Record and brief — Williamson v. Tucker

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Oilice-Supreme Court, U.S.

; FILED

81285

4 a 4 AUG1 2 1981

No. a

— N

IN THE :

Supreme Court of the United States

OCTOBER TERM, 1981

JOHN D. WILLIAMSON, HAROLD R. LILLEy,

JOSEPH C. WILSON AND GEORGE BLAKE,

Petitioners,

GoRDON G. TUCKER, FRED E. TUCKER, IR., M. L. GODWIN

INVESTMENTS, INC., GOOD FINANCIAL CORPORATION,

M. L. GopwIN, KEN Goop, JAMES F. MASON, L. R.

POLAN, JR., AND THE TRUSTEES OF THE HOME INTERI-

ORS AND GIFTS EMPLOYEES PROFIT SHARING TRUST,

Mary C. CROWLEY, HORACE T. ARDINGER, IR., DONALD

J. CARTER AND DOUGLAS ADKINS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT CF APPEALS FOR

THE FIFTH CIRCUIT

E. ELDRIDGE GOINS, JR.

(Counsel of Record)

JOHN O. LANGDON

GoIns & UNDERKOFLER

1015 Republic National Bank Tower

Dallas, Texas 75201

(214) 651-1661

— — —— —

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the test for determining whether an in-

terest in an investment entity called a joint venture is

a security differs from the test established by this Court

in Howey and Forman and includes a requirement that

the manager of the investment must be irreplaceable.

2. Whether 15-year promissory notes issued in ex-

change for investment assets and held as investment

assets as a matter of law cannot be securities under the

federal securities laws.

(i)

PARTIES

John D. Williamson *

Harold R. Lilley

Joseph C. Wilson

George Blake

Gordon GS. Tucker

Fred E. Tucker, Jr.

M. L. Godwin Investment, Inc.

Good Financial Corporation

M. L. Godwin

Kenneth M. Good

James F. Mason

L. R. Polan, Jr.

The Trustees of the Home Interiors and Gifts Employees

Profit Sharing Trust:

Mary C. Crowley

Horace T. Ardinger, Jr.

Donald J. Carter

Douglas Adkins

* John D. Williamson, an original party in this suit, died on May

7, 1981. At the time this Petition was prepared, a motion to sub-

stitute John D. Williamson, Jr., independent executor of the de-

cedent’s will and estate, had been filed. References in this Petition

to “Williamson” are to John D. Williamson.

TABLE OF CONTENTS

List of All Parties a 1

Table of Authorities

Opinions Below

——U— G —k6ͥũ ( B(ᷣũ

Jurisdictional Statement 646

Applicable Statutes

Statement .

Reasons for Granting the Writ

I. The Test Established by the Court of Appeals

II.

for Determining Whether an Interest in an In-

vestment Entity Called a Joint Venture Is a Se-

curity Is Inconsistent with the Test Established

by This Court for Determining Whether an In-

vestment Is a Security in Securities And Ex-

change Commission v. W. J. Howey Co. And

United Housing Foundation, Inc. v. Forman....

Conflicting Tests Have Developed among the

Courts of Appeals for Determining Whether a

Long-Term Note, Expressly Defined by Statutes

To Be a Security, Is a Security, and the Appli-

cation of One Such Test Has Resulted in the

Notes Here, Which Are of a Type Contemplated

by the Statutes and Court Decisions To Be Se-

curities under the Statutes, Being Held Not To

rr **

(iü)

Page

a wo NN de =

TABLE OF AUTHORITIES

Cases Page

Alberto-Culver Co. v. Scherk, 484 F.2d 611 (7th

Cir. 1973), rev’d on other grounds, 417 U.S. 506

eee ee ae 13, 16

Amfac Mortgage Corp. v. Arizona Mall of Tempe,

Inc., 583 F.2d 426 (9th Cir. 1978) 14

Ballard & Cordell Corp. v. Zoller & Dannenberg

Exploration, Ltd., 544 F.2d 1059 (10th Cir.

1976), cert. denied, 431 U.S. 965 (19777 11

Bellah v. First National Bank, 495 F. 2d 1109 (5th

8 29999——ʒ˖¶—2kZCͤʒͥ ꝑ 1b 13

C. N. S. Enterprises, Inc. v. G & G Enterprises,

Inc., 508 F.2d 1354 (7th Cir.), cert. denied, 423

1 — 13

Emisco Industries, Inc. v. Pro's Inc., 543 F.2d 38

(Ith Cir. 1976) 13

Exchange Nat’l Bank v. Touche Ross & Co., 544

3 | 13, 15

Fargo Partners v. Dain Corp., 540 F.2d 912 (8th

„PT 11

Goodman v. Ey ein, 582 F.2d 388 (7th Cir. 1978),

cert. denied, 440 U.S. 939 (19799 —— . 11

Great Western Bank & Trust Co. v. Kotz, 532 F.2d

1 —.—... ö 14

Hirsch v. du Pont, 553 F.2d 750 (2nd Cir. 1977),

af 396 F.Supp. 1214 (S. D. N.Y.) ..................... 12

Ingenito v. Bermec Corp., 376 F.Supp. 1154 (S. D.

N.Y. 1974) 14

International Brotherhood of Teamsters v. Daniel,

r 7

Lawler v. Gilliam, 569 F.2d 1283 (4th Cir. 1978) 13

Lino v. City Investing Co., 487 F.2d 689 (3rd

8 ee 14

McClure v. First National Bank, 497 F.2d 490 (5th

Cir. 1974), cert. denied, 420 U.S. 930 (1975) .... 13

McGovern Plaza Joint Venture v. First of Denver

Mortgage Investors, 562 F.2d 645 = Cir.

K . — — 14

TABLE OF AUTHORITIES—Continued

Page

Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662

(And Cir. 1971), aff’g per curiam, 321 F.Supp.

I GM OE — 14, 16

Mr. Steak, Inc. v. River City Steak, Inc., 560 F.2d

11 1K eee 11

National Bank of Commerce v. All American As-

surance Co., 583 F. 2d 1295 (5th Cir. 1978) 13

Rekant v. Dresser, 425 F.2d 872 (5th Cir. 1970) 14

Sanders v. John Nuveen & Co., 463 F.2d 1075 (7th

Cir.), cert. denied, 409 U.S. 1009 (1972) 13

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) 15

Securities and Exchange Commission v. Conti-

nental Commodities Co., 497 F.2d 516 (5th Cir.

— ͥͤ 2 ee ae 13

Securities and Exchange Commission v. W. J.

Howey Co., 328 U.S. 293 (194))))))ꝛꝛ 6, 8, 11

Securities and Exchange Commission v. C. M.

Joiner Leasing Corp., 320 U.S. 344 (1943) 7

Securities and Exchange Commission v. United

Benefit Life Insurance Co., 387 U.S. 202 (1967) 7

Stowell v. Ted S. Finkel Investment Services, Inc.,

489 F.Supp. 1209 (S. D. Fla. 1980) 11

Tcherepnin v. Knight, 389 U.S. 332 (1967) 7

United California Bank v. THC Financial Corp.,

557 F.2d 1351 (9th Cir. 1977) PEE We ON 14

United Housing Foundation, Inc. v. Forman, 421

U.S. 837 (1975) : 7, 11, 13. 15

Williamson v. Tucker, 632 F.2d 579 (5th Cir.

1980), vacated, 645 F.2d 464 (198177 2,13

Zabriskie v. Lewis, 507 F.2d 546 (10th Cir. 1974) 14

Zeller v. Bogue Electric Mfg. Corp., 476 F.2d 795

(2nd Cir.), cert. denied, 414 U.S. 908 (1973) 14

TABLE OF AUTHORITIES—Continued

Statutes and Regulations

Securities Act of 1933, Sec. 2(1), 15 U.S.C. Sec.

iittala —V—V—FE———

Securities Exchange Act of 1934, Sec. 3(a) (10),

r . eT Ee

CG) ——A — —

Tex. Rev. Civ. Stat. Ann. art. 6132a, Sec. 11 (Supp.

. —

Books and Journals

Annot., 39 A.L.R. Fed. 357 (1979

1 Bromberg, Securities Law: Fraud, Sec. 4.6, p.

EE a

Comment, Commercial Notes and Definition of

‘Security’ Under Securities Exchange Act of

1934: A Note is a Note is a Note? 52 Neb. L.

.. ..

Jennings and Marsh, Securities Regulation 252

Lipton & Katz, Notes Are (Are Not) Always Se-

curities—A Review, 29 Bus. Law. 861 (1974)

Rifkind & Borton, SEC Registration of Real Estate

Interests: An Overview, 27 Bus. Law. 649

LSS Ee ee ee eee

Report of the Subcommittee on n Syndications and

Joint Ventures of the Committee on Real Estate

Financing, Regulation of Real Estate Securities,

13 Real Property, Probate and Trust Journal

th nn

Sonnenschein, Federal Securities Law Coverage of

Note Transactions: The Antifraud Provisions,

35 Bus. Law. 1567 (197000 —

IN THE

Supreme Court of the United States

OCTOBER TERM, 1981

No.

JOHN D. WILLIAMSON, HAROLD R. LILLEY,

JOSEPH C. WILSON AND GEORGE BLAKE,

4 Petitioners,

GorDON G. TUCKER, FRED E. TUCKER, In., M. L. GODWIN

INVESTMENTS, INC., GOOD FINANCIAL CORPORATION,

M. L. Gopwin, KEN Goop, JAMES F. MASON, L. R.

POLAN, JR., AND THE TRUSTEES OF THE HOME INTERI-

ORS AND GIFTS EMPLOYEES PROFIT SHARING TRUST,

Mary C. CROWLEY, HorRACE T. ARDINGER, JR., DONALD

J. CARTER AND DOUGLAS ADKINS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

John D. Williamson, Harold R. Lilley, Joseph C. Wil-

son and George Blake petition for a writ of certiorari

to review the judgment of the United States Court of

Appeals for the Fifth Circuit in this case.

OPINIONS BELOW

The judgment of the District Court dismissing the

ease for lack of subject matter jurisdiction was not

reported. See Appendix at 52a. In a letter to all coun-

sel announcing its decision, the District Court stated

that the court did not consider either the plaintiffs’ joint

venture interests or the notes issued by the joint: ventures

to be securities under the federal securities laws. See

Appendix at 53a. The first opinion of the United States

Court of Appeals for the Fifth Circuit was reported at

632 F.2d 579 (5th Cir. 1980). The second and final

opinion of the Court of Appeals was reported at 645

F.2d 404 (5th Cir. 1981). See Appendix at la.

JURISDICTIONAL STATEMENT

The final judgment of the United States Court of

Appeals for the Fifth Circuit was entered on May 20,

1981. See Appendix at 54a. The jurisdiction of this

Court is invoked under 28 U.S.C. Sec. 1254(1).

APPLICABLE STATUTES

Section 2(1) of the Securities Act of 1933, 15 U.S.C.

Sec. 77 (b) (1) and Section 3(a) (10) of the Securities

Exchange Act of 1934, 15 U.S.C. Sec. 78(c) (a) (10) are

set out in the Appendix at 56a.

STATEMENT

This case involves the application of the Securities Act

of 1933 (the “1933 Act”) and the Securities Exchange

Act of 1934 (the “1934 Act”) to a series of transactions

in which the ownership of three undivided interests in

a parcel of undeveloped real estate was syndicated among

three joint ventures involving a group of thirty-two

different investors. The joint ventures acquired the in-

terests in exchange for promissory notes executed by the

joint ventures to the original owners of the property.

This suit was brought by four of the investors, petitioners

herein, seeking to rescind the joint venture agreements,

cancel the notes they had signed and recover money

already paid on the notes.

Although different investors participated in each joint

venture and each joint venture acquired its interest in

the property at different times (from May 1970 to June

1971) and for a different consideration, the transactions

were all promoted and arranged by M. L. Godwin Invest-

ments, Inc. (“Godwin Investments”) and are nearly

identical in all other relevant aspects. Each joint venture

had approximately fifteen ventures. In each case, Godwin

Investments (or its employees) signed a contract to pur-

chase an interest in the property and then attracted

potential investors to participate in the joint venture

through materials describing the investment potential of

the proposed venture and the expertise of Godwin Invest-

ments, which was to manage each joint venture and the

property. Each joint venture acquired its interest in the

property in exchange for a long-term note or notes pay-

able to the property owner. The notes had terms of

fifteen years and bore interest at rates varying from 7%

to 8½ % per annum with interest only payable for the

first eight years. The notes were touted to the investors

as offering tax advantages and were required by the

sellers of the property interests. At least one seller

desired to use the notes (rather than its interest in the

land) as collateral for borrowing to finance its other

activities and subsequently sold the notes to an employees’

profit sharing trust which acquired and held the notes

for investment.

In the promotional materials utilized by Godwin In-

vestments in marketing the investments, Godwin Invest-

ments represented that it would pursue the sale or devel-

opment of the property and in the interim would perform

all management duties incident to the investments, in-

Some investors, like Williamson, were in more than one joint

venture. Williamson purchased a 20% interest in each of the joint

ventures. Lilley purchased a 10% interest in two of the joint

ventures and Wilson and Blake each purchased a 5% interest in

one of the joint ventures.

cluding efforts to have the land rezoned from single-

family to commercial uses. As the materials emphasized:

M. L. Godwin Investments, Inc. shall manage and

pursue the sale or development of this property dur-

ing the entire period of time this investment remains

in the control of our joint venture.

and further:

OUR FIRM AGGRESSIVELY PURSUES ALL

ZONING AND PROPER LAND PLANNING EF-

FORTS TO ASSURE THE MAXIMUM PROFIT

POTENTIAL OF EACH INVESTMENT.

The materials also described the investment advantages

available through the syndications:

ADVANTAGES OF THE JOINT

VENTURE CONCEPT

1. Opportunity to pool resources with a professional

real estate firm and other investors since most

profitable and viable real estate transactions re-

quire more talent and money than is available

to the average individual investor.

The promotional materials further emphasized the stra-

tegic location of the property and contained an analysis

of real estate values in comparable settings. This an-

alysis stated, for example:

Although the comprehensive data listed herein would

not be totally analagous to each given situation af-

fecting the Dallas/Fort Worth Regional Airport, we

do feel that the historical development of other major

airport areas would indicate a similar potential use

and value pattern applicable to the Regional Air-

port. Of course, an international airport of this

immense size will undoubtedly have a tremendous

effect on the values and development of nearby land,

and its eventual economic contribution might be far

greater than the public’s ability to presently com-

prehend!

Although the joint venture agreements provided that

the venturers could vote on certain matters affecting

the joint venture and that the venturers could remove

the manager, no joint venturer (other than the manager)

had authority to conduct the joint venture’s affairs. No

one joint venturer had sufficient voting power to control

any joint venture and the plaintiffs in the aggregate

could not remove the manager or compel any joint ven-

ture tc take any other action.

At the time the joint ventures were organized, the

property wies the subject of condemnation proceedings

which Godwin Investments managed on behalf of the

joint ventures. The property interests held by the joint

ventures were managed as a unit and included other prop-

erty managed by the promoters. The property, along with

an adjacent tract under the same management, was col-

lectively referred to as “Portamerica” and was promoted

and planned to be developed under that name. In man-

aging the investments, the promoters obtained zoning

changes, represented the joint ventures in condemnation

proceedings, conducted land-planning studies, collected

and paid interest and taxes and independently deter-

mined whether to accept offers made to purchase or lease

portions of the property. The plaintiffs’ primary contacts

with the managers from 1970 through late 1975 were

requests for payments of money, usually accompanied by

materials promoting the prospects that a good profit on

the plaintiffs’ investment was within near reach.

In June 1976, as a result of their discovery of alleged

fraudulent misrepresentations and omissions and other

securities laws violations attendant to their investments,

the plaintiffs filed suit. The plaintiffs predicated their

federal cause of action on the applicability of the 1933

Act and the 1934 Act on the basis that both the joint

On appeal, the Fifth Circuit reversed the District

Court’s dismissal of the action and remanded the case

for further proceedings. Petitioners do not seek review

of the correctness of the Fifth Circu‘t’s reversal and

remand of the case. However, in its opinion the court

of appeals held that in order for an interest in an invest-

ment called a joint venture to be held a security, the

investor must demonstrate that in spite of the partner-

ship form which the investment took, he was so depend-

ent on the promoter or on a third party that he was,

in fact, unable to exercise meaningful partnership pow-

ers. With respect to the joint ventures’ notes issued in

connection with the transactions, the court of appeals

held that the notes are commercial in nature and as a

matter of law are not securities within the meaning of

the 1933 Act and the 1934 Act.

REASO! 3 FOR GRANTING THE WRIT

I. Tne Test Established by the Court of Appeals for

Determining Whether an Interest in an Investment

Entity Called a Joint Venture Is a Security Is Incon-

sisteat with the Test Established by This Court for

Determining Whether an Investment Is a Security in

Securities And Exchange Commission v. W. J. Howey

Co. Ard United Housing Foundation, Inc. v. Forman

In Securities and Exchange Commission v. W. J.

Howey Co., 328 U.S. 293 (1946), this Court held that

an offering of individual rows of trees in a citrus grove

development, coupled with a contract for cultivating and

marketing the trees and remitting the net proceeds to

the investor, was an offering of an “investment contract”

subject to the federal securities laws. In reaching its

decision, this Court defined an investment contract as

follows:

In other words, an investment contract for purposes

of the Securities Act means a contract, transaction

or scheme whereby a erson invests his money in a

common enterprise and is led to expect profits solely

from the effects of a promoter or a third party.

