Free Response to Motion - District Court of Arizona - Arizona

1 d.l. hall, attorney, pllc

14555 North Scottsdale Road, Suite 160 2 Scottsdale, Arizona 85254 Telephone: 480.596.4045 3 Facsimile: 480.596.7976 Dennis L. Hall, # 013547
4 5 P.O. Box 460

James M. McGee, Esq.

Cottonwood, Arizona 86326 6 Telephone: 928.639.4747 Facsimile: 928.639.2190 7 James M. McGee, #011931
8 Attorneys for Defendants Carl Brown and Molly Brown 9 10 11 12

United States District Court For the District of Arizona
Cathleen Channel, Stacie Hanson, Monique Nichols, Plaintiffs vs. Home Mortgage, Inc., an Arizona

13 Theresa Wharry, 14 15 16

Case No. CIV-2003-0100 PHX-ROS RESPONSE TO PLAINTIFF' S MOTION FOR AWARD OF ATTORNEYS' FEES AND TAXABLE COSTS (The Honorable Roslyn O. Silver)

17 Corporation conducting business in

Arizona, Carl Brown, Molly Brown, Defendants.

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Plaintiffs lack legal justification for an award of attorneys'fees in this matter. Plaintiffs failed in their claim against Carl and Molly Brown based in contract, and only

successful claim against Carl and Molly 22 succeeded in piercing the corporate veil. Plaintiffs' s 23 Brown does not arise from contract under the Arizona Supreme Court' interpretation of
24 A.R.S. §12-341.01. Because a contract is not an essential basis to the successful claim, this 25

statutory basis cannot be applied to Carl and Molly Brown.
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Plaintiffs' alternate justification for an award of attorneys' fees, A.R.S. §12-349, a procedural rule applicable only in the Arizona state courts, cannot be applied in Federal District Court. That statute is restricted only to Arizona " Courts of Record." Plaintiffs' petition, in the amount requested, over-reaches by including all fees levied

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since obtaining the judgment against Home Mortgage. Plaintiffs seek $79,577.50 in attorney' fees. Plaintiffs' s have included fees for their unsuccessful attempt to apply the Arizona wage statute to the Browns personally and for their claims against Greg and Melanie Brown. Plaintiffs have no basis to request fees in amounts greater than expended on their case to pierce the corporate veil. Plaintiffs should not be awarded fees, but only the $2,615.14 in taxable costs. 1. PLAINTIFFS' LACK ATTORNEYS' FEES. LEGAL BASIS FOR AN AWARD OF

Plaintiffs rely on two statutes in support of an award of attorneys' fees. Plaintiffs assert that fees should be awarded 1) pursuant to A.R.S. §12-341.01, the Arizona statute providing for an award of attorneys' fees in contracts " arising out of contract"and 2) pursuant to A.R.S. §12-349, the Arizona statute providing assessment of attorneys' in a fees court of record in Arizona for bringing a case " without substantial justification;" solely or " primarily for delay or harassment;"" [u]nreasonably expands or delays the proceeding; or " [e]ngages in abuse of discovery." A. A.R.S. §12-349 APPLIES ONLY TO AN ARIZONA " COURT OF RECORD" AND NOT TO A FEDERAL DISTRICT COURT.

The Arizona Constitution states that " [t]he supreme court, the court of appeals and the superior court shall be courts of record. Other courts of record may be established by
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law, but justice courts shall not be courts of record." Ariz.Const., §30(A). A.R.S. §12-3491 applies only to " courts of record," which does not include this Court. A.R.S. §12-349 has no relevancy in the Federal District Courts. B. A.R.S. §12-341.01 DOES NOT APPLY: PIERCING THE CORPORAT VEIL IS WHOLLY SEPARATE FROM CONTRACT.

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The Arizona statute granting attorneys' fees to the prevailing party in cases, A.R.S. §12-34101(A), states that " any contested action arising out of a contract, express or [i]n implied, the court may award the successful party reasonable attorney fees."(emphasis supplied). This action, with regard to Defendants Carl and Molly Brown, has involved an unsuccessful attempt to apply the Arizona wage statutes to them personally and a successful attempt to pierce the corporate veil and hold them personally responsible for the debt of the corporation. The term " arising out of contract" admittedly broad, but the Arizona courts have is placed limitations on its application. When the essence of a case is a tort, even if there is a contract involved, the statute does not apply. Amphitheater Public Schools v. Eastman, 117 Ariz. 559, 560, 574 P.2d 47,48 (App.1977). If contract and tort theories are intertwined, then the statute applies only if the cause of action in tort could not exist but for the breach of
A.R.S. §12-349(A) states: " Except as otherwise provided by and not inconsistent with another statute, in any civil action commenced or appealed in a court of record in this state, the court shall assess reasonable attorney fees, expenses and, at the court's discretion, double damages of not to exceed five thousand dollars against an attorney or party, including this state and political subdivisions of this state, if the attorney or party does any of the following: 1. Brings or defends a claim without substantial justification. 2. Brings or defends a claim solely or primarily for delay or harassment. 3. Unreasonably expands or delays the proceeding. 4. Engages in abuse of discovery."

