John Babbitt, Res. / X-app. v. Kingsgate Ridge Manor Association, App. / X-res. ( 2018 )

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moo..
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON -
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JOHN BABBITT,
No. 76555-8-1
Respondent/Cross-Appellant,
DIVISION ONE
V. 1
KINGSGATE RIDGE MANOR
ASSOCIATION OF APARTMENT UNPUBLISHED OPINION
OWNERS,a Washington Corporation,
Appellant/Cross-Respondent.
KINGSGATE RIDGE, a Washington
Corporation,
Appellant/Cross-Respondent,
V.
TT1 CONSTRUCTION, INC., a
Washington Corporation,
Respondent/Cross-Appellant. FILED: October 29, 2018
CHUN, J. — Over the course of several years, John Babbitt and his
corporation, TTI Construction, Inc., performed construction work for Kingsgate
Ridge Manor Association (KRM). When KRM encountered financial trouble, it
requested a loan from Babbitt. KRM also needed replacement of a deteriorating
retaining wall and asked TTI to bid on the project. The parties agreed to and
executed both a promissory note memorializing the loan and a contract for TTI's
construction of the wall.
No. 76555-8-1/2
KRM defaulted on repayment of the loan and Babbitt sued to enforce the
note. KRM filed a counterclaim and third party suit against TTI, alleging breach
of contract due to TTI's failure to obtain proper permits for the wall project. The
trial court construed the promissory note and wall construction contract
separately, entering judgment for Babbitt on the promissory note and for KRM on
the breach of contract claim. All parties filed notices of appeal of a number of the
trial court's decisions.
We conclude the trial court properly construed the promissory note and
wall contract as separate agreements but erred in the decisions to pierce the
corporate veil and deny postjudgment interest on the entirety of the judgment for
Babbitt. Therefore, we affirm in part and reverse as to only those two issues.
I.
BACKGROUND
KRM is a condominium owners' association for the Kingsgate Ridge
Manor Condominium complex in Kirkland, Washington. Babbitt is the sole officer
and shareholder of TTI, a Washington corporation and licensed and bonded
construction contractor. TTI specializes in logging, utility, and earthwork,
including retaining wall construction.
Beginning in 2009, Babbitt and his contractor corporation& successfully
bid on and completed several maintenance projects for KRM. While working on
these projects for KRM, Babbitt observed that the association experienced
1 Babbitt was previously the sole officer and shareholder of AAA Tree Tech, Inc., which
was administratively dissolved in 2011.
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No. 76555-8-1/3
chronic underfunding. To help KRM, Babbitt offered "value engineering" and
term financing on some of the projects.
In 2012, KRM encountered significant financial trouble. It was
underfunded and had outstanding bills. In addition, rocks began falling out of
one of the retaining walls in its condominium complex and KRM became
concerned about possible injury to people and property. KRM had attempted to
obtain a conventional bank loan but was rejected due to a lack of financial
reserves.
Having exhausted its options, KRM invited Babbitt to an association board
meeting in August 2012 to discuss a loan. KRM gave Babbitt a written proposal
requesting a $600,000 loan at 10 percent fixed interest with monthly payments of
$11,000. The proposal included a condition that Babbitt's construction company
submit an estimate for replacement of the complex's failing rock wall, which KRM
would consider against three other competitive bids.2 Babbitt said he would try to
help KRM, but indicated he needed time to think about the terms and secure
funding for the loan. The parties did not execute a written agreement at that
time.
Babbitt obtained $150,000 in financial assistance from his uncle. Babbitt
then issued a $150,000 cashier's check to KRM for immediate cash reserves.
He paid $56,561.04 towards KRM's homeowners' insurance bill, water district
bill, sewer bill, and Home Depot bill.
2 The proposal erroneously identified Babbitt's corporation as AAA Tree Tech rather than
TTI. AAA Tree Tech had already been administratively dissolved by the time of the proposal.
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TTI prepared an estimate for replacement of the retaining wall. It
proposed construction of a Keystone wall for $299,847. The estimate specified
exclusions for "permits and fees." Two officers of the KRM board approved and
signed the bid on October 9,2012. Due to winter weather conditions, TTI did not
begin construction until March 2013.
