WA 02 12 Delta Finance v Yeh

BECKER, C.J. - Bob Yeh appeals from a trial court order and judgment finding him liable for breach of fiduciary duty, fraud, and conversion. Yeh, while serving as an officer and director of Delta Development and Investment Company, used Delta's funds and credits to acquire properties in his own name. The court imposed a constructive trust on four of these properties and awarded $200,000 in damages to compensate for the cash Yeh had mined from them. The court also made a sizeable award of attorney fees and costs. We affirm the trial court in all substantive respects.

The findings of fact entered after a bench trial lasting 22 days relate the following version of the relationship between the two principal actors, David Day and Bob Yeh. In 1989, Yeh and Day incorporated Delta Development and Investment Company. Delta's primary purpose was real estate development in the Seattle area. Day, who lived in Taiwan at the time Delta was formed, was involved in real estate acquisition, development, and construction in Taiwan. He was named president of Delta. Yeh, who lived in Seattle, was named director and corporate officer. Day purchased 65 percent of the issued shares of stock in 1989 and 1990. The remaining 35 percent of the shares were designated for Yeh. Yeh never paid for his shares, and Delta never issued them.

Yeh managed and operated Delta pursuant to a written agreement for 'Consent to Action In Lieu of Special Meeting'. The agreement, prepared by lawyers for Delta, gave Yeh the authority to purchase property, obtain financing, and execute documents for the benefit of Delta. For almost 10 years, even after he moved to Seattle in 1991, Day relied on Yeh as his only source of information regarding Delta. Yeh did not receive a salary. He and Day had discussed Delta as a long term investment with little immediate financial benefit to either. In 1989, the company's first year, Delta purchased a lot referred to as the Inverness property. However, Delta's plan to develop the lot failed because the city did not issue Delta the necessary permits. Later, with Day's agreement, Yeh turned the Inverness property into a residential subdivision. In 1993, Delta transferred one lot to Day, who built his home there.

Yeh arranged for the title to the Delta-owned Inverness property to be in his own name as well as Delta's name. Yeh, who had no property of his own to speak of, then secured a bank loan to purchase and develop a property on Green Lake in his own name, using as security the title of the Inverness property and funds belonging to Delta. Yeh developed the Green Lake property into condominiums. He used one of the condominiums as a down payment on a Lake City property, then sold the other condominium units at a substantial profit. Eventually, with intervenor John MacLean, he developed and managed an apartment building on the Lake City property.

Delta, through Yeh, purchased a Bellevue property in February 1990. The plan was to develop the lot into a condominium or hotel. In 1992, Yeh pre- sold condominiums on the Bellevue property to various investors. Instead of using the pre-sale money for Delta's purposes, Yeh diverted most of the money to himself. Yeh used the money to acquire and develop in his own name properties on Sand Point, 38th Avenue NE, NE 68th Street, Lake City, Northpark Avenue, and West Seattle. Yeh generated substantial profits for himself from these properties in sale or rental income. As to Delta's Bellevue property, Yeh never obtained a building permit or developed it, and the pre-sale money was refunded to the investors.

Day eventually began to suspect that Yeh was not being honest. He called Delta's only shareholder meeting in July 1998. Before the meeting, with the assistance of a real estate broker who searched King County real estate records, Day obtained documents which showed him that Yeh 'had amassed a personal real estate fortune' while Delta was 'withering and leaking money.'[1] Day caused Delta to file a lis pendens against ten properties owned by Yeh and his sister. At the meeting, Day voted to remove Yeh as director. Acting for Delta, Day then filed this suit against Yeh. The suit alleged that Yeh had harmed Delta by breaching fiduciary duties, committing fraud, misappropriating corporate assets, usurping corporate opportunities, wrongfully encumbering property, engaging in ultra vires activities, converting corporate assets, engaging in a conspiracy, and engaging in criminal profiteering under RCW 9A.82.100. Delta asked for a constructive trust on properties Yeh had acquired and monetary damages as compensation for proceeds Yeh cashed out from the equity in these properties. Yeh counterclaimed against Delta for wrongful termination and asked for the value of his shares, repayment of loans he allegedly made to Delta, and a salary.

The trial court found Yeh liable for breach of fiduciary duty, fraud, and conversion, and dismissed his counterclaims. The court imposed a constructive trust in favor of Delta upon Yeh's two-thirds interest in the Lake City property, as well as upon Yeh's properties on NE 68th Street, 38th Avenue NE, and Northpark Avenue. The court estimated that the net value of the property so awarded to Delta would exceed one million dollars, and provided for the trust to be restructured if it did not have such value. The court also awarded Delta $200,000 in monetary damages. This judgment, entered in August 2000, was followed by a judgment entered on December 6, 2000, awarding $847,756.07 in attorney fees and costs to Delta. Day later received a judgment for fees and costs awarded to him personally in the amount of $37,367.63 for defending against Yeh's counterclaims.

Yeh appeals. Day cross-appeals. John MacLean, an intervenor in the action below, appeals from the trial court's imposition of the constructive trust on the Lake City property.

Yeh assigns error to 47 of the court's 64 findings of fact. However, Yeh does not effectively challenge the sufficiency of the evidence supporting the findings. Instead, Yeh recites a version of the facts argued and rejected below. An appellant's challenge to the facts is insufficient if it merely contains a recitation of the facts in the light most favorable to the appellant, even if it contains citations to the record. Matter of Estate of Lint, 135 Wn.2d 518, 531-32, 957 P.2d 755 (1998). Because the findings have not been properly challenged on appeal, they are deemed verities. Estate of Lint, 135 Wn.2d at 533. Yeh also challenges the trial court's conclusions of law in their entirety.

The appellate court reviews conclusions of law to determine whether the findings of fact support the trial court's conclusions of law. Landmark Dev. v. City of Roy, 138 Wn.2d 561, 573, 980 P.2d 1234 (1990).

