Woodward v. Terracor

• Citation: 574 F.2d 1023
• Decision Date: 05 May 1978
• Docket Number: No. 76-1720,76-1720
• Parties: Fed. Sec. L. Rep. P 96,386 Brad R. WOODWARD, Wendy J. Woodward, Jeannette S. Wilson, Don W. Crompton, Wiltse P. Crompton, K. Brett Garn, Paul Rowe, Arnold F. Egan, for themselves and for and on behalf of all persons similarly situated, Plaintiffs-Appellants, v. TERRACOR, a Utah Corporation, Continental Mortgage Investors, a Massachusetts Business Trust, Carl Marks & Company, Inc., United American Life Insurance Company, Fleschner-Becker-Erlich Fund, N.V. and FBA Partners, Diversified Mortgage Investors, Avco Financial Services, Glendon E. Johnson, Franklin D. Johnson, Clifton I. Johnson, H. Roger Boyer, Ellis R. Ivory, and Does 1 through X inclusive, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1023

574 F.2d 1023

Fed. Sec. L. Rep. P 96,386

Brad R. WOODWARD, Wendy J. Woodward, Jeannette S. Wilson Don W. Crompton, Wiltse P. Crompton, K. Brett Garn, Paul Rowe, Arnold F. Egan, for themselves and for and on behalf of all persons similarly situated, Plaintiffs-Appellants, v. TERRACOR, a Utah Corporation, Continental Mortgage Investors, a Massachusetts Business Trust, Carl Marks &amp Company, Inc., United American Life Insurance Company Fleschner-Becker-Erlich Fund, N.V. and FBA Partners Diversified Mortgage Investors, Avco Financial Services, Glendon E. Johnson, Franklin D. Johnson, Clifton I. Johnson, H. Roger Boyer, Ellis R. Ivory, and Does 1 through X inclusive, Defendants-Appellees.

No. 76-1720.

United States Court of Appeals, Tenth Circuit.

Argued Nov. 15, 1977.

Decided April 10, 1978.

Rehearing Denied May 5, 1978.

Richard G. Cook, Salt Lake City, Utah, for plaintiffs-appellants.

Daniel L. Berman, Salt Lake City, Utah (Berman & Giauque and Garry F. Bendinger, Salt Lake City, Utah, on the brief), for defendant-appellee Terracor.

Bruce A. Maak, Salt Lake City, Utah (Martineau & Maak and C. Keith Rooker, Salt Lake City, Utah, on the brief), for defendant-appellee H. Roger Boyer.

James B. Lee and David S. Dolowitz of Behle & Latimer, Salt Lake City, Utah, on the brief, for defendant-appellee Avco Financial Services, Inc. James R. Brown, Salt Lake City, Utah (Jardine, Johnson & Baldwin, Salt Lake City, Utah, on the brief), for defendants-appellees Glendon E. Johnson, Franklin D. Johnson, and Ellis R. Ivory.

Edward J. McDonough and Frederick P. McBrier of Jones, Waldo, Holbrook & McDonough, Salt Lake City, Utah, on the brief, for defendant-appellee United American Life Ins. Co.

Before McWILLIAMS, BREITENSTEIN and DOYLE, Circuit Judges.

McWILLIAMS, Circuit Judge.

The seven individual plaintiffs in this proceeding sue in their individual capacities and also seek to represent a class. The named plaintiffs all purchased lots in Stansbury Park, a planned residential community in Tooele, Utah. The first named defendant, Terracor, a Utah corporation, was the developer of Stansbury Park. Several financial institutions which had loaned money to Terracor were also named as parties defendant. Additional defendants included stockholders, officers, directors, and employees of Terracor.

The action was brought under federal securities laws, the securities laws of the State of Utah, and in common-law fraud. The complaint alleged, inter alia, that the sale of the lots constituted the sale of a security, in the form of an investment contract, within the meaning of Section 2(1) of the Securities Act of 1933, as amended, 15 U.S.C. § 77b, Section 3(a)(10) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78c(a)(10) and Section 61-1-13(12) of the Utah Code.

