Opinion
No. 54413-0-II consolidated with No. 54833-0-II
09-14-2021
SERPANOK CONSTRUCTION, INC., a Washington corporation, Respondent, v. POINT RUSTON, LLC, a Washington limited liability company; Point Ruston Phase II, LLC, a Washington limited liability company; Century Condominiums, LLC, a Washington limited liability company; and Michael A. Cohen, an individual, Appellants, Chicago Title Insurance Company, a foreign corporation; Addison Construction Supply, Inc., a Washington corporation; JM Corp & Son, Inc., a Washington corporation; Glacier Northwest, Inc. d/b/a CalPortland, a Washington corporation; Richard Matzen and Edelgard Matzen, husband and wife, and the marital community comprised thereof; C2 Strategies, LLC, a Washington limited liability company; Stacey Poland and Sheri Poland, a married couple; USAA Federal Savings Bank, a federal savings association; First American Title Insurance Company, a foreign corporation; International Fidelity Insurance Company, a foreign corporation; Stoner Electric, Inc., a foreign corporation, Defendants.
Andrew Ramiro Escobar, Seyfarth Shaw LLP, 999 3rd Ave. Ste. 4700, Seattle, WA, 98104-4041, Jack B. Krona Jr., Attorney at Law, 5020 Main Street, Suite H, Tacoma, WA, 98407, for Appellants. Alan B. Bornstein, Jameson Pepple Cantu PLLC, 801 2nd Ave. Ste. 700, Seattle, WA, 98104-1573, Howard Mark Goodfriend, Catherine Wright Smith, Smith Goodfriend PS, 1619 8th Ave. N, Seattle, WA, 98109-3007, for Respondent.
Andrew Ramiro Escobar, Seyfarth Shaw LLP, 999 3rd Ave. Ste. 4700, Seattle, WA, 98104-4041, Jack B. Krona Jr., Attorney at Law, 5020 Main Street, Suite H, Tacoma, WA, 98407, for Appellants.
Alan B. Bornstein, Jameson Pepple Cantu PLLC, 801 2nd Ave. Ste. 700, Seattle, WA, 98104-1573, Howard Mark Goodfriend, Catherine Wright Smith, Smith Goodfriend PS, 1619 8th Ave. N, Seattle, WA, 98109-3007, for Respondent.
PART PUBLISHED OPINION
Glasgow, A.C.J. ¶ 1 Point Ruston LLC, Point Ruston Phase II LLC (Phase II), and Century Condominiums (hereinafter collectively referred to as Point Ruston parties) were separate but related real estate companies developing the Point Ruston area in Pierce County. Serpanok Construction Inc. was a concrete and steel construction subcontractor on the project.
¶ 2 Phase II and Century fell behind in payments to Serpanok. Point Ruston LLC then guaranteed a portion of Phase II and Century's debt to induce Serpanok to keep working. Serpanok also filed a mechanic's lien on a parking garage it was constructing.
¶ 3 Serpanok then sued the Point Ruston parties for breach of contract due to failure to pay. An arbitrator awarded Serpanok over $4.6 million (before attorney fees and interest). The arbitrator limited the total recovery from all defendants to the total amount due under the subcontracts and granted Serpanok's request to foreclose on the garage mechanic's lien. The arbitrator collectively awarded the Point Ruston parties $1.2 million (before attorney fees and interest), comprised of a sanctions award and recovery for its successful counterclaims against Serpanok.
¶ 4 The trial court confirmed the arbitration award, entering a total judgment of approximately $5.2 million (including prejudgment interest) against the three Point Ruston parties, who were jointly and severally liable. Serpanok then foreclosed on its mechanic's lien and purchased the garage at the sheriff's sale with a credit bid of $3.4 million. The trial court adhered to the arbitrator's determination that the total payment from all Point Ruston parties could not exceed the $5.2 million owed under the subcontracts plus interest and fees. The trial court confirmed the foreclosure sale, determined that the sale proceeds fully satisfied the mechanic's lien, and reduced the total underlying debt, as well as Point Ruston LLC's guaranty obligation, to a remaining balance of $1.8 million.
¶ 5 The Point Ruston parties appeal the arbitration award and related orders. The Point Ruston parties also appeal the postjudgment allocation of foreclosure sale proceeds, claiming the trial court erred by not subtracting the $3.4 million foreclosure sale proceeds from Point Ruston LLC's guaranty and releasing Point Ruston LLC entirely from its obligations as a guarantor. Both the Point Ruston parties and Serpanok request attorney fees on appeal.
¶ 6 In the published portion of this opinion, we affirm the allocation of foreclosure sale proceeds. Point Ruston LLC remains a secondary obligor liable for the remaining $1.8 million balance on the underlying debt. In the unpublished portion of this opinion, we affirm the underlying arbitration award and reject the Point Ruston parties’ other claims. Therefore, we affirm both the arbitration award, as well as the trial court's allocation of foreclosure proceeds and judgment. We grant Serpanok's request for attorney fees on appeal.
FACTS
A. Background
¶ 7 The Point Ruston parties constructed apartment buildings, condominiums, retail businesses, a movie theater, a parking garage, and other structures on the site of the former Asarco copper smelter. Michael Cohen was the project manager. Larry Hutchinson was the construction manager and oversaw the Point Ruston projects from 2013 to 2015. Hutchinson negotiated subcontracts, approved change orders, was authorized to "exercise discretion and independent judgment," and owed the Point Ruston parties fiduciary duties. Clerk's Papers (CP (I)) at 1472.
The clerk's papers in cause no. 54413-0-II are referred to as "CP (I)." The clerk's papers in cause no. 54833-0-II are referred to as "CP (II)."
¶ 8 In 2014, Phase II and Serpanok signed subcontracts for the movie theater (Building 1A) and the parking garage. Both subcontracts had arbitration clauses. Shortly after the signing of the Building 1A subcontract, title of that building was transferred to Century, making it the real party in interest. Century was not a party to the garage subcontract, and Point Ruston LLC was not a party to either subcontract.
When reviewing an arbitrator's award, courts are "bound by the arbitrator's findings of fact." Int'l Union of Operating Eng'rs, Local 286 v. Port of Seattle , 176 Wash.2d 712, 724, 295 P.3d 736 (2013). As a result, our recitation of the facts tracks the arbitrator's findings.
B. Kickbacks, Change Orders, and Promissory
¶ 9 From 2013 to 2015, Serpanok paid Hutchinson about $80,000 in kickbacks in exchange for information that would assist Serpanok in obtaining contract awards and change order decisions favorable to Serpanok. The Point Ruston parties learned of Hutchinson's misconduct in November 2015, investigated possible claims against Hutchinson and Serpanok, and fired Hutchinson. Phase II nonetheless executed additional change orders with Serpanok after terminating Hutchinson. Phase II also "insist[ed] that Serpanok continue to perform under the subcontracts, [and] accept[ed] the valuable work ... by Serpanok." CP (I) at 2746. Serpanok completed all of its "work for competitive prices (or better)." CP (I) at 2766. And even after discovering the misconduct between Serpanok and Hutchinson, Cohen praised Serpanok for the speed and quality of its work.
¶ 10 Phase II continued to fall behind in payments, owing more than $2 million for Serpanok's work on the garage by spring 2015. To persuade Serpanok to continue working, Point Ruston LLC (a separate entity from Point Ruston Phase II, the entity directly contracting with Serpanok), issued two promissory notes to Serpanok guaranteeing the amounts due under the subcontracts. Serpanok also filed a mechanic's lien on the garage worth approximately the amount it was owed under the garage subcontract.
¶ 11 Serpanok stopped working on the garage in May 2016 because the Point Ruston parties refused to execute a change order authorizing additional work. Serpanok left behind some construction equipment at the site that could not be safely removed. The equipment was later returned to Serpanok.
C. Complaint, Counterclaims, and Affirmative Defenses
¶ 12 In late 2016, Serpanok sued the Point Ruston parties and Cohen, alleging that Phase II breached the Building 1A and garage subcontracts by failing to fully pay Serpanok for its work. Serpanok also brought a conversion claim against Phase II and Cohen, claiming they improperly possessed and refused to return Serpanok's construction equipment. Additionally, Serpanok sought foreclosure of the mechanic's lien on the garage.
¶ 13 In the answer, the Point Ruston parties denied all of Serpanok's claims and asserted affirmative defenses and counterclaims, including a fraud counterclaim, an affirmative defense of illegality, and other counterclaims alleging Serpanok aided and abetted Hutchinson in breaching his fiduciary duties, breached the duty of good faith and fair dealing, and violated Washington public policy. Concerning the fraud counterclaim, the Point Ruston parties argued that "they were the victims of a fraud perpetrated by [Serpanok] and Mr. Larry Hutchinson" in which "Serpanok made secret and improper payments to Mr. Hutchinson in return for his assistance" and they "reasonably relied on the fraud and suffered damages." CP (I) at 2736-37. The illegality defense alleged the subcontracts, change orders, and notes were unenforceable because they were the product of the illegal kickback scheme between Serpanok and Hutchinson. The Point Ruston parties also sought disgorgement of Serpanok's profits, an award equal to the amount of the kickback payments and "the compensation ... paid to Mr. Hutchinson," and a "refund [of] all of the payments made under the Notes." CP (I) at 2737.
