Opinion
No. 57328-4-I
Filed: June 4, 2007 UNPUBLISHED OPINION
Cambridge Townhomes, a developer, and Polygon Northwest Company, a general contractor, sued subcontractors Pacific Star Roofing, Inc. and P.J. Interprize, Inc. for breach of contract and indemnification. The superior court dismissed on the subcontractors' motion for summary judgment, ruling that the contracts with the subcontractors did not obligate the subcontractors to indemnify the plaintiffs, and that the plaintiffs' claims were barred by the corporate dissolution of the subcontractors. We reverse.
I.
Cambridge Townhomes, LLC was the developer, and Polygon Northwest Company (collectively "Polygon") was the general contractor on the Cambridge Townhomes Condominium development. Constructed in three phases between 1997 and mid-2000, the development consists of 40 multi-unit buildings. Polygon contracted with Pacific Star Roofing, Inc. (PSR) to perform roofing work, and with P.J. Interprize, Inc. (PJ) for siding installation. Polygon's contracts with PSR and PJ contained provisions requiring the subcontractors to indemnify and defend Polygon against all claims arising out of the work of the subcontractors.
In early 2003, Polygon was notified of construction defects in the units by the Cambridge Townhomes owners association. Polygon hired experts to investigate the claims. The experts submitted reports confirming a number of construction defects that had resulted in water damage, including defects in siding and roofing installation.
Polygon and the owners association reached a settlement agreement in November 2003. The association sued to collect on the settlement in December 2003, and the claim was settled shortly thereafter.
PSR dissolved as a corporate entity in October 2003. PJ was administratively dissolved in March 2004, for failure to file a timely annual report or license renewal.
Polygon filed suit against various subcontractors in March 2004, seeking indemnification and asserting breach of contract. The trial court dismissed Polygon's indemnity claims against all defendants, ruling that the indemnity provision in the subcontracts did not apply. The court also ruled that Polygon could not proceed against PJ Interprise's predecessor, a sole proprietorship. In addition, it struck portions of one of the expert's declarations, and required Polygon to prove the alleged construction defects were latent.
The court subsequently dismissed Polygon's breach of contract claims against PSR and PJ.
II.
PSR and PJ assert that Polygon's claims against them are barred because they are post-dissolution claims. Additionally, PJ asserts that the indemnity agreement in its contract with Polygon does not cover damages caused by construction defects. Both assertions are erroneous. Recent decisions by this court and our Supreme Court support Polygon's claims.
This court reviews summary judgment orders de novo, and engages in the same inquiry as the trial court. A summary judgment will be affirmed if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. The de novo standard of review is applied to all trial court rulings made in conjunction with a summary judgment motion.
Aba Sheikh v. Choe, 156 Wn.2d 441, 447, 128 P.3d 574 (2006).
CR 56(c); Huff v. Budbill, 141 Wn.2d 1, 7, 1 P.3d 1138 (2000).
Folsom v. Burger King, 135 Wn.2d 658, 663, 958 P.2d 301 (1998).
Corporate Dissolution
The Washington Supreme Court recently ruled that corporations are not immune to post-dissolution claims. In Ballard Square Condominium Owners Association v. Dynasty Construction Co., the court held that, in contrast to the harsh common law rule that barred all claims against a corporation after its dissolution, Washington statutes allow claims arising after a corporation is dissolved.
158 Wn.2d 603, 146 P.3d 914 (2006).
Ballard Square, 158 Wn.2d at 609.
At common law, when a corporation dissolved, it ceased to exist for all purposes and therefore could not sue or be sued. Although the right to sue a dissolved corporation did not exist at common law, the right does now exist by statute. The common law rule has been modified by the enactment of survival statutes which permit dissolved corporations to sue and be sued as part of their winding up activities for a limited time period.
Ballard Square, 158 Wn.2d at 609.
Ballard Square, 158 Wn.2d at 619.
Ballard Square, 158 Wn.2d at 609.
In Ballard Square, an owners association brought suit against a developer over construction defects that resulted in leaks and water damage. At the time the suit was brought, the developer was a dissolved corporation. The trial court granted summary judgment on the ground that the suit was barred by the developer's corporate dissolution. The Supreme Court, however, held that legislation enacted in 2006 significantly altered the statutory scheme regarding suits by and against dissolved corporations.
Ballard Square, 158 Wn.2d at 608.
Ballard Square, 158 Wn.2d at 606 n. 1.
In 2006, the Legislature amended RCW 23B.14.340 to read:
The dissolution of a corporation . . . shall not take away or impair any remedy available against such corporation . . . for any right or claim existing, or any liability incurred, prior to such dissolution or arising thereafter, unless action or other proceeding thereon is not commenced within two years after the effective date of any dissolution that was effective prior to June 7, 2006, or within three years after the effective date of any dissolution that is effective on or after June 7, 2006. (New language underlined.)
The Ballard Square court held that this statute, read in conjunction with other related provisions of title 23B RCW, particularly RCW 23B.14.050(2)(e) (which states that dissolution of a corporation does not prevent commencement of a proceeding by or against the corporation in its corporate name), allows claims to be brought against corporations after they have been dissolved. The court further held that the amendment applies retroactively. The amended statute requires that a post-dissoluton cause of action be commenced within two years of dissolution if dissolution occurred prior to June 7, 2006. InBallard, RCW 23B.14.340 operated against the Ballard Square, 158 Wn.2d at 608. owners association, because its suit was brought well over two years after dissolution.
Ballard Square, 158 Wn.2d at 606, 612.
Ballard Square, 158 Wn.2d at 606.
Ballard Square, 158 Wn.2d at 616.
Ballard Square, 158 Wn.2d at 616.
In the present case, PSR and PJ were dissolved prior to June 7, 2006, but Polygon filed suit on March 24, 2004, well within the two-year period required under RCW 23B.14.340.
The trial court erred in dismissing Polygon's claims on the grounds that the claims were asserted after the dissolution of PSR and PJ. We reverse that ruling.
Indemnity
PJ argues that the indemnity provision in its contract with Polygon applies only to tort claims, and does not cover claims for economic loss caused by a breach of contract. This argument was rejected in MacLean Townhomes, L.L.C v. America 1st Roofing Builders, Inc.
133 Wn. App. 828, 138 P.3d 155 (2006).
PJ argues that MacLean was wrongly decided, because it relied on our earlier ruling in Karnatz v. Murphy Pacific Corp., which upheld an indemnity provision requiring a subcontractor to defend all suits "arising out of, in connection with, or incident to," the subcontractor's performance. Karnatz, in turn, relied on Tucci Sons v. Carl T. Madsen, Inc., which was overruled in part by Jones v. Strom Construction Co. However, Jones overruled Tucci only to the extent that it permitted indemnification of a contractor for the contractor's sole negligence. Here, the indemnity agreement specifically excludes claims based on the indemnitee's sole negligence.
8 Wn. App. 76, 503 P.2d 1145 (1972).
Karnatz, 8 Wn. App. at 80.
1 Wn. App. 1035, 467 P.2d 386 (1970).
84 Wn. 2d 518, 527 P.2d 1115 (1974).
Jones, 84 Wn.2d at 522-23.
PJ further argues that Polygon cannot enforce the indemnity provision unless it shows proof of payment to the owners association. We disagree. Indemnity actions accrue when the party seeking indemnity pays or is legally adjudged obligated to pay damages to a third party. Polygon was adjudged obligated to pay damages to the association, and its right to seek indemnity from PJ accrued at that time.
Central Wash. Refrigeration, Inc. v. Barbee, 133 Wn.2d 509, 517, 946 P.2d 760 (1997).
We reverse the trial court's order dismissing Polygon's indemnity claims.
Sole Proprietorship
Polygon originally contracted with Gerald Utley, d/b/a P.J. Interprize, a sole proprietorship, in August 1998. The sole proprietorship performed work on phases I and II of the project. P.J. Interprize subsequently incorporated in January 1999. Polygon then executed a contract with the corporation for work on phase III of the project. The corporation also performed some work on phases I and II.
In February 2004, Gerald Utley filed for bankruptcy. The bankruptcy petition describes the debtor as an individual, not a corporation, and lists only Gerald Utley and his wife as debtors. However, in the section asking what other names the debtor had used in the previous six years, Utley listed "d/b/a PJ Interprize, Inc." Utley's bankruptcy was discharged in June 2004.
