Gordon v. Drews

• Decision Date: 12 April 2004
• Docket Number: No. 3775.,3775.
• Court: South Carolina Court of Appeals
• Parties: Frank GORDON, Jr., as Attorney-in-Fact for Dorothy Gordon, Respondent, v. Rudolph Robert DREWS, and Raymond Beasley, Appellants.

358 S.C. 598

595 S.E.2d 864

Frank GORDON, Jr., as Attorney-in-Fact for Dorothy Gordon, Respondent, v. Rudolph Robert DREWS, and Raymond Beasley, Appellants.

No. 3775.

Court of Appeals of South Carolina.

Submitted December 8, 2003.

Decided April 12, 2004.

Rehearing Denied May 20, 2004.

Kerry W. Koon, of Charleston, for Appellants.

Justin O'Toole Lucey, of Mt. Pleasant, for Respondent.

CURETON, A.J.:

Respondent Frank Gordon¹ brought this action against Rudolph Robert Drews alleging the illegal sale of stock in a corporation, misrepresentation, and breach of fiduciary duty. The trial court: (1) found Drews liable for the sale of unregistered securities in the sum of $50,000; (2) dismissed the other claims; and (3) awarded interest and attorney's fees. Drews appeals. We affirm.

FACTS/PROCEDURAL HISTORY

Drews and his business partner, Raymond Beasley, decided to open a hardware store in the West Ashley area of Charleston in 1996. The store, known as Builders Station, was incorporated, and its board of directors approved a business plan and capital structure that provided for the sale of stock to outside investors.

Drews and Beasley agreed that each would own a twenty-five percent share of stock in Builders Station. The other half of the outstanding shares would be sold to outside investors. Drews and Beasley also agreed they would each acquire an additional one-half share for each share issued to outsiders. Ultimately, Builders Station had eleven shareholders.

Among the investors the company was able to attract was Frank Gordon. On several occasions, Gordon discussed with Drews and Beasley the possibility of investing in the new store. Before agreeing to purchase shares, Gordon asked about the capital structure of the company. Gordon testified he expressed concern that "the monies put in by investors were no where [sic] near sufficient." Drews reportedly tried to allay his concern by informing Gordon the company anticipated receiving a $250,000 loan that would be guaranteed by the Small Business Administration. Gordon also claimed Drews and Beasley made oral representations that receipt of the loan was all but certain by assuring Gordon it was a "done deal" or "in the bag." After receiving assurances from Drews and Beasley, Gordon purchased fifty shares at $1,000 per share.

The $250,000 loan, however, never came to fruition. When Drews originally negotiated the terms of the loan, he agreed to pledge several parcels of real property he owned as collateral. He later sought to revise the terms, seeking a right of indemnification for his collateral, additional compensation, or both. Drews' attempts to renegotiate the loan delayed and ultimately prevented its consummation.

The company's board of directors (of which all eleven shareholders were members) learned of the dispute over the guaranty and collateralization of the SBA loan in November 1996. Despite the Board's additional attempts to obtain the loan, the issue was never resolved. The Board later decided to end Drews' relationship with the company. Ultimately, a "Release and Settlement Agreement" was executed releasing Drews and the shareholders from all liability arising out of their business relationship with the corporation. Though a majority of the shareholders signed the Release, Frank Gordon refused.

The business did not succeed and ultimately closed in October 1997.

Gordon brought suit against Drews, claiming the sale of stock was illegal and fraudulent under section 35-1-1490 of the Uniform Securities Act, S.C.Code Ann. §§ 35-1-10 to 1590 (Supp.2003).² He also asserted claims for common-law misrepresentation and breach of fiduciary duty in connection with Drews' sale of the stock.

The trial court found Drews was liable under section 35-1-1490(1) for the illegal sale of unregistered securities. The court concluded, however, that Drews was not liable for the fraudulent sale of stock under section 35-1-1490(2), nor for common-law misrepresentation or breach of fiduciary duty. Drews appeals.

STANDARD OF REVIEW

Section 35-1-1490 provides that a person who purchases a security as a result of an illegal or fraudulent sale or offer "may sue either at law or in equity to recover the consideration paid for the security." S.C.Code Ann. § 35-1-1490 (Supp.2003).

