LK Operating, LLC v. Collection Grp., LLC

• Court: Washington Supreme Court
• Decided: July 31, 2014
• Docket: 88846-9
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

LK OPERATING, LLC, a Washington ) limited liability company, ) ) Plaintiff, ) ) NO. 88846-9 v. ) ) THE COLLECTION GROUP, LLC, a ) Washington limited liability company; and ) BRIAN FAIR and SHIRLEY FAIR, ) ENBANC husband and wife, and the marital ) community composed thereof, ) ) Appellants. ) ____________________________) Filed JUL 3 1 2014 ) BRIAN FAIR and SHIRLEY FAIR, and ) the marital community composed thereof; ) and THE COLLECTION GROUP, LLC, a ) Washington limited liability company, ) ) Appellants, ) ) v. ) ) LESLIE ALAN POWERS and PATRICIA ) POWERS, husband and wife, and KEITH ) THERRIEN and MARSHA THERRIEN, ) husband and wife, ) ) Respondents/Cross-Appellants. ) __________________________) LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

FAIRHURST, J.-In this case and its companion, LK Operating, LLC v.

Collection Grp., LLC, No. 88132-4, we consider issues arising from a joint venture

agreement regarding a debt collection business. The debt collection business

operated according to the terms of the joint venture agreement, as originally

proposed, from approximately winter 2005 through summer 2007, at which time the

disagreements underlying the present litigation surfaced. In this opinion, we consider

whether the trial court erred in applying the doctrine of equitable indemnification

(also known as the "ABC Rule" 1) to hold that the legal malpractice plaintiffs here

suffered no compensable damages as a matter of law and that summary judgment

dismissal was appropriate.

We adhere to established precedent. Where the only damages claimed by a

legal malpractice plaintiff are attorney fees incurred in a separate litigation and the

only legal basis on which plaintiff asserts those fees are compensable is the ABC

Rule, then the defendant is entitled to summary judgment dismissal if the ABC Rule

does not apply to the undisputed facts as a matter of law. That was the situation

presented here. We decline the invitation to reexamine the ABC Rule in the legal

malpractice context because that issue was not raised below. We affirm.

1 The parties primarily use the tenn "ABC Rule," so we use that term as well. 2 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

I. FACTUAL AND PROCEDURAL HISTORY2

At all relevant times, Leslie Powers and Keith Therrien (hereinafter referred

to as Powers) practiced law as Powers & Therrien PS (Law Firm). LK Operating

(LKO), a limited liability company (LLC), was a Law Firm client at all relevant

times. LKO is managed by Powers & Therrien Enterprises Inc. (P&T Enterprises).

Leslie Powers and Keith Therrien are the officers ofP&T Enterprises.

In early 2004, Brian Fair became a Law Firm client in his personal capacity.

Several months later, Fair formed The Collection Group LLC (TCG) to run a debt

collection business. In late 2004, Fair approached Powers about a plan to operate

TCG as a joint venture. Fair proposed that each party would contribute 50 percent

of the costs, Fair would provide administrative and management services, Powers

would provide legal services, and each party would own 50 percent of TCG.

Ultimately, Fair's joint venture proposal was accepted via performance of its

terms-LKO contributed the costs, and Powers provided the legal services. This

arrangement was not formalized in writing. The parties dispute whether TCG was

aware that the costs and the legal services were being provided by two distinct

entities.

2 We include only the factual and procedural history necessary to provide context for our resolution of the issue presented. For a more detailed recitation of the underlying factual and procedural history, please see the companion case, LK Operating, LLC v. Collection Grp., LLC, No. 88132-4 (Wash., argued Oct. 8, 2013). 3 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

In April 2007, Fair proposed to Powers a formalized joint venture agreement

modifying TCG's ownership structure from that originally proposed based on Fair's

assessment of each party's contributions up to that time. Powers objected, asserting

that the joint venture agreement provided for a 50/50 ownership and that P&T

Enterprises, through its attorney, asserted that Powers did not have or claim any

interest in TCG because LKO and TCG were the only parties to the joint venture

agreement.

In July 2007, LKO filed a complaint in Chelan County Superior Court, cause

no. 07-2-00652-9, against Fair and TCG for declaratory relief regarding the

allocation of ownership interests in TCG, breach of contract, and breach of fiduciary

duty (the contract action). In early 2008, Fair and TCG filed a complaint in Chelan

County . Superior Court, cause no. 08-2-00044-8, against Powers for legal

malpractice (malpractice action). The trial court consolidated the contract and

malpractice actions.

All the parties moved for summary judgment in the consolidated case. The

trial court held that Leslie Powers violated former RPC 1. 7 ( 1995) because the Law

Firm simultaneously represented LKO and Fair without obtaining informed consent

from either. 3 The trial court determined that rescission of the joint venture agreement

3 The trial court held there was a genuine issue of fact as to whether this violation could be imputed to Keith Therrien. 4 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

was the appropriate remedy for this violation. This resolved the merits of the contract

action, and the trial court then held a bench trial and issued a final judgment

regarding the contract action damages. The trial court then took up the issues

remaining in the malpractice action.

