Free Memorandum - 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

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

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

Case No. CIV 2003-0100 PHX ROS PLAINTIFFS' MEMORANDUM IN SUPPORT OF MOTION FOR AWARD OF ATTORNEYS' FEES AND TAXABLE COSTS

Plaintiffs, Cathleen Channel, Theresa Wharry, Stacie Hanson, and Monique Nichols, by and through counsel undersigned, pursuant to Rule 54.2(c) of the District of Arizona Local Rules of Civil Procedure, hereby file their Memorandum in Support of Plaintiffs' Motion for Award of Attorney's Fees and Taxable Costs. Plaintiffs have attached hereto the following exhibits: (1) A Statement of Consultation; (2) Plaintiffs Fee Agreement; (3) A Task-Based Itemized Statement of Fees and Expenses; and (4) An Affidavit in Support of Plaintiff's Motion for Award of Attorney's Fees. Plaintiffs request an award of attorney's fees of $79,577.50 and an award of costs of $2,565.14. I. ELIGIBILITY AND ENTITLEMENT A. Ariz. Rev. Stat. § 12-341.01 Plaintiffs are former employees of Home Mortgage, Inc. ("HMI"), a judgment debtor
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in this action. Defendants Carl Brown and Molly Brown own 99% of the outstanding shares of HMI. They are also defendants in this litigation. HMI, in early 2002, began withholding Plaintiffs' wages and eventually ceased operations. HMI has never compensated Plaintiffs for the wages it unlawfully withheld from them. Plaintiffs, as a result, after making several efforts to reach an informal resolution to this matter, filed suit against HMI. Plaintiffs, on August 29, 2003, obtained against Home Mortgage, Inc., a judgment in the amount of totaled $232,241.34, plus $285 in costs, $8,386.43 in prejudgment interest, and $4,390.82 in attorney's fees. Plaintiffs, during the process of obtaining against Home Mortgage, Inc., the above judgment, uncovered evidence that led them to believe Home Mortgage, Inc., was insolvent and that that company's shareholders may be liable for the judgment. Plaintiffs amended their complaint and included as Defendants Carl Brown and Molly Brown, the owner of the vast majority of Home Mortgage's stock. Plaintiffs, in attempting to hold liable for the above-referenced judgment Defendants Carl Brown and Molly Brown, advanced two arguments. Plaintiffs first argued Defendants Carl Brown and Molly Brown, as shareholders/officers of HMI, were, under the Arizona Wage Payment Act, jointly liable for their corporation's failure to pay wages. Plaintiffs' second argument was Defendants Carl Brown and Molly Brown were the alter ego of Home Mortgage and, therefore, the Court should pierce the company's corporate veil and hold them liable for the August 29, 2003, judgment. The Court ruled the Arizona Wage Payment Act did not contemplate shareholder/officer liability, but the Court ruled Plaintiffs could proceed with their efforts to pierce HMI's corporate veil. The matter proceeded to trial on Plaintiffs' alter ego/corporate veil theory of recovery. Plaintiffs produced a wealth of evidence that piercing the corporate veil was justified. Defendant Carl Brown completely controlled HMI's operations. He was the dominant shareholder. He also held with the corporation numerous officer positions. Defendant Carl Brown, in the fall of 2002, entered into an agreement to sell the company. He, in a somewhat complicated transaction, transferred to Greg Brown, his son
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and a 1% owner of the corporation, most, if not all, of the company's assets. Gregg Brown then transferred to a third party, PlainsCapital McAfee, those assets. Defendant Carl Brown received into his personal bank account his share of the proceeds of the sale to PlainsCapital McAfee, thereby commingling funds. Defendant Carl Brown's first installment of the proceeds of the sale was $700,000. This amount was well in excess of the amount of wages the company owed Plaintiffs. There were, at the time he received into his personal bank account, at least three functioning HMI bank accounts, but Defendants chose to not transfer to any of these accounts the proceeds from this sale. Defendants, at trial, finally provided a couple of proposed justifications for placing in his personal account this money. Defendant Molly Brown stated they wanted the money in their personal account, because creditors, such as Plaintiffs, had obtained against HMI judgments and were attempted to garnish/levy on those accounts. Defendants testified they wanted to make the decisions as to which creditors received payment. Defendant Molly Brown also seemed to testify they placed money into their personal UBS account in order to minimize Defendants' personal exposure on the UBS line pursuant to the personal guaranty they signed. The trial took place on September 18, 2007, and September 19, 2007. The Court, on September 19, 2007, denied Defendants' motion for directed verdict and took under advisement Plaintiffs' motion for directed verdict. The Court, on September 21, 2007, issued an Order granting Plaintiffs' motion for directed verdict, which the Court noted was really a Rule 52(c) motion. The Court, in that Order, held Defendants are liable to Plaintiffs under the August 29, 2003, judgment. The Court also confirmed Plaintiffs were entitled to submit an application for attorney's fees. The August 29, 2003, judgment, vis-à-vis the Court's September 21, 2007, Order, is the judgment upon which Plaintiffs now seek an award of attorney's fees.1

