Opinion
Nos. 23648-0-III; 24128-3-III.
September 11, 2007.
Appeals from a judgment of the Superior Court for Benton County, No. 03-2-01605-2, Cameron Mitchell, J., entered November 18, 2004 and May 11, 2005.
Affirmed by unpublished opinion per Sweeney, C.J., concurred in by Stephens, J., and Sanders, J. Pro Tem.
This suit for damages followed the failure of one company and the start up of a second company by a former officer, shareholder, and employee of the old company. The trial court concluded on appropriate findings that this former employee had breached his contract with the old company and committed a number of torts by the timing and by the way that he started and did business in his new company. The court awarded damages. We conclude that the court's conclusions are supported by Page 2 the court's findings, and we affirm the judgment for the old company.
FACTS
Al Tall, Kenneth Nichols, John Lund, and John Swegarden formed the International Sleep Institute of Washington, Inc., (the Sleep Institute) in 2000. All were shareholders and officers of the Sleep Institute. The Sleep Institute diagnosed sleeping disorders and sold and serviced continuous positive air pressure (CPAP) machines to people with sleep apnea.
The appellant and respondent have very similar names. To avoid confusion, the respondent and cross-appellant, International Sleep Institute of Washington, Inc., will be called "the Sleep Institute." And the appellant will be referred to as Mr. Nichols. He owns International Sleep, Inc.
Mr. Nichols and Mr. Tall had both written employment and shareholder agreements. The Sleep Institute agreed to pay Mr. Tall and Mr. Nichols $50,000 per year. But the company had financial difficulties and could not pay the full salaries to Mr. Tall or Mr. Nichols. Mr. Tall resigned and demanded the unpaid portion of his salary. He later sued the Sleep Institute for back wages. Mr. Nichols agreed to defer payment of his full salary and continued to work at a reduced salary.
Mr. Nichols and his attorney, William Murphy, started another corporation, International Sleep, Inc., in the spring of 2002. The Sleep Institute had accumulated significant debt by that point. Mr. Nichols talked to Mr. Lund about closing the Sleep Institute. Mr. Nichols agreed to stay with the Sleep Institute to help collect outstanding accounts receivable. Mr. Tall met with Mr. Nichols in June 2003 to settle Mr. Tall's claim for back wages. The lawsuit was settled. Mr. Lund and Mr. Swegarden conveyed their shares to Mr. Tall. And Mr. Tall gained control of the corporation in 2003.
Mr. Nichols operated his new corporation (International Sleep, Inc.) during this time (spring of 2003) while he worked for and at the Sleep Institute. He set up and serviced CPAP machines from the Sleep Institute for the benefit of his new corporation. The Sleep Institute continued to pay Mr. Nichols as a full-time employee.
Mr. Nichols' new corporation bought CPAP machines from the supplier, Fisher § Paykel. He did not try to obtain the same equipment for the Sleep Institute. But he continued as a corporate officer, shareholder, and employee of the Sleep Institute. Mr. Nichols bought the CPAP machines using the Sleep Institute's corporate name and its line of credit.
Mr. Nichols also did not spend any significant time working to collect the $90,000 in Sleep Institute's outstanding accounts receivable. This was despite the fact that "he could have collected [it]" and previously said that he would. Clerk's Papers (CP) at 38.
Clerk's Papers citations are from Court of Appeals No. 24182-3-III.
Mr. Nichols left the Sleep Institute at the very latest, in July 2003. Mr. Tall went to the Sleep Institute's Richland office and took the client records and the corporation's computer. But Mr. Nichols retained the Sleep Institute's corporate documents, property, and billing information. Mr. Nichols did not return his shares in the Sleep Institute as his employment agreement required. Mr. Nichols or his new corporation also kept at least some of the Sleep Institute's client billing information.
The Sleep Institute sued Mr. Nichols and his new company, International Sleep, Inc., based on various causes of action including breach of contract, conversion of property, and violations of fiduciary duties owed to the Sleep Institute. The case was tried to the court sitting without a jury over the course of four days. The trial judge awarded damages to the Sleep Institute for $111,606.51. The judge concluded that Mr. Nichols was liable for breach of contract, breach of fiduciary duty, tort of conversion, and interference with business opportunity.
