Bergquist v. International Realty, Ltd.

• Decision Date: 03 July 1975
• Citation: 272 Or. 416,537 P.2d 553
• Parties: , Blue Sky L. Rep. P 71,239 Lois J. BERGQUIST et al., Respondents, v. INTERNATIONAL REALTY, LTD., an Oregon Corporation, et al., Appellants. *
• Court: Oregon Supreme Court

Page 553

537 P.2d 553

272 Or. 416, Blue Sky L. Rep. P 71,239

Lois J. BERGQUIST et al., Respondents, v. INTERNATIONAL REALTY, LTD., an Oregon Corporation, et al., Appellants.

Supreme Court of Oregon, In Banc ^*.

Argued and Submitted Jan. 6, 1975.

Decided July 3, 1975.

Ronald J. Loew, Portland, argued the cause for appellants International Realty and Stanley Harris. John J. Haugh, Portland, argued the cause for appellant Shepherd. With them on the joint briefs were O'Connell, Goyak & Haugh, P.C., Portland.

Mack C. McClanahan and Peter C. Richter, Portland, argued the cause for respondents Bergquist, Landauer, Parker and Anderson and counsel for respondent Atwood. With them on the brief were Miller, Anderson, Nash, Yerke & Wiener, Portland, and Nikolaus Albrecht, Portland, as attorney for respondent Atwood.

Lee Johnson, Atty. Gen., W. Michael Gillette, Sol. Gen., and Jim G. Russell, Asst. Atty. Gen., Salem, filed a brief as amicus curiae for Corporation Division.

BRYSON, Justice.

The plaintiffs commenced five separate suits to rescind a contract of sale whereby they purchased undivided fractional interests in the Spanish Villa, an apartment complex in Washington County, Oregon, for the sum of $600,000 from defendant International Realty, Ltd., a corporation (hereinafter International). Plaintiffs alleged that defendants, in effecting such sales to plaintiffs, engaged in the sale of unregistered, nonexempt 'securities' in violation of the Oregon Securities Law, ORS Chapter 59, and sought recovery under the provisions thereof.

The suits, by order of the court pursuant to ORS 11.050, were consolidated for trial to determine if the transaction between the parties constituted the sale of 'securities' and to determine the rights and liabilities of the respective parties pursuant to the Oregon Securities Law.

The trial court found the sales-leaseback contracts to be unregistered, nonexempt securities (investment contracts) and entered a decree in favor of plaintiffs. Defendants appeal.

Defendant International is an Oregon licensed real estate broker specializing in the sale of apartment houses and real property investments. It employs numerous associate brokers. Defendant Stanley Harris is a licensed broker and president-manager of International and specializes in real estate investments as 'tax shelters.' Defendant Shepherd is the designer-contractor who built the Spanish Villa and sold the same to International and leased it back from the plaintiffs.

In the fall of 1969 Shepherd and International discussed the sale of Spanish Villa to International with a leaseback to Shepherd. Shepherd had a $400,000 construction loan from a bank with a take-out long term note and mortgage to Pacific First Federal Savings and Loan. In spite of this, Shepherd was experiencing financial difficulty as a result of constructing Spanish Villa. These discussions between Harris, of International, and Shepherd led to the execution of an agreement dated November 21, 1969, between Shepherd, seller, and International, buyer, for the sale and purchase of Spanish Villa and provided that Shepherd would lease back the apartment similtaneous with the sale to International. On December 20, 1969, International purchased Spanish Villa from Shepherd pursuant to a land sale contract for the sum of $540,000.

After the November 21, 1969, agreement was executed, International began marketing or finding purchasers for its interest in Spanish Villa. Harris, through International, interested the plaintiffs and others, as investors, to purchase varying percentages in Spanish Villa; the total interest of the purchasers represents the 100 percent interest of International.

Harris testified:

'A * * * (W)e had to have what is called a swing man that would take a significant piece of it, generally 30 per cent or more or about a third in order to make--make it possible for smaller investors to participate without making it a public offering, so we had to have the swing man lined up ahead of time. * * *.'