Fair and TCG moved for partial summary judgment, arguing that Powers was

liable for legal malpractice as a matter of law. Powers filed a cross motion for

summary judgment, arguing that Fair and TCG could not show they had incurred

any compensable damages warranting dismissal of the malpractice action as a matter

oflaw. Fair and TCG argued they incurred attorney fees in the contract action, which

were compensable damages in the malpractice action under the ABC Rule.

The trial court held that Fair and TCG were not entitled to recover attorney

fees expended in the contract action under the ABC Rule. Because Fair and TCG

asserted no other damages and no other basis on which their contract action attorney

fees were compensable, the trial court dismissed the malpractice action.

Fair and TCG appealed. On the parties' joint motion, we granted the direct

appeal in the malpractice action, which we heard as a companion case to the petition

for review granted in the contract action. LK Operating, LLC v. Collection Grp.,

LLC, 176 Wn.2d 1027, 301 P.3d 1048 (2013). We affirm.

5 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

II. ISSUES 4

1. Did the trial court err in holding that the ABC Rule does not apply here?

2. Did the trial court err in dismissing the malpractice action on summary judgment?

3. Should this court craft a new or modified equitable rule governing compensability of attorney fees claimed as consequential damages in legal malpractice actions?

III. STANDARD OF REVIEW

Appellate review of summary judgment determinations, including those made

in the context of the ABC Rule, is de novo. Blueberry Place Homeowners Ass 'n v.

Northward Homes, Inc., 126 Wn. App. 352,359, 110 P.3d 1145 (2005). We construe

the facts in favor of Fair and TCG, the nonmoving parties. Schroeder v. Excelsior

Mgmt. Grp., LLC, 177 Wn.2d 94, 104,297 P.3d 677 (2013).

4 Powers assigns error on cross appeal to the trial court's holding that the joint venture agreement was entered in violation of former RPC 1. 7. Because it is unnecessary to our decision here but highly relevant to the issues raised on review in the companion case, former RPC 1.7 is addressed in the companion case only. Cf RAP 2.4(b)(1 ); Sprague v. Safe co Ins. Co. ofAm., 174 Wn.2d 524, 528, 276 P.3d 1270 (2012). Powers also assigns error to the Court of Appeals' holding that the joint venture agreement was entered in violation of former RPC 1. 8( a)(2000). That determination was reached in the direct appeal in the contract action and not in any phase of the malpractice action. We therefore address former RPC 1.8(a) in the companion case only. Finally, Powers assigns error to the trial court's holding that it was undisputed there was an agreement between Powers and Fair. Powers does not make any argument in support of this assignment of error, and so we do not consider it. RAP 10.3(a)(6); In re Estate of Lint, 135 Wn.2d 518,531-32,957 P.2d 755 (1998). 6 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

IV. ANALYSIS

In the malpractice action, TCG and Fair alleged only one form of damages-

attorney fees incurred in the contract action. TCG and Fair asserted only one basis

on which those damages were compensable-the ABC Rule. The trial court held

that the ABC Rule did not apply as a matter of law and dismissed the malpractice

action because TCG and Fair could not establish a necessary element of their legal

malpractice claim. We affirm.

A. The trial court did not err in holding TCG and Fair could not satisfy the necessary elements of the ABC Rule as a matter of law

Washington State courts follow the "American Rule"-even as to a prevailing

party, "attorney fees are not available as costs or damages absent a contract, statute,

or recognized ground in equity." City of Seattle v. McCready, 131 Wn.2d 266, 275,

931 P.2d 156 (1997). The ABC Rule is an equitable rule under which attorney fees

are compensable as consequential damages in certain situations. Blueberry Place,

126 Wn. App. at 358. The ABC Rule has three elements: '"(1) a wrongful act or

omission by A ... toward B ... ; (2) such act or omission exposes or involves B ..

. in litigation with C ... ; and (3) C was not connected with the initial transaction or

event ... , viz., the wrongful act or omission of A toward B."' Id. at 359 (quoting

Manning v. Loidhamer, 13 Wn. App. 766, 769, 538 P.2d 136 (1975)). All three

elements must be satisfied for the ABC Rule to apply. Id. Because Fair and TCG

7 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

cannot satisfy the third element, they cannot recover their contract action attorney

fees under the ABC Rule.

