LK Operating, LLC v. Collection Grp., LLC

• Decision Date: 19 June 2012
• Docket Number: No. 29741–1–III.,29741–1–III.
• Citation: 279 P.3d 448,168 Wash.App. 862
• Parties: LK OPERATING, LLC, a Washington Limited Liability Company, Appellant, v. The COLLECTION GROUP, LLC, a Washington Limited Liability Company, and Brian Fair and Shirley Fair, husband and wife, and their marital community composed thereof, Respondents and Cross–Appellants, Leslie Alan Powers and Patricia Powers, husband and wife, and Keith Therrien and Marsha Therrien, husband and wife, Intervenors.
• Court: Washington Court of Appeals

168 Wash.App. 862

279 P.3d 448

LK OPERATING, LLC, a Washington Limited Liability Company, Appellant,

v. The COLLECTION GROUP, LLC, a Washington Limited Liability Company, and Brian Fair and Shirley Fair, husband and wife, and their marital community composed thereof, Respondents and Cross–Appellants,Leslie Alan Powers and Patricia Powers, husband and wife, and Keith Therrien and Marsha Therrien, husband and wife, Intervenors.

No. 29741–1–III.

Court of Appeals of Washington, Division 3.

June 19, 2012.

James A. Perkins, Larson Berg & Perkins PLLC, Yakima, WA, for Appellant.

Ronald James Trompeter, Hackett Beecher & Hart, Catherine Wright Smith, Smith Goodfriend PS, Seattle, WA, Steven Craig Lacy, Attorney at Law, East Wenatchee, WA, for Respondents and Cross–Appellants.

Sidney Charlotte Tribe, Talmadge/Fitzpatrick, Tukwila, WA, for Intervenors.

SWEENEY, J.

[168 Wash.App. 863]¶ 1 Rules of professional conduct have been used to prohibit lawyers from enforcing agreements with clients that lawyers were a party to. But those same rules have not been applied to support actions for legal malpractice or for equitable relief or damages based on a lawyer's ethical lapses. Here, the court refused to enforce a business agreement between two limited liability companies (LLCs) after concluding that the lawyer representing the parties represented both sides at the same time and therefore violated Rule of Professional Conduct (RPC) 1.7 (prohibiting lawyers from representing clients if there is a conflict of interest). We conclude that the remedy of rescission cannot be based on a violation of RPC 1.7. We, however, also conclude based on the court's findings that the interests of the lawyer and one of the LLCs were sufficiently aligned to warrant rescission of the agreement based on a violation of RPC 1.8 (prohibiting lawyers from entering into business agreements with their clients). We therefore affirm the superior court's judgment ordering rescission.

FACTS

Background

¶ 2 Leslie Powers and Keith Therrien practiced law as Powers & Therrien, P.S. in Yakima, Washington. Together they formed LK Operating, LLC (LKO) in December 2003. LKO managed irrevocable trusts for the benefit of Mr. Powers' and Mr. Therrien's adult children. Each of the five adult children of Mr. Powers and Mr. Therrien is the sole trustee and the beneficiary of a separate trust. Each trust is the sole shareholder of a corporation and the five corporations are the sole members of LKO. Powers & Therrien Enterprises Inc. manages LKO. Mr. Powers and Mr. Therrien are the officers of that management corporation.

¶ 3 Brian Fair was a client of Powers & Therrien, P.S. in 2004. That same year, Mr. Fair and his wife formed The Collection Group LLC (TCG) to engage in the business of debt collection. Powers & Therrien, P.S. had no role in the formation of TCG. TCG is managed by Mr. Fair. Mr. Fair asked Mr. Powers whether he or Mr. Therrien would be interested in his new business venture. Mr. Fair proposed an equal investment of funds and ownership. Mr. Fair proposed that he would contribute administrative and management services and that Mr. Powers and Mr. Therrien would contribute legal services. Mr. Fair outlined his joint venture proposal in an October 2004 e-mail regarding the purchase of debt from Unifund, a debt vendor:

Les, Keith,

...

Attached is a sample purchase agreement from Unifund, the company selling the debt, and the attachment for when they sell FUSA debt (aka First USA). I have not had a chance to review it, but I will do so tonight.

Regarding an agreement between myself and you two, this is how I would like to see it:

A. We will split the purchase price and other out of pocket costs, including legal services that your firm cannot provide.

B. You will contribute legal services you can provide (review the purchase agreement contract, legal doc for this JV [joint venture] (if needed), demand letter, ask smart questions, kick the tires, etc.)

C. My contribution will include no charge for finding this debt, negotiations with debtor and debt seller (unless you prefer to do this), and keeping you informed.

Clerk's Papers (CP) at 216.

¶ 4 Mr. Powers later reviewed the attached Unifund purchase agreement and returned it to Mr. Fair marked up with extensive suggested changes. Mr. Powers did not respond to Mr. Fair's inquiry about an agreement. Mr. Fair continued to negotiate with Unifund; TCG was eventually named as the prospective purchaser of the debt. Mr. Fair sent an e-mail to Mr. Powers in January 2005 asking whether he was still interested in the deal with Unifund. Mr. Powers did not respond. Mr. Fair then caused TCG to invest in the Unifund debt portfolio with $7,969.23 of its own money. Mr. Fair began work to collect the debt that TCG had purchased.

