Mayfield v. Troutman

• Decision Date: 26 February 1981
• Docket Number: No. 1421,1421
• Citation: 613 S.W.2d 339
• Parties: Blue Sky L. Rep. P 71,621 Bette J. MAYFIELD et al., Appellants, v. Forrest TROUTMAN et al., Appellees.
• Court: Texas Court of Appeals

Page 339

613 S.W.2d 339

Blue Sky L. Rep. P 71,621

Bette J. MAYFIELD et al., Appellants, v. Forrest TROUTMAN et al., Appellees.

No. 1421.

Court of Civil Appeals of Texas, Tyler.

Feb. 26, 1981.

Rehearing Denied March 26, 1981.

Louis Frank Oliver, McGinnis, Lochridge & Kilgore, Richard Banks, J. Rowland Cook, Salmanson, Smith & Mouer, Austin, for appellants.

Malcolm Robinson, Hooper, Robinson & Moeller, Austin, for appellees.

McKAY, Justice.

This is an appeal from a directed verdict rendered in an action for fraud under the Texas Securities Act.

Appellants Mayfield, Schilthuis, Brooks and Friedman were four of our nine limited partners in a Texas limited partnership named "335, Ltd." (335). Pursuant to the antifraud provisions of the Texas Securities Act (Tex.Rev.Civ.Stat.Ann., art. 581-1 et seq.) (Securities Act), they seek damages or rescission in connection with the purchase of their limited partnership investments. The principal questions involved in this case are: (1) whether the interests in the limited partnership purchased by each of the appellants was a "security," thereby subjecting the sale to the Act and (2) whether appellants ratified the allegedly fraudulent acts of appellees. Appellant Mayfield filed her brief separately from the other appellants. An amicus curiae brief was filed by the state attorney general's office on behalf of Richard D. Latham, the Securities Commissioner of Texas.

On April 2, 1974, three months before the limited partnership was formed, appellant Forrest Troutman contracted with Mrs. Nellie Marie Boothe Hampe-Moerhing for the purchase of a 335-acre parcel of undeveloped land west of Austin. The contract called for a cash payment at settlement of $52,500 and an installment note to be executed by Forrest Troutman for $583,614.70. The contract also specified that Mrs. Hampe would pay Morris Olguin, who was later the general partner of 335 Ltd., a broker's commission of $24,000, in three equal installments, the first being at the July 1974 closing, and the next two upon the July 1975 and 1976 interest payments to Mrs. Hampe.

After the April 2, 1974, contract was made, potential limited partners, including appellants, were solicited concerning their possible investment in the partnership, the purpose of which was to purchase the same 335-acre parcel of land and hold it for a time while the general partner sought and arranged for a profitable sale.

On July 2, 1974, the partnership was formed and the land in question was the subject of two closings, both of which occurred in the offices of Austin Title Company under the direction of its executive vice president, appellant Wayne Talley. The first transfer was from Mrs. Hampe to Troutman, and the second from Troutman to 335, Ltd.

Disregarding the settlement fees and expenses, the terms of the two transactions are as follows:

Appellants alleged fraud stemming from the second sale because of the failure of appellees to tell the limited partners:

1. That Olguin, Troutman and Talley had an undisclosed agreement among themselves to split all profits realized on the land transaction;

2. That the two-step conveyance at a marked-up price resulted in Olguin, Troutman and Talley realizing an immediate cash gain of approximately $42,500, exclusive of fees and closing costs ($105,000 cash raised from the limited partners, less $62,500 cash paid to Mrs. Hampe on closing). By Troutman's own testimony, the net amount was quickly divided and paid in equal shares to Olguin, Troutman and Talley;

3. That the general partner, Olguin, reserved a $15,000 partnership interest in his own name (but actually for the benefit of Olguin, Troutman and Talley) without leaving any cash contribution with the limited partnership and without disclosing to the limited partners that the promoters had no capital at risk;

4. That the involvement of Talley and Troutman was not limited to performing services normally provided by a title company and an attorney, but instead involved extensive other relationships fraught with actual and potential conflicts of interest.

