Nolfi v. Ohio Kentucky Oil Corp.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0090p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

X
under the Frederick E. Nonneman Declaration -
GREGORY M. NOLFI, as Successor Trustee

of Trust Dated August 19,1994, as Amended; --
-
Nos. 09-4315/4316/4323
ANITA C. NONNEMAN, as Executrix of the
,
>
-
Estate of Deceased Frederick E. Nonneman;

Plaintiffs-Appellees/Cross-Appellants, -
RENA NONNEMAN,
-
-
-
-
v.

-
-
OHIO KENTUCKY OIL CORPORATION; CAROL
-
L. CAMPBELL, individually and as Executrix
of the Estate of Deceased William M. -
-
Defendants-Appellants/Cross-Appellees. -
Griffith,
-
N
Appeal from the United States District Court
for the Northern District of Ohio at Akron.
No. 06-00506; 06-00260—John R. Adams, District Judge.
Argued: March 4, 2011
Decided and Filed: April 4, 2012
Before: COLE, GIBBONS, and ROGERS, Circuit Judges.

_________________

COUNSEL
ARGUED: Thomas W. Connors, BLACK, McCUSKEY, SOUERS & ARBAUGH,
Canton, Ohio, for Appellants. Dennis R. Rose, HAHN, LOESER & PARKS LLP,
Cleveland, Ohio, for Appellees. ON BRIEF: Thomas W. Connors, Gordon D.
Woolbert, II, BLACK, McCUSKEY, SOUERS & ARBAUGH, Canton, Ohio, for
Appellants. Dennis R. Rose, Eric B. Levasseur, Steven J. Mintz, HAHN, LOESER &
PARKS LLP, Cleveland, Ohio, for Appellees.

1
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 2

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OPINION
_________________

JULIA SMITH GIBBONS, Circuit Judge. This case involves allegations of
fraud and misrepresentation in the issuance of securities related to oil and gas interests.
Following a jury verdict for plaintiffs, defendants-appellants/cross-appellees Ohio
Kentucky Oil Corporation (“OKO”) and Carol L. Campbell, both individually and as
executrix of the Estate of William M. Griffith, appeal numerous rulings of the district
court. Plaintiffs-appellees/cross-appellants Gregory M. Nolfi, as successor trustee under
the Frederick E. Nonneman declaration; Anita C. Nonneman, as executrix of the Estate
of Frederick E. Nonneman; and Rena Nonneman1 (together the “Nonneman plaintiffs”)
cross-appeal two additional issues. For the reasons that follow, we affirm in full the
decisions of the district court.

I.

This case stems from a series of investments made by Frederick E. Nonneman
with OKO. Nonneman invested money both personally and through Fencorp, a family
investment corporation he formed in 1986. Many of his investments were in domestic
oil and gas, but he did not have any experience in drilling wells or running an oil and gas
company.

Between 1986 and 2000, Nonneman personally invested a total of $6,520,995
with OKO in oil and gas partnerships and joint ventures. Then, between 2001 and 2003,
he substantially increased his rate of investment, investing an additional $8,383,046 with

1
A fourth plaintiff, Fencorp Co. (“Fencorp”), was joined for trial at the district court. Appeals
involving the claims of Fencorp have proceeded under a separate docket number (09-4317) and were
argued separately before this panel. Our Fencorp opinion is filed simultaneously with this one.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 3

OKO in his individual capacity.2 Evidence showed that Nonneman expected to receive
favorable tax treatment for his investments.

During the period in question—2000 to 2003—Nonneman was in his early
eighties and was showing signs of dementia and suffering from disabilities. Eventually,
Nonneman’s family and advisors—concerned that he was incapable of managing his
business affairs—arranged, with his consent, for Gregory Nolfi, a trusted business
advisor, to assume management of Nonneman’s affairs as successor trustee on
November 5, 2003.

By this time it had become apparent that the OKO investments were not yielding
returns. Nonneman had invested in thirty-three joint ventures and ten limited
partnerships. The programs all involved oil and gas exploration—mainly drilling holes
to find oil and gas—in the states of Kentucky, Tennessee, and Pennsylvania. Of the one
hundred twenty-eight wells drilled, all but eleven were completely dry. The eleven that
produced oil did not produce enough to recoup the investment, let alone return a profit
to Nonneman.

Upon assuming control, Nolfi and Lois Nonneman, Frederick Nonneman’s
daughter, began investigating why Nonneman had invested so much money in joint
ventures with OKO. Because Nonneman himself was unable to explain why—and in
fact was surprised to learn the extent of his investments—Nolfi went to OKO to learn
more about the transactions. After failing to obtain satisfactory answers from OKO,
Nolfi and Lois Nonneman filed suit in Ohio state court. The state court lawsuit, filed
December 22, 2004, alleged undue influence, common law fraud, breach of contract, and
breach of fiduciary duty arising from the claim that over 90% of the oil and gas wells
drilled by OKO resulted in dry holes.

