Lloyd Hara v. Kunath Karren Rinne & Atkin Llc ( 2015 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON O
o coo
CJ1
•P' ™n
LLOYD HARA, an individual, C_ HI,
m
cr
No. 71767-7-1 "3C
ro ~'V, '•
Appellant, ro
cr^or1
DIVISION ONE 2* c/>rnU
2C ^C j> "•--i
v.
UNPUBLISHED OPINION?
KUNATH, KARREN, RINNE, &ATKIN —
o—
LLC, a Washington limited liability
company,
FILED: June 22, 2015
Respondent.
Appelwick, J. — Hara appeals the trial court's dismissal of his action to enforce a
severance agreement against his former employer, KKRA. The trial court concluded that
the severance agreement was illegal and, therefore, unenforceable under both state and
federal law. We affirm.
FACTS
Kunath, Karren, Rinne, & Atkin LLC (KKRA) is an investment adviser registered
with the United States Securities and Exchange Commission (SEC). KKRA is subject to
regulation by both the SEC and the Washington Department of Financial Institutions
(DFI). KKRA has about one billion dollars under its management.
KKRA hired Lloyd Hara in 1996. The parties dispute the reason why KKRA hired
Hara. Hara claims he joined KKRA after KKRA approached him about joining as a
separate consulting arm of the firm. KKRA claims it wanted Hara to join the firm, because
Hara knew a lot of people locally and regionally and KKRA wanted Hara's help in securing
his contacts as clients.
The parties did not execute a written employment contract when Hara joined
KKRA. Pursuant to an oral agreement, KKRA paid Hara a salary of about $5,000 a
No. 71767-7-1/2
month. KKRA claims the oral agreement also included compensation for commissions.
Specifically, KKRA contends that the oral agreement provided that Hara would receive
percentages of the accounts for any new clients he brought in—three percent for the first
year, two percent for the next year, and one percent for the third year.
Ned Karren, a partner at KKRA, and Hara met with several prospective clients
together. Specifically, they traveled to a Native American conference in Alaska and
visited with several tribes and corporations. During their trip to Alaska, Hara introduced
KKRA to the Northwest Arctic Borough (NAB). Hara had a relationship with NAB prior to
joining KKRA, because he did consulting work for NAB previously. Together, Karren and
Hara successfully visited with NAB and NAB became a KKRA client for investment
management services. Hara also received credit for helping to secure the Muckleshoot
Indian Tribe (MIT) as a client. During Hara's employment with KKRA, and while he was
meeting with these prospective clients, he was not registered with the SEC or the DFI.
KKRA never asked Hara to register with either agency or told Hara that he needed to do
so.
After Hara had worked at KKRA for about a year, KKRA indicated that he should
be spending less time doing consulting and more time introducing KKRA to potential
clients. At KKRA's urging, Hara sent out form letters to contacts in his Rolodex list
informing them that KKRA had an investment arm if they needed services in that area.
None of these letters resulted in new clients joining KKRA.
KKRA eventually told Hara that it wanted him to focus primarily on marketing
instead of consulting. Hara told KKRA that his strengths were in consulting and that he
No. 71767-7-1/3
did not want to focus on marketing. At that point, KKRA asked Hara to resign. Hara
submitted a letter of resignation on September 5, 1997.
Hara and KKRA then began negotiating a "Severance Agreement." Hara
consulted with an attorney during the drafting process. The parties did not fully execute
the Severance Agreement until January 15, 1998. The Severance Agreement had
several provisions. First, KKRA acknowledged that Hara was interested in pursuing his
own consulting business, and it offered to help him with the transition process. KKRA
also agreed to provide additional benefits to Hara in exchange for his promise not to
pursue unemployment benefits. These additional benefits included vacation days,
additional salary, start-up materials for his consulting business, medical insurance, and
"a percentage commission of new investment management business at the rate he has
been paid in past periods, for the quarter ending September 30, 1997."
