Vairo v. Clayden

• Decision Date: 24 February 1987
• Docket Number: CA-CIV,No. 1,1
• Citation: 153 Ariz. 13,734 P.2d 110
• Parties: , Blue Sky L. Rep. P 72,503, RICO Bus.Disp.Guide 6562 Frank and Marlene VAIRO, husband and wife, Plaintiffs-Appellees, v. Eric L. CLAYDEN dba BCSI, and Shelia Clayden, Defendants-Appellants. 8659.
• Court: Arizona Court of Appeals

Page 110

734 P.2d 110

153 Ariz. 13, Blue Sky L. Rep. P 72,503,

RICO Bus.Disp.Guide 6562

Frank and Marlene VAIRO, husband and wife, Plaintiffs-Appellees, v. Eric L. CLAYDEN dba BCSI, and Shelia Clayden, Defendants-Appellants.

No. 1 CA-CIV 8659.

Court of Appeals of Arizona Division 1, Department D.

Feb. 24, 1987.

[153 Ariz. 15] Teilborg, Sanders & Parks, P.C. by J. Clayton Berger, Phoenix, for plaintiffs-appellees.

Kaplan, Jacobowitz, Byrnes, Rosier & Hendricks, P.A. by Richard G. Himelrick, Phoenix, for defendants-appellants.

OPINION

EUBANK, Presiding Judge.

Appellants Eric Clayden dba BCSI and Shelia Clayden (Clayden) appeal from summary judgment entered against them and various other defendants in favor of Appellees Frank and Marlene Vairo (Vairo). The trial court held that the defendants offered and sold unregistered securities in the form of master videotapes and entered judgment in the amount of $12,865.03, which was trebled in accordance with A.R.S. § 13-2314(A).

Issues raised on appeal include:

(1) whether the sale of a master videotape in conjunction with a distribution agreement constitutes a security, and specifically whether the record presented fact disputes, which should preclude summary judgment;

(2) whether treble damages are mandatory under the Arizona Racketeering Act, A.R.S. § 13-2314(A);

(3) whether settlement before judgment should be set off before or after the trebling of actual damages; and

(4) whether the trial court properly computed total damages when it trebled prejudgment interest.

I. FACTS

Defendant Vitagram, Inc., a California corporation, produced 200 to 300 master videotapes covering a wide variety of topics. Vitagram was solely owned by Defendants Arthur and Lareed Graves (Graves). Defendant Consulmac, Inc. and other outside salesmen sold the videotapes for approximately 25 percent commission paid by Vitagram. Defendant Clayden initially worked for Vitagram and then Consulmac, selling Vitagram's master videotapes.

Vairo's accountant, Defendant Timothy Mueller, referred Vairo to Clayden. Mueller made certain representations to Vairo concerning tax shelter benefits available from the investment in Vitagram's videotapes, based upon information contained in documents provided by Clayden, as well as statements made to him by Clayden. Mueller received commissions from Clayden when Vairo purchased two Vitagram videotapes packages. Vairo purchased the first tape, entitled "The Way We Were," on or about October 28, 1981, for a total purchase price of $66,270. The terms of the sale provided for a $2,798 down payment with the execution of two notes, payable on or before April 15, 1984, for the balance. Vairo purchased the second tape, entitled "Snowfall in the Spring," on or about December 17, 1982, for a purchase price of $34,500. This purchase was made without a down payment. The entire purchase price was evidenced by a full recourse note payable within three years. Payments totaling $2,872, were eventually made to Vitagram with respect to both purchases.

The terms of the purchases were set forth in separate "Television Property Purchase Agreements." Both of these agreements provided, in part:

3. Distribution and Commercial Exploitation

(a) ... Owner [Vairo] shall not in any way rely upon Producer [Vitagram] either to refer a distributor or to give any guidance whatsoever with respect to the commercial exploitation of the Tape(s) and any success or failure of any commercial exploitation of the Tape(s) shall be the sole responsibility of Owner.

(b) Upon the execution hereof, but not later than thirty (30) days after Delivery of the Tape(s), Owner agrees either to give his own reasonable efforts, or to license a distributor, or both, for the commercial exploitation of the Tape(s).

(c) Until Owner's indebtedness herein to Producer is fully paid, Owner shall cause, and does hereby assign to Producer, any and all gross receipts received or to be received by Owner from any source whatsoever from any use by Owner whatsoever of the Tape(s), to be paid directly to Producer ...

Vairo also entered into a "Distribution Agreement" with Teledent, Inc., a California corporation, at the same time he entered into each Television Property Purchase Agreement. Defendant Graves, the owner of Vitagram, also owned Teledent. The total price of the Distribution Agreement for "The Way We Were," was $17,200, and for "Snowfall in Spring," $24,500. Vairo paid a total of $7,613.00 pursuant to these distribution agreements.