2
In its holding on Rule 12(b)(6) and summary judgment motions, the district court listed
Nonneman’s direct investment during the relevant period as $9,377,436. This figure differs from that
listed by defendants and the plaintiffs, but the discrepancies are minor and, because the jury found an
entirely different amount, irrelevant to the disposition of this appeal.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 4

The Nonneman plaintiffs allege that they first learned of the facts and
circumstances giving rise to the federal and state securities claims at issue here during
discovery for the state fraud case. The Nonneman plaintiffs learned that William M.
Griffith, the founder of OKO, and Carol L. Campbell, Griffith’s daughter and the
president of OKO during the relevant time period, had been persistent in their pursuit of
sales to Frederick Nonneman. In numerous personal letters, Griffith touted the virtues
of the drilling joint-ventures and included grandiose promises of rich rewards, promises
not tempered by cautions or warnings that the exploratory drilling OKO planned had a
low chance of success—less than 10% and sometimes less than 5%. Evidence also
showed that Nonneman had grown to trust Griffith and that Griffith exploited that trust
by pressing for more investment opportunities, encouraging hurried transactions, and
bestowing gifts on Nonneman’s wife.

Not only did the investments fail to deliver the promised returns, but also OKO’s
pricing and other behavior were suspicious. Although the investments were joint
ventures and general partnerships, the investment terms provided that if no oil was
found, OKO would keep any excess funds invested. As a drilling company, OKO made
money by drilling the wells; then, if no oil was found, completion costs would be
unnecessary, and OKO would make even more profit because it could keep the
remainder of Nonneman’s investment. Ostensibly for this reason, OKO did not drill in
areas where it was likely to strike oil; one expert testified that OKO’s wells had the
lowest success rate he had ever seen. Another expert concluded: “[T]he apparent
availability of investment capital (and not the discovery of oil and gas reserves) was the
moving force in the company’s operations, resulting in a flurry of drilling and
acquisition activity that totally lacked economic performance.”3 Additional evidence
revealed that OKO had overstated its costs and had billed substantial and unexplained

3
The expert also reported that oil and gas interests that OKO purportedly owned in Pennsylvania
were, in fact, not owned by OKO. Additionally, on some oil interests where OKO was supposed to drill
in a joint venture with Nonneman, OKO instead declined to drill, let other companies drill in its place, and
then failed to pay Nonneman the royalties. The expert called these actions “dishonest, and possibly
fraudulent.”
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 5

internal overhead, including expenses at restaurants and stores, employment of Griffith’s
family, and purchases of a personal plane, a house, and horses for Griffith.

After learning these facts, the Nonneman plaintiffs filed federal and state
securities claims. With regard to federal claims, the Nonneman plaintiffs initially
alleged only a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78j(b). After discovery, the Nonneman plaintiffs learned that OKO had engaged in a
general solicitation to sell its investments, rendering it unqualified for the SEC filing
exemption it had sought, and they filed a second securities claim under § 12(a)(1) of the
Securities Act of 1933, 15 U.S.C. §77l(a)(1).

A series of federal and state common law and securities claims were eventually
consolidated in the United States District Court for the Northern District of Ohio.
Following defendants’ motion to dismiss for failure to state a claim, the district court
found that many of the §12(a)(1) claims were barred by the three-year statute of repose.
The district court also declined to exercise supplemental jurisdiction over the Nonneman
plaintiffs’ Ohio state law claims. With only the federal securities claims remaining
before the court, the district court denied defendants’ motion to dismiss, finding that the
complaint adequately pled particularity, scienter, reliance, and loss causation.

After discovery, both parties moved for summary judgment. The district court
dismissed the remaining §12(a)(1) claims as barred by the one year statute of limitations.
The court denied defendants’ motion for summary judgment, finding that they had
merely raised again the arguments previously deemed insufficient in their motion to
dismiss and that there remained triable questions of fact. The court also denied
plaintiffs’ motion for summary judgment.

During trial, the district court ruled that the investments at issue were, as a matter
of law, securities under §2(a)(1) of the Securities Act of 1933. Over defendants’
objection, the district court also found that a rescission theory could provide a proper
measure of damages for the §10(b) claims.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 6

The case was tried before a jury. The jury found in favor of the Nonneman
plaintiffs on their federal securities claims and determined that the rescission damages
amounted to $7,700,723 for the Nonneman plaintiffs. Despite having stated the
rescissory damages as over seven million dollars, however, the jury only listed an award
of $1,777,909 on its verdict form.

Both parties filed post-trial motions. Defendants brought a Rule 50(b) motion,
arguing they were entitled to judgment as a matter of law on the §10(b) claims. The
district court denied their motion. Plaintiffs filed a post-trial motion to alter or amend
the judgment, arguing they were entitled to rescissory damages by law. Because the jury
stated rescissory damages were $7.7 million but only awarded $1.7 million, plaintiffs
asked the court to amend the judgment to $7.7 million. The district court refused,
finding that the Nonneman plaintiffs had waived this argument by failing to raise the
issue prior to the discharge of the jury as required by Rule 49(b).

