Law Library

54 N.C.App. 513, 284 S.E.2d 333STATE of North Carolina ex rel. Rufus L. EDMISTEN, Attorney General, Plaintiff, v. CHALLENGE, INC., Edward G. Rector, Douglas L. Beekman, Carol A. Rector, Allen K. Oaks and Richard Mailman, Defendants. No. 8110SC195. Court of Appeals of North Carolina. Nov. 17, 1981.

*516 CLARK, Judge.

[1] The sole question before this Court is whether the trial court erred in granting the preliminary injunction, the defendants having elected to appeal before the ultimate questions raised by the pleadings are decided at the trial on the merits. Ordinarily, a preliminary injunction will be granted pending trial on the merits, (1) if there is probable cause for supposing that plaintiff will be able to sustain his primary equity, and (2) if there is reasonable apprehension of irreparable loss unless injunctive relief be granted, or if in the court's opinion it appears reasonably necessary to protect the plaintiff's right until the controversy between him and defendant can be determined. Pruitt v. Williams, 288 N.C. 368, 218 S.E.2d 348 (1975); Laboratories, Inc. v. Turner, 30 N.C.App. 686, 228 S.E.2d 478 (1976). See G.S. 1-485, and G.S. 1A-1, Rule 65.

[2] On appeal we are not bound by the findings or ruling of the court below in injunction cases, but may review the evidence on appeal. However, there is a presumption that the judgment entered below is correct, and the burden is upon appellant **336 to assign and show error. Pruitt v. Williams, supra; Realty Corp. v. Kalman, 272 N.C. 201, 159 S.E.2d 193 (1967); Huskins v. Hospital, 238 N.C. 357, 78 S.E.2d 116 (1953); 7 Strong's N.C. Index 3d Injunctions 12.1 (1977).

The plaintiff in his complaint alleges that defendants are engaging in a pyramid distribution scheme in violation of G.S. 14-291.2 which provides as follows:

"Pyramid and chain schemes prohibited.--(a) Any person who shall establish, promote, operate or participate in any pyramid distribution plan, program, device or scheme whereby a participant pays a valuable consideration for the opportunity or chance to receive a fee or compensation upon the introduction of other participants into the program, whether or not such opportunity or chance is received in conjunction with the purchase of merchandise, shall be deemed to have participated in a lottery and shall be punished as provided for in G.S. 14-290.

(b) 'Pyramid distribution plan' means any program utilizing a pyramid or chain process by which a participant gives a *517 valuable consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;

'Compensation' does not mean payment based on sales of goods or services to persons who are not participants in the scheme, and who are not purchasing in order to participate in the scheme; and

'Promotes' shall mean inducing one or more other persons to become a participant.

(c) Any judge of the superior court shall have jurisdiction, upon petition by the Attorney General of North Carolina or solicitor of the superior court, to enjoin, as an unfair or deceptive trade practice, the continuation of the scheme described in subsection (a); in such proceeding the court may assess a civil penalty against any defendant found to have engaged in the willful promotion of such a scheme with knowledge that such conduct violated this section, in an amount not to exceed two thousand dollars ($2,000) which shall be for the benefit of the general fund of the State of North Carolina as reimbursement for expenses incurred in the institution and prosecution of the action; and the court may appoint a receiver to secure and distribute assets obtained by any defendant through participation in any such scheme.

(d) Any contract hereafter created for which a part of the consideration consisted of the opportunity or chance to participate in a program described in subsection (a) is hereby declared to be contrary to public policy and therefore void and unenforceable."

The defendants argue (1) that the plaintiff's evidence does not support the findings of fact made by the trial court, (2) that the findings of fact fail to show that the Challenge program is a pyramid scheme in violation of G.S. 14- 291.2, and (3) that the plaintiff failed to show and the trial court failed to find that irreparable injury has occurred. THE FINDINGS OF FACT

[3] The defendants excepted to findings of fact that Glenn W. Turner was a central and controlling figure in the Challenge program; *518 that the Challenge presentations were highly emotional with promises of large profits; that the seminars were purchased at a discount by the trainees themselves; and that participants paid a fee to receive a commission upon the recruitment of new prospects.

