AVENUE CAPITAL MANAGEMENT II, L.P., а Delaware limited partnership; Avenue International Master, L.P., a Cayman Islands exempted limited partnership; Avenue Investments, L.P., a Delaware limited partnership; Avenue Special Situations Fund VI (Master), L.P., a Delaware limited partnership; Managed Accounts Master Fund Services-MAP10, a sub-trust of an umbrella unit trust constituted by a trust deed governed by the laws of Ireland; Avenue-CDP Global Opportunities Fund, L.P., a Cayman Islands exempted limited liability partnership; Avenue Special Opportunities Co-Investmеnt Fund I, L.P., a Delaware limited partnership; Avenue Special Opportunities Fund I, L.P., a Delaware limited partnership; Drawbridge Special Opportunities Fund L.P., a Delaware limited partnership; Drawbridge Special Opportunities Fund LTD, a Cayman Islands company; FCI Holdings I LTD, a Cayman Islands company; FCI Holdings II LTD, a Cayman Islands company; FCOF II UB Securities LLC, a Delaware limited liability company; FCOF UB Investments LLC, a Delaware limited liability company; FTS SIP L.P., a Jersey limited partnership; Pangaea CLO 2007-1 LTD, a Cayman Islаnds company; Sargas CLO I LTD, a Cayman Islands company; Worden Master Fund II L.P., a Cayman Islands exempted limited partnership; Worden Master Fund L.P., a Cayman Islands exempted limited partnership, Plaintiffs-Appellants, v. Richard F. SCHADEN, an individual; Richard E. Schaden, an individual; Frederick H. Schaden, an individual; Greg MacDonald, an individual; Dennis Smythe, an individual; Andrew R. Lee, an individual; Patrick E. Meyers, an individual; John M. Moore, an individual; Thomas Ryan, an individual; Consumer Capital Partners LLC, a Delaware limited liability company a/k/a Cervantes Capital LLC, Defendants-Appellees.
No. 15-1389
United States Court of Appeals, Tenth Circuit.
December 13, 2016
843 F.3d 876
We note that, contrary to the Trustee‘s suggestion, this interpretation of Subsection (A) is bolstered by the language of Subsection (A)(3). Subsection (A)(3) states that the “money or benefits” referred to in the opening clause of Subsection (A) shall “[b]e fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or оf any beneficiary, either before or after said money or benefits is or are paid or rendered.”
That leаves only the Trustee‘s argument that Subsection (A)(4) alone governs bankruptcy proceedings and that Subsection (A)(3) has no application in bankruptcy proceedings. We need not resolve whether (A)(3) applies to bankruptcy proceedings. Having concluded that the opening clause of Subsection (A) encompasses “[a]ll money or benefits of any kind” that have or will be paid to an insured or beneficiary, it is beyond dispute that Subsection (A)(4) operates to render such money or benefits “fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary.”
For these reasons, we agree with the bankruptcy court that Long was entitled to an exemption in the $60,000 of life insurance proceeds that he received prior to filing his bankruptcy petition.
AFFIRMED.
Rex S. Heinke, Akin Gump Strauss Hauer & Feld LLP, Los Angeles, California (Jeffery A. Dailey, Akin Gump Strauss Hauer & Feld LLP, Philadelphia, Pennsylvania, Jessica M. Weisel, Akin Gump Strauss Hauer & Feld LLP, Los Angeles, California, Stephen M. Baldini, Akin Gump Strauss Hаuer & Feld, LLP, New York, NY, and Allen L. Lanstra, Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California, with him on the briefs) for Plaintiffs-Appellants.
Nathaniel P. Garrett, Jones Day, San Francisco, California (Amanda K. Rice, Jones Day, San Francisco, California, Timothy R. Beyer, Bryan Cave, Denver, Colorado, Bruce S. Bennett and Christopher Lovrien, Jones Day, Los Angeles, California, with him on the brief) for Defendants-Appellees.
BACHARACH, Circuit Judge.
1. The district court dismissed the causes of action for securities fraud based on failure to state a valid claim.
The 1934 Act‘s definition of “security” includes an investment contract, stock, or instrument commonly known as a “security.”
2. Issues and Conclusions
Avenue and Fortress challenge the district court‘s conclusion оn three grounds, arguing that the transaction involved (1) investment contracts, (2) stock, and (3) instruments commonly known as securities. We reject each argument: The transaction did not involve investment contracts, and Avenue and Fortress failed to properly preserve their current arguments characterizing the interests as stock or instruments commonly known as securities.
