Washington

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Worthington v. Low Cost Drugs, Inc.,
99 Wash.App. 1037 (Wash.App.Div.3 02/15/2000)

Washington Court of Appeals

No. 18102-2-III

99 Wash.App. 1037, 2000.WA.0042203

February 15, 2000

RICHARD A. WORTHINGTON AND KATHERINE L. WORTHINGTON, HUSBAND AND WIFE, APPELLANTS,

V.

LOW COST DRUGS, INC., A WASHINGTON CORPORATION, AND SHIRLEY R. BROWN, INDIVIDUALLY AND IN HER CAPACITY AS PRESIDENT, RESPONDENTS.

Appeal from Superior Court of Walla Walla County Docket No: 95-2-00710-5 Judgment or order under review Date filed: 12/07/1998 Judge signing: Hon. Donald Schacht

Counsel: Counsel for Appellant(s) Rene Erm Ii Reese Baffney Schrag & Frol PS 7th Fl Baker Bldg 8 South 2nd Ave Walla Walla, WA 99362 Counsel for Respondent(s) Richard F. Monahan Roach Monahan & Lowry 27 1/2 W Main St PO Box 1815 Walla Walla, WA 99362-0034

The opinion of the court was delivered by: Schultheis, J.

Concurring: Frank L. Kurtz Stephen M. Brown

Panel Five

UNPUBLISHED OPINION

Richard and Katherine Worthington sued Low Cost Drugs, Inc. (LCD) and its president, Shirley Brown, for violation of the Uniform Fraudulent Transfer Act, RCW 19.40, and breach of contract.

Summary judgment for LCD and Ms. Brown was appealed to this court and reversed in Worthington v. Low Cost Drugs, Inc., No. 16542-6-III, 1998 WL 123056 (Wash. Ct. App. Mar. 19, 1998). On remand, LCD and Ms. Brown submitted additional affidavits and again moved for summary judgment. The trial court granted the motion as it related to Ms. Brown and the Uniform Fraudulent Transfer Act (UFTA). In this their second appeal, the Worthingtons contend (1) Ms. Brown was collaterally estopped from relitigating issues advanced in the first appeal; (2) there are genuine issues of material fact regarding recovery under the UFTA; and (3) the trial court erred in awarding Ms. Brown attorney fees. We affirm the judgment, but reverse the attorney fees award and remand for segregation of that award.

Facts

LCD was a corporation established in the 1960s by Larry Brown and his wife, Shirley. Mr. Worthington was elected to the board of directors in 1970 and was elected treasurer in 1971. By 1985, Mr. Worthington was vice-president and general manager of the corporation. Ms. Brown was elected to the board in 1974. Early on, the corporation offered a profit sharing plan for its full-time employees and encouraged certain employees, such as Mr. Worthington, to purchase stock. The corporation agreed to repurchase the stock upon termination of employment.

Profits began declining in the mid-eighties. Just before the end of the fiscal year in January 1991, Mr. Worthington resigned and redeemed his 490 shares of common stock for $338 per share, or a total of $165,620. LCD agreed to repurchase the shares pursuant to a purchase plan, with 9 percent interest and monthly payments for 10 years. Mr. Worthington also received $260,390 from the profit sharing plan. He resigned from the board of directors in May 1991. The stock redemption payments began as agreed but ended by August 1993 as LCD's financial situation worsened. To this date, Mr. Worthington has received only $48,360 from the redemption agreement.

Ms. Brown was president of LCD during its decline. In a February 1992 special meeting of the directors, Ms. Brown offered to sell 1,470 shares of common stock to the corporation for $66.38 per share. This sale reduced her ownership to 49 percent of the issued stock. She also offered to reduce her salary to $160 per month so as to improve LCD's cash flow.*fn1 The directors approved these actions and the resulting redemption agreement provided for biweekly payments from March 1992 to February 1995.*fn2 Ms. Brown's last payment under the stock redemption agreement was in August 1993. In all, she received only $50,365 of the $97,578 owed under the agreement.

