McConathy v. Dal Mac Com'l Real Estate, Inc.

• Decision Date: 28 December 1976
• Docket Number: No. 8410,8410
• Citation: 545 S.W.2d 871
• Court: Texas Court of Appeals
• Parties: Blue Sky L. Rep. P 71,338 Richard T. McCONATHY, Appellant, v. DAL MAC COMMERCIAL REAL ESTATE, INC., et al., Appellees.

Page 871

545 S.W.2d 871

Blue Sky L. Rep. P 71,338

Richard T. McCONATHY, Appellant, v. DAL MAC COMMERCIAL REAL ESTATE, INC., et al., Appellees.

No. 8410.

Court of Civil Appeals of Texas Texarkana.

Dec. 28, 1976.

Rehearing Denied Feb. 1, 1977.

Ken R. Davey, Kerry P. Fitzgerald, Dallas, for appellant.

W. Ted Minick, Winstead, McGuire, Sechrest & Trimble, Dallas, for appellees.

CORNELIUS, Justice.

Appellant, Richard T. McConathy, brought suit against appellees, Dal Mac Commercial Real Estate, Inc., Richard M. Romano and J. W. Davis under Article 581--33 of the Revised Civil Statutes of Texas seeking recision of his purchase of an interest in the 'Pioneer Road Joint Venture,' which venture was stated in the agreement to be for the purpose of 'holding for investment and capital appreciation' a tract of 23.3 acres of land in Irving, near Dallas, Texas. Appellant alleged that he had purchased a security, that the security had been sold to him by means of misrepresentations or omissions, that the security was required to be but was not registered with the Texas Securities Commissioner, and that the persons making such sale to the appellant were not licensed as security dealers. Appellees defended on grounds that the interest sold was not a security, that if it was a security no misrepresentation had been made by appellees, and that the transaction was exempt from registration by the provisions of Article 581--5 of the Texas Securities Act. At the conclusion of appellant's case, Appellee Davis moved for a directed verdict which was granted. The remaining appellees then proceeded with their testimony. At the conclusion of all of the testimony the court granted the appellees' motion for instructed verdict and rendered a take-nothing judgment against appellant.

Appellant contends the trial court erred in rendering a take-nothing judgment because (1) the interest he purchased was an 'investment contract' or a 'profit sharing agreement' and was therefore a security within the meaning of Article 581--4, and (2) the security was not an exempt security under the terms of the Securities Act, or if it was an exempt security, a fact issue was made on the question of whether the sale was made by means of public advertising, thus bringing the transaction within the provisions of the Securities Act despite its otherwise exempt status. Appellant did not plead or seek recovery for common law fraud or misrepresentation.

Dal Mac Commercial Real Estate was in the business of organizing joint ventures in real estate. When it became interested in a property it would investigate the location, zoning and price to fair market value ratio before arranging a purchase. It would then sell fractional interests in the joint venture. The Pioneer Road property was purchased for $490,050.00. A total of $46,750.00 was paid down and a vendor's lien note for $443,300.00 was executed. Title to the property was taken in the name of J. W. Davis, President of Dal Mac Commercial Real Estate, Inc., as trustee and manager for the joint venture. Dal Mac was paid a 6% Commission on the sale of the property to the joint venture, which fact was fully disclosed by the joint venture papers. The appellant purchased a 10% Interest in the Pioneer Road Joint Venture for $8,000.00. He purchased his interest on July 17, 1974, from Richard Romano who was a salesman for Dal Mac. The appellant and Romano had been social acquaintances and golfing associates for several years. Over a period of years they had discussed the appellant's possible investment in some of Dal Mac's real estate ventures. A proposal for at least one such adventure was submitted by appellant to his attorney for review which resulted in appellant's decision not to participate in that venture. Appellant and Romano continued to discuss informally the advantage of investing in such ventures. During one such discussion Romano gave appellant a brochure which briefly described the Pioneer Road Venture. Subsequently, appellant advised Romano that he would participate in the venture. On July 17, 1974, Romano and appellant met in Romano's office where appellant looked over and then signed the joint venture agreement. The testimony of appellant and Romano conflicts with regard to the extent to which appellant investigated the brochures and agreements relating to the joint venture. Appellant contended that he barely looked at them and entered the venture mainly upon the representations and assurances of Romano which he contends were false and misleading. To the contrary, Romano contended that he thoroughly discussed the brochures and related agreements with appellant and that appellant was a sophisticated investor who was fully cognizant of all of the facts concerning the joint venture as well as the representations and provisions of the various agreements. Some twenty-one persons purchased interests in the Pioneer Road Joint Venture. All of the participants resided in or near the Dallas area and were business associates, relatives or friends of Romano and Davis. Dal Mac, Davis and Romano themselves took interests in the venture.

The 'Proposal To Form Pioneer Road Joint Venture' stated that the purpose was 'of buying and holding this property as an investment which we hope will appreciate in value during the holding period. We anticipate selling the property for a profit at some future date and realizing a capital gain.' The joint venture agreement itself, which was signed by all of the participants, contained the following provisions:

'(b) The Venturers hereby enter into and form this Joint Venture For the limited purpose of holding and liquidating the Venture Property as an investment only . . ..'

'(c) The scope of the Joint Venture business shall be Limited strictly to sale or liquidation of the Venture Property as an investment, and such property shall be sold only in large tracts and Shall not be subdivided, developed, or otherwise held for the sale to customers in the ordinary course of business, and The only improvements which may be made are those which are imperative to make the property salable as an investment. The rights and obligations of the Venturers and the administration and termination of the Joint Venture shall be governed by the Texas Uniform Partnership Act, except where provisions in this Agreement to the contrary appear, . . .' (Emphasis supplied.)

The agreement also contains provisions to the general effect that:

(1) All gains or profits, as well as losses, are shared by the venturers according to their proportionate interests.

(2) Distribution of any profit shall be made only after the property is sold or upon termination of the joint venture.

(3) The venture will be taxed as a partnership under applicable provisions of the Internal Revenue Code.

(4) J. W. Davis was designated as the venture manager.

(5) The venture manager has management of the venture property and has power to execute all necessary documents and to hold title to the property in his name. The venture manager may not sell, mortgage or transfer the property or incur any debt in an amount of more than $2,000.00 unless expressly authorized by vote of 70% Of the participants. The venture manager will receive $500.00 per year as an administrative fee.

(6) The remaining participants have the first right of refusal on the sale by any other participant of his interest except in the case of a sale to a family member or family trust. If a venturer dies before the termination of the joint venture, the other participants may buy his interest.

(7) A venturer forfeits his interest if he fails to make a required contribution or if he takes bankruptcy or makes an assignment for the benefit of creditors.

(8) The venture will terminate upon the sale of the property or upon a vote to dissolve by at least 70% Of the participants. Upon termination, the assets are to be distributed to the participants in cash or in kind.

Appellant's principal contention is that the interest he purchased was an investment contract and therefore constituted a security under the terms of the Texas Securities Act. The term...