Polygon filed a motion for relief, asking the bankruptcy court for permission to proceed against the debtor "to the extent of available insurance proceeds." The court granted the motion, allowing Polygon to proceed against the debtor for the purpose of pursuing any insurance proceeds that might be available. Under that ruling, Polygon was not barred from pursuing claims against the sole proprietorship in order to recover from its insurance carriers.
The trial court concluded that Utley's bankruptcy discharge barred Polygon from pursuing claims against the corporation for the sole proprietorship's work on the project. While the court stated that Polygon could pursue a declaratory judgment action against the sole proprietorship's insurance carriers, it was silent on the matter of the bankruptcy court's order permitting Polygon to proceed against the sole proprietorship itself.
The court opined that the corporation was a continuation of the sole proprietorship. The court believed the corporation had assumed the liabilities of the sole proprietorship, and given that it was "the same people and they're doing the same business," the corporation was a continuation of the sole proprietorship. However, the court believed it did not need to reach a decision regarding successor liability because it concluded that the bankruptcy discharge precluded Polygon from pursuing claims against the corporation arising out of the sole proprietorship's work.
Report of Proceedings (Oct. 21. 2005), at 66.
The general rule in Washington is that a corporation purchasing the assets of another corporation does not, by reason of the purchase of assets, become liable for the debts and liabilities of the selling corporation, except where: (1) the purchaser expressly or impliedly agrees to assume liability; (2) the purchase is a de facto merger Report of Proceedings (Oct. 21. 2005), at 66. or consolidation; (3) the purchaser is a mere continuation of the seller; or (4) the transfer of assets is for the fraudulent purpose of escaping liability. The four exceptions to the general rule were developed to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions. The purpose of the mere continuation theory is to prevent the corporation from escaping liability by merely changing hats.
Hall v. Armstrong Cork, Inc., 103 Wn.2d 258, 261-62, 692 P.2d 787 (1984).
Hall, 103 Wn.2d at 262.
Gall Landau Young Const. Co. v. Hedreen, 63 Wn. App. 91, 96-97, 816 P.2d 762 (1991).
To establish that a successor corporation is merely a continuation of its predecessor for purposes of determining the successor's legal obligations, a plaintiff must establish at least two factors: (1) a common identity of the officers, directors, and stockholders between the companies; and (2) that the new company gave inadequate consideration for the assets transferred. A transfer of all or substantially all of the predecessor corporation's assets is an implied third element of the mere continuation theory.
Gall Landau Young, 63 Wn. App. at 97.
Gall Landau Young, 63 Wn. App. at 97. But cf. Eagle Pac. Ins. Co. v. Christensen Motor Yacht Corp., 85 Wn. App. 695, 706 n. 1, 934 P.2d 715 (1997),aff'd on other grounds, 135 Wn.2d 894, 135 Wn.2d 896, 959 P.2d 1052 (1998) (declining to adopt the third factor).
In the present case, one corporation did not purchase the assets of another. Rather, the sole proprietorship incorporated. Whether a corporation can be a mere continuation of a sole proprietorship appears to be a question of first impression in this state, although our Supreme Court, in reviewing the history of the mere continuation exception, noted that the exception was first expanded by a federal court when it found a corporation to be a mere continuation of a predecessor sole proprietorship.
Martin v. Abbott Labs., 102 Wn.2d 581, 611, 689 P.2d 368 (1984).
The Supreme Court of New York dealt squarely with this issue in Monroe v. Interlock Steel Company, Inc. The plaintiff in Monroe sued a corporation for personal injuries sustained when using a machine manufactured by the corporation's predecessor, a sole proprietorship. The court held that the general rule of nonliability was inapplicable, and that the successor corporation, which was engaged in the same business, under the same ownership and control, was a mere continuation of the prior enterprise, unprotected from suits arising out of acts of the sole proprietorship. Noting the inequities which could occur if the doctrine that corporations are separate and distinct entities is blindly accepted, the court reasoned that a corporation could escape liability by using reorganization to make cosmetic changes in essentially the same business, leaving plaintiffs without remedy. A sole proprietor who transfers assets to a new corporation, the court held, becomes akin to a predecessor corporation shorn of its assets.
487 N.Y.S.2d 1013 (1985).
Martin, 487 N.Y.S.2d at 1014.
Martin, 487 N.Y.S.2d at 1015.
