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Recent Appellate Decisions – July 27 to August 2, 2012

Selected summaries prepared by Commissioner James Verellen (ret.)

Division I  Washington State Court of Appeals

July 30, 2012

Hill v. Garda CL Northwest,  No. 66137-0

arbitration – silence on class arbitration – statutory wage claims – collective bargaining agreement –  waiver by inconsistent conduct – clear and unmistakable agreement to arbitrate

Arbitration “is a matter of consent, not coercion.”

In this class action, armored truck drivers filed wage claims under ch. 49.52 and ch. 49.12 RCW, alleging that Garda, their employer, altered driver time records in order to reduce wages, denied drivers their meal and rest breaks, and failed to pay drivers for “off-clock” work.  The collective bargaining agreement requires the drivers to grieve and arbitrate “any claim under any federal, state, or local law…related to the employment relationship.”

In its answer, Garda alleged that the claims were subject to arbitration.  Garda and the drivers engaged in discovery for several months, but then delayed further action awaiting the outcome of similar issues pending between another employer and its employees.  After the other litigation concluded, Garda and the drivers engaged in an unsuccessful mediation.  When the drivers filed a motion to certify the class, Garda filed its motion to compel arbitration.  The drivers argued that Garda had waived its right to seek arbitration by waiting more than 19 months to file its motion to compel arbitration.  The drivers also argued they had not clearly and unmistakably waived their right to a judicial forum.  The trial court ordered class arbitration.  Division I granted discretionary review.

Division I reversed the trial court and remanded for individual arbitration:

  • Waiver of the right to arbitrate by conduct inconsistent with arbitration is disfavored and is not susceptible to bright line rules.
  • Garda did not waive its right to arbitration; Garda timely invoked its right to arbitration at the beginning of and throughout the litigation; waiting for the outcome of other litigation and attempting to mediate were not inconsistent with the right to arbitrate; and Garda’s discovery was not extensive or aggressive litigation behavior.
  • The CBA arbitration clause clearly and unmistakably extends to any claim under any federal, state or local law including the drivers’ wage claims; the clause is not a broad and general agreement to arbitrate claims arising under the agreement and is not limited to disputes over contract interpretation.  Therefore, Garda and the drivers unequivocally agreed to arbitrate the current disputes.
  • Consistent with the holding of the United States Supreme Court in Stolt-Nielsen, 130 S.Ct. 1758 (2010), parties are not subject to class arbitration when the arbitration clause is silent on class arbitration: “Because the parties had not agreed to arbitrate on a class-wide basis, they could not be compelled to submit their dispute to class arbitration.”
  • Division I need not resolve whether the trial court or the arbitrator should decide whether an arbitration agreement allows class arbitration, because similar to Stolt-Nielsen, the contract here is silent on the issue of class arbitration, there is no room for an inquiry regarding the parties intent, and the appellate court need not remand to either the trial court or the arbitrator to decide the intent of the parties.

July 30, 2012

Atlas Supply v Realm,  No. 66504-9

attorney fees – contract for costs of collection – includes defense of compulsory counterclaim

A “costs of collection” fee provision extends to the defense of compulsory counterclaims.

Atlas sold construction materials to Realm on credit.  Realm refused to pay when materials failed.  Atlas sued to recover the purchase price.  Realm counterclaimed for breach of contract, breach of warrant and negligent misrepresentation.  Atlas’s suppliers were also joined in the litigation.  The credit application signed by Realm included Realm’s agreement “to pay the costs of collection, including reasonable attorney fees in suit by Atlas…for the merchandise sold to applicant.”

The parties agreed to a reduced amount to be paid to Atlas for the materials, but could not agree on the amount of attorney fees.  The trial court granted summary judgment against Realm for the agreed amount and ultimately awarded attorney fees of $56,247.14, denying Atlas additional fees incurred in defending Realm’s counterclaims.

Division I reversed the trial court and remanded to include reasonable fees incurred in defending Realm’s counterclaims:

  • Realm’s counterclaims “arose out of the same purchase transaction that led to Atlas’s original debt collection action.  If successful, they would have defeated Atlas’s claim on the debt.”
  • By contrast, a permissive counterclaim does not arise out of the transaction or occurrence that is the subject of the opposing party’s claim.  A permissive counterclaim does not affect nor is it affected by the outcome of the original claim.
  • Atlas had to address Realm’s compulsory counterclaims to prevail on its collection action.  “The trial court erred by ruling the credit application did not entitle Atlas to fees relating to the compulsory counterclaims.”

July 30, 2012

224 Westlake LLC v. Engstrom Properties LLC, No. 66723-8

real estate purchase option –  provision to extend closing to complete environmental soil testing – material breach – no reasonable basis to refuse consent to assignment by purchaser – entry of findings – damages for breach of contract – attorney fees – lodestar multiplier – lodestar computation

Engstrom entered into a real estate purchase option agreement to sell the original Ernst Hardware building to Investco.  During the two year option period, Investco agreed to make quarterly option payments totaling $600,000, to be applied to the $4.55 million purchase price if the sale closed.

Engstrom agreed to remove two decommissioned underground storage tanks and clean up any hazardous materials in the surrounding soil to the extent required by current regulations.  Investco had the option to conduct its own independent soil testing to confirm the cleanup.  The agreement expressly provided that “the Closing Date shall be extended as reasonably necessary to complete such tank removal, clean up and permitted testing.”