Additionally, paragraph 5 of the Severance Agreement indicated that KKRA would
pay Hara his "share of the collected management fees on those accounts listed in Exhibit
'B' at percentages originally established (3-2-1%), for as long as KKRA retains the client."
There is no evidence exhibit B ever existed or that any accounts were listed in it. But,
Hara testified that NAB and MIT were the only two clients he introduced to KKRA who
actually joined KKRA.
Paragraph 5 of the Severance Agreement also indicated that Hara would receive
three percent of the payments on NAB and MIT billings. In exchange for these payments,
Hara agreed not to accept employment with a competing firm. Both parties agreed to a
nondisparagement clause found in a separate paragraph of the Severance Agreement.
No. 71767-7-1/4
Another provision of the Severance Agreement indicated that the contract was fully
integrated.
After Hara's employment ended, KKRA paid Hara three percent of the NAB and
MIT receipts as provided for in paragraph 5 of the Severance Agreement. The Severance
Agreement provided for these three percent payments to continue in perpetuity for as
long as KKRA retained NAB and MIT as clients. This was the case even though Hara's
oral employment agreement provided that the percentages Hara was paid on those
accounts would drop to two percent the second year and one percent the third year had
he remained employed with KKRA.1 Copies of checks KKRA gave to Hara and the
corresponding fee invoices indicate that KKRA paid Hara commissions representing three
percent of the receipts for NAB and MITduring Hara's employment in 1996—the first year
of his employment. The checks were labeled "Wages: Marketing: Commissions."
From 1998 through 2009, KKRA paid Hara pursuant to the terms of the Severance
Agreement. The checks and the Internal Revenue Service form 1099 for the payments
stated that the monetary amounts represented commissions. Hara classified the
payments from KKRA as commissions on a public disclosure form.
KKRA stopped making payments to Hara in January 2010. When Hara asked
KKRA why he did not receive his regular payment, KKRA attempted to pay Hara $17,000
in exchange for voiding the Severance Agreement. Hara refused the payment and sought
to keep collecting on the Severance Agreement. KKRA later indicated that it would not
continue to pay Hara, because he had breached the Severance Agreement by making a
1 KKRA claims that Hara was in the first year of the commission schedule, receiving
three percent commissions when he resigned.
No. 71767-7-1/5
disparaging remark about KKRA and because he was engaging in influence peddling.
The parties could not reach a resolution and Hara filed a complaint for breach of contract
on August 13, 2012.
KKRA originally defended against the lawsuit based on several theories including
estoppel and breach of contractual duties. On October 18, 2013, Hara moved for partial
summary judgment. KKRA also moved for summary judgment and defended on the basis
that the Severance Agreement violated both state and federal licensing law. The trial
court denied both motions.
The case proceeded to a bench trial. At trial, KKRA argued that the Severance
Agreement was illegal, because it provides for the continuation of commission payments
that Hara received illegally during his employment with KKRA. KKRA contended that it
could not legally pay Hara the commissions under paragraph 5 of the Severance
Agreement, because Hara was not registered with the DFI as an investment adviser
representative and because Hara did not fall within an exemption to a federal regulation
forbidding KKRA from paying him for solicitation activities. The trial court ruled orally in
favor of KKRA on February 12, 2014. The trial court issued findings of fact and
conclusions of law on March 11, 2014. It concluded that the Severance Agreement was
unenforceable under both state and federal law. It entered judgment in favor of KKRA
and dismissed Hara's claims with prejudice. Hara appeals.
DISCUSSION
Hara first contends that the trial court made two evidentiary errors at trial. Hara
argues that the trial court erred when it denied his motion in limine and improperly
admitted parol evidence. He then asserts that the trial court erred when it admitted
No. 71767-7-1/6
evidence and testimony about KKRA's payment records, because the evidence was not
properly authenticated or listed on the joint statement of evidence. Hara also claims that
the Severance Agreement is legal and enforceable under both federal and state law.
