Kendall v. Allen

1

JOHN KENDALL, JR., an individual, and BELLUS MOTORS - SERVICE OFFROAD, a Washington partnership, Respondents, v. ARTHUR WILLIAM ALLEN, an individual, and PACIFIC N.W. PERFORMANCE DIESEL, a Washington state sole proprietorship, Appellants.

No. 58139-6-II

Court of Appeals of Washington, Division 2

April 16, 2024

UNPUBLISHED OPINION

LEE J.

Arthur William Allen, an individual and sole proprietor of Pacific N.W. Performance Diesel (PNWPD), appeals a judgment against him following a bench trial, which found that Allen formed a partnership, called Bellus Motors Service and Offroad (BSO) with Bellus Motors, LLC (LLC), a limited liability company owned by John Kendall, Jr. Specifically, Allen argues that there is insufficient evidence to support the finding of a partnership, and regardless, BSO never registered as a partnership and therefore had no capacity to sue. Allen also argues that the trial court's damage calculations, based on the finding of a partnership, are not supported by evidence in the record.

Because the facts do not support the conclusion that Allen formed a partnership with the LLC, as defined by RCW 25.05.055, we reverse the trial court's finding of a partnership. Because we hold no partnership was formed, we do not address whether BSO had capacity to sue or the trial court's damage calculations. Accordingly, we reverse the judgment against Allen and remand to the trial court to resolve other causes of action not ruled on by the trial court.

FACTS

A. Background

Kendall is the owner and sole member of the LLC.^[1] The LLC sells used trucks. In 2015, Kendall started an auto service side to his business for customers who bought trucks from him. In 2016, Kendall leased a space in Camas for the service shop and in 2017, began acquiring equipment and building out the space.

Kendall wanted to expand his LLC's service operations. In late 2018, Kendall met Allen through mutual connections.

Allen is the sole proprietor of PNWPD. Allen previously worked at an auto shop in Oregon, but wanted to begin his own diesel performance business. At the time he met Kendall, Allen had been running his business on a friend's personal property.

Allen wanted to lease a space for PNWPD's service operations. Although Kendall did not believe he had the ability to sublease his space in Camas, he and Allen met and discussed doing business with one another. Specifically, Kendall wanted Allen, based on Allen's skillset, to help expand the LLC's diesel service center but have each party maintain their separate entities. Kendall and Allen had multiple conversations, and according to Kendall, developed a "rough draft" agreement. Verbatim Rep. of Proc (VRP) (Dec. 28, 2022) at 31.

The rough draft agreement, titled "Service Partnership Proposal," provided that the LLC and PNWPD would equally share responsibility of rent, insurance, and utilities. Ex. D109, at 1.^[2] The rough draft agreement also stated that the LLC would market and brand PNWPD with its own clothing and marketing material and that Allen would have "[f]ull access to the Bellus Service and off-road account, however checks from this account to any vendors will need dual authorization signatures." Ex. D109, at 1. As to profit-sharing, the rough draft agreement stated:

[The LLC] proposes a 60/40 split of net after cost profit for the . . . first 6 months (can be extended to 12) in PNWPD favor. The contingency is that 10% is deposited into an account for PNWPD to create cushion and stability and eventually allow [the LLC] to not have to take on full responsibility of cash flow requirements. Once this is achieved in the 6-12 [month] period then all revenue shares will go to a 50/50 split as well as cost of materials and supplies.

Ex. D109, at 2. Kendall also wanted a two-year commitment from Allen based on the contribution of Kendall's ongoing service operations and the additional capital Kendall planned to invest. Neither Kendall nor Allen signed the rough draft agreement. According to Allen, he never saw the rough draft agreement.

Allen told Kendall that he was not interested in partnering with anyone. Additionally, Allen did not want to commit to the two years that Kendall wanted. Nevertheless, at the end of January 2019, Allen called Kendall and expressed a desire to obtain a space for PNWPD's operations and "to get started right away." VRP (Dec. 30, 2022) at 231. Kendall agreed and Allen began moving his own property into the LLC's Camas space in early February 2019.

Kendall began purchasing equipment to further build out the service operations and a space for Allen to work in. For instance, Kendall installed a second hydraulic lift specifically for Allen to use. Kendall also created new workstations and bought additional tools.

In mid-February, Kendall and Allen went to Wells Fargo to set up a bank account for their service operations. The name on the bank account was "Bellus Motors Service and Offroad." Ex. D101, at 23. However, the bank account owner was the LLC, and the account was registered under the LLC's employer identification number (EIN). Kendall deposited $1,000 into the bank account to open it. The account was a dual signature account with Kendall and Allen as the authorized signers. Kendall then began transferring receivables for works in progress, as of February 1, from the LLC's service operations into the BSO account.

Allen received a debit card for the BSO bank account, and Kendall also gave Allen a credit card with a $30,000 line of credit. Allen's debit card was a Wells Fargo business debit card with "Bellus Motors LLC" listed beneath his name. Ex. 2, at 1. Allen understood the BSO bank account as for PNWPD's sole use. According to Allen, he agreed to use the BSO bank account because Kendall allegedly wanted to be able to "monitor the checking account" to ensure Allen could cover his expenses. VRP (Dec. 30, 2022) at 236. Allen began using the BSO bank account for business operations.

Around this time, Kendall and Allen met with Ernie Nicholson, Kendall's attorney, to finalize the rough draft agreement into a formal contract. Nicholson provided a draft "Services and Accounting Agreement" based on the rough draft agreement. Ex. D108, at 1.

The draft Services and Accounting Agreement was between the LLC and PNWPD. The draft services agreement stated: "This Agreement is intended to create, and creates, a contractual relationship and is not intended to create, and does not create, any agency, partnership, joint venture or any like relationship between the parties hereto." Ex. D108, at 1. The draft services agreement also provided that the LLC and PNWPD would equally split rent, insurance, utilities, equipment costs, and maintenance. Additionally, the draft services agreement stated the same terms of splitting revenues as did the rough draft agreement.

Allen felt the draft services agreement was one-sided and made him appear as "a Bellus employee." VRP (Dec. 30, 2022) at 232. Additionally, Allen did not want to be "locked" in to any particular location for PNWPD's operations. Ex. D101, at 34. Kendall then re-proposed the terms of the original rough draft agreement and to "shake hands" on it; if Allen disagreed, then they could part ways. Ex. D101, at 34. Kendall was unwilling to agree to any different terms because he had "already purchased all the equipment[,] . . . extended the line of credit, [and] opened up all the accounts." VRP (Dec. 28, 2022) at 32.

Ultimately, Kendall and Allen agreed to split profits; Kendall would take a "cut" at the end of the year while Allen would take monthly draws of $4,200. VRP (Dec. 28, 2022) at 33. Allen officially moved in and began working in March 2019. Allen used the tools and programs that the LLC had provided.

Kendall and Allen never executed the rough draft agreement or finalized any contract. Additionally, neither party registered BSO as a partnership. While BSO had a separate bank account, all operations and reporting otherwise ran through the LLC. For instance, taxes, along with insurance and licensing fees, were paid under the LLC, with the BSO bank account reimbursing the LLC for its proportionate share. BSO paid its share of rent and utilities to the LLC, which made the actual rent and utilities payments. Kendall and Allen had an arrangement such that BSO paid its rent the following month; for instance, BSO paid its March rent in April.

BSO employees were paid from the BSO bank account; however, they were paid as W-2 employees of the LLC, licensed and bonded under the LLC, and registered under the LLC's insurance. Additionally, Allen's monthly "draws" were reported as 1099 contractor^[3] payments and Allen viewed his draws as a monthly paycheck. Kendall viewed Allen as a 1099 contractor.

Kendall and Allen communicated daily about business operations, via both text and email. Allen used the LLC's vendor accounts for the service operations. Kendall and Allen regularly discussed personnel changes, such as hiring and terminating employees. Kendall often introduced Allen to others as his business partner, which Allen never objected to. Additionally, Kendall and Allen jointly marketed their operations under the slogan of "Big Bad A[**] Trucks." VRP (Dec. 29, 2022) at 107.

In January 2020, when Kendall was reconciling accounts for 2019, Kendall noticed a discrepancy in the BSO bank account. Specifically, BSO's gross sales did not match the BSO account's deposits. Kendall asked Allen to look into the discrepancy. However, Allen never followed up.

After finding the initial discrepancy, Kendall began conducting monthly account audits. Kendall began finding additional discrepancies. When discrepancies arose, Kendall and his bookkeeper asked Allen for documentation or receipts. According to...