Washington State Bank v. MEDALIA

• Decision Date: 12 July 1999
• Docket Number: No. 41263-9-I.,41263-9-I.
• Citation: 984 P.2d 1041,96 Wash.App. 547
• Parties: WASHINGTON STATE BANK, a state chartered bank, Respondent, v. MEDALIA HEALTHCARE L.L.C., a Washington limited liability company, Appellant.
• Court: Washington Court of Appeals

984 P.2d 1041

96 Wash.App. 547

WASHINGTON STATE BANK, a state chartered bank, Respondent, v. MEDALIA HEALTHCARE L.L.C., a Washington limited liability company, Appellant.

No. 41263-9-I.

Court of Appeals of Washington, Division 1.

July 12, 1999.

As Amended on Denial of Reconsideration August 27, 1999.

Peter Samuel Holmes, Brian W. Esler of Miller, Nash, Wiener, Hager & Carlsen, Seattle, WA, for Appellant.

Thomas Henry Oldfield, Attorney At Law, Tacoma, WA, for Respondent.

WEBSTER, J.

Respondent Washington State Bank filed a conversion action in King County against Appellant Medalia Healthcare, L.L.C., to recover the monetary value of secured collateral that Dr. Thomas Shelton, the borrower, sold to Medalia subsequent to the Bank's secured interest. The King County Superior Court granted the Bank's motion for a voluntary dismissal. Medalia appeals the King County Superior Court's order denying Medalia's motion for an award of attorney fees pursuant to RCW 4.84.330 or RCW 4.84.185.

The day after the King County action was dismissed, the Bank filed a similar conversion action in Pierce County. After ruling that it had subject matter jurisdiction, the Pierce County Superior Court granted the Bank's partial motion for summary judgment on liability. Medalia stipulated to damages and appeals Pierce County's rulings concerning jurisdiction and liability on the conversion claim.

This consolidated appeal presents four issues: (1) did Pierce County have subject matter jurisdiction over the Bank's conversion claim for monetary damages where the personal property allegedly converted was in King County; (2) did Medalia convert the collateral it purchased from Shelton; (3) is Medalia entitled to an award of attorney fees under RCW 4.84.330; and (4) is Medalia entitled to an award of attorney fees under RCW 4.84.185? We hold that: (1) Pierce County had subject matter jurisdiction because a conversion action for monetary recovery is transitory in nature and not subject to RCW 4.12.010 requirements; (2) Medalia committed conversion not by simply purchasing the encumbered collateral but by interfering with the Bank's right to possession; (3) Medalia is not entitled to attorney fees under RCW 4.84.330 because conversion is not an action on a contract; and (4) Medalia is not entitled to attorney fees under RCW 4.84.185 because the Bank's conversion action was not frivolous. Therefore, we affirm all rulings below.

BACKGROUND

A. Events Giving Rise to the Parties' Dispute

In March 1994, the Bank loaned $150,000 to Dr. Thomas Shelton. Shelton gave the Bank a promissory note and a security interest in all the accounts, contract rights, equipment and general intangibles of his practice. The Bank filed a UCC-1 Financing Statement with the Washington State Department of Licensing on March 28, 1994. The security agreement prohibits Shelton from selling the collateral and requires that proceeds in the event of a sale be immediately delivered to the Bank. An unauthorized sale is a default by the debtor. The promissory note given to the Bank by Shelton provides that Shelton will pay attorney fees and legal expenses related to the Bank's collection in the event of default. The security agreement between the Bank and Shelton provides that Shelton will pay for the Bank's attorney fees and legal expenses incurred in connection with enforcement of the agreement. In October 1995, Shelton sold his practice to Medalia. Medalia paid Shelton $1,000 for supplies, $30,194 for furniture and equipment, and $24,498 for intangibles, for a total of $55,692. Medalia failed to conduct a UCC lien search and was unaware that the Bank had a prior security interest in the property. The Bank was not notified that Shelton sold the practice to Medalia.

The bank declared Shelton's loan in default on September 18, 1996. The Bank and Medalia learned about each other's interests in the property in October 1996 when Shelton filed a Chapter 13 bankruptcy petition.

