Northwest Cascade Inc, Appellant V Unique Construction Inc, Respondent

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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

NORTHWEST CASCADE, INC., a

Washington corporation, No. 71061-3-I

Appellant/Cross Respondent, DIVISION ONE

V. UNPUBLISHED OPINION

UNIQUE CONSTRUCTION, INC.,
a Washington corporation,

Laat
Respondent/Cross Appellant, = gs
=m 47
TEMPORAL FUNDING, LLC, a 2 SS
Washington Limited Liability Company, 2S Sp
2 bon
Defendant, xX 2,0
NS SS
WILLIAM REHE; JANE DOE REHE; S s§

the WILLIAM K. AND MARION L.,
LLLP; and SAHARA ENTERPRISES,

LLC,

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) FILED: March 31, 2014
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Respondents/Cross Appellants.

Grosse, J. — Abuse of the corporate form is established by evidence that
property owned by a corporation was transferred to its shareholders after a
lawsuit was filed against the corporation and that shareholders commingled
personal and corporate funds such that substantial funds were diverted from the
corporation during a time when the corporation was indebted to the creditor.
When, as here, such diversion of funds results in an unjustified loss to the

corporation’s creditors, piercing the corporate veil is warranted. Accordingly, we

reverse.

No. 71061-3-1/2
FACTS
Unique Construction, Inc. (Unique) is a Washington corporation owned by
William (Bill) Rehe and his wife Suzanne Rehe. 	Bill Rehe is its president and he
and his wife are the sole shareholders. 	Unique was incorporated in the 1980s
and remained incorporated throughout this litigation.
In 2004 and 2005, Unique began acquiring lots for the development of a
34-lot residential real estate project in Tacoma. 	In 2005, Unique transferred the
property to a single purpose limited liability company, Temporal Funding LLC,
wholly owned by the Rehes. 	Unique acted as the general contractor for the
project.
On 	March 27, 	2006, Unique entered into a subcontract with Northwest
Cascade, Inc. (NWC) to build the infrastructure for the plat. 	In August 2007,
Unique stopped paying NWC's invoices. 	On July 7, 2008, NWC sued Unique for
breach of contract and unjust enrichment.
In January 2009, Unique quitclaimed one its properties, the "38th Street
Property," to 	Black Point 	Management 	LLC 	(Black Point), 	a 	Nevada 	limited
liability company. 	Black 	Point 	then 	transferred 	the 	38th 	Street Property to
Winnemucca 	Enterprises 	LLC 	(Winnemucca). 	Winnemucca 	was 	another
Nevada limited liability company controlled by the Rehes and by the William K.
and 	Marion 	L. LLLP, which was formed 	at the direction 	of the 	Rehes. 	No
consideration was paid for the transfers.
On July 29, 2009, Unique recorded a quitclaim deed to Black Point for one
of its other properties, 	a 	house 	built by Unique known as the 	"89th Street

No. 71061-3-1/3
Property." 	The Rehes moved into the 89th Street Property in 2006 and paid no
rent to Unique. 	They continued to reside there through this litigation except for
an 18-month period when they temporarily moved out. 	On December 16, 2010,
Black Point transferred the 89th Street Property by quitclaim deed to Sahara
Enterprises LLC, a Nevada limited liability company ultimately controlled by the
William K. and Marion L. LLLP. 	The transfers were identified as tax exempt and
no consideration was paid for them. 	The transfer of this property left Unique
insolvent.
On October 30, 2009, NWC amended its complaint, adding the Rehes and
Temporal 	Funding 	LLC 	as defendants. 	The 	complaint 	also 	added 	a 	claim
seeking to pierce the corporate veil and hold the Rehes personally liable and a
claim under the Uniform Fraudulent Transfer Act (UFTA), chapter 19.40 RCW,
for fraudulent conveyance of the 89th Street Property. 	The amended complaint
did 	not 	include a 	cause of action 	that 	Unique's transfer of the 	38th 	Street
Property was 	a 	fraudulent 	conveyance 	nor was 	Winnemucca 	named 	as 	a
defendant. 	In 	April 	and 	August 	of 	2011, 	NWC 	filed 	additional 	amended
complaints, adding the William K. and Marion L. LLLP and Sahara Enterprises
LLC as defendants.
The case proceeded to trial in March 2012. 	On the morning of trial, NWC
moved for a voluntary dismissal of defendant Temporal Funding LLC, and the
court granted the dismissal. 	The breach of contract and UFTA claims were tried
to a jury and the parties agreed to a bench trial 	on the equitable claim of
corporate veil piercing.

