State ex rel. Woods v. Hameroff

• Decision Date: 27 October 1994
• Docket Number: CA-CV,No. 2,2
• Citation: 180 Ariz. 380,884 P.2d 266
• Parties: STATE of Arizona, ex rel. Grant WOODS, Attorney General, Plaintiff/Appellant, v. Marc Steven HAMEROFF; Arnold Eisenstadt; Midwest Mutual Corporation, Defendants/Appellees. LEWIS AND ROCA, Interested Party/Appellee. 94-0247.
• Court: Arizona Court of Appeals

Page 266

884 P.2d 266

180 Ariz. 380

STATE of Arizona, ex rel. Grant WOODS, Attorney General, Plaintiff/Appellant, v. Marc Steven HAMEROFF; Arnold Eisenstadt; Midwest Mutual Corporation, Defendants/Appellees.

LEWIS AND ROCA, Interested Party/Appellee.

No. 2 CA-CV 94-0247.

Court of Appeals of Arizona,

Division 2, Department B.

Oct. 27, 1994.

[180 Ariz. 381] Grant Woods, Atty. Gen. by Sydney K. Davis and Nancy V. Anger, Phoenix, for plaintiff/appellant.

Lewis and Roca by Geoffrey H. Walker and Cynthia A. Coates, Phoenix, for interested party/appellee.

OPINION

DRUKE, Chief Judge.

This appeal is taken from the trial court's ruling allowing a law firm to recover unpaid attorney's fees as part of a judgment against the defendants in a civil action brought under the Arizona Consumer Fraud Act (the Act), A.R.S. §§ 44-1521 to 44-1534. Because we agree that the trial court erred in construing the applicable statutes to include the law firm, Lewis and Roca, in the distribution as a victim of consumer fraud and because no other authority supports distribution to it of any portion of the funds seized pursuant to the Act, we reverse.

The underlying facts appear to be undisputed. From May 1991 until September 26, 1991, defendants Marc Hameroff, Arnold Eisenstadt, and Midwest Mutual Corporation operated an advance fee loan brokering business in which they represented to the public that, for a fee of $249, they could obtain loans for customers up to $25,000 regardless of the applicant's past or present credit problems. Although the defendants represented that the applications would be processed within 10 to 15 days and that there was a 90 percent approval rate, during the period from May to September 1991, only four loans were approved from 860 applications.

On September 27, 1991, the state filed a complaint against the defendants and obtained a temporary restraining order prohibiting them from engaging in the advance fee loan business or transferring any assets obtained by means alleged to violate the Act. The complaint also named Citibank as a defendant "solely due to the possible existence in its possession of proceeds of the consumer fraud" alleged in the complaint, and the restraining order prohibited the bank from transferring or distributing any funds of the defendants held by Citibank. The order identified two specific accounts, one in Hameroff's name and one in the name of Midwest Mutual. The complaint was later amended to designate two additional accounts in Hameroff's name. Significantly, the complaint did not seek the appointment of a receiver, see A.R.S. § 44-1528(A)(2), but requested only injunctive relief, restitution to the victims, and the assessment of attorney's fees and civil fines. Further, the only assets sought to be recovered were the four Citibank accounts.

On September 17, 1991, Hameroff retained Lewis and Roca to represent Midwest Mutual in the investigation and gave the firm a check in the amount of $5,000. Lewis and Roca represented Midwest Mutual until November 20, 1991, when it filed an application to withdraw from further representation on the ground that Midwest Mutual had failed to pay attorney's fees incurred beyond the original retainer. The trial court granted the motion on December 10, 1991.

In March 1993, the trial court granted the state's partial motion for summary judgment, concluding that the defendants had committed wilful violations of the Act. See A.R.S. § 44-1531(B). The court enjoined the defendants from further violating the Act, prohibited their engaging in the advance fee loan brokerage business, ordered them to pay restitution to those consumers who had paid the $249 fee, imposed civil penalties, and awarded the state its attorney's fees and costs. A.R.S. §§ 44-1528(A), 44-1531, 44-1534.

In July, the state filed a petition for civil penalties, restitution, attorney's fees, and costs. At that point, there appeared to be approximately 100 victims seeking restitution, and the state alleged that it had incurred approximately $46,000 in attorney's fees and costs. The state also sought civil penalties of $1,000,000. ¹ In responding to the petition, Lewis and Roca alleged that it had obtained a default judgment against Midwest Mutual in June 1993 for over $26,000 in unpaid attorney's fees incurred in the consumer fraud action. Although conceding the priority of restitution to the victims and the state's attorney's fees, Lewis and Roca argued that its judgment for attorney's fees should take priority over the civil penalty the state sought. The state opposed the motion, and a hearing was set for December 16.

At the time of the hearing, 263 victims had substantiated claims for restitution totaling $65,487. The total money available from the frozen bank accounts was approximately $104,000. The court awarded the state the requested $1,000,000 civil penalty and entered judgment against the defendants in that amount. The state was also awarded attorney's fees of $34,312.50 and costs of $3,508.50, to be paid from the Citibank accounts along with restitution to the 263 victims. The trial court concluded, however, that Lewis and Roca was also a victim and ordered that it share pro rata in the monies available for restitution. ² Because the state's attorney's fees and costs were paid first, the net effect of the court's order was to reduce the victims' restitution from 100 percent to approximately 75 percent. The trial court denied the state's motion for reconsideration, and the state has appealed from the final judgment.

Although the state has raised numerous issues, we find one to be dispositive. Because we conclude that reversal is required as a result of the trial court's error in treating Lewis and Roca as a victim and that the judgment awarding restitution to Lewis and Roca can be sustained on no other basis, we do not address the remaining issues the state presents.

The Arizona Consumer Fraud Act is a broadly drafted remedial provision designed to eliminate unlawful practices in merchant-consumer transactions. Madsen v. Western American Mortgage Co., 143 Ariz. 614, 618, 694 P.2d 1228, 1232 (App.1985). The Act prohibits as an unlawful practice

any deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise....

A.R.S. § 44-1522(A). The attorney general is given broad powers to investigate any such alleged practices and to seek judicial remedies for violations of the Act. A.R.S. § 44-1528. Subsection (A) of that statute authorizes the attorney general to file an action for injunctive relief and provides that the trial court may make such orders or judgments as may be necessary to:

1. Prevent the use or employment by a person of any unlawful practice.

2. Restore to any person in interest any monies or property, real or personal, which may have been acquired by means of any practice in this article...