United Dairymen of Arizona v. Schugg, 1 CA-CV 04-0611.

Decision Date09 February 2006
Docket NumberNo. 1 CA-CV 04-0611.,1 CA-CV 04-0611.
Citation128 P.3d 756,212 Ariz. 133
PartiesUNITED DAIRYMEN OF ARIZONA, an Arizona corporation, Plaintiff/Counterdefendant/Appellee, v. Michael K. SCHUGG and Debra L.B. Schugg, husband and wife, Defendants/Counterclaimants/Appellants.
CourtArizona Court of Appeals

Squire Sanders & Dempsey LLP by George I. Brandon, Cynthia A. Ricketts, Brian M. McQuaid, Mitchell W. Fleischmann, Phoenix, Attorneys for Plaintiff/Counterdefendant/Appellee.

Robbins & Green PA by Brian Imbornoni, Phoenix, Attorneys for Defendants/Counterclaimants/Appellants.

OPINION

WINTHROP, Presiding Judge.

¶ 1 Michael K. Schugg and Debra L. Schugg ("the Schuggs") appeal from a judgment for liquidated damages in favor of the United Dairymen of Arizona ("UDA"). They also appeal from summary judgment on various counterclaims. For the reasons that follow, we find that the trial court improperly authorized an award of liquidated damages for breach of the implied covenant of good faith and fair dealing and reverse the judgment. We also find that genuine issues of material fact precluded summary judgment on two of the Schuggs' counterclaims and we remand for further proceedings.

I. FACTS AND PROCEDURAL BACKGROUND

¶ 2 This case involves a dispute between UDA, an agricultural milk marketing cooperative association and its former members, the Schuggs. The Schuggs operated a dairy known as Schuburg Holsteins. On October 27, 1988, the Schuggs signed a UDA Membership Agreement ("the Agreement") giving UDA the exclusive right to market their milk.1 The Agreement provides for termination 1) when either party gives written notice of an intent to cancel not more than 90 or less than 60 days prior to the anniversary of the Agreement's effective date, or 2) upon the occurrence of other events listed in the bylaws, such as a Member's resignation, or the dissolution, merger, or consolidation of a Member's business. Pursuant to UDA's bylaws, the Agreement requires members to deliver to UDA all milk produced by cows that a member owns, possesses or controls, and also sets liquidated damages2 in the event of a member's breach:

2. During the term of this Agreement, the Member agrees to deliver all Grade A milk produced by dairy cows that he owns, possesses or controls, except milk used for home consumption, to such persons and at such place or places and in such manner as the Association may designate. . . . (Emphasis added.)

* * * *

10. The Member hereby agrees that if at any time while this Agreement is in force and effect, he neglects or refuses to deliver all milk produced by him . . . as may be designated from time to time by the Association, then, in that event, the Member will pay to the Association a sum of money equal to forty percent of the gross sale price of such milk as the Member may deliver to any person or persons or at any place or in any manner not designated by the Association or otherwise in violation of the agreement. This payment is not and shall not be construed as a penalty or forfeiture, but is agreed upon as liquidated damages, since it is agreed by the Member and the Association that the damages which the Association will suffer by reason of such neglect or refusal is difficult of specific ascertainment. . . . (Emphasis added.)

¶ 3 On September 28, 2001, the Schuggs informed UDA that they were no longer in business, and that UDA should stop picking up their milk. The Schuggs claimed that they sold their milk-producing cows and leased their dairy facility to S & T Dairy, L.L.C. ("S & T"), a company formed by their adult children.3 S & T marketed its milk through a rival milk cooperative, Maverick Milk Producers Association ("Maverick").

¶ 4 On December 31, 2001, UDA filed a complaint against the Schuggs alleging breach of the Agreement. UDA later amended its complaint to add claims for breach of the implied covenant of good faith and fair dealing, fraudulent misrepresentation, negligent misrepresentation, and claims against the Schugg children. UDA contended that the creation of S & T was a sham transaction to enable the Schuggs to market their milk through Maverick and avoid waiting until the next anniversary date to terminate their UDA membership. UDA alleged that the Schuggs remained in possession and control of the dairy and requested an award of liquidated damages pursuant to Paragraph 10 of the Agreement based on the amount of milk S & T sold from October 1, 2001 through October 27, 2002. UDA also requested liquidated damages for breach of the implied covenant of good faith and fair dealing.

