IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE
In the Matter of the Receivership of No. 86766-1-I
NORTHWEST TRUSTEE SERVICES, INC. and RCO LEGAL, P.S.
ELLIOT BAY ASSET SOLUTIONS, LLC, UNPUBLISHED OPINION Appellant/Cross Respondent,
v.
PNC BANK, N.A.,
Respondent/Cross Appellant.
BOWMAN, A.C.J. — Elliott Bay Asset Solutions LLC (EBAS) served as the
general receiver for RCO Legal PS and its affiliate, Northwest Trustee Services
Inc. (NWTS). EBAS hired attorneys to help with its receivership duties, including
defending against a claim for payment by PNC Bank NA. EBAS appeals from
the trial court’s orders disqualifying its attorneys from defending against PNC’s
claim and refusing to authorize EBAS to compensate them for work performed in
January and February 2024. PNC cross appeals, arguing the court abused its
discretion by approving payment to EBAS’ attorneys for work done in May, June,
and July 2024. Because the attorneys had no conflict of interest preventing them
from defending against PNC’s claim, we reverse and remand for the trial court to No. 86766-1-I/2
authorize payment for work that EBAS and its professionals performed in
January and February 2024 and to vacate its order disqualifying them. We also
affirm the trial court’s subsequent order granting EBAS’ requests to compensate
its attorneys.
FACTS
RCO and NWTS were a collective law firm and trust company that
represented financial institutions and foreclosed on over 49,000 properties per
year. In October 2015, JPMorgan Chase & Co. and JPMorgan Chase Bank NA
(collectively Chase) initiated an arbitration proceeding against RCO for damages
incurred during nonjudicial property foreclosures in Hawaii. Chase alleged that
RCO breached its contractual obligations and committed professional
malpractice. RCO’s malpractice insurer, Catlin Specialty Insurance Company,
defended RCO in the arbitration subject to a reservation of rights.1 On
November 29, 2017, RCO, Chase, and Catlin reached a tentative settlement
agreement.
On March 27, 2018, RCO and NWTS could not pay their debts and
assigned their property to EBAS to benefit the creditors under RCW 7.08.030.
EBAS accepted the assignment. The same day, EBAS petitioned for
appointment as general receiver “over all the assets owned by NWTS and/or
RCO.” The next day on March 28, the trial court issued an “Order Appointing
1 RCO’s Catlin policy covered the period of July 1, 2013 to July 1, 2024. It was an eroding policy with a $5,000,000 per claim limit of liability, a $5,000,000 aggregate limit of liability, and a $50,000 retention applicable to each covered claim.
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General Receiver” (Appointment Order), appointing EBAS as the general
receiver for RCO and NWTS.
The Appointment Order authorized EBAS to “take charge over all the
assets and property owned by NWTS and RCO . . . and to take such actions as
are required to protect and preserve such property.” It also authorized EBAS to
contract with, hire or retain (including on a contingency fee basis), direct and discharge any professional persons, including attorneys and accountants, that the Receiver, in its sole discretion, deems necessary for the efficient collection, operation, maintenance, and/or liquidation of the Receivership Property in accordance with RCW . . . 7.60.180.
Section 16 of the Appointment Order explained that EBAS may “disburse funds
from the Receivership Estate as payment for its fees and costs and for the fees
and costs of its professionals on a periodic basis” after filing a compensation
notice. It said the “approved fees and costs of the Receiver and its professionals
shall be paid from the gross receipts derived from the Receivership Property.”
On May 29, 2018, PNC filed a secured proof of claim with EBAS, seeking
over $30 million. Like the Chase claim, PNC alleged that RCO and NWTS
breached a legal services agreement and committed professional negligence
related to nonjudicial foreclosure proceedings in Hawaii. EBAS submitted the
claim to Catlin, which accepted it subject to a reservation of rights.
On May 30, 2018, Chase filed a proof of claim with EBAS. Two years
later in April 2020, EBAS moved the trial court to approve the settlement
agreement with Chase. The settlement agreement required Catlin to pay Chase
$2,500,000 on behalf of RCO and NWTS. In exchange, Chase would withdraw
its proof of claim and dismiss the arbitration with prejudice. PNC opposed EBAS’
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motion to approve the settlement agreement. It argued that if the court considers
the proceeds of the Catlin insurance policy to be property of the receivership
estate, the settlement agreement improperly grants Chase’s unsecured claim
priority over other creditors’ claims like PNC’s. On September 1, the trial court
approved the settlement agreement. It found that “the proceeds of the Catlin
Policy payable directly to Chase are not assets of the Receivership Estate . . .
and are not subject to pro rata distribution to other receivership creditors.”