In February 2013, Babbitt prepared a promissory note to memorialize the
loan. Prior to the promissory note, Babbitt had advanced money and paid KRM's
bills. The promissory note provided for a loan of $600,000, at 10 percent interest
per annum, with monthly payments of $12,748.23, over a repayment term of five
years. The terms also included late fees, attorney fees, and an acceleration of
debt clause. These terms differed from those of KRM's initial loan proposal.
Babbitt presented the promissory note to the full KRM board on
February 12, 2013. The board agreed to the terms, and two of its officers signed
the note. The Board members knew the promissory note contained terms
differing from the original loan proposal. KRM made its required payments in
February and March 2013. KRM then requested an indefinite deferral on the
remaining payments. Babbitt agreed to defer the payments, with the
understanding interest would continue to accrue during the deferral period.
TTI began demolition and construction of the retaining wall in March 2013.
TTI soon discovered site conditions requiring significant changes to the scope of
work, including a larger wall made up of a different stonework system. After
consulting with KRM's construction manager, TT1 provided a change order
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reflecting an increase in cost to $331,332.46, reduced by a $10,000 credit for
deferred pipe upgrades.
TTI completed a non-reinforced StoneTerra retaining wall ranging from
two feet to ten feet tall. Despite the requirements of Kirkland's municipal code,
neither TTI nor KRM obtained a permit for construction of the wall.
In April 2014, KRM's new financial manager, Robert Brencic, discovered
the promissory note while reviewing the association's bills and books to create a
budget. KRM's board asked Brencic to investigate the promissory note to
determine the association's obligations. Brencic determined KRM owed Babbitt
a total of $538,194.40 less the two payments made in February and March 2013.
Brencic prepared an amortization schedule for payments over five years.
KRM approved Brencic's findings and asked him to approach Babbitt to
request waiver of the interest on the loan. Babbitt consented to a five year
repayment period and waiver of the late fees to date, but refused to waive
interest. Babbitt also offered the balance of the $600,000, but KRM did not want
the additional money. KRM agreed to Babbitt's terms but made only four
payments. Babbitt filed suit for default on the promissory note in September
2015.
In March 2016, the trial court granted Babbitt's motion for partial summary
judgment for $150,000 as recovery for the cash payment to KRM. The trial court,
however, did not rule on the enforceability of the promissory note and reserved
judgment on Babbitt's request for attorney fees and costs and prejudgment
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interest. KRM subsequently satisfied the partial summary judgment, resulting in
total payments of $228,407.42 on the principal loan amount of $538,194.40.
KRM asserted a counterclaim against Babbitt and a third party claim
against III for breach of contract in June 2016. KRM claimed Babbitt and TTI
failed to obtain the necessary permits to build the wall, failed to inform KRM no
permits had been obtained, and failed to use or retain engineered drawings to
prove proper construction of the wall.
During a six-day bench trial, the parties argued about the enforceability of
the promissory note, the duty to obtain permits for the wall, and the proper
construction of the wall. KRM also claimed TTI failed to construct a properly
engineered wall, which subsequently required remediation and rebuilding.
According to KRM,the permitting process would have prevented the engineering
deficiency and the need for reconstruction of the wall. TTI contended the
approved estimate for the wall construction specifically excluded permits and
fees, requiring KRM to obtain the proper permits for the project. TTI argued it
had properly built the wall.
The trial court enforced the promissory note and awarded judgment,
prejudgment interest, and attorney fees to Babbitt amounting to $502,216.92.
The trial court also found TTI had materially breached the construction contract
by failing to obtain a permit and "building a wall that is in danger of falling." The
trial court extended personal liability to Babbitt, finding Babbitt "ignored the
corporate distinction with regard to collecting payment for the wall project. . .
Mr. Babbitt used the corporate protection of TTI as a shield to avoid personal
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No. 76555-8-1/7
liability for failure to obtain a permit." Because Babbitt did not reimburse TTI for
the wall project, the trial court inferred TTI was underfunded and unable to satisfy
a judgment in the action. As a result of this underfunding, the trial court
concluded "an injustice will result if the court observes the corporate formalities,
favoring Mr. Babbitt in the transactions at issue. Therefore, the court will
disregard the corporate formalities in this case." The court awarded KRM a
judgment of $258,143(the cost to remediate the wall) without interest or attorney
fees.
