Julianna P. Noble, Resp. v. E. Lee Noble Iii & Edwin Noble, Jr., Apps. ( 2016 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
In the Matter of the Marriage of NO. 71206-3-1
JULIANNA P. NOBLE,
era
—tcr
Respondent,
DIVISION ONE
and i
119 Wash. 2d 438, 450, 832 P.2d 871 (1992). But we review de
novo the trial court's characterization of property as community or separate. In re
Marriage of Skarbek. 100 Wash. App. 444, 447, 997 P.2d 447 (2000). We review
questions of law and conclusions of law de novo. Sunnvside Valley Irrigation Dist. v.
Dickie. 149 Wash. 2d 873, 880, 73 P.3d 369 (2003).
Unchallenged findings of fact are treated as verities on appeal.6 In re Marriage of
Kim. 179 Wash. App. 232, 246, 317 P.3d 555 (2014). Appellate courts defer to the trial
court on issues of conflicting evidence and witness credibility. In re Marriage of Burrill.
113 Wash. App. 863, 868, 56 P.3d 993 (2002).
Lee and Ed seek reversal of the trial court's property division on several legal
grounds. They mainly argue trial court error in ruling on Ed's property interests,
corporate disregard, and community undercompensation. They also challenge the
court's attorney fees award to Julianna and dismissal of Ed's lawsuits.
Trial Court's Adjudication of Ed's Property Interests
Ed contends the trial court exceeded its limited authority in a marital dissolution
action to award Julianna property in which he claims an ownership interest.7 Ed also
argues the trial court "proceeded to strip" him of his interests in the remaining Tallman
6 Lee and Ed do not challenge the findings on insufficiency grounds.
7 Lee adopts the arguments made by Ed that the trial court erred in disregarding
the LLCs and divesting him of his interests by treating his assets as community property
and, "in particular awarding Dayton to Julianna." Br. of Lee Noble at 44.
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proceeds, the promissory notes, and his jointly owned properties. He claims the trial
court ignored the contemporaneous documentary tracing evidence, and misapplied
corporate disregard and undercompensation principles.
He acknowledges the consolidated lawsuits involving the promissory notes and
his remaining share of the Tallman sale proceeds were properly before the court. But
Ed's appearance was limited to the two civil lawsuits which the court consolidated with
the dissolution action.
At trial, Ed was half owner with Lee in these LLCs and properties:
Noble Homes/IMHC LLC (formed 1996)
Lot 5 Commodore Way (acquired in 1997), valued at $320,000.
9233 25th Avenue NW (acquired in 2002), valued at $125,000.
Merit Building LLC (formed 1998)
951 Market Street (acquired in 1998), valued at $400,000.
Tallman Building LLC (formed 1999)
Properties sold for $8.75 million.
$2,183 million proceeds held in trust.
Carstens Building LLC (formed 1998)
Leary Way property sold for $2.5 million.
Promissory note of $203,376 outstanding.
Dayton Building LLC (formed 2011)
8420 Dayton Avenue North (acquired in 2011), valued at $984,500.
A trial court's jurisdiction over dissolution actions is statutory. In re Marriage of
McKean, 110 Wn. App. 191,194, 38 P.3d 1053 (2002).
In spite of an often-repeated and accurate assertion that the superior court is a
constitutional court of general jurisdiction, [in family law court matters], as in
several other areas, the exercise of the court's jurisdiction has been held to be
restricted by legislative enactment. Thus, it has been held that the court has no
power to compel a liquidation of assets for the benefit of creditors as an incident
to a divorce decree, since the divorce act makes no provision for such an
exercise of jurisdiction. This would not seem properly treated as a question of
subject-matter jurisdiction. Rather, the inquiry should be whether all appropriate
parties are before the court.
14 Karl B. Tegland, Washington Practice: Civil Procedure § 3:7 (2d ed. 2009)
(footnotes omitted).
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In In re Marriage of Soriano. 44 Wash. App. 420, 722 P.2d 132 (1986), Seattle First
National Bank challenged the court's jurisdiction to determine its interest in a marital
dissolution action. We reaffirmed the well-settled rule that the trial court lacks
jurisdiction in a dissolution action to determine the rights of a third party in marital
property.
We abide by the longstanding rule that in a dissolution proceeding the
superior court has jurisdiction only over the parties to the action. It may
not adjudicate the rights of third parties who have an interest in any of the
property at issue.
Soriano. 44 Wash. App. at 420.
We explained this rationale based on Arneson v. Arneson. 38 Wash. 2d 99, 227
P.2d 1016 (1951), the seminal case on jurisdictional limits of courts sitting in marital
dissolution proceedings:
Arneson [ ] [held] that the jurisdiction and authority of courts sitting in
statutory proceedings is defined by the governing act. The court has only
those powers which may be inferred from a broad interpretation of the
legislation governing the proceeding. The only proper parties in a
dissolution proceeding are the spouses.
Thus, the court has practically unlimited power over the property in a
dissolution proceeding but only as between the parties. The dissolution
court has no power over the property as to the rights of third parties
claiming an interest in the property.
Soriano, 44 Wash. App. at 421-22.
In addition to its jurisdictional challenge, the Bank also challenged the trial court's
order requiring it to turn over the husband's stocks to the wife's trustee.8 The Bank
claimed a prior perfected security interest in the shares. In a show cause hearing, the
8 In the property division, the trial court granted the wife a lien against the
husband's separate and principal asset—shares of stock.
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trial court determined the rights of the Bank in the securities. We vacated the trial
court's order and dismissed the Bank from any further proceedings in the dissolution
action.
In McKean. Division Two of this court held that the trial court lacked in personam
jurisdiction to order the trust property transferred to a corporate trustee. Nonparty
trustees held legal title to the property. In dividing the couple's property, the court
identified "trust assets owned for the benefit of the [children]." McKean. 110 Wash. App.
at 194. To protect these assets from the couples' manipulation of this property, the
court ordered transfer of these assets to a corporate trustee. Citing the holdings in
Soriano and Arneson. Division Two vacated the transfer order, explaining that the trial
court lacked "authority to adjudicate the rights of parties not before the court, even if
they have an interest in the property at issue." McKean. 110 Wash. App. at 195.
Julianna argues, "RCW 26.09.080 requires a dissolution court to ascertain the
extent of any claimed third-party interests. Here the trial court exercised both its family
law and general jurisdiction to resolve, in a single consolidated trial proceeding, all of
the issues presented by Ed's lawsuits as well as the Lee-Julianna dissolution." Br. of
Resp't at 44.
We are not persuaded by these assertions. First, as noted above, nothing in
RCW 26.09.080's plain language authorizes the trial court to adjudicate the property
interest of a third party such as Ed. In Soriano, we flatly rejected Julianna's statutory
argument, stating, "[w]e find nothing in [chapter] 26.09 RCW, no matter how broadly
construed, which gives a trial court the power to determine the rights of the Bank ..."
Soriano. 44 Wash. App. at 422.
