Court Opinion

ID: 7803065
Source: CourtListenerOpinion
Date Created: 2022-08-24 06:11:44.727226+00
Date Added: 2024-06-11T16:29:34.598933
License: Public Domain

AFFIRMED and Opinion Filed August 19, 2022

                                    S  In The
                            Court of Appeals
                     Fifth District of Texas at Dallas
                               No. 05-20-01045-CV

                        ASHTON CHRISTIE, Appellant
                                   V.
                         TERRY L. HAHN, Appellee

               On Appeal from the 116th Judicial District Court
                            Dallas County, Texas
                    Trial Court Cause No. DC-19-01096

                        MEMORANDUM OPINION
                   Before Justices Reichek, Nowell, and Carlyle
                           Opinion by Justice Reichek
      Following a bench trial, Defendant Ashton Christie appeals a judgment in

favor of Plaintiff Terry L. Hahn. The primary issue is whether a note between the

parties is a “security” under the Texas Securities Act (TSA). For reasons that follow,

the Court affirms the trial court’s judgment.

                                 BACKGROUND

      The parties stipulated to the following facts. In 1991, Richard Christie

founded Christies Sports Bar & Grill. Richard’s two sons, Cheston and Ashton,

worked at the restaurant since the 1990s. Cheston managed the “back-end” financial

operations while Ashton managed the “front-end” and food operations.             The
restaurant/bar operated through a Texas corporation, Cheston, Inc. Before 2016,

Richard Christie and Sandra Christie owned 100% of the outstanding shares of

Christies.

      Ashton and Cheston wanted to purchase Christies. In October 2015, Ashton

applied for (1) a small business loan in the amount of $700,000 to be guaranteed by

the U.S. Small Business Administration and (2) a $100,000 revolving credit loan

from JPMorgan Chase. In addition, the brothers approached five people, including

Hahn, to raise money for the purchase. Cheston communicated with Hahn and sent

him an email soliciting $100,000. In his email, Cheston stated, “I’ll give you 10%

of the profits until your initial investment is paid back then 5% of the profits in

perpetuity and 1% on any sale. This should get you paid back within 3-4 years.” On

October 27, 2015, Ashton opened a new checking account at Hillcrest Bank (“the

Hillcrest account”). Three days later, Hahn wired $50,000 to the Hillcrest account.

      On November 12, 2015, Ashton, Cheston, and Hahn executed a document

titled “Unsecured Note” (“the Note”) in the amount of $100,000 with Hahn as payee

and Ashton and Cheston as makers. The Note provided that Hahn would be repaid

based on the profits of Cheston, Inc.:

      Annual Interest Rate on Unpaid Principal from Date: In lieu of
      interest, Payee shall receive, as consideration for providing a portion of
      the purchase price to be paid by Maker for the acquisition of Cheston,
      Inc. after the repayment of the principal of this Note, an amount equal
      to ten percent (10%) of the profits of Cheston, Inc., a Texas corporation
      being acquired by Maker partly with the proceeds of this Note, for as
      long as the Maker owns an interest in Cheston, Inc. The 10% of profits

                                         –2–
      shall be distributed to Payee quarterly within thirty (30) days after the
      end of each quarter. If Maker sells Cheston, Inc., Payee shall be entitled
      to receive two percent (2%) of the gross sales price payable upon
      closing of any such sale.

      Terms of Payment (principal): This Note shall be payable in
      quarterly installments equal to twenty percent (20%) of the prior
      quarter’s net profits of Cheston, Inc. beginning April 15, 2016 and
      continuing on July 15, October 15 and January 15 of each year until the
      entire principal amount has been repaid.

      Although the Note does not include an interest rate and indicates the

arrangement for repayment is “in lieu of interest,” it does contain general references

to interest: “Interest on the debt evidenced by this note shall not exceed the

maximum amount of nonusurious interest that may be contracted for . . .; any interest

in excess of that maximum amount shall be credited on the principal of the debt or,

if that has been paid, refunded.” The next day, Hahn wired another $50,000 to the

Hillcrest account. Ashton and Cheston are not registered sellers of securities under

the TSA, nor was the Note registered with the Texas State Securities Board.

