Appendix — American Express Travel Related Services Co. v. Washington Public Power Supply System
Supreme Court brief1988
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87 189% peiiaginn
No.
oupreme Court, U.S,
MAY ay 1988
} PANIOL, JR,
—CtERK
IN THE | aa
Supreme Court of the United States
October Term, 1987
FREDRIC HABERMAN, et al.,
V.
Appellants,
WASHINGTON PUBLIC POWER SUPPLY
SYSTEM, et al.,
Appellees.
On Appeal From the Supreme Court
of Washington
APPENDIX TO
JURISDICTIONAL STATEMENT
Of Counsel:
Christopher Kane, Esq.
FERGUSON & BURDELL
Edward J. Tolchin, Esq.
GINSBURG, FELDMAN
and BRESS, Ch.
Robert K. Walsh, Esq.
JAFFE & SCHLESSINGER,
P.A.
Myer Feldman, Esq.
Counsel of Record
GINSBURG, FELDMAN AND
BRESS, Chartered
1250 Connecticut Ave., N.W.
Washington, D.C. 20036
(202) 637-9025
Robert H. Jaffe, Esq.
JAFFE & SCHLESINGER, P.A.
8 Mountain Avenue
Springfield, New Jersey 07081
(201) 467-2246
Counsel for Appellants
Fredric Haberman, ef al.
CASILLAS PRESS ING
17 K ST NW
WASHINGTON |
= etm a TO
Il.
III.
Vil.
Vill.
XI.
(i)
TABLE OF CONTENTS
Page
. OPINION AND JUDGMENT DATED OCTOBER
8, 1987 OF THE WASHINGTON SUPREME
COURT AS REPORTED AT 109 WN. 2d 107 ........... la
ORDER DATED FEBRUARY 17, 1988 OF THE
WASHINGTON SUPREME COURT .................. 85a
ORDER DATED FEBRUARY 19, 1988 OF THE
WASHINGTON SUPREME COURT .................. 86a
. NOTICE OF APPEAL BY APPELLANTS-
PLAINTIFFS FREDRIC HABERMAN, ET AL. ......... 87a
. MEMORANDUM DATED MARCH 7, 1985 BY
THE WASHINGTON STATE DEPARTMENT
Se tees at ed i a ei aus wee. 99a
. FEBRUARY 16, 1986 WASHINGTON STATE
SENATE PLOOR PROCHEIMIGS 6.5 c cc ccc cece, 104a
EXCERPTS FROM WASHINGTON PUBLIC
POWER SUPPLY SYSTEM BOND RESOLUTION
PE eters Vie tuca cans oe K Rha cece kde eewaie s 126a
EXCERPTS FROM RESOLUTION 911 DATED
se oe eka eu eke co ekvaas sae be see i> 130a
. FACSIMILE OF WPPSS BOND CERTIFICATE
FOR NUCLEAR PROJECTS 4 AND 5............... 133a
. EXCERPTS FROM OFFICIAL STATEMENT
ISSUED BY WASHINGTON PUBLIC POWER
SUPPLY SYSTEM DATED MARCH 17, 1981 ......... 135a
ORDER AND JUDGMENT OF DISMISSAL
DATED OCTOBER 7, 1985 OF THE
WASHINGTON SUPERIOR COURT.................. 227a
(il)
XII. AMENDED NOTICE OF APPEAL BY
APPELLANTS FREDERIC HABERMAN,
ge aie dd 08k Se 8 Oe Oe eee See a eee
XIII. PERTINENT EXCERPTS OF WASHINGTON
STATE SECURITIES ACT CIVIL LIABILITY
PROVISIONS PERTAINING TO APPEAL OF
APPELLANTS FREDERIC HABERMAN, ET AL
la
OPINION AND JUDGMENT
DATED OCTOBER 8, 1987
OF THE WASHINGTON SUPREME COURT
AS REPORTED AT 109 Wn.2d 107
Oct 1987 HABERMAN v. WPPSS 107
109 Wn.2d 107
{[No. 52559-5. En Banc. October 8, 1987.]
FREDRIC HABERMAN, ET AL, Appellants, v. WASHINGTON
PusBLic PowER Supply SysTEM, ET AL, Respondents.
[1] Dismissal and Nonsuit — Failure To State Claim — Fac-
tual Basis — Hypothetical Facts. Dismissal of an action for
not stating a claim upon which relief can be granted under CR
12(b)(6) is appropriate only if beyond doubt the plaintiff could not
prove any set of facts, including facts outside the record which are
consistent with the complaint, which would entitle him to relief.
{2} Dismissal and Nonsuit — Failure To State Claim — Con-
version to Summary Judgment — Relevance of Matters
Outside Pleadings. A trial court's consideration of materials
outside the complaint does not convert a motion to dismiss for
failure to state a cause of action under CR 12(b)(6) into a motion
for summary judgment under CR 56 if the court concludes that the
plaintiff cannot obtain relief no matter what facts he proves.
[3] Judgment — Res Judicata — Prior Determination. The
doctrine of res judicata bars only those claims which necessarily
were decided in a previous action.
[4] Bonds — Securities Regulation — Security — Bond
Guaranty. A ‘public instrumentality'’s indirect bond guaranty
[5)
[6)
[7]
[8)
[9)
[10)
[11)
2a
winch could not be purchased seperately from the bonds does not
constitute a security independent of the bonds themselves.
Securities Regulation — Statutory Provisions — Con-
struction — Purpose. The Securities Act of Washington (RCW
21.20) is construed broadly to carry out its purpose of protecting
investors.
Securities Regulation — Civil Remedy — “Seller” —
Privity — Necessity. Under RCW 21.20.430(1), which makes
sellers of securities civilly liable for unlawful sales, a party qualifies
as a “seller” if his acts were a substantia! contributive factor in the
‘gales transaction.
Conflict of Laws — Securities Regulation — Choice of
Law — Significant Contacts. A securities claim is governed by
the law of the jurisdiction having the most significant relationship
with the security. The significance of the relationship depends on
the competing jurisdictions’ contacts with the events giving rise to
the claim and the interests and policies of the jurisdictions.
Commerce — State Regulation — Validity — Factors. The
validity of a state regulation under the commerce clause depends
on the relationship between the state, the subject matter, and the
parties; the existence of a conflict between the state and federal]
regulations; and the degree of the burden placed on interstate
commerce in relation to the local interests served.
Statutes — Validity — Presumption — Burden of Proof. A
party challenging the validity of a statute must overcome the pre-
sumption that the statute is constitutional by proving its invalidity
beyond a reasonable doubt.
Constitutional Law — Equa! Protection — Classifications
— Minima! Scrutiny — Test. A statutory classification not
involving a suspect class or a fundamenta! right does not violate
the equal protection guaranty if all members of each class are
treated alike, there is a reasonable basis for distinguishing between
those included in and those excluded from each class, and the
classification is rationally related to the purpose of the statute.
Securities Regulation — Civil] Remedy — In-State Public
Issuer — Statutory Provisions — Validity. RCW 21.20-
.430(7), which establishes a scienter requirement to hoid the State
and its subdivisions civilly liable for securities act violations and
makes this requirement retroactive, does not violate the constitu-
tional equal protection, special legislation, due process, separation
of powers, or impairment of contracts clauses.
[12)
[13)
[14)
[15]
[16]
[17]
[18)
[19)
3a
Statutes — Validity — Special Legislation — Test. A stat-
ute establishing a claas does not violate the special legislation pro-
hibition of Const. art. 2, § 28(17) if it applies alike to all members
within the class and the classification is reasonably related to the
purpose of the statute
Statutes — Construction — Retroactivity — Due Process
— In General. The retroactive application of a statute violates
due process only if it interferes with a vested liberty or property
right. A claimant has no vested liberty or property right in the
continuation of existing statutory law.
Statutes — Construction — Retroactivity — Separation
of Powers. A retroactive statutory amendment does not violate
the separation of powers doctrine if it establishes new law to be
applied to the facts before the court, does not dictate how factual!
issues are to be decided, and does not affect a final judgment.
Statutes — Construction — Retroactivity — Impairment
of Contracts. A retroactive statutory amendment changing a
remedy does not impair the obligation of a contract executed
before the amendment unless the Legislature intended that the
statute create private rights of a contrectua) nature or the remedy
wes incorporated as a term of the contract.
Corporations — Derivative Action — Defense — Stand-
ing. In a derivative action, the entity which the plaintiff ulti-
mately seeks to represent has standing to challenge the plaintiff's
authority to bring the action.
Corporations — Derivative Action — Standing — Bond-
bolder — Equitable Right. A bondholder has no equitable right
to bring a derivative action to enforce a right of the bond issuer.
Corporations — Derivative Action — Standing — Bond-
holder — Indenture Agreement. A bondholder's contractual
right to bring a derivative action is limited by restrictions in the
indenture agreement if the bonds refer to the agreement
Corporations — Derivative Action — Standing — Bond-
bolder — Prior Demand on Trustee — Necessity. When a
bond indenture agreement requires bondholders to demand that
the bond trustee bring # derivative action to enforce the rights of
the issuer, whether the bondholders are excused from the demand
requirement before commencing their own derivative action is a
decision within the trial court's discretion The doctrine of futility
does not excuse demand if the trustee was involved neither in the
wrongdoing sought to be remedied nor in an action arising out of
the same facts as the bondholders’ derivative action. The demand
[20]
[21]
[22]
[23]
[24)
[25)
[26)
da
requirement is not excused by a running of a statutory limitation
period after the bondholders’ derivative action is commenced.
Credit — Creditor's Equitable Action — Condition Prece-
dent. Absent statutory provisions to the contrary, a creditor must
reduce the debt to judgment before bringing an action in equity to
satisfy his claim.
Government — Toris — Sovereign Immunity — Discre-
tionary Acts — What Constitutes. A governmenta! body is
not immune from tort liability unleas its act, omission, or decision
involves the formulation of basic policy at an executive level,
rather than the implementation of such policy.
Government — Torts — Public Duty Doctrine — Specia!
Relationship — Class of Persons. The public duty doctrine
does not immunize a governmenta! body from tort liability for its
breach of a duty owed to a particular circumscribed class of per-
sons rather than to the public as a whole.
Conflict of Laws — Torts — Choice of Law — Sovereign
Immunity — Significant Relationship. A court will apply the
most significant relationship test to determine if a foreign jurisdic-
tion's sovereign immunity wil) bar a tort claim. Among the factors
which must be considered are the competing policies of the juris-
dictions, the place of the injury, the place where the conduct caus.
ing the injury occurred, the residences of the parties, the place
where the relationship is centered, and any choice of law provision
in the contract out of which the tort claim arose.
Conflict of Laws — Torts — Choice of Law — Sovereign
immunity — Full Faith and Credit. The ful) faith and credit
clause does not require the application of a foreign jurisdiction s
sovereign immunity unless not to do so would threaten the foreign
jurisdiction's ability to govern
Conflict of Laws — Comity — Discretion of Court. The
doctrine of comity permits, but does not require, a state to apply
the laws of a foreign jurisdiction out of deference and respect after
considering the interests of each jursdiction. Basing a choice of
law decision on considerations of comity & a matter within the
court's discretion.
Negligence — Misrepresentation — Elements of Tort. A
party who fails to exercise reasonable care in obtaining or commu-
nicating false information involving a transaction in which he has a
pecuniary interest is liable for pecuniary loss caused by justifiable
reliance on the information if the supplier of the mformation
knows of the injured party s reliance or has specia) reason to knoe
{27}
[28)
(28)
[30)
{31)
[32)
[33)
[34)
te
that some member of « limited group will rely on the information.
or the injured party w a member of « group which the supplher
sought to influence
Fraud — Complaint — Specificity — Test. A complaint sock
ing damages for common law fraud satisfies the particularity
requirement of CR ®8(b) if it describes the fraud, alleges that the
defendant committed it, and gives the defendant sufficient notice
to allow him to prepare an answer and defense
Fraud — Misrepresentation — Scope of Duty — Privity A
person who fraudulently conceals or misstates information i e
business transaction w lable to persona whom the person intends
or has reason to expect will be musied by hu acta Privity or «
fiduciary relationship between the parties w nol @ condition prece
dent to hability in such e situation
Attorney and Client — Consumer Protection — Law or
Otber Professional! Practice — Beope — Malpractice A
claim for damages based on an attorneys or other professionals
megligence in the exercise of bu judgment w not cognizable under
the Consumer Protection Act (RCW 19.46)
Waters — Irrigation Districts — Status — Municipal
Corporations. Irrigation districts established pursuant u KOCW
Title 87 qualify as municipal) corporations
Utility Bervices — Consumer Protection — Beope -—
Rure! Electric Cooperatives Kurai electrw ceommperatives are
ummune from hability under the Consumer Protecuon Act (KCW
19.56)
Pleading — Amendment — Kelation Back — New Parties
— Piaintiffe. CK 15ic), whach governa whetner amendment wv
pleadings relate back Ww the origina) filing dav for statuls of lim,
telion purposes applies \& the clarms of newly added plaintiffs as
well as newly added defendants
Pleading — Amendment — Addition of Party — Inexcus.
able Neglect. A complaint may not be amended & add an add,
tonal party if the moving partys faslure Ww include Une omnitied
party mitsally was due Ww inezcusabie negiect The nemmeorvsirg
party need not show prejudice from the edditucr of Une additucma!
party
Process — Service — Foreign Party — Degree of Comp!
ance. Service of procens on ar wut-of-elale pert, requires atric’
compliance with Ube presedures wf! fortn a KCW 4 2% (Wy 4) an
18 Receipt of procew ant actus motuce Go net by tnemmariven
6a
establish valid service of process
Pearson, C.J., and Doiirver and Anpersen, JJ., dissent in part by sep
arate opinion; CaLiow, J., did not participate in the disposition of this
case.
Nature of Action: Holders of revenue bonds in default
which were issued to finance the construction of two termi-
nated nuclear power plants sought damages under multiple
theories from various parties involved in the construction
and financing of the plants.
Superior Court: The Superior Court for King County,
No. 84-2-06452-8, Terrence A. Carroll, J., on October 7,
1985, dismissed the action for failure to state a claim upon
which relief could be granted.
Supreme Court: Holding that the bondholders had
stated cognizable claims for violation of the state securities
act, negligent misrepresentation, and common law fraud,
and that the claims of bondholders added by an amend-
ment to the complaint related back to the date the action
was filed, the court affirms the judgment in part, reverses it
in part, and remands the case to the trial] court for further
proceedings.
Ferguson & Burdell, by Christopher Kane and Scott
Tucker, and Thoreson, Yost, Berry & Matthews, by Ernest
C. Matthews IV (Myer Feldman, Robert L. Deitz, Edward
J. Tolchin, and Ginsburg, Feldman & Bress; Robert H
Jaffe, Howard G. Schlesinger, and Jaffe & Schlesinger, of
counse]), for appellants Haberman, et al.
Smith, Smart, Hancock & Tabler, by Walter S. Tabler
(Winthrop, Stimson, Putnam & Roberts, by John B. Dan-
iels, David G. Keyko, and Susan J. Kohlmann, of counse)),
for appellants American Express Travel Related Services
Co., et al.
Culp, Dwyer, Guterson & Grader, by Robert D. Stewart,
and Donovan, Leisure, Newton & Irvine, by Daniel R
Murdock, for respondent Washington Public Power Supply
7a
System.
Helsell, Fetterman, Martin, Todd & Hokanson, by
David F. Jurca and Linda J. Cochran, for Columbia
respondents.
Syrdal, Danelo, Klein, Myre & Woods, by Peter A. Dan-
elo and Otto G. Klein II] (S. William Livingston, Jr., Peter
J. Nickles, and Covington & Burling, of counsel); Davis,
Wright & Jones, by Evan L. Schwab, Stephen M. Rum-
mage, and David C. Tarshes; Reed, McClure, Moceri,
Thonn & Moriarty, by Roy J. Moceri and D. Bradley
Hudson; Karr, Tuttle, Koch, Campbell, Mawer & Morrow,
by John F. Kruger (Bernard J. Smolens, Ralph Welling-
ton, Arden J. Olson, and Schnader, Harrison, Sega! &
Lewis, of counsel); Sirianni & Youtz, by Chris R. Youtz
and Stephen J. Sirianni (Robert M. Abrahams, Irwin Jd.
Sugarman, Robert E. Bartkus, and Schulte, Roth & Zabel,
of counsel); Williams, Kastner & Gibbs, by J. Kenneth
McMullin (James J. Hagan, Elizabeth A. York, and Simp-
son, Thacher & Bartlett, of counsel), for respondents
Ebasco Services, Inc., et al.
Riddell, Williams, Bullitt & Walkinshaw, by John D.
Lowery, Hugh R. Tobin, and David R. Peeler, for respon-
dents Smal) Utilities Group.
Foster, Pepper & Riviera, by Camden M. Hall, Stellman
Keehnel, and Daniel L. Thieme; Culp, Dwyer, Guterson &
Grader, by Robert D. Stewart; Gordon, Thomas, Honey-
well, Malanca, Peterson & Daheim, by Albert R. Malanca
and Donald S. Cohen; Harris, Mericle & Orr, by Jack CG.
Orr (Dennis K. Bromley, Robert A. Gordon, and Pillsbury,
Madison & Sutro, of counsel), for respondents Utility
Defendants.
Lane, Powell, Moss & Miller, by Larry S. Gangnes, John
R. Tomlinson, and Paul D. Swanson (Rockne Gill, J. Lau-
rence Cable, Bernard M. Ryan, and Schwabe, Williamson,
Wyatt, Moore & Roberts. R. Erick Johnson, R. Daniel Lin-
dahil, and Bullivant, Houser, Bailey, Hanna, Pendergrass,
8a
Hoffman, O’Connel & Goyak; Peter R. Mersereau and
Rankin, McMurry, Vavorsky & Doherty, of counsel), for
respondents Oregon Public Entities.
Hillis, Cairncross, Clark & Martin, P.S., by Michael F.
Schumacher and Gregory E. Kelier, for respondents Inland
Utilities.
Bennett & Bigelow, by David A. Bennett and Elizabeth
J. Blagg, for respondent Dawson.
Jim Jones, Attorney General for the State of Idaho, and
Clive J. Strong, Deputy, amici curiae.
BRACHTENBACH, J.—This case involves various bondhold-
ers' claims agaist the Washington Public Power Supply
System (Supply System) and others for injuries resulting
from the Supply System's defauit on $2.25 billion in reve-
nue bonds issued to finance construction of two nuclear
power generating plants. The trial court dismissed al]
bondholders' claims for their failure to state a claim for
relief pursuant to CR 12(b)(6). We granted direct review
and reverse the trial court's judgment on several issues.
