Morbeck v. Kirlan Venture Capital, Inc.
| Decision Date | 21 July 2003 |
| Docket Number | NO. 49641-7-I.,Consolidated With NO. 50138-1-I.,49641-7-I. |
| Court | Washington Court of Appeals |
| Parties | JOHN M. MORBECK, an individual, GARY SERGEANT, an individual, TED WINNOWSKI, an individual, DANIEL C. REGIS, an individual, and LES SCHWAB PROFIT SHARING RETIREMENT TRUST, Respondents, v. KIRLAN VENTURE CAPITAL, INC., a Washington corporation; and A. KIRK LANTERMAN and JANET LANTERMAN, husband and wife, and the marital community composed thereof, Appellants. KIRLAN VENTURE CAPITAL, INC., a Washington corporation, Appellant, v. DANIEL C. REGIS and CECELIA M. REGIS, husband and wife, and the marital community composed thereof; and WILLIAM TENNESON, a/k/a BILL TENNESON and TRACI K. TENNESON, husband and wife, and the marital community composed thereof, Respondents. |
Appeal from Superior Court of King County, Docket No: 01-2-10569-8, Judgment or order under review, Date filed: 11/07/2001.
Mark Sherman Carlson, Dorsey & Whitney LLP, Seattle, WA, Counsel for Appellant(s).
Richard M Clinton, Dorsey & Whitney LLP, Seattle, WA, Counsel for Appellant(s).
Todd Stuart Fairchild, Dorsey & Whitney LLP, Seattle, WA, Counsel for Appellant(s).
Howard Mark Goodfriend, Edwards Sieh Smith & Goodfriend PS, Seattle, WA, Counsel for Appellant(s).
Robert James Adolph, Adolph & Gamache PS, Seattle, WA, Counsel for Respondent(s).
Christina Beatrice Gamache, Adolph & Gamache PS, Seattle, WA, Counsel for Respondent(s).
William Robert Hickman, Reed McClure, Seattle, WA, Counsel for Respondent(s).
Ralph Howard Palumbo, Summit Law Group PLLC, Seattle, WA, Counsel for Respondent(s).
This appeal and cross-appeal, while presenting numerous issues relating to transactions involving large amounts of money, arise from claims that we find were fairly and correctly adjudicated by the trial judge. We affirm in all respects.
Kirlan Venture has assigned error to numerous findings of fact that were entered after a two-week bench trial. However, Kirlan Venture's brief provides no argument directed to any specific finding of fact, and no attempt to show that the facts found are unsupported by substantial evidence.1 It is thus apparent that Kirlan Venture's concern is with issues of law: the conclusions the trial court drew from the facts, and the rulings on summary judgment. We therefore treat the findings of fact as verities, and rely on them for our understanding that this litigation arose from the following sequence of events.
In 1989, Kirk Lanterman formed a corporate entity to hold his investments and named it Kirlan Venture Capital, Inc. Lanterman is the company's sole shareholder. Kirlan Venture formed and operated Kirlan One, a venture capital limited partnership, to invest in small, privately owned growth companies in exchange for equity in the companies.
In 1996, Kirlan Venture hired respondent and cross-appellant Dan Regis as the president of Kirlan Venture and manager of Kirlan One. Kirlan Venture agreed to pay Regis an annual salary of $100,000, plus incentive compensation of five percent of realized gains (also referred to as carried interest) on deals that he originated and actively managed for its capital venture funds.
In addition to originating and managing investments, Regis also took on the responsibility of forming a follow-on fund to Kirlan One. In 1997, he arranged the formation of Kirlan Two.
Regis was named as Kirlan Two's managing partner. In this role, he did not have any right to compensation directly from Kirlan Two. Instead, he was to receive compensation from Kirlan Venture according to his employment agreement.
In January 1998, Kirlan Venture increased Regis' salary and increased his incentive compensation to 10 percent of the carried interest.
In June 1999, Regis resigned as president of Kirlan Venture. Thereafter, he served as a part time consultant to Kirlan Venture under a different contract. Under an agreement memorialized by a letter from Lanterman, Regis agreed to assist Kirlan Venture with the transition to the new president, William Tenneson; to monitor investments; and to assist Tenneson in forming a follow-on fund to Kirlan Two. The consultancy agreement provided that Regis would be responsible for his own payroll taxes. Tenneson's employment contract was substantially similar to the contract Regis had when he was president.
The relationship between Regis and Lanterman deteriorated. In September 1999, Regis began to contest the tax characterization of his future incentive compensation payments. He wanted it to be characterized as a partner's distribution and taxed as capital gains. Lanterman wanted Regis' compensation to continue to be treated as ordinary income.