Both parties filed multiple postjudgment motions including motions for
reconsideration pertaining to sanctions, attorney fees, and offsets.
KRM appeals. Babbitt and TTI cross-appeal.
ANALYSIS
The trial court heard several days of testimony and issued findings of fact
and conclusions of law on Babbitt's and KRM's claims. Where the trial court has
weighed the evidence, the reviewing court's role is limited to determining whether
substantial evidence supports the findings of fact, and whether those findings
support the trial court's conclusions of law. Ford Motor Co. v. City of Seattle,
Exec. Serv. Dep't., 160 Wash. 2d 32, 56, 156 P.3d 185 (2007). "Substantial
evidence to support a finding of fact exists where there is sufficient evidence in
the record ``to persuade a rational, fair-minded person of the truth of the finding."
Hegwine v. Longview Fibre Co., Inc., 162 Wash. 2d 340, 353, 172 P.3d 688(2007)
(quoting In re Estate of Jones, 152 Wash. 2d 1, 8, 93 P.3d 147(2004)). An
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No. 76555-8-1/8
appellate court will not substitute its judgment for that of the trial court, reweigh
the evidence, or gauge witness credibility. In re Marriage of Rockwell, 141 Wn.
App. 235, 242, 170 P.3d 572(2007).
In contrast, we review conclusions of law de novo. Hegwine, 162 Wash. 2d
at 353.
A. Separate Agreements or Same Transaction?
KRM claims the trial court erroneously construed the promissory note and
wall construction contract as two separate agreements. KRM contends the
promissory note and construction contract comprised one transaction between
the parties, which Babbitt/TTI breached by failing to obtain a permit to construct
the wall. We agree with the trial court's interpretation of the promissory note and
construction contract as two separately enforceable agreements.
Whether separate agreements are part of one transaction depends upon
the intent of the parties as shown by the agreements. Boyd v. Davis, 127 Wash. 2d
256, 261, 897 P.2d 1239(1995). The trial court must discern the intent of the
parties. Boyd, 127 Wash. 2d at 261. The parties' intent is a question of fact. Don
L. Cooney, Inc. v. Star Iron & Steel Co., 12 Wash. App. 120, 122, 528 P.2d 487
(1974). A trial court's findings of fact are reviewed for substantial evidence.
Hegwine, 162 Wash. 2d at 352.
Discerning the parties' intent in this case required the court to examine the
loan proposal, wall contract, and promissory note. The initial loan proposal
requested a $600,000 loan with fixed interest and the condition Babbitt's
construction company submit a competitive bid for the wall project. The proposal
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No. 76555-8-1/9
made no guarantee Babbitt's company would win the project. The condition only
required the company submit a competitive bid.
Babbitt, as representative of TTI, bid on the wall construction project.
KRM accepted this bid, resulting in the contract between TTI and KRM. This
contract contained terms related to only the construction of the wall and did not
reference the proposal or loan from Babbitt.
Several months after the proposal and wall contract, Babbitt memorialized
his loan to KRM in the promissory note. KRM board members reviewed and
signed the promissory note, which became a valid contract between KRM and
Babbitt. KRM argues the promissory note was a modification of the contract
formed by its proposal. But in this case, the promissory note is a negotiable
instrument separate from the wall contract or the proposal.
A negotiable instrument is "an unconditional promise or order to pay a
fixed amount of money." RCW 62A.3-104(a). A promise 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." Alpacas of America, LLC v. Groome, 179 Wash. App. 391, 396-97, 317
P.3d 1103(2014)(citing RCW 62A.3-106(a)).
Here, the text of the promissory note demonstrates KRM's unconditional
promise to pay Babbitt. The promissory note makes no reference to the wall
construction project or any other agreement. As a result, the promissory note is
a negotiable instrument establishing a "separate promise" independent of the
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No. 76555-8-1/10
wall contract, governing only the financial relationship between Babbitt and KRM.
See Alpacas of America, 179 Wash. App. at 399.
