Hardcastle v. Harris

Decision Date08 December 2004
Citation170 S.W.3d 67
PartiesJoan B. HARDCASTLE, et al. v. Frank HARRIS.
CourtTennessee Supreme Court

Mathew R. Zenner, Nashville, Tennessee, for the appellant, Frank Harris.

David B. Lyons, Nashville, Tennessee, for the appellees, Joan B. Hardcastle, Glen Hardcastle, Joseph Pope, and Charles Provance.

OPINION

WILLIAM C. KOCH, JR., J., delivered the opinion of the court, in which WILLIAM B. CAIN, and PATRICIA J. COTTRELL, JJ., joined.

This appeal concerns a pyramid sales scheme involving the sale of unregistered investment contracts. After discovering that their contracts were worthless, four purchasers filed separate actions against the person who sold them the contracts. These cases were consolidated for trial in the Chancery Court for Davidson County. Following a bench trial, the trial court determined that the seller had breached his personal guarantee contract with two of the buyers and had violated the Tennessee Securities Act of 1980 by selling unregistered investment contracts to all the purchasers. Accordingly, the court awarded the four purchasers judgments totaling $99,450.00, as well as $44,979.50 for attorney's fees and legal expenses. The seller asserts on this appeal that the Tennessee Securities Act claims were filed after the statute of limitations had expired and that the doctrines of waiver and estoppel prevent the purchasers from asserting these claims. In addition, he insists that the court erred by permitting the purchasers to amend their complaints one week before trial to add their Tennessee Securities Act claims. He also takes issue with the trial court's decision to award the purchasers their attorney's fees. We affirm the judgments.

I.

Frank Harris operates several businesses in Madison, Tennessee. He owns a small real estate business called Impact and a small company called Impact International, Inc. that manufactures industrial lubricants. He has aspirations of becoming a major developer and entrepreneur. The centerpiece of his plans is a "perpetual world's fair type development" called Uniquest. As Mr. Harris envisions it, the development will consist of twelve theme parks spread over 50,000 acres in Warren County. He estimates that the development will cost approximately "fifty billion dollars."

Mr. Harris decided that he needed ten million dollars in "seed money" to get Uniquest off the ground. In the late 1990s, after his efforts to obtain bank financing for the project proved unsuccessful, Mr. Harris began searching for business opportunities that would enable him to raise a great deal of capital in a short period of time. Sometime during 1997 or 1998, Mr. Harris became acquainted with Ron Hogsed, who lived in Erwin, Tennessee and began discussing a number of get-rich-quick schemes with him.

The wheels of Mr. Hogsed's and Mr. Harris's first venture began to turn in late 1998 or early 1999 after Mr. Hogsed became an agent for Hercules Holding LIT. Hercules Holding purported to be a "program" located in London, England that purportedly purchased large blocks of United States treasury bills at deep discounts and then resold blocks of treasury bills at enormous profit. Mr. Hogsed incorporated Merit Quest Management International, Ltd. ("Merit Quest") in the West Indies to operate this business. Mr. Hogsed told Mr. Harris about his Merit Quest venture in early 1999, and Mr. Harris became interested in the program because some bankers had purportedly told him that the only way to raise the ten million dollars needed for Uniquest would be to buy and sell treasury bills.

In February or March 1999, Mr. Hogsed sent Mr. Harris a set of materials describing the Merit Quest "asset enhancement program." These materials stated: (1) that participation in the program was by invitation only; (2) that the program was private and confidential; (3) that the program had been operating successfully for over three years; and (4) that the program was "licensed under SEC Rules and Regulations." The materials also stated that the minimum investment in the program was $10,000 and that participants investing between $10,000 and $24,999 would earn twenty-five percent (25%) per month.1

According to Mr. Hogsed's materials, investors in Merit Quest would transfer their funds to Merit Quest's "trust account" at an overseas bank. The funds would then be pooled with the funds of other investors and would eventually be transferred to a "program attorney's" "client trust account" where they would be used to purchase treasury bills "for the benefit of the [p]articipant." Following the purchase of the treasury bills, investors would receive their first interest payment within four to six weeks. The materials stated that each participant's investment was protected because it is "free and clear of encumbrances during and after [the] contract" and because it was insured by "Zenith Insurance Ltd."

