Cascade Falls, L.L.C. v. Henning, No. 25134-9-III (Wash. App. 4/8/2008)
| Decision Date | 08 April 2008 |
| Docket Number | No. 25134-9-III.,25134-9-III. |
| Court | Washington Court of Appeals |
| Parties | CASCADE FALLS, L.L.C., a Washington limited liability company; and SCOTT HENNING, a married individual, Respondents. v. GREGORY HENNING and CARA HENNING, a married couple; and PAVILION POOLS, L.L.C., a Washington limited liability company, Appellants, ONA MARR and JOHN DOE MARR d/b/a MARR FINANCIAL SERVICES, Defendants. |
Appeal from Spokane Superior Court. Docket No. 04-2-04507-4. Judgment or order under review. Date filed: 03/31/2006. Judge signing: Honorable Harold D Clarke III.
Counsel for Appellant(s), Stanley Edward Perdue, Attorney at Law, 5915 S Regal St Ste 214, Spokane, WA, 99223-6970.
Counsel for Respondent(s), Jeffrey Lawrence Supinger, Attorney at Law, 1100 Us Bank Bldg, 422 W Riverside Ave, Spokane, WA, 99201-0369.
A Spokane County jury found that Gregory Henning1 breached fiduciary duties or committed constructive fraud to convert $91,750 from the plaintiffs — his brother Scott Henning and their equally-owned former business Cascade Falls, LLC. The trial court awarded Scott prejudgment interest, attorney fees, and costs for a total judgment of $183,696.76.
Greg appeals, contending the trial court erred by (1) ruling Greg withdrew as a Cascade Falls member and was judicially estopped from claiming otherwise; (2) ruling Scott's claims were not barred by statutes of limitation for Uniform Commercial Code (UCC) and common law conversion/fiduciary breach/fraud claims; (3) ruling Scott was not required to file a derivative action to recover from Greg; (4) ruling Scott was not required to file a claim for an accounting in order to maintain the lawsuit; and (5) refusing to give a jury instruction on apparent authority. Greg also contends the court erred by awarding Scott attorney fees and prejudgment interest. We affirm the trial court in all respects.
In 1997, Greg and Scott Henning formed, as equal owners, Naturescapes Northwest LLC, to fabricate and install artificial landscape rock used in swimming pools and waterfalls. Greg also viewed the business as a chance to supplement his separate swimming pool construction business, Pavilion Pools, LLC, in which Scott had no involvement. Pavilion Pools provided initial startup capital for the Naturescapes entity, which was later renamed Cascade Falls, LLC. By the end of 2000, however, Greg and Scott discussed going in different directions, and Greg withdrew as a Cascade Falls member. Greg reiterated this fact in an affidavit he filed in 2002 in an Idaho lawsuit, the "Puryear" matter, in which he stated under oath that he withdrew from Cascade Falls in January 2001.
Beginning in 2001, Scott continued to operate Cascade Falls as its sole member. Ona Marr, the tax preparer for Cascade Falls, understood that Greg had withdrawn from Cascade Falls. Ms. Marr thus prepared Cascade Falls' tax return to show Scott as sole owner. The 2001 tax return reflected the income from the entity's Coldwater Creek project undertaken by Scott.
In 2004, Scott learned of certain irregular business and accounting activities by Greg, who, unbeknownst to Scott, had continued to operate using the Cascade Falls' name and one of its bank accounts. Scott then filed this lawsuit on September 29, 2004. Scott alleged breach of fiduciary duties, fraud, and conversion of Cascade Falls' money by Greg. Scott alleged he was Cascade Falls' sole remaining member because Greg withdrew in January 2001. Scott also named Greg's separate entity, Pavilion Pools, LLC, and Ms. Marr as defendants. Ms. Marr was subsequently dismissed as a party. Greg and Pavilion Pools asserted various counterclaims against Scott and Cascade Falls for money owed. The jury ultimately awarded Pavilion Pools $10,281.79 in damages. The court awarded Pavilion Pools $3,742 in prejudgment interest, $57.81 in costs and $200 statutory attorney fees. No appeal is taken from that judgment.
Prior to trial, Greg sought a declaratory ruling that he was still a member of Cascade Falls because Scott had not formally consented in writing to his withdrawal pursuant to the limited liability company (LLC) disassociation statute, RCW 25.15.130. Scott contended Greg should be estopped from claiming membership in Cascade Falls in light of his affidavit in the Puryear lawsuit.
The Puryear lawsuit, filed in Idaho, involved Pavilion Pools, Naturescapes Northwest, Cascade Falls, and other parties. As part of a summary judgment motion to dismiss Pavilion Pools as a party, Greg submitted an affidavit stating that he withdrew from Cascade Falls. Cascade Falls was involved, but Pavilion Pools' only connection was that it had provided Naturescapes with its startup money in 1997. Scott filed a companion affidavit in the Puryear case confirming that Naturescapes' name had been changed to Cascade Falls, that Greg's affidavit was true, and that he (Scott) was sole owner of Cascade Falls as of January 1, 2001. Both affidavits were drafted by the attorney for Greg and Pavilion Pools.
In the matter here, the court ruled Greg was judicially estopped from claiming membership in Cascade Falls because of his affidavit filed in the Puryear case. The court also rejected Greg's contention that Scott's lawsuit was statutorily deficient because Scott did not file it as a derivative action.
Greg also filed a pretrial motion to exclude from evidence (1) certain Cascade Falls checks negotiated before September 29, 2001, as barred by the UCC three-year statute of limitation applicable to conversion of negotiable instruments, RCW 62A.3-118(g); and (2) those same money transfers as barred by the three-year statute of limitation for claims of fiduciary breach, fraud, and conversion. RCW 4.16.080. The court ruled the UCC did not apply, and that the jury should determine whether Scott's claims were otherwise time-barred because he should have discovered them earlier.
From its inception, Cascade Falls maintained its bank account at Spokane Teachers Credit Union (STCU). Scott and Greg were joint signers with mutual access to the account. In lieu of taking regular salaries or draws, they paid personal expenses directly from that account with the understanding the withdrawals would be equalized. Each of them commingled their personal and business affairs in this account.
In 2000, Cascade Falls was the successful bidder as general contractor on a $700,000 contract for the "Mirabeau Springs" project at Mirabeau Point in Spokane. Greg negotiated the contract and did not involve Scott in any part of the project. Scott instead, tended to Cascade Falls' other day-to-day business. Greg opened a second Cascade Falls' bank account at STCU for the Mirabeau funds (Mirabeau account). Greg was sole signatory. He completely managed and controlled that account. Scott had no access. Greg knew Scott was about to file for bankruptcy and feared that if Scott accessed the account, he would spend the money and Cascade Falls would be unable to pay vendors. Greg did regularly transfer money from the Mirabeau account into the Cascade Falls' joint account.
Scott agreed to the Mirabeau account arrangement but did not know it was in Cascade Falls' name. He saw only the account number when Greg made the transfers into Cascade Falls' joint account. Scott never asked for access to the Mirabeau account, and he trusted Greg to be fair and honest in their business dealings, consistent with their equal partnership agreement. Greg likewise acknowledged a fiduciary obligation to Cascade Falls and his brother. He knew Scott trusted him. Greg nevertheless testified Scott had no interest in seeing the bank statements or the books relating to the Mirabeau project because Scott had no involvement in the project.
Greg essentially completed the Mirabeau Springs project by November 2000. At year end, Greg told Scott he wished to withdraw as a Cascade Falls member as of January 1, 2001. Greg testified that he, in fact, withdrew at that time because the company did not have any projects, and he and Scott had discussed going in different directions. The Mirabeau account then had a balance of $79,762.41. Greg did not relinquish the account and made no accounting to Scott, who was unaware of these funds. Also unbeknownst to Scott, Greg loaned $69,500 to their brother Mark from the Mirabeau account — $22,500 in 2000 and $47,000 in 2001. According to Scott, the $47,000 was never repaid to Cascade Falls.
On May 1, 2001, Greg entered into an additional $138,997 contract to perform a second Mirabeau Point project known as "Mirabeau Trails." Despite his withdrawal from Cascade Falls earlier in the year, Greg represented himself to Mirabeau officials as a Cascade Falls member and signed the contract in its name. He also used Cascade Falls' contractor's and business licenses and liability insurance for the project. Greg testified he did so because Mirabeau Trails was a fast track project and he did not have time to form a new company. He said Scott agreed to this. But Scott testified he had absolutely no knowledge of the Mirabeau Trails project. Greg also continued to use the Mirabeau bank account and admitted to personally taking all of the proceeds of the Mirabeau Trails project. He explained that he and Scott had agreed that, in exchange, Scott would take a subcontract for an artificial waterfall project with Coldwater Creek and keep those proceeds. Scott denied any such discussions. Scott testified that Greg did help him negotiate the Coldwater Creek contract, but that he (Scott) signed the contract in his capacity as Cascade Falls' owner.
Scott began the Coldwater Creek project in the fall of 2001. Cascade Falls was low on money, however, and Scott had to rely on another entity (Land Expressions) to supply and back charge him for labor. This cost Cascade Falls an extra net $28,000. Scott testified that the money Greg loaned to Mark...
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