Columbia Asset Recovery Group, Llc v. Joseph R. Kelly, Et Ano. ( 2013 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
COLUMBIA ASSET RECOVERY
GROUP, LLC, a Washington DIVISION ONE
limited liability corporation,
Appellant, No. 69365-4-1
CO
v. PUBLISHED OPINION
JOSEPH R. KELLY, as the Successor
Personal Representative of THE
ESTATE OF WILLIAM D. PHILLIPS,
SR., deceased,
Respondent. FILED: November 4, 2013
Dwyer, J. — Columbia Asset Recovery Group, LLC (CARG) appeals from
the trial court's order dismissing its complaint for lack of personal jurisdiction.
Timothy Kennedy, CARG's sole member, was the guarantor of a one million
dollar Business Loan Agreement and Promissory Note executed by William
Phillips and Atlantic Frost Holdings, LLC (AFH). The Agreement contains
jurisdiction and venue provisions permitting the lender, Columbia State Bank, to
bring a collection action in King County. After Phillips died, neither his estate nor
AFH paid the balance of the Note. Accordingly, the lender demanded payment
from Kennedy. In response, Kennedy formed CARG and caused CARG to
No. 69365-4-1/2
purchase the lender's rights under the Agreement and Note, which the lender
assigned to CARG. CARG then filed suit in King County against the Estate of
Phillips (the Estate). However, the trial court dismissed CARG's complaint for
lack of personal jurisdiction. Because there is a genuine issue of material fact as
to whether CARG and the lender intended CARG's payment to constitute a
discharge of the Estate's payment obligation, the trial court erred by granting the
Estate's motion to dismiss. We reverse and remand for further proceedings
consistent with this opinion.
I
In June 2009, Phillips and AFH executed a Commercial Line of Credit
Agreement and Promissory Note (Note) in the principal amount of $1,000,000,
payable to Columbia State Bank (the Bank), and a Business Loan Agreement
(Agreement). Phillips and AFH were the primary obligors. However, Timothy
Kennedy personally guaranteed payment of the Note in the event that Phillips
and AFH failed to pay. The Note contains a provision providing for payment to
be made in Seattle. The Agreement includes a jurisdiction provision providing
that Phillips and AFH "agree to waive any objection to jurisdiction or venue on the
ground that [they] are not residents of [the Bank's] locality"—which was Seattle.
Phillips died in an airplane crash in 2010. Subsequently, the personal
representative of the Estate negotiated two extensions of the Note. The Estate
paid interest on the AFH loan through February 2011 but, by March 17, 2011, the
Estate informed the Bank that it could no longer pay the interest on the AFH loan
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pursuant to Maryland probate law.1 When the Agreement and Note became due
in April 2011, neither AFH nor the Estate paid.
Meanwhile, on October 22, 2010, the Bank demanded that Kennedy make
good on his guaranty.2 On April 13, 2011, Kennedy spoke with a representative
of the Bank regarding "options for enforcement of [the AFH Loan]." Kennedy
subsequently formed CARG, a Washington limited liability company. Kennedy's
counsel later told the Estate's counsel that "Mr. Kennedy formed [CARG] to
facilitate his satisfying the guaranty."
Kennedy filed a counterclaim for indemnity against the Estate in the
Delaware Court of Chancery on July 25, 2011. In his counterclaim, Kennedy
claimed that Phillips "is the primary obligor on the debt owed to Columbia Bank.
Kennedy, as guarantor, is entitled to be indemnified for any amounts he is
required to pay to Columbia Bank."
On August 4, 2011, the Bank and CARG entered into the Loan Purchase
and Assignment Agreement (LPA Agreement). In the LPA Agreement, the Bank
and CARG agreed to several provisions that the parties highlight in disputing
whether the Bank and CARG intended the LPA Agreement to operate as an
assignment rather than a discharge:
• "The Bank has made demand on Kennedy for payment of the amounts
1Maryland law bars an apparently insolvent estate from making a preferential payment to
one claimant over another, and the Estate informed the Bank that continuing to pay interest on
the loan would be viewed as preferential. See Md. Code Ann. § 8-105(b).
2The parties refer to Kennedy's obligation as both a "guarantee" and a "guaranty." For
purposes of this opinion, the difference in spelling does not affect the nature of Kennedy's
obligation.
