People v. Kings Point Corp.

• Decision Date: 31 December 1986
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE of the State of California, Plaintiff and Respondent, v. KINGS POINT CORPORATION, et al., Defendants and Appellants. B 009 903.

Page 227

233 Cal.Rptr. 227

188 Cal.App.3d 544

The PEOPLE of the State of California, Plaintiff and Respondent, v. KINGS POINT CORPORATION, et al., Defendants and Appellants.

B 009 903.

Court of Appeal, Second District, Division 3, California.

Dec. 31, 1986.

[188 Cal.App.3d 545] John Patrick Kelly, for defendant and appellant Kings Point corp.

John K. Van de Kamp, Atty. Gen., Arthur C. de Goede, Asst. Atty. Gen., Jack T. King and Joseph M. O'Heron, Deputy Attys. Gen., for plaintiff and appellee.

KENNARD, Associate Justice. ^*

Defendant Kings Point Corporation appeals from a judgment in favor of plaintiff, the People of the State of California. Because defendant has no standing to appeal, the appeal is dismissed.

FACTUAL AND PROCEDURAL BACKGROUND

In 1977, defendants offered and subleased 1401 coal-mining properties in conjunction with a contract for the sale of coal. ¹ Defendants conducted these activities from headquarters in Los Angeles, California. The investor could invest with either defendant Cambridge Corporation (hereafter Cambridge) or with Wyoming and Western Coal Reserves, Inc. (hereafter Wyoming and Western).

Under the Cambridge program, Cambridge would sublease to the investor a coal-mining property warranted to have certain net tonnage of economically recoverable coal, for which the investor had to pay Cambridge a minimum annual royalty. The royalty was a multiple of the investor's initial cash payment, with the multiple being 3.25 times the amount of the cash investment. It was represented to the investor that the royalty payment was tax deductible. The investor would also enter into a sales contract with defendant Poly-Tex International (hereafter Poly-Tex). Under this contract, Poly-Tex agreed to buy 32.5 percent of the coal "in place" (still in the ground) at the premises subleased from Cambridge. The terms of the contract created a "carved out production payment," requiring Poly-Tex to pay the investor/lessee an initial payment towards the price at which Poly-Tex would buy the coal, with the balance to be paid from coal sold or mined, removed and marketed. Payment to the investor was made by check, which, together with the cash sum invested by the investor for the coal-mining lease, constituted the advance minimum royalty payment due under the lease agreement. After the investor's endorsement of the check in favor of Cambridge, defendants would negotiate the check under an "Authorization to Negotiate" signed by the investor.

Under the Wyoming and Western programs, the investor would enter into (1) a coal-mining sublease with Wyoming and Western and (2) a sales agreement with Coal and Minerals Leasing and Development Corporation (hereafter Coal and Minerals), whereby the latter would buy from the investor 20 to 30 percent of the coal in place in the premises leased from Wyoming and Western. Like the Cambridge plan, the investor would be paid by check, which he would endorse in favor of Wyoming and Western, after which the check would be negotiated by defendants. Under the Wyoming and Western programs, the investor had to execute a nonrecourse note.

The cash received from the investors and the money created solely through bookkeeping entries were circulated among the corporate defendants through bookkeeping advances from one corporate defendant to another. The bulk of the cash received from the investors was ultimately disbursed to defendant Kings Point Corporation. The money created through bookkeeping entries was unsecured by cash or collateral, thus existing only as bookkeeping entries.

On December 21, 1977, the state filed an action against defendants in the superior court for an injunction, receivership, restitution, and civil penalties. The same day, the court issued a temporary restraining order enjoining further sales under the Cambridge and Wyoming and Western programs.

In an amended complaint filed in May 1978, the state named the corporate and individual defendants previously sued as Does 1 through 8. Among the defendants named was Kings Point Corporation. The state alleged that Kings Point Corporation "and others" had offered and sold non-exempt securities in violation of the state Corporate Securities Law. The complaint also alleged that the offering or sale was based on misrepresentations or material omissions in that defendants possessed no interest in the properties subleased to investors in the months of June through September 1977, when defendants collected over $3,900,000 from investors. Also, most of the subleased properties contained no economically recoverable coal, as had been warranted. The complaint further alleged that defendants had engaged in unfair competition.

In June 1978, Kings Point Corporation, severing itself from its codefendants, filed an answer. In December 1982, before trial, defendant Kings Point Corporation filed for bankruptcy in the federal court under Chapter XI of the Bankruptcy Code. The bankruptcy court appointed a trustee. Based on a motion filed by the state, the bankruptcy court ordered the proceedings brought by the state against Cambridge Corporation, et al. exempted from the automatic stay provisions of 11 U.S.C. § 362(a) and ruled that the action not be enjoined from proceeding under 11 U.S.C. § 105(a).

The parties, including defendant Kings Point Corporation, agreed to bifurcate the superior court trial proceedings, with the securities issues being tried first and the civil penalty issues tried thereafter. Trial on the securities issues commenced on September 12, 1983. In its interlocutory judgment, the superior court found that defendants had engaged in the sale of securities without a permit, in violation of the state Corporate Securities Law. The defendants held liable were Joseph Laird, Jr., Cambridge Corporation, Poly-Tex, Wyoming and Western, Coal and Minerals leasing, Turinco, Kings Point Corporation, and Legal Mortgage Corporation. The court found the remaining defendants to be neither issuers nor aiders and abettors.

In January 1984, the state and the bankruptcy trustee, acting on behalf of Kings Point Corporation, stipulated to certain facts on the issue of civil penalties for fraud, misrepresentation and material omission in the sale of nonexempt unqualified securities. On February 24, 1984, the bankruptcy court approved the trustee's application to compromise the controversy. That same date, based on the stipulation of facts entered into earlier, the state and defendants, including the bankruptcy trustee for Kings Point Corporation, stipulated to a judgment for civil penalties in the sum of $500,000. Thereafter, the superior court entered judgment and a permanent injunction against Kings Point Corporation, among others.

Kings Point Corporation appeals, claiming the sale of the coal subleases was not a sale or offer of securities and therefore not subject to the state Corporate Securities Law. Respondent state contends Kings Point Corporation has no standing to appeal, and therefore the appeal should be dismissed. At oral argument, we asked both parties to submit supplemental briefs on the issue of standing, and they have done so.

DISCUSSION

The threshold issue is whether Kings Point Corporation has standing to bring this appeal. We conclude it does not....