Opinion
No. 59611-0-I.
April 28, 2008.
Appeal from a judgment of the Superior Court for Snohomish County, No. 04-2-13848-3, Eric Z. Lucas, J., entered January 26, 2007.
Affirmed in part and remanded by unpublished opinion per Leach, J., concurred in by Grosse and Appelwick, JJ.
Max Ford sold an operated crane business, Max Ford Crane Service, Inc. (MFCS), to Evergreen Crane Services, Inc., in a stock purchase agreement (SPA) that included a covenant not to compete. After a bench trial, the trial court ruled that Max Ford breached the SPA by continuing to collect MFCS accounts receivable after closing and by becoming involved in his son's operated crane business in violation of the covenant not to compete. We affirm, but remand for recalculation of the judgment without prejudgment interest.
FACTS
Max Ford owned and operated MFCS for several years. Initially, MFCS rented to its customers both "operated" cranes (cranes supplied with an operator) and cranes without operators, known as "bare" crane rentals. Sometime prior to selling MFCS, Ford formed a new company, Crane Rental Inc., for bare rentals and used MFCS solely for renting operated cranes.
Ford sold the stock of MFCS to Evergreen, a company owned by John Hines, for $1.05 million in a SPA dated May 14, 2004. Originally, the parties negotiated an asset sale in which Evergreen would purchase equipment, goodwill, and business agreements from MFCS for $1.1 million, with $900,000 to be paid in cash at closing and the balance of $200,000 to be financed by a promissory note from Hines to Ford. One week before the proposed May 14 closing, Ford asked Evergreen to change the transaction from an asset sale to a stock sale in exchange for reducing the sale price to $1 million. Further negotiations took place, and the parties agreed on a final purchase price of $1.05 million. The down payment remained $900,000, and Hines' promissory note was $150,000. The note included funds that Ford was to leave in the corporate checking account and an insurance premium Ford was to pay to Evergreen's liability insurance carrier. Although the parties had agreed to close within 30 days of signing the SPA, the sale closed on June 28, 2004.
The sale was for "all of the issued and outstanding stock of MFCS." The agreement provided that certain assets and liabilities would be transferred out of MFCS before closing and that those assets and liabilities would not be acquired by Evergreen. Included in the list of items Ford would keep was "[a]ll cash except $25,000." Neither MFCS accounts receivable nor the MFCS checking account was on the list of assets to be transferred to Ford. However, after closing, Max and Una Ford continued to collect and retain MFCS accounts receivable and maintained control over the MFCS checking account.
The SPA contained the following covenant not to compete:
During the five (5) year period immediately following closing ("the Noncomptetion [sic] Term"), Ford shall not, directly or indirectly, in any manner orcapacity, as advisor, principal, agent, partner, officer, director, shareholder, employee, creditor, member, manager or otherwise, within the geographic area consisting of the states of Washington, Oregon and California and the province of British Columbia, Canada (the "Protected Area") engage in the business of furnishing crane services which require furnishing of a crane operator as a part of said service.
Similarly, Evergreen agreed not to engage in "bare" crane rentals. After the sale, Ford continued to run a bare rental crane business called Cranes for Rent (C4R) and shared his office building with Evergreen under a six-month lease, which was included in the SPA.
At trial, evidence was presented that Ford was involved in his son Kerry's operated crane business, Ford Crane Inc. (FCI). One witness claimed he had seen Ford operating a crane. Another witness testified that Ford referred a former MFCS customer to FCI for operated crane rental. When Kerry caused property damage at a gas station, Ford negotiated reparations on behalf of FCI with the gas station owner. When the owner asked for an insurance card, Ford told her that they did not have it with them and could not provide it until later in the day because they needed to get the crane to a job site. Kerry was also present, but Ford "did all the talking," referred to the crane as "our" crane, and gave the impression that he was the owner of the FCI crane business. Evidence was also presented that Ford had allowed FCI to use C4R cranes free of charge and later created backdated invoices charging FCI for the cranes when confronted by Hines. Although C4R's standard form rental agreement required a late charge of one percent on all accounts over 30 days, FCI was not required to pay any finance charges when it did not pay for 120 days.
After a bench trial, the trial court ruled that Ford had breached the SPA and the covenant not to compete. The trial court awarded judgment against Max and Una Ford for $515,948.
