Zambezi v. Proforma ( 2022 )

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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
ZAMBEZI HOLDINGS, LLC, an Arizona limited liability company; and
MARK LOVE, an individual, Plaintiffs/Counterdefendant/Appellants/Cross-
Appellees,
v.
PROFORMA HEALTH, PLLC, an Arizona professional limited liability
company; MUNDERLOH HOLDINGS, LLC, an Arizona limited liability
company; MUNDERLOH MEDICAL, INC., an Arizona corporation; and
TIMOTHY MUNDERLOH, an individual,
Defendants/Counterclaimants/Appellees/Cross-Appellants.
No. 1 CA-CV 21-0406
FILED 8-4-2022
Appeal from the Superior Court in Coconino County
No. S0300CV201400492
The Honorable Cathleen Brown Nichols, Judge
AFFIRMED IN PART; REVERSED IN PART; VACATED IN PART
AND REMANDED
COUNSEL
Mangum Wall Stoops & Warden, PLLC, Flagstaff
By Brandon J. Kavanagh
Counsel for Plaintiffs/Counterdefendant/Appellants/Cross-Appellees
Aspey, Watkins & Diesel, PLLC, Flagstaff
By Whitney Cunningham
Counsel for Defendants/Counterclaimants/Appellees/Cross-Appellants
ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
MEMORANDUM DECISION
Presiding Judge Cynthia J. Bailey delivered the decision of the Court, in
which Judge D. Steven Williams and Chief Judge Kent E. Cattani joined.
B A I L E Y, Judge:
¶1 This appeal and cross-appeal involve two brothers-in-law—
Mark Love (“Mark”), an entrepreneur, and Timothy Munderloh (“Tim”), a
chiropractor—and the entities they use to own and operate their businesses.
Mark, Tim, and Siobhan Love Munderloh (“Siobahn”)—who is Tim’s wife
and Mark’s sister—worked cooperatively for approximately a decade
operating Munderloh Chiropractic, LLC (“Munderloh Chiropractic”) and
later a Massage Envy franchise in Flagstaff. In 2013, Mark opened a
Massage Envy franchise in Prescott, and shortly thereafter, Tim cut Mark
and his company, Zambezi Holdings, LLC (“Zambezi”) (collectively,
“Mark”) off from twice-monthly cash distributions from Proforma Health
PLLC (“Proforma”), the holding company formed to do business as
Munderloh Chiropractic. Mark sued Proforma; Munderloh Chiropractic,
replaced by Munderloh Medical, Inc. (“MMI”); Munderloh Holdings, LLC
(“Munderloh Holdings”); and Tim (collectively, “Tim”) alleging breach of
contract and seeking judicial dissolution of Proforma. Tim then sued Mark
alleging, among other things, the taking of a corporate opportunity because
Mark had opened the Prescott Massage Envy without Tim.
¶2 Mark now appeals the superior court’s judgments in favor of
Tim, raising several issues, including the court’s judgment as a matter of
law in favor of Tim regarding liability on the corporate opportunity claim.
Tim cross-appeals the jury’s verdict in favor of Mark on Mark’s claim for
breach of contract and the superior court’s denial of Tim’s motion for a new
trial. For the following reasons, we reverse as to the appeal on the corporate
opportunity claim, affirm as to the cross-appeal, vacate the award of
attorneys’ fees and costs and the separate judgment on 2018 jury fees, and
remand for the court to reconsider attorneys’ fees, costs, and jury fees.
FACTS AND PROCEDURAL HISTORY
¶3 After Tim resigned from his job working for a local
chiropractic office in Flagstaff, Mark and Tim formed their own chiropractic
business. Munderloh Chiropractic began business in April 2004, using the
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Decision of the Court
tax ID of Retail Automation, a company previously created by Mark. Tim
received 75 percent ownership of Munderloh Chiropractic, and Mark
received 25 percent. Munderloh Chiropractic operated from 2004 to 2012
under the umbrella of Retail Automation.
¶4 In 2012, Proforma was formed to do business as Munderloh
Chiropractic. At the same time Proforma was created, Munderloh
Holdings and Zambezi were created. Proforma is owned 75 percent by
Munderloh Holdings, Tim’s holding company that acts as the manager of
Proforma, and 25 percent by Zambezi, Mark’s solely owned holding
company. After the formation of Proforma, Mark and Tim began receiving
distributions twice a month from Proforma.
¶5 Meanwhile, in 2007, Mark and Tim, with help from Siobahn,
sought to open a Massage Envy franchise in Flagstaff, and they formed a
new holding company, Timark, Inc. (“Timark”), to operate and hold the
Flagstaff franchise. Timark d/b/a Massage Envy Spa Flagstaff was
incorporated in April 2007, with Mark and Tim each receiving a 50 percent
ownership interest and both being directors.1 At about the same time, the
Flagstaff Massage Envy franchise was awarded to Mark and Tim, and it
was purchased using funds from Mark and Siobahn and through a Small
Business Administration loan. The business opened in November 2007.