There was extensive pre-trial discovery, primarily by the defendants. Both the plaintiffs and the defendants then moved for a summary judgment on the issue of whether the purchase of the residential lots by the plaintiffs constituted an investment contract. It was the plaintiffs' position that, based on the record as then made, there was no genuine issue of fact on this particular matter and that their purchase of the lots was an investment contract. The defendants' position was that the record demonstrated conclusively that the purchase of the lots was not an investment contract, and hence not within the ambit of the federal security laws. The trial court granted the defendants' motion for summary judgment and entered judgment accordingly. Additionally, the trial court granted the motion of one of the individual defendants, Roger Boyer, for summary judgment on the ground that he was not a "control person" within the meaning of 15 U.S.C. § 77o and 15 U.S.C. § 78t. The plaintiffs now appeal the dismissal of their action. We affirm.

The ultimate issue in this appeal is whether the purchase by the plaintiffs of subdivision lots in a residential development constituted an investment contract, and, as such, subject to the federal securities laws. The fact that the plaintiffs and defendants both moved for summary judgment on this matter, though not controlling, indicates that the parties themselves were of the view that, under the circumstances, the question was one of law, not of fact.

15 U.S.C. § 77b(1) provides that an "investment contract" is a form of a "security." The Supreme Court has declared that an investment contract, for the purposes of the federal securities acts, is a "contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party . . . ." S. E. C. v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). In determining whether a particular transaction is, or is not, an investment contract, substance is exalted over form, and emphasis is placed on economic reality. McGovern Plaza Joint Venture v. First of Denver, 562 F.2d 645 (10th Cir. 1977); Vincent v. Moench, 473 F.2d 430 (10th Cir. 1973); and Continental Marketing Corp. v. Securities & Exchange Com'n, 387 F.2d 466 (10th Cir. 1967).

Stansbury Park was conceived and promoted by Terracor as a planned residential community. To promote the sale of individual building sites, Terracorrepresented that Stansbury Park would eventually become a self-sufficient community. Included in the plans were shopping centers, health and cultural facilities, transportation facilities, and abundant recreational opportunity, including a golf course and lake.

The plaintiffs each purchased lots as future building sites in Stansbury Park, although several indicated that they themselves did not intend to actually build on the land, and that they bought the land as an "investment." In each instance the land was acquired by the execution of what is referred to as a Uniform Real Estate Contract. This was the only agreement between the plaintiffs and Terracor. This real estate contract provided only for the sale of the described parcels of land together with the usual improvements, such as culinary water, underground sewage, curb, gutter, and the like.

Although there is in our view no genuine issue of fact pertaining to the question of whether we are here concerned with an investment contract, the parties are in dispute as to what has happened to the Stansbury Park project. The plaintiffs state in their brief that progress on the project has been slow and that the project itself is "dying on the vine." In this general regard, though it is not pertinent to our resolution of the present controversy, the fraud relied on by the plaintiffs is an alleged misrepresentation by the defendants as to their financial ability to carry the project to final completion. The defendants, however, in their brief, state, for example, that all the recreational facilities mentioned in promotional material have been constructed and that Stansbury Park today is in fact a "burgeoning community." As indicated, however, this factual dispute does not bear on the issue in this appeal.

The test in Howey, above referred to, has recently been reaffirmed in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). United Housing involved stock in a corporation owning and operating a housing cooperative. In holding that the transaction considered there did not involve a security, the Supreme Court quoted the Howey test and then went on to state:

This test, in shorthand form, embodies the essential attributes that run through all the Court's decisions defining a security. The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profit to be derived from the entrepreneurial or managerial efforts of others. Id. at 852, 95 S.Ct. at 2060.

Applying the United Housing test to the instant case, the question becomes whether there was an investment by these plaintiffs in a common venture with Terracor which was premised on a reasonable expectation of profit to be derived from the managerial effort of Terracor. Like the trial court, we conclude that the present case does not measure up to that test. We particularly fail to see any common venture or common enterprise between the plaintiffs and Terracor.

Terracor itself was involved in a business venture. Terracor was developing a new residential community. As part of its venture Terracor sold lots to persons who either intended to build houses thereon, or intended to resell to others who would so build. But the mere fact that the plaintiffs bought lots from Terracor does not mean that by such acquisition they were thereafter engaged in a common venture or enterprise with Terracor. The only contractual agreement between plaintiffs and Terracor was the Uniform Real Estate Contract. Terracor was under no contractual obligation to the plaintiffs other than to deliver title once purchase terms were met. Unlike Howey, Terracor was not under any collateral management contract with the purchasers...