Long v. Shultz Cattle Co., Inc.

• Decision Date: 09 August 1989
• Docket Number: No. 88-1169,88-1169
• Parties: , Fed. Sec. L. Rep. P 95,330 Jim LONG, et al., Plaintiffs-Appellants, v. SHULTZ CATTLE COMPANY, INCORPORATED, an Oklahoma Corporation, and William B. Shultz, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 129

881 F.2d 129

58 USLW 2164, Fed. Sec. L. Rep. P 95,330

Jim LONG, et al., Plaintiffs-Appellants, v. SHULTZ CATTLE COMPANY, INCORPORATED, an Oklahoma

Corporation, and William B. Shultz, Defendants-Appellees.

No. 88-1169.

United States Court of Appeals, Fifth Circuit.

Aug. 9, 1989.

Michael G. O'Neill, Lisa M. Williams, Hamilton & O'Neill, Dallas, Tex., for plaintiffs-appellants.

John D. Luken, Paul R. Mattingly, Cincinnati, Ohio, for defendants-appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, WILLIAMS and SMITH, Circuit Judges.

KING, Circuit Judge:

Plaintiffs-appellants appeal from the judgment of the district court that defendants-appellees' cattle-feeding consulting agreements were not investment contracts and were therefore not subject to federal securities regulation. For the reasons set forth below, we reverse the judgment of the district court.

I.

A. Facts

In August and September of 1982, plaintiffs-appellants Jim Long, Jerome Atchley, and Jon and Linda Coleman (collectively, "plaintiffs") became involved in a cattle-feeding program advertised by defendants-appellees Shultz Cattle Company, Inc. ("SCCI"). Plaintiffs Long, Atchley, and Jon Coleman are all successful business persons in the radio and television industry.

Plaintiffs first learned of SCCI's program through an advertisement SCCI had placed in the Wall Street Journal, announcing a "10 to 1 write-off potential for 1983"--the ad made no reference to the nature of the underlying venture. Plaintiffs contacted SCCI through their investment adviser Donald Alt ("Alt"). SCCI's more detailed promotional literature explained how investors could defer income through cattle feeding with a minimal risk of loss. The literature contained biographical information on SCCI personnel, touting Bill Shultz' twenty-five years of experience as a cattleman, as an attorney with expertise in tax law, and as a member of the Chicago Mercantile Exchange. Arthur and Zachary Shultz, sons of William Shultz, were also advertised as having substantial experience in the cattle business and in the commodities market.

Plaintiffs initially subscribed to a publicly-offered cattle feeding partnership program which SCCI managed as the general partner with individual investors as limited partners. Under this program, SCCI performed all management functions for a fee of $17.50 per head of cattle. Plaintiffs switched, however, to SCCI's individual feeding program after a meeting with Bill Shultz in which Shultz informed plaintiffs that SCCI was having difficulty obtaining approval of its partnership program from the Texas Securities Commissioner. Shultz also told plaintiffs that the individual feeding program would be better suited to their tax needs because they would be able to take greater deductions as "farmers" managing their own business. SCCI subsequently withdrew its application for approval in Texas.

Under the individual feeding program, investors would sign a "consulting agreement" whereby SCCI agreed to provide advice regarding the purchase, feeding and sale of the investor's cattle. The investment benefits of SCCI's program stem from the availability of cash-method accounting to "farmers." The program enables investors to deduct pre-paid feed and other costs associated with raising cattle as business expenses, thus deferring income until the following year for tax purposes. SCCI would determine the number of cattle an individual client needed to purchase according to the amount of income the client wanted to shelter. Based on the amount of grain consumed per head of cattle and the price of grain, SCCI would calculate the number of cattle needed to consume the quantity of grain that would give investors the desired deductions.

Because the tax laws had been revised to provide that investors must participate actively in "farming" in order to employ the cash method of accounting, SCCI's prospectus, incorporated by reference into the consulting agreement, required each investor to represent that "by experience, education or other means [the investor] is or has become knowledgeable about the cattle feeding business and that he will exert substantial and significant control over, and will, exercising independent judgment, make all principal and significant management decisions concerning his cattle feeding operations."

