Opinion
No. 95,869.
November 20, 2007
Appeal from Russell District Court; RON L. SVATY, judge. Opinion filed August 10, 2007. Affirmed in part, reversed in part, and remanded with directions.
Stephen E. Robison and Lyndon W. Vix, of Fleeson, Gooing, Coulson Kitch, L.L.C., of Wichita, for appellant.
J. Ric Gass and Beth E. Hanan, of Gass Weber Mullins LLC, of Milwaukee, Wisconsin, and Heather S. Woodson, of Stinson Morrison Hecker LLP, of Overland Park, Kansas, for appellee Richard McDonald.
Michael S. Holland and Michael S. Holland II, of Holland and Holland, of Russell, for appellees Alma Inc., Thomas C. Moore, and James W. Moore.
Before GREEN, P.J., ELLIOTT and HILL, JJ.
MEMORANDUM OPINION
This appeal requires us to decide what statute of limitations applies to a private cause of action that is not based on fraud in a lawsuit seeking damages from the purported sales of nonexempt unregistered securities. The applicable statute, K.S.A. 17-1268(a)(2), provides the purchaser of nonexempt unregistered securities the right to file a private civil suit against the seller to recover damages, Because the plain language of our 3-year statute of limitations, K.S.A. 60-512(2), expressly states that it applies to an action upon a liability created by a statute that is not a penalty, we hold that it applies here. Accordingly, we affirm in part, reverse in part, and remand with directions.
Background and Prior Proceedings
Those involved in this lawsuit must be identified. The defendants are Alma, Inc., a Kansas corporation, which is owned by Thomas C. Moore and James W. Moore (all referred to as Alma), and Richard McDonald, a Wisconsin resident. The plaintiff is Dr. Lanny B, Hale, also a Wisconsin resident.
Alma owns some Kansas oil and gas wells. The interests in the leases were never registered as securities with the Kansas Securities Commissioner. Alma makes money in two ways from the leases: (1) from investors and (2) from oil production. Alma would sell lease interests in wells to various investors in 1/16 increments. In these turnkey drilling contracts, Alma would set turnkey prices to investors in individual wells. Turnkey prices included the cost of drilling, the cost of completing the well, and the cost of equipment.
Generally, Alma's practice involved setting these turnkey prices higher than the actual cost of drilling the well in order to cover contingencies and to make an additional profit on each well. If the well was dry, Alma did return a portion of the investment to the investor. But, in the end, Alma made a substantial profit whether the well was dry or not.
Richard McDonald is an investor in some of Alma's wells, In addition to his personal investment, McDonald would share his investment story with others. If a person he identified later chose to invest in Alma, Alma paid McDonald a "consulting fee" of $1,000 for each 1/16th share that was purchased. Between 2000 and 2002, McDonald received a total of $108,500, Those fees were deducted from Alma's corporate tax returns as a part of cost of goods sold, i.e., the cost of "[p]utting the well together." McDonald has never served as a director, officer, or employee of Alma.
Dr. Lanny B. Hale became involved with McDonald through Vision 21, a medical management company that provided advertising services to its members. Vision 21 wanted to hire McDonald's advertising firm because of its reputation, Sometime in 2000, McDonald requested a meeting with Hale to discuss business issues. During that meeting, McDonald told Hale about (1) his investment in Alma, (2) his satisfaction with his return from his Alma investment, and (3) the tax advantages he had received from making the Alma investment, Furthermore, McDonald vouched for the integrity of the owners of Alma. After the meeting, Hale remarked to a colleague that "he didn't know when he had become McDonald's friend but was impressed that he was letting him in on investments."
Soon after Hale's meeting with McDonald, James W. Moore called Hale. Based in part on McDonald's opinion of Alma, Hale purchased eight 1/16th interests in four of Alma's wells. Hale acquired (1) two 1/16th interests in Patterson No, 1 on April 18, 2000, (2) two 1/16th interests in Boomhower No. 8 on August 21, 2000, (3) two 1/16th interests in Boomhower No. 9 on November 27, 2000, and (4) two 1/16th interests in Boomhower No. 10 on March 19, 2001. Even though Hale purchased these interests as separate investments, Alma paid McDonald $1,000 for each of Hale's purchased 1/16th interest. Ultimately, Alma sold a total of 16 interests for each well.
On July 14, 2003, Hale filed a civil action against Alma and McDonald alleging that Alma's sale of the interests in the wells was the sale of unregistered securities in violation of the Kansas Securities Act (Act), K.S.A. 17-1252 et seq. Under K.S.A. 17-1268, Hale argued that Alma and McDonald were jointly and severally liable to him for (1) his investments, which totaled $197,675, (2) the statutory interest from the dates of his purchases of the investments, and (3) his attorney fees.
In their answers, Alma and McDonald raised the following affirmative defenses: (1) The statute of limitations time barred Hale's action, (2) the transactions were exempt from registration under the Act's "oil and gas" exemption, (3) McDonald was not an agent of Alma, and (4) McDonald's involvement with Hale was limited to his first sale.
Both parties moved for summary judgment. By that time, Hale had limited his action to an alleged violation of K.S.A. 17-1255 and made no claim for statutory or common-law fraud. Ultimately, the district court held that the sale of unregistered securities was governed by the 1-year statute of limitations under K.S.A, 60-514(c) and all of Hale's claims were time barred.
In this appeal, Hale contends the 3-year statute of limitations applies to the sale of unregistered securities in Kansas; the interests sold to Hale were not exempt from registration; and McDonald is jointly and severally liable with Alma for the sales. To the contrary, Alma, Inc., and Thomas and James Moore argue that our 1-year statute of limitations applies; whether McDonald or Moore received a commission for the sales of lease interests to Hale is a question of fact; and whether there was an agency relationship between Alma and McDonald is also a question of fact. For his part, McDonald avers that the 1-year statute of limitations applies and he is not an agent of Alma.
We focus on four topics. 1) Statute of limitations. Here we decide whether the 3-year or 1-year statute of limitations applies after reviewing all relevant statutes. 2) Timely claims. Next, in light of our conclusion about the time limit, we examine if any or all of Hale's claims are time barred. 3) Exempt or not. In this section we examine the interests that are being sold and decide if they are exempt under the law. 4) McDonald's liability. Finally, we look at the claims made against McDonald to see if they can continue.
Statute of Limitations
Obviously, the interpretation and application of a statute of limitations are questions of law for which an appellate court's review is unlimited, See McCormick v. City of Lawrence, 278 Kan. 797, 798, 104 P.3d 991 (2005).
K.S.A. 60-512(2) establishes a 3-year time limit for "[a]n action upon a liability created by a statute other than a penalty or forfeiture." K.S.A. 60-514(c) directs that if a cause of action concerns a statutory penalty or forfeiture, such actions must be brought within 1 year. Therefore we must determine if this case involves a penalty or forfeiture.
The purpose of the Kansas Securities Act, is to place the traffic of promoting and dealing in speculative securities under rigid governmental regulation and control to protect investors, thereby preventing, so far as possible, the sale of fraudulent and worthless speculative securities. See Klein v. Oppenheimer Co., 281 Kan, 330, 332, 130 P.3d 569 (2006). To accomplish this purpose, K.S.A. 17-1256, K.S.A. 17-1257, and K.S.A. 17-1258 of the Act require the registration of securities while K.S.A. 17-1255 prohibits the sale of unregistered securities, unless they are exempted from the registration requirement under K.S.A. 17-1261 and K.S.A. 17-1262.
