Turley v. Ethington, 2 CA-CV 2006-0070.

• Court: Court of Appeals of Arizona
• Citation: 146 P.3d 1282,213 Ariz. 640
• Docket Number: No. 2 CA-CV 2006-0070.,2 CA-CV 2006-0070.
• Parties: Kenneth TURLEY and Kathy Turley, husband and wife, Plaintiffs/Appellants, v. Dean ETHINGTON and Lorraine Ethington, husband and wife, Defendants/Appellees.
• Decision Date: 29 November 2006

146 P.3d 1282 213 Ariz. 640 Kenneth TURLEY and Kathy Turley, husband and wife, Plaintiffs/Appellants,
v.
Dean ETHINGTON and Lorraine Ethington, husband and wife, Defendants/Appellees. No. 2 CA-CV 2006-0070. Court of Appeals of Arizona, Division 2, Department A. November 29, 2006.

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Johnson, Rasmussen, Robinson & Allen, P.L.C. By John W. Rasmussen and Jennifer M. Wolfe, Mesa, Attorneys for Plaintiffs/Appellants.

Fennemore Craig, P.C. By Keith L. Hendricks, Janice Procter-Murphy, and Whitney Sedwick, Phoenix, Attorneys for Defendants/Appellees.

OPINION

HOWARD, Presiding Judge.

¶ 1 Appellants Kenneth and Kathy Turley (the Turleys) appeal from the trial court's judgment in favor of appellees Dean and Lorraine Ethington (the Ethingtons) dismissing the Turleys' complaint pursuant to Rule 12(b)(6), Ariz. R. Civ. P., 16 A.R.S., Pt. 1. The Turleys argue the trial court erred when it found their claims barred by the statute of frauds, and when it granted the Ethingtons' request for attorney fees. Because we hold the statute of frauds does not bar the imposition of constructive trusts and does not apply to agreements for the transfer of real property in some partnership situations under the

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Revised Uniform Partnership Act (RUPA), we reverse.

Factual and Procedural Background

¶ 2 When reviewing a trial court's judgment granting a motion to dismiss a complaint pursuant to Rule 12(b)(6), we view the alleged facts as true. Riddle v. Ariz. Oncology Servs., Inc., 186 Ariz. 464, 465, 924 P.2d 468, 469 (App.1996). In March 2004, Kenneth Turley learned that a 200-acre parcel of real property was for sale, but was not listed with a salesperson. Because Turley did not have the financial resources to purchase the 200-acre parcel, he approached his uncle, Dean Ethington. Turley and Ethington orally agreed to enter into a partnership on the following terms: (1) the Ethingtons would provide $10,000 earnest money to be deposited at the opening of escrow; (2) Turley would immediately search for a buyer or buyers for some or all of the 200-acre parcel before the close of escrow in the hopes of a "double escrow"; (3) any money the partnership received from the sale or multiple sales of the 200 acres would first be used to complete the purchase of the 200-acre parcel; (4) then the Ethingtons would be reimbursed for any expenditures they had made and expenses they had incurred while acquiring the 200-acre parcel; and (5) finally, any remaining profits and any remaining acreage would be divided equally between the Turleys and the Ethingtons.

¶ 3 The Ethingtons submitted the offer to purchase the 200 acres, which the seller accepted. The Ethingtons and the sellers opened an escrow, and the Ethingtons provided the $10,000 earnest money deposit. Turley located buyers for two eighty-acre parcels of the property. Both transactions were expected to close simultaneously with the partnership's purchase of the initial 200 acres. But, because the buyer of one parcel was unable to close simultaneously with the partnership's purchase of the initial 200 acres, Turley and Ethington agreed that the Ethingtons would borrow the money necessary to complete the purchase of the 200-acre parcel against their existing line of credit so that the partnership could simultaneously convey good title to the other buyer. Turley agreed to allow the Ethingtons to take title to the 200-acre parcel solely in Ethington's name based on Ethington's verbal assurance that he would honor their fifty-fifty partnership arrangement.

¶ 4 The escrows for the partnership's purchase of the 200-acre parcel and the simultaneous sale of one eighty-acre parcel closed. Approximately twenty-six days after the purchase of the 200-acre parcel had been completed, the other buyer of an eighty-acre parcel performed by paying the full purchase price and that escrow closed. The Turleys then requested that their names be added as owners of record on an undivided one-half interest in the remaining forty-acre parcel now owned free and clear and one-half of the net sale proceeds from the sale of the two eighty-acre parcels, if any, after the Ethingtons had been reimbursed pursuant to the partnership agreement.¹ The Ethingtons refused to acknowledge that the Turleys had any interest in either the remaining forty acres or the resulting profits.

¶ 5 The Turleys sued the Ethingtons, seeking the imposition of a constructive trust and monetary damages based on breach of fiduciary duty, fraud, breach of the duty of good faith and fair dealing, and unjust enrichment. The Ethingtons filed a motion to dismiss pursuant to Rule 12(b)(6), arguing, in part, that the statute of frauds, A.R.S. § 44-101, prohibited the Turleys' claim based on Johnson v. Gilbert, 127 Ariz. 410, 413, 621 P.2d 916, 919 (App.1980). The trial court concluded the Ethingtons were entitled to judgment as a matter of law because "[t]he [s]tatute of [f]rauds applies ... [and] the [Turleys] will not be able to prove the existence of an oral partnership agreement between the parties nor an oral contract to convey an interest in real property." The trial court entered its judgment in favor of the Ethingtons, including an award of attorney fees pursuant to A.R.S. § 12-341.01. The Turleys now appeal the trial court's judgment.

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Constructive Trusts and the Statute of Frauds

¶ 6 The dismissal of a complaint is only appropriate when the "plaintiffs would not be entitled to relief under any interpretation of the facts susceptible of proof." Fid. Sec. Life Ins. Co. v. State Dep't of Ins., 191 Ariz. 222, ¶ 4, 954 P.2d 580, 582 (1998). Whether the statute of frauds applies is a question of law, see William Henry Brophy College v. Tovar, 127 Ariz. 191, 194, 619 P.2d 19, 22 (App.1980), which we review de novo. Nielson v. Patterson, 204 Ariz. 530, ¶ 5, 65 P.3d 911, 912 (2003).

¶ 7 The Turleys argue that the trial court erred when it found their complaint was barred by the statute of frauds because the statute of frauds does not apply to the remedy of constructive trusts. Specifically, the Turleys argue they are entitled to the imposition of a constructive trust on the remaining forty-acre parcel because Ethington breached his fiduciary duty under the partnership when he refused to transfer a one-half interest in the real property to the Turleys.

¶ 8 The statute of frauds provides that, unless the agreement is in writing and signed by the party to be charged: "[n]o action shall be brought in any court ... [u]pon an agreement ... for the sale of real property or an interest therein." A.R.S. § 44-101(6). But the statute of frauds does not bar constructive trusts, even in real property interests. See French v. French, 125 Ariz. 12, 15, 606 P.2d 830, 833 (App.1980); Condos v. Felder, 92 Ariz. 366, 370, 377 P.2d 305, 308 (1962). A constructive trust is an equitable doctrine that prevents one person from being unjustly enriched at the expense of another. Chirekos v. Chirekos, 24 Ariz. App. 223, 224, 537 P.2d 608, 609 (1975). It "arises by operation of law and not by agreement or intention." Harmon v. Harmon, 126 Ariz. 242, 244, 613 P.2d 1298, 1300 (App. 1980).

¶ 9 Because imposition of a constructive trust is an equitable remedy, "[t]here is no set or unyielding formula" courts use to impose them. Chirekos, 24 Ariz.App. at 224, 537 P.2d at 609. A court may impose a constructive trust "whenever title to property has been obtained through actual fraud, misrepresentation, concealment, undue influence, duress or through any other means which render it unconscionable for the holder of legal title to continue to retain and enjoy its beneficial interest." Harmon, 126 Ariz. at 244, 613 P.2d at 1300.² Additionally, courts will impose constructive trusts if there has been a breach of fiduciary duty. French, 125 Ariz. at 15, 606 P.2d at 833; Raestle v. Whitson, 119 Ariz. 524, 528, 582 P.2d 170, 174 (1978); Restatement of Restitution § 160 cmt. d (1937). The Turleys could therefore be entitled to a constructive trust based on the general rule for constructive trusts.

¶ 10 The Ethingtons, on the other hand, argue that constructive trusts merely protect, and cannot create, interests in land. But, they also concede that no case recognizes this distinction. And any such restriction would unnecessarily hamper a court's ability to impose a constructive trust "`[w]hen property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest.'" Condos, 92 Ariz. at 370, 377 P.2d at 307, quoting Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378, 380 (1919). Moreover, in French, this court approved the imposition of a constructive trust when the plaintiff had "acquired legal title to [the land] as constructive trustee for himself and his siblings, with the understanding that it be kept in the French family" even though, at the time he had acquired title, his siblings had no interest in the land. 125 Ariz. at 14, 606 P.2d at 832.

¶ 11 Furthermore, Bromberg & Ribstein on Partnerships, which the Ethingtons cited during oral argument in this court, explicitly states that constructive trusts can be a remedy for a breach of fiduciary duty and that "[n]o writing is required under the [s]tatute of [f]rauds to establish such a trust, even if it involves the creation of an interest in land." 2 Alan R. Bromberg & Larry E. Ribstein,

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Bromberg & Ribstein on Partnerships § 6.07(i), at 6:93-94 (1988) (emphasis added). The Restatement of Restitution also supports this result. If a court imposes a constructive trust based on a breach of fiduciary duty, it may be doing so "in favor of a plaintiff who has not suffered a loss .... on the ground that [the defendant] would be unjustly enriched if he were permitted to retain [the property], even though that enrichment is not at the expense ... of the plaintiff." Restatement § 160 cmt. d. Moreover, Scott on Trusts...