Respondent Supply System is a "joint operating agency"
and municipal corporation established and authorized by
state law to finance, construct, own and operate electrical
generating facilities. See RCW 43.52.360. Its members are
19 public utility defendants and four cities.
In the early 1970's, the Supply System began construc-
tion of three nuclear power generating plants WNP 1,
WNP 2 and WNP 3. Those plants were developed in con-
junction with a number of participating utilities from sev-
eral northwestern states, including Washington. The
_ Bonneville Power Administration (BPA), a federal agency,
facilitated financing of the first three plants through com-
plex "net-billing" agreements that allocated the risk of
noncompletion to the federal agency, combined the costs of
the nuclear plants’ construction with less costly hydro-
power, and resulted in an indirect guaranty by BPA. See
Chemical Bank v. WPPSS, 99 Wn.2d 772, 779, 666 P.2d
9a
329 (1983) (Chemica! Bank I).
By 1974, it appeared that additional electrical power
generation facilities would be needed to meet growing
northwest power demands. To meet these demands, the
Supply System decided that two additional nuclear power
plants WNP 4 and WNP 5, wouid be necessary. WNP 4
was to be owned entirely by the Supply System; WNP 5
was to be uwned 90 percent by the Supply System and 10
percent by Pacific Power and Light Company, a private
utility.
In addition to the Supply System and Pacific Power and
Light Company, 88 "Participants" were involved in these
two projects: 9 Washington cities, 19 Washington public
utility districts (PUD's), 1 Washington irrigetion district, 7
Oregon cities, 4 Oregon peoples’ utility districts, 5 Idaho
cities, and 43 rural electric cooperatives, of which 13 are in
Washington. The remaining rural electric cooperatives are
in Idaho, Montana, Nevada, Oregon and Wyoming. These
Participants include 20 of the 23 Supply System members.
The Supply System financed construction of WNP 4 and
WNP 5 through the sale of revenue bonds. Changes in fed-
eral law, however, precluded use of "net—billing” as ae aecu-
rity device as used in the WNP 1, WNP 2 and WNP 3
financing. As a result, in 1976 the Participants al] entered
into a "Participants' Agreement" with the Supply System.
In this agreement, the Supply System promised to sell, and
each Participant promised to buy its share of WNP 4 and
WNP 5 “Project Capability". Project Capability was
defined by the Participants’ Agreement as:
the amounts of electric power and energy, if any, which
the Projects are capable of generating at any particular
time (including times when either or both of the Plants
are not operable or operating or the operation thereof is
suspended, interrupted, interfered with, reduced or cur-
tailed, in each case in whole or in part for any reason
whatsoever), less Project station use and losses.
Participants’ Agreement, section 1(v). In essence, the Par-
ticipants agreed to pay for their share of Project Capability
10a
regerdless whether the projects ever produced electricity.
Each Participant agreed to begin monthly payments for
its share commencing with the projects' date of completion,
or within 1 year of the projects’ termination. The Partici-
pants’ Agreement also established a Participants’ commit-
tee through which the Participants could disapprove certain
actions taken by the Supply System's board of directors.
In 1977, the Supply System adopted bond resolution 890,
a trust indenture which provided for its issuance of a series
of revenue bonds to finance the WNP 4 and WNP 5 plants.
Resolution 890 appointed a bond trustee, Chemical Bank,
to represent the bondholders’ interests. Resolution 890
required the Supply System to collect charges for Project
Capability from the Participants as agreed in the Partici-
pants' Agreement so as to provide for payment of interest
due on the revenue bonds issued. The effect of the Partici-
pants' Agreement together with resolution 890 was that the
Participants indirectly guaranteed debt service on all the
bonds issued by promising to purchase their shares of
Project Capability once the projects were completed, or
~ thin 1 year of termination of construction.
Financing for the plants involved the capitalization of
interest on a series of bonds. Under this arrangement, the
Supply System would use future bond sales revenue to pay
interest due on outstanding bonds until the completion of
WNP 4 and WNP 5, when the operating revenues would
then pay the debt service on the final series of bonds. Con-
struction of WNP 4 and WNP 5 was originally projected to
require $3.4 billion.
The Supply System, along with its investment advisors,
prepared Official Statements to accompany the WNP 4 and
WNP 5 bond offerings. These Official Statements contained
opinions from engineers and accountants as to the struc-
tural and financ al feasibility of the plants. Additionally,
the Official Statements explained that the Participants
were obligated to pay the costs of the plants, including debt
service on the bonds, whether or not the plants ever were
completed or generating power. The WNP 4 and WNP 5
lla
bonds on their faces referred to resolution 890 and the
Participants’ guaranties to purchase Project Capability.
The Supply System gold the bonds through a 15-part
integrated offering beginning in F ebruary 1977. All bonds
were sold directly to underwriters pursuant to bidding pro-
cedures in RCW 43.52.343. These underwriters then resold
the bonds to investors.
WNP 4 was projected to be operational by March 1982:
WNP 5 by April 1984. Presumably, the final series of bonds
would have been issued so as to coincide with these dates,
allowing the operating revenues to pay the debt service
obligations on the final series of bonds as originally
planned. On May 29, 1981, however, the Supply System
announced that because it was not able to obtain bond
financing for its nuclear power projects for the following
year, and because northwest power demands had not grown
48 anticipated, it was terminating WNP 4 and WNP 5. The
Supply System formally withdrew the 15th bond offering,
and announced that the cost estimates contained in the
Official Statements issued with the last series of bonds on
May 17, 1981, had been understated by approximately $5
billion. Final estimates of completion costs for WNP 4 and
WNP 5 had also grown from the original $3.4 billion to
nearly $12 billion. On January 22, 1982, the Supply Sys-
tem's board of directors unanimously voted to terminate
WNP 4 and WNP 5 due to conditions beyond its ability to
control. By that time, bonds outstanding had an agpregate
face value of approximately $2.25 billion.
The Supply System's termination of the projects estab-
lished a trigger date for various debt service payments,
which by virtue of the Participants’ Agreement and resolu-
tion 890, became the Participants’ obligations. The esti-
mated amount necessary to service the outstanding bonds
is $7 billion.
Chemical Bank, on behalf of the WNP 4 and WNP 5
bondholders, filed a declaratory action to determine the
enforceability of the Participants’ Agreement. This court
determined that all Washington Participants lacked statu-
12a
tory authority to enter into the Participants' Agreement,
and declared the Agreement void and unenforceable. See
Chemical Bank I, at 799. Moreover, this court held that the
remaining Participants were released from their obligations
under the Participants’ Agreement on the basis of commer-
cial frustration or impossibility, and mutual mistake. See
Chemical Bank v. WPPSS, 102 Wn.2d 874, 888-89, 691
P.2d 524 (1984) (Chemical Bank II), cert. denied, 471 U.S.
1065, 1075 (1985).
This court denied plaintiffs Fredric Haberman and five
others’ motion to intervene in Chemical Bank II. Subse-
quently, on May 7, 1984, Haberman and other individual
bondholders (plaintiffs) instituted this suit against the
Supply System and others for numerous causes of action
arising out of the WNP 4 and WNP 5 termination and
resulting bond default. A group of institutional bondhold-
ers, including American Express Travel Related Services
Company, Inc. (Amexco) and United States Trust Com-
pany of New York, joined the action as intervenor-plain-
tiffs (intervenors).
Five basic groups were named as defendants and are
respondents on this appeal: the Supply System, the 23
members of the Supply System, Chemical Bank, the 88
WNP 4 and WNP 5 "Participants", and the professionals
who rendered services to the Supply System. The respon-
dent professionals include accountants Ernst & Whinney;
investment advisors Blyth, Eastman, Paine, Webber, Inc.,
and its officers Donald Patterson and Stanley Pardo; engi-
neers R. W. Beck and Associates, United Engineers and
Constructors, Inc., and Ebasco Services, Inc.; attorneys
Wood & Dawson, and Houghton, Cluck, Coughlin & Riley;
and other unnamed professionais.
Plaintiffs’ and intervenors' complaints allege that all
defendants knew or should have known: that the market
could not support the extensive bond sales required to
finance WNP 4 and WNP 5, and that the financing plan
was otherwise insufhcient; that the Participanis' Agreement
was unenforceable or that a declaratory judgment test case
l3a
should have been filed to determine its enforceability
before the bond issues; that all professionais performed
their jobs negligently and rendered inaccurate information
to the Supply System; and that predictions of the need for -
power made by the BPA were inaccurate. Several of plain-
tiffs' counts were not addressed by the trial court and were
not briefed on this appeal.
The complaints reveal several bases upon which these
actions are brought: aid in preparation of the Official
Statements, which contained misstatements and material
omissions; making negligent or fraudulent recommenda-
tions regarding need, cost, and feasibility to the Supply
System that were placed in the Official Statements and
Annual Reports, and were relied upon by the Supply Sys-
tem, bond rating agencies, government agezcies, plaintiffs
and intervenors; participation in the Supply System board
of directors meetings and Participants’ committee meet-
ings; and omissions and misstatements regarding the
enforceability of the Participants' Agreement.
Both plaintiffs and intervenors alleged violations of The
Securities Act of Washington (WSSA), RCW 21.20, and
asserted derivative negligent misrepresentation claims. The
intervenors also alleged common law negligent misrepre-
sentation, fraud, and violations of the Consumer Protection
Act. Plaintiffs also alleged violations of the federal Securi-
ties Act of 1933, sought to add new plaintiffs and defend-
ants, and to overturn the trial court ruling that service on
Patterson and Pardo was defective.
The trial court dismissed all plaintiffs' and intervenors'
claims pursuant to CR 12(b)(6) (failure to state a claim
upon which relief may be granted). Plaintiffs and interve-
nors appealed; we accepted direct review.
|
THE STANDARD OF ReEvIEwW
[1] A trial court may grant dismissal for failure to state
a claim under CR 12(b)(6) only if "'it appears beyond
doubt that the plaintiff can prove no set of facts, consistent
l4a
with the complaint, which would entitle the plaintiff to
relief." Bowman v. John Doe, 104 Wn.2d 181, 183, 704
P.2d 140 (1985); Orwick v. Seattle, 103 Wn.2d 249, 254, 692
P.2d 793 (1984). CR 12(b)(6) motions should be granted
"sparingly and with care". Orwick, at 254.
A plaintiffs factual allegations are presumed true for
purposes of a CR 12(b)(6) motion. Lawson v. State, 107
Wn.2d 444, 448, 730 P.2d 1308 (1986); Bowman, at 183. A
complaint survives a CR 12(b)(6) motion if any state of
facts could exist under which the court could sustain the
claim for relief. Lawson, at 448; Bowman, at 183; Orwick, at
255. Thus, a court may consider hypothetical facts not part
of the forma! record in deciding whether to dismiss a com-
plaint pursuant to CR 12(b)(6). Halvorson v. Dahl, 89
Wn.2d 673, 675, 574 P.2d 1190 (1978).
CR 12(b)(6), read together with CR 8(a)(1), requires the
court to decide whether the allegations in a complaint con-
stitute a short and plain statement of the claim showing
that the pleader is entitled to relief. Orwick, at 254. The
court need not accept legal conclusions as correct. See
Orwick, at 254; State ex rel. Pirak v. Schoettler, 45 Wn.2d
367, 370, 274 P.2d 852 (1954). When an area of the law
involved is in the process of development, courts are reluc-
tant to dismiss an action on the pleadings alone by way of a
CR 12(b)(6) motion. 3A L. Orland, Wash. Prac. § 5152 (3d
ed. 1980).
Notwithstanding the trial court's characterization of its
dismissal as pursuant to CR 12(b)(6), respondents argue
that because the court considered materials outside the
complaint in reaching its decision, the dismissal should
have been pursuant to CR 56 (summary judgment). See CR
12(b). (CR 12(b)(6) motion is converted into CR 56 sum-
mary judgment motion whenever matters outside the
pleadings are presented to and accepted by the court.)
[2] While the submission and consolidation of extrane-
ous materials by either party normally converts a CR
12(b)(6) motion to one for summary judgment, if the court
can say that no matter what facts are proven within the
l5a
context of the claim, the plaintiffs would not be entitled to
relief, the motion remains one under CR 12(b)(6). See
Loger v. Washington Timber Prods., Inc., 8 Wn. App. 921,
924, 509 P.2d 1009, review denied, 82 Wn.2d 1011 (1973).
In such @ case, the presentation of extraneous evidence
would be immaterial. Loger, at 924. In Loger, the trial judge
considered matters outside the pleadings to enable him to
understand the context of the CR 12 motion ao as to rule
on it as a matter of law, without reaching or resolving any
factual dispute. Loger, at 926.
Plaintiffs and intervenors also argue that the trial court
made factual findings. These purported findings were, now-
ever, determinations of law based upon the facts alleged in
the complaint. We find that although the trial court con-
sidered matters extraneous to the complaints, it ruled as a
matter of law that plaintiffs and intervenors had not stated
a claim and did not make any determination of facts in
dispute. We conclude that the proper standard of review
remains that required by CR 12(b)(6). We therefore pro-
ceed to the remaining issues with this standard of review in
mind.
II
Res JupicaTa CLaims
Respondents argue that the doctrine of res judicata bars
plaintiffs’ and intervenors' claims. We disagree. This court
previously determined that the Participants were not liable
to repay principal and interest on WNP 4 and WNP 5
bonds because their obligations to do so were ultra vires
acts, or unenforceable because of commercial frustration,
impossibility, and mutual mistake. See Chemical Bank I;
Chemical Bank II.
[3} Res judicata prevents relitigation of claims already
decided. Meder v. CCME Corp., 7 Wn. App. 801, 803, 502
P.2d 1252 (1972), review denied, 81 Wn.2d 1011 (1973).
While res judicata bars relitigation of claims necessarily a
part of a previous matter in controversy, it poses no bar to
claims not in fact adjudicated previously. Seattle-First
| | ——————
16a
Nat'l Bank v. Kawachi, 91 Wn.2d 223, 226, 588 P.2d 725
(1978).
The prior Chemical Bank litigation dealt solely with
contract claims between the Supply System and the Partic-
ipants. No securities, consumer protection, or common law
tort claims were at issue. A motion brought by plaintiffs to
intervene in the Chemical Bank cases was denied as
untimely. See Chemical Bank Il, at 889. We conclude that
res judicata does not bar the claims before this court.
Il
FEepeRAL Securities Act CLaims
Plaintiffs argue that the trial court improperly dismissed
their federal securities claims. Section 12(2) of the federal
Securities Act of 1933, 15 U.S.C. § 77/(2), provides a cause
of action against any person who “offers or sells a security"
through a prospectus containing misrepresentations or
omissions. Section 3(a)(2) of the act exempts from section
12 any security issued by a public instrumentality. 15
U.S.C. § 77c(a)(2) (1981). While plaintiffs acknowledge that
the WNP 4 and WNP 5 bonds are exempt from section 12,
they claim that the Participants’ guaranties of those bonds
constitute separate securities that are subject to section 12
liability. Plaintiffs contend that whether the guaranties
were separate securities was a factual question improperly
decided by the trial court on a motion to dismiss.
First, we note that federal courts consistently dtermine
as a matter of law whether investment schemes are securi-
ties. See, e.g., Black v. Payne, 591 F.2d 83, 86 n.1, 88 (9th
Cir.) (affirming Fed. R. Civ. P. 12(b)(6) dismissal because
no security involved), cert. denied, 444 U.S. 867 (1979); De
Luz Ranchos Inv. Ltd. v. Coldwell Banker & Co., 608 F.2d
1297, 1299-1301 (9th Cir. 1979) (question of law whether
investment scheme constituted a security); Mason v. Unke-
less, 618 F.2d 597, 598 (9th Cir. 1980) (dismissal for failure
to show a security was involved proper on Fed. R. Civ. P.
12(b)(6) motion); Frederikson v. Poloway, 637 F.2d 1147,
1153-54 (7th Cir.), cert. denied, 451 U.S. 1017 (1981) (dis-
17a
missal because no security involved); Ahrens v. American-
Canadian Beaver Co., 428 F.2d 926, 928 (10th Cir. 1970)
(question of law whether contracts were securities).
[4] Next, we agree with the trial court's conclusion that
the Participants' guaranties were not separate securities. A
similar argument was rejected in Woods v. Homes & Struc-
tures of Pittsburg, Kan., Inc., 489 F. Supp. 1270 (D. Kan.
1980). There, municipal bond purchasers sought to avoid
the section 3(a)(2) exemption by arguing that certain
insurance company guaranties attached to the bonds as
certificates were separate securities subject to section 12(2).
Woods, at 1292-94. The court noted that the guaranties
had not been sold, nor could they have been purchased
separately from the bonds. Woods, at 1293. The court con-
cluded that the presence of the guaranties did not destroy
the exemption created by the Securities Act of 1933
because the bonds were exempt and because the guaranties
were part of those bonds. Woods, at 1293. See also Johns
Hopkins Univ. v. Hutton, 422 F.2d 1124, 1128 (4th Cir.
1970).
Here, no separate Participants’ guaranty existed. The
Participants "guaranteed" only that they would purchase
their share of WNP 4 and WNP 5 Project Capability
whether or not power was produced. This obligation was an
indirect guaranty of the bonds only by virtue of resolution
890, which empowered the Supply System to collect the
amounts owed by the Participants pursuant to the Partici-
pants’ Agreement to pay debt service to the bonds issued.
The Participants did not guarantee payment on the bonds
directly. The guaranties were neither sold, nor marketed,
and could not have been purchased apart from the bonds.
We conclude that the guaranties were not separate secur-
ities.
Finally, plaintiffs argue that our ruling in Chemical Bank
I, voiding the Participants’ guaranties as ultra vires, con-
verted them into separate, nonexempt securities. This con-
tention is without merit. Our Chemical Bank | and II
decisions did not hold the guaranties nonexistent; rather we
18a
held the guaranties unenforceable. Even if we assume that
the guaranties were somehow "converted" into separate
securities, such securities remain exempt from section 12(2)
liability because the Participants are all public instrumen-
talities within the meaning of section 3(a)(2) of the Securi-
ties Act of 1933. The trial court's dismissal of plaintiffs’
Securities Act of 1933 claims is affirmed.
