Suess v. Nw. Timber & Dev.

• Decision Date: 25 October 2022
• Docket Number: 55041-5-II,55545-0-II
• Parties: C. ROBERT SUESS, SR., a single man, [†] Respondent, v. NORTHWEST TIMBER AND DEVELOPMENT, INC., a Washington corporation aka N.W. TIMBER AND DEVELOPMENT, INC., and MICHAEL J. COWAN and JANE DOE COWAN, husband and wife and the martial community composed thereof, Appellants.
• Court: Washington Court of Appeals

C. ROBERT SUESS, SR., a single man, ^[†] Respondent, v. NORTHWEST TIMBER AND DEVELOPMENT, INC., a Washington corporation aka N.W. TIMBER AND DEVELOPMENT, INC., and MICHAEL J. COWAN and JANE DOE COWAN, husband and wife and the martial community composed thereof, Appellants.

Nos. 55041-5-II, 55545-0-II

Court of Appeals of Washington, Division 2

October 25, 2022

UNPUBLISHED OPINION

WORSWICK, P.J.

Michael Cowan and Northwest Timber & Development, Inc. (NWTD) appeal the trial court's final judgment and order finding fraudulent conveyance and corporate disregard. Cowan and NWTD also appeal the trial court's order denying the defendants' motion to cancel lis pendens. Cowan, as the sole officer and director of NWTD, entered into a promissory note agreement with C. Robert Suess in exchange for a business loan. Before payment became due, Cowan transferred substantially all of NWTD's assets to himself, leaving NWTD with inadequate assets to repay the loan. C. Robert Suess filed a lawsuit against Cowan and NWTD, and the Estate of C. Robert Suess Sr. (Estate) obtained a judgment.

On appeal, Cowan and NWTD argue (1) the trial court's findings were not supported by substantial evidence, (2) the trial court erred in finding fraudulent conveyance, (3) the trial court ordered remedies unauthorized by the Uniform Fraudulent Transactions Act (UFTA),^[1] (4) the trial court erred in piercing the corporate veil (corporate disregard), and (5) the trial court erred in not cancelling the lis pendens. All parties request attorney fees on appeal.

We hold that most of the trial court's findings are supported by substantial evidence, and that those findings support a conclusion of fraudulent conveyance. In addition, we hold that the remedies imposed by the trial court were allowed under the UFTA. We also hold that the trial court's findings do not support a conclusion of corporate disregard and the trial court did not err in not cancelling the lis pendens. Lastly, we award the Estate attorney fees on appeal.

Accordingly we affirm in part, reverse in part, and remand for the trial court to amend its judgment and order.

FACTS

I. Background

NWTD an estate development business wholly owned by Michael Cowan, owned and operated Kelso Self Storage. NWTD had no other officers besides Cowan. As part of plans to expand Kelso Self Storage, NWTD acquired commercial lots located at 900 Hazel Street and 1000 Hazel Street. NWTD owned 900 Hazel free and clear.

In 2009, NWTD started trying to sell Kelso Self Storage, 900 Hazel, and 1000 Hazel before a balloon payment became due on 1000 Hazel. Robert^[2] offered to provide financing for 1000 Hazel. Robert was an elderly man who regularly loaned individuals lines of credit in exchange for interest payments. Robert made these loans based on word of mouth.

Robert agreed to loan Cowan $130,000, and secured the loan with a promissory note with monthly payments of $821.69. The terms of the promissory note included an interest rate of 6.5 percent per annum, with the balance due as a balloon payment after two years, on August 1, 2011. The note also included an 18 percent default interest provision. The promissory note gave Cowan the option to prepay the balance before its due date without penalties.

The note was secured by a deed of trust on 1000 Hazel. Robert intended to lend Cowan, not NWTD, the money because he was aware of all the ways that a corporation could avoid its debts.^[3] Nonetheless, neither the promissory note nor the deed of trust was signed by Robert or Cowan; instead, only NWTD signed both documents.

In May 2011, NWTD was able to sell Kelso Self Storage, but not 900 Hazel or 1000 Hazel. Kelso Self Storage sold for $1,195,000. After satisfying debts and paying closing costs, Cowan transferred an estimated net profit of $325,000 from NWTD to himself. Approximately $100,000 of that amount was earmarked for taxes. That same month, Cowan, as the sole director of NWTD, conducted a meeting at which he was the sole attendee, and NWTD resolved to transfer all of NWTD's assets, including 900 Hazel, all equipment, tools, cash funds, and all other property excluding 1000 Hazel, to himself.

