Kinney v. Cook, No. 78128-1.

CourtUnited States State Supreme Court of Washington
Writing for the CourtChambers
Citation159 Wn.2d 837,154 P.3d 206
PartiesClark E. KINNEY and Barbara E. Kinney, individually and the marital community, Respondents, v. Kenneth B. COOK, a single man, Petitioner.
Decision Date22 March 2007
Docket NumberNo. 78128-1.
154 P.3d 206
159 Wn.2d 837
Clark E. KINNEY and Barbara E. Kinney, individually and the marital community, Respondents,
v.
Kenneth B. COOK, a single man, Petitioner.
No. 78128-1.
Supreme Court of Washington, En Banc.
Argued November 14, 2006.
Decided March 22, 2007.

[154 P.3d 208]

Lawrence Ralph Small, Erin Angela Jacobson, Paine Hamblen Coffin Brooke & Miller, John Degnan Munding, Spokane, for Petitioner.

Maris Baltins, Tamara Whalen Murock, Baltins & Murock, P.S., Spokane, for Respondents.

CHAMBERS, J.


¶ 1 Clark E. Kinney and Barbara E. Kinney, a/k/a Bobbi Kinney, made a payment on a promissory note they had signed seven years earlier. The note was secured with stock in a business owned by the parties to the note. The Kinneys claim the holder of the note, Kenneth B. Cook, wrongfully induced their payment and that this was a violation of The Securities Act of Washington (Act), chapter 21.20 RCW. We conclude under the particular facts of this case that the payment on the note was not a sale, offer to sell, or disposition of a security, and therefore the Act does not apply. We reverse the Court of Appeals and reinstate the trial court's order of dismissal.

FACTS

¶ 2 The details of the transaction underlying this case are complex and hopefully unique. The Kinneys together with Cook formed Spokane Freightliner, Inc., in 1993.1 The corporation sold and serviced heavy duty trucks. The Kinneys contributed $225,000 in exchange for 50,000 shares of the corporation's stock; Cook contributed and received the same. The Kinneys' contribution was made possible by a loan from Cook. In exchange for the loan, the Kinneys signed and delivered to Cook a promissory note requiring payment of $225,000 with an eight percent per annum interest to begin accruing in 1994. In addition to the note, the Kinneys signed an agreement pledging their shares of stock as collateral for the loan.

¶ 3 Several years passed until, in February 1997, the Kinneys decided to sell their stock back to Cook. On February 26, 1997, the parties signed a memorandum of understanding canceling the promissory note and stock pledge agreement in exchange for a transfer of the Kinneys' 50,000 shares to Cook. Almost a year later, the Kinneys sued Cook, alleging a violation of the Act. The Kinneys claimed Cook misrepresented the financial condition of the company and the fair market value of the stock. A jury agreed, and on July 11, 2000, following the jury verdict, a judgment was entered which rescinded the February sale and reinstated the promissory note.

¶ 4 The court ordered Cook to "return to [the Kinneys] 50,000 shares of Spokane Freightliner, Inc. common stock" and ordered the Kinneys, "[i]n exchange [for the stock]" to "return to Spokane Freightliner, Inc. all consideration paid to them for the 50,000 shares of common stock." Clerk's Papers (CP) at 111. The Kinneys were also ordered to "return to Kenneth B. Cook . . . the promissory note dated December 31, 1993 . . . which is hereby reinstated." Id. In addition, the court ordered "reinstatement of the Pledge Agreement" and "reinstatement of [the Kinneys] as guarantors of the debts of Spokane Freightliner, Inc." CP at 111-12. In short, the parties were placed in the position they were in before the 1997 sale: the Kinneys reacquired their stock and resumed liability for the promissory note and the debts of the corporation.

¶ 5 In January 2000, approximately six months before the jury verdict, and while Cook had exclusive control of Spokane Freightliner, Inc., he authorized the corporation to guarantee a $4.5 million loan made by Mercedes Benz Credit Corporation to Select Credit & Leasing, L.L.C., a limited liability company Cook owned.2 Cook signed an

154 P.3d 209

agreement guaranteeing the loan six months before the judgment and did not inform the Kinneys.

