People v. Dempster
| Citation | 396 Mich. 700,242 N.W.2d 381 |
| Decision Date | 03 June 1976 |
| Docket Number | No. 13,13 |
| Parties | The PEOPLE of the State of Michigan, Plaintiff-Appellee, v. Phyllis DEMPSTER, Defendant-Appellant, and Dempster Investment Company, Inc., a Michigan Corporation, Defendant. 396 Mich. 700, 242 N.W.2d 381, Blue Sky L. Rep. P 71,308, 84 A.L.R.3d 562, 19 UCC Rep.Serv. 845 |
| Court | Supreme Court of Michigan |
William L. Cahalan, Pros. Atty., Patricia J. Boyle, Principal Atty., Research, Training & Appeals, James M. Wouczyna, Asst. Pros. Atty., Detroit, for appellee.
Levine & Benjamin, P.C., Edwin S. Bean, Detroit, for defendant-appellant.
Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Harry G. Iwasko, Jr., Marc A. Goldman, Asst. Atty. Gen., Lansing, for Department of Commerce, Corp. and Securities Bureau, amicus curiae.
Defendants were convicted of selling unregistered securities in violation of the Uniform Securities Act, M.C.L.A. § 451.701; M.S.A. § 19.776(301) in a 1971 bench trial in Detroit Recorder's Court, and defendant Phyllis Dempster was sentenced to a term of imprisonment. The convictions were affirmed by the Court of Appeals.
Three issues are presented on appeal in this Court: (1) Whether the securities were exempt as 'commercial paper' from the registration provisions of the statute? (2) Whether the statute impermissibly places the burden of proof on a defendant to prove an exemption? (3) Whether the 'commercial paper' exemption is sufficiently definite to sustain the criminal conviction?
The Uniform Securities Act, 1964 P.A. 265, became effective January 1, 1965 replacing the 40-year-old Michigan Blue Sky Law, 1933 P.A. 205. 1 The act substantially follows the language of the Uniform Securities Act. The Uniform Securities Act carries within itself the statement of its purpose, I.e. to 'make uniform the law of those states which enact it and to coordinate the interpretation and administration of this act with the related federal regulation.' M.C.L.A. § 451.815; M.S.A. § 19.776(415). As a matter of judicial policy the act should be broadly construed to effectuate its purposes. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). 'In essence this legislation * * * is designed to protect the public against fraud and deception in the issuance, sale, exchange, or disposition of securities within the State of Michigan by requiring the registration of certain securities and transactions.' Schmidt & Cavitch, Michigan Corporation Law (1974), p. 1071. Violation of the act's provisions is punishable by fine and imprisonment. M.C.L.A. § 451.809; M.S.A. § 19.776(409).
The Uniform Securities Act exempts certain securities and transactions from its registration provisions. 2 One of the exemptions is for:
'(a)ny negotiable promissory note or commercial paper which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which evidences an obligation to pay cash within 12 months of the date of issuance, exclusive of days of grace, or any renewal of such note or paper which is likewise limited, or any guarantee of such note or paper or of any such renewal.' M.C.L.A. § 451.802(a)(9); M.S.A. § 19.776(402) (a)(9).
Defendants allege that the securities sold by Dempster Investment Company fit within this exemption, and thus need not have been registered.
Mrs. Dempster and Dempster Investment Company sold to the general public shares in an 'open-end trust account'. One of the particular securities involved reads as follows:
'Date December 2, 1969
Renewal of Trust Account
'The Dempster Investment Company (a Michigan Corporation) incorporated February 27th, 1964 to engage and carry on a general brokerage and financial business, including mortgage brokerage and financing thereof--with Main Offices located at 14500 West Eight Mile Road, Oak Park, Michigan and branch offices throughout the State, as of this date, December 2nd, 1969, hereby creates an Open-End Trust Account for Gerald N. Schultz and/or Charlotte A. Schultz with the principal sum of Three Thousand ($3,000.00) Dollars.
'This principal sum ($3,000.00) is invested in the Dempster Investment Company at the rate of four (4%) percent per month interest payable each month on the principal amount owing with final total payment of principal amount ($3,000.00) due February 2nd, 1970.
