Buonincontri v. Orhub ( 2023 )

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
FREDERIC J. BUONINCONTRI, et al., Plaintiffs/Appellants,
v.
ORHUB, INC., et al., Defendants/Appellees.
No. 1 CA-CV 22-0332
FILED 2-28-2023
Appeal from the Superior Court in Maricopa County
No. CV2018-013105
The Honorable Roger E. Brodman, Judge, Retired
The Honorable M. Scott McCoy, Judge
AFFIRMED
COUNSEL
Tiffany & Bosco, P.A., Phoenix
By Amy D. Sells, Christopher R. Kaup
Counsel for Plaintiffs/Appellants
Righi Fitch Law Group, P.L.L.C., Phoenix
By Elizabeth S. Fitch, Benjamin L. Hodgson
Counsel for Defendants/Appellees John L. Condrey, Kira N. Barrett, and Gordon
Rees Scully Mansukhani, LLP
BUONINCONTRI, et al. v. ORHUB, et al.
Decision of the Court
MEMORANDUM DECISION
Judge Daniel J. Kiley delivered the decision of the Court, in which Presiding
Judge Maria Elena Cruz and Judge James B. Morse Jr. joined.
K I L E Y, Judge:
¶1 Frederic Buonincontri and AXT Analytics, LLC (“AXT”)
appeal from the superior court’s order denying their request for the
imposition of sanctions on counsel for defendant ORHub, Inc. (“ORHub”)
pursuant to Arizona Rule of Civil Procedure (“Rule”) 11 and A.R.S. § 12-
349. Finding no abuse of discretion, we affirm.
FACTS AND PROCEDURAL HISTORY
¶2 ORHub issued approximately $5 million in convertible notes
to over 70 noteholders pursuant to a note agreement that sets forth the
respective obligations and rights of ORHub and the noteholders. As
relevant here, Section 4.2 of the Note Agreement (“Section 4.2”) requires
ORHub to keep financial records in accordance with generally accepted
accounting principles (“GAAP”) and to provide to the noteholders, on a
quarterly and annual basis, GAAP-compliant financial statements that are
certified by ORHub as true, correct, and complete. Section 7 of the Note
Agreement provides for a note agent to represent the interests of the
noteholders. Although the Note Agreement designates ORHub as the initial
Note Agent, Section 7.5 of the Note Agreement provides for the
replacement of the Note Agent by vote of the noteholders or by court order.
¶3 Section 3.8 of the Note Agreement (“Section 3.8”) provides for
the mandatory conversion of the notes to ORHub stock if the stock price
reaches a specified level for ten consecutive days.
¶4 Buonincontri, an ORHub noteholder, filed suit against
ORHub in October 2018, alleging that ORHub was in default of various
provisions of the Note Agreement and seeking its replacement as Note
Agent. AXT later joined the case as a plaintiff. After further litigation,
Buonincontri and AXT applied for injunctive relief to remove ORHub as
Note Agent and appoint AXT in its place.
¶5 Following an evidentiary hearing, the superior court issued a
ruling on May 16, 2019 (the “May 2019 Order”) granting the plaintiffs’
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request for preliminary injunctive relief. Determining that ORHub “was
failing financially” due to its “poor financial controls” and management’s
“excessive personal spending” from company accounts, the superior court
removed ORHub as Note Agent and appointed AXT in its place. The
superior court further ordered ORHub to provide AXT with “current
financial information as required in the Note Agreement.”
¶6 Several days later, ORHub’s chief financial officer, Barney
Monte, sent Buonincontri an email with attachments identified as ORHub’s
“most recent financial statements.” In his email, Monte informed
Buonincontri that ORHub would provide further financial information
only pursuant to a non-disclosure agreement (“NDA”) supplied by
ORHub.
¶7 Monte’s email led to a dispute between the parties over
whether the financial information Monte provided on ORHub’s behalf was
GAAP-compliant and certified in the manner required by Section 4.2. The
parties further disputed whether ORHub’s insistence that AXT sign an
NDA prior to the disclosure of further financial information violated the
May 2019 Order, which, by its terms, required ORHub to disclose financial
information to AXT without condition.
