2 Wash.App. 703, 469 P.2d 574
SHERWOOD &
ROBERTS-YAKIMA,
INC., a Washington corporation, and
Fairway Finance-
Pasco, Inc., a Washington corporation,
Appellants,
v.
Milton COHAN and Jane Doe
Cohan, his wife, Harold M. Shulman and
Jane Doe
Shulman, his wife, Ronald Weiss and Jane
Doe Weiss, his wife, Daryll Weiss and
Jane Doe Weiss, his wife, Theodore
Altschul and Jane Doe Altschul, his wife,
and Lifetone Electronics, Inc., a Washington
corporation, Respondents.
No. 108--40591--I.
Court of Appeals of Washington, Division 1,
Panel One.
May 18, 1970.
Rehearing Denied July 24, 1970.
Review Denied Sept. 22, 1970.
*704 SWANSON, Judge.
When Sherwood & Roberts-Yakima, Inc., v.
Leach, 67 Wash.2d 630, 409 P.2d 160
(1965),[FN1] decided that the referral sale
scheme conducted by Lifetone Electronics, Inc., to
sell Leach a home fire alarm and radio
intercommunications system was a lottery and
illegal, all of the conditional sale contracts purchased
by Sherwood & Roberts-Yakima, Inc., and
Fairway Finance-Pasco, Inc.,[FN2]
from Lifetone[FN3] became worthless.
FN1. The court, in Sherwood &
Roberts-Yakima, Inc., v. Leach,
Supra, stated at 636, 409 P.2d at 164:
Since the referral selling agreement is
contrary to the terms and policy of
RCW 9.59.010, it is illegal and
unenforceable (Citations.); and when an
instrument is intimately connected with an
illegal one, the former becomes tainted with
that illegality and is likewise unenforceable.
(Citations.)
Here, the referral agreement and the
conditional sale contract were all part of one
transaction. The Lifetone salesman
represented to respondents (Leach) that the
conditional sale contract obligation would
easily be paid from 'commissions earned'
from the referral selling agreement, and
Mr. Leach so intended to pay the
conditional sale contract. It is clear
respondents would have a good defense
against Lifetone. It also appears that
they have a good defense against appellant.
(Sherwood & Roberts- Yakima, Inc.)
The appellant, as assignee of a conditional
sale contract, takes the contract subject to all
defenses. (Citations.)
FN2. Appellants, Sherwood &
Roberts-Yakima, Inc., and Fairway
Finance- Pasco, Inc., will be referred
to in this opinion as 'Sherwood &
Roberts.' They are Washington
corporations doing business in Yakima and
the Tri- Cities, respectively. Both
appellants are subsidiaries of Sherwood &
Roberts, Inc., which has its headquarters
in Walla Walla, Washington.
FN3. Lifetone Electronics, Inc., is
referred to in this opinion as 'Lifetone.'
The other respondents are the men who
promoted Lifetone and the promotors'
wives. Each of these men is an officer, a
director, and a stockholder of Lifetone, and
among themselves they own all the
outstanding stock, hold all the offices, and
comprise the entire board of directors of
Lifetone.
Sherwood & Roberts then sued Lifetone and its
promoters for breach of their agreements warranting
the assigned contracts to be valid and enforceable.
Lifetone asserts a defense of illegality and claims
the warranties are therefore unenforceable. The trial
court agreed, and this appeal follows.
Lifetone is a Seattle based corporation engaged in
selling *705 home radio intercommunication and fire
alarm systems. In the spring of 1963, it decided to
expand its activities into the Yakima and Tri-Cities areas of Eastern Washington. It
contemplated making sales on conditional sale
contracts and needed a financial outlet through which
to sell its contracts for cash. Lifetone contacted
Sherwood & Roberts and revealed its plan of
referral selling as **576 described in Sherwood &
Roberts-Yakima, Inc. v. Leach, Supra at 632,
409 P.2d at 161:
The consumer would purchase a radio intercom
and fire alarm system on a conditional sale
contract. As part of the transaction, a
representative's commission agreement would be
executed. By this, the consumer would furnish
Lifetone a list of prospective purchasers. For
each sale to any one so referred, the consumer
would receive a commission of $100. A bonus
guarantee would also be executed. By this, if
Lifetone made sales presentations to 15 of a
consumer's referrals without a sale being made, the
consumer would receive $200.
