United States Court of Appeals, Tenth Circuit

574 F.
2d 1023
Fed. Sec. L. Rep. P 96,386

Brad R. WOODWARD, Wendy J. Woodward, Jeannette S.
Wilson,
Don W. Crompton, Wiltse P. Crompton, K. Brett Garn, Paul
Rowe, Arnold F. Egan, for themselves and for and on behalf
of all persons similarly situated, Plaintiffs-Appellants,
v.
TERRACOR, a Utah Corporation, Continental Mortgage
Investors, a Massachusetts Business Trust, Carl Marks &
Company, Inc., United American Life Insurance Company,
Fleschner-Becker-Erlich Fund, N.V. and FBA Partners,
Diversified Mortgage Investors, Avco Financial Services,
Glendon E. Johnson, Franklin D. Johnson, Clifton I. Johnson,
H. Roger Boyer, Ellis R. Ivory, and Does 1 through X
inclusive, Defendants-Appellees.
No. 76-1720.
United States Court of Appeals,

Tenth Circuit.
Argued Nov. 15, 1977.
Decided April 10, 1978.
Rehearing Denied May 5, 1978.
Richard G. Cook, Salt Lake City, Utah, for plaintiffs-appellants.

Daniel L. Berman, Salt Lake City, Utah (Berman & Giauque and Garry F.
Bendinger, Salt Lake City, Utah, on the brief), for defendant-appellee
Terracor.
Bruce A. Maak, Salt Lake City, Utah (Martineau & Maak and C. Keith
Rooker, Salt Lake City, Utah, on the brief), for defendant-appellee H.
Roger Boyer.
James B. Lee and David S. Dolowitz of Behle & Latimer, Salt Lake City,
Utah, on the brief, for defendant-appellee Avco Financial Services, Inc.
James R. Brown, Salt Lake City, Utah (Jardine, Johnson & Baldwin, Salt
Lake City, Utah, on the brief), for defendants-appellees Glendon E.
Johnson, Franklin D. Johnson, and Ellis R. Ivory.
Edward J. McDonough and Frederick P. McBrier of Jones, Waldo,
Holbrook & McDonough, Salt Lake City, Utah, on the brief, for
defendant-appellee United American Life Ins. Co.
Before McWILLIAMS, BREITENSTEIN and DOYLE, Circuit Judges.
McWILLIAMS, Circuit Judge.
The seven individual plaintiffs in this proceeding sue in their individual

capacities and also seek to represent a class. The named plaintiffs all purchased
lots in Stansbury Park, a planned residential community in Tooele, Utah. The
first named defendant, Terracor, a Utah corporation, was the developer of
Stansbury Park. Several financial institutions which had loaned money to
Terracor were also named as parties defendant. Additional defendants included
stockholders, officers, directors, and employees of Terracor.
The action was brought under federal securities laws, the securities laws of the
State of Utah, and in common-law fraud. The complaint alleged, inter alia, that
the sale of the lots constituted the sale of a security, in the form of an
investment contract, within the meaning of Section 2(1) of the Securities Act of
1933, as amended, 15 U.S.C. 77b, Section 3(a)(10) of the Securities
Exchange Act of 1934, as amended, 15 U.S.C. 78c(a)(10) and Section 61-113(12) of the Utah Code.
There was extensive pre-trial discovery, primarily by the defendants. Both the
plaintiffs and the defendants then moved for a summary judgment on the issue
of whether the purchase of the residential lots by the plaintiffs constituted an
investment contract. It was the plaintiffs' position that, based on the record as
then made, there was no genuine issue of fact on this particular matter and that
their purchase of the lots was an investment contract. The defendants' position
was that the record demonstrated conclusively that the purchase of the lots was
not an investment contract, and hence not within the ambit of the federal
security laws. The trial court granted the defendants' motion for summary
judgment and entered judgment accordingly. Additionally, the trial court
granted the motion of one of the individual defendants, Roger Boyer, for
summary judgment on the ground that he was not a "control person" within the
meaning of 15 U.S.C. 77o and 15 U.S.C. 78t. The plaintiffs now appeal the
dismissal of their action. We affirm.

4
The ultimate issue in this appeal is whether the purchase by the plaintiffs of
subdivision lots in a residential development constituted an investment contract,
and, as such, subject to the federal securities laws. The fact that the plaintiffs
and defendants both moved for summary judgment on this matter, though not
controlling, indicates that the parties themselves were of the view that, under
the circumstances, the question was one of law, not of fact.
15 U.S.C. 77b(1) provides that an "investment contract" is a form of a

