June 2002

Clarifying the Demise of Washington's Independent Business Judgment Rule: City of Seattle v. Blume 

by Marc A. Perrone

The doctrine of proximate causation is well-developed and fairly uniform between most jurisdictions. Until recently, however, Washington law contained a unique and ill-fated deviation in the law of proximate causation called the Independent (Business) Judgment Rule.1 The rule held that where parties independently decided to forego legal rights, such as a defendant deciding to settle a lawsuit instead of litigating the suit through trial, the decision to forego their legal rights is the proximate cause of their injury. Consequently, in cases involving third-party tortfeasors, if the first and second parties settle, the third party is absolved of liability because their tortious conduct is not the legal cause of the defendant's loss — the decision to settle is.

In City of Seattle v. Blume,2 the Washington State Supreme Court (en banc) abandoned Washington's Independent Business Judgment Rule and re-established the majority interpretation of proximate causation. Nonetheless, because majority interpretation of proximate causation recognizes circumstances where intervening events break the chain of causation, the impact of Blume is difficult to appreciate. Further hindering its clarity, intertwined in Blume is a complex and unusual application of an intentional interference with a business expectancy claim in a two-party municipal context.

In an effort to clarify the significance of Blume, this article will examine the facts and law pertinent to the allegations in Blume, as well as the reasoning and effect of the court's ruling.

The tort of intentional interference with a business expectancy is one of the most ubiquitous causes of action in American jurisprudence. It permeates almost all situations in which contracts exist, such as attorney-client relationships,3 employment contexts,4 debtor-creditor relationships,5 sale or lease of real property,6 tender-offer contests,7 permit-application situations8 and others.9 Nor is the tort insignificant in terms of the damages for which a defendant may be liable. The largest civil jury verdict in U.S. history arose out of tortious interference with a contract action.10 However, despite the above, the law governing this tort is not well-developed and the tort is sometimes misapplied.11 

A simple example of a fact pattern giving rise to a claim for tortious interference with a business expectancy is as follows: Suppose X, a property owner, contracts with Y, a carpenter, to build a deck on his property. The contract specifically states that the deck is to be finished no later than two days after the signing of the contract. This provides Y one day to gather the materials and one day to build the deck. Y has previously built similar decks in the same amount of time. On the first day, Y gathers the materials and reasonably secures them on the job site. However, that night, Z, a competing carpenter, sets the materials on fire in an effort to sabotage Y's business. Thereafter, X sues Y for breach of contract, whereby the parties settle. Y, according to these facts, would have a claim against Z for intentional interference with Y's business expectancy.

In the case of City of Seattle v. Blume,12 the principle is the same; however, the facts can be somewhat confusing because the City of Seattle plays the role of both the plaintiff in a breach-of-contract claim and the defendant to a claim of intentional interference with a business expectancy. In short, the Blumes alleged the City of Seattle's negligence caused the Blumes to breach a separate contract the Blumes had with Seattle.

In February 1987,13 the Blumes applied to the City of Seattle's Department of Construction and Land Use (DCLU) for a Master Use Permit (MUP) for a development project.14 At that time, the usual time period to obtain a MUP was nine months or less.15 Due to community and DCLU concerns of the project's effect on local transportation, the project encountered a series of delays.16 Consequently, in June 1992, the Blumes withdrew their MUP application, stating that the project was no longer feasible due to the city's numerous unjust delays, as well as expenses in excess of $1 million in pursuit of the MUP.17 

Thereafter, in an effort to offset these costs, the Blumes refused to pay the interest on a loan taken through the City of Seattle18 for a different and separate project.19 This action was commenced by the City of Seattle to collect the unpaid interest on this loan made to the Blumes.20 The Blumes filed a counterclaim alleging that the City of Seattle, in delaying the permitting process, (1) acted in an arbitrary and capricious manner in violation of RCW § 64.40.020,21 and (2) intentionally interfered with the Blumes' business expectancy arising from the development project they abandoned.22 