Analysis of the third element depends on "whether the action, for which

attorney's fees are claimed as consequential damages, is brought or defended by

third persons-that is, persons not privy to the contract, agreement or events through

which the litigation arises." Armstrong Constr. Co. v. Thomson, 64 Wn.2d 191, 196,

390 P.2d 976 (1964). TCG and Fair offer several alternatives as to what, precisely,

is the event from which the contract litigation arose-they assert the contract action

arose from "not only [Powers'] concurrent representation of clients with differing

interests, but going into business with an existing client without necessary

safeguards"; and that the "attorneys purported to pass their 'business opportunity'

with Mr. Fair offto LKO." Br. of Appellants at 18-19. Because we construe the facts

in TCG's and Fair's favor, we presume that the contract action arose from one or

more of those events. However, no matter how narrowly the ABC Rule is construed,

and regardless of which underlying events one considers, LKO was privy to all of

them.

If the wrongful action was Powers providing concurrent representation to

LKO and Fair in violation of former RPC 1.7, LKO was connected to that action as

one of the clients wronged by it. If the wrongful action was Powers entering the joint

venture agreement without complying with former RPC 1.8(a), LKO was connected

8 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

to that action as a participant in the joint venture agreement. If the wrongful action

was Powers' passing off a business opportunity to LKO, the very statement of the

wrongful act is sufficient to demonstrate LKO was connected to it. Indeed, Fair and

TCG themselves state, "LKO's claimed ownership of TCG was at the heart of the

attorneys' misconduct, and their family corporation LKO was inextricably linked to

the attorneys' wrongful conduct toward their clients Fair and TCG." Reply Br. of

Appellants at 17.

To return to the terminology of the ABC Rule, where C (LKO) is "inextricably

linked" with all the alleged wrongful actions by A (Powers) that involved B (Fair

and TCG) in litigation with C (LKO), it cannot be the case that "C was not connected

with ... the wrongful act or omission of A toward B." Blueberry Place, 126 Wn.

App. at 359. The third element of the ABC Rule is thus not met as a matter of law.

Because our holding regarding this third element is dispositive, we need not address

the parties' arguments regarding the other elements of the ABC Rule.

B. The trial court did not err in dismissing the malpractice action on summary judgment

TCG and Fair argue the trial court misapplied the ABC Rule because "[t]his

equitable indemnity doctrine was never intended to be an absolute defense to an

award of fees as consequential damages for professional malpractice. Yet that was

how it was misused here." Reply Br. of Appellants at 2. That is simply incorrect.

9 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

An "absolute defense," synonymous with a "real defense," is "good against

any possible claimant." BLACK'S LAW DICTIONARY 484-85 (9th ed. 2009). However,

where the ABC Rule does not apply as a matter of law, it operates as a defense

against only a limited set of potential legal malpractice claimants-those whose sole

alleged damages are attorney fees incurred in a separate litigation and whose only

argument supporting compensability of those fees is the ABC Rule. This narrow set

clearly does not encompass "any possible claimant"-for instance, those who seek

damages other than attorney fees incurred in separate litigation. E.g., Matson v.

Weidenkopf, 101 Wn. App. 472, 3 P.3d 805 (2000) (damages in the form of amounts

due under promissory notes that could have been collected but for the attorney's

failure to act on the notes within the statute of limitations).

Here, the trial court granted summary judgment because, even assummg

Powers committed legal malpractice, TCG and Fair could not show compensable

damages, a necessary element to sustain their malpractice action. Hizey v. Carpenter,

119 Wn.2d 251, 260-61, 830 P.2d 646 (1992). Where a plaintiff cannot meet a

necessary element of the relevant cause of action, summary judgment for the

defendant is appropriate. Mohr v. Grant, 153 Wn.2d 812, 822, 108 P.3d 768 (2005). 5

5We note the ABC Rule also was not employed here as an affirmative defense-the lack of compensable damages "had the effect of destroying, not avoiding, [the malpractice] cause of action." Morse v. McGrady, 49 Wn.2d 505, 508,304 P.2d 691 (1956). 10 LK Operating, LLC v. Collection Grp., LLC, No. 88846-9

C. We decline to modify the ABC Rule in this opinion

For the first time on appeal, Fair and TCG argue we should craft a new or

modified equitable rule for the recovery of attorney fees claimed as consequential

damages in legal malpractice actions. We do not, at this time, specifically reject

those arguments, but we will not consider them when raised for the first time on

appeal. RAP 2.5(a).

V. CONCLUSION

The trial court did not err in holding that the attorney fees Fair and TCG

incurred in the contract action are not compensable under the ABC Rule. Because

they claimed no other damages or basis for damages, Fair and TCG could not meet

a necessary element to sustain their cause of action for legal malpractice. The trial

court thus did not err in dismissing the malpractice action on summary judgment.

Fair and TCG did not raise the question of whether we should modify the ABC Rule

in the context of legal malpractice actions below, and so we decline to consider it.

The trial court is affirmed.

11 LK Operating, LLC v. The Collection Grp., LLC, No. 88846-9

WE CONCUR:

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