Court Opinion

ID: 7921439
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:23:40.755824+00
Date Added: 2024-06-11T16:33:05.123333
License: Public Domain

Lockett, J.,
dissenting: The purpose of the Kansas Securities Act (K.S.A. 17-1252 et seq.) is to place the promoting and dealing in speculative securities under rigid governmental regulation and control to protect investors by preventing the sale of fraudulent and worthless speculative securities. Speculative securities include those of which the value materially depends upon proposed or promised future promotion or development, rather than on present tangible assets or conditions. The test to be applied in determining whether a particular financial relationship constitutes an investment contract is whether the contractual arrangement involves an investment of money in a common enterprise with the profits to come from the efforts of others. Activator Supply Co. v. Wurth, 239 Kan. 610, Syl. ¶¶ 1, 2, 4, 722 P.2d 1081 (1986).
*239We differ from the majority’s conclusion that nowhere in the record does Bowe testify that Hood told him the money Bowe paid would be used in the business. At the preliminary examination, the State presented evidence to support its charge that the defendant had engaged in “acts, practices, or a course of business . . . that would operate as a fraud or deceit upon any person.” The contract and the testimony of Bowe as to the reasons that he invested $15,000 for 5V2 percent of Hood’s interest in the restaurant and drinking establishment were admitted as evidence. When Bowe was asked what his $15,000 was to be used for, Bowe testified: “Fifteen thousand was the purchase of the percentage into the business, of Bobby Gene’s, and also the money was supposed to have been put back into the establishment to buy the accouterments or whatever.”
At the conclusion of the preliminary examination, the following colloquy took place between the magistrate and the prosecuting attorney:
“JUDGE CLEAVER: . . . I'm just going to be quite blunt: I am not — I’m certainly not condoning what apparently happened with Mr. Hood, but I don’t know that it rises to the level of a violation of the law. And the Court’s concern is that the careful reading of this agreement is that the seller agrees to sell to buyer. Now, the seller is Bobby Hood. According to this agreement, whatever interest Bobby Hood would have had in that business, if it was, indeed, a corporation- — -which the testimony before this Court is that it was a corporation— then it obviously would have been a personal sale of stock.
“And based on the facts that the State has adduced at this point, I’m just not sure that the evidence is clear that it would have been his money to do with what he wanted to do. I’m not quite following the State’s argument. This agreement says that he, as an individual, is selling his interest. Well, the agreement is totally inadequate. We can all — I think we can all safely say that, in terms of identifying exactly what that interest was.
“But the only testimony before this court — and that was, I believe, by Mr. Duncan — was that he sold the corporation by the name of PD Enterprises to Mr. Hood. It’s not clear to the Court exactly who was operating this entity called Bobby Gene’s. But at this point, the Court, you know, quite frankly, would find that there’s not sufficient evidence to bind over. Now, that doesn’t mean that State can’t refile, but currently, there just really isn’t evidence as to what exactly was sold. If it was stock, then the money would have been Bobby Hood’s to do with as he wishes.
“MS. ONG: Your Honor, I don’t know if you’re going to want us to file — ■ our contention is—
*240“JUDGE CLEAVER: Right now I think the Court is going to dismiss it. You can certainly refile. But based upon what’s filed, on the evidence before this Court, the evidence is that it was a corporation. Counsel agree with that?
“MS. ONG: Not — no, Your Honor. It was an interest in a business. Our contention is that this was an investment contract, which is a type of security. And this was not a sale of stock in a normal sense at all. This was an irregular transaction which is — an investment contract as defined as a security under 17-I252(j). That is our basis for finding the violation and that it falls under the Act. This was not a normal stock arrangement. They—
“JUDGE CLEAVER: I guess the problem I’m having is that you’re alleging that this individual took money that was given to him and used it for his own personal use.
“MS. ONG: Yes, we were alleging money was given to him for a particular purpose, for an investment purpose.
“JUDGE CLEAVER: You said that you weren’t adducing any testimony to amend the agreement. The agreement is clear on its face. It was to sell a five and a half percent interest in a restaurant, right?
“MS. ONG: Yes, sir.
“JUDGE CLEAVER: Is there anything in this agreement that requires that Mr. Hood to do anything with that money specifically? Is there—
“MS. ONG: What is it that — if we’re looking at this agreement, what is it that Mr. Hood was supposed to do with that money that he didn’t do? Put it in the business, Your Honor.