Delta filed suit in July 1998. The suit alleged that Yeh had misappropriated Delta assets, property, and corporate opportunities between 1989 and 1998. As affirmative defenses, Yeh pled the statute of limitations and laches. Actions for fraud, breach of fiduciary duty, and conversion must be filed within three years. RCW 4.16.080. However, a cause of action for fraud is not to be deemed to have accrued and the limitations period does not begin to run until the discovery by the aggrieved party of the facts constituting the fraud. RCW 4.16.080(4). The discovery rule operates to toll the statute of limitations until the plaintiff knows or, through the exercise of due diligence, should have known all facts necessary to establish a legal claim. RCW 4.16.080(4); Crisman v. Crisman, 85 Wn. App. 15, 20, 931 P.2d 163 (1997).

The doctrine of laches operates to equitably bar the right to sue for recovery where the granting of the relief sought would prejudice the defendant, as where the complainant has slept on his rights and allowed defendant to make valuable improvements or make other expenditures in reliance on the aggrieved party's non action. Carstens v. Mork, 159 Wash. 129, 136, 292 P. 262 (1930). But an aggrieved party 'cannot be deemed guilty of laches while the fraud remains undiscovered, unless by the exercise of ordinary diligence he might sooner have discovered it.' Carstens, 159 Wash. at 136 (quoting 27 C. J. 764).

In his trial brief, Yeh argued that Day slept on his rights, and that the discovery rule could not toll the statute of limitations because Day did not exercise due diligence as an officer of Delta. On that basis, Yeh contended that Delta, having filed suit in July 1998, could not recover damages arising from any of the transactions that occurred prior to July 1995. Yeh contends that the trial court did not make a ruling on laches or statutes of limitations. Because the statute of limitations is an affirmative defense, the burden is on the defendant to prove those facts that establish the defense. Mayer v. City of Seattle, 102 Wn. App. 66, 76, 10 P.3d 408 (2000). Generally, the absence of a finding on a critical issue is interpreted as a negative finding against the party with the burden of proof on that issue. Douglas Northwest, Inc. v. Bill O'Brien & Sons Construction, Inc., 64 Wn. App. 661, 682, 828 P.2d 565 (1992).

Accordingly, we infer that the trial court found Yeh did not prove those defenses. Yeh, however, argues that because Delta raised the issue of the discovery rule, Delta bore the burden of proving its own diligence. See G.W. Constr. Corp. v. Professional Serv. Indus. Inc., 70 Wn. App. 360, 367, 853 P.2d 484 (1993) (to invoke the discovery rule, the plaintiff must show that he or she could not have discovered the relevant facts earlier). Yeh has not cited authority demonstrating that the trial court was required to make findings on Delta's due diligence in order to support rejection of the statute of limitations defense. But even if due diligence is viewed as a material issue on which a finding should have been entered, a missing finding is not reversible error where the record shows that there is ample evidence to support the missing finding, and the findings entered by the court, viewed as a whole, demonstrate that the absence of the specific finding was not intentional. Douglas Northwest, 64 Wn. App. at 682.

Yeh contends that the evidence shows Day knew or reasonably should have known of facts sufficient to cause inquiry before July 1995. However, the court found that Day was not aware of Yeh's actions. Day did not investigate Yeh's properties because Day believed Yeh's lies. Day had no reason to believe that Yeh was engaged in self-dealing practices. Yeh took advantage of their friendship in order to deceive Day. 'Day had no reason to believe that Yeh was off on his own developing substantial real estate projects.'[2] And Day took action immediately after Day 'began to suspect that Yeh was not being honest and aboveboard with him' in July 1998.[3]

It is clear that the court found Yeh hid his self-dealing acts from Day by a longstanding pattern of deceptive behavior and that Day exercised due diligence once he did discover the fraud. We conclude that the court's decision to reject Yeh's affirmative defenses was adequately supported by the facts found.

Yeh contends that the court erred in concluding that he breached his fiduciary duty as an officer and director of Delta. He first argues that the trial court erroneously applied the elevated fiduciary duty standard provided by common law instead of a lesser statutory duty. In conclusion of law 1, the court adopted Judge Cardozo's well-known formulation of a corporate officer's fiduciary duty under the common law as 'the utmost duty of undivided loyalty. The standard of behavior for such fiduciary is stricter than the morals of the marketplace, and entails not honesty alone, but the punctilio of an honor the most sensitive.' Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545 (1928).

Yeh proposes that in adopting the 1990 Business Corporation Act, RCW 23B.08.420, the Legislature eliminated this common law fiduciary duty of a corporate officer, and replaced it with a duty of good faith, ordinary prudence and action in the best interest of the corporation. The statutory duty, he contends, is not a fiduciary duty. Yeh has not cited to any portion of the record demonstrating that this argument was presented to the trial court, and we have found none. We note that Yeh, in his trial brief, assumed that there was a fiduciary relationship when he stated 'an accounting is proper where, as here, there is a fiduciary relation between the parties.'[4] We regard the alleged error as unpreserved for review, and decline to address it. RAP 2.5(a).

The trial court concluded that Yeh breached his fiduciary duty as a corporate officer by failing to make real estate development opportunities available to Delta, by deceptively failing to disclose his own competing investment and development activity, by lying to Day about his administration of Delta and its bank accounts, by his expenditure of Delta's money on his own personal ventures, and by his use of Delta's assets to finance his own opportunities.[5]

The corporate opportunity doctrine prohibits directors or officers from appropriating to themselves business opportunities that rightfully belong to the corporation. Wagner v. Foote, 128 Wn.2d 408, 413, 908 P.2d 884 (1996). Whether a particular business opportunity belongs to the corporation or is personal to an individual depends upon the facts and circumstances of each particular case. Wagner, 128 Wn.2d at 413. Yeh contends that the court's conclusion that he misappropriated corporate opportunities for himself is unsupported by proper findings. Yeh bases his argument on Broz v. Cellular Information Systems, Inc., 673 A.2d 148, 154-55 (Del. 1996). According to Broz, the corporate opportunity doctrine holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. Broz v. Cellular Information Systems, Inc., 673 A.2d at 155.