At trial, the City of Seattle moved to dismiss the Blumes' counterclaims in a motion for summary judgment.23 The trial court granted the city's motion, finding that (1) the RCW § 64.40.020 claim was barred by the statute of limitations in RCW § 64.40.030,24 and (2) the Blumes' voluntary business decision to remove themselves from the permitting process precluded their tortious-interference claim.25 The Blumes appealed.26 

The Washington Court of Appeals affirmed, ruling that even if the tortious interference claim was not governed by the statute of limitations in RCW § 64.40.030, it was precluded by the independent judgment rule.27 The Independent (Business) Judgment Rule holds: "where there is a realistic possibility of correcting the wrongful act by pursuing available legal remedies, and the plaintiff by the voluntary exercise of independent business judgment elects not to pursue those available legal remedies, the defendant's wrongful act is not the proximate cause of the plaintiff's damages."28 The Blume court reasoned that the Blumes' independent business judgment to withdraw from the permitting process was the proximate cause of their injuries.29 The Blumes filed a petition for review with the Washington State Supreme Court.30 

The Supreme Court granted the Blumes' petition for review, and then reversed and remanded the case for trial, ruling that (1) a three-year limitations period applied to the Blumes' tortious interference claim,31 and (2) the independent business judgment rule did not bar the Blumes' tortious interference claim.32 

In deciding if the Court of Appeals properly denied the petitioners' tortious interference claim based on the independent judgment rule, Justice Madsen, writing for the majority, chose to first re-examine the wisdom and efficiency of the rule itself. The court began reviewing the rule's history with its common-law origin, the seminal case of King v. City of Seattle,33 decided by the same court 23 years earlier.34 In King,35 the court held that where there is a reasonable possibility of correcting a wrongful act by perusing available legal remedies, and the plaintiff, by voluntary exercise of an independent business judgment, elects not to pursue available legal remedies, the plaintiff's independent business judgment (and not the defendant's wrongful act) is the proximate cause of the plaintiff's damages.36 

However, the Blume court recognized that King37 had not been widely accepted by the Court of Appeals.38 Only Division I of the Court of Appeals had applied the rule.39 Furthermore, in Flint v. Hart,40 Division III criticized the rule at length and declined to apply it.41 Due to this controversy, the court analyzed the application of the rule by Division I42 and the criticism by Division III in Flint.43 

The court concluded that the independent judgment rule lacks clear origins, noting that the court in King44 cited no authority for the assertion that a party's independent judgment not to pursue a possible legal remedy precludes a claim for damages against a third party.45 Additionally, the court stated that it found no other jurisdiction with a similar rule.46 

The court then rejected the rule, explaining that it threatens to penalize plaintiffs who mitigate their damages through settlement.47 The court added that this in turn either (1) discourages settlement, which consequently favors litigation and, therefore, effectually favors those with the financial means to do so,48 or (2) where plaintiffs do settle, the rule absolves tortfeasors of liability.49 

The court explained its conclusion by asserting that every time a party settles a claim, they are essentially making an independent business judgment which, under the independent judgment rule, precludes an otherwise valid claim against the third-party tortfeasor.50 This, the court reasons, will therefore discourage the settlement of claims.51 The court cited that discouraging settlements is contrary to the express public policy of Washington, which strongly encourages settlement.52 

The court also reasoned that when defendants confronted by valid claims settle, the independent judgment rule operates as an absolution to third-party tortfeasors against whom the defendants may have valid claims.53 If the defendant mitigates their damages caused by the tortfeasor, then their settlement becomes the proximate cause of the defendant's injuries.54 The settlement thereby wrongfully yet legally absolves the tortfeasor of liability.55

The court concluded by summarizing its arguments and ruling that the independent business judgment rule may no longer be used as inherently breaking the chain of proximate causation.56  However, the court adds that its ruling is not to be interpreted as meaning that one's own conduct may not be the sole cause of one's own injuries.57 Rather, courts should employ traditional principles of proximate causation that may or may not, depending on the facts of the case, show that the plaintiff's settlement was the proximate cause of their injuries.58 In accord with this ruling, the majority reversed and remanded the case for trial.59 

