Chan v. HEI Resources

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.

SUMMARY
June 4, 2020

2020COA87

No. 18CA1769, Chan v. HEI Resources — Financial Institutions
— Securities — Colorado Securities Act — Investment
Contracts; Business Organizations — General Partnerships

A division of the court of appeals holds that when deciding

whether an ostensible general partnership interest in a venture is a

security under the Colorado Securities Act, the court must employ a

strong presumption that it is not. The division also holds that when

determining whether the general partners have sufficient experience

with or knowledge of business affairs that they can intelligently

exercise their partnership powers, venture-specific experience or

knowledge should not always be regarded as required: general

business experience and knowledge may be sufficient. In so

holding on these two issues, the division disagrees with the prior
court of appeals decision in this case, Rome v. HEI Resources, Inc.,

2014 COA 160.
COLORADO COURT OF APPEALS 2020COA87

Court of Appeals No. 18CA1769
City and County of Denver District Court No. 09CV7181
Honorable Michael A. Martinez, Judge

Tung Chan, Securities Commissioner for the State of Colorado,

Plaintiff-Appellee and Cross-Appellant,

v.

HEI Resources, Inc., f/k/a Heartland Energy, Inc.; Charles Reed Cagle;
Brandon Davis; Heartland Energy Development Corporation; John Schiffner;
and James Pollak,

Defendants-Appellants and Cross-Appellees.

JUDGMENT REVERSED AND CASE
REMANDED WITH DIRECTIONS

Division V
Opinion by JUDGE J. JONES
Welling and Hawthorne*, JJ., concur

Announced June 4, 2020

Philip J. Weiser, Attorney General, Robert Finke, First Assistant Attorney
General, Charles J. Kooyman, Senior Assistant Attorney General, Denver,
Colorado, for Plaintiff-Appellee and Cross-Appellant

Thomas Law LLC, Jeffrey R. Thomas, Denver, Colorado for Defendants-
Appellants and Cross-Appellees HEI Resources, Inc. and Charles Reed Cagle

Holland & Hart, LLP, Marcy G. Glenn, Denver, Colorado; Munck Wilson
Mandala LLP, Shain A. Khoshbin, S. Wallace Dunwoody, Chase A. Cobern,
Dallas, Texas; Munck Wilson Mandala LLP, Jennifer D. Jasper, Austin, Texas,
for Defendants-Appellants Brand Davis and Heartland Energy Development
Corporation
Law Offices of Otto K. Hilbert II, Otto K. Hilbert, II, Denver, Colorado, for
Defendants-Appellants John Schiffner and James Pollak

Robinson Waters & O’Dorisio, P.C., Tracy L. Ashmore, Denver, Colorado, for
Amicus Curiae National Federation of Independent Business

Ballard Spahr LLP, Theodore J. Hartl, Denver, Colorado; Kameron Hillstrom,
Washington, D.C., for Amicus Curiae North American Securities Administrators
Associations, Inc.

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2019.
¶1 Plaintiff, Tung Chan, in his official capacity as Securities

Commissioner for the State of Colorado, brought this enforcement

action against defendants, HEI Resources, Inc. (HEI), f/k/a

Heartland Energy, Inc.; Heartland Energy Development Corporation

(HEDC); Charles Reed Cagle; Brandon Davis; John Schiffner; and

James Pollack, for allegedly violating the Colorado Securities Act

(CSA) in forming several oil and gas exploration and drilling joint

ventures. The gist of the Commissioner’s position is that,

notwithstanding that the investors are designated general partners

in the joint ventures, their interests are securities (specifically,

investment contracts) under the CSA and defendants violated

certain requirements of the CSA when offering those interests.

¶2 In 2013, following a partial summary judgment and a trial, the

trial court found that the joint venture interests aren’t investment

contracts and therefore aren’t securities under the CSA. The court

reached that conclusion after applying the leading case in this field,

Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), which identifies

three ways in which a party can overcome a strong presumption

1
(the so-called “Williamson presumption”) that a general partnership

interest isn’t an investment contract (the Williamson tests).1

¶3 The Commissioner appealed, and a prior division of this court

reversed and remanded. Rome v. HEI Res., Inc., 2014 COA 160 (HEI

I). The division concluded that the Williamson presumption doesn’t

apply in an action under the CSA and that the trial court erred by

considering the partners’ general, rather than venture-specific,

business experience under the second Williamson test. The division

remanded to the trial court

for redetermination of whether the joint
venture interests are securities under the
second and third Williamson factors and any
other ‘catch-all’ economic realities, taking into
consideration our rejection of the strong
presumption that general partnership interests
are not securities and our determination that

1 As discussed more fully below, the Williamson tests are (1)
whether the parties’ agreement leaves so little power to the partners
that they are in reality limited partners; (2) whether the partner has
so little experience with and knowledge of business affairs that he
can’t intelligently exercise his powers; or (3) whether the manager
has such unique entrepreneurial or managerial skills that he is, as
a practical matter, irreplaceable.

2
the relevant measure of business experience is
experience in the business of the venture.

Id. at ¶ 61.2

¶4 On remand, the trial court first determined that the general

partners’ interests are investment contracts under the second and

third Williamson tests and “other economic realities.” After taking

additional evidence, the court later ruled that defendants had

violated the CSA, enjoined them from engaging in securities-related

activities in Colorado, and ordered certain defendants to pay

restitution to the Commissioner.

¶5 This time, both sides appeal — the Commissioner by way of

cross-appeal.3 Though the parties raise a host of issues, we only

need to address four raised by defendants: (1) whether the prior

division erroneously departed from well-established federal

securities law by rejecting the Williamson presumption; (2) whether

2 The prior division referred to the Williamson tests as “exceptions”
or “factors.” We refer to them as tests because they are
independent bases for analyzing whether a general partnership
interest is an investment contract.
3 The Commissioner cross-appeals one aspect of the trial court’s

liability determinations and several aspects of the trial court’s
remedial rulings. But in light of our resolution of defendants’
appeal, we don’t need to address those issues.

