Moreland v. Department of Corporations

• Decision Date: 26 August 1987
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 72,651 William MORELAND, Plaintiff and Appellant, v. DEPARTMENT OF CORPORATIONS, Defendant and Respondent. F007881.

Page 558

239 Cal.Rptr. 558

194 Cal.App.3d 506, Blue Sky L. Rep. P 72,651

William MORELAND, Plaintiff and Appellant, v. DEPARTMENT OF CORPORATIONS, Defendant and Respondent.

F007881.

Court of Appeal, Fifth District, California.

Aug. 26, 1987.

Review Denied Nov. 10, 1987.

Michael Lynn Gabriel and E.C. LeLouis, Bakersfield, for plaintiff and appellant.

George A. Crawford and Elisa B. Wolfe, Los Angeles, for defendant and respondent.

Joseph C. Long, amicus curiae, Norman, Okl., for defendant and respondent.

REID, Associate Justice. ^*

On April 4, 1986, the Department of Corporations, respondent, issued a desist and refrain order pursuant to CORPORATIONS CODE SECTION 25532^{1 2} alleging William Moreland, appellant, offered securities to the public without complying with various provisions in the Corporate Securities Law of 1968. (§ 25000 et seq.) Soon thereafter, appellant requested an administrative hearing on the order, which ultimately was held on April 25, 1986. Just prior to the hearing, the parties entered into a stipulation wherein it was agreed the sole issue to be resolved at the hearing was whether the investments were securities within the meaning of the Corporate Securities Law.

The administrative law judge issued a proposed decision on May 27, 1986, concluding the investments were "securities," thereby upholding the desist and refrain order. Respondent formally adopted this proposed decision as its own decision on May 29, 1986.

On July 24, 1986, appellant filed a petition for writ of mandate in the Kern County Superior Court seeking a review of this decision. After conducting an independent review of the administrative record, the trial court denied this petition on October 24, 1986. This appeal followed.

FACTS

The transaction which is the focus of this case involves the sale and refining of gold ore. Appellant, through his company, Moreland Industries (Moreland), offered investors the opportunity to purchase gold ore. According to the agreement, investors could purchase ore from Moreland, with a gold content of .15 ounces per ton, for $37.50 per ton. The "sales contract" further provided:

"The gold ore is located on the Moreland property on Piute Mountain at and around the Lone Star Mine located in Kern County, California, Section 18, Township 28 South, Range 34 East, MDM. The ore is in stockpiles ready for shipment. The second party may remove his ore at his own cost.

"The first party will mill the ore and deliver the gold to the second party based on the Sales Contract date. The ore will be milled on a first come basis at the rate of 150 tons per day. The total tonage [sic ] to be sold is 110,000 tons of ore."

Purchasers of the ore could then enter into a second agreement where Moreland would refine the ore:

"MORELAND INDUSTRIES will refine ____ tons of ore, ____ troy oz. gold, and deliver the gold to a reputable company for hallmarking and certifying the gold purity.

"Time of delivery to the hallmarking company will be within 25 days after the ore has been refined.

"The owner will be advised of the name and address of the hallmarking company and the date by which the gold will be available. The owner will pick up his refined and hallmarked gold from the hallmarking company or make other arrangements for delivery.

"The owner will receive a copy of the contract with the hallmarking company entered into by MORELAND INDUSTRIES. On the contract there will be the amount of gold the owner is to receive. The owner will present his copy of the contract and identification to the hallmarking company."

Once the purchaser entered into both the sales and refining contracts, appellant offered to guarantee his performance under the contracts through a third agreement.

"Guarantor hereby guarantees to Buyer that should the Seller fail to complete or fully perform his contract dated ____ with Buyer, that the Guarantor will reimburse the Buyer for the unfulfilled Sales Contract price paid by the Buyer in accordance with the Moreland Irrevocable Gold Trust Agreement."

This guaranty was secured by various mining claims owned by appellant. In the event of a total default, the purchasers of the ore would be reimbursed out of funds generated from the sale of these claims.

It is this set of agreements, individually and as a group, respondent believes constitute securities and violate the Corporate Securities Law.

DISCUSSION

The sole question to be resolved is whether the series of agreements, into which appellant proposed to enter with members of the public, constituted securities within the meaning of section 25019. Since the trial court applied the "independent judgment" test in reviewing the evidence presented by the administrative record, our function is simply to decide whether credible and competent evidence supports the trial court's judgment. (Dresser v. Board of Medical Quality Assurance (1982) 130 Cal.App.3d 506, 510-511, 181 Cal.Rptr. 797; Yakov v. Board of Medical Examiners (1968) 68 Cal.2d 67, 71-72, 64 Cal.Rptr. 785, 435 P.2d 553.) All conflicts must be resolved in favor of the respondent, and all legitimate and reasonable inferences indulged to uphold the trial court's conclusions. (Dresser v. Board of Medical Quality Assurance, supra, 130 Cal.App.3d at p. 511, 181 Cal.Rptr. 797.)

