Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 31491–0–III.

CourtCourt of Appeals of Washington
Citation183 Wash.App. 459,334 P.3d 63
Decision Date04 September 2014
Docket NumberNo. 31491–0–III.,31491–0–III.
PartiesNORTHWEST WHOLESALE, INC., a Washington corporation, Plaintiff, v. PAC ORGANIC FRUIT, LLC, a Washington limited liability company, Defendant. Harold Ostenson and Shirley Ostenson, Appellants, v. Greg Holzman, Inc., a foreign corporation authorized to do business in the State of Washington, Greg Holzman, an individual, and Total Organic, LLC, a Washington limited liability company, Respondents.

183 Wash.App. 459
334 P.3d 63

NORTHWEST WHOLESALE, INC., a Washington corporation, Plaintiff
PAC ORGANIC FRUIT, LLC, a Washington limited liability company, Defendant.

Harold Ostenson and Shirley Ostenson, Appellants
Greg Holzman, Inc., a foreign corporation authorized to do business in the State of Washington, Greg Holzman, an individual, and Total Organic, LLC, a Washington limited liability company, Respondents.

No. 31491–0–III.

Court of Appeals of Washington, Division 3.

Sept. 4, 2014.

334 P.3d 67

Maris Baltins, Law Offices of Maris Baltins, P.S., Spokane, WA, for Appellants.

Daniel J. Appel, Attorney at Law, Wenatchee, WA, for Respondents.


183 Wash.App. 464


¶ 1 This case revolves around business disputes, between local orchardists Harold and Shirley Ostenson, husband and wife, and San Francisco businessman Greg Holzman, concerning the operation of a Grant County orchard packing facility. Although the Ostensons and Holzman were ostensibly partners, the parties jointly established a limited liability company, Pac Organic Fruit, LLC, (Pac Organic), through which they conducted business with one another. Greg Holzman formed additional companies to shield himself from individual liability and inserted those companies into his business relationships with the Ostensons. Greg Holzman, Inc., (GHI) was the company that became a member of Pac Organic. Both Greg Holzman and the Ostensons blame the other for the deterioration of the packing business. The Ostensons eventually filed a Chapter 11 bankruptcy petition that complicates and controls the outcome of this case. The Ostensons' story presents a primer on how not to conduct business.

¶ 2 Harold and Shirley Ostenson sued Pac Organic, claiming the limited liability company breached a lease for a fruit packing facility, failed to pay for orchard crops, owes them unpaid wages, undercompensated them, owes reimbursement for expenses incurred on behalf of the company, failed to distribute profits, and breached fiduciary duties. Shirley and Harold Ostenson also bring a derivative action, on behalf of Pac Organic against Greg Holzman and his companies, GHI, and Total Organic Fruit, LLC (Total Organic). The derivative action alleges Holzman and his companies mismanaged Pac Organic. This appeal concerns only the derivative action.

¶ 3 The trial court granted Greg Holzman's, GHI's, and Total Organic's (collectively the Holzman defendants) CR 41(b)(3) motion to dismiss, ruling that the Ostensons' bankruptcy dissociated them as members from Pac Organic.

183 Wash.App. 465

According to the trial court, because they were dissociated, RCW 25.15.370 precludes the Ostensons from bringing a derivative action. The Ostensons' nonderivative claims against Pac Organic survive the trial court's ruling, but presumably are worthless because of the financial condition of Pac Organic. The trial court directed a final judgment be entered, under CR 54(b), in favor of the Holzman defendants, because there was no just reason to delay entry of final judgment.

¶ 4 The Ostensons appeal the ruling dismissing the Holzman defendants. They argue their bankruptcy filing did not remove them from membership in Pac Organic and does not disqualify them from asserting a derivative action on behalf of the limited liability company. They also argue that, in the bankruptcy proceeding, the Holzman defendants consented to their membership in Pac Organic and this derivative action. Finally, the Ostensons argue that the Holzman defendants are judicially and collaterally estopped and res judicata bars them from denying the Ostensons' standing to bring the derivative action. We address all of these arguments and more. We affirm the trial court's grant of the Holzman defendants' motion to dismiss, because the Ostensons' bankruptcy filing rendered them ineligible to maintain a derivative action.


¶ 5 Harold Ostenson and Greg Holzman met in 1997. Holzman owned Greg Holzman, Inc., an organic brokerage business, and desired to expand into Washington State. To this end, the Ostensons and GHI formed, in June 1998, Pac Organic Fruit, LLC, a Washington limited liability company. The Ostensons

334 P.3d 68

owned 49 percent of Pac Organic. GHI owned the remaining 51 percent, allowing Greg Holzman, through his corporation, to control business decisions.