¶ 14 The Point Ruston parties successfully moved to compel arbitration under the subcontracts. Although Cohen did not sign the subcontracts, the trial court found he was subject to the arbitration clauses because he was the Point Ruston parties’ agent.
D. Arbitration Hearing and Interim Award
¶ 15 During the arbitration hearing, Serpanok's owner, Igor Kunitsa, misinformed all counsel and the arbitrator about the information captured in Serpanok's bookkeeping records regarding the kickbacks. It became clear that he had not provided complete records in response to discovery requests. Kunitsa then tried to alter records to conceal damaging information about the kickback payments to Hutchinson.
¶ 16 The arbitrator entered an interim decision setting forth "the principal reasons for the relief awarded." CP (I) at 362. The arbitrator deemed the kickback scheme "deplorable," CP (I) at 365, and found that Serpanok aided and abetted Hutchinson's breach of his fiduciary duties, but concluded, "The evidence presented did not prove by ‘clear, cogent, and convincing evidence’ that the two subcontracts were fraudulently induced" or that fraud occurred later, during the "change order/performance phases of the two subcontracts, either before or after Mr. Hutchinson's termination," CP (I) at 362. The Point Ruston parties failed to meet the elements of fraud because "[t]he evidence did not establish that the terms of the two Serpanok subcontracts, as originally executed, damaged [them] by requiring them to pay a higher price for the specified work than they could have obtained by contracting with a different subcontractor." CP (I) at 363. The arbitrator found there was no "non-speculative" evidence that the Point Ruston parties had any "then-available options with other willing contractors to do the specified work for less." Id.
¶ 17 The arbitrator also found that the two promissory notes were "intended to persuade Serpanok to keep working despite the fact that payments to Serpanok at the time under the subcontracts were massively late (over $2 million in arrears on each subcontract at the time Note 2 was issued)." CP (I) at 373. Because "the Notes ... were issued as guaranties," obligating Point Ruston LLC to pay the amounts due under the subcontracts if Phase II and Century failed to do so, the arbitrator concluded that "the ‘economic reality’ of the Notes transactions was that they were not intended as investments by the parties but rather were entered into as ancillary components of ordinary ‘commercial transactions’ - i.e., were intended to assure complete payment of construction subcontract invoices already due to the Subcontractor." Id. (emphasis omitted).
¶ 18 The arbitrator concluded that Serpanok had established its breach of contract claims arising from the subcontracts and notes. The arbitrator rejected Serpanok's tortious conversion claim because Phase II and Cohen only temporarily possessed the construction equipment until it could be safely removed.
¶ 19 The arbitrator rejected the Point Ruston parties’ affirmative defenses and all but two counterclaims. The arbitrator did not find that Serpanok breached its duty of good faith and fair dealing because, based on the totality of the evidence presented, the Point Ruston parties failed to establish that the alleged breach of the duty of good faith and fair dealing proximately caused them any recoverable damages with respect to the work provided under the subcontracts. The arbitrator rejected the Point Ruston parties’ public policy tort counterclaim primarily because "it has not been clearly established that Washington law recognizes the existence of the ‘public policy torts’ on which this counterclaim depends." CP (I) at 378.
¶ 20 The arbitrator did find, however, that the Point Ruston parties prevailed on two counterclaims—the claim that Serpanok aided and abetted Hutchinson's breach of his fiduciary duties and the claim based on a lien improperly filed on Building 1A. The arbitrator also found that "Kunitsa engaged in an improper act of spoliation of evidence and related discovery abuse," entitling the Point Ruston parties to a sanctions award. CP (I) at 379.
E. The Point Ruston Parties’ Motion for Reconsideration and Final Arbitration Award
¶ 21 The Point Ruston parties filed a motion for reconsideration, which the arbitrator denied in a final award that incorporated and copied much of the interim award verbatim. In particular, the Point Ruston parties asserted the interim award erroneously rejected its illegality defense and should have instead concluded that the subcontracts could not be enforced because they violated public policy.
¶ 22 The arbitrator again denied the Point Ruston parties’ illegality affirmative defense because they "did not establish that [they] overpaid for the two subcontracts, or the change orders, or the Notes." CP (I) at 2766. The arbitrator reasoned that the Point Ruston parties "failed to prove that [Serpanok's and Hutchinson's] misconduct ... fraudulently induced or otherwise caused the parties to enter" any of the agreements, and "similarly failed to prove that the misconduct proximately caused actionable contract overpayments, improper work, or the like." CP (I) at 2765. The arbitrator held, "The damages ... on the aiding and abetting counterclaim must be limited to the damages actually proven to have been caused by that misconduct, all of which were confined to Mr. Hutchinson's employment relationship with his employer." Id.
