Opinion
No. 22750-2-III
Filed: March 3, 2005 UNPUBLISHED OPINION
Appeal from Superior Court of Spokane County. Docket No: 02-2-05603-7. Judgment or order under review. Date filed: 01/12/2004. Judge signing: Hon. Robert D. Austin.
Counsel for Appellant(s), Timothy James Giesa, Attorney at Law, 222 N Wall St Ste 410, Spokane, WA 99201-0834.
Counsel for Respondent(s), Francis J. Gebhardt, Feltman Gebhardt Greer Zeimantz PS, 421 W Riverside Ave Ste 1400, Spokane, WA 99201-0409.
After considering an allegedly non-conforming right of first refusal, the trial court decreed J.E.M. Investments, Inc. (JEM) must specifically perform its agreement with Felts Field Aviation (FFA) to sell a hangar and assign the underlying lease issued by the Spokane Airport Board (Board). JEM's successor, First Pacific Capital, L.L.C. and First Pacific's subsidiary Business Finance Corporation (collectively First Pacific) appeal, contending (1) material differences negated FFA's offer, (2) the refusal right did not survive FFA's earlier tax free exchange, (3) FFA failed to obtain Board assignment approval, (4) the Board was not joined as a necessary party, and (5) the decree improperly adjudicated rights and failed to do equity. We affirm.
FACTS
Around 1980, FFA constructed a hangar, Building No. 32, on land it leased from the Board. Lease Paragraph XXVII provides that FFA, nor any assignee or successor of FFA, can `assign, sublet, transfer or encumber any of Lessee's rights in and to this Agreement, or to the fixed improvements, or any interest therein . . . without the prior written consent of the Board.' Ex. P-9 at 18.
In June 2000, FFA sold the hangar and assigned its lease interest to JEM. Paragraph 15 of the parties' purchase and sale agreement contains a right of first refusal, whereby JEM granted FFA a right to repurchase the hangar and leasehold interest if JEM received a bona fide offer. The contract clause requires FFA to make an offer `at the same price and on the same terms as contained in the bona fide offer received by J.E.M.' Clerk's Papers (CP) at 14.
FFA used 26 USC sec. 1031, to effect a tax deferred exchange, using Custom 1031, Inc. as a facilitator. The assignment of purchase and sale agreement between FFA and Custom 1031 states Custom 1031, `assumes all of such contractual rights under the Purchase and Sale Agreement for the subject property.' Ex. D-128. There is no mention of the right of first refusal FFA retained in its agreement with JEM.
In July 2000, the Pring Corporation loaned $385,000 to JEM. As part of the security for that loan, JEM granted a deed of trust, security agreement and assignment of rents to Pring for the hangar and lease. The Board approved these documents on November 21, 2001. Prior to making the loan, Pring had actual knowledge of FFA's right of first refusal.
The Pring loan was due in full on July 20, 2001, but due to JEM's financial problems, Pring extended the due date to August 15. JEM was still unable to pay the $65,000 balance on the loan. JEM's president, John R. Harwood, contacted First Pacific's president, Dane Armstrong, for assistance. On October 19, Mr. Armstrong, on behalf of Hand FPC Joint Venture (Hand FPC), an entity in which First Pacific was a 50 percent owner, signed an offer to purchase the hangar and acquire the Board lease from JEM. The offer stated that the purchase price was `$135,000' with JEM paying `a fee of $10,000 to First Pacific Capital, LLC at closing of sale.' CP at 15.
On October 22, Mr. Harwood telephoned Larry N. Schmedding, Jr., FFA's general manager and told him about the Hand FPC offer. Then, pursuant to FFA's right of first refusal in Paragraph 15 of the parties' purchase agreement, Mr. Harwood faxed the offer to Mr. Schmedding. That day, Mr. Harwood signed Hand FPC's offer.
