Opinion
No. C3-02-34.
Filed July 16, 2002.
Appeal from the District Court, Ramsey County, File No. C400005945.
Kammey M. K. Mahowald, Mark K. Thompson, (for appellants)
Peter C. Sandberg, Phong M. Luong, (for respondents)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
Appellants Elaine Benson-Moosbrugger and 22 other individuals challenge the district court's grant of partial summary judgment in favor of respondents Robert P. Day, Eco Tico, Inc., Alpha Tica Beta, Inc., Deanna Day, Dolphin Rental Company, and Dayline Company. Appellants contend that their securities act claims are not barred by the three-year statute of limitations found in Minn. Stat. § 80A.23, subd.7 (2000). Respondents claim the district court erred by denying their motion for dismissal of the case based on misjoinder of parties. We affirm.
FACTS
Respondents solicited appellants for investment money for the purchase and development of a diving and fishing resort in Costa Rica. The money was solicited through local advertisements, promotions, brochures, videos, telephone conversations, and personal meetings. The individuals advancing money received notes evidencing their investment. All the notes were substantially similar in language and carried an interest rate of 10% per annum. The notes also contained the following clauses:
3. Borrower.
I will borrow the money at a rate of [$______] the first month and [$_____] for [____] concurrent months starting [______].
* * * *
5. Lenders Right to Payment.
Lender has the right to, on or before [_____]. To call or personally come to Costa Rica and receive payment of borrowed money plus interest, or receive [____] % ownership of [______], and continue to borrow Robert Day [$_____] per month for [____] concurrent months totaling [$______].
Thus, each individual signing the note had an option of converting the loans into ownership interests.
Sometime between 1997 and 1998, Day told appellants that he could not finish the project because of a lack of money. Many of the appellants asked for their money back. In May or June 1999, Day sent share certificates to appellants, purporting to indicate appellants' ownership in Alpha Tica. The certificates reflect a date of May 14, 1999, and were received by each appellant shortly thereafter. Day admits that these shares represent each appellant's ownership in Alpha Tica and consequently each appellant's ownership in the bottom two-thirds of the total resort property.
On June 8, 2000, appellants brought suit, alleging that respondents (1) made fraudulent and negligent representations; (2) committed consumer fraud; (3) engaged in false advertising; (4) used deceptive trade practices; (5) violated the Uniform Securities Act; and (6) sold securities without a license. Both parties moved for summary judgment. Respondent additionally moved for dismissal on grounds of improper joinder of parties.
The district court issued an order granting partial summary judgment in favor of respondents, dismissing all of appellants' claims that arose from notes executed prior to June 8, 1997. The court granted partial summary judgment in appellants' favor for all claims that arose from notes executed after June 8, 1997. The court also denied respondents' motion to dismiss for misjoinder of parties.
DECISION
Appellants contend that the district court erroneously granted respondents' partial summary judgment based on the incorrect determination that the applicable statute of limitations bars appellants' claims arising prior to June 8, 1997. Respondents contend that (1) they are exempt from liability for the sale of unregistered securities under Minn. Stat. § 80A.15, subd. 2(a)(1) (2000); (2) genuine issues of material fact exist regarding whether they violated Minn. Stat. § 80A.08 (2000) by selling unregistered securities; and (3) the district court erred by denying their motion for dismissal due to misjoinder of parties. At oral argument, respondents withdrew their claims regarding exemption and violation of section 80A.08. The only issues we consider are the statute of limitations and misjoinder of parties issues.
1. Appellants contend that the district court erred by granting partial summary judgment to respondent on the statutue of limitations issue. Summary judgment is properly granted when the pleadings, depositions, affidavits, etc. "show that there are no genuine issues of material fact and that either party is entitled to judgment as a matter of law." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993) (citation omitted). On appeal from summary judgment, this court asks two questions: "(1) whether there are any genuine issues of material fact and (2) whether the lower courts erred in their application of the law." State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990) (citation omitted). The evidence is viewed in the light most favorable to the party against whom judgment was granted. Fabio, 504 N.W.2d at 761. The application of law to stipulated facts is a question of law, which this court reviews de novo. Morton Bldgs., Inc. v. Comm'r of Revenue, 488 N.W.2d 254, 256 (Minn. 1992).