On January 28, 2021, EBAS moved to employ the law firm Beck Chase
Gilman PLLC (BCG) and its attorneys James Beck and Eric Gilman to assist it
with its receivership duties. EBAS told the court it “does not believe that [BCG]
and/or its attorneys . . . have a conflict of interest with the Receiver or the
Receivership Estate.” On February 24, the trial court granted the motion.
Almost two years later on November 2, 2022, EBAS informed PNC that its
May 2018 proof of claim was statutorily noncompliant because it did not include
“a copy of the contract” supporting its claim for over $30 million. On December 6,
PNC amended its proof of claim, reducing it to $7,812,287 and identifying it as an
unsecured claim.
On February 13, 2023, EBAS moved to employ the law firm Wenokur
Riordan PLLC (WR) and its attorney Alan Wenokur “to advise and assist [EBAS]
with respect to administration of the Receivership Estate, including . . . the PNC
. . . Proof of Claim.” EBAS said it was hiring WR as “additional” counsel “to
investigate the PNC Bank Proof of Claim to determine liability and defend the
Proof of Claim if needed.” It stated, “Neither [WR] nor its attorney . . . have a
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conflict of interest with the Receiver or the receivership estate.” The court
granted the motion.
On October 18, 2023, WR sent PNC a letter, stating that it was aware
PNC was trying to identify insurance policies other than Catlin to which EBAS
could submit PNC’s claim. But it disputed that PNC’s claims have merit because
“all the legal actions where [PNC] alleged that RCO Legal committed
professional negligence fall far outside [the] statutes of limitations.” WR told PNC
that “unless we can settle these matters very soon, [EBAS] will be filing an
objection to the PNC claim.”
On November 15, 2023, PNC stated in a letter to EBAS that it discovered
additional RCO malpractice insurance policies. It said, “We are advised that
Chubb was RCO’s insurer from July 1, 2009 to June 30, 2011 and [that] Zurich
was RCO’s insurer from July 1[,] 2011 to June 30, 2013.” PNC asked EBAS to
tender its claim to Chubb and Zurich. EBAS refused.
On February 15, 2024, EBAS filed a “Notice of Intent to Compensate
Professionals” (NOICP) under RCW 7.60.180(4). The notice explained that
EBAS planned to pay itself and its attorneys for work performed in January 2024.
It stated that BCG incurred legal fees and costs of $19,330 and that Fox
Rothschild LLP (FR) incurred legal fees and costs of $272. On February 26,
PNC objected to the NOICP.2 It contended that EBAS “could have taken steps to
resolve PNC’s proof of claim by tendering it to applicable insurance for defense
2 This was the first time that PNC objected to an NOICP. EBAS had been filing NOICPs unopposed for several months.
5 No. 86766-1-I/6
and indemnity.” And by failing to do so, EBAS is “continuing to incur attorney’s
fees and costs for unnecessary and duplicative work serving no legitimate
receivership purpose.”
On February 27, 2024, PNC moved for an order authorizing it to file an
adjunct complaint to “(1) establish the validity of PNC’s claims of liability against
RCO; and (2) compel [EBAS] to tender said liability claims to all of RCO’s
applicable insurance.” On March 8, EBAS objected to PNC’s amended claim,
arguing PNC “is not entitled to any distribution from this receivership estate.” On
March 11, EBAS opposed PNC’s motion to file an adjunct complaint, arguing that
it is unsupported by the law, that it does not appear meritorious because the
statute of limitations bars the professional negligence claims, and that EBAS
reasonably exercised its business judgment in opposing PNC’s claim.
On March 15, 2024, the trial court entered an order authorizing PNC to file
an adjunct complaint. The same day, the court denied EBAS’ request to pay
EBAS, BCG, and FR3 for work performed in January 2024. On March 25, EBAS
moved the trial court to reconsider both its order authorizing PNC to file an
adjunct complaint and its order denying EBAS’ request to pay its attorneys for
work performed in January 2024. The court denied EBAS’ motion for
reconsideration.
On March 22, 2024, EBAS filed an NOICP for time that it, BCG, and WR
spent working, in part, on PNC’s claim in February 2024. The NOICP stated that
3 It does not appear from the briefing that FR’s compensation is at issue in this
appeal.