Four days later, Mr. Schmedding exercised FFA's right of first refusal, sending Mr. Harwood a purchase offer for the hangar and lease. The terms of the offer were the same as Hand FPC's offer, except the $10,000 fee was to be paid to `Empire Lumber Company, Inc. at closing of sale.' CP at 16. FFA is a wholly owned subsidiary of Empire Lumber. Neither Empire Lumbar nor First Pacific is a licensed real estate broker. Mr. Schmedding inadvertently failed to sign the offer.
Before FFA's offer was received, JEM had already begun negotiations with First Pacific for it to purchase the remainder of the Pring loan in exchange for the deed of trust Pring held on the hangar and lease. On October 29, First Pacific paid Pring $72,738.31 and Pring assigned its deed of trust to First Pacific. Three days later, First Pacific loaned JEM $25,000 plus another $23,000 a week later. These loans were also secured by the deed of trust. Hand FPC withdrew its original offer to purchase the hanger and lease. Mr. Harwood testified he `probably' told Mr. Armstrong about FFA's right of first refusal during these negotiations, but he could not recall for certain. Report of Proceedings at 403.
On October 30, Mr. Harwood advised Mr. Schmedding by letter that JEM could not accept FFA's offer because it changed the condition relating to the $10,000. The letter did not mention the loan and deed of trust between JEM and First Pacific. Mr. Schmedding sent letters to Mr. Harwood on October 30, November 8, November 13, and November 14, in an effort to get JEM to accept FFA's offer, with no response.
In a November 2, 2001 letter, Mr. Armstrong advised Mr. Harwood that Hand FPC had withdrawn its offer to purchase. He stated to `obtain the airports [sic] approval and resolution to Felts Field Aviations questionable tactics will take substantially longer then we are willing to accept.' Ex. P-57. Mr. Harwood did not object.
JEM's financial problems continued and on January 10, 2002, it executed a deed in lieu of foreclosure to First Pacific. No Board approval was obtained for this transfer. In May, First Pacific assigned its beneficial interest in the deed of trust to its subsidiary, Business Finance Corporation, again without Board approval.
In September 2002, First Pacific notified JEM it was going to sell its interests in the hangar and lease. On September 13, FFA sued for specific performance and injunctive relief to allow it to exercise its right of first refusal and prevent First Pacific from selling the property. In exchange for FFA's promise not to pursue an injunction, First Pacific agreed not to sell the property. On December 13, First Pacific leased the hangar to the United States Immigration and Naturalization Service (INS) for five years beginning at $2,020.53 monthly. No Board approval was sought or obtained.
JEM became insolvent. It did not respond to FFA's complaint, so an order of default was entered against it on August 6, 2003, apparently after bankruptcy.
On January 12, 2004, the court entered findings of fact and conclusions of law and its judgment and decree for specific performance. It concluded FFA properly exercised its right of first refusal, its offer was identical to Hand FPC's, there was no assignment of FFA's right of first refusal to Custom 1031, the Board lease did not require FFA to obtain permission from the Board for the right of first refusal, and the Board was not a necessary party. Further, the court concluded since FFA delayed in bringing its suit until September 2002, First Pacific was not accountable to it for the fair rental value of the hangar's use from January 2002 to September 2002; however; for the period of September 13, 2002 to December 15, 2002, First Pacific was accountable to FFA for the fair rental value, which the court concluded was $2,020 per month or $6,163.69. This amount was offset against First Pacific's expenses.
In exchange for a quit claim deed and lease assignment from First Pacific, FFA was ordered to pay $125,000 plus expenses for a total of $129,652.92. Part of this amount went to Pat Richling and his attorney for a judgment obtained by Mr. Richling against JEM as garnishee on January 10, 2002.
This appeal followed.
ANALYSIS A. Exercise of Right of First Refusal
The issue is whether the trial court erred in decreeing specific performance based on its conclusion that FFA properly exercised its right of first refusal. First Pacific contends FFA's offer materially varied from Hand FPC's offer.
