Opinion ID: 1915619
Heading Depth: 1
Heading Rank: 6

Heading: Were the Defendant's Constitutional Rights Violated?

Text: A. Retroactive application of determination that COCOTS are securities. Pace argues the decision in this case violated his constitutional due process rights because until the trial court rendered its decision in this case, there had been no adjudication that COCOTS were securities under Iowa law. This argument has no merit. `The principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student.' Rivers v. Roadway Express, Inc., 511 U.S. 298, 311-12, 114 S.Ct. 1510, 1519, 128 L.Ed.2d 274, 288 (1994) (citation omitted); accord Casey's Gen. Stores, Inc. v. Blackford, 661 N.W.2d 515, 525 (Iowa 2003) (stating judicial decisions generally operate retroactively and prospectively). Accordingly, [a] judicial construction of a statute is an authoritative statement of what the statute meant before as well as after the decision of the case giving rise to that construction. Rivers, 511 U.S. at 312-13, 114 S.Ct. at 1519, 128 L.Ed.2d at 289 (footnote omitted). Furthermore, there is no constitutional prohibition against the retroactive application of judicial decisions, even those overruling prior precedent. See State v. Monroe, 236 N.W.2d 24, 37-38 (Iowa 1975) (stating it is now well settled that the constitution neither prohibits nor requires retroactive application of [judicial] decisions); 20 Am.Jur.2d Courts § 173, at 455 (1995). As the United States Supreme Court noted in its Rivers decision, The essence of judicial decisionmaking applying general rules to particular situations necessarily involves some peril to individual expectations because it is often difficult to predict the precise application of a general rule until it has been distilled in the crucible of litigation. 511 U.S. at 312, 114 S.Ct. at 1519, 128 L.Ed.2d at 288. Pace voluntarily subjected himself to this peril when, as an unregistered agent, he sold COCOTS that had not been registered. We also reject Pace's assertion that constitutional proscriptions against ex post facto laws are violated by applying the decision that COCOTS are securities to his case. See U.S. Const. art. I, § 10; Iowa Const. art. I, § 21. Even if we assume ex post facto limitations apply to this civil proceeding, the Ex Post Facto Clause is not violated here. See generally State v. Corwin, 616 N.W.2d 600, 601 (Iowa 2000) (noting that although [p]urely civil penalties are not subject to ex post facto restrictions, civil penalties that are intended to punish are subject to such limitations). Ex Post Facto Clauses forbid the application of a new punitive measure to conduct already committed. See id. The civil remedies and penalties imposed here were not new: they were not enacted after Pace engaged in the prohibited acts. To the contrary, the statutes providing for civil relief were adopted long before Pace decided to sell unregistered COCOTS without becoming a registered agent. Consequently, ex post facto principles are simply not implicated in this case. B. Sufficiency of Notice That Sale of Unregistered COCOTS Was Unlawful. Pace asserts he did not have fair warning that his conduct would subject him to the civil remedies and penalties of chapters 502 and 714 until the trial court in this suit determined that COCOTS were securities within the meaning of Iowa law. The due process requirement that citizens have fair notice of prohibited conduct is satisfied when the terms of a civil statute are such that an ordinary person exercising common sense can sufficiently understand and fulfill its proscriptions. Shriver v. Iowa Dep't of Transp., 430 N.W.2d 921, 925 (Iowa 1988); accord United States v. Harriss, 347 U.S. 612, 617, 74 S.Ct. 808, 811-12, 98 L.Ed. 989, 996 (1954); Fisher, 510 N.W.2d at 876. In the sphere of economic regulation, this court has set forth the following guiding principles: Literal exactitude or precision is not necessary. If vagueness can be avoided by a reasonable construction, consistent with the statute's purpose and traditional restraints against judicial legislation, the statute must be interpreted in that way. Where economic regulation is involved, the statute is subject to a less strict vagueness test because its subject matter is often more narrow, and because businesses, which face economic demands to plan behavior carefully, can be expected to consult relevant legislation in advance of action. Knepper v. Monticello State Bank, 450 N.W.2d 833, 838 (Iowa 1990) (citations omitted). Chapter 502, including the statutory definition of security, was enacted long before Pace began to sell COCOTS. This statute clearly requires registration of securities, as well as registration of the agents selling them. It also clearly prohibits misrepresentations and deception in the sale of such investments. The only aspect of the present case that was not expressly stated in the statute was the fact that COCOTS are securities and thus subject to regulation under chapter 502. The securities law does, however, specifically include investment contracts within the statutory definition of security. In addition, the insurance department has adopted a detailed definition of the term investment contract, which, as noted earlier, is based on a 1946 Supreme Court decision. In addition, our prior opinions in Tyler and Kraklio gave citizens notice of the breadth of this term. Cf. State v. Hunter, 