Opinion
No. 54520-5-I
Filed: June 6, 2005 UNPUBLISHED OPINION
Appeal from Superior Court of Snohomish County. Docket No: 02-2-10669-1. Judgment or order under review. Date filed: 06/10/2004. Judge signing: Hon. David T Patterson.
Counsel for Appellant(s), Michael Scott Dutton, Attorney at Law, 2423 E Valley St, Seattle, WA 98112-4131.
Bryan Craig Gourley, Attorney at Law, PO Box 1091, Snohomish, WA 98291-1091.
Counsel for Respondent(s), Stephan E. Todd, Attorney at Law, PO Box 13635, Bothell, WA 98082-1635.
Jack Johnson agreed to obtain a secured line of credit for Michael Krefting. In return, in a letter of understanding, Krefting promised to pay Johnson $100,000. The trial court interpreted the terms of the agreement to mean that Johnson was entitled to $100,000 from the proceeds of the sale of commercial property jointly owned by Krefting and Johnson. The court also decided that Johnson was entitled to recover from Krefting on a 1992 promissory note (1992 Note). Krefting contends the trial court incorrectly interpreted the agreement and the six-year statute of limitations on the 1992 Note barred recovery. We affirm the trial court's interpretation of the agreement but we reverse the trial court's decision that the 1992 Note was not barred by the statute of limitations and remand to deduct the amounts awarded based on the 1992 Note.
FACTS
Michael Krefting and Jack Johnson had a business relationship and have known each other for nearly thirty years. Krefting worked for many years in the real estate business in Snohomish County. Johnson owned G G Meats and with his business partner, Gary Dahlby, owned and operated a real estate holding company, John Dahl Properties. Johnson and Dahlby bought and sold real estate for approximately twenty years.
In June 1990, Krefting and Craig Shriner purchased a commercial building in Monroe, Washington ('the Monroe property'). Krefting paid $25,000 down and Krefting and Shriner executed a promissory note to the sellers, John and Donna Kalmbach, for $200,000 ('Kalmbach note'). The note was secured by a deed of trust on the Monroe property. From June 1990 to October 1991, Krefting spent $43,000 remodeling and repairing the Monroe property. In November 1991, Johnson purchased Shriner's interest in the Monroe property. Krefting and Johnson rented the building to Windermere Real Estate under a ten-year lease. The lease agreement required Windermere to pay taxes, the insurance and other expenses. Johnson and Krefting agreed to use the rental income to make payments on the Kalmbach note.
In February 1992, Krefting was having financial difficulties and asked Johnson to co-sign on a $60,000 loan to him from Frontier Bank ('Frontier Bank Loan'). Johnson agreed to co-sign on the loan. The loan was secured by a deed of trust on Krefting's house at Flowing Lake ('Flowing Lake property'). The Flowing Lake property was also subject to a deed of trust in favor of Dolores Smith, the previous owner. In February 1992, Johnson also agreed to loan Krefting $11,000. Krefting signed a promissory note for $11,000 payable to Johnson on demand, with 12% interest per annum ('1992 Note').
In March 1992, Krefting asked Johnson to obtain a line of credit for him with First Heritage Bank. Johnson agreed and obtained a $50,000 line of credit for Krefting at First Heritage Bank. The line of credit was secured by a deed of trust on property owned by Johnson and Dahlby. In consideration for obtaining the secured line of credit, Krefting and Johnson executed a letter of understanding (LOU). According to the LOU, Krefting agreed to pay Johnson $100,000 from the profits of his real estate business and/or the proceeds from the sale of Krefting's real estate business. The LOU states that if the $100,000 debt was not paid from the real estate business or its sale, then the balance would be paid from Krefting's 'share of any profits from [the] sale' of the Monroe property. Krefting fell behind in payments to Smith on the Flowing Lake property. On March 31, 1992, the Trustee for the Smith deed of trust filed a Notice of Trustee sale and scheduled a trustee's sale on the Flowing Lake property for July 3, 1992.
Clerk's Papers (CP) at 154.
On July 1 or 2, 1992, Johnson learned that the Trustee sale for the Flowing Lake property was scheduled for July 3 and contacted Krefting. Johnson and Krefting entered into an Option for Sale of Real Estate Agreement ('option agreement') on July 2. Krefting agreed to quit claim his one-half interest in the Monroe property to Johnson to protect Johnson on the Frontier Bank Loan that was secured by a deed of trust on the Flowing Lake property. The agreement provides that Krefting will continue to receive one-half of the rental income from the Monroe property after payment of the Kalmbach note. The option agreement allowed Krefting to buy back his one-half interest in the Monroe property by tendering $1.00 to Johnson when Windermere's lease was terminated.
At the time Krefting was also negotiating with Windermere to sell his real estate business and did not want to be Windermere's landlord on the Monroe property.
