This opinion is subject to revision before
publication in the Pacific Reporter.
IN THE UTAH COURT OF APPEALS
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State of Utah,
Plaintiff and Appellee,
v.
J.R.B.,
Defendant and Appellant.
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OPINION
(For Official Publication)
Case No. 20090055-CA
F I L E D
(September 10, 2010)
2010 UT App 245
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Third District, Salt Lake Department, 061904589
The Honorable Robin W. Reese
Attorneys: Scott C. Williams, Salt Lake City, for Appellant
Mark L. Shurtleff and Marian Decker, Salt Lake City,
for Appellee
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Before Judges Davis, Thorne, and Roth.
THORNE, Judge:
¶1 Defendant J.R.B.
1
appeals from her conviction for securities
fraud, see Utah Code Ann. § 61-1-1 (2006). Defendant argues that
the evidence at trial was insufficient to support her conviction.
We affirm.
BACKGROUND
2
1. This order has been modified in accordance
with the Utah Supreme Court Standing Order No.
12.
2. "On appeal from a bench trial, we view the
evidence in a light most favorable to the trial
court's findings, and therefore recite the facts
consistent with that standard." State v.
Nichols, 2003 UT App 287, ¶ 1 n.1, 76 P.3d 1173
(internal quotation marks omitted).
¶2 In early 2004, Defendant was attempting to open a bar in
Salt Lake County. She had a financial partner who was expected
to provide the necessary capital for the business but failed to
timely keep his commitments. As a result, the business was
frequently in need of financial assistance.
¶3 In April 2004, Tyler Filby was looking for work as a disc
jockey and approached Defendant in his search for employment.
Defendant hired Filby to assist in the opening of the bar and
ultimately continue employment as a disc jockey. Filby knew of
the business's financial difficulties and offered to give
Defendant a personal, short-term loan of $10,000 for thirty days
at 30% interest. Defendant accepted Filby's offer, Filby
memorialized the debt in writing, and Defendant signed the
document. Defendant never repaid the loan.
¶4 Rosemary Stafford, a patron of Dimitri's, the bar previous
to Defendant's at the same address, spoke with Defendant about
the new bar. At some point in the discussion, the subject turned
to the bar's finances. On July 7, 2004, Stafford personally
loaned $30,000 to Defendant for thirty days at 30% interest. The
loan agreement was formalized by a promissory note Stafford and
Defendant executed. Defendant was not able to repay the loan,
and Stafford filed a civil suit and obtained a default judgment
on November 4, 2004.
¶5 Danny Hall, a business owner in Salt Lake City, learned
about a potential business opportunity with Defendant from his
landlord, who operated an adjacent shop. In mid-July 2004, Hall
met with Defendant in front of Hall's shop. Defendant told Hall
that she was trying to open a bar and needed funding. A few days
later, Hall visited the location of Defendant's bar. Defendant
showed Hall around the club and Hall observed that the bar needed
a lot of repairs. Shortly after, Hall called Defendant and
informed her that he was interested in giving her a short term
loan for her business. Hall loaned Defendant $20,000 in two
installments of $10,000 to be repaid in two months at 15%
interest. The first portion of the loan was formalized by a note
Defendant signed on July 19, 2004. The second was formalized by
a note Defendant signed on July 23, 2004. In the second note
Defendant "agree[d] to personally guarantee this sum along with
the note I signed on the nineteenth of July." Defendant
defaulted on the $20,000 loan. Hall filed suit and obtained a
default judgment.
¶6 In July 2004, Gail Sweeny met Defendant. Sweeny's son
worked for Defendant, and Sweeny knew that Defendant needed money
to make repairs to the club and for various other things. In
late September 2004, Sweeny decided to loan Defendant $50,000 to
be repaid with minimal monthly payments for a twenty-four month
20090055-CA 2
period at 10% interest. The debt was collateralized by real
property and memorialized in writing. Defendant was not able to
repay the loan.
¶7 On July 17, 2006, the State charged Defendant by criminal
information with six counts of securities fraud. An amended
information was later filed reducing the counts to five: count I
regarded the Filby loan; count II the Stafford loan; counts III
and IV the Hall loans; and count V the Sweeny loan. A two-day
bench trial was held. After closing arguments, the trial court
consolidated counts III and IV involving Hall. The trial court
found Defendant guilty of one count of securities fraud regarding
Hall and acquitted Defendant of the remaining charges.
¶8 At sentencing, the trial court imposed the statutory
indeterminate prison term of one-to-fifteen years, suspended the
prison term, and placed Defendant on a three-year term of
probation. Defendant timely filed a notice of appeal.