3
the prior division erroneously held that the partners must have

venture-specific experience under the second Williamson test; (3)

whether the trial court improperly focused on whether the partners

themselves could fill the role of the managing partner under the

third Williamson test; and (4) whether the trial court erred by

finding that the general partners’ interests are investment contracts

under “other economic realities.”

¶6 For the reasons explained below, we agree with defendants

that, contrary to the prior division’s holding, the Williamson

presumption applies when general partnership interests are alleged

to be investment contracts under the CSA. We also agree with

defendants, again contrary to the prior division’s holding, that a

collective lack of venture-specific experience isn’t dispositive under

the second Williamson test; it is relevant, but what ultimately

matters is whether the partners have sufficient collective knowledge

and experience to intelligently exercise their powers. And we

conclude that under the third Williamson test the question isn’t

whether any of the general partners themselves could, if necessary,

fill the role of the managing partner, but whether the managing

partner is, considering the nature of the venture and the managing

4
partner’s knowledge and experience, essentially irreplaceable.

These three conclusions are consistent with prevailing federal law

applying corresponding federal statutes, which the General

Assembly and the Colorado Supreme Court have expressly directed

us to follow unless inconsistent with the purposes and provisions of

the CSA. Lastly, we conclude that, although the three Williamson

tests aren’t exclusive, those tests account for economic realities,

and the court should consider other economic realities only if they

aren’t adequately accounted for under the Williamson tests.

¶7 Accordingly, cognizant of our decision’s whiplash effect, but

nevertheless convinced that the prior division’s decision is out of

step with the applicable law, we reverse and remand to the trial

court to determine, consistent with this opinion, whether the joint

venture interests constitute investment contracts, based on the

record developed to date.

I. Background

¶8 Much of the relevant background is recounted in HEI I. The

following, however, should give the reader enough to understand

how we got to where we are now.

5
A. Historical Facts

¶9 Beginning in 2004, defendants solicited thousands of, in the

trial court’s words, “wealthy, educated and sophisticated investors”

nationwide by, in large part, cold-calling them and offering them

interests in several oil and gas exploration and drilling joint

ventures. If someone expressed interest in participating as a

partner in a venture, they were sent an information package that

included a “Confidential Information Memorandum” (CIM) and a

“Joint Venture Agreement” (JVA).4 All parties acknowledge that,

under the terms of the JVA, the joint ventures were organized as

general partnerships under the Texas Revised Partnership Act, and

that the partners ostensibly have significant management rights

and responsibilities, such as the rights to call meetings, propose

agenda items, access partnership records, receive business

information, remove the managing partner, change the managing

partner’s powers, and otherwise actively run the business by

majority vote. The JVA also says the partners are jointly and

4These documents didn’t differ materially (for our purposes) from
venture to venture.

6
severally liable for any joint venture liabilities. The CIM delegates

the venture’s day-to-day operations to either HEI or HEDC as the

initial “managing venturer.”

B. Litigation

¶ 10 In 2009, the Commissioner filed a complaint against

defendants, alleging that they had violated the CSA by employing

unlicensed sales representatives to offer and sell unregistered

securities.

¶ 11 The court granted summary judgment for defendants on the

first Williamson test in 2011. Two years later, after a seven-day

trial, the trial court found that the joint venture interests aren’t

investment contracts, and therefore aren’t securities, under the

CSA. Specifically, the court ruled that the Commissioner had failed

to overcome the Williamson presumption by showing that those

interests are investment contracts under the second and third

Williamson tests.

¶ 12 On appeal, as previously discussed, a division of this court

reversed and remanded. First, it concluded that the trial court

erred by applying the Williamson presumption because Colorado

hadn’t adopted it. The division rejected the Williamson

7
presumption, reasoning that (1) the presumption is inconsistent

with the governing economic realities test; (2) how the presumption

applies is unclear; (3) it is based on a policy judgment, which is for

the General Assembly, not the courts, to make; and (4) it isn’t

necessary because the party claiming that the interests are

securities ultimately bears the burdens of proof and persuasion

anyway. Second, the division held that the trial court erred by

considering the partners’ experience in business affairs generally,

rather than their “collective experience” specific to the oil and gas

exploration and drilling business under the second Williamson test.

¶ 13 On remand, the trial court found that the joint venture

interests are investment contracts because (1) the partners are

incapable of intelligently exercising their partnership powers due to

their relative collective inexperience with oil and gas exploration

and drilling operations specifically (the second Williamson test); (2)

the partners are dependent on HEI and HEDC’s unique managerial

skills because none of the general partners themselves can capably

step into the managing partner’s shoes even if they desire a change

in managing partner (the third Williamson test); and (3) apart from

the Williamson tests, the economic realities generally so indicate.

8
Following a second trial, the court went on to find that defendants

had violated the CSA and ordered injunctive relief and restitution.

II. Discussion

¶ 14 One or more defendants variously contend that the trial court

erred by (1) finding that the joint venture interests are securities; (2)

finding that the statute of limitations of section 13-80-102(1)(i),

C.R.S. 2019, doesn’t bar the Commissioner’s claims; (3) finding that

the safe harbor of section 11-51-704(4), C.R.S. 2019, doesn’t

immunize defendants from liability; (4) awarding the Commissioner

restitution on behalf of out-of-state partners; (5) finding that

defendants committed securities fraud by using unlicensed sales

representatives to sell unregistered securities; (6) holding defendant

Brandon Davis jointly and severally liable for restitution; and (7)

granting the Commissioner’s request for an “obey-the-law”

injunction. Because we reverse based on the first, threshold issue,

we don’t address defendants’ other contentions.

¶ 15 Defendants present four arguments relating to whether the

general partnership interests are investment contracts. The first

two — that the prior division erred by rejecting the Williamson

presumption and by requiring venture-specific experience under the

9
second Williamson test — and the fourth — that the trial court

erred by finding that the interests are investment contracts when

looking at the economic realities independent of the Williamson test

— require us to revisit, to one degree or another, HEI I. The third —

that the trial court erred by limiting potential replacements of the

managing partners to the general partners — wasn’t analyzed in

HEI I. After considering whether the law of the case dictates that

we follow HEI I, and concluding that it doesn’t, we turn to the

arguments’ merits.