This appeal followed.

II.

Defendants raise a number of issues on appeal. They argue (1) that plaintiffs did
not plead the securities claims with sufficient particularity, (2) that the district court
erroneously denied their motion for summary judgment because plaintiffs failed to
present sufficient evidence to support their securities claims, (3) that the district court
erred in denying their Rule 50 motions, and (4) that the jury instructions incorrectly
stated the law. We address each argument in turn.

Defendants’ first two arguments are that plaintiffs did not plead the securities
claims with sufficient particularity and that summary judgment should have been granted
to defendants because plaintiffs failed to present sufficient evidence to support their
securities claims. Because the two arguments are governed by the same Supreme Court
precedent, we address them together.

Under this court’s prior precedent, a denial of summary judgment was often not
appealable after a jury verdict, but this rule only applied when the district court’s ruling
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 7

on the summary judgment motion was based on a determination that there were no
disputed facts. See Adam v. J.B. Hunt Transport, Inc., 130 F.3d 219, 231 (6th Cir.
1997). Under Adam, where motions to dismiss and for summary judgment were based
on questions of law, de novo appellate review was proper. Defendants argue that
whether plaintiffs met their pleading and evidentiary burdens under the Private
Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (“PSLRA”), and
Federal Rule of Civil Procedure 9(b), as delineated in Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007), is a question of law that may be reviewed.

Recently, however, the United States Supreme Court overturned this court’s prior
rule permitting some summary judgment appeals after a jury trial. In Ortiz v. Jordan,
the Court addressed our rule directly and held that a party may not “appeal an order
denying summary judgment after a full trial on the merits.” 131 S. Ct. 884, 888–89
(2011). The Court noted that summary judgment maintains its interlocutory
appealability only as “a step along the route to final judgment.” Id. at 889. “Once the
case proceeds to trial, the full record developed in court supersedes the record existing
at the time of the summary judgment motion.” Id. Furthermore, after a jury verdict is
returned, “the defense must be evaluated in light of the character and quality of the
evidence received in court.” Id. Because most of defendants’ summary judgment appeal
is based on the evidence presented prior to trial, not the evidence received at trial, we are
precluded by Ortiz from reviewing the denial of their motion for summary judgment in
large part.

We consider one purely legal issue that defendants raise: whether plaintiffs’ loss
causation theory is actionable under §10(b). Because Ortiz leaves open the possibility
that cases “involv[ing] . . . [only] disputes about the substance and clarity of pre-existing
law” may still be considered, id. at 892, we briefly address this argument. See also
Owatonna Clinic–Mayo Health Sys. v. Med. Protective Co. of Fort Wayne, Ind., 639
F.3d 806, 809–10 (8th Cir. 2011) (recognizing that Ortiz did not address the issue of
whether a denial of a summary judgment motion was appealable after a final judgment
if the denial was based on a legal question rather than on the existence of material facts
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 8

in issue). Defendants cite Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005),
for the proposition that an inflated purchase price is not an actionable economic loss
under §10(b). Defendants suggest that the investments at issue here are similarly not
actionable. Dura, however, involved the purchase of stock in a pharmaceutical
company. The purchase of stock in a company that is traded on the open market is far
different investment from a partnership with an oil company that has no intention of
actually finding oil. The stockholders in Dura received stock at a price that may have
been inflated by misrepresentations but which still retained real value; the plaintiffs in
this case purchased interests in oil drilling ventures from a company that was not
actually interested in drilling for oil and whose interests are now completely worthless.
The cases are not analogous. The district court found this legal argument without merit,
and we agree.

Ortiz also precludes our consideration of defendants’ appeal from the district
court’s denial of its motion to dismiss. Though Ortiz applies specifically to summary
judgment, its logic applies with equal force to questions involving pleadings.

III.

Defendants further argue that the district court improperly denied their motions
brought under Fed. R. Civ. P. 50. A ruling on a Rule 50 motion is reviewed de novo,
both as to law and as to sufficiency of the evidence. K &T Enters., Inc. v. Zurich Ins.
Co., 97 F.3d 171, 175–76 (6th Cir. 1996). This court has held that a Rule 50 motion
should be treated similarly to a Rule 56 motion, with the evidence viewed “in the light
most favorable to the party against whom the motion is made, and that party given the
benefit of all reasonable inferences.” Id. at 176.

A.

