Tung Chan v. HEI Res.
| Decision Date | 27 June 2022 |
| Docket Number | 20SC595 |
| Citation | 2022 CO 36 |
| Parties | Tung Chan, Securities Commissioner for the State of Colorado, Petitioner v. HEI Resources, Inc. f/k/a Heartland Energy, Inc.; Charles Reed Cagle; Brandon Davis; Heartland Energy Development Corporation; John Schiffner; and James Respondents |
| Court | Colorado Supreme Court |
Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 18CA1769
Attorneys for Petitioner: Philip J. Weiser, Attorney General Robert W. Finke, First Assistant Attorney General Jodanna L Haskins, Senior Assistant Attorney General Janna K. Fischer Assistant Attorney General Denver, Colorado
Attorneys for Respondents Heartland Energy Development Corporation and Brandon Davis: Munck Wilson Mandala LLP Shain A. Khoshbin S. Wallace Dunwoody Chase A. Cobern Dallas, Texas Holland & Hart, LLP Marcy G. Glenn Denver, Colorado
Attorneys for Respondents HEI Resources, Inc. and Charles Reed Cagle: Thomas Law LLC Jeffrey R. Thomas Denver, Colorado
Attorneys for Respondents John Schiffner and James Pollak: Otto Law Otto K. Hilbert, II Denver, Colorado
Attorneys for Amicus Curiae National Federation of Independent Business: Robinson Waters & O'Dorisio, P.C. Tracy L. Ashmore Denver, Colorado
Attorneys for Amicus Curiae North American Securities Administrators Association, Inc.: North American Securities Administrators Association, Inc. Kameron Hillstrom Washington, District of Columbia Ballard Spahr LLP Theodore J. Hartl Denver, Colorado
¶1 This case requires us to determine how courts should evaluate whether an interest in a "general partnership" is an "investment contract" under Colorado's securities laws and thus a "security" subject to the laws and regulations of the Colorado Securities Act, §§ 11-51-101 to -1008, C.R.S. (2021) (the "CSA"). An investment contract is undefined in the statute, but Colorado has long followed federal law in applying the test set forth in Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), which provides that an investment contract must be (1) a contract, transaction, or scheme whereby a person invests money (2) in a common enterprise (3) in which the person is led to expect profits derived from the entrepreneurial or managerial efforts of others. General partnerships ordinarily do not satisfy the third element of Howey because general partners control and direct the venture. But in some instances, an investor or-as here-a security regulator claims that a contract or scheme that purports to be a general partnership in form is actually an investment contract in operation. In those instances, the majority of state and federal courts have turned to the opinion of the United States Court of Appeals for the Fifth Circuit in Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), for guidance on how to assess whether the form of the venture is somehow belied by the economic realities of its operation.
¶2 We conclude here that the Williamson framework applies in Colorado. That, however, does not fully answer the questions we are presented with in this dispute, as Williamson has been interpreted in various ways. As relevant here, some courts, including the division below, have suggested that ventures denominated as general partnerships are entitled to a "strong presumption" that they are not investment contracts. See Chan v. HEI Res., Inc., 2020 COA 87, ¶¶ 32-33, 490 P.3d 789, 799-800 ("HEI II"). We reject the notion that general partnerships are entitled to any presumption that might imply that a plaintiff bears a burden of proof greater than the preponderance of the evidence burden generally applicable in civil litigation. That said, we acknowledge, as Williamson did, that a plaintiff will have a "difficult factual burden" to carry when seeking to establish by a preponderance of the evidence that a venture holding the legal status of a general partnership is not in operation a general partnership. 645 F.2d at 416.
¶3 Beyond the question of how to describe the weight of the burden borne by plaintiffs in disputes like this one, the parties here further disagree over exactly how to apply the Williamson framework. In remanding this case for proceedings consistent with this opinion, we focus on three aspects of that application. First, a court evaluating whether general partners lack the ability to direct the venture may find that their general business knowledge and expertise is in fact sufficient to permit them to exercise their partnership powers. While industry-specific experience may be relevant, if the general partners lack such experience, that fact alone does not make the partnership an investment contract. Second, if general partners themselves would not be able to serve in the place of the manager, that does not necessarily make the partnership an investment contract; rather, a plaintiff must prove that the general partners cannot realistically replace the manager at all. Third, we conclude that a particular venture's "economic realities" can appropriately be considered as part of the Williamson framework.