A. The Law of the Case

¶ 16 The Commissioner argues that there is no basis under the law

of the case doctrine to reconsider HEI I. We don’t agree.

¶ 17 “The doctrine of the law of the case is a discretionary rule of

practice directing that prior relevant rulings made in the same case

generally are to be followed.” Mining Equip. Inc. v. Leadville Corp.,

856 P.2d 81, 85 (Colo. App. 1993). Though the doctrine requires a

trial court to follow an appellate court’s rulings on remand, Saint

John’s Church in the Wilderness v. Scott, 2012 COA 72, ¶ 8, it “is

merely discretionary when applied to a court’s power to reconsider

its own prior rulings,” Grand Cty. Bd. of Comm’rs v. Colo. Prop. Tax

10
Adm’r, 2016 COA 2, ¶ 24; accord People ex rel. Gallagher v. Dist.

Court, 666 P.2d 550, 553 (Colo. 1983); Saint John’s Church in the

Wilderness, ¶ 8.

¶ 18 Indeed,

a division of [the court of appeals] may review
another division’s ruling in the same case if
there is the possibility that “the previous
decision is no longer sound because of
changed conditions or law, or legal or factual
error, or if the prior decision would result in
manifest injustice.”

Grand Cty. Bd. of Comm’rs, ¶ 24 (quoting Core-Mark Midcontinent,

Inc. v. Sonitrol Corp., 2012 COA 120, ¶ 10); accord Saint John’s

Church in the Wilderness, ¶ 8. For the reasons discussed below,

reconsideration of the prior division’s decision is warranted. We

turn, then, to the merits.

B. Are the General Partnership Interests Investment Contracts?

1. Standard of Review

¶ 19 Whether an interest in a venture is an investment contract is a

question of law that we review de novo. HEI I, ¶ 26; Joseph v.

Viatica Mgmt., LLC, 55 P.3d 264, 266 (Colo. App. 2002); Straub v.

Mountain Trails Resort, Inc., 770 P.2d 1321, 1323 (Colo. App. 1988).

We also review de novo the trial court’s application of the governing

11
legal standards to the facts of the case. HEI I, ¶ 26. But if we need

to examine any of the trial court’s findings of historical fact, we

review them for clear error. Id.

2. General Principles

¶ 20 We begin by covering familiar ground. The Commissioner’s

complaint hinges on whether the general partnership interests are

“investment contracts,” a species of security. See § 11-51-201(17),

C.R.S. 2019. Because the CSA doesn’t define an “investment

contract,” Colorado courts apply the three-part test set forth in

Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293

(1946), as modified by United Housing Foundation, Inc. v. Forman,

421 U.S. 837 (1975), cases addressing the meaning of investment

contract under federal statute, to determine whether an interest in

a venture is an investment contract. Toothman v. Freeborn &

Peters, 80 P.3d 804, 811 (Colo. App. 2002). Under the Howey test,

“an ‘investment contract’ is: (1) a contract, transaction, or scheme

whereby a person invests his or her money (2) in a common

enterprise and (3) is led to expect profits derived from the

entrepreneurial or managerial efforts of others.” Toothman, 80 P.3d

at 811 (citing People v. Milne, 690 P.2d 829, 833 (Colo. 1984)).

12
¶ 21 This definition of investment contract “embodies a flexible

rather than a static principle, one that is capable of adaptation to

meet the countless and variable schemes devised by those who seek

the use of the money of others on the promise of profits.” Id.

(quoting Howey, 328 U.S. at 299). So in determining whether a

certain transaction is an investment contract, “the substantive

economic realities underlying the transaction” govern over its name

or form. Viatica Mgmt., 55 P.3d at 266; see Forman, 421 U.S. at

851-52. In other words, the label given to a particular interest isn’t

determinative of whether it is an investment contract. See

Williamson, 645 F.2d at 423 (“A scheme which sells investments to

inexperienced and unknowledgeable members of the general public

cannot escape the reach of the securities laws merely by labelling

itself a general partnership or joint venture.”).

¶ 22 In this case, the only part of the Howey test at issue is the

third part — whether the partners were dependent on the

managerial efforts of others for their expected profits. Before getting

into the law specifically applicable to that question, we pause to

acknowledge the role federal securities law plays when interpreting

the CSA.

13
¶ 23 The Colorado Supreme Court has repeatedly said that while

Colorado courts aren’t bound by federal law in interpreting the CSA,

when provisions of the CSA parallel provisions of federal law, the

“federal authorities that interpret provisions parallel to the [CSA]

are highly persuasive.” Milne, 690 P.2d at 833; accord, e.g., Cagle v.

Mathers Family Tr., 2013 CO 7, ¶ 19; Goss v. Clutch Exch., Inc., 701

P.2d 33, 34-35 (Colo. 1985); Lowery v. Ford Hill Inv. Co., 192 Colo.

125, 129-30, 556 P.2d 1201, 1204 (1976). But that may understate

the degree of deference we should afford federal authorities

construing parallel provisions. For the General Assembly has said

that “[t]he provisions of [the CSA] and rules made under [the CSA]

shall be coordinated with the federal acts and statutes to which

references are made in [the CSA] and rules and regulations

promulgated under those federal acts and statutes, to the extent

coordination is consistent with both the purposes and the

provisions of [the CSA].” § 11-51-101(3), C.R.S. 2019. We take this

to mean that if there is a prevailing federal judicial interpretation of

a parallel federal provision, we should follow that interpretation

unless some material difference in language or an underlying

14
purpose or policy of the CSA affirmatively dictates otherwise. See

Cagle, ¶¶ 20-27 (so applying federal case law).

¶ 24 So what does federal authority have to say about the third

Howey factor?

¶ 25 In the leading case, Williamson, the Fifth Circuit explained

that the pertinent economic reality under the third Howey prong is

whether “the power retained by the investors is a real one which

they are in fact capable of exercising.” 645 F.2d at 419. Thus, “[s]o

long as the investor has the right to control the asset he has

purchased, he is not dependent on the promoter or on a third party

for ‘those essential managerial efforts which affect the failure or

success of the enterprise.’” Id. at 421 (quoting Sec. & Exch. Comm’n

v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973)).

