NO. C 09-2054 RS

ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT

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*E-Filed 06/04/2010* 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

SAN FRANCISCO RESIDENCE CLUB, 

INC., et al., 

 Plaintiffs, 

 v. 

HENRY A. AMADO, et al., 

 Defendants. 

____________________________________/

No. C 09-2054 RS 

ORDER DENYING PLAINTIFFS’ 

MOTION FOR SUMMARY 

JUDGMENT 

I. INTRODUCTION 

This case revolves around the sale of membership units in White Sands Estates, a Hawaii 

limited liability company formed to acquire and develop a 42.28 acre parcel of property in KailuaKona, Hawaii. Plaintiffs, who purchased membership interests in that property, move for summary 

judgment of their claim to rescind on the ground that the sales violated section 5 of the Securities 

Act of 1933 (the “Act”). Specifically, plaintiffs contend defendants failed to register the 

membership interests with the Securities and Exchange Commission (the “SEC” or the 

“Commission”). Defendants do not dispute that the interests were not registered. At issue here is 

whether the membership interests were “securities” as contemplated by the Act. Because this 

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NO. C 09-2054 RS 

ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT

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question cannot be answered without first resolving disputed issues of fact, the matter is 

inappropriate for summary judgment and plaintiffs’ motion must be denied. 

I. RELEVANT FACTS 

The plaintiff entities each emanate from members of an extended family. At least as 

defendants characterize their activities, the individual family members have over the past several 

decades engaged in a series of sophisticated real estate investments. SFRC is a California 

corporation operated by Kevin and Kate Donahue. Donahue, O’Shea, LLC, is a California limited 

liability corporation. Kevin Donahue, Kate Donahue and Anne (Donahue) O’Shea comprise its 

members. The third plaintiff is the O’Shea Trust, managed by Tom O’Shea and his wife, Anne 

Donahue O’Shea. Tom O’Shea is the sole individual plaintiff. 

According to the First Amended Complaint (“FAC”), defendant Ed Broda advised Kevin 

Donahue of an investment opportunity in White Sands Estates in 2007. The White Sands company 

was apparently formed to acquire and develop an unimproved 42.28 acre parcel of real estate in 

Kailua-Kona, Hawaii. Broda, as founder and CEO of companies called Aspire Real Estate and 

Aspire Investments, had acted as an investment adviser to the Donahues and O’Sheas for a number 

of years and had placed numerous investments on their behalf. The plaintiffs explain that Broda 

advised the plaintiffs with respect to investments in commercial office buildings in Virginia, 

California and Illinois, and in apartment communities in Indiana and North Carolina. In 2007, the 

plaintiffs aver that they were interested in the White Sands Estates and its real estate development 

project in Kona at least in part as an opportunity to effect a “like-kind” exchange of existing assets 

in compliance with Section 1031 of the Internal Revenue Code. 

Broda referred the plaintiffs to defendant Henry Amado. Amado is the agent of Abacus 

Financial Group and also one of the members of White Sands Estates. Broda arranged a conference 

call between Amado and Kate and Kevin Donahue on August 18, 2007. The Donahues explain that 

Amado then supplied them with an Executive Summary and a proposed Operating Agreement for 

White Sands Estates. Amado also represented that he had retained Gregory Fish of G.D. Fish & 

Associates to develop the project. According to the plaintiffs, Amado and Fish conceived of the 

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ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT

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Kona Development; indeed, plaintiffs suggest it was in part Fish’s reputation that drove their 

decision to invest. The Donahues, on behalf of SFRC, then agreed to purchase for $2 million a ten 

percent undivided interest in the estate pursuant to a Tenants In Common (“TIC”) Agreement and a 

sixteen percent membership interest in White Sands Estates. 

White Sands Estates was established to purchase the acreage with the plaintiffs’ investment 

and through funds obtained from a series of loans from other entities. The primary loan was 

obtained from an entity called Kennedy Financing, Inc. for a principal amount of $7,000,000. 

