McElhanon v. Hing

• Decision Date: 01 October 1985
• Docket Number: No. 1,CA-CIV,1
• Citation: 151 Ariz. 386,728 P.2d 256
• Parties: Harvey R. McELHANON, Jr., and Doreen T. McElhanon, his wife, Plaintiffs- Appellees Cross-Appellants, v. Robert Ong HING and Alice Hing, his wife, Defendants-Appellants Cross- Appellees. 5933.
• Court: Arizona Court of Appeals

Page 256

728 P.2d 256

151 Ariz. 386

Harvey R. McELHANON, Jr., and Doreen T. McElhanon, his wife, Plaintiffs- Appellees Cross-Appellants, v. Robert Ong HING and Alice Hing, his wife, Defendants-Appellants Cross- Appellees.

No. 1 CA-CIV 5933.

Court of Appeals of Arizona Division 1, Department A.

Oct. 1, 1985.

Jack E. Evans, Ltd. by Jack E. Evans, Phoenix, for plaintiffs-appellees cross-appellants.

Daughton, Feinstein & Wilson by Donald Daughton, Allen Feinstein, R. Stewart Halstead, Phoenix, for defendants-appellants cross-appellees.

GRANT, Judge.

This appeal raises the question of whether there is a cause of action against an attorney who, while acting in his capacity as an attorney, engages in a conspiracy to defraud a judgment creditor of his client. A cross-appeal raises the issue of whether a judgment creditor may recover damages in excess of his judgment plus incidental costs as a result of an alleged conspiracy to hinder him from collecting his judgment. Several sub-issues are raised in relation to the main issue on appeal.

FACTS

I. History of Parties' Relationships.

A detailed history of the facts leading up to this lawsuit is necessary for an understanding of the issues raised on appeal. In the summer of 1970, appellee Harvey R. McElhanon, Jr. (McElhanon), John H. Greer, Jr. (Greer), and Charles Gilbert Harris (Harris) purchased stock in several corporations which operated restaurants. One group of restaurants was acquired through the acquisition of stock in corporations owning the restaurants. The stock of these corporations was placed in escrow as security for payment of the purchase price. Another restaurant, Pinnacle Peak Patio, was owned by the Southwest Restaurants Systems, Inc. (Southwest), a new corporation formed by McElhanon, Greer and Harris. McElhanon and Greer each contributed $85,000 as down payment for the stock of these corporations. McElhanon, Greer and Harris each became owner of one-third of the stock in each of the corporations.

In return for his receiving his stock ownership, Harris agreed to forego dividends from the restaurants until the initial down payment by McElhanon and Greer had been returned to them. A formula was devised whereby Harris would waive $250,000 in dividends, and after that sum was reached, would thereafter participate equally in the dividends. This agreement was reached because Harris was unable to pay his one-third share of the purchase price. Part of this agreement was that if there were no profits Harris incurred no obligation to pay.

II. Maricopa County Cause No. C-249999.

Several months following the purchase of the stock in the corporations, in the fall of 1970, disputes arose among these three shareholders. In May, 1971, John Philip Grace (Grace), the lawyer for the corporations (also the personal attorney of Greer), wrote to McElhanon's attorney requesting that McElhanon sell his interest in the corporations to Greer and Harris. McElhanon declined. In May, 1971, at a corporate meeting McElhanon was not re-elected as an officer of the corporations. At the time McElhanon was primarily responsible for operating the restaurant known as Pinnacle Peak Patio. About that time McElhanon filed suit in Maricopa County Cause No. C-249999 against Harris, Greer, and the corporations seeking both a determination that Southwest and the other corporations were a partnership, not a corporation, and seeking monetary relief: payment of $250,000 based on Harris's prior promise to pay that sum; damages against Greer for maliciously interfering with Harris's obligation to pay that sum, and damages on the grounds that Greer and Harris had committed acts of malfeasance and misfeasance against the corporations.

Grace originally represented the defendants in that action. Shortly after the suit In the spring of 1972, an arbitration proceeding determined that McElhanon's one-third stock interest was worth $483,600. An attempt to reduce the arbitration award was unsuccessful.

[151 Ariz. 390] was filed Grace began consulting with attorney Robert Ong Hing (Hing) who is the defendant/appellant in this appeal. In accordance with a shareholders' agreement among Harris, Greer and McElhanon, an application for arbitration as to the value of the stock of the corporations was filed and arbitration hearings were held. Harris and Greer eventually retained Hing as counsel for them individually. Apparently on one occasion Grace stated that Hing was hired because Grace had a conflict in representing both Southwest and Greer and Harris personally. Although the record is somewhat confused on this point it is clear that Grace and Hing consulted frequently about matters relating to the lawsuit in cause no. 249999.

