Gall Landau Young Const. Co., Inc. v. Hedreen

Decision Date23 September 1991
Docket NumberI-X,No. 25061-2-I,D,I-XX,25061-2-I
Citation63 Wn.App. 91,816 P.2d 762
PartiesGALL LANDAU YOUNG CONSTRUCTION COMPANY, INC., Respondent/Cross-Appellant, v. Richard C. HEDREEN and Elizabeth Hedreen, individually and as a marital community, Defendants, R.C. Hedreen Co., Appellant/Cross-Respondent, Doe Corporation, and Doe Partnerships, Defendants.
CourtWashington Court of Appeals

Oles, Morrison & Rinker, David H. Karlen, Seattle, for Gall Landau Young Const. Co., Inc.

WEBSTER, Acting Chief Judge.

This appeal concerns the attempt of Gall Landau Young Construction Company (GLY) to hold the R.C. Hedreen Company (R.C. Hedreen) 1, the successor to assets of Parkside Building Company (Parkside), liable for Parkside's debts to GLY. R.C. Hedreen appeals the trial court's judgment that it was a "mere continuation" of Parkside and is therefore liable for Parkside's debts. GLY cross- appeals an earlier judgment that R.C. Hedreen was not an alter ego of Parkside.

FACTS

In 1985, Richard Hedreen incorporated Parkside Building Company. Hedreen has always been the sole stockholder, as well as an officer and director of Parkside. At all times John Chapman and Gerald Heron were the other officers and directors of Parkside. In 1986, Hedreen hired Parkside to serve as the general contractor in building Jefferson Square. Jefferson Square is located on property owned by the Seattle School District, which entered into a 99-year lease with Hedreen.

In 1986, Parkside contracted with GLY to perform structural concrete work at Jefferson Square. Disputes arose between GLY and Parkside about work performed and payments due. The parties submitted the disputes to arbitration, and GLY obtained a judgment of $1,016,415.07 against Parkside. The arbitration award was not appealed. The superior court confirmed the award on March 11, 1988.

The R.C. Hedreen Company, which was incorporated in 1970, is also owned solely by Richard Hedreen. Hedreen has always been its president and chief executive officer. At all relevant times, R.C. Hedreen's directors were identical to Parkside's. Prior to Parkside's incorporation, Hedreen, Heron, and Michael Quinn (an employee of R.C. Hedreen) conducted some of the Jefferson Square work through R.C. Hedreen. After Parkside's incorporation, all of the R.C. Hedreen head office employees, furniture, and equipment were transferred to Parkside. Quinn became president and Heron and Hedreen became vice presidents of Parkside. Their respective salaries were $5,000, $18,500, and $11,500 per month. R.C. Hedreen's business affairs, except those related to the Seattle Hilton Hotel, were taken over by Parkside. R.C. Hedreen ceased to have a head office with a payroll.

During its existence, Parkside worked only for Hedreen or entities wholly owned or closely related to him. In addition to its Jefferson Square construction contract, Parkside had a contract to remodel the Seattle Hilton (owned by the R.C. Hedreen Co.), and contracts to manage the Park PlaceBuilding (50 percent owned by Hedreen) and Jefferson Square after its completion. Parkside employees also provided substantial management services to the Harbor House Apartments, which were originally owned by Hedreen and are now owned by his children or other relatives. The Park Place and Jefferson Square management contracts contained clauses allowing them to be terminated on 90 days notice without cause. Because of Hedreen's ownership interest in these properties and his relationship with the other owner of Park Place, Hedreen controlled the use of the termination clauses.

When the court entered GLY's judgment against Parkside, Parkside was in desperate financial straits. Hedreen initially capitalized Parkside at $50,000. Because of the construction problems and disputes regarding Jefferson Square, Hedreen apparently stopped paying Parkside under the construction contract. However, Hedreen made loans to Parkside from borrowing sources available to him personally or to R.C. Hedreen in a net amount of approximately $2 million. After the judgment against Parkside was entered, Parkside's liabilities greatly exceeded its assets and it had no prospects for future construction business. Hedreen was unwilling to provide additional capital or loans to keep Parkside going.

