J. Donald GOODWIN, Appellant, v. ELKINS & CO., Robert G. Hayden, Richard Sichenzio, and Gabriel F. Nagy, Appellees

will be lower court judgment The part. part and reversed

affirmed sentence will terms of the

length and

be altered. GOODWIN, Appellant, Donald

J. CO., Hayden, Robert G. &

ELKINS Sichenzio, F. and Gabriel

Richard

Nagy, Appellees.

No. 83-1295. Appeals, Court

United States

Third Circuit.

Argued Dec. March

Decided Wolf, Block, (argued),

David M. Doret Solis-Cohen, Pa., Philadelphia, Shorr & for appellees. (argued),

H. Donald Busch A. Lewis Grafman, Dreusche, Karen A. von Busch & Schramm, Pa., Cynwyd, appellant. Bala SEITZ, GARTH, Before BECKER, Judges. Circuit OPINION THE ANNOUNCING THE JUDGMENT OF COURT GARTH, Judge. Circuit case, give In this we are asked to further security definition to what constitutes a meaning within the of federal securities law. Goodwin asserts that his brokerage contract in a firm is a interest, enabling provi- him to invoke the sions of Securities A.ct seeking vindication of his claims. The dis- court, F.Supp. trict held other- wise, claim and dismissed Goodwin’s law, brought under federal securities remitted his common law claims to arbitra- tion. We affirm.

