Juanita Country Club Condo Owners Assoc., App v. Phillips Real Estate Services, L.l.c., Resp ( 2019 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
JUANITA COUNTRY CLUB ) No. 77569-3-I
CONDOMINIUM OWNERS )
ASSOCIATION, a Washington ) DIVISION ONE
non-profit corporation, )
Appellant,)
)
v. ) UNPUBLISHED OPINION
)
PHILLIPS REAL ESTATE SERVICES, )
L.L.C., a Washington limited liability )
corporation, )
)
Respondent. ) FILED: March 4, 2019
SCHINDLER, J. — In 2012, Juanita Country Club Condominium Owners
Association (Association) entered into a management agreement with Phillips Real
Estate Services LLC (Phillips). In 2016, the Association filed a lawsuit against Phillips
alleging breach of contract. The court granted Phillips’ motion for summary judgment
and dismissed the claims against Phillips. Because the parties modified the standard of
care in the management agreement in writing and there are material issues of fact
whether Phillips breached the reasonable care standard, we reverse summary judgment
dismissal of the claims against Phillips, vacate the award of attorney fees, and remand.
No. 77569-3-112
FACTS
In June 2012, Juanita Country Club Condominium Owners Association
(Association) entered into a “Management Agreement” with Phillips Real Estate
Services LLC (Phillips). The agreement gives Phillips the authority and duty to
“supervise the management and maintenance” of the Association.
The Management Agreement defines Phillips as the “Agent.” Section 2 of the
agreement describes the “DUTIES OF AGENT.” Section 2.1, “Management Duties,”
states Phillips will “[m]aintain businesslike relations with members and respond in
systematic fashion to requests for services from the” Association board of directors
(Board); “[o]versee modernization, rehabilitation, and major construction projects”; and
“[p]repare special reports in accordance with requests by the Board.” Section 2.2 states
Phillips is responsible for “Fiscal and Accounting,” specifically:
a. Preparation of an annual budget at least 60 days prior to the end of
the fiscal accounting year, subject to final approval by the Board.
b. Receipt and posting of individual Association member dues to
individual account records.
c. Collection of assessments as provided in the Declaration and follow
upon all delinquencies to effectuate collection of all amounts owed.
d. Preparation and mailing of delinquency notice(s) as directed by the
Board.
e. Timely preparation of payroll checks and accurate record keeping
of payroll time sheets for Association personnel.
f. Make payment on invoices, utility bills and other common expenses
as approved by the Board and consistent with section 2.1.
g. Monthly preparation and distribution of Statement of Cash Receipts
and Disbursements as directed by the Board.
h. Preparation and distribution of annual financial reports as directed
by the Board.
Preparation of correspondence and reports regarding finances as
requested by the Board.
j. Assist in performance of audits in cooperation with auditors
appointed by the Association.
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No. 77569-3-1/3
Section 2.5 states Phillips shall “[m]aintain all financial records of the Association and its
members” and “[m]aintain complete files for all major repairs and expenditures made to
common areas.”
In early 2013, the Association obtained a construction loan to repair the roof of
the condominiums. The Association planned to repay the loan with a “special
assessment” against each condominium owner. The Board resolution for the special
assessment states, ‘In the event of a surplus in special assessment payments
collected, whether due to Project cost savings, high collection rates, or any other
reason, those funds shall be committed to the Association’s reserve accounts.”
The Board agreed condominium owners could pay the assessment with monthly
payments for 15 years and had the option to pay the assessment early. The monthly
payments included principal and interest. The interest rate on the installment payments
was the same as the interest rate on the construction loan. Because the loan required
interest-only payments for the first year, those payments were not applied toward
principal in the first year. Some condominium owners exercised the option to pay the
special assessment early. As a result, the Association initially collected more than it
was required to pay on the loan.
On September 23, 2013, Association Board president Frank Sloan sent an e-mail
to Phillips president Timothy Pfohl and manager Terry Hughes about a “number of
issues.” The e-mail states that “it appears that items are being forgotten and or not
being followed through on” and identifies “Monthly Financials not being posted for
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No. 77569-3-1/4
HOA,”1 “Loan monthly accounting,” and “Penalties, Rental accounting and letters to
offenders.” Hughes responded to the e-mail the next day on September 24:
You have not received your August financials yet as they were incorrect. I
have our financial lead correcting them now and will have them to you as
soon as I can.
The warning letters all went out when directed and there has been some
response from them. I have not received any updates on them. I am
working on the rental list (I sent you my most recent copies) and getting all
the leases, etc. That is taking some time, but I am getting some response
from those investor owners.