Section 25019 provides in relevant part:

" 'Security' means any note; stock; ... investment contract; ...; 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.)

What constitutes a security is a question of fact to be decided on a case-by-case basis. (People v. Figueroa (1986) 41 Cal.3d 714, 733-734, 224 Cal.Rptr. 719, 715 P.2d 680.) In so doing, section 25019 is not read or applied literally. Instead, the determination of whether an instrument is a security is made only after reviewing the facts and circumstances surrounding the transactions and considering the regulatory purpose of the Corporate Securities Law. (Leyva v. Superior Court (1985) 164 Cal.App.3d 462, 470, 210 Cal.Rptr. 545.) The purpose of the law is "to protect the public against spurious schemes, however ingeniously devised, to attract risk capital." (Silver Hills Country Club v. Sobieski (1961) 55 Cal.2d 811, 814, 13 Cal.Rptr. 186, 361 P.2d 906.)

In Figueroa, the Supreme Court summarized the various cases where transactions were found to be securities and noted:

"These cases underscore the fact that the corporate securities laws do not contain an 'all-inclusive formula by which to test the facts in every case. And the courts have refrained from attempting to formulate such a test. Whether a particular instrument is to be considered a security within the meaning of the statute is a question to be determined in each case. In arriving at a determination the courts have been mindful that the general purpose of the law is to protect the public against the imposition of unsubstantial, unlawful and fraudulent stock and investment schemes and the securities based thereon.' " (Id. 41 Cal.3d at p. 736, 224 Cal.Rptr. 719, 715 P.2d 680.)

Again, the substance of the transaction rather than its form governs whether a transaction will be considered a "security." (Id. at p. 734, 224 Cal.Rptr. 719, 715 P.2d 680.)

The California Corporate Securities Law was patterned after the federal Securities Act of 1933. (People v. Schock (1984) 152 Cal.App.3d 379, 387, 199 Cal.Rptr. 327.) Section 25019 is derived from section 2(1) of the act (15 U.S.C.A. § 77b), section 401(l ) of the Uniform Securities Act, and section 25008 of the previous Corporate Securities Law. (1A Marsh and Volk, Practice Under the Corporate Securities Law (1986), pp. A-1-89-A-1-90.3.) When legislation has been judicially construed, a subsequent statute on the same subject, using the same language, is generally given a similar interpretation. (Los Angeles Met. Transit Authority v. Brotherhood of Railroad Trainmen (1960) 54 Cal.2d 684, 688, 8 Cal.Rptr. 1, 355 P.2d 905, overruled on other grounds in County Sanitation Dist. No. 2. v. Los Angeles County Employees' Assn. (1985) 38 Cal.3d 564, 592, 214 Cal.Rptr. 424, 699 P.2d 835.) Furthermore, it is a basic premise of statutory construction that when a state law is patterned after a federal law, the two are construed together. (See Sutherland Statutory Construction (4th ed. 1984) § 57.06.) In these situations, the federal cases interpreting the federal law offer persuasive rather than controlling authority in construing the state law. (See Kaplan's Fruit & Produce Co. v. Superior Court (1979) 26 Cal.3d 60, 65, 160 Cal.Rptr. 745, 603 P.2d 1341; Solano County Employees' Assn. v. County of Solano (1982) 136 Cal.App.3d 256, 259-260, 186 Cal.Rptr. 147.)

In making the determination whether an investment is a security in the form of an "investment contract," California appellate courts have set forth two separate and distinct tests. The first such test is the "risk capital" test articulated in Silver Hills Country Club v. Sobieski, supra, 55 Cal.2d 811, 815, 13 Cal.Rptr. 186, 361 P.2d 906; the second is the federal or "Howey " test formulated by the United States Supreme Court in S.E.C. v. Howey Co. (1946) 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244. Both tests have been applied, either separately or together, by California courts in making the factual determination of whether a particular transaction is a security under section 25019. (See People v. Figueroa, supra, 41 Cal.3d 714, 736-737, and fn. 28, 224 Cal.Rptr. 719, 715 P.2d 680; People v. Coster (1984) 151 Cal.App.3d 1188, 1193-1195, 199 Cal.Rptr. 253; Leyva v. Superior Court, supra, 164 Cal.App.3d 462, 470-471, 210 Cal.Rptr. 545). Accordingly, we too undertake an analysis of the facts before us to determine whether under either test the...