Goldberg Family Investment Corp. v. William Quigg ( 2014 )

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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
GOLDBERG FAMILY INVESTMENT No. 44915 -3 -II
CORPORATION, a Washington corporation,
Appellant, UNPUBLISHED OPINION
v.
WILLIAM D. QUIGG and CAROL QUIGG,
and the marital community comprised thereof;
and PATRICK D. QUIGG and KATHLEEN A.
QUIGG, and the marital community comprised
thereof,
Respondents.
BJORGEN, A.C. J. — This appeal arises out of a lawsuit by Goldberg Family Investment
Corporation (Goldberg) to compel William and Patrick Quigg (the Quiggs) to arbitrate claims
related to the failure of a limited liability company in which Goldberg and entities in which the
Quiggs were officers had ownership interests. The Quiggs opposed Goldberg' s claims, arguing
that Goldberg ( 1) lacked standing, ( 2) was not the real party in interest, and ( 3) could not compel
them to arbitrate because they were not parties in their individual capacities to the agreements
containing the arbitration clauses.
No. 44915 -3 - II
Before us, Goldberg appeals two trial court orders. The first order granted the Quiggs'
motion to strike portions of Goldberg' s pleadings as unauthenticated hearsay. Goldberg claims
that the trial court erred in granting this motion because it did not offer the statements in the
pleadings for their truth, but only to show that its claims were subject to arbitration. The second
order granted summary judgment to the Quiggs on the arbitrability of Goldberg' s claims, denied
Goldberg' s motion to compel arbitration, denied Goldberg' s motion to strike the Quiggs'
affirmative defenses and counterclaim, and dismissed Goldberg' s claims with prejudice.
Goldberg contends that the trial court erred in granting this order because the arbitration clauses
at issue required the Quiggs to arbitrate in their individual capacities and because it had standing
to pursue the claims at issue.
Holding that the trial court properly granted the Quiggs' motion to strike, properly
determined that the arbitration clauses did not bind the Quiggs in their individual capacities, and
properly determined that Goldberg lacked standing and was not the real party in interest for the
type of claims it brought, we affirm.
FACTS
In 1993 a group of investors formed a limited partnership, Grays Harbor Paper L.P. ( the
Partnership), to operate the Hoquiam Paper Mill and related assets. Among the entities involved
in forming the Partnership were its general partner, Grays Harbor Industrial Inc. ( GHI), and a
number of limited partner entities, including Goldberg, WDQ Investments Inc., and Quigg
Investments Inc. William Quigg signed the limited partnership agreement as the president of
both GHI and WDQ. Patrick Quigg signed the limited partnership agreement as the president of
Quigg Investments Inc.
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The limited partnership agreement contained an arbitration clause. The clause provided,
in relevant part, that
a] ny dispute, controversy or claim arising out of or in connection with, or relating
to [ the Partnership Agreement] or any breach or alleged breach hereof, upon the
request of any party involved, shall be submitted to, and settled by, arbitration in
Grays Harbor County, Washington, or any other venue agreed upon by the parties,
pursuant to American Arbitration Association, or under any other form of
arbitration mutually acceptable to the parties so involved.
Clerk' s Papers ( CP) at 56 -57.
In 2010 the partners created Grays Harbor Paper LLC (the LLC) and merged the
Partnership into it. The merger resulted in the partners receiving " generally equivalent shares of
ownership" in the LLC as those they had possessed in the Partnership. Through this merger the
LLC obtained " all properties and assets, and all the rights, privileges, powers, immunities and
franchises of [the Partnership]." CP at 164.
Like the limited partnership agreement, the LLC operating agreement contained an
arbitration clause. The clause provided that
a] ny controversy, claim or dispute of whatever nature arising between any of the
parties under this Agreement, the other Transaction Documents or in connection
with the transactions contemplated hereunder, including those arising out of or
relating to the breach, termination, enforceability, scope or validity hereof, whether
such claim existed prior to or arises on or after the date hereof (a " Dispute "), shall
be resolved by mediation or, failing mediation, by binding arbitration. The
agreement to mediate and arbitrate contained in this Section 16. 1 shall continue in
full force and effect despite the expiration, rescission or termination of this
Agreement.
CP at 129. Any party to the agreement wishing to invoke the arbitration clause could do so by
serving a written "[ d] ispute [ n] otice" on the party it wished to arbitrate with "setting forth the
nature of the [ d] ispute." CP at 129. Once successfully invoked, the LLC operating agreement' s
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No. 44915 -3 -II
arbitration clause provided that the Federal Arbitration Act would govern and specified the
arbitration' s procedures and substantive governing law.
The LLC became insolvent in 2011 and eventually assigned its assets to a court appointed
receiver. Goldberg filed a notice of appearance in the receivership matter as an interested party,
but filed no claims related to this suit.
