Marshall v. Harris

• Decision Date: 21 October 1976
• Citation: 276 Or. 447,555 P.2d 756
• Parties: , Blue Sky L. Rep. P 71,323 Ansel MARSHALL and Marina Marshall, Respondents, v. J. Robert HARRIS, Appellant.
• Court: Oregon Supreme Court

Page 756

555 P.2d 756

276 Or. 447, Blue Sky L. Rep. P 71,323

Ansel MARSHALL and Marina Marshall, Respondents, v. J. Robert HARRIS, Appellant.

Supreme Court of Oregon, Department 1.

Argued and Submitted June 10, 1976.

Decided Oct. 21, 1976.

Blair M. Henderson, Klamath Falls, argued the cause and filed the brief for appellant.

Owen M. Panner, Bend, argued the cause for respondents. On the brief were Panner, Johnson, Marceau, Karnopp & Kennedy and C. Montee Kennedy, Bend.

Before DENECKE, C.J., and McALLISTER, TONGUE, and HOWELL, JJ.

TONGUE, Justice.

This is an action to recover money due and owing under a contract by which plaintiffs sold to defendant an interest in two racehorses and in their 'earnings,' in return for defendant's agreement to pay expenses involved in training and racing the horses. By affirmative defense and counterclaim, defendant contended that the contract was a 'security' within the terms of the Oregon Securities Law, ORS ch. 59, and that it had not been registered, as required by that statute, with the result that defendant was entitled to recover the money previously paid by him to plaintiffs under that contract.

The case was tried before the court, without a jury. The trial court held that the Oregon Securities Law did not apply to the facts of this case; that there was no sale or attempt to sell any 'security,' and that plaintiffs were entitled to judgment against defendant for amounts due and owing under the contract in the sum of $5,167.10.

The facts.

Plaintiffs own a ranch near Burns where they raise thoroughbred racehorses. These horses have been raised for sale, except for the years 1964 and 1969, during which plaintiffs raced some of them.

In February 1973 plaintiffs' attorney suggested to them an arrangement under which he and three of his friends would pay the expenses for one of plaintiffs' horses in return for one-half of its winnings as a racehorse (i.e. a one-eighth interest to each of the four). An oral agreement was then made to that effect.

In May 1973 Mrs. Marshall was visited by Beverly Lewis, a longtime friend of hers, who was also interested in horses. During that visit they talked about plaintiffs' horses. In the course of that conversation Mrs. Marshall told her friend about the arrangement with plaintiffs' attorney and his three friends. Beverly Lewis then said that she had a friend, the defendant, who might also be interested in such an arrangement. Beverly Lewis then 'mentioned this' to defendant, who said that he would like to talk to Mrs. Marshall. At that time defendant frequently went to the horse races and was considering buying a racehorse 'outright.'

Beverly Lewis then called Mrs. Marshall and arranged a meeting with defendant. At that meeting Mrs. Marshall explained the arrangement to defendant. They then discussed which horses were 'available' and the cost of training and keeping the horses for racing. The horses were then colts. Mrs. Marshall told defendant that he could have 'his choice' under an arrangement 'of the same type' as the one with the attorney and his friends. She gave defendant the names of three horses, but said that her husband was a better 'horse judge' and might have different ideas.

At a subsequent meeting between defendant and Mrs. Marshall, also arranged by Beverly Lewis, he said that he was 'interested.' Mrs. Marshall then said that he could talk to her husband by telephone, which he then did. Mr. Marshall suggested the names of the two horses that he thought were the 'best.' Defendant then decided to enter into an agreement under which he would pay for training, feeding and other expenses for those two horses until the end of 1974 in return for one-third interest in the horses and one-third of their racetrack 'earnings' during 1973 and 1974. It was also understood that the horses were to be sent on to west coast tracks for racing. Plaintiffs expressly retained the right to control the 'care' and 'activities' of the horses. On June 18, 1973, a letter agreement confirming this understanding was prepared by plaintiffs' attorney and signed by plaintiffs and defendant. Defendant testified that Mrs. Marshall told him that the horses 'would be running in October or November.' This was denied by her.

In July the two horses were sent to California for training. Defendant paid the 'bills' for the two horses until December 1, 1973, but not after that date. Both horses had been previously injured and neither raced in 1973.