I. Standard of Review
In an appeal from a bench trial, this court's review is limited to determining whether
substantial evidence supports the findings of fact and, if so, whether the findings of fact
in turn support the trial court's conclusions of law and judgment. Ridgeview Props, v.
Starbuck, 96 Wash. 2d 716, 719, 638 P.2d 1231 (1982). Substantial evidence is evidence
in sufficient quantum to persuade a fair-minded person of the declared premise. ]d.
Unchallenged findings of fact are verities on appeal. Robel v. Roundup Corp., 148 Wash. 2d
35, 42, 59 P.3d 611 (2002). We review challenges to the trial court's conclusions of law
de novo.2 Id at 42-43.
II. Evidentiary Challenges
Hara makes two evidentiary challenges that he contends affected the trial court's
ruling.
A. Motion in Limine - Parol Evidence
Hara contends that the trial court erred when it denied his motion in limine and
improperly admitted parol evidence. In his motion in limine, Hara asked the trial court to
exclude "[a]ny evidence extrinsic to the written agreement, except as it pertains to issues
2 Hara contends that we should review the trial court's dismissal of his motion for
summary judgment. He does so ostensibly to argue that the standard of review should
be de novo. But, the trial court's order denying summary judgment is not an appealable
order. Where a denial of summary judgment is based on the presence of material,
disputed facts, it will not be reviewed when raised after a trial on the merits. Weiss v.
Lonnquist, 173 Wash. App. 344, 354, 293 P.3d 1264 (2013).
No. 71767-7-1/7
of performance or breach of its terms." (Bold face and capitalization omitted.) The motion
was broad and would have resulted in exclusion of all evidence of the type of work Hara
did while employed at KKRA.
Hara contends that the trial court erred when it admitted the parol evidence,
because KKRA used the evidence to show illegal intent independent of the Severance
Agreement. This court reviews a denial of a motion in limine for abuse of discretion.
Fenimore v. Donald M. Drake Constr. Co.. 87 Wash. 2d 85, 91, 549 P.2d 483 (1976).
Under the parol evidence rule:
"[Pjarol or extrinsic evidence is not admissible to add to, subtract from, vary,
or contradict written instruments which are contractual in nature and which
are valid, complete, unambiguous, and not affected by accident, fraud, or
mistake."
Berg v. Hudesman, 115 Wash. 2d 657, 670, 801 P.2d 222 (1990) (alteration in original)
(quoting St. Yves v. Mid State Bank, 111 Wash. 2d 374, 377, 757 P.2d 1384 (1988)).
Evidence of Hara's oral employment agreement and the type of work Hara was
doing is not parol evidence, because it was not admitted to vary or contradict a specific
written term in the contract. Even assuming the evidence of Hara's oral employment
agreement and activities while at KKRA constitutes parol evidence, the parol evidence
rule does not exclude parol evidence to establish illegality. City of Redmond v. Kezner,
10 Wash. App. 332, 340, 517 P.2d 625 (1973). The rule forbidding the introduction of parol
evidence to contradict, add to, or vary a written instrument does not extend to evidence
offered to show that a contract was made in furtherance of objects forbidden by statute,
by common law, or by the general policy of the law. Auve v. Fagnant, 16 Wash. 2d 669,
No. 71767-7-1/8
677, 134 P.2d 454 (1943). Therefore, the trial court did not abuse its discretion when it
denied Hara's motion in limine.
B. Admission of Exhibit 13
Hara also claims that the trial court erred when it admitted evidence—KKRA's
payment records (Exhibit 13) and Karren's testimony about Exhibit 13—to show that
KKRA considered the payments it made to Hara commissions. Exhibit 13 is one of
KKRA's payment records including a column listing Hara's commissions from 1996-2010.
Hara contends that admission of the evidence was improper, because the evidence was
not submitted by either party as a trial exhibit and it was not listed on the joint statement
of evidence. He further contends that it was not properly authenticated.
