Caruthers v. Underhill

• Decision Date: 09 October 2012
• Docket Number: No. 1 CA–CV 10–0664.,1 CA–CV 10–0664.
• Citation: Caruthers v. Underhill, 230 Ariz. 513, 287 P.3d 807, 644 Ariz. Adv. Rep. 9 (Ariz. App. 2012)
• Parties: David CARUTHERS and Ruby Rumiko Tanouuye, husband and wife; Kyle T. Underhill; Lawrence J. Warfield, Trustee of the Chapter 7 Bankruptcy Estate of Helena Underhill; Chester W. Allen; and William G. MacBeth, Plaintiffs/Appellants, v. Clinton T. UNDERHILL and Kimberly Underhill, husband and wife; James A. Underhill, a single man; Underhill Holding Company, Inc., a Nevada corporation, Defendants/Appellees.
• Court: Arizona Court of Appeals

230 Ariz. 513

287 P.3d 807

644 Ariz. Adv. Rep. 9

David CARUTHERS and Ruby Rumiko Tanouuye, husband and wife; Kyle T. Underhill; Lawrence J. Warfield, Trustee of the Chapter 7 Bankruptcy Estate of Helena Underhill; Chester W. Allen; and William G. MacBeth, Plaintiffs/Appellants,

v.Clinton T. UNDERHILL and Kimberly Underhill, husband and wife; James A. Underhill, a single man; Underhill Holding Company, Inc., a Nevada corporation, Defendants/Appellees.

No. 1 CA–CV 10–0664.

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

Oct. 9, 2012.

Aiken Schenk Hawkins & Ricciardi, PC by Joseph A. Schenk and Robert C. Van Voorhees, Phoenix, for Appellants.

Jennings, Strouss & Salmon, PLC by Michael J. O'Connor and John J. Egbert, Phoenix, for Appellees Clinton T. Underhill, Kimberly Underhill and James A. Underhill.

Kercsmar & Feltus, PLLC by Geoffrey S. Kercsmar and Gregory B. Collins, Scottsdale, for Appellee Underhill Holding Company, Inc.

OPINION

THOMPSON, Judge.

¶ 1 This case involves the purchase of shares between cousins in a closely held family business. Plaintiffs Kyle Underhill (Kyle) and Helena Underhill (Helena and, collectively, plaintiffs) appeal from a grant of summary judgment in favor of defendants Clinton Underhill (Clinton) and James Underhill (James) and from an award of attorneys' fees to Underhill Holding Company, Inc. (UHC). Plaintiffs alleged that Clinton, an officer in UHC, fraudulently misrepresented the value of the UHC stock and that Clinton's father James and UHC conspired with and aided and abetted his efforts. Plaintiffs alleged Clinton possessed special facts regarding the value of the shares that he was legally required to share with plaintiffs prior to purchase. Because we agree with the trial court that there was no evidence of material facts possessed by Clinton which were not available to plaintiffs, we affirm.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 UHC is a holding company whose wholly owned subsidiary, Underhill Transfer Company (UTC), owns and manages commercial real estate. James and John Underhill, Jr. (John Jr.) are the sons of John Underhill, Sr. (John Sr.) and Diane Underhill. Clinton is the son of James; Kyle and Helena are grandchildren of John Sr. and cousins of Clinton.¹

¶ 3 John Sr. was Chairman of the Board from 1965 through March 2006. ² In 1992, John Sr. and Diane, transferred ownership of most of their stock to their children and grandchildren. As of 1996, 1159 shares of UHC stock were outstanding. John Jr. and James, the surviving sons of John Sr. and Diane, had 449 shares each and each grandchild, including Kyle and Helena, had twelve shares of stock. Nonfamily members also possessed shares of stock.

¶ 4 In July 2004, Diane died. At the time of her death, Diane owned UHC stock. John Sr. hired Jeffrey B. Polston, a certified public accountant, to provide an independent valuation ³ of the stock. Before Polston completed his valuation, John Sr. filed an estate tax return valuing her shares of UHC stock at $8000 each. Polston later opined that each share of UHC stock had a value of $6000. In reaching this number, Polston determined the market value of each share to be $10,733, he then applied an eighteen percent minority interest discount and a thirty-two percent lack-of-marketability discount.

¶ 5 In early 2006, Wells Fargo Bank engaged an appraiser to conduct an independent appraisal of UTC's principal real estate assets. The 2006 appraisal was completed in March 2006, and a written copy received by UHC in early May. The 2006 appraisal valued UTC's major real estate asset at $35,000,000. The 2006 appraisal did not value the UHC shares.

