Michan Rhodes, Et Ano. v. Emily Sharp, Et Ano.

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
MICHAN RHODES, an individual;
KEYSTONE WINDOWS AND DOORS, No. 72801-6-1 O
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a Washington corporation, (consolidated with 72802-4- Jcrs
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Appellants, DIVISION ONE —
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EMILY SHARP RAINS and MICHAEL
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RAINS, individually and their marital —
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community; RAINS LAW GROUP, a
professional limited liability company; UNPUBLISHED OPINION
Respondents, FILED: May 31, 2016
HEATHER CHRISTIANSON and
JOHN DOE CHRISTIANSON, and
their marital community,
Defendants.
EMILY SHARP RAINS and MICHAEL
RAINS, individually and their marital
community,
Third-Party
Plaintiffs,
v.
TONY DAVIS and AMERICAN
CONTRACTORS INDEMNITY
COMPANY, and RLI INSURANCE
COMPANY,
Third-Party
Defendants.
No. 72801-6-1/2
Becker, J. — The owner of a now defunct small business appeals the order
dismissing her Consumer Protection Act claim on summary judgment. There is
evidence that the defendant used deceptive advertising in a scheme to gain the
owner's confidence and exploited the struggling business for personal gain. The
defendant's status as a company employee does not shield her from liability.
Because there are genuine issues of material fact with respect to all five elements
of a consumer protection claim, we reverse and remand for trial of that claim.
Summary judgment is reviewed de novo. Indoor Billboard/Wash., Inc. v.
Integra Telecom of Wash., Inc., 162 Wash. 2d 59, 69, 170 P.3d 10 (2007). "We
consider all facts in the light most favorable to the nonmoving party and affirm a
grant of summary judgment only if we determine, based on all of the evidence,
reasonable persons could reach but one conclusion." Indoor Billboard, 162
Wash. 2d at 70. The moving party has the burden of showing that there is no
genuine issue as to any material fact. Indoor Billboard, 162 Wash. 2d at 70.
We state the facts in the record in the light most favorable to plaintiffs
Michan Rhodes and her company, Keystone Windows and Doors Inc. According
to Rhodes, she founded Keystone and built it up over a period of nine years,
working out of her home and eventually opening a showroom in Seattle. She
was the only shareholder and board member. Keystone prospered in terms of its
ability to produce sales. The company was more or less current in accounts until
a longtime full-service accountant and controller resigned in 2010. By June
2011, a permanent replacement in that position had not been found, and Rhodes
No. 72801-6-1/3
realized that Keystone was on the verge of bankruptcy due to neglect of financial
management and accounting. Looking for assistance in that area, Rhodes was
referred to defendant Emily Rains. Rhodes met with Rains on June 20, 2011, in
a restaurant in the Fremont area of Seattle. Thus began a relationship that
continued for the next 15 months.
Rains identified herself as the owner of the Rains Strategic Accounting
Firm. She represented that she had 1,500 clients and had frequently assisted
individuals and entities similar to Rhodes and Keystone. She explained that
because she was also a lawyer, she could assist with legal matters as well.
Rains asked for an initial retainer of $15,000.
After this initial meeting, Rhodes researched Rains Strategic Accounting
on the internet. The firm was described in a "Company Profile" as "the nation's
leader in comprehensive and integrated accounting solutions." The profile stated
that the company employed bookkeepers, accountants, reporting analysts,
certified public accountants, tax attorneys, and a network of respected chief
financial officers to provide comprehensive support to business operators at
affordable prices. Rhodes was impressed with Rains. The promotional material
on the internet helped to convince Rhodes that Rains would generate "reliable
financial data that I could trust."
Rhodes sent a check for $15,000 to Rains and signed a retainer and fee
agreement. The agreement stated that Rhodes was contracting with the "Rains
Law Group" for services related to corporate liquidation, dissolution, Washington
state tax analysis, and bankruptcy support. It stated that the services would be
No. 72801-6-1/4
provided by Emily Sharp Rains, "Senior Attorney." Hourly rates were listed as
$275 for an associate attorney, $415 for a senior attorney, and $125 for a legal
clerk.
Rains began to work with Rhodes and to review Keystone's financial
information. Together, Rains and Rhodes met with a bankruptcy attorney. At
this time, the end of June 2011, Keystone had virtually no operating funds due to
a withdrawal of more than $65,000 by the Department of Revenue for back
taxes. Rains discussed with Rhodes the options of bankruptcy and sale of the
business. Upon learning that Rhodes had personal savings of $65,000, Rains
advised her to contribute those funds and continue to operate the company with
the goal of rebuilding it.