"security." The Supreme Court has declared that an investment contract, for the
purposes of the federal securities acts, is a "contract, transaction or scheme
whereby a person invests his money in a common enterprise and is led to
expect profits solely from the efforts of the promoter or a third party . . . ." S. E.
C. v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). In
determining whether a particular transaction is, or is not, an investment
contract, substance is exalted over form, and emphasis is placed on economic
reality. McGovern Plaza Joint Venture v. First of Denver, 562 F.2d 645 (10th
Cir. 1977); Vincent v. Moench, 473 F.2d 430 (10th Cir. 1973); and Continental
Marketing Corp. v. Securities & Exchange Com'n, 387 F.2d 466 (10th Cir.
1967).
Stansbury Park was conceived and promoted by Terracor as a planned

residential community. To promote the sale of individual building sites,
Terracorrepresented that Stansbury Park would eventually become a selfsufficient community. Included in the plans were shopping centers, health and
cultural facilities, transportation facilities, and abundant recreational
opportunity, including a golf course and lake.
The plaintiffs each purchased lots as future building sites in Stansbury Park,
although several indicated that they themselves did not intend to actually build
on the land, and that they bought the land as an "investment." In each instance
the land was acquired by the execution of what is referred to as a Uniform Real
Estate Contract. This was the only agreement between the plaintiffs and
Terracor. This real estate contract provided only for the sale of the described
parcels of land together with the usual improvements, such as culinary water,
underground sewage, curb, gutter, and the like.
Although there is in our view no genuine issue of fact pertaining to the question
of whether we are here concerned with an investment contract, the parties are
in dispute as to what has happened to the Stansbury Park project. The plaintiffs
state in their brief that progress on the project has been slow and that the project
itself is "dying on the vine." In this general regard, though it is not pertinent to
our resolution of the present controversy, the fraud relied on by the plaintiffs is
an alleged misrepresentation by the defendants as to their financial ability to
carry the project to final completion. The defendants, however, in their brief,
state, for example, that all the recreational facilities mentioned in promotional
material have been constructed and that Stansbury Park today is in fact a
"burgeoning community." As indicated, however, this factual dispute does not
bear on the issue in this appeal.
9
The test in Howey, above referred to, has recently been reaffirmed in United
Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d
621 (1975). United Housing involved stock in a corporation owning and
operating a housing cooperative. In holding that the transaction considered
there did not involve a security, the Supreme Court quoted the Howey test and
then went on to state:
10 test, in shorthand form, embodies the essential attributes that run through all the
This
Court's decisions defining a security. The touchstone is the presence of an
investment in a common venture premised on a reasonable expectation of profit to
be derived from the entrepreneurial or managerial efforts of others. Id. at 852, 95
S.Ct. at 2060.
11
Applying the United Housing test to the instant case, the question becomes
whether there was an investment by these plaintiffs in a common venture with
Terracor which was premised on a reasonable expectation of profit to be
derived from the managerial effort of Terracor. Like the trial court, we
conclude that the present case does not measure up to that test. We particularly
fail to see any common venture or common enterprise between the plaintiffs
and Terracor.
12
Terracor itself was involved in a business venture. Terracor was developing a