Defendants first assert that the district court erred in denying its Rule 50 motion
by concluding as a matter of law that plaintiffs’ partnership and joint-venture interests
are securities. Defendants argue that sales of assignments of oil and gas leases do not
constitute the oil and gas interests or instruments specified by the Securities Exchange
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 9

Act of 1933, 15 U.S.C. § 77b(a)(1), and clarified by S.E.C. v. C.M. Joiner Leasing
Corp., 320 U.S. 344, 352 (1943).4 The district court’s error, according to defendants,
is that the jury needed to determine whether the investments are “investment contracts”
as determined by the Howey test: “whether the scheme involves an investment of money
in a common enterprise with profits to come solely from the efforts of others.” S.E.C.
v. W.J. Howey Co., 328 U.S. 293, 301 (1946). Defendants argue that the district court
erred in making this determination as a matter of law.

The Howey test is inapplicable. The statute specifically lists “fractional
undivided interests in oil, gas, or other mineral rights” as a security. Defendants
wrongly equate the OKO investments with “investment contracts”—instead of admitting
they are the “fractional undivided interests” listed in the statute—in order to advocate
use of the Howey test. At least five circuits have accepted or suggested that fractional
undivided interest in oil and gas is a security under the statute, while no circuit has held
otherwise. See Adena Exploration Inc. v. Sylvan, 860 F.2d 1242, 1244–45 (5th Cir.
1988) (listing cases holding the same and noting that no circuit has held otherwise).5 If
the OKO investments are fractional undivided interests in oil or gas, then the statute
specifies that they are securities as a matter of law.

The OKO investments are analogous to the working interest in oil that the Fifth
Circuit classified as a security under the Act in Adena Exploration. Id. at 1249.
Nonneman purchased what was proposed to be a 50% share in numerous oil wells. A
50% interest in a well is, by its plain meaning, a “fractional undivided interest.”
Defendants’ assertion that Nonneman purchased “an assignment of an oil and gas lease”

4
15 U.S.C. § 77b(a)(1) provides: “The term ‘security’ means any note, stock, treasury stock, . . .
fractional undivided interest in oil, gas, or other mineral rights, . . . or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.” (emphasis added)
5
This court has not previously settled this question. We addressed the scope of “fractional
undivided interests” under § 77b(a)(1) in Graham v. Clark, 332 F.2d 155 (6th Cir. 1964), but Graham is
not applicable to this case. In Graham, we found that when a party purchased oil leases for $72,500 and
paid for them in part with a promise of a quarter interest in the oil produced, the sale did not constitute an
“undivided fractional interest” under the statute. Id. at 156. Rather, the purchase was analogous to a
purchase of land that included a lien on the property. A direct purchase of an oil lease, with the purchase
guaranteed by oil production, is distinct from partnership and joint-venture investments in speculative oil
wells.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 10

is wrong—Nonneman purchased a working interest in a well, not an assignment of a
lease on mineral rights. Defendants argue that Nonneman’s interest was analogous to
that examined by the Supreme Court in C.M. Joiner; that case, however, involved a
leasehold interest in land near a proposed oil well and is not analogous to these
investments. C.M. Joiner, 320 U.S. at 345–46. Rather, the arrangement here is similar
to that in Adena Exploration, where a party who had purchased a 50% interest in a
working oil well sued because the operator “had been charging off certain overhead
costs against the lease costs, thus effecting a ‘mark up.’” Adena Exploration, 860 F.2d
at 1243.

In holding that such an interest constituted a security, the Fifth Circuit concluded,
“[The] test is simple: if a fractional undivided interest is created for the purpose of sale,
the conveyance of the interest is the sale of the security.” Id. at 1246; see also
Woodward v. Wright, 266 F.2d 108, 114 (10th Cir. 1959) (noting that fractional interests
conveyed in oil and gas leases owned by the seller, if created for the purpose of sale, are
securities within the meaning of the [1933 Act]). Adena Exploration and Woodward are
persuasive and state the proper test. The OKO investments—fractional undivided
interests created by OKO for the purpose of sale—are securities as a matter of law. We
therefore affirm the district court’s denial of defendants’ Rule 50 motion on the issue of
whether the interests purchased by Nonneman are securities as a matter of law.

B.

Defendants next argue that the district court erred in denying their Rule 50(b)
motion arguing that the § 10(b) claims were barred by the two-year statute of limitations.
Defendants assert that the district court should have granted their Rule 50(b) motion
because “the evidence indicates that plaintiffs had either actual or constructive notice of
their federal securities claims more than two years prior to filing their complaint.”
Defendants state that a party is under a duty to investigate and learn about a potential
§ 10(b) claim from the moment the party becomes aware of “suspicious facts” or “storm
warnings.” See New England Health Care Emps. Pension Fund v. Ernst & Young, LLP,
336 F.3d 495, 501 (6th Cir. 2003). Once a party is aware of such “storm warnings,”
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 11

defendants claim that party has a duty to investigate, which puts the party on inquiry
notice. Defendants argue that plaintiffs were on inquiry notice from February 2002, at
which time they knew many of the wells were dry; therefore, the statute of limitations
ended long before plaintiffs brought suit.

