Opinion
No. 59304-8-I.
May 27, 2008.
Appeal from a judgment of the Superior Court for Snohomish County, No. 02-2-07538-8, Kenneth L. Cowsert, J., entered November 27, 2006.
Affirmed by unpublished opinion per Leach, J., concurred in by Becker and Appelwick, JJ.
Dr. Karen Stokes appeals dismissal of her derivative claims on behalf of Anesthesia Associates of Monroe, PLLC, against Dr. Dermot Chamberlain and others. Following a jury verdict in Stokes' favor on her individual claims against this closely held limited liability company of which she and Dr. Chamberlain were formerly members, the trial court dismissed her derivative claims on summary judgment. Under the unusual facts of this case, Dr. Stokes was not an appropriate representative of this PLLC to prosecute a derivative action on its behalf and also lacked standing to commence it.
Dr. Ashok Shroff appeals a summary judgment dismissing his individual counterclaims against Stokes and others, claiming either that he raised genuine issues of material fact or was entitled to judgment as a matter of law on his various claims. We disagree and affirm the dismissal of the derivative action brought by Dr. Stokes and the counterclaims of Dr. Shroff.
Factual Background
To obtain a reliable source of anesthesiology services, Valley General Hospital in Monroe, Washington, encouraged its head of anesthesiology, Dr. Chamberlain, to create an entity with three or more anesthesiologists who would be equal partners available to provide these services to the hospital. Originally, Drs. Chamberlain and Stokes discussed forming a new group with Dr. Bryan Hyman. They developed and submitted to the hospital a draft business plan for the purpose of obtaining a service contract with the hospital.
The formation of this new group proved problematic, and Hyman elected not to participate. Chamberlain formed Anesthesia Associates of Monroe, PLLC (AAM) and negotiated a three-year anesthesia service contract between it and the hospital. This contract provided for termination by either party without cause upon 90 days notice and for cause upon 30 days notice. To satisfy the staffing requirements of the contract, Shroff was invited to participate in AAM with Stokes and Chamberlain.
Difficulties arose between Stokes and Chamberlain. On April 2, 2002, at a meeting between Stokes, Chamberlain, and Shroff, Chamberlain terminated Stokes from AAM. In June 2002, Chamberlain and Shroff formed Physicians Anesthesia of Monroe, PLLC. AAM's interest in the hospital contract was assigned to PAM. Shortly afterwards, Stokes commenced this litigation.
For purposes of this litigation the parties have stipulated that Anesthesia Associates of Monroe, PLLC, and Physicians Anesthesia of Monroe, PLLC, are the same entity. In this opinion we will refer to Anesthesia Associates of Monroe, PLLC, as AAM and Physicians Anesthesia of Monroe, PLLC, as PAM.
In her original complaint, Stokes sued only AAM, seeking declaratory relief and damages based upon her claim that she had been wrongfully excluded from AAM. She included a request that she be reinstated as a member of AAM. She amended her complaint a number of times, adding parties and, ultimately, derivative claims on behalf of AAM against Chamberlain, Shroff, and PAM. During these amendments she abandoned her request for reinstatement. At trial she stipulated that she was making no claim to an ongoing membership or other interest in AAM or PAM.
Upon being joined as a defendant, Shroff asserted claims against Stokes and an alleged general partnership of Chamberlain, Stokes, and Shroff for fraud and intentional interference with business expectancy.
The trial court bifurcated Stokes' individual and derivative claims, with the individual claims proceeding to a jury trial first. The jury would be asked to decide if Stokes was ever a member of AAM, or only an employee. If the juryfound that she was only an employee, she would lack standing to proceed with the derivative claims. During trial Shroff agreed to try his claims to the court at a later date.
The jury trial lasted four weeks. Stokes presented individual claims against Chamberlain for wrongful termination of a PLLC member, wrongful termination of employment as an employee of AAM, tortious interference with a business relationship, fraud and mismanagement, and individual claims against AAM for wrongful termination of a member and an employee. Stokes presented evidence of her costs for malpractice insurance, claimed lost wages, and claimed lost profits from AAM to support her request for more than $2,000,000.00 in damages. At the close of Stokes' case, the trial court dismissed her claim against Chamberlain for tortious interference and her claim against AAM for wrongful termination of employment. Stokes abandoned her claim against Chamberlain for wrongful termination of employment, and her claim for mismanagement was dismissed before the case was submitted to the jury.
By special verdict, the jury found that Dr. Stokes was a member of AAM and awarded her $64,765.00 against AAM only.
Post-trial, Drs. Chamberlain and Shroff, AAM, and PAM moved to dismiss Dr. Stokes' derivative claims on the alternative grounds that these claims were actually individual rather than derivative in nature, that Dr. Stokes did not represent the interests of AAM members, and that her claims were barred by collateral estoppel. In their reply brief, these same parties raised for the first time a claim that Dr. Stokes lacked standing to bring a derivative action on behalf of AAM because she was no longer a member when she first commenced this action. The trial court granted summary judgment, dismissing the derivative claims without identifying the grounds for its decision.
