Serpanok Constr. v. Point Ruston, LLC, 091421 WACA, 54413-0-II

CourtCourt of Appeals of Washington
JudgeWe concur: Cruser, J., Veljacic, J.
Writing for the CourtGlasgow, A.C.J.
PartiesSERPANOK CONSTRUCTION, INC., a Washington corporation, Respondent, v. POINT RUSTON, LLC, a Washington limited liability company; POINT RUSTON PHASE II, LLC, a Washington limited liability company; CENTURY CONDOMINIUMS, LLC, a Washington limited liability company; and MICHAEL A. COHEN, [†] an individual, Appellants, CHICAGO TITLE INSURANCE COMPA...
Docket Number54833-0-II,54413-0-II

SERPANOK CONSTRUCTION, INC., a Washington corporation, Respondent,


POINT RUSTON, LLC, a Washington limited liability company; POINT RUSTON PHASE II, LLC, a Washington limited liability company; CENTURY CONDOMINIUMS, LLC, a Washington limited liability company; and MICHAEL A. COHEN, [†] an individual, Appellants,

CHICAGO TITLE INSURANCE COMPANY, a foreign corporation; ADDISON CONSTRUCTION SUPPLY, INC., a Washington corporation; JM CORP & SON, INC., a Washington corporation; GLACIER NORTHWEST, INC. d/b/a CALPORTLAND, a Washington corporation; RICHARD MATZEN and EDELGARD MATZEN, husband and wife, and the marital community comprised thereof; C2 STRATEGIES, LLC, a Washington limited liability company; STACEY POLAND and SHERI POLAND, a married couple; USAA FEDERAL SAVINGS BANK, a federal savings association; FIRST AMERICAN TITLE INSURANCE COMPANY, a foreign corporation; INTERNATIONAL FIDELITY INSURANCE COMPANY, a foreign corporation; STONER ELECTRIC, INC., a foreign corporation, Defendants.

Nos. 54413-0-II, 54833-0-II

Court of Appeals of Washington, Division 2

September 14, 2021

Glasgow, A.C.J.

Point Ruston LLC, Point Ruston Phase II LLC (Phase II), and Century Condominiums (hereinafter collectively referred to as Point Ruston parties) were separate but related real estate companies developing the Point Ruston area in Pierce County. Serpanok Construction Inc. was a concrete and steel construction subcontractor on the project.

Phase II and Century fell behind in payments to Serpanok. Point Ruston LLC then guaranteed a portion of Phase II and Century's debt to induce Serpanok to keep working. Serpanok also filed a mechanic's lien on a parking garage it was constructing.

Serpanok then sued the Point Ruston parties for breach of contract due to failure to pay. An arbitrator awarded Serpanok over $4.6 million (before attorney fees and interest). The arbitrator limited the total recovery from all defendants to the total amount due under the subcontracts and granted Serpanok's request to foreclose on the garage mechanic's lien. The arbitrator collectively awarded the Point Ruston parties $1.2 million (before attorney fees and interest), comprised of a sanctions award and recovery for its successful counterclaims against Serpanok.

The trial court confirmed the arbitration award, entering a total judgment of approximately $5.2 million (including prejudgment interest) against the three Point Ruston parties, who were jointly and severally liable. Serpanok then foreclosed on its mechanic's lien and purchased the garage at the sheriff's sale with a credit bid of $3.4 million. The trial court adhered to the arbitrator's determination that the total payment from all Point Ruston parties could not exceed the $5.2 million owed under the subcontracts plus interest and fees. The trial court confirmed the foreclosure sale, determined that the sale proceeds fully satisfied the mechanic's lien, and reduced the total underlying debt, as well as Point Ruston LLC's guaranty obligation, to a remaining balance of $1.8 million.

The Point Ruston parties appeal the arbitration award and related orders. The Point Ruston parties also appeal the postjudgment allocation of foreclosure sale proceeds, claiming the trial court erred by not subtracting the $3.4 million foreclosure sale proceeds from Point Ruston LLC's guaranty and releasing Point Ruston LLC entirely from its obligations as a guarantor. Both the Point Ruston parties and Serpanok request attorney fees on appeal.

In the published portion of this opinion, we affirm the allocation of foreclosure sale proceeds. Point Ruston LLC remains a secondary obligor liable for the remaining $1.8 million balance on the underlying debt. In the unpublished portion of this opinion, we affirm the underlying arbitration award and reject the Point Ruston parties' other claims. Therefore, we affirm both the arbitration award, as well as the trial court's allocation of foreclosure proceeds and judgment. We grant Serpanok's request for attorney fees on appeal.


