The Washington state Supreme Court has ruled that a Spokane heavy-duty truck dealer didnt violate securities laws when he failed to inform two co-founders of the dealership about a big loan the business had guaranteed six months before they repaid him a sizable sum of money to cover their purchase of shares in the company.


In an 8-1 decision, the high court held that the July 2000 payment of $266,534 by Clark and Barbara Kinney to Ken Cook, their partner in Freedom Truck Centers Inc., wasnt a purchase of stock.


Rather, the majority found, it was a payment to satisfy a promissory note that the couple had signed seven years earlier when the company was formed, as Spokane Freightliner Inc. The Kinneys had secured the note with their 50,000 shares of stock in the business.


The dealership later was forced into an involuntary Chapter 11 bankruptcy filing by Cook, who had taken out a $4.5 million loan through a separate company he owned called Select Credit & Leasing LLC and was a secured creditor of the truck dealership, court documents say.


A U.S. Bankruptcy Court-approved reorganization plan canceled all of the stock in the dealership, including Cooks and the Kinneys, but Cooks infusion of additional money into the company helped enable it to emerge from bankruptcy, with him as its sole owner, his attorney says. He continues to own and operate the dealership, which changed its name to Freedom Truck Centers in 1999.


The plaintiffs may pursue any other remedies that may be available to them under the law, but the conduct they alleged, no matter how egregious, is not within the scope of the (Securities) Act (of Washington), Justice Tom Chambers wrote in the majority opinion.


The Supreme Court reversed a ruling by the state Court of Appeals that had sided with the Kinneys and reinstated a Spokane County Superior Court order dismissing the Kinneys lawsuit.


In a lone dissent, Justice Barbara A. Madsen argued that the majority interpreted the word security more narrowly than state law prescribes.


Given the intent of the securities law to protect investors, the blatant conduct by Cook, and the injury suffered by the Kinneys, I would hold that the Kinneys complaint survives this motion by Cook to dismiss the case.


Spokane attorney Maris Baltins, who represents the Kinneys, declines to comment on the case.


Larry Small, an attorney for Cook, says of the ruling, It just clarifies that a promissory note has to be used in an investment context rather than a commercial context to be considered a security.


He says, It was an important ruling for purposes of the development of securities law in our state, and both Ken and I are pleased. I hope that its the last lawsuit in this prolonged battle.


Cook says, They finally got it right. Its unfortunate it had to go to the Supreme Court and waste taxpayers money. Im very glad this is over with.


The Supreme Court opinion describes the details of the transaction underlying the case as complex and hopefully unique. According to court documents, heres what happened:


In 1993, the Kinneys joined with Cook to form Spokane Freightliner, which sold and serviced heavy-duty trucks. The Kinneys contributed $225,000 in exchange for 50,000 sharesor halfof the corporations stock, and Cook did the same. The Kinneys contribution, though, was made possible by a loan from Cook, in return for which they provided him a promissory note.


In early 1997, the Kinneys decided to sell their stock back to Cook. They gave back the 50,000 shares and the promissory note was canceled. About a year later, the Kinneys sued Cook, alleging he had misrepresented the financial condition of the company and the fair market value of the stock they relinquished. A jury agreed, and in July 2000, a judgment was entered that essentially reversed the 1997 transaction by returning the 50,000 shares of stock to the Kinneys and resuming their liability for the promissory note and the debts of the company.


Six months before that verdict, though, while Cook had exclusive control of the dealership, he had authorized the company to guarantee the $4.5 million loan, made by Mercedes-Benz Credit Corp. to Select Credit & Leasing.


Shortly after the verdict, Cook demanded payment on the reinstated promissory note, and the Kinneys paid him the $266,534. Cook then demanded that the Kinneys comply with the portion of the court order making them liable for the corporations debts, by signing a personal guaranty of every loan it had made.


They claim, though, that they didnt learn of the Mercedes-Benz loan until more than a year later, when it was disclosed in bankruptcy documents filed by Cook. In April 2003, they filed the lawsuit that led to the Supreme Court decision, alleging they were wrongfully induced into making the promissory note payment, in violation of securities laws.


Cook argued that the promissory note involved a commercial loan, not a security. The state Supreme Court agreed.


Freedom Truck Centers sells Freightliner, Western Star, and Unimog trucks. It operates facilities at 10310 W. Westbow Blvd. and 7626 W. Geiger Blvd., both on the West Plains, and at 5615 E. Third, as well as a store in Yakima.


Contact Kim Crompton at (509) 344-1263 or via e-mail at [email protected].