After the opening of the receivership estate, Goldberg served a dispute notice on the
Quiggs under the arbitration clause, making various allegations of misconduct related to the
LLC' s failure. The notice alleged that William Quigg, through his alter ego GHI, the
Partnership' s general partner, had misappropriated partnership funds in breach of fiduciary duties
he owed to Goldberg. The notice asserted that these financial improprieties continued when the
Partnership became an LLC by virtue of William Quigg' s role as a de facto manager of the LLC.
The notice further alleged that Patrick Quigg took part in his brother' s " diversions of funds" and
then failed to seek disgorgement of the ill -gotten gains in violation of fiduciary duties that he
owed Goldberg. CP at 15.
Despite receiving the notice of dispute, the Quiggs declined to arbitrate Goldberg' s
claims. Consequently, Goldberg filed a complaint to compel arbitration.
Before the Quiggs responded to Goldberg' s complaint, the receiver appeared in the
matter by filing a notice of automatic stay. The notice advised the parties that "[ w]hile [ the
LLC] is not a party to this litigation, the claims made herein are assets of the Receivership estate
and the commencement of this action constitutes a violation of the automatic stay" triggered by
the creation of the receivership estate. CP at 157. Goldberg filed no answer and ultimately, the
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receiver assigned all of the LLC' s assets to its senior secured creditor; the supervising trial court
approved the assignment and closed the receivership.
The Quiggs answered Goldberg' s complaint on three grounds. First, the Quiggs denied
the substance of Goldberg' s allegations. Second, the Quiggs contended that they had not agreed
to arbitrate any dispute with Goldberg. In support of this argument, the Quiggs noted that they
were not parties to the Partnership or LLC operating agreements in their individual capacities.
Finally, the Quiggs maintained that Goldberg was not the real party in interest and lacked
standing to make its claims. The Quiggs argued that had the Partnership and the LLC suffered
any injuries as Goldberg alleged the right to any remedy belonged to the LLC. The Quiggs
contended that this right had passed into the receivership estate and the receiver had assigned it
to the LLC' s senior secured creditor. The Quiggs' answer also contained a counterclaim
requesting declaratory relief and dismissal with prejudice of Goldberg' s claims based on their
real party in interest and standing arguments.
Goldberg then moved to compel arbitration, arguing that the trial court could compel the
Quiggs to arbitrate whether or not they had signed the Partnership and LLC operating
agreements in their individual capacities. In support, Goldberg noted that the federal courts had
compelled nonsignatories to arbitrate under numerous theories and that the courts of this state
had seemingly adopted those theories. Of these theories, Goldberg contended that two required
the Quiggs to arbitrate. First, Goldberg claimed that principles of agency law required the
Quiggs to arbitrate with it because they were corporate officers in entities that had signed the
Partnership and LLC operating agreements. Second, Goldberg argued that, because various
entities that had signed the Partnership and LLC operating agreements were alter egos for the
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No. 44915 -3 -II
Quiggs, the trial court could compel them to arbitrate in the place of those entities by
disregarding the entities' corporate form.
Goldberg also moved to strike the Quiggs' standing and real party in interest defenses
and dismiss the associated counterclaim with prejudice.' Goldberg first contended that the
standing and real party in interest issues concerned the merits of its right to recover, and
therefore the arbitrator, rather than the trial court, needed to resolve them. Goldberg then argued
that, under the Uniform Limited Partnership Act, chapter 25. 05 RCW, and the Washington
Limited Liability Company Act, chapter 25. 15 RCW, general partners and LLC managers owe
fiduciary duties to limited partners and LLC members as well as to the business entity itself.
Goldberg maintained that it alleged a breach of a fiduciary duty owed to it, not to the Partnership
or the LLC, and that it was the proper party to seek a remedy for this breach.
The Quiggs responded with three motions of their own, the first of which was a motion to
strike certain factual allegations from Goldberg' s motions to compel arbitration and to strike the
Quiggs' affirmative defenses and counterclaim. These factual allegations concerned the
existence of financial improprieties at the Partnership and LLC, the Quiggs' managerial control
over the LLC, the Quiggs' ownership of entities that were members of the Partnership and the
LLC, and the Quiggs' breach of fiduciary duties. The Quiggs' motion to strike contended that
Goldberg based these allegations on the dispute notice and its attached documents and that these
1 Plaintiffs may use a motion to strike made under CR 12( f)to dismiss defenses with prejudice in
the same way that defendants may use a motion made under CR 12( b)( 6) to dismiss a plaintiff' s
claims with prejudice. 3A LEWIS H. ORLAND & KARL B. TEGLAND, WASHINGTON PRACTICE:
RULES PRACTICE at 286 cmts. ( 6th ed. 2013).
