Opinion ID: 406730
Heading Depth: 2
Heading Rank: 2

Heading: Williamson v. Tucker

Text: 14 Gordon argues that when he invested in the real estate syndications he entered into investment contracts and thus securities under the federal securities laws. 3 SEC v. W. J. Howey Co. defines an investment contract as a contract, transaction or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or a third party. 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1946). The District Court determined that Howey's third element was not satisfied because under the written agreements the investors, by majority vote, retained control over all decisions which would affect the success of the ventures. 4 On appeal, Gordon argues that Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, --- U.S. ----, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981), decided after the District Court entered its order, requires our reversal. 15 Under the third criteria of the Howey definition, the focus is on the dependency of the investor on the entrepreneurial or managerial skills of a promoter or other party. See SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 (5th Cir. 1974); SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). An investor who has the ability to control the profitability of his investment, either by his own efforts or by majority vote in group ventures, is not dependent upon the managerial skills of others. Thus, general partnerships and other arrangements which grant the investors control over the significant decisions of the enterprise are not securities. See, e.g., Schultz v. Dain Corporation, 568 F.2d 612 (8th Cir. 1978); Ballard & Cordell Corporation v. Zoller & Danneberg Exploration, Ltd., 544 F.2d 1059 (10th Cir. 1976), cert. denied, 431 U.S. 965, 97 S.Ct. 2921, 53 L.Ed.2d 1060 (1977); Vincent v. Moench, 473 F.2d 430 (10th Cir. 1973); Hirsch v. duPont, 396 F.Supp. 1214 (S.D.N.Y.1975), aff'd, 553 F.2d 750 (2d Cir. 1977); Oxford Finance Cos. v. Harvey, 385 F.Supp. 431 (E.D.Pa.1974); cf. Cameron v. Outdoor Resorts of America, Inc., 608 F.2d 187 (5th Cir. 1979), modified on other grounds, 611 F.2d 105 (5th Cir. 1980) (promoter retained right to manage property). The written agreements in this case place control over all significant decisions in the hands of the investors and would seem to mandate the conclusion reached by the District Court. 5 Williamson v. Tucker, however, articulates a narrow exception to the general rule. 16 The investors in that case were participants in joint ventures in real estate. The written agreements provided that any decision regarding the properties could be made by vote of the holders of 60% or 70% interests in the ventures. The investors in each joint venture expected to either develop the property or sell it after it had appreciated in value and the promoter, Godwin Investments, represented that it would aggressively pursue those objectives. 17 By their terms, the agreements vested control in the joint venturers and the Fifth Circuit noted that there could be no security if the power retained by the investors is a real one which they are in fact capable of exercising. Id. at 419. Proceeding from that point, the Court recognized that under certain circumstances an investor may be incapable of exercising a power given by a written agreement. If that were the case, the investor would be in a position of dependency. With no real means of protecting his investment, he would be forced to rely on others for his hoped for profits. 18 One situation envisioned by the Court was a dependency on another's specialized expertise. 6 In setting forth this exception, the Court carefully delineated the circumstances which would create the sort of dependency contemplated by investment contract analysis. The fact that the investor has delegated management duties or has chosen to rely on some other party does not establish dependency. The investor must have no reasonable alternative to reliance on that person. Id. at 423. That is, the investor must be forced to rely on some particular non-replaceable expertise. Id. As an example, the Court indicated that investors may be induced to enter a real estate partnership on the promise that the partnership's manager has some unique understanding of the real estate market in the area in which the partnership is to invest. Id. 19 The panel emphasized that when agreements provide investors with substantial control, a plaintiff claiming forced reliance on another is faced with a difficult burden of proof. Such an investor must demonstrate that, in spite of the partnership form which the investment took, he was so dependent on the promoter or on a third party that he was in fact unable to exercise meaningful partnership powers. Id. at 424 (footnote omitted). And, in order to survive a motion to dismiss or a motion for summary judgment, the plaintiff must allege at a minimum that the promoter was uniquely capable of such tasks or that the (investors) were incapable, within reasonable limits, of finding a replacement manager. Id. at 425. 20