Commissioner's Opinion No. 06 / 1F

State of California Department of Corporations

Wayne Strumpfer, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to Corporation Code section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Keith W. McBride
Diepenbrock Harrison
400 Capitol Mall, Suite 1800
Sacramento, CA 95814

Re: Van De Pol Enterprises, Inc.

Dear Mr. McBride:

The request for an interpretive opinion contained in your letter dated November 10, 2004, and as supplemented by your correspondence dated April 28, 2005 and November 21, 2005, has been considered by the Commissioner of Corporations.

I. Question

Your letter raises the question of whether your client, Van De Pol Enterprise, Inc. (hereinafter "VDP"), must meet and disclose the minimum net worth requirements including the financial statements and a guarantee as specified in Corporations Code Section ("Section") 31101 (a) of the Franchise Investment Law ("the Law"), as a condition to claiming the exemption from registration under Section 31104. We conclude these net worth and disclosure requirements are inapplicable for the following reasons.

II. Background

You represent the following facts:

  • VDP is a wholesale distributor of petroleum products that proposes to offer and sell petroleum products to retail service stations to purchase and resell these petroleum products under brand names to public consumers.
  • The contemplated petroleum supply contracts will likely constitute franchises under the Law.
  • If the petroleum supply contracts do constitute franchises, VDP will be subject to registration and compliance under the Law, unless an exemption applies.
  • The exemption provided by Section 31104 of the Law appears directly applicable to the activities contemplated by VDP.
  • In order to qualify for the Section 31104 exemption, a franchisor must meet the requirements of Subdivisions (a) and (b) of that section. Specifically, Section 31104(b) contains a cross-reference to Section 31101 (c) requiring the delivery of certain disclosures to prospective franchisees.
  • This cross-reference to Section 31101(c) raises confusion as to the required minimum net worth and disclosures necessary to qualify for exemption form registration afforded by Section 31104

 

III. Ambiguous Statutory Language

Section 31104 provides petroleum corporations or distributors an exemption from the registration requirements as set forth in Chapter 2 (commencing with Section 31110) of the Law. Although the Section 31104 exemption does not expressly contain a minimum net worth requirement, Section 31104(b) provides that to qualify for the exemption, a franchisor must comply with the "provisions of subdivision (c)...of Section 31101." The current version of Section 31101(c) requires a franchisor to disclose to prospective franchisees the information and documents listed in (c)(1)(A)( c)(1)(P). Subdivision (c)(1)(O) of Section 31101 provides for disclosure of a copy of the financial statement or statements required by Section 31101(a); and likewise, subdivision (c)(1)(P) includes disclosure of a copy of the unconditional guarantees, if applicable, required by Section 31101(a).

Under Section 31101(a), a franchisor has three available options to satisfy the minimum net worth requirement:

1. The franchisor has a net worth on a consolidated basis of not less than five million dollars ($5,000,000), according to its audited financial statement.

2. The franchisor has a net worth of not less than one million dollars ($1 ,000,000) and its parent has a net worth of five million dollars ($5,000,000), according to the audited financial statements of the franchisor and its parent, respectively.

3. The franchisor has a net worth of one million dollars ($1,000,000), according to its unaudited financial statement, and the parent has a net worth on a consolidated basis of not less than five million dollars ($5,000,000), according to its audited financial statement, and the parent absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor under the franchise agreement should the franchisor become unable to perform its duties and obligations.

Section 31104(a) includes a cross-reference to Section 31101(c) which, in turn, specifically references certain disclosures of financial statements and an applicable guarantee in Section 31101(a). It is this subsequent reference to Section 31101(a) that causes an ambiguity because it is unclear whether a franchisor claiming the Section 31104 exemption must meet and disclose a minimum net worth, including the financial statements and applicable guarantee.

IV. Construing Statutes to Accomplish Their Purpose

Due to the ambiguity in the Law, examination of the statute's purpose and exploration of the rules of statutory construction must be undertaken. Generally, statutes are to be given their plain or literal meaning. (People v. Smith (2003) 110 Cal. App. 4th 492.) However, where the provisions of a statute are ambiguous or conflict, statutory construction is to be utilized. (Santa Ana Unified School District v. Orange County Development Agency (2001) 90 Cal. App. 41th 404.) The cardinal rule of statutory construction is to ascertain the intent of the Legislature so as to effectuate the purpose of the law. (Palmer v. GFT California, Inc. (2003) 30 Cal. 4th 1265.) The legislative intent behind the statute supersedes a strict reading of the statutory text. (In re Potter's Estate(1922) 188 Cal 55; California School Employees Association. v. Jefferson Elementary School District (1975) 45 Cal. App.3d 683.) Once the legislative intent has been ascertained, a statute must be given a reasonable construction, which conforms to that intent, even though it may not be consistent with the strict letter of the statute. (Alameda County v. Kuchel (1948) 32 Cal. 2d 193.) If following the plain meaning of a statute would inevitably frustrate the manifest purpose of the legislation or lead to an absurd result, a literal interpretation may be rejected. (People v. Belleci (1979) 24 Cal. 3d 879.)

The canons of statutory construction provide that "where a statute adopts by specific reference the provisions of another statute....such provisions are incorporated in the form in which they exist at the time of the reference" so that a subsequent addition to, or modification of, the provisions referred to does not affect the adopting statute, absent a clearly expressed intention to the contrary. (Palermo v. Stockton Theatres, Inc. (1948) 32 Cal. 2d 53, 58-59.) When enacted in 1976, Section 31104 included the cross-reference to Section 31101(c); however, at that time subdivision (c)(1)(O) and (P) had not yet been amended into Section 31101. (Cal. Corp. Code §31104, added by Stats. 1976, Chap. 1410, §1.)

Subdivisions (c)(1)(O) and (c)(1)(P) were subsequently added to Section 31101 by Assembly Bill 2135 (Chapter 1026, Statutes of 1989). There is no clearly expressed legislative intention to incorporate (c)(l)(O) or (c)(l)(P) into the requirements of the Section 31104 exemption. The legislative history behind AB 2135 is void of any mention of Section 31104 including its reference to Section 31101(c). Nor does the legislative history of Section 31101(c)(1)(O) and (P) discuss the application of these provisions to Section 31104. (Senate Insurance, Claims and Corporations Committee on Assembly Bill No. 2135 (1989) July 19, 1989.) Had the Legislature intended the minimum net worth requirements of Section 31101 (a) and the related disclosure of financial statements and a guarantee to apply as conditions of exemption under Section 31104, those requirements would have been expressly included into the statutory language of Section 31104.

This interpretation is consistent with the original intent of Section 31104, which was added by Assembly Bill3463 (Chapter 1410, Statutes of 1976). The legislative history behind Section 31104 indicates that the purpose of that section is to exempt qualifying fnmchisors from specified requirements of the Law - the minimum net worth and disclosure of audited financial statements - that are mandatory under the Section 31101 "large franchisor" exemption. (Assembly Committee on Resources, Land Use, and Energy on Assembly Bill No. 3463 (1976) May 10, 1976.) Furthermore, the Section 31104 exemption is intended to provide relief to qualifying small-scale petroleum wholesalers or "jobbers" from the financial burden of obtaining costly audits of financial statements. (Ibid.)

A letter from the author of AB 3463 to then Governor Brown stated that "AB 3463 would exempt a jobber and wholesaler from the unnecessary provisions of Section 31101(c) of the Corporations Code," such as "obtaining audited financial statements at an estimated maximum cost of $10,000." (Assemblyman Vic Fazio) letter to Governor Brown regarding Assembly Bill No. 3463 (1976) Sept. 13, 1976.) Even the Department of Corporations noted in a letter to the author of AB 3463 that "[t]he effect of [AB 3463] would be to exempt oil distributors from the net worth and business experience requirements, and more particularly, not require oil distributors to provide audited financial statements to their franchisees." (David C. Woods, Legislative Coordinator for the Department of Corporations, in a letter to Assemblyman Vic Fazio, July 13, 1976.)

V. Conclusion

Based on the foregoing, we conclude that your client, VDP, is not required to meet and disclose the minimum net worth requirements including the financial statements and guarantee as specified in Corporations Code Section 31101(a) of the Law, as a condition to claiming the exemption from registration under Section 31104.

Our reading of the Section 31104 exemption requirements harmonizes and carries out the intent of both statutory exemptions. The Section 31101 exemption was created to remove qualifying "large franchisors" from the registration requirements of the Law, as specified, by meeting a minimum net worth and disclosing certain information demonstrating that net worth. While the Section 31104 exemption was also added to provide an exemption from registration for certain franchisors, this section does not require VDP to meet the net worth requirements of Section 31101(a) or to disclose the financial statements or guarantee referenced in Section 31101(a), as discussed above.

This opinion is limited to the facts as specifically represented to the Commissioner in your correspondence. Any change in the facts as represented in your correspondence may compel a different conclusion. This reading of Section 31104 does not alleviate a franchisor from complying with any other requirements of Section 31104, and Section 31101(c) and (d) by cross-reference, including disclosure of information pursuant to Section 31101(c)(1)(A)-(c)(1)(N), or any other law in connection with the offer and sale of franchises.

Dated: January 12, 2006
Sacramento, California

By order of
WAYNE STRUMPFER
Acting Commissioner of Corporations

By __________________
TIMOTHY L. LeBASS
Deputy Commissioner and General Counsel
Office of Law and Legislation
(916)332-3553