In 1999, Johnson refinanced the Monroe property with a US Bank loan for $200,000 ('US Bank Loan') to pay off the Kalmbach note. Johnson used rental income from the Monroe property to make payments on the US Bank Loan.
In spring 2002, Windermere terminated its lease. In September 2002, Krefting tendered $1.00 under the option agreement for his one-half share of the Monroe property. Johnson refused to accept Krefting's attempt to exercise the option on the Monroe property because Krefting had not paid the debts he owed Johnson. After Windermere terminated the lease for the Monroe property, Johnson paid $70,990 for taxes, insurance and other expenses.
In November 2002, Krefting filed a complaint to quiet title and for breach of contract. Krefting alleged he was a one-half owner of the Monroe property and under the option agreement, he was entitled to an undivided interest in the property. Krefting sought an order requiring Johnson to execute a deed to Krefting for an undivided one-half interest in the Monroe property; an accounting of the receipts and expenditures since June 1999; and damages for breach of the option agreement and Johnson's breach of fiduciary duty. Johnson filed an answer, affirmative defenses, and a counterclaim seeking to recover the outstanding amounts Krefting owed Johnson based on the LOU and the 1992 Note. In Krefting's answer to Johnson's counterclaim he asserted a number of affirmative defenses including statute of limitations.
Johnson also claimed Krefting failed to pay on another promissory note for $13,000. Johnson later voluntarily dismissed this claim.
While the lawsuit was pending, Johnson received an offer on the Monroe property. In September 2003, Johnson sold the property for $450,000. He deposited $227,518.35 from the proceeds of the sale into the registry of the court pending resolution of the lawsuit.
Closing costs totaled $81,007.64 and the US Bank Loan pay off was $65,974.01. Thus, the proceeds from the sale totaled $303,018.35 ($450,000 — $81,007.64 — $65,974.01 = $303,018.35). The buyers also paid an additional $22,500 in deferred real estate commissions, which Johnson was obligated to pay back at a later date. Johnson received payment for the sale proceeds and the deferred real estate commission ($22,500) in the form of $227,518.35 in cash and two promissory notes totaling $98,000 ('Carry Back Notes') ($227,518.35 + $98,000 = $325,518.35 — $22,500 = $303,018.35).
After trial on May 5 and 6, 2004, the court ruled that Krefting was entitled to an undivided one-half interest in the Monroe property and was entitled to share in the proceeds from the sale. The court ruled that Johnson was entitled to recover the amounts owed to him by Krefting under the terms of the LOU and the 1992 Note. The court offset the amounts owed Johnson against Krefting's share of the proceeds from the sale of the Monroe property. The court ordered the clerk to disburse $42,898.49 to Krefting and $184,619.86 to Johnson from the court registry. Krefting appeals and challenges the trial court's interpretation of the LOU and the trial court's decision to offset the amounts owed under the LOU and the 1992 Note.
ANALYSIS Contract Interpretation
The trial court interpreted the phrase 'share of the profits' in the LOU to mean 'share in a 'common fund' resulting from the sale of the Monroe Property.' The court concluded that the ''common fund' is the amount of money left after the costs of sale.' Krefting contends the trial court incorrectly interpreted the meaning of the term 'profits,' in the LOU. Krefting also contends the court's incorrect interpretation resulted in an erroneous calculation of the judgment amount.
CP at 66.
CP at 66.
The court's purpose in interpreting a written contract is to ascertain the parties' intent. U.S. Life Credit Life Ins. Co. v. Williams, 129 Wn.2d 565, 569, 919 P.2d 594 (1996). It is the court's responsibility 'to declare the meaning of what is written' and not what was intended to be written.' Berg v. Hudesman, 115 Wn.2d 657, 669, 801 P.2d 222 (1990) (quoting J.W. Seavey Hop Corp. v. Pollock, 20 Wn.2d 337, 349, 147 P.2d 310 (1944)). To determine the parties' intent, the court uses the 'context rule' of interpretation. Berg, 115 Wn.2d at 667; see also Diaz v. Nat'l Car Rental Sys., Inc., 143 Wn.2d 57, 66, 17 P.3d 603 (2001). Under Berg, extrinsic evidence is relevant to determine intent if the evidence gives meaning to the words used in the contract. See Williams, 129 Wn.2d at 571; Berg, 115 Wn.2d at 666-68. In applying the context rule, the court may consider (1) the subject matter and objective of the contract, (2) the circumstances surrounding the entering into the contract, (3) the subsequent conduct of the parties to the contract, (4) the reasonableness of the parties' respective interpretations, (5) statements made by the parties in preliminary negotiations, (6) usages of trade, and (7) the course of dealing. Berg, 115 Wn.2d at 668.
