Securities and Exchange Commission v. Schooler et al, No. 3:2012cv02164 - Document 634 (S.D. Cal. 2014)
Court Description: ORDER Denying 592 Motion for Partial Reconsideration April 25, 2014 Summary Judgment Order. The hearing on Defendants' Motion, currently set for August 1, 2014, is Vacated. Signed by Judge Gonzalo P. Curiel on 7/30/2014. (All non-registered users served via U.S. Mail Service)(srm)
Download PDF
<![CDATA[
Securities and Exchange Commission v. Schooler et al Doc. 634 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 SECURITIES AND EXCHANGE COMMISSION, 12 13 Plaintiff, v. LOUIS V. SCHOOLER and FIRST FINANCIAL PLANNING 15 CORPORATION, dba Western Financial Planning Corporation, 14 16 Defendants. 17 ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. 3:12-cv-2164-GPC-JMA ORDER DENYING MOTION FOR PARTIAL RECONSIDERATION OF APRIL 25, 2014 SUMMARY JUDGMENT ORDER (ECF NO. 592) 18 19 On April 25, 2014, the Court denied Defendants’ Motion for Partial Summary 20 Judgment and granted in part and denied in part the SEC’s Motion for Partial Summary 21 Judgment. (ECF No. 583, “Summary Judgment Order.”) In doing so, the Court found 22 no dispute of material fact with regard to application of the first Williamson factor. See 23 Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir. 1981); Koch v. Hankins, 928 F.2d 24 1471, 1478 (9th Cir. 2011) (adopting Williamson analysis for use in the Ninth Circuit).1 25 26 27 28 1 Under the first Williamson factor, courts read and interpret relevant agreements to determine whether the agreements, according to their express terms, leave so little power in the hands of an investor in a general partnership that the resulting distribution of power is more akin to a limited partnership. Williamson, 645 F.2d at 424. If just one of the three Williamson factors is met, then the third element of the Howey test will be satisfied. Williamson, 645 F.2d at 424. The Howey test is used for determining whether an investment in a general partnership, for example, is actually a security 3:12-cv-2164-GPC-JMA Dockets.Justia.com 1 In applying the first Williamson factor, the Court examined the “Partnership 2 Agreement” and the “Co-Tenancy Agreement.” The Partnership Agreement governs 3 the relations among investors in the general partnerships (“GPs”) that Defendants 4 organized to hold undivided, fractional interests in raw land. Investors generally 5 signed a Partnership Agreement upon purchasing their interests in the GPs—i.e., at the 6 time they gave their money to Defendants. The “Co-Tenancy Agreement” governs the 7 relationships between those GPs that own properties as co-tenants. The Court found 8 that investors had no powers under these two agreements at the time of investment 9 because, according to their express terms, these agreements did not become effective 10 until months or years after investors gave their money to Defendants. 11 Based on that finding, the Court concluded the first Williamson factor was 12 satisfied, meaning the Court found that investors were left with so little power at the 13 time of investment that the resulting allocation of powers was more akin to a limited 14 partnership. This meant that the third Howey element was satisfied. Thus, because the 15 first two Howey elements were not in dispute, the Court found the GP interests that 16 investors bought from Defendants to be securities in the form of investment contracts. 17 Presently before the Court is Defendants’ request for reconsideration of the 18 Summary Judgment Order. (ECF No. 592, “Motion for Reconsideration.”) 19 Specifically, Defendants ask the Court to reconsider its ruling on the first Williamson 20 factor. The SEC opposes Defendants’ Motion for Reconsideration, (ECF No. 605), and 21 Defendants have filed a reply, (ECF No. 607). The Court finds Defendants’ Motion 22 for Reconsideration suitable for disposition without oral argument. See CivLR 7.1.d.1. 23 Having considered the parties’ submissions and the applicable law, and for the reasons 24 that follow, the Court will DENY Defendants’ Motion for Reconsideration. 