Title: Carder v. Burrow

State: arkansas

Issuer: Arkansas Supreme Court

Document:

Frank CARDER v. Bruce BURROW

96-828                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                Opinion delivered March 17, 1997


1.   Securities regulation -- interpreting definition of security -
     - purpose of Arkansas Securities Act. -- The courts utilize a
     flexible approach when interpreting the definition of
     "security"; however, the definition should not be too narrowly
     construed or it could be inapplicable to transactions of the
     nature that the Securities Act was adopted to prevent; the
     Arkansas Securities Act was promulgated to protect investors,
     so a broad and flexible definition should govern which
     transactions constitute securities under this section; the
     name of a particular transaction or offering was not a
     decisive factor; the obvious purpose of the Securities Act is
     to "protect the general public"; this protection promotes full
     disclosure of important information to investors. 

2.   Securities regulation -- five-element test to determine
     whether transaction is security. -- The five-element test in
     analyzing whether a transaction is a security is as follows: 
     (a)  the investment of money or money's worth; (b) in a
     venture; (c) the expectation of some benefit to the investor
     as a result of the investment; (d) the contribution towards
     the risk capital of the venture; and (e) the absence of direct
     control over the investment or policy. 

3.   Securities regulation -- fixed rate of interest payable at
     fixed times not sufficient to make note a security -- no
     expectation of benefit to investor. -- A fixed rate of
     interest payable at fixed times does not constitute the
     "expectation of benefit" needed to make a note a security
     because it does not give the holder "an opportunity for either
     capital appreciation or participation in the earnings" of the
     company; a fixed rate of return is not an expectation of
     benefit to the investor. 

4.   Securities regulation -- sufficient evidence existed for trial
     court to rule that transaction was commercial loan and not
     sale of security -- no error found. -- Where appellant did
     invest money in the appellee's company which was used to fund
     its operations and was used as "risk capital"; where appellant
     expected to profit from the transaction through the receipt of
     the highest interest rate permissible by Arkansas law; where
     the loan rate was not dependent upon earnings of the
     corporation, and payment of the loan was expected regardless
     of company profitability; where there was no expectation to
     "profit" from this transaction as if it were an investment;
     where the loan was accounted for in appellant's books as an
     account receivable and on his income tax return as "interest
     income" instead of dividends; where appellant was a
     sophisticated investor; where appellant initially was given
     the offer to become a stockholder and refused this offer,
     making a conscious choice to instead offer a commercial loan
     to the company; where the transaction was not part of a broad
     solicitation for investments by the company; and where there
     were no allegations of fraud nor was this a situation
     involving a scheme devised to deceive uninformed investors,
     the trial court was correct in concluding that this was not
     the sale of a security as defined by the Arkansas Securities
     Act.   


     Appeal from Craighead Circuit Court; John N. Fogleman, Judge;
affirmed.
     Hatfield & Lassiter, by: Richard F. Hatfield, for appellant.
     The Rose Law Firm, A Professional Association, by:  Herbert C.
Rule, III and Kathryn Bennett Perkins, for appellee.
     
     W.H."Dub" Arnold, Chief Justice.
     This case involves the question of whether a transaction
between Appellant Frank Carder and Corporate Furnishings, Inc. (of
which Appellee Bruce Burrow was an organizer and president), is a
security within the definition in the Arkansas Securities Act, Ark.
Code Ann.  23-42-102 (12)(a) (1994 &Supp. 1995).  Appellant Carder
filed suit claiming that the transaction was an unauthorized sale
of a security, and, thus, he was entitled to recovery pursuant to
the Arkansas Securities Act.  The trial court dismissed the action
upon a finding that the transaction was not the sale of a security
but instead a commercial loan.    
     Corporate Furnishings, Inc. (hereinafter "CFI"), was
incorporated in January 1989 by Appellee Bruce Burrow and others
with the purpose of buying used office furniture for resale. 
George Carder III, son of Appellant Carder, subsequently became a
forty-seven percent stockholder.
     On behalf of CFI, George Carder offered Appellant Carder the
opportunity for Appellant Carder to purchase stock.  Appellant
Carder refused the offer to become a stockholder, and he testified
that he offered to loan CFI money instead of purchasing stock
because of the added protection that he would obtain as a secured
creditor.  Appellant Carder then made a loan to CFI, and a
promissory note was executed by CFI.   Pursuant to the note, the
initial loan sum was $100,000 with the option of additional
advances; the terms required CFI to pay accrued interest quarterly
and pay one-fourth (1/4) of the outstanding principal annually. 
The interest rate on the initial loan and all subsequent loans was
to be calculated at a rate of five percent per annum above the
federal discount rate calculated at the time of each loan -- the
maximum rate allowed by Arkansas law.  The loan was collateralized
by all of the furniture, fixtures, equipment, and inventories owned
at that time or in the future by CFI; a UCC security agreement was
filed.
     In 1992, CFI defaulted; Appellant Carder filed suit for
recovery of the sum transferred to CFI with interest at six percent
per annum plus attorney's fees pursuant to Ark. Code Ann.  23-42-
106(a)(1) (1994 & Supp. 1995).  
     The trial court determined that it was Appellant Carder's
intention that this loan be a "floor plan" loan, with which he was
familiar through his dealings in the automobile industry. 
Appellant Carder treated money paid to him by CFI as interest
income on his tax returns and testified that he characterized the
transactions as "floor plan financing."  The circuit court further
found that Appellant Carder was a sophisticated investor with
experience in a broad range of business and loan transactions and
that Appellant Carder had access to information regarding CFI's
financial performance as well as the status of its inventory
through his son, a major stockholder.  
     Additionally, the trial court found that the note was not a
part of a broad scale public offering by CFI.  Also, the circuit
court noted that most of CFI's venture capital came from several
loans, some of which were repaid with the proceeds of the loan from
Appellant Carder.
     Under Ark. Code Ann.  23-42-106(a)(1), any person who offers
or sells a security in violation of the Arkansas Securities Act is
liable to the person buying the security either in law or equity. 
In order for a claimant to recover pursuant to this section, the
transaction in question must be a security as defined by the
Arkansas Securities Act.  Ark. Code Ann.  23-42-102(12)(A) defines
"security" as follows:
     "Security" means any note; stock; treasury-stock; bond;
     debenture; evidence of indebtedness; certificate of
     interest or participation in any profit-sharing
     agreements; collateral-trust certificate; preorganization
     certificate or subscription; transferable share;
     investment contract; variable annuity contract;
     voting-trust certificate; certificate of deposit for a
     security;  certificate of interest or participation in an
     oil, gas, or mining title or lease or in payments out of
     production under such a title or lease; or, in general,
     any interest or instrument commonly known as a "security"
     or any certificate of interest or participation, 
     temporary or interim certificate for, guarantee of, or
     warrant or right to subscribe to or purchase, any of the
     foregoing.

(Emphasis supplied.)  Section 23-42-102(12)(B)(i) further provides
that the terms "sale" or "sell" do not include any bona fide pledge
or loan.
     In Schultz v. Rector-Phillips-Morse, Inc., 261 Ark. 769,