Foxfield Villa Assocs., LLC v. Robben

• Decision Date: 31 July 2020
• Docket Number: No. 18-3054,18-3054
• Citation: 967 F.3d 1082
• Parties: FOXFIELD VILLA ASSOCIATES, LLC; Richard A. Bartlett; Ernest J. Straub, III; Bartlett Family Real Estate Fund, LLC ; PRES, LLC, Plaintiffs - Appellants, v. Paul ROBBEN; RDC Holdings, LLC, Defendants - Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

967 F.3d 1082

FOXFIELD VILLA ASSOCIATES, LLC; Richard A. Bartlett; Ernest J. Straub, III; Bartlett Family Real Estate Fund, LLC ; PRES, LLC, Plaintiffs - Appellants,

v.Paul ROBBEN; RDC Holdings, LLC, Defendants - Appellees.

No. 18-3054

United States Court of Appeals, Tenth Circuit.

FILED July 31, 2020

John M. Duggan (Deron A. Anliker with him on the briefs), Duggan Shadwick Doerr & Kurlbaum LLC, Overland Park, for Plaintiffs-Appellants.

Robert M. Pitkin, Horn Aylward & Bandy, LLC, Kansas City, Missouri, for Defendants-Appellees.

Before LUCERO, HARTZ, and CARSON, Circuit Judges.

CARSON, Circuit Judge.

We consider whether ownership interests in a limited liability company are securities under the Securities Exchange Act of 1934. The specific attributes of the LLC interests in this case compel us to conclude that they are not. We thus affirm the district court's order declining to characterize the LLC interests as securities and granting summary judgment to the defendants on that basis.

I.

This appeal stems from an attempt to hold Defendant Paul Robben liable for securities fraud. In short, various Plaintiffs allege that Mr. Robben fraudulently induced them to purchase ownership interests in a Kansas limited liability company named Foxfield Villa Associates, LLC ("Foxfield"). Plaintiffs also argue that those interests were securities under the Securities Exchange Act of 1934. Plaintiffs thus maintain that Mr. Robben violated section 10(b) of the 1934 Act (its broad antifraud provision) and SEC Rule 10b-5 (an administrative regulation expounding upon that antifraud provision) when engaging in his allegedly deceitful conduct. See generally 15 U.S.C. § 78j(b) (codifying section 10(b));¹ 17 C.F.R. § 240.10b-5 (codifying SEC Rule 10b-5).²

The specifics are not so simple. The relevant complaint, for instance, contains 114 pages of allegations against Mr. Robben and his company RDC Holdings, LLC ("RDC")—the other defendant in this case—describing their supposedly fraudulent behavior over several years.³ Relatedly, the discovery process and procedural history that arose out of those detailed allegations leaves us with a long and dense appellate record. The course of litigation also highlights the case's complexity: the district court issued stays and consolidated lawsuits, parties came and went, and myriad motions peppered the district docket.

Fortunately, we need not discuss most of those details. The district court granted summary judgment to Mr. Robben and RDC on the sole ground that Plaintiffs’ interests in Foxfield were not securities under the 1934 Act. Because that narrow inquiry—rather than whether Mr. Robben and RDC's conduct was fraudulent—is the lone issue on appeal, we discuss only the factual background and circumstances that influence whether Plaintiffs’ interests fall under the 1934 Act's definition of "security."

To that end, we begin by examining the history of Foxfield. At the most basic level, Mr. Robben—an experienced residential real estate developer—conceived Foxfield as a vessel through which its members would purchase specific tracts of real estate. Some of the targeted tracts consisted of raw land that remained undeveloped; other tracts had been developed for residential use but had not yet been built upon. Even if further development was necessary, the hope was that the members—again through Foxfield—could eventually sell the acquired land for the construction of residential homes. If all had gone according to plan, the members would have earned considerable profits.

Mr. Robben eventually enlisted his acquaintances Richard Bartlett and Ernest Straub to take part in the Foxfield endeavor. Mr. Bartlett was an established businessman who had earned his wealth in the technology sector. Mr. Straub owned construction companies that specialized in both commercial and residential real estate construction. Both men had participated in real estate development projects with Mr. Robben in the past.

Even so, Mr. Bartlett and Mr. Straub were not actual members of Foxfield. That distinction instead belonged to the Bartlett Family Real Estate Fund, LLC ("BFREF") and PRES, LLC ("PRES"), companies which Mr. Bartlett and Mr. Straub respectively owned and operated either in full or in part. BFREF—a company Mr. Bartlett owned outright with his wife—owned a 50% interest in Foxfield. PRES, in turn, owned the remaining 50% interest in Foxfield. But unlike Mr. Bartlett's ownership of BFREF, Mr. Straub did not own PRES outright. Rather, Mr. Straub held only a 50% ownership interest in PRES. The other 50% of PRES belonged to Mr. Robben's company, RDC.

