Straub v. Mountain Trails Resort, Inc.

• Citation: 770 P.2d 1321
• Decision Date: 21 November 1988
• Docket Number: No. 86CA0633,86CA0633
• Parties: Blue Sky L. Rep. P 72,931 William C. STRAUB and Joanne R. Wickersham, Plaintiffs-Appellants, v. MOUNTAIN TRAILS RESORT, INC., a Colorado corporation, Thomas D. Warren, a/k/a Tom Warren, Ira Brawer, a/k/a Ira E. Brawer, Delmar Schroeder, a/k/a Delmar H. Schroeder, individually, Defendants-Appellees. . IV
• Court: Colorado Court of Appeals

Page 1321

770 P.2d 1321

Blue Sky L. Rep. P 72,931

William C. STRAUB and Joanne R. Wickersham, Plaintiffs-Appellants, v. MOUNTAIN TRAILS RESORT, INC., a Colorado corporation, Thomas D. Warren, a/k/a Tom Warren, Ira Brawer, a/k/a Ira E Brawer, Delmar Schroeder, a/k/a Delmar H. Schroeder individually, Defendants-Appellees.

No. 86CA0633.

Colorado Court of Appeals Div. IV.

Nov. 21, 1988.

As Modified on Denial of Rehearing Dec. 22, 1988.

Certiorari Denied March 13, 1989.

C. Jean Smollett, Denver, for defendants-appellees.

JONES, Judge.

In this promissory note and securities fraud case, plaintiffs, William C. Straub and Joanne R. Wickersham, appeal the judgment entered against them. We affirm.

The plaintiffs, along with two other partners, owned the Blue Arrow Campground. Pursuant to an agreement dated March 1, 1982, plaintiffs agreed to sell the campground to defendant, Mountain Trails Resorts, Inc., a corporation, the officers and directors of which were the individual defendants, Thomas Warren, Ira Brawer, and Delmar Schroeder.

The terms of the agreement called for payment of $1,500,000 payable by a promissory note of $5,000 as earnest money; $95,000 cash at closing; a promissory note to plaintiffs and their partners for $50,000, with interest at 18% per annum; and approximately $443,500, to be paid by way of defendants' assumption of plaintiffs' contract for deed with their original mortgagor (lender). The balance of the purchase price, totaling approximately $906,500 was to be paid by four promissory notes due on or before five years after closing, and bearing interest at 12% per annum, payable annually.

All promissory notes from defendants to plaintiffs were secured by campground equipment and memberships that were to be sold in a campground association. It was anticipated that a sufficient number of memberships would be assigned as collateral so that each dollar of defendants' debt would be secured by three dollars of membership value. Ultimately, an escrow agreement was drafted which required 495 memberships to be placed in escrow.

Defendants were to have formed a campground association to sell the memberships. The association was not formed, however, and an organization which defendants contracted with to sell the memberships sold very few before becoming defunct.

The memberships provided only for the members' use and enjoyment of the campground for a specified number of days, as reserved each year, subject to availability. They did not entitle a member to own an interest in real estate or profits. By their express terms, the membership certificates stated that the memberships were not for investment or profit, and did not generate income, dividends, or profits. Also, because the escrow in which the memberships were to be held had no provision for distribution of its contents to plaintiffs, they had no right to the memberships unless defendant defaulted on the purchase price, and had no rights to profits from the memberships or from the campground itself. Their principal interest in the memberships could only be realized upon redemption of the property on foreclosure if defendants defaulted.

Defendants defaulted both as to the underlying lender and as to plaintiffs. The original lender foreclosed and, when plaintiffs failed to redeem, took possession of the campground.

Plaintiffs sued the corporate defendants on the promissory notes. They sued the individual defendants for improper sale of a security under Colorado law, and on an alter ego theory, for individual liability on the notes. The trial court directed verdicts in favor of plaintiffs and against the corporate defendants as to the promissory notes. Plaintiffs' other claims were dismissed upon directed verdicts. This appeal followed.

I.

Plaintiffs first contend that the trial court erred in concluding that the campground memberships pledged as security for the purchase price of the campground were not "investment contracts", and thus, not securities under the Colorado Securities Act of 1981. Section 11-51-102(14), C.R.S. (1987 Repl.Vol. 4B). We disagree.

A "security" under the Colorado act includes an investment contract to the same extent that an investment contract is a security under the Securities Act of 1933, 15 U.S.C. § 77b(1) (1970). Colorado has, thus, adopted the federal test to determine whether a given interest is an investment contract under the Colorado act. See Lowery v. Ford Hill Investment Co, 192 Colo. 125, 556 P.2d 1201 (1976); Raymond Lee Organization Inc. v. Division of Securities, 192 Colo. 112, 556 P.2d 1209 (1976). These cases adopt the benchmark test to determine whether an interest or instrument constitutes an investment contract as stated in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946):

"[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party...."

Whether an interest or instrument is an investment contract is a question of law to be determined by the court. Ahrens v. American Canadian Beaver Co., 428 F.2d 926 (10th Cir.1970). Here, the trial court properly concluded that the campground memberships do not constitute investment contracts because the Howey test was not satisfied.

The memberships do not have the attributes of an investment. Members expected no profits from the memberships. Rather, members expected only personal use of the campground. All Seasons Resorts v. Abrams, 68 N.Y.2d 81, 506 N.Y.S.2d 10, 497 N.E.2d 33 (1986); Cf. Raymond Lee Organization Inc. v. Division of Securities, supra; Lowery v. Ford Hill Investment Co., supra.

Because the memberships do not have the attributes of an investment, and the members did not expect a profit, the circumstances of this case cannot meet the Howey test for an investment contract. Therefore, we need not consider the "common enterprise" element of that test.

Hence, the trial court properly dismissed the claims alleging improper sale of a security under the Colorado Securities Act. See All Seasons Resorts v. Abrams, supra (selling of memberships in outdoor recreational campgrounds did not involve an investment contract).

II.

Plaintiffs also contend that the corporation had no real existence and was...