DO NOT CITE. SEE RAP 10.4(h).
Court of Appeals Division II
State of Washington
Opinion Information Sheet
Docket Number: 24845-0-II
Title of Case: Castle Creek Cutting, Inc., Appellant
v.
Department of Labor & Industries, Respondent
File Date: 04/20/2001
SOURCE OF APPEAL
----------------
Appeal from Superior Court of Cowlitz County
Docket No: 98-2-00977-3
Judgment or order under review
Date filed: 06/01/1999
Judge signing: Hon. Stephen M. Warning
JUDGES
------
Authored by Karen G. Seinfeld
Concurring: J. Dean Morgan
Carroll C. Bridgewater
COUNSEL OF RECORD
-----------------
Counsel for Appellant(s)
Paul D. Doumit
Doumit & Doumit
522 Franklin St SE
Olympia, WA 98501
Counsel for Respondent(s)
James S. Johnson
Atty Gen Ofc
PO Box 40121
Olympia, WA 98504-0121
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
In the Matter of the Industrial No. 24845-0-II
Insurance Tax
Assessment Against Castle Creek
Cutting, Inc.
CASTLE CREEK CUTTING, INC.,
Appellant,
v.
DEPARTMENT OF LABOR & UNPUBLISHED OPINION
INDUSTRIES,
Respondent. Filed:
Seinfeld, J. -- Castle Creek Cutting, Inc., a timber cutting business,
appeals from an order assessing industrial insurance taxes. The
Department of Labor and Industries issued the assessment following an audit
in which it determined that the corporation's vice-presidents were not
exempt from industrial insurance under RCW 51.12.020(8)(b) because they did
not exert substantial control over the corporation's daily management. The
Board of Industrial Insurance Appeals and the superior court affirmed the
assessment. As the evidence supports the finding of no substantial
control, we affirm.
FACTS
Richard G. Stonex formed Castle Creek Cutting, Inc., in 1993. Stonex
also operated another timber cutting business, RGS Contracting, as a sole
proprietorship.
During 1995, Castle Creek had five corporate officers who also acted
as the corporation's directors: Stonex, the president; Mrs. Stonex, the
corporate secretary and treasurer; and James Olmstead, Darwin Weicht, and
Bing Taylor, who served as vice-presidents. The vice-presidents were also
Castle Creek's employees.
The Castle Creek board elected to provide the vice-presidents with
private insurance in lieu of industrial insurance. Castle Creek treated
the vice-presidents as exempt from industrial insurance coverage under the
corporate officer exemption in RCW 51.12.020(8)(b).1
Following an audit covering the period of January 1, 1995 through
December 31, 1995, the Department of Labor and Industries (L&I) determined
that the vice-presidents were not exempt from industrial insurance coverage
and issued a notice and order of assessment for $54,824.32. Castle Creek
appealed the assessment to the Board of Industrial Insurance Appeals
(BIIA).
An Industrial Appeals Judge (IAJ) heard testimony from Stonex, the
three vice- presidents, and the L&I auditor. The testimony revealed that
during the audit period, Stonex owned approximately 80 percent of the
corporate shares, Mrs. Stonex owned approximately 14 percent, and each of
the vice-presidents owned either 1 or 2 percent. The shareholders had not
paid for their shares or received share certificates but the distribution
of shares was memorialized in meeting minutes.
Castle Creek originally had six shareholder/vice-presidents, all of
whom had previously worked for Stonex as employees of RGS Contracting.
Three of the vice-presidents left the corporation before the audit period
and they, along with a vice-president who has since left the corporation,
transferred their shares back to the corporation upon their departure.
They were not compensated for these shares.
Castle Creek held annual shareholder meetings and periodically held
informal board meetings. The Castle Creek board made decisions by majority
vote and, despite the disparity in share ownership, each board member had
an equal vote. Thus, the Castle Creek board, as a whole, could and did
make decisions independently of Stonex. For example, the vice-presidents
overrode the Stonexes' vote on their health insurance deductible and on
unemployment compensation.
The Castle Creek board discussed and voted on such matters as the
types of medical, dental, and disability insurance the corporation would
provide the board members; bonuses for the board members; hiring and firing
decisions; safety policy and implementation; past and potential jobs; and
profit maximization. Stonex testified that he placed his wife on the board
in order to ensure he would have more than one vote.
