Wichansky v. Zowine
| Decision Date | 19 April 2016 |
| Docket Number | No. CV-13-01208-PHX-DGC,CV-13-01208-PHX-DGC |
| Parties | Marc A. Wichansky, Plaintiff, v. David T. Zowine, et al., Defendants. |
| Court | U.S. District Court — District of Arizona |
On February 29, 2016, the parties submitted their joint proposed jury instructions. Doc. 342. During trial, the Court circulated its proposed final jury instructions to the parties. Doc. 454. The Court heard arguments on challenges to several of its proposed final jury instructions on April 11, 2016. Doc. 455. The Court made revisions, circulated another draft, and heard further arguments on April 18, 2016. Doc. 478. This order will describe the Court's ruling on jury instruction issues raised by the parties.
Defendants proposed a jury instruction on the unclean hands defense, to which Plaintiff objected. Doc. 342 at 106-08. In the parties' joint proposed pretrial order, Plaintiff asserted that Defendants waived their unclean hands affirmative defense by failing to raise it in a responsive pleading. Doc. 345-1 at 36-38. Under Federal Rule of Civil Procedure 8(c), a party must "must affirmatively state any avoidance or affirmative defense" in responding to a pleading. Defendants responded, without citation of authority, that the doctrine of unclean hands is not an affirmative defense and therefore has not been waived. Id. at 38. During trial, Defendants cited five cases for the proposition that unclean hands is an equitable defense that may be raised by defendants at any time or raised sua sponte by the court even if it was not raised in a pleading or subsequent motions. See Gratreak v. N. Pac. Lumber Co., 609 P.2d 375 (Or. Ct. App. 1980); Clark v. Watts, 77 A.2d 188 (N.J. Super. Ct. 1950); Bishop v. Bishop, 257 F.2d 495 (3d Cir. 1958); Conn. Telephone & Elec. Co. v. Auto. Equip. Co., 14 F.2d 957 (D.N.J. 1926); De Garmo v. Goldman, 123 P.2d 1 (Cal. 1942).
Whether the doctrine of uncleans hands may be waived depends on the type of relief sought. In the cases cited by Defendants, the only relief sought was equitable. Clark, 77 A.2d at 188-89 (injunctive relief); Bishop, 257 F.2d at 499 (); Conn. Telephone, 14 F.2d at 967 (injunctive relief, accounting); De Garmo, 123 P.2d at 4 (injunctive relief). In one of the cases cited by Defendants, the court declined to apply unclean hands because the plaintiff was seeking a legal remedy rather than equitable relief. Gratreak, 609 P.2d at 378 (" ") (emphasis added) (quoting Dobbs, Law of Remedies § 2.4 at 45 (1st ed. 1973)). Defendants have cited no case where the doctrine of unclean hands was raised late in a case as a defense to a legal remedy.
The Court declined to give an unclean hands instruction to the jury for two reasons. First, Plaintiff in this case seeks the legal remedy of compensatory damages. Arizona cases, like others, have recognized that unclean hands is a defense to equitable relief. See Tripati v. State, Ariz. Dep't of Corr., 16 P.3d 783, 786 (Ariz. Ct. App. 2000) () (emphasis omitted; citation omitted); see also Dobbs, Law of Remedies § 2.4(2) at 93 (2d ed. 1993) ( ).
Second, even if unclean hands could be asserted in response to the legal remedy sought by Plaintiff, it was not raised in Defendants' answer. Arizona cases refer to unclean hands as an affirmative defense. See Nat'l Bank of Ariz. v. Thruston, 180 P.3d 977, 979, ¶ 9 (Ariz. Ct. App. 2008) (); Wieman v. Roysden, 802 P.2d 432, 433 (Ariz. Ct. App. 1990) (). Because it was not raised by Defendants until the final pretrial order, long after pleadings and discovery had closed, the Court concludes that the unclean hands defense has been waived. As noted in an earlier order, Defendants were allowed during trial to present evidence of Plaintiff's alleged improper conduct in connection with their general defense of the case. Doc. 434.
The parties submitted proposed jury instructions addressing the fiduciary duties of directors and officers. See Doc. 342 at 52-61. One of the key points of disagreement was whether the duties were defined by statute or common law. The Court concluded that the fiduciary duties of directors and officers are defined by statute in Arizona. See A.R.S. §§ 10-830 (directors), 10-842 (officers). No Arizona case holds that the common law of director and officer duties survives these statutes, and commentators suggest it does not. See 6 Ariz. Prac., Corporate Practice § 7:48 (); Id. § 7:54 ( ); 9 Ariz. Prac., Business Law Deskbook§ 2:13 (2015-16 ed.) ( ).
Plaintiff proposed jury instructions addressing a director's fiduciary duties in self-interested transactions. Doc. 342 at 60, 83-85. Plaintiff seeks to invoke common law duties, including the burden shifting that occurred under the common law when a director participated in a self-interested transaction. The Court concludes that Zowine's fiduciary duties in his role as a director and officer are defined by A.R.S. §§ 10-830, 10-842, and that a separate instruction based on common law fiduciary duties or self-interested transactions is not appropriate.
As noted, Zowine's fiduciary duties as an officer or director are governed by statute. A.R.S. §§ 10-830, 10-842. Plaintiff argues that these statutes codify the common law business judgment rule. This is not explicitly stated in the statutory text, but Arizona cases do refer to these statutes as codifying the business judgment rule. See, e.g., Phx. Payment Sols., Inc. v. Towner, No. CV08-00651-PHX-DGC, 2009 WL 3241788, at *7 (D. Ariz. Oct. 2, 2009) () (citing A.R.S. § 10-830(D); other citations omitted).
Under the common law, a director could be stripped of the protections of the business judgment rule if he acted in a grossly negligent manner. See F.D.I.C. v. Jackson, 133 F.3d 694, 700 (9th Cir. 1998) (). Plaintiff cites noauthority for the proposition that the statutes somehow incorporate this gross negligence trigger. The statutes are silent as to gross negligence, see A.R.S. §§ 10-830(D), 10-842(D), and the Court can find no indication that the Legislature intended the protections of the statutes to fall away in instances of gross negligence. The Court concludes that §§ 10-830 and 10-842, rather than the common law, govern Zowine's conduct as an officer and director.
Under the common law, a director could also lose the protection of the business judgment rule by engaging in a self-interested transaction. The Court concludes that this common law doctrine does not apply for several reasons. First, a director's conflicting interest transaction is statutorily defined in Arizona. See A.R.S. § 10-860. The definition applies only to corporate transactions, and there is no such transaction in this case.1 Although Plaintiff claims that Zowine duped him into a chain of events that resulted in Plaintiff selling his shares, the sales transaction was with Zowine, not the corporation. Second, § 10-860 and related provisions do not say that a director or officer loses the protections of § 10-830 and § 10-842 by engaging in a self-interested transaction. See A.R.S. §§ 10-860 et seq. Third, even if the common law addressing self-interested transactions was not abrogated by A.R.S. § 10-860, it would be similarly inapplicable because the common law also speaks to corporate transactions. See Kadish v. Phx.-Scotts. Sports Co., 466 P.2d 794, 797 (Ariz. Ct. App. 1970). Again, that is not this case.
The Court recognizes that this conclusion is in tension with one of its prior orders in Best Western International, Inc. v. Furber, No. CV06-01537-PHX-DGC, 2008 WL 2045701 (D. Ariz. May 12, 2008), cited in the parties'...
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