Articles & Court of Appeals

Summary:  The trial court issued a writ of administrative mandamus ordering the California Corporations Commissioner to set aside a desist and refrain order against a corporation and several individuals. The corporation, which was not licensed to sell securities, compiled regular lists of banks that offered high-yielding certificates of deposit (CD's) and advertised that it would give investors a higher yield. If an investor purchased a CD from a bank on the list, the corporation paid the investor a bonus after the investor met with a sales agent from an affiliated corporation that sold annuities. The corporation had no business relationship with the banks and earned nothing from the CD purchases; the bonus payments were intended only to induce prospective investors to consider buying the annuities. The trial court ruled that the corporation was not selling securities. (Superior Court of Orange County, No. 04CC11740, Ronald L. Bauer, Judge.)

The Court of Appeal affirmed the judgment, noting that the revenues used to pay the bonuses were generated from the sale of annuities, so payment was in a sense dependent on the viability of the enterprise. The same could be said of any unsecured creditor relationship, however. A federally insured CD was not a security because the investor was not subject to financial loss. The CD-plus-bonus package could not be characterized as an investment contract under Corp. Code, § 25019, under either the risk capital test or the federal test. (Opinion by Fybel, J., with Rylaarsdam, Acting P. J., and Aronson, J., concurring.)

Can you imagine a parent waiting until a child is critically ill before seeing a doctor? Too many entrepreneurs do this with their business—the "child" that they nurtured for so long. All too often entrepreneurs ignore their legal problems until they are overwhelming. Finally, they go see a lawyer. By that time, the problems may have deteriorated to such a point that any resolution would be very costly and very time-consuming.

A more efficient and economical approach is to have a built-in procedure for recognizing and addressing legal problems at an early stage. Such an approach is like having quality assurance on the assembly line. Providing legal quality assurance can be done by giving the business a legal check-up on a regular basis.

Some phrases become cliché because they're so true.

That thought came to mind regarding "penny-wise and pound-foolish" when Laguna Hills [now Irvine] lawyer John Baker talked about the typical small-business owner's unwillingness to practice preventive law.

Baker specializes in business law such as liens and trust deeds. Often he feels like a member of the bucket brigade trying to douse raging fires. Legal conflagrations are expensive to resolve and rarely benefit a business.

Wouldn't it be great to stamp out the blazes when they're merely sparks? he thought.