IV
Securities ACT OF WASHINGTON
Plaintiffs and ‘ntervenors allege that all respondents
made materia] misrepresentations and omissions in connec-
tion with the bond sales in violation of the Securities Act of
Washington (WSSA). They sought recovery pursuant to the
civil liability provisions of RCW 21.20.430(1), (3). The trial
court dismissed all WSSA claims, holding as a matter of
law that no respondent was a seller under RCW 21.20-
.430(1); that no respondent controlled a seller within the
meaning of RCW 21.20.430(3); and that RCW 21.20.430(7)
barred negligence claims against all respondents except
bond counse! Wood & Dawson because it requires proof of
scienter.
A
Seller Claims Under RCW 21.20.430(1)
Plaintiffs and intervenors seek recovery under RCW
21.20.430(1) which provides that:
Any person, who offers or sells a security in violation
of any provisions of RCW 21.20.010 or 21.20.140 through
.. 20.230, is liable to the person buying the security
from him or her, who may sue either at law or in equity
to recover the consideration paid for the security,
together with interest at eight percent per annum from
the date of payment, costs, and reasonable attorneys’
fees, less the amount of any income received on the secu-
rity, upon the tender of the security, or for damages if he
or she no longer owns the security. Damages are the
amount that would be recoverable upon a tender less (a)
the value of the security when the buyer disposed of it
and (b) interest at eight percent per annum from the
date of disposition.
19a
(Italics ours.) Plaintiffs and intervenors allege that respon-
dents violated RCW 21.20.010(2) and (3) by making mate-
rial misrepresentations, or omitting necessary facts to make
statements not misleading, in the Official Statements and
Annual Reports.
Plaintiffs and intervenors contend that the trial court
erred in concluding that RCW 21.20.430(1) imposes liability
only on the literal seller of & security who passes title
directly to the plaintiff. Instead, plaintiffs and intervenors
argue that RCW 21.20.430(1), like its federal counterpart
from which it was derived, section 12(2) of the Securities
Act of 1933, 15 U.S.C. § 77/(2), imposes liability on those
persons who are a substantial factor in a sale of securities
[5] Washington's securities fraud laws are modeled after
the Uniform Securities Act. RCW 21.20.430 parailels sec-
tion 410 of the Uniform Securities Act, which in turn is
modeled after section 12(2) of the federal Securities Act of
1933. See Comment, Uniform Securities Act § 410, 7B
U.L.A. 644 (1985); L. Loss, Commentary on the Uniform
Securities Act 147-48 (1976). Our Legislature provided that
the WSSA
shall be so construed as to effectuate its general purpose
to make uniform the law of those states which enact it
and to coordinate the interpretation and administration
of this chapter with the related federal regulation.
RCW 21.20.900. We have interpreted this provision to
require harmony but not exact parallelism with other
states’ and federal] law. Kittilson v. Ford, 93 Wn.2d 223,
227, 608 P.2d 264 (1980); see Clausing v. DeHart, 83 Wn.2d
70, 72-73, 515 P.2d 982 (1973) (applying federal analysis of
Securities Exchange Act of 1934 to RCW 21.20.010). We
note that while the purpose of federal securities laws is to
maintain the integrity of the secondary securities markets
and to enforce disclosure, the WSSA is intended to protect
investors. Comment, Securities Fraud Under the Blue Sky
of Washington, 53 Wash. L. Rev. 279, 282 n.10 (1978).
Rooks, The Blue Sky of Washington: Registration of Secu-
rities of a New Venture, 6 Gonz. L. Rev. 187, 188 (1971).
LOE
20a
‘lo this end, this court has construed the WSSA broadly.
See McClellan v. Sundhelm, 89 Wn.2d 527, 533, 574 P.2d
371 (1978).
At least two Washington Court of Appeals decisions have
interpreted the WSSA to impose liability upon persons
rendering assistance in preparation of an unlawful sale of
securities in violation of RCW 21.20.010. See Goiberg vw.
Sanglier, 27 Wn. App. 179, 193, 616 P.2d 1239 (1980) (rely-
ing on Kaas v. Privette, 12 Wn. App. 142, 151, 529 P2d 23
(1974)), rev'd on other grounds, 96 Wn.2d 874, 639 P.2d
1347, 647 P.2d 489 (1981). However, both decisions appar-
ently presumed that liability attached pursuant to RCW
21.20.010 without determining civil liability under RCW
21.20.430{1).
In McClellan v. Sundholm, supra at 534, the court held a
salesman liable under RCW 21.20.430(1) as a seller
although the purchase agreement was between the buyer
and the salesman's employer. Without discussing the
absence of privity, the court found that because the eales-
man’s actions constituted an “affer* of a security, hm dis-
position of the security through the purchase agreement
constituted a sale. McClellan, at 534.
Thus, although we have imterpreted the offer and aell
language in RCW 21.20.430(1) to be brosd enough to
include face to face "dispositions" of securities where priv-
ity is absent, we have not yet decided the scope of liability
where privity is lacking.
An examination of federa! court decisions interpreting
section 12(2) of the Securities Act of 1933, 15 U.S.C. §
771{2) shows that only two circuiis require privity between
a plainud -purchasar and defendant-seller. See, e.g., Col-
lins vw. Signetics Corp., 605 F.2d 110, 113-14 (3d Cir. 1979);
Sanders v. John Nyveen & Co., 619 F.2d 1222, 1226 {7tb
Cir. 1980), cert. denied, 450 U.S. 1005 (1981). This
approach emphasizes the statutory language of section
(2(2) im light of the Supreme Court's strict construction in
securities cases not involving section 12(2). See, e.g., Tou-
che Russ & Co. v. Redington, 442 US. 560, 578, 61 L. Ed.
Zla
2d 82, 99 S. Cu 2479 (1979) (generelized references to the
remedia) purposes of The Securities Exchange Act of 1934
do not justify reading a provision more broadly than its
language and the statutory scheme reasanably permit). In
Collins, for example, the court concluded that a hroad
interpretation of section 12(2) would be contrary to its
plain meaning and frustrate the overall statutory scheme
where Congress had already provided a specific remedy for
the purchaser against the defendant issuer of the securities
in section 11 of the Securities Act of 1933. Collins, at 113.
The majority of the federal circuits, however, have con-
strued the term seller to include those whose participation
in the sale was a substantial factor in causing the transac
tion to take place. See, e.g., Lawler v. Gilliam, 569 F.2d
1283, 1287 (4th Cir. 1978); Pharo v. Smith, 621 F.2d 656,
665-67 (5th Cir. 1980), rev'd in part on other grounds on
rehearing, 625 F.2d 1226 (5th Cir. 1980); Davis »v AVCO
Fin. Servs., 739 F.2d 1057, 1063-63 (6th Cir. 1984), cert.
denied, 470 U.S. 1005, 472 U.S. 1012 (1985); Stokes v. Lok-
ken, 644 F.2d 779, 785 (8th Cir. 1981); Anderson v. Auro-
tek, 774 F.2d 927, 930 (9th Cir. 1985); SEC v. Murphy, 626
F.2d 633, 650 (9th Cir. 1980); Foster uv. Jesup & Lamont
Sec. Co., 759 F.2d 838, 843-44 (11th Cir. 1985), afPd, 782
F.2d 901 (11th Cir. 1986); see also In re Wicat Sec. Litig ,
600 F. Supp. 1236, 1239, 1242 (D. ijtah 1984) (althougi
question of whether strict privily required not yet decided
by Tenth Circuit, heavy weight of authority suggests sub-
stantial factor approach); Cady v. Murpky, 113 F.2d 988,
990 (ist Cir.), cert. denied, 311 U.S. 785 (1940) (broker who
acted as agent for seller could be liable under section
12(2)).
‘The Supreme Court has aot yet addressed this issue, but
has most recently emphasized the cumulative remedial!
purpose of the securities laws is not to be ignored in their
interpretation. See Herman & Maclean v Huddleston, 459
U.S. 375, 386-87, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983).
see also Davis, 739 F.2d at 106¢ (Supreme Court has called
for flexible yet litersi mterpretetian of the securities acts)
22a
This substantial factor-proximate cause approach origi-
nated in Lennerth v. Mendenhall, 234 F. Supp. 59, 65
(N.D. Ohio 1964), where the court stated:
[L]jiability must lie somewhere between the narrow view,
which holds only the parties to the sale, and the too-lib-
eral view which would hold all who remotely participated
in the events leading up to the transaction. We think
that the line of demarcation must be drawn in terms of
cause and effect: To borrow a phrase from the law of
negligence, did the injury to the plaintiff flow directly
and proximately from the actions of this particular
defendant? If the answer is in the affirmative, we would
hold him liable. But for the presence of the defendant
. . in the negotiations preceding the sale, could the sale
have been consummated? If the anawer is in the nega-
tive, and we find that the transaction could never have
materialized without the efforts of that defendant, we
must find him guilty.
. . . The hunter who seduces the prey and leads it to
the trap he has set is no less guilty than the hunter
whose hand springs the snare. We find that the activity
of the corporate defendant's agent . . . is tantamouni to
that of a "seller" within the liberal remedial spirit of the
securities laws.
The Lennerth court's proximate cause theory has been
refined to the present substantia] factor—proximate cause in
subsequent cases. Davis, at 1066-67.
The Davis court concluded that a substantia! factor test
"constitutes an appropriate synthesis of the sometimes
antithetical policies that the securities laws are to be con-
strued as statutes while, at the same time, giving effect to
their far-reaching remedial purpose." Davis, at 1067.
Indeed, as noted by one commentator, a strict privity
requirement applied to a firm commitment underwriting
agreement, where underwriters buy the securities from the
corporation without recourse if they cannot sell the entire
block of shares, would allow a cause of action only against
the underwriter, even where the corporation was the issuer
raising capital through the sale. Note, Seller Liability
Under Section 12(2) of the Securities Act of 1933: A Prox-
23a
imate Cause Substantial Factor Approach Limited by a
Duty of Inquiry, 36 Vand. L. Rev. 361. 389-90 (1983). Such
a result could not have been intended by Congress and
should not be allowed to defeat the remedial purposes of
the securities laws. Note, 36 Vand. L. Rev., at 389-90.
A review of other states’ decisions as to the scope of
"seller" under their securities laws is inconclusive. The
Oklahoma Supreme Court refused to construe language in
its statute similar to that in RCW 21.20.430(1) to include
participants in the securities transaction. Nikkel v. Stifel,
Nicolaus & Co., 542 P.2d 1305, 1307 (Okla. 1975). On the
other hand, the Minnesota Court of Appeals has adopted a
substantial factor test to determine seller liability under its
securities act based on section 410 of the Uniform Securi-
ties Act and section 12(2). Anders v. Dakota Land & Dev.
Co., 380 N.W.2d 862 (Minn. Ct. App. 1986). This court's
research disclosed no other state court decisions construing
state securities laws similar to RCW 21.20.430(1).
Although other federal courts have construed similar
state securities statutes, the decisions do not reflect state
court analysian They instead reflect a federal analysis of
section 12(2) as applied to the state law in question. More-
over, the analysis applied by federal trial courts in these ~
cases is usually that of their respective federal circuits. See.
e.g., Dahl v. Pinter, 787 F.2d 985, 991 (5th Cir. 1986)
(Texas test for seller liability substantially similar to Fifth
Circuit substantial factor test), cert. granted, __ U.S. ame
95 L. Ed. 2d 493, 107 S. Ct. 1885 (1987); Huddleston v.
Herman & MacLean, 640 F.2d 534, 550-51 (5th Cir. 1981)
(interpreting Texas Securities Act to impose liability on
persons constituting a substantial factor in sale, noting that
Texas statutory comments referred to section 12(2) as
model for state act and noting that the Fifth Circuit uses
substantial factor test), rev'd on other grounds, 459 U.S.
375 (1983); see also Anderson v. Aurotek, 774 F.2d at 929
n.l (assuming that Washington securities statute inter-
preted in same manner as section 12(2), finding substantia!
factor liability); SEC v. Seaboard Corp., 677 F.2d 1289,
24a
1295 (9th Cir. 1982) (California requires direct privity, no
California precedent); Jn re Victor Technologies Sec. Litig.,
Blue Sky L. Rep. (CCH) # 72,491 (N.D. Cal. 1987) (relying
on Jn re Diasonics Sec. Litig., 599 F. Supp. 447, 459 (N.D.
Cal. 1984) (finding that California Securities Act requires
privity)); Jn re Catanella & E.F. Hutton & Co. Sec. Litig.,
583 F. Supp. 1388, 1440 (E.D. Pa. 1984) (Pennsylvania
securities statute privity requirement likened to that found
in section 12(2)); Ging v. Parker-Hunter, Inc., 544 F. Supp.
49, 52 (W.D. Pa. 1982) (determining that Pennsylvania
Securities Act requires strict privity, no Pennsylvania
precedent). In any event, federal law does not preempt or
control] state securities acts. See Securities Act of 1933, §
18, 15 U.S.C. § 77r.
[6] We conclude that the substantial factor—-proximate
cause definition of seller prevailing in the federal circuits
provides the best guidance for our analysis of seller liability
under RCW 21.20.430(1). We note that our conclusion is in
accord with the views expressed in the official comments to
the recently revised Uniform Securities Act of 1985.
Although not adopted in Washington, new section 605(a) of
the Uniform Securities Act contains the language of old
section 410 upon which RCW 21.20.430(1) was based. The
official comments to section 605(a) state that under this
section, "liability may be imposed on a person in addition
to the immediate seller if the person's participation was a
substantial contributive factor in the violation." Uniform
Securities Act, § 605 comment, 7B U.L.A. 81 (Supp. 1987)
(citing Davis, 739 F.2d at 1057). We believe this approach
best promotes the legislative purpose behind the WSSA,
while harmonizing our statutory scheme with federal and
other state decisions. We also believe this definition is in
harmony with similar developments in general tort law.
Davis, at 1066.
The Ninth Circuit has described its substantial factor-
proximate cause analysis as follows:
In assessing proximate cause, courts focus first on
whether a defendant's acts were the actual cause of the
25a
injury, i.e., whetner ‘but for’ the defendant's conduct,
there would have been no sale. Nicewarner v. Bleavins,
supra, 244 F. Supp. [261] at 266 (D.Colo.1965); see Hill
York Corp. v. American International Franchises, Inc.,
448 F.2d [680, 693 (5th Cir. 1971)]; Lennerth v. Menden-
hall, supra, 234 F.Supp. at 65. A finding of "but for’
causation, alone, does not satisfy proximate cause, how-
ever. See Nicewarner v. Bleavins, supra, 244 F.Supp. at
266; R. Jennings & H. Marsh, Securities Regulation 1096
(4th ed. 1977); W. Prosser, Handbook of the law of Torts
238-39, 244 (4th ed. 1971). Prior to the issuance of a
security, numerous persons perform mechanical acts
without which there could be no sale. For example, a
printer may prepare key documents or a bank may
advance cash to a customer upon the customer's presen-
tation of an instrument and then pass the instrument to
another person. Both would satisfy a "but for" causation
test, but these acts nonetheless do not render the
defendants sellers. See First Trust & Savings Bank v.
Fidelity-Philadelphia Trust Co., 214 F.2d 320 (3d Cir.
1954); Ruder, Muitiple Defendants in Securities Law
Fraud Cases, 120 U.Pa.L.Rev. 597, 646 (1972). Before a
person's acts can be considered the proximate cause of a
sale, his acts must also be a substantial factor in bringing
about the transaction. Lewis v. Walston & Co., Inc., 487
F.2d 617, 621-22 (5th Cir. 1973). See Restatement (Sec-
ond) of Torts § 431 (1965).
SEC v. Murphy, 626 F.2d 633, 650 (9th Cir. 1980).
In a similar fashion, we hold that a defendant is liable as
a seller under RCW 21.20.430(1) if his acts were a substan-
tial contributive factor in the sales transaction. Considera-
tions important in determining whether a defendant's
conduct is a substantial contributive factor in the sales
transaction include: (1) the number of other factors which
contribute to the sale und the extent of the effect which
they have in producin, t; (2) whether the defendant's con-
duct has created a force or series of forces which are in
continuous and active operation up to the time of the sale,
or has created a situation harmless unless acted upon by
other forces for which the actor is not responsible; and (3)
lapse of time. See generally Restatement (Second) of Torts
26a
§§ 432, 433 (1977). Whether a defendant's conduct was a
substantial contributive factor is necessarily a question of
fact.
We emphasize that our adoption of a substantial con-
tributive factor test to determine seller liability under
RCW 21.20.430(1) is distinct from the test for participant
liability pursuant to RCW 21.20.430(3). Our substantial
contributive factor analysis simply expands the strict priv-
ity approach to sellers so as to include those parties who
have the attributes of a seller and thus who policy dictates
should be subject to liability under RCW 21.20.430(1), but
who would escape primary liability for want of privity.
Here, for example, the Supply System sold all the bonds
to underwriters who then sold them to plaintiffs and inter-
venors. If we were to require strict privity for liability
under RCW 21.20.430(1), only the underwriters would be
potentially liable for prospectus fraud, cutting off all
potential claims against the issuer of the bonds and others
acting together with the issuer who were the actual benefi-
ciaries of the sale proceeds. The result allows issuers of
securities to insulate themselves from liability to ultimate
purchasers simply by selling to middlemen beyond their
control, even in situations where they know that the securi-
ties will be resold immediately to buyers who will rely on
Official Statements and Annual Reports written by the
issuer to facilitate the sales. Unlike the federal Securities
Act of 1933, § 11, the WSSA does not provide for separate
issuer liability. Thus, if privity were required for liability
under RCW 21.20.430(1), an issuer in a firm commitment
underwriting would never be liable, regardless of its culpa-
bility. We find such a result contrary to the clear purposes
of the WSSA.
RCW 21.20.430(1) liability remains based on a defend-
ant's status as seller. RCW 21.20.430(3) liability is based on
other defendants’ relationships to a seller liable under
RCW 21.20.430(1). Therefore, respondents' argument that a
substantial contributive factor approach to seller in RCW
21.20.430(1) would render RCW 21.20.430(3) meaningless is
27a
without merit. Although some secondarily liable parties
under RCW 21.20.430(3) may also be liable as sellers under
RCW 21.20.430(1), clearly not all secondarily liable parties
are sellers under the substantial contributive factor test.
Thus, as contemplated by the statutory scheme, partici-
pants who are involved in a securities sale, but who are not
substantial contributive factors, may be subject to second-
ary liability under RCW 21.20.430(3).
We therefore reverse the trial court's dismissal of plain-
tiffs’ and intervenors' securities claims under RCW 21.20-
.430(1).
