Bank One, Arizona v. Rouse

• Citation: 887 P.2d 566,181 Ariz. 36
• Decision Date: 05 May 1994
• Docket Number: CA-CV,No. 1,1
• Parties: BANK ONE, ARIZONA, a national banking association, Plaintiff-Appellant, Cross-Appellee, v. A.E. ROUSE and Betty M. Rouse, husband and wife, Defendants-Appellees, Cross-Appellants, Joseph P. Schwan and Catherine Schwan, husband and wife, Defendants-Appellees. 91-0612.
• Court: Court of Appeals of Arizona

Page 566

887 P.2d 566

181 Ariz. 36

BANK ONE, ARIZONA, a national banking association, Plaintiff-Appellant, Cross-Appellee, v. A.E. ROUSE and Betty M. Rouse, husband and wife, Defendants-Appellees, Cross-Appellants, Joseph P. Schwan and Catherine Schwan, husband and wife, Defendants-Appellees.

No. 1 CA-CV 91-0612.

Court of Appeals of Arizona, Division 1, Department D.

May 5, 1994.

Review Denied Jan. 24, 1995.

[181 Ariz. 37] Bryan Cave by Stephen M. Dichter, Mark I. Harrison and George Vice III, Phoenix, for plaintiff-appellant, cross appellee.

Copple, Chamberlin & Boehm, P.C. by Scott E. Boehm and Richard Q. Nye, Ltd. by Richard Q. Nye, Phoenix, for defendants-appellees, cross appellants.

OPINION

CLABORNE, Presiding Judge.

This action arose out of a 1985 real estate loan in the original principal amount of $11,500,000 from Valley National Bank of Arizona ("VNB") ¹ to the Varga Group, an Arizona general partnership. The guarantors defaulted on the loan and VNB brought this action. The case was tried to a jury and the jury returned its verdict in favor of the guarantors. VNB brought this appeal raising four issues for review:

1. Whether Appellees' claims, defenses, and the judgment are void on grounds of illegality;

2. Whether the parol evidence rule should have barred the admission of evidence contradicting the loan agreement;

3. Whether the evidence supported Appellees' claim for negligent misrepresentation; and

4. Whether the trial court abused its discretion in denying the motion for new trial.

Appellees raise one issue on cross-appeal:

Whether the trial court erred in refusing to award reasonable attorney's fees pursuant to statute.

Since we believe that the evidence presented at trial supports the verdicts rendered and that the trial court did not abuse its discretion in denying the motion for new trial and an award of attorney's fees, we affirm in part. However, because we do not want to engage in a policy of enforcing illegal contracts, we reverse the award of damages in favor of Appellees, and we also reverse on the negligent misrepresentation claim.

FACTS AND PROCEDURAL HISTORY

The Varga Group is an Arizona general partnership consisting of Charles P. Varga, Schwan Properties, A.E. Rouse & Company, and B.M. Rouse & Company. Appellee Joseph P. Schwan is a partner in Schwan Properties, an Arizona partnership, and is married to Catherine Schwan. Appellees A.E. Rouse and B.M. Rouse are husband and wife, and are partners in A.E. Rouse & Company and B.M. Rouse & Company, Wyoming general partnerships. The Varga Group was formed for the purpose of purchasing real estate known as Lone Mountain Ranch. The Varga Group approached VNB to help in its financing of the real estate.

In 1985, VNB and the Varga Group entered into a real estate loan agreement in the amount of $11,500,000. The loan was made pursuant to a written loan agreement, evidenced by a written promissory note, and secured by a deed of trust. A.E. and B.M. Rouse, Charles Varga, and Joseph and Catherine Schwan each personally guaranteed the loan as an additional inducement for VNB to make the loan.

In 1987, the Varga Group and the guarantors defaulted on the loan and VNB sued to foreclose the deed of trust and for the remaining deficiency. ² The Varga Group and the guarantors defended and counterclaimed on the basis of an alleged oral joint venture agreement between VNB and the Varga Group designed to evade federal statutes prohibiting VNB's involvement as a joint venturer. The Varga Group and the guarantors claimed that the oral agreement provided that VNB would continue indefinite funding of interest payments on VNB's loan until the subject property was sold. They also contended that the joint venture agreement required VNB to seek satisfaction of the debt only from the sales proceeds on the property, and that VNB would share in the net profits of the sale of the subject property in the amount of twenty-five percent, which would be labeled an additional interest loan.

The Varga Group filed Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Arizona. VNB filed a motion in Bankruptcy Court to foreclose its deed of trust on the Varga Group's real property. The motion was granted and VNB foreclosed its deed of trust by nonjudicial foreclosure at a Trustee's Sale. The Varga Group's Chapter 11 bankruptcy was dismissed prior to the commencement of trial, and VNB's lawsuit against the Varga Group for the remaining deficiency was returned to the trial court for adjudication.

