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Rowlett v. Fagan

Court of Appeals of Oregon

May 14, 2014

GERALD L. ROWLETT, an individual; WESTLAKE DEVELOPMENT COMPANY, INC., an Oregon corporation; and WESTLAKE DEVELOPMENT GROUP, LLC, an Oregon limited liability company, Plaintiffs-Appellants,
v.
DAVID G. FAGAN, an Oregon resident; JAMES M. FINN, an Oregon resident; and SCHWABE WILLIAMSON & WYATT, PC, an Oregon professional corporation, Defendants-Respondents

Argued and Submitted January 3, 2013.

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Multnomah County Circuit Court. 090101006. Henry Kantor, Judge.

David W. Melville argued the cause for appellants. With him on the briefs were The Law Offices of David Melville, and Katherine R. Heekin and The Heekin Law Firm.

Chris Carson argued the cause for respondents. On the brief were Graham M. Sweitzer, Stephen C. Voorhees, and Kilmer Voorhees & Laurick, P.C.

Before Armstrong, Presiding Judge, and Nakamoto, Judge, and Egan, Judge. Armstrong, P. J., concurring.

OPINION

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[262 Or.App. 669] NAKAMOTO, J.

Plaintiffs Rowlett and his two companies, plaintiffs Westlake Development Company, Inc. and Westlake Development Group, LLC, appeal in this attorney malpractice action against their former attorneys, defendants Schwabe Williamson & Wyatt, PC (Schwabe) and lawyers Fagan and Finn. Some, but not all, of plaintiffs' theories of defendants' negligence went to trial, as did plaintiffs' claims for negligent misrepresentation and breach of fiduciary duty. There was a defense verdict on the latter two claims, which plaintiffs do not challenge on appeal. As for the negligence claim, plaintiffs achieved a Pyrrhic victory: the jury agreed that defendants were " negligent" in representing plaintiffs but awarded no damages. Asserting seven assignments of error, plaintiffs now challenge various pretrial and trial rulings by the trial court, with all but one in some way concerning their damages on the negligence claim.

Plaintiffs challenge the trial court's pretrial dismissal of two aspects of their damages by way of summary judgment. They contend that they were entitled to seek as damages on the negligence claim (1) the attorney fees that they had paid to Schwabe for the legal services defendants rendered in the underlying matter, litigation involving Sunrise Partners LLC (Sunrise), and (2) the attorney fees that they would have recovered from the Sunrise opponents, as measured by their fees incurred in this action. We reject the first contention and, in light of our disposition and the opportunity for plaintiffs to

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seek fees as part of their damages on remand, we do not reach the second contention.

Plaintiffs also argue that the jury's determination of damages was adversely affected because of the trial court's erroneous rulings at trial. Specifically, plaintiffs contend that (1) over their objection, the trial court gave the jury a verdict form that allowed it to use an impermissible date for valuing Rowlett's interest in Sunrise; (2) despite a ruling in plaintiffs' favor on their motion in limine, the trial court failed to limit defendants' use of evidence of the Sunrise litigation settlement during the trial; and (3) over plaintiffs' objection, the trial court erroneously allowed testimony by defendants' expert witness, accountant Thompson, as to the [262 Or.App. 670] value of Rowlett's interest in Sunrise. We agree with plaintiffs that the trial court erred regarding the verdict form.

Plaintiffs also assign error to the pretrial dismissal of one of their specifications of negligence based on defendants' motion under ORCP 21 G(3). Plaintiffs alleged that defendants damaged them in the Sunrise litigation by failing to timely allege an " oppression" or " squeeze-out" claim, coupled with a demand for a forced buyout or dissolution of Sunrise. The trial court concluded that plaintiffs had failed to establish that a limited liability company (LLC) member can bring an oppression claim and granted defendants' motion to dismiss that part of the negligence claim. We reverse because plaintiffs properly stated a claim for negligence by alleging that defendants breached a duty of care by asserting the oppression claim too late in the Sunrise litigation and that plaintiffs suffered harm because of that breach.

