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DOMESTIC & FOREIGN PETROLEUM CO., Limited, v. LONG et al. (RIFFEY et al., Interveners).*
The sole question for our determination on this appeal is whether or not individuals may at all legally make and deliver, for value, instruments conveying interests in oil leases, without first having obtained a permit so to do from the commissioner of corporations. In the briefs it is said that this court must view the matter from first impression.
The facts which we deem necessary to a proper determination of this appeal are not disputed. In the year 1930, the individuals, who were at that time the owners of an oil and gas lease, for value, and without such a permit made and delivered to the defendants respectively instruments in the form of deeds, purporting to grant fractional interests or overriding royalties in and to all oil, petroleum, gas, and other hydrocarbon substances that may be produced and saved from the lands covered by the lease during the existence of the lease and all moneys derived from any sale thereof. None of these conveyances referred to a drilling contract in any way or obligated the grantees or any of them to bear any share in the costs of drilling, operating, or maintaining any oil well on the lease.
Additional details of the transactions are as follows: Two of the several owners of the lease conveyed all of their interests therein to the other owners, and each of these two received in exchange for his interest one of the instruments under discussion. Another of the instruments was given in payment of attorney's fees. The others were given for services rendered by the grantees, respectively, in procuring the lease. Each of the instruments was made and delivered in the ordinary course of business. None of them was sold or offered for sale to the public. All of them were made in individual instances, in a bona fide way, without any intent or design of violating or evading any provision of the Corporate Securities Act (St. 1917, p. 673, as amended).
A permit was obtained by the owners of the lease to sell and issue a series or issue of securities which were offered for sale and sold to the public, some of them to the interveners, for the purpose of raising money to drill an oil well on the lease. These securities obligated their owners to participate in the costs and expenses of operation and maintenance and evidenced the right of their owners to share in the profits of the oil well to be drilled on the lease with the proceeds of sale of these securities. There is no claim, however, that these securities are invalid. Plaintiff has been operating the oil well on the leased premises ever since July, 1931, at which time the plaintiff acquired by assignment the leasehold estate subject to the rights of the defendants, the interveners, and others therein.
Plaintiff and interveners claimed at the trial and plaintiff now claims that all of the instruments were “securities” as defined by section 2(a), subd. 7, of the Corporate Securities Act (St. 1929, p. 1251, § 2(a), subd. 7), and that the instruments which were issued without having been authorized by permit are void. The trial court held otherwise, and entered judgment accordingly, from which judgment the plaintiff appeals.
Section 3 of the Corporate Securities Act (St. 1917, p. 675, § 3) as it existed at the time in question provided: “No company shall sell * * * any security of its own issue until it shall have first applied for and secured from the commissioner a permit authorizing it so to do.” Section 16 of said act then provided (St. 1917, p. 679, § 12) and still provides (St. 1933, p. 2316, § 16): “Every security issued by any company, without a permit of the Commissioner authorizing the same then in effect, shall be void.” Under section 2(a), subds. 3, 6 (St. 1929, p. 1251, § 2(a), subds. 3, 6) the word “company” includes individuals, but the word “individual” “includes only persons selling * * * any security for their own issue.” Among the instruments included in the definition of a “security,” section 2 (a), subd. 7, are “certificate of interest in a profit-sharing agreement, certificate of interest in an oil, gas, or mining lease.” The following also appears as part of section 2 of said act: “(c) Except as hereinafter expressly provided, the provisions of this act shall not apply to the sale of any security in any of the following transactions: * * * 3. The sale in a bona fide way of any security by an owner who is not the issuer or an underwriter thereof, who sells the same for his own account; and not for the purpose of evading the provisions of this act.” St. 1929, p. 1251, § 2(c) (3). Section 14, now § 18 (St. 1925, p. 970, § 14; St. 1931, p. 950, § 18) imposes penalties for violation of the act “by imprisonment in the state prison not exceeding five years, or in a county jail not exceeding two years, or by a fine not exceeding five thousand dollars, or by both such fine and imprisonment.” The amendment of 1929 changed the act in regard to individuals. The pertinent portion of subdivision 8 of section 2(a) of the act (St. 1925, p. 962, § 2(a), subd. 8) prior to the amendment of 1929, was as follows: “The word ‘security,’ in so far as it applies to ‘individuals,’ includes: (a) any instrument offered to the public by an ‘individual’ evidencing or representing any right to participate or share in oil, gas * * * minerals. * * *” By an amendment in 1931 (St. 1931, p. 938, § 2(a), subd. 7), the word “title” was added to “lease” in the definition of “security,” so that “security” now includes any “certificate of interest in an oil, gas or mining title or lease.”
