Opinion
No. 51949-2-I.
Filed: March 8, 2004. UNPUBLISHED OPINION
Appeal from Superior Court of King County. Docket No: 01-2-14176-7. Judgment or order under review. Date filed: 02/11/2003. Hon. Anthony P Wartnik.
Counsel for Appellant(s), Fred Stephen Finkelstein, Lawrence Finkelstein PLLC, 11061 NE 2nd St. Ste 250, Bellevue, WA 98004-5810.
Counsel for Respondent(s), David L. Tingey, Law Office of David L Tingey, 321 Burnett Ave S Ste 303, Renton, WA 98055-2570.
The Cuhaciyans appeal a trial court's decision adding them as defendants at the end of trial and finding them personally liable for debts incurred by Better Homes Corporation. They argue they did not have sufficient notice that they would be added personally to the lawsuit and were deprived of the opportunity to defend; the trial court erred by piercing the corporate veil because its findings are not supported by substantial evidence in the record; and the trial court erred by awarding attorney fees at trial. Both parties request attorney fees on appeal. We reverse the trial court's decision to add the Cuhaciyans as defendants and vacate the judgment against them.
FACTS
In 2000, Better Homes Construction Company (Better Homes), a corporation owned and operated by Ohannes and Charlene Cuhaciyan, retained Krupp Development (Krupp), owned and operated by Roger and Marjean Krupp, to perform contractor services on Cuhaciyan's properties in Duvall and Bertona. According to the record, Krupp exceeded the scope of the original oral contract for excavation and foundation work and billed Better Homes for the extra labor he performed. There is conflicting testimony about whether Better Homes authorized the additional work, but it is undisputed that Better Homes did not pay Krupp for all of the work it performed. Krupp sued Better Homes for the unpaid balance.
On September 11, 2002, shortly before trial, Krupp filed a motion to add the Cuhaciyans as defendants. The trial court denied the motion. On the same day, Better Homes' attorney filed a notice of withdrawal. On September 23, Krupp sent Cuhaciyan a subpoena requiring him to appear at trial to testify on behalf of Better Homes.
The judge who denied this motion was not the same judge that presided over the October 14-15 trial.
Cuhaciyan appeared at trial pro se on behalf of Better Homes. Krupp did not object to Cuhaciyan's appearance on behalf of Better Homes, and the trial court allowed him to make an opening statement, offer exhibits, cross-examine witnesses, and make a closing. After closing, Krupp asked the court to find Better Homes in default, arguing that corporations must be represented by an attorney. The court agreed and concluded the corporation, which was properly served with a summons, did not appear in court and was in default. Krupp also asked the court to amend the pleadings to add Cuhaciyan and his wife as defendants. The court granted the motion, stating that it 'accept[ed] Mr. Cuhaiyan's [sic] testimony and presentation as representing the interests of himself and his wife . . . [and] the evidence . . . support[ed] a finding that the corporate veil had been pierced because of lack of formality in the handling of corporate business.' The trial court entered judgment against the Cuhaciyans.
Under Lloyd Enterprises, Inc. v. Longview Plumbing Heating Co., 91 Wn. App. 697, 958 P.2d 1035 (1998), review denied, 137 Wn.2d 1020 (1999), a corporation must be represented in court by an attorney. This court discussed the issue in Willapa Trading Co. v. Muscanto, Inc., 45 Wn. App. 779, 727 P.2d 687 (1986). We concluded a trial court did not abuse its discretion by permitting a corporate president who was also director and sole shareholder to act as his own attorney. But we stopped short of stating that Washington law allows sole shareholders to represent the corporation in every case. Federal courts have recognized limited exceptions to the general rule that a corporation must be represented by an attorney, but the Supreme Court has criticized those cases as 'aberrant.' See Rowland v. California Men's Colony, Unit II Men's Advisory Council, 506 U.S. 194, 202, 113 S.Ct. 716, 121 L.Ed.2d 656 (1993).
The Cuhaciyans do not appeal the default judgment against Better Homes.
ANALYSIS I. Notice
CR 15(c) permits a claimant to amend the original pleading by changing the party against whom a claim is asserted. It provides in part: Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against him, the party to be brought in by amendment (1) has received such notice of the institution of the action that he will not be prejudiced in maintaining his defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against him.
(Emphasis added.)
The purposes of CR 15 are to "facilitate a proper decision on the merits' . . . and to provide each party with adequate notice of the basis of the claims or defenses asserted against him. Leave to amend should be freely given 'except where prejudice to the opposing party would result." A court may consider undue delay and unfair surprise when determining whether a party was prejudiced.
