Brown v. Cole

Citation155 Tex. 624,59 A.L.R.2d 1011,291 S.W.2d 704
Decision Date28 March 1956
Docket NumberNo. A-5244,A-5244
Parties, Blue Sky L. Rep. P 70,306, 59 A.L.R.2d 1011 Edmond L. BROWN, Petitioner, v. Harold G. COLE et al., Respondents.
CourtSupreme Court of Texas

Golden, Croley, Howell, Johnson & Mizell, John L. Roach, Ralph Howell, Jr., Dallas, for petitioner.

Davidson & Silverberg, Philip Silverberg and Douglas E. Bergman, Dallas, for respondents.

CULVER, Justice.

Respondents Cole and Gould sued to recover from Brown the sum of $10,000 expended in an alleged purchase of securities sold to them by petitioner, Brown, in violation of Article 600a, Vernon's Civil Statutes, and commonly known as the Texas Securities Act. Judgment in favor of respondents has been affirmed by the Court of Civil Appeals. 276 S.W.2d 369. We agree with that result.

The facts are set forth in great detail in that opinion and we shall only summarize them as briefly as possible.

A mining operator in Mexico, Howard Fields, required funds for further development of his properties. His authorized representative, Kane, proposed that Brown and others lend $30,000 to Fields for that purpose. The loan would be paid within a reasonable time with interest at five per cent. It was further proposed that Fields would convey his mining properties to a corporation, Carbo Minera S.A., and one-fourth of the capital stock of Carbo Minera would be transferred to another corporation, Industrial Ores de Mexico. The stock in the latter corporation would then be issued to the lenders of the $30,000 proportionately as a further consideration. Brown was at the time a salesman for Beer & Company, a dealer in securities, and a partner in the firm of Brown & Ivey. Brown and Ivey participated in the loan in the amount of $5,000, Gould and Cole for $5,000 each and others, not parties to this litigation, came in for varying amounts.

Brown presented the venture to Gould, and furnished him with a copy of a memorandum and prospectus that included a description of the properties owned by Fields, a financial statement and other information. 1 Gould in turn then made known the proposal to Cole. The matter was discussed between Gould and Brown on several occasions, and upon request Gould mailed to Cole a copy of the memorandum and prospectus. Gould and Cole not being satisfied entirely as to the merits of the venture, Brown proposed that he and Cole's auditor, Bloch, would go to Mexico and make a first-hand investigation. Brown defrayed the expenses of this trip for both himself and Bloch, without any agreement or understanding that the respondents, or anyone else, would reimburse him for any part of this expense.

Upon their return, Bloch's report being satisfactory, both Cole and Gould decided to participate to the extent of $5,000 each, and Bloch himself invested $1,250.

In accordance with instructions from Brown, Gould and Cole made their checks payable to E. L. Brown, Agent. Brown acknowledged receipt of the checks, writing each respondent as follows:

'This letter will acknowledge receipt of your check for $5,000.00 which will be deposited to the E. L. Brown, agent account at the Republic National Bank, Dallas, for transmittal to William G. Kane and will in turn be transmitted to Howard H. Fields. It is understood that the loan will be repaid by Fields through Kane as promptly as is advisable. This will also make it of record with Mr. Kane that your subscription is received for 1/8th of all authorized stock of Industrial Ores de Mexico, S.A. De C.V., and that the total stock of the company now consists of 27,000 shares of preferred and 30,000 common-all one peso par. The total subscription cost to you will be $500.00 payable on or before July 1, 1953. It is mutually understood that this is for private investment purposes and that I am acting as agent for the group.'

Brown promptly transferred these funds to Kane, in Mexico.

Some months later the parties hereto ascertained that the affairs of these two Mexico corporations had been misrepresented to them by Fields and Kane, and it became more or less apparent that the investment would be a total loss. Later, the certificates of stock in Industrial Ores de Mexico were tendered to respondents, and by them rejected. Thereafter respondents assigned and delivered to Brown all of their right, title and interest 'in and to all of the property, property rights and increment described in the attached instrument (letters of receipt from Brown, otherwise described as Exhibits 3 and 6) intending by this general description to include all of my right, title and interest in and to the $5,000.00 loan and the stock subscription rights described in Exhibit A,' thus seeking to comply with Section 33a of Article 600a, Vernon's Texas Civil Statutes.

