Braddock v. Family Finance Corporation

BAKES, Justice.

We are called upon today to determine the validity of notes and security instruments executed as a result of a chain referral sales scheme. This appeal consolidates a suit in which Family Finance brought action to enforce a promissory note and security agreement against a defaulting purchaser with another suit in which Gloria Braddock, and others, sought a declaratory judgment that similar instruments were void and unenforceable as part of an illegal lottery. The district court granted summary judgment in favor of the purchasers on the ground that the instruments had been obtained as a result of a referral sales scheme which constituted an illegal lottery. We reverse the summary judgment entered by the trial court.

In March of 1968 one Larry Sease, doing business as Cen-States Marketing and Research, planned a campaign of door-to-door stereo phonograph sales in the Coeur d’Alene area. Sease approached defendant-appellant Family Finance Corporation (hereinafter Family Finance) to obtain financing for his prospective customers. Family Finance refused to purchase conditional sales contracts resulting from stereo sales. Family Finance did, however, agree to loan money directly to Sease’s customers. These loans were evidenced by notes which were secured by the stereo sets and in some cases additional security put up by the purchasers. Family Finance was fully aware of the referral sales scheme planned by Sease to obtain sales of stereo sets.

Under Sease’s scheme, the purchaser would automatically become a “representative” of Cen-States when he bought a stereo set. Each “representative” received an “allotment privilege” and a “bonus appointment privilege.” Under the “allotment privilege” a “representative” was to be paid $100 for each sales referral which resulted in a sale. The “bonus appointment privilege” promised a “representative” $1,000 if the “representative” supplied Cen-States with 40 bona fide appointments with prospective customers.

The representation and main thrust of this referral sales scheme was that some purchasers would thus obtain their stereo phonographs at a lower cost, or, if they had enough successful referrals, without cost. The “contact instruction” given to “representatives” indicated that the “representatives” were to emphasize the possibility of easy money and refrain from talking about the product in their contacts with other prospective purchasers.

There appears to have been a close operating relationship between Sease and Family Finance during the time Sease was marketing his referral sales plans in the Coeur d’Alene area. Family Finance was fully aware of the referral sales scheme Sease was using to sell his stereo sets and facilitated Sease’s sales by permitting Sease to display a sample set in the Family Finance office in Coeur d’Alene, by assuring purchasers on occasion that the stereo sets were worth $700-800, by opening their office evenings and on weekends at the request of Sease to make loans to purchasers, by permitting “representatives” to leave referrals for Sease at their office, and by loaning approximately $50,000 in the Coeur d’Alene area for the purchase of stereo sets from Sease.

Family Finance, plaintiff-appellant in Case Number 23413, brought an action in May, 1968, to enforce a promissory note and security agreement against a defaulting stereo purchaser. In July, 1968, plaintiffs-respondents Gloria Braddock and others (hereinafter purchasers) filed action against Family Finance in Case Number 23457, seeking a declaratory judgment that the notes and security agreements were void and unenforceable as constituting part of an illegal lottery. After the cases had been consolidated for trial, the purchasers sought summary judgment. After hearing, summary judgment was granted against Family Finance on the ground that the referral sales scheme was an illegal lottery in violation of Article 3, Section 20, of the Idaho Constitution, and of Section 18-4901, Idaho Code, and that Family Finance actively participated in the scheme.

Family Finance first assigns as error the trial court’s finding that the referral sales scheme used herein was an illegal lottery. The trial court based its decision upon the decision of the Washington Supreme Court in the case of Sherwood & Roberts-Yakima, Inc. v. Leach, 67 Wash.2d 630, 409 P. 2d 160 (1965), wherein the Washington Court held on facts strikingly similar to those before the Court today that such a referral sales scheme was a lottery and therefore illegal. In interpreting their lottery statute, the Washington Court held that “chance within the lottery statute is one which dominates over skill or judgment.” A number of other states have made similar rulings regarding chain referral sales schemes as we observed in Nab v. Hills, 92 Idaho 877, 882, 452 P.2d 981 (1969). However, while no mention has been made by either the trial court or appellants before this Court, the application of the constitutional mandate against lotteries in Article 3, Section 20, Idaho Constitution, as applied to referral sales schemes is controlled by our own decision in Oneida County Fair Board v. Smylie, 86 Idaho 341, 386 P.2d 374 (1963), wherein this Court definitively passed on the issue of what constitutes a lottery and stated that for a scheme to be a lottery it must be “one solely based on chance.” On a petition for rehearing in the Oneida case, this Court stated, at page 374, 386 P.2d at page 395:

“Respondent would have this Court adopt the rule that a determination as to whether a particular scheme of wagering constitutes a lottery, should be based on whether the element of skill predominates over the element of chance. It is our conclusion that the persuasive weight of authority rejects that rationale of decision.

