People v. Kline

• Decision Date: 12 September 1980
• Docket Number: Cr. 19803
• Citation: 168 Cal.Rptr. 185,110 Cal.App.3d 587
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 71,597 The PEOPLE, Plaintiff and Respondent, v. Donald Gene KLINE, Defendant and Appellant.

Page 185

168 Cal.Rptr. 185

110 Cal.App.3d 587, Blue Sky L. Rep. P 71,597

The PEOPLE, Plaintiff and Respondent, v. Donald Gene KLINE, Defendant and Appellant.

Cr. 19803.

Court of Appeal, First District, Division 4, California.

Sept. 12, 1980.

Hearing Denied Nov. 5, 1980.

William D. Farber, San Rafael, (By Court Appointment), for defendant and appellant.

George Deukmejian, Atty. Gen. of the State of California, Robert H. Philibosian, Chief Asst. Atty. Gen., Edward P. O'Brien, Asst. Atty. Gen., William D. Stein, Stan M. Helfman, Deputy Attys. Gen., San Francisco, for plaintiff and respondent.

KOFORD, ^* Associate Justice.

Appellant Donald Gene Kline was charged by information with two counts of unlawful offer and sale of securities (Corp.Code, § 25110) and one count of unlawful offer and sale of a franchise (Corp.Code, § 31110). Kline pleaded not guilty to all counts and moved to dismiss the information (Pen.Code, § 995); the motion was granted as to one count of unlawful offer and sale of securities, and was otherwise denied.

At a nonjury trial appellant moved for judgment of acquittal (Pen.Code, § 1118) which was denied. The court found appellant guilty of both remaining counts and pronounced sentence reducing the offenses to misdemeanors. This appeal followed.

The two contentions on appeal are that appellant did not sell a "franchise" within the statutory definition, and that he should not have been convicted of an unlawful offer and sale of securities because he did not receive value for his offer to give securities. The facts can be summarized as follows:

In mid-1977 appellant formulated plans to establish a fast food chain which would sell hot dogs from portable kiosks under the name "Aunt Hilda's Pennsylvania Dutch Steamed Franks." He incorporated a company for this purpose, designated as National Food Service Marketing, Inc. The corporation was not registered to sell securities.

1. As to the unlawful offer and sale of securities

On September 14, 1977, an acquaintance, Christian de Nes, loaned appellant $2,000 to help start the business and an additional $7,000 on October 3, 1977. Appellant offered to give de Nes 100,000 shares of stock in National Food Service Marketing, Inc., if de Nes would build a prototype Aunt Hilda's kiosk, to which de Nes agreed.

Subsequently de Nes told appellant that he wanted to be given 1,000,000 shares in the corporation, in place of 100,000 shares. Appellant offered 500,000 shares, and handwrote and signed an agreement, dated October 10, 1977, stating that he would give de Nes 500,000 shares of stock "when Mr. de Nes has provided the wherewithal and labor to construct and completely finish building the prototype kiosk for 'Aunt Hilda's Penn. Dutch Steamed Franks.' " Appellant was found guilty of violating Corporations Code section 25110 as to this transaction.

2. As to the unlawful offer and sale of a franchise

In June 1977, appellant had begun regularly to patronize a restaurant in Tiburon, where he met James Shaul and Caroline Mushet with whom he discussed his plans for the Aunt Hilda's Pennsylvania Dutch Steamed Franks enterprise. He told Mushet that he intended to build many kiosks for the enterprise, and showed her blueprints for the kiosks.

In November 1977, Shaul told Mushet that appellant "was offering a very good price for his franchises," and suggested that they become involved in the enterprise as partners, with Shaul as manager and Mushet as investor. On November 21, 1977, Shaul, Mushet, and appellant met at Shaul's apartment to discuss the enterprise. Appellant told Mushet that he was offering a franchise for $25,000 on a very short term basis, which he would soon sell for $40,000 and later would sell for $80,000. Shaul told Mushet that "it was a turn key operation." Mushet understood this to mean that "it was everything complete, ready to go, absolutely supplied and sustained and everything else." She was also told that the menu for the business "would be handled by an expert." She was given a "pro forma" outlining projected sales, operating expenses, payroll expenses, and profits for "Aunt Hilda's Pennsylvania Dutch Steamed Franks," and appellant handed Mushet a newspaper article about franchises and said that he was proposing a similar operation. She testified that, "as I understood it, he was going to have many many franchises. He was going to have a lot of Aunt Hilda's barns all over the place."

