Flynn v. Klineman

• Decision Date: 07 May 1980
• Docket Number: No. 2-877A318,2-877A318
• Citation: 403 N.E.2d 1117
• Parties: J. Kelly FLYNN, Appellant (Plaintiff Below), v. James KLINEMAN, Jay Williams, Jr., and Dean Glasel, Appellees (Defendants Below).
• Court: Indiana Appellate Court

Page 1117

403 N.E.2d 1117

J. Kelly FLYNN, Appellant (Plaintiff Below), v. James KLINEMAN, Jay Williams, Jr., and Dean Glasel Appellees (Defendants Below).

No. 2-877A318.

Court of Appeals of Indiana, Fourth District.

May 7, 1980.

Stephen P. Zinkan, Zinkan O'Hara & Campbell, Indianapolis, for appellant.

James E. Carlberg, Klineman, Rose & Wolf, Indianapolis, for appellees.

MILLER, Presiding Judge.

Plaintiff-appellant Flynn appeals the granting of the defendant-appellees' motion for summary judgment. Flynn, who purchased securities of the Sandy Creek Development Corporation, sued Klineman, Williams and Glasel for their failure to register the securities as required by Ind.Code 23-2-1-3. ¹ His complaint demanded the purchase Flynn does not dispute that the elements of the exemption statute were met, with one exception: He argues he did not represent to the seller in writing as required by the statute that he purchased the securities for "investment" rather than for resale. The trial court found he did so represent, through writings including a signed election of Subchapter S tax status and corporate by-laws placing restrictions on resale of the stock. We conclude the trial court erred when it found there was a written representation of investment intent within the meaning of IC 23-2-1-2(b)(10). We reverse and remand to the trial court.

                price and attorney's fees pursuant to IC 1971, 23-2-1-19(a) (Burns Code Ed.)  (amended 1975).  2 Defendants argued, inter alia, that IC 1971, 23-2-1-2(b)(10) (Burns Code Ed.)  (amended 1975) 3 exempted the securities from registration as part of a "private offering".  On cross motions for summary judgment, the trial court held for defendants, concluding the exemption did apply
                

The Sandy Creek Development Corporation was incorporated by Jay Williams on February 4, 1975, its purpose being to restore and refurbish an old railroad car, the "Sandy Creek", and ultimately lease it as an accommodation for meetings and parties. At the time Flynn purchased the securities, both Glasel and Williams were officers, directors and stockholders of the corporation while Klineman was an officer and stockholder. Sometime during the latter part of February, 1975, and the first part of March, 1975, Flynn met with Glasel, Klineman and Williams to discuss the "investment opportunity"

offered by the Sandy Creek Development Corporation. As a result of the meeting, Flynn agreed to buy seven shares in the corporation for $5,250.00 and completed the purchase on March 28, 1975, by executing an initial subscription agreement. The stock of the Sandy Creek Development Corporation was never registered with the Indiana Securities Commissioner pursuant to IC 23-2-1-3, and on October 26, 1976, Flynn requested that Klineman, Glasel and Williams refund his original $5,250.00, plus interest and reasonable attorney's fees as provided in IC 23-2-1-19(a). When the defendants did not respond, Flynn filed suit for failure to register the securities. On February 7, 1977, the defendants filed a motion for summary judgment with supporting affidavits and exhibits, alleging that the Sandy Creek stock was exempt from registration by virtue of IC 23-2-1-2(b)(10), commonly known as the private offering exemption. Flynn filed two memorandums and an affidavit in opposition to defendants' motion for summary judgment and in the second memorandum filed an alternative cross-motion for summary judgment alleging that, as a matter of law, IC 23-2-1-2(b)(10), had not been complied with, in that an "investment letter" stating that Flynn was purchasing the stock for the sole purpose of investment, had not been obtained. As noted above, the trial court granted defendants' motion. Flynn argues on appeal that (1) the trial court improperly found that the offer and sale of securities was exempt from registration requirements under IC 23-2-1-2(b)(10); and (2) the defendants failed to meet their burden of proof in establishing that the securities were exempt from registration.

ISSUE I

We note that the primary purpose of a summary judgment under Ind. Rules of Procedure, Trial Rule 56 is to dispose of matters that do not require resolution by a jury or judge at trial, and that on appeal from a grant of summary judgment "(t)he only issues are whether the trial court correctly applied the law and whether there is a genuine issue of material fact." Tekulve v. Turner, (1979) Ind.App., 391 N.E.2d 673, 675. In this case, the appeal from the grant of defendants' motion involves only a question of law: whether the trial court properly determined that the Sandy Creek securities were exempt from registration by virtue of Flynn's alleged written representations that he was purchasing for investment.