I. brought Plaintiff Donald suit J. Goodwin brokerage firm Elkins & against the Co.1 Sichenzio, Hayden, Richard and Gabriel 1. The also named as defendants Rob- ert 31, 1982, El- least Goodwin, at March a former so as to prejudice induced to avoid kins, that he was sell undue the firm. In Feb- alleged ruary 1982, firm based that it partnership interest back advised made representations would more convenient if his withdrawal false charged a viola- from the firm were to His take effect defendants. January 10(b) agreed Ex- 1982. Goodwin to that Securities tion of Section § 1934, 78j(b) suggestion, 15 U.S.C. and his withdrawal from the change Act of 10(b)(5),promul- firm was as if (1976), of SEC Rule effectuated it had occurred and 1, January com- on gated It also raised state Goodwin asserts thereunder. February agree- and in connection with the law claims of fraud breach mon ment, falsely fraudulently duty. Jurisdiction was based on was and ad- fiduciary § (federal (1976) question firm merger vised that no sale of the 28 U.S.C. pendent jur- planned; and that jurisdiction), under the court’s was the defendants isdiction, fraudulently under 28 concealed from him the fact and also U.S.C. § (1976), 1332(a) negotiations being there existed diversi- that such were then ac- since 17, 1982, citizenship. tively pursued. ty On March when still have Goodwin would been a moved to the federal secu- Elkins dismiss February agreement, the Elkins but 12(b)(6), under Fed.R.Civ.P. and rities claim into, purchased by, merged firm was and compel remaining arbitration of to Bache, Stewart, Halsey, large a New York claims, since Elkins state house, brokerage in a transaction which contained an arbitration clause. advantageous financially gener- was to granted court motion to The district partners suit, al of the Elkins firm. In his dismiss, finding that Goodwin’s sought Goodwin to recover the difference “security” not interest could constitute paid upon him between the amount to his meaning of the Act. It also within (representing his withdrawal the value of the state claims to an arbitrator. remitted 1, 1982) interest January calculated as of rulings ap- that Goodwin It is from these amount would have been peals. paid to him had his interest valued as been originally agreed upon, of the March date II. 31, 1982. 12(b)(6)motion, by a all required As Rule allegations ap are this factual of Goodwin’s com- Two raised on issues First, plaint peal. true. that the dis must be taken as Goodwincontends Elkins, trict a matter of finding and a court erred as was representative. He had law that not state a registered been as- his could He also with that firm for more than 20 claim under federal securities law. sociated when, 1981, argues law fraud years he became dissatisfied that the state claims of firm, fiduciary management policies duty and breach of are within with the scope Partnership Agreement’s as of resignation Octo- and announced clause, He was arbitration and therefore it was er prevailed ber 1981. sever- proceedings ror to send the al firm to withdraw his to arbitra partners We with the firm until tor. address these issues in turn.2 resignation continue Arbitration.) Stay Proceedings partners Compel Nagy, individual of the firm. All to as granted referred to will hereafter be collec- mo- defendants The district court the defendants’ tively "Elkins." by dismissing the first Goodwin’s tion count of staying proceedings and then matter, appel- preliminary we note that As pending submission of all other claims jurisdiction properly lies in this matter as a late arbitration. (1976). decision under 28 U.S.C. final record, reading the de- A fair and of plaintiff's dismiss the defendants moved to The motion, leads us to the action fendants’ construe stay proceedings and to and com- federal claims compelling district court as one taken (The pel defendants’ motion arbitration. are have held such orders arbitration. We "Motion of Defendants Dismiss entitled gress III. did not intend to create a federal cause of action for common fraud. Marine A. Bank, 455 U.S. at 102 S.Ct. at 1223. Exchange Act enacting the Securities It is therefore our task to determine wheth- recognize Congress intend- we general partnership er the legislation, which provide remedial ed to brokerage firm as described Tcherep- liberally construed. turn must be complaint comes within the definition of 332, 336, Knight, 389 U.S. 88 S.Ct. nin “security.” the term (1967). 548, 553, As the L.Ed.2d 564 area, The seminal case in this SEC noted, has definition Supreme Court “[t]he Howey v. W.J. in the Securities Act ‘security’ (1946), 90 L.Ed. 1244 in defined an quite broad. Act was of 1934 vestment contract4 as: adopted restore investors’ confidence contract, transaction or scheme where- markets, and the term ‘securi- the financial by person money a invests his in a com- types ty’ many meant to include ‘the of enterprise expect prof- mon and is led to in our world instruments that commercial solely promot- from the efforts of the ordinary concept fall within the of a securi- ” party er or a third ... Weaver, Marine Bank ty.’ 455 U.S. 555-56, 1220, 1223, Id. at 551, 298-99, 102 S.Ct. 71 at 66 S.Ct. 1102-03.5 (1982) (quoting H.R.Rep. No. L.Ed.2d 409 acknowledges the inherent 85, Sess., (1983)). 11 Cong., 73d 1st difficulty in treating as Nevertheless, scope federal under the Howey “security” of securi- the holder of a limitation, test, by presumed ties laws is not without Con- since he definition is appealable any maturity under 1291. Gavlik Constr. Co. v. or § renewal thereof the is like- Co., (3d Cir.1975). Campbell F.2d 777 H.F. 526 wise limited. Mercury Hospital v. Moses H. Cone Memorial Cf. 1, 927, Corp., Although only 460 U.S. 103 S.Ct. "investment contract" is one Constr. 74 categories of securities enunciat- (1983) (order staying proceedings of the several L.Ed.2d 765 arbitration, compel Exchange brought ed supra in federal court to in the Securities Act {see suit, 3), pending parallel Howey progeny outcome of state court is note we find that and its set 1291). appealable dispositive as final order under But § out the definition in this case. We Co., 133, (3d see Kirschner v. West 300 F.2d argues 134 party Howey note that neither does Cir.1962) (in banc) (order staying proceedings applicable analysis. not announce the More- pending over, arbitration in absence of motion to categories of the other of securities noted compel purposes arbitration held not final for Act, 3(a)(10) only category other § 1291). of § colorably which is relevant is a "certificate of participation any profit-sharing interest or 3(a)(10) 3. Section Act as set forth in 1934 agreement.” Although general partnership 78c(a)(10), provides: 15 U.S.C. § might literally description, fall within this (a) chapter, When used in ... this unless the Supreme profit-sharing] Court has held that "[a requires— context otherwise provision alone is not sufficient to make that note, (10) “security" any The term means Weaver, security.” Marine Bank v. stock, stock, bond, debenture, treasury certifi- 551, 560, 1220, 1225, 455 U.S. 102 S.Ct. 71 participation any profit- cate of interest or (1982). L.Ed.2d 409 We are satisfied re- oil, sharing agreement any gas, or in or other gardless of whether an interest is characterized lease, royalty any or mineral collateral-trust "profit-shar- as an "investment contract” or as a certificate, pre-organization certificate or sub- ing agreement,” require- it still must meet the share, scription, transferable investment con- Howey. ments of tract, certificate, voting-trust certificate of de- posit, security, general any for a or in instru- Howey interpreted "security” 5. While as commonly "security"; any ment known as a or 1933, 2(1) defined the Securities Act of §in of in, participation certificate of interest or porary tem- 77b(l), consistently 15 U.S.C. it has been held § for, for, receipt interim or certificate essentially that this definition is the same as right pur- or warrant or to subscribe to or that contained in the Securities Act of chase, any foregoing; of but shall not 1934, 78c, note, 15 U.S.C. the statute which is at draft, currency any include bill of Foundation, Housing E.g., issue here. United exchange, acceptance or banker’s has a Forman, 837, 12, Inc. v. 2051, 421 U.S. 847 n. maturity at the time of issuance of not exceed- (1975). months, ing days grace, 2058 n. 44 L.Ed.2d nine exclusive of profits solely from the efforts of personally involved [anoth be er]”), not to read alleges, literally how- be when con enterprise. Goodwin sidering by the efforts made an investor. ever, reality, he was invested with City Investing Lino v. 487 F.2d under responsibility little so (3d Cir.1973). Accord, v. Glenn SEC Agreement that ac- Elkins Enterprises, Inc., F.2d W. Turner than that of a position was no more tual (9th Cir.), denied, cert. control partner, and that effective limited (1973). 38 L.Ed.2d 53 An S.Ct. invest exclusively with the of the firm rested may ment contract or interest still be Management Managing Partner and if security classed as a even the investor is asks that firm. Goodwin Committee duties, required perform long some as sup- be to introduce evidence allowed are limited those duties “nominal or find, however, allegation. We port little upon receipt would have direct effect if were to his assertions be that even by participants promised benefits claims interest which Goodwin proved, the promoters.” 487 F.2d at 692. requirement satisfy “se- does not curity.” point It at this the views this panel members of to some extent di Even if Elkins verge. Although Court is unanimous enterprise,” as that as a “common deemed Goodwin’s interest of an Howey’s used in definition term was qualify does not as a under federal contract, persuaded we are not investment laws, securities Seitz and he, gen- as a argument Judge respective concurring Becker their profits to partner, expect “led eral could be opinions would confine their examinations the or a solely promoter from the efforts of Partnership Agreement, to the so and hold. his interest third and thus have party,” conclusion, agree While I with their I gen-A security. classed as an investment would hold that Goodwin’s does firm, partner in as other eral Goodwin’s qualify security primarily as a because firms, is- if unavoidably, even un- similar law, general partner, by the of a role ex operation of willingly, part a of the the beyond permitted tends well the role of a noted, As enterprise. the Sixth Circuit passive investor.6 managerial general powers vested “[t]he inspec- express right the of partners and Accordingly, the that I reach to extent them kind gives tion of the of documents my colleagues, result two same as but protect to themselves leverage ability Pennsylva- wholly by so to do reference scope Act, them intended Partnership that takes outside nia this of portion Slavik, III.A.) (the 703 F.2d opinion Act.” v. of the ’34 Odom remainder of Part ex- Cir.1983). (6th only my those presses 215 views and not of Judge Judge Seitz or Becker. It noted that is true this Court has Act, Pennsylvania’s Partnership “solely,” Howey as used in the Under the term §§ (Pur- (i.e. money in a tit. 301-365 person test “a invests his Pa.Cons.Stat.Ann. expect Supp.1983),7 general partner don a enterprise and is led to common Paragraph complaint alleges characterizing 2 of that El- emphasize 7. I Goodwin’s 6. firm, Pennsylvania partner- careful to a roie in the Elkins have been kins Co. is limited & by placed upon us ship. App. Pennsylvania’s the limitations observe at 2. Limited Part- appeal Act, turn, this arises from an order dis- fact that provides powers, nership missing under Fed.R.Civ.P. rights, general partner in a and liabilities of Becker, 12(b)(6). Unlike I believe we by partnership shall be determined limited allegations all factual con- must take true apply no limited law which if there were pleadings, must rule tained Goodwin’s (Pur- partners. § Pa.Cons.Stat.Ann. tit. validity complaint. only To the facial his on legal position Supp.1983). of Goodwin don rely that I on sources outside extent the Elkins firm is therefore determined within conclusions, my re- reach Act, by Partnership Id. only state statutes liance is based relevant §§ 301-365. general partners, defining role of which judicial taken. See note 9. notice infra firm, agent every and the act of enjoyed does not fall within the partner, only exceptions,8 certain scope of the term “security” as by intended § partnership. binds the Id. 321. Admis- Congress. As by noted the court in New representations partner sions or made York Sloan, Stock concerning partnership affairs is evidence F.Supp. (S.D.N.Y.1975): § against partnership. Id. 323. Notice partner- determination whether the [T]he partner any relating part- matter to a ship interest of a partner is a nership operates affairs as notice to the security does not and hinge should not § partnership. wrongful Id. 324. A act or particular degree of responsibility he partner of trust breach renders the assumed within the firm. The fact that a §§ liable, 325-26, partnership Id. and each partner may delegate choose to day- his subject liability to unlimited to-day managerial responsibilities partnership losses. Id. committee does not diminish in the least equal rights

