Montana Supreme Court Says Lower Court’s Finding that Tenancy-in-Common Investment Is Not A Securities Was In Error

The Supreme Court of Montana says that a lower court erred when it found that an investor’s stake in a tenancy-in-common venture promising fixed return rates is not a securities under the Montana Securities Act. The case is Redding v. Montana 1st Judicial District .

Holding that the Montana First Judicial District Court improperly ruled that the plaintiff failed to invest in a common venture that would be considered an “Investment contract” under the act, the state’s highest court granted plaintiff Billie Redding’s petition seeking writ of supervisory control over the district court.

Redding had filed her Montana securities lawsuit against her accountant and number of entities, after a failed $4.5M investment in four TICs in commercial property through DBSI Housing Inc., which promised a steady return and that it would manage the properties. (Unfortunately, DBSI not only had to file for bankruptcy protection in 2008, but also its receiver found out that the company had been running a Ponzi scam.) Both sides moved for summary judgment on a number of matters, including whether a TIC constitutes a security under the state’s law.

Finding there was no common venture between DBSI and Redding, the district court said that the TICs in question are not to be considered securities. The lower court applied the horizontal commonality approach to reason that the plaintiff hadn’t been burdened with the same risks as other investors because her contract stated there would be fixed profit returns. The court also said that the vertical commonality test was not satisfied because Redding stood to gain regardless of how much was collected from the properties at any month.

Montana Supreme Court Justice Michael Wheat noted that under the Montana securities law, the courts in the state interpret that an investment contract has to satisfy the prongs that it is an a) investment having a b) common venture that c) comes with reasonable expectations and profits d) through the managerial or entrepreneurial efforts of others. Wheat said that seeing as the state hasn’t adopted a method to determine what satisfies the common prong venture for the Montana Securities Act’s purposes, a common venture can be set up by fulfilling the element of “either horizontal, broad vertical, or narrow vertical commonality.” In the matter of Redding, the state’s Supreme Court said that the district court’s finding in regards to common venture conflicted with United States Supreme Court precedent in SEC v. Edwards and was therefore incorrect.

In that case, the nation’s highest court determined that a fixed return rate could be an investment contract and, hence, a security that was “subject to federal securities laws.” The Montana Supreme Court found that the district court’s “reliance on a promised return as dispositive of common venture” needed to be reversed. The state’s highest court said that vertical commonality or horizontal community is the “keystone” when it comes to common venture and not the investment return’s accompanying fluctuation and risk.

Court Erred in Finding TIC Investments Not Securities, Montana High Court Rules, Bloomberg/BNA, July 10, 2012

Redding v. Montana 1st Judicial District (PDF)

SEC v. Edwards

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