Chan v. HEI Resources

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
June 4, 2020
2020COA87
No. 18CA1769, Chan v. HEI Resources — Financial Institutions
— Securities — Colorado Securities Act — Investment
Contracts; Business Organizations — General Partnerships
A division of the court of appeals holds that when deciding
whether an ostensible general partnership interest in a venture is a
security under the Colorado Securities Act, the court must employ a
strong presumption that it is not. The division also holds that when
determining whether the general partners have sufficient experience
with or knowledge of business affairs that they can intelligently
exercise their partnership powers, venture-specific experience or
knowledge should not always be regarded as required: general
business experience and knowledge may be sufficient. In so
holding on these two issues, the division disagrees with the prior
court of appeals decision in this case, Rome v. HEI Resources, Inc.,
2014 COA 160.
COLORADO COURT OF APPEALS 2020COA87
Court of Appeals No. 18CA1769
City and County of Denver District Court No. 09CV7181
Honorable Michael A. Martinez, Judge
Tung Chan, Securities Commissioner for the State of Colorado,
Plaintiff-Appellee and Cross-Appellant,
v.
HEI Resources, Inc., f/k/a Heartland Energy, Inc.; Charles Reed Cagle;
Brandon Davis; Heartland Energy Development Corporation; John Schiffner;
and James Pollak,
Defendants-Appellants and Cross-Appellees.
JUDGMENT REVERSED AND CASE
REMANDED WITH DIRECTIONS
Division V
Opinion by JUDGE J. JONES
Welling and Hawthorne*, JJ., concur
Announced June 4, 2020
Philip J. Weiser, Attorney General, Robert Finke, First Assistant Attorney
General, Charles J. Kooyman, Senior Assistant Attorney General, Denver,
Colorado, for Plaintiff-Appellee and Cross-Appellant
Thomas Law LLC, Jeffrey R. Thomas, Denver, Colorado for Defendants-
Appellants and Cross-Appellees HEI Resources, Inc. and Charles Reed Cagle
Holland & Hart, LLP, Marcy G. Glenn, Denver, Colorado; Munck Wilson
Mandala LLP, Shain A. Khoshbin, S. Wallace Dunwoody, Chase A. Cobern,
Dallas, Texas; Munck Wilson Mandala LLP, Jennifer D. Jasper, Austin, Texas,
for Defendants-Appellants Brand Davis and Heartland Energy Development
Corporation
Law Offices of Otto K. Hilbert II, Otto K. Hilbert, II, Denver, Colorado, for
Defendants-Appellants John Schiffner and James Pollak
Robinson Waters & O’Dorisio, P.C., Tracy L. Ashmore, Denver, Colorado, for
Amicus Curiae National Federation of Independent Business
Ballard Spahr LLP, Theodore J. Hartl, Denver, Colorado; Kameron Hillstrom,
Washington, D.C., for Amicus Curiae North American Securities Administrators
Associations, Inc.
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2019.
¶1 Plaintiff, Tung Chan, in his official capacity as Securities
Commissioner for the State of Colorado, brought this enforcement
action against defendants, HEI Resources, Inc. (HEI), f/k/a
Heartland Energy, Inc.; Heartland Energy Development Corporation
(HEDC); Charles Reed Cagle; Brandon Davis; John Schiffner; and
James Pollack, for allegedly violating the Colorado Securities Act
(CSA) in forming several oil and gas exploration and drilling joint
ventures. The gist of the Commissioner’s position is that,
notwithstanding that the investors are designated general partners
in the joint ventures, their interests are securities (specifically,
investment contracts) under the CSA and defendants violated
certain requirements of the CSA when offering those interests.
¶2 In 2013, following a partial summary judgment and a trial, the
trial court found that the joint venture interests aren’t investment
contracts and therefore aren’t securities under the CSA. The court
reached that conclusion after applying the leading case in this field,
Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), which identifies
three ways in which a party can overcome a strong presumption
1
(the so-called “Williamson presumption”) that a general partnership
interest isn’t an investment contract (the Williamson tests).1
¶3 The Commissioner appealed, and a prior division of this court
reversed and remanded. Rome v. HEI Res., Inc., 2014 COA 160 (HEI
I). The division concluded that the Williamson presumption doesn’t
apply in an action under the CSA and that the trial court erred by
considering the partners’ general, rather than venture-specific,
business experience under the second Williamson test. The division
remanded to the trial court
for redetermination of whether the joint
venture interests are securities under the
second and third Williamson factors and any
other ‘catch-all’ economic realities, taking into
consideration our rejection of the strong
presumption that general partnership interests
are not securities and our determination that
1 As discussed more fully below, the Williamson tests are (1)
whether the parties’ agreement leaves so little power to the partners
that they are in reality limited partners; (2) whether the partner has
so little experience with and knowledge of business affairs that he
can’t intelligently exercise his powers; or (3) whether the manager
has such unique entrepreneurial or managerial skills that he is, as
a practical matter, irreplaceable.
2
the relevant measure of business experience is
experience in the business of the venture.
Id. at ¶ 61.2
¶4 On remand, the trial court first determined that the general
partners’ interests are investment contracts under the second and
third Williamson tests and “other economic realities.” After taking
additional evidence, the court later ruled that defendants had
violated the CSA, enjoined them from engaging in securities-related
activities in Colorado, and ordered certain defendants to pay
restitution to the Commissioner.
¶5 This time, both sides appeal — the Commissioner by way of
cross-appeal.3 Though the parties raise a host of issues, we only
need to address four raised by defendants: (1) whether the prior
division erroneously departed from well-established federal
securities law by rejecting the Williamson presumption; (2) whether
2 The prior division referred to the Williamson tests as “exceptions”
or “factors.” We refer to them as tests because they are
independent bases for analyzing whether a general partnership
interest is an investment contract.
3 The Commissioner cross-appeals one aspect of the trial court’s
liability determinations and several aspects of the trial court’s
remedial rulings. But in light of our resolution of defendants’
appeal, we don’t need to address those issues.