We see no deficiency in the findings with respect to these points. The court stated that Delta was formed 'for the primary purpose of investing in real estate in the Seattle area.'[6] A forensic accountant expert witness presented by Delta proved that Yeh routinely commingled Delta's funds with his own, and used Delta's funds and credit to make himself appear to be 'an individual investor of substance'[7] when in reality he had no income or personal assets. Delta presented credible and unrefuted evidence linking Yeh's personal acquisitions in real estate directly or indirectly to use of Delta's assets and financial standing.[8]

Yeh argues that the court did not expressly find that Yeh's activities proximately harmed Delta. He contends Delta, due to its financial hardships, could not have exploited the investment opportunities Yeh took for himself. Unlike the situation in Broz, Yeh engaged in behavior that was in direct conflict with his responsibility to Delta. Contrary to Yeh's arguments, the findings do address this issue. Had it not been for Yeh's diversion of Delta's assets and his encumbrance of Delta property, Delta would have been in the financial position to exploit real estate opportunities. As the court found, Yeh's breaches of loyalty denied Delta 'the opportunity to earn profits far in excess of Yeh's financial contributions.'[9] The court found that Yeh had used Delta's resources, credit and corporate opportunities and made them his own, to his benefit and the detriment of Delta.[10] Yeh also used his authority to purchase property for Delta to secure, in order to effect real estate transactions for his own benefit rather than for Delta's benefit.[11] Beginning in 1989, Yeh used Delta to advance his own personal interest, rather than the interest of Delta.[12] Yeh was using Delta 'as a vehicle to pay for his acquisitions and to secure credit to develop those acquisitions strictly for his own benefit, and not for the benefit of the corporation to which he owed a fiduciary duty.'[13]

These findings are sufficient to support the conclusion that Yeh usurped investment opportunities that were within Delta's line of business and would have enriched Delta rather than Yeh if Yeh had been loyal to his duty. Finally, Yeh argues that Delta acquiesced to or ratified his individual pursuit of real estate investments. See, e.g., Smith v. Pacific Polls, Inc., 12 Wn. App. 578, 583, 530 P.2d 658 (1975) (a corporation may consent to actions of an officer that are competitive to the corporation's interest). The evidence is insufficient to compel such a finding, and Yeh failed to persuade the finder of fact to make such a finding. Instead, the court found 'Yeh never had Day's consent' to preserve for himself the opportunities that Delta's credit and wealth made available.[14] As that is a factual determination, and one supported by the evidence, it will not be disturbed on appeal.

The court stated, in conclusion of law 4, that Yeh's conduct constituted fraud and willful and purposeful misrepresentation, as to Delta and Day. Yeh argues that the conclusion is unsupported because the court did not enter findings of fact relating to two of the nine elements of fraud. See Stiley v. Block, 130 Wn.2d 486, 505, 925 P.2d 194 (1996) (Each element of fraud must be established by clear, cogent, and convincing evidence.). According to Yeh, the two missing elements are Yeh's representation of an existing fact and Day's reliance on the truth of the representation.

The court found that on several occasions Yeh lied to Day by telling him that he was not the owner of the Green Lake property, when in fact Yeh held the title in his own name.[15] The court found that Day relied on this misrepresentation.

If Day had known that Yeh had acquired the Green Lake property for himself, when he had no personal assets, Day would have had cause to question how Yeh had done so; the answer would have been that Yeh had used {Delta's} resources, credit and corporate opportunities and made them his own, to his benefit and the detriment of {Delta}.{[16]}

The court also found that Yeh concealed all of his business activity, and kept Day 'in the dark' about his unilateral use of Delta's assets.[17] These findings are sufficient on the two allegedly missing elements. In addition, where a party has a duty to disclose a fact, the suppression of that fact is tantamount to an affirmative misrepresentation. Crisman v. Crisman, 85 Wn. App. 15, 22, 931 P.2d 163 (1997); Washington Mut. Sav. Bank v. Hedreen, 125 Wn.2d 521, 526, 886 P.2d 1121 (1994).

It is well settled that the suppression of a material fact which a party is bound in good faith to disclose is equivalent to a false representation. Where the law imposes a duty on one party to disclose all material facts known to him and not known to the other, silence or concealment in violation of this duty with intent to deceive will amount to fraud as being a deliberate suppression of the truth and equivalent to the assertion of a falsehood. Oates v. Taylor, 31 Wn.2d 898, 902-03, 199 P.2d 924 (1948) (quoting 37 C.J.S. 244, Fraud, sec. 16a).

The trial court found that Yeh had transferred corporate funds into his own accounts for his own benefit and failed to make Delta aware of such activities.[18] Because Yeh was a director and officer of Delta, he had a duty to disclose these activities and his failure to do so constituted fraud. Yeh observes that the trial court did not indicate that there was clear, cogent, and convincing evidence to support its conclusion of fraud. Yeh did not raise this argument below, nor did Yeh object on this basis to the findings and conclusions before the trial court.

The standard of proof used by a court to reach its findings is not the same thing as an element of the necessary proof. Yeh has not cited authority showing that the findings entered by a trial court in a bench trial must necessarily mention the standard of proof applied by the court. In the absence of any citation to the record showing otherwise, we presume the trial court used the correct standard of proof in reaching its findings.

To prove the tort of conversion, Delta bore the burden of proving that Yeh willfully and without legal authority deprived Delta of its dominion and control over a chattel. Kruger v. Horton, 106 Wn.2d 738, 743, 725 P.2d 417 (1986). Yeh argues that the trial court, in concluding that Yeh committed conversion, failed to enter findings concerning what property Yeh took, and failed to find that Yeh acted without legal authority or that Delta suffered harm.

