Koch v. Hankins, 89-16005
| Citation | 928 F.2d 1471 |
| Decision Date | 21 March 1991 |
| Docket Number | No. 89-16005,89-16005 |
| Parties | , Fed. Sec. L. Rep. P 95,868 Floyd KOCH; Janice Koch; William D. Lowe; Phyllis Lowe; Colin Wong; Mark Burr; Suzanne Borges; Herman Duran; Walter Hashimoto; Shoge Kimura; Hercules Fini, Damien Chang, Ken Takeda, Bill Parrish, Ken Kemp, James Fong, Yui Yee Fong, F. Allen Whitaker, Bob Lugg, Joe Kimura, Beverly Chinn, Harold Chew, Ken Lee, Charles DiBari, Russell DeBari, Richard Plash, Eddon Duran, Rock Koch, J. William Bace, Don Nusbaum, J. Warren Davis, Larry Peterson, Barbara Peterson, George Riley, Harold Hester, Patricia Hester, Jack Isaacs, Robert Chisholm, Forrest Chioppa, Roy Fong, Alan Joe, Virginia Joe, Henry Nigro, James Ford, James Chen, Robert Lee, James Lau, Morris Fowler, Kay Haa, Chris Hara, Frank Ducato, Winston Lee, Allen Tusting, Marcia Tusting, Enrique Agorio, Inger Agorio, Lilia Buck, Stephen Buck, Ue Ching Ow, Pat Ow, Edward Chan, Pat Chan, Pak Tong Yee, Marshall I. Rothstein, Francoise Rothstein, Tom Drake, F.K. Chin, Sandra Chin, Hayden Evans, Arlene Evans, Phillip Lucas, William Jagger, Delores Jagger, Howard Schwat, Robert I. Longstreth, Barbara J. Longstreth, Jerry Vonder Ahe, William Wong, Doreen Wong, Carl Chen, Ben Hara, Helen Hara, Blair Anderson, John Dailley, Sarah Dailley, Fred Drew, Ruth Drew, Terry Kessler, Leland Smith, Helene Smith, Plaintiffs-Appellants, v. Edward J. HANKINS; Robert Chew; Beverly A. Chew; Rodney Chew; Linda A. Chew; Audrey A. Hankins; Carla Patterson; Terry J. Hankins; Bradley L. Hankins; Kerdie J. Hawks; Dean K. Hawks; Rodlin Enterprises, Inc., Carlon Properties, Inc., Kean Financial Corp., Buckingham Financial Corp., Sentinel Financial Corp., Citadel Financial Corp.; Johnson, Hankins, MacDonald, Kimball & Co., Glen MacDonald, Richard C. Clews, Don Kimball, Maxus Management Group, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Andrew Wilson, Wilson, Ryan & Campilongo, San Francisco, Cal., for plaintiffs-appellants.
Montie S. Day, Day Law Corp., Oakland, Cal., for defendants-appellees.
Appeal from the United States District Court for the Northern District of California.
Before CHOY, TANG and FLETCHER, JJ.
The plaintiff-investors ("investors") appeal from the district court's summary judgment that the investments did not constitute securities within the meaning of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b). The investors likewise seek to appeal the district court's denial of their motion for reconsideration of the summary judgment order in light of Hocking v. Dubois, 885 F.2d 1449, 1454 (9th Cir.1989) (en banc), cert. denied, --- U.S. ----, 110 S.Ct. 1805, 108 L.Ed.2d 936 (1990). The defendant-promoters ("promoters") have filed a motion to limit the scope of this appeal to review of the summary judgment order since the investors did not file a separate notice of appeal related to the later order denying reconsideration. The promoters also move for sanctions based on the investors' alleged violations of Circuit Rules 28-2.8 and 30-1.4.
The investors are primarily doctors, dentists and their relatives (and corporations formed by them for investment purposes) who invested between $23,000 and $500,000 each in general partnerships formed to purchase land for the production of jojoba. Several of the promoters had been the longtime accountants of a number of the investors. Promoter Beverly Chew, who drafted most of the relevant documents, had been the attorney for investors Koch, Wong and Lowe for a number of years prior to the time they made these investments. 1 Other defendants are corporations formed by the accountants and lawyer, relatives of the accountants and lawyer, and the accounting firm with which the accountants were affiliated at the time of the investments or with which they had previously been affiliated. 2 The investments were undertaken in part for tax purposes and allegedly were promoted to the accountants' clients on that basis.