Each has legal right his to a voice in partnership management partnership and conduct of matters, nor his responsibility under business, subject provisions state law for acts partnership. § 331(5). agreement. Id. Accord, Id. at Pont, Hirsch v. du partner, Each has what amounts F.Supp. 1214, (S.D.N.Y.1975), to an any absolute veto over act (2d aff'd, Cir.1977). 553 F.2d 750 sought performed by part- to be the other ners which contravenes the B. § 331(8). agreement. Id. Even if we were to limit our considera- tion of arguments any person

It is manifest that to the Part- pos- who nership Agreement powers, rights, sesses the which was responsibil- annexed to Dismiss,9 Elkins’ Motion to ities described above cannot have invested capital with the on its expectation profits face reveals that non- solely others, general partners derived from the efforts of in the Elkins firm significant therefore cannot be the retained managerial pre- holder of a “security” rogatives. as intended the provisions Act. What- When these are read subjective perceptions conjunction ever may Goodwin the stat- have entertained position above, about his utes described it is evident that firm, may and whatever have been the role Goodwin’s qualify interest did not as an assumed, actually the legal investment within the meaning of 8. See text at dent 107. Nat'l Bank v. Trust infra Frankford F.Supp. (E.D.Pa.1979); Wright 450 & n. 2 Although Goodwin attached a number of ex- Miller, & Federal Practice and Procedure complaint, hibits to the the one exhibit he did Opinion Judge 1357 at 593. See Beck- infra not attach but to which he referred in the text of disposition, er. Because of our I be- complaint Partnership Agree- his was the 1981 lieve we need not decide at this time the issue of copy ment. Elkins submitted a of the Partner- 12(b)(6) how to treat a Rule motion when un- ship Agreement as an "Exhibit” to its motion to contradicted exhibits are before the court but dismiss, argued pow- that Goodwin retained part complaint. were not made of the Agreement, put ers and duties under the arguments To the extent that Elkins bases its him outside the ambit federal securities "Exhibits,” particular on its and in on the Part- us, argued strongly laws. Before the defendants nership Agreement, arguments might such have provisions Agreement precluded that the of the been better made in connection with a motion relief under the federal securities laws. summary judgment for rather than a motion to motion, 12(b)(6) In normal course on a Rule summary judgment dismiss. Whether or not only pleadings we look and take all factu- proper juncture, given would have been allegations at this al contained in the E.g., discovery Rogin true. 680, the amount of Twp., v. allowed and not al- Bensalem 616 F.2d (3d Cir.1980). court, recognize parties by 685 & n. 14 lowed to the the district is an authority permitting there is entirely some for reference question present- different from the one to uncontradicted exhibits which were not made Opinion ed here. But see infra part of the but which were attached Seitz. moving papers seeking dismissal. See Provi- Moreover, dependence part- on others. reach this law. We securities federal powers fact are in the nature recognition nership not of a full conclusion with opportuni- enterprises role in the given no nominal which a had been that Goodwin his investment contracts in- flesh out seller of would district court ty discovery. clude in order to through avoid securities argument laws; contrary, expect one would example, For promoter to insist on such a ultimate par- any general provides that the investment venture. An control over election, nomination, or re- ticipate in the who is offered an interest in a investor and the moval of the Executive Committee joint general partnership or venture Partnership Agree- Managing Partner. notice, therefore, should be on his general partners App. at 45. The ment fl ownership rights are significant, manage- ultimate group as a also maintain pro- acts will not the federal securities through oversight the Execu- rial control him from a mere failure to tect exercise Managing Partner. and the tive Committee rights. 7(a), part- at App. Id. 45-46. General U 645 F.2d at approve new admissions into ners must involuntary terminations partnership and court, however, Williamson partnership. 21a( )(i) 23(a), Id. UU & open possibility, hold apparently how- powers, if App. All of these even at 60-61. faint, general partnership ever inter- them, provided failed to exercise Goodwin can, circumstances, under unusual meet est manage- role in the him with substantial requirements thereby Howey fall notwithstanding any re- ment of firm protection of the Act. The court within the Agreement. specified strictions stated: fact that an investment mere takes [T]he

