Risdall v. Brown-Wilbert, Inc., No. A06-1233.

• Decision Date: 31 July 2008
• Docket Number: No. A06-1233.
• Citation: 753 N.W.2d 723
• Parties: Charles RISDALL, et al., Appellants, v. BROWN-WILBERT, INC., et al., Defendants, Christopher C. Brown, et al., Respondents.
• Court: Minnesota Supreme Court

753 N.W.2d 723

Charles RISDALL, et al., Appellants, v. BROWN-WILBERT, INC., et al., Defendants, Christopher C. Brown, et al., Respondents.

No. A06-1233.

Supreme Court of Minnesota.

July 31, 2008.

Peter A. Koller, Moss & Barnett, Scott D. Hillstrom, Guardian Law Group, LLC, Minneapolis, David J. Morrissey, Gonzaga University Law School, Spokane, WA, for Appellant.

Kay N. Hunt, Lommen Abdo, George E. Antrim, III, Minneapolis, for Respondents.

Michele M. Owen, Christopher Michael Kaisershot, Asst. Atty. General, St. Paul, for Amicus Curiae.

Heard, considered, and decided by the court en banc.

OPINION

ANDERSON, G. BARRY, Justice.

Appellants Charles Risdall, Len Dozier, and John Risdall (as personal representative of the estate of Mary Risdall) sued defendant Brown-Wilbert, Inc., and respondents Christopher C. Brown and funeral.com, Inc., seeking damages and rescission of purchases of funeral.com stock. The district court granted appellants' motion for summary judgment. The court of appeals reversed, holding that appellants' state law claims were preempted by federal law. Risdall v. Brown-Wilbert, Inc., 733 N.W.2d 827, 832, 834 (Minn.App.2007). We reverse the decision of the court of appeals and remand for further proceedings.

Respondent funeral.com was incorporated in the fall of 1999 for the purpose of developing a comprehensive funeral website. The company's chief executive officer, respondent Christopher Brown, also served as president of defendant Brown-Wilbert, Inc., a family-owned, closely-held company that manufactures and sells concrete burial vaults and cremation products. On March 2, 2000, funeral.com issued a private placement memorandum (PPM1) for the sale of funeral.com stock. In March and April of 2000, Charles Risdall, Len Dozier, and Mary Risdall purchased shares of funeral.com stock in the amounts of $70,000, $100,000, and $50,000, respectively. PPM1 disclosed that the shares were not registered and were offered pursuant to the registration exemption for sales of stock to "accredited investors" as defined in Regulation D, 17 C.F.R. §§ 230.501-.508 (2007), a regulation promulgated by the Securities and Exchange Commission (SEC) under the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77a-77aa (2000). Charles Risdall, Len Dozier, and Mary Risdall acknowledged in their subscription agreements that they had been advised that the shares had not been registered and were offered pursuant to exemptions from registration. The parties agree that the stock was offered under the registration exemption found in Rule 506 of Regulation D, 17 C.F.R. § 230.506.

On May 17, 2000, funeral.com issued a second private placement memorandum (PPM2) for the sale of funeral.com stock. Information concerning PPM2 was posted on the Internet, circulated via e-mail, and mailed to potential investors, despite the fact that offers and sales are disqualified from the Rule 506 registration exemption if the issuer or a person acting on its behalf "offer[s] or sell[s] the securities by any form of general solicitation or general advertising," 17 C.F.R. 230.502(c); see 17 C.F.R. 230.506(b)(1) (providing that offers and sales must satisfy all the terms and conditions of 230.501 and 230.502 to qualify for the Rule 506 registration exemption). In an affidavit filed with the district court, Christopher Brown stated that no sales were made under PPM2. Funeral.com issued a third private placement memorandum on July 20, 2000, and, according to Brown, funeral.com subsequently "quit trying to raise money."

In a letter dated August 3, 2000, the SEC notified funeral.com that it had learned that the company or affiliated persons were "offering securities to potential investors without registering the offers under the federal securities laws" and that the SEC was "not aware of any exemption applicable to [these] offerings." The SEC directed funeral.com either to cease sending e-mails regarding the offering and remove the offering from the Internet or to provide the SEC a written response demonstrating the company's compliance with the Securities Act. Counsel for funeral.com informed the SEC that although information regarding a private placement offering had been circulated via e-mail and posted on the Internet, the company had removed the information from the Internet and no one who had contacted the company in connection with the online postings had actually purchased shares of funeral.com stock. According to funeral.com's counsel, the company would not accept subscriptions from investors who had requested a copy of the private placement memorandum through the online postings and would "make every effort to ensure that its offering efforts remain limited and focused and that investors are not sought or identified through any form of general solicitation."

