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Ito International Corp. v. Prescott Inc.

August 26, 1996

ITO INTERNATIONAL CORP., A WASHINGTON CORPORATION; KAZUO AND KIMIKO ITO, HUSBAND AND WIFE; TOMOYUKI KATAYAMA; ITSUKO KANEKO; HIDEKO KANEKO; KANEKO TOKIWA, INC., A JAPANESE CORPORATION; FUMI KAWASHIMA; FT LIMITED COMPANY, A JAPANESE CORPORATION; KAZUO KOH; TSUNEO SATO; HISATAKA SHIMIZU; MICHIO SHIMURA; TOSHIKO SUGAI; AKIRA TANABE; KAMAYA COMPANY, LTD., A JAPANESE CORPORATION; EIKICHI TANABE; HIDEO NAKAMURA; HIROMI MATSUNO; IWAO MIYAMOTO: HISAYOSHI YAZAKI; HIROAKI WATANABE; AND INTER CO-OP USA NO. 1, A JAPANESE PARTNERSHIP, APPELLANTS,
v.
PRESCOTT, INC., A WASHINGTON CORPORATION; RICHARD C. CLOTFELTER AND JAN C. CLOTFELTER, A MARITAL COMMUNITY; GARY J. CARPENTER AND CHRISTIN A. CARPENTER, A MARITAL COMMUNITY; STEVEN P. QUAIVER AND JANE DOE QUAIVER, A MARITAL COMMUNITY; MICHAEL PETERSON AND JANE DOE PETERSON, A MARITAL COMMUNITY; ALAN PETERSON AND JOAN ROE PETERSON, A MARITAL COMMUNITY; AMERICAN PROPERTY CONSULTANTS, LTD., A JAPANESE CORPORATION; DEFENDANTS, YUTAKA NARITA, A JAPANESE NATIONAL; KEIJI TERUYA, A JAPANESE NATIONAL; SACHIO SUGINUMA, A JAPANESE NATIONAL; SAYYOU CORP., A JAPANESE CORPORATION, F/K/A INTER-REALTY PLANNING CO., LTD.; RESPONDENTS, FERGUSON & BURDELL, A DISSOLVED LAW PARTNERSHIP; BRUCE P. BABBITT AND JANE DOE BABBITT, A MARITAL COMMUNITY HENRY W. DEAN AND JANE DOE DEAN, A MARITAL COMMUNITY; DENNIS J. DUNPHY AND JANE DOE DUNPHY, A MARITAL COMMUNITY; W.J. THOMAS FERGUSON AND JANE DOE FERGUSON, A MARITAL COMMUNITY; THOMAS J. GREENAN AND JANE DOE GREENAN, A MARITAL COMMUNITY; EDWARD T. HILPERT, JR. AND JANE DOE HILPERT, A MARITAL COMMUNITY; JAMES E. HURT AND JANE DOE HURT, A MARITAL COMMUNITY; HENRY C. JAMESON AND JANE DOE JAMESON, A MARITAL COMMUNITY; CHRISTOPHER KANE AND JANE DOE KANE, A MARITAL COMMUNITY; ANNE DEVOE LAWLER AND JOHN DOE LAWLER, A MARITAL COMMUNITY; DAVID N. LOMBARD AND JANE DOE LOMBARD, A MARITAL COMMUNITY; DAVID R. LORD AND JANE DOE LORD, A MARITAL COMMUNITY; MICHAEL MCCORMACK AND JANE DOE MCCORMACK, A MARITAL COMMUNITY; PHILLIP S. MILLER AND JANE DOE MILLER, A MARITAL COMMUNITY; WILLIAM B. MOORE AND JANE DOE MOORE, A MARITAL COMMUNITY; SCOTT OSBORNE AND JANE DOE OSBORNE, A MARITAL COMMUNITY; SHAWN OTOROWSKI AND JOHN DOE OTOROWSKI, A MARITAL COMMUNITY; GREGORY S. PETRIE AND JANE DOE PETRIE, A MARITAL COMMUNITY; EDWARD P. SWAIN, JR., AND JANE DOE SWAIN, A MARITAL COMMUNITY; WILLIAM WESSELHOEFT AND JANE DOE WESSELHOEFT, A MARITAL COMMUNITY; WILLIAM D. STITES AND JANE DOE STITES; A MARITAL COMMUNITY; AND ANDREW L. SYMONS AND JANE DOE SYMONS, A MARITAL COMMUNITY, DEFENDANTS.