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owing under the Loan pursuant to the Commercial Loan Guaranty.
Kennedy has instead proposed to purchase the Loan through a new entity
he has established for that purpose, [CARG]."
• "The purchase price will be funded by a loan from Bank to Kennedy, the
proceeds of which Kennedy will loan to [CARG]."
• "Subject to the terms and conditions of this Agreement, the Bank also
hereby agrees to assign to [CARG] all of the Bank's interests, rights and
obligations under the Cooperation Agreement
CARG then paid the Bank $1,026,071.94.
On February 3, 2012, Kennedy's counsel stated in a letter to the Estate's
counsel that Kennedy had been "forced to honor his personal guarantee" of the
obligation owed by Phillips and AFH. One week later, the Estate's counsel asked
Kennedy's counsel to confirm that the LPA Agreement "satisfied Mr. Timothy
Kennedy's personal guarantee." Kennedy's counsel provided a letterfrom the
Bank to Kennedy stating that "[f]rom the bank's perspective, your purchase of the
loan for full face value certainly satisfied all of your obligations to the Bank under
your personal guaranty, and we therefore view you to have honored your
guaranty in full." Additionally, Kennedy's counsel—during a hearing before the
Delaware Court of Chancery—stated that "Mr. Kennedy used [CARG] as the
vehicle to satisfy his personal guarantee." Finally, Kennedy submitted a
declaration to the United States District Court for the Western District of
Washington that stated, "Since the filing of the Complaint, I have been required
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to make good on my guarantee of that debt by Columbia State Bank."
On March 15, 2012, CARG brought suit to enforce the Agreement and
Note against the Estate in King County Superior Court. On June 8, 2012, the
Estate, pursuant to CR 12(b)(2), moved to dismiss the complaint for lack of
personal jurisdiction. In its motion, the Estate argued that Kennedy and CARG
were alter egos and that Kennedy had fulfilled his obligation as guarantor by
virtue of the Bank's assignment to CARG, which had thereby discharged the
Agreement and Note. It followed from this, the Estate contended, that the King
County jurisdiction and venue provisions were also discharged and could no
longer provide a contractual basis for exercising personal jurisdiction over the
Estate in Washington.
CARG opposed the Estate's motion to dismiss, contending that
assignment of the Note and Agreement did not constitute a discharge, especially
where the parties did not intend such a discharge to occur. CARG further
asserted that, if it was an alter ego of Kennedy, it would be subrogated to the
Bank's rights under the Agreement and Note. CARG also moved for summary
judgment in a separate motion. However, instead of ruling on CARG's motion for
summary judgment, the trial court granted the Estate's motion to dismiss for lack
of personal jurisdiction and dismissed CARG's complaint with prejudice. In
granting the Estate's motion to dismiss, the trial court made no findings of fact.
CARG subsequently filed a motion for reconsideration. Although the trial
court granted CARG's motion, it did so only insofar as it dismissed CARG's
complaint without prejudice, thereby allowing CARG to refile its complaint
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elsewhere. CARG appeals both the order granting the Estate's motion to dismiss
and the order granting CARG's motion for reconsideration to the extent that the
second order did not vacate the first order's dismissal of the complaint.
II
The Estate first contends that CARG's appeal is moot. This is so, the
Estate asserts, because CARG is currently litigating an identical claim in the
United States District Court for the District of Maryland. We disagree. "A case is
moot if a court can no longer provide effective relief." State v. Gentry, 125 Wash. 2d
570, 616, 888 P.2d 1105 (1995). We avoid considering moot cases in order "to
avoid the danger of an erroneous decision caused by the failure of parties, who
no longer have an existing interest in the outcome of a case, to zealously
advocate their position." Orwick v. Citv of Seattle. 103 Wash. 2d 249, 253, 692 P.2d
793 (1984). Here, notwithstanding CARG's pending action in federal district
court, effective relief can still be granted. The Estate points to no final judgment
or other ruling in the federal court that would preclude us from providing CARG
with such relief. Accordingly, this action is not moot.
Ill
The Estate next contends that the doctrine of judicial estoppel should
prevent us from considering CARG's appeal. The Estate reasons that because
CARG misrepresented to the federal court the purpose for its appeal in
Washington, it gained an advantage in the federal court litigation: specifically,
that the Estate's motion to stay proceedings in the federal court was denied.