6 No. 86766-1-I/7
BCG incurred legal fees and costs of $14,059 and that WR incurred legal fees
and costs of $2,915. Again, PNC objected, arguing EBAS was incurring attorney
fees and costs for unnecessary work that serves no receivership purpose. PNC
also argued that EBAS failed to disclose that the fees “relating to PNC’s claim
are being paid out of the remaining proceeds from the [Catlin policy].” And it
asserted that “[b]y allowing its attorneys to incur and be paid fees that erode the
Catlin Policy at the expense of PNC, [EBAS] . . . has without court approval
created clear conflicts of interest which are just now being disclosed.”
On April 19, 2024, EBAS moved under RCW 7.60.060(1)(g) to seek and
obtain advice or instruction on how it “should pay its fees and costs and its legal
counsel’s fees and costs to process the PNC Bank claim and to otherwise litigate
the adjunct cause of action authorized by the Court.” It explained that it made
the request because the court “has authorized [it] to retain legal counsel and has
authorized the filing of an adjunct cause of action against [EBAS], yet has denied
[EBAS] counsel’s request for compensation to address the adjunct cause of
action.”
On May 3, 2024, the trial court denied EBAS’ RCW 7.60.060(1)(g) motion.
It agreed with PNC’s argument that EBAS’ attorneys were conflicted. And it
instructed EBAS to hire new counsel that represented only EBAS and had no
affiliation with Catlin’s insured. The court ordered EBAS to
obtain approval (upon notice to all creditors of this above-captioned receivership case) of the employment of special insurance defense counsel retained by the insurers for the specified special purpose of only defending RCO Legal, P.S. in the adjunct case proceeding under King County Superior Court No. 24-2-06322-6 SEA and said
7 No. 86766-1-I/8
special insurance defense counsel shall not advise [EBAS] on any other receivership matters.
On May 7, 2024, the trial court requested supplemental briefing on PNC’s
objection to EBAS’ request to pay its attorneys for work performed in February
2024. It asked the parties to address “what, if any, impact the Court’s Order
[denying advice or instruction under RCW 7.60.060(1)(g)] has on the matter.”
After considering the supplemental briefing, the court overruled PNC’s objection
to the NOICP and authorized EBAS to issue payment for work performed in
February 2024.
On May 23, 2024, PNC moved for reconsideration, arguing that EBAS
“now stands to further erode the Catlin Policy’s remaining proceeds[,]” which
“directly prejudices PNC who has a valid claim to the proceeds.” On June 12, the
court granted PNC’s motion for reconsideration and denied EBAS’ request to
compensate. It recognized that its order authorizing payment for work performed
in February 2024 contradicted its order refusing payment for work performed in
January 2024, “since no material facts or evidence has changed.” It also stated
that EBAS
improperly disclosed and never obtained this Court’s approval and authorization to allow [EBAS’] two general counsel attorneys, Beck and Wenokur, to simultaneously serve as [EBAS’] general counsel and as paid insurance defense counsel for Catlin in defending the Amended Proof of Claim asserted by PNC.
Further, the court stated that EBAS never received approval to have its attorneys
be paid “from the remaining proceeds of the Catlin policy.”
On August 6, 2024, EBAS filed an NOICP for work that it, BCG, WR, and
Carney Badley Spellman performed in May, June, and July 2024 related to
8 No. 86766-1-I/9
PNC’s claim. PNC objected and the court overruled its objection, authorizing
payment of legal fees and costs.
EBAS appealed the trial court’s order refusing to authorize compensation
for work that its attorneys performed in January and February 2024, as well as
the court’s order disqualifying its attorneys from defending against PNC’s claim.4
PNC cross appealed, arguing the trial court erred by authorizing payment for
work performed from May through July 2024.
On December 13, 2024, the parties stipulated that pending our decision,
EBAS may continue to submit NOICPs and “issue payment from the bank
accounts held by the receivership estate for any Fee Notices that are approved
by the Court or deemed approved pursuant to the Appointment Order.” They
also stipulated that
neither the Receiver nor its counsel will request to be compensated, reimbursed, or otherwise paid from the proceeds of any insurance policies that do or may provide coverage for defense costs or claim expenses to the Estate or indemnity coverage to RCO Legal, P.S. or any of its affiliates.
And they agreed that “PNC will not object to future Fee Notices based on the
source from which approved compensation is paid, so long as payment is made
from the Estate’s bank accounts and not from the proceeds of any Insurance
Policies.”