3. We engage in de novo review.
The district court ruled that the causes of action for securities fraud had failed to state a valid claim. In addressing this ruling, we еngage in de novo review. Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1196 (10th Cir. 2013).
To survive the motion to dismiss, Avenue and Fortress had to plead enough facts to create a facially plausible claim. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In applying this standard, we accept the truth of the complaint‘s well-pleaded factual allegations. Cty. of Santa Fe v. Pub. Serv. Co. of N.M., 311 F.3d 1031, 1034 (10th Cir. 2002). These factual allegations include not only the statements in the complaint but also the documents referenced in the complaint that are central to the claims. GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997). Thus, we rely on (1) the facts alleged in the complaint and (2) the central documents referenced in the complaint.
4. Quiznos restructured its debt after experiencing a sharp downturn.
The complaint and referenced documents show that Quiznos had borrowed heavily before its business sharply declined. From 2007 to 2011, Quiznos lost roughly 3,000 franchise restaurants and profitability plunged.
With this plunge, Quiznos could no longer satisfy its loan covenants. As a result, Avenue, Fortress, and others could foreclose on collateral, call in debt, or accelerate payments. To avoid a calamity, Quiznos restructured its debt.
5. With the restructuring of the debt, Avenue and Fortress gained control over Quiznos.
The restructuring took place through a transaction involving Quiznos, Avenue, Fortress, and others. This transaction made Avenue and Fortress members of a
With roughly 80% of the LLC‘s shares, Avenue and Fortress collectively obtained the power to amend the LLC agreement however they wished. In addition, the LLC agreement empowered Avenue to appoint seven managers (one of whom would serve as the chairperson of the board) and Fortress to appoint one manager. Avenue and Fortress could also remove the managers that they had appointеd. The appointed managers would select the Chief Executive Officer, who would serve as the ninth manager. Avenue and Fortress also obtained the power to appoint five nonvoting observers to attend board meetings.
Management of Quiznos would be vested exclusively with the board. Although Quiznos‘s day-to-day operations would be handled by the CEO and other officers, the board would appoint these officers and enjoy supervisory authority over the officers. If the board wishеd, it could even dissolve the LLC.
At the end of each fiscal year, Avenue, Fortress, and other members of the LLC would receive Quiznos‘s audited financial statements. At the end of each quarter, these members would also receive Quiznos‘s unaudited financial statements. In addition, the LLC agreement allowed Fortress to inspect, examine, and copy Quiznos‘s records.
6. Avenue and Fortress collectively controlled the profitability of their investments in Quiznos, which means the interests cannоt constitute investment contracts.
We must determine, as a matter of law, whether the interests conveyed to Avenue and Fortress constitute investment contracts. See SEC v. Thompson, 732 F.3d 1151, 1160 (10th Cir. 2013) (matter of law). In making this determination, we consider whether the expected profits from these interests were “to come solely from the efforts of others.” SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see Landreth Timber Co. v. Landreth, 471 U.S. 681, 691-92 (105 S.Ct. 2297, 85 L.Ed.2d 692) (1985) (indicating that Howey‘s control test determines whether an instrument constitutes an investment contract). In our view, Avenue and Fortress controlled the profitability of their investments, рreventing characterization as investment contracts.
“An investor who has the ability to control the profitability of his investment, either by his own efforts or by majority vote in group ventures, is not dependent upon the managerial skills of others.” Gordon v. Terry, 684 F.2d 736, 741 (11th Cir. 1982). The greater the control acquired by Avenue and Fortress, the weaker the justification to characterize their investments as investment contracts. SEC v. ETS Payphones, Inc., 408 F.3d 727, 732 (11th Cir. 2005) (per curiam).
In assessing the degree of control that Avenue and Fortress acquired, we consider their contribution of time and effort to the success of the enterprise, their contractual powers, their access to information, the adequacy of financing, the level of speculation, and the nature of the business risks. SEC v. Shields, 744 F.3d 633, 645 (10th Cir. 2014).
Applying these factors, Avenue and Fortress point out that (1) the LLC is manager-managed and (2) the daily operations are controlled by the officers rather than the members. But in three ways, the
First, Avenue and Fortress collectively obtained ownership of about 80% of the LLC. With this level of ownership, Avenue and Fortress could freely amend the LLC agreement. See Wen v. Willis, 117 F.Supp.3d 673, 685-88 (E.D. Pa. 2015) (holding that an interest in an LLC was not an investment contract, partially because the LLC agreement could be amended only if the plaintiff-investor consented). For instance, Avenue and Fortress could amend the agreement to
- make the company member-managed, which would allow direct control over Quiznos, or
- allow dissolution of the company through a majority vote of the members.