To determine whether this suit is legal or equitable, we must look to the "main purpose" of the action as reflected by the nature of the pleadings and proof, and the character of relief sought under them. Ins. Fin. Servs., Inc. v. South Carolina Ins. Co., 271 S.C. 289, 293, 247 S.E.2d 315, 318 (1978); see also Alford v. Martin, 176 S.C. 207, 212, 180 S.E. 13, 15 (1935) (finding "[t]he character of an action is determined by the complaint in its main purpose and broad outlines and not merely by allegations that are merely incidental"); Nat'l Bank of South Carolina v. Daniels, 283 S.C. 438, 440, 322 S.E.2d 689, 690 (Ct.App.1984) (noting that, although the determination of whether an action is legal or equitable "must be determined from the character of the action as framed in the complaint," the court may also consider "the prayer for relief and any other facts and circumstances which throw light upon the main purpose of the action").

In this action, the only cause of action before this Court is Gordon's claim seeking return of the price he paid for the Builders Supply stock. Furthermore, this was the exclusive remedy allowed by the trial court. The action, therefore, is rescissionary in nature and is appropriately reviewed under the equitable standard of review. See Brown v. Greenwood Sch. Dist. 50 Bd. of Trustees, 344 S.C. 522, 525, 544 S.E.2d 642, 643 (Ct.App.2001) (holding an action to rescind a contract was equitable in nature).

Accordingly, this Court may "find facts in accordance with its views of the preponderance of the evidence." Townes Assocs. v. City of Greenville, 266 S.C. 81, 86, 221 S.E.2d 773, 775 (1976). Our broad scope of review, however, does not require this Court to disregard the findings of the trial judge who saw and heard the witnesses and was in a better position to judge their credibility. Ingram v. Kasey's Assocs., 340 S.C. 98, 105, 531 S.E.2d 287, 291 (2000).

LAW/ANALYSIS

I. Drews' Liability Under the Securities Act

The South Carolina Uniform Securities Act prohibits the sale of securities in this state unless the securities are properly registered with the securities commissioner or the securities are subject to an exemption. See S.C.Code Ann. § 35-1-810 (Supp.2003). Drews admits the Builders Supply stock at issue in this case was not registered with the commissioner. Drews, however, claims he is not liable for the illegal sale of stock because (A) the stock offering was an exempt transaction under the Securities Act, and (B) he did not participate in the sale of the stock.

A. Exemption from Registration Requirement

Drews argues the trial court erred in finding the offering of stock in Builders Station was not exempt from registration as a limited offering. We disagree.

There are numerous registration exemptions provided for under the Securities Act in sections 35-1-310 and 35-1-320. Only one of these exemptions—the "limited offering" exemption— arguably applies in the present case. Section 35-1-320(9) defines this exemption, in pertinent part, as follow:

Any transaction pursuant to an offer directed by the offeror to not more than twenty-five persons ... in this State during any period of twelve consecutive months, whether or not the offeror or any of the offerees is then present in this State, if (a) the seller reasonably believes that all the buyers in this State ... are purchasing for investment and (b) no commission or other remuneration is paid or given directly or indirectly for soliciting any prospective buyer in this State.

S.C.Code Ann. § 35-1-320(9) (Supp.2003). Specifically at issue in the present case is (1) whether Drews offered the Builders Station stock to more than twenty-five people and (2) whether Drews received remuneration for soliciting the potential buyers.

We are mindful that we must narrowly construe exemptions under the Act because the securities laws are remedial in nature and, therefore, should be liberally construed to protect investors. McGaha v. Mosley, 283 S.C. 268, 273, 322 S.E.2d 461, 464 (Ct.App.1984). Furthermore, in arguing the Builders Station stock was exempt from the Act's registration requirements, Drews bears the burden of proving he was entitled to the claimed exemption. S.C.Code Ann. § 35-1-340 (Supp.2003). We find he has failed to satisfy this burden.

1. Number of Offerees

We find Drews failed to sufficiently prove he offered Builders Station stock to no more than twenty-five people.

Drews presented no evidence regarding the number of people to whom he offered stock. Raymond Beasley, Drews' original business partner, testified that Drews probably offered the stock to "dozens" of people. He further testified, "I believe we did it to more than 25 people" and that Drews offered the stock to "dozens and dozens."

Drews attempts to circumvent this obvious lack of proof by arguing the limited offering exemption applies when there are not more than twenty-five "ultimate purchasers" of the offered security. This assertion is without merit.

As always, we look first to the plain meaning of the statute when interpreting its language. See Hitachi Data Sys. Corp. v. Leatherman, 309 S.C. 174, 178, 420 S.E.2d 843, 846 (1992)

(holding that words used in a statute "must be given their plain and ordinary meaning without resort to subtle or forced construction to limit or expand its operation"). Under the plain language of section 35-1-320(9), we find this Court is compelled to reject Drews' contention that the exemption applies to all transactions involving twenty-five or fewer "purchasers." The statute speaks only in terms of an "offer," not a "sale" or "purchase." The Securities Act specifically defines "offer" and ...