The court found that Yeh used Delta bank accounts to entice the bank into extending him credit for the purchase of the Green Lake property;[19] Yeh used money from the pre-sale of condominium units on the Bellevue property for his own benefit for a period of time prior to refunding the money;[20] Yeh made cash withdrawals from Delta accounts for no corporate purpose;[21] and Yeh moved funds from Delta accounts into his own accounts to make it appear that he had substantial funds.[22] The court found that Yeh had the authority to manage Delta funds for the benefit of Delta, but instead used Delta assets for his own benefit.[23] The court also found that Yeh used the corporate assets to Delta's detriment.[24] In its memorandum opinion, the trial court made specific reference to Yeh's use of Delta account No. 0145 for his own purposes.[25] These findings identify the property converted, show that the money was taken without legal authority, and find that Delta was harmed. They are sufficient to support the conclusion that Yeh willfully and unlawfully deprived Delta of its control over its money.

The trial court dismissed Yeh's counterclaims for unpaid salary, repayment of investment funds and loans, and wrongful termination. Yeh contends the court erred in failing to find facts in support of the dismissal of the counterclaims.

The trial court found that a salary for Yeh was never a topic of discussion between Yeh and Day.[26] This finding supports the conclusion that Yeh was not entitled to a salary. The court found that Yeh was originally intended to have 35 percent of the stock after contributing money to the corporation, but Yeh never paid for his designated shares and thus never became a shareholder.[27] This supports the conclusion that Yeh was not entitled to repayment of investment funds.

The court found that what Yeh characterized as loans that he made to Delta were actually payments from third parties who were already obligated to pay back Delta; or were misappropriated Delta funds; or were profits generated from Yeh's misconduct.[28] This supports a conclusion that Yeh was not entitled to repayment of any loans made to Delta.

The court found that Yeh commingled and diverted Delta funds into his own accounts to advance his own personal interests, rather than the interest of Delta.[29] This supports a conclusion that Yeh's removal as director and officer, far from being wrongful, was based on good cause.

The court's memorandum opinion of April 13, 2002 makes clear that these were the court's reasons for dismissing Yeh's counterclaims. Yeh failed to establish his claims on the basis of contract or other legal theories. He was precluded from any award in equity because of his unclean hands. The counterclaims were properly dismissed.

Yeh argues that the trial court erred in entering a constructive trust on his properties. An appellate court reviews the authority of a trial court to fashion equitable remedies under the abuse of discretion standard. Sac Downtown Ltd. Partnership v. Kahn, 123 Wn.2d 197, 204, 867 P.2d 605 (1994).

A trial court sitting in equity has broad discretion in fashioning remedies "to do substantial justice to the parties and put an end to litigation." Carpenter v. Folkerts, 29 Wn. App. 73, 78, 627 P.2d 559 (1981). "The trial court is vested with a broad discretionary power to shape and fashion injunctive relief to fit the particular facts, circumstances, and equities of the case before it." Brown v. Voss, 105 Wn.2d 366, 372, 715 P.2d 514 (1986) (emphasis in original).

A constructive trust is an equitable remedy that arises when the person holding title to property has an equitable duty to convey it to another, on the grounds that the person holding title would be unjustly enriched if permitted to retain it. City of Lakewood v. Pierce Cy., 144 Wn.2d 118, 126, 30 P.3d 446 (2001). ''In general, whenever the legal title to property, real or personal, has been obtained through actual fraud, misrepresentations, concealments, or through undue influence, duress, taking advantage of one's weakness or necessities, or through any other similar means or under any other similar circumstances which render it unconscientious for the holder of the legal title to retain and enjoy the beneficial interest, equity impresses a constructive trust on the property thus acquired in favor of the one who is truly and equitably entitled to the same{.}” Bangasser & Assoc., Inc v. Hedges, 58 Wn.2d 514, 516-17, 364 P.2d 237 (1961) (emphasis in original), quoting Rozell v. Vansyckle, 11 Wash. 79, 83, 39 Pac. 270 (1895).

There is ample evidence to support the trial court's exercise of its discretion in imposing the constructive trust. The court found that Yeh used Delta assets to acquire his various properties. Yeh did not offer any evidence to challenge many of the calculations presented by Delta's forensic accounting expert, and the evidence tracing Delta assets to Yeh's properties. Yeh's self-dealing, diversion of corporate assets, misrepresentation, and bad faith provided him with the opportunity to purchase and develop the properties, while preventing Delta from being able to exploit these same investment and development opportunities. The trial court did not abuse its discretion in concluding it would have been unjust to allow Yeh to retain the beneficial interest in all of those properties.

Yeh argues that the court ignored evidence that Yeh invested his own hard work and money to help develop the properties. To the contrary, the record demonstrates that Yeh's hard work and skill was a factor the court considered when it limited the constructive trust to four of Yeh's six properties, while allowing him to retain title to the other two.

Because Yeh's success in building the properties in issue was not only due to his personal perfidy and betrayal of {Delta} and David Day, but also due to his ingenuity, industry and acumen in developing his own property, although the court might have legal authority to award {Delta} a constructive trust on Yeh's interest in the six contested properties . . .such an award would be more punitive toward Yeh than just, in light of Yeh's personal efforts and the lack of significant work by Day. {[30]}

In the alternative, Yeh argues that Delta is barred from equitable relief because Day did not have clean hands. Yeh contends Day violated his duty of care as president of Delta to understand and inquire into the affairs of the corporation. RCW 23B.08.420(1)(b) (an officer shall discharge his duties with 'the care an ordinarily prudent person in a like position would exercise under similar circumstances'); Senn v. Northwest Underwriters, Inc., 74 Wn. App. 408, 414, 875 P.2d 637 (1994) (a director has the duty to be aware of the affairs of the company).