Sherwood & Roberts agreed to buy Lifetone's
contracts, pursuant to financing requirements which
included a dealer agreement warranting a bona fide
sales transaction and containing a covenant that any
referral sales program 'will be conducted only as a
proper single referral basis, * * *'[FN4]
Lifetone assigned contracts having a total unpaid
*706 balance of $99,415.76,[FN5] and
warranted each contract to be valid, genuine, and
enforceable.[FN6] The individual promoters of
Lifetone guaranteed personally the accuracy of
warranties from Lifetone to Sherwood &
Roberts.[FN7] The referral selling program
was established and conducted by Lifetone, and
Sherwood & Roberts did not participate in the
conduct of that program. In their dealings with
each other, the parties acted in good faith and did not
know that the referral selling scheme was
illegal.[FN8]
FN4. The dealer agreements, exhibit
10 dated July 30, 1963, and exhibits 4 and
5 dated August 23, 1963, between
Lifetone as dealer, and the appellants
Sherwood & Roberts-Yakima, Inc.,
and Fairway Finance-Pasco, Inc.,
as finance companies, all provided in part as
follows:
Contracts purchased hereunder shall be on
a non-recourse basis, provided that, whether
expressed in the assignment or not, Dealer
warrants: a bona fide sales transaction,
genuineness of signatures, completion of
installation, correctness of installation, and
delivery dates shown, accuracy of real
property description, and that Dealer will
perform any duties under applicable sales
warranties to the end that breach of
warranty claims will not reduce contract
payments under contracts purchased.
* * * Dealer covenants that any referral
compensation program which it may
undertake will be conducted only as a proper
single referral basis, will be performed by
Dealer as its retained and continuing
obligation to the purchaser, and that
Dealer indemnifies and holds harmless the
Finance Company as to any and all
referral payments and obligations
thereunder.
FN5. This amount includes finance
charges over a 3-year period and includes
the sum of $49,833.23 which represents the
balance owing on contracts which were
assigned to Sherwood & Roberts-Yakima, Inc., before August 23, 1963,
the date when the individual respondents
signed the guarantee set forth in n. 7.
FN6. Each assignment used by
Lifetone contained the following language:
I warrant that: title to said property is in
me free and clear, I have the right to make
this assignment, the within contract IS
GENUINE, VALID
AND
ENFORCEABLE
ACCORDING TO ITS
TERMS and arose from a bona fide
sale of the said property according to the
contract terms, * * *
FN7. The personal guarantees
executed on August 23, 1963, read as
follows:
The undersigned individuals are principals
of and interested in Dealer, and in
consideration of entry by Finance
Company into the foregoing agreement, the
undersigned jointly and severally and on
behalf of their respective marital
communities hereby guarantee the accuracy
of warranties and representations from
Dealer to Finance Company, further
guaranteeing the performance by Dealer
of any sale or service warranties to the
respective contract purchasers for a
minimum period of one year from date of
contract, and further covenant to and hereby
do indemnify the Finance Company
from any and all loss, cost, charge or
expense arising from or connected with said
warranties or representations.
FN8. The trial court's finding of fact
8 states in part: 'The parties were in good
faith in that they did not know they were
violating the law.'
**577 The parties stipulated that as a result of
Leach, all of the contracts assigned by Lifetone to
Sherwood & Roberts are unenforceable. After
Sherwood & Roberts presented their evidence and
rested, respondents challenged the sufficiency of the
evidence and asked the trial court either to treat the
appellants' evidence as true and rule as a matter of
law, as *707 in a jury case, or rule as a matter of fact
after weighing the evidence. The trial court chose
the second approach and ruled that Sherwood &
Roberts' evidence established facts that prevent them
from recovering.[FN9] As is required in ruling
on a motion to dismiss after weighing the evidence,
the trial court made findings of fact and conclusions
of law and entered a judgment of dismissal.
FN9. The right of the trial court to
weigh the testimony in a nonjury case on a
motion for a nonsuit is well established.
