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State v. Lundberg

Supreme Court of Kansas

July 19, 2019

State of Kansas, Appellant,
v.
David G. Lundberg and Michael L. Elzufon, Appellees.

         SYLLABUS BY THE COURT

         1. As provided in K.S.A. 17-12a610(a), Kansas has jurisdiction under the Kansas Uniform Securities Act (KUSA), K.S.A. 17-12a101 et seq., to prosecute a defendant for acts related to the sale of a security only if the offer to sell or the sale was made in Kansas.

         2. Sales of a security can involve a continuing process, including steps such as paying consideration, notifying the purchaser the offer has been accepted, and delivering the security. If any step occurs in Kansas, Kansas has jurisdiction under the KUSA.

         3. The KUSA defines "offer to sell" more broadly than that concept is understood in contract law or under the Uniform Commercial Code. An offer to sell a security can occur only once or multiple times in the sales or negotiation process or in a way where more than one offer is extended during the sales process of a single security.

         4. Even under the expansive reading permitted by the definition of "offer to sell" in the KUSA, Kansas' jurisdiction is statutorily limited to situations in which the offer originates within the territorial boundaries of Kansas. This is true no matter whether the offer to sell is an attempt or a solicitation, no matter how early in the process it occurs, and no matter whether it is just one of several steps.

         5. Jurisdiction arises under the KUSA only if an offer or sale occurred in the state- not only because the transaction has some sort of nexus to the state.

         Review of the judgment of the Court of Appeals in 53 Kan.App.2d 721, 391 P.3d 49 (2017).

          Appeal from Sedgwick District Court; Benjamin L. Burgess, judge.

          Kristafer R. Ailslieger, deputy solicitor general, argued the cause, and Thomas E. Knutzen, deputy director of policy and senior staff attorney, and Joshua A. Ney, Ryan A. Kriegshauser, and Christopher D. Mann, of the Office of the Kansas Securities Commissioner, and Derek Schmidt, attorney general, were with him on the briefs for appellant.

          David L. Miller, of Ney, Adams & Miller, of Wichita, argued the cause, and Richard Ney, of the same office, was with him on the briefs for appellee David G. Lundberg.

          Kurt P. Kerns, of Ariagno, Kerns, Mank & White, LLC, of Wichita, argued the cause and was on the briefs for appellee Michael Elzufon.

          Zachary T. Knepper, deputy general counsel, and A. Valerie Mirko, general counsel, North American Securities Administrators Association, Inc., of Washington, D.C., and Alan V. Johnson, of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, LLC, of Topeka, for amicus curiae North American Securities Administrators Association, Inc.

          PER CURIAM.

         The State filed many criminal charges of selling or offering to sell unregistered securities and committing fraud in selling or offering to sell securities against Minnesota residents David Lundberg and Michael Elzufon. Lundberg and Elzufon, as principals for Kansas limited liability corporations, sold what the State alleges to be securities by using intermediaries who resided in California. These California intermediaries made sales presentations in California and sold the securities from California to individuals who did not reside in Kansas.

         In this appeal, we must determine whether the Kansas Uniform Securities Act (KUSA), K.S.A. 17-12a101 et seq., allows Kansas courts to exercise jurisdiction over the criminal charges against Lundberg and Elzufon. Jurisdiction to prosecute the criminal charges depends on whether "the offer to sell or the sale [was] made in this state or the offer to purchase or the purchase [was] made and accepted in this state." K.S.A. 17-12a610(a). Considering the facts as stipulated to by the parties, we hold neither an offer to sell nor a sale of securities occurred in Kansas.

         Facts and Procedural History

         Lundberg and Elzufon formed Real Development Corp., a Minnesota corporation they registered to do business in Kansas. They formed the corporation to develop properties in downtown Wichita. They were the officers, sole shareholders, and agents during its existence. Real Development maintained places of business in Minnesota and Kansas.

         Lundberg and Elzufon also formed four Kansas LLCs. Lundberg and Elzufon were the sole members of each, and they acted as the managers and agents of the LLCs. These LLCs conducted substantial operations from Real Development's place of business in Minnesota, although Lundberg and Elzufon often acted for these businesses while in Kansas and they maintained a place of business in Kansas. The Kansas LLCs issued promissory notes and membership interests. The State alleges these notes and membership interests-representing the buyers' investments-are securities under the KUSA.

         Lundberg and Elzufon recruited California intermediaries who were responsible for finding investors. In return, the intermediaries received a percentage of the sale price of any security sold as a result of his or her efforts. These California intermediaries hosted real estate seminars and roundtables in California at which they made presentations. From Minnesota, Lundberg and Elzufon provided some information and materials included in these presentations, but the intermediaries prepared the actual presentations. One intermediary formed his own LLC for the purpose of selling the investment.

