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Foxfield Villa Associates, LLC v. Robben

No. 18-3054. D.Kan. Judge Carson. Securities Act of 1934—Securities Fraud—Limited Liability Company Interests—Supplemental Jurisdiction.

July 27, 2020


Defendant is a real estate developer. He conceived Foxfield Villa Associates, LLC (Foxfield), a Kansas limited liability company, as a vessel through which its members would purchase real estate. Defendant enlisted his acquaintances to become owners in Foxfield. They participated through two companies that they owned and operated, either in whole or in part, and in exchange for their ownership interests, they made capital contributions to Foxfield. Defendant served as Foxfield’s president and treasurer, and under the operating agreement, served as both its chief executive officer and chief operating officer and ran the day-to-day operations of Foxfield. Foxfield failed to turn a profit.

Defendant’s acquaintances, the companies they own and/or operate, and Foxfield (collectively, plaintiffs), filed one federal claim for securities fraud under the 1934 Securities Act and 23 state law claims against defendant alleging that he fraudulently induced them to purchase ownership interests in Foxfield. The district court granted summary judgment for defendant on the ground that plaintiffs’ interests in Foxfield were not securities under the 1934 Securities Act. The court declined to exercise supplemental jurisdiction over the 23 state law claims.

Plaintiffs appealed the summary judgment ruling, arguing that the district court’s conclusion that plaintiffs’ membership interests in Foxfield were not securities under the 1934 Securities Act was erroneous. Under US Supreme Court precedent, a security is “virtually any instrument that might be sold as an investment” including, as relevant here, investment contracts, certificates of interest or participation in a profit-sharing agreement, or instruments commonly known as securities. First, the membership interests were not investment contracts because the profits that the LLCs expected to gain as a result of the investments were not “to come solely from the efforts of others.” Second, because the member LLCs did not intend to publicly trade their interests in Foxfield, those interests were not certificates of interest or participation in a profit sharing agreement under the 1934 Securities Act. Third, the interests in Foxfield were not commonly known as securities because they were not securities under the economic realities of those interests.

Plaintiffs also argued that the district court abused its discretion by declining supplemental jurisdiction over the state law claims. The district court declined to exercise supplemental jurisdiction because it concluded that the state law issues warranted a Kansas state court’s consideration in the absence of the sole federal claim. Further, the district court determined that retaining this case in federal court might lead to inconsistent findings of fact or law given that a similar, corollary case already existed in Kansas state court. Thus, even though the federal law claim was litigated in the US District Court for about four years, the district court did not abuse its discretion in determining not to hear the state law claims given that there were no remaining federal claims.

The summary judgment was affirmed.

Official US Court of Appeals for the Tenth Circuit proceedings can be found at the US Court of Appeals for the Tenth Circuit website.

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