Cohen v. Barnard, Vogler & Co.

• Decision Date: 16 November 2000
• Docket Number: No. 1 CA-CV 00-0024.,1 CA-CV 00-0024.
• Citation: 13 P.3d 758,199 Ariz. 16
• Parties: Charles R. COHEN, Receiver, and Michael J. Fitzgibbons, Special Deputy Receiver, of American Bonding Company, an Arizona insurer in receivership, Plaintiffs-Appellants, v. BARNARD, VOGLER & COMPANY a Nevada professional corporation; J. Richard Barnard and Ann Barnard, husband and wife; Beth L. Kohn and Robert Cole, wife and husband; Philip R. Mays and Maria Mays, husband and wife; Barnard Vogler Employees, Defendants-Appellees.
• Court: Arizona Court of Appeals

13 P.3d 758

199 Ariz. 16

Charles R. COHEN, Receiver, and Michael J. Fitzgibbons, Special Deputy Receiver, of American Bonding Company, an Arizona insurer in receivership, Plaintiffs-Appellants, v. BARNARD, VOGLER & COMPANY a Nevada professional corporation; J. Richard Barnard and Ann Barnard, husband and wife; Beth L. Kohn and Robert Cole, wife and husband; Philip R. Mays and Maria Mays, husband and wife; Barnard Vogler Employees, Defendants-Appellees.

No. -0024.

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

November 16, 2000.

Glover & Van Cott, P.A. by Joyce N. Van Cott, Christina Marie Marko, Phoenix, Attorneys for Appellants.

Streich Lang, P.A. by Robert E. Miles, Timothy J. Thomason, Phoenix, Attorneys for Appellees.

OPINION

TOCI, Judge.

¶ 1 This appeal arises from the trial court's refusal to exercise personal jurisdiction over a Nevada accounting firm and three individuals who performed an audit in Nevada. The issue is whether accountants who negligently or fraudulently perform an audit in Nevada for a Nevada client are subject to personal jurisdiction in Arizona. We hold that absent proof that the accountants purposefully created contacts with Arizona or purposefully directed their activities at Arizona residents, Arizona cannot subject them to personal jurisdiction.

I. BACKGROUND

¶ 2 In January 1994, American Insurance Agencies, Inc. ("AIA") engaged Barnard, Vogler & Company (the "Firm"), a Nevada professional corporation, to audit its accounting statements through December 31, 1993, and prepare an independent auditor's report (the "Report"). The Firm executed the engagement letter in Nevada and delivered it to AIA, a Nevada corporation, in Nevada. The engagement letter did not specify how the Report would be used.

¶ 3 Beth L. Kohn, the Firm's director of audit and accounting, took charge of the audit and performed all her services in Nevada. The Firm's accountant, Philip R. Mays, also performed all his audit work in Nevada. Kohn resides in Nevada, and Mays now resides in Texas.

¶ 4 During the AIA audit, the Firm generated hand-written notes stating: "Appears company has been operating utilizing collateral funds. Could come back to haunt them." American Bonding Company ("ABC"), an Arizona corporation, interprets these notes to mean that AIA, its general managing agent, was spending collateral funds held for the benefit of ABC. Upon finishing the audit on February 1, 1994, the Firm issued its unqualified Report and delivered it to the AIA Board of Directors in Reno, Nevada. In September 1994, AIA forwarded a copy of the Report to ABC upon its request. ¶ 5 On December 4, 1998, ABC sued the Firm, Kohn, Mays, and Firm president J. Richard Barnard (collectively "Barnard Vogler"), as well as AIA in Arizona. The First Amended Complaint alleges that AIA breached a contract and committed fraud and other wrongful conduct that injured ABC, and that other defendants participated in various ways. Specifically, ABC claims that Barnard Vogler committed fraud and negligent misrepresentation, and aided and abetted AIA's alleged fraud and breaches of fiduciary duty, by issuing the Report upon which ABC allegedly relied.

¶ 6 On April 19, 1999, after ABC had conducted significant discovery, Barnard Vogler moved to dismiss based on the lack of personal jurisdiction. ABC supported its response with affidavits and copies of Barnard Vogler's audit work papers. The trial court granted the motion on August 9, 1999. ABC moved for reconsideration of the dismissal and for leave to conduct further document discovery and seven depositions to establish the basis for specific jurisdiction. The trial court denied the motions. This appeal followed.

II. TRIAL COURT PROPERLY REFUSED TO ASSERT SPECIFIC JURISDICTION OVER BARNARD VOGLER

¶ 7 This court reviews de novo a dismissal for lack of personal jurisdiction. See A. Uberti & C. v. Leonardo, 181 Ariz. 565, 569, 892 P.2d 1354, 1358 (1995). We accept as true all material facts alleged by the non-movant. G.T. Helicopters, Inc. v. Helicopters, Ltd., 135 Ariz. 380, 382, 661 P.2d 230, 232 (App.1983).

