Free Response to Motion - District Court of Arizona - Arizona

Robert M. Frisbee #018779 FRISBEE & BOSTOCK, PLC 2 1747 East Morten Avenue, Suite 108 Phoenix, Arizona 85020 3 Phone: (602) 354-3689 Fax: (602) 266-7744 4 [email protected] Attorneys for Greg and Linda Hancock
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Meritage Homes Corporation, a Maryland Corporation, formerly d/b/a Meritage Corporation; Hancock-MTH Builders, Inc., an Arizona corporation; Hancock-MTH Communities, Inc., an Arizona corporation d/b/a/ Meritage Homes Construction, Inc.; and Meritage Homes of Arizona, Inc., an Arizona Corporation, Plaintiffs, vs. ) ) ) ) ) ) ) ) ) ) ) ) Ricky Lee Hancock and Brenda ) Hancock, husband and wife; Gregory ) S. Hancock and Linda Hancock, ) husband and wife; Rick Hancock Homes ) LLC, an Arizona limited liability ) company; RLH Development, LLC, an ) Arizona limited liability company; and ) J2H2, LLC, an Arizona limited ) liability company, ) Defendants, ) and ) ) Greg Hancock, an individual, ) ) Defendant, Counter) Claimant and Third) Party Plaintiff, ) vs. ) ) Steven J. Hilton, an individual; John R. ) Landon, in individual; Larry W. Seay, ) an individual; and Snell & Wilmer, LLP, ) an Arizona professional ) corporation, ) Third-Party Defendants. ) )
Document 334

Case No. CV-04-0384-PHX-ROS

GREG HANCOCK'S RESPONSE TO MERITAGE'S MOTION TO STAY ARBITRATION AND MEMORANDUM IN SUPPORT OF CROSS-MOTION TO STAY MERITAGE'S ATTEMPT TO SPLIT ITS CAUSE OF ACTION BY ARBITRATION

