Sheppard v. Bay Country Realty, Inc.

Rodowsky, J., delivered the opinion of the Court. Md. Code (1957, 1979 Repl. Vol.), Art. 56, §§ 212-232A, Title, "Licenses,” subtitle "Real Estate Brokers,” created the Real Estate Commission of Maryland (Commission) and provides for the licensing and other regulation of real estate brokers and salesmen. Section 217A establishes a real estate guaranty fund administered by the Commission (the Fund).

In the present case the appellants unsuccessfully sought to be reimbursed from the Fund for the amounts that they had paid to acquire interests in two limited partnerships which had been represented to the appellants as formed to develop real estate. The ventures are now insolvent. In each venture the syndicator and manager was an individual who was licensed as a real estate broker. We shall hold that these circumstances do not bring appellants’ claims within the scope of § 217A.

On February 28, 1979 the appellants complained to the Commission and made claim against the Fund based on the alleged acts and omissions of three persons, Kenneth Albert Patrick (Kenneth), a licensed real estate broker who traded as Bay Country Realty, Inc., Kenneth’s wife, Léala M. Patrick (Léala), who was licensed as a salesman under Kenneth’s license, and Ronald Jordan, formerly a salesman under Kenneth’s license. In their consolidated claims, appellants alleged that they had subscribed for investment shares in what was represented to them to be two limited partnerships ⁹⁰ known as Spa Haven Yacht Club Joint Venture [Spa Haven] and Baltimore-Washington International Yachting Center, Inc. (BWI) [sic], Kenneth Patrick, along with Lela Patrick [sic] and Ronald Jordan, induced [appellants] to make their investments. The dates and amounts of these subscriptions are as follows: Investor Amount Venture Date 1. Rudolph & Í 5,000 BWI 5/03/77 Ruth Goldschmidt 10,000 Spa Haven 5/29/75 2.

Leonard & 3.125 BWI 5/01/77 Francine Goldschmidt 2,000 Spa Haven 2/28/76 3. Leslie 3.125 BWI 5/03/77 Goldschmidt 2,000 Spa Haven 2/28/76 4. Dr. Harold 7,500 BWI 7/07/78 Sheppard 6,000 Spa Haven 7/21/75 After the Commission had entered a summary dismissal which the Circuit Court for Baltimore County reversed with remand, an evidentiary hearing was conducted before a hearing panel of the Commission. It again denied the claims as not falling within the coverage of § 217A (a) and the Circuit Court for Baltimore County affirmed.

On our own motion the claimants’ appeal to the Court of Special Appeals was brought before this Court prior to consideration of the matter in the intermediate appellate court. Only the Commission appeared in this Court to defend the judgment below. Article 56, § 217A (a), at the time of the events giving rise to the subject claims, provided: The Maryland Real Estate Commission shall establish and maintain a real estate guaranty fund from which, subject to the provisions of this section, any person aggrieved by any action of a real estate ⁹¹ broker or real estate salesman, duly licensed in this State, arising out of a real estate transaction and by reason of the theft of money or property, or money or property unlawfully obtained from any person by forgery or by reason of any fraud, misrepresentation or deceit by or on the part of any such real estate broker or real estate salesman or the unlicensed employee of any such real estate broker, or by reason of a violation of this subtitle by such broker, salesman, or employee may recover compensation in the amount of his actual loss as proven before the Commission. [Emphasis added. 1 ] The issue between the parties is over the construction of the phrase italicized above and arises out of the factual background hereinafter described. Spa Haven was a real estate project involving an assemblage along Spa Creek in the Annapolis harbor.

An existing apartment building was to be enlarged and converted to a condominium regime. There would be a yacht club marina, with the clubhouse in the basement of the condominium building. Adjoining sites would be developed for parking, tennis courts and a swimming pool. Kenneth was the creator and promoter of the business plan, the procurer of the mortgage financing and the leader in raising equity capital from investors.

