Rsd Aap Llc v. Alyeska Ocean Llc& Jeff & Jane Doe Hendrick's

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
RSD AAP, LLC,
No. 71926-2-1
Appellant,
DIVISION ONE
v.
PUBLISHED OPINION
ALYESKA OCEAN, INC; JEFF
HENDRICKS and JANE DOE
HENDRICKS, individually and as a
marital community,
Respondents. FILED: September 14, 2015
Trickey, J. — RSD AAP, LLC (RSD) is a partner in the Auriga/Aurora General
Partnership (AAGP). RSD appeals the trial court's summary dismissal of its lawsuit
against another partner, Alyeska Ocean, Inc. (AOI). RSD asserts that the trial court erred
by holding that (1) the right of first refusal provision setforth in the partnership agreement
was not triggered, (2) the partnership agreement's requirement that written consent from
two thirds ofthe partnership be obtained before encumbering a partnership interest was
not breached, and (3) the fiduciary duty of loyalty or good faith and fair dealing was not
violated. Finding no error, we affirm.
FACTS
Jeff Hendricks is the sole shareholder of AOI. In 1987, AOI purchased two vessels
to convert them for commercial fishing. To raise capital to convert the vessels and
prepare them for operation, AOI formed AAGP in 1988. All of the partners who were
invited to join AAGP were friends or family of Hendricks.
No. 71926-2-1/2
A general partnership agreement (Agreement) was entered into on February 13,
1988. Article VII of the Agreement involved the transferring of partnership interests. It
provided, in relevant part:
7.1 Transfer Prohibited.
7.1.1 No Partner may, without the prior written consent of the
Partners holding at least a two-thirds interest in the Partnership (excluding
the transferring Partner's interest), directly or indirectly sell, lease, transfer,
assign, give, pledge, hypothecate or otherwise encumber or permit or suffer
any encumbrance of all or any part of his interest in the Partnership, with or
without consideration, except as provided in this Article VII and Section 8.2.
7.3 Right of First Refusal. Notwithstanding the provisions of Section
7.1.1, a Partner may sell his interest in the Partnership upon compliance
with the conditions of Section 7.1.2 and the following conditions:
m
As set forth in Section 7.3, if a partner decided to accept an offer to purchase his
or her partnership interest, the partner was required to provide written notification to the
other partners of his or her intention to sell the interest. That notification was to include
the terms and conditions of the proposed offer. After receiving the selling partner's
notification, the other partners would have 30 days to elect to purchase for themselves
the selling partner's interest upon the same terms and conditions in the selling partner's
notification. If the other partners elected not to purchase the interest or if they did not
respond within 30 days, the selling partner was permitted to effect the sale of his or her
interest upon the same terms and conditions contained in the notification to the other.
In addition, the Agreement contained an integration clause:
12.3 Governing Law. Miscellaneous. This Agreement is intended to
benefit only the parties hereto, constitutes the entire agreement of the
parties relative to the formation, operation, termination and dissolution of
Clerk's Papers (CP) at 70-71.
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the Partnership There are no promises, terms, conditions or obligations
other than those contained herein, and this Agreement supersedes all
previous communications, representations or agreements, either verbal or
written, between the parties concerning the subject matter hereof. No
variations, modifications, or changes herein or hereof shall be binding upon
either party hereto ... .[2]
AOI became the general manager of AAGP under the Agreement and
Management Agreement, and has continued to hold that position since the formation of
the partnership.
Robert Resoff became an original partner of AAGP through his corporation Robert
E. Resoff, Inc. RSD is a wholly-owned subsidiary of, and managed by, Robert E. Resoff,
Inc. In 2010, Robert E. Resoff, Inc. transferred its entire 20.618 percent share of its
partnership interest to RSD. George Steers is the president of Robert Resoff, Inc.
On April 24, 2012, Hendricks contacted Mark O'Brien, a partner of O'Brien
Enterprises, Inc., to ask if he was interested in selling his partnership interest to him.
