Opinion
No. 63331-7-I.
October 11, 2010. UNPUBLISHED OPINION
Appeal from a judgment of the Superior Court for Snohomish County, No. 08-2-10683-5, Eric Z. Lucas, J., entered April 10, 2009.
Reversed and remanded by unpublished opinion per Spearman, J., concurred in by Grosse and Appelwick, JJ.
The objective of a show cause hearing under the replevin statute, chapter 7.64 RCW is simply to determine whether the plaintiff has a right to obtain possession and whether the plaintiff has posted bond for the property it seeks to replevy. RCW 7.64.035. The trial court here reached the merits of the underlying contractual dispute between GMAC and Everett Chevrolet, Inc., in a replevin show cause hearing. As such, the trial court erred, and we reverse and remand.
FACTS
This is a commercial dispute between two corporations, Everett Chevrolet, Inc. (EC) and GMAC. EC sells automobiles and GMAC provides financing for EC. In general, the financing arrangement allows EC to purchase new and used vehicles and repay GMAC as the vehicles are sold. GMAC has a security interest in the cars EC has available for sale and in the other assets of EC's business. The core document for this financing arrangement is a Wholesale Security Agreement (Agreement), executed in 1996. This Agreement provides that any and all credit lines GMAC supplies to EC are subject to the Agreement. The Agreement requires EC to repay to GMAC the amounts GMAC advances "on demand". The Agreement was amended in March 2000. The amendment did not change the "on demand" provision of the Agreement. In the normal course of business, the amount EC owes to GMAC is constantly shifting as EC purchases cars and repays GMAC from the sales it makes. In 2000, GMAC agreed to provide additional financing to EC under a revolving line of credit. This Agreement provides terms for payments in the ordinary course of business but also allows GMAC to require full payment on demand.
For most of its existence, EC was a profitable business, but car sales fell starting in 2007. By 2008, EC owed GMAC more than $700,000 on the revolving line of credit and GMAC was unwilling to extend this line of credit further. EC proposed to improve its position by purchasing the property on which its business is located and asked GMAC to loan it the money to accomplish this. GMAC did not respond immediately but eventually refused EC's request. In early June 2008, GMAC representatives met with EC owner John Reggans and expressed concern about EC's ability to repay its debts. GMAC attempted to get EC to change certain aspects of its business operation and restructure its financial position. GMAC sent a letter on July 31, 2008 detailing its concerns and asking for changes to EC's capitalization. GMAC told EC it should inject additional capital into its business, but EC did not meet GMAC's requirements. In November 2008, GMAC believed EC was selling cars without paying GMAC, a practice referred to as "selling out of trust." On December 15, 2008, GMAC terminated EC's wholesale credit line and demanded full payment of the outstanding balances EC owed by March 13, 2009. According to GMAC, EC owed $5,629,294.89 on the floor plan and $738,000 on the line of credit. GMAC alleges that EC then continued to sell cars out of trust, and as such, GMAC demanded full payment immediately.
On December 31, 2008, GMAC filed suit against EC, seeking possession of EC's inventory and assets via replevin. In January 2009, the trial court entered an injunction, which restricted EC's ability to sell vehicles and required regular documentation concerning vehicle sales. GMAC posted a bond in conjunction with the issuance of the injunction. According to GMAC, EC continued to sell vehicles without paying what GMAC claims it is owed from each sale, and, in some cases, without paying GMAC anything. GMAC requested relief under the terms of the injunction. GMAC also moved to amend its complaint.
The trial court held a three week hearing on GMAC's motions for replevin, enforcement of the injunction, and to amend the complaint. On April 10, 2009, the trial court made oral findings and signed an order reflecting its decision. No written findings of fact and conclusions of law were entered. The court found that EC was profitable and doing well from 1996 through 2006 but that the car business began to decline after 2006. Toward the end of 2007, as a means of improving its debt position, EC proposed buying the property the dealership occupied, which it currently leased. EC requested that GMAC help finance the purchase. Although EC indicated the deal had to close by the end of 2007, GMAC did not respond until May 2008. The court found that from a business standpoint, GMAC's position was not reasonable, and that its delay, rather than swift rejection, denied EC the opportunity to pursue other options.
The trial court also found that GMAC's July 31, 2008 letter was "unreasonable" because it was sent fifty days after the meeting with EC, which, in the court's view, deprived EC of time to meet GMAC's conditions. The court characterized the letter as a "drop dead" letter, a communication that the relationship between GMAC and EC was over. The court also found that GMAC was attempting to "mask" its intent to end the relationship by manipulating and withholding information, and that it thereby misled EC. The court found GMAC breached a general obligation to deal in good faith by failing to disclose aspects of its financial analysis of EC's business, by setting false targets, by misleading EC about its future actions, and by deliberately depriving EC of working capital.
The trial court's written order (1) denied GMAC's request for replevin, finding that GMAC breached its Wholesale Security Agreement and violated its duty of good faith and fair dealing under the Washington Uniform Commercial Code (UCC) and Washington common law; (2) dissolved the injunction; (3) released funds held in the court's registry to EC; (4) denied GMAC's motion to amend its complaint; and (5) retained jurisdiction to resolve remaining issues related to the replevin request, including EC's counterclaims against GMAC's $2 million bond. GMAC sought discretionary review of the April 10, 2009 order, which a commissioner of this court granted.
