Enservco, Inc. v. State, Office of Secretary of State, Securities Div., 49A02-9111-CV-503

• Decision Date: 31 December 1992
• Docket Number: No. 49A02-9111-CV-503,49A02-9111-CV-503
• Citation: 605 N.E.2d 256
• Parties: ENSERVCO, INC., Western Environmental Resources, Inc., Associated Environmental Systems, Inc., and Don James, Appellants-Plaintiffs, v. STATE of Indiana, OFFICE OF the SECRETARY OF STATE, SECURITIES DIVISION; and Mark E. Maddox, as Indiana Securities Commissioner, Appellees-Defendants.
• Court: Indiana Appellate Court

Page 256

605 N.E.2d 256

ENSERVCO, INC., Western Environmental Resources, Inc.,

Associated Environmental Systems, Inc., and Don

James, Appellants-Plaintiffs, v. STATE of Indiana, OFFICE OF the SECRETARY OF STATE,

SECURITIES DIVISION; and Mark E. Maddox, as

Indiana Securities Commissioner,

Appellees-Defendants.

No. 49A02-9111-CV-503.

Court of Appeals of Indiana,

Second District.

Dec. 31, 1992.

Robert S. Walters, Barrett & McNagny, Fort Wayne, for appellants-plaintiffs.

Linley E. Pearson, Atty. Gen., John M. White, Deputy Atty. Gen., Office of Attorney General, Indianapolis, for appellees-defendants.

SULLIVAN, Judge.

Enservco, Inc., Western Environmental Resources, Inc., Associated Environmental Systems, Inc., all California corporations, and Don James, President of Enservco and Western Environmental Resources, Inc., (collectively "Enservco" or "Appellants") appeal the judgment of the Marion Circuit Court, Marion County, Indiana affirming the Indiana Securities Commissioner's Findings of Fact, Conclusions of Law, and Final Order (Order) which adjudged that Appellants had violated the antifraud provisions of the Indiana Franchise Act (Franchise Act). ¹

We reverse the trial court's affirmance of the Commissioner's Order and remand with instructions that the Commissioner set aside his Order which adjudged that Appellants violated the Franchise Act and which revoked Appellants' exemption from franchise registration.

Appellants present several issues for review. We deem the following issue dispositive:

Whether there is substantial evidence of record to support the Indiana Securities Commissioner's Order and its subsequent affirmance by the Marion Circuit Court?

On August 14, 1989, the Indiana Securities Division filed an administrative complaint with the Indiana Securities Commissioner (Commissioner) alleging violations of I.C. 23-2-2.5-27. Specifically, Appellants were charged with engaging in acts, practices, and a course of business which operated as a fraud or deceit upon investors and with making untrue statements of material facts in connection with the sale of a franchise ² within the State of Indiana.

Appellants were engaged in the offer and sale of an underground tank testing enterprise. ³ After meeting with Don James, the Appellants' representative, Associated Environmental Systems (AES)/Indiana, an Indiana Corporation ⁴, purchased the rights to a computer system designed to test underground tanks and entered into a License Agreement (Agreement) on March 1, 1988, which granted AES/Indiana a twenty-five year exclusive technology license in the State of Indiana. The terms of the Agreement required AES/Indiana to remit an initial fee of $72,000 and an ongoing royalty fee equal to twenty percent of AES/Indiana's gross revenues. AES/Indiana purchased the testing and measuring equipment and the specially-equipped vans needed to begin the testing business in Indiana. Subsequent to commencing operations, AES/Indiana contacted the Indiana Securities Division and alleged certain acts of wrongful conduct on the part of Appellants concerning the offer and sale of the franchise.

Petitioner sought a cease and desist order and other appropriate relief with respect to Appellants' alleged violations of the antifraud provisions. The Commissioner conducted an administrative hearing upon the complaint in January, 1990. At the hearing, Appellants presented a unified challenge to the charges. On January 30, 1990, the Commissioner ordered Appellants to cease and desist from violations of the antifraud provisions, revoked Appellants' exemptions ⁵ from franchise registration pursuant to I.C. 23-2-2.5-3, and ordered Appellants to pay the costs of the administrative action.

Enservco/Appellants challenge the Order, and its subsequent affirmance by the Marion Circuit Court, upon grounds that the evidence is insufficient to support the findings of fact and conclusions. Specifically, Enservco attacks three findings which led to the Commissioner's conclusion that Enservco engaged in fraudulent conduct in the offer and sale of a franchise. The three findings in question have been identified as the EPA (Environmental Protection Agency) Test issue, the Testing Time issue, and the Option/First Right of Refusal Issue. ⁶ The factual underpinnings of this case can best be explored within the context of our discussion of the three issues below.

I. Introduction

This case presents a question of first impression regarding administrative enforcement pursuant to the antifraud provisions of the Indiana Franchise Act. ⁷ In 1975, the Indiana General Assembly enacted legislation designed to prevent franchise sale abuses. ⁸ The Act has been viewed as embodying "crucial policy choices affirmatively made by the legislature in an effort to balance, in a way that makes sense in the commercial and social life of Indiana, the freedom to enter into contracts and the need to regulate the practices of the franchise industry." Wright-Moore Corporation v. Ricoh Corporation (1990) 7th Cir., 908 F.2d 128, 142 (Ripple, J., dissenting).

The purpose of the Act is to ensure that

"the practice or commission of fraud may be prohibited and prevented, [and that] disclosure of sufficient and reliable information in order to afford reasonable opportunity for the exercise of independent judgment of the persons involved may be assured, in connection with the issuance, barter, sale, purchase, transfer or disposition of franchises in this state." I.C. 23-2-2.5-47.

Two major mechanisms protect against abuses in the offer, sale, and purchase of franchises. See Gerald Bepko, Survey of Recent Developments in Indiana Law-Contracts and Commercial Law, 9 Ind.L.Rev. 132, 152 (1975) [hereinafter "Contracts and Commercial Law"]. The focus in the instant case falls upon the mechanism permitting public action taken by the securities commissioner. ⁹

Generally, franchisors must register with the securities commissioner before the offer or sale of a franchise. I.C. 23-2-2.5-9. The registered franchisors are then subject to the jurisdiction of the securities commissioner who is authorized to implement several actions to protect prospective franchisees. ¹⁰ As noted in footnote 5, supra, Enservco was apparently exempt from registration pursuant to I.C. 23-2-2.5-3, although the record does not disclose under which subsection the exemption arose. Once Enservco attained exempt status, several of the oversight procedures of the Securities Division were removed. ¹¹ Nevertheless, Enservco was not empowered to operate entirely beyond the bounds of the Franchise Act.

Notwithstanding fulfillment of the requirements for exemption under I.C. 23-2-2.5-3, Enservco must comply with I.C. 23-2-2.5-27. This section has been characterized as an "antifraud" provision which prohibits the offer, sale, or purchase of any franchise by means which directly or indirectly involve fraud, deceit, or misrepresentation. Moll, supra, 419 N.E.2d at 162. If the commissioner opines that a franchisor is engaged in unlawful conduct, a cease and desist order may issue restraining the further offer or sale of the franchise until compliance, i.e., non-fraudulent conduct, is achieved. I.C. 23-2-2.5-35. In the instant case, subsequent to a hearing with respect to the alleged unlawful conduct, the Commissioner ordered Enservco to cease and desist from violations of the antifraud provisions and then ordered a revocation of Enservco's exempt status. We take this opportunity to articulate the required elements of an administrative enforcement action under I.C. 23-2-2.5-27 and to reiterate the appropriate standard of review of administrative proceedings before the Indiana Securities Commissioner.

A. Elements

The elements of an antifraud violation were first delineated within the context of the private civil remedy in Moll v. South Central Solar Systems, Inc., supra, 419 N.E.2d at 162. Our First District noted that Indiana's antifraud provision parallels Rule 10b-5 ¹² which was promulgated under the federal Securities Exchange Act of 1934. Id. In Moll, the court concluded that an action predicated upon the antifraud statute arises when there are "allegations of facts which would support an inference of fraud, deceit, or misrepresentation." Id. Thus, in a private action, it would be necessary to demonstrate that Enservco made a material representation of a past or existing fact, which representation was false and was made with knowledge or reckless disregard of its falsity, causing reliance upon the representation to the detriment of the person so relying. Id. Accord Master Abrasives, supra, 469 N.E.2d at 1201. The question becomes what elements must be shown in administrative enforcement proceedings pursued under the antifraud provisions.

When faced with an issue of first impression, an analysis of relevant and parallel statutory schemes at the federal level is appropriate. Matter of CTS Corporation (1981) 2d Dist.Ind.App., 428 N.E.2d 794 (cross-referencing and construing Indiana's Business Take-Over Offers Act in light of interpretation of the federal securities law of tender offers contained in the Williams Act, 15 U.S.C. Sec. 78n(d)(1)); Flynn v. Klineman (1980) 4th Dist.Ind.App., 403 N.E.2d 1117 (comparing and contrasting provisions of the "private offering" exemption of the federal Securities Exchange Act of 1934, 15 U.S.C. Sec. 78a (1976), with the parallel provision of I.C. 23-2-1-2(b)(10) (Burns Code Ed.1976)). Reliance upon federal interpretation of parallel provisions carries with it the directive to adopt the established legal significance of key terms as well as the constructions placed upon such language or statutes. CTS Corporation, supra, 428 N.E.2d at 799. We take our cue from Aaron v. Securities Exchange Commission (1980) 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 and S.E.C. v. MacDonald (1983) 1st Cir., 699 F.2d 47.

In Aaron, the Securities Exchange Commission (SEC) sought preliminary and final...