Kevin Donahue acted on behalf of SFRC as a co-borrower under this loan. The company secured a 

second loan from another lender called FC Kona, LLC, for $756,000, and a third loan from the 

seller of the Kona property in the amount of $500,000. When these funds were still insufficient to 

cover the asking price, plaintiffs increased their investment. The Donahue, O’Shea company 

purchased a four percent Class A membership interest and an eight percent Class B membership in 

White Sands Estates for approximately $1 million. White Sands Estates purchased the property on 

November 15, 2007 for $9,975,000. In June of 2008, the O’Shea trust purchased for $382,537.96 a 

three percent membership interest as well as an undivided interest pursuant to a TIC Agreement. 

Defendants offer evidence that at least some of the plaintiffs applied for Hawaiian building 

permits, described themselves as “developers” on these permits, and retained at least some control 

of construction and development. Moreover, Kevin and Kate Donahue’s attorney, Jeffrey Weiss, 

also allegedly played a key role in the drafting of several White Sands documents designed to attract 

future investors. Defendants contend it was Weiss who insisted that the membership interests did 

not require registration as securities. 

White Sands Estates was not able to service the debt on the Kennedy loan and is currently in 

default. Property taxes remain outstanding. Also according to the FAC, the entity is currently at 

least $11 million in debt, has failed to repay Kennedy Financing or any other lender and also owes 

fees to the retained architectural firm. According to the plaintiffs, White Sands Estates is insolvent 

and on the brink of collapse. 

II. LEGAL STANDARD 

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Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment “shall 

be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on 

file, together with the affidavits, if any, show that there is no genuine issue as to any material fact 

and that the moving party is entitled to a judgment as a matter of law.” The party who seeks 

summary judgment bears the initial responsibility of identifying an absence of a genuine issue of 

material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party satisfies this 

initial burden, it shifts to the non-moving party to present specific facts showing that there is a 

genuine issue for trial. Fed. R. Civ. P. 56(e); Celotex, 477 U.S. at 324. “Only disputes over facts 

that might affect the outcome of the suit under governing law” are material. Anderson v. Liberty 

Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine issue exists if the non-moving party presents 

evidence from which a reasonable fact-finder, viewing the evidence in the light most favorable to 

that party, could resolve the material issue in his or her favor. Id. at 248-49. 

III. DISCUSSION 

A. Claim for Relief Under Section 12(a)(1)

Section 12 of the 1933 Act provides that “[a]ny person who . . . (1) offers or sells a security 

in violation of [section 5 of the 1933 Act] . . . shall be liable . . . to the person purchasing such 

security from him.” 15 U.S.C. § 771(a) (“section 12(a)(1)”). Section 5, in turn, forbids the offer or 

sale of unregistered securities in interstate commerce. 15 U.S.C. § 77e(a) (“section 5”). 

Defendants argue first that this Court cannot as a matter of law grant the relief plaintiffs 

request because plaintiffs failed to identify section 12(a)(1) of the Securities Act specifically in the 

FAC. While plaintiffs do not make reference to the relevant statutory subsection in the FAC, they 

do contend that defendants sold to them un-registered securities and seek rescission as the 

appropriate remedy. See, e.g., FAC. ¶ 18 (“Despite the fact that the interests sold are securities, as 

defined in the Securities Act of 1933 and were not exempt from registration under Rule 506 of 

Regulation D (17 C.F.R. 230.506), the defendants failed to register the securities with . . . the 

Securities and Exchange Commission . . . .”). The notice pleading requirements contemplated by 

the Federal Rules of Civil Procedure do indeed insist that a plaintiff notify a defendant of all charges 

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levied against him or her. Where a complaint functionally provides this notice, Rule 8 does not 

demand the technical pleading upon which defendants insist. Sagana v. Tenorio, 384 F.3d 731, 737 

(9th Cir. 2004) (“We long ago rejected the argument that a specific statute must be named, 

describing it as an attempt to evoke wholly out-moded technical pleading rules.”) (citation and 

internal quotation marks omitted). Where plaintiffs have adequately alleged the behavior section 

12(a)(1) condemns, the fact that they did not expressly name the actual provision is not 

determinative. 