On July 7, 2011, Rains accompanied Rhodes to the bank where Rhodes
deposited her personal savings into the Keystone business account. Rains
insisted that she and her husband, Michael Rains, be added as signers on the
account. Rhodes agreed to put Rains on the account because she assumed that
it was important for her attorney to have signing authority, but she refused to add
Michael Rains.
Also in early July 2011, Rains suggested that she continue working for
Keystone "to organize the accounting and any legal issues Keystone had." Rains
became an employee of Keystone. With Rhodes' approval, Rains assumed the
titles of Chief Financial Officer and General Counsel for Keystone. She drew
$2,500 every two weeks, approximately the same amount that Rhodes was
drawing.
No. 72801-6-1/5
Rains took on the day-to-day bookkeeping operations of the company and
hired her sister, Heather Christensen, to perform bookkeeping as an independent
contractor. Rains also arranged for Keystone to hire her husband, Michael
Rains, to handle information technology. Michael Rains obtained control of the
accounting system. Thereafter, Rhodes was unable to gain access to accounting
information without going through him. Over a six-month period beginning in
September 2011, Michael Rains billed Keystone $49,338 on behalf of "Rains and
Rains Consulting." In June 2012, Rains raised her own salary from $2,500 to
$10,000 per month. She increased Rhodes' draw as well. Rains assured
Rhodes that the company was doing well and could afford it.
Focused on making sales, Rhodes noticed as time went on that Rains was
not producing financial reports. Rhodes became increasingly frustrated with the
lack of information that would allow her to gauge how the company was doing
financially.
In September 2012, Rhodes informed Rains "that I wasn't getting any
reports from her so I could understand the finances of the company, and I was
bringing somebody in to look at my books. It was at that time .. . Rains was
scrambling to prepare for her exit." Rains resigned abruptly on October 17,
2012, leaving behind what Rhodes describes as "an accounting nightmare" of
unpaid vendors, unpaid bills, unpaid taxes, unrenewed insurance policies, and an
unanswered writ of garnishment. Rhodes found documents Rains had prepared
and filed identifying herself as a part owner of Keystone. Rhodes also learned
No. 72801-6-1/6
that Rains had failed to pay an outstanding balance of almost $30,000 for
windows Rains had ordered for her own house.
Rhodes hired a different accounting firm in November 2012. She spent
approximately $10,000 over the next several months to get the bookkeeping
cleaned up. Rhodes closed Keystone in April 2013. She believes she could
have saved the company if Rains had not left it in such bad shape financially.
Rhodes states that she would have stopped taking draws herself, would have
terminated Rains earlier, and would have hired cheaper accounting help if Rains
had not concealed the company's poor financial condition.
This litigation began in December 2012. Rhodes and Keystone sued
Rains for legal malpractice, breach of fiduciary duty, and consumer protection
violations. Rains counterclaimed for nonpayment of wages. The trial court
dismissed the malpractice and consumer protection claims on summary
judgment. A jury found against Rains on the remaining claim for breach of
fiduciary duty. The jury awarded $7,685.29 for Rains' conduct when she was
acting as an outside attorney and $88,764.38 for her conduct when she was
employed in-house as an officer of Keystone. The jury found for Rains on the
wage claim and awarded her $18,780.08 for willfully withheld wages. After
adding interest and attorney fees, doubling the wage claim damages, and
calculating the offset, the trial court entered a net judgment for Rhodes and
Keystone in the amount of $40,162.89.
Rhodes and Keystone appeal the summary judgment dismissing their
consumer protection claim.
No. 72801-6-1/7
To prevail on a claim under the Consumer Protection Act, chapter RCW
19.86, a private plaintiff must prove (1) an unfair or deceptive act or practice
(2) occurring in trade or commerce (3) affecting the public interest, (4) injury to a
person's business or property, and (5) causation. Hangman Ridge Training
Stables. Inc. v. Safeco Title Ins. Co., 105 Wash. 2d 778, 784-85, 719 P.2d 531
(1986). Rains contends Rhodes failed to establish all five elements.
UNFAIR OR DECEPTIVE ACT OR PRACTICE
Rhodes contends the first element is satisfied by evidence showing that
Rains made false promises regarding "expert financial management services"
and that she had a scheme to exploit vulnerable small businesses for personal
gain. Rhodes also alleges that Rains engaged in deceptive billing for legal
services.