No. 71061-3-1/4
NWC presented evidence showing a 	consistent disregard of corporate
accounting principles by 	Bill 	Rehe on 	behalf of Unique, 	including cashing of
corporate checks made out to "Cash" by Bill Rehe with no record of how the cash
was used and no records indicating that such cash payments were accounted for
as 	income 	to 	the 	Rehes; 	payment 	of 	the 	Rehes' 	medical 	premiums 	and
deductible expenses, personal utility bills, and other personal expenses without
properly accounting for them on the Rehes' 	personal tax returns as income;
inadequate tax reporting; use of personal expenses and not allocating those to
income; and use of the 89th Street Property for several years without payment of
rent to 	Unique. 	NWC's expert testified that the substantial majority of such
questionable expenses occurred before 2008.
According to Bill Rehe, he treated his corporate and personal assets as
one and the same and comingled the assets because, in his mind, all of the
assets 	belonged to him. 	Bill 	Rehe, 	an attorney, 	claimed 	he 	viewed 	the S-
Corporation as a "flow through" entity and understood that such distributions,
whether they were wages, owner's distributions, or profits, would eventually flow
out to his personal tax return where it would be treated as ordinary income.
Thus, the exact characterization of the distributions was, in his mind, immaterial.
Bill Rehe also testified that the funds to build the 89th Street house and
purchase the 38th Street Property came solely from the Rehes' personal funds.
The Rehes claimed that such funds constituted shareholder loans to Unique and
that transfers of the properties were in repayment of shareholder loans. 	But
there was no evidence of records of any shareholder loans to Unique and such

No. 71061-3-1/5
loans were not reflected on the Rehes' tax returns.
The jury returned a verdict in favor of NWC on the breach of contract and
UFTA claims. 	The jury made a specific finding that Unique transferred the 89th
Street Property with the actual intent to hinder, delay, or defraud creditors. 	The
court entered judgment against Unique for $512,322.73. 	The court also voided
the transfer of the 89th 	Street Property and quieted title to 	Unique, 	leaving
Unique with a single asset. 	On the veil piercing claim, the trial court found in
favor 	of the 	Rehes, 	concluding 	that 	"[pjiercing 	of the 	corporate 	veil is not
necessary to prevent an unjustifiable loss to NW[C]."
The court awarded attorney fees to NWC in the amount of $237,924.54 on
the breach of contract claim and $32,730.36 on the UFTA claim. 	The court also
awarded attorney fees to the Rehes in the amount of $85,000.00 on the veil
piercing claim. 	NWC appeals the dismissal of the veil piercing claim and the fee
award to the Rehes. 	Unique cross appeals the fee award to NWC.
ANALYSIS
NWC contends that the trial court erred by refusing to pierce the corporate
veil 	and 	hold 	the 	Rehes 	personally liable. 	NWC 	argues that the evidence
established as a matter of law that the Rehes manipulated Unique to their benefit
and to the detriment of Unique's creditors, resulting in an unjustifiable loss to
NWC. We agree.
The doctrine of "veil piercing," or "corporate disregard" allows the court to
disregard a corporate entity and assess liability against individual shareholders
when (1) they have used the corporation to intentionally violate or evade a duty

