Boxa v. Vaughn

• Citation: 674 N.W.2d 306,2003 SD 154
• Decision Date: 30 December 2003
• Docket Number: No. 22756.,22756.
• Parties: Earl G. BOXA, Elizabeth Boxa, Brent Combs, as guardian ad litem for Johnathan L. Combs, Brent Combs, Jennifer Combs, Shirley A. Vosika, Polly Anne Cerney, Emil J. Cerney Estate, Marjorie Harrison, and Verne Ellston, Plaintiffs and Appellees, v. Paul VAUGHN, Paul Vaughn Insurance Inc., Defendants and Appellants, and Scott Vanderbeek, Defendant.
• Court: South Dakota Supreme Court

674 N.W.2d 306

2003 SD 154

Earl G. BOXA, Elizabeth Boxa, Brent Combs, as guardian ad litem for Johnathan L. Combs, Brent Combs, Jennifer Combs, Shirley A. Vosika, Polly Anne Cerney, Emil J. Cerney Estate, Marjorie Harrison, and Verne Ellston, Plaintiffs and Appellees, v. Paul VAUGHN, Paul Vaughn Insurance Inc., Defendants and Appellants, and Scott Vanderbeek, Defendant.

No. 22756.

Supreme Court of South Dakota.

CONSIDERED ON BRIEFS ON October 6, 2003.

Decided December 30, 2003.

J.M. Grossenburg, Winner, for plaintiffs and appellees.

Mark V. Meierhenry, Clint Sargent of Danforth, Meierhenry & Meierhenry, Sioux Falls, for defendants and appellants.

SABERS, Justice.

[¶ 1.] Plaintiff purchasers¹ brought suit against Paul Vaughn for damages, alleging that he sold purchasers unregistered business opportunities in violation of the Business Opportunities Act (Act). SDCL 37-25A-7. Vaughn did not dispute that he sold the purchasers unregistered business opportunities but he raised the affirmative defenses of waiver and failure to mitigate damages. Purchasers moved for directed verdict at the close of Defendant's evidence arguing that (1) the affirmative defense of waiver was not permissible under the Act. The trial court agreed and granted purchasers' motion for directed verdict and found that (2) Defendant did not meet his burden to show Plaintiffs failed to mitigate damages. Vaughn appeals. We affirm (1) for a different reason and affirm (2).

FACTS

[¶ 2.] Vaughn approached each of the Plaintiffs and offered them an investment opportunity with a 14.1% return. The plan was for Plaintiffs to purchase pay telephones for $7,000 each, and then lease them back to Phoenix Telecom which would pay Plaintiffs $82.25 per month. Each Plaintiff also entered into an "Option to Sell" agreement with Phoenix entitling Plaintiffs to terminate the lease at the end of five years and Phoenix would buy back the telephones for the original purchase price. Plaintiffs were told they could pull their money out of the plan at any time and that there was little risk in the investment.

[¶ 3.] Vaughn sold phones from September 1999 until January 2000 when he received a cease and desist order from the South Dakota Division of Securities (Division). The Division found that Phoenix's products were business opportunities which needed to be registered with the Division. Phoenix was also issued a cease and desist order. After the cease and desist orders were issued, the Division directed Phoenix to send an offer of rescission to the South Dakota purchasers. On March 3, 2000, Phoenix sent a letter to each Purchaser informing them that Phoenix had failed to register the product with the Division and that Plaintiffs were entitled to rescind their purchases. Agents were told by Phoenix to "contact each Lessor and advise them to expect the letter, and then reassure the client that they should not be alarmed upon receipt."

[¶ 4.] Plaintiffs testified that Vaughn urged them not to rescind, telling them that he would take care of the problem and encouraging them to hold on to their "investment." Although the parties dispute the reason why, each of the Plaintiffs chose not to rescind their contracts. By July of 2000, Phoenix could no longer make its lease payments to the Plaintiffs. Phoenix transferred its leases to ETS Payphones. Plaintiffs agreed to the transfer, but in September 2000, ETS stopped making lease payments. Phoenix and ETS have filed for bankruptcy.

[¶ 5.] On September 29, 2000, the SEC filed a complaint against ETS alleging that ETS engaged in fraud in the offer and sale of unregistered securities. In its complaint, SEC asserts that investors were not told ETS was losing money, had a negative net worth and was dependent on new investors to continue in business. The "investment opportunity" was actually a pyramid, or "Ponzi scheme" wherein Phoenix and ETS² used the money they received from later purchasers to pay earlier purchasers.

[¶ 6.] On October 19, 2000, the original Plaintiffs filed an amended summons and complaint against Vaughn for damages, alleging that he sold unregistered business opportunities in violation of SDCL 37-25A-7. The parties went to trial, and at the close of evidence, Plaintiffs moved for a directed verdict on the basis that Vaughn's affirmative defense of waiver was not allowed under the Act. The trial court granted the motion, directed a verdict in Plaintiffs' favor, and entered a judgment for purchasers' statutory damages less lease payments received. Vaughn appeals raising two issues:

1. Whether the Business Opportunities Act's anti-waiver provision precludes the affirmative defense of waiver, and if not, whether waiver was established.