Although the Consumer Protection Act does not define the term
"deceptive," an act or practice is deceptive if it has the capacity to deceive a
substantial portion of the public. Panaq v. Farmers Ins. Co. of Wash., 166 Wash. 2d
27, 47, 204 P.3d 885 (2009). The purpose of the capacity-to-deceive test is to
deter deceptive conduct before it occurs. Dwver v. J.I. Kislak Mortq. Corp., 103
Wn.App. 542,547, 13 P.3d 240 (2000). review denied. 143Wn.2d 1024(2001).
Neither intent to deceive nor actual deception is required. Dwver, 103 Wash. App.
at 547.
False promises and advertising
Contrary to Rains' argument, Rhodes' allegations of false promises and
false advertising are neither vague nor innocuous. In her online company profile
No. 72801-6-1/8
as well as her verbal pitch to Rhodes, Rains portrayed herself as leading a
successful firm with many skilled professional employees. The record contains
no evidence of anyone who worked for Rains except for her husband, who had
no accounting background, her sister, whose background was in cosmetology,
and a bookkeeper hired later. Rhodes once suggested a meeting with Rains at
her purported law office in Fremont, but Rains declined because there was
"sensitive material" there. In fact, the address was "nothing but a place with mail
boxes." A jury could find that Rains committed an unfair or deceptive act by
misrepresenting the nature of her business and the experience and expertise of
the personnel associated with it in a way that had the capacity to deceive.
Confidence scheme
Rhodes presented evidence that Rains schemed to put herself in a
position where she could covertly siphon off Keystone's revenues to benefit
herself and her family members. Rains used her status as an attorney along with
the false advertising to win Rhodes' trust. Having obtained a trusted position as
an officer of the company, Rains lulled Rhodes into a false belief that the
company's financial obligations were current, and she concealed information that
showed otherwise. Rains hired Grace Alonzo to help with bookkeeping.
According to Alonzo, Rhodes begged her for financial reports and at one point
asked for Alonzo's help in figuring out how to use a new database created to
track sales. Alonzo could see that Rhodes was "feeling desperate for answers
and frustrated," but Rains had instructed Alonzo "not to discuss financial matters"
with Rhodes and not to take directions from her.
No. 72801-6-1/9
Rains argues that once she became a Keystone employee, her conduct
was no longer actionable under the Consumer Protection Act and Keystone's
only remedy was to fire her for poor performance. For this proposition, Rains
cites RCW 19.86.070, which states that the "labor of a human being is not a
commodity or article of commerce." RCW 19.86.070 has been referred to as "the
labor exemption." Ernst Home Center, Inc. v. United Food & Commercial
Workers Int'l Union, AFL-CIO. Local 1001. 77 Wash. App. 33, 46-47, 888 P.2d
1196 (1995). Derived from federal antitrust laws, the exemption of labor
organizations from liability reflects an accommodation between congressional
policies favoring free competition in the marketplace and labor policies favoring
collective bargaining and other union activities. The federal exemption "may only
be asserted by a labor organization acting in its self-interest." Ernst Home
Center, Inc., 77 Wash. App. at 47.
Rains does not explain how RCW 19.86.070 prevents an employer like
Rhodes from suing an employee in a case not involving union activity. Rhodes is
not alleging that Rains violated the Consumer Protection Act by performing below
expectations as an employee. Rhodes is alleging that Rains utilized deception
and concealment in a scheme to obtain a position with Keystone as a trusted
employee so that she could drain the company's income to herself. A jury could
find that such a scheme is an unfair and deceptive practice.
Padded bill for legal services
Rhodes claims that Rains was deceptive in the way she billed for legal
services. The claim is based on a single billing invoice. Rhodes sent Rains a
No. 72801-6-1/10
retainer of $15,000 for legal services in late June 2011 before there was any
discussion of Rains being a Keystone employee. Rains never gave Rhodes an
invoice or accounting for the $15,000 retainer. After this litigation began, Rhodes
received a one-page Rains Law Group invoice in response to a request for
production. Rhodes had never seen it before. The invoice contains 20 entries
for the period from June 22 through July 5, 2011, for the meeting with the
bankruptcy attorney, phone calls, discussions with Rhodes and others, and
review of various documents. The invoice shows total fees incurred of
$15,209.75, with a balance of $209.75 owing after exhaustion of the retainer. All
work is charged at $415.00 per hour, the rate stated in the retainer agreement for
a "Senior Attorney."
The two largest items are for a five-hour conference call with Rhodes on
June 30 and an on-site visit with Rhodes for 9.25 hours on July 1. Rhodes
claims these two entries in particular are "bogus."