Case 2:04-cv-00384-ROS

Filed 07/27/2006

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Meritage, after filing an arbitration complaint which illegally splits its cause of action against Greg Hancock and which should have been brought in this Court, now moves to prevent Greg Hancock from arbitrating his counterclaims in the arbitration. Hancock herewith requests that the Court deny Meritage's motion and let the arbitration proceed in its entirety or, alternatively, hereby moves the Court for an Order also staying Meritage's arbitration claim. I. INTRODUCTION On May 26, 2006, Meritage filed a complaint in arbitration with the American Arbitration Association (attached hereto as EXHIBIT A) against Greg Hancock and others. Its seeks recovery of $113,000 in home warranty payments which Meritage claims Hancock should have paid (EXH. A, Count Two) and for alleged "injurious falsehood" and "defamation" (EXH. A, Counts Three and Four) contained in a letter dated February 17, 2005, to warranty claimants. Meritage's claim is based upon the Master Transaction Agreement ("MTA"), whereby Meritage bought Hancock's home building enterprise, and Exhibit F thereto, an Indemnification Agreement (EXH. A, Pars. 8-14). Greg Hancock's Answer in arbitration (attached hereto as EXHIBIT B) alleges at paragraph 8: "that all elements of the [Meritage arbitration] complaint are claims which should have been brought and included in plaintiffs' complaint against Gregory S. Hancock in United States District Court, District of Arizona, Cause No. CIV 04-0384-PHX-ROS, and that this arbitration claim constitutes the splitting of causes of action, and unfairly subjects this defendant to a multiplicity of claims." In addition, Hancock counterclaimed for damages for Meritage's breach of the License Agreement between them (EXH. B, Counterclaims) based on documents produced only recently by Meritage in this litigation, including the "go dark" Email by Meritage's CEO Steve Hilton (EXH B, Counterclaims, Par. 11). Meritage, by implication, asks this Court to approve of its arbitration claims, thereby
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permitting it to split its cause of action, but to prevent Hancock from bringing his arbitration claims. As will be seen, both sides of the arbitration should be allowed to go forward or it should be stayed in its entirety. II. FACTS The MTA itself is a 52 page document, and it incorporates by reference 11 Exhibits, including a Management Agreement (Exhibit A), Greg Hancock's Employment Agreement (Exhibit B), Indemnification Agreement (Exhibit F), and Dispute Resolution (Exhibit I). The MTA was intended to and did control the relationship between the parties as to all aspects of the ongoing activities of Meritage, Hancock Communities, and Greg Hancock. Almost all of the Agreements annexed to the MTA are involved in this litigation in one way or another. And even though the Dispute Resolution mechanism was available, indeed mandatory, Meritage chose to go to this Court. Meritage's initial complaint, containing 120 paragraphs and 7,500 words, does not mention arbitration. When Greg Hancock moved this Court for dismissal, Meritage's Response made no mention of arbitration. When Greg Hancock sued in state court, Meritage did not seek to compel arbitration. Between March 4, 2004, and September 3, 2004, Meritage made six substantive filings here, served a Disclosure Statement, and participated in several depositions, never mentioning arbitration. On September 23, 2004, Meritage lodged its first amended complaint, which similarly did not mention the MTA's alternative dispute resolution requirement. Between then and November 15, 2004, when it requested an expedited scheduling and management conference, Meritage made seventeen further filings in this court. In the midst of litigating this case, Meritage demanded by letter dated November 2, 2004 (EXHIBIT C attached hereto), citing the MTA, that Hancock pay Meritage $18,030 pursuant to the Indemnification Agreement (Exh. C, p.2, last two paragraphs). By letter of November 22, 2204, Hancock's attorneys denied the demand (EXHIBIT D attached hereto).
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In response, on November 24, 2004 (EXHIBIT F attached hereto) Meritage stated, "it is no longer feasible to believe such a cooperative arrangement can ever be reached" (Exh. F, p. 2, par.5). This exchange of letters set the stage for the claim that Meritage now seeks to arbitrate. On January 14, 2005, in a cross-motion for summary judgment, for the first time in the then eleven month history of this heavily litigated case, Meritage used the word "arbitration," but only with reference to its imperious demand that Greg Hancock's earn-out be arbitrated, thereby "cherry picking" only one out of many issues to arbitrate rather than litigate.1 Then, on April 15, 2005, five months after the exchange of letters regarding warranty claims, Meritage filed its Second Amended Complaint. The document makes no mention whatever of the warranty dispute. Moreover, it makes no mention of the February, 2005 letter related to the warranty dispute now claimed by Meritage in arbitration to be "false" and "defamatory." In short, the facts and issues now sought to be arbitrated by Meritage all arose before Meritage filed its Second Amended Complaint, and all pertain to the ongoing MTArelated and temporal relationships between the parties. III. ARGUMENT 1. Meritage's Arbitration Splits Its Cause of Action and Should Be Stayed. The rule against splitting causes of action requires that all claims between the same parties arising out of or relating to the same transactional circumstances, or core set of facts, or involving the same subject matter, be joined in a single action. Even if plaintiff's claims are based on different legal theories, if they arise out of the same transaction, they must be asserted in the same action. A plaintiff may not withhold part of a controversy for separate litigation, even when the withheld component might be a separate and independently

The issue was heavily briefed. See Docs. 164, 168, 171, 172, 176 and 178. The Court has never ruled on the topic.

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cognizable cause of action. 1A C.J.S. Actions §229. "Simply, a plaintiff may not split his claim or cause of action between different suits."Alyeska Pipeline Service Co. v. United States, 688 F.2d 765 (Ct.Cl. 1982), citing Everett Plywood Corp. v. United States, 512 F.2d 1082, 1087, 206 Ct.Cl. 244, 252 (l975). A plaintiff's claims consists of all rights against a particular defendant with respect to all or any part of the transaction, or a series of connected transactions, out of which the action arose. More specifically, as stated at 18 C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure § 4407: What factual grouping constitutes a `transaction,' and what groupings constitute a `series,' are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectation or business understanding or usage. Such a pragmatic consideration leaves no doubt whatever that all of the issues between Meritage and Hancock, including the November exchange about home warranties, arise out of the same transaction - the MTA - and the events which occurred after its signing. They are all related in time, space, origin, motivation, and the parties' business expectations and understandings. Moreover, the issues and facts sought by Meritage to be arbitrated now all arose prior to its filing of its second amended complaint, and should have been included in it as a matter of law. The rule with regard to knowledge of facts prior to filing is that, "if the claimant, before filing its first suit, is in possession of all the facts on which its second suit is based, the splitting of the claims is fatal to the maintenance of the later-filed action. Everett Plywood, supra, 512 F.2d at 1087. The same principle applies to amended complaints, e.g. Alyeska Pipeline, supra, where in holding that plaintiff had impermissibly split its claims, the court remarked in criticism: "When the plaintiffs first amended their petition in 1979 to include the claim addressed in Alyeska I, they were in possession of all the facts upon which the third claim of the second amended petition is based." 688 F.2d at 770.
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So, too, was Meritage aware of all of the facts it now seeks to arbitrate prior to filing its second amended complaint. If it had filed the warranty case in a court other than this one, instead of in arbitration, it would be subject to dismissal. Therefore, the Court should either allow the arbitrator to decide Hancock's affirmative defense of splitting a cause, or stay Meritage from further arbitrating the issues, at least until the case in this court is determined one way or the other. 2. Greg Hancock Was Entitled To Present Counterclaims in Arbitration and If Meritage is Entitled to Arbitrate, So is Greg Hancock. When Greg Hancock filed his Answer, Counterclaims and Third Party Claims in