550 N.W.2d 460, 465 (Iowa 1996) (A statutory term provides fair warning if the meaning of the word `is to be fairly ascertainable by reference to similar statutes, prior judicial determinations, reference to the dictionary, or if the questioned words have a common and generally accepted meaning.' (Citation omitted and emphasis added.)), overruled on other grounds by State v. Robinson, 618 N.W.2d 306, 312 (Iowa 2000). Thus, Pace's due process rights were not violated merely because the agency rule did not explicitly state that COCOTS are investment contracts. This court has recognized that in `regulating certain matters a degree of indefiniteness is necessary to avoid unduly restricting the applicability of the proscribing rule.' Fisher, 510 N.W.2d at 876 (citation omitted). As a practical matter, it would be impossible and counterproductive for the legislature or the insurance department to list all transactions that fall within the scope of the term investment contract. Cf. Eaves v. Bd. of Med. Exam'rs, 467 N.W.2d 234, 236 (Iowa 1991) (holding that statute prohibiting [k]nowingly ... engaging in... practice harmful or detrimental to the public gave sufficient notice to doctors, stating [i]t would be impossible to catalog all the types of professional misconduct). A degree of indefiniteness is essential to prevent circumvention of the statute through the development of creative transactions that would fall outside even the most exhaustively crafted list of regulated investments. See Kraklio, 560 N.W.2d at 18 ([T]he term `investment contracts' is included within the definition of security `to identify unconventional instruments that have the essential properties of a debt or equity security.' (Citation omitted.)); accord Howey, 328 U.S. at 299, 66 S.Ct. at 1103, 90 L.Ed. at 1250 (recognizing need for flexible definition to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits). Consequently, the legislature is permitted some leeway to define the prohibited conduct in broad terms that can be reasonably applied to varying factual circumstances. That is what the legislature did here. Consequently, we think chapter 502 and the department's administrative rule gave the defendant fair notice that his sale of unregistered COCOTS as an unregistered agent was unlawful. C. Failure of State to Issue a Cease-and-Desist Order Prior to Commencing Civil Enforcement Proceeding. The defendant's final argument rests on the failure of the Iowa Securities Bureau to issue a cease-and-desist order to Pace prior to the State commencing the present action against him. We first note that chapter 502 does not require the State to proceed progressively under the statute, using administrative remedies before it is permitted to pursue a civil or criminal enforcement action in court. Because there is no statutory basis for criticism of the procedure followed by the State in this case, Pace claims the State's decision to seek civil remedies without first ordering him to cease and desist violated his due process rights to notice and an opportunity to be heard. See U.S. Const. amend. XIV, § 1; Iowa Const. art. I, § 9. Pace relies on a federal district court case to support his position, Economou v. Wade, 515 F.Supp. 813 (S.D.Iowa 1980). In Economou, the Iowa superintendent of securities had issued a cease and desist order against the plaintiffs directing them to stop the sale of unregistered securities in Iowa. Economou, 515 F.Supp. at 814. The plaintiffs claimed in a federal lawsuit that the superintendent's order violated their procedural due process rights because there was no prior notice or hearing on whether the plaintiffs were actually violating Iowa securities law. Id. The federal court held the plaintiffs' property interests were implicated by the agency order, but concluded the cease and desist order itself served as notice, and the post-order hearing offered to the plaintiffs in the order adequately protected their rights. Id. at 815. Pointing out that chapter 502 does not require notice and an opportunity for hearing before a cease and desist order is issued, the court specifically rejected the plaintiffs' contention that due process required a hearing prior to the issuance of the order. Id. Contrary to the defendant's assertion in this case, the Economou decision does not stand for the proposition that a cease and desist order must precede a civil enforcement action. The Economou court simply held that the issuance of a cease and desist order with the opportunity for a prompt post-order hearing complies with due process. Here, the initiation of the civil enforcement hearing was procedurally more favorable to the defendants than the cease and desist order was to the plaintiffs in Economou. In Economou the plaintiffs were required to immediately stop their sale of securities without first being afforded a hearing on whether their conduct violated Iowa securities law. Id. at 814. In contrast, here, the State asked for relief, including injunctive relief, only after such notice and hearing deemed reasonably required by the trial court. See Quality Refrigerated Servs., Inc. v. City of Spencer, 586 N.W.2d 202, 205 (Iowa 1998) (The Due Process Clause requires that any deprivation of property `be preceded by notice and opportunity for hearing appropriate to the nature of the case.' (Citation omitted.)). Thus, the defendant's due process rights were not violated.