Roark v. Belvedere, Ltd.

• Citation: 633 F. Supp. 765
• Decision Date: 19 November 1985
• Docket Number: Civ. No. C-1-85-840.
• Parties: Ronald E. ROARK, et al., Plaintiffs, v. BELVEDERE, LTD. et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

633 F. Supp. 765

Ronald E. ROARK, et al., Plaintiffs, v. BELVEDERE, LTD. et al., Defendants.

Civ. No. C-1-85-840.

United States District Court, S.D. Ohio, W.D.

November 19, 1985.

Gary D. Greenwald, Columbus, Ohio, for plaintiffs.

Stanley Goodman, Michael G. Kohn, Frank Cunningham, Sylvan Reisenfeld, Cincinnati, Ohio, for defendants.

ORDER

CARL B. RUBIN, Chief Judge.

This matter is before the Court on defendant's Motion to Dismiss (doc. nos. 7, 11) and on defendant Univest Corporation's Motion to Name an Additional Party Defendant (doc. no. 9). Plaintiffs brought this action under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. and have asserted pendent Ohio claims.

I. FACTS

The plaintiffs in this action are Ronald E. Roark (Roark), R.E. Roark Companies, Inc. (Roark, Inc.), and Belhill, Ltd. (Belhill). The defendants are Belvedere, Ltd. (Belvedere), Univest Corporation (Univest), Oak Street Square, Ltd. (Oak Street Square)¹ and B.W. Morris (Morris), Tom D. Isaac (Isaac), Dr. Harvey I. Sloane (Sloane) and Carson P. Porter (Porter), who have ownership interest in Univest or Oak Street Square. Plaintiff Belhill, an Ohio limited partnership was created in December, 1981 to develop, finance and sell condominium units in the Belvedere Condominiums in Cincinnati, Ohio. Plaintiff Roark, Inc. was the sole general partner of Belhill and defendant Belvedere was its sole limited partner. Belvedere is an Ohio general partnership with Univest, Oak Street Square and Kenneth C. Segal (Segal)² as its partners.

The parties to this action along with Segal entered into an agreement to form a limited partnership. (Doc. no. 1, Exhibit 1). In return for the exercise of Roark's skill and expertise as a developer and arranger of financing, Roark, Inc. was named general partner with a 20% interest in Belhill. Belvedere, the prior owner of the condominium project became the limited partner with an 80% interest. Among the assets transferred to Belhill were promissory notes executed by the buyers of pre-sold units to Belvedere.³ The agreement also provided that Belhill would assume certain existing liabilities set forth in an attachment to the agreement while Belvedere would retain all other liabilities incurred on the project prior to the execution of the agreement. In addition, Roark, Inc. was obligated to procure an interim construction loan in the amount of $2,200,000 and a permanent take-out loan commitment in the amount of $3,800,000. Segal along with defendants Morris, Sloane, Isaac and Porter were to be guarantors of the permanent take-out loan. (See Doc. no. 1 Exhibit 2 at § 8.01).

On December 22, the Limited Partnership Agreement was executed. (Doc. no. 1 Exhibit 2). An interim loan commitment was obtained from Fifth Third Bank as well as a take-out loan commitment from Phenix Federal Savings & Loan Association. Subsequently, the interim loan was closed and Phenix Federal refused to complete the take-out loan.

Plaintiffs assert that defendant failed to disclose certain liabilities of Belvedere relating to the completion of some condominium units. Plaintiffs also assert that defendants failed to live up to the agreement to act as guarantors. Thus, plaintiffs claim breach of contract, fraud and violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10(b)-5, 17 C.F.R. 240 § 10(b)-5.

II. SECURITIES EXCHANGE ACT CLAIM

Defendants contend that the Court lacks jurisdiction over this matter because there is no federal question and the parties are not diverse.⁴ Defendants assert that the matter does not involve the sale of a security and that therefore plaintiffs fail to state a cause of action under the Securities Exchange Act of 1934. Plaintiffs claim that Roark, Inc.'s interest in Belhill is a security as are the promissory notes issued to Belvedere and transferred to Belhill incident to Belhill's creation. For the following reasons, the Court holds that neither Roark, Inc.'s general partnership interest in Belhill nor the promissory notes transferred to Belhill under the Limited Partnership Agreement are securities for purposes of the 1934 Act.

