Opinion
No. 79313-6-I
12-30-2019
CHENGDU GAISHI ELECTRONICS, LTD., a company incorporated under the laws of China, and Zhizheng Wang, an individual, for the Wang Group, Appellants, v. G.A.E.M.S., INC., a Washington State corporation; DWG Acquisition Company, LLC, a Washington State limited liability company; Dean Mercier and Jane Doe Mercier, husband and wife and the marital community composed thereof; John Smith and Jane Doe Smith, husband and wife and the marital community composed thereof; and Decathlon Alpha, III, L.P., a Delaware limited partnership, Respondents.
Benjamin Alexander Ellison, Salish Sea Legal PLLC, 2212 Queen Anne Ave. N, No. 719, Seattle, WA, 98109-2312, for Appellants. John Hugo Jamnback, Yarmuth LLP, 1420 5th Ave. Ste. 1400, Seattle, WA, 98101-3336, Jeremy E. Roller, Arete Law Group, 1218 3rd Ave. Ste. 2100, Seattle, WA, 98101-3094, Jennifer Lynn Campbell, Farron Curry, Schwabe Williamson & Wyatt PC, 1420 5th Ave. Ste. 3400, Seattle, WA, 98101-2339, Kevin Riach, Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 400, Minneapolis, ME, 55402-1425, for Respondents.
Benjamin Alexander Ellison, Salish Sea Legal PLLC, 2212 Queen Anne Ave. N, No. 719, Seattle, WA, 98109-2312, for Appellants.
John Hugo Jamnback, Yarmuth LLP, 1420 5th Ave. Ste. 1400, Seattle, WA, 98101-3336, Jeremy E. Roller, Arete Law Group, 1218 3rd Ave. Ste. 2100, Seattle, WA, 98101-3094, Jennifer Lynn Campbell, Farron Curry, Schwabe Williamson & Wyatt PC, 1420 5th Ave. Ste. 3400, Seattle, WA, 98101-2339, Kevin Riach, Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 400, Minneapolis, ME, 55402-1425, for Respondents.
OPINION PUBLISHED IN PART
Dwyer, J. ¶1 Chengdu Gaishi Electronics, Ltd. (Chengdu) and the Wang Group brought this suit, seeking repayment of a debt, against G.A.E.M.S., Inc. (GAEMS), DWG Acquisition Company LLC (DWG), Dean Mercier and John Smith, two of DWG’s board members, and Decathlon Alpha III, L.P. (Decathlon), another of GAEMS’s creditors. The trial court denied Chengdu’s motion to appoint a receiver. It then granted DWG’s motion to dismiss for insufficiency of service of process. Chengdu and the Wang Group appeal, averring that DWG waived this affirmative defense and that the trial court erred in denying the motion for receivership.
We refer to the appellants collectively, when discussing their arguments in this action, as "Chengdu."
¶2 In their joint brief, respondents GAEMS, DWG, and Mercier claim that the orders from which the appeal was taken are not appealable and that the appeal should be dismissed. On the other hand, respondent Decathlon views the appeal as properly taken but urges affirmance of the trial court rulings. We view the matter as properly appealable and hold that the defenses of insufficiency of process and insufficiency of service of process were waived, thus necessitating reversal of the order of dismissal. We also hold that the trial court did not abuse its discretion in denying the motion to appoint a receiver.
I
A
¶3 In 2017, GAEMS entered into financing agreements with Chengdu, an electronics manufacturing company. That same year, DWG, GAEMS’s parent company, entered into a loan agreement with the Wang Group, a consortium of several Chinese financiers led by Qiqi "Denny" Wang, with GAEMS as a guarantor. Wang, a former officer and director of GAEMS, remains a 30 percent owner of DWG.
¶4 In June 2017, GAEMS entered into another loan agreement, this time with Decathlon. Simultaneously, DWG, GAEMS, the Wang Group and Decathlon entered into a "Subordination and Intercreditor Agreement," pursuant to which the Wang Group subordinated its loan to Decathlon’s and, with limited exceptions, agreed that no payments would be made toward the Wang loan until full payment was made on the Decathlon loan. DWG, the Wang Group, and GAEMS also executed a letter agreement amending their prior loan agreement to reflect the subordination agreement’s terms and confirm that the Decathlon loan would be paid off prior to the Wang Group loan.
