Hamilton Jewelers v. Department of Corporations

• Decision Date: 15 February 1974
• Citation: 37 Cal.App.3d 330,112 Cal.Rptr. 387
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 71,128 HAMILTON JEWELERS, a division of Ferd Wolfson, Inc., a California corporation, Plaintiff and Respondent, v. DEPARTMENT OF CORPORATIONS of the State of California and Brian R. Van Camp, Commissioner, Defendants and Appellants. Civ. 14067.

Page 387

112 Cal.Rptr. 387

37 Cal.App.3d 330, Blue Sky L. Rep. P 71,128

HAMILTON JEWELERS, a division of Ferd Wolfson, Inc., a California corporation, Plaintiff and Respondent, v. DEPARTMENT OF CORPORATIONS of the State of California and Brian R. Van Camp, Commissioner, Defendants and Appellants.

Civ. 14067.

Court of Appeal, Third District, California.

Feb. 15, 1974.

As Modified Feb. 21, 1974.

Hearing Denied May 1, 1974.

Arnold, Brownston & White, Sacramento, for plaintiff-respondent.

Evelle J. Younger, Atty. Gen., by Walter J. Wiesner, Deputy Atty. Gen., Sacramento, for defendants-appellants.

JANES, Associate Justice.

Defendants, the state Department of Corporations and its Commissioner (hereinafter, collectively, 'the Department'), appeal from a declaratory judgment that a diamond sales promotional plan which was advertised and successfully used by plaintiff Hamilton Jewelers (hereinafter,

'HAMILTON') DID NOT CONSTITUTE THE OFFER OR SAle Of a 'security' as defined in section 25019 of the Corporations Code. ¹

FACTS

The relevant facts are undisputed.

Hamilton operates a retail jewelry business in Sacramento County. In September 1971, by newspaper advertisement, Hamilton offered for sale to the general public a selected group of unmounted diamonds ordinarily sold at prices of $500 or more.

In relevant part, the newspaper advertisement stated: 'Hamilton Jewelers invites you to invest in a ONE CARAT DIAMOND for only $500, and if anytime (sic) within a three year period you elect to return the Stone, Hamilton will return to you the full purchase price Plus 5% Interest calculated daily from the date of purchase. ( ) A diamond investment of $500 will return $578.81 in cash at the end of a three year period.' (Emphasis added.)

Sales were transacted in accordance with the advertisement. Each purchaser received a written warranty which reiterated the terms of the advertisement and imposed no further conditions.

Shortly after publication of the advertisement, the Department notified Hamilton by letter and interpretive opinion (10 Cal.Admin.Code, § 250.12) that, in the Department's view, the advertisement constituted the offer of a 'security' within the meaning of section 25019. Hamilton then filed suit for declaratory relief.

CONTENTIONS

With exceptions not here relevant, section 25019 provides: "Security' means any note; stock; treasury stock; membership in an incorporated or unincorporated association; bond; debenture; Evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; Investment contract; voting trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease; any beneficial interest or other security issued in connection with a funded employees' pension, profit sharing, stock bonus, or similar benefit plan; or, in general, any interest or instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether or not evidenced by a written document. . . .' (Emphasis added.)

The Department contends that Hamilton's public offering, as set forth in its newspaper advertisement, constituted the offer of a security in the form of an 'evidence of indebtedness' or 'investment contract.' The contention fails.

The draftsmen of the state Corporate Securities Law of 1968 (Corp.Code, § 25000 et seq.) have declared that the definition of 'security' in section 25019 has the following sources: Section 401, subdivision (1), of the Uniform Securities Act (7 U.L.A. 746) ²; section 2, subdivision 1, of the federal Securities Act of 1933 (15 U.S.C. § 77b, subd. 1); and former sections 25004 (defining 'trust') and 25008 (defining 'security') of the state Corporations Code. (Marsh & Volk, Practice under the California Corporate Securities Law of 1968 (1969) ch. 5, § 16, p. 178, and Draftsmen's Commentary, App. A, p. 512.) The sections cited in the uniform and federal acts as well as former section 25008, all include the terms 'evidence of indebtedness' and 'investment contract' within the definition of 'security.' In those respects, the uniform act copied the federal definition. (Commissioners' Note, 7 U.L.A. 749.) Accepting the draftsmen's statement that section 25019 is modeled after section 2, subdivision 1, of the Securities Act of 1933, decisions interpreting the federal definition are authoritative in resolving the issues presented by the case at bench. (See, Los Angeles Met. Transit Authority v. Brotherhood of Railroad Trainmen (1960) 54 Cal.2d 684, 688--689, 8 Cal.Rptr. 1, 355 P.2d 905; Innes v. McColgan (1941) 47 Cal.App.2d 781, 784, 118 P.2d 855.) ³

