Tanner v. State Corp. Commission

PRESENT: Hassell, C.J., Lacy, Koontz, Kinser, and Lemons, JJ.,
and Carrico and Stephenson, S.JJ.

DAVID R. TANNER, JAMES C. PERRY,
AND BRIAN W. KREIDER

v. Record Nos. 020938, 020939, OPINION BY
and 020940 SENIOR JUSTICE ROSCOE B. STEPHENSON, JR.
June 6, 2003
STATE CORPORATION COMMISSION

UPON REHEARING FROM THE STATE CORPORATION COMMISSION

On January 10, 2003, we rendered an opinion in these

consolidated appeals in which we determined whether the State

Corporation Commission (the Commission) erred in finding that

David R. Tanner, James C. Perry, and Brian W. Kreider violated

certain sections of the Virginia Securities Act, Code § 13.1-501

et seq. (the Act). We affirmed, in part, and reversed, in part,

the Commission's judgments and remanded the case to the

Commission for further consideration of penalties. Tanner v.

State Corporation Commission, 265 Va. 148, 574 S.E.2d 525

(2003).

Thereafter, the Commission, pursuant to Code § 8.01-675.2

and Rule 5:39, petitioned this Court for a rehearing to

reconsider and withdraw the portions of the opinion that

reversed its judgments. By order entered February 28, 2003, we

granted the petition as it relates to Parts V and VI of the

opinion.

I
 In Part V of the opinion in Tanner, we considered whether

certain instruments entitled "Accounts Receivable Purchase and

Sales Agreement" (the Agreements) issued by Kennsington Holding

Corporation (Kennsington) and sold by Tanner, Perry, and Kreider

are investment contracts as defined in Securities and Exchange

Com'n v. W.J. Howey Co., 328 U.S. 293 (1946), and, therefore,

securities subject to the registration requirements of the Act.

The Commission contends that, in deciding that the Agreements

are not securities, we based our decision on a mistake of fact.

The Act defines a "security" to include an "investment

contract." Code § 13.1-501. In W.J. Howey Co., the Supreme

Court ruled that "an investment contract for purposes of the

Securities Act [of 1933] means a contract, transaction or scheme

whereby a person invests his money in a common enterprise and is

led to expect profits solely from the efforts of the promoter or

third party." 328 U.S. at 298-99.

In Tanner, we rejected the Commission's contention that the

purchasers of the Agreements were led to expect profits solely

from the efforts of others. 265 Va. at 155, 574 S.E.2d at 529.

We noted that, under the terms of the Agreements, Kennsington

"sells, sets over and assigns" to the purchasers certain

accounts receivable; that the purchasers "shall be the absolute

owner[s] of the accounts;" that Kennsington agreed to deliver to

the purchasers "a detailed listing of all of the accounts [and]

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the work folder for each account, as available, containing all

supporting documents;" and that the purchasers have "the right

to assign the collection of the Accounts Receivable . . . to the

Collection Company of their choice." Id. at 154, 574 S.E.2d at

528.

With respect to the operation of the Agreements, we said

the following:

The sole evidence relating to the operation of
the Agreements was the testimony of Harold J. Bailey,
who had purchased accounts receivable owed to an
entity called "The Legal Society." Bailey received a
UCC-1 financing statement related to his purchase that
showed the legal name of the debtor. He was furnished
an information packet, including an explanation of
"how the entire system [of accounts receivable
financing] works." Although Bailey, by a separate
agreement, engaged Summit Financial Services to be his
collection agent, nothing in the record suggests that
Bailey was not free to proceed directly against The
Legal Society to collect the accounts receivable.

Id. at 155, 574 S.E.2d at 528-29.

Upon rehearing, the Commission contends that we mistakenly

"relied on the fact that . . . Bailey had received a UCC-1

financing statement related to his investment." The Commission

so contends notwithstanding that Bailey testified that he "got a

financing statement." Further, the record contains the

information packet furnished to Bailey informing him that,

"[o]nce the receivables have been verified, Kennsington then

files a UCC-1 on them in the name of the client." (Emphasis

added.)

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 Nonetheless, the Commission, in an attempt to vitiate this

evidence in the record, attached to its petition for rehearing a

copy of an alleged letter from Kennsington to Bailey. 1 This

document is not a part of the record, and we will not consider

it. Upon rehearing, as with original appeals, we consider and

make decisions based upon the record that has been brought to

us. Accordingly, we reaffirm our decision in Part V of the

opinion in Tanner.

II

In Part VI of the opinion in Tanner, we considered whether

certain promissory notes, which were issued pursuant to Rule 504

Regulation D, are exempt from registration under the Act. The

Commission contends that our ruling that the notes are exempt

from registration was based upon a mistake of law. We agree.

We erred in concluding that Rule 504 Regulation D was

issued under the authority of § 4(2) of the Securities Act of

1933 (the Securities Act), 15 U.S.C. § 77d(2) (2000). Based

upon this erroneous conclusion, we held that the notes were

exempt from the Act's registration requirements pursuant to

§ 18(b)(4) of the Securities Act, 15 U.S.C. § 77r(b)(4).

1
In this letter, Kennsington purportedly informed Bailey
that "a UCC-1 has been filed in the name of Kennsington."
Therefore, according to the Commission, "the investors had to
depend entirely upon Kennsington" to collect on their
investments.

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 We are persuaded now that Rule 504 Regulation D was issued

under the authority of § 3(b) of the Securities Act, 15 U.S.C.
2
§ 77c(b). Indeed, the Rule itself references § 3(b), and the

adopting release for Regulation D states that Rule 504 "provides

an exemption under section 3(b) of the Securities Act."

Securities Act Release No. 33-6389, 47 Fed. Reg. 11251 (March

16, 1982). Further, we are persuaded that § 18(b)(4) of the

Securities Act does not preempt state law with respect to

transactions exempt from registration pursuant to rules issued

under § 3(b). In other words, securities issued under § 3(b)

are not "covered securities" and, therefore, must be registered
3
under Code § 13.1-507.

III

For the reasons stated above, Part VI of the opinion in

Tanner will be modified. The remainder of the opinion will be

reaffirmed.

Reaffirmed, as modified.

2
Although the Commission made the argument, in Tanner, that
securities issued under Rule 504 are not "covered securities,"
it did not cite § 3(b) of the Securities Act as authority to
support its argument until it filed its petition for rehearing.
3
The appellants contend that, even if the notes should have
been registered, they should not be held accountable due to the
complexity of the issue. While we agree that the issue is
complex, especially to a lay person, our function is limited to
correctly construing the applicable statutes, rules, and
regulations. It well may be, however, that, when the Commission

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reconsiders penalties on remand, it will take into account the
appellants' contention.

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