¶ 23 The arbitrator separately concluded that declining to enforce the contracts entirely would have been "neither just nor equitable," and the arbitral rules the parties agreed to authorized him to " ‘grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.’ " CP (I) at 2767 (quoting Am. Arbitration Ass'n, Commercial Arbitration Rules and Mediation Procedures R-47(a) (Oct. 1, 2013)), https://adr.org/sites/default/files/CommercialRules_Web-Final.pdf. (Rule R-47(a)). The arbitrator observed that the Point Ruston parties "aggressively and repeatedly" insisted that Serpanok finish construction even after discovering Hutchinson's misconduct, so it would be unfair to permit the Point Ruston parties "to escape their duty to pay for millions of dollars worth of valuable work done on their buildings in accordance with the parties’ contracts." CP (I) at 2766.
¶ 24 Under the final arbitration award, Serpanok received a total award of approximately $4.6 million, based on the subcontracts, the guaranty/notes, and the garage mechanic's lien. For the subcontract-based awards, Serpanok received $4,646,062 (comprised of $3,426,303 against Phase II under the garage subcontract and $1,219,759 against Century and Phase II under the Building 1A subcontract). For the guaranty/notes awards, Serpanok received a total of $2,184,039 against Point Ruston LLC (comprised of $895,311 under Note 2 and $1,288,728 under Note 3). And for the garage mechanic's lien award, Serpanok was awarded $3,178,179 against Phase II.
¶ 25 The guaranty/notes and the lien provided alternative avenues for recovery, so the arbitrator clarified that Serpanok's total relief under all the awards could not exceed the approximately $4.6 million it was owed under the two subcontracts, plus attorney fees and costs, arbitration expenses, and postjudgment interest.
¶ 26 The arbitrator also awarded damages to the Point Ruston parties on three counterclaims. Century received $481,870 on the improper lien counterclaim. Century, Phase II, and Point Ruston LLC collectively received $311,894 for the aiding and abetting counterclaim award. And Century, Phase II, Point Ruston LLC, and Cohen collectively received a $500,000 sanctions award based on Kunitsa's misconduct during the arbitration hearing. The total award in favor of the Point Ruston parties was $1,293,764.
¶ 27 The arbitrator denied Cohen's request for attorney fees, although he prevailed on the conversion tort claim asserted against him and Phase II. The arbitrator concluded that Cohen could not enforce the subcontracts’ attorney fee provisions to recover attorney fees on this claim because he never signed the subcontracts, and, alternatively, he was not the substantially prevailing party on the claims as a whole.
F. Trial Court's Confirmation of the Arbitration Award and Final Judgment
¶ 28 The Point Ruston parties sought to vacate the arbitrator's award in superior court, and Serpanok asked the trial court to confirm the award. The trial court confirmed the award, denying the motion to vacate. The trial court exercised its discretion under RCW 4.56.060 to enter a setoff award, reducing the amount owed to Serpanok by the amount owed to the Point Ruston parties. Under Serpanok's setoff analysis, the maximum subcontract debt owed by Phase II and Century, as well as the maximum guaranty provided by Point Ruston LLC under the notes, was reduced by the amount Serpanok owed the Point Ruston parties, including the $500,000 sanction that had been awarded jointly to the Point Ruston parties.
¶ 29 After subtracting amounts due to the Point Ruston parties under the setoff and then adding interest accrued to date, the trial court entered an amended final judgment with the following awards:
Subcontract-based judgment
$5,003,370.09 against Phase II under garage and Building 1A subcontracts (comprised of $2,937,061.61 principal judgment after setoff + $709,031.68 in attorney fees and costs + $1,357,276.80 in prejudgment interest)
$732,444.01 of this amount was jointly owed by Century under the Building 1A subcontract (comprised of $700,214.60 principal judgment after setoff + $32,229.40 in prejudgment interest)
¶ 30 Total due under subcontracts after setoff, attorney fees, costs, and interest: $5,003,370.09
Guaranty/notes-based judgment
$2,470,449.69 against Point Ruston LLC (comprised of $2,105,769.29 in principal after setoff and attorney fees/costs + $364,680.40 in prejudgment interest)
Garage mechanic's lien
$3,281,135.00 against Phase II (comprised of $2,236,847.00 in principal + $1,044,288.00 in prejudgment interest)
Total award in favor of Serpanok: $5,003,370.09 + $63,232.15 in attorney fees and costs for judgment entry proceedings.