¶8 Buonincontri and AXT then moved for the imposition of
sanctions against ORHub pursuant to Rule 65(f), asserting that ORHub had
violated the May 2019 Order in various respects, including by failing to
provide certified, GAAP-compliant financial information as required by
Section 4.2 and by belatedly insisting that Buonincontri sign an NDA before
ORHub would disclose additional financial information. ORHub
responded that sanctions were not warranted because it had “done
everything in its power to comply with” the May 2019 Order.
¶9 Shortly thereafter, ORHub filed a notice with the superior
court stating that, as a result of the recent sale of ORHub stock to an investor
(whom ORHub did not identify), the stock’s trading price reached the level
that triggered the mandatory conversion provisions of Section 3.8. ORHub
took the position that the mandatory conversion of all ORHub notes to
company stock eliminated the need for a note agent, rendering moot the
plaintiffs’ efforts to replace ORHub with AXT as Note Agent.
¶10 Buonincontri and AXT then applied for injunctive relief to
block ORHub’s efforts to implement the mandatory conversion of the
ORHub notes. ORHub, in turn, moved for summary judgment on grounds
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of mootness on the plaintiffs’ claim for the appointment of AXT as Note
Agent.
¶11 The superior court held an evidentiary hearing on November
21, 2019, on the pending motions and requests for relief.
¶12 Roughly a month before the evidentiary hearing, the
plaintiffs, through counsel, emailed ORHub’s counsel asking to schedule a
consultation pursuant to Rule 11(c)(2) to discuss unspecified “actions of
your client and your own actions, including statements to the court, which
we believe violate Rule 11.” After ORHub’s counsel requested clarification,
the plaintiffs sent ORHub’s counsel a letter on November 19 (the “Rule
11(c)(2) Notice”) detailing what they described as “serious Rule 11(b)
violations by you and your firm.” The alleged violations identified in the
Rule 11(c)(2) Notice include, inter alia, ORHub’s counsel’s representations
that the financial information Monte supplied in response to the May 2019
Order was GAAP-compliant and certified in the manner required by
Section 4.2 and counsel’s purportedly inaccurate characterization, in court
filings, of the parties’ respective positions regarding the NDA. The Rule
11(c)(2) Notice also alleged that ORHub’s counsel had failed to disclose the
fact that the unidentified investor whose purchase of ORHub stock had
purportedly triggered the mandatory conversion of the notes to equity was
an entity controlled by Christopher Wiggins, an ORHub investor aligned
with ORHub’s leadership. According to the plaintiffs, the failure to disclose
Wiggins’s role in the underlying transaction created the “false impression”
that the mandatory conversion was triggered by an arm’s-length
transaction between ORHub and “a disinterested third party” rather than a
collusive effort by ORHub and a company insider to moot the plaintiffs’
claim.
¶13 After the evidentiary hearing, the superior court denied
ORHub’s motion for summary judgment and granted the plaintiffs’ request
to enjoin ORHub from converting any notes into equity without the
noteholder’s consent. In so holding, the superior court found “persuasive
evidence” that the Wiggins transaction was “contrived” to manipulate
ORHub’s stock price “to trigger mandatory conversion” to the detriment of
Buonincontri, “a non-consenting debtholder.” The court went on to find
that ORHub had not complied with the May 2019 Order because it failed to
provide GAAP-compliant financial documents, had given “no persuasive
reason” for its failure to provide the required information, and had offered
a “woefully inadequate” certification for what it did provide. Rejecting
ORHub’s contention that a good faith dispute over the NDA had delayed
its compliance with the May 2019 Order, the court found that ORHub
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Decision of the Court
“appears to be looking for excuses not [to] provide” the required financial
information and that its “complaints about the NDA are more ruse than
legitimate excuse.” The court awarded attorney fees and costs to the
plaintiffs as a sanction for ORHub’s noncompliance.
¶14 After further litigation, the parties filed a Joint Notice of
Settlement in August 2020. The matter was not dismissed at that time,
however, pending ORHub’s completion of its obligations under the parties’
settlement agreement.