Lawyers may be subject to consumer protection liability ifthe suit seeks to
recover for acts that relate to "entrepreneurial aspects of the practice of law" and
does not purely allege negligence or legal malpractice. Short v. Demopolis, 103
Wash. 2d 52, 60, 691 P.2d 163 (1984). The issue about the allegedly padded bill is
not one of negligence or legal malpractice.
Rains contends that Rhodes cannot complain about being charged $415
per hour because she signed the retainer agreement, which clearly stated $415
as the rate for a "Senior Attorney." But there is a question whether the retainer
agreement may have misled Rhodes into thinking that part of the work would be
10
No. 72801-6-1/11
assigned to an "Associate Attorney" at $275 per hour. And Rhodes is primarily
asserting exaggeration of hours worked, not inflation of the hourly rate.
The entrepreneurial aspects of the practice of law are those related to
"how the price of legal services is determined, billed, and collected and the way a
law firm obtains, retains, and dismisses clients." Short. 103 Wash. 2d at 61. We
are mindful of Rains' argument that a simple dispute between attorney and client
about the number of hours worked on a particular date should not be elevated to
the status of a consumer protection claim. But here the evidence is not only that
Rains padded the bill. There is an inference that she did not even prepare the
bill until called upon to produce it in litigation more than a year after performance
of the services itemized. A jury could conclude that Rains fabricated the
allegedly bogus entries after the fact to justify keeping the entire $15,000. Under
these circumstances, the allegation of unfair and deceptive billing is actionable
under Short.
TRADE OR COMMERCE
Under the Consumer Protection Act, trade and commerce "shall include
the sale of assets or services, and any commerce directly or indirectly affecting
the people of the State of Washington." RCW 19.86.010(2). These terms are to
be construed broadly. Hangman Ridge, 105 Wash. 2d at 785.
Rains contends the Consumer Protection Act does not apply because an
employer is not a consumer and an employee is not a commodity. As discussed
above, Rains' status as a Keystone employee does not protect her when she
allegedly used deception to attain and hold her status as a trusted employee. A
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No. 72801-6-1/12
private action may be brought by one who is not in a consumer relationship with
the actor against whom the suit is brought. It is the five Hangman Ridge
elements that assure that the plaintiff is a proper party to bring suit. Panag, 166
Wash. 2d at 43-44.
Rains deceived Rhodes over the course of their business relationship. A
jury could find that the unfair and deceptive acts and practices alleged by Rhodes
occurred in trade or commerce.
PUBLIC INTEREST ELEMENT
A plaintiff may establish that an alleged unfair or deceptive act or practice
is injurious to the public interest because it:
(1) Violates a statute that incorporates this chapter;
(2) Violates a statute that contains a specific legislative
declaration of public interest impact; or
(3)(a) Injured other persons; (b) had the capacity to injure
other persons, or (c) has the capacity to injure other persons.
RCW 19.86.093; Rush v. Blackburn, 190 Wash. App. 945, 967-68, 361 P.3d 217
(2015). Rhodes does not allege that Rains' conduct violated a statute. She
satisfies the public interest element under subsection (3), which bases public
interest impact on actual injury and capacity to injure. Rush, 190 Wash. App. at
968.
It is the likelihood that additional plaintiffs have been or will be injured in
exactly the same fashion that changes a factual pattern from a private dispute to
one that affects the public interest. Hangman Ridge. 105 Wash. 2d at 790. In the
context of a private dispute such as the provision of professional services, factors
indicating public interest include:
12
No. 72801-6-1/13
(1) Were the alleged acts committed in the course of the
defendant's business? (2) Did defendant advertise to the public in
general? (3) Did defendant actively solicit this particular plaintiff,
indicating potential solicitation of others? (4) Did plaintiffand
defendant occupy unequal bargaining positions?
Hangman Ridge. 105 Wash. 2d at 790-91. No one factor is dispositive, nor is it
necessary that all be present. Hangman Ridge. 105 Wash. 2d at 790-91.
Rains committed deceptive acts in the course of operating her businesses.
Her advertising marketed the Rains Strategic Accounting Firm to "small and mid-
market businesses" whose operators "did not possess the requisite knowledge
necessary to hire and hold accountable qualified accounting professionals."
Rains herself recognized that her targeted client base was an unsophisticated
and vulnerable group. Her company profile offered to help "business operators
without financial backgrounds" who found they had hired "inexperienced
individuals who are self proclaimed experts but are little more than data
processors." This advertising was on the internet, directed at the public in
general. Rains actively solicited Rhodes when they met in person as a client for
the Rains Law Group as well as for Rains Strategic Accounting.
