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District Court of Appeal, Second District, Division 2, California.


Cr. 3052.

Decided: February 04, 1938

U. S. Webb, Atty. Gen., Walter L. Bowers, Deputy Atty. Gen., and Buron Fitts, Dist. Atty., and A. H. Van Cott, Deputy Dist. Atty., both of Los Angeles, for the People. Morris Lavine, of Los Angeles, for respondent.

From a judgment sustaining a demurrer to eighteen counts of an amended indictment purporting to charge defendant with violations of the Corporate Securities Act, St.1917, p. 673, as amended, the People appeal.

The essential facts are these:

October 22, 1937, an amended indictment was filed in the superior court of Los Angeles county purporting to charge defendant in twenty separate counts with violations of the Corporate Securities Act. Defendant filed a demurrer to the amended indictment on the ground that each count failed to allege facts constituting a public offense. The demurrer was overruled as to counts XIII and XIV and sustained as to all the remaining eighteen counts.

Count I of the indictment reads as follows:

“The said Noel Davenport is accused by the Grand Jury of the County of Los Angeles, State of California, by this Amended Indictment of the crime of Violation Corporate Securities Act, a felony, committed prior to the finding of this Indictment, and as follows:

“The said Noel Davenport, on or about the 23d day of October, 1933, at and in the county of Los Angeles, state of California, did willfully, unlawfully, feloniously and knowingly authorize, direct and aid in the issuance and sale of, and did issue, execute and sell, and assist in causing to be issued, executed and sold to Ella J. Bloom for value, a security of his own issue, to–wit, an evidence of indebtedness, note and investment contract, said security not being one issued, given or acquired in a bona fide way in the ordinary course of legitimate business, trade or commerce, and said security being one issued for sale to the public by the said Noel Davenport, the said Noel Davenport not having first applied for an secured a permit from the Commissioner of Corporations of the state of California so to do; the said security being in words and figures as follows, to–wit:

“‘Agreement Noel Davenport and Ella J. Bloom or L. B. Bloom 635 Ohio Ave Long Beach

“‘Noel Davenport, hereinafter designated as First Party, and Ella J. Bloom or and L. B. Bloom, hereinafter designated as Second Party, both of the county of Los Angeles, State of California, do hereby respectively declare as follows:

“‘Declaration of First Party. That he now is and for some considerable time heretofore has been engaged in the business of buying and selling gold and silver bullion, maintaining a principal place for the transaction of said business at Nogales, Arizona, in the conduct of which he has contracted to purchase the gold and silver production from a number of mining properties now in actual operation in the Altar Mining District of Mexico.

“‘That to avail himself of the increased production of said bullion additional capital is required to finance his operations, which will be used only in the business of merchandising gold and silver bullion and for no other purpose whatsoever.

“‘That his present and past experience leads him to believe that the continuance of this business will be profitable and his experience has been that a profit of not less than fifty (50%) per cent can be realized upon shipments of bullion as they are made from time to time.

“‘That he is thoroughly conversant with the character of business in which he is now engaged and conducts said business on his own individual responsibility, and that he believes that he is established in a way that he can continue to operate successfully in the future.

“‘Declaration of Second Party. That he has read the above and foregoing statement and that First Party has made no representations other than therein contained to induce him to execute this agreement and that he does so freely and voluntarily, on his own initiative and responsibility without any promise, agreement, representation, or inducement except as herein contained, and with no hope of profit or reward other than the payment of the purchase price herein stipulated.

“‘That said sale is made without any restriction or limitation with the understanding that First Party may use and dispose of said securities as the absolute owner thereof and that his agreement to pay therefor as herein provided is the sole and only consideration therefor, and that the only obligation of First Party is the debt evidenced hereby.

“‘That he has made no representation as to the value of said securities and that the selling price therefor is fixed and determined without reference to the present market value and that any difference between the selling price as fixed hereby and the market value shall not be a defense available to First Party either on the ground of usury or otherwise.

“‘By Reason’ Whereof, the said Parties do hereby agree as follows:

“‘1. That First Party agrees to buy from Second Party and Second Party agrees to sell to First Party, for the sum of $795.47, payable in lawful money of the United States in the manner hereinafter set forth, the following securities, the receipt whereof with the proper endorsement thereon transferring title to First Party is hereby acknowledged, to wit:

“‘Mutual B and L Assoc Commonwealth B and L Assoc

“‘2. That First Party promises and agrees to pay to Second Party said sum in the following manner:

“‘(a) The sum’ of $․ upon the execution of these presents, receipt whereof is hereby acknowledged;

“‘(b) The balance of said purchase price, of the sum of $795.47, in equal monthly installments of four (4%) per cent of said principal sum for a period of twenty–five (25) months on the first day of each and every month, commencing on the first day of December, 1933, and continuing until said purchase price has been paid in full, together with interest on all deferred payments at the rate of seven (7%) per cent per annum, payable quarterly, from date hereof.