GMAC also filed two emergency motions with this court, one seeking a halt of a transfer of money from the court registry to EC, and one seeking an injunction preventing EC from selling vehicles without paying GMAC. A commissioner of this court denied both motions. GMAC moved to modify the order denying the emergency motion for an injunction. The motion was granted and it was ordered that:
Respondents Everett Chevrolet, Inc. and John and Jane Doe Reggans are directed to deposit all proceeds from the sales of vehicles into the registry of the superior court, there to abide the final judgment of that court as to the rights to those proceeds. The trial court may release funds to either or both of the parties during the pendency of the action upon a showing of good cause.
Per this order, EC filed a motion with the trial court seeking release of funds. The trial court denied the motion. EC filed with this court, an emergency motion to direct the trial court to release the funds. A commissioner of this court denied that motion.
On July 28, 2009, the trial court entered an order awarding attorney fees of $215,422.50 to respondent EC. On July 29, the trial court entered an order requiring GMAC and/or the bonding company that issued the replevin bond to deposit this amount into the registry of the court no later than 5:00 p.m. on Monday, August 3. On July 31, the court set a hearing for August 5 to determine whether funds already deposited into the registry of the court should be released to EC. GMAC sought an emergency stay of all three decisions. A commissioner of this court granted the motion in part, staying the court's order directing GMAC to immediately deposit the attorney fees into the court registry. GMAC's other requests were denied. Additionally, EC filed a motion with this court to terminate review; that motion was also denied.
DISCUSSION Nature of Replevin Statute, Chapter 7.64 RCW
This case comes before us on discretionary review of the trial court's decision in a show cause hearing under the Washington replevin statute, chapter 7.64 RCW. Under that statute, a "plaintiff in an action to recover the possession of personal property may claim and obtain the immediate delivery of such property, after a hearing[.]" RCW 7.64.010. The statute specifies a two-step process by which a plaintiff obtains the remedy of replevin. First, the plaintiff applies for an order to show cause why the defendant should not deliver the property:
(1) At the time of filing the complaint or any time thereafter, the plaintiff may apply to the judge or court commissioner to issue an order directing the defendant to appear and show cause why an order putting the plaintiff in immediate possession of the personal property should not be issued.
RCW 7.64.020(1). The application for an order to show cause must be supported by an affidavit or declaration alleging the following:
(a) That the plaintiff is the owner of the property or is lawfully entitled to the possession of the property by virtue of a special property interest, including a security interest, specifically describing the property and interest;
(b) That the property is wrongfully detained by defendant;
(c) That the property has not been taken for a tax, assessment, or fine pursuant to a statute and has not been seized under an execution or attachment against the property of the plaintiff, or if so seized, that it is by law exempt from such seizure; and
(d) The approximate value of the property.
RCW 7.64.020(2). Once the plaintiff obtains the order to show cause, the plaintiff must serve the order, which specifies the date, time, and place of the show cause hearing, upon the defendant. RCW 7.64.020(3), .020 (4).
Second, at the show cause hearing, a trial court or commissioner has authority to issue an order temporarily awarding possession to the plaintiff, if the plaintiff establishes the right to obtain possession and posts a bond:
(1) At the hearing on the order to show cause, the judge or court commissioner may issue an order awarding possession of the property to the plaintiff and directing the sheriff to put the plaintiff in possession of the property:
(a)(i) If the plaintiff establishes the right to obtain possession of the property pending final disposition, or (ii) if the defendant, after being served with the order to show cause, fails to appear at the hearing; and
(b) If the plaintiff executes to the defendant and files in the court a bond in such sum as the court may order, with sufficient surety to be approved by the clerk, conditioned that the plaintiff will prosecute the action without delay and that if the order is wrongfully sued out, the plaintiff will pay all costs that may be adjudged to the defendant and all damages, court costs, reasonable attorneys' fees, and costs of recovery that the defendant may incur by reason of the order having been issued.
With this statutory language in mind, we turn to the trial court's order on the show cause hearing at issue in this case.
GMAC is Entitled to Replevin
After three weeks of testimony and evidence, the trial court denied GMAC's request for replevin and ruled on the merits of EC's counterclaims, finding that GMAC breached its contract with EC and violated duties of good faith and fair dealing. The court further denied GMAC's motion to enforce the injunction, dissolved the injunction, and denied GMAC's motion to amend its complaint, leaving open the possibility of a trial on damages.