25 District courts have the discretion to reconsider interlocutory rulings until a final 26 judgment is entered. Fed. R. Civ. P. 54(b); United States v. Martin, 226 F.3d 1042, 27 28 in the form of an investment contract, and its elements include: (1) an investment of money, (2) a common enterprise, and (3) the expectation of profits derived solely from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946); Koch, 928 F.2d at 1476. 2 3:12-cv-2164-GPC-JMA 1 1048-49 (9th Cir. 2000). While the Federal Rules of Civil Procedure do not set forth 2 a standard for reconsidering interlocutory rulings, the “law of the case” doctrine and 3 public policy dictate that the efficient operation of the judicial system requires the 4 avoidance of re-arguing questions that have already been decided. See Pyramid Lake 5 Paiute Tribe of Indians v. Hodel, 882 F.2d 364, 369 n.5 (9th Cir. 1989). 6 As such, most courts adhere to a fairly narrow standard by which to reconsider 7 their interlocutory rulings. This standard requires: (1) an intervening change in the 8 law; (2) additional evidence that was not previously available; or (3) that the prior 9 decision was based on clear error or would work manifest injustice. Id.; Marlyn 10 Nutraceuticals, Inc. v. Mucos Pharma GmbH & Co., 571 F.3d 873, 880 (9th Cir.2009); 11 Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir.1993). 12 Reconsideration is an “extraordinary remedy, to be used sparingly in the interests 13 of finality and conservation of judicial resources.” Kona Enters., Inc. v. Estate of 14 Bishop, 229 F.3d 877, 890 (9th Cir. 2000). “‘A motion for reconsideration is not an 15 opportunity to renew arguments considered and rejected by the court, nor is it an 16 opportunity for a party to re-argue a motion because it is dissatisfied with the original 17 outcome.’” FTC v. Neovi, Inc., 2009 WL 56130, at *2 (S.D. Cal. Jan. 7, 2009) 18 (quoting Devinsky v. Kingsford, 2008 WL 2704338, at *2 (S.D.N.Y. July 10, 2008)). 19 In addition to these substantive standards, Civil Local Rule 7.1.i.1 requires a 20 party moving for reconsideration to submit an affidavit or certified statement of an 21 attorney 22 23 24 setting forth the material facts and circumstances surrounding each prior application, including inter alia: (1) when and to what judge the application was made, (2) what ruling or decision or order was made thereon, and (3) what new or different facts and circumstances are claimed to exist which did not exist, or were not shown, upon such prior application. 25 26 Rule 7.1.i.2 provides that “any motion or application for reconsideration must be filed 27 within twenty-eight (28) days after the entry of the ruling, order or judgment sought to 28 be reconsidered.” 3 3:12-cv-2164-GPC-JMA 1 Defendants argue the Court clearly erred in applying the first Williamson factor 2 because the Court applied this factor to a “formation, subscription phase of the GPs” 3 “for the first time ever.” (ECF No. 592-1 at 7.) Defendants argue that, “even if the 4 subscription period were relevant to the Williamson analysis, the Court’s Order does 5 not correctly identify when the Partnership Agreement is in effect.” Defendants assert, 6 that contrary to the Court’s conclusion, “[t]he Partnership Agreement is in effect during 7 the subscription phase.” Defendants argue the Court further erred because “this Court 8 had previously ruled twice that the first Williamson factor had not been met.” Finally, 9 Defendants argue the Court erred by treating disputed facts as undisupted. 10 In opposition, the SEC argues Defendants’ Motion for Reconsideration should 11 be denied because Defendants’ assertions of clear error are based on re-arguments of 12 the same position Defendants took in opposition to the SEC’s Motion for Partial 13 Summary Judgment. The SEC also argues Defendants failed to comply with Civil 14 Local Rule 7.1.i.1 because Defendants did not provide an affidavit setting forth the 15 material facts and circumstances surrounding its prior request for relief. On the merits, 16 the SEC argues the Court did not err in applying the first Williamson factor because 17 the Partnership Agreement, as written, was not effective at the time of investment. The 18 SEC argues the Court’s prior rulings on the first Williamson factor have no impact on 19 the Summary Judgment Order because those prior rulings were made at the pleading 20 stage and because the Court had never before considered the effective dates of the 21 Partnership Agreement. Finally, the SEC argues the facts Defendants claim the Court 22 improperly treated as undisputed are irrelevant to application of the first Williamson 23 factor. 