Marc Nunez v. Edward Robin, Sr. , 415 F. App'x 586 ( 2011 )

Case: 10-30808 Document: 00511404829 Page: 1 Date Filed: 03/09/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 9, 2011
No. 10-30808 Lyle W. Cayce
Summary Calendar Clerk
MARC NUNEZ,
Plaintiff – Appellant
v.
EDWARD ROBIN, SR.; EDWARD ROBIN, JR.; DON ROBIN, SR.; BRAD
ROBIN; ROBIN CAPITAL HOLDINGS, L.L.C.; PEARL SAND AND
GRAVEL, L.L.C.; SAND SPECIALTIES AND AGGREGATES, L.L.C.,
Defendants – Appellees
Appeal from the United States District Court
for the Eastern District of Louisiana
USDC No. 2:09-CV-5445
Before HIGGINBOTHAM, SMITH, and HAYNES, Circuit Judges.
PER CURIAM:*
Appellant Marc Nunez (“Nunez”) challenges the district court’s
determination that his ownership interest in a joint venture was not an
investment contract as defined by the Securities Exchange Act of 1934 (“SEA”),
codified at 15 U.S.C. § 78a et seq. See 15 U.S.C. § 78c(a)(10). For the reasons set
forth below, we AFFIRM the district court’s grant of summary judgment.
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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I. Background
Mike Moncrief (“Moncrief”), a pilot for Federal Express, helped build a
sand and gravel mining plant in Arkansas. From that experience, he developed
a plan to build a sand and gravel mining facility and produce frac sand,1
although he had never actually worked with frac sand. Moncrief began looking
for partners to provide the necessary capital for the venture. Ultimately,
Moncrief entered into a joint venture with Brad Robin, Don Robin, Sr., Edward
Robin, Sr., Edward Robin, Jr. (collectively, the “Robins”), and Nunez. On June
5, 2008, they formed Sand Specialties and Aggregates, LLC (“SSA”), a limited
liability company organized in Louisiana. By agreement, Nunez and each of the
Robins were to receive a 10% membership of SSA in exchange for capitalizing
the venture. Moncrief would receive a 50% membership interest in return for
(1) his experience in constructing gravel plants; (2) the engineering technology
to construct a gravel and frac sand plant; (3) the ultimate design and
engineering for the plant to be used by the business; and (4) his technical
experience to develop a strategy and business plan. Moncrief would also
manage, build, and run the plant “for the first year or so.”
On June 11, 2008, Nunez was named SSA’s managing partner. In his
capacity as managing partner, Nunez was given the authority to “execute all
documents and do all things necessary and proper to sell, encumber, purchase,
alienate or enter into any contracts whatsoever with (immovable) property
owned by [SSA] and otherwise exercise all authority as Managing Partner.” 2 In
1
Frac sand is a specialty sand used by oil and gas companies to increase the
productivity of wells.
2
Nunez argues that Moncrief testified that he did not accept Nunez as the managing
partner. Read in context, however, Moncrief testified that he thought Nunez and the Robins
brothers were “all managing members.” Thus, this testimony does not support the concept
that Nunez was a mere passive investor only that Moncrief thought that more of the parties
funding the enterprise were involved in its management than just Nunez.
2
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his capacity as managing partner, Nunez signed every check paid out by SSA.3
Nunez also signed numerous contracts on SSA’s behalf, including the lease for
the land upon which the gravel and sand facility was to be built. He was also
SSA’s registered agent.
Furthermore, Southern Services and Equipment, Inc. (“Southern
Services”), a company owned and directed by Nunez and his wife, performed
numerous financial and administrative services for SSA. These services
included maintaining SSA’s books and records, generating SSA’s financial
reports, receiving and possessing SSA’s bills for payment, paying bills, setting
up accounts, and generating SSA’s business account records. Southern Services
also was active in the construction of SSA’s gravel and sand facility, helping to
fabricate equipment for the facility.4
After some time, SSA began to have problems with capital. Furthermore,
some disputes arose between the Robins and Nunez regarding the fees Southern
Services was receiving from SSA. Nunez brought suit in federal court against
the Robins; SSA; Robin Capital Holdings, LLC (“RCH”); and Pearl Sand and
3
Pete Robin also had authority to sign checks for SSA, but never exercised that right.
