Rogerson Hiller Corp. v. Port of Port Angeles
Court of Appeals Division II
State of Washington
Opinion Information Sheet
Docket Number: 22064-4-II
Title of Case: Rogerson Hiller Corp, Michael J Rogerson
v.
Port of Port Angeles, etal
File Date: 08/20/1999
SOURCE OF APPEAL
----------------
Appeal from Superior Court of Clallam County
Docket No: 95-2-00080-3
Judgment or order under review
Date filed: 05/09/1997
Judge signing: Hon. Kenneth D. Williams
JUDGES
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Authored by David H. Armstrong
Concurring: Karen G. Seinfeld
Carroll C. Bridgewater
COUNSEL OF RECORD
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Counsel for Appellant(s)
Charles K. Wiggins
Attorney At Law
241 Madison Ave N
Bainbridge Is, WA 98110
Counsel for Respondent(s)
Malcolm L. Edwards
Edwards Sieh Hathaway Smith & Goodfriend
701 5th Ave Ste 7170
Seattle, WA 98104
Bruce W. Hilyer
Law Offices of Bruce W. Hilyer
110 Main St Ste 101
Edmonds, WA 98020
Catherine W. Smith
Edwards Sieh Smith & Goodfriend
701 5th Ave Ste 7170
Seattle, WA 98104
Howard M. Goodfriend
Edwards Sieh Smith & Goodfriend P.S.
701 5th Ave Ste 7170
Seattle, WA 98104
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
ROGERSON HILLER CORPORATION, a No. 22064-4-II
California corporation and
AEROBOND CORPORATION, a Michigan
corporation
Appellants,
v.
PORT OF PORT ANGELES, a Washington
municipal corporation; W. JOE
HAWE, Sheriff of Clallam County,
Washington,
Defendants,
and
NORTHWEST COMPOSITES, INC., a
Washington corporation; R. ERDMAN
TRUCKING CO., INC., a Washington
corporation,
Respondents,
MICHAEL J. ROGERSON, individually, PUBLISHED OPINION
and AEROCOMPOSITES CORPORATION, a
California corporation,
Appellants. Filed:
ARMSTRONG, J. -- Michael Rogerson is the sole shareholder of Rogerson
Aircraft Corporation (RAC). RAC, in turn, is the sole shareholder in
several related aircraft corporations. One of these corporations,
Aerocomposites, leased space from the Port of Port Angeles. The Port
ousted Aerocomposites when it failed to make lease payments. The Port also
seized equipment in the leased space and, after obtaining a judgment for
back rent, scheduled a sheriff's sale of the equipment. At the sale, a
representative of Rogerson announced to the assembled crowd that the
equipment was actually owned by Aerobond, another Rogerson corporation, and
that Michael Rogerson personally had a security interest in the equipment.
Nevertheless, Northwest Composites, Inc. purchased the equipment at the
sheriff's sale for $180,000. Aerobond and Rogerson Hiller, another
Rogerson corporation, then sued the Port, the sheriff, and Northwest
Composites to recover the equipment. After an advisory jury found that
Aerocomposites owned the equipment, the trial court ruled that the separate
legal status of Rogerson and his corporations would be disregarded;
accordingly, Rogerson's security interest was extinguished by merging with
the corporations' fee ownership of the equipment. Finally, the trial court
awarded attorney's fees against the corporations and Michael Rogerson for
bad faith in maintaining the actions. We reverse the trial court's
judgment extinguishing Rogerson's security interest and the award of
attorney's fees. But we remand for a hearing on whether Rogerson and the
Port intended to include Rogerson's security interest in his release of any
claim to title to the equipment.
FACTS
In 1975 Michael Rogerson started RAC, which soon acquired or created
other aircraft industry corporations, including Rogerson Hiller,
Aerocomposites, and Aerobond. The corporations had the same officers and
directors. And the trial court found that the corporations mingled their
finances, banking transactions, employee savings plans and inventories.
The court also found that Michael Rogerson "dominated the Rogerson Group"
and disregarded the separation between corporations and himself.