Writing for the dissent, however, Justice Talmadge presents a sound argument that was not addressed by the majority opinion.60 The dissent begins with a discourse of the origins and evolution of the tort of interference with a business expectancy to demonstrate the necessity of a third party.61 It then asserts that the tort of interference with a business expectancy cannot be properly applied against a government agency in a land-use permit context as the court allowed in King62 (thereby establishing the precedent that the plaintiff's claim relies on) because there is no third party.63 The dissent cites Olympic Fish Products, Inc. v. Lloyd,64 which effectively states that only outside third parties can be liable for the tort of inducing a breach of contract, not the parties to the contract.65 The dissent therefore reasons that Seattle would not be tortiously liable for inducing its own breach even if the Blumes had business expectancy.66 The dissent concludes that since a tortious interference claim cannot be held against the City of Seattle on the facts, the petitioner's claim should be dismissed.67 

This case clearly deviates from Washington's common law since King,68 and effectively changes the law in Washington. Due to the majority holding in this case, independent business judgments will no longer absolve tortfeasors by automatically deeming a party's settlement as the proximate cause of their damages.69 However, it suggests that if a court found a settlement to be poorly justified, then the chain of causation between the defendant's tortious action and the damages incurred by the settling party would be broken.70 In such cases the claim should therefore be denied.71 

This precedent is well-demonstrated in Mastro v. Kumakici Corp.,72 a recent case involving this issue.73 In this case, Mastro purchased a parcel of land from Kumakici which included a warrantee deed.74 The parcel of land, however, was encroached upon by a neighbor, Newhall.75 Mastro informed Kumakici of the encroachment and that Kumakici, as per the warrantee deed, was responsible for Mastro's defense fees and damages.76 Mastro later settled with Newhall, and then filed suit against Kumakici to recover the settlement costs.77

Before the court, Kumakici argued that Mastro's settlement was the proximate cause of his injuries.78 Citing Blume,79 however, the court noted that the independent judgment rule is no longer an automatic bar to the plaintiff establishing the defendant's acts as the proximate cause of the plaintiff's injuries.80 Accordingly, following the procedure outlined in Blume,81 the Mastro court went on to apply traditional principles of proximate causation to the facts at issue.82 

The court found that Kumakici was legally responsible for Mastro's litigation fees via the warrantee deed, and consequently, to absolve Kumakici of the duty to pay Mastro's settlement costs, which it deemed to be reasonable, would be contrary to Blume.83 In rejecting Kumakici's argument that Mastro's settlement was the proximate cause of his injuries, the court stated: "it appears fairly certain that if the plaintiff had not settled the claim, a judgment would have been rendered against him at trial."84 Therefore, the court reasoned, the defendant's acts, and not the plaintiff's independent judgment to settle, was the proximate cause of the plaintiff's injuries.85 

This last point distinguished by the court clearly demonstrates the impact of the doctrine set forth in Blume.86 Although the independent business judgment rule no longer automatically assigns a plaintiff's settlement as the proximate cause of their injuries, if a plaintiff settles a claim which clearly would have been rejected at trial, the plaintiff's independent business judgment is the proximate cause of the injuries sustained.87 In such cases, claims against an alleged third-party tortfeasor will be dismissed.

Therefore, due to Blume,88 the independent judgment rule may no longer be

an undefeatable defense in settlement recovery cases,89 but where a settlement is deemed to be poorly justified, then the rule should cause denial of the plaintiff's claim.

NOTES

1. The Independent (Business) Judgment Rule held "where there is a realistic possibility of correcting the wrongful act complained of by pursuing available legal remedies, and the plaintiff, by the voluntary exercise of independent business judgment, elects not to pursue those available legal remedies, the defendant's wrongful act is not the proximate cause of the plaintiff's damages." City of Seattle v. Blume, 947 P.2d 223 (Wash. 1997).

2. 947 P.2d 223.

3. See, e.g., Wiess v. Marcus, 124 Cal. Rptr. 297 (1975); Gregory Hyatt et al., American Mineral Fields Inc.: Firm Withdraws Lawsuit Against Anglo-American, Wall St. J., Mar. 18, 1998, at B4.

