Frye v. TaylorFrye v. Taylor
- Reporters:
- Before:
- Mager, Cross, Owen
Defendant executed the note to secure a loan of $2,500.00 made by the plaintiff to enable defendant to purchase a directorship in Koscot Interplanetary, Inc. Defendant contends that the note in question is void and unenforceable since it was given in consideration of participation in a transaction declared to be a lottery under
From our review of the evidence in the record we are of the opinion that the transaction in question unmistakably and as clearly as the proverbial “nose on the face” constitutes a lottery within the spirit and letter of
The evidence in the record reflects an ingenious scheme of “pyramid franchising” agreements embracing multi-level membership recruitments with the payment of finder‘s fees for membership recruitment and “advancement” within the various levels of such plan. The evidence further demonstrates that the motivating factor inducing persons to become participants was not the sale of cosmetics but rather the receipt of a fee or commission through a chain process of securing membership.
“849.091 Chain letters, pyramid clubs, etc., declared a lottery; prohibited; penalties. — The organization of any chain letter club, pyramid club, or other group organized or brought together under any plan or device, whereby fees or dues or anything of material value to be paid or given by members thereof are to be
paid or given to any other member thereof, which plan or device includes any provision for the increase in such membership through a chain process of new members securing other new members and thereby advancing themselves in the group to a position where such members in turn receive fees, dues or things of material value from other members, is hereby declared to be a lottery, and whoever shall participate in any such lottery by becoming a member of, or affiliating with, any such group or organization or who shall solicit any person for membership or affiliation in any such group or organization shall be guilty of a felony, and upon conviction thereof shall be punished by a fine of not less than one hundred dollars, nor more than five thousand dollars, or by imprisonment in the county jail for a period of not more than two years or in the state penitentiary not less than one year nor more than ten years.” (Emphasis added.)
It is difficult to discern any distinctive difference between the scheme giving rise to the debt in question and the prohibited chain letter or pyramid transaction set forth in
Thus, it can be seen how movement occurs at the various levels and how this chain process initiates and continues on ad infinitum. This process, particularly recruitment and replacement, is perhaps most clearly illustrated in Koscot‘s “Directors Training Manual” which was admitted into evidence before the trial court:
“‘This is the strength of our marketing plan. Before any Supervisor can reach the highest position in the field, he must fill his shoes with another Supervisor. This means the number of Supervisors you sponsor into the program can never decrease, but the number of Directors you have will be continually increasing.‘”
In the case sub judice plaintiff was formerly a supervisor in Koscot having ascended to a directorship position prior to the time of the transaction in question. As a director plaintiff had “sponsored” defendant as a supervisor for which transaction defendant paid Koscot $2,000.00, with plaintiff receiving a $750.00 finder‘s fee. Subsequently plaintiff, as a director, sponsored defendant to be elevated from his supervisorship position to director position. It was this latter transaction that gave rise to the $2,500.00 loan, execution of the promissory note and this litigation. Defendant testified, inter alia, that he agreed to become a director and to pay Koscot $2,500.00 if plaintiff would loan him that amount.
Although there is some reference to the sale and transfer of cosmetic products which supposedly is the business in which Koscot is engaged, the evidence indelibly indicates a pyramid franchising scheme possessing all of the requisite features and characteristics so as to bring it within the proscription of
“As a Director, you sponsor 1 Supervisor in the program. Now help your Supervisor become a success. See that he is thoroughly trained make certain he understands the program, and help him sponsor other distributors.
“...
“As soon as he is ready, he will sponsor another Supervisor to replace him, and he will become a Director.
“Now you have 1 Director and still 1 Supervisor, don‘t you? Work with your new Supervisor and see that he understands the program and becomes a success. Once he is properly trained, he will replace himself and he will become a Director. Now you have two Directors and 1 Supervisor to work with.
“Continue to help the Supervisor you always have, and make him a success. If it takes you an entire month to advance each Supervisor to Director, you will earn over $33,000 a year! But again, get serious about this! Work with your Supervisor full-time! Advance one Supervisor to Director each week in your organization and you will earn over $143,000 a year! And as a Director you sponsored only 1 man.
“...
“Now let us show you the greatest financial opportunity that KOScot has to offer — the 2% dividend that Directors earn from the Directors they have sponsored!
“As a Director, suppose you sponsor only 5 Supervisors into the program, and then you work with these to make them successful.
“...
“If it takes you a full month to advance each Supervisor to a Director, then at the end of 1 month, you will have 5 Directors and 5 replacement Supervisors.
“At this rate you will gain 5 new Directors per month, or 60 per year. In 2 years, then, you will have 120 trained Directors with women managers running their retail organizations.