Plaintiffs have filed concurrently herewith a proposed form of judgment including as judgment debtors, Carl Brown and Molly Brown. -3Document 198 Filed 10/05/2007 Page 3 of 14

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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). The prevailing party in a claim for unpaid wages is, under Ariz. Rev. Stat. § 12-341.01(A), entitled to attorney's fees. See Velarde v. Pace Membership Warehouse, 105 F.3d 1313 (9th Cir. 1997) (holding that plaintiffs were entitled to an award of attorney's fees pursuant to A.R.S. § 12-341.01(A) upon prevailing in their wage claims). An award of fees is justified in a breach of contract action where a party succeeds in piercing the corporate veil and/or demonstrating an alter ego relationship exists. See, e.g., Four Seasons Manufacturing, Inc. v. 1001 Coliseum, L.L.C., 870 N.E.2d 494 (Ind. Ct. App. 2007) and Vanounou v. Dulce Cantu, 2007 Tex. App. LEXIS 7168 (Tex. Ct. App. Aug. 28, 2007). Plaintiffs are, without, question the prevailing party in this action. Plaintiffs, by prevailing at trial, obtained all the relief they sought. Plaintiffs, in the initial action against HMI obtained a judgment that represented their past wages, treble damages thereon, an award of attorney's fees and costs, and prejudgment and post-judgment interest. While the Court ruled the Arizona Wage Payment Act does not allow for individual liability, Plaintiffs, through their corporate veil claims, succeeded in obtaining exactly what they sought, i.e., a ruling Defendants Carl Brown and Molly Brown were liable for the judgment. The policy underlying section 12-341.01 is to mitigate the burden of the expense of litigation. First National Bank of Arizona v. Continental Bank, 138 Ariz. 194, 199, 673 P.2d 938, 943 (Ct. App. 1983). That provision also serves to encourage litigants in contract actions to consider the risk of litigating their claims. All-Way Leasing, Inc. v. Kelly, 182 Ariz. 213, 895 P.2d 125 (Ct. App. 1994). Plaintiffs claim for wages constitutes a contract action, and, as such, they are entitled to fees under 12-341.01. B. Ariz. Rev. Stat. § 12-349 Section 12-349(a) of the Arizona Revised Statutes 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,
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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. Ariz. Rev. Stat. § 12-349(A). The conduct Defendant Carl Brown unreasonably expanded and delayed these proceedings. Defendant Carl Brown, during both his debtor's examination and his subsequent deposition, flatly refused to provide Plaintiffs' counsel with information he could use to further investigate his client's claims. Mr. Brown, when he did answer a question, often gave answers that directly contradicted the documentary evidence and/or his previous sworn testimony. For example:

!

Mr. Brown, who states he had previously given depositions, could not remember approximately when he gave his most recent deposition.

!

He further stated he could not remember the subject matter of the suit for which he gave that deposition.

! !

He also stated he does not know whether he files tax returns. He stated he doesn't know whether either he or his wife receive bank account statements.

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Defendant Carl Brown stated he had never, in his life, reviewed a bank statement.

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He also stated he did not know whether he or his wife had any personal bank accounts.

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Earlier in the deposition, Defendant Carl Brown stated he was aware his wife did have a personal bank account.

! !

He stated he did not know where his wife might bank. He later admitted he had with UBS such accounts and he received from UBS statements.

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He further stated he did not remember receiving from any money from the sale to Plains Capital McAfee (McAfee) of HMI assets.
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This, despite the fact there is incontrovertible evidence he received from McAfee at least $700,000.

!

He also stated he never deposited into a personal bank account HMI corporate funds.

!

Again, there is incontrovertible evidence he received into his personal account at least $700,000 in connection with the McAfee sale.

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Mr. Brown later stated he could not recall whether he received into his personal account these funds.

