Sullivan v. Metro Productions, Inc., 2
| Decision Date | 20 March 1986 |
| Docket Number | CA-CIV,No. 2,2 |
| Citation | 724 P.2d 1242,150 Ariz. 573 |
| Parties | , Blue Sky L. Rep. P 72,387, 62 A.L.R.4th 643, RICO Bus.Disp.Guide 6229 Mark SULLIVAN, an individual, and Harry and Helen M. Sullivan, husband and wife, Plaintiffs/Appellants/Cross-Appellees, v. METRO PRODUCTIONS, INC., a California corporation; Producers' Liaison Corporation, an alleged Delaware corporation; Michael and Patricia Kathleen Miller, husband and wife; Ralph and Jean Smith, husband and wife, Defendants/Appellees/Cross-Appellants. 5568. |
| Court | Arizona Court of Appeals |
Appellants Harry, Helen and Mark Sullivan appeal from the trial court's ruling that they are entitled to actual damages only, contending that the Arizona Racketeering Act, and specifically A.R.S. § 13-2314(A), requires that they be awarded treble damages. Appellees Metro Productions, Inc., Producers' Liaison Corporation, Michael and Patricia Miller and Ralph and Jean Smith (hereafter "Metro"), have cross-appealed, contending that the trial court erred in denying their motion to dismiss for lack of jurisdiction and in granting partial summary judgment in favor of the Sullivans because disputed issues of material fact exist.
In November 1978, Mark Sullivan entered into a production service agreement with Metro Productions under which Metro produced a 30-minute master videotape of one episode of a 65-program series called "The Sam Diego Show." Shortly thereafter, Harry and Helen Sullivan signed a production service agreement for the purchase of two videotape episodes of "The Sam Diego Show." Each tape was sold at a cost of $100,000. For each tape, the Sullivans paid $8,000 down and signed a promissory note for the balance of $92,000. The notes called for interest-only payments of $2,400 per year for five years and for certain payments on the principal to be made from income generated by distribution of the tapes to various television stations and TV cable networks throughout the world. The promissory notes were due in five years, but with the payment of $1,000 in the fifth year, the promissor could extend the note and convert it to a non-recourse note so that any additional principal payments could be obtained only from revenues earned from distribution of the tape.
The agreement provided that the master videotape was to be stored at the purchaser's expense in a vault to be obtained by Metro Productions. The purchaser signed a financing statement which created a security interest in the tape. The vault storage master agreement provided that the purchaser could not remove the tape from storage without Metro Production's written consent until the promissory note was paid in full.
The production service agreement also provided that the purchaser would contact a management consulting firm within 14 days of signing the agreement to "help Owner [purchaser] in the selection of a distributor for the purpose of exhibiting the Tapes in all media." It further provided: "Owner also warrants that he will engage a management consulting firm within thirty (30) days of contract date." Metro Production's brochure stated as follows:
The Sullivans signed a management and service agreement with Investors Management Services, Inc., a Connecticut corporation, as did all the other purchasers of Metro's tapes. Neither Metro Productions nor its officers and shareholders hold an interest in Investors Management Services.
The management agreement was for a period of five years. There was no provision for any earlier termination date. The agreement refers to the production service agreement between the Sullivans and Metro Productions and directs all payments to be made to Metro Productions. It also states: "Owner acknowledges that Manager did not solicit Owner's business but that the Owner sought the services of the Manager." To date no revenues have been received from the Sullivans' tapes nor have any episodes of "The Sam Diego Show" been televised. Metro Productions apparently sold in the same manner nearly 1,000 episodes of various programs on subjects such as sewing, cooking, diet and health, coping with life and game shows.
The Sullivans learned of the investment from their accountant, James Allen, who in turn had learned of it from another client. Allen spoke to the salesman, Duane McCleary, about the investment, and McCleary agreed to pay Allen's expenses for the two of them to travel to Los Angeles to discuss it with Miller and Smith, the sole shareholders and officers of Metro Productions and Producers' Liaison. McCleary is apparently an employee of Rennert Investment Company of Utah, a company which entered into an agreement with Producers' Liaison to solicit purchasers for Metro's tapes. McCleary agreed to pay Allen $400 for each person Allen introduced to McCleary who entered into a production service agreement. Six of Allen's clients, including the Sullivans, entered into agreements with Metro Productions.
The Sullivans purchased the investment as a tax shelter. Included in the brochure on the investment were projected tax savings over the life of the promissory note and various comments about depreciation and investment credits to be taken by the purchasers. After the Internal Revenue Service disallowed their deductions, the Sullivans sued.
The complaint was filed in January 1983, and sought rescission of the agreements and return of the Sullivans' money because of violations of Arizona securities laws in the sale of unregistered securities by unregistered salesmen, damages for fraud and violations of the Consumer Fraud Act, and treble damages under the Arizona Racketeering Act (RICO). A partial summary judgment was entered in September 1984 in favor of the Sullivans on the racketeering act violations, with the court finding that the agreements are securities that are not exempt from registration. It is undisputed that neither Metro Productions nor Producers' Liaison is a licensed broker/dealer and that neither McCleary nor Allen is a licensed securities salesman. The Sullivans were awarded actual damages of $48,485, pre-judgment interest, costs and $25,000 attorney's fees. The remaining causes of action were then dismissed, and this appeal and cross-appeal followed. We address the cross-appeal issues first.
Metro contends the trial court erred in granting summary judgment to the Sullivans on their RICO count, insisting that fact issues exist. The trial court found that the investment is a security. Since there was no dispute that the investment was not registered and that no salesman was licensed to sell securities, the court determined there had been a RICO violation. The only question on appeal then is whether the trial court was correct in its determination that the investment is a security or an investment contract.
The United States Supreme Court has established a three-prong test for determining whether the purchase of an interest is the purchase of an investment contract, S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), and that test applies in Arizona. Rose v. Dobras, 128 Ariz. 209, 624 P.2d 887 (App.1981). "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." 328 U.S. at 301, 66 S.Ct. at 1104.
Metro contends there are factual issues as to the existence of a common enterprise. "A common enterprise is one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties." S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973).
Metro contends that, since Metro Productions' only obligation under the production service agreement was to produce a one-half hour videotape program, there can be no common enterprise between it and the Sullivans. Appellees argue that, once the tape was delivered, Metro Productions' obligations ended. Although that statement is correct, it does not end the matter. The trial court observed in its minute...
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