Waters v. Millsap

• Decision Date: 18 June 2015
• Docket Number: No. CV–15–18,CV–15–18
• Citation: 465 S.W.3d 851,2015 Ark. 272
• Parties: B. Edmond Waters, Arkansas Securities Commissioner, Appellant, v. Isaac Hal Millsap III, Gifford Keith Jordon, and Charles Duance Solum, Appellees.
• Court: Arkansas Supreme Court

2015 Ark. 272

465 S.W.3d 851

B. Edmond Waters, Arkansas Securities Commissioner, Appellant

v.Isaac Hal Millsap III, Gifford Keith Jordon, and Charles Duance Solum, Appellees.

No. CV–15–18

Supreme Court of Arkansas.

Opinion Delivered June 18, 2015

Theodore Holder, Little Rock, Arkansas Securities Department, for Appellant.

Reece Moore Pendergraft LLP, Fayetteville, by: Larry McCredy and Timothy C. Hutchinson, for Appellees.

Opinion

KAREN R. BAKER, Associate Justice

This case involves a civil regulatory action filed by the Arkansas Securities Commissioner, B. Edmond Waters (Commissioner), in his official capacity, against three individuals, Isaac Hal Millsap III, Gifford Keith Jordon, and Charles Duance Solum.¹ The Commissioner's complaint alleged two violations of the Arkansas Securities Act (the Act), codified at Arkansas Code Annotated sections 23–42–101 through –509. In his complaint, the Commissioner alleged that the appellees engaged in the sale of unregistered securities, in the form of notes for real estate loans with a fixed rate of interest, and offering and selling securities despite not being licensed as a brokers or agents. The circuit court concluded that the notes at issue were not securities based on the test announced by the Arkansas Court of Appeals in Smith v. State, 266 Ark. 861, 587 S.W.2d 50 (Ark.App.1979). On appeal, the Commissioner contends that the circuit court erred in concluding that the notes were not securities, that this court has never explicitly adopted the Smith test as the exclusive test of whether a transaction is a security, and that the element of a fixed rate of interest does not automatically preclude the notes at issue from being securities. In addition, the Commissioner urges this court to adopt the Family Resemblance Test adopted by the United States Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). Because this case involves issues of substantial public interest and a perceived inconsistency between opinions from this court and the court of appeals regarding the proper test for determining what constitutes a security, our jurisdiction is proper pursuant to Arkansas Supreme Court Rule 1–2(b)(2) and (4).

On January 1, 2012, the Commissioner filed a complaint against the appellees in the Pulaski County Circuit Court. In his complaint, the Commissioner alleged that from 2001 through 2009, appellee Millsap did business with the British American Group (BAG), which purportedly matched borrowers from the United Kingdom with lenders. According to the complaint, the borrowers would borrow money for real-estate projects at interest rates of 15% to 17% per annum. The complaint alleged that Millsap would approach individuals and tell them about the business and ask them to invest or loan their money as a lender to a borrower in the United Kingdom through BAG. In doing so, Millsap relied on a page of facts and information, referred to as the “Highlights” page, regarding the risks and returns on the investments. The complaint further alleged that investors would write a check to BAG and fill out some paperwork and several weeks later Millsap would send them a document entitled Loan Agreement, which set out a contract between the investor as the lender and the borrower, a British business entity conducting real-estate development. This note would be for a term of one year, the Commissioner alleged, and the annual interest rates varied from 14.5% to 17.5%. In addition, the complaint stated that investors could elect to compound their interest or receive periodic payments and were encouraged to “roll over” their notes to extend the term past one year. According to the complaint, Millsap was paid a commission of .5% to 8% of the investment upon the initial investment and received an additional commission upon rollover of the note. The complaint alleged that the appellees sold a total of twenty notes with a total value of $1,907,881.41, and received commissions for each of these sales.