B. The 12(a)(1) Claim

Turning to the substantive merits of the Trust’s section 12(a)(1) claim, defendants argue that 

material facts are in dispute as to whether the membership and TIC interests were “securities” as 

contemplated by the Act.1

 The plaintiffs insists the membership and TIC interests were “investment 

contracts.” Defendants argue they were not. “Although characterization of a transaction raises 

questions of both law and fact, the ultimate issue of whether or not a particular set of facts, as 

resolved by the factfinder, constitutes an investment contract is a question of law.” United States v. 

Carman, 577 F.2d 556, 562 (9th Cir. 1978). “When a mixed question of fact and law involves 

undisputed underlying facts, summary judgment may be appropriate.” Warfield v. Alaniz, 569 F.3d 

1015, 1019 (9th Cir. 2009) (citing Union Sch. Dist. v. Smith, 15 F.3d 1519, 1523 (9th Cir. 1994)). 

Section 2 of the Securities Act, 15 U.S.C. § 77b(1), defines the term “security” to include 

any “investment contract.” Although not defined in the Act, the Supreme Court has read the term 

“investment contract” expansively. See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 

(1943) (stating that the term has been interpreted to reach “[n]ovel, uncommon, or irregular devices, 

whatever they appear to be”). “It embodies a flexible rather than a static principle, one that is 

 

1

 Section 2(1) of the Securities Act of 1933 provides: “The term ‘security’ means any note, stock, 

treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in 

any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, 

transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, 

fractional undivided interest in oil, gas or other mineral rights . . . or, in general, any interest or 

instrument commonly known as a ‘security,’ or any certificate of interest or participation in, 

temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or 

purchase, any of the foregoing.” 

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capable of adaptation to meet the countless and variable schemes devised by those who seek the use 

of the money of others on the promise of profits.” SEC v. Howey Co., 328 U.S. 293, 299 (1946). In 

SEC v. Howey Company, the Supreme Court instructed that “an investment contract for purposes of 

the Securities Act means 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.” 328 U.S. at 298-99. There, the Court found an investment contract existed where promoters 

sold acreage with fruit trees on it as well as “service contracts” to cultivate and market the crops, 

with an allocation of profits directed to the purchaser. Id. at 299. 

The Ninth Circuit has distilled Howey’s definition into a three-part test requiring: (1) an 

investment of money; (2) in a common enterprise; (3) with an expectation of profits produced by the 

efforts of others. Warfield v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009) (quoting SEC v. Rubera, 

350 F.3d 1084, 1090 (9th Cir. 2003)). As the Court explained in Alaniz, the third prong of this test 

involves two distinct concepts: whether a transaction involves any expectation of profit and whether 

such expected profits are the product of the efforts of a person other than the investor. Id. 

Moreover, while Howey’s third prong discussed an expectation of profits “solely from the efforts of 

the promoter or a third party,” 328 U.S. at 299, the Ninth Circuit has “dropped the term ‘solely’ and 

instead require[s] that the efforts made by those other than the investor are the undeniably 

significant ones, those essential managerial efforts which affect the failure or success of the 

enterprise.” Hocking v. Dubois, 885 F.2d 1449, 1455 (9th Cir. 1989) (quoting SEC v. Glenn W. 

Turner Enters., 474 F.2d 476, 482 (9th Cir. 1983)). 

The parties’ disagreement centers on competing conceptions of the plaintiffs’ involvement. 

Defendants do not disagree that a TIC interest can in appropriate contexts function as an investment 

contract. See, e.g., SEC v. TLC Investments & Trade Co., 179 F. Supp. 2d 1149, 1158 (C.D. Cal. 

2001). Nor do they claim a membership interest in a company tasked with property development is 

inherently inconsistent with an investment contract. They do suggest, however, that plaintiffs’ 

involvement and actual control indicates that, in this particular case, the memberships were not a 

security at all but rather a real property interest. See, e.g., Deutsch Energy Co. v. Mazur, 813 F.2d 

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1567, 1570 (9th Cir. 1987) (finding interest did not constitute an “investment contract” where 

family of sophisticated individuals invested in drilling operations but retained managerial power). 

