Warne Investments, Ltd. v. Higgins

• Decision Date: 15 April 2008
• Docket Number: No. 1 CA-CV 06-0410.,1 CA-CV 06-0410.
• Citation: 195 P.3d 645,219 Ariz. 186
• Parties: WARNE INVESTMENTS, LTD., an Arizona corporation, Plaintiff/Appellee, v. Sandra HIGGINS and Dennis Higgins, wife and husband; Bridge Info Tech, Inc., an Arizona corporation, Defendants/Appellants.
• Court: Arizona Court of Appeals

195 P.3d 645

219 Ariz. 186

WARNE INVESTMENTS, LTD., an Arizona corporation, Plaintiff/Appellee, v. Sandra HIGGINS and Dennis Higgins, wife and husband; Bridge Info Tech, Inc., an Arizona corporation, Defendants/Appellants.

No. 1 CA-CV 06-0410.

Court of Appeals of Arizona, Division 1, Department C.

April 15, 2008.

Review Denied September 23, 2008.

Tiffany & Bosco, P.A. by Robert A. Royal, Chad A. Hester, Phoenix, Attorneys for Plaintiff/Appellee.

Dyer & Butler, L.L.P. by Robert O. Dyer, Wayne B. Ducharme, Bryan M. Folger, Phoenix, Attorneys for Defendants/Appellants.

OPINION

IRVINE, Judge.

¶ 1 Sandra Higgins ("Higgins"), Dennis Higgins, and Bridge Info Tech, Inc. ("Info Tech") (collectively "Appellants") appeal from a judgment holding them liable for paying the debts owed by Bridge IT, Inc. ("IT"). We agree with the trial court that Info Tech was properly found to be a mere continuation of IT and that Higgins was liable under the trust fund doctrine because she benefitted from preferential transfers made while IT was insolvent. We disagree, however, that Higgins was personally liable for the entire amount of IT's debt because the value of the intangible assets transferred to Info Tech was not proven. For the reasons that follow we affirm the judgment in part and reverse it in part.

FACTS AND PROCEDURAL HISTORY

¶ 2 Higgins founded IT in 1995. She was IT's president, majority shareholder, a director and its principal employee, and her spouse, Dennis, also served as a shareholder, director and officer. IT enjoyed increasing success, and in 2000 it had gross receipts of over $2,000,000. At one time IT had as many as twelve employees. Higgins was paid a salary by IT, and also received cash distributions in her capacity as IT's owner and via shareholder loans that totaled approximately $89,000 by the end of 2002. IT also established a company pension plan, which was funded with corporate funds and primarily benefitted Higgins and her husband.

¶ 3 As part of its business, IT entered into a contract with Warne Investments, Ltd. ("Warne") to construct Warne's web page. A contract dispute arose and Warne filed suit against IT (the "Warne Contract Action") in August 2001. During the course of the litigation, Higgins spent increasing amounts of her time on the dispute with the result that IT's business declined. Nevertheless, in September 2002, Sherilyn Janson ("Janson") was hired to run IT. Janson described any IT sales at that time as "negligible."

¶ 4 The Warne Contract Action went to trial on December 19, 2002, and a jury returned a verdict against IT for $30,000. During the trial Higgins told James Warne, Warne's owner, that he would never get paid, and that she did not know why he was pursuing the trial because she would just close down IT if Warne prevailed.

¶ 5 Arguing that the damage award was too little, on February 11, 2003, Warne obtained an additur of $40,000, which IT rejected.¹ Consequently, the trial court ordered a new trial regarding damages. While the new trial was pending, the trial court entered a judgment on May 16, 2003, awarding Warne $44,572.30 for its attorneys' fees and costs incurred in the original trial. Making use of this judgment, Warne began to garnish IT's bank account in June 2003, resulting in the collection of approximately $3000.

¶ 6 The retrial on damages in the Warne Contract Action took place in October 2003. Neither IT nor Higgins appeared to defend at the retrial. The outcome was a second judgment awarding damages of $111,425.95, entered on October 7, 2003. At this point, Warne had two judgments against IT totaling $155,998.25.²

¶ 7 IT's tax return indicated that at the end of 2002 it had current assets consisting of $4874 in cash and $89,250 in loans to shareholders. IT's current liabilities totaled $99,850, of which $69,696 represented a pension contribution payable. IT's net worth at the end of 2002, representing the difference between total assets and total liabilities, was $299.

¶ 8 During 2003, IT continued to do business, but only with financial assistance from Higgins and her husband. A portion of the cash that Higgins paid into IT was used to pay the pension plan contribution that was due on February 27, 2003. The Higginses borrowed $75,000 on their personal equity line of credit secured by a mortgage on their residence, and deposited that sum into IT's account, which then paid the $69,696 pension contribution.³ Higgins' salary from IT during 2003 totaled $41,089, but IT's records show that she received little cash because her salary after taxes and deductions was treated as repayment of shareholder loans. By the end of 2003, the shareholder loans had been reduced to zero. Higgins states on appeal that when the cash deposits and foregone salary are totaled, she and her husband paid approximately $152,000 into IT in 2003. In addition, IT completely exhausted its $50,000 line of credit, which was personally guaranteed by Higgins.