¶ 26 In recognizing that general partnership powers may be

illusory, however, the court identified three tests for determining

whether purported general partners are, in reality, dependent on

the entrepreneurial or managerial skills of others. The party

alleging that the interest is an investment contract must establish

that

15
(1) an agreement among the parties leaves so
little power in the hands of the partner or
venturer that the arrangement in fact
distributes power as would a limited
partnership; or (2) the partner or venturer is so
inexperienced and unknowledgeable in
business affairs that he is incapable of
intelligently exercising his partnership or
venture powers; or (3) the partner or venturer
is so dependent on some unique
entrepreneurial or managerial ability of the
promoter or manager that he cannot replace
the manager of the enterprise or otherwise
exercise meaningful partnership or venture
powers.

Id. at 424.5 Many federal courts of appeals have expressly adopted

these tests. See, e.g., Sec. & Exch. Comm’n v. Schooler, 905 F.3d

1107, 1112 (9th Cir. 2018); Sec. & Exch. Comm’n v. Shields, 744

F.3d 633, 644 (10th Cir. 2014); United States v. Leonard, 529 F.3d

83, 90-91 (2d Cir. 2008); Sec. & Exch. Comm’n v. Merch. Capital,

LLC, 483 F.3d 747, 755-66 (11th Cir. 2007); Stone v. Kirk, 8 F.3d

1079, 1086 (6th Cir. 1993); Rivanna Trawlers Unlimited v.

Thompson Trawlers, Inc., 840 F.2d 236, 241 (4th Cir. 1988). As has

5 The party claiming that the interest is an investment contract has
the burden of proof. See, e.g., Sec. & Exch. Comm’n v. Arcturus
Corp., 928 F.3d 400, 410 (5th Cir. 2019); Banghart v. Hollywood
Gen. P’ship, 902 F.2d 805, 808 (10th Cir. 1990).

16
this court. See, e.g., HEI I, ¶ 24; Feigin v. Dig. Interactive Assocs.,

Inc., 987 P.2d 876, 882 (Colo. App. 1999).

¶ 27 On all this, the parties appear to agree; no party takes issue

with Williamson’s characterization of the Howey test or with the

three tests set forth in Williamson for determining whether an

ostensible general partnership interest is actually an investment

contract.6 The Commissioner and defendants part company,

however, on secondary legal principles that put flesh on the bones

of these general precepts.

3. The Williamson Presumption

¶ 28 The strong presumption that a general partnership interest

isn’t an investment contract — the presumption rejected by the

division in HEI I — derives from the following passage in Williamson:

[A]n investor who claims his general
partnership or joint venture interest is an
investment contract has a difficult burden to
overcome. On the face of a partnership
agreement, the investor retains substantial
control over his investment and an ability to
protect himself from the managing partner or
hired manager. Such an investor must

6 In 2011, the trial court ruled against the Commissioner on the
first Williamson test. The Commissioner didn’t cross-appeal that
ruling.

17
demonstrate that, in spite of the partnership
form which the investment took, he was so
dependent on the promoter or on a third party
that he was in fact unable to exercise
meaningful partnership powers.

645 F.2d at 424; see also id. at 425 (characterizing the presumption

as “an extremely difficult factual burden”). The court said this after

surveying federal cases dealing with similar interests; it summed up

by saying, “the courts that have ruled on the issue have held that a

general partnership or joint venture interest generally cannot be an

investment contract under the federal securities acts.” Id. at 421.

Although the court didn’t use the word “presumption” (as the HEI I

division pointed out), the existence of the presumption is the logical

conclusion from the court’s recognition of a “general” rule and

imposition of “an extremely difficult factual burden” to overcome the

general rule. Numerous federal circuit courts of appeals, including

the Fifth Circuit itself, have so recognized. See, e.g., Shields, 744

F.3d at 644; Merch. Cap., LLC, 483 F.3d at 755; Banghart v.

Hollywood Gen. P’ship, 902 F.2d 805, 807-08 (10th Cir. 1990);

Rivanna Trawlers Unlimited, 840 F.2d at 240-41; Youmans v. Simon,

18
791 F.2d 341, 346 (5th Cir. 1986); Odom v. Slavik, 703 F.2d 212,

215 (6th Cir. 1983).7

¶ 29 The presumption is justified, these courts say, based on the

powers typically granted to general partners. These often include

the powers to participate in the management and control of the

partnership, act on behalf of the partnership, bind the partnership

by their actions, remove a managing partner or entity, and dissolve

the partnership. General partners are also individually liable for

the partnership’s liabilities. Sec. & Exch. Comm’n v. Arcturus Corp.,

928 F.3d 400, 410 (5th Cir. 2019); Youmans, 791 F.2d at 346;

Williamson, 645 F.2d at 421-22.

¶ 30 And because these partnership powers provide general

partners with leverage and the ability to protect themselves, “[a]n

investor who is offered an interest in a general partnership or joint

venture should be on notice . . . that his ownership rights are

significant, and that the federal securities acts will not protect him

7As have state courts, including the Colorado Court of Appeals.
See, e.g., Joseph v. Mieka Corp., 2012 COA 84, ¶ 17; Ak’s Daks
Commc’ns, Inc. v. Md. Sec. Div., 771 A.2d 487, 497 (Md. Ct. Spec.
App. 2001); State v. Kramer, 804 S.W.2d 845, 848 (Mo. Ct. App.
1991).

19
from a mere failure to exercise his rights.” Williamson, 645 F.2d at

422.

¶ 31 Recently, the Fifth Circuit summed up the rationale for the

Williamson presumption as follows:

[P]artners in a general partnership can guard
“their own interests” with their “inherent
[partnership] powers” and do not need
protection from securities laws — they can “act
on behalf of the partnership”; “bind their
partners by their actions”; “dissolve the
partnership”; and “are personally liable for all
liabilities of the partnership.” General
partners are, in short, “entrepreneurs, not
investors.”