ISSUE AND STANDARDS OF REVIEW
¶9 Defendant argues that the evidence at trial was insufficient
to sustain a guilty verdict on the single count of securities
fraud. Although Defendant frames the issue as insufficiency of
the evidence, Defendant essentially argues that the trial court
erred in determining that the promissory notes executed by the
parties were a security within the definition contained in Utah
Code section 61-1-13, see Utah Code Ann. § 61-1-13 (Supp. 2010),
and the meaning of the term "security" as interpreted in Reves v.
Ernst & Young, 494 U.S. 56 (1990).
¶10 "When reviewing a bench trial for sufficiency of the
evidence, we must sustain the trial court's judgment unless it is
against the clear weight of the evidence, or if the appellate
court otherwise reaches a definite and firm conviction that a
mistake has been made." State v. Nichols, 2003 UT App 287, ¶ 24,
76 P.3d 1173 (internal quotation marks omitted). To the extent
that Defendant's arguments implicate the trial court's
application and interpretation of Reves, we review the trial
court's interpretation of case law as presenting a question of
law that we review for correctness. See State v. Richardson, 843
P.2d 517, 518 (Utah Ct. App. 1992).
ANALYSIS
¶11 Defendant challenges the sufficiency of the evidence
supporting her securities fraud conviction. Defendant argues
that the evidence at trial was insufficient to show that the loan
transaction memorialized by two promissory notes entered into
20090055-CA 3
between Defendant and Hall was a security.
3
Defendant
acknowledges that the Utah Uniform Securities Act (the Utah
Securities Act) presumes that notes are securities, see Utah Code
Ann. § 61-1-13(1)(ee)(i)(A) (Supp. 2010), but argues that this
presumption is rebutted according to the family resemblance test
of Reves v. Ernst & Young, 494 U.S. 56 (1990).
4
3. The State urges this court to decline to
review Defendant's sufficiency of the evidence
supporting her securities fraud conviction
challenge because Defendant failed to marshal the
evidence. Although Defendant does at times stray
from her marshaling requirement and refer to
evidence that does not support the findings, we
believe that Defendant has marshaled the evidence
sufficiently to pose the question of whether the
key findings are supported by the evidence. See
generally Martinez v. Media-Paymaster Plus/Church
of Jesus Christ of Latter-day Saints, 2007 UT 42,
¶ 20, 164 P.3d 384 ("The reviewing court, . . .
retains discretion to consider independently the
whole record and determine if the decision below
has adequate factual support.").
4. The application of the federal test created in
Reves v. Ernst & Young, 494 U.S. 56 (1990), to
the Utah Securities Act presents us with a case
of first impression. The parties acknowledge
that there is no Utah case law specifically
applying the Reves test but assert that Utah
courts have adopted the test to determine whether
a note is a security. We note that there is Utah
case law applying the federal test created in SEC
v. W.J. Howey Co., 328 U.S. 293 (1946), to
determine whether an instrument is an investment
contract, which test the Eighth and District of
Columbia Circuits have applied to notes. See
Reves, 494 U.S. at 64 (rejecting "the approaches
of those courts that have applied the Howey test
to notes," and determining that courts are to
apply the version of the family resemblance test
articulated in Reves, see 494 U.S. at 67).
However, there is no Utah case applying either
the Howey test or the Reves test to notes.
The parties do not present argument on
whether the Reves test should be applied to the
(continued...)
20090055-CA 4
¶12 The family resemblance test begins with the presumption that
every note is a security. See id. at 67. This presumption may
be rebutted if the note bears a strong resemblance to one of the
following: (1) a note delivered in consumer financing, (2) a
note secured by a home mortgage, (3) a short-term note secured by
a lien on a small business or its assets, (4) a note evidencing a
character loan to a bank customer, (5) a short-term note secured
by an assignment of accounts receivable, (6) a note that
formalizes an open-account debt incurred in the ordinary course
of business, or (7) a note evidencing loans by commercial banks
for current operations. See id. at 65; see also State v.
Pedersen, 95 P.3d 385, 388 (Wash. Ct. App. 2004). To determine
whether a note bears a strong resemblance to one of these
instruments, courts consider four factors: "(1) the motivations
that would prompt reasonable parties to enter into the
transaction; (2) the plan of distribution of the instrument; (3)
the reasonable expectations of the investing public; and (4)
whether some factor, such as the existence of another regulatory
scheme, significantly reduces the instrument's risk." Pedersen,
95 P.3d at 389 (citing Reves, 494 U.S. at 66-67). "If an
instrument is not sufficiently similar to an item on the list,
the decision whether another category should be added is to be
made by examining the same factors." Reves, 494 U.S. at 67.
I. Trial Court's Application of the
Reves Family Resemblance Test
¶13 In applying the Reves test to the promissory notes at issue
in this case, the trial court considered the four factors of the
family resemblance test and determined that Hall was an investor
and the notes were securities. The trial court found that
"Defendant's purpose in obtaining the funds solicited was for
general business use; however, the witnesses' motivation for
loaning [D]efendant money varied." The trial court also found
that the interests of three of the witnesses were not solely for
4. (...continued)
Utah Securities Act. As a result, we do not
consider the statutory interpretation or
legislative purpose of the Utah Securities Act,
nor do we consider any constitutional or notice
issues that may arise from application of the
Reves test. Instead, we simply review whether
the trial court correctly applied the Reves
family resemblance test without deciding whether
Utah should adopt that test.
20090055-CA 5
the profit the note was intended to generate but for other
reasons such as obtaining employment as in Filby's and Sweeny's
case or assisting Defendant in opening the club as in Stafford's
case. In contrast, the trial court found that Hall gave
Defendant money under dissimilar circumstances that demonstrated
Hall's purpose for loaning the money was primarily as an
investment. The trial court noted that
a. Hall's landlord told him about an
opportunity to invest in [D]efendant's
business enterprise.
b. Hall appraised the opportunity in
connection with expecting a return on his
investment.
c. Hall was not loaning the money for
payroll or equipment but, instead, for a
general business purpose.
d. Hall had no control over the use of the
funds.
e. There was no regulatory scheme or other
risk-reducing factor to protect Hall's
investment.
f. Hall's investment sounds like a security
and would appear so to the investing public.
¶14 Applying the second and third factors, the trial court
determined that the "factor about plan distribution did not apply
in this case" and the "factor about expectations of the investing
public was also of minor significance in this case." Applying
the fourth factor, the trial court determined that "[t]here were
no risk-reducing factors for the notes issued in this case; there
was no regulatory scheme or mortgage, etc. which reduced the risk
of the loss of the monies given to [D]efendant."
II. Appellate Review of the Trial Court's Application and
Interpretation of the Reves Family Resemblance Test
¶15 The next step involves reviewing the trial court's
application of the facts to the law regarding Defendant's
sufficiency of the evidence claim and, to the extent necessary,
the court's interpretation of the Reves family resemblance test
to the promissory notes entered into between Hall and Defendant.
"When reviewing a bench trial for sufficiency of the evidence, we
20090055-CA 6
must sustain the trial court's judgment unless it is against the
clear weight of the evidence, or if the appellate court otherwise
reaches a definite and firm conviction that a mistake has been
made." State v. Nichols, 2003 UT App 287, ¶ 24, 76 P.3d 1173
(internal quotation marks omitted). The trial court's
interpretation of case law presents a question of law, and we
review the trial court's interpretation of that case law for
correctness. See State v. Richardson, 843 P.2d 517, 518 (Utah
Ct. App. 1992). In applying Reves, we first presume that the
promissory notes are securities. Next we consider the four
factors to determine whether the promissory notes strongly
resemble one of the commercial notes listed in Reves as
nonsecurities.
¶16 The first Reves factor is the motivation of a reasonable
seller and buyer. "If the seller's purpose is to raise money for
the general use of a business enterprise or to finance
substantial investments and the buyer is interested primarily in
the profit the note is expected to generate, the instrument is
likely to be a 'security.'" Reves v. Ernst & Young, 494 U.S. 56,
66 (1990). If, however, "the note is exchanged to facilitate the
purchase and sale of a minor asset or consumer good, to correct
for the seller's cash-flow difficulties, or to advance some other
commercial or consumer purpose, . . . the note is less sensibly
described as a 'security.'" Id.
¶17 The evidence here supports the trial court's findings about
the parties' motivations. Hall met with Defendant after learning
about a potential business opportunity with Defendant from the
parties' mutual acquaintance. In seeking the loan, Defendant
solicited the funds for the general use of a business enterprise
and told Hall that she "was trying to open a bar and that she
needed funding." Defendant did not identify how she would spend
the money, nor did she indicate that it would be used to
facilitate the purchase and sale of a minor asset or consumer
good, to correct for the seller's cash-flow difficulties, etc.
In loaning the $20,000, Hall testified that he was expecting a
profit from the 15% interest. Although Hall wanted to be
informed regarding how the money was spent, Hall never sought nor
had control over the use of the funds. Based on this evidence,
we conclude that the trial court's determination that this factor
weighs against a family resemblance to a nonsecurity is supported
by evidence and should not be disturbed.