4 EBAS first filed a notice of appeal on May 10, 2024. On June 24, it amended its appeal to include additional orders.
9 No. 86766-1-I/10
ANALYSIS
EBAS argues the trial court erred by disqualifying its attorneys from
defending against PNC’s claim and denying them compensation for work
performed in January and February 2024. PNC argues the trial court’s orders
are not appealable and, regardless, it did not err by disqualifying EBAS’ attorneys
or denying them compensation. PNC also cross appeals, challenging the trial
court’s order authorizing EBAS to compensate its attorneys for work performed
from May through July 2024. We address each argument in turn.5
1. Appealability
As an initial matter, PNC argues the trial court’s orders denying
compensation and instructing EBAS to retain new counsel are not appealable.6
EBAS contends the orders are reviewable under RAP 2.2(a)(3) and 2.3(b). We
agree with EBAS that the orders are reviewable under RAP 2.3(b)(2).
Under RAP 2.3(b)(2), we may accept discretionary review when the trial
court “has committed probable error and the decision of the superior court
substantially alters the status quo or substantially limits the freedom of a party to
act.” Here, the trial court granted EBAS’ motions to employ BCG and WR but
then disqualified them from defending EBAS against PNC’s claims. As explained
below, substantial evidence does not support their disqualification. And the trial
5 EBAS moved to strike the overlength portion of PNC’s response brief and to
strike PNC’s reply brief for violating RAP 10.1(c) and 10.3(c). We deny both motions. PNC moved for leave to file an overlength brief, which a commissioner of this court deferred to the panel. We now grant that motion. 6 A commissioner of this court deferred the appealability issue to the panel.
10 No. 86766-1-I/11
court’s error substantially limited EBAS’ ability to defend against PNC’s claim. As
a result, we grant discretionary review under RAP 2.3(b)(2).7
2. Orders Denying Compensation
EBAS argues the trial court abused its discretion by disqualifying its
attorneys and denying them compensation for time incurred in January and
February 2024. PNC disagrees and cross appeals, arguing the court erred by
granting compensation for time incurred in May, June, and July 2024. We agree
with EBAS.
We review the trial court’s rulings related to a receivership for abuse of
discretion. In re Receivership of Applied Restoration, Inc., 28 Wn. App. 2d 881,
890-91, 539 P.3d 837 (2023). A court abuses its discretion when its decision is
manifestly unreasonable or based on untenable grounds or reasons. Id. at 891.
We review the court’s findings of fact for substantial evidence, which exists when
there is sufficient evidence in the record “ ‘to persuade a reasonable person that
the declared premise is true.’ ” Id. (quoting Wenatchee Sportsmen Ass’n v.
Chelan County, 141 Wn.2d 169, 176, 4 P.3d 123 (2000)).
Chapter 7.60 RCW provides the trial court broad discretion over
receiverships. Bero v. Name Intel., Inc., 195 Wn. App. 170, 175, 381 P.3d 71
(2016). A trial court appoints a receiver “as the court’s agent, and subject to the
court’s direction, to take possession of, manage, or dispose of property.” RCW
7 PNC argues we should dismiss EBAS’ appeal because it did not first obtain the
trial court’s permission to appeal. But PNC cites no Washington authority requiring EBAS to get the court’s approval to appeal a denial of a request to compensate. See RAP 10.3(a)(6) (brief “should contain . . . argument in support of the issues presented for review, together with citations to legal authority”). So, we reject that argument.
11 No. 86766-1-I/12
7.60.005(10). A general receiver’s broad powers include managing the
receivership property, liquidating assets, and satisfying creditors. Bero, 195 Wn.
App. at 175. With the court’s approval, the receiver may employ attorneys “that
do not hold or represent an interest adverse to the estate to represent or assist
the receiver in carrying out the receiver’s duties.” RCW 7.60.180(1). A person is
not disqualified for employment
solely because of the person’s employment by, representation of, or other relationship with a creditor or other party in interest, if the relationship is disclosed in the application for the person’s employment and if the court determines that there is no actual conflict of interest or inappropriate appearance of a conflict.
RCW 7.60.180(2).
RCW 7.60.180(4) provides that a receiver may pay its employed
professionals by filing an itemized billing statement showing the time spent,
billing rates, and a detailed list of expenses for compensation and by serving
copies on any parties. If no one objects, the receiver may make the payments
specified in the notice. Id. Similarly, section 16 of the Appointment Order states
that the receiver “is authorized to disburse funds from the Receivership Estate as
payment for its fees and costs and for the fees and costs of its professionals on a
periodic basis.” And it specifies that the “approved fees and costs . . . shall be
paid from the gross receipts derived from the Receivership Property.”
