967 F.3d 1082
10th Cir.2020Background
- Foxfield Villa Associates, LLC formed to buy and develop residential lots; BFREF (Bartlett) and PRES (Straub and RDC/Robben) each held 50% membership interests.
- Operating agreement made Foxfield member-managed, required member assent for most decisions (majority/supermajority/unanimous thresholds that in practice required both members).
- Robben served as president/treasurer (CEO/COO), managed day-to-day operations, and weeks after membership purchases the members unanimously authorized him by resolution to execute banking and closing documents binding Foxfield.
- BFREF and PRES each contributed $200,000 to Foxfield (PRES’s $200,000 comprised $100,000 from Straub and $100,000 from Robben/RDC); plaintiffs later alleged Robben fraudulently induced their purchases.
- Plaintiffs sued under §10(b)/Rule 10b-5 claiming the LLC interests were securities; the district court granted summary judgment for defendants finding the interests were not securities and dismissed state-law claims for lack of supplemental jurisdiction.
- Plaintiffs appealed only (1) the securities characterization and (2) the district court’s refusal to retain supplemental jurisdiction over the remaining state-law claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether BFREF/PRES LLC interests are "investment contracts" (Howey) | Interests were investments in a common enterprise and profits would come from Robben’s efforts | Members had contractual control, access to information, and ability to manage—so profits were not solely from others’ efforts | Not investment contracts: Schaden/Howey factors show members had ability to control profitability at purchase; summary judgment affirmed |
| Whether interests are "certificates of interest or participation in a profit-sharing agreement" | Economic form (sharing development profits; could be evidenced by certificates) fits statutory label | Those were privately negotiated interests not designed for public trading; Marine Bank/formal economic-reality analysis forecloses classification as securities | Not securities under this label: private profit-sharing instruments not covered by §78c(a)(10) per Marine Bank and Forman |
| Whether interests are instruments "commonly known as a security" | Operating agreement labeled interests as "security"; transfer restrictions and registration/ exemption language confirm common understanding | Economic-reality test (Howey) applies; because interests fail Howey they are not commonly-known securities | Not commonly-known securities: court applies Howey economic-reality test and reaches same conclusion as to investment-contract analysis |
| Whether district court abused discretion by declining supplemental jurisdiction over state-law claims | Plaintiffs: long federal litigation, extensive discovery, judicial economy favors retention | Defendants: many state-law issues better suited to state court; district court properly exercised discretion | No abuse of discretion: district court reasonably dismissed state claims after federal claim disposed at summary judgment |
Key Cases Cited
- SEC v. W.J. Howey Co., 328 U.S. 293 (establishing investment-contract test)
- Reves v. Ernst & Young, 494 U.S. 56 (broad scope of "security")
- Marine Bank v. Weaver, 455 U.S. 551 (private profit-sharing agreements not securities under the 1934 Act)
- United Housing Found., Inc. v. Forman, 421 U.S. 837 (use economic realities to determine whether an instrument is a security)
- Landreth Timber Co. v. Landreth, 471 U.S. 681 (Howey test relevant to "commonly known as a security")
- Avenue Capital Mgmt. II, L.P. v. Schaden, 843 F.3d 876 (10th Cir.) (six-factor test for LLC interests and ability-to-control inquiry)
- SEC v. Shields, 744 F.3d 633 (10th Cir.) (access-to-information and investor-control analysis)
- Banghart v. Hollywood Gen. P’ship, 902 F.2d 805 (10th Cir.) (managerial efforts significance under Howey)
- Maritan v. Birmingham Props., 875 F.2d 1451 (10th Cir.) (significance of managerial efforts)
- SEC v. Merch. Capital, LLC, 483 F.3d 747 (11th Cir.) (analysis of promoter uniqueness and investor dependence)
- Williamson v. Tucker, 645 F.2d 404 (5th Cir.) (three Williamson circumstances used in investor-dependence analysis)