No. 71061-3-1/6
owed to another, and (2) the shareholder's conduct resulted in a unjustified loss
to a creditor.1 	To establish the first element, the court must find an abuse of the
corporate form, which typically involves fraud, misrepresentation, or some form of
manipulation of the corporate form to the stockholder's benefit and the creditor's
detriment.2 	To establish the second element, the wrongful corporate activities
must harm the party seeking relief so that disregard is necessary.3
Whether a corporate form should be disregarded is a question of fact.4
Thus, 	the 	trial 	court's 	ruling 	must 	be 	supported 	by 	substantial 	evidence.5
Piercing the corporate veil is an equitable remedy that should only be used in
"exceptional circumstances."6
Here, 	the 	trial 	court 	ruled 	that 	piercing 	the 	corporate 	veil 	was 	not
warranted because NWC failed to show that the Rehes' commingling of personal
and corporate funds and poor accounting practices were intended to defraud,
manipulate, or misrepresent the corporate status of Unique or resulted in NWC's
loss. 	The trial court did not make a finding that the 38th Street Property transfer
was fraudulent or otherwise relevant to the veil piercing claim, noting that NWC
did not plead a claim of fraudulent conveyance relating to that property. 	NWC
contends that the trial court erred by failing to consider the transfer of the 38th
Street 	Property 	as 	evidence 	of 	corporate 	"gutting," 	which 	establishes
1 Morgan v. Burks. 93 Wn.2d 580, 585, 611 P.2d 751 (1980).
2 Meisel v. M & N Modern Hydraulic Press Co.. 97 Wn.2d 403, 410, 645 P.2d 689
(1982) (quoting Truckweld Equip. Co. v. Olson. 26 Wn. App. 638, 645, 618 P.2d
1017(1980)).
3Meisel.97Wn.2dat410.
4Truckweld. 26 Wn. App. at 643.
5 Truckweld, 26 Wn. App. at 643.
6 Truckweld. 26 Wn. App. at 643-44.

No. 71061-3-1/7
manipulation 	of the 	corporation 	to 	the 	stockholder's 	benefit and 	a 	creditor's
detriment. We agree.
As the court recognized in Morgan v. Burks, 	an intentional use of the
corporation to evade a duty owed to another is established when "the liable
corporation has been 'gutted' and left without funds by those controlling it in order
to avoid actual or potential liability."7 	In such cases, "post-tort activities must be
considered, 	and 	often 	will 	independently support disregard 	of the 	corporate
entity, because it is only after the tort that the impetus to 'gut' the corporation
arises."8 	Here, there was undisputed evidence showing that after the lawsuit was
filed against 	Unique, 	the 	38th 	Street 	Property was transferred 	to 	an 	entity
controlled by the Rehes for no consideration. 	Thus, the trial court was required
to 	consider 	the 	post-lawsuit 	transfer 	of 	the 	38th 	Street 	Property 	as 	an
independent basis for disregard of the corporate form and its failure to do so was
error.
NWC argued to the trial court that this questionable transfer of Unique's
assets was a basis for piercing the corporate veil because it gutted corporate
assets after the filing of the lawsuit. The trial court determined that the 38th
Street Property transfer was not before it on the veil piercing claim because it
was not pleaded to the jury as a UFTA claim:
[COUNSEL FOR NWC]: . . . [T]he 38th Street property was clearly
taken 	out for no consideration. 	Now, the jury wasn't asked to
address that because that was not a fraudulent conveyance claim,
but it was an asset stripped out of the company that's worth 200
and some thousand dollars that has - 	that was taken for no value,
7 93 Wn.2d 580, 585, 611 P.2d 751 (1980).
8 Morgan, 93 Wn.2d at 585 (emphasis added).

