OPINION ANNOUNCING THE JUDGMENT OF THE COURT
GARTH, Circuit Judge.
In this case, we are asked to give further definition to what constitutes a security within the meaning of federal securities law. Goodwin asserts that his partnership contract in a brokerage firm is a security interest, enabling him to invoke the provisions of the Securities Exchange Act in seeking vindication of his claims. The district court, 558 F.Supp. 1375, held otherwise, and dismissed Goodwin's claim brought under federal securities law, and remitted his common law claims to arbitration. We affirm.
Plaintiff J. Donald Goodwin brought suit against the brokerage firm of Elkins & Co.
Elkins moved to dismiss the federal securities claim under Fed.R.Civ.P. 12(b)(6), and to compel arbitration of the remaining state claims, since the Elkins Partnership Agreement contained an arbitration clause. The district court granted the motion to dismiss, finding that Goodwin's partnership interest could not constitute a "security" within the meaning of the Act. It also remitted the state claims to an arbitrator. It is from these rulings that Goodwin appeals.
As required by a Rule 12(b)(6) motion, all the factual allegations of Goodwin's complaint must be taken as true. Goodwin was a general partner with Elkins, and a registered representative. He had been associated with that firm for more than 20 years when, in 1981, he became dissatisfied with the management policies of the firm, and announced his resignation as of October 1981. He was prevailed upon by several partners of the firm to withdraw his resignation and continue with the firm until at least March 31, 1982, however, so as to avoid undue prejudice to the firm. In February 1982, Goodwin was advised that it would be more convenient if his withdrawal from the firm were to take effect as of January 1, 1982. Goodwin agreed to that suggestion, and his withdrawal from the firm was effectuated as if it had occurred on January 1, 1982. Goodwin asserts that, in connection with the February agreement, he was falsely and fraudulently advised that no sale or merger of the firm was planned; and that the defendants fraudulently concealed from him the fact that such negotiations were then being actively pursued. On March 17, 1982, when Goodwin would still have been a partner but for the February agreement, the Elkins firm was purchased by, and merged into, Bache, Halsey, Stewart, a large New York brokerage house, in a transaction which was financially advantageous to the general partners of the Elkins firm. In his suit, Goodwin sought to recover the difference between the amount paid to him upon his withdrawal (representing the value of his interest calculated as of January 1, 1982) and the amount which would have been paid to him had his interest been valued as of the date originally agreed upon, March 31, 1982.
Two issues are raised on this appeal. First, Goodwin contends that the district court erred in finding as a matter of law that his complaint could not state a claim under federal securities law. He also argues that the state law claims of fraud and breach of fiduciary duty are not within the scope of the Partnership Agreement's arbitration clause, and therefore it was error to send the proceedings to an arbitrator. We address these issues in turn.
In enacting the Securities Exchange Act of 1934, we recognize that Congress intended to provide remedial legislation, which in turn must be liberally construed. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). As the Supreme Court has noted, "[t]he definition of `security' in the Securities Exchange Act of 1934 is quite broad. The Act was adopted to restore investors' confidence in the financial markets, and the term `security' was meant to include `the many types of instruments that in our commercial world fall within the ordinary concept of a security.'" Marine Bank v. Weaver, 455 U.S. 551, 555-56, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) (quoting H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1983)).
Nevertheless, the scope of federal securities laws is not without limitation, and Congress did not intend to create a federal cause of action for common fraud. Marine Bank, 455 U.S. at 556, 102 S.Ct. at 1223. It is therefore our task to determine whether the general partnership interest in a brokerage firm as described in Goodwin's complaint comes within the definition of the term "security."
The seminal case in this area, SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), defined an investment contract
Id. at 298-99, 66 S.Ct. at 1102-03.
