Free Reply to Response to Motion - District Court of Arizona - Arizona

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Law Office of James Burr Shields 382 East Palm Lane Phoenix, Arizona 85004-1531 (602) 307-0780 (Office) (602) 307-0784 (Facsimile)
James Burr Shields II, State Bar #011711 John A. Conley, State Bar #016429 Blake Simms, State Bar #021595 Attorneys for Plaintiff

IN THE UNITED STATES DISTRICT COURT IN AND FOR THE STATE OF ARIZONA

Cathleen Channel, Theresa Wharry, Stacie Hanson, Monique Nichols,

) ) ) ) ) Plaintiffs, ) ) vs. ) ) Home Mortgage, Inc., an ) Arizona corporation conducting ) business in Arizona, ) Carl Brown; ) Molly Brown; ) ) Defendants. ) ____________________________)

Case No. CIV 2003-0100 PHX ROS REPLY TO DEFENDANTS' RESPONSE TO PLAINTIFFS' MOTION FOR AWARD OF ATTORNEYS' FEES AND TAXABLE COSTS

Plaintiffs, Cathleen Channel, Theresa Wharry, Stacie Hanson, and Monique Nichols, by and through counsel undersigned, hereby submit their Reply to Defendants' Response to Plaintiffs' Motion for Award of Attorney's Fees and Taxable Costs. Plaintiffs renew their request the Court grant the fees and costs they sought in their initial fee application packet. A. Plaintiffs' Claims Do Arise Out of Contract Defendants, in their Response, argue the claims on which Plaintiffs were ultimately successful do not arise out of contract. Under Arizona law, "In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." Ariz. Rev. Stat. § 12-341.01(A). Defendants argue Plaintiffs' successful efforts to pierce Home Mortgage, Inc.'s ("HMI"), corporate veil and hold liable for the HMI judgment Defendants Carl Brown and Molly Brown do not arise out of contract. The case
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law interpreting § 341.01(A), however, supports Plaintiffs' position they are entitled to an award of attorney's fees related to their efforts to pierce HMI's corporate veil. The phrase "arising out of a contract" means "an action in which a contract was a factor causing the dispute." ASH, Inc. v. Mesa Unified Sch. Dist. No. 4, 138 Ariz. 190, 192, 673 P.2d 934, 936 (Ariz. Ct. App. 1983). Attorney's fees under § 341.01 are available where a cause of action could not exist "but for the breach of the contract." Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141 (1982). Arizona courts, when interpreting the phrase "arising out of contract" have consistently "broadly interpreted what types of transactions are included with this clause." Marcus v. Fox, 150 Ariz. 333, 334, 723 P.2d 682, 683 (1986). Plaintiffs' claims clearly arise out of contract. Plaintiffs were employees of HMI. HMI agreed to, in exchange for their promises to perform certain services, provide Plaintiffs wages in form of commissions. HMI failed to pay Plaintiffs all the commissions they earned, and Plaintiffs brought suit. Plaintiffs brought a claim for unpaid wages under the Arizona Wage Payment Act, which is equivalent to a breach of contract action. Plaintiffs obtained against HMI a judgment representing their unpaid commissions. When it became clear Defendants Carl Brown and Molly Brown had over HMI complete control and had left HMI in a position where it could not satisfy Plaintiffs' judgment, Plaintiffs sought to hold defendants liable for their wages. The contracts of employment between Plaintiffs and HMI was clearly a "factor in causing the dispute" between Plaintiffs and Defendants Carl Brown and Molly Brown. Plaintiffs, then, are entitled to recover under § 341.01(A) from Defendants their attorney's fees. Defendants' argument is that Plaintiffs' alter ego/corporate veil claims constitute "an equitable remedy" that is separate from the contract giving rise to Plaintiffs' wage claims. Defendants argue Plaintiffs' successful attempt to hold them liable for the judgment they obtained against HMI is not sufficiently related to the underlying contract action to justify an award of fees. Again, however, the relevant case law demonstrates Plaintiffs' claims do arise out of contract.
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The case of Corbet v. Superior Court provides strong support to Plaintiffs' argument. Corbet v. Superior Court, 165 Ariz. 245, 798 P.2d 383 (Ct. App. 1990). In that case, the plaintiff filed against the defendant a breach of contract action. The defendant did not appear and respond within the time set forth in Rule 12(a) of the Arizona Rules of Civil Procedure. The plaintiff, after the defendant failed to meet the answering deadline, filed for an application for the entry of default. The clerk, consistent with the plaintiff's request, entered the defendant's default. The defendant then answered the plaintiff's complaint. The plaintiff, in the meantime, filed a motion for a default judgment. The defendant filed motions to set aside the entry of default and to vacate the default hearing. The trial court denied the defendant's motions. The defendant then appealed the trial court's ruling. The court of appeals ruled the trial court was incorrect in refusing to set aside the entry of default. The court of appeals also, holding the action to set aside arose from the underlying contract, held the defendant