B
Secondary Liability Claims Under RCW 21.20.430(3)
Our conclusion that seller liability pursuant to RCW
21.20.430(1) is to be determined through a substantial con-
tributive factor analysis necessarily requires us to reverse
the trial court's dismissal] of plaintiffs' and intervenors' sec-
ondary liability claims pursuant to RCW 21.20.430(3).
Because secondary liability under RCW 21.20.430(3) would
be based on a party's relationship to a seller of securities,
the sufficiency of plaintiffs’ and intervenors' allegations of
secondary liability can only be determined after the sellers
are identified. We also reverse the trial court's determina-
tion that respondent nonmember Participants are not sec-
onderily liable because they did not control the Supply
System. For purposes of our CR 12(b)(6) standard of
review, it is conceivable that nonmember Participants may
be secondarily liable because of their relationship to a party
other than the Supply System. We cannot say, without a
determination of all sellers potentially liable under RCW
21.20.430(1), that these respondents did not contro! any
seller.
C
Implied Remedy Under RCW 21.20.010
In the alternative, intervenors argue that RCW 21.20.010
provides an implied remedy to fil! any liability gap created
by a strict privity requirement under RCW 21.20.430(1).
28a
Because we find that RCW 21.20.430(1) provides an express
remedy available to intervenors, we need not address the
issue.
D
Extraterritorial Application of the WSSA
Respondent Smal! Utilities Group contends that the trial
court's dismissal of plaintiffs’ and intervenors’ WSSA
claims should be upheld because the WSSA should not be
applied extraterritorially to out-of-state defendants or
transactions. Small Utilities Group also contends that
extraterritorial application of the WSSA would violate the
commerce clause. We disagree with both contentions.
[7] Initially, we note that this issue involves the choice
of law to be applied in this case rather than whether the
WSSA can be applied extraterritorially to regulate out-—of-
state transactions. Here, we are not concerned with the
application of the WSSA within another state's jurisdiction.
Instead, the question before us is whether the WSSA
applies in an action brought in a Washington forum where
out-of-state parties are under this State's jurisdiction. As a
result, choice of law principles govern our analysis.
This court employs a "most significant relationship"
standard to determine what law governs in a contracts or
torts case. Southwell v. Widing Transp., Inc., 101 Wn.2d
200, 204, 676 P.2d 477 (1984); Johnson v. Spider Staging
Corp., 87 Wn.2d 577, 580, 555 P.2d 997 (1976). This stand-
ard requires a court to evaluate the contacts of the inter-
ested jurisdictions with respect to the claims at issue and
the interests and policies of those jurisdictions. Southwell,
at 204.
Here, Washington is clearly the state with the most sub-
stantial contacts with the subject matter of this case. The
bonds at issue were issued by the Supply System to finance
two nuclear power plants in Washington. The Supply Sys-
tem, respondent members and directors, one respondent
bond counsel, as well as the majority of the respondent
Participants are Washington residents. All respondents had
29a
substantial business dealings in Washington, and the Offi-
cial Statements and Annual Reports allegedly containing
misrepresentations emanated from this state. No party
contends that another state's securities act applies. More-
over, Washington State has an interest in regulating the
conduct of parties involved in the sale of bonds issued by a
municipal corporation, the Supply System, to finance con-
struction of in-state power generating facilities. We con-
clude that the contacts of the parties involved, the claims at
issue, and the interests of this State dictate our application
of the WSSA to this case.
Nevertheless, Smal] Utilities Group contends that our
application of the WSSA would violate the commerce
clause. Their argument is based on Edgar v. MITE Corp.,
457 U.S. 624, 641, 73 L. Ed. 2d 269, 102 S. Ct. 2629 (1982).
Edgar involved a commerce clause challenge to an Illinois
statute regulating corporate takeovers in a multistate con-
text. The statute could be applied to regulate tender offers
not affecting Illinois shareholders. Edgar, at 642. The Court
found that the burden on interstate commerce posed by the
statute was not counterbalanced by local interests, and that
the statute upset the balance struck by Congress between
corporate management and takeover bidders in its regula-
tion of interstate tender offers. Edgar, at 643-46. The Court
noted that an impermissible conflict between federal and
state regulation of commerce exists where compliance with
both federal and state regulations is physically impossible,
or where state law interferes with the accomplishment and
execution of congr<ssional purposes and objectives. Edgar,
at 631. .
[8] Here, our application of the WSSA does nui impinge
on federal regulation of commerce as did the Illinois anti-
takeover statute under scrutiny in Edgar. First, our appli-
cation of the WSSA to this case is based on the substantia!
relationship between the subject matter, the parties, and
the forum state. Unlike the Illinois statute in Edgar, we do
not attempt to apply the WSSA to transactions completely
unrelated to Washington. Moreover, in contrast to the cor-
30a
porate takeover regulations at issue in Edgar, Congress
explicitly provided that federal and state securities regula-
tion may co-exist absent conflict. See 15 U.S.C. §§ 77r,
78bb(a) (1981). The WSSA is intended to be coordinated
with related federal regulation. RCW 21.20.900. Our appli-
cation of the WSSA in this case in no way affects the fed-
eral regulatory scheme enacted by Congress to regulate
interstate securities transactions. Finally the impact of our
application of the WSSA on interstate commerce does not
rise to the level of an impermissible burden like that found
in Edgar.
Not every exercise of state power with some impact on
interstate commerce is invalid. A state statute must be
upheld if it "regulates evenhandedly to effectuate a legit-
imate local public interest, and its effects on interstate
commerce are only incidenta! ... unless the burden
imposed on such commerce is clearly excessive in relation
to the putative local benefits."
Edgar, at 640, citing Pike v. Bruce Church, Inc., 397 U.S.
137, 142, 25 L. Ed. 2d 174, 90 S. Ct. 844 (1970).
Washington's interests in regulating bond issues by
municipal corporations, and in providing a forum for claims
arising from those issues outweigh the impact that our
application of the WSSA in this case will have on interstate
commerce, particularly when considering the substantial
relationship between this state and the case in controversy.
See In re WPPSS Sec. Litig., [new matters] Blue Sky L.
Rep. (CCH) § 72,371, 71,683 (W.D. Wash. 1986); Lewis v.
Berry, No. C82-1244VR (W.D. Wash. May 24, 1985)
(WSSA antifraud provision does not burden interstate
commerce; it is clearly justified by the local interests
served). Thus, we find no violation of the commerce clause.
The WSSA may be properly applied to this case.
E
Scienter Amendment Claims
The trial court held that RCW 21.20.430(7) applied
retroactively to bar plaintiffs’ and intervenors’ WSSA
claims. Plaintiffs and intervenors, together with respon-
3la
dent/cross-appellaut Wood & Dawson, challenge RCW
21.20.430(7) on several constitutional grounds.
As amended in 1985, RCW 21.20.430(7) provides that:
Notwithstanding subsections (1) through (6) of this
section, if an initial offer or sale of securities that are
exempt from registration under RCW 21.20.310 is made
by this state or its agencies, political subdivisions,
municipal or quasi--municipal corporations, or other
instrumentality of one or more of the foregoing and is in
violation of RCW 21.20.010(2), and any such issuer,
member of the governing body, committee member, pub-
lic officer, director, employee, or agent of such issuer act-
ing on its behalf, or person in control of such issuer,
member of the governing body, committee member, pub-
lic officer, director, employee, or agent of such person
acting on its behalf, materially aids in the offer or sale,
such person is liable to the purchaser of the security only
if the purchaser establishes scienter on the part of the
delenilant, The word "employee" or the word “agent,” as
such words are used in this subsection, do not include a
bond counse! or an underwriter. Under no circumstances
whatsoever shall this subsection be applied to require
purchasers to establish scienter on the part of bond
counsels or underwriters.
(Italics ours.) RCW 21.20.430(7) (Laws of 1985, ch. 171, §
1). The Legislature again amended RCW 21.20.430(7) in
1986, adding that:
The provisions of this subsection are retroactive and
apply to any action commenced but not final before July
27, 1985. In addition, the provisions of this subsection
apply to any action commenced on or after July 27, 1985.
(Italics ours.) RCW 21.20.430(7) (Laws of 1986, ch. 304, §
i).
1. Equal Protection
Initially, plaintiffs and intervenors ergue that RCW
21.20.430(7) violates their state and federal equal protec-
tion guaranties by treating similarly situated persons
unequally. They contend that RCW 21.20.430(7) impermis-
sibly distinguishes between public and private defendants,
and in-state and out-of-state public issuers.
32a
Within the context of their equal protection claims,
intervenors also contend that RCW 21.20.430(7) violates
the federal commerce clause because it discriminates
between in-state and out-of-state public issuers. However,
intervenors' argument mischaracterizes the nature of the
commerce clause. While the commerce clause is designed to
prevent states from burdening the free flow of interstate
commerce, Massachusetts v. United States, 435 U.S. 444,
462, 55 L. Ed. 2d 403, 98 S. Ct. 1153 (1978), the equal pro-
tection clause protects persons from unconstitutional! dis-
crimination by the states, Metropolitan Life Ins. Co. v.
Ward, 470 U.S. 869, 881, 84 L. Ed. 2d 751, 105 S. Ct. 1676,
reh'g denied, 471 U.S. 1120 (1985). Here, intervenors' com-
merce clause claims are better characterized as part of their
equal protection claims; we will consider them as such.
Respondents argue that because plaintiffs’ and interve-
nors' equal protection rights are not affected by the stat-
ute's distinction between public and private issuers, and
between in-state and out-of-state public issuers, they lack
standing to assert these claims. We agree.
The doctrine of standing prohibits a litigant from raising
another's legal rights. Allen v. Wright, 468 U.S. 737, 750-
51, 82 L. Ed. 2d 556, 104 S. Ct. 3315, reh'g denied, 468 U.S.
1250 (1984). One who is not adversely affected by a statute
may not question its validity. State v. Carroll, 81 Wn.2d 95,
103-04, 500 P.2d 115 (1972); State v. Sluder, 11 Wn. App.
8, 10, 521 P.2d 971, review denied, 84 Wn.2d 1008 (1974).
Here, no plaintiff or intervenor is a public or private
defendant for RCW 21.20.430(7) purposes, and no out-—of-
state issuer of securities is party to this suit. Plaintiffs and
intervenors improperly attempt to assert the equal! protec-
tion rights of other parties and nonparties. We conclude
that plaintiffs’ and intervenors' state and federal equal
protection claims fail for lack of standing.
Notwithstanding plaintiffs’ and intervenors' lack of
standing, respondent/cross—appellant Wood & Dawson
argues that RCW 21.20.430(7) violates its equal protection
rights by distinguishing between a public issuer's bond
33a
counsel, against whom a plaintiff need only establish negli-
gence, and other employees and agents of that issuer,
against whom scienter must be proved. Wood & Dawson, as
bond counsel to the Supply System, a public issuer within
the meaning of RCW 21.20.430(7), does have standing to
assert its equa! protection claims.
[9] A party challenging a legislative classification has
the heavy burden of overcoming the presumption of a stat-
ute's constitutionality. Yakima Cy. Deputy Sheriff's Ass'n
v. Board of Comm'rs, 92 Wn.2d 831, 835, 601 P.2d 936
(1979), appeal dismissed, 446 U.S. 979, 64 L. Ed. 2d 835,
100 S. Ct. 2958 (1980). A statute should not be declared
unconstitutional unless it appears unconstitutional beyond
a reasonable doubt. State v. Maciolek, 101 Wn.2d 259, 263,
76 P.2d 996 (1984).
[10] At the threshold of any equa! protection determi-
nation, the court must identify the appropriate standard of
judicial review. Convention Ctr. Coalition v. Seattle, 107
Wn.2d 370, 378, 730 P.2d 636 (1986). Here, because RCW
21.20.430(7) does not involve a suspect classification or
fundamental right, we apply a rational basis test. See Con-
vention Ctr. Coalition, at 378.
Under a rationa! basis test the court must determine: (1)
whether the legislation applies alike to all members within
a designated class; (2) whether there are reasonable
grounds to distinguish between those within and those
without the class; and (3) whether the classification has a
rationa! relationship to the purpose of the legislation. Con-
vention Ctr. Coalition, at 378-79.
[11] Wood & Dawson first contends that RCW 21.20-
.430(7) treats members of the same class differently. Wood
& Dawson claims that some “agents” are subject to a scien-
ter standard while other “agents"—bond counsel—are sub-
ject only to negligence. We disagree. RCW 21.20.430(7)
clearly exempts bond counsel! from its definition of agent or
employee. As a result, the statute creates a distinction
between two classes, agents and bond counsel, not between
members of the same class
34a
Wood & Dawson next argues that no rational basis exists
for the RCW 21.20.430(7) distinction between bond counsel
and agents. Again we disagree. Under the rational basis
test, a statutory classification will be upheld if any state of
facts may reasonably be conceived to substantiate it. Auto-
mobile Drivers & Demonstrators, Local 882 v. Department
of Retirement Sys., 92 Wn.2d 415, 422, 598 P.2d 379 (1979),
appeal dismissed, cert. denied. 444 U.S. 1040 (1980); see
also Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522,
528, 3 L. Ed. 2d 480, 79 S. Ct. 437 (1959). Such a rational
basis for a legislative decision need not have actually moti-
vated the Legislature's decision. United States R.R
Retirement Bd. v. Fritz, 449 U.S. 166, 179, 66 L. Ed. 2d
368, 101 S. Ct. 453 (1986), reh'g-denied, 450 U.S. 960
(1981).
States are not required to convince the courts of the cor-
rectness of their legislative judgments. . .
[Pjarties challenging legislation under the Equal Pro-
tection Clause. . . cannot prevail so long as “it is evident
from all the considerations presented to [the legislature],
and those of which we may take judicial notice, that the
question is at least debatable.”
Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 464,
66 L. Ed. 2d 659, 101 S. Ct. 715, reh'g denied, 450 U.S. 1027
(1981) (quoting United States v. Carolene Prods. Co., 304
U.S. 144, 154, 82 L. Ed. 1234, 58 S. Ct. 778 (1938)).
Here, we find severa] reasonable grounds upon which the
Legislature could have based its decision to distinguish
agents of public issuers from bond counsel. First, the Leg-
islature could have reasonably concluded that bond counse!
should be held to a higher standard of care because of their
expertise upon which the public at large has a right to rely
Also, the Legislature may have concluded that because
bond counsel, like underwriters, are among the last “links
in the chain” in the sale of bonds to the public, they are in
a better position to protect the public from misrepresenta-
tions or omissions in the sale of securities. Thus, the Legis
lature may have retained a negligence standard to
eee
35a
encourage greater diligence on the part of bond counsel
prior to distribution of bonds to the public. Furthermore,
bond counsel typically provides the principal opinion letter
upon which the underwriters, investors and issuers rely to
determine the validity of an offering. See Comment, The
Function and Professional Responsibilities of Bond Coun-
sel, 16 Urb. Law. 489, 490-91 (1984). Bond counsel there-
fore perform different functions than other agents or
employees of public issuers. Finally, the Legislature may
have reasonably distinguished between bond counsel and
public issuer agents and employees on the basis of compen-
sation. Here, for example, plaintiffs allege that respondent
bond counsels’ compensation was based on a percentage of
the dollar value of the bonds sold. See Plaintiffs’ third
amended complaint, at 48; Clerk's Papers, at 1044. Bond
counse) may have a greater incentive to “sell” the bonds
than do agents or employees of public issuers who are com-
pensated by contract. The Legislature could have deter-
mined that bond counse! are thus more profit oriented and
less public interest oriented than other agents of a public
issuer. We conclude that reasonable grounds exist to sup-
port the Legislature's distinction between bond counsel and
other agents or employees of public issuers of securities.
With these grounds on which the Legislature could have
based its classifications in mind, we also conclude that the
classifications are rationally related to the remedial pur-
poses of the WSSA. Presuming that the Legislature had
reason to distinguish between bond counsel and other
agents of public issuers on the basis of their abilities to
protect the public, the Legislature's decision to hold bond
counsel! to a negligence standard must prevail.
Therefore, because there exists a reasonable basis for the
Legislature's distinction between bond counsel and other
agents of public issuers and because this basis is rationally
related to the overall purpose of the WSSA, we conclude
that RCW 21.20.430(7) does not violate Wood & Dawson's
state or federal! equal protection rights.
ee
36a
2. Special Legislation
[12] We also find that RCW 21.20.430(7) is not special
legislation prohibited by Const. art. 2, § 28(17). It is a gen-
eral law appliceble to all public issuers of securities that are
exempt from registration under RCW 21.20.310. See Libby,
McNeill & Libby v. Ivarson, 19 Wn.2d 723, 730, 144 P.2d
258 (1943) (special laws relate to particular persons or
things, while general laws operate on all persons or things
constituting a class); Swanson v. School Dist. 15, 109 Wash.
652, 654, 657, 187 P. 386 (1920) (statute relieving schooi
districts and their officers, agents or employees from liabil-
ity for injuries arising out of manual training equipment
not special legislation because the act appiied to all school
districts in state). Moreover, a party challenging a statute
as special legislation must show that the classification made
by a statute, as well as the statute itself, is not rationally
related to the purpose of the statute. See Seattle v. State,
103 Wn.2d 663, 675, 694 P.2d 641 (1985). Here, as our equal
protection analysis demonstrates, the Legislature's classifi-
cation in RCW 21.20.430(7) is a rational one, related to the
overall purposes of the WSSA. Plaintiffs and intervenors
fail to overcome the presumption of constitutionality as
required. We conclude that RCW 21.20.430(7} is not special
legislation prohibited by Const. art. 2, § 28(17).
3. Due Process
Next, Intervenors argue that retroactive application of
RCW 21.20.430(7) violates their state and federal due pro-
cess rights. We find this argument without merit.
[13] A claimant alleging deprivation of due process
must first establish a legitimate claim of entitlement.
Meyer v. UW, 105 Wn.2d 847, 853, 719 P.2d 98 (1986).
