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Mosler v. S/P Enterprises Inc.

decided: October 30, 1989.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 84 C 2178 -- Harry D. Leinenweber, Judge.

Bauer, Chief Judge, and Easterbrook and Kanne, Circuit Judges.

Author: Easterbrook

EASTERBROOK, Circuit Judge

Warren Mosler, a professional securities trader and experienced investor, purchased interests in some Ohio oil and gas properties. Michael Krebsar, Michael McKenzie, and Ralph Santilli, as M/K Ventures International, Inc., operated and promoted these properties. Krebsar recruited Peter B. Carey (a partner of a Chicago law firm) and Roger Pfohl to round up investors in Illinois. Neither Carey nor Pfohl had special knowledge about oil and gas in Ohio -- or anywhere else, for that matter. Carey and Pfohl formed S/P Enterprises, Inc., through which they sold interests in M/K Ventures' projects. These interests are "securities". Mosler wants to rescind the transactions and retrieve the $500,000 he paid.

Under Illinois law offerings of securities must be registered. Distributions to fewer than 35 persons need not be registered, but the state requires the "issuer, controlling person, or dealer" to file a report with its Secretary of State no later than 30 days after the sale. Ill.Rev.Stat. ch. 121 1/2 para. 137.4H (1981). No one filed such a report of the sales to Mosler. Carey and Pfohl, alerted to the need for a report, took the position that M/K had to file; M/K did not file; Carey and Pfohl did not protect themselves by filing in its stead.

The Ohio ventures did not pay off, and Mosler demanded rescission of the sales, an obligation that fell on Carey and Pfohl under state law. Unless Mosler was a "dealer" in securities (a question to which we return), he was entitled to rescission under the law as it stood in late 1983, when the transactions took place. Carey and Pfohl maintain that subsequent changes in Illinois law defeat Mosler's demand. Before his retirement, Judge Leighton rejected this contention and entered partial summary judgment for Mosler., (N.D.Ill.), reconsideration denied, (1987). After Judge Leinenweber wrapped up the case by resolving other claims and the status of other parties, Carey, Pfohl, and S/P Enterprises (the "S/P parties") pursued this appeal. The other claims and parties have dropped out; only Mosler's demand for rescission is before us.

Illinois has amended para. 137.4 twice in recent years. The first, enacted in July 1983 (before the sales) but effective on January 1, 1984, replaced subsections 4G and 4H with a new subsection 4G that specified in greater detail the essential elements of exempt transactions. Subsection 4G(4) provided that:

The Secretary of State shall by rule or regulation require and prescribe the form of a report to be filed upon the conclusion of all sales made in reliance upon the exemption provided by this subsection G and every six months after the first such sale unless the report due upon the conclusion of all sales has been filed, but the failure to file any such report shall not affect the availability of such exemption.

The principal drafters of this language explained in a contemporaneous commentary that the small-issue exemption had been designed to allow small firms to raise capital "in an informal manner without benefit of counsel" and that the filing requirement had been "a classic trap for the unwary" with "harsh and inequitable consequences". Roger G. Fein & Sidney Sosin, Interpretive Comments published with the statute in Ill.Ann.Stat. ch. 121 1/2 (West 1983).

As amended in 1983, para. 4G(4) could be read to say that despite any regulations the Secretary of State might promulgate, the issuer and seller never had to file a report. The report "shall not affect the availability of such exemption", so why bother? The drafters wanted to make the report compulsory but eliminate the "harsh and inequitable" remedy of rescission. So in 1985 the state legislature revised the statute again, with the changes to go into effect on January 1, 1986. Section 4G was rewritten to make it clear that the issuer had to file the report prescribed by the Secretary of State. New language in the remedial provisions of the statute specified:

Ill.Rev.Stat. ch. 121 1/2 para. 137.13A (1987).

After the first of these two amendments went into force, defendants in pending cases argued that they should not be exposed to rescission. They regularly lost. E.g., Thoms v. Private Ledger Financial Services, Inc., 155 Ill. App. 3d 289, 507 N.E.2d 1327, 107 Ill. Dec. 958 (2d Dist. 1987); Salzbrenner v. Beckham, 145 Ill. App. 3d 941, 496 N.E.2d 354, 99 Ill. Dec. 779 (2d Dist. 1986); Boldon v. Chiappa, 140 Ill. App. 3d 913, 489 N.E.2d 6, 95 Ill. Dec. 54 (4th Dist. 1986). All of the opinions concluded that state law presumptively applies prospectively, see Maiter v. Chicago Board of Education, 82 Ill. 2d 373, 390, 415 N.E.2d 1034, 1041-42, 47 Ill. Dec. 721 (1980), and that the legislature had not provided for retrospective application of the changes at hand. Indeed, by setting the effective date of the 1983 act as January 1, 1984, the legislature had done its best to make the change run prospectively.

Although these decisions were rendered after the enactment and effectiveness of the 1985 statute, none mentions it. This is defendants' opening. The S/P parties maintain that the 1983 statute was prospective because it worked a "substantive" change in the rules. The 1985 law, by contrast, revoked a remedy, and this, defendants say with some support, makes all the difference. See Stefani v. Baird & Warner, Inc., 157 Ill. App. 3d 167, 510 N.E.2d 65, 109 Ill. Dec. 444 (1st Dist. 1987). Rights and remedies are closely related, and we are reluctant to attribute to Illinois a dividing line as sharp as Carey and Pfohl find in Stefani. The 1983 and 1985 amendments were aimed at the same problem: rescission as an excessive remedy for failure to file a report. The two statutes show that alteration of rights (1983) and remedies (1985) may be used to achieve the same end. The 1985 change was not an extension of the 1983 change; it came about because the 1983 language may have gone too far (implying that the issuer needn't file a report at all), and the legislature then used more careful language to achieve its objective. Schuler v. Beers, 157 Ill. App. 3d 97, 105, 510 N.E.2d 48, 52, 109 Ill. Dec. 427 (1st Dist. 1987).

To attribute a dramatically different effect to the statutes according to the device the legislature used is to make the outcome fortuitous. So we are not surprised to find many Illinois cases denying that there is a sharp line between changes in rights (prospective only) and remedies (retroactive always). Courts regularly say that the effects of the law depend in either case on what the legislature sought to achieve. Moore v. Jackson Park Hospital, 95 Ill. 2d 223, 235, 447 N.E.2d 408, 413, 69 Ill. Dec. 191 (1983), quoting People ex rel. Manczak v. Carpentier, 3 Ill. 2d 556, 558-59, 121 N.E.2d 762, 763 (1954). Salzbrenner, which denied retroactive effect to the 1983 amendment, is among ...

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