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Ronald M. Rodeo v. Gillman

April 3, 1986


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 7655--James B. Parsons, Judge.

Author: Cudahy

Before: BAUER, CUDAHY and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge:

Plaintiffs' investment group purchased limited partnership interests in certain Illinois apartment buildings. At the time they purchased their limited partnership shares, plaintiffs also acquired an option to buy out the general partners. Several years later, plaintiffs became disenchanted with the deal and brought suit against the brokers that had arranged the investment, the general partners who managed the apartments and the individuals who originally sold the property, alleging violations of the federal securities laws, RICO and the Illinois Blue Sky Act. The district court granted summary judgment for the defendants, concluding that by contemporaneously acquiring an option to buy out the general partners and a limited partnership interest, plaintiffs acquired enough control to take their interest out of the category of "security" under federal law. We vacate and remand.

In the fall of 1980, defendant R. Dean Gillman, a real estate broker, informed plaintiffs of their opportunity to invest as limited partners in two 24-unit apartment buildings in Aurora, Illinois. After reviewing information concerning the management of the apartments and the financial status of the investment, plaintiffs decided to invest. On November 1, 1980, plaintiffs signed four agreements. First they entered into a joint venture agreement with one another agreeing to be limited partners in the apartment. Next, they signed an agreement with the selling limited partners to purchase all limited partnership interests in the buildings. They entered into a third agreement with defendant Koenig & Strey, the firm of the general partners, which gave plaintiffs an option to purchase the general partnership interests upon paying $20,000 and repaying all loans which the general partners had made to the limited partnership. That agreement also provided that if plaintiffs had not exercised their option by June 1984, the general partners could, at their option, sell their interests to the plaintiffs for the same price. Plaintiffs signed a final agreement with the general partners that the general partners would have sole responsibility for managing the investment.

In the fall of 1981, Gillman contacted plaintiffs and urged them to exercise their option to purchase the general partnership interests. In January 1982, plaintiffs purchased these interests and shortly thereafter retained Gillman to manage the apartments. In 1983, plaintiffs' counsel informed them that the purchase of the limited partnership units was voidable under the Illinois Blue Sky Act. Believing that material misrepresentations and omissions had been made during the negotiation of their limited partnership contracts, plaintiffs filed a 12-count suit in the district court for the Northern District of Illinois.

Plaintiff's suit claimed violations of the Securities Acts of 1933, 15 U.S.C. § 77 et seq., and 1934, 15 U.S.C. § 78 et seq., and ofRICO, 18 U.S.C. § 1981 et seq. Plaintiffs' case also included claims under the Illinois Blue Sky Act and Illinois common law which were brought before the court under its pendent jurisdiction. Both sides then filed for summary judgment. The court concluded that fundamental to its jurisdiction over the case was the requirement of a finding that plaintiffs had purchased a security. Defendants contended that the interests were not a security because, while plaintiffs were nominally limited partners, their option to purchase at will actually gave them ultimate control over the management of the apartments. Defendants noted that the plaintiffs agreed to contribute to expenses for tax, accounting and legal fees--an arrangement which was inconsistent with a mere limited partner's role. Similarly, defendants noted that they could transfer certain cost burdens to the plaintiffs, a circumstance which was inconsistent with a limited partner's limited liability. The deal was meant to transfer control, defendants argued, but was structured as a limited partnership in order to keep in force the favorable interest rates provided by the original owner's mortgage. The terms of the mortgage allowed for its becoming due in full in the event of a transfer of ownership.

The district court awarded the defendants summary judgment. While it did not address defendants' specific allegations or make a specific finding that the limited partnership deal was a sham transaction, it concluded that plaintiffs' interests were not in the nature of a security because of the option to purchase. The court stated that, "This manadatory buy-sell agreement was part of the total but-out transaction and it gave the plaintiffs total control at any time they wished to exercise it. This control is too great to fall within the confines of the third prong of the Howey-Forman test [for determining whether an interest is a security.]" The court concluded that "looking at the economic reality and not the name appended to the party . . . we see that plaintiffs had ultimate control and therefore do not fit within the status of limited partners."

Plaintiffs dispute defendants' characterization of their motives in entering into the transactions. They note that they did not assume actual control for two years and point out that certain conditions had to be met before they could replace the general partners. Because we believe that certain issues of material fact appear to remain in dispute, we find this an inappropriate case for summary judgment.


"[S]ummary judgment is appropriate only if it appears that there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." F.R.C.P. 56(c). "For the purpose of determining whether any material fact remains disputed, the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motivation." Fitzsimmons v. Best, 528 F.2d 692, 697 (7th Cir. 1976) quoting United States v. Diebold Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962) (per curiam). If the evidence is subject to conflicting interpretations, or if reasonable people might differ as to its significance, summary judgment is not appropriate. See Korf v. Ball State University, 726 F.2d 1222, 1226 (7th Cir. 1984).

In reviewing an appeal of a grant of summary judgment, this court must determine whether the district court correctly determined that no material facts remained in dispute and whether, even if no facts are disputed, the court correctly interpreted the federal securities laws.


In drafting the securities laws, Congress expected the term "security" to be read broadly so as to extend to the many types of instruments purchased for investment. See United Housing Association v. Forman, 421 U.S. 837, 847, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975). The issue here is whether the limited partnership interest is an "investment contract" under the relevant statutes. In SEC v. W. J. Howey Co., 328 U.S. 293, 298-99, 90 L. Ed. 1244, 66 S. Ct. 1100 ...

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