Gemstar Ltd. v. Ernst & Young
| Decision Date | 07 May 1996 |
| Docket Number | No. CV-95-0186-PR,CV-95-0186-PR |
| Parties | GEMSTAR LIMITED, a British Virgin Islands corporation; Canstar Limited, a British Virgin Islands corporation; Kunst Corporation, Inc., a corporation; R. Pape Corporation, Inc., a corporation; Richard Holding, a corporation; H.K. Bergmann, Inc., a corporation; Kittan, Inc., a corporation; and James R. Tomasini, Plaintiffs-Appellees, v. ERNST & YOUNG, fka Ernst & Whinney, a partnership; Edward A. Villanueva and Lynn Villanueva, husband and wife, Defendants-Appellants. |
| Court | Arizona Supreme Court |
This case is one of three lawsuits involving the purchase and resale of two Arizona real properties. Plaintiffs are two British Virgin Islands (B.V.I.) corporations, Gemstar Limited and Canstar Limited, and 6 of the corporations' original 8 shareholders. The 6 plaintiff shareholders are 5 closely held corporations and one individual: (1) Kunst Corporation (principal Adam Kunst); (2) R. Pape Corporation (principal Adam Kunst); (3) H.K. Bergmann, Inc. (principal Herbert Bergmann); (4) Kittan, Inc. (principal Kurt Kittan); (5) Richard Holding, Inc. (principal Joseph Stangl); and (6) James Tomasini. We will refer to these as the individual shareholders. Defendants are Ernst & Young (formerly known as Ernst & Whinney), Edward Villanueva (an accountant with Ernst & Young), and Lynn Villanueva, his wife.
Plaintiffs' suit went to the jury on claims of breach of contract, professional negligence, breach of fiduciary duty, and substantial assistance of another's breach of fiduciary duty. Plaintiffs alleged that the individual shareholders had capacity to sue individually and derivatively, as shareholders of Gemstar and Canstar, and that Gemstar and Canstar had capacity to sue directly. After a lengthy trial, the jury returned separate verdicts for the individual shareholders and Gemstar and Canstar on all four claims. The trial court then entered a damage award of $2.4 million and added prejudgment interest, attorneys' fees, and costs, for a total judgment of $4,258,768.47.
Defendants appealed, raising numerous issues. The court of appeals reversed the trial court's judgment, finding that: (1) the individual shareholders lacked capacity to sue individually on the breach of contract, professional negligence, and breach of fiduciary duty claims because the damages they sought to recover were corporate, rather than individual, in nature; (2) the individual shareholders lacked capacity to sue derivatively on all four claims because they did not satisfy the procedural requirements, under either Arizona or B.V.I. law, for bringing a derivative suit; and (3) Gemstar and Canstar lacked capacity to sue on all four claims because the corporations did not authorize the suit when it was filed or later ratify the suit within the applicable statute of limitations periods. Gemstar Ltd. v. Ernst & Young, 183 Ariz. 148, 159-61, 901 P.2d 1178, 1189-91 (App.1995). Additionally, the court of appeals found that the individual shareholders had capacity to sue individually on the substantial assistance claim, and it remanded the case for a new trial on that issue. 183 Ariz. at 159, 162, 901 P.2d at 1189, 1192.
Plaintiffs petitioned this court for review of the court of appeals' opinion and presented the other issues defendants raised on appeal, which the court of appeals did not reach. See rule 23(c)(2), Arizona Rules of Civil Appellate Procedure. We granted review and now vacate the court of appeals' opinion on the ground that Gemstar and Canstar have capacity to sue. Because the jury returned separate verdicts in favor of both the individual shareholders and Gemstar and Canstar and because the damages awarded were duplicative, we need not address the individual shareholders' capacity to sue. In addition, to avoid further litigation and delay in this matter, we address the other issues that defendants raised on appeal. We have jurisdiction pursuant to article 6, § 5(3), Arizona Constitution, and rule 23, Arizona Rules of Civil Appellate Procedure.
Our resolution of the capacity issue and the other issues defendants raised on appeal does not require a detailed recounting of the facts concerning defendants' alleged misfeasance. We provide a brief discussion of the background facts for context.
Sometime in late 1978 or early 1979, a group of one American and six Canadian investors, including those who later became individual shareholders, and Siegfried Wauro agreed to purchase and later sell two Arizona real properties, which Wauro had located. Wauro was a defendant in the companion case, Kunst Corp. v. Wauro, 1 CA-CV 90-0655 (Ariz.App.Mem.Dec. filed July 26, 1994) (the Wauro case). The investors agreed to "share and share alike" in the costs and profits associated with the properties in proportion to the amount they invested in the properties.
