In Re The Marriage Of: Kelly Grace v. Peter Spouse ( 2014 )

lN THE COURT OF APPEALS FOR THE STATE OF WASH|NGTON
|N RE MARR|AGE OF
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KELLYGRACE, ) ma70164-9-1(consoiidaiedw/§ §§
) No. 70460-5-1 -»- as
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Respondent, ) D|V|S!ON ONE T
PETERsPousE, ) uNPuBLlSHEDOPiNlON 5 §§
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Appellani_ ) Fii_izoz.iunez 2014 33 §§
SPEARMAN, C.J. -~ C|ear and unambiguous terms in a property settlement
agreement must be enforced as written. Here, the parties’ property settlement
agreement, incorporated into the decree of dissolution, awards Peter Spouse full
ownership of the parties’ co-founded business and requires him to pay all outstanding
taxes and liabilities associated with that asset. Therefore, the trial court did not err in
determining that Spouse was solely responsible for taxes associated with corporate
earnings for 2011, the year the parties dissolved their marriage, except for that portion
of corporate profit that Spouse's wife received in cash distributions. in addition to
granting appropriate tax relief to Spouse's wife, the trial court also awarded her attorney
fees and $2,500 for professional accountants fees. But since the parties’ contractual
agreement encompasses only court costs and reasonable attorney fees, we reverse the
award as to the fees awarded for professional services We affirm in all other respects.
N0. 70164-9-|/2 (Conso|id. wf``/O460-5-l)
|L$E
Peter Spouse and Ke||y Grace married in 2000 and dissolved their marriage in
2011. Spouse and Grace resolved the issues related to property distribution through a
property settlement agreement (PSA) which is incorporated into the decree of
dissolution The parties’ primary asset was a business, TelcoPrime, which they jointly
founded and co-owned. TelcoPrime is organized as a subchapter S Corporation for
federal taxation purposes. S_ee 26 U.S.C. § 1361. As such, TelcoPrime’s profits or
losses are allocated to its owners on a K-1 tax form, reported on the owners’ personal
tax returns, and taxes are calculated and paid at personal income tax |evels. §_eg 26
U.S.C. § 1366(a).
The PSA awards the business to Spouse. in exchange, the parties agreed that
Grace would receive a transfer payment of over a million dollars to be paid in
installments over a seven-year period. in addition, the agreement awards several
"company assets" to Grace, including three vehicles and 50 percent of the "dividends
and distributions from the business" until the September 30, 2011 date of dissolution
Clerk’s Papers (CP) at 29.
in early 2012, Grace received from TelcoPrime a 2011 K-1 form that allocated
business income of $350,479 to her. Grace quickly recognized that the form allocated
corporate income to her beyond the amount she had received in cash distributions
between January and September 2011. She retained an accountant to assess the
accuracy of the K-1 form and to determine whether she received her full 50 percent
share of the 2011 distributions. For this purpose, she requested TelcoPrime’s
accounting records.
No. 70164-9-|!3 (Consolid. wf70460-5-l)
Spouse's attorney refused to provide the records unless Grace executed a non-
disclosure agreement restricting her ability to use the information in a subsequent
motion to enforce the PSA. After the parties were unable to negotiate a mutually
acceptable agreement, Grace filed a motion to allow discovery. The court entered an
order allowing the discovery.
After obtaining and examining TelcoPrime’s accounting records, Grace filed a
motion to enforce the terms of the PSA. in her motion, Grace sought tax relief and
claimed entitlement to additional distributions of TelcoPrime’s 2011 earnings She
argued that because Spouse was awarded the business, under the PSA he was
responsible to pay the taxes resulting from all profit and earnings generated by the
business in 2011, regardless of whether that profit was retained by the business or
distributed to either party. Grace argued that under the agreement, she was required to
pay taxes only on the salary she received from TelcoPrime in 2011.