The agreement generally precluded an assignment without prior written consent, which consent shall not be unreasonably withheld, provided that the Purchaser may assign to a partnership or LLC in which the Purchaser holds a 51% ownership interest without any consent upon written notice to the Seller.

Seven months after the agreement was signed, Investco assigned its interest to Westlake, an LLC jointly owned by several LLCs that were in turn owned by individuals, including common owners of Investco.  Engstrom learned of the assignment 19 months later.  Investco and Westlake referred to the 51% ownership exception.  Engstrom did not object to the assignment or make any inquiries about Westlake.   Westlake made all of the remaining option payments and incurred other expenses in preparation for closing.

Engstrom removed the tanks and excavated soil.  Westlake’s consultants found contamination, but Engstrom’s did not.  The day after receiving Westlake’s test results, Engstrom poured a concrete pad over the exposed soil.  Westlake’s consultants bored through the concrete for a second set of samples and again found contamination above state clean-up levels.  Westlake demanded a full cleanup.  Seven days before the closing date, Engstrom provided new test results and disclosed he had engaged in a second excavation that concluded with repouring the concrete floor.  Westlake requested a 30-day extension of the closing date to allow time to arrange for boring through the concrete and analysis of new soil samples.  Engstrom questioned Westlake’s financial ability to close and would agree to only a 4-day extension.  The sale did not close. Westlake sued Engstrom for damages for breach of contract.

The trial court denied Engstrom’s motion for summary dismissal for invalidity of the assignment to Westlake.

After a bench trial, the trial court ruled in favor of Westlake on every issue awarding more than $1 million in damages, including the $600,000 option payments.

The trial court awarded Westlake attorney fees and costs.  Westlake had a modified contingency agreement with its attorneys.  Westlake refused to produce detailed fee records based on attorney client privilege.  The trial court made a lodestar calculation of $110,000 on limited summaries and then applied a 2.73 multiplier to arrive at over $300,000 in fees.

Division I affirmed the trial court judgment in favor of Westlake for damages, but reversed the use of a multiplier and remanded for a new calculation of the lodestar amount:

  • Engstrom did not waive his right to challenge the validity of the assignment to Westlake; he was entitled to rely upon Investco and Westlake’s representation that the assignment was within the 51% ownership exception.
  • Engstrom’s challenge to the trial court’s ruling on the validity of the assignment is based on the record developed at trial and is not limited to the record on summary judgment:  “Rightly or wrongly, the trial court determined the motion raised a factual issue that had to go to trial, and the issue did go to trial.  In such a circumstance, as a matter of fairness, this court will review the issue ‘in light of the full record.’”
  • Consistent with the general policy favoring free assignability of contracts, the provision imposing reasonable consent is the dominant requirement, even though Investco failed to seek Engstrom’s consent.
  • The reasonableness of withholding consent is examined as of the time when Engstrom learned that his consent was required and decided to withhold it, not when Investco made the assignment.
  • The record supports the trial court’s ultimate finding that a reasonably prudent person in Engstrom’s position, would not have withheld consent to the assignment; Investco and Westlake made all $600,000 in option payments and Westlake had sufficient funds in its bank account to close the purchase.
  • A material breach is one that substantially defeats a primary function of an agreement;  insuring that the building was clean was a primary function of the agreement; Engstrom’s refusal to extend closing prevented Westlake from confirming that “the building was clean.”
  • Engstrom’s refusal to perform the condition precedent of extending the closing date, discharged Westlake from any obligation to purchase or to tender the funds for the purchase into escrow.
  • CR 52(c) requires five days notice of the submission of proposed findings, not five days notice of when the trial court will enter findings; the proposed findings were timely submitted at the beginning of the trial.
  • Damages are recoverable if they were within the contemplation of the parties at the time the contract was made, are the proximate result of the defendant’s breach and are proven with reasonable certainty.
  • Westlake’s election to bring an action for damages for breach of contract was contemplated under the agreement.  Westlake did not seek benefit of the bargain damages and retained no ownership interest in the property, so the downturn in the market value of the property did not insulate Engstrom from damages.  The $600,000 in option payments are not nonrefundable; “Because of Engstrom’s breach, Westlake was not obligated to close and was free to pursue the return of the option payments as part of its damages.”
  • The complexity and number of factual and legal issues, the length of the dispute, the amount of briefing and the results obtained were already accounted for in the lodestar amount, either in the number of hours expended in trial and briefing, or in the higher hourly rate of the attorneys skilled enough to analyze the complex issues and obtain a good result.
  • The “contingent” nature of the case does not support a multiplier because the trial court did not assess the likelihood of success at the outset of the litigation or any other time, and the modified agreement assured the attorneys of being paid; they were paid their full hourly rate for one year and after were paid half their hourly rate:  “It was not a high risk contingency case in which the lawyers risked no recovery at all for their services.”
  • No upward adjustment of the lodestar amount is warranted.
  • The limited summaries provided to the trial court preclude any meaningful review of the lodestar calculation; detailed fee records are required and claims of privilege can be resolved by redactions or by more detailed summaries.

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