Appellant contends that the conveyances to the defendants “are certificates of interest in a profit-sharing enterprise, to-wit: a projected oil well.” The interests conveyed to the defendants are interests in the lease as distinguished from interests in the oil well thereon. “Profit is defined as ‘acquisition beyond expenditure,’ or ‘excess of value received over cost.”’ Prince v. Lamb, 128 Cal. 120, 60 P. 689, 691. Ordinarily profit is the net gain upon any business or investment. There are no profits in an oil well until after the costs of operation and maintenance and the rents and royalties and taxes and overhead are paid and deducted from the proceeds of the sale of the production. Defendants do not share in paying any of these expenses. The payments to them, on the contrary, are made as a part of these prior costs and expenses. As overriding royalty owners the defendants receive the same share of the production whether the wells show a large profit, whether they show a small profit, or whether they show a loss. The defendants do not have any share in the profits of the well nor are their returns measured in any way by the profits of the well. So it is evident that appellant's contention that the conveyances to the defendants are certificates of interest in a profit-sharing enterprise is not supported by the facts in the case.
It follows therefore that if the instruments under which defendants received title to their interests in the oil lease are securities it is because they are included in that phrase in the definition of the word “security” which says “certificate of interest in an oil, gas or mining lease.” The first question which then arises is: Are the instruments by which defendants claim interest in the oil lease “certificates?” Ordinarily a grant deed is not considered a certificate. A certificate states a fact. “A certificate is a written assurance, or official representation, that some act has or has not been done, or some event occurred, or some legal formality been complied with.” Black's Law Dictionary. Popularly, when used in connection with financial securities, the word “certificate” connotes a document in which the officer issuing the same purports to state on his authority as such that certain shares or participating interests are owned by some one named therein.
No statute should be interpreted so as to make of it a dragnet to catch and make criminals of innocent, unsuspecting, and well-meaning persons who are engaged in business in an honest and bona fide way. A statute creating a crime should define it so clearly and definitely that a person of ordinary understanding may know therefrom when he is violating its provisions. “So important is the liberty of the individual that it may not be taken away even from the most debased wretch in the land, except upon conviction of a crime which has been so clearly defined that all might know in what act or omission the violation of the law should consist.” In re Lockett, 179 Cal. 581, 178 P. 134, 135. Undoubtedly thousands of our citizens are making and delivering instruments evidencing interests in oil, gas, and mineral lands without securing permits therefor and without even the thought that such conduct might be in violation of the Corporate Securities Act.
Persons of ordinary understanding would not contemplate that grant deeds and other instruments conveying or assigning property rights are “certificates.” We must not assume that the word “certificate” is as broad and inclusive as the words “any instrument” as used in the act prior to the amendment of 1929. We must not hold that the word “certificate” when used in a criminal statute, the violation of which is punishable with such severe penalties as in the Corporate Securities Act, includes such instruments as grant deeds.
The word “certificate,” as spoken “on the street,” as printed on the financial page, as understood by those who are accustomed to dealing in securities, and we believe as used in the definition of “security” in the Corporate Securities Act, means something quite different from a deed, a conveyance, or an assignment. As so used it means a written declaration or statement that the person named therein is the owner of one or more shares or interests in a series or issue of similar shares or interests in some property, profit-sharing agreement, business enterprise, venture, or speculation, with the right to participate in net profits or dividends on a pro rata basis with the owners of all other like certificates of the same issue. Certificates, indorsed in blank, pass by mere delivery and without transfer on the books of the issuer. The instruments by which the defendants obtained title to their interests in the oil lease lack many of these necessary characteristics. They are not certificates as “certificate” is used in the definition of a “security” in the act.