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Second, Julianna's family law general jurisdiction argument confuses subject
matter jurisdiction and in personam jurisdiction. There is no dispute that Ed was never
made a party to the dissolution proceeding in order to resolve any interest in the
property he owned equally with Lee. Like the nonparty trustees in McKean. Ed was not
a party to the dissolution proceeding.9 In re Marriage of Lutz. 74 Wash. App. 356, 873,
P.2d 566 (1994) (sister of husband joined as a party in marital dissolution proceeding to
determine and quiet title to disputed property). As Ed acknowledges, the court's
consolidation of his two lawsuits with the dissolution action meant the limited issues
over his remaining share of Tallman proceeds and validity of the promissory notes were
properly before the trial court for resolution.10
Julianna also argues that Ed's interests were not adjudicated because the court
found "he possessed no interest." This argument is nonsensical and unsupported by
the record. For example, Ed and Lee each owned half interests in Commodore Way,
Merit Building, and 9233 25th Avenue West. The trial court acknowledged Ed's interest
in these properties when it awarded Lee a half interest in these properties. Ed also
owned half interest in the Tallman, Carstens, and Dayton LLCs. The court ruled Ed
9 The findings of fact and conclusions of law at issue here show three individual
cause numbers in the caption. Two cause numbers relate to the consolidation of Ed's
two lawsuits (18-2-05778-6 and 13-2-17219-4). The caption also names Ed as the
plaintiff in his consolidated cases and Julianna and Lee as the only two named parties
in their dissolution action (11-3-08086-6). In other words, Ed is not a party for purposes
of the dissolution action. The record shows no one sought to join Ed as a party in the
dissolution action. Indeed, the trial court's July 31, 2013 order granted Julianna's
motion to intervene and join as a party in Ed's lawsuits. But there was no
corresponding motion brought to join Ed in the dissolution action. We need not resolve
the question of whether an attempt to join Ed as a necessary party in the dissolution
action violates Soriano.
10 Despite intervening in Ed's lawsuit, Julianna filed no answer or sought relief
against Ed.
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owned no interest in these properties based on a corporate disregard theory discussed
below. As to Ed's interest in the Dayton property, the court outright awarded it to
Julianna.
Nor is Julianna's assertions about Ed's participation in the trial as a witness
persuasive. Julianna cites no controlling authority that Ed's limited participation at trial
to prosecute his two lawsuits and his trial testimony subjects him to the superior court's
limited statutory jurisdiction in the dissolution proceeding.
Julianna relies on Hackler v. Hackler. 37 Wash. App. 791, 683 P.2d 241 (1984). At
the dissolution trial, the husband's father testified about ownership of the couple's
home, but failed to disclose a quitclaim deed executed by the couple years earlier. The
court awarded the property to the wife. Two years later, the father recorded the
quitclaim deed and filed suit to quiet title. The court held he was collaterally estopped
from asserting ownership, "[o]ne who was a witness in an action, fully acquainted with
its character and object and interested in its result, is estopped by the judgment as fully
as if he had been a party." Hackler. 37 Wash. App. at 795. Hackler is inapposite. The
present case implicates no collateral estoppel principle.
Julianna relies on In re Marriage of Wallace. 111 Wash. App. 697, 45 P.3d 1131
(2002). The husband quitclaimed his interest in real property to his father during the
dissolution action. Division Two of this court affirmed the property award to the wife. It
noted the trial court's acknowledged lack of authority to set aside the conveyance and
the trial court's comment indicating the wife's recourse was a separate action for
fraudulent conveyance to realize on her award.
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Unlike in Wallace, the trial court here determined Ed's interest in properties he
owned jointly with Lee, including the award of Dayton to Julianna. To give effect to its
property ruling, the trial court ordered the parties to "execute any and all documents
necessary to effectuate this decree." CP at 115-16. The court further ordered that
Julianna receive "all right, title, and interest in and to the real properties awarded" to her
using quitclaim deeds. CP at 115-16. These orders leave no doubt the trial court
improperly adjudicated Ed's property interests. The trial court lacked authority over Ed's
property rights in the dissolution proceedings. It was arguably authorized to resolve
questions involving the validity of the promissory notes and the amount of remaining
Tallman sale proceeds owed to Ed via the consolidated lawsuits. But the trial court
erred when it exceeded its limited authority by ruling on Ed's shared property rights.
Corporate Disregard
The trial court compounded its third party adjudication error by relying on an
untenable legal theory—corporate disregard—to sweep aside all the LLCs whether
owned jointly by Ed and Lee or solely by Lee. The trial court found "that all of the LLCs
... shall be disregarded as independent entities ... due to a lack of documentation
sufficient to define the LLCs and the disregard of LLC structures in their long term
course of conduct." CP at 311. The trial court also found that such a finding "means
that the operating agreements of all the LLCs are hereby rendered invalid for the
purposes ..." of this case. CP at 312. As discussed above, the trial court lacked
authority to rule on Ed's property rights. Once it rendered the agreements inoperative,
the trial court "decid[ed] on equitable grounds what, if anything, Ed Noble is due from
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the remaining Tallman sale proceeds or promissory notes."11 CP at 312. As to the
Dayton property, the trial court ruled that Lee acquired this property alone. This ruling
left Ed with no property interest in Dayton. The trial court lacked authority to divest Ed
of his property interests under the doctrine of corporate disregard. Soriano.
44 Wash. App. 420.
Ed and Lee also argue that Julianna shows no exceptional grounds to justify the
court's disregard of the LLCs to reach Ed and Lee's interest in properties established
before and after the parties married.
The court entered the following findings to support its corporate disregard ruling:
The lack of documentation to show what, if any, contributions Ed Noble
made to any of the LLC's; the failure to maintain capital accounts or
balance sheets for those LLC's; the gross disparity in overall equity
between Ed and Lee Noble in the unified account; Ed Noble's admitted
lack of involvement in labor, management and finance; the commingling of
all LLC and non-LLC accounts, whether jointly owned or not; and Lee and
Ed Noble's demonstrated practice of misrepresenting ownership of assets
to the banks, to the IRS, and to the court, create a serious question
concerning the legitimacy of the LLC's and Ed Noble's interest in them.
The court finds that all of the LLC's in this case, whether owned jointly by
Ed and Lee Noble or solely by Lee Noble, shall be disregarded as
independent entities for purposes of the cases herein due to the lack of
documentation sufficient to define the LLCs and the disregard of the LLC
structures in their long term course of conduct.
Lee Noble treated the LLC's as his alter ego. He commingled his private
finances with those of the LLC's and the LLC's with each other, whether
owned individually or in purported partnership with his father. He failed to
follow LLC formalities as required by the operating agreements and the
Washington State Limited Liability Company Act. He failed to keep a
written record of members' capital accounts and he distributed funds to his
father without regard to capital accounts and without regard to creditor
11 Ed argues, "By disregarding the LLCs, the dissolution court in effect eliminated
Ed's interest in the properties they held, wrongly depriving Ed of his right to enforce the
operating agreements, executed years before Lee's marriage to Julianna, under which
he could pursue his share of the properties and proceeds." Br. of Ed Noble at 33-34.
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claims of the marital community against the LLC's for labor and equity
contributions. The LLC's were inadequately capitalized due to the
complete lack of capital accounting, leaving potential creditors
unprotected. Assets and liabilities of the LLC's were commingled with
each other and with private assets and liabilities to the point it is
impossible to sort out how much money was transferred from one LLC to
support the expenses of another LLC. Mortgage loans were cross-
collateralized with no records kept of loans between LLC's. Mortgage
interest deductions were reported in the tax returns of various LLC's
regardless of which LLC asset actually secured the property (Exhibit
1006). Personal expenditures were made from LLC funds; for example,
Ed Noble's 2012 remodeling costs at his new home were expensed
against Pullington, LLC—an entity solely owned by Lee Noble. Lee's
bookkeeper, Sandra Maluy, testified this was done for the sake of
convenience.