It is admitted that Brown was not registered as a dealer under the Texas Securities Act, and that the Secretary of State had issued no permit authorizing the issuance and disposal of the alleged securities. Therefore the question here presented for determination is wether or not petitioner Brown made a sale of 'securities' to the respondents.

So far as we are aware, this is the first time a case invoking the penalties of Section 33a has reached the appellate courts, though in Smith v. Fishback, Tex.Civ.App., 123 S.W.2d 771, writ refused, decided prior to the adoption of Section 33a, an exchange of stock in a corporation for oil royalties was held to constitute a sale of securities within the purview of the Securities Act requiring a permit from the Secretary of State, and the plaintiffs were allowed to cancel and rescind their contract.

Petitioner asserts that the Securities Act does not apply to this transaction, for the following reasons: (1) That he made no sale of any securities to respondents, but was merely a co-purchaser or joint adventurer with them; (2) that he was an agent only of respondents and the other investors in transmitting their money to Kane for delivery to Fields; (3) that in the transaction he was not dealing with securities within the terms of the Act; and (4) that the transaction was exempt under Section 3(k) of the Securities Act.

As to the first point, petitioner argues that Kane was the seller, and that Gould and Cole merely joined with petitioner and others in making the loan to Carbo Minera or Fields and the acquisition of stock in Industrial Ores de Mexico. The facts do show that Brown invested his funds along with respondents', and, like them, sustained a total loss; that he received no profit or commission on the transaction; that he knowingly did not make any false representations of fact; and that respondents did not rely on any statements made to them by petitioner, but, on the contrary, conducted their own investigation, through their own auditor, and relied solely on the auditor's report. Petitioner maintains that all subscribing parties to this loan were acting together as co-purchasers; that Brown merely served as the agent of respondents in transmitting their money to Kane, and that petitioner and respondents acquired equal rights from the same person and made the same investment in the same manner.

Admittedly the Act does not undertake to regulate purchasers or to protect sellers against purchasers. Only sellers and sales are regulated. Fowler v. Hults, 138 Tex. 636, 161 S.W.2d 478; Lewis v. Davis, 145 Tex. 468, 199 S.W.2d 146.

The fact that Brown also became a purchaser and a participant does not ipso facto prevent his being a seller. Obviously a dealer could purchase a part of the securities he offered for sale and sell a part to others. The provisions of the Securities Act are broad and comprehensive. Section 2(e) defines the term 'sale', or "offer for sale" or 'sell' as including 'every disposition, or attempt to dispose of a security for value', and provides that 'any security given or delivered with or as a bonus on account of, any purchase of securities or other thing of value, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value.' The Act further defines the term 'sell' as meaning 'any act by which a sale is made, and the term 'sale' or 'offer for sale' shall include a subscription, an option for sale, a solicitation of sale, an attempt to sell, or an offer to sell, directly or by an agent or salesman.'

Under the terms of the Act it is true that Kane was a seller, but if that fact alone would relieve petitioner of his responsibility then Kane could have denied acting in the capacity of a seller by showing that Fields was the seller. Clearly there may be more than one. As we interpret the Act the seller may be any link in the chain of the selling process or in the words of the Act he is one who performs 'any act by which a sale is made'. Suppose that Kane had agreed to pay Brown a commission on securing the participation of respondents and others in this venture, then it could hardly be denied that under the facts here shown Brown would have earned that commission because his efforts resulted in the participation by respondents.

Petitioner claims that he was acting only as the agent or intermediary of respondents in accepting the funds and forwarding them to the seller, solely for convenience and orderly handling. He says this is completely shown by all the facts and circumstances, and particularly by the letters of acknowledgment (Exhibits 3 and 6) written to respondents with the notation that he was acting for the group. In support of his position petitioner cites Herren v. Hollingsworth, 140 Tex. 263, 167 S.W.2d 735, where the Securities Act was held not to apply. In that case, however, Herren was neither to sell nor to buy. He was authorized to find a driller who would explore Hollingsworth's ranch for oil and gas, and a contract, if agreeable to the driller and Hollingsworth, would then be negotiated between them. This cause of action, like that in Fowler v. Hults, supra, was not...

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