### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE August 7, 2001 Session
JOHN T. KING v. ANNE B. POPE, Commissioner of the Tennessee Department of Commerce and Insurance Direct Appeal from the Chancery Court Part III, for Davidson County No. 99-3550-III Hon. Ellen Hobbs Lyle, Chancellor

No. M2000-02127-COA-R3-CV - Filed October 10, 2001

The Commissioner re v oked Petitioner’s security lic

ense upon finding

Petitioner had sold unregistered securities. The Chancellor r eviewed the act

ion and affirmed

. On appeal,

we reverse and dismiss the action for revocation. Tenn. R. App. P.3 Appe al as of Right; Judgme

nt of the Chancery Co

urt Reversed.
H ERSCHEL P ICKENS F RANKS , J., de livered the opinion of the court, in which H OUSTON M. G ODDARD , P.J., and C HARLES D. S USANO , J R ., J., joined.

R. Louis Crossley, Jr., Knoxville, Tennessee, and W. Davidson Broemel, Nashville, Tennessee, for Appellant , John T. K ing.
Paul G. Summers, Attorney General and Reporter, Michael E. Moore, Solicitor General, and Janet M. Kleinfelter, Senior Counsel, Nashville, Tennessee, for Appellee, Anne B. Pope.

OPINION
This action commence

d when th e Department of Commerce and Insurance filed a complaint seeking to revo

ke John D. King’s r

egist ration as an agent, alleging that he was selling unregistered

securities through a sale/leaseback program offered by his company. C ap ital Investments,

Inc., King’s company, beg an selling a pay telephone sal e/leaseback program for Qu arter Call, Inc., (“QCI”) in February of 1994. This plan sold pay telephones from QCI to consumers for $4,995.00 each, and then theconsumers leased the phones back to QCI for lease payments of $75.00 per month, for

a term of sixty months. The consumers received the fixed lease payment and did not receive an y fluctuation of payments depending on the revenues generated by the phone. The

### -2-

consum er also entered into an Option to Sell Agreement, whereby the consumer c ould re sell th e te lephones to Q CI at any t ime upo n a s peci fie d no tic e. Q CI’s obl igat ion s we re gu aran tee d by a performance

bond with American Diversified Insurance Company, and at the end of the lease, QCI was obligated to repurchase the phone from the customer.

In the administrative proceeding, the parties agreed to stipulate the facts and exhibits and the issue of whether the program was a security wa s submitted to an Administrative Law Judge. The ALJ issued an Or

der finding that

this program was a security, and King appealed to the Commissioner who affirmed the ALJ’s Order. This action was then filed in Chancery Court seeking review.
The Chancell or aff irmed the ALJ’s

ruling, finding

that the ALJ appl

ied the proper te

st in finding an investm

ent contract, and that the requirements of the test were met with the sale/leasebac

k program. This r

uling is now appea

led to this Court. The sole issue on appeal is whether the sale/leaseback

program constit

utes a security under Tennessee law?

The Chancellor’s review, as well as this Court’s of the ALJ’s ruling is pursuant

to the standard set for

th in Tenn. Code Ann . §4-5-322 (h), w hich states:
The court may affirm the dec isio n of the agency or remand the case f or further proceedings.

The court may reverse or modify the decision if the rights of the petitioner have been preju

diced because t

he admi nistr ative findings, i nferences, conclusions or decisions are: (1) In violati

on of constitutiona

l or statutory

provisions; (2) In ex cess of t he s tat uto ry aut hor ity o f th e age ncy; (3) Made upon unlawful procedure; (4) Arbitrary or capricious or characterized by abuse of discretion or

clearly unwarranted exercise of discretion; or (5) Unsupported by evi dence whic h is both substantial and material in the light of the entire record.
In determining the substantiality of evidence, the c

ourt shall take into account whatever in the record fairly detracts from its weight, but the court shall not substitute its judgment for that of the agency as to t he weight of the evidence on questions of fact

.

### -3- Our review of the Trial Court's decisionis essentially to determine whether or not the Trial court prope rly applied the foregoing standard of review. Papachristou v. University of Tennessee , 29 S.W.3d 487, 490 (Tenn. Ct. App. 2000). Further, “substantial and material evidence" has been defined as "such relevant evidence as a reasonable mind might accept to support a rational conclusion and such as to furnish a reasonably sound basis for the action und er consideration." Id. Tenn. Code Ann. §48 -1-102 defines se curity as:
“Se curi ty” means any note, stock, treasury stoc k, bond , debentu

re, evidence of indebtedness,

certificate of

interest or participation in a

ny profit-s

haring agre

ement, collateral-tru

st certificate, pr

e-organization

certificate or

subscription, tra

nsf era ble share , investment contract, voting-trust certificate, certificat e of deposit for a security, cert if icate of interest or pa