Under the distribution agreements, Vairo ultimately received payments totalling $482.00. Vairo was to receive 80 percent of the income generated from the distribution of the master videotapes until the amount provided for in the agreements had been paid to Clayden. Thereafter, Teledent would keep 80 percent of the income and 20 percent would go to Vairo. Additional facts will be set forth hereafter as needed.

The record indicates that the Internal Revenue Service determined the investment was an abusive tax shelter and disallowed the tax benefits Vairo had anticipated. Vairo subsequently filed suit against Defendants Vitagram, Teledent, Graves, Clayden, Mueller, Consulmac, and the owner of Consulmac, Whipple, alleging that the defendants had sold them unregistered securities, that defendants Clayden and Mueller were not registered salesmen or dealers of securities, and that the sales violated the Arizona Racketeering Act. It is undisputed that Clayden and Mueller are not, and never have been, registered securities salesmen or dealers. Further, it is undisputed that the videotapes were not registered as securities. Mueller settled the claim against him for $5,000 and was dismissed from the lawsuit with prejudice. Summary judgment was entered against most of the remaining defendants, from which only Clayden appeals. ¹

II. SUMMARY JUDGMENT

On appeal, Clayden contends that there are factual disputes concerning whether or not the transactions involved were securities, thus precluding summary judgment. Summary judgment is proper only when there is no dispute as to any genuine issue of material fact, when there is only one inference to be drawn from the fact, and when the moving party is entitled to judgment as a matter of law. Nicoletti v. Westcor, Inc., 131 Ariz. 140, 639 P.2d 330 (1982); Rule 56(c), Arizona Rules of Civil Procedure. In reviewing a summary judgment a court must resolve any doubt in favor of the losing party, viewing all facts and inferences in a light most favorable to that party. Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983).

The definition of security in A.R.S. § 44-1801(19) is substantially similar to its definition in the Securities Act of 1933 and the Securities Exchange Act of 1934. Rose v. Dobras, 128 Ariz. 209, 211, 624 P.2d 887, 889 (App.1981). Arizona courts look to federal law for guidance in interpreting its securities law. Greenfield v. Cheek, 122 Ariz. 70, 593 P.2d 293 (App.1978), approved, 122 Ariz. 57, 593 P.2d 280 (1979); Rose v. Dobras, 128 Ariz. at 211, 624 P.2d at 889.

Both the Arizona and federal definitions of securities include "investment contracts." A.R.S. § 44-1801(19); 15 U.S.C. § 77b(1). The United States Supreme Court has developed a three-prong test to determine the existence of an investment contract. It requires (1) an investment of money, (2) in a common enterprise, (3) with the expectation that profits will be earned solely from the efforts of others. Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1944); Rose v. Dobras, 128 Ariz. at 211, 624 P.2d at 889; Daggett v. Jackie Fine Arts, Inc., 152 Ariz. 559, 565, 733 P.2d 1142, 1148 (App.1986). There is no question that Vairo invested money. Thus, the first prong of the Howey test is met.

Clayden contends that there are fact disputes concerning the second and third prongs. A common enterprise exists when "the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties". Securities and Exchange Commission v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973).

Two tests have been developed to analyze the common enterprise prong of the Howey test: (1) vertical commonality and (2) horizontal commonality. Daggett v. Jackie Fine Arts, Inc., 152 Ariz. at 565, 733 P.2d at 1148. Horizontal commonality requires that a pooling of funds collectively managed by a promoter or third party take place, while vertical commonality requires a positive correlation between the success of the investor and the success of the promoter without a pooling of funds. Id. In Arizona, satisfying either commonality test satisfies the common enterprise test. Id. at 566, 733 P.2d at 1149.

Vairo argues that a common enterprise exists by contending that this case is "on all fours" with Sullivan v. Metro Productions, 150 Ariz. 573, 724 P.2d 1242. We do not agree. The record indicates that the payment terms here call for full recourse notes. Sullivan, on the other hand, was based, in part, on nonrecourse notes. The importance of this fact was highlighted in Daggett v. Jackie Fine Arts, Inc., supra, 152 Ariz. at 566, 733 P.2d at 1149, where we found vertical commonality on the basis of nonrecourse notes, the payment of which depended on the success of the investor.

Viewing all facts and inferences drawn from the record in favor of the appellant, the record indicates to us that the success or failure of the investment may not be interwoven here. Likewise, there is no evidence of the pooling of funds. Thus, an issue of fact exists regarding whether a common enterprise exists.

Similarly, Vairo asserts that the third prong is satisfied because of Sullivan v. Metro Productions, Inc., supra. The "efforts of others" must involve significant managerial efforts which affect the...