DISCUSSION
Unpaid Back Wage Claim
Mr. Nichols first assigns error to the trial judge's refusal to award double damages and attorney fees provided for by statute where an employer fails to pay wages. He argues that the trial court found that the Sleep Institute failed to pay $22,076.88 in wages to Mr. Nichols but nonetheless refused to award double the wages or attorney fees.
The Sleep Institute responds that Mr. Nichols agreed to defer his salary. And the Sleep Institute never had the money to pay the salary nor did Mr. Nichols demand payment. The Sleep Institute then contends that the trial court properly concluded that the parties had modified Mr. Nichols' employment agreement and the modification was supported by consideration. Furthermore, the Sleep Institute argues that the statute at issue (RCW 49.52.070) specifically provides that the benefits of that section are not available to any employee who knowingly submits to the violations (of reduced or deferred wages).
We review findings of fact for substantial evidence. Chelius v. Questar Microsystems, Inc., 107 Wn. App. 678, 681-82, 27 P.3d 681 (2001). But we only review those findings to which the parties assign error. RAP 10.3(g); In re Contested Election of Schoessler, 140 Wn. App. 368, 385, 998 P.2d 818 (2000). The trial court's findings if unchallenged are the facts of the case. Lakeside Pump § Equip., Inc. v. Austin Constr. Co., 89 Wn.2d 839, 842, 576 P.2d 392 (1978); Klebs v. Byung Sik Yim, 54 Wn. App. 41, 42, 772 P.2d 523 (1989). We review a trial court's conclusions of law de novo. Lang v. Hougan, 136 Wn. App. 708, 717, 150 P.3d 622 (2007). The trial court's findings of fact must support its conclusions of law. Scott v. Trans-System, Inc., 148 Wn.2d 701, 707-08, 64 P.3d 1 (2003).
RCW 49.52.070 provides civil liability for double damages for the failure to pay wages. Any employer who violates subdivisions (1) and (2) of RCW 49.52.050 by depriving an employee of any part of his wages shall be liable for twice the amount of wages unlawfully withheld along with attorney fees. RCW 49.52.070. However, the benefits of RCW 49.52.070 are not available "to any employee who has knowingly submitted" to the withholding of wages. "Knowingly submitted" requires that Mr. Nichols intentionally defer to the Sleep Institute the decision of whether he would be paid. Questar, 107 Wn. App. at 682.
RCW 49.52.050 states:
Any employer or officer, vice principal or agent of any employer, whether said employer be in private business or an elected public official, who
(1) Shall collect or receive from any employee a rebate of any part of wages theretofore paid by such employer to such employee; or
(2) Wilfully and with intent to deprive the employee of any part of his wages, shall pay any employee a lower wage than the wage such employer is obligated to pay such employee by any statute, ordinance, or contract; . . .
. . . .
Shall be guilty of a misdemeanor.
RCW 49.52.070 states that: Any employer and any officer, vice principal or agent of any employer who shall violate any of the provisions of subdivisions (1) and (2) of RCW 49.52.050 shall be liable in a civil action by the aggrieved employee or his assignee 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: PROVIDED, HOWEVER, That the benefits of this section shall not be available to any employee who has knowingly submitted to such violations.
Here, "Mr. Nichols agreed to defer payment of his wages" until the Sleep Institute "was able to pay those wages." CP at 30 (Finding of Fact 4). But he urges that he is entitled to the benefits of RCW 49.52.070 despite his agreement. He relies on the authority of Schilling v. Radio Holdings, Inc. for the proposition that only carelessness or inadvertence excuse the imposition of the penalty and attorney fees for the failure to pay back wages.
Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 159-61, 961 P.2d 371 (1998).
The critical determination in Schilling was whether the employer's failure to pay the wages was "willful" under RCW 49.52.070. Schilling, 136 Wn.2d at 159. The employer contended that its actions were not willful because it did not have the financial ability to pay the wages. The court refused to engraft a "financial inability" defense into the statute. Id. at 154. Significantly, for our analysis here, no one in Schilling claimed that the employee agreed to defer the payment of wages. Id. at 155. Indeed, the employer assured the employee that all wages would be paid. Id. Likewise in Questar, no one argued that the employee had agreed to defer payment of wages. Questar, 107 Wn. App. at 682-83. There, the employer argued only that the employees constructively agreed to do so by accepting only sporadic payments. Id. at 683. The court rejected that argument. Id.
