Falcon Properties, App-cross Resp v. Bowfits 1308 Llc, Resp-cross App

• Court: Court of Appeals of Washington
• Decided: December 28, 2020
• Docket: 80128-7
• Status: Published

Opinion

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

FALCON PROPERTIES LLC, ) No. 80128-7-I (consolidated with a Washington limited liability company, ) No. 80185-6-I) and ALEXEY SOKOLOV and JANE ) DOE SOKOLOV, husband and wife, ) ) DIVISION ONE Appellants/Cross-Respondents, ) ) v. ) ) BOWFITS 1308 LLC, a Washington ) limited liability company, ) ) PUBLISHED OPINION Respondent/Cross-Appellant. ) )

MANN, C.J. — Falcon Properties LLC (Falcon) and Alexey Sokolov appeal the

trial court’s judgment awarding damages and attorney fees to Bowfits 1308 LLC

(Bowfits) arising out of the sale of a residential apartment building. Falcon and Sokolov

argue that the trial court erred in disgorging to Bowfits a $75,000 commission that

Falcon paid to Sokolov after the sale. Falcon also argues that the trial court erred in its

calculation of actual damages. Finally, Falcon argues that the award of attorney fees

was excessive. We agree on the issue of disgorgement and reverse. We affirm on all

other grounds. No. 80128-7-I/2 (consolidated with No. 80185-6-I)

Bowfits cross appeals and argues that the trial court erred by determining

attorney fees were not awardable against Sokolov individually. Bowfits also argues that

the trial court erred in concluding that Falcon did not violate the Consumer Protection

Act (CPA), chapter 19.86 RCW. We remand to the trial court to reexamine its award of

attorney fees after our reversal of the order requiring disgorgement of Sokolov’s

commission. We otherwise affirm.

Affirmed in part, reversed in part, and remanded for determination of attorney

fees consistent with this opinion.

I. BACKGROUND

This dispute involves a contract for sale of a 13-unit apartment building located at

1308 12th Avenue South, in Seattle (the Property). Falcon is a Seattle-based, multi-

family portfolio and property management company. Sokolov is Falcon’s managing

member and a real estate broker. Falcon purchased the Property in 2015 for

$2,075,000.

Bowfits consists of 10 members who jointly invested for the sole purpose of

purchasing an income producing property. Walter Boos is Bowfits’s general partner.

John Odegard, president of Seattle Funding Group, and Don Burdick, a corporate

executive and licensed attorney, are also members of Bowfits.

Falcon originally listed the Property for sale at $4,250,000, with a net operating

income of $185,581 and a capitalization (cap) rate1 of 4.37 percent. Falcon then

removed the listing from the market, subsequently reintroducing it with a lowered price

1 A cap rate is a way of analyzing the current performance of a property by dividing its net income by its purchase price, thus yielding a percentage.

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of $3,747,500, and an increased cap rate of 4.94 percent. Bowfits, interested in a

property with a cap rate of approximately 5 percent, was satisfied with the Property’s

cap rate upon relisting.

On July 6, 2017, Bowfits and Falcon reached mutual acceptance on a purchase

and sale agreement (the Agreement) for the Property. Bowfits diligently retained a

licensed inspector to investigate the physical condition of the Property. Pursuant to the

Agreement, Falcon was required to provide Bowfits with various documents relating to

the income of the Property.2 Falcon was also required to deliver to Bowfits updated

versions of this information no later than two days before the scheduled closing date,

certifying the information as true and accurate.

After receiving the initial documents required by the Agreement, Bowfits noticed

discrepancies in the financial history of the Property. First, Bowfits observed that the

rent roll and profit and loss statement did not match. Falcon explained that it sent both

a current and budgeted rent roll. Second, Bowfits found that pages of leases were

missing. Third, Bowfits asked follow-up questions about the tenants and requested

receipts and bank statements showing that the Property was achieving the advertised

$20,000 per month income. Falcon refused to substantiate the Property’s income,

claiming it as confidential. Finally, after the failed inquiry, Bowfits requested a certified

rent roll. On October 24, 2017, Falcon prepared and signed a certified rent roll.

