Otto v. Otto
| Decision Date | 14 February 2019 |
| Docket Number | No. 1 CA-CV 18-0080,1 CA-CV 18-0080 |
| Parties | ALAN ROBERT OTTO, et al., Plaintiffs/Appellees, v. MARK WILLIAM OTTO, et al., Defendants/Appellants. |
| Court | Arizona Court of Appeals |
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
Appeal from the Superior Court in Maricopa County
The Honorable David B. Gass, Judge
AFFIRMED
By Andrew S. Gordon, Marvin C. Ruth, Katherine L. Hyde
By Geoffrey S. Kercsmar, Eric B. Hull, Callie P. Maxwell
Presiding Judge Lawrence F. Winthrop delivered the decision of the Court, in which Judge Maria Elena Cruz and Judge Kenton D. Jones joined.
¶1 This appeal involves a dispute between two brothers, Alan and Mark Otto, regarding the meaning of and obligations arising from a 2012 Equity Interest Purchase Agreement ("the Purchase Agreement") pursuant to which Alan purchased Mark's share of a group of jointly-owned family businesses (collectively, "the Otto Companies").1 The dispute boils down to two primary questions: (1) Did Alan owe a duty to indemnify Mark for taxes owed in excess of estimated taxes projected in a "Schedule F" Purchase Price Allocation Schedule to the Purchase Agreement; and (2) Did Alan breach any terms of the Purchase Agreement? The trial court concluded that Alan did not owe such a general duty to indemnify Mark and did not breach the Purchase Agreement. Mark appeals the trial court's judgment in favor of Alan, raising numerous issues. Concluding that the trial court did not misinterpret the Purchase Agreement and substantial evidence supports the court's rulings, we affirm.
¶2 Alan and Mark were in business together for many years before they decided to part ways. The terms of the Purchase Agreement were heavily negotiated, with each brother represented by separate legalcounsel—Alan by Andrew Gordon and Mark by Scott Weiss. The Otto Companies retained MCA Financial Group ("MCA")—Morrie Aaron and Paul Roberts—as an independent financial consultant to help broker the deal.
¶3 The structure of the Otto Companies complicated the sale, as each business had its own financials and tax history.2 Further, over the years, Alan and Mark had each maximized tax advantages and deferrals from the companies to minimize their personal taxes, which they would need to account for through the sale and change of ownership, meaning the sale would likely result in a significant tax event.3 Otto Trucking's CFO, Bryan Adamson, and Jim Raftery, the Otto Companies' long-time accountant, used the companies' available financial information for cash flow projections and liquidation analysis. Raftery provided this information to Mark's tax accountant and financial advisor, William Hodges, to estimate Mark's tax obligations going forward. The projections, often referred to by the parties as Schedule F, were a spreadsheet called the Purchase Price Allocation Schedule. The numbers in Schedule F allowed for a preliminary estimate as to the values of the Otto Companies and set forth an estimated tax basis in the various companies.
¶4 Due to the uncertainty regarding how much he would ultimately owe in taxes, Mark proposed during negotiations that Alan agree to a blanket tax indemnification provision guaranteeing the tax projections—to be included as § 6.02(iv) of the Purchase Agreement's general indemnification section, 6.02—which would ultimately require Alan to indemnify Mark for "any obligation of the Mark Otto Parties to pay amounts related to tax or other obligations that exceed those projections set forth in the Purchase Price Allocation Schedule." Alan ultimately rejectedthe blanket indemnification, and the final version of the Purchase Agreement, executed by the parties, did not contain that provision.4
¶5 In September 2012, Mark and Alan, their respective trusts, and the Otto Companies entered the Purchase Agreement, which detailed the duties and warranties each side promised to uphold. In exchange for relinquishing his ownership interests in the Otto Companies, Mark agreed to receive payments totaling approximately $4.05 million (in the amount of $22,500 per month), and approximately $2 million as reimbursement for money he had previously lent the Otto Companies. After execution of the Purchase Agreement, Alan controlled the Otto Companies.
¶6 When the Otto Companies began preparing 2010 and 2011 amended tax returns and 2012 original tax returns, the tax estimates exceeded the Schedule F projections, and Mark demanded indemnification. Robert Shull, counsel for Alan, responded that it made sense to first determine Mark's actual—rather than estimated—tax liability before determining whether Alan might owe Mark any indemnification. Further, as Shull and Raftery later testified, Alan was trying to determine if a re-allocation of management fees might help Mark reduce his taxes.
¶7 Mark then refused to sign a forbearance agreement on a bank loan to the Otto Companies unless he received approximately $200,000 for his estimated taxes. In September 2013, the Otto Companies remitted $200,000 to cover Mark's estimated personal tax obligations.
¶8 In 2014, Alan filed a First Amended Complaint against Mark, asserting claims for declaratory judgment, breach of contract, unjust enrichment, and specific performance. Alan sought declaratory relief that he did not owe a duty to indemnify Mark for taxes Mark owed that exceeded the projections set forth in Schedule F. The breach of contract and unjust enrichment claims sought return of the $200,000 tax payment, whichAlan asserted had been conditioned upon an understanding that if Mark's 2012 tax liability was reduced, Mark would then reimburse the Otto Companies accordingly. Finally, the specific performance claim sought return of the Purchase Agreement's loan promissory note, which had allegedly been paid in full.
¶9 Mark answered Alan's complaint and filed a counterclaim. In his Amended Counterclaim, Mark alleged claims for breach of contract, promissory estoppel, breach of the implied covenant of good faith and fair dealing, and declaratory relief. In part, Mark alleged Alan had breached §§ 2.05, 4.02, 5.03, and 6.02 related to tax indemnity; § 5.08 related to financial reporting; and § 5.04 related to Alan's post-agreement compensation from the Otto Companies. In general, Mark asserted that, by allegedly breaching these provisions, Alan had caused Mark's taxes to exceed the figures projected in Schedule F of the Purchase Agreement. Mark's promissory estoppel claim arose out of numerous promises Alan or his agents had allegedly made that Alan would pay for Mark's taxes that exceeded the allegedly warranted amounts in Schedule F.
¶10 On July 24 to 27, 2017, the trial court held a four-day bench trial. As ordered by the court, the parties submitted closing memoranda on August 21, 2017, and the court took the matter under advisement.
¶11 On October 4, 2017, the court issued its verdict. Neither side had requested findings of fact or conclusions of law, see Ariz. R. Civ. P. 52(a)(1), and the court summarily found (1) Alan did not owe a duty to indemnify Mark for taxes owed in excess of the estimates set forth in the Schedule F Purchase Price Allocation Schedule to the Purchase Agreement; (2) Alan did not breach the Purchase Agreement; (3) Mark had not proven damages as a result of any alleged breaches of the Purchase Agreement; (4) Alan was entitled to recover the $200,000 tax payment advanced to Mark; (5) Alan was not entitled to pre-judgment interest on the $200,000 payment advanced to Mark; (6) Alan had paid Mark all amounts due under the loan promissory note and the attached payment schedule; (7) Alan was entitled to the return of the original executed loan promissory note; and (8) Mark was not entitled to relief on any counterclaims.
¶12 On January 16, 2018, the trial court entered a final judgment pursuant to Arizona Rule of Civil Procedure 54(c) in favor of Alan on all counts, awarding $200,000 in compensatory damages, $528,000 in attorneys' fees under Arizona Revised Statutes ("A.R.S.") section 12-341.01, and $12,181.65 in taxable costs under A.R.S. § 12-341.¶13 Mark filed a timely notice of appeal. We have jurisdiction pursuant to A.R.S. § 12-2101(A)(1).
¶14 "When reviewing issues decided following a bench trial, we view the facts in the light most favorable to upholding the court's ruling." Bennett v. Baxter Grp., Inc., 223 Ariz. 414, 417, ¶ 2 (App. 2010) (citation omitted). We give due regard to the opportunity of the trial court to judge the credibility of witnesses and will not set aside the court's findings unless they are clearly erroneous. Castro v. Ballesteros-Suarez, 222 Ariz. 48, 51, ¶ 11 (App. 2009) (citation omitted). If substantial evidence supports a finding of fact, that finding is not clearly erroneous, even if substantial conflicting evidence exists. Id. at 51-52, ¶ 11 (citation omitted). In our review, we do not reweigh the evidence or substitute our evaluation of the facts. Id. at 52, ¶ 11. We will, however, review de novo the court's legal conclusions and interpretation of a contract. See id. at ¶ 12; Grubb & Ellis Mgmt. Servs., Inc. v. 407417 B.C., L.L.C., 213 Ariz. 83, 86, ¶ 12 (App. 2006).
¶15 Mark argues the trial court erred in using parol evidence—specifically, evidence of the blanket warranty/indemnification contained in the proposed but ultimately rejected § 6.02(iv)—to create an ambiguity that contradicted the otherwise unambiguous meaning of the Purchase Agreement, thereby rendering several unambiguous provisions of the Purchase Agreement unenforceable.
¶16 We review de novo whether evidence is admissible under the parol evidence...
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