Monthofer Investments Ltd. Partnership v. Allen
| Decision Date | 28 January 1997 |
| Docket Number | CA-CV,No. 1,1 |
| Citation | 189 Ariz. 422,943 P.2d 782 |
| Parties | , 235 Ariz. Adv. Rep. 7 MONTHOFER INVESTMENTS LIMITED PARTNERSHIP, an Arizona limited partnership; The E.M.W. Family Trust; Wolfgang Monthofer and Nancy J. Monthofer, husband and wife, Third-Party Plaintiffs/ Appellants, v. Mark R. ALLEN and Jane Doe Allen, husband and wife; Mark R. Allen, P.C., an Arizona professional corporation, Third-Party Defendants/ Appellees. 93-0366. |
| Court | Arizona Court of Appeals |
In 1987, Wolfgang and Nancy Monthofer were co-trustees of the E.M.W. Family Trust, an entity which served as the sole general partner of another entity known as Monthofer Investments Limited Partnership ("MILP"). Mark Allen was the Monthofers' attorney.
In August 1987, as part of a complex real estate transaction, Allen arranged for MILP to assume liability on a full-recourse promissory note ("the Note") held by Goodbuck Investors Limited Partnership Number 3 ("Goodbuck"). In preparing the necessary documents, however, Allen mistakenly identified the Monthofers as general partners of MILP, when he should have identified E.M.W. Family Trust as the true general partner and the Monthofers as merely co-trustees of E.M.W. Family Trust. By signing as general partners, the Monthofers assumed personal liability on the Note.
MILP made the first annual payment on the Note in April 1988, but failed to make the payment due in April 1989. Goodbuck sued the Monthofers, alleging default. The Monthofers then filed a combined answer and third-party complaint against Allen, alleging that their personal liability, if any, arose from Allen's negligence in identifying them on the Note as general partners of MILP.
The parties to the Goodbuck-Monthofer lawsuit eventually entered a settlement agreement that called for a stipulated judgment to be entered against the Monthofers "in an amount equal to the total amount due and owing under the Note, including ... interest, late charges, litigation costs, and attorneys' fees." In exchange for Goodbuck's agreement not "to record, collect, or execute upon the stipulated judgment," the Monthofers promised to pursue their third-party claim against Allen and to assign any proceeds to Goodbuck to the extent necessary to satisfy the stipulated judgment.
The Monthofer-Allen claim proceeded to trial in April 1993. At the close of the Monthofers' case-in-chief, Allen moved for a directed verdict, asserting that the Monthofers' non-execution agreement with Goodbuck eliminated any damages from Allen's alleged malpractice. The trial court agreed that the non-execution agreement eliminated the face amount of the Goodbuck-Monthofer stipulated judgment as an element of damages, and directed a verdict for Allen on that issue. But the court permitted the Monthofers to proceed against Allen for the attorneys' fees they had incurred during the Goodbuck-Monthofer suit and for any damage to their credit rating from the Goodbuck-Monthofer stipulated judgment.
After a jury found for Allen on the surviving claims, the Monthofers appealed, raising three issues: (1) whether the trial court committed reversible error by eliminating the face amount of the Goodbuck-Monthofer judgment as an element of their damages; (2) whether the trial court erred by admitting the Goodbuck-Monthofer settlement agreement into evidence; and (3) whether the trial court incorrectly instructed the jury on the law of attorney malpractice. We address each issue in turn.
We first consider whether the trial court erred in granting Allen a partial directed verdict striking the face amount of the Goodbuck-Monthofer judgment as an element of the Monthofers' damage claim against Allen.
Damages are a necessary element in a legal malpractice action, as in any negligence action. Phillips v. Clancy, 152 Ariz. 415, 418, 733 P.2d 300, 303 (App.1986). Further, damages must be "ascertainable and nonspeculative." Tullar v. Walter L. Henderson, P.C., 168 Ariz. 577, 579, 816 P.2d 234, 236 (App.1991). Thus, the directed verdict was proper if either: (1) the non-execution agreement eliminated any damages to the Monthofers from the Goodbuck-Monthofer judgment; or (2) the non-execution agreement made the Monthofers' damages unascertainable or speculative.
In this case, these questions are essentially the same. Given the face amount of the judgment, there is nothing speculative or unascertainable about the amount of damages, if any, attributable to the judgment. The question is whether the judgment, although certain in amount, constitutes a damage element at all in light of the non-execution agreement.