      On November 24, 2015, Ashton signed a stock purchase agreement agreeing

to acquire all the outstanding shares of Christies for a purchase price of $900,000.

He funded the purchase using $675,000 from the proceeds of his small business loan

and a $225,000 sellers’ note from Richard Christie and Sandra Christie.            On

December 31, 2015, Ashton transferred $50,000 from the Hillcrest account to

Richard Christie toward the stock purchase agreement. Ashton’s acquisition of

Christies closed and funded on January 8, 2016. When Ashton paid Richard Christie

                                         –3–
and Sandra Christie the proceeds of the small business loan, he also paid them

$100,000 toward the sellers’ note with funds from his revolving credit loan.

Between January 13 and January 27, 2016, Ashton made various transfers of money

out of the Hillcrest account to his mother, his mother-in-law, his father-in-law, a

credit union, and Cheston. Ashton contends these transfers were in repayment of

debt. On February 4, 2016, Ashton transferred $65,000 from the Hillcrest account

to his father.

       In 2017, Ashton placed Christies into Chapter 11 bankruptcy and also filed

for personal bankruptcy. Hahn was paid $6,000 in profits before the bankruptcies

were filed.

       In addition to the stipulated facts, each side presented the following evidence.

Hahn testified he had known the brothers since the early 1990s. Cheston asked him

to make an investment. Hahn believed Cheston was asking on behalf of himself and

his brother Ashton. Cheston told Hahn (1) both he and Ashton were buying the bar,

which was important to Hahn because he knew Cheston better than he knew Ashton,

trusted Cheston more, and knew Cheston ran the financial end, and (2) Hahn’s

money would be used to purchase the bar. It was important to Hahn to know what

the brothers planned to do with his money. Hahn took the money from his 401K

account and said his purpose was to “build an income stream for retirement.”

       The Note was not payable on demand, did not require monthly principal

payments or payment of interest, and was not secured by collateral. Rather, as Hahn

                                         –4–
testified, he was to be paid 20% of profits until his initial investment was repaid, and

then he would receive 10% of profits in perpetuity. If Christies ever sold, Hahn was

to be paid 2% of the gross sales price.

        Evidence showed that Hahn’s money was not used to purchase Christies but

was used to pay off Ashton’s personal debts and to make payments to family

members. Moreover, only Ashton purchased the bar. Hahn testified he would not

have invested had he known either of these facts.

        Ashton testified that he and his brother planned to be co-owners of Christies,

but Ashton ended up as the sole owner because Cheston could not qualify to be on

the small business loan. Ashton used at least some of Hahn’s money to get rid of

his debt so he could qualify for the small business loan. He indicated that the debts

he paid with money from the Hillcrest account were all tied to the business. Cheston

testified that he did not tell Hahn his money was going to be used to pay off Ashton’s

credit cards or to repay family members. Nor did he tell Hahn that Ashton was the

only one buying the business.

        Hahn brought this suit solely against Ashton asserting that Ashton violated

the TSA by selling an unregistered security, without a license, and under false

pretenses.1 Hahn alleged the Note is a security under the TSA and that Cheston

acted as Ashton’s agent in soliciting funds from Hahn. Hahn alleged Ashton: (1)

    1
      Hahn apparently brought a separate action against Cheston. Hahn testified he received a default judgment
against Cheston for approximately $100,000.

                                                    –5–
violated TSA § 33(A)(1) by offering or selling a security without registering as a

seller under the TSA and by offering or selling a security that was not registered with

the Texas State Securities Board (“the registration violations”); and (2) violated §

33(A)(2) by offering or selling a security by means of an untrue statement of material

fact and/or by an omission to state a material fact necessary to make the statements

made not misleading (“the fraud violations”). See TEX. REV. CIV. STAT. ANN. art.