new residential community. As part of its venture Terracor sold lots to persons
who either intended to build houses thereon, or intended to resell to others who
would so build. But the mere fact that the plaintiffs bought lots from Terracor
does not mean that by such acquisition they were thereafter engaged in a
common venture or enterprise with Terracor. The only contractual agreement
between plaintiffs and Terracor was the Uniform Real Estate Contract. Terracor
was under no contractual obligation to the plaintiffs other than to deliver title
once purchase terms were met. Unlike Howey, Terracor was not under any
collateral management contract with the purchasers of its land. In short, the
record in the instant case simply shows the purchase by the plaintiffs of lots in
a real estate development. Though it is possible that the plaintiffs may have a
common-law remedy against the defendants arising out of the purchase of the
lots, such does not mean that the transaction itself is an "investment contract,"
thereby invoking the provisions of the federal securities laws.
13
A case which illustrates our thinking on the matter is Davis v. Rio Rancho
Estates, Inc., 401 F.Supp. 1045 (S.D.N.Y.1975). There the plaintiffs alleged
that they bought lots in Rio Rancho Estates as an investment, expecting the lots
to appreciate in value through the sole efforts of the defendant promoters. In
dismissing such complaint for failure to state a claim, the court spoke as
follows:
14defendants in fact built roads and other improvements, this is not the type of
If
managerial service contemplated in Howey, supra, or United Housing, supra.
Defendants did not promise to run the development and distribute profits to the
plaintiff, as did the operators of the orange groves in Howey. There was no
management contract between plaintiff and defendants, nor were defendants
obligated by the Purchase Agreement to perform any such services. Defendants'
attempts to induce purchasers to build or their efforts, if any, to enhance living
conditions in the development were unrelated to plaintiff. Their interest was in
recouping their investment, making a profit and moving on. Any benefit to plaintiff
would be purely incidental.
15 the absence of a "common enterprise" between the parties, the expectation of a
In
profit on resale is insufficient to transform what is essentially a sale of real property
into the sale of an investment contract:
16
"Plaintiff's
effort to shoe-horn their land speculation into the definition of the
Securities Acts in our opinion fails. They have alleged only a superficial similarity
with the leading cases on this point and have not distinguished their transactions
from any other agreement to purchase real estate in undeveloped land." Bubula v.
The Grand Bahama Development Co., (N.D.Ill. June 7, 1974, unreported decision,
pp. 4-5)
17 plaintiffs in Bubula alleged that written contracts for the purchase of
The
undeveloped land on Grand Bahama Island were investment contracts. The Court
disagreed and dismissed the complaint. Contracts for the purchase of undeveloped
lots in recreational subdivisions in California were held not to be investment
contracts in Happy Investment Group v. Lakeworld Properties, Inc., 396 F.Supp.
175 (N.D.Cal.1975). See also Contract Buyers League v. F & F Investment, 300
F.Supp. 210 (N.D.Ill.1969) and 1 Loss, Securities Regulation, pp. 491-2 (2d ed.,
1961):
18 line is drawn, however, where neither the element of a common enterprise nor
"The
the element of reliance on the efforts of another is present. For example, no
'investment contract' is involved when a person invests in real estate, with the hope
perhaps of earning a profit as the result of a general increase in values concurrent
with the development of the neighborhood, as long as he does not do so as part of an
enterprise whereby it is expressly or impliedly understood that the property will be
developed or operated by others."
19
The plaintiffs in the instant case have in our view failed to shoe-horn their land
speculation into the parameters of the federal securities laws.
20
In this Court the plaintiffs place almost total reliance on McCown v. Heidler,
527 F.2d 204 (10th Cir. 1975). It is plaintiffs' position that if we adhere to
McCown we must reverse the trial court and remand the case with directions to
grant the plaintiffs' motion for summary judgment and hold that as a matter of
law the present transaction does constitute an investment contract within the
meaning of the federal securities laws. We do not believe that McCown dictates
such a result.
21
In McCown, the plaintiffs bought lots in a real estate development. They later
brought suit against the seller alleging common-law fraud and violations of the
Interstate Land Sales Full Disclosure Act. 15 U.S.C. 1701, et seq.1 The trial
court granted summary judgment in favor of the defendants on the basis that
the Land Sales Full Disclosure Act did not apply to the defendants named in the
McCown case. Prior to the summary judgment hearing, the plaintiffs in
McCown sought leave to file an amended complaint alleging violations of the
federal securities laws by the defendants. The trial court refused such request,
terming the effort to be "wholly without merit."
22
On appeal, in McCown, we reversed, holding that the Land Sales Full

Disclosure Act did apply to the named defendants. Additionally, we held that
the trial court erred in refusing to permit the plaintiffs to file an amended
complaint alleging violations of the federal securities laws. In so holding we
noted that the plaintiffs in McCown proposed to allege in their amended
complaint, and to prove at trial, that there was more than a mere offer and sale
of lots in the real estate subdivision, and that the sellers in McCown were under
"contractual promise" to do certain enumerated things which would enhance the
value of the individual building sites in the project. In the instant case there is
no suggestion that Terracor is under any contractual obligation to do anything
more than deliver title upon payment of the purchase price. That, to us, is a
significant difference between McCown and the present case.
23
Our holding in McCown was that the trial court erred in refusing to allow the
plaintiffs to file an amended complaint setting up alleged violations of the
federal securities laws. We did not hold that if the plaintiffs in McCown proved
all that they offered to prove they would establish an investment contract within
the meaning of the federal securities laws. Rather, we simply held that there
remained a factual question as to whether the sale of the lots constituted a sale
of securities. In the instant case both sides agree that there is no factual
question, and that the matter should be resolved as a question of law. On the
record before it the trial court did not err in granting the defendants' motion for
summary judgment and in denying the like motion filed by the plaintiffs.
24
Having determined that the trial court's judgment should be affirmed for the
reason that the transaction under consideration is not an investment contract, we
need not here consider whether the trial court was also correct in dismissing the
action against the one defendant, Roger Boyer, on the ground that he was not a
"control person" within the meaning of 15 U.S.C. 77o and 15 U.S.C. 78t.
25
Judgment affirmed.
The plaintiffs in the instant case did not assert a claim under the Land Sales
Full Disclosure Act

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574 F.

Fed. Sec. L. Rep. P 96,386

United States Court of Appeals,

Richard G. Cook, Salt Lake City, Utah, for plaintiffs-appellants.

The seven individual plaintiffs in this proceeding sue in their individual

dismissal of their action. We affirm.

15 U.S.C. 77b(1) provides that an "investment contract" is a form of a

Stansbury Park was conceived and promoted by Terracor as a planned

Terracor itself was involved in a business venture. Terracor was developing a

On appeal, in McCown, we reversed, holding that the Land Sales Full

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