¶6 Mark, Tim, and Siobhan were in constant communication and
met once a week at the Munderloh Chiropractic office to “discuss anything
that was going on” related to their Flagstaff businesses. Mark and Tim did
not regularly hold corporate meetings or memorialize their conversations
in formal minutes, however, because they talked all the time about business
in their adjacent offices at Munderloh Chiropractic and around the dinner
table.
¶7 In late 2011 and early 2012, their discussions included
whether to invest in a second Massage Envy franchise in Prescott,
approximately 100 miles from Flagstaff. After the Flagstaff Massage Envy
had opened, Steve Cook, a regional developer who had worked as their go-
between with the Massage Envy corporate office, broached the possibility
of opening a franchise in Prescott, but after discussing it, Mark and Tim did
not believe the time was right to undertake a new venture.
1 This 50/50 ownership split apparently occurred with no negotiation
between Mark and Tim, who testified he was unaware of any “formal
meeting minutes,” given that it was “a family business.”
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Decision of the Court
¶8 In 2011, Cook called again and told them they needed to start
thinking about whether they were interested in opening a new franchise in
Prescott. Cook notified them that someone else, possibly Cook himself, was
interested in that location.
¶9 Mark, Tim, and Siobahn discussed the Prescott opportunity
off-and-on for several months. From the beginning, Mark and Tim were at
a stalemate, largely because Mark proposed that he have a 75 percent
ownership interest in the Prescott Massage Envy and Tim have a 25 percent
interest; Tim, however, proposed that each have a 50 percent interest. Tim
also continuously questioned whether “the whole opportunity was too
risky.” By early 2012, Mark believed prompt action was necessary because
Massage Envy franchise royalties were set to increase by two percent after
the first of April 2012, thus increasing the cost to new franchisees over the
ten-year life of a franchise by approximately $300,000, a fact that Mark
discussed with Tim.
¶10 On March 21, 2012, Mark, Tim, and Siobahn held a weekly
meeting, and the main topic discussed was the Prescott Massage Envy.
Mark prepared “Meeting Notes” for the meeting, which expressed that
Mark planned to go ahead with the Prescott Massage Envy, the need for
Tim to make a quick decision, and the need for better communication
between the parties:
Prescott is going to move forward pretty quickly. It has been
difficult without feedback and without an answer and I am
assuming that you have withdrawn from this project. I want
you as part of this project[,] but I don’t want to push you
uphill on this or others. I don’t want to fight with family or
set us up for failure later on, any more than now. I am very
w[]ary of further business ventures that could erode the
family further. I would like to have Siobhan communicate
with me more. I think this has been hampered more due to
kitchen round table discussions than having meetings with
the other partner. Siblings are fiercely independent. We are
going to have to find a way to communicate and take
direction better and meetings is a great new step. . . .
(Bullet points omitted.)
¶11 At the meeting, Mark told Tim that he would not agree to a
50/50 ownership split given the enormous time commitment Mark would
personally and almost exclusively be making on the project. Mark
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Decision of the Court
explained that he would have to spend two full summers in Prescott away
from his family, and that he saw no reason why he should not receive 75
percent of the Prescott franchise ownership, especially given that Tim
already had 75 percent ownership in the parties’ chiropractic business. Tim
refused to negotiate any ownership percentage other than 50/50, then
informed Mark that he “didn’t want any part of it” and never again brought
up the subject of the Prescott franchise, despite Mark stating that he would
be proceeding with the project on his own.
¶12 Mark discussed the Prescott Massage Envy franchise
opportunity with Cook, who subsequently recalled that Mark was
“distraught” at the idea of going it alone but didn’t want to lose the
opportunity. Cook affirmed that Mark “could swing it on his own” but
decided to confirm Mark’s claim that Tim did not “want any part of it.”
Cook met with Tim and Siobahn, who confirmed that they had declined
Mark’s offer of joint ownership of the proposed Prescott Massage Envy
because “they didn’t think Prescott was ready.” They wanted to “let
Flagstaff mature a little bit more,” and they were unwilling to go forward
within anything in Prescott unless it was a “50/50 situation.” They also
expressed anger that Cook would recommend that the Massage Envy
corporate office offer the opportunity to Mark alone, but Cook saw no
problem with such an offer:2
But I -- I said, well, there’s -- there’s no, you know, rules
against that. And because you’re partners on one doesn’t
mean you have to be partners on another and that he meets
the -- you know, the requirements and he says that he’s got
the -- you know, the financial wherewithal to do it. And he
proved that . . . .