C. joint general partnership form of a or inevitably does not insulate it position venture support for his conceivably reach of federal securities con from the interest could laws____ If, example, security, relies Wil stitute a (5th delegated his Tucker, irrevocably powers, F.2d has or Cir. liamson them, exercising or is denied, incapable so 1981), cert. dependent particular expertise on the (1982). In William 70 L.Ed.2d promoter that he has manager no son, before it a real the Fifth Circuit had reasonably reliance on that alternative to the form of estate venture which took powers may person, then his court had general partnership. The district inadequate protect him from the interests could consti found implicit dependence on others which in securities, un and dismissed the suit tute 12(h)(3) subject an investment contract. for lack of der Fed.R.Civ.P. Appeals jurisdiction. Thus, The Court

matter general partnership in which a reversed, on doing so commented among partners agreement the some partnership general that a possibility controlling in the places power hands security. It first could constitute a partners may interest managing be an of certain acknowledged previ have stated what we to respect contract with investment partner general ously: interests a case partners. such other security ships a rule do not constitute power as partnership allocates It interests. continued: has partnership, limited as a investment con- long been held to be an Although partners joint general expect Similarly, one would not individually deci- tract. may not have venturers large to num- decisions, sold they partnership do interests major sive control over public provide any to general general- bers of the influence which have the sort of control; point at some impor- partnership real access to ly provides them with partners a many against be so there would protection information and tant partnership vote would be more like ledgeable in business affairs that he is vote, corporate partner’s incapable each role hav- of intelligently exercising his ing single partnership been diluted to the level of a or powers; (3) venture or partner or corporation. shareholder in a venturer is dependent Such an so unique entrepreneurial some arrangement might well manage- constitute an in- or ability promoter rial manager contract. or vestment replace he cannot the manager of (citations omitted). 645 F.2d at 422-23 enterprise or otherwise exercise court itself acknowledged, Williamson meaningful partnership pow- or venture exception it would carve ers. general out to the rule is a narrow one. (emphasis added). Id. at 424 investor who general claims his [A]n reasoning If the partnership joint or venture interest Williamson is accept is an ed, then position might investment contract has a difficult bur- be more substantial than we find it. part- den to overcome. On the face of The com plaint explicitly alleged that: nership agreement, the investor retains substantial control over his Despite investment the faet that passive certain ability protect partners, and an Goodwin, himself from were denomi- managing partner or manager. general partners, hired nated as the terms of that, Such an investor must the limited partnership agreement demonstrate left so spite little control in the form which hands of Goodwin and took, passive general the investment other depend- partners was so who did promoter ent on the serve on the committee, or on a party third executive that the arrangement that he inwas fact unable to exercise distributed control respect meaningful to those partnership powers. partners gen- A including Goodwin as it joint eral or did with venture the lim- partners. ited designated can be if the inves- establish, example, (1) tor can for Complaint App. Quite U at 6. literally, agreement among parties leaves so and no doubt intentionally, language this power little hands puts the pleadings within the exception or venturer arrangement enunciated in Williamson, which might power distributes as would a limit- protect viability of the federal fact claim (2) ed partnership; or against dismiss, a motion to and allow a venturer inexperienced is so and unknow- plaintiff to raise factual issues.11 Williamson, accept 10. Were we to (1945). then Goodwin 90 L.Ed. 939 "A claim is insubstantial would be port sup- entitled to introduce evidence to only if its clearly unsoundness so results from allegation that he had little or no previous Supreme] decisions of this [the disclose, in the Elkins firm. The docket sheets court as subject to foreclose the and leave no however, that the district court ruled on Elkins’ room questions inference sought that the motion to op- dismiss before Goodwin had the subject to be can controversy.” raised be the portunity discovery to conduct develop or to Levine, Hagans 528, 538, factual record. 1372, 1379, (1974). L.Ed.2d agree We that the claims raised in William- 11. We also note to the extent Williamson son, here, and indeed the claims raised were not general partner allow some forms of utterly so devoid "securities," of merit and ships frivolous as arguably constitute it is require jurisdiction. dismissal for lack of obiter That dictum. The Williamson court was re however, inquiry, viewing is far different from an order of the the one district court that dis here, i.e., we missed a address federal securities whether dismissal claim for lack under of subject 12(b)(6) jurisdiction. matter Fed.R.Civ.P. As for failure to the Fifth Circuit state a cause opinion, noted subject in its the of action test for is warranted. The matter Williamson court jurisdiction under jurisdic- such did no more than to circumstances is wheth hold that federal plaintiff’s er "clearly the appears federal claim tion had remanding been established before for solely to be pur proceedings. immaterial and made explicitly for the further It declined to pose obtaining jurisdiction of summary judgment or where such a discuss whether could have wholly claim granted. is insubstantial and frivolous." been 645 F.2d at and was silent Hood, 678, 682, 773, 776, Bell v. propriety 12(b)(6) U.S. on the of a motion. Its actu- management of argument partnership, under Wil- the neverthe- sole Goodwin’s less, Pennsylvania’s Partnership puts Partnership Act Elkins is that the liamson extent its own limitations on the to which a he limited his Agreement so general partner Sig- can so be restricted. essence, partner. was, in a mere limited nificantly, non-management general a part- noted, however, a whether have As we firm, agent ner is still an and indeed constitutes a interest partnership the conduct can bind firm and firm busi- rights powers and depends legal on the with third in the parties ness same manner may investor. Whatever enjoyed the management partner, as a even such Partnership of if effect the have been the provisions acts contravene the the of persuaded that it are not Agreement, we agreement, unless partnership the third of a statutory powers so diminish the could knowledge party has actual of the non- as partner partnership, in the such general partner’s management authority lack of un- Goodwin, interest the agreement. the der Pa.Cons.Stat.Ann. tit. qualify as a se- possessed he could which §59, agreement 321. Nor an can absolve curity. liability partner’s of for a quarrel with the of course do We wrongful duty, acts or of breaches or ab- proposition legal powers liability partner- a from solve for may joint enterprise in a be participant aof ship particular losses. Notice to a non- agreements con- private from derived management would remain notice Indeed, tracts, public as well as statutes. partnership, to the admissions further than v. How- need look no SEC we against would still evidence the firm. example of a situation ey itself supra text at 103-104. See pri- created was defined interest Indeed, major partner- effect that a by an marily, solely, if not be- have, ship agreement appear would is on Where, parties.12 tween Thus, rights partners of inter sese. a exists a statute which affects there both partnership agreement may modify part- a rights participants in an powers right ner’s a voice in as private agreement, a enterprise, as well as right partners. relates to other It we read the statute and then must not, however, the power could diminish of a conjunction agreement in with each private represent partner to the firm outside legal pow- in order to determine the other partnership, what the below ers that results.13 has set forth as a Even statute minimum. analysis pow- legal of the resultant Our Partnership if Elkins con- leads conclu- vested in to the ers the most draconian restrictions on tained necessarily enjoyed still sion non-management rights partners significant prerogatives operation therefore, possess such partners would still a firm interest not be responsibilities that his could quantum powers law, alle- “security.” Taking which, as true preclude as a matter of Agree- being Elkins a se- gations their from considered sought severely curity under the Act.14 to limit his role ment therefore, argument only ruling, inapposite proceed- 14. that an investor who was al many general ings presented partners here. one of would have such enterprise a diluted interest in the that his role Howey private for the involved contract analogous corporate to that of would become grove, plots along citrus with a sale of in a unconvincing. shareholder also See William- cultivate, harvest, and mar- contract to service son, at we were 645 F.2d 423. If to consider crops. ket large partners, with 54 Wall Street law firm corporation close contrasted a small may private over- course not 13. A contract shareholders, law, only still we would find public many but in instances the rule a "security" comprise but not the for- provisions latter to explicitly to be al- allows statute task, therefore, partners, many or agreement. General no matter how mer. Our tered still, be, group, legally harmonizing they as a are simply two different few be one of management rights. responsible for the firm. of substantive sources 108 course, participant Arbitrability, purely that a is conclude a matter therefore

