Lowery v. Ford Hill Inv. Co.

• Decision Date: 15 November 1976
• Docket Number: No. C--925,C--925
• Citation: 192 Colo. 125,556 P.2d 1201,84 A.L.R.3d 997
• Parties: , Blue Sky L. Rep. P 71,344, 84 A.L.R.3d 997 Bernard L. LOWERY, Sr. and Joanne M. Lowery, Petitioners, v. FORD HILL INVESTMENT CO., a partnership, and Wynn D. Crew, as general partner and Individually, Respondents.
• Court: Colorado Supreme Court

Page 1201

556 P.2d 1201

192 Colo. 125, Blue Sky L. Rep. P 71,344,

84 A.L.R.3d 997

Bernard L. LOWERY, Sr. and Joanne M. Lowery, Petitioners, v. FORD HILL INVESTMENT CO., a partnership, and Wynn D. Crew as general partner and Individually, Respondents.

No. C--925.

Supreme Court of Colorado, En Banc.

Nov. 15, 1976.

Rehearing Denied Dec. 20, 1976.

Stitt, Wittenbrink & Roan, P.C., R. J. Wittenbrink, Denver, for petitioners.

Wynn D. Crew, pro se and for Ford Hill Inv. Co.

ERICKSON, Justice.

We granted certiorari to review the decision of the court of appeals in Lowery v. Ford Hill Investment Co., Colo.App., 548 P.2d 127 (1976). We reverse the court of appeals and remand with directions to grant the relief mandated by the Colorado Securities Act.

Bernard L. Lowery, Sr. and Joanne M. Lowery filed a civil action to rescind an installment sales contract which they entered into with the Ford Hill Investment Company (hereinafter Ford Hill), for the purchase of a condominium at Breckenridge, Colorado. The basis for rescission was that the contract of sale constituted a security and that the sale was in violation of the Colorado Securities Act. Admittedly, Ford Hill did not file a registration statement in accordance with the requirements of the Colorado Securities Act. Section 11--51--101, Et seq., C.R.S.1973. As an alternative basis for recovery, the plaintiffs asserted that even if the sales transaction was exempt from registration under the Securities Act, the defendants were liable for misrepresentation. Thus, the issues are: (1) Did the installment sales contract constitute a security? (2) Was the sale exempt from registration? (3) Were the defendants guilty of actionable misrepresentation?

The trial court, at the conclusion of the trial, entered alternative findings and held that:

(1) The sale of the condominium did not involve a security;

(2) Even if a security was involved, the transaction was exempt as a private offering; and

(3) Even if a security was involved, the plaintiffs failed to prove that the defendants made a material misrepresentation of fact, or that the defendants omitted to state material facts.

In affirming the trial court, the court of appeals concluded that while the contract constituted a security, the offering was a private offering and, therefore, exempt from registration requirements. In addition, the court of appeals concluded that no material misrepresentations of fact was shown by the plaintiffs.

I. The Facts

Ford Hill Investment Company is a partnership. Wynn D. Crew is the managing partner. Ford Hill built a six-unit condominium in Breckenridge, Colorado, and on August 21, 1971, listed the units in the condominium for sale with a broker, pursuant to an exclusive right to sell agreement.

In early 1973, the plaintiffs had access to funds which they intended to invest. They learned that their friends, the Crews, were selling condominium units in Breckenridge, Colorado. After some negotiations, Wynn D. Crew obtained a release of one condominium unit from the broker, and the plaintiffs and the defendant Ford Hill executed an installment sales contract. Tied to this sales contract was a mandatory exclusive management and rental agreement which was common to each unit for sale. It contained the following elements:

(1) Ford Hill Investment Company was the exclusive management and rental agent for each condominium owner for at least five years. As such, Ford Hill was to use 'best efforts' in 'a manner fair to all owners' to rent the units at all feasible times.

(2) Owners of each condominium unit were required to give up to six months' advance notice, in writing, if they were to reserve the right to occupy their condominium unit for personal use.

(3) The condominium owners were 'responsible for furnishing and maintaining the individual unit in a rentable, first-class manner and condition, complete with furniture, furnishings, and appliances.'

(4) The duties of the manager included: (a) necessary promotion, with funds obtained by a monthly promotion charge, 'so as to provide the longest number of rental days possible'; (b) arrange for trade association memberships and promotional materials; and (c) hire, pay, supervise, and discharge the necessary personnel and contract labor to properly manage, maintain, and operate the condominium and rental of the units during the entire twelve-month calendar period at a reasonable cost to the owners.