No other member of SSA, including Moncrief, had authority to sign checks for SSA.
4
Nunez makes the somewhat bizarre argument that his work on behalf of Southern
Services is in a “different capacity” than his work at SSA such that it “doesn’t count” in the
equation of whether or not his investment was an “investment contract.” Nunez argues that
under “entity theory” the court cannot attribute Southern Services’s administrative role to him
in his role as managing partner of SSA. Taken to its logical extreme, Nunez’s argument
would allow him to contend that his “other capacity” was actually the “indispensable”
entrepreneur allowing his “SSA capacity” to then be the passive investor. Further, he points
to no case that has applied “entity theory” in this context. Indeed, to do so would ignore this
court’s constant refrain that “economic realities govern over form” when determining whether
an arrangement qualifies as a security. Williamson, 645 F.2d at 422. Moreover, were we to
assume arguendo that the actions performed by Southern Services cannot be attributed to
Nunez, his management of Southern Services would nonetheless establish that he has the
requisite knowledge and experience to manage SSA’s finances, which is all that Williamson
and its progeny require. In any event, Nunez’s reliance on himself in a different capacity, as
well as other family members and Southern Services employees, does not raise a fact issue to
show that Moncrief was “the indispensable person” upon whom the venture relied.
3
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Gravel, LLC (“Pearl”) (collectively, the “Securities Defendants”), alleging that
the Robins fraudulently misrepresented that they could each contribute up to
$800,000 to SSA in violation of section 10(b) of the SEA, codified at 28 U.S.C.
§ 78j(b), and Rule 10(b)-5, codified at 17 C.F.R. § 240.10b-5.5 The Securities
Defendants filed a motion to dismiss for lack of jurisdiction, arguing that
Nunez’s ownership interest in SSA was not a security, therefore Nunez had no
valid federal claims. The district court denied the motion to dismiss and directed
the parties to engage in limited discovery as to whether Nunez has an actionable
securities claim under federal law. Following discovery, the Securities
Defendants moved for summary judgment, which the district court granted,
dismissing Nunez’s state claims without prejudice. Nunez appeals this grant of
summary judgment.
II. Analysis
A. Standard of Review
We review a district court’s grant of summary judgment de novo, using the
same legal standard as the district court. Turner v. Baylor Richardson Med.
Ctr., 476 F.3d 337, 343 (5th Cir. 2007). Summary judgment is appropriate where
there is no genuine issue of material fact and the parties are entitled to
judgment as a matter of law. Id. All reasonable inferences must be drawn in
favor of the nonmovant, but “a party cannot defeat summary judgment with
conclusory allegations, unsubstantiated assertions, or only a scintilla of
evidence.” Id. (internal quotation marks omitted).
B. Nunez’s Federal Securities Claim
5
Whether the Robins actually promised to contribute $800,000 each is a subject of
dispute between the parties. Because we resolve Nunez’s federal securities claim on other
grounds, we express no opinion as to this issue. It is unclear on the face of the complaint and
subsequent briefing what cause of action Nunez asserts against SSA, RCH and Pearl.
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The primary question before the court is whether Nunez’s ownership
interest in SSA is an investment contract and therefore regulated under the
SEA. See 15 U.S.C. § 78c(a)(10) (including “investment contract[s]” within the
definition of securities covered by the SEA). An investment contract is a
contract, transaction or scheme whereby (1) a person invests his money, (2) in
a common enterprise, and (3) is led to expect profits solely from the efforts of the
promoter or a third party. SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946);
Williamson v. Tucker, 645 F.2d 404, 417 (5th Cir. 1981). The parties only
contest the third prong.
“Although the Court used the word ‘solely’ in the Howey decision, it should
not be interpreted in the most literal sense.” Williamson, 645 F.2d at 418.
Instead, courts read this requirement broadly “to ensure that the securities laws
are not easily circumvented by agreements requiring a ‘modicum of effort’ on the
part of investors.” Long v. Shultz Cattle Co., 881 F.2d 129, 133 (5th Cir. 1989).
