Brown v. Rairigh

• Decision Date: 25 October 1978
• Docket Number: No. 77-648,77-648
• Citation: 363 So.2d 590
• Parties: Blue Sky L. Rep. P 71,491 Roger BROWN, Appellant, v. Magel H. RAIRIGH and Richard C. Whiteford, as Personal Representatives of the Estate of W. Wayne Rairigh, Deceased, Appellees.
• Court: Florida District Court of Appeals

Page 590

363 So.2d 590

Blue Sky L. Rep. P 71,491

Roger BROWN, Appellant, v. Magel H. RAIRIGH and Richard C. Whiteford, as Personal Representatives of the Estate of W. Wayne Rairigh, Deceased, Appellees.

No. 77-648.

District Court of Appeal of Florida, Fourth District.

Oct. 25, 1978.

Eugene L. Heinrich of McCune, Hiaasen, Crum, Ferris & Gardner, Fort Lauderdale, for appellant.

Michael W. Melvin of Kennedy & Melvin, Fort Lauderdale, for appellees.

LETTS, Judge.

This case involves one friend buying from another a 10% Interest in 5 harness race horses, which transaction the trial court ruled, as a matter of law, to be the sale of a "security" in violation of the Florida Blue Sky Laws. We reverse.

The appellant's primary occupation is that of a successful public relations executive in New York. However, he is a legal resident of Fort Lauderdale and spends much of his time owning, breeding, raising and racing harness horses at the Pompano track. The appellee investor was a wealthy businessman who met the appellant socially on several occasions, so that the relationship between the two grew into a hospitality swapping friendship. Inescapably the public relations executive's love of horses and his involvement with them became a topic of discussion. It is disputed as to which of the two first suggested that the investor buy an interest in some of the 15 horses then owned by the other, but it is undisputed that the public relations executive had not, with only one exception, previously sold any interest in any of his horses in the manner employed in the case at bar. As such, it is apparent from the facts that he was not in the business of promoting and selling percentage interests in race horses.

Pursuant to their discussions the investor purchased a 10% Interest in 5 horses at the end of February, 1974, for $11,675. Under the terms of the agreement, the investor was to receive 10% Of the winnings of any, or all, of the 5 horses and pay 10% Of all bills and stake fees thereon. Meanwhile, although the agreement is silent on this aspect, it is also undisputed that the public relations executive was to retain custody and control of the horses and undertake all the work of training, caring for and racing them. The agreement further gave the investor an option to purchase a further 25% Interest in the same 5 horses at the same price they were valued at on the date of the original agreement (even if the horses were very successful and obviously, therefore, more valuable). Finally, the investor was also given the privilege of selling the horses back to the public relations executive, providing he did so by January 1, 1975, (the price was to be the market value at time of resale, same to be determined mutually, or by a mutually agreeable horse assessor).

We suspect that had the horses won, the investor would have been most content, but they did not and suffered health problems besides. The investor then wanted his money back, but failed to exercise his privilege of resale on or before the cutoff date. Undismayed, he then claimed that he was sold an unregistered security in violation of Section 517.07 Florida Statutes (1977), ¹ and demanded his original stake back plus interest and attorney's fees.

It has long been recognized that, absent some type of governmental control over the issuance of, and transactions in, securities, many opportunistic and often unscrupulous issuers and dealers in securities will defraud naive or unsophisticated purchasers. 69 Am.Jur.2d 591. The legislative purpose then, in enacting these so called "Blue Sky Laws," was aimed at "speculative schemes which have no more basis than so many feet of 'blue sky;' " Hall v. Geiger-Jones Co., 242 U.S. 539, 37 S.Ct. 217, 61 L.Ed. 480 (1917). ²

Like so many other regulatory statutes, just as fast as they are enacted, the same unscrupulous issuers find more and more loopholes which the legislature keeps on plugging, until the latter day result is a statute that technically might prevent two brothers from purchasing a share in their sister's business, without going through the frighteningly complicated and expensive business of registration. Thus we find, under Section 517.02(1), Florida Statutes (1977), that the word "security" spawns an 18 line definition, in which is included the term "any investment contract." However the term "investment contract" is not itself statutorily defined and we therefore are required to look to the Supreme Court case of S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) for the classic definition of the term. This definition, known as the Howey test, requires:

(1) an investment of money

(2) in a common enterprise

(3) with the expectation of profits to be derived solely from the efforts of the promoter or a third party. ³

Adapting these three criteria to the case at bar we have no trouble in finding that there has been an investment of money and that the profits are to be derived solely from the efforts of the promoter. ⁴ We also can take judicial notice of the fact that joint ownership of race horses can be big business indeed, rising to astronomical levels when we consider the likes of Secretariat, Seattle Slew and Affirmed. The question however remains, do they all necessarily involve a common enterprise and more to the point, is a common enterprise to be found in the case at bar? We think not.

There are basically three lines of cases interpreting the phrase "common enterprise." First of all, there are those that require more than one investor and some kind of joint participation or dependency between investors must be present. See for example, Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Circuit 1972). This view has been adopted by our own Third District in the last few months. See Blacker v. Shearson Hayden Stone, 358 So.2d 1147, opinion filed May 16, 1978.

There is a second line of cases that finds a common enterprise even though there is no joint participation or dependency among the investors. The courts reason that, even though there is no actual interaction between investors, the fortunes of all of them are inextricably tied to the effectiveness of the promoter in securing multiple recruits, so that in truth they are not independent of each other. See for example, S. E. C. v Koscot Interplanetary, Inc., 497 F.2d 473 (5th Circuit 1974).

The third line of cases simply holds that a common enterprise exists even where there is only a one-on-one relationship between the promoter and investor. Huberman v. Denny's Restaurants, Inc., 337 F.Supp. 1249 (N.D.Cal.1972). In Huberman the court found a common enterprise even though only two parties were involved because both of them had an interest in the success of the venture and "were going to benefit from the productive operation of the (isolated transaction)."

To us, this Huberman case...