State v. Lundberg

• Decision Date: 03 March 2017
• Docket Number: 114,897,114,898
• Citation: 391 P.3d 49,53 Kan.App.2d 721
• Parties: STATE of Kansas, Appellant, v. David G. LUNDBERG and Michael L. Elzufon, Appellees.
• Court: Kansas Court of Appeals

53 Kan.App.2d 721

391 P.3d 49

STATE of Kansas, Appellant,

v.David G. LUNDBERG and Michael L. Elzufon, Appellees.

114,897

114,898

Court of Appeals of Kansas.

Opinion filed March 3, 2017

Thomas E. Knutzen, deputy director of policy and senior staff attorney, and Joshua A. Ney, Ryan A. Kriegshauser, and Christopher D. Mann, of the Office of the Kansas Securities Commissioner, and Derek Schmidt, attorney general, for appellant.

Richard Ney and David L. Miller, of Ney, Adams & Miller, of Wichita, for appellee David G. Lundberg.

Kurt P. Kerns, of Ariagno, Kerns, Mank & White, LLC, of Wichita, for appellee Michael L. Elzufon.

Zachary T. Knepper, deputy general counsel, and A. Valerie Mirko, general counsel, of North American Securities Administrators Association, Inc., of Washington, D.C., and Alan V. Johnson, of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., of Topeka, for amicus curiae North American Securities Administrators Association, Inc.

Before Bruns, P.J., McAnany and Buser, JJ.

Bruns, J.:

The State appeals from the district court's decision dismissing 56 counts in each of two 61–count criminal complaints filed against David G. Lundberg and Michael W. Elzufon. The complaints alleged that Lundberg and Elzufon had violated the Kansas Uniform Securities Act, K.S.A. 17–12a101 et seq. Specifically, the complaints asserted that Lundberg and Elzufon unlawfully sold—or offered to sell—unregistered securities and committed securities fraud.

The district court consolidated the two cases for preliminary hearing. Prior to the hearing, Lundberg filed a motion to dismiss for lack of territorial jurisdiction because the sales, offers to sell, and purchases occurred outside of Kansas. Elzufon subsequently joined the motion to dismiss and, prior to the completion of the preliminary hearing, the district court dismissed the bulk of the charges against both defendants for lack of territorial jurisdiction. Subsequently, the State voluntarily dismissed the remaining charges in order to appeal the district court's decision.

On appeal, we find that the district court has territorial jurisdiction over these cases pursuant to K.S.A. 17–12a610 because a portion of the securities selling process occurred in this state. Furthermore, we find that there is a sufficient territorial nexus between the actions of Lundberg and Elzufon—as well as that of their limited liability companies—to support jurisdiction in Kansas. Thus, although we take no position on the merits of the criminal charges brought against Lundberg and Elzufon, we reverse the district court's decision to dismiss these cases for lack of territorial jurisdiction, and we remand them to the district court for further proceedings consistent with this opinion.

FACTS

The pertinent facts necessary to resolve the issue of territorial jurisdiction are undisputed, and we can glean them primarily from the stipulation of facts entered into by the parties. In addition, the State supplemented these facts with testimony offered at the preliminary hearing. Because of the limited issue presented on appeal, we will limit our discussion of the facts to those that relate to the issue of territorial jurisdiction.

In January 2005, Lundberg and Elzufon formed a Minnesota corporation called Real Development Corp. Lundberg and Elzufon were listed in filings with the Minnesota Secretary of State as the sole shareholders, officers, and agents of the corporation for the duration of its existence. In May 2008, Real Development Corp. filed a foreign corporation application with the Kansas Secretary of State's Office. Additionally, Real Development Corp. maintained places of business in Minnesota and Kansas.

In April 2006, Lundberg and Elzufon started the first of their four limited liability companies in Kansas, known as Wichita 19, LLC. The second—started in May 2008—was known as 150 WFA, LLC. The third—also started in May 2008—was known as 150 Main, LLC. The fourth—started in June 2008—was known as 150 Main Four Ten, LLC. The organizational documents of the LLCs listed Lundberg and Elzufon as the sole members as well as the managers and agents for each of these limited liability companies.

The parties have stipulated that substantial operations of Wichita 19, LLC, 150 WFA, LLC, 150 Main, LLC, 150 Main Four Ten, LLC, and Real Development Corp. were conducted from places of business in both Minnesota and Kansas. Lundberg and Elzufon were also physically present in Wichita on multiple occasions. In addition, Lundberg and Elzufon issued promissory notes to investors relating to various buildings in downtown Wichita on behalf of Wichita 19, LLC, and Real Development Corp. While some of the promissory notes stated that Minnesota law would apply to the resolution of disputes, others indicated that the laws of Kansas would apply.