In April 1992, Ms. Brown made an unsecured $100,000 loan to LCD. She made another unsecured $100,000 loan in June 1992.*fn3 LCD defaulted on the two $100,000 loans in August 1992. By May 1993, LCD owed Ms. Brown over $20,000 in missed payments. On May 3, 1993, LCD granted Ms. Brown a security interest in pharmacy files, customer records and merchandize located in two of its stores to secure payment of the $260,000 in loans. At the annual meeting held over a week later, the shareholders and directors approved the execution of the security agreement. Ms. Brown ultimately recovered only $76,000 on these loans, including furniture and fixtures worth about $14,500. LCD had sold or auctioned all of its assets by the fall of 1993, and Ms. Brown released her security interest to the bank without compensation. Proceeds from the auctions and sales of LCD's assets were used to pay trade accounts, leases and other debts of the corporation.

The Worthingtons filed suit against LCD and Ms. Brown in December 1995. One year later, LCD and Ms. Brown moved for summary judgment, arguing that the Worthingtons' UFTA claims were barred by the relevant statute of limitations: RCW 19.40.091. Summary judgment was granted and the Worthingtons appealed to this court. In Worthington, we found that the one-year statute of limitations of RCW 19.40.091(c) applied to only one of the Worthingtons' causes of action. Because two other theories of recovery came under the four-year limitations of RCW 19.40.091(a) and (b), we reversed and remanded these causes. Additionally, we found that the record showed material factual disputes regarding these surviving theories of recovery. Worthington, 1998 WL 123056, at *3.

After remand, LCD and Ms. Brown again moved for summary judgment. On the basis of two additional affidavits by former members of the board, Ms. Brown alleged that the Worthingtons had no remedy under RCW 19.40.071 or RCW 19.40.081 and that she did not violate UFTA because LCD received a reasonably equivalent value for her security interest. In December 1998 the trial court granted summary judgment dismissal of the UFTA and breach of contract claims against Ms. Brown, leaving LCD as the remaining defendant in the breach of contract cause of action. The court also awarded Ms. Brown attorney fees, based on the attorney fees provision in the Worthingtons' redemption agreement. On appeal, the Worthingtons challenge the summary judgment and the award of fees.

Collateral Estoppel

The Worthingtons first contend summary judgment was precluded by the earlier appeal. They argue that in the earlier opinion this court considered and decided the same issues raised by Ms. Brown in her second motion for summary judgment. As a result, they assert, she was collaterally estopped from moving for summary judgment on those issues a second time.

In reviewing a summary judgment order we engage in the same inquiry as the trial court. Nielson v. Spanaway Gen. Med. Clinic, Inc., 135 Wn.2d 255, 261, 956 P.2d 312 (1998). Summary judgment is proper if the pleadings and supporting documents on file show no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id. at 261-62; CR 56(c). The purpose of a summary judgment is to avoid a useless trial. Nielson, 135 Wn.2d at 262 (citing Seven Gables Corp. v. MGM/UA Entertainment Co., 106 Wn.2d 1, 12, 721 P.2d 1 (1986)).

In the first summary judgment of this case, the trial court dismissed the UFTA complaint for violation of the statute of limitations found in RCW 19.40.091(c). This provision applies a one-year limit on an action alleging a fraudulent transfer from a debtor to an insider for an antecedent debt. RCW 19.40.051(b); .091(c). The Worthingtons had also alleged violations of RCW 19.40.041(a)(1) (transfer with intent to hinder, delay or defraud a creditor) and RCW 19.40.041(a)(2) (transfer without receipt of a reasonably equivalent value). Worthington, 1998 WL 123056, at *3. An action on these UFTA claims has a four-year statute of limitations. RCW 19.40.091(a), (b). Although this court affirmed the trial court's dismissal of the insider claim, we reversed the summary dismissal of the remaining claims, which were timely under the four-year limit. Additionally, we noted that the documents in the record indicated there were material factual disputes regarding the two remaining claims. It is this finding that is the basis for the Worthingtons' argument that the appellate decision collaterally estopped Ms. Brown from moving for summary judgment on the claims a second time.