On March 18, one week after the judgment was entered, Parkside directors Hedreen, Heron, and Chapman met and resolved to transfer Parkside's construction activities to R.C. Hedreen. They also resolved to have Parkside continue its building management activities, subject to review by Parkside's officers on a regular basis. On March 21, GLY garnished Parkside's bank account. On March 23, the same Parkside directors held a meeting characterized as a continuation of the March 18 meeting. At this meeting Parkside decided to transfer all of its building management contracts to R.C. Hedreen. Two days later, R.C. Hedreen directors Hedreen, Heron, and Chapman had a meeting during which they accepted Parkside's assignment of the management contracts retroactive to March 16. All of Parkside's employees were transferred to the payroll of R.C. Hedreen as of March 16. However, the employees remained in the same offices with the same furniture and equipment doing the same things they did before the transfer.

GLY filed the instant action against R.C. Hedreen on April 15, 1988. GLY alleged that R.C. Hedreen was Parkside's alter ego and was a "mere continuation" of Parkside. On July 26, 1989, the trial court granted R.C. Hedreen's motion for summary judgment as to all of GLY's alter ego claims.

On October 27, 1989, the trial court found R.C. Hedreen liable solely on the theory that it was a "mere continuation" of Parkside. The court concluded that, since Hedreen controlled the termination clauses of the Jefferson Square and Park Place management contracts, the contracts' value should be determined according to how they were valued by entities owned by Hedreen. In evaluating the contracts, the court relied in part on the testimony of GLY's expert, Eddie Hendrickson. An expert in the areas of property management and acquisition, Hendrickson testified that the cash flow directly attributable to the management contracts transferred from Parkside to R.C. Hedreen was a valuable asset. He testified that "income streams" produced by the contracts could be invested to earn interest ranging from 8 to 12 percent per year. According to his calculations, the value of the management contracts over their life span using a 10 percent interest rate and discounted to present value equaled $1,263,000. Hendrickson indicated, however, that due to the termination clauses an "outsider" would pay "little if anything" for the contracts initially, and would pay for them only over time.

The trial court found that the Park Place and Jefferson Square management contracts had a combined value in excess of $500,000, that transfer of the management contracts comprised a transfer of substantially all of Parkside's unimpaired assets, and that R.C. Hedreen did not pay significant or sufficient consideration for the management contracts. R.C. Hedreen assigns error to these findings.

On April 15, 1988, GLY and other creditors filed an involuntary bankruptcy petition against Parkside. Parkside's trustee instituted an adversary proceeding against Hedreen, and obtained a judgment that Hedreen owes Parkside approximately $4 million and that Hedreen's claims against Parkside should be subordinated to those of other creditors. The judgment has been appealed. GLY also sought to collect on its judgment through a lien action, which this court heard last term. See Pacific Erectors, Inc. v. Gall Landau Young Constr. Co., 62 Wash.App. 158, 813 P.2d 1243 (1991).

SUCCESSOR LIABILITY

We first address whether R.C. Hedreen was a "mere continuation" of Parkside. Washington's successor liability doctrine was summarized in Hall v. Armstrong Cork, Inc., 103 Wash.2d 258, 692 P.2d 787 (1984):

The general rule in Washington is that a corporation purchasing the assets of another corporation does not, by reason of the purchase of assets, become liable for the debts and liabilities of the selling corporation, except where: (1) the purchaser expressly or impliedly agrees 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 261-62, 692 P.2d 787. See 15 W. Fletcher, Private Corporations §§ 7122-7133 (rev. ed. 1990). The general rule of non-liability is based on the premise that "a sale of corporate assets transfers an interest separable from the corporate entity and does not result in a transfer of unbargained-for liabilities from the seller to the purchaser." Hall, at 262, 692 P.2d 787. The four exceptions to the general rule were developed "to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions." Id.

The only exception at issue is the purchaser's "mere continuation". The mere continuation theory is designed to prevent the corporation from escaping liability "by merely changing hats". Fletcher, § 7124.10, at 292. See also Baltimore Luggage Co. v. Holtzman, 80 Md.App. 282, 562 A.2d 1286, 1293 (1989), cert. den'd, 318 Md. 323, 568 A.2d 28 (1990). Washington courts have indicated that to prevail on the theory of "mere continuation", proof of at least two elements is required. The first element is "a common identity of the officers, directors, and stockholders in the selling and purchasing companies." Cashar v. Redford, 28 Wash.App. 394, 397, 624 P.2d 194 (1981); accord Long v. Home Health Servs. of Puget Sound, Inc., 43 Wash.App. 729, 735, 719 P.2d 176, review den'd, 106 Wash.2d 1012 (1986). The second element is "the sufficiency of the consideration running to the seller corporation in light of the assets...

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