We in of E.g. contract. United holds a Steelworkers v. who Co., Navigation as that interest is 363 at least Warrior & U.S. enterprise, Gulf law,’15 574, 1347, (1960); does 4 Pennsylvania 80 S.Ct. L.Ed.2d 1409 under defined meaning Balfour, of Commercial Metals v. within Co. Guth possess Co., (5th Cir.1978); therefore rie 577 F.2d 264 law. We will & federal securities Co., district court which United v. order of the Steelworkers Crane 456 affirm the (W.D.Pa.1978). F.Supp. resolving federal securities 385 Goodwin’s dismissed contract, question such a a federal court claims. sitting diversity normally be bound state law under the Erie doct IV. enacting rine.17 In the Federal Arbitra prop- court find that the district Since we §§ Act, 1-13, however, tion 9 U.S.C. Con federal erly securities dismissed gress intended to establish a uniform feder claims, complaint is reduced to an ac- al law over contracts which fall within its diversity tion in for fraud and breach of Thus, scope. if the Arbitration Act is fiduciary duty under state law. Before applicable, applies deemed federal law commence, discovery could Elkins moved to construing enforcing an arbitration of these state claims compel arbitration clause, juris even in those cases which Partnership Agreement’s under the arbitra- Huber, diversity. diction based on Hunt agreed court tion clause. The district Nichols, & v. Inc. Architectural Stone Elkins, remitted Goodwin’s state (5th Cir.1980); 625 F.2d 22 Becker For the reasons claims to an arbitrator. Autoradio Inc. v. Becker USA Autoradio below, expressed hold that arbitration we GmbH, (3d Cir.1978); werk 585 F.2d 39 Agreement, proper under the and will Corp., v. Collins Radio Co. Ex-Cell-O portion therefore also affirm (8th Cir.1972). Indeed, applies F.2d 995 it court’s which committed the district order proceedings to in state courts as well as claims to arbitration.16 state Corp. federal courts. v. Southland Keat — —, 852, ing, U.S. 104 S.Ct. A. (1984). L.Ed.2d 1 initial confronts issue which apply gauging to us is what law To be included within the cover Act, age propriety of the district arbitration of the Federal Arbitration an arbi court’s Although originally provision order. Elkins moved tration must be contained evidencing the district court for arbitration un “contract a transaction involv before Act, commerce,” ing and has der the Federal Arbitration 9 U.S.C. For the arbi brief, parties provision cited to that Act in its both tration at issue here to be con law, therefore, argue discussing the Partner state law strued under federal ship Agreement’s provision. Partnership Agreement arbitration Elkins must be Shareholders, many pro no matter how Such a course could lead to courts. be, they may legally longed litigation, very par few have a circumscribed one of the risks the corporation. ties, arbitration, role in the of a State by contracting sought to corporation uniformly — statutes invest exclusive Keating, Corp. eliminate." Southland U.S. manage ordinary business affairs —at—, 856, 104 S.Ct. 852 at 79 L.Ed.2d Directors, very indeed the with the Board of (1984). concept corporation of a is one in which the Because we find that the federal securities ownership. control of assets is divorced from dismissed, properly claims were the rule in Wil- Swan, ko v. 346 U.S. 74 S.Ct. 98 L.Ed. adopted Uniform Part- has (1953), exempts securities claims nership Act the Uniform Limited Partner- Act, inapplicable. ship provisions provisions, from arbitration and therefore should regard. typical most statutes in this state Tompkins, Co. v. 17. Erie Railroad stated, Supreme 16. As the Court "Contracts has (1938). L.Ed. by allowing to arbitrate are not to be avoided ignore party one the contract and resort