The doctrine of collateral estoppel also called issue preclusion prevents relitigation of an issue after a party has had a full and fair opportunity to litigate on that issue. Nielson, 135 Wn.2d at 262. The purpose of the doctrine is to prevent endless litigation of issues by the same parties. Id. (citing Reninger v. Department of Corrections, 134 Wn.2d 437, 449, 951 P.2d 782 (1998)). Four conditions must be met before the doctrine is applied: (1) the issues in the two actions must be identical; (2) the prior adjudication must have ended in a final judgment on the merits; (3) the party against whom the doctrine is asserted must be a party to or in privity with a party to the first action; and (4) application of the doctrine must not work an injustice. Nielson, 135 Wn.2d at 262-63; Lutheran Day Care v. Snohomish County, 119 Wn.2d 91, 115, 829 P.2d 746 (1992), cert. denied, 506 U.S. 1079 (1993). In this case, the issues in the two summary judgment motions are the same (minus the insider transfer issue in the second motion) and the parties are clearly the same. While application of the doctrine might not work a severe injustice to Ms. Brown, it would subject her to costly litigation. Key to our determination of this issue, however, is the second element.

Contrary to the Worthingtons' argument, this court did not reach a final judgment on the merits of the remaining claims on appeal. In the first summary judgment, the trial court did not address the issues of fact and granted summary judgment on the narrow issue of the statute of limitations. Although we noted that the questions of reasonably equivalent value and remedy under the UFTA were material factual disputes, we did not decide the issues and merely remanded them for further proceedings. Worthington, 1998 WL 123056, at *3. Consequently, collateral estoppel is not applicable to these issues. On remand, nothing prevented the parties from submitting additional affidavits and moving again for summary judgment based on the lack of genuine issues of material fact.*fn4

Summary Judgment

The Worthingtons next contend issues of material fact defeat summary judgment. In particular, they argue they presented sufficient evidence to show that the security agreement was a fraudulent transfer and that they had a cognizable remedy under the UFTA.

While the law recognizes that a person generally has the right to dispose of his or her property as he or she sees fit, the principle of fraudulent conveyances prohibits any disposition of property that infringes upon the right of another person and accomplishes a fraudulent result. Rainier Nat'l Bank v. McCracken, 26 Wn. App. 498, 505, 615 P.2d 469 (1980), review denied, 95 Wn.2d 1005 (1981). A fraudulent conveyance or transfer is a transaction by which the owner of real or personal property has attempted to place the land or goods beyond the reach of his or her creditors or any other person who has legal or equitable rights to the property. Id. at 506.

Under the UFTA, a transfer may be fraudulent in two general circumstances: (1) the transfer (including a security interest created by agreement, RCW 19.40.011(8), (12)) is made by a debtor with actual intent to hinder, delay or defraud a creditor (RCW 19.40.041(a)(1)); or (2) the transfer is made without adequate consideration (RCW 19.40.041(a)(2)) (also called a constructively fraudulent transfer). Clearwater v. Skyline Constr. Co., 67 Wn. App. 305, 320, 835 P.2d 257 (1992), review denied, 121 Wn.2d 1005 (1993). In determining whether there was actual intent to defraud under RCW 19.40.041(a)(1), the trial court may consider these nonexclusive factors: whether (1) the transfer was to an insider; (2) the debtor retained control over the property transferred; (3) the transfer was disclosed or concealed; (4) before the transfer, the debtor had been threatened with suit; (5) the transfer was of substantially all the debtor's assets; (6) the debtor absconded; (7) the debtor concealed assets; (8) the debtor did or did not receive reasonably equivalent value for the transfer; (9) and (10) the debtor was insolvent or became insolvent soon after the transfer, or incurred a substantial debt shortly before or after the transfer; and (11) the debtor transferred the assets of the business to a lienor who transferred the assets to an insider. RCW 19.40.041(b).

The court may find constructive fraud under RCW 19.40.041(a)(2) if the debtor did not receive a reasonably equivalent value in exchange for the transfer and any one of the following exists: (1) the debtor was left by the transfer with unreasonably small assets (RCW 19.40.041(a)(2)(i)); (2) the debtor intended to incur more debts than he or she would be able to pay (RCW 19.40.041(a)(2)(ii)); or (3) the debtor was insolvent at the time of the transfer or as a result of the transfer (RCW 19.40.051(a)). Clearwater, 67 Wn. App. at 320-21.