The court finds Lee Noble took advantage of the commingled accounting
and lack of balance sheets to make unsupported representations
regarding Tallman Building, LLC and Cartsens Building, LLC distributions.
Lee Noble, as the managing member of Tallman Building, LLC, failed to
put up defenses to Ed Noble's lawsuit against the LLC, even though his
father's complaint relied on an oral agreement between the two of them
that was prohibited by the LLC's operating agreement. There were
defenses available to Ed Noble's lawsuit based on the Tallman Building
LLC Operating Agreement and the Washington LLC Act that Lee Noble
ignores. The Operating Agreement states that it is the sole source of
agreement between the members and it can only be amended by a written
instrument. The Operating Agreement allows distributions to members
"from excess" funds and in accordance with capital account balances.
The LLC is not yet winding up and creditors (the marital community) have
not yet been paid, so Ed Noble has no standing to sue the LLC.
The evidence at trial has established that there is a lack of foundation for
recognizing the LLC's, especially since Ed and Lee Noble failed to honor
their own operating Agreements or abide by Washington's LLC Act.
The court's finding that all of the LLC's in this case shall be disregarded
means that the Operating Agreements of all the LLC's are hereby
rendered invalid for the purposes of the cases herein. With regard to Ed
and Lee Noble's partnership, the court is required to decide on equitable
grounds what, if anything, Ed Noble is due from the remaining Tallman
sale proceeds or promissory notes.
CP at 311-12.
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Julianna bears the burden of establishing that the corporate form was used to
violate or evade a duty and that the corporate veil must be disregarded in order to
prevent loss to an innocent party. Chadwick Farms Owners Ass'n v. FHC LLC. 166
Wash. 2d 178, 200, 207 P.3d 1251 (2009).
"In general, a corporation is considered a separate entity, even if it is owned by a
single shareholder." Dickens v. Alliance Analytical Labs.. LLC. 127 Wash. App. 433, 440,
111 P.3d 889 (2005). Notwithstanding this, the equitable remedy of "corporate
disregard," though "not a freestanding claim for relief," may allow a court to reach the
principals of a corporation and hold them personally responsible for abuses of the
corporate privilege. Landstar Inwav. Inc. v. Samrow. 181 Wn. App. 109,125, 325 P.3d
327 (2014) (citing Truckweld Eguip. Co. v. Olson. 26 Wash. App. 638, 643, 618 P.2d 1017
(1980)). It is well established that the purpose of the corporate form is to limit
shareholder liability. Meisel v. M & N Modern Hydraulic Press Co.. 97 Wash. 2d 403, 411,
645 P.2d 689 (1982).
Only in exceptional circumstances will the corporate entity be disregarded when
its recognition would aid in perpetrating a fraud or result in a manifest injustice.
Truckweld. 26 Wash. App. at 644.
"Under RCW 25.15.060 a member may also be liable under the theory of piercing
the veil of a limited liability company if respecting the limited liability company form
would work injustice, in the same way that an individual may be personally liable under
the theory of piercing the corporate veil." Chadwick Farms. 166 Wash. 2d at 200.
"First, the corporate form must be intentionally used to violate or evade a duty."
Meisel. 97 Wash. 2d at 410. "Second, the fact finder must establish that disregarding the
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corporate veil is necessary and required to prevent an unjustified loss to the injured
party." Dickens. 127 Wash. App. at 441.
As to the first factor, "the court must find an abuse of the corporate form."
Meisel. 97 Wash. 2d at 410. Courts most commonly find an abuse where there has been
fraud, misrepresentation, or some kind of manipulation of the corporation to the
stockholder's benefit and the creditor's detriment. Meisel. 97 Wash. 2d at 410. But this
showing is not enough. "[T]he law requires a showing of both disregard of the corporate
form and that the disregard was done to avoid a duty owed to another." Rooerson Hiller
Corp. v. Port of Port Angeles. 96 Wash. App. 918, 926, 982 P.2d 131 (1999). "If duty were
to arise from abuse of the corporate form alone, the second part of the first [factor], 'to
avoid a duty owed,' would be redundant." Rooerson Hiller. 96 Wash. App. at 926. If that
were the case, then duty would always arise by abuses of the corporate form, "such as
commingling of the corporate interests." Rooerson Hiller. 96 Wash. App. at 926.
Corporate misconduct will not itself justify a disregard of the corporate entity. Morgan v.
Burks. 93 Wash. 2d 580, 587, 611 P.2d 751 (1980); Truckweld. 26 Wash. App. at 644-45.
As to the second factor, the "wrongful corporate activities must actually harm the
party seeking relief so that disregard is necessary." Meisel. 97 Wash. 2d at 410. The
harm cannot be accidental. "Intentional misconduct must be the cause of the harm that
is avoided by disregard." Meisel. 97 Wash. 2d at 410. This is a proximate cause
requirement. Morgan. 93 Wash. 2d at 587. But "[t]he absence of an adequate remedy
alone does not establish corporate misconduct." Meisel, 97 Wash. 2d at 411. If this were
so, the purpose of the corporate form—"to limit liability"—would be defeated. Meisel, 97
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Wn.2d at 411. "Separate corporate entities should not be disregarded solely because
one cannot meet its obligations." Meisel. 97 Wash. 2d at 411.
Washington recognizes the "alter ego" theory of corporate disregard. Under this
theory, a court may disregard the corporate form "when 'the corporate entity has been
disregarded by the principals themselves so that there is such a unity of ownership and
interest that the separateness of the corporation has ceased to exist.'" Columbia Asset
Recovery Group. LLC v. Kelly. 177 Wash. App. 475, 486, 312 P.3d 687 (2013). "[T]here
must be such a commingling of property rights or interests as to render it apparent that
they are intended to function as one, and, further, to regard them as separate would aid
the consummation of a fraud or wrong upon others." Norhawk Invs.. Inc. v. Subway
Sandwich Shops. Inc.. 61 Wash. App. 395, 401, 811 P.2d 221 (1991) (alteration in
original). The Supreme Court has also considered whether "corporate records or
formalities" were kept and whether there was any suggestion of "an overt intention by
[the private person] to disregard the corporate entity." Gravson v. Nordic Constr. Co.
Inc.. 92 Wash. 2d 548, 553, 599 P.2d 1271 (1979). Nevertheless, "informality in the
operation of a closely held corporation [will not] lead to a disregard of the corporate
entity if the informality neither prejudices nor misleads the plaintiff." Roderick Timber
Co. v. Willapa Harbor Cedar Prods.. Inc.. 29 Wn. App. 311,315, 627 P.2d 1352 (1981).
This court reviews the facts underlying the corporate disregard for substantial
evidence. Rooerson Hiller Corp.. 96 Wash. App. at 924. But we review de novo the legal
conclusions drawn to support corporate disregard. Rooerson Hiller Corp.. 96 Wash. App.
at 924.