But despite having an equal voice, only Stonex had authority to sign
checks and written contracts, and the vice-presidents were never assigned
any specific duties related to the corporation's daily management. Stonex
testified that although hiring was usually a collective board action,
Stonex and the vice-presidents had hired individuals without board
approval. Further, it appears that neither the board nor any individual
board member made significant hiring or firing decisions during the audit
period.
During the audit period, Castle Creek employed only two employees who
were not shareholders, 'Earnest Pete' and, for a short period of time at
the end of 1995, Jay Collins, a previous board member. Also during this
period, the vice-presidents worked primarily as tree fallers and supervised
crews on various jobs. Castle Creek paid them hourly wages for their work
falling timber but did not compensate them for time spent in annual
meetings or conducting board related business. One of the vice-presidents
testified that he had previously worked as a foreman or crew director for
other tree falling operations and that, although his work with Castle Creek
was similar, he had more autonomy than he did in his previous positions.
Taylor testified that the crews they managed were composed of either
Castle Creek or RGS Contracting employees. But because Castle Creek
periodically employed only two other part-time employees in 1995, it
appears that Stonex and the three vice-presidents comprised most of the
crews working during 1995.
The vice-presidents all testified that in addition to felling trees
and supervising crews, they were responsible for determining and ensuring
compliance with the corporation's safety policy; tracking and reporting the
work time for the crews; and ensuring customer satisfaction. They said
that they also had the authority to bid jobs and bind the corporation to
contracts but may not have exercised this authority during 1995. This
testimony corresponded with Stonex's testimony.
The auditor testified, however, that Stonex told her that he had the
exclusive authority to negotiate contracts. The auditor also indicated
that Taylor and Weicht stated in L&I questionnaires that Stonex was the
sole person who took care of bids.
Stonex testified that approximately 20 percent of Castle Creek's jobs
during the audit period came from RGS Contracting. But the auditor
contradicted this testimony, stating that during the audit, Stonex told her
Castle Creek contracted only with RGS Contracting.
Castle Creek's office, main telephone line, and computer were in the
basement of the Stonex home, and the corporation also received its mail
there. Stonex received most of the payments, kept track of and paid the
corporation's bills, tracked payroll and issued paychecks, and generally
functioned as the corporation's business manager.
In April 1995, the Castle Creek board apparently granted Stonex formal
authority to continue functioning as the firm's business manager and gave
him check writing authority and authority to bind the corporation to
contracts.2 Stonex and Taylor both testified that this grant of authority
related primarily to the paperwork aspects of running the corporation and
that the April 1995 board action did not preclude the other officers from
binding the corporation or signing contracts.
The auditor testified that during the audit, she interviewed Stonex
and examined the corporation's payroll reports, check register, tax
returns, employment security records, bank statements, and cancelled
checks. Although the corporate records were not available at the audit,
she received copies of the corporate records and minutes from the Secretary
of State after the audit was complete.3
During the audit, the auditor sent questionnaires to the current and
past vice-presidents. She testified that Taylor's and Weicht's
questionnaires indicated that they primarily cut lumber, that their wages
were decided at the corporate meetings, and that '{Stonex} usually is the
one that bids all the jobs.' Clerk's Papers at 237. She also stated that
the questionnaire responses revealed that the vice-presidents could
participate in hiring and firing decisions but that no one was hired or
fired during 1995.
After the hearing but before the IAJ issued a proposed decision and
order, the parties stipulated that the only issue before the BIIA was
whether the vice-presidents exercised substantial control in the
corporation's daily management during the audit period. They also
stipulated that the issue of whether Castle Creek had complied with its
articles of incorporation or bylaws was not before the BIIA.
The IAJ's proposed decision and order affirmed the assessment. The
IAJ found that: (1) Castle Creek failed to comply with its articles of
incorporation or bylaws; and (2) the vice-presidents did not exercise
substantial control. The IAJ concluded that the three vice-presidents were
not bona fide officers and also determined that the BIIA must consider the
issue of whether Castle Creek had complied with its articles of
incorporation or bylaws regardless of L&I's statement that it had not
examined the issue during its audit. Thus, the vice-presidents were not
exempt under RCW 51.12.020(8)(b).
After the BIIA denied review of the IAJ's proposed order, the order
became final. Castle Creek then filed a petition for review to the Cowlitz
County Superior Court in which it incorporated by reference its petition
for review to the BIIA. Although the petition made two assertions: (1)
the BIIA erred in finding that the vice-presidents did not exercise
substantial control, and (2) the BIIA erred when it disregarded the
parties' stipulation and based its decision in part on whether Castle Creek
had complied with its articles of incorporation or bylaws, Castle Creek's
argument focused exclusively on the substantial control issue.
The superior court affirmed the BIIA's decision. Castle Creek
appeals.
DISCUSSION
I. STANDARD OF REVIEW AND RCW 51.12.020(8)(b)
The Administrative Procedure Act (APA), RCW 34.05.510 through .598,
governs this court's review of the BIIA's final notice of assessment. RCW
51.48.131. Under the APA, Castle Creek bears the burden of 'demonstrating
the invalidity of {the} agency action.' RCW 34.05.570(1)(a). The agency
action under review here is the BIIA's final order of assessment. See
Scott R. Sonners, Inc. v. Dep't of Labor & Indus., 101 Wn. App. 350, 354-
55, 3 P.3d 756, review denied, 142 Wn.2d 1008 (2000); Littlejohn Constr.
Co. v. Dep't of Labor & Indus., 74 Wn. App. 420, 428, 873 P.2d 583 (1994);
Peter M. Black Real Estate Co. v. Dep't of Labor & Indus., 70 Wn. App. 482,
491, 854 P.2d 46 (1993).
The applicable standard of review for determining the validity of the
agency action is 'applied to the agency action at the time it was taken{.}'
RCW 34.05.570(1)(b). We will grant relief from the agency action only
under certain specific circumstances enumerated in RCW 34.05.570(3)(a) -
(i).4 On appeal from the superior court, we sit in the same position as
the superior court and apply the APA standard of review directly against
the record before the BIIA. RCW 34.05.558; Okanogan Wilderness League,
Inc. v. Town of Twisp, 133 Wn.2d 769, 776, 947 P.2d 732 (1997); Batchelder
v. City of Seattle, 77 Wn. App. 154, 158, 890 P.2d 25 (1995); Peter M.
Black Real Estate Co., 70 Wn. App. at 486.
To qualify for exemption from industrial insurance coverage under RCW
51.12.020(8)(b), Castle Creek had the burden of establishing (1) that the
vice-presidents were bona fide officers who were 'voluntarily elected or
voluntarily appointed in accordance with the articles of incorporation or
bylaws of the corporation' and (2) that they 'exercise{d} substantial
control in the daily management of the corporation{.}' Mere honorary
titles are not sufficient to trigger the exemption, and the Department may
look to the corporation's compliance with its articles of incorporation and
bylaws when determining whether the exemption applies:
Determinations respecting the status of persons performing services
for a corporation shall be made, in part, by reference to Title 23B RCW and
to compliance by the corporation with its own articles of incorporation and
bylaws. For the purpose of determining coverage under this title, substance
shall control over form, and mandatory coverage under this title shall
extend to all workers of this state, regardless of honorary titles
conferred upon those actually serving as workers.
RCW 51.12.020(8)(c).
II. COMPLIANCE WITH ARTICLES OR BYLAWS
Castle Creek assigns error to the BIIA's determination that Castle
Creek failed to comply with its articles of incorporation or bylaws. L&I
argues that Castle Creek waived this assignment of error because it failed
to present any argument or cite to any relevant case law. We agree.
We deem an assignment of error alone, without argument or authority to
support it, waived. Smith v. King, 106 Wn.2d 443, 451-52, 722 P.2d 796
(1986); Peter M. Black Real Estate Co., 70 Wn. App. at 491 n.1. Although
Castle Creek clearly assigns error and raises this issue, it fails to make
any argument or cite to any relevant authority related to this issue in its
opening brief. Thus, Castle Creek has waived this assignment of error.
See Smith, 106 Wn.2d at 451-52.
As unchallenged findings of fact are verities on appeal, the BIIA's
finding that during the audit period Castle Creek did not act in compliance
with its articles of incorporation or bylaws is binding. Davis v. Dep't of
Labor & Indus., 94 Wn.2d 119, 123, 615 P.2d 1279 (1980). Because Castle
Creek cannot show that the vice-presidents were 'voluntarily elected or
voluntarily appointed in accordance with the articles of incorporation or
bylaws of the corporation' as required under RCW 51.12.020(8)(b), it does
not qualify for the exemption.5
Castle Creek argued in its reply brief that the BIIA, as an appellate
tribunal, could not consider the compliance issue. But as a party may only
reply to the respondents in a reply brief and may not raise arguments for
the first time, we need not consider the appellate tribunal argument. See
RAP 10.3(c). See also Fosbre v. State, 70 Wn.2d 578, 583, 424 P.2d 901
(1967) (points not argued and discussed in the opening brief are
abandoned).
