Free Order on Motion for Attorney Fees - District Court of Arizona - Arizona

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Date: July 14, 2005
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pending before the Court is the Defendants', Incentive Connection Travel Inc., et al. ("ICT"), Motion for Attorneys' Fees and Costs (Doc. # 88). Plaintiff Edward G. Lesofski responded (Doc. #90) and ICT replied (Doc. #94). The Court rules as follows. I. Background The Plaintiffs, Edward G. Lesofski and Jim R. Keese ("Plaintiffs"), filed a multi-count complaint against ICT in the Montana District Court. Plaintiffs alleged breach of a written contract (Count Five), fraud in inducement of verbal contract (Count Three), fraud in the inducement of a written contract (Count Four), a federal racketeering claim predicated on an alleged fraudulent inducement to contract (Count One) and a violation of Title II of the
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EDWARD G. LESOFSKI and JIM R.) ) KEESE, ) ) Plaintiffs, ) ) vs. ) ) INCENTIVE CONNECTION TRAVEL,) INC.; ROBERT SIAMON, individually) and as President; HARVEY SIAMON,) individually and as Treasurer; KAREN) BUTLER, individually and as a major) ) stockholder; and JOHN DOES 1-25, ) ) Defendants. ) )


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Americans with Disabilities Act of 1990 (Count Two). (Doc. #2.) On November 14, 2003, the District Court of Montana transferred the case to the District of Arizona pursuant to 28 U.S.C. 1404(a). (Doc. #26.) On November 24, 2004, the Court granted ICT's Motion to Dismiss Counts One, Three, Four, and Five (Doc. #73) after Plaintiffs failed to respond. On March 23, 2005, the Court dismissed the case with prejudice. (Doc. #86.) ICT filed a Motion for Attorneys' Fees and Costs (Doc. #88) on March 25, 2005. II. Choice of Law Rules for Montana: Most Significant Relationship Test When a case is transferred pursuant to 28 U.S.C. 1404(a), the conflict laws from the district where the action was filed will apply. Piper Aircraft Co. v. Reyno, 454 U.S. 235, 243 n.8 (1981) (citing Van Dusen v. Barrack, 376 U.S. 612 (1946)). Thus, because Plaintiffs originally filed this action in Montana, the Court must apply Montana's conflict laws. Montana's conflict laws use the "most significant relationship" test set forth in the Restatement (Second) of Conflict of Laws when a contract dispute arises. Emerson v. Boyd, 805 P.2d 587, 588 (Mont. 1991), citing R.J. Williams Co. v. Fort Belknap Housing Authority, 719 F.2d 979 (9th Cir. 1983). Under this test, if the contract contains no choice of law provision, then the substantive law of the state that has the "most significant relationship" to an issue will apply to that issue. Id. Factors to be used in determining what state has the "most significant relationship" include: "(a) the place of contracting, (b) the place of the negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, (e) the domicile residence, nationality, place of incorporation and place of business of the parties." Id. Under Montana's conflict laws criteria, Arizona has the most significant relationship to the contract issues in dispute. Thus, Arizona substantive law should apply to Plaintiffs' contract claims. Plaintiffs admit that they met with ICT in Arizona to discuss the contract requirements on more than one occasion, and that subsequently they executed a written contract in Arizona. In addition, Montana law considers the "place of performance" of a contract to generally be where the benefits are received and utilized. Mitchell v. State Farm Ins., 315 Mont. 281, 289, 68 P.3d 703, 709 (Mont. 2003) (holding an insurance contract's -2Case 2:03-cv-02361-JAT Document 100 Filed 07/15/2005 Page 2 of 8

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place of performance is where insured is entitled to receive a benefit). Plaintiffs' company signed a contract to produce software that the Phoenix-based ICT would use in Arizona. This makes Arizona the place of performance for the purpose of Montana's conflict laws. Also, according to the complaint (Doc. #2), Plaintiff Jim Keese is not domiciled in Montana and has no significant connection to the state, other than he may have worked on the ICT software there at one time. He is a resident of Florida and he has provided the Court with a South Carolina address. (Doc. #2.) Other than Plaintiff Edward Lesofski's residence in Montana, the state has no other material contacts to the contract at issue. Although Montana's conflict laws dictate that Plaintiffs' contract claims be governed by the substantive laws of Arizona, the Court must still determine if the attorneys' fees sought are based in procedural claims, like misconduct during the litigation, or in substantive claims, like an award to the prevailing party. In re Larry's Apartment, L.L.C., 249 F.3d 832, 838 (9th Cir. 2001). Indeed, "a federal court sitting in diversity applies state law in deciding whether to allow attorneys' fees when those fees are connected to the substance of the case." Id. Here, ICT's request of attorneys' fees is connected to the substance of the case since it is based on the successful defense of all Plaintiffs' substantive contract claims. So, the Court must apply the state laws of Montana rather than federal procedural law. Therefore, Arizona law governs any attorneys' fees stemming from the contract claims because Arizona has the most significant relationship to the contract at issue. Under Arizona law, "statutes authorizing attorneys' fees [are] substantive in nature not procedural." Aries v. Palmer Johnson, Inc., 153 Ariz. 250, 258 n.3, 735 P.2d 1373, 1381 n.3 (App. 1987) (citing Seattle-First Nat. Bank v. Schriber, 51 Or. App. 441, 625 P.2d 1370 (1981)). Because Arizona law considers attorneys' fees substantive, A.R.S. 12-341.01(A) is encompassed within the Arizona substantive law called for by Montana's conflict laws. Thus, it is proper for ICT to seek attorneys' fees under A.R.S. 12-341.01(A).