328 U.S. at 298-99. This Court has repeatedly empha-

sized that economic reality is to govern over form and

that the definitions of the various types of securities

should not hinge on exact and literal tests. International

Brotherhood of Teamsters v. Daniel, 439 U.S. 551 (1979);

United Housing Foundation, Inc. v. Forman, 421 US.

837 (1975) ; Tcherepnin v. Knight, 389 U.S. 332 (1967).

This Court has further stated that, in determining

whether an instrument constitutes an investment con-

tract:

[T]he test. . . is what character the instrument is

given in commerce by the terms of the offer, the

plan of distribution, and the economic inducements

held out to the prospect. In the enforcement of an

act such as [the Securities Act] it is not inappro-

priate that the promoters’ offerings be judged as

what they were represented to be.

Securities and Exchange Commission v. United Benefit

Life Insurance Co., 387 U.S. 202, 211 (1967), quoting

Securities and Exchange Commission v. C. M. Joiner

Leasing Corp., 320 U.S. 344, 352-53 (1943).

The Fifth Circuit in the present case departed from

these fundamental principles. The court’s opinion re-

quires, as a condition of finding that a joint venture or

partnership interest is a security, that the joint venturers

or partners be incapable of exercising control over the

venture. The court sta ed:

It is not enough, therefore, that the partners in fact

rely on others for the management of their invest-

ment; a partnership can be an investment contract

only when the partners are so dependent on a par-

ticular manager that they cannot replace him or

otherwise exercise ultimate control. Such an

investor must demonstrate that, in spite of the part-

nership 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 part-

nership powers. 645 F.2d at 424.

This ruling is an unjustifiable departure from this

Court’s prior decisions that economic reality, and not

the form of an investment, must control. In addition,

the Fifth Circuit’s decision obliterates the significance

of the promotional material utilized in marketing the

investments involved in the present case in which the

investors were led to believe that their investments would

be professionally managed.

This Court has not yet expressly determined whether

a latent right of investor control precludes the existence

of a security. However, previous decisions of this Court

show that such a formalistic test is inappropriate. In

Securities and Exchange Commission v. C. M. Joiner

Leasing Corp., 320 U.S. 344 (1943), the investors had

the right to control their investment in that the investors

could have themselves undertaken the drilling activity

offered by the promoter in that case. In Securities and

Exchange Commission v. W. J. Howey Co., 328 U.S. 293

(1946), the purchasers of the citrus trees had the right

to control their investment in that they were not legally

compelled to contract with the seller for the cultivation

of the trees and not all of the investors did contract for

the management of their investment. However, in each

of these cases this Court found a security present because

from the standpoint of economic reality the investors

were dependent on the efforts of another for any return

on their investment. This case likewise involves investors

who were induced to purchase an investment based upon

the managerial expertise of those promoting the invest-

ment and who were dependent on the managers for any

return on their investment. In order to participate in

the investment, each investor was required to waive any

right to seek a partition of the property, thus totally

removing each investor’s right to act unilaterally with

respect to the property. The investors’ dependence on the

managers’ efforts for any return on their investment is

further evidenced by the nature of the underlying in-

vestments themselves, i.e., undivided interests in one tract

of property. It ignores economic reality to hold, as the

Fifth Circuit has done, that the mere formal retention

of the power to vote on certain partnership matters pre-

cludes a finding of reliance on the managerial efforts

of others. As one commentary has stated:

If in the realities of the situation, one or more of

the partners or joint venturers are looking to the

efforts of others for the management and operation

of the scheme, it is likely that an investment contract

has been offered. This is so in spite of the legal

rights and obligations of the parties in such agree-

ments.“

Interpretative regulations promulgated by the Securities

Exchange Commission also dictate that the joint venture

interests in this case are securities:

Under the Federal Securities Laws, an offering of

limited partnership interests and interests in joint

or profit sharing real estate ventures generally con-

stitutes an offering of a “profit sharing agreement”

or an “investment contract” which is a “security”

2 Rifkind & Borton, SEC Registration of Real Estate Interests:

An Overview, 27 Bus. Law. 649, 656 (1972). See also 1 Bromberg,

Securities Law: Fraud, Sec. 4.6, p. 3831 (1977 ed.) (“Even with-

out a formal agreement, the intent of the partners and other evi-

dence may show the reliance necessary for a security“); Jennings

and Marsh, Securities Regulation 252 (1977 ed.) (Where the

partnership form is used “to mask what essentially is a passive

investment . . the partnership interest would fall within the defi-

nition of a ‘security’. . .”).

within the meaning of section 2(1) of the Securities

Act of 1933.

. . If the promoters of a real estate syndication

offer investors the opportunity to share in the profits

of real estate syndications or similar ventures, par-

ticularly when there is no active participation in

the management and operation of the scheme on the

part of the investor, the promoters are, in effect,

offering a “security.” *

The inapplicability of a right to control test in the

context of an investment in a joint venture or partner-

ship is magnified by the Fifth Circuit’s acknowledgement

that a limited partnership has “long been held to be an

investment contract” and that a joint venture interest

may be equivalent to a share of stock in a corporation

and hence a security.“ The joint venture interests mar-

keted and purchased in this case are no different in

economic terms from shares of stock in a corporation or

interests in a limited partnership. The joint venture

interests were purchased by the plaintiffs with the ex-

pectation that the ventures would be professionally man-

aged and that the investors would not take any opera-

tional role in the enterprises. The only role assumed by

the plaintiffs and the other investors was to vote on

matters affecting the joint venture as those matters were

developed by the managers. This role is no different from

that of shareholders in a corporation who, by virtue of

their ownership of the enterprise, control it. A right of

shareholders to replace a slate of corporate managers or

to vote on certain corporate matters does not per se

remove their stock from the coverage of the securities

332 Fed. Reg. 156 (1967). See also Report of the Subcommittee

on Syndications and Joint Ventures of the Committee on Real

Estate Financing, Regulation of Real Estate Securities, 13 Real

Property, Probate and Trust Journal 841 (1978).

4645 F.2d at 423. See Appendix at 87a.

laws and a different result should not be reached in a

case where the investment entity is a joint venture.“ By

focusing on the venturers’ latent right to control the

joint venture, the Fifth Circuit has thus created a ritual-

istic distinction based on the form of an investment that

this Court’s decisions in Howey and Forman have re-

jected.

This case merits review vy the Court because of the

importance of the issue presented. This Court has not

specifically addressed the effect of a latent right of con-

trol on the applicability of the securities laws to an

investment. The Fifth Circuit’s decision is the only fed-

eral appellate court opinion dealing with a latent right

of control in the context of a general partnership or

joint venture.“ In announcing that the federal securities

5 The same lack of distinction exists between the joint venture

interests in the present case and interests in a limited partner-

ship. Like limited partners, the joint venturers in the present

case (other than the manager) could not take an active mana-

rial role in the enterprises. In addition, limited partners can

have the same voting rights as were granted to the joint venturers

n the present case. Tex. Rev. Civ. Stat. Ann. art. 6132a, Sec. 11

(Supp. 198). Yet under the Fifth Circuit’s rationale, an interest

im a limited partnership would be a security and an interest in a

joint venture would not—a distinction again based solely on the

form of the investment. Cf., Goodman v. Epstein, 582 F.2d 388

(7th Cir. 1978), cert. denied, 440 U.S. 989 (1979) (limited part-

nership interests were securities as a matter of law); Stowell v.

Ted S. Finkel Investment Services, Inc., 489 F.Supp. 1209 (S.D.

Fla. 1980) (limited partnership interests were securities despite

limited partners’ power to replace the general partner).

The Fifth Circuit relied on Fargo Partners v. Dain Corp., 540

F.2d 912 (8th Cir. 1976), Ballard & Cordell Corp. v. Zoller &

Dannenberg Exploration, Ltd., 544 F.2d 1059 (10th Cir. 1976),

cert. denied, 431 U.S. 965 (1977), and Mr. Steak, Inc. v. River

City Steak, Inc., 560 F.2d 666 (10th Cir. 1972) in holding that an

investor’s latent right of control destroys the applicability of the

securities laws. The issue presented by this case is narrower be-

cause in those cases the investment asset was owned directly by

laws will not protect investors who invest in a scheme

structured in such a way, the court of appeals failed to

follow prior decisions of this Court. Unless the opinion

is corrected, the protections afforded by the securities

laws will be denied to investors based solely on the form

of their investment.

II. Conflicting Tests Have Developed among the Courts

of Appeals for Determining Whether a Long-Term

Note, Expressly Defined by Statutes To Be a Security,

Is a Security, and the Application Of One Such Test

Has Resulted in the Notes Here, Which Are of a Type

Contemplated by the Statutes and Court Decisions To

Be Securities under the Statutes, Being Held Not To

Be Securities

This case merits review by this Court in order to

resolve critical questions concerning the applicability of

the federal securities laws to transactions involving notes

issued in an investment context. Despite the inclusion

of the term “note” in the statutory definition of a

security,’ the courts have not applied the statutes liter-

ally. Instead, in attempting to determine what notes are

within the scope of the statutes, the courts of appeals

have utilized varying tests, factors and criteria and are

split over the proper approach to be followed.* The Fifth

the investor. In this case, the asset was owned by the joint venture

and each venturer had only his proportionate vote in the venture

and none of the plaintiffs, individually or in the aggregate, in any

venture had sufficient voting power to control the venture’s affairs.

In Hirsch v. duPont, 553 F.2d 750 (2nd Cir. 1977), affe 396

F.Supp. 1214 (S.D. N.Y.), the parties had conceded that a general

partnership interest is not a security where the general partner

plays a leading part in the management of the firm. In the present

case, none of the venturers other than the manager performed

any managerial functions.

7 See Appendix at 56a.

8 See Sonnenschein, Federal Securities Law Coverage of Note

Transactions: The Antifraud Provisions, 35 Bus. Law. 1567 (1970) ;

Circuit follows a “commercial-investment” dichotomy and

holds that an investment note is a security while a com-

mercial note is not a security.“ In attempting to dis-

tinguish between the two, the Fifth Circuit has held that

an investment note is either issued in exchange for an

investment asset or is acquired as an investment asset.

The Seventh Circuit has held that the key lies in a “com-

mercial/consumer-investment” dichotomy and that in or-

der for the securities laws to apply, the payee of the

note must invest in the note rather than accept it as a

cash substitute in a commercial setting.“ The Fourth

Circuit appears to apply the investment contract analysis

of Forman to transactions involving notes.“ The inquiry

Lipton & Katz, Notes Are (Are Not) Always Securities—A Review,

29 Bus. Law. 861 (1974); Comment, Commercial Notes and Defi-

nition of ‘Security’ Under Securities Exchange Act of 1934: A

Note is a Note is a Note? 52 Neb. L. Rev. 478 (1973); Annot.,

39 A.L.R. Fed. 357 (1978).

® McClure v. First National Bank, 497 F.2d 490 (5th Cir. 1974),

cert. denied, 420 U.S. 930 (1975). See also National Bank of Com-

merce v. All American Assurance Co., 583 F.2d 1295 (5th Cir.

1978) ; Securities and Exchange Commission v. Continental Com-

modities Co., 497 F.2d 516 (5th Cir. 1974) ; Bellah v. First National

Bank, 495 F.2d 1109 (5th Cir. 1974).

1% Emisco Industries, Inc. v. Pro's Inc., 543 F.2d 38 (7th Cir.

1976). Cf., C. N. S. Enterprises, Inc. v. G & G Enterprises, Inc., 508

F. 2d 1354 (7th Cir.), cert. denied, 423 U.S. 825 (1975); Sanders

v. John Nuveen & Co., 463 F.2d 1075 (7th Cir.), cert. denied, 409

U.S. 1009 (1972). But see Alberto-Culver Co. v. Scherk, 484 F.2d

611 (7th Cir. 1973), rev'd on other grounds, 417 U.S. 506 (1974).

11 Lawler v. Gilliam, 569 F.2d 1283 (4th Cir. 1978). The Fifth

Circuit in the present case appears to have adopted this rationale

in its first opinion. Williamson v. Tucker, 632 F.2d 579 (5th Cir.

1980), vacated, 645 F.2d 464 (1981). Cf., Exchange Nat'l Bank v.

Touche Ross & Co., 544 F.2d 1126 (2nd Cir. 1976) (stating that

the investment contract analysis is of dubious value in resolving

the status of a note as a security).

under this approach is to determine whether the payee

of the note is dependent upon the efforts of another for

repayment of the note. The Tenth Circuit has held that

the proper approach is to determine if the note is given

in a transaction of the kind in which stock often actually

is given.“ However, the Tenth Circuit has also stated

that the Howey test of an investment contract should

be applied.“ The Ninth Circuit applies a risk capital

app Under this approach, various factors such

as the term of the note, the existence and extent of col-

lateralization, the form of the obligation, the circum-

stances of its issuance, the relationship between the

amount borrowed and contemplated use of the proceeds

of the note are examined to distinguish between a risky

loan and risk capital. The Third Circuit has not devised

any specific test to resolve the question but has held that

a note issued in what the court perceived to be a com-

mercial context did not involve a security.“ The Second

Circuit, after reviewing the tests, indicia and approaches

utilized by the various courts, has concluded that none

2 Zabriskie v. Lewis, 507 F.2d 546 (10th Cir. 1974).

18 McGovern Plaza Joint Venture v. First of Denver Mortgage

Investors, 562 F.2d 645 (10th Cir. 1977).

4 Great Western Bank & Trust Co. v. Kotz, 582 F.2d 1252 (9th

Cir. 1976); United California Bank v. THC Financial Corp., 557

F.2d 1851 (9th Cir. 1977); Amfac Mortgage Corp. v. Arizona

Mall of Tempe, Inc., 583 F.2d 426 (9th Cir. 1978).

15 Lino v. City Investing Co., 487 F.2d 689 (83rd Cir. 1973). The

court in Lino relied in part on the fact that the issuer was the

person claiming to be defrauded, a distinction that has been re-

jected by other courts. Rekant v. Dresser, 425 F.2d 872 (5th Cir.

1970); Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662 (2nd

Cir. 1971) af’g per curiam, 321 F.Supp. 806 (S.D. N.Y. 1970);

Zeller v. Bogue Electric Mfg. Corp., 476 F.2d 795 (2nd Cir.), cert.

denied, 414 U.S. 908 (1973) ; Ingenito v. Bermec Corp,, 376 F.Supp.

1154 (S.D. N.Y. 1974).

of them offers much guidance in resolving the issue and,

after taking into account the anti-literalist approach of

the Forman opinion, has determined to rely more heavily

on the statutory language. The Second Circuit has listed

specific examples of when a note is not a security and,

if a note does not bear a strong family resemblance to

these examples, has indicated that the securities laws

should generally be held to apply.“

This Court has never addressed the issue raised by the

contradictory approaches of the courts of appeal.“ With-

out the benefit of a resolution of the question, the circuits

will continue to apply disparate tests and the application

of the securities laws to a transaction involving a note

will depend upon the circuit in which the case is heard.

Application of the Ninth Circuit’s risk capital approach

or the standard utilized by the Second Circuit to the

notes involved in this case would yield a different result

than that reached by the Fifth Circuit in the present

case. In addition, the notes should have been held to be

securities under the criteria utilized by the Fifth Cir-

cuit’s test for distinguishing between investment and

commercial notes. The court of appeals held that the

notes are commercial in nature and not securities because

of the court’s perception that the payees of the notes

performed a commercial function by, in essence, loaning

the purchase price of the property interests to the in-

vestors. This holding fails to take into account the invest-

ment characteristics attendant to the circumstances in

which the notes were issued. The property interests held

by the property owners and acquired by the joint ventures

were unquestionably held for investment. In addition,

16 Exchange Nat'l Bank v. Touche Ross & Co., 544 F.2d 1126

(2nd Cir. 1976). .

* This Court expressly declined to express any opinion on the

applicability of the 1934 Act to the notes involved in Scherk v.

Alberto-Culver Co., 417 U.S. 506 (1974).

the notes were also acquired for investment by the payees.

None of the payees was a commercial bank or lending

institution. None of the payees exchanged cash for the

joint ventures’ notes. Rather, each payee converted his

unliquidated investment in real property into a liquid

security with a term of 15 years. Each payee engaged

and paid commissions to the promoters to obtain the

notes. The investment characteristics of the notes are

further evidenced by the fact that one of the original

payees, which acknowledged that it wanted the notes to

increase its financial position, sold the notes to a tax-

exempt employees’ trust which admittedly acquired the

notes as an investment.

The reliance by the Fifth Circuit on the notes’ status

as purchase money notes conflicts with the decisions of

several other courts of appeals. Other courts of appeals

have examined the status of purchase money notes and

have concluded—contrary to the decision below—that such

notes can be securities. In Alberto-Culver Co. v. Scherk,

484 F.2d 611 (7th Cir. 1973), rev’d on other grounds,

417 U.S. 506 (1974), the issuance of promissory notes

in partial payment for the purchase of business assets

was held to involve a security. In Movielab, Inc. v.

Berkey Photo, Inc., 452 F.2d 662 (2nd Cir. 1971), the

issuance of two promissory notes in payment for cor-

porate assets was held to clearly constitute the sale or

purchase of a security within the purview of the securi-

ties laws. The Fifth Circuit’s reliance on the notes’

status as purchase money notes is thus unsupportable.

The present case offers an opportunity for this Court

to determine what criteria are relevant in determining

whether a note is a security and to correct the error of

the Fifth Circuit in holding the notes issued by the joint

ventures are not securities as a matter of law.

CONCLUSION

This case contains error in the resolution of two federal

securities issues never addressed » this Court and, for

the reasons stated, this Court shouid and is respectfully

requested to grant the Petition for a Writ of Certiorari.