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Mr. Brown testified he knew nothing of the HMI sale to First Palm of certain assets.

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He later stated he had never heard of First Palm. Mr. Brown, however, in previous sworn testimony, informed Plaintiffs' counsel he was aware of the sale to First Palm.

!

Similarly, Mr. Brown stated he had never heard of an entity called Atlantic Mortgage.

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Mr. Brown, however, in previous sworn testimony, disclosed to Plaintiffs' counsel he was aware HMI sold to Atlantic Mortgage certain assets.

!

Mr. Brown also provided implausible testimony about another company he owned, Realty Home Mortgage. When Plaintiffs' counsel questioned him regarding the company's date of incorporation, Mr. Brown indicated the incorporation took place less than five years from the date of the deposition. Just seconds later, he stated he did not recall whether that was the case.

!

Mr. Brown maintained throughout his deposition he had no involvement with HMI. Mr. Brown, however, is a shareholder of the company. He is also the secretary, a director and the treasurer of HMI.

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He expressed a belief a person could be an officer of a corporation and, yet, not be "involved" in the company.

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Further, he acknowledged investing in the company approximately
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$8,000,000.

! !

He later admitted using for HMI business HMI's corporate aircraft. Mr. Brown after stating he used to call on investors, buyers, and realtors the company aircraft, stated he never used the aircraft for HMI business. He, after Plaintiffs' counsel suggested using the company airplane to call on investors, buyers, and realtors was "involvement" with the company, stated he used the aircraft only for personal trips, e.g., to watch his thoroughbred horses race.

! !

He also later asserted he played an active role in paying the company's bills. Mr. Brown, despite all of this, continued to deny he had with the company any involvement.

!

Mr. Brown denied receiving from HMI any payments. Mr. Brown, however, indisputably received in connection with the sale to McAfee $700,00.

!

Mr. Brown went on to deny receiving from HMI any salary. Mr. Brown, however, in previous sworn testimony, admitted to receiving from HMI a monthly salary of $15,000. [SOF ¶ 33.]

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Mr. Brown stated he had no idea what kind of business HMI conducted. He provided this testimony despite the fact he received a salary, was/is a shareholder, was/is an officer, and invested in the company approximately $8,000,000.

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He also stated he had no idea how HMI started. In previous sworn testimony, he stated the company eventually merged with another entity, the Mortgage Bank, and formed the entity that conducted business until its insolvency.

!

Mr. Brown stated he could not remember whether any employee (other than the Plaintiffs in the present action) of a company he owned and/or operated ever sued him in his individual capacity. He, upon prompting, stated another such employee, Paul Kueffer, sued him in his personal capacity.

!

He also stated he could not recall whether Mr. Kueffer had obtained against him a judgment. The fact Mr. Kueffer obtained against Mr. Brown,
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individually, a judgment of approximately $800,000 (a verdict he satisfied) makes Mr. Brown's testimony on these matters extremely suspect.

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Mr. Brown refused to acknowledge Exhibits 8, 9, and 10 to his deposition, documents Plaintiffs received from Defendants' counsel, were bank statements.

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He, in the context of responding to Plaintiffs' counsel's question as to why the funds for the HMI sale did not go into one of the company's many active bank accounts, stated he did not know whether the date September 17, 2002, fell between the dates August 30, 2002, and September 30, 2002.2 Mr. Brown had several opportunities to revise his response to this question but continued to state he did not know whether September 17, 2002, fell within the above date range. [SOF ¶ 44.]

Mr. Brown's refusal to answer some questions at all and his practice of providing intentional false answers to Plaintiffs' deposition questions, combined with Defendants absolute refusal to provide relevant documentary evidence, made it very difficult for Plaintiffs to obtain the information they needed to prosecute their claims. Plaintiffs, because of Defendants uncooperative approach, had to issue several subpoenas in this matter. Plaintiffs' counsel then had to pore over the thousands of pages of documents they received in response to their subpoenas. Plaintiffs, once they received subpoena responses from one entity, would, by reviewing those responses, learn they needed to subpoena other entities. This is because Defendants refused to inform Plaintiffs where they (Defendants) had bank/investment accounts. This, in turn, would force Plaintiffs' counsel to go through hundreds, if not

September 17, 2002, was the date Mr. Brown received into his personal bank account the funds from the McAfee sale. The HMI bank statements about which Plaintiffs' counsel questioned Mr. Brown each covered the period of August 30, 2002, to September 30, 2002. Plaintiffs' counsel's implication was that the HMI bank statements demonstrated HMI, at the time of the deposit into Mr. Brown's personal account, had active bank accounts into which Mr. Brown could have deposited the money. -8Document 198 Filed 10/05/2007 Page 8 of 14

