Regional Properties, Inc. v. Financial & Real Estate Consulting Co.

• Decision Date: 07 February 1985
• Docket Number: No. 83-1668,83-1668
• Citation: 752 F.2d 178
• Parties: Fed. Sec. L. Rep. P 91,942, 1 Fed.R.Serv.3d 408 REGIONAL PROPERTIES, INC., Regional Properties of New Mexico, Inc., Kingsley Creek Inc., Jerry D. Shipley and Paul E. Thomes, Plaintiffs-Appellees, v. FINANCIAL & REAL ESTATE CONSULTING CO. and David Goldner, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 178

752 F.2d 178

Fed. Sec. L. Rep. P 91,942, 1 Fed.R.Serv.3d 408

REGIONAL PROPERTIES, INC., Regional Properties of New

Mexico, Inc., Kingsley Creek Inc., Jerry D.

Shipley and Paul E. Thomes, Plaintiffs-Appellees, v. FINANCIAL & REAL ESTATE CONSULTING CO. and David Goldner,

Defendants-Appellants.

No. 83-1668.

United States Court of Appeals, Fifth Circuit.

Feb. 7, 1985.

John Alan Goren, Dallas, Tex., for defendants-appellants.

George W. Bramblett, Jr., Nina Cortell and Jay F. Whittle, Jr., Dallas, Tex., for plaintiffs-appellees.

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

Before CHARLES CLARK, Chief Judge, JOHNSON and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

This is an action for rescission of a contract by two real estate developers and their affiliated corporations against a securities broker who agreed to structure and market limited partnership interests. The developers' action for rescission is based on their discovery that the broker had never registered as a broker/dealer with the SEC and had thus violated the Securities Exchange Act by selling the partnership interests.

This court held on a prior appeal that the developers were entitled to bring their ac tion and had established a prima facie case for relief under the contract-voiding provision of the Securities Exchange Act. 678 F.2d 552 (1982). We also held that the district court erred in failing to rule upon the broker's asserted defenses, and we remanded for consideration of those defenses. On remand, the district court held that the broker's asserted defenses did not bar rescission of the contract between the developers and the broker. The court also denied a motion by the broker to admit newly discovered evidence. We affirm, although on grounds differing somewhat from those relied upon by the district court.

I. FACTS

Plaintiffs Paul E. Thomes and Jerry D. Shipley are real estate entrepreneurs who planned to acquire, develop, and operate certain residential and commercial projects. Thomes and Shipley formed Regional Properties Inc., Regional Properties of New Mexico, Inc., and Kingsley Creek, Inc. to act as general partner for four Texas limited partnerships (collectively referred to as "Regional"). They created three residential property limited partnerships, Kingsley Creek, Thousand Pines, and Brooklake, and one shopping mall limited partnership, Montgomery Mall.

In October 1971, David Goldner and his sister created a New York partnership, Financial & Real Estate Consulting Company ("Financial"). Shipley and Thomes were introduced to Goldner through an intermediary in early 1974. At that time, Goldner represented to Thomes and Shipley that he had had considerable experience in real estate transactions and that he had a number of client investors who were interested in tax shelter investments. Goldner, in fact, had very little real estate experience. ¹ He had never done securities work or practiced securities law in either state or federal courts. Goldner did not tell Thomes and Shipley at the time of their contract negotiations that he was not registered under federal securities law as a broker/dealer or that he had been disbarred in New York. ² On April 4, 1974, Thomes, Shipley and Regional, Inc., and Financial, represented by Goldner, signed an agreement relating to the Kingsley Creek Limited Partnership.

Through Financial, Goldner agreed to structure, package and sell limited partnership interests in the Kingsley Creek Limited Partnership. Goldner advertised and tried to sell the limited partnership interests, but with little success. He actually sold very few of the interests, and eventually engaged the assistance of a registered broker/dealer, Holt & Hartman, to sell them. With the assistance of Holt & Hartman, all the Kingsley interests were eventually sold at terms that turned out to be highly unfavorable to Regional. ³

To handle the legal documentation associated with the Kingsley project, Financial recommended to Regional that it engage Loren Weinstein, a New York attorney. Weinstein was retained by Regional for the purpose of preparing partnership documents for the Kingsley Creek transaction. Weinstein's legal fees for service associated with Regional's interests were paid by Regional. In August 1974, approximately three months before the closing of the Kingsley Creek interests and before the signing of the Thousand Pines and Brooklake agreements, Weinstein learned that neither Goldner nor Financial were registered as a broker/dealer with the SEC. On August 16, 1974, Weinstein sent a letter to Goldner advising him of his obligation to either register as a broker/dealer or fall within the "issuer" exemption ⁴ if he planned to sell limited partnership interests in the Kingsley Creek project. Weinstein testified at trial that he had "no idea" upon discovering Financial's unregistered status that Goldner had already made efforts to sell the interests. Weinstein testified that he had been satisfied that Financial's unregistered status was not in violation of Federal securities law because he believed that all selling of the interests was being done by Holt & Hartman.