3
the prior division erroneously held that the partners must have
venture-specific experience under the second Williamson test; (3)
whether the trial court improperly focused on whether the partners
themselves could fill the role of the managing partner under the
third Williamson test; and (4) whether the trial court erred by
finding that the general partners’ interests are investment contracts
under “other economic realities.”
¶6 For the reasons explained below, we agree with defendants
that, contrary to the prior division’s holding, the Williamson
presumption applies when general partnership interests are alleged
to be investment contracts under the CSA. We also agree with
defendants, again contrary to the prior division’s holding, that a
collective lack of venture-specific experience isn’t dispositive under
the second Williamson test; it is relevant, but what ultimately
matters is whether the partners have sufficient collective knowledge
and experience to intelligently exercise their powers. And we
conclude that under the third Williamson test the question isn’t
whether any of the general partners themselves could, if necessary,
fill the role of the managing partner, but whether the managing
partner is, considering the nature of the venture and the managing
4
partner’s knowledge and experience, essentially irreplaceable.
These three conclusions are consistent with prevailing federal law
applying corresponding federal statutes, which the General
Assembly and the Colorado Supreme Court have expressly directed
us to follow unless inconsistent with the purposes and provisions of
the CSA. Lastly, we conclude that, although the three Williamson
tests aren’t exclusive, those tests account for economic realities,
and the court should consider other economic realities only if they
aren’t adequately accounted for under the Williamson tests.
¶7 Accordingly, cognizant of our decision’s whiplash effect, but
nevertheless convinced that the prior division’s decision is out of
step with the applicable law, we reverse and remand to the trial
court to determine, consistent with this opinion, whether the joint
venture interests constitute investment contracts, based on the
record developed to date.
I. Background
¶8 Much of the relevant background is recounted in HEI I. The
following, however, should give the reader enough to understand
how we got to where we are now.
5
A. Historical Facts
¶9 Beginning in 2004, defendants solicited thousands of, in the
trial court’s words, “wealthy, educated and sophisticated investors”
nationwide by, in large part, cold-calling them and offering them
interests in several oil and gas exploration and drilling joint
ventures. If someone expressed interest in participating as a
partner in a venture, they were sent an information package that
included a “Confidential Information Memorandum” (CIM) and a
“Joint Venture Agreement” (JVA).4 All parties acknowledge that,
under the terms of the JVA, the joint ventures were organized as
general partnerships under the Texas Revised Partnership Act, and
that the partners ostensibly have significant management rights
and responsibilities, such as the rights to call meetings, propose
agenda items, access partnership records, receive business
information, remove the managing partner, change the managing
partner’s powers, and otherwise actively run the business by
majority vote. The JVA also says the partners are jointly and
4These documents didn’t differ materially (for our purposes) from
venture to venture.
6
severally liable for any joint venture liabilities. The CIM delegates
the venture’s day-to-day operations to either HEI or HEDC as the
initial “managing venturer.”
B. Litigation
¶ 10 In 2009, the Commissioner filed a complaint against
defendants, alleging that they had violated the CSA by employing
unlicensed sales representatives to offer and sell unregistered
securities.
¶ 11 The court granted summary judgment for defendants on the
first Williamson test in 2011. Two years later, after a seven-day
trial, the trial court found that the joint venture interests aren’t
investment contracts, and therefore aren’t securities, under the
CSA. Specifically, the court ruled that the Commissioner had failed
to overcome the Williamson presumption by showing that those
interests are investment contracts under the second and third
Williamson tests.
¶ 12 On appeal, as previously discussed, a division of this court
reversed and remanded. First, it concluded that the trial court
erred by applying the Williamson presumption because Colorado
hadn’t adopted it. The division rejected the Williamson
7
presumption, reasoning that (1) the presumption is inconsistent
with the governing economic realities test; (2) how the presumption
applies is unclear; (3) it is based on a policy judgment, which is for
the General Assembly, not the courts, to make; and (4) it isn’t
necessary because the party claiming that the interests are
securities ultimately bears the burdens of proof and persuasion
anyway. Second, the division held that the trial court erred by
considering the partners’ experience in business affairs generally,
rather than their “collective experience” specific to the oil and gas
exploration and drilling business under the second Williamson test.
¶ 13 On remand, the trial court found that the joint venture
interests are investment contracts because (1) the partners are
incapable of intelligently exercising their partnership powers due to
their relative collective inexperience with oil and gas exploration
and drilling operations specifically (the second Williamson test); (2)
the partners are dependent on HEI and HEDC’s unique managerial
skills because none of the general partners themselves can capably
step into the managing partner’s shoes even if they desire a change
in managing partner (the third Williamson test); and (3) apart from
the Williamson tests, the economic realities generally so indicate.
8
Following a second trial, the court went on to find that defendants
had violated the CSA and ordered injunctive relief and restitution.
II. Discussion
¶ 14 One or more defendants variously contend that the trial court
erred by (1) finding that the joint venture interests are securities; (2)
finding that the statute of limitations of section 13-80-102(1)(i),
C.R.S. 2019, doesn’t bar the Commissioner’s claims; (3) finding that
the safe harbor of section 11-51-704(4), C.R.S. 2019, doesn’t
immunize defendants from liability; (4) awarding the Commissioner
restitution on behalf of out-of-state partners; (5) finding that
defendants committed securities fraud by using unlicensed sales
representatives to sell unregistered securities; (6) holding defendant
Brandon Davis jointly and severally liable for restitution; and (7)
granting the Commissioner’s request for an “obey-the-law”
injunction. Because we reverse based on the first, threshold issue,
we don’t address defendants’ other contentions.
¶ 15 Defendants present four arguments relating to whether the
general partnership interests are investment contracts. The first
two — that the prior division erred by rejecting the Williamson
presumption and by requiring venture-specific experience under the
9
second Williamson test — and the fourth — that the trial court
erred by finding that the interests are investment contracts when
looking at the economic realities independent of the Williamson test
— require us to revisit, to one degree or another, HEI I. The third —
that the trial court erred by limiting potential replacements of the
managing partners to the general partners — wasn’t analyzed in
HEI I. After considering whether the law of the case dictates that
we follow HEI I, and concluding that it doesn’t, we turn to the
arguments’ merits.