Legitimate claims of entitlement entail vested liberty or
property rights. Jn re Marriage of MacDonald, 104 Wn.2d
745, 748, 709 P.2d 1196 (1985). A claimant has no vested
right in the continuation of existing statutory law. Mac-
Donald, at 750. This court has held that statutory tort
claim rights under Washington law are not vested absent a
37a
final, unreviewable judgment. Seattle Rendering Works,
Inc. v. Darling-Delaware Co., 104 Wn.2d 15, 19, 701 P.2d
502 (1985); Johnson v. Continental West, Inc., 99 Wn.2d
555, 563, 663 P.2d 482 (1983); Haddenham v. State, 87
Wn.2d 145, 149-50, 550 P.2d 9 (1976); Sparkman &
McLean Co. v. Govan Inv. Trust, 78 Wn.2d 584, 587, 478
P.2d 232 (1970). Moreover, property interests for federal
due process purposes are not created by the United States
Constitution, but instead stem from independent sources
such as state law. Cleveland Bd. of Educ. v. Loudermill,
470 U.S. 532, 538, 84 L. Ed. 2d 494, 105 S. Ct. 1487 (1985).
Here, because intervenors have no claim of entitlement
to the pre-amendment terms of RCW 21.20.430(7), we con-
clude that retroactive application of the section does not
implicate any interest protected by state or federal due
process guaranties.
4. Separation of Powers
Intervenors also unclearly allege separation of powers
arguments as part of their due process claims. We find
these arguments unpersuasive.
[14] A statute prescribing new rules to be applied to
pending litigation is generally constitutional because it does
not violate the separation of powers clause. 16 C.J.S. Con-
stitutional Law § 127 (1984). Separation of powers princi-
ples are violated only when the Legislature infringes on a
judicial function. See United States v. Board of Educ., 588
F. Supp. 132, 134 (N.D. Ill. 1984); In re Consol. United
States Atmospheric Testing Litig., 616 F. Supp. 759, 770-
71 (N.D. Cal. 1985); United States v. Brainer 691 F.2d 691,
695 (4th Cir. 1982); United States v. Sioux Nation of Ind1-
ans, 448 U.S. 371, 402-05, 65 L. Ed. 2d 844, 100 S. Ct. 2716
(1980).
Intervenors rely on United States v. Klein, 80 US. (13
Wall.) 128, 146-47, 20 L. Ed. 519 (1871), condemning con-
gressiona] attempts to alter the rule of decision in pending
litigation. However, we note that courts have restricted
Klein since it was decided over 100 years ago:
38a
[T]he better reading of Klein is quite narrow and con-
strues the case as holding only that Congress violates the
separation of powers when it presumes to dictate “how
the Court should decide an issue of fact (under threat of
loss of jurisdiction)" and purports "to bind the Court to
decide a case in accordance with a rule of law indepen-
dently unconstitutional on other grounds."
Brainer, at 695 (quoting P. Bator, D. Shapiro, P. Mishkin
& H. Wechsler, The Federal Courts and the Federal Sys-
tem 316 n.4 (2d ed. 1973)); In re Consol. United States
Atmospheric Testing Litig., 820 F.2d 982, 992 (9th Cir.
1987). We find Klein distinguishable from the present case.
Here; the Legislature's retroactive amendment of RCW
21.20.430 does not impede upon the court's right and duty
to apply new law to the facts of this case. It does not dic-
tate how the court should decide a factual issue, nor does it
affect a final judgment. Instead, the amendment is a legis-
lative enactment of a facially neutral law for the court to
apply to the facts before it. We find no violation of separa-
tion of powers principles.’ See In re Consol. United States
Atmospheric Testing Litig., supra, at 992 (no violation of
separation of powers where act neither directs the court to
make a certain finding of fact, nor requires it to apply an
unconstitutional law).
5. Impairment of Contracts
Finally, plaintiffs argue that retroactive application of
the RCW 21.20.430(7) scienter standard impairs their con-
tractual right to recover for negligence under their bond
contracts. They contend that because negligence was the
standard of liability before the RCW 21.20.430(7) amend-
ment, that standard was incorporated into their bond con-
tracts and cannot now be changed by the Legislature. We
disagree.
[15] The Washington and federal provisions forbidding
impairment of contract are given similar effect. Ruano v.
1Our analysis leads us to a contrary result to that reached by the federa! dis-
trict court in In re Washington Public Power Supply System Securities Litigation
(W.D. Wash. Apr. 30, 1987) (MDL 551) (Order).
39a
Spellman, 81 Wn.2d 820, 825, 505 P.2d 447 (1973). Both
clauses forbid laws that impair the "obligation of con-
tracts”. See U.S. Const. art. 1, § 10; Const. art. 1, § 23. The
contracts clause is applicable only if the legislative act
complained of impairs a contractual relationship. Allied
Structural Steel Co. v. Spannaus, 438 U.S. 234, 24445, 57
L. Ed. 2d 727, 98 S. Ct. 2716, reh’g denied, 439 U.S. 886
(1978). The impaired relationship must be a "contract" in
the usual sense of the word "signifying an agreement of two
or more minds, upon sufficient consideration, to do or not
to do certain acts.” Crane v. Hahlo, 258 U.S. 142, 146, 66 L.
Ed. 514, 42 S. Ct. 214 (1922). A contract clause claim based
on statutory rights succeeds only if “the language and cir-
cumstances evince a legislative intent to create private
rights of a contractual nature enforceable against the
State." See United States Trust Co. v. New Jersey, 431
U.S. 1, 17 n.14, 52 L. Ed. 2d 92, 97 S. Ct 1505, reh'g denied,
431 U.S. 975 (1977). The contracts clause does not prohibit
the states from repealing or amending statutes generally, or
from enacting legislation with retroactive effects. United
States Trust Co., at 17.
Here, plaintiffs argue that the negligence standard exist-
ing prior to the RCW 21.20.430(7) amendment became a
part of their bond contracts because their bend purchases
pursuant to the contracts were made in contemplation of
existing law.
Initially, we note that in situations where statutes govern
the interpretation and enforcement of private agreements,
such statutes may create contractual rights because the
statutes define the parties’ contractual rights. United
States Trust Co., at 17 n.14; Tremper v. Northwestern
Mut. Life Ins. Co., 11 Wn.2d 461, 463-64, 119 P.2d 707
(1941) (statutory change in rule for interpreting the interest
term on life insurance policy loans would have changed the
meaning of an agreed term in a life insurance contract).
However, where a general statute involved provides a rem-
edy, which is later changed, the previous remedy will not
ordinarily be implied as an unexpressed term of an other-
40a
wise express contract. See Chicago & A. R.R. v. Tranbarger,
238 U.S. 67, 76, 59 L. Ed. 1204, 35 S. Ct. 678 (1915).
Here, the negligence standard existing prior to the RCW
21.20.430(7) amendment was part of a statutory remedy. It
was not expressly incorporated as a term of the bond con-
tract. Moreover, the negligence standard did not define any
party's rights pursuant to the bond contract. Thus, the
RCW 21.20.430(7) amendment requiring scienter in place of
negiigence did not affect, much less impair, the terms of the
contract.
Nevertheless, plaintiffs contend that the subsequent
amendment to require scienter diminished the value of
their bonds, thus unconstitutionally impairing the force of
their contracts. Plaintiffs rely on Metropolitan Seattle v.
O’Brien, 86 Wn.2d 339, 352, 544 P.2d 729 (1976), for the
proposition that an action by the State "though indirect,
which diminishes the value of the contract constitutes a
prohibited impairment." We disagree with plaintiffs' broad
reading of O’Brien. In O’Brien, the Legislature authorized
certain taxes to provide security for a city's debt service
obligations pursuant to the city's issuance of bonds.
O’Brien, at 342. This security, which substantially exceeded
the actual debt requirements, was found to be an important
reason for favorable bond ratings and an important factor
in the bondholders’ decisions to purchase the bonds.
O’Brien, at 351. It was within this context that the court
held that a state official's withholding of the funds
impaired the bondholders’ contract because his actions
diminished the value of the bonds by affecting the security
underlying them. O’Brien, at 352.
Here, we do not believe that the negligence standard of
liability in force at the time of the bond purchases was an
important reason for favorable bond ratings or an impor-
tant factor in the bondholders’ decisions to purchase the
bonds. Moreover, unlike the State's action in O’Brien,
which directly affected a security pledged in the bond con-
tract, here the Legislature's amendment of a general civil
liability provision of the WSSA only changed the element
4la
of a statutory remedy that was never a part of the bond
contract. We conclude that the Legislature's amendment in
RCW 21.20.430(7) did not unconstitutionally impair any of
plaintiffs’ contractual rights.
Finally, plaintiffs contend that because RCW 21.20-
430(7) by its express terms applied only to RCW 21.20-
010(2), their negligence claims under RCW 21.20.010(3)
still survive. However, plaintiffs point to no trial court rul-
ing on this issue. Therefore, we decline to address the issue
as it is not properly before the court. Overall we conclude
that the trial court properly applied RCW 21.20.430(7) to
require plaintiffs and intervenors to show scienter on the
part of respondents coming within its terms to establish
their violation of RCW 21.20.010(2).
V
DERIVATIVE PROFESSIONAL NEGLIGENCE
AND MALPRACTICE CLAIMS
Plaintiffs and intervenors seek reversal of the trial court's
dismissal of their derivative negligence and malpractice
claims against respondent professionals for services rend-
ered to the Supply System.
In a derivative suit, a stockholder asserts rights or reme-
dies belonging to the corporation for the corporation's ben-
efit. 12B W. Fletcher, Private Corporations § 5907 (1984).
Such suits arise in equity to enforce a corporate right which
the corporation fails, is unable, or refuses to assert by court
action. LaHue v. Keystone Inv. Co., 6 Wn. App. 765, 772,
496 P.2d 343 (1972); Goodwin v. Castleton, 19 Wn.2d 748,
761-62, 144 P.2d 725 (1944). Derivative suits are disfavored
and may be brought only in exceptional circumstances. See
LaHue, at 777. Double derivative actions usually occur
when a stockholder of a parent or holding company sues to
enforce a cause of action in favor of a subsidiary company.
13 W. Fletcher, Private Corporations § 5977 (1984); H.
Henn & J. Alexander, Corporations 1056 (3d ed. 1983). The
ultimate beneficiary of a double derivative action is the
corporation that possesses the primary right to sue. N. Lat-
42a
tin, Corporations 367-68 (1959).
A
Standing
Here, plaintiffs and intervenors sue through Chemical
Bank, asserting its right as bond trustee to sue on the Sup-
ply System's behalf for injury resulting from the profes-
sionals’ negligence. The Supply System and the respondent
professionals challenge plaintiffs' and intervenors' authority
to bring derivative claims. In turn, plaintiffs and interve-
nors challenge the Supply System's and the professionals’
standing to challenge their authority. They assert that only
Chemical Bank, their trustee, has standing to contest their
authority to sue derivatively. They note that Chemical
Bank does not challenge their authority, and has filed no
brief in this appeal. We find plaintiffs' and intervenors'
standing arguments unpersuasive.
[16] Standing to challenge a derivative plaintiff's failure
to comply with the procedural requirements of a derivative
suit lies with the entity the plaintiff seeks to represent.
Colan v. Monumental Corp., 524 F. Supp. 1023, 1028 (N.D.
Ill. 1981); Prager v. Sylvestri, 449 F. Supp. 425, 429
(S.D.N.Y. 1978); see Note, Defenses in Shareholders’
Derivative Suits—Who May Raise Them, 66 Harv. L. Rev.
342, 343, 346 (1952) (proper party to invoke defense is
party whom defense is designed to protect). Here, because
plaintiffs’ and intervenors' claims against the professionals
are “double derivative" in nature, it follows that the entity
they ultimately seek to represent is the Supply System,
through Chemical] Bank. See Brief of Appellant Haberman,
at 69 (derivative claims here are by definition for benefit of
Supply System). Therefore, the Supply System has stand-
ing to challenge these claims. Moreover, other courts have
granted standing to defendants other than the corporation
to assert derivative plaintiffs’ lack of authority to sue for
failure to comply with procedural requirements. See, e.z.,
Shlensky v. Dorsey, 574 F.2d 131, 142 (3d Cir. 1978)
(accountant for corporation had standing to raise plaintiffs’
43a
noncompliance with procedural requirements for derivative
suit); Dietzel v. Anger, 8 Cal. 2d 373, 377-78, 65 P.2d 803
(1937) (defendant shareholders challenged derivative bond-
holder suit based on failure to meet indenture demand
requirements). We conclude that respondents have stand-
ing to challenge plaintiffs’ and intervenors' authority to
bring these "double derivative” ciaims.
B
Equitable Stockholder Derivative Claims
[17] To begin with, we note that plaintiffs and interve-
nors blur the distinction between 4 stockholder's equitable
right to sue derivatively and a bondholder's right, which is
contractual in nature. Standing to bring 4 stockholder
derivative claim requires a proprietary interest in the cor-
poration whose right is asserted. Kauffman v. Dreyfus
Fund, Inc., 434 F.2d 727, 735-36 (3d Cir. 1970), cert.
denied, 401 U.S. 974 (1971). A creditor has no equitable
standing to sue derivatively. Dodge v. First Wis. Trust Co.,
394 F. Supp. 1124, 1127 (E.D. Wis. 1975); see CR 23.1
(referring to Stockholders’ rights to bring derivative suit).
Thus, as bondholders, plaintiffs and intervenors are only
creditors of the Supply System with no proprietary interest,
they have no equitable right to bring derivative claims.
Cc
Bondholder Derivative Claims
Because there is no governing body of statutory or com-
mon law that protects bondholders against harmful acts by
issuers except in the most extreme situations, bondholders’
rights are created and protected by contracts between the
bondholders and issuers. See American Bar Found., Jnden-
tures 2 (1971). These “Debenture Indentures*” commonly
designate a trustee to protect the bondholders’ contractual!
rights created pursuant to the indenture. Jndentures, at 2,
8. Although debts created by bonds issued run directly
from the issuer to the bondholders. the contractual rights
conferred by indentures run from the issuer to the trustee
for the bondholders’ benefit. Jndentures, at 8, 233; see also
44a
Note, The Rights and Remedies of the Bondholder Under
Corporate Bonds and Indentures: I, 27 Colum. L. Rev. 443,
445 (1927).
Here, the WNP 4 and WNP 5 bonds were issued accord-
ing to the authority granted the Supply System in resolu-
tion 890, an indenture agreement between the Supply
System and the bondholders. Resolution 890 reflects provi-
sions commonly contained in debenture indentures. Section
11.4 of resolution 890 authorizes the bond fund trustee,
Chemica] Bank, to sue on the bondholders’ behalf in the
event of default, and to sue on the Supply System's behalf
in a derivative-type capacity upon request of a majority of
the bondholders. Clerk's Papers, Second Supplemental
Index, at 92, 96.
Section 11.5, a "no action" provision, precludes suit pur-
suant to a right created in resolution 890 unless 20 percent
of the bondholders serve a forma] demand upon the trustee,
a reasonable time passes for the trustee to respond to the
demand, and the would-be plaintiffs furnish security and
indemnity to the trustee. Such "no action” provisions serve
to ensure that a few bondholders take no advantage of cor-
porate assets over other bondholders, to avoid burdensome
multitudinous suits where one would suffice, and to ensure
that the security of all the bondholders is not threatened by
a minority action that a large majority believes hostile to its
interests. Quirke v. St. Louis-San Francisco Ry., 277 F.2d
705, 709-10 (8th Cir.), cert. denied, 363 U.S. 845 (1960);
Moore v. Tumwater Paper Mills, 181 Wash. 45, 52-53, 42
P.2d 29, cert. denied, 296 U.S. 597 (1935); Indentures, at
232-33.
We note also that section 11.5 distinguishes between
bondholder suits to enforce payment of the principal and
interest on the bonds and bondholder suits pursuant to
contractual rights created in resolution 890. See resolution
890, § 11.5, Clerk's Papers, Second Supplemental! Index, at
96. While the “no action" provision of section 11.5 explic-
itly governs al] rights of action pursuant to resolution 890,
it does not impair or affect the Supply System's underlying
45a
obligation for principal and interest to the bondholders, nor
the bondholders’ ability to enforce payment of their bonds.
Resolution 890, § 11.5, Clerk's Papers, Second Supple-
mental! Index, at 96.
Plaintiffs and intervenors contend that resolution 890's
procedural restrictions do not bar their maintenance of
these derivative claims because the limitations were inade-
quately incorporated in the bonds.
The WNP 4 and WNP 5 bonds provided that:
[Rjeference [to resolution 890] is hereby made for a more
complete description of the . . . remedies of the holders
of the bonds with respect thereto...
In case an Event of Default (as defined by resolution
890) shall occur, the principal of the bonds . . . at such
time outstanding may be declared due and payable by
the Bond Fund Trustee or by the holders of 20% in
principal amount of such Bonds. . . but such declaration
may, under certain circumstances, be annulled.
Clerk's Papers, at 321$, 3221.
[18] Where bonds contain no restriction, either directly
or by reference, against an action on them, 4 holder may
maintain a separate action without reference to the provi-
sions of an indenture regardless of the restrictions which
might otherwise be binding. See Snyder v. Yakima Fin.
Corp., 174 Wash. 499, 508, 25 P.2d 108 (1933). In Snyder,
however, the bonds contained no reference to restrictions
on bondholders’ rights to sue. Snyder, at 508. In cases
where the bonds refer to the indenture agreement, bond-
holders are bound by the terms of the indenture. See Col-
sky v. Eyres Storage & Distrib. Co., 178 Wash. 404, 407, 34
P_2d 1114 (1934). Plaintiffs and intervenors cite other deci-
sions holding that passing reference to an indenture cannot
restrict bondholders’ rights to sue if the bond is not paid at
maturity. Plaintiffs and intervenors ignore the distinction
between restrictions placed on rights created by the inden-
ture contract, e.g., derivative authority, and rights existing
apart from the contract, e.£., right to enforce debt owed.
Indeed, in all! of the cases cited, unlike the present deriva-
tive action for negligence, the indenture involved restricted
46a
the bondholders’ rights to collect interest or principe! when
due. See, e.g., Guardian Depositors Corp. v. David Stott
Flour Mills, Inc., 291 Mich. 180, 185, 289 N.W. 122 (1939):
Scott v. Platt, 171 Or. 379, 391, 135 P.2d 769, 775, 137 P.2d
975 (1943). Bank of Cal. v. National City Co., 138 Wash.
517, 524, 244 P. 690, rev'd on other grounds on rehearing,
141 Wash. 243, 251 P. 561 (1926); Friedman v. Airlift Int'l,
Inc., 44 A.D.2d 459, 355 N.Y.S.2d 613, 614-15 (1974)
(expressly distinguishing incorporation by reference of
restrictions on suit for interest owed from incorporation by
reference of a special collection right created by indenture).
