Avenue Capital Management II, L.P. v. Schaden, 843 F.3d 876

Quiznos faced a dramatic business decline (loss of ~3,000 franchises, falling profitability) and could not meet loan covenants, prompting a debt-restructuring transaction.
Avenue and Fortress (sophisticated investment funds) invested and, in exchange, received roughly 80% of membership interests in a manager-managed LLC that operated Quiznos; Avenue invested $150 million and received ~70%, Fortress ~10%.
The LLC agreement gave Avenue and Fortress broad governance powers: ability to amend the LLC agreement, appoint eight of nine managers (Avenue seven, Fortress one), remove appointed managers, appoint non-voting observers, receive quarterly and annual financial statements, and permit Fortress to inspect books.
After financial performance worsened, Avenue and Fortress sued Quiznos managers/officers under § 10(b) and Rule 10b-5 alleging securities fraud; the district court dismissed, finding the transferred interests were not securities (investment contracts).
On appeal, the Tenth Circuit reviewed de novo and assessed whether the interests were (a) investment contracts under Howey, (b) stock, or (c) instruments commonly known as securities, and whether appellate theories were preserved.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether interests were investment contracts	Interests were securities because plaintiffs relied on managers/officers to run Quiznos; profits came from others’ efforts	Defendants argued plaintiffs acquired controlling rights and could govern Quiznos	Held: Not investment contracts — plaintiffs had ultimate control over profitability (amendment power, managerial appointments/removals, information access)
Whether interests constituted stock	Plaintiffs later argued interests should be treated as stock	Defendants defended district-court ruling that interests were not stock	Held: Forfeited on appeal — plaintiffs failed to raise this theory below, so appellate court declined to consider it
Whether interests were "instruments commonly known as securities"	Plaintiffs argued alternative classification on appeal	Defendants opposed; district court did not address it below	Held: Forfeited — not preserved in district court and not argued under plain-error standard on appeal
Whether Fortress could separately argue lesser control than Avenue	Fortress argued it had less control than Avenue and should be judged differently	Defendants treated plaintiffs collectively below	Held: Forfeited — Fortress failed to raise this distinction in district court and did not seek plain-error review on appeal

Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190 (10th Cir. 2013) (de novo review standard for dismissal ruling)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility pleading standard)
GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381 (10th Cir. 1997) (complaint documents central to claims may be considered)
SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test: profits ‘‘to come solely from the efforts of others’’ defines investment contract)
Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985) (‘‘stock’’ characterization and distinction from Howey test)
SEC v. Shields, 744 F.3d 633 (10th Cir. 2014) (factors for assessing control and security status)
Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) (partnership as investment contract only when managers are irreplaceable)
Robinson v. Glynn, 349 F.3d 166 (4th Cir. 2003) (sophisticated investor factor relevant to security analysis)
SEC v. Thompson, 732 F.3d 1151 (10th Cir. 2013) (legal question whether interests constitute securities is one of law)