24 As a preliminary matter, the Court rejects Defendants’ arguments that the Court’s 25 prior rulings on the first Williamson factor during the pleading stage of this case 26 preclude the Court’s ruling on that factor at the summary judgment phase. The Court 27 further finds the facts that Defendants’ argue the Court improperly treated as 28 undisputed are irrelevant to application of the first Williamson factor. 4 3:12-cv-2164-GPC-JMA 1 Before the Court addresses Defendants’ remaining arguments for 2 reconsideration, the Court addresses the requirements of Civil Local Rule 7.1.i.1, 3 which provides: 4 5 6 7 8 9 Whenever any motion . . . for any order or other relief has been made to any judge and has been refused in whole or in part, . . . and a subsequent motion . . . is made for the same relief in whole or in part upon the same or any alleged different state of facts, it will be the continuing duty of each party and attorney seeking such relief to present to the judge to whom any subsequent application is made an affidavit of a party or witness or certified statement of an attorney setting forth the material facts and circumstances surrounding each prior application, including inter alia: (1) when and to what judge the application was made, (2) what ruling or decision or order was made thereon, and (3) what new or different facts and circumstances are claimed to exist which did not exist, or were not shown, upon such prior application. 10 11 Defendants argue Rule 7.1.i.1 “addresses motions for reconsideration brought from a 12 denial of a motion.” Defendants thus argue that–because “Defendants do not seek 13 reconsideration of the Order denying their motion for partial summary judgment on the 14 first and second Williamson factors” (but instead seek “reconsideration of that part of 15 the Order granting partial summary judgment to the SEC”)–Defendants are not required 16 to comply with Rule 7.1.i.1. Defendants’ reasoning is unpersuasive. 17 In moving for partial summary judgment on the first Williamson factor, 18 Defendants essentially requested a ruling that the first Williamson factor is unsatisfied 19 as a matter of law. The Court denied Defendants’ request and instead granted the 20 SEC’s opposing request for summary judgment in its favor on the first Williamson 21 factor. Defendants now ask for the same relief they asked for in moving for partial 22 summary judgment—i.e., that the Court find, as a matter of law, that the first 23 Williamson factor is unmet. Because Defendants are requesting the same relief they 24 sought in moving for partial summary judgment, and because Defendants did not 25 submit the affidavit or certified attorney statement required by Rule 7.1.i.1, the Court 26 concludes Defendants have failed to comply with Rule 7.1.i.1. This is a sufficient basis 27 on which to deny Defendants’ Motion for Reconsideration. See FTC v. Neovi, Inc., 28 2009 WL 56130, at *2 (S.D. Cal. Jan. 7, 2009). This, however, is not the only basis for 5 3:12-cv-2164-GPC-JMA 1 denial. 2 The Court agrees with the SEC that Defendants have merely reargued the points 3 they unsuccessfully advanced in opposing the SEC’s Motion for Partial Summary 4 Judgment. Defendants previously argued, for example, that: “No legal entity has 5 authority prior to its existence – every entity must go through a period of formation 6 when it is an idea that exists, but the final formation documents have not yet been 7 finalized.” (ECF No. 556 at 15.) Defendants argued: “Analyzing the lack of power 8 prior to formation is nowhere contemplated as a basis for applying the first Williamson 9 factor.” (Id. at 16.) Defendants argued: 10 11 12 Although the SEC argues that “these agreements could not have been in effect, and the GPs could not have exited [sic], during the entire offering period,” because “the investors did not have control over their funds or the underlying real estate during the all-important offering period,” that argument is directly contradicted by the clear language of the partnership agreement. 