LK Operating, LLC v. Collection Grp., LLC ( 2014 )


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  • IN THE SUPREME COURT OF THE STATE OF WASHINGTON
    LK OPERATING, LLC, a Washington           )
    limited liability company,                )
    )
    Plaintiff,       )
    )   NO. 88846-9
    v.                                        )
    )
    THE COLLECTION GROUP, LLC, a              )
    Washington limited liability company; and )
    BRIAN FAIR and SHIRLEY FAIR,              )   ENBANC
    husband and wife, and the marital         )
    community composed thereof,               )
    )
    Appellants.      )
    ____________________________)                 Filed   JUL 3 1 2014
    )
    BRIAN FAIR and SHIRLEY FAIR, and        )
    the marital community composed thereof; )
    and THE COLLECTION GROUP, LLC, a )
    Washington limited liability company,   )
    )
    Appellants,    )
    )
    v.                                      )
    )
    LESLIE ALAN POWERS and PATRICIA )
    POWERS, husband and wife, and KEITH )
    THERRIEN and MARSHA THERRIEN, )
    husband and wife,                       )
    )
    Respondents/Cross-Appellants.   )
    __________________________)
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    FAIRHURST, J.-In this case and its companion, LK Operating, LLC v.
    Collection Grp., LLC, No. 88132-4, we consider issues arising from a joint venture
    agreement regarding a debt collection business. The debt collection business
    operated according to the terms of the joint venture agreement, as originally
    proposed, from approximately winter 2005 through summer 2007, at which time the
    disagreements underlying the present litigation surfaced. In this opinion, we consider
    whether the trial court erred in applying the doctrine of equitable indemnification
    (also known as the "ABC Rule" 1) to hold that the legal malpractice plaintiffs here
    suffered no compensable damages as a matter of law and that summary judgment
    dismissal was appropriate.
    We adhere to established precedent. Where the only damages claimed by a
    legal malpractice plaintiff are attorney fees incurred in a separate litigation and the
    only legal basis on which plaintiff asserts those fees are compensable is the ABC
    Rule, then the defendant is entitled to summary judgment dismissal if the ABC Rule
    does not apply to the undisputed facts as a matter of law. That was the situation
    presented here. We decline the invitation to reexamine the ABC Rule in the legal
    malpractice context because that issue was not raised below. We affirm.
    1
    The parties primarily use the tenn "ABC Rule," so we use that term as well.
    2
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    I.     FACTUAL AND PROCEDURAL HISTORY2
    At all relevant times, Leslie Powers and Keith Therrien (hereinafter referred
    to as Powers) practiced law as Powers & Therrien PS (Law Firm). LK Operating
    (LKO), a limited liability company (LLC), was a Law Firm client at all relevant
    times. LKO is managed by Powers & Therrien Enterprises Inc. (P&T Enterprises).
    Leslie Powers and Keith Therrien are the officers ofP&T Enterprises.
    In early 2004, Brian Fair became a Law Firm client in his personal capacity.
    Several months later, Fair formed The Collection Group LLC (TCG) to run a debt
    collection business. In late 2004, Fair approached Powers about a plan to operate
    TCG as a joint venture. Fair proposed that each party would contribute 50 percent
    of the costs, Fair would provide administrative and management services, Powers
    would provide legal services, and each party would own 50 percent of TCG.
    Ultimately, Fair's joint venture proposal was accepted via performance of its
    terms-LKO contributed the costs, and Powers provided the legal services. This
    arrangement was not formalized in writing. The parties dispute whether TCG was
    aware that the costs and the legal services were being provided by two distinct
    entities.
    2
    We include only the factual and procedural history necessary to provide context for our
    resolution of the issue presented. For a more detailed recitation of the underlying factual and
    procedural history, please see the companion case, LK Operating, LLC v. Collection Grp., LLC,
    No. 88132-4 (Wash., argued Oct. 8, 2013).