Arcturus, 928 F.3d at 410 (citation omitted).8

8 Another division of this court has expressed a similar rationale for
the presumption:
A general partnership provides its partners
with an equal right in the management and
conduct of the partnership business, and
general partners are jointly and severally liable
for the obligations of the general partnership.
See §§ 7-60-115(1), 7-60-118(1), C.R.S. 2002.
The Williamson ruling adheres to these
principles in that a partnership interest is
presumed not to be an investment contract to
the extent that partners have a legal right to
participate in the management of the
partnership.
Toothman v. Freeborn & Peters, 80 P.3d 804, 812 (Colo. App. 2002).

20
¶ 32 This strong presumption that general partnership interests

aren’t investment contracts is widely applied by federal and state

courts alike. See, e.g., Schooler, 905 F.3d at 1112; Shields, 744

F.3d at 643; Rivanna Trawlers Unlimited, 840 F.2d at 242;9 Gordon

v. Terry, 684 F.2d 736, 741 (11th Cir. 1983); Slavik, 703 F.2d at

215; Sec. & Exch. Comm’n v. Shiner, 268 F. Supp. 2d 1333, 1340-44

(S.D. Fla. 2003); Great Lakes Chem. Corp. v. Monsanto Co., 96 F.

Supp. 2d 376, 391 (D. Del. 2000); Sec. & Exch. Comm’n v. Telecom

Mktg., Inc., 888 F. Supp. 1160, 1165 (N.D. Ga. 1995); Kline Hotel

Partners v. Aircoa Equity Interests, Inc., 725 F. Supp. 479, 481 (D.

Colo. 1989); Power Petroleum, Inc. v. P & G Mining Co., Inc., 682 F.

Supp. 492, 493-94 (D. Colo. 1988); Roark v. Belvedere, Ltd., 633 F.

Supp. 765, 767 (S.D. Ohio 1985); McConnell v. Frank Howard Allen

9 Contrary to the division’s assertion in Rome v. HEI Resources, Inc.,
2014 COA 160, ¶ 35 (HEI I), the Fourth Circuit hasn’t
“inconsistently applied Williamson,” at least when it comes to
general partnership interests. The case the division cited that
didn’t apply the presumption, Bailey v. J.W.K. Props., Inc., 904 F.2d
918 (4th Cir. 1990), dealt with an enterprise that “did not involve
the formal structure and protection of a general partnership.” Id. at
923 (distinguishing the contracts before the court from the general
partnership interests at issue in Rivanna Trawlers Unlimited v.
Thompson Trawlers, Inc., 840 F.2d 236 (4th Cir. 1988)).

21
& Co., 574 F. Supp. 781, 786 (N.D. Cal. 1983); Westlake v. Abrams,

565 F. Supp. 1330, 1343 (N.D. Ga. 1983); Nutek Info. Sys., Inc. v.

Ariz. Corp. Comm’n, 977 P.2d 826, 830 (Ariz. Ct. App. 1998); Corp.

E. Assocs. v. Meester, 442 N.W.2d 105, 107 (Iowa 1989); Ak’s Daks

Commc’ns, Inc. v. Md. Sec. Div., 771 A.2d 487, 497 (Md. Ct. Spec.

App. 2001); Bahre v. Pearl, 595 A.2d 1027, 1031 (Me. 1991); Russell

v. French & Assocs., Inc., 709 S.W.2d 312, 314 (Tex. App. 1986).10

¶ 33 Indeed, apart from one case taking an even more extreme view

of general partnership interests as shielded from the securities

laws, we haven’t found any published decision of any court holding

that there is no such presumption: the Williamson presumption is

prevailing federal law.11 This makes HEI I a true outlier. And given

10 The Williamson presumption isn’t without critics. See Kenneth L.
MacRitchie, General Partnerships and Similar Interests as
“Securities” Under Federal and State Law, 32 Lincoln L. Rev. 29
(2004-2005); J. William Callison, Changed Circumstances:
Eliminating the Williamson Presumption that General Partnership
Interests are Not Securities, 58 Bus. Law. 1373 (Aug. 2003). But it
apparently hasn’t waned in popularity despite that criticism.
11 The Third Circuit follows a stricter approach. If a general

partnership agreement gives the usual general partnership powers
to the general partners, then the partnership “interest does not
qualify as a security primarily because the role of a general partner,
by law, extends well beyond the permitted role of a passive
investor.” Goodwin v. Elkins & Co., 730 F.2d 99, 103 (3d Cir. 1984).

22
that we must coordinate Colorado securities law with federal

securities law, and that the Commissioner points to no purpose or

policy of the CSA counseling otherwise in this context, we conclude

that the HEI I division erred by rejecting the Williamson

presumption. See § 11-51-101(3); Cagle, ¶ 27.

¶ 34 Nonetheless, the Commissioner argues that because Colorado

courts have departed from federal law in the securities context, we

should do so here. He cites only Viatica Management in support. In

that case, the division concluded that units in a trust were

investment contracts because the investors who bought the units

“relied entirely” on the managerial efforts of others for profits. 55

P.3d at 267. But contrary to the Commissioner’s assertion, the

division didn’t reject any interpretation of federal law; it held that

the case’s facts were distinguishable from those in the federal case

on which the defendant relied. Id. at 266-67; see Cagle, ¶ 26

(recognizing this basis for the holding in Viatica Management). And

in any event, as we have just noted, the Commissioner doesn’t point

to anything in the language of the CSA, or any policy underlying it,

that dictates a course different from the one federal courts have

charted for analyzing general partnership interests.

23
¶ 35 That could be the end of the matter. But we nevertheless

address HEI I’s four stated reasons for rejecting the presumption.

a. Economic Realities

¶ 36 The prior division concluded that applying the presumption “is

contrary to Colorado and federal law that requires courts to look at

substantive economic realities, not form.” HEI I, ¶ 41. But the

Williamson presumption reflects the economic realities of being a

general partner; that status ordinarily carries with it considerable

legal rights to control the venture. See Williamson, 645 F.2d at 424

(“So long as the investor retains ultimate control, he has the power

over the investment and the access to information about it which is

necessary to protect against any unwilling dependence on the

manager.”); Dig. Interactive, 987 P.2d at 881 (expressly recognizing

that the Williamson framework is based on “economic reality”).