Foxfield's operating agreement governed how BFREF (read Mr. Bartlett) and PRES (read Mr. Straub and Mr. Robben) made decisions and took actions on behalf of the new, member-managed enterprise. Most decisions and actions—e.g., acquiring the targeted real estate, establishing the corresponding sales prices for that land, and selecting and contracting with Foxfield's advisors—required only a majority in interest, which the operating agreement defined as any member or combination of members holding more than a 50% ownership interest in Foxfield. Other specified decisions and actions—e.g., loaning money to other people or entities, assuming the liabilities and obligations of other people or entities, and filing for bankruptcy—required a supermajority in interest, which the operating agreement defined as any member or combination of members holding 65% or more ownership interest in Foxfield. And still other decisions and actions—e.g., merging or consolidating Foxfield with another entity—required the unanimous consent of all members.

Practically speaking, though, the fact that Foxfield comprised only two members with equal ownership interests effectively nullified any distinction between decisions requiring a majority in interest, supermajority in interest, or unanimous consent. After all, given that BFREF and PRES each owned exactly 50% of Foxfield, even a decision requiring just a majority in interest still required the assent of both members; one member acting alone could not tip the scales in its favor. The same held true for decisions requiring a supermajority in interest: no individual member held 65% or more of the ownership interests in Foxfield, so both BFREF and PRES had to agree on any such decision before it could take effect. And by definition, unanimous decisions required the approval of both members.

In any event, one decision that required "only" a majority in interest was the election and removal of Foxfield's officers. The members agreed (and the operating agreement confirms) that Mr. Robben would serve in dual roles as the original president and treasurer. And under the operating agreement, serving as president also made Mr. Robben both the chief executive officer (CEO) and chief operating officer (COO) of Foxfield. Mr. Robben accordingly managed "the day to day operations" of Foxfield and was responsible for "carr[ying] into effect" the decisions of Foxfield's members. As treasurer, Mr. Robben also had the duties of keeping Foxfield's accounts and preparing all of its financial statements.

Mr. Bartlett and Mr. Straub also served as officers of Foxfield. Mr. Bartlett acted as Foxfield's secretary. In that capacity, the operating agreement required him to attend all meetings between members and record the proceedings of those meetings. Mr. Straub, in turn, served as the company's vice president. His primary responsibility in that role was to assume the duties of the president and act in his place should Mr. Robben be unable to do so.

The operating agreement also included other provisions dictating the rights and duties of Foxfield's members. For example, the operating agreement required BFREF and PRES to "devote so much of [their] time and attention as is reasonably necessary and advisable to manage the affairs of [Foxfield] to the best advantage of [Foxfield]." Further, each member—including its designated "agent and representative"—had the right to inspect and copy any of Foxfield's financial records.

Finally, in exchange for their ownership interests, the operating agreement required BFREF and PRES to make capital contributions to Foxfield to help fund the enterprise. To that end, BFREF and PRES each made $200,000 contributions to the company. Mr. Bartlett provided the entire $200,000 on behalf of BFREF. Mr. Straub and Mr. Robben, on the other hand, each provided $100,000 on behalf of PRES.⁴

Several weeks passed between the moment when BFREF and PRES bought their ownership interests in Foxfield and the moment when Foxfield acquired the targeted tracts of real estate. When that day finally arrived, Mr. Robben was the one who purchased that land on behalf of Foxfield and its members. And he did so through a resolution that BFREF and PRES had unanimously passed earlier that very same day. That resolution "authorized and empowered" Mr. Robben to execute a vast array of banking documents (such as mortgages, promissory notes, etc.) on Foxfield's behalf "in connection with the acquisition of lots, the construction of residences, and the sale of residences." The resolution, in other words, gave Mr. Robben permission to bind Foxfield and its assets without first obtaining BFREF's and PRES's—and therefore Mr. Straub's and Mr. Bartlett's—approval. Thus, in the end, Mr. Robben was no longer just the president of Foxfield who merely "carried into effect" the decisions of BFREF and PRES. Instead, as of the day the resolution passed, he could manage and control the enterprise's assets as he saw fit.

Despite that new power, Mr. Robben's efforts at using the acquired real estate to turn a profit for Foxfield and its members ultimately proved unsuccessful. In response, five Plaintiffs—Mr. Bartlett, Mr. Straub, BFREF, PRES, and Foxfield itself—eventually banded together and sued Mr. Robben and RDC. The relevant document includes one claim based on federal law (the securities fraud action...