Appellants Charles Risdall, Len Dozier, and John Risdall (as personal representative of the estate of Mary Risdall) brought an action against defendant Brown-Wilbert and respondents Christopher Brown and funeral.com in Ramsey County District Court in 2003, alleging consumer fraud, negligence, common law fraud, securities fraud, and unjust enrichment, and seeking rescission of the stock purchases. Appellants and respondents moved for summary judgment. Appellants argued, in part, that they were entitled to rescind the stock purchases under Minn.Stat. § 80A.23, subd. 1 (2006), because respondents sold unregistered securities in violation of Minn.Stat. § 80A.08 (2006). According to appellants, the stock offering did not qualify for the Minn.Stat. § 80A.15, subd. 2(h) (2006), exemption from registration because respondents violated a condition of the exemption by engaging in general solicitation and advertising.

The district court granted appellants' motion for summary judgment against respondents Christopher Brown and funeral.com and ordered that appellants be repaid the amounts of the stock purchases plus interest and attorney fees. The court concluded that (1) federal law did not preempt appellants' claim, (2) the sales under PPM1 and the offers under PPM2 were integrated into a single offering, and (3) respondents' solicitations in connection with PPM2 disqualified the sales under PPM1 from any registration exemption. The court denied appellants' motion for summary judgment against defendant Brown-Wilbert and respondents' motion for summary judgment. At appellants' request, the court subsequently dismissed with prejudice all of appellants' remaining claims against respondents and defendant Brown-Wilbert. The court entered final judgment in appellants' favor on May 31, 2006, and respondents appealed.

The court of appeals reversed the district court's grant of summary judgment to appellants. Risdall, 733 N.W.2d at 832, 834. Noting that funeral.com intended for PPM1 to be exempt from registration under Regulation D, the court concluded "that an offering purporting to be exempt under Regulation D is governed exclusively by federal law, and any claim under state law relating to the offering is therefore preempted." Id. at 832. In dicta, the court explained that even if it were to "conclude that an offering must actually comply with Regulation D for federal law to preempt state-law claims relating to the offering," it "would nonetheless reverse the district court's grant of summary judgment * * * because * * * funeral.com complied with Regulation D in its sale of securities to [appellants]." Id. at 832-33. According to the court, PPM1 and PPM2 were not integrated into a single offering because it was undisputed that "no sales were made under PPM2" and "an offering under which no sales are made cannot be integrated with another offering under Regulation D." Id. at 833. Finally, the court also stated in dicta that even if appellants' claims were not preempted by federal law, the sales of securities were exempt from Minnesota's registration requirement under Minn.Stat. § 80A.15, subd. 2(h). Id. at 834. We granted appellants' petition for review.

Appellants argue that they are entitled to rescission of their purchases of funeral.com stock under Minn.Stat. § 80A.23, subd. 1, which states that "[a]ny person who sells a security in violation of section[] 80A.08 * * * is liable to the person purchasing the security, who may sue either in equity for rescission upon tender of the security or at law for damages if that person no longer owns the security."¹ Minnesota Statutes § 80A.08 prohibited the offer or sale of unregistered securities in Minnesota unless "the security or transaction is exempted under section 80A.15 or * * * it is a federal covered security." The outcome of this case turns on our resolution of the following two issues: (1) whether federal law preempts state registration requirements with respect to securities that purport to be, but are not in fact, federal covered securities; and (2) whether a securities offer must result in a sale in order to be integrated under Minn. Stat. § 80A.15, subd. 2(h)(10), and Rule 502 of Regulation D, 17 C.F.R. § 230.502.

I.

The threshold issue in this case is whether federal law preempts state registration requirements with respect to securities that purport to be, but are not in fact, federal covered securities, because if we resolve that issue affirmatively, then appellants' claims are preempted and we must affirm the decision of the court of appeals. In determining whether a state statute is preempted by federal law, the "sole task is to ascertain the intent of Congress." Cal. Fed. Sav. & Loan Ass'n v. Guerra, 479 U.S. 272, 280, 107 S.Ct. 683, 93 L.Ed.2d 613 (1987). "The clearest indication of such Congressional intent is express language; if Congress expressly preempts state action, the matter is settled." Dahl v. Charles Schwab & Co., 545 N.W.2d 918, 922 (Minn.1996).

A.

The Supremacy Clause of the United States Constitution provides that the "Constitution, and the Laws of the United States * * * made in Pursuance thereof * *...