Court Opinion

ID: 2652218
Source: CourtListenerOpinion
Date Created: 2014-02-04 22:27:49.200939+00
Date Added: 2024-06-11T12:57:53.112862
License: Public Domain

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    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                                     DIVISION II

ALPACAS OF AMERICA, LLC, a                                                         No. 44018 -1 - II
Washington limited liability company,

                                            Appellant,

          V.

SAM and ODALIS GROOME, husband and                                           PUBLISHED OPINION
wife,

          JOHANSON, A.C. J. —                   Alpacas    of   America, LLC ( AOA) appeals the trial court' s

dismissal of its lawsuit to recover on two promissory notes that Sam and Odalis Groome

executed       in   conjunction with sales        contracts.     At issue in this appeal is whether the four -
                                                                                                             year

statute of limitations for sales contracts or the six - ear statute of limitations for negotiable
                                                      y

instruments         applies   here.   The parties agree that the six - ear statute applies if the notes qualify as
                                                                     y

 negotiable          instruments"       under article 3         of the Washington Uniform Commercial Code

 WUCC), Title 62A RCW.                      We hold that the promissory notes here are negotiable instruments

because they contain unconditional promises to pay despite referencing the underlying sales

contracts.      Accordingly, we also hold that the six - ear statute of limitations applies, reverse the
                                                       y

trial court' s dismissal of AOA' s complaint, which relied on an application of the four -
                                                                                         year

statute    of       limitations,      and   remand   for   further   proceedings    consistent       with   this   opinion.
No. 44018 -1 - II

Additionally, we reverse the trial court' s attorney fees award to the Groomes because they are no

longer the prevailing party entitled to attorney fees.

                                                               FACTS

         The Groomes twice entered into sales contracts with AOA to purchase alpacas, and both

times they financed the purchases. First, on January 14, 2006, the Groomes purchased " Phashion

Model"    and   financed $ 18, 750          over   four   years.       Second, on January 13, 2007, they purchased

 Black Thunder'       s   Midnight"    and    financed $ 20, 250. In conjunction with each sales contract, the

Groomes     executed        a     promissory    note,     outlining a payment schedule to satisfy the alpaca

purchases. Each promissory note contained a security agreement.

         In April 2012, AOA sued the Groomes, alleging that in October 2007, the Groomes

stopped   making    payments and         defaulted        on   the promissory        notes.   In its complaint, AOA alleged

that the Groomes purchased alpacas from AOA pursuant to the sales contracts and promissory

notes. AOA attached the 2006 and 2007 sales contracts and promissory notes to its complaint.

          The Groomes filed a CR 12( b)( 6) motion to dismiss AOA' s claim, arguing that the four -

year statute of limitations under WUCC article 2 for the sale of goods had expired. AOA argued

that its action was on the promissory notes which were negotiable instruments and, therefore, the

six -
    year statute of limitations for negotiable instruments under WUCC article 3 applied.

          The trial       court   granted    the Groomes'          CR 12( b)( 6) motion, finding that the four - ear
                                                                                                               y

statute of limitations on WUCC article 2 actions applied here because AOA did not base its

action on a negotiable            instrument.      The trial court reasoned that the promissory notes were not

negotiable      instruments because they              enforced         the   sales    contracts,   the sales documents all

referenced one another, the Groomes signed the contracts and promissory notes at the same time

in conjunction with one another, and AOA attached both the contracts and promissory notes to

                                                                   2
No. 44018 -1 - II

its complaint. The trial court ultimately found that the sales contracts and promissory notes were

part of the same transaction, not separate transactions and, thus, the promissory notes could not

be characterized as negotiable instruments under WUCC article 3.

         AOA then unsuccessfully                 moved    for   reconsideration.   Later, the trial court granted the

Groomes attorney fees as the prevailing party pursuant to the sales contracts and promissory

notes.

         AOA appeals the trial court action dismissing AOA' s complaint on a CR 12( b)( 6)

motion, as     well   as   its denial     of     AOA' s   reconsideration      motion.   AOA also appeals the trial

court' s attorney fees award to the Groomes.

                                                          ANALYSIS

                                                 I. STATUTE OF LIMITATIONS

         AOA first argues that the trial court improperly applied the four -year statute of

limitations for claims arising from the sale of goods set forth in RCW 62A.2 -725, rather than the

six - ear statute of limitations for claims arising from negotiable instruments set forth in RCW
    y

62A.3 - 118.    We    agree and reverse           the trial   court.   Because the promissory notes used to secure

payment on the sales contracts were not subject to or governed by the sales contracts, they

remain negotiable instruments governed by WUCC article 3 and. subject to a six -year statute of

limitations.

                                  II. STANDARD OF REVIEW AND RULES OF LAW

         We    review      de   novo a   trial   court' s order   dismissing   a claim under   CR 12( b)( 6).   Kinney v.