¶ 31 Following the arbitrator's mandate, the final judgment capped Serpanok's total recovery at the amount due under the subcontracts, which was then $5,003,370.09, plus postjudgment interest, which would accrue as described in the order. The trial court awarded Serpanok an additional $63,232.15 in attorney fees for postjudgment litigation. The Point Ruston parties were jointly and severally liable for the award.
¶ 32 Serpanok proceeded to foreclose on the mechanic's lien. Then in July 2020, Serpanok purchased the garage at a sheriff's sale for a credit bid of $3.4 million. The trial court confirmed the sale.
To the extent the Point Ruston parties sought a ruling from this court before June 19, 2021, when Phase II's redemption rights related to this sale were set to expire, this request was impossible to honor because one of these now-consolidated cases was set for oral argument on June 29, 2021. The Point Ruston parties did not file a motion to accelerate either case before or after oral argument was set. To the extent the Point Ruston parties intended the request in its brief to be a motion to accelerate, a motion to accelerate is not a dispositive motion under RAP 10.4(d), so it cannot be brought in a brief. See Money Mailer, LLC v. Brewer , 194 Wash.2d 111, 130, 449 P.3d 258 (2019) (citing RAP 17.4(d), which is identical to RAP 10.4(d) ).
¶ 33 At the time of the sheriff's sale, the judgment balances had further increased to reflect additional postjudgment interest and the total award in favor of Serpanok had increased to $5,194,360.36. The total amount guaranteed under the notes was $2,602,067.40.
¶ 34 The Point Ruston parties then moved to apply the foreclosure sale proceeds to ensure that "nothing further is owed by Point Ruston, LLC [the party that had provided the guaranty,] which is entitled to a satisfaction of judgment." CP (II) at 3305. The Point Ruston parties argued, "[T]he Court must ensure that the proceeds of the Garage foreclosure are applied against the amounts awarded under the Garage subcontract (owed by [Phase II]) and the Notes (owed by Point Ruston, LLC)." CP (II) at 3308. The Point Ruston parties proposed that the approximately $3.4 million foreclosure sale proceeds be applied to fully satisfy Point Ruston LLC's approximately $2.6 million guaranty.
¶ 35 Serpanok countered that the $3.4 million in foreclosure sale proceeds should be applied to reduce the overall debt owed by Phase II under the subcontracts from around $5.2 million to a balance of approximately $1.8 million. Serpanok contended that Point Ruston LLC's obligation as a guarantor would therefore be reduced to equal the $1.8 million subcontract balance, but not eliminated.
¶ 36 The trial court denied the Point Ruston parties’ motion, adopted Serpanok's position that the foreclosure sale reduced Phase II's judgment on the mechanic's lien to zero, and reduced the judgment against the Point Ruston parties to the difference between the maximum award and the value of the foreclosure sale proceeds, about $1.8 million. After applying the garage foreclosure sale proceeds, the trial court determined that the obligations of the various Point Ruston parties were as follows:
Subcontract-based judgment
$1,759,216.87 against Phase II ($5,194,360.36 - $3,435,143.49)
$821,740.73 of this amount was jointly owed by Century on the Building 1A subcontract
Total still owed under the subcontracts: $1,759,216.87
Guaranty/notes-based judgment against Point Ruston LLC
$1,759,216.87
Garage mechanic's lien claim (against Phase II)
$0
Total remaining balance against the Point Ruston parties: $1,759,216.87 .
¶ 37 The Point Ruston parties appeal the trial court's decision to affirm the arbitrator's award, as well as the trial court's denial of its motion to discharge the entirety of Point Ruston LLC's debt as a guarantor under the notes.
ANALYSIS
A. Guaranties Generally
¶ 38 A guaranty "arises when one assumes an obligation to pay the debt of another." Tr. of Strand v. Wel-Co Grp. Inc. , 120 Wash. App. 828, 836, 86 P.3d 818 (2004) ; see also RESTATEMENT (THIRD) OF SURETYSHIP & GUAR. § 1 cmt. b ( AM. LAW INST. 1996). "[T]he secondary obligation ... protect[s] the obligee against the actual or potential nonperformance of the underlying obligation by giving the obligee recourse against the secondary obligor." RESTATEMENT § 1 cmt. h.
¶ 39 A secondary obligor does not have to guarantee the full amount of the principal obligor's debt. Id. at cmt. k. "The secondary obligation can be for a smaller amount or of a different character" so long as the arrangement "protect[s] the obligee against the actual or potential nonperformance of the underlying obligation by giving the obligee recourse against the secondary obligor." Id. A guarantor is discharged from liability "to the extent the borrower satisfies the underlying obligation. This is because the creditor has the right to only one performance." Strand , 120 Wash. App. at 836-37, 86 P.3d 818 ; see also RESTATEMENT §§ 1(1)(b), 19(a) & cmt. a.