The key difference, they insist, relates to the degree of control plaintiffs exercised. 

Defendants assert that all plaintiffs in fact “actively managed and developed the property 

along with Amado . . . .” (Defs.’ Opp’n at 13: 9-10.) They argue at least some of the plaintiffs 

(Amado points to “an officer” of SFRC) signed an application for Hawaiian building and 

construction permits as co-developers. Amado explains that these plaintiffs exercised at least some 

control over the hiring of engineers and architects. While he does not point to any contractual 

provision so providing, Amado contends all plaintiffs maintained an “absolute veto [of] the whole 

[p]roject.” (Defs.’ Opp’n at 3:22.) Finally, defendants suggest the principals of the two companies 

and the Trust are sophisticated individuals with a “high degree of business acumen” and no small 

amount of experience in complex real estate investments. (Id. at 13:6.) On a related note, they 

contend that Kate and Kevin Donahue’s tax attorney, Jeffrey Weiss, actually advised them that the 

membership interests did not require registration as securities. According to Amado, Weiss helped 

craft the “Summary of Offering” and “Subscription Booklet” designed for future investors. In any 

event, they suggest that the handful of documents that reference securities or discuss registration or 

exemption were created after the SFRC and Donahue, O’Shea, LLC, entities (or their principals) 

purchased membership interests in 2007. 

Plaintiffs, by contrast, insist that Amado retained complete managerial control and point to 

the unadorned language of the October 27 amended Operating Agreement, which provides that 

“Henry Amado shall be the sole manager of White Sands.” The first (although undated) Operating 

Agreement (presumably, the one that Amado originally offered to Kevin and Kate Donahue) also 

states that “[t]he General Manager shall have full, exclusive, and complete discretion, power, and 

authority, subject in all cases to the other provisions of this Agreement and the requirements of 

applicable law, to manage, control, administer, and operate the business.” The next section does 

provide, however, that Amado would not have power, without the approval of a majority of 

members, to, among other listed activities, engage in any capital transaction, to make large loans of 

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the Company’s assets, or in some context, to admit other members.2 Defendants point out that these 

contracts were adopted before plaintiffs by their conduct took on the more engaged role detailed 

above. 

Accordingly, the parties present two entirely different factual scenarios to explain the 

plaintiffs’ involvement in the development project. The determination of whether the membership 

and TIC interests were “securities” and subject to the registration requirements under the 1933 Act 

depends upon resolution of these disputed facts. The question is not, therefore, one that can be 

answered at the summary judgment phase and plaintiffs’ motion must be denied.3

 

IV. CONCLUSION 

 As the plaintiffs have not presented undisputed facts to establish that the membership and 

TIC interests were securities, their motion for summary judgment on their section 12(a)(1) claim 

must be denied. 

IT IS SO ORDERED. 

Dated: 06/04/2010 

RICHARD SEEBORG 

UNITED STATES DISTRICT JUDGE 

 

2

 Plaintiffs also point to the language of the Amended Operating Agreement that referenced the 

interests: “The LLC membership interests . . . have not been registered with the Securities And 

Exchange Commission under the Securities Act of 1933 or under the laws of any state in reliance 

upon exemption under those Acts.” From this language, plaintiffs suggest defendants 

acknowledged from the outset that the membership interests were securities but, presumably, 

assumed the offering of those interests to plaintiffs did not constitute a “public offering.” See 15 

U.S.C. § 77d(2) (exempting “transactions by an issuer not involving any public offering” from 

registration requirements). Defendants counter that the Donahue’s tax attorney helped craft this 

document and is responsible for its language. 

3

 Defendants in their opposition papers also argue that the SFRC and Donahue, O’Shea entities may 

not in any event bring a section 12(a)(1) claim because they arguably attempt to do so outside the 

applicable statutory limitations period. Because plaintiffs have not yet shown that the the interests 

at stake were securities, the Court does not reach the question of whether some plaintiffs’ possible 

section 12(a)(1) claims are time-barred. 

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