John L. Donlin v. Jerry Murphy ( 2013 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
JOHN L DONLIN, NO. 67823-0-1
Appellant, DIVISION ONE
v.
JERRY MURPHY, in his individual
capacity and in his capacity as director
and officer of GREENSHIELDS
INDUSTRIAL SUPPLY, INC., a
Washington corporation, and
CONTRACTOR SUPPLY
CORPORATION, a Washington PUBLISHED OPINION
corporation,
Respondents, FILED: April 1,2013
and
GREENSHIELDS INDUSTRIAL
SUPPLY, INC.,
Respondent in an
action for dissolution
of the corporation.
Lau, J. — John Donlin appeals the trial court's dismissal of his shareholder
derivative claims brought under CR 23.1 on the ground that he lacked standing to bring
67823-0-1/2
suit on behalf of an administratively-dissolved corporation whose assets had been sold
through a receivership. Because Jerry Murphy's CR 12(b)(6) motion to dismiss was
procedurally improper and because under the Washington Business Corporation Act
(WBCA), title 23B RCW, shareholder standing to assert derivative claims survives the
administrative dissolution of the corporation, we reverse the trial court's CR 12(b)(6)
dismissal order and remand Donlin's derivative claims for trial.
FACTS
In 2005, Jerry Murphy told his friend, John Donlin, about a business opportunity
involving a local business known as "Greenshields Industrial Supply" (GIS), a
Washington corporation. Donlin agreed to purchase GIS jointly with Murphy. Donlin
contributed approximately $250,000 toward the purchase price and Murphy contributed
approximately $224,000, with the balance financed through a commercial loan. The
purchase price included all GIS assets except the underlying storefront real estate. GIS
leased the real estate from the Greenshields family, with an option to purchase.
Donlin and Murphy agreed to share ownership and management authority
equally. Each became a 50 percent shareholder. When Murphy later asked for a 65/35
percent equity adjustment in his favor, Donlin was "stunned" and refused the demand.
Although Donlin and Murphy continued to own equal shares, their relationship
deteriorated.
In September 2007, Donlin read a news bulletin about the Greenshields family
sale of the storefront real estate to a company called "Whido Isle LLC." Donlin later
received an e-mail from a friend, who told Donlin that Murphy and his wife owned Whido
-2-
67823-0-1/3
Isle. Murphy caused GIS to lease the storefront real estate from Whido Isle. The
purchase option expired on December 31, 2007.
In April 2009, Donlin sued GIS for judicial dissolution and an accounting. As
grounds for dissolution, Donlin alleged that the directorate was deadlocked,1 that
Murphy had engaged in oppressive behavior,2 and that Murphy had misapplied and
wasted corporate assets.3 In August 2009, Murphy formed Contractor Supply
Corporation (CSC), a Washington corporation. CSC agreed to operate GIS under an
agency agreement. In September 2009, the court-ordered receiver assumed control of
GIS during the dissolution process.
In October 2009, Donlin amended his complaint to allege derivative claims
against Murphy for breach offiduciary duty4 and against CSC for violation ofthe
Uniform Fraudulent Transfer Act (UFTA), chapter 19.40 RCW. The amended complaint
also included direct claims against Murphy for conversion and ouster. In November
1RCW 23B.14.300(2)(a) permits judicial dissolution where "[t]he directors are
deadlocked in the management of the corporate affairs, the shareholders are unable to
break the deadlock, and irreparable injury to the corporation is threatened or being
suffered, or the business and affairs of the corporation can no longer be conducted to
the advantage of the shareholders generally, because of the deadlock."
2 RCW 23B.14.300(2)(b) permits judicial dissolution where "[t]he directors or
those in control of the corporation have acted, are acting, or will act in a manner that is
illegal, oppressive, or fraudulent."
3RCW23B.14.300(2)(d) permits judicial dissolution where "corporate assets are
being misapplied or wasted."