For his services he retained a 40% interest. Each appellant, when investing, signed subscriptions stating that they wished to purchase a specified percentage "equity in the Venture ....” The subscription form further recited that as a limited partner the subscriber’s personal liability would be limited to the amount of the subscription, that the general partners assumed all other liability, that the general partners would share in the profits pro rata only after the limited partners’ capital had been returned and that each partner would be ⁹² entitled to the pro rata share of the income tax advantages including, e.g., depreciation. Checks for the appellants’ investments were made payable to Spa Haven Joint Venture. By letter on Bay Country Realty, Inc. stationery, and with the word "Realtor” typed beneath his signature, Kenneth personally guaranteed appellant Harold L. Sheppard (Sheppard) that Sheppard’s investment would be returned within 30 days of Sheppard’s written request to Kenneth, together with 10% per annum interest, on condition of Sheppard’s relinquishing his share in the venture. 2 When the appellants received their IRS forms K-l for the year ending December 31,1976, it was noted that Spa Haven was reported to be a general partnership.

So far as the record discloses, no partnership agreement of any kind has ever been signed by the investors and there is no certificate of limited partnership filed with "the clerk of the court” as then required by Md. Code (1975), § 10-102 (a) of the Corporations and Associations Article. In all but one of the 1976 deeds from the grantors of the parcels in the assemblage, the grantee is Spa Haven Joint Venture. It is described as a general partnership, consisting solely of Kenneth and Léala. Title to the remaining parcel was taken in the name of Kenneth’s son who in 1978 conveyed that parcel to Spa Haven.

The Spa Haven project failed and the property was sold at a public sale on March 16, 1979. 3 Demand had been made on Kenneth to purchase the claimants’ interests in Spa Haven. Kenneth has acknowledged his promise to do so, but claims financial inability to perform. The BWI venture envisioned a major marina and recreational center on the Magothy River in Anne Arundel County, at the site of the Mago Vista Beach Club. This property was owned by Magothy Corporation whose shareholders ⁹³ sold their stock.

Who the buyer was does not specifically appear in the record. Nor can the legal structure of BWI be intelligibly stated from the record which simply contains a typewritten form, signed by Sheppard and headed "Baltimore-Washington International Yachting Center, Inc., Joint Venture Membership Application & Subscription.” It recites payment of $7,500 "for the purchase of 1/2% equity in the venture organized to purchase the stock, land and assets of the Magothy Corporation. ...” Investors’ checks were made payable to B.W.I. Yachting Center Venture. Sheppard acknowledged that he had "received and read the prospectus and financial pro forma statements, [and] made independent investigation of the merits of the property, the partnership, the plans for development and the potential as an investment vehicle.” The form recites that "[e]ach investor ... can afford the purchase of a partnership interest to be held for personal investment....” If there had been any prospectus, it is either not in the record or the subscription form is referring to a typewritten document of three and one-half legal size pages headed "Environmental Impact Statement.” This document contains no internal indication that it was prepared for any governmental agency, but it describes the care which purportedly would be taken to preserve the ecology in the development of the site. Owners of other properties in the neighborhood and county officials apparently did not see it the same way.

Governmental approvals were not obtained and the project failed. Kenneth, who was retaining 75% ownership in whatever entity was involved, had promised to repurchase investors’ interests but did not do so after demand was made upon him. There is no indication that any partnership agreement was ever prepared or executed or that any certificate of limited partnership was ever recorded with respect to BWI. 4 Commission fact findings included a finding that "at all times relevant to the Claimants’ dealings with” Kenneth, he ⁹⁴ "held himself out to them as a licensed Maryland real estate broker.” The Commission’s first conclusion of law was: (1) That the Claimants have been "aggrieved” by the action of the Respondent Kenneth Patrick, a real estate broker licensed by the Real Estate Commission of Maryland within the meaning of [§ 217A] in that he has failed to return to the Claimants the amounts of their investments as he personally guaranteed. Appellants’ claims were denied, however, because the Commission determined that the losses did not arise out of a real estate transaction, within the meaning of § 217A, inasmuch as appellants had "purchased investment shares or securities and did not purchase or lease real estate as is required by Section 217A.” Appellants assert that the phrase, "arising out of a real estate transaction,” does not require that a claimant have engaged directly in a real estate transaction.

Emphasizing the words "arising out of,” they contend that they have met all of the elements of § 217A. They say that Kenneth was a real estate broker, they have been found to be "aggrieved” by Kenneth’s action, and their losses, which measure the amount of the claims against the Fund, arise out of transactions in which Kenneth represented that real estate would be acquired by limited partnerships in