Meanwhile, and at the time of the agreement between plaintiffs and defendant, the horse that was the subject of the original agreement with plaintiffs' attorney and his friends had been sent to California for training. At some undisclosed time defendant also acquired an 'interest' in that horse and, in return, made payments to plaintiffs on billings for part of its expenses. Bills for expenses of all three horses were paid from a single checking account and payments by defendant and by plaintiffs' attorney to reimburse plaintiffs for such expenses were deposited in that same account.

Also in the meantime, and at defendant's suggestion, Mrs. Marshall talked to a Dr. Viets about the 'possibility' of entering into a similar agreement involving another horse owned by plaintiffs. At the suggestion of Dr. Viets, she had a similar conversation with a Pat Kittridge. However, no contract was made with either of them.

Plaintiffs testified that prior to the time of the contract with defendant the two horses had been advertised for sale and that plaintiffs would not have raced them, but would have sold them, had defendant not entered into the contract. It is conceded that the contract was not registered with the Oregon Corporation Commissioner under ORS 59.055.

After unsuccessful negotiations between plaintiffs and defendant, plaintiffs filed this action for amounts due under the contract and defendant filed an affirmative defense and counterclaim under the Oregon Securities Law.

The contract was an 'investment contract' and the transaction was a 'sale' of a 'security.'

ORS 59.015(13)(a) defines the term 'security' for the purposes of the Oregon Securities Law to include an 'investment contract.' The most common definition of an 'investment contract' is that adopted by the Supreme Court of the United States in Securities & Exchange Comm. v. W. J. Howey Co., 328 U.S. 293, 298--99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1945), as follows:

'* * * (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, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. * * *.' ¹

Although not expressly adopting the Howey definition, this court has held that a contract under which one person entrusts money to another with the expectation of deriving a profit to be created through the efforts of other persons is an 'investment contract' for the purposes of the Oregon Securities Law. ² That test is satisfied in this case because it is clear from the facts that the defendant agreed to pay money to the plaintiffs with the expectation of deriving a profit to be created solely through the efforts of other persons. Accordingly, we need not consider in this case whether other tests, such as the 'risk-capital' test, may also be applied under appropriate circumstances. ³

It is contended by the dissent that the sale of a fractional interest in a racehorse is not the sale of a 'security' within the intended meaning of ORS 59.015(13)(a); that the 'primary purpose of the Blue Sky Law is to * * * prevent * * * the sale of fraudulent and worthless corporate or quasi-corporate stocks and securities,' and that 'it is going to be a shock to a rancher' to learn that the sale of a 'fractional interest in a horse or a registered bull' is subject to the provisions of that law.

While we may sympathize with these plaintiffs, such 'shocks' are by no means uncommon to many in this day of constantly proliferating laws. As previously noted, the definition of the term 'security,' in ORS 59.015(13)(a) includes not only 'stocks' and 'bonds,' but also 'investment contracts' and 'evidence of indebtedness,' among other things. We must also remember, as recognized by the dissent and as previously held by this court, that the Oregon Securities Law must be 'liberally construed to afford the greatest possible protection to the public.' ⁴

Consistent with that view, we have held that good faith and even reliance upon advice of counsel is not a defense ⁵ and that knowledge of the violation by the person making the sale is not a necessary element of liability because otherwise evasion of the statute would be easily accomplished, thus depriving it of much of its practical effect. ⁶ We have previously recognized in cases involving the question of whether various types of transactions are subject to the Oregon Securities Law that there is '* * * a certain class of gentleman * * * (who) 'toil not neither do they spin,'"' but who 'lie awake nights endeavoring to conceive some devious and shadowy way of evading the law.' ⁷

Were we to hold, as urged by the dissent, that the Oregon Securities Law was not intended to apply to the sale of a 'fractional interest in a horse or a registered bull,' we could hardly distinguish sales of fractional interests in other personal property when, as in this case, the purchasers expect to derive a profit to be created solely through the efforts of other persons. The rule which we adopt in this case must be one which does not open up new areas for possible evasion of that law and must also be one which will apply alike to unsophisticated ranchers in the sale of 'fractional interests' in registered bulls and to sophisticated promoters in...