May 21, 2019

Colorado Court of Appeals: Test Drive Constituted Joint Venture Between Driver and Dealership

The Colorado Court of Appeals issued its opinion in American Family Mutual Insurance Co. v. AN/CF Acquisition Corp. on Thursday, September 10, 2015.

Summary Judgment—Vicarious Liability for Negligence—Joint Venture in Operating an Automobile.

Hart asked to test drive a car she was interested in buying from defendant Go Courtesy Ford, a car dealership. A salesman accompanied Hart as a passenger on the test drive. The salesman chose the route and told her where to turn. During the drive, Hart negligently attempted to turn left in front of oncoming traffic and collided with a car driven by Kelly.

Kelly filed a claim with her insurer (American Family) for damages. American Family paid the claim and then filed this negligence action as Kelly’s subrogee against Hart and Go Courtesy Ford to recover the amount it had paid and the deductible. Hart did not defend, and the court entered a default judgment against her. She did not appeal.

Cross-motions for summary judgment were filed. American Family argued the test drive was a joint venture between Go Courtesy Ford and Hart, making Go Courtesy Ford vicariously liable for Hart’s negligence. Go Courtesy Ford argued the test drive was not a joint venture because the participants had adverse financial interests. The district court granted Go Courtesy Ford’s motion and denied American Family’s.

The sole issue on appeal was whether, as a matter of law, the test drive constituted a joint venture. For a joint venture to exist in the operation of an automobile, “two or more persons must unite in pursuit of a common purpose” and “each person must have a right to control the operation of the automobile in question.” This doctrine has been used to hold defendant passengers vicariously liable for drivers’ negligence for nearly a century. No published Colorado case has considered the joint venture doctrine in the context of a test drive. The majority rule in other jurisdictions is that when a dealer’s representative is a passenger during the test drive, the dealer is liable for the prospective purchaser’s negligence.

The Court found the district court erred in finding that Go Courtesy Ford and Hart did not share a common purpose. The test drive itself constituted a common purpose. Further, Go Courtesy Ford’s salesman had a right to control the car because the dealership owned it. Therefore, the test drive constituted a joint venture and, as a matter of law, Go Courtesy Ford was liable for Hart’s negligence during the test drive. The judgment was reversed and the case was remanded with directions.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Economic Realities Test Determines When General Partnership Interests Constitute Securities

The Colorado Court of Appeals issued its opinion in Rome, Acting Securities Commissioner for the State of Colorado v. HEI Resources, Inc. on Thursday, November 20, 2014.

Partnership Interests as Securities Under the Colorado Securities Act—Strong Presumption Test Under Williamson.

Rome, Acting Securities Commissioner for the State of Colorado (commissioner), appealed from a judgment dismissing his enforcement action against defendants. Two of the defendants, HEI Resources, Inc. (HEI) and Heartland Energy Development Corporation (HEDC), had their principal place of business in Colorado. In 2009, the commissioner filed a complaint alleging that defendants violated the Colorado Securities Act (Act) by using unlicensed sales representatives to offer and sell unregistered securities.

The allegations were premised on defendants’ formation and operation of several joint ventures in oil and gas exploration and drilling. To capitalize the ventures, defendants solicited investors by cold-calling thousands of people across the country. If an individual was interested, defendants sent an information package that included a Confidential Information Memorandum (CIM) and a Joint Venture Agreement (JVA). The JVA provided for the formation of a joint venture, organized as a general partnership under the Texas Revised Partnership Act.

HEI or HEDC was named as the initial managing venture. Although the JVA gave the venturers authority to remove the managing venturer by a majority vote and to vote on other issues, the commissioner alleged that any theoretical control by the venturers was illusory. The commissioner argued that the substance of the transaction was an investment contract under which the venturers invested money with the expectation that defendants’ efforts would return a profit.

