Youmans v. Simon, 85-2428

• Citation: 791 F.2d 341
• Decision Date: 06 June 1986
• Docket Number: No. 85-2428,85-2428
• Parties: Fed. Sec. L. Rep. P 92,766, 5 Fed.R.Serv.3d 409, RICO Bus.Disp.Guide 6273 C. Roger YOUMANS, Jr., M.D., and Leonard B. Tatar, Trustee, Plaintiffs- Appellants, v. Nick SIMON and Bidco, Inc., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 341

791 F.2d 341

Fed. Sec. L. Rep. P 92,766, 5 Fed.R.Serv.3d 409,

RICO Bus.Disp.Guide 6273

C. Roger YOUMANS, Jr., M.D., and Leonard B. Tatar, Trustee, Plaintiffs- Appellants, v. Nick SIMON and Bidco, Inc., Defendants-Appellees.

No. 85-2428.

United States Court of Appeals,

Fifth Circuit.

June 6, 1986.

Rehearing and Rehearing En Banc Denied July 17, 1986.

Charles W. Getman, Robert N. Hinton, Alan N. Magenheim, Houston, Tex., for plaintiffs-appellants.

J. Eric Toher, Wright & Patton, William E. Wright, Houston, Tex., for Nick Simon.

Appeal from the United States District Court for the Southern District of Texas.

Before WILLIAMS, GARWOOD and JONES, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

Appellants C. Roger Youmans and Leonard B. Tatar entered into several real estate ventures with appellees Nick Simon and Bidco, Inc. These projects subsequently floundered resulting in large financial losses to the appellants. Youmans and Tatar sought to recover their losses from appellees in an action filed in federal district court. Youmans and Tatar alleged violations of the federal securities laws as well as violations of the civil liability provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1961 et seq.

Appellees moved for summary judgment on the grounds that none of their transactions with appellants involved securities and that the conduct alleged by appellants did not satisfy the elements of a civil RICO claim. The district court granted their motion and dismissed appellants' complaint. Youmans and Tatar now appeal the dismissal.

I. FACTS

Youmans is a physician who resides in Galveston County, Texas. In 1974, Youmans participated in a limited partnership managed by Joel P. Simmons. This business venture appears to have been to Youman's satisfaction because he maintained a good working relationship with Simmons over the next several years. In 1977, Simmons introduced Youmans to appellee Nick Simon. Simon was a Houston area contractor. At the time, he and Simmons were organizing several real estate projects throughout Texas. Some of these projects were being organized through Bidco, Inc., a Texas corporation owned and controlled by Simmons and Simon. Simmons and Simon sought to attract Youmans to invest in some of these projects. Through Youmans, Simon and Simmons also met Leonard B. Tatar, the trustee of a fund established for the benefit of Youmans' children. Youmans and Tatar, as trustee, proceeded to invest in several projects organized by Simon, Simmons, and Bidco over the next several years as set out below.

In November 1977, Tatar invested $6,500 in cash on behalf of the trust in one of these projects, the Bidco-Tomball Joint Venture in Tomball, Texas. This investment bought a seven percent equity interest in the project. The joint venture agreement called for Bidco to serve as the Managing Venturer and Simon as the Development Manager. In June 1978, Youmans also entered into a real estate project being organized by Simmons and Simon. For $22,000, Youmans received a seven percent equity interest in the Dickinson Apartment Project Joint Venture in Dickinson, Texas. Simmons was the Managing Venturer and Simon the Developer of that project.

In August 1979, Youmans bought interests in several other Texas real estate projects from Simon, Simmons, and Bidco. In return, consideration consisted of promissory notes in the amount of $600,000 executed by Bidco and personally guaranteed by Youmans. In May 1981, Youmans purchased from Simon, Simmons, and Bidco additional interests in more real estate ventures, including a fifteen percent equity interest in the Bidco-Tomball venture. In consideration for these additional interests, Youmans secured and personally guaranteed a loan of $192,811 for the sellers. In May 1981, Youmans secured and guaranteed another loan in the amount of $192,811 for the sellers in exchange for which he received an undivided 10.416 percent equity interest in the Bidco-West Chase Office Building, Limited. Youmans' and Tatar's participation in each of these projects never exceeded a fifty percent equity interest.

