Simpson v. Thorslund
| Decision Date | 20 July 2009 |
| Docket Number | No. 61590-4-I.,61590-4-I. |
| Citation | 211 P.3d 469,151 Wn. App. 276 |
| Court | Washington Court of Appeals |
| Parties | Arthur G. SIMPSON, Respondent, v. Alan K. THORSLUND and Louise M. Thorslund, husband and wife, and the marital community comprised thereof, Thorslund Construction, Inc., a Washington corporation; and Northwest Housewrights, Inc., a Washington corporation, Appellants. |
Philip M. deMaine, Wade Neal, Tacoma, WA, for Respondent.
Gary W. East, The Law Office of Gary W. East, Seattle, WA, for Appellants.
¶ 1 After a bench trial, Arthur Simpson prevailed in his suit against Alan Thorslund for misappropriation of company funds, unpaid wages, and failure to repay a loan. Here, Simpson and Thorslund were found to be de facto partners, having failed to form a corporation. No full accounting of partnership assets and liabilities was ever undertaken prior to the trial court's entry of judgment in favor of Simpson. Under the common law, a formal accounting was a prerequisite to any action between partners. But, since Washington's adoption of the Revised Uniform Partnership Act (RUPA) in 1998, a full accounting of partnership assets and liabilities is no longer required.1 Washington partnership law is governed by statute and the legislature's intent that RUPA supersede and supplant the common law with regard to partnership is clear. A partnership accounting is no longer a precondition to an action between partners. Therefore, we affirm.
¶ 2 Alan Thorslund and his wife owned a small, high-end custom home construction company called Northwest Housewrights, Inc. (NHI). Arthur Simpson and Thorslund were friends for over 30 years and prior to this action had successfully worked together for a number of years. In 1997, Simpson began working as a laborer for NHI part time, quickly moving to full time work for the company at a salary of $60,000 per year.
¶ 3 By 2000, Thorslund was struggling to keep NHI solvent. NHI and Thorslund failed to pay more than $200,000 in payroll taxes owing the Internal Revenue Service (IRS) for the years 2000 through 2003. As its sole owner, Thorslund faced personal liability for NHI's unpaid taxes. In 2000, Thorslund asked Simpson for a loan of $50,000 to keep NHI afloat. Despite Simpson making the loan, the company's financial difficulties continued. Simpson continued to work for NHI as its day-to-day operations manager until it ceased doing business in 2003. Simpson alleges he was never paid the full salary owed him under his employment contract with NHI. Simpson contends that Thorslund assured him that he would indeed be paid and to be patient in receiving remuneration.
¶ 4 By 2002, NHI owed both excise taxes to the Washington State Department of Revenue and, primarily, employment taxes to the IRS. NHI was also delinquent on its debts to suppliers and various other creditors. On the verge of bankruptcy, Thorslund sought advice from a Certified Public Accountant (CPA), David E. Hill, of Tax Alternatives, Inc. Hill negotiated a partial abatement of the penalties and interest with the Department of Revenue and a partial abatement of a matching portion of payroll taxes that would have otherwise been due the IRS on behalf of NHI. Thorslund wanted to continue business operations in home construction by founding a new company, but Hill advised him that the IRS would likely require a change in ownership in the company so that the new entity was not simply a continuation of NHI.
¶ 5 Thorslund Construction, Inc. (TCI) was founded in April 2003 and NHI was wound up. Thorslund and Simpson agreed to become equal owners of the new company, each owning a 50 percent share. Both Simpson and Thorslund agreed to take smaller salaries from TCI than they had previously received from NHI. Daniel Gandara, an attorney, was retained to draw up the appropriate papers for incorporation in the state of Washington, including a shareholder agreement and a proposal for the issuance of stock. Gandara testified at trial that these documents were never filed with the secretary of state because both Simpson and Thorslund failed to respond to his repeated requests to sign and return to him the appropriate paperwork for filing. While TCI's corporate documents were amended to reflect Simpson's 50 percent ownership stake in TCI, no shares in the new company were ever issued to Simpson or to any other person, excepting those already held by Thorslund.
