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Joyce v. Bobcat Oil & Gas

April 3, 2008

KEVIN JOYCE, PLAINTIFF
v.
BOBCAT OIL & GAS, INC., BEAR CREEK OIL & GAS, INC., ELLIS MEISTER AND GORDON TUCK, DEFENDANTS



The opinion of the court was delivered by: William W. Caldwell United States District Judge

MEMORANDUM

I. Introduction

Plaintiff, Kevin Joyce, filed this lawsuit against Defendants, Bobcat Oil & Gas, Inc., Bear Creek Oil & Gas, Inc., Ellis Meister, and Gordon Tuck. Meister and Tuck are alleged to be controlling shareholders and officers of Bobcat and Bear Creek. Bobcat and Bear Creek have certain interests in oil and gas leases and sold a portion of their rights to Plaintiff in nine agreements. Plaintiff has set forth nine claims. Asserting that Defendants fraudulently induced him into purchasing the rights, Plaintiff has made securities-fraud claims under Rule 10b-5 and the Pennsylvania and New Jersey counterparts to that rule. State-law claims for fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract have also been made. Finally, Plaintiff alleges that the agreements violate federal and state law requiring the registration of securities.

We are considering Defendants' motion to dismiss under Fed. R. Civ. P. 12(b)(6). The motion argues that the 10b-5 claim is deficient because it fails to allege loss causation and scienter and to meet special pleading requirements imposed on federal securities fraud claims. The motion extends this argument to the state securities-fraud claims and common-law claims based on fraud and negligent misrepresentation. The motion also raises the bar of the applicable statute of limitations to some of the claims.

II. Standard of Review

In considering a motion to dismiss, we must accept as true the factual allegations in the complaint and construe any inferences to be drawn from them in Plaintiff's favor. See Morrison v. Madison Dearborn Capital Partners III L.P., 463 F.3d 312, 314 (3d Cir. 2006). The court is not limited to evaluating the complaint alone. It may consider documents that form the basis of a claim. Lum v. Bank of Am., 361 F.3d 217, 221 n.3 (3d Cir. 2004). It may also consider "documents whose contents are alleged in the complaint and whose authenticity no party questions," even though they "are not physically attached to the pleading . . . ." Pryor v. Nat'l Collegiate Athletic Ass'n, 288 F.3d 548, 560 (3d Cir. 2002).

A complaint has to plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, U.S. , , 127 S.Ct. 1955, 1974, 167 L.Ed.2d. 929 (2007). For the most part, detailed factual allegations are not required, id. at , 127 S.Ct. at 1964-65; Pryor, supra, 288 F.3d at 564, only a "short and plain statement" showing the right to relief. Pryor, supra, 288 F.3d at 564 (citing Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) and quoting Fed. R. Civ. P. 8(a)(2)).

However, allegations of fraud must be pled with specificity. See Fed. R. Civ. P. 9(b)("the circumstances constituting fraud . . . shall be stated with particularity"). And in a federal securities fraud action, under the Private Securities Litigation Reform Act of 1995 (PSLRA), if a plaintiff alleges that a defendant "made an untrue statement of material fact" or "omitted to state a material fact" that was necessary to make a statement made not misleading in the circumstances, "the complaint [must] specify each statement alleged to have been misleading" [and] the reason or reasons why the statement is misleading . . ." 15 U.S.C. § 78u-4(b)(1)(A) and (B). See also Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007)(citing § 78u-4(b)(1)(B)).

The PSLRA also imposes a special pleading requirement relevant to the element of scienter in a 10b-5 claim. When a federal securities claim seeking damages requires a plaintiff to prove "that the defendant acted with a particular state of mind," the PSLRA requires the plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). For the scienter requirement in a 10b-5 claim, this means the plaintiff must allege facts giving rise to an inference of scienter that is "cogent and compelling," not "merely 'reasonable' or 'permissible'"; that is, "strong in the light of other explanations." Tellabs, Inc. v. Makor Issues & Rights, Ltd., U.S. , , 127 S.Ct. 2499, 2510, 168 L.Ed.2d 179 (2007). In applying this standard, the court must thus consider competing, plausible inferences of nonculpable intent, and the inference of fraudulent intent must be "at least as compelling" as these competing inferences. Id. at , 127 S.Ct. at 2510. The complaint in a 10b-5 claim must also be examined in its entirety. Id. at ___, 127 S.Ct. at 2509.

A 10b-5 claim must also satisfy Rule 9(b)'s pleading requirements. In re: Suprema Specialties, Inc. Securities Litigation, 438 F.3d 256, 276 (3d Cir. 2006). "As applied to Section 10(b) claims, 'Rule 9(b) requires a plaintiff to plead (1) a specific false representation [or omission] of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage.'" Id. (quoted case omitted). "Moreover, 'Rule 9(b) requires plaintiffs to identify the source of the allegedly fraudulent misrepresentation or omission." Id. (quoted case omitted); see also In re Rockefeller Ctr. Properties, Inc., 311 F.3d 198, 216 (3d Cir. 2002)(Rule 9(b) "requires, at a minimum, that the plaintiff identify the speaker of allegedly fraudulent statements"). "In sum, 'Rule 9(b) requires, at a minimum, that plaintiffs support their allegations of securities fraud with all of the essential factual background that would accompany 'the first paragraph of any newspaper story'-that is, the 'who, what, when, where and how' of the events at issue.'" In re: Suprema Specialties, 438 F.3d at 276 (quoted case omitted).

