Ryan & Wages, Llc, / Cross- Res. v. Tom Wages, / Cross-app. ( 2013 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
RYAN AND WAGES, LLC, a Washington)
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limited liability company through its No. 68253-9-1
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members, JULIA MCCORD and S- ^nO
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Appellant/
Cross-Respondent,
v.
TOM WAGES, an individual, UNPUBLISHED OPINION
Respondent/ FILED: March 18,2013
Cross-Appellant,
REDDING LAKE STEVENS, LLC, an
Oregon limited liability company,
Respondent.
Becker, J. — One cannot sue for breach under a contract that has a
prevailing party attorney fee clause and then cry foul when held liable for an
award of fees to a successful defendant. After Redding Lake Stevens LLC won
dismissal from Ryan and Wages LLC's lawsuit for breach of contract, the court
properly applied the equitable mutuality of remedies doctrine to award Redding
No. 68253-9-1/2
prevailing party fees under the contract. Finding no error in this decision, or in
the decisions challenged by Tom Wages in his cross appeal, we affirm.
FACTS
Tom Wages and Doris Ryan formed Ryan and Wages LLC (the company)
in 2004. In December 2005, Ryan died and her interest in the company passed
to her son and daughter, Floyd Ryan and Julia McCord. We will refer to Floyd
Ryan and Julia McCord as "the heirs."
Around the same time, the company and an Oregon investment firm were
forming Redding Lake Stevens LLC (Redding), a real estate venture to develop
two assisted living facilities, one in Redding, California, and the other in Lake
Stevens, Washington. The Redding project was built, but due to a problem of
sewer access, it was not possible to build a facility on the Lake Stevens property.
The heirs filed a derivative shareholder action on behalf of the company,
in which they sued Redding for breaching its own operating agreement. They
also sued Tom Wages for misappropriating company funds and sought his
removal as manager of the company. In May 2010, Wages counterclaimed for
judicial dissolution of the company. The heirs did not oppose the dissolution
request.
In December 2010, while the dissolution was pending, Redding paid the
company $1.25 million. This money became the focal issue in the dissolution
dispute between Wages and the heirs. Despite the pending dissolution, Wages
argued the money should be distributed to the members as income according to
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their ownership of the company. Such a distribution would have resulted in
Wages receiving around $635,000.
The following year, in September 2011, the court granted Redding
summary judgment dismissal from the heirs' shareholder action for breach of
contract. The court awarded Redding $43,237.60 in attorney fees.
In December 2011, a two-day bench trial was held to resolve the
dissolution and distribution of the company's assets. The company's operating
agreement required that in a corporate dissolution, assets were to be distributed
first to creditors, and next to members due a return of their initial capital
contributions. The court heard testimony from Wages, from the heirs, and from
the company's certified public accountant, Michael Cunningham, about the
parties' contributions to and withdrawals from the company.
The testimony reflected that the company's only liquid assets were the
$1.25 million held in an attorney trust account and a bank account containing
about $2,000. Cunningham calculated that Wages had received more payouts
from the company than he initially put in, so that Wages had a negative capital
balance. Cunningham calculated the heirs' balance of unpaid returns on their
initial contributions at over $3 million. According to Cunningham, the heirs'
capital account balance was "much, much higher than the available cash to
distribute" during the dissolution. The court entered findings of fact and
conclusions of law, distributing the full $1.25 million to the heirs, reserving only
enough to cover the company's last debts to third parties and the attorney fee
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award to Redding.
The heirs appeal the attorney fee award to Redding. Wages appeals the
distribution of the full $1.25 million to the heirs.
ATTORNEY FEES
The heirs sued Redding for breaching the Redding Lake Stevens LLC
Operating Agreement. Their complaint included a request for attorney fees and
costs. Paragraph 13.4 of the operating agreement authorized an award of
reasonable attorney fees to the prevailing party in any suit "commenced to
enforce or interpret any provision of this Agreement":
ATTORNEYS' FEES: If any legal proceeding is commenced to
enforce or interpret any provision of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees at trial
and on any appeal (including but not limited to expert witness fees,
transcript costs and other similar expenses), in addition to the costs
and disbursements allowed by law.
After Redding won summary dismissal from the suit by persuading the
court it was not a party to the operating agreement that created it, the court relied
on paragraph 13.4 to award Redding more than $43,000 in attorney fees and
costs. The heirs contend this award constituted legal error.
Whether a specific statute, contractual provision, or recognized ground in
equity authorizes an award of attorney fees is a question of law reviewed de
novo. Tradewell Group. Inc. v. Mavis, 71 Wash. App. 120, 126, 857 P.2d 1053
(1993).