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No. 44915 -3 -II
documents were not based on personal knowledge as required by ER 602, but instead were
hearsay under ER 801 and ER 802 and were not authenticated as required by ER 901.
The Quiggs also moved ( 1) for summary judgment on Goldberg' s motion to compel them
to arbitrate and ( 2) for summary judgment dismissing Goldberg' s claims with prejudice based on
the counterclaim filed in their original answer. Each of these motions for summary judgment
incorporated the Quiggs' motion to strike and argued that Goldberg could not create a material
issue of fact with the dispute notice or its attached documents because these documents consisted
of unauthenticated hearsay.
Goldberg' s consolidated reply brief addressed, among other matters, the Quiggs' motion
to strike. Goldberg argued that the motion was meritless because it had not offered the factual
matters asserted in its motion to compel arbitration or its motion to strike the Quiggs' defenses
and counterclaim for their truth, but only to alert the trial court of the substance of the dispute
with the Quiggs.
The trial court resolved these various motions with two orders. The first order granted
the Quiggs' motion to strike and stated that the court would not consider the factual allegations
the Quiggs objected to for purposes of resolving the parties' other motions. The second order ( 1)
denied Goldberg' s motions to compel arbitration and to dismiss the Quiggs' affirmative defenses
and counterclaim because Goldberg lacked standing and was not the real party in interest and (2)
granted the Quiggs summary judgment because the arbitration clauses did not apply to them in
their individual capacities and Goldberg was not the real party in interest and lacked standing.
Based on the grant of the Quiggs' motion for summary judgment, the trial court dismissed
Goldberg' s claims with prejudice.
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Goldberg now appeals these two trial court orders.
ANALYSIS
We review de novo Goldberg' s appeal of the trial court' s denial of its motion to compel
arbitration, the grant ofthe Quiggs' motion for summary judgment, and the grant of the Quiggs'
motion to strike. Gandee v. LDL Freedom Enter., Inc., 176 Wn.2d 598, 602, 293 P. 3d 11972013) ( motion to compel); Afoa v. Port ofSeattle, 176 Wn.2d 460, 466, 296 P. 3d 800 ( 2013)
summary judgment); Southwick v. Seattle Police Officer John Doe Nos. 1 - 5, 145 Wn. App. 292,
297, 186 P. 3d 1089 ( 2008) ( motion to strike in conjunction with a motion for summary
judgment). Summary judgment is appropriate where the nonmoving party fails to rebut the
moving party' s initial showing that no material issue of fact exists, and the moving party is
entitled to judgment as a matter of law. Young v. Key Pharm., Inc., 112 Wn.2d 216, 225, 770
P.2d 182 ( 1989). A defendant moving for summary judgment may demonstrate the absence of a
material issue of fact by showing the lack of competent evidence to support a plaintiff' s claims.
Young, 112 Wn.2d at 225 n.l.
I. ARBITRABILITY
Goldberg contends that the trial court erred in denying its motion to compel arbitration
and in granting the Quiggs' related motion for summary judgment, in which the Quiggs argued
1) that the arbitration agreements did not bind the Quiggs in their individual capacities and (2)
that Goldberg lacked standing and was not the real party in interest. Goldberg argues that the
arbitrator, not the trial court, must decide whether it was the proper party to raise its claims and
whether the arbitration clauses bound the Quiggs in their individual capacities, since these issues
went to the merits, not the arbitrability, of its claims. The Quiggs respond that the trial court
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No. 44915 -3 -II
needed to resolve the standing and real party in interest issues and the applicability ofthe
arbitration clauses to them personally before compelling arbitration.
We hold that the trial court properly determined the arbitration clauses did not apply to
the Quiggs in their individual capacities and, therefore, affirm the order denying Goldberg' s
motion to compel arbitration and granting the Quiggs' motion for summary judgment.2 We also
affirm the trial court' s order granting the Quiggs' motion to strike.
A. Quiggs' Motion to Strike
Before turning to the motion to compel, we address Goldberg' s appeal of the trial court' s
order granting the Quiggs' motion to strike, since our resolution of this issue sets the record we
review on appeal. Goldberg contends the trial court should not have stricken the factual
assertions at issue because it did not offer them to prove the truth of the matters asserted, but
instead to show that its claims fell within the scope of the arbitration clauses. The Quiggs
contend that, to the extent that Goldberg offered the stricken material as evidence to support its
theories for compelling them, as nonsignatories, to arbitrate, the trial court properly declined to
consider the assertions. We agree with the Quiggs on this issue.