¶18 The second factor examines whether the instrument was one
for which there is "common trading for speculation or
investment." Reves, 494 U.S. at 66 (internal quotation marks
omitted). In this case, there is no evidence that the promissory
notes were to be commonly traded, and the loan appears to be a
20090055-CA 7
private agreement between two parties. The State argued below
that Defendant's plan of distribution was to offer a note to
anyone who was willing to invest money with Defendant. The State
further argued that although "[t]here was no indication of a
secondary market," it emphasized that "the investment was open to
anyone in the public who was willing to invest." The State,
however, ultimately acknowledged the weakness of this factor by
stating that "this factor may tilt toward a family resemblance to
a non-security." We agree, and conclude that this factor weighs
in favor of a nonsecurity determination.
5
¶19 The third factor considers the reasonable expectations of
the investing public. See Reves, 494 U.S. at 66. The trial
court considered this factor and determined that it was of "minor
significance in this case," but ultimately ruled that "Hall's
investment sounds like a security and would appear so to the
investing public." Under the circumstances of this case, it is
reasonable for an individual loaning money to consider the
transaction done for a profit from the 15% interest to be an
investment. See id. ("A reasonable investor would have
considered the transaction with its higher-than-commercial
interest rate to be an investment."). We conclude that the trial
court properly found that this factor weighs against a
resemblance to the family of nonsecurities.
¶20 The final factor examines "[w]hether some factor such as the
existence of another regulatory scheme significantly reduces the
risk of the instrument, thereby rendering application of the
Securities Acts unnecessary." Reves, 494 U.S. at 67. Defendant
acknowledges that no other formal regulatory scheme applies to
the transaction and that the loan was not collateralized.
Defendant asserts, however, that this would be true of any such
short-term loan and that the short-term nature of the loan
together with available remedies at common law are other factors
that would reduce the risk of the transaction to some degree. As
evidence of this assertion, Defendant points out that Hall
quickly obtained a judgment for the amount of the loan and could
have availed himself of it by execution of the judgment at any
time. We disagree. The ability to collect damages from a civil
lawsuit does not necessarily reduce the risk of an instrument,
5. The trial court found that "[t]he factor about
plan distribution did not apply in this case."
As such, it appears that the trial court
essentially found that there was not a plan of
distribution in place and that this factor was
ultimately considered to weigh in favor of a
nonsecurity determination.
20090055-CA 8
nor does it "render the application of securities statutes
unnecessary." See State v. Pedersen, 95 P.3d 385, 390 (Wash. Ct.
App. 2004) (stating that the ability to collect damages in a
lawsuit is "speculative, [and] it also does not render the
application of securities statutes unnecessary. If it did, there
would be little need for securities acts"). Here, even if Hall
had executed upon the judgment, it does not necessarily follow
that he would have recovered any of the money loaned to
Defendant--especially given Defendant's financial history of
other loan defaults. As such, we do not agree that the ability
to obtain a judgment reduces the risk of the transaction to any
measurable degree. Because Defendant does not point out any
factor that would reduce the risk of the transaction and render
application of the Utah Securities Act unnecessary, we conclude
that the trial court properly found that this factor weighs
against a family resemblance to nonsecurities.
¶21 In summary, the first, third, and fourth factors weigh
against any family resemblance to nonsecurities; only the second
factor weighs in favor. "The factors are considered as a whole,
and failure to satisfy one of the factors is not dispositive."
State v. McGuire, 2007 WI App 139, ¶ 23, 735 N.W.2d. In this
case, the factors considered together support the presumption
that the promissory notes at issue are securities. Accordingly,
we conclude that the evidence is sufficient to support the trial
court's conclusion that the notes were a security and its
decision to convict Defendant of securities fraud.
CONCLUSION
¶22 In applying the Reves family resemblance test, pursuant to
statute, it is presumed that the promissory notes are securities.
This presumption may be rebutted if the note bears a strong
resemblance to a nonsecurity. The trial court applied the Reves
test, considered the factors as a whole, and found that Hall's
promissory notes were securities because the first, third, and
fourth factors weigh against any family resemblance to
nonsecurities. The evidence presented at trial supports the
trial court's determination that Defendant's purpose in obtaining
the funds solicited was for general business use; Hall gave
Defendant money as an investment; there was no regulatory scheme
or other risk-reducing factor to protect Hall's investment, and
Hall's investment would appear as a security to the investing
public. Based on the foregoing, we conclude that the factors
considered together establish that the promissory notes at issue
are securities. Accordingly, we uphold Defendant's conviction of
securities fraud.
20090055-CA 9
______________________________
William A. Thorne Jr., Judge
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¶23 WE CONCUR:
______________________________
James Z. Davis,
Presiding Judge
______________________________
Stephen L. Roth, Judge
20090055-CA 10