Totem Equip. Co. v. Critchfield
Logging Co., 62 Wash.2d 175, 381
P.2d 738 (1963); Jacobs v. Brock, 66
Wash.2d 878, 406 P.2d 17 (1965);
Richards v. Kuppinger, 46 Wash.2d
62, 278 P.2d 395 (1955).
Appellants' first three assignments of error are
directed to the following findings of fact:
First, finding 5:
That the referral sales technique employed by the
defendants, with the knowledge and Approval of
the plaintiffs, is Identical to that which has been
declared to be a lottery in violation of RCW
9.59.010 in the case of Sherwood & Roberts-Yakima, Inc. v. Leach, 67 Wash.2d 630, (409
P.2d 160).
(Italics ours.) Second, finding 7:
That defendants could not have made sales using
the referral selling method Without the financial
support of the plaintiffs.
(Italics ours.) Third, finding 8, in part:
That the plaintiffs were Knowingly an
Integral part of the referral selling scheme.
(Italics ours.)
[1] Appellate review of the findings is limited to
ascertaining whether there is substantial evidence to
support them. Appellants object to the use of the
words italicized and claim they are misleading.
There is no evidence to support the statement
italicized that Lifetone needed 'the financial support
of the plaintiffs' in particular. The evidence only
indicates that Lifetone needed the financial support
of someone in order to conduct its business. Such
portion of finding 7 is erroneous. Although more
accurate language could have been employed,
substantial evidence *708 exists to support the use of
the other words italicized above.
The trial court concluded that the parties were in
pari delicto in their transactions with one another and
the equipment purchasers. Therefore, said the trial
court, Sherwood & Roberts required the aid of an
illegal transaction to support their cause of action,
and the illegality cannot be severed from the main
consideration of the contract between them.
Appellants also assign error to these conclusions
and to certain proposed findings and conclusions
which were rejected. However, appellants'
remaining 21 assignments of error will be discussed
together, for the determination of this appeal rests on
the resolution of this question: Is the illegality of
this referral selling scheme, resulting in the assigned
contracts' being illegal and unenforceable, a sufficient
defense to the assignee's suit claiming a breach of the
assignor's warranty that the contracts assigned are
genuine, valid, and enforceable?
[2] Appellants Sherwood & Roberts place
principal reliance upon the warranty agreement
contained in each assignment, which states in part:
I warrant that: * * * the within contract IS
GENUINE, VALID
AND ENFORCEABLE
ACCORDING TO ITS
TERMS * * *
**578 n. 6, Supra, and on this language of the
August 23, 1963, guarantee agreement given by the
individual respondents:
The undersigned * * * guarantee the accuracy of
warranties * * *, and further covenant to * * *
indemnify the Finance Company (Sherwood
& Roberts) from any and all loss, * * * arising
from or connected with said warranties * * *
n. 7, Supra. Sherwood & Roberts assert that the
warranty of enforceability includes the warranty
that the assigned contracts are free from the defense
of illegality or, stated conversely, are legal and
enforceable. We agree. Lifetone concedes that this
kind of warranty has been recognized and upheld,
Warner v. Seaboard Finance Co., 75 Nev.
470, 345 P.2d 759 (1959), but, says respondent,
Lifetone only warranted *709 the contracts at the
time of the assignment and not into the future until
such time as the law is found to be different. This
contention has no merit, for even though the trial
court found that neither party knew at the time the
agreements were made that single stage referral
selling was a lottery and illegal, it nevertheless was,
as determined by Leach, a lottery and illegal.
Their ignorance or doubt of this fact does not make
it any less a fact.
The warranty that the contracts assigned were
'genuine, valid and enforceable,' plus the stipulated
fact that the contracts assigned were illegal and
unenforceable, equals a conclusion of breach of
warranty, unless the factor, illegality, should be
included in the equation, as Lifetone contends,
requiring the result reached by the trial court; namely,
leaving the parties where it finds them. If the
warranted conditional sale contracts sued upon are
illegal or against public policy, they are
unenforceable. Whether appellants Sherwood &
Roberts can recover in this case depends upon the
answers to these two questions: First, whether or not
the warranties sued upon were so intimately
connected with an illegal transaction, or one that was
against public policy, to which Sherwood &
Roberts were a party, as to be a part thereof; or
secondly, if it is determined that the warranties were
so intimately connected with an illegal transaction, so
that the suit is one to enforce an illegal contract,
whether or not the parties are in pari delicto.