¶13 With Cook’s endorsement, Mark applied for the Prescott
Massage Envy franchise and was awarded it in the summer of 2012.3 The
Prescott Massage Envy opened for business in May 2013.
2 Cook’s recommendation was a necessary step in the process of being
awarded a Massage Envy franchise. The final decision to grant or deny a
franchise application rested with the Massage Envy corporate office
following a financial vetting.
3 Mark financed the purchase and development of the Prescott
Massage Envy franchise in part using his own funds and in part by
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Decision of the Court
¶14 Shortly thereafter, in July 2013, Proforma stopped issuing
distributions to Zambezi (Mark). Mark filed a complaint in September 2014
for breach of contract and judicial dissolution against Proforma, Munderloh
Holdings, and Tim, seeking reimbursement for the bi-monthly
distributions that Mark asserted Zambezi was to receive from Proforma.
Mark alleged that he and Tim had verbally agreed to take $3,000 bi-monthly
distributions from Proforma, divided according to each partner’s
ownership percentage, with Tim receiving 75 percent ($2,250.00) and Mark
receiving 25 percent ($750.00) from each distribution. Mark alleged the
partners had followed the agreement for more than a year, but in July 2013,
Tim made a unilateral decision to stop issuing distributions to Zambezi,
although he continued to issue and in fact increased distributions to
himself.
¶15 Tim filed an answer and third-party complaint against Mark.4
The initial third-party complaint did not mention the corporate opportunity
doctrine, but in February 2015, Tim filed a first amended third-party
complaint asserting that Mark breached a fiduciary duty “by not bringing
business opportunities to the corporation or, alternatively, to the
partnership.”5 Mark denied there were any business opportunities he did
not bring to Tim and Timark for consideration, and he asserted numerous
affirmative defenses.
¶16 In 2016, Tim incorporated MMI, which operates out of the
Proforma/Munderloh Chiropractic office. Tim began providing
borrowing from his mother after an investor died suddenly. Mark worked
“60 hours plus” a week on the Prescott business before its opening and
during its first year of operation. At no time through at least 2014 did Tim
or Siobhan approach Mark regarding involvement in that enterprise.
4 Tim alleged conversion, breach of contract, and breach of the implied
covenant of good faith and fair dealing based on his claim that Mark had
converted Munderloh Chiropractic’s website and taken over its emails,
website, Facebook page, financial accounts, and some tax documents.
5 Tim added this allegation after Mark terminated Siobhan’s
employment as the Clinic Administrator of the Flagstaff Massage Envy on
January 30, 2015. Within an hour of that termination, Tim transferred
$50,000 from the bank account belonging to Timark into an account held by
Munderloh Holdings. This resulted in a separate judgment in favor of
Mark that is not at issue here.
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Decision of the Court
chiropractic services on behalf of MMI and billing for these services through
MMI.
¶17 Before trial, Mark moved for summary judgment on Tim’s
breach of fiduciary duty claim, arguing in part that (1) the Prescott Massage
Envy franchise was not a corporate opportunity and Mark had no duty to
present the opportunity to Tim; (2) if any obligation existed, Mark had
satisfied the obligation; and (3) any corporate opportunity claim was barred
by the statute of limitations and/or laches. See Ariz. R. Civ. P. 56. Tim
cross-moved for summary judgment, asserting that Mark violated a duty to
present the Prescott Massage Envy opportunity to Tim and Timark on the
same terms as the parties’ Flagstaff Massage Envy agreement. The court
denied both motions.
¶18 Trial to a jury began in May 2018, but the court declared a
mistrial after learning that three jurors had extra pages in their notebooks,
and at least one juror had received pages in an exhibit that he or she should
not have received, the contents of which had been read to the other jurors.
¶19 At the conclusion of a new trial in October 2019, both Mark
and Tim moved for judgment as a matter of law on various claims,
including the corporate opportunity claim, the defenses of laches and
limitations, and damages.6 See Ariz. R. Civ. P. 50(a). The court granted
Tim’s motion for judgment as a matter of law on the corporate opportunity
claim, but determined the issue of damages should be submitted to the jury
after concluding corporate formalities had not been met:
[T]here wasn’t a corporate meeting where they agreed to
consider the opportunity and take a vote on it. So based on
the evidence that was presented, this was not an opportunity
that was presented to Timark in a corporate meeting where
the two individuals, Mr. Love and Dr. Munderloh, could then,
as part of the -- officers of Timark -- take a vote and decide if
the corporation itself was going to take advantage of this
opportunity.
¶20 Based on this ruling, and over Mark’s objections, the court
instructed the jury that Mark was liable to Tim for taking a corporate
opportunity and that the jury must decide damages as to that claim. The
6 The court granted judgment as a matter of law on several claims,
including Mark’s claims against MMI for conversion (Count 11) and unjust
enrichment (Count 12).