109 evidencing applied eral or state is makes no differ- a transac- law to a contract found result,19 ence in the find- substantive and there- commerce. Such tion interstate however, perceive prolong fore no reason to these is a determination ing, factual proceedings. rely will on state initially the district We law by be made must which discussion, although Here, court our the same outcome the district court. findings doubtlessly Elkins would obtain if we were whether the to no made apply Arbitration Agreement constituted con- Federal Act. We question turn evidencing in commerce therefore to the substantive transaction tract whether, Pennsylvania law, it of what law was under Good- did not state under of of As win’s claims fraud breach fiduci- committing the matter to arbitration. Co. v. ary duty scope of Part- noted in Gavlik Construction are within we (3d Co., nership Agreement’s arbitration F.2d clause. Campbell H.F. 526 777 Cir. pre- 1975), findings absence of these “[t]he B. applicability of our consideration cludes Id. at 784. Al- Paragraph 31 of the Elkins Part of the arbitration act.” part- Agreement following possible nership it contained though certainly is brokerage provisions.20 firm nership of a interstate dealing securities involves 31. Arbitration. Any controversy commerce,18 assump- make we cannot this by arising hereunder will be determined predicate. proper factual tion without pursuant to the Constitution arbitration speculate on what much we “However pf of and Rules the Board of Governors perform- may have the nature been Exchange. If the New York Stock for contract, it by the required ance any possi- reason such arbitration is not appeal for us to determine on impossible ble, controversy be submitted will Act United States Arbitration whether the to the American Arbitration Association us require do For to so would applies. for under Rules but before arbitration an initial factual determination make If panel of at least three arbitrators. contract evidence ‘a transac- whether possible, such arbitrators shall include involving within the mean- commerce’ tion firm one or a member Merritt-Chapman ing of 2 of the Act.” Exchange, one New York Stock officer Turnpike Corp. v. & Scott president of vice of a at least the rank Commission, 387 F.2d (3d 772 Cir. Philadelphia company bank or trust 1967). practicing one member the Bar in Phil- of a ma- adelphia. The written decision could, course, remand the We binding jority of said arbitrators will be requisite to the district court matter parties hereto. conclusive finding if no alterna as to commerce other Gavlik, face, Agreement’s F.2d at On its the Elkins arbi- available. 526 tive were sweep. “Any find, however, fed- tration clause is broad We whether 784. Co., F.Supp. Lynch 19. See note 23. See Fox v. Merrill 561 infra (S.D.N.Y.1978) (employment contract which in corporated N.Y. Stock arbitration Although, ruling upon the dismissal Good- provisions commerce and involved interstate claims, questioned we win’s federal securities act); governed Dick federal arbitration was deciding appropriate without whether it Pont, (D.Mass.1970), F.Supp. stein v. du Elkins Partner- consider the actual text Cir.1971) (1st (employment aff’d, F.2d 783 9), (see ship Agreement supra 6 & regularly engaged by is com- accountants arising hereunder” controversy n Partnership), general- been settled accordance with It has to arbitration. mitted ly accepted accounting principles consist- may clauses cover not expansive that such ingly applied life of an and with such reserves for arising during the only disputes contingencies may from or as which arise otherwise also those agreement, but necessary proper, subject to Supreme deemed demise. provisions:21 following similar to the provision dealt with Court Shriber, 465 one this case Waddell Disputes over the value of Goodwin’sshare (1975) (Wadell I) (con- A.2d Pa. termination, Partnership upon there- N.Y. Stock struing provision of fore, itself, Agreement arise out of the “any commits contro- Constitution would be arbitrable. arbitration). parties” to versy between The fact that Goodwin’s state held that: The court phrased claims are in terms of “fraud” and create a contractual rela- parties When fiduciary duty” “breach of does not remove includes a broad arbitra- tionship which scope them from the of the arbitration they intend to include agreement, tion clause. Intentional torts even less connect any scope of arbitration dis- within ed to the actual terms of the contract have arising the termination of that pute from by Pennsylvania to be been found courts relationship they unless contractual subject to arbitration. v. Shri Waddell purpose to exclude clearly evidence a ber, (1976) Pa.Super. 357 A.2d 571 disputes. II), (Waddell the court considered whether added). (emphasis Id. at arbitrable,22 claim for was defamation defamatory language alleged when the was Here, complains in connection with the termination uttered dealing the termination of his interest with of a interest. The II Waddell tortiously partnership, Elkins acted court noted: withholding pertinent information from by dispute, arises from him. Such a provides The NYSE constitution Agreement. provisions of the very “any controversy”. the arbitration of Partnership Agree 27 of the Paragraph intentional tort While it is true that the provides: ment arbitrated, normally of defamation is not not ex- to arbitrate does Payment In- 27. Valuation and “any phrase clude this claim. The con- Partners. terests General troversy” certainly enough broad (a) Upon the termination of the Part- dis- embrace tort as well as contractual Membership of a nership or the General being putes, only limitation that the value the interest Partner ... dispute applicable has its roots in the (hereinafter referred to as such Partner relationship parties. between Partner”) “retiring in the Partner- A.2d at If defamation uttered by the Partner- ship will be determined subject part- the termination of a Inventory Date connection with ship as retiring nership Partner to re- interest is considered to be arbi- right dispute, trable then it would seem a (the cost of which audit quest an audit fortio- fraud, Partner) party entirely by such ri that committed while shall be borne very provisions of actually executing the independent public certified account- by termination, (who dealing Agreement by ants selected dispute seems to independent public certified also arbitrable.23 Such may be the wrongly argues II was that Waddell lists various rules and 23. Goodwin 21. The then decided, it was de- arriving need not control since procedures at value for to be used in only by court. an intermediate state partnership. cided be bound that we While it is true interpretation law if of state lower state court’s parties and II involved the same 22. Waddell Pennsylvania Su- we arc convinced agreements did Waddell I.

m clearly applica- rately us to have “its roots because differ my somewhat from relationship parties.” ble between the colleagues on the governing analysis. Partnership Agreement The Elkins con- contained federal provision tains as broad an arbitration as is securities claims and state law claims for in normal usually encountered course. We fraud and of fiduciary duty. breach Elkins enough find that it is broad to cover the moved to dismiss the federal securities disputes allega- raised Goodwin. His 12(b)(6) claims under Fed.R.Civ.P. [failure defendants, by of tortious tions conduct the to state a and to compel arbitration claim] in connection with the termination of his claims under an law arbitration state the of interest, partnership squarely fall within agreement. partnership clause in the Elkins subject the of Partnership matter the dismissed the federal The district court Agreement. Significantly, parties the did claims and ordered arbitration of state “clearly purpose evidence a to exclude claims.1 disputes.” I, 348 Waddell A.2d at Judge My first concern with Garth’s 101. We therefore conclude that the dis- disposes it of opinion is that Goodwin’s properly relegated trict court Goodwin’s complaint by affirming the order of the state claims of fraud and breach of fiduci- ary duty to arbitration. granting district court which in the motion cognizance

to dismiss took terms agreement though the even V. com- agreement was not attached to the True, agreement plaint. was attached dismissing court of the district The order However, claims, the dis- di to the motion. before federal securities Goodwin’s it, remaining rely required it state claims trict court could was recting that the arbitrated, 12(b) will be affirmed.24 treat the motion as by Fed.R.Civ.P. and, summary judgment ordi- a motion for