 Cook, 159 Wash. 2d 837,              842, 154 P.3d 206 ( 2007).             We review the denial of a motion for

 reconsideration for an abuse of discretion. Brinnon Grp. v. Jefferson County, 159 Wash. App. 446,

 485, 245 P.3d 789 ( 2011).
No. 44018 -1 - II

          WUCC           article   2   governs   the   sale of goods.          RCW 62A. 2 -. 02.
                                                                                           1                Under WUCC article 2,

the   price   of goods         may be     payable      in money     or otherwise.             RCW 62A.2 -304.            If a promissory

note is taken for an obligation, such as an obligation to pay for goods sold, the obligation is

suspended          and   subsequently discharged to the                   extent   the note is        paid.      RCW 62A.3- 310( b).

When the note holder is also the obligee, the obligee may enforce either the note or the

obligation.        RCW 62A. 3- 310( b)( 3).             A plaintiff must commence an action for breach of a sales

contract within four years after the cause of action accrued. RCW 62A.2- 725( 1).

          WUCC article 3 governs negotiable instruments, which can include promissory notes.

RCW 62A. 3 - 102; RCW 62A.3 - 104.                       Under WUCC article 3, an action to enforce a party' s

obligation to pay a note payable at a definite time that qualifies as a negotiable instrument must

be commenced within six years after the due date stated on the instrument. RCW 62A.3- 118( a).

                            A. THE PROMISSORY NOTES ARE NEGOTIABLE INSTRUMENTS

          The dispositive question is whether the promissory notes here are negotiable instruments,

        that                              to WUCC         article   3'   s        year
                                                                              six -       statute    of    limitations.    A negotiable
such           they      are    subject

instrument         contains an " unconditional promise or order                    to pay      a   fixed   amount of     money."   RCW

 62A. 3- 104( a).        Under RCW 62A. 3- 106( a),            a promise or order to pay is unconditional unless it

 contains an express condition to payment and states that ( 1) the promise or order to pay is subject

 to or governed by another writing or ( 2) rights or obligations with respect to the promise or order

 to pay   are stated       in   another    writing.      A reference to another writing does not of itself make the

 promise      or   order conditional.        RCW 62A.3- 106( a).                We analyze the promissory notes' contents

 to determine whether the notes' holder could determine her or his rights, duties, and obligations

 with respect        to the     payment on       the   notes without          having     to   examine      any   other   documents.   See

 RCWA 62A.3 - 106 cmt. 1.

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No. 44018 -1 - II

          The Groomes argue that the two promissory notes are not negotiable instruments for

three   reasons.         First, both notes state that the indebtedness evidenced by the notes is " pursuant

to" the corresponding             sales contract.     However, RCW 62A.3- 106( a)            provides     that "[   a] reference

to   another    writing does        not of   itself   make   the    promise    or order conditional."'      For purposes of

determining whether a reference to an outside writing destroys a note' s negotiability, the

language "      pursuant     to" is   not   the   same as " governed        by"   or " subject   to" and does not condition

one' s promise       to pay because "         pursuant      to"    simply requires conformance with something and

does not provide that something else controls or conditions it.2
          Second,         both notes contain security agreements that all the alpacas - the Groomes

purchased under            the    sales   contracts   are   the security.     As a result, the sales contracts must be

                                                                                                     3
consulted       to determine the property             covered      by    the security agreements.        But nothing in this

language    references           the Groomes'     promise     to pay.      Accordingly, the fact that the sales contracts

must be consulted to determine the security does not create an express condition to payment or

1
 RCWA 62A.3 - 106 cmt. 1 states, " The rationale is that the holder of a negotiable instrument
should not be required to examine another document to determine rights with respect to
payment."  And an instrument can retain its negotiability when it merely refers to the existence
of another writing and does not require reference to the other writing as to whether or when
payment     is due.         6B LARY LAWRENCE, ANDERSON ON                         THE   UNIFORM COMMERCIAL CODE § 3-
 106: 14R ( 3d. ed. 2003).

2 " Pursuant to" simply means that one thing is " in conformance to or in agreement with" another.
WEBSTER'        S   THIRD NEW INTERNATIONAL DICTIONARY 1848 ( 2002).                               But when something is
                                      else, the governing device " control[ s] the workings or operation" of
     governed"      by   something
that    being   governed.         WEBSTER' S 982. And similarly, when something is " subject" to something
else, the subjected element is " likely to be conditioned, affected, or modified in some indicated
way" by the subjecting device. WEBSTER' S 2275.

 3 A negotiable instrument may contain a security agreement without necessarily destroying
 negotiability. See RCW. 62A.3- 104( a)( 3) ( "                   the promise or order may contain ( i) an undertaking
 or power to give, maintain, or protect collateral to secure payment ").

                                                                     5
No. 44018 -1 - II

suggest that the promise, or the rights or obligations with respect to the promise to pay are stated

in   another   writing.    Further, RCW 62A.3- 106( b) states that a promise is not made conditional by

a " reference to another writing for a statement of rights with respect to collateral."

