Sauve v. K.C., Inc.

• Decision Date: 10 April 1978
• Docket Number: No. 4686-I,4686-I
• Citation: 577 P.2d 599,19 Wn.App. 659
• Parties: , Blue Sky L. Rep. P 71,412 Ruth SAUVE, a single woman, Respondent, v. K. C., INC., a Washington Corporation, James O. Flynn and Joyce Flynn, his wife, Donald J. DeHan and Jane Doe DeHan, his wife, Appellants, Stephen Flynn and Jane Doe Flynn, his wife, Defendants.
• Court: Washington Court of Appeals

Page 659

19 Wn.App. 659

577 P.2d 599, Blue Sky L. Rep. P 71,412

Ruth SAUVE, a single woman, Respondent, v. K. C., INC., a Washington Corporation, James O. Flynn and Joyce Flynn, his wife, Donald J. DeHan and Jane Doe DeHan, his wife, Appellants Stephen Flynn and Jane Doe Flynn, his wife, Defendants.

No. 4686-I.

Court of Appeals of Washington, Division 1.

April 10, 1978.

Steinberg & Steinberg, Jack Steinberg, Seattle, for K. C., Inc. and flynn.

Robert Kuvara, Kent, for DeHan.

Siderius, Lonergan & Crowley, Patrick W. Crowley, Seattle, for respondent.

CALLOW, Judge.

The defendant K.C., Inc., was owned and operated by K.C. Appliance Leasing, and it also had its own retail appliance store. It was in the business of buying new household appliances and then leasing them to householders who would pay it a monthly rental with the option at the end of the lease period to purchase the appliance for about one dollar. The corporation's officers were defendants James O. Flynn, his wife Joyce, and their son Stephen.

The Flynns employed the defendant Donald J. DeHan as a full-time fundraiser, to approach various individuals to borrow money from them in order to finance the corporation's purchase of new appliances. Mr. DeHan approached over 50 persons and succeeded in obtaining loans from about 45 of them in the total amount of at least $250,000. Mr. DeHan was paid a straight commission based upon the amount of money he was able to raise. Neither Mr. DeHan nor any of the Flynns was a licensed or registered security salesman.

One of the persons from whom Mr. DeHan sought to borrow money was the plaintiff, Ruth Sauve. Mrs. Sauve is a 47-year-old widow whose husband was killed in a truck/train accident in 1971. She has one dependent child living with her at home. As a result of her husband's death, she received approximately $21,000 in death benefits. She has little or no experience in business and only completed the sophomore year of high school. During her life she worked 3 months at Woolworth's and 71/2 years as a machine operator for an envelope company. Mrs. Sauve had known and trusted Mr. DeHan for about 5 years, since he and his family were friends of her niece, who had loaned some money to defendant corporation. Mr. DeHan represented himself to the plaintiff as an investment counselor.

Mrs. Sauve was interested in the prospect of loaning money to defendant corporation in order to obtain a rate of interest greater than that obtainable from her savings bank. Mr. DeHan informed her that any loan could involve a risk.

On April 16, 1972, the plaintiff loaned the defendant corporation $15,120, through Mr. DeHan, and was given a receipt therefor. She knew that this loan was being made to the corporation, and not to its individual officers or directors, but she mistakenly believed that the Flynns would be personally liable for the loan.

The corporation used the amount of the plaintiff's loan to immediately purchase 84 new appliances which it thereupon leased to householders. At the time of the loan, the corporation gave the plaintiff 84 documents, each representing her security interest in the new appliances purchased with her money. Each was entitled at the top "Security Agreement (Conditional Sale Contract)." The documents were on the same type of printed form; each was dated April 17, 1972, and named the plaintiff as the seller and K.C., Inc. and Joyce E. Flynn as the buyers. Joyce Flynn, who was vice president of the corporation, acted as a corporate officer and not in her individual capacity. Each document describes a specific appliance, listing both its model number and serial number, together with its cash sales price. Each document contains a box for the listing of the Washington State sales tax, which in each of the documents is listed as "$.00". The balance of the form spreads interest payments over 35 months with a cash out on the 36th month.

