Opinion ID: 1127718
Heading Depth: 1
Heading Rank: 2

Heading: violation of utah uniform securities act

Text: Lichfield attacks the verdict finding him liable for violating the Utah Uniform Securities Act. He argues (1) that Zephor's corporate authority was suspended in November 1987, prior to any of Steenblik's investments, (2) that his position with Zephor as a director and an officer was terminated when Zephor's corporate authority was suspended, and (3) that his personal involvement with Steenblik was so nominal that he had no legal liability. Lichfield contends that the evidence shows he had no knowledge that Rasmussen had induced Steenblik to invest through Zephor and that he assumed that plaintiff was Rasmussen's personal client, not Zephor's. He further claims that although he continued to be involved in various business dealings with Rasmussen after Zephor was suspended, he did so only on an informal, ad hoc basis, not as a principal of Zephor. In short, Lichfield argues that the evidence shows that his relationship was severed with Zephor and Rasmussen to such an extent that the jury could not reasonably find him liable under the Act. Contrary to Lichfield's contentions, the evidence clearly shows that Lichfield's relationship with Zephor continued after the suspension of its corporate authority. In a letter to Rasmussen dated March 6, 1989, Lichfield complained that work for Zephor was consuming at least 50% of Lichfield's time and that [a]s you may perceive, I am sick of making excuses for you [Rasmussen] and Zephor, so I QUIT. Lichfield complained about his involvement with other businesses including Rex Mining, Green Construction, and HPS, and he withdrew from them also. Significantly, he referred to these companies as Zephor skeletons. Lichfield also had personal involvement with Steenblik's investments that manifested a continuing relationship with Zephor. He met with Steenblik in April, October, and November 1988. During those three meetings, Steenblik was induced to invest $78,000 in HPS, Rex Mining, Green Construction, and Fairway. Lichfield signed or prepared documents purporting to secure all of these investments except the $35,000 loan to Fairway. He had a personal interest in each of these entities. The evidence, rather than showing that Lichfield's relationship with Zephor ceased on the corporation's suspension, as he maintains, clearly allowed the jury to conclude that Lichfield had a connection with Zephor that existed long after Zephor's corporate authority was suspended. Lichfield's participation in Zephor's operations after its corporate authority was suspended subjected him to liability for acts proscribed by the Utah Uniform Securities Act (the Act). [2] The Act applies to those who are able to exert control and influence over the policies and decisions of others. See Utah Code Ann. § 61-1-22; Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1441 (9th Cir.1987); Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 885 (3d Cir.1975). Section 61-1-22 imposes liability on any person who sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made ... not misleading. Utah Code Ann. § 61-1-22. [3] It also imposes liability on [e]very person who directly or indirectly controls a seller ..., every partner, officer, or director of such seller ..., [and] every person occupying a similar status or performing similar functions unless he sustains the burden of proof that he did not know, and in exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist. Id. Thus, a partner, an officer, a director, a person of similar status or function, or a seller of securities is liable for violations committed by the entity unless that person proves the affirmative defense that he lacked knowledge of the unlawful acts. Thus, the scope of liability under the Utah Act is similar in a number of respects to § 77 o of the Federal Securities Act of 1934. [4] However, Utah Code Ann. § 61-1-22(2) deviates from the federal act by expressly imposing liability on every partner, officer, director, or the like. The plaintiff need not demonstrate that such a person was able to control the transaction. If it is established that the defendant functioned in or occupied one of these positions, the defendant has the burden of proving that he did not know and, in the exercise of reasonable care, could not have known of the violation of the Act. See