The evidence tends to show that Glenn W. Turner had some connection with the Challenge Program. Turner's residence and the home office of Challenge, Inc., were located in Orlando, Florida. Challenge's Chairman of the Board admitted that Turner was an unpaid consultant. Turner's wife was on the Challenge payroll. On 7 June 1980 Turner spoke for about an hour at a seminar in Hickory, North Carolina and urged participation in the program. Turner's name was used in the seminars as an inducement to participation in the program. We do not find this evidence sufficient to **337 support the finding that Turner was the central and controlling figure in Challenge, Inc. However, such finding is not necessary or material to the issuance of the temporary injunction by the trial court. The evidence was sufficient to show Turner's participation in the Challenge program and to support the order enjoining him and other defendants from acts and conduct in violation of the pyramid statute, G.S. 14-291.2. Turner has received widespread publicity for his promulgation and operation of other pyramid schemes, including the "Dare to Be Great" (motivational and self-development) and "Koscot Interplanetary" (cosmetics) programs which have been found by the courts to be illegal and in violation of fair trade practices. In reviewing the evidence and determining the issues, we rely entirely on the record on appeal and not on Turner's notorious record as a basis for inferring guilt by association.

The other findings of fact challenged by the defendants which are material to the issuance of the injunction we find to be fully supported by State's evidence presented in the four affidavits and by the testimony of the director of Challenge operations in North Carolina. We see no need to reiterate this evidence previously summarized which has few contradictions as to the plan of operation. THE CHALLENGE PROGRAM

[4] The defendants argue that Challenge is not an illegal pyramid scheme that violates G.S. 14-291.2 because participants *519 are not "required" to sell courses to themselves to advance in the organization, and an Independent Sales Agent does not pay valuable consideration for the chance to receive compensation upon the introduction of other participants. This argument is not convincing since the statute is violated if an individual "pays" consideration, regardless of whether he is required to pay it. The Challenge modus operandi is such that it would be grossly impractical not to pay the consideration for the opportunity to participate. The evidence is uncontroverted that all participants in North Carolina who advanced in the program did so by purchasing the seminars for themselves in order to meet the $5,000.00 requirement to become an Independent Sales Agent.

Although there are differences, this program closely resembles the pyramid sales operations of Glenn Turner's Dare to Be Great, Inc., (motivational and self-development program), and Koscot Interplanetary, Inc. (cosmetics). In a series of lawsuits, many states enjoined the operation of these two programs as illegal pyramid schemes and deceptive trade practices. See, for example, State ex rel. Morgan v. Dare to Be Great, Inc., 15 N.C.App. 275, 189 S.E.2d 802 (1972); State ex rel. Turner v. Koscot Interplanetary, Inc., 191 N.W.2d 624 (Iowa 1971); Dare to Be Great, Inc. v. Commonwealth ex rel. Hancock, 511 S.W.2d 224 (Ky.App.1974); Kugler v. Koscot Interplanetary, Inc., 120 N.J.Super. 216, 293 A.2d 682 (1972). Turner's operations were enjoined for their "headhunting" tactics, which allowed a salesman to make more money by recruiting new prospects than by selling a product. Injunctions were also issued to prevent potential danger to consumers, in that a prospect who paid $5,000.00 for a motivational course believed he was paying not only for the product but also for the chance to earn future income. Therefore, prospects paid more for the product than it alone was worth. See, 33 Ohio St.L.J. 676 (1972). The similarities between Challenge and Dare to Be Great cannot be ignored. Dare to Be Great was a series of four self-motivation courses or "adventures" that sold for $5,000.00 and had several levels of salesmen, including one called an "Independent Sales Agent." Both programs recruited new individuals by using manufactured excitement and promises of wealth.

