Caruthers v. Underhill

• Decision Date: 03 April 2014
• Docket Number: No. 1 CA–CV 12–0618.,1 CA–CV 12–0618.
• Citation: Caruthers v. Underhill, 235 Ariz. 1, 326 P.3d 268, 683 Ariz. Adv. Rep. 20 (Ariz. App. 2014)
• Parties: David CARUTHERS and Ruby Rumiko Tanouye, husband and wife, Plaintiffs/Appellants, v. Clinton T. UNDERHILL and Kimberly Underhill, husband and wife; James T. Underhill, a single man, Defendants/Appellees.
• Court: Arizona Court of Appeals

235 Ariz. 1

326 P.3d 268

683 Ariz. Adv. Rep. 20

David CARUTHERS and Ruby Rumiko Tanouye, husband and wife, Plaintiffs/Appellants,

v.Clinton T. UNDERHILL and Kimberly Underhill, husband and wife; James T. Underhill, a single man, Defendants/Appellees.

No. 1 CA–CV 12–0618.

Court of Appeals of Arizona, Division 1.

April 3, 2014.

Aiken Schenk Hawkins & Ricciardi P.C., by Joseph A. Schenk, Robert C. Van Voorhees, Phoenix, Counsel for Plaintiffs/Appellants.

Jennings, Strouss & Salmon, P.L.C., by John J. Egbert, Michael J. O'Connor, Paul G. Johnson, Phoenix, Counsel for Defendants/Appellees.

Presiding Judge PETER B. SWANN delivered the opinion of the Court, in which Judge PATRICIA K. NORRIS and Judge MARGARET H. DOWNIE joined.

OPINION

SWANN, Judge.

¶ 1 In this securities fraud case, we must decide whether the Plaintiffs were required to elect between the remedies of rescission and damages, whether the court properly denied them the remedy of rescission after they prevailed at trial on liability, and whether their election of rescission was revocable once the court determined after trial that the remedy was unavailable. We hold that when a plaintiff sues on a single theory of fraud-in-the-inducement, an election of remedies is not required. We further hold that the court correctly determined that rescission in securities fraud cases is subject to equitable defenses, but erred by disallowing the remedy of rescission based on the findings it made. Finally, we hold that if rescission were unavailable, Plaintiffs should have been allowed a damage remedy. We therefore reverse in part and remand for a new trial at which the Plaintiffs may seek to satisfy the verdicts in their favor by damages, rescission, or both remedies.

FACTS AND PROCEDURAL HISTORY

¶ 2 This case arises out of the sale and purchase of shares in Underhill Holding Company, Inc. (“UHC”), a closely held company whose wholly owned subsidiary, Underhill Transfer Company (“UTC”), owns and manages commercial real estate. As of 2005, the number of issued shares in UHC totaled 1,159. UHC and UTC officers James and Clinton Underhill (father and son) owned, respectively, 449 and 12 shares. The remaining shares were owned by other Underhill family members and by third parties. Among the third parties were husband and wife David Caruthers and Ruby Rumiko Tanouye (collectively, “Plaintiffs”).

¶ 3 Starting in 2006, Clinton began purchasing other shareholders' shares, eventually acquiring sufficient shares to give himself and his father together a controlling interest in UHC. Clinton's purchases were funded, at least in part, by money that James loaned to Clinton and by a loan that James co-signed with Clinton.

¶ 4 Clinton purchased Plaintiffs' 64 shares for $6,000 per share in July 2006. Several months later, in October 2006, Plaintiffs wrote to Clinton and accused him of knowingly misrepresenting UHC's worth for the purpose of purchasing the shares at a lower price. Plaintiffs claimed that Clinton had provided them with an outdated appraisal to establish the purchase price and had lied when they asked him whether a more recent appraisal existed. Plaintiffs demanded the return of their stock certificates and voting rights pending an agreement to adjust the purchase price. Clinton did not respond to this demand.

¶ 5 In June 2007, Plaintiffs filed a complaint asserting claims against Clinton for common law fraud, consumer fraud, securities fraud, negligent misrepresentation, and breach of fiduciary duty, and asserting claims against James for conspiracy and aiding and abetting. Plaintiffs requested compensatory damages or, alternatively, “an order of restitution requiring Clinton to return to Plaintiffs that portion of their UHC stock having an aggregate value in excess of $384,000 [the purchase price paid by Clinton].”

¶ 6 Plaintiffs' action was consolidated with similar actions by other former shareholders who had entered purchase agreements with Clinton: Kyle Underhill, Helena Underhill, Chester Allen, and William Macbeth. The shareholders together filed a first amended complaint in June 2008 and a second amended complaint in October 2008. The amended complaints asserted the same causes of action as the original pleading and, like the original pleading, sought damages or a partial return of shares.

