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Kilcullen v. Calbom & Schwab, P.S.C.

Court of Appeals of Washington, Division 3

October 15, 2013

Kathleen G. KILCULLEN, Respondent,
v.
CALBOM & SCHWAB, P.S.C., Appellant.

Page 61

Kristin L. Bremer, Robert Lane Carey, Tonkon Torp LLP, Portland, OR, for Appellant.

Steven Craig Lacy, Attorney at Law, East Wenatchee, WA, for Respondent.

SIDDOWAY, A.C.J.

¶ 1 [177 Wn.App. 196] The law firm of Calbom & Schwab PSC (C & S) appeals the trial court's summary judgment [177 Wn.App. 197] determination that a shareholder loan received from a former partner, Kathleen Kilcullen, was due, owing, and must be promptly paid. We agree with the law firm that the court relied on its concern over a long, unexplained delay in payment by the law firm and the possibility of a legal basis for immediate liability rather than on a demonstration by Ms. Kilcullen that undisputed facts support relief. On the record presented, summary judgment was unwarranted. We reverse and remand.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 From 1992 until early January 2010, Ms. Kilcullen, a lawyer, was a shareholder of C & S, a professional services corporation that provides legal services. C & S terminated her employment in January 2010, allegedly for cause. While the basis for her discharge from employment is the subject matter of an ongoing dispute, it is not a subject matter of this appeal. This appeal concerns, instead, an amount owed to Ms. Kilcullen on loans she made to the law firm in years before she was discharged.

¶ 3 C & S is a C corporation for federal tax purposes and, like many such professional corporations, it determines the amount of net income available after payment of its expenses at year-end and then declares and distributes bonuses to its lawyer-shareholders in that amount. The purpose is to reward the lawyer-shareholders for their service currently and to avoid having net income taxed at the corporate level. Given the ongoing cash flow needs of the firm's operations, however, it is impossible for the firm to pay out all of its available net income as bonuses without borrowing money for operations at the same time. The law firm's practice for at least 2002 through 2009 was, then, to declare shareholder bonuses at year-end but at the same time borrow a corresponding amount from the same shareholders, to be repaid, with interest, when the corporation had built up sufficient operating capital.

¶ 4 [177 Wn.App. 198] The bonuses and anticipated terms of the associated borrowing were reflected in minutes of the annual meetings of the law firm's board of directors for 2002 through 2009. The minutes of the 2002 meeting are typical of those for later years through 2008, with the sole exception being the dollar amount of the operating capital requirement, which varied in years 2003 and 2008. The 2002 minutes provide;

The president reviewed the business of the corporation from 1-1-02 to 12-27-02 ... On motion duly made, seconded and passed it was agreed to bonus out all net taxable income to the shareholders.

Clerk's Papers (CP) at 43. After identifying the amount to be paid as a bonus to each shareholder, the minutes continued:

On motion duly made, seconded and passed it was agreed that the stockholders would loan the corporation $315,222 at 2% above prime or 6.25% interest, for the year of 2002 .... Repayment of loans will be made after the corporation has $100,000 in operating capital in the bank.

Id. (emphasis added). The minutes for the directors' annual meeting for 2003 increased the operating capital required before the loans would be repaid to $150,000. The operating capital requirement reverted to $100,000 in 2004 and later years until being increased to $200,000 in 2008.

¶ 5 In 2009, the minutes for the annual directors' meeting held on ...


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