Buonincontri v. Orhub ( 2023 )


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  •                       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    UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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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    BUONINCONTRI, et al. v. ORHUB, et al.
    Decision of the Court
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
    Decision of the Court
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
    Decision of the Court
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
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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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    BUONINCONTRI, et al. v. ORHUB, et al.
    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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    BUONINCONTRI, et al. v. ORHUB, et al.
    Decision of the Court
    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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