State v. Hood, 70084

• Decision Date: 22 April 1994
• Docket Number: No. 70084,70084
• Citation: 255 Kan. 228,873 P.2d 1355
• Parties: , Blue Sky L. Rep. P 73,945 STATE of Kansas, Appellant, v. Robert Eugene HOOD, Appellee.
• Court: Kansas Supreme Court

Page 1355

873 P.2d 1355

255 Kan. 228, Blue Sky L. Rep. P 73,945

STATE of Kansas, Appellant, v. Robert Eugene HOOD, Appellee.

No. 70084.

Supreme Court of Kansas.

April 22, 1994.

Syllabus by the Court

1. The test to be applied in determining whether or not a particular financial transaction constitutes an investment contract is whether the contractual arrangement involves an investment of money in a common enterprise with the profits to come from the efforts of others.

2. In a criminal action wherein the defendant is charged with an unlawful act in connection with the sale or purchase of a security under K.S.A. 17-1253(a)(3), the record is examined and it is held that the magistrate did not err in finding that the charged violation of the Kansas Securities Act had not been sufficiently established to bind the defendant over for trial and in dismissing the complaint without prejudice.

Caroline M. Ong, Sp. Asst. Atty. Gen., argued the cause, and Robert T. Stephan, Atty. Gen., was with her on the brief for appellant.

Ronald P. Wood, of Gates & Clyde, Chartered, Overland Park, argued the cause and was on the brief for appellee.

McFARLAND, Justice:

This is an appeal by the State pursuant to K.S.A.1993 Supp. 22-3602(b)(1) from the dismissal of a complaint by the magistrate at the preliminary hearing.

On June 1, 1988, Thomas M. Bowe entered into a written contract entitled "Sales Agreement" with his cousin, Robert Eugene Hood, wherein, for the consideration of $15,000, Bowe purchased 5 1/2 percent of Hood's interest in a restaurant and drinking establishment known as "Bobby Gene's," located in Shawnee Mission. The agreement contained option provisions whereby, for additional payments, Bowe could purchase additional percentages of Hood's interest in the business. Bowe was to receive a percentage of the profits commensurate with his percentage of ownership. Inasmuch as the nature of this transaction is at the heart of the issues herein, a legal characterization of this transaction and additional facts relative thereto will be discussed later in the opinion. Bowe became dissatisfied with his purchase and brought a civil action against Hood. Bowe obtained a judgment against Hood but was unable to collect the judgment. There are no details before us as to the claims made in the civil action or the amount of the judgment.

Thereafter, on the advice of his attorney, Bowe contacted the Office of the Securities Commissioner of Kansas. That office investigated the transaction and concluded that the Bowe/Hood agreement was an investment contract within the purview of the Kansas Securities Act (K.S.A. 17-1252 et seq.) and that Hood's personal usage of the $15,000 received from Bowe (as opposed to the investment of same in the business) constituted a violation of K.S.A. 17-1253(a)(3). Said statute provides:

"(a) It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly, to:

....

(3) engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person."

Caroline M. Ong, Associate General Counsel for the Office of the Securities Commissioner of Kansas in her capacity as Special Assistant Attorney General, filed a complaint/information in the Johnson County District Court charging Hood with violation of K.S.A. 17-1253(a)(3). The penalty for the willful violation of the statute is a fine of not more than $5,000 and/or imprisonment of up to three years. K.S.A. 17-1267.

The case was called for preliminary hearing on June 1, 1993. The magistrate concluded that the State had not presented sufficient evidence to establish probable cause to believe that defendant had violated K.S.A. 17-1253(a)(3) and dismissed the complaint without prejudice.

The rules concerning a preliminary hearing are well settled. In Kansas, the preliminary hearing affords the person arrested, as a result of a complaint, an opportunity to challenge the existence of probable cause for further detention or for requiring bail. The preliminary hearing apprises the accused about the nature of the crime charged and the sort of evidence he or she will be required to meet when subjected to final prosecution. State v. Sherry, 233 Kan. 920, Syl. p 3, 667 P.2d 367 (1983). A preliminary hearing is not a trial of the defendant's guilt; it is rather an inquiry whether the defendant should be held for trial. State v. Jones, 233 Kan. 170, Syl. p 1, 660 P.2d 965 (1983). In order to bind a defendant over for trial at a preliminary hearing, it must appear to the magistrate that a crime has been committed and that there is probable cause to believe the defendant committed a felony. State v. Burrell, 237 Kan. 303, 305, 699 P.2d 499 (1985). "Probable cause" means a reasonable ground of suspicion, supported by circumstances sufficiently strong in themselves to warrant a reasonable belief that the person accused committed the offense with which he is charged. State v. Huff, 235 Kan. 637, Syl. p 3, 681 P.2d 656 (1984); State v. Howland, 153 Kan. 352, Syl. p 4, 110 P.2d 801 (1941). See State v. Chapman, 252 Kan. 606, Syl. p 4, 847 P.2d 1247 (1993).