In June 2011, Robert suffered a stroke and his son, John, took over management of the debt. In December, NWTD defaulted on its loan to Robert. John sent Cowan a letter informing him that his balloon payment was past due, and that he must send payment or evidence of an agreement to extend the balloon payment due date by November 5, 2011. Just two days after the November 5 deadline, on November 7, Cowan quit claimed all interest in 900 Hazel to himself. The transfer left NWTD with no remaining assets other than 1000 Hazel. Notably, Cowan had also owed $20,300.72 in delinquent tax payments on 1000 Hazel, which Robert paid.

Cowan knew that 1000 Hazel was difficult to sell. In fact, prior to the transfer, Cowan had tried to sell 1000 Hazel for more than two years without success. In December 2011, Cowan negotiated with John to extend the note until August 2012. After the extension, payments resumed until 2012 at which point payments stopped. Because all of NWTD's assets were transferred to Cowan, NWTD was unable to pay its debt and had insufficient capital to liquidate for the payment of debts.

On October 25, John demanded full payment plus penalties and interest. Cowan explained that NWTD had no funds to make full payment until 1000 Hazel was sold and sought to negotiate with John to avoid foreclosure on 1000 Hazel. However, John informed Cowan that if payment of the loan and taxes was not made promptly, he would pursue legal action against him. Cowan made no additional payments, and Robert sued NWTD and Cowan to foreclose on the note and deed of trust, alleging, among other things, that the transfer of assets from NWTD to Cowan was fraudulent.

In 2016, NWTD and Cowan agreed to sell 900 Hazel and 1000 Hazel to Butch Henry, but Robert filed a lis pendens on 900 Hazel. Due to the lis pendens and other delays, Henry eventually gave up.

II. PROCEDURAL HISTORY, TESTIMONY, AND TRIAL COURT'S FINDINGS

In 2013, Robert filed a lawsuit alleging breach of the promissory note and deed of trust. Robert filed a motion for summary judgment, arguing, among other things, that NWTD breached the promissory note and deed of trust by failing to pay, and that Cowan fraudulently conveyed property and funds from NWTD to himself. NWTD conceded that summary judgment in favor of Robert was appropriate on the breach of promissory note and deed of trust issue.^[4]

The trial court granted summary judgment against NWTD regarding its breach of the note and deed of trust, but denied summary judgment on the fraudulent conveyance claim. The trial court awarded Robert reasonable attorney fees for prevailing against NWTD, but not for any claims relating to Cowan.

The court conducted a bench trial. At trial, witnesses testified to the previously mentioned facts that are more specifically described below. Additionally, the trial court admitted documents under a joint statement of evidence supporting many of these facts. John testified that Robert never obtained an appraisal of 1000 Hazel and never asked for documentation or any financial statements from Cowan before loaning him the money because he believed Cowan was a person in need.

Cowan testified that although he had "several buyers lined up" for 1000 Hazel, none of the potential buyers materialized into a pending or potential sale. 1 Report of Proceedings (RP) (July 3, 2019) at 54. Cowan also testified that he was unable to sell 1000 Hazel for $100,000, despite that the county assessor valued 1000 Hazel at $159,430.

The trial court entered judgment in favor of the Estate in the amount of $333,220.35, which included attorney fees. It also found fraudulent conveyance of 900 Hazel and corporate disregard of NWTD. The trial court enjoined NWTD and Cowan from disposing of assets traceable to NWTD, allowed any and all assets traceable to NWTD to be subject to collection of the judgment, and foreclosed on 1000 Hazel with all proceeds of the sale awarded to the Estate. The trial court ordered Cowan to convey 900 Hazel to NWTD within 30 days of the judgment.

Based on corporate disregard, the court also ruled that Cowan was personally liable for the entire judgment.

The trial court made the following findings of fact:

5.2 [The] transfer resulted in an inability of NWTD to pay its debts and insufficient capital to liquidate for the payment of debts.

. . . .

7.1 Defendants had the actual intent to hinder, delay, or defraud Plaintiff.

7.2 COWAN is an insider of NWTD. As its only corporate officer he solely controlled all actions of the corporation.

7.3 When the transfer of real property and property from NWTD to COWAN occurred, the decision was fully contemplated formed, and executed by the only insider and the only recipient, COWAN.

7.4 COWAN, notwithstanding efforts to market and sell the real property, does continue in possession and control of the transferred property.

7.5 COWAN purposely concealed the transfer from SUESS. A letter dated October 25, 2011, from Mr. Suess to Defendants not only confirmed SUESS had a stroke in June 2011, but also indicated that the balloon payment was more than two months past due, and that an answer to the debt/payment situation was due on November 5, 2011. Due to the increased pressure, NWTD, guided by its sole shareholder, COWAN, quit claimed all interest in 900 Hazel Street to COWAN, in his personal capacity, effective November 7, 2011. At that time, NWTD had little to no assets, other than 1000 Hazel. COWAN then sought to and did extend the Note on December 29, 2011. COWAN and NWTD was completely tight-lipped and divulged nothing about the lack of assets in NWTD.

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