Deckebach v. La Vida Charters, Inc. of Florida, 87-3836
| Decision Date | 01 February 1989 |
| Docket Number | No. 87-3836,87-3836 |
| Parties | Blue Sky L. Rep. P 72,952, Fed. Sec. L. Rep. P 94,182 R. Alan DECKEBACH; Connie M. Deckebach, Plaintiffs-Appellants, v. LA VIDA CHARTERS, INC. OF FLORIDA; La Vida Management Co., Inc.; Robert M. Dixon; Julia Dixon; George R. Bell; J.C. Hartney; B & H Yacht Ventures; La Vida Charters, Inc. of Virgin Islands; Caribbean Ventures, Inc.; Pamela K. Bell; Dorothy P. Hartney; A.V. Slack, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Flach Douglas, Milford, Ohio, George F. Carr, Jr., Michael L. Cioffi argued, Cincinnati, Ohio, for plaintiffs-appellants.
Michael L. Gay, Cincinnati, Ohio, Elizabeth A. Horwitz argued, for defendants-appellees.
Before KEITH and WELLFORD, Circuit Judges, and HORTON *, Chief District Judge.
R. Alan and Connie M. Deckebach, plaintiff/appellants, seek reversal of the district court's grant of partial summary judgment in favor of the defendant/appellees, La Vida Charters, Inc. and La Vida Management, Inc. (sometimes referred to collectively as "La Vida"); Robert M. Dixon, Julia Dixon and A.V. Slack, shareholders and directors of the two La Vida corporations; Caribbean Ventures, Inc., a successor corporation of La Vida Charters, Inc.; B & H Yacht Ventures, a partnership, and its four partners, George Bell, Pamela Bell, J.C. Hartney and Dorothy Hartney. The two La Vida corporations, the Dixons and George Bell are the primary focus of the Deckebachs' state and federal securities law and RICO claim arising out of the purchase of a yacht from La Vida Charters, Inc. to be operated and managed by La Vida Management, Inc.
The district court dismissed plaintiffs' claims of violations of state and federal securities laws and their RICO claim predicated on violations of federal securities laws, because it concluded that plaintiffs' yacht and management agreement purchase did not constitute a "security" for purposes of either state or federal securities laws. 1 The district court concluded that the Deckebachs failed to demonstrate the element of horizontal commonality, a prerequisite to constitute a "security" under the Sixth Circuit's interpretation of federal law, and that the "investment" plaintiffs made failed also to comport with the requirements of a security under Ohio law. The Deckebachs appeal the grant of partial summary judgment against them. 2 We affirm.
The facts, virtually undisputed, indicate the following scenario. The Deckebachs initiated negotiations with Bell in 1982 to purchase a Pearson 36 Cutter yacht owned by B & H Yacht Ventures. The yacht was at that time harbored in St. Thomas, Virgin Islands, under a management program with La Vida. The Deckebachs had been supplied Bell's name by the Dixons, from whom the Deckebachs had previously chartered yachts. Dixon had provided the Deckebachs with La Vida promotional materials, including a document entitled "Should You Cruise Your Investment," describing yacht management as a combination of the sale of a yacht and then the placement of the yacht in charter service. Those materials explained that La Vida would exercise significant day to day managerial control on behalf of the yacht "owner."
Bell also furnished the Deckebachs with a variety of information, including financial projections and statements of actual income and expenses from his own yacht ownership experience with B & H Yacht Ventures. After consulting with their own tax advisor and legal counsel, plaintiffs decided to purchase the yacht offered. It is clear that they planned to utilize the management program designed and offered by La Vida to acquire the yacht by using rental income to finance its purchase. Ultimately, the goal was to use the yacht solely for personal purposes. The Deckebachs, however, could not deny that neither La Vida nor Bell could make any guaranty as to the amount of income the charter of their yacht to third parties would generate. The Deckebachs also understood that they were not required to have their yacht managed by La Vida, or by any management company. (It was not, in sum, a "tie-in" arrangement.)