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Decision of the Court
jury found damages of $390,000 in favor of Tim and against Mark on the
corporate opportunity claim. The jury also found damages in favor of Mark
and against Tim on Mark’s claims for breach of contract ($111,000) and
breach of fiduciary duty ($13,000).
¶21 Tim moved for a new trial, challenging the award of $111,000
to Mark. See Ariz. R. Civ. P. 59(a)(1). The superior court denied the motion.
¶22 In May 2021, the court entered a judgment under Arizona
Rule of Civil Procedure (“Rule”) 54(b) in favor of Mark for $111,000 and in
favor of Tim for $377,000, plus attorneys’ fees to MMI ($131,809) and costs
to Tim and MMI ($14,470.30). That same day, the court entered a separate
judgment for jury fees, providing in part that each side pay 50 percent of
the 2018 trial’s jury fees ($2,841.34 each) and Mark pay 100 percent of the
2019 trial’s jury fees ($3,864.09).
¶23 Mark filed a timely notice of appeal from these portions of the
judgment under Rule 54(b) and the judgment for jury fees. Tim timely
cross-appealed. We have jurisdiction over this appeal and cross-appeal
pursuant to Article 6, Section 9, of the Arizona Constitution and Arizona
Revised Statutes (“A.R.S.”) sections 12-2101(A)(1) and 12–2102(B); see also
A.R.S. § 12-2101(A)(5)(a).
DISCUSSION
I. JMOL on the Corporate Opportunity Claim
¶24 Mark argues that the superior court erred in granting
judgment as a matter of law in favor of Tim on the corporate opportunity
claim.
¶25 We review de novo whether the superior court should have
granted judgment as a matter of law. Stafford v. Burns, 241 Ariz. 474, 483,
¶ 35 (App. 2017). In ruling on a motion for judgment as a matter of law, we
view the facts in the light most favorable to the party opposing the motion.
Crackel v. Allstate Ins. Co., 208 Ariz. 252, 259, ¶ 20 (App. 2004). The standards
for judgment as a matter of law and for summary judgment are the same,
and they apply to both claims and defenses. See Orme Sch. v. Reeves, 166
Ariz. 301, 309 (1990). “Either motion should be granted if the facts
produced in support of the claim or defense have so little probative value,
given the quantum of evidence required, that reasonable people could not
agree with the conclusion advanced by the proponent of the claim or
defense.” Id.8
ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
¶26 Rooted in equity, the corporate opportunity principle is a
species of the fiduciary duty of loyalty and disclosure. See AMERCO v.
Shoen, 184 Ariz. 150, 158-59 (App. 1995); Alger v. Brighter Days Mining Corp.,
63 Ariz. 135, 142-44 (1945). “Arizona courts have adopted a somewhat
narrow view of the corporate opportunity doctrine,” Taser Int’l, Inc. v. Ward,
224 Ariz. 389, 398, ¶ 33 n.20 (App. 2010), which generally “prohibits
fiduciary usurpation of a corporate opportunity,” AMERCO, 184 Ariz. at
158. The “precise test is whether the director has a specific duty to act in
regard to the particular matter as a representative of the company. If there
is no such duty, the director may acquire outside interests although the
corporation may be more or less interested.” Tovrea Land & Cattle Co. v.
Linsenmeyer, 100 Ariz. 107, 122 (1966) (citations omitted); see also Zeckendorf
v. Steinfeld, 12 Ariz. 245, 261-62 (1909), modified by 225 U.S. 445 (1912)
(holding that, for a duty to exist, a corporation must have “an interest,
actual or in expectancy, in the property” or show an officer or director’s
actions “hinder or defeat the plans and purposes of the corporation in the
carrying on or development of the legitimate business for which it was
created” (citation omitted)).
¶27 The opportunity must actually exist and not merely be a
concept “briefly discussed or abstractly contemplated.” Taser, 224 Ariz. at
399, ¶ 36. The doctrine does not extend to all possible business ideas
discussed or learned about because “such [an] extension would have the
effect of unnecessarily restraining competition” and could effectively create
a “de facto non-compete agreement.” Id. Further, a corporate opportunity
does not exist if it is not available to the corporation. See Zeckendorf, 12 Ariz.
at 262-63 (concluding there was no lost opportunity when the corporation
lacked resources to purchase the disputed property).