As a result of this dispute, Lanterman terminated Regis' consulting contract in October 1999. Notwithstanding the dispute over tax characterization, Regis consistently demanded a timely distribution of his incentive compensation.
By spring 2000, Regis and Lanterman were attempting to mediate their dispute. Kirlan Venture sent Regis a letter containing several options that would allow Regis to receive a portion of his incentive compensation while the tax characterization issue was being resolved. Regis accepted one of the proposals. However, on March 17, Lanterman rescinded the proposed offer and insisted that Regis' carried interest shares be withheld by Kirlan Venture pending resolution of the dispute about how to characterize them for tax purposes.
Meanwhile, InterNAP, one of the investments held by both Kirlan One and Kirlan Two, had become enormously successful. Restrictions on the distribution of Regis' incentive compensation from Kirlan Two's InterNAP holdings were set to be lifted on March 20, 2000, the fund's liquidity date. As that date approached, the securities market became extremely volatile. Still, Regis and Lanterman were unable to agree on how to pay Regis' carried interest. When March 20 came, Lanterman did not make any distribution to Regis. Lanterman then canceled the mediation.
Litigation began on March 21, 2000, when Regis filed a complaint in federal court against Kirlan Venture, Kirlan One, Kirlan Two, and Lanterman. The complaint alleged breach of contract and other theories primarily aimed at recovering the share value Regis allegedly was losing as a result in Lanterman's delay in distributing his incentive compensation. During the two weeks following March 20, the value of InterNAP shares dropped dramatically.
On April 3, 2000, Kirlan Venture distributed to Regis 142,485 of his uncontested 202,116 shares of InterNAP, while retaining the remaining 59,631 shares to make a tax deposit on Regis' compensation. Kirlan Venture reduced Regis' incentive compensation by 10 percent, as Lanterman believed he was authorized to do under the termination penalty clause of the consultancy agreement. Kirlan Venture also withheld $334,219 in stock from Regis' Kirlan Two InterNAP compensation as a holdback reserve fund, as authorized by the consultancy agreement.
On May 18, 2000, Kirlan Venture filed the case now on appeal in state court, naming Regis and Tenneson as defendants. The complaint as finally amended alleged a variety of claims. The general theme was that Regis and Tenneson had stolen Kirlan Venture's property when they formed another capital venture fund, Digital Partners.
Regis counterclaimed against Kirlan Venture, alleging the same claims as in his federal complaint. Eventually, Regis dismissed his federal suit.
The parties filed 11 motions and cross-motions for summary judgment, each containing multiple issues. On summary judgment, the court dismissed all of Kirlan Venture's claims against Regis and Tenneson. The court also granted Regis' motion for summary judgment on his claims for breach of contract, consequential damages, and prejudgment interest resulting from the delayed distribution of his Kirlan Two InterNAP incentive pay. The court ruled that Kirlan Venture was liable for $5,554,903 in damages for the decline in the value of the InterNAP stock during the 2-week delay in distribution of the InterNAP shares. The court also awarded Regis an additional $931,109 upon finding that Regis' termination penalty was one percent, not 10 percent.
The court proceeded to try the surviving claims for unpaid wages, delayed distribution, and declaratory judgment on the contract. The court ruled in favor of Regis on these claims. Including the damages found to be due on summary judgment, the court awarded Regis a total of $9,313,274 for withheld compensation on his contract and wage claims; $8,130,320 in statutory wage claim damages; and $1,092,670 in attorney fees and costs, totaling $18,536,264. The court also entered declaratory judgment in favor of Tenneson, and awarded him $179,498.51 in attorney fees and costs. This appeal followed.
Kirlan Venture argues that the court erred in ruling on summary judgment that it was liable for the damages arising from the delay in distributing Regis' incentive compensation. When reviewing a grant of summary judgment, we engage in the same inquiry as the trial court. RAP 9.12; Harris v. Ski Park Farms, Inc., 120 Wn.2d 727, 737, 844 P.2d 1006 (1993). Summary judgment is appropriate only when, after reviewing all facts and reasonable inferences in the light most favorable to the nonmoving party and all questions of law de novo, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c); Wilson v. Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982).
The following facts were undisputed at summary judgment.
On March 7, Kirlan Venture proposed three stock distribution options that would allow Regis to receive payment of his incentive compensation: (1) Kirlan Venture would sell a portion of Regis' shares, make a tax payment, and remit the balance; (2) Kirlan Venture would distribute all shares directly to Regis as independent contractor fees with no tax...
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