Dooley v. O'Brien

• Decision Date: 28 December 2010
• Docket Number: No. 1 CA-CV 09-0595.,1 CA-CV 09-0595.
• Citation: 244 P.3d 586,226 Ariz. 149
• Parties: Michael DOOLEY, an unmarried man, individually, and/or derivatively on behalf of Corvallas Development Corporation, an Arizona corporation, Plaintiff/Counterdefendant/Appellant, v. William O'BRIEN and Kathleen O'Brien aka Kathleen Falkenberg, husband and wife, Defendants/Appellees, and Michael Fencl, a married man dealing with his sole and separate property, Defendant/Counterclaimant/Appellee.
• Court: Arizona Court of Appeals

244 P.3d 586 226 Ariz. 149 Michael DOOLEY, an unmarried man, individually, and/or derivatively on behalf of Corvallas Development Corporation, an Arizona corporation, Plaintiff/Counterdefendant/Appellant, v. William O'BRIEN and Kathleen O'Brien aka Kathleen Falkenberg, husband and wife, Defendants/Appellees, and Michael Fencl, a married man dealing with his sole and separate property, Defendant/Counterclaimant/Appellee. No. 1 CA-CV 09-0595. Court of Appeals of Arizona, Division 1, Department E. Dec. 28, 2010.

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. By L. Eric Dowell and Kerry S. Martin, Phoenix, Attorneys for Plaintiff/Counterdefendant/Appellant.

Burch & Cracchiolo, P.A. By Edwin D. Fleming and Jake D. Curtis And Melissa Iyer, Phoenix, Attorneys for Defendants/Appellees O'Brien.

Burch & Cracchiolo, P.A., By Daryl Manhart, Phoenix, Attorneys for Defendant/Counterclaimant/Appellee Fencl.

OPINION

SWANN, Judge.

¶ 1 This case presents the question whether A.R.S. 12-341.01(A) authorizes the award of attorneys fees to the prevailing party in actions for breach of fiduciary duty, fraudulent conveyance, and accounting. We conclude that such claims are based on duties imposed by law, not by express or implied promises, and therefore do not "aris[e] out of a contract" within the meaning of the statute. Accordingly, we vacate the superior courts award of fees.

FACTS AND PROCEDURAL HISTORY

¶ 2 In the late 1980s, Michael Dooley ("Plaintiff") joined with Michael Fencl, William O'Brien and William's wife Kathleen O'Brien (aka Kathleen Falkenberg) ("Defendants") to develop Arizona real estate. In 1994 they formed Corvallas Development Corporation ("Corvallas"), an Arizona corporation, as a vehicle for investing in such ventures. Plaintiff owns 31.25% of Corvallas stock, Fencl owns 31.25%, and Kathleen O'Brien owns the remaining 37.5%. All three served on the corporation's board of directors, and William O'Brien served as a manager of Corvallas.

¶ 3 In April 1998, the parties began working together toward developing a Merrill Ranch property, purportedly for Corvallas. In mid-1999, however, the parties had a falling out and Defendants decided to develop the property without Plaintiff. To this end, Defendants conveyed the Merrill Ranch property to a newly formed limited liability company ("LLC") in which neither Plaintiff nor Corvallas was an investor. Around that time, Defendants had decided not to work with Plaintiff on Merrill Ranch or any other project.

¶ 4 Plaintiff commenced this action in September 1999. He asserted individual and derivative claims for breach of fiduciary duty (alleging misappropriation of a corporate opportunity), a claim for fraudulent conveyance concerning William O'Brien's interest in Merrill Ranch, and three claims for accounting regarding Corvallas and two of the parties' LLCs. Later, Plaintiff recorded a notice of lis pendens against the Merrill Ranch property. In response, Defendants conveyed the Merrill Ranch property to Corvallas so that the lis pendens would not interfere with sales of homes in the development.

¶ 5 In April 2004, the parties agreed to the appointment of a Special Master to perform an accounting of Corvallas and the LLCs involved in the dispute. The Special Master submitted his report in July 2007, and the court adopted it over Plaintiff's objections in September 2007.

¶ 6 In October 2007, Defendants moved for summary judgment. They argued that the breach of fiduciary duty and fraudulent conveyance claims were rendered moot by the transfer of the Merrill Ranch property to Corvallas, that the Special Master's report precluded any finding of misconduct by Defendants, and that Plaintiff could not prove any damages. Finally, Defendants argued the Special Master's report effectively accomplished the accountings that Plaintiff sought.¹ The court granted summary judgment in favor of Defendants on all but one claim and denied Plaintiff's cross-motions for summary judgment on all claims. The parties then agreed to dismiss all remaining claims and counterclaims with prejudice.

¶ 7 By that time, the O'Brien defendants had submitted a request for fees and costs of $248,944.02 under A.R.S §§ 12-341.01(A) and -349, and the Fencl defendants had joined the request seeking fees and costs of $136,292.93. Plaintiff argued that § 12-341.01(A) did not apply because the claims at issue did not arise "out of contract" within the meaning of A.R.S. § 12-341.01(A). Afterhearing oral arguments, the court granted the Defendants' applications for attorney's fees in an unsigned minute entry.

