Gear Athletics LLC v. Engstrom Props. LLC
| Decision Date | 29 August 2011 |
| Docket Number | NO. 65338-5-I,65338-5-I |
| Court | Washington Court of Appeals |
| Parties | GEAR ATHLETICS LLC (f/k/a ALKI SPORTS LLC), a Washington limited liability company, and CHAD BAERWALDT, Appellants/Cross Respondents, v. ENGSTROM PROPERTIES LLC, a Washington limited liability company, Respondent/Cross Appellant. |
UNPUBLISHED OPINION
Lau, J. — A superior court's authority in a chapter 7.04 RCW arbitration proceeding is limited. It can confirm, vacate, modify, or correct the arbitration award under RCW 7.04.150. Once the court confirms the arbitration award, it is not free to disregard the award and proceed with a trial de novo. Because the trial court here confirmed the arbitration award and then conducted a trial de novo, we reverse the judgment in favor of Engstrom Properties LLC and remand for entry of judgment in Gear Athletics LLC's favor consistent with this opinion.
FACTS
Engstrom Properties LLC and Gear Athletics LLC executed a lease (masterlease) in which Engstrom agreed to lease a building in Seattle to Gear from May 1, 2006, until December 21, 2008. The lease was part of the consideration for Engstrom's sale of a business, Athletic Supply Company,1 to Gear. On September 6, 2006, Gear subleased the building to Collegegear for the remainder of the master lease term.2
The master lease provided for arbitration of certain disputes:
If any dispute arises between Landlord and Tenant regarding the extent of rent abatement under Section 9 or Section 14 and such dispute is not resolved within (20) days after notice by either party to the other of such disagreement, either party may request arbitration and each party shall appoint as its arbitrator an appraiser who has been a member of the American Institute of Real Estate Appraisers for not less than 10 years.
Master Lease (ML) § 16.12(b). Section 9.5 of the lease describes when rent abatement is owed:
If the Premises are Partially Damaged, the rent payable while such damage, repair, or restoration continues shall be abated in proportion to the degree to which Tenant's reasonable use of the Premises is substantially impaired.
The indemnification clause, section 8.5, provides:
Indemnity. . . . Landlord shall indemnify and hold harmless Tenant from and against any and all claims arising from any breach or default in the performance of any of Landlord's obligations under the terms of this Lease or arising from any act of Landlord, or any of Landlord's agents or employees, and from and against all costs, reasonable attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon.
On November 13, 2006, the subtenant notified Gear principle Chad Baerwaldtthat water was coming into the building basement and Baerwaldt reported it to Steve Engstrom3 of Engstrom Properties. Steve Engstrom4 "went to the site within two hours and witnessed personally . . . a small, small thing," something "basically, [the size] of a spilled soft drink." Report of Proceedings (RP) (Aug. 11, 2009) at 150-51. By December 1, Engstrom hired property manager Brad Olson to undertake repairs. On December 14, before repairs were complete, a heavy rain storm occurred. Olson e-mailed the subtenant to check for any water in the basement. The subtenant again reported flooding. Olson went to the building the next day and saw a "one-and-a-half by one-and-a-half foot puddle in the stairwell" and a pile of t-shirts on the floor, one which was wet. RP (Aug. 11, 2009) at 215. Olson photographed what he saw, and the photographs were admitted at trial. Roof repairs were completed in January. Neither Gear nor the subtenant notified Engstrom or Olson of any subsequent water intrusion. Gear never notified Engstrom of any failure to perform a lease obligation. A January 22, 2007 letter from Gear's attorney to Steve Engstrom stated, "It appears that the water problem may have been resolved."
On December 19, 2007, the subtenant sued Gear, alleging Gear had breached the sublease by "permitting flooding" and the "growth of mold and other toxic substances" in the basement. Gear later filed a third party complaint against Engstromalleging Engstrom's obligation to indemnify it under the master lease for any damages for which Gear was liable to the subtenant. Gear answered and filed a fourth party claim against Chad Baerwaldt as guarantor of the master lease for unpaid rent and common area maintenance (CAM) charges. Gear later filed an amended complaint to add fraudulent inducement and negligent misrepresentation claims, alleging Engstrom knew about the building's water intrusion history, but failed to disclose it.