A. The Law of the Case
¶ 16 The Commissioner argues that there is no basis under the law
of the case doctrine to reconsider HEI I. We don’t agree.
¶ 17 “The doctrine of the law of the case is a discretionary rule of
practice directing that prior relevant rulings made in the same case
generally are to be followed.” Mining Equip. Inc. v. Leadville Corp.,
856 P.2d 81, 85 (Colo. App. 1993). Though the doctrine requires a
trial court to follow an appellate court’s rulings on remand, Saint
John’s Church in the Wilderness v. Scott, 2012 COA 72, ¶ 8, it “is
merely discretionary when applied to a court’s power to reconsider
its own prior rulings,” Grand Cty. Bd. of Comm’rs v. Colo. Prop. Tax
10
Adm’r, 2016 COA 2, ¶ 24; accord People ex rel. Gallagher v. Dist.
Court, 666 P.2d 550, 553 (Colo. 1983); Saint John’s Church in the
Wilderness, ¶ 8.
¶ 18 Indeed,
a division of [the court of appeals] may review
another division’s ruling in the same case if
there is the possibility that “the previous
decision is no longer sound because of
changed conditions or law, or legal or factual
error, or if the prior decision would result in
manifest injustice.”
Grand Cty. Bd. of Comm’rs, ¶ 24 (quoting Core-Mark Midcontinent,
Inc. v. Sonitrol Corp., 2012 COA 120, ¶ 10); accord Saint John’s
Church in the Wilderness, ¶ 8. For the reasons discussed below,
reconsideration of the prior division’s decision is warranted. We
turn, then, to the merits.
B. Are the General Partnership Interests Investment Contracts?
1. Standard of Review
¶ 19 Whether an interest in a venture is an investment contract is a
question of law that we review de novo. HEI I, ¶ 26; Joseph v.
Viatica Mgmt., LLC, 55 P.3d 264, 266 (Colo. App. 2002); Straub v.
Mountain Trails Resort, Inc., 770 P.2d 1321, 1323 (Colo. App. 1988).
We also review de novo the trial court’s application of the governing
11
legal standards to the facts of the case. HEI I, ¶ 26. But if we need
to examine any of the trial court’s findings of historical fact, we
review them for clear error. Id.
2. General Principles
¶ 20 We begin by covering familiar ground. The Commissioner’s
complaint hinges on whether the general partnership interests are
“investment contracts,” a species of security. See § 11-51-201(17),
C.R.S. 2019. Because the CSA doesn’t define an “investment
contract,” Colorado courts apply the three-part test set forth in
Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293
(1946), as modified by United Housing Foundation, Inc. v. Forman,
421 U.S. 837 (1975), cases addressing the meaning of investment
contract under federal statute, to determine whether an interest in
a venture is an investment contract. Toothman v. Freeborn &
Peters, 80 P.3d 804, 811 (Colo. App. 2002). Under the Howey test,
“an ‘investment contract’ is: (1) a contract, transaction, or scheme
whereby a person invests his or her money (2) in a common
enterprise and (3) is led to expect profits derived from the
entrepreneurial or managerial efforts of others.” Toothman, 80 P.3d
at 811 (citing People v. Milne, 690 P.2d 829, 833 (Colo. 1984)).
12
¶ 21 This definition of investment contract “embodies a flexible
rather than a static principle, one that is capable of adaptation to
meet the countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits.” Id.
(quoting Howey, 328 U.S. at 299). So in determining whether a
certain transaction is an investment contract, “the substantive
economic realities underlying the transaction” govern over its name
or form. Viatica Mgmt., 55 P.3d at 266; see Forman, 421 U.S. at
851-52. In other words, the label given to a particular interest isn’t
determinative of whether it is an investment contract. See
Williamson, 645 F.2d at 423 (“A scheme which sells investments to
inexperienced and unknowledgeable members of the general public
cannot escape the reach of the securities laws merely by labelling
itself a general partnership or joint venture.”).
¶ 22 In this case, the only part of the Howey test at issue is the
third part — whether the partners were dependent on the
managerial efforts of others for their expected profits. Before getting
into the law specifically applicable to that question, we pause to
acknowledge the role federal securities law plays when interpreting
the CSA.
13
¶ 23 The Colorado Supreme Court has repeatedly said that while
Colorado courts aren’t bound by federal law in interpreting the CSA,
when provisions of the CSA parallel provisions of federal law, the
“federal authorities that interpret provisions parallel to the [CSA]
are highly persuasive.” Milne, 690 P.2d at 833; accord, e.g., Cagle v.
Mathers Family Tr., 2013 CO 7, ¶ 19; Goss v. Clutch Exch., Inc., 701
P.2d 33, 34-35 (Colo. 1985); Lowery v. Ford Hill Inv. Co., 192 Colo.
125, 129-30, 556 P.2d 1201, 1204 (1976). But that may understate
the degree of deference we should afford federal authorities
construing parallel provisions. For the General Assembly has said
that “[t]he provisions of [the CSA] and rules made under [the CSA]
shall be coordinated with the federal acts and statutes to which
references are made in [the CSA] and rules and regulations
promulgated under those federal acts and statutes, to the extent
coordination is consistent with both the purposes and the
provisions of [the CSA].” § 11-51-101(3), C.R.S. 2019. We take this
to mean that if there is a prevailing federal judicial interpretation of
a parallel federal provision, we should follow that interpretation
unless some material difference in language or an underlying
14
purpose or policy of the CSA affirmatively dictates otherwise. See
Cagle, ¶¶ 20-27 (so applying federal case law).
¶ 24 So what does federal authority have to say about the third
Howey factor?