Further, this argument is not persuasive. Although the BIIA lacks the
authority to examine unappealed orders, see Kingery v. Dep't of Labor &
Indus., 132 Wn.2d 162, 171, 937 P.2d 565 (1997), Castle Creek originally
appealed the assessment as a whole. There is no indication in the record
that Castle Creek limited its initial appeal to the issue of whether the
vice-presidents exercised substantial control, nor does Castle Creek argue
that it did. Because the BIIA reviews L&I's actions de novo, see RCW
51.52.100, the BIIA could examine whether Castle Creek met the requirements
of RCW 51.12.020(8)(b) in its entirety.
Nor was Castle Creek prejudiced by the BIIA's consideration of the
compliance issue because the parties entered into the stipulation after the
hearing. Thus, Castle Creek did not rely on the stipulation in preparing
for the hearing.
Castle Creek was on notice that it had to establish this element.
Consequently, the BIIA did not err when it considered whether the
corporation had complied with its articles of incorporation or bylaws.
III. SUBSTANTIAL CONTROL
Although the status of the three vice-presidents is dispositive, we
note, also, that there is substantial evidence supporting the BIIA's
finding of no substantial control.
We review the BIIA's findings of fact under the substantial evidence
standard. In re Contested Election of Schoessler, 140 Wn.2d 368, 385, 998
P.2d 818 (2000). 'Substantial evidence exists where there is a sufficient
quantity of evidence in the record to persuade a fair-minded, rational
person of the truth of the finding.' State v. Hill, 123 Wn.2d 641, 644,
870 P.2d 313 (1994). When determining whether substantial evidence exists,
the court must consider the entire administrative record. RCW
34.05.570(3)(e).
To qualify for an exemption under RCW 51.12.020(8)(b), Castle Creek
had to establish that the vice-presidents exercised substantial control in
the corporation's daily management. No final BIIA decisions or published
case law defines the phrase 'substantial control in the daily management of
the corporation.' RCW 51.12.020(8)(b).
The BIIA concluded that the vice-presidents did not exercise
substantial control because: (1) Stonex maintained all the records at his
residence, let the majority of the firm's contracts, and received the
corporation's revenues; (2) the management duties of the vice-presidents --
assuring safety, keeping time, speaking with customers, maintaining
equipment -- were the typical duties of a foreperson or 'lead man,' not the
level of 'white collar' duties expected of a corporate officer; and (3)
there was no evidence that the vice-presidents exercised any hiring and
firing authority they may have had during the audit period.
Substantial evidence supports the BIIA's conclusions. Castle Creek
did not hire or fire anyone in 1995, so the Castle Creek board apparently
did not exercise this authority during the audit period. Although the vice-
presidents could vote on issues and could override Stonex's vote, the vice-
presidents exercised this authority only with regard to issues related to
insurance, benefits, and bonuses, rather than to issues regarding the
corporation's daily management. And the auditor testified that Stonex told
her that he had exclusive authority to negotiate and sign written
contracts. Additionally, there was testimony that Stonex alone had
authority to sign corporate checks.
Further, although the Castle Creek board did not specifically preclude
the participation of other board members when it granted Stonex authority
to write checks, bind the corporation to contracts, and otherwise serve as
the corporation's business manager, it is reasonable to view the board's
specific grant of this authority only to Stonex as limiting the authority
of others. Moreover, the vice-presidents indicated in their questionnaires
that Stonex was the primary person who dealt with the bidding process and
one of the vice-presidents testified that Stonex was the person who took
care of bids in 1995. In addition, Castle Creek's office, main telephone
line, and computer were in the Stonex home; the corporation's mail was
delivered to the Stonex home; and Stonex generally functioned as the
corporation's business manager.
The vice-presidents directed work crews but were never assigned any
specific duties related to the corporation's daily management. It is
reasonable to find that the duties that the vice-presidents described --
determining and ensuring compliance with the corporation's safety policy,
tracking and reporting the work time for the crews, and ensuring customer
satisfaction -- are more similar to the work of a foreman than that of a
manager. While the vice-presidents may have had more autonomy than the
foremen or crew directors of other employers, autonomy directing a crew is
not equivalent to day-to-day corporate management.