Post-trial, Dr. Stokes moved to dismiss Dr. Shroff's claims based upon Dr. Shroff's deposition testimony. When deposed, Dr. Shroff testified that when he began working for AAM he did so as an independent contractor and not a member of AAM or a partner of Drs. Chamberlain or Stokes. Before he began work he had two brief conversations with Dr. Stokes and did not recall the contents of either. Apart from the information contained in AAM meeting minutes, he had no conversation with either Dr. Chamberlain or Dr. Stokes concerning his pay, his relationship with AAM, or any other term of his work. Dr. Shroff never spoke with Dr. Stokes after she was terminated on April 2, 2002. In opposition to Dr. Stokes' motion for summary judgment, Dr. Shroff submitted a declaration reciting a number of assurances he recalled being made by Drs. Chamberlain and Stokes before he began working with AAM. The trial court struck those portions of Dr. Shroff's declaration contradicting his deposition testimony and dismissed his claims on summary judgment.
Standard of Review
We review summary judgment de novo, engaging in the same inquiry as the trial court. On appeal, all facts and reasonable inferences will be viewed ina light most favorable to the non-moving party. Summary judgment is appropriate where there is no issue of material fact, and reasonable persons could reach but one conclusion entitling the moving party to summary judgment.
Colwell v. Holy Family Hosp., 104 Wn. App. 606, 611, 15 P.3d 210 (2001).
Valencia v. Reardan-Edwall Sch. Dist. No. 1, 125 Wn. App. 348, 350, 104 P.3d 734 (2005).
Miller v. Jacoby, 145 Wn.2d 65, 71-72, 33 P.3d 68 (2001).
Discussion
The Stokes Appeal
A member of a limited liability company may bring an action on behalf of the company only if those with authority to bring the action have refused to bring the action or an effort to cause them to bring the action is not likely to succeed. This member must be a member both at the time of the transaction complained of and at the time of bringing the action.
RCW 25.15.370.
RCW 25.15.375.
Historically, a shareholder could not bring an action at law or in equity to enforce corporate rights because this cause of action accrued to the corporation itself and could only be enforced by it. Under certain very limited circumstances, to prevent a failure of justice, equity permitted a shareholder to sue to enforce a right belonging to the corporation. A shareholder was not permitted to bring a derivative suit because the action or the requested relief belonged to him, but simply to set in motion the "judicial machinery" to prevent a failure of justice.
Goodwin v. Castleton, 19 Wn.2d 748, 761, 144 P.2d 725 (1944).
Goodwin, 19 Wn.2d at 761.
Goodwin, 19 Wn.2d at 763.
Little authority exists addressing whether and when a member of a limited liability company may maintain a derivative action. However, CR 23.1 and the cases interpreting this rule and its counterparts in other jurisdictions provide guidance by analogy. Under CR 23.1 a derivative action may not be maintained "if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association."
CR 23.1, by its express terms, only applies to a shareholder action to enforce the right of a corporation or a member's action to enforce the right of an unincorporated association.
See Haberman v. Washington Pub. Power Supply Sys., 109 Wn.2d 107, 153, 744 P.2d 1032, 750 P.2d 254 (1987), where the court looks to Fed.R.Civ.P. 23.1 on issue of whether bond trustee must comply with demand requirements before commencing derivation action.
Under this standard, courts have considered a number of factors to decide whether a particular derivative plaintiff can provide the requisite fair and adequate representation, including: economic antagonism between the plaintiff and other shareholders; the magnitude of the plaintiff's personal interests as compared to her interest in the derivative action itself; plaintiff's vindictiveness toward defendants; and the degree of support plaintiff receives from the shareholders she purports to represent.
Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir. 1980).
Stokes claims no ongoing interest in AAM. She cannot identify anyeconomic interest of her own she will further with the derivative claims. Similarly, she cannot identify any economic benefit to AAM or its other member(s) produced by continuing the derivative litigation. The four-week trial on her individual claims reflects her hostility towards AAM and Chamberlain. These considerations make it very unlikely that Stokes would scrupulously keep their interests in mind if permitted to continue the derivative litigation.
Stokes stipulated at trial that she had no claim to a continuing membership interest in the company. Her counsel told the court, "We're going . . . forward with what her damages might have been in the future, and there's no further claim that, even after this trial, she's still a member." The federal counterpart to CR 23.1 has generally been interpreted to require dismissal if a plaintiff is divested of ownership while a derivative suit is pending. See, e.g., Johnson v. United States, 317 F.3d 1331 (Fed. Cir. 2003).
The evidence presented to the trial court raises no genuine issue as to whether Stokes could fairly and adequately represent the interests to be benefited by the derivative claims. She could not.
