State ex rel. Owens v. Colby, 53596

• Decision Date: 11 June 1982
• Docket Number: No. 53596,53596
• Citation: 646 P.2d 1071,231 Kan. 498
• Parties: , Blue Sky L. Rep. P 71,757 STATE of Kansas, ex rel., Clark V. OWENS, District Attorney of Sedgwick County, Appellant, v. Morton COLBY and Big 3 Auto Products, Inc., Appellees.
• Court: Kansas Supreme Court

Page 1071

646 P.2d 1071

231 Kan. 498, Blue Sky L. Rep. P 71,757

STATE of Kansas, ex rel., Clark V. OWENS, District Attorney of Sedgwick County, Appellant, v. Morton COLBY and Big 3 Auto Products, Inc., Appellees.

No. 53596.

Supreme Court of Kansas.

June 11, 1982.

Syllabus by the Court

1. The purpose of the Kansas Securities Act is to place the traffic of promoting and dealing in speculative securities under rigid governmental regulation and control to protect investors, thereby preventing, so far as possible, the sale of fraudulent and worthless speculative securities.

2. Speculative securities include those, the value of which materially depends upon proposed or promised future promotion or development, rather than on present tangible assets or conditions.

3. Under the Kansas Securities Act, K.S.A. 17-1252(j ), the definition of a "security" includes the term "investment contract."

4. To determine whether a particular financial relationship constitutes an "investment contract" within the meaning of K.S.A. 17-1252(j ), the test to be applied is whether the contractual arrangement involves an investment of money in a common enterprise with profits to come from the efforts of others. This test is to be applied in light of the economic realities of the particular contractual arrangement, rather than accepting the terminology employed by the parties in the investment contract.

5. The record on appeal from an order dismissing criminal charges under the Kansas Securities Act is examined and it is held, the agreement to sell and purchase mini warehouses and automobile repair and E. Dwight Taylor, Deputy Dist. Atty., argued the cause, and Robert T. Stephan, Atty. Gen., Clark V. Owens, Dist. Atty., and Mark A. Vining, Asst. Dist. Atty., were with him on the brief for appellant.

tune-up parts as set forth in the opinion did not constitute an "investment contract" controlled by the Kansas Securities Act.

Joseph O. Giaimo, of Giaimo & Vreeburg, Forest Hills, N. Y., and Jim Lawing, Wichita, argued the cause and were on the brief for appellees.

FROMME, Justice:

The State appeals from the dismissal of charges following a preliminary hearing. K.S.A. 22-3602(b )(1). The defendants, Big 3 Auto Products, Inc., its president, Morton Colby, and two sales representatives were charged with three violations of the Kansas Securities Act. These charges were for selling securities without prior registration (K.S.A. 17-1255), failing to register as brokers (K.S.A. 17-1254), and making untrue statements of material fact (K.S.A. 17-1253). The lower court dismissed these charges after finding the agreement to sell and purchase mini warehouses and automobile repair and tune-up parts did not constitute an "investment contract" controlled by the provisions of the Kansas Securities Act.

We are confronted with a single issue. Did the agreement used by the defendants constitute an "investment contract" controlled by the Kansas Securities Act?

The contract in question provided:

"This agreement made and entered into this day of 19, by and between Big 3 Auto Products, Inc., hereinafter designated as 'Big 3' and

NAME WWW

ADDRESS PHONE NUMBER

CITY STATE ZIP CODE

hereinafter designated as the 'Distributor', upon the following terms and conditions:

"1. Big 3 agrees to supply the above named Distributor with the following items:

A. Uni-Sets, Point Sets, Condensers, Rotors, Distributor Caps, Spark Plug Wire sets, Spark Plugs, PCV Valves, Gas Filters, Air Breather Elements, Modules, Coils, Air Filters, 10 Mini Warehouses.

"2. Big 3 acknowledges receipt of.$1000.00 representing payment only to the locator who, solely at Distributor's request obtains 10 Service Station and/or Repair Shop accounts at $100.00 per account, approved as to sales volume and location by the distributor in writing, in the following non-exclusive area:

"3. (Here was set forth numbers and description of various repair and tune-up parts which the distributor was to receive from Big 3 listing the cost for such items and totaling $5,766.57.)

C. Amount due upon acceptance by Big 3

$10,131.67

Payments to be by Certified check or Cashiers check made payable only to Big 3 Auto Products, Inc.

D. The balance due for delivery of items in paragraph 3 'B' shall be at the then current wholesale price, less the deposits. In the event that the Distributor decides not to order delivery of the aforementioned items, Distributor shall not be liable for any balance due in excess of prepaid deposits.

