The Sage Group I, LLC v. Kotter
| Decision Date | 24 August 2015 |
| Docket Number | 71405-8-I |
| Court | Washington Court of Appeals |
| Parties | THE SAGE GROUP I, LLC, a Washington limited liability company; M3, INC., a Washington corporation; RONALD WORMAN and SALLY WORMAN, individually and the marital community composed thereof; ERIK VAN ALSTINE, individually and his marital community, Appellants, v. JOHN KOTTER and NANCY DEARMAN, individually and the marital community composed thereof; KOTTER ASSOCIATES, INC., a Massachusetts corporation; KOTTER INTERNATIONAL, INC., a Massachusetts corporation; SAGE|KOTTER, LLC, an inactive Delaware limited liability company, Respondents. |
UNPUBLISHED OPINION
The Sage Group I LLC, M3 Inc., Ronald and Sally Worman, and Erik Van Alstine (collectively Sage Group) appeal a trial court's summary judgment ruling that collateral estoppel bars Sage Group's constructive trust claims against John Kotter and Kotter's wife, Nancy Dearman (collectively the Kotters), and the Kotters' business entities. Sage Group also challenges the trial court's denial of its motions for summary judgment on the basis of constructive trust and successor liability.
Because Sage Group had a full and fair opportunity at arbitration to litigate the central issue in this case-the value of a former business partner's ownership interest-we affirm the trial court's conclusion that collateral estoppel bars Sage Group's claims for constructive trust. And because the arbitrator and trial court both correctly determined that no property existed over which they could justly impose a constructive trust, we affirm the trial court's denial of Sage Group's motion for summary judgment.
In 2002, Ronald Worman and Dana Green formed the Sage Group which provided advice, consulting, and services to business entities, using its "Path to Value'" methodology. As managing members of the Sage Group, Worman and Green shared equally the income generated by consulting agreements, plus any stock or other ownership interests they obtained in the companies they assisted. Erik Van Alstine who ran M3 Inc., was not a member of the Sage Group but at various times worked as a consultant to the company.
In spring 2007, Van Alstine e-mailed Dr. John Kotter, a Harvard Business School professor and successful author of books on business leadership and organizational change. Kotter and his wife, Nancy Dearman, established and owned Kotter Associates Inc., a multimillion dollar business they operated. Van Alstine, Worman, and Green believed that Kotter represented a valuable business opportunity, and Kotter wished to promote his ideas in a way that reached many more people.
In fall 2007, Van Alstine introduced Kotter to the Sage Group, and in February 2008, Kotter and the Sage Group executed a written consulting agreement. This agreement, signed by Green as "Managing Principal, " provided for $20, 000 per month payments to the Sage Group from February through October 2008 in exchange for using its Path to Value' methodology to implement Kotter's business plan. The agreement specified that it was "intended to provide for the provision of consulting services on an independent contractor basis, and is expressly not intended to create a joint venture, partnership, agency, employment or other relationship." It made no reference to Worman or Van Alstine.
Because Green, Worman, and Van Alstine agreed that Green would take the lead in building a relationship with the Kotters, Green continued to travel to Boston and work directly with them. In June 2008, John Kotter proposed creating a new relationship Green agreed, and he and Kotter pursued plans to create a new business. Initially, Worman participated in some discussions. In communications about business and personal goals and priorities, Kotter emphasized the importance of maintaining a reputation "as pure as snow white" and that he "won't work with anybody of questionable ethics." Green, Van Alstine, and Worman agreed that they would share equity interests in the new business equally but did not tell the Kotters about this arrangement.[1]
The Sage Group, Worman, and Van Alstine worked with Green to help develop Sage|Kotter, established as a Delaware limited liability company (LLC) in August 2008. Green continued to communicate with Worman about ongoing negotiations related to ownership interests but disclosed progressively less information. By the last months of 2008, Green pursued only his interests in Sage|Kotter and no longer promoted Worman's interests as his co-member or the interests of Sage Group as a whole.