Any party making a claim under the UFTA carries the burden of proving that the transfer in question was fraudulent. Sedwick v. Gwinn, 73 Wn. App. 879, 885, 873 P.2d 528 (1994). Proof of actual intent to defraud must be clear and satisfactory, while proof of constructive fraud must be shown by substantial evidence. Clearwater, 67 Wn. App. at 321. Ms. Brown moved for summary judgment on the basis that the Worthingtons failed to establish either actual or constructive fraud. Specifically, she argued that they presented no evidence to show LCD received less than a reasonably equivalent value for the security interest.

A defendant is entitled to summary judgment when that party can show there is an absence of evidence supporting an element essential to the plaintiff's claim. Las v. Yellow Front Stores, Inc., 66 Wn. App. 196, 198, 831 P.2d 744 (1992) (citing Young v. Key Pharmaceuticals, Inc., 112 Wn.2d 216, 225, 770 P.2d 182 (1989)). As Ms. Brown did here, the defendant is merely required to challenge the sufficiency of the plaintiff's evidence on any material issue. Las, 66 Wn. App. at 198. The burden then shifts to the nonmoving party to set forth specific facts by affidavit or other evidence that show a genuine issue exists. Id.; Ingersoll v. DeBartolo, Inc., 123 Wn.2d 649, 654, 869 P.2d 1014 (1994). The nonmoving party may not rely on the allegations in the pleadings, and any affidavits submitted must be admissible, based on personal knowledge, and not merely conclusive, speculative or argumentative. Las, 66 Wn. App. at 198 (citing Grimwood v. University of Puget Sound, Inc., 110 Wn.2d 355, 359, 753 P.2d 517 (1988)); CR 56(e).

In this case, Ms. Brown challenged the Worthingtons' contention that LCD did not receive a reasonably equivalent value for the security interest. Value, as defined in RCW 19.40.031, is what is given for a transfer or obligation if, in exchange, property is transferred or an antecedent debt is secured or satisfied. Where property is transferred as security for a debt, the transfer 'is ordinarily for a reasonably equivalent value notwithstanding a discrepancy between the value of the asset transferred and the debt secured, since the amount of the debt is the measure of the value of the interest in the asset that is transferred.' Sedwick, 73 Wn. App. at 889 (quoting Uniform Fraudulent Transfer Act sec. 3 comment, 7A U.L.A. 651 (1985)).

Ms. Brown contends her forbearance to pursue the defaulted payments on the loans constituted adequate equivalent value for the security interest on the LCD assets. While this argument is persuasive, it is not necessary to the resolution of this issue. According to the above definition of value, the secured interest in an antecedent debt is measured by the value of the debt and is presumed equivalent value. Further, the Worthingtons, in response to Ms. Brown's motion for summary judgment, failed to provide affidavits or any other specific facts to show that the security interest was transferred for less than reasonably equivalent value. The Worthingtons also neglected to provide specific facts relating to other indications of actual intent to defraud. Accordingly, the trial court did not err in granting summary judgment on the basis that the Worthingtons did not adequately support essential elements of their fraudulent transfer claims.

Ms. Brown also successfully argued to the trial court that the Worthingtons had no remedy under the UFTA because they sought only the $76,000 Ms. Brown received in payments on the loans. These payments, she asserted, were not the product of the security interest and therefore were not recoverable under RCW 19.40.071 or RCW 19.40.081.*fn5 The Worthingtons responded, not with affidavits of fact, but with the argument that the corporation was forced to make these payments to Ms. Brown a secured creditor as it liquidated the collateral. This argument fails for two reasons. First, the Worthingtons provide no record to show that the post-security interest payments corresponded with liquidation of the collateral, and therefore cannot support their assertion that the payments were related to the secured assets. Second, it is axiomatic that a debtor has a right to prefer one creditor over another, even to the exhaustion of the debtor's assets. Workman v. Bryce, 50 Wn.2d 185, 190, 310 P.2d 228 (1957).