We disagree. Recently, the United States Supreme Court clarified that, because
scienter is a requirement for a §10(b) claim and a plaintiff cannot prevail “without
proving that a defendant made a material misstatement with an intent to deceive,”
inquiry notice of scienter is necessary before a § 10(b) claim’s two-year statute of
limitations period begins to run. Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784, 1796
(2010). Furthermore, “discovery” of a § 10(b) claim means, in addition to actual
discovery, the point at which “a reasonably diligent plaintiff would have discovered ‘the
facts constituting the violation,’” id. at 1798, not when a reasonable “plaintiff would
have begun investigating.” Id. at 1797 (emphasis in original). The Court specifically
noted that the very purpose of the discovery provision would be frustrated if a defendant
could conceal a misstatement for two years with an intent to deceive and thus avoid the
statute. Id.

The facts, which we construe in favor of the plaintiffs, showed that OKO
concealed its intent to deceive. Lois Nonneman and Gregory Nolfi repeatedly asked for
information from OKO but were stymied. They eventually had to file suit in state court
to get information, and it was only through discovery in the state case—occurring
between December 2004 and January 2006— that they learned the facts which made
them aware of an intent to deceive and gave them grounds for a §10(b) claim. Because
knowledge of the intent to deceive was not something the plaintiffs could have known
prior to the state court discovery, pursuant to Merck, the statute of limitations did not
begin to run until then. Plaintiffs’ claims were therefore not barred by the statute of
limitations.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 12

C.

Defendants also assert that the district court should have granted their Rule 50(b)
motion because plaintiffs did not present sufficient evidence that Nonneman relied on
misrepresentations or omissions while investing with OKO. Defendants’ argument
centers on the investment documents, which included clauses disclaiming reliance on
extra-contractual representations. Asserting that there is no real evidence to the
contrary, defendants state that the non-reliance clauses in the contract establish that
plaintiffs’ evidence was insufficient.

This court has rejected a per se rule that non-reliance clauses foreclose the
possibility of recovery. Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 921 (6th
Cir. 2007). Rather, we engage in a contextual analysis in which factors considered
include:

(1) The sophistication of expertise of the plaintiff in financial and
securities matters; (2) the existence of long standing business or personal
relationships; (3) access to the relevant information; (4) the existence of
a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity
to detect the fraud; (7) whether the plaintiff initiated the stock transaction
or sought to expedite the transaction; and (8) the generality or specificity
of the misrepresentations.

Id. (internal quotations omitted). When such a contextual analysis is undertaken, with
the facts construed in favor of the plaintiffs, the evidence shows that Nonneman was of
frail health and mind, that he trusted Griffith as a friend, that neither Nonneman nor his
associates had information regarding OKO’s business model, that there was a fiduciary
relationship under Ohio law, and that Griffith initiated most of the transactions by
approaching Nonneman and giving him little time to make a decision.

Viewed within the requisite contextual analysis, there was sufficient evidence
Nonneman justifiably relied on defendants’ misrepresentations.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 13

IV.

Defendants’ final argument is that the jury instructions incorrectly stated the law.
Defendants challenge three elements of the district court’s instructions to the jury:
(1) that reliance may be presumed for the § 10(b) omission claims, (2) that the measure
of damages for the § 10(b) claims is the purchase price (i.e., rescission), and (3) that tax
benefits received by the Nonneman plaintiffs should not be deducted from the damages
award. This court reviews the correctness of jury instructions de novo, but on appeal the
standard is “whether the charge, taken as a whole, fairly and adequately submits the
issues and applicable law to the jury.” Fisher v. Ford Motor Co., 224 F.3d 570, 575–76
(6th Cir. 2000).

A.

First, defendants argue that the district court erred by instructing the jury,
“[w]hen a claim is based upon an omission, positive proof of reliance is not a
prerequisite to recovery. . . . In the case of the omission of a material fact, the elements
of reliance by the plaintiffs may be presumed.” Although defendants concede that an
omission by one with a duty to disclose may lead to a presumption of reliance, they
argue that there was no fiduciary or similar relation of trust that would lead to such a
duty and that whether such a relationship existed was a factual question for the jury to
determine.

A duty to disclose under § 10(b) arises “when one party has information that the
other [party] is entitled to know because of a fiduciary or other similar relation of trust
and confidence between them.” Chiarella v. United States, 445 U.S. 222, 228 (1980)
(internal quotations omitted). “[I]f there is an omission of a material fact by one with
a duty to disclose, the investor to whom the duty was owed need not provide specific
proof of reliance.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S.
148, 159 (2008). Pursuant to Stoneridge, if Nonneman had a fiduciary relationship or
other similar relation of trust with defendants, then the instruction that reliance may be
presumed is correct as a matter of law.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 14