We must note that as of July 1, 2005, the entire Act was repealed and replaced with the Kansas Uniform Securities Act, K.S.A. 2006 Supp. 17-12a101 et seq. See L. 2004, ch. 154; K.S.A. 2006 Supp. 17-12a703. In addition to imposing civil liability on a seller that sells unregistered securities to a purchaser, the new act provides a 1-year statute of limitations for such a violation. K.S.A. 2006 Supp. 17-12a301(3); K.S.A. 2006 Supp. 17-12a509(b), (j)(1). However, this new provision does not affect actions or proceedings that were pending on the effective date of the new act, K.S.A. 2006 Supp, 17-12a703(a). Rather, "[t]he predecessor act exclusively governs" so long as the civil action was "instituted within any period of limitation that applied when the cause of action accrued." (Emphasis added.) K.S.A. 2006 Supp. 17-12a703(a). Hence we must look to the former act in this case.
K.S.A. 17-1255(a) states that "[i]t is unlawful for any person to offer or sell any security in this state, except securities exempt under K.S.A. 17-1261 and amendments thereto or when sold in transactions exempt under K.S.A. 17-1262 and amendments thereto."
When a seller violates K.S.A. 17-1255(a), the seller can be penalized in two ways. First, K.S.A. 17-1255(b) imposes criminal penalties for a seller's intentional violations. Second, K.S.A. 17-1268(a) provides the purchaser the right to file a private civil suit against the seller to recover damages.
Next, K.S.A. 17-1268(a) imposes civil liability for three types of actions that arise from an offer or sale of security: "(1) an action alleging a violation of K.S.A. 17-1254, which requires that sellers of securities be registered with the State; (2) an action alleging a violation of K.S.A. 17-1255, which prohibits selling unregistered securities; and (3) an action alleging a material and misleading misrepresentation or omission by one who has offered or sold a security ( i.e., `fraud-based' action)." (Emphasis added.) Kelly v. Primeline Advisory, Inc., 256 Kan. 978, 982, 889 P.2d 130 (1995).
K.S.A. 17-1268(a) provides for the payment of interest:
"Any person, who offers or sells a security in violation of K.S.A. . . . 17-1255 . . . is liable to the person buying the security from such person, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at 15% per annum from the date of payment, costs, and reasonable attorney fees, less the amount of any income received on the security, upon the tender of the security, or for damages if the buyer no longer owns the security. Damages are the amount that would be recoverable upon a tender less (1) the value of the security when the buyer disposed of it, and (2) interest at 15% per annum from the date of disposition."
Because K.S.A. 17-1268 does not contain an internal statute of limitations for its private causes of action, this issue has previously been addressed by our Supreme Court in Kelly. In determining which statute of limitations applied, the court limited its analysis to only the fraud-based action and found the general 3-year statute of limitations in K.S.A. 60-512(2) was applicable to a fraud-based cause of action. 256 Kan. at 983.
Here, K.S.A. 60-512(2) expressly states that it applies if the "action upon a liability is created by statute other than a penalty. . . ." (Emphasis added.) Relating this language to Hale's cause of action, K.S.A. 60-512(2) is applicable if K.S.A. 17-1268(a) created liability for an action alleging a violation of K.S.A. 17-1255. But, if Hale's cause of action is "an action upon statutory penalty," then his claim falls outside the realm of K.S.A. 60-512(2) and, instead, is governed by K.S.A. 60-514(c). See Haag v. Dry Basement, Inc., 11 Kan. App. 2d 649, 650-51, 732 P.2d 392, rev. denied 241 Kan. 838 (1987) (applying this similar two-step analysis to a statute of limitations issue concerning an action alleging a violation of the Kansas Consumer Protection Act).
But the Supreme Court has ruled that K.S.A. 60-512(2) does not apply to every statutory cause of action. It applies when a statute creates a new, substantive right not recognized at common law but not when a statute merely affords relief for certain violations of existing common-law rights. Kelly, 256 Kan. at 983. "Stated another way, K.S.A. 60-512(2) applies when a statute creates a liability where liability would not exist but for the statute. If the statute merely provides a procedure for obtaining relief, it does not trigger K.S.A. 60-515(2). [Citation omitted.]" McCormick, 278 Kan. at 799.
