Marte v. Hernandez

• Court: Washington Court of Appeals
• Writing for the Court: GROSSE, J.
• Decision Date: 16 May 2011
• Docket Number: No. 66664-9-I
• Citation: Marte v. Hernandez, No. 66664-9-I (Wash. App. May 16, 2011)
• Parties: HUGO ANTONIO CASTILLO MARTE, Appellant/Cross-Respondent, v. JESSIKA HERNANDEZ, as personal representative of the Estate of FRANKLYN CASTILLO, and the Estate of FRANK CASTILLO, Deceased, Respondents/Cross-Appellants.

HUGO ANTONIO CASTILLO MARTE, Appellant/Cross-Respondent, v. JESSIKA HERNANDEZ, as personal representative of the Estate of FRANKLYN CASTILLO and the Estate of FRANK CASTILLO, Deceased, Respondents/Cross-Appellants.

No. 66664-9-I

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE

FILED: May 16, 2011

UNPUBLISHED OPINION

GROSSE, J. — An agreement to form a partnership to purchase a franchise and to conceal from the franchisor the existence of that partnership, when the franchisor prohibits partnerships from purchasing its franchises, amounts to deceptive conduct in violation of RCW 21.20.010 and RCW 19.100.170 and renders the agreement unlawful. Thus, the parties to the agreement may not enforce it, when, as here, they were equally culpable in its illegal creation. Accordingly, we affirm.

FACTS¹

Franklyn Castillo (Frank) and his brother, Hugo Antonio Castillo Marte (Tony), ²decided to purchase two McDonald's restaurant franchises in Oregon. They agreed that Frank would apply for the franchise and Tony would supply at least a portion of the money necessary to buy the franchise and pay other costs of opening the restaurants.They were aware that McDonald's Corporation sells franchises only to individuals who own the entire equity interest of the franchise and would not grant a franchise to a partnership. Thus, they agreed to conceal from McDonald's the existence of their partnership and Tony's financial involvement in the purchase.

Between November 2000 and April 2003, Tony advanced to Frank $116,000 in nine separate checks as part of his investment in the partnership. Tony misrepresented the purpose of some of these checks by notations on the checks that they were for "debt repayment," "credit card payment," and "house proceeds." In April 2003, Tony also advanced to Frank three separate checks of $10,000 each and did so to avoid the reporting requirements of 32 U.S.C. § 5313 and to conceal his involvement in the partnership with Frank.

In June 2003, Frank executed franchise agreements with McDonald's Corporation, for two restaurants located in Gresham, Oregon. Both agreements contained the following language:

Franchisee represents, warrants, and agrees that Franchisee actually owns the complete equity interest in this Franchise and the profits from the operation of the Restaurant, and that Franchisee shall maintain such interest during the term of its Franchise except only as otherwise permitted pursuant to the terms and conditions of this Franchise....

With McDonald's approval, Frank assigned his interest in both franchises to CM Restaurant Management, LLC, an Oregon limited liability company owned entirely by Frank.

Once the restaurants were operational, Tony began receiving money from the two restaurants. Tony prepared invoices showing that he provided services forconsultation on computer related or information technology, but in fact performed no such services for the restaurants. Tony also received $15,000 from Frank, which he claims was also part of his share of the restaurant profits. He did not report any of this income on his federal tax returns.

In November 2004, Frank died intestate and his wife, Jessika Hernandez, was appointed personal representative. As the surviving spouse, Hernandez was approved as a franchisee operator by McDonald's Corporation upon completing the required training. The estate was entered into probate and in November 2005, Tony filed a creditor's claim for his interest in the partnership. Hernandez rejected the claim.

In April 2006, Tony sued the estate, alleging that he held an ownership interest in the McDonald's franchise and that he was entitled to receive the amount of his partnership interest from the estate. Alternatively, he sought that the partnership be wound up and that he receive $171,000 in addition to 50 percent of any profits and increase in value.

The estate moved for summary judgment requesting dismissal based on a finding that no partnership was formed as a matter of law. The court denied the motion, finding that an issue of material fact existed about the existence of a partnership. In the meantime, Tony amended his complaint to add a claim for unjust enrichment, seeking the $171,000 he disbursed to Frank to make the down payment for the restaurants.

The estate moved again for summary judgment, contending that any alleged partnership between the brothers was unlawful and the partnership agreement was therefore unenforceable. The court denied the summary judgment motion and issued aletter to counsel, stating:

In lieu of a Memorandum of Opinion, this letter will suffice. I find that as [sic] best the franchise agreement with McDonalds is voidable rather than void. The fact that Frank may have misrepresented his capacity or status gives the franchisor the option of negating the agreement. The statute RCW 19.100.170180 would appear to allow such action. However, it would not render the agreement void ab initio.

Further complicating the issue is the lack of privity between McDonalds and the plaintiff. Thus while the franchisor may negate the contract, the effect of such action on the parties hereto is uncertain. Consequently I deny defendant's motion for summary judgment. I further find that defendant did not waive the protection of the Dead Man's Statute. Please draft an order to reflect the above.

The estate moved for reconsideration, which was denied. The estate also sought certification of the issue to the Court of Appeals under RAP 2.3(b)(4), but the court declined to certify the issue and entered an order denying the summary judgment motion. The estate then sought discretionary review.

The commissioner issued a ruling granting discretionary review, concluding that the trial court committed obvious error that rendered future proceedings useless. The commissioner's ruling reasoned that the brothers' agreement was likely void against public policy and therefore unenforceable. Tony moved to modify the commissioner's ruling. A three judge panel of the court granted the motion and denied discretionary review. The matter then proceeded to trial.

Before trial, Tony moved in limine to prevent the estate from arguing at trial that the partnership was illegal. He contended that based on the court's denial of the estate's second summary judgment, the legal issue was decided and therefore a final order. The estate argued that the denial of summary judgment simply left all issues "in play," and that the estate would move for a directed verdict on the legality of thepartnership at the close of the evidence. The trial court ruled that the only question that would go to the jury would be the existence of the partnership and that the court would reserve ruling on the legality of the partnership until after the jury made that determination.

At the close of the evidence, the estate moved to direct a verdict that a partnership was not formed and reserved the right to later argue the legality of the partnership. The trial court denied the motion to direct the verdict and sent the case to the jury. The verdict form instructed the jury to answer the following questions:

QUESTION 1: Did Plaintiff and Franklyn Castillo form a partnership?

ANSWER: ____(Write "yes" or "no")

(INSTRUCTION: If you answered "yes" to Question 1, answer Question 2. If you answer "no" to question 1, answer Question 3.

QUESTION 2: Does the Plaintiff's partnership include the two McDonald's restaurants?

ANSWER: ____(Write "yes" or "no")

(INSTRUCTION: If you answered "yes" to Question 2, do not answer any further questions: sign this verdict. If you answered "no" to Question 2, answer Question 3.)

QUESTION 3: Is Plaintiff entitled to recovery from Defendants for the value of money that the Plaintiff furnished to Defendants?

ANSWER: ____(Write "yes" or "no")

(INSTRUCTION: If you answered "no" to Question 3, do not answer any further questions: sign this verdict. If you answered "yes" to Question 3, answer Question 4.)

QUESTION 4: What do you find to be the amount of money that Plaintiff is entitled to receive from Defendants?

ANSWER: ____

(INSTRUCTION: Sign this verdict and notify the bailiff.)

The jury found that a partnership existed and that it included both restaurants.

The court excused the jury and then addressed counsel about proceeding on the remaining issues of the legality of the partnership and partnership property. The court ordered a briefing schedule and set a date to rule on those issues. When the partiesappeared before the court to address the issues, Tony objected on the basis that the estate failed to make a formal motion for post-trial relief, as required by the rules. He further argued that the legality of the partnership was an issue that had already been decided on summary judgment and was therefore a final order and could not be reconsidered.

The court rejected Tony's argument, concluding that it had the authority to raise the issue on its own to correct an earlier ruling, noting that it was an issue that had been raised without the benefit of having controlling case law. The court also agreed with the estate that a denial of a summary judgment is not necessarily a final decision and noted that this was consistent with this court's denial of discretionary review of its order denying summary judgment.

On December 2, 2009, the court issued its decision in a written opinion and dismissed Tony's complaint. The court concluded:

Despite the jury's finding of a partnership, the plaintiff is barred from enforcement of same as the partnership was formed with the purpose of defrauding the franchisor. As such it violated statutory and public policy restrictions. Under the theory of pari delicto the plaintiff cannot maintain this action because both brothers were equally at fault in the illicit formation of the partnership. The same legal theory bars recovery under unjust enrichment which mandates that in such situations the courts must leave the parties as they find them. Consequently plaintiff's

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