2 Paragraph 5(a) of the Agreement states that “Seller shall make available for inspection by Buyer and its agents . . . all documents in Seller’s possession or control relating to the ownership [and] operation . . . of the Property . . . and including . . . leases and other agreements relating to all or a portion of the Property and a suite-by-suite schedule of tenants, rents, prepaid rents, deposits and fees.”

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Through the certified rent roll, Falcon represented and warranted identities of

tenants, monthly rents, current lease terms, and expenses. Relying on the certified rent

roll, Bowfits and Falcon closed on the purchase of the property for $3,747,500. Falcon

paid Sokolov a $75,000 commission for the sale.

After closing, Bowfits discovered multiple material misrepresentations made by

Falcon on the certified rent roll. Falcon also made other misrepresentations designed to

mislead and reassure Bowfits. The fiscal misrepresentations lowered the advertised

cap rate from 4.94 percent to 4.27 percent.

On January 17, 2018, Bowfits filed a complaint against Falcon for breach of

contract, fraudulent misrepresentation, negligent misrepresentation, violation of the

CPA, and the disgorgement of Sokolov’s commission. Bowfits offered two alternative

calculations of damages. The first was for a $266,532.33 lost investment value based

on the discrepancy between the cap rate as advertised and the cap rate once Bowfits

discovered the false claims in the certified rent roll. The second was for the actual

damages determined from the false income claims in the certified rent roll compared to

the Property’s actual income.

Following a bench trial, the trial court entered written findings of fact and

conclusions of law. The court found in favor of Bowfits on its claims for breach of

contract, fraudulent misrepresentation, negligent misrepresentation, and disgorgement

of the commission paid to Sokolov, but found that Bowfits could not establish its CPA

claim.

The trial court awarded Bowfits actual damages of $13,400 (with adjustments)

related to the misrepresentations of the current rents and leases. Finding the testimony

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of Bowfits’s expert witness unpersuasive, the trial court refused to award the larger

damages based on the differences in cap rates. The court also found Bowfits’s claim

for damages for lost time speculative and declined to award damages.

The trial court also awarded judgment against Sokolov in the amount of $75,000

for the disgorgement of the commission he earned from Falcon. The court justified

disgorging Sokolov’s commission because of his violation of his statutory duties as a

realtor and subsequent unjust enrichment from receiving the commission.

Based on an attorney fees provision in the Agreement, the trial court determined

that Bowfits was the prevailing party. The court awarded Bowfits $118,594.75 in

attorney fees and $6,466.05 in litigation costs.

Falcon appeals, Bowfits cross appeals.

II. ANALYSIS

A. Disgorgement of Sokolov’s Commission

Falcon argues first that the trial court erred when it disgorged Sokolov’s $75,000

commission. The trial court justified the disgorgement of Sokolov’s commission on two

theories: (1) Sokolov’s violation of his duties as a real estate broker under RCW

18.86.030, and (2) in order to avoid unjust enrichment. Falcon contends that tort and

compensatory damages, not restitution damages, are proper redress for a violation of

RCW 18.86.030. Falcon further contends that Bowfits cannot establish the elements of

unjust enrichment. We agree.

We review the legal standard of recovery de novo. Young v. Young, 164 Wn.2d

477, 483, 191 P.2d 1258 (2008).

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The trial court’s reliance on RCW 18.86.030 as a basis for disgorging Sokolov’s

commission to Bowfits was erroneous for two reasons. First, the trial court was correct

that a real estate broker has a statutory duty under RCW 18.86.030(1)(b) and (d) to deal

honestly and in good faith, and to disclose all existing material facts known. But that

duty is owed only to the parties “to whom the broker renders real estate brokerage . . .

duties.” RCW 18.86.030(1). Sokolov was Falcon’s broker and provided real estate

brokerage duties to Falcon, not Bowfits. Sokolov did not owe a duty to Bowfits under

RCW 18.86.030(1).