¶ 6 In May 2003, Thorslund transferred all of NHI's assets, including $91,254 in accounts receivable to TCI. Simpson contributed only his labor to TCI as capital. Simpson and Thorslund agreed that TCI would make $5,000 monthly payments to NHI, variously characterized as either consulting fees or loans. These funds were to be used to satisfy NHI's outstanding debt obligations. At trial, Simpson testified he was led to believe that when he became a co-owner of TCI, performing essentially the same work for a much lower salary than he had as an NHI employee, he would share in TCI's expected future profits. He further testified that he was made to understand he would be repaid by TCI for the $50,000 loan (plus interest) that he had made to NHI and Thorslund in 2000.
¶ 7 Thorslund remained in control of TCI's finances at all times. The $5,000 consulting payments were insufficient to meet NHI's outstanding obligations. As a result, Thorslund began to draw funds from TCI to pay NHI's debts, classifying those withdrawals as shareholder loans or draws. Thorslund treated TCI's accounts as his own personal accounts taking out large draws for family purposes, such as vacations and private school tuition. Simpson, on the other hand, was drawing a reduced salary and living off his personal savings account. Simpson testified that Thorslund was mishandling the money though he was not aware of this misfeasance for quite some time. Simpson claims that when he confronted Thorslund about unexplained missing sums in TCI's financial records, Thorslund questioned Simpson's friendship.
¶ 8 By 2005, TCI was failing, had essentially ceased all business operations, and by 2006 was insolvent. In April 2006, Simpson sued Thorslund for monies owed alleging multiple theories of recovery including breach of fiduciary duty, fraud, negligent misrepresentation, conversion, breach of contract, unjust enrichment, and non-payment of wages. Simpson further alleged that Thorslund had failed to observe requisite corporate formalities and was thus personally liable for both TCI's and NHI's debts. Neither Simpson nor Thorslund ever requested a full partnership accounting to determine the partnership's net assets and liabilities and none was ever undertaken.
¶ 9 A bench trial was held in December 2007. In March 2008, the court entered judgment in favor of Simpson, also awarding him attorney fees and costs. The trial court denied both parties' subsequent motions for reconsideration. Thorslund timely appeals.
¶ 10 Thorslund's primary argument on appeal is that the entry of judgment in favor of Simpson by the trial court was premature and improper, because there was never a full partnership accounting of TCI's assets and liabilities. Such an accounting was required under the common law and was a precondition to an action between partners, including de facto partners.2 Since the adoption of RUPA in 1998, however, Washington law no longer requires such an accounting.3
¶ 11 A partnership is formed by "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership."4 Simpson and Thorslund formed a partnership when their attempt to form a corporation failed. Further, neither party contends the trial court erred in finding that Simpson and Thorslund were de facto partners.5
¶ 12 In Washington, the operation of partnerships and the rights and obligations of a partnership's individual members are expressly governed by statute.6 RUPA expressly superseded the common law governing partnerships.7
¶ 13 Prior to the adoption of RUPA, a partner was generally barred from bringing suit against a former co-partner regarding partnership liabilities without first bringing an action to account for and settle the partnership's affairs.8 Thorslund contends that the common law accounting requirement is still applicable and further argues that RUPA requires one, citing the following the provisions:
A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to:
(a) Enforce the partner's rights under the partnership agreement;
(b) Enforce the partner's rights under this chapter, including:
(i) The partner's rights under RCW 25.05.150, 25.05.160, or 25.05.165;
(ii) The partner's right on dissociation to have the partner's interest in the partnership purchased pursuant to RCW 25.05.250 or enforce any other right under article 6 or 7 of this chapter; or
(iii) The partner's right to compel a dissolution and winding up of the partnership business under RCW 25.05.300 or enforce any other right under article 8 of this chapter; or
(c) Enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.
(3) The accrual of, and any time limitation on, a right of action for a remedy under this section is governed by other law. A right to an accounting upon a dissolution and winding up does not revive a claim barred by law.[9]
And RCW 25.05.150 states, in relevant part:
(1) Each partner is deemed to have an account that is:
(a) Credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner's share of the partnership profits; and
(b) Charged with an amount equal to the money plus the value...
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