In this circuit, the critical inquiry is “whether ‘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.’” Youmans v. Simon,
791 F.2d 341, 345 (5th Cir. 1986) (quoting Williamson, 645 F.2d at 418).
Because SSA is a joint venture, Nunez must overcome the “strong
presumption” that “a general partnership or joint venture interest is not a
security. A party seeking to prove the contrary must bear a heavy burden of
proof.” Id. at 346; see also Williamson, 645 F.2d at 421 (“[A] general partnership
or joint venture interest generally cannot be an investment contract under the
federal securities acts.”). “The reason [joint venturers] are usually not covered
under the securities laws is that they are entrepreneurs, not investors, and have
the ability to take care of their own interests because of the inherent powers
available to them.” Youmans, 791 F.2d at 346. “Although general partners and
joint venturers may not individually have decisive control over major decisions,
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they do have the sort of influence which generally provides them with access to
important information and protection against a dependence on others.”
Williamson, 645 F.2d at 422. Our court has therefore cautioned that “[a]n
investor who is offered an interest in a general partnership or joint venture
should be on notice . . . that his ownership rights are significant, and that the
federal securities acts will not protect him from a mere failure to exercise his
rights.” Id.On the other hand, “the mere fact that an investment takes the form of a
general partnership or joint venture does not inevitably insulate it from the
reach of federal securities laws.” Id. Instead, “economic reality is to govern over
form.” Id. at 418. Whether a joint venture or general partnership interest
constitutes a security depends on whether:
(1) an agreement among the parties leaves so little power in the
hands of the partner or venturer that the arrangement in fact
distributes power as would a limited partnership; or
(2) the partner or venturer is so inexperienced and unknowledgeable
in business affairs that he is incapable of intelligently exercising his
partnership or venture powers; or
(3) the partner or venturer is so dependent on some unique
entrepreneurial or managerial ability of the promoter or manager
that he cannot replace the manager of the enterprise or otherwise
exercise meaningful partnership or venture powers.
Youmans, 791 F.2d at 346.
Nunez does not argue that he lacked managerial power; instead, he argues
that because he lacked experience in sand and gravel mining, he was forced to
rely on Moncrief and was unable to intelligently exercise his managerial powers.
At trial, Nunez would have the burden to establish that he was unable to
exercise his managerial powers. See Long, 881 F.2d at 134 (“[A] plaintiff may
establish reliance on others within the meaning of Howey if he can demonstrate
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not simply that he did not exercise the powers he possessed, but that he was
incapable of doing so.”).
The district court correctly concluded that “[i]t is clear that Nunez could
not by himself entirely control the course and scope of SSA’s business.” Moncrief
brought technical expertise to SSA that its other members lacked. However,
although we consider an investor’s expertise “in relation to the nature of the
underlying venture,” id. at 135, Nunez, in response to the summary judgment
motion, did not offer sufficient evidence showing that his reliance on Moncrief’s
technical expertise precluded him from exercising meaningful control over SSA’s
finances. See Robinson v. Glynn, 349 F.3d 166, 171 (4th Cir. 2003) (“In the end,
[the plaintiff] generally asserts that he lacked technical sophistication, without
explaining in any detail what was beyond his ken or why it left him powerless
to exercise his management rights.”). As the Fourth Circuit noted:
[b]usiness ventures often find their genesis in the different
contributions of diverse individuals—for instance, as here, where
one contributes his technical expertise and another his capital and
business acumen. Yet the securities laws do not extend to every
person who lacks the specialized knowledge of his partners or
colleagues, without a showing that this lack of knowledge prevents
him from meaningfully controlling his investment.
Id. 171-72 (4th Cir. 2003); cf. Williamson, 645 F.2d at 423 (“The delegation of
rights and duties—standing alone—does not give rise to the sort of dependence
on others which underlies the third prong of the Howey test.”).
Rather, the undisputed facts in this case establish that Nunez not only had
the knowledge and expertise to exercise authority over SSA’s finances, but also
that he actively exercised that authority. He signed checks and contracts on
behalf of SSA, and through Southern Services, managed nearly every aspect of
SSA’s finances. As discussed, Southern Services maintained SSA’s books and
records, generated SSA’s financial reports, received and possessed SSA’s bills for
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payment, paid bills, set up accounts, and generated SSA’s business account
records. As Moncrief, who is not a party to this litigation, described the
situation, “[Southern Services] administrated everything we did.”