On October 31, Phillips finance director William Holguin sent an e-mail to Sloan
about the need to correct the accounts for dues and the special assessment:
I wanted to provide you an update on status of the adjustments and
review. We have been working diligently on the Juanita Country Club
financial information and making a tremendous amount of progress.
Tomorrow, I will be able to forward you a report outlining up to date history
on the special assessment accounts and regular dues accounts. We do
have one owner’s ledger that may need to be adjusted, but everything
else has been carefully reviewed. All items that sho[we]d up in the regular
ledger that should have been in the Special Assessment ledger have been
moved to their correct spot. You should be receiving an email from
[Hughes] or me sometime tomorrow containing an update of all the tenant
ledgers balances.
On November 5, Sloan sent an e-mail to Hughes, Pfohl, and Holguin pointing out
accounting errors:
[Y]our numbers are not correct.. .1 don’t about [sic] anyone else but our unit
1-102 accounting states we have paid no monies toward the roof’? I want
a letter to each owner regarding their unit and the current accounting you
have and allow them to audit their account both the DUES and SPECIAL
ASSESSMENT.
If my accounting via the email from [Holguin] is supposed to be update[d]
and correct then there are issues. I have spen[t] the weekend retrieving
all payments to the HOA is B[ank] of A[merica]. .and both my dues which
. .
should be reduced is at ($176) monthly....wrong but I will check with the
1 Homeowner association.
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No. 77569-3-1/5
others and see what their reduction is currently at Special Assessment
($76) monthly9 we will pay [$]4k this month.. .and reduce that amount....
This is just my account [I] am afraid to hear from othersj2]
On November 19, Sloan sent an e-mail to Pfohl concerning Hughes’ “lack of
accounting knowledge” and problems with “co-mingling the Dues and Assessment.”
Pfohl responded:
On the accounting dep[artmen]t I saw the shortcomings and made a
—
key hire about 6 months ago Mary J0 Bennett. Knows condo[3]
—
bookkeeping in and out. .She is oversight of all our condo bookkeepers
. .
now so will see vast improvement there. That’s a promise.
Very disappointed on the accounting items. Accounting has to be one of
the foundations upon which we build our relationships and reputation. No
ifs, ands, or buts about it. There has been and will continue to be vast
improvement. I guarantee it.
On November 28, 2014, Sloan sent a letter to Pfohl about the “continuous
accounting issues regarding our Monthly Dues/Assessment Loan” and the intent to
terminate the Management Agreement with Phillips. But after assurances from Pfohl,
Sloan agreed to “try to work it out.” After the Board meeting on July 27, 2015, Phillips
decided to terminate the Management Agreement with the Association effective
September 1, 2015.
The Association retained accountant Andrew McAlister and Emerald City
Management & Consulting LLC to reconcile the “many discrepancies” in the accounting.
In 2016, the bank rejected the Association’s application for a loan “because of
the state of the accounting.” The Association hired consultant and loan broker Rebekah
Baze to manage the accounting and help obtain the loan.
2 Ellipses in original.
~ Condominium.
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No. 77569-3-1/6
On May 12, 2016, the Association filed a lawsuit against Phillips. The complaint
alleged (1) breach of contract, (2) breach of fiduciary duty, and (3) breach of implied
duty of good faith and fair dealing. The Association alleged Phillips breached the
Management Agreement by failing to properly manage the special assessments,
conduct audits, manage rental restrictions, record an amended declaration, and
charging the Association for services it did not perform.
Phillips propounded interrogatories, asking the Association to “[i]temize the
damages claimed by you against defendant in this litigation, and describe how you
calculated each category of damages.” In answer to the interrogatory, the Association
identified (1) the failure of Hughes “to pass along increase in loan adjustable rate to
owners” and “to transfer approximately $1 50,000[.00] in funds from Mutual of Omaha
Bank to Alliance Bank,” (2) the failure of Phillips “to conduct audits for 2013 and 2014
and to timely forward to accountant 2010-12 audits,” (3) the failure of Hughes and
property manager Vickie Tolson to “manage rental restrictions” and identify delinquent
renters, and (4) the failure of Tolson to record the amended declaration for
approximately two to three months. The Association claimed $32,092.50 in damages
plus attorney fees.
The case was transferred to mandatory arbitration on February 7, 2017. The
arbitrator filed an award on June 16, 2017. On June 22, the Association filed a request
for a trial de novo, a jury demand, and a request to seal the award. The superior court
sealed the award and issued the case schedule order on June 26.