In 1985, the Port of Port Angeles and Rogerson contracted for the
"composites division" of Rogerson Aircraft to be located in Port Angeles.
The Port issued industrial revenue bonds to build a plant and acquire
equipment for manufacturing operations. Aerocomposites, Rogerson Hiller,
and Aerobond then leased space and acquired equipment through RAC with the
bond funds.
The Tokai Bank of California financed all of Rogerson's corporations.
In 1990, the bank extended credit to the corporations in the amount of
$13.5 million. Michael Rogerson personally guaranteed the loans and had
signature authority on the loans and various revolving accounts. Tokai
also took security interests in the Rogerson corporations' assets,
including the equipment in Aerocomposites' possession in Port Angeles.
In 1994, the Port gave notice to the Rogerson entities located in Port
Angeles to vacate. Rogerson Hiller and Aerobond sold assets in their
possession to pay creditors. Aerocomposites was closed by the sheriff on
July 18, 1994, and the Port seized the assets remaining in Aerocomposites'
possession. The Port obtained an unlawful detainer judgment against
Aerocomposites on October 27, 1994, in the amount of $248,562.82 (excluding
attorney's fees).
The Port then scheduled a sheriff's sale of the equipment to satisfy
the judgment for unpaid rent. Before the sale, the Port attempted to
purchase the Tokai Bank's security interest in the equipment. Instead,
Tokai Bank transferred its security interest to Rogerson personally. The
transfer was part of a larger resolution of credit agreements in which RAC
assigned Tokai its expected interest in $800,000 in proceeds from an escrow
account with an RAC customer in exchange for a $600,000 loan from Tokai.
Rogerson sent Tokai two checks dated November 21, 1994 and December 9,
1994, each for $25,000. The checks were returned with a letter stating
that Tokai was still awaiting the assignment of the escrow funds. The
checks were again sent to Tokai on January 19, 1995, the date of the
sheriff's sale, and were endorsed by the bank on January 20, 1995. The
"Assignment" agreement was dated December 14, 1994. The trial court found
that Rogerson personally borrowed the $50,000 from RAC without adequate
documentation, that Rogerson had no intention of foreclosing against the
equipment, that the underlying loan from Tokai substantially exceeded
Rogerson's payment, and that Rogerson purchased the security interest to
avoid payment of the Port's judgment.
The day before the sale, Aerocomposites and Rogerson Hiller's
corporate counsel wrote the Port that the assets the Port intended to sell
at the sheriff's sale were not owned by Aerocomposites. And at the
sheriff's sale, Rogerson Group attorney Lawrence Hard announced that (1)
many items listed were not the property of Aerocomposites, (2) that Tokai
Bank had a preexisting security interest in the property, and (3) that the
security interest had been assigned to Michael Rogerson. Northwest
Composites, Inc., submitted the winning bid of $180,000.
On January 30, 1995, Rogerson Hiller and Aerobond sued the Port,
Northwest Composites and others for declaratory relief, conversion, and
replevin. Northwest joined Michael Rogerson and Aerocomposites, alleging
that the Rogerson group's corporate form should be disregarded.
A jury found that Aerocomposites owned the equipment and that Michael
Rogerson was not a "bona fide purchaser" of the security interest. The
trial court disregarded the corporate entity and ruled that Rogerson was
precluded by the doctrine of merger from enforcing any security interest in
the equipment" The court awarded the Port a judgment in the amount of
$229,500; Rogerson and the Port later settled the Port's judgment.
The trial court awarded Northwest Composites attorney's fees against
Rogerson Hiller, Aerobond, and Michael Rogerson in the amount of $244,135.
This award was based upon Rogerson's "bad faith" in pursuing the claim
after Aerocomposites filed its 1994 California corporate tax return (filed
on December 20, 1995). The tax return showed that Aerocomposites took a
deduction for a "seizure of assets" in the exact amount of the purchase
price of the equipment sold at the sheriff's sale. Although Rogerson
contended that the entry did not refer to the Port Angeles assets, the
trial court found that it did and that prosecuting a claim of corporate
ownership by Rogerson Hiller after Aerocomposite took the deduction
conclusively established Rogerson's bad faith.