The potential for Rains soliciting others is reinforced by the declaration of
Kyle Duce, a small business operator who had a similar experience with Rains.
Duce states that he was referred to Rains for financial management advice in
October 2010 when he was planning to open a restaurant. He was inspired to
trust Rains by her claims that she "had a big accounting office in Fremont" and
that she was an expert tax attorney "who had helped hundreds of start-up
businesses." During the few months that Rains worked with Duce, "she did not
13
No. 72801-6-1/14
file a single tax return on time," costing the company substantial amounts in
interest and penalties. Duce said that Rains "wanted to be an operating owner
and asked to make business decisions"; she got her husband Michael involved in
doing the accounting; she invoiced Duce for $20,000 for services, an amount that
"flabbergasted" Duce, who had never received an estimate; she asked for a 12
percent ownership interest as payment of the invoice; and she prepared tax
documents that falsely listed her as a co-owner of the business. The similarities
indicate that Rains' deception of Rhodes was part of a predatory pattern, not a
one-time aberration.
Rains contends that Keystone, as an employer, necessarily had the
advantage in their respective bargaining positions. But this was not an ordinary
employment relationship. Rains started out with the advantage of being an
attorney, and after going in-house, she used concealment and deception and
manipulation to undermine the strength of Keystone's position as employer.
A jury could find that Rains' deceptive acts and practices have the
potential for repetition and are injurious to the public interest.
CAUSATION AND INJURY
A plaintiff satisfies the Consumer Protection Act's causation requirement
by demonstrating that there is a causal link between the misrepresentation and
the plaintiff's injury. "A plaintiff must establish that, but for the defendant's unfair
or deceptive practice, the plaintiff would not have suffered an injury." Indoor
Billboard, 162 Wash. 2d at 84. The injury requirement may be satisfied even if the
14
No. 72801-6-1/15
expenses caused by a consumer protection violation are minimal. Panaq, 166
Wash. 2d at 57.
Rains argues that Rhodes alone caused the destruction of Keystone
through her own shortcomings as a business person. The evidence, however,
supports a finding that the conduct of Rains was at least a proximate cause, if not
the only one.
Rains argues that injury cannot be established as to her acts when she
was in the employ of Keystone because having to pay a salary is not an injury.
This argument is not persuasive. Rains' status as an employee is not a bar to
suit.
The injuries here are more than minimal. Rhodes presents evidence that
Rains' deceptions induced her to pay out exorbitant sums that otherwise could
have been used to pay the company's debts. But for Rains' scheming and her
concealment of important financial information, Rhodes arguably would have
terminated Rains earlier and saved the money paid to Rains for services she did
not perform. If Rains had presented the $15,000 invoice at the time she
performed the legal services itemized therein, Rhodes could have disputed it and
avoided paying the bogus charges.
The evidence of injury and causation is sufficient to take the issue to trial.
In summary, Rhodes has presented evidence creating a genuine issue of
material fact with respect to the five elements of a Consumer Protection Act
claim.
15
No. 72801-6-1/16
MICHAEL RAINS
The order granting partial summary judgment to the defendants states,
with respect to the Consumer Protection Act claims, three separate dismissals as
follows:
4. All claims for violation of the Consumer Protection Act
asserted by Plaintiffs against Rains Law Group are dismissed with
prejudice;
5. All claims for violation of the Consumer Protection Act
asserted by Plaintiffs against Michael Rains, personally, are
dismissed with prejudice; and
6. All claims for violation of the Consumer Protection Act
asserted by Plaintiffs against Emily Rains, personally, are
dismissed with prejudice.
Rains contends that the dismissal of Michael Rains, personally, should be
affirmed because there is no evidence or argument supporting a consumer
protection claim against him personally. Rhodes responds that Michael Rains
participated in the overbilling and should be held liable as an agent of the Rains
entities and as an agent of the marital community. It is not clear from the record
that the trial court would have dismissed Michael Rains personally if the court
had allowed the consumer protection claim to go forward against Emily Rains
personally and as Rains Law Group. For this reason, we reverse all three
dismissals and reinstate the consumer protection claim against all three named
defendants.
16
No. 72801-6-1/17
ATTORNEY FEES
Rhodes seeks an award of attorney fees for this appeal under RCW
19.86.090. That request is premature. Rhodes may seek an award of fees and
costs for this appeal from the trial court if she prevails on remand.
The order dismissing the Consumer Protection Act claim against Emily
Rains, Michael Rains, and the Rains Law Group is reversed.
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WE CONCUR:
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17