L & B Hosp. Ventures, Inc. v. Healthcare Intern., Inc.
| Decision Date | 12 February 1990 |
| Docket Number | No. 89-2236,89-2236 |
| Citation | 894 F.2d 150 |
| Parties | , Fed. Sec. L. Rep. P 94,952 L & B HOSPITAL VENTURES, INC., Leo J. Borrell, Bobby R. Lowrance, Psychiatric Associates of Houston, P.A., and Douglas B. Hansen, Plaintiffs-Appellants, v. HEALTHCARE INTERNATIONAL, INC., West Oaks, Inc., Healthcare-Brown Management Co., the Brown Schools, Inc., James L. Fariss, Jr., David L. Whelan and Elliott H. Weir, Jr., Defendants- Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Philip P. Sudan, Jr., Jeffery T. Nobles, Ryan & Shoss, Houston, Tex., Paul V. Castellitto, V. Thomas Lankford, Sharp, Green & Lankford, Washington, D.C., for plaintiffs-appellants.
Robert N. Brailas, Robin C. Gibbs, Gibbs & Ratliff, Houston, Tex., for defendants-appellees.
Appeal from the United States District Court for the Southern District of Texas.
Before DAVIS and SMITH, Circuit Judges, and LITTLE, District Judge. 1
Believing they were bamboozled by the vendee-defendants, vendor-plaintiffs filed suit asserting, among other causes of action, relief under the Securities Exchange Act of 1934. 15 U.S.C. Sec. 78j. The properties which the plaintiffs owned and sold were limited partnership interests in West Oaks, The Psychiatric Institute of Houston Ltd. The purchaser was the general partner.
The defendants presented a very narrow issue in their motion for summary judgment. Stripped to its bare essentials, the motion asserts that there is no securities violation as that which was sold and purchased was not a security. The sellers were so inextricably intertwined in the partnership that they are not afforded the protection of the Securities Act. The trial court determined that there was no genuine issue of material fact and granted the defendants' motion, dismissed the plaintiffs' case with prejudice and dismissed the pendent state law claims without prejudice. Plaintiffs' appealed that decision. We REVERSE.
Four physicians, each having a specialty in psychiatry, recognized a need for an inpatient treatment facility for adolescents and children in the Houston area (Tr. 779). The development of the project was discussed with plaintiffs by defendant James L. Fariss, Jr., an employee of co-defendant Brown Schools, Inc. A limited partnership agreement formed under the laws of Texas was signed in September of 1979; the limited partners were three psychiatrists (Hansen, Borrell and Lowrance) and one medical corporation (Psychiatric Associates of Houston, P.A.) whose members specialized in psychiatry. Each limited partner had a 6 1/4% interest in the partnership. The general partner was Brown Schools, Inc. which owned the remaining 75% interest. According to the physicians, Brown Schools, Inc. had expertise in hospital construction, management and operation.
The nature of the impasse between the limited partners and the general partner is not material to this discussion. We need only observe that some discontent with the investment was the motivating force for plaintiffs to sell their limited partnership interests to the general partner, one of the defendants. The discontent burgeoned into allegations of fraud and deception when the plaintiffs discovered certain post-sale facts which are the basis of their complaint against the defendants.
The standard of review which we follow is summarized in Jones v. Southern Marine & Aviation Underwriters, 888 F.2d 358, 360 (5th Cir.1989). The standard of review at the appellate level of a district court's grant or denial of summary judgment remains the same as at the trial court level. Ayo v. Johns-Manville Sales Corp., 771 F.2d 902, 904 (5th Cir.1985). For summary judgment to be granted, the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, must demonstrate that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Id.; Fed.R.Civ.P. 56(c). See also Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Under this standard, fact questions are considered with deference to the non-movant. Reid v. State Farm Mut. Auto Ins. Co., 784 F.2d 577, 578 (5th Cir.1986). The appellate court decides questions of law, however, just as it decides questions of law outside the summary judgment context: de novo. Walker v. Sears, Roebuck & Co., 853 F.2d 355, 358 (5th Cir.1988); Brooks, Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins. Co., 832 F.2d 1358, 1364 (5th Cir.1987).
The oft cited Celotex, interpreting Rule 56 of the Federal Rules of Civil Procedure, requires the entry of a summary judgment against the party failing to make a showing sufficient to establish the existence of an element essential to that party's case. Celotex, 477 U.S. at 322-24, 106 S.Ct. at 2552-53. In this case, the defendants claim that the plaintiffs do not belong to the class of investors to whom the Securities Act offers protection. There is no disagreement that the Securities Act applies to investment contracts and that, generally, investment contracts include limited partnership interests. Williamson v. Tucker, 645 F.2d 404, 423-24 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). The Supreme Court crafted a definition of investment contract which forms the starting point for our analysis. In S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), an investment contract was defined as "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 the promoter or a third party." More recently, however, the Supreme Court has modified the definition of investment contract. In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621, 632 (1975), the Supreme Court defined or restated investment contract as "an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." This circuit has provided additional guidance in light of Howey and United Housing Foundation directing the benefits of the statute to investors in entities where the " 'efforts made by those other than the investor are undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise ' " (emphasis supplied). Williamson, 645 F.2d at 418 (); see also Long v. Shultz Cattle Co., 881 F.2d 129, 133 (5th Cir.1989); Securities & Exchange Commission v. Koskot, Inc., 497 F.2d 473, 483 (5th Cir.1974).
In ruling in defendants' favor, the trial court found as undisputed facts that the plaintiffs were actively involved in the hospital, contributed to its profitability and were crucial to its success. But the opinion recognizes that the medical acumen of the physicians was not the sole profit generating power unit. The thing needed a head, an operational manager, hence the general partner. The plaintiff limited partners had professional or clinical control but the defendants had managerial control. The trial court equated the professional medical involvement of the plaintiffs and their rights to perform as medical men with being "significant" within the Williamson case, Williamson, 645 F.2d at 422. The trial court concluded that:
The plaintiffs have failed to "designate...
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