Western-Realco Ltd. Partnership 1983-A v. Harrison

• Decision Date: 17 August 1989
• Docket Number: WESTERN-REALCO,No. 87CA0813,87CA0813
• Parties: LIMITED PARTNERSHIP 1983-A, a Wyoming limited partnership, Cortez-Realco Limited Partnership, a Wyoming limited partnership, and Realco, a Wyoming general partnership, and a general partner of Western-Realco Limited Partnership 1983-A and Cortez-Realco Limited Partnership, Plaintiffs-Appellees, v. Cleveland C. HARRISON, Defendant and Third-Party Plaintiff-Appellant, v. Larry HARSH, Third-Party Defendant-Appellee. . V
• Court: Colorado Court of Appeals

Page 1139

791 P.2d 1139

WESTERN-REALCO LIMITED PARTNERSHIP 1983-A, a Wyoming limited

partnership, Cortez-Realco Limited Partnership, a Wyoming

limited partnership, and Realco, a Wyoming general partnership, and a general partner of Western-Realco Limited Partnership 1983-A and Cortez-Realco Limited Partnership, Plaintiffs-Appellees, v. Cleveland C. HARRISON, Defendant and Third-Party Plaintiff-Appellant, v. Larry HARSH, Third-Party Defendant-Appellee.

No. 87CA0813.

Colorado Court of Appeals,

Div. V.

Aug. 17, 1989.

Rehearing Denied Oct. 26, 1989.

Certiorari Denied May 14, 1990.

Hall & Evans, Daniel R. Satriana, Jr. and John E. Bolmer, II, Denver, for plaintiffs-appellees.

Constantine Anderson & Tobey, P.C., Jeffrey A. Knoll, Englewood, for defendant and third-party plaintiff-appellant.

Radetsky & Shapiro, P.C., Jay Stuart Radetsky and James M. Edwards, Denver, for third-party defendant-appellee.

Opinion by Judge PLANK.

In this dispute concerning an investment in two limited partnerships, defendant and third-party plaintiff, Cleveland C. Harrison (buyer), appeals the judgment entered upon a jury verdict, finding in favor of plaintiff, Western-Realco Limited Partnership (seller). Buyer also appeals the trial court's judgments dismissing his third-party claims against Larry Harsh (accountant), and dismissing his counterclaims based on fraud and violations of federal and state security regulations. We affirm in part, reverse in part, and remand.

Accountant had been providing tax planning advice to the buyer for ten years. As part of that tax planning advice, the accountant made recommendations regarding tax sheltered investments to the buyer. Accountant recommended to the buyer only those investments that had some direct relationship to the seller or its affiliates.

Acting on accountant's advice, the buyer invested in two limited partnerships in December of 1983. Each subscription document included a purchaser questionnaire, a partnership agreement, a subscription agreement, and a promissory note setting forth the buyer's payment schedule over the next several years. However, the buyer did not sign any of the subscription documents for either limited partnership.

In June of 1984, the buyer, through his attorneys, demanded rescission, but seller refused. The seller subsequently brought this action for breach of an express oral contract. The buyer denied any breach asserting, inter alia, the affirmative defense of fraud in the inducement and counterclaimed against the seller alleging violations of federal and state security regulations by its failure to disclose material facts and failing to register the securities. The buyer also brought a third-party claim against the accountant for fraudulent representations.

Prior to the submission of the case to the jury, the trial court directed a verdict against the buyer on all counterclaims and third-party claims. The trial court also refused to instruct the jury on the buyer's affirmative defense of fraud in the inducement. However, the trial court fashioned a rescission remedy allowing the jurors to find that if they determined that no contract existed between the seller and buyer, then the buyer would be entitled to a return of the initial down payments which he paid into the limited partnerships.

The jury returned a verdict for seller, and this appeal followed.

I.

Initially, the buyer contends that the trial court erred in directing verdicts against him on his claims that the seller had violated § 5(a) of the Securities Act of 1933 (the Act), 15 U.S.C. § 77e (1981) (§ 5 Registration Requirement), and also § 12(1) of the Act, 15 U.S.C. § 77l (1) (1981) (Strict Liability Provision). We agree.

The Securities Act of 1933 and the subsequent Securities and Exchange Act of 1934 constitute a comprehensive plan to protect investors by requiring the filing of a registration statement containing material facts bearing upon the investment merit of securities which are publicly offered or sold through the use of the mails or through the instrumentalities of interstate commerce. Securities & Exchange v. Continental Tobacco Co., 463 F.2d 137 (5th Cir.1972). To accomplish this end, registration and disclosure requirements are imposed on those with access to relevant information. Wasson v. Securities and Exchange Commission, 558 F.2d 879 (8th Cir.1977).