Defendants owed a fiduciary duty to Nonneman. There was abundant evidence
that a relationship of trust and confidence existed between Nonneman and Griffith.
Moreover, the agreements signed between Nonneman and OKO were general
partnerships, and under Ohio law at the time, partners owed a fiduciary duty to each
other. Dunn v. Zimmerman, 631 N.E. 2d 1040, 1042 (Ohio 1994) (“Partners in Ohio
owe a fiduciary duty to one another.”).6 Because the “fiduciary duty” is not defined
under § 10(b) itself, courts have incorporated state law definitions of fiduciary duty.
See, e.g., Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 436 (7th Cir. 1987) (“The
obligation to break silence [as a condition of a § 10(b) claim] is itself based on state law
. . . and so may be redefined to the extent state law permits.” (internal citations
omitted)).7 The district court concluded as a matter of law—and instructed the
jury—that in Ohio “[a] general partner owes a fiduciary duty . . . [to] the other partners.”
We agree. Because defendants owed a fiduciary duty to Nonneman as a matter of law,
reliance may be presumed.

B.

Second, defendants argue that the district court’s instruction on the measure of
damages was erroneous. The district court gave the following instruction:

Rescission . . . may be awarded against the seller or broker of the
securities to restore the plaintiffs to the position they would have been in
had the defendants not misrepresented or omitted material facts. . . .
Rescission cancels the original purchase and allows the plaintiffs to
recover the price paid, plus interest.

Defendants, citing Dura Pharmaceuticals, Inc. v. Broudo and the PSLRA, argue that
recovery should be limited to the economic losses actually caused by the
misrepresentations and that the district court abused its discretion by refusing to provide
an instruction to this effect.

6
The state law upon which Dunn was based was repealed subsequent to the Nonneman-OKO
dealings. See O.R.C. 1775.20(A) (repealed January 1, 2010).
7
For more on the incorporation of state law fiduciary duties by federal courts determining § 10(b)
claims, see Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider
Trading Prohibition, 52 Wash. & Lee L. Rev. 1189 (1995).
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 15

We disagree. As we have noted above, Dura is not analogous to this case. In
Dura, plaintiffs alleged that false public statements by a pharmaceutical company had
inflated the stock price, causing the investors to lose money once the truth came out.
Dura, 544 U.S. at 339–40. The Court found plaintiffs’ pleadings were inadequate
because they did not let the defendants know “what the causal connection might be
between that loss and the misrepresentation.” Id. at 347. This makes sense in Dura,
where the stock continued to fluctuate on the market. Here, however, there is no
question what the causal connection is between the loss and the misrepresentation. The
misrepresentation caused the complete loss of plaintiffs’ entire investment because the
wells were worthless, and the investments were fraudulent. A private sale of worthless
investments by a company intending to keep the profits by drilling dry wells is in no way
analogous to the public sale of stock by a major corporation.

Moreover, the loss causation requirement of the PSLRA, which provides that,
“the plaintiff shall have the burden of proving that the act or omission . . . caused the loss
for which the plaintiff seeks to recover damages,” 15 U.S.C. § 78u-4(b)(4), does not
preclude rescission damages as a potentially appropriate measure of damages. A district
court does not abuse its discretion by including a rescission theory in the jury
instructions on the proper measure of damages where, as here, plaintiffs have established
that the loss was complete and was caused entirely by defendants’ misrepresentation.

This court has previously recognized rescission as an appropriate measure of
damages for a § 10(b) claim. See Stone v. Kirk, 8 F.3d 1079, 1092 (6th Cir. 1993) (“[I]n
some circumstances, at least, it appears that the plaintiff in a § 10(b)/Rule 10b-5 case
may elect to obtain rescissory damages in lieu of out-of-pocket damages.” (citing
Randall v. Loftsgaarden, 478 U.S. 647, 661 (1986)); Bass v. Janney Montgomery Scott,
Inc., 152 F. App’x 456, 458 (6th Cir. 2005). While Stone and Bass are pre-PSLRA cases
that focus, primarily, on §12(a)(2) claims, we find nothing in the PSLRA that would
make rescissory damages inappropriate for the circumstances of this case; indeed, since
the misrepresentations caused plaintiffs to lose their entire investment, rescission appears
to be the only truly adequate remedy. We emphasize that rescission is a fact-dependent
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 16

remedy for § 10(b) claims and is likely only appropriate in rare or unusual
circumstances. But in this case there was no error in the jury instruction.

C.

Third, defendants challenge the district court’s instruction that tax benefits
should not be deducted from the recovery. Defendants argue that Nonneman received
a large tax benefit from the investments, which should have been deducted from the
recovery.

We disagree. In Randall v. Loftsgaarden the Supreme Court definitively held
that tax benefits are not deducted from rescissory recovery so as to deter bad actors:
“Th[e] deterrent purpose is ill served by a too rigid insistence on limiting plaintiffs to
recovery of their ‘net economic loss.’ The effect of allowing a tax benefit offset would
often be substantially to insulate those who commit securities frauds from any
appreciable liability to defrauded investors.” 478 U.S. at 647, 664 (1986) (internal
citation omitted). This court has applied that holding, as we must. Fleischhauer v.
Feltner, 879 F.2d 1290, 1300–01 (6th Cir. 1989).8 We therefore affirm the district
court’s jury instruction.