The operation agreement for Wichita 19, LLC, also contained a provision that any legal actions relating to the agreement or to transactions contemplated by the agreement must be brought in the United States District Court for the District of Kansas sitting in Wichita or in Sedgwick County District Court. Further, Lundberg signed at least one of the promissory notes issued to an investor while he was physically present in Sedgwick County. Lundberg and Elzufon also issued a promissory note to an investor who lived in Wichita. Subsequently, they issued another promissory note to the Wichita investor in their personal capacity as well as on behalf of Real Development Corp.

Similarly, Lundberg and Elzufon issued membership interests on behalf of 150 WFA, LLC, to investors. The operating agreement for 150 WFA, LLC, contained a choice of law provision stating that the laws of Kansas applied to disputes arising out of or relating to the agreement. It also contained a provision stating that all legal actions relating to the operating agreement or the transactions contemplated in the agreement must be brought in the United States District Court for the District of Kansas sitting in Wichita or in Sedgwick County District Court.

Real Development Corp., as well as each of the Kansas LLCs, owned interests in assets—in particular, real property—in Wichita. Specifically, the businesses started by Lundberg and Elzufon were engaged in the revitalization of downtown Wichita through investment in and rehabilitation of commercial real estate. From at least 2005 through 2011, the companies offered investment opportunities—including the sale of promissory notes and membership interests—related to their Wichita real estate. Ultimately, Real Development Corp. forfeited its foreign corporation application in Kansas in July 2015, and each of the Kansas LLCs has now forfeited or dissolved its articles of organization.

Only one of the investors, Dennis Miller, actually lived in Kansas. Many of the out-of-state investors lived in California. Joseph Tacelli and Tom Martinson, both California residents, and others introduced the California investors to the investment opportunity in Wichita real estate. Tacelli and Martinson received information regarding the investments from Lundberg and Elzufon. In turn, they used this information to solicit investors in exchange for a commission. At some point, Tacelli went to Wichita to meet with Lundberg and Elzufon about the investments. In addition, Tacelli received information evidently faxed to him from the Broadview Hotel in Wichita. According to Tacelli, he obtained approximately 12 investors for one of the Wichita projects and received a commission from Lundberg and Elzufon.

Martinson raised about $800,000 from out-of-state investors and received approximately $120,000 in commissions. Although he believed that some of the investors may have gone to Kansas, he was not sure when this occurred. Specifically, Martinson was involved in the 150 Main project. He explained that Lundberg and Elzufon first sold investment opportunities in the basement and first three floors of the building under the name of 150 Main WFA, LLC. Once a maximum number of investors for these floors had been obtained, they moved on to selling investment opportunities in floors 4 through 10 under the name 150 Main Four Ten, LLC. Martinson also invested personally in the property and visited Wichita with his wife about a year after they invested. According to Martinson, they found that the building renovation was not as promised to them by Lundberg and Elzufon.

On February 10, 2015, the Sedgwick County District Attorney filed separate 61–count criminal complaints against Lundberg and Elzufon alleging violations of the Kansas Uniform Securities Act. The complaints alleged multiple counts of securities fraud and unlawful sale of unregistered securities occurring between December 12, 2005, and December 31, 2011. In particular, the State alleged that investors lost a substantial sum of money as a result of the unlawful activities committed by Lundberg and Elzufon in raising funds to purchase and rehabilitate buildings in downtown Wichita.

On September 29, 2015, Lundberg filed a motion to dismiss the charges for insufficient evidence "because the Defendant's alleged acts were not in connection with the offer, sale, or purchase of a security, as that term is defined under Kansas law." On the same day, Lundberg also filed a motion to dismiss for lack of jurisdiction, arguing that the district court lacked territorial jurisdiction because none of the alleged sales or offers to sell were made or accepted in Kansas. Subsequently, Elzufon orally joined in Lundberg's motion to dismiss for lack of jurisdiction.

The district court commenced a preliminary hearing on November 9, 2015. Although the district court scheduled the preliminary hearing to last a week, it only lasted 2 days before the parties entered into a stipulation of facts relating to the issue of jurisdiction. During the 2 days of the preliminary hearing, the State presented the testimony of 8 witnesses and introduced 40 exhibits into evidence. Each of the witnesses...