B. Correspondence Between the Parties

A series of written correspondence, and apparently some telephone conversations, occurred between the parties involved. The Bank first presented a copy of its financing statement to Medalia on December 6, 1996. On January 13, 1997, a letter from the Bank sets out its conversion argument and requests Medalia to "reconsider its position," an apparent reference to a prior telephone conversation. The Bank's letter of January 28, 1997, rejects Medalia's apparent offer to purchase the Bank's interest for $10,000 but also indicates a willingness to negotiate. Medalia's letter of January 28, 1997, states its position that the Bank has no conversion claim. The Bank's letter of February 11, 1997, again sets out its conversion argument and claims that it is entitled to $55,692, the amount Medalia paid Shelton for the practice. On February 12, 1997, Medalia acknowledges the Bank's perfected security interest in the tangible assets but asserts that the collateral is "in the possession of a Chapter 13 debtor under the U.S. Bankruptcy Code, 11 U.S.C. sec. 101, et seq." and raises the prohibitions on creditor actions under 11 U.S.C. sec. 362 and 18 U.S.C. sec.sec. 152 and 157 as reasons for not turning the collateral over to the Bank. KCP at 55. Noting that the Bank has twice rejected Medalia's offer (presumably for $10,000), Medalia states that it is not interested in further negotiation. On February 24, 1997, another letter from Medalia's counsel states that "Medalia has consistently acknowledged the Bank's prior security interest and offered to pay fair market value for that interest to obviate the need for stay relief and other expenses." PCP at 195. The letter adds: "If the [bankruptcy] stay is lifted, I assume that you will first attempt to coordinate with Dr. Shelton and Medalia to pick up the collateral for liquidation before filing an unnecessary (and frivolous) lawsuit." PCP at 195. After obtaining relief from the bankruptcy stay, the Bank's letter of March 21, 1997, sent to whom we assume is Shelton's counsel,¹ states:

Washington State Bank herewith makes demand on Thomas Shelton for possession of the collateral subject of that Commercial Security Agreement dated March 24, 1994, to include the equipment, accounts, and general intangibles of his medical practice. Dr. Shelton is instructed to assemble the collateral and make it available to representatives of the bank no later than 5 p.m., Monday, March 24, 1997. ....

As discussed, please send me a letter denying the bank's demand for possession and verifying the fact that Medalia Healthcare L.L.C. is in possession of said assets if Dr. Shelton is unwilling or unable to assemble and deliver possession of the collateral to the bank.

KCP at 61. The response of March 24, 1997, states that the assets of the practice are in Medalia's possession. On March 31, 1997, the Bank's letter to Medalia makes demand for the "fair market value of the assets" and states that the Bank will not accept possession of the assets. KCP at 65. Medalia's response, on April 10, 1997, states:

Medalia ... previously offered to pay [the Bank] $10,000 to release the bank's security interest in the assets used in Dr. Shelton's medical practice, which was rejected by the bank. Medalia also remains ready, willing, and able to turn over the assets to the bank at a mutually convenient time. We understand, however, that the bank does not actually want the assets and continues to demand [a monetary sum] from Medalia. Medalia is unwilling to pay this sum.

KCP at 70.

C. Proceedings in King County Superior Court

On April 18, 1997, the Bank brought a conversion action against Medalia in King County and sought a money judgment in the amount of $138,320.88 plus costs and attorneys fees. The requested amount derives from Shelton's loan balance: $136,049 in principal and $2,271.88 in interest. In the complaint, the Bank stated that "[u]pon information and belief, the fair market value of the collateral exceeds the amount owing on the loan by Thomas Shelton." KCP at 6.

On May 29, 1997, Medalia moved for summary judgment. On July 17, 1997, the Bank moved for a voluntary dismissal of its King County action pursuant to CR 41(a)(1)(B). The motion was granted.

On July 31, 1997, Medalia moved for attorney fees and costs in the King County action pursuant to RCW 4.84.330, or alternatively, under RCW 4.84.185. On August 19, 1997, the King County Superior Court entered an order denying an award of attorney fees.

D. Proceedings in Pierce County Superior Court

On July 18, 1997, the day after taking the voluntary dismissal in King County, the Bank filed a conversion action against Medalia in Pierce County requesting a judgment in the amount of the highest market value of the collateral as of the date of the conversion, not to exceed the balance of the loan to Shelton. The Pierce County Superior Court denied Medalia's motion to dismiss for lack of subject matter jurisdiction. The court initially denied cross-motions for summary judgment. Division II of this court denied Medalia's motion for discretionary review of the jurisdictional issue. Both parties moved for reconsideration of the denials of the summary judgment motions on liability, both asserting that there was no genuine issue of material fact. The Pierce County Superior Court granted the Bank's motion for partial summary judgment on liability, reserving the assessment of damages for trial. To expedite appeal of the liability ruling, Medalia stipulated to damages equal to the amount it paid Shelton to purchase the collateral.

STANDARD OF REVIEW

"When reviewing an order for summary judgment, we engage in the same inquiry as the trial court, and will affirm summary judgment if there is no genuine issue of any material fact and the moving party is entitled to judgment as a matter of law." Wilson Court Ltd. Partnership v. Tony Maroni's, Inc., 134 Wash.2d 692, 698, 952 P.2d 590 (1998); see also CR 56(c). All...