At trial, on February 11, 2014, counsel for KKRA stated that he sent the payment
record to Hara's counsel on November 7, 2013—the day that he received it. KKRA's
counsel stated that he did not produce the document on the joint statement of evidence,
because he did not know that whether Hara received commissions was going to be an
issue. It was his understanding that that fact had been established. He argued that,
alternatively, he could submit the exhibit to impeach Hara's testimony that he did not
remember receiving commissions while working at KKRA.
Admission of evidence lies largely within the sound discretion of the trial court.
Davis v. Globe Mach. Mfg. Co.. 102 Wash. 2d 68, 76-77, 684 P.2d 692 (1984). Absent
abuse of that discretion there is no error, jd. KCLR 4(k) provides that all parties shall file
a joint statement of evidence no later than five court days before the scheduled trial
including a list of exhibits each party expects to offer at trial. Hara provides no authority
No. 71767-7-1/9
for the assertion that a trial court may not allow the admission of an exhibit not provided
in the joint statement of evidence.
The trial court allowed Karren to testify about the document, reasoning that Hara's
counsel had previously received a copy of the document and that it had no reason not to
believe KKRA's counsel's belief that the commission issue would not be raised at trial.
And, the trial court admitted Exhibit 13, reasoning that Karren was a proper custodian for
authentication purposes, because he saw Exhibit 13 previously, saw the checks and
invoices used to generate Exhibit 13, and is aware of how KKRA's business records are
maintained.
Similarly, this court reviews a trial court's decision regarding the authenticity of an
exhibit under an abuse of discretion standard. State v. Williams, 136 Wash. App. 486, 499,
150 P.3d 111 (2007). ER 901 requires the proponent of the evidence to make a prima
facie showing that the evidence is authentic—it is what it purports to be. Rice v. Offshore
Svs., Inc., 167 Wash. App. 77, 86, 272 P.3d 865 (2012). Under ER 901(b)(1) authenticity
may be established based on testimony of a witness with knowledge who claims that the
a matter is what it is claimed to be. Karren testified that he was familiar with KKRA's
business records and that he had previously seen the checks used to generate Exhibit
13. We conclude that the trial court did not abuse its discretion when it determined that
Exhibit 13 was properly authenticated, when it admitted the exhibit or when it allowed
Karren to testify about it.
III. Challenged Findings of Fact
Hara argues that the trial court did not have substantial evidence to support the
finding of fact that Hara's original employment contract was oral. It is unclear whether
No. 71767-7-1/10
Hara is challenging the finding that an employment contract existed or that it was oral.
But, either way, both Hara and Karren testified at trial that Hara's employment with KKRA
was governed by an oral agreement. There was substantial evidence in the record to
support this finding.
Hara also challenges the finding that Hara's work at KKRA included both
consulting and soliciting new clients. But, there was substantial evidence in the record
that Hara both consulted and worked to solicit clients. Hara testified that he was brought
on to join as a separate consulting arm of KKRA. Hara testified that he billed for his
consulting practice while with KKRA. Specifically, he testified that he consulted for NAB
and MIT after they became KKRA clients. Regarding solicitations, Karren testified that
he and Hara traveled to Alaska to solicit prospective clients. Hara testified that he sent
letters to his contacts informing them that KKRA had an investment arm if they needed
services in that area. Hara introduced KKRA to NAB and received credit for helping to
secure MIT as a client. Hara testified that he introduced KKRA to MIT, because he had
been doing consulting work for MIT. There was substantial evidence in the record to
support the finding that Hara was both consulting and soliciting clients while working at
KKRA.
Hara also challenges the trial court's finding of fact that he was paid both a salary
and commissions while working for KKRA and that the commissions were for clients that
Hara participated in procuring for KKRA. Both Hara and Karren testified that KKRA paid
Hara a fixed salary. At trial, Karren testified that KKRA also paid Hara commissions
starting at a three percent rate for the first year, two percent the next year, and one
percent for the third year for any new client he brought into the firm. Moreover, the
10
No. 71767-7-1/11
Severance Agreement states that KKRA would pay Hara "a percentage commission of
new investment management business at the rate he has been paid in past periods"—
implying that he had previously been paid commissions for generating investment
management business. Karren testified that copies of checks KKRA paid to Hara marked
as "commissions" match three percent of the NAB and MIT fees for the corresponding
quarter. There was substantial evidence in the record to support this finding.
