Benaroya Capital Company v. EMF Partners, No. 54428-4-I (WA 7/5/2005), No. 54428-4-I
| Court | United States State Supreme Court of Washington |
| Writing for the Court | Ellington |
| Docket Number | No. 54428-4-I |
| Parties | BENAROYA CAPITAL COMPANY, LLC, Respondent, v. EMF PARTNERS, LLC; VALBERG I, LLC; THOMAS JAMES INTERNATIONAL I, LLC; and THOMAS KROON and GWENANN KROON, Appellants. |
| Decision Date | 05 July 2005 |
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v.
EMF PARTNERS, LLC; VALBERG I, LLC; THOMAS JAMES INTERNATIONAL I, LLC; and THOMAS KROON and GWENANN KROON, Appellants.
Appeal from Superior Court of King County. Docket No. 02-2-11673-6. Judgment or order under review. Date filed: 06/14/2004. Judge signing: Hon. Michael S Spearman.
Counsel for Appellant(s), Fred B Burnside, Attorney at Law, 1501 4th Ave Ste 2600, Seattle, WA 98101-1664.
Bradley L. Fisher, Davis Wright Tremaine, 1501 4th Ave Ste 2600, Seattle, WA 98101-1688.
Stephen Michael Rummage, Attorney at Law, 1501 4th Ave Ste 2600, Seattle, WA 98101-1664.
Counsel for Respondent(s), Matthew Thomas Adamson, Jameson Babbitt Stites & Lombard, 999 3rd Ave Ste 1900, Seattle, WA 98104-4016.
Alan B. Bornstein, Attorney at Law, 999 3rd Ave Ste 1900, Seattle, WA 98104-4028.
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ELLINGTON, A.C.J.
In this factually complex commercial real estate case, we are asked to overturn pretrial summary judgments as to successor liability and de facto merger, and to reverse a jury's verdict on liability and damages. We affirm in all respects.
Benaroya Capital Company, LLC (Benaroya) owned commercial real estate in Redmond known as Willows II. In November 1999, Benaroya entered into a five-year lease with EMF Corporation (EMFC), which manufactured coin-counting kiosks, medical equipment, and other electronic equipment. The rent began at $9,350 per month plus a pro rata share of certain expenses. The lease contained a clause prohibiting assignment without Benaroya's consent:
Lessee shall not either voluntarily or by operation of law assign, transfer, convey or encumber this Lease or any interest under it . . . without Lessor's prior written consent, which consent will not be unreasonably withheld or delayed. . . . Any assignment or subletting without Lessor's consent shall be void, and shall, at Lessor's option, constitute a default under this Lease.
Ex. 2, 12.
EMFC was in financial trouble, and soon after occupying the premises, EMFC solicited a holding company, Thomas James International, Inc. (TJI), to try to turn the failing business around. TJI created a wholly-owned subsidiary called EMF Partners, LLC (EMFP), and in April 2000, EMFP acquired EMFC's assets and liabilities, including the lease, by way of an asset purchase and sale agreement (APSA). The APSA purported to limit EMFP's liability:
Buyer shall assume the agreements, leases, permits, accounts payable, registrations and other liabilities of Seller in connection with the Assets and the Business as set forth on Exhibit `B-5', in an amount not to exceed Forty Thousand and No/100 Dollars ($40,000.00).
Ex. 182, 2.3. The referenced Exhibit B-5 included the Benaroya lease. Benaroya was not informed of the EMFC-EMFP transaction until October 2001. EMFP continued EMFC's business in the Willows II space for about 16 months. In July 2001, EMFP's general manager Deborah Harrison signed a letter agreement with Benaroya amending the lease on behalf of `EMF.' The agreement authorized Benaroya to begin marketing the space to prospective replacement tenants, given that Harrison had notified Benaroya that EMF would vacate the space on August 1. The agreement provided that `{y}ou {EMF} will continue to be responsible for the Lease until a replacement tenant begins paying rent for the space, and for the portion of the real estate commission pertaining to the then unexpired term of your Lease.' Ex. 3.
In August 2001, EMFP moved its operations to a building owned by TJI. EMFP continued paying rent for the Willows II space through November 2001, but
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stopped all payments in December 2001. EMFP offered to forfeit the deposit and pay rent for two more months if Benaroya would cancel the remainder of the lease. Benaroya declined.
In January 2002, Benaroya terminated the lease, reserving the right to seek all remedies. In March 2002, Benaroya demanded that EMFC and EMFP pay $479,835.85 in past-due rent and damages. In response, EMFP's attorney advised that EMFP was insolvent and suggested that Benaroya mitigate its damages.
Throughout this period TJI owned 100 percent of EMFP. In March, TJI formed another wholly-owned subsidiary, Valberg I LLC (Valberg). In April 2002, Benaroya sued EMFP and EMFC.