I. BACKGROUND

To set the stage for our discussion of the assignments of error, where we consider additional facts relevant to each of those assignments, we provide background concerning the formation of Sunrise and who its members and managers were, the history of defendants' representation of plaintiffs, and the procedural history of this malpractice action. We state the facts regarding defendants' breach of their duty of care in the light most favorable to plaintiffs, " the party in whose favor the verdict was returned." Northwest Natural Gas Co. v. Chase Gardens, Inc., 328 Or. 487, 490, 982 P.2d 1117 (1999).

A. The formation of Sunrise

Rowlett is a real estate developer and residential building contractor and the sole principal in his two companies. Before forming Sunrise, Rowlett held an option to purchase land in Gresham, the so-called Kelley Creek property. Rowlett also had plans to obtain options to purchase three properties in Happy Valley, which the parties referred to as the Sunnyside Road properties. All told, the parcels together were worth $11,000,000. Rowlett was looking for other investors to help purchase and develop the properties and decided to form Sunrise with Michael Pruett and [262 Or.App. 671] Tracey Baron in the fall of 2000. Baron agreed to provide financing for the two projects through Sunrise.

Sunrise was organized as an Oregon manager-managed LLC. The Sunrise operating agreement provided that Sunrise could have only three Class A members, and Rowlett, Pruett, and Baron held all of the Class A shares. Class A ownership could not be diluted, even if one of the members declined to contribute to a request for capital contributions. The operating agreement further allowed Sunrise to have Class B members. Each Class A member held an effective veto over the admission of a Class B member. In addition to being a Class A member, Rowlett was a Class B member. Initially, all three men were managers of Sunrise.

After Sunrise was formed, Rowlett assigned his rights to purchase the Kelley Creek property to Sunrise and, in 2001, acquired options to purchase the Sunnyside Road properties, which he also assigned to Sunrise. Rowlett's companies had made payments on the option contracts.

Sunrise struggled to find other investors. It stopped making payments on the Kelley Creek option contract and lost the option to purchase that property; Sunrise also defaulted on a purchase agreement for one of the Sunnyside Road properties. Baron, an investment advisor at Private Consulting

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Group, Inc. (PCG), approached Robert Keys, his employer at PCG, about investing in Sunrise and becoming a member. Rowlett opposed having Keys join Sunrise.

But after a vacation in March 2002, Rowlett learned that, without his approval, Pruett, Baron, and Keys were planning to take Sunrise's rights with respect to the Sunnyside Road properties to a different entity that would not include Rowlett. Baron excluded Rowlett from a meeting with a potential construction partner, Randy Robinson, who later became a member in Sunrise. Rowlett learned that others who worked for PCG besides Keys were becoming involved in Sunrise, also without Rowlett's approval. Rowlett refused to sign an amended operating agreement and, without his consent, Keys became a Sunrise Class B member through a consent resolution that purported to contain Rowlett's signature, which Rowlett contended was a forgery.

[262 Or.App. 672] B. Schwabe's representation of plaintiffs

In June 2002, Rowlett, concerned about the actions that Pruett and Baron had taken in Sunrise, went to Schwabe for representation. Schwabe assigned the matter to Fagan, an associate with three to four years of experience. In November 2002, Fagan filed a complaint on behalf of plaintiffs against Pruett, Baron, Keys, and PCG regarding the Kelley Creek property in Multnomah County Circuit Court. Fagan did so despite a clause in the Sunrise operating agreement requiring arbitration of disputes. When Keys's lawyer pointed out the requirement for arbitration, Fagan stipulated to dismissal of the complaint in January 2003, and the parties agreed to binding arbitration.

Fagan then failed to promptly pursue arbitration. Fagan did not file plaintiffs' arbitration statement until December 2003. The 2003 arbitration statement that Fagan filed contained the same claims that were in the circuit court complaint, plus it alleged that Baron had breached fiduciary duties as an agent. The arbitration statement did not allege an oppression claim and did not contain a demand for a compulsory buyout of Rowlett's interest in Sunrise. The statement did not name Sunrise as a party, although Sunrise held the property rights. One of the lawyers for Keys and PCG testified at trial that, had Fagan promptly pursued arbitration, federal Securities and Exchange Commission rules would have required Keys and PCG, as investment advisors, to report the pending action, and that would have " pressure[d]" his clients to seek " a complete resolution of the matter fairly quickly."

