Wren v. Stanford & Sons, LLC

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KENNETH WREN and ALICE WREN, husband and wife; Respondents, v. STANFORD AND SONS, LLC, a Washington limited liability company; DAVID G. WHITEHEAD, individually; J & N INVESTMENTS INC., a Washington corporation; HENRY L. RUSSELL II, individually; and the marital community of HENRY L. and VICTORIA L. RUSSELL; DUWARD WILLIAM FRAME, IV, individually; FIRST HORIZON BANK, successor by conversion to FIRST TENNESSEE BANK NATIONAL ASSOCIATION d/b/a FIRST HORIZON HOME LOANS; NATIONSTAR MORTGAGE LLC, d/b/a, MR. COOPER, a Delaware limited liability company; and FIRST NICHOLAS D. LECLERQ AND SUSAN L. LECLERQ FAMILY LLC, a Washington limited liability company; Defendants

HERBERT L. WHITEHEAD III, individually; the marital community of HERBERT L. WHITEHEAD III and JENNIFER L. WHITEHEAD; SOUTHWEST ENTERPRISES, LLC, a Washington limited liability company; MT. VIEW ENTERPRISES, LLC, a Washington limited liability company; WHITEHEAD CONSULTING, LLC., a Washington limited liability company; and WHITEHEAD ENTERPRISES, LLC. a Washington limited liability company; Appellants.

No. 56441-6-II

Court of Appeals of Washington, Division 2

May 9, 2023

UNPUBLISHED OPINION

Glasgow, C.J.

In 2009, Herbert L. Whitehead helped his friend Kenneth Brautigan start a car dealership, Stanford & Sons (S&S). Whitehead then worked at S&S. In 2010, S&S extended a line of credit to Whitehead, his wife, and several companies the couple owned. Brautigan wrote Whitehead numerous checks over the next few years with "loan" in the memo line. Whitehead endorsed and deposited the checks.

In the meantime, Ken and Alice Wren loaned significant amounts to S&S. S&S later defaulted on that debt and it assigned the Wrens most of its and Brautigan's assets, including Whitehead's line of credit. Whitehead then failed to make payments as required by the promissory note and the Wrens sued to collect on the debt. Whitehead filed several counterclaims, alleging in part that the Wrens owed him money because he had a credit balance on the line of credit.

The Wrens moved for partial summary judgment to dismiss some of Whitehead's counterclaims, including the ones addressing the line of credit. The trial court granted partial summary judgment and denied reconsideration. The trial court entered final judgment against Whitehead on the debt for the line of credit, eventually imposing a 36 percent interest rate, the default rate set by the promissory note.

Whitehead appeals. He argues the trial court erred by granting partial summary judgment because there are genuine issues of material fact as to whether the payments S&S made to him were loans under the line of credit or payment for work he performed for S&S. He also argues the trial court erred by imposing a 36 percent interest rate. Both parties seek appellate attorney fees.

We agree that there are genuine issues of fact as to the nature of the payments S&S made to Whitehead. We reverse and remand for the trial court to vacate the Wrens' judgment against Whitehead and engage in further proceedings consistent with this opinion. If another judgment is entered in the future, the parties may raise the issue of the correct interest rate before the trial court. Neither party is entitled to attorney fees at this time.

FACTS

I. Background

In 2009, Brautigan founded S&S, a limited liability corporation (LLC), operating the company as a car dealership. Brautigan was the sole owner and member. Whitehead was friends with Brautigan and consulted with him about starting the company, but Whitehead had no ownership interest in S&S.

A. Whitehead Promissory Note for Line of Credit

In March 2010, S&S extended a $250,000 line of credit to Whitehead, his wife, and several LLCs the Whiteheads owned. Whitehead used several vehicles and pieces of real property including a house in Lake Tapps, as collateral.

The parties signed and executed the promissory note, security agreements, and deed of trust on the same day in March 2010. They also filed public record financing statements in March 2010. The promissory note stated that the makers, the Whiteheads and their LLCs (the Whiteheads), would pay an annual interest rate of 12 percent on the principal balance. If the Whiteheads had a credit balance, or negative debt, interest would accrue on the balance at a 3 percent annual rate. There was also an initial loan fee of 10 percent of the total line of credit, or $25,000, and an annual renewal fee of 5 percent of the total line of credit, or $12,500. The full amount of the principal debt and interest matured and became due in March 2020.