581-33(A).2 The alleged basis for the fraud violations were Ashton’s representations

that both brothers were going to purchase Christies and that Hahn’s money would

be used to make the purchase. In addition, Hahn alleged Ashton was liable for the

registration and fraud violations because (1) he directly or indirectly controlled his

brother Cheston (§ 33(F)(1)), and (2) he directly or indirectly, with intent to deceive

or defraud, or with reckless disregard for the truth or the law, materially aided and

abetted Cheston’s violations of the TSA (§ 33(F)(2)). Hahn sought rescission of the

Note and return of his investment, as well as attorney’s fees.

         After hearing the evidence, the trial judge found both registration violations

and fraud violations. The trial court rescinded the Note and awarded Hahn $94,000,

plus attorney’s fees and interest. Along with its judgment, the trial court issued

extensive findings of fact and conclusions of law. Among the court’s findings and

conclusions were that the Christie brothers solicited investments from five people,

    2
      Effective January 1, 2022, the TSA was codified in the Texas Government Code. See TEX. GOV’T CODE ANN.
§ 4001. For ease and clarity, the Court refers to the version in the revised civil statutes in effect at trial and cited by
the parties.

                                                          –6–
including Hahn, to raise $225,000 to purchase Cheston, Inc. Cheston acted on his

own behalf and on Ashton’s behalf in connection with his solicitations to Hahn and

acted as Ashton’s agent with respect to this transaction. The Note is a security.

References in the Note to “interest on the debt” are in “cut-pasted boilerplate

language (in a different size and font)” that is inapplicable because there is no

“interest . . . evidenced by the note.” The parties expressly agreed that Hahn would

be paid profits in “lieu of interest.” Ashton and Cheston offered and sold a security

to Hahn and were not registered sellers of securities under the TSA. Nor was the

Note registered with the Texas State Securities Board. Ashton with intent to deceive

or defraud or with reckless disregard for the truth directly or indirectly materially

aided Cheston in selling the Note. In addition, Ashton and Cheston sold a security

by means of an untrue statement of material fact. Cheston stated that he and his

brother would acquire Christies and that Hahn’s $100,000 would go toward a portion

of the purchase price for acquisition of the sports bar. Ashton used Hahn’s money

for other purposes. The trial court also found that Ashton and Cheston offered a

security by means of an omission to state a material fact necessary to make the

statements made, in light of the circumstances under which they are made, not

misleading. Neither Ashton nor Cheston disclosed to Hahn that his investment

would be used for purposes other than going toward a portion of the purchase price

for the acquisition of Christies. Neither brother disclosed to Hahn that Ashton

needed to pay off personal debt to qualify for the small business loan and revolving

                                        –7–
line of credit. Neither brother disclosed that Cheston would not acquire Christies

and did not apply for the small business loan. Hahn would not have invested had he

known the facts the brothers omitted to tell him. The trial court concluded that both

brothers violated § 33(A)(1) and § 33(A)(2) of the TSA. The court further concluded

the Note was not exempt under either § 109.13(a) or § 139.16(a) of the Texas

Administrative Code.

      In this appeal, Ashton contends (1) the trial court erred in finding that the Note

was a security under the TSA; (2) if the Note was a security, he proved an exemption

under the TSA; and (3) the evidence is legally and factually insufficient to prove he

violated § 33(A)(2).

                            STANDARD OF REVIEW

      In reviewing a legal sufficiency challenge to the evidence, we credit evidence

that supports the verdict if a reasonable factfinder could have done so and disregard

contrary evidence unless a reasonable factfinder could not have done so. Akin,

Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. & Research Corp., 299 S.W.3d

106, 115 (Tex. 2009); City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005).

We consider all the evidence in the light most favorable to the prevailing party and

indulge every reasonable inference in that party’s favor. St. Joseph Hosp. v. Wolff,

94 S.W.3d 513, 520–21 (Tex. 2003). The evidence is legally sufficient if “more than

a scintilla of evidence exists.” Browning-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928

(Tex. 1993). More than a scintilla of evidence exists if the evidence furnishes some

                                         –8–
reasonable basis for differing conclusions by reasonable minds about a vital fact’s

existence. Litton Loan Servicing, L.P. v. Manning, 366 S.W.3d 837, 840 (Tex.

