Phillips Sisson Indus., Inc. v. Hysell

• Citation: 317 Or.App. 440,506 P.3d 1139
• Decision Date: 09 February 2022
• Docket Number: A169634
• Parties: PHILLIPS SISSON INDUSTRIES, INC. and Clint Phillips, Plaintiffs-Respondents, v. Tim HYSELL, Defendant-Appellant. Phillips-Sisson Industries, Inc., an Oregon corporation, and Clint Phillips, an individual, Plaintiffs, v. PSI Acquisition, LLC, an Oregon limited liability company, Defendant.
• Court: Court of Appeals of Oregon

317 Or.App. 440

506 P.3d 1139

PHILLIPS SISSON INDUSTRIES, INC. and Clint Phillips, Plaintiffs-Respondents,

v.Tim HYSELL, Defendant-Appellant.

Phillips-Sisson Industries, Inc., an Oregon corporation, and Clint Phillips, an individual, Plaintiffs,

v.PSI Acquisition, LLC, an Oregon limited liability company, Defendant.

A169634

Court of Appeals of Oregon.

Argued and submitted September 2, 2020.

February 9, 2022

Sara Kobak, Portland, argued the cause for appellant. Also on the briefs were Thomas Payne and Schwabe, Williamson & Wyatt, P.C.

Ben C. Fetherston, Jr., Salem, argued the cause for respondents. Also on the brief was Fetherston Edmonds, LLP.

Before Ortega, Presiding Judge, and Shorr, Judge, and Powers, Judge.

SHORR, J.

Defendant Tim Hysell (defendant) appeals from a judgment in favor of plaintiffs Clint Phillips and Phillips-Sisson Industries, Inc. (Phillips-Sisson). That judgment was entered after the trial court ruled in favor of plaintiffs following a bench trial. Defendant assigns error to the trial court's denial of defendant's "motion for a directed verdict"¹ and the court's decision to enter "judgment against [defendant] personally on the theory that [certain] note payments [to defendant] were unlawful distributions under ORS 63.229." We agree with defendant's latter contention. The trial court erred by entering judgment for plaintiffs based on its conclusion that the challenged note payments were unlawful distributions under ORS 63.229. As we discuss, the note payments were not distributions as defined under the Oregon Limited Liability Company Act (LLC Act), and the trial court erred in instructing itself on that law. Defendant has not adequately developed an argument, however, that the trial court had to direct a verdict for defendant on plaintiffs’ claims. As we explain, we vacate and remand to the trial court for further proceedings.

THE SUBSTANTIVE FACTS UNDERLYING THIS APPEAL

The material facts necessary to resolve this appeal are undisputed. We recount only those facts necessary to understand the trial court's ruling and our decision. The background to this dispute is both involved and complex, involving a number of different loans, transactions, and entities. However, we need only discuss the key transactions that underlie this dispute.

PSI Acquisitions, LLC (PSIA) was an Oregon limited liability company with two members, defendant and Dan Sisson. Defendant owned approximately 90 percent of the membership units and was the managing member. Dan Sisson owned the remaining minority interest.

PSIA was originally formed to take over the sales and operations of plaintiff Philips-Sisson, which was owned by plaintiff Clint Phillips and Dan Sisson. In 2006, PSIA purchased the assets of Phillips-Sisson, which had manufactured and sold traffic lights and related traffic control products. PSIA purchased the assets for both cash and a $600,000 promissory note payable to Philips-Sisson. From the start, PSIA failed to make payments on the promissory note. In 2009, plaintiffs Phillips-Sisson and Clint Phillips sued PSIA on the note. Plaintiffs obtained a stipulated judgment for $600,000 against PSIA, with plaintiffs appearing as judgment creditors and PSIA as the judgment debtor. Plaintiffs, however, later agreed to forbear on collection of that judgment pending the occurrence of certain events and payments. The forbearance agreement gave plaintiffs a security interest in a large number of publicly traded shares in a company called Blue Earth, Inc. The value of those shares dropped precipitously in 2015 and 2016, and they ultimately became worthless at some point in 2016.

During its operations, PSIA also borrowed money from commercial banks and individuals. At issue in this lawsuit are two loans made in 2007 and 2008. In those years, defendant and his wife Robin Hysell loaned $180,000 and $104,911, respectively, to PSIA and received promissory notes in return.

By January 2016, PSIA was insolvent and its liabilities were greater than the value of its assets. Nevertheless, in February and April 2016, while PSIA was insolvent and despite the fact that plaintiffs had still not recovered on their judgment against PSIA, defendant caused PSIA to pay $250,000 and $5,000, respectively, to himself to pay down PSIA's outstanding promissory notes to himself and his wife. Defendant and Dan Sisson, the two members of the LLC, approved all repayments to the LLC's creditors.