Here, the question is whether Mr. Nichols can agree to defer his salary until the corporation has the money to pay him. CP at 30. The statute anticipates that he can: "the benefits of this section shall not be available to any employee who has knowingly submitted to such violations." RCW 49.52.070.
Here, we have a shareholder, founder, and employee of this corporation who agreed to do just that. The statute was, then, violated but by Mr. Nichols' agreement. He submitted to that violation. Therefore, he is not entitled to twice the amount of wages withheld or attorney fees. RCW 49.52.070. Breach of Contract
Mr. Nichols next argues that the Sleep Institute breached and repudiated his employment contract by failing to pay him. And he was, then, excused from any obligation to the Sleep Institute imposed by the contract. The Sleep Institute responds that Mr. Nichols agreed to defer his wages and, moreover, he never asked for the wages even at his resignation.
Mr. Nichols contends that the trial court's findings of fact do not support the conclusion that he breached his contract. We will interpret the court's conclusions of law as findings of fact if they are findings and not conclusions. Willener v. Sweeting, 107 Wn.2d 388, 394, 730 P.2d 45 (1986). Here, the trial court's conclusions of law 4, 5, and 6 are findings of fact and we will review them as such. Id. The trial court found that Mr. Nichols breached his written shareholder and employment agreement with the Sleep Institute by:
engaging in business activities that interfered with his duties as an employee of the Sleep Institute,
failing to return his shares of stock to the corporation as required by the employment agreement,
failing to return all corporate documents, records, and property to the corporation,
keeping at least some of the client billing information, and
continuing to use the name CPAP Clinic and retaining a CPAP Clinic sign, fax machine, and desk.
CP at 43-44 (Conclusions of Law 4, 5, and 6).
The record here easily supports these "findings." Mr. Nichols and his attorney, Mr. Murphy, started another corporation (International Sleep, Inc.) in 2002. Mr. Nichols obtained and set up 78 CPAP units from April through June 2003. He used the Sleep Institute's office space and equipment, while he was a paid staff member of the Sleep Institute.
Mr. Nichols' employment contract prohibited him from engaging in any activities that interfered with his duties as an employee of the Sleep Institute.
All of this supports the trial court's conclusion that Mr. Nichols engaged in business activities contrary to the duties imposed by his employment contract with the Sleep Institute. While Mr. Nichols was an officer, shareholder, and employee of the Sleep Institute, he failed to obtain any equipment for that corporation and instead used the opportunity for his own company, International Sleep, Inc.
Mr. Nichols or his new corporation also retained at least some of the client billing information belonging to the Sleep Institute, although his employment had been terminated. He then breached his duty to his employer, the Sleep Institute. Mr. Nichols was obligated under the employment contract to return all corporate property upon his termination.
Mr. Nichols bought Fisher § Paykel equipment under the Sleep Institute's name, while he was still on the Sleep Institute's payroll and still using its offices. But the income from this equipment went to him and not the Sleep Institute.
Mr. Nichols still had at least a fax machine, a desk, and two boxes of documents belonging to the Sleep Institute when the court entered findings. The trial judge then properly concluded that Mr. Nichols failed to return all corporate records, documents, and property to the Sleep Institute.
Finally, Mr. Nichols' new corporation, International Sleep, Inc., "did business under the exact same name, CPAP Clinic, as did the original company." CP at 39-40 (Finding of Fact 31). So he was doing business for himself under the exact same name, CPAP Clinic, while he worked for the Sleep Institute. This supports the conclusion that he also breached his obligation under the employment contract. CP at 43 (Conclusion of Law 6).
Mr. Nichols' employment contract required that he tender his shares of stock to the Sleep Institute upon termination. He did not do so.
The record supports the findings of fact. And the trial court's findings support its conclusions of law that he breached his contract of employment with the Sleep Institute. Trans-System, 148 Wn.2d at 707-08. Breach of Fiduciary Duty
Mr. Nichols next challenges the court's conclusion that he and his new company improperly diverted business opportunities from the Sleep Institute. He says the Sleep Institute was insolvent and could not have taken advantage of any opportunity anyway. The Sleep Institute responds that as long as Mr. Nichols remained an officer and employee of the Sleep Institute, he had a fiduciary obligation to that company. And he breached that duty by diverting business from the Sleep Institute to his new company.