During that conversation, O'Brien informed Hendricks for the first time that he had
terminal cancer and only had a few weeks to live. O'Brien was receptive to the notion of
selling his interest and suggested that Hendricks give him his "idea" of a purchase price.3
On April 30 through May 10, 2012, Hendricks communicated with Clayton Lynch,
O'Brien's certified public accountant, about the valuation of O'Brien's interest and
determined that a purchase by way of an option would be the best method of
accomplishing the transaction. Hendricks forwarded to Lynch an updated valuation of
O'Brien's 20.618 percent interest—$3,482,478—that was prepared by Hendicks'
accountant. On May 10, Hendricks wrote to Lynch offering to pay $4 million plus
2 CP at 77.
3 CP at 55.
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$500,000 for O'Brien's share of the partnership funds held for distribution and in reserve
for a pending shipyard expense. Hendricks notified Lynch that his counsel, Doug Fryer,
would draft an Option Agreement.
On May 15, 2012, Hendricks sent a letter to the partners alerting them of O'Brien's
health condition.4 He told them that he and O'Brien "agreed that after his death [AOI]
would purchase [O'Brien's] corporate interest in the partnership."5 In the letter, Hendricks
attached a "CONSENT AND WAIVER as required by our partnership agreement" to be
returned to Hendricks.6 Hendricks also instructed the partners to "[f]eel free to call if you
have questions about the agreement or [O'Brien's] condition."7
By May 21, 2012, counsel for O'Brien and Hendricks agreed on a form of Option
Agreement to be executed. The Option Agreement stated that it "is entered into as of
May 24, 2012."8 Although the Option Agreement had been executed effective May 24,
2012, according to Hendricks, O'Brien and his wife did not sign it until May 31.9 The
option was not exercisable until O'Brien's death. By May 31, 2012, Hendricks received
the consent of two-thirds of the partnership, excluding O'Brien's consent.
On June 4, 2012, Matt Lieske contacted Hendricks about the details of the
transaction. Lieske inquired about the value agreed upon for O'Brien's interest.
Hendricks replied, providing a detailed explanation of what he believed his valuation of
the company was for a sale of a less-than-controlling interest versus the sale of a
4 CP at 117.
5 CP at 117.
6 CP at 117-19.
7 CP at 117.
8 CP at 121.
9The Option Agreement does not indicate the dates on which each party signed it.
No. 71926-2-1/5
controlling interest. On June 6, 2012, Hendricks wired O'Brien $200,000 as consideration
to finalize the Option Agreement.
By June 8, 2012, Hendricks had not heard from RSD. Hendricks contacted Twig
Mills, one of the Robert E. Resoff, Inc. trustees, to inquire about RSD's consent. Mills
responded that George Steers was meeting with the other managers on the week of June
14 to discuss the O'Brien transaction.
On June 20, 2012, Steers wrote to Fryer, asking for the details of the O'Brien
purchase. Steers also notified Fryer that RSD may want to exercise its right of first
refusal. Fryer responded the next day. He informed Steers that all of the partners had
given written approval of the acquisition by AOI of the option to purchase O'Brien's
partnership interest. Fryer stated his opinion that under the Agreement, because two-
thirds of the partnership had consented, the right of first refusal did not apply. Steers
responded by letter dated June 25, 2012, asserting that as a partner, Hendricks was
required by the Revised Uniform Partnership Act (RUPA), chapter 25.05 RCW, to meet
his fiduciary duties and disclose the terms of the transaction.
O'Brien died on July 9, 2012. Under the Option Agreement, this event triggered
the 30-day period for Hendricks to exercise the option to purchase O'Brien's interest in
the partnership. On July 10, Fryer received Steers' June 25 letter. Fryer responded that
same day with details of the transaction by sending a copy of the Option Agreement and
advising Steers that O'Brien had died and Hendricks planned to close the transaction
within 30 days.
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On July 30, 2012, Fryer received the executed closing documents, including a bill
of sale for the O'Brien partnership interest. Hendricks wired the balance of the purchased
price shortly after August 2, 2012.