Under the clean hands principle, equitable relief may not be granted to a party whose own conduct was unconscientious, unjust, or marked by want of good faith. Portion Pack, Inc. v. Bond, 44 Wn.2d 161, 170, 265 P.2d 1045 (1954). However, the clean hands principle does not repel a party from courts of equity, nor does it disqualify any claimant from obtaining relief, where the party has not dealt unjustly in the very transaction concerning which he complains. McKelvie v. Hackney, 58 Wn.2d 23, 32, 360 P.2d 746 (1961). Day's failure to discover Yeh's ongoing misconduct is probably not bad faith at all, but certainly it cannot be characterized as an unjust involvement in Yeh's diversion of corporate opportunities or assets. To hold that Day's failure to discover Yeh's willful concealment of his fraud bars Delta from a recovery in equity would be an absurd result.

Yeh also argues that the imposition of the constructive trust must be reversed because the court failed to state that clear, cogent, and convincing evidence supported the need for the trust. Again, we presume the trial court applied the correct standard in the absence of any contrary indication in the record.

Yeh also contends that the court should have entered a finding that there was not an adequate remedy at law. He argues that the court should have considered imposing an equitable lien as a less intrusive remedy than a constructive trust. Delta responds, citing pertinently from Dan B. Dobbs, Law of Remedies (2d ed. 1993) and the Restatement (First) of Restitution, that a constructive trust is an appropriate remedy when a defendant has taken the plaintiff's funds and used them to acquire specific properties. That the equitable remedy of a constructive trust was suitable here is made even more evident by the fact that Yeh was a conscious wrongdoer, with a history of deception, dishonesty, and stonewalling against Delta's interests. As Delta argued, under those circumstances gaining direct control of the properties is a superior remedy to having to chase after a judgment debtor in a long and dismal series of supplemental proceedings.[31] The trial court did say that it might be 'neater' to simply award a money judgment.[32] But this must be understood in the context of the court's preceding comment, 'I've come to the conclusion that, if we have to depend on Mr. Yeh's cooperation to effectuate the remedies in this case, that that's not going to be possible.'[33]

If a trial court must rule out other remedies as inadequate before imposing a constructive trust, we find that the court did so here. Moreover, Yeh's brief does not point to any place in the record below where he argued that there was an adequate remedy at law or that an equitable lien should have been the remedy. Under these circumstances, more intensive scrutiny of the issue at the appellate level is unwarranted.

Delta, in a cross appeal, contends that the trial court erred in not forcing Yeh to disgorge all six of the properties that the evidence traced back to Delta's funds, and in awarding only $200,000 in damages rather than the full profit of $874,053 Yeh realized from those properties.[34]

Delta argues that the court was required to eliminate all possibility of profit flowing from Yeh's breach of fiduciary duty. A case Delta primarily relies on is Leppaluoto v. Eggleston, 57 Wn.2d 393, 403, 357 P.2d 725 (1960), wherein the court endorsed, as wise public policy, the concept that there should be no possibility of profit flowing from a breach of fiduciary duty. The court also reaffirmed its commitment to the principle that a faithless fiduciary must disgorge his ill gotten gains. Leppaluoto, 57 Wn.2d at 408.

We do not read this case or the principles on which it rests as compelling the result sought by Delta. If Yeh had acquired his properties solely through betrayal and perfidy, Delta's argument would be stronger. However, the trial court recognized that Yeh's personal profits were to some extent due to his own diligence and the 'lack of significant work by Day.'[35] The court sought to fashion a remedy that would balance the equities of Yeh's bad faith and Day's lack of work. As discussed above, a trial court sitting in equity has broad discretion in fashioning appropriate remedies. Carpenter, 29 Wn. App. at 78. We find no abuse of discretion in the court's decision not to include all of the identified properties and profits in the disgorgement remedy.

In the alternative, Delta contends that the trial court's judgment essentially, and erroneously, awarded Yeh a salary because that is the only way to account for the difference between the total of Yeh's profits and the lesser amount of damages awarded to Delta. We disagree.

The trial court denied Yeh's claim for unpaid salary. As discussed above, the trial court stated an appropriate rationale for not using the total of Yeh's profits as the measure of damage.

The trial court entered a judgment for attorney fees against Yeh in favor of Delta in the amount of $847,756.07, dated December 6, 2000. Yeh assigns error to this award of attorney fees on several grounds.

First, Yeh contends that the court lacked an authoritative basis on which to award attorney fees. Washington follows the rule that a prevailing party normally does not recover its attorney fees. Dempere v. Nelson, 76 Wn. App. 403, 406, 886 P.2d 219, review denied, 126 Wn.2d 1015 (1995). Attorney fees may only be awarded if authorized by contract, statute, or a recognized ground in equity. Bowles v. Department of Retirement Sys., 121 Wn.2d 52, 70, 847 P.2d 440 (1993).

In this case the trial court based its award on equitable grounds recognized in the factually similar case of Hsu Ying Li v. Tang, 87 Wn.2d 796, 557 P.2d 342 (1976). That case involved two business partners in a Seattle apartment house. One partner, who served as the sole manager, breached his duty to the partnership by failing to keep records of partnership funds and commingling them with his personal funds. The other partner successfully sued to obtain an accounting and dissolution of the partnership. At the conclusion of the action, the trial court awarded the petitioner one-half of the attorney fees and expenses he had incurred. The issue on appeal, as here, was whether the trial court exceeded its authority in making that award. The Supreme Court affirmed the award.

Petitioner necessarily instituted this lawsuit to compel respondent to carry out his fiduciary duties as manager of the partnership. The lawsuit preserved the partnership assets and prevented respondent from further commingling the partnership with his separate assets. A partner should share the expense of a lawsuit when he breaches his fiduciary duty to the other partners. Tang, 87 Wn.2d at 801. The trial court in this case found Yeh's acts to be 'far more fraudulent and purposeful' than the conduct forming the basis for the fee award in Tang.[36]

Yeh contends that an award of attorney fees under Tang must be reversed because it does not fit any of the categories commonly recognized in Washington case law as equitable grounds for awarding attorney fees: bad faith conduct in litigation; preservation of a common fund; protection of constitutional principles; and private attorney general actions. See Dempere, 76 Wn. App. at 406-07.