¶15 In June 2021—over eighteen months after the plaintiffs served
their Rule 11(c)(2) Notice, and approximately eight months after the parties
filed their Joint Notice of Settlement—the plaintiffs filed a motion for
sanctions against ORHub’s counsel. In their sanctions motion, the plaintiffs
asserted that ORHub’s counsel had violated Rule 11 and A.R.S. § 12-349 by
falsely claiming that the financial information ORHub provided to the
plaintiffs complied with the May 2019 Order, by falsely asserting that “[a]
legitimate dispute existed over the NDA,” and by filing a meritless motion
for summary judgment based on the purported mandatory conversion of
the ORHub notes to equity.
¶16 The superior court denied the plaintiffs’ motion for sanctions
against ORHub’s counsel. Noting that “the conduct about which plaintiffs
complain” in their sanctions motion “occurred more than a year and a half
ago” and that the parties had “entered into a settlement agreement in the
interim,” the superior court stated that it was
troubled by the prospect of plaintiffs waiting until July 2021
(after a settlement with ORHub is concluded) to bring a
sanctions motion against ORHub’s counsel for misconduct
occurring in 2019, when the requested sanction is payment of
more attorneys’ fees.
¶17 The court held that the “untimeliness” of the sanctions motion
and the fact that the Rule 11(c)(2) consultation occurred over a year and half
before the motion was filed were sufficient “reasons alone” to deny
sanctions. The court also held that sanctions were not warranted in any
event, finding no bad faith or misconduct on the part of ORHub’s counsel.
¶18 The action was subsequently dismissed consistent with the
parties’ settlement. Buonincontri and AXT appeal from the denial of their
motion for sanctions against ORHub’s counsel.
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Decision of the Court
JURISDICTION
¶19 As an initial matter, we examine our jurisdiction. In seeking
dismissal of the action after the parties settled, the plaintiffs specifically
disclaimed waiver of their right to appeal the denial of sanctions against
ORHub’s counsel. In these circumstances, we have jurisdiction under
A.R.S. § 12-2101(A)(1). See Harris v. Cochise Health Sys., 215 Ariz. 344, 348-
49, ¶¶ 12-15 (App. 2007) (holding that appellate court has jurisdiction to
consider claims involuntarily dismissed before voluntary dismissal of
remainder of action).
DISCUSSION
¶20 Buonincontri and AXT argue that the superior court erred in
finding that (1) their motion for sanctions was untimely, (2) their “good
faith consultation” efforts did not satisfy the requirements of Rule 11(c)(2),
and (3) ORHub’s counsel did not engage in sanctionable misconduct.
Noting that the superior court had previously imposed sanctions on
ORHub for using “false representations and unpersuasive excuses” to
avoid complying with the May 2019 Order, Buonincontri and AXT assert
that ORHub’s counsel, as the “messenger” of their clients’ representations
and excuses, “must also be sanctioned.”
¶21 A trial court’s ruling on a request for sanctions pursuant to
Rule 11 will be affirmed absent an abuse of discretion. Compassionate Care
Dispensary, Inc. v. Ariz. Dep’t of Health Servs., 244 Ariz. 205, 216, ¶ 36 (App.
2018). An appellate court gives great deference to a trial court’s ruling on a
Rule 11 motion not only because a trial court “is better situated than the
court of appeals to marshal the pertinent facts and apply the fact-dependent
legal standard mandated by Rule 11,” but also because “[d]eference to the
determination of courts on the front lines of litigation will enhance [the trial
court’s] ability to control the litigants before them.” Cooter & Gell v.
Hartmarx Corp., 496 U.S. 384, 402, 404 (1990). We will not, therefore, disturb
a trial court’s ruling on a request for Rule 11 sanctions unless the trial court’s
decision is manifestly unreasonable or untenable. Quigley v. City Ct. of
Tucson, 132 Ariz. 35, 37 (App. 1982). Stated differently, this Court will find
no abuse of discretion as long as the trial court’s ruling “is supported by
any reasonable evidence” in the record. Maher v. Urman, 211 Ariz. 543, 551,
¶ 25 (App. 2005) (citation omitted).
