State v. Lundberg ( ( 2017 )

Nos. 114,897
114,898
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
STATE OF KANSAS,
Appellant,
v.
DAVID G. LUNDBERG
and
MICHAEL L. ELZUFON,
Appellees.
SYLLABUS BY THE COURT
1.
Whether jurisdiction exists is a question of law over which appellate courts have
unlimited review.
2.
The purpose of the Kansas Securities Act is to provide rigid governmental
regulation and control over the promoting and selling of speculative securities in order to
protect both investors and the public.
3.
The Kansas Securities Act is patterned after the Uniform Securities Act that, in
turn, is modeled after the Federal Securities Act. Accordingly, Kansas courts may look to
decisions of federal courts as well as decisions from other states that have adopted the
Uniform Securities Act for guidance in interpreting the Kansas Securities Act in an
attempt to make its application uniform with other jurisdictions.
1
4.
K.S.A. 17-12a501 makes it unlawful for a person, in connection with the offer,
sale, or purchase of a security, to make an untrue statement of material fact or to omit a
material fact. It is also unlawful to engage in an act, practice, or course of business that
operates as a fraud or deceit upon another person.
5.
Under K.S.A. 17-12a610, Kansas courts have territorial jurisdiction over a person
that sells or offers to sell a security in this state. Likewise, Kansas courts have jurisdiction
where the purchase or offer to purchase a security is made and accepted in this state. An
offer to sell or to purchase a security is made in Kansas—whether or not either party is
then present in this state—if the offer originates from within Kansas.
6.
An out-of-state offer originates from Kansas if any portion of the selling process
has occurred here or if there is some territorial nexus between the offer and this state.
Appeal from Sedgwick District Court; BENJAMIN L. BURGESS, judge. Opinion filed March 3,
2017. Reversed and remanded.
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, for appellant.
Richard Ney and David L. Miller, of Ney, Adams & Miller, of Wichita, for appellee David G.
Lundberg.
Kurt P. Kerns, of Ariagno, Kerns, Mank & White, LLC, of Wichita, for appellee Michael L.
Elzufon.
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Zachary T. Knepper, deputy general counsel, and A. Valerie Mirko, general counsel, of North
American Securities Administrators Association, Inc., of Washington, D.C., and Alan V. Johnson, of
Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., of Topeka, for amicus curiae North American
Securities Administrators Association, Inc.
Before BRUNS, P.J., MCANANY and BUSER, JJ.
BRUNS, J.: The State appeals from the district court's decision dismissing 56
counts in each of two 61-count criminal complaints filed against David G. Lundberg and
Michael W. Elzufon. The complaints alleged that Lundberg and Elzufon had violated the
Kansas Uniform Securities Act, K.S.A. 17-12a101 et seq. Specifically, the complaints
asserted that Lundberg and Elzufon unlawfully sold—or offered to sell—unregistered
securities and committed securities fraud.
The district court consolidated the two cases for preliminary hearing. Prior to the
hearing, Lundberg filed a motion to dismiss for lack of territorial jurisdiction because the
sales, offers to sell, and purchases occurred outside of Kansas. Elzufon subsequently
joined the motion to dismiss and, prior to the completion of the preliminary hearing, the
district court dismissed the bulk of the charges against both defendants for lack of
territorial jurisdiction. Subsequently, the State voluntarily dismissed the remaining
charges in order to appeal the district court's decision.
On appeal, we find that the district court has territorial jurisdiction over these
cases pursuant to K.S.A. 17-12a610 because a portion of the securities selling process
occurred in this state. Furthermore, we find that there is a sufficient territorial nexus
between the actions of Lundberg and Elzufon—as well as that of their limited liability
companies—to support jurisdiction in Kansas. Thus, although we take no position on the
merits of the criminal charges brought against Lundberg and Elzufon, we reverse the
district court's decision to dismiss these cases for lack of territorial jurisdiction, and we
remand them to the district court for further proceedings consistent with this opinion.
