Arizona Tile, L.L.C. v. Berger

Decision Date02 February 2010
Docket NumberNo. 1 CA-CV 08-0763.,1 CA-CV 08-0763.
Citation224 P.3d 988
PartiesARIZONA TILE, L.L.C., an Arizona limited liability company, Plaintiff-Appellee, v. Howard Steven BERGER and Cynthia Berger, husband and wife; John McCarthy, Defendants-Appellants.
CourtArizona Court of Appeals

Berry & Branch, PLLC by Christopher J. Berry, Katherine R. Branch, Phoenix, Attorneys for Appellants.

Lake & Cobb, PLC by Richard L. Cobb, Joel E. Sannes, Joseph J. Glenn, Tempe, Attorneys for Appellee.

OPINION

WEISBERG, Judge.

¶ 1 Arizona Tile, L.L.C. sold materials on an open account to Designer Surfaces, Inc., an Arizona corporation. Designer Surfaces' board of directors consisted of only two individuals, Howard Berger and John McCarthy. After Designer Surfaces failed to pay it, Arizona Tile filed suit against Designer Surfaces, Berger and his wife, and eventually McCarthy as well. The superior court granted summary judgment to Arizona Tile and denied summary judgment to the Bergers and McCarthy (collectively "the Defendants"). The Defendants appeal from the superior court's rulings that it could exercise personal jurisdiction over them, that they could be personally liable for Designer Surfaces' failure to pay Arizona Tile, and awarding Arizona Tile its attorneys' fees. For the reasons that follow, we affirm the court's personal jurisdiction ruling and its grant of summary judgment to Arizona Tile but reverse the award of attorneys' fees.

BACKGROUND

¶ 2 Berger and McCarthy were officers and the sole directors of Designer Surfaces, which was in the business of supplying countertops to homeowners who shopped at retail stores such as Costco or Lowe's. The homeowners contracted with and made payment to the retailer, who in turn subcontracted the work to and paid Designer Surfaces for fabricating and installing the countertops. Here, Designer Surfaces purchased the necessary materials from Arizona Tile. Arizona Tile did not enter into a contract with the homeowners. After Designer Surfaces became insolvent, it stopped paying Arizona Tile for materials it had purchased on behalf of various homeowners and for which it had been paid by the retailers.

¶ 3 Arizona Tile filed suit against Designer Surfaces for breach of a credit agreement and unjust enrichment.1 Arizona Tile later obtained a default judgment against Designer Surfaces.2

¶ 4 Arizona Tile's complaint, however, also alleged a breach of fiduciary duty against the Bergers personally based on Arizona Revised Statutes ("A.R.S.") section 33-1005 (2007). The Bergers unsuccessfully moved to dismiss the complaint against them for lack of personal jurisdiction and failure to state a claim. Arizona Tile then moved to amend its complaint to add a similar claim against McCarthy for violation of A.R.S. § 33-1005, and the three Defendants answered the amended complaint.

¶ 5 Arizona Tile next moved for summary judgment on the ground that Designer Surfaces had failed to pay $26,796.57 and that Designer Surfaces, Howard Berger, and McCarthy had diverted to other uses funds they held in trust for payment to Arizona Tile. Arizona Tile further alleged that Berger and McCarthy were personally liable for having failed to pay to Arizona Tile the funds received from the retailers on behalf of the owner-occupants of homes in which Designer Surfaces had installed countertops. Finally, Arizona Tile argued that the breach of fiduciary duty arose out of contract, entitling it to attorneys' fees.

¶ 6 The Defendants also moved for summary judgment. They argued that they could not be personally liable on the credit agreement with Arizona Tile and that no evidence showed that Designer Surfaces' work had been performed for owner-occupied residences for purposes of A.R.S. § 33-1002(A)(2).3 They additionally argued that § 33-1005 does not require a contractor to separately hold funds received on behalf of each materials supplier and that no evidence showed any improper use of funds but merely that the funds had been pooled and otherwise expended in the normal course of business. Finally, they contended that A.R.S. § 33-1005 imposed neither a fiduciary duty on corporate directors or officers nor personal liability for breach of a duty to materials suppliers.

¶ 7 In awarding summary judgment to Arizona Tile, the superior court ruled that A.R.S. § 33-1005 applied to these facts and that the case arose out of contract, entitling Arizona Tile to attorneys' fees. Defendants timely appealed. We have jurisdiction pursuant to A.R.S. § 12-2101(B) (2003).

