Erickson v. Wheatley Ventures

On January 31, 1980, Preferred Properties Fund-80 (the partnership) issued certain nonrecourse promissory notes pursuant to an indenture. The partnership registered the notes as securities under § 12(g) of the Securities Exchange Act of 1934 (the 1934 act) and sold them to the public. The notes provided that noteholders (plaintiffs) were entitled to interest payments of 10 percent per annum, paid quarterly, with the principal to be paid on June 30, 1994. The notes were secured by real properties owned by the partnership. The notes also provided that noteholders were entitled to residual proceeds, described as residual interest, from the sale of the partnership’s properties after payment of the partners’ preferential returns. The notes did not confer any voting or other participatory rights other than the right to remove the trustee for the noteholders and nominate any successor. Beginning in 1988, the partnership repeatedly told the noteholders that they would not receive any residual interest. In April 1989, the partnership defaulted on the notes. On August 20, 1993, Wheatley Ventures (Wheatley) (defendant) made a tender offer for the outstanding notes. In July 1993, prior to the tender offer, at Wheatley’s request, the trustee for the noteholders, Northern Trust Bank of California (Northern Trust) (defendant), amended the indenture to separate the residual interest from the notes. The partnership then filed the proposed amendment with the Securities and Exchange Commission (SEC). On August 6, 1993, the SEC returned several comments and raised certain questions about the purpose of the amendment. In response to the SEC’s questions, the partnership withdrew the proposed amendment. Subsequently, Deanne Erickson (plaintiff), trustee for the Kaufman Family 1981 trust and putative representative for all the noteholders, filed an action against Wheatley, Northern Trust, and the general partner of the partnership, Montgomery Realty Company-80 (Fox) (defendant). The noteholders alleged that Wheatley, Fox, and Northern Trust failed to comply with the disclosure requirements for tender offers under federal securities laws, including the Williams Act. The noteholders argued that the purpose of the proposed amendment to the indenture was to circumvent the Williams Act’s obligations relating to tender offers for registered equity securities. The noteholders also claimed that the tender offer was intended to facilitate Wheatley’s takeover of the partnership’s general partner. Wheatley and Fox moved to dismiss on the basis that the notes were not equity securities and that the Williams Act was thus inapplicable.