Goodwin acknowledges the inherent difficulty in treating a general partner as the holder of a "security" under the Howey test, since by definition he is presumed to
Even if the Elkins partnership may be deemed as a "common enterprise," as that term was used in Howey's definition of an investment contract, we are not persuaded by Goodwin's argument that he, as a general partner, could be "led to expect profits solely from the efforts of the promoter or a third party," and thus have his interest classed as an investment security. A general partner in Goodwin's firm, as in other similar firms, is unavoidably, even if unwillingly, a part of the operation of the enterprise. As the Sixth Circuit noted, "[t]he managerial powers vested in general partners and the express right of inspection of documents gives them the kind of leverage and ability to protect themselves that takes them outside the intended scope of the '34 Act." Odom v. Slavik, 703 F.2d 212, 215 (6th Cir.1983).
It is true that this Court has noted that the term "solely," as used in the Howey test (i.e. "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of [another]"), is not to be read literally when considering the efforts made by an investor. Lino v. City Investing Co., 487 F.2d 689, 692 (3d Cir.1973). Accord, SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). An investment contract or interest may still be classed as a security even if the investor is required to perform some duties, as long as those duties are "nominal or limited and would have little direct effect upon receipt by the participants of the benefits promised by the promoters." 487 F.2d at 692.
It is at this point that the views of the members of this panel to some extent diverge. Although the Court is unanimous that Goodwin's interest in the partnership does not qualify as a security under federal securities laws, Chief Judge Seitz and Judge Becker in their respective concurring opinions would confine their examinations to the Partnership Agreement, and so hold. While I agree with their conclusion, I would hold that Goodwin's 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.
Accordingly, to the extent that I reach the same result as my two colleagues, but do so wholly by reference to the Pennsylvania Partnership Act, this portion of the opinion (the remainder of Part III.A.) expresses only my views and not those of Chief Judge Seitz or Judge Becker.
Under Pennsylvania's Partnership Act, Pa.Cons.Stat.Ann. tit. 59, §§ 301-365 (Purdon Supp.1983),
Each partner has equal rights in the management and conduct of partnership business, subject to the provisions of the partnership agreement. Id. § 331(5). Each partner, however, has what amounts to an absolute veto power over any act sought to be performed by the other partners which contravenes the partnership agreement. Id. § 331(8).
It is manifest that any person who possesses the powers, rights, and responsibilities described above cannot have invested his capital with the expectation of profits derived solely from the efforts of others, and therefore cannot be the holder of a "security" as intended by the Act. Whatever subjective perceptions Goodwin may have entertained about his position in the firm, and whatever may have been the role he actually assumed, the legal interest which he enjoyed does not fall within the scope of the term "security" as intended by Congress. As noted by the court in New York Stock Exchange v. Sloan, 394 F.Supp. 1303 (S.D.N.Y.1975):
Even if we were to limit our consideration of Goodwin's arguments to the Partnership Agreement which was annexed to Elkins' Motion to Dismiss,
For example, the Partnership Agreement provides that any general partner may participate in the nomination, election, or removal of the Executive Committee and the Managing Partner. Partnership Agreement ¶ 6, App. at 45. The general partners as a group also maintain ultimate managerial control through oversight of the Executive Committee and the Managing Partner. Id. ¶ 7(a), App. at 45-46. General partners must approve new admissions into the partnership and involuntary terminations of the partnership. Id. ¶¶ 21a()(i) & 23(a), App. at 60-61. All of these powers, even if Goodwin failed to exercise them, provided him with a substantial role in the management of the firm notwithstanding any restrictions specified by the Agreement.
In support for his position that a general partnership interest could conceivably constitute a security, Goodwin relies upon Williamson v. Tucker, 645 F.2d 404 (5th Cir.1981), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1982). In Williamson, the Fifth Circuit had before it a real estate venture which took the form of a general partnership. The district court had found that such interests could not constitute securities, and dismissed the suit under Fed.R.Civ.P. 12(h)(3) for lack of subject matter jurisdiction. The Court of Appeals reversed, and in doing so commented on the possibility that a general partnership interest could constitute a security. It first acknowledged what we have stated previously: that interests in general partnerships as a rule do not constitute security interests. It continued:
645 F.2d at 422.
The Williamson court, however, would apparently hold open the possibility, however faint, that a general partnership interest can, under unusual circumstances, meet the Howey requirements and thereby fall within the protection of the Act. The court stated:
645 F.2d at 422-23 (citations omitted). The Williamson court itself acknowledged, however, that the exception it would carve out to the general rule is a narrow one.
Id. at 424 (emphasis added).
If the reasoning in Williamson is accepted, then Goodwin's position might be more substantial than we find it.
Complaint ¶ 17, App. at 6. Quite literally, and no doubt intentionally, this language puts the pleadings within the exception enunciated in Williamson, which might protect the viability of the federal claim against a motion to dismiss, and allow a plaintiff to raise factual issues.
We of course do not quarrel with the general proposition that the legal powers of a participant in a joint enterprise may be derived from private agreements and contracts, as well as public statutes. Indeed, we need look no further than SEC v. Howey itself for an example of a situation in which the interest created was defined primarily, if not solely, by an agreement between the parties.
Our analysis of the resultant legal powers vested in Goodwin leads to the conclusion that he still necessarily enjoyed such significant prerogatives in the operation of the firm that his interest could not be a "security." Taking as true Goodwin's allegations that the Elkins Partnership Agreement sought to limit severely his role in the management of the partnership, nevertheless, Pennsylvania's Partnership Act puts its own limitations on the extent to which a general partner can be so restricted. Significantly, a non-management general partner is still an agent of the firm, and indeed can bind the firm and conduct firm business with third parties in the same manner as a management partner, even if such acts contravene the provisions of the partnership agreement, unless the third party has actual knowledge of the non-management partner's lack of authority under the agreement. Pa.Cons.Stat.Ann. tit. 59, § 321. Nor can an agreement absolve the partnership of liability for a partner's wrongful acts or breaches of duty, or absolve a partner from liability for partnership losses. Notice to a particular non-management partner would remain notice to the partnership, and his admissions would still be evidence against the firm. See supra text at 103-104.
Indeed, the major effect that a partnership agreement would appear to have, is on the rights of partners inter sese. Thus, a partnership agreement may modify a partner's right to a voice in management as that right relates to other partners. It could not, however, diminish the power of a partner to represent the firm outside the partnership, below what the Pennsylvania statute has set forth as a minimum. Even if the Elkins Partnership Agreement contained the most draconian restrictions on the rights of non-management partners therefore, such partners would still possess a quantum of powers and responsibilities which, as a matter of law, would preclude their interest from being considered a security under the Act.
Since we find that the district court properly dismissed Goodwin's federal securities claims, his complaint is reduced to an action in diversity for fraud and breach of fiduciary duty under state law. Before discovery could commence, Elkins moved to compel arbitration of these state claims under the Partnership Agreement's arbitration clause. The district court agreed with Elkins, and remitted Goodwin's state claims to an arbitrator. For the reasons expressed below, we hold that arbitration was proper under the Agreement, and will therefore also affirm that portion of the district court's order which committed the state claims to arbitration.
The initial issue which confronts us is what law to apply in gauging the propriety of the district court's arbitration order. Although Elkins originally moved before the district court for arbitration under the Federal Arbitration Act, and has cited to that Act in its brief, both parties argue state law in discussing the Partnership Agreement's arbitration provision. Arbitrability, of course, is purely a matter of contract. E.g. United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); Commercial Metals Co. v. Balfour, Guthrie & Co., 577 F.2d 264 (5th Cir.1978); United Steelworkers v. Crane Co., 456 F.Supp. 385 (W.D.Pa.1978). In resolving such a question of contract, a federal court sitting in diversity would normally be bound by state law under the Erie doctrine.