Appellants' securities claims (counts VII and VIII of their complaint) were brought under subdivisions 1 and 2 of section 80A.23 (2000). Count VI of appellants' complaint was brought under subdivision 2. Count VII was brought under subdivision 1. The district court found that appellants' claims were barred by the three-year statute of limitations found in Minn. Stat. § 80A.23, subd.7 (2000) which provides:
No person may commence an action under subdivision 1 more than three years after the sale upon which such action is based. No person may commence an action under subdivision 2 more than three years after the occurrence of the act or transaction constituting the violation.
Minn. Stat. § 80A.23, subd. 7.
Statutory constructions is a question of law, which this court reviews de novo. Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 393 (Minn. 1998). Minnesota courts have generally interpreted the provisions of the securities act in accordance with its objective, which is "to protect investors by regulating the merits of securities offered for sale to the public." State by Spannaus v. Coin Wholesalers, Inc., 250 N.W.2d 583, 588 (Minn. 1976).
Subdivision 1 of section 80A.23 prohibits the sale of a security that is unregistered. Whether the statute of limitations has run depends on when the sale of a security took place. Determining when the sale took place necessarily involves determining what constitutes a security.
A security is defined by statute as follows:
(a) "Security" means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable shares; investment contract; investment metal contract or investment gem contract; voting trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining right, title or lease or in payments out of production under the right, title or lease; or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Minn. Stat. § 80A.14, subd.18(a) (2000). In line with the broad statutory definition, Minnesota case law has also expansively defined securities. See generally State v. Investors Sec. Corp., 297 Minn. 1, 209 N.W.2d 405 (1973) ("security," as used in statutes relating to sale and registration of securities, includes both notes and investment contracts); see also State v. Gopher Tire Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938 (1920) (broadly defining "investment" in context of term "investment contract"). Here, the notes that appellants signed gave them the right to receive a certain percentage of ownership in the resort. The notes clearly meet the statutory definition of a "security."
Citing Medtox Scientific, Inc. v. Morgan Capital, L.L.C., 258 F.3d 763 (8th Cir. 2001), appellants argue that the sale of securities did not take place until the respondents issued the Alpha Tica shares to appellants on May 14, 1999. Medtox examined whether the conversion of a company's preferred stock to common stock was a purchase under section 16(b) of the Securities Exchange Act of 1934. Id. at 768-69. The court determined that the conversion was a purchase, stating the following:
The SEC has made clear that conversion is a purchase for the purposes of determining whether a § 16(b) purchase and sale transaction has occurred.
[A] right to purchase an equity security is deemed acquired as of the date the exercise or conversion price becomes fixed, and the acquisition, absent an exemption, will be matchable for § 16(b) purposes with a disposition within six months of the fixing of the price. For example, the acquisition of an option having an exercise price equal to 90% of the market price as of the date of exercise would be deemed to be a purchase of the underlying stock as of the date of exercise.
Id. at 769. (citation omitted)
Medtox focuses on section 16(b) of the Securities Exchange Act, however, and is inapplicable to the case at bar. This court has previously stated:
The Minnesota Securities Act is to be construed to "coordinate the interpretation of sections 80A.01 to 80A.31 with the related federal regulation." Minn. Stat. § 80A.31 (1998). Federal caselaw is of considerable precedential value in deciding issues arising under the act. Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520, 534 (Minn. 1986). The federal corollary to Minn. Stat. § 80A. 01 is section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b) (1994). The Securities Exchange Commission prescribed rule 10b-5 to enforce the provisions of section 10(b). St. Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 562 F.2d 1040, 1048 (8th Cir. 1977), cert. denied, 435 U.S. 925, 98 S.Ct. 1490, 55 L.Ed.2d 519 (1978).
Fawcett v. Heimbach, 591 N.W.2d 516, 522 (Minn.App. 1999) (footnote omitted). Appellants' claims arise predominately from sections 80A.01 and 80A.08 of the Minnesota Statutes. Section 16(b) of the Securities Exchange Act provides no guidance for interpreting these statutes. Also, Medtox considered whether profits should be disgorged from a securities dealer for insider trading. Medtox, 258 F.3d at 768-69. The case at bar does not involve insider trading or disgorgement of profits, but instead involves the sale of unregistered securities and fraud.