The plaintiff was made aware of the fact that in the event the corporation defaulted on the interest payments she could declare the entire principal immediately due, or she could commence proceedings to repossess the appliances. None of the 84 documents was registered as a security. The plaintiff was not aware of any need to have these documents filed with any governmental office, and she did not file them with either the county auditor or the Secretary of State.

For about 21/2 years after the loan the corporation sent plaintiff its check for $149 each month, constituting the interest payment called for in the 84 documents. All these checks were honored by the bank except for five which were dishonored. Since the five dishonored checks constituted a default, the plaintiff then demanded immediate repayment of the entire principal balance. Accordingly, in April 1974 the corporation repaid her about half the principal (slightly over $7,400), at which time she returned half of the security documents to the corporation. The corporation failed to pay her the remaining half of the principal, and went into voluntary bankruptcy on January 28, 1976.

Upon this default, the plaintiff did not attempt to repossess the 42 remaining appliances since, had she done so, she would have had to rent a warehouse in which to store them. She instituted this action seeking recovery against both the corporation and all the individual defendants of the remaining principal balance of $7,470, plus interest, attorney's fees, and "consequential damages" of $5,000. In her complaint the plaintiff based her right to recovery against the individual defendants upon the following grounds: (1) breach of contract; (2) common-law fraud; (3) violation of the Washington Securities Act, RCW 21.20 (which makes it unlawful for an unlicensed salesman to sell unregistered securities); and (4) violation of the Washington Unfair Business Practices Act (Consumer Protection Act), RCW 19.86. In their answer the defendants prayed that the complaint be dismissed with prejudice, asserting that the debt was a corporate debt and that the officers, directors and stockholders of the corporation were not liable individually.

Trial to the court resulted in the dismissal of the defendant Stephen Flynn from the action and the entry of judgment in favor of the plaintiff against the defendants James O. Flynn and Joyce Flynn, husband and wife, and Donald J. DeHan and Elizabeth DeHan, husband and wife, together with their marital communities, in the sum of $6,308, together with $1,500 attorney's fees and taxable costs.

The court found that the defendant K.C., Inc. owed a duty as trustee to the plaintiff to collect on the merchandise from the consumer lessees. Based upon that finding, the court concluded that the arrangement constituted a collateral trust. The trial court characterized the transaction as a 3-party arrangement with the plaintiff furnishing the funds, the defendants furnishing the business knowledge and sales efforts in seeking out the consumers who leased the merchandise, and the consumers who leased the merchandise from the defendants. Judgment was entered in favor of the plaintiff. The trial court found that the defendants had not committed fraud, but entered judgment on the basis that the defendants had violated the Washington Securities Act. The defendants appeal.

The issue raised is whether the transaction between the parties represents a sale of a "security" without said security being registered pursuant to the requirements of the Washington Securities Act, Chapter 21.20 of the Revised Code of Washington.

The defendants assert that the transaction did not involve a "security." They state that the transaction was similar to an installment cash loan secured by a chattel mortgage normally made by commercial banks to finance equipment purchases. The defendants argue that it was not necessary to notify the lessees that the defendant corporation's rights were assigned to the plaintiff because the assignment to the plaintiff of all of the corporate rights was not absolute and became effective only upon the corporation's default. The defendants state that the assignment of the 84 documents merely made the plaintiff a secured creditor, provided that she perfected her security interest. Such a commercial loan transaction, it is asserted, has not been included within federal or state definitions of a "security."

The defendants also point out that this transaction is similar to accounts receivable financing where the lender makes loans or advances secured by assigned accounts receivable, without assuming credit risk and without notifying the assignor's customers. The claim is made that this form of non-notification financing involved a security device or collateral security which did not affect the existence of the debt due to the plaintiff, but provided the plaintiff with an immediate source of recovery.

The defendants further assert that this transaction is not an investment contract under federal or state law, and the fact that the loan involved risk did not make it an "investment contract." They state that the term "security" as defined in state and federal securities laws is confined to profit-sharing investments, and the transfer of rights under a lease of personal property is not an "investment" where it is made as collateral for a commercial loan.

Finally, the defendants state that the trial court erred when it isolated the words "collateral" and "trust" in defining them, for collateral-trust has its own meaning. They state that a collateral trust is one in which a debtor deposits collateral with a third party, with the third party, and not the debtor, acting as trustee.

The term "security" is defined in RCW 21.20.005(12) 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;...