In Dempere, this court concluded that the bad faith exception did not allow an award of attorney fees to a successful civil plaintiff based on the conduct of a defendant who harassed her. The rationale that would support such an award is essentially the rationale behind punitive damages, which Washington does not allow. Dempere, 76 Wn. App. at 410. Thus, the award of attorney fees against Yeh may not be affirmed as a punishment of Yeh's intentional misconduct.

And under Tang, the common fund exception is not applicable either. The court in Tang observed that the suit 'preserved and protected a common fund the partnership assets.' Tang, 87 Wn.2d at 799. But because the common fund exception requires the suit to benefit others as well as the litigant, the court held that the award of attorney fees could not be supported on that ground. 'This suit merely benefited petitioner, as she and respondent are the only partners.' Tang, 87 Wn.2d at 799. Instead, the court relied on its 'inherent equitable powers', citing Weiss v. Bruno, 83 Wn.2d 911, 914, 523 P.2d 915 (1974). Tang, 87 Wn.2d at 799. This court has refused to read Weiss to confer 'an unlimited equitable power to determine when attorney fees should be awarded'. Dempere, 76 Wn. App. at 411. Nevertheless, the Supreme Court did invoke its inherent equitable powers to award attorney fees in Tang, a case with similar facts. The court found the award in Tang appropriate given 'the facts and circumstances of this case'. Tang, 87 Wn.2d at 799. The court specifically mentioned that the managing partner's breach of his fiduciary duty was 'tantamount to constructive fraud.' Tang, 87 Wn.2d at 800.

While Tang may not fit neatly within any of the four categorical exceptions mentioned in Dempere, it has not been overruled.[37] Its continuing viability as a precedent is shown by citation to it in more recent cases that are contextually analogous. In a case where a bank breached its fiduciary duty as a trustee, the Supreme Court made an exception to the general rule imposing litigation expenses on the trust estate, and ordered that the trustee be individually responsible for those expenses where litigation 'is necessitated by the inexcusable conduct of the trustee'. Allard v. Pacific Nat'l Bank, 99 Wn.2d 394, 408, 663 P.2d 104 (1983). The court cited Tang as in accord with that holding. Allard, 99 Wn.2d at 408.

The amount of fees awarded in that case later came up for review. In affirming that award, the Supreme Court held 'it was within the trial court's discretion to consider making plaintiffs whole as a factor in reaching its decision.' Allard v. First Interstate Bank, 112 Wn.2d 145, 152, 768 P.2d 998 (1989).

And this court recently followed Tang in ordering a trial court, on remand, to consider awarding fees in a case where partners committed a breach of fiduciary duty that amounted to a constructive fraud. Green v. McAllister, 103 Wn. App. 452, 466-69, 14 P.3d 795 (2000).

Yeh ultimately recognizes that Tang and Green 'stand for the proposition that there is an equitable exception to the American Rule for a breach of fiduciary duty in a partnership setting.'[38] We agree, and conclude that Tang remains an authoritative precedent upon which an attorney fee award may properly be based in factually similar circumstances.

In this case, the trial court court's decision is consistent with Tang, Allard and Green. The court recognized that because of the protracted and complex nature of the litigation, an attorney fee award was necessary to make the plaintiff whole. 'Here, failure to award fees will mean that Mr. Day, by exposing Mr. Yeh and gaining judgment against him, has brought about his own financial ruin.'[39]

We conclude that the trial court's decision to award attorney fees was properly based on a recognized ground of equity.

Next, Yeh argues that the amount of the award more than $800,000 was unreasonable. The trial court must take an active role in the calculation of attorney fees. Mahler v. Szucs, 135 Wn.2d 398, 434, 957 P.2d 632 (1998). Courts should apply the lodestar method in calculating an award of reasonable attorney fees. Mahler, 135 Wn.2d at 433. Under the lodestar method, the court multiplies the total number of attorney hours reasonably expended by the reasonable hourly rate of compensation. Bowers v. Transamerica Title Ins. Co., 100 Wn.2d 581, 597, 675 P.2d 193 (1983). Trial courts must also create an adequate record for review of fee award decisions. Mahler, 135 Wn.2d at 435. Failure to create an adequate record will result in a remand of the award to the trial court to develop such a record. Mahler, 135 Wn.2d at 435.

Yeh contends the trial court committed reversible error by failing to show how a lodestar was calculated in this case. The trial court's findings and conclusions are contained in its memorandum opinion on attorney fees. The court found that the hourly rate of $150 per hour was reasonable.[40] The trial court also found that the 4,827 reported hours were reasonable.[41] The court considered objections raised by Yeh and ultimately disallowed more than $50,000 of the requested fees and costs.

Yeh argues that the 4,827 hours reported by counsel were unreasonable because they duplicated much of the work of the forensic accountant. The trial court, however, considered whether the amount of work reported was reasonable, and reviewed all the time entries. The court also read the deposition of Delta's lead counsel, Mr. Lam, taken at Yeh's instance to explore the basis for the attorney fee request. The court found that Mr. Lam's M.B.A. degree and familiarity with financial and accounting principles were helpful in presenting his client's case.[42]

The court found that the reason the litigation took so much attorney time was attributable not to overworking by plaintiffs' attorneys but to resistance and stonewalling by Mr. Yeh. 'Defendant has not submitted an attorney's fee expert affidavit which would support a contention that any of the time entries are unreasonable. The only evidence as to the hours worked, and their reasonableness, is that submitted by the plaintiff.'[43]

The court's memorandum opinion adequately shows a lodestar calculation and adequately supports the award with reasons as required by Mahler. The argument about duplication of the accountant's work was not supported by an affidavit or argument specific to particular time entries.