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contract. Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982). Even if a breach of the contract is a factual predicate to the action, it is not sufficient to invoke the statute unless it is " essential basis of it."Cashway Concrete & Materials v. Sanner Contracting Co., the 158 Ariz. 81, 83, 761 P.2d 155, 157 (App.1988). In Cashway, the Court explained: Both issues litigated in this case, the validity of the lien and the reasonable value of the material provided, are wholly separate from the contract. They relate to a statutory remedy designed to protect materialmen from those who do not pay their bills. That remedy stands apart from the contract remedy. It exists against those who are foreign to the contract. The action, therefore, does not arise out of the contract. Id. The same logic applies here, where piercing the corporate veil is wholly separate from the contract, relates to an equitable remedy, stands apart from the wage contract and the wage statute and its remedies, and exists against those who are foreign to the contract. The successful cause of action here, like the lien action in Cashway, does not arise out of the contract. In Barmat v. John & Jane Doe Partners, 155 Ariz. 519, 747 P.2d 1218 (1987), the Arizona Supreme Court succinctly explains its Sparks reasoning: We believe that the problem of interpretation is properly resolved by the principles announced in Sparks v. Republic National Life Insurance Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982). There we held that fees may be awarded under the statute even though a single act constitutes both a tort and breach of contract, " long as the cause of action in tort could as not exist but for the breach of contract." at 543, 647 P.2d at 1141 Id. (emphasis in original). In Sparks, we allowed fees to an insured in an action based upon the insurer's breach of an implied covenant of good faith. In such actions, neither the duty of " good faith"nor any other duty would exist between insurer and insured but for the promises between the parties. Similarly, the tort action for breach of the implied covenant of good faith could not have existed " for" breach of but the agreements, express or implied, in the contract of indemnity. Thus,
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whether the action for breach was pleaded in contract, in tort, or both, whether it involved the breach of an express or implied covenant, the action in Sparks and similar cases ( see, e.g., Ford v. Revlon, Inc., 153 Ariz. 38, 45, 734 P.2d 580, 587 (1987)) " arises out of a contract." See also Morris v. Achen Construction Co., 155 Ariz. 512, 747 P.2d 1211 (1987); Lewin v. Miller-Wagner & Co., 151 Ariz. 29, 725 P.2d 736 (App.1986); Cauble v. Osselaer, 150 Ariz. 256, 722 P.2d 983 (App.1986). The successful cause of action here, piercing the corporate veil, fails the " for" of Sparks. but test Piercing the corporate veil is a procedural remedy. See Phoenix Safety Inv. Co. v. James, 28 Ariz. 514, 237 P. 958 (1925). It merely furnishes a means to reach a second corporation or individual upon a cause of action that otherwise would have existed only against the first corporation, and is but a means of imposing liability on an underlying cause of action such as a tort or breach of contract. 1 Fletcher, Fletcher Cyclopedia of the Law of Corporation, §41.10. Plaintiffs cite two cases, neither which are Arizona cases, and neither providing this Court any guidance in this matter. Neither discusses the application of A.R.S. §341.01(A). In Vananounou v. Dulce, 2007 WL 2417487 (Tx.Ct.App.,Aug.28,2007), the court awarded attorneys' fees in a construction defect case. The Vananounou case fails to discuss, in any

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manner, the award of attorneys' fees. Neither does Four Seasons Manufacturing, Inc. v. 1001 Coliseum, L.L.C., 870 N.E. 2nd 494 (Ind.App.,2007), a case which discusses piercing the corporate veil, but does not, in any manner, discuss the award of attorneys' fees. 2. ATTORNEYS' FEE PETITION CONTENT.

Local Rule of Civil Procedure 54.2 (c) describes the content a petitioner for attorneys' must make in their motion for fees.
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A.

ELIGIBILITY.

Plaintiffs' lack any statutory or contractual authority applicable in this matter to support an award of attorneys' fees. B. ENTITLEMENT.

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Plaintiffs asserted entitlement to attorneys' fees depends on the Arizona statutes. The attorneys' fees awarded must be reasonable. Under A.R.S. §12-341.01(B), as earlier noted, the fees awarded may not exceed the amount actually paid by the claimant. C. REASONABLENESS OF REQUESTED REWARD.