App.—Dallas 2012, pet. denied). The final test for legal sufficiency must always be

whether the evidence at trial would enable reasonable and fair-minded people to

reach the verdict under review. Del Lago Partners, Inc. v. Smith, 307 S.W.3d 762,

770 (Tex. 2010).

      To evaluate a factual sufficiency challenge, we consider and weigh all

evidence. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001) (per curiam).

We can set aside a verdict only if the evidence is so weak or the finding is so against

the great weight and preponderance of the evidence that it is clearly wrong and

unjust. Id. We must not substitute our judgment for that of the factfinder and should

remain cognizant that the factfinder is the sole judge of witness credibility. Golden

Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003). We review a trial

court’s conclusions of law de novo. See BMC Software Belg., N.V. v. Marchand, 83

S.W.3d 789, 794 (Tex. 2002).

                                     ANALYSIS

      Ashton first contends the trial court erred in determining that the Note was a

security. The TSA’s definition of “security” is broad. See TEX. REV. CIV. STAT.

ANN. art. 581-4(A); Life Partners, Inc. v. Arnold, 464 S.W.3d 660, 666 (Tex. 2015).

Among other things, the term “security” includes any note or investment contract.

TEX. REV. CIV. STAT. ANN. art. 581-4(A). Because the TSA is so similar to the

                                         –9–
Securities Exchange Act, Texas courts look to decisions of the federal courts to aid

in the interpretation of the Texas act. Grotjohn Precise Connexiones, Int’l, S.A. v.

JEM Fin., Inc., 12 S.W.3d 859, 868 (Tex. App.—Texarkana 2000, no pet.).

      Ashton contends the Note is not an investment contract under S.E.C. v. W.J.

Howey Co., 328 U.S. 293 (1946), which created a test to determine whether a

transaction was an investment contract under the federal Securities Act of 1933. He

also contends the Note is not a security under Reves v. Ernst & Young, 494 U.S. 56

(1990), which set out a “family resemblance” test for courts to use in determining

whether a note is a security under federal securities law. Hahn responds that the

Note is a security under the Texas Supreme Court’s opinion in Life Partners, Inc. v.

Arnold, which adopted a version of the test set out in W.J. Howey to determine

whether investment contracts are securities under the TSA. Hahn also maintains the

Note is a security under the Reves test.

      In Life Partners, the Texas Supreme Court considered whether a “life

settlement agreement” was an investment contract and thus a security under the

TSA. 464 S.W.3d at 662. After review of the TSA’s language and extensive

authorities from Texas and the United States, the court confirmed and clarified that

the TSA’s definition of “securities” must be broadly construed to maximize the

protection it provides to investors, while focusing on the economic realities of the

transaction at issue regardless of any labels or terminology the parties may have

used. Id. at 681. Second, in light of those principles, the court confirmed and

                                           –10–
clarified that an “investment contract” for purposes of the TSA means (1) a contract,

transaction, or scheme through which a person pays money (2) to participate in a

common venture or enterprise (3) with the expectation of receiving profits, (4) under

circumstances in which the failure or success of the enterprise, and thus the person’s

realization of the expected profits, is at least predominantly due to the

entrepreneurial or managerial efforts of others, rather than merely ministerial or

clerical efforts of others. Id. Finally, the court held that the entrepreneurial or

managerial efforts relevant to the inquiry include those made prior to the transaction

as well as those made after the transaction. Id.

      Evidence showed the Note met the Life Partners test for an investment

contract. Although the contract was labeled an “Unsecured Note,” under Life

Partners we focus on the economic realities of the transaction regardless of the

parties’ labels or terminology. As stated in the Note, Hahn paid $100,000 to Ashton

and Cheston so the brothers could purchase Cheston, Inc. In exchange, Hahn

expected to receive profits from Cheston, Inc. The Note did not require the Christie

brothers to make monthly principal payments or pay interest. Hahn instead was to

receive quarterly payments of 20% of the sports bar’s profits until his initial

investment was repaid. After that, he would receive 10% of profits in perpetuity and

2% of the gross sales price in the event Christies was sold. Hahn invested to “build

an income stream for retirement.” He did not have any role in managing Christies;

Cheston and Ashton were going to manage the sports bar.