Mrs. Mayfield further alleges that Talley told her before her contribution that a sale of the property to an unnamed company was imminent, but by the summer of 1975, when the annual interest was due on the note, the property still had not been resold.

Additionally, Olguin, the general partner, was unable to continue his duties in 1976 because of personal and financial problems which apparently existed at the time the partnership was formed. As of July, 1974 Olguin was separated from his wife and knew a divorce was inevitable. Also prior to the closing, he knew that the IRS had begun an investigation of his financial conditions and tax returns which ultimately led to an IRS tax lien filed on his property. These difficulties were apparently known to Troutman and Talley at the time appellants were solicited for contributions to the limited partnership, but were not revealed to appellants.

Soon after the limited partnership was formed, the real estate market dropped substantially, and a quick sale became impossible. In view of Olguin's failures, Schilthuis, Brooks and Troutman generally undertook to collect the interest and tax payments from the limited partners for 1976, 1977 and 1978, and disburse the necessary payments. After 1975 appellant Mayfield made no further interest payments.

In 1977, an effort was made to form a new 335, Ltd. The purpose was to try to bring about some organization to assure the land would not be lost through foreclosure, to attempt to clarify who was responsible for advertising the sale of the land and to name a new general partner in order that the new entity could convey title to the real estate, should a buyer appear. A new limited partnership agreement (new 335, Ltd.) was signed in mid-1977 by appellants Mayfield, Schilthuis and Brooks (and others) and by appellees Troutman & Talley, who were assuming Olguin's interest. Appellant Friedman did not enter into this second partnership agreement. Appellants claim that for a number of reasons the formation of a new partnership was not meant to ratify the past fraudulent actions of appellees. The new 335, Ltd., agreement was never filed with the Secretary of State as required under the Texas Limited Partnership Act.

The 1979 annual interest payment was not made to Mrs. Hampe by any of the limited partners, and the property was foreclosed.

Appellants' first point of error addresses the trial court's directed verdict for appellees in which the court determined that the limited partnership interests did not involve a "security" and therefore were not within the purview of the Texas Securities Act. The Securities Act at Art. 581, § 4 defines terms relevant to this case as follows:

A. The term "security" or "securities" shall include ... evidence of indebtedness ... any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not.

B. The terms "person" and "company" shall include a corporation, person joint stock company, partnership, limited partnership .... (Emphasis added.)

In order for the transaction before us to be subject to the Securities Act, it is therefore necessary for appellants' limited partnership interests to conform to at least one of the enumerated categories included in the definition of "security." After examining the record as to the nature of the limited partnership here involved, we find that the interest held by each appellant qualifies as an investment contract.

The landmark decision of S.E.C. v. Howey, 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946) specifies the criterion for an investment contract: "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." There is no dispute that the limited partners of 335 invested their money in a common enterprise to make a profit upon resale of the property. The sole ground of contention is whether the operation was dependent only on the efforts of someone other than the limited partners, i. e., Mr. Olguin, the general partner.

Some confusion arose as to what was meant by the requirement that profits "come solely from the efforts of others," and in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), the Supreme Court elaborated on the Howey test:

"The touchstone (of the test) is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." (Emphasis added.)

The Texas Supreme Court adopted the Howey test and added yet another dimension to the definition of an investment contract in Searsy v. Commercial Trading Corp., 560 S.W.2d 637, 641 (Tex.1977):

We agree that the more realistic test is "whether the efforts made by those other than the investor are undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." S.E.C. v. Glenn W. Turner Enterprises, Inc., supra at 482 (474 F.2d 476, (9th Cir.)]; King Commodity Co. of Texas v. State, supra (508 S.W.2d 439 (Tex.Civ.App.)); State Commissioner of Securities v. Hawaii Market Center, Inc., 52 Haw. 642, 485 P.2d 105 (1971). (Emphasis added.)

The question now before us is whether 335, Ltd., was operated in such a manner as to satisfy the requirements of Howey and its progenies. The testimony of each limited partner was that the main purpose of their investment was to hold the property for sale at an appreciated value. Likewise, appellants admitted in their pleadings that the goal of 335 was to keep the land for a short time and sell it for a profit. The limited partnership agreement...