¶5 In October 2017, the Wang Group sued GAEMS and two DWG board members seeking payment on its loan. Later, the Wang Group voluntarily dismissed the case. However, 11 months later, the Wang Group filed this lawsuit, naming Chengdu as an additional plaintiff. The defendants in this action are GAEMS, the previously-sued DWG members, Decathlon, and DWG.
¶6 In October 2018, Chengdu moved for the trial court to appoint a receiver to assume control of GAEMS and DWG. In its motion, it argued that GAEMS was insolvent and that Chengdu had a probable right to GAEMS’s property. GAEMS and DWG, in response, disputed these contentions and presented evidence that GAEMS remained able to pay obligations as they came due, had future prospects, and was not an appropriate candidate for receivership. Separately, Decathlon opposed receivership on the basis that, as the senior lender, it had priority over the Wang Group to assert rights in GAEMS’s property. After considering the parties’ extensive briefing, but without comment or explanation, the trial court entered an order declining to appoint a receiver. ¶7 Chengdu filed a motion for reconsideration of the trial court’s denial of its motion to appoint a receiver, alleging that the trial court had used the incorrect test to determine whether GAEMS was insolvent, and requesting further explanation as to why the motion was denied.
B
¶8 Initially, Chengdu’s summons and complaint had referenced DWG, in both the caption and in the body of the complaint, as "DWG Acquisition, LLP." However, the correct name of the entity was "DWG Acquisition Company LLC." After this error was called to plaintiffs’ counsels’ attention, Chengdu served on DWG an amended summons and complaint, both of which referenced DWG as "DWG Acquisition Company, LLC." In addition, the amended complaint still contained an isolated reference to "DWG Acquisition, LLP." On November 13, 2018, Chengdu filed a praecipe, or errata sheet, seeking to replace the first page of its amended complaint. It did not style this action as a motion to amend. Indeed, it did not attempt to justify this action by referencing any court rule or case authority.
The comma preceding the letters LLC is not contained in the respondent’s proper name.
DWG and Chengdu do not agree as to whether an amended summons was served on DWG. While an amended summons was indeed served, it was simply titled, "Summons," with no indication that it had been amended.
¶9 That same day, DWG filed a motion to dismiss Chengdu’s claims against it, based on the plaintiffs’ failure to correctly identify it on the summons and complaint and the plaintiffs’ failure to correct the error in the amended complaint. Then, while its motion was pending, DWG joined in GAEMS’s counterclaims against Chengdu and filed a cross claim against Denny Wang, who, until that point, had not been named as a party.
¶10 Chengdu opposed the motion to dismiss and, in its pleading in opposition to the motion, indicated its willingness to move to amend its amended complaint to properly name all parties. Nevertheless, on December 3, 2018, the trial court, without explanation, granted DWG’s motion to dismiss.
¶11 Meanwhile, prior to entry of the dismissal order, Chengdu filed its motion to reconsider the trial court’s denial of its motion to appoint a receiver. On the same day that the trial court granted DWG’s motion to dismiss, it also denied the motion for reconsideration, stating:
THIS MATTER having come before the Court on Plaintiffs’ Motion for Reconsideration and/or Clarification of Court’s Denial
of Motion to Appoint General Receiver (the "Motion"), Motion is DENIED.*
....
*This case was dismissed on December 3, 2018 for insufficiency of service of process.
¶12 Chengdu appeals.
II
¶13 Chengdu first assigns error to the trial court’s dismissal of its action on the stated basis of insufficient service of process. This decision was erroneous, it asserts, because a motion based on insufficient service of process is an allegation that the trial court lacks personal jurisdiction over the defendant, and any objection by DWG to the trial court’s personal jurisdiction over it was waived when it sought affirmative relief in the form of a cross claim. We agree.
In the order of dismissal, the trial court did not set forth a basis for dismissal. The sole indication of a legal basis for dismissal is the notation on the order denying reconsideration of the denial of receivership. We thus analyze this basis for dismissal in the published portion of this opinion. We analyze the impropriety of granting dismissal on the other bases urged by the movant in the unpublished portion of this opinion.
