Summary
explaining that Arizona law treats limited liability companies the same as corporations for purposes of alter ego/piercing the corporate veil
Summary of this case from Bird v. DJO LLCOpinion
No. 1 CA-CV 10-0702
11-29-2011
ALL CUSTOM EXTERIORS, INC. dba KAY ROOFING, Plaintiff/Appellee, v. TOM and LAURIE BILYEA, husband and wife, Defendants/Appellants.
Holland Law Firm, PLLC By Joseph E. Holland Attorneys for Plaintiff/Appellee Snowflake Tom and Laurie Bilyea In Propria Persona Defendants/Appellants Gilbert
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz. R. Supreme Court 111(c); ARCAP 28(c);
Ariz. R. Crim. P. 31.24
MEMORANDUM DECISION
Not for Publication (Rule 28, Arizona Rules of Civil Appellate Procedure
Appeal from the Superior Court in Navajo County
Cause No. CV20090158
The Honorable Thomas L. Wing, Judge
AFFIRMED
Holland Law Firm, PLLC
By Joseph E. Holland
Attorneys for Plaintiff/Appellee
Snowflake
Tom and Laurie Bilyea
In Propria Persona Defendants/Appellants
Gilbert GEMMILL, Judge
¶1 Defendants Tom and Laurie Bilyea ("the Bilyeas") appeal from a grant of summary judgment by the trial court, ask us to reverse, and grant their cross-appeal for summary judgment. We find no error by the trial court and affirm the court's entry of summary judgment in favor of Plaintiff All Custom Exteriors, Inc. ("ACE").
FACTS AND PROCEDURAL HISTORY
¶2 This action for breach of a construction contract was initiated in Snowflake Justice Court. ACE (in pro per) filed two separate complaints in Snowflake Justice Court listing Paradise Home Builders, L.L.C. ("PHB"), Tom Bilyea, and the other principal member of PHB, Ted Hallett, as defendants. Tom Bilyea disputed that ACE properly filled out the caption listing Tom Bilyea, the individual, as a defendant, or put another way, Bilyea asserted he was unclear who ACE was suing.
¶3 PHB filed a notice of appearance on December 23, 2008, with the justice court, and it filed a motion to dismiss claiming that ACE's two individual claims exceeded the monetary jurisdictional limit of the justice court. On the next day, PHB filed a "Pre-Answer" Motion to Dismiss based on, among other things, insufficient service of process. On January 29, 2009, the justice court held that it had proper jurisdiction and venue and that the "defense" was properly served. Furthermore, the court denied PHB's motion to dismiss.
¶4 After a blizzard of motions filed by all parties, on February 23, 2009, the justice court held that PHB was subject to the court's jurisdiction and that PHB had failed to timely answer ACE's complaint. Also, the court denied PHB's motion to dismiss and motion to reconsider on the court's January 29, 2009 ruling.
¶5 On March 11, 2009, ACE, now with legal counsel, filed a notice of appearance and a first amended complaint. The caption specifically listed PHB, Tom Bilyea and Jane Doe Bilyea, and the Halletts as defendants. Moreover, the amended complaint averred that Tom Bilyea was a principal of PHB and that any acts performed by Tom Bilyea through PHB were for the benefit of his marital community.
¶6 On that same day, ACE filed a motion to consolidate and amend both original claims and to transfer jurisdiction to the Navajo County Superior Court because the total amounts of the claims, once combined, exceeded the justice court's jurisdictional limit. Additionally, within the motion to consolidate, ACE asked the court that its first amended complaint be "deemed filed and served upon Defendants, who have already each made an appearance in this Court (either on their own behalf, or on the behalf of [PHB]."
¶7 On approximately March 18, 2009, Tom Bilyea personally filed a "Pre-Answer" Motion to Dismiss ACE's now amended complaint. In that motion, Tom Bilyea claimed he was not a party to the suit because he was not a part of the contract between PHB and ACE; he was a separate individual.
¶8 On March 23, 2009, the justice court held that ACE's motion to consolidate and amend was granted and that the case would be transferred to the superior court. The superior court accepted transfer and jurisdiction of the case. ACE filed a motion to strike all pleadings because PHB, as a fictional entity, was required to be represented by counsel. The superior court agreed that PHB needed counsel, however, it did not strike the pleadings because the individual parties (the Bilyeas and Halletts) were still entitled to represent themselves pro per.