A. Background

The Point Ruston parties constructed apartment buildings, condominiums, retail businesses, a movie theater, a parking garage, and other structures on the site of the former Asarco copper smelter. Michael Cohen was the project manager. Larry Hutchinson was the construction manager and oversaw the Point Ruston projects from 2013 to 2015. Hutchinson negotiated subcontracts, approved change orders, was authorized to "exercise discretion and independent judgment," and owed the Point Ruston parties fiduciary duties. Clerk's Papers (CP (I))1 at 1472.

In 2014, Phase II and Serpanok signed subcontracts for the movie theater (Building 1A) and the parking garage.[2] Both subcontracts had arbitration clauses. Shortly after the signing of the Building 1A subcontract, title of that building was transferred to Century, making it the real party in interest. Century was not a party to the garage subcontract, and Point Ruston LLC was not a party to either subcontract.

B. Kickbacks, Change Orders, and Promissory Notes

From 2013 to 2015, Serpanok paid Hutchinson about $80, 000 in kickbacks in exchange for information that would assist Serpanok in obtaining contract awards and change order decisions favorable to Serpanok. The Point Ruston parties learned of Hutchinson's misconduct in November 2015, investigated possible claims against Hutchinson and Serpanok, and fired Hutchinson. Phase II nonetheless executed additional change orders with Serpanok after terminating Hutchinson. Phase II also "insist[ed] that Serpanok continue to perform under the subcontracts, [and] accept[ed] the valuable work . . . by Serpanok." CP (I) at 2746. Serpanok completed all of its "work for competitive prices (or better)." CP (I) at 2766. And even after discovering the misconduct between Serpanok and Hutchinson, Cohen praised Serpanok for the speed and quality of its work.

Phase II continued to fall behind in payments, owing more than $2 million for Serpanok's work on the garage by spring 2015. To persuade Serpanok to continue working, Point Ruston LLC (a separate entity from Point Ruston Phase II, the entity directly contracting with Serpanok), issued two promissory notes to Serpanok guaranteeing the amounts due under the subcontracts. Serpanok also filed a mechanic's lien on the garage worth approximately the amount it was owed under the garage subcontract.

Serpanok stopped working on the garage in May 2016 because the Point Ruston parties refused to execute a change order authorizing additional work. Serpanok left behind some construction equipment at the site that could not be safely removed. The equipment was later returned to Serpanok.

C. Complaint, Counterclaims, and Affirmative Defenses

In late 2016, Serpanok sued the Point Ruston parties and Cohen, alleging that Phase II breached the Building 1A and garage subcontracts by failing to fully pay Serpanok for its work. Serpanok also brought a conversion claim against Phase II and Cohen, claiming they improperly possessed and refused to return Serpanok's construction equipment. Additionally, Serpanok sought foreclosure of the mechanic's lien on the garage.

In the answer, the Point Ruston parties denied all of Serpanok's claims and asserted affirmative defenses and counterclaims, including a fraud counterclaim, an affirmative defense of illegality, and other counterclaims alleging Serpanok aided and abetted Hutchinson in breaching his fiduciary duties, breached the duty of good faith and fair dealing, and violated Washington public policy. Concerning the fraud counterclaim, the Point Ruston parties argued that "they were the victims of a fraud perpetrated by [Serpanok] and Mr. Larry Hutchinson" in which "Serpanok made secret and improper payments to Mr. Hutchinson in return for his assistance" and they "reasonably relied on the fraud and suffered damages." CP (I) at 2736-37. The illegality defense alleged the subcontracts, change orders, and notes were unenforceable because they were the product of the illegal kickback scheme between Serpanok and Hutchinson. The Point Ruston parties also sought disgorgement of Serpanok's profits, an award equal to the amount of the kickback payments and "the compensation . . . paid to Mr. Hutchinson," and a "refund [of] all of the payments made under the Notes." CP (I) at 2737.

The Point Ruston parties successfully moved to compel arbitration under the subcontracts. Although Cohen did not sign the subcontracts, the trial court found he was subject to the arbitration clauses because he was the Point Ruston parties' agent.

D. Arbitration Hearing and Interim Award

During the arbitration hearing, Serpanok's owner, Igor Kunitsa, misinformed all counsel and the arbitrator about the information captured in Serpanok's bookkeeping records regarding the kickbacks. It became clear that he had not provided complete records in response to discovery requests. Kunitsa then tried to alter records to conceal damaging information about the kickback payments to Hutchinson.

The arbitrator entered an interim decision setting forth "the principal reasons for the relief awarded." CP (I) at 362. The arbitrator deemed the kickback scheme "deplorable," CP (I) at 365, and found that Serpanok aided and abetted Hutchinson's breach of his fiduciary duties, but concluded, "The evidence presented did not prove by 'clear, cogent, and convincing evidence' that the two subcontracts were fraudulently induced" or that fraud occurred later, during the "change order/performance phases of the two subcontracts, either before or after Mr. Hutchinson's termination," CP (I) at 362. The Point Ruston parties failed to meet the elements of fraud because "[t]he evidence did not establish that the terms of the two...

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