Second, even if Sokolov did owe a statutory duty to Bowfits under RCW

18.86.030(1), the vehicle for recovery for a breach of statutory duties under chapter

18.86 is through common law tort. Jackowski v. Borchelt, 174 Wn.2d 720, 735, 178

P.3d 1100 (2010). In this case, Bowfits sought and recovered damages for Falcon’s

fraudulent misrepresentation. Damages for fraudulent misrepresentation are limited to

the losses proximately caused by the defendant’s fraud. McRae v. Bolstad, 32 Wn.

App. 173, 178, 646 P.2d 771 (1982). The trial court awarded Bowfits its actual

damages of $13,400 for Falcon’s misrepresentations. Bowfits was not entitled to a

disgorgement of Sokolov’s commission for fraudulent misrepresentation.

At trial, Bowfits justified its claim for disgorgement of Sokolov’s commission

based on its claimed loss of $50,000 for lost time investment opportunity, and $25,000

of CPA treble damages. The trial court, however, rejected both of these claims. On

appeal, Bowfits relies on several cases that authorize the disgorgement of real estate

commissions or attorney fees for fraudulent or unethical conduct. The cases Bowfits

cites do not support disgorgement in this situation. Instead, the cited cases involve

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disgorgement of commissions or fees paid by the injured party where the recipient of

the commission or fees acted fraudulently or unethically. Bowfits cites, and we can find

no case, where commissions or fees are disgorged to a third party where there was no

privity between the third party and the recipient of the commission or fees. See, e.g.,

Cogan v. Kidder, Mathews & Segner, Inc., 97 Wn.2d 658, 648 P.2d 875 (1982)

(disgorging a commission paid to a listing broker by a buyer where the broker failed to

identify a conflict of interest with the seller); Girard v. Meyers, 39 Wn. App. 577, 694

P.2d 678 (1985) (disgorging a commission paid to a vendor by a property owner); Eriks

v. Denver, 118 Wn.2d 451, 824 P.2d 1207 (1992) (disgorging attorney fees paid by a

client to his attorney).

Disgorgement of real estate commissions and attorney fees is not an appropriate

remedy where the damaged party was not in privity with the recipient of the commission

or fees. The Agreement for the sale of the Property was between Bowfits and Falcon.

Falcon paid a commission to its agent Sokolov after the sale. Because there was no

privity between Bowfits and Sokolov, the trial court erred in ordering the disgorgement

of Sokolov’s commission to Bowfits.3 We reverse the trial court’s order disgorging

Sokolov’s $75,000 commission to Bowfits.

3 Disgorgement is also not appropriate under a standalone theory of unjust enrichment. Three elements must be established for unjust enrichment: (1) there must be a benefit conferred on one party by another, (2) the party receiving the benefit must have an appreciation or knowledge of the benefit, and (3) the receiving party must accept or retain the benefit under circumstances to make it inequitable for the receiving party to retain the benefit without paying its value. Bailie Commc’ns, Ltd. v. Trend Bus. Sys., Inc., 61 Wn. App. 151, 159-60, 810 P.2d 12 (1991) (quoting BLACK’S LAW DICTIONARY 1535-36 (6th ed. 1990)). Bowfits’s unjust enrichment claim fails on the first element. Falcon paid Sokolov’s commission, not Bowfits’s. Therefore, Bowfits did not confer the $75,000 benefit to Sokolov.

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B. Bowfits’s Damages

Falcon argues that the court erred in its determination of Bowfits’s damage

award. We disagree.

We will not disturb the trial court’s determination of damages unless it is outside

the range of substantial evidence in the record, shocks the conscience of the court, or

was the unmistakable result of passion or prejudice. Bingaman v. Grays Harbor Cmty.

Hosp., 103 Wn.2d 831, 835, 699 P.2d 1230 (1985).