III. Attorneys' Fees Under A.R.S. 12-341.01(A)

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Under Arizona law, "[i]n any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorneys' fees." A.R.S. 12341.01(A). Furthermore, the trial court has discretion regarding the award of attorneys' fees to the successful party. See Wilcox v. Waldman, 744 P.2d 444, 450 (Ariz. App. 1987). To recover attorneys' fees under the Arizona statute, the party seeking attorneys' fees must be the "successful party." Under Arizona law the Court considers the "totality of the litigation" in determining whether a party is successful. All Am. Distrib. Co., Inc. v. Miller Brewing Co., 736 F.2d 530, 532 (9th Cir. 1984); Nataros v. Fine Arts Gallery of Scottsdale, 612 P.2d 500, 505 (Ariz. Ct. App. 1980). Here, ICT moved for the dismissal of all Plaintiffs' claims and the Court subsequently dismissed all five claims, making ICT the successful party. Thus, the Court must determine two issues. First, whether the contested action in this case arose out of a contract dispute. Second, if the action did arise out of a contract dispute, whether an award of reasonable attorneys' fees is due ICT under Arizona's balancing test. To determine whether to award attorneys' fees, courts consider: 1. the merits of the unsuccessful party's claim, 2. whether the successful party's efforts were completely superfluous in achieving the ultimate result, 3. whether assessing fees against the unsuccessful party would cause extreme hardships 4. whether the successful party prevailed with respect to all relief sought, 5. whether the legal question presented was novel or had been previously adjudicated, and 6. whether a fee award would discourage other parties with tenable claims from litigating. Velarde v. PACE Membership Warehouse, Inc., 105 F.3d 1313, 1319-20 (9th Cir. 1997); Assoc. Indemn. Corp., 694 P.2d 1181, 1184 (Ariz. 1987); Uyleman v. D.S. Rentco, 981 P.2d 1081, 1086 (Ariz. App. 1999). Additionally, no single factor is to be considered

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determinative and the court is to weigh all of the factors in exercising its discretion to award attorneys' fees. See Wilcox, 744 P.2d at 450. The first issue is whether Plaintiffs' claims arose out of a contract dispute. Plaintiffs allege breach of a written contract, fraud in inducement of verbal contract, fraud in the inducement of a written contract, and a federal racketeering claim predicated on an alleged fraudulent inducement to contract. ICT contends these four claims stem from allegations that ICT breached an agreement with Plaintiffs and that the only claim made by the Plaintiffs unrelated to a contract is the ADA claim. The Plaintiffs argue that the contract claims were incorrectly filed and thus the only claim at issue between the parties was the ADA claim. However, Plaintiffs' Complaint lists four counts related to an agreement between ICT and Plaintiffs' company, Cyber Travel, L.L.C. The fact that Plaintiffs filed the complaint incorrectly, under their names rather than their company's name, does not change the fact that litigation began between the two parties over a disputed contractual agreement. See Colberg v. Rellinger, 160 Ariz. 42, 51 770 P.2d 346, 355 (App. 1988) (supp. opinion); see also Berhot v. Security Pac. Bank, 170 Ariz. 318, 324, 823 P.2d 1326, 1332 (App. 1991) (holding if a plaintiff alleges a contract exists and a defendant proves it does not, the action arises out of a contract under Arizona law). Thus, the four contract-based claims fall under A.R.S. 12-341.01(A). The second issue is whether, under Arizona standards, an award of attorneys' fees is warranted. The Court finds that it is. ICT argues Plaintiffs' contract-based claims were meritless otherwise they would have filed a response to ICT's motion to dismiss. Further, ICT points out that the Court dismissed the case due to Plaintiff's failure to respond and ICT achieved complete success with respect to all five claims made by Plaintiffs. Also, ICT notes that, in Montana, Plaintiffs knew that their contract claims were inappropriate, due to Plaintiffs filing the case under their names rather than their company's name. Yet even after Montana transferred the case to Arizona, Plaintiffs still would not dismiss these claims forcing ICT to file a motion to dismiss and related briefs.