¶ 25 In the leading case, Williamson, the Fifth Circuit explained
that the pertinent economic reality under the third Howey prong is
whether “the power retained by the investors is a real one which
they are in fact capable of exercising.” 645 F.2d at 419. Thus, “[s]o
long as the investor has the right to control the asset he has
purchased, he is not dependent on the promoter or on a third party
for ‘those essential managerial efforts which affect the failure or
success of the enterprise.’” Id. at 421 (quoting Sec. & Exch. Comm’n
v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973)).
¶ 26 In recognizing that general partnership powers may be
illusory, however, the court identified three tests for determining
whether purported general partners are, in reality, dependent on
the entrepreneurial or managerial skills of others. The party
alleging that the interest is an investment contract must establish
that
15
(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.
Id. at 424.5 Many federal courts of appeals have expressly adopted
these tests. See, e.g., Sec. & Exch. Comm’n v. Schooler, 905 F.3d
1107, 1112 (9th Cir. 2018); Sec. & Exch. Comm’n v. Shields, 744
F.3d 633, 644 (10th Cir. 2014); United States v. Leonard, 529 F.3d
83, 90-91 (2d Cir. 2008); Sec. & Exch. Comm’n v. Merch. Capital,
LLC, 483 F.3d 747, 755-66 (11th Cir. 2007); Stone v. Kirk, 8 F.3d
1079, 1086 (6th Cir. 1993); Rivanna Trawlers Unlimited v.
Thompson Trawlers, Inc., 840 F.2d 236, 241 (4th Cir. 1988). As has
5 The party claiming that the interest is an investment contract has
the burden of proof. See, e.g., Sec. & Exch. Comm’n v. Arcturus
Corp., 928 F.3d 400, 410 (5th Cir. 2019); Banghart v. Hollywood
Gen. P’ship, 902 F.2d 805, 808 (10th Cir. 1990).
16
this court. See, e.g., HEI I, ¶ 24; Feigin v. Dig. Interactive Assocs.,
Inc., 987 P.2d 876, 882 (Colo. App. 1999).
¶ 27 On all this, the parties appear to agree; no party takes issue
with Williamson’s characterization of the Howey test or with the
three tests set forth in Williamson for determining whether an
ostensible general partnership interest is actually an investment
contract.6 The Commissioner and defendants part company,
however, on secondary legal principles that put flesh on the bones
of these general precepts.
3. The Williamson Presumption
¶ 28 The strong presumption that a general partnership interest
isn’t an investment contract — the presumption rejected by the
division in HEI I — derives from the following passage in Williamson:
[A]n investor who claims his general
partnership or joint venture interest is an
investment contract has a difficult burden to
overcome. On the face of a partnership
agreement, the investor retains substantial
control over his investment and an ability to
protect himself from the managing partner or
hired manager. Such an investor must
6 In 2011, the trial court ruled against the Commissioner on the
first Williamson test. The Commissioner didn’t cross-appeal that
ruling.
17
demonstrate that, in spite of the partnership
form which the investment took, he was so
dependent on the promoter or on a third party
that he was in fact unable to exercise
meaningful partnership powers.
645 F.2d at 424; see also id. at 425 (characterizing the presumption
as “an extremely difficult factual burden”). The court said this after
surveying federal cases dealing with similar interests; it summed up
by saying, “the courts that have ruled on the issue have held that a
general partnership or joint venture interest generally cannot be an
investment contract under the federal securities acts.” Id. at 421.
Although the court didn’t use the word “presumption” (as the HEI I
division pointed out), the existence of the presumption is the logical
conclusion from the court’s recognition of a “general” rule and
imposition of “an extremely difficult factual burden” to overcome the
general rule. Numerous federal circuit courts of appeals, including
the Fifth Circuit itself, have so recognized. See, e.g., Shields, 744
F.3d at 644; Merch. Cap., LLC, 483 F.3d at 755; Banghart v.
Hollywood Gen. P’ship, 902 F.2d 805, 807-08 (10th Cir. 1990);
Rivanna Trawlers Unlimited, 840 F.2d at 240-41; Youmans v. Simon,
18
791 F.2d 341, 346 (5th Cir. 1986); Odom v. Slavik, 703 F.2d 212,
215 (6th Cir. 1983).7
¶ 29 The presumption is justified, these courts say, based on the
powers typically granted to general partners. These often include
the powers to participate in the management and control of the
partnership, act on behalf of the partnership, bind the partnership
by their actions, remove a managing partner or entity, and dissolve
the partnership. General partners are also individually liable for
the partnership’s liabilities. Sec. & Exch. Comm’n v. Arcturus Corp.,
928 F.3d 400, 410 (5th Cir. 2019); Youmans, 791 F.2d at 346;
Williamson, 645 F.2d at 421-22.
¶ 30 And because these partnership powers provide general
partners with leverage and the ability to protect themselves, “[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
7As have state courts, including the Colorado Court of Appeals.
See, e.g., Joseph v. Mieka Corp., 2012 COA 84, ¶ 17; Ak’s Daks
Commc’ns, Inc. v. Md. Sec. Div., 771 A.2d 487, 497 (Md. Ct. Spec.
App. 2001); State v. Kramer, 804 S.W.2d 845, 848 (Mo. Ct. App.
1991).
19
from a mere failure to exercise his rights.” Williamson, 645 F.2d at
422.
¶ 31 Recently, the Fifth Circuit summed up the rationale for the
Williamson presumption as follows:
[P]artners in a general partnership can guard
“their own interests” with their “inherent
[partnership] powers” and do not need
protection from securities laws — they can “act
on behalf of the partnership”; “bind their
partners by their actions”; “dissolve the
partnership”; and “are personally liable for all
liabilities of the partnership.” General
partners are, in short, “entrepreneurs, not
investors.”
Arcturus, 928 F.3d at 410 (citation omitted).8
8 Another division of this court has expressed a similar rationale for
the presumption:
A general partnership provides its partners
with an equal right in the management and
conduct of the partnership business, and
general partners are jointly and severally liable
for the obligations of the general partnership.