Prior to the acquisition of O'Brien's interest, AOI, O'Brien Enterprises, Inc., and
RSD each owned a 20.618 percent partnership interest in AAGP.
On August 8, 2012, Steers advised Fryer that Robert E. Resoff, Inc. had elected
to purchase the O'Brien interest on the same terms set forth in Hendricks' Option
Agreement.
On February 13, 2013, RSD filed a complaint for declaratory and equitable relief
against AOI. RSD alleged breach of fiduciary duty, breach of contract, and interference
with business expectancy. In its prayer for relief, RSD requested (1) declaratory relief
that its alleged right of first refusal under Section 7.3 of the Agreement be recognized; (2)
that the court impose a constructive trust to protect RSD's alleged interest in the O'Brien
transaction based upon its purported right of first refusal; and (3) specific performance of
the Agreement that would require AOI to make the O'Brien transaction subject to the right
of first refusal as determined by Section 7.3 of the Agreement.
AOI moved for summary judgment against RSD. AOI maintained that under the
plain language of the Agreement, only where a partner cannot obtain consent from two-
thirds of the partnership to a transfer of interest does the right of first refusal apply. AOI
argued that because the transfer of O'Brien's partnership interest was approved by two-
thirds of the partnership, the right of first refusal was never triggered. The trial court
granted AOI's motion for summary judgment.
RSD appeals.
No. 71926-2-1/7
ANALYSIS
We review summary judgment orders de novo. Durland v. San Juan County, 182
Wash. 2d 55, 69, 340 P.3d 191 (2014). Summary judgment is appropriate only if there is no
genuine issue of material fact in the pleadings, affidavits, and depositions on file, and the
moving party is entitled to judgment as a matter of law. CR 56(c). Material facts are
those upon which the outcome of the litigation depends. Greater Harbor 2000 v. City of
Seattle. 132 Wash. 2d 267, 279, 937 P.2d 1082 (1997).
RSD first contends that the trial court's interpretation of the Agreement was
erroneous because, it argues, under the Agreement, even where a partner obtains
consent of two-thirds of the non-selling partners under Section 7.1.1, it still must comply
with the right of first refusal provision set forth in Section 7.3. We disagree with RSD's
interpretation of the Agreement.
"The interpretation of a contract can be a mixed question of law and fact. But
where the contract presents no ambiguity and no extrinsic evidence is required to make
sense of the contract terms, contract interpretation is a question of law." Rekhter v. Dep't
of Soc. & Health Servs., 180 Wash. 2d 102, 134, 323 P.3d 1036 (2014) (internal citations
omitted).
The touchstone of contract interpretation is the parties' intent. See Newport Yacht
Basin Ass'n of Condo. Owners v. Supreme Nw., Inc., 168 Wash. App. 86, 100, 285 P.3d 70
(2012); 25 David K. DeWolf &Keller W. Allen, Washington Practice: Contract Law
and Practice § 5:7, at 152 (2d ed. 2007). We construe contracts "to reflect the intent of
the parties." Corbrav v. Stevenson. 98 Wn.2d 410,415, 656 P.2d 473 (1982). We follow
the '"objective manifestation theory'" of contract interpretation, focusing on the
No. 71926-2-1/8
"'reasonable meaning of the contract language to determine the parties' intent.'" Viking
Bank v. Firgrove Commons 3. LLC, 183 Wash. App. 706, 712, 334 P.3d 116 (2014) (quoting
Hearst Commc'ns. Inc. v. Seattle Times Co.. 154 Wash. 2d 493, 503, 115 P.3d 262 (2005)).
"We impute an intention corresponding to the reasonable meaning of the words used."
Hearst, 154 Wash. 2d at 503.