Dominion and control of the corporation by the sole or principal
shareholder, who is entitled to all of the corporation's profits, does not
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alone make the shareholder personally liable. Since alter ego
corporations are not of themselves illegal, the fact that an individual is the
alter ego of a corporation is insufficient to state a claim against an
individual.
1 William Meade Fletcher & Carol A. Jones, Fletcher Cyclopedia of the Law of
Corporations § 41.10, at 142-43 (2006) (footnotes omitted).
Ed and Lee contend the trial court disregarded the LLCs based on alleged failure
to observe corporate formalities and lax accounting practices contrary to the LLC
operating agreements and the Washington State Limited Liability Act, Chapter 25.15
RCW.12
Ed argues no "duty" existed to maintain capital accounts or balance sheets. Br.
of Ed Noble at 36. He points to the operating agreements which all contain a similar
provision that excuses the LLCs from any obligation to adhere to "formalities or
requirements": "No member shall be liable for company liabilities. The failure of the
company to observe any formalities or requirements relating to the exercise of its
powers or management of its business or affairs under this agreement shall not be
grounds for imposing personal liability on the members or manager for company
liabilities." See, e.g.. Ex. 310. The parties' experts also agreed it is not unusual for
family-owned companies to observe fewer formalities in corporate record keeping,
including use of a "centralized cash management system." RP (Oct. 18, 2013) at 1923-
24.
Nothing in this record shows that lax accounting practices and informality in the
operation of this father-son business either prejudiced or misled Julianna. Roderick
12 The LLC Act was substantially amended in January 2016 after all the LLCs in
this case were formed.
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Timber Co., 29 Wash. App. at 315. The lack of a critical finding on this issue underscores
this point. The record undisputedly shows these informal business practices existed for
years before Julianna married Ed. And many of the LLC operating agreements predate
the marriage. Julianna never presented evidence and the court never found that LLC
lax accounting practices and operating informalities prejudiced, misled, or actually
harmed her. The absence of evidence and related finding on this essential element
renders the court's corporate disregard ruling erroneous. Nor did Julianna demonstrate
and the court never found that Ed and Lee intentionally abused the corporate form
through lax accounting practices and operating informalities for the purpose to harm
Julianna.
The record undisputedly shows that the various abuses of the LLC form alleged
by Julianna were going on long before the marriage. For instance, the record shows lax
record keeping and informal accounting practices going back to the mid 1990's when
the first LLC was formed. The LLCs never maintained regular capital accounts or
individual balance sheets. We fail to see how Julianna's position in the divorce would
be different if the LLC operation meticulously documented its transactions. Truckweld.
26 Wash. App. at 644-45 ("The informality with which Aztec may have been operated
neither prejudiced nor misled Truckweld ... we cannot see how Truckweld's position
would be different had Aztec meticulously documented its corporate actions....
Similarly, Truckweld's allegation that Aztec was inadequately capitalized fails to
convince us that Olson abused the corporate entity.").
Other alleged misdeeds relied on by the trial court also predate the marriage.
For instance, the court found that Lee and Ed misrepresented their interest in various
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properties three times beginning in 1997. The court found Lee and Ed collaborated to
misrepresent Lee's ownership interest in financial statements submitted in 2003 to
Shoreline Bank. The court found the pair made "significant" changes to their financial
statements in 2004. Events that predated or occurred near the marriage date do not
establish that alleged misdeeds by Ed and Lee were done with intent and actually
caused harm to Julianna.
Julianna does not dispute that corporate disregard is an exceptional remedy. It
applies infrequently when the principles of fraudulent conveyance law could not apply.
See Robert Charles Clark, The Duties of the Corporate Debtor to Its Creditors. 90 Harv.
L. Rev. 505 (1977). Wrongful corporate activities must actually harm the party who
seeks relief and intentional misconduct must be the cause of the harm. Meisel. 97
Wash. 2d at 410. These essential factors to disregard the LLC forms are absent here.
Julianna's corporate disregard claim fails as a matter of law.
Even if disregard was proper, Julianna points to no authority supporting the
court's ruling invalidating all of the LLC operating agreements (including agreements
predating the marriage) under its corporate disregard theory. DeHeer v. Seattle Post-
Intelligencer, 60 Wash. 2d 122, 126, 372 P.2d 193 (1962).
The court also disregarded the LLC forms where no "exceptional circumstances"
existed to justify disregard. Nothing about this case was exceptional for purposes of the
corporate disregard doctrine. It is well settled that all property and liabilities whether
separate or community are properly before the dissolution court. Except for Ed's
alleged property interests noted above, Lee's separate property was properly before the
court and subject to the trial court's broad discretion to make a fair and equitable
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property distribution. "Under appropriate circumstances [the trial court] need not award
separate property to its owner." In re Marriage of Larson and Calhoun. 178 Wash. App.
133, 138, 313 P.3d 1228 (2013).
The trial court's broad discretion, in general, to make a fair and equitable
property division permitted it to make a just property award without invoking the
extraordinary remedy of corporate disregard reserved only for exceptional cases of
misconduct. The court erred when it used the exceptional remedy of corporate
disregard to reach LLC-owned properties and invalidated the operating agreements
here.
A trial court abuses its discretion if its property division is manifestly
unreasonable or based on untenable grounds or untenable reasons. A court's decision
is manifestly unreasonable if it is outside the range of acceptable choices, given the
facts and the applicable legal standard; it is based on untenable grounds if the factual
findings are unsupported by the record; it is based on untenable reasons if it is based
on an incorrect standard or the facts do not meet the requirements of the correct
standard. Larson. 178 Wash. App. at 138.
The trial court manifestly abused its discretion here when it disregarded the LLC
forms and invalidated the operating agreements.13
Marital Community Undercompensation
13 The trial court disregarded the LLC operating agreements and concluded that
Ed had no interest in the LLC-owned properties. But it recognized Lee had only a 50
percent interest in Commodore Way and 951 Market Street. This apparent recognition
of Ed's interests is difficult to reconcile with the court's legal rulings.
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Lee owned real properties, alone or with Ed, prior to Lee's marriage in 2004. Ed
and Lee contend they sold some of these properties during the marriage and used the
proceeds to purchase other properties. They argue the trial court erred when it
eliminated Ed's half-interest in the Tallman proceeds based on a community
undercompensation theory. The trial court ruled that Ed was owed "nothing more" from
the Tallman proceeds on "equitable" grounds, because:
[H]e has not compensated the marital community for the unknown amount
of capital it has contributed to sustain the properties in which Ed held an
interest and he has not compensated the community for the years' worth
of labor spent working on the properties.
CPat314.
Lee argues the trial court wrongly concluded:
The basis for the trial court's decision that every asset acquired by Lee (and his
father Ed) during the marriage was community property was its determination
that "not less than $1.1 million of undercompensated community funds were
retained and commingled in the pooled business accounts [and] Lee Noble's Key
Bank account."
CPat319.