A. Barnard Vogler Lacks Minimum Contacts With Arizona

¶ 8 Arizona's long-arm statute is very broad and is intended to allow Arizona to exert personal jurisdiction over a non-resident litigant to the maximum extent permitted by the United States Constitution. Houghton v. Piper Aircraft Corp., 112 Ariz. 365, 367, 542 P.2d 24, 26 (1975); see also Ariz. R. Civ. P. 4.2(a). Consequently, we need only consider the constitutional limitations of asserting specific jurisdiction under the Due Process Clause. See Batton v. Tennessee Farmers Mut. Ins. Co., 153 Ariz. 268, 270, 736 P.2d 2, 4 (1987).

¶ 9 Under the federal constitution, two factors govern the scope of personal jurisdiction: the defendant's minimum contacts with the forum state and the reasonableness of exercising personal jurisdiction over the defendant. The requisite contacts for specific jurisdiction exist if Barnard Vogler "purposefully created contacts" with Arizona, id. at 271, 736 P.2d at 5, or "`purposefully directed' [its] activities" at Arizona residents. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (quoting Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984)). Furthermore, ABC's claim must arise out of or relate to Barnard Vogler's forum activities. Id.

¶ 10 ABC does not dispute that Barnard Vogler performed the audit in Nevada and that none of the defendants is an Arizona resident or does business here. ABC contends, however, that it relied upon the Report and suffered the consequences of that reliance in Arizona. But when the only nexus with the forum state is the effect of a damage-causing event, the requisite minimum contacts generally do not exist. See Northern Propane Gas Co. v. Kipps, 127 Ariz. 522, 526, 622 P.2d 469, 473 (1980)(rejecting the plaintiffs' argument that Arizona courts could exercise jurisdiction over a foreign defendant because the defendant's employee knew that the plaintiffs would take a motor home to Arizona). In an attempt to distinguish this case, ABC argues that an exception applies when a foreign defendant engages in intentional conduct calculated to cause injury in the forum.

¶ 11 The United States Supreme Court recognized such an exception in Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984). In Calder, a Florida reporter and editor wrote and published a magazine article impugning the professionalism of Shirley Jones, a California resident. Id. at 785-86, 104 S.Ct. 1482. The defendants argued that mere foreseeability of an injury in California did not justify assertion of jurisdiction there. Id. at 789, 104 S.Ct. 1482. Nevertheless, the Court rejected this argument because the defendants' action did not constitute "mere untargeted negligence" but rather qualified as tortious activity expressly aimed at California. Id. at 789, 104 S.Ct. 1482. The magazine circulated in California, and Jones suffered the brunt of the harm to her reputation there, making California the "focal point" of both the story and the harm. Id.

¶ 12 The Eighth Circuit applied Calder to an accounting conspiracy claim in General Electric Capital Corp. v. Grossman, 991 F.2d 1376 (8th Cir.1993). Grossman arose out of an agreement by Air Canada to purchase the stock of Gelco Express United ("Express") from Gelco Corporation ("Gelco"). Id. at 1378. Prior to the sale, Air Canada hired Peat Marwick Thorne ("Peat Marwick") to assist in investigating Express. Id. Peat Marwick discovered significant irregularities in Express's financial statements, which Touche Canada had previously audited. Id. at 1378-79. Air Canada asked Gelco to waive the audit report requirement of the sale and accept instead a certification from Peat Marwick that Express had a positive net worth of a certain amount. Id. Gelco agreed. Id. Peat Marwick accordingly sent a draft certification of net equity letter to Gelco in Minnesota. Id. at 1378. The parties then completed the sale. Id.

¶ 13 Gelco and General Electric Capital Corporation, which had merged with Gelco, subsequently sued Peat Marwick and Touche Canada, claiming that they and others had conspired to suppress information about Gelco's financial status. Id. The plaintiffs brought suit in Minnesota and alleged that the court had jurisdiction over the foreign accounting firms because they caused an injury to occur in that state. Id. at 1378. The Eighth Circuit rejected that argument and dismissed the suit. Id. at 1387-88. Applying Calder, the court reasoned that the focal point of the wrongdoing lay in Canada, where Express was located, where the firms performed the accounting work, and where the purchase of Express and related negotiations primarily occurred. Id. While the plaintiffs felt the harm's effects in Minnesota, the accounting firms performed their work in Canada for a Canadian client and could not reasonably anticipate being haled into a Minnesota court. Id.

¶ 14 In this case, even stronger evidence supports the trial court's dismissal. Like the Grossman accounting firms, Barnard Vogler contracted to perform the audit in a non-forum state and performed the work there. Unlike the Grossman accounting firms, however, Barnard Vogler did not deliver its work to the plaintiff in the forum state. Instead, Barnard Vogler sent the Report to AIA in Nevada and let AIA decide what to do with it. Under Calder and Grossman, therefore, Nevada was the focal point of any wrongdoing by Barnard Vogler.

¶ 15 In any event, the record fails to support the argument that Barnard Vogler expressly targeted ABC for injury. The work papers indicate that Barnard Vogler knew that AIA was ABC's managing agent and that AIA may have been operating with collateral funds. ABC's conclusion that Barnard Vogler therefore directly targeted fraudulent activity at ABC just does not follow. Nor can we accept...