Appellants additionally argue that even if the issuance of the notes is considered a sale of securities, the issuance of the ownership certificates for Alpha Tica was a separate sale of securities. A sale is defined as "every contract of sale, contract to sell, or disposition of, a security or interest in a security for value." Minn. Stat. § 80A.14, subd. 17(1). The promissory notes giving appellants the right to receive ownership in the resort were securities. Thus, it is clear that the issuance of the notes was a sale of securities. Appellants argue, however, that the fact that the certificates that were ultimately issued give appellants ownership in Alpha Tica, not in the resort, suggest that this issuance indeed was a separate sale from the notes. But the evidence in the record indicates that ownership in Alpha Tica is essentially the ownership in the resort contemplated by the notes.
Day began developing the resort on four acres of land on the northwest coast of Costa Rica, known as Playa Real. This land is owned by the Costa Rican government and carries with it a concession right, which allows the government to lease out the land for up to 99 years. The concession right was conveyed to Mini Golf Pacific, S.A., and Mini Golf then conveyed a 99-year lease to Alpha Tica for the lower parcel to build the resort. Day purchased a controlling interest in Eco Tico to develop a condominium on the upper parcel of the land and also purchased a controlling interest in Alpha Tica to develop the actual resort on the lower parcel. Because Alpha Tica is actually the corporation that was building the resort, ownership in the corporation is not separate or distinct from the appellants' contemplated ownership interest in the resort. The issuance of the notes and the subsequent issuance of the Alpha Tica shares are not two separate security sales.
Subdivision 2 of section 80A.23 prohibits any person from engaging in acts of fraud in connection with the sale of a security. Under the applicable statute of limitations, the relevant triggering event is when the act constituting the violation of subdivision 2 took place. Appellants argue that the violation was the conversion of the promissory notes to shares of ownership in Alpha Tica and that, therefore, the act took place in May 1999, when the ownership certificates were issued.
As noted above, the notes clearly meet the definition of securities. Because appellants' allege fraud occurred in connection with the issuance of the notes, the statute of limitations bars all claims under subdivision 2 by appellants who signed notes prior to June 8, 1997. Appellants, however, point out that the notes they signed secured rights of ownership in Eco Tico Resort, and therefore there were actually two different securities transactions, because the certificates issued were for Alpha Tica. Nevertheless, ownership in Alpha Tica is essentially the ownership contemplated by appellants in the resort properties.
Appellants also argue that when there is fraud in connection with the sale of a security, the statute of limitations should be tolled until the fraud is reasonably discoverable. Such tolling is consistent with the federal doctrine of equitable tolling. See TCF Banking and Sav., F.A. v. Arthur Young Co., 706 F. Supp. 1408, 1413 (D.Minn. 1988) ("In addition to applying state statute of limitations periods, however, federal tolling principles also apply. The limitations period does not begin to run, therefore, until the fraud was or should have been discovered."). This court, however, has previously rejected the federal doctrine of equitable tolling in relation to the statute of limitation at issue here. See Semrad v. Edina Realty, Inc., 470 N.W.2d 135, 140 (Minn.App. 1991) (concluding that "fraud does not toll the limitations period for claims under section 80A.23"), reversed on other grounds 493 N.W.2d 528 (Minn. Dec. 4, 1992). The district court did not err by granting partial summary judgment in respondents' favor.
2. Respondents contend that the district court erred by denying their motion for dismissal based on misjoinder. Respondents argue that it was improper for the district court to allow the individual investors to join together as plaintiffs. A district court's determination of who shall be made a party to a suit will not be reversed on appeal absent an abuse of discretion. Flowers v. Germann, 211 Minn. 412, 420, 1 N.W.2d 424, 429 (1941). The permissive joinder of parties is governed by Minnesota Rules of Civil Procedure which provide as follows:
All persons may join in one action as plaintiffs if they assert any right to relief, jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of fact or law common to all these persons will arise in the action.
Here, the claims of all appellants arise from the same series of transactions, namely the solicitation of investment money and the subsequent issuance of promissory notes. Additionally, all of the appellants must address the same questions of law; for example, whether respondents sold unregistered securities and whether respondents committed fraud in connection with the sale of securities. The district court did not abuse its discretion by dismissing respondents' misjoinder motion.