Opinion
No. 49641-7-I c/w 50138-1-I
Filed: July 21, 2003 UNPUBLISHED OPINION
Appeal from Superior Court of King County Docket No: 01-2-10569-8 Judgment or order under review Date filed: 11/07/2001
Counsel for Appellant(s), Mark Sherman Carlson, Dorsey Whitney LLP, 1420 5th Ave Ste 3400, Seattle, WA 98101-4010.
Richard M Clinton, Dorsey Whitney LLP, 1420 5th Ave Ste 3400, Seattle, WA 98101-4010.
Todd Stuart Fairchild, Dorsey Whitney LLP, Us Bank Center, 1420 5th Ave Ste 3500, Seattle, WA 98101-4087.
Howard Mark Goodfriend, Edwards Sieh Smith Goodfriend PS, 1109 1st Ave Ste 500, Seattle, WA 98101-2988.
Counsel for Respondent(s), Robert James Adolph, Adolph Gamache PS, 701 5th Ave Ste 7100, Seattle, WA 98104-7008.
Christina Beatrice Gamache, Adolph Gamache PS, 701 5th Ave Ste 7100, Seattle, WA 98104-7008.
William Robert Hickman, Reed McClure, 601 Union St. Ste 4901, Seattle, WA 98101-3920.
Ralph Howard Palumbo, Summit Law Group PLLC, Ste 1000, 315 5th S, Seattle, WA 98104-2682.
This appeal and cross-appeal, while presenting numerous issues relating to transactions involving large amounts of money, arise from claims that we find were fairly and correctly adjudicated by the trial judge. We affirm in all respects. Kirlan Venture has assigned error to numerous findings of fact that were entered after a two-week bench trial. However, Kirlan Venture's brief provides no argument directed to any specific finding of fact, and no attempt to show that the facts found are unsupported by substantial evidence. It is thus apparent that Kirlan Venture's concern is with issues of law: the conclusions the trial court drew from the facts, and the rulings on summary judgment. We therefore treat the findings of fact as verities, and rely on them for our understanding that this litigation arose from the following sequence of events.
See In re Matter of Estate of Lint, 135 Wn.2d 518, 531-32, 957 P.2d 755 (1998) (`an appellant's brief is insufficient if it merely contains a recitation of the facts in the light most favorable to the appellant even if it contains a sprinkling of citations to the record throughout the factual recitation. It is incumbent on counsel to present the court with argument as to why specific findings of the trial court are not supported by the evidence and to cite to the record to support that argument.').
In 1989, Kirk Lanterman formed a corporate entity to hold his investments and named it Kirlan Venture Capital, Inc. Lanterman is the company's sole shareholder. Kirlan Venture formed and operated Kirlan One, a venture capital limited partnership, to invest in small, privately owned growth companies in exchange for equity in the companies.
In 1996, Kirlan Venture hired respondent and cross-appellant Dan Regis as the president of Kirlan Venture and manager of Kirlan One. Kirlan Venture agreed to pay Regis an annual salary of $100,000, plus incentive compensation of five percent of realized gains (also referred to as carried interest) on deals that he originated and actively managed for its capital venture funds.
In addition to originating and managing investments, Regis also took on the responsibility of forming a follow-on fund to Kirlan One. In 1997, he arranged the formation of Kirlan Two. Regis was named as Kirlan Two's managing partner. In this role, he did not have any right to compensation directly from Kirlan Two. Instead, he was to receive compensation from Kirlan Venture according to his employment agreement.
In January 1998, Kirlan Venture increased Regis' salary and increased his incentive compensation to 10 percent of the carried interest.
In June 1999, Regis resigned as president of Kirlan Venture. Thereafter, he served as a part time consultant to Kirlan Venture under a different contract. Under an agreement memorialized by a letter from Lanterman, Regis agreed to assist Kirlan Venture with the transition to the new president, William Tenneson; to monitor investments; and to assist Tenneson in forming a follow-on fund to Kirlan Two. The consultancy agreement provided that Regis would be responsible for his own payroll taxes. Tenneson's employment contract was substantially similar to the contract Regis had when he was president.