4 Donlin alleged, "Murphy has breached his fiduciary duties to [GIS] and its
Shareholders, including Plaintiff Donlin, by engaging in self-dealing, by usurping a
corporate opportunity, by exposing [GIS] to liability, and by acting oppressively and in
bad faith in the ways alleged [in the amended complaint."
-3-
67823-0-1/4
2009, on the receiver's recommendation, the trial court approved the sale of GIS's
assets to CSC. In December 2009, the court discharged the receiver upon his
distribution of the sale proceeds to GIS's creditors.
In April 2010, the Washington secretary of state administratively dissolved GIS
for failure to file renewal paperwork and pay applicable fees. In June 2010, Murphy and
CSC moved for summary judgment on all of Donlin's claims.5 The trial court denied the
motion, ruling, "The sale of [GIS] was court authorized on the condition the Plaintiffs
and shareholders claims in this lawsuit would remain for trial and survive the sale, i.e.,
not be transferred." Later that month, Donlin voluntarily dismissed his direct claims
against Murphy.6
In September 2011, with trial less than two weeks away, CSC and Murphy
(collectively, "Murphy") moved successfully before a different judge to dismiss Donlin's
derivative claims. Murphy argued among other things that the administrative dissolution
of GIS deprived Donlin of standing and that Donlin failed to state a claim under UFTA.
Although it cited CR 12(b)(1)7 and (b)(6)8 as grounds for dismissal, the court did not
5Murphy's motion argued that Donlin's claims failed on the merits, that Donlin's
claim for dissolution and an accounting did not survive the receivership or the
administrative dissolution of GIS, that Donlin's derivative claims did not survive the
receivership, that Donlin failed to meet certain pleading requirements under CR 23.1,
and that Donlin was not permitted to bring derivative and direct claims in the same
lawsuit.
6 Donlin's direct claims against Murphy are not at issue in this appeal.
7Civil Rule 12(b)(1) permits a party to assert lack of subject matter jurisdiction as
a defense to a claim for relief. Because the standing doctrine does not implicate the
trial court's subject matter jurisdiction, we need not consider whether the trial court
properly granted Donlin's motion to dismiss under CR 12(b)(1). Ullerv v. Fulleton, 162
-4-
67823-0-1/5
explain its reasoning.9 The court denied Donlin's motion for reconsideration. Donlin
appeals the court's dismissal order.
ANALYSIS
Murphy contends that "Donlin does not meet the standing requirements under
CR 23.1 because the receivership liquidation and winding up together with the
dissolution of the corporation have stripped Mr. Donlin of his proprietary interests."
Resp't's Br. at 17 (formatting omitted). He clarifies that the sale of GIS's assets and the
administrative dissolution of the corporation left "no business to claim an interest in and
no class of shareholders to fairly and adequately represent as required by CR 23.1."
Resp't's Br. at 21.
In June 2010, the trial court denied Murphy's motion for summary judgment that,
among other things, challenged Donlin's standing. The court's order contained a
handwritten interlineation stating, "The sale of [GIS] was court authorized on the
condition the Plaintiff's and shareholders claims in this lawsuit would remain for trial and
survive the sale, i.e., not be transferred." Murphy did not move for reconsideration or
request the court to clarify its ruling. And because he failed to cross appeal the ruling,
its propriety is not before us.10
Wn. App. 596, 604-05, 256 P.3d 406 (2011); To-Ro Trade Shows v. Collins. 100 Wn.
App. 483, 489, 997 P.2d 960 (2000).
8Civil Rule 12(b)(6) permits a party to assert "failure to state a claim upon which
relief can be granted" as a defense to a claim for relief.
9The trial court's written orderdid not expressly incorporate its oral ruling.
10 Murphy does not argue RAP 2.4's application in this case.
-5-
67823-0-1/6
The summary judgment ruling clearly ordered a trial on Donlin's derivative
claims. This ruling necessarily resolved the very standing challenge Murphy advanced
in his subsequent CR 12(b)(6) motion to dismiss.
Murphy claims that the summary judgment order did not resolve his standing
challenge "because the issue of standing was not before the court." Resp't's Br. at 31.