Mitchell v. Beard, 256 Ark. 926, 513 S.W.2d 905, 907 (1974) (construing similar statute); Arnold v. Dirrim, 398 N.E.2d 426, 433-34 (Ind.Ct.App. 1979) (same); Foelker v. Kwake, 279 Or. 379, 568 P.2d 1369, 1373 (1977) (en banc); McGaha v. Mosley, 283 S.C. 268, 322 S.E.2d 461, 465 (Ct.App.1984). Furthermore, Utah Code Ann. § 61-1-22(1)(b) provides that upon a showing that the violation was reckless or intentional, the court may award treble damages, interest, costs, and attorney fees. Lichfield argues that the suspension of Zephor's corporate authority terminated his personal liability as a director and an officer of Zephor. Suspension is a temporary restriction on the corporation's authority and functions [5] that renders the corporation powerless or unable to continue its normal operations. See Mackay & Knobel Enter., Inc. v. Teton Van Gas, Inc., 23 Utah 2d 200, 203, 460 P.2d 828, 829 (1969); Micciche v. Billings, 727 P.2d 367, 370 (Colo.1986); Kupski v. Bal Invest. Co., 35 Mich.App. 680, 192 N.W.2d 519, 522 (1971); see also Colo. Rev.Stat. § 7-10-109(2) (repealed 1994) (providing that [a]ny domestic corporation which is suspended ... shall be inoperative and no longer competent to transact business in this state). Under the former Business Corporation Act, the corporation could cure the default and regain its powers by correcting any delinquencies and paying a reinstatement fee. Utah Code Ann. § 16-10-88.2 (repealed 1987). [6] A temporary revocation of authority is intended to encourage a delinquent corporation to rectify its delinquency. Bank of America Nat'l Trust & Savings Assoc. v. Morse, 265 Or. 72, 508 P.2d 194, 196 (1973). Thus, the suspension revoked Zephor's authority and gave the corporation one year to rectify its delinquency or be dissolved. Zephor's officers' liability for its operations during suspension, however, was not terminated. The liability for operating a corporation without authority is set forth in Utah Code Ann. § 16-10-139, which provides: All persons who assume to act as a corporation without authority so to do shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof. A person who purports to act for and on behalf of a corporation that has no corporate authority is personally liable. See Gillham Advertising Agency, Inc. v. Ipson, 567 P.2d 163, 165 (Utah 1977); see also Loveridge v. Dreagoux, 678 F.2d 870, 878 (10th Cir.1982) (interpreting Utah law). Section 16-10-139 is a codification of general corporation law that holds promoters personally liable as partners for preincorporation debts and obligations. See Malisewski v. Singer, 123 Ariz. 195, 598 P.2d 1014, 1015 (Ct.App.1979); Gazette Pub. Co. v. Brady, 204 Ark. 396, 162 S.W.2d 494, 496 (1942); Holzer Sheet Metal Works v. Reynolds & Marshall, 43 So.2d 169 (La.Ct.App.1949). There is, however, a split of authority as to whether personal liability as provided by the general rule embodied in § 16-10-139 applies when a corporation's authority is suspended or whether its application is limited to preincorporation activities. A minority of jurisdictions hold that individuals are not liable for corporate obligations incurred while the corporation is suspended. Micciche v. Billings, 727 P.2d 367, 371 (Colo.1986), for example, held that corporate officers were not personally liable, under a statute worded identically to § 16-10-139, for obligations they incurred during suspension. The Colorado Supreme Court gave three reasons for its holding. First, it stated that a purpose of the statute was to eliminate de facto corporations. Second, the absence of express language imposing personal liability indicated that no liability was intended because prior statutes had expressly imposed personal liability on officers and directors for corporate debts incurred during suspension. Finally, the court stated that Colorado case law held that upon reinstatement there is no personal liability for corporate debts incurred during suspension. The Colorado court reasoned that it would be anomalous to impose personal liability if reinstatement is not sought and at the same time eliminate that liability if reinstatement is obtained. Such a rule would make personal liability contingent on corporate actions over which the individual has no control. In Colorado, therefore, persons operating a suspended corporation are not personally liable for obligations arising from those operations. A