was entitled to attorney's fees under § 341.01(A). The Corbet case demonstrates a court will find an action arises out of contract even when one of the parties to the underlying contract subsequently employs procedural mechanisms not directly related to the underlying breach of contract claim. Plaintiffs, in the present case, once they determined Defendants Carl Brown and Molly Brown were the alter egos of HMI, employed a procedural mechanism to hold them liable for HMI's breach of contract. Plaintiffs' attempts to hold liable for HMI's breach of contract Defendants Carl Brown and Molly Brown were just a continuation of their underlying unpaid wages/breach of contract action. Defendants cite to support their argument numerous Arizona cases, each of which held a transaction did not arise out of contract and, therefore, the prevailing party was not entitled to an award of fees under § 341.01(A). Some of the cases Defendants cite are Barmat v. John & Jane Doe Partners, 155 Ariz. 519, 747 P.2d 1218 (1987); Morris v. Achen Construction Co., 155 Ariz. 512, 747 P.2d 1211 (1987); Lewin v. Miller-Wagner & Co., 151
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Ariz. 29, 725 P.2d 736 (Ct. App. 1986); and Cauble v. Osselaer, 150 Ariz. 256, 722 P.2d 983 (Ct. App. 1986). None of those cases support Defendants' position Plaintiffs' claims do not arise out of contract. In Barmat, the plaintiffs brought against their attorney a malpractice action stemming from the attorney's representation of them in a wrongful death action. Barmat v. John & Jane Doe Partners, 155 Ariz. 519, 520, 747 P.2d 1218, 1219 (1987). The plaintiffs, on appeal, obtained a ruling the attorney was not immune from suit. The plaintiffs also received from the court of appeals an award of attorney's fees. The Arizona Supreme Court granted certiorari and reviewed, inter alia, the court of appeals' award of attorney's fees. The Arizona Supreme Court held the plaintiffs were not entitled to an award of fees under § 341.01, because their legal malpractice action did not arise out of contract. The Court made a distinction of actions that arise out of tort and actions that arise out of contract. The court then discussed causes of actions where tort claims and contract claims were "intertwined." The court addressed claims of bad faith an insured files against an insurer and noted that these claims, while sounding in tort, would not exist without the underlying insurance policy contract. In such a case, the cause of action did arise out of contract. As such, attorney's fees are available in bad faith insurance claims. The Court noted claims of malpractice against an attorney would exist even if an underlying attorney-client relationship, contractual in nature, did not exist. That is, if an attorney commits malpractice vis-à-vis an individual, the attorney is liable for the tort of malpractice even if that attorney does not have the contractual right to represent the individual who subsequently brings the malpractice suit. The Court stated that in special relationships, such as attorney-client, innkeeper-guest, common carrier-passenger, and bailor-bailee, "the law imposes special duties to all within the foreseeable range of harm as a matter of public policy, regardless of whether there is a contract, express or implied, and generally regardless of what its covenants may be." Id. at 522, 1221. This special relationship issue does not apply in the present case. Plaintiffs'
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relationship with HMI was one of employer-employee, which is much different from the relationships the Marcus case cited. The employer-employee relationship is contractual in nature. See Velarde v. Pace Membership Warehouse, 105 F.3d 1313 (9th Cir. 1997). That is, Plaintiffs' claim against HMI, absent the contract between the parties, would not exist. This is much different from the situation the Court addressed in Marcus. The other cases Defendants cite as support for their position are, likewise, inapposite. The Lewin case involved a client's malpractice suit against his accountant, which, as Marcus notes, involves a special relationship where a cause of action exists without regard to the existence of a contract. Lewin v. Miller-Wagner & Co., 151 Ariz. 29, 725 P.2d 736 (Ct. App. 1986). The Cauble case involved a party's attempt to require a court-appointed receiver to refund some of the fees the receiver charged for administering the property in question. Cauble v. Osselaer, 150 Ariz. 256, 722 P.2d 983 (Ct. App. 1986). The Morris case involved a case where the plaintiff alleged the defendant fraudulently induced it into entering a contract with a third party. Morris v. Achen Construction Co., 155 Ariz. 512, 747 P.2d 1211 (1987). Defendants have cited no case in any jurisdiction where a court has held a plaintiff who breached the corporate veil in a breach of contract action is not entitled to attorney's fees. Plaintiffs' counsel has been, after extensive research, unable to find, any such cases. Plaintiffs have, however, found numerous cases where courts have held such plaintiffs are entitled to attorney's fees. See, e.g., Peschel Family Trust v. Colonna, 75 P.33d 793 (Mont. 2003); J.C. Compton v. Brewster, 59 P.3d 1288 (Ore. Ct. App. 2002) (assuming, without deciding, attorney's fees would be available to a party that prevailed on a alter ego claim related to breach of contract); Reynolds Metals Company v. Alperson, 599 P.2d 83 (Cal. 1979). Plaintiffs, then, are entitled to an award of attorney's fees under section 341.01(A). B. Plaintiffs Entitled to Fees for Defendants' Litigation Conduct Defendants also argue Plaintiffs are not entitled to attorney's fees under Ariz. Rev. Stat. § 12-349, which allows recovery of fees for an opposing party's litigation conduct.