While the issue of Stokes' standing was not timely raised in the trial court, we can affirm the trial court on any basis supported in the record. RCW 25.15.375 requires that a plaintiff be a member of a limited liability company at the time a derivative action is commenced. The jury found that Stokes had been a member of AAM and awarded her $64,765.00 damages for wrongful termination of her membership. Inherent in this verdict is a finding that Stokes was no longer a member of AAM after she was terminated on April 2, 2002. Had the jury found she remained a member, it would not have awarded Page 9 her damages.
Respondents first raised the standing issue at the trial court in their reply brief. See White v. Kent Med. Ctr., 61 Wn. App. 163, 810 P.2d 4 (1991).
Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 766, 58 P.3d 276 (2002).
Therefore, the trial court's dismissal of Stokes' derivative claims can also be affirmed on the basis that she lacked standing to bring them in the first place.
The Shroff Cross Appeal
Fraud
Respondent Shroff cross appeals the trial court's dismissal of his counterclaims of fraud and intentional interference with a business expectancy. Shroff asserts that Stokes was silent and omitted material facts and made fraudulent misrepresentations upon which he relied in deciding to become a member of AAM.
When deposed, Shroff testified that he was an independent contractor and not a member of AAM up to the time of Stokes' termination. He also testified that he had two brief conversations with Stokes before he commenced working as an independent contractor and discussed nothing of consequence in either conversation.
In a declaration opposing Stokes' motion for summary judgment, Shroff claims Stokes made numerous misrepresentations and omissions. Stokes, he asserts, "told Shroff nothing concerning any problems that she had with anybody on any terms." She did not disclose that she had signed an employment agreement with another LLC before joining AAM or that she had complained to a third party about a member in a previous LLC. Nor, according to Shroff, did Stokes disclose that she had a problem with a former employer in Idaho and was Page 10 contemplating bringing a lawsuit against them or that she had a "bad relationship" with Chamberlain. Shroff asserts that Stokes agreed that he would be an equal partner in AAM, but had no intention of actually accepting him as a full member.
Shroff and Stokes dispute whether Shroff was actually a member of AAM.
Shroff claims considerable damages as a result of Stokes' alleged fraudulent misrepresentations and omissions. Among other damages, he claims he would have received one-third of AAM's gross revenues for a period of six years.
To the extent that Shroff's declaration contradicts his earlier deposition testimony the trial court properly struck it. A party cannot create an issue of fact with a declaration that contradicts clear answers to unambiguous questions negating any genuine issue of material fact.
Marshall v. AC S, Inc., 56 Wn. App. 181, 185, 782 P.2d 1107 (1989).
To establish a claim of fraud, each element of fraud must be established by clear, cogent, and convincing evidence. The nine elements of fraud are: (1) representation of an existing fact; (2) materiality; (3) falsity; (4) the speaker's knowledge of its falsity; (5) intent of the speaker that it should be acted upon by the plaintiff; (6) plaintiff's ignorance of its falsity; (7) plaintiff's reliance on the truth of the representation; (8) plaintiff's right to rely upon it; and (9) damages suffered by the plaintiff.
Stiley v. Block, 130 Wn.2d 486, 505, 925 P.2d 194 (1996).
Stiley, 130 Wn.2d at 505.
Shroff became a member of AAM when he signed the Limited Liability Company Agreement of Anesthesia Associates of Monroe, LLC, on June 3, 2002, two months after Stokes was terminated. Given Shroff's clear deposition testimony, he cannot establish elements (1), (2) and (7). The trial court properly dismissed his fraud claims.
Tortious Interference
The Washington Supreme Court has identified five elements necessary to establish a claim for tortious interference with a business expectancy: (1) the existence of a valid contractual relationship or business expectancy; (2) that defendants had knowledge of that relationship; (3) an intentional interference inducing or causing a breach or termination of the relationship or expectancy; (4) that defendants interfered for an improper purpose or used improper means; and (5) resultant damages.
Commodore v. Univ. Mech. Contractors, Inc., 120 Wn.2d 120, 137, 839 P.2d 314 (1992).
Shroff's principal argument for tortious interference is that, as a result of Stokes' lawsuit, the business relationship between Shroff, Chamberlain, AAM, and Valley General was irrevocably damaged. He complains that he was deposed by Stokes twice and by co-defendants a third time and asserts that the relationship between himself and Chamberlain became strained as a result of the suit, leading to the eventual dissolution of AAM.
This argument fails because Shroff's business relationship was between Page 12 Shroff as an independent contractor and AAM, and not Stokes. This relationship continued, and Shroff admitted in his deposition that he received all that was due him as an independent contractor. He further admitted that he was never partners with Stokes.
Shroffs claim also fails under element (4) above. Stokes' filing of a lawsuit did not constitute an improper purpose or an improper means. Stokes sued for wrongful termination and prevailed. While her derivative suit was dismissed, it cannot be said that her third party claims were groundless or improper. Shroff cannot now seek to recover the costs of his litigation under the guise of tortious interference with a business expectation.
Affirmed.