Halleran v. Nu West, Inc.
| Decision Date | 26 July 2004 |
| Docket Number | No. 51959-0-I, No. 52202-7-I. |
| Parties | John A. HALLERAN and Carolyn Halleran, husband and wife and the marital community composed thereof; John F. Halleran and Sheree Halleran, husband and wife and the marital community composed thereof; William J. Halleran and Susan Halleran, husband and wife and the marital community composed thereof; and Joseph Nelson and Lynn Nelson, husband and wife and the marital community composed thereof, Appellants, v. NU WEST, INC., Michelle Frey, individually and as Administratrix of the Estate of Georg Frey; Don Jones and Jane Doe Jones, husband and wife and the marital community composed thereof; The State of Washington; and John Does I through XX, Respondents. John R. Kaleas; Helen S. Clark, Joseph J. Victor, Sr., all on behalf of themselves and a class of similarly situated persons, Appellants, v. The State of Washington, Respondent. |
| Court | Washington Court of Appeals |
Michael James Warren, Attorney at Law, Seattle, WA, for Helen S. Clark, John R. Kaleas, Joseph J. Victor.
Michael E. Tardif, Talis Merle Abolins, Attorneys at Law, Robert Lundgaard, Attorney at Law, Olympia, WA, for State of Washington.
Louis `Larry' L. Barokas, John Randolph Tomlinson, Attorneys at Law, H. Richmond Fisher, Win Win Resolution, Seattle, WA John Peter Ferguson, Attorney at Law, Bainbridge Island, WA, for Carolyn Halleran, John Halleran, Sheree Halleran, Susan Halleran, William J. Halleran, Joseph Nelson, Lynn Nelson.
The Washington State Securities Act does not create a duty to protect individual investors from investment losses. Halleran and Kaleas,1 investors in financial services company Nu West, Inc., rely on the legislative intent and failure to enforce exceptions to the public duty doctrine to argue that the Securities Division of the Washington State Department of Financial Institutions had a duty to protect them from Nu West's fraudulent activities. We conclude neither exception to the public duty doctrine applies and affirm the trial courts' summary judgment decisions to dismiss Halleran's and Kaleas' lawsuits.
The Securities Division of the Department of Financial Institutions (the Securities Division)2 is responsible for administering the Washington State Securities Act, RCW 21.20.3 The Securities Act contains provisions for registration of securities offered or sold in Washington and licensing individuals employed in the securities industry. The Securities Division is authorized to investigate matters related to securities licenses and registrations, revoke licenses and registrations, issue administrative cease and desist letters, and impose fines. The Securities Division can also refer matters for criminal prosecution.
Nu West, Inc. was a Bellevue financial services company that specialized in high interest rate loans. Georg Frey was the president and owner of Nu West. Nu West arranged short term loans at interest rates of 12 to 20 percent to property owners and developers who did not qualify for bank loans and acted as the escrow agent for the loans. Through advertisements, Nu West solicited investors to fund the loans and in return receive monthly payments at a high rate of return secured by a promissory note and deed of trust. Sometime in the early 1990's, Nu West began to combine the funds of several investors to make larger loans. The investors agreed to invest a specific amount in exchange for the right to receive a proportionate share of the monthly payment from the borrower. The escrow agreements identified the name of the borrower and the property securing the investor's proportionate interest in the deed of trust and promissory note. When the loan was funded, the loan documents, including a deed of trust and promissory note, were recorded by Nu West. The borrower then made payments to Nu West and Nu West paid the individual investors in proportion to the amount each investor funded.
In 1993, the Securities Division received a copy of a Nu West brochure soliciting investors to fund a portion of a loan and receive a high interest return secured by an interest in a deed of trust and promissory note. While a note secured by a deed of trust is exempt from the registration requirement, fractionalized interests in notes and deeds of trust must be registered.4 RCW 21.20.320. On July 7, 1993, Securities Examiner William Beatty sent a warning letter to Nu West explaining that the notes described in the brochure were "securities" under RCW 21.20.005, and that "[a]bsent the availability of an exemption, it is unlawful to offer or sell these securities unless they are registered."5 Beatty's letter advised Frey that unless Nu West could establish an exemption, Nu West must "cease the offer and sale of the unregistered fractionalized deed of trust interests,"6 and further offers and sales could only be made if there was an exemption or after registering. Beatty requested Nu West's assurance that it had stopped offering and selling fractionalized interests and asked for additional information including articles of incorporation, a list of loans sold to more than one investor and the names of investors.7
Frey acknowledged in a July 21 letter that Nu West offered fractionalized deed of trust investments in 1992 but assured Beatty that "Nu West, Inc. has ceased offering lists or advertisements of fractionalized deed of trust investments."8 Along with his letter, Frey provided documents related to two different loans. Beatty concluded the loan documents did not indicate a violation of the Securities Act.