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thousands, of more documents. Defendants, if they had simply provided to Plaintiffs' the specific bank/investment account records Plaintiffs' continually requested, could have saved Plaintiffs' counsel significant time. Further, Defendants, on the date of the first settlement conference, appeared at the conference without an attorney and without any ability to engage in a meaningful mediation. Defendants appeared at the second settlement conference with new legal counsel, but Defendants still refused to participate in the conference in any meaningful way. Also, Plaintiffs, prior to filing suit, issued to Defendants' corporate counsel a demand letter in which they requested their wages. Defendants, in fact, responded by offering Plaintiffs significantly less than the wages they had earned. Defendants refused to budge from this lowball offer, and Plaintiffs had no choice but to file suit. Defendants, then, had an opportunity to resolve this matter without Plaintiffs incurring the attorney's fees they have incurred. The above constitutes just a few examples of how Defendants' dilatory and disrespectful conduct has unreasonably delayed these proceedings and caused Plaintiffs' counsel to devote to the matter significantly more time than would have otherwise been the case. Plaintiffs' request the Court, when ruling on Plaintiff's Motion for Attorney's fees, takes into consideration Defendants' litigation conduct. C. Attorney's Fees for Filing Motion Plaintiffs have, in their request, requested the Court award attorney's fees for time Plaintiffs' attorneys spend in preparing the fee application packet. Local Rule 54.2(c)(1) requires a party that seeks such fees to cite legal authority for the request. Plaintiffs note there is legal authority to support that request. See, e.g., First National Insurance Company of America v. MBA Construction, 2005 U.S. Dist. LEXIS 38808 (E.D. Cal. Dec. 12, 2005). II. REASONABLENESS OF REQUESTED AWARD Plaintiffs have, in order to assist the Court in determining Plaintiffs' request for fees is reasonable, included as an exhibit a document containing a detailed list of the legal services Plaintiffs' counsel performed and the time they spent on these services. Plaintiffs'
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fee arrangement with the attorneys who prosecuted their claims required Plaintiffs to pay standard hourly rates and all litigation-related expenses. Plaintiffs' counsel established their standard hourly rate by taking into consideration the attorneys' education and level of experience. Plaintiffs' counsel have, since they began representing Plaintiffs, increased their standard hourly rates multiple times. Plaintiffs' counsel, however, did not increase the rates they charged Plaintiffs. Plaintiffs have incurred in pursuing their claims against Defendants Carl Brown and Molly Brown $79,577.50. Plaintiffs have incurred in pursuing their claims against Defendants Carl Brown and Molly Brown $2,565.14. A. Time and Labor Required of Counsel Determining whether there are grounds to pierce a corporate veil is a fact intensive inquiry. As Plaintiffs have previously stated, Defendants refusal to truthfully respond to Plaintiffs' deposition questions and the dearth of corporate records made Plaintiffs' counsel's job much more difficult. Plaintiffs had to issue numerous subpoenas. The responses to those subpoenas created thousands of pages of document review. Plaintiffs' counsel had to reconstruct the details of HMI's assets sale to PlainsCapital McAfee. Plaintiffs then had to determine what happened to the proceeds of the assets sale, which led them to Gregory Brown. They had to use information they obtained from Gregory Brown to trace where the proceeds went after he surrendered them. Plaintiffs then had to, with Defendants refusing to give them any information about personal bank accounts, determine to whom the account Greg Brown sent the proceeds belonged. Plaintiffs then had to review hundreds of pages of documents to determine the money went into Defendants' personal bank account. Defendants then falsely claimed they used to pay HMI debts all the proceeds of the sale. Defendants, in an attempt to support this claim, cited deposits Defendants made from their personal accounts into other accounts, i.e., UBS and Bank of America. Defendants claimed these deposits, which totaled $300,000, went to pay on HMI hedge funs. Plaintiffs then had to, as Defendants refused to turn over records related to these accounts, submit