Attorney Fees

Finally, the Worthingtons challenge the trial court's award of attorney fees to Ms. Brown. In Washington, attorney fees may be awarded only when authorized by statute, recognized ground in equity, or private agreement by the parties. Perkins Coie v. Williams, 84 Wn. App. 733, 742-43, 929 P.2d 1215, review denied, 132 Wn.2d 1013 (1997). Whether a particular statute, contract provision or ground in equity authorizes fees and costs is a question of law subject to independent appellate review. Tradewell Group, Inc. v. Mavis, 71 Wn. App. 120, 126, 857 P.2d 1053 (1993).

RCW 4.84.330 provides that when a contract or lease grants attorney fees and costs incurred to enforce the provisions of the agreement, the prevailing party in an action on the contract or lease is entitled to reasonable attorney fees and costs. This statute encompasses any action that alleges a person is liable on a contract. Herzog Aluminum, Inc. v. General American Window Corp., 39 Wn. App. 188, 197, 692 P.2d 867 (1984) (the prevailing party was entitled to fees although the contract was determined to be void). Here, however, the Worthingtons sought recovery on the basis of two actions: one against Ms. Brown for a fraudulent transfer, and the other against Ms. Brown and LCD for breach of the redemption contract. Fees are not awarded for actions based on UFTA violations. The Worthingtons' redemption contract contains a provision that authorizes fees and costs to the party who sues to enforce the contractual rights. Fees under the contract may be awarded only for those services that relate to the contract action. Pearson v. Schubach, 52 Wn. App. 716, 723, 763 P.2d 834 (1988), review denied, 112 Wn.2d 1008 (1989). Besides granting summary judgment on the UFTA action, the trial court also dismissed Ms. Brown from the breach of contract action. The court did not, however, distinguish between the attorney fees incurred as a result of the UFTA action (apparently the far greater proportion of the fees) and those incurred in defending against the breach of contract claim. Because Ms. Brown is not entitled to fees that relate to defending against the UFTA claims, the matter of fees is remanded to determine the amount that relates only to the contract action. Id.

Judgment affirmed. Attorney fees award reversed and remanded for segregation.

A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040.

Opinion Footnotes

*fn1 This was the minimum salary to qualify for medical benefits.

*fn2 According to James Hayner, Ms. Brown's attorney and a member of the board, the payments for the stock redemption were scheduled to replace Ms. Brown's former salary.

*fn3 Ms. Brown made two smaller unsecured loans in April and September 1992. Worthington, 1998 WL 123056, at *1.

*fn4 We also note that the 'law of the case' doctrine is inapplicable here because our previous decision did not reach the merits of the case and additional evidence was presented before the second motion for summary judgment. See Trent v. Valley Elec. Ass'n, Inc., 195 F.3d 534, 537 (9th Cir. 1999); State v. Worl, 129 Wn.2d 416, 425, 918 P.2d 905 (1996); Holst v. Fireside Realty, Inc., 89 Wn. App. 245, 258, 948 P.2d 858 (1997).

*fn5 Under RCW 19.40.071, a creditor in a UFTA action generally may obtain avoidance of the transfer, attachment against the asset, an injunction against the disposition of the asset, appointment of a receiver to take charge of the asset, or any other relief required. If the transfer is voidable, the creditor may recover the value of the asset or the amount necessary to satisfy the creditor's claim, whichever is less. RCW 19.40.081(b).

The legal opinions are a matter of public record (that's how we got them), and as such there can be no defamation for republishing them. Sometimes, however, legal opinions are reversed, vacated, or significantly modified, etc., and we do not discover this fact until somebody points it out to us. As we do not desire to publish inaccurate or outdated information, if a legal opinion has been reversed, vacated, or significantly modified, please advise us of this fact immediately, by fax to (877) 698-0678 or you may also send regular postal correspondence to Riser Adkisson LLP at 1827 Powers Ferry Road, Building One, Suite 200, Atlanta GA 30339.