In Kelly, the court held that "K.S.A. 17-1268(a) created new, substantive rights and liabilities not existing under common law." 256 Kan. at 983. Kelly then determined that fraud-based actions under K.S.A. 17-1268(a) were not identical to common-law fraud actions. And, because both components existed, Kelly applied the 3-year statute of limitations found in K.S.A. 60-512(2). 256 Kan. at 983.
Following Kelly's rationale, the first requirement for the application of K.S.A. 60-512(2) has been established. At issue, then, is whether an action alleging a violation of K.S.A. 17-1255 exists at common law. On this point, since the legislature created the requirement for registering securities and enacted K.S.A. 17-1255 in order to make it unlawful for any person to sell unregistered securities, there are no common-law rights resembling an action alleging a violation of K.S.A. 17-1255. In other words, but for K.S.A. 17-1268(a), civil liability for selling unregistered nonexempt securities would not exist. Consequently, K.S.A. 60-512(2) applies to a K.S.A. 17-1268(a) action based on a violation of K.S.A. 17-1255.
On appeal, Alma and McDonald assert that the 15% interest, described in K.S.A. 17-1268(a), represents a statutory penalty because Hale's overall compensation will be greater than his actual damages if his suit is successful and, therefore, the 1-year statute of limitations should apply. We are not convinced by this argument.
Both sides refer to Haag and Alexander v. Certified Master Builders Corp., 268 Kan. 812, 824, 1 P.3d 899 (2000), as persuasive authority because the courts in those cases had to deal with a similar issue under the Kansas Consumer Protection Act (KCPA). In Haag, the plaintiff sought only damages. In Alexander, the plaintiffs sought to recover either their actual damages or the civil penalties, whichever proved to be greater. In both instances, the courts held that the 3-year statute of limitations applied. Haag, 11 Kan. App. 2d at 651 (plaintiff sought to bring defendant within the scope of KCPA and establish its liability created by statute rather than recover upon a statutory penalty); Alexander, 268 Kan. at 824 (actions seeking both damages and civil penalties under the KCPA fits the object of the act, which is remedial rather than penal).
To resolve this issue, we must examine the nature of an interest award. Our courts have held that "[w]here a party retains and makes actual use of money belonging to another, equitable principles require that it pay interest on the money so retained and used." Holmes v. Kewanee Oil Co., 233 Kan. 544, 553, 664 P.2d 1335 (1983), cert. denied 474 U.S. 953 (1985); Gray v. Amoco Production Company, 1 Kan. App. 2d 338, Syl. ¶ 1, 564 P.2d 579 (1977), aff'd in part and rev'd in part on other grounds 223 Kan. 441, 573 P.2d 1080 (1978).
Here, Alma and McDonald allege that Hale has not disposed of his security, making the following interest portion under K.S.A. 17-1268(a) applicable. K.S.A. 17-1268(a) allows a buyer to sue either at law or in equity to recover the consideration paid for the security, less the amount received on the security, together with interest at 15% per annum from the date of payment. Thus, under these circumstances, the 15% interest award is dependent upon the date on which Hale transferred his money to Alma, which retained and used it for the drilling and completion of its wells. Under equitable principles, it would be inappropriate to construe this interest as a statutory penalty but rather as interest to be paid for the use of his money.
Additional support for this conclusion is found in K.S.A. 17-1266a(c)(2). That statute imposes a civil penalty up to a maximum of $5,000 for each violation, which can include the sale of unregistered nonexempt securities. Therefore, because the Act has provided a civil penalty for violations of the Act in a separate provision, its presence further supports the belief that the legislature did not intend the 15% interest to be a statutory penalty. See Pieren-Abbott v. Kansas Dept, of Revenue, 279 Kan. 83, 89, 106 P.3d 492 (2005) (several provisions of an act, in pari materia, must be construed together when determining legislative intent and reconciling provisions).
