Reset A A Font size: Print

District Court of Appeal, Second District, Division 1, California.


Cr. 3788.

Decided: August 31, 1944

James E. Pawson, of Long Beach, and John N. Metcalf and Bernard Brennan, both of Los Angeles, for appellants. Robert W. Kenny, of San Francisco, and Frank Richards, Fred N. Howser, and Jere J. Sullivan, all of Los Angeles, for respondent.

In an information filed by the District Attorney of Los Angeles County, the defendants were jointly charged with the crime of violation of the corporate securities act (Act 3814, General Laws of California, and amendments thereto up to and including 1941). The information alleged that the defendants did “feloniously and knowingly sell and issue and cause to be sold and issued for value * * * a certificate of interest and participation, certificate of interest in title, to property, profits and earnings, a certificate of interest in an oil, gas and mining title and lease, to–wit, five per cent of all oil, gas, * * *” from a certain well “located upon lots 25 to 37, inclusive, Tract 7470,” in Los Angeles County, “without having first applied for and received from the Corporation Commissioner's Office of the State of California, a permit so to do.”

Following the entry of not guilty pleas and waiver of a jury, the cause proceeded to trial before the court, resulting in the conviction of both defendants as charged. The motion of each defendant for a new trial was denied and sentence of imprisonment in the county jail for one year was pronounced against them. From the judgment of conviction and from the order denying their motion for a new trial, defendants prosecute this appeal.

The factual situation here presented is not in serious conflict and may be thus epitomized: Since 1937, the defendant Sidwell had been engaged in the oil business. During the month of May, 1940, while residing at La Canada, in Los Angeles County, defendant Sidwell met the complaining witness, Joseph J. Moore, who was a neighbor of his. Defendant Louis Davis, Jr., had also been engaged in the oil business for some eight years and was associated as a partner with his co–defendant. During the time here pertinent, the defendants were engaged in drilling an oil well in what was commonly referred to as the Rosecrans Field in Los Angeles County.

During the course of their neighborly association, defendant Sidwell told the complaining witness Moore that Sidwell and Davis were drilling the aforesaid oil well; that they had gone down some 7,000 feet and that “there was not any risk in it”; that they also had royalties and assets from other wells. We think it may fairly be said that defendant Sidwell told the complaining witness that the sum of $5,000 was needed to complete the well, and that after some negotiations, details of which are somewhat in conflict, Mr. Moore agreed to provide the requisite $5,000. Defendant Sidwell then introduced Mr. Moore to the former's partner at the partnership office in Los Angeles. The details of the foregoing negotiations, as testified to by the complainant Moore, may be summarized by quoting the following excerpt from his testimony given at the trial:

“A. Mr. Sidwell is the man I had most of the conversations with. Mr. Sidwell said that he would get not less than a 500–barrel well, although his engineer driller told him it would be a 1,000–barrel well, but anyways it would be a 500–barrel well. That he would pay me 5% of the oil, whatever they sold the oil for, which was $1.00 or something, I don't remember what he named, that there was absolutely no risk to it at all, and if they happened not to get the well they would return my money according to their agreement without any argument. That was the conversation and that was the deal.”

At a meeting in Los Angeles between both defendants and the complaining witness, a written agreement was drawn up between them, reading as follows:

“Los Angeles, California

“June 1, 1940

“Mr. Joseph J. Moore

“Orchard Lane,

“La Canada, California.

“Dear Mr. Moore:

“In consideration of Five Thousand ($5000.00) Dollars advanced by you to us covered by our note for that amount dated June 1, 1940 running for ninety days and bearing interest at the rate of six (6%) per cent annum, we hereby agree to set aside or cause to be set aside for you 5% of all oil, gas and other hydro–carbon substances of production in the well known as Chicogo Oil Co. Founders #1 located upon:

“Lots 25 to 37, inclusive, Tract 7470, in Rosecrans, County of Los Angeles, State of California, as per Map recorded in Book 141, pages 7 and 8 of Maps, Records of Los Angeles County, California.