\We conclude the evidence did not compel the court to find duplication. Yeh further contends the amount awarded was unreasonable because the court did not account for claims initially pursued by Delta that were dismissed at trial and on partial summary judgment. These claims included allegations of criminal profiteering under RCW 9A.82 and business opportunity fraud under RCW 19.110. If attorney fees are recoverable for only some of a party's claims, the award must properly reflect a segregation of the time spent on issues for which fees are authorized from time spent on other issues. Dash Point Village Assocs. v. Exxon Corp., 86 Wn. App. 596, 611, 937 P.2d 1148 (1997). The trial court need not segregate the time, however, if it determines that the various claims in the litigation are so related that no reasonable segregation of successful and unsuccessful claims can be made. Hume v. American Disposal Co., 124 Wn.2d 656, 673, 880 P.2d 988 (1994).

It is not surprising that the trial court's memorandum opinion does not address the issue of segregation of unproductive claims. While Yeh argued generally below that the plaintiff's attorney expended time on unproductive and duplicative matters, the defense memorandum did not mention the dismissed claims as a basis for reducing the award unlike the situation in Dash Point, where the argument of insufficient segregation was thoroughly documented and litigated before the trial court. See Dash Point, 86 Wn. App. at 610-611.

A reasonable basis on which the unsuccessful claims could be segregated from the successful ones is not self-evident, and Yeh's briefing on appeal does not cite to any portion of the record that would have been material to such a determination. Under these circumstances we regard Yeh's failure to bring his concern about the dismissed claims to the trial court's attention as a waiver of the issue, and decline to address it for the first time on appeal. RAP 2.5(a). Yeh also contends the fees charged by Mr. Lam to Delta were unreasonable because, at the end of the trial, most of the bills for attorney's fees remained unpaid. Yeh argues that the trial court 'condoned a disguised contingent fee agreement',[44] and failed to consider the fee arrangement in that light. The existence of a contingency fee agreement` is a factor to be considered in the determination of a reasonable attorney fee award. See Mayer v. City of Seattle, 102 Wn. App. 66, 81, 10 P.3d 408 (2000).

This rule does not supply a basis for reversal of the fee award in this case. First, there was no contingency fee agreement. Second, as a result of reviewing the attorney fee deposition, the trial court must have been fully aware of the unpaid status of the bills. Third, this argument was not made to the trial court and we see no reason why it should now become a subject for analysis by an appellate court.

Yeh assigns error to a separate judgment in favor of David Day awarding him $37,367.63 for attorney fees incurred in defending against claims unsuccessfully prosecuted by Yeh against Day personally. These were claims of unpaid salary, repayment of investment funds and loans, and wrongful termination. Yeh contends that the court failed to identify its basis for this fee award. A fair reading of the court's memorandum opinion, however, makes clear that the award to Day personally, like the award to Delta, rests on the equitable ground identified in Tang. Yeh does not explain why Tang is not an appropriate authority for the award of attorney fees to Day, and has offered no other argument, below or on appeal, to show an abuse of discretion in this award.

Mahler directs trial courts to take an active role in assessing the reasonableness of fee awards, rather than treating the award as 'a litigation afterthought' or simply rubberstamping a request. Mahler, 135 Wn.2d at 434. The trial court in this case fulfilled that charge. The requests for attorney fees were hotly contested. The trial court's resolution of the dispute was thorough, deliberative, well-informed and well-documented. We find no abuse of discretion.

Delta and Day request attorney fees on appeal. When a trial court has exercised its discretion to award fees to a party based on Tang, that party is also entitled under RAP 18.1 to an award of fees on appeal. Green, 103 Wn. App. at 472. The requests for fees and costs on appeal are granted, subject to compliance with RAP 18.1.

Yeh has moved to strike Delta's revised reply brief. The brief is in reply to Yeh's response to Delta's cross-appeal, as allowed by RAP 10.1(c), and to that extent the motion to strike is denied. To the extent that any of it re-argues Delta's response to Yeh's appeal, the court has disregarded it.

Delta asks the court to strike two declarations by Day that Yeh attached to his reply brief. Cases on appeal are decided only from the record of proceedings below. Grobe v. Valley Garbage Service, Inc., 87 Wn.2d 217, 228-29, 551 P.2d 227 (1977). Because the attached declarations were not before the trial court, the court has disregarded them.

Yeh's motion to supplement the record with Docket No. 457, Defendants' Response to Plaintiff's Motion for Attorney Fees, is granted. Yeh's motion to strike Delta's statement of Additional Authorities is denied.

Yeh and John MacLean formed the Lake City Park Place Limited Liability Company in 1997. According to MacLean's representations in his motion to intervene, the membership agreement shows Yeh owning '66.7% of the membership units' and MacLean owning the remaining one-third of the membership units.[45] Yeh managed the property at first.

In June 2000, one month after the trial court announced its decision to include the property in the constructive trust, Yeh transferred the management responsibility to MacLean. Delta moved the court to appoint a receiver to manage the property on which the trust had been imposed. At that point, MacLean intervened. He argued that the nature of a Limited Liability Company not only prevented Delta from becoming a member without the consent of the other member (MacLean) but also prevented its real property from being reached through the constructive trust. The court maintained its decision to include the Lake City property in the constructive trust as part of the final judgment,[46] and thereafter appointed a receiver for it. MacLean appeals.

A Limited Liability Company is a legal entity separate and apart from, rather than an aggregate of, its members. Property is owned by the company as an entity. See RCW 25.15.030(2) ('a limited liability company has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs.'). A member of the Limited Liability Company is to be personally liable for his own torts. RCW 25.15.125(2). A member's ownership interest in a Limited Liability Company is considered personal property. RCW 25.15.245(1). A member has no property interest in any specific Limited Liability Company property. RCW 25.15.245(1).

