Powers Steel & Wire Prods. v. Vinton Steel, LLC
| Docket Number | 1 CA-CV 20-0652 |
| Decision Date | 23 November 2021 |
| Parties | POWERS STEEL & WIRE PRODUCTS, INC., Plaintiff/Appellant, v. VINTON STEEL, LLC, et al., Defendants/Appellees. |
| Court | Arizona Court of Appeals |
Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court
Appeal from the Superior Court in Maricopa County No. CV2018-011427 The Honorable Roger E. Brodman, Judge Retired
By William John Quinlan, Eric T. Schmitt
Counsel for Plaintiff/Appellant
Curl & Glasson, PLC, Tucson
Counsel for Defendants/Appellees Judge James B. Morse Jr. delivered the decision of the Court, in which Presiding Judge D. Steven Williams and Judge David B. Gass joined.
¶1 Powers Steel and Wire Products, Inc. ("Powers Steel") appeals the grant of summary judgment to Vinton Steel LLC ("Vinton Steel") and its manager, David Villarreal (collectively "Defendants"). For the following reasons, we affirm.
¶2 Powers Steel is a family-owned steel fabricator and distributor. William Powers[1] worked as an employee, director, and officer at Powers Steel until he retired in December 2017. William still owns approximately 16.7% of Powers Steel's non-voting shares. Alice Powers (William's aunt) holds the entirety of Powers Steel's voting stock. Alice's five children and William hold equal portions of the non-voting shares. Before William resigned, all shareholders also served as corporate directors. Powers Steel alleges that William "continues to hold decision-making powers and responsibilities as a shareholder in [Powers Steel]."
¶3 William did not covenant not to compete with Powers Steel, and, after retiring, started Powers Reinforcing Fabricators, LLC ("PRF").
¶4 Vinton Steel is a rebar supplier that supplied Powers Steel until March 2018. When William started PRF, Vinton Steel extended lines of credit for PRF to purchase steel.
¶5 Powers Steel sued William and PRF in February 2018, asserting William breached fiduciary duties he owed to Powers Steel. See generally Powers Steel & Wire Prods. Inc. v. Powers, 1 CA-CV 19-0136, 2021 WL 248634, at *1-2, ¶¶ 2-6, 13 (Ariz. App. Jan. 26, 2021) (mem. decision) (affirming denial of preliminary injunction and noting superior court's subsequent grant of summary judgment in favor of William and PRF).
¶6 In August 2018, Powers Steel filed this lawsuit against Defendants, asserting that they aided and abetted William's breach of fiduciary duties and tortiously interfered with Powers Steel's business expectancies.
¶7 Defendants moved for summary judgment. After a partial ruling and supplemental briefing, the superior court eventually granted summary judgment to Defendants on all claims. The court held that (1) no evidence supported a breached duty through a partnership agreement or steel purchases, (2) any agreement was not a breach but a mere preparation to compete, and (3) Powers Steel failed to establish non-speculative damages.
¶8 Defendants sought fees as a sanction. The superior court found that though "the case was brought for harassment" it could not find that Powers Steel pursued the case "solely or primarily" to harass Defendants. But the court also found that Powers Steel sought unreasonable, disproportional, and inappropriate discovery. The court further found that Powers Steel "failed to make complete and timely disclosures," and awarded Defendants $87, 877 in attorney fees under A.R.S. § 12-349. The court also awarded $10, 701 in costs and $26, 993 as a sanction under Rule 68(g).
¶9 Powers Steel timely appealed, and we have jurisdiction under A.R.S. § 12-2101(A)(1).
¶10 We review the grant of summary judgment de novo "viewing the facts and reasonable inferences in the light most favorable to the non-prevailing party." BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 365, ¶ 7 (2015). We review the imposition of sanctions for an abuse of discretion. Lund v. Donahoe, 227 Ariz. 572, 578, ¶ 19 (App. 2011).
¶11 Aiding and abetting a breach of fiduciary duty requires: (1) a breached fiduciary duty; (2) the defendant's knowledge of that breach; (3) the defendant's substantial assistance in the breach; (4) a causal relationship between defendant's assistance or encouragement and the breach; and (5) the breach injured the plaintiff. Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480, 495, ¶ 64 (App. 2008).
¶12 Powers Steel's claim is based on two separate alleged duties -William's duty as an employee during his employment and his alleged duty as a shareholder following his employment. Both arguments fail.
¶13 Powers Steel's post-December 2017 claim theorizes that William, as a minority shareholder in Powers Steel, owed a fiduciary duty. "The existence of a fiduciary duty is a question of law we review de novo." Maxfield v. Martin, 217 Ariz. 312, 314, ¶ 12 (App. 2007).
¶14 Generally, shareholders do not assume fiduciary duties when they acquire shares in a corporation. Compare A.R.S. §§ 10-830(A), -842(A) (providing fiduciary duties for corporate officers and directors), with A.R.S. § 10-622 (); see also Duties of shareholders, 6 Ariz. Prac, Corporate Practice § 6:119 (). But a majority shareholder is more akin to an officer or director and "occupies a fiduciary relation to the holders of the minority stock and the corporation, who can only act through him." Heffern Coop. Consol. Gold Mining & Milling Co. v. Gauthier, 22 Ariz. 67, 69-70 (1920); see also Garrett v. Reid-Cashion Land & Cattle Co., 34 Ariz. 245, 262-63 (1928) (); accord Steinfeld v. Copper State Mining Co., 37 Ariz. 151, 163 (1930). Thus, a majority shareholder with the ability to manage and control a corporation owes the same fiduciary duty as an officer or director. Mims v. Valley Natl Bank, 14 Ariz.App. 190, 192 (1971) (citing Steinfeld v. Nielsen, 15 Ariz. 424 (1913)). As the United States Supreme Court held, "[t]he majority has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors." S. Pac. Co. v. Bogert, 250 U.S. 483, 487-88 (1919); accord Pepper v. Litton, 308 U.S. 295, 306 (1939).
¶15 Powers Steel asserts an exception to this general rule such that minority shareholders in closely held corporations owe a fiduciary duty "due to close corporations' strong resemblance to partnerships." Even if we assume that Powers Steel is closely held, [2] William's ownership interest in Powers Steel is not equivalent to a partnership interest and does not give rise to a fiduciary duty.
¶16 In limited circumstances, Arizona courts have considered closely held corporations as similar to partnerships. In Funk v. Spalding, our supreme court addressed a dispute between two 50-50 shareholders in a business "operated as a partnership." 74 Ariz. 219, 221 (1952). The supreme court found the two shareholders had a fiduciary relationship based on their "absolute confidence in each other" and that one shareholder's absence due to World War II placed a duty on the remaining shareholder to protect the absent shareholder's interest in the business. Id. at 224. The court held that the aggrieved shareholder was not required to sue the other derivatively for his share of profits, in part, because of the fiduciary relationship between partners. Id. Relying on this distinction, other Arizona courts have recognized a fiduciary relationship between 50-50 shareholders. See Johnson v. Gilbert, 127 Ariz. 410, 411-12 (App. 1980) (), overruled on other grounds by Turley v. Ethington, 213 Ariz. 640 (App. 2006); see also Wichansky v. Zowine, CV-13-01208-PHX-DGC, 2016 WL 11002479, at *4 (D. Ariz. Apr. 19, 2016) ().
¶17 But outside the equal-ownership context, Powers Steel does not cite, and we cannot find, an Arizona case extending the fiduciary duty of partners to all closely held corporations. Powers Steel primarily relies on Ohaco Sheep Co. v. Heirs of Ohaco, where the trial court found that four equal shareholders reconfigured their partnership as a corporation but continued to operate as a partnership. 148 Ariz. 142, 143-44 (App. 1986). But Ohaco Sheep does not support Powers Steel's argument. This Court accepted "the trial court's legal conclusion that, in spite of the corporate form, the parties dealt with each other as partners." Id. at 145. But we described the trial court's conclusion as "probably not supportable" and the concession was made "strictly on the basis that whether the original parties were former stockholders or former partners the legal result [wa]s the same." Id. at 145 n.3. Other cases cited by Powers Steel are similarly unhelpful. See, e.g., Dooley v. O'Brien, 226 Ariz. 149, 151, 154-55, ¶¶ 2, 21-22 (App. 2010) ( that a director and minority shareholder in closely held company had a legal not contractual, right to personally seek an accounting for purposes of attorney fee statute).
¶18 In the absence of persuasive Arizona authority, Powers Steel cites out-of-state c...
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