Odom v. Slavik, 81-1795

• Decision Date: 23 March 1983
• Docket Number: No. 81-1795,81-1795
• Citation: 703 F.2d 212
• Parties: Fed. Sec. L. Rep. P 99,130 Gerald T. ODOM, Plaintiff-Appellant, v. Joseph F. SLAVIK, Stephen F. Slavik, Sr., The Slavik Company and Slavik Investors, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 212

703 F.2d 212

Fed. Sec. L. Rep. P 99,130

Gerald T. ODOM, Plaintiff-Appellant, v. Joseph F. SLAVIK, Stephen F. Slavik, Sr., The Slavik Company and Slavik Investors, Defendants-Appellees.

No. 81-1795.

United States Court of Appeals, Sixth Circuit.

Argued Feb. 18, 1983.

Decided March 23, 1983.

Donald F. Tucker (argued), Simon, Deitch, Siefman & Tucker, Southfield, Mich., for plaintiff-appellant.

Abba I. Friedman (argued), Robert Friedman, Hyman, Gurwin, Nachman, Friedman, Southfield, Mich., for defendants-appellees.

Before MARTIN and JONES, Circuit Judges and PECK, Senior Circuit Judge.

PER CURIAM:

Plaintiff, Gerald Odom, appeals from a judgment below dismissing, for lack of jurisdiction, his case alleging, inter alia, a violation of the federal securities law. He contends on appeal that the district court erred when it ruled that his partnership interest in an enterprise called Essex at Hampton was, as a matter of law, not a security under the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78a et seq. Though we believe that the court erred in dismissing the case for lack of jurisdiction, we affirm the district court insofar as it held that the plaintiffs interest is not a security.

I.

The Slavik Company, a Michigan corporation involved in the promotion of residential housing and real estate projects, is owned and controlled by Joseph and Stephen Slavik. Gerald Odom, the plaintiff-appellant, worked for that company prior to 1977. He is, it appears, experienced in the management and development of real estate.

The agreement which forms the basis of the plaintiff's claim to have been defrauded in violation of the Exchange Act involves the Slavik Company's plan to develop a community called Essex at Hampton. Some time in January 1976, Joseph Slavik and Gerald Odom had conversations concerning this development. The appellant describes these conversations as meetings in which the Slaviks offered and proposed that he share in the partnership to develop Essex; the appellees contend that Odom demanded that he be given a share in the project. In any event, these meetings gave rise to the partnership called Essex at Hampton.

In June of 1976, a partnership agreement was executed with Gerald Odom and the Slavik Company as general partners. Odom had a one percent interest in the partnership, while the Slavik Company received four percent. The limited partners, yet to become part of the venture, were to have 95% interest collectively. At the execution of the contract, Odom made his proportionate share of the capital contribution, $50.00.

That summer, a construction contract was executed and the partnership engaged in a series of public offerings of the limited partnership interests. The private placements of these interests amassed $1,620,000. for the project.

Some time in February 1978, the partnership agreement was amended. Slavik Investors, a Michigan partnership of Joseph and Stephen Slavik, was added as a general partner. The Slavik Company and the Slavik Investors partnership shared the four percent general partnership interest, giving them, collectively, an 80% share. After this and a second amendment, the agreement specified that an action of any two general partners would bind the partnership. In essence, this meant that Gerald Odom could not control the partnership business. Joseph and Stephen Slavik, through the Slavik Company and Slavik Investors, had effective control over the project.

This suit was filed because Gerald Odom believed that he had been fraudulently frozen out of the partnership and denied his share and control of the business. Odom's complaint alleged six counts of violation of state law and one count of violation of the Securities Exchange Act's anti-fraud provision, 15 U.S.C. 78j [Securities Exchange Act Sec. 10] and Rule 10(b)-5 promulgated thereunder. The jurisdiction of the federal court was premised upon Sec. 27 of the 1934 Act, 15 U.S.C. 78aa, for the federal claim and pendent jurisdiction for the state law claims.

In a motion dated July 2, 1979, the appellees moved to dismiss the plaintiff's action, alleging that the federal claim was frivolous and merely a subterfuge to bring the pendent state claims into federal court. The district court denied the motion on September 11, 1979. For the next two years, the parties engaged in discovery.

On October 5, 1981, the defendant filed a motion captioned a motion for judgment on the pleadings, alleging, among other things, that the interest claimed was not a security under the '34 Act. The motion was made pursuant to F.R.Civ.P. Rule 12(c), and the court, as permitted, considered the motion as a Rule 56 motion for summary judgment. The judge found that the partnership interest Odom had acquired under the Essex at Hampton agreement was not a security under the '34 Act. He ruled that "the court finds no genuine issue of material fact exists, and concludes that it has no subject matter jurisdiction." [App. at 96]. Because it dismissed the federal cause of action for lack of jurisdiction, the district court also dismissed the state claims.

The appellant motioned the court to reconsider this ruling, but was denied. It is from this order that the appellant takes this appeal.

II.

The threshold issue in this case is whether the district court was correct to conclude, as a matter of law, that the partnership interest Odom possessed under the agreement is not a security. The Exchange Act in Sec. 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.

Plaintiff contends that the district court erred in holding that the partnership interest Odom acquired in Essex at Hampton was not an "investment contract" within the meaning of "security."

The seminal case concerning whether an investment contract is a security is SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). In that case, decided under the Securities Act of 1933, the Supreme Court held that an offering for sale of individual rows of trees in an orange grove development, coupled with a contract for cultivating and marketing the trees and a scheme for remitting the net profits to the "owner", was an investment contract. It stated the now well used test for determining whether an investment contract is a security:

In other words, an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or a third party. 328 U.S. at 298-99, 66 S.Ct. at 1102-1103.

The three part Howey test requires that there be (1) an investment of money; (2) in a common enterprise; and (3) on an expectation of profits that will be derived solely from the efforts of others. Though decided under the '33 Act, the Supreme Court has made clear that the definitions under the '33 and '34 Act are "virtually identical." Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

In the case at bar, there is no dispute that the partnership agreement and scheme meets the first two prongs of the Howey test. The issue, then, is whether the agreement creates an expectation of profits solely from the efforts of others.

Literally read, Howey's formulation of the test would exclude any enterprise in which the "investor" had any role in the enterprise. In that case, the profits would not be "solely" from the efforts of others. Yet, the Supreme Court has warned that the coverage of the act would not be governed by labels or strict technical readings of the terms. United Housing Foundation v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). Instead, the economic realities of the situation will govern. Id.

Heeding Forman's warning, several courts have noted that "solely" is not to be read strictly. Rather, when the functions the "investor" performs are not significant managerial ones, but mere ministerial ones, the schemes will not be excluded from the coverage of the act merely because the profits are not derived, in some strict sense, solely from the efforts of others. SEC v. Turner Enterprises, 474 F.2d 476 (9th Cir.1973) cert. denied 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); SEC v. Koscot, 497 F.2d 473 (5th Cir.1974); Union Planters National Bank v. Commercial Credit, 651 F.2d 1174, 1181 n. 9 (6th Cir.1981) [recognizing this view among...