    3
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    In April 2007, Fair proposed to Powers a formalized joint venture agreement
    modifying TCG's ownership structure from that originally proposed based on Fair's
    assessment of each party's contributions up to that time. Powers objected, asserting
    that the joint venture agreement provided for a 50/50 ownership and that P&T
    Enterprises, through its attorney, asserted that Powers did not have or claim any
    interest in TCG because LKO and TCG were the only parties to the joint venture
    agreement.
    In July 2007, LKO filed a complaint in Chelan County Superior Court, cause
    no. 07-2-00652-9, against Fair and TCG for declaratory relief regarding the
    allocation of ownership interests in TCG, breach of contract, and breach of fiduciary
    duty (the contract action). In early 2008, Fair and TCG filed a complaint in Chelan
    County . Superior Court, cause no. 08-2-00044-8, against Powers for legal
    malpractice (malpractice action). The trial court consolidated the contract and
    malpractice actions.
    All the parties moved for summary judgment in the consolidated case. The
    trial court held that Leslie Powers violated former RPC 1. 7 ( 1995) because the Law
    Firm simultaneously represented LKO and Fair without obtaining informed consent
    from either. 3 The trial court determined that rescission of the joint venture agreement
    3
    The trial court held there was a genuine issue of fact as to whether this violation could be
    imputed to Keith Therrien.
    4
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    was the appropriate remedy for this violation. This resolved the merits of the contract
    action, and the trial court then held a bench trial and issued a final judgment
    regarding the contract action damages. The trial court then took up the issues
    remaining in the malpractice action.
    Fair and TCG moved for partial summary judgment, arguing that Powers was
    liable for legal malpractice as a matter of law. Powers filed a cross motion for
    summary judgment, arguing that Fair and TCG could not show they had incurred
    any compensable damages warranting dismissal of the malpractice action as a matter
    oflaw. Fair and TCG argued they incurred attorney fees in the contract action, which
    were compensable damages in the malpractice action under the ABC Rule.
    The trial court held that Fair and TCG were not entitled to recover attorney
    fees expended in the contract action under the ABC Rule. Because Fair and TCG
    asserted no other damages and no other basis on which their contract action attorney
    fees were compensable, the trial court dismissed the malpractice action.
    Fair and TCG appealed. On the parties' joint motion, we granted the direct
    appeal in the malpractice action, which we heard as a companion case to the petition
    for review granted in the contract action. LK Operating, LLC v. Collection Grp.,
    LLC, 
    176 Wn.2d 1027
    , 
    301 P.3d 1048
     (2013). We affirm.
    5
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    II.     ISSUES 4
    1.     Did the trial court err in holding that the ABC Rule does not apply here?
    2.   Did the trial court err in dismissing the malpractice action on summary
    judgment?
    3.     Should this court craft a new or modified equitable rule governing
    compensability of attorney fees claimed as consequential damages in legal
    malpractice actions?
    III.    STANDARD OF REVIEW
    Appellate review of summary judgment determinations, including those made
    in the context of the ABC Rule, is de novo. Blueberry Place Homeowners Ass 'n v.
    Northward Homes, Inc., 
    126 Wn. App. 352
    ,359, 
    110 P.3d 1145
     (2005). We construe
    the facts in favor of Fair and TCG, the nonmoving parties. Schroeder v. Excelsior
    Mgmt. Grp., LLC, 
    177 Wn.2d 94
    , 104,
    297 P.3d 677
     (2013).
    4
    Powers assigns error on cross appeal to the trial court's holding that the joint venture
    agreement was entered in violation of former RPC 1. 7. Because it is unnecessary to our decision
    here but highly relevant to the issues raised on review in the companion case, former RPC 1.7 is
    addressed in the companion case only. Cf RAP 2.4(b)(1 ); Sprague v. Safe co Ins. Co. ofAm., 
    174 Wn.2d 524
    , 528, 
    276 P.3d 1270
     (2012).
