McCarthy Western Constructors, Inc. v. Phoenix Resort Corp.

• Decision Date: 19 February 1991
• Docket Number: No. 1,CA-CV,1
• Citation: 821 P.2d 181,169 Ariz. 520
• Parties: McCARTHY WESTERN CONSTRUCTORS, INC., an Arizona corporation, Plaintiff-Appellee, v. The PHOENIX RESORT CORPORATION, a Delaware corporation, Defendant-Appellant. 89-305.
• Court: Arizona Court of Appeals

Page 181

821 P.2d 181

169 Ariz. 520

McCARTHY WESTERN CONSTRUCTORS, INC., an Arizona corporation, Plaintiff-Appellee, v. The PHOENIX RESORT CORPORATION, a Delaware corporation, Defendant-Appellant.

No. 1 CA-CV 89-305.

Court of Appeals of Arizona,

Division 1, Department C.

Feb. 19, 1991.

Redesignated as Opinion and Publication Ordered April 2, 1991.

Reconsideration Denied May 29, 1991.

As Corrected Oct. 18, 1991.

Review Denied Dec. 17, 1991.

[169 Ariz. 521] O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by Henry L. Timmerman, Larry L. Smith and Nicholas J. Wallwork, Phoenix, for plaintiff-appellee.

Morrison, Hecker, Curtis, Kuder & Parrish by Mark A. Nadeau, Phoenix, and Martin, Cavan & Andersen, P.C. by H. Fielder Martin, C. Walker Ingraham and Linda A. Klein, Atlanta, Ga., for defendant-appellant.

OPINION

SHELLEY, Presiding Judge.

Defendant-appellant Phoenix Resort Corporation (Phoenix) appeals from the granting of a preliminary injunction preventing it from withdrawing money from a special construction fund escrow account (fund agreement).

FACTS AND PROCEDURAL HISTORY

McCarthy Western Constructors, Inc. (McCarthy), as general contractor, built the Phoenician Golf & Tennis Resort for Phoenix. To insure payment under the construction contract, the parties entered into a deposit account agreement dated April 17, 1987. That agreement was funded with approximately $16,000,000. Subsequently, an unnamed buyer (buyer) acquired a 45% interest as part-owner. At that time, Phoenix requested a substitution of security agreements for a letter guarantee. The owners deposited $91,038,200 into a partnership account and $74,485,800 into the buyer account for construction and resort opening purposes pursuant to a June 30, 1987, construction fund escrow agreement (fund agreement) between Phoenix; the buyer; Manufacturer's Hanover Trust Company (MHT), as escrow agent of the construction fund; Crescent Holdings, Inc.; and Crescent Holdings Limited Partnership. Under the fund agreement, the owner was authorized to request disbursements from the fund once a month. Paragraph 7 of the fund agreement states:

No part of the Escrow Funds held by Agent pursuant to this Escrow Agreement shall be, at any time, subject or liable to attachment or levy at the suit of any creditor of any party to this Agreement or of any contractor, sub-contractor, supplier of labor or materials, or of any of their respective creditors. This Agreement is solely for the benefit of CHI, Phoenix Resort, Crescent Partnership and Buyer and may not be relied upon for any purpose by any other person or entity.

While the fund agreement was being prepared, Phoenix and McCarthy executed another agreement dated June 26, 1987. This agreement recited that the fund agreement provides sufficient security "to reasonably assure payment" for construction-related expenses and terminated the deposit account agreement. Paragraphs 4 and 5 of the June 26 agreement stated:

4. Phoenix Resort shall take all actions reasonably necessary to assure that the funds deposited in the Accounts (as that term is defined in The Construction Fund Escrow Agreement) are utilized only for the purposes described in The Construction Fund Escrow Agreement. Phoenix Resort shall not permit the Accounts to be closed, without McCarthy's written consent, until such time as McCarthy certifies to MHT that is [sic] has been paid all sums due to McCarthy pursuant to the Construction Contract. In the event of a dispute regarding any indebtedness asserted by McCarthy, the Accounts shall not be closed until such dispute is finally resolved (through litigation or otherwise); provided, however, that during the pendency of any such dispute, any funds in the Accounts may be used to pay for construction activities relating to The Phoenician or for any other purpose consistent with the terms of The Construction Fund Escrow Agreement if, but only if, funds are retained in the Accounts in the amount of the indebtedness asserted by McCarthy.

5. Except as provided herein, McCarthy shall have no right or property interest in the Accounts or any funds held therein. [Emphasis added.]

Towards the end of the construction, Phoenix ceased making payments to McCarthy. McCarthy subsequently stopped work because of non-payment. McCarthy filed a mechanics lien in October, 1988, for $19,443,000 to protect its interests and the interest of subcontractors.

