No. 59707-8-I.The Court of Appeals of Washington, Division One.
May 27, 2008.
Appeal from a judgment of the Superior Court for Snohomish County, No. 05-2-05824-1, Richard J. Thorpe, J., entered February 16, 2007.
by unpublished opinion per Grosse, J., concurred in by Agid and Becker, JJ.
To sustain an action sounding in negligence, a plaintiff must demonstrate the defendant owed them a duty of care. Here, investors have failed to demonstrate that the State or its Department of Financial Institutions had a duty to them in particular when the Department has such broad discretion to determine both how and whether to enforce the Securities Act of Washington.
Cyril W. Randell, the sole owner of Cyril W. Randell Associates (CWR), solicited and sold certain investments from 1997 through 2001 to the plaintiff investors. Of particular interest, CWR offered high-risk investments consisting Page 3 of interests in promissory notes for loans secured by real property deeds of trust. Under the Securities Act, if investment interests are split among multiple investors they are fractional securities that must be registered with the Securities Division of the Department of Financial Institutions (hereinafter, DFI) and may only be sold by registered brokers.
DFI opened an investigation into CWR after one of its investigators came across a CWR advertisement aimed at potential investors in December 1997. At that time, DFI had not received any complaints about the company. The investigation was minimal. For instance, only two of CWR’s approximately 63 investors as of 1998 were contacted, both of whom reported being happy with their investments.
In September 1998, DFI and CWR negotiated and entered into a consent order. Without admitting or denying the truth of DFI’s findings and conclusions, CWR agreed to provide its investors with a copy of the consent order and to then furnish DFI with proof of having done so within 30 days. CWR also agreed to assign and record each current participation loan investor’s fractional interest in the borrower’s note and the deed securing borrower’s performance and provide DFI with documentation thereof within 120 days. And further, CWR agreed it would cease and desist from selling any unregistered securities or engage in any sort of fraud or willful deception in connection with the offer, sale, or purchase of any security.
The consent order did not impose any duties on DFI. It did, however, specify that DFI may “reopen its investigation of th[e] matter and take additional enforcement action” if it found there had been misrepresentation by Randell and/or CWR.
CWR failed to comply with the consent order’s terms. DFI did not, however, follow up or take any other action with regard to CWR. The investors were never notified of the consent order’s existence.
Approximately one month after entry of the consent order, Barbara Prater, CWR’s former bookkeeper, contacted DFI. Prater contended that CWR’s business amounted to little more than a ponzi scheme and that the company was flagrantly violating applicable securities laws and the consent order. No action was taken by DFI in response to Prater’s allegations or the documents she submitted under subpoena.
After receiving two complaints about the company in late 2001/early 2002, DFI opened a new investigation into CWR and eventually referred the matter to its administrator for further enforcement action. Before DFI’s investigation was complete, CWR went into involuntary bankruptcy and its assets were liquidated.
In January 2005, investors sued the State alleging its agency, DFI, failed to execute its statutory duties under the Securities Act and for common law negligence. The trial court granted the State summary judgment under CR 56 in February 2007. The investors appeal.
“The threshold determination in a[ny] negligence action is whether a duty of care is owed by the defendant to the plaintiff.” Like any other tort defendant, the State and its entities are only liable for any actionable breaches of a duty owed the plaintiff. Lest government and its agencies be subject to unlimited liability, the public duty doctrine serves as a “`focusing tool'” to determine whether a duty was owed a particular individual or group of persons, the breach of which is actionable, or the duty is owed to the “`nebulous public,'” the breach of which is not actionable. This judicially created doctrine stands for the proposition that a duty to all is a duty to none.
The Washington Supreme Court has recognized four exceptions to the public duty doctrine:
(1) where there is legislative intent to impose a duty of care;
(2) where a “special relationship” exists between plaintiff and the public entity;
(3) where the government has engaged in “volunteer rescue” efforts; or
(4) where the government is guilty of a “failure to enforce” a specific statute.
In identifying these exceptions, and thus defining the contours of the public duty doctrine, the courts have described the doctrine as “simply an extension of general negligence principles determining whether a duty of care is owed.”
Here, the only exception the investors have alleged applicable is that of failure to enforce. That exception provides a general duty of care normally owedthe public can be owed an individual (or distinct class or group of persons) where:
(1) Governmental agents responsible for enforcing statutory requirements possess actual knowledge of a statutory violation.
(2) They fail to take corrective action.
(3) There is a statutory duty to do so.
(4) And the plaintiff is within the class the statute intended to protect.
The failure to enforce exception is narrowly construed and the investors bear the burden of establishing all four elements of the exception satisfied before it will be found applicable. Here, DFI had no statutory duty to take corrective action.
Washington precedent is clear that the Securities Act does not confer on DFI or the State enforceable duties toward individual investors or the duty to take corrective action for violations of the act. Because DFI had no actionable duty to the investors, summary judgment for the State was proper.
Investors argue that when DFI became aware that CWR was selling these particular investors securities in violation of the Securities Act and entered into the consent order, it gained a duty to the investors not owed to the general public. And further, DFI owed them a duty of care since these investors werereadily identifiable and the harm they may suffer foreseeable. However, DFI’s awareness of specific violations of the act that may harm these particular investors does not mean that it ever had a corresponding duty to protect these investors. Any duty to protect them individually or as a class must have been created by statute (at least under the failure to enforce exception) and the investors fail to point to any particular provision within the Securities Act that could plausibly be read, singly or collectively, as creating such a duty.
In McKasson v. State, this court held that DFI had no enforceable duty to act, noting the Securities Act (“replete with `mays'”) granted DFI broad discretion regarding enforcement and lacked any mandatory directives. The failure to enforce exception only creates an actionable duty where a plaintiff has demonstrated all four elements of the exception present. In Baerlein v. State, the Supreme Court held that the Securities Act did not create a duty to protect individual investors from losses. In so finding, the court noted that the pertinent statutory provisions demonstrate legislative intent to “bring order and regulation to the securities industry which will inure to the protection of investors as a class and the public generally” rather than protect individual investors.
Investors contend that Baerlein is distinguishable because there the plaintiffs alleged they were owed a duty under the legislative intent exceptionrather than that of failure to enforce. This distinction comes to naught. Here, the investors have similarly failed to establish that they were owed a duty of care not owed the general public. Further,McKasson involved the failure to enforce exception. There, the McKasson
court was clear that DFI had no duty to take any corrective action whatsoever. Further, the foreseeability of the harm to these particular investors did not create an independent duty owed by DFI to those investors. While foreseeability may serve to limit the scope of a duty owed to potential plaintiffs, it may not create one.
For the above reasons, we affirm.