¶28 The record dictates the conclusion that the superior court
should have granted judgment as a matter of law in favor of Mark rather
than Tim because, despite Mark and Tim discussing purchasing the
Prescott Massage Envy franchise, no corporate opportunity actually existed
for Timark or Tim. Timark is not a party to this litigation, and even if it
was, the scope of Timark’s business is clearly limited to operating the
Flagstaff Massage Envy. Timark’s Articles of Incorporation list only a
Flagstaff address and location, and Timark’s Massage Envy Franchise
Agreement is for Flagstaff, Arizona only, and reserves to the Massage Envy
corporate office alone the sole right to establish other Massage Envy
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franchises “at any locations other than within the Territory.”7 Additionally,
both Mark and Tim regarded a potential Prescott Massage Envy franchise
as an entity separate and distinct from Timark, one that would be “siloed”
under a separate holding company rather than operate as a subsidiary of
Timark. Further, even if Timark desired to engage in a more expansive
mission than operating the single Flagstaff Massage Envy, Timark could
not simply preempt for itself all possible fields and territories into which it
might venture. See Dishman v. Umberhour, 241 S.W. 62, 63-64 (Ky. 1922);
Solimine v. Hollander, 16 A.2d 203, 218-19 (N.J. Ch. 1940); Szymanowski v.
Brace, 987 A.2d 717, 726, ¶ 27 (Pa. Super. Ct. 2009). In securing the right to
the Prescott Massage Envy, Mark acquired a separate and distinct entity in
another community, and his acquisition of the Prescott franchise did not
“hinder or defeat the plans and purposes of [Timark] in carrying on or
developing its legitimate and usual business.” Tovrea, 100 Ariz. at 123.
¶29 Moreover, even assuming that, as Mark’s partner and 50
percent owner in Timark, Tim personally had an expectancy interest in a
corporate opportunity,8 the undisputed facts make clear the superior court
should have granted judgment as a matter of law in Mark’s favor because
the Prescott franchise was never a corporate opportunity belonging to Tim.
A franchise award could only occur with both Cook’s recommendation and
approval by the Massage Envy corporate office. However, neither Cook
nor the Massage Envy corporate office was interested in granting the
franchise to Tim. Cook testified that, without Mark, Tim would not be
separately approved as a franchisee because (1) Tim’s chiropractic business
conflicted in part with Massage Envy’s business—a conflict that would not
be overlooked without Mark’s inclusion—and (2) Tim could not devote
full-time efforts to the Prescott Massage Envy. See generally 3 Fletcher Cyc.
Corp. (“Fletcher”) § 862.10 (2021) (stating that a corporation can have no
expectancy in an opportunity if the offering “party refuses to deal with it”);
New v. New, 306 P.2d 987, 996-97 (Cal. Dist. Ct. App. 1957) (“[T]he power to
negate the enjoyment of a business opportunity by a third party, a stranger,
does not constitute the kind of an expectancy which lies at the basis of the
corporate opportunity doctrine.”). Thus, although Mark could operate the
Prescott Massage Envy without Tim, Tim could not do so without Mark,
and Mark had no duty to act regarding that franchise, both because he had
no role or influence in the Massage Envy corporate office’s decision
7 The Massage Envy Flagstaff-West Business Plan analyzed the
franchise’s economic potential “within a 5-mile radius of the Woodlands
Village Complex” in Flagstaff.
8 See generally Funk v. Spalding, 74 Ariz. 219, 223-24 (1952).
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concerning the awarding of franchises and because nothing would have
required Mark to help Tim finance and run the Prescott franchise even had
it been an opportunity available to Tim. See Fletcher § 862.10 (“A director
is not required to use his or her own money or credit to finance the business
of the company.”).
¶30 Finally, as we have noted, the corporate opportunity doctrine
is rooted in equity. Tim was offered 25 percent ownership of the Prescott
Massage Envy as an essentially passive owner but declined the
opportunity—both because he was not offered a 50/50 ownership option
and because Tim believed they were not ready to take on a new venture. In
essence, Tim expected Mark to both “improve” his offer and wait for some
undetermined time, all while risking the loss of the opportunity. Mark was
not required to do so. In general, one can have no expectancy in an
opportunity if one has previously rejected the opportunity, see id., and
Tim’s decision to let Mark take all the risk, wait for almost three years after
declining Mark’s offer and twenty-one months after the Prescott Massage
Envy opened, then claim usurpation of a corporate opportunity stretches
the bounds of equity. See Turner v. Am. Metal Co., 50 N.Y.S.2d 800, 814 (N.Y.
App. Div. 1944) (“There are persons, who will stand by; see the expenditure
incurred; if it turns out profitable, set up their claim; if otherwise have
nothing to do with it. There is no tangible expectancy in a gamble.” (citation
and internal quotation marks omitted)). We will not transform the
corporate opportunity doctrine into a mechanism for the judicial creation
of contracts when parties cannot agree on material terms and conditions.
See Goodman v. Newzona Inv. Co., 101 Ariz. 470, 473-74 (1966).