4. See, e.g., Signal Const. v. Stanbury, 586 A.2d 1204 (D.C. 1991) (terminated employee recovered damages from former employer under theory of tortious interference with contractual relation after former employer's false, negative reference caused employee to lose job prospect); see generally Steve Lash et al., Supreme Court Set to Hear Dispute over Multistate Litigation Statute, Chi. Daily L. Bull., Nov. 4, 1997, at 1.

5. See, e.g., Flanagan v. Germania, F.A., 872 F.2d 231 (8th Cir. 1989); J. Dennis Hynes, Lender Liability: The Dilemma of the Controlling Creditor, 58 Tenn. L. Rev 635, 636 (1991).

6. See, e.g., Tedford v. Roswell Village, Ltd., 328 S.E.2d 403 (Ga. Ct. App. 1985); see generally Harvey S. Perlman, Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine, 49 U. Chi. L. Rev. 61 (1982); Donald C. Dowling Jr., A Contract Theory for a Complex Tort: Limiting Interference with Contract Beyond the Unlawful Means Test, 40 U. Miami L. Rev. 487 (1986) (proposing a more restrictive unlawful means test than Perlman's); Benjamin L. Fine, Note, An Analysis of the Formation of Property Rights Underlying Tortious Interference with Contracts and Other Economic Relations, 50 U. Chi. L. Rev. 1116 (1983).

7. See Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. Ct. App. 1987), cert. dismissed, 485 U.S. 994 (1988).

8. See, e.g., City of Seattle v. Blume, 947 P.2d 223 (Wash. 1997).

9. However, in certain circumstances the tort has been pre-empted by statute. This is especially true in the context of labor relations. See, e.g., National Labor Relations Act of 1935, 49 Stat. 449 (1935) (current version at 29 U.S.C. § 151-169 (1993)) (governing labor-management conflicts); see also, Nili Cohen-Grabelsly, Interference with Contractual Relations and Equitable Doctrines, 45 Mod. L. Rev. 241, 266 (1982) (citing recent English legislation that abolished the tort as applied to certain employment contracts); see, e.g., John Danforth, Note, Tortious Interference with Contract: A Reassertion of Society's Interest in Commercial Stability and Contractual Integrity, 81 Colum. L. Rev. 1491, 1511-13 (1981).

10. Texaco, Inc., 729 S.W.2d at 768. A Texas jury found that Texaco tortiously interfered with a Pennzoil stock purchase and merger contract and awarded Pennzoil $7.53 billion in compensatory damages and $3 billion in punitive damages. Id. On appeal, the punitive damage component was reduced to $1 billion. Id. at 866; see also, Timothy S. Feltham, Note, Tortious Interference with Contractual Relations: The Texaco Inc. v. Pennzoil Co. Litigation, 33 N.Y.L. Sch. L. Rev. 111, 118-20 (1988) (summarizing the damage calculations and rationale). Consequently, Texaco had to file for bankruptcy protection. See, Allanna Sullivan et al., Bankruptcy Option: Texaco Files Petition for Chapter 11 As Talks with Pennzoil Collapse, Wall St. J., Apr. 13, 1987, at 1.

11. American Petrofina, Inc. v. PPG Indus., Inc., 679 S.W.2d 740, 759 (Tex. App. Fort Worth 1984), writ dism'd by agr. ("[T]he law governing the area of tortious interference with a contract is not a well developed area."); see also, Steve Lash et al., Supreme Court Set to Hear Dispute over Mitigation Litigation Statute, Chi. Daily L. Bull., Nov. 4, 1997, at 1; see generally, Note, Tortious Interference with Contractual Relations in the Nineteenth Century: The Transformation of Property, Contract, and Tort; 93 Harv. L. Rev. 1510 (1980).

12. 947 P.2d 225.

13. There is a discrepancy as to the exact date the Blumes filed the MUP application. The Supreme Court, in the majority's opinion, states it as February 1987. See Id. at 224. The Court of Appeals, however, states the application was filed March 2, 1987. See City of Seattle v. Blume, WL 312500 (Wash. App. Div. 1, 1996).