¶22 We review a superior court’s application of A.R.S. § 12-349 de
novo, but we will affirm the superior court’s factual findings unless clearly
erroneous. Takieh v. O’Meara, 252 Ariz. 51, 61-62, ¶ 39 (App. 2021). We may
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affirm the superior court’s ruling if it is correct for any reason apparent in
the record, id., bearing in mind that “[c]ourts should not impose sanctions
lightly.” Compassionate Care, 244 Ariz. at 216, ¶ 36 (alteration in original)
(citation omitted).
¶23 We first address the superior court’s determination that the
imposition of sanctions on ORHub’s counsel was not warranted because
the sanctions motion was untimely.
¶24 As Buonincontri and AXT correctly assert, Rule 11, by its
terms, “does not place time limits on when a motion for sanctions must be
filed during the course of proceedings.” Arizona courts have long
recognized, however, that “[t]he lack of a specific time limit does not mean
that there is no limit on when a Rule 11 motion should be filed.” Britt v.
Steffen, 220 Ariz. 265, 271, ¶ 25 (App. 2008). On the contrary, a request for
sanctions must be made within a “reasonable time” of the offending
conduct. Id. Moreover, the determination of the timeliness of such a request
“is within the discretion of the trial court.” Id. at ¶ 24. In denying the
sanctions motion after declaring itself “troubled” by the plaintiffs’ “waiting
until July 2021 . . . to bring a sanctions motion against ORHub’s counsel for
misconduct occurring in 2019,” the superior court implicitly found that the
plaintiffs did not file the motion within a reasonable time.
¶25 Rule 11 and A.R.S. § 12-349 share the common purpose of
promoting judicial economy by deterring meritless and wasteful litigation.
See Beitman v. Herrick, CV-17-08229-PCT-JAT, 2022 WL 220492, slip op. at 1
(D. Ariz. Jan. 25, 2022) (“The purpose of [Federal Rule of Civil Procedure
11] is to promote judicial economy by deterring baseless filings, thereby
streamlin[ing] [court] administration and procedure . . . .”) (citation
omitted);1 Solimeno v. Yonan, 224 Ariz. 74, 81-82, ¶ 32 (App. 2010) (affirming
imposition of sanctions under A.R.S. § 12-349 based on disclosure violation
that “significantly delayed and expanded the litigation” by resulting in a
mistrial and requiring a new trial, thereby wasting judicial resources).
¶26 To promote judicial economy, a sanctions motion should, as a
general rule, be filed promptly upon discovery of the alleged violation. See
Fed. R. Civ. P. 11 advisory committee’s note to 1993 amendment
(“Ordinarily the motion should be served promptly after the inappropriate
paper is filed, and, if delayed too long, may be viewed as untimely.”).
1Arizona courts recognize case law interpreting the federal counterpart to
Rule 11 as persuasive. See James, Cooke & Hobson, Inc. v. Lake Havasu
Plumbing & Fire Prot., 177 Ariz. 316, 318-19 (App. 1993).
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Promptness in filing sanctions motions serves, inter alia, to deter further
misconduct and to foster judicial efficiency by allowing courts to address
and resolve what are typically fact-intensive disputes close in time to the
underlying events. See Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 99 (3d
Cir. 1988) (requiring “prompt action by a litigant whenever a [Rule 11]
violation appears” because “[p]romptness in filing valid [Rule 11] motions
will serve . . . to foster efficiency” and “in many instances will deter further
violations of Rule 11 which might otherwise occur during the remainder of
the litigation”). Here, the plaintiffs’ sanctions motion was based on
purportedly wrongful conduct by ORHub’s counsel that had occurred a
year and a half earlier, a delay that is excessive on its face. See Vandeventer
v. Wabash Nat’l Corp., 893 F. Supp. 827, 844 (N.D. Ind. 1995) (denying, as
“untimely as a matter of law,” an “extremely late” Rule 11 motion filed
more than “seventeen months after” the offending conduct).