Local Rule of Civil Procedure 54.2 (c)(3) cites thirteen factors to be evaluated with regard to reasonableness. Defendants here acknowledge the experience, skill, and reputation of Plaintiffs' counsel as outstanding and the fee rates charged as being reasonable. Here, the factor to be considered is the time and labor required of counsel. Most important, the fees awarded should relate only to the time and effort expended in piercing the corporate veil. This matter involved three phases. First, Plaintiffs sought and obtained a judgment on their wage claims against Home Mortgage. Plaintiffs next took a debtor' exam of Carl s Brown as a representative of Home Mortgage. Plaintiffs then sued Carl and Molly Brown, and Greg and Melanie Brown, in an attempt to make them personally responsible for the judgment under the wage statutes. After a lengthy battle, Plaintiffs' attempt to apply the wage statute to the officers of Home Mortgage was rejected by this Court. The final phase of the case was to pursue a new theory, piercing the corporate veil, against Carl and Molly Brown (Greg and Melanie Brown only insignificantly had an ownership interest in the corporation).
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Plaintiffs have received an award for the first phase of the case against Home Mortgage. Plaintiffs have now asked for all of their time other than that already received, including the time and efforts expended against Greg and Melanie Brown and for the unsuccessful attempt to apply the Arizona wage statute against all the individual defendants

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personally. Plaintiffs should not be rewarded for their attempts to apply the Arizona wage statutes to the Browns. They unnecessarily enlarged this litigation by pursuing this novel theory unsupported in Arizona law. They lost. The matter of piercing the corporate veil is distinct and separate from the attempt to apply the wage statutes to officers. In addition, that effort was aimed at a second set of defendants, who were dismissed from the action. Plaintiffs' time entries are not sufficiently robust to make the distinctions necessary to parse the entries among these different aspects of the case. Local Rule of Civil Procedure 54.2(e)(2) requires that the description " adequately describe the services rendered so that the reasonableness of the charge can be evaluated." Most of the entries identify what work was performed (i.e., " Conference with Mr Shields;" " or Research" but not the purpose of ), the activity. Local Rule of Civil Procedure 54.2(e)(2)(B) requires that the time entry for legal research must " identify the specific legal issue researched." The time entries fail to do so. Even with these limitations, it can be said that the " ego" alter theory was not actively pursued until December 21, 2005, the first time entry mentioning that theory. After that, any contact with Greg Brown or his counsel concerned the alter ego theory. Because of these problems, all entries prior to December 21, 2005 should be disallowed. According to
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Defendants computations, the amounts claimed relating to the last, successful phase of the case is $52,490.00. Affidavit of Dennis L. Hall. In addition, Plaintiffs' included fees for the first of two settlement conferences. Carl and Molly Brown paid $3,000 to Plaintiffs for the first settlement conference. Plaintiffs'

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time and cost entries of March 22 and 23, 2007 of $2,460 in fees and $215.46 of costs should be disallowed. D. SUPPORTING DOCUMENTATION.

Local Rule of Civil Procedure 54.2(c) says that " motion for award of attorneys' [n]o fees will be considered unless a separate statement of the moving counsel is attached to the supporting memorandum certifying that, after personal consultation and good faith efforts to do so, the parties have been unable to resolve all disputed issues or that the moving counsel has made good faith effort, but has been unable, to arrange such a conference." Plaintiffs' efforts were limited to faxing one letter to Defendants' counsel. This does not meet the requirement of good faith. Defendants have been in contact with Plaintiffs' counsel, and this consultation will be completed prior to the Plaintiffs' filing a Reply. E. ITEMIZED STATEMENT.

Plaintiffs have not provided a description of expenses incurred in " separate portion a of the itemized statement" attached invoices. Local Rule of Civil Procedure 54.2(e)(3). or 3. CONCLUSION: NO AWARD OF ATTORNEYS' FEES.

Plaintiffs lack legal authority to request an of award attorneys'fees for their successful claim of piercing the corporate veil. In requesting attorneys' fees, they have overreached and requested that Defendants Carl and Molly Brown pay for the Plaintiffs'
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unsuccessful attempt to expand the Arizona wage statutes to individuals and for the Plaintiffs' work against Greg and Melanie Brown. Only taxable costs of $2,399.68 should be awarded. Dated October 22, 2007. D.L. Hall, Attorney, pllc /s/ Dennis L. Hall Dennis L. Hall Attorney for Defendants Carl and Molly Brown /// /// ///

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CERTIFICATE OF SERVICE

Pursuant to Fed.R.Civ.P. 5(b), I certify that on the 22nd day of October, 2007, I personally caused to be served electronically, a true and correct copy of the foregoing document.

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James Burr Shields II Blake Simms Law Office of James Burr Shields 382 East Palm Lane Phoenix, AZ 85004 /s/Laura Keller Laura Keller

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