¶ 5 Mr. Fair exchanged e-mails with Powers & Therrien, P.S. that discussed the legal services required to collect the debt. The law firm drafted legal documents for TCG and TCG made progress collecting the accounts in the Unifund portfolio. In early February 2005, Mr. Powers apparently indicated in a telephone conversation with Mr. Fair that LKO, the company owned by the adult children, was interestedin making the proposed investment. Mr. Fair sent a fax to Mr. Powers' legal assistant asking her to arrange for a check for $3,984.61 (one-half the cost of the Unifund portfolio) made out to “The Collection Group, LLC.” CP at 1153. Mr. Fair again sent the fax to the firm's bookkeeper several days later after he did not receive the funds.

¶ 6 TCG received a check in the amount requested on February 21, 2005. The check was signed by Michelle Briggs, whom Mr. Fair knew to be an employee of Powers & Therrien, P.S. The check was a “counter check” with the name “LK Operating LLC” handwritten in the upper left-hand corner. CP at 197, 441. Mr. Fair did not know the identity of LKO but assumed it was an account owned by Les and Keith (LK) of Powers & Therrien, P.S. Mr. Fair faxed an accounting to Powers & Therrien, P.S. that stated: “Les, this gives you guys 1/2 ownershipin the company. You can formalize however you wish.” CP at 311. Neither Mr. Powers nor Mr. Therrien formalized any agreement.

¶ 7 Mr. Fair continued to expand the business and when an opportunity to purchase additional debt portfolios arose, he contacted Powers and Therrien, P.S. for additional funds. They responded and sent three additional checks: one on March 3, 2005, for $13,015.39; one on December 23, 2005, for $10,000; and one on September 11, 2006, for $25,000. Each check was a “LK Operating LLC” counter check. Mr. Powers and Mr. Therrien still had not proposed any formal agreement to spell out the relationship among the parties.

¶ 8 Mr. Fair asked Mr. Powers to draft an operating agreement for a new entity, OPM I, LLC (OPM), in early 2007. OPM was a limited liability company formed by TCG and Mr. Fair to collect delinquent debt in states other than Washington. TCG was a member of OPM, and TCG and Mr. Fair were its managers. The OPM operating agreement drafted by Mr. Powers included a waiver of “legal conflict”: “Members of Counsel's family have an interest in the Manager and through it the Company [OPM].” CP at 1478–79. Mr. Fair signed the OPM operating agreement personally and as TCG's manager.

[168 Wash.App. 867]¶ 9 Mr. Fair again requested that Mr. Powers and Mr. Therrien formalize their ownership interest in TCG in April 2007. This time Mr. Fair proposed that Mr. Powers and Mr. Therrien would own a 38 percent interest, that Mr. Fair's mother would own a 7 percent interest, and that he and his wife would own a 55 percent interest. The percentages were based on both the financial and service related contributions of the parties. Mr. Fair estimated that the value of TCG had grown to approximately $1.5 million. Mr. Powers and Mr. Therrien rejected the proposal and insisted that they were entitled to a 50 percent ownership interest in TCG.

Procedural History

¶ 10 Mr. Powers and Mr. Therrien caused LKO to sue TCG and Mr. Fair for a judicial declaration of the ownership rights of the parties, for breach of fiduciary duty, and for breach of contract. The Fairs responded by suing Mr. Powers and Mr. Therrien personally for legal malpractice and breach of the Consumer Protection Act, chapter 19.86 RCW. Both matters were consolidated. TCG and the Fairs moved for partial summary judgment against LKO on the ground that RPC 1.8 prohibits business dealings between an attorney and his client unless the client gives informed consent. LKO also moved for summary judgment against the Fairs on the ground that Mr. Fair was not a client of Powers & Therrien, P.S. at the time of the disputed transaction, and neither Mr. Powers, Mr. Therrien, nor Powers & Therrien, P.S. had any ownership or financial interest in LKO.

¶ 11 The court ruled in a memorandum decision that Mr. Fair personally was at all times a client of Powers & Therrien, P.S. The court ruled that any attempted purchase of an interest in TCG by Mr. Powers and Mr. Therrien personally or through Powers & Therrien, P.S. would be against public policy and void because it violated RPC 1.8. The court, however, also concluded that a question of fact remained about whom Mr. Fair actually entered into the agreement with, Powers & Therrien, P.S. or LKO.

[168 Wash.App. 868]¶ 12 The court went on to conclude, sua sponte, that Mr. Powers and Mr. Therrien had a conflict of interest under RPC 1.7 (concurrent conflict of interest). This was because Powers & Therrien, P.S. represented LKO, and LKO was a potential purchaser of an ownership interest in TCG, and neither entity consented to the representation. The court denied LKO's motion for summary judgment, partially granted TCG's motion for summary judgment, and requested additional briefing on whether rescission was an appropriate remedy for a violation of RPC 1.7.

¶ 13 LKO and Mr. Powers and Mr. Therrien each moved to reconsider. The court granted LKO's...