See §§ 7-60-115(1), 7-60-118(1), C.R.S. 2002.
The Williamson ruling adheres to these
principles in that a partnership interest is
presumed not to be an investment contract to
the extent that partners have a legal right to
participate in the management of the
partnership.
Toothman v. Freeborn & Peters, 80 P.3d 804, 812 (Colo. App. 2002).
20
¶ 32 This strong presumption that general partnership interests
aren’t investment contracts is widely applied by federal and state
courts alike. See, e.g., Schooler, 905 F.3d at 1112; Shields, 744
F.3d at 643; Rivanna Trawlers Unlimited, 840 F.2d at 242;9 Gordon
v. Terry, 684 F.2d 736, 741 (11th Cir. 1983); Slavik, 703 F.2d at
215; Sec. & Exch. Comm’n v. Shiner, 268 F. Supp. 2d 1333, 1340-44
(S.D. Fla. 2003); Great Lakes Chem. Corp. v. Monsanto Co., 96 F.
Supp. 2d 376, 391 (D. Del. 2000); Sec. & Exch. Comm’n v. Telecom
Mktg., Inc., 888 F. Supp. 1160, 1165 (N.D. Ga. 1995); Kline Hotel
Partners v. Aircoa Equity Interests, Inc., 725 F. Supp. 479, 481 (D.
Colo. 1989); Power Petroleum, Inc. v. P & G Mining Co., Inc., 682 F.
Supp. 492, 493-94 (D. Colo. 1988); Roark v. Belvedere, Ltd., 633 F.
Supp. 765, 767 (S.D. Ohio 1985); McConnell v. Frank Howard Allen
9 Contrary to the division’s assertion in Rome v. HEI Resources, Inc.,
2014 COA 160, ¶ 35 (HEI I), the Fourth Circuit hasn’t
“inconsistently applied Williamson,” at least when it comes to
general partnership interests. The case the division cited that
didn’t apply the presumption, Bailey v. J.W.K. Props., Inc., 904 F.2d
918 (4th Cir. 1990), dealt with an enterprise that “did not involve
the formal structure and protection of a general partnership.” Id. at
923 (distinguishing the contracts before the court from the general
partnership interests at issue in Rivanna Trawlers Unlimited v.
Thompson Trawlers, Inc., 840 F.2d 236 (4th Cir. 1988)).
21
& Co., 574 F. Supp. 781, 786 (N.D. Cal. 1983); Westlake v. Abrams,
565 F. Supp. 1330, 1343 (N.D. Ga. 1983); Nutek Info. Sys., Inc. v.
Ariz. Corp. Comm’n, 977 P.2d 826, 830 (Ariz. Ct. App. 1998); Corp.
E. Assocs. v. Meester, 442 N.W.2d 105, 107 (Iowa 1989); Ak’s Daks
Commc’ns, Inc. v. Md. Sec. Div., 771 A.2d 487, 497 (Md. Ct. Spec.
App. 2001); Bahre v. Pearl, 595 A.2d 1027, 1031 (Me. 1991); Russell
v. French & Assocs., Inc., 709 S.W.2d 312, 314 (Tex. App. 1986).10
¶ 33 Indeed, apart from one case taking an even more extreme view
of general partnership interests as shielded from the securities
laws, we haven’t found any published decision of any court holding
that there is no such presumption: the Williamson presumption is
prevailing federal law.11 This makes HEI I a true outlier. And given
10 The Williamson presumption isn’t without critics. See Kenneth L.
MacRitchie, General Partnerships and Similar Interests as
“Securities” Under Federal and State Law, 32 Lincoln L. Rev. 29
(2004-2005); J. William Callison, Changed Circumstances:
Eliminating the Williamson Presumption that General Partnership
Interests are Not Securities, 58 Bus. Law. 1373 (Aug. 2003). But it
apparently hasn’t waned in popularity despite that criticism.
11 The Third Circuit follows a stricter approach. If a general
partnership agreement gives the usual general partnership powers
to the general partners, then the partnership “interest does not
qualify as a security primarily because the role of a general partner,
by law, extends well beyond the permitted role of a passive
investor.” Goodwin v. Elkins & Co., 730 F.2d 99, 103 (3d Cir. 1984).
22
that we must coordinate Colorado securities law with federal
securities law, and that the Commissioner points to no purpose or
policy of the CSA counseling otherwise in this context, we conclude
that the HEI I division erred by rejecting the Williamson
presumption. See § 11-51-101(3); Cagle, ¶ 27.
¶ 34 Nonetheless, the Commissioner argues that because Colorado
courts have departed from federal law in the securities context, we
should do so here. He cites only Viatica Management in support. In
that case, the division concluded that units in a trust were
investment contracts because the investors who bought the units
“relied entirely” on the managerial efforts of others for profits. 55
P.3d at 267. But contrary to the Commissioner’s assertion, the
division didn’t reject any interpretation of federal law; it held that
the case’s facts were distinguishable from those in the federal case
on which the defendant relied. Id. at 266-67; see Cagle, ¶ 26
(recognizing this basis for the holding in Viatica Management). And
in any event, as we have just noted, the Commissioner doesn’t point
to anything in the language of the CSA, or any policy underlying it,
that dictates a course different from the one federal courts have
charted for analyzing general partnership interests.
23
¶ 35 That could be the end of the matter. But we nevertheless
address HEI I’s four stated reasons for rejecting the presumption.
a. Economic Realities
¶ 36 The prior division concluded that applying the presumption “is
contrary to Colorado and federal law that requires courts to look at
substantive economic realities, not form.” HEI I, ¶ 41. But the
Williamson presumption reflects the economic realities of being a
general partner; that status ordinarily carries with it considerable
legal rights to control the venture. See Williamson, 645 F.2d at 424
(“So long as the investor retains ultimate control, he has the power
over the investment and the access to information about it which is
necessary to protect against any unwilling dependence on the
manager.”); Dig. Interactive, 987 P.2d at 881 (expressly recognizing
that the Williamson framework is based on “economic reality”).