Finally, Hara challenges the trial court's findings of fact that Hara successfully
solicited NAB, had some involvement with obtaining MIT as a client, and solicited a
number of other entities on behalf of KKRA. Hara testified that he had a relationship with
NAB prior to joining KKRA, because he consulted for them. He further testified that he
introduced KKRA to NAB. Karren testified that Hara received credit for helping to secure
MIT as a client. Hara testified that he had a relationship with MIT prior to joining KKRA.3
Karren testified that he and Hara solicited several prospective clients on a trip to Alaska.
Hara sent out letters to several of his contacts informing them about KKRA's investment
services. There was substantial evidence in the record to support this finding.
IV. Illegality
Hara claims that the trial court erred when it concluded that the Severance
Agreement was illegal under both federal and state law.
3 Hara emphasizes that Karren testified that someone else solicited the MIT
account. But, Hara testified that he introduced KKRA and MIT. And, this court defers to
the trier of fact for purposes of resolving conflicting testimony and evaluating the
persuasiveness of the evidence and credibility of the witnesses. Lodis v. Corbis Holdings,
Inc., 172 Wash. App. 835, 861, 292 P.3d 779 (2013).
11
No. 71767-7-1/12
A. Illegality of Payments Under Federal Law
Under federal law, investment advisers4 with more than $25 million in assets under
management must register with the SEC. 15 U.S.C. §§ 80b-3(a), 80b-3a(a)(1)(A). And,
15 U.S.C. § 80b-3a(b)(1)(A) preempts most state regulation of investment advisers.
Federal law restricts KKRA's ability to pay money for solicitation activities. Specifically,
"[i]t shall be unlawful for any investment adviser required to be registered pursuant to
section 203 of the [Investment Advisor] Act to pay a cash fee, directly or indirectly to a
solicitor with respect to solicitation activities" unless an exemption applies. 17 C.F.R.
275.206(4)-3 (emphasis added). A "solicitor" is "any person who, directly or indirectly,
solicits any client for, or refers any client to, an investment adviser." 17 C.F.R. 275.206(4)-
3(d)(1).
KKRA is an investment adviser registered with the SEC and is thus regulated by
the SEC under federal law. The trial court found that Hara solicited new clients for KKRA,
and that KKRA paid Hara commissions for clients that Hara helped solicit. After Hara
resigned, the Severance Agreement provided that Hara would receive compensation
measured as a percentage of the on-going fees earned by KKRA in managing the NAB
and MIT accounts—accounts that Hara helped solicit. Tbhe trial court concluded that it
would be unlawful under federal law for KKRA to pay Hara, either directly or indirectly,
with respect to solicitation activities.
Hara argues that federal law is not relevant or applicable, because no allegation was
made and no inference can be drawn based on the language of the Severance
4 An "investment adviser" means any person who, for compensation, engages in
the business of advising others as to the value of securities or as to the advisability of
investing in, purchasing, or selling securities. 15 U.S.C. § 80b-2.
12
No. 71767-7-1/13
Agreement that Hara is required to engage in solicitation or investment representative
activities upon signing the Severance Agreement. In making this argument, Hara
assumes both that the illegality can be based on only his actions and that the
compensation provided in the Severance Agreement is not connected to the illegal
compensation Hara received for his solicitation activities while he was employed with
KKRA. Neither assumption is supported by legal authority. Continuation of solicitation
activity after signing the Severance Agreement is not necessary to establish a violation
of the federal law. It is enough that the payments are being made with respect to
solicitations that were illegal when made.