Defendants further argue that the Challenge program is similar to that used by established business concerns, such as *520 Amway and insurance companies, because the Independent Sales Agents of Challenge do not receive compensation upon the introduction of other participants, but only upon actual sales made by a Sales Trainee. This argument was not fully answered by State **338 ex rel. Morgan v. Dare to Be Great, supra, the only appellate decision in this State dealing with a violation of G.S. 14-291.2. Therefore, although federal court decisions are not controlling in construing the North Carolina statute, it is appropriate to look for guidance at federal decisions interpreting provisions in the Federal Trade Commission Act which closely parallel G.S. 75- 1.1. The Federal Trade Commission found that Koscot, Ger-Ro-Mar and Holiday Magic were illegal pyramid schemes that involved marketing plans which required a person seeking to become a distributor to pay a large sum of money, either as an entry fee ("headhunting" fee) or for the purchase of a large amount of nonreturnable inventory ("inventory loading"). In exchange, the new distributor would have the right to recruit others who would themselves have to pay a large sum of money to join the organization. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), aff'd, sub nom., 580 F.2d 701 (D.C.Cir.1978); In re Ger-Ro-Mar, 84 F.T.C. 95 (1974), aff'd in part, rev'd in part sub nom., 518 F.2d 33 (2d Cir. 1975); In re Holiday Magic, Inc., 84 F.T.C. 748 (1974). The F.T.C. has found that the Amway plan discussed in In re Amway Corporation, Trade Reg.Rep. (CCH) 21,574 (1979) relied on by defendants does not contain the essential features of an illegal pyramid scheme. In Amway a sponsoring distributor receives nothing from the mere act of sponsoring. It is only when the newly recruited distributor sells to consumers that the Sponsor begins to earn money from his recruit's efforts. Amway prevents inventory loading and encourages the sale of Amway products to consumers with two rules: the "70 percent rule" provides that a distributor must sell at least 70% of the products he bought during a given month and the "10 customer" rule provides that a distributor must make sales to ten different customers each month. Therefore, these safeguards and others not here discussed prevent the Amway plan from being an illegal pyramid scheme. In re Amway Corporation, supra.

Defendants' reliance on Amway is misplaced because the marketing plan of Challenge does not closely resemble that of Amway and lacks the safeguards inherent in that program. In the *521 Challenge program, each time a prospect met the requirements to become an Independent Sales Agent by paying $5,000.00 for the seminar package, his sponsoring Sales Agent received a commission on that sale which amounted to a fee for recruiting a new participant. The net effect of this feature of Challenge's program in North Carolina was to give participants, upon the payment of a valuable consideration, the opportunity to receive a fee for the introduction of new participants into the program in violation of G.S. 14-291.2.

[5] Defendants further contend that issuance of the injunction was inequitable because prior to the hearing on 15 September 1980, Challenge, Inc., took action to change their operating procedures and eliminate objectionable features in a meeting of the Board of Directors on 13 August 1980. It appears from the minutes of this meeting that the Board made "recommendations" for modification of its marketing plan, including the elimination of the requirement to sell courses for $5,000.00 within sixty days and the addition of the requirement that a Sales Trainee make at least one of his sales to an outside purchaser. The Board agreed to "present these possible amendments to the marketing program to the officials of North Carolina" and, if they were accepted, the officials could implement them within a reasonable length of time. Since the proposed or recommended changes were not effected prior to the injunction hearing, it is obvious that they were not considered by the trial court, and it would be inappropriate for this Court to rule on what effect, if any, the proposed amendments would have on the legality of the Challenge program. The defendants have elected to appeal from the injunction order before a trial on the merits, and we must limit our decision to the issues raised in the appeal from that order. IRREPARABLE INJURY

[6] Turning now to defendants' claim that the preliminary injunction was improvidently **339 issued by the trial court because the State failed to show irreparable harm, G.S. 14-291.2 prohibits pyramid and chain schemes such as alleged in the case sub judice. Section (c) of this statute provides for injunctive relief from the continuation of such schemes. In addition, G.S. 75- 14 provides that the Attorney General has the power to obtain mandatory orders to carry out the provisions of Chapter 75. In Mayton v. Hiatt's *522 Used Cars, 45 N.C.App. 206, 262 S.E.2d 860, disc. review denied, 300 N.C. 198, 269 S.E.2d 624 (1980), this Court stated that public enforcement through the Attorney General was similar to Section 5 of the Federal Trade Commission Act, whose purpose is to vindicate public interest rather than to redress individual grievances. It is not necessary to show actual injury has resulted, but merely that the act or practice complained of adversely affects the public interest. The court continued, "[s]imilarly, there is no suggestion in our own statutory scheme that the Attorney General would be required to prove such actual injury." Id. 45 N.C.App. at 211, 262 S.E.2d at 863. Many other jurisdictions have held that where an injunction is authorized by a statute designed to provide a government agent with the means to enforce public policy, the usual grounds for relief need not be established as long as the statutory conditions exist. Henderson v. Burd, 133 F.2d 515 (2d Cir. 1943); Conover v. Hall, 11 Cal.3d 842, 523 P.2d 682, 114 Cal.Rptr. 642 (1974); Ackerman v. Tri-City Geriatric & Health Care, 55 Ohio St.2d 51, 378 N.E.2d 145 (1978); Bowles v. Barde Steel Co., 177 Or. 421, 164 P.2d 692, 162 A.L.R. 328 (1945); 42 Am.Jur.2d Injunctions 38 (1969).