The trial court carefully assessed potential calculations of damages and selected

the one it found most appropriate. The court rejected Bowfits’s argument that it suffered

$276,269 in damages because of the difference between the advertised and actual cap

rates. In doing so, the court found the testimony of Bowfits’s expert witness

unpersuasive. The trial court also rejected Bowfits’s assertion that it experienced

damages as a result of a loss of time as entirely speculative. Instead, the trial court

calculated damages for each unit individually based on the fabricated income and actual

income, for a final determination of $13,400. Because the trial court’s findings are

supported by substantial evidence we will not disturb them on appeal.

C. Attorney Fee Award to Bowfits

Falcon argues that the trial court erred in awarding Bowfits attorney fees and

incorrectly determined the amount of fees awarded. We disagree in part.4

We apply a two-part standard of review to a trial court’s award or denial of

attorney fees: (1) we review de novo whether there is a legal basis for awarding 4 In its cross appeal, Bowfits argues that the trial court erred in not also awarding attorney fees against Sokolov individually. But as the trial court correctly concluded, the Agreement was between Falcon and Bowfits. There was no basis for an award of attorney fees against Sokolov.

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attorney fees by statute, under contract, or in equity and (2) we review a discretionary

decision to award or deny attorney fees and the reasonableness of any attorney fees

award for an abuse of discretion. Gander v. Yeager, 167 Wn. App. 638, 647, 282 P.3d

1100 (2012).

Courts may award attorney fees only when authorized by a contract provision, a

statute, or a recognized ground in equity. King County v. Vinci Constr. Grands

Projects/Parsons RCI/Frontier-Kemper, JV, 188 Wn.2d 618, 625, 398 P.3d 1093 (2017).

Here, the trial court recognized the legal basis for awarding Bowfits its attorney fees

was in the Agreement. This Agreement provides that “[i]f Buyer or Seller institutes suit

against the other concerning this Agreement, the prevailing party is entitled to

reasonable attorneys’ fees and expenses.” This is a proper legal basis for awarding

attorney fees.

Trial courts have broad discretion when determining the amount of attorney fees

awarded. Mahler v. Szucs, 135 Wn.2d 398, 435, 957 P.2d 632 (1998). In calculating

these fees, the trial court must supply findings of fact and conclusions of law sufficient to

permit this court to determine why the trial court awarded the amount in question.

SentinelC3, Inc. v. Hunt, 181 Wn.2d 127, 144, 311 P.3d 40 (2014).

The trial court also properly exercised its discretion in determining the amount of

attorney fees to award. The trial court properly applied the lodestar method and

determined that the rates charged and time spent were both reasonable. While Bowfits

requested fees based on hourly rates slightly higher than actually charged, the court

limited its fees to the rates actually charged. The court then explained its rationale for

reducing fees for time spent briefing and researching Bowfits’s unsuccessful CPA claim

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and that many of the hours spent were due in part to unreasonable delays by Sokolov.

Finally, the trial court concluded that the breach of contract, fraudulent

misrepresentation, and disgorgement of the commission paid to Sokolov all “arose out

of the same transaction” and “are intertwined and interrelated.”

There is no basis for us to conclude that the trial court abused its discretion in its

award of attorney fees and costs. However, because we reverse the trial court’s

decision disgorging Sokolov’s commission, we must remand to the trial court to consider

whether an adjustment of its attorney fees award is necessary.

D. Bowfits’s Consumer Protection Act Claims

Bowfits argues that the trial court erred in finding that Falcon did not violate the

CPA. We disagree.

We review for substantial evidence whether a defendant in a CPA case did or did

not engage in certain conduct. Grayson v. Nordic Constr. Co., 92 Wn.2d 548, 559 P.2d

1271 (1979). “Substantial evidence is said to exist if it is sufficient to persuade a fair-

minded, rational person of the declared premise.” Brown v. Superior Underwriters, 30

Wn. App. 303, 306, 632 P.2d 887 (1980). “The determination of whether a particular

statute applies to a factual situation is a conclusion of law, and not a finding of fact.”

