Cambridge Townhomes v. Pacific Star Roofing

• Decision Date: 18 June 2009
• Docket Number: No. 81003-6.,81003-6.
• Citation: 166 Wn.2d 475,209 P.3d 863
• Court: Washington Supreme Court
• Parties: CAMBRIDGE TOWNHOMES, LLC, a Washington limited liability company; and Polygon Northwest Company, a Washington general partnership, Respondents, v. PACIFIC STAR ROOFING, INC., a Washington corporation; and P.J. Interprize, Inc., a Washington corporation, Petitioners, and 4 Bees Siding, Inc., a Washington corporation; Courtesy Glass, Inc., d/b/a Pacific Decktec, a Washington corporation; Giard Construction LLC, a Washington limited liability company; Interwest Industries, Inc., a Washington corporation; Janes Brothers Waterproofing, Inc., a Washington corporation; United Development Corporation d/b/a Mill Creek Landscaping Services, a Washington corporation; Puget Sound Foundation Services, Inc., a Washington corporation; Creative Concrete, Inc., a Washington corporation; and J.S. Contracting, Inc., a Washington corporation, Defendants, Gerald Utley, Petitioner/Intervener.

209 P.3d 863

166 Wn.2d 475

CAMBRIDGE TOWNHOMES, LLC, a Washington limited liability company; and Polygon Northwest Company, a Washington general partnership, Respondents, v. PACIFIC STAR ROOFING, INC., a Washington corporation; and P.J. Interprize, Inc., a Washington corporation, Petitioners, and 4 Bees Siding, Inc., a Washington corporation; Courtesy Glass, Inc., d/b/a Pacific Decktec, a Washington corporation; Giard Construction LLC, a Washington limited liability company; Interwest Industries, Inc., a Washington

corporation; Janes Brothers Waterproofing, Inc., a Washington corporation; United Development Corporation d/b/a Mill Creek Landscaping Services, a Washington corporation; Puget Sound Foundation Services, Inc., a Washington corporation; Creative Concrete, Inc., a Washington corporation; and J.S. Contracting, Inc., a Washington corporation, Defendants,

Gerald Utley, Petitioner/Intervener.

No. 81003-6.

Supreme Court of Washington, En Banc.

Argued February 10, 2009.

Decided June 18, 2009.

Eileen I. McKillop, Oles Morrison Rinker & Baker LLP, Mark A. Clausen, Clausen Law Firm PLLC, Seattle, WA, for Petitioners.

Jerret E. Sale, Deborah Lynn Carstens, Bullivant Houser Bailey PC, Gregory Paul Turner, Lee Smart PS, Seattle, WA, for Respondents.

STEPHENS, J.

¶ 1 Respondents Cambridge Townhomes, LLC, a developer, and Polygon Northwest Company (Polygon),¹ a general contractor, were involved in a townhome condominium development project between 1997 and mid-2000. During construction, Polygon entered into a subcontract with intervenor Gerald Utley, who did business as P.J. Interprize during the time Polygon originally contracted with him. Utley subsequently incorporated P.J. Interprize, Inc. (P.J. Inc.) and signed a new contract with Polygon under the incorporated name.² In early 2003, after the condominium project was substantially completed, the Cambridge Townhomes Homeowner's Association (Association) notified Polygon of several construction defects. Polygon settled with the Association and then in March 2004 filed suit for breach of contract and indemnification against various subcontractors, including P.J. Inc. Polygon did not file against Utley's sole proprietorship. Utley had filed for chapter 7 bankruptcy in February 2004. Polygon's claims against P.J. Inc. proceeded to a summary judgment hearing. After denying Polygon's motion to amend its complaint to include Utley, the trial court granted summary judgment in favor of P.J. Inc., dismissing Polygon's claims with prejudice. Polygon appealed, and the Court of Appeals reversed.

¶ 2 We affirm the Court of Appeals. We hold that P.J. Inc. may be liable for the sole proprietorship's construction defects under a theory of successor liability; that Polygon's breach of contract claim against the sole proprietorship is not time-barred; that the trial court erred when it denied Polygon's motion to amend its complaint; and that Polygon's claim for indemnity from P.J. Inc. was within the scope of the parties' contractual indemnity clause.

FACTS AND PROCEDURAL HISTORY

¶ 3 In approximately 1997, Cambridge and Polygon began work on a condominium development. The development was set to be constructed in three phases between 1997 and mid-2000, consisting of 40 multiunit buildings.

¶ 4 In August 1998, Polygon subcontracted with Gerald Utley, a sole proprietor doing business as P.J. Interprize, to install vinyl siding and trim on phase II of the project. In November 1998, the sole proprietorship's work on phase II was completed. On October 1, 1999, a temporary certificate of occupancy for phase II was issued.

¶ 5 Meanwhile, in January 1999, Utley incorporated his business as P.J. Inc. In April 1999, Polygon entered into a subcontract with P.J. Inc. for phase III of the project. This subcontract also included an indemnity agreement.

¶ 6 In early 2003, the Association notified Polygon of construction defects in the condominium development. In November 2003, Polygon and the Association agreed to settle conditioned upon funding.

¶ 7 In February 2004, Utley and his wife jointly filed for personal bankruptcy in the United States Bankruptcy Court for the Western District of Washington. In response to a request on the bankruptcy form to list all trade names used in the last six years, Utley listed P.J. Inc. Utley also listed the nature of his debts as business related. He named Cambridge as one of the numerous creditors to whom he owed money.

¶ 8 In March 2004, Polygon filed suit against the subcontractors involved in the condominium development, including P.J. Inc. Polygon asserted claims for breach of contract and indemnification. Polygon sued P.J. Inc. in its corporate capacity but did not list Utley or the sole proprietorship in its complaint.

¶ 9 In May 2004, Polygon filed a motion in the bankruptcy court to allow it to pursue claims against Utley in his capacity as a sole proprietor to the extent insurance assets were available. The court granted the motion, allowing Polygon to proceed in this action against Utley "for the purpose of pursuing any insurance proceeds that are the result of any insurance coverage the Debtor may possess." Clerk's Papers (CP) at 1210.

¶ 10 In June 2004, the bankruptcy court issued a chapter 7 discharge order for Utley.

¶ 11 Meanwhile, the case against the subcontractors proceeded to summary judgment. In May 2005, the trial court dismissed the indemnity claims against all the subcontractors, including P.J. Inc., granting summary judgment in their favor. In October 2005, the trial court ruled that the bankruptcy discharge barred Polygon from pursuing claims against P.J. Inc. under a theory of successor liability for Utley's work as a sole proprietor. The court also denied Polygon's request to amend its complaint to add Utley as a defendant in his capacity as a sole proprietor. In November 2005, Polygon filed a separate suit against the sole proprietorship. That same month, the court dismissed Polygon's breach of contract claims.

¶ 12 Polygon appealed. The Court of Appeals reversed, holding that P.J. Inc. could be held liable under a theory of successor liability for Utley's actions as a sole proprietor and that the bankruptcy discharge did not bar Polygon's claims against the sole proprietorship. Cambridge Townhomes LLC v. Pac. Star Roofing, Inc., No. 57328-4-I, 139 Wash.App. 1008, 2007 WL 1666653, at *3-6 (Wash.Ct.App. June 11, 2007). The Court of Appeals also reversed the trial court's order denying Polygon's motion to amend its complaint to name Utley. P.J. Inc. petitioned this court for review, which we granted. We also granted Utley leave to intervene on behalf of the sole proprietorship.

ANALYSIS

¶ 13 Summary judgment is appropriate only if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56. Our review is de novo.

A. Successor Liability

¶ 14 Washington adheres to the general rule that a corporation purchasing the assets of another corporation does not become liable for the debts and liabilities of the selling corporation. Hall v. Armstrong Cork, Inc., 103 Wash.2d 258, 261-62, 692 P.2d 787 (1984). An exception to this rule may exist, however, where (1) there is an express or implied agreement for the purchaser to assume liability; "(2) the purchase is a de facto merger or consolidation; (3) the purchaser is a mere continuation of the seller; or (4) the transfer of assets is for the fraudulent purpose of escaping liability." Id. at 262, 692 P.2d 787.

¶ 15 The parties here focus on "mere continuation" as the relevant exception. Washington courts rely on several factors to determine whether a successor business is a mere continuation of a seller. Cashar v. Redford, 28 Wash.App. 394, 397, 624 P.2d 194 (1981). These include a common identity between the officers, directors, and stockholders of the selling and purchasing companies, and the sufficiency of the consideration running to the seller corporation in light of the assets being sold. Id. In considering these factors, the objective of the court is to discern whether the "purchaser represents `merely a "new hat" for the seller.'" Id. (quoting McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 570, 264 A.2d 98, 106 (1970)).

¶ 16 The Court of Appeals framed the issue here as one of first impression because instead of one corporation becoming a new corporation, we have a sole proprietorship becoming a corporation. Cambridge, 2007 WL 1666653, at *4. But as the Court of Appeals also noted, we have previously recognized in "reviewing the history of the mere continuation exception ... that the exception was first expanded by a federal court when it found a corporation to be a mere continuation of a predecessor sole proprietorship." Id. (citing Martin v. Abbott Labs., 102 Wash.2d 581, 611, 689 P.2d 368 (1984)). The particular form of the business entity should not be determinative.

¶ 17 The successor liability doctrine is a common law rule, and the principle it embraces is not linked to statutes or laws governing corporate entities. Though there is no continuation of officers, directors, or shareholders where a sole proprietorship is involved, we can consider the continuity of individuals in control of the business as satisfying this factor, which at any rate is not a rigid requirement for finding successor liability. Thus, we reject P.J. Inc.'s argument that as a matter of law, a corporation cannot be a mere continuation of a predecessor sole proprietorship.

¶ 18 Here, the undisputed facts show that P.J. Inc. is a mere continuation of the sole proprietorship. The business performed by P.J. Interprize and P.J. Inc. is the same. The same individual, Utley, was at the helm of both entities. The clients, at least in the case of Polygon, remained the same. There is no issue of sufficient consideration in this case because there was no sale of assets. Utley simply chose to incorporate his business. In sum, P.J. Inc....