E. ELDRIDGE GOINS, JR.

(Counsel of Record)

JOHN O. LANGDON

Goins & UNDERKOFLER

1015 Republic National Bank Tower

Dallas, Texas 75201

(214) 651-1661

Attorneys for Petitioners

John D. Williamson, Harold R. Lilley,

Joseph C. Wilson and George Blake

Dated August, 1981

APPENDIX

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

No. 79-1058

JOHN D. WILLIAMSON et al.,

Plaintiffs-Appellants-Cross Appellees,

GORDON G. TUCKER et al.,

Defendants-A ppellees- Cross Appellants.

May 20, 1981

ON PETITION FOR REHEARING AND

PETITION FOR REHEARING

EN BANC

(Opinion December 11, 1980, 5 Cir., 632 F.2d 579).

Before GODBOLD, Chief Judge, and

GARZA and RANDALL, Circuit Judges

RANDALL, Circuit Judge:

IT IS ORDERED that the petition for rehearing filed

by the plaintiffs-appellants in the above entitled and

numbered cause is hereby DENIED and, no member of

this panel or judge in regular active service on the court

having requested that the court be polled on rehearing

en bane (Federal Rule of Appellate Procedure 35; Local

Fifth Circuit Rule 16), the petition for rehearing en

banc filed by the plaintiffs-appellants is DENIED. The

petitions for rehearing filed by the defendants-appellees

are hereby GRANTED IN PART; our original opinion,

reported at 632 F.2d 579 (5th Cir. 1980), is withdrawn

and the following opinion is substituted in its place. In

all other respects, the petitions for rehearing filed by the

defendants-appellees are hereby DENIED.

This case involves the application of the Securities Act

of 1933 (the 1933 Act) and the Securities Exchange Act

of 1934 (the 1934 Act) to a series of transactions in

which undivided interests in a parcel of undeveloped real

estate were transferred to several joint ventures created

for the purpose of holding the interests for a small num-

ber of purchasers, in exchange for promissory notes from

the purchasers to the original owners of the property.

This suit was brought by four of the purchasers, seeking

to rescind the joint venture agreements, cancel the notes

they had signed, and recover money already paid on the

notes. The plaintiffs predicated their federal cause of

action on the applicability of the 1933 Act and the 1934

Act, arguing that both the joint venture interests and

the notes issued in payment for the real estate are secur-

ities within the meaning of the 1933 Act and the 1934

Act. The district court dismissed their claims for lack

of subject matter jurisdiction and awarded $18,885.75

in costs to the defendants. We conclude that the plain-

tiffs’ claims could not properly be dismissed for lack of

subject matter jurisdiction; we therefore reverse the

judgment of the district court and remand the case for

further proceedings consistent with this opinion.

I. THE FACTS

From 1960 to 1969, Gordon G. Tucker, Fred E. Tucker,

Jr. and Marvin M. Blakeney, Jr. each owned an undi-

vided one-third interest in a 160 acre tract of land

located between Dallas and Fort Worth (the Property).

Gordon Tucker and Fred Tucker are brothers; Blakeney,

now deceased and not a party to this suit, was married

to their sister. After the location of the Dallas-Fort

Worth airport was announced, each of the Tucker broth-

ers and Blakeney, in a separate transaction, sold his

undivided interest in the Property. The first sale oc-

curred in November, 1969, when Blakeney sold his un-

divided one-third interest to Kenneth M. Good and Asso-

ciates, Trustee (Good & Associates).

The second sale (and the first transaction directly

involved in this suit) occurred in May, 1970, when Fred

Tucker sold his undivided one-third interest to a group

composed of M. L. Godwin, L. R. Polan, Jr. and James

F. Mason, all of whom are employees of M. L. Godwin

Investments, Inc. (Godwin Investments). Although the

contract of sale required the group to execute a promis-

sory note in the principal sum of $1,000,000 to Fred

Tucker, it permitted the group thereafter to form a joint

venture, and if such was accomplished, to substitute a

new note executed by all the joint venturers in lieu of,

and in rearrangement of, the first note. In July, 1970,

the Grapevine-Regional Airport No. 1 Joint Venture (Reg

Air I) was executed by John D. Williamson (one of the

four plaintiffs in this action) and fifteen other investors

(none of whom is a party to this action) for the purpose

of purchasing the interest that Godwin, Polan and Mason

had purchased from Fred Tucker. In December, 1970,

this interest was conveyed to Reg Air I, and a promissory

note in the principal amount of $1,000,000 was executed

and delivered by Williamson and the other joint venturers

to Fred Tucker in renewal and extension of the original

note. Williamson purchased a 20% interest in the ven-

ture.

In December, 1970, Gordon Tucker (still the owner of

a one-third undivided interest in the Property) and Good

& Associates (which had purchased Blakeney’s one-third

interest in the Property) each sold a one-sixth undivided

interest in the Property (a total one-third undivided

interest) to Grapevine-Regional Airport No. 2 Joint

Venture (Reg Air II), a joint venture formed for the

purpose of acquiring that interest. In consideration of

the transfer, the joint venturers executed and delivered

long-term promissory notes to Gordon Tucker and Good

& Associates in the aggregate principal amount of

$1,332,333. Williamson purchased a 20% interest in Reg

Air II; Harold R. Lilley purchased a 10% interest; Jo-

seph C. Wilson and George Blake each purchased a 5%

interest. Lilley, Wilson and Blake are the other three

plaintiffs in this action.

In June, 1971, Cordon Tucker and Good & Associates

again each sold a one-sixth undivided interest in the

Property. Th’ ime the purchaser was Grapevine-Re-

gional Airpe. No. 4 Joint Venture (Reg Air IV), and

the purchase rice was paid by the execution and delivery

to Gordon Tucker and Good & Associates by the joint

venturers of long-term promissory notes totalling $1,500,-

000 in principal amount. Williamson again purchased a

20% interest; Lilley purchased a 10% interest.

As of June, 1971, therefore, each of three separate

joint ventures owned an undivided one-third interest in

the Property. The ownership of each joint venture was

different; each had acquired its interest at a different

time; and each had paid a different consideration. Nev-

ertheless, the transactions were all arranged by Godwin

Investments and are identical in all other relevant re-

spects. Each of the purchases was financed by the ex-

ecution and delivery of a fifteen year general liability

promissory note, bearing interest at rates varying from

7% to 8½ % per annum, with interest only payable for

the first eight years. The liability of the venturers on

each note was several and not joint. Each of the notes

was secured by a vendor’s lien and deed of trust cover-

ing the undivided one-third interest in the Property

purchased in exchange for such note. Each of the joint

ventures had approximately fifteen venturers. In each

case Godwin Investments (or Godwin, Polan and Mason,

employees of Godwin Investments) signed a contract to

purchase an interest in the Property and then attracted

potential investors to participate in a joint venture

through materials describing the investment potential of

the proposed venture and the expertise of Godwin Invest-

ments, which was to manage the Property.“ ,

These materials emphasized the strategic location of

the Property and included an analysis of real estate

values in the areas surrounding the Los Angeles, San

Francisco and Atlanta airports. The analysis stated, for

example:

Although the comprehensive data listed herein would

not be totally analagous to each given situation af-

fecting the Dallas/Fort Worth Regional Airport, we

do feel that the historical development of other major

airport areas would indicate a similar potential use

and value pattern applicable to the Regional Airport.

Of course, an international airport of this immense

size will undoubtedly have a tremendous effect on

the values and development of nearby land, and its

eventual economic contribution might be far greater

than the public’s ability to presently comprehend!

1 Reg Air II and Reg Air IV purchased their interests directly

from the original owners (Gordon Tucker and Good & Associates),

as Godwin Investments assigned its contract of sale to them before

the closing date. Reg Air I purchased its interest from Godwin

Investments, however which had already closed its purchase from

Fred Tucker. There has been much discussion on the nature of the

relationship between the purchasers of joint venture interests and

the original owners of the Property, and Fred Tucker argues that

the two-step process through which his interest was transferred to

the purchasers insulates him from securities liability. This issue

would be relevant in a trial reaching the merits of this case; but

the dismissal now at issue was for lack of subject matter jurisdic-

tion and appears to have been based solely on the exclusion of the

joint venture interests and the promissory notes from the definition

of securities in the federal securities acts.

It was expected that the Property would be held by

the joint venturers for a period of substantial apprecia-

tion in real estate values, after which it would be either

sold by the venturers or developed by them. Godwin In-

vestments represented that it would ultimately pursue

the sale or development of the Property and in the interim

would perform all management duties, including efforts

to have the land rezoned from single-family residential

to its best uses. As the materials emphasized:

OUR FIRM AGGRESSIVELY PURSUES ALL

ZONING AND PROPER LAND PLANNING EF-

FORTS TO ASSURE THE MAXIMUM PROFIT

POTENTIAL OF EACH INVESTMENT.

Despite the representations of Godwin Investment’s

management duties and capabilities, the participants in

each joint venture retained substantial control of the

venture in the agreement which they signed. Each joint

venture agreement requires unanimous consent of the

venturers to confess a judgment; to make, execute or

deliver any bond, mortgage, deed of trust, guarantee,

indemnity bond, surety bond or accommodation paper or

accommodation endorsement; to borrow money in the

name of the joint venture or use joint venture property

as collateral; and to amend the agreement to modify the

rights of the venturers. In the event that any proposal

for development is presented to the venturers, the vote

of the holders of 60% or 70% in joint venture interests

(depending upon the particular joint venture involved)

is required for its approval. If the proposal is accepted,

those venturers who approve it are obligated to purchase

the interests of those who do not. Whether the Property

is developed or not, the venturers have the power—by

vote of 60% or 70% in interest, as the case may be—to

remove Godwin Investments as manager and to make

any other decision regarding the Property.

The extent to which the joint venturers actually ex-

ereised these powers is not clear. All of the plaintiffs

herein represent that they relied entirely on Godwin In-

vestments and made no attempt to oversee or participate

in the management of the Property, at least until late

1975. It appears that several other venturers defaulted

in their payments in 1975, and that two other venturers

(who are not plaintiffs herein) threatened suit against

some of the defendants herein in 1976, at which time

the plaintiffs represent they first became aware of alleged

securities violations. The record shows that—apparently

because of these events—all of the plaintiffs participated

in joint venture meetings (although the number of meet-

ings and the nature of the participation is unclear)

after late 1975.

In 1976, the plaintiffs defaulted in their payments

under the notes they had executed. In June 1977, the

trustees under the deeds of trust securing the payment

of the plaintiffs’ notes to Fred Tucker, Gordon Tucker

and the Trustees of the Home Interiors and Gifts Profit

Sharing Trust (who purchased the notes executed by the

venturers in Reg Air II and Reg Air IV payable to Good

& Associates) foreclosed and sold the plaintiffs’ undi-

vided interests in the Property. The sale proceeds did not

fully cover the plaintiffs’ obligations.

II. THE PROCEDURAL POSTURE OF THIS CASE

On June 29, 1976, the plaintiffs—Williamson, Lilley,

Wilson and Blake—filed suit in the United States Dis-

trict Court for the Northern District of Texas, seeking

to rescind the joint venture agreements they had signed

and cancel the notes they had executed, and to recover

the amounts they had already paid on the notes, plus

interest and attorneys’ fees. The complaint, as amended,

asserts claims based upon the 1933 Act, the 1934 Act,

the Texas Securities Act and common law omissions and

misrepresentations against Godwin Investments (the

manager of the Property), Fred Tucker, Gordon Tucker

and Good & Associates (the original owners of the

Property), and persons who in the past or now own

notes executed and delivered by the plaintiffs in payment

for the Property. Counterclaims were filed by the pres-

ent holders of the notes to collect deficiencies allegedly

owed by the plaintiffs following foreclosure sales of the

plaintiffs’ undivided interests in the Property.

In March and April, 1978, each of the defendants filed

a motion for sumary judgment, Fed.R.Civ.P. 56, or a

motion to dismiss for lack of subject matter jurisdiction,

Fed.R.Civ.P. 12(b) (1). The plaintiffs based their claim—

and consequently federal jurisdiction—on the inclusion

of both the joint venture interests they purchased and

the notes they executed within the definition of “security”

in section 2(1) of the 1933 Act, 15 U.S.C. § 77b(1)

(1976), and section 3(a) (10) of the 1934 Act, 15 U.S.C.

§ 78c(a) (10). After extensive discovery, all parties filed

briefs and the court heard oral argument on the motions.

On December 19, 1978, the district court dismissed this

entire suit. The judgment of the court was as follows:

IT IS ORDERED, ADJUDGED and DECREED that

Plaintiffs’ actions be, and they are hereby, dismissed

for want of subject matter jurisdiction; that, be-

cause of such dismissal of Plaintiffs’ actions, all

counterclaims and cross-actions are hereby dismissed

without prejudice for want of jurisdiction; and that

Defendants recover of the Plaintiffs their costs of

action.

The district court did not set forth in the judgment any

reasons for its decision. The court did, however, send a

letter to all counsel briefly explaining the decision:

I have heard your argument, eviewed the record and

your briefs and concluded that the joint venture

agreements were not securities. Securities and Ex-

change Commission v. W. J. Howey Co., 328 U.S.

293, 66 S.Ct. 1100, 90 L. Ed. 1244 (1946). Also, I

have concluded that the notes made by the Plaintiffs

are commercial in nature, not investments, in light

of the reasoning of the Fifth Circuit in the line of

cases culminating in National Bank of Commerce v.

All American Assurance Company [583 F.2d 1295

No. 76-3331 (5th Cir. Nov. 14, 1978).

I am therefore of the opinion that I have no juris-

diction in this case and that it must be dismissed.

To say the least, this letter from the district judge is a

short and ambiguous statement of the basis of his deci-

sion. The brevity of his explanation is all the more strik-

ing in the face of the complexity of the facts and issues

necessarily involved in the decision; this case comes to us

with over 3,000 pages of record in fourteen volumes, more

than fifty volumes of depositions, and briefs from six

separate parties.

In failing to state findings of fact and conclusions of

law, the district court presumably relied on the final sen-

tence of Fed.R.Civ.P. 42(a), which states that such find-

ings are unnecessary “on decisions of motions under Rules

12 or 56 or any other motion except as provided in Rule

41(b).”* Some courts have indeed read this provision to

2 Fed. R. Civ. P. 52 (a) provides:

set forth the findings of fact and conclusions of law which

constitute the grounds of its action. Requests for findings are

not necessary for purposes of review. Findings of fact shall

not be set aside unless clearly erroneous, and due regard shall

de given to the opportunity of the trial court to judge of

10a

exempt all decisions under the stated rules from the re-

quirement of findings. E. g., Lea v. Cone Mills Corp., 467

F.2d 277 (4th Cir. 1972) ; Robin Products Co. v. Tomecek,

465 F.2d 1193 (6th Cir. 1972); Interpace Corp. v. City

of Philadelphia, 438 F.2d 401 (3rd Cir. 1971). But one

commentator has argued that it would be more consistent

with the purpose of Rule 52(a) (and with the intent of

the Advisory Committee on Rules, which drafted the final

sentence of the Rule) to read the Rule as a whole to

require findings of fact whenever a decision rests on fac-

tual determinations. 5A J. Moore, Moore’s Federal Prac-

the credibility of the witnesses. The findings of a master, to

the extent that the court adopts them, shall be considered as

the findings of the court. If an opinion or memorandum of

decision is filed, it will be sufficient if the findings of fact and

conclusions of law appear therein. Findings of fact and con-

clusions of law are unnecessary on decisions of motions under

Rules 12 or 56 or any other motion except as provided in

Rule 41(b).

Fed.R.Civ.P. 41(b) provides:

Involuntary Dismissal: Effect Thereof. For failure of the

plaintiff to prosecute or to comply with these rules or any order

of court, a defendant may move for dismissal of an action or

of any claim against him. After the plaintiff, in an action

ed by the court without a jury, has completed the presenta-

tion of his evidence, the defendant, without waiving his right

to offer evidence in the event the motion is not granted, may

move for a dismissal on the ground that upon the facts and

the law the plaintiff has shown no right to relief. The court

as trier of the facts may then determine them and render

judgment against the plaintiff or may decline to render any

judgment until the close of all the evidence. If the court

renders judgment on the merits against the plaintiff, the court

shall make findings as provided in Rule 52(a). Unless the

court in its order for dismissal under this subdivision other-

wise specifies, a dismissal under this subdivision and any

dismissal not provided for in this rule, other than a dismissal

for lack of jurisdiction, for improper venue, or for failure to

join a party under Rule 19, operates as an adjudication upon

the merits.

lla

tice 725.08 (1980). See Horizons Titanium Corp v.

Norton Co., 290 F.2d 421 (Ist Cir. 1961); Interpace

Corp. v. City of Philadelphia, supra (dissent).* We need

not decide whether the district courts are required to

make findings of fact whenever a decision of a motion

is based on a factual determination, for we find infra

that the record cannot be construed in any way so as to

support the action taken by the district court in this case.

We do emphasize, however, that an explanation of the

basis of the district court’s decision can be invaluable

even in cases where Rule 52(a) clearly does not require

The findings required by Fed.R.Civ.P. 52(a) serve three im-

portant purposes: they aid the appellate court by helping it to

understand the basis of the trial court’s decision; they clarify

the precise issues which are decided by the court, in order to

allow the doctrines of collateral estoppel and res judicata to

operate in future cases; and they insure care on the part of the

trial judge in ascertaining the facts. See 9 C. Wright & A. Miller,

Federal Practice and Procedure § 2571, at 679-90 (1971); 5A

Moore’s Federal Practice . 52.06 (1) (1980). All three of these

purposes are served whenever the district court makes a decision

on the basis of factual determinations, even when that decision

is on a motion under Rule 12. Most courts before 1946 therefore

held that findings of fact were required on decisions of motions

which rested on factual determinations, i. e., motions under Rule 12

which were based on disputed facts, although findings need not

be made on decisions of motions which did not rest on factual

determinations, i.e., motion for summary judgment, Rule 56,

and motions directed at the pleadings under Rule 12. See 4 Federal

Rules Digest 52a.1 (2d ed. 1955). The final sentence of Rule 52 (a)

was added to the rule in 1946. The Notes of the Advisory Com-

mittee on 1946 Amendments to the Rules indicate that its purpose

was to incorporate existing judicial interpretations into the rule.

