Sauve v. K. C., Inc.

Decision Date15 March 1979
Docket NumberNo. 45678,45678
Citation91 Wn.2d 698,591 P.2d 1207
Parties, Blue Sky L. Rep. P 71,494 Ruth SAUVE, Respondent, v. K. C., INC., a Washington Corporation, and Donald J. DeHan and Jane Doe DeHan, his wife, Appellants, James O. Flynn and Joyce E. Flynn, his wife, Petitioners, Stephen Flynn and Jane Doe Flynn, his wife, Defendants.
CourtWashington Supreme Court

Steinberg & Steinberg, Jack Steinberg, Seattle, for petitioners.

Siderius, Lonergan & Crowley, Patrick Crowley, Seattle, Robert Kuvara, Kent, for respondent.

DOLLIVER, Justice.

Petitioners, officers of defendant corporation K. C., Inc., seek review of a decision of the Court of Appeals (Sauve v. K. C., Inc., 19 Wash.App. 659, 577 P.2d 599 (1978)), which affirmed the trial court judgment for plaintiff.

K. C., Inc., operated a retail appliance store which leased household appliances to consumers with an option to purchase at the end of the lease period. The corporation and its principal officers financed their operation by obtaining $250,000 in loans from 45 individuals. Plaintiff, a widow, was interested in making an investment which would assure her a greater rate of interest than was available from a savings institution. In April 1972, she loaned $15,120 to the corporation in exchange for 84 documents entitled "Security Agreement (Conditional Sales Contract)". The documents purported to represent plaintiff's security interest in the new appliances which had been purchased with her money. Each document provided that, for the first 3 years following the date of the loan, the corporation was to pay plaintiff the interest due on the loan at a rate of 12 percent per annum, payable monthly, and that, at the expiration of this 3-year period, it was to repay the entire principal.

Plaintiff was told that, in the event the corporation defaulted on the interest payments, she could declare the entire principal immediately due or commence proceedings to repossess the appliances.

For 2 1/2 years the corporation paid plaintiff her monthly interest check. Five of those checks were dishonored by the bank which constituted a default under the agreement, and plaintiff demanded payment of the entire principal. The corporation paid only half of the principal, however, in exchange for Mrs. Sauve's return of half of the documents. The corporation went into voluntary bankruptcy in 1976. Plaintiff did not attempt to repossess the remaining appliances since she had no warehouse in which to store them. She thereafter brought an action against the corporation and its officers. The action alleged, Inter alia, a violation of the Securities Act of Washington (RCW 21.20) because neither the corporation nor the individuals acting on its behalf were registered as securities salespersons, nor were the documents registered as securities under the act.

RCW 21.20.005(12) defines a "security" as follows:

"Security" means any note; stock; treasury stock; bond; Debenture; evidence of indebtedness ; certificate of interest or participation in any profit-sharing agreement; Collateral-trust certificate ; preorganization certificate or subscription; transferable share; Investment contract ; voting-trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease; or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing; or any sale of or indenture, bond or contract for the conveyance of land or any interest therein where such land is situated outside of the state of Washington and such sale or its offering is not conducted by a real estate broker licensed by the state of Washington. "Security" does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay money either in a lump sum or periodically for life or some other specified period.

(Italics ours.) This definition is taken from the federal Securities Act of 1933, 15 U.S.C., § 77a et seq. (1976), and the Securities Exchange Act of 1934, 15 U.S.C., § 78a et seq. (1976). The definition of a security "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits". Securities & Exchange Comm'n v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct 1100, 90 L.Ed. 1244 (1946). In determining whether a given transaction constitutes a "security" within the meaning of these statutes, form should be disregarded for substance, and the emphasis should be on economic reality. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

The trial court concluded that the transaction was a "collateral-trust certificate" by examining the separate definitions of "collateral" and "trust" contained in Black's Law Dictionary 327, 1680 (Rev. 4th ed. 1968). Petitioners argue that a collateral trust is one in which a debtor deposits stocks, bonds or other collateral with a third party to act as trustee, and that the trial court erred in defining a collateral trust to include the transaction negotiated here.

The Court of Appeals did not refer to the trial court's finding on the nature of the agreement as a collateral trust certificate. Instead, it focused on the purposes of the securities laws and the circumstances surrounding the transaction. Applying what has come to be known as the "risk capital" approach, it analyzed the agreement and concluded that plaintiff's outlay of funds combined with the corporation's unencumbered rights in the collateral constituted a security as contemplated by the act.

While we agree that the transaction entered into by Mrs. Sauve was a "security" within the meaning of RCW 21.20.005(12), we do not follow the "risk capital" approach of the Court of Appeals. Rather, our holding is based upon the test in Securities & Exchange Comm'n v. W.J. Howey Co., supra, which was recently adopted by this court in McClellan v. Sundholm, 89 Wash.2d 527, 531-32, 574 P.2d 371, 373 (1978):

We choose to employ the federal (Howey) test for two reasons. First, as noted above, the Washington statutory definition is derived substantially from the federal statute. This is strong evidence that the intent of the legislature was to adopt existing federal law relating to the definition. Second, the federal test is widely used by state agencies and courts interpreting state securities acts. See Annot., What Constitutes an "Investment Contract" Within the Meaning of State Blue Sky Laws, 47 A.L.R.2d 1375, 1379 (1973)....

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13 cases
  • State v. Argo, 33461-1-I
    • United States
    • Court of Appeals of Washington
    • 6 d1 Maio d1 1996
    ...a third party. Cellular Engineering, 118 Wash.2d at 26, 820 P.2d 941; Philips, 108 Wash.2d at 632, 741 P.2d 24; Sauve v. K.C., Inc., 91 Wash.2d 698, 702, 591 P.2d 1207 (1979); McClellan v. Sundholm, 89 Wash.2d 527, 531, 574 P.2d 371 (1978). Argo does not appear to challenge the existence of......
  • Connors v. Lexington Ins. Co., CV 85-1381.
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    ...Dec. 23, 1977) Available on WESTLAW, DCT database, there are cases in which they are so deemed, see, e.g., Sauve v. K.C. Inc., 91 Wash.2d 698, 591 P.2d 1207 (1979) (en banc); cf. SEC v. G. Weeks Securities, Inc., 678 F.2d 649 (6th Cir.1982). Therefore, the fact that the rebate involved a fi......
  • All Seasons Resorts, Inc. v. Abrams
    • United States
    • New York Court of Appeals
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    ...Cal.Rptr. 186, 361 P.2d 906; compare, Jet Set Travel Club v. Corporation Commr., 21 Or.App. 362, 535 P.2d 109; contra, Sauve v. K.C., Inc., 91 Wash.2d 698, 591 P.2d 1207; see, Ann., 47 A.L.R.3d 1375, 1382; see generally, Coffey, op. cit., 18 W.Res.L.Rev. 367). 6 The circumstances in these c......
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    ...acts are similar, states frequently rely on federal case law in interpreting state security acts. See, e.g., Suave v. K.C., Inc., 91 Wash.2d 698, 591 P.2d 1207 (1979); American Mutual Reinsurance Co. v. Calvert Fire Insurance Co., 52 Ill.App.3d 922, 9 Ill.Dec. 670, 367 N.E.2d 104 At the out......
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