V.

Plaintiffs also appeal two of the district court’s rulings. Plaintiffs’ first
contention on the cross-appeal is that the district court erred by refusing to amend the
judgment to award them full rescission. Although the jury found the rescission amount
was $7,700,723, the jury only awarded the Nonneman plaintiffs $1,777,909. Plaintiffs
argue that, if they were entitled as a matter of law to full rescission, then the award of
$1.7 million has left them “massively under-compensated for their losses.”

8
In their reply brief, defendants suggest that the PSLRA has limited recovery to “losses caused
by misrepresentations or omissions,” but defendants cite no law to support this assertion. The PSLRA
states that plaintiffs have the burden of proving loss causation, but that in no way limits the damages that
are available. We see no reason that the PSLRA requires that we now deduct tax benefits from rescissory
damages.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 17

Initially, by way of background, we note that the jury instructions and verdict
form are not models of clarity on the issue of damages for the federal claim. The jury
instructions charged rescissory damages as a permissible measure of damages for the
federal claims. They did not mention any other measure of damages for these claims,
but they also did not require the jury to award rescissory damages in the event it decided
plaintiffs were entitled to damages on the federal claims. The verdict form suggested in
question 1-G that recissory damages were the appropriate measure but then in questions
1-H and 1-I gave the jury the opportunity to compute damages based on the losses
proximately caused by defendants’ fraud—a measure that does not require rescissory
damages. The jury availed itself of the opportunity afforded by questions 1-H and 1-I
and awarded lesser amounts than the amount of rescissory damages.9

The district court found that plaintiffs waived their right to challenge the verdict
by not raising the issue, prior to discharge of the jury, under Fed. R. Civ. P. 49(b). As
we have previously held:

[I]f, after answers to special interrogatories are read, a party does not
object to the discharge of the jury or raise any issue with respect to the
jury’s responses, that party should be deemed to have waived any
objection as to inconsistency, ambiguity, or lack of clarity in the
answers. . . . The purpose of the rule is the allow the original jury to
eliminate any inconsistencies without the need to present the evidence to
a new jury. This prevents a dissatisfied party from misusing procedural
rules and obtaining a new trial for an asserted inconsistent verdict.

Radvansky v. City of Olmsted Falls, 496 F.3d 609, 618 (6th Cir. 2007) (quoting Central
On Line Data Sys., Inc. v. Filenet Corp., 99 F.3d 1138, 1996 WL 483031, at *11 (6th
Cir. 1996) (table)). If the jury’s verdict was inconsistent,10 pursuant to Radvansky,
plaintiffs should have moved under Rule 49(b) for the jury to further consider its

9
Plaintiffs have raised no issue about the language of the instructions or the verdict form at trial
or on appeal.
10
As noted, the jury’s verdict may have been inconsistent, but the record does not conclusively
establish that the district court concluded that plaintiffs were entitled to rescissory damages as a matter of
law, if they prevailed.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 18

answers. It was not error for the district court to find plaintiffs waived their right to
challenge the verdict.

Plaintiffs counter that the district court should have amended the judgment under
Fed. R. Civ. P. 59(e). In this circuit, a district court may alter a judgment under Rule 59
based on (1) a clear error of law; (2) newly discovered evidence; (3) an intervening
change in controlling law; or (4) a need to prevent manifest injustice. Leisure Caviar,
LLC v. United States Fish & Wildlife Serv., 616 F.3d 612, 615 (6th Cir. 2010). Plaintiffs
argue that the jury’s $1.7 million award is both a clear error of law and a manifest
injustice.

We review the denial of a Rule 59(e) motion for abuse of discretion, which
occurs when a district court relies on clearly erroneous findings of fact or when it
improperly applies the law. Intera Corp. v. Henderson, 428 F.3d 605, 619–20 (6th Cir.
2005); see also Leisure Caviar, 616 F.3d at 615 (“A district court, generally speaking,
has considerable discretion in deciding whether to grant [a Rule 59(e)] motion.”).11

The district court did not abuse its discretion. The district court neither relied on
erroneous facts nor improperly applied the law in question, which here was to deny the
Rule 59(e) motion because of the Rule 49(b) waiver rule. Rule 49(b)(4) allows
objections when a jury’s answers “are inconsistent with each other and one or more is
also inconsistent with the general verdict.” Fed. R. Civ. P. 49(b)(4). In this case, two
interrogatories were arguably inconsistent with each other, and the instructions of one
interrogatory were inconsistent with the award of $1.7 million. Our precedent requires
a party to bring a Rule 49(b) motion when there is an inconsistency, which plaintiffs
failed to do. A party that fails to do so has waived its right to object. The district court’s
reading of Rule 49(b) and application of the waiver rule was a correct application of the

