McKesson Chemical Co., a div. of Foremost-McKesson, Inc. v. Van Waters & Rogers

• Decision Date: 05 May 1987
• Docket Number: CA-CIV,FOREMOST-M,No. 1,1
• Citation: 739 P.2d 211,153 Ariz. 557
• Parties: McKESSON CHEMICAL CO., A DIVISION OFcKESSON, INC., Defendant-Appellee, v. VAN WATERS & ROGERS, Intervenor Defendant Cross-claimant-Appellant. 8845.
• Court: Arizona Court of Appeals

Page 211

739 P.2d 211

153 Ariz. 557

McKESSON CHEMICAL CO., A DIVISION OF FOREMOST-McKESSON, INC., Defendant-Appellee, v. VAN WATERS & ROGERS, Intervenor Defendant Cross-claimant-Appellant.

No. 1 CA-CIV 8845.

Court of Appeals of Arizona Division 1, Department A.

May 5, 1987.

[153 Ariz. 558] Lewis and Roca by John P. Frank, Janet A. Napolitano, Phoenix, and Suciu, Donovan & Schmitt by Robert E. Schmitt, Yuma, for defendant-appellee.

Hunt, Stanley, Hossler & Rourke, Ltd. by David J. Hossler, Karen S. Gaylord, Yuma, for intervenor defendant cross-claimant-appellant.

OPINION

BROOKS, Judge.

The issue presented in this appeal is whether the trial court erred in failing to award attorney's fees to intervenor Van Waters & Rogers against defendant McKesson Chemical Co.

PROCEDURAL HISTORY

This case began as an action between plaintiff OEM Repro Products, Inc. (hereinafter "plaintiff") and defendant McKesson Chemical Co. (hereinafter "McKesson"). McKesson is engaged in the business of distributing chemicals including a chemical known as dibutyl phthalate (hereinafter "DBP"). McKesson sells its DBP in black barrels. Intervenor Van Waters & Rogers (hereinafter "Van Waters") is a competing chemical company and sells its DBP in green barrels with white tops. In June of 1982, McKesson supplied a barrel of DBP to plaintiff. That same month, because DBP was in short supply, McKesson had purchased four barrels of DBP from its competitor Van Waters. McKesson thereafter received a letter of complaint from plaintiff, claiming that the DBP it had received from McKesson was contaminated. McKesson declined to acknowledge or honor plaintiff's claim, and in January of 1983, plaintiff brought suit against McKesson, seeking substantial damages incurred by reason of its use of the defective DBP.

On September 12, 1983, Van Waters received a letter from William Nebeker, then McKesson's attorney, demanding that Van Waters "come in and defend" based upon A.R.S. § 44-2370(E)(1) (now A.R.S. § 47-2607(E)(1)), which provides:

E. Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over:

1. He may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.

McKesson claimed that the DBP supplied to plaintiff in June 1982, was one of the four barrels that McKesson had purchased from Van Waters in that same month. Van Waters declined to assume defense of the case. McKesson then filed a motion for leave to file a third-party complaint to add Van Waters and certain other companies as third-party defendants. That motion was denied.

On December 7, 1983, Nebeker sent a second letter to Van Waters, notifying it that McKesson believed that a strong defense could be presented that neither McKesson nor Van Waters was responsible for the contaminated DBP, but that if Van Waters did not voluntarily choose to intervene in the action, McKesson might stipulate to facts with plaintiff designed to allow the jury to find that the defective DBP came from a Van Waters barrel. ¹ After reviewing this letter, Van Waters sought leave to intervene pursuant to Rule 24(a), Arizona Rules of Civil Procedure. ² The trial court granted the motion, allowing Van Waters to intervene as a defendant and as a cross-claimant seeking indemnity, attorney's fees, and costs from McKesson.

After Van Waters concluded discovery and convinced itself that it had not provided McKesson with the barrel containing defective DBP, it filed a motion for summary judgment against both plaintiff and McKesson, which was denied by the trial court. The matter then proceeded to trial, and at the close of plaintiff's case, Van Waters moved for a directed verdict against plaintiff and renewed its motion for summary judgment against McKesson. At this point, the trial court determined that no evidence had been presented nor could be presented that would establish any liability on the part of Van Waters. The trial court therefore granted a directed verdict for Van Waters against plaintiff and a partial summary judgment for Van Waters against McKesson, indicating that the issue of Van Waters' request for attorney's fees against McKesson would be reserved.

Thereafter, a jury verdict was returned in favor of plaintiff against McKesson for $3,128,082.00, and a formal judgment to that effect was entered. The trial court denied Van Waters' request for an award of attorney's fees against McKesson, and it is from this order that Van Waters has appealed to this court.

JURISDICTION

As a preliminary matter, we note that McKesson alleges in the answering brief that the notice of appeal was not timely filed and that this court therefore has no jurisdiction over the appeal. This issue was previously resolved by this court when it denied McKesson's motion to dismiss the appeal, and we decline to reconsider that ruling.

ATTORNEY'S FEES AT TRIAL

Van Waters argues that the trial court erred in ruling that there was "no sufficient basis" to support an award of attorney's fees against McKesson. Van Waters contends that it should have been awarded attorney's fees on any one of three separate bases. ³

A. A.R.S. § 12-341.01(C)

We first consider Van Waters' argument that it was entitled to an award of attorney's fees pursuant to A.R.S. § 12-341.01(C), which provides that "[r]easonable attorney's fees shall be awarded by the court in any contested action upon clear and convincing evidence that the claim or defense constitutes harassment, is groundless and not made in good faith." Van Waters argues that McKesson had evidence from which it should have known that Van Waters could not possibly have been liable in this case. Van Waters points out that McKesson had the barrel of contaminated DBP, which plaintiff had returned, in its possession throughout the litigation. Van Waters argues that because McKesson knew all along that the barrel was one of its own black barrels and not a green Van Waters barrel, McKesson must have been acting in bad faith in attempting to convince Van Waters that it might be ultimately liable; in indicating to Van Waters that it would consider stipulating with plaintiff to facts that would shift liability to Van Waters; and in opposing Van Waters' motions for summary judgment and for a directed verdict. McKesson responds that there was no clear and convincing evidence of bad faith and that the question of Van Waters' liability remained a debatable issue until trial was well underway.

It is undisputed that plaintiff returned a contaminated barrel of DBP to McKesson, that the barrel was black rather than green, and that McKesson was aware of these facts. The barrel was introduced at trial as Exhibit 12. It was marked with the name, "Moreland-McKesson," and the number, "25280." Plaintiff claimed that McKesson had delivered the barrel to it on June 18, 1982, but plaintiff had no documentation to establish receipt of that barrel on that date.

In October of 1982, a McKesson chemist, Douglas Eisener, conducted an extensive review of company records in an effort to determine whether it was possible that McKesson had delivered Exhibit 12 to plaintiff in June of 1982. Eisener traced the forty-nine barrels of DBP that had been assigned the 25280 lot number and concluded that McKesson could not have had a barrel of 25280 on hand in June of 1982. As he interpreted the records, they showed that McKesson had no DBP in stock at all at that time, which was why it had been necessary to purchase four barrels from Van Waters.

Eisener also found evidence that a barrel of 25280 had been delivered in 1980 to plaintiff's predecessor, Columbia Ribbon, a company that had since declared bankruptcy and whose inventories were later acquired by plaintiff. Eisener concluded that the contaminated barrel was one that plaintiff had purchased from Columbia Ribbon and that it could have been contaminated while in possession of that company. He was convinced that McKesson could not have delivered anything but a green Van Waters barrel to plaintiff in June of 1982. ⁴

As a result of Eisener's research, McKesson attempted to bring Van Waters into the case and led Van Waters to believe that some doubt existed as to whether the contaminated barrel had come from the 1982 Van Waters shipment. Such doubt should not have occurred to one in possession of the only barrel alleged to be contaminated, a barrel that everyone agrees could not have come from Van Waters.

Van Waters did not become aware that the contaminated barrel was in fact a black McKesson barrel until about a month before trial, whereupon it filed a motion for summary judgment, and, later, a motion for a directed verdict following opening statements. McKesson and plaintiff successfully opposed these motions, apparently on the grounds that a debatable issue existed as to whether Van Waters was in the chain of distribution for the contaminated DBP. We are convinced, however, that the debatable issue was solely between McKesson and plaintiff and concerned whether McKesson had delivered the black barrel in question to plaintiff in 1982 or to Columbia Ribbon in 1980. In neither case, given that the contaminated barrel was black, could Van Waters have been liable.

However, the question for the trial court, in determining whether to award attorney's fees under A.R.S. § 12-341.01(C), was not only whether the claim against Van Waters was groundless, but also whether it was made in bad faith and constituted harassment. Under the plain language of that section, all three elements must be established by clear and convincing evidence in order to require an award of fees. Although we believe that the record might have supported an...