We find no error in the fee award. The award was a straightforward
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application of the equitable doctrine of mutuality of remedies. See generally
Herzoq Aluminum, Inc. v. Gen. Am. Window Corp.. 39 Wash. App. 188, 692 P.2d
867 (1984). If the heirs had prevailed against Redding in their suit to enforce the
Redding Operating Agreement, they would have been entitled to an award of
fees from Redding under paragraph 13.4. Because Redding prevailed in the
action instead, the mutuality doctrine permits it to claim the same entitlement.
The mutuality of remedies doctrine authorizes contractual attorney fee awards
even after the contract itself is ruled invalid or unenforceable. Kaintz v. PLG,
Inc., 147 Wash. App. 782, 789, 197 P.3d 710 (2008).
The heirs argue the Kaintz holding is limited to cases where the parties to
the litigation are also parties to the contract, and where the contract is ruled
unenforceable as to all parties. But neither Kaintz nor the authorities it relies on
impose any such limits on the rule. Here, the contract allowed an award of
attorney fees to the "prevailing party." This standard terminology means the
prevailing party in the litigation. It is not a limitation to the parties to the
agreement, as the heirs argue.
We affirm the fee award to Redding. Redding also requests an award of
its fees and costs for defending this appeal. Paragraph 13.4 expressly provides
for such relief. Redding's request is granted.
IN LIMINE RULING
Wages contends the court erred as a matter of law by granting the heirs'
motion in limine. Wages planned to introduce an expert witness at trial to offer
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the opinion that the $1.25 million payment from Redding should be characterized
as "income" or "profits," as opposed to a return of "capital." Wages expected the
testimony to support his argument that he was entitled to receive a share of the
money before the court considered the parties' relative capital account balances.
The heirs argued the testimony was irrelevant.
The court tentatively granted the motion but left the matter open for further
discussion during trial. "Now, whether or not it's helpful for the Court or the Court
needs this expert testimony, it's a little bit early for me to say. ... at this point I'm
going to grant the motion." When given an opportunity to renew his objection to
the tentative ruling during trial, however, Wages' counsel responded, "Actually,
that won't be necessary. We'll rest our case now, too, Your Honor."
Having effectively withdrawn his challenge to the in limine ruling at trial,
Wages has waived this challenge on appeal. In a comparable situation, where a
court tentatively denies a party's motion in limine and the evidence that is the
subject of the motion is later introduced at trial, the losing party is obligated to
renew an objection to the evidence in order to preserve the error for review.
Sturgeon v. Celotex Corp., 52 Wash. App. 609, 623, 762 P.2d 1156 (1988). By
failing to renew objections at trial when the opportunity is offered, the objecting
party fails "to give the trial court an opportunity to correct the error at the time
when it could and should have been corrected." Sturgeon, 52 Wash. App. at 623.
We apply the same rationale here. By withdrawing his challenge to the in
limine ruling at trial, Wages removed the matter from the court's consideration. If
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the ruling was error, Wages gave the court no opportunity to correct it.
In any event, the ruling was not erroneous. The expert's proposed
testimony was irrelevant to the judicial dissolution trial. In a dissolution, the court
is required to distribute the corporation's assets according to a hierarchy
specified in the company's operating agreement, or according to a statutory
hierarchy if no operating agreement exists. See Noble v. A & R Envtl. Servs.,
LLC, 140 Wash. App. 29, 35, 164 P.3d 519 (2007), citing RCW 25.15.300. Here,
the company's operating agreement required the court to distribute the
company's remaining assets first to repay debts to creditors, and next to repay
members in return of their capital contributions. Payment to members "in respect
of their share of profits"—the step Wages wished the court would take first,
before members' capital contributions were returned—was the very last step of
the process under the operating agreement.
Wages' only claim before the court was for judicial dissolution under
chapter 25.15 RCW. The opening statements reflected Wages' understanding
that the purpose of the trial was to dissolve the company. The court was
required to follow the dissolution scheme set forth in the company's operating
agreement. The expert's testimony to distinguish "income" from "capital" was
irrelevant to that task.
Wages argues the expert's testimony was nevertheless relevant because
a subsection of the dissolution statute cross-references a statute permitting
"interim distributions" of income to members "before the member's dissociation
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from the limited liability company and before the dissolution and winding up
thereof" RCW 25.15.215 (emphasis added), cited in RCW25.15.300(1)(b). The
dissolution statute places these distributions in the second step of the distribution
hierarchy—but it does so only "unless otherwise provided in a limited liability
company agreement." RCW 25.15.300(1 )(b). Here, the company's operating
agreement did provide otherwise. It made payments to members in return of
their capital contributions the second step of the distribution hierarchy, while
relegating income distributions to members to the last step of the process.