Martin, 487 N.Y.S.2d at 1015.
Martin, 487 N.Y.S.2d at 1015.
Similarly, the Supreme Court of Connecticut held that the transformation of a sole proprietorship into a limited liability company creates in the new business entity rights and obligations previously held by the sole proprietorship.
C J Builders and Remodelers, LLC v. Geisenheimer, 733 A.2d 193, 197 (1999).
Utley was both the sole proprietor and the president of the corporation. The sole proprietorship and the corporation performed the same work for the same contractor. The directors of the corporation were Utley's family members and long-time employees of the sole proprietorship.
Numerous other factors suggest that the corporation was a mere continuation of the sole proprietorship. Utley listed his d/b/a as P.J. Interprize, Inc, when filing for bankruptcy, even though he was filing only on behalf of himself and the sole proprietorship. He stated in a declaration that the corporation was bankrupt when, in fact, it was the sole proprietorship that was bankrupt; the corporation was administratively dissolved. In its answer to Polygon's complaint, which named only the corporation as a defendant, PJ stated that it signed a master agreement with Polygon in August 1998. In fact, that agreement was signed by the sole proprietorship, before PJ incorporated.
Under the persuasive authority of Monroe and C J Builders, we hold that the corporation was merely a continuation of the sole proprietorship, and, as such, can be held liable for the sole proprietorship's obligations. We further hold that the bankruptcy proceeding does not bar Polygon's claims against the sole proprietorship insofar as they relate to recovery of insurance proceeds.
See Arreygue v. Lutz, 116 Wn. App. 938, 69 P.3d 881 (2003) (bankruptcy discharge does not bar suit for the sole purpose of insurance recovery).
Amended Complaint
After the court ruled that Polygon could not proceed against PJ for work performed by the sole proprietorship, Polygon moved to amend the complaint to include the sole proprietorship as a defendant. The court denied the motion.
The decision to grant leave to amend the pleadings is within the discretion of the trial court. Civil Rule 15(a) provides that leave to amend shall be freely given when justice so requires. These rules serve to facilitate proper decisions on the merits, to provide parties with adequate notice of the basis for claims and defenses asserted against them, and to allow amendment of the pleadings except where amendment would result in prejudice to the opposing party. An amendment should be permitted unless it will prejudice the opposing party. A trial court's decision to grant or deny leave to amend is reviewed for manifest abuse of discretion.
Wilson v. Horsely, 137 Wn.2d 500, 505, 974 P.2d 316 (1999).
Caruso v. Local Union No. 690 of Int'l Bhd. of Teamsters, 100 Wn.2d 343, 349, 670 P.2d 240 (1983).
Wilson, 137 Wn.2d at 505.
Wilson, 137 Wn.2d at 505.
Civil Rule 15 also provides that an amendment to a pleading relates back to the date of the original pleading when the claim asserted in the amended pleading arose out of the occurrence set forth in the original pleading, and the amendment changes the party against whom the claim is asserted. This relation back is permitted if the party to be brought in by amendment has received such notice of the action that the party will not be prejudiced in maintaining a defense on the merits, and knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
Given the continuity between the sole proprietorship and the corporation, the sole proprietorship would not be prejudiced by being added as a defendant. The sole proprietorship would have adequate notice of the basis for the claims and ample time to prepare its defenses. Nor would such an amendment be rendered futile by the statute of limitations or the statute of repose. Under RCW 4.16.310, which governs the accrual of construction claims, all claims or causes of action shall accrue, and the applicable statute of limitation shall begin to run, only during the period within six years after substantial completion of construction. RCW 4.16.310 is a statute of repose, rather than a statute of limitation, because it establishes the time period in which a cause of action must accrue, rather than the time period after accrual in which a plaintiff must commence an action. Here, construction was substantially completed in 1999 and Polygon's claim accrued in early 2003, well within the six-year period set forth in the statute. The statute of limitations therefore does not bar Polygon's claims.
RCW 4.16.310.
Escude v. King County Pub. Hosp. Dist., 117 Wn. App. 183, 192 n. 8, 69 P.3d 895 (2003).
We hold that the trial court erred in denying Polygon's motion to amend its complaint to add the sole proprietorship as a defendant, and reverse.