Herron v. Tribune Pub. Co., 108 Wn.2d 162, 165, 736 P.2d 249 (1987) (quoting Caruso v. Local Union 690 of Int'l Bhd. of Teamsters, 100 Wn.2d 343, 349, 670 P.2d 240 (1983)) (citations omitted).
Id.
The Cuhaciyans argue that they did not receive adequate notice they would be added personally to the lawsuit. Because the judge granted a request to add them only at the end of the trial, Cuhaciyan argues he was deprived of the opportunity to defend against the claims. Krupp asserts that Cuhaciyan had adequate notice that he would be personally added as a defendant because Krupp made a motion to do so in September, he did not secure legal counsel who could have told him about the risk of being personally liable, and his pro se representation at trial shows that he recognized he was being personally challenged. We disagree completely.
Cuhaciyan did not receive adequate notice that he would have to defend his personal interests at trial, and he was prejudiced in presenting a defense. The original summons and complaint in this case named only Better Homes as a defendant, and it was delivered to Cuhaciyan only in his capacity as an officer of the corporation. It did not include any allegations against the Cuhaciyans personally nor did it allege corporate disregard. Krupp attempted to add the Cuhaciyans as defendants in the lawsuit on September 11, 2002, based on alleged corporate disregard. Because the trial court denied the motion, it certainly does not constitute notice to Cuhaciyan that he risked personal liability for Better Homes' debts. In fact, it denotes just the opposite. The Cuhaciyans had every reason to believe they would not be personally liable after the court denied the motion.
Cuhaciyan arrived at court under subpoena intending to defend Better Homes in a case in which corporate disregard was not an issue. To make matters worse, the trial court only added the Cuhaciyans as defendants after the trial was over. A person cannot represent his own interests at trial when he was not personally added to the lawsuit until after both parties finished presenting their cases. And the Supreme Court has rejected applying CR 15(c) in this manner. In Public Utility District No. 1 of Klickitat County v. Walbrook Ins. Co., it stated that CR 15(c) presupposes there has been no actual litigation. To interpret the rule otherwise could potentially bind parties to decisions in which they had no opportunity to participate. This would be inconsistent with the second component of the rule, which requires that newly joined parties not be prejudiced in maintaining a defense on the merits. Further, application of the rule in [this] manner . . . would not comport with the minimal prerequisites of due process, which require an opportunity to be heard at a meaningful time and in a meaningful manner.
See Morgan Bros., Inc. v. Haskell Corp., 24 Wn. App. 773, 780, 604 P.2d 1294 (1979) (the test for proceeding with evidence on a theory that had not been pleaded is whether the opposing party is prepared to meet the new issue).
115 Wn.2d 339, 797 P.2d 504 (1990) (holding that an order of substitution entered after the trial court rendered an oral ruling did not relate back to the date of filing under CR 15(c)).
Id. at 348 (citation omitted).
In addition, under CR 15(c), joinder will not be permitted where the plaintiff's delay in changing or adding a party is due to inexcusable neglect, a conscious decision, strategy, or tactic. Krupp does not offer any reason why he did not join the Cuhaciyans to the lawsuit in his initial complaint. Apparently, the trial judge who denied the motion to amend found no reason either.
Krupp argues that because Cuhaciyan could have gotten an attorney who might have told him about the risk of personal liability, the trial court did not err by adding him as a defendant at the end of trial. But, it is not a defendant's attorney who must provide him with adequate notice, and Krupp cites no authority to support his contention. We also reject Krupp's argument that Cuhaciyan's attempt to defend Better Homes pro se at trial shows he recognized that he was being sued personally. The record shows that Cuhaciyan appeared in court to represent Better Homes, and he did not believe he was defending himself personally at trial. Finally, the case Krupp cites in support of his assertion that when 'service was obtained on the corporation without objection, service on the individuals was also deemed obtained' does not address or support that proposition. In J.I. Case Credit Corp. v. Stark, Stark leased a combine from the LaCrosse Hardware Company. Sometime afterward, he exercised an option to purchase the combine from LaCrosse. He signed a note and chattel mortgage on J.I. Case Company (Case) forms and J.I. Case Credit Corporation (Credit) purchased the note and mortgage. Stark experienced repeated problems with the combine, returned it to the retailer as irreparable, and refused to pay on the note. Credit sued him, claiming he could not assert a defense that the combine was defective because Credit was a separate corporation from Case. The court concluded that Credit and Case were the same company, so Stark could assert the defense against Case. The court did not even discuss whether service of a summons and complaint on a corporation constitutes service on an individual because individual liability was not an issue Case and Credit are both corporations.