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Even assuming the veracity of the Estate's claim, its remedy, if any, lies in
federal court.
"Judicial estoppel is an equitable doctrine that precludes a party from
gaining an advantage by asserting one position in a court proceeding and later
seeking an advantage by taking a clearly inconsistent position." Cunningham v.
Reliable Concrete Pumping. Inc., 126 Wash. App. 222, 224-25, 108 P.3d 147
(2005). Application of judicial estoppel centers around three factors:
"(1) whether a party's later position is clearly inconsistent with its
earlier position; (2) whether judicial acceptance of an inconsistent
position in a later proceeding would create the perception that
either the first or the second court was misled; and (3) whether the
party seeking to assert an inconsistent position would derive an
unfair advantage or impose an unfair detriment on the opposing
party if not estopped."
Miller v.Campbell. 164 Wash. 2d 529, 539, 192 P.3d 352 (2008) (internal quotation
marks omitted) (quoting Arkison v. Ethan Allen, Inc.. 160 Wash. 2d 535, 538-39, 160
P.3d13(2007)).
Here, it is for the federal court to determine whether CARG should be
judicially estopped from litigating in that court. The Estate contends that the
misrepresentation was made to the federal court and that the advantage gained
was in that litigation. However, the federal court's order denying the Estate's
motion to stay proceedings did not explain why the motion was denied. The
Estate now asks us to infer a causal relationship between CARG's argument
opposing the motion to stay and the court's ruling. Not only would this be
speculative, it would be inappropriate because the Estate's remedy is in federal
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court. Accordingly, judicial estoppel does not prevent us from considering
CARG's appeal.
IV
CARG asserts that its payment to the Bank in exchange for an assignment
of the Bank's rights against the Estate did not discharge the Estate's obligation
as principal obligor. This is so, CARG contends, because whether the debt
evidenced by the Note was discharged must be determined by the parties' intent.
We agree that the parties' intent is the proper standard. Moreover, because
CARG and the Estate dispute CARG's and the Bank's intent in assigning the
debt—a question of fact—dismissal was inappropriate.
"When the trial court considers matters outside the pleadings on a motion
to dismiss for lack of personal jurisdiction, we review the trial court's ruling under
the de novo standard of review for summary judgment." Freestone Capital
Partners LP v. MKA Real Estate Opportunity Fund I, LLC, 155 Wash. App. 643,
653, 230 P.3d 625 (2010). Summary judgment is appropriate where there are no
genuine issues of material fact and the moving party is entitled to judgment as a
matter of law. CR 56(c).
"Ordinarily, the intention of the parties determines whether a transfer of
money by a third person to a creditor constitutes a discharge or purchase of an
underlying debt." 60 Am.Jur.2d Payment § 5 (2013). Similarly, we look to the
parties' intent when determining whether an obligor's payment was intended to
discharge another obligor's payment obligation:
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"We are in accord with the trend of modern authority, which
tends to modify the strict common law rule by which joint contract
obligors were often released from the burden of their contract by an
inadvertent or ill advised release of one of their number. In
connection with such questions as this, the modern rule that the
intent of the parties, as expressed by their acts, and particularly by
their writings, should receive a greater measure of consideration in
determining contract rights, is clearly expressed in standard texts
and judicial decisions. This principle tends to accomplish just and
equitable results to a greater extent than did the strict rule of the
common law."
Seafirst Ctr. Ltd. P'ship v. Erickson. 127 Wash. 2d 355, 364, 898 P.2d 299 (1995)
(emphasis added) (quoting Johnson v. Stewart. 1 Wash. 2d 439, 453, 96 P.2d 473
(1939)). Determining what the parties to a contract intended is generally a
question of fact. Paradise Orchards Gen. P'ship v. Fearing. 122 Wash. App. 507,
517, 94 P.3d 372 (2004).
In dismissing CARG's claim based on a lack of personal jurisdiction, the
trial court would have had to conclude that the LPA Agreement discharged the
Estate's payment obligation and, with it, the jurisdiction and venue provisions in
the original Agreement and Note. However, for the trial court to conclude that the
underlying debt was discharged, rather than purchased, it would have had to
determine that the parties intended for it to be discharged, rather than purchased.
This is a disputed question of fact.
