Daggett v. Jackie Fine Arts, Inc.

• Decision Date: 20 November 1986
• Docket Number: CA-CIV,No. 1,1
• Citation: 152 Ariz. 559,733 P.2d 1142
• Parties: , Blue Sky L. Rep. P 72,466, RICO Bus.Disp.Guide 6444 Charles DAGGETT, an individual, Plaintiff-Appellant, Cross Appellee, v. JACKIE FINE ARTS, INC., a Florida corporation; Herman Finesod, an individual; Sigmund Rothschild, an individual, Defendants-Appellees, Cross Appellants. 8231.
• Court: Arizona Court of Appeals

Page 1142

733 P.2d 1142

152 Ariz. 559, Blue Sky L. Rep. P 72,466,

RICO Bus.Disp.Guide 6444

Charles DAGGETT, an individual, Plaintiff-Appellant, Cross Appellee, v. JACKIE FINE ARTS, INC., a Florida corporation; Herman Finesod, an individual; Sigmund Rothschild, an individual, Defendants-Appellees, Cross Appellants.

No. 1 CA-CIV 8231.

Court of Appeals of Arizona Division 1, Department C.

Nov. 20, 1986.

Reconsideration Denied Jan. 5, 1987.

Review Denied March 11, 1987.

[152 Ariz. 561] Teilborg, Sanders & Parks, P.C. by J. Clayton Berger, Phoenix, for plaintiff-appellant, cross appellee.

Burch & Cracchiolo, P.A. by Stephen E. Silver, Scott D. Crowell, Phoenix, for defendants-appellees, cross appellants.

OPINION

EUBANK, Presiding Judge.

This appeal involves the Arizona Racketeering Act, A.R.S. § 13-2301, et seq., (Rico), and whether the treble damages provision contained in A.R.S. § 13-2314 requires that the trial court award a successful plaintiff in a civil action treble damages. The cross-appeal questions whether the admitted facts established a "security" sufficiently to support an award of summary judgment.

Appellant, Charles Daggett (plaintiff) filed his complaint against appellee-defendant and cross-appellant Jackie Fine Arts, Inc,, and others (Jackie) alleging multiple counts of fraud and securities violations. Count IV of the complaint was based on A.R.S. § 13-2314, the Arizona Rico statute. Following discovery, plaintiff moved for summary judgment on the Rico count. The trial judge granted plaintiff's motion but, after reconsideration, refused to grant him treble damages. Plaintiff appeals from the denial of treble damages. Jackie cross-appeals from the summary judgment contending that it was improper because genuine issues of material fact exist relating to the factual determination that the transactions constituted a "security" or an "investment contract," as defined by A.R.S. § 44-1801(19).

The basic facts are not in dispute. Plaintiff, who was a contractor in the construction industry, without knowledge or experience in art or the art business, executed a purchase agreement with Jackie, through Jackie's agent, Charles E. Orr, Jr., for the purchase of an "Art Master" for $136,000. The purchase price consisted of cash on closing in the amount of $3700, a promissory note in the amount of $5550, at 8% annual interest, due by October 1, 1979, a second promissory note in the principal amount of $9,250, at 8% annual interest, due by February 1, 1980, and a third promissory note representing the deferred balance of the purchase price in the principal amount of $117,500, at 6% annual interest, due on January 15, 1991. This last note is secured by a security agreement executed by plaintiff and Jackie wherein plaintiff's personal liability is limited to $45,000. This note is described in Jackie's material as a non-negotiable partial recourse note. All of these documents and others were executed as part of a "package" on the same date, June 29, 1979.

The art master was designed basically as a tax shelter. In Jackie's Information Memorandum For the Sale of Art Masters, dated April, 1979, it describes its product as follows:

Jackie Fine Arts markets art masters, each consisting generally of silkscreen mylars, lithographic plates and mylars or photoscreen negatives of an original work of art, together with related copyrights. The artist has agreed to cooperate in the production of 100 to 300 limited edition graphics from the art master, which will be signed and numbered by the artist. The art master purchaser will pay for the costs of production of these graphics.