    Powers also assigns error to the Court of Appeals' holding that the joint venture agreement
    was entered in violation of former RPC 1. 8( a)(2000). That determination was reached in the direct
    appeal in the contract action and not in any phase of the malpractice action. We therefore address
    former RPC 1.8(a) in the companion case only.
    Finally, Powers assigns error to the trial court's holding that it was undisputed there was
    an agreement between Powers and Fair. Powers does not make any argument in support of this
    assignment of error, and so we do not consider it. RAP 10.3(a)(6); In re Estate of Lint, 
    135 Wn.2d 518
    ,531-32,
    957 P.2d 755
     (1998).
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    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    IV.    ANALYSIS
    In the malpractice action, TCG and Fair alleged only one form of damages-
    attorney fees incurred in the contract action. TCG and Fair asserted only one basis
    on which those damages were compensable-the ABC Rule. The trial court held
    that the ABC Rule did not apply as a matter of law and dismissed the malpractice
    action because TCG and Fair could not establish a necessary element of their legal
    malpractice claim. We affirm.
    A.     The trial court did not err in holding TCG and Fair could not satisfy the
    necessary elements of the ABC Rule as a matter of law
    Washington State courts follow the "American Rule"-even as to a prevailing
    party, "attorney fees are not available as costs or damages absent a contract, statute,
    or recognized ground in equity." City of Seattle v. McCready, 
    131 Wn.2d 266
    , 275,
    
    931 P.2d 156
     (1997). The ABC Rule is an equitable rule under which attorney fees
    are compensable as consequential damages in certain situations. Blueberry Place,
    126 Wn. App. at 358. The ABC Rule has three elements: '"(1) a wrongful act or
    omission by A ... toward B ... ; (2) such act or omission exposes or involves B ..
    . in litigation with C ... ; and (3) C was not connected with the initial transaction or
    event ... , viz., the wrongful act or omission of A toward B."' Id. at 359 (quoting
    Manning v. Loidhamer, 
    13 Wn. App. 766
    , 769, 
    538 P.2d 136
     (1975)). All three
    elements must be satisfied for the ABC Rule to apply. 
    Id.
     Because Fair and TCG
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    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    cannot satisfy the third element, they cannot recover their contract action attorney
    fees under the ABC Rule.
    Analysis of the third element depends on "whether the action, for which
    attorney's fees are claimed as consequential damages, is brought or defended by
    third persons-that is, persons not privy to the contract, agreement or events through
    which the litigation arises." Armstrong Constr. Co. v. Thomson, 
    64 Wn.2d 191
    , 196,
    
    390 P.2d 976
     (1964). TCG and Fair offer several alternatives as to what, precisely,
    is the event from which the contract litigation arose-they assert the contract action
    arose from "not only [Powers'] concurrent representation of clients with differing
    interests, but going into business with an existing client without necessary
    safeguards"; and that the "attorneys purported to pass their 'business opportunity'
    with Mr. Fair offto LKO." Br. of Appellants at 18-19. Because we construe the facts
    in TCG's and Fair's favor, we presume that the contract action arose from one or
    more of those events. However, no matter how narrowly the ABC Rule is construed,
    and regardless of which underlying events one considers, LKO was privy to all of
    them.
    If the wrongful action was Powers providing concurrent representation to
    LKO and Fair in violation of former RPC 1.7, LKO was connected to that action as
    one of the clients wronged by it. If the wrongful action was Powers entering the joint
    venture agreement without complying with former RPC 1.8(a), LKO was connected
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    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    to that action as a participant in the joint venture agreement. If the wrongful action
    was Powers' passing off a business opportunity to LKO, the very statement of the
    wrongful act is sufficient to demonstrate LKO was connected to it. Indeed, Fair and
    TCG themselves state, "LKO's claimed ownership of TCG was at the heart of the
    attorneys' misconduct, and their family corporation LKO was inextricably linked to
    the attorneys' wrongful conduct toward their clients Fair and TCG." Reply Br. of
    Appellants at 17.