CARG points to the language in the LPA Agreement as well as the
testimony of the Bank's vice president, both of which indicate that CARG and the
Bank intended the LPA Agreement to operate as a purchase of the Bank's rights,
not as a discharge of the Estate's payment obligation. On the other hand, the
Estate points to different language in the LPA Agreement, as well as statements
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made by counsel for Kennedy to courts and opposing counsel, suggesting that
CARG and the Bank intended the LPA Agreement to satisfy Kennedy's guaranty,
which had the legal effect of discharging the Estate's payment obligation. The
absence of fact finding in the trial court's order to dismiss for lack of personal
jurisdiction does not mean that there were implicit findings made, as the Estate
suggests,3 and it does not mean that this was purely a legal question, as CARG
suggests. Rather, a question of fact was improperly decided as a matter of law.
Accordingly, dismissal was inappropriate.
Additionally, the Estate asserts that payment or discharge of a guaranty
constitutes performance and that the Bank is only entitled to one performance. It
follows from this, the Estate reasons, that the Bank had no rights to assign to
CARG once it received its one performance. It is true that a creditor is only
entitled to one performance. Revocable Living Trust of Strand v. Wel-Co Grp..
Inc.. 120 Wash. App. 828, 836, 86 P.3d 818 (2004). However, the Estate's
argument assumes that the Agreement constituted a discharge of Kennedy's
guaranty, not a purchase of the Bank's rights. As explained above, the parties'
intent is the controlling factor in determining whether the Agreement constituted a
discharge or a purchase. Because intent is a factual question that was not
resolved in the trial court, the Estate's "one performance" argument is contingent
upon the fact finder's determination of what the parties intended and should
3The Estate's argument regarding "implicit fact finding" is untenable. We apply the
summary judgment standard to the order herein. Neither implicit nor explicit fact-finding is
permitted on summary judgment. Summary judgment is only apposite when there are no genuine
issues of material fact. Here, there are genuine issues of material fact, rendering dismissal
improper.
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therefore be considered by the trial court only after the intent of the parties to the
LPA Agreement is determined.
V
The Estate next contends that it was proper for the trial court to pierce
CARG's corporate veil and that the summary judgment order can be upheld on
this basis. Veil piercing was appropriate, the Estate reasons, because Kennedy
disregarded CARG's corporate form and his disregard resulted in injustice. We
disagree. To the extent that the trial court based its dismissal of CARG's
complaint on piercing CARG's corporate veil, it erred by doing so in the absence
of the factual findings requisite to veil piercing. Accordingly, summary dismissal
on this basis was not warranted.
For a court to pierce the corporate veil, "two separate, essential factors
must be established." Dickens v. Alliance Analytical Labs.. LLC. 127 Wash. App.
433, 440, 111 P.3d 889 (2005). "'First, the corporate form must be intentionally
used to violate or evade a duty.'" Dickens. 127 Wash. App. at 440-41 (quoting
Meisel v. M & N Modern Hydraulic Press Co.. 97 Wash. 2d 403, 410, 645 P.2d 689
(1982)). "Second, the fact finder must establish that disregarding the corporate
veil is necessary and required to prevent an unjustified loss to the injured party."
Dickens, 127 Wash. App. at 441. Furthermore, a court may pierce the corporate
veil under an "alter ego" theory "when 'the corporate entity has been disregarded
by the principals themselves so that there is such a unity ofownership and
interest that the separateness of the corporation has ceased to exist.'" Grayson
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v. Nordic Constr. Co.. 92 Wash. 2d 548, 553, 599 P.2d 1271 (1979) (quoting Burns
v. Norwesco Marine. Inc.. 13 Wash. App. 414, 418, 535 P.2d 860 (1975)).
We need not address whether Kennedy intentionally used CARG to
violate or evade a duty; dismissal was not proper here because the trial court
could not find, as a matter of law, that disregarding the corporate veil was
necessary and required to prevent an unjustified loss to the injured party. At
most, a disputed question of fact on the question is presented. The Estate
asserts that Kennedy's use of CARG both to satisfy his guaranty and seek to
enforce the Note against the Estate would work an injustice. CARG, on the other
hand, points out that the Estate seeks an "equitable" right of disregard when, in
reality, the Estate defaulted on its loan obligations and is seeking to preserve its
subsequent windfall of $1,250,000—a windfall antithetical to equity. Before the
trial court may pierce the corporate veil, it must find that piercing is necessary to
prevent an unjustified loss to the Estate. CARG's assertion raises a clear factual
question as to the existence of any equitable entitlement on the part of the
Estate. The trial court could not resolve this disputed factual question utilizing
summary procedures and, therefore, dismissal was inappropriate.