                                        –11–
       Ashton argues the economic realities of the transaction show the Note was not

a security. Without citation to any legal authority, he cites the fact that Cheston, Inc.

was not a signatory to the Note and also that the transaction did not give Hahn an

ownership interest in Cheston, Inc. It is not surprising that Cheston, Inc. is not a

party to the Note. At the time the Note was executed, Ashton did not own Cheston,

Inc. The purpose of the Note was to allow him to purchase the business. Ashton

also argues, again without citing any authority, that the Note cannot be a security

because it is by and between individuals. The Court is not persuaded by this

argument as the TSA imposes liability on a “person” who offers or sells a security

in violation of the registration requirements or by means of an untrue statement or

omission of a material fact. See TEX. REV. CIV. STAT. ANN. arts. 581-4(B) (defining

“person” and “company” to include “person”) and 581-33(A). Broadly construing

the TSA definition of a “security,” the Court concludes the Note meets the Texas

Supreme Court’s Life Partners test for an “investment contract” and thus is a

security under the TSA. In light of this conclusion, the Court need not consider

whether the Note is also a security under the U.S. Supreme Court’s Reves test. We

overrule the first issue.

       Ashton next asserts that even if the Note meets the definition of a security

under the TSA, the Note was exempt “from registration and obligations” under § 5

of the TSA. See TEX. REV. CIV. STAT. ANN. art. 581-5 (“Exempt Transactions”).

The provisions of the TSA do not apply when a sale is made without any public

                                         –12–
solicitation or advertisement, and either (1) the total number of security holders does

not exceed 35 persons after taking the sale into account or (2) the sale is to no more

than 15 persons in a 12-month period. See id. § 581-5(I)(a) and (c). Ashton contends

both exemptions apply because he never approached more than five individuals

about the sale.

      Hahn argues, and we agree, the trial court’s judgment can be affirmed without

reaching the issue of exemptions because the issue is only relevant to a finding of

liability under § 33(A)(1). The trial court found violations of both § 33(A)(1) and

(2). Section 33(A)(2) provides that a person who offers or sells a security by means

of an untrue statement or omission of a material fact is liable to the person buying

the security “whether or not the security or transaction is exempt under Section 5 or

6 of this Act.” Id. § 581-33(A)(2). Thus the plain language of the TSA prohibits

fraud even when a security or seller is exempt from TSA registration provisions. See

Russell v. French & Assocs., Inc., 709 S.W.2d 312, 314 (Tex. App.—Texarkana

1986, writ ref’d n.r.e.). As long as the evidence is sufficient to support the trial

court’s finding that Ashton committed the fraud violations, the Court need not

address whether an exemption applies.

      Ashton challenges the sufficiency of the evidence on his liability for fraud in

selling a security under § 33(A)(2). He argues that he cannot be held liable based

on the actions of his brother Cheston and that there were no untrue statements or

omissions of material fact.

                                        –13–
      The TSA establishes both primary and secondary liability for securities

violations. Darocy v. Abildtrup, 345 S.W.3d 129, 136 (Tex. App.—Dallas 2011, no

pet.) (citing Sterling Trust Co. v. Adderley, 168 S.W.3d 835, 839 (Tex. 2005)).

Primary liability arises when a person offers to sell a security by means of an untrue

statement of a material fact or an omission to state a material fact necessary to make

the statements made, in light of the circumstances, not misleading. Id. In contrast,

secondary liability is derivative liability for another person’s securities violation

either because he is a “control person” or because he “aided” the seller of the

securities. Id.; see TEX. REV. CIV. STAT. ANN. art. 581-33(F)(1), (2). Both control

persons and aiders are jointly and severally liable with the primary violator to the

same extent as if they were the primary violator. Darocy, 345 S.W.3d at 137.