A trial court's exercise of specific performance is reviewed for an abuse of discretion. Paris v. Allbaugh, 41 Wn. App. 717, 720, 704 P.2d 660 (1985). A trial court abuses its discretion when a ruling is manifestly unreasonable or exercised on untenable grounds or for untenable reasons. State ex rel. Carroll v. Junker, 79 Wn.2d 12, 26, 482 P.2d 775 (1971). We defer to a trial court's judgment in tailoring a decree which balances both parties' interests and reaches an equitable solution to the controversy. Eichorn v. Lunn, 63 Wn. App. 73, 80, 816 P.2d 1226 (1991).
To support its conclusion that FFA was entitled to specific performance, the court found FFA `exercised that company's right of first refusal' (Finding of Fact 14) and JEM's `goal was to net $125,000.00 from the sale of the Hangar, after paying the $10,000.00 fee' (Finding of Fact 40). CP at 529, 536.
Where, as here, the trial court has weighed the evidence, appellate review is limited to determining whether the findings of fact are supported by substantial evidence and, if so, whether the findings support the conclusions of law and judgment. City of Tacoma v. State, 117 Wn.2d 348, 361, 816 P.2d 7 (1991). Evidence is substantial if, when viewed in the light most favorable to the prevailing party, it would persuade a rational person of the truth of the finding. Ino Ino, Inc. v. City of Bellevue, 132 Wn.2d 103, 112, 937 P.2d 154, 943 P.2d 1358 (1997).
Under the contract, FFA was required to make an offer `at the same price and on the same terms as contained in the bona fide offer received by J.E.M.' if exercising its right of first refusal. CP at 14. FFA was entitled to a fair opportunity to meet the sale conditions. Matson v. Emory, 36 Wn. App. 681, 684, 676 P.2d 1029 (1984). "A right of first refusal to purchase is a valuable prerogative, limiting the owner's right to freely dispose of his property by compelling him to offer it first to the party who has the first right to buy." Manufactured Hous. Communities of Wash. v. State of Wash., 142 Wn.2d 347, 364-65, 13 P.3d 183 (2000) (quoting N.W. Television Club, Inc. v. Gross Seattle, Inc., 26 Wn. App. 111, 116, 612 P.2d 422 (1980), rev'd in part on other grounds by 96 Wn.2d 973, 634 P.2d 837 (1981)).
Regarding the sale conditions:
[A]n acceptance of an offer must always be identical with the terms of the offer, or there is no meeting of the minds and no contract. . . . A purported acceptance that changes the terms of an offer in any material respect may operate as a counteroffer, but it is not an acceptance and does not consummate the contract. . . . Any material variance between offer and acceptance precludes the formation of a contract. . . . If the intended acceptance adds a condition that can be implied in the original offer, then the condition is not a material variance rendering the acceptance ineffective.
Matson, 36 Wn. App. at 684 (quoting N.W. Television Club, 96 Wn.2d at 980). Relying on David Meyers, Inc. v. Anderson, 48 Wn. App. 381, 739 P.2d 102 (1987), First Pacific argues the offers were materially different because Hand FPC's offer contained a broker's fee to a related party and FFA's contained an illegal fee to a non-related party. First Pacific claims it is a related party to Hand FPC because it is part owner of Hand FPC, whereas FFA and Empire Lumber are separate and distinct entities. In David Meyers, a lessee was given a right of first refusal to purchase the Butterworth Building in Seattle on the same terms and conditions as a third party. Id. at 382. The David Meyers court held: `Lessee's failure to include the amount of the brokerage commission in its offer to the owners precluded its offer from constituting a proper exercise of its right of first refusal.' Id. at 383-84.