GMAC contends the trial court's order was error, and it was entitled to replevin. We agree. The trial court decided the merits of the underlying contractual dispute in a replevin show cause hearing. The objective of a replevin show cause hearing, however, is not to reach and decide the merits of an underlying dispute. Rather, the objective of such a hearing is to determine whether the plaintiff has a right to obtain possession and whether the plaintiff has posted an appropriate bond for the property it seeks to replevy. RCW 7.64.035. This is because the replevin statute, chapter 7.64 RCW, is simply a mechanism by which a plaintiff can protect its personal property or security interest while the underlying dispute is ongoing. Indeed, the statute provides that the court has authority to award the plaintiff possession "pending final disposition" of the dispute. RCW 7.64.035(1)(a)(i). The interest of a defendant is likewise protected by the requirement that plaintiff post a bond, and if it turns out the plaintiff was not entitled to possession, the plaintiff will be required to pay to the defendant all costs, damages, and reasonable attorneys' fees that may be incurred by reason of the order being wrongfully issued. See RCW 7.64.035(1)(b). Further, a defendant that does not wish to deliver possession to the plaintiff can simply post a "redelivery bond" in order to "retain possession of the property pending final judgment in the action for possession." RCW 7.64.050(1).
Thus, the trial court's order deciding the merits of the underlying contractual dispute in a replevin show cause hearing conflicts with the plain language of the replevin statute. This was an error of law. Cf. Bercier v. Kiga, 127 Wn. App. 809, 815, 103 P.3d 232 (2004) (construction of a statute is a question of law, which is reviewed de novo under the "error of law" standard). At the show cause hearing, GMAC needed to demonstrate only that it had posted a bond and had a right to obtain possession. RCW 7.64.035. Here, it is undisputed that GMAC had a security interest, not only in the "floored" vehicles that it financed for EC, but also in EC's non-floored vehicles, the proceeds of the sale of any vehicles, and other assets. It is further undisputed that GMAC posted a $2 million bond to secure the collateral. As such, GMAC was entitled to replevin.
We reverse the trial court's order on this issue and remand for entry of an order granting GMAC's request for replevin, and for further proceedings consistent with the remainder of this opinion.
GMAC spends much of its brief discussing why the trial court erred in finding GMAC breached a duty of good faith in its loan agreement with EC. GMAC points out that its agreement with EC contains "demand obligation" language and argues that under Badgett v. Security State Bank, 116 Wn.2d 563, 807 P.2d 356 (1991), the implied duty of good faith and fair dealing in every contract does not inject additional terms into the contract, and requires only that the parties perform in good faith those obligations that are already part of their agreement. Id. at 570. For the reasons described above, however, the merits of an underlying dispute are not to be decided in a replevin show cause hearing, and as such, we need not decide GMAC's arguments on this issue.
Remand
Injunction. The trial court ordered: "The Restraining Order entered December 31, 2008 and modified January 14, 2009, is dissolved." GMAC contends the trial court erroneously dissolved the injunction, and it should be reinstated on remand. The January 14, 2009 restraining order, however, expired by its own terms on January 22, 2009. Although the parties acted as if the injunction was in place, there was in fact, no injunction for the trial court to dissolve, and there is nothing for this court to reinstate.
Additionally, to the extent the injunction precluded EC from selling vehicles without paying GMAC, this issue is now moot. We have ordered replevin, and GMAC is entitled to possession of any remaining vehicles on remand.
Funds in the court registry from EC's sale of vehicles. The trial court also ordered that the money from EC's sale of vehicles held in the registry of the court be paid "immediately" to EC. Given our disposition in this case, we reverse that order. On remand, any money from EC's sale of vehicles held in the registry of the court is to be allocated and paid to the parties as is specified in their contracts.
To the extent EC contends it is entitled to compensation out of these funds for GMAC's alleged breach of contract, any such damages are not to be paid out of these funds, but are instead to be determined on remand at trial, should EC pursue its counterclaims against GMAC.
GMAC's motion to amend. After rendering a decision on the merits of the underlying claims, the trial court simply denied GMAC's motion to amend its complaint. Given our disposition in the case, we reverse that order and remand for the trial court to consider the motion to amend in the first instance.
Attorney fee award. The trial court also entered an order awarding attorney fees of $215,422.50 to EC. The fee award was based on EC's "defense of Plaintiff's Temporary Restraining Order of December 31, 2008 and Modified Restraining Order of January 14, 2009, plus percent of the bill pursuant to the Lodestar Method[.]" We agree with GMAC, that this was error. Attorney fees may be awarded when incurred in defense of a restraining order only if the trial "has for its sole purpose the determination of whether an injunction should be dissolved, the injunction is dissolved, and a trial was the sole procedure available to the party attempting to dissolve the temporary injunction." All Star Gas, Inc. v. Bechard, 100 Wn. App. 732, 739, 998 P.2d 367 (2000). Here, the sole purpose of the hearing was not whether the injunction should be dissolved, but rather, as we have stated, whether GMAC established that it was entitled to replevin. Indeed, the issue of the injunction came up only as an afterthought. As such, we reverse the trial court's order on this issue and vacate the award of attorney fees.
Replevin bond. The trial court further ordered GMAC and/or the bonding company that issued the replevin bond to deposit the amount of attorney fees into the registry of the court by no later than 5:00 p.m. on Monday, August 3. Given this court's disposition on the award of attorney fees, we reverse the trial court's order requiring the bond to be deposited in the registry of the court.
Reversed and remanded for further proceedings consistent with this opinion.
WE CONCUR: