First-Citizens Bank & Trust Co. v. Morari

• Decision Date: 15 June 2017
• Docket Number: No. 2 CA-CV 2016-0201,2 CA-CV 2016-0201
• Citation: 399 P.3d 109
• Parties: FIRST–CITIZENS BANK & TRUST COMPANY, d/b/a First Citizens Bank, Plaintiff/Appellant, v. Nayana MORARI, Renu Shah, and Vaishali Patel, Defendants/Appellees.
• Court: Arizona Court of Appeals

399 P.3d 109

FIRST–CITIZENS BANK & TRUST COMPANY, d/b/a First Citizens Bank, Plaintiff/Appellant,

v.Nayana MORARI, Renu Shah, and Vaishali Patel, Defendants/Appellees.

No. 2 CA-CV 2016-0201

Court of Appeals of Arizona, Division 2.

Filed June 15, 2017

May, Potenza, Baran & Gillespie, P.C., Phoenix, By Philip G. May, Devin Sreecharana, and Andrew S. Lishko, Counsel for Plaintiff/Appellant

Clark Hill PLC, Scottsdale, By Sean M. Carroll, Ryan J. Lorenz, and Christopher T. Curran, Counsel for Defendants/Appellees

Judge Miller authored the opinion of the Court, in which Presiding Judge Staring and Judge Espinosa concurred.

OPINION

MILLER, Judge:

¶ 1 First Citizens Bank appeals the trial court's ruling dismissing its breach of contract action as to the spouses of three guaranty signatories. It argues the court erred by applying Arizona law to the guaranties rather than California law, which led the court to dismiss the action. It also argues the court abused its discretion by denying its request to amend the complaint. We conclude the court correctly applied Arizona law and amending the complaint would not have changed the result. We affirm.

Factual and Procedural Background

¶ 2 "On appeal from a motion to dismiss, we consider the facts alleged in the complaint to be true, and we view them in a light most favorable to the plaintiff to determine whether the complaint states a valid claim for relief." Mintz v. Bell Atl. Sys. Leasing Int'l, Inc. , 183 Ariz. 550, 552, 905 P.2d 559, 561 (App. 1995). In 2010, Sun Sky Hospitality, LLC, borrowed $3,737,000 from First Citizens' predecessor-in-interest, United Western Bank, to purchase real property in Cochise County, and executed a promissory note, loan agreement, and deed of trust. On January 31, 2012, Dilip Shah, Chandrakant Patel, and Bharat Morari each executed personal guaranties for one hundred percent of all amounts owing from Sun Sky to First Citizens. Sun Sky defaulted on its obligations in November 2012, and First Citizens sued Sun Sky and the personal guarantors for breach of contract. First Citizens also sued the personal guarantors' spouses despite the absence of personal guaranties by them. The guarantors and their spouses are residents of California. First Citizens attached guaranties to the complaint ("the attached guaranties") and incorporated them by reference.

¶ 3 The non-signatory spouses jointly moved to dismiss First Citizens' complaint pursuant to Rule 12(b)(6), Ariz. R. Civ. P.¹ They argued First Citizens had failed to state a claim upon which relief could be granted as to them because they had not signed the attached guaranties as A.R.S. § 25–214(C)(2) requires. In its response, First Citizens argued California law applied instead, and asserted California law requires the signature of only one spouse in order to bind a marital community. First Citizens included in its response three additional guaranties not alleged in or attached to the complaint ("the supplemental guaranties"). The supplemental guaranties contained California choice of law provisions, but like the attached guaranties, were not signed by the spouses.

¶ 4 At the conclusion of the hearing on the motion to dismiss, First Citizens orally requested leave to amend the complaint to include the supplemental guaranties if their absence was a "turning point." The trial court issued an under-advisement ruling dismissing the action with prejudice as to the spouses and denying First Citizens' request to amend the complaint. The court also denied First Citizens' subsequent motion for reconsideration. The court issued a final judgment as to the spouses pursuant to Rule 54(b), Ariz. R. Civ. P., and we have jurisdiction over First Citizens' appeal pursuant to A.R.S. §§ 12–120.21(A)(1) and 12–2101(A)(1).

Motion to Dismiss

¶ 5 We review de novo the dismissal of a complaint pursuant to Rule 12(b)(6). Coleman v. City of Mesa , 230 Ariz. 352, ¶¶ 7–8, 284 P.3d 863, 866–67 (2012). Dismissal for failure to state a claim upon which relief can be granted is appropriate if, as a matter of law, the "plaintiffs would not be entitled to relief under any interpretation of the facts susceptible of proof." Id. ¶ 8, quoting Fid. Sec. Life Ins. Co. v. State Dep't of Ins. , 191 Ariz. 222, ¶ 4, 954 P.2d 580, 582 (1998). The court should dismiss if the plaintiff has pled facts revealing a legal bar to recovery. See Moretto v. Samaritan Health Sys. , 190 Ariz. 343, 346, 947 P.2d 917, 920 (App. 1997). In our analysis we will "look only to the pleading itself," including any exhibits thereto. Coleman , 230 Ariz. 352, ¶ 9, 284 P.3d at 867, quoting Cullen v. Auto–Owners Ins. Co. , 218 Ariz. 417, ¶ 6, 189 P.3d 344, 346 (2008) ; see also Ariz. R. Civ. P. 10(c) (copy of written instrument as exhibit to pleading is part of pleading). We will assume the truth of all well-pleaded factual allegations and accept all reasonable inferences from those facts. Coleman , 230 Ariz. 352, ¶ 9, 284 P.3d at 867.

¶ 6 Here, the question of whether the complaint reveals a legal bar to recovery depends on which state's law applies. Compare § 25–214(C)(2) (requiring joinder of both spouses to bind marital community to guaranty or suretyship), and Rackmaster Sys., Inc. v. Maderia , 219 Ariz. 60, ¶ 15, 193 P.3d 314, 317 (App. 2008) (both spouses must actually sign guaranty), with Cal. Fam. Code § 910(a) (marital community liable for debt incurred by only one spouse during marriage unless otherwise provided by statute), and Litke O'Farrell, LLC v. Tipton , 204 Cal.App.4th 1178, 139 Cal.Rptr.3d 548, 550 (2012) (same). Thus, we begin with a choice of law analysis. We review conflict of laws issues de novo as questions of law. Swanson v. Image Bank, Inc. , 206 Ariz. 264, ¶ 6, 77 P.3d 439, 441 (2003). Arizona courts apply the Restatement (Second) of Conflict of Laws (1971) ("Restatement") to determine the applicable law in a contract action. Cardon v. Cotton Lane Holdings, Inc. , 173 Ariz. 203, 207, 841 P.2d 198, 202 (1992) ; cf. Pounders v. Enserch E & C, Inc. , 232 Ariz. 352, ¶ 9, 306 P.3d 9, 11 (2013) (Restatement applied in determining choice of law for wrongful death claim).

¶ 7 Section 194 of the Restatement provides:

The validity of a contract of suretyship^{[2 ]} and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the law governing the principal obligation which the contract of suretyship was intended to secure, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.

See also id. cmt. b ("In situations where there are several sureties and several contracts of suretyship, the convenience of having all these contracts determined by the law which governs the principal obligation becomes even more apparent.").

¶ 8 The attached guaranties contain no choice of law provision alleged to apply.³ Given the absence of an effective choice of law by the parties in the attached guaranties, the trial court first determined which law governed the principal obligation between Sun Sky and United Western/First Citizens. See Restatement § 194. The loan agreement between Sun Sky and United Western provides: "This agreement shall be governed by and construed in accordance with the laws of the state of Arizona and the laws of the United States applicable to transactions within such state." Parties generally have the power to determine the terms of their contractual engagements except as to issues such as capacity, formalities, and validity. See Swanson , 206 Ariz. 264, ¶ 12, 77 P.3d at 443, citing Restatement § 187 cmt. d. First Citizens does not dispute the enforceability of this choice of law provision as to the principal obligation. And indeed, even without a choice of law clause, the principal obligation would be governed by the law of Arizona, where the subject real property is located, the borrower is domiciled, and the deed of trust was recorded. See Restatement § 189 (governing contracts transferring interests in land). The court correctly determined that Arizona law governs the principal obligation.⁴

¶ 9 Because the principal obligation is expressly governed by Arizona law, we apply the law of another state only if it has a more significant relationship to the transaction and parties. See Restatement §§ 6, 194. Restatement § 194, comment c, addresses the significant relationship analysis in this situation:

On occasion, a state which is not the state whose local law governs the principal obligation will nevertheless, with respect to the particular issue, be the state of most significant relationship to the suretyship contract and the parties and hence the state of the applicable law.... A sufficient relationship to justify application of the law governing the principal obligation would, however, exist if the state whose local law governs the obligation was (1) the state where the creditor extended credit to the principal or otherwise relied upon the surety's promise ..., or (2) the state where the contract of suretyship was to be performed, or (3) the state where the negotiations between the surety and creditor were conducted or where the surety delivered the contract to the creditor, or (4) the state of domicile of either the creditor or the surety. Presumably, there are still other relationships which will suffice.

We have previously held that "any one" of these four relationships "would be sufficient to apply the law governing the underlying obligation to the guarant[y]." Phx. Arbor Plaza, Ltd. v. Dauderman , 163 Ariz. 27, 29–30, 785 P.2d 1215, 1217–18 (App. 1989).

¶ 10 We agree with the trial court that the first of these relationships is present here. The complaint alleges that creditor United Western extended credit to principal Sun Sky in order to facilitate acquisition of a hotel located in Cochise County, Arizona. The promissory...