Crowley v. Montgomery Ward & Co., Inc.

• Decision Date: 03 February 1978
• Docket Number: No. 76-1653,76-1653
• Citation: 570 F.2d 877
• Parties: Fed. Sec. L. Rep. P 96,313 Vern CROWLEY, Richard Mansfield, Jerry Wall, Douglas Barton, Jayne Barton, William Dubois, Wendell Winegar, David Dittman, Plaintiffs-Appellants, v. MONTGOMERY WARD & CO., INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 877

570 F.2d 877

Fed. Sec. L. Rep. P 96,313

Vern CROWLEY, Richard Mansfield, Jerry Wall, Douglas Barton Jayne Barton, William Dubois, Wendell Winegar David Dittman, Plaintiffs-Appellants, v. MONTGOMERY WARD & CO., INC., Defendant-Appellee.

No. 76-1653.

United States Court of Appeals Tenth Circuit.

Argued and Submitted Nov. 14, 1977.

Decided Feb. 3, 1978.

Robert J. DeBry, Salt Lake City, Utah (Valden P. Livingston, Salt Lake City, Utah, with him on the brief), for plaintiffs-appellants.

E. Scott Savage, Salt Lake City, Utah (Dennis McCarthy and Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah, with him on the brief), for defendant-appellee.

Before McWILLIAMS, BREITENSTEIN and DOYLE, Circuit Judges.

BREITENSTEIN, Circuit Judge.

The controlling question in this case is whether the "Catalog Sales Agency Agreement" entered into by defendant-appellee Montgomery Ward & Co. with individual plaintiffs-appellants is a security within the purview of the Securities Act of 1933, 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. We hold that the agency agreement is not a security and, hence, there is no federal jurisdiction.

When the case was here before, we reversed in an unpublished opinion. We have now ordered the opinion to be published. See No. 74-1476, Crowley v. Montgomery Ward & Co., 570 F.2d 875. The basic facts are there stated and will not be repeated. The situation then was that the trial court, on consideration only of the pleadings, had dismissed the actions on the ground that the agency agreement was not a security and, hence, there was no federal jurisdiction.

The definition of "security" in each of the Acts includes any "investment contract." 15 U.S.C. §§ 77b(1) and 78c(a)(10). In our first decision, we noted that under Securities & Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244, whether an investment contract is a security depends on "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." We also noted the modification of that test in Securities & Exchange Commission v. Glenn W. Turner Enterprises, 9 Cir., 474 F.2d 476, 482, cert. denied 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53. Turner holds that the word "solely" used in the Howey test "should not be read as a strict or literal limitation on the definition of an investment contract, but rather must be construed realistically, so as to include within the definition those schemes which involve in substance, if not form, securities." 474 F.2d at 482. Applying the Howey test as modified by Turner, we held that the issue was not determinable as a matter of law and directed that on remand, "Consideration must be given to 'economic reality' and the word 'solely' must not be given an unduly restrictive application."

On remand the plaintiffs submitted interrogatories and the defendant responded. Plaintiffs presented the affidavit of a former holder of an agency agreement and of an expert in economics and management. Montgomery Ward presented three affidavits, (1) of an expert in economics and management, (2) of the holder of an agency agreement, and (3) of its Sales Agency Manager responsible for the State of Utah.

Montgomery Ward again moved to dismiss for lack of jurisdiction. The court considered the affidavits presented and entered findings of fact and conclusions of law. Because matters outside of the pleadings were presented and not excluded, Rule 12(b), F.R.Civ.P., requires that the motion to dismiss be treated and disposed of as one for summary judgment under Rule 56. The court ignored both rules. Findings of fact are required in actions tried upon the facts without a jury. Rule 52(a). No trial was held. The action of the court was a grant of summary judgment under Rule 56, and cannot be sustained if there is a genuine issue as to a material fact. Rule 56(c). In the circumstances, the court's findings of fact merit no consideration. We conclude that the controlling facts are undisputed.

This suit was brought as a class action. Probably because of the dismissal of the action, no ruling was made on the certification of the class. The position of the plaintiffs seems to be that the determination of the presence of a security is so intertwined with the merits that decision on jurisdiction must be deferred until the case is heard on its merits. Reliance is placed on Land v. Dollar, 330 U.S. 731, 67 S.Ct. 1009, 91 L.Ed. 1209. In that case plaintiffs claimed that certain shares of stock were never the property of the United States and were wrongfully withheld by the defendants in excess of their authority as public officers. Ibid. at 738, 67 S.Ct. 1009. Defendants asserted that jurisdiction was absent because the suit was in fact against the United States. Ibid. The Court held that the federal court had "jurisdiction to determine its jurisdiction by proceeding to a decision on the merits." Ibid. at 739, 67 S.Ct. at 1013. The question whether the property belonged to the United States was determinative of both jurisdiction and the merits. In the instant case determination of jurisdiction is not determinative of the merits.

Plaintiffs rely on cases distinguishable from that at bar. Mitzner v. Cardet International, Inc., N.D.Ill., 358 F.Supp. 1262, presented a situation in which the tasks of the licensees were purely mechanical and ministerial. In Venture Investment Co., Inc. v. Schaefer, 10 Cir., 478 F.2d 156, jurisdiction was based on diversity and the evidence showed common law fraud. Securities & Exchange Commission v. Koscot Interplanetary, Inc., 5 Cir., 497 F.2d 473, related to a pyramid scheme. Huberman v. Denny's Restaurants, Inc., N.D.Cal., 337 F.Supp. 1249 involved a sale and lease of a restaurant rather than a franchise.

A number of decisions hold that a franchise is not a security. See e. g., Nash & Associates v. Lum's of Ohio, 6 Cir., 484 F.2d 392; Lino v. City Investing Co., 3 Cir., 487 F.2d 689; Bitter v. Hoby's International, Inc., 9 Cir., 498 F.2d 183; and Wieboldt v. Metz, S.D.N.Y., 355 F.Supp. 255. No single determinative test or standard emerges from these decisions. Each case is decided on its particular facts.

In Mr. Steak, Inc. v. River City Steak, Inc., 10 Cir., 460 F.2d 666, affirming D.C., 324 F.Supp. 640, we held that a restaurant franchise, the success or failure of which "stands or falls independently of (the franchisor's) success or failure," was not a security. See 460 F.2d at 670. McCown v. Heidler, 10 Cir., 527 F.2d 204, 208, and Continental Marketing Corp. v. Securities & Exchange Commission, 10 Cir., 387 F.2d 466, 470, cert. denied 391 U.S. 905, 88 S.Ct. 1655, 20 L.Ed.2d 419, emphasize that whether an investment contract is a security depends on the economic reality of the transaction.

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