Many of the statements which we have made regarding the word “certificate” might be made with equal or even greater force with respect to the word “security.” We shall not extend this opinion by needless repetition, and shall only say that the words deed, conveyance, and assignment are not used in the act in the definition of “security,” and that a person of ordinary understanding would not contemplate that the term “security” would include such instruments.
We must also give due consideration to the word “issue” used as a noun in the expression “of its own issue” in section 3 of the act. This is the section which forbids the sale of securities without a permit. We are satisfied that “issue,” as so used, means something entirely different from the words “make and deliver” which are ordinarily used with the words deeds, conveyances, assignments, and other instruments which are not commonly known as securities. An “issue” when connected with or applied to securities ordinarily contemplates a series or group of several of the same class of transfers to be issued as a series or group under a scheme or plan, offered to the public and sold to any one who might be persuaded to buy. It is fair to assume that the Legislature had in mind this ordinary use of the word “issue.” The instruments conveying interests in the oil lease to the defendants were not “of their own issue” within this common meaning of the word as used in the act under consideration.
If the Legislature had intended that the words “certificate” and “security” should include deeds, conveyances, and assignments, and had intended that the words “of their own issue” should mean the same as “make and deliver” as ordinarily used in connection with such instruments, it would have been a very simple matter to have said so in the act or in any of the several amendments. We do not say this by way of suggesting such an amendment, but for the purpose of indicating that we do not believe that the Legislature had any such intention.
However, our objection to the narrow and harsh construction of the act urged upon us by the appellant cuts much deeper than the proper definitions of words and phrases. Generally speaking, all men under our system of government have the right to acquire and possess property and to dispose of it under an unimpeded barter. The limitations come under the reserved police power and are based upon the wholesome doctrine that the health, safety, morals, and welfare of the public generally are superior to the rights of the individual. The police power, however, may not interfere with these rights under the guise of “general welfare” or “regulation,” although the California courts have gone a long way in support of such legislation holding that the courts will not inject their judgment where the subject-matter is susceptible to police power legislation. Certainly the reason would have to clearly appear to justify the injection of the police power into a situation such as we have wherein conveyances of interests in oil leases under individual bona fide sales in the ordinary course of business would be declared illegal and void.
We are bound, moreover, in the interpretation of this or any other act to give it a construction which will be both constitutional and effective if it can be done without violence to the language used. In considering this question it is well to recall that the act was declared unconstitutional and void in so far as it attempts to require a person owning securities, of which he is not the issuer or underwriter, to secure a broker's permit before he may lawfully sell such securities “in the course of repeated and successive transactions of like or similar character by him.” People v. Pace, 73 Cal. App. 548, 238 P. 1089, 1091. Thereafter in 1929 the Legislature amended the act by eliminating from the definition of “security” the phrase “any instrument offered to the public by an individual,” and by including in the definition of the word company “individuals selling securities of their own issue.”
The elimination of the phrase “offered to the public” created considerable confusion in the minds of many, which confusion has crept out in this case, by giving the impression that individuals, since said amendment was adopted, may not under any circumstances without a permit legally make and deliver any conveyances evidencing an interest in oil, gas, or mining leases. But the purpose and effect of the amendment of 1929, in so far as individuals are concerned, was to limit the regulation of individuals to the sale of securities “of their own issue.” By such amendment, individuals were put on a par in this respect with corporations and other companies because the sale of securities by a corporation or other company was already regulated in the same way by the words “of its own issue” in section 3 of the act.
The act should be considered all together with a view of arriving at its true meaning and intent. The whole tenor of the act is the regulation of the sale and the issue of “securities” under a scheme or plan where the public in general will buy. The purpose of such legislation is “to protect the public against the imposition of unsubstantial schemes and the securities based upon them.” Hall v. Geiger-Jones Co., 242 U. S. 539, 37 S. Ct. 217, 220, 61 L. Ed. 480, 70 L. R. A. 1917F, 514, Ann. Cas. 1917C, 643. With this purpose in mind, the Legislature has sought to include within the definition of “security” all instruments which are of a character usually offered to or dealt in by the general investing public. But the use of the words “certificate” and “share” and “beneficial interest” and “or any other instrument commonly known as a security” and the expressions “of its own issue” and “of their own issue” in section 2 of the act indicates clearly that the Legislature did not have in mind to regulate private transactions where there is no offer to the public and where the transfers are made, in a bona fide way, in individual instances in the ordinary course of business without design to evade the provisions of the act, such as were the transactions by which defendants herein obtained their interests.