14. See id. at 224.

15. See id.

16. The DCLU required the Blumes to submit a time-consuming and costly environmental impact statement before it would consider issuing a master use permit for the project. Id. at 224. The final draft of the statement was submitted in January of 1990. Id. at 225. In June of 1990 the DCLU handed down its MUP decision which required the Blumes to extensively redesign the project. Id. In early 1992, the Blumes submitted the redesigned project plans to the DCLU. Blume, 947 P.2d at 225. In a letter dated May 28, 1992, the DCLU enclosed a list of additional modifications it was requiring of the project. Id. On June 2, 1992, the Blumes requested the withdrawal of the MUP application. Id.

17. See id.

18. See id.

19. See Blume, 947 P.2d at 226.

20. See id. at 225.

21. Wash. Rev. Code § 64.40.020 (1986) (provides permit applicants legal remedy for arbitrary, capricious or unlawful governmental acts causing delay of permit processing); See Blume, WL 312500 (Wash. App. Div. 1, 1996).

22. See Blume, 947 P.2d at 226.

23. See id.

24. Wash. Rev. Code § 64.40.030 (1986) (provides in part, 30-day limitation for Wash. Rev. Code § 64.40.020 claims).

25. See Blume, 947 P.2d at 226.

26. See id.

27. See id. The Independent (Business) Judgment Rule holds "where there is a realistic possibility of correcting the wrongful act complained of by pursuing available legal remedies, and the plaintiff by the voluntary exercise of independent business judgment elects not to pursue those available legal remedies, the defendant's wrongful act is not the proximate cause of the plaintiff's damages."

28. Marsh v. Commonwealth Land Title Ins. Co., 789 P.2d 792, 797 (Wash. 1990) (escrow agent's correction of legal description and re-recording trust deed not the proximate cause of damages due to plaintiffs settlement.) citing, King, 525 P.2d 228.

29. See id. The Court of Appeals affirmed, however initially on somewhat different grounds. Blume, 947 P.2d at 226. Initially the Court of Appeals ruled that both of the Blumes' claims arose under Wash. Rev. Code § 64.40.020 and therefore both of the claims were barred under Wash. Rev. Code § 64.40.030, a limitation provision for the former statute. Id. The Blumes then filed a motion for reconsideration arguing that their claim for tortious interference with a business expectancy was not barred by the statute of limitation provision in Wash. Rev. Code § 64.40.030. Id. The Court of Appeals, citing King v. City of Seattle, 525 P.2d 228 (Wash. 1974), granted in part the motion for reconsideration and changed its opinion, stating in a footnote that even if the tortious-interference claim was not governed by the statute of limitation in Wash. Rev. Code § 64.40.030, the tortious-interference claim was precluded because the Blumes' independent business judgment to withdraw from the permitting process was the proximate cause of their injuries. Id.

30. The Blumes filed a petition for review to the Supreme Court arguing that (1) the Appeals Court decision to bar the tortious-interference claim based on Wash. Rev. Code § 64.40.030 is contrary to the Supreme Court's decision in Stenburg v. Pacific Power & Light Co., 709 P.2d 793 (1985), and (2) the Blumes' decision to withdraw from the permitting process does not preclude the tortious-interference claim. Blume, 947 P.2d at 226.

31. The majority, citing Stenberg, 709 P.2d 793, held the tortious-interference claim was separate from the claim for damages pursuant to Wash. Rev. Code § 64.40.020 and that it was within the scope of the statute of limitations of Wash. Rev. Code § 4.16.080(2) rather than Wash. Rev. Code § 64.40.030 as held by the Court of Appeals. Blume, 947 P.2d at 226. The court reasoned that Wash. Rev. Code § 4.16.080 provides a catch-all statute of limitations of three years for all common-law torts not specifically enumerated in other limitation sections. Id. The court stated that tortious interference was a common-law tort and that the tort was not specifically enumerated in any other limitations section. Id. Therefore, the court reasoned that the three-year limitation period within Wash. Rev. Code § 4.16.080 was governing. Id.

32. See Blume, 947 P.2d at 226.

33. 525 P.2d 228 (Wash. 1974).

34. See Blume, 947 P.2d at 227.

35. 525 P.2d 228.

36. See Blume, 947 P.2d at 227 (citing Marsh, 798 P.2d 792); see King, 525 P.2d 228.

37. 525 P.2d 228.

