Kennedy Johnson Gallagher, L.L.C. v. Payne

• Decision Date: 14 October 2014
• Docket Number: No. 1 CA-CV 13-0540,1 CA-CV 13-0540
• Parties: KENNEDY JOHNSON GALLAGHER, L.L.C., a New York limited liability company, Plaintiff/Appellee, v. THOMAS N. PAYNE and BARBARA C. PAYNE, husband and wife; and each of them, Defendants/Appellants.
• Court: Arizona Court of Appeals

KENNEDY JOHNSON GALLAGHER, L.L.C.,a New York limited liability company, Plaintiff/Appellee, v. THOMAS N. PAYNE and BARBARA C. PAYNE, husband and wife; and each of them, Defendants/Appellants.

No. 1 CA-CV 13-0540

ARIZONA COURT OF APPEALS DIVISION ONE

October 14, 2014

NOTICE: NOT FOR PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.

Appeal from the Superior Court in Maricopa County

No. CV2011-009147

The Honorable Mark H. Brain, Judge

AFFIRMED

COUNSEL

Hammerman & Hultgren, P.C., Phoenix

By Jon R. Hultgren and Allan R. Draper

Counsel for Plaintiff/Appellee

Thomas N. Payne, Attorney at Law, Paradise Valley

By Thomas N. Payne

Counsel for Defendants/Appellants

MEMORANDUM DECISION

Judge Donn Kessler delivered the decision of the Court, in which Presiding Judge Jon W. Thompson and Judge Kent E. Cattani joined.

KESLER, Judge:

¶1 This appeal arises out of Kennedy Johnson Gallagher, L.L.C.'s ("KJG") efforts to collect a judgment from Barbara Payne's ("Wife") community property. The superior court issued findings of fact and conclusions of law holding the community liable for attorneys' fees incurred by Thomas Payne ("Husband"). For the reasons that follow, we affirm.

BACKGROUND

¶2 Husband and Wife (collectively "the Paynes") have been married for more than fifty-five years. During the marriage, John Mohnach, a fifty-percent shareholder in Smith West, Inc., invited Husband to purchase the other fifty-percent share of that corporation. To raise $1.75 million for the purchase, the Paynes obtained a bank loan and pledged their jointly owned residences and land as security. After the purchase's completion, Husband and Mohnach renamed the corporation Mohnach Payne, Inc. ("MPI").

I. The MPI Asset Sale

¶3 MPI, along with Mohnach and Husband in their capacities as shareholders, contracted to sell MPI's accounts receivable, inventory, contracts, equipment, machinery, data, and records to Smith West, L.L.C. pursuant to an asset purchase agreement ("APA"). The APA, which Husband negotiated, states that it is a binding obligation of each shareholder and "enforceable against him." The APA does not identify Husband as a married man nor does it refer to Wife or their marital community. In the APA, MPI, Mohnach, and Husband agreed to indemnify jointly and severally Smith West, L.L.C. for any damages arising out of or based upon any breach of a covenant or obligation under the APA.

II. The Arbitration

¶4 Smith West, L.L.C. subsequently disputed pre-sale misrepresentations by Husband, Mohnach, and MPI, and demanded arbitration. In its supplemental arbitration demand, Smith West, L.L.C. asserted fraud and other claims under the APA.

¶5 According to Smith West, L.L.C, Husband and Mohnach "were motivated to . . . portray the Company's financial position more positively than what it was" because that would result "in an increased Purchase Price under the Agreement" from which Husband and Mohnach "would directly and personally benefit." Smith West, L.L.C. sought about $16 million in principal damages on the basis that Husband and Mohnach had manipulated inventory reserves; masked decreasing earnings; inflated the reported Earnings Before Interest, Taxes, Depreciation and Amortization; and misrepresented the condition of equipment.

¶6 Husband, Mohnach, and MPI retained KJG to represent them "late" in the arbitration and after becoming dissatisfied with their prior counsel. After a five-day hearing, the arbitrator filed his Partial Final Award No. 3 (Phase 2) finding Husband, Mohnach, and MPI jointly and severally liable in the principal amount of $1,331,035. This amount indemnified Smith West, L.L.C. for damages related to accounts receivable and equipment conditions and conveyances. The arbitrator did not find fraud and rejected a number of other claims concerning breach of representations and warranties.

III. The Attorneys' Fee Dispute

¶7 Husband disputed KJG's fee invoices and declined to pay KJG. KJG sued Husband and MPI for breach of contract in New York District Court. KJG dismissed that complaint after executing a Settlement Agreement and Mutual General Release ("Settlement Agreement") in which Husband agreed to pay a reduced sum of $130,000. In accordance with the Settlement Agreement, Husband executed an affidavit of confession of judgment. Wife was not a named party to the Settlement Agreement and Husband testified that he had not intended to obligate their community in signing that document.