¶31 On this record, the superior court should have granted
judgment as a matter of law in favor of Mark because no corporate
opportunity existed for Timark or Tim. Accordingly, we reverse the
judgment in favor of Tim and against Mark on the corporate opportunity
claim.9
9 Because no corporate opportunity claim existed, we do not address
Mark’s arguments that the superior court erred in (1) concluding the
corporate opportunity principle was breached as a matter of law because
corporate formalities were not observed; (2) failing to apply the statute of
limitations and/or laches to preclude Tim’s corporate opportunity claim;
and (3) the award of damages (by allowing Tim personally to recover
damages and in finding sufficient the evidence supporting the calculation
of damages).
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II. The Award of Attorneys’ Fees and Taxable Costs
¶32 Mark argues the superior court erred in its award of
attorneys’ fees and costs. Tim argues that because MMI was the only entity
awarded fees in the court’s Rule 54(b) judgment, and the claims against
MMI were dismissed, the award of fees may stand. The record supports
Mark’s argument.
¶33 We review for an abuse of discretion the superior court’s
ruling on a request for attorneys’ fees, but review de novo issues of law,
including whether the court relied on an incorrect legal standard. Charles I.
Friedman, P.C. v. Microsoft Corp., 213 Ariz. 344, 350, ¶ 17 (App. 2006); In re
Marriage of Pownall, 197 Ariz. 577, 580, 583, ¶¶ 7, 26 (App. 2000).
¶34 In its order awarding fees, the court applied the “net
judgment” test and determined that Tim—or more specifically, the group
of defendants we refer to in this decision collectively as Tim—was the “net
winner.” The court’s analysis included the following reasoning:
[T]he Plaintiffs obtained verdicts for $111,000.00 on Count 1,
breach of contract, and $13,000.00 on Count 5, breach of
fiduciary duty, in their Second Amended Complaint.
Defendants obtained directed verdicts on Count 9, breach of
contract, and Count 10, breach of covenant of good faith and
fair dealing, in Plaintiffs’ Second Amended Complaint, and a
verdict for $390,000.00 on their claim for breach of fiduciary
duty for taken corporate opportunity in Defendants’ Fourth
Amended Third Party Complaint/Counterclaim. Therefore,
Defendants were the “net winners” and, as such, the
successful parties in this case.
¶35 Relying on that analysis, the court determined that
Defendants were the “successful party” under A.R.S. § 12-341.01, which
allows a court to award attorneys’ fees “[i]n any contested action arising
out of a contract, express or implied.” Thus, the court granted Tim’s request
for attorneys’ fees and costs and denied Mark’s request:
IT IS HEREBY ORDERED, for the foregoing reasons,
granting Defendants’ Motion for Award of Attorneys’ Fees
and Taxable Costs, since they were the net winners, and, as
such, the successful parties, and awarding Defendants
$131,809.00 in attorneys’ fees and $14,470.30 in taxable costs.
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IT IS FURTHER ORDERED, based on the reasons
stated above, denying the Plaintiffs’ Application for Award of
Attorneys’ Fees and Costs since they were not the net
winners/successful parties in this case.
The court then issued its Rule 54(b) judgment awarding attorneys’ fees to
MMI and costs to MMI and Tim personally.
¶36 The court’s judgment conflated MMI with the entire group of
defendants, a blending that has no reasonable basis in fact. In addition,
although the superior court has discretion to determine who is the
successful party in cases where there are multiple parties and claims,
Schwartz v. Farmers Ins. Co. of Ariz., 166 Ariz. 33, 38 (App. 1990), the court’s
net winner reasoning in this case conflated Mark’s successful contract
action, which provided a basis for a claim of attorneys’ fees under § 12-
341.01, with Tim’s successful tort action, which did not. See Dooley v.
O’Brien, 226 Ariz. 149, 153-54, ¶¶ 14-18 (App. 2010). The court should have
considered each attorneys’ fees request separately. See Ocean W. Contractors
v. Halec Constr. Co., 123 Ariz. 470, 473-74 (1979) (distinguishing between a
case involving essentially two separate actions, where each action should
be dealt with individually regarding the award of attorneys’ fees, and a case
involving one action on a contract and a counterclaim on the same contract,
where the court could determine the statutory “successful party” (citation
omitted)). In any event, the court must redetermine attorneys’ fees because
our reversal on the corporate opportunity claim changes the calculus relied
on by the court. Accordingly, we vacate the award of attorneys’ fees and
taxable costs and remand for reconsideration of the parties’ requests for
attorneys’ fees and costs.
III. The Judgment for Jury Fees
¶37 Mark also argues the superior court erred in assessing one-
half of the 2018 jury fees to him in the separate judgment for jury fees.10
10 We lack jurisdiction over the judgment assessing jury fees because it
does not contain finality language pursuant to Rule 54(b). See Madrid v.