¶ 8 Plaintiff filed a motion for reconsideration of the grant of attorney's fees and requested that the court issue findings of fact and conclusions of law to support the award.² The court adopted Defendants' proposed findings of fact and conclusions of law, and entered judgment for Defendants. Plaintiff timely appeals. We have jurisdiction pursuant to A.R.S. § 12-2101(B).

STANDARD OF REVIEW

¶ 9 "[I]nterpretation and application of the attorney fee statute present questions of law subject to de novo review." Ariz. Tile, L.L.C. v. Berger, 223 Ariz. 491, 498-99, ¶ 35, 224 P.3d 988, 995-96 (App.2010). If attorney's fees are available under the statute, we review the award for abuse of discretion. Id. at 498, ¶ 35, 224 P.3d at 995.

DISCUSSION

I. A CLAIM DOES NOT "ARISE OUT OF CONTRACT" WHEN THE RELEVANT DUTY IS NOT CREATED BY A PROMISE.

¶ 10 The threshold, and ultimately dispositive, question in this case is whether Plaintiff's claims arose out of contract within the meaning of § 12-341.01(A). The statute provides: "In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." "In interpreting statutes, our central goal 'is to ascertain and give effect to the legislature's intent.' " Yarbrough v. Montoya-Paez, 214 Ariz. 1, 5, ¶ 12, 147 P.3d 755, 759 (App.2006) (citing Washburn v. Pima County, 206 Ariz. 571, 575, ¶ 9, 81 P.3d 1030, 1034 (App.2003)). Here, the legislature chose not to use more restrictive language, such as "an action for breach of contract," or more expansive language, such as "an action between parties to a contract." And as our supreme court held, "[t]he legislature clearly did not intend that every tort case would be eligible for an award of fees whenever the parties had some sort of contractual relationship or ingenious counsel could find authority for an implied-in-law contractual claim." Barmat v. John and Jane Doe Partners A-D, 155 Ariz. 519, 524, 747 P.2d 1218, 1223 (1987). In Barmat, the court approved the view expressed in Lewin v. Miller Wagner & Co., Ltd., 151 Ariz. 29, 725 P.2d 736 (App.1986), that "where the implied contract does no more than place the parties in a relationship in which the law then imposes certain duties recognized by public policy, the gravamen of the subsequent action for breach is tort, not contract." Barmat, 155 Ariz. at 523, 747 P.2d at 1222.

¶ 11 Though the precise question before us has never expressly been decided, it is clear that fees may not be awarded in every case that merely involves or relates to a contract. In Barmat, the court distinguished contractual duties created by the express or implied assent of the parties and those duties " 'created by the law without regard to expressions of assent.' " Id. at 521, 747 P.2d at 1220 (quoting 1 Arthur L. Corbin, Corbin on Contracts § 19, at 44 (1963)). And as this court noted in Ramsey Air Meds, L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 15, ¶ 27, 6 P.3d 315, 320 (App.2000), "[t]he existence of a contract that merely puts the parties within tortious striking range of each other does not convert ensuing torts into contract claims." Put differently, "[w]hen the duty breached is one implied by law based on the relationship of the parties, that claim sounds fundamentally in tort, not contract." Id. at 15, ¶ 27, 6 P.3d at 320.

¶ 12 On the other hand, when "the duty breached is not imposed by law, but is a duty created by the contractual relationship, and would not exist 'but for' the contract, then breach of either express covenants or those necessarily implied from them sounds in contract." Barmat, 155 Ariz. at 523, 747 P.2d at 1222. To make this determination, "the court should look to the fundamentalnature of the action rather than the mere form of the pleadings." Ramsey, 198 Ariz. at 15, ¶ 27, 6 P.3d at 320.

¶ 13 This case involves three basic claims: breach of fiduciary duty, fraudulent conveyance, and accounting. We address each claim in turn.

A. A Claim for Breach of Fiduciary Duty/Misappropriation of Corporate Opportunity Does Not Arise Out of Contract.

¶ 14 Plaintiff alleged that Defendants breached their fiduciary duties as directors and controlling shareholders of Corvallas by pursuing for themselves the Merrill Ranch development opportunity that Corvallas had been preparing to pursue. Misappropriation of a corporate opportunity occurs when a "director has a specific duty to act in regard to the particular matter as a representative of the company" and breaches that duty. Tovrea Land & Cattle Co. v. Linsenmeyer, 100 Ariz. 107, 122, 412 P.2d 47, 57 (1966).

¶ 15 Here, the relationship between the parties is that of directors and officers of a corporation to its shareholders. The parties do not dispute that a contract created that relationship.³ But "[i]n Arizona a director of a corporation owes a fiduciary duty to the corporation and its stockholders. This duty is in the nature of a trust relationship requiring a high degree of care on the part of the director." Atkinson v. Marquart, 112 Ariz. 304, 306, 541 P.2d 556, 558 (1975) (citations omitted); accord Kenton v. Wood, 56 Ariz. 325, 331, 107 P.2d 380, 383 (1940) ("[D]irectors are trustees for the benefit of the stockholders.").⁴

¶ 16 In support of their contention that this case arises out of contract, Defendants argue that they had no duty to preserve development opportunities...