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FACTS
The pertinent facts necessary to resolve the issue of territorial jurisdiction are
undisputed, and we can glean them primarily from the stipulation of facts entered into by
the parties. In addition, the State supplemented these facts with testimony offered at the
preliminary hearing. Because of the limited issue presented on appeal, we will limit our
discussion of the facts to those that relate to the issue of territorial jurisdiction.
In January 2005, Lundberg and Elzufon formed a Minnesota corporation called
Real Development Corp. Lundberg and Elzufon were listed in filings with the Minnesota
Secretary of State as the sole shareholders, officers, and agents of the corporation for the
duration of its existence. In May 2008, Real Development Corp. filed a foreign
corporation application with the Kansas Secretary of State's Office. Additionally, Real
Development Corp. maintained places of business in Minnesota and Kansas.
In April 2006, Lundberg and Elzufon started the first of their four limited liability
companies in Kansas, known as Wichita 19, LLC. The second—started in May 2008—
was known as 150 WFA, LLC. The third—also started in May 2008—was known as 150
Main, LLC. The fourth—started in June 2008—was known as 150 Main Four Ten, LLC.
The organizational documents of the LLCs listed Lundberg and Elzufon as the sole
members as well as the managers and agents for each of these limited liability companies.
The parties have stipulated that substantial operations of Wichita 19, LLC, 150
WFA, LLC, 150 Main, LLC, 150 Main Four Ten, LLC, and Real Development Corp.
were conducted from places of business in both Minnesota and Kansas. Lundberg and
Elzufon were also physically present in Wichita on multiple occasions. In addition,
Lundberg and Elzufon issued promissory notes to investors relating to various buildings
in downtown Wichita on behalf of Wichita 19, LLC, and Real Development Corp. While
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some of the promissory notes stated that Minnesota law would apply to the resolution of
disputes, others indicated that the laws of Kansas would apply.
The operation agreement for Wichita 19, LLC, also contained a provision that any
legal actions relating to the agreement or to transactions contemplated by the agreement
must be brought in the United States District Court for the District of Kansas sitting in
Wichita or in Sedgwick County District Court. Further, Lundberg signed at least one of
the promissory notes issued to an investor while he was physically present in Sedgwick
County. Lundberg and Elzufon also issued a promissory note to an investor who lived in
Wichita. Subsequently, they issued another promissory note to the Wichita investor in
their personal capacity as well as on behalf of Real Development Corp.
Similarly, Lundberg and Elzufon issued membership interests on behalf of 150
WFA, LLC, to investors. The operating agreement for 150 WFA, LLC, contained a
choice of law provision stating that the laws of Kansas applied to disputes arising out of
or relating to the agreement. It also contained a provision stating that all legal actions
relating to the operating agreement or the transactions contemplated in the agreement
must be brought in the United States District Court for the District of Kansas sitting in
Wichita or in Sedgwick County District Court.
Real Development Corp., as well as each of the Kansas LLCs, owned interests in
assets—in particular, real property—in Wichita. Specifically, the businesses started by
Lundberg and Elzufon were engaged in the revitalization of downtown Wichita through
investment in and rehabilitation of commercial real estate. From at least 2005 through
2011, the companies offered investment opportunities—including the sale of promissory
notes and membership interests—related to their Wichita real estate. Ultimately, Real
Development Corp. forfeited its foreign corporation application in Kansas in July 2015,
and each of the Kansas LLCs has now forfeited or dissolved its articles of organization.
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Only one of the investors, Dennis Miller, actually lived in Kansas. Many of the
out-of-state investors lived in California. Joseph Tacelli and Tom Martinson, both
California residents, and others introduced the California investors to the investment
opportunity in Wichita real estate. Tacelli and Martinson received information regarding
the investments from Lundberg and Elzufon. In turn, they used this information to solicit
investors in exchange for a commission. At some point, Tacelli went to Wichita to meet
with Lundberg and Elzufon about the investments. In addition, Tacelli received
information evidently faxed to him from the Broadview Hotel in Wichita. According to
Tacelli, he obtained approximately 12 investors for one of the Wichita projects and
received a commission from Lundberg and Elzufon.