Wages contends he became entitled to a distribution from the $1.25
million at the time the money was received in December 2010, and since he did
not receive a distribution at that time, he became a creditor whose debt should
have been repaid as the first step of dissolution under RCW 25.15.230. But by
December 2010, when Redding made the payment at issue, the parties were
well into their litigation of Wages' claim for dissolution. By then the members'
entitlement to distributions under RCW 25.15.230 had passed.
The expert's testimony would also have been cumulative. Wages' counsel
remarked at trial that his expert's testimony "may or may not be necessary,"
depending on how Cunningham, the company's accountant, testified. Wages
cross-examined Cunningham at length. After Cunningham finished testifying,
Wages withdrew his objection to the in limine ruling, signaling Wages' own belief
that the expert's testimony was no longer necessary. The exclusion of evidence
which is cumulative or has speculative probative value is not reversible error.
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No. 68253-9-1/9
Havens v. C&D Plastics, Inc., 124 Wash. 2d 158, 169-70, 876 P.2d 435 (1994).
FINDINGS OF FACT
Wages assigns error to the court's findings of fact and conclusions of law
in which the court determined the value of the heirs' initial contributions to the
company and adopted Cunningham's calculations as to all parties' capital
account balances. A trial court's factual determinations are not disturbed if they
are supported by substantial evidence. Davis v. Dep't of Labor & Indus., 94
Wash. 2d 119, 123, 615P.2d 1279(1980). If substantial evidence supports the
finding, it does not matter that other evidence may contradict it. State v.
Camarillo, 115 Wash. 2d 60, 71, 794 P.2d 850 (1990).
Substantial evidence supported the court's decision to rely on
Cunningham's calculations of the parties' capital account balances. Cunningham
gave detailed testimony and was subject to cross-examination and direct
examination by the court. Cunningham's process, ledgers, correspondence with
the parties concerning his calculations, and the tax returns he prepared were
examined in court. The story he told was consistent with the parties' testimony.
The court found his testimony credible and his calculations reliable. It is not our
role as an appellate court to substitute our judgment for that of the trial court, or
to weigh the evidence or the credibility of witnesses. Davis, 94 Wash. 2d at 124.
The $4,048,000 valuation given by the court to the 13.3-acre Lake
Stevens property was also supported by substantial evidence. The parties
agreed to that value in the Redding Operating Agreement, which all parties—
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including Wages—signed in 2005. Cunningham testified that he understood the
tax value of the Lake Stevens property was around $3.4 million before the parties
agreed to a higher "book value." Cunningham gave testimony that he reported
the $4,048,000 value to the Internal Revenue Service on the heirs' K-1 corporate
tax forms.
Although Wages testified that he and the heirs mutually agreed to delete
the $4,048,000 value for the property when they executed the first amendment to
the Operating Agreement, this was a matter sharply contested at trial and the
court was not obliged to believe Wages' testimony.
We also reject Wages' argument that the court erred as a matter of
contract interpretation by failing to adjust the $4,048,000 figure downward based
on exhibit C to the Redding Operating Agreement. An appellate court's primary
goal in interpreting a contract is to ascertain the parties' intent. Anderson Hay &
Grain Co. v. United Dominion Indus., Inc., 119 Wash. App. 249, 254, 76 P.3d 1205
(2003), review denied, 151 Wn.2d 1016(2004). Exhibit C provided that the value
of a contribution should be reduced by $23,000 for each of the 176 planned units
not actually built on the Lake Stevens property. Since no units were ever built on
the property, this argument would place the value of the property at $0. That
suggestion is frivolous. Moreover, exhibit C's adjustment calculation refers
specifically to a contribution amount totaling $3,048,312, not $4,048,000. It is
therefore not clear that the parties ever intended exhibit C to be used to adjust
the Lake Stevens property's value.
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Wages argues for the first time in his reply brief on appeal that the court's
use of the $4,048,000 figure was error because Cunningham reflected
uncertainty at trial as to whether this was a proper valuation of the Lake Stevens
property. This argument is a nonstarter; the court did not rely on Cunningham's
opinions to determine the property value. That value was set forth in the
Redding Operating Agreement, signed by all parties in 2005.
Cunningham testified plainly that no matter how the numbers shifted to
account for a few uncertainties, Wages' capital account balance would still be in
the negative, while the heirs' unreturned initial contributions were in the millions.
The court did not err by returning the $1.25 million to the heirs. Even after
receiving that distribution, they still bore significant losses.
Affirmed. Redding Lake Stevens LLC's request for fees and costs on
appeal is granted, subject to compliance with RAP 18.1.
WE CONCUR:
IT
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