Dragt v. Dragt/Detray, LLC

• Decision Date: 03 July 2007
• Docket Number: No. 35046-7-II.,35046-7-II.
• Citation: 161 P.3d 473,139 Wn. App. 560
• Parties: Henry DRAGT and Jane Dragt, husband and wife, Appellants, v. DRAGT/DeTRAY, LLC, a Washington limited liability; and E. Paul DeTray and Phyllis DeTray, and their marital community, Respondents.
• Court: Washington Court of Appeals

161 P.3d 473

139 Wn. App. 560

Henry DRAGT and Jane Dragt, husband and wife, Appellants, v. DRAGT/DeTRAY, LLC, a Washington limited liability; and E. Paul DeTray and Phyllis DeTray, and their marital community, Respondents.

No. 35046-7-II.

Court of Appeals of Washington, Division 2.

July 3, 2007.

Kevin Arnold Bay, Robert Richard King, Ryan Swanson & Clevelans PLLC, Aaron Matthew Laing, Seattle, WA, for Appellants.

R. Alan Swanson, Law Offices of R. Alan Swanson, PLLC, Olympia, WA, Robert G. Casey, David John Corbett, Eisenhower & Carlson PLLC, Tacoma, WA, for Respondents.

PENOYAR, J.

¶ 1 Henry and Jane Dragt appeal the trial court's conclusion that they breached their contractual and fiduciary duties as members of a limited liability company between the Dragts and land developer, Paul DeTray. The Dragts owned a large parcel of land that they wanted to develop, but they lacked the funds and expertise. In 1996, they formed Dragt/DeTray, LLC (the LLC) for the purpose of developing their property. DeTray agreed to front the costs and to provide his expertise to develop the Dragts' land. The operating agreement granted the LLC a future option to purchase the land but the Dragts insisted they did not want to transfer title of their land to the LLC at that time. Eventually, the Dragts became frustrated with the progress of the development and, in 2004, they consulted an attorney. The attorney advised them that the LLC's option was legally unenforceable. The Dragts proceeded to sell their land to a third party buyer without informing DeTray. This lawsuit ensued.

¶ 2 The trial court concluded that the option was unenforceable but that the parties had modified the LLC operating agreement and that the Dragts agreed not to sell their land. The court then awarded DeTray damages for breach of contract and breach of fiduciary duty based on the operating agreement. We agree with the trial court that the option was unenforceable but hold that the trial court erred in concluding that the Dragts breached their contractual and fiduciary duties to DeTray. We agree with DeTray, however, that the Dragts were unjustly enriched by his financial contributions to the LLC and we remand to the trial court to award DeTray restitution in quantum meruit. Affirmed in part, reversed in part, and remanded.

FACTS

¶ 3 The Dragt owned and operated a dairy farm on approximately 220 acres of land located in Yelm, Washington. They sold their dairy herd in 1993 and ceased dairy operations. They attempted to sell their land, but were unsuccessful and contacted Frank Kirkbride, the principal in a development management company, for advice. Kirkbride proposed several options and told them that they could sell their land "as is" for $280,000. The Dragts wanted a much higher price for the land and they asked him to determine the land's suitability for development.

¶ 4 Kirkbride suggested that the Dragts find a partner with the necessary capital to finance the development. He introduced the Dragts to Paul DeTray, a property developer with experience developing subdivisions for manufactured homes. The Dragts and DeTray reviewed a partnership agreement, but decided not to enter into the contract because the arrangement required the Dragts to contribute their land to the partnership. Henry Dragt stated that he did not want to contribute his property or transfer his property title to the partnership. They instead formed a limited liability company so the Dragts would not have to transfer title. Henry Dragt emphasized that he did not want his land to be "tied up" during the land development venture. 1 Report of Proceedings (RP) at 32.

¶ 5 In 1996, DeTray's accountant drafted a Limited Liability Company Agreement (the Agreement) for the LLC, and DeTray and the Dragts signed the Agreement. The LLC's purpose was to acquire, develop, construct, manage, own, and sell real property. The parties agreed that the Dragts would contribute their land to the LLC and DeTray would contribute his money and expertise. The Dragts understood that they would continue to own the land, pay the taxes and insurance, and maintain the land. Instead of transferring the land title to the LLC, the Dragts granted the LLC an option to purchase the land. The Agreement stated:

The Member, Dragt, grants the Company an option to acquire the 220 +/acres of real estate whose legal description is set forth in attached Schedule 2.

1 Clerk's Papers (CP) at 40-41. The parties understood that the Dragts' land would be held for development by the LLC and that the option was binding and enforceable.