2 The trial court based its denial of Goldberg' s motion to compel arbitration on its determination
that Goldberg lacked standing and was not the real party in interest. Because the trial court
properly determined the Quiggs were not parties to the arbitration clauses, its denial of the
motion to compel arbitration was proper; and, as noted, we affirm the trial court' s denial of
Goldberg' s motion to compel arbitration on that basis. Gross v. City ofLynnwood, 90 Wn.2d
395, 401, 583 P. 2d 1197 ( 1978) ( " we will sustain the trial court' s judgment upon any theory
proof. "). We therefore need not address the
established by the pleadings and supported
by the
parties' arguments about standing and the real party in interest defense in this context. We do,
however, discuss the parties' standing and real party in interest arguments below when
addressing the Quiggs' counterclaim and the dismissal of Goldberg' s claims.
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No. 44915 -3 -II
CR 12( f) allows a party to move to strike " from any pleading any insufficient defense or
any redundant, immaterial, impertinent, or scandalous matter." Goldberg argues that it did not
offer the statements at issue for their truth and that they are therefore not hearsay under ER
801( c). However, to the extent that Goldberg did not offer the factual allegations at issue for
their truth, they do not make it more or less likely that the Quiggs owed or breached fiduciary
duties, improperly benefitted from their positions, or owned the entities signing the operating
agreements. In that event, the allegations would be irrelevant under ER 401 and immaterial
under CR 12( f). On the other hand, if Goldberg offered the factual allegations in the dispute
notice and its attached documents for their truth, they were inadmissible hearsay. ER 801( a), ( c);
ER 802. Goldberg has not argued that any exception to the bar against hearsay testimony applies
and the record before us is insufficient to establish any. Inadmissible evidence is irrelevant to
summary judgment proceedings. Lynn v. Labor Ready, Inc., 136 Wn. App. 295, 306, 151 P. 3d
201 ( 2006). Thus, the trial court did not err in striking the factual allegations in Goldberg' s
motion to compel arbitration or its motion to strike the Quiggs' affirmative defenses as
irrelevant.
B. Quiggs' Motion for Summary Judgment and Goldberg' s Motion to Compel Arbitration
An agreement to arbitrate a dispute "[ is] valid, irrevocable, and enforceable," subject to
certain exceptions not relevant to this appeal. 9 U.S. C. § 2; accord RCW 7. 04A.060( 1).
Arbitration is, however, a creation of contract, and no party to an arbitration agreement may
compel another party to arbitrate a matter that it did not agree to submit to an arbitrator.
Howsam v. Dean Witter Reynolds, Inc.., 537 U.S. 79, 83, 123 S. Ct. 588, 154 L. Ed. 2d 4912002) ( quoting Steelworkers v. Warrior & GulfNavigational Co., 363 U.S. 574, 582, 80 S. Ct.
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1347, 4 L. Ed. 2d 1409 ( 1960)); accord Saleemi v. Doctor' s Assocs., Inc., 176 Wn.2d 368, 376-
78, 292 P. 3d 108 ( 2013).
Accordingly, before compelling arbitration, the trial court must decide the "` question of
arbitrability, "' meaning whether or not " the parties have submitted a particular dispute to
arbitration." Howsam, 537 U.S. at 83 -84 ( quoting AT &T Techs., Inc. v. Commc' ns Workers, 475
U. S. 643, 649, 106 S. Ct. 1415, 89 L. Ed. 2d 648 ( 1986)); accord Saleemi, 176 Wn.2d at 376.
The trial court determines whether the parties have agreed to arbitrate a dispute by looking to
whether a valid agreement to arbitrate exists between the parties and whether the subject matter
of the dispute arguably falls within the class of disputes subject to arbitration. Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S. Ct. 1238, 84 L. Ed. 2d 158 ( 1985); see In re
Marriage of Pascale, 173 Wn. App. 836, 842, 295 P. 3d 805 ( 2013). If the trial court determines
that an arbitration agreement creates a duty to arbitrate, it must order the parties to do so, and the
arbitrator, not the trial court, must resolve the merits of the parties' claims. 9 U. S. C. § 4; RCW
7. 04A.070; AT &T Techs., 475 U.S. at 649 -50; Pascale, 173 Wn. App. at 842 -43 ( quoting
Hanford Guards Union ofAm., Local 21 ofIntl Guards Union ofAm. v. Gen. Elec. Co., 57
Wn.2d 491, 498, 358 P. 3d 307 ( 1961)).
