Rowlett v. Fagan

• Decision Date: 14 May 2014
• Docket Number: A146351.,090101006
• Court: Oregon Court of Appeals
• Parties: Gerald L. ROWLETT, an individual; Westlake Development Company, Inc., an Oregon corporation; and Westlake Development Group, LLC, an Oregon limited liability company, Plaintiffs–Appellants, v. David G. FAGAN, an Oregon resident; James M. Finn, an Oregon resident; and Schwabe Williamson & Wyatt, PC, an Oregon professional corporation, Defendants–Respondents.

262 Or.App. 667
327 P.3d 1

Gerald L. ROWLETT, an individual; Westlake Development Company, Inc., an Oregon corporation; and Westlake Development Group, LLC, an Oregon limited liability company, Plaintiffs–Appellants,
v.
David G. FAGAN, an Oregon resident; James M. Finn, an Oregon resident; and Schwabe Williamson & Wyatt, PC, an Oregon professional corporation, Defendants–Respondents.

090101006; A146351.

Court of Appeals of Oregon.

Argued and submitted Jan. 03, 2013.
Decided May 14, 2014.

[327 P.3d 3]

David W. Melville argued the cause for appellants. With him on the briefs were The Law Offices of David Melville, and Katherine R. Heekin and The Heekin Law Firm.

Chris Carson argued the cause for respondents. On the brief were Graham M. Sweitzer, Stephen C. Voorhees, and Kilmer Voorhees & Laurick, P.C.

Before ARMSTRONG, Presiding Judge, and NAKAMOTO, Judge, and EGAN, Judge.

NAKAMOTO, J.

Plaintiffs Rowlett and his two companies, plaintiffs Westlake Development Company, Inc. and Westlake Development Group, LLC, appeal in this attorney malpractice action against their former attorneys, defendants Schwabe Williamson & Wyatt, PC (Schwabe) and lawyers Fagan and Finn. Some, but not all, of plaintiffs' theories of defendants' negligence went to trial, as did plaintiffs' claims for negligent misrepresentation and breach of fiduciary duty. There was a defense verdict on the latter two claims, which plaintiffs do not challenge on appeal. As for the negligence claim, plaintiffs achieved a Pyrrhic victory: the jury agreed that defendants were “negligent” in representing plaintiffs but awarded no damages. Asserting seven assignments of error, plaintiffs now challenge various pretrial and trial rulings by the trial court, with all but one in some way concerning their damages on the negligence claim.

Plaintiffs challenge the trial court's pretrial dismissal of two aspects of their damages by way of summary judgment. They contend that they were entitled to seek as damages on the negligence claim (1) the attorney fees that they had paid to Schwabe for the legal services defendants rendered in the underlying matter, litigation involving Sunrise Partners LLC (Sunrise), and (2) the attorney fees that they would have recovered from the Sunrise opponents, as measured by their fees incurred in this action. We reject the first contention and, in light of our disposition and the opportunity for plaintiffs to

[327 P.3d 4]

seek fees as part of their damages on remand, we do not reach the second contention.

Plaintiffs also argue that the jury's determination of damages was adversely affected because of the trial court's erroneous rulings at trial. Specifically, plaintiffs contend that (1) over their objection, the trial court gave the jury a verdict form that allowed it to use an impermissible date for valuing Rowlett's interest in Sunrise; (2) despite a ruling in plaintiffs' favor on their motion in limine, the trial court failed to limit defendants' use of evidence of the Sunrise litigation settlement during the trial; and (3) over plaintiffs' objection, the trial court erroneously allowed testimony by defendants' expert witness, accountant Thompson, as to the value of Rowlett's interest in Sunrise. We agree with plaintiffs that the trial court erred regarding the verdict form.

Plaintiffs also assign error to the pretrial dismissal of one of their specifications of negligence based on defendants' motion under ORCP 21 G(3). Plaintiffs alleged that defendants damaged them in the Sunrise litigation by failing to timely allege an “oppression” or “squeeze-out” claim, coupled with a demand for a forced buyout or dissolution of Sunrise. The trial court concluded that plaintiffs had failed to establish that a limited liability company (LLC) member can bring an oppression claim and granted defendants' motion to dismiss that part of the negligence claim. We reverse because plaintiffs properly stated a claim for negligence by alleging that defendants breached a duty of care by asserting the oppression claim too late in the Sunrise litigation and that plaintiffs suffered harm because of that breach.

I. BACKGROUND

To set the stage for our discussion of the assignments of error, where we consider additional facts relevant to each of those assignments, we provide background concerning the formation of Sunrise and who its members and managers were, the history of defendants' representation of plaintiffs, and the procedural history of this malpractice action. We state the facts regarding defendants' breach of their duty of care in the light most favorable to plaintiffs, “the party in whose favor the verdict was returned.” Northwest Natural Gas Co. v. Chase Gardens, Inc., 328 Or. 487, 490, 982 P.2d 1117 (1999).