¶ 6 The Ostensons' and Holman's operating agreement for Pac Organic designated GHI as the manager of the

183 Wash.App. 466

limited liability company. The manager could be removed by a vote of all members, but remember that GHI was a member. Under the agreement, a member became dissociated upon the occurrence of any event considered a dissociation under the Washington Limited Liability Company Act. The agreement required both the Ostensons and GHI to contribute additional capital at GHI's discretion. Finally the limited liability company agreement obligated Harold Ostenson to lease a packing facility to Pac Organic, obtain a loan towards improving that facility, and pay that loan.

¶ 7 Shirley and Harold Ostenson were more than Pac Organic's minority owners. Harold Ostenson oversaw Pac Organic's operations. Shirley Ostenson served as Pac Organic's accountant. The Ostensons owned the packing facility in Grant County, which they leased to Pac Organic for 20 years with monthly payments beginning at $8,200.

¶ 8 Under Pac Organic's business model, growers delivered fruit to Pac Organic for packing and storage, and Pac Organic paid the growers for their fruit. GHI sold the fruit to distributors, and the distributors paid GHI for the produce. GHI remitted sales proceeds, less its commission, to Pac Organic, rendering Pac Organic financially vulnerable to business practices of GHI. Pac Organic conveyed the fruit to the distributor.

¶ 9 Pac Organic first operated only three months a year. With the goal of operating year-round, Pac Organic added packing lines and constructed four controlled atmosphere rooms. Pac Organic financed this expansion by borrowing almost one million dollars. The Ostensons and Holzman personally guaranteed the loan.

¶ 10 According to the Ostensons, Pac Organic steadily grew from 1998 to 2004. Growers delivering fruit to Pac Organic increased from 3 to over 30. The number of bins packed increased from 491 to 24,539. To accommodate the growth, Pac Organic leased controlled atmosphere rooms from another facility, effective May 1,

183 Wash.App. 467

2000. Under the terms of the lease, Pac Organic initially leased 4 rooms. Pac Organic promised to increase the number of rooms leased by 2 biannually, such that Pac Organic would eventually lease all 12 of the facility's rooms. At that point, the lease provided Pac Organic the option of purchasing the facility. Total income increased from $187,220 to $3,244,523. Harold Ostenson expected Pac Organic's net profit for 2005 to exceed $324,000.

¶ 11 According to Harold Ostenson, GHI stopped remitting sales proceeds to Pac Organic in 2004, and instead paid growers directly. GHI's records show it owed Pac Organic more and more as 2004 progressed: $310,560 in January, $717,816 in April, and $833,272 in May. Similarly, Pac Organic's records show that GHI remitted less and less: $502,411 in July, $72,494 in August, and nothing in September. The Ostensons accuse GHI of meeting its cash flow needs at the expense of Pac Organic, by paying orchardists directly.

¶ 12 Greg Holzman's version of Pac Organic's decline differs from the Ostensons' testimony. According to Holzman, Pac Organic lost money every year from 1998 to 2003. Holzman maintains that he tried to work with the Ostensons to turn Pac Organic around, but Harold Ostenson was uncooperative. Harold Ostenson, according to Holzman, refused sales of stored fruit because he and buyers disagreed on pricing, which caused fruit to sit past its prime and Pac Organic to lose revenue.

¶ 13 Regardless of who, if anyone, was to blame, Pac Organic financially collapsed. In early January 2005, Pac Organic defaulted on its operating line of credit. The company also defaulted on its lease payments to the Ostensons. On March 8, 2005, Holzman fired the Ostensons from employment with Pac Organic. Later that year, KeyBank foreclosed on the Pac Organic packing facility and the Ostensons' orchard.

¶ 14 On July 27, 2005, Greg Holzman executed, as agent of Pac Organic, a demand promissory note in favor of GHI in

183 Wash.App. 468


334 P.3d 69

amount of $1,023,009.38. The Ostensons claim that the note is, at worst, fraudulent, and, at best, constituted mismanagement by Greg Holzman and GHI of Pac Organic's affairs. Holzman maintains the promissory note Pac Organic executed in favor of GHI was legitimate and, if anything, understated the amount Pac Organic owed to GHI. As agent for Pac Organic, Holzman transferred the...

To continue reading

Request your trial
1 cases
  • Nw. Wholesale, Inc. v. Pac Organic Fruit, LLC, 31491–0–III.
    • United States
    • Court of Appeals of Washington
    • September 4, 2014
    ...183 Wash.App. 459334 P.3d 63NORTHWEST WHOLESALE, INC., a Washington corporation, Plaintiff,v.PAC ORGANIC FRUIT, LLC, a Washington limited liability company, Defendant.Harold Ostenson and Shirley Ostenson, Appellants,v.Greg Holzman, Inc., a foreign corporation authorized to do business in th......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT