Wooldridge Homes, Inc. v. Bronze Tree, Inc.

• Decision Date: 18 February 1983
• Docket Number: No. 82-K-1729.,82-K-1729.
• Parties: WOOLDRIDGE HOMES, INC., a California corporation, Plaintiff, v. BRONZE TREE, INC., a Colorado corporation, Defendant.
• Court: U.S. District Court — District of Colorado

558 F. Supp. 1085

WOOLDRIDGE HOMES, INC., a California corporation, Plaintiff, v. BRONZE TREE, INC., a Colorado corporation, Defendant.

No. 82-K-1729.

United States District Court, D. Colorado.

February 18, 1983.

B. Joseph Krabacher, Sachs, Klein & Seigle, Aspen, Colo., for plaintiff.

Thomas R. Bromberg and Robert W. Walter, Hall & Evans, Denver, Colo., for defendant.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

Plaintiff's six claim complaint alleges violations of federal and state securities laws and breach of contract. Defendant moves under Rule 12(b)(6), F.R.Civ.P. to dismiss for failure to state a claim upon which relief can be granted. Defendant contends that the sale of the condominium unit which is the subject of this lawsuit is not a sale of a security or an investment contract and, therefore, the action cannot be one based on the securities laws. Jurisdiction is based on Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and 28 U.S.C. § 1332.

The complaint alleges that Robert E. Wooldridge received a solicitation letter dated October 31, 1979 from Mountain Real Estate Association, Ltd., inviting offers in certain investment resort property located in Steamboat Village, Colorado. The condominium units to which the letter related were known as the Bronze Tree Condominiums. Wooldridge responded to the solicitation on November 2, 1979, and received a standard contract which he executed in the name of Wooldridge Homes on November 13, 1979, agreeing to make a $205,000 investment. Wooldridge tendered a $25,000 earnest money check which was deposited in an escrow account. A purchase agreement was entered "with the intent of making an investment in a growing resort community." Plaintiff maintains that it believed it was making a passive investment and anticipated little or no management of the unit would be required by it. Defendant, plaintiff alleges, is a controlling person of the sales agent, Mountain Real Estate Association, Ltd. Sever, a principal of the sales agent, communicated by telephone and letter that plaintiff's investment was increasing in value. Plaintiff avers it expected to earn profits from the investment and relied on the efforts of defendant to do so. Plaintiff characterizes the investment as a common enterprise. By letter dated April 4, 1980, defendant informed plaintiff that defendant was seeking construction financing and that financial institutions with whom defendant was dealing may contact plaintiff for financial information regarding plaintiff's credit worthiness. Plaintiff alleges that defendant was using plaintiff's contractual commitment under the purchase agreement, and other investors' contractual commitments under similar agreements, to obtain construction financing. Defendant was delayed in obtaining financing for a construction loan until December, 1980 and construction was unable to continue during the winter of 1980-1981. Plaintiff claims that defendant represented through the sales agent that completion of the project was guaranteed for December, 1981, when in fact defendant contemplated or should have contemplated the delays in construction. Plaintiff seeks rescission of the purchase agreement and return of Wooldridge's earnest money deposit plus accrued interest.

Defendant filed its motion to dismiss and submitted an affidavit in support of the motion. Rule 12(b)(6) provides:

If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all materials made pertinent to such a motion by Rule 56.

I have discussed the mechanics for converting a Rule 12(b)(6) motion to a Rule 56 motion in Donovan v. Gingerbread House, Inc., 536 F.Supp. 627 (D.Colo.1982). To avoid further delay in this case by requiring the filing of additional briefs, affidavits and other documentation appropriate for consideration on a motion for summary judgment, I will not convert this motion and will not consider the tendered affidavit of David R. Travis at this time.

The parties agree that if this scheme can be characterized as a security or an investment contract, it must meet the three elements set forth in the paradigmatic case of Securities & Exchange Commission v. W.J. Howey Company, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The elements require that an individual (1) invest his money (2) in a common enterprise, and (3) expect profit solely from the efforts of the promoter or a third party. 328 U.S. at 298-299. Accord: United Housing Foundation v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir. 1980).