To be included within the coverage of the Federal Arbitration Act, an arbitration provision must be contained in a "contract evidencing a transaction involving commerce," 9 U.S.C. § 2. For the arbitration provision at issue here to be construed under federal law, therefore, the Elkins Partnership Agreement must be
We could, of course, remand the matter to the district court for the requisite finding as to commerce if no other alternative were available. Gavlik, 526 F.2d at 784. We find, however, that whether federal or state law is applied makes no difference in the substantive result,
Paragraph 31 of the Elkins Partnership Agreement contained the following provisions.
On its face, the Elkins Agreement's arbitration clause is broad in sweep. "Any
Id. at 101 (emphasis added).
Here, Goodwin complains that, in dealing with the termination of his interest in the partnership, Elkins acted tortiously by withholding pertinent information from him. Such a dispute, however, arises from the very provisions of the Agreement. Paragraph 27 of the Partnership Agreement provides:
Disputes over the value of Goodwin's share of the Partnership upon termination, therefore, arise out of the Agreement itself, and would be arbitrable.
The fact that Goodwin's state claims are phrased in terms of "fraud" and "breach of fiduciary duty" does not remove them from the scope of the arbitration clause. Intentional torts even less connected to the actual terms of the contract have been found by Pennsylvania courts to be subject to arbitration. In Waddell v. Shriber, 238 Pa.Super. 241, 357 A.2d 571 (1976) (Waddell II), the court considered whether a claim for defamation was arbitrable,
357 A.2d at 573. If defamation uttered in connection with the termination of a partnership interest is considered to be an arbitrable dispute, then it would seem a fortiori that fraud, committed while a party was actually executing the very provisions of the Agreement dealing with termination, is also arbitrable.
The Elkins Partnership Agreement contains as broad an arbitration provision as is usually encountered in normal course. We find that it is broad enough to cover the disputes raised by Goodwin. His allegations of tortious conduct by the defendants, in connection with the termination of his partnership interest, fall squarely within the subject matter of the Partnership Agreement. Significantly, the parties did not "clearly evidence a purpose to exclude such disputes." Waddell I, 348 A.2d at 101. We therefore conclude that the district court properly relegated Goodwin's state claims of fraud and breach of fiduciary duty to arbitration.
The order of the district court dismissing Goodwin's federal securities claims, and directing that the remaining state claims be arbitrated, will be affirmed.
SEITZ, Chief Judge, concurring.
While I join the judgment of the court affirming the order of the district court dismissing the federal claims and directing arbitration of the state claims, I write separately because I differ somewhat from my colleagues on the governing analysis.
Goodwin's complaint contained federal securities claims and state law claims for fraud and breach of fiduciary duty. Elkins moved to dismiss the federal securities claims under Fed.R.Civ.P. 12(b)(6) [failure to state a claim] and to compel arbitration of the state law claims under an arbitration clause in the Elkins partnership agreement. The district court dismissed the federal claims and ordered arbitration of the state claims.
My first concern with Judge Garth's opinion is that it disposes of Goodwin's complaint by affirming the order of the district court which in granting the motion to dismiss took cognizance of the terms of the partnership agreement even though the agreement was not attached to the complaint. True, the agreement was attached to the motion. However, before the district court could rely on it, it was required by Fed.R.Civ.P. 12(b) to treat the motion as a motion for summary judgment and, ordinarily, give the opposing party an opportunity to respond with any relevant material. This was not done. However, for reasons developed later, I am persuaded that the district court's failure to treat Elkins' motion
Turning to the federal claims, Judge Becker and I are in agreement that we need not decide here whether a general partner's rights and responsibilities under the Pennsylvania Uniform Partnership Act are sufficient to prevent a general partner's interest from being treated as a security for purposes of federal law. Goodwin's partnership interest was a security under SEC v. Howey, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), if there was an investment contract between Goodwin and Elkins. In their respective opinions, Judge Garth and Judge Becker have summarized the rights and responsibilities of general partners under the Partnership Agreement. Judge Becker and I agree that a general partner with this degree of participation in partnership affairs is not a security holder. See, e.g., Odom v. Slavik, 703 F.2d 212, 215 (6th Cir.1983); Hirsch v. DuPont, 396 F.Supp. 1214, 1220-21 (S.D.N.Y.1975), aff'd, 553 F.2d 750 (2d Cir.1977); NYSE, Inc. v. Sloan, 394 F.Supp. 1303, 1314 (S.D.N.Y.1975). I do not consider my conclusion to be inconsistent with the dicta in Williamson v. Tucker, 645 F.2d 404, 422-24 (5th Cir.1981), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981).