See Great Lakes Chem. Corp. v. Monsanto Co., 96 F.Supp.2d 376, 392-93 (D. Del. 2000) (holding that interests in an LLC did not constitute investment contracts, in part because the plaintiff-investor could dissolve the company); Wen, 117 F.Supp.3d at 685-88 (same).
Second, Avenue and Fortress could (1) choose eight of the nine managers, including the chairperson of the board, and (2) remove the eight managers without cause. See Great Lakes, 96 F.Supp.2d at 392-93 (concluding that interests in an LLC operated by managers did not constitute investment contracts, primarily because the plaintiff-investor could appoint all managers and remove them without cause).4 With the power to choose and remove managers, Avenue and Fortress could supervise the individuals handling day-to-day operations and could dissolve the LLC.
Third, Avenue and Fortress are sophisticated and informed investors, allowing them to make informed investment decisions and intelligently exercise control over Quiznos. As professional investors, Avenue and Fortress had earlier invested heavily in Quiznos. See Robinson v. Glynn, 349 F.3d 166, 172 (4th Cir. 2003) (stating that an investor in an LLC “was a savvy and experienced businessman” in concluding that an interest in an LLC was not an investment contract). Under the LLC agreement, Avenue and Fortress could
- receive audited and unaudited financial statements from Quiznos and
- designate non-voting members to attend board meetings.
In addition, the LLC agreement expressly stated that Fortress could inspect, examine, and copy Quiznos‘s books. See Rossi v. Quarmley, 604 Fed.Appx. 171, 174 (3d Cir. 2015) (concluding that an interest in an LLC was not an investment cоntract, partially because the plaintiff-investor had the right to examine the LLC‘s financial documents); Nelson v. Stahl, 173 F.Supp.2d 153, 164-66 (S.D.N.Y. 2001) (holding that interests in an LLC were not investment contracts, in part because the plaintiff-investors had obtained the right “to audit, examine and make copies of or extracts from the books of account of the Company,
In these three ways, the transactiоn gave Avenue and Fortress control over Quiznos‘s profitability, preventing characterization of the investments as investment contracts.
Avenue and Fortress argue that they did not intend to exercise control because they continued to expect the board and the officers to operate Quiznos. But “the test of control is an objective one.” Bailey v. J.W.K. Props., Inc., 904 F.2d 918, 921-22 (4th Cir. 1990); see Warfield v. Alaniz, 569 F.3d 1015, 1021-22 (9th Cir. 2009) (framing the control test as an objective inquiry and stating that “while the subjective intent of the purchasers may have some bearing on the issue of whether they entered into investment contracts, we must focus our inquiry on what the purchasers were offered or promised“). Thus, we analyze the measure of control that Avenue and Fortress could exercise over Quiznos, not the control that they intended to exercise. See Goodwin v. Elkins & Co., 730 F.2d 99, 104 (3d Cir. 1984) (“Whatever subjective perceptions [the plaintiff-investor] may have entertained about his position in the firm, and whatever may have been the role he actually assumed, the legal interest which he enjoyed does not fall within the scope of the term ‘security’ as intended by Congress.“). “So long as [Avenue and Fortress] retain[ed] ultimate control, [they had] the power over the investment and the access to information about it which is necessary to protect against any unwilling dependence on the manager[s]. It [was] not enough, therefore, that [Avenue and Fortress] in fact rel[ied] on others for the management of their investment....” Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir. 1981); see also SEC v. Shields, 744 F.3d 633, 645 (10th Cir. 2014) (“[W]e view the Williamson approаch as a supplement to controlling Supreme Court and circuit precedent in determining if allegations are sufficient to raise a fact question regarding whether a particular investment is a security.“).
The interests could constitute investment contracts only if Quiznos‘s managers and officers were irreplaceable or otherwise insulated from Avenue and Fortress‘s ultimate control. See Williamson, 645 F.2d at 424 (“[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 ultimate control.“). There is no suggestion that Quiznos‘s managers or officers were irreplaceable or otherwise beyond Avenue and Fortress‘s ultimate control.
***
Avenue and Fortress are sophisticated and informed investors that could make informed investment decisions and intelligently exercise their control over Quiznos‘s operations; thus, Avenue and Fortress controlled the profitability of their investments. What Avenue and Fortress purchased was not an investment contract.5
7. Fortress forfeited its argument that Avenue could unilaterally dominate the board.
Fortress argues that it was mistakenly lumped together with Avenue. According to Fortress, it had considerably less sway over the board than Avenue had.