      Ashton argues he cannot be liable under a theory of aider and abettor liability.

He also challenges the trial court’s finding that Cheston was his agent with respect

to the transaction with Hahn. In support of these contentions, Ashton relies on the

fact that he had no communications with Hahn about the loan or acquisition of

Christies; Hahn dealt exclusively with Cheston.

      The evidence in this case is sufficient to demonstrate that Ashton had primary

liability under § 33(A)(2) because Cheston acted as his agent in his dealings with

Hahn. A principal is liable for the fraudulent acts and misrepresentations of his

authorized agent. III Forks Real Estate, L.P. v. Cohen, 228 S.W.3d 810, 814 (Tex.

App.—Dallas 2007, no pet.); see In re Enron Corp. Securities, Derivative & ERISA

                                        –14–
Lit., 623 F. Supp. 2d 798, 805 n.3 (S.D. Tex. 2009). A principal is liable for the acts

of another acting as his agent only when the agent has actual or apparent authority

to do those acts or when the principal ratifies those acts. Reliant Energy Servs., Inc.

v. Cotton Valley Compression, L.L.C., 336 S.W.3d 764, 783 (Tex. App.—Houston

[1st Dist.] 2011, no pet.). Evidence showed Cheston had actual authority. Ashton

testified that Cheston represented his interest in connection with the purchase of the

sports bar and Cheston acted on his behalf when he solicited an investment from

Hahn. This evidence is also sufficient to show that Ashton had secondary liability

because he aided and abetted Cheston.

      Ashton also challenges the trial court’s findings that Cheston’s statement (and

the Note’s statement) that Hahn’s investment would go toward a portion of the

purchase price for the acquisition of Christies was untrue. He argues the evidence is

insufficient on this issue because he did not take Hahn’s money and run. Hahn’s

money was used to purchase Christies; $115,000 from the Hillcrest account was used

to pay down the sellers’ note.

      The Court need not consider this issue because this was not the only untrue

statement made. The trial court found that Cheston told Hahn that both he and

Ashton would acquire Christies. In addition, the Note states that both brothers would

acquire the sports bar. The trial court further found that these statements were

material and untrue. Ashton has not challenged these findings on appeal. Where the

trial court’s findings of fact are unchallenged by complaint on appeal, they are

                                        –15–
binding on the appellate court unless the contrary is established as a matter of law or

if there is no evidence to support the finding. MasterGuard L.P. v. Eco Techs. Int’l,

LLC, 441 S.W.3d 367, 375 (Tex. App.—Dallas 2013, no pet.); In re Estate of Miller,

243 S.W.3d 831, 839 (Tex. App.—Dallas 2008, no pet.). These unchallenged

findings support the trial court’s determination that Ashton violated § 33(A)(2) of

the TSA by making an untrue statement of material fact or omitting a material fact.

The evidence is legally and factually sufficient to support the trial court’s finding

that Ashton committed fraud violations. It is not necessary to consider whether there

was an exemption for the registration violations. We overrule the second and third

issues.

      We affirm the trial court’s judgment.

                                            /Amanda L. Reichek/
                                            AMANDA L. REICHEK
                                            JUSTICE
201045F.P05

                                        –16–
                                    S
                            Court of Appeals
                     Fifth District of Texas at Dallas
                                   JUDGMENT

ASHTON CHRISTIE, Appellant                     On Appeal from the 116th Judicial
                                               District Court, Dallas County, Texas
No. 05-20-01045-CV           V.                Trial Court Cause No. DC-19-01096.
                                               Opinion delivered by Justice
TERRY L. HAHN, Appellee                        Reichek. Justices Nowell and Carlyle
                                               participating.

       In accordance with this Court’s opinion of this date, the judgment of the trial
court is AFFIRMED.

      It is ORDERED that appellee TERRY L. HAHN recover his costs of this
appeal from appellant ASHTON CHRISTIE.

Judgment entered August 19, 2022.

                                        –17–