¶ 37 Courts applying the Williamson presumption don’t see any

tension between it and the requirement to consider economic

realities. To the contrary, they expressly acknowledge that

economic realities control and see the presumption, and the tests

that may be used to try to overcome it, as consistent with such

realities. See, e.g., Arcturus, 928 F.3d at 410-11; Youmans, 791

24
F.2d at 345-46; Slavik, 703 F.2d at 216; Telecom Mktg., 888 F.

Supp. at 1165; Roark, 633 F. Supp. at 767; McConnell, 574 F.

Supp. at 785-86; Meester, 442 N.W.2d at 107.

b. Applying the Presumption

¶ 38 The prior division said that it isn’t clear how courts are

supposed to apply the presumption because “no court has

articulated the presumption in a manner that enables trial courts to

reliably apply” it. HEI I, ¶ 42. But courts across the country have

been applying the presumption for decades, and we haven’t found

any cases expressing difficulty in applying it. Presumptions aren’t

uncommon in the law (as HEI I notes). We don’t think it likely that

courts would have any difficulty applying this one. At bottom, it

sets a high burden of factual proof for the one seeking to overcome

it, and thus the inquiry ultimately comes down to whether the

degree of control possessed by the ostensible general partners is

real or illusory. Trial courts are perfectly capable of making such

judgments.

c. Policy Judgment

¶ 39 The prior division also said that, because “the resolution of

what weight a presumption has and whether it disappears upon

25
presentation of sufficient rebuttal evidence depends on policy

judgments,” it is the General Assembly’s prerogative to decide if it

applies. Id. at ¶ 45. The General Assembly, however, has made a

policy judgment: the CSA “shall be coordinated” with federal

securities law “to the extent coordination is consistent with both the

purposes and the provisions of this article.” § 11-51-101(3)

(emphasis added). And the supreme court has held that the CSA’s

purposes and provisions align with those of the federal securities

acts. Cagle, ¶ 24. To put a finer point on it, the General Assembly

has made a policy judgment to follow federal law, and the

presumption is prevailing federal law. See id. at ¶¶ 20-27 (following

federal case law interpreting federal statutes when interpreting the

CSA).

d. Necessity of the Presumption

¶ 40 The prior division believed that the presumption is “wholly

unnecessary” because the party alleging that a general partnership

interest is an investment contract carries the burden of proof and

persuasion anyway. HEI I, ¶¶ 47-48. But the presumption

provides a degree of certainty that is essential for business

transactions. In forming or joining a general partnership, partners

26
are put on notice that, so long as the partners’ powers are real, the

securities laws won’t protect them, see Arcturus, 928 F.3d at 413

(the joint venture agreements “clearly state that the venture is not a

security, putting the investors ‘on notice’ that ‘federal securities

acts’ will not protect them” (quoting Williamson, 645 F.2d at 422)),

and the presumption also gives promoters notice of the regulatory

requirements with which they must comply. In addition, the

presumption serves as a guard-rail in assuring that securities laws

aren’t turned into general antifraud provisions allowing general

partners to sue their copartners or the managers for alleged

securities violations. See Goodwin v. Elkins & Co., 730 F.2d 99,

113 (3d Cir. 1984) (“[T]he federal securities laws are not properly

invoked to protect one general partner from the deceit of his

copartners.”) (Seitz, C.J., concurring); see also Landreth Timber Co.

v. Landreth, 471 U.S. 681, 690 (1985) (the federal securities acts

are intended to protect “passive” investors, not “active

entrepreneur[s]”); Marine Bank v. Weaver, 455 U.S. 551, 556 (1982)

27
(“Congress, in enacting the securities laws, did not intend to provide

a broad federal remedy for all fraud.”).12

¶ 41 In sum, we conclude that where the parties’ agreement

purports to give participants rights typical of those possessed by a

general partner, see Shields, 744 F.3d at 644, there is a strong

presumption that the general partnership interests aren’t

investment contracts. Because it is undisputed that the JVA gives

partners partnership powers, the Williamson presumption applies in

this case.

¶ 42 The trial court, bound of course by HEI I, didn’t apply the

presumption. We therefore reverse the trial court’s judgment and

remand for reconsideration. On remand, the court must make

factual findings as to whether the interests are investment

12In fact, this case shows how the Williamson presumption can
make a difference. Applying the presumption, the trial court found
that the general partnership interests aren’t investment contracts.
On remand, following the prior division’s direction not to apply the
presumption, the trial court found, on the same record, that the
general partnership interests are investment contracts.

28
contracts under the second and third Williamson tests, applying the

presumption, and based on the existing record alone.13

¶ 43 We next examine other relevant legal principles that must

guide the court in addressing the second and third Williamson tests.

4. Relevant Business Experience

¶ 44 In HEI I, the division held that under the second Williamson

test “there must be substantial collective experience in the specific

business of the venture such that the partners, as a whole, need

not rely solely on the promoters or third parties for the success of

the venture or to meaningfully exercise their partnership powers.”

HEI I, ¶ 58 (emphasis added). On remand, the trial court found

that the general partners collectively lacked venture-specific

experience. (Before the first appeal, the trial court found that the

general partners had sufficient general business experience to

protect their interests by meaningfully exercising their powers.)

13We realize that the trial court did this once before in 2013. But
the court on remand took evidence in determining liability and
remedies that may bear on these issues. And the court didn’t have
the benefit of the guidance set forth below relating to the second
and third tests.

29
Defendants contend that the HEI I division erred by requiring

collective venture-specific experience. We agree.

