Reeves v. Teuscher
| Decision Date | 10 August 1989 |
| Docket Number | Nos. 86-3964,86-4028 and 86-4110,s. 86-3964 |
| Parties | Fed. Sec. L. Rep. P 94,541, 14 Fed.R.Serv.3d 600 Merle and Doris REEVES; Herman J. and Anna Davis; John Shierman; Milton and Joann Johnson; Ralph and Margaret Boyden; Kenneth and Janice Lundeberg; Barbara Chodakaskua; Robert and Mary Lou Garwood; Arthur Pohlman; Richard and Adele Mansfield; Eudore Berry; Sarah Elizabeth Berry; Frank and Dorothy Donahue; and Asghar Sadri, Elsie Shierman, Plaintiffs-Appellees, v. Wallace V. TEUSCHER, and Joan Teuscher, his wife, and the marital community composed thereof; Defendants, and Edward Borkowski and Alina Borkowski, his wife, and the marital community composed thereof, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Roger A. Myklebust and J. Tayloe Washburn, Seattle, Wash., for defendants (Teuscher).
Kevin P. O'Connell, Portland, Or., for defendants-appellants (Borkowski).
J. Ronald Sim and Kenneth G. Whitaker, Seattle, Wash., for plaintiffs-appellees.
Appeal from the United States District Court for the Western District of Washington.
Before WRIGHT and ALARCON, Circuit Judges, and TEVRIZIAN, * District Judge.
Wallace Teuscher sold interests in Badger Mountain South (BMS) to appellees, misrepresenting its value and investment potential. They sued, alleging primarily securities violations and a jury awarded them damages. We affirm as to all appellees except Asghar Sadri as to whom we reverse.
In 1974 Teuscher bought 2400 acres of property in Benton County, Washington, known as Badger Mountain South. Between October 1, 1975 and January 1, 1976, he sold through his broker, Edward Borkowski, approximately 48% of it as undivided interests to all appellees, except Sadri. Beginning in January 1976 and until 1983, he assessed development expenses against those with undivided interests.
Appellees except Sadri are 12 unsophisticated investors who sought low risk investments. An experienced real estate investor, Sadri acquired an interest in BMS when, in June 1977, he and Teuscher consolidated assets and formed a general partnership, Triangle Land Company. At that time, Teuscher contributed his 52% undivided interest in BMS to the partnership. Sadri paid assessments through the partnership beginning in 1977 and continuing through 1983.
A limited partnership, Badger Mountain South, Ltd., was formed in 1981 to develop BMS. Triangle became the general partner of BMS, Ltd., and those who had bought undivided interests from Teuscher became limited partners. Sadri remained a general partner of Triangle, which was the general partner of BMS, Ltd.
In November 1984, Sadri and the other appellees filed this action against Teuscher and Borkowski. After a three week trial the jury found against Teuscher and Borkowski and in favor of all appellees on their (1) Securities Act of 1933 claims; (2) Securities Exchange Act of 1934 claims; (3) Washington and Oregon securities acts claims; and (4) Washington Consumer Protection Act claim. 1 Teuscher and Borkowski challenged the sufficiency of the evidence by moving for judgment not withstanding the verdict (JNOV) and a new trial, which the court denied. They appealed.
A party under Fed.R.Civ.P. 50(b) must move for a directed verdict at the close of the evidence to question the sufficiency of the evidence through JNOV. Farley Transp. Co., Inc. v. Santa Fe Trail Transp. Co., 786 F.2d 1342, 1345 (9th Cir.1985). Although courts construe strictly the requirement that a motion be made after a case-in-chief, they are generally more liberal about what suffices as a motion for a directed verdict after the close of all the evidence. Id. at 1346-47. Fed.R.Civ.P. 50(b) may be satisfied by an ambiguous or inartfully made motion for a directed verdict or by an objection to an instruction for insufficient evidence to submit an issue to the jury. Id.
Although Teuscher and Borkowski attempted to move for a directed verdict after all the evidence was in, the court interrupted and told them to renew their motion after the verdict. They did so. In these circumstances their motion suffices, is timely, and they may challenge the sufficiency of the evidence.
Viewing the evidence in a light most favorable to appellees, we inquire if the evidence and inferences can reasonably support only one conclusion as to the verdict. Peterson v. Kennedy, 771 F.2d 1244, 1252 (9th Cir.1985), cert. denied, 475 U.S. 1122, 106 S.Ct. 1642, 90 L.Ed.2d 187 (1986); Garvin v. Greenbank, 856 F.2d 1392, 1396 (9th Cir.1988).