VI
CARG correctly argues that, if, on remand, the trial court does pierce
CARG's corporate veil, CARG will necessarily possess Kennedy's subrogation
rights against the Estate. This is so because Kennedy and CARG will be treated
as one, allowing CARG—which is in greater need of equity than the Estate—to
pursue this equitable remedy against the Estate.
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Equitable subrogation is applied broadly "'to include every instance in
which one person, not acting voluntarily, pays a debt for which another is
primarily liable, and which in equity and good conscience should have been
discharged by the latter.'" Tri-Citv Constr. Council v. Westfall. 127 Wash. App. 669,
675, 112 P.3d 558 (2005) (internal quotation marks omitted) (quoting In re
Liquidation of Farmers & Merchs. State Bank of Nooksack. 175 Wash. 78, 85-86,
26 P.2d 631 (1933)). However, "there is no absolute right of equitable
subrogation"; instead, it is "based upon the circumstances of each case and the
demands of justice for an equitable result." Westfall, 127 Wash. App. at 674. Thus,
the party seeking equitable subrogation must be in greater need of equity than its
adversary. Livingston v. Shelton. 85 Wash. 2d 615, 619, 537 P.2d 774 (1975).
Once a party is subrogated, it"step[s] into the lender's shoes to the extent of the
current obligation." Columbia Cmtv. Bank v. Newman Park. LLC. 177Wn.2d
566, 574, 304 P.3d 472 (2013).
Here, Kennedy had an obligation, as the guarantor, to pay the debt upon
which the Estate was primarily liable. Moreover, Kennedy asserts the greater
need for equity because—as the result of his payment—the Estate has retained
a windfall exceeding one million dollars. Nevertheless, the Estate contends that
subrogation is inappropriate both because Kennedy is not a party to the case and
because subrogation is repugnant to the equity-based alter ego doctrine. The
Estate's contentions lack merit.
It is true that Kennedy is not a party to this case. However, if, on remand,
the trial court determines to pierce CARG's corporate veil under an alter ego
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theory, Kennedy and CARG must be treated as one in having answered for the
Estate's debt. Accordingly, CARG and Kennedy, as alter egos, would share an
identical subrogation right against the Estate. Thus, even though Kennedy is not
a named party to this action, as an incident of the alter ego finding, he and
CARG, which is a named party in this action, would jointly possess the right to
subrogation. Therefore, CARG, as the alter ego of Kennedy, may seek to
recover from the Estate under a subrogation theory.
The Estate is correct that piercing the corporate veil is an equitable
remedy imposed to rectify an abuse of the corporate privilege. From this,
however, the Estate wrongly reasons that subrogation against it is not available
because—as an equitable doctrine—subrogation may only be used to prevent
injustice, not perpetuate it. In making this argument, however, the Estate
disregards the fact that it has been unjustly enriched by over one million dollars
as the result of CARG's payment. Focusing narrowly on Kennedy's alleged
disregard of CARG's corporate form misses the larger injustice resulting from the
Estate's seven-figure windfall. Thus, in the event that the trial court does pierce
the corporate veil, it must determine whether the balance of equities is in CARG's
and Kennedy's favor. Accordingly, should the trial court pierce CARG's
corporate veil, CARG will still share the right to subrogation with its alter ego,
Kennedy. Accordingly, CARG would step into the shoes of the lender, the Bank,
allowing it to invoke the jurisdiction and venue provisions ofthe Note and the
Agreement.
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VII
CARG contends that because "performance of the obligations under the
Note and Agreement were due in Seattle WA. There was therefore, specific
jurisdiction for enforcement of the obligations in [King County] even in the
absence of the contractual venue and jurisdiction provisions." Appellant's
Opening Br. at 3-4. We need not consider this argument because CARG
provides no authority to support its contention. See e.g.. State v. Logan. 102
Wash. App. 907, 911, 10 P.3d 504 (2000). However, CARG is not barred from
presenting evidence and citing pertinent authority to support this contention on
remand.
Reversed and remanded.
We concur:
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