LK Operating, LLC v. Collection Grp., LLC

• Decision Date: 31 July 2014
• Docket Number: No. 88846–9.,88846–9.
• Citation: 330 P.3d 190,181 Wash.2d 117
• Court: Washington Supreme Court
• Parties: LK OPERATING, LLC, a Washington limited liability company, Plaintiff, v. The COLLECTION GROUP, LLC, a Washington limited liability company; and Brian Fair and Shirley Fair, husband and wife, and the marital community composed thereof, Appellants. Brian Fair and Shirley Fair, and the marital community composed thereof; and The Collection Group, LLC, a Washington limited liability company, Appellants, v. Leslie Alan Powers and Patricia Powers, husband and wife, and Keith Therrien and Marsha Therrien, husband and wife, Respondents/Cross–Appellants.

181 Wash.2d 117

330 P.3d 190

LK OPERATING, LLC, a Washington limited liability company, Plaintiff,

v.The COLLECTION GROUP, LLC, a Washington limited liability company; and Brian Fair and Shirley Fair, husband and wife, and the marital community composed thereof, Appellants.

Brian Fair and Shirley Fair, and the marital community composed thereof; and The Collection Group, LLC, a Washington limited liability company, Appellants,

v.Leslie Alan Powers and Patricia Powers, husband and wife, and Keith Therrien and Marsha Therrien, husband and wife, Respondents/Cross–Appellants.

No. 88846–9.

Supreme Court of Washington,

En Banc.

July 31, 2014.

Steven Craig Lacy, Attorney at Law, East Wenatchee, WA, Stewart Robert Smith, Lacy Kane PS, East Wenatchee, WA, Catherine Wright Smith, Howard Mark Goodfriend, Smith Goodfriend PS, Seattle, WA, for Appellant(s).

Bradley S. Keller, Joshua Bacon Selig, Byrnes Keller Cromwell LLP, Seattle, WA, Philip Albert Talmadge, Sidney Charlotte Tribe, Talmadge/Fitzpatrick, Seattle, WA, for Respondent/Cross–Appellant.

FAIRHURST, J.

¶ 1 In this case and its companion, LK Operating, LLC v. Collection Grp., LLC, No. 88132–4, we consider issues arising from a joint venture agreement regarding a debt collection business. The debt collection business operated according to the terms of the joint venture agreement, as originally proposed, from approximately winter 2005 through summer 2007, at which time the disagreements underlying the present litigation surfaced. In this opinion, we consider whether the trial court erred in applying the doctrine of equitable indemnification (also known as the “ABC Rule” ¹) to hold that the legal malpractice plaintiffs here suffered no compensable damages as a matter of law and that summary judgment dismissal was appropriate.

¶ 2 We adhere to established precedent. Where the only damages claimed by a legal malpractice plaintiff are attorney fees incurred in a separate litigation and the only legal basis on which plaintiff asserts those fees are compensable is the ABC Rule, then the defendant is entitled to summary judgment dismissal if the ABC Rule does not apply to the undisputed facts as a matter of law. That was the situation presented here. We decline the invitation to reexamine the ABC Rule in the legal malpractice context because that issue was not raised below. We affirm.

I. FACTUAL AND PROCEDURAL HISTORY ²

¶ 3 At all relevant times, Leslie Powers and Keith Therrien (hereinafter referred to as Powers) practiced law as Powers & Therrien PS (Law Firm). LK Operating (LKO), a limited liability company (LLC), was a Law Firm client at all relevant times. LKO is managed by Powers & Therrien Enterprises Inc. (P & T Enterprises). Leslie Powers and Keith Therrien are the officers of P & T Enterprises.

¶ 4 In early 2004, Brian Fair became a Law Firm client in his personal capacity. Several months later, Fair formed The Collection Group LLC (TCG) to run a debt collection business. In late 2004, Fair approached Powers about a plan to operate TCG as a joint venture. Fair proposed that each party would contribute 50 percent of the costs, Fair would provide administrative and management services, Powers would provide legal services, and each party would own 50 percent of TCG. Ultimately, Fair's joint venture proposal was accepted via performance of its terms—LKO contributed the costs, and Powers provided the legal services. This arrangement was not formalized in writing. The parties dispute whether TCG was aware that the costs and the legal services were being provided by two distinct entities.

¶ 5 In April 2007, Fair proposed to Powers a formalized joint venture agreement modifying TCG's ownership structure from that originally proposed based on Fair's assessment of each party's contributions up to that time. Powers objected, asserting that the joint venture agreement provided for a 50/50 ownership and that P & T Enterprises, through its attorney, asserted that Powers did not have or claim any interest in TCG because LKO and TCG were the only parties to the joint venture agreement.

¶ 6 In July 2007, LKO filed a complaint in Chelan County Superior Court, cause no. 07–2–00652–9, against Fair and TCG for declaratory relief regarding the allocation of ownership interests in TCG, breach of contract, and breach of fiduciary duty (the contract action). In early 2008, Fair and TCG filed a complaint in Chelan County Superior Court, cause no. 08–2–00044–8, against Powers for legal malpractice (malpractice action). The trial court consolidated the contract and malpractice actions.

¶ 7 All the parties moved for summary judgment in the consolidated case. The trial court held that Leslie Powers violated former RPC 1.7 (1995) because the Law Firm simultaneously represented LKO and Fair without obtaining informed consent from either.³ The trial court determined that rescission of the joint venture agreement was the appropriate remedy for this violation. This resolved the merits of the contract action, and the trial court then held a bench trial and issued a final judgment regarding the contract action damages. The trial court then took up the issues remaining in the malpractice action.

¶ 8 Fair and TCG moved for partial summary judgment, arguing that Powers was liable for legal malpractice as a matter of law. Powers filed a cross motion for summary judgment, arguing that Fair and TCG could not show they had incurred any compensable damages warranting dismissal of the malpractice action as a matter of law. Fair and TCG argued they incurred attorney fees in the contract action, which were compensable damages in the malpractice action under the ABC Rule.

¶ 9 The trial court held that Fair and TCG were not entitled to recover attorney fees expended in the contract action under the ABC Rule. Because Fair and TCG asserted no other damages and no other basis on which their contract action attorney fees were compensable, the trial court dismissed the malpractice action.

¶ 10 Fair and TCG appealed. On the parties' joint motion, we granted the direct appeal in the malpractice action, which we heard as a companion case to the petition for review granted in the contract action. LK Operating, LLC v. Collection Grp., LLC, 176 Wash.2d 1027, 301 P.3d 1048 (2013). We affirm.

II. ISSUES ⁴

¶ 11 1. Did the trial court err in holding that the ABC Rule does not apply here?

¶ 12 2. Did the trial court err in dismissing the malpractice action on summary judgment?

¶ 13 3. Should this court craft a new or modified equitable rule governing compensability of attorney fees claimed as consequential damages in legal malpractice actions?

III. STANDARD OF REVIEW

¶ 14 Appellate review of summary judgment determinations, including those made in the context of the ABC Rule, is de novo. Blueberry Place Homeowners Ass'n v. Northward Homes, Inc., 126 Wash.App. 352, 359, 110 P.3d 1145 (2005). We construe the facts in favor of Fair and TCG, the nonmoving parties. Schroeder v. Excelsior Mgmt. Grp., LLC, 177 Wash.2d 94, 104, 297 P.3d 677 (2013).

IV. ANALYSIS

¶ 15 In the malpractice action, TCG and Fair alleged only one form of damages—attorney fees incurred in the contract action. TCG and Fair asserted only one basis on which those damages were compensable—the ABC Rule. The trial court held that the ABC Rule did not apply as a matter of law and dismissed the malpractice action because TCG and Fair could not establish a necessary element of their legal malpractice claim. We affirm.

A. The trial court did not err in holding TCG and Fair could not satisfy the necessary elements of the ABC Rule as a matter of law

¶ 16 Washington State courts follow the “American Rule”—even as to a prevailing party, “attorney fees are not available as costs or damages absent a contract, statute, or recognized ground in equity.” City of Seattle v. McCready, 131 Wash.2d 266, 275, 931 P.2d 156 (1997). The ABC Rule is an equitable rule under which attorney fees are compensable as consequential damages in certain situations. Blueberry Place, 126 Wash.App. at 358, 110 P.3d 1145. The ABC Rule has three elements: “ ‘(1) a wrongful act or omission by A ... toward B ...; (2) such act or omission exposes or involves B ... in litigation with C ...; and (3) C was not connected with the initial transaction or event ..., viz., the wrongful act or omission of A toward B.’ ” Id. at 359, 110 P.3d 1145 (quoting Manning v. Loidhamer, 13 Wash.App. 766, 769, 538 P.2d 136 (1975)). All three elements must be satisfied for the ABC Rule to apply. Id. Because Fair and TCG cannot satisfy the third element, they cannot recover their contract action attorney fees under the ABC Rule.

¶ 17 Analysis of the third element depends on “whether the action, for which attorney's fees are claimed as consequential damages, is brought or defended by third persons—that is, persons not privy to the contract, agreement or events through which the litigation arises.” Armstrong Constr. Co. v. Thomson, 64 Wash.2d 191, 196, 390 P.2d 976 (1964). TCG and Fair offer several alternatives as to what, precisely, is the event from which the contract litigation arose—they assert the contract action arose from “not only [Powers'] concurrent representation of clients with differing interests, but going into business with an existing client without necessary safeguards”; and that the “attorneys purported to pass their ‘business opportunity’ with Mr. Fair off to LKO.” Br. of Appellants at 18–19. Because we construe the facts in TCG's and Fair's favor, we presume that the contract action arose from one or more of those events. However, no matter how narrowly the ABC Rule is construed, and regardless of which underlying events one considers, LKO was privy to all of them.

¶ 18 If the wrongful action was Powers providing concurrent representation to LKO and Fair in violation of former RPC 1.7, LKO was connected to that action as one of the clients wronged by it. If the wrongful action was Powers...