The trial court granted summary judgment motions filed by defendants. It held the commissioner was collaterally estopped (due to a 2002 cease and desist action) from arguing that, based on the plain language of the JVAs, the joint venture interests were securities. It also ruled that, as a matter of law, the commissioner could not establish that the interests were securities. Based on its summary judgment orders, the subsequent trial was limited to the commissioner trying to prove that the interests were securities based on the knowledge and experience of the partners or venturers or under other economic realities surrounding their offer and sale. The court ruled in favor of defendants.

On appeal, the commissioner argued it was error to apply a strong presumption that general partnership or joint venture interests are not securities and to conclude that the relevant experience of the venturers is their general business experience. Only transactions that involve a “security” fall under the scope of the Act. Courts are to look to the “economic realities” of the transaction.

In what the Court of Appeals saw as a matter of first impression in Colorado, it held that Colorado courts should not apply the “strong presumption” that interests in joint ventures or general partnerships are not securities. Because the trial court applied the strong presumption, the Court vacated the judgment and remanded the case for reconsideration.

The Court found that the inquiry is to be based on the knowledge of the nature of the underlying venture. The Court clarified that this is not a requirement that every investor have specific experience related to the underlying venture. Therefore, this issue must also be reconsidered on remand.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: Issue of Fact Existed Concerning Whether Investments Were “Investment Contracts” Under Securities Law

The Tenth Circuit Court of Appeals published its opinion in SEC v. Shields on Monday, February 24, 2014.

The Securities and Exchange Commission (“SEC”) brought this civil enforcement action against Defendant-Appellees Jeffory D. Shields, GeoDynamics, Inc. (“GeoDynamics”), and several other business entities affiliated with Mr. Shields, alleging securities fraud in connection with four oil and gas exploration and drilling ventures Mr. Shields, as managing partner of GeoDynamics, marketed to thousands of investors nationwide as Joint Venture Agreements (“JVAs”). The district court granted defendants’ Fed. R. Civ. P. 12(b)(6) motion to dismiss. The SEC appealed, contending that despite their labels as JVAs, the investment agreements were actually “investment contracts” and thus “securities” subject to federal securities regulations as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934 (collectively, the “Securities Acts”).

The central issue raised on appeal was whether the investments sold by Mr. Shields as managing partner of GeoDynamics were “investment contracts” and thus “securities” subject to federal securities regulations.

Congress painted with a broad brush in defining a “security.” Coverage of the antifraud provisions of the securities laws is not limited to instruments traded at securities exchanges and over-the-counter markets, but extends to uncommon and irregular instruments. Although the Securities Acts broadly define a security, neither act specifically defines an “investment contract.” The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.

The parties confined their argument to whether the investment was premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The joint venture agreements here were denominated general partnerships, and the Tenth Circuit applies a strong presumption that an interest in a general partnership is not a security, mainly because the partners – the investors – are ordinarily granted significant control over the enterprise. But presumptions are not per se rules, and the court recognized that the presumption can be rebutted by evidence that the general partners were rendered passive investors because they were somehow precluded from exercising their powers of control and supervision. Access to information about the investment, and not managerial control, is the most significant factor in determining whether investors are in need of the protections of the securities acts.

The Tenth Circuit agreed with the SEC that the allegations in the complaint were clearly sufficient to rebut the presumption that the purported general partnerships were not securities, and raised a fact issue concerning whether investors were relying on the efforts of Mr. Shields and GeoDynamics to significantly affect the success or failure of the ventures. The allegations also raised a fact issue as to whether the investors actually had the type of control reserved under the agreements to obtain access to information necessary to protect, manage, and control their investments at the time they purchased their interests. The allegations were sufficient to defeat a motion to dismiss on the issue of whether the investors lacked meaningful control over their interests. They raised a plausible claim that the joint venture agreements, in substance as opposed to form, actually distributed powers similar to a limited partnership, which is usually held to be a security.

Because it could not be said as a matter of law that the investments at issue were not “investment contracts,” the Tenth Circuit REVERSED and REMANDED for further proceedings consistent with this opinion.