Additionally, the construction contract and the promissory note were
prepared months apart and without contingencies or conditions. Again, the two
agreements make no reference to, or mention of, the other. KRM needed the
loan from Babbitt regardless of whether TTI or another corporation built the wall.
Thus, the facts point toward the parties' intention to establish separate
agreements on the two distinct issues—the loan and the wall construction.
Based on the documents and the evidence presented, substantial
evidence supports the trial court's separate construction of the agreements. The
trial court properly interpreted the promissory note and accepted construction
estimate as two distinct, valid contracts governing the relationships between the
various parties.
B. Affirmative Defenses
At trial, in response to Babbitt's claim on the promissory note, KRM
pursued the affirmative defenses of mistake, misrepresentation, and fraud,
claiming it would never have entered the transaction knowing the contractor
would not obtain permits. Because these defenses are inapplicable to the
promissory note claim, the trial court properly rejected them.
KRM's affirmative defenses depend in large part on its one-contract
theory. That is, if the promissory note and wall are part of one agreement, then
success on the affirmative defenses would theoretically allow KRM to avoid
liability on the note. But, under the proper interpretation of the promissory note
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No. 76555-8-1/11
and construction contracts as two separate agreements, these affirmative
defenses are inapposite.
On appeal, KRM argues that the affirmative defenses apply solely to the
promissory note, alleging Babbitt committed fraud or misrepresentation by writing
the loan for an amount greater than KRM actually borrowed and included terms
beyond those in the initial proposal. But the KRM Board reviewed the promissory
note and approved the terms, despite the differences. KRM voluntarily signed
the agreement and cannot now claim ignorance of its terms. See Michak v.
Transnation Title Ins. Co., 148 Wash. 2d 788, 799,64 P.3d 22(2003). As a result,
the trial court properly dismissed the affirmative defenses of mistake,
misrepresentation, and fraud.
C. Attorney Fees
1. Fee Award to Babbitt But Not KRM
KRM contends the trial court erroneously awarded attorney fees to Babbitt
under the terms of the promissory note or should have awarded fees to both
sides. Based on the terms of the two separate contracts, the trial court properly
awarded fees only to Babbitt.
Attorney fees and costs may be recovered only when authorized by
private agreement of the parties, statute, or a recognized ground in equity. Pa.
Life Ins. Co. v. Dep't of Emp't Sec., 97 Wash. 2d 412, 413, 645 P.2d 693(1982).
RCW 4.84.330 provides for award of attorney fees to the prevailing party in a
contract dispute. The prevailing party "is one that receives an affirmative
judgment in its favor." Newport Yacht Basin Ass'n of Condo. Owners v. Supreme
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No. 76555-8-1/12
NW Inc., 168 Wash. App. 86, 98, 285 P.3d 70(2012). For a court to award
attorney fees, the prevailing party must substantially prevail but does not need to
have succeeded on its entire claim. Newport Yacht Basin, 168 Wash. App. at 98.
A defendant can recover as a prevailing party by successfully defending against
a plaintiffs claims. Newport Yacht Basin, 168 Wash. App. at 99.
A trial court's determination of whether a party is entitled to attorney fees
is an issue of law reviewed de novo. Bopuch v. Landover Corp., 153 Wash. App.
595, 615, 224 P.3d 795(2009).
Here, the promissory note contained a provision for KRM to pay
"reasonable attorney fees... for collection of this Note upon default." According
to the trial court, Babbitt prevailed on the enforcement of the promissory note. As
a result, this term in the note authorized the award of attorney fees to Babbitt for
the expenses required to obtain repayment. Thus, the trial court properly
awarded attorney fees and costs to Babbitt.
In contrast, the wall contract does not include a provision for attorney fees.
Therefore, KRM had no contractually established means for recovering fees in its
successful claim for breach of the construction contract.3 The trial court properly
declined to awarded attorney fees and costs to KRM.
3 In its reply brief, KRM argues that it should recover attorney fees under the two-contract
theory because it prevailed when Babbitt recovered only one-third of his requested recovery
under the promissory note. KRM raises this argument for the first time in the reply brief. We will
not consider issues raised for the first time in a reply brief. RAP 10.3(c); Ainsworth v. Progressive
Cas. Ins. Co., 180 Wash. App. 52, 78 n.20, 322 P.3d 6(2014).