Fisher v. World-Wide Trophy Outfitters, Ltd., 15 Wn. App. 742, 743-44, 551 P.2d 1398

(1976). Thus, whether a set of actions gives rise to a CPA claim is a question of law.

Keyes v. Bollinger, 31 Wn. App. 286, 289, 640 P.2d 1077 (1982).

To establish a claim under the CPA, a plaintiff must prove five elements: (1) an

unfair or deceptive act or practice, (2) occurring in trade or commerce, (3) public interest

impact, (4) injury to plaintiff in his or her business or property, and (5) causation. Sing v.

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John L. Scott, Inc., 134 Wn.2d 24, 30, 948 P.2d 816 (1997) (citing Hangman Ridge

Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 784, 719 P.2d 531

(1986)). The trial court acknowledged, and it is uncontested, that Bowfits proved all but

the public interest element. The public interest element is therefore the only one at

issue.

To establish the public interest element of a CPA claim, the court considers: “(1)

whether the acts were committed in the course of defendant’s business, (2) whether the

defendant advertised to the public, (3) whether the defendant actively solicited the

plaintiff, and (4) whether the parties occupied unequal bargaining positions. Bloor v.

Fritz, 143 Wn. App. 718, 737, 180 P.3d 805 (2008) (citing Svendsen v. Stock, 143

Wn.2d 546, 553, 23 P.3d 455 (2001)). “These factors show a likelihood that additional

plaintiffs have been or will be injured in the same manner.” Bloor, 143 Wn. App. at 737.

No single factor is dispositive. Rather, courts weigh all factors to determine if the

plaintiffs have established the public interest element of the CPA. Bloor, 143 Wn. App.

at 737.

The trial court found that: (1) Falcon’s acts were committed in the course of its

business, (2) although some of Falcon’s listings were to the public, Falcon marketed the

Property specifically toward real estate investors, (3) Falcon did not actively solicit

Bowfits, and (4) the parties were not in unequal bargaining positions. Substantial

evidence supports each of these findings.

Falcon is a property management company that has bought and sold multiple

properties. It is within the course of its business to sell the Property to Bowfits. Falcon

also specifically marketed the Property with cap rates meant to attract investors and

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listed the multi-million dollar complex on commercial real estate sites. The Property

was intended for investors and not the general public. The record does not contain

evidence that Falcon solicited Bowfits. Finally, Bowfits consisted of several savvy real

estate investors. It was in an equal bargaining position with Falcon.

Based on the trial court’s findings, Bowfits failed to establish the public interest

element of the CPA. Although Falcon’s acts were committed during the course of its

business, the final three factors weighed to establish the element are in its favor.

Because Falcon was advertising the Property to investors, not targeting Bowfits, and the

two were in equal bargaining positions, it is unlikely that additional plaintiffs will be

injured in the same manner.

We review a party’s conduct relating to a CPA claim for substantial evidence, and

the application of that conduct as a matter of law. Substantial evidence supports

Falcon’s listing not being public, not soliciting Bowfits, and the two parties being in equal

bargaining positions. Taken in whole, these findings do not satisfy the public element

interest of the CPA and, therefore, the necessary elements for a CPA claim.

E. Attorney Fees on Appeal

Both Bowfits and Falcon request attorney fees on appeal under RAP 18.1.

Under RAP 18.1, a party may request reasonable attorney fees on appeal if an

applicable law grants the party the right to recover. Both parties request attorney fees

based on the attorney fees provision in the Agreement. We generally recognize a

provision in a contract allowing attorney fees to include fees on appeal as well as at

trial. Edmundson v. Bank of America, 194 Wn. App. 920, 932-33, 378 P.3d 272 (2016).

Because both parties prevailed in part, we decline to award attorney fees on appeal.

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Affirmed in part, reversed in part, and remanded for determination of attorney

WE CONCUR:

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