¶ 45 In Williamson, the Fifth Circuit said that the relevant inquiry

under the second test is whether “the partner or venturer is so

inexperienced and unknowledgeable in business affairs that he is

incapable of intelligently exercising his partnership or venture

power.” 645 F.2d at 424 (emphasis added). True, the Fifth Circuit,

in Long v. Schultz Cattle Co., 881 F.2d 129, 134 n.3 (5th Cir. 1989),

later said that “the knowledge inquiry must be tied to the nature of

the underlying venture.” But that isn’t the same as saying that the

venture-specific experience is required. Rather, it means only that

“the investors’ expertise must be considered in relation to the

nature of the underlying venture.” Id. at 135.14

¶ 46 The Fifth Circuit much more recently addressed this issue in

Arcturus. In discussing this statement from Long (a case which

didn’t even involve a general partnership), the court said, “[t]his

14In a post-Long decision, the Fifth Circuit pointed out that Long
didn’t involve a joint venture, and therefore the interests in that
case didn’t enjoy the presumption of active involvement. Nunez v.
Robin, 415 F. App’x 586, 591 (5th Cir. 1991).

30
requirement . . . should not be read to suggest that investors

necessarily need a specialized background. If the evidence shows

that an investor can intelligently control his investment, then courts

do not require specialized experience.” Arcturus, 928 F.3d at 417-

18 (emphasis added).

¶ 47 So although venture-specific experience is unquestionably

relevant, it isn’t necessarily required. What matters is whether,

considering the nature of the business, the partners collectively

possess sufficient knowledge and experience to intelligently exercise

their powers. See, e.g., Robinson v. Glynn, 349 F.3d 166, 170-72

(4th Cir. 2003) (specialized experience wasn’t required where

investor, “a savvy and experienced businessman,” showed he was

capable of managing his investment); Holden v. Hagopian, 978 F.2d

1115, 1121 (9th Cir. 1992) (rejecting argument that partners

weren’t able to intelligently exercise their partnership powers

because they lacked specialized experience and stating that,

instead, “[t]he proper inquiry is whether the partners are

inexperienced or unknowledgeable in ‘business affairs’ generally”);

Koch v. Hankins, 928 F.2d 1471, 1479 (9th Cir. 1991) (“While it is

undisputed that none of the investors had prior experience in jojoba

31
farming, that draws the question too narrowly.”); Deutsch Energy

Co. v. Mazur, 813 F.2d 1567, 1570 (9th Cir. 1987) (even though “it

appears to be an open question whether sophistication in one field

of business will always transfer to another,” Williamson looks to an

investor’s “level of general business expertise”); Youmans, 791 F.2d

at 347 (specialized experience wasn’t required where the plaintiff, a

physician who invested in real estate projects, had “also engaged in

a number of business transactions not connected with [the

defendants]”); Williamson, 645 F.2d at 425 (specialized experience

wasn’t required where an investor’s experience on the Frito-Lay

board was “business experience and knowledge adequate to the

exercise of partnership powers in a real estate joint venture”).15

15We recognize that Securities and Exchange Commission v. Shields,
another case on which HEI I relied, says that “[t]he experience and
knowledge referred to in Williamson ‘focus[es] on the experience of
investors in the particular business, not the general experience of
the partners.’” 744 F.3d 633, 647 (10th Cir. 2014) (quoting Sec. &
Exch. Comm’n v. Merch. Capital, LLC, 483 F.3d 747, 762 (11th Cir.
2007)). But as the Fifth Circuit recently made clear in Arcturus,
that reading of Williamson is incorrect.

32
¶ 48 Courts have considered the following nonexclusive factors to

determine whether the partners possessed sufficient knowledge and

experience:

(1) Do the partners have prior business experience

generally? See Arcturus, 928 F.3d at 419; Koch, 928 F.2d

at 1479; Deutsch Energy Co., 813 F.2d at 1570;

Youmans, 791 F.2d at 347.

(2) What kind of prior business experience do the partners

have, not just as investors but as businesspeople (such

as by holding executive positions in organizations)? See

Robinson, 349 F.3d at 171; Williamson, 645 F.2d at 424-

25.

(3) Are the partners otherwise financially sophisticated? See

Arcturus, 928 F.3d at 420; Koch, 928 F.2d at 1479.

(4) Did the partners represent that they considered

themselves experienced in business affairs generally?

See Arcturus, 928 F.3d at 420; Holden, 978 F.2d at 1121.

(5) Do the partners have prior experience in the same type of

enterprise? See Arcturus, 928 F.3d at 419; Deutsch

Energy Co., 813 F.2d at 1570.

33
(6) Is the nature of the venture such that venture-specific

experience is essential to enable the partners to

intelligently exercise their powers? See Koch, 928 F.2d at

1478-79.

(7) Did the partners consult advisors or legal counsel for

advice or assistance, or have they indicated that they

will? See Arcturus, 928 F.3d at 419; Robinson, 349 F.3d

at 171; Banghart, 902 F.2d at 808 n.5; Rivanna Trawlers

Unlimited, 840 F.2d at 242 n.10; Deutsch Energy Co., 813

F.2d at 1570.

(8) Did the partners in fact exercise their partnership

powers? See Arcturus, 928 F.3d at 419; Robinson, 349

F.3d at 171; Koch, 928 F.2d at 1474; Rivanna Trawlers

Unlimited, 840 F.2d at 242; Casablanca Prods., Inc. v.

Pace Int’l Res., Inc., 697 F. Supp. 1563, 1567 (D. Or.

1988).

(9) Did the partners previously invest in one of the

defendant’s businesses? See Arcturus, 928 F.3d at 420;

Williamson, 645 F.2d at 425.

34
(10) How did the partnership acquire its members? See

Arcturus, 928 F.3d at 418.

(11) To what extent do the partners have meaningful access to

information about the venture? See Sec. & Exch. Comm’n

v. Sethi, 910 F.3d 198, 205 (5th Cir. 2018); Shields, 744

F.3d at 648.16

¶ 49 On remand, the trial court must make new factual findings

under the second Williamson test, applying the strong presumption

that a general partnership interest isn’t an investment contract and

analyzing the partners’ collective experience under the foregoing

factors and any other factors relevant given the nature of the

venture.