The court clerk's minute entry recites:
Plaintiff appearing by counsel David L Tingey Defendant Better Homes Construction appearing pro se (The owner Ohannes Cuhaciyan is present and appearing pro se)
The minutes support Cuhaciyan's position that he appeared only on behalf of Better Homes. This is particularly true considering that at the time the court clerk made this notation, Cuhaciyan was not personally a party to the lawsuit. In addition, Cuhaciyan submitted a declaration with his Motion Objecting to Personal Liability, stating he did not know he was personally at risk, and he would have prepared witnesses to testify on his behalf if he had known.
64 Wn.2d 470, 392 P.2d 215 (1964).
The court based its conclusion on the following facts: Credit is a wholly-owned subsidiary of Case; the secretary-treasurer of Case is president of Credit; all employees of Credit are paid by Case; the credit manager of Credit is also an employee of Case; both companies have the same address, the same lawyers, the same nonresident agent, and the same auditors; Credit is in business only to handle retail refinancing for Case.
Id. at 475.
In sum, because Cuhaciyan did not receive adequate notice that he would have to defend his personal interests at trial and he was prejudiced in presenting a defense, we reverse the trial court's decision to add the Cuhaciyans as defendants and vacate the judgment against them.
II. Piercing Corporate Veil
There is also insufficient evidence in the record to support the trial court's decision to pierce the corporate veil. The findings upon which the trial court's legal conclusion is based are not supported by substantial evidence in the record.
A 'corporation is considered an entity separate and distinct from its officers or stockholders even when they are only one in number.' The protection afforded by the corporate form will be pierced only when there are exceptional circumstances. There are two essential factors a court must consider when deciding whether to pierce the corporate veil:
Truckweld Equip. Co. v. Olson, 26 Wn. App. 638, 644, 618 P.2d 1017 (1980).
Id.
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.'
With regard to the first element, the court must find an abuse of the corporat[ion] [which] . . . typically involves 'fraud, misrepresentation, or some other form of manipulation of the corporation to the stockholder's benefit and creditor's detriment.'
. . . .
With regard to the second element, wrongful corporate activities must actually harm the party seeking relief so that disregard is necessary. Intentional misconduct must be the cause of the harm that is avoided by disregard.
Meisel v. M N Modern Hydraulic Press Co., 97 Wn.2d 403, 410, 645 P.2d 689 (1982) (citations omitted).
An appellate court reviews the facts underlying corporate disregard for substantial evidence and reviews de novo the legal conclusions that support corporate disregard. 'Substantial evidence is evidence in sufficient quantum to persuade a fair-minded person of the truth of the declared premise.' We conclude that the relevant findings of fact in this case are not supported by substantial evidence, and the remaining findings are insufficient to justify corporate disregard.
Truckweld Equip., 26 Wn. App. at 643.
Rogerson Hiller Corp. v. Port of Port Angeles, 96 Wn. App. 918, 924, 982 P.2d 131 (1999), review denied, 140 Wn.2d 1010 (2000).
Holland v. Boeing Co., 90 Wn.2d 384, 390-91, 583 P.2d 621 (1978).
FF 7: Ohannes Cuhaciyan commingled business funds with personal funds.
FF 8: Funds received by Mr. Cuhaciyan on sale of business property, real property on which Mr. Krupp performed services, were not maintained in a business account but were withdrawn for personal use by Mr. Cuhaciyan. If the funds had remained in the business account, those funds may have been available to satisfy Mr. Krupp's claim for services rendered.
FF 14: . . . Mr. Cuhaciyan . . . took personal benefit from Krupp's services.
There is nothing in the record supporting the finding that Cuhaciyan commingled funds or that he did not maintain the proceeds from the house sale in the business account. The only evidence about Better Homes' accounting in the record is Cuhaciyan's own testimony. It is clear from the record that Cuhaciyan was initially confused by and misunderstood the line of questioning about Better Homes' corporate accounts. However, when he finally understood what Krupp's attorney was asking, he stated that 'the only thing . . . that [he and his wife] use in that account is to build the house. We have a separate account for our personal. We have a construction account that is Better Homes that we do business with.' When Krupp's attorney pressed him about commingling funds, he responded,
Cuhaciyan's initial difficulty in understanding the line of questioning appears to be language based. English is not his first language.