The court's conclusion that Mr. Nichols owed a fiduciary duty to the Sleep Institute is a question of law and so our review is de novo. Hougan, 136 Wn. App. at 717. Mr. Nichols owed a duty as a fiduciary to the Sleep Institute, both as an officer and shareholder. CP at 33. He breached that duty by diverting opportunities from the corporation to himself. Hougan, 136 Wn. App. at 719; Wagner v. Foote, 128 Wn.2d 408, 413, 908 P.2d 884 (1996). Directors and officers must discharge their duties to a corporation in good faith. Hougan, 136 Wn. App. at 718. They breach that duty of good faith if they convert corporate property. Id.
Mr. Nichols argues that he was legally excused from offering the corporate opportunity to the Sleep Institute because the company was insolvent. He relies on Noble v. Lubrin for this. The argument is not well developed in the brief. We nonetheless address it.
Noble v. Lubrin, 114 Wn. App. 812, 60 P.3d 1224 (2003).
Mr. Nichols' new company was no better situated than the original company to take advantage of business opportunities. Mr. Nichols used the Sleep Institute's name, line of credit, address, office, and supplies to buy the new CPAP machines from Fisher § Paykel for his new company. Fisher § Paykel must have been just as likely to sell the CPAP machines to the Sleep Institute as it was to Mr. Nichols' company. This is especially true since technically Fisher § Paykel did sell the machines to the Sleep Institute under that company's line of credit. Mr. Nichols, nonetheless, used the income for his own benefit. Mr. Nichols has not shown how his new company (with no office, line of credit, or address) was in a better position than the Sleep Institute to seize the corporate opportunity.
The court's conclusion that he breached his fiduciary duty by diverting business opportunities from the Sleep Institute to his corporation is well supported. Hougan, 136 Wn. App. at 719. Conversion and Interference with Business Relationship.
Mr. Nichols next argues that the court failed to adequately address the elements necessary to support the torts of conversion or interference with a business relationship.
Conversion is the willful, unjustified interference with chattel that deprives a person who is entitled to the possession of property. Hougan, 136 Wn. App. at 718. Chattel includes both intangible and tangible items, such as corporate property. Id.
Officers and directors of corporations are required by the Washington Business Corporation Act, Title 23B RCW, to discharge their duties to a corporation in good faith. Hougan, 136 Wn. App. at 718. The officer or director breaches that duty by converting corporate property for his or her own use. Id.
Mr. Nichols was a shareholder, officer, and employee of the Sleep Institute. And, he argues from this, he was entitled to the property he used; he did not convert it.
Mr. Nichols used the Sleep Institute's name, line of credit, and contacts to benefit himself and his new company. CP at 34-35 (Findings of Fact 16, 20). He used the Sleep Institute's name, office, equipment, tax identification number, and insurance provider number to buy the CPAP machines at cost for his new company. The trial judge was correct. That is conversion. Hougan, 136 Wn. App. at 718.
The court also concluded that Mr. Nichols interfered with a business relationship when he bought the CPAP machines from the Sleep Institute's supplier, Fisher § Paykel, with the Sleep Institute's name and credit, for the new corporation's benefit. Conclusions of law mislabeled as findings of fact are reviewed as conclusions of law. Sweeting, 107 Wn.2d at 394.
Tortious interference with a business expectancy requires five elements: (1) a business expectancy, (2) knowledge of the relationship, (3) intentional interference which results in the termination of the expectancy, (4) improper purpose or means, and (5) damage. Leingang v. Pierce County Med. Bureau, Inc., 131 Wn.2d 133, 157, 930 P.2d 288 (1997).
Mr. Nichols used the Sleep Institute's employee (Ms. Brown) and insurance provider numbers, and diverted the Sleep Institute's credit with Fisher § Paykel for the advantage of his new company. This is interference with the Sleep Institute's business relations. CP at 44 (Conclusion of Law 10). Again, Mr. Nichols' main argument is that the Sleep Institute was not financially able to pursue the opportunity with Fisher Paykel and, therefore, the opportunity was one Mr. Nichols could lawfully pursue on his own. We have answered that contention.