See Fed.R.Civ.P. 52(a), 28 U.S.C.A. at 18 (1971); Fed.R.Civ.P.

41(b), 28 U.S.C.A. at 335 (1971). Moreover, although we have

not specifically required Rule 52(a) findings for decisions on mo-

tions under Rule 12, we have required them for decisions on mo-

tions to hold a party in civil contempt (which also fall within

the final sentence of Rule 52(a)). Sanders v. Monsanto Co., 574

F.2d 198 (5th Cir. 1978).

12a

findings of fact.“ A motion which is based purely on the

pleadings and on undisputed facts sometimes implicates

complicated factual and legal issues, or rests on a lengthy

and difficult record. We have repeatedly stated that a

detailed statement of the reasons for such a decision

would be most helpful to appellate review. Huckeby v.

Frozen Food Express, 555 F.2d 542, 545 n.4 (5th Cir.

1977) ; Melancon v. Insurance Co. of North America, 482

F.2d 1057, 1059 n.4 (5th Cir. 1973); Steed v. Central

Georgia Railway Co., 477 F.2d 1303, 1305 (5th Cir.

1973) ; United States ex rel. Industrial Investment Corp.

v. Paul Hardeman, Inc., 320 F.2d 115, 116 (5th Cir.

1963).

In this case it is not clear what action the district court

took or whether it based its decision on a resolution of

disputed factual issues. Several important statements are

missing from thé district court’s order and letter of ex-

planation. First, the order is not explicitly entered under

either Rule 12 (b) (1) or Rule 56, the two separate mo-

tions before the court. Second, it is not entirely clear

whether the court based its decision on the face of the

plaintiffs’ complaint or instead relied on facts presented

in the record, and if the latter, whether it relied only on

undisputed facts or in addition made certain factual de-

terminations. The judge’s letter does state that he “re-

viewed the record;” but to the extent that this means

that the court relied on facts not stated in the complaint,

it is not clear whether the court based its decision purely

on undisputed facts or instead made some factual deter-

In Huckeby v. Frozen Food Express, 555 F.2d 542, 545 n.4

(5th Cir. 1977), we stated that findings of fact are not required

in decisions of motions under the rules mentioned in the final

sentence of Rule 52(a). Rut there were no disputed facts in

Huckeby, and therefore the court did not decide whether the re-

quirement attaches to decisions which are based on factual deter-

minations. In any case it is clear that findings are not required

where a motion is based purely on the pleadings and on undisputed

facts.

13a

mination on the basis of conflicting depositions, affidavits

and documents. And third, the district court did not

state the standard by which it decided the motions before

it. All of this makes our task a good deal more difficult.

Before reaching the validity of the district court’s judg-

ment, we must first determine (1) the action which it

took (that is, precisely which motion it granted); (2)

the factual basis of the decision; and (3) the standard

which is appropriate to the action taken.

The Action Taken by the District Court

A motion to dismiss under Rule 12 (b) (1) for lack of

subject matter jurisdiction and a motion for summary

judgment under Rule 56 were both properly before the

district court. Although Rule 56 requires that a motion

for summary judgment be filed at least ten days before

a hearing on it and that the opposing party have the

opportunity to present affidavits in opposition, it appears

that these requisites were met; the Rule 56 motions were

filed months before the hearing and were met with ex-

tensive discovery and affidavits from a number of parties.

Moreover, the record in the case and the arguments made

to the court could conceivably have formed the basis of

either motion; the applicability of the 1933 Act and the

1934 Act to the transactions at issue is the basis of both

federal jurisdiction and the merits of the plaintiffs’ cause

of action.

It is arguable—on the basis of the record in this case

and the arguments made to the district court—that the

trial judge intended to enter an order for summary judg-

ment, and we note that we are not bound by the label the

district court puts on its action where underlying facts

indicate that a different action was in fact intended. Tuley

v. Heyd, 482 F.2d 590 (5th Cir. 1973). Nevertheless we

believe that the order in this case must be considered as

the granting of a motion to dismiss for lack of subject

14a

matter jurisdiction, Rule 12 (b) (1). The order of the

district court states that the action is “dismissed for want

of subject matter jurisdiction” and dismisses all counter-

claims and cross-actions “without prejudice for want of

jurisdiction.” The letter from the district judge concludes

that he is “of the opinion that I have no jurisdiction in

this case and that it must be dismissed.” On this basis it

seems clear that the judge did not intend to rule on the

merits of the plaintiffs’ claims. Given the judge’s consis-

tent reference to the lack of subject matter jurisdiction, a

stronger showing of a different intent would have to be

shown before we could recharacterize the action of the

district court.

The Factual Basis of the District Court’s Decision

A motion to dismiss for lack of subject matter juris-

diction, Rule 12(b) (1), can be based on the lack of juris-

diction on the face of the complaint. If so, the plaintiff

is left with safeguards similar to those retained when a

Rule 12 (b) (6) motion to dismiss for failure to state a

claim is raised—the court must consider the allegations in

the plaintiff’s complaint as true. E.g., Spector v. L Q

Motor Inns, Inc., 517 F.2d 278, 281 (5th Cir. 1975);

Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir. 1970).

But the two motions are treated quite differently when

matter outside the complaint is the basis of the attack.

Rule 12(b) provides that a motion to dismiss for failure

to state a claim will be automatically converted into a

motion for summary judgment (Rule 56) if the court

considers matters outside the pleadings.’ This provides

5 The relevant portion of Rule 12 (b) provides:

If, on a motion asserting the defense numbered (6) to dismiss

for failure of the pleading to state a claim upon which relief

can be granted, matters outside the pleading are presented

to and not excluded by the court, the motion shall be treated

as one for summary judgment and disposed of as provided

15a

an additional safeguard for the plaintiff, for, in addition

to having all his allegations taken as true, the trial court

cannot grant the motion unless there is no genuine issue

of materia] fact. This protection is not, however, provided

the plaintiff who faces dismissal for lack of subject matter

jurisdiction. As the Court of Appeals for the Third Cir-

cuit has explained:

The facial attack [on subject matter jurisdiction]

does offer similar safeguards to the plaintiff: the

court must consider the allegations of the complaint

as true. The factual attack, however, differs greatly

for here the trial court may proceed as it never could

under 12 (b) (6) or Fed.R.Civ.P. 56. “ecause at issue

in a factual 12(b)(1) motion is the trial court’s

jurisdiction—its very power to hear the case—there

is substantial authority that the trial court is free

to weigh the evidence and satisfy itself as to the

existence of its power to hear the case. In short, no

presumptive truthfulness attaches to plaintiff’s alle-

gations, and the existence of disputed material facts

will not preclude the trial court from evaluating for

itself the merits of jurisdictional claims.

Mortensen v. First Federal Savings and Loan Associa-

tion, 549 F.2d 884, 891 (3rd Cir. 1977). The distinction

between factual Rule 12 (b) (1) motions and factual Rule

12(b) (1) motions and factual Rule 12(b) (6) motions

is rooted in the unique nature of the jurisdictional ques-

tion. It is elementary that a district court has broader

power to decide its own right to hear the case than it

has when the merits of the case are reached. Jurisdic-

tional issues are for court—not a jury—to decide,

whether they hinge on legal or factual determinations.

See 5 C. Wright & A. Miller, Federal Practice and Pro-

cedure §1350 (1969). The unique power of district

in Rule 56, and all parties shall be given reasonable oppor-

tunity to present all materia] made pertinent to such a motion

by Rule 56.

16a

courts to make factual findings which are decisive of

jurisdiction is, therefore, not disputed. Land v. Dollar,

330 U.S. 731, 735 n.4, 67 S.Ct. 1009, 1011 n.4, 91 L.Ed.

1209 (1947); Menchaca v. Chrysler Credit Corp., 613

F.2d 507 (5th Cir. 1980), cert. denied, —— US. ——,

101 S.Ct. 358, 66 L.Ed.2d 217 (1980); Thornhill Pub-

lishing Co., Inc. v. General Telephone & Electronics Corp.,

594 F.2d 730 (9th Cir. 1979); McLain v. Real Estate

Board of New Orleans, Inc., 583 F.2d 1315 (5th Cir.

1978), vacated on other grounds, 444 U.S. 232, 100 S.Ct.

502, 62 L.Ed.2d 441 (1980) ; Mortensen v. First Federal

Savings and Loan Association, supra; Exchange National

Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126

(2d Cir. 1976); State of Alabama ex rel. Bazley v.

Woody, 473 F.2d 10 (5th Cir. 1973); Rosemound Sand

and Gravel Co. v. Lambert Sand and Gravel Co., 469 F. 2d

416 (5th Cir. 1972). This means that the district court

is not limited to an inquiry into undisputed facts. It

may hear conflicting written and oral evidence and de-

cide for itself the factual issues which determine juris-

diction. Thus, in Menchaca v. Chrysler Credit Corp.,

supra, we upheld a dismissal for lack of subject matter

jurisdiction which was based in part on the district

court’s determination—on the basis of a written record

and the testimony of all parties—of factual issues that

were in dispute.

The district court consequently has the power to dis-

miss for lack of subject matter jurisdiction on any one

of three separate bases: (1) the complaint alone; (2)

the complaint supplemented by undisputed facts evidenced

in the record; or (3) the complaint supplemented by un-

disputed facts plus the court’s resolution of disputed

facts.

Which of these is the foundation of the district court’s

decision is relevant to appellate review in several ways.

First, if the court’s decision rests on one of the first two

of these bases—in which case the court need not decide

among conflicting factual positions—our review is limited

17a

to determining whether the district court’s application of

the law is correct and, if the decision is based on undis-

puted facts, whether those facts are indeed undisputed.

But if the court has relied in addition on its own deter-

mination of disputed factual issues, we must then review

those findings as we would any other district court reso-

lution of factual disputes—we must accept the district

court’s findings unless they are “clearly erroneous.”

McLain v. Real Estate Board of New Orleans, Inc., supra

at 1322-23; Krashov v. Dinan, 465 F.2d 1298 (38rd Cir.

1972) ; Walden v. Broce Construction Co., 357 F.2d 242

(10th Cir. 1966) ; Hill v. Gregory, 241 F.2d 612 (7th Cir.

1957) .°

Second, if the district court bases its decision on its

own resolution of disputed facts it may be required, at

the very least, to identify and explain the factual deter-

minations it has made.

Third, the path which the district court takes to its

jurisdictional decision can limit its procedural discretion.

It is true that the factual determinations decisive of a

motion to dismiss for lack of jurisdiction are within the

court’s power, and that no right to a jury trial exists

with regard to such issues. Menchaca v. Chrysler Credit

Corp., supra, at 511; Rosemownd Sand and Gravel Co.

v. Lambert Sand and Gravel Co., swpra at 418. But still

the district court must give the plaintiff an opportunity

for discovery and for a hearing that is appropriate to

the nature of the motion to dismiss. Thus, some courts

have refused to grant such a motion before a plairiitf

has had a chance to discover the facts necessary to estab-

lish jurisdiction. Surpitski v. Hughes-Keenan Corp., 362

F.2d 254 (Ist Cir. 1966) ; Collins v. New York Central

* Where the attack on jurisdiction implicates the merits of the

plaintiff's federal cause of action, the district court’s role in

judging the facts may be more limited and our role in reviewing

the court’s findings may be somewhat greater. Thus, the “clearly

erroneous” standard of review may not be applicable in all such

cases. See infra note 10 & accompanying text.

18a

System, 327 F.2d 880 (D.C. Cir. 1963). Other courts

have refused to uphold such a motion where—absent an

incurable defect in the complaint—the plaintiff has had

no opportunity to be heard on the factual matters under-

lying jurisdiciton. Harmon v. Superior Court of State

of California in and for the County of Los Angeles, 307

F.2d 796 (9th Cir. 1962) ; Topping v. Fry, 147 F.2d 715

(7th Cir. 1945). And, although Fed.R.Civ.P. 43(e) al-

lows factual motions to be heard on the basis of affidavits

alone, a judge may be required to hear oral testimony

where the facts are complicated and testimony would be

helpful. As we explained in Sanders v. Monsanto Co.,

supra at 200 (holding, inter alia, that a civil contempt

motion cannot be decided under Rule 43 (e)):

Historical experience has taught us that testimonial

evidence has the highest reliability because the credi-

bility of the witness can be evaluated, and the factual

issues narrowed by cross-examination. Because the

contempt proceedings depend so heavily on complex

facts not readily perceivable from the record, an oral

hearing within the scope of Rule 43(a) is necessary.

Insofar as the defendant’s motion to dismiss raises

factual issues, the plaintiff should have an opportunity

to develop and argue the facts in a manner that is ade-

quate in the context of the disputed issues and evidence.

For all of these reasons it is important—and some-

times crucial—that the district court state the basis (in-

7 Fed.R.Civ.P. 43 deals with the taking of testimony. In per-

tinent part, it provides:

(a) Form. In all trials the testimony of witnesses shall be

taken orally in open court, unless otherwise provided by an

Act of Congress or by these rules, the Federal Rules of Evi-

dence, or other rules adopted by the Supreme Court.

(e) Evidence on Motions. When a motion is based on facts

not appearing of record the court may hear the matter on

affidavits presented by the respective parties, but the court

may direct that the matter be heard wholly or partly on oral

testimony or deposition.

19a

cluding any factual determinations made) of a decision

to dismiss for lack of subject matter jurisdiction. In the

absence of such a statement, an appellate court can decide

the appeal only with great difficulty and only in two

limited circumstances. First, an appellate court may de-

termine for itself, on the basis of the record and any

statements made by the district court, what the basis of

the district court’s decision was and what, if any, implicit

factual findings it made. On a record as long and as

complicated as the one in this case, such an attempt would

be little more than guesswork and we decline to engage

in such guesswork. Second, an appellate court may re-

verse a decision of the district court dismissing a case

for lack of subject matter jurisdiction if it finds that the

record cannot be construed in any way so as to support

such a dismissal.* See Horizons Titanium Corp. v. Nor-

ton Co., supra at 424. On the basis of our discussion

below, we conclude that this is an appropriate way to

resolve this case. For the purpose of this analysis, we

will assume that any disputed material facts were de-

cided by the district court in favor of its action. Any

decisions as to disputed material facts which must have

been made by the district court will be discussed in

greater detail below, following our analysis of the basic

legal issues involved in this case.

The Standard by Which This Motion to Dismiss

for Lack of Subject Matter Jurisdiction

Should be Decided

The Supreme Court has enunciated a strict standard

for dismissals for lack of subject matter jurisdiction

when the basis of jurisdiction is also an element in the

8 Conversely, were an appellate court to find that dismissal for

lack of subject matter jurisdiction would be appropriate if dis-

puted factual issues had been resolved by the district court in a

particular way, and the district court had failed to explain its

resolution of such factual issues, then the appellate court would

have to remand for such an explanation before it could exercise

its appellate function.

20a

plaintiff’s federal cause of action. In Bell v. Hood, 327

U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1945) (implied

right of action under the Fourth and Fifth Amend-

ments), the Court explained:

Jurisdiction, therefore, is not defeated as respond-

ents seem to contend, by the possibility that the aver-

ments might fail to state a cause of action on which

petitioners could actually recover. For it is well set-

tled that the failure to state a proper cause of ac-

tion calls for a judgment on the merits and not for a

dismissal for want of jurisdiction. Whether the com-

plaint states a cause of action on which relief could

be granted is a question of law and just as questions

of fact it must be decided after and not before the

court has assumed jurisdiction over the controversy.

If the court does later exercise its jurisdiction to de-

termine that the allegati ns in the complaint do not

state a ground for relief, then dismissal of the case

would be on the merits, not for want of jurisdic-

tion. . The previously carved out exceptions are

that a suit may sometimes be dismissed for want of

jurisdiction where the alleged claim under the Con-

stitution or federal statutes clearly appears to be

immaterial and made solely for the purpose of ob-

taining jurisdiction or where such a claim is wholly

insubstantial and frivolous. The accuracy of calling

these dismissals jurisdictional has be.n questioned.

327 U.S. at 682, 66 S.Ct. at 776 (emphasis added).

Accord, Duke Power Co. v. Carolina Environmental Study

Group, 438 U.S. 59, 98 S.Ct. 2620, 57 L.Ed.2d 595

(1978) ; Hagans v. Lavine, 415 U.S. 528, 94 S.Ct. 1372,

39 L.Ed.2d 577 (1974) ; Oneida Indian Nation v. County

of Oneida, 414 U.S. 661, 94 S.Ct. 772, 39 L.Ed.2d 73

(1974) ; Powell v. McCormack, 395 U.S. 486, 512-16, 89

S.Ct. 1944, 1959-61, 23 L.Ed.2d 491 (1969); Baker v.