¶ 9 After Warne garnished IT's bank account, IT essentially shut down. Higgins ensured that all IT's outstanding jobs were completed, new work was undertaken by Info Tech, not IT. Higgins incorporated Info Tech on July 15, 2002, but the new corporation remained inactive until the summer of 2003. Higgins explained her decision to make Info Tech operational:

A. Well, once the [IT] bank accounts were garnished, we never—Sherilyn and I never executed the plan as it was intended for Bridge Info Tech because we were too busy with the litigation. She was trying to run Bridge IT, so we never executed the plan. So by the time June came rolling around, they garnished our bank accounts, I told her, you know, you need to just—you got to go do what you got to do.

Q. Okay. You then began winding the operations down of Bridge IT and began shifting your personal energies to Bridge Info Tech?

A. No, I spent eight years building Bridge IT, I did not want it to fail.

Q. But it did?

A. It did.

Q. And at the point that it did, you shifted your own energy to the new company, did you not?

A. Yes.

¶ 10 Both Higgins and Janson stopped providing services for IT in the summer of 2003, and Janson left to work for Info Tech by July or August 2003. Info Tech leased space in the same northeast Scottsdale area as IT did. Info Tech and IT had at least five of the same customers and three of the same business partners. It was undisputed that during the summer of 2003 Info Tech purchased some of IT's office equipment and paid fair market value of $2165.

¶ 11 Info Tech's ownership and operations were very similar to those of IT. Higgins and her husband owned both IT and Info Tech. Higgins served as a corporate officer and director of Info Tech, as she had of IT. Like IT, Info Tech was a Subchapter S corporation, which meant company profits were not subject to a corporate income tax, but were reported on Higgins' individual income tax returns. IT and Info Tech sold products such as Viador software and provided computer-related consulting services. The purpose of both entities was to provide business solutions to customers using information technology.

¶ 12 Higgins had drawn a salary from IT until the summer of 2003. After that she was officially an employee of Datasmart LLC, which was created as a vehicle to provide consulting services to and for Info Tech. Info Tech was Datasmart's only customer and Higgins was Datasmart's only employee. Datasmart (Higgins) was compensated by receiving payments measured by a division of the fees received by Info Tech for services after payment of Info Tech's expenses. During 2004 and 2005, Info Tech paid Datasmart an average of $96,000 per year for Higgins' services. Janson drew salaries from both IT and Info Tech for similar services as an employee. Her salary at Info Tech was measured by the net fees remaining after accounting for expenses and the payments to Datasmart/Higgins.

¶ 13 On July 30, 2004, Warne sued Info Tech, along with Higgins and her spouse,⁴ on theories of successor corporate liability, breach of the Uniform Fraudulent Transfer Act, Arizona Revised Statutes ("A.R.S.") sections 44-1001 to -1010 (2003) (the "UFTA"), and the corporate trust fund doctrine. Following Appellants' unsuccessful motion for summary judgment, the trial court conducted a four-day jury trial. The jury returned verdicts in favor of Warne and against Higgins on the trust fund doctrine ($46,000); against Info Tech on the UFTA claim ($100,000); and against Info Tech on the successor liability claim. Based on the successor liability finding, the trial court entered a judgment against Info Tech for the $155,998.25 awarded against IT in the Warne Contract Action. The trial court's judgment specified that the total amount collected from Appellants would not exceed the $155,998.25 with interest commencing from October 7, 2003, the date of the second trial in the Warne Contract Action.

¶ 14 After further briefing, the trial court ruled as a matter of law that Higgins was personally liable under the theories of fraudulent transfer and successor corporate liability. Accordingly, the trial court entered judgment against Higgins in the amount of $155,998.25, representing the judgments for damages, attorneys' fees, and costs in the Warne Contract Action. This appeal followed. We have jurisdiction pursuant to A.R.S. §§ 12-120.21(A)(1) and-2101(B), (F)(1), and (M) (2003).

DISCUSSION

I. INFO TECH'S LIABILITY.

¶ 15 Info Tech maintains that the trial court erred by denying its motions for judgment as a matter of law on both the successor corporate liability and UFTA claims. A claim is properly submitted to the jury when evidence exists to justify, but not necessarily compel, an inference of liability. Robledo v. Kopp, 99 Ariz. 367, 371, 409 P.2d 288, 291 (1965). On appeal from a denial of a motion for judgment as a matter of law, "we view the evidence and all reasonable inferences [from it] in a light most favorable to the non-moving party."...