In Lino v. City Investing Co., 487 F.2d 689, 693 (3d Cir.1973), we held that if an agreement is not on its face an investment contract, and the plaintiff does not allege facts that call into question the substance of the agreement, the plaintiff is not a security holder, as a matter of law. A court's overriding concern, however, is to determine the "economic reality" of the enterprise. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). See SEC v. Aqua-Sonic Products, 687 F.2d 577, 582-84 (2d Cir.1982) (license agreement is an investment contract where optional management powers described in the agreement are a mere formality and unlikely to be exercised). I turn to the pertinent allegations in Goodwin's complaint.
Goodwin alleges that:
The question under Lino is whether these allegations point to a significant variance between the terms of the Partnership Agreement and the allocation of management power in fact. Paragraph 16 alleges that the managing partner made many management decisions by himself. It is not clear that this allegation challenges the substance of the Partnership Agreement, which provides that "[t]he Partnership will be managed by the Managing Partner under the supervision of the Executive Committee subject to the approval or decisions of the General Partners." This language would seem to authorize the managing partner to make management decisions.
It is possible to interpret paragraph 16 as an allegation that the managing partner did not in fact respect the terms of the Partnership Agreement and had usurped some unspecified amount of control.
The allegations in paragraph 17 of Goodwin's complaint pertain explicitly and exclusively to the allocation of management power pursuant to the terms of the Partnership Agreement. I have concluded above that this allocation of power does not make Goodwin a security holder.
Goodwin argues that he could not control the management of the firm and that he was dissatisfied with management decisions, but an unhappy minority partner does not a security holder make. See Odom, 703 F.2d at 215. Goodwin also argues that he was effectively denied access to the information necessary for him to protect his investment because Elkins failed to inform him of the alleged merger negotiations. Although the federal securities laws protect investors by requiring disclosure of certain kinds of information, see, e.g., Tcherepnin, 389 U.S. at 336, 88 S.Ct. at 553, the federal securities laws are not properly invoked to protect one general partner from the deceit of his copartners.
Although I would treat the district court's order dismissing Goodwin's federal securities law claims as an order granting summary judgment in favor of Elkins, I would affirm that order, albeit on grounds different from those on which Judge Garth relies. I join in the disposition of the state law claims.
BECKER, Circuit Judge, concurring:
I concur in the judgment of the Court, and in all but part III of Judge Garth's opinion. Moreover, I agree essentially with what Judge Garth has written in part III B. My difference with Judge Garth is that I would ground our decision solely upon the terms of the Elkins & Co. Limited Partnership Agreement, to which Goodwin was a signatory, and would not reach the arguments founded upon the Pennsylvania Uniform Partnership Act. Obviously this approach presupposes the view that the partnership agreement is properly before us in the present posture of the case. Judge Garth and Chief Judge Seitz have doubts on this point, but I believe that the agreement is properly before us and hence would dispose of the case on the narrower grounds of the partnership agreement. I will first address the question whether we may consider the agreement, and then its legal effect.
Where, as here, the allegations of a complaint are based on underlying written documents, and the authenticity of those documents is unchallenged, I believe that a court may properly consider those documents on a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), even if the documents are not formally attached to the complaint.
I believe that the terms of the Limited Partnership Agreement dispose of Goodwin's securities claims as a matter of law, even if his allegations concerning management of Elkins & Co are accepted as true.