The relationship between Regis and Lanterman deteriorated. In September 1999, Regis began to contest the tax characterization of his future incentive compensation payments. He wanted it to be characterized as a partner's distribution and taxed as capital gains. Lanterman wanted Regis' compensation to continue to be treated as ordinary income. As a result of this dispute, Lanterman terminated Regis' consulting contract in October 1999. Notwithstanding the dispute over tax characterization, Regis consistently demanded a timely distribution of his incentive compensation. By spring 2000, Regis and Lanterman were attempting to mediate their dispute. Kirlan Venture sent Regis a letter containing several options that would allow Regis to receive a portion of his incentive compensation while the tax characterization issue was being resolved. Regis accepted one of the proposals. However, on March 17, Lanterman rescinded the proposed offer and insisted that Regis' carried interest shares be withheld by Kirlan Venture pending resolution of the dispute about how to characterize them for tax purposes. Meanwhile, InterNAP, one of the investments held by both Kirlan One and Kirlan Two, had become enormously successful. Restrictions on the distribution of Regis' incentive compensation from Kirlan Two's InterNAP holdings were set to be lifted on March 20, 2000, the fund's liquidity date. As that date approached, the securities market became extremely volatile. Still, Regis and Lanterman were unable to agree on how to pay Regis' carried interest. When March 20 came, Lanterman did not make any distribution to Regis. Lanterman then canceled the mediation. Litigation began on March 21, 2000, when Regis filed a complaint in federal court against Kirlan Venture, Kirlan One, Kirlan Two, and Lanterman. The complaint alleged breach of contract and other theories primarily aimed at recovering the share value Regis allegedly was losing as a result in Lanterman's delay in distributing his incentive compensation. During the two weeks following March 20, the value of InterNAP shares dropped dramatically. On April 3, 2000, Kirlan Venture distributed to Regis 142,485 of his uncontested 202, 116 shares of InterNAP, while retaining the remaining 59,631 shares to make a tax deposit on Regis' compensation. Kirlan Venture reduced Regis' incentive compensation by 10 percent, as Lanterman believed he was authorized to do under the termination penalty clause of the consultancy agreement. Kirlan Venture also withheld $334,219 in stock from Regis' Kirlan Two InterNAP compensation as a holdback reserve fund, as authorized by the consultancy agreement. On May 18, 2000, Kirlan Venture filed the case now on appeal in state court, naming Regis and Tenneson as defendants. The complaint as finally amended alleged a variety of claims. The general theme was that Regis and Tenneson had stolen Kirlan Venture's property when they formed another capital venture fund, Digital Partners. Regis counterclaimed against Kirlan Venture, alleging the same claims as in his federal complaint. Eventually, Regis dismissed his federal suit.
The parties filed 11 motions and cross-motions for summary judgment, each containing multiple issues. On summary judgment, the court dismissed all of Kirlan Venture's claims against Regis and Tenneson. The court also granted Regis' motion for summary judgment on his claims for breach of contract, consequential damages, and prejudgment interest resulting from the delayed distribution of his Kirlan Two InterNAP incentive pay. The court ruled that Kirlan Venture was liable for $5,554,903 in damages for the decline in the value of the InterNAP stock during the 2-week delay in distribution of the InterNAP shares. The court also awarded Regis an additional $931,109 upon finding that Regis' termination penalty was one percent, not 10 percent.
The court proceeded to try the surviving claims for unpaid wages, delayed distribution, and declaratory judgment on the contract. The court ruled in favor of Regis on these claims. Including the damages found to be due on summary judgment, the court awarded Regis a total of $9,313,274 for withheld compensation on his contract and wage claims; $8,130,320 in statutory wage claim damages; and $1,092,670 in attorney fees and costs, totaling $18,536,264. The court also entered declaratory judgment in favor of Tenneson, and awarded him $179,498.51 in attorney fees and costs. This appeal followed.
Kirlan Two InterNAP Delay Claims
Kirlan Venture argues that the court erred in ruling on summary judgment that it was liable for the damages arising from the delay in distributing Regis' incentive compensation. When reviewing a grant of summary judgment, we engage in the same inquiry as the trial court. RAP 9.12; Harris v. Ski Park Farms, Inc., 120 Wn.2d 727, 737, 844 P.2d 1006 (1993). Summary judgment is appropriate only when, after reviewing all facts and reasonable inferences in the light most favorable to the nonmoving party and all questions of law de novo, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c); Wilson v. Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982).
The following facts were undisputed at summary judgment. On March 7, Kirlan Venture proposed three stock distribution options that would allow Regis to receive payment of his incentive compensation: (1) Kirlan Venture would sell a portion of Regis' shares, make a tax payment, and remit the balance; (2) Kirlan Venture would distribute all shares directly to Regis as independent contractor fees with no tax withholding; or (3) Kirlan Venture would submit to mediation. On March 13, Regis accepted Kirlan Venture's proposals to pay the compensation in the form of independent contractor fees and to mediate the dispute. But on March 17, Lanterman rescinded the proposals and insisted that Regis' carried interest shares be withheld by Kirlan Venture until the taxation dispute was resolved. On March 20, Regis requested by fax that Kirlan Venture distribute 70 percent of his InterNAP shares and escrow the remaining 30 percent to cover any potential tax liability. The cover letter warned Lanterman of his liability for withholding Regis' wages. Regis attached a draft motion to compel payment of his incentive compensation directly from Kirlan Two, in the event that they could not `execute an acceptable [distribution] agreement today'. On that same day, Kirlan Two distributed InterNAP shares to its limited partners, and transferred the carried interest, including Regis' share, to Kirlan Venture. But it did not distribute any shares to Regis. Between March 20 and 24, Kirlan Venture proposed and Regis approved and signed at least two draft distribution agreements for an interim distribution of his compensation. However, Lanterman refused to execute any of the distribution agreements. On March 29, Lanterman cancelled the mediation, notified Regis that there was no agreement forthcoming, and told Regis that he would litigate the issue instead. On April 3, Lanterman distributed 142,485 InterNAP shares to Regis, and retained the remaining 59,631 shares to make a tax deposit. By April 3, the value of Regis' shares had declined by $5,554,903, as compared to their value on the March 20 liquidity date. Kirlan Venture argues that Regis caused the delay in the distribution of the InterNAP stocks by disputing the tax character of the incentive compensation and filing a complaint in federal court. See Reynolds Metals Co. v. Electric Smith Const. Equip., 4 Wn. App. 695, 699, 483 P.2d 880 (1971) (A plaintiff may not recover for breach of contract for delay in performance where the plaintiff is the proximate cause of the delay). But, based on the undisputed facts, no reasonable finder of fact could have found find that Regis caused the delay in his compensation. Because Lanterman rescinded the `stock distribution options' he had previously proposed, and opted instead to withhold all of Regis' incentive compensation on March 17, Regis' March 20 threat to note a motion cannot be seen as causing the delay. Kirlan Venture had already caused it. The court did not err in granting summary judgment in favor of Regis.
Clerk's papers at 687.
Clerk's papers at 688.
Clerk's papers at 688.
Clerk's papers at 704.
Clerk's papers at 690-91.
Clerk's papers at 691; 706.
Clerk's papers at 692; 706.
Clerk's papers at 693.
In a related argument, Kirlan Venture contends that Regis caused the delay because he violated his contractual duty of good faith and fair dealing by disputing the tax characterization of the carried interest. See Badgett v. Security State Bank, 116 Wn.2d 563, 569, 807 P.2d 356 (1991) (`the duty of good faith does not extend to obligate a party to accept a material change in the terms of its contract'). Kirlan Venture characterizes Regis' dispute as trying to force Kirlan Venture to modify his consultancy contract to make him payable as a partner in the Kirlan Two fund. But the consultancy agreement did not set forth the tax character of the incentive compensation. And Kirlan Venture does not explain what terms would have had to be modified if Kirlan Venture had distributed Regis' incentive compensation on the date of liquidity. Therefore, even if Regis wrongfully claimed that he was payable as a partner, Kirlan Venture has not shown how this dispute would have forced a modification of the consultancy agreement. Kirlan Venture also argues that the court erred in awarding damages for the delay because Regis failed to mitigate his damages. See Young v. Whidbey Island Bd. Of Realtors, 96 Wn.2d 729, 732, 638 P.2d 1235 (1982) (an injured party must use such means as are reasonable under the circumstances to avoid or minimize the damages). But Regis demonstrated his willingness to accept an interim distribution pending resolution of their dispute. And this cannot be seen as anything but his attempt to mitigate possible damages caused by the fluctuating stock price. Because it was Lanterman who declined to enter into an interim distribution and cancelled the mediation, the court did not err granting summary judgment.
Measure of Damages for Delayed Distribution
At trial, the court awarded Regis damages for the delayed distribution of his incentive compensation measured by a loss in the value of the carried interest shares from the date of liquidity. See Frisch v. Victor Indus., 51 Wn. App. 377, 381, 753 P.2d 1000 (1988) (damages for the failure to deliver stock are properly based on the value of the stock at the date of the breach); Haft v. Dart Group Corp., 877 F. Supp. 896 (1995). The court awarded Regis these damages based on a conclusion that Kirlan Venture had `deprived him of any investment decision opportunity by withholding payment.'
Conclusion of law 8, in part.
Kirlan Venture contends that the court, in order to award damages based on loss of value of the shares, was required to first find that Regis would have sold his shares at a profit. This argument relies on Scully v. US WATS, Inc., 238 F.3d 497, 512 (3rd Cir. 2001). In Scully, the court found an employer liable for breach of employment contract for refusing to allow an employee to exercise stock options. In discussing the proper measure of damages, the court rejected the employee's argument that a damages award should be based on a presumption that the shares would be sold immediately at the end of the restricted period. Scully, 238 F.3d at 512. Kirlan Venture relies on this statement to support its proposition that the court must enter an additional finding. But Scully actually supports the trial court's ruling. It holds that the proper measure of damages for breach of contract is determined by the loss sustained or gain prevented at the time and place of breach, not by a presumption about when the shares would be sold. Scully, 238 F.3d at 510. Thus, Scully does not require the court to find that Regis would have sold his InterNAP shares at a profit as a prerequisite to awarding damages for the delay.
Wrongful Withholding of Wages
At trial, Regis and Tenneson prevailed on their claims for unpaid wages under the wrongful withholding of wages statute, RCW 49.52.050.
In regard to Regis' claims for unpaid and delayed incentive compensation, the court concluded that Kirlan Venture `willfully and with intent to deprive Regis of part of his wages paid Regis a lower wage than it was obligated to pay Regis by contract. [Kirlan Venture] has not established any bona fide dispute over the obligation to pay incentive compensation'. Based on its conclusion of willfulness, the trial court entered an award of statutory double damages in favor of Regis. See RCW 49.52.070 (an employer who willfully withholds wages `shall be liable . . . for twice the amount of the wages'). Kirlan Venture does not dispute that it withheld Regis' incentive compensation but argues that the court erred in concluding that the withholding was willful. Accordingly, Kirlan Venture contends it should not be held liable for exemplary damages and attorney fees under RCW 49.52.070(2). Kirlan Venture first argues that Regis knowingly submitted to Kirlan Venture's violation of the wage claims statute. Under RCW 49.52.070, an employer is not liable for double damages if the employee `has knowingly submitted to such violations.' But to have knowingly submitted, Regis must have deliberately and intentionally deferred to Kirlan Venture the decision of whether or when he would be paid. Chelius v. Questar Microsystems, Inc., 107 Wn. App. 678, 683, 27 P.3d 681 (2001). The court found that on several occasions Regis demanded a distribution of his incentive compensation upon liquidity of the fund, and put Kirlan Venture and Lanterman on notice that they would be liable for losses caused by delay. These findings, which Kirlan Venture has not shown to be unsupported by substantial evidence, are sufficient to support a conclusion that Regis did not knowingly submit to Kirlan Venture's withholding of his wages. Alternatively, Kirlan Venture argues that the court erred in concluding that there was no bona fide dispute about Regis' incentive compensation.
