Cameron v. Outdoor Resorts of America, Inc., 77-2312

• Decision Date: 13 December 1979
• Docket Number: No. 77-2312,77-2312
• Citation: 608 F.2d 187
• Parties: Fed. Sec. L. Rep. P 97,210 Nelson C. CAMERON, Jr., and Helen S. Cameron, Plaintiffs-Appellees-Cross Appellants, v. OUTDOOR RESORTS OF AMERICA, INC., etc., et al., Defendants-Appellants-Cross Appellees, Associates Capital Corp., etc., et al., Defendants-Appellees. Joseph E. KARL and Dorothy A. Karl, Plaintiffs-Appellees-Cross Appellants, v. OUTDOOR RESORTS OF AMERICA, INC., etc., et al., Defendants-Appellants-Cross Appellees, Associates Capital Corp., etc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 187

608 F.2d 187

Fed. Sec. L. Rep. P 97,210

Nelson C. CAMERON, Jr., and Helen S. Cameron, Plaintiffs-Appellees-Cross Appellants, v. OUTDOOR RESORTS OF AMERICA, INC., etc., et al., Defendants-Appellants-Cross Appellees, Associates Capital Corp., etc., et al., Defendants-Appellees.

Joseph E. KARL and Dorothy A. Karl, Plaintiffs-Appellees-Cross Appellants, v. OUTDOOR RESORTS OF AMERICA, INC., etc., et al., Defendants-Appellants-Cross Appellees, Associates Capital Corp., etc., et al., Defendants-Appellees.

No. 77-2312.

United States Court of Appeals, Fifth Circuit.

Dec. 13, 1979.

Opinion On Rehearing Feb. 4, 1980.

See 611 F.2d 105.

Ted R. Brown, Orlando, Fla., for defendants-appellants-cross appellees.

Trapp & Black, A. Clifton Black, J. Thomas Cardwell, Orlando, Fla., for plaintiffs-appellees-cross appellants.

Harlan Tuck, Orlando, Fla., for Associates Capital Corp.

Appeals from the United States District Court for the Middle District of Florida.

Before BROWN, CHARLES CLARK and VANCE, Circuit Judges.

VANCE, Circuit Judge:

Outdoor Resorts of America, Inc., and several of its officers and agents, were found to have violated Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 under that provision, 17 C.F.R. § 240.10b-5, and to have committed common law fraud. Suit was brought by two investors, Joseph E. Karl and Nelson Cameron, who alleged that they were induced to invest in condominium campsites by materially misleading projections of rental income made by Outdoor Resorts and its agents. We agree with the district court's conclusions that the multiple campsite packages constituted securities, that controlling persons are liable for agents' misrepresentations, and that an assignee acting in good faith and without knowledge of securities law violations can enforce the mortgages and notes. The district court failed to make sufficient findings as to whether for security law purposes the misrepresentations were made with scienter. We conclude, however, that its holding that the same defendants are equally liable for common law fraud is not clearly erroneous. We therefore affirm its judgment both in favor of plaintiffs and in favor of Associates Capital Corp. on its counter claim.

I.

As it must be viewed on appeal the record discloses the following facts:

Outdoor Resorts had developed an outdoor campsite in Gatlinburg, Tennessee, and by October 1971 was constructing a similar condominium campsite near Orlando, Florida. At the Orlando campsite it planned to offer for sale nearly 1,000 lots. The lots were to have utility connections, and the campsite was to have swimming areas, parks, a golf course and tennis courts by late December 1972, and a recreational hall by July 1973. The company directed sales of these condominium campsites primarily toward individual sales for the purchaser's own recreational use. The declaration of condominium gave Outdoor Resorts the exclusive right to rent the campsite in the absence of the owner and his guests with the owner paying the condominium fees, utility expenses, and property taxes and receiving half of the rental income from his lot. Rental income was determined by campers' choices of a particular lot rather than by Outdoor Resorts' pooling of all rental income or its random assignment of lots.

Karl learned of the Orlando campsite when he stopped his motor home at Outdoor Resorts' Gatlinburg campsites where he owned two lots. Two Outdoor Resorts salesmen, Bill Kirk and Earl Carver, described the Orlando development and projected a rental rate of $10 nightly and an occupancy rate of eighty percent. Karl then told his friend, Cameron, about the Orlando campsite, and they arranged to meet Kirk and Carver there to discuss a multiple lot purchase.