¶ 37 Courts applying the Williamson presumption don’t see any
tension between it and the requirement to consider economic
realities. To the contrary, they expressly acknowledge that
economic realities control and see the presumption, and the tests
that may be used to try to overcome it, as consistent with such
realities. See, e.g., Arcturus, 928 F.3d at 410-11; Youmans, 791
24
F.2d at 345-46; Slavik, 703 F.2d at 216; Telecom Mktg., 888 F.
Supp. at 1165; Roark, 633 F. Supp. at 767; McConnell, 574 F.
Supp. at 785-86; Meester, 442 N.W.2d at 107.
b. Applying the Presumption
¶ 38 The prior division said that it isn’t clear how courts are
supposed to apply the presumption because “no court has
articulated the presumption in a manner that enables trial courts to
reliably apply” it. HEI I, ¶ 42. But courts across the country have
been applying the presumption for decades, and we haven’t found
any cases expressing difficulty in applying it. Presumptions aren’t
uncommon in the law (as HEI I notes). We don’t think it likely that
courts would have any difficulty applying this one. At bottom, it
sets a high burden of factual proof for the one seeking to overcome
it, and thus the inquiry ultimately comes down to whether the
degree of control possessed by the ostensible general partners is
real or illusory. Trial courts are perfectly capable of making such
judgments.
c. Policy Judgment
¶ 39 The prior division also said that, because “the resolution of
what weight a presumption has and whether it disappears upon
25
presentation of sufficient rebuttal evidence depends on policy
judgments,” it is the General Assembly’s prerogative to decide if it
applies. Id. at ¶ 45. The General Assembly, however, has made a
policy judgment: the CSA “shall be coordinated” with federal
securities law “to the extent coordination is consistent with both the
purposes and the provisions of this article.” § 11-51-101(3)
(emphasis added). And the supreme court has held that the CSA’s
purposes and provisions align with those of the federal securities
acts. Cagle, ¶ 24. To put a finer point on it, the General Assembly
has made a policy judgment to follow federal law, and the
presumption is prevailing federal law. See id. at ¶¶ 20-27 (following
federal case law interpreting federal statutes when interpreting the
CSA).
d. Necessity of the Presumption
¶ 40 The prior division believed that the presumption is “wholly
unnecessary” because the party alleging that a general partnership
interest is an investment contract carries the burden of proof and
persuasion anyway. HEI I, ¶¶ 47-48. But the presumption
provides a degree of certainty that is essential for business
transactions. In forming or joining a general partnership, partners
26
are put on notice that, so long as the partners’ powers are real, the
securities laws won’t protect them, see Arcturus, 928 F.3d at 413
(the joint venture agreements “clearly state that the venture is not a
security, putting the investors ‘on notice’ that ‘federal securities
acts’ will not protect them” (quoting Williamson, 645 F.2d at 422)),
and the presumption also gives promoters notice of the regulatory
requirements with which they must comply. In addition, the
presumption serves as a guard-rail in assuring that securities laws
aren’t turned into general antifraud provisions allowing general
partners to sue their copartners or the managers for alleged
securities violations. See Goodwin v. Elkins & Co., 730 F.2d 99,
113 (3d Cir. 1984) (“[T]he federal securities laws are not properly
invoked to protect one general partner from the deceit of his
copartners.”) (Seitz, C.J., concurring); see also Landreth Timber Co.
v. Landreth, 471 U.S. 681, 690 (1985) (the federal securities acts
are intended to protect “passive” investors, not “active
entrepreneur[s]”); Marine Bank v. Weaver, 455 U.S. 551, 556 (1982)
27
(“Congress, in enacting the securities laws, did not intend to provide
a broad federal remedy for all fraud.”).12
¶ 41 In sum, we conclude that where the parties’ agreement
purports to give participants rights typical of those possessed by a
general partner, see Shields, 744 F.3d at 644, there is a strong
presumption that the general partnership interests aren’t
investment contracts. Because it is undisputed that the JVA gives
partners partnership powers, the Williamson presumption applies in
this case.
¶ 42 The trial court, bound of course by HEI I, didn’t apply the
presumption. We therefore reverse the trial court’s judgment and
remand for reconsideration. On remand, the court must make
factual findings as to whether the interests are investment
12In fact, this case shows how the Williamson presumption can
make a difference. Applying the presumption, the trial court found
that the general partnership interests aren’t investment contracts.
On remand, following the prior division’s direction not to apply the
presumption, the trial court found, on the same record, that the
general partnership interests are investment contracts.
28
contracts under the second and third Williamson tests, applying the
presumption, and based on the existing record alone.13
¶ 43 We next examine other relevant legal principles that must
guide the court in addressing the second and third Williamson tests.
4. Relevant Business Experience
¶ 44 In HEI I, the division held that under the second Williamson
test “there must be substantial collective experience in the specific
business of the venture such that the partners, as a whole, need
not rely solely on the promoters or third parties for the success of
the venture or to meaningfully exercise their partnership powers.”
HEI I, ¶ 58 (emphasis added). On remand, the trial court found
that the general partners collectively lacked venture-specific
experience. (Before the first appeal, the trial court found that the
general partners had sufficient general business experience to
protect their interests by meaningfully exercising their powers.)
13We realize that the trial court did this once before in 2013. But
the court on remand took evidence in determining liability and
remedies that may bear on these issues. And the court didn’t have
the benefit of the guidance set forth below relating to the second
and third tests.
29
Defendants contend that the HEI I division erred by requiring
collective venture-specific experience. We agree.