The Share Purchases

¶ 6 Kyle worked for UHC, in charge of maintenance for the shopping center and hotel, and would stop into the office several times a week to talk to Clinton. In December 2005, Clinton asked Kyle if he wanted to sell his twelve shares of UHC stock. The two had discussions about it over several months. Clinton offered Kyle $6000 per share. During one of the conversations, Clinton showed Kyle at least part of the 2004 valuation; Kyle glanced at it but did not ask for a copy. On March 24, 2006, Kyle signed a written agreement selling his twelve shares to Clinton for $6000 per share. The agreement stated, “By signing below, I am aware that the value of the stock to be transferred might be of greater or lesser value, but agree to sell for the amount above.” According to Kyle, before he sold the stock, James told him several times that the shares were worthless. After the sale, Kyle spoke with James, who told him selling was a good idea because otherwise Kyle would receive nothing for the shares. John Sr., who overheard the conversation, told Kyle that James was wrong and that selling the stock for $6000 was a mistake.

¶ 7 In late 2005, Helena called UHC to inquire about selling her shares; Clinton answered the telephone and offered to buy her shares. Helena and her then-husband Mark had multiple conversations and emails with Clinton over the next several months. Clinton offered her $6000 per share, representing that a valuation existed showing that the shares were valued at a “whopping $6,000.” Clinton did not disclose that the valuation was two years old or that an appraisal was in the process of being prepared. Prior to her selling her shares, John Jr. advised Helena that he believed the value to be higher than the $6000 Clinton was paying; Helena contended Clinton told her husband that John Jr.'s value was based on false information. Helena spoke to Kyle, who said their grandfather told him that James's statements that the stock was worthless were not true. On March 29, 2006, Helena sold seven of her twelve UHC shares to Clinton for $6000 per share. She executed an agreement, stating “By signing below, I am aware that the value of the stock to be transferred might be of greater or lesser value, but agree to sell for the amount above.”

¶ 8 On April 7, 2006, Helena received an email from John Jr. explaining that a plan was being developed whereby he would sell his shares to the company. The email stated that Clinton, in anticipation, was trying to buy as many shares as possible using the estate valuation for the $6000; John Jr. asserted that Clinton knew the true per share value was about $25,000. John Jr. suggested Helena contact her grandfather if she had questions and to cancel the sale of her shares if possible. Helena did not attempt to contact John Sr. or John Jr. to obtain additional information. In June and July 2006, Helena's husband, with her knowledge and approval, emailed Clinton about purchasing her remaining shares. As late as May 2007, Helena was still offering to sell her shares to Clinton.

¶ 9 During the period when Clinton was purchasing the UHC shares, he and James were in a dispute with John Sr. and John Jr. over the future of UTC and UHC. Clinton was attempting to purchase sufficient shares so he and James, collectively, would have a controlling interest. James made an undocumented $300,000 loan to Clinton, which he assumed Clinton would use to purchase shares of stock. James also co-signed another loan to Clinton for $200,000 for Clinton to purchase UHC stock.

The Lawsuits

¶ 10 Kyle and Helena, as well as several other shareholders ⁴ who had sold UHC stock to Clinton, filed suit against Clinton, James, and UHC. Plaintiffs asserted claims against Clinton for breach of fiduciary duty, common law fraud, consumer fraud, and securities fraud. Plaintiffs alleged Clinton improperly used the 2004 valuation to support his purchase offers although he knew that the 2006 appraisal valued one major UTC asset at $35,000,000. Plaintiffs alleged that Clinton and James had been informed repeatedly that the UHC stock had a fair market value of at least $20,000 to $25,000; they alleged that the actual value of the stock was $29,315. The complaint contended that Clinton misrepresented the value of the UHC stock by stating or implying that the 2004 valuation represented current financial information, by indicating that he was purchasing the stock on behalf of the Underhill family, by failing to disclose the existence of the forthcoming 2006 appraisal, and by failing to disclose the internal struggle for control of the company. These misrepresentations, they assert, allowed Clinton to purchase the stock for substantially less than fair value.

¶ 11 The complaint asserted claims against James and UHC for aiding and abetting, contending among other things that they had prior knowledge of Clinton's actions, assisted him by providing funds to support Clinton's purchase of the shares, and by not informing shareholders that the value of the stock exceeded the amount offered by Clinton. The complaint alleged conspiracy by Clinton, James, and claimed UHC was vicariously liable, and claimed a fraudulent transfer by Clinton and James for UHC's purchase of property from Clinton's brother-in-law after which the brother-in-law made a loan to Clinton to purchase shares of stock, with the loan secured by a stock pledge.

The Summary Judgment Motions

¶ 12 Clinton, James, and UHC moved for summary judgment. Clinton argued that Kyle and Helena could not establish any actionable misrepresentation of material fact, any violation of duty, or any justifiable reliance. Clinton argued that even if his offer of $6000 per share constituted a representation of value, it was not actionable because it was merely his opinion. Clinton asserted he had no duty to disclose any information to Kyle or Helena and plaintiffs could not show justifiable reliance because over several months of negotiating, neither made a counteroffer, sought additional financial information or consulted their grandfather. Further, they both signed agreements recognizing that the value of the share might be more or less than the purchase price.

¶ 13 In response, Kyle and Helena argued that Clinton, as an officer and director of UHC, had a fiduciary duty to disclose...