Fortress forfeited this argument by failing to raise it in district court.
8. Avenue and Fortress forfeited their appellate arguments characterizing the interests as stock or instruments commonly known as securities.
Securities include not only investment contracts but also stock and instruments commonly known as securities.
An appellant forfeits an argument by failing to preserve it in district court. Anderson, 827 F.3d at 1238. In district court, Avenue and Fortress never argued that the interests constituted stock or instruments commonly known as securities. As a result, the district court expressly declined to address these possibilities. Ave. Capital Mgmt. II, L.P. v. Schaden, 131 F.Supp.3d 1118, 1125 (D. Colo. 2015).
Avenue and Fortress do not deny that they failed to preserve their argument identifying the interests as instruments commonly known as securities. But Avenue and Fortress insist that they did not forfeit their characterization of the instrument as “stock,” arguing that
- they are simply presenting a further argument in support of their prior characterization of the transactional documents as a security and
- characterization as stock involves a matter of law.
We reject these arguments.
Avenue and Fortress did argue in district court that the transaction involved securities. But what matters are the theories presented in district court, not “the overarching claims or legal rubrics that provide the foundation for them.” Fish v. Kobach, 840 F.3d 710, 730 (10th Cir. 2016).
As Avenue and Fortress observe, their current arguments are consistent with the one presented in district court, for something can simultaneously constitute an investment contrаct and stock. But this observation proves little, for many things are consistent even though they are different. Though the arguments were consistent, Avenue and Fortress never contended to the district court that the transaction involved stock.
Both an investment contract and a share of stock fall under the general category of a “security,” but the two involve different legal analyses. Compare Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (105 S.Ct. 2297, 85 L.Ed.2d 692) (1985) (stating that an instrument constitutes stock when it “is both called ‘stock’ and bears stock‘s usual characteristics“), with id. at 691-92 (indicating that the control test from SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), determines whether an instrument creates an investment contract). Avenue and Fortress‘s arguments
When an argument is forfeited, we have discretion to consider the argument. We sometimes do so when an issue involves a matter of law. Cox v. Glanz, 800 F.3d 1231, 1246 n.7 (10th Cir. 2015). But even for matters of law, we decline to consider newly presented legal arguments unless the proper legal disposition is beyond reasonable doubt. Habecker v. Town of Estes Park, Colo., 518 F.3d 1217, 1227-28 (10th Cir. 2008). The legal disposition is subject to reasonable doubt, for example, when the issue involves a matter of first impression in our circuit. See id. (indicating that proper resolution of a forfeited issue is unsettled when the issue involves a matter of first impression in our circuit).
Characterization оf the interests as stock could involve multiple issues of first impression. For example, we have never decided whether the 1934 Act‘s coverage for a stock transaction is triggered by calling an instrument “stock” when the transaction involves some, but not all, of the attributes of stock. Nor have we decided whether membership in an LLC can constitute stock.
The same is true for characterization as instruments commonly known as securities, for we have not yet addressed this classification for interests in an LLC.
Even though Avenue and Fortress failed to preserve these appellate challenges, we could ordinarily consider these challenges under the plain-error standard. Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1238-39 (10th Cir. 2016). But we have not been asked to review these arguments for plain error. As a result, we decline to consider the newly presented arguments characterizing the interests as stock or as instruments commonly known as securities. See Richison v. Ernest Grp., Inc., 634 F.3d 1123, 1130-31 (10th Cir. 2011) (stating that a failure to argue plain error on appeal “marks the end of the road” for an argument newly presented on appeal).
9. Conclusion
Avenue and Fortress (1) failed to adequately allege facts showing that their collective interests constituted investment contracts and (2) forfeited the remaining appeal points. Thus, we affirm.
COALITION OF CONCERNED CITIZENS TO MAKE ART SMART; 2706 Central Avenue LLC, a New Mexico Limited Liability Company; Fox Pla-
Notes
The parties collectively refer to the following plaintiffs as “Fortress“: Drawbridge Special Opportunities Fund L.P., Drawbridge Special Opportunities Fund LTD, FCI Holdings I LTD, FCI Holdings II LTD, FCOF II UB Securities LLC; FCOF UB Investments LLC, FTS SIP L.P., Pangaea CLO 2007-1 LTD, Sargas CLO I LTD, Worden Master Fund II L.P., and Worden Master Fund L.P. All of these plaintiffs are investment funds affiliated with Fortress Investment Group LLC, an investment management firm that is not a party.