The record undermines this assertion. Our review of the record indicates Murphy's
summary judgment motion placed Donlin's derivative standing squarely before the
court. His summary judgment motion argued, "The assets of Greenshields Industrial
Supply, Inc. were sold to Contractor Supply Corporation, an accounting was performed,
and Greenshields has been administratively dissolved." (Boldface omitted.) Murphy
also argued that Donlin's derivative claims did not survive the receivership and asset
sale. His brief framed the issue before the court as follows:
2. Do Plaintiffs claims for dissolution and accounting against [GIS] survive after
[GIS's] assets are sold pursuant to a court supervised receivership and after
[GIS] is administratively dissolved?
3. Do Plaintiffs derivative claims on behalf of [GIS] survive after all of [GIS's]
assets have been sold pursuant to a court authorized sale?
Elaborating on these issue statements, Murphy argued, "If a shareholder in a
corporation is divested of ownership of that corporation while a derivative suit is
pending, the suit will usually be dismissed." For support, he relied on two standing
cases, Johnson v. United States, 317 F.3d 1331 (Fed. Cir. 2003), and Schilling v.
Belcher. 582 F.2d 995 (5th Cir. 1978). In both cases, a shareholder lost standing to
pursue derivative claims when he was divested of his stock.11 The undisputed record
11 In Johnson, the court held that a shareholder lost standing to maintain his
derivative action when his shares were canceled under a bankruptcy reorganization
-6-
67823-0-1/7
leaves no doubt that Murphy's summary judgment motion challenged Donlin's derivative
standing.
The trial court rejected Murphy's standing challenge in its unappealed summary
judgment order. Undeterred, Murphy moved before a different judge to dismiss Donlin's
claims shortly before trial on standing grounds.12 This motion recast the standing
arguments made in his summary judgment motion. The essential claim, however, was
the same—Donlin lacked standing to maintain derivative claims on behalf of a
corporation that no longer existed, premised on the receivership sale of its assets and
its administrative dissolution. Donlin responded, correctly arguing that the summary
judgment order "expressly wrote that Mr. Donlin's issues and claims survived to trial in
this matter unaffected by the Court's confirmation of the sale to CSC." Disregarding the
earlier summary judgment ordering a trial on the merits, the trial court granted Murphy's
motion to dismiss Donlin's claims.13
plan. Johnson, 317 F.3d at 1333-34. In Schilling, the court held that a shareholder lost
standing when he sold his stock. Schilling, 582 F.2d at 996 (applying Florida law).
12 Among other things, Murphy's motion to dismiss argued:
"All of Plaintiffs derivative claims on behalf of [GIS] against the Defendants must
be dismissed for lack of standing because the Plaintiff is no longer a shareholder of
[GIS] and [GIS] was administratively dissolved as a corporation in April of 2010.
Therefore, the Plaintiff no longer has a proprietary interest in [GIS] and all derivative
claims asserted by the Plaintiff lack subject matter jurisdiction.
"Furthermore, Plaintiff lacks standing because his asserted derivative claim is not
permitted under the Washington Uniform Fraudulent Transfers Act."
13 Donlin moved for reconsideration, again arguing that the trial court's summary
judgment order resolved Murphy's standing challenge. The court denied
reconsideration.
-7-
67823-0-1/8
The record is silent on the court's rationale for readdressing the standing
question that had previously been decided on the same facts and issues in the
summary judgment motion. In doing so, the court violated Snohomish County Local
Civil Rules 7(b)(2)(D)(6) & (7), which provide:
6. Reapplication on Same Facts.
Except as stated below, when a motion has been ruled upon in whole or in part,
the same motion may not be later presented to another judge. Ifthe prior ruling
was made without prejudice or when the prior motion has been granted
conditionally, and the condition has not been met, any subsequent motion may
be presented as set forth below. Reapplication shall be made in the same
manner as a motion to reconsider.