The Association filed supplemental interrogatory responses claiming additional
damages of $34,897.50 for a total of $66,990.00 plus attorney fees.
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No. 77569-3-1/7
The Association filed a motion for partial summary judgment on the standard of
care under the terms of the Management Agreement. The Association argued section
10 of the Management Agreement that limits the responsibility of Phillips to willful
misconduct and gross negligence violated the law that regulates the actions of real
estate agents and brokers, chapter 18.86 RCW.
Phillips filed a motion for summary judgment dismissal of the lawsuit. Phillips
argued the provision of the agreement that limits its responsibility to willful misconduct
and gross negligence did not violate chapter 18.86 RCW and the evidence did not
support the breach of that duty.
The court denied the Association’s motion for partial summary judgment. The
court ruled the willful misconduct and gross negligence standard in the Management
Agreement did not violate chapter 18.86 RCW. The court dismissed the claims for
failure to record the amended declaration and “failure to manage rentals” but did not
dismiss the accounting claims. The order states:
(1) Section 10 of the Management Agreement is enforceable and plaintiff
will be required to prove gross negligence or willful misconduct at trial;
(2) Plaintiff[’]s claims for failure to record, and failure to manage rentals
are dismissed;
(3) Only plaintiff[’]s accounting failure claims remain.
On reconsideration, the court concluded the Association did not present evidence to
show willful misconduct or gross negligence to support the accounting claims. The
court entered an order dismissing the lawsuit. The court awarded Phillips attorney fees
and costs in the amount of $79,837 plus interest.
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No. 77569-3-1/8
ANALYSIS
Chapter 18.86 RCW
The Association contends the court erred by concluding section 10 of the
Management Agreement did not violate chapter 18.86 RCW. Section 10 limits Phillips’
duty under the Management Agreement to “willful misconduct or gross negligence.”
The Association asserts section 10 violates RCW 18.86.030(1). RCW
18.86.030(1)(a) states an agent who “renders real estate brokerage services” cannot
waive the duty to exercise reasonable care. Phillips contends the statutory duty of
reasonable care under RCW 18.86.030(1)(a) does not apply to “common interest
community managers” that provide only management and financial services under
chapter 18.85 RCW.
“Statutory interpretation is a question of law reviewed de novo.” Williams v.
Tilaye, 174 Wash. 2d 57, 61, 272 P.3d 235 (2012). We look first to the text of a statute to
determine its meaning. Griffin v. Thurston County Bd. of Health, 165 Wash. 2d 50, 55, 196
P.3d 141 (2008). If a statute is plain and unambiguous, the meaning of the statute must
be determined from the wording of the statute itself. W. Telepaqe, Inc. v. City of
Tacoma Dept of Fin., 140 Wash. 2d 599, 608-09, 998 P.2d 884 (2000). Statutes are read
together to achieve a harmonious statutory scheme that maintains the integrity of the
respective statutes. Employco Pers. Servs., Inc. v. City of Seattle, 117 Wash. 2d 606, 614,
817 P.2d 1373 (1991).
Chapter 18.85 RCW and chapter 18.86 RCW regulate and govern the activities
of real estate agents and brokers. Under RCW 18.86.030(1)(a), the duty to use
“reasonable skill and care” applies only to a broker or agent who renders “real estate
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No. 77569-3-1/9
brokerage services under chapter 18.85 RCW.” ROW 18.86.010(11) defines “real
estate brokerage services” as “the rendering of services for which a real estate license
is required.” RCW 18.85.151(12) exempts “[c]ommon interest community managers
who . . . provide management or financial services” from obtaining a broker’s license “if
they do not promote the purchase, listing, sale, exchange, optioning, leasing, or renting
of a specific real property interest.”
Because the Management Agreement and the record establishes Phillips was
acting as a common interest community manager for the Association, not as a provider
of real estate brokerage services, section 10 of the Management Agreement does not
violate ROW 18.86.030(1).
Written Modification of the Management Agreement
In the alternative, the Association contends the parties modified the terms of the
Management Agreement in writing to adopt reasonable care and not willful misconduct
or gross negligence.