In May 2002, TJI's majority shareholder and chairman of the board Thomas Kroon engaged Terry Greenke1 to undertake an appraisal of EMFP. Kroon informed Greenke of the Benaroya lawsuit. From his conversation with Kroon, Greenke understood that `Benaroya is seeking the full amount over the life of the lease which approximates $400,000. It is likely that judgment would go Benaroya's way in the full amount, and that would force Company into bankruptcy.' Clerk's Papers at 2559.
Kroon placed certain limitations on Greenke's work, such that Greenke made `no attempt to accurately value and inventory individual assets,' and `did not personally conduct an audit of individual expenses or revenue.' Ex. 47 at 216. Instead, the analysis and conclusions in the report were largely based on information furnished by Kroon and TJI: `No attempt has been made to verify the accuracy or completeness of this information.' Id. Greenke was provided a revenue projection for the company which anticipated a 2002 operating income of $551,568 and net income before taxes of $514,665. For some reason he could not recall, Greenke had written `ignore' on the document. Report of Proceedings (RP) (Mar. 29, 2004) at 90. He undertook no valuation of customer relationships. Although Greenke testified he took Kroon's projections of the company's future at face value (Kroon projected EMFP revenues at $6.7 million for years 2002 through 2005), Greenke's appraisal valued EMFP's assets at only $300,000. In June 2002, Valberg acquired EMFP's assets for the appraised price of $300,000.2 The three most profitable customers of EMFC/EMFP thus became Valberg's customers.3 Valberg earned more than $1.6 million from these customers in the 17 months following the June 2002 transfer.
Meanwhile, also in June 2002, Benaroya signed a 10-year lease with Schindler Elevator Corporation for the EMF space after making $191,770 worth of tenant improvements. In August 2002, Schindler moved in and began paying rent at $9,800 per month, gradually increasing to a maximum of $14,641 per month over 10 years.
In July and September 2002, Judge Glenna Hall granted Benaroya partial summary judgment against EMFC and EMFP, respectively, in the amount of $17,992.18 as the amount owed under the lease as of January 31, 2002 (pre-lease termination damages), but reserved issues relating to post-termination damages and attorney fees for trial.
In October, four months after Valberg acquired its assets, EMFP filed for Chapter 7 bankruptcy protection. Benaroya was listed as a creditor and received notice of the filing. The bankruptcy trustee did not challenge Valberg's purchase of EMFP's assets, and concluded there was no property available for distribution. The bankruptcy proceedings concluded in February 2003.
In February 2003, six months after Schindler moved in, Benaroya sold Willows II.
In July 2003, Benaroya amended its complaint, joining Valberg, TJI, and Kroon as defendants. Benaroya alleged that Valberg was liable for EMFP's debts on three theories of successor liability,4 and that TJI and Kroon were liable for EMFP's debts on a theory of corporate disregard. Benaroya claimed post-lease termination damages of $364,276: $76,154 in unpaid rents for the time between lease termination to the sale of the building, $191,770 in tenant improvement costs incurred to attract Schindler as a mitigating tenant, $96,351 in leasing commission costs incurred to attract Schindler, and the remaining EMFC commission costs. In January 2004, the parties filed cross motions for summary judgment.
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Judge Michael Spearman confirmed Judge Hall's ruling that EMFP was liable for EMFC's breach as its assignee, despite the anti-assignment clause and EMFP's purported limitation of liability,5 and also concluded that the EMFP-Valberg transaction was a de facto merger as a matter of law. All other motions were denied, and the case proceeded to jury trial. The jury awarded damages against each defendant, and the court entered judgments in the amount of $694,216 against EMFP, Valberg, and Kroon, including both pre- and post-termination damages totaling $387,494;6 interest,7 attorney fees, and costs; against TJI, in the amount of $375,621 including both pre- and post-termination damages, interest, attorney fees, and costs; and against EMFC, in the amount of $473,597, including the same components.
The court rejected all challenges to the judgment and denied defendants' post-trial motion for judgment as a matter of law. This appeal followed.
EMFP's Liability for Breach of Lease. Appellants first contend the trial court erred by granting summary judgment for Benaroya on its claim against EMFP for breach of the commercial lease. We apply the usual standard of review in summary judgment.8
Appellants point out that the lease signed by EMFC and Benaroya prohibits assignment without Benaroya's consent. Because Benaroya never consented to the assignment from EMFC to EMFP, appellants argue the assignment was void, and EMFP thus has no obligation to Benaroya under the lease.
Appellants rely on an Oregon case, Cascade Shopping Center v. United Grocers, Inc., 106 Or. App. 428, 808 P.2d 720 (1991). In Cascade, the lessor (Cascade) and lessee (R.V.L.P. Foods, Inc.) signed a lease containing an anti-assignment clause. Id. at 430 n.2. R.V.L.P. defaulted on obligations to United Grocers, which held perfected security interests in the lessee's inventory and `leasehold interests.' R.V.L.P. assigned the lease to United Grocers without Cascade's consent. United Grocers expressly declined to...
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