William's Delight Corp. v. Harris

• Decision Date: 27 November 1978
• Docket Number: Docket No. 77-997
• Citation: 273 N.W.2d 911,87 Mich.App. 202
• Parties: WILLIAM'S DELIGHT CORPORATION, Plaintiff-Counter Defendant-Appellant, v. Fred L. HARRIS, Defendant-Counter Plaintiff-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 911

273 N.W.2d 911

87 Mich.App. 202

WILLIAM'S DELIGHT CORPORATION, Plaintiff-Counter Defendant-Appellant, v. Fred L. HARRIS, Defendant-Counter Plaintiff-Appellee.

Docket No. 77-997.

Court of Appeals of Michigan.

Nov. 27, 1978.

Released for Publication Jan. 25, 1979.

Berry, Moorman, King, Lott & Cook by Thomas J. Pereira and Francis J. Newton, Jr., Detroit, for appellant.

Paul G. Valentino, Bloomfield Hills, for appellee.

Before T. M. BURNS, P. J., and CAVANAGH and RILEY, JJ.

CAVANAGH, Judge.

Plaintiff, William's Delight Corporation, is a corporation organized under the laws of the Virgin Islands and apparently qualified to do business in Michigan. In 1969 it was incorporated to carry out a real estate development program for the purchase of land and the construction of condominium units in the Virgin Islands. Pursuant to this program, plaintiff contacted 14 persons in Michigan, including defendant Harris, for the purpose of investing in the corporation. From the record, it is unclear whether all 14 offers were made prior to the plaintiff's incorporation.

Plaintiff's offering brochure indicated defendant Harris as an investor who would also act as legal advisor, performing a variety of legal duties connected to the plaintiff's organization. He subsequently became secretary of the corporation as well.

The corporation has brought suit against the defendant, alleging he had failed to complete his agreement to purchase 250 shares in the amount of $25,000. Defendant moved to dismiss the complaint, denying, first, that such an agreement ever existed, and second, arguing that even if it did, plaintiff could maintain no suit on the contract and/or it was voidable by him because of plaintiff's failure to comply with the Michigan Uniform Securities Act, M.C.L. § 451.501 Et seq.; M.S.A. § 19.776(101) Et seq.

The court below granted the motion, finding that the plaintiff had failed either to comply with the Act's registration provision, (M.C.L. § 451.701; M.S.A. § 19.776(301)) or to meet the exemption requirements for preincorporation subscriptions under the same act (M.C.L. § 451.802(b)(10); M.S.A. § 19.776(402)(b)(10)).

On appeal, plaintiff corporation raises essentially the same arguments it raised to the trial court: (1) the transaction in question, while it does not fall within the exemption for preincorporation certificates or subscriptions, did meet the more general provisions of M.C.L. § 451.802(b)(9); M.S.A. § 19.776(402)(b)(9), and was therefore exempt from registration; (2) in any event, the defendant should be estopped from asserting the agreement's invalidity. Plaintiff argues that as its legal advisor, defendant had the responsibility to insure the corporation's compliance with Michigan security law, and thus cannot be heard to assert its failure to do so to avoid his obligation on the contract. The trial court did not rule on the plaintiff's second contention, apparently finding the first dispositive of the case. We will consider both arguments in turn.

Plaintiff first argues that if a sale of preincorporation subscriptions exceeds the limits set out in M.C.L. § 451.802(b)(10); M.S.A. § 19.776(402)(b) (10), thus failing to meet the specific registration exemption for such subscriptions under that section, it may nevertheless still meet the more general terms of M.C.L. § 451.802(b)(9); M.S.A. § 19.776(402)(b)(9) and qualify for exemption from registration.

M.C.L. § 451.802(b)(10) provides:

"Any offer or sale of a preorganization certificate or subscription, and The issuance of securities pursuant thereto, if:

"(B) The number of subscribers does not exceed 10 * * *." (Emphasis added.)

By contrast M.C.L. § 451.802(b)(9) more generally exempts from registration:

"Any transaction pursuant to an offer directed by the offeror to not more than 15 persons, * * * in this state during any period of 12 consecutive months * * *."

As used in the latter provision, "offer" includes every attempt or offer to buy or sell a security, which according to the definitional sections of the act, does encompass a preorganization subscription. M.C.L. § 451.801(j)(2); M.S.A. § 19.776(401)(j)(2). By reading these three sections together, plaintiff constructs an elaborate carry-over scheme, which in effect allows the offeror to straddle the two exemptions, thus enjoying the benefit of each.

The interpretation of these two exemption sections is one of first impression in this state and apparently also in the other jurisdictions that have adopted the Uniform Securities Act. After examining the available authority, we conclude that the trial court was correct in ruling that M.C.L. § 451.802(b) (10) alone applied to the transaction in question.