Approximately two years later, Examiner Beatty received an anonymous inquiry from a prospective investor about a Nu West advertisement. Beatty asked a Securities' Division investigator to contact Nu West to determine what investments Nu West was offering. The investigator responded to a Nu West advertisement but the information obtained did not indicate that Nu West was involved in securities transactions subject to registration.
In 1996, the Securities Division received additional inquiries about Nu West's advertisements. After reviewing Nu West's promotional materials, Securities Examiner Victoria W. Sheldon sent a warning letter in October 1996 to Nu West stating that unless the investment interests in promissory notes and deeds of trust were exempt, sold in an exempt transaction, or registered, Nu West may have offered an unregistered security in violation of RCW 21.20. When Examiner Sheldon subsequently talked to Frey, he assured her Nu West had not offered or sold fractional interests in deeds of trust.
In 1997 and 1998, Securities Examiner Janet So continued to investigate Nu West. Examiner So contacted escrow companies and obtained records from a title company regarding Nu West's transactions. Examiner So also interviewed a prospective Nu West investor who provided some information about Nu West but did not file a complaint. So's investigation did not indicate any violation of the Securities Act. In May 1999, Examiner Marlo DeLange interviewed Nu West investors from the 1990's and conducted a background check on Nu West and Frey. None of the investors interviewed had complaints about Nu West. Each had received timely monthly payments and had been paid in full. In August 1999, the Securities Division issued a subpoena to Nu West and Frey to ascertain whether Nu West was offering or selling securities as defined by the Securities Act.9
On October 18, 1999, the Securities Division for the first time received a complaint from a Nu West investor, Lowell Anderson. Although Anderson had received timely monthly payments, Nu West had not provided the documents he requested about his investment. On October 26, 1999, a second Nu West investor, John O'Donnell, filed a complaint with the Securities Division. Like Anderson, O'Donnell complained that Nu West failed to provide requested documentation regarding his investment.
On November 22, Anderson told the Securities Division that recording stamps on a deed of trust and promissory note appeared to have been falsified. On November 23, 1999, Examiner Anthony Carter was assigned the Nu West file and instructed to obtain bank records, interview investors and enforce the subpoena. After completing work on two other cases, Carter started working on the Nu West file in June 2000.
On June 7, 2000, Jean Cline, a third Nu West investor, filed a complaint about Nu West's failure to provide a recorded assignment of her deed of trust. The following week, the Securities Division arranged for an undercover investigation of Nu West. Posing as a prospective investor, the investigator obtained information that indicated Nu West was offering investments in loans and fractional interests in deeds of trust.
Examiner Carter interviewed Frey, obtained additional documentation from Frey, and deposed Nu West salesman Don Jones. In the course of the investigation, Carter verified that many of the recording stamps on the documents Frey filed were forged. On August 15, Carter referred the Nu West file for criminal prosecution.
In October 2000, the Securities Division issued a cease and desist order against Nu West, Frey, and Jones alleging Nu West had violated the Securities Act. On December 1, 2000, Frey committed suicide. Nu West investors lost in excess of $69 million.
In December 2000, John A. Halleran, Carolyn Halleran, John F. Halleran, Sheree Halleran, Susan Halleran, William Halleran, Joseph Nelson and Lynn Nelson (collectively, "Halleran") sued Nu West.10 In September 2002, Halleran added the State of Washington's Securities Division as a defendant. Halleran alleged the Securities Division had a statutory duty to regulate the activities of Nu West by enforcing the Securities Act and preventing their investment losses. Relying on Baerlein v. State,11 McKasson v. State,12 and Smith v. State,13 the trial court granted the State's...
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