State, Dept. of Finance v. Resource Service Co., Inc., 22211

CourtUnited States State Supreme Court of Idaho
Citation950 P.2d 249,130 Idaho 877
Docket NumberNo. 22211,22211
PartiesSTATE of Idaho, DEPARTMENT OF FINANCE, Plaintiff-Respondent, v. RESOURCE SERVICE CO., INC., a Wisconsin Corporation, Fred L. Engle, and their agents and representatives, Defendants-Appellants. Boise, December 1996 Term
Decision Date02 September 1997

Ormiston, Korfanta, Dunbar & Holland, Steven R. Ormiston; Eberle, Berlin, Kading, Turnbow & McKlveen, Chtd., Richard A. Riley, Boise, for Defendants-Appellants.

Alan G. Lance, Attorney General; Michael J. McDonagh, Deputy Attorney General, Boise, for Plaintiff-Respondent.

SCHROEDER, Justice.

Resource Service Co., Inc. (RSC) appeals from an order of the district court granting summary judgment in favor of the Idaho Department of Finance (Department) based upon a determination that RSC was marketing a security in violation of various provisions of the Idaho Securities Act (Act). I.C. §§ 30-1401 to 30-1458.

RSC solicited a $40.00 fee from customers to enter their names in a Bureau of Land Management (BLM) lottery for gas and oil leases. A portion of the payment was profit to RSC for preparing and filing customer applications in the lottery, and a portion was combined with like payments from nineteen (19) other customers and applied to the payment of a $75.00 filing fee and advance lease payment on government-owned lands. The program was marketed as having the potential for obtaining valuable oil and gas reserves. The district court determined that RSC was marketing an "investment contract" constituting a security and granted summary judgment to the Department on various claims.

I. BACKGROUND

RSC is a Wisconsin based business that provides services related to the application for noncompetitive oil and gas lease drawings. The U.S. Department of the Interior, through the BLM, is responsible for leasing oil and gas exploration and development rights. 43 C.F.R. § 3100. The BLM issues two types of leases--competitive and non-competitive. Parcels of land are offered for lease at auctions for competitive bids. If a parcel fails to receive an adequate bid, a noncompetitive lease may be issued on that parcel. Offers for noncompetitive leases are for eighty (80) acre tracts and must be submitted on a BLM-approved form. A $75.00 filing fee, plus the first year's advance rent of $1.50 per acre, must accompany the application. Priority among offers received on noncompetitive leases is on a first-come, first-serve basis. Priority on offers received the same day is determined by random drawing. A successful applicant acquires the right to explore, drill, extract and dispose of oil and gas deposits found on that parcel.

RSC groups customers together, files an application on their behalf, and provides customers with information regarding the filings including parcel and lease numbers, legal descriptions, and filing status. To promote its services RSC mailed Idaho residents unsolicited correspondences. In the summer of 1990, Gloria Holt (Holt) received correspondence from RSC containing its promotional materials.

Holt is typical of a prospective RSC client who first received a letter encouraging him or her to purchase RSC's services because, "[a]s a participant, you may have the good fortune of being rewarded beyond your wildest dreams for the successful exploration of oil and/or gas on the land that you acquire an interest in." The letter encouraged a quick response because "potentially attractive lands are limited and ALL applications are handled on a first-come, first-service basis." Three enclosures were included with the initial solicitation letter. The first enclosure provided information on the BLM leasing The confirmation letter indicated that participants would have no other financial obligation except a requirement to pay "a like amount of $40.00 each year until the oil and gas lease rights you acquire an interest in are sold to an oil company." The letter also provided that should the participants wish to discontinue participation in the program they could do so prior to any future anniversary date without further obligation.

program in Wyoming and also information on RSC. The second enclosure, captioned "Actual Cash paid to RSC Clients for Federal Oil & Gas Lease Rights Sold to Giants of the Oil Industry ...," provided a list of cash royalties paid to more than one hundred RSC clients. The last enclosure was a photocopy of an actual oil production and royalty income check for $10,494.00 made payable to RSC. Recipients of RSC's initial promotional material were informed that they could receive RSC's services by paying a $40.00 fee and signing a Service Agreement. The Service Agreement was not included in the initial materials but was sent only after the prospective customer remitted $40.00. After applicants paid $40.00 to RSC, they received a confirmation letter and the Service Agreement.