Ed and Lee also argue the trial court ignored substantial evidence tracing the
funds used to purchase the properties to premarital assets owned by Ed and Lee.14
14 Julianna criticizes Lee's observation that the trial court signed Julianna's
proposed 25-page findings and conclusions "without comment or change." Br. of Lee
Noble at 45. The trial court gave no oral ruling after this complex 13-day bench trial
over a marital estate roughly valued at $13 million. No trial court oral ruling and no trial
court edits to the proposed findings and conclusions, in this context, is unusual. We
made a similar comment in Berrvman v. Metcalf. 177 Wash. App. 644, 657, 312 P.3d 745
(2013), "[t]he trial court signed Berryman's proposed findings of fact and conclusions of
law without making any changes except to fill in the blank for the multiplier of 2.0."
We also note that Lee and Julianna each proposed findings and conclusions
without the benefit and guidance of an oral ruling from the trial judge. In other words,
the parties each submitted findings and conclusions without any knowledge of how the
trial court intended to resolve the property division and other issues.
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They explain that clear and convincing tracing evidence shows the disputed postmarital
properties were all acquired with Ed and Lee's premarital separate properties. The
disputed properties are thus presumed separate property. "Undercompensation of the
community could not change the character of separate property." Lee's Reply at 2.
The trial court here ruled that these assets traced to separate property were
community because the community was undercompensated in the amount of $1.1
million for uncompensated labor performed by Lee and Julianna "on the real estate
business." CP at 318. It also ruled that "[a]ll of the uncompensated benefit of the
community labor was retained by the LLCs and by Lee Noble in his business/personal
KeyBank account." CP at 319. By retaining the value of the community labor in the
accounts, which funded the different mortgage payments, the separate properties were
all converted to community property:
All mortgages for all the properties were paid out of the commingled
account throughout the marriage. To the extent that the properties or
LLCs contain a separate interest of Lee Noble's the court finds ownership
of these properties has been converted to community property.
CP at 319-20.
In a dissolution proceeding, before dividing the property the trial court must
consider all relevant factors, including but not limited to:
(1) The nature and extent of the community property;
(2) The nature and extent of the separate property;
(3) The duration of the marriage or domestic partnership; and
(4) The economic circumstances of each spouse or domestic partner at
the time the division of property is to become effective, including the
desirability of awarding the family home or the right to live therein for
reasonable periods to a spouse or domestic partner with whom the
children reside the majority of the time.
RCW 26.09.080.
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The court must have in mind the correct character and status of the property
before any theory of division is ordered. Brewer v. Brewer. 137 Wash. 2d 756, 766, 976
P.2d 102 (1999). Distribution of property by the trial court should be disturbed only if
there is a manifest abuse of discretion. Brewer. 137 Wash. 2d at 769. But the
characterization of property as community or separate property is a mixed question of
law and fact. In re Marriage of Skarbek. 100 Wash. App. 444, 447, 997 P.2d 447 (2000).
"The time of acquisition, the method of acquisition, and the intent of the donor, for
example, are questions for the trier of fact." In re Marriage of Kile. 186 Wash. App. 864,
876, 347 P.3d 894 (2015). The ultimate characterization of property as community or
separate is a question of law that this court reviews de novo. Kile. 186 Wash. App. at 876.
The character of property as separate or community property is determined at its
acquisition date. In re Estate of Borghi. 167 Wash. 2d 480, 484, 219 P.3d 932 (2009).
"Separate property will remain separate property through changes and transitions, if the
separate property remains traceable and identifiable..." In re Marriage of Chumblev.
150 Wash. 2d 1, 5, 74 P.3d 129 (2003).
An asset is separate property if acquired before marriage, during marriage by gift
or inheritance, or during marriage by the traceable proceeds of separate property.
RCW 26.16.010; In re Marriage of White. 105 Wash. App. 545, 550, 20 P.3d 481 (2001).
Property acquired during marriage is generally presumed to be community property,
and the party asserting otherwise has the burden of proving it was acquired using
separate funds by clear and convincing evidence. RCW 26.16.030; Skarbek. 100 Wn.
App. at 451. This requires the proponent of the separate property to trace the funds
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used to acquire the property with some degree of particularity. Berol v. Berol. 37 Wash. 2d
380, 381-82, 223 P.2d 1055 (1950).
"Once the separate character of property is established, a presumption arises
that it remained separate property in the absence of sufficient evidence to show an
intent to transmute the property from separate to community property." Borghi. 167
Wash. 2d at 484. One way of establishing this is where "the property becomes so
commingled that it is impossible to distinguish or apportion it, then the entire amount
becomes community property." Chumblev. 150 Wash. 2d at 5-6. If the party succeeds in
doing this, all the funds or property into which the funds were invested belong to the
community. In re Bing's Estate. 5 Wash. 2d 446, 456-57, 105 P.2d 689 (1940).
"[L]abor performed during a marital or quasi-marital relationship has a community
character from its inception. In our community property system, there is no basis for
allocating one party's labor to a separate property account." Lindemann v. Lindemann.
92 Wash. App. 64, 73, 960 P.2d 966 (1998).
The record shows the trial court never addressed the substantial tracing
evidence presented at trial.15 The trial court entered a few general credibility findings.
But it entered no findings (and made no oral ruling) to resolve the tracing issue. The
trial court, instead, characterized these disputed postmarital assets as community
property based on alleged community undercompensation. This issue raises no
question about the sufficiency of the findings on tracing. We review the trial court's
property characterization de novo as a question of law. "[T]he 'finding' that the funds
15 The record shows almost 9 out of 13 trial days on tracing-related evidence and
voluminous tracing exhibits used or admitted.
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were community property is not a finding of fact, it is a conclusion of law." Skarbek. 100
Wash. App. at 447.
Under CR 52 the court must enter findings on the ultimate facts and relevant
issues.16 Proper characterization of real property here as separate or community via
tracing is a critical and material issue ignored by the trial court.
The record also shows most of the tracing evidence was not disputed at trial. For
example, Julianna's CPA expert witness agreed that Lee's CPA expert witness,
"correctly followed the cash to the acquisition of every parcel of real estate during the
marriage, with your two exceptions ..." RP (Oct. 7, 2013) at 812-15.
[SKONE]: If you immediately turn to page eight, [Lee's expert report] starts
with the tracing of the Tallman funds and goes on to trace all the other
acquisitions during marriage, correct?
[BEATON]: Yes, it does.
[SKONE]: Okay. And you told me before that you had two disagreements
with all of his tracing, all the transactions regarding where the money
came from to buy all these properties, and they were two in number, right?
[BEATON]: I did.
[SKONE]: So that you agree that [Hawes] correctly followed the cash to
the acquisition of every parcel of real estate during the marriage, with your
two exceptions, correct?
[BEATON]: I did.
[SKONE]: And one exception was that he said that a loan in part secured
by Tallman of $900,000 from then Frontier Bank that he said all went into
Colorado. You said no, only $761,000 or so was all you were willing to
give credit for the acquisition of Colorado, correct?
[BEATON]: I did.
[SKONE]: Okay. And then the other difference that you pointed out was
not a tracing of funds, but an allocation of funds. And that was the
$140,000 that went in part to purchase the Dayton property, right?
[BEATON]: Well, you've characterized it as an allocation versus a tracing,
but you can't get an allocation unless you trace it, so I'm not sure I agree
with that.
16 CR 52(a)(1) states that, "[i]n all actions tried upon the facts without a jury or
with an advisory jury, the court shall find the facts specially and state separately its
conclusions of law."
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[SKONE]: You don't doubt that the $140,000 was used, in part, to acquire
Dayton?
[BEATON]: Oh, all of it was.
[SKONE]: All of it was?
[BEATON]: Absolutely.
[SKONE]: What you disagreed with was not that the $140,000 entirely was
used as part of the Dayton acquisition?
[BEATON]: That's correct.
[SKONE]: But rather, you disagreed with his allocation of equal ownership
of Dayton to Ed Noble and Lee Noble?
[BEATON]: Actually, I think it's the other way around. I think Mr. Hawes
allocated it all, unless it's the other way around. Maybe it was the other
way around. Yes. Mr. Hawes believes that it was a 50/50 purchase. The
documents I reviewed indicated that it was not. That is was [sic] 100
percent purchased by Lee Noble.
[SKONE]: So your position is that all of Dayton is owned by Lee Noble,
inconsistent with Mr. Hawes' presentation that half is owned by Ed Noble
and half is owned by Lee Noble?
[BEATON]: I'll agree with that.
[SKONE]: And with those two simple differences, every single one of Mr.
Hawes' tracing of cash, loan proceeds, 1031 exchanges, for the
acquisition of the real estate during the marriage is accurate?
[BEATON]: I would agree that wherever Mr. Hawes utilized documentation
that he was accurate in the utilization of that documentation. Yes.
[SKONE]: Okay. Now, let's talk apples and apples. Mr. Hawes' [Lee's
expert] report, and I'm sure you will agree with me, purports to be a tracing
of the source of funds for the acquisition of the real estate, which was
acquired during the marriage by Lee Noble, correct?
[BEATON]: Yes. In part. In part.
[SKONE]: I'm asking you if that's a correct statement?
[BEATON]: It's not.
[SKONE]: What is wrong with my statement?
[BEATON]: Because you have a whole section on Tallman proceeds that
are being allocated that are not the tracing of the acquisition of the
properties.
[SKONE]: With that exception, is it right?
[BEATON]: Yes, with that exception.
[SKONE]: Okay. All right. So without his—if you took out how he
allocates the Tallman proceeds in that report, his report is limited to
tracing the assets that were used to acquire the real estate during the
marriage by Lee Noble?
[BEATON]: That's correct.
[SKONE]: And it's accurate?
[BEATON]: According to the documentation provided, yes.
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[SKONE]: Are you aware of any documentation that is inconsistent with
Mr. Hawes' report as to the simple question of where did the funds come
from to acquire the real estate by Lee Noble during the marriage? Other
than the two exceptions you noted, the $140,000 to Dayton and the
approximately same amount to Colorado?
[BEATON]: No. The only one I was questioning would have been the
Dayton, but all he puts down is $140,000. He doesn't say where it came
from. But yes, I would agree then that the cash and assets used to
acquire were traced from certain accounts to the acquisition of real
properties accurately.
RP (Oct. 7, 2013) at 812-15. Julianna's own expert acknowledged, and the record
confirms, that the documentary evidence standing alone supported Lee's tracing.
"Generally, where findings are required, they must be sufficiently specific to
permit meaningful review." In re LaBelle. 107 Wash. 2d 196, 218, 728 P.2d 138 (1986).
"The purpose of the requirement of findings and conclusions is to insure the trial judge
'"has dealt fully and properly with all the issues in the case before [she] decides it and
so that the parties involved and this court on appeal may be fully informed as to the
bases of [her] decision when it is made.'" LaBelle. 107 Wash. 2d at 218-19. Even if the
credibility findings were meant to address the tracing testimony here, they fail to show
the trial court "dealt fully and properly" with the tracing issue.
Our review of issues on the disputed real properties acquired postmarriage and
the Tallman and Leary Way sale proceeds are hampered by the trial court's failure to
analyze and resolve the tracing issue here. The trial court on remand must resolve the
tracing issue and enter specific findings of fact and conclusions of law to support its
tracing decision.
The court also treated all assets acquired by Ed and Lee during Lee's marriage
as community property based on alleged unpaid community funds commingled in the
real estate business and Lee's personal accounts. The court ruled "[t]o the extent that
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the properties of LLCs contain a separate interest," that interest was transmuted to
community property based on a community undercompensation theory. CP at 319-20.
Julianna avoids the tracing evidence. She claims instead that all the disputed
properties were improved with community labor during the marriage. But that does not
change their character from separate to community. "Once the separate character of
property is established, a presumption arises that it remained separate property in the
absence of sufficient evidence to show an intent to transmute the property from
separate to community property." Borghi. 167 Wash. 2d at 484. No evidence shows that
Lee intended to change his separate property's character or that Ed intended to give up
his property interests.
Julianna may be entitled to reimbursement protected by an equitable lien for any
unpaid labor contributed to the improvement or management of these properties. But
the unpaid labor cannot alter the properties' character.
Later community property contributions to the payment of obligations,
improvements upon the [separate] property, or any subsequent mortgage
of the property may in some instances give rise to a community right of
reimbursement protected by an equitable lien, but such later actions do
not result in a transmutation of the property from separate to community
property.
Borghi. 167 Wash. 2d at 491 n.7.
Julianna relies on Hamlin v. Merlino. 44 Wash. 2d 851, 272 P.2d 125 (1954), to
argue "where separate property business assets are combined with community
personal services rendered without adequate compensation, all the income and
increase in value of the business is presumed community property." Br. of Resp't at
59. Julianna never proved that the $1.1 million contribution of community labor
increased the properties' value. "[A]ny increase in the value of separate property is
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presumed to be separate property. This presumption may be rebutted by direct and
positive evidence that the increase is attributable to community funds or labor." Elam v.
Elam. 97 Wash. 2d 811, 816-17, 650 P.2d 213 (1982).
Nor is it sufficient to show that Lee's properties increased in value during the
marriage. Julianna failed to prove with "direct and positive evidence" that the increase
in value was due solely to the community and not "the natural course of inflation." Elam.
87 Wash. 2d at 815. The trial court here erred where it assumed unpaid community labor
alone increased the disputed properties' value during the marriage.
Julianna also argues the value of unpaid community labor was "indiscriminately
commingled" with Lee's separate property, thus making it all community property. Br. of
Resp't at 60-61. She cites Koher v. Morgan. 93 Wash. App. 398, 968 P.2d 920 (1998).
Koher owned two companies when he met Morgan. He paid himself an artificially low
salary during their relationship. The trial court found that by not paying himself a regular
salary, Koher had commingled "community-like" property with the separate profit of his
business by "intermix[ing] large sums of separate and relationship income in his
personal and business accounts" from which he acquired property and equipment and
funded other investments. Koher. 93 Wash. App. at 402-03. Because Koher was "unable
to trace any portion of the disputed assets to his separate profits," it was "more
appropriate and fair to find that the assets Koher had acquired [during the relationship]
were subject to distribution" as community-like property. Koher. 93 Wash. App. at 403.
Unlike in Koher. even if unpaid community labor was commingled with LLC
profits, Lee contends he traced the disputed assets acquired during marriage to his
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separate property by clear and convincing proof.17 The trial court must resolve this
significant issue and enter proper findings and conclusions to aid our review.
Award of Distributed Property
Lee contends the trial court erred when it awarded Tallman and Leary Way sale
proceeds that were already distributed to Ed as part of Lee's community property
share.18 He thus received nearly $2 million less in community assets than Julianna. Ed
contends the trial court improperly eliminated Leary Way sale proceeds owed to him.
And he got "nothing more" from the Tallman proceeds even though no one disputed he
"was entitled to some interest in these properties." Br. of Lee Noble at 42.
Lee and Julianna agreed before trial that Ed would receive $1 million from the
Tallman proceeds.19 This agreement was effective without any ruling on Ed's
entitlement to the funds. The court also denied Julianna's motion for an order to force
Ed to disgorge Leary Way sale proceeds he already received. Julianna did not
challenge this order. The court ruled that Ed's receipt of Leary Way and Tallman
proceeds were "more than adequate compensation to Ed Noble for any claims he might
have against the marital community." CP at 314. But the court reduced Lee's total
award when it credited these proceeds to his community share.
Lee cites the well-settled rule that the trial court focuses on the parties' assets
before it at trial. If the parties dispose of an asset before trial, the court lacks ability to
17 We note the trial record shows almost no disagreement by Julianna's attorney
and expert over the tracing evidence presented. And Julianna presented no rebuttal
evidence to undermine Lee's tracing evidence.
18 Ed and Lee contend the tracing evidence shows Tallman and Leary properties
are separate property.
19 Julianna acknowledged that Ed had interests in Tallman and Leary. Thus, the
only issue before the court was how much more Ed was entitled to from the proceeds.
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No. 71206-3-1/34
distribute it at trial. Lee cites In re Marriage of White. 105 Wash. App. 545, 549, 20 P.3d
481 (2001). In White, the trial court abused its discretion by awarding to the wife her
separate property of $30,511, which had already been spent on acquiring community
assets subsequently distributed during the dissolution proceedings. On appeal, the
court explained that "if one or both parties disposed of an asset before trial, the court
simply has no ability to distribute that asset at trial." White. 105 Wash. App. at 549. The
court reasoned that as soon as the money was spent, it ceased to exist and lost
whatever character it previously had. White, 105 Wash. App. at 552.
Julianna acknowledges this well-settled principle. She argues instead that the
court's community property division accounted for Lee's misconduct and waste of
assets when he gifted nearly $2 million to Ed before trial.
Julianna relies on Marriage of Wallace. 111 Wash. App. 697, 45 P.3d 1131
(2002).20 Wallace involved a husband's attempt to quitclaim the family home and
business to his father "in lieu of foreclosure" without notice to his wife in violation of
RCW 26.16.030(3). Unlike here, the husband conceded on appeal to fraudulent
conduct regarding property transfers to his father. Wallace also differs from this case
because Wallace involved extensive instances of fraud and fiscal misconduct. We held
"it is an abuse of discretion to allow a [community property award] when the allegations
and evidence focus on debts and property that are not before the dissolution court ..."
In re Marriage of Kaseburo. 126 Wash. App. 546, 561, 108 P.3d 1278 (2005) (discussing
Wallace).
20 This case was discussed above for a different proposition.
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Even if we assume misconduct occurred, the trial court erred by awarding sale
proceeds from Leary Way and Tallman as part of Lee's share of the community property
that were already distributed pretrial to Ed. These proceeds were no longer marital
assets available for division at the dissolution trial. And the trial court did not determine
that Ed wrongfully received the Tallman proceeds subject to the stipulation, finding only
that "[t]his hefty sum of cash is found to be more than adequate compensation to Ed
Noble for any claims he might have against the marital community." CP at 314. Even
Julianna's expert agreed that Ed was entitled to some of the proceeds of the Tallman
sale.21
A trial court has broad discretion when distributing property in a dissolution case.
White. 105 Wash. App. at 549; RCW 26.09.080. "When exercising this broad discretion, a
trial court focuses on the assets then before it—i.e., on the parties' assets at the time of
trial." White. 105 Wash. App. at 549. But this broad discretion is abused if, as here, it is
grounded on an improper basis.
Because the trial court improperly focused on the sale proceeds correctly
distributed to Ed before trial, it lacked the ability to distribute these proceeds at trial as
part of Lee's dissolution award.
21 Ed's counsel cross-examined Julianna's expert witness:
[COUNSEL]: So it's fair to say, is it not, that Ed Noble's claim to a portion of
the Tallman proceeds is a legitimate claim?
[BEATON]: I would agree with that.
RP(Oct. 3, 2013) at 742.
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Ed's Standing in Tallman Lawsuit
Ed also contends that the trial court improperly "divested" him of his interest in
half the Tallman proceeds by ruling that he lacked standing to sue Tallman to protect his
interest. Br. of Ed Noble at 42.
The court's standing ruling is based on its finding that "the LLC is not yet winding
up and creditors (the martial community) have not yet been paid." CP at 312. This
ruling is erroneous for two reasons. First, the Tallman operating agreement granted
members the right to interim distributions or allocations of the net profits as directed by
the managing member. The agreement also allows:
The managing members shall determine, from time to time in their
reasonable judgment, to what extent the company may make distributions
from excess. The distributions may be in cash or property.
Ex.310.
Second, under former RCW 25.15.215 (1994), governing interim distributions, an
LLC "member is entitled to receive from a limited liability company distributions before
the member's disassociation from the limited liability company and before dissolution
and winding up thereof." RCW 25.15.230, governing the right to distribution, also states
that at the time a member is entitled to receive a distribution, he is entitled to all
remedies available to a creditor of the LLC with respect to that distribution.22
Julianna fails to address the operating agreement and statutes applicable here.
The trial court's standing ruling is erroneous.
22 Former RCW 25.15.215 and .238 were amended in January 2016 after the
dissolution decree was entered in this case.
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Tallman LLC Tax Liability
Lee argues the trial court erred in its property division when it failed to consider
the roughly $1.5 million tax liability on the Tallman sale. We decline to address this
issue based on our resolution of the issues here. The trial court must address this issue
on remand.
Promissory Note Lawsuit
Ed contends the trial court erred when it invalidated all the promissory notes Lee
signed in his favor and dismissed his lawsuit.
The trial court determined the remaining notes were unenforceable after it
resolved two promissory notes:
The remainder of the promissory notes, 21 in number, spanning a time
period from 2001 through 2012 and totaling $313,119.20, are found to be
inauthentic and unenforceable. Lee and Ed Noble claim that Ed loaned
Lee money from time to time because Lee was short of funds. The court
finds this not credible, given their course of conduct and the fact that Lee
Noble had been giving $3,000 a month to his father since 2005. The
evidence showed that the vast majority of the notes represent amounts on
checks written by Ed Noble to the LLC's, not to Lee Noble. One of the few
personal loans to Lee Noble, $3,000 in cash loaned on 10/15/2004, was
apparently repaid to Ed Noble two weeks later (Exhibit 274), yet it was still
claimed to be owing. No credible alternative explanation was provided by
Lee or Ed Noble to rebut the repayment.
The court finds overall that Ed Noble's lawsuit (13-2-05778-6 SEA) against
Lee Noble on the promissory notes fails due to the lack of authenticity
and/or enforceability of the alleged notes.
CP at 316 (emphasis added).
Ed argues "authenticity" is defined under Evidence Rule 901. He analyzes the
rule's authentication requirement. A document is admissible if evidence shows it "is
what its proponent claims." ER 901. He argues the notes satisfied this rule at trial.
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Julianna argues Ed misconstrues the court's ruling. She argues "inauthentic"
means the notes did not evidence genuine debt obligations. She also argues this
conclusion is supported by substantial evidence. For example, Lee paid Ed $3,000 per
month until just before trial. Neither Lee nor Ed listed the promissory notes on any of
their financial statements.
The court's reference to "lack of authenticity," viewed in context, means it
concluded the notes do not evidence genuine debts owned by Lee to Ed.23
Ed reargues the significance of the court's factual findings. He does not
challenge the findings as insufficient. They are verities on appeal. The findings support
the court's conclusion that the notes were not enforceable. The trial court properly
dismissed Ed's promissory note lawsuit.
Carsten Promissory Note (Leary Way Property)
The trial court declined to enforce the $203,000 note between Ed and Lee on
grounds it lacked consideration or foundation. The court entered the following findings
regarding this note only:
1515 Leary Way, held under ownership of Carstens Building, LLC
was sold on May 30, 2012, during the pendency of the dissolution, for
$2,500,000. The Leary property secured a line of credit at Union Bank in
the amount of $1,329,748, and that loan was paid off out of escrow. After
closing costs, the net profit on the sale was $972,513. Per Lee Noble's
instructions, the entire net proceeds were wired straight from escrow into
Edwin Noble's account.
Julianna Noble moved for an order to disgorge the $972,513 and
have it placed in a protected account pending trial. An order was entered
August 29, 2012 to place half the net proceeds in a blocked account
pending trial; however, that decision was reversed on revision on
September 25, 2012. Lee Noble's argument upon revision was that,
because the loan secured by the Leary property was paid off with sale
23 No one objected to the admission of the notes on lack of authenticity grounds
because the notes were admitted at trial. The ER 901 challenge fails.
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proceeds and because the loan payoff benefitted an LLC solely owned by
Lee Noble, in order for his father to receive 50% of the Leary profits, he
had to give his father all the cash plus a promissory note for $203,000.
Neither Lee nor Ed Noble provided a balance sheet or equity account
record to show the capital accounts of Lee or Ed Noble in Carstens
Building, LLC or to show any loans between Cartsens and any other LLC.
As with all the LLC's, father and son ignored the statutes and the
LLC's own foundational requirements to keep capital accounts and
balance sheets. Since Lee and Ed Noble produced no documentation of a
binding agreement they might have had regarding the debt secured by the
Leary property, there is no basis to find the debt is anything other than a
debt of Carstens Building, LLC to be shared equally by the members. The
2011 Carstens Building, LLC tax return (Exhibit 251) contains a capital
account reconciliation schedule showing Ed Noble with a negative
$105,060 balance and Lee Noble with a positive $49,818 balance. The
court finds no basis to support Ed Noble's right to the net proceeds of the
Leary sale.
The promissory note for $203,376.40, dated May 30, 2012 is found
to be unenforceable for lack of consideration or foundation. Lee Noble
claims this amount is due to his father as part of his 50% share of the net
proceeds of the Carstens/Leary closing on May 30, 2012. However, as
discussed above, no reliable evidence was provided to show that Ed
Noble has a right to 50% of the net proceeds from the Leary sale, of which
he already received $972,000.
CP at 312-15.
Ed does not challenge the findings of fact based on insufficient evidence. The
findings are thus verities on appeal. These findings support the trial court's conclusion
that the note is not enforceable. This claim fails.
Shannon Finding
Lee argues a "Shannon finding"24 is insufficient to avoid remand based on the
court's legal errors. Br. of Lee Noble at 45.
24 In re Marriage of Shannon. 55 Wash. App. 137,142, 777 P.2d 8 (1989) ("Remand
is required where (1) the trial court's reasoning indicates that its division was
significantly influenced by its characterization of the property, and (2) it is not clear that
had the court properly characterized the property, it would have divided it in the same
way."). The parties refer to this legal principle as a "Shannon finding."
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The trial court's finding states: "if the LLCs and properties in which Lee Noble
held an interest had been found to be separate property, it would be equitable to divide
the property in the same proportion." CP at 322.
Generally, the failure to properly characterize the divisible property may
constitute reversible error. In re Marriage of Olivares. 69 Wash. App. 324, 330, 848 P.2d
1281 (1993). Remand is thus required when it appears the trial court's division of the
property was driven by a mischaracterization of the separate or community nature of the
property. In re Marriage of Shannon. 55 Wash. App. 137, 141, 777 P.2d 8 (1989);
Marriage of Skarbek. 100 Wash. App. 444, 450, 997 P.2d 447 (2000).
Julianna argues a Shannon finding is adequate because the ultimate question in
any marital dissolution is whether the property division is fair, just, and equitable under
the circumstances. Kraft. 119 Wash. 2d at 449. Julianna also claims that even if the court
mischaracterized some of the property, this court should affirm the division of certain
other (unidentified) property.
The fundamental legal errors here undermine a fair, just, and equitable property
division. The trial court did not have in mind the correct character of the properties as
community or separate prior to ordering its division. The court mainly relied on
untenable legal grounds and ignored the tracing evidence when it ordered the division
of property. It is questionable whether the trial court would impose the same property
division if it had properly characterized the disputed property and applied correct legal
principles to resolve this complex dissolution proceeding.
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No. 71206-3-1/41
Attorney Fees Award
Lee challenges the trial court's $150,000 attorney fees award to Julianna on
grounds that the findings are inadequate. Because we remand the entire property
division here, we also reverse the court's attorney fees award. The trial court may
consider whether to award attorney fees upon conclusion of the case. We also decline
to award attorney fees in this appeal.
CONCLUSION2526
The trial court's adjudication of Ed's property interest was erroneous. The trial
court's reliance on untenable legal theories to distribute Ed's property interests and to
characterize most of the disputed properties as community was erroneous. The court
compounded these errors by not addressing the tracing issue. Lee presented
numerous documents to support his tracing methodology as Julianna's expert
acknowledged above. The trial court failed to recognize that tracing properties acquired
during marriage to a separate or community source was essential to properly
characterize the properties as separate or community.
For the reasons discussed above, we reverse the trial court's order distributing
the parties' assets and remand for redistribution consistent with this opinion. We affirm
the trial court's order dismissing Ed's promissory note lawsuit. We reverse the order
25 Julianna's attorney filed two motions after oral argument: "Motion to Enforce
RAP 12.1(a) by declining to consider an issue raised by appellant Lee Noble for the first
time at oral argument," and "motion to supplement its statement of facts to address an
issue raised by the court at oral argument." We deny both motions. In light of our
disposition here, we need not address the matters raised by these motions.
26 Julianna's attorney filed two statements of additional authority citing Rea v.
Rea. 19 Wash. App. 496, 576 P.2d 84 (1978); Blair v. McKinnon. 40 Wash. 2d 492, 244 P.2d
250; In re Marriage of Schwarz. 192 Wash. App. 180, P.3d (2016). Given our
resolution of the issues, we do not find these cases persuasive.
-41-
No. 71206-3-1/42
dismissing the Tallman lawsuit and remand for further proceedings. We reverse the
order granting attorney fees to Julianna, remand for further proceedings, and deny
attorney fees on appeal.
r
WE CONCUR:
WflQPl
-42-