Avalon Care Ctr.–Chandler, L.L.C., 236 Ariz. 221, 224, ¶ 8 (App. 2014) (“[T]his
court lacks jurisdiction over an appeal from a judgment that does not
resolve all claims as to all parties and that does not include Rule 54(b)
language.” (citation omitted)). However, because requiring Mark to obtain
a signed judgment with Rule 54(b) language and file a new notice of appeal
13
ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
¶38 Mark claims that “[Tim’s] error led to the mistrial,” and that
Mark “should not bear any part of the burden for [Tim’s] fault.” Tim does
not dispute Mark’s statements regarding fault in this regard and makes no
argument in response. Jury fees may be assessed against a party that causes
a mistrial. See Carman v. Hefter, 136 Ariz. 597, 598-99 (1983) (awarding jury
fees against a plaintiff on two occasions). Under A.R.S. § 12-343(A), “[t]he
costs of a new trial may either abide the result of the action or may be taxed
against the party to whom a new trial is granted, as may be adjudged by
the court at the time of granting a new trial.” Because the result of the action
has now changed with this decision, and the record reflects Tim was the
party to whom a new trial was granted, we vacate that judgment and
remand for the superior court to reconsider the assessment of the 2018 jury
fees.
IV. The Cross-Appeal
¶39 Tim argues the superior court erred in denying his Rule 59
motion for new trial on Mark’s claim for breach of contract. Tim does not
challenge the adequacy of the evidence presented by Mark in support of his
claim that he and Tim agreed to take $3,000 bi-monthly distributions from
Proforma, divided according to each partner’s ownership percentage, with
Tim receiving 75 percent ($2,250.00) and Mark receiving 25 percent
($750.00) from each distribution. He further does not challenge the
evidence supporting the resulting $111,000 damages award. Instead, the
issue he raises is limited to whether the parties’ agreement is unenforceable
because it “violates the terms of controlling statutory law contrary to public
policy.” His argument relies on former A.R.S. §§ 29-703 and 29-709.11 Even
assuming Tim has not waived this issue,12 we find no error.
would not provide an “equally plain, speedy, and adequate remedy,” in the
exercise of our discretion, we take special action jurisdiction over the
judgment for jury fees. Ariz. R.P. Spec. Act. 1(a).
11 Sections 29-703 and -709 have since been repealed as part of the
recodification of the Arizona Limited Liability Company Act. See 2018 Ariz.
Sess. Laws, ch. 168, § 3 (eff. Sept. 1, 2020). Section 29-703 has been restyled
and renumbered as A.R.S. § 29-3404.
12 Neither in his answer to Mark’s second amended complaint nor in
the third amended joint pretrial statement (the parties’ operating document
for trial) did Tim set up as affirmative defenses or otherwise plead public
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ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
¶40 We review for an abuse of discretion the superior court’s
denial of a motion for new trial. Monaco v. HealthPartners of S. Ariz., 196
Ariz. 299, 304, ¶ 13 (App. 1999). A court abuses its discretion when it acts
arbitrarily or inequitably, makes a decision unsupported by the facts, or
misapplies the law. See City of Phoenix v. Geyler, 144 Ariz. 323, 328-29 (1985).
Because a court abuses its discretion if it commits an error of law, we review
de novo the superior court’s rulings on questions of law presented in the
motion for new trial. Sandretto v. Payson Healthcare Mgmt., Inc., 234 Ariz.
351, 355, ¶ 8 (App. 2014).
¶41 “Contract provisions are enforceable unless prohibited by law
or otherwise contrary to identifiable public policy.” CSA 13-101 Loop, LLC
v. Loop 101, LLC, 236 Ariz. 410, 411, ¶ 6 (2014) (citing 1800 Ocotillo, LLC v.
WLB Grp., Inc., 219 Ariz. 200, 202, ¶ 7 (2008)). Arizona law “values the
private ordering of commercial relationships and seeks to protect parties’
bargained-for expectations.” Id. (citing 1800 Ocotillo, 219 Ariz. at 202, ¶ 8).
“[I]f a contractual term is not specifically prohibited by legislation, courts
will uphold the term unless an otherwise identifiable public policy clearly
outweighs the interest in the term’s enforcement.” Id. at 411-12, ¶ 6
(citations omitted).
¶42 At trial, the jury received the following instruction regarding
interim distributions, which effectively mirrored the language of former
A.R.S. § 29-703(B) and (C)(1):
A. Distributions of cash or other property to members
by a limited liability company before the dissolution and
winding up of a limited liability company shall be shared
among the members and among classes of members in the
manner provided in an operating agreement. If an operating
agreement does not so provide, distributions shall be shared among
the members in the following order:
policy or illegality in general or the statutes on which he now relies.
Nevertheless, at the conclusion of the second trial, the superior court agreed
to instruct the jury on part of A.R.S. § 29-703 over Mark’s objection. In his
motion for new trial, Tim asserted for the first time that the jury’s award
was illegal and contrary to Arizona’s public policy as set forth in §§ 29-703,
-706(D), and -709. Generally, an issue raised for the first time in a motion
for new trial is deemed to have been waived. Conant v. Whitney, 190 Ariz.