Appellants' suit against Simmons, Simon, and Bidco claimed violations of Secs. 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. Secs. 771 & 77q, and Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j. Appellants also complained of civil RICO violations, 18 U.S.C. Sec. 1961 et seq. Additionally, appellants claimed various pendent state causes of action.

Appellants alleged that many of the real estate projects had failed financially and appellants had lost substantial amounts of the money they had invested in them. Appellants also alleged that Simon, Simmons, and Bidco sold the joint venture's interest in the Bidco-Tomball project without informing appellants and without distributing to them the proceeds of the sale. Youmans was also forced to pay large amounts of money on the promissory notes and loans he had guaranteed on behalf of Simon, Simmons, and Bidco. Appellants contended that except for material omissions and misrepresentations made by the appellees and Simmons, they would not have invested in any of these projects.

Appellees filed a motion for summary judgment or, in the alternative, for dismissal for lack of subject matter jurisdiction. Appellants then moved pursuant to Fed.R.Civ.P. 15(a) for leave to file their first amended complaint. The district court denied this latter motion. Shortly thereafter, the district court approved of an agreed final judgment between appellants and Simmons. Under its terms, judgment in favor of the appellants was awarded in the amount of $469,500, plus interest and half of the court costs incurred. The district court then severed the claims against Simmons from the lawsuit.

After entering this judgment, the district court granted appellees' motions for summary judgment and dismissed appellants' remaining claims. The district court found that the transactions at issue in this case were not securities within the meaning of the federal securities laws. The RICO claims were dismissed because appellees had not alleged any racketeering injury distinct from the injury resulting from the predicate acts. A motion pursuant to Fed.R.Civ.P. 59 for a new trial or in the alternative to alter or amend order and judgment was denied. Appellants now seek review of the district court's summary judgment and of the refusal to allow amendment of their complaint.

II. WHAT IS A SECURITY?

We can affirm a decision on summary judgment only if we find that no issues of material fact existed and that the movant was entitled to judgment as a matter of law. McCrae v. Hankins, 720 F.2d 863, 865 (5th Cir.1983). In reviewing the record, all inferences to be drawn must be viewed in the light most favorable to the party opposing summary judgment. U.S. v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962). Although summary judgment, if properly invoked, may advance the interest of our judicial system in many ways, it should, nonetheless, be cautiously and sparingly applied. See Bayou Bottling, Inc. v. Dr. Pepper Co., 725 F.2d 300, 303 (5th Cir.), cert. denied, --- U.S. ----, 105 S.Ct. 123, 83 L.Ed.2d 65 (1984). ¹

The determination of what is a "security" must begin with a review of the statutory language of the federal securities laws. The term security has the same meaning for purposes of both the 1933 Securities Act and the 1934 Securities Exchange Act. Landreth Timber Co. v. Landreth --- U.S. ----, ---- n. 1, 105 S.Ct. 2297, 2302 n. 1, 85 L.Ed.2d 692 (1985). The 1933 Securities Act definition encompasses a large number of financial instruments, and includes:

... any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate, or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

15 U.S.C. Sec. 77b(1). Appellants contend that the transactions at issue in this case are investment contracts and thus securities within the meaning of the federal securities laws.

The term "security" has been interpreted broadly, encompassing unusual financial instruments as well as these commonly considered to be securities. Marine Bank v. Weaver, 455 U.S. 551, 555, 102 S.Ct. 1220, 1222, 71 L.Ed.2d 409 (1982); Tcherepnin v. Knight, 389 U.S. 332, 338, 88 S.Ct. 548, 554, 19 L.Ed.2d 564 (1967). The "investment contract" has been one of the means employed to bring "instruments of 'more variable character' " within the scope of the federal securities laws. Landreth, --- U.S. at ---, 105 S.Ct. at 2302, quoting SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943).

Within the scope of the investment contract are included financial instruments that may superficially resemble private commercial transactions. These instruments may not bear the formal attributes of a security, but they are in actuality securities. Landreth, --- U.S. at ----, 105 S.Ct. at 2304. The evaluation of such contracts as securities must be done in light of the economic reality of the underlying transactions. Int'l Brotherhood of Teamsters v....