It also describes the tax considerations of purchasing such a product in these terms:

Jackie Fine Arts has received opinions of its counsel, Meserve, Mumper & Hughes, Los Angeles and Chadbourne, Parke, Whiteside & Wolff, New York, concerning tax matters, which are attached as Exhibits. Subject to the discussion contained therein, the opinions conclude that a purchaser is entitled to a 10% investment tax credit and accelerated depreciation deductions based on the entire purchase price of the art master. A purchaser who properly elects the accrual method of accounting for his trade or business of exploiting the art master is also entitled to currently accrue interest deductions on his notes, including the partial recourse note, and a cash basis taxpayer is entitled to a deduction for interest actually paid. The investment credit available to the purchaser of an art master is not affected by the "at risk" limitation contained in the Code; however, losses incurred in the venture are subject to that limitation. A cash payment made by a purchaser, and all notes as to which the purchaser is personally liable, including the recourse portion of the partial recourse note, qualify as amounts at risk. Accordingly, purchasers of art masters will be allowed to deduct losses up to the total of those amounts. The availability of a substantial portion of these tax benefits depends on a factual determination that the purchaser is acquiring the art master with the intent to engage in the business of exploiting the art master in order to make a profit (aside from tax benefits), and that the purchase price is at least equal to the fair market value of the art master....

The Informational Memorandum contains the two extensive legal opinions by the law firms as indicated.

As a part of the purchase agreement, plaintiff selected the art master entitled "Wild Geese" created by artist Allen Friedman. Two appraisals were contained in the package, also dated June 29, 1979, valuing "Wild Geese" at $145,000 and $165,000 fair market value. Following the sale of an art master, Jackie made all the arrangements with a printer to produce a limited edition of prints. The plaintiff paid Jackie an additional $3,500 for such arrangements and printing.

In plaintiff's affidavit supporting his motion for summary judgment, he states:

4. I made my investment with Jackie Fine Arts, Inc. based upon the representations of Jackie and its agents, including the man who sold the Jackie program to me, Charles Orr, that all distribution and marketing of the art print would be handled by third parties and that my only involvement with the investment would be to pay for the art master in accordance with the terms of the Jackie program and to choose a distributor from among the list of those distributors supplied by Jackie. I was advised that these distributors were available and that they would handle all the actual details of marketing and distributing the print itself without any involvement on my part.

5. It was always my understanding that I would be a passive investor at all times. It was never my intention to actively participate in the marketing and distribution of the art master, and I had no knowledge or experience in that area, and would have been totally unable to do so on my own.

6. Jackie or its agents supplied me with a list of distributors and a form contract for use in retaining the services of a distributor. That material was sent to me unsolicited and was part of the Jackie package.

7. I have paid a total of $21,950.00 to Jackie in conjunction with the purchase of the art master and the preparation of the limited edition of 200 art prints. I have been totally unable to sell any of the art prints, and I have never received any income return on my investment or any revenues or profits as a result of my investment. As a result, I have considered my entire investment to be lost.

8. As a result of my investment in Jackie and based upon the representations made to me by Jackie and its agents, I filed a Schedule C with my personal income tax returns for the years 1977 on, which showed substantial losses which were taken in accordance with the instructions given me by Jackie. Subsequently, I was audited by the Internal Revenue Service, which I am informed has classified the Jackie Fine Arts, Inc.'s program as an abusive tax shelter. As a result of the audit, I was assessed tax deficiencies for the years 1977 through 1980 in the amount of $20,323.60, plus accrued interest at the IRS rate.

9. I was advised that Jackie had retained the law firm of Friedman and Shaftan to defend investors such as myself in the event of an assessment by the Internal Revenue Service. I utilized the services of Friedman and Shaftan for such a defense. Subsequently, I was advised by Friedman and Shaftan that the Internal Revenue Service agreed to allow me to deduct only my out-of-pocket costs as a theft loss and to disallow any additional losses as shown on my tax returns. Based upon their advice and the advice of my counsel, J. Clayton Berger, I agreed to settle the case with the IRS on that basis. As a result, it was necessary for me to pay the sum of $20,323.60, plus interest. I was advised by the Internal Revenue Service that they had filed a tax lien on my residence, and that they would foreclose the tax lien and evict me from my home if I did not pay off the taxes. Consequently, it was necessary for me to refinance my home in order to pay the Internal Revenue Service the amount due.

10. Although I received two appraisals from appraisers retained by Jackie showing that the art print was worth $136,000.00 or more, the art print was submitted to the Art Print Advisory Panel of the Internal Revenue Service for valuation in conjunction with the audit of my income tax returns. The Art Print Advisory Panel, which I am informed consists of nationally recognized art print experts, has valued the art print at $0.00 and based upon my interpretation of their appraisal, the art master sold to me by Jackie has absolutely no commercial value whatsoever.

The vice-president of Jackie filed a counteraffidavit which denied that Jackie had any economic interest in the success of plaintiff's art master, and stated in part:

7. Jackie's role in Charles Daggett's [plaintiff] efforts to commercially exploit his...