¶27 Moreover, the basis for the plaintiffs’ motion for sanctions
against ORHub’s counsel pursuant to Rule 11 and A.R.S. § 12-349 was the
same as the basis for the Rule 65(f) sanctions they had sought against
ORHub itself 18 months earlier. Had the plaintiffs sought the imposition of
sanctions against ORHub’s counsel at the same time it sought sanctions
against ORHub, the superior court could have addressed both requests at a
single evidentiary hearing. Instead, by seeking sanctions against ORHub
prior to the November 2019 evidentiary hearing and then waiting 18
months to seek sanctions against ORHub’s counsel based on the same
conduct, the plaintiffs forced the superior court to address the same issues
twice. In so doing, the plaintiffs wasted judicial resources and unnecessarily
expanded the proceedings in contravention of the central purpose of Rule
11 and A.R.S. § 12-349. The superior court can hardly be said to have abused
its discretion by refusing to apply Rule 11 or A.R.S. § 12-349 in a manner
contrary to their intended purpose. Cooter & Gell, 496 U.S. at 393 (Federal
Rule of Civil Procedure 11 “must be read in light of concerns that it will
spawn satellite litigation”); Autrey v. United States, 889 F.2d 973, 986 n.20
(11th Cir. 1989) (stating “we look with disfavor on a party’s use of Rule 11
or the ethical rules as combative tools” and “will not tolerate attempts to
use the ethical rules in a way contrary to the spirit of those very rules”).
¶28 Buonincontri and AXT assert that they had good reason to
delay filing their motion for sanctions against ORHub’s counsel until after
ORHub had satisfied its obligations under the parties’ settlement
agreement. Seeking sanctions against ORHub’s counsel earlier, they
contend, risked creating “a conflict of interest” between ORHub and its
counsel that might have required ORHub’s counsel to withdraw, thereby
“jeopardiz[ing] the parties’ fragile settlement negotiations.”
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Decision of the Court
¶29 The plaintiffs’ justification for their delay in seeking sanctions
against ORHub’s counsel is unpersuasive. The premise of their argument—
that the potential conflict between ORHub and its counsel did not arise until
they filed their motion for sanctions against ORHub’s counsel in June
2021—is simply incorrect; a potential conflict between ORHub and its
counsel was apparent once the plaintiffs served their Rule 11(c)(2) Notice
on ORHub’s counsel in November 2019. In any event, the fact that the
plaintiffs perceived a tactical advantage to be gained from delay in filing
their sanctions motion does not entitle them to act in disregard of the
judicial interests served by the prompt filing of such motions. Kaplan v.
Zenner, 956 F.2d 149, 152 (7th Cir. 1992) (“Prompt filings of motions for
sanctions after discovery of an abuse best serve both the systemic and case-
specific deterrent functions of Rule 11.”).
¶30 We conclude that, after imposing sanctions on ORHub for its
litigation conduct, the superior court did not abuse its discretion in
denying, as untimely, a subsequent motion for the imposition of additional
sanctions on ORHub’s counsel based on the same conduct. Because the
subsequent motion was filed so late in the proceedings as to defeat the
interests of judicial economy and efficiency that Rule 11 and A.R.S. § 12-349
were meant to promote, the superior court’s implicit determination that the
subsequent motion was not filed within the requisite “reasonable time” was
not manifestly unreasonable, untenable, or clearly erroneous. See Lawrence
v. Richman Grp. of CT LLC, 620 F.3d 153, 155, 158-59 (2d Cir. 2010) (vacating
sanctions imposed pursuant to a Rule 11 motion that was not filed until
more than “some nine months” after the offending conduct and noting that
Rule 11 is intended “to reduce, if not eliminate, the unnecessary
expenditure of judicial time and adversary resources”).
¶31 Because we find that the superior court did not abuse its
discretion in denying the plaintiffs’ sanctions motion as untimely, we need
not address their alternative arguments that the superior court abused its
discretion in finding that their pre-filing consultation did not satisfy the
requirements of Rule 11(c)(2) and in finding that ORHub’s counsel did not
engage in sanctionable conduct.
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CONCLUSION
¶32 We conclude that the superior court acted within its
discretion by denying the plaintiffs’ request for the imposition of Rule 11
and A.R.S. § 12-349 sanctions against the opposing party’s counsel. We
therefore affirm.
AMY M. WOOD • Clerk of the Court
FILED: JT
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