Toy v. Katz
| Decision Date | 26 June 1997 |
| Docket Number | CA-CV,Nos. 1,s. 1 |
| Citation | 961 P.2d 1021,192 Ariz. 73 |
| Parties | , 246 Ariz. Adv. Rep. 31 Louis TOY and Alice Toy, husband and wife; Phoenix Wholesale Sporting Supply, Inc., an Arizona corporation, fka Phoenix Wholesale Shooters Supply, Inc., Plaintiffs-Appellants, Cross Appellees, v. A. Alexander KATZ and Harriet Katz, husband and wife, Defendants-Appellees, Cross Appellants. 95-0409, 1 96-0232. |
| Court | Arizona Court of Appeals |
Appellants Louis and Alice Toy ("Toys") appeal from the trial court's grant of summary judgment in favor of Appellees A. Alexander Katz, Esq. ("Katz") and Harriet Katz, his wife in a legal malpractice action. Katz represented the Toys in the sale of the retail division of their corporation. The trial court ruled the Toys were precluded from suing Katz because his professional negligence damaged only their corporation. The trial court also ruled that, while the corporation was a real party in interest, the Toys' attempt to name the corporation as a plaintiff did not relate back and was time-barred. Therefore, the trial court denied the Toys leave to amend their complaint. The Toys seek reversal of the summary judgment and a remand for a trial on the merits. Katz filed a cross-appeal seeking reversal of the trial court's denial of Katz's Motion to Dismiss for improper service. Both parties request an award of costs and attorneys' fees incurred on appeal.
For reasons that follow, we remand and instruct the trial court to allow the Toys to amend their complaint against Katz to name their corporation as a plaintiff, and to allow the case to proceed to trial on the merits.
The Toys opened a sporting goods business in the mid-1970s, which they incorporated in the early 1980s under the name of Phoenix Wholesale Shooters Supply ("the Corporation"). The Toys were the sole shareholders of the Corporation which was comprised of a wholesale division and a retail division. The retail division was named Phoenix Shooters Supply.
In 1991, the Toys sold the retail division of the Corporation. The Toys had not previously been involved in the sale of a business, therefore they retained the services of a business broker ("the broker") to assist them in locating potential buyers. In the fall of 1990, the broker introduced the Toys to prospective purchasers, Bernard Goodman and Kerry DeCesare (collectively the "Buyers").
The Toys and the Buyers entered into negotiations concerning the potential sale of Phoenix Shooters Supply. Goodman asked the Toys to meet with Katz, with whom the Toys had not previously dealt. Goodman identified Katz as his attorney and disclosed Katz's recent representation of him in several business dealings. At Goodman's request, the Toys accompanied Goodman to a meeting at Katz's office. Katz advised the Toys that he had represented a corporation named Toy Enterprises which is owned by members of the Toys' extended family. The Toys held a ten percent interest in Toy Enterprises, but did not participate in its management. Toy Enterprises owns the property on which Phoenix Shooters Supply is located.
In December 1990, the Toys met at Katz's law office with the Buyers and attorney Robert Schwartz ("Schwartz"), who shared office space with Katz. Katz did not attend the meeting. The parties worked on preparing an outline of the terms of the sale of Phoenix Shooters Supply. Schwartz prepared a memorandum to Katz which set forth the key points discussed at the meeting. The memorandum identified Goodman and DeCesare jointly as Buyers. Included in the memorandum was an admonition to Katz stating, " details concerning the form of entity must be received."
On January 3, 1991, the Toys and the Buyers met with Katz to discuss further the terms of the sale of Phoenix Shooters Supply. Katz indicated, in light of both his previous representation of Goodman and his representation of Toy Enterprises, Inc., that he could only represent one party to the transaction. The Toys retained Katz to represent their interests in the transaction. Katz prepared a letter dated January 3, 1991, which contains a brief reference to his conflict of interest and confirms that he had been retained to represent their interests in the transaction. That letter confirms that the Toys would be responsible for the fees incurred in connection with the preparation of the sale documents.
Following the January 3, 1991 meeting, Katz prepared several drafts of a Sale and Purchase Agreement (the "Agreement"). A key term in the Agreement related to the value of the inventory of Phoenix Shooters Supply. The original drafts of the Agreement stated that the inventory in Phoenix Shooters Supply would be valued for the purposes of sale based upon "distributor's catalog price plus 10%." The Toys insisted on this language because it would facilitate the calculation of the value of the inventory located within Phoenix Shooters Supply. The Toys and the Buyers anticipated that the inventory valuation, and thus the sale price, would be agreed upon prior to the close of the sale.
In their preliminary negotiations, the parties discussed the valuation of the inventory. Both Schwartz's memorandum to Katz, and the subsequent drafts of the Agreement drafted by Katz, required the parties to agree to the value of the inventory prior to closing the sale in order to establish the inventory price, which represented 75% of the value of the transaction. Schwartz's memorandum to Katz informed Katz of the terms relating to the price of the inventory, stating: "The inventory shall be represented by the seller to be not less than $400,000.00 at cost."
Because the Toys owned the separate wholesale supply business, the parties also bargained for a provision obligating the Corporation to supply merchandise to the Buyers for an indefinite period at a specified price following the sale. The memorandum and drafts of the Agreement also provided that any additional merchandise the Toys would be required to provide after the close of sale would be calculated at "distributor's catalog price plus 10 percent." The parties also bargained for a provision granting the Buyers the right of first refusal to buy the wholesale business. In his deposition during discovery, Katz conceded that he was aware of the Corporation's existence and of its ownership of the wholesale division. The Agreement also specifically refers to the Corporation and its wholesale business.
The Toys allege that throughout the negotiations, Katz communicated directly with the Buyers without their knowledge. The Toys maintain that despite Katz's duty to represent only them in the transaction, he represented the Buyers and also acted as their paid legal representative on the following transaction-related issues: (1) Katz formed Western Weapons Supply, Inc. ("Western"), the corporation to which the Buyers ultimately assigned the right, title and interest they acquired in Phoenix Shooters Supply; (2) Katz was Western's statutory agent for more than a year following the Toys' sale of Phoenix Shooters Supply; (3) Katz prepared the financing documents which defined the financial relationship between the Buyers and Western; (4) Katz served as Goodman's agent to hold stock pledged by Western to secure Goodman's loan to DeCesare which financed the acquisition of Phoenix Shooters Supply; and (5) Katz charged both the Buyers and the Toys for legal services he rendered in connection with the sale of Phoenix Shooters Supply. Katz never disclosed these numerous conflicts to the Toys.
Immediately prior to the close of the transaction, the Buyers instructed Katz to revise critical language concerning inventory valuation in the transaction documents. The Toys allege that Goodman provided Katz with specific written instructions relating to those changes in the sales documents, and that Katz revised the sales documents in accordance with Goodman's instructions. Specifically, the Buyers instructed Katz to revise the Agreement to provide that both the existing inventory and future purchases of merchandise would be valued at the equivalent of "manufacturer's invoice price to seller, plus 10%."
The Toys further maintain that neither the Buyers nor Katz contacted them to inform them of the change in the transaction documents, and that Katz did not explain the legal effect of the revised language. On the date of the execution of the transaction documents, the Toys maintain they were assured by Katz that the final Agreement was consistent with the terms set forth in the prior drafts.
The Toys allege that Katz negligently drafted the Agreement to name the Toys personally (and not their Corporation) as the sellers of Phoenix Shooters Supply, thereby exposing them to personal liability. In fact, Phoenix Shooters Supply was an asset of the Corporation, and Katz repeatedly referred to Phoenix Shooters Supply as the "Retail Division" in his correspondence to the parties prior to the sale, suggesting that he was aware of its status as a corporate asset. The corporate ownership was discussed openly among the participants to the transaction. Katz made no effort to determine the nature of the ownership of Phoenix Shooters Supply.
Despite Schwartz's admonition in his memorandum to Katz that Katz needed to inquire into the ownership of the business being sold, Katz did not request to review the Corporation's corporate records, or speak to the Corporation's counsel or accountant, or contact the Arizona Corporation Commission to determine the corporate...
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