Carr, 369 U.S. 186, 198-204, 82 S.Ct. 691, 699-703, 7

L.Ed.2d 663 (1962). Where the defendant’s challenge

21a

to the court’s jurisdiction is also a challenge to the ex-

istence of a federal cause of action, the proper course

of action for the district court (assuming that the plain-

tiff’s federal claim is not immaterial and made solely

for the purpose of obtaining federal jurisdiction and is

not insubstantial and frivolous) is to find that jurisdic-

tion exists and deal with the objection as a direct at-

tack on the merits of the plaintiff’s case.“ The Supreme

Court has made it clear that in that situation no purpose

is served by indirectly arguing the merits in the context

of federal jurisdiction. Judicial economy is best pro-

moted when the existence of a federal right is directly

reached and, where no claim is found to exist, the case

is dismissed on the merits. This refusal to treat indirect

attacks on the merits as Rule 12(b) (1) motions provides,

moreover, a greater level of protection to the plaintiff

who in truth is facing a challenge to the validity of his

claim: the defendant is forced to proceed under Rule

12(b) (6) (for failure to state a claim upon which re-

lief can be granted) or Rule 56 (summary judgment)

both of which place greater restrictions on the district

court’s discretion. The court must take the plaintiff’s

allegations as true when a Rule 12 (b) (6) motion is

raised, and in addition must determine that no genuine

issue of material fact exists when a Rule 56 motion is

granted. As discussed above, however, a Rule 12(b) (1)

motion can be based on the court’s resolution of disputed

facts as well as on the plaintiff’s allegations and undis-

puted facts in the record. Therefore as a general rule a

claim cannot be dismissed for lack of subject matter

jurisdiction because of the absence of a federal cause of

„ Conversely, a jurisdictional attack which does not implicate

the merits of any federal cause of action is not bound by the

strict Bell v. Hood standard. A district court may find, for ex-

ample, that the basis for diversity jurisdiction is absent without

finding that the underlying state claim is “immaterial” or “in-

substantial.”

22a

action. The exceptions to this rule are narrowly drawn,

and are intended to allow jurisdictional dismissals only

in those cases where the federal claim is clearly immate-

rial or insubstantial. As we stated in Bell v. Health-

Mor, Inc., 529 F.2d 342 (5th Cir. 1977), the Bell v.

Hood standard is met only where the plaintiff’s claim

“has no plausible foundation” or “is clearly foreclosed by

a prior Supreme Court decision.”

The question in this case is whether certain joint ven-

ture interests and certain promissory notes are “securi-

ties” within the meaning of the 1933 Act and the 1934

Act. We have already specifically held that the definition

of the term “security” in the context of a suit based on

10 This standard tests the legal sufficiency of the plaintiff's cause

of action. But an attack on jurisdiction might challenge instead

the factual basis of the plaintiff’s claim. Where the defendant ad-

mits that a federal claim exists on facts stated in the complaint

but argues that these facts cannot be established, the question

arises whether these jurisdictional facts (which admittedly im-

plicate the merits of the plaintiff's claim) must be accepted for

jurisdictional purposes unless the evidence to support them is

clearly insubstantial. One might argue that the Bell v. Hood

reluctance to dismiss for lack of jurisdiction on the basis of argu-

ments which go to the merits of the case is relevant whether the

jurisdictional attack is legal or factual. But in McLain v. Real

Estate Board of New Orleans, Inc., supra at 1322-23, we held that

where the jurisdictional issue can be extricated from the merits

and tried as a separate issue the findings of the district court must

be accepted unless they are clearly erroneous. See also Menchaca

v. Chrysler Credit Corp., supra (accepting the findings of the dis-

trict court, but not discussing the appropriate standard). This

holding indicates that at least in some circumstances the standards

are not the same for legal and factual attacks on jurisdiction which

implicate the merits. But McLain did not deal with factual find-

ings in cases where the jurisdicational issue is so intertwined with

the merits that it cannot be separately addressed, and did not con-

sider the appropriate standard for the district court’s evaluation

of the evidence. We need not reach these issues today, for we find

that a dismissal for lack of jurisdiction was improper even if all

disputed material facts are resolved against the plaintiffs.

23a

the federal securities laws may reach the merits of the

case and thereby limit the court’s discretion to dismiss

for lack of subject matter jurisdiction. Hilgeman v. Na-

tional Insurance Co. of America, 547 F.2d 298 (5th Cir.

1977) (whether certain insurance policies were securi-

ties) ; Bell v. Health-Mor, Inc., supra (whether a referral

sales agreement is a security). In this case it is clear

that the jurisdictional issue reaches the merits of the

plaintiffs’ case; if the joint venture interests and notes

are not securities, there is not only no federal jurisdic-

tion to hear the case but also no federal cause of action

on the stated facts.

If this case was properly dismissed for lack of sub-

ject matter jurisdiction, it must therefore fall within the

exceptions to Bell v. Hood’s general prohibition of juris-

dictional dismissals which implicate the merits of the

plaintiffs’ case. That is, the plaintiffs’ claim must “clearly

appear to be immaterial and made solely for the purpose

of obtaining jurisdiction,” or must be “wholly insub-

stantial and frivolous.” In the discussion to follow we

find (1) that the plaintiffs have a difficult factual burden

if they are to establish that the joint venture interests

they purchased are securities, and (2) that on the basis

of undisputed facts the notes are not securities. We

need not decide whether the plaintiffs’ assertion that the

notes are securities is so immaterial or insubstantial as

to allow a dismissal for lack of jurisdiction, for the plain-

tiffs’ assertion that the joint venture interests are securi-

ties is clearly not so immaterial or insubstantial. Even

assuming that the district court found disputed material

facts against the plaintiffs, we cannot say that their argu-

ment “has no plausible foundation” or “is clearly fore-

closed by a prior Supreme Court decision.” If the answer

in this case were that easy the substantive issues could

have been resolved in an opinion a good deal shorter

than this one Therefore we must reverse the district

court’s order dismissing this case for lack of subject

24a

matter jurisdiction. However, the substantive issues pre-

sented by the district court’s decision will remain to be

disposed of by the district court. Therefore, in the inter-

ests of judicial economy, see Bell v. Health-Mor, Inc., 549

F.2d at 345, we will discuss the substantive questions at

issue in this case.

III. THE JOINT VENTURE INTERESTS

The plaintiffs argue that their interests in the joint

ventures were “investment con ” and therefore “se-

curities” within the definitions stated in section 2(1) of

the 1933 Act, 15 U.S.C. f 77b(1), and in section 3 (a) (10)

of the 1934 Act, 15 U.S.C. § 78e (a) (10). We must

therefore begin where all analyses of investment con-

tracts start, with Securities & Exchange Commission v.

W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed.

1244 (1946) (appeal from a judgment denying an in-

junction sought by the S.E.C.). In Howey the Supreme

11 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 inter-

est or participation in any profit sharing agreement, collateral

trust certificate, preorganization certificate or subscription,

transferable share, investment contract, voting-trust certifi-

cate, 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.

Section 3(a)(10) of the Securities Exchange Act of 1934 corre-

sponds almost exactly with this definition. It adds, however, an

exception to the above:

[The term “security”] shall not include currency or any note,

draft, bill of exchange, or banker’s acceptance which has a

maturity at the time of issuance of not exceeding nine months,

exclusive of days of grace, or any renewal thereof the maturity

of which is likewise limited.

25a

Court held that an offering of individual rows of trees in

a citrus grove development, coupled with a contract for

cultivating and marketing the trees and remitting the

net proceeds to the investor, was an offering of an “in-

vestment contract.” The Court recognized that “some-

thing more than fee simple interests in land, something

different from a farm or orchard coupled with manage-

ment services” was needed to convert these sales of land

into investment contracts. The Court found “something

more” in the seller’s plan to gather the plots together

and manage them as one and in the dependence of the

investors on that common enterprise. The seller explained

to the investors that it was uneconomic to purchase the

land without the management contract, and 85% of the

land sold was so covered. Most investors were nonresi-

dents and lacked the necessary knowledge, skill and

equipment to care for the trees. The investors realized

that they were part of a larger scheme, the success of

which depended on the company’s ability to manage a

large grove. They were entirely dependent, therefore, on

the efforts and abilities of the seller for any return on

their investment. See also Securities & Exchange Com-

mission v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64

S.Ct. 120, 88 L.Ed. 88 (1943) (sale of oil leases condi-

tioned on promoter’s agreement to drill exploratory well)

(appeal from a judgment denying an injunction sought by

the S. E. C.).

In deciding Howey the Court defined an investment

contract as follows:

In other words, 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 a promoter or a third party.

328 U.S. at 298-99, 66 S.Ct. at 1102-1103. As this court

has recognized, the test requires three distinct elements:

26a

(1) an investment of money; (2) in a common enter-

prise; and (3) on an expectation of profits to be derived

solely from the efforts of individuals other than ‘he in-

vescor. Securities & Exchange Commission v. Koskot In-

ternational, Inc., 497 F.2d 473 (5th Cir. 1974) (pyramid

franchise scheme) (reversing a dismissal for failure to

state a claim). The joint venture interests in this case

involve the most often litigated of these factors—the

expectation of “profits solely from the efforts of [others].”

Although the Court used the word “solely” in the

Howey decision, it should not be interpreted in the most

literal sense. The Supreme Court has repeatedly em-

phasized that economic reality is to govern over form

and that the definitions of the various types of securities

should not hinge on exact and literal tests. International

Brotherhood of Teamsters, Chauffeurs, Warehousemen &

Helpers of America v. Daniel, 439 U.S. 551, 99 S.Ct. 790,

796, 58 L.Ed.2d 808 (1979); United Housing Founda-

tion, Inc. v. Forman, 421 U.S. 837, 848, 95 S.Ct. 2051,

2058, 44 L.Ed.2d 621 (1975) ; Tcherepnin v. Knight, 389

U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967) ;

Howey, supra, 328 U.S. at 298, 66 S.Ct. at 1102.

A broad definition of “solely” was developed in Secu-

rities & Exchange Commission v. Glenn W. Turner

Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), cert. de-

nied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973)

(appeal front the granting of a preliminary injunction

sought by the S.E.C.). There the Court of Appeals for

the Ninth Circuit was faced with a pyramid franchise

scheme which depended for its success on the efforts of

the promoters (who were to actually sell the product,

a series of motivational seminars called “Dare to be

Great”) but nevertheless required an effort on the part

of the investors (who received a commission for new

prospects brought to the promoters). Although profits

were not strictly to come “solely” from the efforts of

27a

the promoters who gave the sales pitch and ran the

program, the court held that the scheme was an invest-

ment contract:

We hold, however, that in light of the remedial

nature of the legislation, the statutory policy of af-

fording broad protection to the public, and the Su-

preme Court’s admonitions that the definition of

securi zes should be a flexible one, the word “solely”

should not be read as a strict or literal limitation

on the definition of an investment contract, but

rather must be construed realistically, so as to in-

clude within the definition those schemes which in-

volve in substance, if not form, securities

Strict interpretation of the requirement that profits

to be earned must come “solely” from the efforts of

others has been subject to criticism .... Adherence

to such an interpretation could result in a mechani-

cal, unduly restrictive view of what is and what

is not an investment contract. It would be easy to

evade by adding a requirement that the buyer con-

tribute a modicum of effort. Thus the fact that

the investors here were required to exert some

efforts if a return were to be achieved should not

automatically preclude a finding that [the scheme]

is an investment contract. To do so would not serve

the purpose of the legislation. Rather we adopt a

more realistic test, whether the efforts made by

those other than the investor are the undeniably sig-

nificant ones, those essential managerial efforts which

affect the failure or success of the enterprise.

474 F.2d at 482 (emphasis added).

This court was faced with an identical scheme (in

fact, a subsidiary of Glenn W. Turner Enterprises) in

Securities and Exchange Commission v. Koskot Inter-

national, Inc., supra. After considering the historical

28a

derivation of the Howey standard and its development

in recent years, we adopted the test explicated by the

Ninth Circuit in Turner and held the scheme to be an

investment contract. 497 F.2d at 479-85. Moreover, the

Supreme Court has altogether omitted the word “solely”

in its most recent formulation of the investment contract

definition. In United Housing Foundation, Inc. v. For-

man, supra (holding that stock in a housing cooperative

that entitled the owner to the use of an apartment, but

not to any cash return, was not a security) (appeal from

the granting of a motion to dismiss for lack of subject

matter jurisdiction), the Court quoted the investment

contract definition from Howey and restated it as “an

investment in a common venture premised on a reason-

able expectation of profits to be derived from the entre-

preneurial or managerial efforts of others.” 421 U.S. at

852, 95 S.Ct. at 2060.

The plaintiffs argue that they meet this liberalized

form of the third prong of the Howey test by virtue of

the signficant role left to Godwin Investments in the

promotional materials:

The significance of the manager’s efforts to the

enterprise involved in this case are acknowledged

by promotional sales materials and deposition testi-

mony .... The managers were to plan uses for the

property, obte’ zoning changes, refinance, manage

condemnation proceedings, and develop, lease or sell

the property to return a profit.

Appellants’ Brief 31. They argue that, since these cen-

tral tasks were to be performed by the manager, the

scheme allowed the investors to rely on others for “those

essential managerial efforts which affect the failure or

success of the enterprise,” and, accordingly, that the

venture interests were securities under Howey and its

progeny. However, whether the role actually played by

the plaintiffs in the management of the Property was

so significant that their joint venture interests cannot

be securities is an issue that was not developed to any

significant degree by any of the litigants in the district

court. None of the affidavits or briefs in support of the

defendants’ motions under Rules 12(b) (1) and 56 dis-

cusses the extent of the plaintiffs’ actual participation

in the management of the Property.“ Instead, the battle

was joined over the question whether the powers possessed

by the joint venturers in the joint venture agreements

were so significant that, regardless of the degree to

which such powers were exercised, the investments could

not have been premised on a reasonable expectation of

profits to be derived from the management efforts of

others. The issue, then, as posed by the parties, is

whether meaningful powers possessed by the venturers

under the joint venture agreements are enough to pre-

clude as a matter of law a finding that the venture in-

terests were securities.

Although this issue has not previously arisen in the

Fifth Circuit, a number of courts elsewhere have dealt

with a variety of situations in which investors retained

substantial control but in fact remained passive. The

question has been faced in the context of franchise

agreements, the sale of oil and gas leases, the sale of

real estate, and the sale of partnership or joint venture

interests. Insofar as the power retained by the investors

is a real one which they are in fact capable of exercising,

courts have uniformly refused to find securities in such

cases.

12 Were there any indication that the district court had based its

decision on the involvement of the plaintiffs in the operation of

the Property, we might have found it necessary to remand this

case to the district court for a statement of its factual determina-

tions in this regard, for a finding of significant participation by

the plaintiffs in the management of the venture might indeed pro-

vide the basis of a motion to dismiss for lack of subject matter

jurisdiction. But that issue was clearly not developed before the

district court and we therefore need not reach it now.

30a

In Mr. Steak, Inc. v. River City Steak, Inc., 460 F.2d

666 (10th Cir. 1972), affirming 334 F.Supp. 640 (D.Colo.

1970), the Court of Appeals for the Tenth Circuit affirmed

a dismissal, for failure to state a claim, of alleged fed-

eral securities claims arising out of a franchise agree-

ment which envisioned substantial operation by the fran-

chisor but left some meaningful control in the hands of

the franchisee. The agreement provided that the fran-

chisor (Mr. Steak) would construct and equip the estab-

lishment, train the manager, set a number of restrictions

on the operation of the restaurant (including product

standards, initial hiring, uniforms and the opening of

the restaurant), manage the franchise’s financial affairs

and in fact retain the right to dismiss the manager for

non-compliance with its requests. The franchisee (River

City Steak) retained the right to direct the daily opera-

tion of the restaurant, and had the power to dismiss

the manager and other employees. In fact, the franchisee

exercised none of its powers and left the entire operation

of the restaurant to the franchisor. Nevertheless, the

district court—after adopting a liberal interpretation of

the Howey standard—refused to find this arrangement

a security :

[The agreements] contemplated that River City

Steak would play an active, if severely circum-

scribed, role in the conduct of the restaurant. It

is also evident that neither a manager nor sub-

sidiary personnel would be totally unresponsive to

River City Steak, which had the power to terminate

their employment. In fact, a reading of both con-

tracts suggests to us that the role of the franchisee

was envisioned as a flexible one, depending upon the

business expertise and inclination of the franchisee.

Most duties mentioned in the franchise agreement

could be performed by the franchisee, or delegated

to the manager. That River City Steak delegated

performance of those duties and ignored daily opera-

3la

tions does not affect the nature of its powers, nor

change the essential fact that River City Steak aban-

doned what rights of control and participation it did

have.

324 F.Supp. at 645, quoted at 460 F.2d at 669.

The Tenth Circuit has since been faced with a case

analogous to Mr. Steak, Inc., but in the context of the

sale of an oil and gas interest. In Ballard & Cordell

Corporation v. Zoller & Dannenberg Exploration, Ltd.,

544 F.2d 1059 (10th Cir. 1976) (appeal from the dis-

missal, for failure to state a claim, of counterclaims

based on federal securities law), cert. denied, 431 U.S.

965, 97 S.Ct. 2921, 53 L.Ed.2d 1060 (1977), the de-

fendants (two oil exploration firms) had offered to

purchase a 50% working interest in two wells and lease

units; after the plaintiffs accepted the offer, the defend-

ants tried to back out, and the plaintiffs sued to enforce

the contract. The defendants then asserted in a counter-

claim that the transaction created an investment contract

because of their dependence on the independent opera-

tor who held the lease.“ No return was possible unless

the operator chose to drill. But the court denied the

existence of an investment contract, relying on terms

in the operating agreement which gave the defendants

considerable power over the operation. The agreement

allowed them to withhold their consent for the incurrence

of operating expenses over $5,000, for the drilling of

new wells on the unit area, and for the reworking,

plugging back or deepening of existing wells. In the

event of disgreement, a dissenting party would be al-

lowed not to participate in the proposed operation, and

18 Subsequent to Mr. Steak, Inc. but prior to Ballard & Cordell

the Tenth Circuit specifically adopted the wording of the Turner

standard which the Fifth Circuit, as discussed above, has adopted

in Koshot. Crowley v. Montgomery Ward & Co., 570 F.2d 875

(10th Cir. 1975).

32a

the defendants were also to participate in the selection

of a new operator, should the present one sell his rights.

The Court of Appeals for the Eighth Circuit has twice

faced the case of a purchaser of real estate who simul-

taneously with the purchase enters into a contract of

management with the vendor, yet retains ultimate con-

trol of the operation. In Fargo Partners v. Dain Corp.,

540 F.2d 912 (8th Cir. 1976) (appeal from a dismissal

for lack of subject matter jurisdiction), the plaintiff

purchased a 248-unit apartment complex in a transaction

in which it signed a management agreement granting

back to the vendor an exclusive right to manage the

property, including all of the marketing, renting, main-

tenance and financial activities attendant to running an

apartment complex. The agreement provided, however,

that it could be cancelled by the purchaser upon thirty

days’ notice. The court found that no investment con-

tract was created by the transaction:

We recognize that the statement in Howey that in

an investment contract the investor relies solely

on the efforts of the promoter or another is not taken

as a literal requirement of the test. Where

the investors’ duties were nominal or insignificant,

their roles were perfunctory or ministerial, or they

lacked any real control over the enterprise, the

courts have found investment contracts. It is

clear, however, that Fargo’s role was a sign Scant

one despite the management contract. Fargo retained

ultimate control of the operation of the apartment

complex by reserving the right to fire Candletree

as its manager on thirty days’ notice. Whether it

chose to exercise that right or was content to give

Candletree a free hand is irrelevant; the power to

control the business was in Fargo’s hands. Mr.

Steak, Inc. v. River City Steak, Inc., 460 F.2d 666,

670 (10th Cir. 1972).

33a

540 F.2d at 914-15 (emphasis in original). The court

came to the same conclusion when faced with a similar

transaction involving some of the same parties but more

seriously restricting the purchaser’s right to change the

management. In Schultz v. Dain Corp., 568 F.2d 612 (8th

Cir. 1978) (appeal from a dismissal for lack of subject

matter jurisdiction), the apartment complex purchaser

entered into a three-year nonrevocable management con-

tract with the vendors. Still the transation did not create

an investment contract. The purchaser had negotiated

the contract himself and delegated his responsibility to

an agent for a limited period of time, after which he was

free to negotiate a new management arrangement. There-

fore the investor had “retained ultimate control over the

apartment complex” and had not purchased a security.

These cases from the Tenth and Eighth Circuits—deal-

ing in turn with the purchase of franchise, oil and gas,

and veal estate interests—are consistent in their treat-

ment of latent investor control. In each case the actual

control exercised by the purchaser is irrelevant. So long

as the investor has the right to control the asset he has

purchased, he is not dependent on the promoter or on a

third party for “those essential managerial efforts which

affect the failure or success of the enterprise.” But a

complication is added where the investment asset is not

owned directiy, but is held instead through a joint venture

or general partnership. While the partnership per se may

have full ownership powers over the asset, each individual

partner has only his proportionate vote in the partnership.

Nevertheless the courts that have ruled on the issue

have held that a general partnership or joint venture

interest generally cannot be an investment contract under

the federal securities acts. In New York Stock Exchange,

Inc. v. Sloan, 394 F.Supp. 1303 (S.D.N.Y. 1975), the

District Court for the Southern District of New York

granted summary judgment against general partners of

34a

a member firm who had brought a counterclaim against

the New York Stock Exchange for failure to enforce the

Exchange’s rules. The court held that general partner-

ships were not securities, regardless of the actual partici-

pation of the partners:

The fact that a partner may choose to delegate his

day-to-day managerial responsibilities to a committee

does not diminish in the least his legal right to a

voice in partnership matters, nor his responsibility

under state law for acts of the partnership... .

These factors critically distinguish the status of a

general partner from that of the purchaser of an

investment contract who in law as well as in fact is

a “passive” investor.

394 F.Supp. at 1314.

In Hirsch v. duPont, 396 F.Supp. 1214 (S.D.N.Y.),

aff'd, 553 F.2d 750 (2d Cir. 1977), the District Court for

the Southern District of New York again granted sum-

mary judgment on this issue. The plaintiffs were general

partners of a brokerage firm which had been liquidated;

its assets had been sold to a second brokerage firm, which

as part of the deal agreed to sell general partnership

interests in itself to certain partners of the liquidated

firm. The court followed its earlier reasoning in Sloan

and held that the partnership interests were not securi-

ties. But the court added an important reason for its

holding:

[Slome courts have stated that the reason Howey

excluded the investor who participates in the enter-

prise from the protection of the disclosure and fraud

provisions of the securities laws is that an investor

does not need such protection where he obtains a

degree of managerial control which affords access to

information about the issuer. . The fact that the

investor performs nominal services or physical labor

35a

gives him no access whatever to information about

the issuer and affords no reason for depriving him

of the protection of the securities laws.

* * * -

[Bly virtue of their managerial powers and express

rights of inspection, [the general partners in this

case] could inform themselves as to the condition of

the business and, through their efforts, promote its

success.

396 F.Supp. at 1222. Similar reasoning was behind the

dismissal of a federal securities claim in Oxford Finance

Companies, Inc. v. Harvey, 385 F.Supp. 431 (E.D. Pa.

1974). The plaintiff had entered into a joint venture

with the defendant for the improvement of a parcel of

real estate, and was suing for alleged violations of the

antifraud provisions of the securities acts. But the joint

venture agreement had required the approval of the

plaintiff for most managerial decisions, and provided

for joint control of capital withdrawals. The court held

that no investment contract was created, because the

control over managerial decisions and over capital with-

drawals was each enough to afford the plaintiff “signifi-

cant protection of its investment.”

The same result has been reached by those state courts

which have considered the effect of latent partnership

control. In Polikoff v. Levy, 55 Ill.App.2d 229, 204

N.E.2d 807, cert. denied, 382 U.S. 903, 86 S.Ct. 237, 15

L.Ed.2d 156 (1965), the Illinois Court of Appeals held

that a joint venture interest in a motel was not a secur-

ity. Although the defendant had sold a number of in-

terests in the property and the plaintiff had taken no

part in its management, the court found that the plaintiff

was adequately protected by his “equal right of control

over the property and right to know what is going on.”

Since the plaintiff had assumed the role of a joint

venturer, “he did not pay his money with the expectation

86a

that future profits from the venture would come solely

from the efforts of others.” The Texas Court of Civil

Appeals came to the same conclusion when faced with

the sale of joint venture interests in a tract of undevel-

oped land near Dallas, Texas. In McConathy v. Dal Mac

Commercial Real Estate, Inc., 545 S.W.2d 871 (Tex.Civ.

App.—Texarkana 1976, no writ), the court found that

the investors expected to hold the property for apprecia-

tion and therefore were not dependent on its manager.

Where the only management duties of the managing

venturer were the maintenance and protection of the

property—insuring it, paying taxes and so forth—the

court held that an association of persons in a joint ven-

ture lacked “the essential element of reliance on the

managerial, operational or developmental efforts of

others.” See also Oakley v. Rosen, 76 Cal.App.2d 310,

173 P.2d 55 (1946).

Although general partners and joint venturers may

not individually have decisive control over major deci-

sions, they do have the sort of influence which generally

provides them with access to important information and

protection against a dependence on others. Moreover,

partnership powers are not in the nature of a nominal

role in the enterprise which a seller of investment con-

tracts would include in order to avoid the securities laws;

on the contrary, one would expect such a promoter to

insist on ultimate control over the investment venture.

An investor who is offered an interest in a general

partnership or joint venture should be on notice, there-

fore, that his ownership rights are significant, and that

the federal securities acts will not protect him from a

mere failure to exercise his rights.

It should be clear from the context of the cases dis-

cussed above, however, that the mere fact that an in-

vestment takes the form of a general partnership or

joint venture does not inevitably insulate it from the

37a

reach of the federal securities laws. All of these cases

presume that the investor-partner is not in fact depend-

ent on the promoter or manager for the effective exercise

of his partnership powers. If, for example, the partner

has irrevocably delegated his powers, or is incapable of

exercising them, or is so dependent on the particular

expertise of the promoter or manager that he has no

reasonable alternative to reliance on that person, then

his partnership powers may be inadequate to protect him

from the dependence on others which is implicit in an

investment contract.

Thus, a general partnership in which some agreement

among the partners places the controlling power in the

hands of certain managing partners may be an invest-

ment contract with respect to the other partners. Pawgun

v. Silverstein, 265 F.Supp. 898 (S.D.N.Y. 1967). In

such a case the agreement allocates partnership power

as in a limited partnerrhip, which has long been held to

be an investment contract. See generally 3 Bloomenthal,

Securities & Federal Corporate Law § 2.12(2) (1979).

Similarly, one would not expect partnership interests

sold to large numbers of the general public to provide

any real partnership control; at some point there would

be so many partners that a partnership vote would be

more like a corporate vote, each partner’s role having

been diluted to the level of a single shareholder in a

corporation. Such an arrangement might well constitute

an investment contract.

A general partner or joint venturer who lacks the

business experience and expertise necessary to intelli-

gently exercise partnership powers may also be dependent

on the investment’s promoter or manager. This sort of

dependence was absent in all of the cases, discussed

supra, which found that passive but powerful investors

did not purchase investment contracts. The decision in

Mr. Steak, Inc. was premised in part on the failure

88a

of the franchisee to demonstrate “that it lacked the

requisite knowledge, skill or expertise” to manage the

restaurant. 324 F.Supp. at 645. The Court of Appeals

for the Eighth Circuit was careful to note, in deciding

Fargo Partners, that it was “not a case where a small

investor is helplessly reliant on the promoter’s efforts

because of lack of business knowledge, finances, or con-

trol over the operation.” 540 F.2d at 915. The pur-

chasers in Ballard & Cordell were themselves oil ex-

ploration firms; the partners in Sloan and Hirsch were

professional brokers contesting the sale to them of part-

nerships in brokerage firms; and the partners in Oxford

Finance Co. were business corporations. These pur-

chasers or partners were well able to protect ther. selves.

But the same might not be true in other cases. A scheme

which sells investments to inexperienced and unknowl-

edgeable members of the general public cannot escape

the reach of the securities laws merely by labelling itself

a general partnership or joint venture. Such investors

may be led to expect profits to be derived from the efforts

of others in spite of partnership powers nominally re-

tained by them.

A genuine dependence on others might also exist where

the partners are forced to rely on some particular non-

replaceable expertise on the part of a promoter or man-

ager. Even the most knowledgeable partner may be left

with no meaningful option when there is no reasonable

replacement for the investment’s manager. For example,

investors may be induced to enter a real estate partner-

ship 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; the

partners may have the legal right to replace the man-

ager, but they could do so only by forfeiting the manage-

ment ability on which the success of the venture is

dependent. Or investors may purchase joint venture

interests in an operating business in reliance on the

39a

managing partner’s unusual experience and ability in

running that particular business; again, a legal right of

control would have little value if the partners were forced

to rely on the manager’s unique abilities. We must em-

phasize, however, that a reliance on others does not exist

merely because the partners have chosen to hire another

party to manage their investment. The delegation of

rights and duties—standing alone—does not give rise

to the sort of dependence on others which underlies the

third prong of the Howey test. An investor who retains

control over his investment has not purchased an interest

in a common venture “premised on the reasonable ex-

pectation of profits to be derived from the entrepreneurial

or managerial efforts of others,” even if he has contracted

with the vendor for the management of the property.

Fargo Partners v. Dain Corp., supra; Schultz v. Dain

Corp., supra. So long as the investor retains ultimate

control, he has the power over the investment and the

access to information about it which is necessary to pro-

tect against any unwilling dependence on the manager.

It is not enough, therefore, that partners in fact rely

on others for the management of their investment; a

partnership can be an investment contract only when

the partners are so dependent on a particular manager

that they cannot replace him or otherwise exercise ulti-

mate control.

All of this indicates that an investor who claims his

general partnership or joint venture interest is an in-

vestment contract has a difficult burden to overcome.

On the face of a partnership agreement, the investor re-

tains substantial control over his investment and an

ability to protect himself from the managing partner

or hired manager. Such an investor must demonstrate

that, in spite of the partnership form which the invest-

ment took, he was so dependent on the promoter or on

a third party that he was in fact unable to exercise

40a

meaningful partnership powers.“ A general partnership

or joint venture interest can be designated a security if

the investor can establish, for example, that (1) an

agreement among the parties leaves so little power in

the hands of the partner or venturer that the arrange-

ment in fact distributes power as would a limited part-

nership; or (2) the partner or venturer is so inexperi-

enced and unknowledgeable in business affairs that he

is incapable of intelligently exercising his partnership

or venture powers; or (3) the partner or venturer is

so dependent on some unique entrepreneurial or man-

agerial ability of the promoter or manager that he can-

not replace the manager of the enterprise or otherwise

exercise meaningful partnership or venture powers.“

14 We emphasize that this dependence does not by itself establish

that a partnership interest satisfies the third prong of the Howey

test. Where an investment contract exists it is the original invest-

ment which is premised on an expectation of profits to be derived

from the efforts of others. As the Supreme Court explained in

Securities & Exchange Commission v. C. M. Joiner Leasing Corp.,

supra at 352-53, 64 S.Ct. at 124:

In applying acts of this general purpose, the courts have not

been guided by the nature of the assets back of a particular

document or offering. The test rather is what character the

instrument is given in commerce by the terms of the offer, the

plan of distribution, and the economic inducements held out to

the prospect. In the enforcement of an act such as this it is

not inappropriate that promoter’s offerings be judged as what

they were represented to be. [emphasis added

Thus, one would have to show that the reliance on the manager

which forms the basis of the partner’s expectations was an under-

standing in the original transaction, and not some subsequent

decision to delegate partnersbip duties. In this case the issue is

not raised, as no party has argued that such dependence as may

exist was the result of transactions subsequent to the sale of the

Property to the joint ventures.

15 These are the only factors relevant to the issue that are at

all implicated by the facts of this case. But this is not to say that

other factors could not also give rise to such a dependence on the

promoter or manager that the exercise of partnership powers would

be effectively precluded.

4la

None of these factors appear to be present in this

case. In the first place, there is no representation or

indication in the record that the partnership agreement

did not really give the investors partnership powers.

The plaintiffs do assert that they did not expect to exer-

cise these powers, and that they in fact purchased their

interests on the expectation that they would rely on

Godwin Investments to make all management decisions.

But they do not deny that tae agreement allowed them

to exercise ultimate control should they decide to do so,

and it appears that, when trouble arose in late 1975, the

plaintiffs did attend joint venture meetings and take a

greater interest in important decisions.

In the second place, it is clear that the plaintiffs were

capable of exercising genuine control over the enter-

prise. Williamson was Chairman of the Board of Frito-

Lay, Inc., at the same time as Lilley was its President;

Lilley later succeded Williamson as Chairman. Wilson

and Blake were also high executives in Frito-Lay and

had long been closely associated with Williamson and

Lilley. The defendants’ exhibits contain documents from

previous ventures which indicate that Williamson and

Lilley had already been members of other joint ventures

organized by Godwin Investments, some of which in-

volved tracts of raw land, before any of the joint ven-

tures in question were organized. All of the plaintiffs

were, previous to the formation of the joint ventures in

question, close associates of William B. Oliver, now de-

ceased, who had been Frito-Lay’s President prior to be-

coming a stockholder and director, during his retirement,

of Godwin Investments. On these facts, it is clear that

the plaintiffs had the business experience and knowledge

adequate to the exercise of partnership powers in a real

estate joint venture.

The closest that the plaintiffs come to the third factor

consists of the generalized argument that they were

42a

dependent on Godwin Investments’ promise to “plan uses

for the property, obtain zoning changes, refinance, man-

age condemnation proceedings, and develop, lease or sell

the property to return a profit.” Appellants’ Brief 31.

It is true that the Property would ultimately have to be

developed or sold, and in the interim managed, before

a profit could be returned on it; and it is true that God-

win Investments promised to perform these tasks. But

this alone does not establish a dependence on Godwin

Investments so great as to deprive the plaintiffs of their

partnership powers. The plaintiffs must allege that

Godwin Investments was uniquely capable of such tasks

or that the partners were incapable, within reasonable

limits, of finding a replacement manager. Godwin In-

vestment’s promise must be more than a binding contract

enforceable under state law; it must create the sort of

dependence implicit in an investment contract. However,

the plaintiffs have at no point asserted or alleged that

Godwin Investments was uniquely capable of either

managing or developing the Property, or that their de-

pendence on the expertise of Godwin Investments was

so great that they were incapable, within reasonable

limits, of finding a replacement. Each of the plaintiffs

makes only the vague statement, in his affidavit in op-

position to the defendants’ motions under Rules 12(b) (1)

and 56, that “I relied and was dependent upon the

efforts” of Godwin Investments. We conclude, therefore,

that the plaintiffs have not raised the possibility of a

dependence on the unique or irreplaceable expertise of

Godwin Investments as an issue in this case.

To sum up: The plaintiffs predicated their federal

cause of action (and therefore federal jurisdiction) on

the inclusion of the joint venture interests they pur-

chased within the reach of the 1933 Act and the 1934

Act. They argued that the interests were “investment

contracts,” and therefore securities, by virtue of the

significance of Godwin Investments’ managerial efforts.

43a

They asserted, in this regard, that Godwin Investments

had promised ultimately to pursue the sale or develop-

ment of the Property, and in the interim to manage it.