¶ 6 Following judgment, Cook demanded payment on the recently reinstated promissory note and, on July 26, 2000, the Kinneys paid Cook $266,534.06. Two days later the Kinneys received the stock certificate showing their ownership. At this time, the Kinneys were unaware that the corporation had guaranteed the loan made to Cook's limited liability company. On August 4, 2000, Cook demanded the Kinneys comply with the portion of the court order making them liable for the corporation's debts by signing a personal guaranty of every loan it had made. The Kinneys were still unaware that the $4.5 million loan to Cook's limited liability company was among the loans agreed.

¶ 7 Over a year later, Cook, as a secured creditor of Spokane Freightliner, Inc., filed an involuntary chapter 11 bankruptcy petition. On August 15, 2001, the Kinneys first became aware of the Mercedes Benz Credit Corporation loan guaranty when it was disclosed in bankruptcy papers filed by Cook. On April 30, 2003, the Kinneys filed suit in Spokane County Superior Court, claiming Cook violated the Act. They claimed:

Without knowledge of the $4,500,000 loan guarantee made by Cook, on July 26, 2000, plaintiffs repurchased their 50% interest in the Corporation by paying $266,534.06 to defendant Cook in satisfaction of the Promissory Note.

In return, on or about July 28, 2000, plaintiffs received a stock certificate for 50,000 shares in the Corporation.

CP at 6. Cook moved to dismiss the Kinneys' claim under CR 12(b)(6), arguing they failed to state a claim upon which relief may be granted. Cook argued the note evidenced a commercial loan and was not a security and that the payment of the note was not a sale. Cook also contends he was not a "seller" of a security in 2000, even if a sale occurred. The trial court agreed that the note was not a security, that payment of the note was not a sale, and dismissed the Kinneys' claim. The Court of Appeals reversed, on the ground that the "broad definitions" of securities and sales under the Act, combined with their "accommodating attitude toward securities fraud victims," made dismissal inappropriate. Kinney v. Cook, 130 Wash.App. 436, 445, 123 P.3d 508 (2005). We granted review. Kinney v. Cook, 157 Wash.2d 1021, 142 P.3d 608 (2006).

ANALYSIS

¶ 8 A trial court's ruling to dismiss a claim under CR 12(b)(6) is reviewed de novo. Tenore v. AT & T Wireless Servs., 136 Wash.2d 322, 329-30, 962 P.2d 104 (1998). Dismissal is warranted only if the court concludes, beyond a reasonable doubt, the plaintiff cannot prove "any set of facts which would justify recovery." Id. (citing Hoffer v. State, 110 Wash.2d 415, 420, 755 P.2d 781 (1988)). The court presumes all facts alleged in the plaintiff's complaint are true and may consider hypothetical facts supporting the plaintiff's claims. Id. A motion to dismiss is granted " `sparingly and with care'" and, as a practical matter, "`only in the unusual case in which plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief.'" Hoffer, 110 Wash.2d at 420, 755 P.2d 781 (internal quotation marks omitted) (quoting Orwick v. City of Seattle, 103 Wash.2d 249, 254, 692 P.2d 793 (1984)) and (quoting 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357, at 604 (1969)).

¶ 9 The Kinneys allege Cook violated the Act by committing fraud or other dishonest acts in connection with the purchase and sale of securities. See RCW 21.20.010.3 The statute has two essential

154 P.3d 210

elements: (1) a fraudulent or deceitful act committed (2) in "connection with the offer, sale or purchase of any security." Id. The complaint survives the motion to dismiss on the first prong. The Kinneys allege Cook failed to inform them that Cook had burdened the corporation with a multimillion dollar debt. We presume, for purposes of this CR 12(b)(6) motion, that this nondisclosure occurred. Hoffer, 110 Wash.2d at 420, 755 P.2d 781. The alleged omission is, at least conceivably, a violation of RCW 21.20.010(2). See Hines v. Data Line Sys., Inc., 114 Wash.2d 127, 787 P.2d 8 (1990) (defendants found liable for securities fraud for failure to disclose the poor health condition of a key company officer). No more is needed to survive a CR 12(b)(6) motion to dismiss on this element.