Consequently, the 3-year statute of limitations applies. Liability for an action alleging a violation of K.S.A. 17-1255 is created by K.S.A. 17-1268(a), and K.S.A. 17-1268(a) does not impose any civil penalties to prevent K.S.A. 60-512(2) from applying to Hale's cause of action.
Timely Claims
McDonald alleges that Hale's cause of action is time barred because Hale's first investment occurred more than 3 years before Hale filed suit. McDonald admits that he raises this issue for the first time on appeal but argues that the facts surrounding this issue are not contested.
Generally, issues not raised before the trial court cannot be raised on appeal. Board of Lincoln County Comm'rs v. Nielander, 275 Kan. 257, 268, 62 P.3d 247 (2003). There are several exceptions to the rule: (1) The newly asserted theory involves only a question of law arising on proved or admitted facts and is finally determinative of the case; (2) consideration of the theory is necessary to serve the ends of justice or to prevent denial of fundamental rights; and (3) the judgment of the trial court may be upheld on appeal despite its reliance on the wrong ground or having assigned a wrong reason for its decision. See Smith v. Yell Bell Taxi, Inc., 276 Kan, 305, 311, 75 P.3d 1222 (2003).
Here, the uncontroverted facts prove that Hale purchased his interest in Alma more than 3 years before filing suit. Therefore, under the first and third exceptions to the general rule, this court has authority to review this issue.
"When an action is time barred on its face, it must be dismissed unless the statute of limitations was tolled. The plaintiff has the burden of proving facts sufficient to toll the limitations." Underhill v. Thompson, 37 Kan. App. 2d 870, Syl. ¶ 5, 158 P.3d 987 (2007).
Hale does not contend that the statute of limitations should have been tolled. Instead, he argues that McDonald waived this defense when he failed to assert this claim in the pretrial order. The pretrial order supports Hale's statement.
"The defense of the statute of limitations is an affirmative defense that must be pleaded and proved by one who asserts it. [Citation omitted.] The failure to raise an affirmative defense at trial waives that defense on appeal. [Citation omitted.]" Diversified Financial Planners, Inc. v. Maderak, 248 Kan. 946, 948, 811 P.2d 1237 (1991).
McDonald raised this issue as an affirmative defense: (1) statute of limitations, and (2) "McDonald's involvement in this matter preceded the investment in the first well. The repeat investments by [Hale] in three other wells occurred without any involvement from McDonald as a `finder.'" But, due to the district court's dismissal of all of Hale's claims at summary judgment, no trial occurred.
Hale's three other investments occurred within the 3-year time period before he made his claims and are, therefore, timely. Furthermore, based on uncontroverted facts, the parties agreed that these investments were separate from Hale's first purchase, Therefore the district court wrongly dismissed Hale's claims concerning the latter transactions. The district's application of K.S.A. 60-514(c) is reversible error.
Exempt or Not
Because Dr. Hale conceded that Alma has fulfilled all other exemption requirements, the issue becomes whether Alma complied with K.S.A. 17-1262a(b)(2)(B) to qualify for exemption from registration. Under K.S.A. 17-1262a(b), K.S.A. 17-1255 "shall not apply to an offer to sell or sale of . . . any fractional or undivided interest, or any certificate based upon any fractional or undivided interest in any oil or gas royalty, lease or deed, . . . if the land subject to the interest or certificate is situated in Kansas and:
"(2) all sales are made to not more than a total of 32 purchasers without regard to whether the purchasers reside within or without the state of Kansas, and:
(A) The seller of such interests reasonably believes that all purchasers of such interests are purchasing for investment and not for resale; and
(B) no commission or other remuneration is paid or given directly or indirectly for the solicitation, offer to sell or sale of any such interests; and
(C) no public advertising or public solicitation is used in connection with the solicitation, offer to sell or sale of any such interest." (Emphasis added.) K.S.A. 17-1262a(b)(2).