First, we disagree with plaintiff's argument that the two sections are interrelated. While this contention has merit when applied to the Uniform Securities Act, it fails to comprehend the import of the changes made in the Michigan version of § 402(b)(10).

The Uniform provision exempts the offer or sale of preincorporation subscriptions, but not the issuance of stock itself, unless another exemption is available. One such exemption is § 402(b)(9), which will exempt the issued stock, assuming that the number of original offers of subscriptions did not exceed ten. In Michigan, however, there is no need to resort to both exemptions, because M.C.L. § 451.802(b)(10), specifically exempts both the offer or sale of the subscriptions And the issuance of the securities. See Loss, Commentary on the Uniform Securities Act, pp. 130-131 (1976).

It is unlikely also that the Legislature intended to allow an offeror to stack exemptions by employing a carry-over device. First, such devices enable offerors or sellers to evade the Act's registration requirements, thus undermining its investigative and protective purpose. ¹ People v. Dempster, 396 Mich. 700, 242 N.W.2d 381 (1976). Secondly, the provisions are designed to achieve two distinct results. As the Official Comments to the Uniform Securities Act indicate, M.C.L. § 451.802(b)(10); M.S.A. § 19.776(402)(b)(10), limits only the number of eventual subscribers, not offerees, thereby allowing the organizers to publicly advertise and inform a large number of investors of an investment opportunity. With this object in mind, it would be counter-productive to permit the carry-over of excess offers and subject them to the stricter terms of M.C.L. § 451.802(b)(9); M.S.A. § 19.776(402)(b)(9). It is much more logical to view the limits on offers in this provision as directed towards post-incorporation offers of securities to enable a corporation, which may not desire a major public financing campaign, to attract additional investors yet avoid the expense of registration. Securities Rule 451.802.3 ² supports this interpretation by indicating that § 802(b)(9) is aimed at post-incorporation Offers, not merely the conclusion of transactions pursuant to offers made at any time by an issuer. Thus, the mere fact that Harris "cemented" his contractual liability after plaintiff's incorporation is insufficient to bring the transaction within the rule especially since the offer itself was couched in terms of a preincorporation proposal.

Finally, we agree that

"Where there is in the same statute a specific provision, and also a general one which in its most comprehensive sense would include matters embraced in the former, the particular provision must control, and the general provision must be taken to affect only such cases within its general language as are not within the provisions of the particular provision."

Evanston YMCA Camp v. State Tax Comm., 369 Mich. 1, 8, 118 N.W.2d 818, 821 (1962), Dossin's Food Products, Inc. v. State Tax Comm., 360 Mich. 312, 103 N.W.2d 474 (1960), McKenna v. Chevrolet-Saginaw Grey Iron Foundry Division, General Motors Corp., 63 Mich.App. 365, 234 N.W.2d 526 (1975), Lv. den., 395 Mich. 827 (1976). The subscriptions at issue here clearly fell within the provisions of the narrower exemption and should be governed by it. Plaintiff's failure either to qualify for the exemption or register constituted a violation of the act.

M.C.L. § 451.810(f); M.S.A. § 19.776(410)(f) prevents a party from basing any suit upon a contract made or performed in violation of any provision of the Uniform Securities Act. However, the plaintiff urges here, as it did below, that the defendant be estopped from asserting the violation of M.C.L. § 451.701; M.S.A. § 19.776(301) as a defense to its action for damages for breach of contract, relying mainly on the authority of Schrier v. B&B Oil Co., 311 Mich. 118, 18 N.W.2d 392 (1945).

Generally speaking, estoppel cannot be used to enforce an illegal contract or allow its rescission if the contract offends a public policy embodied in a statute. Leland v. Ford, 245 Mich. 599, 223 N.W. 218 (1929). Where contracts for sale of securities in violation of state Blue Sky laws have been made, a number of jurisdictions have followed the general rule, mainly in suits for rescission brought by purchasers of these securities. Normally, the aggrieved purchasers, even if not free of wrongdoing, have been allowed to rescind the illegal contract and recover any money paid under it. ³

Michigan, however, has developed a jurisprudence in such cases which recognizes that in certain circumstances, the policy embodied in the state securities' laws is better served by a more flexible approach. One line of cases, decided under the statutory scheme replaced by the Uniform Security Act, ⁴ permitted the assertion of an estoppel argument against a purchaser seeking to rescind an agreement violative of the act, on the grounds that the parties were In pari delicto, and should be left as the court found them. This conclusion was based in part on the finding that the act's protection of innocent purchasers did not extend to one who was aware of the violation but who had made no attempt to rescind until his investment became...