¶ 10 The second prong, the connection between the fraudulent act and an offer, sale, or purchase of a security, is at the heart of the present dispute. Cook contends he neither sold nor bought a security and thus the alleged bad acts could not be in...

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104 practice notes
  • Alexander v. Sanford, No. 69637–8–I.
    • United States
    • Court of Appeals of Washington
    • May 12, 2014
    ...duty requirement set out in Haberman. This is all that is required to survive a CR 12(b)(6) motion. Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Hence, all plaintiffs sufficiently state a claim for fraud against Lozier Homes, Sanford, Burckhard, Sansburn, and Peter. ¶ 90 Final......
  • West v. Seattle Port Comm'n, No. 73014–2–I
    • United States
    • Court of Appeals of Washington
    • July 5, 2016
    ...allegations are true and “may consider hypothetical facts supporting the plaintiff's claims.” Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Dismissal is appropriate only where “it appears beyond doubt that the plaintiff cannot prove any set of facts which would justify recovery......
  • Kumar v. Gate Gourmet, Inc., No. 88062–0.
    • United States
    • United States State Supreme Court of Washington
    • May 22, 2014
    ...v. AT & T Corp., 164 Wash.2d 372, 387, 191 P.3d 845 (2008) (legal conclusions are reviewed de novo); Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007) (trial court's ruling to dismiss a claim under CR 12(b)(6) is reviewed de novo (citing Tenore v. AT & T Wireless Servs., 136 Wash.2d......
  • Byrd v. Pierce Cnty., No. 50513-4-II
    • United States
    • Court of Appeals of Washington
    • September 5, 2018
    ...OF LAW ¶ 17 We review de novo a trial court’s decision to dismiss a claim under CR 12(b)(6). Kinney v. Cook , 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Dismissal based on failure to state a claim is appropriate only if we conclude, beyond a reasonable doubt, that the plaintiff cannot prove......
  • Request a trial to view additional results
104 cases
  • Alexander v. Sanford, No. 69637–8–I.
    • United States
    • Court of Appeals of Washington
    • May 12, 2014
    ...duty requirement set out in Haberman. This is all that is required to survive a CR 12(b)(6) motion. Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Hence, all plaintiffs sufficiently state a claim for fraud against Lozier Homes, Sanford, Burckhard, Sansburn, and Peter. ¶ 90 Final......
  • West v. Seattle Port Comm'n, No. 73014–2–I
    • United States
    • Court of Appeals of Washington
    • July 5, 2016
    ...allegations are true and “may consider hypothetical facts supporting the plaintiff's claims.” Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Dismissal is appropriate only where “it appears beyond doubt that the plaintiff cannot prove any set of facts which would justify recovery......
  • Kumar v. Gate Gourmet, Inc., No. 88062–0.
    • United States
    • United States State Supreme Court of Washington
    • May 22, 2014
    ...v. AT & T Corp., 164 Wash.2d 372, 387, 191 P.3d 845 (2008) (legal conclusions are reviewed de novo); Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007) (trial court's ruling to dismiss a claim under CR 12(b)(6) is reviewed de novo (citing Tenore v. AT & T Wireless Servs., 136 Wash.2d......
  • Byrd v. Pierce Cnty., No. 50513-4-II
    • United States
    • Court of Appeals of Washington
    • September 5, 2018
    ...OF LAW ¶ 17 We review de novo a trial court’s decision to dismiss a claim under CR 12(b)(6). Kinney v. Cook , 159 Wash.2d 837, 842, 154 P.3d 206 (2007). Dismissal based on failure to state a claim is appropriate only if we conclude, beyond a reasonable doubt, that the plaintiff cannot prove......
  • Request a trial to view additional results

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