7. Subsequent Motion; Different Facts. If a subsequent motion is made
upon alleged different facts, the moving party must show by affidavit what motion
was previously made, when and to which judge, what order or decision was
made on it, and what new facts are claimed to be shown. For failure to comply
with this requirement, the subsequent motion may be stricken, any order made
upon such subsequent motion may be set aside, or provide such other relief as
the court seems appropriate.
Because the trial court's summary judgment order rejected his standing challenge,
Murphy's subsequent CR 12(b)(6) motion was improper.14
But even assuming Murphy's summary judgment motion did not raise the effect
of administrative dissolution on pending shareholder derivative claims, his argument
that the administrative dissolution of GIS eliminated Donlin's shareholder status and
14 We also note that the trial court erred byfailing to treat the CR 12(b)(6) motion
as a motion for summary judgment, since the trial considered materials outside the
pleadings, i.e., the affidavit of Thomas D. Adams in support of the motion and the
declaration of John Donlin in support of Donlin's response. It is well established that "[a]
motion to dismiss for failure to state a claim is treated as a motion for summary
judgment when matters outside the pleading are presented to and not excluded by the
court." Sea-Pac Co. v. United Food & Commercial Workers Local 44, 103 Wn.2d 800,
802, 699 P.2d 217 (1985). Given our decision, we need not address this issue.
-8-
67823-0-1/9
thereby terminated his ability to fairly and adequately represent similarly situated
shareholders, as required under CR 23.1, fails.15
A derivative suit permits a shareholder to sue a third party on behalf of a
corporation, even though management is a function generally reserved to the
corporation's officers and directors:
Ordinarily, a shareholder cannot sue for wrongs done to a corporation,
because the corporation is viewed as a separate entity, and the shareholder's
interest is too remote to meet the standing requirements. However, because of
the possibility of abuse by the officers and directors of a corporation, a narrow
exception has been created for shareholders to bring derivative suits on behalf of
the corporation.
Gustafson v. Gustafson, 47 Wn. App. 272, 276, 734 P.2d 949 (1987). "Shareholders
have long had the power to assert a corporation's rights on its behalf when its officers
and directors have failed to do so or have done so improperly." In re F5 Networks Inc.,
166 Wn.2d 229, 236, 207 P.3d 433 (2009).
Standing is a common law doctrine that prohibits a litigant from raising another's
legal right. Grant County Fire Prot. Dist. No. 5 v. City of Moses Lake, 150 Wn.2d 791,
802, 83 P.2d 419 (2004). A shareholder bringing a derivative action must meet the
standing and pleading requirements in CR 23.1:
15 Murphy argues for the first time on appeal, "Donlin cannot maintain his
derivative action because he failed to properly present such claims to the Receiver, and
the Receiver elected to not pursue the claims he was aware of based on Mr. Donlin's
Amended Complaint." Resp't's Br. at 27. This claim fails. Murphy cites no legal
authority for the proposition that a receiver has exclusive discretion to maintain
shareholder derivative claims filed on behalf of a corporation. Cowiche Canyon
Conservancy v. Boslev, 118 Wn.2d 801, 809, 828 P.2d 549 (1992) (argument
unsupported by reference to the record or citation authority will not be considered). He
also cites nothing in the record to support his factual assertion that "[although the
Receiver was aware of Mr. Donlin's claims, he did not assert any claims on behalf of
[GIS]." Resp't's Br. at 23. We are not required to search the record to locate relevant
evidence. RAP 10.3(a)(6); Mills v. Park. 67 Wn.2d 717, 721, 409 P.2d 646 (1966).
-9-
67823-0-1/10
CR 23.1 imposes four requirements upon a party who wishes to bring derivative
actions: (1) he or she must be a shareholder at the time of the complained of
transaction, (2) the action must not simply be collusive in order to confer
jurisdiction on the court, (3) the complaint must allege what attempts the
shareholder made to have the directors or corporation bring the suit, and (4) the
shareholder bringing suit must fairly and adequately represent the interests of the
class.