¶9On April 20, 2009, PHB, Ted Hallett, and Tom Bilyea answered ACE's amended complaint. On the same day, in a response to ACE's motion to strike all of PHB's pleadings and motion to reconsider, defendants argued that they were allowed to represent PHB without counsel. Moreover, while arguing that they should be entitled to represent PHB as non-attorneys, the defendants made the following assertions: "[PHB] is the alter ego of its only two members and is a closely held corporation. The company was consummated and built by the sole efforts of its two members [Tom Bilyea and Ted Hallett]. The company was conceived, organized and financed by its two members." They continued:
[t]he two members of the company (Defendant) are to the company as life or spirit is to a person's body. One does not function or survive without the other. The company, an entity without the two managing members, is
dead and a non functioning shell without life, as is the body without life or spirit, also no longer a functioning person, but just a shell.
¶10 The superior court, on June 11, 2009, determined it would make rulings despite the fact that PHB was not represented by counsel. The court addressed and dismissed defendants' "Pre-Answer" motions to dismiss and ruled that insufficiency of service of process was waived for any defect because defendants appeared in both cases in the justice court and that "[n]o defendant entered a limited appearance for the purpose of contesting service of process." Moreover, the court denied all motions not rendered moot or ruled upon to date.
¶11 In an apparent effort to remove any ambiguity concerning service of process, ACE's attorney filed a declaration of service of the first amended complaint on September 15, 2009. Then, on November 19, 2009, ACE moved for summary judgment. The Bilyeas responded to the motion for summary judgment and filed a cross motion for summary judgment on November 29, 2009. The trial court denied the Bilyeas' motion for summary judgment and granted ACE's motion for summary judgment, awarding damages, costs, and attorneys' fees. The trial court explained that "[t]he records in the case clearly establish the legal requirements for liability of the defendants Bilyea and defendants Hallett, and the community liability of these defendants, as well as the corporate liability of [PHB]." The trial court thereafter denied the Bilyeas' motion to reconsider concerning summary judgment.
¶12 We have jurisdiction over the Bilyeas' timely appeal pursuant to Arizona Revised Statutes ("A.R.S.") sections 12-120.21(A) (2003) and 12-2101(A) (Supp. 2010).
Absent material revisions to a statute after the date of an offense, we cite the current version.
ANALYSIS
¶13 In reviewing a grant of summary judgment, we view the facts and any reasonable inferences drawn from the facts "in the light most favorable to the party against whom judgment was entered." Maycock v. Asilomar Dev., Inc., 207 Ariz. 495, 496, ¶ 2, 88 P.3d 565, 566 (App. 2004) . We also determine de novo "whether any genuine issues of material fact exist and whether the trial court correctly applied the law." See Diaz v. Phoenix Lubrication Serv., Inc., 224 Ariz. 335, 338, ¶ 10, 230 P.3d 718, 721 (App. 2010).
¶14 The Bilyeas raise three principal issues on appeal.First, whether the trial court erred by finding that the Bilyeas were properly served as individual parties apart from PHB; second, whether PHB is the alter ego of the Bilyeas and subject to the judgment of the trial court; and last, whether the marital community is also subject to the judgment of the trial court.
We note that the Bilyeas are not disputing the breach of contract claim; in footnote two of their opening brief they state: "The dispute between the companies is irrelevant."
Service of Process
¶15 According to the Bilyeas, they were never properly served as parties to the breach of contract action. Based on this record, however, we conclude that the Bilyeas were afforded proper service of process and put on notice of the claims alleged in ACE's complaint. Scott v. G.A.C. Finance Corp., 107 Ariz. 304, 305, 486 P.2d 786, 787 (1971) (recognizing that the purpose of proper service is to give the party actual notice of the proceeding).
¶16 Arizona Rules of Civil Procedure ("Rule(s)") 4(f) provides:
The person to whom a summons or other process is directed may accept service, or waive issuance of service . . . . A person upon whom service is required may, . . . enter an appearance . . . . The filing of a pleading responsive to a pleading allowed under Rule 7(a) of these Rules shall constitute an appearance.Additionally, our supreme court has held: "general appearance by a party who has not been properly served has exactly the same effect as a proper, timely and valid service of process." Montano v. Scottsdale Baptist. Hosp., Inc. , 119 Ariz. 448, 452, 581 P.2d 682, 686 (1978).
¶17 Even if we assume (without deciding) that a service defect existed, "strict technical compliance with rules governing service may be excused when the court has already acquired jurisdiction over the receiving party and that party receives actual, timely notice." Kline v. Kline, 221 Ariz. 564, 570, ¶ 21, 212 P.3d 902, 908 (App. 2009).
¶18 Here, the justice court originally found proper service: "the Court deems the defense served." As the suit progressed, the justice court allowed ACE to file a first amended complaint. ACE's attorney asked the justice court to deem the first amended complaint to be served on the defendants. The justice court granted the motion. Once the proceedings were moved to the superior court, ACE's attorney filed a declaration of service explaining how service was determined as proper in the justice court.
