Northgate Ventures LLC v. Geoffrey H. Garrett PLLC

• Decision Date: 21 October 2019
• Docket Number: No. 78495-1-I,78495-1-I
• Citation: 450 P.3d 1210
• Parties: NORTHGATE VENTURES LLC, Appellant, v. GEOFFREY H. GARRETT PLLC (fka Byrd Garrett PLLC); Geoff Garrett PLLC; and Geoffrey H. Garrett and Sabina S. Garrett, Respondents.
• Court: Washington Court of Appeals

450 P.3d 1210

NORTHGATE VENTURES LLC, Appellant,

v.GEOFFREY H. GARRETT PLLC (fka Byrd Garrett PLLC); Geoff Garrett PLLC; and Geoffrey H. Garrett and Sabina S. Garrett, Respondents.

No. 78495-1-I

Court of Appeals of Washington, Division 1.

FILED: October 21, 2019

Joseph A. Hamell, Christopher Michael Reed, Montgomery Purdue Blankinship & Austin P, 701 5th Ave., Ste. 5500, Seattle, WA, 98104-7096, for Appellant.

Thomas Scott Linde, Jacob Rosenblum, Schweet Linde & Coulson, PLLC, 575 S Michigan St., Seattle, WA, 98108-3316, for Appellee.

Mann, A.C.J. ¶ 1 In 2010, Northgate Ventures LLC (Northgate) entered an eight-year commercial lease agreement with the law firm Geoffrey H. Garrett PLLC. In 2016, Geoffrey H. Garrett PLLC asked Northgate to terminate its lease. After Northgate declined, Geoffrey H. Garrett PLLC stopped making monthly rental payments and vacated the premises. Shortly thereafter Geoffrey H. Garrett PLLC was dissolved and placed into receivership. Its principal, Geoffrey Garrett, then formed a new law firm, Geoff Garrett PLLC and continued to practice law.

¶ 2 Northgate sued for breach of the lease and sought to hold Garrett personally liable as a member of Geoffrey H. Garett PLLC, and Geoff Garrett PLLC liable as a successor entity. Northgate appeals the trial court’s decision granting summary judgment and dismissing its claims against Garrett and Geoff Garrett PLLC. Northgate contends that Garrett and Geoff Garrett PLLC are mere continuations of Geoffrey H. Garrett PLLC and fraudulently transferred goodwill from Geoffrey H. Garrett PLLC to Geoff Garrett PLLC. We disagree and affirm.

I.

¶ 3 Garrett is an attorney practicing law in Washington, focusing primarily on estate and financial planning. In 2007, Garrett purchased the law firm Stanley R. Byrd, Inc., P.S. (Stanley R. Byrd), an estate planning law firm. Garrett then changed the firm name to Byrd Garrett PLLC, and later to Geoffrey H. Garrett, PLLC. Garrett purchased Stanley R. Byrd, Inc., P.S. for $600,000. $539,497.10 of the purchase price was allocated to goodwill, or "the value of clients."

¶ 4 In August 2010, Northgate and Geoffrey H. Garrett PLLC entered an eight-year commercial lease for office space in Seattle. The lease was between Geoffrey H. Garrett PLLC and Northgate. Garrett did not sign a personal guaranty for the lease.¹ On August 25, 2016, Garrett notified Northgate that he was significantly changing his law practice, no longer required the office space and requested to terminate the lease or in the alternative, sublet the office space. Northgate declined the request. Garrett was unable to find a tenant to sublet and Geoffrey H. Garrett PLLC stopped making monthly rental payments of $6,912.00 in October 2016 and vacated the premises in November 2016.

¶ 5 Geoffrey H. Garrett PLLC was not a profitable law firm and reported losses for the last seven years of its existence.² Garrett subsidized the firm from 2013 to 2016 by using his personal 401(k) retirement account, which totaled $1 million. Garrett also used almost the entirety of a $300,000 home equity line of credit from Chase (Chase HELOC) to remain current on Geoffrey H. Garrett PLLC’s obligations.

¶ 6 On November 23, 2016, Geoffrey H. Garrett PLLC executed a general assignment for the benefit of creditors assigning all property to attorney Nathan Riordan. The assignment granted interest in "all of Assignor’s property ... including, but not limited to, all real property, fixtures, goods, interests, stock, inventory, equipment, furniture, furnishing, accounts receivable, general intangibles, bank deposits, cash, promissory notes, cash value and proceeds of insurance policies, claims, and damages belong to the Assignor." Geoffrey H. Garrett PLLC then petitioned the court to appoint a receiver and the court appointed Riordan. Northgate participated in the receivership filing a proof of claim.

¶ 7 While operating, Geoffrey H. Garrett PLLC charged a flat fee for its estate planning clients and the clients paid a 75 percent down payment at the start of projects. Estate settlement clients also paid a flat fee, paying 60 percent up front, then 15 percent in the second month, 15 percent in the third month, and then the remaining balance when the work was completed. Because of Geoffrey H. Garrett PLLC’s fee structure, there were rarely unpaid receivable accounts.