Gustafson, 47 Wn. App. at 276-77. Our Supreme Court has also stated, "Standing to
bring a stockholder derivative claim requires a proprietary interest in the corporation
whose right is asserted." Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107,
149, 744 p.2d 1032, 750 P.2d 254 (1987). To maintain a derivative claim, the plaintiffs
interest as a shareholder must continue throughout the litigation. Sound Infiniti, Inc. v.
Snyder, 145 Wn. App. 333, 350, 186 P.3d 1107 (2008), affd, 169 Wn.2d 199, 237 P.2d
241 (2010).
Relying on these principles, Murphy argues that the administrative dissolution of
GIS stripped Donlin of his shareholder status, thus making it impossible to comply with
CR 23.1 's requirement that he fairly and adequately represent similarly situated
shareholders. Resp't's Br. at 17.
The administrative dissolution of a corporation does not terminate corporate
existence for all purposes. Under the WBCA, an administratively dissolved corporation
continues to exist and may carry on business necessary and appropriate to wind up and
liquidate its affairs. RCW 23B.14.050(1)(e), .210. Dissolution does not "[a]bate or
suspend a proceeding pending by or against the corporation on the effective date of
dissolution." RCW 23B.14.050(2)(f). Donlin amended his complaint to allege derivative
claims against Murphy in October 2009. GIS did not dissolve until April 2010. The
statute is plain—the administrative dissolution of GIS did not "[a]bate or suspend"
-10-
67823-0-1/11
Donlin's derivative claims, which were pending against Murphy on the date of
dissolution. RCW23B.14.050(2)(f).
The WBCA's legislative history reinforces the conclusion that "dissolution" has a
special statutory meaning. Under the statute, "corporate dissolution" should not be
equated with "corporate death:"
Proposed subsection 14.05(a) [now codified at RCW 23B.14.050(1)]
provides that dissolution does not terminate the corporate existence but simply
requires the corporation thereafter to devote itself to winding up its affairs and
liquidating its assets; after dissolution, the corporation may not carry on its
business except as may be appropriate for winding-up.
The Proposed Act uses the term "dissolution" in the specialized sense
described above and not to describe the final step in the liquidation of the
corporate business. This is made clear by Proposed subsection 14.05(b) [now
codified at RCW 23B. 14.050(2)], which provides that chapter 14 dissolution does
not have any of the characteristics of common law dissolution, which treated
corporate dissolution as analogous to the death of a natural person and abated
lawsuits, vested equitable title to corporate property in the shareholders, imposed
the fiduciary duty of trustees on directors who had custody of corporate assets,
and revoked the authority of the registered agent. Proposed subsection 14.05(b)
expressly reserves all of these common law attributes and makes clear that the
rights, powers, and duties of shareholders, the directors, and the registered
agent are not affected by dissolution and that suits by or against the corporation
are not affected in any way.
Senate Journal, 51st Legis., Reg. Sess., at 3095 (1989) (Wash. 1989) (emphasis
added). Under the WBCA, Donlin's derivative action—in essence, a suit by the
corporation—was not affected in any way by the administrative dissolution of GIS.
Murphy cites Sound Infiniti, Inc. v. Snyder, 169 Wn.2d 199, 237 P.2d 241 (2010),
for the proposition that Donlin cannot fairly and adequately represent similarly-situated
shareholders following the administrative dissolution of GIS. Sound Infiniti does not
control. There, a minority shareholder had been divested of his shares by a reverse
stock split while his derivative suit was pending. Sound Infiniti, 169 Wn.2d at 213-14.
-11-
67823-0-1/12
The court held that the plaintiff, having lost his shareholder status, no longer "fairly and
adequately" represented the interests of similarly-situated shareholders under CR 23.1:
[The plaintiff] Pisheyar is no longer a member or shareholder of either of the
[defendant] corporations. He has been divested of his shares. It is therefore
utterly unreasonable to think that Pisheyar could fairly and adequately represent
the interests of the shareholders similarly situated, as he is simply not a
shareholder.
Sound Infiniti, 169 Wn.2d at 213. The court affirmed the dismissal of the plaintiffs suit
for lack of standing. Sound Infiniti, 169 Wn.2d at 214.