Martinson raised about $800,000 from out-of-state investors and received
approximately $120,000 in commissions. Although he believed that some of the investors
may have gone to Kansas, he was not sure when this occurred. Specifically, Martinson
was involved in the 150 Main project. He explained that Lundberg and Elzufon first sold
investment opportunities in the basement and first three floors of the building under the
name of 150 Main WFA, LLC. Once a maximum number of investors for these floors
had been obtained, they moved on to selling investment opportunities in floors 4 through
10 under the name 150 Main Four Ten, LLC. Martinson also invested personally in the
property and visited Wichita with his wife about a year after they invested. According to
Martinson, they found that the building renovation was not as promised to them by
Lundberg and Elzufon.
On February 10, 2015, the Sedgwick County District Attorney filed separate 61-
count criminal complaints against Lundberg and Elzufon alleging violations of the
Kansas Uniform Securities Act. The complaints alleged multiple counts of securities
fraud and unlawful sale of unregistered securities occurring between December 12, 2005,
and December 31, 2011. In particular, the State alleged that investors lost a substantial
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sum of money as a result of the unlawful activities committed by Lundberg and Elzufon
in raising funds to purchase and rehabilitate buildings in downtown Wichita.
On September 29, 2015, Lundberg filed a motion to dismiss the charges for
insufficient evidence "because the Defendant's alleged acts were not in connection with
the offer, sale, or purchase of a security, as that term is defined under Kansas law." On
the same day, Lundberg also filed a motion to dismiss for lack of jurisdiction, arguing
that the district court lacked territorial jurisdiction because none of the alleged sales or
offers to sell were made or accepted in Kansas. Subsequently, Elzufon orally joined in
Lundberg's motion to dismiss for lack of jurisdiction.
The district court commenced a preliminary hearing on November 9, 2015.
Although the district court scheduled the preliminary hearing to last a week, it only lasted
2 days before the parties entered into a stipulation of facts relating to the issue of
jurisdiction. During the 2 days of the preliminary hearing, the State presented the
testimony of 8 witnesses and introduced 40 exhibits into evidence. Each of the witnesses
testified regarding their interactions with Lundberg and Elzufon as well as regarding their
knowledge of the investment opportunities in the real estate located in downtown
Wichita.
On November 12, 2015, prior to the completion of the preliminary hearing, the
district court dismissed the majority of the charges against Lundberg and Elzufon for lack
of territorial jurisdiction. Although at that point the district court did not dismiss Counts
57 through 61—which related to the sale of alleged securities to Miller, these counts were
later voluntarily dismissed by the State so it could go forward with an appeal. We have
consolidated the two cases for the purposes of appeal. We also granted a motion filed by
the North American Securities Administrators Association, Inc., for leave to file an
amicus curiae brief.
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ANALYSIS
Issue Presented and Standard of Review
On appeal, the sole issue presented by the State is whether the district court erred
in holding that it did not have territorial jurisdiction over these cases alleging violations
of the Kansas Securities Act. Both the State—through the Office of the Kansas Securities
Commissioner—and the North American Securities Administrators Association, Inc.—
which has filed an amicus curiae brief in this case—contend that territorial jurisdiction
exists in these cases pursuant to K.S.A. 17-12a610 because a portion of the selling
process occurred in Kansas. In response, Lundberg and Elzufon contend that their
business activities in Kansas did not constitute an "offer to sell" or a "sale" of securities
over which Kansas courts have territorial jurisdiction.
Whether jurisdiction exists is a question of law over which we have unlimited
review. State v. Rizo, 304 Kan. 974, 984, 377 P.3d 419 (2016); State v. Rupnick, 280 Kan.
720, 741, 125 P.3d 541 (2005) (whether territorial jurisdiction exists is a question of law
over which an appellate court's scope of review is unlimited). To the extent that the
resolution of this issue requires statutory interpretation, we apply a de novo standard of
review. State v. Dunn, 304 Kan. 773, 819, 375 P.3d 332 (2016). Likewise, when the State
appeals the dismissal of a complaint, our standard of review is de novo. State v. Fredrick,
292 Kan. 169, 171, 251 P.3d 48 (2011). Although Elzufon argues in his brief that we
should apply a "negative finding" standard of review, we find that the result in this appeal
would be the same under either standard. See Hamel v. Hamel, 296 Kan. 1060, 1078, 299
P.3d 278 (2013).