¶ 45 In Williamson, the Fifth Circuit said that the relevant inquiry
under the second test is whether “the partner or venturer is so
inexperienced and unknowledgeable in business affairs that he is
incapable of intelligently exercising his partnership or venture
power.” 645 F.2d at 424 (emphasis added). True, the Fifth Circuit,
in Long v. Schultz Cattle Co., 881 F.2d 129, 134 n.3 (5th Cir. 1989),
later said that “the knowledge inquiry must be tied to the nature of
the underlying venture.” But that isn’t the same as saying that the
venture-specific experience is required. Rather, it means only that
“the investors’ expertise must be considered in relation to the
nature of the underlying venture.” Id. at 135.14
¶ 46 The Fifth Circuit much more recently addressed this issue in
Arcturus. In discussing this statement from Long (a case which
didn’t even involve a general partnership), the court said, “[t]his
14In a post-Long decision, the Fifth Circuit pointed out that Long
didn’t involve a joint venture, and therefore the interests in that
case didn’t enjoy the presumption of active involvement. Nunez v.
Robin, 415 F. App’x 586, 591 (5th Cir. 1991).
30
requirement . . . should not be read to suggest that investors
necessarily need a specialized background. If the evidence shows
that an investor can intelligently control his investment, then courts
do not require specialized experience.” Arcturus, 928 F.3d at 417-
18 (emphasis added).
¶ 47 So although venture-specific experience is unquestionably
relevant, it isn’t necessarily required. What matters is whether,
considering the nature of the business, the partners collectively
possess sufficient knowledge and experience to intelligently exercise
their powers. See, e.g., Robinson v. Glynn, 349 F.3d 166, 170-72
(4th Cir. 2003) (specialized experience wasn’t required where
investor, “a savvy and experienced businessman,” showed he was
capable of managing his investment); Holden v. Hagopian, 978 F.2d
1115, 1121 (9th Cir. 1992) (rejecting argument that partners
weren’t able to intelligently exercise their partnership powers
because they lacked specialized experience and stating that,
instead, “[t]he proper inquiry is whether the partners are
inexperienced or unknowledgeable in ‘business affairs’ generally”);
Koch v. Hankins, 928 F.2d 1471, 1479 (9th Cir. 1991) (“While it is
undisputed that none of the investors had prior experience in jojoba
31
farming, that draws the question too narrowly.”); Deutsch Energy
Co. v. Mazur, 813 F.2d 1567, 1570 (9th Cir. 1987) (even though “it
appears to be an open question whether sophistication in one field
of business will always transfer to another,” Williamson looks to an
investor’s “level of general business expertise”); Youmans, 791 F.2d
at 347 (specialized experience wasn’t required where the plaintiff, a
physician who invested in real estate projects, had “also engaged in
a number of business transactions not connected with [the
defendants]”); Williamson, 645 F.2d at 425 (specialized experience
wasn’t required where an investor’s experience on the Frito-Lay
board was “business experience and knowledge adequate to the
exercise of partnership powers in a real estate joint venture”).15
15We recognize that Securities and Exchange Commission v. Shields,
another case on which HEI I relied, says that “[t]he experience and
knowledge referred to in Williamson ‘focus[es] on the experience of
investors in the particular business, not the general experience of
the partners.’” 744 F.3d 633, 647 (10th Cir. 2014) (quoting Sec. &
Exch. Comm’n v. Merch. Capital, LLC, 483 F.3d 747, 762 (11th Cir.
2007)). But as the Fifth Circuit recently made clear in Arcturus,
that reading of Williamson is incorrect.
32
¶ 48 Courts have considered the following nonexclusive factors to
determine whether the partners possessed sufficient knowledge and
experience:
(1) Do the partners have prior business experience
generally? See Arcturus, 928 F.3d at 419; Koch, 928 F.2d
at 1479; Deutsch Energy Co., 813 F.2d at 1570;
Youmans, 791 F.2d at 347.
(2) What kind of prior business experience do the partners
have, not just as investors but as businesspeople (such
as by holding executive positions in organizations)? See
Robinson, 349 F.3d at 171; Williamson, 645 F.2d at 424-
25.
(3) Are the partners otherwise financially sophisticated? See
Arcturus, 928 F.3d at 420; Koch, 928 F.2d at 1479.
(4) Did the partners represent that they considered
themselves experienced in business affairs generally?
See Arcturus, 928 F.3d at 420; Holden, 978 F.2d at 1121.
(5) Do the partners have prior experience in the same type of
enterprise? See Arcturus, 928 F.3d at 419; Deutsch
Energy Co., 813 F.2d at 1570.
33
(6) Is the nature of the venture such that venture-specific
experience is essential to enable the partners to
intelligently exercise their powers? See Koch, 928 F.2d at
1478-79.
(7) Did the partners consult advisors or legal counsel for
advice or assistance, or have they indicated that they
will? See Arcturus, 928 F.3d at 419; Robinson, 349 F.3d
at 171; Banghart, 902 F.2d at 808 n.5; Rivanna Trawlers
Unlimited, 840 F.2d at 242 n.10; Deutsch Energy Co., 813
F.2d at 1570.
(8) Did the partners in fact exercise their partnership
powers? See Arcturus, 928 F.3d at 419; Robinson, 349
F.3d at 171; Koch, 928 F.2d at 1474; Rivanna Trawlers
Unlimited, 840 F.2d at 242; Casablanca Prods., Inc. v.
Pace Int’l Res., Inc., 697 F. Supp. 1563, 1567 (D. Or.
1988).
(9) Did the partners previously invest in one of the
defendant’s businesses? See Arcturus, 928 F.3d at 420;
Williamson, 645 F.2d at 425.
34
(10) How did the partnership acquire its members? See
Arcturus, 928 F.3d at 418.
(11) To what extent do the partners have meaningful access to
information about the venture? See Sec. & Exch. Comm’n
v. Sethi, 910 F.3d 198, 205 (5th Cir. 2018); Shields, 744
F.3d at 648.16
¶ 49 On remand, the trial court must make new factual findings
under the second Williamson test, applying the strong presumption
that a general partnership interest isn’t an investment contract and
analyzing the partners’ collective experience under the foregoing
factors and any other factors relevant given the nature of the
venture.
5. Replaceability of the Manager
¶ 50 Defendants also contend that the trial court erred by
misconstruing the third Williamson test.17 Specifically, they argue
that the court erred by narrowly focusing on whether any of the
16 We don’t mean to imply that these factors are exclusive.
Depending on the circumstances, other facts may be relevant to
this inquiry. Some of these factors, such as access to information,
may also be relevant to the analysis under the third Williamson test.