Hara contends that even if the payments during his employment were with respect
to solicitation activities, they were not illegal under the employee exemption in 17 C.F.R.
275.206(4)-3(a)(2)(ii). The exemption states that a cash fee can be paid to a solicitor who
is an employee of the investment adviser provided that the employee's status as a solicitor
of the investment adviser is disclosed to the client at the time of the solicitation or referral.
]d. There is no evidence in the record that any such required disclosures were made to
NAB or MIT. And, the trial court concluded that no evidence was introduced at trial that
an exemption applied.
Because the Severance Agreement required KKRA to compensate Hara directly
or indirectly with respect to solicitation activities and because there is no evidence that an
exemption applies, the trial court properly concluded that the Severance Agreement was
illegal under federal law.
13
No. 71767-7-1/14
B. Illegality of the Contract Under State Law
While federal law regulates investment advisers, state law regulates "investment
adviser representatives," defined as:
[A]ny partner, officer, director, or a person occupying similar status or
performing similar functions, or other individual, who is employed by or
associated with an investment adviser, and who does any of the following:
(a) Makes any recommendations or otherwise renders advice
regarding rsecurities; . . .
(d) Solicits, offers or negotiates for the sale of or sells investment
advisory services.
RCW 21.20.005(9). It is unlawful for any person to transact business as an investment
adviser or investment adviser representative unless the person is registered or exempt.
RCW 21.20.040(3).
Hara contends that the trial court erred when it concluded that he was an
investment adviser representative while he was employed by KKRA. Consequently, he
contends that the trial court erred when it concluded that the oral employment contract
violated RCW 21.20.040(3), because it required KKRA to pay Hara for services as an
investment adviser representative when he was not registered.
However, Hara's work with KKRA included both consulting and soliciting new
clients for KKRA. The trial court correctly found that Hara was working as an investment
adviser representative and that KKRA was compensating Hara for that work. Hara was
not registered with the DFI. And, Hara does not challenge the trial court's conclusion of
law that he does not meet the requirements for any exemption to RCW 21.20.040(3).
14
No. 71767-7-1/15
Therefore, the trial court properly concluded that the oral employment contract violated
RCW 21.20.040(3).
Hara then claims that he was not an investment adviser representative when the
Severance Agreement was executed, because he was not employed by or associated
with KKRA at that time. Hara contends that the illegality of the oral employment
agreement does not affect the legality of the Severance Agreement, because the
Severance Agreement is only incidentally or indirectly connected to the oral employment
agreement, if at all. Specifically he claims that the Severance Agreement is supported by
valid, independent consideration.
In determining whether the Severance Agreement is severable from the illegal oral
employment agreement, we engage in the three-part test established by the court in
Sherwood & Roberts-Yakima, Inc. v. Cohan, 2 Wash. App. 703, 713-15, 469 P.2d 574
(1970). We consider (1) whether or not the Severance Agreement is separate and distinct
from the antecedent illegal solicitation payments in the oral employment agreement (2)
whether there is independent legal consideration to support the Severance Agreement
and (3) whether the Severance Agreement provisions sued upon are sufficiently remote,
collateral, or severable from the antecedent illegal solicitations so that the enforcement
of the Severance Agreement does not result in sanction of the original illegal contract or
conflict with the policy against enforcing illegal contracts, jd.
In Cohan, an electronics sales corporation (Lifetone) sold radios and fire alarm
systems to consumers. ]d. at 704-05. In exchange, the consumers would furnish Lifetone
with a list of prospective purchasers. Id. at 705. For each sale Lifetone made based on
a consumer's referral, the consumer would receive a $100 commission. Id. The Lifetone
15
No. 71767-7-1/16
salesman would assure the consumer that the commissions would be adequate to cover
the purchase price. Sherwood & Roberts-Yakima, Inc. v. Leach, 67 Wash. 2d 630, 632, 409
P.2d 160 (1965). Lifetone encouraged consumers to finance the original purchase price
of the item through Sherwood & Roberts. Cohan, 2 Wash. App. at 705. Sherwood &
Roberts then bought Lifetone's conditional sales contracts pursuant to financing
requirements, which included Lifetone's warranty that the sales transactions between
Lifetone and the consumer were valid, genuine, and enforceable, id. at 705-06. The
individual Lifetone promoters also personally guaranteed the accuracy of the warranties
from Lifetone to Sherwood & Roberts, id. at 706.
Shortly after the parties made these arrangements, the Supreme Court in Leach,
ruled that the referral selling scheme between Lifetone and the consumers was illegal.
67 Wash. 2d at 636-37. In light of the decision in Leach, the parties in Cohan stipulated that
all of the contracts assigned by Lifetone to Sherwood & Roberts were unenforceable.
Cohan, 2 Wash. App. at 706. Sherwood & Roberts then sued Lifetone and its promoters
for breach of their agreement warranting the assigned contracts to be valid and
enforceable, id. at 704. Lifetone defended based on illegality and claimed that the
warranties were unenforceable. ]d The Court of Appeals reversed the trial court and
held that the warranty contracts were severable and that Sherwood & Roberts could
recover on them. id. at 717.
i. Separate and Distinct
The first part of the severability analysis is whether the two agreements are
separate and distinct—whether the Severance Agreement is separate and distinct from
the illegal oral employment agreement, id. at 713. In Cohan, the court reasoned that it
16
No. 71767-7-1/17
was important that the only illegal transactions were the transactions between Lifetone
and the consumers—different parties than the parties in the case before it. id. at 713-14.
In concluding that the warranty and guarantee agreements were collateral to the illegal
contracts, the court stated that it was apparent that neither the assignments containing
the warranties nor the personal guarantees were substantially identical to the underlying
sales contracts even though the agreements were casually related to each other, id.
By contrast, here, the parties involved in the oral employment agreement and the
Severance Agreement are identical. Moreover, the Severance Agreement provides that
Hara will receive commissions based on accounts that he illegally solicited while
employed under the oral employment agreement with KKRA. We conclude that the two
agreements are not separate and distinct.
ii. New and Independent Consideration
The second part of the analysis requires us to determine whether the Severance
Agreement is supported by independent consideration, id. at 714. An agreement will be
enforced when collaterally related to an illegal transaction, so long as there is an
independent consideration or if the plaintiff does not require the aid of the illegal
transaction to make out his case. id. The trial court concluded that the consideration for
the Severance Agreement flowed directly from the illegal employment relationship. It
concluded that the three percent of fees Hara was to receive under paragraph 5 of the
Severance Agreement was measured by income from clients Hara never should have
solicited.
Hara contends that this part of the severability analysis is satisfied as long as there
is some new or additional consideration. Hara argues that there was consideration
17
No. 71767-7-1/18
distinct from the alleged misconduct during employment and that the independent
consideration does not rely on anything from his term of employment. Hara cites to the
Severance Agreement's requirements that Hara not seek employment at a competing
firm and that he not seek unemployment benefits. He claims that it was logical for KKRA
to tie the payments to NAB and MIT, not because Hara solicited them, but because Hara
had an ongoing relationships with them and they were the clients Hara could most easily
persuade to leave KKRA. But, even if this were true, it does not mean that the funds he
was to receive under the Severance Agreement were not tied in part to, or derived from,
the illegal solicitation activities.
Moreover, the Cohan court concluded that the consideration in that case was
independent, because the consideration for the assignment and the warranties received
by Sherwood & Roberts consisted solely of the cash Lifetone received and was
independent from and not related to the illegal promises made by Lifetone to its
customers, id. It opined that the illegal promises between Lifetone and the consumers
constituted no part of the consideration for the warranties. Jd. Here, by contrast, even if
the consideration flowing from Hara to KKRA was a valid noncompete promise, the
consideration specified in the noncompete paragraph, flowing from KKRA to Hara, was
payments specifically tied to fees paid by NAB and MIT. These were the only two clients
the court found Hara successfully, and illegally, solicited for KKRA while working in an
investment adviser representative capacity.