Cases interpreting the uniform act are likewise persuasive (People's F. & T. Co. v. Shaw-Leahy Co. (1931) 214 Cal. 108, 109, 3 P.2d 1012); and, of course, there is a strong presumption that section 25019 was intended by the Legislature to embrace the prior judicial construction of former section 25008 (State of California ex rel. Dept. of Employment v. General Ins. Co. (1970) 13 Cal.App.3d 853, 860, 96 Cal.Rptr. 744).

Under the Securities Act of 1933, '(t)he term 'evidence of indebtedness' is not limited to a promissory note or other simple acknowledgment of a debt owing and is held to include all contractual obligations to pay in the future for consideration presently received.' (United States v. Austin (10th Cir. 1972) 462 F.2d 724, 736; cf. United States v. Jones (5th Cir. 1971) 450 F.2d 523, 525.) For the purposes of the same Act, 'an investment contract . . . means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.' (Securities & Exchange Com. v. W. J. Howey Co. (1946) 328 U.S. 293, 298--299, 66 S.Ct. at p. 1103, 90 L.Ed. 1244, 1249.)

Taken literally, the term 'evidence of indebtedness' might seem plainly applicable to the newspaper advertisement and written warranty setting forth Hamilton's promise to pay its customer, at the latter's option, a full refund of the purchase price, plus 5% Interest, upon return of the diamond within the specified three-year period. Similarly, from the standpoint of the customer who purchases the diamond with the preconceived intention of exercising his option and receiving profit of 5% Interest, the transaction might also seem to be an 'investment contract.' As said in State v. Hawaii Market Center, Inc. (1971) 52 Haw. 642, at page 651, 485 P.2d 105, at page 110, involving an investment contract under the Hawaii Uniform Securities Act (Modified), 'It should be irrelevant to the protective policies of the securities laws that the inducements leading an investor to risk his initial investment are founded on promises of fixed returns rather than a share of the profits. . . . The unwary investor lured by promises of fixed fees deserves the same protection as a participant in a profit sharing plan. For this reason courts have avoided a narrow definition of 'profits."

However, as this court pointed out in Sarmento v. Arbax Packing Co. (1964) 231 Cal.App.2d 421, at page 424, 41 Cal.Rptr. 869, at page 871, 'No hard and fast rule fixes that which constitutes a 'security.' Rather, the question is determined on a case by case basis. The crucial question is whether the transaction comes within the regulatory purpose of the Corporate Securities Law.' (Emphasis added.) In so stating, we cited Silver Hills Country Club v. Sobieski (1961) 55 Cal.2d 811, at page 814, 13 Cal.Rptr. 186, 361 P.2d 906, where the state Supreme Court pursued the same 'crucial question' despite the fact that the transaction there involved came within the Literal statutory definition of 'security' (former Corp.Code, § 25008).

The purpose of the Corporate Securities Law (former Corp.Code, § 25000 et seq.) was explained by the court in Silver Hills Country Club v. Sobieski, supra, 55 Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906, as follows: 'Section 25008 defines a security broadly to protect the public against spurious schemes, however ingeniously devised, to attract Risk capital.' (Id. at p. 814, 13 Cal.Rptr. at p. 187, 361 P.2d at p. 907.) (Emphasis added.) 'Since the act does not make profit to the supplier of capital the test of what is a security, it seems all the more clear that its objective is to afford those who Risk their capital at least a fair chance of realizing their objectives in legitimate ventures whether or not they expect a return on their capital in one form or another.' (Id. at p. 815, 13 Cal.Rptr. at p. 188, 361 P.2d at p. 909.) (Emphasis added.)

Thus California follows the 'risk capital' approach in ascertaining whether a transaction involves a 'security' within the meaning of the Corporate Securities Law. (Accord, State v. Hawaii Market Center, Inc., supra, 52 Haw. at pp. 648--649, 485 P.2d at p. 109.)

The instant case is without reported judicial precedent ⁴ in that here the trial court expressly found that the diamonds in question 'are ordinarily sold at prices of $500.00 or more.' This finding is unassailed by the Department; indeed, the finding was proposed by the Department in its objections to findings proposed by Hamilton. Since, if reasonably possible, we must resolve any...