Most of the investors were friends or business acquaintances, and they originally planned to form a partnership. In February 1979, however, the investors decided to form and become shareholders of two B.V.I. corporations, Gemstar and Canstar, because their tax lawyers had advised them of a United States tax law that allowed foreign corporations passively investing in United States land to avoid capital gains tax. Also in February 1979, Wauro introduced defendant Edward Villanueva, an accountant with defendant Ernst & Young who also had served as Wauro's personal accountant since 1978, to at least two of the other investors. The investors agreed to hire Villanueva to prepare the corporations' tax returns and financial statements.
After Gemstar and Canstar were formed, the investors owned the following percentages of stock in each corporation: the 6 individual shareholders each owned 10%, Wauro owned 30%, and one other individual, who is not a party to this action, owned the final 10%. Gemstar and Canstar each had 5 directors: 3 B.V.I. directors, Siegfried Wauro (who also served as president and treasurer), and Adam Kunst (who also served as vice president). The investors agreed that Wauro would handle the corporations' daily affairs, including any contact with Villanueva, but a written shareholders' agreement provided that the approval of both Wauro and Kunst was required before the corporations could purchase or sell the real properties or redeem any of Gemstar's and Canstar's stock.
Later in 1979, Gemstar and Canstar purchased the two Arizona real properties for a total of $1.4 million. In early 1980, Villanueva informed Wauro that legislation pending in Congress would eliminate the capital gains tax advantage and advised Wauro that the corporations should sell the properties before the new law became effective. Wauro informed the other investors of the potential change in the law and suggested that the corporations sell the properties to Ziggy's Opportunities, a company controlled by Wauro. Wauro suggested this sale because the Arizona real estate market was depressed at the time and the investors were unlikely to find another buyer. The investors agreed to the sale.
When Wauro informed Villanueva of the decision to sell the properties to Ziggy's Opportunities, Villanueva drafted two sale agreements. Under the terms of these agreements, Gemstar and Canstar agreed to sell the properties to Ziggy's Opportunities for a total of $10 million. The agreements provided that Ziggy's Opportunities would pay $500 down for each property, with the balance and 10% interest due on October 1, 1981, and that Gemstar and Canstar remained responsible for the mortgage payments and other expenses related to the properties. Villanueva later drafted two modifications to the original sales agreements, which waived the corporations' right to interest already earned and extended the due dates on the balances for two years. Although the sales agreements and later modifications did not reflect such, Wauro and plaintiffs orally agreed that the purpose of the sale to Ziggy's Opportunities was only to retain the capital gains tax advantage and that the sale did not modify or terminate the investors' "share and share alike" agreement.
In 1983, Wauro, through Ziggy's Opportunities, began to subdivide and sell the properties, using a series of subdivision and junior subdivision trusts. Ultimately, Wauro sold the properties for a total of $12.3 million, and, of that amount, he distributed $8 million to Gemstar and Canstar, which in turn was distributed to the individual shareholders and to Wauro. Wauro kept for himself the remaining $4.3 million, which he had diverted into undisclosed junior subdivision trusts.
Plaintiffs eventually learned of the diverted profits, and in July 1987, they sued Wauro for breach of contract and breach of fiduciary duties in the Wauro case. In September 1990, the jury awarded damages to plaintiffs, and the trial court entered a total judgment of $4,337,994.05 against Wauro. Kunst Corp. v. Wauro, 1 CA-CV 90-0655 (Ariz.App.Mem.Dec. filed July 26, 1994). After the judgment was entered, Wauro appealed and filed bankruptcy. The court of appeals affirmed the judgment in part and remanded in part with directions to recompute the damages. We declined review of that decision.
Plaintiffs also sued the corporations' attorneys for malpractice arising out of the real estate transactions. That case settled before trial for $1.25 million. Gemstar Ltd. v. Goodson, CV 87-40772 ...
To continue reading
Request your trial
-
Acuna v. Kroack
...Similarly, our supreme court has "review[ed] the trial court's grant of a directed verdict de novo." Gemstar Ltd. v. Ernst & Young, 185 Ariz. 493, 505, 917 P.2d 222, 234 (1996). In more recent decisions, however, the court has reviewed a trial court's "decision to deny post-trial motions [f......
-
Standard Chartered PLC v. Price Waterhouse
...the evidence is insufficient to support a verdict, the trial court has a duty to decide the issue." See Gemstar Ltd. v. Ernst & Young, 185 Ariz. 493, 504-05, 917 P.2d 222, 233-34 (1996) (quoting Rhoads, 145 Ariz. at 148, 700 P.2d at 846). 8 We find the evidence insufficient to support a ver......
-
Thompson v. StreetSmarts, Inc.
...of right.'" AMHS Ins. Co. v. Mut. Ins. Co. of Ariz., 258 F.3d 1090, 1103 (9th Cir. 2001) (quoting Gemstar Ltd. v. Ernst & Young, 185 Ariz. 493, 508, 917 P.2d 222, 237 (Ariz. 1996) (en banc)); Precision Heavy Haul, Inc. v. Trail King Industries, Inc., _____ P.3d. _____, 580 Ariz. Adv. Rep. 8......
- State v. Jones