A. Personal Jurisdiction

¶ 8 The Defendants first argue that the superior court lacked personal jurisdiction over them and should have granted the Bergers' motion to dismiss the complaint. When a defendant challenges the existence of personal jurisdiction, the plaintiff must come forward with facts establishing a prima facie showing of jurisdiction, at which time the burden shifts to the defendant to rebut the showing. Macpherson v. Taglione, 158 Ariz. 309, 312, 762 P.2d 596, 599 (App.1988). However, the court should resolve any conflicts "in the affidavits and pleadings" in the plaintiff's favor. Id. (citation omitted). We review the superior court's exercise of personal jurisdiction de novo. Morgan Bank (Delaware) v. Wilson, 164 Ariz. 535, 536-37, 794 P.2d 959, 960-61 (App.1990).

¶ 9 In their motion,4 the Bergers contended that they were California residents, had not personally guaranteed Designer Surfaces' debts, and that the complaint failed to allege that they had committed any act or omission in or had minimum contacts with Arizona. They cited Maloof v. Roper Sales, Inc., 113 Ariz. 485, 488, 557 P.2d 522, 525 (1976), to assert that corporate officers or directors are not liable for a corporation's torts unless they authorized or participated in the challenged actions or the corporation was their alter ego.

¶ 10 In response, Arizona Tile submitted documents showing that Howard Berger was the statutory agent, president, and a director of Designer Surfaces, an Arizona corporation, that had been doing business in Arizona for at least ten years, and that he often performed such activities in Arizona. After considering the pleadings and attachments,5 the superior court denied the motion to dismiss for lack of personal jurisdiction and stated that it would consider summary judgment motions after discovery had taken place.

¶ 11 We have held that personal general jurisdiction may exist over a "nonresident who has `substantial' or `continuous and systematic' contacts with Arizona." Austin v. CrystalTech Web Hosting, 211 Ariz. 569, 574, ¶ 17, 125 P.3d 389, 394 (App.2005) (quoting Batton v. Tenn. Farmers Mut. Ins. Co., 153 Ariz. 268, 270, 736 P.2d 2, 4 (1987)); see also Williams v. Lakeview Co., 199 Ariz. 1, 3, ¶ 6, 13 P.3d 280, 282 (2000). Here, Howard Berger was regularly physically present in Arizona, had offices and property in Arizona, and systematically transacted business in Arizona. Because he conducted a continuous and systematic business in Arizona, exercise of general jurisdiction by an Arizona court was "reasonable and just." Perkins v. Benguet Cons. Min. Co., 342 U.S. 437, 438, 72 S.Ct. 413, 96 L.Ed. 485 (1952). Accordingly we uphold the superior court's conclusion that it could exercise personal jurisdiction over the Berger Defendants.

¶ 12 After the superior court denied the Bergers' motion to dismiss for lack of personal jurisdiction, Arizona Tile moved to amend the complaint to assert its claims against McCarthy for violation of § 33-1005. Counsel for the Bergers accepted service for McCarthy, and McCarthy and the Bergers jointly answered the amended complaint. Their answer did not again raise the affirmative defense of lack of personal jurisdiction. Because McCarthy never objected to the court's exercise of personal jurisdiction over him, he waived this as a defense. Morgan Bank (Delaware), 164 Ariz. at 537, 794 P.2d at 961 (failure to raise affirmative defense of lack of jurisdiction waives any jurisdictional objection). We next consider the award of summary judgment to Arizona Tile.

B. Summary Judgment

¶ 13 In weighing the grant of the summary judgment here, we must resolve two issues. First, does A.R.S. § 33-1005 create a trust obligation? Second, if it does, can directors of a corporation be held personally liable if they caused the corporation to breach that trust obligation?

¶ 14 On appeal from summary judgment, we determine de novo whether genuine issues of material fact exist and whether the trial court erred in its application of the law. Orme Sch. v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990); Ariz. R. Civ. P. 56(c). We view the facts and inferences therefrom in the light most favorable to the non-moving party and affirm only if the evidence produced by the non-moving party has so little probative value, given the quantum of evidence required, that no reasonable person could find for its proponent. Orme Sch., 166 Ariz. at 309-10, 802 P.2d at 1008-09; State Comp. Fund v. Yellow Cab Co., 197 Ariz. 120, 122, ¶ 5, 3 P.3d 1040, 1042 (App.1999).

¶ 15 Arizona Tile's motion for summary judgment argued that it had provided materials on credit to Designer Surfaces; that Designer Surfaces had received payment from homeowners for materials that were installed in owner-occupied dwellings; and that Designer Surfaces did not pay Arizona Tile the funds it had received but instead used them to pay other debts. Arizona Tile further alleged that the funds received by Designer Surfaces for the payment of materials supplied by Arizona Tile were required to be held in trust pursuant to A.R.S. § 33-1005 and that for the breach of their duties as trustees of those funds, Berger and McCarthy, as officers and directors of Designer Surfaces, were personally liable.

¶ 16 In support of its motion, Arizona Tile offered Berger's deposition testimony. Berger testified in part that in the last few months of...

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