According to the complaint, Millsap enlisted Jordon and Solum to solicit investors with BAG and sell the notes. Jordon and Solum also received commissions based on soliciting investors. In addition, Millsap received a commission of .5% for Jordon's and Solum's sales. The complaint alleged that Jordon sold BAG notes from 2008 through 2010 and that Solum did the same in 2008 and 2009. The complaint alleged that, although some of the BAG investors received interest payments, the “vast bulk of the money was never repaid.” Thus, while the complaint acknowledged that the investors were “guaranteed a specific return on their money,” it alleged that the investors had no control over the real estate projects and “expected their profits to come solely from the efforts of the borrower.” Finally, the complaint alleged that each note was a security, was not registered, and that Millsap, Jordon, and Solum were not registered to sell securities. The Commissioner requested that the appellees be restrained and enjoined from continuing to sell the notes, be ordered to render an accounting of all monies received and disbursed in connection with the notes, be ordered to disgorge all monies raised, and be ordered to pay a fine.

On August 3, 2012, the appellees filed an answer denying that notes were securities. On April 23, 2014, the Commissioner filed separate motions for summary judgment against Jordon and Solum. In his motion, the commissioner contended that the proper test for determining whether an instrument constituted a security is the so-called “family resemblance test,” which was announced by the United States Supreme Court in Reves. On May 14, 2014, Jordon filed a response and cross-motion for summary judgment. In his motion, Jordon contended that the proper test was the test announced in Smith. Jordon contended that this court has adopted that test but has not adopted the family resemblance test. As a result of these two motions, the following facts were undisputed:

1. Interested lenders and borrowers would enter into loan agreements structured with one-year fixed rates of interest.

2. Lenders expected to receive interest payments reflective of the interest rates and principal amounts agreed to in the loans.

3. The loans had a fixed rate of interest.

4. The borrower's obligation to repay the loan was not based on the financial performance of the borrower's endeavor.

5. The appellees utilized the highlights page to promote the loans.

6. According to the highlights page, the more principal invested, the higher the interest rate on the loans.

The circuit court held a hearing on the cross-motions for summary judgment on July 30, 2014. The circuit court entered a written order on September 17, 2014. In that order, the court granted summary judgment in favor of the appellees and determined that the notes did not constitute securities. Specifically, the court found that there were no issues of fact and but one issue of law, whether certain instruments entitled “loan agreements” are securities within the meaning of the Act. The court characterized the facts of the transactions at issue as follows:

Jordon contends that his role was to match lenders with one borrower in the United Kingdom. Because the loans were secured by collateral and had a fixed interest rate which was payable in one year regardless of the success of the real estate development, and the persons making this loan had no opportunity to participate in the earnings of the borrower and had no opportunity to participate in the earnings of the borrower [sic], Jordon contends that these transactions were loans and not securities.

....

[The Commissioner] on the other hand contends that these transactions were investments which were securities both as investment contracts ... and as notes ... It matters not, according to [the Commissioner] ... that these instruments promise only a fixed rate of return and allow no opportunity to participate in the earnings or profit of the borrower in the United Kingdom.

The Arkansas Supreme Court has not adopted the Reves family resemblance test or SEC v. Edwards ... and the law in Arkansas remains Smith v. State .... The instruments here in question do not qualify as securities under that test.

After concluding that the notes at issue did not meet the test for securities announced in Smith, the circuit court granted summary judgment in favor of Jordon. The circuit court also granted summary judgment in favor or Millsap and Solum on the basis that their position was the same as Jordon's and the Commissioner had the opportunity to respond to Jordon's motion. On October 10, 2014, the Commissioner filed a timely notice of appeal from the circuit court's ruling.

To reiterate, on appeal the Commissioner contends that the circuit court erred in concluding that the notes were not securities, that this court has never explicitly adopted the Smith test as the exclusive test of whether a transaction is a security, and that the element of a fixed rate of interest does not automatically preclude the notes at issue from being securities. In addition, the Commissioner urges this court to adopt the family resemblance test from Reves.

Generally, on appeal from a summary-judgment disposition, the evidence is viewed in the light most favorable to the party resisting the motion, and any doubts and inferences are resolved against the moving party. Ark. State Bd. of Election Comm'rs v. Pulaski Cnty. Election Comm'n, 2014 Ark. 236, 437 S.W.3d 80. However, when the parties agree on the facts, we simply determine whether the appellee was entitled to judgment as a matter of law. See id. When parties file cross-motions for summary judgment, as was done in this case, they essentially agree that there are no material facts remaining, and summary judgment is an appropriate means of resolving the case. See id. As to issues of law presented, our review is de novo. Crafton, Tull, Sparks & Assocs., Inc. v. Ruskin Heights, LLC, 2015 Ark. 1,...