Here, the face of the WNP 4 and WNP 5 bonds referred
readers to resolution 890 for a complete description of the
remedies available to bondholders. A bondholder would
necessarily look to the resolution to determine - whether
derivative rights existed, and would also discover restric-
tions on any such right created. Thus, the present case is
distinguishable from situations where a bondholders’ right
to sue for principle and interest owed is involved. More-
over, resolution 890 was properly incorporated in the
bonds.
Plaintiffs also argue that they are not bound by resolu-
tion 890 because they were induced to become parties to it
by untrue statements and omissions of materia) facts in the
Official] Statements. However, no allegations of misstate-
ments in resolution 890 are made in plaintiffs’ complaint.
In any event, misstatements in the Official Statements are
not relevant to whether the WNP 4 and WNP 5 bonds
adequately notified bondholders of the rights and restric-
tions created by resolution 890. Here, we find that the
bonds gave bondholders notice of resolution 890, and thus
that plaintiffs are bound by its terms. We therefore decline
to reform the clear terms of resolution 890.
We also reject intervenors' attempt to sue in place of
Chemica] Bank pursuant to the language in the bonds giv-
ing holders of 20 percent in principal amount of the bonds
the right to declare the bonds due upon default. Interve-
nors’ derivative claims do not seek to declare the bonds
47a
due, but rather are for negligence and malpractice against
professionals not parties to the bonds.
We conclude that plaintiffs’ and intervenors’ derivative
negligence claims are governed by resolution 890, and the
demand requirements of section 11.5.
Alternatively, plaintiffs and intervenors assert that they
were excused from the resolution 890 demand require-
ments. First, they argue that any demand on Chemical
Bank would have been futile because they were not allowed
to intervene in Chemical Bank II and because Chemical
Bank has not supported them in their attempts to bring
these derivative claims. They also contend that Chemical
Bank waived the demand requirements by failing to object
to this action.
[19] Few cases address the issue of whether and when a
bondholder must comply with indenture demand require-
ments in indentures authorizing a trustee to sue deriva-
tively in place of the corporation. But see Quirke v. St.
Louis-San Francisco R.R., supra at 709 (upholding similar
no action clause). However, cases interpreting Fed. R. Civ.
P. 23.1, requiring shareholders to demand that the corpora-
tion sue before suing derivatively, provide guidance by
analogy. The Fed. R. Civ. P. 23.1 demand requirement is
intended to allow the corporation an opportunity to take
over a suit brought on its behalf. Lewis v. Graves, 701 F.2d
245, 247 (2d Cir. 1983). Whether the demand requirement
is excused is within the trial court's discretion. DePinto v
Provident Sec. Life Ins. Co., 323 F.2d 826, 830 n.7 (9th Cir.
1963), cert. denied, 376 U.S. 950 (1964); 3B J. Moore, Fed-
eral Practice 4 23.1.19, at 23.1-83 (1987). Thus, a trial
court's determination of whether demand requirements are
excused will only be reversed for a manifest abuse of dis-
cretion. Lewis, at 248.
The doctrine of futility excuses demand on directors
when the majority of the directors are the alleged wrongdo-
ers. Note, Demand on Directors and Shareholders as ca
Prerequisite to a Derivative Suit, 73 Harv. L. Rev. 746, 753
(1960); 3B J. Moore, Federe! Practice 4 23.1.19, at 23.1-87,
48a
—89 (1987); see, e.g., Jannes v. Microwave Communications,
Inc., 57 F.R.D. 18, 21 (N.D. Ill. 1972); First Wis. Nat'l
Bank v. Brynwood Land Co., 245 Wis. 610, 15 N.W.2d 840
(1944) (demand upon bondholders futile because majority
bondholders were engaged in acts giving rise to action); GE
Co. v. Bucyrus-Erie Co., 563 F. Supp. 970, 974 (S.D.N.Y
1983); Clark v. Lomas & Nettleton Fin. Corp., 625 F.2d 49,
53-54 (5th Cir.), reh'g denied, 632 F.2d 894 (1980), cert.
denied, 450 U.S. 1029 (1981); Clay v. Selah Vly. Irrig. Co.,
14 Wash. 543, 5484S, 45 P. 141 (1896) (bondholders
excused from notice where corporation conspired with trus-
tee to dispose of property contrary to deed provisions and
deceived them as to amount due on mortgage). However, it
is well established that futility is not established by mere
approval .or acquiescence by a corporation. Kaufman v.
Safeguard Scientifics, Inc., 587 F. Supp. 486, 489 (E.D. Pa.
1984); Lewis v. Graves, 701 F.2d at 248. Finally, courts may
excuse demand upon a trustee when the trustee is involved
in a lawsuit arising out of the same facts asserting the same
claims as the bondholders’ claims. Morgan Stanley & Co. v.
Archer Daniels Midland Co., 570 F. Supp. 1529, 1539 n.2
(S.D.N.Y. 1983) (trustee intervened in bondholder suit
rendering demand irrelevant); Campbeli v. Hudson &
Manhattan R.R., 277 A.D. 731, 102 N.Y.S.2d 878, 882, affd,
302 N.Y. 902 (1951) (trustee's complaint urged that court
grant relief requested by plaintiffs); see Thornton v. Evans,
692 F.2d 1064, 1080 (7th Cir. 1982) (court excused demand
because trustees had notice of claims; trustees filed identi-
cal suit to beneficiaries’ but failed to name certain defend-
ants who breached trust).
Here, demand on Chemica! Bank was not excused on the
basis of futility. Chemical Bank is not the target of plain-
tiffs’ and intervenors' allegations of negligence. Moreover,
Chemical Bank's failure to sue the professionals does not
excuse the demand requirements because Chemica] Bank
had no reason to take action. As noted by Chemica! Bank's
attorney at trial, “nobody has moved against us or we have
not moved against anyone. So there's no reason for us to
49a
take a position.” Report of Proceedings vol. II, at 9. Like-
wise, Chemical Bank's failure to support plaintiffs’ inter-
vention in Chemical Bank II does not excuse demand. No
claims against respondent professionals were involved
there, and this court wil] not presume that Chemica! Bank
knew of any alleged negligence or malpractice.
Next, plaintiffs and intervenors contend that forma!
demand, by 20 percent of the bondholders should be
excused because to do so would be too costly. This argu-
ment is without merit. We note that shareholders may be
excused from serving demand on other shareholders as
required by Fed. R. Civ. P. 23.1 when onerous expense is
involved. Messinger v. United Canso Oil & Gas Ltd, 80
F.R.D. 730, 738 (D. Conn. 1978); Levitt v. Johnson, 334
F.2d 815, 818 (lst Cir. 1964), cert. denied, 379 U.S. 961
(1965). However, locating 20 percent of the bondholders
presents no onerous expense here because nearly 20 percent
of the bondholders are already parties to this action. See
Brief of Appellant Haberman, at 74; Brief of Intervenors, at
104.
Finally, plaintiffs argue that demand should be excused
because the statute of limitations has run against the Sup-
ply System for its choses in action against the professionals
for negligence. Plaintiffs contend that these actions wil) be
lost if this court upholds the dismissal of these derivative
claims
At least one court has noted that a factor in determining
whether shareholders are excused from Fed. R. Civ. P. 23.1
demand requirements is if a limitations period might run in
the time necessary to serve such a demand. Levitt, at 817.
However, whether a demand is excused because a limite-
tions period will run is gauged at the time the action is
commenced, not afterward with the benefit of hindsight.
Lewis v. Graves, 701 F.2d at 250. Here, at the time plain-
tiffs and intervenors commenced this action in 1985, the
statute of limitations had not yet run. Therefore, demand
could have been served in 1985 to preserve these choses in
action. Because excuse is measured at that time, piaintiffs
50a
and intervenors cannot be excused from demand require-
ments on this basis.
We conclude that plaintiffs’ and intervenors' double
derivative claims against respondent professionals for neg-
ligence and malpractice were properly dismissed by the
trial court. The claims are governed by the terms of resolu-
tion 890 and plaintiffs and intervenors have failed to meet
the demand requirements contained in section 11.5.
Because we determine that plaintiffs and intervenors have
not met the procedural prerequisites to their claims, we
need not address their substantive derivative claims against
respondent professionals for malpractice and negligence.
D
Equitable Creditor Claims
Plaintiffs also allege their derivative claims as equitable
creditors of the Supply System. They contend that the
Supply System's rights of action against the respondent
professionals constitute equitable assets recoverable by the
creditor-bondholders to satisfy debts represented by the
bonds.
[20] Such “creditor suits" are brought to compel the
discovery and application of equitable assets or property to
the payments of debts. However, "a general creditor with a
mere legal demand may not, in the absence of statutory
authorization, come into equity to collect his claim." 21
C.J.S. Creditors’ Suits § 43 (1940). The debt must be
reduced to judgment before an equitable creditor action can
be brought. Hamburger Apparel Co. v. Werner, 17 Wn.2d
310, 317, 322, 135 P.2d 311 (1943); see Woody's Olympia
Lumber, Inc. v. Roney, 9 Wn. App. 626, 513 P.2d 849 (1973)
(allowing attachment of debtor's tort action after creditor's
claim reduced to judgment).
Here, the trial court dismissed plaintiffs’ claims as inade-
quately pleaded. Notwithstanding the pleadings, we hold
that plaintiffs’ equitable creditor claims fail for want of a
judgment. The trial court properly dismissed all derivative
claims.
5la
VI
NEGLIGENT MISREPRESENTATION AND FRAUD
The trial court dismissed intervenors' common law fraud
and negligent misrepresentation claims against all respon-
dents. The trial court concluded that intervenors' claims
were barred by principles of discretionary immunity, the
, public duty doctrine, and sovereign immunity as applied to
- out-of-state respondents through choice of law rules. The
trial court alternatively held that intervenors' negligent
misrepresentation claims against the respondent profes-
sionals failed for lack of duty. Intervenors contend that
their claims are not barred by immunity, and that their
claims were alleged sufficiently to state claims for fraud and
negligent misrepresentation against respondent profession-
als. We agree.
a
Discretionary Immunity
[21] Discretionary immunity is a narrow court-—created
exception to the Legislature's abolition of sovereign immu-
nity. Bender v. Seattle, 99 Wn.2d 582, 587, 664 P.2d 492
(1983); Evangelical United Brethren Church v. State, 67
Wn.2d 246, 255, 407 P.2d 440 (1965). Discretionary immu-
nity serves to assure that courts refuse to pass judgment on
policy decisions in the province of coordinate branches of
government. Bender, at 588; King v. Seattle, 84 Wn.2d 239,
246, 525 P.2d 228 (1974). To be protected by such immu-
nity, an act, omission, or decision must involve an exercise
of basic policy evaluation, judgment and expertise by the
governmental agency involved. Evangelica! United Breth-
ren Church, at 255. The activity must involve basic policy
discretion rather than the implementation of policy. Mason
v. Bitton, 85 Wn.2d 321, 327-29, 534 P.2d 1360 (1975);
Bender, at 588-90. Thus, only “high level discretionary acts
exercised at a truly executive level" are protected. Bender,
at 588.
Arguably, the Supply System's decision to build the
WNP 4 and WNP 5 is immune as a discretionary act.
52a
However, intervenors challenge the means by which that
decision was carried out. Intervenors allege that respon-
dents made fraudulent statements and omissions, which
were used in the Official Statements and Annual Reports
by the Supply System to sell bonds to finance the project.
Thus, the acts complained of by intervenors do not involve
discretionary acts, or policy decisions by the Supply Sys-
tem; rather they involve the mechanism by which the Sup-
ply System implemented its decision to build the project.
As a result, discretionary immunity does not bar interve-
nors' fraud claims. See Miotke v. Spokane, 101 Wn.2d 307,
337, 678 P.2d 803 (1984) (decision to build sewage bypass
was not a basic policy decision protected by discretionary
immunity because the decision was based on technical
engineering and scientific judgment); Stewart v. State, 92
Wn.2d 285, 294, 597 P.2d 101 (1979) (decision to build a
freeway was a basic policy decision, but its design and
lighting was not protected by discretionary immunity).
Algona v. Pacific, 35 Wn. App. 517, 520, 667 P.2d 1124,
review denied, 100 Wn.2d 1028 (1983) (municipality fur-
nishing sewer facilities functioning in proprietary capacity
and not immune to suit).
B
Public Duty Doctrine
[22] The public duty doctrine determines the scope of
duty involved where public services are provided. J & B
Dev. Co. v. King Cy., 100 Wn.2d 299, 303, 669 P.2u 468, 41
A.L.R.4th 86 (1983). The doctrine limits governmental lia-
bility arising out of its provision of public services to breach
of a duty owed specifically to one plaintiff, rather than the
public generally. J & B Dev. Co., at 303-05.
’ Here, intervenors' allegations of fraud do not arise out of
& service to the general public. Instead, they involve alleged
fraud in the course of raising private funds for public use.
Moreover, the Supply System issued its statements and
reports pursuant to the securities laws, not a general public
duty. We conclude that the public duty doctrine is inappli-
53a
cable to this case.
.
Sovereign Immunity
The trial court also held that intervenors' common law
fraud claims against respondent Oregon and Idaho Utilities
were barred by Oregon and Idaho sovereign immunity
principles. We disagree.
[23] Resolution 890, pursuant to which the Oregon and
Idaho Utilities entered into the Participants’ Agreements,
provides that the resolution and the bonds be construea
and governed by Washington law. Resolution 890, § 14.11.
Although a choice of law provision in a contract does not
govern tort claims arising out of the contract, it may be
considered as an element in the most significant relation-
ship test used in tort cases. See Kammerer v. Western Gear
Corp., 96 Wn.2d 416, 423, 635 P.2d 708 (1981).
When faced with claims of other states’ immunity, this
court uses the most significant relationship test, then eval-
uates the policies behind the interested states whose polli-
cies conflict. Johnson v. Spider Staging Corp., 87 Wn.2d
577, 582, 555 P.2d 997 (1976); Southwell v. Widing
Transp., Inc., 101 Wn.2d 200, 204, 676 P.2d 477 (1984); see
also Biscoe v. Arlington Cy., 738 F.2d 1352, 1359 (D.C. Cir.
1984) (states faced with claims of immunity by sister states
have resolved the issue by reference to the forum state's
policy on comity, not by rigid application of choice of law
rules), cert. denied, 469 U.S. 1159 (1985). The elements of
the significant relationship test include: (a) the place of
injury; (b) the place where the conduct causing the injury
occurred; (c) the residence of the parties; and (d) the place
where the relationship is centered. Restatement (Second) of
Conflict of Laws § 145 (1971).
Here, the most significant relationship is with Washing-
ton. A significant number of the parties to this action are
Washington residents. The fraudulent acts occurred here
where the Supply System, and thus the relationship is cen-
tered. Moreover, the planning of the project, the issuance of
54a
bonds, and the rendering of allegedly fraudulent services
occurred here. Finally, the statements and reports contain-
ing the injurious misrepresentations originated in Washing-
ton. See also section IV(D).
The policies of the states involved also dictate our appli-
cation of Washington law. Oregon and Idaho Utilities claim
that sovereign immunity reflects their states’ interests in
protecting their public fisc and ability to govern their oper-
ations. On the other hand, the Washington Legislature
waived sovereign immunity to discourage tortious govern-
mental] conduct, and to hold government responsible for its
acts. Bender v. Seattle, supra at 590. We believe our appli-
cation of Washington-law here furthers the Washington
Legislature's purpose without interfering with Oregon's or
Idaho's ability to govern. Our decision recognizes this
State's policy of holding government accountable for tor-
tious conduct and only applies to Oregon and Idaho
respondents to the extent they acted tortiously in Wash-
ington.
Respondents also argue that full faith and credit and
comity require that we apply Oregon and Idaho sovereign
immunity principles. We disagree.
[24, 25) Full faith and credit does not require a forum
state to respect another state's rule on sovereign immunity
unless the other state's ability to govern would be threat-
ened. Nevada v. Hall, 440 U.S. 410, 424 n.24, 59 L. Ed. 2d
416, 99 S. Ct. 1182, reh’g denied, 441 U.S. 917 (1979); see
Mianecki v. Second Judicial Dist. Court, 99 Nev. 93, 96,
658 P.2d 422, cert. dismissed, 464 U.S. 806 (1983). More-
over, the doctrine of comity is not a rule of law, but one of
practice, convenience and expediency. Mast, Foos & Co. v.
Stover Mfg. Co., 177 U.S. 485, 488, 44 L. Ed. 856, 20 S. Ct.
708 (1900). Comity allows the courts of one jurisdiction to
give effect to laws of another jurisdiction out of deference
and respect, considering the interests of each state. Mian-
ecki, at 97. The decision to invoke comity is within the
court's discretion. Mianecki, at 98. Smith v. Fletcher, 102
Wash. 218, 222, 173 P. 19 (1918). Comity does not preclude
55a
one state from exercising jurisdiction over another state
because of that state's sovereign immunity, especially over
claims arising out of securities purchases. Ehrlich-Bober &
Co. v. University of Houston, 49 N.Y.2d 574, 583, 404
N.E.2d 726, 427 N.Y.S.2d 604 (1980) (any other rule would
burden financial institutions with reviewing the laws of
every jurisdiction before consenting to do business with any
agency of a state).
We conclude that Washington law applies and that the
Oregon and Idaho Utilities are not immune to intervenors'
common law claims. Therefore, we reverse the trial court's
ruling that intervenors' claims are barred by immunity
principles.
D
Intervenors' Negligent Misrepresentation Claims
Against Professionals
The trial court alternatively dismissed intervenors'
claims against the professionals on the basis that the pro-
fessionals owed no duty beyond that owed to their individ-
ual client, the Supply System. We disagree. Intervenurs
alleged that respondent professionals made and partici-
pated in making negligent misrepresentations of fact in the
Official Statements and Annual Reports, and negligently
omitted facts necessary to make the statements and reports
not misleading. Intervenors further alleged that they suf-
ficed pecuniary loss in reliance on the information con-
tained, or not contained, in the statements and reports.
[26] To determine whether a plaintiff has stated a claim
for negligent misrepresentation, this court adheres to the
standards in the Restatement (Second) of Torts § 552(1),
(2) (1977) which provides:
(1) One who, in the course of his business, profession
or employment or in any other transaction in which he
has a pecuniary interest, supplies false information for
the guidance of others in their business transactions, is
subject to liability for pecuniary loss caused to them by
their justifiable reliance upon the information, if he fails
to exercise reasonable care or competence in obtaining or
56a
communicating the information.