Conclusion of law 13, in part.
Findings of fact 12, 21.
In order for a dispute to be sufficient to preclude a finding of willful withholding, there must be a fairly debatable dispute over whether an employment relationship exists, or whether all or a portion of the wages must be paid. Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 159-60, 961 P.2d 371 (1998). Kirlan Venture contends that the court's oral ruling, in which it stated that `it was the better part of wisdom for [Kirlan Venture] not to make the distribution under [Regis' motion to compel payment]', refutes its later conclusion that there was no bona fide dispute. But a trial court's oral ruling cannot be used to impeach written findings and conclusions. City of Lakewood v. Pierce County, 144 Wn.2d 118, 127, 30 P.3d 446 (2001). Thus, the trial court's oral ruling does not compel this court to find error.
Report of the proceedings, December 17, 2002 at 1432.
Conclusion of law 13.
The findings of fact, which we treat as verities in the circumstances of this appeal, support the conclusion that there was no bona fide dispute about whether Kirlan Venture was obligated to pay all or a portion of Regis' incentive compensation at the time that payment was due. Prior to the liquidity date, Regis agreed to at least two different interim distribution plans that would allow Kirlan Venture to distribute his incentive compensation. Under Kirlan Venture's proposed plan, Regis would be liable for paying taxes on the compensation. Under Regis' plan, Kirlan Venture would retain 30 percent of his shares in an escrow account pending resolution of the tax dispute. Neither plan was affected by the tax characterization of the incentive compensation. Kirlan Venture has not shown how the disagreement about the tax characterization changed its obligation to distribute all or a portion of Regis' incentive compensation. Thus, we find no error.
In a related argument, Kirlan Venture contends that the court erred in finding that the employment agreements obligated Kirlan Venture to pay the incentive compensation upon liquidity of the fund because the agreements did not specify a date for payment. Kirlan Venture contends that, as the general partner of Kirlan One and Kirlan Two, it had the discretion to delay the distribution of Regis' and Tenneson's incentive compensation in order to provide the other limited partners the opportunity to liquidate their stocks before the fund managers. But, while the partnership agreements may have granted Kirlan Venture the discretion to distribute shares to the partners, the agreements did not affect Kirlan Venture's responsibilities under the fund managers' employment agreements. Indeed, Regis' and Tenneson's `salary and incentive compensation arose in connection with [their] employment relationship with [Kirlan Venture]', not Kirlan One and Kirlan Two. Thus, the discretion granted to Kirlan Venture in the partnership agreements does not provide a basis for finding that the trial court erred. Moreover, Kirlan Venture does not challenge the sufficiency of the evidence supporting the court's findings that a course of dealings established payment of incentive compensation upon liquidity of the fund. Unchallenged findings are verities on appeal. Matter of Estate of Lint, 135 Wn.2d 518, 531-32, 957 P.2d 755 (1998). And a course of dealings analysis is appropriate to fill in the voids of a contract. Puget Sound Financial, L.L.C. v. Unisearch, Inc., 146 Wn.2d 428, 437, 47 P.3d (2002) (parties' course of dealings established liability limitations not provided for in the contract). Thus, the court did not err in finding that Kirlan Venture was obligated to pay incentive compensation on the date of liquidity of the fund.
Finding of fact 4, in part.
Findings of fact 14, 15, and 16.
Regis' Claim for Additional Damages
On cross-appeal, Regis argues that the court erred in summarily dismissing his claim that he was additionally entitled to 10 percent ($1,269,412) of Kirlan Venture's profits from its direct investment in InterNAP. Regis characterizes Kirlan Venture's profits as `carried interest'. Regis was entitled to 10 percent of carried interest under his consultancy agreement. But carried interest is `that portion of the realized gains allocated to the partners that manage the fund without regard to their capital contribution.' Because Kirlan Venture was not a venture capital partnership fund, its profits from its direct investments were not carried interest. The court properly denied this claim. Regis' Termination Penalty
Finding of fact 4, in part.
Regis' consultancy agreement provided that he would receive 10 percent of the carried interest as incentive compensation. The agreement contained a termination penalty clause that would reduce his incentive pay if he were not employed by Kirlan Venture when his compensation became payable:
You further agree that the 10% amount you are to receive will be reduced by 1% if you are not employed with [Kirlan Venture] as an employee or consultant when the deal is terminated.
Exhibit 8.
Exhibit 8.
Kirlan Venture withheld 10 percent of Regis' incentive pay.
The court ruled that Regis' consultancy agreement was unambiguous and `provided a 1% (not 10%) reduction of his profit payment as a termination penalty.' The court awarded Regis $939,109, making up the difference between the 10 percent actually withheld and the one percent that the court ruled should have been withheld.
Finding of fact 5, in part.