Contract interpretation is a question of law we review de novo. Dave Johnson
Ins., Inc. v. Wright, 167 Wash. App. 758, 769, 275 P.3d 339 (2012). Washington courts
follow the objective manifestation theory of contracts. Berg v. Hudesman, 115 Wash. 2d
657, 663, 801 P.2d 222 (1990); Hearst Oommc’ns, Inc. v. Seattle Times Co., 154 Wash. 2d
493, 503, 115 P.3d 262 (2005). “[W]e attempt to determine the parties’ intent by
focusing on the objective manifestations of the agreement, rather than on the
unexpressed subjective intent of the parties.” Hearst, 154 Wash. 2d at 503. We “impute
an intention corresponding to the reasonable meaning of the words used.” Hearst, 154
Wash. 2d at 503. We give words in a contract their ordinary and usual meaning “unless
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No. 77569-3-1/10
the entirety of the agreement clearly demonstrates a contrary intent.” Hearst, 154
Wash. 2d at 504. ‘Interpretations giving lawful effect to all the provisions in a contract are
favored over those that render some of the language meaningless or ineffective.” Grey
v. Leach, 158 Wash. App. 837, 850, 244 P.3d 970 (2010).
The plain and unambiguous language of section 9 of the Management
Agreement, “AGREEMENT TO BE CHANGED IN WRITING ONLY,” states, “This
Agreement shall constitute the entire Agreement between the contracting parties, and
no variance or modification thereof shall be valid and enforceable, except by an
agreement in writing.”4
Section 8, “REAL ESTATE AGENCY LAW,” states, “Association acknowledges
the receipt from Agent of a pamphlet on the law of real estate agency as required by
RCW 18.86.030(1).” A Phillips representative and an Association representative
inserted the following handwritten language, “Honesty, Good Faith, Reasonable Care,
Material Facts.”
Section 10, “RESPONSIBILITY,” states:
Agent shall be responsible for willful misconduct or gross negligence but
shall not be held responsible for any matters relating to error of judgment,
or for any mistakes of fact or law, or for anything, which it may do or
refrain from doing which does not include any willful misconduct or gross
negligence. Agent shall not be responsible for acts or omissions of
independent contractors engaged by Agent on behalf of the Association.
The Management Agreement establishes the parties modified the terms of the
agreement in writing. Both parties initialed and acknowledged the handwritten change
“Emphasis added.
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No. 77569-3-Ill 1
to the standard of care.
8.0 REAL ESTATE AGENCY LAW
Association acknowledges the receipt from Agent of a pam on the law of real estate agency s required by RCW 18.86.030(1.
9.0 AGREEMENT TO BE CHANGED IN WRITiNG ONL 7
~ ~ b1f~/
/
f
This Agreement shall constitute the entire Agreement between the contracting parties and no variance or modification thereof chall
be valid and enforceable, except by an agreement in writIng.
10.0 RESPONSIBILI1Y
Agent shall be responsible for willful misconduct or gross negligence but shall not be held responsible for any matters relating to
error ofjudgment or for any mistakes of fact or law or for anything~ which it may do or refrain from doing which does not include any
willful miscondi.~ct or gross negligence. Agent shall not be responsible for the acts or emissions of Independent contractors engaged
by Agent on behalf of the Association,
Because the handwritten modification prevails over the conflicting printed willful
misconduct or gross negligence provision in section 10, the handwritten reasonable
care standard controls. Green River Valley Found., Inc. v. Foster, 78 Wash. 2d 245, 249,
473 P.2d 844 (1970).
Summary Judgment Dismissal of Claims
The Association contends the court erred by dismissing its breach of contract
claims for failure to present evidence of gross negligence or willful misconduct. Philips
contends that even if a reasonable care standard applies, the Association did not
present evidence to establish breach or damages to support its claims.
We review summary judgment de novo, engaging in the same inquiry as the trial
court. Kruse v. Hemp, 121 Wash. 2d 715, 722, 853 P.2d 1373 (1993). Summary judgment
is appropriate if the pleadings, depositions, and affidavits show there is no genuine
issue as to any material fact and the moving party is entitled to judgment as a matter of
law. CR 56(c); Degel v. Majestic Mobile Manor, Inc., 129 Wash. 2d 43, 48, 914 P.2d 728
(1996).
The defendant on summary judgment has the burden of showing the absence of
evidence to support the plaintiff’s case. Young v. Key Pharm., Inc., 112 Wash. 2d 216,
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No. 77569-3-l112
225, 770 P.2d 182 (1989). If the moving party shows an absence of a genuine issue of
material fact, the burden shifts to the nonmoving party. Youncj, 112 Wash. 2d at 225.