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Under the Erie doctrine, "Federal courts sitting in diversity apply state substantive law and federal procedural law." Witte v. United States, 515 U.S. 415, 427 (1995). In diversity cases, the question whether a party is entitled to attorney's fees is a substantive issue. In re King Resources, Co., 651 F.2d 1349, 1353 (10th Cir. 1981); See also, Aleyska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975) (holding state law generally applies to determine an entitlement to attorney's fees in diversity cases). Whether a state has the power to pass a substantive law and then restrict solely to state courts its application, thereby precluding its application in federal courts sitting in diversity, is highly debatable. The Court, however, need not wade into this issue, as federal courts have the inherent power to award attorney's fees to sanction bad faith conduct. Chambers v. NASCO, Inc., 501 U.S. 32 (1991). The Chambers court specifically held a federal court, "sitting in diversity," has the "inherent power [of] assessing as a sanction for a party's bad-faith conduct attorney's fees and related expenses paid by the party's opponent to its attorneys." Id. at 33. This Court, then, has the inherent power to award to Plaintiffs as a sanction for Defendant's bad faith litigation conduct the attorney's fees Plaintiffs seek. Plaintiffs have cited at length the deliberate falsehoods and other bad faith conduct to which Defendant Carl Brown subjected Plaintiffs and the Court. Plaintiffs will not set forth here the litany of contemptible actions in which Defendant Carl Brown engaged, as Plaintiffs' Memorandum in Support of their Motion for Award of Attorney's fees list many of these acts. Further, the Court had the opportunity, both through reviewing Plaintiffs' Motion for Summary Judgment and Plaintiffs' Request for Reconsideration and from observing Defendant Carl Brown's live trial testimony, to become familiar with Defendant Carl Brown's bad faith conduct. C. Reasonableness of Award Defendants also argue Plaintiffs should not receive attorney's fees for their ultimately unsuccessful attempt to have the Court hold Defendants personally liable under the Arizona Wage Payment Act. It is true Plaintiffs, prior to pressing forward with their attempts to pierce HMI's corporate veil to reach Defendants Carl Brown's and Molly Brown's personal
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assets, asserted Defendants, as the dominant shareholders and ultimate decision-makers in HMI, were personally liable under the definition of employer in the Arizona Wage Payment Act. Plaintiffs, however, prior to pushing the Wage Payment Act claim, sought to obtain evidence relevant to their alter ego claims. Plaintiffs, on August 4, 2003, held a debtor's examination at which Defendant Carl Brown testified under oath. Plaintiffs' counsel asked Defendant Carl Brown numerous questions aimed at procuring answers that would shed light on whether Defendants Carl Brown and Molly Brown were the alter egos of HMI. Defendant Carl Brown provided to each of these questions answers Plaintiffs later learned were completely false. For example, Plaintiffs' counsel asked Defendant Carl Brown whether he, personally, received any of the proceeds of the HMI asset sale to McAfee. Defendant Carl Brown stated he received "[n]ot a dime" of the proceeds of that sale. Plaintiffs, after issuing several subpoenas and reviewing thousands of pages of documents eventually learned Defendants Carl Brown and Molly Brown received into their personal bank account all of the proceeds of that sale. Had Defendant Carl Brown answered truthfully that he deposited into his personal account the proceeds of that sale, Plaintiffs would have immediately moved forward with their alter ego claims. Plaintiffs, at that time, had not yet realized Defendant Carl Brown habitually makes false statements in an attempt to advance his interests and thwart the administration of justice. As such, they adduced from Defendant Carl Brown's debtor's examination testimony no evidence he was HMI's alter ego. They, at that point, began pursuing the Arizona Wage Payment Act claim. Defendant Carl Brown's intentionally deceptive answers to Plaintiffs' questioning at the debtor's examination were directly responsible for Plaintiffs' decision to first pursue the Arizona Wage Payment Act claim. Defendant Carl Brown should not profit from his false testimony. Plaintiffs, therefore, request the Court award them fees for all aspects of