Mushet was not given specific details as to a marketing plan or system; both appellant and Shaul, however, told her that "everything would be supplied and managed and promoted by National Food Service Marketing." She understood that the day-to-day operation of the business was to be conducted by National Food Service Marketing, Inc., that there would be an ongoing relationship between appellant's corporation and her proposed partnership with Shaul, and that appellant was in complete control of the operation.

That very evening Mushet decided to enter into the proposed investment. Mushet and Shaul signed a handwritten "partnership agreement" drafted by appellant, in which Mushet agreed to invest $50,000 in the partnership for the purchase of at least two "Aunt Hilda's Kiosks' Business Opportunities." They also signed as partners a "purchase agreement," also handwritten and drafted by appellant, to purchase two "Aunt Hilda's Kiosks' Business Opportunities" for $25,000 each from National Food Service Marketing, Inc.

Mushet gave appellant $50,000 in two installments (appellant later demanded more money from her, and on two occasions she loaned him funds totaling $15,000). Appellant was found guilty of violating Corporations Code section 31110 by the unlawful offer and sale of an unregistered franchise to Caroline Mushet.

A. Did appellant sell or offer to sell an unregistered "franchise" within the meaning of Corporations Code section 31005 and 31110?

Appellant contends that the court erred when it denied motions to set aside the count for offer and sale of an unregistered franchise (per Pen.Code, § 995 ¹) and for acquittal on that count at trial, because appellant did not sell or offer to sell a "franchise" as defined by Corporations Code section 31005. Corporations Code section 31110 provides that it is unlawful "to offer or sell any franchise in this state unless the offer of the franchise has been registered . . . or exempted . . . ." Corporations Code section 31005 defines "franchise" in pertinent part as follows:

" "Franchise" means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

"(a) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and

"(b) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

"(c) The franchisee is required to pay, directly or indirectly, a franchise fee."

Appellant argues that the two "business opportunities" sold to the partnership formed by Shaul and Mushet did not as a matter of law constitute a franchise within the meaning of Corporations Code section 31005, subdivision (a), because there was no "marketing plan or system" and even so, it was not "prescribed in substantial part by a franchisor." ² The evidence which satisfied the trial court that whatever appellant was selling constituted a franchise was, says appellant, as a matter of law insufficient to meet the statutory definition. He argues that California has a more limited definition of "franchise" than other states with franchise registration laws, citing various articles on the subject, the "Guidelines for Determining Whether an Agreement constitutes a Franchise" issued by the Commissioner of Corporations (Released 3-F, Revised, Feb. 21, 1974) and opinions of the Corporations Commissioner holding that various agreements submitted for registration did not constitute registerable franchises.

The "Guidelines," of course, are not exclusive and although the interpretation of a statute by the officials charged with its administration is entitled to great weight (City and County of San Francisco v. State of California (1978) 87 Cal.App.3d 959, 967, 151 Cal.Rptr. 469), the final say on the meaning of a statute rests with the courts (State Compensation Ins. Fund v. Workers' Comp. Appeals Bd. (1979) 88 Cal.App.3d 43, 53-54, 152 Cal.Rptr. 108). We should ascertain the intent of the Legislature so as to effectuate the purpose of the law (Tripp v. Swoap (1976) 17 Cal.3d 671, 131 Cal.Rptr. 789, 552 P.2d 749) and construe the statute with reference to the whole system of law of which it is a part (People v. Weltsch (1978) 84 Cal.App.3d 959, 149 Cal.Rptr. 112).

Corporations Code section 31001 sets forth the legislative intent:

"It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship."

So long as there is a prescribed marketing plan or system in the agreement, one of the definitional elements of a registerable franchise is present. The "Guidelines" of the Commissioner of Corporations state:

"If the franchisor in his advertising to prospective franchisees claims to have available a successful marketing plan, the element of a marketing plan presumably will be present "

The contract or agreement which...