We review the trial court's findings of fact to determine whether they are supported by substantial evidence and, if so, whether the findings support the trial court's conclusions of law. Nordstrom Credit, Inc. v. Dep't of Revenue, 120 Wn.2d 935, 939, 845 P.2d 1331 (1993); Martinez v. Miller Industries, Inc., 94 Wn. App. 935, 943, 974 P.2d 1261 (1999). The party challenging a finding of fact has the burden to demonstrate that the finding is not supported by substantial evidence. Nordstrom Credit, Inc., 120 Wn.2d at 939. Substantial evidence is evidence sufficient to persuade a fair-minded person of the truth of the declared premise.
Krefting's assertion that this court should review the trial court's findings of fact de novo is without merit. Although determining the legal consequences of a contract involves a question of law reviewed de novo, Krefting specifically challenges the court's interpretation of 'profits' based on extrinsic evidence, which is a question of fact. Denny's Restaurants, Inc. v. Security Union Title Ins. Co., 71 Wn. App. 194, 201, 859 P.2d 619 (1993) (citing Berg v. Hudesman, 115 Wn.2d 657, 668, 801 P.2d 222 (1990)); see also.
The objective of the LOU and the circumstances related to the LOU support the trial court's finding that 'profits' means the money realized from the sale of the Monroe property after deducting the costs of sale. Krefting and Johnson were long-time business associates with an informal course of dealing, including contracts based on a handshake and handwritten contracts sometimes without signatures or dates. Johnson agreed to co-sign a loan for Krefting secured by the Flowing Lake property. Johnson also obtained a secured line of credit for Krefting. After Johnson learned Krefting was in default on the Flowing Lake property, Krefting agreed to enter into the LOU. The LOU was an undated handwritten agreement signed by Krefting and Johnson:
This is a Letter of Understanding between Mike Krefting [a]nd Jack Johnson in lieu of Jack co-signing with me on lines of credit to help finance the Business. . . . I Mike Krefting agree to give to Jack Johnson 25% of all profits and or any sale of any offices. . . . Also it is understood this agreement holds a min and max of $100,000.00 when this amount is paid. Jack Johnson agrees to except [sic] no more profits from Business. If in the event there is a shortfall Mike Krefting agrees to pay balance out of his share of any profits from [s]ale of Monroe Bldg. located at 328 W Main, Monroe, Washington.
CP at 154.
Johnson testified that he 'was to be paid when the building in Monroe was sold' and 'we had an agreement that when the proceeds came, everything would be cleared up.' Johnson also testified that Dahlby would not agree to pledge property for Krefting's benefit without the written agreement. Dahlby testified that Johnson and Krefting drafted the LOU because otherwise Dahlby would not agree to secure a line of credit for Krefting. Krefting testified that the LOU was a blank piece of paper when he signed it and the terms were inserted later, but the trial court rejected Krefting's testimony as not credible. Substantial evidence supports the trial court's findings and its interpretation of the LOU and the term 'profits' in the LOU. The trial court's interpretation took into consideration the purpose of the agreement, the course of dealing, the circumstances surrounding the LOU and the reasonableness of the parties' interpretations.
Report of Proceedings (RP) (5/05/04) 14.
RP (5/05/04) 15.
In his opening brief, Krefting states that he proposed an alternative interpretation of 'profits' to the trial court — the amount left after subtracting total expenditures. Appellant's Brief (App. Br.) at 27. The first time Krefting raised this interpretation of 'profits' was in a motion for reconsideration filed after the trial court entered written finds of fact and conclusions of law. We, therefore decline to review this argument. Anderson v. Farmers Ins. Co., 83 Wn. App. 725, 734, 923 P.2d 713 (1996).
Because the trial court's interpretation of the term 'profits' in the LOU is supported by substantial evidence, we conclude the court's calculations based on that interpretation is also supported by the evidence.
Krefting concedes that the trial court's accounting analysis is only erroneous as a result of its incorrect interpretation of the term 'profits,' and this court need not 're-visit or rule upon the specifics of the trial court's accounting.' Appellant's Reply Brief at 16-17. Despite Krefting's concession, he contends that the trial court failed to account for the out-of-pocket costs he incurred from remodeling and repairing the Monroe property. Krefting incurred these costs before Johnson purchased his interest in the Monroe property in 1991. Krefting cites no legal authority supporting his claim that Johnson owes him for out-of-pocket expenses for improvements made without Johnson's consent before Johnson was a co-owner of the Monroe Property. Arguments that are not supported by citation to legal authority will not be considered on appeal. See Cowiche Canyon Conservancy v. Bosley, 118 Wn.2d 801, 809, 828 P.2d 549 (1992); RAP 10.3(a)(5).