Several agents of Outdoor Resorts at the Orlando site made representations to Karl and Cameron about the income potential of campsite investment during their visit on October 25 and 26, 1971. George Gaines, then the national sales manager, had prepared a statement of projected cash flow and had passed it to Carver and to George Blackburn, the construction manager. Carver showed the statement to Karl at Gatlinburg, then Blackburn discussed it during the Orlando visit. This statement asserted that the campsites would enjoy "80% Occupancy Due to Location" and would produce "$5.00 Day" (as the owner's one-half share of its rental income) beginning in June 1972. It showed that the rental income would cover the debt payments beginning in June 1972 for a block of twenty campsites. A secretary of Outdoor Resorts handed Cameron an identical statement, which Carver had caused to be prepared. This statement set forth the same assumptions about occupancy and rental rates after about six months and rental coverage of debt payments. Carver and Kirk told Karl and Cameron that the company expected eighty percent occupancy and $10 rental nightly. Blackburn made these same representations on giving Karl the statement, although he denied having represented that this was probable for the near future. Gaines discussed the statement with Karl and Cameron, although he also mentioned the possibility of a fifty percent occupancy rate.

On October 26, 1971, Karl purchased twenty-five lots and Cameron purchased twenty at $6,000 each, and they executed notes and purchase money mortgages for most of this sum. Their purpose for investment manifestly was realization of rental income, and Outdoor Resorts knew of that purpose. The district court found that Karl and Cameron relied on Outdoor Resorts' representations and that the representations induced their investment. It also determined that Outdoor Resorts realized the lack of a factual basis to estimate occupancy or rent, on the basis of statements to that effect by its president, E. Randall Henderson, Jr., its chairman of the board, Albert W. Johnson, and its corporate secretary (also a director), Ben Kingree.

Outdoor Resorts assigned the notes and mortgages to Associates Capital Corp. Associates did not participate in the misrepresentations or know of them at the time. The campsite's rental income fell far short of the projected level that would cover the debt payments. Karl and Cameron subsequently defaulted on the notes and mortgages.

Karl and Cameron brought suits demanding rescission of the campsite contracts for violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 under that provision, and for commission of common law fraud. The district court found that Section 10(b) and Rule 10b-5 were violated by Outdoor Resorts, Kirk, Carver, Blackburn, Gaines, and Henderson as a controlling person, and that common law fraud was committed by all but Henderson. ¹

II.

A. Condominium Campsite Blocks as Securities

An investment contract, which is a type of security under the Securities Exchange Act, § 3(a)(10), 15 U.S.C. § 78c(a)(10), is defined as

a contract, transaction, or scheme whereby a person invests his money in (1) a common enterprise and is led to (2) expect profits (3) solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.

SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946). Accord, SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 477 (5th Cir. 1974). All three elements must be present for a land contract to constitute a security. A contract to purchase residential or recreational property "when a purchaser is motivated by a desire to use or consume the item purchased" does not come within the securities law. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852-53, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975). Accord, SEC Release No. 33-5347, 17 C.F.R. § 231.5347, 38 Fed.Reg. 1735, 1736 (Jan. 18, 1973). ² On the other hand, an offering of condominium units constitutes an offering of securities if it involves (1) both a rental arrangement and sales emphasis on the economic benefits to the purchaser from the managerial efforts of the promoter or third parties; (2) a rental pool arrangement; or (3) material restrictions on the owner's occupancy or rental of his unit, such as a requirement for making the unit available for rental for part of the year or a requirement for using an exclusive rental agent. Id. The sale of the condominium campsite blocks involved both a rental arrangement with sale emphasis, in the case of the multiple-unit sales to Karl and Cameron, on rental benefits from other persons' management, and material restrictions on the owner's rental through the exclusive agency provision. The offering of these campsite blocks therefore constituted an offering of a security under the Securities Exchange Act, as an examination of the three factors under Howey makes clear.

First, these condominium campsite blocks involved investment in a common enterprise. The crucial factor is that "the fortunes of all investors are inextricably tied to the efficacy" of common management and promotion. SEC v. Koscot Interplanetary, Inc., 497 F.2d at 479. Accord, SEC v. W.J. Howey Co., 328 U.S. at 300, 66 S.Ct. 1100. The benefit to Karl from twenty-five lots and to Cameron from twenty was inextricably wedded to the success of Outdoor Resorts' rental business including its advertising and management. It is irrelevant that these owners might have refused to rent out their campsite lots or rented the sites out themselves. E. g., SEC v. W.J. Howey Co., 328 U.S. at 295, 66 S.Ct. 1100 (investor could enter service contract with different company); Blackwell v. Bentsen, 203 F.2d 690, 691-92 (5th Cir. 1953), Cert. dismissed, 347 U.S. 925, 74 S.Ct. 528, 98 L.Ed. 1078 (1954) (investor could sell produce from his own lot). It is also not controlling that the rental income varied with the individual owners' lots, depending on which campsites tourists chose,...