contrary rule is followed in a majority of jurisdictions. For example, a corporate officer was held personally liable, under a Mississippi statute identical to § 16-10-139, for continuing business while the corporation was suspended. Carolina Transformer Co. v. Anderson, 341 So.2d 1327, 1329-30 (Miss. 1977). Likewise, in T-K Distributors, Inc. v. Soldevere, 146 Ariz. 150, 152, 704 P.2d 280, 282 (Ct.App.1985), principal stockholders were held personally liable for their acts performed after revocation of corporate authority but before reinstatement. See also Anderson v. Hillsborough Sheet Metal, Inc., 513 So.2d 1359 (Fla.Dist.Ct.App.1987); Estate of Plepel v. Industrial Metals, Inc., 115 Ill.App.3d 803, 71 Ill.Dec. 365, 450 N.E.2d 1244 (1983); Kessler Distributing Co. v. Neill, 317 N.W.2d 519 (Iowa Ct.App.1982). T-K Distributors acknowledged that its statute, identical to § 16-10-139, was intended to abolish the doctrine of de facto corporations but further noted that its broad language applied to all who assume to act as a corporation without authority and sets forth no exception for individual liability which might arise during the period of revocation and reinstatement of a corporation. 704 P.2d at 282; see also Carolina Transformer, 341 So.2d at 1330; Kessler Distributing, 317 N.W.2d at 522. The statutory history in Arizona also indicated that individuals who continued a corporation's business after its authority had been revoked were personally liable. See T-K Distributors, 704 P.2d at 282. Also following the majority rule, the Iowa Court of Appeals reasoned: Reinstatement of the corporate charter should not be viewed as retroactively restoring the privilege of limited liability with respect to transactions which took place during the period of time when the corporate charter was revoked. Kessler Distributing, 317 N.W.2d at 522; T-K Distributors, 704 P.2d at 283. Jurisdictions that do not automatically eliminate personal liability upon reinstatement do not create an anomaly by holding persons liable for assuming to act as a corporation when the corporation's authority has been suspended. In our view, the reasoning that supports the majority rule is persuasive. By its terms, § 16-10-139 applies to all persons who act as a corporation without authority. See Murphy v. Crosland, 886 P.2d 74, 80 (Utah Ct.App.1994). It therefore abolishes the de facto corporation doctrine, but nothing in the statute's language suggests that it is limited to that purpose. See cases cited in American Vending Servs. Inc. v. Morse, 881 P.2d 917 (Utah Ct.App.1994). Further, nothing in Utah's statutory history suggests that § 16-10-139 is limited to preincorporation activities. Here, Zephor's authority not only was suspended, but was never reinstated. As to corporations that have been suspended and not reinstated, we hold that officers and directors who continue the business of a suspended corporation are personally liable for all debts and liabilities arising from those operations that are a continuation of the types of activities the corporation performed. Under such circumstances, the relationship of persons who continue the operations of a suspended corporation is like the relationship of preincorporation promoters, which is essentially that of partners. Thus, persons who act as if pursuant to valid corporate authority, after that authority has been suspended, are personally responsible for liabilities arising from the continued operations. First Nat'l Bank of Boston v. Silberstein, 398 S.W.2d 914, 915-16 (Tex.1966). They are jointly and severally liable with others who know the corporation's authority is no longer effective but continue its operations. Mobil Oil Corp. v. Thoss, 385 So.2d 726, 726-27 (Fla.Dist.Ct.App.1980) (construing a similarly worded statute); Steve's Equip. Service, Inc. v. Riebrandt, 121 Ill.App.3d 66, 76 Ill.Dec. 612, 615, 459 N.E.2d 21, 24 (1984) (same); Kessler Dist. Co. v. Neill, 317 N.W.2d 519, 522 (Iowa Ct.App.1982) (same). As stated, the Utah Securities Act provides that every partner of a securities seller and every person occupying a similar status or performing similar functions is liable unless he proves that he neither knew nor in the exercise of reasonable care could have known of the violations. Utah Code Ann. § 61-1-22(2). Lichfield argues that the evidence shows he did not know and could not have known that the