Court: Court of Appeals of Washington; September 4, 1973; Washington; State Appellate Court
John Fisk and Wanda Fisk filed a malpractice lawsuit against J. Hartly Newsum following a summary judgment dismissal. The case involved Bellevue Enterprises, Inc., a corporation in the ambulance business, where Fisk owned 450 shares and Philip M. Retherford was the contract buyer of 450 shares from a third party. In early 1970, Fisk and Retherford agreed on a transaction where Retherford would purchase Fisk's shares, and Newsum was engaged to manage the legal aspects.
During this period, a financial statement showed the corporation had an earned surplus of $18,750. On January 10, 1970, several key transactions occurred: Retherford purchased 65 shares from Fisk for $9,000 and signed a redemption agreement for the remaining 385 shares, obligating the corporation to pay Fisk $60,000 at $600 monthly. A mortgage was executed to secure this obligation.
A subsequent financial statement prepared for January 31, 1970, reported retained earnings of $23,719.44 but failed to mention the $60,000 obligation to Fisk. In April 1970, this statement and related documents were used to secure a loan of $54,040 from Peoples National Bank, which included paying off loans guaranteed by Fisk. Later, the corporation entered receivership due to creditor actions, revealing that it lacked sufficient surplus to redeem Fisk's shares as initially claimed. The court found that, at the time of the stock redemption agreement, Bellevue Enterprises did not possess unreserved and unrestricted surplus to fulfill Fisk's redemption.
The court determined that John Fisk must subordinate any claims against Bellevue Enterprises, Inc. as long as the corporation owes money to Peoples National Bank of Washington. Fisk is prohibited from suing or enforcing any security interests against Bellevue Enterprises during this indebtedness, and he instructs any receiver to prioritize payments to the Bank over his claims. Additionally, Fisk agrees to assign any rights to payments from the receiver to the Bank and not to take any lien, mortgage, or similar advantage that contradicts the Subordination Agreement. If he violates this agreement, the Bank has the authority to annul such actions.
In receivership proceedings, it was revealed that there were not enough assets to cover the secured claim of Peoples National Bank, which had lent the corporation $54,040, leaving no funds for general creditors, including Fisk. Fisk claims there are factual disputes regarding the attorney-client relationship, the legitimacy of redemption documents, and whether Newsum should have investigated the corporation’s financial health before January 10, 1970. The court found these claims unsubstantiated.
Counsel for Newsum acknowledged the attorney-client relationship with Fisk, eliminating that as a point of contention. Although RCW 23A.08.030 restricts corporations from purchasing their own stock without adequate capital surplus, the statute permits future purchase agreements if surplus exists at that time. The court found no capital surplus at the relevant times, rendering any payments made under the redemption agreement illegal.
Fisk argues Newsum should have scrutinized the October 31, 1969, financial statement for inaccuracies. However, as president and director of the corporation, Fisk was responsible for that statement and did not request Newsum to verify its accuracy. Moreover, he affirmed in the redemption agreement that the financial statement accurately represented the corporation's condition, asserting no undisclosed liabilities existed.
Fisk's claim that Newsum should have investigated the financial statement fails to establish a genuine issue according to Easton v. Chaffee. Fisk initially owned 450 common shares and engaged in a transaction that converted his status from a shareholder to a secured creditor of the corporation. This arrangement allowed Retherford to gain a larger interest in the corporation while providing Fisk with a secured position regarding corporate real estate, despite the implications for general creditors. The receivership action invalidated the mortgage, ensuring general creditors could access the corporation's assets before Fisk, obligating him to return $5,400 he received from these assets. The trial court found the earned surplus figure was false, negating any legal basis for the payments to Fisk.
Fisk's assertion that he lost the $5,400 is incorrect; he merely repaid an illegal gain. Additionally, in April 1970, he subordinated his claim to that of a bank loan, effectively eliminating any chance of recovering assets from the corporation, independent of Newsum's actions. The validity of this subordination agreement was upheld in the receivership proceedings, and Fisk does not contest it. His sole challenge to the bank officer's affidavit regarding the corporation's insufficient assets lacks evidence of a genuine factual dispute. Consequently, it is determined that Fisk did not incur any loss due to Newsum's actions, with no genuine issue of material fact existing in the case, leading to the affirmation of judgment.