III. Background

Joyce alleges that between March 29, 2004, and October 14, 2005, the defendants sold him securities in the form of agreements, each entitled a "Working and Operating Interest Agreement." Plaintiff executed nine of these agreements, (Am. Compl. ¶ 12), attached as exhibits to Defendants' motion to dismiss.*fn1 The first eight are between Plaintiff and Bobcat for wells in West Virginia. The ninth is between Plaintiff and Bear Creek for a well in Ohio. They are as follows:

1. An agreement, dated March 29, 2004, by which Plaintiff purchased a four percent working interest in an oil and gas well in Wayne County, West Virginia, for $12,000 from Bobcat.

2. An agreement, dated April 22, 2004, by which Plaintiff purchased a five percent working interest in an oil and gas well in Wayne County, West Virginia, for $15,000 from Bobcat.

3. An agreement, dated July 20, 2004, by which Plaintiff purchased a ten percent working interest in an oil and gas well in Wood County, West Virginia, for $20,000 from Bobcat.

4. An agreement, dated July 20, 2004, by which Plaintiff purchased a ten percent working interest in an oil and gas well in Wood County, West Virginia, for $20,000 from Bobcat.

5. An agreement, dated November 4, 2004, by which Plaintiff purchased a ten percent working interest in an oil and gas well in Wayne County, West Virginia, for $30,000 from Bobcat.

6. An agreement, dated April 9, 2005, by which Plaintiff purchased a five percent working interest in an oil and gas well in Wayne County, West Virginia, for $15,000 from Bobcat.

7. An agreement, dated April 9, 2005, by which Plaintiff purchased a five percent working interest in an oil and gas well in Wood County, West Virginia, for $10,000 from Bobcat.

8. An agreement, dated April 9, 2005, by which Plaintiff purchased a five percent working interest in an oil and gas well in Wood County, West Virginia, for $10,000 from Bobcat.

9. An agreement, dated October 14, 2005, by which Plaintiff purchased an eight percent working interest in an oil and gas well in Morgan County, Ohio, for $15,000 from Bear Creek.*fn2 (Am. Compl. ¶ 12; doc. 14, Defs.' Mot. to Dismiss, Ex. A).

Plaintiff alleges that all of the defendants made "false and fraudulent representations," (Am. Compl. ¶ 19), in connection with his purchase of these investments. (Id. ¶ 20). The alleged false and fraudulent misrepresentations are specified in paragraph 17 of the amended complaint.*fn3 The paragraph reads as follows:

17. Bobcat, Bear Creek, Ellis and Meister made statements to Joyce, including untrue statements of material fact and/or omitted to state material facts necessary in order to make the statements, in light of the circumstances under which they were made, not misleading, with respect to the securities sold to Joyce described in Paragraph 12 herein, in the following particulars:

(a) By failing to advise Joyce as to the use of and/or their intended use of the proceeds of his investments in the oil and gas wells;

(b) By failing to advise Joyce of the risks involved in oil and gas investments; (c) By failing to advise Joyce that he would not have substantive management rights in any of the investments;

(d) By failing to advise Joyce that the drilling operations with respect to the wells were undercapitalized;

(e) By failing to advise Joyce that there was not an available market for oil and gas production from the wells;

(f) By failing to obtain sufficient capital to drill, complete and equip the wells and to advise Joyce of the lack of such capital;

(g) By failing to advise Joyce as to the tax consequences of his investments;

(h) By failing to advise Joyce as to the compensation derived and/or intended to be derived by them from the sale of the securities to Joyce;

(i) By failing to advise Joyce of anticipated oil and gas production declines from the wells;

(j) By failing to advise Joyce as to various governmental and environmental controls that the wells were subject to and their non-compliance with many such regulations;

(k) By failing to advise Joyce that they would be relying upon third-party independent contractors to drill, complete and equip the wells;

(l) By failing to advise Joyce as to the known geology relating to the likelihood of the wells producing oil and gas in commercial quantities;

(m) By failing to advise Joyce of their lack of geologic data relating to the wells;

(n) By failing to advise Joyce as to the known geology relating to offset wells in the areas of the wells;

(o) By failing to obtain and keep in force all bonds and permits required to drill and operate the wells;

(p) By failing to immediately drill the wells upon receipt of the investment funds from Joyce;

(q) By failing to complete the wells that were drilled;

(r) By failing to advise Joyce that certain of the oil and gas wells had been previously drilled or partially drilled, and by failing to ...


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