Hara contends that even if the payments were tied to the illegal employment
agreement, once the employment agreement ceased, the Severance Agreement could
stand alone. Hara cites to McDonald v. Lund, 13 Wash. 412, 43 P. 348 (1896), for this
18
No. 71767-7-1/19
assertion. In McDonald, partners organized an illegal gambling game together. kL at
413-14. One partner was to run the games and the others were to collect a share of the
proceeds, id. When the partnership ceased organizing the games, one partner owed the
other money, representing that partner's percentage of the gambling proceeds, id. at
414. The McDonald court concluded that because the underlying illegal contract
governing running the games had been fully executed, it would enforce the contract
regarding distribution of the gambling funds, id. at 416.
Here, Hara argues that because his employment agreement had ended, the court
can enforce the independent Severance Agreement. But, unlike in McDonald, the
payments in the Severance Agreement were generated from funds KKRA continued to
receive as a result of illegal solicitations. As such, the underlying illegality had not ended.
Therefore, we conclude that the consideration is not sufficiently independent to
allow the Severance Agreement to stand alone.
iii. Sufficiently Remote
The final factor under the severability analysis is whether the oral employment
agreement is sufficiently remote, or collateral, or severable from the antecedent illegal
transaction such that the enforcement of the agreement sued upon does not result in
sanction of the original illegal contract, or conflict with the policy against enforcing illegal
contracts. Cohan, 2 Wash. App. at 714.
Hara argues that he is not seeking to enforce payment for delivering clients to
KKRA, but is instead seeking to enforce payments according to the terms of the
Agreement. But, the Severance Agreement provides Hara compensation with respect to
client accounts that he illegally solicited while he was an employee at KKRA. Therefore,
19
No. 71767-7-1/20
not only does the Severance Agreement sanction the commission scheme under the
original illegal oral employment contract, but it also perpetuates it by continuing to
compensate Hara from client accounts that he illegally solicited.
Therefore, we conclude that the trial court did not err when it concluded that the
compensation provisions in the Severance Agreement are not severable from the original
illegal oral employment agreement. Hara's suit is thus barred under state law. See RCW
21.20.430(5) ("No person who has made or engaged in the performance of any contract
in violation of any provision of this chapter . . . may base any suit on the contract.").
Agreements in violation of state securities law are unenforceable. See Cellular Eng'g,
Ltd. V. O'Neill, 118 Wash. 2d 16, 19, 820 P.2d 941 (1991) (holding a contract to be
unenforceable, because it was made in violation of the Securities Act of Washington's
registration requirement even though one of the parties had already performed under the
contract). In an action to recover on an illegal contract, this court leaves the parties where
it finds them whether or not the situation is unequal as to the parties. Leach, 67 Wash. 2d
at 637.
On these facts, the trial court did not err when it concluded that the Severance
Agreement was illegal under federal law because it required KKRA to pay Hara, directly
or indirectly, for his solicitation activities while he was employed with KKRA. Similarly,
the trial court did not err when it concluded that the Severance Agreement was illegal
under state law because it required KKRA to pay Hara for services as an investment
adviser representative when he was not registered.
20
No. 71767-7-1/21
V. Attorney Fees
Hara argues that he is entitled to attorney fees incurred both at trial and on appeal,
because the Severance Agreement provides for payment of attorney fees. A contract
that provides for attorney fees at trial also supports such an award on appeal. Atlas
Supply, Inc. v. Realm, Inc., 170 Wash. App. 234, 241, 287 P.3d 606 (2012).
Paragraph 12 of the Severance Agreement states that the prevailing party in a
legal proceeding shall be entitled to reimbursement for its reasonable costs and attorney
fees incurred. As Hara is not the prevailing party on appeal, he is not entitled to attorney
fees either at trial or on appeal.
We affirm.
WE CONCUR:
104x.j^*~j l*J
21