¶4 As we describe in detail below, whether respondents have sold securities has been in dispute for over a decade. Today, we do not resolve that factual dispute. The question before us is not whether these particular interests are securities. Rather, the question is a broader one: How should a court assess a plaintiff's claim that a particular "general partnership"-which, as everyone appears to agree, in its bona fide form would not be a security-is in fact operating as an investment contract and thus is a security under the CSA?
¶5 Between approximately 2004 and 2008, respondents HEI Resources, Inc. ("HEI"), and the Heartland Development Corporation ("HEDC"), both corporations whose principal place of business is Colorado, formed, capitalized, and operated eight separate joint ventures related to the exploration and drilling of oil and gas wells.[1] They solicited investors for what they called Los Ojuelos Joint Ventures by cold calling thousands of individuals from all over the country. To those individuals who expressed interest in the ventures, respondents mailed promotional material and a confidential information memorandum, which described features of the ventures and disclosed certain risks. Those who joined the ventures became parties to an agreement organized as a general partnership under the Texas Revised Partnership Act.[2] Each of the eight ventures ultimately included between forty-six and ninety investors. These investors each signed a joint venture agreement that explained that the investors are "general partners" with a variety of rights and responsibilities but delegated the day-to-day management duties for the ventures to HEDC. HEI and HEDC did not register the ventures as securities, nor did they file a notice of exemption from registration. See § 11-51-301, C.R.S. (2021).
¶6 In 2009, the Securities Commissioner for the State of Colorado ("the Commissioner") initiated this enforcement action. The Commissioner's complaint alleged that respondents had violated the CSA by, among other things, offering and selling unregistered securities to investors nationwide through the use of unlicensed sales representatives and in the guise of general partnerships. The Commissioner alleged that HEDC and HEI used the general partnership form deliberately in order to avoid regulation. Each of the Commissioner's claims required that the Commissioner prove that the general partnerships were securities, so the trial was bifurcated to permit resolution of that threshold question.
¶7 In 2010, the Commissioner moved for partial summary judgment, arguing that an application of the framework set out in Williamson, as well as consideration of other economic realities of the general partnerships, demonstrates that the ventures were in fact investment contracts. Respondents filed cross-motions, asking the trial court to conclude precisely the opposite-that, under the Williamson framework, the ventures were in fact operating as general partnerships and therefore were not investment contracts.
¶8 The trial court granted partial summary judgment in respondents' favor. First, the trial court agreed with respondents that under Williamson the general partnerships are presumed not to be securities. In reaching this conclusion, the court referred to Williamson as creating a "strong presumption" that interests in general partnerships are not securities.
¶9 Second, the trial court ruled that the Commissioner's claims with respect to two of the Williamson tests[3] failed as a matter of law. The court described the first test as requiring that, in the partnership agreements, the relationship among the parties is tantamount to a limited partnership rather than a general partnership-that is, the agreements themselves "restrict the non-managing venturers' rights as to make the titular general partnership really a limited partnership." And it found that the agreements at issue here do not include such restrictions.
¶10 The court described the third Williamson test as requiring that the non- managing partners are so dependent on some unique ability of the manager that they cannot realistically replace the manager. This, too, the trial court concluded the Commissioner had failed to show.
¶11 Remaining in contention were the second test, which requires that the partners be incapable of intelligently exercising their partnership powers because of a lack of experience and knowledge, and whatever other economic realities of the ventures might be relevant.
¶12 The case proceeded to a bench trial in July 2013 to determine whether the ventures were securities. The trial court determined that the...
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Summaries of Published Opinions
...respect to mother's parental rights and remanded the case for the Court of Appeals to address mother's remaining appellate contentions. 2022 CO 36. No. 20SC595. Chan v. HEI Resources, Inc. Colorado Securities Act—Investment Contracts—General Partnerships. This case required the Supreme Cour......