11
Plaintiffs note that this court reviews de novo “when the lower court rejects an application
under Rule 59(e) based upon an erroneous legal doctrine.” See Huff v. Metro. Life Ins. Co., 675 F.2d 119,
122 n.5 (6th Cir. 1982). Plaintiffs argue that we should use de novo review because the 59(e) motion was
predicated on an alleged legal error by the jury. This argument misses the point. The district court rejected
application of Rule 59(e) because of the Rule 49(b) waiver rule. The district court’s use of Rule 49(b)
waiver is not “an erroneous legal doctrine”; therefore, we review for abuse of discretion.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 19

law and based on the indisputable fact that plaintiffs did not object; therefore, the district
court did not abuse its discretion.12

VI.

Plaintiffs’ second contention on cross-appeal is that the district court erred in
dismissing their claims under §12(a)(1), 15 U.S.C. §77l(a)(1), as barred by the statute
of limitations.

The relevant statute of limitations states that a §12(a)(1) claim cannot be
maintained “unless brought within one year after the violation upon which it is based.”
15 U.S.C. § 77m.13 Plaintiffs, however, contend that equitable tolling should extend
their limitations period because the facts pertaining to the securities’ exemption status
were concealed to them until discovery in the state court litigation.

We affirm the district court. Because the statute permits claims under §12(a)(2)
to proceed if brought within one year of discovery of the violation but does not have a
similar discovery rule for § 12(a)(1) claims, Congress’s intent on this matter is clear and
that the express language of the statute should be applied. Although we assume that
“Congress legislates against the backdrop of existing jurisprudence unless it specifically
negates that jurisprudence,” Souter v. Jones, 395 F.3d 577, 598 (6th Cir. 2005), the fact
that the statute plainly fails to include a discovery rule for § 12(a)(1)—when juxtaposed
with a provision within the same sentence specifically allowing it for § 12(a)(2)—shows
that Congress intended to negate equitable tolling in this context. This holding is in

12
We also note that plaintiffs brought a Rule 49(b) motion with regard to an inconsistency in the
verdict for Fencorp. For the plaintiffs to have objected to one inconsistency while failing to object to
another was their error.
13
15 U.S.C. § 77m provides in full:
No action shall be maintained to enforce any liability created under section 77k or
77l(a)(2) of this title unless brought within one year after the discovery of the untrue
statement or the omission, or after such discovery should have been made by the
exercise of reasonable diligence, or, if the action is to enforce a liability created under
section 77l(a)(1) of this title, unless brought within one year after the violation upon
which it is based. In no event shall any such action be brought to enforce a liability
created under section 77k or 77l(a)(1) of this title more than three years after the
security was bona fide offered to the public, or under section 77l(a)(2) of this title more
than three years after the sale.
Nos. 09-4315/4316/4323 Nolfi, et al. v. Ohio Kentucky Oil Corp., et al. Page 20

keeping with the interpretive canon, expressio unius est exclusio alterius. Congress
expressly mentioned a discovery rule for § 12(a)(2) claims but not for § 12(a)(1). This
decision puts us in line with the majority of other circuits and the majority of district
courts that have considered the question. See Cook v. Avien, Inc., 573 F.2d 685, 691 (1st
Cir. 1978) (“We hold that, under the explicit language of [the statute], the limitations
period runs from the date of the violation irrespective of whether the plaintiff knew of
the violation.”); Gridley v. Cunningham, 550 F.2d 551, 552–53 (8th Cir. 1977) (stating
that a § 12(a)(1) claim must be brought within one year of the violation, finding that the
statute of limitations period had passed, and not permitting the claim to proceed under
Fed. R. Civ. P. 15(c) as an amendment relating back to an original contract claim); Blatt
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 916 F.Supp. 1343, 1352–53 (D. N.J.
1996) (finding that the statute provides an absolute one year limitation, listing federal
district court opinions that have considered the issue, and noting that the majority view
is that equitable tolling is not permitted). But see Katz v. Amos Treat & Co., 411 F.2d
1046, 1055 (2d Cir. 1969) (allowing equitable tolling where a party said it was in the
process of registering securities when, in fact, it was not).14 Therefore, the district court
correctly held that equitable tolling does not apply to § 12(a)(1) claims.

VII.

For the foregoing reasons, we affirm in full the district court’s judgment.

14
Plaintiffs counter by citing our decision in Souter v. Jones, 395 F.3d 598. Souter, however,
involved interpretation of the Antiterrorism and Effective Death Penalty Act’s one year limitation period.
Id. at 580; see 28 U.S.C. § 2244(d)(1). Section 77m compares two different substantive violations and sets
out different limitation periods, while AEDPA makes no such comparison. The Souter court was therefore
not limited by the expressio unius interpretive canon that informs our decision here. Souter is therefore
not analogous.