In the absence of any legal action on plaintiffs' behalf, the other Sunrise members took actions that adversely affected Rowlett in 2003. On March 13, 2003, Pruett and Baron, through a consent resolution, removed Rowlett as a manager of Sunrise. Shortly thereafter, Sunrise announced a capital call to raise money to prevent foreclosure on one of the Sunnyside Road properties and demanded that Class B members, including Rowlett, contribute over $600,000 to Sunrise. If Rowlett did not contribute the capital, his interest in Sunrise would be diluted. Fagan advised Rowlett that he need not respond to the capital call. Eventually, the [262 Or.App. 673] principals at Sunrise began operating the company according to an amended and restated operating agreement, although the effectiveness of that document was disputed between the parties.

Fagan also did not take steps to press the litigation during 2004 or the first part of 2005, before he left Schwabe in May to take another position. The parties mediated in August 2004, but that effort failed. Fagan did not obtain and review documents from the Sunrise opponents, seek admissions, conduct depositions, or hire experts, either before or after the mediation.

When Fagan left, Finn, a partner with Schwabe, took over the case and met with Rowlett. Finn began reviewing the file immediately but did not bill for any work on the case until October 25, 2005, when he began to look for an arbitrator. One of the lawyers for Keys and PCG testified that no one from Schwabe contacted her on the matter from December 2004 until October 2005, which is when she learned that Fagan had left Schwabe.

In the meantime, additional adverse actions were taken against Rowlett in Sunrise.

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During the summer of 2005, Keys, Baron, and Robinson arranged for Sunrise to distribute $5.8 million to themselves. Rowlett received nothing, although he remained a member. On October 7, 2005, Keys, Baron, and Robinson then removed Rowlett as a member of Sunrise.

After Finn initiated contact with opposing counsel in the Sunrise litigation, one of the lawyers for Keys and PCG informed Finn that the Sunrise defendants were going to move to dismiss for want of prosecution. Finn and Schwabe then tried to pursue plaintiffs' claim in the arbitration forum. In early 2006, Finn worked on preparing an amended arbitration statement to add Sunrise as a party to the arbitration, drop Pruett as a party to the arbitration, and add additional claims, including oppression and breach of fiduciary duty claims. In March 2006, the attorney for Keys and PCG objected to further arbitration and filed a motion with the circuit court to reinstate the 2002 complaint and to dismiss it for want of prosecution. In April [262 Or.App. 674] 2006, Finn filed the amended arbitration statement naming Baron, Keys, and Sunrise as respondents.

In September 2006, the circuit court granted the Sunrise defendants' motion to dismiss and, in February 2007, entered a judgment dismissing the claims pleaded in the 2002 circuit court complaint. The court concluded that the arbitration was not promptly conducted, to defendants' prejudice, and that Schwabe had delayed without justification in pursuing the case until Finn's active involvement after October 2005. Keys and PCG then sought an award of their attorney fees, which were over $180,000, and costs. After the circuit court dismissed the 2002 complaint, Finn initiated an appeal of the dismissal. He also attempted to pursue arbitration on the additional claims not asserted in the 2002 court complaint; that effort, though, was halted by the circuit court's order in December 2006 dismissing the arbitration.

In March 2007, Finn then filed a second complaint in Multnomah County Circuit Court against Sunrise, Baron, Keys, Robinson, Keys Family Holdings Co., LLC, and Robinson & Sons, LLC. It was nearly identical to the amended arbitration statement from 2006, except for the additional parties and allegations related to them. The 2007 complaint included an oppression claim asserted by Rowlett against all defendants as well as breach of fiduciary duty claims that plaintiffs or Rowlett variously asserted against Baron, Keys, Robinson & Sons, and Sunrise. The Sunrise defendants sought to have the oppression claim dismissed in motions under ORCP 21 A(8) for failure to state a claim; however, the circuit court denied the motions.