As part of the arrangement, the parties agreed that Bell would trade-in the yacht in question to La Vida Charters, Inc. as a downpayment on the purchase of a new yacht and then that La Vida entity would sell the yacht to the Deckebachs. The sale was structured in this way to obtain favorable tax treatment for B & H Yacht Ventures. On September 6, 1983, the Deckebachs entered into an agreement with La Vida to purchase the yacht for $120,500, contingent upon the Deckebachs entering into a management contract with La Vida. The agreement, drafted by the Deckebachs' counsel, also provided that the management contract would extend for five years, but this provision was eliminated at La Vida's insistence. Instead, the management agreement, which was actually executed on October 3, 1983, was terminable by either side upon 60 days written notice by either party. La Vida Management would harbor and maintain the yacht and arrange for its charter to third parties under the agreement. La Vida would receive a monthly management fee and a commission on each charter arranged for the yacht.
La Vida managed a number of other vessels for owners other than plaintiffs, classifying the vessels by type and size. La Vida gave priority to vessels in each class which had been available for charter the longest period of time. Personal use of the vessels was not restricted except in the case involving a pre-existing charter contract. The management agreement also provided that La Vida was an independent contractor, not a partner, joint venturer or employee of the Deckebachs, and La Vida made no claim to ownership, title, or property interest in the vessel. The Deckebachs did not claim that they were involved in a joint venture with La Vida or any of the other defendants. It was clear that other boat owners using La Vida did not have an ownership interest in the Deckebach yacht, and the contrary applied as well.
The Deckebachs never placed money in a common fund with other owners and the income generated by charters of each yacht was segregated and applied towards its expense of maintenance and operation. Although some expense was directly attributable to the Deckebachs' yacht, expenses generally were allocated pro rata among the boats in a particular class or among all the boats in the fleet. There was no sharing or pooling of funds by the various yacht owners dealing with La Vida under the management arrangement.
In March, 1984, Dixon advised the Deckebachs that another boat had erroneously been assigned a charter which should have been assigned to their boat in accordance with the standard rotation policy. Dixon assured plaintiffs that the mistake would be rectified by giving them a charter "out of turn." In October, 1984, Bell, who by then had become associated with La Vida, wrote the Deckebachs and explained to them that because other boats in the same class as the Deckebachs' yacht had been removed from the fleet; it had, in effect, been moved ahead in the rotation. He claimed no other feasible way to compensate for the mistaken lost charter because one could not "go back and remove charter income from one of the 36's that have left our fleet at this date."
The Deckebachs' yacht never operated at a profit. They ceased making required payments to La Vida Management in early 1986 and La Vida terminated the management agreement. The yacht is now listed for sale. The Deckebachs contend that they have unsuccessfully attempted to place the yacht with other charter management companies.
The Securities Act of 1933, 15 U.S.C. Sec. 77b(1) defines a "security" as:
[A]ny note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferrable share, investment contract, voting-trust certificate, certificate of deposit for security, fractional undivided interest in oil, gas or other mineral rights, or in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or to purchase any of the foregoing.
The term "security" is similarly defined in the Securities Exchange Act of 1934. See 15 U.S.C. Sec. 78c(a)(10). The Deckebachs claim violations of both Acts. The definition of "security" set forth in both Acts has been found to be "virtually identical." Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).
The Deckebachs contend that the purchase/management arrangement meets the three part test set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), for determining whether a particular arrangement is an investment contract for purposes of the federal securities laws. Howey requires: (1) an investment of money; (2) in a common enterprise; (3) 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. In Curran v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216, 222 (6th Cir.1980), we construed the "common enterprise" element of the Howey test to require a demonstration of "horizontal commonality."
Plaintiffs ask us to reconsider prior law requiring a showing of horizontal commonality in order to support a finding that an investment constitutes a security. Plaintiffs point to the approach of other circuits which have interpreted Howey to require only a demonstration of vertical commonality. They contend that such a change would protect innocent consumers or investors such as themselves, whose capital may effectively be used to finance a charter business by defendants without...
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