The order granting the preliminary injunction is

Affirmed.

MORRIS, C. J., and WELLS, J., concur.

322 S.E.2d 658

(Cite as: 71 N.C.App. 575, 322 S.E.2d 658) STATE of North Carolina ex rel. Rufus L. EDMISTEN, Attorney General v. CHALLENGE, INC., Edward G. Rector, Douglas L. Beekman, Carol A. Rector, Allen K. Oaks, and Richard Mailman. No. 8310SC1121. Court of Appeals of North Carolina. Dec. 4, 1984.

Attorney General brought action alleging that defendants were in violation of statutes prohibiting pyramid or chain schemes and prohibiting unfair and deceptive trade practices. Attorney General moved to set forth matters of uncontested facts. The Superior Court, Wake County, Robert L. Farmer, J., granted the motion, and defendants appealed. The Court of Appeals, Eagles, J., held that: (1) trial court's asking defendants to provide information as to which portion of each matter was in good faith controverted as opposed to broad statement that the entire matter was controverted did not require defendants to assume burden of proof or to produce additional evidence; (2) by initially finding that it was not practicable to ascertain what material facts existed without substantial controversy and asking for more information, and by later granting the motion to set forth undisputed facts, the trial court was not reversing its initial ruling; and (3) evidence supported trial court's granting of the motion.

Affirmed.

See also, --- N.C.App. ---, 284 S.E.2d 333.

[1] JUDGMENT k181(14)

228k181(14)

On plaintiff's motion for partial summary judgment, trial court's asking defendants to provide information as to which portion of each matter was in good faith controverted as opposed to a broad statement that the entire matter was controverted was permissible and did not require defendants to assume a burden of proof or to produce additional evidence. Rules Civ.Proc., Rule 56(d), G.S. 1A-1.

[2] JUDGMENT k186

228k186

Where trial court, on plaintiff's motion to set forth matters of uncontested fact, initially found that plaintiff, in setting out facts alleged to be uncontested, had assumed facts not in evidence, and found that it was "not practicable" to ascertain what material facts existed without substantial controversy and what material facts were actually and in good faith controverted, trial court did not reverse its ruling when, after it issued interim order and asked defendants to provide a more specific response, it made final ruling ordering that all statements of fact listed in plaintiff's motion be deemed established for purposes of trial. Rules Civ.Proc., Rule 56(d), G.S. 1A-1.

[3] JUDGMENT k186

228k186

Evidence supported trial court's grant of plaintiff's motion to set forth matters of uncontested fact, in view of several instances in which defendants made no response at all, but merely asserted in a broadside manner that the matter was controverted, and other instances in which defendants, without responding directly to the material facts said to be disputed, merely asserted additional facts or objected to certain facts based on credibility and subjective feelings of the witnesses asserting the facts. Rules Civ.Proc., Rule 56(d), G.S. 1A-1.

*576 **658 Appeal by defendants from Order of Farmer, Judge, dated 13 May 1982 granting plaintiff's motion to set forth matters of uncontested facts pursuant to N.C.Gen.Stat.Sec. 1A-1, Rule 56(d) (1983) and from judgment of Bowen, Judge, dated 9 June 1983 in favor of plaintiff. The Order and Judgment appealed from were rendered in Superior Court, Wake County. Heard in the Court of Appeals 24 August 1984.

Atty. Gen. Rufus L. Edmisten by Sp. Deputy Atty. Gen. John R.B. Matthis, and **659 Asst. Attys. Gen. Philip A. Telfer, Alan S. Hirsch, Raleigh, for the State.