In October 2008, Kotter proposed that Dearman own 51 percent of Sage|Kotter and Green or "[Green] and friends" own 49 percent. In December, however, Worman received from Green a proposed Sage|Kotter operating agreement that allocated to the Kotters and Green 96 percent of the company and all voting and management rights. It provided Worman a 4 percent nonvoting interest. The agreement made no provision for Van Alstine. In January 2009, over Worman and Van Alstine's objections, Green and the Kotters executed the final version of the Sage|Kotter LLC operating agreement. This agreement allocated to Green and the Kotters 38 percent and 62 percent ownership interests, respectively. It also made no provision for Worman or Van Alstine.
The Sage|Kotter operating agreement provided that the Kotters could unilaterally dissolve the LLC at any time during a five-year "initial period." The Kotters' attorney clarified in an e-mail that "[Kotter] expressly wants to retain and does retain all his 'inventions' under the IP [intellectual property] Licensing Agreement while, at the same time, he grants the LLC an exclusive license to all such inventions." And a member services agreement executed by Green and Kotter memorialized Kotter's absolute control over his intellectual property as "head of research, with the title Chief Innovation Officer":
[Kotter] is expressly granted the authority to claim the copyright or the sharing of the copyright for all ideas products or services based substantially on his work on behalf of himself, on behalf of Sage|Kotter or on behalf [of] some combination of individuals and Sage|Kotter, as he deems fair and appropriate in his sole and absolute discretion.![2]
In 2009, Sage|Kotter generated revenues almost triple what Kotter Associates had generated the previous year, increasing from $2.8 million to over $7 million. The majority of revenue came from consulting fees, such as a contract between Sage|Kotter and Westinghouse Electric Company for $1 million, which Green signed as "President and CEO [chief executive officer]" of Sage|Kotter.
Claiming that Green usurped a business opportunity and committed breaches of contract, fiduciary duties, and good faith by pursuing his personal interest in Sage|Kotter without their consent, Worman and Van Alstine commenced separate legal actions against Green. In April 2009, Worman filed an arbitration demand and complaint against Green under the terms of the Sage Group's LLC agreement. Van Alstine, not a member of Sage Group LLC, later filed a separate lawsuit in King County Superior Court. The same counsel represented Worman and Van Alstine in their respective actions, and they coordinated discovery. Van Alstine and Worman sought damages, disgorgement, and imposition of a constructive trust "for all property, profits, and/or benefits derived by Green related to Sage|Kotter and/or Green's interest therein."
The Kotters learned in late spring 2009 about the arbitration demand. They had some discussions with Green and his attorney around the time of a failed mediation in October 2009. Sage|Kotter paid some of Green's legal fees. The Kotters learned of Van Alstine's lawsuit in late fall 2009.
In a December 7, 2009, letter, the Kotters' attorney told counsel for Green and counsel for Worman and Van Alstine that the Kotters "will not allow the internal dispute between your clients to disrupt the business operations of Sage|Kotter or divert the attention of our clients or its employees from carrying out the goals that led to its formation":
Accordingly, this is to advise your respective clients that unless the present dispute between your clients is resolved in a manner satisfactory to our clients on or before December 21, 2009, our clients intend to exercise their rights under the Sage|Kotter Operating Agreement, dissolve Sage|Kotter and immediately commence to wind up its affairs.
Green and Worman did not resolve their dispute. Van Alstine's lawsuit against Green continued.
On January 6, 2010, Green and the Kotters signed a "Settlement Agreement and Mutual Releases." It had the stated purposes of effecting the orderly liquidation of Sage|Kotter and settling all actual and potential claims between the Kotters and Green. The agreement terminated Green's employment as CEO of Sage|Kotter. Green received $150, 000 as a "settlement payment" and an additional $160, 889 in liquidated distributions in proportion to his 38 percent interest. The Kotters also received liquidated distributions, and Kotter Associates Inc. received the remaining assets and obligations.[3] The agreement included a broad mutual release of Sage|Kotter-related claims.
In July 2010, arbitrator Judge Robert Alsdorf (retired) heard Worman's arbitration action. Worman requested an award of almost $5 million, his calculation of half the value of Green's 38 percent equity interest in Sage|Kotter.
The arbitrator found that because "[t]he evidence overwhelmingly supports the conclusion" that Green breached contract and/or fiduciary duties by his self-dealing, Worman was entitled to damages and other relief. This conclusion was "bolstered...
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