In response, the defendants argued that the plaintiffs

possessed meaningful powers under the joint venture

agreements, and contended that these powers were enough

to preclude as a matter of law a finding that the joint

venture interests were securities. We have determined

that absent one of the limited circumstances discussed

above, meaningful powers possessed by joint venturers

under a joint venture agreement do indeed preclude a

finding that joint venture interests are securities. As

our discussion should indicate, the plaintiffs have an

extremely difficult factual burden if they are to establish

that the joint venture interests they purchased are secu-

rities. As we concluded in Part II of this opinion, how-

ever, the district court’s dismissal of this case for lack

of subject matter jurisdiction was nevertheless improper.

At the time the district court considered the defendants’

motions under Rule 12 (b) (1), neither the Supreme Court

nor this court had considered the effect of meaningful

powers retained by joint venturers on the inclusion of

joint venture interests within the investment contract

concept. Therefore the plaintiffs’ claim—which rested on

the central management role played by Godwin Invest-

ments—was not clearly foreclosed even if the district

court could find and did find that the plaintiffs failed

to meet the factual burden established by our holding in

the case at bar. Accordingly, we cannot say that the

plaintiffs’ claims “clearly appear led! to be immaterial

and made solely for the purpose of obtaining jurisdiction”

or were “wholly insubstantial and frivolous.” A dismissal

for lack of subject matter jurisdiction was consequently

barred by the doctrine of Bell v. Hood.

Our discussion of the facts in this case has been solely

for the purpose of determining whether the district court

properly dismissed this case for lack of subject matter

44a

jurisdiction. As explained in Part II of this

(under “The Factual Basis of the District Court’s Deci-

sion”), we have assumed for this purpose that

terial factual disputes were resolved by the district court

in favor of the defendants and in support of its order,

and our discussion and analysis of the facts have been

based on that assumption. Since we have already decided

that the district court dismissed this case for lack of

subject matter jurisdiction, and did not rule on any

motion for summary judgment, no such motion is before

us. As our discussion in Part II of this opinion indi-

cates, the criteria for the granting of a motion for

summary judgment are markedly different from the

criteria for the granting of a motion to dismiss for lack

of subject matter jurisdiction, and the standards of ap-

pellate review of orders granting such motions are also

markedly different. Accordingly we have made no re-

view of the substantial record in this case with a view

to determining whether any motion for summary judg-

ment could properly have been granted, and we express

no views with respect thereto.

IV. THE PURCHASE MONEY NOTES

The definitional section of each of the 1933 Act and

the 1934 Act, see supra note 11, includes “any note”

within its purview. But section 3(a)(10) of the 1934

Act excludes from the definition “any note. . which

has a maturity at the time of issuance of not exceeding

nine months, exclusive of days of grace, or any renewal

thereof the maturity of which is likewise limited.”

Despite the literal wording of the exception, many

courts have recognized that a precise reliance on it would

thwart the purposes of the securities acts, and have

therefore turned to more functional approaches in de-

ciding when a note becomes a security. See, e.g., Amfac

Manufacturing Corp. v. Arizona Mall of Tempe, Inc.,

45a

583 F.2d 426 (9th Cir. 1978); Great Western Bank &

Trust v. Kotz, 582 F.2d 1252 (9th Cir. 1976) ; Exchange

National Bank of Chicago v. Touche Ross & Co., 544

F.2d 1126 (2d Cir. 1976); C.N.S. Enterprises, Inc. v.

G. & G. Enterprises, Inc., 508 F.2d 1354 (7th Cir.), cert.

denied, 423 U.S. 825, 96 S.Ct. 38, 46 L.Ed.2d 40 (1975) ;

Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d

795 (2d Cir.), cert. denied, 414 U.S. 908, 94 S.Ct. 217,

88 L.Ed.2d 146 (1973); Lino v. City Investing Co., 487

F.2d 689 (3d Cir. 1973); Sanders v. John Nuveen &

Co., Inc., 463 F.2d 1075 (7th Cir.), cert. denied, 409

U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972). See

generally E. Sonnenschein, “Federal Securities Laws

Coverage of Note Transactions: The Antifraud Provi-

sions,” 35 Bus. Law. 1567 (July, 1980).

We have followed one such functional approach and

held that an investment note is a security while a com-

mercial note is not a security, regardless of the literal

reach of the definitional sections and the exception writ-

ten into section 3(a) (10) of the 1934 Act. In McClure

v. First National Bank of Lubbock, Texas, 497 F.2d 490

(5th Cir. 1974), cert. denied, 420 U.S. 930, 95 S.Ct.

1132, 43 L.Ed.2d 402 (1975), we explained:

We realize that our holding today that the Act does

not apply to commercial notes of a longer duration

than nine months, taken with the decisions voiding

the short-term exemption as to investment paper,

virtually writes that exemption out of the law. On

the one hand, the Act covers all investment notes,

no matter how short their maturity, because they

are not encompassed by the “any note” language of

the exemption. On the other hand, the Act does not

cover any commercial notes, no matter how long their

maturity, because they fall outside the “any note”

definition of a security. Thus, the investment or

commercial nature of a note entirely controls the

46a

applicability of the Act, depriving of all utility the

exemption based on maturity-length.

497 F.2d at 494-95. Accord, National Bank of Commerce

of Dallas v. All American Assurance Co., 583 F.2d 1295

(5th Cir. 1978); Securities & Exchange Commission v.

Continental Commodities Corp., 497 F.2d 516 (5th Cir.

1974) ; Bellah v. First National Bank of Hereford, Texas,

495 F.2d 1109 (5th Cir. 1974) ; First Federal Savings &

Loan Association v. Mortgage Corp. of the South, 467

F.Supp. 943 (N.D. Ala. 1979), appeal docketed, No. 79-

2141 (5th Cir., May 10, 1979); Sea Pines of Virginia,

Inc. v. PLD, Ltd., 399 F.Supp. 708 (M. D. Fla. 1975).

It is easier to state that the investment-commereial“

distinction is the basis of our decisions than it is to

formulate any comprehensive definition of those terms.

We have followed, instead, a case by case approach, rely-

ing in each instance on “the economic realities underlying

[the] transaction, and not on the name appended there-

to,” United Housing Foundation, Inc. v. Forman, 421

U.S. 837, 849, 95 S.Ct. 2051, 2059, 44 L.Ed.2d 621

(1975). We must begin, therefore, by examining the

cases in which we have applied this test. In Bellah v.

First National Bank of Hereford, Texas, supra, the

p. aintiffs owned a livestock business for which they had

borrowed operating funds from the bank. They executed

a six-month promissory note, secured by a deed of trust

covering seventeen tracts of real estate, to the Bank.

We found that the bank merely intended to aid the own-

ers in the operation of their livestock business and did

not seek to profit from the successful operation of the

enterprise. On this basis we found that the notes were

commercial in nature and thus not securities, and dis-

missed the case for lack of subject matter jurisdiction.

In McClure v. First National Bank of Lubbock, Texas,

supra, the plaintiff owned 50% of a corporation which

had borrowed funds from the bank, for which it had

47a

executed a six-month promissory note secured by a deed

of trust on the corporation’s real estate. The plaintiff

contended that her consent had been obtained for the

transaction on the representation of her husband, who

owned the other 50% of the corporation, that the funds

would be used to pay corporate obligations; in fact, they

were used to repay the husband’s personal obligations.

We found that the note issued to the bank was not a

security, and dismissed the case for lack of subject mat-

ter jurisdiction. Our decision was based on the absence

of two factors which are typically present where “in-

vestment notes” are found to exist. First, only the bank

and the corporation were involved in the transaction. The

corporation’s notes were not offered to some class of

investors, nor were they acquired by the bank for specu-

lation or investment. Second, the loan was extended

solely to allow the corporation to pay off its business

debt. Thus, the corporation did not obtain investment

assets with the proceeds of the loan. The fact that

neither of these elements was present was a strong

indication that the notes were “commercial” in rature;

but, as we stated in McClure, these two factors “are not

necessarily the only one appropriate for consideration,”

497 F.2d at 493.

In Securities & Exchange Commission v. Continental

Commodities Corp., supra, a commodities options dealer

issued notes to some of its customers in partial reim-

bursement of sums owed them upon the suspension of

trading in futures options. The complaint alleged that

Continental Commodities Corp. exacted a promise of fore-

bearance from legal action from those of its customers

who accepted 60% of their original investments in cash

and the remaining 40% in the form of non-interest bear-

ing, short-term promissory notes. The firm allegedly rep-

resented that the S.E.C. would allow it to remain in

business if payments were made to all of its customers

on such terms. We held that the notes were securities

48a

because they were issued “to rejuvenate and not to liqui-

date the enterprise,” 497 F.2d at 527, and therefore

reversed the district court’s order dismissing the case for

lack of subject matter jurisdiction. Customers accepted

the notes on the hope that the firm would be revived.

They had a genuine stake in the survival of the firm, for

they could expect a higher return on their investments in

the event the firm survived than in the event it were

forced into bankruptcy.

In National Bank of Commerce of Dallas v. All Ameri-

can Assurance Co., supra, the bank sought to recover

damages from borrowers who had allegedly pledged

worthless stock in procuring a loan. We held that the

note executed by the borrowers was commercial in na-

ture, and affirmed the district court’s order dismissing

the case for lack of subject matter jurisdiction. There

was nothing in the transaction to indicate that it was

anything other than a loan evidenced by a promissory

note and secured by a pledge of securities. We relied on

the facts that there were no special investment rights

given to the payee; that the note was payable in fixed

amounts at fixed times; that repayment was not condi-

tionec! upon profit or productivity of the company; that

no class of investors was involved; and that the bank

anticipated no gain beyond repayment of the note with

interest.

In several instances district courts in the Fifth Cir-

cuit have applied the investment-commercial distinction

and determined whether a note was a security. In Sea

Pines of Virginia, Inc. v. PLD, Ltd., supra, the maker

of a note executed as purchase money for à real estate

limited partnership interest sought a preliminary injunc-

tion to prevent collection by the payees, on the basis of

securities acts violations. The court denied the injunc-

tion. It held that the note was commercial because it

served as a “cash substitute” for the purchase price. The

49a

acquisition of the note was not the motivating factor

behind the defendant’s sale of a limited partnership inter-

est; the real object of the transaction was an exchange

of the property for the purchase price, which in this case

was accepted in the form of a note. In First Federal

Savings & Loan Association of Miami v. Mortgage Corp.

of the South, supra (summary judgment granted against

the defendants on other grounds), the court found that

a note issued to a lender who provided the permanent

financing for an apartment complex development was an

investment note and therefore a security. The court re-

lied on the facts that the note was long-term (twenty

years); that the permanent lender had initiated the

transaction, and was in fact seeking loans of this nature

throughout the country; that the lender was a third

party to the initial transaction (the construction loan) ;

that the negotiations which preceded the purchase of the

notes indicated an awareness on the part of all parties

that the successful management and completion of the

project would determine the value of the notes; and that

the lender acquired a substantial security interest in the

projects which, given the size of the loans, created a

dependence of the permanent lender on the developer and

on the initial lender. See also Strain v. Citizens Bank &

Trust Co., 68 F.R.D. 697, 701-02 (E. D. La. 1975).

Although all of these decisions rest on the “commercial-

investment” distinction, none of them attempts a conclu-

sive explanation of the distinction or posits any all-

inclusive definition of the terms “commercial” and “in-

vestment” in this context. There are therefore important

unanswered questions in this area. See E. Sonnenschein,

Jr., supra, at 1590-91. This case, however, is not the

proper place to answer these questions or to begin the

formulation of a more precise test than has already

developed, for the promissory notes involved in this case

are clearly not securities under any reasonable interpre-

tation of our prior cases.

50a

The notes issued by the plaintiffs were real estate pur-

chase money notes, given to the defendants in exchange

for the Property. As in Sea Pines of Virginia, Inc. v.

PLD, Ltd., supra, the purpose of the note transaction

was to finance the sale of the Property, not to sell in-

vestments to the defendants. See Emisco Industries Inc.

v. Pro's Inc., 543 F.2d 38 (7th Cir. 1976); Lino v. City

Investing Co., supra; Chess v. Nieport, 386 F.Supp. 312

(E.D.Cal. 1974); Altman v. Knight, 431 F.Supp. 309

(S.D.N.Y. 1977). In essence, the defendants facilitated

their sale of the Property by themselves loaning the pur-

chase price to the plaintiffs and accepting general liabil-

ity notes secured by the Property as evidence of such

debts. In loaning this amount on the basis of the notes,

the defendants were performing much the same commer-

cial function as were the various banks in Bellah, Mc-

Clure and National Bank of Commerce of Dallas, each

of which loaned funds on the strength of notes similar

to those at issue in this case. We hold, therefore, that

the promissory notes executed by the plaintiffs are com-

mercial in nature and, as a matter of law, are not securi-

ties within the meaning of the 1933 Act and the 1934

Act.

We need not determine, however, whether the piain-

tiffs’ federal securities claims in relation to the notes

are so clearly immaterial or insubstantial that they can

be dismissed for lack of subject matter jurisdiction. Each

of the plaintiffs’ federal securities claims is also based on

their purchase of joint venture interests in the Property,

and, as we determined above, these claims cannot be

dismissed for lack of subject matter jurisdiction. We do

note, however, that in the four recent instances in which

we have considered whether a note was a security within

the meaning of the federal securities acts—i.e., National

Bank of Commerce of Dallas v. All American Assurance

Co., supra; McClure v. First National Bank of Lubbock,

Texas, supra; Securities & Exchange Commission v. Con-

51a

tinental Commodities Corp., supra; Bellah v. First Na-

tional Bank of Hereford, Texas, supru— the issue was

raised in the form of a motion to dismiss for lack of

subject matter jurisdiction. Although it does not appear

that the appropriateness of such a motion was chal-

lenged, we did not find in any of these cases that it was

improper.

We conclude that the judgment of the district court

dismissing this case for lack of subject matter jurisdic-

tion must be reversed because the plaintiffs’ federal secu-

rities claims, insofar as they arise out of the purchase

of joint venture interests, are not so clearly immaterial

or insubstantial as to justify their dismissal under the

strict standard mandated by Bell v. Hood, supra. We

also reverse the judgment of the district court awarding

costs to the defendants. We remand this case to the dis-

trict court for further proceedings consistent with this

opinion.

REVERSED and REMANDED.

52a

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

Civil Action No. CA-3-76-0892-C

JOHN D. WILLIAMSON, HAROLD R. LILLEY,

JOSEPH C. WILSON and GEORGE BLAKE,

7 Plaintiffs,

GorRDON G. TUCKER, FRED E. TUCKER, IR., M. L. GODWIN

INVESTMENTS, INC., GOOD FINANCIAL CORPORATION,

M. L. GopWIN, KEN Goop, JAMES F. MASON, L. R.

POLAN, JR., and THE TRUSTEES OF THE HOME INTERIORS

AND GIFTS EMPLOYEES PROFIT SHARING TRUST, MARY

C. CROWLEY, HORACE T. ARDINGER, IR., DONALD J.

CARTER, and DOUGLAS ADKINS,

Defendants.

JUDGMENT

This action came on for consideration before the Court,

Honorable W. M. Taylor, Jr., District Judge, presiding,

and the issues having been duly considered and a deci-

sion having been rendered.

IT IS ORDERED, ADJUDGED and DECREED that

Plaintiffs’ actions be, and they are hereby, dismissed for

want of subject matter jurisdiction; that, because of suc’

dismissal of Plaintiffs’ actions, all counterclaims and

cross-actions are hereby dismissed without prejudice for

want of jurisdiction; and that Defendants recover of the

Plaintiffs their costs of action.

DATED at Dallas, Texas, this 19th day of Dec., 1978.

/s/ W. M. Taylor, Jr.

W. M. TAYLOR, JR.

United States District Judge

53a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

Dallas 75242

December 11, 1978

W. M. Taylor, Jr.

U.S. District Judge

To COUNSEL OF RECORD

Re: John D. Williamson, et al

vs. Gordon G. Tucker, et al

CA 3-76-0892-C

Counsellors:

I have heard your argument, reviewed the record and

your briefs and concluded that the joint venture agree-

ments were not securities. Securities & Exchange Com-

mission v. W. J. Hovey Co., 328 U.S. 293, 66 S.Ct. 1100,

90 L.Ed. 1244 (1946). Also, I have concluded that the

notes made by the Plaintiffs are commercial in nature,

not investments, in light of the reasoning of the Fifth

Circuit in the line of cases culminating in National Bank

of Commerce v. All American Assurance Company, ——

F.2d ——, No. 76-3331 (5th Cir., Nov. 14, 1978).

I am therefore of the opinion that I have no jurisdiction

in this case and that it must be dismissed.

Defendants’ counsel are requested to propose an appro-

priate form of order or orders.

Yours very truly,

/s/ W. M. Taylor, Jr.

W. M. TAyYLor, JR.

54a

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

October Term, 19

No. 79-1058

D.C. Docket No. CA 3-76-0892-C

JOHN D. WILLIAMSON, ET AL,

Plaintiffs-Appellants-Cross Appellees,

versus

GORDON G. TUCKER, ET AL,

Defendants-A ppellees-Cross Appellants.

Appeals from the United States District Court for the

Northern District of Texas

Before GODBOLD, Chief Judge, GARZA and RANDALL,

Circuit Judges

JUDGMENT ON REHEARING

Defendants-appellees petitions for rehearing are

granted in part, and the opinion originally entered by

this Court dated December 11, 1980 is withdrawn;

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment

of the said District Court appealed from is reversed and

55a

that this cause be, and the same is hereby remanded to

the said District Court for further proceedings con-

sistent with the opinion of this Court;

It is further ordered that defendants-appellees pay to

plaintiffs-appellants the costs on appeal to be taxed by

the Clerk of this Court.

May 20, 1981

Issued as Mandate: Jun. 11, 1981

56a

SECURITIES ACT OF 1933

Section 2(1) of the Securities Act of 1933, 15 U.S.C.