We also follow the context rule that "extrinsic evidence relating to the context in
which a contract is made may be examined to determine the meaning of specific words
and terms" used in the contract. William G. Hulbert. Jr. & Clare Mumford Hulbert
Revocable Living Trust v. Port of Everett. 159 Wash. App. 389, 399-400, 245 P.3d 779
(2011) (emphasis added). Extrinsic evidence includes both the contract's subject matter
and objective, the circumstances surrounding contract formation, both the parties'
conduct and subsequent acts, and the reasonableness of the parties' respective
interpretations. Hulbert. 159 Wash. App. at 400. However, extrinsic evidence may not be
used to "'show an intention independent ofthe [contract]' or to 'vary, contradict[,] or modify
the written word.'" Hearst. 154 Wash. 2d at 503 (quoting Hollis v. Garwall. Inc.. 137 Wash. 2d
683, 693, 974 P.2d 836 (1999)). Moreover, extrinsic evidence of a party's subjective,
unilateral, or undisclosed intent regarding the meaning of a contract's terms is
inadmissible. Hulbert. 159 Wash. App. at 400. "Nor is itadmissible under the parol evidence
rule to add to the terms of a fully integrated written contract." Hulbert. 159 Wash. App. at
400.
We "should ultimately give effect to . . . the intent of the parties at the time of
execution." 25 DeWolf &Allen, § 5:7, at 154 (2007). If contractual language is "clear
No. 71926-2-1/9
and unambiguous,"we must enforce the written contract. Lehrer v. Dep't of Soc. &Health
Servs.. 101 Wash. App. 509, 515, 5 P.3d 722 (2000).
The primarily disputed sections of the Agreement are repeated as follows:
7.1.1 No Partner may, without the prior written consent of the
Partners holding at least a two-thirds interest in the Partnership (excluding
the transferring Partner's interest), directly or indirectly sell, lease, transfer,
assign, give, pledge, hypothecate or otherwise encumber or permit or suffer
any encumbrance of all or any part of his interest in the Partnership, with or
without consideration, except as provided in this Article VII and Section 8.2.
7.3 Right of First Refusal. Notwithstandingthe provisions of Section
7.1.1, a Partner may sell his interest in the Partnership upon compliance
with the conditions of Section 7.1.2 and the following conditions:
[10]
RSD interprets these provisions, in addition to others quoted above, to mean that the right
of first refusal in Section 7.3 trumps the two-thirds consent requirement in Section 7.1.1.
The plain language of Sections 7.1.1 and 7.3, when read together, delineates two
separate mechanisms of transferring partnership interest. The first is Section 7.3's
general requirement that in order totransfer a partnership interest, the partner must obtain
written consent of the partners holding at least a two-thirds interest in the partnership.
The second mechanism is outlined in Section 7.3, the right of first refusal provision. The
term "notwithstanding" indicates that this is a separate method of transferring interest.
"Notwithstanding" is defined as "without prevention or obstruction from or by";
"nevertheless, however, yet." Webster's Third New International Dictionary 1545
(2002).
10 CP at 70-71 (emphasis added).
No. 71926-2-1/10
The term "may" in Section 7.3 also supports this interpretation. It establishes that
the right of first refusal procedure is optional, not required. The language of the
Agreement does not state that it is mandatory that a transferring partner follow the
procedure of first refusal. The Agreement could have done so by mirroring the language
of Section 7.1.1. Nor does the Agreement state that Section 7.3 is an additional
requirement to Section 7.1.1.
RSD relies on extrinsic evidence to buttress its argument that the Agreement
requires a selling partner to comply with the right of first refusal regardless of whether the
partner obtained consent from the partnership. For example, RSD focuses attention on
a 1987 Offering Memorandum, offered by AOI, which contained a provision regarding the
right of first refusal. But resorting to extrinsic evidence such as this is unwarranted.
[Sjurrounding circumstances and other extrinsic evidence are to be used 'to determine
the meaning of specific words and terms used and not to 'show an intention independent
of the instrument' or to 'vary, contradict or modify the written word.'" Hearst. 154 Wash. 2d
at 503 (quoting Hollis. 137 Wash. 2d at 695-96). RSD seeks to modify—not define—the
clear terms of the contract to support its interpretation.
The Agreement's language is clear and unambiguous. The consent provision in
Section 7.3 is a separate process of transferring a partnership interest from the right of
first refusal in Section 7.1.1. The trial court did not err in so concluding.
RSD next contends that material questions of fact remain as to whether AOI
complied with Section 7.1.1 of the Agreement. According to RSD, because the Option
Agreement is dated May 24, itwas on that date that the agreement to grant Hendricks an
option became binding and, thus, encumbered O'Brien's partnership interest. RSD
10
No. 71926-2-1/11
argues, as it did to the trial court, that because May 24 predates May 31, the date that
the partners consented to the transfer, AOI failed to comply with Section 7.1.1's
requirement that the transferring partner obtain pr/'orwritten consent. RSD did not present
evidence refuting the fact that O'Brien signed the Option Agreement on May 31. Its
argument was that the Option Agreement was binding on May 24 by virtue of the effective
date listed on the agreement.
The trial court based its summary judgment decision on its finding that the Option
Agreement became binding when O'Brien signed it on May 31, after two-thirds of the
partnership consented to the transaction.
Nevertheless, AOI argues on appeal that the Option Agreement, which is different
from a purchase and sale agreement, was not binding on O'Brien until he received the
$200,000 consideration on June 6. We agree with this assertion.
An option to purchase property is a contract wherein the owner, in
return for a valuable consideration, agrees with another person that the
latter shall have the privilege of buying the property within a specified time
upon the terms and conditions expressed in the option. If no consideration
passes, the transaction resolves itself into a mere offer which may be
withdrawn by the optionor at any time before acceptance by the optionee.
But when supported by a consideration, as in the case at bar, the execution
of the agreement results in a contract binding upon the optionor which may
not be withdrawn by him during the time set forth therein.
Whitworth v. Enitai Lumber Co.. 36 Wash. 2d 767, 770, 220 P.2d 328 (1950). Accordingly,
an option contract is not binding until consideration passes. Here, consideration did not
change hands until June 6, when Hendricks wired O'Brien $200,000. The trial court did
not err. See Wendle v. Farrow. 102 Wash. 2d 380, 382, 686 P.2d 480 (1984) (reviewing
court may affirm the trial court's judgment on any theory established by pleadings and
supported by proof).
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No. 71926-2-1/12
RSD further contends that there was no evidence that Hendricks obtained written
consent from the partners. RSD asserts that the trial court misread Hendricks'
declaration. In Hendricks' declaration, he stated, "By [May 31] I had the consent of 2/3 of
the partners excluding the transferring partner."11 However, in its summary judgment
motion, AOI also attached a copy of the consent forms mailed to the partners. Additional
evidence offered by AOI on summary judgment demonstrated that the consent was in
written form. Furthermore, RSD presented no evidence that contradicted AOI's evidence
that the consent was in writing. A trier of fact could reasonably infer, based on this
evidence, that AOI properly obtained consent in writing from the partners. The trial court
correctly concluded that no material question of fact remained as to whether the consent
received was in writing and obtained prior to encumbering O'Brien's partnership interest,
as required by Section 7.1.1. of the Agreement.
RSD contends, finally, that the trial court erred by summarily dismissing his claim
that Hendricks breached his duties of loyalty and good faith and fair dealing to the partners
and partnership. We disagree.
Partners are accountable to each other and the partnership as fiduciaries. Bishop
of Victoria Corp. Sole v. Corporate Bus. Park. LLC. 138 Wash. App. 443, 457, 158 P.3d
1183 (2007). One of the duties owed as a fiduciary is the duty of loyalty, which includes
refraining from self-dealing, secret profits, and conflicts of interest. Bishop. 138Wn. App.
at 457 (citing RCW 25.05.165(2)(a)-(c)). A partner also has an obligation of good faith
and fair dealing to discharge duties to the partnership and other partners under the terms
of the partnership agreement. RCW 25.05.165(4).
11 CPat56.
12
No. 71926-2-1/13
RUPA governs partnership affairs to the extent not defined in the partnership
agreement. Home v. Aune. 130 Wash. App. 183, 200-01, 121 P.3d 1227 (2005); RCW
25.05.165. RUPA is considered a "gap filler" in this manner. Home. 130 Wash. App. at
200-01. "With few exceptions . . . partners may 'write their own ticket.'" Home. 130 Wn.
App. at 200-01 (internal quotation marks omitted) (quoting Seattle-First Nat'l Bk. v.
Marshall. 31 Wash. App. 339, 347, 641 P.2d 1194 (1982)). Included within those exceptions
is the duty of loyalty under RCW 25.05.165(2). RCW 25.05.015(2)(c) prohibits a
partnership agreement from eliminating the duty of loyalty under RCW 25.05.165(2).
Partnership agreements also cannot "[unreasonably reduce the duty of care under RCW
25.05.165(3)," or "[eliminate the obligation of good faith and fair dealing under RCW
25.05165(4)." RCW 25.05.015(2)(d), (e).
RSD contends that Hendricks breached the duty of loyalty because, he argues,
the opportunity to purchase the O'Brien interest was a "partnership opportunity." RSD
points to Section 8.2 of the Agreement, which gave the partnership an opportunity to
purchase a partner's interest upon his or her death. Section 8.2 of the Agreement
provided:
Upon the death ... of any partner, the Partnership shall continue the
Partnership business under its then present name. . . . The Partnership
may elect to (but need not) liquidate the interest of the . . . deceased . . .
Partner and cause the Partnership to purchase the interest of the . . .
deceased ... Partner at a purchase price equal to 100% of the Value of the
. . . deceased . . . Partner's interest. .. .[12]
Notably, not one partner expressed an interest in purchasing O'Brien's partnership
interest for the benefit of the partnership. Hendricks informed the partners of the
12 CP at 74.
13
No. 71926-2-1/14
transaction in his May 15, 2012 letter to them, and gave them the opportunity to inquire
further about the details of the transaction. Had any of the partners been interested in
purchasing the interest for the partnership as a "partnership opportunity," they could have
taken action to do so. RSD communicated its interest in purchasing the O'Brien interest
weeks after having been informed of the transaction. And RSD sought to purchase the
interest on its own behalf as an individual partner, and not on behalf of the partnership
interest.
RSD also argues that Hendricks failed to disclose the material terms of the
transaction before seeking timely, informed consent from the partners. The good faith
obligation of a partner includes a duty of candor, which demands that the partner abstain
from any and all concealment concerning matters pertaining to the partnership business
and to refrain from making false statements to a copartner. Bow v. Graham. Cohen &
Wampold. 17 Wash. App. 567, 570-71, 564 P.2d 1175 (1977) (citing Karle v. Seder. 35
Wash. 2d 542, 214 P.2d 684 (1950)). Hendricks satisfied the good faith obligation by
promptly informing the partners of O'Brien's impending death and the deal upon which
they agreed. Indeed, Hendricks eventually disclosed the details of the transaction to
RSD.
RSD cites Bow for the proposition that as managing partner Hendricks is held to
the highest standard of fiduciary obligation. In Bow. Division Two stated in a footnote,
"We also note that as managing partner, Bovy occupied a higher fiduciary position and
had the burden of dispelling all doubts concerning the discharge of his duties. In the
event a managing partner is unable to satisfy this burden, all doubts would ordinarily be
resolved against him." 17 Wash. App. at 571 n.3 (citing Conrad v. Judson. 465 S.W.2d 819
14
No. 71926-2-1/15
(Tex. Civ. App. 1971); Bakalis v. Bressler. 1 III. 2d 72, 115 N.E.2d 323 (1953)). No
Washington case has adopted this proposition since Bow. Because it is merely dicta,
we do not apply this proposition for the first time here.
RCW 25.05.165(5) states that no duty is violated under either RUPA or a
partnership agreement "merely because the partner's conduct furthers the partner's own
interest." AOI did not violate the duty of loyalty or any other obligation imposed because
it sought an opportunity for itself as a partner in the enterprise.
We reject RSD's claim that AOI breached its fiduciary duties. The trial court did
not en.
We affirm.
TT'i'iA'* >s
WE CONCUR:
St^w"CTY! O&AtJ m
15