Gallion v. Alabama Market Centers, Inc.
| Decision Date | 22 August 1968 |
| Docket Number | 6 Div. 506 |
| Citation | 213 So.2d 841,282 Ala. 679 |
| Parties | , Blue Sky L. Rep. P 70,791 MacDonald GALLION as Securities Commissioner v. ALABAMA MARKET CENTERS, INC., et al. |
| Court | Alabama Supreme Court |
Earl C. Morgan, Dist. Atty., Birmingham, for appellant.
Larry S. Vines and Hobart A. McWhortor, Jr., Birmingham, for appellees.
In January, 1967 the Securities Commissioner informed the appellees that the plans practices and procedures of the Alabama Market Centers, Inc. did not come within the purview or under the provisions of the Alabama security laws 'as the Alabama Market Centers, Inc., * * * is not in our opinion selling stocks, bonds, securities, debentures, but is solely in the business of selling commodities and the salesman who introduces a purchaser known as a Supervisor or Distributor receives a commission on persons they introduce to the Market Center who purchase products and that the sale is strictly such items as cooking ware, televisions, sewing machines, etc.'
In mid 1967 the Attorney General in his capacity as Securities Commissioner for the State of Alabama filed a bill seeking to enjoin the appellees from the further sale of what the Securities Commissioner now contends are unregistered 'securities' as defined in title 53, § 36, Code of Alabama, 1940 (recomp.1958).
The facts were stipulated. The trial court concluded on oral testimony and the stipulation that the 'founders contract' involved was not a security or investment contract as defined by the Code. The Attorney General appealed.
The single issue then is whether or not the founders (Supervisors and Distributors) contract involved is a security within the meaning of the security act.
From the stipulation it appears that the arrangement involved is as follows:
'Defendant Alabama Market Centers, Inc. ('A.M.C.') is an Alabama corporation, licensed to do business in the State of Alabama, having its principal place of business in Birmingham. All of the authorized capital stock in A.M.C. has been issued and is now outstanding, and is owned and held by Alabama residents. None of these stockholders of A.M.C. have contracts with A.M.C. as 'founders'. The defendant Fred Worsham is president of A.M.C., is a male resident of the State of Alabama over the age of twenty-one (21) years, and resides at Eight Country Club Drive in Tuscaloosa; the defendant R. J. Fusilier is a vice president and employee of A.M.C., is a male resident of the State of Alabama over the age of twenty-one (21) years, and resides at 1017 Herring Street in Bessemer.
'A.M.C.'s contracts with its 'founders', which include the instruments attached to the Bill of Complaint as Exhibit A (hereinafter referred to as the 'contract(s)') have not been registered as securities, and the defendants have not complied with the provisions of Title 53, of Volume 12, Ala.Code 1940 (Recompiled 1958).
'In and for the Birmingham market area A.M.C. initially appointed four 'supervisors', choosing four adult males who are in a position to devote a considerable amount of time to the business. This initial appointment of the four supervisors by A.M.C. did not involve any sales, exchanges or consideration, or result in any bilateral contracts between A.M.C. and these initial supervisors. These four supervisors have the primary responsibility for securing the 'founders' in the Birmingham market area. The number of 'founders' in any one market center is limited to 3,000.
'These supervisors establish 'distributors' by selling them an article which the purchaser may choose from a limited selection. (If the purchaser elects not to select an article from this limited selection then he may wait until the store is open and select a comparable product of his choice.) The distributor pays $320 for the article, or for his right to select an article in the future. The supervisor is paid a $70 commission out of this one-time retail sale by the distributor for $320; the remaining amount of $250 is allocated as follows: $18 sales tax, $2 for a sales kit which is given to the distributor, with the remaining portion allocated to restock market center inventory and as a sales receipt to A.M.C. A material part of the inducement for this purchase for $320 is the right to become a distributor and the anticipation of receipts pursuant to the operation of the contract. 'In conjunction with this purchase from A.M.C. whereby the purchaser becomes a 'distributor' pursuant to the contract, he is given (as a distributor) 100 numbered plastic IBM 'purchase authority' cards. The distributor then attempts to place his 100 cards with persons whom he believes to be potential retail purchasers from A.M.C. When a distributor selects a person as a recipient of a purchase authority card that person signs for the card which is numbered for use in the IBM program. Receipt of a purchase authority card in no way obligates the holder then or ever to use the card and make any purchases from A.M.C. In distributing his cards, through personal contact with sales literature, the distributor encourages the recipients of his purchase authority cards to make purchases from A.M.C. due to the available wholesale prices. Total purchases made by each purchase authority card holder are calculated monthly by an IBM computer. The distributor who placed the purchase authority card then receives a sales commission of from 12% To 20% (depending upon the articles purchased) on the total purchases made by each of his purchase authority card holders. This sales commission is a direct incentive to the distributor to encourage his purchase authority card holders to make their purchases from A.M.C. This sales commission received by the distributor is paid to him by A.M.C. only upon purchases made by the people to whom he has distributed his purchase authority cards. A distributor does not receive this sales commission on purchases by persons who have received their purchase authority cards from any other distributor.
'A distributor has the right to 'establish' other distributors under his supervision in the same manner in which he became a distributor. A distributor can make a one-time retail sale to another for $320, thus establishing his purchaser as a distributor The selling distributor receives a commission of $60, out of this $320 sales price, and his supervisor receives a commission of $10 from this amount. The purchaser then becomes a distributor under his seller's supervisor. A distributor gains a $200 credit by establishing another distributor if and when the selling distributor seeks to be elevated to supervisor by his supervisor. (This is explained more fully hereinafter.) Apart from this one-time retail sale, the selling distributor does not have a direct right to receive any commissions from the purchases made by the purchase authority card holders of the distributor he has established (or of any other distributor). The purchasing distributor, of course, never receives any fees or commissions of any kind from the distributor who sold to or established him, or based on his sales.
'A supervisor earns a 3% To 5% Commission (depending upon the articles purchased) on the purchases made by the purchase authority card holders of the distributors under him. A supervisor receives this sales commission only upon sales made by A.M.C. to those persons who have received purchase authority cards from a distributor who has been established (through the one-time purchase as aforesaid) by or under that particular supervisor. The supervisor receives monthly a report of purchases made with the purchase authority cards placed by his distributors. He meets at least monthly with his distributors to give them these sales reports and to stimulate their efforts in contacting their respective purchase authority card holders. Through the IBM program each supervisor is able to advise his distributors as to the exact extent that the particular distributor's purchase authority cards are being used. Since there is no obligation on the purchase authority card holder to ever make any purchases, a supervisor encourages a distributor under him to collect purchase authority cards from persons who have not made any purchases over a period of some months.
'Supervisors can establish other supervisors but only from among those persons who are established as distributors directly by them or by distributors under them. When a supervisor does this, he loses the 3% To 5% Sales commissions from the purchases made by that distributor's purchase authority card holders. By purchasing a second article from A.M.C. through his supervisor for $300 (in the manner and under the circumstances that he made his initial purchase to become a distributor), a distributor can pay his supervisor $1800,...
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