Here, the primary variance between Hand FPC's offer to purchase and FFA's offer was the payee of the $10,000. FFA interpreted the $10,000 to be a payment or rebate of the purchase price to a party related to the purchaser. While First Pacific claims the $10,000 was a brokerage fee, the record does not clarify the exact purpose of the $10,000. The trial court did not make a finding on this issue, but did correctly conclude neither First Pacific nor Empire Lumber `was entitled to receive the $10,000.' CP at 538. In any event, while the FFA included the fee in its offer distinguishing this case from David Meyers, the net effect was $125,000 to JEM. In this sense, the trial court found FFA's offer was for the same price and terms as Hand FPC's offer.
First Pacific next argues the court's remedy amounted to creating a contract the parties never made for themselves. First Pacific argues the offer was for $135,000, not $125,000. To the extent possible, specific performance should place the parties in the same condition as contract performance would have. Chan v. Smider, 31 Wn. App. 730, 736, 644 P.2d 727 (1982). A trial court sitting in equity has broad discretion in fashioning remedies "to do substantial justice to the parties and put an end to litigation." Hough v. Stockbridge, 150 Wn.2d 234, 236, 76 P.3d 216 (2003) (quoting Carpenter v. Folkerts, 29 Wn. App. 73, 78, 627 P.2d 559 (1981)). Again, to the extent JEM would net $125,000 from either offer, the court's decree of specific performance did not exceed the performance of the contract. Moreover, in view of the trial court's correct conclusion that JEM could not `give a better deal' to Hand FPC than to FFA, the amount of the offer was identical. CP at 538. Accordingly, the trial court did not err.
B. Effect of 1031 Exchange
The issue is whether the trial court erred in concluding the tax deferred exchange with Custom 1031 did not include or affect the validity of the right of first refusal.
First Pacific challenges the court's findings that the exchange complied with the Internal Revenue Code; no intent existed to assign or transfer the right of first refusal; all parties treated FFA as though it had retained the right after the exchange; and `[i]t is not reasonable to conclude that an assignment for section 1031 purposes would extinguish [FFA's] entitlement to the right of first refusal.' CP at 536. We review the findings for substantial evidence. City of Tacoma, 117 Wn.2d at 361.
`The transferability or assignability of a right of first refusal depends upon the intent of the parties.' Old Nat'l Bank of Washington v. Arneson, 54 Wn. App. 717, 723, 776 P.2d 145 (1989) (citing Shower v. Fischer, 47 Wn. App. 720, 727-28, 737 P.2d 291 (1987)). If the parties' intent is not shown in the writing, `the court must ascertain their intention by reviewing the contract as a whole and consider all of the circumstances leading to its execution, including the subsequent acts and conduct of the parties.' Old Nat'l Bank, 54 Wn. App. at 723 (citing Kwik-Lok Corp. v. Pulse, 41 Wn. App. 142, 147, 702 P.2d 1226 (1985)). Contract rights are assignable; however, absent evidence of intent, preemptive rights are generally construed to be nontransferable. Shower, 47 Wn. App. at 727-28 (citing 6 American Law of Property sec. 26.67, at 984 (Supp. 1977)).
While the FFA-Custom 1031 agreement provides that FFA assigns its contract rights, the agreement is silent as to the right of first refusal. Additionally, Paragraph 15 of the FFA-JEM agreement is silent on the assignability of FFA's right of first refusal. Yet, the paragraph refers to JEM and its `successors or assigns' but not FFA's successors, evidencing the parties' intent for FFA's right to not be assignable. Inferably, JEM took this intent because when JEM received Hand FPC's offer it notified FFA, not Custom 1031.
Gary A. Bates of Custom 1031 testified it was not necessary for Custom 1031 to acquire FFA's right of first refusal to complete a 1031 exchange. Furthermore, both Mr. Bates and Mr. Schmedding testified they did not intend to assign the right of first refusal to Custom 1031. First Pacific unsuccessfully objected to this evidence as irrelevant based on subjective intent. But the testimony of both men about whether they believed the right of first refusal was being assigned to effect a section 1031 exchange is relevant under ER 401.
