In re Guardianship of Pacheco

• Decision Date: 22 September 2008
• Docket Number: No. 2 CA-CV 2007-0135.,2 CA-CV 2007-0135.
• Citation: 219 Ariz. 421,199 P.3d 676
• Parties: In re the GUARDIANSHIP/Conservatorship OF Lucrecia PACHECO, Deceased. Estate of Lucrecia Pacheco, by successor guardian and conservator Phyllis Cornell, Plaintiff/Appellee/Cross-Appellant, v. Hartford Fire Insurance Co., a Connecticut corporation, Defendant/Appellant/Cross-Appellee.
• Court: Arizona Court of Appeals

199 P.3d 676

219 Ariz. 421

In re the GUARDIANSHIP/Conservatorship OF Lucrecia PACHECO, Deceased.

Estate of Lucrecia Pacheco, by successor guardian and conservator Phyllis Cornell, Plaintiff/Appellee/Cross-Appellant, v. Hartford Fire Insurance Co., a Connecticut corporation, Defendant/Appellant/Cross-Appellee.

No. 2 CA-CV 2007-0135.

Court of Appeals of Arizona, Division 2, Department B.

September 22, 2008.

Reconsideration Denied November 6, 2008.

William E. Druke, Tucson and Kate McMillan, Tucson and John Tully, Tucson, Attorneys for Plaintiff/Appellee/Cross-Appellant.

Mesch, Clark & Rothschild, P.C. By Melvin C. Cohen and Scott H. Gan, Tucson, Attorneys for Defendant/Appellant/Cross-Appellee.

OPINION

VÁSQUEZ, Judge.

¶ 1 Defendant/appellant Hartford Fire Insurance Company appeals from the trial court's grant of summary judgment in favor of plaintiff/appellee Estate of Lucrecia Pacheco. The judgment holds Hartford, as surety on a conservator's bond, liable for misappropriations by the conservator that occurred prior to the bond's issuance and awards the Estate prejudgment interest on the amount of the bond. The Estate cross-appeals from the trial court's denial of its request for attorney fees. For the reasons below, we affirm.

Factual and Procedural Background

¶ 2 We review the facts in the light most favorable to Hartford, the party against whom summary judgment was entered. See Owens v. M.E. Schepp Ltd. P'ship, 218 Ariz. 222, ¶ 7, 182 P.3d 664, 666 (2008). Because Lucrecia Pacheco was suffering from dementia, in August 2001, the Cochise County Superior Court appointed a law firm to serve as her guardian and as the conservator of her estate. According to an inventory filed by the firm, Pacheco's assets consisted of a 780-acre ranch in Benson, Arizona, and approximately $12,000 in financial investments and livestock. In July 2002, Pacheco's niece, Cecilia Talvy, petitioned the trial court to terminate the law firm's appointment and to appoint Talvy as successor guardian and conservator. The court granted Talvy's petition, required her to post a $9,000 bond, and ordered that "no property may be sold without Court approval."¹

¶ 3 In April 2003, Talvy petitioned the court for permission to sell Pacheco's ranch for $445,000. The court granted the petition but ordered Talvy to post a $309,000 bond before completing the sale. In May, without having posted the additional bond, Talvy received the proceeds from the sale — a check for approximately $240,000 and a promissory note for $145,000.² When the escrow agent for the sale apparently refused to record the deed until Talvy had first obtained the additional bond, the court, at Talvy's request, ordered the deed recorded. The court then granted Talvy's petition to reduce the amount of the bond to $200,000 but also ordered her to deposit $109,000 of estate funds into a restricted bank account.³ After receiving the sale proceeds in May, Talvy began to misappropriate thousands of dollars of the Estate's assets.

¶ 4 In October 2003, Talvy submitted an application to Hartford for a $200,000 surety bond. The application falsely stated that the Estate had cash assets of $309,000 and that Talvy was not indebted to the Estate. On October 13, Hartford issued the requested bond, the terms of which provided: "Now, therefore, if said Principal shall faithfully execute the duties of the trust according to the law, then this obligation to be void, otherwise to remain in full force and effect." The court approved the $200,000 bond on November 19, and the original $9,000 bond was exonerated.

¶ 5 In December 2003, Talvy's attorney, Nathan Hannah, filed with the court proof that Talvy had deposited into the restricted account estate funds of only $93,477, rather than $109,000. The next week, Hannah informed the court that Talvy had sold the $145,000 promissory note and had $40,000 of the proceeds in her possession. He asked the court to order Talvy to deposit all proceeds from the sale into the restricted account and immediately provide a full accounting of her expenditures as conservator.⁴ The court granted the request and ordered Talvy to provide an accounting by January 2004. When she failed to do so, the court granted a petition filed by Pacheco's counsel, Christopher Hitchcock, to terminate Talvy's appointment and appoint a successor conservator. The court appointed Phyllis Cornell, a certified professional fiduciary, as Pacheco's successor guardian and conservator. In May, the case was transferred from Cochise County to the Pima County Superior Court at the request of the new conservator.