SEITZ, concurring. Judge, give opposing party opportu- an narily, respond any with relevant material. nity to judgment of the court join I While However, for reasons This was not done. of the district court affirming the order later, persuaded I that the developed am directing dismissing claims and the federal claims, sepa- failure to treat Elkins’ mo- I write district court’s of the state arbitration otherwise, challenge validity of the El- we find no does not even preme hold Court would itself, merely Partnership is the circumstance here. but that such indication kins policy wholly consistent with the challenges Waddell II is the defendants the manner in which Supreme by Pennsylvania, announced carrying Agree- out the conducted themselves in Court, encourages See Wad us, arbitration. provisions. is clear to ment’s termination It I, stating (Supreme A.2d at 99 Court 348 dell therefore, would be arbi- that Goodwin’s claims courts"). "arbitration is favored Act. Al- trable under the Federal Arbitration starkly irregularity defined absence of a noted, though, have state law controls as we decision, therefore, hypothesize decline to we here, Pennsylvania the absence of authori- ”[i]n Pennsylvania disagreement Su between the ty contrary we shall assume appel preme state’s intermediate Court and the Pennsylvania courts would take the view late court. Supreme adopted by Court of the United expressed policy both in that the We also note Scott, F.2d at Merritt-Chapman & 387 States.” favoring II arbitration I and Waddell Waddell 771. analogous pronouncements agrees in fed- Corp. & Paint v. Flood Conk- eral law. In Prima affirming holding, the dismissal of 24. Our Mfg. U.S. 87 S.Ct. lin and the arbitration Goodwin's securities claims (1967), Supreme held Court L.Ed.id claims, remaining in no state law of Goodwin’s Act, Arbitration an alle- the Federal under any respect way to the mer- intimates view with the con- gation in the inducement fraud claims. its of Goodwin’s properly con- submitted under was tract provision, absent a arbitration broad tract’s correctly my colleagues am doubtful showing clause itself was the arbitration directing as one the arbitration order construe Accord, Merritt-Chapman & fraud. induced pend- staying action than arbitration rather Comm’n, Turnpike Corp. Pennsylvania v. Scott ing arbitration. Here, (3d Cir.1967). Goodwin F.2d 768 summary judgment pertinent allegations motion for tion as a complaint. error. harmless was claims, alleges that: the federal Turning to I are we Becker and 16. Pursuant to the the El- terms of here decide whether need not partnership agreement, kins limited man- responsibilities rights and under partner’s agement was vested in Elkins’ executive Uniform Act committee, information and be- prevent general part lief, are sufficient many of Elkins’ deci- being treated as a se interest from ner’s solely by managing sions were made purposes of federal law. Good curity general partner. win’s Despite pas- the fact that certain Howey, under SEC Goodwin, partners, sive such as were de- (1946), if L.Ed. 1244 there was general partners, nominated as the terms contract between Goodwin and investment partnership agreement of the limited left respective opinions, Judge In their Elkins. in so little control the hands of Goodwin Judge Becker have summarized Garth passive general partners and other who responsibilities general of rights the committee, did not serve on the executive partners Partnership Agreement. under the arrangement that the distributed control agree and I that a Judge Becker respect general partners to those degree partner participation with this of including it did lim- Goodwin as with the security affairs is not a holder. partners. ited See, Slavik, 212, e.g., v. 703 F.2d 215 Odom question The under Lino is whether these (6th Cir.1983); DuPont, Hirsch v. 396 allegations point significant to a variance 1214, (S.D.N.Y.1975), F.Supp. 1220-21 Partnership between the terms of the (2d Cir.1977); NYSE, aff'd, 553 F.2d 750 manage- and the allocation of Sloan, 1303, (S.D. F.Supp. 1314

Inc. v. power in Paragraph alleges ment fact. N.Y.1975). I my do not consider conclusion managing partner many that made to be inconsistent with the dicta Wil management decisions himself. It is Tucker, 404, 645 F.2d 422-24 liamson v. allegation challenges not clear that this (5th Cir.1981), denied, 897, cert. Partnership Agreement, substance of the 396, (1981). 70 L.Ed.2d 212 102 S.Ct. provides Partnership which will “[t]he managed by Managing Partner un- City Investing Lino v. 487 F.2d supervision der the of the Executive Com- 689, (3d Cir.1973), we that if an held subject approval mittee or decisions agreement is not on its face an investment language of the General Partners.” This contract, plaintiff allege and the does not managing would seem to authorize the question facts that call into the substance management to make decisions. agreement, plaintiff of the is not a holder, security a matter of A possible interpret paragraph law. It is 16 as concern, however, overriding allegation managing partner is to court’s reality” respect determine the “economic of' the in fact the terms of the did not enterprise. Partnership Agreement usurped and had Tcherepnin Knight, 548, 553, unspecified U.S. 19 L.Ed.2d some amount of control.2 Even (1967). interpretation paragraph Aqua-Sonic See SEC v. Prod- under this Cir.1982) ucts, (2d alleged managing partner’s 687 F.2d 582-84 excesses (license agreement is an investment con- could not convert Goodwin’s optional management powers security. into a Goodwindoes not tract where general part- agreement allege are a mere for- that he and the other described exercised). management pre- deprived mality unlikely to be I turn ners were managing partners specify succeeding whether 2. Goodwin’s does not whether ment or particular managing allegedly authority. exceed- their exceeded authority Partnership Agree- ed his under the