Superior Court County: King. Superior Court Cause No: 94-2-04070-8. Date filed in Superior Court: November 17, 1995. Superior Court Judge Signing: Hon. Harriett Cody.

Written by: Judge Coleman. Concurred by: Judge Baker, Judge Ellington

The opinion of the court was delivered by: Coleman

COLEMAN, J. -- Plaintiffs, a group of investors in a general partnership, ask this court to decide whether their investments are securities as a matter of law under the Washington State Securities Act. Plaintiffs claim that the court erred in granting defendants partial summary judgment on this issue because plaintiffs' passivity in the partnership renders them subject to the WSSA's protections. We agree and reverse.

After the parties filed briefs but before oral argument, plaintiffs settled with a number of defendants. Plaintiffs did not, however, settle with the American Property Consultants Ltd. defendants and the Inter Realty Planning Co. Ltd. (now known as SaYYou Corporation) defendants, both of whom did not file briefs in this case. Because all of the parties have not settled, we must address the merits and in doing so we have considered all the briefs filed--including those of the prior defendants. We note that we make no determination regarding the actual liability of the prior or the remaining defendants under the WSSA.

Inter Co-op USA No. 1 (IC-1) was a Japanese Kumiai, the equivalent of a general partnership under U.S. law. Prescott, APC, and IRP formed IC-1 to own and operate a building in downtown Seattle. The Kumiai was made up of 40 equal shares.

APC, with offices in Tokyo and Seattle, and IRP marketed the sale of the building through direct mailings and advertising in Japan. Some of the offering material emanated in Seattle. Marketing activity also occurred in Seattle, including a cocktail party that some of the plaintiffs attended. Thirty-six of the 40 shares were sold to plaintiffs, mostly Japanese individuals and entities. One of those entities was Ito International Corporation, a Washington corporation run by Japanese individuals.

The purchasers sued the sellers, alleging securities fraud under the WSSA, among other claims. Plaintiffs moved for partial summary judgment, requesting that the court determine that the investments were "securities" as a matter of law.

Each plaintiff executed documents in connection with the purchase, including a partnership agreement, a special power of attorney, and a real estate purchase and sale agreement. Prescott guaranteed plaintiffs a 6.4 percent net rate of return for five years, and Prescott, IRP, and APC agreed to manage the partnership, with each receiving an income management fee. Any excess income would go into a reserve account, which was to be distributed to the partners upon sale.

The partnership agreement established a rijikai, the Japanese term for a Board of Directors, to consist of no less than two nor more than five directors. Article 24 provided that the Directors be selected by the partners at a general meeting but mandated that three of the initial Directors be officers of IRP, APC, and Prescott. Article 24 also provided, "As long as there is no dismissal or resignation, the Director's term of office is from the time of establishment of the partnership or the time of election of the Directors until the dissolution of the partnership."

Article 25 provided that a Director's term ended upon resignation or dismissal for cause, both of which required consent of two-thirds or more of the other directors. But Article 34 provided, "Despite the terms set forth in Article 26, *fn1 a Director can be dismissed by vote of two-thirds or more of all partners at a lawfully convened partners' general meeting."

Under the partnership agreement, the partners gave the Board of Directors the right to carry out business operations, borrow money, enter into agreements, dispose of assets including real estate, sign purchase and sale certificates, notes, mortgage certificates, and other documents.

The Special Power of Attorney provided the defendants with broad control over the management of the building:

Specifically included within this authority, and not by way of limitation thereon, shall be the power to make, execute, sign, seal, deliver, acknowledge, publish and file all documents and instruments of whatsoever kind and nature relating to:

(1) any agreement of general or limited partnership, the certificate thereof, any amendments thereto, and the admission or removal ...


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