¶ 6 In January 2005, Hitchcock lodged a demand with Hartford on Pacheco's behalf for the entire amount of the bond, plus interest and attorney fees, based on Talvy's violation of her duties as conservator. At the same time, Hitchcock also paid Hartford the annual premium on Talvy's bond, which had been due in October. In March 2005, Hitchcock requested an order to show cause why Talvy had not provided an accounting of her expenditures as conservator.

¶ 7 After Talvy subsequently submitted an accounting in May, the successor conservator and Hitchcock challenged it, claiming Talvy had failed to account for more than $200,000 of Estate assets and seeking an order surcharging Talvy for that amount. The trial court granted Hartford's request to intervene in the action. Following a one-day bench trial in November, the court found Talvy had failed to account for $153,222.35 in Estate assets. The court entered a surcharge judgment against Talvy in the amount of $198,721.86, which included costs and fees for the successor conservator, her attorney, and Hitchcock. Pacheco died two weeks before the surcharge judgment was entered against Talvy.

¶ 8 In October 2005, Hartford and Hitchcock on Pacheco's behalf had submitted cross-motions for summary judgment on whether Hartford would be liable for the misappropriations by Talvy that occurred prior to issuance of the surety bond. The court ruled in the affirmative, stating: "A conservator, having engaged in fiduciary malfeasance, has a continuing duty to recover misappropriated or mismanaged assets. The defendant's suretyship, therefore, extends to acts of the fiduciary which occurred prior to the effective date of the bond."

¶ 9 After the court entered the surcharge judgment, Hartford refused to pay. The Estate then filed a petition seeking an order that Hartford pay the surcharge amount plus accrued interest. Hartford raised several defenses to the petition, and the Estate moved for summary judgment. Hartford responded that its obligation under the bond was voidable because, inter alia, Hitchcock had known of Talvy's misappropriations before the bond was issued but had failed to inform Hartford. The court granted the Estate's motion and ordered Hartford to pay the Estate the $200,000 bond amount. The court initially declined to award prejudgment interest but, after a hearing on the issue, awarded prejudgment interest from the date of the surcharge judgment. Hartford now appeals from that decision, and the Estate cross-appeals from the trial court's denial of its request for attorney fees.

Discussion

I. Liability on Bond

¶ 10 Hartford and the Estate do not dispute that Talvy began to misappropriate Estate assets after she sold Pacheco's ranch but before Hartford issued its bond. The first issue we must address, therefore, is whether Hartford, as surety on Talvy's bond, was properly held liable for Talvy's misappropriations occurring before the bond was issued. Because this presents a question of law, our review is de novo. See Mohave Elec. Co-op., Inc. v. Byers, 189 Ariz. 292, 308, 942 P.2d 451, 467 (App.1997) ("[W]here a court applies a theory of liability to facts, its ruling is a mixed question of law and fact which is reviewed de novo.").

¶ 11 Generally, a surety on a bond is not liable for actions the principal committed before the bond was issued. See Ferrarell v. Robinson, 11 Ariz.App. 473, 477, 465 P.2d 610, 614 (1970) (surety on real estate broker's bond not liable for misappropriations "prior to the effective date of the bond").⁵ This rule, however, does not necessarily apply to bonds issued for the protection of persons and estates. See In re Foodsource, Inc., 130 B.R. 549, 561 (Bankr.N.D.Cal.1991); S. Surety Co. v. Burney, 34 Okla. 552, 126 P. 748, 751 (1912); see also 11A John Appleman & Jean Appleman, Insurance Law and Practice § 6713, at 415 (1981). Although Arizona courts have not addressed this question, other jurisdictions have held the surety liable on such bonds in certain circumstances.

A. Duty to Recover if Solvent

¶ 12 As Hartford points out, several courts have found a surety on a guardian's or conservator's bond liable for misappropriations that occurred prior to issuance of the bond if the principal was solvent at any time during the term of the bond. See Foodsource, 130 B.R. at 562; King v. Jones, 971 S.W.2d 916, 922 (Mo.Ct.App.1998). These courts have determined that, although the misappropriations occurred before the bond issued, the fiduciary breached his or her duty during the term of the bond by failing to recover those assets from himself or herself when able to do so. See Aetna Indem. Co. v. State, 101 Miss. 703, 57 So. 980, 982-83 (1912).

¶ 13 In this case, the trial court concluded that "A.R.S. § 14-5411 requires a conservator to `furnish a bond conditioned upon faithful discharge of all duties according to law.' A conservator, having engaged in fiduciary malfeasance, has a continuing duty to recover misappropriated and mismanaged assets. The defendant's suretyship, therefore, extends to acts of the fiduciary which occurred prior to the effective date of the bond." Although we decline to base liability in this case on Talvy's continuing duty to recover misappropriated assets, we will affirm the trial court's ruling if it is correct for any reason. See Odom v. Farmers Ins. Co. of Ariz., 216 Ariz. 530, ...