38. See Blume, 947 P2d. at 227.

39. See id. at 226-227; (citing Hollis Holmes, Inc. v. Snohomish County, 32 Wn. App. 279, 647 P.2d 43 (1982) (real estate developer's independent business judgment not to pursue litigation to force city to issue permit is proximate cause of injuries); Grader v. City of Lynnwood, 53 Wn. App. 431, 767 P.2d 952 (1989) (city's unfair zoning was not proximate cause of plaintiffs damages because plaintiff failed to seek permit); Horn v. Moberg, 68 Wn. App. 551, 844 P2d. 452 (1993) (proximate causation between attorney negligence in preparing case and damages sustained by former clients not established because plaintiff did not pursue claim); Marsh, 789 P.2d 792.

40. 82 Wn. App. 209, 917 P.2d 590 (1996) (plaintiff's settlement was sound independent business judgment so independent business judgment rule not applicable defense). See also Blume, 947 at 229.

41. See Blume, 947 at 229.

42. See Blume, 947 P.2d at 227-228.

43. See Blume, 947 P.2d at 229 (citing Flint, 917 P.2d 590).

44. 525 P.2d 228.

45. See Blume, 947 P.2d at 229-230.

46. See id. at 229.

47. See id.

48. See id.; compare W. Landes & R. Posner, The Economic Structure of Tort Law 254 (1987); Rizzo, A Theory of Economic Loss in the Law of Torts, 11 J. Legal Stud. 281, 283-285 (1982).

49. See Blume, 947 P.2d at 230.

50. See id.

51. See id.; compare W. Landes & R. Posner, The Economic Structure of Tort Law 254 (1987); Rizzo, A Theory of Economic Loss in the Law of Torts, 11 J. Legal Stud. 281, 283-285 (1982).

52. See Blume, 947 P.2d at 230; (citing Seafirst Ctr. Ltd. Partnership v. Erickson, 127 Wn.2d 355, 365, 898 P.2d 299 (1995) (the law "strongly favors" settlement).

53. See Blume, 947 P.2d at 230 (citing Flint, 917 P.2d 590).

54. See id.

55. See id.

56. See Blume, 947 P.2d at 230.

57. See id.

58. See id.

59. See id.

60. See id. at 232-234 (Talmadge, J., dissenting).

61. See Blume, 947 P.2d at 232-234.

62. 525 P.2d 37.

63. See Blume, 947 P.2d at 234; see generally, Francis Bowes Sayre, Inducing Breach of Contract, 36 Harv. L. Rev. 663 (1923).

64. 93 Wn.2d 596, 611 P.2d 737 (1980) (tortious interference with contract lies only with third party, a party to a contract cannot be held liable for his own breach).

65. See Blume, 947 P.2d at 234.

66. See id. The court continues its discussion by further criticizing King's failure to recognize the established precedence requiring a third party in a tortious-interference claim, and adds that even if the King court was attempting to provide permit applicants who were wronged by a city agency with a legal remedy (though through improper means), that since King, both federal and state legislatures have enacted numerous statutes which provide a legal remedy for wronged applicants. Id. Therefore, the dissent reasons, the King ruling is unnecessary in addition to being legally erroneous, and as such should be overruled completely. Id.

67. See Blume, 947 P.2d at 234.

68. 525 P.2d 228.

69. See Blume, 947 P.2d at 231.

70. See id.

71. See id.

72. 90 Wn. App. 157, 951 P.2d 817 (1998).

73. See id. at 822-823.

74. See id. at 819.

75. See Id.

76. See id.

77. See Mastro, 951 P.2d at 819.

78. See id. at 822.

79. 947 P.2d at 823.

80. See Mastro, 951 P.2d at 822 (quoting Blume, 947 P.2d 223).

81. 947 P.2d 223.

82. See Mastro, 951 P.2d at 823 (following Blume, 947 P.2d 223).

83. See id.

84. See Mastro, 951 P.2d at 823.

85. See id.

86. 917 P.2d 233.

87. See Mastro, 951 P.2d at 822, 823.

88. 917 P.2d 223.

89. See id. at 231.