State v. Duncan
181 Mont. 382, 593 P.2d 1026, 1979 Mont. LEXIS 682 (1979)
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Rule of Law:
An investment contract constitutes a security subject to registration requirements if it involves an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. This standard modifies the prior test by removing the requirement that profits come 'solely' from the efforts of others.
Facts:
- Norman Duncan, president of Smart Pak, Inc., created and marketed a charcoal lighter product.
- After encountering problems with automated packaging, Duncan began selling 'package sealer agreements' to the public for fees ranging from $500 to $5,000.
- Purchasers of these agreements were supplied with manual sealing machines and were contracted to seal bags on three sides.
- Smart Pak promised to buy back all properly sealed bags from the sealers for 5 cents per bag, guaranteeing them a regular income.
- Duncan represented to potential buyers that he had large contracts with Safeway and the Coleman Company, which was false.
- Duncan also promised to hold 5% of each sealer's deposit in trust, but only made a nominal deposit to an escrow account which he later withdrew.
- The company's income from product sales was vastly insufficient to cover its obligations to the sealers, causing the operation to fail.
- As a result, sealers did not receive payment for their work or a recoupment of their initial investment.
Procedural Posture:
- The State of Montana filed a four-count information against Norman Duncan in the Gallatin County District Court.
- The charges included deceptive practices, fraudulent securities practices, failure to register securities, and issuing a bad check.
- The trial court dismissed the bad check charge.
- Duncan waived his right to a jury trial and proceeded with a bench trial.
- The District Court found Duncan guilty of deceptive practices and failure to register securities, but dismissed the fraudulent securities charge.
- Duncan, as appellant, appealed his convictions to the Supreme Court of Montana.
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Issue:
Do 'package sealer agreements,' where individuals invest money to perform a menial task in a larger enterprise with the expectation of profits derived primarily from the promoter's efforts, constitute 'investment contract' securities under the Montana Securities Act?
Opinions:
Majority - Justice Sheehy
Yes. The package sealer agreements are investment contracts and therefore securities subject to state registration laws. The court adopts the flexible standard from United Housing Foundation, Inc. v. Forman, which defines an investment contract as an investment in a common venture premised on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. This test effectively removes the rigid 'solely' from the efforts of others requirement established in S.E.C. v. Howey Co. Although the sealers performed a menial task, their expectation of profit was not derived from their own work but was fundamentally dependent on Duncan's managerial efforts to market and sell the final product. Applying this broadened definition retroactively does not violate due process, as the defendant had sufficient notice from the clear trend in federal and other state court decisions.
Concurring-in-part-and-dissenting-in-part - Justice Daly
Yes. The agreements do fall under the newly adopted, broadened definition of an 'investment contract.' However, applying this new definition retroactively to secure a criminal conviction against Duncan violates his due process right to fair warning. An unforeseeable judicial enlargement of a criminal statute operates like an unconstitutional ex post facto law. The statutory definition of a security was not clear enough to give Duncan, or even the local county attorney, notice that his conduct was criminal. Therefore, while the court is correct to adopt the broader definition for future cases, Duncan's conviction for selling unregistered securities should be reversed.
Analysis:
This case officially adopts the modern, flexible Forman test for defining an 'investment contract' security in Montana, significantly expanding the scope of the state's securities laws. By moving beyond the restrictive 'solely from the efforts of others' standard, the ruling brings many work-at-home, franchise, and multi-level marketing schemes under regulatory scrutiny. The court's decision to apply this new standard retroactively in a criminal context demonstrates a strong public policy favoring investor protection over potential fair notice concerns. The precedent requires promoters of any enterprise involving an investment for profit to carefully consider registration requirements, even if the investor performs some minor tasks.
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