290, 293 (App. 1997).
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ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
1. Distributions shall be shared among the members in
proportion to the amount of cash capital contributions and the value
of other capital contributions, as determined under subsection B
of this section, made by them and not returned until each member
has been repaid his capital contributions.
2. Other distributions shall be shared by the members
equally.
B. For purposes of subsection A, a capital contribution
other than a cash contribution has the value determined in the
manner prescribed in an operating agreement. If an operating
agreement does not specify the value of any such capital
contribution and does not prescribe a manner for determining
its value:
1. The value of a capital contribution of services is the
fair market value of the services at the time they are rendered.
(Emphasis added.)
¶43 We note that Tim’s argument ignores the fact that the plain
language of the above instruction (and former § 29-703) contemplates
distributions being made “before the dissolution and winding up of a
limited liability company.” See also current A.R.S. § 29-3404 (entitled
“[s]haring of and right to distributions before dissolution”). Tim points to
nothing indicating that Proforma was or is in the process of dissolution and
winding up. Even assuming § 29-703 applies to this situation, however, we
find it unavailing.
¶44 Read plainly, the language of § 29-703 provides that if there is
no operating agreement—which in this case, there is at least no written
operating agreement—then distributions are to be shared among the
members—Mark and Tim—“in proportion to the amount of cash capital
contributions and the value of other capital contributions . . . made by
them.” These capital contributions may include cash or other
contributions—such as sweat equity—and in this case, were reflected in the
parties’ ownership interests. The distributions Mark and Tim agreed upon
were not based on salary for work performed or the sharing of profits or
losses, but ownership percentages based on the equity they contributed to
the business–i.e., the value of their capital contributions as agreed on by the
parties when they formed Munderloh Chiropractic. Nothing precluded the
parties from agreeing to take out distributions based on each party’s
ownership percentage.
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ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
¶45 Tim also relies on former § 29-709 to bolster his argument, but
even assuming he has not waived reliance on that statute, § 29-709 simply
deals with the separate allocation of profits and losses among members and
has no direct applicability here.13 Again, the distributions Mark and Tim
agreed upon were not based on the sharing of profits or losses, but on their
relative capital contributions/ownership percentages. In other words, the
agreement between Mark and Tim did exactly what Tim argues the statutes
required: “[F]irst pay back capital contributions, including the fair market
value of services rendered, and then distribute profits.”14
¶46 The agreement between Mark and Tim was neither illegal nor
contrary to public policy, and Mark’s recovery should not be denied on that
basis. See Mountain States Bolt, Nut & Screw Co. v. Best Way Transp., 116 Ariz.
123, 124 (App. 1977) (“[P]arties have the legal right to make such contracts
as they desire to make, provided only that the contract shall not be for
illegal purposes or against public policy.” (quoting S. H. Kress & Co. v.
Evans, 21 Ariz. 442, 449 (1920))). The jury was presented the breach of
contract issue, made its determination based on the facts and law as
presented to it, and we find no illegality or violation of public policy here.
Accordingly, the superior court did not abuse its discretion in denying
Tim’s motion for a new trial.
V. Attorneys’ Fees on Appeal
¶47 Both sides request attorneys’ fees on appeal pursuant to
A.R.S. § 12-341.01. Mark is the successful party on appeal, and specifically
with regard to the contract action. Accordingly, in our discretion, we deny
Tim’s request and award Mark taxable costs and attorneys’ fees in an
13 Section 29-709 provides as follows: “The profits and losses of a
limited liability company shall be allocated among the members and among
classes of members in the manner provided in an operating agreement. If
an operating agreement does not so provide, profits shall be allocated
among the members according to the manner in which they share in
distributions that exceed the repayment of their capital contributions, and
losses shall be allocated among the members according to the relative
capital contributions that they have made or promised to make in the
future.”
14 The agreement also appears to comport with § 29-703(A) and former
A.R.S. § 29-681(D)(2) (requiring the affirmative vote, approval, or consent
of the majority of the members or managers to “[a]uthorize the distribution
of limited liability company cash or property to the members”).
17
ZAMBEZI, et al. v. PROFORMA, et al.
Decision of the Court
amount to be determined upon compliance with Arizona Rule of Civil
Appellate Procedure 21.
CONCLUSION
¶48 For the foregoing reasons, we reverse the judgment in favor
of Tim and against Mark on the corporate opportunity claim, affirm as to
the cross-appeal, vacate the award of attorneys’ fees and costs and the
judgment on jury fees, and remand for the court to reconsider attorneys’
fees, costs, and the 2018 jury fees.
AMY M. WOOD • Clerk of the Court
FILED: AA
18