These factors, taken together, negate the argument that the interest of partners in the firm was basically a passive investment. As I have noted above, in his complaint in this case Goodwin has relied on the terms of the agreement, actually and constructively, and has not alleged that the provisions referred to above were shams. Under these circumstances, the terms of the agreement conclusively determine that the general partnership interest created thereby is not a security. Goodwin's allegations concerning his non-participation in management therefore fail to state a claim under the securities law, whether or not they are true.
A fair reading of the record, and of the defendants' motion, leads us to construe the action taken by the district court as one compelling arbitration. We have held that such orders are appealable under § 1291. Gavlik Constr. Co. v. H.F. Campbell Co., 526 F.2d 777 (3d Cir.1975). Cf. Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (order staying proceedings brought in federal court to compel arbitration, pending outcome of parallel state court suit, is appealable as final order under § 1291). But see Kirschner v. West Co., 300 F.2d 133, 134 (3d Cir.1962) (in banc) (order staying proceedings pending arbitration in absence of motion to compel arbitration held not final for purposes of § 1291).
In normal course on a Rule 12(b)(6) motion, we look only to the pleadings and take all factual allegations contained in the complaint as true. E.g., Rogin v. Bensalem Twp., 616 F.2d 680, 685 & n. 14 (3d Cir.1980). I recognize that there is some authority for permitting reference to uncontradicted exhibits which were not made part of the complaint but which were attached to moving papers seeking dismissal. See Provident Nat'l Bank v. Frankford Trust Co., 468 F.Supp. 448, 450 & n. 2 (E.D.Pa.1979); 5 Wright & Miller, Federal Practice and Procedure § 1357 at 593. See infra Opinion of Judge Becker. Because of our disposition, however, I believe we need not decide at this time the issue of how to treat a Rule 12(b)(6) motion when uncontradicted exhibits are before the court but were not made part of the complaint.
To the extent that Elkins bases its arguments on its "Exhibits," and in particular on the Partnership Agreement, such arguments might have been better made in connection with a motion for summary judgment rather than a motion to dismiss. Whether or not summary judgment would have been proper at this juncture, given the amount of discovery allowed and not allowed to the parties by the district court, is an entirely different question from the one presented here. But see infra Opinion of Chief Judge Seitz.
We agree that the claims raised in Williamson, and indeed the claims raised here, were not so devoid of merit and utterly frivolous as to require dismissal for lack of jurisdiction. That inquiry, however, is far different from the one we address here, i.e., whether dismissal under Fed.R.Civ.P. 12(b)(6) for failure to state a cause of action is warranted. The Williamson court did no more than to hold that federal jurisdiction had been established before remanding for further proceedings. It explicitly declined to discuss whether summary judgment could have been granted. 645 F.2d at 426, and was silent on the propriety of a 12(b)(6) motion. Its actual ruling, therefore, is inapposite to the proceedings presented here.
Because we find that the federal securities claims were properly dismissed, the rule in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), which exempts securities claims from arbitration provisions, is inapplicable.
We also note that the policy expressed both in Waddell I and Waddell II favoring arbitration agrees with analogous pronouncements in federal law. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the Supreme Court held that, under the Federal Arbitration Act, an allegation of fraud in the inducement of the contract was properly submitted under that contract's broad arbitration provision, absent a showing that the arbitration clause itself was induced by fraud. Accord, Merritt-Chapman & Scott Corp. v. Pennsylvania Turnpike Comm'n, 387 F.2d 768 (3d Cir.1967). Here, Goodwin does not even challenge the validity of the Elkins Partnership Agreement itself, but merely challenges the manner in which the defendants conducted themselves in carrying out the Agreement's termination provisions. It is clear to us, therefore, that Goodwin's claims would be arbitrable under the Federal Arbitration Act. Although, as we have noted, state law controls here, "[i]n the absence of Pennsylvania authority to the contrary we shall assume that the Pennsylvania courts would take the view adopted by the Supreme Court of the United States." Merritt-Chapman & Scott, 387 F.2d at 771.