A. [Cuhaciyan]. We're getting confused here. . . .
. . . .
Q. [Krupp's attorney]. You took money out, if money was available, for your own personal needs?
A. Only time we took money out of there, when house was sold, we took whatever money we put in there to build the house, we took the money what we borrow from my dad to pay that and whatever bills that's owed to the rest of the contractors, we paid everything out.
Q. And you also said you took some money, if the money was available, cash flow was available, you said you took the money for your wife and yourself?
A. Only time there was cash available when we sold the house. Meantime, we didn't have even a penny one. Everything that was there went to built the construction and there was no money left in the construction. That house sit there for a year.
Q. What did you mean when you said you took money out monthly if there was money there?
A. I misunderstood, totally misunderstood your question. I don't know what you're trying to get at.
Q. I'm not trying to get at anything.
A. Oh, well, only time that we took money out, when we sold the house, we pay our bills. Whoever we owe money, like we owe money to Roger [a company that worked on the house], so we pay his bill. Lumber company, pay his bill. Whatever. If there's money left so we can get our money back, there is. If there's not, so be it.
The trial court stated that it did not find Cuhaciyan's testimony to be credible. While credibility determinations are for the trier of fact and will not be disturbed on appeal, we note that Cuhaciyan's own testimony, credible or not, does not support the finding, and Krupp provided no evidence that Cuhaciyan commingled funds or benefited personally from the home sale.
In its oral ruling, the court appears to be referring only to Cuhaciyan's testimony about whether he authorized the Krupps to perform work outside the scope of their contract, but we assume for the sake of this argument that he meant this testimony as well.
Cuhaciyan might have been prepared to respond to this line of questioning and present his own evidence, including his wife's testimony as Better Homes' bookkeeper had he been named as a defendant before trial. Because he was not, he was not afforded an opportunity to present a personal defense.
FF 2: There is insufficient evidence that Better Homes Construction Company is a valid corporation. There was a failure of corporate formalities, including by-laws, organization, annual meetings and reports.
The Cuhaciyans are the sole shareholders, officers, and directors of Better Homes. Although Cuhaciyan testified that Better Homes was a valid corporation, he did not submit documents proving it in court. There is no evidence in the record supporting the trial court's finding that Better Homes 'fail[ed to follow] corporate formalities, including by-laws, organization, annual meetings and reports.' According to Cuhaciyan's testimony, Better Homes had an attorney organize the corporation and prepare its articles of incorporation and bylaws. He also testified that he held an organizational meeting, kept a corporation book, kept minutes of the organizational meeting, and held an election of officers. Krupp offered no contrary evidence.
After trial, the Cuhaciyans submitted declarations in their Motion Objecting to Personally Liability, which included attachments from the Secretary of State confirming that Better Homes is a valid corporation. He had no reason to know they would be necessary until the court found him personally liable at the end of trial.
Krupp did not allege that Better Homes was not a valid corporation. In fact, his complaint refers to Better Homes as a Washington corporation and even includes its license number.
FF 3: Cuhaciyan is sole shareholder of Better Homes Construction Company. He represents that he is unmarried.
Krupp's citation to the record does not support the finding, and there is no evidence in the record that Cuhaciyan represented that he was unmarried. In fact, the record shows that he testified that he and his wife owned Better Homes, she was an officer in the corporation, she attended the organizational meeting, and they both kept the corporation book.
FF 4: Plaintiffs did not know they were dealing with a corporation but understood they were dealing with Ohannes Cuhaciyan doing business as Better Homes Construction Company.
Krupp cites to the court's oral ruling as evidence supporting the finding. That is not evidence, and there is no evidence in the record supporting this finding.
FF 6: Roger Krupp provided construction services for Mr. Cuhaciyan . . . at his personal residence in Seattle, Washington. Mr. Cuhaciyan paid for those services with business funds. He also obtained a personal loan from his father and deposited a portion of these funds in the business bank account to finance the business and withdrew monies from that business account without formal accounting in the business. There was no promissory note for the personal loan from his father or personal documentation for the loans to the corporation or withdrawals from the corporation. There were no dividends paid.