¶ 8 All property of Geoffrey H. Garrett PLLC was administered by the receiver. Office furniture of Geoffrey H. Garrett PLLC was sold to Garrett for $4,705.00. After Geoffrey H. Garrett PLLC was liquidated, the receiver moved for approval of the final report and accounting, authority to make disbursements, discharge of the receiver, termination of the receivership, and exoneration of the bond. The trial court granted the receiver’s motion. The final report included the receipts and disbursements of the receiver and the expenses the receiver incurred. The receiver surrendered Geoffrey H. Garrett PLLC’s $7,300 deposit, abandoned the remaining office assets, and disbursed $1,120.13 to Northgate. Northgate did not appeal the order approving the final report.

¶ 9 After appointment of the receiver, but before the court terminated the receivership, Garrett incorporated a new law firm, Geoff Garrett, PLLC. Garrett mailed all of the former Geoffrey H. Garrett PLLC clients a letter informing them of his new firm and his desire to continue serving as their estate planning attorney. Garrett continued representing 33 clients.

¶ 10 Northgate sued Geoffrey H. Garrett PLLC for breach of its lease and damages of $129,733.66. Northgate alleged Garrett and Geoff Garrett PLLC were successors of Geoffrey H. Garrett PLLC, making them liable to Northgate under the lease. Northgate also alleged violations of the Uniform Fraudulent Transfer Act and justifications for piercing the corporate veil and claims of improper windup.

¶ 11 All parties filed motions for summary judgment. The trial court granted summary judgment for Garrett and Geoff Garret PLLC and dismissed Northgate’s successor and personal liability claims. The court found, however, that Geoffrey H. Garrett PLLC was liable to Northgate for its breach of lease. The court awarded attorney fees and costs to Garrett and Geoff Garrett PLLC under the terms of the lease.

¶ 12 Northgate appeals.

II.

¶ 13 Northgate first contends that the trial court erred in granting summary judgment and dismissing its claims against Garrett and Geoff Garrett PLLC because Northgate was entitled to a determination of successor liability as a matter of law. We disagree.

A.

¶ 14 We review summary judgment orders de novo, engaging in the same inquiry as the trial court. Summary judgment is warranted only when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. CR56(c). The facts and all reasonable inferences are viewed in the light most favorable to the nonmoving party. Young v. Key Pharmaceuticals, Inc., 112 Wash.2d 216, 225-26, 770 P.2d 182 (1989).

¶ 15 A person or group of persons licensed or legally authorized to render professional services within Washington may form and become members of a professional limited liability company (PLLC). RCW 25.15.046. As a general rule, unless a member of a PLLC agrees to be obligated personally,³ members of a PLLC are not liable for the liabilities of the PLLC.

The debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations, and liabilities of the limited liability company; and no member or manager of a limited liability company is obligated personally for any such debt, obligation, or liability of the limited liability company solely by reason of being or acting as a member or manager respectively of the limited liability company.

RCW 25.15.126. Similarly, Washington "adheres to the general rule that a corporation purchasing the assets of another corporation does not become liable for the debts and liabilities of the selling corporation." Cambridge Townhomes, LLC v. Pac. Star Roofing, Inc., 166 Wash.2d 475, 481-82, 209 P.3d 863 (2009).

¶ 16 There is no dispute that Northgate contracted with Geoffrey H. Garrett PLLC and did not require Garrett to personally guarantee the commercial lease contract. Thus, in order to prevail in its claim against Garrett personally, or Geoff Garrett PLLC, Northgate must demonstrate that an exception to the general rule applies. Recognized exceptions include where the "purchaser is a mere continuation of the seller" or where the transfer is for "fraudulent purpose of escaping liability." Columbia State Bank v. Invicta Law Grp. PLLC, 199 Wash. App. 306, 320, 402 P.3d 330 (2017) (quoting Cambridge, 166 Wash.2d at 482, 209 P.3d 863 ); RCW 25.15.061 (recognizing limited application of common law piercing the corporate veil doctrine to PLLCs).

B.

¶ 17 Northgate first argues that Geoff Garrett PLLC is a successor entity of Geoffrey H. Garrett PLLC because it is a mere continuation of Geoffrey H. Garrett PLLC.

¶ 18 Washington courts rely on several factors to determine whether a successor business is a mere continuation of the seller. These include (1) "a common identity between the officers, directors, and stockholders of the selling and purchasing companies," and (2) "the sufficiency of the consideration running to the seller corporation in light of the assets being sold." Cambridge, 166 Wash.2d at 482, 209 P.3d 863. These factors help the court determine whether the " ‘purchaser represents merely a new hat for the seller.’ " Cambridge, 166 Wash.2d at 482, 209 P.3d 863 (quoting Cashar v. Redford, 28 Wash. App. 394, 397, 624 P.2d 194 (1981) ).

¶ 19 There is no dispute that Garrett was the sole member of both Geoffrey H. Garrett PLLC and Geoff Garrett PLLC. Thus, our inquiry is focused on whether Geoff Garrett PLLC paid adequate consideration for the assets of Geoffrey H. Garrett PLLC. Northgate contends that Geoff Garrett PLLC...