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COHEN v. MCALLISTER

June 22, 1988

Edward Cohen, Alfred Cohen, Michael Cohen, the Estate of Judson Cohen, the Estate of Arthur Shapiro, Helen Shapiro, William Russell Shapiro, Alice Russell Shapiro, David Robbins and Lucille Robbins, Individually and as Limited Partners of certain California Limited Partnerships, Plaintiffs
v.
Bruce McAllister and BMI Energy, Ltd., Individually and as General Partners of BMI/Washington 1980-II, BMI/Martha 1980-III, BMI/George 1981-I and BMI/Adams 1981-II, California Limited Partnerships, Defendants



The opinion of the court was delivered by: MENCER

 GLENN E. MENCER, United States District Judge

 I. Background

 This suit concerns alleged misrepresentations made to the plaintiffs regarding the purchase of limited partnership interests in partnerships formed to explore for and develop oil and gas properties in Erie and Crawford counties. The plaintiffs allege that they first discussed investment in these partnerships, sponsored by defendants Bruce McAllister and BMI Energy, Ltd. ["BMI Energy"], in 1980. They made their first investments in September, 1980. They made subsequent investments in the defendants' other limited partnerships in November of 1980, as well as in March and June of 1981.

 The plaintiffs allege that before and after their purchases, defendant Bruce McAllister repeatedly misrepresented the risks inherent in their investments. McAllister allegedly assured the plaintiffs that the limited partnerships had entered into contracts with two gas purchasers, National Fuel Gas Supply Corporation ["NFG"] and Columbia Gas Transmission Corporation ["Columbia Gas"]. McAllister allegedly represented that these gas purchase contracts included "take-or-pay" provisions which eliminated "marketing risk." This meant that while there were "exploration risks," i.e., that the partnerships' wells might not strike gas in economically producible quantities, there were no "marketing risks" that the partnerships would not be able to find a purchaser for its gas at a price sufficient to generate an acceptable return on investment. The plaintiffs claim that while they were willing to accept "exploration risk," they relied on McAllister's oral representations that there would be no "marketing risk." They assert that they would not have made these investments if they had been aware that there were "marketing risks."

 In 1982 and early 1983, the market for natural gas weakened and NFG allegedly informed the defendants that it would not take any more gas from partnership wells. NFG also refused to pay for partnership gas not taken. Second Amended Complaint, par. 30. In early 1983, NFG offered to resume gas purchases only if the partnerships would agree to reduce prices and modify the gas purchase contract to permit renegotiation of the price in the event of gas deregulation. Second Amended Complaint at par. 31. McAllister and BMI Energy acceded to these demands. Second Amended Complaint at par. 32. Columbia Gas, the partnerships' other gas purchaser, demanded and received similar concessions. Second Amended Complaint at par. 33. Plaintiffs allege that the interruptions in gas sales and the later concessions caused a drastic decline in partnership revenues and the value of their limited partnership interests.

 Plaintiffs' complaint alleges that McAllister and BMI Energy made no attempt to enforce the "take-or-pay" provision in the gas purchase contract for the payments due for the period when NFG refused to take the partnerships' gas. Second Amended Complaint at par. 32. Plaintiffs assert that this was because there were in fact no "take-or-pay" provisions in the gas purchase agreements, and that McAllister had no reasonable basis for making such a representation. Second Amended Complaint at par. 34-35. McAllister wrote two letters to partnership investors on January 20 and February 9, 1983 informing them of NFG's demands and his decision on behalf of the partnerships to agree to the concessions. Second Amended Complaint at par. 40. In these letters, McAllister represented that NFG's demands were a breach of the gas purchase contract, but that business conditions required the partnerships to accede. Id.

 The plaintiffs filed their complaint on April 15, 1987. *fn1" The amended complaint includes causes of action under: (1) Pennsylvania common law of fraud; (2) section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission; (3) section 352-c of the New York General Business Law (plaintiffs allege that the misrepresentations took place in New York and California); (4) section 25401 of the Corporate Code of the California Corporate Securities Law (BMI Energy and the limited partnerships were allegedly organized under California law); (5) title 70, section 1-401 of the Pennsylvania statutes; (6) breach of fiduciary duty; and (7) breach of contract. Defendants Bruce McAllister and BMI Energy have yet to answer the plaintiffs' complaint.

 Defendants had previously moved to dismiss all the claims asserted in the First Amended Complaint pursuant to Rule 12(b)(6), arguing that the plaintiffs' only federal cause of action, based on section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 was barred by the statute of limitations. The plaintiffs asserted that because the defendants had concealed their misrepresentations in the January 20 and February 9, 1983 letters, the fraudulent concealment (or equitable tolling) doctrine acted to toll the statute of limitations until the plaintiffs discovered the fraud. Because the plaintiffs had not alleged a date on which they had discovered the fraud, this Court granted the plaintiffs thirty days in which to amend their complaint to specify that date, and in the meantime denied the defendants' motion to dismiss without prejudice 673 F. Supp. 733.

 The plaintiffs have since filed their Second Amended Complaint in which they allege that plaintiff Edward Cohen "first became aware that he had been defrauded as alleged . . . in or about March or April, 1986. The other plaintiffs each became aware of the fraud alleged . . . when they were contacted by Edward Cohen or his representative." Second Amended Complaint, par. 41. The defendants have now renewed their motion to dismiss the entire action pursuant to Rule 12(b)(6), or in the alternative for summary judgment under Rule 56(b), based on the facts set forth in the sworn affidavits of defendant Bruce McAllister, plaintiff Edward Cohen, and Cohen's attorney Gary Mucci (and attached exhibits). Once again, their motion is based primarily on the assertion that the plaintiffs' federal securities claim is time-barred.

 Findings of Fact

 Based on the affidavits filed by both sides, the Court has been able to make findings on a number of facts pertaining to the question of the statute of limitations which are not in dispute between the parties.

 The parties agree that McAllister, as general partner of BMI Energy, sent a letter to the plaintiffs on January 20, 1983. Second Amended Complaint, exh. C. In that letter McAllister informed the plaintiffs of a "significant problem that . . . developed with the buyer of a large portion of the production from our gas wells in Pennsylvania, National Fuel Gas (NFG)." Id., p. 1. The letter explained that NFG refused to pay the agreed-upon price of approximately $ 5.50 per mcf., instead offering to pay either $ 4.00 per mcf. or nothing at all. Id. McAllister also reported that the partnerships' operator, Meridian Exploration, "have been informed orally that if the terms that NFG has proposed are not agreed to by January 31, NFG's next price offer will be even lower." Id. The alleged reference to the take-or-pay provisions was a sentence in the letter's first paragraph which reads: "I believe this action by NFG is a violation of our contract." Id.

 McAllister sent the plaintiffs another letter on February 9, 1983, reporting that he was unable to secure any concessions from NFG and, heeding the threat of yet harsher terms, he had accepted NFG's demands and production was to begin. McAllister wrote that NFG felt "there is adequate language in the contract to permit them to take this action. Although we do not agree with the latter point, the attorneys consulted by ...


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