    To return to the terminology of the ABC Rule, where C (LKO) is "inextricably
    linked" with all the alleged wrongful actions by A (Powers) that involved B (Fair
    and TCG) in litigation with C (LKO), it cannot be the case that "C was not connected
    with ... the wrongful act or omission of A toward B." Blueberry Place, 126 Wn.
    App. at 359. The third element of the ABC Rule is thus not met as a matter of law.
    Because our holding regarding this third element is dispositive, we need not address
    the parties' arguments regarding the other elements of the ABC Rule.
    B.     The trial court did not err in dismissing the malpractice action on summary
    judgment
    TCG and Fair argue the trial court misapplied the ABC Rule because "[t]his
    equitable indemnity doctrine was never intended to be an absolute defense to an
    award of fees as consequential damages for professional malpractice. Yet that was
    how it was misused here." Reply Br. of Appellants at 2. That is simply incorrect.
    9
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    An "absolute defense," synonymous with a "real defense," is "good against
    any possible claimant." BLACK'S LAW DICTIONARY 484-85 (9th ed. 2009). However,
    where the ABC Rule does not apply as a matter of law, it operates as a defense
    against only a limited set of potential legal malpractice claimants-those whose sole
    alleged damages are attorney fees incurred in a separate litigation and whose only
    argument supporting compensability of those fees is the ABC Rule. This narrow set
    clearly does not encompass "any possible claimant"-for instance, those who seek
    damages other than attorney fees incurred in separate litigation. E.g., Matson v.
    Weidenkopf, 
    101 Wn. App. 472
    , 
    3 P.3d 805
     (2000) (damages in the form of amounts
    due under promissory notes that could have been collected but for the attorney's
    failure to act on the notes within the statute of limitations).
    Here, the trial court granted summary judgment because, even assummg
    Powers committed legal malpractice, TCG and Fair could not show compensable
    damages, a necessary element to sustain their malpractice action. Hizey v. Carpenter,
    
    119 Wn.2d 251
    , 260-61, 
    830 P.2d 646
     (1992). Where a plaintiff cannot meet a
    necessary element of the relevant cause of action, summary judgment for the
    defendant is appropriate. Mohr v. Grant, 
    153 Wn.2d 812
    , 822, 
    108 P.3d 768
     (2005). 5
    5We  note the ABC Rule also was not employed here as an affirmative defense-the lack
    of compensable damages "had the effect of destroying, not avoiding, [the malpractice] cause of
    action." Morse v. McGrady, 
    49 Wn.2d 505
    , 508,
    304 P.2d 691
     (1956).
    10
    LK Operating, LLC v. Collection Grp., LLC, No. 88846-9
    C.     We decline to modify the ABC Rule in this opinion
    For the first time on appeal, Fair and TCG argue we should craft a new or
    modified equitable rule for the recovery of attorney fees claimed as consequential
    damages in legal malpractice actions. We do not, at this time, specifically reject
    those arguments, but we will not consider them when raised for the first time on
    appeal. RAP 2.5(a).
    V.     CONCLUSION
    The trial court did not err in holding that the attorney fees Fair and TCG
    incurred in the contract action are not compensable under the ABC Rule. Because
    they claimed no other damages or basis for damages, Fair and TCG could not meet
    a necessary element to sustain their cause of action for legal malpractice. The trial
    court thus did not err in dismissing the malpractice action on summary judgment.
    Fair and TCG did not raise the question of whether we should modify the ABC Rule
    in the context of legal malpractice actions below, and so we decline to consider it.
    The trial court is affirmed.
    11
    LK Operating, LLC v. The Collection Grp., LLC, No. 88846-9
    WE CONCUR:
    ?X~.c.c;
    12