McCarthy sued to foreclose its mechanics lien, to recover contract damages in an amount of $18,449,549, and to enjoin Phoenix from making any further withdrawals from the fund which was in escrow at MHT. McCarthy's amended complaint added a claim for an equitable lien against the fund. McCarthy alleged that the amount then in the fund was less than the amount of its asserted indebtedness and requested specific performance of the guaranty provisions of the security agreements.

Phoenix answered and counterclaimed asserting that, among other things, 1) McCarthy had double billed and failed to account for legitimate back charges; 2) part of the escrow money was needed to pay other contractors and vendors for resort projects and to correct McCarthy's defective work; 3) McCarthy had an adequate legal remedy through the judgment it was seeking against a solvent company as well as through its mechanic's lien foreclosure action. Phoenix alleged that McCarthy's assertion of Phoenix's indebtedness to it was not made in good faith and with clean hands.

McCarthy, in its lawsuit, asserted an indebtedness of approximately $18,400,000. It was ascertained that the balance in the fund agreement was less than the amount asserted. Furthermore, MHT had been instructed to prepare for another withdrawal. The trial court granted McCarthy's request for a temporary restraining order followed by a preliminary injunction enjoining Phoenix from making or permitting further withdrawals from the fund agreement. The preliminary injunction is the order at issue in this appeal.

DID THE TRIAL COURT ABUSE ITS DISCRETION IN ENTERING A PRELIMINARY INJUNCTION WITHOUT ALLOWING THE DEFENSE A REASONABLE OPPORTUNITY TO PRESENT ITS CASE?

STANDARD OF REVIEW

We review the trial court's order granting a preliminary injunction for abuse of discretion. Financial Assoc's, Inc. v. Hub Properties, Inc., 143 Ariz. 543, 545, 694 P.2d 831, 833 (App.1984); Los Angeles Memorial Coliseum Comm'n v. National Football League, 634 F.2d 1197, 1200 (9th Cir.1980). An abuse of discretion exists if the trial court 1) applied the incorrect substantive law or preliminary injunction standard; 2) based its decision on a clearly erroneous finding of fact that is material to the decision to grant or deny the injunction; or 3) applied an acceptable preliminary injunction standard in a manner that results in an abuse of discretion. Zepeda v. United States Immigration & Naturalization Serv., 753 F.2d 719, 724 (9th Cir.1983).

DISCUSSION

At the commencement of the preliminary injunction hearing held on April 18, 1989, the trial court stated that it had reserved only two days for the hearing. It is apparent from statements made by counsel for Phoenix that he assumed that McCarthy would have one day to present its evidence and Phoenix would have the second day to present its case.

In the afternoon of the second and final day of the hearing, the court reconvened at 2:05 p.m. and completed testimony of a McCarthy witness who had commenced testifying in the morning. Thereafter, McCarthy recalled a witness who had previously been on the stand two different times.

When testimony of the recalled witness was concluded, McCarthy rested. Thereafter, preliminarily to the making of the oral motion to dismiss by Phoenix, a discussion occurred between the court and Phoenix's counsel, Joseph McGarry. The pertinent portions are:

THE COURT: The kind of things you generally try to establish are generally handled by legal argument, first of all.

MR. MCGARRY: But I have to have some base to argue from.

THE COURT: Affidavits generally provide it. Depositions, or some other form of discovery, generally provides it. Avowals by counsel generally provide it. Those are three alternative methods to get facts into the record which the Court will accept. Sometimes judicial notice of various things, of the files, will provide it.

....

THE COURT: One of the two.

I think I have enough evidence on hand right now to make a determination with respect to the TRO, with respect to the continuation or the elimination of the TRO.

....

I think we are really going to get into the legal arguments more than anything else. I think I am at a point I don't believe I need any more. I think we are going to have this rush to get more. You can step back, and Mr. Braun will now take the record for the legal arguments.

....

MR. MCGARRY: ....

But let me--What I was driving at, Your Honor, was going to put a witness on on [sic] unclean hands, which is something you look at.

THE COURT: Fine. If that's what we are going to deal with, fine.

MR. MCGARRY: Yeah.

THE COURT: But I think on the financial conditions and the various other things about which we have talked, that we are--basically have sufficient information for me to make a determination whether or not--well, also, with the confession on the record.

MR. TIMMERMAN (attorney for McCarthy): O.K.

THE COURT: I think we have got enough on the record, I think we have got enough in the record for me to make a determination. [Emphasis added.]

Phoenix then made a motion to dismiss which was argued at length. When the arguments were concluded on the motion to dismiss, Mr. McGarry stated, "I'd like to put on my case, Your Honor, in defense, as well as be heard on the bond at length. Because it would be, you know, humongous damages." The court responded, "O.K. I'm going to take a recess for a period of time. I don't know how long it will take."

The court reconvened at 4:18 p.m. Without ruling on the motion to dismiss and...