(2) Except as stated in Subsection (3), [which pertains
to the liability of one who is under a public duty to fur-
nish such information) the liability stated in Subsection
(1) is limited to loss suffered
(a) by the person or one of a limited group of persons
for whose benefit and guidance he intends to supply the
— or knows that the recipient intends to supply
it; an
(b) through reliance upon it in a transaction that he
intends the information to influence or knows that the
recipient so intends or in a substantially similar transac-
tion.
Transamerica Title Ins. Co. v. Johnson, 103 Wn.2d 409,
415-16, 693 P.2d 697 (1985); Wilbur v. Western Properties,
22 Wn. App. 458, 463, 589 P.2d 1273 (1979).
In deference to legitimate fears of indeterminate liability
to third persons, the Restatement narrows the scope of an
action for negligent misrepresentations. Liability does not
extend to every person who ultimately becomes aware of
the misstatement. Instead, because of the "important social
policy of encouraging the flow of commercial information
upon which the operation of the economy rests", the
defendant must be "manifestly aware of the use to which
the information was to be put and intended to supply it for
that purpose." Restatement (Second) of Torts § 552, com-
ment a (1977). Indeed, "[w]hen there is no intent to deceive
but only good faith coupled with negligence, the fault of the
maker of the misrepresentation is sufficiently less to justify
a@ narrower responsibility for its consequences." Restate-
ment (Second) of Torts § 552, comment a. Liability for
negligent misrepresentations is thus limited to cases where
(1) the defendant has knowledge of the specific injured
party's reliance; or (2) the plaintiff is a member of a group
that the defendant seeks to influence; or (3) the defendant
has special reason to know that some member of a limited
group will rely on the information. See Chubb Croup of
Ins. v. C.F. Murphy & Assocs., 656 S.W.2d 766 (Mo. Ct.
App. 1983). However,
57a
it is not necessary that the maker should have any par-
ticular person in mind as the intended, or even the prob-
able, recipient of the information. In other words, it is
not required that the person who is to become the plain-
tiff be identified or known to the defendant as an indi-
vidual when the information is supplied. It is enough
that the maker of the representation intends it to reach
and influence either a particular person or persons,
known to him, or a group or class of persons, distinct
from the much larger class who might reasonably be
expected sooner or later to have access to the information
and foreseeably to take some action in reliance upon it. It
is enough, likewise, that the maker of the representation
knows that his recipient intends to transmit the informa-
tion to a similar person, persons or group. It is sufficient,
in other words, insofar as the plaintiff's identity is con-
cerned, that the maker supplies the information for rep-
etition to a certain group or class of persons and that the
plaintiff proves to be one of them, even though the maker
never had heard of him by name when the information
was given.
Restatement (Second) of Torts § 552, comment h (1977).
Here, the trial court's CR 12(b)(6) dismissal of interve-
nors' misrepresentation claims must be reversed. Assuming
intervenors' allegations to be true, and considering al) con-
ceivable facts in support of them, we cannot say that inter-
venors have failed to state a claim. See Lawson v. State,
107 Wn.2d 444, 448, 730 P.2d 1308 (1986).
Intervenors specifically allege that respondent profes-
sionals negligently supplied information to the Supply Sys-
tem, and that the information appeared in the Official
Statements and Annual Reports relied upon by intervenors
in their decisions to purchase the bonds. As a result of their
reliance, intervenors allege pecuniary loss. Additionally,
intervenor Amexco alleges that several respondent profes-
sionals made persona! visits and telephone calls on several
occasions to discuss the bonds. Respondents contend that
this court should not consider these allegations because
they did not appear in intervenors' first amended com-
plaint, and because the telephone calls were raised for the
first time on this appeal. However, bound by the CR
58a
12(b)(2) standard of review here, we consider these allega-
tions as hypothetical facts forming a viable conceptual
background for the alleged negligent misrepresentations
made by respondent professionals. See Halvorson v. Dahl,
89 Wn.2d 673, 674-75, 574 P.2d 1190 (1978).
Moreover, it is conceivable that each of the respondent
professionals were told by the Supply System of its intent
to supply information received from the professionals
directly to institutional investors such as the intervenors,
either specifically, or as a limited class to induce them to
purchase bonds. In such circumstances, intervenors would
be part of a limited group which the professionals knew
would receive their information and rely on it in making a
decision to purchase bonds. Conceivably, the professionals
could have intended that intervenors, as institutional
investors, benefit from the information so as to induce
them to purchase bonds, resulting in favorable bond sales
and pecuniary gain to the professionals.
However, because the trial court dismissed intervenors'
allegations on the pleadings, we have no factual basis from
which to discern respondent professionals’ knowledge or
intentions. Because this information is necessary to a
determination of whether a duty exists to intervenors for
alleged misrepresentations, we must remand to the trial
court for further factual determinations.
E
Intervenors' Common Law Fraud Claims
In addition to their negligent misrepresentation claims,
intervenors also allege fraudulent misrepresentation by al!
respondents in the Official Statements and Annual! Reports.
Respondents first argue that intervenors failed to plead
fraud with particularity as required by CR 9(b). The trial!
court did not decide this issue, but noted that any deficien-
cies could be cured by a motion for more definite state-
ment. Report of Proceedings vol. III, at 16. Nevertheless,
respondents argue that: (1) no allegations that any respon-
dent other than the Supply System supplied information to
59a
them appear within intervenors' complaint; (2) intervenors
fail to set forth the allegedly fraudulent acts by each
respondent; and (3) the allegations in the complaint are too
general.
CR 9(b) requires dismissal when a complaint fails to
plead fraud with particularity. CR 9(b), like its federal
counterpart, Fed. R. Civ. P. 9(b), ensures that plaintiffs
seek redress for a wrong rather than use lawsuits as pre-
texts to discover unknown wrongs, protects defendants
from unnecessary harm to their reputation, and gives
defendants sufficient notice to enable them to prepare a
defense. See D & G Enters. v. Continental Ill. Nat'l Bank
& Trust Co., 574 F. Supp. 263, 266-67 (N.D. Ill. 1983);
Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). The
complaining party must plead both the elements and cir-
cumstances of fraudulent conduct. 3A L. Orland, Wash.
Prac. 129 (3d ed. 1980). Applying CR 9(b) in light of CR
8(a), which requires a "short and plain statement of the
claim showing that the pleader is entitled to relief", a com-
plaint must allege specific fraudulent acts, but need not
plead evidentiary matters. See D & G Enterprises, at 267;
Trak Microcomputer Corp. v. Wearne Bros., 628 F. Supp.
1089, 1092 (N.D. Ill. 1985); Somerville v. Major Explora-
tien, Inc., 576 F. Supp. 902, 909 (S.D.N.Y. 1983).
[27] To determine whether allegations of fraud satisfy
CR 9(b), the court will consider only the complaint, and not
additional allegations made in the briefs. See Beck v. Can-
tor, Fitzgerald & Co., 621 F. Supp. 1547, 1552 (N.D. Ill.
1985). A complaint adequately alleges fraud if it informs
the defendant of who did what, and describes the fraudu-
lent conduct and mechanisms. Beck, at 1552 n.3; Lewis v
Berry, 101 F.R.D. 706, 708-09 (W.D. Wash. 1984). If a
complaint provides this information, then group conduct
may be pleaded generally because the defendants have suf-
ficient information to answer the allegations. Jn re Equity
Funding Corp. of Am. Sec. Litig., 416 F. Supp. 161, 181
(C.D. Cal. 1976). "{[W]hen a plaintiff sues individual group
members on the basis of the collective product of the group,
60a
specific allegations about the role of each defendant are
unnecessary.” Jn re Consumers Power Co. Sec. Litig., 105
F.R.D. 583, 593 (E.D. Mich. 1985).
Here, intervenors' complaint specifies the allegedly
fraudulent information supplied or omitted by each
respondent to the Supply System, the individual respon-
dent compiling and disseminating this information, and
what statements were in the Official Statements and
Annual Reports. Clerk's Papers, at 640-53; First Amended
Complaint, paras. 12-57. Intervenors' complaint then
alleges the elements of fraud based on the assertions made
in, or omitted from, the Official) Statements and Annual
Reports. Clerk's Papers, at 692-94; First Amended Com-
plaint, paras. 195-201. Although the pleadings do not set
forth circumstances illustrating respondents’ knowledge of
their misrepresentations (scienter), CR 9(b) specifies that
knowledge may be averred generally. Therefore, as interve-
nors' complaint gave respondents sufficient notice of the
allegations to allow them to prepare their answer and
defense, we conclude that intervenors' complaint satisfies
the CR 9(b) particularity requirement as to their fraud
claims.
Respondents next argue that they owed no duty to inter-
venors in the absence of privity or a fiduciary relationship.
They point out that no respondent other than the Supply
System represented anything directly to the bondholders in
the Official Statements and Annual Reports.
[28] While Washington cases allowing recovery for
fraud generally involve privity or fiduciary relationships
between the parties, allegations of fraud may be asserted
where one party to a transaction has a duty to speak
because that party possesses superior knowledge yet that
party fails to state, or has no basis for, an asserted material
fact. See, e.g., Lincoln v. Keene, 51 Wn.2d 171, 174, 316
P.2d 899 (1957); Hamilton v. Mihills, 92 Wash. 675, 680,
159 P. 887 (1916); Kaas v. Privette, 12 Wn. App. 142, 149,
529 P.2d 23 (1974).
Other courts have held defendants liable for concealment
bla
or misstatements absent privity when the defendant knows
that information will be passed on to the plaintiff or to a
class of person who the defendant intends to induce reli-
ance. See, e.g., Fischer v. Kletz, 266 F. Supp. 180, 187
(S.D.N.Y. 1967) (where affirmative misrepresentation was
involved, accountant was liable regardless of his interest in
the transaction); Bank of Vly. v. Mattson, 215 Neb. 596,
597-98, 339 N.W.2d 923 (1983) (borrower's fraudulent mis-
representations regarding his finances made to second party
constituted fraud on third party plaintiff who was
approached by second party to raise money for borrower).
Additionally, while requiring privity, @ fiduciary relation-
ship, or a limited class is warranted in negligent misrepre-
sentation cases where a defendant is merely negligent and
should not be held potentially liable to an unlimited num-
ber of plaintiffs, the same reasoning does not apply where a
defendant knowingly makes a misrepresentation.
The Restatement (Second) of Torts provides:
One who makes a fraudulent misrepresentation is sub-
ject to liability to the persons or class of persons whom
he intends or has reason to expect to act or to refrain
from action in reliance upon the misrepresentation, for
pecuniary loss suffered by them through their justifiable
reliance in the type of transaction in which he intends or
has reason to expect their conduct to be influenced.
(Italics ours.) Restatement § 531.
The maker of a fraudulent misrepresentation is subject
to liability for pecuniary loss to another who acts in jus-
tifiable reliance upon it if the misrepresentation,
although not made directly to the other, is made to a
third person and the maker intends or has reasons to
expect that its terms will be repeated or its substance
communicated to the other, and that it will influence his
conduct in the transaction or type of transaction
involved.
(Italics ours.) Restatement § 533.
(1) One who fails to disclose to another a fact that he
knows may justifiably induce the other to act or refrain
from acting in a business transaction is subject to the
same liability to the other as though he had represented
62a
the nonexistence of the matter that he has failed to dis-
close, if, but only if, he is under a duty to the other to
exercise reasonable care to disclose the matter in ques-
tion.
(2) One party to a business transaction is under a duty
to exercise reasonable care to disclose to the other before
the transaction is consummated,
(a) matters known to him that the other is entitled to
know because of a fiduciary or other similar relation of
trust and confidence between them; and
(b) matters known to him that he knows to be neces-
sary to prevent his partial or ambiguous statement of
the facts from being misleading; and
(e) facts basic to the transaction, if he knows that the
other is about to enter into it under a mistake as to
them, and that the other, because of the relationship
between them, the customs of the trade or other objec-
tive circumstances, would reasonably expect a disclosure
of those facts.
(Italics ours.) Restatement § 551. Thus, while a duty in a
fraud case may be owed by a defendant to plaintiffs in
privity, a fiduciary relationship, or a limited class of per-
sons, a duty may also arise to those third persons whom the
defendant intends or has reason to expect will receive the
information, especially in a business transaction where a
defendant has knowledge necessary to prevent misrepre-
sentation, or facts basic to the transaction where the plain-
tiff would reasonably expect disclosure.
Here, with the trial court's CR 12(b)(6) dismissal in
mind, we assume that respondents gave information to the
Supply System knowing or intending that the Supply Sys-
tem would pass the information onto the intervenors in the
Official Statements and Annual Reports. The respondents
also have superior knowledge of facts basic to the transac-
tion which they knew or reasonably should have expected
intervenors to expect disclosure. Thus, respondents may
have owed a duty to intervenors even absent privity or a
fiduciary relationship.
63a
Vil
ConsSUMER Protection Act CLAIMS
Intervenors challenge the trial court's dismissal of their
Consumer Protection Act (CPA), RCW 19.86, claims
against respondent professionals, irrigation districts and
rural electric cooperatives. Intervenors concede that the
remaining respondents are exempt from the CPA as
municipal corporations or political subdivisions of the state.
See Washington Natural Gas Co. v. PUD 1, 77 Wn.2d 94,
98, 459 P.2d 633 (1969).
A
Respondent Professionals
[29] The trial court held that intervenors' allegations of
unfair and deceptive acts or practices in connection with
the sale of bonds by respondent professionals failed to state
a claim under the CPA as interpreted by this court in Short
v. Demopolis, 103 Wn.2d 52, 61, 691 P.2d 163 (1984). In
Short, this court held that the term “trade or commerce’
used by the CPA only includes the entrepreneurial or com-
mercial aspects of the professional practice of law, not the
substantive quality of services provided. Claims ‘directed
to the competence of and strategy employed" by attorneys
constitute allegations of negligence or malpractice in per-
forming professional services and, as such, are not action-
able under the CPA. Short, at 61.
Intervenors do not dispute that Short is applicable to the
respondent professionals here. Rather, the intervenors con-
tend that their claims amount to allegations of unfair or
deceptive acts in the entrepreneurial aspects of the profes-
sionals’ businesses. We disagree.
Intervenors allege that al! professionals rendered services
negligently to the Supply System. The intervenors do not
challenge the professionals’ fee rates, billing or client rela-
tionships. We conclude that because intervenors’ allege only
negligence or malpractice against the respondent profes-
sionals, they do not state a claim under the CPA. Imterve-
nors' bald assertions that the respondent investment
64a
advisors were, by definition, engaged in entrepreneurial
aspects of their business are without merit. In their profes-
sional malpractice claims against the respondent advisors,
intervenors attack the advisors' exercise of professional
judgment, not the entrepreneurial aspects of their services.
Therefore, we affirm the trial court's dismissal of interve-
nors' CPA claims against respondent professionals.
B
Irrigation Districts
Intervenors claim that because respondent irrigation dis-
tricts perform no governmental functions, they are not
municipal corporations exempt from the CPA. Intervenors
rely on State v. Human Relations Research Found., 64
Wn.2d 262, 266, 391 P.2d 513 (1964). In Human Relations,
however, the question whether an irrigation district was a
municipal cerporation was not before the court; rather, the
court was faced with the issue of the district's interest in
compensation for state condemnation of its land. In this
context the court reasoned that the district was entitled to
compensation for the condemnation because it performed
no governmental function. Human Relations, at 266.
[30] Other cases hold that irrigation districts are unde-
niably municipal corporations created by the Legislature
for a public purpose. See State ex rel. Clancy v. Columbia
Irrig. Dist., 121 Wash. 79, 84, 208 P. 27 (1922): In re
Columbia Irrig. Dist., 183 Wash. 425, 437, 48 P.2d 648
(1935); Outlook Irrig. Dist. v. Fels, 176 Wash. 211, 219, 28
P.2d 996 (1934); Washington Nat'l Inv. Co. v. Grandview
Irrig. Dist., 175 Wash. 644, 648, 28 P.2d 114 (1933); Roberts
v. Richland Irrig. Dist., 169 Wash. 156, 160, 13 P.2d 437
(1932), affd, 289 U.S. 71 (1933); Richland Trrig. Dist. v. De
Bow, 149 Wash. 242, 246, 270 P. 816 (1928); Burbank Trrig.
Dist. 4 v. Douglass, 143 Wash. 385, 396, 255 P. 360, 259 P.
881 (1927); Peters v. Union Gap Irrig. Dist., 98 Wash. 412,
414, 167 P. 1085 (1917); Brown Bros. v. Columbia Irrig.
Dist., 82 Wash. 274, 283-84, 144 P. 74 (1914); Roza Irrig.
Dist. v. State, 80 Wn.2d 633, 634, 497 P.2d 166 (1972).
65a
Therefore, we conclude that respondent irrigation districts
are municipal corporations and, as such, are exempt from
the CPA under Washington Natural Gas Co. v. PUD 1,
supra at 98.
C
Rural Electric Cooperatives
Intervenors take exception to the trial court's conclusion
that because rural electric cooperatives are otherwise regu-
lated, they are exempt from the CPA. The CPA exempts
"transactions permitted by any other regulatory body".
RCW 19.86.170. See Tokarz v. Frontier Fed. Sav. & Loan
Ass'n, 33 Wn. App. 456, 464 n.5, 656 P.2d 1089 (1982). The
Rural Electrification Administration (REA), a federal
agency, closely monitors and extensively controls the acts of
rural electric associations borrowing money from the REA.
In re Dairyland Power Coop., 37 F.P.C. 12, 18 (1967). Here,
however, the record contains no assertion that any of the
respondent electrical associations were Administration bor-
rowers and therefore subject to such control by the REA.
[31] Nevertheless, as the rural electric cooperatives, like
the respondent PUD's and municipal utilities, are non-
profit, consumer-owned utilities serving those who reside
within their service areas, there exists no public policy rea-
son as expressed by the CPA why the cooperatives should
not be likewise exempt from the CPA. Moreover, these
entities allegedly violated the CPA only by virtue of their
relationship with the Supply System, which is exempt from
the CPA. We conclude that to subject the respondent rural
electric cooperatives to potential CPA liability would be
contrary to the Legislature's purpose in excluding munici-
pal corporations from liability under the CPA. Therefore,
we hold in light of the unique facts of this case that, like
the Supply System and other governmental entities admit-
tedly exempt from the CPA, respondent rural electric
cooperatives are also exempt from the CPA under our rea-
soning in Washington Natural Gas Co. v. PUD 1, supra at
98. We affirm the trial court's dismissal of intervenors' CPA
66a
claims against respondents.