No. 71061-3-1/8
by Mr. Rehe's own admission ....
That again deprives [NWC] of an asset that should 	have
been in the corporation to pay what the final judgment is in this
case ....
THE COURT: 	But the 89th Street property we have a jury verdict
determining that was a fraudulent conveyance. 	We do not have a
determination that the transfer of the 38th Street property was.
[COUNSEL FOR NWC]: 	That's something -- you have to decide
that on the piercing question.
[COUNSEL 	FOR 	THE 	REHES]: 	No. 	They didn't even 	name
Winnemuca as a party.
[COUNSEL FOR NWC]: 	We did not assert that as a fraudulent
transfer claim.
THE COURT: ... No one ever previously communicated to this
Court that this Court was going to be asked to determine that the
38th Street conveyance was a fraudulent conveyance.
I was asked to consider the issue of piercing the corporate
veil.
The 	trial court was apparently confused about the evidence it was to
consider on the veil piercing claim and mistakenly decided it could not consider
the 38th Street Property transfer because it was not pleaded as a UFTA claim or
found 	by the jury to be fraudulent. 	While the jury was not asked to make a
specific 	finding 	that 	the 	38th 	Street 	Property 	transfer 	was 	a 	fraudulent
conveyance under the UFTA, evidence of that transfer was presented and the
court was not precluded from considering it as evidence to support the separate
claim of veil piercing. 	Indeed, the very fact that the transfer of the 38th Street

No. 71061-3-1/9
Property was not pleaded as a UFTA claim made it all the more necessary for
NWC 	to 	pursue the 	equitable 	remedy 	of 	corporate 	veil 	piercing 	to 	prevent
unjustified loss resulting from that transfer.
As the court recognized in Morgan, the doctrine of corporate disregard
applies "only when, at the time the doctrine is invoked, it is necessary to prevent
violation of a duty owed."9 	In Morgan, the court did not apply the doctrine of
corporate disregard when post-tort fraudulent conveyances were avoided by a
bankruptcy trustee and ultimately left the liable corporation intact. 	As the court
acknowledged, 	"the result sought 	by the 	plaintiff 	in 	this 	case 	was 	already
accomplished by the bankruptcy trustee's avoidance of the post-tort transfers."10
Thus, 	in such 	cases 	avoidance of fraudulent 	conveyances was 	a 	sufficient
alternative 	to 	disregarding 	the 	corporate 	entity. 	But 	here, 	there 	was 	no
avoidance of the 	post-lawsuit transfer of the 38th Street 	Property precisely
because it was not brought as a UFTA claim. 	Thus, Unique was not left intact
and the 38th Street Property transfer effectively "gutted" the corporation of those
assets.11
Nor was a finding of intent to defraud required to establish abuse of the
corporate form, as the trial court seemed to suggest. 	Rather, the evidence need
only 	show 	"some 	form 	of 	manipulation 	of the 	corporate 	form]" 	to 	the
9 93 Wn.2d at 586.
10 93 Wn.2d at 588-89.
11 As the trial court correctly noted, this was not the case of the 89th Street
Property transfer, which was avoided 	based on the jury's finding that it was
fraudulent. 	As a result, those assets were returned to the corporation and the
transfer did not result in a loss to the corporation.
9

No. 71061-3-1/10
stockholder's benefit and the creditor's detriment, which was established here.12
The undisputed evidence showed the 38th Street Property was transferred to an
entity controlled by the Rehes after the lawsuit was filed for no consideration.
This 	property 	was 	a 	substantial 	asset 	of 	Unique 	valued 	at 	approximately
$250,000.00 at the time of transfer, and its transfer gutted Unique of assets such
that it was unable to pay its creditor NWC. 	Piercing of the corporate veil was
therefore warranted. The trial court's conclusions to the contrary were error.
NWC also contends that the trial court further erred by concluding that the
evidence of the commingling of personal and corporate funds was not sufficient
to justify veil piercing. 	We agree.
As our courts have recognized, the corporate veil will 	be pierced and
courts 	will 	impose 	personal 	liability 	"where the 	corporate 	entity has 	been
disregarded 	by 	the 	principals 	themselves so that there is such a 	unity 	of
ownership and interest that the separateness of the corporation has ceased to
exist."13 	In McCombs. the court held that veil piercing was warranted when the
evidence established that the principal owner of a corporation "commingled his
personal affairs with those of the corporation such as to warrant imposition of
personal 	liability."14 	There, 	the principal 	owner of a corporation 	directed 	a
contractor to remodel a house he rented and to send the bill to the corporation.15
The contractor claimed a lien against the corporation for unpaid work.16 	The
12Mjesel, 97Wn.2dat410.
13McCombs Constr.. Inc. v. Barnes. 32 Wn. App. 70, 76, 645 P.2d 1131 (1982).
14 32 Wn. App. at 77.
15 McCombs. 32 Wn. App. at 72.
16 McCombs, 32 Wn. App. at 72.
10