¶8 Husband then again refused to pay the amount owed under the Settlement Agreement. KJG accordingly filed suit against Husband and Wife in Arizona for breach of contract. The superior court conducted a trial at which Husband, Wife, and Peter Gallagher of KJG testified. At the hearing's conclusion, the superior court ruled that Husband "wasdefending or hiring an attorney to defend in part the potential liability against the community." The superior court filed findings of fact and conclusions of law holding that the community had benefitted from KJG's representation.

¶9 After denying a motion for new trial, the superior court entered a judgment against both Husband and Wife, but provided that Wife's separate property could not satisfy the judgment. This appeal followed. We have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1) (Supp. 2013).¹

DISCUSSION

I. The Paynes failed to rebut the presumption of community liability for KJG's attorneys' fees.

¶10 The Paynes challenge the superior court's classification of the attorneys' fee debt as a community liability. We are bound by the superior court's findings of fact unless clearly erroneous, and review legal questions de novo. Flying Diamond Airpark, LLC v. Meienberg, 215 Ariz. 44, 47, ¶ 9, 156 P.3d 1149, 1152 (App. 2007). "[W]e view the evidence and reasonable inferences therefrom in the light most favorable to the prevailing party." Inch v. McPherson, 176 Ariz. 132, 136, 859 P.2d 755, 759 (App. 1992).

¶11 In general, community property is liable for debts incurred for the benefit of the community. A.R.S. § 25-215(D) (2007) ("[E]ither spouse may contract debts and otherwise act for the benefit of the community."); see also A.R.S. § 25-215(C) ("The community property is liable for a spouse's debts incurred outside of this state during the marriage which would have been community debts if incurred in this state."). "A debt incurred during a marriage for the benefit of the marital community is presumed to be a community obligation unless clear and convincing evidence exists to the contrary." Arab Monetary Fund v. Hashim, 219 Ariz. 108, 111, ¶ 17, 193 P.3d 802, 805 (App. 2008). If a spouse enters a debt-creating agreement, it does not necessarily follow that the debt is the separate obligation of that spouse. See Cardinal & Stachel, P.C. v. Curtiss, 225 Ariz. 381, 384-85, ¶¶ 7-12, 238 P.3d 649, 652-53 (App. 2010) (noting that even attorneys' fees incurred by one spouse in preparation for filing a divorce petition may qualify as a community debt to the extent that the family court will structure the parties' child-custody and property division).

¶12 Our task is to determine whether Wife's community interests were at risk in the arbitration with Smith West, L.L.C. Her interests were at risk if there was a community benefit from the APA and asset sale that was jeopardized in that proceeding.

¶13 Smith West, L.L.C. paid approximately $32 million to buy MPI's assets. Husband testified that MPI had $13 million left from the sale after paying creditors, and he and Mohnach each received $2.5 million. As to the balance, Husband testified that he and Mohnach "left a lot of money in the company." Husband admitted that he and Wife held their shares in MPI as a community asset.

¶14 As a result of Husband's representations and successful negotiation of the APA, the value of the community's MPI shares increased. That benefit was at risk when Smith West, L.L.C. demanded arbitration. A large judgment against MPI could decrease the value of its shares, including the Paynes' community share, even if Wife would not be liable to Smith West, L.L.C. on an indemnification theory. See A.R.S. § 25-214(C)(2) (2007) ("Either spouse separately may acquire, manage, control or dispose of community property or bind the community, except that joinder of both spouses is required in . . . [a]ny transaction of guaranty, indemnity or suretyship."). Accordingly, we affirm the superior court and hold that the attorneys' fees owed to KJG constituted a community debt. See Fitzsimmons v. Jackson, 51 B.R. 600, 613 (9th Cir. B.A.P. 1985) (holding that although wife was separated from husband at the time of the action, wife was still liable for attorneys' fees when husband engaged law firm to defend condemnation suit against community property). See generally Cabibi & Cabibi v. Hatheway, 570 So. 2d 104, 109-10 (La. Ct. App. 1990) (construing analogous La. Civ. Code art. 2346 and holding that attorneys' fees were a community debt even though the wife did not sign the attorney-client contract).

¶15 The Paynes contend that the community was not at risk because neither the Settlement nor the KJG retainer letter mentions Wife, the fact that Husband is married, or the marital community. They also argue Wife did not acquiesce to incurring these obligations. However, a spouse need not acquiesce to incurring the obligations for them to be deemed community debts. Lorenz-Auxier Fin. Grp., Inc. v. Bidewell, 160 Ariz. 218, 220, 772 P.2d 41, 43 (App. 1989) ("Debt incurred by one spouse while acting for the benefit of the marital community is a community obligation whether or not the other spouse approves it.").

¶16 The Paynes also argue that there was no community liability because Husband testified that he had never intended to obligate Wife's assets when executing the Settlement Agreement. "The test of whether an obligation is a community debt" is whether the...