E. All shipments shall be made at F.O.B. nearest Big 3 Distribution center.

"4. Distributor is engaged in an independent business and is solely responsible for his own employees, taxes, insurance, and the acts and omissions, of his agents and employees. As such, Distributor is not and shall not represent that it is an agent for Big 3, AC Delco, or Motorcraft; nor use the name Big 3, AC Delco or Motorcraft, AC Delco's or Motorcraft's trademarks and/or designs and markings in advertising, catalogs, promotional literature or other material without the prior written consent of Big 3, AC Delco, or Motorcraft, as the case may be.

"5. Distributor is not required to pay any fee to Big 3, as Big 3 does not sell or grant any rights to engage in a business but hereby sells only automotive parts to Distributor at the total sum set forth in Paragraph '3'. Distributor is free to engage in any other business and sell any other products and is not required to operate his business under any marketing plan or system prescribed by Big 3.

"6. Any dispute, controversy or claim arising out of or relating to this agreement or the breach thereof, shall be settled by the American Arbitration Association, 140 W. 51st Street, New York, N. Y. 10020.

"7. This agreement shall be effective only upon written acceptance by an Officer of Big 3 and is for an initial period of one year commencing from the delivery of merchandise at locations and shall remain in effect each year thereafter unless terminated by the Distributor.

"8. This agreement comprising of 2 pages is complete within itself and may be changed only in writing signed by the Distributor and an Officer of Big 3. The Distributor has read and understands the contents of this agreement and agrees that there are no warranties, representation, guarantees of profits or sales volume, grants of exclusive territories, promises or statements, expressed or implied, in connection therewith other than stated in writing herein. Big 3 makes no earning claims. Big 3 will not and does not represent that it will provide any service or assistance other than specified in this agreement. This agreement is made in and shall be interpreted according to the laws of the State of Florida and shall be binding upon Big 3 and shall go into effect only when signed by an Officer of Big 3."

The foregoing agreement was signed at the end by the distributor, and an acceptance was noted by affixing the signature of an officer of Big 3.

There was a second agreement denominated "Repurchase Agreement" available to those who were to become distributors. We need not set forth that agreement. Suffice it to say, under this agreement, if the distributor desired to terminate the distribution agreement at the end of the initial period Big 3 agreed to buy back the inventory then on hand at original purchase prices.

After the preliminary hearing in these criminal cases, the trial court made the following findings on which it based dismissal:

"1. Big 3 Auto Products, Inc., referred to herein as Big 3, is an auto parts wholesaler in Florida and Morton Colby is its President.

"2. On or about January 29, 1981, Wayne Brock, Wichita, entered into a contract (State's Exhibit 4) with Big 3 to purchase from it various auto parts for distribution at various locations in and around Wichita, Kansas, the nature and extent of this contract is evidenced by State's Exhibits 1 through 6, inclusive.

"3. At the time Mr. Brock signed the contract, he intended to make a profit between what he paid Big 3 for the parts and what he charged to the independent garages and auto repair shops where 'mini-warehouses' had been placed by an independent contractor, called a 'locator,' who Big 3 had procured at the request of Mr. Brock.

"4. Under the contract Mr. Brock signed with Big 3, he paid $1,000.00 for the locator's services. He relied on the judgment of the locator, who placed ten mini-warehouses in locations which the locator recommended, but he had the right to install mini-warehouses wherever he desired and to remove any warehouses from the places the locator had recommended.

"5. Neither Morton Colby nor Big 3 ever registered to sell securities in the State of Kansas.

"6. Mr. Brock did not have any expertise as an auto parts jobber, although he had bought and sold new and used cars with a local auto dealer.

"7. To carry out the intent of the contract, Mr. Brock would have had to make a material effort toward the project if he were to realize a profit.

"8. Defendant Big 3 furnished Mr. Brock a suggested price list showing what he would pay Big 3 and indicating prices that he in turn could charge to dealers and the prices that the dealers could then charge their customers.

"9. The enterprise of Mr. Brock did not become profitable.

"10. The same facts comprising the Brock transaction with defendants Colby and Big 3 generally existed with respect to the contracts entered into between those two defendants and Gary and Mary Iverson and Glen Brichacek and the contract negotiations entered into between defendants and Ruth Hoadley.

"11. Therefore, the Court concluded that as a matter of law, State's Exhibit 4 is not a security as contemplated by the Kansas Securities Act, K.S.A. 17 (252 C.J.). Accordingly, the twelve counts charging defendants Big 3 and Morton Colby with violating the Kansas Securities Act should be dismissed."

The Kansas Securities Act is patterned after the Uniform Securities Act which is itself a...