Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-02021/USCOURTS-ca10-89-02021-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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PUBLISH 

. FILED 

Urmed St~~ vmt"-c Df Ap~ts 

Tenth Circuit 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

ROBERT L. HOECKER 

Clerk 

DALLAS BANGHART; and MICHAEL G. 

BANGHART, 

Plaintiffs-Appellants, 

v. 

HOLLYWOOD GENERAL PARTNERSHIP; 

ED WRAY; ROBERT ROSEN, M.D.; and 

BARRY MARON, M.D., 

Defendants-Appellees. 

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No. 89-2021 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF NEW MEXICO 

(D.C. No. 86-1229-JC) 

Submitted on the briefs: 

David L. Plotsky, Albuquerque, New Mexico, for 

Plaintiffs-Appellants. 

Joseph H. Mercer and Carolyn s. Fudge, of Mercer Professional 

Association, Albuquerque, New Mexico, for Defendants-Appellees. 

Before McKAY, BARRETT, Circuit Judges, and KANE,* District Judge. 

*Honorable John L. Kane, Senior District 

District Court for the District of 

designation. 

Judge, United States 

Colorado, sitting by 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 1
PER CURIAM. 

Dallas Banghart and Michael Banghart (plaintiffs) brought 

this action against the Hollywood General Partnership and its 

general partners, Ed Wray, Robert Rosen, M.D., and Barry Maron, 

M.D., (together defendants) alleging a violation of federal 

securities laws and pendent state law claims. At the conclusion 

of plaintiffs' case, the district court (1) directed a verdict for 

defendants on the claim under the federal securities laws and (2) 

refused to exercise pendent jurisdiction over the state law 

claims. The sole issue on appeal concerns the propriety of the 

directed verdict on the federal securities laws claim. 1 

The facts pertinent to this appeal are straightforward. 

Plaintiffs premised their case on a document labeled "Exchange 

Agreement." According to plaintiffs, they were induced into 

entering this agreement by the representations of defendants and, 

had the agreement been consummated, they would have acquired a 

general partnership interest in the Hollywood General Partnership. 

The core question is whether the interest plaintiffs sought to 

acquire pursuant to the agreement was a security, as defined by 

the federal securities law, by virtue of being an "investment 

contract." See Section 2(1) of the Securities Act of 1933, 

1 After exam1n1ng the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a)~ 10th Cir. R. 34.1.9. The case is therefore ordered 

submitted without oral argument. 

2 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 2
15 U.S.C. § 77b(l). 2 The district court, in directing a verdict 

in defendants' favor, ruled that plaintiffs' evidence did not 

establish an investment contract. 

The standard of review in assessing whether a trial court 

properly directed a verdict is the same standard applied by the 

trial court in passing on a summary judgment motion, i.e., whether 

the evidence is sufficient to create an issue for the jury. See 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986); see 

also Black v. Hieb's Enters., Inc., 805 F.2d 360, 364 (10th Cir. 

1986). "[T]he trial judge may grant a motion for directed verdict 

only when all the inferences to be drawn from the evidence are so 

in favor of the moving party that reasonable persons could not 

differ in their conclusions." FDIC v. Palermo, 815 F.2d 1329, 

1335 (10th Cir. 1987)(citing Hidalgo Properties, Inc. v. Wachovia 

Mortgage Co., 617 F.2d 196, 198 (10th Cir. 1980)); see also 

McKinney v. Gannett Co., 817 F.2d 659, 663 (10th Cir. 1987)("If 

reasonable men could differ as to the inferences drawn from the 

facts in evidence, a motion for a directed verdict should be 

denied."). 

Applying these principles, we conclude that the district 

court's decision was correct. In SEC v. W.J. Howey Co., 328 U.S. 

293, 301 (1946), the Supreme Court held that the test for 

distinguishing an investment contract from other commercial 

dealings ''is whether the scheme involves an investment of money in 

2 "The term 'security' means any note, stock, treasury stock, 

bond, debenture, evidence of indebtedness, •.• investment 

contract •.. or, in general, any interest or instrument commonly 

known as a 'security' ••.• " See 15 U.S.C. § 77b(l). 

3 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 3
a common enterprise with profits to come solely from the efforts 

of others." The test has subsequently been broken down into three 

requirements: (1) an investment, (2) in a common enterprise, (3) 

with a reasonable expectation of profits to be derived from the 

entrepreneurial or managerial efforts of others. Crowley v. 

Montgomery Ward & Co., 570 F.2d 877, 880 (10th Cir. 1978)(quoting 

United Housing Found., Inc. v. Forman, 421 U.S. 837, 852 (1975). 

On appeal, the parties do not dispute these legal principles. 

Instead, the parties confine the analysis to the third part of the 

Howey test. An investment satisfies this third prong when the 

efforts made by those other than the investor are the ones which 

affect significantly the success or failure of the enterprise. 