Furthermore, if the contended for harsh interpretation of the Corporate Securities Act were the law it would be a veritable ball and chain on private transactions which do not in any way affect the public. Oils and minerals are classed as one industry, and, as such, is the chief industry of California. An act which would make it unlawful to sell or convey oil or mineral lands or leases, or any interest therein, by a company or an individual without first securing a permit therefor from the Commissioner of Corporations, would put the industry to intolerable delays, annoyance, and expense. It is common knowledge in California that oil companies and individuals buy and sell oil lands and obtain leases thereon and sell and transfer royalty interests therein in the ordinary course of business in individual instances with no thought of evading the provisions of the Corporate Securities Act. Pipe line companies buy the production from wells and leases on long-term contracts. Gasoline extraction companies contract for the natural gas from wells and leases, usually for the life of the wells or leases. These are of daily occurrence. Can we say that such transactions are invalid unless authorized by a permit? There is nothing inherently bad or reprehensible about the oil business and it yields to general rights as every other business yields to appropriate police restriction.
California is a rugged state with long ranges of high mountains, rich in minerals, and with rolling hills and broad valleys beneath the surface of which oil and gas has been and may be discovered. New mines are being opened up and new oil fields are being brought in, and who knows whether his land contains valuable minerals until a shaft is opened into it, and who knows whether oil and gas do not underly his lands until the drill has penetrated deep into the earth. If the Corporate Securities Act were given the narrow construction which would make it illegal and even criminal without a permit for the owner of oil or mineral lands in this state to lease or sell the same or any interest therein in good faith, in individual instances, without sale or offer of sale to the public, who would be so bold as to offer his lands or lots for sale? Who would risk the purchase of them? What dependence could be put in our titles? It would be an impossible situation. The Legislature never contemplated that such an extreme and harsh construction would be given to the Corporate Securities Act.
A construction of the Corporate Securities Act such as we place upon it will protect individuals in their constitutional rights and at the same time make the act effective “to protect the public against the imposition of unsubstantial schemes and the securities based on them.”
The case of the People v. Craven, 219 Cal. 522, 27 P.(2d) 906, presents no difficulty to a proper decision of this case. There was no claim in that case that the instruments sold and issued were not certificates. Indeed, that they were certificates seems to have been one of the facts to which defendant stipulated. The opinion in that case recites: “The defendant stipulated that he knowingly sold and issued the certificates of interest in the oil and gas leases in question and that he had not secured a permit therefor from the commissioner of corporations. * * * There can be no question but that the certificates of interest sold by the defendant were securities. We do not understand that the defendant contends otherwise.” The defense was based upon the contention that assuming that defendant had sold certificates of interest which were securities still he was not guilty because the sections of the Corporate Securities Act under discussion in so far as they affected individuals were unconstitutional and void. The certificates of interest in that case were sold and offered for sale to the public with design to evade the Corporate Securities Act and in defiance of that act. And the court said: “There would have been no practical difference in so far as the transaction might affect the public had the defendant formed a corporation, sold to it his leases in exchange for its stock, and then sold this stock without securing a permit.” In the instant case the instruments conveying interests in the oil lease to the defendants were not certificates, they were not securities as defined by the Corporate Securities Act, they were not sold or offered for sale to the public, and they were not of an “issue” of securities, and they were not sold with design or intent to evade the provisions of the act; all of which present an entirely different state of facts from that existing in the Craven Case.
From all of the foregoing, the conclusion is inescapable that conveyances of interests in oil leases are legal and valid, and need no permit from the commissioner of corporations, or from any other source, if such conveyances are made and delivered in the ordinary course of business in individual instances in a bona fide way without sale or offer of sale to the public.
Judgment affirmed.
CRAIL, Justice.
I concur: STEPHENS, P. J.
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Docket No: Civ. 8784.
Decided: March 02, 1935
Court: District Court of Appeal, Second District, Division 2, California.
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