17 The HEI I division didn’t address the third Williamson test.
35
general partners themselves possessed the skills necessary to
replace the managing partner (HEI or HEDC); that is, whether any
of them could step into the managing partner’s shoes. However, it
isn’t entirely clear from the record if the court, in determining
whether the partners were dependent on HEI and HEDC’s unique
knowledge or abilities, considered only the partners themselves as
potential replacements.
¶ 51 We agree with defendants that any such focus would be “too
narrow. Under this part of Williamson, investors must show that
‘there is no reasonable replacement’ for the manager.” Holden, 978
F.2d at 1123 (quoting Williamson, 645 F.2d at 423). Does the
managing partner have “some particular non-replaceable
expertise?” Williamson, 645 F.2d at 423. Or does the managing
partner have some “unique understanding” of the subject of the
venture? Id. Or does the managing partner have some “unusual
experience and ability in running that particular business” without
which the venture can’t succeed? Id. In short, are the partners “so
dependent on a particular manager that they cannot replace him or
otherwise exercise ultimate control?” Id. at 424.
36
¶ 52 On remand, the trial court should again make findings on this
test, applying the strong presumption and taking into account
Williamson’s caution that what ultimately matters is whether the
partners realistically could exercise their power to replace the
manager if they wanted to do so.
6. “Catch-All” Economic Realities
¶ 53 On remand, the trial court analyzed whether the interests are
investment contracts by looking at “other economic realities”
independently of the Williamson tests. It did so because the division
in HEI I told it to determine whether the “interests are securities
under the second and third Williamson factors and any other
‘catch-all’ economic realities.” HEI I, ¶ 61.
¶ 54 On appeal, defendants challenge the trial court’s findings,
arguing that the court “failed to separately evaluate the economic
realities evidence that was particular to” the specific joint venture at
issue, referred to as LO9, and “gave undue weight to certain facts
that, in reality, had little or no bearing on the parties’ ability to
exercise control.” They also argue that the court’s approach was, in
certain respects, inconsistent with Williamson.
37
¶ 55 Because the trial court (understandably following HEI I) didn’t
apply the Williamson presumption, we must reverse its
determination on this issue as well. To assist the court on remand,
we offer the following guidance on the role of “other economic
realities” in this context.
¶ 56 In HEI I, the division said, “[o]ther economic realities
underlying the transaction may also ‘give rise to such a dependence
on the promoter or manager that the exercise of partnership powers
[is] effectively precluded.’” Id. at ¶ 25 (quoting Williamson, 645 F.2d
at 424 n.15). We don’t quarrel with the HEI I division’s conclusion
that there may be considerations in addition to the three Williamson
tests that bear on whether an ostensible general partnership
interest is an investment contract. Williamson said so. Williamson,
645 F.2d at 424 & n.15 (referring to the three tests as “example[s]”
and noting that those were “the only factors relevant to the issue
that are at all implicated by the facts of this case”); see also
Arcturus, 928 F.3d at 411. But if facts — i.e., economic realities —
lead to the conclusion that the interests aren’t investment contracts
under the Williamson tests, those same facts shouldn’t be
repackaged under a “catch-all economic realities” test to reach a
38
contrary conclusion, absent some articulable reason akin to the
Williamson tests (and consistent with the underlying goal of the
Williamson tests) to do so. Applying the “catch-all economic
realities” in an amorphous way, untethered to the goal of
determining whether the general partners’ power “is a real one
which they are in fact capable of exercising,” Williamson, 645 F.2d
at 419, would significantly impair the utility of the entire Williamson
framework.
¶ 57 The cases on which HEI I relied when discussing the economic
realities test — Digital Interactive, Toothman, and Joseph v. Mieka
Corp., 2012 COA 84 — actually don’t have much to say about
looking outside the Williamson tests.
¶ 58 In Digital Interactive, the division recognized the three
Williamson tests and turned immediately to facts — such as who
the interests were marketed to and the number of partners — that
it thought relevant to those tests. 987 P.2d at 882. So did the
division in Mieka Corp., ¶ 20 (looking to “the sophistication and
vulnerability of the solicited investors” and the partners’ lack of
expertise, among other things).
39
¶ 59 Toothman involved a limited liability partnership, not a general
partnership, and because of differences in the two forms of
enterprise, the division rejected the entire Williamson framework.
80 P.3d at 812-13. Its analysis of various facts therefore says little,
if anything, about general partnerships, and certainly doesn’t
support the notion that a court must always apply a general “other
economic realities” test even when the economic realities-based
Williamson tests are sufficient.
¶ 60 All this is to say that (1) many, perhaps all, of the facts
analyzed by the trial court as “other economic realities” are relevant
to one or more of the Williamson tests and (2) if the economic
realities of the case need to be accounted for in some way in which
the Williamson tests prove inadequate, that needs to be articulated
in terms of some relatively concrete principle that will assist the
court in deciding whether the partners were “led to expect profits
derived from the entrepreneurial or managerial efforts of others.”
Toothman, 80 P.3d at 811; see Howey, 328 U.S. at 298-99;
Williamson, 645 F.2d at 417-18.
40
III. Conclusion
¶ 61 The judgment is reversed and the case is remanded to the trial
court to redetermine whether the joint venture interests are
investment contracts under the second and third Williamson tests,
consistent with the views stated herein. We acknowledge the trial
court’s commendable efforts in this case. And we acknowledge that
it likely frustrates the court to be instructed to do one thing and
then be told to do something else. But we have a duty to
independently examine the appeal’s merits notwithstanding the
prior division’s decision. Doing so leads us to conclude that the
trial court must once more resolve the threshold issue of whether
the interests in the joint ventures are investment contracts.18
JUDGE WELLING and JUDGE HAWTHORNE concur.
18We decline defendants’ invitation to make this determination in
the first instance.
41