The record establishes that Nunez participated in other managerial
decisions in his role as managing partner of SSA. For example, Moncrief’s
original plan called for SSA to contract the sand and gravel plant to a third
party. Instead, Moncrief, Nunez, and Pete Robin decided that SSA should own
and operate the plant internally. Similarly, Nunez participated in, and agreed
to, the decision for SSA to seek a $250,000 loan. Nunez also called a meeting of
SSA’s members when SSA began to lack necessary capital. These are not the
type of decisions that require a technical knowledge of gravel mining. These are,
in their essence, financial decisions. Furthermore, Nunez’s control of the
finances was “undeniably significant.” Those decisions which affect the failure
or success of the enterprise include not only profit-making decisions, but also
“the essential infrastructure of the venture.” Long, 881 F.2d at 137.
These facts distinguish this case from Long. In Long, Shultz Cattle
Company, Incorporated (“SCCI”) entered into “consulting agreements” whereby
investors would invest in cattle to take advantage of certain tax breaks available
to cattle farmers. Id. at 130-31. Although the investors had “a substantial
degree of theoretical control over the investment,” id. at 134, the court found
that agreements were investment contracts because it was undisputed that the
investors, who had no relevant cattle farming experience, “acquired from SCCI
all of the knowledge necessary to ‘actively manage’ their ‘individual’ cattle-
feeding businesses.” id. at 135 (some emphasis added); see also Long v. Shultz
Cattle Co. Inc., 896 F.2d 85, 87 (5th Cir. 1990) (denial of petition for rehearing)
(“[The] investors here were business and professional people who resided in
locales far removed from their nominally owned cattle, and who possessed
neither the knowledge nor the desire to buy, raise and market cattle on an
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individual basis.”). Indeed, the court noted that SCCI’s consulting agreements
did not vary in practice from limited partnerships that it offered to other
investors. Long, 881 F.2d at 136 (“SCCI performed for [the investors] . . . all of
the services it performed for the limited partners in its other programs.”). In
this case, Nunez was not reliant on Moncrief for every decision relevant to his
management of SSA. Southern Services, not Moncrief, provided Nunez, and all
of SSA’s members, with the relevant financial data. Furthermore, unlike the
investors in Long, Nunez entered into a joint venture, which carries with it the
presumption of active involvement, involvement he indisputably had. Nunez has
therefore failed to prove that he lacked the knowledge and experience to
meaningfully exercise his managerial powers at SSA.
Nunez also argues that he was reliant on Moncrief’s unique knowledge of
gravel and frac sand production. Nunez’s control of SSA’s finances does not
preclude this argument because “[e]ven the most knowledgeable partner may be
left with no meaningful option when there is no reasonable replacement for the
investment’s manager.” Williamson, 645 F.2d at 423. To succeed on this prong,
Nunez must show that Moncrief was “uniquely capable” or that SSA’s members
were so dependent on Moncrief that they were “incapable, within reasonable
limits, of finding a replacement.” Id. at 425.
However, as the district court noted, although Moncrief has left the
venture, the gravel plant built by SSA is currently operating. Nunez argues that
the fact that the plant is operating does not show Moncrief was replaceable
because SSA has contracted management of the facility to another company and
is not operating it internally. However, Nunez presents no evidence that the
contracting out of the facility is not substantially equivalent to operating the
plant internally. Indeed, the original business plan for SSA called for
contracting out the gravel and sand mining facility. Furthermore, the plant is
currently being managed by Buddy Breaux, who attended several of the
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membership meetings of SSA and was known to Nunez and other SSA partners.
The record therefore firmly establishes that Moncrief’s role was not unique or
irreplaceable. Nunez has failed to raise a material fact issue on the question of
whether he was a mere “passive investor” under Williamson. See id. at 421(“These factors critically distinguish the status of a general partner from that of
the purchaser of an investment contract who in law as well as in fact is a
‘passive’ investor.”).
C. Nunez’s state claims
Nunez also brings a number of state law claims against the Securities
Defendants. The district court, having dismissed Nunez’s only federal cause of
action at the summary judgment stage, dismissed the state law claims without
prejudice. Nunez has not challenged this aspect of the district court’s decision
on appeal.
III. Conclusion
For the foregoing reasons, we AFFIRM the judgment of the district
court.
10