Taken together, these general principles emphasize that the purpose of a guaranty is to ensure the creditor is protected from nonperformance of the principal obligor.
B. Trial Court's Denial of the Motion for Discharge of Point Ruston LLC
¶ 40 The Point Ruston parties contend the trial court should have found that the foreclosure sale proceeds fully satisfied Point Ruston LLC's guaranty obligations to Serpanok. We disagree. 1. Background on foreclosure sale proceeds and guarantor liability
¶ 41 While there are no Washington cases directly on point, case law from other jurisdictions holds that where foreclosure sale proceeds reduce but do not eliminate the underlying debt, the guarantor remains obligated to the extent of the remaining debt, up to the maximum of the guaranty, until the principal obligor discharges the entirety of its debt.
¶ 42 In Ralston-Purina Co. v. Bertie , a poultry farm, Northwestern Poultry Growers, entered into a contract with a feed provider, Purina, while John and Irene Bertie provided "a personal guaranty ... promising [to pay] any liabilities to Purina incurred by Northwestern" up to $95,000. 541 F.2d 1363, 1364 (9th Cir. 1976). Northwestern declared bankruptcy and "was unable to pay $141,597[ ] of its debt to Purina." Id. Purina recouped a portion of its debt through a sale of Northwestern's inventory and other collateral, but Northwestern still owed approximately $78,000. Id. at 1365. A jury found that, as guarantors, the Berties were thus liable for the $78,000 deficiency. Id.
¶ 43 On appeal, the Berties argued that the $95,000 cap on their guaranty obligation "limited the total amount of debt which Purina could extend to Northwestern and still remain within the total coverage of the Berties’ guaranty." Id. at 1365. The Berties asserted that "the amount realized from the collateral should ... have been subtracted from $95,000 not from $141,597[ ] to determine the extent of their liability for Northwestern's remaining debt to Purina." Id. The Ninth Circuit rejected this argument, reasoning that the guaranty agreement "can only reasonably be construed to limit the guarantors’ potential liability to $95,000. The limitation is to the guarantors’ agreement and in no way purports to limit or affect the underlying obligations of the customer." Id. Thus, Ralston-Purina supports Serpanok's argument that a guarantor remains liable until the last dollars owed are paid, up to the total amount that the guarantor has chosen to guaranty.
¶ 44 In Southern Bank & Trust Co. v. Harley , 292 S.C. 340, 341, 343, 356 S.E.2d 410 (Ct. App. 1987), the South Carolina Court of Appeals relied on Ralston-Purina to reject an argument almost identical to the one presented here. In Harley , a bank lent money to an investment company. Id. at 341, 356 S.E.2d 410. Three separate guarantors guaranteed the loan up to $775,000. Id. The investment company also secured its debt with a real estate mortgage. Id. The investment company defaulted, and the bank foreclosed on the mortgage. Id. at 342, 356 S.E.2d 410. The foreclosure sale plus an additional payment netted $762,416 in proceeds, which was less than the $790,556 owed by the investment company to the bank. Id. at 341-42, 356 S.E.2d 410. The bank sued the guarantors for the deficiency. Id. at 342, 356 S.E.2d 410.
¶ 45 The court subtracted the amount recovered through the foreclosure sale "from the total amount owed by the debtor , not from the contractual limit on the guaranty." Id. at 343, 356 S.E.2d 410 (emphasis added). The court explained that "[r]equiring the Guarantors to pay this sum [would] not impose on them a liability greater than they agreed to assume" and would not "result in a double recovery to Southern" because "[i]f the Guarantors pay the full amount of the deficiency, the debt is not being paid twice; it is merely being paid in full." Id. at 342-43, 356 S.E.2d 410.
¶ 46 By contrast, in BankEast v. Michalenoick , 138 N.H. 367, 370-71, 639 A.2d 272 (1994), foreclosure sale proceeds extinguished a guarantor's liability where the guaranty agreement specifically provided, " ‘This guarantee shall be reduced to the extent of any principal pay[ ]down on the Obligations’ " and the guaranty applied only to the first $100,000 of principal to be paid on the loan. Because the guaranty did "not specify the source of the pay[ ]down required to reduce the $100,000 and release the guarantor, or that foreclosure proceeds might be otherwise applied than to the front end of the note's obligations," the court held that "the guarantee requires reduction by the application of the foreclosure proceeds." Id. at 371, 639 A.2d 272. ¶ 47 Because the parties do not contest the underlying facts, the allocation of foreclosure sale proceeds here is a question of law that we review de novo. See In re Tr's Sale of Real Prop. of Upton , 102 Wash. App. 220, 222-23, 6 P.3d 1231 (2000).