“‘3. That the payments of principal and interest shall be made at the California–First National Bank of Long Beach, at First Street and Pine Avenue, in the City of Long Beach, California, and that said Bank will be designated and appointed as agent of First Party to receive and disburse moneys belonging to First Party and that said payments hereinabove provided for shall be made by said Bank to Second Party, each of which such payments shall be endorsed upon the contract in the possession of Second Party and the duplicate in the possession of said Bank.

“‘4. That in the event any fourth consecutive installment of principal or interest be not paid as herein promised and agreed, Second Party may declare the whole of said sum, principal and interest then unpaid, due and payable and in the event suit is filed to enforce payment hereunder the Court shall fix and allow a reasonable attorney fee therefor.

“‘5. That to secure the performance of the terms and provisions hereof and as collateral security for the payments herein provided for, First Party will cause a policy of life insurance upon his life to be issued for the amount agreed to be paid hereunder, in which the said California–First National Bank of Long Beach will be made beneficiary under an agreement that in the event of the death of First Party the proceeds thereof shall be used and applied in payment of such amount as may be due Second Party under the provisions hereof.

“‘6. This instrument is nonnegotiable and shall not be assigned by either party without the written consent of the other.

“‘In Witness Whereof, said Parties hereto have hereunto subscribed their names hereto, in triplicate, this 23 day of October, 1933.

“‘(Signed) Noel Davenport

“‘First Party

“‘(Signed) Ella J. Bloom

“‘Second Party.’

“That the defendant was absent from and not an inhabitant of, nor usually a resident within, the State of California for the period from April 8, 1934 to April 8, 1936, between the date of the offense alleged in this Amended Indictment, and the date of the filing of this Amended Indictment.”

Except as to dates and names, counts II and XII, both inclusive, and XV to XX, both inclusive, are identical.

The People rely for reversal of the judgment on the following proposition:

Each of the counts as to which the demurrer was sustained states a public offense, in that the contract alleged in such counts constitutes a security within the meaning of the Corporate Securities Act.

This proposition is untenable. Our Supreme Court and the District Court of Appeal have heretofore held that allegations similar to those in the first and second paragraphs of count I of the amended indictment without any accompanying allegations of fact are merely conclusions of the pleader and are not allegations of facts which constitute a public offense. People v. Davenport, Cal.App., 69 P.2d 862.

There is therefore left for determination the single question of whether the agreement alleged in count I of the indictment constitutes a security. Eliminating the preamble to the agreement, which it is conceded contains nothing but immaterial recitals, we have a simple contract whereby defendant agrees to purchase from the owner thereof certain building and loan association certificates and pay as a purchase price for the same $795.47 in twenty–five monthly installments with interest at the rate of 7 per cent. per annum on any unpaid balance.

It needs no citation of authorities to demonstrate the proposition that a simple purchase and sales contract is not a security either under common acceptation or by any definition in the Corporate Securities Act. Nowhere in the Corporate Securities Act is there any requirement that one who purchases personal property must first obtain a permit from the Commissioner of Corporations of the state of California, nor has any case been called to our attention where it has been held that it is necessary for a vendee to obtain a permit before entering into a contract to purchase personal property. The very purpose of the Corporate Securities Act was to require the vendor of personal property defined in the act to obtain a permit before such property or an interest therein was sold. The restraints and penalties of the act are placed upon the vendor and not upon the vendee. In the instant case it is obvious from a reading of the contract that defendant was the vendee and not the vendor of the property. Therefore, there was no requirement that he obtain a permit before entering into the contract alleged in count I of the amended indictment, and it fails to state a public offense.

It would serve no useful purpose to discuss the various authorities cited by counsel. Suffice it to say that each case cited by the People may be distinguished on its facts from the present case; for example in People v. White, 124 Cal.App. 548, 12 P.2d 1078, defendant White agreed to invest $5,000 advanced to him and on a certain designated date return $7,500 as principal and earnings for the period during which he was to have possession of the money. It is clear that such a case is entirely different from the instant case wherein defendant agreed to purchase personal property, which became his absolutely without qualification upon his paying the purchase price.

It is of interest to note that the learned trial judge in the present case is the author of the opinion in the case of People v. White, supra, and undoubtedly he had the above–mentioned distinction in mind when making the order sustaining the demurrer to the various counts of the amended indictment, which is here under consideration.

For the foregoing reasons, the judgment is affirmed.

I dissent. In my opinion the instrument issued by defendant and delivered to Ella J. Bloom, “being one issued for sale to the public,” is a security as defined by the act and construed by the courts. People v. Coyle, 134 Cal.App. 612, 25 P.2d 991; Domestic and Foreign Petroleum Co. v. Long, 4 Cal.2d 547, 51 P.2d 73; People v. White, 124 Cal.App. 548, 12 P.2d 1078; Cecil B. De Mille Productions v. Woolery, 9 Cir., 61 F.2d 45.

McCOMB, Justice.

I concur: CRAIL, P. J.