Finally, at least 20 percent and as much as 100 percent of Castle
Creek's work in 1995 came through RGS Contracting, a corporation over which
Stonex exercised complete control. This supports the finding that Stonex
had great influence over Castle Creek's operation despite his equal vote on
the board of directors.
There is no indication that the Castle Creek board or vice-presidents
exercised any authority in 1995 that impacted the daily operations of
Castle Creek, apart from generally directing work crews. Thus, there is
substantial evidence to support the BIIA's finding that the vice-presidents
did not exercise substantial control in the corporation's daily management.
Accordingly, we affirm the assessment.
A majority of the panel having determined that this opinion will not
be printed in the Washington Appellate Reports, but will be filed for
public record pursuant to RCW 2.06.040, it is so ordered.
Seinfeld, J.
We concur:
Morgan, P.J.
Bridgewater, J.
1 RCW 51.12.020(8)(b) provides:
Alternatively, a corporation that is not a 'public company' as defined
in RCW 23B.01.400(21) may exempt eight or fewer bona fide officers, who are
voluntarily elected or voluntarily appointed in accordance with the
articles of incorporation or bylaws of the corporation and who exercise
substantial control in the daily management of the corporation, from
coverage under this title without regard to the officers' performance of
manual labor if the exempted officer is a shareholder of the corporation,
or may exempt any number of officers if all the exempted officers are
related by blood within the third degree or marriage. If a corporation
that is not a 'public company' elects to be covered under subsection (8)(a)
of this section, the corporation's election must be made on a form
prescribed by the department and under such reasonable rules as the
department may adopt.
RCW 51.12.020 was amended in 1997 and 1999. These amendments are not
relevant here; we refer to the current version.
2 The appellate record does not contain the minutes of this meeting.
3 The appellate court record does not contain any of the corporate records.
4 RCW 34.05.570(3) states: 'Review of agency orders in adjudicative
proceedings. The court shall grant relief from an agency order in an
adjudicative proceeding only if it determines that:
'(a) The order, or the statute or rule on which the order is based,
is in violation of constitutional provisions on its face or as applied;
'(b) The order is outside the statutory authority or jurisdiction of
the agency conferred by any provision of law;
'(c) The agency has engaged in unlawful procedure or decision-making
process, or has failed to follow a prescribed procedure;
'(d) The agency has erroneously interpreted or applied the law;
'(e) The order is not supported by evidence that is substantial when
viewed in light of the whole record before the court, which includes the
agency record for judicial review, supplemented by any additional evidence
received by the court under this chapter;
'(f) The agency has not decided all issues requiring resolution by
the agency;
'(g) A motion for disqualification under RCW 34.05.425 or 34.12.050
was made and was improperly denied or, if no motion was made, facts are
shown to support the grant of such a motion that were not known and were
not reasonably discoverable by the challenging party at the appropriate
time for making such a motion;
'(h) The order is inconsistent with a rule of the agency unless the
agency explains the inconsistency by stating facts and reasons to
demonstrate a rational basis for inconsistency; or
'(i) The order is arbitrary and capricious.'
5 Castle Creek also appears to assert that it incorporated argument on this
issue by reference:
In {Castle Creek's} original Petition for Review before the Board of
Industrial Insurance Appeals, it took specific exception to Findings of
Fact 4, 5 and 7 and Conclusions of Law 2, 3 and 4. When {Castle Creek}
appealed the {BIIA's} decision to superior court, it incorporated by
reference its original Petition for Review.
Reply Brief at 3 n.1 (citations omitted). But mere incorporation by
reference is not sufficient. U.S. West Communications, Inc. v. Wash. Util.
& Transp. Comm'n, 134 Wn.2d 74, 111-12, 949 P.2d 1337 (1997); State v.
Kalakosky, 121 Wn.2d 525, 540 n.18, 852 P.2d 1064 (1993); Holland v. City
of Tacoma, 90 Wn. App. 533, 537-38, 954 P.2d 290 (1998). Even if
incorporation by reference was allowed, in this circumstance it would not
be sufficient because Castle Creek merely took exception to the relevant
findings of fact and conclusions of law in its petition before the BIIA
and, as it does here, did not argue the issue or cite to any relevant
authority.
1