         Each investor's first contact was through a California intermediary, but the investors also received binders of materials from either the Kansas LLCs, Real Development, or both. None of these materials were sent from Kansas. Investors purchasing securities issued by the Kansas LLCs wired funds to bank accounts in Minnesota. All the investors whose claims are at issue were located outside Kansas when they accepted the offers at issue. All but one investor was a California resident; the one exception was a Colorado resident. Lundberg, Elzufon, or both, while in Minnesota, signed the documents reflecting the transactions at issue.

         The State, in separate but identical complaints, charged Lundberg and Elzufon with 61 counts. In one count, the State alleged Lundberg and Elzufon violated K.S.A. 17-12a501(3), which makes it illegal to commit fraud or deceit when offering, selling, or purchasing of a security. The State alleged Lundberg and Elzufon committed "a fraud on at least 60 persons, . . . resulting in a loss of at least $1, 000, 000 or more." The State also charged six counts of selling an unregistered security under K.S.A. 17-12a301. In the remaining 54 counts, the State charged Lundberg and Elzufon with violating K.S.A. 17-12a501(2), which makes it illegal to make a false statement of a material fact or to omit a material fact when offering, selling, or purchasing a security.

         Lundberg and Elzufon filed separate motions to dismiss for lack of jurisdiction, arguing neither the offers to sell, the sales, the offers to purchase, nor the purchases were made or accepted in Kansas. Instead, according to Lundberg and Elzufon, the sales and offers to sell at issue in this appeal took place in California and the sales and offers to sell were between the individual investors and one of the intermediaries, not Lundberg or Elzufon. In contrast, the State contended that the "offer" came from the various "issuers"-the Kansas LLCs-rather than from one of the intermediaries. Because the issuers were Kansas entities, the offer originated from Kansas, supporting territorial jurisdiction in Kansas. According to the State, the Legislature intended this outcome because it wanted to prevent the state from being used as a base for fraudulent activity.

         The district court judge granted the motion to dismiss 56 of the counts-the counts related to the sales involving the California intermediaries. The district judge found that jurisdiction over these counts turned on the identity of the offeror. He relied on the Black's Law Dictionary 1081 (6th ed. 1990) definition of "offer" as "to present for acceptance or rejection" and concluded the California intermediaries, acting in California, were the ones presenting the sale of the investments for acceptance or rejection. He also emphasized the offers made by one intermediary that purported to be made by that intermediary's investment LLC rather than any of the Kansas LLCs or Real Development. The district judge rejected the State's argument that any of the offers originated within Kansas. After this ruling, the State voluntarily dismissed the remaining charges to appeal the district judge's decision rejecting territorial jurisdiction over the 56 remaining counts.

         A panel of the Court of Appeals reversed. State v. Lundberg, 53 Kan.App.2d 721, 733, 391 P.3d 49 (2017).

         The panel analyzed the jurisdictional question applying language from Lintz v. Carey Manor Ltd., 613 F.Supp. 543, 550 (W.D. Va. 1985), and Newsome v. Diamond Oil Producers, Inc., CCH Blue Sky L. Rptr. ¶ 71, 869 (Okla. Dist. Ct. 1983). The panel noted that in Newsome, an Oklahoma state court held "that a sale or offer to sell a security originates from a state if 'any portion of the selling process' has occurred within the state." Lundberg, 53 Kan.App.2d at 730. The panel also relied on a statement from Lintz that "'so long as there is some territorial nexus to a particular transaction, the [security] laws of two or more states may simultaneously apply.'" Lundberg, 53 Kan.App.2d at 730 (quoting Lintz, 613 F.Supp. at 550).

         The panel held that the sales originated in Kansas and thus Kansas had territorial jurisdiction. The panel emphasized Lundberg and Elzufon formed Kansas LLCs to raise funds to revitalize properties in downtown Wichita. The panel noted some promissory notes and membership interests included Kansas choice-of-law clauses and some LLCs' operating agreements contained forum-selection clauses designating federal or state courts in Sedgwick County. The panel also emphasized Lundberg's and Elzufon's other Kansas contacts not directly related to the offers of sale or sales at issue. See 53 Kan.App.2d at 732.

         We granted Lundberg's and Elzufon's petitions for review, providing our jurisdiction under K.S.A. 60-2101(b).