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2. Specific Attorney Fees
KRM assigns error to the trial court's award of specific attorney fees.
When authorized by contract, the determination of a reasonable attorney fee
award is a matter within the trial court's discretion. Noble v. Safe Harbor Family
Pres. Trust, 167 Wash. 2d 11, 15, 216 P.3d 1007(2009). "In order to reverse an
attorney fee award made pursuant to a statute or contract, an appellate court
must find the trial court manifestly abused its discretion." Noble, 167 Wash. 2d at
17. The party challenging the fee award bears the burden of demonstrating the
award was clearly untenable or manifestly unreasonable. Washington State
Communication Access Project v. Regal Cinemas, Inc., 173 Wash. App. 174, 219,
293 P.3d 413(2013).
KRM contends the trial court erred by awarding fees for duplicative,
unreasonable, and unproductive work. Babbitt requested compensation for
380.10 hours of attorney work. The trial court found 264 hours were reasonably
expended by counsel and awarded attorney fees based on that number. The
trial court provided a list of all the reductions due to duplicative, inaccurate,
excessive, unsuccessful, or unproductive work. KRM disagrees with the
substantial reduction in hours, claiming further reduction was required. But
nothing in the record demonstrates manifest abuse of discretion. Therefore, we
will not disturb the attorney fees award on appeal.
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D. Chapter 64.50 RCW Notice Requirements
On cross-appeal, TT1 claims the trial court should have dismissed KRM's
construction defect claim for failure to comply with the required notice set forth in
RCW 64.050.030 and 64.050.040(2)(a). KRM counters its failure to notify was
not fatal to the claim. We agree with KRM.
Chapter 64.50 RCW sets forth notice requirements for construction defect
claims. Construction professionals must "provide notice to each homeowner
upon entering into a contract for sale, construction, or substantial remodel of a
residence, of the construction professional's right to offer to cure construction
defects before a homeowner may commence litigation against the construction
professional." RCW 64.50.050(1). The statute provides, if the contractor does
not give this notice, the chapter shall not bar a homeowner's lawsuit. RCW
64.50.050(3).
Chapter 64.50 RCW establishes additional responsibilities for plaintiff
homeowners' construction defect cases. Homeowners must provide at least
45 days' notice to a construction professional prior to filing an action.
RCW 64.50.020(1). For condominium construction defect claims, the board of
directors for the homeowners' association must mail or deliver written notice of
the commencement of a construction defect action to each homeowner prior to
service of the summons or complaint on a defendant. RCW 64.50.040(1)(2)(a).
Additionally, the plaintiff in a construction defect action must file with the court,
and serve the defendant with, a list of known construction defects within thirty
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days after commencement of the action. RCW 64.50.030(1),(2). This list must
contain a description of the allegedly defective construction. RCW 64.50.030(2).
Only one case has interpreted the notice requirements in chapter 64.50
RCW. In Lakemont Ridge Homeowners Assoc. v. Lakemont Ridge Limited
P'ship, 156 Wash. 2d 696, 131 P.3d 905(2006), the Washington Supreme Court
considered the interplay between RCW 64.50.020 and RCW 64.50.050. In
Lakemont, the condominiums at issue were constructed prior to the enactment of
chapter 64.50 RCW,and the construction professional did not provide the
homeowners with notice of the prelitigation requirement of notice and opportunity
to cure. 156 Wash. 2d at 697-98. The homeowners' association brought a
construction defect claim after enactment of chapter 64.50 RCW, but failed to
comply with notice to the construction professional as required by RCW
64.50.020(1). Lakemont, 156 Wash. 2d at 697-98.
The court concluded the homeowners' association's failure to give notice
was not fatal to the construction defect claim, because the prelitigation notice
requirement "became operative only where the construction professionals have
given prior notice to the homeowner of the requirement." Lakemont, 156 Wash. 2d
at 698. If the construction professional provides notice of the prelitigation notice
requirement, then the homeowner must give notice of the alleged defects and
comply with the requirements of chapter 64.50 RCW. Lakemont, 156 Wash. 2d at
703. If the construction professional fails to give notice of the prelitigation notice
requirement, then RCW 64.50.050(3) explicitly states this failure does not bar a
claim. Lakemont, 156 Wash. 2d at 703. This interpretation serves the express
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purpose of "preserving adequate rights and remedies for property owners."