'In the event Gerald N. Schultz and/or Charlotte A. Schultz should want any part or all of principal sum withdrawn before the final due date--so be it--upon a thirty (30) day written notice.
'DEMPSTER INVESTMENT COMPANY
'By: Phyllis Dempster
Its President'
For the instruments sold by defendants to be exempt under § 402(a)(9) as claimed by them, they must either be negotiable promissory notes or commercial paper. The instruments clearly are not negotiable promissory notes because there are no words of negotiability; appellants do not claim otherwise.
Appellants' major contention is that these instruments are 'commercial paper' within § 402(a)(9). Unfortunately, the Uniform Securities Act does not define commercial paper. Appellants argue that because Article 3 of the Uniform Commercial Code is entitled 'Commercial Paper' instruments satisfying M.C.L.A. § 440.3805; M.S.A. § 19.3805 should be exempt under § 402(a)(9) of the Securities Act. Section 3--805 of the U C C Supra, reads:
'This article applies to any instrument whose terms do not preclude transfer and which is otherwise negotiable within this article but which is not payable to order or to bearer, except that there can be no holder in due course of such an instrument.'
This is the section relied upon by Mrs. Dempster. Professor James J. White of the University of Michigan Law School, an undisputed authority in the field of commercial transactions, was called as an expert witness by the defense at trial. Professor White testified that: 'It would be my opinion that this (instrument) is commercial paper under Article 3'. Professor White described the security involved as 'a horribly drafted non-negotiable note'. Assuming that Professor White's conclusion is accurate, the issue remains as to whether Article 3's concept of commercial paper should be read into the Securities Act. 3
The prosecution called, as their expert, Mr. John Hueni, Director of the Securities Bureau of the Michigan Department of Commerce. Mr. Hueni testified that the instruments involved here were securities, were not exempted, and were required to be registered.
In People v. Hall, 391 Mich. 175, 189--190, 215 N.W.2d 166, 174 (1974), this Court in language particularly appropriate to this issue stated:
The application of the U C C concept of commercial paper is singularly inappropriate in this setting. The U C C is intended to 'simplify, clarify and modernize the law governing commercial transactions.' M.C.L.A. § 440.1102(2) (a); M.S.A. § 19.1102(2)(a). The Uniform Securities Act, however, is intended to prevent an offering to the public of securities without first giving the Securities Bureau an opportunity to investigate the venture and determine whether sound policy justifies permitting the issuer to offer these securities for sale. Schmidt & Cavitch, Michigan Corporation Law (1974), p. 1071.
The broad concept of commercial paper that might be appropriate under the U C C provisions to facilitate commerce is, therefore, at odds with the purpose of the Securities Act to protect against swindles. The Uniform Securities Act was drafted as a means of discouraging swindlers from selecting a particular state in which to operate. With this purpose in mind, we look to the administrative and judicial interpretations of the commercial paper exemption rather than to the U C C. 4
The Uniform Securities Act, § 402, lists the exemptions to registration requirements. Section 402(a)(9) exempts notes to this provision state: 'This exemption is modeled on § 3(a)(3) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(3) * * *'. The Securities Act of 1933 exempts in 3(a)(3), Supra, certain promissory notes with an original maturity date of less than nine months. The original 1933 draft of the Federal Securities Act provided no exemption for short-term notes. The § 3(a)(3) exemptions were then included by amendment because 'it seemed to the (Federal Reserve) Board that the Act was not intended to apply to bankers acceptances or short-time paper issued for the purpose of obtaining funds for current transactions in commerce, industry, or agriculture and purchased by banks and corporations as a means of employing temporarily idle funds'. Comment, The Commercial Paper Market and the Securities Acts, 39 U.Chi.L.Rev. 362, 382 (1972).
Statements made during the hearings of the House Committee on Interstate and Foreign Commerce considering the 1933 act exhibit an understanding that the commercial paper to which the exemption was to be applied:
'was sold only to banks and not to the 'the public'. Such a qualification was expressly included in the amended Senate version of the Act * * *. In the course of Senate debate, the...
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