SCCI's promotional materials emphasized that investors could be "at risk" for tax purposes but eliminate any real risk of loss by "hedging" their cattle--buying futures on the commodities market or entering forward sale contracts--to lock in a price and minimize the clients' potential profits or losses. SCCI arranged for such transactions to be conducted through the Rosenthal commodities brokerage firm of which SCCI was a branch office. SCCI also made arrangements with a select number of financial institutions and feed yards to provide the services required by its clients.

Other than the 60% commission which SCCI received on the one dollar per head fee paid to Rosenthal on hedging transactions, SCCI received only a flat-rate consulting fee of $20 per head for these services and received no share of its clients' profits.

Plaintiffs' cattle were fed, along with those of many other SCCI clients, at the McElhaney feedyard in Yuma, Arizona. The McElhaney feedyard maintained large pens in which the cattle owned by various clients were commingled. The cattle were tagged only by pen number and not by individual investor. Each investor was therefore considered to own a percentage of the total pounds of cattle in the pen. If any cattle died, the loss was not attributed to a single investor/owner, but was distributed on a pro rata basis among the investors.

During the first year of the program--1982/83, plaintiffs hedged all of their cattle and lost half of the money they had provided up-front. Plaintiffs testified that this result was consistent with SCCI's predictions and that they had no complaints about the first year of the program. Plaintiffs elected to continue in the feeding program for a second year--this time with less satisfactory results. Based on predictions that beef prices were on the rise, plaintiffs decided to hedge only half of their 1450 head of cattle in the second year. Beef prices declined substantially instead of increasing, and a strike involving Arizona meatpackers required that cattle at the McElhaney feedyard be transported to Missouri for sale at an additional cost of $15 per head. Plaintiffs lost a total of over $100,000 and subsequently filed this lawsuit against SCCI in 1984, alleging that SCCI sold unregistered securities in the form of the consulting agreements and had committed fraud in connection with those transactions in violation of the Securities Act of 1933, 15 U.S.C. Sec. 77l and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j. ¹

B. The Trial

The case was tried to a jury in the Federal District Court for the Northern District of Texas in October of 1987. At the close of evidence, plaintiffs moved for a directed verdict instructing the jury to find that the consulting agreements at issue were, as a matter of law, investment contracts subject to federal securities regulations. The district court denied the motion, and the jury found that the agreements were not investment contracts. The jury therefore did not reach plaintiffs' claims of securities fraud. Following the return of the verdict, plaintiffs moved for a judgment notwithstanding the verdict or, in the alternative, for a new trial. The district court denied both motions and entered a judgment on the jury verdict. Plaintiffs timely filed a notice of appeal.

C. Issue on Appeal

The sole issue on appeal is whether the district court erred in failing to direct a verdict or grant a j.n.o.v. holding that the consulting agreements were investment contracts as a matter of law.

D. Standard of Review

We apply the same standard of review to the denial of a motion for a directed verdict and to the denial of a motion for a judgment n.o.v. Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969) (en banc); 9 C. Wright & A. Miller, Federal Practice & Procedure Secs. 2524, 2537 (1971 & Supp.1988). We may reverse the judgment of the district court only if we determine that there was no conflict in substantial evidence sufficient to create a question of fact for the jury. Boeing, 411 F.2d at 375. In other words, we may reverse the district court only if we conclude, on the entire record construed in the light most favorable to the nonmoving party, that the evidence is so overwhelmingly in favor of the moving party that no reasonable jury could have arrived at the disputed verdict. Id. at 374; see also Knight v. Texaco, Inc., 786 F.2d 1296, 1298 (5th Cir.1986).

The decision whether to grant a new trial is, on the other hand, within the discretion of the district court and may be granted even if the moving party is not entitled to judgment as a matter of law. See 9 C. Wright & A. Miller, supra, Sec. 2539.

We find, however, that plaintiffs were entitled to a judgment, as a matter of law, on the investment contract question, for the record reveals that there was no disputed question of fact which, even if resolved in favor of SCCI, would support the conclusion that the consulting agreements at issue in this case were not investment contracts. We therefore find that the district court erred in refusing to enter a judgment notwithstanding the verdict.

II.

The Securities Act of 1933 and the Securities Exchange Act of 1934 include "investment contracts" within the definition of "securities" subject to the Acts. 15 U.S.C. Secs. 77b(1), 78c(a)(10). In Securities & Exchange Commission v. W.J. Howey Co., the Supreme Court held that to determine whether a contract, transaction or scheme is an investment contract for purposes of the Securities Acts "[t]he test is whether the scheme involves an...