(5) In addition to the monthly rental promotion fee, each owner was to be assessed a 'rental management fee paid out of gross rentals.'

(6) Rental rates were to be determined and fixed solely by the manager.

(7) For promotional purposes the manager was to have the use of each individual unit during the off-season for a maximum of three days in each twelve-month period.

(8) Ford Hill was the exclusive agent for each owner in securing rental supporting services such as heating, maid service, liability insurance, firewood, and repairs and maintenance.

(9) The mandatory arrangement was terminable only by mutual consent or by a two-thirds vote of all individual unit owners. Voting had to be personal and in writing. No proxies were allowed. If not terminated in accordance with the contract, prior to February 1, 1977, the agreement was to be automatically renewed for an additional six-year period.

Ford Hill provided the broker with a brochure which stated: 'For convenient mountain living with a potential for income producing, lease-rent arrangements, this plan is unequalled.' Each 'basic unit' could be divided into two independent units 'with the same potential for subrenting as described above.'

The broker advertised the condominiums for sale in the newspapers. Undisputed testimony established that the plaintiffs visited Breckenridge to view the unit which was ultimately purchased and that the plaintiffs were informed by the defendant that the units were being rented to skiers for three to four nights a month at $60 per night. The plaintiffs testified that the defendant's management rental agent informed them that the rental units were nationally advertised. The evidence was conflicting, but the trial court concluded that the defendant made a 'full disclosure' of what he thought the future would bring for this condominium. The trial court's findings do not indicate what 'full disclosure' consisted of, but the record reveals that Wynn D. Crew, when asked by the plaintiffs for information regarding the future profits of the condominium, declined to speculate and warned them not to undertake the purchase for profit, specifically stating that the rental level achieved to date in the area was ninety days per year.

Finally, the trial court found that the plaintiffs' purpose in purchasing the unit was two-fold: primarily for an investment purpose and secondarily 'for the recreation of the (plaintiffs') family.'

II. The Condominium Contract as a Security

While this court is not bound by federal law in the interpretation of the Colorado Securities Act, we find that insofar as the provisions and purposes of our statute parallel those of the federal enactments, such federal authorities are highly persuasive. See, e.g., Saur v. Hayes, 36 Colo.App. 190, 539 P.2d 1343 (1975); Cf. Mr. Steak, Inc. v. River City Steak, Inc., 324 F.Supp. 640 (D.Colo.1970), Aff'd 460 F.2d 666 (10th Cir. 1972).

The statutory definitions of the term 'security' under section 11--51--102(12), C.R.S.1973, and 15 U.S.C. § 77b(1) (1970) (commonly referred to as the Securities Act of 1933) are virtually identical. Each includes 'evidence of indebtedness . . . participation in any profit-sharing agreement . . . investment contract . . . or, in general, any interest or instrument commonly known as a 'security. " Such expansive language in the Colorado statute indicates a legislative intent to provide the flexibility needed to regulate the various schemes devised by those who seek the use of the money of others with the lure of profits. See SEC v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); Saur v. Hayes, supra.

The hallmark of state and federal securities regulation has always been close attention to the facts of each case and a substantive appraisal of the commercial realities of the offering. See, e.g., SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943); Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); 1 L. Loss, Securities Regulation 493 (2d ed. 1961).

The classic articulation of what constitutes an 'investment contract' under federal securities law was stated in SEC v. W. J. Howey Co., supra:

'(A)n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. . . .' ¹

The elements of the Howey formula are present in this case. The plaintiffs invested money under a contract of sale. The fact that the rental agreement imposed by Ford Hill was mandatory and exclusive as to all purchasers, and that the rental rate, supporting services, and promotion and allocation of renters were all controlled by a common agent makes this venture a 'common enterprise' within the meaning of the Howey formula. See, e.g., McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975); Continental Marketing Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967), Cert. denied, 391 U.S. 905, 88 S.Ct. 1655, 20 L.Ed.2d 419 (1968). Despite the finding by the trial court of a 'secondary' purpose of personal recreational use, this subordinate motive for the purchase does not sufficiently eclipse the plaintiffs' primary purpose of an 'expectation of profit.' Compare SEC v. W. J. Howey Co., supra (found to be a security because the investor was 'attracted solely by the prospects of a return'...