# Record and brief — Williamson v. Tucker > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385008_0134%3A0 ## Record - **Collection:** Supreme Court brief - **Document type:** Record and brief - **Published:** January 1, 1981 - **Citation:** 454 U.S. 897 ## Text | 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, V. 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) ii 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 r. rr ** (iü) Page ii a wo NN de = iv 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 V 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 vi 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 Ce 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 Zr 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 — 13 12 10 12 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. 3 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. 4 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 5 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: 7 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’. . .”). 10 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. 11 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 12 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) ; 13 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). 14 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). 15 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). 16 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. 17 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 la UNITED STATES COURT OF APPEALS FIFTH CIRCUIT No. 79-1058 JOHN D. WILLIAMSON et al., Plaintiffs-Appellants-Cross Appellees, v. 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 2a 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- 3a 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 4a 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, 5a 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. 6a 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. 7a 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 8a 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385008_0134%3A0. Public record. Not legal advice.