8
Kansas Securities Law
In 1911, Kansas was the first state in the United States to enact blue sky laws. See
L. 1911, ch. 133, § 1; L. 1913, ch. 141, § 1. By 1933, every state in the union had enacted
similar statutes. These acts were intended to protect the public from "'speculative
schemes which have no more basis than so many feet of blue sky'" and, as a result, they
became known as "'blue sky laws.'" Brenner v. Oppenheimer & Co., 273 Kan. 525, 533,
44 P.3d 364 (2002) (quoting 69A Am. Jur. 2d, Securities Regulation State § 1, p. 759
[1993]). "Because securities acts are remedial legislation, they must be liberally
construed." See State ex rel. Mays v. Ridenhour, 248 Kan. 919, 934, 811 P.2d 1220
(1991).
Similarly, Congress passed the Securities Act of 1933, 15 U.S.C. § 77a et seq.
(2012), to regulate the sale of securities nationally. It is important to note, however, that
the Federal Securities Act does not preempt the Kansas Securities Act. Instead, the
Federal Securities Act expressly allows for state regulation of securities. Brenner, 273
Kan. at 533-34. Accordingly, federal and state laws work together to protect the public
from the sale of unregistered, fraudulent, and speculative securities.
Among other things, the Kansas Securities Act makes it "unlawful for a person, in
connection with the offer, sale, or purchase of a security, directly or indirectly" to make
untrue statements of material fact or to omit material facts. K.S.A. 17-12a501(2). In
addition, it is illegal to engage in fraudulent actions in connection with the sale of a
security. See K.S.A. 17-12a501(3). It is also unlawful—subject to certain exceptions—to
sell an unregistered security. K.S.A. 17-12a301. Under the Act, a "person" can be "an
individual; corporation; . . . limited liability company; association; joint venture; . . . or
any other legal or commercial entity." K.S.A. 17-12a102(20).
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The Kansas Supreme Court has held "that the legislative intent and purpose for
enacting the Kansas Securities Act was to place the traffic of promoting and dealing in
speculative securities under rigid governmental regulation and control to protect investors
and to prevent, to the extent possible, the sale of fraudulent or worthless speculative
securities." Ridenhour, 248 Kan. at 934 (citing State v. Hodge, 204 Kan. 98, 101, 460
P.2d 596 [1969]); see also Klein v. Oppenheimer & Co., 281 Kan. 330, 332, 130 P.3d 569
(2006). The Kansas Legislature pattered the current version of the Kansas Securities
Act—enacted in 2004—after the Uniform Securities Act of 2002 that, in turn, is modeled
after the Federal Securities Act. Thus, when interpreting and applying the Kansas
Securities Act, we may look to federal decisions as well as decisions from other states for
guidance. See State ex rel. Owens v. Colby, 231 Kan. 498, 501, 646 P.2d 1071 (1982);
State v. Atteberry, 44 Kan. App. 2d 478, 489, 239 P.3d 857 (2010).
Interpretation of K.S.A. 17-12a610
The Kansas Securities Act also contains what is known as a territorial jurisdiction
provision at K.S.A. 17-12a610. Specifically, the statute states:
"(a) Sales and offers to sell. K.S.A. 17-12a301 . . . [and] 17-12a501 . . . 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.
....
"(c) Offers in this State. For the purpose of this section, an offer to sell or to
purchase a security is made in this state, whether or not either party is then present in this
state, if the offer:
(1) Originates from within this state . . . ." K.S.A. 17-12a610.