“Suppose the average monthly volume of each of your Directors is only $5,000. You are receiving a 2% dividend, and 2% of $5,000 is $100 a month for each Director. $100 times 120 Directors is $12,000 a month or $144,000 a year in dividends you can be earning in 2 years’ time!” (Certain diagrams and reference numbers omitted.)
The Training Manual dwells at great lengths on various techniques for recruiting
“DON‘T GO INTO DETAILS. Never explain the program to a prospect before bringing him to an Opportunity Meeting. Do not mention Kosmetics or give any particulars, as many people will prejudge the program and decide it is not for them before they see the presentation.” (Emphasis ours.)
Under a section of the Manual entitled “Persuasion Techniques” for recruitment the following reference to the signing up of a prospect is further illustrative of the shadowy aspects of this operation:
”Contract! This is another stop sign in our language. Everyone is afraid of a contract. That is why we have none in KOScot. We use application forms and agreement pads.
“No one wants to sign anything either. Ask a prospect to sign a contract and you have just asked him to read all the small print that you can‘t always explain well enough to him. It is much better to have him okay the agreement.”
The following testimony of plaintiff on direct examination by defendant‘s counsel is indeed illuminating:
“Q Okay. Now, was it necessary to go from a supervisor to a director that the supervisor going to director replace himself as a supervisor or recruit another supervisor?
“A Yes. I would say yes.
“Q And is this — there is Helen B. Thompson here. Is this the supervisor who replaced Mr. Frye?
“A She was, yes, supervisor. And I used her to replace and bring Mr. Frye up as director.
“Q So you recruited her rather than Mr. Frye?
“A No. Mr. Frye was the man.
“Q Are you saying that you did not get Mrs. Thompson to replace Mr. Frye?
“A Oh, yes, I did that.
“Q You found Mrs. Thompson. Is that correct?
“A I did, that is right. She was a supervisor and I used her to bring Mr. Frye in as a Director.
“Q This was a requirement of Koscot, wasn‘t it?
“A That‘s right.
“...
“Q Were you in the wholesale or retail end of the Koscot business, Mr. Taylor?
“A I went in the retail end of it as a supervisor, and I wasn‘t interested in retail; and I went to director and wholesale of it.
“Q Okay. Now, does the word wholesale have any particular meaning in the parlance of Koscot lingo?
“A I don‘t know what you mean.
“Q Well, what do you mean by the term wholesale?
“A Go out and recruit people and bring them in the program.”
One witness who was not a party testified:
“Q When you were a director of Koscot what was your primary endeavor, what did you do for Koscot as a director?
“A I did everything that I could to recruit people to bring in as directors.” (Emphasis ours.)
Schemes similar in purpose and operation have received judicial scrutiny and were held to be violative of the law. M. Lippincott Mortgage Investment Co. v. Childress, supra; Florida Discount Centers, Inc. v. Antinori, Fla.App. 1969, 226 So.2d 693, aff‘d Fla. 1970, 232 So.2d 17. See also Bond v. Koscot Interplanetary, Inc., Fla.App. 1971, 246 So.2d 631.
In Bond v. Koscot, supra, this court had occasion to review the Koscot operation in the context of whether the allegations in plaintiff‘s complaint against Koscot were sufficient to establish a cause of action. We observed in part:
“... If the plaintiffs are able to prove that the method and alleged scheme as described in their complaint constitutes a pyramid or lottery as prohibited by
Section 849.091 , the contract embodying such scheme or plan would be unenforceable and void....”
In our opinion the record in the case sub judice is more than sufficient to prove that the transaction giving rise to the promissory note in question constitutes a lottery as prohibited by
It would be contrary to reason and public policy to enforce such contracts. The rationale for not enforcing these agreements and for leaving the parties where the court finds them is based upon the broad ground that “no court will allow itself to be used where its judgment will consummate an act forbidden by law and upon the policy of discouraging illegal and corrupt agreements by refusing all judicial aid to the parties thereto“. 17 Am.Jur.2d, Contracts, § 216.
The legislature has made its intent abundantly clear in the enactment of
With respect to the defendant‘s counterclaim seeking to recover from the plaintiff $2,000.00 which defendant paid for a supervisorship it is our opinion that that transaction, as evidenced by the “Distributor Application and Agreement“, falls within the broad definition of “security” as set forth in
The record in the case sub judice reflects that the defendant complied with the prerequisites for seeking the remedies under
It is our opinion, therefore, that the trial court failed to give proper legal effect to the evidence before it. Accordingly, the final judgment is reversed with directions to enter judgment in favor of the defendant on plaintiff‘s claim and on defendant‘s counterclaim.
CROSS and OWEN, JJ., concur.