The five elements for tortious interference of a business expectancy are met here. First, there was a business expectancy that the Sleep Institute's line of credit would benefit the Sleep Institute. Leingang, 131 Wn.2d at 157. Second, Mr. Nichols had knowledge of the relationship between the Sleep Institute and Fisher § Paykel. Id. This is especially clear given Mr. Nichols' relationship with the Sleep Institute, and his use of its line of credit to purchase the equipment from Fisher § Paykel. There was intentional interference because the benefits were diverted to Mr. Nichols' new company. Id. This occurred for an improper purpose, and Sleep Institute suffered damages of $98,098.26. Id.
Damage Calculation
Finally, Mr. Nichols assigns error to the court's damage calculation. The trial court found the total amount of revenue received for each CPAP machine sold and then deducted the actual cost of that unit to determine "net profit." For Mr. Nichols the net effect of this was to ignore other costs of doing business (salaries, office rent, utilities, supplies, etc.). He argues that the court calculated gross profit rather than net profit and this is not the proper measure of damages.
We grant the trial court great latitude in calculating damages; the court's damage award need only fall within the range of relevant evidence. Mason v. Mortgage Am., Inc., 114 Wn.2d 842, 850, 792 P.2d 142 (1990).
The trial court concluded that the Sleep Institute suffered damages in the amount of $35,585.13 because Mr. Nichols retained the records related to the Sleep Institute's accounts receivable. CP at 45 (Conclusion of Law 15). The trial judge provided a detailed explanation of why he awarded these damages. First, Mr. Nichols failed to collect the accounts receivable for $90,000. He acknowledged that he could have collected the amount in his March 2003 letter to Mr. Swegarden and Mr. Lund. Mr. Nichols testified that when he contacted the Sleep Institute shareholders in March 2003 he felt that he could collect the $90,000 of the outstanding accounts receivable. Yet, when Mr. Tall took over the company computer in July 2003, the amount for the accounts receivable was still at $90,000. Mr. Nichols was working full time for the Sleep Institute yet did not spend any significant time working to collect the accounts receivable. Mr. Tall collected $54,414.77 after obtaining the company's computer. Mr. Nichols worked for the company yet did very little to collect the outstanding amount. The court deducted the $54,414.77 Mr. Tall collected from the $90,000 Mr. Nichols could have collected for a net sum of $35,585.13.
The trial judge also found that the Sleep Institute suffered damages of $98,098.26 by Mr. Nichols' using the Sleep Institute's credit opportunity with Fisher § Paykel for his own benefit. CP at 45 (Conclusion of Law 16). The trial court found that the Sleep Institute could have expected to collect 70 percent of the profits from the machines had they not been diverted to Mr. Nichols' new company. It found that Mr. Nichols was entitled to $22,076.88 for his unpaid back wage claim. It then reduced the award by the amount of these wages. So the resulting damage award was $111,606.51 ($35,585.13 + $98,098.26 — $22,076.88). CP at 46 (Conclusion of Law 19).
The Sleep Institute'S Cross-Appeal
Attorney Fees
The Sleep Institute struck its own motion on the morning of the hearing. Opposing counsel had already traveled across the state for the hearing and requested attorney fees. The Sleep Institute argues that the trial court did not have the authority to consider Mr. Nichols' request for attorney fees once the hearing had been stricken. And Mr. Nichols did not timely move for fees.
We review the award of attorney fees for an abuse of discretion. Brand v. Dep't of Labor § Indus., 139 Wn.2d 659, 665, 989 P.2d 1111 (1999). A trial court abuses its discretion if its decision is manifestly unreasonable or based on untenable grounds. Id.
The trial judge only granted attorney fees for Mr. Murphy's transit time, the court appearance time, and his costs of travel. Opposing counsel told Mr. Murphy that he was striking the motion on the morning of the hearing. Mr. Murphy had traveled for hours across the pass for the hearing only to be informed at the last minute that opposing counsel decided to strike the motion. The trial judge did not abuse his discretion.
We affirm the decision of the trial court.
A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040.
STEPHENS, J., SANDERS, J., concur.