This court has the advantage of being able to look at the preliminary hearing transcript objectively and from a distance. From this vantage point it is easy to see what went wrong as far as the State's case was concerned.

The securities commissioner's office investigated the facts and concluded the Bowe/Hood transaction was an investment contract, which is included in the definition of "security" contained in K.S.A. 17-1252(j) and, therefore, within the purview of the Kansas Securities Act. Inasmuch as Hood used the $15,000 received from Bowe for personal purposes as opposed to investing the same in the business, it was concluded this was a violation of K.S.A. 17-1253(a)(3) as it was an "act practice or course of business which operates or would operate as a fraud or deceit" upon Bowe. Hood was so charged. Ong obviously believed she had established a clear violation by Hood of the statute by her evidence of the contract and Hood's usage of the funds received therefrom in the preliminary hearing. Accordingly, the magistrate's dismissal of the complaint came as a complete surprise to the prosecution.

The State did not refile or alter its approach. Rather, in this appeal, the State is seeking to establish the dismissal was erroneous. The State contends the magistrate did not understand the transaction was an investment contract, improperly excluded parol evidence, and misconstrued what conduct is prohibited by K.S.A. 17-1253(a)(3). The record, however, does not establish the dismissal was erroneous.

The problem lies in the State's failure to establish that the Bowe/Hood transaction constituted an investment contract. A wide variety of schemes, plans, and arrangements have been held to constitute investment contracts. See 22A Words and Phrases, Investment Contract. The common thread is the investing of money into a common enterprise with the expectation of future profits from the utilization of the money by others. In Activator Supply Co. v. Wurth, 239 Kan. 610, Syl. p 4, 722 P.2d 1081 (1986), we held:

"The test to be applied in determining whether or not a particular financial relationship constitutes an investment contract is whether the contractual arrangement involves an investment of money in a common enterprise with the profits to come from the efforts of others."

The State contends the transaction was an investment in the business with said funds to be utilized in the business to produce profits and, hence, an investment contract. Therefore, under the State's theory, Hood's usage of the $15,000 for personal purposes violated the statute under which he was charged.

The written agreement between the parties is as follows:

"SALES AGREEMENT

"THIS AGREEMENT, made this 1 day of June, 1988, between Bobby Hood, hereinafter called the seller, and Thomas M. Bowe, hereinafter called the buyer.

"WITNESSETH:

"In consideration of the mutual covenants and agreements herein contained, the seller and buyer agree as follows:

"1. The seller agrees to sell to buyer, upon payment of the purchase price set out in paragraph 2 herein, five and one-half percent (5 1/2%) of his interest in the restaurant and drinking establishment commonly known as Bobby Gene's as of the date of this agreement. Such sale of the seller's interest shall include all of his interest in Bobby Gene's, including his goodwill and his rights to use the premises, to conduct business as a restaurant and drinking establishment, and his interest in the assets to the extent of the percentage stated above. As further consideration for this agreement, the seller and buyer covenant and agree more specifically as follows:

"2. The buyer agrees to pay the sum of Fifteen Thousand Dollars ($15,000) cash in hand for five and one-half percent (5 1/2%) of seller's interest as stated in paragraph 1. Buyer shall have the option of purchasing an additional four and one-half percent (4 1/2%) of seller's interest in increments of one percent (1%) based upon a purchase price of Two Thousand Seven Hundred Fifty Dollars ($2,750) per one percent (1%). Such purchases may be made from buyer's share of the profits, based upon his prevailing percentage of ownership in the assets of Bobby Gene's, figured on a quarterly basis. The first quarterly calculation of profit, if any, shall be made three (3) months from the date of this agreement and shall reoccur on a three (3) month basis thereafter. As the buyer's percentage ownership increases, he shall receive a prorated and similar percentage of the profits based on the foregoing quarterly calculation. The parties agree that the buyer may purchase more than ten percent (10%) in one percent (1%) increments based upon the parties' agreement to agree from time to time as circumstances dictate.

"3. It is further agreed by the parties...