Vill
AMENDMENT OF COMPLAINT
Although plaintiffs agree with the trial court's ruling
allowing them to amend their original complaint to add
new plaintiffs, they challenge the trial court's refusal to
allow those new plaintiffs' claims to relate back to the orig-
inal filing date for statutes of limitation purposes.
Respondents argue, and the trial court held, that CR
15(c) applies only to the relation back of claims against
newly added defendants, not newly added piaintiffs. We
disagree.
CR 15(c) provides:
(c) Relation Back of Amendments. Whenever the
claim or defense asserted in the amended pleading arose
out of the conduct, transaction, or occurrence set forth or
attempted to be set forth in the original pleading, the
amendment relates back to the date of the original
pleading. An amendment changing the party against
whom a claim is asserted relates back if the foregoing
provision is satisfied and, within the period provided by
law for commencing the action against him, the party to
be brought in by amendment (1) has received such notice
of the institution of the action that he will not be preju-
diced in maintaining his defense on the merits, and (2)
knew or should have known that, but for a mistake con-
cerning the identity of the proper party, the action would
have been brought against him.
The advisory committee note to Fed. R. Civ. P. 15(c)
from which CR 15(c) was derived, states that rule 15(c)
extends by analogy to plaintiffs. See Advisory Committee
Note to the 1966 amendment to rule 15(c), 39 F.R.D. 82-84
(1966); 3 J. Moore, Federal Practice 4 15.15[4.-2], at 15-
169 (2d ed. 1985); 6 C. Wright & A. Miller, Federal Prac-
tice § 1501, at 524 (1971). We find these comments persua-
sive.
[32] Respondents argue that to allow new plaintiffs’
claims to relate back in this case would amount to granting
them a new cause of action after the applicable statutes of
67a
limitations had run. Since the amendment of CR 15(c),
however, we have rejected this argument. Indeed, once the
notice and prejudice requirements of CR 15(c) have been
met, any amendment does not subvert the policies of the
statute of limitations. North St. Ass'n v. Olympia, 96
Wn.2d 359, 368, 635 P.2d 721 (1981). "Rule 15(c), as
amended, dovetails with the policies of the limitation stat-
utes." North St. Ass'n, at 368. Moreover, "[aJs long as a
defendant is fully apprised of a claim arising from specific
conduct and has prepared to defend the action against him,
he will not be prejudiced by the addition of a new plaintiff
and thus should not be allowed to raise a limitations
defense." 6 C. Wright & A. Miller, Federal Practice § 1501,
at 272 (Supp. 1986).
Thus, we conclude that the notice and prejudice princi-
ples contained in CR 15(c) extend by analogy to the rela-
tion back of amendments adding new plaintiffs. Thus, a
court must determine whether the requirements of CR
15(c) are met and the court must determine whether failure
to join the plaintiffs earlier was the result of inexcusable
neglect. See South Hollywood Hills Citizens Ass'n v. King
Cy., 101 Wn.2d 68, 77, 677 P.2d 114 (1984).
Plaintiffs also challenge the trial court's denial of their
request to amend their complaint to add defendants.
Plaintiffs sought to add as parties several directors and
officers of respondent R. W. Beck and Associates, Raytheon
Company as parent corporation of respondent United
Engineers, and Enserch Corporation as owner of respon-
dent Ebasco Services. The trial court held that plaintiffs’
failure to join these defendants was the result of inexcus-
able neglect.
[33] Plaintiffs contend that delay, excusable or not, is
not sufficient to support the trial court's denial of their
motion. Instead, plaintiffs argue that a showing of specific
prejudice by the nonmoving party must be shown. See
Caruso v. Local 690, Int'l Bhd. of Teamsters, 100 Wn.2d
343, 349, 670 P.2d 240 (1983) (delay alone insufficient to
support denial of leave to amend to add new claims). How-
68a
ever, in cases where leave to amend to add additional
defendant has been sought, this court has clearly held that
inexcusable neglect alone is a sufficient ground for denying
the motion. North St. Ass'n, at 368; Tellinghuisen v. King
Cy., 103 Wn.2d 221, 223, 691 P.2d 575 (1984); South Holly-
wood Hilis Citizens Ass'n v. King Cy., supra at 77. Gener-
ally, inexcusable neglect exists when no reasons for the
initial failure to name the party appears in the record.
South Hollywood Hills Citizens Ass'n, at 78. If the parties
are apparent, or are ascertainable upon reasonable investi-
gation, the failure to name them will be held to be inexcus-
able. See 3A L. Orland, Wash. Prac., comment § 5185, at
43-44 (3d ed. 1986 Supp.); Tellinghuisen, at 224 (no excuse
where identity of omitted parties was matter of public
record); South Hollywood Hills Citizens Ass'n, at 77 (no
excuse because identity of omitted parties was matter of
public record).
Here, plaintiffs only contend that they could not have
discovered the identity of the defendants earlier. The
record does not indicate plaintiffs' reasons. Nevertheless,
the record shows that the identities of all the defendants
sought to be added was readily available to plaintiffs from a
variety of public sources. See, e.g., Clerk's Papers, at 867
(outlining public documentation of respondent Ebasco's
ownership by proposed new defendant Enserch); Plaintiffs’
Supplemental! Clerk's Papers, at 20 (detailing proposed new
defendant Raytheon's ownership of respondent United
Engineers); Clerk's Papers, at 779 (setting out annual
reports filed with Washington Secretary of State identify-
ing proposed new defendant officers and directors of
respondent R. W. Beck and Associates, Inc.).
Plaintiffs’ failure to avail themselves of this information
- prior to their third amended complaint, without evidence in
the record to the contrary, supports the trial court's con-
clusion that plaintiffs' failure to name these defendants
originally was the result of inexcusable neglect. Therefore,
the trial court did not abuse its discretion in denying
plaintiffs’ request for leave to amend its complaint to
69a
include additional defendants.
IX
SERVICE OF PROCESS
Plaintiffs challenge the trial court's dismissal of defend-
ants Donald Patterson and Stanley Pardo on the basis of
defective service of process. Patterson is a former officer of
respondent Blyth, Eastman, Paine, Webber, Inc.; Pardo 18
presently an officer of respondent Paine Webber, Inc.
A civil action in the superior court is commenced by ser-
vice of a copy of a summons, together with a copy of the
complaint, a8 provided in CR 4. See CR 3. RCW 4.28.080
details the appropriate method of service of process for
specific types of defendants. RCW 4.28.080(14), which
describes the proper method of service for all defendants
not specifically covered in sections 1-13, provides for ser-
vice as follows:
In all other cases, to the defendant personally, or by
leaving a copy of the summons at the house of his usual
abode with some person of suitable age and discretion
then resident therein.
Concerning personal service out-of-state, which is appli-
cable in the present situation, CR 4(e)(2) provides:
Although rule 4 does not generally apply to personal
service out of state, the prescribed form of summons
may, with the modifications required by statute, be used
for that purpose. See RCW 4.28.180.
RCW 4.28.180 provides:
Personal service out of state. Personal service of sum-
mons or other process may be made upon any party out-
side the state. If upon 4 citizen or mats ir of this state or
upon a person who has submitted to the jurisdiction of
the courts of this state, it shall have the force and effect
of personal service within this state; otherwise it shal!
have the force and effect of service by publication. The
summons upon the party out of the state shall contain
the same and be served in like manner as personal sum-
mons within the state, except it shall require the party to
appear and answer within sixty days after such personal
service out of the state.
70a
Proof of service is provided for in CR 4(g) which states in
relevant part:
Proof of service shall be as follows:
(6) In case of personal service out of the state, the affi-
davit of the person making the service, sworn to before a
notary public, with a seal attached, or before a clerk of a
court of record.
While the affidavit of service, regular in form and sub-
stance, is presumptively correct, the return is subject to
attack and may be discredited by competent evidence. Lee
v. Western Process Co., 35 Wn. App. 466, 469, 667 P.2d 638
(1983). Affidavits sworn to by individuals purportedly
served asserting that they were not in fact personally
served are considered by the courts as competent evidence
discrediting averments to the contrary in affidavits of ser-
vice. See, e.g., Lee, at 469.
Here, at the time service was purportedly made on his
wife at his residence, neither Patterson nor his wife was at
home. While Patterson's wife was allegedly served at home
in New Jersey on August 15, 1984, she was in fact vaca-
tioning in Massachusetts from July 4, 1984, to September 2,
1984. See Affidavit of Jane Patterson; Clerk's Papers, at
1517. Moreover, Patterson was not at home any time
between August 12, 1984, and August 19, 1984. See Affida-
vit of Donald Patterson; Clerk's Papers, at 1513. Patterson
only discovered the summons and complaint when he
returned home to find them on his porch, Clerk's Papers, at
1514, and has no recollection of receiving the copies pur-
portedly mailed to him, Clerk's Papers, at 1515.
Plaintiffs affidavit of service on Pardo demonstrates
defective service on its face, purporting to have served his
personal secretary at his usual place of business on August
13, 1984, rather than at his residence. Additionally, Pardo's
personal secretary has no recollection of the service at his
place of business. See Affidavit of Sharon O'Reilly; Clerk's
Papers, at 1524. No attempt was made to serve Pardo at his
residence. Pardo discovered the summons and complaint
J7la
among the mai! at his office sometime subsequent to
August 13, 1984. See Affidavit of Stanley Pardo; Clerk's
Papers, at 1521.
Plaintiffs do not dispute the Patterson and Pardo affida-
vits. Instead, they contend that their service of process
constituted substantial compliance with procedural rules
because both Patterson and Pardo eventually received
notice of their suit. We disagree.
[34] Initially, we observe that mere receipt of process
and actual notice alone do not establish valid service of
process. See Spokane v. Department of Labor & Indus., 34
Wn. App. 581, 584, 663 P.2d 843, review denied, 100 Wn.2d
1007 (1983). Moreover, substantial compliance with out—of-
state service requirements has been recognized only where
the defect in service involved a late filing of nonresidency
affidavits as required by RCW 4.28.185(4). See Golden
Gate Hop Ranch, Inc. v. Velsicol Chem. Corp., 66 Wn.2d
469, 472, 403 P.2d 351 (1965), cert. denied, 382 U.S. 1025
(1966); Ryland v. Universal Oil Co., 8 Wn. App. 43, 45, 504
P.2d 1171 (1972); Hatch v. Princess Louise Corp., 13 Wn.
App. 378, 379, 534 P.2d 1036 (1975).
Here, the service was more than technically defective; the
statutory procedures to ensure proper notice to nonresident
defendants were not followed. As statutes authorizing ser-
vice on out-of-state parties are in derogation of common
law personal service requirements, they must be strictly
pursued. See State ex rel. Hopman v. Superior Court, 88
Wash. 612, 617, 153 P. 315 (1915) (comparing out-of-state
service statutes to service by publication).
The Washington long-arm statute was clearly not strictly
pursued in the instant case. Mr. Patterson was not person-
ally served, nor was the process delivered to a person of
suitable age or discretion at his home. Rather, the summons
and complaint were left outside the door of his house at &
time when no one was present. Likewise, service upon Mr.
Pardo was neither made upon him personally, nor upon &
person of suitable age or discretion at his home. Rather, the
summons and complaint were either mailed to him, or
72a
dropped off at his place of business.
Finally, plaintiffs contend that service was made pursu-
ant to the trial court's order granting plaintiffs leave to
serve their third amended complaint on counsel for all
defendants appearing in this action. Plaintiffs argue that
because they served the complaint on Patterson and
Pardo's counsel pursuant to that order, service was prop-
erly made pursuant to CR 4(e)(1) (providing that service
may be made in manner prescribed by court order provid-
ing for service of summons and complaint).
Plaintiffs’ argument is without merit. Voluntary appear-
ances by defendants do not preclude their rights to chal-
lenge sufficiency of service pursuant to CR 12(b). CR
4(d)(5); Adkinson v. Digby, Inc., 99 Wn.2d 206, 209, 660
P.2d 756 (1983). Moreover, the trial court's order allowing
service of the third amended compiaint did not provide for
service of a summons. See Clerk's Papers, at 993. Thus, the
order does not fall within the scope of CR 4(e)( 1), and does
not negate the original defective service.
We conclude that the trial court properly dismissed
defendants Patterson and Pardo.
CONCLUSION
For the reasons stated in our foregoing analysis, we
reverse the tria) court's judgment as to plaintiffs’ and
intervenors’ claims under the Securities Act of Washington
and intervenors' common law fraud and negligent misrep-
resentation claims. We also reverse the trial court's denial
of plaintiffs’ motion to allow the claims of newly added
plaintiffs to relate back to the original filing date of this
action. The trial court's judgment as to all remaining claims
is affirmed.
We remand this case to the trial court for further pro-
ceedings consistent with this opinion.
Urrer, Dore, GoopLog, and DurHam, JJ., and WETHER-
ALL, J. Pro Tem., concur.
Pearson, C.J. (dissenting)—I would affirm the trial
73a
court's dismissal of all plaintiffs’ and intervenors’ Washing-
ton State Securities Act (WSSA) claims pursuant to CR
12(b)(6), as none of the complaints assert the necessary
privity required to establish an action under RCW
91.20.430(1). Further, the majority has, in my opinion, mis-
applied the Restatement of Torts section 552 to allow the
intervenors’ negligent misrepresentation claims to stand.
Therefore, ! dissent.
I
WASHINGTON STATE Securities Act CLAIMS
A
Proper Construction of the WSSA
First and foremost, the reasonable interpretation of
RCW 21.20.430(1) requires privity between plaintiff and
defendant. The majority's expansive denomination of par-
ties liable in a private action is without basis under the
clear language of the WSSA.
This court interprets statutory language to implement
legislative intent. Seven Gables Corp. v. MGM/UA Enter-
tainment Co., 106 Wn.2d 1, 6, 721 P.2d 1 (1986). The
authoritative indicator of legislative intent is the plain and
unambiguous meaning of the words in a statute. State v.
Johnson, 104 Wn.2d 179, 181, 703 P.2d 1052 (1985). When
the language of a statute is clear, the court must respect its
ordinary meaning. People’s Org. for Wash. Energy
Resources v. Utilities & Transp. Comm'n, 104 Wn.2d 798,
825, 711 P.2d 319 (1985). The ordinary and clear meaning
of "is liable to the person buying the security from him or
her* in RCW 21.20.430(1) requires that the plaintiff bought
a security from the defendant—that is, privity. Although
the Washington Legislature has substantially altered sec-
tion .430 during the ongoing development of numerous §
12(2) interpretations in the federa! circuits, the original
language in subsection .430(1) requiring privity remains
intact. The majority ignores that legislative intent can be
implemented only by retaining the plain meaning of that
subsection.
74a
Also, including only actual sellers under subsection
-430(1) retains the net of liability obviously contemplated
by the scheme of section .430. We interpret statutory lan-
guage to render all sections meaningful. State v. Q.D., 102
Wn.2d 19, 23, 685 P.2d 557 (1984). Only a strict privity
approach ensures meaningful application of all portions of
section .430; the majority's substantia! factor—proximate
cause approach renders subsection .430(3) repetitious and
meaningless. For example, under the majority's interpreta-
tion an employee who falls under subsection .430(3)
because he or she materially aids in the sale also necessarily
falls under subsection .430(1) as a substantial factor causing
the sale. Under a privity approach, however, the party who
actually sold the security to the plaintiff is liable under
subsection .430(1), and in subsection .430(3) the Legislature
specifically delineated other parties liable by virtue of their
status, knowledge, and participation in the sale, such as
employees who materially aid.’ Hence, the privity plainly
required under the reasonable construction of the WSSA
language avoids rendering subsection .430(3) superfluous.
Furthermore, the majority's comparison to the comments
of the Uniform Securities Act is without merit. Our Legis-
lature has not espoused that act and its comments in any
part; indeed, only two states have adopted the act, and
then with numerous variations. Unif. Sec. Act (1985), 7B
U.L.A. 30 (Supp. 1987). Whether other states wil] adopt the
aci is not only speculative but improbable, because both
*RCW 21.20.430(3) provides:
"Every person who directly or indirectly controls a seller or buyer liable under
subsection (1) or (2) above, every partner, officer, director or person who occupies
® similar status or performs a similar function of such seller or buyer, every
employee of such « seller or buyer who materially aids in the transaction, and
every broker-dealer, salesperson, or person exempt under the provisions of RCW
21.20.040 who materially aids in the transaction is also liable jointly and severally
with and to the same extent as the seller or buyer, unless such person sustains the
burden of proof that he or she did not know, and in the exercise of reasonable
cure could not have known, of the exisience of the facts by reason of which the
liability is alleged to exist. There is contribution as in cases of contract among the
- several persons so liable *
75a
the American Bar Association and the North American
Securities Administrators Association criticized and refused
to endorse it. See 19 Sec. Reg. & L. Rep. (BNA) 264 (1987);
18 Sec. Reg. & L. Rep. (BNA) 399 (1986).
The majority's reliance on tort law is also inappropriate
and without merit. The question of the existence of a stat-
utory cause of action is one of statutory construction; the
majority's argument based on tort principles, therefore, is
entirely misplaced. Touche Ross & Co. v. Redington, 442
U.S. 560, 568, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979); SEC v.
Seaboard Corp., 677 F.2d 1289, 1294 n.4 (9th Cir. 1982).
The WSSA does not supplant c. mirror tort law remedies
available to an injured party in @ securities transaction.
Accord, Ging v. Parker-Hunter, Inc., 544 F. Supp. 49, 52
(W.D. Pa. 1982). In fact, the securities laws were created
specifically to regulate a unique aspect of commerce that no
other area of law touches upon, including common law tort.
See Bowden v. Robinson, 67 Cal. App. 3d 705, 712, 136 Cal.
Rptr. 871 (1977). It is for this very reason that the interve-
nors’ common law negligent misrepresentation and fraud
claims are treated and analyzed as actions separate from
the WSSA claims.
B
Interpretation Mirroring Section 12(2)
The majority incorrectly imposes 4 meaning on the
WSSA that allegedly mirrors the current federal circuit
court trend in interpreting § 12(2) of the Securities Act of
1933, 15 U.S.C. § 771(2) (1982). Although this court must
not interfere with federal enforcement of the 1933 and 1934
securities acts, we need not interpret the WSSA in a dupli-
cate manner. Kittilson v. Ford, 93 Wn.2d 223, 227, 608 P.2d
264 (1980).
Mirrored interpretation is improper because the purposes
of the federal securities acts differ sharply from the purpose
of the WSSA. Federal securities laws enforce disclosure and
maintain integrity in the secondary s
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