Burden of Proof
PJ argued that Polygon waived any right to seek damages against PJ because it inspected, accepted, and paid for the work. The trial court ruled that PJ's liability was limited to latent defects, and that Polygon bore the burden of proving those defects alleged to be latent.
PJ is asserting the defense of waiver. Waiver is the intentional and voluntary relinquishment of a known right. The party asserting waiver bears the burden of proving an intention to relinquish the right. PJ consequently bears the burden of establishing the alleged defects were patent. The trial court was in error when it ruled Polygon bore the burden of establishing latency.
U. S. Oil Ref. Co. v. Lee Eastes Tank Lines, Inc., 104 Wn. App. 823, 830, 16 P.3d 1278 (2001).
Jones v. Best, 134 Wn.2d 232, 241-42, 950 P.2d 1 (1998); Perez v. Perez, 11 Wn. App. 429, 432, 523 P.2d 455 (1974), overruled on other grounds, Brown v. Brown, 100 Wn.2d 729, 675 P.2d 1207 (1984).
See Michel v. Efferson, 65 So.2d 115, 119 (1953) ("The defense of waiver is a special one and the burden of proof is on the defendants to show that the plaintiff had knowledge of the defects in construction and that she intentionally waived same.").
Expert's Declaration
Polygon submitted a declaration by Mark Jobe, one of the experts hired to investigate construction defects in response to the association's complaints. Based on his experience as a general contractor, construction manager, and superintendent coordinating the work of subcontractors, Jobe disputed PJ's assertion that Polygon inspected PJ's work during construction, and that there was nothing about the installation that was not visible at the time of construction. He stated that the nature of the work involved in installing siding made it impossible for Polygon to supervise installation every step of the way without requiring a superintendent to "stand behind the installer as the materials were being installed," a proposition he termed unrealistic, particularly in light of the scope of the project.
PJ moved to strike Jobe's declaration on the ground that Jobe was not present during construction of the project and had no experience in condominium developments. The trial court granted PJ's motion in part, striking paragraphs five through eight of Jobe's declaration.
ER 702 provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.
ER 702.
Once an expert witness's basic qualifications are established, any deficiencies in those qualifications go to the weight, rather than the admissibility, of the expert's testimony.
State v. Rangitsch, 40 Wn. App. 771, 779, 700 P.2d 382 (1985); Keegan v. Grant County Pub. Util. Dist. No. 2, 34 Wn. App. 274, 283, 661 P.2d 146 (1983).
Jobe was qualified to offer his opinion by virtue of his knowledge, experience, and training. Once the court admitted his declaration, any alleged deficiencies in his qualifications should have gone to the weight of his testimony. The trial court acknowledged that Jobe's qualifications went to the weight of the statements, but expressed concern about Jobe's lack of personal knowledge due to the fact he was not present during construction.
Such personal knowledge is not required of an expert witness. The facts or data in a particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing.
ER 703.
Jobe based his opinion upon his investigation and his experience in the construction trades. It was not necessary for him to have been on site during construction to proffer his expert opinion. To the extent the trial court rejected Jobe's testimony based upon lack of personal knowledge, we reverse.
Attorney Fees
Whether a party is entitled to attorney fees is an issue of law, and is reviewed de novo.
Ethridge v. Hwang, 105 Wn. App. 447, 460, 20 P.3d 958 (2001).
The trial court awarded PSR $21,882.73 in attorney fees and costs, and awarded PJ $205,012.75 in attorney fees and costs. The fees were awarded pursuant to attorney fee clauses in the indemnity agreement provisions of the subcontracts.
The agreement with PSR states, "Should any disputes arise with respect to the applicability and/or interpretation of the right to indemnification, the prevailing party shall be entitled to recover its reasonable attorney's fees and costs in addition to any other remedy." Under this provision, and in accordance with RAP 18.1, Polygon is entitled to reasonable attorney fees and costs incurred on review.
The provision in the PJ contract states, "SUBCONTRACTOR'S duty to defend, indemnify, and hold CONTRACTOR harmless as to all claims, demands, losses, and liabilities shall include CONTRACTOR'S personnel related costs, reasonable attorney fees, court costs, and all related expenses." As this is not clearly a prevailing party agreement, award of attorney fees with respect to PJ will abide the results on remand.
REVERSED AND REMANDED.
WE CONCUR: Schindler, A.C.J., Ellington, J.