rticipation in an oi

l, gas, or mining

title or lease or i

n payments out of production under such a title or lease; or, in general, any interest or instrumentcom mon ly kn own as a “ secu rit y,” o r any c ertificate of interest or participation in, temporary or interim certificate for, receipt for, g uarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. . . .
The Commissioner insists that the transaction was an “investment contract” within the meaning of the definition of “

security” set forth in the Stat

ute. As the Administr

ative Law Judg

e observed:
T his statute is remarkably similar to the Federal statute, which was used as a basi s for the Stat e stat ute. It defines a security as: “any note, stock, treasury stock, bond, debenture, certificate of

interest or participation in any profit-sharing agreement or in any oil, ga

s, or other minera

l royalty or lease, any collateral-trust certificate, preorganization certificate, or subscription, transferable share, investment contract,

. . . The ALJ based his decision finding that this sale/leaseback program constituted an investmentcontract and therefore a security under Te nnessee law on the Tennessee Court of Criminal Appeals’ decision in the case of State v. Brewer , 932 S.W.2d 1 (Tenn. Crim. App. 1996). The Brewer

Court applied the so-called “Howey-Risk Test,”and followed the decision in State v. Hawaii Market Center, Inc., 52 Haw. 642, 485 P.2d 105 (Haw. 1971). However, the Sixth Circuit, in 1997, in Cooper

v. King , 114 F.3d 1186, 1997 WL 243424 (6th Cir. Tenn.), which involved the sale of telephones by Capital Investments to the Coopers in the same manner and ter ms as King marketed the phones for QCI, said:

The Coopers cl aim that th e District Court erred in finding t hat the QCI sale and leaseback program was not

a security . A security

includes an instru

ment or interest (1) commonly known as a stock, (2) an investment as specified in the Security Act and Security Exchange Act, and (3) some investment contra cts or certificates of interest or participation.

15 U.S.C. §§77b(1); 78c(a )(10). An investme

nt contract is a security if it satisfies a four part test: (1) an investment of money; (2) in a common

### -4- enterprise; (3) with the expectatio n of profits; (4) de

rived solely

from the efforts of others. S.E.C. v. W.J. Howey Co. , 328 U.S. 293, 298-99 (1946). The substanceof the transaction, i.e., “the economic realities,” rather than is form, determine whether a financial arra

ngement is a sec

urit y. U nited Housing Fund v. Forman, 421 U.S. 837, 851-52 (1975).
The Court applied what is commonly known as a Howey

-Forman test,

which is the majori

ty rule in the Federal courts. Id. In order to satisfy all the elements of a security under the statute, the Court said horizontal commonalities are required, i.e., the sharing or pooling of funds in which the fortunes of individual inv estors are inextricably intertwined by contra ctual and financial arrangem ents. Citin g Union Planters National Ban k v. Commercial Cre

dit Business Loans, Inc. , 651 F.2d 1174 (6 th Cir. 1981) The Court then said:

Here, Plaintiffs ha ve not demonstrated that the purchase of their phones was “inextricably

intert wi ned” by contractual or financial arrang ements to that of any other investors. Plaintiffs did not acquire or own the phones in common with other investors. Nor did they

have an interest

in the profit generated

from all of the installed phones. Rather, th e purchasers sim

ply receiv ed a fixed monthly

rental fee of $75. Further, each owner, including Plaintiffs, had a separate purchase agreement that individually entitled them to their own phones and to resell them

to QCI. The mere fact that funds of investors, such as Plaintiffs, were co-mingled in a single bank acco unt doe s no t re nde r th is t rans act ion a sec uri ty. King also argues that either under the Howey-Forman test or the Howey Risk Capital test the transactions

in this case were

not securiti

es. We do not reach the analysis employed by Brewer , because we believe the better reasoned and proper test is the Howey-Forman test, as

applied by the 6 th Circuit in the Cooper case. When that test is applied to the transactions before us, as found by the 6 th Circuit, we hold the transactions at is sue are not secu riti es within the meaning of the Tennessee Act.

The A LJ and the Chancellor did not inappropriately look to the Brewer case f o r guidance. However, we de cline to foll

ow its a nalysis and adopt the Howey-For man test which results in the reve

rsal of the Chanc

ellor and the Commis sioner’s finding s. Acco rdi ngly, the decision of the Trial Court i s reversed, the action dismissed and the cause is remanded to the

Commissioner to

dismiss the action against John T. King. The cost of the appeal is assessed to Appellee.

_________________________ H ERSCHEL P ICKENS F RANKS , J.