¶ 7 In December 2008, the superior court rejected Plaintiffs' partial refund demand. Treating it as a demand for partial rescission, the court ruled it unavailable as a matter of law. The same month, the shareholders' counsel sent a letter to Clinton's counsel “tendering to Clinton ... the complete rescission of the stock transactions.” Clinton did not agree to the tendered rescission. Accordingly, in February 2009, the shareholders moved for leave to amend their complaint to request complete rescission as the alternative to damages. In support of their motion, the shareholders argued that they “will be required to make an election between these two alternative remedies when [the] case is submitted to the jury, but not before.”

¶ 8 Clinton and James opposed the shareholders' motion to amend, contending, inter alia, that the proposed amendment was futile because rescission had not been timely demanded. Over that objection, the superior court granted the motion for leave to amend in April 2009, and the shareholders filed the third amended complaint in February 2010. Clinton and James continued to dispute the timeliness of rescission.

¶ 9 The matter proceeded to a ten-day jury trial commencing October 13, 2010. By that time, the only shareholders remaining in the case were Plaintiffs, Allen, and Macbeth.¹ On the sixth day of trial, the court asked the shareholders' counsel whether his clients had decided what remedy they would elect. Counsel responded that Allen and Macbeth would elect damages and Plaintiffs would elect rescission.

¶ 10 On the next day of trial, November 3, James moved for judgment as a matter of law against Plaintiffs on their claims against him for conspiracy and aiding and abetting. James argued that he could not provide Plaintiffs' elected rescission remedy because he was not the defendant who had obtained their shares. Over Plaintiffs' objection, the court granted James's motion.

¶ 11 Clinton also moved for judgment as a matter of law against Plaintiffs, again arguing that they had not timely demanded rescission. Plaintiffs disagreed and moved that the question of rescission be decided by the jury. The court did not immediately rule on either motion.

¶ 12 On November 5, the parties rested and the evidence closed. On November 9, before meeting with counsel to settle the final jury instructions, the court issued two written rulings. First, the court denied Clinton's motion for judgment as a matter of law, concluding that Clinton had not shown that he was prejudiced by Plaintiffs' delay in asserting rescission and that the delay was not unreasonable as a matter of law. Instead, the court ruled that the matter should be submitted to the trier of fact. Second, the court denied Plaintiffs' request that the jury decide rescission, concluding that Plaintiffs were not entitled to a jury trial on that remedy because it was equitable in nature. The court ordered that “as to the [Plaintiffs]' requested remedy of rescission, the jury will remain impaneled as an advisory jury.”

¶ 13 After the parties received the court's written rulings, defense counsel moved for and obtained dismissal of Plaintiffs' request for damages, and of Allen and Macbeth's request for rescission, based on the parties' chosen remedies. The court granted the dismissals without objection by Plaintiffs. Plaintiffs then agreed to jury instructions and verdict forms showing that Plaintiffs sought rescission and punitive damages only.

¶ 14 The next day, the jury was given its final instructions, including a stipulated instruction that Plaintiffs had not offered to repay Clinton the full purchase price before December 2008. The jury returned verdicts in favor of Allen and Macbeth on all counts, awarding each of them $224,200 in compensatory damages and $4,000 in punitive damages. The jury also returned a verdict in favor of Plaintiffs on common law fraud, consumer fraud, securities fraud, and breach of fiduciary duty, and returned an advisory finding that Plaintiffs were entitled both to rescission and $15,000 in punitive damages. The jury responded “yes” to an interrogatory that asked whether Plaintiffs had notified Clinton of their intent to rescind the sale within a reasonable time after discovery of his improper conduct.

¶ 15 After the jury returned its verdicts, the parties submitted posttrial memoranda on whether Plaintiffs were entitled to rescission. Reversing its earlier ruling, the court then entered an order denying rescission, based on its conclusion that Plaintiffs had unreasonably delayed in rescinding and had waived their right to rescission by ratifying the stock purchase transaction. Plaintiffs timely moved for new trial, arguing that if they were not awarded rescission, they were entitled to a new trial on damages because the court's ruling on rescission meant that rescission had never been actually available for election.

¶ 16 The court denied Plaintiffs' motion for new trial and entered a judgment in favor of the defendants on all claims that also required Plaintiffs to pay the defendants more than $100,000 in attorney's fees and costs. Plaintiffs timely appeal.

DISCUSSION

¶ 17 We will reverse the denial of a motion for new trial when the denial is based upon an error of law. See Grant v. Ariz. Pub. Serv. Co., 133 Ariz. 434, 455–56, 652 P.2d 507, 528–29 (1982); Adroit Supply Co. v. Elec. Mut. Liability Ins. Co., 112 Ariz. 385, 389, 542 P.2d 810, 814 (1975).

I. THE SUPERIOR COURT ERRED AS A MATTER OF LAW BY DENYING PLAINTIFFS ANY REMEDY.

A. The Superior Court Erred by Applying the Election-of-remedies Doctrine to Plaintiffs' Claims, but Plaintiffs Invited This Error.

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