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In contrast, Plaintiffs have offered no explanation for their actions using the factors denoted in the Arizona balancing test. Plaintiffs have not made any attempt to justify their failure to respond to ICT's motions and briefs. In addition, Plaintiffs' response to ICT's application for attorneys' fees makes no claim of any extreme hardship that may occur if ICT is granted attorneys' fees for the work done with respect to the contract claims. The Court finds that Plaintiffs' lack of response, and refusal to dismiss their claims, shows Plaintiffs' claims were meritless. Plaintiffs should have withdrawn their claims if they planned to discontinue the litigation. Additionally, the Court finds there is no danger of discouraging others from filing tenable claims. An award of attorneys' fees here would only discourage those who file incorrectly and delay in correcting their mistakes. Thus, the Court finds that the full award of 80% of ICT's attorneys' fees is proper under Arizona law. III. Attorneys' Fees Under 42 U.S.C.A. 12205 Under Section 12205, the Court may, at its discretion, award reasonable attorneys' fees to the prevailing party in "any action commenced pursuant to [Chapter 126, Equal Opportunity for Individuals with Disabilities]." 42 U.S.C.A. 12205. Plaintiffs filed a Title II claim under the ADA which falls under Chapter 126 and therefore is within the scope of 42 U.S.C.A. 12205. Also, ICT prevailed in the litigation surrounding this claim as the Court dismissed the ADA claim with prejudice. The Court chooses to use its discretion to grant ICT reasonable attorneys' fees under 42 U.S.C.A. 12205 for several reasons. First, ICT promised they would not pursue legal fees in exchange for Plaintiffs signing a release of all claims against ICT. Plaintiffs refused to sign the release and therefore caused ICT to continue litigation. Second, if Plaintiffs' ADA claim had any merit, they certainly would have pursued or defended the claim in Arizona rather than let it be dismissed with prejudice. Lastly, Plaintiffs have failed to raise any arguments justifying their actions. In fact, Plaintiff Jim Keese decided to stop responding completely to any attempts of contact regarding the litigation. Plaintiffs have given no reasons for these actions. The failure of Plaintiffs to respond to ICT's motions and briefs related to the ADA claim, and the failure to end the litigation, leads this Court to find -6Case 2:03-cv-02361-JAT Document 100 Filed 07/15/2005 Page 6 of 8

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that attorneys' fees are warranted. Therefore, the Court grants the full award of 20% of ICT's attorneys' fees under 42 U.S.C.A. 12205. III. Attorneys' Fees Under 28 U.S.C. 1927 Under 28 U.S.C. 1927, "[a]ny attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." In short, "[s]ection 1927 authorizes the imposition of sanctions against any lawyer who wrongfully proliferates litigation proceedings once a case has commenced." Pac. Harbor Capital, Inc. v. Carnival Air Lines, Inc., 210 F.3d 1112, 1117 (9th Cir. 1999). However, sanctions may be imposed under 1927 only if there has been a determination of bad faith. Id. at 1118. Courts "`assess an attorney's bad faith under a subjective

standard. Knowing or reckless conduct meets this standard.'" Id. (quoting MGIC Indem. Corp. v. Moore, 952 F.2d 1120 1121-22 (9th Cir. 1991). The Court declines to award attorneys' fees under 28 U.S.C. 1927 for ICT's claim that Plaintiffs "unreasonably or vexatiously" multiplied the proceedings. Plaintiffs filed their claims as pro se parties and did not show bad faith or "knowing or reckless conduct" in filing the contract claims incorrectly. Nor did Plaintiffs frivolously or vexatiously file extended or untimely pleadings which proliferated the litigation proceedings. Plaintiffs' actions were the product of legal inexperience. While the substance of Plaintiffs' claims may be questioned, given their failure to reply to ICT's motions to dismiss, the award of attorneys' fees under A.R.S. 12-341.01(A) and 42 U.S.C.A. 12205 is sufficient to redress ICT. Accordingly, the Court finds that ICT's attorneys' fees are warranted under A.R.S. 12-341.01(A) given Montana's conflict laws and Plaintiffs' meritless substantive contract law claims. Additionally, the Court finds ICT's attorneys' fees should be awarded under 42 U.S.C.A. 12205 for the successful defense of Plaintiffs' ADA claim. The Court finds that ICT's claim for attorneys' fees under 28 U.S.C. 1927 is not warranted because Plaintiffs' filing errors were likely due to legal inexperience. -7Case 2:03-cv-02361-JAT Document 100 Filed 07/15/2005 Page 7 of 8

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IV. Conclusion Accordingly, IT IS ORDERED that Defendants' Motion for Award of Attorneys' Fees (Doc. #88) is GRANTED under A.R.S. 12-341.01(A) and 42 U.S.C.A. 12205 in the amount of $13,019 and DENIED under 28 U.S.C. 1927. IT IS FURTHER ORDERED that the Clerk of Court shall enter judgment in the amount of $13,019, plus interest from the date of judgment until paid, in favor of Defendants and against Plaintiffs.

DATED this 14th day of July, 2005.

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