A. The formation of Sunrise

Rowlett is a real estate developer and residential building contractor and the sole principal in his two companies. Before forming Sunrise, Rowlett held an option to purchase land in Gresham, the so-called Kelley Creek property. Rowlett also had plans to obtain options to purchase three properties in Happy Valley, which the parties referred to as the Sunnyside Road properties. All told, the parcels together were worth $11,000,000. Rowlett was looking for other investors to help purchase and develop the properties and decided to form Sunrise with Michael Pruett and Tracey Baron in the fall of 2000. Baron agreed to provide financing for the two projects through Sunrise.

Sunrise was organized as an Oregon manager-managed LLC. The Sunrise operating agreement provided that Sunrise could have only three Class A members, and Rowlett, Pruett, and Baron held all of the Class A shares. Class A ownership could not be diluted, even if one of the members declined to contribute to a request for capital contributions. The operating agreement further allowed Sunrise to have Class B members. Each Class A member held an effective veto over the admission of a Class B member. In addition to being a Class A member, Rowlett was a Class B member. Initially, all three men were managers of Sunrise.

After Sunrise was formed, Rowlett assigned his rights to purchase the Kelley Creek property to Sunrise and, in 2001, acquired options to purchase the Sunnyside Road properties, which he also assigned to Sunrise. Rowlett's companies had made payments on the option contracts.

Sunrise struggled to find other investors. It stopped making payments on the Kelley Creek option contract and lost the option to purchase that property; Sunrise also defaulted on a purchase agreement for one of the Sunnyside Road properties. Baron, an investment advisor at Private Consulting

[327 P.3d 5]

Group, Inc. (PCG), approached Robert Keys, his employer at PCG, about investing in Sunrise and becoming a member. Rowlett opposed having Keys join Sunrise.

But after a vacation in March 2002, Rowlett learned that, without his approval, Pruett, Baron, and Keys were planning to take Sunrise's rights with respect to the Sunnyside Road properties to a different entity that would not include Rowlett. Baron excluded Rowlett from a meeting with a potential construction partner, Randy Robinson, who later became a member in Sunrise. Rowlett learned that others who worked for PCG besides Keys were becoming involved in Sunrise, also without Rowlett's approval. Rowlett refused to sign an amended operating agreement and, without his consent, Keys became a Sunrise Class B member through a consent resolution that purported to contain Rowlett's signature, which Rowlett contended was a forgery.

B. Schwabe's representation of plaintiffs

In June 2002, Rowlett, concerned about the actions that Pruett and Baron had taken in Sunrise, went to Schwabe for representation. Schwabe assigned the matter to Fagan, an associate with three to four years of experience. In November 2002, Fagan filed a complaint on behalf of plaintiffs against Pruett, Baron, Keys, and PCG regarding the Kelley Creek property in Multnomah County Circuit Court. Fagan did so despite a clause in the Sunrise operating agreement requiring arbitration of disputes. When Keys's lawyer pointed out the requirement for arbitration, Fagan stipulated to dismissal of the complaint in January 2003, and the parties agreed to binding arbitration.

Fagan then failed to promptly pursue arbitration. Fagan did not file plaintiffs' arbitration statement until December 2003. The 2003 arbitration statement that Fagan filed contained the same claims that were in the circuit court complaint, plus it alleged that Baron had breached fiduciary duties as an agent. The arbitration statement did not allege an oppression claim and did not contain a demand for a compulsory buyout of Rowlett's interest in Sunrise. The statement did not name Sunrise as a party, although Sunrise held the property rights. One of the lawyers for Keys and PCG testified at trial that, had Fagan promptly pursued arbitration, federal Securities and Exchange Commission rules would have required Keys and PCG, as investment advisors, to report the pending action, and that would have “pressure[d]” his clients to seek “a complete resolution of the matter fairly quickly.”

In the absence of any legal action on plaintiffs' behalf, the other Sunrise members took actions that adversely affected Rowlett in 2003. On March 13, 2003, Pruett and Baron, through a consent resolution, removed Rowlett as a manager of Sunrise. Shortly thereafter, Sunrise announced a capital call to raise money to prevent foreclosure on one of the Sunnyside Road properties and demanded that Class B members, including Rowlett, contribute over $600,000 to Sunrise. If Rowlett did not contribute the capital, his interest in Sunrise would be diluted. Fagan advised Rowlett that he need not respond to the capital call. Eventually, the principals at Sunrise began operating the company according to an amended and restated operating agreement, although the effectiveness of that document was disputed between the parties.

Fagan also did not...