10
As indicated above, courts are to liberally construe the Kansas Securities Act to
protect investors and members of the public. Ridenhour, 248 Kan. at 934. Although
Lundberg and Elzufon argue that we should strictly construe K.S.A. 17-12a610 because
this is a criminal case, we note that the Kansas Supreme Court has applied a broad
interpretation to a territorial jurisdiction statute in a criminal case. State v. Grissom, 251
Kan. 851, 885-89, 840 P.2d 1142 (1992). In Grissom, which involved criminal activity
occurring in both Kansas and Missouri that led to three murders at an unknown location,
our Supreme Court found:
"A broad interpretation of the territorial jurisdiction statute is consistent with our
venue statutes. Although jurisdiction and venue are different, an analogy can be made to
the venue statutes. For example, if a crime is committed in two counties, either county
has venue. K.S.A. 22-2603. If a crime is committed on or so near the boundary of two
counties that it cannot be determined in which county the crime occurred, either county
has venue. K.S.A. 22-2604. If the cause of death is inflicted in one county and the victim
dies in another county, either county has venue. K.S.A. 22-2611." Grissom, 251 Kan. at
889.
Our Supreme Court went on to conclude that there was "evidence from which a
jury could find that Grissom committed criminal acts in Kansas which were a substantial
and integral part of an overall continuing crime plan and which were in partial execution
of the plan." 251 Kan. at 889. We find that a similar rationale applies in cases involving
alleged violations of the Kansas Securities Act because alleged violations—or acts in
furtherance of a violation—may occur in more than one state. Furthermore, we find the
plain language of K.S.A. 17-12a610 is far-reaching and provides for territorial
jurisdiction over any person who sells or offers to sell securities where such transaction
"originates" in Kansas whether or not either party is present within this state. K.S.A. 17-
12a610(c).
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In interpreting K.S.A. 17-12a610, we also find guidance from the legal authority
cited in the amicus brief filed by the North American Securities Administrators
Association, Inc. (NASAA) in this appeal. The NASAA was formed in 1919 and is a
nonprofit association of state, provincial, and territorial securities regulators in the United
States, Canada, and Mexico. Its members include the securities regulators from all 50
states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Part of the
work of the NASAA is to promulgate model rules and coordinate multi-state enforcement
actions relating to securities acts.
In its brief, the NASAA shows that the territorial jurisdiction statute codified at
K.S.A. 17-12a610 is consistent with the jurisdictional provisions found in the Uniform
Securities Act of 2002 and the Uniform Securities Act of 1956. Specifically, the NASAA
asserts that all of these provisions confer territorial jurisdiction where a sale or offer to
sell a security "originates" from the state. Moreover, the NASAA indicates that 33 states
have adopted this language while the remaining states have a similar requirement.
However, only a few courts have addressed the issue of what it means for a sale or offer
to sell to originate from a state.
The NASAA points us to two cases setting forth tests that courts may use in
determining whether a sale or offer to sell a security originates from within a state. In
Newsome v. Diamond Oil Producers, Inc., CCH Blue Sky L. Rptr. ¶ 71,869 (Okla. Dist.
Ct. 1983), an Oklahoma state court determined 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. (Emphasis added.) Subsequently, both the United States District Court for the
Middle District of Florida and the United States District Court for the Southern District of
Indiana have adopted what has become known as the Newsome test. See Barnebey v. E.F.
Hutton & Co., 715 F. Supp. 1512, 1540 (M.D. Fla. 1989); Klawans v. E.F. Hutton & Co.,
Case No. IP 83-680-C (S.D. Ind. 1989).
12
In Lintz v. Carey Manor Ltd., 613 F. Supp. 543, 550 (W.D. Va. 1985), the United
States District Court for the Western District of Virginia adopted a similar—although not
identical—test. The Lintz court found that "so long as there is some territorial nexus to a
particular transaction, the [security] laws of two or more states may simultaneously
apply." (Emphasis added.) 613 F. Supp. at 550 (citing Loss, The Conflict of Laws and the
Blue Sky Laws, 71 Harv. L. Rev. 209, 242 [1957]). The Lintz test was subsequently
adopted by the United States District Court for the Western District of Missouri, by the
United States District Court for the Western District of Oklahoma, and by the Supreme
Court of Colorado. See Cromeans v. Morgan Keegan & Co., Inc., 303 F.R.D. 543, 556
(W.D. Mo. 2014); Nuveen Premium Income Mun. Fund 4, Inc. v. Morgan Keegan & Co.,
Inc., 200 F. Supp. 2d 1313, 1317-18 (W.D. Okla. 2002); Rosenthal v. Dean Witter
Reynolds, Inc., 908 P.2d 1095, 1105 (Colo. 1995).
Although the Newsome and Lintz tests are not identical, they are very similar in
that they allow a state not only to protect its own citizens but also to protect against
unlawful securities activities from taking place—in whole or in part—within the borders
of a state. We find these tests to be consistent with the common meaning of the word
originate, which is "[t]o bring into being, create" or to "start" something. American
Heritage Dictionary, p. 1241 (4th ed. 2006). We also find these tests to be consistent with
the requirement under the Due Process Clause of the Fourteenth Amendment to the
United States Constitution that a "defendant's conduct and connection with the forum
State [must be] such that he should reasonably anticipate being haled into court there."
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S. Ct. 2174, 85 L. Ed. 2d 528
(1985); see also Merriman v. Crompton Corp., 282 Kan. 433, Syl. ¶ 18, 146 P.3d 162
(2006) (Defendants should "not be haled into a jurisdiction solely as a result of random,
fortuitous, or attenuated contacts."). Thus, in interpreting K.S.A. 17-12a610, we conclude
that a sale or offer to sell a security originates in Kansas if any portion of the selling
process has occurred here or if there is some territorial nexus between the offer and the
State of Kansas.
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Application of K.S.A. 17-12a610
In the present case, the record on appeal reflects that Lundberg and Elzufon started
the four Kansas LLCs for the purpose of raising funds from investors for the
revitalization of buildings located in downtown Wichita. Each of the Kansas LLCs—as
well as Real Development Corp.—maintained places of business in Kansas. In particular,
the Kansas LLCs and Real Development Corp. had places of business at 105 S.
Broadway and 125 N. Market Street in Wichita. The parties have also stipulated that
"substantial operations" of these business entities—of which Lundberg and Elzufon were
the sole owners, managers, and/or agents—were conducted in both Minnesota and
Kansas.
At least some of the promissory notes and membership interests issued by
Lundberg and Elzufon stated that Kansas law would apply. One of these promissory
notes was signed while Lundberg was physically present in Kansas. Another promissory
note was issued to an investor who lived in Wichita. In addition, at least some of the
operating agreements for the Kansas LLCs provided that any legal actions relating to
them must be brought in either the United States District Court for the District of Kansas
sitting in Wichita or in Sedgwick County District Court.
On multiple occasions, Lundberg and Elzufon were physically present in Kansas.
Those who were selling the alleged securities on behalf of the Kansas LLCs and/or Real
Development Corp. received information regarding the investments as well as
commissions from Lundberg and Elzufon. One of these people travelled to Wichita to
meet with Lundberg and Elzufon. It also appears that at least some information about the
investments was faxed from the Broadview Hotel in Wichita.
Based on the stipulation of the parties as well as the evidence presented during the
initial portion of the preliminary hearing, we do not find Lundberg's and Elzufon's
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connections with Kansas to be random, fortuitous, or attenuated. Rather, we find their
connection to Kansas to be purposeful and they should have reasonably anticipated that
they might be haled into Kansas court based on their substantial and continuing activities
here over the course of several years. We also find that a portion of the selling process of
the alleged securities occurred in Kansas and that there is a territorial nexus between
Kansas and the alleged violations of the Kansas Securities Act. We, therefore, conclude
that the district court has territorial jurisdiction over these cases pursuant to K.S.A. 17-
12a610.
Because the district court dismissed these cases before the completion of the
preliminary hearing, we do not take a position regarding whether there is sufficient
evidence to bind either Lundberg or Elzufon over for trial on any of the charges asserted
by the State. Rather, we remand these cases to the district court for reinstatement of the
complaints, for completion of the preliminary hearing, and for any further proceedings
that may be appropriate.
Reversed and remanded for further proceedings.
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