People v. Black
8 Cal. App. 5th 889
| Cal. Ct. App. | 2017Background
- In 2006 defendant Charles Black solicited $124,456 (later increased to ~$279,920) from acquaintance Bronic Knarr via a promissory note on Atherton LLC letterhead to fund a planned real‑estate development in Eagle, Idaho; the note provided alternative returns (profit share on sale, one acre if developed) and, if neither occurred within a year, a mandatory repayment of principal plus 10% at lender’s election.
- The note was signed only by Black (as managing member); Black also bound his separate property to secure repayment; the parties executed later amendments and extensions through January 2012, some without additional funds from Knarr.
- Knarr testified he invested expecting profit from Black’s efforts but also relied on the 10% repayment term as protection and would not have invested otherwise; communications and updates continued for years but repayment was never made.
- Prosecutors charged Black under Corporations Code §§ 25401 and 25540 for making false statements in the offer or sale of a security; after a preliminary hearing the magistrate held him to answer on counts alleging sale of a security.
- At a Penal Code § 995 motion the trial court dismissed two counts (relating to later extensions) concluding the promissory notes were not "securities" under either the California risk‑capital test or the federal Howey test; the People appealed and the Court of Appeal affirmed dismissal of those counts.
Issues
| Issue | People’s Argument | Black’s Argument | Held |
|---|---|---|---|
| Whether the promissory notes constituted a “security” under Corporations Code §25019 (so that §25401 applies) | Notes were investment contracts under Howey: Knarr invested money in a common enterprise expecting profit primarily from Black’s managerial efforts; public offering not required. | The notes were individualized, negotiated one‑on‑one loans with an absolute repayment option (principal +10%) and personal guaranty by Black — not the sort of instrument Congress/CA intended to regulate as a security. | Court held the notes were not securities: individualized transaction, repayment term and personal commitment made the instrument fall outside the ordinary concept of a security. |
Key Cases Cited
- S.E.C. v. Howey, 328 U.S. 293 (1946) (establishes federal test for “investment contract”: investment of money in a common enterprise with profits to come solely from the efforts of others)
- Marine Bank v. Weaver, 455 U.S. 551 (1982) (one‑on‑one, unique family agreement not a security; courts must consider commercial character and plan of distribution)
- People v. Figueroa, 41 Cal.3d 714 (1986) (definition of security is a legal question; substance over form)
- People v. Smith, 215 Cal.App.3d 230 (1989) (Howey test appropriate where investors relied on promoter; §25401 reaches private offerings but definition analysis differs)
- People v. Schock, 152 Cal.App.3d 379 (1984) (federal test applied where public soliciting and investor reliance on promoter’s services)
- Silver Hills Country Club v. Sobieski, 55 Cal.2d 811 (1961) (articulated California risk‑capital test factors)
- S.E.C. v. Edwards, 540 U.S. 389 (2004) (promises of fixed returns can satisfy Howey; form of return not dispositive)
- People v. Miller, 192 Cal.App.3d 1505 (1987) (notes sold to public with inadequate collateral constituted securities)
- S.E.C. v. Wallenbrock, 313 F.3d 532 (9th Cir. 2002) (short‑term notes sold to the public in a pyramid scheme were securities)
- People v. Park, 87 Cal.App.3d 550 (1978) (private land‑development agreement found to raise reasonable suspicion of being an investment contract)
- People v. Davenport, 13 Cal.2d 681 (1939) (contract providing unconditional right to be paid is less like a security)