McElhanon v. Hing, CV

Citation151 Ariz. 403,728 P.2d 273
Decision Date03 November 1986
Docket NumberNo. CV,CV
PartiesHarvey R. McELHANON, Jr., and Doreen T. McElhanon, his wife, Plaintiffs- Appellees Cross-Appellants, v. Robert Ong HING and Alice Hing, his wife, Defendants-Appellants Cross- Appellees. 86 0128-PR.
CourtSupreme Court of Arizona

Jack E. Evans, Ltd. by Jack E. Evans, Phoenix, for plaintiffs-appellees cross-appellants.

Feinstein Halstead & Leonard, P.A. by Allen L. Feinstein, R. Stewart Halstead, Phoenix, for defendants-appellants cross-appellees.

FELDMAN, Justice.

This case arises from a series of actions alleging fraud, embezzlement, and conspiracy surrounding the formation of a corporation in 1970. In this particular case, plaintiff (petitioner McElhanon), a judgment creditor, alleged a conspiracy to defraud and named the judgment debtor's attorneys as defendants. The sole issue before us is whether an ex parte conference between the trial judge, plaintiff, and plaintiff's attorney requires reversal of a jury verdict in plaintiff's favor. The court of appeals held that the trial judge erred in denying a mistrial motion based on the ex parte contact. McElhanon v. Hing, 151 Ariz. 386, 400, 728 P.2d 256, 270 (1985). We accepted review pursuant to Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. We have jurisdiction under Ariz. Const. art. 6, § 5 and A.R.S. § 12-120.24.

I. FACTS
A. The Underlying Transaction

In the summer of 1970, Harvey R. McElhanon, Jr. (McElhanon), John H. Greer, Jr. (Greer), and Charles Gilbert Harris (Harris) purchased stock in several corporations that acquired and operated four restaurants. The first restaurant purchased, Pinnacle Peak Patio, became the principal asset of Southwest Restaurants Systems, Inc. (Southwest), a new corporation formed by McElhanon, Greer, and Harris. All three principals contributed cash for the Pinnacle Peak Patio transaction. Although only McElhanon and Greer contributed cash for stock in the other corporations, each of the three men became owners of one-third of the stock in all the corporations. In return for McElhanon's and Greer's disproportionate capital contributions, Harris agreed to pay for his stock out of the corporations' profits. A formula was devised to determine the amount of Harris's obligation to McElhanon and Greer; the men agreed that the obligation would be forgiven if there were no profits.

B. McElhanon v. Harris and Greer

In the fall of 1970, disputes arose among the three shareholders. McElhanon filed suit against Harris, Greer, and the corporations, demanding payment of $250,000 based on the formula and Harris's prior promise to pay his debt from profits. McElhanon also sought damages against Greer for maliciously interfering with Harris's obligation to pay and for committing, with Harris, acts of malfeasance and misfeasance in operating the corporations.

Shortly after the suit was filed, John Grace (Grace), counsel for Greer and Harris, began consulting with attorney Robert Ong Hing (Hing), defendant in this case. In September 1973, McElhanon's lawsuit against Greer and Harris went to trial with Hing representing Greer and Harris. On October 11, the jury returned a $200,000 verdict for McElhanon against Harris based on the repayment formula. The jury found Greer not liable. The following day, October 12, 1973, judgment on the verdict was entered in favor of McElhanon and against Harris.

The sequence of events following the verdict led to McElhanon's present claim against Hing. McElhanon alleges that after being informed of the verdict, Greer and Harris went to Hing's office to discuss the matter. Hing knew that Harris's only asset was his interest in Southwest. McElhanon alleged that to prevent collection of the judgment, Greer and Harris decided to have Greer purchase Harris's stock. Hing prepared a sale agreement to that effect. Harris's stock certificate in Southwest was cancelled and a new stock certificate was issued in Greer's name. The transaction was completed by October 13, 1973, the day after entry of judgment. As security for his legal fees from Greer and Harris, Hing retained Greer's Southwest stock certificates, the agreement between Greer and Harris, and the Greer-to-Harris note and assignment. McElhanon later claimed that the transfer of stock from Harris to Greer and Hing's assertion of an attorney's lien on the stock and the proceeds of the transfer were fraudulent transactions facilitated by Hing and Grace.