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response to Meritage's Second Amended Complaint (Doc. 165) on May 12, 2005, Meritage
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had produced virtually no documents responsive to Hancock's requests for same. Thus,
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contrary to Meritage when it filed its Second Amended Complaint, Hancock was unaware
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of many of the facts and documents pertinent to his claims.2 Of foremost import is the following:

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The same is true of Rick Hancock, who was unaware that Meritage had defrauded him from purchasing a home. See his Motion to Amend his Answer and assert Counterclaims.
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John: You may want to begin considering how we are going to transition the "Hancock Communities" name to "Meritage Homes." We have the rights to the name for 6 years. I think the name should be dark in the market for at least 1 year or maybe 2 prior to the expiration of our license so that we do not waste advertising dollars on a name that Greg may resurrect immediately following our license. Therefore we should consider a plan to phase out the name over the next 18 months. What do you think? (Emphasis supplied.)3

This Email, authored by Steve Hilton and sent to Co-CEO John Landon and CFO Larry Seay on 9/8/03, bears a printing date of 2/13/06. It has not been learned whether it was earlier printed out before that date, or who printed it out. In any event, it was not produced to defendants until late March, 2006, conveniently after the March 2, 2006 deadline imposed by the Court on Hancock by which to file additional counterclaims (See current Meritage Motion, p.3). The conclusions that Meritage knew about this document for a long time prior

Of equal import are the documents evidencing the carrying out of the "go dark" plan.

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to the printing date shown on it, and didn't produce it until after the amendment deadline in order to preclude Greg Hancock from better articulating his counterclaims here, are virtually inescapable. Meritage's assertion at footnote 2 of its Motion that the warranty transactions are somehow unrelated to the transactions between the parties - i.e. are not claims between the same parties arising out of or relating to the same transactional circumstances, or core set of facts, or involving the same subject matter - is as lame as its statement, also in footnote 2, that "the parties agreed to arbitrate a separate dispute" involving warranties. Yes, the Indemnification Agreement contained an arbitration clause, but so did the MTA and every other agreement other than the License Agreement, and Meritage had no difficulty ignoring the arbitration clauses when it rushed into this court. It is equally interesting to note that had Meritage done what it should have done - file its warranty claim as another count to its second amended complaint here - Snell & Wilmer would have to withdraw as Meritage's counsel, because several of its lawyers are factual witnesses as to the background, drafting and intent of the Indemnification Agreement. If the fee applications thus far filed by Snell & Wilmer are any measure, goodbye cash cow. Finally, if Hancock's arbitration counterclaim is an "end run" around the rules - which Hancock denies - then so is Meritage's arbitration action, which is an "end run" around the doctrine preventing splitting of causes of actions. This is yet another instance of Meritage doing whatever it wants to do, and complaining when the other side seeks to asserts its own rights. What is good for the goose is good for the gander, and if Greg Hancock's arbitration claims should be stayed, so should those of Meritage IV. CONCLUSION The law articulated above and fundamental fairness dictate the result of this debate. Either the arbitration action should be allowed to proceed in its entirety, with a fully qualified arbitrator deciding all issues raised therein, or the Court should stay the arbitration
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in all respects. To do otherwise would endorse Meritage's purposeful failure to allege what it knew about prior to its second amended complaint, and prevent Greg Hancock from taking full advantage of what should have been disclosed to him prior to his last responsive pleading. RESPECTFULLY SUBMITTED this 27th day July, 2006.

/s/ Robert M Frisbee Robert M. Frisbee Attorneys for Greg Hancock

The foregoing was electronically filed this 27th day of July, 2006, and copy 10 thereof mailed to the Honorable Judge Silver.
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/s/ Robert M. Frisbee
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