There is evidence in the record that Cuhaciyan owned and resided in one of the houses where Krupp performed work. There is also evidence that there was an oral agreement but no promissory note for the loan from Cuhaciyan's father. There is, however, little evidence supporting the rest of the finding. Cuhaciyan testified that he borrowed money from his father to build the house, kept a record of the money he received from his father, deposited the money into his business account from which he drew to pay for construction costs, and paid his father back some but not all of the money when he sold the house. Cuhaciyan also testified that he did not write himself promissory notes for money he and his wife contributed to Better Homes, but he never testified that they did not keep a record of the transactions. And he mentioned earlier in his testimony that he did keep a record of his expenses. The only evidence from which one could infer the loan was personal in nature is Cuhaciyan's testimony that he was unsure but believed his father wrote the check out to him rather than the corporation, and Better Homes did pay his father back some of the money when he sold the house. That is not enough evidence to support the finding. And finally, the record does not even mention dividends.
In sum, many of the factual findings upon which the court's decision to pierce the corporate veil is based are not supported by substantial evidence in the record. And the remaining findings do not establish the first element of corporate disregard: that the corporate form was intentionally used to violate or evade a duty, and involved "fraud, misrepresentation, or some other form of manipulation of the corporation to the stockholder's benefit and creditor's detriment."
Meisel, 97 Wn.2d at 411 (quoting Truckweld, 26 Wn. App. at 645).
III. Attorney Fees
Cuhaciyan and Krupp seek attorney fees on appeal under RCW 4.84.250. RCW 4.84.250 permits a trial court to award attorney fees 'where the amount pleaded by the prevailing party as hereinafter defined, exclusive of costs, is [less than ten thousand dollars].' Krupp limited his claim to $10,000 to take advantage of this provision. Cuhaciyan claims because Krupp never made an offer of settlement, he was not entitled to attorney fees at trial. Both parties seek attorney fees on appeal.
Under RCW 4.84.250, 'when a plaintiff seeks less than $10,000 in damages and recovers nothing, the defendant is entitled to attorney's fees, regardless of whether an offer of settlement has been made by either party.' RCW 4.84.260 and .270 '[b]oth require offers of settlement unless the plaintiff recovers nothing.' Krupp, the plaintiff in this case, recovered on his claim against Better Homes at trial. Because there was no offer of settlement in this case and the plaintiff did not 'recover nothing,' the trial court erred by awarding fees under RCW 4.84.250. RCW 4.84.290 provides that a party may recover fees on appeal "if the prevailing party . . . would be entitled to attorneys' fees under . . . RCW 4.84.250. . . ." Because we vacate the trial court's decision finding the Cuhaciyans personally liable, we award attorney fees on appeal to the Cuhaciyans as the prevailing party on appeal. A commissioner of this court will determine the amount of fees.
Public Utils. Dist. 1 of Grays Harbor County v. Crea, 88 Wn. App. 390, 393, 945 P.2d 722 (1997), review denied, 134 Wn.2d 1021 (1998).
Hertz v. Riebe, 86 Wn. App. 102, 107, 936 P.2d 24 (1997). Krupp cites Lay v. Hass, 112 Wn. App. 818, 51 P.3d 130 (2002), to support his argument that one can collect attorney fees under RCW 4.84.250 without an offer of settlement. But the party in that case made an offer of settlement, and the court only discusses the common law notice requirement when a party seeks fees under Chapter RCW 4.84. Id. at 824-25. In contrast, Hertz analyzes the statutory language and did not involve an offer of settlement.
RCW 4.84.290 states:
If the case is appealed, the prevailing party on appeal shall be considered the prevailing party for the purpose of applying the provisions of RCW 4.84.250: Provided, That if, on appeal, a retrial is ordered, the court ordering the retrial shall designate the prevailing party, if any, for the purpose of applying the provisions of RCW 4.84.250.
In addition, if the prevailing party on appeal would be entitled to attorneys' fees under the provisions of RCW 4.84.250, the court deciding the appeal shall allow to the prevailing party such additional amount as the court shall adjudge reasonable as attorneys' fees for the appeal.
Hertz, 86 Wn. App. at 107.
The Cuhaciyans did not appeal the judgment against Better Homes, so there is no reason to remand the case to the trial court.
IV. Sanctions
Under RAP 18.9, an appellate court may, on its own initiative, order a party or counsel who fails to comply with the Rules of Appellate Procedure to pay sanctions to the court. We order Krupp's counsel to pay sanctions to the court in the amount of $1,000 for failing to follow the RAP 10.4(f) citation requirements. It is unacceptable for appellate counsel to repeatedly direct this court through his brief to specific parts of the record that, when referenced, do not support the arguments he makes.
The trial court is reversed and the judgment against the Cuhaciyans is vacated.
ELLINGTON and COLEMAN JJ., concur.