Regarding qualified intermediaries, 26 CFR 1.1031(k)-1(g)(4)(ii) provides that to effect a 1031 exchange, the agreement between the taxpayer and the intermediary must expressly limit `the taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary.' The agreement must provide `that the taxpayer has no rights . . . to pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period.' 26 CFR 1.1031(k)-1) (g) (6) (i). First Pacific misconstrues these regulations. The safe harbors provided in 26 CFR 1.1031(k)-1 regarding the treatment of deferred exchanges are directed solely to the prevention of actual or constructive receipt by the seller of the sale proceeds held by the intermediary, not preemptive rights. Moreover, our courts have expressly limited the transferability of preemptive rights. Shower, 47 Wn. App. at 727-28.
In sum, FFA's preemptive right was not assigned to Custom 1031. Substantial evidence supports the trial court's findings.
C. Board Approval
The issue is whether FFA's right of first refusal was invalid because the Board did not approve it. FFA contends First Pacific lacks standing to raise this issue.
Finding of Fact 41 provides:
Section XXVII of the Airport Board lease requires that the lessee obtain Spokane Airport Board approval for certain actions that have an immediate effect upon the title to the property. Neither that section nor any other provision in the lease mentions a right of first refusal.
CP at 536.
"The invalidity of an assignment, on the ground that it has not been assented to by the lessor, can be raised only by the lessor." OTR v. Flakey Jake's, Inc., 112 Wn.2d 243, 247, 770 P.2d 629 (1989) (quoting Morrison v. Nelson, 38 Wn.2d 649, 659, 231 P.2d 335 (1951)). Thus, FFA retained right of first refusal in its purchase and sale agreement with JEM based on Board approval is an issue for the Board to raise, not First Pacific.
`Because the holder of the right of first refusal acquires merely an equitable interest, it remains inchoate until the owner decides to sell thus triggering the right of first refusal.' Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1384 (1991). It follows that since the right is inchoate FFA was not required to seek Board approval until it actually exercised the right. First Pacific does not argue this issue. In any event, whether the Board is a necessary party is separately discussed below.
In sum, because the Board did not challenge FFA's retention of the right of first refusal, and First Pacific does not show its authority to stand in the Board's position, the matter is not before us. Therefore, we decline to decide this hypothetical issue and turn next to the suggested procedural problem of the Board's absence.
D. CR 19 Affirmative Defense
The issue is whether the trial court erred in striking First Pacific's CR 19 affirmative defense asserting the Board was an indispensable party.
We review a trial court's ruling on a motion to strike for an abuse of discretion. Analytical Methods, Inc. v. Dep't of Revenue, 84 Wn. App. 236, 244, 928 P.2d 1123 (1996). Discretion is abused only if it is exercised without tenable grounds or reasons. State ex rel. Carroll v. Junker, 79 Wn.2d 12, 26, 482 P.2d 775 (1971).
CR 19(a) partly provides:
A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if . . . he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may . . . as a practical matter impair or impede his ability to protect that interest.
CR 19(a).
A necessary party is one who `has a sufficient interest in the litigation that the judgment cannot be determined without affecting that interest or leaving it unresolved.' Kitsap County Fire Prot. Dist. No. 7 v. Kitsap County Boundary Review Bd., 87 Wn. App. 753, 761, 943 P.2d 380 (1997) (citing Harvey v. Bd. of County Comm'rs, 90 Wn.2d 473, 474, 584 P.2d 391 (1978)). First Pacific fails to show the trial court could not resolve this dispute without the Board's presence.
As analyzed above, the Board's interests theoretically remain protected by Paragraph XXVII in its lease with FFA. The Board has taken no action affecting this litigation. That the Board may choose to act in the future is speculative and not critical here. First Pacific cannot force the Board to act. Thus, First Pacific's arguments ring hollow. Moreover, similar to FFA's section 1031 transfer, First Pacific equally acted without seeking Board approval when taking its deed in lieu of foreclosure, assigning its interest to Business Finance Corporation, and entering into the INS lease. In sum, the court had tenable grounds to strike First Pacific's CR 19 affirmative defense.