In September, 1973, a trial was held in cause no. C-249999. Hing represented Greer and Harris in the action. On October 11, 1973, the jury returned a verdict in C-249999 in the amount of $200,000 in favor of McElhanon and against Harris based on Harris's promise to pay that amount from the dividends of the corporation. No relief was given against Greer. The following day judgment was entered on the jury's verdict. On the date the judgment was entered against Harris his interest in the restaurant corporation was the only asset which could be used to satisfy McElhanon's judgment.

It is the sequence of events following the return of the jury's verdict in cause no. 249999 and entry of the judgment against Harris on October 12, 1973, which caused McElhanon to bring the instant action against Greer, Grace and Hing for an unlawful conspiracy to defraud McElhanon's rights as a judgment creditor. McElhanon claimed that as a result of the participation of Greer, Grace and Hing in this sequence of events that his rights as a judgment creditor were rendered worthless, the restaurant corporations became bankrupt, and, in addition, McElhanon's one-third interest in those restaurant corporations became worthless. Although the record is confused, the main allegation is that, after being informed of the verdict, Greer and Harris went to Hing's office to discuss the matter. During the course of the meeting they apparently expressed a desire to have Greer purchase Harris's stock in the corporations. Hing prepared a sale agreement to that effect. Harris's stock certificate in Southwest was cancelled and a new stock certificate was issued in Greer's name and the transaction was completed by October 13, 1973. McElhanon claims that the transfer of this stock to Greer was fraudulent and was facilitated by Hing and Grace. Because there were outstanding legal fees owed to Hing by Greer and Harris, Hing retained the Southwest stock certificates, the agreement, and the note and assignment as security for his fees. Hing subsequently filed post-judgment motions as well as a motion for a stay which was granted pending a ruling on the post-trial motions.

On October 20th, prior to the order staying execution, McElhanon had a writ of garnishment served against the corporations as garnishee defendants. The writ was timely answered. In the answer it was disclosed that Harris did not own any stock in the corporations and that Greer was indebted to Harris. As a result of this answer McElhanon became aware of the sale of stock from Harris to Greer. McElhanon filed an application for an order to show cause to set aside the sale of stock from Harris to Greer. The order to show cause was dismissed. On November 14, Harris appealed the judgment against him. On the same day Harris, Greer and Southwest signed a promissory note in favor of Hing and his law partner in the sum of $25,000 for fees owed.

III. The Bankruptcy Actions.

On July 26, 1974, Southwest filed a voluntary bankruptcy petition under Chapter XI of the Bankruptcy Act. In February, 1975, Harris filed a voluntary bankruptcy petition. In October, 1976, Greer filed a McElhanon sought a determination in the Harris bankruptcy action that he was entitled to a lien on the stock which Harris had sold to Greer. The law firm of Stockton and Hing opposed McElhanon's claim on the ground that it had a prior right to the stock because of its retaining lien for its fees. The bankruptcy judge ruled in favor of McElhanon. Stockton and Hing appealed that decision to federal district court. The district court reversed the bankruptcy court and ruled that Stockton and Hing's lien was superior to McElhanon's claim based on his writ of garnishment. McElhanon appealed the district court's decision to the Ninth Circuit, which reversed the district court and reinstated the judgment of the bankruptcy court.

[151 Ariz. 391] voluntary bankruptcy petition. The bankruptcy court ruled that the October 13th agreement was a fraudulent conveyance and that Harris's bankruptcy trustee owned the stock in Southwest.

While these various actions were being litigated both McElhanon and Hing bid for the stock of Southwest in the reorganization proceedings. McElhanon's bid was accepted by the court. McElhanon paid $700,000 in cash for the new stock and assumed an existing encumbrance on the Pinnacle Peak Patio Restaurant in the amount of $400,000.

IV. The Instant Action (Maricopa County Cause No. C-320360).

McElhanon filed the instant action on September 23, 1975. He amended his complaint on March 14, 1980 to contain four counts. Count 1 was an allegation of an unlawful conspiracy among Harris, Greer, the law firm of Stockton and Hing, Stockton and Hing individually, and Grace to defraud McElhanon as a judgment creditor and to violate certain statutes. Count 2 alleged that the firm of Stockton and Hing breached its statutory duties as a garnishee defendant. Count 3 alleged that Greer breached his statutory duties as a garnishee defendant. Count 4 alleged that Grace breached his duties as a garnishee defendant and that Grace and Greer breached their duties as agents of the garnishee defendants. The court granted Hing's and Grace's motions for summary judgment as to Counts 2 and 4. The...