securities sold to Steenblik were sold in violation of the Act. His argument does not comport with the facts and the inferences the jury was entitled to draw. Lichfield was present when plaintiff invested $20,000 in HPS before it was incorporated. He listened as Rasmussen assured Steenblik that HPS was a sound investment without disclosing the material facts that HPS was a start-up company with no operating history and no clients. In addition, he signed the loan disclosure statement which falsely purported to show the loan was secured with HPS preferred stock. It is inconceivable that he did not know of this violation. Lichfield's knowledge of Steenblik's subsequent investments in HPS, Rex Mining, and Green Construction is equally clear. He was present at each meeting; he had a personal interest in each investment; and similar untrue statements or material omissions induced plaintiff's investments. Lichfield was a director or an officer as those terms are used in § 61-1-22, and he participated in meetings where false or misleading statements were made or material facts were omitted in the sale of a security. Under such circumstances, such a person is liable if he does not exercise his power or influence to prevent the illegal conduct. San Francisco-Oklahoma Petroleum Exploration Corp. v. Carstan Oil Co., 765 F.2d 962, 964 (10th Cir.1985) (per curiam). Actual knowledge of the violations is sufficient for the jury to find a defendant liable. See id. at 964; Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1442 (9th Cir.1987); McGaha v. Mosley, 283 S.C. 268, 322 S.E.2d 461, 465 (Ct. App.1984). Lichfield asserts that he neither knew of nor participated in Steenblik's $35,000 investment in Fairway. Even accepting his claim as true, Lichfield is still liable. The lack-of-knowledge defense of § 61-1-22(2) refers not to a particular transaction, but to the existence of the basic facts relating to the course of business of the corporation. The director [or officer] need not have been involved in the particular transaction. San Francisco-Oklahoma Petroleum, 765 F.2d at 965. Ignorance of a particular transaction is not exculpatory because officers and directors are liable if, in the exercise of reasonable care, they could have known. See Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 804 (3d Cir.1978); Moerman v. Zipco, Inc., 302 F.Supp. 439, 450 (E.D.N.Y. 1969). As discussed, starting in April 1988, Lichfield clearly knew that Steenblik was being fraudulently enticed into making investments. He did nothing to warn her or prevent her savings from being consumed. To the contrary, Lichfield helped defraud her. He cannot escape liability by claiming that one of the fraudulent transactions was completed without his knowledge. Lichfield also argues that Utah law requires more than nominal participation to establish liability under the Act. He relies on Willis v. Spring Canyon Copper Co., 4 Utah 2d 211, 291 P.2d 878 (1956), and Harper v. Tri-State Motors, Inc., 90 Utah 212, 58 P.2d 18 (1936), for support. Those cases construed the forerunner of the Utah Uniform Securities Act, which expressly limited liability to defendants who participated or aided in some way. See Willis, 4 Utah 2d at 212-13, 291 P.2d at 879; Harper, 90 Utah at 214, 58 P.2d at 19; see also Utah Code Ann. § 61-1-25 (1953) (repealed 1963). As written, § 61-1-22 imposes liability on a partner, an officer, or a director without requiring any direct participation in a particular transaction. In this regard, it is significant that the Act deals differently with employees of sellers than with officers and directors. Liability is imposed on an employee of a seller only if the employee materially aids in a sale that violates subsection (1) of § 61-1-22. Therefore, as a director, Lichfield's liability was not dependent on his personal participation in the transaction. Lichfield also contests the finding that he recklessly or intentionally violated the Act, which conduct gave rise to treble damages. See Utah Code Ann. § 61-1-22(1)(b). The evidence supports the jury verdict. Lichfield was personally involved with Steenblik's investments: He signed loan disclosure and stock purchase agreements, he continuously reassured her that her money was secure, and he funded his personal business ventures by repeatedly returning to Steenblik for funds. Lichfield's conduct was intentional and reckless.