A. General Partnership Interest

The 1934 Act in § 3(a)(10) defines a security as follows:

The term "security" means any note, stock, treasury stock, bond debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but 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.

"Normally, a general partnership interest is not considered a `security'." Odom v. Slavik, 703 F.2d 212, 215 (6th Cir.1983); Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). Plaintiff contends, however, that under these circumstances, Roark, Inc.'s partnership interest in Behill is an investment contract within the meaning of security. The Court does not agree. The test to be applied to determine whether a particular interest is an investment contract for purposes of federal securities law was set out in SEC v. W.J Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). See Landreth Timber Co. v. Landreth, ___ U.S. ___, 105 S.Ct. 2297, 2305, 85 L.Ed.2d 692 (1985).

The three part Howey test requires: (1) an investment of money; (2) in a common enterprise; (3) on an expectation of profits that will be derived solely from the efforts of others. 328 U.S. at 298-99, 66 S.Ct. at 1102-03.⁵ In United Housing Foundation v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), the Supreme Court liberalized the third prong of the test to substitute "primarily" for "solely" in recognition that the economic realities of the situation should govern. In the present case, Roark, Inc.'s general partnership interest fails to meet even the liberalized Howey-Forman test. In some cases, a general partner can meet the third prong of the Howey-Forman test by showing that in spite of the form of the partnership, he was so dependent upon another party that he was in fact unable to exercise meaningful managerial powers. However, the general partner must meet a substantial burden of proof. Odom v. Slavik, 703 F.2d at 215 (citing, Williamson v. Tucker, 645 F.2d at 423). The Sixth Circuit in Odom recognized the following factors set out in Williamson as determinative of a general partner's lack of power:

(1) An agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership; or (2) the partner or venturer is so inexperienced 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 entreprenurial or management ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.

703 F.2d at 215 (quoting Williamson, 645 F.2d at 424).

Nothing in the Agreement to Form a Limited Partnership nor in the Limited Partnership Agreement itself so restricts Roark, Inc.'s actions that he cannot exercise meaningful managerial powers. In fact, the Limited Partnership Agreement in § 5.03 provides: "The General Partner shall have the authority on behalf of the Limited Partnership to conduct any and all Limited Partnership business...." Moreover, plaintiffs cannot claim that Roark is so inexperienced and unknowledgeable in the real estate development business because his sole contribution in return for a 20% interest in the partnership was his "skill and expertise". (Doc. no. 1 Exhibit 2 at § 3.01). Likewise, plaintiffs cannot claim that Roark was dependent on some other manager because he was the sole manager of the enterprise. Plaintiffs claim, rather, that defendants obstructed Roark's ability to manage the enterprise by failing to meet their obligations under the Agreement. While this may constitute a breach of contract claim under state law, the undisputed facts do not indicate that Roark, through Roark, Inc., was so deprived of meaningful partnership authority as to render the general partnership interest a security. See Odom v. Slavik, 703 F.2d at 215.

The federal securities law's anti-fraud provisions were not intended to remedy every instance of common law fraud or breach of contract. Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982). Here the Limited Partnership Agreement explicitly grants the general partner full power and there is no indication that the general partner lacks expertise in the business. Therefore, plaintiffs have failed to overcome the presumption that Roark, Inc.'s general partnership interest is not a security. Odom v. Slavik, 703 F.2d at 216; Williamson, 645 F.2d at 423.

B. Promissory Notes

The 1934 Act in § 3(a)(10) provides that "unless the context otherwise requires," a "security" includes any note except those notes with maturities of nine months or less.⁶ Courts have interpreted the "unless the context otherwise requires" language to consider the economic reality surrounding the issuance of the note regardless of its maturity. See, e.g., Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1981); Chemical Bank v. Arthur Andersen...