A Florida intermediate appellate court recently reversed a $5.8 million judgment in a dispute arising out of loan participation agreements between a commercial lender and an investment firm, reasoning that the agreements were not “securities” under Florida law but, instead, were “routine commercial transactions.”
ACF IV, LLC and FDI Capital, LLC executed two loan participation agreements that required FDI to contribute $5 million to fund 80 percent of two collateralized loans that ACF extended to a Mexican corporation. The Mexican corporation defaulted, ACF brought suit in Mexico, and FDI filed suit against ACF in Florida state court, alleging that ACF had sold it unregistered securities.
The trial court found that the participation agreements were “securities” under the Florida Securities and Investor Protection Act, reasoning that the agreements were akin to a “certificate of interest” or “participation in any profit-sharing agreement.”
Relying on the plain text of the statute and federal case law interpreting analogous federal statutes, the appellate court reversed. Specifically, the court noted that the Securities Act directs courts to examine the “context” of transactions when determining whether they are “securities.” And, under federal case law, courts use a three-prong test to determine whether an instrument constitutes an “investment contract” subject to securities regulations—such a contract exists if there is (1) an investment, (2) in a common enterprise, (3) with profits expected from the efforts of others.
Applying these factors, the appellate court found there was no common venture and multiple investors did not pool their funds to share in profits. The court also noted that FDI was not reliant on ACF’s expertise to receive a return on investment, that FDI only expected to receive repayment of the principal it loaned, and that FDI did not anticipate the appreciation in the value of its share of the participation.
The case is ACF IV LLC v. FDI Capital LLC, No. 3D24-0533 (Fla. 3d Dist. Ct. App.). ACF is represented by Greenberg Traurig PA. FDI is represented by Berger Singerman LLP. The decision is available here.