K.S.A. 17-1262a states:
"(a) As used in this section:
(1) `Commission or other remuneration' shall include any consideration, compensation or fees paid or given to an agent in exchange for the agent's services, except that `commission or other remuneration' shall not include any interest in the oil and gas estate, including any overriding royalty interest, or the production therefrom so long as the identity of the person or persons owning or holding such interest and the extent of such interest is fully disclosed to all purchasers." (Emphasis added.)
The legislature's use of "as used in this section" plainly demonstrates its intent for "other remuneration" to mean what is defined in K.S.A. 17-1262a(a)(1). Therefore, since it is the court's duty to give effect to the intention of the legislature as expressed, Hale's argument that the definition should be expansive is without merit. See Iron Horse Auto, Inc. v. Lititz Mut. Ins. Co., 283 Kan. 834, 839, 156 P.3d 1221 (2007) (""`The fundamental rule of statutory construction to which all other rules are subordinate is that the intent of the legislature governs if that intent can be ascertained.'"").
Under K.S.A. 17-1262a(a)(1), the statutory definition limits this court's review to Hale's first argument: whether Alma's payments to McDonald constitutes "other remuneration." K.S.A. 17-1262a(a)(1) specifies that "other remuneration" exists if an agent receive the fees. Consequently, in order for Hale to prevail on this issue, the facts must show that McDonald acted as an agent of Alma.
"What constitutes agency and whether there is competent evidence reasonably tending to prove the relationship is a question of law. Although what constitutes agency is a question of law, resolution of conflicting evidence which might establish its existence is for the finder of fact. [Citation omitted.] The weight to be given evidence and resolution of conflicts therein are functions of the trier of facts in the determination of whether there is a relationship of principal and agent. Where the existence of agency is disputed, its existence or nonexistence is ordinarily a question of fact for the jury, to be determined upon proper instructions. [Citation omitted.]" Barbara Oil Co. v. Kansas Gas Supply Co., 250 Kan. 438, 446-47, 827 P.2d 24 (1992).
As a matter of law, the Act clearly defines what constitutes "agency." K.S.A. 17-1252(b) states that an "`[a]gent' means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to affect sales of securities."
In this case, however, the uncontroverted evidence does not clearly demonstrate that McDonald's conduct met the Act's definition of agent. The uncontroverted evidence shows that (1) McDonald informed Hale about the benefits of investing in Alma before his initial investment; (2) Hale ultimately purchased eight 1/16th interests in Alma; (3) Alma paid "consulting fees" to McDonald of $1,000 for each of Hale's purchased 1/16th interests; and (4) McDonald performed no other services for Alma. But, because of the analysis under Issue II, the facts remain in dispute whether McDonald represented Alma in Hale's latter purchases and whether this alleged representation affected such sales. Accordingly, because it is the function of the trier of fact to weigh and resolve conflicting evidence, the district court was correct in denying Hale's motion for summary judgment over this issue.
McDonald's Liability
It is uncontested that McDonald was not a partner, officer, director, or employee of Alma. Furthermore, neither party asserts that McDonald was a broker-dealer. Therefore, for McDonald to be jointly and severally liable for the damages that Hale is claiming, the facts must show that McDonald was (1) an agent and (2) materially aided in the sale of the latter purchases, These facts remain in dispute. Consequently, summary judgment over this issue was also inappropriate.
For these reasons, we affirm the district court's ruling that Hale's claim for damages from his initial investment in Alma (Patterson No. 1) is time barred. We reverse the district court's ruling that Hale's claim for damages for Hale's latter purchases (Boomhowcr Nos. 8, 9, and 10) were time barred. We remand for trial the issues of whether Alma's securities were exempt from registration and whether McDonald is jointly and severally liable for Hale's damage claims for the Boomhower Nos. 8, 9, and 10 investments.
Affirmed in part, reversed in part, and remanded with directions.