5. Replaceability of the Manager

¶ 50 Defendants also contend that the trial court erred by

misconstruing the third Williamson test.17 Specifically, they argue

that the court erred by narrowly focusing on whether any of the

16 We don’t mean to imply that these factors are exclusive.
Depending on the circumstances, other facts may be relevant to
this inquiry. Some of these factors, such as access to information,
may also be relevant to the analysis under the third Williamson test.
17 The HEI I division didn’t address the third Williamson test.

35
general partners themselves possessed the skills necessary to

replace the managing partner (HEI or HEDC); that is, whether any

of them could step into the managing partner’s shoes. However, it

isn’t entirely clear from the record if the court, in determining

whether the partners were dependent on HEI and HEDC’s unique

knowledge or abilities, considered only the partners themselves as

potential replacements.

¶ 51 We agree with defendants that any such focus would be “too

narrow. Under this part of Williamson, investors must show that

‘there is no reasonable replacement’ for the manager.” Holden, 978

F.2d at 1123 (quoting Williamson, 645 F.2d at 423). Does the

managing partner have “some particular non-replaceable

expertise?” Williamson, 645 F.2d at 423. Or does the managing

partner have some “unique understanding” of the subject of the

venture? Id. Or does the managing partner have some “unusual

experience and ability in running that particular business” without

which the venture can’t succeed? Id. In short, are the partners “so

dependent on a particular manager that they cannot replace him or

otherwise exercise ultimate control?” Id. at 424.

36
¶ 52 On remand, the trial court should again make findings on this

test, applying the strong presumption and taking into account

Williamson’s caution that what ultimately matters is whether the

partners realistically could exercise their power to replace the

manager if they wanted to do so.

6. “Catch-All” Economic Realities

¶ 53 On remand, the trial court analyzed whether the interests are

investment contracts by looking at “other economic realities”

independently of the Williamson tests. It did so because the division

in HEI I told it to determine whether the “interests are securities

under the second and third Williamson factors and any other

‘catch-all’ economic realities.” HEI I, ¶ 61.

¶ 54 On appeal, defendants challenge the trial court’s findings,

arguing that the court “failed to separately evaluate the economic

realities evidence that was particular to” the specific joint venture at

issue, referred to as LO9, and “gave undue weight to certain facts

that, in reality, had little or no bearing on the parties’ ability to

exercise control.” They also argue that the court’s approach was, in

certain respects, inconsistent with Williamson.

37
¶ 55 Because the trial court (understandably following HEI I) didn’t

apply the Williamson presumption, we must reverse its

determination on this issue as well. To assist the court on remand,

we offer the following guidance on the role of “other economic

realities” in this context.

¶ 56 In HEI I, the division said, “[o]ther economic realities

underlying the transaction may also ‘give rise to such a dependence

on the promoter or manager that the exercise of partnership powers

[is] effectively precluded.’” Id. at ¶ 25 (quoting Williamson, 645 F.2d

at 424 n.15). We don’t quarrel with the HEI I division’s conclusion

that there may be considerations in addition to the three Williamson

tests that bear on whether an ostensible general partnership

interest is an investment contract. Williamson said so. Williamson,

645 F.2d at 424 & n.15 (referring to the three tests as “example[s]”

and noting that those were “the only factors relevant to the issue

that are at all implicated by the facts of this case”); see also

Arcturus, 928 F.3d at 411. But if facts — i.e., economic realities —

lead to the conclusion that the interests aren’t investment contracts

under the Williamson tests, those same facts shouldn’t be

repackaged under a “catch-all economic realities” test to reach a

38
contrary conclusion, absent some articulable reason akin to the

Williamson tests (and consistent with the underlying goal of the

Williamson tests) to do so. Applying the “catch-all economic

realities” in an amorphous way, untethered to the goal of

determining whether the general partners’ power “is a real one

which they are in fact capable of exercising,” Williamson, 645 F.2d

at 419, would significantly impair the utility of the entire Williamson

framework.

¶ 57 The cases on which HEI I relied when discussing the economic

realities test — Digital Interactive, Toothman, and Joseph v. Mieka

Corp., 2012 COA 84 — actually don’t have much to say about

looking outside the Williamson tests.

¶ 58 In Digital Interactive, the division recognized the three

Williamson tests and turned immediately to facts — such as who

the interests were marketed to and the number of partners — that

it thought relevant to those tests. 987 P.2d at 882. So did the

division in Mieka Corp., ¶ 20 (looking to “the sophistication and

vulnerability of the solicited investors” and the partners’ lack of

expertise, among other things).

39
¶ 59 Toothman involved a limited liability partnership, not a general

partnership, and because of differences in the two forms of

enterprise, the division rejected the entire Williamson framework.

80 P.3d at 812-13. Its analysis of various facts therefore says little,

if anything, about general partnerships, and certainly doesn’t

support the notion that a court must always apply a general “other

economic realities” test even when the economic realities-based

Williamson tests are sufficient.

¶ 60 All this is to say that (1) many, perhaps all, of the facts

analyzed by the trial court as “other economic realities” are relevant

to one or more of the Williamson tests and (2) if the economic

realities of the case need to be accounted for in some way in which

the Williamson tests prove inadequate, that needs to be articulated

in terms of some relatively concrete principle that will assist the

court in deciding whether the partners were “led to expect profits

derived from the entrepreneurial or managerial efforts of others.”

Toothman, 80 P.3d at 811; see Howey, 328 U.S. at 298-99;

Williamson, 645 F.2d at 417-18.

40
III. Conclusion

¶ 61 The judgment is reversed and the case is remanded to the trial

court to redetermine whether the joint venture interests are

investment contracts under the second and third Williamson tests,

consistent with the views stated herein. We acknowledge the trial

court’s commendable efforts in this case. And we acknowledge that

it likely frustrates the court to be instructed to do one thing and

then be told to do something else. But we have a duty to

independently examine the appeal’s merits notwithstanding the

prior division’s decision. Doing so leads us to conclude that the

trial court must once more resolve the threshold issue of whether

the interests in the joint ventures are investment contracts.18

JUDGE WELLING and JUDGE HAWTHORNE concur.

18We decline defendants’ invitation to make this determination in
the first instance.

41