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Northwest Wholesale, Inc. v. Pac Organic Fruit, LLC

Court of Appeals of Washington, Division 3

September 4, 2014

Northwest Wholesale, Inc., Plaintiff ,
v.
Pac Organic Fruit, LLC, Defendant, Harold Ostenson et al., Appellants, Greg Holzman, Inc., et al., Respondents

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Appeal from Chelan Superior Court. Docket No: 07-2-00514-0. Judge signing: Honorable Lesley a Allan. Judgment or order under review. Date filed: 02/14/2013.

Maris Baltins (of Law Offices of Maris Baltins PS ), for appellants.

Daniel J. Appel (of Law Offices of Dale M. Foreman ), for respondents.

Authored by George B. Fearing. Concurring: Stephen M. Brown, Laurel H. Siddoway.

OPINION

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[183 Wn.App. 464] Fearing, J.

¶ 1 INTRODUCTION AND RULING

¶ 2 This case revolves around business disputes, between local orchardists Harold and Shirley Ostenson, husband and wife, and San Francisco businessman Greg Holzman, concerning the operation of a Grant County orchard packing facility. Although the Ostensons and Holzman were ostensibly partners, the parties jointly established a limited liability company (LLC), Pac Organic Fruit LLC (Pac Organic), through which they conducted business with one another. Greg Holzman formed additional companies to shield himself from individual liability and inserted those companies into his business relationships with the Ostensons. Greg Holzman Inc. (GHI) was the company that became a member of Pac Organic. Both Greg Holzman and the Ostensons blame the other for the deterioration of the packing business. The Ostensons eventually filed a Chapter 11 bankruptcy petition that complicates and controls the outcome of this case. The Ostensons' story presents a primer on how not to conduct business.

¶ 3 Harold and Shirley Ostenson sued Pac Organic, claiming the limited liability company breached a lease for a fruit packing facility, failed to pay for orchard crops, owes them unpaid wages, undercompensated them, owes reimbursement for expenses incurred on behalf of the company, failed to distribute profits, and breached fiduciary duties. Shirley and Harold Ostenson also bring a derivative action, on behalf of Pac Organic, against Greg Holzman and his companies, GHI and Total Organic Fruit LLC (Total Organic). The derivative action alleges Holzman and his companies mismanaged Pac Organic. This appeal concerns only the derivative action.

¶ 4 The trial court granted Greg Holzman's, GHI's, and Total Organic's (collectively the Holzman defendants) CR 41(b)(3) motion to dismiss, ruling that the Ostensons' bankruptcy dissociated them as members from Pac Organic. [183 Wn.App. 465] According to the trial court, because they were dissociated, RCW 25.15.370 precludes the Ostensons from bringing a derivative action. The Ostensons' nonderivative claims against Pac Organic survive the trial court's ruling, but presumably are worthless because of the financial condition of Pac Organic. The trial court directed a final judgment be entered, under CR 54(b), in favor of the Holzman defendants, because there was no just reason to delay entry of final judgment.

¶ 5 The Ostensons appeal the ruling dismissing the Holzman defendants. They argue their bankruptcy filing did not remove them from membership in Pac Organic and does not disqualify them from asserting a derivative action on behalf of the limited liability company. They also argue that, in the bankruptcy proceeding, the Holzman defendants consented to their membership in Pac Organic and this derivative action. Finally, the Ostensons argue that the Holzman defendants are judicially and collaterally estopped and res judicata bars them from denying the Ostensons' standing to bring the derivative action. We address all of these arguments and more. We affirm the trial court's grant of the Holzman defendants' motion to dismiss, because the Ostensons' bankruptcy filing rendered them ineligible to maintain a derivative action.

FACTS

¶ 6 Harold Ostenson and Greg Holzman met in 1997. Holzman owned Greg Holzman Inc., an organic brokerage business, and desired to expand into Washington State. To this end, the Ostensons and GHI formed, in June 1998, Pac Organic Fruit LLC, a Washington limited liability company. The Ostensons

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owned 49 percent of Pac Organic. GHI owned the remaining 51 percent, allowing Greg Holzman, through his corporation, to control business decisions.

¶ 7 The Ostensons' and Holman's operating agreement for Pac Organic designated GHI as the manager of the [183 Wn.App. 466] limited liability company. The manager could be removed by a vote of all members, but remember that GHI was a member. Under the agreement, a member became dissociated upon the occurrence of any event considered a dissociation under the Washington Limited Liability Company Act, ch. 25.15 RCW. The agreement required both the Ostensons and GHI to contribute additional capital at GHI's discretion. Finally the limited liability company agreement obligated Harold Ostenson to lease a packing facility to Pac Organic, obtain a loan toward improving that facility, and pay that loan.

¶ 8 Shirley and Harold Ostenson were more than Pac Organic's minority owners. Harold Ostenson oversaw Pac Organic's operations. Shirley Ostenson served as Pac Organic's accountant. The Ostensons owned the packing facility in Grant County, which they leased to Pac Organic for 20 years with monthly payments beginning at $8,200.

¶ 9 Under Pac Organic's business model, growers delivered fruit to Pac Organic for packing and storage, and Pac Organic paid the growers for their fruit. GHI sold the fruit to distributors, and the distributors paid GHI for the produce. GHI remitted sales proceeds, less its commission, to Pac Organic, rendering Pac Organic financially vulnerable to the business practices of GHI. Pac Organic conveyed the fruit to the distributor.

¶ 10 Pac Organic first operated only three months a year. With the goal of operating year-round, Pac Organic added packing lines and constructed four controlled atmosphere rooms. Pac Organic financed this expansion by borrowing almost one million dollars. The Ostensons and Holzman personally guaranteed the loan.

¶ 11 According to the Ostensons, Pac Organic steadily grew from 1998 to 2004. The number of growers delivering fruit to Pac Organic increased from 3 to over 30. The number of bins packed increased from 491 to 24,539. To accommodate the growth, Pac Organic leased controlled atmosphere rooms from another facility, effective May 1, [183 Wn.App. 467] 2000. Under the terms of the lease, Pac Organic initially leased 4 rooms. Pac Organic promised to increase the number of rooms leased by 2 biannually, such that Pac Organic would eventually lease all 12 of the facility's rooms. At that point, the lease provided Pac Organic the option of purchasing the facility. Total income increased from $187,220 to $3,244,523. Harold Ostenson expected Pac Organic's net profit for 2005 to exceed $324,000.

¶ 12 According to Harold Ostenson, GHI stopped remitting sales proceeds to Pac Organic in 2004 and instead paid growers directly. GHI's records show it owed Pac Organic more and more as 2004 progressed: $310,560 in January, $717,816 in April, and $833,272 in May. Similarly, Pac Organic's records show that GHI remitted less and less: $502,411 in July, $72,494 in August, and nothing in September. The Ostensons accuse GHI of meeting its cash flow needs at the expense of Pac Organic, by paying orchardists directly.

¶ 13 Greg Holzman's version of Pac Organic's decline differs from the Ostensons' testimony. According to Holzman, Pac Organic lost money every year from 1998 to 2003. Holzman maintains that he tried to work with the Ostensons to turn Pac Organic around, but Harold Ostenson was uncooperative. Harold Ostenson, according to Holzman, refused sales of stored fruit because he and buyers disagreed on pricing, which caused fruit to sit past its prime and Pac Organic to lose revenue.

¶ 14 Regardless of who, if anyone, was to blame, Pac Organic financially collapsed. In early January 2005, Pac Organic defaulted on its operating line of credit. The company also defaulted on its lease payments to the Ostensons. On March 8, 2005, Holzman fired the Ostensons from employment with Pac Organic. Later that year, KeyBank foreclosed on the Pac Organic packing facility and the Ostensons' orchard.

¶ 15 On July 27, 2005, Greg Holzman executed, as agent of Pac Organic, a demand promissory note in favor of GHI in [183 Wn.App. 468] the

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amount of $1,023,009.38. The Ostensons claim that the note is, at worst, fraudulent, and, at best, constituted mismanagement by Greg Holzman and GHI of Pac Organic's affairs. Holzman maintains the promissory note Pac Organic executed in favor of GHI was legitimate and, if anything, understated the amount Pac Organic owed to GHI. As agent for Pac Organic, Holzman transferred the limited liability company's assets to GHI to satisfy the note. Holzman assigned Pac Organic's lease with the cold storage facility to GHI. The Ostensons claim Holzman, through GHI, wrongfully gutted Pac Organic of any value.

¶ 16 On January 9, 2007, Harold and Shirley Ostenson filed for bankruptcy protection under Chapter 11. On August 18, 2008, the bankruptcy court approved a " stipulation," which attempted to resolve claims of the Ostensons, Holzman, and affiliated entities against one another. Clerk's Papers (CP) at 2046; Ex. D-5. Under the stipulation, the Ostensons agreed to arbitrate some claims and litigate others. In relevant portion, that stipulation reads:

5. Mutual Releases. The parties shall incorporate into the Ostenson's [sic] plan of reorganization a general and mutual release of all claims not expressly addressed or treated herein.
... .
7. This Stipulation does not affect nor release the following claims:
a. Any purported claims of the Ostensons against Pac Organic, including, but not limited to, claims for unpaid lease installments, wages, expense reimbursement, dividends, fruit proceeds, and/or failure to pay Keybank's [sic] line of credit, provided that the Ostensons shall not be entitled to assert those purported claims, whether derivatively or directly (including by way of a veil-piercing or similar theory) against Holzman, GHI or POP [Pacific Organic Produce Inc.], such purported claims to be released; and
b. Any purported claims of [Pac Organic] (and [Pac Organic] only) against Holzman, GHI, POP and/or Total Organic for their alleged failure to pay packing fees, expenses, and [183 Wn.App. 469] revenues earned solely by Pac Organic or fruit proceeds or rent due [Pac Organic] or for conversion of assets of [Pac Organic].
c. To avoid multiple suits, any claims described in " b" above shall be asserted and pled in that litigation presently pending in the Superior Court of the State of Washington, Chelan County, case number 07-2-00514-0, captioned Northwest Wholesale, Inc., a Washington corporation, Plaintiff v. Pac Organic Fruit, LLC, a Washington limited liability company, Greg Holzman, Inc., a foreign corporation authorized to do business in the State of Washington; and Harold Ostenson and Shirley Ostenson, Defendants provided the Superior Court allows the same.

CP at 2045-46.

¶ 17 On October 5, 2010, Greg Holzman filed, in the bankruptcy proceeding, a " Motion of Creditors Greg Holzman and [GHI], to Confirm Extent of Estate Property." CP at 1933. In this motion, Holzman argued for the first time that the Ostensons were no longer members of Pac Organic because RCW 25.15.130 dissociated them from the limited liability company when they filed for bankruptcy. In opposition, the Ostensons wrote:

Holzman and the Holzman entities, in signing the Stipulation, agreed that these claims, including the stance which Holzman and the Holzman entities now appear to be advancing, to-wit, that the Ostensons have no right to bring their derivative claims, is a matter which the parties agreed would be determined by the Chelan County Superior Court as directed by paragraph 7(c) of the Stipulation.

CP at 2320-21. The bankruptcy court did not rule on Greg Holzman's motion.

¶ 18 In October 2009, on the eve of one trial in this pending state case, Pac Organic Fruit LLC also filed a Chapter 11 bankruptcy petition. The bankruptcy court dismissed Pac Organic's petition on the grounds it was filed in bad faith. The bankruptcy judge ordered Pac Organic to pay reasonable attorney fees and costs of two of its creditors, Northwest Wholesale Inc. and the Ostensons, for time [183 Wn.App. 470] spent in responding to the bankruptcy filing. GHI, on behalf of Pac

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Organic, appealed the award of attorney fees to the federal district court judge, who affirmed the award but remanded the award for further review of the amount. In his written ruling, the district court judge commented that the Ostensons' " cross-claims against GHI and a derivative claim on behalf of Pac Organic against GHI, Mr. Holzman, and Total Organics LLC" were " [c]onsistent with the stipulation." CP at 1926.

PROCEEDINGS

¶ 19 Meanwhile, back in Chelan County, Northwest Wholesale Inc., a creditor of Pac Organic, filed this suit, in May 2007, against Pac Organic, GHI, and the Ostensons, claiming fraudulent conveyances and constructive fraudulent transfers of Pac Organic's assets to GHI. In July 2008, the Ostensons filed cross claims against Pac Organic and GHI, and a third-party complaint against Greg Holzman and Total Organic Inc. The cross claims against Holzman, GHI, and Total Organic are in the nature of a derivative action on behalf of Pac Organic.

¶ 20 On January 24, 2011, the trial court dismissed all of Northwest Wholesale's claims against GHI and Pac Organic with prejudice after those parties settled outside of court. The Ostensons' seven claims against Pac Organic and derivative claims against Holzman, GHI, and Total Organic remained.

¶ 21 Trial commenced in Chelan County Superior Court on July 11, 2011. After the Ostensons rested their case on July 13, Greg Holzman, GHI, and Total Organic moved to dismiss count VIII, the derivative action claim, under CR 41(b)(3). The Holzman defendants argued that the Ostensons were no longer members of Pac Organic and, thus, lacked authority to bring their derivative claim. In response, the Ostensons argued that the Holzman defendants consented, in the bankruptcy stipulation, to the [183 Wn.App. 471] Ostensons' continued membership. The trial court took the motion under advisement, because it needed time to study it. The trial court directed the Holzman defendants to proceed with their evidence in the meantime. For the rest of July 13 and July 14, 2011, these defendants called witnesses but did not finish their testimony.

¶ 22 The court continued the remainder of trial to February 21, 2012, and then to May 24, 2012. At the Ostensons' request, the court again continued the remainder of trial to November 8, 2012.

¶ 23 In May and June 2012, the Holzman defendants filed a supplemental memoranda in support of their motion to dismiss. On July 13, the Ostensons responded with their own memorandum and a declaration from their attorney, Maris Baltins. Baltins declared Daniel O'Rourke and he represented the Ostensons through bankruptcy. Regarding the bankruptcy stipulation, Maris Baltins declared:

6. In addressing the outstanding disputes between the Ostensons and Holzman and his business entities, on or about April 28, 2008, the parties entered into a Stipulation under which the parties agreed, in pertinent part, as follows:
... .
d. The Ostensons would be permitted to assert claims against [Pac Organic], including, but not limited to, claims for unpaid lease installments, wages, expense reimbursement, dividends, fruit proceeds and/or failure to pay a Key Bank line or credit.
e. [Pac Organic] would be permitted to bring claims against Holzman, individually, GHI and/or Total Organic LLC for their alleged failure to pay packing fees, expenses and revenue earned solely by [Pac Organic] or fruit proceeds or rent due.
f. [Pac Organic] would be permitted to bring claims against Holzman, individually, GHI and/or Total Organic LLC for conversion of the assets of [Pac Organic] ...

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