Waterman v. Alta Verde Industries, Inc.

• Decision Date: 28 August 1986
• Docket Number: No. 85-1472-CIV-5.,85-1472-CIV-5.
• Citation: 643 F. Supp. 797
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Curtis R. WATERMAN, Plaintiff, v. ALTA VERDE INDUSTRIES, INC., et al., Defendants.

643 F. Supp. 797

Curtis R. WATERMAN, Plaintiff, v. ALTA VERDE INDUSTRIES, INC., et al., Defendants.

No. 85-1472-CIV-5.

United States District Court, E.D. North Carolina, Raleigh Division.

August 28, 1986.

COPYRIGHT MATERIAL OMITTED

Michael T. Medford, Manning, Fulton & Skinner, Raleigh, N.C., for plaintiff.

Barbara Mills Larkin, Sanford, Adams, McCullough & Beard, Raleigh, N.C., (Thomas A. Harwood, Uvalde, Tex., of counsel), for defendants.

ORDER

DUPREE, District Judge.

Plaintiff, a North Carolina resident, brought this action in October of 1985 seeking rescissionary damages for the alleged sale of unregistered securities in violation of federal and state law, as well as damages for alleged negligence, breach of fiduciary duty, breach of contract, misrepresentation and unfair and deceptive trade practices. Jurisdiction is claimed on federal question and diversity of citizenship grounds. Plaintiff subsequently voluntarily dismissed the final four claims, leaving only the securities and negligence claims for disposition by the court. The action is before the court on defendants' motion to amend their answer to include certain affirmative defenses and plaintiffs motion for partial summary judgment based on his claims of violation of North Carolina and federal securities laws. The issues have been fully briefed and the motions are ripe for disposition.

FACTUAL BACKGROUND¹

This action arose out of a transaction between plaintiff and defendants in late 1984 and early 1985 whereby plaintiff purchased cattle and feed from defendant Alta Verde as part of an effort to reduce his taxable income for the 1984 tax year. Defendant Alta Verde is a Texas corporation which is in the business of feeding cattle for investors. It has advertised the availability of its operation in a number of publications, including the Wall Street Journal, the New York Times, the Los Angeles Times, the Chicago Sun Times and Barron's, as well as other magazines and newspapers. The advertisements emphasize the potential tax advantages of defendants' operation.

The service operates as follows: Alta Verde purchases cattle on the open market and holds them in its inventory² until an investor expresses an interest in purchasing a certain number of cattle and feeding them with Alta Verde. Alta Verde then sells to the investor the number of cattle he wishes to purchase and separates them from its inventory lot. The amount of the investment depends on the investor, but according to a brochure put out by Alta Verde regarding this program, the minimum investment is approximately $25,000. While the investor can pay cash for the cattle and feed, he also may take out a loan with defendant Miller Finance Company for the purchase price, which company was instituted by defendants for precisely this purpose. From the investor's cash payment or the proceeds of the loan, Alta Verde reimburses itself for the cost of the feeder cattle and cattle feed. The loan and Alta Verde's fees are secured by a security interest in the cattle and the feed. Alta Verde then feeds and maintains the cattle in its feed yards for six or seven months while they fatten. When this process is complete, Alta Verde contacts the investor to determine whether he wishes to sell the cattle. They inform him of the price that they feel that he can get for the cattle, and the investor makes the decision whether to sell them or to hold them in hopes of obtaining a better price in the near future. The cattle may not be held indefinitely, though, due to the fact that the investor will continue to have to pay the price of the feed and the cattle will become less attractive to buyers if they are fed too long prior to slaughter. Thus, there is some risk in this venture, since the investor is bound by the price set by the market at the time when his cattle are ready to be sold for slaughter.

At the time that plaintiff became involved in this program, Alta Verde itself ran a meatpacking plant, and was one of the potential purchasers of the fattened cattle. The price it offered could often be more attractive than that of its competitors, since the other meatpacking plants which would commonly purchase this cattle were one hundred miles or more away from Alta Verde, and since the seller (here, the investor) generally pays the cost of transporting the cattle to the buyer. Butler Deposition, pp. 116-117.

Upon receiving approval from the investor, Alta Verde sells the cattle, using the proceeds to repay any loans arranged through Miller Finance and all amounts due to Alta Verde. It then sends the balance back to the investor. Alta Verde's profit in these transactions comes from the sale of the grain consumed by the cattle. Miller Finance's profit comes from the interest on the loans.

This is the operation of which plaintiff was made aware in late 1984. Plaintiff began seeking such an investment at this time because he had earned a great deal of money in that year and wished to shelter some of that income from federal income taxes.³ Through his accountant and his attorney, plaintiff learned about the Alta Verde program and had them contact representatives at Alta Verde to see if there was time for him to invest between $100,000 and $200,000 prior to the end of 1984. He was informed that this was, indeed, possible. About a week later plaintiff's attorney telephoned John Butler, a representative of Alta Verde, and informed him that plaintiff wished to invest in the cattle feeding program. Mr. Butler said that Alta Verde was willing to accept the investment. On December 27, 1984, plaintiff's attorney wired $192,000 from plaintiff's bank in North Carolina to Alta Verde's bank in Texas for the purchase of approximately 1,200 head of heifer cattle plus feed. Alta Verde subsequently refunded an "overborrowing" of $39,500, leaving plaintiff's initial cash investment at $152,500. In January, 1985, plaintiff was mailed the cattle feeding agreement from Alta Verde and an optional advance note and security agreement from Miller Finance Company. Plaintiff signed these documents and returned them to the defendants in Texas.

In the spring of 1985, John Butler contacted plaintiff regarding plaintiff's possible interest in investing in a different cattle feeding program involving Holstein cattle. Plaintiff eventually decided to do this, and invested $74,609.33, $29,540 of which was in cash, in the Holstein feeding program. Thus, by April, 1985, plaintiff's total net cash investment in Alta Verde cattle was $182,040.

Also in the spring of 1985, plaintiff decided to visit the stockyards at Alta Verde. He contacted Mr. Butler and flew down to Texas with his wife. He viewed the operations of the company, including the pens of cattle which he owned, and met with Mr. Butler and also briefly met defendant Leon Miller, Jr., the president of Alta Verde. He asked a number of questions regarding his investment and appeared to the defendants to be quite knowledgeable with respect to investments. He left Alta Verde with the feeling that his investment had been well made.

By June of 1985, the first of the heifer cattle were ready for market according to the projections of Alta Verde's people. Plaintiff spoke with Mr. Butler and with Glenn Polhemus, Alta Verde's feedyard manager, regarding the sale of the heifers which were ready for market. However, at that time the market was very low and plaintiff would not break even on his investment if he sold his heifers at the prevailing market rate. Plaintiff asked the Alta Verde representatives whether they thought the market might go up if he waited a few weeks, and they replied that a number of market analysts had expressed their opinions that it would. Plaintiff decided to hold off selling the cattle on that date in the hope that the market would rise.

There is a dispute between the parties as to what happened during the ensuing weeks. However, it is undisputed that Mr. Butler resigned and that plaintiff was in some confusion as to who was handling his account. It is also undisputed that the market price for heifers did not rise, and that all of plaintiff's heifers were sold during the month of July at a price which resulted in plaintiff losing his entire investment. It is also undisputed that during this time period, Alta Verde closed its meatpacking plant so that plaintiff was unable to sell his cattle to Alta Verde. Plaintiff subsequently requested of defendants that they sell his Holsteins prior to the time that they were at their optimum weight for market. However, the price for the Holsteins was such that plaintiff's initial investment was recouped. However, this amount was not paid to plaintiff but was used to offset the loans due Miller Finance Company. Plaintiff now contends that he is entitled to the return of his entire cash investment, plus costs and attorney's fees.

MOTION TO AMEND

Defendants seek to amend their answer to include the following affirmative defenses: (1) the transactions at issue were exempt from registration under the securities laws because there was no public offering of the cattle feeding program; (2) plaintiff's securities claims are barred by the applicable statute of limitations; (3) plaintiff's negligence claim is barred because defendant could not sell the cattle earlier due to "an intervening impossibility;" and (4) plaintiff's negligence claim is barred because plaintiff interfered with defendants' efforts to sell the cattle at an earlier date.

In opposition to this motion, plaintiff asserts that the first two proposed amendments are futile because they are legally insufficient as defenses to claims for the sale of unregistered securities. Plaintiff further argues that defendants have shown no good excuse for their failure to assert these defenses prior to the close of discovery. Additionally, plaintiff asserts that if the court grants his motion for partial summary judgment, the motion to amend with respect to the negligence claims...