To support their position that the non-execution agreement did not eliminate the Goodbuck-Monthofer stipulated judgment as a damage item against Allen, the Monthofers argue that Arizona courts should follow the "judgment rule." The judgment rule treats the full face amount of a judgment as a loss to the judgment debtor even if the debtor has made no payments on the judgment. See, e.g., Roebuck v. Steuart, 76 Md.App. 298, 544 A.2d 808, 814 (1988).
Allen does not dispute that Arizona courts should follow the judgment rule. However, each of the judgment rule cases cited by the Monthofers was grounded in a judicial concern, absent in this case, that a plaintiff/judgment debtor faced the imminent threat of execution on the underlying judgment. See Roebuck, 544 A.2d at 814; Carter v. Pioneer Mut. Casualty Co., 67 Ohio St.2d 146, 423 N.E.2d 188, 191 (1981); Montfort v. Jeter, 567 S.W.2d 498, 499-500 (Tex.1978); Hernandez v. Great American Ins. Co., 464 S.W.2d 91, 94 (Tex.1971); Allied Prods., Inc. v. Duesterdick, 217 Va. 763, 232 S.E.2d 774, 777 (1977) (Poff, J., dissenting). None of these cases concerned a covenant not to execute. 1 Moreover, because even recordation of the Goodbuck-Monthofer judgment is precluded by the non-execution agreement, the Monthofers do not face credit damage comparable to that faced by the plaintiffs in the judgment rule cases. Thus, the judgment rule cases do not help us to decide this case.
Allen argues that the non-execution agreement constitutes a total mitigation by the Monthofers of any damages they might otherwise have suffered from the Goodbuck-Monthofer judgment, eliminating the judgment as a damage element against Allen.
We distinguish for the purpose of this discussion between two related issues: (1) Does the non-execution agreement constitute a mitigation of damages inuring to the benefit of Allen? (2) If not, is the jury entitled to consider the non-execution agreement as evidence that the Monthofers too readily capitulated to a judgment and failed to meet their obligation to Allen to mitigate their damages? We defer the second question to Part II of this decision. To answer the first question, we distinguish a covenant not to execute from a release.
If, as a result of the Goodbuck-Monthofer negotiations, Goodbuck had released the Monthofers from any liability on the Note, the Monthofers would have avoided the substantial consequences of Allen's alleged malpractice, and Allen would face liability to the Monthofers only for incidental costs associated with the Goodbuck-Monthofer suit. See 66 AM.JUR.2D Release § 1, at 678 (1964) (); see also Kay v. Bricker, 485 So.2d 486, 487 (Fla.App.1986) (); McLane v. Russell, 159 Ill.App.3d 429, 111 Ill.Dec. 250, 254-55 512 N.E.2d 366, 370-71 (1987) (same), aff'd, 131 Ill.2d 509, 137 Ill.Dec. 554, 546 N.E.2d 499 (1989); Katzenberger v. Bryan, 206 Va. 78, 141 S.E.2d 671, 676-77 (1965) (same); Gustavson v. O'Brien, 87 Wis.2d 193, 274 N.W.2d 627, 631-32 (1979) (same).
However, the Monthofers did not obtain a release from Goodbuck; nor did they achieve by settlement any reduction in the note amount. To the contrary, Goodbuck obtained a personal judgment against the Monthofers for the full amount due under the Note in exchange for Goodbuck's contractual promise not to execute. The Monthofers claim, by reference to numerous "Damron agreement" cases, that such a promise does not mitigate, vitiate, or eliminate in any respect the damages flowing from the judgment. See generally Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969); see also United Serv. Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987); State Farm Mut. Auto. Ins. Co. v. Paynter, 122 Ariz. 198, 593 P.2d 948 (App.1979); Globe Indem. Co. v. Blomfield, 115 Ariz. 5, 562 P.2d 1372 (App.1977); Kagele v. Aetna Life & Casualty Co., 40 Wash.App. 194, 698 P.2d 90 (1985).
In a typical Damron agreement, an insured transfers his indemnity claims against his insurer to a judgment creditor in exchange for the judgment creditor's covenant not to execute against the insured. See, e.g., Damron, 105 Ariz. at 152-53, 460 P.2d at 998-99. And in Damron agreement cases, both divisions of this court have rejected the assertion that a covenant not to execute nullifies...
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