The registration requirements are the heart of the 1933 Act, and § 12(1) imposes strict liability for violating those requirements. Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063 100 L.Ed.2d 658 (1988). A person who violates § 12(1):

"... shall be liable to the person purchasing such security from him, ... to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security. H.R. 5480, 73d Cong., 1 Sess. (1933)."

Liability under § 12(1) is a particularly important enforcement tool, because in many instances a private suit is the only effective means of detecting and deterring a seller's wrongful failure to register securities before offering them for sale. Pinter v. Dahl, supra.

Generally, the § 5 Registration Requirement forbids the use of any means of interstate commerce or of the mails to sell or offer to sell securities without having first filed a registration statement with the Securities and Exchange Commission. See United States v. Custer Channel Wing Corp., 376 F.2d 675 (4th Cir.1967), cert. denied, 389 U.S. 850, 88 S.Ct. 38, 19 L.Ed.2d 119 (1967). And, the Strict Liability Provision permits recovery by a purchaser if the § 5 Registration Requirement has been violated. See Pinter v. Dahl, supra.

However, the Act "carefully exempts from its application certain types of securities and securities transactions where there is no practical need for its application or where the benefits are too remote." Securities & Exchange Commission v. Continental Tobacco Co., supra.

Section 4 of the Act, 15 U.S.C. § 77d (1981), exempts transactions by an issuer not involving a "public offering" from the § 5 Registration Requirement. Nevertheless, this "exempted transaction" must be narrowly viewed since the Securities Act of 1933 is remedial legislation entitled to a broad construction. Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680 (5th Cir.1971).

A.

The primary issue presented on this appeal is whether the sale of these securities was a private offering and thus exempt from the § 5 Registration Requirements.

Here, the trial court correctly concluded that each limited partnership interest was a "security" as that term is described by the applicable federal securities acts. See also Lowery v. Ford Hill Investment Co., 192 Colo. 125, 556 P.2d 1201 (1976).

Also, no registration statement was filed with any federal or state regulatory body in connection with the seller's offering of these securities. These facts together with two others that we must take as established--that the seller sold or offered to sell these securities, and that the seller used interstate transportation or communication with the sale or offer of sale--are sufficient to constitute a prima facie case for a violation of the federal securities laws. Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir.1977); Hill York Corp. v. American International Franchises, Inc., supra.

Seller, however, asserts the affirmative defense that the relevant transactions came within the exemption from registration found in § 4 of the Act. Thus, it became the seller's burden to prove that it was entitled to the claimed exemption, i.e., that there was no public offering of the securities and that registration was not otherwise required. See Securities & Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); see Garfield v. Strain, 320 F.2d 116 (10th Cir.1963).

What constitutes a non-public offering is not set forth in the Act. However, the Securities and Exchange Commission has stated that the question of a public offering is one of fact and must depend upon the circumstances of each case. See 1 Fed.Sec.L.Rep. (CCH) §§ 2740 (1935), 2770 (1962); Hill York Corp. v. American International Franchises, Inc., supra.

As a result, the courts have cited four relevant factors as being helpful in determining whether an offering of securities is public or private:

1. The number of offerees and their relationship to each other and to the issuer.

2. The number of units offered.

3. The size of the offering.

4. The manner of the offering.

Hill York Corp. v. American International Franchises, Inc., supra; Chapman v. Dunn, 414 F.2d 153 (6th Cir.1969).

Consideration of these factors need not exhaust the inquiry, nor is the weight of one factor in favor of the private status sufficient to ensure the availability of the exemption. Rather, these factors serve as guideposts for the fact finder in attempting to determine whether subjecting the offering to registration requirements would further the purpose of the 1933 Act. Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir.1977).

The ultimate test, is whether the particular class of persons affected need the protection of the Act. Securities & Exchange Commission v. Ralston Purina Co., supra; Anastasi v. American Petroleum Inc., 579 F.Supp. 273 (Colo.1984). The design of the Act is to protect investors by promoting full disclosure. However, investors who are shown to be able to "fend for themselves in a transaction not involving any public offering," may be exempt from this protection. See Securities & Exchange Commission v. Ralston Purina Co., supra. It therefore follows that the "exemption question turns on the knowledge of the offerees." Securities & Exchange Commission v. Ralston Purina Co., supra.

Establishing the number of persons involved in an offering is important both in order to ascertain the magnitude of the...