E. Equitable Disposition
The overriding issue is whether the trial court failed to do equity when adjudicating rights and decreeing remedies.
As analyzed above, we review specific performance decrees for an abuse of discretion. Paris v. Allbaugh, 41 Wn. App. 717, 720, 704 P.2d 660 (1985). We defer to a trial court's judgment when tailoring a decree balancing both parties' interests and reaches an equitable solution to the controversy. Eichorn v. Lunn, 63 Wn. App. 73, 80, 816 P.2d 1226 (1991).
First Pacific contends the court improperly adjudicated rights between First Pacific and the Board, and failed to do equity because First Pacific was prejudiced by the timing of FFA's filing of its complaint. The trial court partly adjudged and decreed:
None of the defendants shall take any action of any nature whatsoever to adversely affect, or that would have an adverse effect upon, the hangar, the Airport Board Lease, the U.S. Government Lease, and/or any interests therein, or that would create any lien or encumbrances therein or thereon.
CP at 551.
Relying on injunction law, First Pacific argues this language is overly broad, does not apprise First Pacific of the prohibited conduct and unlawfully prohibits First Pacific from pursuing legitimate claims of breach of warranty against the Board. Paragraph 7 is not an injunction. But if it were, injunctive relief is equitable in nature and the court `is vested with a broad discretionary power to shape and fashion injunctive relief to fit particular facts, circumstances, and equities of the case before it.' Rupert v. Gunter, 31 Wn. App. 27, 20, 640 P.2d 36 (1982) (citing 43A C.J.S., Injunctions sec. 235, at 512 (1978)). Given the history between the parties, it was well within the court's discretion to order First Pacific to maintain the status quo until specific performance was fulfilled.
In Finding of Fact 44, the court found:
Felts Field Aviation, Inc.'s Offer to Purchase was rejected by J.E.M. Investments, Inc. on October 30, 2001. Felts Field Aviation, Inc. waited until September 13, 2002 to commence this lawsuit for specific performance. Neither First Pacific Capital, L.L.C. nor Business Finance Corporation changed their position because of that delay. First Pacific Capital, L.L.C. entered into the U.S. Government lease on December 13, 2002, which is a lucrative lease and First Pacific Capital, L.L.C. was not prejudiced.
CP at 537. The court then concluded no prejudice existed and `[l]aches does not prohibit the granting of specific performance.' CP at 540.
First Pacific contends it was prejudiced because if FFA had commenced its lawsuit earlier, it would not have had to deduct the Richling judgment from FFA's purchase price. On January 10, 2002, the court entered a money judgment for Pat Richling against JEM. But the small claims judgment for Mr. Richling was filed on March 13, 2001 and a writ of garnishment was issued on June 22, 2001, well before FFA exercised its right of first refusal. So, it cannot be said FFA's delay in bringing suit prejudiced First Pacific when the Richling matter was already existent before the facts giving rise to this action transpired. And, First Pacific was not `required to account for the fair rental value of its use of the Hangar for the period January 10, 2002 to September 13, 2002' further mitigating prejudice. CP at 541.
Under the statute of limitations, FFA had six years to commence its specific performance action. RCW 4.16.040(1). Absent highly unusual circumstances, we will not apply the laches doctrine to bar an action short of the statute of limitations. Kelso Educ. Ass'n v. Kelso Sch. Dist. No. 453, 48 Wn. App. 743, 750, 740 P.2d 889 (1987).
Considering all, the trial court judiciously and equitably tailored a decree balancing both parties' interests when solving this dispute and shaping remedies. Accordingly, the trial court did not abuse its broad equitable powers.
Affirmed.
A majority of the panel has determined 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.
SWEENEY, A.C.J. and KURTZ, J., Concur.