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the case against Defendants Carl Brown and Molly Brown.1 D. Statement of Consultation Defendants' previous attorney, subsequent to the Court's ruling in favor of Plaintiffs at trial, refused to contact Plaintiffs' counsel. Plaintiffs' counsel faxed to Defendant's previous attorney a written invitation to consult regarding Plaintiffs' attorney's fee application. Defendant's previous attorney failed to respond thereto. In any event, Plaintiffs' counsel and Defendants' new counsel, on October 25, 2007, did consult regarding Plaintiffs' application for attorney's fees and Defendants' objections thereto. Plaintiffs, then, have complied with the consultation requirement. E. Separate Description of Expenses Incurred Defendants note Plaintiffs did not file along with their fee application packet the separate description of expenses set forth in Local Rule 54.2(e)(3). That rule, however, requires a separate description, along with "copies of applicable invoices, receipts and/or disbursement instruments," for only non-taxable expenses. Local R. of Civ. P. 54.2(e)(3). Plaintiffs have not sought any non-taxable costs. They have requested only taxable costs. As such, Rule 54.2(e)(3) will have no application herein. F. Conclusion Plaintiffs' claims clearly arise out of contract. The Court has the inherent authority to award as sanctions for Defendant Carl Brown's bad faith conduct attorney's fees. Finally, the amount of fees Plaintiffs have requested is reasonable. Plaintiffs, therefore, request the Court award attorney's fees in the full amount Plaintiffs have requested. RESPECTFULLY SUBMITTED this 7th day of November, 2007. LAW OFFICE OF JAMES BURR SHIELDS ____s/ W. Blake Simms__________________ James Burr Shields Blake Simms Attorneys for Plaintiffs As previously stated, the Court has the inherent power to award attorney's fees as a sanction for Defendant Carl Brown's bad faith conduct.
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CERTIFICATE OF SERVICE I hereby certify that on the 7th day of November, 2007, I electronically submitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: James M. McGee, Esq. P.O. Box 460 Cottonwood, Arizona 86326 [email protected] Attorney for Defendants Dennis L. Hall, Esq. d.l.hall attorney, pllc 14555 North Scottsdale Road, Suite 160 Scottsdale, Arizona 85254 [email protected] Co-Counsel for Defendants Carl and Molly Brown ____s/ Gail Ivey___________________

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