Kirlan Venture argues that the court erred in finding the contract unambiguous. `A contract provision is ambiguous when its terms are uncertain or when its terms are capable of being understood as having more than one meaning.' Shafer v. Bd. of Trustees of Sandy Hook Yacht Club Estates, Inc., 76 Wn. App. 267, 275, 883 P.2d 1387 (1994). However, a contract provision is not ambiguous merely because the parties suggest opposite meanings; and we will not read ambiguity into a contract where it can reasonably be avoided. Mayer v. Pierce County Med. Bureau, Inc., 80 Wn. App. 416, 421, 909 P.2d 1323 (1995). Kirlan Venture suggests that when the phrase the `amount you are to receive' is read in context of the entire agreement, it could be read to mean Regis' percentage entitlement in the carried interest. We disagree.
There is nothing in the consultancy contract that suggests that the termination penalty's use of the phrase `the amount you are to receive' means anything besides the total amount that Regis was entitled to receive.
Because the terms of the termination penalty clause were unambiguous, extrinsic evidence is not admissible to vary or contradict the written language of the contract. Hollis v. Garwall, Inc., 137 Wn.2d 683, 693, 974 P.2d 836 (1999). Accordingly we have not considered the extrinsic evidence that Kirlan Venture argues supports its interpretation of the termination penalty clause. Tenneson's Termination Penalty
Tenneson's employment agreement authorized Kirlan Venture to reduce payment of his incentive compensation as follows:
50% of the `carried interest' distributions for all investments made vested immediately, subject to a 5% holdback to reserve for early portfolio losses or a departure by the new `President' earlier than is mutually agreeable.
Exhibit 12.
Exhibit 12.
Lanterman interlineated a clarification of this provision on the contract, `In the event that Bill Tenneson is not employed for a portion of the time a `carried interest' security is in the Portfolio, the carried interest will be reduced by 5% per year or part year.' The court found that this provision meant that Tenneson's `share of carried interest would be reduced by 5% each year or part year it was held if Tenneson was no longer employed by [Kirlan Venture]. Tenneson accepted and was bound by the inserted language.'
Exhibit 12.
Finding of fact 7, in part.
On cross-appeal, Tenneson contends that the term `departure' is ambiguous because it could refer to his choosing to leave the job, being terminated, or both, and that the ambiguity should be construed against Lanterman so that the provision is construed to apply only if he chose to leave the job. But the written clarification in the agreement's margin clearly states that the termination penalty applied if he `is not employed' with Kirlan Venture. We find no error.
Regis' Holdback Fund
Regis' consultancy agreement authorized Kirlan Venture to keep a percentage of Regis' incentive compensation shares as a holdback to ensure against future losses. Under this clause, Kirlan Venture withheld InterNAP shares, valued at $334,219, from Regis' Kirlan Two compensation distribution. Due to stock volatility, Regis asked Kirlan Venture to place the holdback shares in an escrow account so that he could manage the stocks. Kirlan Venture declined his request and did nothing to preserve the value of the shares as the prices for InterNAP shares decreased. The value of the holdback shares decreased to such an extent that in 2001 Kirlan Venture recalculated the holdback liability to be negative $200,000. To make up for this shortfall, Kirlan Venture withheld Regis' entire carried interest distribution of Kirlan One InterNAP stock. On summary judgment, Regis argued that Kirlan Venture breached its fiduciary duty to preserve the value of the holdback shares. The court ruled that Kirlan Venture was bound by a duty of `good faith and fair dealing' to `act in a way to preserve Mr. Regis' funds.' Kirlan Venture `is not allowed to sit by and allow assets to deteriorate or dissipate and then withhold more and more and more from each succeeding disbursement to be sure that there was a sufficient holdback to cover the amount of the uncompleted deals. nobody can predict what the market's going to do, but this market was clearly going down and down and down.' The court granted summary judgment and awarded Regis $251,845: the difference between the amount actually withheld and the current holdback liability. Kirlan Venture argues that the court erred in defining its duty to Regis. Kirlan Venture contends that it should have been held to the `prudent investor' standard of care of a trustee. See In re Estate of Cooper, 81 Wn. App. 79, 88, 913 P.2d 393 (1996) (a trustee must exercise the judgment and care under the circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs). Kirlan Venture argues that, under this standard, the fact that it retained 85,000 of its own 185,186 shares of InterNAP during the decline was evidence of its good faith. But Kirlan Venture's retention of a portion of its own InterNAP stocks was a matter of its own discretion it did not involve a trustee's duty to exercise judgment and care. Because Kirlan Venture does not explain how doing nothing with the holdback shares in the face of a declining market fulfilled its duty, either fiduciary or trustee, we cannot say that the trial court erred in granting Regis' motion for summary judgment.
Exhibit 8.
Clerk's papers at 3761.
Clerk's papers at 3761-62.
Clerk's papers at 6534-37.
Kirlan Venture's Theft of Fund Claims
Kirlan Venture's complaint alleged a number of `theft of fund' claims against Regis and Tenneson, based on the central allegation that they had stolen the follow on fund to Kirlan Two when they independently formed a venture capital fund, named Digital Partners. On defense motions for summary judgment, the trial court dismissed all of Kirlan Venture's `theft of fund' claims.
Kirlan Venture's complaint as finally amended included claims for misappropriation of trade secrets; breach of corporate opportunity doctrine; intentional interference with contractual relations and business expectancies; violation of 15 U.S.C. § 1125(a)(1); unfair business practices, RCW 19.86; common law unfair competition; civil conspiracy; conversion and destruction of company records; unjust enrichment and constructive trust; and defamation.
