acknowledging promoters’ concerns that “an interest marketed as a general partnership might thus be transformed into a security simply because its holder is not diligent or knowledgeable in exercising his rights under the agreement”
How later courts described this case
- acknowledging promoters’ concerns that “an interest marketed as a general partnership might thus be transformed into a security simply because its holder is not diligent or knowledgeable in exercising his rights under the agreement”
- finding a general partnership not a security where no 12 USSEC V. SCHOOLER practical impairment to exercising partnership authority had been shown
- applying Williamson test and holding no security alleged, as partnership agreement "provided the plaintiffs with sufficient power to protect their investments," and they "made no showing and are unable to show they were prevented from exercising their powers under the agreement"
- apparent dictum citing Potomac Passengers for the proposition that “[s]ubject matter jurisdiction, because of its intrinsic importance to the judicial power of the federal courts, is particularly suitable for reconsideration”
Written by the judges who cited it.
Later courts went against this
Abrogated on other grounds by Holden v. Hagopian, 978 F.2d 1115 (1992)
862 F.2d 720, 733 (9th Cir.1988), abrogated on other grounds, Holden v. Hagopian, 978 F.2d 1115 (9th Cir.1992).
Abrogated on other grounds by Ussec v. E. Andrew Schooler, 905 F.3d 1107 (2018)
862 F.2d 720, 728 (9th Cir. 1988), abrogated on other grounds by Schooler, 905 F.3d 1107
Abrogated on other grounds by Koch v. Hankins, 928 F.2d 1471 (1991)
862 F.2d 720, 734 (9th Cir.1988) (“Attorney’s fees are not recoverable as damages in an action on an injunction bond.”), abrogated on other grounds by Koch v. Hankins, 928 F.2d 1471 (9th Cir.1991);
The opinion
CANBY, Circuit Judge,
concurring:
I agree with everything Judge Wiggins has said about the pendent claims, the surety bonds, and costs. I also agree with the result reached on the securities question, but my analysis differs from that of the majority.
The majority properly rejects a “bright-line” rule on the ground that “substance and not form controls.” Supra, at 727. It also states, again correctly, that economic realities must govern:
A nominal general partnership created pursuant to state law may in reality operate more like a limited partnership, the functional equivalent of a public offering of preferred stock.
Id. at 727.
I find considerable tension, however, between this rejection of formalism and the majority’s holding that appears to give controlling effect to the terms of the partnership agreement. Thus, the majority rejects the last two prongs of the test of Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir.), cert. denied, 454 U.S. 897 , 102 S.Ct. 396 , 70 L.Ed.2d 212 (1981), which permit consideration of the investor’s lack of knowledge and experience, and his or her dependence upon some unique ability of the promoter or manager. Supra, at 731. To me, it is difficult to determine whether a general partnership may “in reality operate” like a limited partnership unless I am permitted to look beyond the terms of the agreement itself. Such evidence may have an important bearing on the nature of the interests that were offered and sold, and the expectations of the parties at the time they entered the transaction. See Williamson, 645 F.2d at 424, n. 14 . While I agree that “an investor who claims his general partnership ... interest is an investment contract has a difficult burden to overcome,” id. at 424 , I would not preclude the investor from meeting that burden with facts extrinsic to the partnership agreement. In *735 deed, we considered such evidence in Deutsch Energy Co. v. Mazur, 813 F.2d 1567 (9th Cir.1987) (general business expertise of investor), and Stone v. Millstein, 804 F.2d 1434, 1439 (9th Cir.1986) (investor’s actual participation in business), although in both cases we concluded that the facts established that no security was involved.
Perhaps the majority’s rule is not so absolute as it seems. The opinion states that “appellants made no showing and are unable to show that they were prevented from exercising their powers under the agreement.” Supra at 731. The opinion also seems to suggest that general partnership interests may be treated as securities if they are “only masquerading as general partnership interests.” Id. at n. 8. To show that the investor is unable to exercise powers granted on the face of the agreement, or that the agreement is “masquerading,” it would seem necessary to resort to extrinsic facts. I would make that implication explicit, and would not exclude whole categories of evidence such as the lack of sophistication of the investor, or reliance on the expertise of the promoter or manager.
I concur in the result reached by the majority, however, because I agree with its statement that plaintiffs failed to meet the requirements of the Williamson test. Supra, at n. 15. The undisputed evidence of plaintiffs’ sophistication, participation, and exercise of the powers of partnership refutes their contention that they entered the partnership as essentially passive investors. Id. Under the rule I would apply, plaintiffs have not borne the heavy burden of showing that their interests were other than the general partnerships set forth in the agreement. Their securities claim accordingly fails.