Sec. 77(b) (1), provides as follows:

When used in this title [15 U.S.C. Sec. 77a et seq.]

unless the context otherwise requires—

(1) The term “security” means any note, stock,

treasury stock, bond, debenture, evidence of indebted-

ness, certificate of interest or participation in any

profit-sharing agreement, collateral-trust certificate,

preorganization certificate or subscription, transfer-

able share, investment contract, voting-trust certifi-

cate, 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.

SECURITIES EXCHANGE ACT OF 1934

Section 3 (a) (10) of the Securities Exchange Act of

1934, 15 U.S.C. Sec. 78 (e) (a) (10) provides as follows:

ta, Definitions. When used in this title [15 U.S.C.

Sec. 78a et seq.], unless the context otherwise re-

quires—

(10) The term “security” means any note, stock,

treasury stock, bond, debenture, certificate of interest

or participation in any profit-sharing agreement or

in any oil, gas, or other mineral royalty or lease,

any collateral-trust certificate, preorganization cer-

tificate or subscription, transferable share, invest-

ment contract, voting-trust certificate, certificate of

57a

deposit, for a security, or in general, any instru-

ment commonly known as a “security”; or any cer-

tificate of interest or participation in, temporary

or interim certificate for, receipt for, or warrant

or right to subscribe to or purchase, any of the

foregoing; but shall not include currency or any

note, draft, bill of exchange, or banker’s acceptance,

which has a maturity at the time of issuance of not

exceeding nine months, exclusive of days of grace,

or any renewal thereof the maturity of which is

likewise limited.

UOILISOGAO —

e- Supreme Court. U.S.

FILED

der 14 .

ALEXANDE:

No. 81-285 — —

In the

Supreme Court of the

United States

OCTOBER TERM, 1981

JohN D. WILLIAusod, HAROLD R. LILLEV,

JosePH C. WILSON and GEoRGE BLAKE,

Petitioners

Gorpon G. Tucker, FRED E. Tucker, JR., M. L.

Gopwin INVESTMENTS, INC., Goop FINANCIAL

Corporation, M. L. Gopwin, Ken Goon, JAMEs F.

Mason, L. R. PoLAN, IR., and the TRUSTEES OF THE

Home INTERIORS AND Girts EMPLOYEES PROFIT

SHARING TRustT, Mary C. Crow.ey, Horace IT.

ARDINGER, JR., DoNALD J. CARTER and DouGLAs

ADKINS,

Respondents

BRIEF OF RESPONDENTS, JAMES F. Mason,

L. R. PoLAN, JR., and M. L. Gopwin

INVESTMENTS, INC.,

IN OPPOSITION

JEFFREY S. LYNCH

er R. Powe.

VIAL, HamiLtTon, Koch, Tun,

Knox & STRADLEY

1500 Republic National Bank Tower

Dallas, Texas 75201

(214) 748-4541

Attorneys for Respondents

JAMES F. Mason, L. R. PoLAN, JR.,

and M. L. Gopwin INVESTMENTS, INc.

QUESTION PRESENTED FOR REVIEW

This case presents the question of whether a party which

prevails at the Court of Appeals, and obtains all of the relief

which it seeks may seek review of the opinion of the Court

of Appeals by Petition for Writ of Certiorari.

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW.........

TABLE OF CONTENTS.

TABLE OF AUTHORITIES ..

STATEMENT OF THE CASE

ARGUMENRrr

CONCLUSION ..............

PROOF OF SERVICE .......

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„ 5 52„%„ % % eee ] g.

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TABLE OF AUTHORITIES

Cases:

Equitable Life Assurance Society

of the United States v. Mercantile

Commercial Bank & Trust, 143 F.2d 397

(8th Cir. 1944) cert. denied 329 U.S.

760, 67 S.Ct. 114, 91 L.Ed. 655 (1946) ....

Gunn v. University Committee to End

War in Vietnam, 399 U.S. 383, 390 N. 5,

90 S.Ct. 2013, 26 L.Ed.2d 684 (1970) .....

Mach v. Abbott Company, 136 F.2d 7 (8th Cir.

1943) cert. denied 320 U.S. 773, 64

S.Ct. 80, 88 L.Ed. 464 (1943) ............

Public Service Commission of State of

Missouri v. Brashear Freight Lines,

Inc., 306 U.S. 204, 59 S.Ct. 480,

Nees.

Williamson v. Tucker, 632 F.2d 579,

neee sees

Treatises:

Wright HANDBOOK OF THE LAW OF

FEDERAL COURTS, 5106 (3rd ed. 1976)

seeeeee

eee eee

ev ewee

ene eee

No. 81-285

in the

Supreme Court of the

United States

OCTOBER TERM, 1981

Joun D. WILLIAMsod, HAROLD R. LILLEV,

Jos EFH C. Wiso and GEORGE BLAKE,

Petitioners

GoR DON G. Tucker, Frep E. Tucker, IR., M. L.

GoDWIN

INVESTMENTS, INC., Goop FINANCIAL CORPORATION,

M. L. Gopwin, Ken Goon, JAMEs F. Mason,

L. R. PoLAN, IR., and the TRUSTEES OF THE HouE

INTERIORS AND Girts EMPLOYEES PRorrr SHARING

Trust, Mary C. CROWLEV, Horace T. ARDINGER, IR.,

Dona.p J. CarTER and DouGLas ADKINS,

On Petition for Writ of Certiorari to

The United States Court of Appeals

For the Fifth Circuit

Brief of Respondents

JAMES F. Mason, L. R. PoLAN, IR., and M. L.

GobwWI N INVESTMENTS, INC., in Opposition

TO THE HONORABLE SUPREME COURT OF THE

UNITED STATES:

Respondents, James F. Mason, L. R. PoLan, IR., and

M. L. Gopwin INVESTMENTS, INc., respectfully pray that

a Writ of Certiorari be denied herein. Petitioners prevailed

at the United States Court of Appeals for the Fifth Circuit,

obtained all of the relief which they requested, and there-

fore are not entitled to review by Writ of Certiorari.

STATEMENT OF THE CASE

For the purposes of the Petition for Writ of Certiorari,

respondents generally agree with petitioners’ Statement of

the Case.

ARGUMENT

At the district court level, all of the defendants, including

respondents herein, filed Motions for Summary Judgment

or Motions to Dismiss for Lack of Subject Matter Jurisdic-

tion. The propriety of the district court action in dismissing

petitioners’ complaint was the sole question before the

United States Court of Appeals for the Fifth Circuit. The

court reversed and remanded the judgment of the district

court. The reasoning of the Fifth Circuit was that because

the jurisdictional question at issue also reached the merits

of the plaintiffs’ case, it was improper for the district court

to dismiss for lack of subject matter jurisdiction. However,

the Fifth Circuit did not decide the substantive issue upon

which petitioners’ complaint was grounded. Rather, the

Court of Appeals discussed those issues only “in the inter-

ests of judicial economy.” Williamson v. Tucker, 632 F.2d

579, 592 (5th Cir. 1980).

Petitioners do not seek review of the action of the Fifth

Circuit in reversal and remand of the case; but rather, seek

review of the dicta of the court below on the substantive

issues. These respondents contend that petitioners are not

entitled to such review.

In cases of direct appeal to the United States Supreme

Court from decisions of three-judge courts, it has been held

that the successful party before the district court may not

seek review of that decision. The successful party has no

standing to appeal from such a judgment. Public Service

Commission of State of Missouri v. Brashear Freight

Lines, Inc., 306 U.S. 204, 59 S.Ct. 480, 83 L.Ed. 608

(1939); Gunn v. University Committee to End War in

Vietnam, 399 U.S. 383, 390 N.5, 90 S.Ct. 2013, 26 L.Ed.2d.

684 (1970).

Respondents contend that the same rule should apply in

cases involving Petition for Writ of Certiorari. The reason-

ing behind this rule is equally applicable to such cases, and

in fact, is a basic principle of appellate review. “The rule is

well settled that one who secures by a judgment, order or

decree all the relief he seeks cannot maintain an appeal to

reverse or modify it, or to review the proceedings on which

it is founded.” Mach v. Abbott Company, 136 F.2d 7, 10 (8th

Cir. 1943) cert. denied 320 U.S. 773, 64 S.Ct. 80, 88 L.Ed.

464 (1943); Equitable Life Assurance Society of the United

States v. Mercantile Commercial Bank & Trust, 143 F.2d

397, 405 (8th Cir. 1944) cert. denied 329 U.S. 760, 67 S.Ct.

114, 91 L.Ed. 655 (1946). “The Court may grant certiorari on

petition of ‘any party’ ... There seems to be no case in

which the Court has granted certiorari at the instance of a

party who has been successful in the court of appeals.”

Wright HANDBOOK OF THE LAW OF FEDERAL

COURTS, $106 (rd ed. 1976).

Petitioners have no standing to seek review of the deci-

sion of the Fifth Circuit. The judgment was in their favor.

The opinion is not in itself reviewable. Petitioners could

obtain no further relief from this Honorable Court than

they have already obtained from the Court of Appeals.

Therefore, certiorari should be denied.

CONCLUSION

WHEREFORE, PREMISES CONSIDERED, these re-

spondents respectfully pray that the Petition for Writ of

Certiorari be denied.

Respectfully submitted,

JEFFREY S. LYNCH

GERALD R. PowELL

VIAL, Hamivton, Koch, Tuss,

Knox & STRADLEY

1500 Republic National Bank

GERALD R. POWELL

Attorneys for Respondents

JaMes F. Mason, L. R. PoLAN,

IR., AND M. L. Gopwin

INVESTMENTS, INC.

PROOF OF SERVICE

I HEREBY CERTIFY that a true and correct copy of

the foregoing has been mailed on the day of Septem-

ber, 1981, by certified mail, return receipt requested to the

following:

Mr. Stan McMurry

Rain, Harrell, Emery, Young & Doke

4200 Republic Bank Tower

Dallas, 75201

Mr. Rosert B. PAYNE

Payne & Spradley

3800 Republic Bank Tower

Dallas, Texas 75201

Mr. Gorpon H. Rowe, Jr.

Gardere & Wynne

1700 Republic Bank Building

Dallas, Texas 75201

Mx. Davin P. SEIKEL

1617 Marathon Building

600 Jefferson

Houston, Texas 77002

Mr. Howarp V. TyGRetrT, JR.

Tygrett, Walker & Lamb

8111 Preston Bank Building

Dallas, Texas 75225

E. ELDRIDGE GoIns, JR.

Goins & Underkofler

1015 Republic National Bank Tower

| (cond R el

GERALD R. PoweELL

IN THE

Supreme Court of the United States

OCTOBER TERM, 1981

Joun D. WiLtiaMson, Haron R. Luxx,

JoserpH C. WILSON AND GEORGE BLAKE,

Petitioners,

Gorpon G. Tucker, Frep E. Tucker, In., M. L. GopwIn

INVESTMENTS, INC., Goop FINANCIAL CORPORATION,

M. L. Gopwin, Ken GOOD. JAMEs F. Mason,

L. R. PoLAN, In., AND THE TRUSTEES OF THE HOME INTERIORS

AND Girts EMPLOYEES Prorir SHARING TRUST,

Mary C. Crow ey, Horace T. ARDINGER, JR.,

Dona.p J. CARTER AND DoucLas ADKINS,

Respondents.

BRIEF IN OPPOSITION OF RESPONDENTS,

THE TRUSTEES OF THE HOME INTERIORS

AND GIFTS EMPLOYEES PROFIT SHARING TRUST,

MARY C. CROWLEY, HORACE T. ARDINGER, IR.,

DONALD J. CARTER AND DOUGLAS ADKINS

Gordon H. Rowe, Jr.

Counsel of Record

GARDERE & WYNNE

1700 Republic National

Bank Building

Dallas, Texas 75201

(214) 748-7211

Attorneys for Respondents.

Page

Caption 1

Reasons for Denying the Writ 2

5 ————.——.—.—— 3

Argument II 5

e 6

LIST OF AUTHORITIES

Bell v. n

90 L.Ed. 939 (1945)

Securities and Exchange Commission v.

W. J. Howey Company, 328 U.S. 293 (1946)

United Housing Foundation, Inc. v. —

421 U.S. 837 (1975)

(4%

No. 81-285

Supreme Court of the United States

OCTOBER TERM, 1981

Joun D. WruiaMson, Hanoi R. Luxx,

Joseru C. Witson AND Georce BLAKE,

Petiti

Gorpvon G. Tucker, Frep E. Tucker, In., M. L. Gopwin

INVESTMENTS, INc., Goop FINANCIAL CORPORATION,

M. L. GO, Ken Goon, James F. Mason,

L. R Pot Ax, In, AND THE TRUSTEES OF THE Home INTERIORS

A Girts Emp.Loyees Prortr SHARING TRUST,

Mr C. Crow:zy, Horace T. A. Ju.

The Trustees of the Home Interiors and Gifts Employees

Profit Sharing Trust, Mary C. Crowley, Horace T. Ardinger,

Jr., Donald J. Carter and Douglas Adkins, Respondents

herein, oppose the Petition for Writ of Certiorari herein

filed and submit this Brief showing to the Court their

reasons why such Petition should be denied.

STATEMENT

Petitioners, as joint venturers, had purchased tracts of

undeveloped real property near the developing Dallas-Fort

Worth International Airport and had given in exchange

therefor long-terra promissory notes, three of which notes

were subsequently acquired by there named Respondents.

Petitioners brought this suit to cancel their obligations under

the joint venture notes and to rescir the related joint ven-

ture agreements. Federal jurisdiction was predicated upon

violations of both the Securities Act of 1933 and the Securi-

ties Exchange Act of 1934. Respondents sought and obtained

dismissal of the suit for lo- A of subject matter jurisdictiow.

Upon review, the United States Court of Appeals for the

Fifth Circuit, relying upon Bell v. Hood, 327 U.S. 678, 6

8. Ct. 773, 90 L.Ed. 989 (1945). held invalid on procedural

grounds the district court’s dismissal order. Because sub-

stuntive issues remained to be disposed of upon remand, the

Fifth Circuit, in the interests of judicial economy, also dis-

money notes and the joint venture interests which the

district court would later have to face. The Petition for Writ

ut Certiorari addresses only these instructions to the trial

court. Indeed, Petitioners admit they seek no review of the

correctness of the Fifth Circuit’s procedural disposition.

REASONS FOR DENYING THE WRIT

Rother than being at odds therewith, the tests utilized

by the Court of Appeals for determining whether the in-

terests in question were securities are the same as those

tests established by this Court in Securities and Exchange

Commission v. W. J. Howey Company and United Housing

Foundation, Inc. v. Forman.

Proper resolution of the substantive issue involving long-

term notes taken in the transaction in question is not

affected whatsoever by those so-called “conflicting tests”

developed among the various Courts of Appeals involving

iong-term notes taken in other type transactions.

This case presents no special and important considerations

to justify formulation by this Court of more precise tests

than have already been developed for deciding what promis-

sory notes are securiti s, the promissory notes involved in

thi. case being clearly not securities under any reasonable

interpretation of prior cases.

ARGUMENTS

THE COURT OF APPEALS APPLIED HEREIN

THE PROPER TESTS ALREADY ESTABLISHED

BY THIS COURT FOR DETERMINING WHETHER

THE INTERESTS IN QUESTION WERE SECURITIES

Petitioners have failed to establish that tests applied by

the Court of Appeals below are in fact inconsistent with

tests previously tablished by this Court. Contrary to Peti-

tioners’ contentions, the Court of Appeals be’ow to the

extent applicable did rely expressly upon this Court’s deci-

sions in Securities and Exchange Commission v. W. J. Howey

Company, 328 U.S. 298 (1946) and in United Housing

Foundation, Inc. v. Forman, 421 U.S. 837 (1975). Admittedly,

this case does present two features unique to both Howey

and Forman, to-wit, the notes were given to purchase unim-

proved real H perty and the purchasers were joint venturers

with general partnership powers. Even this unique aspect

was addressed by the Court of Appeals in context with

Howey and Forman, the court below taking pains to d

the admonition of this Court that “economic reality is to

govern over form” and that “mechanical” and “unduly

restrictive” views must be avoided. In so doing, the Court of

Appeals concluded that the fact that an investment takes

the form of a general partnership or joint ventwe does

not inevitably insulate it from the reach of the federal

securities laws”. The Court of Appeals merely required

Petitioners in order to prevail on the merits, to demonstrate

that in spite of the partnership form which their investment

took, they were nonetheless so dependent on some third

party that they were in fact unable to exercise meaningful

partnership powers. Tu the extent the opinion of the Court

of Appeals dealt with “latent investor control” such treat-

ment of the matter was entirely compatible with the spirit

and intent of this Court’s enunciations in Howey and

Forman. No showing is made in the Petition for Writ of

Certiorari that the Court of Appeals failed in any way to

follow prior decisions of this Court.

As previously stated, the Court of Appeals by overruling

the dismissal for want of subject matter jurisdiction rein-

stated the entire cause on the district court’s docket for

ultimate resolution there. No special or important reason

exists for any review by this Court at this time on the

matter.

THE PURCHASE MONEY NOTES TAKEN IN THE

TRANSACTION IN QUESTION ARE CLEARLY

NOT SECURITIES UNDER ANY TEST FORMULATED

HERETOFORE BY ANY COURT OF APPEALS

All Courts of Appeals have long recognized that a precise

reliance on the express language with respect to “any note”

appearing in the securities acts of 1983 and 1934 would

thwart the purposes of those statutes. The approach to be

taken in deciding wher. a note becomes a security is

obviously a functional approach, and such type approach

inevitably has an ad hoc feature. Under such an approach

it becomes immaterial whether the Court of Appeals

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