On October 20, McElhanon served a writ of garnishment naming the corporations as garnishee-defendants. When the writ was answered, McElhanon learned that Harris's stock had been transferred to Greer, that Greer was indebted to Harris, and that Hing claimed an attorney's lien on the proceeds. McElhanon sought to set aside the sale of stock from Harris to Greer. Hing opposed McElhanon, arguing that Harris was not insolvent. McElhanon claims that Hing knew this to be untrue. Eventually, the order to show cause was dismissed. On November 14, Harris appealed the judgment against him. 1 While the appeal was pending, Southwest filed a reorganization petition under Chapter XI of the Bankruptcy Act and Harris and Greer filed voluntary bankruptcy petitions.

In the bankruptcy proceedings, McElhanon sought a determination that he was entitled to a judgment lien on the stock that Harris had sold to Greer. The law firm of Stockton and Hing opposed McElhanon's claim, arguing that it had a prior right to the stock by way of a retaining lien for its fees. It also claimed that Southwest was indebted to it for services rendered in defending McElhanon's action against Harris and Greer. Eventually, the bankruptcy court ruled that the October 13 stock transfer was a fraudulent conveyance and that the stock in Southwest was an asset of Harris's estate. The court also ruled that Hing had no claim against Southwest for legal services. These and other findings were upheld on appeal. In re Southwest Restaurant Systems, Inc., 607 F.2d 1241 (9th Cir.1979); In re Southwest Restaurant Systems, Inc., 607 F.2d 1243 (9th Cir.1979), cert. denied, 444 U.S. 1081, 100 S.Ct. 1035, 62 L.Ed.2d 765 (1980).

C. The Present Action
McElhanon v. Hing, Grace, and Greer

McElhanon filed the present case on September 23, 1975. He alleged that Hing and Grace had conspired with Harris and Greer to defraud him and had taken affirmative steps to hinder and prevent execution on his 1973 judgment against Harris. The trial was long and bitter; emotions engaged the attorneys as well as the parties. Toward the end of trial, the judge informed defendants' counsel that he wished to have a private meeting with plaintiff and his attorney. There was no objection, and the meeting took place in the judge's chambers. The subjects discussed went beyond those originally proposed by the judge. Defendants eventually moved for a mistrial, but the judge denied the motion and the trial continued. The jury was instructed that they could find against Hing if they found that he knowingly assisted his clients, Harris and Greer, to commit a fraud on McElhanon. Fraud was defined as "action of an affirmative, evil nature, such as ... acting dishonestly, intentionally, maliciously and deliberately, with a wicked motive to deceive and cheat...." On August 14, 1980, the jury returned a verdict of $286,120.

Implicit in the jury verdict is a finding that the stock transfer and lien transactions between Harris, Greer, and Hing were intentionally fraudulent. With respect to Harris and Greer, this finding is strengthened by the holdings in the two bankruptcy matters, In re Southwest Restaurant Systems, Inc., supra, and In re Southwest Restaurant Systems, Inc., supra. As far as Hing's knowledge is concerned, we agree with the conclusion of the court of appeals:

The circumstancial evidence [at trial] strongly indicates that Hing drafted the stock transfer agreement and participated in the transfer discussion, knowing that Harris was or would be rendered insolvent, knowing that Greer was financially unstable if not insolvent, knowing that the consideration was inadequate and that the stock transfer agreement itself was a sham, and with the actual intention on Hing's part of hindering, delaying, and defrauding McElhanon. Additionally, based upon the delay occasioned by Hing's acts and those of his co-conspirators, including the looting of the corporation by the co-conspirators, the value of the stock subsequently decreased so as to give rise to a cause of action for money damages by McElhanon....

151 Ariz. at 395, 728 P.2d at 265. 2

After judgment was entered against Hing and Grace, McElhanon settled with Grace and agreed not to execute against him. Hing's motions for a new trial and for judgment notwithstanding the verdict were denied and he appealed. McElhanon also appealed on the issue of damages.

D. Decision of the Court of Appeals

The court of appeals decided numerous issues, only one of which is before us. First, it determined that a cause of action lies against a judgment debtor's attorney who conspires to defraud the judgment creditor. The court found sufficient evidence to support the finding that Hing knowingly participated in such a conspiracy. At 395, 728 P.2d at 265. It then determined that the proper measure of damages was the value of the property fraudulently conveyed or the amount of the debt, whichever was less. Id. at 394, 728 P.2d at 264. The court found that all elements of the tort were adequately stated in the instruction. Id. at 396, 728 P.2d at 266.

On procedural issues, the court held that the trial judge did not abuse his discretion when he denied Hing's motion to sever the case. It further held that Evans, McElhanon's trial counsel, had acted improperly by repeatedly mentioning the prior bankruptcy judgment in front of the jury. However, relying on Grant v. Arizona Pub. Serv., 133 Ariz. 434, 454, 652 P.2d 507, 527 (1982), the court of appeals found that the trial...

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