Here, the trial court refused to authorize EBAS to pay its attorneys at BCG
and WR for their work in January and February 2024. It reasoned, in part, that
Catlin’s reimbursement of attorney fees for work defending against PNC’s claim
created a conflict of interest. It explained that BCG and WR could not
12 No. 86766-1-I/13
“simultaneously serve as the Receiver’s general counsel and as paid insurance
defense counsel for Catlin in defending the Amended Proof of Claim asserted by
PNC.”8 But the court misconstrued BCG and WR’s role as independent counsel
under Washington insurance law.
Catlin accepted EBAS’ claim for coverage against PNC’s allegations
under a reservation of rights, meaning Catlin agreed to defend EBAS subject to
the right to later deny coverage. See Ledcor Indus. (USA), Inc. v. Mut. of
Enumclaw Ins. Co., 150 Wn. App. 1, 7, 9, 10-11, 206 P.3d 1255 (2009) (under a
reservation of rights defense, the insured receives the defense promised, but if
the insurer later determines there is no coverage, it need not pay). In a
reservation-of-rights defense, an insurance company has an enhanced obligation
to its insured, which includes “retain[ing] competent defense counsel for the
insured.” Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 387-88, 715 P.2d
1133 (1986). Defense counsel “represents only the insured, not the [insurance]
company.” Id. at 388. As a result, they are “loyal only to the insured.” Ledcor,
150 Wn. App. at 9; see also RPC 5.4(c).
Catlin’s decision to accept EBAS’ claim for coverage under a reservation
of rights compelled it to retain independent counsel for EBAS. EBAS chose BCG
and WR as their independent counsel. And while Catlin was contractually
8 The trial court also found that EBAS violated its obligation to disclose and
obtain approval to “seek reimbursement for the fees and costs incurred . . . from the remaining proceeds of the Catlin Policy.” But EBAS had no duty to disclose reimbursement under RCW 7.60.180 or the Appointment Order. And EBAS otherwise followed the procedural requirements of RCW 7.60.180 and the Appointment Order—it timely submitted the NOICPs, supported by itemized billing statements, and paid the fees from the receivership assets.
13 No. 86766-1-I/14
obliged to reimburse EBAS for the attorney fees, BCG and WR represented only
EBAS under Washington law. The attorneys owed no duty of loyalty to Catlin.
So, the trial court erred by concluding that Catlin’s reimbursement made BCG
and WR “paid insurance defense counsel for Catlin,” creating a conflict of
interest.
PNC argues this case is like Lowder v. All Star Mills, Inc., 309 N.C. 695,
309 S.E.2d 193 (1983). In that case, minority shareholders sued a corporation,
alleging that a corporate officer diverted assets. Id. at 696. The shareholders’
attorneys agreed to prosecute the case on a contingency basis. Id. at 700. The
court then appointed those same attorneys to serve as counsel for the
corporation’s receiver. Id. at 699-700. The court of appeals held that the
attorneys’ appointment created a conflict of interest and that the trial court could
not compensate the attorneys for fees related to services for the receiver. See
id. at 698. The North Carolina Supreme Court agreed that the appointment
created a conflict of interest because the attorneys’ personal interests in a
successful lawsuit substantially conflicted with their loyalty to the receiver. Id. at
702-03.
This case is not like Lowder. Here, BCG and WR’s duty of loyalty was
solely to EBAS. Neither BCG nor WR stood to personally gain from PNC’s claim.
So, they had no conflict of interest.
Still, PNC argues that Catlin’s reimbursement of EBAS’ attorney fees
creates a conflict of interest because “[e]very dollar that Catlin paid EBAS eroded
the policy limit further, leaving a dollar less to pay PNC’s claim.” But PNC fails to
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explain how BCG and WR vigorously defending against its claim at the expense
of eroding policy limits amounts to a conflict of interest. Indeed, EBAS has a duty
to protect and preserve estate property,9 which includes contesting unsupported
claims. See RCW 7.60.060. And because BCG and WR are loyal to only EBAS,
they must advocate consistently with that duty.
The trial court abused its discretion by disqualifying EBAS’ attorneys from
defending against PNC’s claim and refusing to authorize compensation for work
the attorneys performed in January and February 2024.10 We reverse and
remand for the trial court to authorize payment for those services and to vacate
its order instructing EBAS to hire new counsel. And we affirm the order granting
EBAS’ requests to compensate its attorneys for work performed from May
through July 2024.
WE CONCUR:
9 As much as PNC suggests that the Catlin policy proceeds are estate property, it
is mistaken. The trial court determined that the proceeds were not estate property in its 2020 order approving EBAS’ settlement agreement with Chase. 10 For the same reasons, the court did not err by authorizing payment to EBAS
and its attorneys for the work they performed from May through July 2024.