LOUISVILLE — When Paul Bennett, Frederick Clayton and others lost more than $4 million on an oil drilling investment in southern Kentucky, they sued the companies involved and their lawyer.
While the investors may be able to collect from Mammoth Resource Partners and Heartland Resources through bankruptcy proceedings, they won't be able to get money from the attorney for the two companies.
The U.S. 6th Circuit Court of Appeals on Thursday ruled that lawyers generally are not responsible if their clients swindle investors, as long as they do routine legal work and don't act as salesmen.
The ruling came in the case of a group of investors who sued Mammoth Resource Partners and attorney Hunter Durham of Columbia. The men alleged that Durham went beyond standard legal work and knew the offerings of Mammoth Resource Partners were fraudulent.
Judge Jeffrey S. Sutton found that there's no evidence that Durham did anything other than routine legal work, enacting the exemption from liability under the state's "Blue Sky" laws. The "Blue Sky" laws were enacted federally in 1933, with many states following suit over the next several decades. The laws regulate the sales and offers of securities and draw their name because the statutes initially targeted swindlers "so brazen and shameless they would peddle shares of anything including (allegedly) shares of the sky," Sutton wrote.
"Durham no more 'offered' or 'sold' these securities than the lawyer representing Magic Johnson's investment group 'bought' the Los Angeles Dodgers," Sutton wrote.
The investors, led by Bennett and Clayton, and companies in California, Colorado, Florida and Illinois, bought in to oil and gas drilling with investments ranging from $1.35 million to $34,750.
The plaintiffs said Mammoth wasn't licensed to sell securities in oil and gas drilling projects in Kentucky. They claimed in one case, the company used a man as a "drill consultant" to sell the investment securities with a pitch of "You put five or six well programs together in this area and there's going to be at least one winner. This is absolutely the best lease in the country."
The investors also claimed that Durham took an active role with the companies and knowingly drafted false and misleading documents. Sutton, joined by judges Karen Nelson Moore and Jane Branstetter Stranch, found that wasn't the case here.
"Of course, an attorney who knowingly drafted false or misleading documents would face other problems," Sutton wrote.
The Kentucky Department of Financial Institutions weighed in on the side of the plaintiffs, telling the court in a brief that Durham didn't fulfill his role of ensuring the accuracy of his work and assumed a role in selling the investments by crafting documents aimed at persuading investors.
Sutton found that the investors couldn't show that Durham did anything more than ordinary legal work for Mammoth Resource and Heartland Resources.
In the midst of the lawsuit, Mammoth Resource and Heartland Resources each filed for bankruptcy protection. Mammoth remains in business, pitching on its Web site the idea that "It Takes Energy To Make Energy." Heartland Resources has closed.
Mammoth Resource Partners ran afoul of Kentucky regulators in 2004, when the state sought to sanction the company for violating the Securities Act of Kentucky. The company and regulators reached a settlement in 2007, requiring compliance with the law and imposing a $20,000 fine, of which $15,000 was suspended.