“JUDGE CLEAVER: I don’t believe that’s what this agreement calls for.
“MS. ONG: Your Honor—
“JUDGE CLEAVER: This agreement calls for the — Mr. Hood to sell Mr. Bowe five and a half percent of his interest in the restaurant and drinking establishment, correct?
“MS. ONG: Yes, sir.
“JUDGE CLEAVER: I don’t see that it requires Mr. Hood to do anything else now.
“MS. ONG: Our contention, Your Honor, is that the transaction, under the law as it’s written in 1253(a)(3) that the acts, practices and course of business would offer as a fraud upon the purchaser of the security because—
“JUDGE CLEAVER: Counsel, I don’t think that law is that vague, and if the State wishes to allege a criminal conduct and file it, then it must do so specifically so that the defendant can be aware — apprised of exactly what it is he’s accused of doing.
“At this juncture, the Court does not believe there’s probable cause to believe that a violation of the law occurred.”
When the magistrate discharged the defendant, he considered only the written agreement and disregarded Bowe’s testimony that he had purchased the security agreement because Hood had *241agreed to invest the $15,000 purchase money in the business. The magistrate’s explanation for discharging the defendant is that he was not allowing any testimony to amend the written agreement, or any testimony relating to anything not stated in the agreement.
The magistrate based his ruling on the parol evidence rule, which prevents the admission of parol evidence to vary terms of unambiguous written contracts in civil contract disputes. See Colt Co. v. Kocher, 123 Kan. 286, 255 Pac. 48 (1927). However, that rule does not prevent consideration of the introduction of testimony in all situations. Two exceptions to the rule of exclusion of parol evidence are applicable to this criminal matter.
First, the oral agreement as to investing money to improve the business can be admitted to show why Bowe purchased the security. Bowe testified that the purchase money was to be used for improvement of the business and not for the defendant’s personal expenses. This testimony did not contradict or vary the terms of the written agreement. The oral testimony related to a separate agreement that resulted in the purchase of the security. It shows why the contract was entered into by the parties. State v. Atwood, 187 Kan. 548, 358 P.2d 726 (1961).
Additionally, the parol evidence rule has no application in situations where an agreement is induced or procured by fraud. The fraud exception to the parol evidence rule is longstanding and well recognized in civil and criminal law. Edwards v. Phillips Petroleum Co., 187 Kan. 656, 659, 360 P.2d 23 (1961); Boxer v. Watchorn Oil & Gas Co., 120 Kan. 278, 280, 243 Pac. 316 (1926).
Citing Hart v. Haynes, 96 Kan. 262, 265, 150 Pac. 530 (1915), the majority recognizes that the rule that parol testimony cannot be used to vary the terms of a written instrument has no application to an issue of fraud in the making or procuring of the contract. The majority states that courts will not permit their hands to be tied in the administration of justice by restricting the realm of inquiry on an issue of fraud, and such an issue may be maintained by any testimony competent under the ordinary rules of evidence. It concludes were this not so, fraudulent contracts could seldom be overturned if the perpetrators of the fraud had the foresight to have their contracts reduced to writing and executed.
*242The only crime charged in this case was securities fraud, a violation of K.S.A. 17-1253(a)(3). The complaint/information contained a detailed statement of a series of acts by the defendant that it alleged would operate as a fraud or deceit. The State’s allegations, in part, were that the signing of the written contract and the payment of money to the defendant were induced or procured by a series of fraudulent misrepresentations and omissions made by the defendant. The trial court should have looked beyond the language of the written contract to determine if fraud had occurred. The trial court’s refusal to consider the evidence outside of the written agreement that supported the fraud charge is clearly erroneous.
Here, there was evidence that the parties entered into a contractual arrangement which involved an investment of money in a common enterprise with the profits to come from the efforts of others. The parol testimony that the purchase money was to be used to improve the business was not introduced to vary the terms of the security agreement but to show that Hood misled Bowe and actually intended to use the purchase money for his (Hood’s) own needs and wants. The parol evidence rule on exclusion of oral testimony has no application to the issue of whether Hood actually intended to use the purchase money for personal use rather than for improving the business as promised. There was sufficient evidence for the magistrate to find that it appeared a violation of the Kansas Securities Act had been committed and there was probable cause to believe that the defendant committed the felony.