2. The trial court correctly allocated the foreclosure sale proceeds
¶ 48 We find Ralston-Purina and Harley persuasive and hold that the trial court properly subtracted the amount of foreclosure sale proceeds from the underlying debt, rather than from the amount of Point Ruston LLC's guaranty. See Ralston-Purina , 541 F.2d at 1365 ; Harley , 292 S.C. at 343, 356 S.E.2d 410. Unlike in BankEast , where the guaranty agreement expressly stated that the guaranty was subject to a pay down provision, there is no evidence that Point Ruston LLC guaranteed only the first portion of any principal payment. Point Ruston LLC therefore remained obligated as a guarantor for the deficiency until it is paid, subject to the maximum total amount Point Ruston LLC agreed to pay. As a result, Point Ruston LLC was obligated to pay the amount that remained after subtracting the foreclosure sale proceeds from the underlying debt.
¶ 49 As Serpanok has explained, the Point Ruston parties "would have this Court hold that if John owes $10, and Mary has guaranteed $5 of John's debt, then John's $6 payment discharges Mary's guaranty rather than being reduced to $4. That is not how a guaranty works." Br. of Resp't (cause no. 54833-0-II) at 19. Rather, we agree with Serpanok that
nothing in our law, or in equity[,] ... authorizes a guarantor of a partially secured debt and an unsecured debt to mandate that proceeds from collateral sale on the partially secured debt be applied to discharge its guaranty on unsecured debts. If it were allowed to do so, it would put a guarantor in control of applying payments by others, and turn a guaranty from being a guaranty of the last dollars owed by a debtor, to a guaranty limited to the first dollars paid.
Id. at 20. We decline to adopt a "first dollars paid" approach to a guaranty unless the instrument, here the promissory note, contains an express agreement to that effect. The Point Ruston parties point to no such language in the promissory notes at issue here.
¶ 50 Nor do we agree with the Point Ruston parties that the trial court's order allows Serpanok double recovery. As Division Three noted in Strand , "the creditor has the right to only one performance." 120 Wash. App. at 837, 86 P.3d 818. The secondary obligor's duty to perform is "discharged to the extent the [principal obligor] satisfies the underlying obligation." Id. at 836-37, 86 P.3d 818 ; see also RESTATEMENT § 19(a) & cmt. a.
¶ 51 Here, the guaranteed obligation was not fully satisfied, and the trial court prevented double recovery by partially reducing Point Ruston LLC's obligation, but the trial court appropriately left intact Point Ruston LLC's obligation to the extent some of the guaranteed debt remained unpaid. As in Harley , Point Ruston LLC's continuing liability for the amount remaining on the underlying obligation will not "result in a double recovery" for Serpanok because if Point Ruston LLC pays "the full amount of the deficiency, the debt is not being paid twice; it is merely being paid in full." 292 S.C. at 342-43, 356 S.E.2d 410.
¶ 52 We also reject the Point Ruston parties’ suggestion that the trial court erred by applying the proceeds of the foreclosure sale " ‘to a debt unrelated to the source from which such proceeds were generated.’ " Opening Br. of Appellants Point Ruston LLC, Point Ruston Phase II LLC, and Century Condominiums LLC (cause no. 54883-0-II) (Opening Br. of Appellants) at 8 (quoting Ellingsen v. W. Farmers Ass'n , 12 Wash. App. 423, 427, 529 P.2d 1163 (1974) ). The Point Ruston parties are correct that the proceeds of a foreclosure sale generally must be applied to the debt secured by the foreclosed property. See Cummings v. Erickson , 116 Wash. 347, 350, 199 P. 736 (1921) (Where a creditor has secured part of their debt with a lien subject to a foreclosure sale "the presumption must be that the proceeds will be applied to the secured debt."); see also RCW 60.04.181(2) . Here, the trial court properly applied the foreclosure sale proceeds to the debt owed by Phase II under the mechanic's lien and the garage subcontract. The Point Ruston parties offer no evidence to support their contention that the mechanic's lien also secured Point Ruston LLC's guaranty.
¶ 53 Finally, to the extent the Point Ruston parties argue that the trial court's imposition of joint and several liability on Phase II, Century, and Point Ruston LLC requires extinguishing Point Ruston LLC's liability entirely, we disagree. The principle of "joint and several liability" provides that "each liable party is individually responsible for the entire obligation" but recognizes that the obligee cannot receive more than the total relief. BLACK'S LAW DICTIONARY 1098 (11th ed. 2019). The combined effect of the trial court's final judgment imposing joint and several liability and its order confirming the foreclosure sale is that, after subtracting the $3.4 million recouped through the foreclosure sale from the $5.2 million underlying debt, Phase II and Point Ruston LLC properly remain jointly and severally liable for the $1.8 million balance.
