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Columbia State Bank v. Invicta Law Group PLLC

Court of Appeals of Washington, Division 1

May 22, 2017

COLUMBIA STATE BANK, Respondent,
v.
INVICTA LAW GROUP PLLC, Defendant, MARK V. JORDAN, individually and on behalf of the marital community comprised of MARK V. JORDAN and CYNTHIA JORDAN, Appellants.

          Mann, J.

         Mark Jordan appeals the trial court's ruling that his sole proprietorship, Invicta Law Group, was a successor in liability to Invicta Law Group, PLLC (PLLC), on a promissory note to Columbia State Bank (CSB). Jordan asserts that the trial court: (1) erred in finding that the sole proprietorship is a successor to the PLLC under the "mere continuation" theory, (2) provided insufficient findings of fact, (3) abused its discretion in allowing refreshed recollection testimony supporting damages, and (4) erred in awarding CSB its attorney fees and costs. We affirm.

         I

         In 1999, Jordan formed the PLLC and was the sole member and manager. In February 2012, the PLLC borrowed $165, 000 from CSB. In order to do so, the PLLC entered into several loan documents including a commercial promissory note (note), loan agreement, and security agreement. Jordan signed all three loan documents as manager of the PLLC. Jordan also signed the loan agreement individually as guarantor.

         Under the terms of the note, the PLLC was required to make 23 consecutive monthly payments of $2, 377.04 beginning March 20, 2012, at an interest rate of 5.5 percent per year, with a final balloon payment of the balance on February 20, 2014. The security agreement granted CSB a first-priority security interest to:

All Equipment, Inventory, Chattel Paper, Accounts, and General Intangibles; whether it is owned now or acquired later; all accessions, additions, replacements, and substitutions relating to the Collateral; all records and proceeds of any kind relating to the Collateral (including insurance, general intangibles and other account proceeds).

         In the event of a default, the loan documents preserved the right for CSB to accelerate the loan and indebtedness, take immediate possession of the collateral, and to pursue any remedy under any of the loan documents, at law or in equity.

         Both the loan agreement and note included an "Attorneys' Fees and Other Costs" provision that states, if "legal proceedings are instituted to enforce the terms of this Note, borrower agrees to pay all costs of the lender in connection therewith, including reasonable attorneys' fees to the extent permitted by law." The note and security agreement include a "survival clause" confirming they are binding on all "heirs, executors, administrators, assigns and successors" of the borrower.

         On September 30, 2013, Jordan filed for voluntary Chapter 7 bankruptcy. On January 2, 2014, the bankruptcy court discharged Jordan's personal guaranty on the loan agreement.

         On the same day he filed for bankruptcy, Jordan also ceased operating as the PLLC. The PLLC did not file for bankruptcy.

         When Jordan filed for personal bankruptcy, he also stopped (as sole owner and managing partner) making PLLC's payments on the note. The PLLC made its last payment on the loan to CSB in October 2013. The PLLC maintained two bank accounts at CSB, a general account and an IOLTA[1] account. In September and October 2013, the PLLC deposited fewer and fewer funds into its CSB general account until all funds were withdrawn on October 25, 2013. The PLLC also withdrew funds held in the CSB IOLTA account, which historically carried a balance of approximately $20, 000 to $23, 000. All funds in the CSB IOLTA account were withdrawn by November 6, 2013.

         The day after filing for personal bankruptcy, Jordan began operating a law practice known as the Mark V. Jordan sole proprietorship (sole proprietorship). The sole proprietorship was owned, operated, and controlled by Jordan. Jordan applied for and received a new tax identification number, a new Unified Business Identifier number, and opened new bank accounts at Umpqua Bank and American West Bank under the name Invicta Law Group.

         Jordan continued his individual law practice, using the same name, website, signage, telephone number, offices, insurance, employees, equipment, and representing the same clients. Jordan continued to use the full name Invicta Law Group, PLLC in new client engagement letters for nearly six months. Jordan also continued under the same contracts as the PLLC including: lease agreement, subtenant agreements, existing client agreements, and malpractice insurance agreement. Jordan continued representing the same clients the PLLC had represented at the time the PLLC ceased operation. No clients left the PLLC due to its change in legal structure. Indeed, Jordan did not tell the clients until months later. Jordan allocated nearly all of his income after September 30, 2013, from clients and from the sublease agreements, to the sole proprietorship's bank accounts.

         After learning Jordan filed for bankruptcy, counsel for CSB contacted counsel for Jordan and notified him that the loan was in default. CSB requested access to the collateral as well as detailed financial information. Jordan acknowledged the requests for information and offered to make the collateral available. Jordan never provided the requested financial information. Jordan moved some office equipment to a storage facility and sent a storage unit key to CSB. After inspection, CSB declined to accept the collateral as full or partial satisfaction of the debt. CSB explained that it did "not wish to take possession of the Collateral or dispose of the Collateral, as the estimated cost of disposition exceeds the value of the Collateral."