         Third, the 2007 promissory                note   states, "    Any notice given under this Note and the

attached Security Terms and Conditions shall be given in accordance with the Sales Contract
                                                                          A
between the      parties    at   the addresses set forth below.                Clerk' s Papers   at   44.    This provision

requires a reader to consult the sales contract to determine proper procedures for giving notice.

But although the 2007 promissory note requires the note holder to review the sales contract to

understand procedures for giving notice, the notice requirements do not condition the Groomes'

promise    to pay.        Therefore, any language regarding notice requirements does not destroy the

note' s negotiability.

         Both the 2006           and   2007 promissory         notes   are unconditional     promises       to pay.   Neither

includes any express conditions on the Groomes' promise to pay. Also, neither provides that the

promise     to pay is      subject     to   or   governed     by   another    writing.   Finally, neither note contains

language that the rights or obligations with respect to the promise to pay are stated in another

writing.       Therefore, both promissory notes constituted unconditional promises to pay and are

negotiable      instruments      under      WUCC    article   3.   See RCW 62A.3- 106( a).

           B. PROMISSORY NOTES GIVE RISE TO SEPARATE ACTIONS UNDER UCC ARTICLE 3

          AOA argues that because the notes are separate and distinct from the underlying sales

 contracts, AOA could have sued on either the underlying sales contract under WUCC article 2 or

 4 The 2006 note does not contain a similar provision.

                                                                   0
No. 44018 -1 - II

on    the promissory    note under       WUCC        article   3.       AOA claims that because it sued only on the

notes, the six -
               year statute of limitations applies. We agree.

         Because this is a matter of first impression in Washington, we look for guidance in out-

of-state cases.     In O' Neill   v.   Steppat, 270 N.W.2d 375 ( S. D. 1978), for example, the trial court

concluded that South Dakota UCC article 2' s four - ear statute of limitations applied to an action
                                                  y

to   collect on a   promissory      note     given   in   part payment         of a sales    contract.    The South Dakota

Supreme Court reversed, holding that the sellers sought to recover on the promissory note, not

the   sales contract, and "[    t]hat the note might have been given in payment for a contract for sale is

not relevant    in this   action."       O' Neill, 270 N.W.2d           at   376.   The court noted that in signing a

negotiable note, the buyers made a separate promise under which arises a separate remedy on the

note under    South Dakota UCC           article   3, distinct from the          sales contract.      O' Neill, 270 N.W.2d at

376.    The court explained that " the holder of a note taken for an underlying contract has a choice

of remedies.      He   can sue on      the   note or   the underlying contract."                 O' Neill, 270 N.W.2d at 376.

The court held that the sellers chose to sue on the note under South Dakota UCC article 3, and

the South Dakota UCC article 2 statute of limitations did not impair the remedy on the note.

 O' Neill, 270 N.W.2d at 376, 377.

          In O' Neill, the       court    held that the promissory                note,     an    unconditional   promise   not

 dependant on the underlying sales contract, gave rise to a " separate promise" distinct from the

 sales contract, so    the    seller could   bring its    claim under either          the   note or sales contract.   O' Neill,
270 N.W.2d     at   376.    Like O' Neill, the promissory notes here were unconditional promises.

 Accordingly, the transactions here involve separate and distinct negotiable instruments under

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No. 44018 -1 - II

                                                                                                   5
which      AOA   could     bring   a cause of action separate        from the    sales contract.       Adopting the rule

outlined in O' Neill, we may consider claims on a negotiable instrument separate from the

underlying sales contract.

                                                   III. ATTORNEY FEES

           The trial court awarded attorney fees to the Groomes under the sales contracts. The sales

contracts provide that the prevailing party in an action concerning the contracts is entitled to

attorney fees. Because we have reversed the trial court' s dismissal in favor of the Groomes, they

are no longer the prevailing party and therefore are not entitled to attorney fees.

           We    reverse    the trial   court' s   CR 12( b)( 6) dismissal and denial of AOA' s motion for

reconsideration. Accordingly, we also reverse its award of attorney fees to the Groomes.

                                                                Ot"  HANSON, A.C. J.
                                                                                           I   I

We concur:

 5
     The   Groomes       also   cite        of - tate
                                        out -  s        cases   to   support    their   argument.       These   cases   are

 distinguishable because they involved transactions in which the underlying sales contracts and
promissory notes issued as payment on the contracts could not be divorced from one another or
they involved statutory schemes significantly different from ours. See Troy Boiler Works, Inc. v.
 Sterile Technologies, Inc., 3 Misc. 3d 1006, 777 N.Y. S. 2d 574 ( 2003); Jackson v. Luellen Farms,
 Inc., 877 N.E.2d 848 ( Ind. Ct.     App. 2007); Fallimento C.Op.M.A. v. Fischer Crane Co., 995 F.2d
789 ( 7th Cir. 1993).       Accordingly, the Groomes' cases are not persuasive.

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