Then, in November 2007, the Sunrise principals served plaintiffs with an offer of judgment for $200,000 and plaintiffs' reasonable attorney fees, as determined by the circuit court, in the 2007 action. By that time, plaintiffs had paid approximately $200,000 in attorney fees to Schwabe for the Sunrise litigation. Finn advised Rowlett that, given the severe drop in the real estate market that had occurred, in the best case, plaintiffs' recovery from the Sunrise opponents might not exceed the amount of fees already paid to Schwabe. Plaintiffs accepted the offer of judgment in [262 Or.App. 675] December 2007. The court awarded only part of the fees Schwabe had billed plaintiffs for work on the 2007 action. Through the 2007 settlement, plaintiffs received less than $260,000, including the payment of attorney fees. They also dropped their appeal of the dismissal of the 2002 complaint and released their claims against the Sunrise opponents, and the prevailing Sunrise defendants in the initial litigation that began in 2002 withdrew their pending attorney fee petition.

C. Plaintiffs' malpractice action against defendants

In 2009, plaintiffs filed suit against defendants in this case, alleging that defendants had committed professional malpractice in the Sunrise litigation and had caused plaintiffs to settle for a fraction of what their Sunrise opponents would have paid plaintiffs had the matter been properly litigated. Plaintiffs alleged negligence claims against defendants that included numerous specifications, generally relating to failures to diligently prepare and pursue claims, to competently represent their interests, to properly

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advise them, and to properly staff the 2002 case and the 2003 arbitration. One of the specifications of negligence was that defendants had failed to timely recognize and allege an oppression claim in the Sunrise litigation. Plaintiffs also alleged claims for negligent misrepresentation, negligent supervision, breach of fiduciary duty, money had and received, unjust enrichment, quantum meruit, and conversion.

As for damages on plaintiffs' negligence claims against defendants, in their third amended complaint, plaintiffs alleged that defendants had caused the following damages:

" a. The difference between the settlement amount in the 2007 case and:
" i. the value of Plaintiff Rowlett's equity interest in Sunrise Partners LLC as of either March 13, 2003 or October 7, 2005, which is $2,200,000;
" ii. the amount that Plaintiff Rowlett paid to maintain the option on the Kelley Creek property, which is $90,036.88;
[262 Or.App. 676] " iii. the amount of the Brown Note, which is $150,000 plus 8% interest per annum from the date of February 11, 2000, for a total of $270,000 [one of the plaintiff companies signed the note in favor of Brown, an investor]; and
" iv. the amount of legal fees owed to Hagen Dye, which is $18,500 [to prepare private investment solicitation documents]; and
" b. Plaintiffs' attorney's fees and costs in the amount of $214,207.91 paid to Schwabe."

Plaintiffs also alleged a right to recover prejudgment interest as of October 7, 2005.

In their second amended complaint, plaintiffs had alleged a right to recover, as part of their damages on the negligence claim, their " attorney's fees and costs in this action as plaintiffs' reasonably foreseeable damages in an amount to be determined at trial because these fees and costs are ongoing." Defendants challenged that damages allegation through a summary judgment motion. At the hearing on the motion, plaintiffs explained that their theory of recovery was based on the fact that the fees they were incurring in the malpractice action served as an appropriate proxy for the amount of fees that they would have been entitled to recover from the Sunrise defendants by virtue of the attorney fee provision in the operating agreement. The court granted defendants' summary judgment motion on that element of damages.

Thirteen days before trial, defendants moved against the third amended complaint, the operative complaint at trial, seeking dismissal of various claims and some individual allegations under ORCP 21 G(3). Defendants sought dismissal of allegations of damages on the negligence claim consisting of fees that plaintiffs had paid to Schwabe, and the trial court granted that motion. Defendants also moved to dismiss plaintiffs' allegation that ...


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