The plaintiffs Parker were unknowingly designated the 'swing man.' Harris further testified, including his deposition read into the record, as follows:

'A * * * I am still not too clear on what the security laws are since they have been explained ten different ways by ten different people to me since then. We were structuring it from a tax point of view and I think in--in taking my remarks out of context we are thinking firstly that a security does not have the depreciation allowed from the Federal income tax, so we structured this from the tax point of view so that the tax people would not declare it a security or the SEC would not. * * *.

'* * *

'A * * * (W)e were pioneering some ground that a lease would get around the Securities & Exchange Commission requirement that you simultaneously sold to a group of people and provided management, centralized management immediately. There was a Florida case that said it could be turned to security, but if it was an undivided interest and it was leased back, then it was not a security. So we had to work within the scope of our own operation and our own license.'

Dr. Bergquist, one of the plaintiffs, described his understanding with Harris as follows:

'A Well, I don't recall specifically, but he (Harris) told me that he had 15 per cent of an apartment house available and that there would be certain income tax advantage to me to own this. It was my understanding that this was a limited partner ventureship.

'Q Where did you get that understanding?

'A From Mr. Harris.

'* * *

'A Well, Mr. Harris outlined and showed me a lot of figures that I really don't understand about, prepaid taxes, cash flow and all that sort of thing.

'* * *

'A I would own 15 per cent of the apartment, but I had no actual control of it.

'Q Is that what Mr. Harris told you?

'A That was my understanding, yes.'

Plaintiff Sarah Landauer testified that Harris explained the transaction to her as follows:

'A He (Harris) said that the new property was a new apartment house that would not need much upkeep, that, you know, there wouldn't have to be a lot of investment in it. What we put into the property initially would be all that we have to do. It would just be an investment. We put in that amount of money and just step aside and that would be it and the combination of what tax shelter there was and the cash flow from the apartment house would help service a loan that we had taken out in order to pay for the property.'

International sold Spanish Villa to plaintiffs and others by land sale contract dated December 20, 1969, for the sum of $600,000 with $47,000 of the down payment being 'prepaid interest through DECEMBER 31, 1970.' The plaintiffs actually signed the contract on different dates sometime after December 25, 1969. Plaintiffs purchased a total of 72 percent of International's 100 percent interest.

Upon signing the December 20, 1969, agreement to purchase, the plaintiffs and other purchasers executed, as of the same date, a lease of the apartment back to Shepherd for a period of four and one-half years with options to renew. ¹ International was to serve as escrow agent for the receipt and disbursement of all funds. There is testimony that Harris stated that he was using this 'form of investment contract to avoid having to register it as a security.'

This is a summarization of the evidence, including numerous exhibits which we have reviewed, describing this transaction. ²

Defendants first contend that the court erred 'in holding that the respective sales of interests in Spanish Villa were sales of an investment contract and therefore a security required to be registered under ORS 59.055.'

ORS 59.015(13)(a) ³ provides:

"Security' means a note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in a pension plan or profitsharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, Investment contract, voting-trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such title or lease, Or, in general, any interest or instrument commonly known as a 'security,' ⁴ 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 supplied.)

We construe this statute liberally in light of the legislative purpose of the Oregon Securities Law to afford the 'greatest possible protection' to the public. Day v. Saunders, 99 Or.Adv.Sh. 2408, 2409--410, 528 P.2d 513 (1974); Adams v. American Western Securities, 265 Or. 514, 524, 510 P.2d 838 (1973); Union Land Associates v. Ussher, 174 Or. 453, 457, 149 P.2d 568 (1944).

In addition, we note the legislature's concern in its 1967 revision of the Oregon Securities Law to 'protect the public investor more than present law' does by adopting, in particular, a definition which 'is intended to include every possible kind of interest in a venture.' Hearings on House Bill 1299 Before the House Judiciary Committee, 54th Oregon Legislative Assembly, Regular Session (February 24 & 27, 1967).

Numerous writers have discussed the definition of a 'security' or 'investment contract' ⁵ following the 'test' developed by the United States Supreme Court under the Federal Securities Act in SEC v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).

'In other words, an investment contract for purposes of the (Federal) 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 * * *.' SEC v. W. J. Howey Co., 328 U.S. at 298--99, 66 S.Ct. at 1103.

Our cases, as well as the federal decisions, have expressly...