¶ 54 In sum, the trial court properly confirmed the foreclosure sale and allocated its proceeds.
C. Judicial Estoppel
¶ 55 The Point Ruston parties argue that the trial court erred by not granting their motion for allocation of the foreclosure sale proceeds under judicial estoppel because Serpanok advanced inconsistent arguments at different stages of the proceedings. According to the Point Ruston parties, Serpanok should have been estopped from arguing that the foreclosure sale proceeds did not fully satisfy Point Ruston LLC's debt because Serpanok previously acknowledged it was only entitled to a single satisfaction of the maximum amount due under the subcontracts. The Point Ruston parties also claim judicial estoppel on the basis that Serpanok previously argued that the $500,000 sanction award in favor of the Point Ruston parties should be set off against the amount owed by Century and asserted that " ‘[f]ull payment to one of multiple co-obligees satisfies the debt to all oblige[es].’ " Opening Br. of Appellants at 13 (first alteration in original). We disagree.
¶ 56 Judicial estoppel precludes a party from " ‘asserting one position in a court proceeding and later seeking an advantage by taking a clearly inconsistent position.’ " Miller v. Campbell , 164 Wash.2d 529, 539, 192 P.3d 352 (2008) (internal quotation marks omitted) (quoting Arkison v. Ethan Allen, Inc ., 160 Wash.2d 535, 538, 160 P.3d 13 (2007) ). "The purpose of the doctrine is ‘to preserve respect for judicial proceedings’ and ‘to avoid inconsistency, duplicity, and ... waste of time.’ " Id. 540, 192 P.3d 352 (alteration in original) (internal quotation marks omitted) (quoting Arkison , 160 Wash.2d at 538, 160 P.3d 13 ). In determining whether to apply judicial estoppel, courts consider three factors:
"(1) [W]ether a party's later position is clearly inconsistent with its earlier position; (2) whether judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled; and (3) whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped."
Id. at 539, 192 P.3d 352 (internal quotation marks omitted) (quoting Arkison , 160 Wash.2d at 538-39, 160 P.3d 13 ). We review the applicability of judicial estoppel for an abuse of discretion. Id. at 536, 192 P.3d 352.
1. Single satisfaction argument
¶ 57 In its arbitration brief, Serpanok said it was "entitled only to one satisfaction of [all the awards it sought] such that a payment on one of these obligation types, for example a payment on the Garage contract, reduces the obligations on the others (Garage lien and notes)." CP (II) at 3322. Serpanok then requested a total award of damages equal to the damages it sought on the basis of the subcontract based claims, "subject to one payment satisfaction." CP (II) at 3358.
¶ 58 In context, Serpanok's previous request for damages at the arbitration hearing was entirely consistent with its argument that the foreclosure sale proceeds should reduce the Point Ruston parties’ total collective obligation on their remaining claims. The Point Ruston parties offer no evidence that Serpanok ever advocated for subtracting an entire partial payment from Point Ruston LLC's guaranteed debt, which could reduce Serpanok's total recovery below the total subcontract-based award. This is not a reasonable interpretation of Serpanok's position at any time in the proceeding, and the trial court properly rejected this judicial estoppel argument.
2. Setoff argument
¶ 59 Likewise, Serpanok's previous argument about the setoff award was not inconsistent with its position on applying foreclosure sale proceeds. In its motion to confirm the arbitration award, Serpanok asked the trial court to subtract the amount it owed to the Point Ruston parties from the amount they owed Serpanok. Serpanok argued that applying the setoff to Century's debt fully discharged Serpanok's obligation to the Point Ruston parties "because the discharge of the whole obligation to one joint obligee, here Century, discharges that whole obligation to the other joint obligees in a joint judgment." CP (II) at 1028 (emphasis added).
¶ 60 Serpanok's setoff argument was not inconsistent with its foreclosure sale argument because the two situations are not comparable. The setoff accounted for the entire award owed by Serpanok to the joint defendants, fully discharging Serpanok's obligations to the Point Ruston parties. By contrast, the foreclosure sale proceeds represented only a portion of Phase II's debt to Serpanok. This claim would only have been inconsistent if Serpanok argued that payment of the full underlying debt by Phase II did not discharge Point Ruston LLC's liability as a secondary obligor. But that is not what Serpanok argued and the trial court correctly rejected this claim.
CONCLUSION
¶ 61 We affirm the trial court's allocation of foreclosure sale proceeds. In the unpublished portion of this opinion below, we affirm the underlying arbitration award and resolve the remaining claims in Serpanok's favor.
¶ 62 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:
Cruser, J.
Veljacic, J.