On March 31, 2008,5 the subtenant moved out of the building and stopped paying all rent and CAM charges to Gear. Gear stopped paying some CAM fees in April 2008, stopped all CAM payments in July, and stopped rent payments in September.
The subtenant and Gear agreed to mediate whether rent abatement is due subtenant resulting from water intrusion. The parties agreed on retired judge Terrence Carroll to mediate and then proceed to binding arbitration if unable to resolve the dispute. Gear requested and Engstrom initially agreed to participate in this mediation but not arbitration and to make Steve Engstrom available to testify at the arbitration. But later, Engstrom refused to participate in the mediation and retracted its offer to allow Steve Engstrom to testify at the arbitration. Neither Steve Engstrom nor Olson testified at the arbitration. The parties proceeded to arbitration, presented and cross-examined witnesses, and submitted exhibits. Judge Carroll awarded Gearunpaid rent through December 31, 2008, but ordered an offset of $63,000 for rent abatement to the subtenant. Regarding water intrusion, Judge Carroll found:
On December 11, 2008, Gear wrote to Engstrom demanding arbitration. Engstrom opposed arbitration and moved to stay arbitration, arguing that under the master lease "arbitration is limited to the determination of the amount of damages and not to the determination of liability . . . ." The court denied Engstrom's motion and ordered arbitration on liability and damages. At arbitration, Gear did not call any subtenant witnesses to testify about the water intrusion. The only Gear employees who testified were Mark Baerwaldt and his son Chad. According to Engstrom, none of the witnesses testified that they had seen any flooding. An arbitration panel of three real estate appraisers "concluded that the premises were partially damaged due to water intrusion issues that became apparent in November 2006, and that the Tenant is due Abatement of Rent provided in Section 9.5 from the Landlord in the amount of $50,000." Ex. 18. They also allocated an award of costs and arbitration expenses between Gear of 20.64 percent and Engstrom of 79.36 percent.6
Gear moved to confirm the arbitration award and enter judgment in King County Superior Court. Engstrom opposed confirmation and moved to vacate the award under RCW 7.04A.230 because "there was no agreement to arbitrate the issues decided, the arbitrators exceeded their powers, and the award was procured by undue means." Engstrom argued that it agreed to arbitrate the damages issue but not the liability issue. Engstrom further argued that the arbitrators prematurely decided damages before
a court ruling on the issue of liability for loss of use of the leased premises. On August 10, 2009, the morning of trial on Gear's and Engstrom's outstanding claims,7 the trial court confirmed the arbitration award and entered an order and final judgment for $50,000.8 On the same day, the trial court denied Engstrom's motion for summary judgment, which argued there was no evidence of loss of use, a condition precedent to rent abatement.
At the bench trial, Gear called no witnesses from the subtenant. Steve Engstrom testified that he had seen a small puddle of water after the November event. Brad Olson testified he saw a "one-and-a-half by one-and-a-half foot puddle in the stairwell" after the December 14, 2006 storm. RP (Aug. 11, 2009) at 215. No other witnessestestified that they saw water in the building.9 Olson testified that he noted no change in the subtenant's use of the building or inventory moved around due to water intrusion.
Gear objected on relevancy grounds to testimony regarding water intrusion: "[T]here's a relevance objection and an objection that this is something that's already been ruled on by the Court." RP (Aug. 10, 2009) at 116. The court overruled the objection, explaining, "[T]here are other reasons that [water intrusion] testimony could be relevant aside from those direct issues." RP (Aug. 11, 2009) at 115. The court reiterated this decision the next day. At the close of the trial, the court reserved ruling on all issues.
On November 25, 2009, the court entered its written findings of fact and conclusions of law. The court concluded that the economic loss rule barred Gear's fraudulent inducement and negligent misrepresentation claims and failure to prove the fraud elements. Gear does not challenge those conclusions. On the indemnification issue, the court concluded that Gear was required to show that the subtenant's claims "arose from a breach or default of Engstrom Properties" and that "[b]ecause Engstrom . . . commenced to repair the roof within approximately two weeks following the water intrusion . . . Engstrom . . . did not breach any obligation to repair." Conclusions of Law (CL) 2, 4. The court also concluded Engstrom was entitled to a judgment for the amount of unpaid rent and CAM...
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