Van Arsdale v. Claxton

• Decision Date: 10 March 1975
• Docket Number: Civ. No. 74-566.
• Citation: 391 F. Supp. 538
• Court: U.S. District Court — Southern District of California
• Parties: Alice VAN ARSDALE, Plaintiff, v. Robert R. CLAXTON et al., Defendants.

391 F. Supp. 538

Alice VAN ARSDALE, Plaintiff, v. Robert R. CLAXTON et al., Defendants.

Civ. No. 74-566.

United States District Court, S. D. California.

March 10, 1975.

Gerald J. O'Neill, of Higgs, Fletcher & Mack, San Diego, Cal., for plaintiff.

David H. Hayworth, in pro per.

MEMORANDUM OPINION AND ORDER

GORDON THOMPSON, Jr., District Judge.

This matter is before the court on defendant David H. Hayworth's motion to dismiss filed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Jurisdiction for the underlying action is based upon alleged violations of the federal securities laws.¹ For the reasons discussed below, the court must conclude that plaintiff's complaint should be dismissed for failure to state a claim upon which relief can be granted.

The allegations contained in the complaint fail to establish a violation of federal securities laws. The court is mindful of the expansive trend in this area and of the Supreme Court's own suggestion of liberality in determining jurisdiction. Tcherepinin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). However, when substance is elevated over form, there is little question that the transaction found herein does not invoke the protection of federal legislation.

The facts alleged in the complaint indicate that the plaintiff was desirous of acquiring income property. Plaintiff was approached by a real estate salesman and a broker who suggested an exchange of real property. The proposal involved the transfer of a residence, owned by plaintiff, plus cash and a note in exchange for a mobile home park. The park was owned by a partnership which in turn was composed of two general and seven limited partners. The park was the sole asset of the partnership. Due to the presence of existing financing arrangements and encumberances it was agreed that in lieu of simply transfering the deed for the park to the plaintiff, the entire partnership and all of its assets would be sold.

It is alleged that these negotiations utilized the instrumentalities of the mails and telephone. During the course of these discussions various oral and written representations allegedly occurred.

The parties agreed to the transfer and the matter was consummated with the exchange of property and the receipt by a trust established by the defendants of plaintiff's cash and notes. Subsequently, defects were discovered in the foundation of the residence transfered by plaintiff. A partial rescission followed with plaintiff remaining in possession of the park. Due to alleged misrepresentations, plaintiff has filed the instant action seeking rescission and damages. All of the parties discussed above have been named as defendants.

Plaintiff would have this court conclude that the sale of the entire partnership is analogous to the sale of fractional security interests and that the presence of a note of indebtedness automatically creates federal jurisdiction. The facts alleged in this case do not support that broad of a construction of federal securities jurisdiction.

Initially, the court should note that generally limited partnership interests are considered to be within the definition of the term securities.² This results from the fact that, under the Uniform Limited Partnership Act,³ a limited partner may not take part in the control of the business; he must retain the status of a passive investor. If a limited partner becomes involved with the operation of the enterprise, he will destroy his status as a limited partner and will find that he is no longer sheltered from personal liability. Limited partnership interests by definition thus falls squarely within the scope of a security under both the Federal and California Securities Acts.⁴

However, in the case at hand plaintiff did not acquire a limited partnership interest; plaintiff purchased the entire partnership. Accordingly, the court is faced with the question: does the acquisition of the undivided whole fall within the definition of a security?

The definition of a security is broad and comprehensive, and is intended to embrace a wide variety of investment interests. Generally speaking, it means any transaction or scheme in which a person ". . . invests his money in a common enterprise and is led to expect profits solely from the efforts of . . . a third party . . .," it being unimportant whether the interest bought or sold is represented by formal certificates or by undivided interests in the physical assets of the business. S.E.C. v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). This definition was recently expanded in this circuit. In S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), the court held that a security may be present where there is an investment in a common enterprise and "the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." Id. at 482.

The complaint in the case at hand does not allege that plaintiff purchased a divided interest in the partnership. It appears that plaintiff purchased the entire partnership and all of its assets. Further, there is no allegation that defendants retained any interest in the property transfered to plaintiff. In short, there is neither an allegation of "investment in a common enterprise" nor a suggestion that plaintiff would rely on the "significant efforts of others."

The significance of the concepts of "common enterprise" and "reliance on the efforts of others" is reflected in the following comment:

The line is drawn, however, where neither the element of a common enterprise nor the element of reliance on the efforts of another is present. For example, no `investment contract' is involved when a person invests in real estate, with the hope perhaps of earning a

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