A deficiency hearing was held pursuant to Ariz.Rev.Stat.Ann. ("A.R.S.") section 33-814 (Supp.1993) in which VNB obtained judgment against the Varga Group in the total amount of $12,946,415.10, plus interest at the rate of ten percent from June 19, 1991, until paid.

The case against the guarantors was tried to a jury and the jury returned four verdicts finding: (1) the relationship between VNB and the guarantors to be a joint venture; (2) in favor of Rouse and Schwan as to their negligent misrepresentation claims, but awarding no damages; (3) for VNB as to Rouse and Schwan's fraud claim; and (4) in favor of Rouse and Schwan on the breach of contract claim against VNB, awarding $300,000 in damages. Following the verdict, VNB filed a motion for judgment notwithstanding the verdict and Rouse filed an application for attorney's fees and costs. Both were denied. VNB then filed a motion for new trial on the grounds that the jury's verdict and judgment based thereon were not justified by the evidence and were contrary to law. The trial court denied the motion and VNB brought this appeal from the judgment entered and the order denying the motion for new trial.

DISCUSSION

1. Waiver of Illegality

The first issue on appeal is whether the judgment is void on the grounds of illegality. Specifically, VNB claims that the defenses and counterclaims raised by Appellees are based on an alleged oral agreement which was ultra vires, illegal, and unenforceable against VNB. Appellees respond by arguing that the illegality and ultra vires defenses were not raised below and therefore are waived on appeal. Appellees cited several cases for the proposition that illegality must be pleaded and proved or it is waived. See Leone v. Precision Plumbing and Heating of S. Arizona, Inc., 121 Ariz. 514, 516, 591 P.2d 1002, 1004 (App.1979); see also Aldrich and Steinberger v. Martin, 172 Ariz. 445, 447, 837 P.2d 1180, 1182 (App.1992) (only those theories raised below are preserved for appeal). In response, VNB cites cases which hold that illegality may be raised for the first time on appeal. Koenen v. Royal Buick Co., 162 Ariz. 376, 381, 783 P.2d 822, 827 (App.1989); Mitchell v. American Sav. & Loan Ass'n, 122 Ariz. 138, 140, 593 P.2d 692, 694 (App.1979).

The current case law seems to support both sides. However, as we noted in Leone, when the illegality "appears on the face of the contract or from appellees' case," the defense is preserved even though it was not pleaded and proved. Leone at 516, 591 P.2d at 1004 (emphasis added). Further, we may exercise our discretion to consider unargued issues when there is clearly a wrong to be addressed and when the issue will dispose of the case on appeal. Aldrich and Steinberger at 447-48, 837 P.2d at 1182-83. We find not only that the issue of illegality appears in the record, but also that we can address the wrong and dispose of this case without having to return it to the trial court.

Additionally, we refuse to allow the courts to be used to enforce a contract that is contrary to law and common sense. As our supreme court stated in National Union Indem. Co. v. Bruce Bros., Inc., 44 Ariz. 454, 38 P.2d 648 (1934):

"... In such cases there can be no waiver. The defense [of illegality] is allowed, not for the sake of the defendant, but of the law itself. The principle is indispensable to the purity of its administration. It will not enforce what it has forbidden and denounced. The maxim, ex dolo malo non oritur actio, is limited by no such qualification. The proposition to the contrary strikes us as hardly worthy of serious refutation. Whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case. No consent of the defendant can neutralize its effect. A stipulation in the most solemn form to waive the objection, would be tainted with the vice of the original contract, and void for the same reasons. Wherever the contamination reaches, it destroys. The principle to be extracted from all the cases is, that the law will not lend its support to a claim founded upon its violation...."

44 Ariz. at 466-67, 38 P.2d at 653, quoting Coppell v. Hall, 74 U.S. (7 Wall.) 542, 558, 19 L.Ed. 244 (1868) (citations omitted). We therefore exercise our discretion to address the issues of illegality and ultra vires.

2. The Joint Venture

We will view the facts in a light most favorable to upholding the judgment and make all reasonable inferences from the evidence in favor of Appellees, McFarlin v. Hall, 127 Ariz. 220, 224, 619 P.2d 729, 733 (1980). In viewing the facts most favorable to Appellees we find that a joint venture did exist and that the loan document was only a part of the entire agreement between VNB and the Varga Group.

VNB and Appellees clearly entered into a joint venture in which VNB agreed to limit repayment on its loan to proceeds generated from a real estate development. The agreement was not documented because such a relationship would violate federal banking laws. Charles Varga testified to this fact:

Q. Prior to the time of the closing ... did anyone at [VNB] tell you that they were in this transaction as your partners?

A. When Barry Shannahan [the bank's loan officer] came to my office and he made the comment about the bank wanting twenty-five percent of it, he said to me that they would have to take, or show their interest in the project as additional interest under the...