¶14 "Proper service of the summons and complaint is a prerequisite to a court’s obtaining jurisdiction over a party." Harvey v. Obermeit, 163 Wash. App. 311, 318, 261 P.3d 671 (2011). Whether service of process was proper is a question of law that this court reviews de novo. Heinzig v. Seok Hwang, 189 Wash. App. 304, 310, 354 P.3d 943 (2015). A party may waive a claim of lack of personal jurisdiction by requesting the court to grant affirmative relief. Grange Ins. Ass’n v. State, 110 Wash.2d 752, 765, 757 P.2d 933 (1988). As this court has stated:
"[A] party, when he counterclaims, cross-claims, or impleads a third party, is seeking affirmative relief and is thereby invoking the jurisdiction of the court. He cannot at the same time deny that jurisdiction."
Kuhlman Equip. Co. v. Tammermatic, Inc., 29 Wash. App. 419, 424, 628 P.2d 851 (1981) (quoting Globig v. Greene & Gust Co., 193 F. Supp. 544, 549 (E.D. Wis. 1961) ).
¶15 It matters not that the counterclaims asserted may have been of the compulsory variety. Although the assertion of compulsory counterclaims does not waive the defense of lack of personal jurisdiction, Kuhlman Equip., 29 Wash. App. at 423-24 n.4, 628 P.2d 851, "[u]nder CR 13(g), the assertion of a cross claim is permissive" as opposed to compulsory. Krikava v. Webber, 43 Wash. App. 217, 221, 716 P.2d 916 (1986) (citing Nautilus, Inc. v. Transamerica Title Ins. Co. of Wash., 13 Wash. App. 345, 353, 534 P.2d 1388 (1975) ). By asserting its cross claim, DWG sought affirmative relief, thus invoking the jurisdiction of the court. By invoking the jurisdiction of the court, it waived its defense of lack of personal jurisdiction over it. The trial court erred by not so ruling.
By grounding our decision on waiver, we in no way indicate that a deficiency in the wording of either a summons or complaint gives rise to a defense of insufficiency of service of process, within the meaning of CR 12(b)(5). Cf. CR 12(b)(4) (insufficiency of process).
III
¶16 Chengdu next asserts that the trial court erred by declining to appoint a receiver over GAEMS’s affairs. This is so, Chengdu argues, because documentation before the trial court showed that the total of GAEMS’s liabilities exceeded the total of GAEMS’s assets. For their part, GAEMS and Decathlon dispute that this reflected the proper analysis to determine whether GAEMS was solvent. Further, they correctly note that solvency is not the sole consideration before a trial court on a motion for appointment of a receiver, and the trial court’s discretion to appoint or not appoint a receiver is not dependent solely on this measure. GAEMS and Decathlon have the better arguments.
As GAEMS and DWG have submitted a single respondent’s brief, they are referred to collectively as "GAEMS" when their arguments on appeal are discussed.
¶17 A receiver is "a person appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, or dispose of property of a person." RCW 7.60.005(10). Washington statutes identify 40 circumstances in which a receiver may be appointed; in almost every circumstance, the trial court must make the determination that appointing a receiver "is reasonably necessary and that other available remedies either are not available or are inadequate." RCW 7.60.025(1). The appropriate item in RCW 7.60.025 ’s list of scenarios provides for such appointment
(i) In an action against any person who is not an individual ... if that person is insolvent or is not generally paying the person’s debts as those debts become due unless they are the subject of bona fide dispute, or if that person is in imminent danger of insolvency.
RCW 7.60.025(1)(i). This was the basis on which Chengdu sought appointment of a receiver over GAEMS.