Thomes, Shipley, and their affiliated corporations brought this action against Goldner and Financial to rescind their agreements with Financial pursuant to Sec. 29(b) of the Securities Exchange Act of 1934, ⁵ on grounds that Financial was not registered as a broker/dealer with the SEC as required by Sec. 15(a)(1) of the Act. ⁶ Regional alleged that its agreements with Financial were void under the contract-voiding provision of Sec. 29(b) and sought to recover sums already paid to Financial, less expenses incurred, and to obtain access to funds Financial had placed in escrow.

The district court found that Financial was a "broker" within the meaning of the Act and was therefore required to register under the Act, that Regional had standing to invoke Sec. 29(b) remedies, and that Regional was entitled to rescind its contracts with Financial. On appeal, this Court held that Regional had a private cause of action under Sec. 29(b) and that plaintiffs had established a prima facie case for relief. We also held that defendants should have been allowed to assert their defenses to rescission, and remanded for findings of fact and a ruling upon Financial's asserted defenses to Regional's Sec. 29(b) claims.

Financial's Equitable Defenses. ⁷

On remand, the district court made the following findings: (1) that Weinstein was Regional's attorney and agent; (2) that Weinstein's knowledge of Financial's unregistered status could be imputed to Regional and (3) that the knowledge of Financial's status was insufficient to trigger an equitable defense to Regional's Sec. 29(b) claim. With regard to this last finding, the court reasoned that even if Regional was on notice of Financial's unregistered status, knowledge of that fact did not put Regional on notice that Financial was in violation of the Act. Knowing that Financial was in violation of the Act by virtue of its unregistered status was a conclusion of law, and the district court held that conclusions of law were not imputable.

Although the district court, it appears, correctly concluded that Financial could not successfully assert any equitable defenses, we need not review these conclusions because we do not reach them. Pursuant to our prior decision, we do consider Financial's equitable defenses. But part of the controlling law concerning equitable defenses is that one who claims such defenses must come into court with clean hands. Financial asserts those defenses with hands which are sullied by its own conduct.

Section 29(b) of the Securities Exchange Act permits a party to a contract to seek its rescission if performance of the contract "involves the violation of or the continuance of any relationship or practice in violation of," any provision of the Securities Exchange Act of 1934. 15 U.S.C. Sec. 78cc(b). Under the Act, brokers and dealers of securities are required to register with the Securities Exchange Commission. 15 U.S.C. Sec. 78o (a)(1). Financial had not registered with the SEC when it undertook to sell securities for Regional in the form of limited partnerships. Under Sec. 29(b), Regional was therefore entitled to rescind its agreement with Financial by virtue of Financial's failure to register in violation of the Act. In this appeal, Financial does not dispute Regional's right to rescission of the contract except for the assertion of equitable defenses which it contends bar Regional from rescission.

Under Texas law, ⁸ the right to rescind a contract may be lost by failure to assert the right or by conduct indicating an affirmation or ratification of the contract after a party has knowledge of facts which constitute grounds for rescission. We briefly note, for example, that under Texas law the equitable doctrines of laches, estoppel, and waiver are all grounded in the principle that a party with full knowledge of facts which entitle him to rescind a contract will be barred from asserting his right where he fails to act promptly upon this right to the detriment of another. Under the doctrine of laches, prejudice may result from a party's unreasonable delay in enforcing rights of which he has or should have had knowledge. City of Fort Worth v. Johnson, 388 S.W.2d 400, 403 (Tex.1964); Culver v. Pickens, 142 Tex. 87, 176 S.W.2d 167, 170; Stergios v. Forrest Place Home Owner's Association, 651 S.W.2d 396, 401 (Tex.App.--Dallas 1983, writ ref'd n.r.e.). Similarly, a party may be estopped from asserting a right where, with actual or constructive knowledge of facts affecting his rights, the party leads another by his words or conduct to believe that he will acquiesce in the other's conduct. Champlin Oil & Refining Co. v. Chastain, 403 S.W.2d 376, 385 (Tex.1965). Finally, a waiver of rights may result where a party demonstrates intentional relinquishment...