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subpoenas to UBS and Bank of America. The responses Plaintiffs received from UBS and Bank of America show these were not HMI hedge funds, but more of Defendants' personal accounts. Plaintiffs then had to tie together all of these transactions and demonstrate to the Court Defendant did not, as they stated, use to pay off HMI debts all of the McAfee proceeds. Plaintiffs' counsel, who had significant prior experience with Defendant Carl Brown's willingness to utter complete falsehoods, prepared their trial questions in such a way that they had ready citations to the portions of Defendant Carl Brown's debtor's exam and deposition transcript. Plaintiffs' counsel, on numerous occasions, used those citations to point out Defendant's lack of credibility. Plaintiffs' counsel also had significant experience with Defendant Carl Brown's absolute refusal to provide testimony on items on which he most certainly had knowledge. They drafted their cross-examination questions for Mr. Brown in such a way as they could, when he did feign ignorance, confront him with exhibits relevant to the specific question. Defendant Carl Brown's obstinacy both in his deposition and at trial unreasonably delayed the conclusion of this matter. B. Novelty and Difficulty of the Questions Presented Succeeding on a claim of piercing the corporate veil is very difficult to do. A party seeking to do so must present strong evidence a shareholder is the corporation's alter ego. Plaintiffs' counsel recognized the difficulties they would face in attempting to reach Defendants' personal assets. Plaintiffs' counsel, as such, did everything they could to find evidence relevant to their claims. As it happened, there was an abundance of evidence to support the corporate veil claim, but the evidence was difficult to uncover. C. The Skill Requisite to Perform the Legal Services Properly Plaintiffs will ask the Court to determine the skill necessary to obtain from completely uncooperative adversaries evidence sufficient to succeed on their corporate veil/alter ego theory of recovery. ***
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D. Preclusion of Other Employment by Counsel Because of the Acceptance of the Action Plaintiffs' counsel is not sure whether it lost business as a result of the time they spent on the present matter. Plaintiffs' counsel did, in anticipation of preparing for trial and trying the case, for a period leading up to the trial, cease accepting additional clients. E. The Customary Fee Charged in Matters of the Type Involved Plaintiffs' billed Plaintiffs at their then current hourly rate. The rates counsel charged vary, depending on the particular attorney performing the work. The attached billing statements specify the rates for each attorney who performed on this matter any services. Plaintiffs' counsel believes the rates they charged Plaintiffs are lower than the average rate other lawyers in the community with similar experience now charge. F. Fee Agreement Plaintiffs' agreement with counsel was that counsel would bill on an hourly basis. G. Time Limitations Plaintiffs imposed on counsel no time limitations, but Plaintiffs did have to wait for more than five years to receive the wages. Plaintiffs were, understandably, eager to receive their wages and anxious for the completion of these proceedings. H. Amount of Money/Value of the Rights Involved and Results Plaintiffs, pursuant to their claims against Defendants Carl Brown and Molly Brown, sought to hold Defendants liable for the judgment Plaintiffs obtained against HMI. That judgment totaled $232,241.34, plus $285 in costs, $4,390.82 in attorney's fees, prejudgment interest, and post-judgment interest. Plaintiffs, at trial, obtained all the relief they sought. I. Experience, Reputation, and Ability of Counsel See Exhibit 4, Affidavit of James Burr Shields. J. Undesirability of the Case Plaintiffs' counsel did not view the case as particularly undesirable. Counsel, at the outset, realized how daunting a task it would be to pierce HMI's corporate veil and hold liable for the judgment individuals with terrific wealth.
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K. Nature and Length of the Professional Relationship Between Attorney and Client Plaintiffs and counsel formed their relationship in or about November of 2002, after their Nevada attorney had been unable to obtain from HMI payment of their wages. L. Awards in Similar Actions Plaintiffs are not aware of any similar matters. Cases in which a party attempts to pierce a corporate veil are very fact specific and can come up in the context of almost any legal claim. As such, it is difficult to imagine there are cases that would assist the Court's determination. M. Other Matters. Plaintiffs would, once again, ask the Court to, when considering their fee application, consider Defendants litigation conduct. Plaintiffs would also ask the Court to consider Defendants' conduct during trial. III. CONCLUSION Plaintiffs, based on the results they achieved, Defendants conduct during litigation and at trial, and the length they had to wait to receive their wages, asks the Court to award attorney's fees in the amount Plaintiffs have requested. RESPECTFULLY SUBMITTED this 5th day of October, 2007. LAW OFFICE OF JAMES BURR SHIELDS

*** *** *** *** *** ***

____s/ W. Blake Simms__________________ James Burr Shields Blake Simms Attorneys for Plaintiffs

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CERTIFICATE OF SERVICE I hereby certify that on the 5th day of September, 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 ____s/ Gail Ivey___________________

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