The Service Agreement explains that the BLM allows lease offers to be filed in the name of only one individual and that RSC combines offerees into groups of twenty (20) members with one individual designated as the "Primary Applicant." The Primary Applicant must acknowledge that the other nineteen (19) members of the group are entitled to equal 1/20th interests in any lease rights obtained. The Service Agreement disclaims any guarantee that a lease will be acquired or that any successful lease application will result in profit to the customer. The Service Agreement reads further: "The obtaining of a lease and any potential value thereof are speculative matters of chance and risk."

After sending in $40.00 and signing the Service Agreement, RSC customers received three chances at a 1/20th interest in an eighty (80) acre noncompetitive lease. If the first application was not successful, RSC automatically submitted a second application, and if the second application was not successful, RSC submitted a third. RSC customers were also sent additional opportunities to participate in "optional additional programs" involving larger interests in leases. If a customer acquired an interest in a lease, he or she was free to dispose or develop the interest in any manner he or she deemed appropriate.

II. PRIOR PROCEEDINGS

On April 30, 1991, the Department filed a complaint against RSC and its president, Fred Engle (Engle), alleging violations of the Act. Although Holt received a full refund from RSC and is not a party in this case, her experiences with RSC's program prompted the Department to initiate this suit. The parties filed cross motions for partial summary judgment on the issue of whether RSC's program constituted a "security." RSC's motion for partial summary judgment was denied and the Department's motion was granted. Summary judgment was later granted in favor of the Department.

In its Memorandum Decision granting summary judgment, the district court determined that RSC had violated I.C. § 30-1406, related to the sale of securities in the state by unregistered broker-dealers, and I.C. § 30-1416, related to the sale of unregistered securities in the state, and I.C. § 30-1403(2) and (3) which contains the anti-fraud provisions of the Act. The district court concluded that a question of material fact remained as to whether RSC had violated I.C. § 30-1438, related to making misleading statements in connection with an investigation for violations of the Act. The Department later moved to dismiss this part of its claim and the parties stipulated to a $5,000 civil penalty to be imposed against RSC and Engle for violations of the Act. The district court permanently enjoined the defendants from offering or selling non-exempt securities, or employing broker-dealers to do so, or making any untrue statements or engaging in conduct operating as a fraud in the sale of a security, or selling exempt securities in the state without written notice to the Department.

The district court also ordered RSC to pay refunds to each person within the state from whom they had obtained money.

The district court denied RSC's motion for reconsideration in which RSC argued that application of the term "investment contracts" as to its program is unconstitutionally vague. RSC appeals this determination and the court's determination that its program constitutes the sale of securities. Engle appeals the court's determination that he is personally liable pursuant to I.C. § 30-1442(3) for any violations of the Act by RSC.

III. STANDARD OF REVIEW

On appeal from an order granting summary judgment this Court's standard of review is the same as that properly employed below. Friel v. Boise City Hous. Auth., 126 Idaho 484, 485, 887 P.2d 29, 30 (1994). Summary judgment is proper if the "pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." I.R.C.P. 56(c).

The question of whether a transaction constitutes a "security" has been interpreted both as a question of fact, In re Longhorn Sec. Litigation, 573 F.Supp. 255, 266 (W.D.Okla.1983) (citing Crowley v. Montgomery Ward and Co., 570 F.2d 875, 877 (10th Cir.1975)); see Dumbarton Condominium Ass'n v. 3120 R St. Assoc. Ltd. Partnership, 657 F.Supp. 226, 229 (D.D.C.1987), and a question of law, Sheets v. Dziabis, 738 F.Supp. 307, 308 n. 1 (N.D.Ind.1990); Wright v. Schock, 571 F.Supp. 642, 653 (N.D.Cal.1983) (citing United States v. Carman, 577 F.2d 556, 562 (9th Cir.1978)); Ahrens v. American-Canadian Beaver Co., 428 F.2d 926 (10th Cir.1970). See 3 BLOOMENTHAL, SECURITIES AND FEDERAL CORPORATE LAW, § 2.04 (1991). This Court agrees with those jurisdictions holding that, although characterization of a transaction raises questions of both law and fact, the ultimate issue of whether a particular set of facts constitutes an investment contract is a question of law. Carman, 577 F.2d at 562. This Court reviews questions of law de...

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