¶ 5 The Schuggs denied liability, and asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties, intentional interference with contract, and unjust enrichment. As more fully discussed below, these claims arose out of UDA's requirement that members "dump" their milk production for several months, and UDA's decision to table the Schuggs' Applications for Base Transfer in 2001.

¶ 6 Prior to trial, the court entered summary judgments dismissing UDA's claims for fraudulent and negligent misrepresentation, and each of the Schuggs' counterclaims. The parties stipulated to dismiss the claims against the Schugg children. UDA's remaining claims for breach of contract and breach of the implied covenant of good faith and fair dealing were tried to a jury.

¶ 7 At the close of UDA's evidence, the Schuggs moved for judgment as a matter of law ("JMOL") on UDA's claim for breach of the implied covenant of good faith and fair dealing because UDA had not presented any evidence of actual damages. The Schuggs argued that a jury could find a breach of the implied covenant without finding a violation of Paragraphs 2 and 10 of the Agreement. Thus, absent such violation, the jury could not award liquidated damages. The Schuggs contended that because UDA failed to present evidence of ordinary contract damages, it failed to present a prima facie case for such a claim.

¶ 8 The trial court denied the Schuggs' motion, concluding that liquidated damages were available for a breach of the implied covenant of good faith and fair dealing, and both claims were submitted to the jury. The court instructed the jury that in order to succeed on its breach of contract claim, UDA had to prove that the Schuggs materially breached the Agreement. It instructed the jury to award liquidated damages calculated pursuant to the Agreement if they found breach of the Agreement.

¶ 9 The court further instructed the jury that to succeed on the breach of the implied covenant of good faith and fair dealing claim UDA had to prove that the Schuggs intentionally impaired the benefits that should have flowed to UDA under the agreement, and that they committed this breach when they started shipping their milk to Maverick. The court also instructed the jury that if they found a breach of the implied covenant, they must award liquidated damages as set forth in the Agreement.

¶ 10 The jury returned two verdict forms: one finding that the Schuggs did not breach the Agreement, the other finding that the Schuggs breached the implied covenant of good faith and fair dealing. As directed by the court's instructions, the jury awarded liquidated damages to UDA on this claim in the amount of $1,034,350.18.

¶ 11 The Schuggs renewed their motion for judgment as a matter of law, and alternatively, requested a new trial. The trial court denied these motions and ultimately awarded $938,453.61 as costs and attorneys' fees to UDA. The Schuggs timely appealed.4 We have jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution and A.R.S. §§ 12-2101(B) (2003) and -2102(F)(1) (2003).

II. UDA'S CONTRACT CLAIMS

¶ 12 On appeal, the Schuggs argue that the trial court erred in authorizing an award of liquidated damages for the breach of the implied covenant of good faith and fair dealing claim. UDA initially contends that the Schuggs did not object to the jury instructions and thus have waived their right to challenge the submission of those instructions on appeal. We disagree. The Schuggs are not appealing the form of jury instructions. They filed a motion for JMOL to prevent the court from submitting UDA's claim for breach of the implied covenant of good faith and fair dealing to the jury. Accordingly, the Schuggs properly preserved their right on appeal to challenge the trial court's ruling as it relates to the submission of this claim to the jury.

A. UDA's Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

¶ 13 We review de novo the trial court's denial of a motion for JMOL. Monaco v. HealthPartners of S. Ariz., 196 Ariz. 299, 302, ¶ 6, 995 P.2d 735, 738 (App.1999). UDA contends that the trial court properly denied the Schuggs' motion because liquidated damages are recoverable for breach of the implied covenant of good faith and fair dealing. UDA asserts that liquidated damages were recoverable not only under Paragraph 10 of the Agreement, but also under the liquidated damages provision of UDA's bylaws.5

¶ 14 Although UDA's First Amended Complaint contains a claim for violation of the bylaws, UDA did not present this issue to the jury, nor did it request an instruction on this claim. Accordingly, the jury could not have awarded liquidated damages pursuant to UDA's bylaws. We therefore need consider only whether liquidated damages are recoverable under our common law for breach of the implied covenant of good faith and fair dealing.

¶ 15 All contracts as a matter of law include the implied duties of good faith and fair dealing, and contract damages are available for their breach. E.g., Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 490-91, ¶¶ 59-60, 38 P.3d 12, 28-29 (2002); Rawlings v. Apodaca, 151 Ariz. 149, 153-54, 726 P.2d 565, 569-70 (1986); Enyart v....

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