Only when reasonable minds could reach but one conclusion on the evidence
should the court grant summary judgment. Smith v. Safeco Ins. Co., 150 Wash. 2d 478,
485, 78 P.3d 1274 (2003). In conducting this inquiry, the court must view all facts and
reasonable inferences in the light most favorable to the nonmoving party. Keck v.
Collins, 184 Wash. 2d 358, 370, 357 P.3d 1080 (2015). Where different competing
inferences may be drawn from the evidence, the issue must be resolved by the trier of
fact. Hudesman v. Foley, 73 Wash. 2d 880, 889, 441 P.2d 532 (1968); Kuyper v. Dep’t of
Wildlife, 79 Wash. App. 732, 739, 904 P.2d 793 (1995).
The Association contends material issues of fact preclude summary judgment
dismissal of its claim that Phillips breached a reasonable care standard in providing
fiscal and accounting services.
Section 2.2 of the Management Agreement addresses the “[f]iscal and
accounting services” Phillips is responsible for providing. The fiscal and accounting
services include “[r]eceipt and posting of individual Association member dues to
individual account records” and “[c]ollection of assessments.”
Viewing the evidence in the light most favorable to the Association, there are
material issues of fact as to whether Phillips breached the standard of reasonable care
in performing fiscal and accounting duties. In September 2013, Phillips reported to the
Association, ‘You have not received your August financials yet as they were incorrect.”
On October 31, Phillips assured the Association, “All items that sho[we]d up in the
regular ledger that should have been in the Special Assessment ledger have been
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No. 77569-3-1/13
moved to their correct spot.” On November 5, the Association informed Phillips, “[Yjour
numbers are not correct. . . . I want a letter to each owner regarding their unit and the
current accounting you have and allow them to audit their account both the DUES and
SPECIAL ASSESSMENT.” On November 19, Phillips admitted there were continuing
‘shortcomings” in its accounting, stating, “Very disappointed on the accounting items.
Accounting has to be one of the foundations upon which we build our relationships and
reputation. No ifs, ands, or buts about it. There has been and will continue to be vast
improvement.” The Association also presented evidence that it was unable to obtain a
loan from its lender “because of the state of the accounting” and could obtain the loan
only after hiring consultant and loan broker Rebekah Baze.
The Association contends there are genuine issues of material fact as to whether
Phillips breached the Management Agreement by failing to collect delinquent fees and
manage rental restrictions. Phillips argues it had no duty to collect delinquent fees or
manage rental restrictions. The Management Agreement does not support Phillips’
argument. The Management Agreement defines Phillips’ duties broadly. The
agreement states Phillips has the duty to “follow up on all delinquencies to effectuate
collection of all amounts owed.”
Viewing the evidence in the light most favorable to the Association, the record
shows manager Hughes assured the Association she was addressing past-due
amounts owed. In a September 24, 2013 e-mail, Hughes states the “warning letters all
went out when directed” and she was “working on the rental list.” On November 5,
Sloan sent an e-mail asking Hughes, “Did you send out [t]he letter regarding renting this
unit’? I have not seen it and as I stated many times.. .please contact the owner of 1105
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No. 77569-3-1/14
and let him know he owes [$1500 move in fee.”5 We conclude there are material issues
of fact as to whether Phillips breached the standard of reasonable care in failing to
facilitate and manage delinquent fees.
The Association contends there are material issues of fact as to whether Phillips
breached the standard of reasonable care by delaying the approval and filing of the
amended declaration. Phillips argues the Association did not present any evidence of
delay or damages.
Viewing the evidence in the light most favorable to the Association, there are
material issues of fact related to the delay between December 2014 and May 2015 and
whether the delay was the proximate cause of the Association’s damages. In
December 2014, the Association decided to amend the declaration to make an owner
responsible for water damage to the condominium unit. The Association attorney
drafted and e-mailed the final documents for the amended declaration to property
manager Tolson with instructions to begin the owner approval process by early
December. The e-mail provides directions on providing notice to each condominium
owner and states the documents “are designed to allow owners to consent by mail,
without a meeting.” Tolson did not record the amended declaration until late May. The
undisputed record shows Phillips did not record the amended declaration until May 29,
2015. In the interim, there was water damage to a condominium unit in April. An April
15 e-mail states that because the amended declaration “is not recorded yet,” the
Association is liable for the repairs.
~ Ellipses in original.
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No. 77569-3-1/15
We reverse summary judgment dismissal of the lawsuit against Phillips, vacate
the award of attorney fees, and remand.
~ h``!’ ~
WE CONCUR:
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