         Analysis

         Lundberg and Elzufon argue the Court of Appeals erred because Kansas courts lack jurisdiction to pursue criminal charges against them under the KUSA. They cite K.S.A. 17-12a610(a), titled "Jurisdiction; Sales and offers to sell" and providing that K.S.A. 17-12a301and 17-12a501, among other statutes, "do not apply to a person that sells or offers to sell a security unless the offer to sell or the sale is made in this state or the offer to purchase or the purchase is made and accepted in this state."

         Standard of review

         This issue of jurisdiction presents a question of law over which we exercise unlimited review. State v. Rupnick, 280 Kan. 720, 741, 125 P.3d 541 (2005).

         To determine whether jurisdiction exists, we must interpret the KUSA. Statutory interpretation is also a question of law subject to unlimited review. We begin our analysis with the touchstone of statutory interpretation: legislative intent. The best and safest rule for discerning this intent is the plain language of the statute. Only when the statutory language is unclear or ambiguous do we move on to consider tools of statutory construction. State ex rel. Secretary of DCF v. Smith, 306 Kan. 40, 48, 392 P.3d 68 (2017).

         KUSA background

         Kansas has historically been an early adopter of laws regulating securities. It was the first state to adopt a securities act, passing the first such laws in 1911. 12 Blue Sky Law § 1:1 (2018). The purpose of this early law and its successor statutes was "'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.' Activator Supply Co. v. Wurth, 239 Kan. 610, Syl. ¶ 1, 722 P.2d 1081 (1986)." Brenner v. Oppenheimer & Co., 273 Kan. 525, 543, 44 P.3d 364 (2002).

         Effective July 1, 2005, Kansas adopted the 2002 Uniform Securities Act (USA) promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL). See Klein v. Oppenheimer & Co., 281 Kan. 330, 331, 130 P.3d 569 (2006). The purpose of the uniform act, and in turn the KUSA, remains the same as the earlier Kansas statutes. See NCCUSL, Uniform Securities Act, Prefatory Note ("It is not intended that adoption of a new Uniform Securities Act will reject earlier case decisions interpreting identical or substantively identical sections of [earlier acts] unless specifically so stated in the Official Comments."). Uniform laws "are adopted to remove doubts as to controlling rules of law on the subjects involved and are intended to secure not only identity of the statute, but also uniformity in decision." In re Estate of Reed, 233 Kan. 531, 540-41, 664 P.2d 824 (1983).

         We thus often look to decisions from other courts as persuasive authority when interpreting uniform laws. This can be helpful when, as here, no Kansas case has addressed a statute. On the issue now presented, however, we find no case precisely on point with the facts here. As a result, we focus on the plain language of the KUSA and explore the limited guidance we can glean from the caselaw of other jurisdictions. We thus begin by looking more in depth at the elements of each crime charged, as those crimes are defined in the KUSA.

         KUSA as applied here

         In six counts, the State charged Lundberg and Elzufon with violating K.S.A. 17-12a301 by selling an unregistered security. The KUSA regulates securities by making it unlawful for a person to offer or sell a security in the state unless at least one of three conditions is satisfied: (1) the security is a federally covered security, (2) the security, transaction, or offer is exempt from registration, or (3) the security is registered under the KUSA. K.S.A. 17-12a301; see also K.S.A. 2018 Supp. 17-12a302 (notice filing); K.S.A. 2018 Supp. 17-12a303 (registration by coordination); K.S.A. 17-12a304 (registration by qualification). These provisions apply only if a security is at issue. In their motions to dismiss, Lundberg and Elzufon challenged whether the interests underlying the charges here are securities under the KUSA. See 12A Blue Sky Law § 10:9. The district court did not reach this question and it is not before us. We therefore assume, without deciding, that the notes and membership interests underlying the charges here are securities under the KUSA.

         The State also charged Lundberg and Elzufon with many counts of fraud. The antifraud provisions of the KUSA make it unlawful "in connection with the offer, sale, or purchase of a security, directly or indirectly" to commit one of three types of fraudulent acts. (Emphasis added.) See K.S.A. 17-12a501. The State charged Lundberg and Elzufon with two of the three possible types of fraudulent acts, specifically those that make it unlawful:

"(2) to make an untrue statement of a material fact, or omit to state a material fact necessary in order to make a statement made, in the light of the circumstances under which it is made, not misleading; or
"(3) to engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person."

         The Legislature has assigned crime severity levels for intentional violations of the registration requirements of K.S.A. 17-12a301 and the antifraud provisions of K.S.A. 17-12a501 based on the amount of loss caused by action. See K.S.A. 2018 Supp. 17-12a508(a)(2), (3).

         Jurisdiction ...


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