No. 71061-3-1/11
principal owner then filed for bankruptcy and the corporation was dissolved. The
contractor then sought personal judgment against the principal owner and the
court awarded a judgment against the owner personally.17 	On appeal, the court
affirmed, 	based on evidence showing commingling of personal and corporate
affairs:
Here, 	the 	evidence 	established 	that 	after 	the 	major
construction was completed by the McCombs, Scott Barnes moved
into the improved house with the intent of keeping it as his personal
residence. 	Payment for the work was made with checks drawn
upon the corporation's bank account and a boat manufactured by
the 	corporation. 	The 	checks 	were 	not 	signed 	by 	Scott 	in 	a
representative capacity on behalf ofthe corporation.1 	]
In a recent case, a federal district court held that under Washington law,
veil piercing was warranted by evidence showing use of corporate assets to pay
for obviously personal expenses.19 The court concluded that "such dissipation of
the corporate assets harmed [the] Plaintiffs in that those corporate funds were
not then available to pay [the] Plaintiffs' royalties."20
Similarly here, the dissipation of corporate assets harmed NWC because
those funds were not available to pay NWC's invoices and we agree with NWC
that the trial 	court's finding 	that the amount of personal expenses was "de
minimus" 	is not supported 	by substantial 	evidence. 	NWC entered 	into the
contract with 	Unique in March 2006 and 	performed work through December
2007, submitting its final invoice in April 2008. 	Unique stopped paying NWC's
17 McCombs, 32 Wn. App. at 72-73.
18 McCombs, 32 Wn. App. at 76-77.
19 Curtis v. Illumination Arts. Inc.. No. C12-0991JRL, 2013 WL 6173799, *9 (W.D.
Wash. Nov. 21,2013).
20 Curtis. 2013 WL 6173799 at *9.
11

No. 71061-3-1/12
invoices in August 2007. 	The evidence showed that from July 2005 through
October 2007, there were "hundreds of thousands" of credit card charges paid by
Unique, $27,000.00 of which were identifiable as personal expenses and there
were checks drawn on 	Unique's account for the 	Rehes' 	personal expenses,
including 	medical and 	utility bills. 	Between 2006 and 2007, there were also
checks drawn on Unique's account made out to "Cash" totaling approximately
$33,000.00. 	And from 2005 through 2009, Unique was foregoing $96,000.00 in
rent 	for the 	Rehes' 	personal 	use of the 89th Street house. 	In all, at 	least
$177,000.00 	of 	corporate 	funds 	were 	diverted 	by 	the 	Rehes 	for 	personal
expenses during the time Unique was indebted to NWC, depriving Unique of its
ability to honor its obligations to NWC.
The evidence establishes as a matter of law that the Rehes' post-lawsuit
transfer of the 38th Street Property owned by Unique and their commingling of
personal and corporate assets amounted to manipulation of the corporate form to
the Rehes' benefit and to the detriment of NWC as Unique's creditor, and that
NWC suffered an unjustifiable loss as a result. Thus, piercing the corporate veil
was warranted. 	Accordingly, we reverse the trial court's ruling in favor of the
Rehes on the corporate veil piercing claim.
Both parties 	challenge the 	trial court's award 	of attorney fees to the
opposing party. Because we reverse on the veil piercing claim, we remand to the
trial court for entry of judgment consistent with this opinion and a determination of
appropriate fees to the prevailing party, NWC. 	We also award attorney fees on
appeal, the amount to be determined by the trial court on remand.
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No. 71061-3-I / 13

We reverse and remand.

WE CONCUR:

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