Yeh's interest in the company is a personal property interest, not an ownership interest in the real property. RCW 25.15.245(1). As MacLean points out, the judgment does not recognize this distinction. It describes the two-thirds interest awarded to Delta as an 'Interest in real property.'[47] The trial court, upon hearing MacLean object to the judgment on that basis, said, 'I understand that. I find that more form than anything else.'[48]

The court decreed that Delta was the legal owner of what had formerly been Yeh's two-thirds interest:

Plaintiff shall be deemed the legal owner of said property interests as of the effective date and shall be entitled to all rights, privileges and benefits associated with being the legal owner of said interest in the properties. Defendants Yeh (or any successor(s) in control of the Lake City Park Place, LLC) are directed to execute any documents and take any actions necessary to effect this judgment within 10 days of entry of this judgment.{[49]}

While it was technically an error to describe the interest awarded as an 'Interest in real property', MacLean has failed to demonstrate that the error is more than mere form. The real thrust of MacLean's brief is to argue, 'Even if the Court had correctly characterized Yeh's interest as a personal property interest in the LLC,' Delta would not have been entitled to a management role because Delta is a mere assignee.[50]

The argument that Delta is a mere assignee is based on statute. A judgment creditor of a member of a limited liability company may apply to a court for a charging order, and to the extent charged, the judgment creditor is an assignee of that member's interest in the company:

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member's limited liability company interest. RCW 25.15.255.

An assignee of a membership interest cannot participate in the management of the Limited Liability Company without the consent of the members. RCW 25.15.260. Thus, MacLean argues that Delta, as a judgment creditor, is a mere assignee, and cannot have any management rights in the property, but must instead be content to charge against the net profits of the company as reported by MacLean.

Delta responds that the term 'judgment creditor' in the statute does not include the beneficiary of a constructive trust because the judgment is not monetary. This argument has merit. In discussing the remedy of a charging order, the statute speaks only of 'the unsatisfied amount of the judgment with interest.' RCW 25.15.260. It does not rule out the possibility that a member's interest can be reached by a constructive trust in this situation where the judgment is not for a particular amount.

We conclude that Delta is not a 'judgment creditor' for the purpose of this statute, and therefore is not limited to the non-managerial rights of an assignee.[51] The trial court could properly impose the constructive trust upon Yeh's two-thirds interest in the limited liability company. That is what the trial court did. The judgment substitutes Delta for Yeh as the owner of the two-thirds interest in the company and gives Delta all the rights, privileges and benefits associated with being the owner of that interest - including the right to participate in management.

We see no basis for disturbing the substantive effect of this equitable decree. We do remand the judgment for the sole purpose of correcting the technical error of describing the interest Delta received as an 'Interest in real property.’ The judgment should state that it is a personal property interest, to ensure that this technical error does not cause confusion in the future.

[1] Finding of fact 57.

[2] Finding of fact 52.

[3] Finding of fact 55, in part.

[4] Clerk's Papers at 1851.

[5] Conclusion of law 3.

[6] Finding of fact 11.

[7] Finding of fact 31.

[8] Findings of fact 24-40; 44-47.

[9] Finding of fact 61.

[10] Finding of fact 42.

[11] Finding of fact 22.

[12] Finding of fact 27.

[13] Finding of fact 36.

[14] Finding of fact 51.

[15] Finding of fact 42.

[16] Finding of fact 42, in part.

[17] Finding of fact 41; see also findings of fact 42 and 43 (continuing pattern of deception and concealment to avoid discovery).

[18] Findings of fact 44, 45, and 46.

[19] Findings of fact 30 and 32.

[20] Finding of fact 35.

[21] Finding of fact 44.

[22] Findings of fact 24, 25, and 45.

[23] Finding of fact 22.

[24] Finding of fact 47.

[25] Clerk's papers at 2802.

[26] Finding of fact 23.

[27] Findings of fact 13 and 60.

[28] Finding of fact 61.

[29] Findings of fact 24 and 27.

[30] Conclusion of law 7.

[31] See, e.g., Report of Proceedings, August 16, 2000, at 18.

[32] Report of Proceedings, August 16, 2000, at 16.

[33] Report of Proceedings, August 16, 2000, at 11.

[34] See Brief of Respondents/Cross-Appellants, at 7.

[35] Conclusion of law 7.

[36] Clerk's papers at 4012.

[37] The four categories identified in Dempere v. Nelson, 76 Wn. App. 403, 886 P.2d 219, reviewed denied, 126 Wn.2d 1015 (1995), should not be viewed as an exhaustive list of equitable exceptions to the American rule. For example, another recognized ground that does not quite fit any of the four categories is the 'ABC rule' -- the allowance of attorney's fees against a person (A) who has wrongfully exposed another (B) to litigation with a (C) third party. See, e.g., Aldrich & Hedman, Inc. v. Blakely, 31 Wn. App. 16, 20, 639 P.2d 235 (1982).

[38] Reply Brief of Appellants/Cross-Respondents, at 29.

[39] Clerk's papers at 4013.

[40] Clerk's papers at 4015.

[41] Clerk's papers at 4015.

[42] Clerk's Papers at 4013.

[43] Clerk's papers at 4015.

[44] Brief of Appellants Yeh at 49.

[45] Clerk's papers, at 3092.

[46] Clerk's papers, at 3302.

[47] Clerk's papers, at 3301.

[48] Report of Proceedings, August 23, 2000, at 23.

[49] Clerk's papers at 3302-03.

[50] Opening brief of appellants MacLean and Lake City Park Place LLC, at 7.

[51] MacLean's reply brief raises a new argument, based on RCW 25.15.250, that Delta is an assignee because it is the transferee of the interest held by Yeh as constructive trustee. Because this argument was not presented in the opening brief, we do not consider it.

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