Lakemont, 156 Wash. 2d at 704.
TTI correctly points out that Lakemont examined different notice
provisions. TTI relies on RCW 64.50.030 and 64.50.040 mandating prelitigation
notice to condominium owners and postfiling notice of defects rather than
RCW 64.50.020 and 64.50.050. But the language of RCW 64.50.050(3) places
the burden on the construction professional to give notice of the prelitigation
requirements to trigger homeowner duties under the statute. The statute
provides, "[t]his chapter shall not preclude or bar any action if notice is not given
to the homeowners as required by this section." RCW 64.50.050(3)(emphasis
added). Thus, a homeowner's failure to comply with any of the requirements of
chapter 64.50 RCW will not preclude an action if the construction professional did
not give notice at the time of contracting.
TTI does not claim to have fulfilled the notice obligation of
RCW 64.50.050. Because TTI did not give notice as required, KRM's failure to
comply with RCW 64.50.030 and 64.50.040 was not fatal to the breach of
contract claim.
Even if KRM was required to comply with the statutory obligations, we do
not believe dismissal would be a proper remedy for failure to fulfill the notice
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requirements of RCW 64.50.030.4 The language of RCW 64.50.030 indicates
the court has discretion over the filing period for the defect list.5 RCW 64.50.
030(2) requires filing and service of a description of the construction defects
"within thirty days after the commencement of the action or within such longer
period as the court in its discretion may allow." This discretion with regard to the
allowable time frame of RCW 64.50.030 suggests the legislature did not intend
strict compliance.6 Further, remedies for noncompliance may include
enforcement at the trial court level, akin to an order to compel discovery. As
such, mandatory dismissal of the claims would not be the appropriate remedy for
failure to provide notice under these provisions.
Whether RCW 64.50.00(3) or the discretion permitted under
RCW 64.50.030 applies, the trial court's decision to deny dismissal for failure to
comply with the statute was not error.
4 We note TTI/Babbitt's standing is questionable on the issue of KRM's failure to provide
notice to the individual homeowners under RCW 64.50.040. A party has standing if it is arguably
within the zone of interest to be protected by the statute and has suffered an injury in fact.
Branson v. Port of Seattle, 152 Wash. 2d 862, 875-876, 101 P.3d 67(2004). RCW 64.50.040
governs the board of directors' responsibility to individual homeowners. Thus, TTI/Babbitt is
arguably not within the zone of interest protected by that section of chapter 64.50 RCW. Neither
party raised this issue on appeal.
5 Courts do not construe unambiguous statutes. Davis v. State ex rel. Dep't of Licensing,
137 Wash. 2d 957, 963, 977 P.3d 554(1999). "If the statute's meaning is plain on its face, then
courts must give effect to its plain meaning as an expression of what the Legislature intended."
State v. J.M., 144 Wash. 2d 472, 480, 28 P.3d 720(2001). In the case of ambiguity, however, the
court's fundamental objective is to ascertain and carry out the legislative intent. J.M., 144 Wash. 2d
at 480.
6 The legislature included mandatory dismissal as the remedy elsewhere in chaptef 64.50
RCW. RCW 64.50.020(6) provides that "[a]ny action commenced by a claimant prior to
compliance with the requirements of this section shall be subject to dismissal without prejudice,
and may not be recommenced until the claimant has complied with the requirements of this
section." This section pertains to the required 45 days' notice and opportunity to cure provided by
the homeowner to the construction professional. "This section" refers only to RCW 64.50.020,
rather than the entirety of chapter 64.50 RCW. The legislature clearly included mandatory
dismissal to ensure strict compliance.
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E. Disregard of the Corporate Form
The trial court pierced the corporate veil after concluding injustice would
otherwise result due to its belief Babbitt intentionally underfunded TTI and
manipulated the corporate form to his benefit. Babbitt contends the trial court
improperly disregarded the corporate entity without evidence of the requisite
abuse of the corporate form. We agree.