“It is definitely understood between all of the parties to this letter that this transaction does not constitute a sale or a purchase of the above described 5% interest in the Chicago Oil Co. Founders #1 well, but that proper application will be made through proper authorization upon completion of said Chicago Oil Co. Founders #1 well to have such interest duly issued and placed in your name or such nominee as you may designate under permissive authority. In any event the undersigned Davis and Sidwell acknowledge the advance of the $5000.00 covered by note as above described as a full personal obligation. Such interest in the well as may be permitted will come from their own interest or interest controlled by them. If this is in accordance with your understanding will you please indicate so on the line below provided for your acceptance. In any event said $5000 note shall be paid to Joseph J. Moore on the due date together with interest thereon.

“Very truly yours,


“Joseph J. Moore”

Prior to the execution of the foregoing instrument, the complainant stated that he wanted a bonus for advancing the $5000 and was informed by defendant Sidwell that the well was not yet on production, but “we will set aside five per cent of all oil from the well as security for your note. We will stand behind the note itself. And then after the well is on production we would apply to the Department for a permit.” The complaining witness paid over the $5000 and received the foregoing agreement, but no certificate or other document excepting the promissory note. It is conceded that no application was ever filed with the Commissioner of Corporations of the State of California for a permit to issue any certificate of interest in the lots mentioned in the above quoted agreement.

Appellants' main contention upon this appeal is that the transaction here in question was nothing more than a loan of money from the complaining witness to the defendants and does not constitute a “sale” of any “security” mentioned in the corporate securities act. That the loan bore interest at the rate of six per cent per annum and was accompanied by a bonus or premium of five per cent of the oil, etc., to be produced in a certain well, provided that permissive authority could be secured from the Commissioner of Corporations to issue a certificate of interest thereto upon proper application when and if the well went on production.

In determining the questions raised on this appeal, it seems appropriate to observe that the purpose of the corporate securities act is to protect the public against the purchase of spurious and worthless securities. It is not for the courts, but for the legislative branch of government, to determine the character and scope of the law. So long as that department does not impinge upon its constitutional restraints, the courts are not authorized to interfere with the policy of the law. With further reference to the purposes of legislation of the character with which we are here concerned, and of the evils it is designed to correct, we quote the following observation from the Supreme Court of the United States:

“It will be observed, therefore, that the law is a regulation of business, constrains conduct only to that end, the purpose being to protect the public against the imposition of unsubstantial schemes and the securities based upon them. Whatever prohibition there is, is a means to the same purpose, made necessary, it may be supposed, by the persistence of evil and its insidious forms and the experience of the inadequacy of penalties or other repressive measures. The name that is given to the law indicates the evil at which it is aimed; that is, to use the language of a cited case, ‘speculative schemes which have no more basis than so many feet of “blue sky” ’ or, as stated by counsel in another case, ‘to stop the sale of stock of fly–by–night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations.’ Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government, and that the appreciation of the consequences of it is not open for our review.'' Hall v. Geiger–Jones Co., 242 U.S. 539, 550, 37 S.Ct. 217, 220, 61 L.Ed. 480, L.R.A.1917F, 514, Ann.Cas.1917C, 643.

Appellants' first contention on this appeal is that no certificate or security of any kind was sold or issued. The corporate securities act defines a “security” in part as “* * * any * * * certificate of interest in a profit–sharing agreement, certificate of interest in an oil, gas or mining title or lease * * * any transferable share, investment contract, or beneficial interest in title to property, profits or earnings.” To us it seems manifest that the above mentioned agreement is a security within the meaning of the corporate securities act, in that it includes an interest in a profit–sharing agreement; also an interest in an oil and gas title or lease; and finally it includes profits and earnings to be obtained from the oil well described in the instrument. By the very terms of the document herein, it is agreed by the defendants that they will “set aside or cause to be set aside for you 5% of all oil, gas * * * of production in the well known as * * *.”

It is next contended that there was no “sale” of any security but simply an agreement, upon the happening of a future contingency, to “set aside” out of the defendants' own interests five per cent of the oil etc. from the well, and later “upon completion” of the well to make “proper application * * * for permissive authority” to have such interest “duly issued and placed” in the name of the complaining witness.

With reference to what constitutes a “sale” of a “security,” the corporate securities act provides:

“ ‘Sale’ or ‘sell’ shall include every disposition, or attempt to dispose, of a security or interest in a security for value. Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value. * * *” § 2, subd. 8.

