Opinion ID: 406730
Heading Depth: 1
Heading Rank: 3

Heading: A Securities Interest?

Text: 10 We stress at the outset of our analysis, the procedural posture of this case. In reviewing a grant of summary judgment, our inquiry must be whether the undisputed facts, considered in the light most favorable to the opposing party, establish that the moving party is entitled to judgment as a matter of law. Adickes v. S. H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); American Telephone & Telegraph Co. v. Delta Communications Corporation, 590 F.2d 100, 101-02 (5th Cir.), cert. denied, 444 U.S. 926, 100 S.Ct. 265, 62 L.Ed.2d 182 (1979). Those facts, gleaned from the pleadings, documents, and affidavits filed in this case, are as follows. 11 Gordon first met E. G. Green, in October, 1970. Defendant Green told Gordon that he was putting together several real estate syndicates which would be highly profitable to investors. Green explained that because of his contacts, his unique expertise and his experience with the central Florida real estate market, he was able to purchase large tracts of undeveloped land at bargain prices and to resell the land within two years for substantial profits to a pool of developers. Green explained that the First National Bank of Palm Beach (the Bank) would act as trustee, that attorney Gustave Broberg would prepare the trust documents, and that Broberg and the Bank would assist in the management and resale of the properties. As a result of those representations, Gordon was persuaded to invest in five real estate syndications. Four of the syndications were governed by trust agreements and the fifth was governed by a limited partnership agreement. 12 Under the trust agreements, a tract of land is held in the trustee's name (the Bank) and each beneficiary's interest is proportionate to the amount contributed by the beneficiary. The agreements indicate that their purpose is to simplify later resale of the property and disposition of the property is controlled by majority vote of the beneficiaries. Under the limited partnership agreement, George Barley, Jr., is designated general partner and Gordon is listed as one of the limited partners. The agreement indicates that its purpose is investment in real property. Disposition of the property is controlled by majority consent of the partners. 13 All five agreements give the investors substantial control over the property. Gordon, however, claims that he did not read the agreements and did not know their terms when he made his initial investments. Gordon states that Green made it a condition of investment that none of the investors meet each other, that they were to deal only with Green, Broberg, and the Bank, and that they place absolute faith in Green.
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
21 Gordon argues that Williamson requires our reversal of the summary judgment order. And, indeed, where there exists a factual question as to Gordon's dependency we must reverse. But we begin with the written agreements. They undeniably give Gordon control through his voting powers over the fate of his investments. Such control precludes a finding of a security interest unless dependency in the narrow sense articulated by Williamson could be found to exist. In our opinion, dependency upon the skills of one or more defendants does not establish dependency upon all defendants. Williamson requires an examination of the representations and promises made by promoters or others to induce reliance upon their entrepreneurial abilities. Where representations or promises have not been made or where, if made, they do not involve claims of unique entrepreneurial or managerial abilities, the dependency required by Williamson cannot exist. We therefore examine Gordon's allegations and uncontroverted affidavits as they pertain to each defendant. 22 Green: Green, a central Florida real estate broker, promoted the land investment syndications. Gordon claims that he relied upon Green's skills and expertise, and that Green represented that he was an expert in selecting bargain-priced central Florida properties which could be resold to his pool of developers within two years at large profits; that (t)he investors' property would be used ... to provide the financial basis for the developer he selected and thereby give (the) investors a resale price that involved part of the developer's profit; that he could make such deals because of his contacts and his unique expertise; and that only he knew how to structure the deals. 23 Broberg, the Bank, and Barley: Attorney Broberg drafted the trust agreements and the Bank served as trustee for the four land trusts. Barley was named general partner in the partnership agreement. Gordon claims that Green represented that his team of money managers consisted of Broberg and the Bank; that Broberg and the Bank assured Gordon that Green was brilliant and that Gordon was fortunate to be an investor in the syndications; that Broberg and the Bank claimed great abilities in managing other people's funds; and that all three defendants represented that they would take care of the managerial legal, and resale operation. 24 The Sellers: 7 The sellers owned property which was acquired by the five real estate syndications. 8 Green makes no claim that these defendants ever made any representations. His complaints and his affidavits assert only that the sellers conspired with Green and that Green was their agent. 25 The Inside Investors: 9 These defendants were co-investors in certain of the real estate syndications. Again, no claim is made that these defendants ever represented anything to Gordon. Gordon alleges only that they conspired with Green and that Green was acting under their control. 26 We believe that taking the allegations as supported by affidavits in the light most favorable to Gordon, they are sufficient to preclude summary judgment as to Green only. Gordon has set forth specific statements made by Green which, if proven, demonstrate that Green represented himself to have unique knowledge regarding the real estate market in central Florida and the contacts and expertise to structure highly profitable deals. Whether Green's represented skills created the dependency contemplated by Williamson is a question of fact which cannot be resolved on the present record. Gordon must be given an opportunity to prove his assertions. 27 In contrast, the allegations and claims against the other defendants are far from sufficient to raise a factual question. 28 Regarding the Bank, Broberg, and Barley, Gordon's assertions demonstrate that the Bank and Broberg had confidence in Green's expertise, that they assured Gordon his investments were in good hands, and that they claimed to be skilled in their respective occupations. Last, we are told that all three defendants agreed to manage the syndications. In order to establish a genuine factual dispute, affidavits must set forth facts which are relevant to a viable legal theory. Spectrum Financial Cos. v. Marconsult, Inc., 608 F.2d 377, 380 (9th Cir. 1979), cert. denied, 446 U.S. 936, 100 S.Ct. 2153, 64 L.Ed.2d 788 (1980); First National Bank Co. v. Insurance Co. of North America, 606 F.2d 760, 766 (7th Cir. 1979). The alleged statements and acts of these defendants simply do not raise an issue of dependency under Williamson's narrow exception. Gordon does not contend that the three defendants possessed unique knowledge or skills, nor does he set forth facts from which we could infer such expertise. Summary judgment as to the Bank, Broberg, and Barley is therefore affirmed. 29 Regarding the sellers and the co-investors, the record is, for all practical purposes, non-existent. The complaints and affidavits allege no specific facts or representations pertaining to these defendants. Bare assertions that the defendants conspired, controlled, or retained Green as their agent are insufficient to create an issue as to Gordon's dependency on these defendants or to demonstrate the sort of relationship between the defendants and Green which would create a question as to imputed knowledge or responsibility. 10 Conclusory allegations such as these, without specific supporting facts, have no probative value. SEC v. Bonastia, 614 F.2d 908, 914 (3d Cir. 1980); Broadway v. City of Montgomery, 530 F.2d 657, 660 (5th Cir. 1976); Benton-Volvo-Metaire, Inc. v. Volvo Southwest, Inc., 479 F.2d 135, 139 (5th Cir. 1973). Summary judgment as to the sellers and the co-investors is affirmed. 11 30 Our opinion deals with a very narrow issue, jurisdiction under the federal securities laws. The protection provided by the securities acts is not limitless, not every fraudulent commercial transaction falls within their ambit. Marine Bank v. Weaver, --- U.S. ---- at ----, 102 S.Ct. 1220 at 1223, 71 L.Ed.2d 409 (1982) (Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud.). The allegations and affidavits in this case are sufficient to raise an issue only as to Gordon's dependency on Green's skills. The plaintiff may have common law and statutory claims against the remaining defendants, but he does not have a securities claim. In selecting the federal securities acts as a means to obtain redress, Gordon has chosen a most difficult route. On remand he will be faced with the burden of proving that his dependency on Green rendered him incapable of exercising the powers the written agreements vested in him. His path would have been more direct and much simpler in a state court. Summary judgment is reversed as to defendant Green and affirmed as to the remaining defendants. 31 AFFIRMED IN PART, REVERSED IN PART, and REMANDED. 32