The doctrine of disregard of the corporate entity, or piercing the veil, is an
equitable remedy imposed in exceptional circumstances where recognition of the
corporate form would aid in perpetrating a fraud or result in a manifest injustice.
Truckweld Equip. Co., Inc. v. Olson, 26 Wash. App. 638, 643-44, 618 P.2d 1017
(1980). To pierce the veil,(1) the corporate form must have been intentionally
used to violate or evade a duty, and (2) disregard must be necessary to prevent
unjustified loss to the injured party. Meisel v. M&N Modern Hydraulic Press Co.,
97 Wn.2d 403,410,645 P.2d 689(1982). Regarding the first element, abuse of
the corporate form typically involves fraud, misrepresentation, or some form of
manipulation to the entity's benefit and the creditor's detriment. Meisel, 97
Wash. 2d at 410. Regarding the second element, the "wrongful corporate activities
must actually harm the party seeking relief so that disregard is necessary."
Meisel, 97 Wash. 2d at 410. "Intentional misconduct must be the cause of the harm
that is avoided by the disregard." Meisel, 97 Wash. 2d at 410. The corporation
should not be disregarded solely because its assets are not sufficient to meet its
obligations. Meisel, 97 Wash. 2d at 411; Norhawk Invest., Inc. v. Subway Sandwich
Shops, Inc., 61 Wash. App. 395, 399-400, 811 P.2d 221 (1991).
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The alter ego doctrine provides,"where one entity ``so dominates and
controls a corporation that such corporation is [the entity's] alter ego, a court is
justified in piercing the veil of corporate entity and holding that the corporation
and private person are one and the same." In re Rapid Settlements, Ltd. v.
Symetra Life Ins. Co, 166 Wash. App. 683, 692, 271 P.3d 925(2012)(quoting
Standard Fire Ins. Co. v. Blakeslee, 54 Wash. App. 1, 5, 771 P.2d 1172 (1989)).
The doctrine is most commonly invoked "to impose personal liability upon
corporate officers for fraud committed by a corporation." Standard Fire, 54 Wn.
App. at 5-6. The trial court will find a corporate entity is one and the same with
another entity "when the corporate form has been intentionally used to violate or
evade a duty." In re Rapid Settlements, 166 Wash. App. at 692.
The issue of whether the corporate form should be disregarded is a
question of fact. Norhawk Invest., Inc., 61 Wash. App. at 398. A trial court's
findings of fact are reviewed for substantial evidence. Heciwine, 162 Wash. 2d at
352.
Even where the entities are alter egos, piercing the corporate veil requires
misconduct. See In re Rapid Settlements, 166 Wash. App. at 692. Here, the trial
court made no findings related to fraud, misrepresentation, or corporate
misconduct.7 Without evidence of such behavior, Babbitt's conduct did not rise
to the level of misconduct generally required to pierce the corporate veil.
7 In its findings of fact about the breach of promissory note, the trial court stated, "[t]here
was no evidence that Mr. Babbitt, on behalf of his corporation, made any misrepresentations or
fraudulent inducements to persuade KRM to accept his bid."
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Instead of fraud or misrepresentation, the trial court grounded its rationale
for corporate disregard on TTI's presumed undercapitalization. But based on
Meisel and Norhawk Investments, undercapitalization alone does not amount to
misconduct requiring disregard of the corporate form. "The absence of an
adequate remedy alone does not establish corporate misconduct." Meisel, 97
Wash. 2d at 411. Norhawk Investments specifically states, "the separate existence
of a corporation should not be disregarded solely because its assets are not
sufficient to discharge its obligations." 61 Wash. App. at 399-400. Therefore, the
trial court's reliance on TTI's presumed undercapitalization does not support
corporate disregard.
The trial court pierced the corporate veil based only on the lack of
corporate distinction and presumed undercapitalization of TTI, without evidence
TTI attempted to violate or evade a duty to KRM. Because TTI's conduct did not
rise to the level of fraud, misconduct, or manipulation to benefit TTI, the trial court
erred by disregarding the corporate entity and holding Babbitt personally liable.
