Unpublished Disposition, 930 F.2d 27 (9th Cir. 1991)

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US Court of Appeals for the Ninth Circuit - 930 F.2d 27 (9th Cir. 1991)

James KRAUSE; James Jean, Inc., Plaintiffs-Appellants,v.Jane Doe ADOLPH, Defendant,andDan Daigle; Paul Ferris; First Western Bank; Lesourd &Patten; Jane De Matthews; Richard P. Matthews; Bert H.Weinrich, Jr.; Gilmore Weinrich; Jane Doe Weinrich; J.M.Thompson & Associates, Ltd.; Jane Doe Thompson; John M.Thompson, Defendants-Appellees.

No. 89-35386.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 14, 1990.Decided April 4, 1991.



The primary issue raised in this appeal is whether the general partnership entered into by the appellants constitutes an "investment contract," within the meaning of the security laws, thereby creating a federal cause of action.

Plaintiffs-appellants are James Krause and his wife, Janice Krause. James is the president and owner of the Jeans Design Group, and James Jean, Inc. (formerly Bear Bottoms), which design and manufacture clothing. Starting in 1979 and continuing through the end of 1982, the Krauses invested in ventures initiated by two of the appellees, John Thompson and William Ellis, under the auspices of Thompson Ellis and Associates ("TEA") or its successor, Ellis Martin and Associates ("EMA"). The investments (with the exception of Chalet Vineyards) were organized as general partnerships, formed under "the Uniform Partnership Act of the State of Washington" (Wash.Rev.Code Secs. 25.04.010-.430), the object of which was to own and operate fruit orchards. The partnerships were established through a "partnership agreement" of one or two investors (which were a combination of Bear Bottoms, James and Janice Krause) and the promoter, TEA. Each of these partnership units owned a portion of an orchard.

In addition, each partnership entered into one of two management arrangements with TEA. The first type, entered into collectively by the partnerships owning the San Dollar Hillside, and Riverside Orchards, was a "Management Agreement" under which TEA operated the orchards for a fee. The agreement expressly permitted a majority of the partners to cancel it with 30 days written notice to TEA.

The second type of arrangement was termed a "joint venture." It was entered into by a partnership or group of partnerships (Chief Joseph, Lakeshore, Pine Creek, and Spring Creek) and indicated that an unspecified amount of fees would be paid to TEA as "managing agent." It also allowed removal of the managing agent "upon the vote of 66 2/3 in interest of the investors in the membership partnership."1

Chalet Vineyards was organized somewhat differently. Each investor owned his share of the orchards outright (and not only as a member of a partnership) and entered into a "joint venture" with "MET Associates" as "Managing Agent."

By the end of 1981, the orchard programs had lost over $3 million. By early 1983, a number of loans stood in default. By the end of 1984, the orchards had suffered cumulative losses in excess of $18.5 million.

Starting in 1983, James Krause became active in the management of the orchards by meeting with the managers and questioning their performance. He personally undertook to transport orchard apples to Southern California. Other general partner-investors exercised similar powers. They issued instructions to the managers, demanded information and ultimately assumed control of the Lakeshore orchard. James Krause, as a partner, participated in these activities.

In July, 1986, the Krauses initiated this action against the promoters of the investment, the promoters' attorneys, certain banks, and certain employees of the banks and the promoters. A number of defendants made motions to dismiss the Krauses' claims, and those motions were treated as if they were for summary judgment. The district court ruled in favor of the defendants on the ground that the interests marketed were not securities and therefore no cause of action was stated under the securities laws. The action against First Western Bank was dismissed on the same grounds, but in addition, the court relied on the doctrine of res judicata to dispose of the remaining claims against the bank. Finally, the district court dismissed the additional state claims against defendants Daigle and Ferris, ruling that without a federal claim, the court had no jurisdiction over pendent state claims. The Krauses filed a timely notice of appeal. This court's jurisdiction arises under 28 U.S.C. § 1291.

The appellants' first contention is that the district court erred in holding that the contracts they entered into were partnership agreements and not securities. The agreements were described as partnership agreements rather than investment contracts and this gives rise to a presumption that the interests are not securities. See Reeves v. Teuscher, 881 F.2d 1495 (9th Cir. 1989); Matek v. Murat, 862 F.2d 720 (9th Cir. 1988). To override that presumption, the Krauses would have to show that the contract placed significant limits on their power to control their investment. See Reeves, 881 F.2d at 1500. Under Washington law, the Krauses retained the power to dissolve the partnership at any time with notice. See Wash.Rev.Code Sec. 25.04.310(1) (b).

We also look to the partners' practical ability to exercise their rights. See Hocking v. Dubois, 885 F.2d 1449, 1460 (9th Cir. 1989) (en banc), cert. denied, 110 S. Ct. 1085 (1990). In this case there is no evidence that the Krauses' actual ability to exercise their rights was limited in any way. The record indicates that James Krause is a sophisticated business person and that the Krauses do not reside a great geographical distance from the site of their investment. That they are inexperienced at running orchards is immaterial; what matters is their general business acumen. See Deutsch Energy Co. v. Mazur, 813 F.2d 1567, 1570 (9th Cir. 1987).

Appellants also contend that, even if we affirm the dismissal of the securities claims, we should remand for the district court to consider the pendent claims or at least to exercise its discretion as to whether or not to consider them. Appellants correctly point out that the district court dismissed the state claims under a misapprehension that they were based upon the theory of pendent party jurisdiction which this circuit does not recognize. Because this case does not involve pendent party jurisdiction, the district court's reliance upon Ayala v. United States, 550 F.2d 1196 (9th Cir. 1977), cert. dismissed, 435 U.S. 982 (1978), was misplaced.

The district court does have discretion to hear state claims that fall within its pendent jurisdiction even if the federal claim ultimately proves meritless. See In re Nucorp Energy Securities Litigation, 772 F.2d 1486 (9th Cir. 1985). Here, however, the district court's citation of an inappropriate case does not require reversal. The district court dismissed the federal claims before trial. We have held that " [w]hen federal claims are dismissed before trial, ... pendent state claims should also be dismissed." Jones v. Community Redevelopment Agency, 733 F.2d 646, 651 (9th Cir. 1984). In so doing, we followed the Supreme Court's language in United Mine Workers v. Gibbs, 383 U.S. 724, 726, 86 S. Ct. 1130, 1139 (1966):

Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well.

This case presents just such a situation. We therefore affirm the district court's dismissal on those grounds. See Marino v. Vasquez, 812 F.2d 499, 508 (9th Cir. 1987) (appellate court may affirm district court's decision on grounds other than those articulated by the district court). See also Jones, 733 F.2d at 651 (affirming district court's dismissal because of the impropriety of retaining jurisdiction over pendent state claims, although district court had dismissed on grounds of abstention and res judicata).


WILLIAM A. NORRIS, Judge, concurring and dissenting:

I concur in the majority's decision that the contracts are not securities. But I must dissent from the majority's usurpation of the district court's discretionary authority to decide whether to dismiss the pendent state law claims. The majority correctly holds that the district court erred in ruling that it was required as a matter of law to dismiss the state law claims. However, once having decided that the decision whether or not to hear the pendent claims is entrusted to the sound discretion of the district court, the majority then proceeds to exercise that discretionary authority itself by ordering the dismissal of the claims. I would remand the case to the district court so it may decide for itself whether to hear the state law claims or dismiss them.


This deposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3