         On February 6, 2014, CSB filed a lawsuit in King County Superior Court against the PLLC, Jordan, and Jordan's marital community. CSB's complaint alleged causes of action against the PLLC for breach of contract and for foreclosure of the security interest. CSB sought recovery against Jordan under a claim of successor liability. After initial discovery, CSB moved for summary judgment on its claims against the PLLC and Jordan. On December 17, 2014, the trial court granted summary judgment in favor of CSB for its claims against the PLLC. The court denied CSB's motion as it pertained to the claim against Jordan for successor liability.

         CSB's claim against Jordan for successor liability proceeded to a three-day bench trial in June 2015. The trial court issued its findings of fact and conclusions of law on July 9, 2015. The court found in favor of CSB and awarded CSB $151, 360.40 against the PLLC and Jordan jointly and severally under the doctrine of successor liability, holding that Jordan's sole proprietorship was a "mere continuation" of the PLLC. Specifically, the trial court concluded: (1) the PLLC defaulted on the note, (2) the PLLC transferred all of its assets to Jordan, (3) there was no consideration given by Jordan, and (4) that Jordan was liable for the PLLC's obligations on the note.

         CSB sought to recover $314, 662.54 for its attorney fees and costs. After reviewing the fee petition and supporting declarations, the trial court reduced the requested fees and awarded CSB $258, 045.78 for its attorney fees and costs. The attorney fees award was also jointly and severally against the PLLC and Jordan individually. The court entered a judgment and awarded $409, 406.18 in damages against Jordan and the PLLC jointly and severally.

         The trial court's judgment also held that CSB's interest in the collateral identified in the security agreement was superior to any claim of right or interest by the PLLC or Jordan. The court directed issuance of a writ of execution for law enforcement to take possession of the collateral and deliver it to CSB, and for any net proceeds or credits to be applied against the judgment. Jordan appealed.

         II

         Jordan argues first that CSB's equitable claim for successor liability is precluded because CSB had an adequate remedy at law. We disagree.

         Successor liability is an equitable claim. A court may grant relief in both law and equity. GMB Enterprises. Inc. v. B-3 Enterprises, Inc.. 39 Wn.App. 678, 687, 695 P.2d 145 (1985); Yount v. Indianola Beach Estates. Inc.. 63 Wn.2d 519, 525, 387 P.2d 975 (1964). The general rule is that courts will not exercise equity jurisdiction when there is a clear, adequate, complete, and speedy remedy at law. Gall Landau Young Const. Co., Inc. v. Hedreen. 63 Wn.App. 91, 99, 816 P.2d 762 (1991); see also Roon v. King County. 24 Wn.2d 519, 166 P.2d 165 (1946) (holding equity will not act if there is a complete and adequate remedy at law). We review the decision of whether to grant equitable relief de novo. Niemann v. Vaughn Comm'ty Church. 154 Wn.2d 365, 374, 113 P.3d 463 (2005).

         Jordan argues that the trial court erred in granting equitable relief because CSB had an adequate remedy at law. Jordan contends that because CSB had the legal remedy of foreclosure against the PLLC and the collateral under the security agreement, equitable remedies are barred. Jordan does not dispute CSB's claim that after inspecting the stored collateral it determined that the "estimated cost of disposition exceeds the value of the Collateral." Jordan argues instead that it is irrelevant that the any remaining assets of the PLLC and the collateral may not be sufficient to satisfy the judgment. Jordan ignores that the test for exercising equitable jurisdiction is whether the plaintiff lacks a "clear, adequate, complete, and speedy remedy at law." Hedreen. 63 Wn.App. at 99 (emphasis added). "Where the remedy by action for damages is inadequate or insufficient to do complete justice between the parties, equity will take jurisdiction and grant proper relief." 30A C.J.S. Equity. § 25 (2007). "The fact that a plaintiff may have a remedy at law by an action for damages does not prevent equity from assuming jurisdiction if the equitable remedy is better adapted to render more perfect and complete justice than the remedy at law." 30A C.J.S. Equity, § 25. The trial court's conclusion that CSB was left without an adequate remedy at law was supported by substantial evidence.

         Jordan relies on Seattle Mortgage Co. v. Unknown Heirs of Gray. 133 Wn.App. 479, 136 P.3d 776 (2008), to support his claim that CSB had an adequate legal remedy to foreclose on some of the PLLC's physical collateral. Seattle Mortgage did not involve a claim for successor liability. Instead, Tacoma Public Utilities Department (PUD) made a $3, 186.96 loan secured by a deed of trust on the borrower's residence. After the borrower defaulted, PUD sought an equitable lien which would have allowed PUD to terminate utility service to the residence until the loan was paid. Seattle Mortgage. 133 Wn.App. at 499. The court refused to grant the equitable lien because PUD had the right to foreclose on the borrower's residence, which was worth substantially more than the loan balance. The court concluded that an equitable lien was not necessary to prevent injustice. Seattle Mortgage. 133 Wn.App. at 500-01.

         Here, the collateral made available by Jordan was not worth the cost of disposal. All of the other assets that belonged to the PLLC, including its clients and accounts, were transferred to Jordan's sole proprietorship. Foreclosure on the available collateral would be inadequate and would not provide a clear, adequate, or complete remedy.

         Jordan's reliance on Sorenson v. Pyeatt. 158 Wn.2d 523, 544, 146 P.3d 1172 (2006), is similarly misplaced. In Sorenson, our Supreme Court rejected a claim for an equitable lien against real property because the plaintiff had already obtained an $868, 000 judgment against the defendants based on a deed, and the owner of the real property was an innocent third party. Sorenson. 158 Wn.2d at 544. The Court concluded that "the Lenders have failed to show how the equities would be served by requiring, in essence, Sorenson [innocent third party] to bear the burden of satisfying the Lenders' judgment against the Pyeatts [the defendants]. Sorenson. 158 Wn.2d at 544.

         Here, unlike Sorenson. the trial court found CSB's legal remedy-foreclosure on the available collateral-inadequate in light of the debt owed. Moreover, Jordan is not an innocent third party; he is the successor to the PLLC.

         This case is more similar to Hedreen. Hedreen concerned an attempt by the Gall Landau Young Construction Company (GLY) to hold the R.C. Hedreen Company (Hedreen), the successor to the assets of Parkside Building Company (Parkside), liable for Parkside's debts to GLY. Hedreen asserted that the court could not exercise its equitable jurisdiction because GLY had prevailed against Parkside at the trial court level in bankruptcy court. Hedreen. 63 Wn.App. at 99. We disagree because GLY's claim in bankruptcy court was on appeal and therefore not certain, and also because there was "no guarantee" that GLY's bankruptcy claim would provide complete relief. Gall. 63 Wn.App. at 99-100.

         Here, CSB prevailed on summary judgment in its claim to foreclose against the PLLC. However, there is no dispute that the collateral made available to CSB does not satisfy the amount owed on the debt. Based on this, the trial court concluded that "the legal remedies that may be available to Plaintiff do not provide a guarantee that they would provide complete, or any, relief." Like Hedreen, CSB should be able to proceed in its equitable claim for successor liability against Jordan. The trial court did not err in exercising its equitable jurisdiction and granting both an equitable and legal remedy.

         III

         Jordan argues next that the trial court's decision finding successor liability fails because there is no evidence supporting a transfer of assets from the PLLC to Jordan's sole proprietorship. We disagree.

         Our review of an appeal from a bench trial is "limited to determining whether a trial court's findings are supported by substantial evidence, and if so, whether those findings support the conclusions of law." American Nursery Prods.. Inc. v. Indian Wells Orchards, 115 Wn.2d 217, 222, 797 P.2d 477 (1990). Substantial evidence "is the quantum of evidence sufficient to persuade a rational fair-minded person." Sunnyside Valley Irrig. Dist. v. Dickie. 149 Wn.2d 873, 879, 73 P.3d 369 (2003). "We view the evidence and all reasonable inferences in the light most favorable to the prevailing party. State v. Kaiser, 161 Wn.App. 705, 724, 254 P.3d 850 (2011). We do not review credibility determinations on appeal. Kaiser. 161 Wn.App. at 724. Unchallenged findings are verities on appeal. In re Estate of Jones. 152 Wn.2d 1, 8, 93 P.3d 147 (2004).

         Washington follows the general rule that "a corporation purchasing the assets of another corporation does not become liable for the debts and liabilities of the selling corporation." Cambridge Townhomes. LLC v. Pacific Star Roofing. Inc.. 166Wn.2d 475, 481-82, 209 P.3d 863 (2009). The rationale for this rule is a "bona fide purchaser who gives adequate consideration and who lacks notice of prior claims against the property acquires no liability for those claims." Hall v. Armstrong Cork. Inc., 103 Wn.2d 258, 262, 692 P.2d 787 (1984)). There are, however, exceptions to this general rule. A successor may be held liable for the debts of a predecessor, where:

(1) there is an express or implied agreement for the purchaser to assume liability; "(2) the purchase is a de facto merger or consolidation; (3) the purchaser is a mere continuation of the seller; or (4) the transfer of assets is ...

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