Therefore, we reverse on this issue.
F. Postjudgment Interest
Babbitt argues the trial court erred by failing to award postjudgment
interest on the prejudgment interest awarded on the principal judgment. KRM
contends RCW 4.56.110 authorizes but does not require postjudgment interest
on a judgment with both principal and interest. Due to the statutory requirement
of postjudgment interest on the entirety of the judgment, the trial court should
have awarded postjudgment interest on the prejudgment interest.
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RCW 4.56.110(1) allows for postjudgment interest for judgments based on
written contracts at the rate specified in the contract. Sharbano v. Universal
Underwriters, Ins. Co., 158 Wash. App. 963, 971, 247 P.3d 430(2010). "When
prejudgment interest is awarded, it is added to the judgment and becomes part of
the judgment principal." State v. Trask, 98 Wash. App. 690, 695-96, 990 P.2d 976
(2000). Postjudgment interest is calculated based on this new judgment
principal. Sharbano, 158 Wash. App. at 971. The judgment then accrues interest at
the stipulated rate until paid in full. Trask, 98 Wash. App. at 696; RCW 4.56.110(1).
Postjudgment interest is mandatory under RCW 4.56.110. TJ Landco
LLC. v. Harley C. Douglass, Inc., 186 Wash. App. 249, 256, 346 P.3d 777(2015).
"Consequently, awards of postjudgment interest are matters of law that are
reviewed de novo." TJ Landco, 186 Wash. App. at 256.
Here, the trial court awarded Babbitt a principal judgment of $309,786.98
and prejudgment interest of $187,149.94. The judgment provided an interest
rate of 10 percent for both the principal judgment and attorney fees and costs,
but did not establish an interest rate for the prejudgment interest.
Based on Sharbano and Trask, the prejudgment interest merges with the
principal judgment to become the new total judgment. This new total judgment
serves as the basis for calculating postjudgment interest.
KRM contends RCW 4.56.110 does not require postjudgment interest on
prejudgment interest awards based on additional language in Sharbano that the
statute, "authorizes a trial court to calculate postjudgment interest on a judgment
that already contains within it both principal and interest, especially where a
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written underlying contract so provides." 158 Wash. App. at 971. But this ignores
the language of RCW 4.56.110, which states "interest on judgments shall
accrue." The use of "shall" imposes a mandatory requirement unless a contrary
legislative intent is apparent. Erection Co. v. Dep't of Labor and Indus., 121
Wash. 2d 513, 518, 852 P.2d 288(1993). Thus, the award of postjudgment interest
is not discretionary.
Postjudgment interest accrues on the principal judgment. An award of
prejudgment interest combines with the original principal amount to become the
total principal for the purposes of postjudgment interest. As a result, Babbitt was
entitled to postjudgment interest on the prejudgment interest award. The trial
court's failure to award interest on this prejudgment interest was error requiring
reversal and recalculation.
G. Attorney Fees on Appeal
Babbitt and KRM both request fees on appeal.
Babbitt requests fees on appeal based on the attorney fees provision of
the promissory note. As noted above, the promissory note included a term for
"reasonable attorney fees...for collection of this Note upon default." This term
applies to appellate proceedings as well. "A provision in a contract providing for
the payment of attorneys' fees in an action to collect any payment due under the
contract includes both fees necessary for trial and those incurred on appeal as
well." Granite Equip. Leasing Corp. v. Hutton, 84 Wash. 2d 320, 327, 525 P.2d 223
(1974). As the prevailing party in this appeal pertaining to the collection of the
Note on default, Babbitt is entitled to attorney fees and costs on appeal.
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Under RAP 18.1(b), the party must devote a section of its opening brief to
a request for attorney fees and expenses. KRM failed to request attorney fees
on appeal in its opening brief, waiting until the reply brief to raise the issue. As a
result, the request does not comply with RAP 18.1(b). Furthermore, KRM lacks a
contractual basis to recover attorney fees and does not prevail on appeal.
Therefore, we decline to award fees on appeal to KRM.
We affirm in part, reverse in part, and remand for further proceedings
consistent with this opinion.
Cl......,.., 1.
WE CONCUR:
vctiv6292-1 cY
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