Source: http://www.ecases.us/case/ca5/c381385/fed-sec-l-rep-p-97666-paul-t-martin-and-harold-bridges-v-t-v
Timestamp: 2020-05-27 12:25:39
Document Index: 133465054

Matched Legal Cases: ['§ 77', '§ 3567', '§ 77', '§ 78', '§ 240', '§ 97']

Fed. Sec. L. Rep. P 97,666 Paul T. Martin and Harold Bridges v. T. v. Tempo, Inc., Fifth Circuit, US Court of Appeals Cases, Federal Courts, COURT CASE
Fed. Sec. L. Rep. P 97,666 Paul T. Martin and Harold Bridges v. T. v. Tempo, Inc. , 628 F.2d 887 ( 1980 )
The starting point is the Supreme Court's definition in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946):
Id. at 298-99, 66 S.Ct. at 1103.3 See 15 U.S.C. §§ 77b(1) and 78c(a)(10). Our opinion in SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.1974), dealt with the subsequent development of the law with respect to the third element of the Howey test, "solely from the efforts of (others)." Concluding that a literal application of the test is unwarranted, id. at 480, we held that the proper standard was that explicated in SEC v. Glenn W. 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), "whether 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," id. at 482. SEC v. Koscot Interplanetary, Inc., 497 F.2d at 483; accord, Cameron v. Outdoor Resorts of America, Inc., 608 F.2d 187, 193 (5th Cir.1979), modified on other grounds, 611 F.2d 105 (5th Cir.1980).
In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975), the Supreme Court noted but declined to express any view as to the correctness of the Turner standard. Id. at 852 n.16, 95 S.Ct. at 2060 n.16. It did, however, reaffirm that
(t)he touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others . . . . In such cases the investor is "attracted solely by the prospects of a return" on his investment.
Id. at 852, 95 S.Ct. at 2060.
The district court viewed the agreements as no different than ordinary franchise agreements that the courts have uniformly found not to be investment contracts. Koscot, on the other hand, emphasized the indispensable presence of "schemes in which promoters retain immediate control over the essential managerial conduct of an enterprise and where the investor's realization of profits is inextricably tied to the success of the promotional scheme" in finding that a pyramid sales scheme constituted a security. Koscot distinguished on that basis "a conventional franchise arrangement, wherein the promoter exercises merely remote control over an enterprise and the investor operates largely unfettered by promoter mandates." 497 F.2d at 485. Plaintiffs argue that defendants retained the real authority and control that determined the success or failure of the enterprise. They also stress the amount of consulting and management services that defendants represented that they would perform, contending that only simple ministerial tasks were required on the part of plaintiffs.
In the present posture of the case, plaintiffs are entitled to have us view the material evidence in the light most favorable to them and to indulge every reasonable inference from those facts in their favor. American Telephone & Telegraph Co. v. Delta Communications Corp., 590 F.2d 100, 102 n.1 (5th Cir.), cert. denied, 444 U.S. 926, 100 S. Ct. 265, 62 L. Ed. 2d 182 (1979). Even so viewed, however, the evidence demonstrates that the agreement fails to meet the Koscot test.
In this franchise arrangement, plaintiffs had immediate control over the essential managerial conduct of the enterprise and defendants exercised merely remote control. The efforts of plaintiffs were the undeniably significant ones in determining profit or loss. See generally Bitter v. Hoby's International, Inc., 498 F.2d 183, 184-85 (9th Cir.1974).
The testimony of Mr. Martin also supports the district court's finding that the failure of T. V. Tempo, Inc. would not necessarily doom plaintiffs' local activity. Because revenues were dependent on local sales activities and production could be obtained from other sources, plaintiffs' enterprise could have survived as an independent entity. See id. at 185. The testimony of plaintiffs themselves thus does not square with the test for a security under Koscot and Howey. In summary, we hold that these franchise agreements were not securities.
Having concluded that the agreements were not securities, the district court dismissed with prejudice not only the federal securities claim but also the state securities claim. We conclude that dismissal of the state claim should have been without prejudice. Pharo v. Smith, 621 F.2d 656, 673-675 (5th Cir.1980); 13 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3567, at 351 & n.36.1 (1980 Supp.). We modify the judgment of the district court so to hold.
Sections 12(1) & (2) and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77l and 77q; sections 10, 15(a) and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o et seq. and 78cc, and Rule 10b-5, 17 C.F.R. § 240.10b-5; sections 3, 5 and 12(a) of the Georgia Securities Act of 1973, Ga. Code Ann. §§ 97-103, 97-105 and 97-112(a) (1976)
Our review is influenced by the fact that both sides moved for summary judgment. As we observed in Pharo v. Smith, 621 F.2d 656, 664 (5th Cir.1980), "(t)hat motion amounted to a representation by the moving counsel, as officers of the court, that the case was fully at issue, that all theories of liability and all defenses had been presented, and that the case was ripe for summary treatment."
The Howey court stated that "(s)uch a definition necessarily underlies this Court's decision in Securities Exch. Commission v. C.M. Joiner Leasing Corp., 320 U.S. 344 (64 S. Ct. 120, 88 L. Ed. 88) . . . ." 328 U.S. at 299, 66 S.Ct. at 1103
DocketNumber： 79-1232
Citation Numbers： 628 F.2d 887
Filed Date： 10/23/1980
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