Beagles v. Seattle-First Nat. Bank

• Decision Date: 25 April 1980
• Docket Number: No. 3535-II,SEATTLE-FIRST,3535-II
• Citation: 610 P.2d 962,25 Wn.App. 925
• Parties: J. W. BEAGLES, Appellant, v.NATIONAL BANK, a National Banking Association; Seattle First Company, a Washington Corporation; Computer Systems, Inc., a Washington Corporation, a/k/a Computech, d/b/a First Bank Services Corporation, and Seafirst Corporation, Respondents.
• Court: Washington Court of Appeals

Page 925

25 Wn.App. 925

610 P.2d 962

J. W. BEAGLES, Appellant, v. SEATTLE-FIRST NATIONAL BANK, a National Banking Association Seattle First Company, a Washington Corporation; Computer Systems, Inc., a Washington Corporation, a/k/a Computech d/b/a First Bank Services Corporation, and Seafirst Corporation, Respondents.

No. 3535-II.

Court of Appeals of Washington, Division 2.

April 25, 1980.

William J. Rush, Tacoma, for appellant.

Lauren D. Studebaker, Seattle, for respondents.

ARMSTRONG, Judge. ^*

The basic issue in this appeal is whether a party to a reorganization agreement, unhappy with the valuation of stock transferred pursuant to the agreement, is precluded by collateral estoppel from enforcing an arbitration clause contained in the agreement. We hold that he is not and reverse the order of the trial court granting defendant's motion for summary judgment. ¹

In 1971 J. W. Beagles and the other stockholders of Computech Corporation entered a reorganization agreement by which a subsidiary company of defendant Seattle- First National Bank acquired the stock of Computech. The reorganization agreement established a purchase plan by which the stockholders were to be paid for their stock out of a fund made up of the net profits of the successor corporation. Assuming the fund showed a profit, payments could begin on January 1, 1974, and the plan was to terminate on January 15, 1977. The reorganization agreement provided that net income for purposes of the purchase plan fund would be determined by generally accepted accounting principles and that disputes "shall be submitted to a mutually acceptable independent certified public accountant for arbitration" whose decision shall be binding on the parties. For purposes of disbursement, valuation was to be made at the end of the fiscal quarter preceding payment with valuation determined by the records of the plan or, if the parties could not agree, by an independent accountant. The parties also agreed that plaintiff and the other stockholders would remain in their management positions as employees of the successor corporation during the buyout period.

Following substantial losses in 1972, an officer of defendant informed plaintiff that it would be impossible for the purchase plan fund to show a profit before 1977 and that he should not expect any payment for his Computech stock. Plaintiff disputed this and claimed that if certain additions were made to the net profit and loss statement the corporation and the purchase plan fund would show a net profit.

In 1974 plaintiff filed suit in Federal District Court under Rule 10b-5 of the 1934 Securities and Exchange Act alleging a fraudulent scheme on the part of defendant to deprive the Computech stockholders of their stock without payment. After hearing evidence, the Federal District Court dismissed the 10b-5 action in January 1977 and entered judgment for defendant. In its findings the Federal Court accepted the view of defendant that Computech was in poor financial condition when defendant acquired its stock in 1971, and that the severe losses in 1972 were caused by the continued poor management by plaintiff and the other Computech stockholders and not, as plaintiff had argued, by deliberate mismanagement by defendant so that the corporation would not show a profit. Included in its findings, the Federal District Court entered finding of fact No. 113 which approved defendant's method of accounting:

The value of the Purchase Plan Fund as of the end of 1975, taking into account appropriate adjustments from the books and records of the corporation to reflect the difference between the operating books of the corporation and the accounting for the Purchase Plan Fund, which adjustments are the add-back of the amortization of the Tally software; the add-back of rental charged in 1973 in excess of the $8,500 figure agreed to by Mr. Beagles; the add-back of the chargeoff of Tally leasehold improvements and the add-back of the management bonus paid in 1974, but without taking into account any other adjustments proposed by the plaintiffs herein, which adjustments the Court finds to be either too speculative or inappropriate, was a negative $418,931. The company will not show after-tax profits during the year 1976 sufficient to overcome this negative value and the Computech management group will not be entitled to any distribution from the Purchase Plan Fund.

(Italics ours.)

Plaintiff continued to dispute the method of accounting used by defendant and demanded a formal accounting in March 1977. Defendant provided a financial statement from its accountant showing a negative balance for the fund as of December 31, 1976. The financial statement for the same period prepared by plaintiff's accountant showed a net profit in the fund available for distribution. The discrepancy in the two accountings is explained primarily by the additional adjustments made by plaintiff's accountant to the net profit and loss figures.

Following submission of the two accountings, plaintiff demanded that an independent accountant be appointed to resolve the dispute pursuant to the arbitration clause contained in the reorganization agreement. Defendant refused, claiming that its accounting method had already been approved by the Federal District Court. Plaintiff subsequently filed the present action in state court to enforce the arbitration clause. Defendant moved for summary judgment arguing that the issue of the proper accounting method had already been determined in the federal securities action and that plaintiff was precluded from reopening the question of the proper accounting method in a new lawsuit by collateral estoppel. The trial court agreed and entered judgment for defendant.

Collateral estoppel prevents the relitigation of a particular issue or determinative fact after the party estopped has had a full and fair opportunity to present its case in order to promote the policy of ending disputes. E. g. Henderson v. Bardahl Int'l Corp., 72 Wash.2d 109, 115, 431 P.2d 961 (1967); Clippinger v. Birge, 14 Wash.App. 976, 983, 547 P.2d 871 (1976). The modern requirements for application of the doctrine are: (1) the issue decided in the prior adjudication must be identical with the one presented in the second; (2) the prior adjudication must have ended in a final judgment on the merits; (3) the party against whom the plea of collateral estoppel is asserted must have been a party or in privity with a party to the prior litigation; and (4) application of the doctrine must not work an injustice. Lucas v. Velikanje, 2 Wash.App. 888, 894, 471 P.2d 103 (1970). Accord, Dunlap v. Wild, 22 Wash.App. 583, 589-90, 591 P.2d 834 (1979). The only element at issue in the present case is the first element: whether the proper method of accounting for purposes of valuation of plaintiff's stock was determined in the federal securities action so as to preclude a second action to enforce the reorganization agreement's arbitration clause to settle the dispute on the method of accounting. Defendant argues that, since finding of fact No. 113 entered by the Federal District Court approved its method of accounting, this issue was clearly determined in a prior action, and collateral estoppel applies to bar any future actions in which the proper method of accounting is an issue. We disagree.

The party asserting the doctrine of collateral estoppel has the burden to show that the determinative issue was litigated in a prior proceeding. Luisi Truck Lines, Inc. v. Washington Utilities and Transportation Comm'n., 72 Wash.2d 887, 894, 435 P.2d 654 (1967); Meder v. CCME Corp., 7 Wash.App. 801, 807, 502 P.2d 1252 (1972). Issues not material in the first adjudication, although determined therein, do not necessarily become precluded by operation of collateral estoppel. Luisi Truck Lines, Inc. v. Washington Utilities & Transportation Comm'n, supra; Dolby v. Fisher, 1 Wash.2d 181, 189, 95 P.2d 369 (1939); McGee v. Wineholt, 23 Wash. 748, 751, 63 P. 571 (1901). Accord, Dixon v. Fiat-Roosevelt Motors, Inc., 8 Wash.App. 689, 695, 509 P.2d 86 (1973). The party asserting the doctrine must prove that the...