THE PROCEDURAL FACTS AND THE TRIAL COURT'S RULING

Plaintiffs filed the lawsuit underlying this appeal in December 2017. Plaintiffs’ operative complaint alleged one claim for relief stating two counts, one labeled as a creditor's bill and the other, relatedly, for fraudulent transfer.² The matter was tried to the court in a bench trial. During defense counsel's opening statement, the trial court, sua sponte , raised the possibility that, by approving the repayment of PSIA's debts to himself and his wife, defendant had approved an improper distribution under ORS 63.229. As to that point, plaintiffs had not raised ORS 63.229 as part of its claim and no party had mentioned the issue. Defense counsel contended to the trial court that, although he was only familiar and not "current" with the statute, he understood that a "distribution" under the LLC Act was an ownership distribution or reimbursement of an ownership interest and not a repayment of a debt that was owed to the owner. Defense counsel also asked to submit supplemental briefing on the issue.

After plaintiffs rested their case, the court again returned to the application of ORS 63.229 to the facts. Plaintiffs asked to incorporate that theory into their pleadings to conform their complaint to the evidence. Defendant, again, maintained that PSIA's repayment to defendant and his wife for an established company debt was not a distribution as that term was defined in ORS 63.001(6) and repeated his request to submit supplemental briefing. The court preliminarily concluded that distribution was defined much more broadly and that anything out of the corporation—whether money, property, or debt repayment—was a distribution. As a result, the court initially concluded that defendant "made a transaction that is in violation of [ORS] 63.229." The court, however, provided the parties an opportunity to file supplemental briefing on the issue. Further, at the close of the trial, the court appeared to find that defendant had not acted in bad faith or with a fraudulent purpose in approving the debt repayments, but also concluded that defendant's good faith was

"not an issue. It doesn't bear on my decision either way. I mean, maybe it would bear if I felt that you had cheated your creditors and it was done for a purpose to defraud them. Then there's other remedies. But that's just not present in the evidence."

The court also stated that the analysis that the court must undertake under ORS 63.229 "supplements or supplants" the analysis under the case law, including in analyzing plaintiffs’ claim against defendant for a creditor's bill and fraudulent transfer.

After defendant submitted supplemental briefing on the issue of the application of ORS 63.229, the trial court ruled in accordance with its earlier inclination that the LLC's repayment of defendant's and his wife's loan was an unlawful distribution. The court entered a general judgment against defendant personally for $255,000 plus statutory interest after concluding that defendant had "engaged in a prohibited and thus fraudulent transfer of assets."

LEGAL ANALYSIS

Defendant appeals from that general judgment, arguing that the trial court erred by denying defendant's "motion for a directed verdict and by entering judgment against [defendant] personally on the theory that the note payments were unlawful distributions under ORS 63.229."³ Defendant repeats the essential argument that he made in the trial court, namely that his approval of PSIA's repayment of his and his wife's loans were not "distributions" as that term is defined in the LLC Act. Plaintiffs, for their part, do not grapple with the LLC Act, engage in any statutory analysis, or defend the statutory basis for the trial court's ruling. Rather, plaintiffs contend that the trial court was correct in ruling for plaintiffs because defendant had breached his fiduciary duty, as defined by case law, in preferring payments to himself over other plaintiffs and other creditors. That contention restates the original bases for plaintiffs’ claim, which did not rely on a theory of an unlawful distribution under the LLC Act.

We start with a brief analysis of the nature of defendant's first assignment of error. As noted, defendant first contends that the trial court erred both in denying his "motion for a directed verdict and by entering judgment against [defendant] personally on the theory that the note payments were unlawful distributions under ORS 63.229." As to defendant's argument that the trial court erred in denying his directed-verdict motion, defendant does not develop a legal argument in support of that contention and we, therefore, decline to address it. Bazzaz v. Howe , 262 Or. App. 519, 529, 325 P.3d 775, rev. den. , 356 Or. 397, 337 P.3d 127 (2014).

Defendant's first assignment, however, also contends that the trial court erred by entering judgment against defendant personally on the theory that, by approving the loan repayments to himself and his wife, he had caused PSIA to make unlawful distributions under ORS 63.229. As to that aspect of his assignment, defendant may not precisely classify the nature of the assignment, but he does identify it and fully develops an argument in support of it. That is, we understand defendant to contend that the trial court applied the wrong legal standard in ruling for plaintiffs in this bench trial. As we have stated,

"[i]n a bench trial, an argument that the trial court applied an incorrect legal standard is akin to an assertion that a trial court delivered an incorrect jury

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