If the Whiteheads were more than five days late in making a payment, a late charge of 10 percent of the overdue payment applied to the balance due and the Whiteheads would be in default. In the event of default, the holder of the note could call in the entire principal debt, interest, "and any other amounts owing under th[e] Note." Clerk's Papers (CP) at 8. If the Whiteheads defaulted, including failure to make the balloon payment at maturity, the note stated that it would "bear interest at the lesser of the rate of thirty-six percent (36%) per annum or the maximum interest rate allowed by law." Id.

The note also required the Whiteheads "to pay all costs, expenses[,] and attorney's fees incurred by Holder in the exercise of any remedy (with or without litigation) under this Note . . . in any proceeding for the collection of the debt evidenced by th[e] Note" where the holder of the note prevailed. CP at 10. The note stated that it contained the parties' "entire agreement" and that "[n]o prior agreement, statement, or promise written or oral made by any party to this Note that is not contained herein shall be binding or valid, save each Deed of Trust speaks for itself." CP at 10-11.

B. LeClerq Judgment Against Whitehead

The LeClerqs, a couple who had bought a separate business from Whitehead, sued him for breach of contract and obtained a judgment against him in May 2010 for approximately $245,000. In the summer of 2013, they sought to collect that judgment. Whitehead e-mailed Brautigan in July 2013, telling him, "You need to start getting info together [as soon as possible] to protect your interest." CP at 1605. Whitehead then sent Brautigan spreadsheets that Whitehead described as "what I think the accounting is for my Line of Credit." Id.

Brautigan filed a declaration as an interested party in the LeClerq lawsuit. He stated that since March 2010, S&S had loaned approximately $239,000 to the Whiteheads under the line of credit. Due to partial repayments, Brautigan stated that the Whiteheads owed S&S a remaining balance of roughly $63,000. Brautigan asserted that the line of credit was executed in March 2010 and gave S&S superior secured interests in most of Whitehead's assets, including his Lake Tapps house, limiting what could be taken to satisfy the LeClerqs' May 2010 judgment.^[1]

C. S&S Payments to Whitehead 2013 to 2017

Whitehead did not report any earned income on his taxes from at least 2013 until 2017. During that time period, he endorsed and cashed numerous checks from S&S where Brautigan handwrote "loan" in the memo line on the face of the check. S&S also paid for Whitehead's medical insurance during some of the time that he performed work for the company.

II. Wren Loans and This Lawsuit

A. Loans and Default

In 2016, the Wrens loaned S&S $1.2 million. In 2017, they loaned S&S an additional $500,000. In 2019, Brautigan closed the car dealership. S&S then defaulted on these loans and began conveying its assets to the Wrens to avoid foreclosure. This included "[a]ll claims and causes of action" S&S had "against third parties in contract, tort, equity, or otherwise," such as Whitehead's line of credit. CP at 150.

In January 2020, the Wrens sued numerous defendants, including S&S, the Whiteheads as individuals, and all of the Whiteheads' LLCs that were makers in the line of credit promissory note.

B. Complaint, Answer, and Counterclaims in this Case

The statement of facts in the Wrens' complaint addressed the line of credit:

110. On March 14, 2010, Stanford and Sons, LLC, as Lender and Holder, agreed to extend a $250,000 Line of Credit to [Whitehead, his wife, and three of their LLCs], all of whom were referred to and defined as the "Makers". This loan is hereinafter referred to as the "S&S Line of Credit".

111. Also on March 14, 2010, and to secure the S&S Line of Credit, Herbert L. Whitehead and Jennifer L. Whitehead executed a deed of trust on the Lake Tapps Real Property . . . [that] was recorded in Pierce County.

CP at 1466.

The complaint listed 10 causes of action. In part, the Wrens alleged that Whitehead had failed to make payments on the line of credit, constituting a breach of contract. Among other damages, the Wrens sought approximately $756,000 that they argued was owed under the line of credit, and they sought to quiet title in Whitehead's Lake Tapps house. Because they thought Whitehead was moving or disposing of assets, the Wrens also brought a replevin action seeking to safeguard certain property.

In February 2020, Whitehead filed a declaration in response to the Wrens' replevin claim, stating that "On March 14, 2010, my wife and I, along with several entities we owned, executed a promissory note wherein Stanford and Sons offered us a line of credit of up to $250,000." CP at 1084. Whitehead attached a signed copy of the promissory note, which was dated March 14, 2010.

In March 2020, in his answer to the complaint, Whitehead admitted paragraphs 110 and 111. Whitehead then asserted "On or about March 14, 2010, Butch, his wife, [and three of their LLCs] executed a Promissory Note/Line of Credit as the 'Makers' whereby Stanford and Sons would loan Makers money under a line of credit...