Kirlan Venture argues that the existence of material issues of fact precluded the court from summarily dismissing the `theft of fund' claims. To defeat a defense summary judgment motion, the plaintiff must raise a genuine issue of material fact as to all challenged elements of the claims. LaMon v. Butler, 112 Wn.2d 193, 197, 770 P.2d 1027 (1989). The prima facie case must consist of specific material facts that would allow a jury to find that each element of the claim exists. LaMon, 112 Wn.2d at 197. A defendant moving for summary judgment `can attempt to establish through affidavits that no material factual issue exists or, alternatively, the defendant can point out to the trial court that the plaintiff lacks competent evidence to support an essential element of his or her claim.' Guile v. Ballard Cmty. Hosp., 70 Wn. App. 18, 23, 851 P.2d 689 (1993). Regis and Tenneson, in their motions for summary judgment on the theft of fund claims, demonstrated that as to each of Kirlan Venture's claims, the record lacked proof of at least one essential element.
Although Kirlan Venture contends that the trial court was unaware of the proper standards to be used on summary judgment, and improperly allowed a trial by affidavit without cross-examination, we do not find this to be an accurate description of the procedure below. Kirlan Venture has not shown that it met its burden on summary judgment to respond by demonstrating the existence of evidence to prove the allegedly missing elements. Kirlan Venture's case on appeal consists of conclusory assertions. The brief fails to identify the elements that are in dispute and show how they could be proved at trial. The trial court properly dismissed the theft of fund claims.
Discovery Orders
Kirlan Venture challenges two court orders that limited the scope of its discovery into Digital Partners' investors and investments. We review a discovery order for an abuse of discretion. Howell v. Spokane Inland Empire Blood Bank, 117 Wn.2d 619, 629-30, 818 P.2d 1056 (1991). A trial court has broad discretion to manage the discovery process and, if necessary, to limit the scope of discovery. CR 26(b),(c); Rhinehart v. Seattle Times Co., 98 Wn.2d 226, 232, 654 P.2d 673 (1982). Matters to be discovered must be `relevant to the subject matter involved in the pending action'. CR 26(b)(1); Barfield v. City of Seattle, 100 Wn.2d 878, 886, 676 P.2d 438 (1984).
In two orders, the court directed Kirlan Venture to specify the investors and investments that it claimed were its property, and ordered that Kirlan Venture limit its discovery to only those investors and investments in which it claimed a proprietary interest. Since the court's orders followed the directive of CR 26(b)(1), its ruling was neither exercised on untenable grounds nor for untenable reasons. In the alternative, Kirlan Venture claims that the court arbitrarily selected the date beyond which Kirlan Venture would not be permitted to discover information about investors and investments. The order required Regis and Tenneson to produce documents or investor information if Kirlan Venture was able to make a showing that it conducted research in a particular company or investor prior to October 5, 1999. This date was not arbitrary; it was the date that Tenneson first proposed to form the follow on fund. There was no abuse of discretion.
Clerk's papers at 10293, 10739, 10741.
Clerk's papers at 10293.
Clerk's papers at 6919.
Morbeck Claims
During the course of the proceedings, several Kirlan Two partners brought a summary judgment motion for reimbursement of $232,285 in attorney fees that had been charged to Kirlan Two by Lanterman and Kirlan Venture. The trial court partially granted the motion, and awarded $104,992 as a prorated share of the attorney fees, plus $16,975 in prejudgment interest. Kirlan Venture argues that the award was in error inasmuch as Kirlan Venture had a good faith belief it was authorized to charge Kirlan Two for attorney fees incurred in defending against Regis' claims. See Opus Corp. v. Int'l Bus. Machine Corp., 141 F.3d 1261 (8th Cir. 1998) (business judgment rule).
Kirlan Venture hired one law firm to represent all the defendants in Regis' federal suit: Kirlan Venture, Kirlan One, Kirlan Two, and Lanterman. Kirlan Venture used the same firm to represent it in defending against Regis' counterclaims in the state case, which did not name Kirlan Two. Kirlan Venture did not apportion or account for the fees between the individual entities. Instead, between the filing of Regis' federal court suit on March 2000 and the staying of the action in September 2000, 72 percent of the fees were allocated to Kirlan Two and 28 percent to Kirlan One. None of the fees during this period were allocated to Kirlan Venture or Lanterman. Between October 2000 and Regis' dismissal of his federal claims in January 2001, 50 percent of the fees were allocated to Kirlan Two and 50 percent to Kirlan Venture. After Regis dismissed his federal claims, Kirlan Venture paid for all attorney fees.
The Kirlan Two partnership agreement authorized reimbursement of attorney fees only in connection with the operations of the fund:
The Partnership shall reimburse the General Partner [Kirlan Venture] for the following: (i) all costs and expenses incurred by the General Partner or its Affiliates in connection with the operations of the Partnership, including, any litigation expenses.
Clerk's papers at 1147.
Clerk's papers at 1147.
While the partnership agreement did authorize Kirlan Venture to charge Kirlan Two for expenses of litigation while the partnership was a subject of this litigation, it did not authorize Kirlan Venture to continue to allocate 50 percent of the attorney fees to Kirlan Two after the federal case was stayed. And this alone is sufficient to support the trial court's ruling that Kirlan Venture must pay the Kirlan Two partners a prorated share of the fees. We find no error.