The overall investment scheme involved thirty-five different general partnerships, each of which purchased eighty acres of land from "selling corporations" owned by the promoters, which in turn purchased land from a common seller. 3 In all, approximately 2700 acres and 160 investors were involved in the various general partnerships. Although the promoters present the general partnerships as independent entities, the investors assert that the promoters told them at the outset that it was not economically feasible to farm jojoba in eighty-acre parcels; that they never regarded their general partnerships as separate eighty-acre farms but rather as part of a 2700-acre plantation; and indeed that the promoters themselves did not view the general partnerships as separate farms with the capability of operating independently. 4 Prior to the solicitation of investor funds, the promoters arranged for the clearing and levelling of all 2700 acres of the land and the planting of jojoba seed for a predetermined price. Moreover, the Confidential Private Placement Memoranda for the thirty-five general partnerships all specified identically that the general partners would initially employ Franklin W. Rogers as foreman to carry out the onsite farming cultural practices; that two named experts would be consulted as to jojoba planting practices; that the partnership would execute an irrigation lease for a term of five years for an annual rental of $2,800; and that the partnership would purchase from the promoters by bill of sale a supply of jojoba seeds, fertilizer, weed control and other materials at a cost of $300 per acre. In addition, the thirty-five partnerships shared a common field office financed by an administrative fund to which all the partnerships contributed. At a minimum, therefore, whether the eighty-acre partnerships could or were intended to operate independently from the 2700-acre Great Western Jojoba plantation is a disputed question of fact.
Each general partnership was comprised of one operating general partner and a number of general partners. The thirty-five partnership agreements detail identically the rights and responsibilities of the partners. The operating general partners have responsibility for executing the general partners' decisions about the management and control of partnership business. 5 Within each partnership, the general partners have full and exclusive control of the business of the partnership and can take action in that regard only upon a majority vote. 6 Within each partnership, the general partners have the ability to remove any person from a management position by majority vote and have access to the partnership's books and records.
The degree of actual participation by the general partners and operating general partners and its significance to the endeavor is a matter of considerable dispute. The promoters point out that some investors have voted on such partnership business decisions as whether to pay additional assessments to meet operating budgets, a proposed sale of partnership assets in response to an offer by a third party, whether to interplant alfalfa between rows of jojoba, whether to join a marketing cooperative, whether to amend the partnership agreement, water district elections, and whether to stop farming their parcel or section. In addition, some investors have visited the property their partnerships purchased and tested the soil. There are also letters and memoranda in the record from operating general partners and general partners which suggest that the operating general partners paid careful attention to the status of their particular farms and kept the general partners informed in some detail as to the status of particular plots.
The investors argue, on the other hand, that their role was essentially passive. It is undisputed that none of them had any experience in jojoba farming. It appears that even those investors who nominally held the role of operating general partner usually acted as conduits for materials created by the promoters. The investors assert that the operating general partners did not even generate the pro rata assessments for operating expenses for each general partner. Those figures were determined by the promoters. Finally, the investors assert that any voting they did was largely pro forma in light of their lack of expertise, their inability to devote time to direct participation in the project, and their ability at best to shape decisionmaking only for the eighty acres owned by their particular general partnership. It is even disputed in the record whether, had investors actively exercised decisionmaking regarding the farming of their particular parcels of land, their decisions would have been implemented. 7
As one might guess from the fact that the parties are now in court, the investments proved less than successful. "The super bean of the future" did not achieve its full potential in this venture. Approximately ninety of the investors brought suit in the federal district court alleging violations of both federal and state law. The district court exercised its discretion to refuse jurisdiction of the pendent state law claims, leaving only the federal securities law claims. The promoters then brought motions for summary judgment on statute of limitations and jurisdictional grounds. The district court, relying heavily on the case of Matek v. Murat, 862 F.2d 720, 724-32 (9th Cir.1988), granted the promoters' motion for summary judgment on jurisdictional grounds, holding the investments were not securities within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The investors filed a timely notice of appeal.
Subsequent to the granting of summary judgment, this court decided en banc the case of Hocking v. Dubois, 885 F.2d 1449 (9th Cir.1989). The appeal was therefore remanded on a limited basis to the district...
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