We find the trial court granted summary judgment to defendants based on an erroneous construction of the private offering exemption expressed in IC 23-2-1-2(b)(10). The controlling language exempts:

"(10) any offer or sale of a security if, during any period of twelve (12) consecutive months which includes the date of such offer or sale, the offeror or seller has not directed offers to sell securities of the same class to more than twenty (20) persons in this state, excluding in determining the number of such persons, persons receiving offers otherwise exempted by this section 102 and also excluding persons receiving offers of such securities made after registration thereof under this act, whether or not the offeror, seller or any of the offerees or buyers are then present in this state and if (A) each buyer in a sale exempted under this subsection represents in writing to the seller that he is purchasing such securities for investment, and (B) no commission or other remuneration is paid or given for or on account of a sale exempted under this subsection (10); but the commissioner may by rule or order, as to any security or transaction or any type of security or transaction, (withdraw or) further condition this exemption, or increase or decrease the number of offerees permitted, or waive the conditions in clauses (A) and (B) with or without the substitution of a limitation on remuneration; . . . (emphasis added)"

Flynn's sole contention, as noted above, is that he did not represent in writing, as required by statute, to either the corporation or the defendants that he was purchasing the securities for "investment". The defendants countered this allegation by stating that Flynn, by signing his subscription It is a fundamental rule of statutory construction that a court may not interpret a statute which is clear and unambiguous on its face. Economy Oil Corp. v. Indiana Department of State Revenue, (1974) 162 Ind.App. 658, 321 N.E.2d 215, 218. Where a statute is susceptible to more than one interpretation, however, the court may consider the consequences of a particular construction. Id. The relevant statute in this case does not specify what constitutes a representation in writing that securities are being purchased for "investment"; thus, it is incumbent upon this court to decide that question. Because this is a case of first impression in Indiana, our analysis of relevant state law will consider parallel provisions at the federal level.

agreement, ascribed to corporate by-laws placing substantial restrictions upon resale of the securities, and that he also consented in writing to Subchapter S tax status for the Sandy Creek Development Corporation. They contend these are sufficient representations in writing within the meaning of the statute to show Flynn purchased the securities for "investment", and the stock is therefore exempt from registration under IC 23-2-1-2(b)(10).

The most important federal statute for our purposes is the Securities Act of 1933. ⁴

"The fundamental concept of the 1933 Act is the requirement that offerings of securities be registered with the Securities and Exchange Commission unless exempt under some provision of that Act. Registration requires the distribution of a prospectus containing an elaborate and detailed description of the issuer and the offering."

Boehm, Federal Business Law and the Indiana Lawyer: The Impact of the Securities Law on the General Practitioner, 48 Ind.L.J. 216, 219 (1973). The Securities Act proceeds upon a theory of disclosure; if the investor knows relevant facts concerning the securities, his decision to buy or not to buy will be an informed one. Despite the general policy of disclosure, however, Congress assumed that in certain circumstances there was no need for registration, or that the benefits of registration do not outweigh the difficulty and expense. There are four basic categories of transactions which the 1933 Securities Act exempts from its registration requirements: (1) transactions by persons other than issuers, dealers, or underwriters; (2) transactions not involving public offerings; (3) certain transactions by dealers; and (4) brokers' transactions. The provisions of IC 23-2-1-2(b)(10) parallel the federal exemption for number (2) the so-called "private offering" exemption.

The Securities Act does not define "private offering", but the federal exemption has been interpreted to permit issuers to make isolated sales to particular persons who do not need the protection of the disclosure requirements because of their special knowledge. SEC v. Ralston Purina Co., (1953) 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494. Whether an offering is public or private is a question of fact to be determined after considering circumstances such as the relationship between the offeror and the offeree and the size, scope, nature, and manner of the offering. ⁵

Of course, the protections afforded under the federal exemption are meaningless if the initial, informed purchasers are merely conduits for sales to uninformed purchasers. United States v. Custer Channel Wing Corp., (4th Cir. 1967) 376 F.2d 675, cert. denied, 389 U.S. 850, 88 S.Ct. 38, 19 L.Ed.2d 119; Gilligan, Will & Co. v. SEC, (2d Cir. 1959...