2. Whether Vaughn established that Plaintiffs failed to mitigate damages.

STANDARD OF REVIEW

[¶ 7.] Our standard of review of a trial court's ruling on a motion for directed verdict is well settled:

A motion for a directed verdict under SDCL 15-6-50(a) questions the legal sufficiency of the evidence to sustain a verdict against the moving party. Upon such a motion, the trial court must determine whether there is any substantial evidence to sustain the action. The evidence must be accepted which is most favorable to the nonmoving party and the trial court must indulge all legitimate inferences therefrom in his favor. If sufficient evidence exists so that reasonable minds could differ, a directed verdict is not appropriate. The trial court's decisions and rulings on such motions are presumed correct and this Court will not seek reasons to reverse.

Veeder v. Kennedy, 1999 SD 23, ¶ 25, 589 N.W.2d 610, 617 (quoting Border States Paving, Inc., v. S.D. Dep't of Transp., 1998 SD 21, ¶ 10, 574 N.W.2d 898, 901) (citations omitted). Whether claims brought under SDCL 37-25A-48 are subject to the affirmative defense of waiver is a question of statutory construction which this Court reviews de novo. In re Estate of Foss, 2001 SD 140, ¶ 5, 637 N.W.2d 30, 31 (citation omitted).

[¶ 8.] 1. WHETHER THE BUSINESS OPPORTUNITIES ACT'S ANTI-WAIVER PROVISION PRECLUDES THE AFFIRMATIVE DEFENSE OF WAIVER, AND IF NOT, WHETHER WAIVER WAS ESTABLISHED.

[¶ 9.] SDCL 37-25A-7 provides:

No person may offer or sell any business opportunity in this state unless the business opportunity is registered under this chapter or is exempt under § 37-25A-3.

Vaughn concedes that by selling the payphone business opportunity to Plaintiffs, he violated SDCL 37-25A-7. Therefore, the only question is the extent he is liable to Plaintiffs.

[¶ 10.] SDCL 37-25A-48 provides in part:

Any person who violates §§ 37-25A-7, [] is liable to the purchaser who may sue either at law or in equity for rescission, for recovery of all money or other valuable consideration paid for the business opportunity and for actual damages, together with interest at the legal rate from the date of sale, reasonable attorney's fees and court costs.

When the Division discovered that Phoenix was in violation of SDCL 37-25A-7, it required Phoenix to offer all purchasers the option of rescinding the sales contract and recovering their investment. Phoenix complied with the demand and sent this letter to each purchaser:

It has been brought to our attention by the Director of the Division of Securities of the Department of Commerce and Regulation ... that business opportunities were sold by [Phoenix Telecom] prior to complying with all of the requirements of the South Dakota Business Opportunity Act.

Therefore, it is necessary at this time to inform you of your right to rescind your purchase from the above referenced company and we hereby offer to repurchase the interest sold for a purchase price equal to the full amount paid therefore, plus interest at an annual rate of 12 per cent per annum from the date of purchase. If you elect to rescind the offer, ownership of the payphones and equipment you purchased from Phoenix Telecom, L.L.C. must be transferred to Phoenix Telecom, L.L.C. as well as all rights and interests in those payphones and equipment.

If you elect to rescind the offer, you will be entitled to the receipt of $7,000.00 per unit plus interest less any income received from lease payments. Interest shall accrue from the date of purchase until the date of payment. If you accept the offer, payment will be made to you within thirty (30) days of receipt of your written acceptance.

This offer shall continue in force for thirty (30) days from the date on which this offer is received by you. Please notify our office of your decision to accept this offer of rescission by signing at the bottom of this letter and returning this letter to our office in the enclosed envelope. If we do not receive written notice from you accepting this offer of rescission before the expiration of thirty (30) days, we will presume you are refusing this offer and thus affirming your previous purchase from the above-referenced company.

None of the Plaintiffs accepted the offer to rescind. Vaughn argues that by failing to accept the offer within thirty days, Plaintiffs waived their right to recover against him under SDCL 37-25A-48. Plaintiffs counter that SDCL 37-25A-54 precludes Vaughn from asserting the affirmative defense of waiver. SDCL 37-25A-54 provides:

Any condition, stipulation or provision binding any purchaser of a business opportunity to waive compliance with or relieving a person from any duty or liability imposed by or any right provided by this chapter or any rule or order issued pursuant to this chapter is void.

Relying on the reasoning of the Fifth Circuit Court of Appeals' decision in Meyers v. C & M Petroleum, 476 F.2d 427 (5th Cir.1973), the trial court determined that SDCL 37-25A-54 precludes sellers from utilizing the affirmative defense of waiver. However, the language of this statute is insufficient to support the trial court's holding that the affirmative defense of waiver is barred in any case where there is a violation of the Act.

[¶ 11.] The...