It seems clear to us from a reading of the agreement that, by its terms, the defendants agreed with the complaining witness Moore that, as a bonus and additional consideration to him for the loan, they would set aside for and later transfer to him five per cent of their interest in the well. It was understood and agreed between the defendants and Moore that the money loaned by the latter was to be used by the former in developing and putting the well on production. In other words, the first paragraph of the aforesaid written instrument disposes of five per cent of the oil and gas produced from a designated well for value. People v. Weibert, 18 Cal.App.2d 457, 64 P.2d 169. Having made such disposition of an interest in the well without obtaining a permit from the Commissioner of Corporations, defendants contravened the provisions of the Act. As was said by this court in People v. Yant, 26 Cal.App.2d 725, 736, 80 P.2d 506, 511: “Looking through the mere form of the instruments to the facts and circumstances which surrounded their execution, we have no hesitancy in arriving at this conclusion. It should be and is an established principle of law that the substance and not the mere form of transactions constitutes the proper test for determining their real character. If this were not true, it would be comparatively simple to circumvent by sham the provisions of statutes framed for the protection of the public. This the law does not permit. People v. Ratliff, 131 Cal.App. 763, 772, 22 P.2d 245; People v. Reese, 136 Cal.App. 657, 672, 29 P.2d 450.”

Finally appellants assert that they had a right to sell their own property, or any interest therein, outright to Mr. Moore in an ordinary commercial transaction, without securing a permit so to do from the Commissioner of Corporations; and that any portion of the corporate securities act which attempts to make it a criminal offense for one to sell his own property without obtaining a permit from the Corporation Commissioner is unconstitutional and void, because it violates the Fourteenth Amendment to the Federal Constitution and similar guaranties contained in our State Constitution. Sec. 1, Art. I; and Sec. 13, Art. I, Constitution of California.

Undoubtedly, it is the law that, when a sale of property takes place under the usual contract and in the ordinary course of business, the transaction does not come within the purview of the corporate securities act. Nevertheless, as was said in People v. Davenport, 13 Cal.2d 681, 684, 91 P.2d 892, 894: “* * * the mere fact that a transaction is clothed in the language and form of such a purchase and sale contract is not in itself a conclusive badge of its innocence. In proper circumstances ‘courts have looked through form to substance and found that in fact the transaction contemplated the conduct of a business enterprise by others than the purchasers, in the profits or proceeds of which the purchasers were to share’. (Emphasis added.) Domestic and Foreign Pet. Co., Ltd., v. Long, 4 Cal.2d 547, 51 P.2d 73, 76. It may be conceded that, in some circumstances, judicial tribunals have concluded that a contract, or even a deed, regular upon its face, has been found to constitute a ‘security’ as that word was intended to be used in relation to the act, and within the scope and purpose of the legislation.”

Viewing the transaction in the case at bar in the light of the circumstances surrounding it, we are persuaded it must be held that the instrument here in question evidences a right to participate in the profits or earnings of the assets of a business carried on for profit, and that the transaction had for its objective that Mr. Moore would receive a profit through the efforts of others than himself. Such a transaction cannot be characterized as an ordinary commercial contract wherein one receives income or profit from his own efforts. While it is true that Mr. Moore had the right to be paid the $5000 which he loaned to defendants, as evidenced by their promissory note, nevertheless, Mr. Moore was given a bonus under the contract of a five per cent interest in the production from the oil well, dependent upon the success attending the efforts, not of Mr. Moore, but of the defendants in putting the well on production. Taken in its entirety, the agreement manifestly provides, as a consideration or bonus for the loan therein referred to, that Mr. Moore was given a right to share in the profits or proceeds of an oil business, in the management and operation of which he himself was to exert no effort, but which business was to be conducted, controlled and managed by others in the persons of these defendants.

The constitutionality of the corporate securities act was established in the cases of People v. Craven, 219 Cal. 522, 27 P.2d 906; Domestic, etc., Co., Ltd. v. Long, supra; and People v. Yant, supra, and is not now open to question.

For the foregoing reasons, the judgment and the order denying defendants' motion for new trial are, and each is, affirmed.

WHITE, Justice.

YORK, P. J., and DORAN, J., concur.

Copied to clipboard