13 14 (Id. at 14.) The Court considered and rejected the foregoing arguments in applying the 15 first Williamson factor. Because Defendants make the same arguments in support of 16 their Motion for Reconsideration, Defendants’ Motion should be denied. 17 Turning briefly to the merits of Defendants’ Motion for Reconsideration, 18 however, the Court first notes that Defendants have completely ignored the Ninth 19 Circuit’s explanation that “[t]he focus under Williamson is on the investor’s 20 expectations at the time of the original investment, and ‘is not directed at what actually 21 transpires after the investment was made[.]’” Holden v. Hagopian, 978 F.2d 1115, 22 1119 n.6 (9th Cir. 1992). 23 The Court further notes that Defendants provide no support for their theory that 24 the Williamson factors cannot apply to activities occurring during the “subscription 25 period” of a general partnership’s formation. Indeed, Defendants do not provide any 26 authority defining or explaining what they mean by “subscription period” in the context 27 of general partnerships. Defendants do not, for example, provide authority explaining 28 that a “subscription period” may include a period of time when individuals have turned 6 3:12-cv-2164-GPC-JMA 1 their money over to a company for an interest in a general partnership that will 2 eventually hold an interest in real property, without the individuals having entered into 3 an effective agreement that provides them with some authority to control their money 4 or at least the interest in real property they bought with their money. 5 The Court has found little authority on the issue of “subscription periods” in the 6 context of general partnerships. One case that does address the issue, however, is of 7 no help to Defendants because it involved a subscription agreement that governed 8 separately from any partnership agreement. See Roberts v. Peat, Marwick, Mitchell & 9 Co., 857 F.2d 646, 651-52 (9th Cir. 1988) (separately analyzing subscription 10 agreement, promissory note, and partnership agreements). Had investors here signed 11 a subscription agreement or a partnership agreement that provided for a subscription 12 period (and not just an acquisition period), the analysis under the first Williamson 13 factor might be different. The mere fact that a subscription period might take place, 14 however, does not make the Partnership Agreement anymore effective than the Court 15 has already found it to be. Moreover, Defendants’ assertion that pre-investment 16 activities cannot be analyzed under Williamson is contrary to the Eleventh Circuit case 17 Defendants rely on for this position, which states that: “Indeed, investment schemes 18 may often involve a combination of both pre- and post-purchase managerial activities, 19 both of which should be taken into consideration in determining whether Howey’s test 20 is satisfied.” SEC v. Mutual Benefits Corp., 408 F.3d 737, 743-44 (11th Cir. 2005). 21 Defendants assert that, in applying the first Williamson factor, courts have never 22 examined when a formal agreement became effective. While most courts applying the 23 first Williamson factor have focused on the specific powers provided under a given 24 agreement, such a focus is irrelevant if, as is the case here, the agreement is not, by its 25 own terms, effective at the time an investor gives his or her money to a promoter. 26 Defendants also assert that the first Williamson factor requires an examination 27 of the plain language of the Partnership Agreement. In this regard, Defendants assert 28 the Court misread the Partnership Agreement with regard to its effectiveness and that, 7 3:12-cv-2164-GPC-JMA 1 in fact, “[t]he Partnership Agreement is in effect during the subscription phase.” 2 Defendants base this argument on the theory that, “for purposes of partnership law a 3 general partnership has been established since there is now ‘an association of two or 4 more persons to carry on as coowners a business for profit.’” [ECF No. 592-1 at 22 5 (citing Cal. Corp. Code §§ 16101(9) & 16202(a).] This, however, has nothing to do 6 with whether the Partnership Agreement was, according to its terms, effective at the 7 time of investment. 8 While two or more persons might associate to carry on as co-owners of a 9 business for profit, it does not follow that a written agreement that purports to govern 10 the partnership (which is, by its own terms, ineffective at the time of investment) 11 suddenly becomes effective. Indeed, without a written agreement, such a partnership 12 would be governed by the default rules of California’s Corporations Code. See Cal. 13 Corp. Code § 16103(a) (“To the extent the partnership agreement does not otherwise 14 provide, this chapter governs relations among the partners and between the partners 15 and the partnership.”) All of this, however, is irrelevant under the first Williamson 16 factor, which focuses only on formal, written agreements. 17 Defendants also point to language in the Partnership Agreement, which states: 18 “The Partnership shall commence upon the execution of this Agreement and shall 19 continue until terminated as hereinafter provided.” (See ECF No. 14-1 at 4, § 1.4.) 20 Based on this language, Defendants assert “[t]he Partnership Agreement, by its own 21 words, state [sic] that it shall commence upon its execution.” The Court disagrees. 22 The cited language states only that the partnership itself shall commence (which–as 23 Defendants point out–is true regardless of whether a formal agreement is effective 24 because of the rule that a general partnership is formed upon the association of two or 25 more people for business purposes). Moreover, the cited language neither contradicts, 26 nor requires an alternate reading of, the language stating the Partnership 27 Agreement—i.e., the formal document itself—is not effective until a date certain. 28 Apart from the Partnership Agreement’s language, Defendants also address the 8 3:12-cv-2164-GPC-JMA 1 first Howey element (i.e., an investment of money). Defendants assert that an 2 “investment of money” is synonymous with an “investment contract” and that, without 3 an “investment contract,” there can be no “investment of money.” This circular 4 argument, however, is nonsensical because a determination of whether a particular 5 transaction, scheme, or enterprise is an investment contract requires a determination 6 of whether there has been an investment of money. Howey, 328 U.S. at 298-99; see 7 also SEC v. Alliance Leasing Corp., 2000 WL 35612001, at *4 (S.D. Cal. Mar. 20, 8 2000) [finding first Howey element (i.e., an “investment of money”) satisfied where 9 investors merely contributed money to the venture]. Defendants’ citation to 10 Cocklereece v. Moran, 532 F. Supp. 519, 527 (D. Ga. 1982), does not persuade the 11 Court otherwise. There, an escrow deposit was deemed not to be an “investment of 12 money,” whereas, here, investors did not deposit their money into escrow. Rather, 13 investors deposited their money into bank accounts set up by Western employees 14 (purportedly on behalf of the GPs), after which most of the money investors deposited 15 was transferred to Western. 16 Defendants also take issue with the Court’s consideration of the Co-Tenancy 17 Agreement. Defendants imply the Court should not have considered the Co-Tenancy 18 Agreement because it does not alter investors’ power to control their respective GPs, 19 but instead alters the GPs’ power to control a particular property. (ECF No. 592-1 at 20 25.) While this may be true in theory, the Co-Tenancy Agreement is nonetheless a 21 formal document that affects investors’ ability to control their investments—i.e., their 22 undivided, fractional interests in real property—because the Co-Tenancy Agreement 23 purports to dictate how the GPs that co-own a particular property may dispose of the 24 property as a whole. It was therefore appropriate for the Court to consider the Co- 25 Tenancy Agreement. See Holden, 978 26 /// 27 /// 28 /// 9 3:12-cv-2164-GPC-JMA 1 F.2d at 1120 n.7. Because the Co-Tenancy Agreement was not, according to its terms 2 effective at the time of investment, it suffers the same fate as the Partnership 3 Agreement. 4 For all the foregoing reasons, IT IS HEREBY ORDERED that: 5 1. and 6 7 8 9 10 11 Defendants’ Motion for Reconsideration, (ECF No. 592), is DENIED; 2. The hearing on Defendants’ Motion, currently set for August 1, 2014, is VACATED. DATED: July 30, 2014 HON. GONZALO P. CURIEL United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 3:12-cv-2164-GPC-JMA
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