“We have by the original opinion concluded that ‘lottery’ as used in our Constitution applies only to distributions of money or things of value by chance, and in which process of distribution the element of skill plays no part. If skill plays any part in determining the distribution there is no lottery as prohibited by our Constitution. In any particular game where skill is in fact an element, the questions oL whether skill predominates over chance in determination of the result, and whether any game in which skill may or may not predominate is to be prohibited, must be decided by the legislature under its inherent and delegated powers as the law making body.” 86 Idaho. 341, at 374, 386 P.2d 374, at 395. (Emphasis added).

If the average individual who walks in to a race track and, with or without reading the racing form, places a $2.00 bet on a horse is exercising skill and judgment which removes parimutuel horseracing from the category of a lottery as the Court said in the Oneida case, then when that same individual leaves the race track and goes home and prepares his list of referrals to a Cen-States representative after exercising his judgment in considering those of his acquaintances who would be sufficiently interested in music to give serious consideration to purchasing one of the stereo sound systems in question, he is also exercising skill and judgment which would prevent that act from constituting participation in a lottery. At least it raises a sufficient factual issue on that point to prevent the granting of a summary judgment on the disputed evidence which we find in the record of this case. In addition, the skill and efforts of the salesman would certainly remove the scheme from the lottery category. In this regard we are not unmindful of the view of the Washington court in Roberts-Yakima v. Leach, supra, that the skill of the salesman is immaterial. However, in our opinion, such a rule could draw into the realm of lottery legitimate business transactions never intended to be within the scope of the constitutional prohibition. We are of the view that any skill or judgment practiced by a participant, or someone on his behalf, removes the enterprise from the category of lottery as prohibited by Article 3, Section 20, of the constitution. From the record before us it is apparent that skill and judgment are involved in the Cen-States sales referral scheme, and therefore it is not a lottery.

There is no doubt that the referral sales scheme practiced by Cen-States was an insidious plan; however, we note that as of March 30, 1971, chain referral schemes such as the one in the instant case would be consumer credit sales within the meaning of our Uniform Consumer Credit Code (U.C.C.C.), I.C. § 28-31-101 et seq. S.L.1971 Ch. 299. The U.C.C.C. expressly prohibits referral sales plans such as that employed in the instant case. Under the U.C.C.C., consumer credit agreements executed under such a plan are unenforceable and the consumer may at his option keep any goods or services received under such a plan and lawfully refuse to pay for them. I.C. § 28-32-411. As a result there is no compelling reason for us to remold the law of lottery to fit the needs of this particular case. As we stated in the Oneida County case at page 374, 386 P.2d at page 395:

“In any particular game where skill is in fact an element, the questions of whether skill predominates over chance in determination of the result, and whether any game in which skill may or may not predominate is to he prohibited, must be decided by the legislature under its inherent and delegated powers as the law making body" 86 Idaho 341, at 374, 386 P.2d 374, at 395. (Emphasis added).

There is no necessity for this Court to fashion a new remedy when there are existing ' remedies available. The answer to the complaint in Case Number 23413, and the complaint of plaintiffs Braddock et al in Case Number 23457, while primarily alleging that the referral sales scheme is an illegal lottery and that Family Finance was a party to the illegal scheme, nevertheless also allege that the loan transaction with Family Finance was entered into as a result of fraudulent misrepresentations on behalf of both Cen-States and Family Finance. While the allegations concerning an illegal lottery are not appropriate as a result of the action which we have taken in this opinion, nevertheless the answer to the complaint of Family Finance in Case Number 23413, and the complaint of plaintiffs Braddock et al in Case Number 23457, allege or attempt to allege fraud on behalf of Family Finance. If proven the causes of action for fraud would adequately and perhaps better protect the rights of the purchasers, with the possibility for substantial punitive damages as pointed out by this Court in Jolley v. Puregro, 94 Idaho 702, 496 P.2d 939 (1972), rather than merely declaring the promotion to be a lottery, and as a result refusing to enforce the notes and leaving the parties where we found them.

The trial court granted summary judgment in favor of the purchasers, determining in effect as a matter of law that chance predominated over skill in this venture, following the doctrine of the Sherwood & Roberts-Yakima v. Leach case, supra. However, applying the test of lottery as set out in the Oneida case, i. e., whether or not the scheme was dependent “entirely on chance,” we are of the opinion that as a matter of law skill and judgment were involved in this sales scheme and therefore it was not a lottery.

Summary judgment reversed. Costs to appellant.

DONALDSON, C. J„ and McQUADE and McFADDEN, JJ., concur.