NELSON, Circuit Judge:
Deutsch Energy Company ("DEC") appeals from the district court's grant of summary judgment in favor of defendants Sherman Mazur, Gerald Weiner, New Century Energy Corporation ("NCEC"), New Century Oil and Gas Supply Corporation ("NCOGSC"), and New Century Oil and Gas Supply Corporation Income Development Program 1982-1983 ("Program"), and dismissal of its complaint against the remaining defendants, Richard Wall, Jack Ralston, Courtney Ralston, and Sand Dollar Energy Corporation ("Sand Dollar"). We find that no genuine issue of material fact exists as to whether the transaction among the parties constitutes a security because there was no expectation that profits would be derived solely from the efforts of individuals other than the investors. Accordingly, we affirm the district court's grant of summary judgment.
In April 1981, defendants Mazur and Weiner formed NCEC, a California corporation, to acquire oil and gas producing properties. NCEC subsequently purchased the mineral and extraction rights over a 400-acre parcel located in Kansas referred to as the "Morton Lease." At the time of the purchase, twenty-two wells had been drilled and were operating on the parcel.
Negotiations between Mark and Jaime Deutsch and NCEC began in December 1981 for a purchase of well sites. Negotiations continued through February 1982, and concluded with NCEC agreeing to transfer the lease rights to four drilled wells and eighteen well sites to DEC, a general partnership formed by the Deutsches, for a payment of approximately $1.5 million. Two purchase agreements ultimately reflected the terms of the transaction. Each purchase agreement expressly provided that the parties would execute an operating agreement, which was attached as an exhibit to the purchase agreements, designating Sand Dollar as operator of the wells and sites. DEC retained significant managerial powers under the agreements, including the power to veto any decision by NCEC to replace Sand Dollar as operator or to abandon wells as dry holes.
Unfortunately, the wells did not perform to the expectations of DEC, which has received no money in return for its $1.5 million investment. The parties entered a contingent repurchase agreement on March 15, 1983. The repurchase was never consummated, however, apparently because NCEC (then acting as Program) was unable to acquire the necessary funds.
DEC filed the present action on November 10, 1983. The complaint alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2) (1982), in connection with the sale of the oil well leases. NCEC filed a motion for summary judgment in February 1986 seeking dismissal of DEC's complaint on the ground that the interests purchased by DEC did not constitute securities within the meaning of the securities laws. Following a hearing on April 7, 1986, the district court granted the motion and entered judgment on April 30, 1986. DEC timely appealed this decision.
This court reviews de novo the district court's grant of summary judgment and its determination that the transaction
DEC argues that issues of material fact exist as to whether the transaction constitutes an "investment contract" and, therefore, a security within the definitions stated in section 2(1) of the 1933 Securities Act, 15 U.S.C. § 77b(1) (1982), and in section 3(a)(10) of the 1934 Securities Exchange Act, 15 U.S.C. § 78c(a)(10) (1982).
The undisputed facts in the present case are as follows: the Deutsches, who are California residents, own and operate a convalescent hospital as their primary business. Jaime Deutsch, the father, also owns and operates retirement hotels adjacent to the convalescent hospital. Mark Deutsch, the son, inspected the oil well sites before the agreements were executed. The Deutsches' previous investments include a limited partnership organized to drill and operate gas wells in Ohio. Furthermore, they retained legal counsel who was present for the latter stages of the negotiations with NCEC regarding the purchase agreements.
While one may surmise from these facts that neither of the Deutsches possesses the expertise to drill and complete the oil wells personally, it does not follow that they are "inexperienced and unknowledgeable members of the general public." See Williamson, 645 F.2d at 423. Their general business expertise arises from other sophisticated business transactions. They clearly know how to read financial statements and are familiar with the use of experts such as accountants, attorneys, and geologists. Although it appears to be an open question whether sophistication in one field of business will always transfer to another field, we find that the Deutsches' claim of unsophistication is unsupported and raises no genuine issues of material fact given their level of general business expertise.
Based on undisputed facts, the transaction entered into by DEC and NCEC did not constitute an investment contract because, as possessors of significant managerial powers and a high degree of business acumen, the partners of DEC could not rightfully expect their profits to be derived solely from the efforts of individuals other than themselves. The district court, therefore, correctly granted summary judgment to NCEC because no genuine issues of material fact exist as to whether the third element of Howey is absent.
15 U.S.C. § 77b(1). Section 3(a)(10) of the Securities Exchange Act of 1934 corresponds almost exactly with this definition. It adds, however, an exception to the above:
15 U.S.C. § 78c(a)(10). The courts have found these definitions to be functional equivalents. Tcherepnin v. Knight, 389 U.S. 332, 336, 342, 88 S.Ct. 548, 553, 556, 19 L.Ed.2d 564 (1967); United Cal. Bank v. THC Fin. Corp., 557 F.2d 1351, 1356 (9th Cir.1977).