Krefting also contends the trial court failed to account for $98,000 Johnson retained from the sale of the Monroe property. After a close examination of the trial court's calculations, we conclude it accounted for the $98,000 before dividing the proceeds from the sale between Krefting and Johnson.
1992 Note
Krefting also contends the trial court erred in concluding he failed to sustain his burden of proving that the 1992 Note was barred by the statute of limitations. Krefting argues the trial court's decision is not supported by substantial evidence. We agree.
The trial court addresses Krefting's statute of limitations defense to the 1992 Note in findings of fact 19 and 20 and conclusions of law 4 and 5. Findings of fact 19 and 20 state:
19. There was no evidence presented by Krefting as to the purpose of the loan or that an action on the Note was subject to the long arm statute.
20. There was no evidence presented by Krefting as to the number of days Krefting had been in Washington between the normal running of the statute of limitations and the filing of Johnson's counterclaims.
CP at 65-66. Although it is true that Krefting did not prove the exact 'number of days' he had visited Washington between 1993 and November 2002, the significance of this is unclear. Especially, since Krefting did not move to Nevada until 1996.
Conclusions of Law 4 and 5 state:
4. Krefting had the burden of proof on his affirmative defenses of failure of consideration, statute of limitations, laches and estoppel.
5. Krefting did not sustain his burden of proof on the affirmative defenses.
CP at 68.
Johnson testified that he demanded payment on the 1992 Note in January 1993. It is undisputed that Johnson had to file a claim to recover within six years of demand and it is undisputed that the six-year statute of limitations expired in January 1999. It is also undisputed that Johnson did not take any action to enforce the 1992 Note until he filed the counterclaim to Krefting's quiet title action in December 2002. Based on these unrefuted facts, Krefting established Johnson's counterclaim on the 1992 Note was barred by the six-year statute of limitations. See Brown v. Prowest Transport Ltd., 76 Wn. App. 412, 419, 886 P.2d 223 (1994).
RCW 62A.3-118(b) provides,
Except as provided in subsection (d) or (e), if demand for payment is made to the maker of a note payable on demand, an action to enforce the obligation of a party to pay the note must be commenced within six years after the demand. If no demand for payment is made to the maker, an action to enforce the note is barred if neither principal nor interest on the note has been paid for a continuous period of ten years.
The trial court's findings focus on the purpose of the loan are misplaced. Krefting and Johnson executed the interest bearing 1992 promissory note in Washington, while Johnson was a resident of Washington. Obtaining a loan and executing an interest bearing promissory note is a business transaction, regardless of the purpose for the loan. See Toulouse v. Swanson, 73 Wn.2d 331, 334, 438 P.2d 578 (1968). The 1992 Note was a business transaction, subject to service under Washington's long-arm statute.
Relying on RCW 4.16.180, Johnson contends the statute of limitations for the 1992 Note was tolled because Krefting moved to Nevada in 1996. But under RCW 4.16.180, the statute of limitations is not tolled when a nonresident defendant is amenable to service. Summerrise v. Stephens, 75 Wn.2d 808, 809, 811, 454 P.2d 224 (1969).
RCW 4.16.180 provides:
If the cause of action shall accrue against any person who is a nonresident of this state, or who is a resident of this state and shall be out of the state, or concealed therein, such action may be commenced within the terms herein respectively limited after the coming, or return of such person into the state, or after the end of such concealment; and if after such cause of action shall have accrued, such person shall depart from and reside out of this state, or conceal himself, the time of his absence or concealment shall not be deemed or taken as any part of the time limit for the commencement of such action.
(emphasis added).
For the first time on appeal, Johnson asserts that Krefting was not amenable to service until he filed his complaint in November 2002. But Johnson presented no evidence below that Krefting was not amenable to service. To the contrary, the record shows Krefting continued to have contact with Johnson while Krefting lived in Nevada at least through 1998.
Contrary to the court's finding, Johnson had the burden to prove Krefting was not amenable to service under RCW 4.16.180. See Summerrise v. Stephens, 75 Wn.2d 808, 810-11, 454 P.2d 224 (1969).
See Exhibit 19; Exhibit 13; RP (5/05/04) 83.
The undisputed evidence establishes Johnson's 1992 Note is barred by the six year statute of limitations and the trial court's decision to the contrary is not supported by substantial evidence. We reverse the trial court's conclusion that Krefting failed to prove the 1992 Note was barred by the six-year statute of limitations. Because Johnson is not entitled to recovery on the 1992 Note, he is also not entitled to an award of attorneys' fees based on the 1992 Note.
CONCLUSION
We affirm the trial court's interpretation of the LOU, but reverse the trial court's conclusion that the 1992 Note was not barred by the six-year statute of limitations. We remand to amend the judgment to deduct the amounts awarded to Johnson based on the 1992 Note.
APPELWICK and AGID, JJ., Concur.