Cellular Engineering, Ltd. v. O'Neill, 57291-7

• Court: United States State Supreme Court of Washington
• Writing for the Court: GUY; DORE, C.J., UTTER, BRACHTENBACH, DOLLIVER, ANDERSEN, DURHAM and SMITH, JJ., and CALLOW
• Citation: 820 P.2d 941,118 Wn.2d 16
• Parties: CELLULAR ENGINEERING, LTD., Respondent, v. Dennis O'NEILL, Appellant.
• Docket Number: No. 57291-7,57291-7
• Decision Date: 12 December 1991

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118 Wn.2d 16 820 P.2d 941 CELLULAR ENGINEERING, LTD., Respondent,
v.
Dennis O'NEILL, Appellant. No. 57291-7. Supreme Court of Washington,
En Banc. Dec. 12, 1991.

[820 P.2d 943]

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Siriannis & Youtz, Michael A. Small, Seattle, for appellant.

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Feinstein & Bull, Larry B. Feinstein, Seattle and Michael E. Morgan, Seattle, for respondent.

GUY, Justice.

The Federal Communications Commission (FCC) regulates the cellular telephone industry. In 1984, the FCC adopted a lottery system to determine, for each of numerous specified areas, who would receive the license to establish a cellular telephone system in that area. Winners of the lottery would be issued construction permits, and only after various permit requirements were fulfilled would the actual licenses be granted. Lottery entrants were required to complete an application containing detailed technical, geographical, demographic, and financial information. Because of the complexity of these applications, several application filing firms developed. These firms gathered the necessary information to prepare generic applications, then filed nearly identical applications for a number of investors. Typically, these firms also offered investors a range of post-filing services. The plaintiff, Cellular Engineering, Ltd. (Cellular), is one such application filing firm. The defendant, Dennis O'Neill, entered into an Application Purchase Agreement with Cellular under which Cellular completed FCC lottery applications for O'Neill. The present dispute arose when O'Neill refused to pay fees Cellular claimed to be due. The primary issue here is whether Cellular's activities constitute the sale and offer for sale of securities under the Securities Act of Washington, RCW 21.20. We hold that they do. Those securities were not registered, in violation of RCW 21.20.140. Because Cellular's Application Purchase Agreements with its customers were made in violation of the Act's registration requirement, Cellular may not base any suit upon its agreement with O'Neill. Accordingly, Cellular's agreement with O'Neill is unenforceable.

FACTS

Under the terms of Cellular's Application Purchase Agreement, Cellular would complete and file a minimum of 10 lottery applications for each client at a charge of $50 per

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application. If the applicant did not win a license in the lottery, no additional payments were due. If the applicant did win a license, then Cellular was entitled to certain contingent payments. For the first three "wins", the applicant was to pay Cellular $5,000 each. For each subsequent win, the applicant was to pay Cellular $10,000 each. These payments were due only as income was received from the system. In addition, the Cellular fee structure called for a "bonus payment" of $90,000 for each "full license" received. Finally, applicants could join together into "settlement groups" in an effort to increase their chances of winning. A person joining a settlement group agreed to share any license he or she won in the lottery for a particular market with others in the group who applied for the same market. Under FCC regulations, the person whose name was selected was required to maintain a majority interest in the group; minority owners could hold no more than a 0.99 percent interest. Cellular's contingent fees applied whether the applicant won a full or partial license interest.

When he first contacted Cellular, O'Neill had employed other application filing services for the cellular telephone lottery on two previous occasions. These previous efforts had resulted in O'Neill receiving partial interests in several licenses. Attracted by Cellular's contingent fee structure, O'Neill paid Cellular $5,000 for 100 applications. He subsequently joined several settlement groups after receiving promotional literature from Cellular encouraging him to [820 P.2d 944] do so. O'Neill eventually won partial interests in 23 cellular licenses and was the name selectee for Aguadilla, Puerto Rico. Since O'Neill was part of a settlement group for Aguadilla, he shared that market with the other members of the group.

Shortly after O'Neill learned that he had won minority interests in 3 markets, he received invoices from Cellular calling for payments of $5,000 for each interest. He refused to make the payments, maintaining that they were not yet due since the FCC had not yet issued the actual licenses. Through his attorney, O'Neill requested from Cellular

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a more detailed explanation of the charges. Cellular did not respond to O'Neill's requests. In the meantime, O'Neill sold his majority interest in the Aguadilla cellular license for $1,114,000.