Mr. Harris decided to become an agent of Merit Quest and eventually signed a "Non-Circumvention & Non-Disclosure Agreement" and a "Program Agreement" with Mr. Hogsed. In return for Mr. Harris's agreement to "introduce" "clients" to Merit Quest and to act as "Trust Officer" with regard to the disbursement of all "earnings, commissions, and investment returns," Mr. Hogsed agreed to pay Mr. Harris a ten percent (10%) commission on all funds wired to Merit Quest's accounts in either Erwin, Tennessee or London, England, as well as 50% of the monthly earnings after these funds were invested. Mr. Harris was responsible for paying the clients he introduced to the program using the funds he received from Merit Quest.

Mr. Harris then prepared another set of materials to distribute to potential investors.2 These documents characterized Merit Quest as a "best efforts high yield program" in which persons who invested $10,000 for one year could receive "potential returns" with a "very high degree of confidence of [s]uccess" of twenty-five percent (25%) every thirty days.3 In addition, they referred to Mr. Harris variously as a "transaction manager" or a "trust officer." The documents also contained various assurances regarding the safety of the investments. The program description stated that each participant's investment would be held "in a major foreign [b]ank, which insures 100% of all deposits." Mr. Harris's early documents stated that "Impact/Frank Harris underwrites and protects all principal investments for investors through corporate and personal investment guarantees."4 Several months later, Mr. Harris's guarantee was replaced by a "Trust Agreement" in which Mr. Hogsed accepted "full legal, personal and corporate responsibility for the safety and accurate disbursement of funds . . . with which I am entrusted."

Mr. Harris then set about to recruit persons who would act as "introducers" for him, who in return would be given a commission for every person they brought into the program through him. Eventually, Mr. Harris recruited six or seven introducers, including his brother-in-law, Gordon Hawkins, and his sister, Susan Murphey. These introducers set about telling their family and acquaintances about Merit Quest. In May 1999, Mr. Harris convinced his father, Darryl A. Harris, to invest $37,500 in Merit Quest. This proved to be a potent marketing tool because his father was a prominent Baptist minister who was well-known in the community. Many potential investors assumed that Merit Quest must be a good program if Darryl Harris had invested in it.

Between March and October 1999, Mr. Harris and his introducers convinced 118 persons to invest $3,300,000 in Merit Quest.5 Included among these investors were Glen and Joan Hardcastle who were neighbors of Mr. Harris and his father. The Hardcastles invested $30,000 in September 1999 and made a second investment of $25,000 one month later. In turn, they told Billy Hardcastle, Mr. Hardcastle's brother,6 and Dale Pyron, Mr. Hardcastle's cousin, about the program.7 In October 1999, Joe B. Pope and his wife invested $10,000 despite Mr. Pope's belief that Merit Quest was a pyramid scheme. Likewise, Mr. Charles Provance, one of Mr. Harris's long-time friends, invested $25,000 in October 1999.

A profile of the Merit Quest investors emerges from their testimony at trial. Most of them had a common church affiliation with Messrs. Harris and Hawkins.8 None of them understood how the Merit Quest program worked, and few of them read or understood the program materials or documents they signed. None of them sought independent financial or legal advice, and many of them were influenced by the fact that Darryl Harris had invested in the program.9 Most of the investors did not believe that they would earn the promised rate of return, but they believed Mr. Harris's assurances that their principal was safe and that it would be returned to them at the end of the contract period.

The Securities and Exchange Commission learned of Merit Quest after one of Mr. Harris's introducers posted the program on the Internet. It forwarded the information to the Division of Securities of the Tennessee Department of Commerce and Insurance. On October 25, 1999, after receiving additional information from the Attorney General and Reporter, the Division of Securities issued a cease and desist order directing Merit Quest, Mr. Harris, and others to refrain from violating the Tennessee Securities Act of 1980 by acting as unregistered broker-dealers and by selling unregistered securities.

The issuance of the cease and desist order forced Mr. Harris and his introducers to stop accepting new investors. At the same time, Mr. Hogsed stopped sending monthly earnings and commissions payments to Mr. Harris for distribution,10 causing a dispute between Mr. Harris and Mr. Hogsed. D...

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