The Port and Rogerson then settled and Rogerson and his corporations
waived "any claim to title to all property which has been the subject of
this litigation . . . ." On appeal, Rogerson contends that the trial court
erred in disregarding the corporate form, extinguishing Michael Rogerson's
security interest, and awarding attorney's fees for "bad faith."
ANALYSIS
A. Piercing the Corporate Veil
The trial court disregarded the separate legal status of Rogerson and
his various corporations: (1) to award attorney's fees against Michael
Rogerson personally, as well as Rogerson Hiller and Aerobond; and (2) to
extinguish Rogerson's claimed security interest in the equipment by merging
the security interest Rogerson got from Tokai with the fee ownership of the
equipment held by one of Rogerson's corporations.
Corporate disregard requires proof of two elements: "First, the
corporate form must be intentionally used to violate or evade a duty;
second, disregard must be 'necessary and required to prevent unjustified
loss to the injured party.'" Meisel v. M & N Modern Hydraulic Press Co.,
97 Wn.2d 403, 410, 645 P.2d 689 (1982) (quoting Morgan v. Burks, 93 Wn.2d
580, 587, 611 P.2d 751 (1980)). The first element requires a finding of an
abuse of the corporate form. Meisel, 97 Wn.2d at 410. The second element
requires that the abuse caused harm to the party seeking relief so that
disregarding the corporate form is necessary. Meisel, 97 Wn.2d at 410.
In disregarding the corporate form, the court exercises its equitable
powers. Truckweld Equip. Co., Inc. v. Olson, 26 Wn. App. 638, 643, 618
P.2d 1017 (1980); see also Thomas V. Harris, Washington's Doctrine of
Corporate Disregard, 56 Wash. L. Rev. 253, 263 (1981). We review the facts
underlying corporate disregard for substantial evidence. Truckweld, 26 Wn.
App. at 643. But we review de novo the legal conclusions drawn to support
corporate disregard. Harris, supra at 271-75.
Rogerson does not challenge the sufficiency of the evidence. Rather,
he argues, in part, that the trial court erred in disregarding the
corporate entity because neither he nor any of his entities owed a duty to
Northwest. The trial judge concluded that "Rogerson and the Rogerson group
owed a duty to the Port, Sheriff and Northwest Composites not to misuse the
corporate form of the Rogerson Group." We disagree.
"'{D}uty may arise from common law and equity, contract or statute.'"
Morgan Bros., Inc. v. Haskell Corp., Inc., 24 Wn. App. 773, 778, 604 P.2d
1294 (1979) (quoting Charles Horowitz, Disregarding the Entity of Private
Corporations, 15 Wash. L. Rev. 1, 11 (1940)). In J.I. Case Credit Corp. v.
Stark, 64 Wn.2d 470, 478, 392 P.2d 215 (1964), the corporate forms of a
machinery manufacturer and its wholly owned financing corporation were
disregarded to enforce a contract warranty to the machinery purchaser. In
Culinary Workers and Bartenders Union No. 596 v. Gateway Cafe, Inc., 91
Wn.2d 353, 366-67, 588 P.2d 1334 (1979), 642 P.2d 403 (1982), the corporate
form was disregarded to enforce a contract between the disregarded
corporation and a union. In Morgan Bros., although not discussed, the duty
owed was based upon a personal injury tort judgment against the
corporation. See Morgan Bros., 24 Wn. App. at 774, 778-79.
Although Aerocomposites owed the Port a duty under the lease to pay rent,
Northwest was not a party to that contract and had no rights under the
contract. In addition Northwest was not misled by any of Rogerson's
financial manipulations because it was not aware of them. And, Northwest
claims no misrepresentation as to the security interest assigned to
Rogerson by Tokai. Indeed, Northwest was told of the claimed security
interest before it bid on the equipment. Moreover, although Rogerson may
have acquired the security interest by manipulating the loan agreement with
Tokai, the security interest was a valid, properly recorded interest.
But Northwest argues that it was a creditor of Aerocomposites and duty
flows from this relationship. Duty has been found in favor of a creditor
and the corporate form disregarded where necessary to prevent a fraud on
the creditors. See Roderick Timber Co. v. Willapa Harbor Cedar Prods.,
Inc., 29 Wn. App. 311, 315, 627 P.2d 1352 (1981). But here, Northwest's
status as creditor was totally unrelated to its purchase of equipment at
the sheriff's sale. Northwest did not bid at the sale in its role as
creditor. Further, any wrongful depletion of Aerocomposites' corporate
assets to the detriment of creditors was not the cause of harm to Northwest
from the sale. That harm was caused solely by the security interest on the
equipment.
The trial court's conclusion that the duty arose from the misuse of
the corporate form simply eliminates the essence of the first element of
corporate disregard, misuse of the corporate form to avoid a duty owed to
another. See Meisel, 97 Wn.2d at 410. If duty were to arise from abuse of
the corporate form alone, the second part of the first element, "to avoid a
duty owed," would be redundant. Duty would always be created by an abuse
of the corporate form such as commingling of the corporate interests. But
the law requires a showing of both disregard of the corporate form and that
the disregard was done to avoid a duty owed to another. Morgan, 93 Wn.2d
at 585; see Meisel, 97 Wn.2d at 410. We conclude that because neither
Rogerson nor any of his corporations owed a duty to Northwest as a
purchaser at the sheriff's sale, the trial court erred in disregarding the
corporate forms of the various Rogerson entities to extinguish the security
interest transferred by Tokai Bank to Rogerson.1 Because of our decision
on corporate disregard, we need not discuss the issues raised as to merger.
B. Attorney's Fees
1. Bad Faith
"Attorney fees may be awarded only if authorized by 'contract, statute
or a recognized ground in equity'." Bowles v. Department of Retirement
Sys., 121 Wn.2d 52, 70, 847 P.2d 440 (1993) (quoting Painting & Decorating
Contractors of Am., Inc. v. Ellensburg Sch. Dist., 96 Wn.2d 806, 815, 638
P.2d 1220 (1982)). The parties concede that no statute or contract
authorizes an award of attorney's fees. But the trial court awarded fees
on the equitable grounds of Rogerson's "bad faith."
Although a number of cases have questioned the existence of bad faith
as a basis of an attorney's fee award,2 the Washington Supreme Court has
recently confirmed that "bad faith litigation can warrant the equitable
award of attorney fees." In re Recall of Pearsall-Stipek, 136 Wn.2d 255,
267 & n.6, 961 P.2d 343 (1998) (citations omitted). But Washington case
law provides little precedent for what constitutes bad faith.
In the federal courts, three types of bad faith conduct have warranted
attorney's fees: (1) prelitigation misconduct; (2) procedural bad faith;
and (3) substantive bad faith. Jane P. Mallor, Punitive Attorney's Fees
for Abuses of the Judicial System, 61 N.C.L. Rev. 613, 632-46 (1983); Note,
Attorneys' Fees - Nemeroff v. Albeson and the Bad Faith Exception to the
American Rule, 59 Tul. L. Rev. 1519, 1524 (1984).
Prelitigation misconduct refers to "obdurate or obstinate conduct that
necessitates legal action" to enforce a clearly valid claim or right.
Mallor, supra at 632; see also Jay E. Rosenblum, The Appropriate Standard
of Review for a Finding of Bad Faith, 60 Geo. Wash. L. Rev. 1546, 1549
(1992). For example, the Fourth Circuit awarded attorney's fees for bad
faith to a class of children and their parents when they were forced to sue
the school district to implement desegregation following Brown v. Board of
Education3. Bell v. School Bd., 321 F.2d 494, 500 (1963). The award of
attorney's fees for prelitigation misconduct can be compared to "a remedial
fine imposed by a court for civil contempt" in that the party acting in bad
faith is wasting private and judicial resources. Mallor, supra at 633.
This type of bad faith was recognized, but not applied, by our Supreme
Court in State ex. rel. Macri v. City of Bremerton, 8 Wn.2d 93, 105, 111
P.2d 612 (1941) (quoting Guay v. Brotherhood Bldg. Ass'n, 87 N.H. 216, 177
A. 409, 413, 97 A.L.R. 1053 (1935)).
Procedural bad faith is unrelated to the merits of the case and refers to
"vexatious conduct occurring during the course of litigation." Mallor,
supra at 644. In Lipsig v. National Student Mktg. Corp., 663 F.2d 178, 181
(D.C. Cir. 1980), bad faith attorney's fees were upheld against a plaintiff
for dilatory tactics during discovery, failure to meet filing deadlines,
misuse of the discovery process, and misquoting or omitting material
portions of documentary evidence. The purpose of this type of award is "to
protect the efficient and orderly administration of the legal process."
Mallor, supra at 644. In State v. Harris, 95 Wn. App. 741, 977 P.2d 621
(1999), Division One recognized that this type of bad faith could support
the award of attorney's fees:
{W}e hold that a trial court's inherent authority to sanction litigation
conduct is properly invoked upon a finding of bad faith. A party may
demonstrate bad faith by, inter alia, delaying or disrupting litigation.
Chambers v. NASCO, Inc., 501 U.S. 32, 46, 111 S. Ct. 2123, 115 L. Ed. 2d 27
(1991). The court's inherent power to sanction is "governed not by rule or
statute but by the control necessarily vested in courts to manage their own
affairs so as to achieve the orderly and expeditious disposition of cases."
{Chambers, 501 U.S. at 43} (citation omitted). Sanctions may be
appropriate if an act affects "the integrity of the court and, {if} left
unchecked, would encourage future abuses." Gonzales v. Surgidev, 120 N.M.
151, 899 P.2d 594, 600 (1995){.}
Harris, 977 P.2d at 625.
Substantive bad faith, the type alleged here, occurs when a party
intentionally brings a frivolous claim, counterclaim, or defense with
improper motive. Mallor, supra at 638, 641-42; see Pearsall-Stipek, 136
Wn.2d at 267. In Pearsall-Stipek, the trial court awarded attorney's fees
for bad faith to an elected official who was the subject of five recall
petitions. The petitioner submitted one recall petition based on charges
that were held to be insufficient in a prior judicial proceeding and
another petition based on new charges that were also held to be
insufficient. Pearsall-Stipek, 136 Wn.2d at 259, 265. While recognizing
that the court's "inherent equitable powers authorize the award of
attorney's fees in cases of bad faith," the Supreme Court reversed the fee
award because there was no finding of "bad faith." Pearsall-Stipek, 136
Wn.2d at 266. Bringing a frivolous claim is not enough, there must be
evidence of an "intentionally frivolous {claim} brought for the purpose of
harassment." See Pearsall-Stipek, 136 Wn.2d at 266-67.4 Because there was
no finding of improper motive, the trial court abused its discretion in
awarding fees. Pearsall-Stipek, 136 Wn.2d at 267.
Here, the trial court found that "the tax deduction taken by Aerocomposites
. . . was inconsistent with the position taken by Michael Rogerson and the
Rogerson Group on the central issue in this litigation{,}" the ownership of
the equipment. Based on this finding and "a pattern of disregard for the
separation of corporate entities" the trial court concluded that Rogerson
acted in bad faith. We disagree.
Because we have held that Rogerson owed no duty to Northwest to maintain a
separation between the corporate entities, Rogerson's alleged misuse of the
corporate form cannot be the basis for a bad faith award of attorney's
fees. Thus, the sole issue is whether claiming that Rogerson Hiller owned
the equipment, while simultaneously filing a tax return that took a
deduction for "seizure of corporate assets" on behalf of Aerocomposites,
constitutes bad faith.
The issue of ownership of the equipment was hard fought. Ultimately the
trial court, believing that the California income tax return impeached
Rogerson, rejected his claim that Rogerson Hiller owned the equipment. But
nothing in the trial court's decision indicates that Rogerson brought a
frivolous claim of ownership to harass Northwest or for other improper
motive. In fact, Rogerson's witnesses attempted to explain that the
equipment mentioned in the tax return was not the equipment at issue. The
trial court did not find the testimony credible. But many if not most
trials turn upon which party is the most credible. And this decision
frequently comes down to deciding that a party is simply not believable on
the principal issue. The conduct here does not rise to the level of bad
faith required by Pearsall-Stipek. We recognize that the trial court did
not have the benefit of the Pearsall-Stipek decision, but based on that
decision we conclude that the trial court abused its discretion in awarding
attorney's fees for bad faith.
2. ABC Theory
Alternatively, Northwest contends that they are entitled to attorney's
fees under the equitable "ABC" doctrine. The elements of this claim are:
"(1) a wrongful act or omission by A toward B; (2) such act or omission
exposes or involves B in litigation with C; and (3) C was not connected
with the initial transaction or event, viz., the wrongful act or omission
of A toward B." Manning v. Loidhamer, 13 Wn. App. 766, 769, 538 P.2d 136
(1975).
According to Northwest, "Rogerson wrongfully asserted an interest in
the equipment acquired by Northwest Composites at the sheriff's sale in
this declaratory judgment action. As a result, Northwest Composites was
forced to both defend and to assert its paramount title to the equipment in
litigation with Rogerson Hiller and Aerocomposites."
This argument confuses the roles of the parties. Rogerson did not
claim to own the equipment. Rogerson Hiller claimed ownership. And this
claim was made directly against Northwest. No third party was involved,
and Rogerson cannot be considered a third party because, to the extent he
was involved in this claim, it was on behalf of Rogerson Hiller.
Similarly, Rogerson's claim was to a security interest in the equipment and
no third party was involved in that claim.
We conclude that Northwest is not entitled to an award of attorney's fees
under either of the equitable theories of bad faith or the ABC doctrine.
But we remand for a hearing by the trial court on the issue of what the
Port and Rogerson intended in their settlement. Rogerson argues that his
release of any claim to title to the property does not include the security
interest. Northwest contends that the language clearly includes the
security interest and that Rogerson waived any claim to the security
interest. We cannot resolve the issue on the language of the document
alone. The intent of the parties must be determined by the circumstances
surrounding execution of the agreement. See Berg v. Hudesman, 115 Wn.2d
657, 667, 801 P.2d 222 (1990). Although Northwest was not a party to the
agreement, Northwest and the Port dismissed mutual cross-claims in reliance
on the agreement. Under these circumstances, Northwest is entitled to a
hearing on the question of what was intended by Rogerson and the Port in
their settlement agreement.
We reverse the judgment extinguishing Rogerson's security interest in the
equipment and the award of attorney's fees to Northwest. We remand for a
hearing to determine the intent of the parties to the settlement agreement
between the Port and Rogerson. If the court finds that the parties
intended to include the security interest in the settlement, Rogerson will
have released or waived any claim to a security interest in the equipment
Northwest purchased.
Armstrong, J.
We concur:
Seinfeld, J.
Bridgewater, C.J.
1 Because the issue is not before us, we express no opinion as to the value
of the security interest, i.e., whether it is the $50,000 paid for it or
the $150,000 recited in the purchase agreement.
2 Dempere v. Nelson, 76 Wn. App. 403, 407, 886 P.2d 219 (1994); see Miotke
v. City of Spokane, 101 Wn.2d 307, 338, 678 P.2d 803 (1984); ASARCO v. Air
Quality Coalition, 92 Wn.2d 685, 716, 601 P.2d 501 (1979); Malarkey Asphalt
Co. v. Wyborney, 62 Wn. App. 495, 509 n.2, 814 P.2d 1219, 821 P.2d 1235
(1991).
3 Brown v. Board of Educ., 347 U.S. 483, 74 S. Ct. 686, 98 L. Ed. 873, 38
A.L.R.2d 1180 (1954).
4 Under RCW 4.84.185, the prevailing party in a civil action is entitled to
attorney's fees if the trial court enters written findings that the action
was "frivolous and advanced without reasonable cause." But this statute
was held to be inapplicable to recall petitions given the cost prohibition
in RCW 29.82.023. See Pearsall-Stipek, 136 Wn.2d at 266.