A party may consent to arbitration without signing an arbitration clause, just as a party
may consent to the formation of a contract without signing a written document. Fisser v. Intl
Bank, 282 F. 2d 231, 233 ( 2d Cir. 1960), overruled on other grounds by Kirno Hill Corp. v. Holt,
618 F. 2d 982 ( 2d Cir. 1980). Therefore, whether an arbitration agreement binds a nonsignatory
is a question of whether the party has agreed to arbitrate a matter. As with any determination
about the validity and applicability of an arbitration clause, the trial court, not the arbitrator, must
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No. 44915 -3 -II
decide whether an agreement binds a nonsignatory. Howsam, 537 U.S. at 83 -84 ( citing First
Options ofChicago v. Kaplan, 514 U. S. 938, 943 -46, 115 S. Ct. 1920, 131 L. Ed. 2d 9851995)); World Rentals & Sales, LLC v. Volvo Constr. Equip. Rents, Inc., 517 F.3d 1240, 1244
1 lth Cir. 2008); Smith /Enron Cogeneration Ltd. P 'ship, Inc. v. Smith Cogeneration Intl, 198
F. 3d 88, 95 ( 2d Cir. 1999); accord Saleemi, 176 Wn.2d at 376. The question of arbitrability,
therefore, was properly before the trial court to decide.
Turning to the merits of the issue, the Quiggs signed the Partnership agreement in their
capacities as presidents of partner corporations and the LLC operating agreement in their
capacities as presidents of member corporations. As such, the parties bound to arbitrate by the
Quiggs' signatures on these agreements are the Quiggs' corporate principals, not the Quiggs
individually. Union Mach. & Supply Co. v. Taylor -Morrison Logging Co., 143 Wash. 154, 157-
62, 254 P. 2d 1094 ( 1927) ( collecting cases).
However, the federal courts have held that, under ' common law principles of contract
and agency law, "' a nonsignatory may consent to arbitrate a dispute " under ... five distinct
theories." World Rentals, 517 F.3d at 1244 ( quoting Employers Ins. Of Wausau v. Bright Metal
Specialties, 251 F. 3d 1316, 1322 ( 1 lth Cir. 2001)). These theories include incorporation by
reference, assumption, agency, corporate disregard, and estoppel. Thomson -CSF, S.A. v. Am.
Arbitration Ass 'n, 64 F. 3d 773, 776 -80 ( 2d Cir. 1995). The Washington Supreme Court and
another division of our court have approved these theories for binding nonsignatories to an
arbitration clause. E.g., Satomi Owners Ass 'n v. Satomi, LLC, 167 Wn.2d 781, 810 -11 & n.22,
225 P. 3d 213 ( 2009); Woodall v. Avalon Care Ctr., 155 Wn. App. 919, 923 -24, 231 P.3d 125212
No. 44915 -3 -II
2010). Goldberg argues that three of these theories apply here: estoppel, corporate disregard,
and agency. We consider each in turn.
Goldberg first contends that the Quiggs must arbitrate due to principles of estoppel.
Where nonsignatories have derived benefits from an agreement, a trial court may find that they
are bound by arbitration clauses in the agreement through estoppel. Smith /Enron, 198 F.3d at97 -98. The trial court properly struck the evidence that Goldberg relied on to show the Quiggs
benefitted from the operating agreements. Therefore, no material issue of fact existed, and the
trial court properly found that the Quiggs were not required to arbitrate in their individual
capacities based on estoppel. Young, 112 Wn.2d at 225 n. 1.
Goldberg next alleges that the arbitration clauses bind the Quiggs because they signed the
limited Partnership and LLC operating agreements through their alter ego corporations. A trial
court may disregard the business entity and find that an arbitration clause binds nonsignatory
owners. Thomson -CSF, 64 F. 3d at 777 -78. A successful alter ego claim allows such disregard.
Columbia Asset Recovery Grp. v. Kelly, 177 Wn. App. 475, 486, 312 P. 3d 687 ( 2013) ( quoting
Grayson v. Nordic Constr. Co., 92 Wn.2d 548, 553, 599 P. 2d 1271 ( 1979)). However, to
establish that any entity was an alter ego for the Quiggs, Goldberg needed to show that William
or Patrick "` so dominate[ d] and control[ led] "' the entity that the court should treat the entity' s
signature as either William' s or Patrick' s signature. Standard Fire Ins. Co. v. Blakeslee, 54 Wn.
App. 1, 5, 771 P. 2d 1172 ( 1989) ( quoting Pohlman Inv. Co. v. Virginia City Gold Mining Co.,
184 Wash. 273, 283, 51 P. 2d 363 ( 1935)). The trial court struck the evidence Goldberg relied on
to make this showing. Therefore, no material issue of fact existed, and summary judgment for
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No. 44915 -3 - II
the Quiggs was appropriate on the alter ego theory of compelling arbitration. Young, 112 Wn.2d
at 225 n.1.
Finally, Goldberg argues that agency principles bind the Quiggs to the arbitration clauses.
A trial court may find that arbitration clauses bind nonsignatories based on traditional agency
principles. Thomson -CSF, 64 F. 3d at 777. Evidence remaining in the record established that the
Quiggs acted as the officers of various entities when they signed the limited Partnership and LLC
operating agreements. The Quiggs, therefore, acted as agents for those entities. See Youngs v.
Peacehealth, 179 Wn.2d 645, 670, 316 P. 3d 1035 ( 2014). No evidence, though, established the
converse: that the entities acted as agents for the Quiggs who acted as principals. Agency law
does not allow a party to compel an agent to arbitrate in the place of his or her principal. Flink v.
Carlson, 856 F.2d 44, 46 ( 8th Cir. 1988) ( "[ s] igning an arbitration agreement as agent for a
disclosed principal is not sufficient to bind the agent to arbitrate claims against him
personally. "); In re Matter of Arbitration Between Keystone Shipping Co. & Texport Oil Co., 782
F. Supp. 28, 32 ( S. D.N.Y. 1992) ( "[ s] igning an arbitration agreement as an agent for a disclosed
principal is not sufficient to render an agent a party to the arbitration clause. "). No material issue
of fact existed and the trial court properly granted the Quiggs summary judgment on this theory
of compelling arbitration.
As noted, before compelling arbitration, the trial court must determine that a dispute
subject to arbitration exists. Dean Witter Reynolds, 470 U.S. at 218; see Saleemi, 176 Wn.2d at
376. As part of this inquiry, the trial court must determine whether a nonsignatory to an
arbitration clause has agreed to arbitrate a dispute with a signatory. See Howsam, 537 U.S. at
83 -84. As shown, the Quiggs did not agree to arbitrate any dispute with Goldberg in their
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individual capacities, and none of the asserted common law doctrines impose that duty on the
Quiggs. Therefore, the trial court did not err by granting the Quiggs' motion for summary
judgment or by denying Goldberg' s motion to compel arbitration. See Howsam, 537 U.S. at 83-
84; Saleemi, 176 Wn.2d at 376.
II. STANDING/ REAL PARTY IN INTEREST
Goldberg next contends that the trial court erred in denying Goldberg' s motion to strike
the Quiggs' defenses and counterclaim and in dismissing its claims based on the Quiggs'
standing and real party in interest arguments. While agreeing that any claims the LLC had
against the Quiggs were assigned to the receiver and now belong to the LLC' s senior creditor,
Goldberg contends that its claims did not belong to the LLC. Instead, Goldberg maintains that it
is seeking redress for the loss of its investment in the Partnership and LLC caused by the Quiggs'
breach of fiduciary duties owed to it and, therefore, it is the proper party to raise its own claims.
The Quiggs maintain that Goldberg seeks to recast injuries to the Partnership and the LLC as
injuries to itself, meaning that Goldberg is not the proper party to seek redress. Thus, we address
whether Goldberg had any claims that it could pursue directly, rather than derivatively, for the
LLC. We hold that it did not. Because Goldberg pursued these claims directly rather than
derivatively, it lacked standing and was not the real party in interest. For that reason, we affirm
the grant of summary judgment to the Quiggs dismissing Goldberg' s claims.
The doctrine of standing prevents " a plaintiff from asserting another' s legal rights."
Trinity Universal Ins. Co. of Kan. v. Ohio Cas. Ins. Co., 176 Wn. App. 185, 199, 312 P. 3d 9762013), review denied, 179 Wn.2d 1010 ( 2014). The doctrine performs this task by requiring a
plaintiff to show, among other things, " a personal injury fairly traceable to the challenged
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conduct and likely to be redressed by the requested relief." High Tide Seafoods v. State, 106
Wn.2d 695, 702, 725 P. 2d 411 ( 1986).
The real party in interest doctrine " protect[ s] the defendant against a subsequent action by
the party actually entitled to recover, and ... insure[ s] generally that the judgment will have its
proper effect as res judicata." Rinke v. Johns -Manville Corp., 47 Wn. App. 222, 227, 734 P.2d
533 ( 1987) ( citing FED. R. Civ. P. 17( a), Advisory Committee Note, reprinted in 39 F.R.D. 84,
85 ( 1966)). Washington' s court rules codify the doctrine in CR 17( a), which requires that
e] action shall be prosecuted in the name of the real party in interest." Subject to certain
very
exceptions, " the real party in interest is `the person who, if successful, will be entitled to the
3
fruits of the action. "' Nw. Indep. Forest Mfrs. v. Dep' t ofLabor & Indus., 78 Wn. App. 707,
716, 899 P. 2d 6 ( 1995). (quoting 3A LEWIS H. ORLAND & KARL B. TEGLAND, WASHINGTON
PRACTICE: RULES PRACTICE, at 420 ( 4th ed. 1992)).
In a limited partnership, the general partner owes fiduciary duties to both the partnership
entity itself and its limited partners. RCW 25. 10. 441( 1). Similarly, LLC managers owe the LLC
entity itself and its members fiduciary duties analogous to those owed in a partnership. Bishop of
Victoria Corp. Sole v. Corporate Bus. Park, LLC, 138 Wn. App. 443, 456, 158 P.3d 1183 ( 2007)
citing John Morey Maurice, Operational Overview ofthe Washington Limited Liability
Company Act, 30 GONZ. L. REV. 183, 200 ( 1994/ 95)). One of these duties is the duty of loyalty,
which requires the fiduciary to avoid " secret profits, self-dealing, and conflicts of interest."
3 A derivative suit is such an exception because the equity holder sues on behalf of the business
entity in order to redress wrongs done to it; the recovery from such a suit goes to the entity, not
the equity holder. LaHue v. Keystone Inv. Co., 6 Wn. App. 765, 777, 496 P. 2d 343 ( 1972).
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Horne v. Aune, 130 Wn. App. 183, 200, 121 P. 3d 1227 ( 2005); RCW 25. 10. 441( 2); see RCW
25. 15. 040( 1).
However, the fact that the Quiggs may have owed fiduciary duties to Goldberg as an LLC
member, as well as to the Partnership and the LLC, does not mean that Goldberg is the proper
parry to raise the claims it seeks to arbitrate. The plain terms of the Uniform Limited Partnership
Act define when a partner may sue another partner directly for a breach of duty owed to the
partner. RCW 25. 10. 701( 2) allows such suits only where the partner alleges an injury " that is
not solely the result of an injury suffered or threatened to be suffered by the limited partnership."
Where the partner does not allege such an injury, the right to the suit belongs to the limited
partnership itself, and the partner must sue derivatively in its name. RCW 25. 10. 701; see RCW
25. 10. 706 -.721.
The Washington Limited Liability Company Act also distinguishes between direct and
derivative suits, although it does not specify how to distinguish the two. See RCW 25. 15. 370-
385. The act has numerous such omissions, and the courts of this state have filled the gaps in
the act while the legislature and the Washington State Bar Association consider how to redraft it.
Sherron Assocs. Loan Fund V (Mars Hotel) LLC v. Saucier, 157 Wn. App. 357, 361 -62, 237
P. 3d 338 ( 2010). We hold the same test used for distinguishing direct and derivative actions in
the limited partnership context also applies to suits by LLC members for two reasons.
First, in this state the test for limited partnerships is the one generally used, outside of the
partnership context, to distinguish between direct and derivative actions. As noted, the
legislature specifically prescribed the test for limited partnerships. RCW 25. 10. 701( 2). The
courts of this state apply the same test when distinguishing between direct and derivative actions
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by corporate shareholders. Sabey v. Howard Johnson & Co., 101 Wn. App. 575, 584 -85, 5 P. 3d
730 ( 2000) ( discussing when corporate shareholders may make direct, rather than derivative,
claims). Further, the Delaware courts use this same test to determine whether a stockholder' s
claim is derivative or direct. Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 10312004). Because the Delaware courts have significant experience with the law of business
entities, the courts of this state often look to Delaware decisions as persuasive authority. Eg., In
re F5Networks, Inc., Derivative Litig., 166 Wn.2d 229, 239 -40, 207 P. 3d 433 ( 2009).
Second, compelling reasons justify applying the general rule just noted to identify when
an LLC member may bring a direct rather than a derivative suit. A derivative suit ensures that
the business entity suffering the injury is made whole and that all its equity holders share in this.
See Moore v. Los Lugos Gold Mines, 172 Wash. 570, 598, 21 P. 2d 253 ( 1933) ( citing 14 C. J., §
1457 at 937). Particularly apposite here, a derivative suit also prevents equity holders from
recovering in a manner upsetting the creditor priority scheme when the business entity has
become insolvent. See LaHue v. Keystone Inv. Co., 6 Wn. App. 765, 780 -81, 496 P.2d 3431972); In re Sunrise Secs. Litig., 916 F.2d 874, 886 -87 ( 3d Cir. 1990).
A fair reading of Goldberg' s complaint indicates that it seeks redress for an injury arising
solely from injuries inflicted on the Partnership and the LLC. Goldberg alleges that the Quiggs
essentially looted the Partnership and the LLC of value and that this eventually rendered the LLC
insolvent, not that the Quiggs stole directly from Goldberg. The injury that Goldberg complains
of, misappropriation of partnership and LLC funds, is an injury to the Partnership and the LLC,
not to Goldberg; Goldberg' s injury was derivative of the injury to the Partnership and the LLC.
Thus, Goldberg lacks the type of personal injury sufficient to confer standing for a direct suit and
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is not the party entitled to the ' fruits of the action "; the LLC is. Nw. Indep. Forest Mfrs., 78
Wn. App. at 716 ( quoting 3A LEWIS H. ORLAND & KARL B. TEGLAND, WASHINGTON PRACTICE:
RULES PRACTICE, at 420 ( 4th ed. 1992)). Because Goldberg sought direct, rather than derivative,
recovery, the trial court did not err in granting the Quiggs summary judgment and dismissing
Goldberg' s claims.
Goldberg argues that the legislature authorized a direct action whenever a limited partner
brings suit against another partner for fiduciary breaches or when an LLC member sues an LLC
manager for such a breach. In support, Goldberg notes that the legislature defined the standard
of conduct partners owe each other in a limited partnership or that managers owe members of an
LLC separately from creating derivative rights of action. See RCW 25. 10. 441 ( standard of
conduct by a partner in a limited partnership); RCW 25. 15. 155 ( standard of conduct for an LLC
manager); RCW 25. 10. 706 ( derivative right of action in a limited partnership); RCW 25. 15. 370
derivative right of action in an LLC). RCW 25. 10. 441 does prescribe the duties the partners in a
limited partnership owe each other. But RCW 25. 10. 701 and RCW 25. 10. 706 define whether a
partner may pursue a claim for a breach of the duties owed in RCW 25. 10.441 directly or
derivatively. The legislature explicitly made the type of claims Goldberg asserts here derivative
in the partnership context and, as we discussed above, we hold the same rule applies in the LLC
context.
Goldberg also cites our opinion in Bishop of Victoria, 138 Wn. App. at 443, and the
Western District of Washington' s opinion in Finlay v. Takisaki, No. C05- 1118JLR, 2006 WL
1169794 ( W.D. Wash. April 28, 2006), claiming that they also support its reading that suits by
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partners or LLC members against other partners or LLC managers are always direct. We
disagree.
Bishop of Victoria involved a suit by one member of an LLC against another member.
Our opinion in Bishop of Victoria concerned the existence of fiduciary duties in a member
managed LLC. Bishop of Victoria, 138 Wn. App. at 455 -60. Because we found no breach of
any duty, we never analyzed whether the plaintiff needed to press a direct or derivative action to
remedy the breach. Bishop of Victoria, 138 Wn. App. at 454 -60. Bishop of Victoria, therefore,
offers no precedential authority for Goldberg' s proposition that the relationship between the
plaintiff and the defendant defines the type of suit the plaintiff must pursue to recover for
breaches of fiduciary duties. Cazzanigi v. Gen. Elec. Credit Corp., 132 Wn.2d 433, 443, 938
P. 2d 819 ( 1997).
Finlay involved a suit by a member of an LLC against a third party arising from damages
to the LLC. The Finlay court dismissed the suit based on standing grounds consistent with the
principles we discussed above. The trial court reasoned that Finlay suffered no injury aside from
the one he suffered derivatively from injury to the LLC. Finlay, 2006 WL 1169794 at * 3. Given
this lack of a direct personal injury, the trial court reasoned that Finlay lacked standing to pursue
direct claims against the third party. Finlay, 2006 WL 1169794 at * 3. Based on this reasoning,
the Finlay court noted that the LLC itself was the proper party to raise the claims Finlay pleaded
and dismissed his complaint. Finlay, 2006 WL 1169794 at * 3. Thus, Finlay stands for the
proposition that the nature of the injury, direct or derivative, determines whether a plaintiff must
pursue a direct or derivative remedy, just as we have held above. The identity of the party
inflicting the injury is irrelevant to this inquiry.
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CONCLUSION
We hold that the trial court did not err in granting the Quiggs' motion to strike. We hold
also that the court correctly determined that the arbitration clauses did not require the Quiggs to
arbitrate this dispute in their individual capacities. Accordingly, we affirm its grant of summary
judgment to the Quiggs on this issue and its denial of Goldberg' s motion to compel arbitration.
Finally, we hold that Goldberg could not pursue direct claims against the Quiggs for injuries it
suffered derivatively from injuries to the Partnership and LLC and, therefore, we affirm the trial
court' s determination that Goldberg lacked standing and was not the real party in interest.
Consequently, we affirm the trial court' s grant of summary judgment to the Quiggs on their
counterclaim, its denial of Goldberg' s motion to strike the Quiggs' defenses and counterclaims,
and its dismissal of Goldberg' s claims.
A majority of the panel having determined that this opinion will not be printed in the
Washington Appellate Reports, but will be filed for public record in accordance with RCW 2. 06. 040,
it is so ordered.
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