Cellular brought this action for payment under the terms of the Application Purchase Agreement. O'Neill contended he was not liable to Cellular for two reasons. First, he maintained the payments were not yet due under the agreement. Second, he argued that the agreement was a contract for the sale of securities and, therefore, was unenforceable because Cellular had not complied with the registration requirements of the Securities Act of Washington. The trial court rejected O'Neill's arguments and granted Cellular's motion for summary judgment as to the contingent fees for all 23 interests O'Neill had won. After further factfinding, the court denied Cellular's claim to the $90,000 bonus payment. O'Neill appealed the court's summary judgment order. Cellular cross appealed the order denying its claim for the bonus payment. The Court of Appeals certified the case to this court.

ANALYSIS I PROCEDURAL ISSUES

The primary issue in this case is whether Cellular's activities constitute the sale and offer for sale of securities. Before we can reach that issue, however, we must first address Cellular's contention that O'Neill's securities defense may not be considered because it was raised in an untimely fashion, and because it was not affirmatively pled as required by CR 8(c). We reject these arguments.

CR 8(c) requires that: "In pleading to a preceding pleading, a party shall set forth affirmatively ... illegality ... and any other matter constituting an avoidance or affirmative defense." Although O'Neill did not plead the securities defense in his answer to Cellular's original complaint, he did raise it in response to Cellular's amended complaint. The CR 8(c) requirement is satisfied

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when an affirmative defense is raised for the first time in response to an amended complaint. Therefore, O'Neill did not violate CR 8(c).

Cellular also argues that O'Neill's securities defense is untimely under CR 12, which allows a defendant 20 days in which to answer after service of the summons and complaint. We disagree. First, we note that since O'Neill did not raise the securities defense in his answer to Cellular's original complaint but in his answer to Cellular's amended complaint, the applicable rule is not CR 12, which sets forth the time period for responding to the initial summons and complaint, but CR 15(a), the rule specifying the time period for responding to an amended complaint. Under CR 15(a), "[a] party shall plead in response to an amended pleading within the time remaining for response to the original pleading or within 10 days after service of the amended pleading, whichever period may be the longer, unless the court otherwise orders." Cellular's amended complaint was filed on January 18, 1989, and O'Neill's answer was not filed until June 7, 1989. O'Neill's response was therefore not within the applicable time period.

Under RCW 4.32.250, however, the trial court may, "on such terms as are just", permit a paper to be filed or served after the applicable time period for doing so has expired. Here, the trial court properly exercised its discretion in accepting O'Neill's tardy answer to Cellular's amended complaint. Doing so enabled the court to reach the merits of the case and did not prejudice [820 P.2d 945] Cellular. Cellular was not caught unprepared by the securities defense. On June 9, 1989, 2 days after O'Neill raised the securities issue, Cellular presented the court with a response memorandum that included a 7-page rebuttal. On June 12, 1989, Cellular filed an 18-page document entitled "Declaration of Anthony W. Djinis", which is devoted exclusively to the securities issue. Moreover, Cellular had encountered a securities defense in at least one other lawsuit in which it was trying to collect fees under an Application Purchase Agreement, so it is unlikely that Cellular was wholly surprised

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by O'Neill raising the issue. Under these circumstances, we find no error in the trial court's exercise of its discretion to accept O'Neill's tardy answer to Cellular's amended complaint. We wish to emphasize, however, that we do not approve of failure to file papers within the prescribed time periods, and that the trial court has discretion to reject untimely papers.

Finally, Cellular contends that O'Neill is time barred from raising the securities defense by RCW 21.20.430(4)(b), which provides: "No person may sue under this section more than three years after the contract of sale for any violation of the provisions of RCW 21.20.140 through 21.20.230". Cellular argues that O'Neill's defense is barred under this statute because the Application Purchase Agreement was signed on February 17, 1986, whereas the defense was not asserted until June 7, 1989. Cellular misinterprets the statute. The time bar applies only to those who would sue more than 3 years after the contract of sale; it does not limit defenses. Since O'Neill is raising the securities issue as a defense, RCW 21.20.430(4)(b) does not apply.

II THE SECURITIES DEFENSE

A. General Principles

The Securities Act of Washington, RCW 21.20, is remedial in nature, its primary purpose being to protect investors from speculative or fraudulent schemes of promoters. State v. Philips, 108 Wash.2d 627, 631, 741 P.2d 24 (1987); McClellan v. Sundholm, 89 Wash.2d...