Meyer v. Dans un Jardin, 816 F.2d 533, 535 (10th Cir. 1987). The 

essence of plaintiffs' argument on appeal is that a delegation of 

managerial authority and a lack of any discernible role for some 

general partners within the Hollywood General Partnership raises a 

triable issue of whether the partnership interest contemplated in 

the "Exchange Agreement" was a securi~y. 3 

Courts which have considered the issue have uniformly held 

that general partnerships are not investment contracts because the 

partners -- the investors -- are ordinarily granted significant 

control over the enterprise. See,~, Goodwin v. Elkins & Co., 

3 During the trial, defendants contended that the "Exchange 

Agreement" should be interpreted as only allowing plaintiffs to 

acquire an interest in a partnership asset rather than an interest 

in the partnership itself. On appeal, however, defendants have 

not made this specific argument, apparently recognizing that this 

court, in reviewing the directed verdict against plaintiffs, is 

required to construe the evidence and inferences most favorably to 

plaintiffs. See Zimmerman v. First Federal Sav. & Loan Ass'n, 848 

F.2d 1047, 1051(10th Cir. 1988). 

4 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 4
730 F.2d 99, 102-03 (3d. Cir.), cert denied, 469 U.S. 831 (1984); 

Odom v. Slavik, 703 F.2d 212, 215 (6th Cir. 1983); see also Gordon 

v. Terry, 684 F.2d 736, 741 (11th Cir. 1982), cert. denied, 459 

U.S. 1203 (1983). In Williamson v. Tucker, 645 F.2d 404 (5th 

Cir.), cert. denied, 454 U.S. 897 (1981), 4 a leading case which 

plaintiffs have principally relied on, the court identified 

exceptions to the general rule that general partnership interests 

are not securities. In Williamson, the court examined general 

partnership interests in a real estate development scheme and, in 

dicta, set forth three examples of when a general partnership 

interest can be a security. 

A general partnership or joint venture interest can be 

designated a security if the investor can establish, for 

example, that (1) an agreement among the parties leaves 

so little power in the hands of the partner or venturer 

that the arrangement in fact distributes power as would 

a limited partnership; or (2) the partner or venturer is 

so inexperienced and unknowledgeable in business affairs 

that he is incapable of intelligently exercising his 

partnership or venture powers; or (3) the partner or 

venturer is so dependent on some unique entrepreneurial 

or managerial ability of the promoter or manager that he 

cannot replace the manager of the enterprise or 

otherwise exercise meaningful partnership or venture 

powers. 

Id. at 424. 

This court has never directly addressed the issue of whether 

general partnership interests are securities and, consequently, 

this court has never had occasion to discuss the Williamson 

approach. Nevertheless, our recent decision in Maritan v. 

Birmingham Properties, 875 F.2d 1451 (10th Cir. 1989), while not 

4 Plaintiffs have cited Williamson as appearing at 

579. However, that op1n1on was withdrawn and the 

appearing at 645 F.2d 404 was substituted in its place. 

5 

632 F.2d 

opinion 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 5
directly on point factually, clearly indicates that our primary 

inquiry in the partnership setting is not, as suggested by 

plaintiffs, on the actual control and participation of the 

partners, but on the powers possessed by the partners. In 

Maritan, we approved the analysis set forth in Matek v. Murat, 862 

F.2d 720, 730-32 (9th Cir. 1988) and Rivanna Trawlers Unlimited v. 

Thompson Trawlers, Inc., 840 F.2d 236, 241 (4th Cir. 1988), where 

the courts held that regardless of the control actually exercised, 

if a partnership agreement retains real power in the general 

partners, then an investment in the general partnership is not a 

security. Thus, our determination of whether a general 

partnership interest can be characterized as a security .turns on 

the partnership agreement. 

When a partnership agreement allocates powers to general 

partners that are specific and unambiguous and those powers 

provide the general partners with access to information and the 

ability to protect their investment, then the presumption is that 

the general partnership is not a security. Matek, 862 F.2d at 

731; Rivanna, 840 F.2d at 241. As the court in Rivanna stated, 

"[e]ven when general partners do not individually have decisive 

control over major decisions, they do have the sort of influence 

which generally provides them with access to important information 

and protection against a dependence on others." Rivanna, 840 F.2d 

at 241. The strong presumption that an interest in a general 

partnership is not a security can only be overcome by evidence 

that the general partners were rendered passive investors because 

they were somehow precluded from exercising their powers of 

6 

Appellate Case: 89-2021 Document: 010110296463 Date Filed: 05/02/1990 Page: 6
control and supervision. Matek, 862 F.2d at 730-31; Rivanna, 840 

F.2d at 241. 

Applying the analysis of Matek and Rivanna here, in order for 

plaintiffs to succeed in characterizing the Hollywood General 

Partnership as an investment contract, there must be evidence that 

the governing partnership agreement did not, or would not in the 

future, afford general partners their customary powers or that 

general partners had been, or would be, prevented from exercising 

those powers. When plaintiffs presented their case, however, they 

offered no evidence with respect to the partnership agreement. 

The absence of such evidence was fatal. 5 Therefore, the district 

court's directed verdict on the claim under the federal securities 

laws was correct. 

Accordingly, the judgment of the United States District Court 

for the District of New Mexico is AFFIRMED. 

5 Plaintiffs' arguments that some general partners in the 

Hollywood General Partnership may have remained passive or lacked 

financial sophistication or business expertise does not undermine 

the result reached here. General partners with managerial powers 

cannot convert their partnership interest into a security merely 

by remaining passive. Rivanna, 840 F.2d at 242 n.10. Moreover, 

general partners who lack financial sophistication or business 

expertise nevertheless may still exercise intelligently the powers 

given them under the partnership agreement and state law by 

seeking advice or assistance from more knowledgeable partners or 

other persons such as lawyers or accountants. Id. 

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