H3 BECKER, Partnership Agreement Judge, concurring: that the Circuit rogatives face, including right on its grants judgment Court, I concur by majority managing partner replace part and in III Judge all but Garth’s Moreover, vote.3 opinion. agree essentially I Judge part with what Garth has written allegations paragraph of Good- B. My Judge III difference with Garth is pertain explicitly and exclu- win’s I ground solely that would our decision sively to the allocation upon terms of the Elkins Limited & Co. terms of the Part- pursuant to the power Agreement, to Goodwin Partnership Agreement. I have concluded nership a signatory, was and would not reach the this does not allocation above arguments founded security holder. make Goodwin Act. Obviously Uniform this argues he could not approach presupposes control view partnership agreement properly before firm and management of the present posture us the case. management deci- dissatisfied with Judge have Garth Seitz sions, minority partner unhappy but an point, doubts on but I that the this believe not a holder make. See does properly before us and hence Odom, F.2d 215. Goodwin also ar- 70S at dispose of the case the narrower effectively denied access that he was gues grounds partnership agreement. necessary for him to the information question will first address the we whether because Elkins protect investment agreement, consider the and then its alleged merger inform him of the failed to legal effect. negotiations. Although the federal securi- Where, here, allegations of a com- by requiring protect laws investors dis- ties plaint on underlying are based written doc- information, see, certain kinds of closure of uments, authenticity docu- and of those 336, Tcherepnin, 389 U.S. at 88 S.Ct. e.g., unchallenged, ments I that a believe laws the federal securities are not at may properly consider those docu- court one protect invoked to properly pursuant ments on a motion to dismiss copartners. from the deceit of his 12(b)(6),even Fed.R.Civ.P. if the documents Although I treat the district would formally complaint.1 are not attached to the dismissing federal order court’s contrary holding plaintiffs A would enable granting order law claims as an securities 12(b)(6) to survive a motion where Elkins, summary judgment in favor of I terms of on the claim the document which order, grounds that on affirm albeit would complaint is based render the insuf- would Judge from those on which Garth law, different simply by ficient re- as a matter join disposition in fusing I the state the com- relies. to attach the document to plaint.2 Accordingly, claims. This is such case.3 law ations, (9th Cir.1982). Agreement, gener- In Town- each 667 F.2d 844 3. Under send, ownership proportion votes in to his under- al the court stated the documents voting pow- partners Limited have no lying interest. in that case were "in sub- er, Partnership Agreement explicitly and the they complaint, though part stance” of the even management prohibits participation in the their complaint. The court were not attached to partnership. control or not, however, hold that did need to Townsend underlying be considered documents could question are wheth- The courts divided on motion, 12(b)(6) felt that on a because it rule plaintiff required to attach written aer require- opportunity respond the notice and to a thereon. See 2A contract based summary judgment under Fed.R. ments Moore, at Moore's Federal Practice 8.17[6] J. substantially Civ.P. had been met. agreement partnership In this case the 8-184. 12(b)(6) Rule attached as an exhibit Goodwin, clearly complaint, relied on in his motion. agreement. limited the terms of the it would Ninth Circuit indicated 2. jijj complaint. See 17 of the Oper- in Townsend v. Columbia reach that result addition, provides a document is that where hold “[ejach partner substantially necessarily relied will devote all actually complaint, and its authen- of his business time and attention to the allegations of conceded, may (117(b)), the document partnership” ticity is business of the on a motion under not, the court during considered “will the continuance partners 12(b)(6).4 approach This carry Fed.R.Civ.P. Partnership, on or be con- dispose courts to the district would enable any cerned with or interested in ... other which, light of the documents of claims other than as herein business venture based, legally are insuf- they are on (117(c)), provided” and that in- necessity allowing ficient, without (1122). assigned not be terests discovery generally required extensive factors, together, negate These taken summary a motion for passing before argument partners that the interest of judgment. basically passive the firm was invest- of the Limited that the terms I believe above, As I have noted in his com- ment. dispose of Good- Partnership Agreement plaint this case Goodwin has relied on law, as a matter of securities claims win’s agreement, actually the terms of the manage- concerning allegations if his even constructively, alleged and has not that the accepted as true.5 Elkins & Co are ment of provisions referred to above were shams. his interest was a prove In order to circumstances, these the terms of Under meaning “security” of the secu- within agreement conclusively determine that laws, had to show his rities general partnership interest created an- in Elkins falls within the test thereby security. is not a Goodwin’s alle- Com- nounced Securities concerning gations non-participation Co., 328 U.S. Howey mission W.J. fail to state a claim therefore (1946), 90 L.Ed. law, under the securities whether or not basically attempts progeny.6 That test to they are true. active, passive investments from separate in businesses. As

participatory interests out, the El- opinion points Garth’s general part- agreement provides that

kins nomination, in the may participate

ners

election, Executive or removal of the Com- Partner, Managing

mittee and the

they through retain ultimate control overseeing

function of the decisions of the managing

executive committee and the they retain over

partner, and that

new and over admissions I note

involuntary terminations. holding by Since the I am in this under Fed.R.Civ.P. 56. buttressed interpretation of a written docu- rule that the renders insuffi- purposes appel- law, ment is a matter of law for proof as a matter of factual cient Emor, scope Cyprus late review. See Inc. (3d Cir.1972). allegations would not be ''ma- Corp., Therefore, Mines 467 F.2d disposition terial” to our of the case. language of contract Where the written the district court’s there was no harm from dispositive of an issue as a other document is give opportunity Goodwin an failure to law, reason even the matter there is no for granting present factual rebuttal before the mo- discovery presentation cursory re- factual summary for even if we treat it as one tion quired Fed.R.Civ.P. 56. legal insufficiency. judgment the basis of Judge posi- Seitz’s understand this to be position, I believe that we 5. Because I take this tion as well. dispose case on the basis of the could agreement of this even if we had to treat motion opinion. 4 of Garth’s 6. See note summary judgment dismiss as a motion notes exami- and mem account executive contract between obviously warranted nation of Exchange, contem firm N.Y. Stock ber determining arbitrability of the law state travel or plated that account executive would arbitration as an claims. Since Elkins raises states involved inter solicit customers other defense, only equitable proper, but it is not commerce); Kohlmeyer & Tallis state cf. required produce support it it. evidence (5th 1977) (validity of arbitra F.2d 632 Cir. application for allied member clauses in tion exchange governed ship federal in stock law).

Case Details

Case Name: J. Donald GOODWIN, Appellant, v. ELKINS & CO., Robert G. Hayden, Richard Sichenzio, and Gabriel F. Nagy, Appellees

Court Name: Court of Appeals for the Third Circuit

Date Published: Mar 14, 1984

Citation: 730 F.2d 99

Docket Number: 83-1295

Court Abbreviation: 3rd Cir.