¶18 The power to appoint a receiver is discretionary. King County Dep’t of Cmty. & Human Servs. v. Nw. Defenders Ass’n, 118 Wash. App. 117, 122, 75 P.3d 583 (2003). As has long been recognized, a trial court’s decision regarding appointment of a receiver is reviewed for abuse of discretion. Roberts v. Wash. Nat’l Bank, 9 Wash. 12, 13, 37 P. 26 (1894) ; Mony Life Ins. Co. v. Cissne Family LLC, 135 Wash. App. 948, 952, 148 P.3d 1065 (2006). "The court’s discretion is not absolute or arbitrary, but a sound judicial discretion, in view of all the facts and circumstances of the particular case, ‘exercised for the promotion of justice and the protection of rights, where no other adequate remedy exists.’ " Union Boom Co. v. Samish River Boom Co., 33 Wash. 144, 152, 74 P. 53 (1903). "A trial court abuses its discretion when its decision ‘is manifestly unreasonable or based upon untenable grounds or reasons.’ " Salas v. Hi-Tech Erectors, 168 Wash.2d 664, 668-69, 230 P.3d 583 (2010) (quoting State v. Stenson, 132 Wash.2d 668, 701, 940 P.2d 1239 (1997) ); Mony Life Ins. Co., 135 Wash. App. at 952-53, 148 P.3d 1065.
¶19 In support of its argument that the trial court abused its discretion by not appointing a receiver, Chengdu asserts that the court was required to use a "balance sheet test" to determine whether GAEMS was insolvent. In support of its contentions, Chengdu points to the definition of "insolvent" in the receivership statute:
"Insolvent" or "insolvency" means a financial condition of a person such that the sum of the person’s debts and other obligations is greater than all of that person’s property, at a fair valuation, exclusive of (a) property transferred, concealed, or removed with intent to hinder, delay, or defraud any creditors of the person, and (b) any property exempt from execution under any statutes of this state.
RCW 7.60.005(5). This language tracks the federal bankruptcy statute’s definition of "insolvent" as
with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation.
¶20 However, Washington’s receivership statute does not require the rote application of the insolvency test to determine whether appointment of a receiver is appropriate. RCW 7.60.025(1)(i) provides for receivership where a party "is insolvent or is not generally paying the person’s debts as those debts become due unless they are the subject of bona fide dispute, or if that person is in imminent danger of insolvency." (Emphasis added.) Thus, whether a receiver should be appointed does not hinge on insolvency alone; rather, insolvency is one factor informing a trial court’s consideration.
¶21 Furthermore, as stated above, a trial court must determine whether appointment of a receiver "is reasonably necessary and that other available remedies either are not available or are inadequate." RCW 7.60.025(1).
¶22 The trial court had before it ample evidence that appointing a receiver was not necessary. GAEMS’s financial advisor, Debra Griffith, submitted a declaration in opposition to Chengdu’s motion stating that GAEMS’s current assets exceed its current liabilities by $463,802 as of September 30, 2018. Griffith also stated, with support from exhibits, that GAEMS is profitable, is current with its creditors, and "has significant prospects for growth," making it "well-positioned to rebound from past setbacks due to problematic leadership." This view was supported by the declaration of a financial partner, also citing to Griffith’s exhibits, "that GAEMS is now in a very strong position to pay off its long-term debt over the next 18-36 months."
¶23 Chengdu’s assertion, also supported by exhibits, that GAEMS was in fact insolvent under the balance sheet test was also presented to the trial court. However, the trial court "considered all briefs and supporting materials filed in support of or opposition to the motion" and determined that appointing a receiver was not warranted. The trial court had before it ample evidence aside from the balance sheet test that indicated receivership was not warranted, and its decision was in fact premised upon tenable reasons. Even if the receivership statute requires establishing insolvency on a balance sheet test, it does not require a trial court to appoint or deny appointment of a receiver based on this measure alone. The trial court did not abuse its discretion by declining to appoint a receiver.
In further support of the trial court’s decision, Decathlon also notes that, per RCW 7.60.025(1)(i), debts subject to a bona fide dispute do not factor into a trial court’s assessment of insolvency.
Our decision resolves the issue presented. It does not foreclose a future receivership request based on facts as they then exist.
¶24 A majority of the panel having determined that only the foregoing portion of this opinion will be printed in the Washington Appellate Reports and that the remainder shall be filed for public record in accordance with RCW 2.06.040, it is so ordered.
WE CONCUR:
Mann, ACJ
Verellen, J.