After a family court commissioner denied Grace’s motion, she filed a motion to
revise the commissioner’s decision. Following oral argument the court entered an order
on revision granting, in part, Grace’s motion to enforce the F’SA. The court ruled that
Grace was responsible to pay the taxes on $171,386 of TelcoPrime prohit she received
as cash distributions between January 1 and September 30, 2011, because these
distributions were a business asset awarded to her according to the agreement,
However, the court determined it was Spouse's responsibility to pay the taxes on
approximately $179,000 of corporate income allocated to Grace on the K-1 form--the
difference between $350,479 and $171,386. Therefore, the court ordered Spouse to
reimburse Grace for the excess taxes she incurred
No. 70164-9-|/4 (Consoiid. wf70460-5»l)
Grace also requested attorney fees based on a provision in the PSA. The court
granted the request, recognizing that Grace prevailed to a significant extent. The court
also pointed out that the conduct of Spouse and his counsel unnecessarily increased
the cost of resolving the tax issue:
The steps they took to have to get here [sic] were totally
inappropriate and totally excessive. it did appear to me that it was
an attempt to interfere with [Grace’s] ability to get information to
really address this issue.
Verbatim Report of Proceedings (VRP) (1/11!2013) at 38.
The court entered judgment on the reimbursement amount of $69,989. in a
separate order, the court awarded approximately $23,000 in attorney fees and $2,500 in
costs to Grace, Spouse appeais.
interpretation of the PSA
Spouse contends that the trial court erred by interpreting the PSA to require him
to pay taxes on income allocated to Grace, as co-owner of TelcoPrime for 9 months of
2001, on the K-1 form. He claims that by doing so, the court essentially added terms to
the contract because the PSA does not specifically mention this obligation or list
Grace’s taxes as a debt assumed by him.
in an appeal from a decision granting or denying a motion to revise a
commissioner’s ruiing, we review the decision on revision, not the commissioner’s
ruling_ Boeing_Emps. Credit Union v. Burns, 167 Wash. App. 265, 270, 272 P.3d 908, @y.
d_car_iLeg, 175 Wn_2d 1008 (2012). The interpretation of the language of a property
settlement agreement is a question of law that we review de novo. in re iviarriage of
Gimlett, 95 Wash. 2d 699, 705, 629 P.2d 450 (1981). C|ear and unambiguous terms of an
agreement are enforced as written. Grey v. Leach, 158 Wash. App. 837, 850, 244 P.3d
4No. 70164-9-|/5 (Conso|id. w/70460-5-|)
970 (2010). "lnterpretation by the reviewing court must be based upon the intent of the
parties as reflected in the language of the agreement." Byrne v. Ackerlund, 108 Wn_2d
445, 455, 739 P.2d 1138 (1987). We look for the objective manifestations of the
meeting of the minds; the parties’ subjective intent is irrelevant. @/mpia Police Guild v.
City of Olympia, 60 Wash. App. 556, 559, 805 P.2d 245 (1991). We give words used in an
agreement their ordinary, usuai, and popular meaning unless the agreement clearly
demonstrates a contrary intent, and we do not read ambiguity into an agreement where
it can reasonably be avoided. Grey, 158 Wn. App. at 850.
This issue is resolved by specific provisions of the PSA. Paragraph 7.5
addresses taxes. With respect to income taxes for the year 2011, the agreement
states:
The parties shall file separate income tax returns for calendar year
2011 and each party shall be responsible for any and all taxes due
on his or her own earned income and income or deductions
generated by assets awarded to him or her by this Agreement.
CP at 31-32. Paragraph 7.7 entitled, Oblioations and Taxes incident to Assets, is also
instructive and consistent with paragraph 7.5. CP at 32. Paragraph 7.7 provides:
Unless otherwise specifically provided herein, each party shall
assume and pay any and ali outstanding obligations relating to
property received by him or her hereunder, and shall hold the other
harmless therefrom and indemnify the other therefore. This shall
include taxes, penalties and interest incident to any asset awarded
to each party.
CP at 32.
Spouse contends that the PSA obligates him to pay all taxes on TelcoPrime’s
corporate earnings only with respect to those earnings generated after the September
2011 dissolution, when he assumed sole ownership. However, the PSA’s provisions are
No. 70164-9-|/6 (Conso|id. W/70460-5-|)
ciear and to the contrary For the 2011 tax year, the PSA requires that each party pays
taxes on his or her own earned income and pays taxes in connection with those assets
awarded to him or her in the agreement. The business was awarded to Spouse. He is
therefore required to pay taxes associated with the company’s 2011 profits The only
exception is the portion of 2011 TelcoPrime profit that was distributed to Grace as an
asset in accordance with the agreement,
Spouse relies on the fact that Exhibit C of the PSA allocating debt to him does
not mention taxes associated with TelcoPrime income allocated to Grace. Exhibit C
states that Spouse assumes "[a]ny and all debts associated with any asset he reoeives"
in the PSA. At the time of the September 2011 agreement, the 2011 taxes generated by
TelcoPrime’s 2011 profit were not yet a debt owed. TelcoPrime did not issue the K-1
triggering Grace's responsibility to report corporate earnings on her 2011 tax form until
early 2012. The failure to refer to the K-1 form or provide a specific mechanism for
reimbursement does not make the provisions of the PSA either ambiguous or invaiid.
Spouse adopts two contradictory positions to argue that the trial court’s
interpretation is erroneous. On the one hand, he claims that the court reached its
conclusion only by improperly considering extrinsic evidence of Grace’s subjective
intent that she would be reimbursed for any taxes due on TelcoPrime’s 2011 earnings
On the other hand, he argues that the court’s interpretation is flawed because it is
inconsistent with the parties’ mutual intent to achieve an equal division of assets_l
Although we may consider the context surrounding an instrument's execution to
interpret the parties’ intent in certain circumstances we use extrinsic evidence only to
illuminate the meaning of specific language used, and not to uncover an independent
‘We note that below, Spouse denied any mutual intention to equally divide the assets.
6
No. 70164-9-|/7 (Conso|id. W/``r'O460-5-l)
intention or to vary, contradict, or modify the language of the instrument. Ll_cea;t
Commc'ns, lnc. v. Seattle Times Co., 154 Wn_2d 493, 503, 115 P.3d 262 (2005);
Go2Net, lnc. v. C l i~iost, lnc., 115 Wash. App. 73, 84, 60 P.3d 1245 (2003) (evidence ofa
party’s unilateral or subjective intent as to contract’s meaning is inadmissible extrinsic
evidence). Spouse's argument here advocates the use of extrinsic evidence of intent to
modify and qualify the written terms, not to elucidate the meaning of those terms. And
where, as here, the terms of the contract can be determined from the actual words
used, the subjective intent of the parties is generally irreievant. @\r_st, 154 Wn.2d at
504. Because the provisions of the contract with respect to liability for 2011 taxes
generated by TelcoPrime’s earnings are unambiguous, there was no need to resort to
extrinsic evidence to ascertain the intent behind the provisions, nor was there any need
for an evidentiary hearing on the issue of intent.
Attorney Fees
Spouse challenges the award of attorney fees to Grace because she did not
prevail on all issues raised in her motion to enforce the PSA. Spouse argues that the
court should have denied Grace’s motion in its entirety because she was not the
"prevailing party." Spouse claims that he actually prevailed because he successfully
defended against several ciaims. The question of whether a trial court is authorized to
award attorney fees is a question of law, which we review de novo. Gander v. Yeager,
167 Wash. App. 638, 646, 282 P.3d 1100 (2012). When attorney fees are authorized, we
review an attorney fee award for an abuse of discretion. Gander, 167 Wn. App. at 647.
The court awarded fees under the PSA which states that "[a]ny party failing to
timely carry out the terms of this Agreement shall be responsible for any court costs and
No. 70164-9-l/8 (Conso|id. w/70460-5-|)
reasonable attorney’s fees of the other party incurred as a result of such failure. CP at
34. Spouse cites RCW 4.84.330, but this statute is inapplicable because the contractual
attorney fee provision in the PSA is bi|ateral. §_e_e Hawk v. Brandies, 97 Wash. App. 776,
780, 986 P.2d 841 (1999); accord Waiii v. Candvco, |nc., 57 Wash. App. 284, 288, 787
P.2d 946 (1990) (statutory "prevailing party" provision of RCW 4.84.330 does not control
over the plain language of a contract that contains a bilateral attorney fee clause).
Under the specific language of the contractual provision at issue, Grace was entitled to
reasonable attorney fees if she incurred fees as a result of Spouse’s failure to "timely
carry out the terms of the Agreement." According to the trial court’s decision, Spouse
failed to carry out the terms of the agreement by refusing to pay taxes associated with
TelcoPrime’s earnings. The trial court did not likewise find that Grace failed to carry out
any terms of the PSA. Spouse’s argument fails to address the specific language of the
agreement.
Aiternatively, Spouse argues that Grace was entitled only to fees associated with
her successful claims. He contends, for instance, that it was unnecessary for Grace to
access TelcoPrime’s accounting records or negotiate a non-disclosure agreement in
order to seek reimbursement under the PSA and that fees related to these matters
should have been exc|uded. However, the trial court disagreed with this position, noting
that Grace reasonably sought to access accounting information to enable her to
determine her tax liability and the accuracy of the K-1 form. The fees incurred in
obtaining financial information were related to Grace’s claim for reimbursement under
the PSA. C.f. Maver v. City Of Seattie, 102 Wash. App. 66, 79-80, 10 P.3d 408 (2000)
No. 70164-9-|/9 (Conso|id. w/70460-5-|)
(abuse of discretion for court to award fees for time spent on discovery that was not
relevant to plaintiffs Mode| Toxics Control Act claim which provided attorney fees).
Finally, Spouse asserts that the court failed to adequately state the basis for fees
or the method used to calculate fees. But the fee request was based on the PSA and
the record is sufficient to demonstrate the manner of calculation. Grace provided
detailed documentation of the fees she incurred. The record before the trial court shows
that the court considered the number and reasonableness of the hours expended, the
tasks performed, and the billing rates of the legal service providers. The court awarded
approximately 85 percent of the fees requested, in recognition that Grace was not
successful on all her claims. Spouse fails to identify, here or below, specific billing items
that were unrelated to the issue of tax liability and required segregation. Thus, there is
no basis to conclude that the trial court erred in awarding fees or failed to properly
exercise its discretion in calculating the amount of fees.
Fees for Professional Services
Spouse argues that the trial court improperly awarded professional fees to Grace
as costs. in addition to attorney fees, Grace requested $5,100 for accountant fees. The
trial court awarded approximately half of that amount, $2,500. Grace correctly points out
that the statutory definition of costs under RCW 4.84.010 is not determinative because
the court awarded fees and costs under the PSA, not the statute. Nevertheless, the
PSA allows for recovery of only "court costs" and "reasonab|e attorney fees." Grace
maintains that the accountant’s “expertise was essential to the development of [her]
case," and that it would be inequitable for her to bear the cost of that expense. Resp. Br
at 20. She does not, however, identify the legal basis for the award of such fees.
No. 70164-9-|/10 (Conso|id. w/70460-5-l)
Because the court lacked a contractual or other legal basis to award Grace fees for
professional accounting services, we reverse that aspect of the court’s Nlarch 27, 2013
order awarding fees and costs.
Attornev Fees on Appeai
Grace seeks attorney fees and costs on appeal. We may award attorney fees
under RAP 18.1(a) if applicable law grants the right to recover attorney fees and the
party requests the fees as prescribed by RAP 18.1. Wachovia SBA Lendino. inc. v.
E, 165 Wash. 2d 481, 493, 200 P.3d 663 (2009). A contract that provides for the
payment of attorney fees includes fees necessary for both trial and appeal. §gyg_L
a, 127 Wash. 2d 256, 264, 897 P.2d 1239 (1995). Upon compliance with RAP 18.1,
Grace is entitled to an award of reasonable attorney fees and costs on appeal.
WE CONCUR:
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