¶ 6 Each member also contributed $500 to the LLC and acquired an equal 50 percent interest in the LLC. The Agreement stipulated that each member was required to make "additional Capital Contributions as shall be determined by the Manager from time to time to be reasonably necessary to meet the expenses of the Company . . ." 1 CP at 41. The Agreement explained that each member would receive 50 percent interest in the LLC and outlined a complex method of compensating each member for contribution or services to the LLC.

¶ 7 DeTray was the manager of the LLC and Dragt was a member. The Agreement stated that the LLC's manager had fiduciary responsibilities for the safekeeping and use of all the LLC's funds and assets. It contained no deadline for development completion and it stated that the LLC's term extended to the year 2046. The Agreement outlined a procedure for notice to members and gave members "first refusal rights" if a member desired to transfer all or a portion of his membership interest in the LLC to a third party. 5 CP at 882, 1 CP at 49. The Agreement stated that it was "the complete and final agreement of the parties relating to the transactions contemplated by this Agreement." 5 CP at 883. It also provided that it may not be amended except by unanimous written agreement of all the Members. Finally, the Agreement stated that if any contract provision was invalid, illegal, or unenforceable, the remainder of the Agreement would still be enforceable.

¶ 8 The LLC was a legally organized limited liability company and was properly incorporated with the Washington Secretary of State. The parties never dissolved the LLC and neither party argued that the LLC was improperly formed.

¶ 9 After forming the LLC, the Dragts did not have sufficient funds to continue making mortgage payments on the land. DeTray began making the mortgage payments in 1997 and also executed a personal guarantee on the mortgage. DeTray thought that he was obligated to make the payments under the Agreement's terms and due to the fiduciary duties he owed as the LLC manager. In the first three years of the land development venture, DeTray conducted surveying and topographical studies of the land. In total, he contributed $593,462.66 to the LLC. He paid $124,371.62 for sewer connection; $69,000 for consultant reports and designs; $124,000 for access to a wastewater treatment facility; and $280,000 in mortgage payments.

¶ 10 Almost ten years into the land development venture, the Dragts became frustrated with the development progress. In March 2004, Henry Dragt requested a meeting with DeTray. He expressed his frustration and indicated that he wanted DeTray to either "buy him out" or he wanted to "buy out" DeTray from the land development venture. 1 RP at 113. He told DeTray that he would give the LLC operation only three to four more months to progress. After this meeting, DeTray presented an offer to the Dragts; he agreed to assume responsibility of the Dragts' loan, which was approximately $220,000, and give the Dragts $450,000 in cash. The Dragts did not accept this offer.

¶ 11 Two months later, in May 2004, Henry Dragt received a letter from the Yelm community development director, indicating that because no significant progress had been made on the development project, the city would withdraw the LLC's land use application. Yelm's community development director testified that he wrote the letter because typically, a land use application will not typically "languish as long as" the LLC's application. 2 RP 32.

¶ 12 Throughout the land development venture with DeTray, the Dragts received frequent inquires from developers seeking to purchase his land. In 2004, Doug Bloom, a developer and member of Tahoma Terra, LLC, approached Dragt and inquired about purchasing the land. The Dragts sought legal advice. They were unsure what their obligations to the LLC were if they sold the land to Bloom. An attorney informed Henry Dragt that if he sold the property outside the LCC arrangement, he would only be required to reimburse DeTray for his financial costs that DeTray accrued during the development venture.

¶ 13 The Dragts decided to proceed with the sale to Bloom and did not inform DeTray that they intended to sell the land. The sale to Bloom closed in December 2004, nine months after Henry Dragt's March 2004 meeting with Detray. Bloom's purchase price included the price of the land, $3,300,000, plus $280,000 to be paid to DeTray for the mortgage payments DeTray made on the land, plus the Dragts' attorney fees to relieve them of their obligations to DeTray and the LLC, and loan satisfaction to the bank, approximately $212,000.

¶ 14 About a month after closing, Bloom met with DeTray and told him that he had purchased the Dragts' land. He said that he was aware that DeTray had time and effort invested into developing the land and indicated that he wanted to reimburse DeTray for these costs. He told DeTray to think about the offer and to contact him later to discuss. DeTray did not contact Bloom again.

¶ 15 In September 2004, the Dragts sought a declaratory judgment in superior court, arguing that the option to purchase the land in the Agreement was unenforceable because it did not contain all of the essential terms of a real estate purchase and sale agreement.¹ DeTray asserted that the Dragts breached their fiduciary...