Sherwood & Roberts, Inc. v. Leach, Supra;
Miller v. Myers, 158 Wash. 643, 291 P. 1115
(1930); Restatement of Contracts ss 598, 599
(1932).
Taking first the question of the connection of the
warranties to the illegal transaction, Lifetone rests
its argument upon these conclusions reached by the
trial court: (1) The conditional sale contracts are
illegal; (2) The assignments to Sherwood &
Roberts of these illegal contracts cannot be severed
from the illegal transactions; (3) The warranties
contained in the assignments are not enfoceable,
because Sherwood & Roberts must rely upon
illegal transactions to *710 establish the assignments;
(4) Since the warranties are not enforceable, the
court should leave the parties where it finds them.
Even though not precisely so expressed, these
arguments, combined, say that the promises contained
in the warranties sued upon cannot be severed from
the illegal transaction and, consequently, are
unenforceable. In so arguing, respondent Lifetone
does not contend that the warranties themselves are
illegal. Its argument is directed to the conclusion
that the warranties are part of the assignments which
cannot be separated from the antecedent illegal
transactions.
[3] Though variously stated, the authorities are in
general agreement that if the promise sued upon is
related to an illegal transaction, but is not illegal in
and of itself, recovery should not be denied,
notwithstanding the related illegal transaction, if the
aid of the illegal transaction is not relied upon or
required, or if the promise sued upon is remote from
or collateral **579 to the illegal transaction, or is
supported by independent consideration.[FN10]
Considered together, these various tests form what
may be termed the 'doctrine of
severability.'[FN11] This doctrine finds
consistent support in the decisions of the Supreme
Court of our state. *711 Beginning with
McDonald v. Lund, 13 Wash. 412, 414, 43 P.
348 (1896), the court said:
FN10. 6A A. Corbin, Contracts
s 1529 at 784 (1962), states:
'There are many bargains, wholly lawful
in themselves, that the parties would not
have made except for the fact that an
antecedent illegal transaction had taken
place. A mere causal relation such as this,
the bargain not being substantially identical
with the illegal transaction and its
enforcement not being the consummation of
an illegal purpose, is not ground for refusal
of enforcement. The illegal transaction is
in such cases described as 'collateral' or
'remote."
This rule is differently stated in 17
C.J.S. Contracts s 276 (1963):
'An agreement will be enforced, even if it
is incidentally or indirectly connected with
an illegal transaction, provided it is
supported by an independent consideration,
or if plaintiff will not require the aid of the
illegal transaction to make out his case; * *
*'
FN11. Restatement of Contracts s
597 (1932), states, in part:
'A bargain collaterally and remotely
connected with an illegal purpose or act is
not rendered illegal thereby if proof of the
bargain can be made without relying upon
the illegal transaction.
'Comment:
'a. How closely a bargain must be
connected with an illegal purpose in order to
make the bargain itself illegal is a question
of degree. 'b. Even though a plaintiff's case
can be made out without indicating
anything unlawful, it may be shown that
the bargain is illegal because of facts not
brought out in the plaintiff's case, provided
that the facts so offered show a close enough
connection with an illegal transaction. The
line of proximity varies somewhat according
to the gravity of the evil apprehended. If
the evil is serious a more remote connection
with the illegal purpose or act is sufficient to
invalidate the bargain than if the evil is
slight.'
It is conceded by the appellant that courts will
decline to lend their aid to the enforcement of an
executory contract which has for its object the
performance of some act or the accomplishment of
some end which is contrary to law or a sound
public policy, * * * It is insisted, however, by the
appellant, that this case does not fall within the
rule above conceded, but within one of the
limitations of such rule; that the obligation of the
respondent in this case was a collateral obligation,
in a manner connected with or growing out of the
illegal transaction, but that it is not an attempt to
enforce the illegal contract; that the illegal contract
had been fully executed; and that there is a new,
independent and implied contract which the
plaintiff will not be precluded from enforcing.
Even though the money claimed by the plaintiff in
McDonald constituted actual proceeds of an
illegal contract, involving gambling, between the
parties, the recovery was permitted on the ground that
the action was not founded upon the illegal contract
nor brought to enforce any of its conditions, but on a
separate, independent contract.[FN12] The
severability approach was also utilized in Central
Labor Council of Tacoma v. Young, 136 Wash.
550, 551, 240 P. 919, 920 (1925):
FN12. Cf. Reed v. Johnson, 27
Wash. 42, 67 P. 381 (1901), where the
court did not cite McDonald v. Lund,
Supra, nor discuss any Washington cases,
but in accordance with the general rule
refused to enforce an illegal contract and
grant specific performance, on the ground
that the enforcement of such an illegal
contract would violate public policy.
It is true that some courts have held that even a
new and independent promise to pay will not be
enforced, where the original contract was tainted
with illegality, *712 and even though it had been
fully executed. (Citation.) But this court long
ago committed itself to a contrary doctrine, and has
established the rule that, where an illegal contract
has been fully performed, the illegality is no
defense to an action brought upon a
subsequent**580 promise to pay over the balance in
the hands of one of the parties to the original
contract.
Accord, Wakefield v. Hughes, 149 Wash. 135,
270 P. 299 (1928). See also Miller v. Myers,
158 Wash. 643, 645, 291 P. 1115, 1116 (1930),
wherein it is stated:
Whether appellant Miller can recover in this
case depends upon whether the note sued upon was
so intimately connected with an illegal transaction
or one that was against public policy, to which
Miller was a party, as to be a part thereof.
But see Brower v. Johnson, 56 Wash.2d 321,
352 P.2d 814 (1960).[FN13]
FN13. Brower v. Johnson, Supra
at 325, 352 P.2d at 817, somewhat
qualified the rule announced in Central
Labor Council of Tacoma v. Young,
Supra, and McDonald v. Lund,
Supra, when the court said:
Concededly, we have announced a rule
somewhat qualifying the view expressed by
the Montana court, holding that an
independent agreement for the distribution
of the profits of an illegal business, made
after the basic agreement for the carrying on
of that business has been fully executed, will
be enforced. (Citations.) However, in the
instant case the basic agreement has not been
fully executed, as is evident from the fact
that the primary question before this court is
the enforcibility of that agreement.
It should be noted that in Brower, the
covenant sought to be enforced was a
covenant not to compete, but enforceability
of the covenant by its express terms depended
upon the continued existence of a partnership
engaged in the operation of pinball
machines, a felony. Relief was denied
because the partnership agreement was not
fully executed, so that the agreement sought
to be enforced could not be severed from the
illegal agreement.
Our court, in Den Adel v. Blattman, 57
Wash.2d 337, 340, 357 P.2d 159, 161 (1960),
stated:
The instant case falls within the principle of law
announced in Melton v. United Retail
Merchants of Spokane, 1945, 24 Wash.2d 145,
161, 163 P.2d 619, 627:
'It is, therefore, apparent that the state of our law
governing the matter under discussion is
substantially *713 the same as set out in the
following quotation from Teich v. City of
Chicago, 298 Ill. 498, 501, 131 N.E. 605,
606:
"* * * In a case where such a party can show a
right of recovery without relying on the illegal
contract and without having the court sanction the
same he may recover in any appropriate action. *
* *' (Italics ours.)'
The most recent consideration of the severability
doctrine occurred in Palmer v. Stevens-Norton,
Inc., 75 Wash.Dec.2d 165, 169, 449 P.2d 689,
690 (1969), where this question was presented:
Where a plaintiff has purchased from his own
agent, a mortgage broker, two promissory notes and
has simultaneously received from the broker a
guaranty that the notes would be paid in
accordance with their terms and the plaintiff sues
upon the guaranty and not upon the notes, is the
defense that the notes are usurious available to the
guarantor?
The trial court concluded that appellants'
guaranty was an independent agreement, not
secondary or collateral to, or a part of, the loan
transactions between Stevens-Norton, Inc. and
Hendricks and Martin, and that the guaranty
was a valid, enforceable contract. We agree with
that determination.
* * * The guaranty was in no way, nor could it
be, a benefit or accommodation to the debtors. The
guaranty is independent of the usurious loand, is
supported by consideration, and is therefore
enforceable. (Citations.)
In applying the severability doctrine to the facts in
the instant case, we look for satisfaction of the tests
of remoteness announced in our cases: First,
whether or not the contracts of assignment and
warranty were separate and distinct from the
antecedent illegal transactions between Lifetone and
its customers. It is important to note that the only
illegal transactions were transactions between
Lifetone and its individual customers, and those
**581 transactions were illegal because the referral
commission agreements were made at the same time.
It is thus apparent that neither the assignments
containing the warranties of enforceability nor the
guarantee agreements sued upon are substantially
identical *714 with the illegal transactions even
though they are causally related. The warranties
and guarantee agreements are therefore only
collateral to the conditional sale contracts.
Secondly, an otherwise valid promise, though
causally related, is sufficiently remote from the
illegal transaction if it is supported by independent
consideration. Sherwood & Roberts-Yakima,
Inc. v. Leach, Supra, may be cited as authority
for this proposition. The court, in Leach,
recognized the doctrine that 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.
In Leach, the oral promise of the contract-purchaser Leach to pay, regardless of the promises
contained in the commission agreement, stood alone
and without consideration, and so could not be
enforced.[FN14] In the instant case, the
consideration for the assignment and the warranties
received by Sherwood & Roberts consisted solely
of the cash received and was independent from and
not related to the illegal promises made by Lifetone
to its customers, and such illegal promises constituted
no part of the consideration for the warranties. The
consideration for the August 23, 1963, individual
guarantee agreement was the promise to purchase
Lifetone's contracts.
FN14. Appellants here, Sherwood
& Roberts, contend that the underlying
reason the court did not find independent
consideration to support the contract in
Leach was that the illegal promise, related
to the referral selling commission agreement,
was part of the consideration for Leach's
written promise to pay. Therefore, the
written promise to pay was part of the
illegal promise, and therefore, not
independent from the illegality.
Consequently, there was no independent
consideration.
[4] The third test requiring analysis is whether the
warranty agreements sued upon are sufficiently
remote, or collateral, or severable from the antecedent
illegal transactions so that the enforcement of the
agreements sued upon (the warranties) does not result
in sanction of the original illegal contract, or conflict
with the policy against enforcing illegal contracts.
Appellant concedes, and properly so, that *715 one
may not enter into a venture involving conduct which
one knows, or suspects, to be illegal and attempt to
shield himself from the consequences of the wrongful
conduct by obtaining from another an agreement by
which he will indemnify the other against the
monetary consequences of the contemplated
wrongdoing. To enforce such an agreement would
be to sanction and promote the deliberate violation of
the public policies included in the law. Kansas
City Operating Corp. v. Durwood, 8 Cir., 278
F.2d 354 (1960). Here, it is conceded that both
parties acted in good faith and without knowledge
that Lifetone's contemplated referral selling
program involved a violation of the law.[FN15]
FN15. Indemnity contracts have been
upheld in cases of unintentional
wrongdoing, I.e., tort situations. Cope v.
J. K. Campbell & Assoc., 71
Wash.2d 453, 456, 429 P.2d 124, 126
(1967), states:
(W)e find no doctrine of public policy
which renders unenforceable contracts to
indemnify one against the loss sustained by
reason of the other's negligence even though
the party indemnified may, by his
negligence, have contributed to cause the loss
or injury.
In Municipal Metallic Bed Mfg. Corp. v.
Dobbs, 253 N.Y. 313, 316, 171 N.E. 75, 76
(1930), the lessor warranted that the lessee could
lawfully use the premises for its intended purposes.
The court sustained the lessee's action for breach of
this warranty. In holding that the lessee had
justifiably relied on this warranty and had no intent
to do an illegal act, the court said:
A plaintiff cannot recover if he is compelled to
predicate his cause of action on an illegal contract,
and one may not indemnify another against the
consequences **582 of his illegal acts (Citation.),
but the covenant or guaranty of indemnity sued on
is not an illegal contract and it may be enforced
without any violation of law by the tenant. The
fact that the lease may not be lawfully performed
does not make the guaranty illegal. It stands on
its own footing.
The lease contains an absolute and unequivocal
guaranty that the manufacture of metal beds in the
leased premises is not in violation of law and a
promise that the landlords will indemnify the
tenant against any loss sustained*716 by it as the
result of the existence of any such restriction on the
use of the premises.
Here, as in Metallic Bed, Sherwood &
Roberts is not seeking to recover money paid on a
transaction entered into for an illegal purpose, nor to
be indemnified for a violation of the law. The
warranties upon which Sherwood & Roberts base
their suit are not illegal contracts, and they may be
enforced without causing Lifetone to violate any
law. The fact that Lifetone's referral selling
program is illegal, and, that as a consequence, the
assigned contracts are also illegal and unenforceable,
does not make the warranties illegal if we can regard
the warranties as being sufficiently divorced or
severed from the related illegal contracts. Each
assignment given by Lifetone contains an
unequivocal warranty that the assigned contract is
valid, genuine and enforceable and, therefore, not in
violation of the law. Also, the Lifetone promoters,
the individual respondents, guaranteed the accuracy
of such warranties and promised to indemnify
Sherwood & Roberts against any loss sustained
by them as a result of breach of warranty made by
their corporation, Lifetone. Neither party knew
that single stage referral selling was illegal until the
decision in Leach was filed. When the warranties
were given by Lifetone in 1963, it was by no means
clear that single stage referral selling was a lottery.
Ignorance as to the legality of single stage referral
selling was not unreasonable.[FN16] It was
therefore entirely proper for Lifetone to assure the
purchaser of its contracts that they were legal and
enforceable contracts. There was no intent on the
part of either party to violate the law, and the trial
court so found.
FN16. Sherwood & Roberts-Yakima, Inc. v. Leach, Supra, was a
case of first impression in the State of
Washington. The Ohio attorney general
had expressed an opinion that some types of
referral selling involve a lottery. However,
the appellate court of Ohio rejected this
opinion. Dewitt Motor Co. v. Robert
Bodnark, Ohio Com.Pl., 14 Ohio
Op.2d 25, 169 N.E.2d 660 (1960). See
42 Wash.L.Rev. 668 n. 1.
[5] We see no reason why Lifetone's warranty as
to the legality of the contracts assigned should not be
enforced, since enforcement causes no violation of the
law but, *717 rather, encourages compliance with the
law. The court of appeals, in Metallic Bed, 253
N.Y. at 318, 171 N.E. at 76, stated:
The building may not be lawfully used for
factory purposes and the lease may be illegal to
that extent, but it does not appear from the
complaint and it cannot be inferred from the facts
pleaded that it was the intent of the parties that the
law should be violated. The contrary is the
natural inference. The complaint looks to
compliance with the law rather than
noncompliance.
The trial court's finding that the parties dealt in
good faith with no intent to violate the law lends
support to a conclusion that the warranty as to
legality is severable from the illegality of the
transaction to which the warranty relates. If it
were not so, the illegality of the underlying
transaction in every case would taint the warranty
and cause it to be unenforceable whenever it was
breached. As in Metallic Bed, the fact that the
conditional sale contract may not be lawfully
performed does not make either the warranty or the
guarantee agreements illegal. They stand on their
own footing.
**583 We hold that, on reviewing the totality of
circumstances in the context of the doctrine of
severability, the warranties and guarantee agreements
sued upon are severable from the antecedent illegal
transactions, and to enforce the warranties would
neither sanction nor enforce the illegal transactions.
Lifetone contends that the trial court's conclusion
'(t)hat the parties hereto were in pari delicto in their
transactions with one another and the equipment
purchasers' prevents a recovery by Sherwood &
Roberts upon the warranties. We do not reach this
issue, in view of our determination that the warranty
agreements sued upon are severable from the
antecedent illegal transactions, so that this suit is not
based on an illegal contract or bargain.
The order of dismissal is vacated, and the cause
remanded with directions to vacate that portion of
finding 7 indicated herein to be erroneous and the
conclusions of law inconsistent with this opinion.
This cause is remanded to *718 the trial court for
further proceedings not inconsistent with this opinion.
Appellants shall recover their costs.
JAMES, C.J., and FARRIS,
J., concur.
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