Teuscher and Borkowski contend that appellees may not recover on a security claim because their interests in BMS were not securities. 2 They attack the sufficiency of the evidence to support the jury's finding.
Section 2(1) of the 1933 Act defines security: 3
The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness ... investment contract ... or, in general, any interest or instrument commonly known as a security.
An interest meets the investment contract test when it involves (1) an investment of money (2) in a common enterprise (3) with profits to come solely from the efforts of others. 4 Matek v. Murat, 862 F.2d 720, 725 (9th Cir.1988) (citing SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946)). An investment satisfies this third element when the efforts made by those other than the investor are the ones which affect significantly the failure or success of the enterprise. Deutsch Energy Co. v. Mazur, 813 F.2d 1567, 1569 (9th Cir.1987) (citing SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973)).
Appellants contend that appellees' interest does not meet the Howey test for an investment contract. They argue that the evidence shows that appellees' efforts affected significantly the success or failure of the enterprise. We disagree.
Viewing the evidence in the light most favorable to appellees, we find that their efforts played almost no role in the success or failure of BMS. See, e.g., SEC v. Murphy, 626 F.2d 633, 641 (9th Cir.1980). They testified that Borkowski and Teuscher told them that Teuscher would manage BMS, that he was an expert in converting dry land to wet land, and that he had successfully done so with similar projects, Irrigo and Tee-Farms. Although they attended meetings and approved his plans, they testified that they relied on his expertise. They only supplied the capital.
Teuscher and Borkowski contend also that appellees' had no expectation of monetary return. We disagree. They testified that Teuscher and Borkowski promised them returns of two to three times their investment.
Teuscher contends that Sadri's interest in BMS is not a security because Sadri had a right to manage BMS as a general partner in Triangle. 5 Unlike the other appellees, Sadri acquired an interest in BMS when he and Teuscher formed the Triangle Land Company, and Teuscher contributed BMS as one of its assets. Later, appellees and appellants formed BMS, Ltd., to develop BMS and all appellees except for Sadri became limited partners of BMS, Ltd. Sadri remained a general partner of Triangle which was the general partner of BMS, Ltd.
The jury found that Sadri's interest in BMS was a security. Although Instruction # 27 did not list specifically Sadri's general partnership interest in Triangle, the jury awarded him over a million dollars in damages. From this, we conclude that the jury determined that his interest was a security. See Graphic Prod. Distrib., Inc. v. Itek Corp., 717 F.2d 1560, 1569 (11th Cir.1983) (); Faison v. Nationwide Mortg. Corp., 839 F.2d 680, 686 (D.C.Cir.1987), cert. denied, --- U.S. ----, 109 S.Ct. 70, 102 L.Ed.2d 46 (1988).
We have held that a general partnership interest is not a security because it fails the Howey test for an investment contract. 6 See Stone v. Millstein, 804 F.2d 1434, 1439 (9th Cir.1986). But we have acknowledged that such an interest may be a security if a manager's or promoter's efforts are the "undeniably significant ones." Matek, 862 F.2d at 725. In this situation, "[t]he proper focus must be the partnership agreement and not how in fact the entity functioned in carrying out its business affairs." Id. at 731.
Viewing the evidence in the light most favorable to Sadri, we find that the evidence permits only one reasonable conclusion. He did not have a security. The agreement here, "Consolidation of Assets and Partnership Agreement," is a standard general partnership contract. It refers to Teuscher and Sadri as "co-partners" and says that their interests as co-partners shall be defined by the Washington Uniform Partnership Act. Wash Rev.Code ch. 25.04. That Act gives Sadri and Teuscher equal rights to manage and control the partnership. Wash.Rev.Code Secs. 25.04.180(5), 25.04.240(3). It gives Sadri access to partnership records and information about its regular business transactions. Wash.Rev.Code Sec. 25.04.190. It limits transferability of the general partnership interest. Wash.Rev.Code Sec. 25.04.180(7).
The Agreement itself creates strong powers of control and supervision that are not typical of a passive investor in a security. See Matek, 862 F.2d at 731. It specifies that ventures:
shall be undertaken on a mutual consent basis only and all decisions made throughout the course of each...
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