INVESTMENT OF MONEY

Investment of money requires the investor to commit his assets to an enterprise or venture in such a manner as to subject himself to financial loss. Securities & Exchange Com. v. International Mining Exchange, Inc., 515 F.Supp. 1062, 1067 (D.Colo. 1981) (Kane, J.); Stowell v. Ted S. Finkel Investment Services, Inc., 489 F.Supp. 1209, 1220 (D.Fla.1980). Defendant virtually concedes that plaintiff has made an investment of money by stating at page 2 of his motion "... the $25,000.00 earnest money deposit may constitute an `investment' for purposes of the Howey test ..." Certainly the sale of a condominium for investment purposes is subject to financial loss due to various market factors. Neither side contends that there is any genuine dispute that this transaction qualifies as an investment of money.

COMMON ENTERPRISE

Defendant disputes that the common enterprise element is present in this action arguing that the fortunes of the condominium purchaser were not interwoven with and dependent upon the efforts and success of Bronze Tree, Inc. or any third party as required by Securities & Exchange Com. v. Koscot Interplanetary, Inc., 497 F.2d 473, 478 (5th Cir.1974). Plaintiff contends that under Securities Act Release No. 5347, 17 C.F.R. section 231.5347 (January 4, 1973), the offer or sale coupled with an optional rental arrangement will constitute the offer of investment contracts.

There is debate on whether a horizontal or vertical relationship between the investor and promoter satisfies the common enterprise language of Howey. A vertical relationship is essentially a one-to-one arrangement between the customer and broker. A horizontal relationship is between an individual investor and the pool of other investors. Securities & Exchange Com. v. International Mining Exchange, supra; Curran v. Merrill Lynch, Pierce, Fenner & Smith, 622 F.2d 216 (6th Cir.1980). Some courts have adopted the horizontal approach. See, e.g. Curran, supra; Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir.1977); Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir.1972), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144, while others have opted for the vertical approach. See, e.g., Securities & Exchange Com. v. Koscot, supra; Miller v. Central Chinchilla Group, Inc., 494 F.2d 414 (8th Cir.1974); Securities & Exchange Com. v. Glenn Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.) cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). The Tenth Circuit has not adopted either approach.

The vertical relationship defines a common enterprise as 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. SEC v. Glenn Turner, 474 F.2d at 482. Defendant argues that the fortunes of the condominium purchaser are not interwoven with and dependent upon the efforts and success of Bronze Tree, Inc. or any third party. Specifically, defendant relies on the fact that its arrangement with Ski Country Enterprises, Inc. (a management company) to manage the common areas and to provide administrative and supervisory management for the complex was not to exceed two years, after which the owners of the individual condominium units were free to engage professional management as they desired. Further, defendant points out that after the initial two year contract, the rental of condominiums was strictly optional. In other words "if an owner chooses to make their (sic) condominium available for rental purposes, they can enter into a Rental Agreement with Ski Country." (Exhibit B, page 2)

Here, defendant's activities come within both the vertical and horizontal definitions of common enterprise. In attempting to obtain construction financing and by providing managerial services, however optional, the investors' profits are directly tied to the efforts of Bronze Tree, Inc. Without this effort the investor would lose the opportunity to participate in the rental pool. Thus, there is a one-to-one relationship between the investor and the promoter. Each investor is also in a common enterprise with the other investors. It is undisputed that defendant was in effect "pooling" pre-sale purchase commitments in order to obtain construction financing to fund the project. It is evident that the project would have gone forward only if sufficient investor interest had been generated on a pre-sale basis. If sufficient investor interest was not generated, the defendant would cancel the project by exercising its right under the purchase agreement. Clearly, the fortunes of the investors are "interwoven with and dependent upon the efforts and success of those seeking the investment or those of third parties." Koscot, 497 F.2d at 478.

Defendant cites Aldrich, supra, to support its argument that "the obligation to perform minimal managerial functions or to provide basic improvements does not transform a real estate sale into a...