Personal and Marital Community Liability
Kirlan Venture argues that the trial court erred in entering judgment personally against Lanterman under the fraudulent conveyance statute, RCW 19.40.041. The court concluded that Lanterman solely made the decision not to distribute carried interest profits to Regis when shares in Kirlan I and Kirlan II became freely tradable or otherwise liquid and thereby breached KVC's contract with Regis. Lanterman then directed dividend distributions from KVC to himself after Regis's lawsuit was filed without regard to whether such distributions would leave KVC without assets sufficient to meet known liabilities. To the extent these dividends left KVC unable to meet its obligations, they constitute fraudulent conveyances. Lanterman and his marital community have personal liability for amounts due Regis.
Conclusion of law 7, in part.
In the same conclusion, the court also cited two cases supporting different bases for imposing personal liability. See Olympic Fish Products, Inc. v. Lloyd, 93 Wn.2d 596, 601, 611 P.2d 737 (1980) (a corporate officer who induces the corporation to violate a contractual relation in bad faith may be held personally liable for the damages ensuing from the interference); Northwest Airlines, Inc. v. Ticket Exchange, Inc., 793 F. Supp. 976, 980 (W.D.Wash. 1992) (an agent may be held personally liable for the tortious practices of his company when he has been unjustly enriched). And in a separate conclusion, Conclusion of law 13, the court restated that Lanterman is personally liable under the fraudulent transfer statute, and also cited Ellerman v. Centerpoint Prepress, Inc., 143 Wn.2d 514, 522-23, 22 P.2d 795 (2001) (personal liability for an employer's nonpayment of wages attaches to an agent who exercises control over the payment of wages). Because these three additional unchallenged bases support the trial court's entry of judgment against Lanterman in his personal capacity, we need not address the effect of the fraudulent conveyance statute.
Lanterman also argues that the court erred in entering judgment against his marital community. Property acquired during marriage is presumptively community property. Marriage of Hurd, 69 Wn. App. 38, 50, 848 P.2d 185 (1993). This presumption can only be rebutted by clear and convincing evidence. Hurd, 69 Wn. App. at 50. Lanterman testified that his interest in Kirlan Venture was subject to a separate property agreement and he deposited his $35 million distribution from Kirlan Venture into an account in his own name. However, this alone is not sufficient to rebut the presumption of community property. The name in which property is held does not determine character of property. Hurd, 69 Wn. App. at 51. The $35 million distribution was paid to Lanterman while he was married. For whatever reason, Lanterman did not enter the separate property agreement into evidence. As the trial court noted: `I would be very surprised if any two people as successful and bright as Kirk and Janet Lanterman were married, that they got married without a separate property agreement or some sort of prenuptial agreement, but that was not in evidence. And I don't know what the terms of that are.' Lanterman failed to rebut the presumption of community property. Given the evidence available to the trial court, the court did not err in entering judgment against Lanterman's marital community.
Report of the proceedings 948-49.
Report of the proceedings, March 1, 2002 at 82.
Prejudgment Interest
At summary judgment, the court awarded prejudgment interest on the awards to Regis for breach of contract based on the delay in the incentive compensation distribution. But after trial, the court withdrew the award of prejudgment interest: `damages owing by [Kirlan Venture] and Lanterman include exemplary damages pursuant to remedial employment statutes. Regis is not entitled to prejudgment interest.' On cross-appeal, Regis argues that the court erred in entering this conclusion.
Conclusion of law 14, in part.
Kirlan Venture contends, however, that the court ruled correctly because prejudgment interest is not available where the court has already awarded exemplary damages. Kirlan Venture relies on Ventoza v. Anderson, 14 Wn. App. 882, 897, 545 P.2d 1219 (1976) and JDFJ Corp. v. International Raceway, Inc., 97 Wn. App. 1, 10, 970 P.2d 343 (1999). In both cases, the court held that because the treble damages in a timber trespass case brought under RCW 64.12.030 are punitive in nature, an award of prejudgment interest would not serve to compensate the plaintiff, but instead would be a windfall. The punitive treble damage statute contains no provision for interest, and `the statute cannot be extended by implication to provide for interest upon any portion of the award. Interest is generally disallowed when recourse upon a punitive statute is sought.' Ventoza, 14 Wn. App. at 897.
The Ventoza court relied on Blake v. Grant, 65 Wn.2d 410, 413, 397 P.2d 843 (1964). In Blake, another timber trespass case, the trial court awarded treble statutory damages and prejudgment interest. Because the appellant did not challenge the propriety of the award of prejudgment interest on treble damages, the Supreme Court declined to decide the issue. But the court addressed the issue in extended dicta. The court noted that prejudgment interest is generally disallowed on punitive damages. Blake, 65 Wn.2d at 413; see also, 22 Am. Jur. Damages sec. 818 (1988) (`Courts should not add prejudgment interest, because damages statutes of a penal nature fix the maximum amount to be recovered.'); annotation, Right to Prejudgment Interest on Punitive or Multiple Damages Awards, 9 A.L.R. 5th sec. 63 (1993) (majority of courts disallow the recovery of prejudgment interest on punitive and statutory multiple damages because prejudgment interest is compensatory, while multiple damages and punitive damages are essentially meant to punish or deter, which is noncompensatory); Restatement (Second) of Torts sec. 913, cmt. d (1965) (prejudgment interest is not awardable on punitive damages). Regis argues that prejudgment interest should nevertheless be recoverable when the action is for a wage claim. Regis relies on an Idaho wage claim case, De Witt v Medley, 117 Idaho 744, 791 P.2d 1323 (1990). In DeWitt, the court held that prejudgment interest is recoverable on the un-multiplied part of a treble damages award. But Ventoza refutes Idaho's approach. The Ventoza court stated that `interest may not be granted upon either the compensatory or the punitive portion of the award.' Ventoza, 14 Wn. App. at 897. Regis also cites a Washington wage claim case, Paul v. All-Alaskan Seafoods, Inc., 106 Wn. App. 406, 427-28, 24 P.2d 447 (2002). In Paul, the court ruled that Washington law concerning prejudgment interest was in conflict with the federal law; therefore, the application of Washington law was preempted. Paul, 106 Wn. App. at 427. The court affirmed the award of prejudgment interest based on federal maritime law. Paul is not instructive on Washington state law. Following Blake, Ventoza, and JDFJ Corp., we affirm the ruling denying Regis prejudgment interest on the wage claim award.
Attorney Fees and Costs
Kirlan Venture challenges the court's awards of attorney fees and costs in favor of Regis and Tenneson. In Conclusion of law 12, the court held that both Regis and Tenneson were entitled to attorney fees and costs under RCW 49.48.030 (attorney fees for recovery of wages). In Conclusion of law 13, the court held that Regis was additionally entitled to attorney fees and costs under RCW 49.52.070 (attorney fees for recovery of wrongfully withheld wages). The court awarded Regis $1,092,671 and Tenneson $179,498.51 in attorney fees and costs.
`In any action in which any person is successful in recovering judgment for wages or salary owed to him, reasonable attorney's fees, in an amount to be determined by the court, shall be assessed against said employer or former employer.' RCW 49.48.030.
`Any employer who shall [wrongfully withhold wages] shall be liable in a civil action by the aggrieved employee to judgment for twice the amount of the wages unlawfully rebated or withheld by way of exemplary damages, together with costs of suit and a reasonable sum for attorney's fees'. RCW 49.52.070.
In regard to Regis' award of fees, Kirlan Venture argues only that if this court reverses the trial court's conclusions of liability under RCW 49.48.030 and RCW 49.48.070, this court must likewise reverse the award of fees. Because we affirm the findings of liability for Kirlan Venture's wrongfully withholding Regis' wages, we likewise affirm the award of fees.
In regard to Tenneson's award of attorney fees, Kirlan Venture argues that a court may not award attorney fees for an action to recover wages unless there is an actual judgment for `wages or salary owed to him'. RCW 49.48.030. Kirlan Venture contends that because the court's ruling on Tenneson's future distributions was prospective, it was not strictly a judgment for wages or salary.
But this court has held that a court may award attorney fees under RCW 49.48.030 where a judgment is obtained for any type of compensation due by reason of employment, including future wages. See Hodge v. Development Services of America, 65 Wn. App. 576, 583, 828 P.2d 1175 (1992) (denying employer's argument that a claim for loss of future wages does not allow employee to recover attorney fees under statute); see also Abels v. Snohomish County Pub. Util. Dist. 1, 69 Wn. App. 542, 558, 849 P.2d 1258 (1993) (a judgment requiring employer to pay wages in the future involves the payment of compensation for employment, and thus falls within the broad definition of `compensation due to an employee by reason of employment). Here, the court's declaratory judgment required Kirlan Venture to pay Tenneson's incentive compensation upon liquidity of the fund. This judgment entitled Tenneson to his future compensation by reason of his employment agreement. Thus, the award of attorney fees was justified. Kirlan Venture also argues that the court erred in awarding `expanded costs' totaling $407,000 to Regis and Tenneson. Kirlan Venture contends that an award of costs is strictly limited to those enumerated in RCW 4.84.010. See Hume v. Am. Disposal Co., 124 Wn.2d 656, 674, 880 P.2d 988 (1994) (`Costs have historically been very narrowly defined, and RCW 4.84.010 limits cost recovery to a narrow range of expenses such as filing fees, witness fees, and service of process expenses.'). But the court did not award expanded costs under RCW 4.84.010. In Conclusion of law 6, the court stated that an award would be made for `expert witness fees and other necessary fees, costs and expenses of litigation' under Panorama Village Condominium Assoc. Board of Directors v. Allstate Ins. Co., 144 Wn.2d 130, 142, 26 P.3d 910 (2001) (in certain circumstances, a court may `additionally award other reasonably necessary expenses of litigation based upon such equitable factors as the court determines are appropriate). Because Kirlan Venture fails to show that the award was improper under Panorama, it cannot be said that the court erred in making the award.
We affirm the trial court's award of fees and costs, and grant Regis' and Tenneson's request for attorney fees on appeal subject to their compliance with RAP 18.1.
Kirlan Venture filed a CD-Rom containing the parties' appellate briefs with hyperlinks to the record. Finding that some of the hyperlinks linked to the wrong documents, Regis filed a motion to strike. Several motions on this issue were filed with the court. On February 25, 2003, Kirlan Venture submitted a corrected CD-Rom. Regis has not indicated any errors with the corrected CD-Rom. It appears that all parities are now satisfied with the state of the record as far as the CD-ROM is concerned. Therefore, this court will not rule on the motions.
Affirmed.
SCHINDLER and COX, JJ., concur.