DISCUSSION
Findings of Fact
The trial court's findings of fact must be supported by substantial evidence, and its conclusions of law must be supported by the findings of fact. Substantial evidence to support a finding of fact exists where there is sufficient evidence in the record "to persuade a rational, fair-minded person of the truth of the finding." An appellate court may not substitute its evaluation of the evidence for that made by the trier of fact. We conclude that the trial court's findings of fact and conclusions of law are supported by substantial evidence and reveal the following facts:
Landmark Dev., Inc. v. City of Roy, 138 Wn.2d 561, 573, 980 P.2d 1234 (1999) (citing Willener v. Sweeting, 107 Wn.2d 388, 393, 730 P.2d 45 (1986)).
In re Estate of Jones, 152 Wn.2d 1, 8, 93 P.3d 147 (2004).
Goodman v. Boeing Co., 75 Wn. App. 60, 82-83, 877 P.2d 703 (1994).
1. Max Ford diverted $174,606.68 of corporate assets from Evergreen.
2. For nearly fifteen years before the sale of MFCS in 2004, Kerry Ford owned only one crane.
3. After the sale in the summer of 2004, Kerry Ford changed the name of his operated crane business to Ford Crane Inc. (FCI) and began competing with crane companies that had twenty times his inventory in equipment.
4. FCI is in the business of furnishing crane services which require the furnishing of a crane operator.
5. After the sale of MFCS to Evergreen, Max Ford operated a bare crane rental business called Cranes for Rent (C4R).
6. Max Ford and/or C4R acted as a creditor to FCI in the following ways:
a. C4R loaned working capital to FCI in the form of making bare crane rentals to it without requiring payment until FCI was paid by its customer and not charging FCI for the delay in payment.
b. Max Ford and/or C4R mobilized cranes to FCI without sending an invoice to FCI.
c. The invoices prepared for FCI were backdated.
d. Backdating of invoices to FCI was done secretly, in order to represent that the transactions had occurred in the regular course of business when, in fact, they had not.
e. Ford required its other customers to pay for crane rentals within 30 days and charged them financing charges after 30 days.
7. Ford's practice of allowing FCI to pay for cranes after collecting its own receipts gave FCI a tremendous advantage over its competitors.
8. FCI had control over the crane inventory of C4R.
9. The customer list purchased by Evergreen was protected by the noncompetition agreement.
10. FCI generated gross receipts of at least $169,852 from former MFCS customers.
11. FCI would not have been able to serve the number of customers it served nor generate the amount of revenue it generated without the assistance provided by Max Ford and/or C4R such as providing FCI with names of customers and the use of cranes on credit without any financing expense.
12. Max Ford had a special relationship with FCI and Kerry Ford in which Max Ford assisted FCI and Kerry Ford in an operated crane business.
13. Max Ford acted as an agent for FCI when he negotiated reparations for an accident caused by Kerry Ford at a gas station.
14. Max Ford was seen operating a crane on a FCI job site after the sale to Evergreen.
Conversion of Funds
Ford assigns error to the trial court's finding that Ford converted a total of $174,606.68 when he failed to transfer the checking account to Evergreen and continued to collect accounts payable after closing. He also assigns error to the finding that his payment of $27,285.87 to Evergreen was an insufficient effort to meet his obligation to transfer at closing the MFCS checking account with a balance of $25,000. The trial court ruled on summary judgment that Evergreen was entitled to the checking account and accounts receivable, but reserved the amount of damages for trial. Ford does not assign error to the order granting summary judgment to Evergreen. Furthermore, although Ford assigns error to the pertinent findings of fact, he does not support the assignment of error with argument in his opening brief. "Accordingly, the assignment of error is waived," and the fact that Evergreen was entitled to the checking account and accounts receivable is a verity on appeal.
Cowiche Canyon Conservancy v. Bosley, 118 Wn.2d 801, 809, 828 P.2d 549 (1992).
Ford argues that damages relating to the accounts were calculated incorrectly because some checks issued by Ford after closing were used to pay Evergreen's business expenses and should have been subtracted from the total accounts receivable. However, the trial court analyzed the MFCS bank statements and found that Ford had illegally diverted $174,606.68 from the assets of MFCS after closing. It further found that because the amount of the checks later issued by Ford had been included in the promissory note from Hines, it was improper to deduct the amount of these checks from the diverted amount when calculating damages. Substantial evidence supports the trial court's finding that damages relating to conversion of accounts payable and the checking account totaled $174,606.68.
Noncompete Agreement
Ford argues that he did not breach the covenant not to compete because the loaning of money or equipment is not a breach of a noncompete agreement. Because the covenant expressly prohibited engaging in the operated crane business as a creditor and because Ford's conduct went beyond that of mere financial assistance, we affirm.
Ford correctly states that loaning money to the owner of a competing business is generally insufficient to find breach of a generic covenant not to compete. In Riverview Floral, Ltd. v. Watkins, Division Three of this court held:
McKeighan Wachter Co. v. Swanson, 138 Wash. 682, 683, 245 P. 10 (1926). See also Pitts v. Ashcraft, 586 S.W.2d 685, 692 (Tex.Civ.App. 1979); Thomas v. Thomas Truck Caster Co., 228 N.W.2d 52 (Iowa 1975); Buckingham Tool Corp. v. Evans, 35 Mich. App. 74, 192 N.W.2d 362 (1971); Slate Co. v. Bikash, 343 Mass. 172, 177 N.E.2d 780 (1961).
51 Wn. App. 658, 754 P.2d 1055 (1988).
Absent a contractual provision to the contrary, a party who covenants not to compete in a particular business is not precluded from merely leasing property or loaning money to others engaged in that business. The covenantor is precluded from having a connection with the business or deriving a profit therefrom.
Riverview Floral, Ltd. v. Watkins, 51 Wn. App. 658, 661-62, 754 P.2d 1055 (1988) (emphasis added) (citing Management, Inc. v. Schassberger, 39 Wn.2d 321, 235 P.2d 293 (1951)).
Here, however, the agreement contains a covenant that prohibits Ford from engaging in the operated crane business "directly or indirectly, in any manner or capacity, as . . . creditor . . . or otherwise. . . ." Thus, Ford breached the covenant when he extended credit to FCI in the manner found by the trial court.
Additionally, Ford's assistance to FCI went well beyond mere financial assistance. Riverview Floral held that the Watkins breached the noncompete agreement because the Watkins actively financed relatives who operated a competing baby's breath flower business and shared in the profits of the competing venture. Ford argues that he did not breach the covenant because, unlike the Watkins, he did not share in FCI's profits. However, it is not necessary that the covenantor derive profits from a competing business in order to breach a covenant not to compete. Courts in other jurisdictions have held that where "financial assistance is further accompanied by other acts on the part of the covenantor, such as giving advice to or making purchases for the competitor . . . there is a violation of the covenant." It is generally a breach of a covenant not to compete when a covenantor provides assistance to a competing business that "creates an effect which is as injurious to the covenantee as if he had engaged in competition himself."
Riverview, 51 Wn. App. at 662.
F.T. Chen, Annotation, Rendering Financial or Other Assistance to Another as Breach of Covenant Not to Compete, 1 A.L.R.3d 778, 782 (1965). See, e.g., Bicycle Transit Auth., Inc. v. Bell, 314 N.C. 219, 333 S.E.2d 299 (1985); Vendo Co. v. Stoner, 105 Ill. App. 2d 261, 245 N.E.2d 263 (1969); Uptown Food Store, Inc. v. Ginsberg, 255 Iowa 462, 123 N.W.2d 59 (1963); Bennett v. Carmichael Produce Co., 64 Ind. App. 341, 115 N.E. 793 (1917).
Annotation, 1 A.L.R.3d at 782.
For example, in Uptown Food Store, Inc. v. Ginsberg, the covenantor assisted his son in a competing business by furnishing financial assistance, performing management functions such as negotiating prices and arranging purchases for the business, and giving his son advice regarding the operation of the business. The Iowa Supreme Court held that the covenantor breached the agreement despite the fact that he had not derived profit from the competing business.
255 Iowa 462, 123 N.W.2d 59, 1 A.L.R.3d 765 (1963).
Uptown, 255 Iowa at 471-73.
Uptown, 255 Iowa at 471-73.
Like the defendant in Uptown, Ford's conduct was not limited to financial assistance or an extension of credit. After the sale to Evergreen, Ford negotiated damages for Kerry's crane accident at a gas station and was seen operating a crane on a jobsite. He referred at least one operated crane customer to Kerry, and a significant portion of FCI's business was billed to the same customers that were on Evergreen's customer list. As in Uptown, "[t]he reasonable and probable result of defendant's actions is to take business away from plaintiff. By his efforts he has increased plaintiff's competition, that [sic] is what he agreed not to do." The trial court correctly concluded that Ford's provision of financial and other assistance to FCI demonstrated interested involvement in a competing business in violation of the covenant.
Uptown, 255 Iowa at 474.
We hold that Ford breached the noncompete agreement by extending preferential credit and providing other assistance to FCI including, but not limited to, labor, negotiation, advice, and customer referrals.
Proximate Cause
Lost profits are recoverable as damages only if they are (1) within the contemplation of the parties at the time the contract is made, (2) proximately caused by the defendant's breach, and (3) proved with reasonable certainty. Ford argues that Evergreen has not proved that his breaches of the SPA and noncompetition agreement proximately caused damage to Evergreen.
Larsen v. Walton Plywood Co., 65 Wn.2d 1, 15, 390 P.2d 677, 396 P.2d 879 (1964).
Ford argues that the trial court erred in concluding that his retention of the accounts receivable was sufficient to cause Evergreen's lost profits. We agree that the evidence offered at trial does not support an inference that the loss in operating capital from the conversion of the accounts receivable alone caused Evergreen's lost profits. However, we affirm the award because it is supported by other substantial evidence that Ford's actions caused these lost profits.
Ford argues that several factors other than the breach were the cause of Evergreen's lost profits, including changes in management style, renaming and unionizing the company, selling and buying cranes, instituting new safety procedures, increasing maintenance expenses, and increasing crane rental prices. However, conflicting evidence was presented at trial, and substantial evidence supports the trial court's findings that Ford promoted FCI's utilization of C4R cranes on credit to give FCI a substantial economic advantage over its competitors, including Evergreen, and that Ford assisted FCI in its solicitation of customers identified on the customer list. Such evidence included a list of Evergreen customers who were invoiced by FCI, evidence that Ford had referred a customer to Kerry for operated crane work, and circumstantial evidence that Evergreen's customers were hiring FCI. It was reasonable for the trial court to infer that Evergreen would have served those customers if FCI had not received assistance from Ford.
Ford argues that MFCS's customers would not necessarily have gone to Evergreen if they had not gone to FCI. In Prentice Packing Storage Co. v. United Pacific Insurance Co., our supreme court held that causation was not proved because the respondent's case rested upon conjecture rather than a reasonable inference. The expert opinion on which respondent relied had "assume[d] a fact necessary to establish a cause of action, but concerning which assumed fact there [was] no evidence, and then employ[ed] the supposititious fact as the basis for a conjecture as to the possible cause of a particular physical result." Here, however, the trial court's inference of causation is founded upon evidence that FCI rented cranes to Evergreen's existing customers, and that FCI could not have served those customers if Ford had not extended credit to and otherwise assisted it. The trial court reasonably inferred that Evergreen would have retained these existing customers absent Ford's breach of the covenant.
5 Wn.2d 144, 106 P.2d 314 (1940).
Prentice Packing Storage Co. v. United Pac. Ins. Co., 5 Wn.2d 144, 162-63, 106 P.2d 314 (1940).
Prentice, 5 Wn. 2d at 163.
In arguing that his breach did not cause Evergreen's lost profits, Ford compares this case to Golf Landscaping, Inc. v. Century Construction Co. Golf claimed that delays occasioned by Century's breach of a landscaping contract caused lost profits by preventing Golf from bidding on other jobs during the period of the delay. This court held that evidence consisting of a list of projects from the Journal of Commerce for the delay period and testimony regarding the number of jobs Golf normally bid on and won was insufficient to support a claim of lost profits. Quoting the Court of Claims, Golf held that the
39 Wn. App. 895, 903, 696 P.2d 590 (1984).
Golf, 39 Wn. App. at 903.
Golf, 39 Wn. App. at 903.
damages are not recoverable because they "would not have been reasonably foreseeable by the defendant at the time when the breaches of contract . . . were committed." It is wholly conjectural whether [the contractor] would have been awarded those additional contracts. The petition states only that he was unable to bid on them and that he had a "reasonable expectation" of receiving them. Such an attenuated theory of damages is legally insufficient.
Golf, 39 Wn. App. at 903-04 (alteration in original) (citations omitted) (quoting Rocky Mountain Constr. Co. v. United States, 25 Cont. Cas. Fed. (CCH) at 88, 354-55 (Ct.Cl. 1978)).
Here, however, the theory of damages is not so attenuated. When the parties entered the SPA for the sale of MFCS, they intended that Evergreen acquire MFCS's customer list and retain its existing customers. The possibility that Evergreen would lose profits if Ford directed those same customers to a competing operated crane business owned by his son was a foreseeable harm. The noncompete agreement was entered in part to protect Evergreen from exactly that harm. Unlike Golf, Evergreen provided evidence of the loss of business from existing customers rather than mere speculation that it would successfully obtain new business in a competitive bid process.
Because the trial court's inferences are reasonable and based on substantial evidence, we affirm the trial court's ruling that Ford's breach of the noncompetition agreement proximately caused damages in the form of lost profits to Evergreen.
Damages
Next, Ford argues that Evergreen's damages were not proved with reasonable certainty. He argues that, as in Larsen, the trial court's determination of Evergreen's lost profits was wholly speculative. In Larsen, the court reduced an award of lost profits where the plaintiff's expert based profit estimates on hypothesis rather than substantial evidence. By contrast, the trial court here used data derived by Evergreen's expert witness from MFCS financial statements for the three complete fiscal years prior to the sale to Evergreen. Ford argues that, contrary to the unchallenged testimony of his expert, Dennis Wintch, "the court must have assumed that all of MFCS's profits for the 2001-2003 fiscal years derived from the operated crane business" and not from bare crane rentals. Although Ford argues that Wintch's testimony was uncontroverted, both Evergreen's expert, William Partin, and Hines provided controverting testimony. Hines testified that Ford represented that the 2001-2003 financial statements understated the profits realized by the crane operated business because they included the expenses but not the revenue from the bare crane rentals.
See Larsen, 65 Wn.2d at 15. See also Golf, 39 Wn. App. at 903 (quoting United States ex rel. A.V. DeBlasio Constr., Inc. v. Mountain States Constr. Co., 588 F.2d 259, 263 (9th Cir. 1978) (applying Washington law)).
Larsen, 65 Wn.2d at 19.
While the trial court based its calculation of damages on the financial statements provided to Hines as inducement to purchase MFCS, which were incorporated into Partin's report, it did not accept Partin's conclusions. The trial court was entitled to weigh the evidence in reaching its decision. "Expert testimony alone is a sufficient basis for an award for loss of profits." The range of this evidence included a low of zero from Wintch to a high of $908,648 from Partin. As in Larsen, the court adopted an amount higher than the figure offered by defendant's expert but lower than at least one of the estimates by plaintiff's expert. "The fact that no evidence sustained the exact sum allowed is not pertinent." The damages awarded were within the range of evidence presented.
Larsen, 65 Wn.2d at 18.
Larsen, 65 Wn.2d at 17 (citing Bogart v. Pitchless Lumber Co., 72 Wash. 417, 130 P. 490 (1913)).
See Larsen, 65 Wn.2d at 18.
Larsen, 65 Wn.2d at 18.
Prejudgment Interest
Ford argues that the trial court erred in awarding prejudgment interest on the lost profits award. As this court held in Northwest Land Investment Inc. v. New West Federal Savings Loan Ass'n, prejudgment interest may not be granted on a lost profits award because the amount of damages is unliquidated prior to judgment. The trial court erred by awarding prejudgment interest on the lost profits award.
57 Wn. App. 32, 786 P.2d 324 (1990).
N.W. Land, 57 Wn. App. at 45-46.
Attorney Fees
Ford requests reversal of attorney fees awarded by the trial court to Evergreen, and both parties request attorney fees on appeal. The SPA provides,
[i]n the event of any action to enforce this Agreement, for interpretation or construction of this Agreement or on account of any default under this agreement, the prevailing party in such action shall be entitled to recover from the other party, in addition to all other relief, all attorney's fees and expenses incurred by the prevailing party in connection with such action (including any appeal thereof).
Because Evergreen is the substantially prevailing party in this action, we affirm the trial court's fee award and award attorney fees to Evergreen on appeal under the agreement.
CONCLUSION
The award of damages is affirmed and the judgment is remanded to the trial court for recalculation consistent with this decision.
WE CONCUR: