LK Operating, LLC v. Collection Grp., LLC

181 Wash.2d 48

331 P.3d 1147

LK OPERATING, LLC, a Washington limited liability company, Petitioner,

v. The COLLECTION GROUP, LLC, a Washington limited liability company; and Brian Fair and Shirley Fair, husband and wife, and their marital community composed thereof, Respondents,Leslie Alan Powers and Patricia Powers, husband and wife, and Keith Therrien and Marsha Therrien, husband and wife, Petitioners/Intervenors.

No. 88132–4.

Supreme Court of Washington, En Banc.

July 31, 2014.

James A. Perkins, Larson Berg & Perkins PLLC, Yakima, WA, Philip Albert Talmadge, Sidney Charlotte Tribe, Talmadge/Fitzpatrick, Seattle, WA, for Petitioner.

Catherine Wright Smith, Smith Goodfriend PS, Ronald James Trompeter, Hackett Beecher & Hart, Seattle, WA, Steven Craig Lacy, Attorney at Law, East Wenatchee, WA, for Respondents.

FAIRHURST, J.

¶ 1 In this case and its companion, LK Operating, LLC v. Collection Grp., LLC, No. 88846–9, ––– Wash.2d ––––, 330 P.3d 190, 2014 WL 3765934 (Wash. July 31, 2014), we consider issues arising from a joint venture proposal regarding a debt collection business. The debt collection business operated according to the functional terms of the joint venture proposal from approximately winter 2005 through summer 2007, at which point the disagreements underlying the present litigation surfaced. This opinion addresses whether the proceedings below complied with due process requirements; whether, as a matter of law, the joint venture proposal was entered by an attorney in violation of one or both of former RPCs 1.7 (1995) and 1.8(a) (2000); and, if so, whether the remedy imposed by the trial court and affirmed on appeal is appropriate. We affirm.

¶ 2 The proceedings below satisfied the requirements of procedural due process because the parties received sufficient notice and a meaningful opportunity to be heard regarding the issues presented for judicial determination. We hold, though on different reasoning from that used by the Court of Appeals, that the undisputed facts establish as a matter of law that the joint venture proposal contemplated a business transaction subject to, agreed to, and entered into in violation of former RPC 1.8(a). We affirm that the former RPC 1.8(a) violation renders the terms of the business transaction unenforceable under the circumstances presented and the remedy imposed was appropriate. We further affirm that the business transaction was entered in violation of former RPC 1.7. We need not, and decline to, determine whether the former RPC 1.7 violation would also justify the remedy imposed.

I. FACTUAL AND PROCEDURAL HISTORY

¶ 3 At all relevant times, Leslie Powers (Mr. Powers) and Keith Therrien (Mr. Therrien) ¹ practiced law as Powers & Therrien, PS (Law Firm). In December 2003, Mr. Powers and Mr. Therrien formed LK Operating (LKO), a limited liability company (LLC). LKO has five members, each of which is a corporation. Each corporation has a single shareholder, and each shareholder is a trust. One of Mr. Powers' or Mr. Therrien's adult children is named as the trustee and sole beneficiary of each of those five trusts. LKO is managed by Powers & Therrien Enterprises Inc. (P & T Enterprises). Mr. Powers and Mr. Therrien are the officers of P & T Enterprises. The Law Firm, LKO, each of LKO's member corporations, and P & T Enterprises all apparently used the same mailing address during the relevant time frame.

¶ 4 In early 2004, Brian Fair retained the Law Firm in connection with Fair's formation of a Nevada-based LLC, which is not implicated here. Fair, who practiced as a certified public accountant from 1995 through 2007, had prior familiarity with the Law Firm through common clients. Several months later, Fair and his wife, without the assistance of any attorney, formed The Collection Group LLC (TCG) to run a debt collection business. Fair acted as manager of TCG, and, at the time of its formation, TCG had only two members—Fair and his wife.

¶ 5 In early fall 2004, Fair, in his capacity as TCG's agent, asked Mr. Powers if he, Mr. Therrien, and/or the Law Firm ² would be interested in investing in TCG and operating it as a joint venture. Fair proposed each party to the joint venture would contribute 50 percent of the costs, Fair would provide administrative and management services at no itemized or hourly cost, the Law Firm and/or Powers would provide legal services at no itemized or hourly cost, Fair would own 50 percent of TCG, and the Law Firm and/or Powers would own the other 50 percent of TCG. Powers claims it explicitly rejected this offer but suggested to Fair that LKO might be interested in investing. Fair claims Mr. Powers expressed interest in the idea but did not give an explicit response and did not mention LKO as a prospective investor. This factual dispute is not material to our holding and does not require resolution.

¶ 6 In late October 2004, Fair e-mailed Powers at its Law Firm e-mail address. Fair again set out his joint venture proposal and attached a proposed purchase and sale agreement for a debt portfolio from a company called Unifund (which is not otherwise implicated here) to TCG. In this e-mail, Fair described the proposed joint venture as “between myself and you two.” Clerk's Papers (CP) at 22. Mr. Powers made extensive notations, edits, and suggestions on the proposed purchase and sale agreement and e-mailed this annotated version back to Fair in December 2004. However, Mr. Powers' e-mail did not respond directly regarding Fair's joint venture proposal. Mr. Powers asserts his annotations to the Unifund purchase and sale agreement were not for TCG's benefit; rather, they were “designed to make the investment safer and acceptable to our children's company [LKO]” and were a part of the “due diligence” required of Mr. Powers “as an officer of the manager and for the exclusive benefit of our children's company.” CP at 1411.

¶ 7 Apparently interpreting Mr. Powers' e-mail response as an acceptance of the joint venture proposal, Fair then contacted the Law Firm, through both its legal assistant and its bookkeeper, to request half of the funds needed to purchase the Unifund debt portfolio. While awaiting the funds, TCG purchased the Unifund portfolio with its own money. In February 2005, Fair ultimately received a check for half the purchase price of the Unifund debt portfolio. The check was a “counter check,” ³ and so there was no preprinted information on the check regarding the account holder. Rather, the check included a handwritten notation at the upper left-hand corner reading, “LK Operating, LLC.” CP at 833. The check was signed by Michele Briggs, a Law Firm employee.

¶ 8 Fair asserts he had no idea what “LK Operating, LLC” was, but he recognized the check as precisely the amount he had requested on behalf of TCG for the Unifund purchase and assumed the check came from Powers or the Law Firm, knowing Mr. Powers and Mr. Therrien have the first initials “L” and “K,” respectively. Powers asserts Fair knew all along the money was coming from LKO and knew LKO was an entirely separate entity from the Law Firm. This factual dispute is not material to our decision on review and does not require resolution.

¶ 9 Shortly after the first check was sent, Fair e-mailed Powers to request further funds on behalf of TCG and stated, “Les[lie Powers], this gives you guys 1/2 ownership in the company. You can formalize however you wish.” CP at 311. No written agreement or other formalization of the joint venture was proposed or entered by Powers or Fair. For a little over two years, Fair continued to engage in debt collection through TCG and requested and received multiple checks for one-half the purchase price of other debt portfolios; each such check was a counter check with “LK Operating, LLC” handwritten or typed in the upper-left hand corner, and each check was signed by Michele Briggs. The Law Firm, primarily through Mr. Powers and a legal assistant, Diane Sires, provided legal services to TCG as requested. The Law Firm did not bill TCG for its legal services.

¶ 10 In April 2007, Fair proposed to Powers a formalized joint venture agreement, which would modify TCG's ownership structurefrom that originally proposed. Fair proposed his percentage of ownership would be 55 percent, his mother would have a 7 percent interest, and Powers would have a 38 percent interest. Fair asserted this apportionment of ownership interest was based on the differing amounts of money and work each party had contributed to TCG over the years. Powers objected, asserting the original joint venture agreement provided for 50/50 ownership.

¶ 11 On June 29, 2007, Fair gave Powers notice, through their respective attorneys, that TCG would no longer purchase new debt portfolios and intended to contract with another entity for its debt collection work. P & T Enterprises, through its attorney, responded by stating Mr. Powers, Mr. Therrien, and the Law Firm did not have or claim any interest in TCG, and LKO was the only other party to the business transaction contemplated by TCG's joint venture proposal. LKO alleges Fair then began transferring TCG's accounts to another debt collection LLC, which was owned entirely by Fair, to the detriment of TCG.

¶ 12 On July 10, 2007, LKO filed a complaint against Fair and TCG for declaratory relief regarding the allocation of ownership interests in TCG, breach of contract, and breach of fiduciary duty (the contract action). Fair and TCG later filed a complaint against Powers for legal malpractice (the malpractice action). The trial court consolidated the actions.

¶ 13 Fair moved for partial summary judgment. Although Fair would not concede a joint venture agreement had in fact been entered, he argued that even if it were, any such agreement would be void as violative of public policy because Powers did not comply with former RPC 1.8(a), which restricts an attorney's ability to enter business transactions with current clients. TCG filed a ...