Purser, Cheshire, Manning & Parker by Thomas C. Manning and Barbara A. Smith, Raleigh, for defendants-appellants.

EAGLES, Judge.

On the basis of the pleadings and issues of fact found by the Court to be uncontested pursuant to Rule 56(d) of the North Carolina Rules of Civil Procedure, the trial court granted summary judgment against the defendants, finding them in violation of N.C.Gen.Stat.Sec. 14-291.2 (1981) (prohibiting pyramid or chain schemes), and N.C.Gen.Stat.Sec. 75-1.1 (prohibiting unfair and deceptive trade practices). By judgment entered 9 June 1983, the defendants, Challenge, Inc. (Challenge) and certain individuals, all officers, directors or employees of the corporate defendant, were permanently enjoined from operating their business in North Carolina, *577 and monetary damages were assessed against them. Defendants appeal. I

Challenge is a Nevada corporation registered to do business in North Carolina, as well as in approximately twenty other states. Challenge is in the business of selling self-development motivational seminars. More specifically, the motivational course sold by Challenge is given in the form of four different seminars, known collectively as the "Adventure" Series, but which can be purchased separately.

An individual interested in becoming a sales representative or Independent Sales Agent (ISA) for Challenge generally attends an introductory meeting known as the "Shooting Star" Seminar, where he is told about the Challenge marketing program and about the Challenge Adventure series. If an individual decides that he or she wishes to become an ISA, that person must meet certain training requirements: (1) sell courses of a total value of $5,000; (2) attend a salesperson workshop (different from the introductory meeting); and (3) pre- screen two other individuals who may be interested in selling the Challenge courses. The sales trainee receives a 20% commission on his own sales, and the ISA who sponsors the sales trainee receives a 30% commission on the trainee's sales. A sales trainee may purchase courses himself to meet his sales requirements, but he is not required to do so. Although the participants expressed various motives for doing so, the vast majority of sales trainees met their sales requirement by purchasing the Adventure Series for themselves or their family. Moreover, the trial court ultimately found as an uncontested fact that participants in defendants' program in North Carolina sold $808,200 worth of courses by selling the seminar to themselves, and only $4,700 worth of courses to persons not involved in defendants' sales program.

Following the complaint filed by the Attorney General in this matter on 4 September 1980 and the answer filed by defendants on 1 October 1980, extensive discovery ensued. Following discovery, Superior Court Judge Herring, on 9 December 1981, denied plaintiff's motion for partial summary judgment on the issue of liability for operating a pyramid scheme in violation of G.S.Sec. 14- 291.2 (1981) and for engaging in unfair and deceptive trade *578 practices in violation of G.S.Sec. 75-1.1 (1981), and further denied "plaintiff's motion under Rule 56(d) ... specifically finding [that it was] not practicable to ascertain what material facts exist without substantial controversy and what material facts are actually and in good faith controverted. However, such denial is without prejudice as to any potential future motion by said plaintiff under Rule 56(d)."

On 18 December 1981, plaintiff filed a written motion to set forth matters of uncontested fact pursuant to Rule 56(d). In the motion, plaintiff set out thirty-three separate material facts which it believed were uncontroverted. At the hearing on the motion, the defendants stipulated that twelve of these facts were not in controversy, but asserted, without providing specifics, that the remaining twenty-one facts were disputed. Superior Court Judge **660 Farmer, following the hearing, found that the plaintiff, in setting out facts alleged to be uncontested, had "assumed facts not in evidence and incorporated them with facts in evidence." He further found and concluded that "it [was] not practicable to ascertain what material facts exist without substantial controversy and what material facts [were] actually and in good faith controverted." Judge Farmer did not deny the plaintiff's motion outright; rather, he ordered the defendant to provide to the court, within a specified time, information as to which portions of each matter defendant contended were controverted. Thereafter, he continued the hearing. Approximately five weeks later, defendants filed the requested information while simultaneously noting, for the first time, their objection to the trial court's order. The defendants' response did not contain any new evidence; rather, it consisted of defendants' argument regarding each of the allegedly controverted matters along with citations to the portions of the court file which purportedly supported their arguments.

On 13 May 1982, Judge Farmer, after making the requisite findings, ordered that all statements of fact listed in plaintiff's motion under Rule 56(d) be deemed established for purposes of trial.

From Judge Farmer's 9 June 1983 order finding defendants in violation of G.S.Sec. 14-291.2 (1981) and G.S.Sec. 75-1.1 (1981), defendants appeal. They contend that the trial court erred (1) in ordering the defendants to file documents with and provide information *579 to the court showing what facts were in good faith controverted because this impermissibly shifted the burden of proof from the State to the defendant; and (2) in finding that each of the matters set forth in plaintiff's motion to set forth matters of uncontested fact was fully supported by the evidence and not in controversy. We disagree. II

[1] The burden of proof under G.S.Sec. 1A-1, Rule 56 (1983) is on the moving party. The trial court specifically found, initially, that the plaintiff had, in its motion, assumed facts not in evidence and had further found that the evidence was insufficient to establish the non-existence of genuine controversy. Defendants therefore first argue that the trial court's action in granting the plaintiff's motion under Rule 56(d) was irreconcilably inconsistent with the court's previous finding and constituted reversible error, especially since the court received no further evidence from the movant.

We disagree with the defendants' assumption that "[t]he court apparently made this ruling because it did not feel the defendants had produced adequate evidence of controversy ... [and] improperly shifted the burden of proof to the defendants." As stated by the plaintiff, the trial judge has a specific duty under Rule 56(d):

[T]he court at the hearing of the motion, by examining the pleadings and the evidence before it and by interrogating counsel, shall if practicable ascertain what material facts exist without substantial controversy and what material facts are actually and in good faith controverted.

The record in this case was voluminous, containing many affidavits and depositions, transcriptions of tape recorded conversations, and several lengthy and detailed motions, among other items. The hearing on the plaintiff's 18 December 1981 motion was Judge Farmer's first contact with the case, and, in order to perform his duty under Rule 56(d), Judge Farmer asked the defendants to "come forth and provide the court information as to which portion of each matter is in good faith controverted as opposed to a broad statement that the entire matter is controverted." In our view, Judge Farmer's order does not require the defendants to assume a burden of proof; it does not require *580 them to produce additional evidence. It merely orders them, pursuant to Rule 56(d), to explain by argument and reference to the record, how each matter they claim was in controversy was disputed. Defendants cite no cases in support of **661 their contention that the trial court erred when he merely gave them an additional opportunity to further argue their case before making a final ruling.

Considering the above, and considering further that the State satisfied its burden with many citations to the record supporting its Rule 56(d) motion, we find no merit in this assignment of error. III

In their second assignment of error, defendants assert two claims. First, they argue that the trial court found that it could not ascertain what material facts were in controversy, yet, without receiving new evidence, improperly reversed its ruling. Second, they argue that the evidence was not sufficient to support the judge's ruling.

[2] Considering our analysis in Part II, supra, we summarily reject defendants' assertion that the trial court reversed its ruling. The trial judge specifically stated that he could not determine "at this time" which facts were contested and which were not. In effect, he issued an interim order and asked defendants to provide a more specific response. Having considered the defendants' response during a period that exceeded two months, the trial court then made its final ruling. We are unable, as defendants would apparently have us do, to transform the judge's initial comments that it was not practical at that time to ascertain which material facts were in controversy into a ruling that it was not practical to do so at all. In any event, when a motion is still pending before a judge, he should be able to reconsider the motion based on a more complete review of the record and not be bound by his preliminary determination.

[3] We also reject defendants' argument that the evidence was not sufficient to support the trial judge's ruling. The plaintiff, in an addendum to their brief, has compared each fact which the State argued was uncontroverted with the defendants' response disputing those facts and has further analyzed the facts and responses to persuasively demonstrate that the trial court was *581 correct. Having reviewed the addendum and the record, we conclude that in several instances the defendants made no response at all, but merely asserted, in a broadside manner, that the matter was controverted. In other instances, the defendants, without responding directly to the material facts said to be disputed in the State's Rule 56(d) motion, merely asserted additional facts or objected to certain facts based on credibility and the subjective feelings of the witnesses asserting the facts.

Moreover, any error as to whether a material fact was in controversy would be harmless in this case since the trial court's findings contain several bases for the conclusion it reached.

In this case, we find no error, and we

Affirm.

HILL and BRASWELL, JJ., concur.