Unlike the plaintiff in Sound Infiniti, Donlin was never "divested of his shares."
Murphy argues that Donlin lost shareholder status immediately upon GIS's
administrative dissolution, but he cites no authority for that proposition. "Where no
authorities are cited in support of a proposition, the court is not required to search out
authorities, but may assume that counsel, after diligent search, has found none."
DeHeerv. Seattle Post-Intelligencer, 60 Wn.2d 122, 126, 372 P.2d 193 (1962).
Donlin retained shareholder status despite administrative dissolution. The
WBCA plainly recognizes the continued existence of shareholder status following
administrative dissolution. See RCW 23B.14.050(1)(d) (authorizing a dissolved
corporation to make distributions to shareholders, subject to the statutory limitations that
applied before dissolution); RCW 23B.14.050(2)(d) (specifying that dissolution does not
change shareholder quorum or voting requirements); RCW 23B.14.050(5) (providing for
shareholder approval of postdissolution corporate actions, including by a special
meeting of the shareholders); RCW23B.14.040 (shareholders may have authority to
approve revocation of dissolution); RCW23B.14.070 (holder of an unpaid claim against
a dissolved corporation may "petition to compel the dissolved corporation to collect any
-12-
67823-0-1/13
amounts owing to it" by any shareholder liable for accepting an unlawful distribution
under RCW 23B.08.310); see also Senate Journal, supra, at 3095 ("Proposed
subsection 14.05(b) [now codified at RCW 23B.14.050(2)]. . . makes clear that the
rights, powers, and duties of shareholders, the directors, and the registered agent are
not affected by dissolution ....") (Emphasis added.) Because shareholders retain
rights and potential liability after dissolution, Murphy's unsupported conclusion that
administrative dissolution immediately terminates the interests of all shareholders is
flawed.16
Because Donlin retained his shareholder status following the administrative
dissolution of GIS, the only relevant consideration under CR 23.1 is whether "it appears
that the plaintiff does not fairly and adequately represent the interests of the
shareholders or members similarly situated in enforcing the right of the corporation or
association." CR 23.1. Murphy never challenged the fairness or adequacy of Donlin's
representation. He argues solely that Donlin cannot represent "similarly situated"
16 Two courts applying New York law have concluded that corporate dissolution
does not terminate shareholder status for purposes of standing to bring derivative
claims. See Snyder v. Pleasant Valley Finishing Co., 756 F. Supp. 725, 730 (S.D.N.Y.
1990) ("A corporation's dissolution or liquidation, without more, will not defeat a
shareholder's right to prosecute an action on the corporation's behalf. . . .") (applying
New York law); Indep. Investor Protective League v. Time, Inc., 50 N.Y.2d 259, 264,
406 N.E.2d 486 (1980) ("dissolution, without more, did not deprive the shareholders of
their derivative remedy . . . ."). A California court came to a similar conclusion in Favila
v. Katten Muchin Roseman LLP, 188 Cal. App. 4th 189, 115 Cal. Rptr. 3d 274 (Cal. Ct.
App. 2010). The court held, "Just as the dissolved corporation continues to exist for
purposes including prosecuting and defending actions by or against it, the shareholders
continue to exist and to have rights and potential liabilities with respect to the dissolved
corporation. . . . [A]s a matter of public policy, since the shareholders may be
responsible for postdissolution claims against the corporation, there is no reason to
deny them the right to bring a derivative action, which may benefit them postdissolution.
. . ." Favila, 115 Cal. Rptr. 3d at 294-95 (internal citation omitted).
-13-
67823-0-1/14
shareholders because he is no longer a shareholder. His argument rests on the
erroneous assumption that the administrative dissolution of GIS stripped Donlin of his
shareholder status. His standing challenge fails.
CONCLUSION
For the reasons discussed above, the trial court erred when it considered and
then granted Murphy's CR 12(b)(6) motion. We reverse and remand Donlin's
shareholder derivative claims for trial.
WE CONCUR:
/c^e^ /T'
ro tncD
co -
-14-