¶19 Even more significant, the Bilyeas filed an answer and response to the first amended complaint on April 20, 2009. Tom Bilyea signed the answer for PHB and he signed for himself. Subsequently, the Bilyeas filed a response to ACE's motion to compel interrogatories and Tom Bilyea signed it Tom Bilyea and Jane Doe Bilyea, Husband and Wife. The Bilyeas filed their motion opposing summary judgment, their cross motion for summary judgment, and their motion to reconsider in the same manner. Laurie Bilyea signed the motion to reconsider along with her husband, Tom Bilyea.
¶20 Even if we assume there was some deficiency in the service, we conclude that the Bilyeas were afforded proper protections required by our Arizona Rules of Civil Procedure and due process principles because they filed numerous responsive pleadings in this matter. Thus, the trial court did not err on this issue.
Personal Liability and Alter Ego Doctrine
¶21 The Bilyeas argue that they are individuals apart and separate from PHB. Furthermore, they contend that they should not be subject to the trial court's orders and judgment because they were not parties to the contract between ACE and PHB. Essentially, the Bilyeas claim that they are not liable for the debts of PHB. They are arguing, in effect, that the "L.L.C. veil" of PHB should not be pierced.
¶22 ACE contends that PHB has few assets of worth, if anything, and recovery is appropriate from the members of PHB, including the Bilyea marital community. ACE's theory of recovery is based on piercing the corporate veil. But PHB is an L.L.C., not a traditional corporation per se. It has not been explicitly determined under Arizona law whether a party may "pierce the L.L.C. veil." Both the parties and the trial court approached this issue as identical or analogous to piercing the corporate veil, and the Bilyeas do not argue on appeal that the "L.L.C. veil" cannot, as a matter of law, be pierced. Accordingly, we will assume for purposes of this case that the same case law and principles that apply to piercing a traditional corporate veil also apply here.
We have found nothing in this record indicating that any party has cited the appropriate statutes governing limited liability companies. Section 29-651, A.R.S. (1998) provides: "[A] member . . . of a limited liability company is not liable, solely by reason of being a member, . . . for the debts, obligations and liabilities of the limited liability company whether arising in contract or tort, under a judgment, decree or order of a court or otherwise." Moreover, A.R.S. § 29-655(A) (1998) provides: "On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member's interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest." Subsection (C) offers: "This section provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor's interest in the limited liability company."
¶23 Both parties cite and address the leading Arizona case pertaining to piercing the corporate veil, Dietel v. Day, 16 Ariz. App 206, 208, 492 P.2d 455, 457 (1972). Dietel states:
As a general rule, a corporation will be treated as a legal entity until sufficient reason appears to disregard the corporate form. The corporate fiction will be disregarded when the corporation is the alter ego or business conduit of a person, and when to observe the corporation would work an injustice. The alter-ego status is said to exist when there is such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist.Id. (emphasis added); see also Loiselle v. Cosas Mgmt. Group, L.L.C., 224 Ariz. 207, 214, ¶ 30, 228 P.3d 943, 950 (App. 2010).
¶24 The Dietel opinion further explained: "Where a corporation is operated and maintained for the purpose for which it was incorporated and not as a mere shield of the stockholders, the corporate form should not be disregarded." Dietel, 16 Ariz. App. at 208, 492 P.2d at 457. Additionally, Dietel provides: "But it must be noted that a legitimate purpose of incorporation is to avoid personal liability and if the corporate fiction is too easily ignored and personal liability imposed, then incorporation is discouraged." Id. Thus, in order to pierce the corporate veil, ACE must show that 1) PHB was the alter ego of Tom Bilyea (the formalities prong); and 2) maintaining the corporate form would promote injustice (the fairness prong).
Formalities Prong
¶25 Courts have relied on a host of factors to determine the existence of an alter ego under the formalities prong. For instance: failing to maintain corporate formalities (minutes, voting, meetings, etc.); plaintiff's lack of knowledge of a separate corporate existence; undercapitalization; commingling of corporate and personal funds; diverting corporate property for personal use, etc. Deutsche Credit Corp. v. Case Power & Equip. Co. , 179 Ariz. 155, 160, 876 P.2d 1190, 1195 (App. 1994).
¶26 In this instance, however, the initial showing in support of ACE's motion for summary judgment was provided by the defendants themselves, including Tom Bilyea. In their response to ACE's motion to strike, PHB (by its two members), and individually by Tom Bilyea and Ted Hallett, asserted and reiterated that PHB was the "alter ego" of the two members; their interests are the same; entity's interests are "inseparable" from its members; the entity and two managing members are one and the same; two members "are to the company as life or spirit is to a person's body"; and "[o]ne does not function or survive without the other."
¶27 We understand the context of the Bilyeas' argument -- they contended they should be able to represent PHB without the necessity of counsel notwithstanding Supreme Court Rule 31.They were arguing the inseparability of interest between their corporate form (PHB) and themselves for the purpose of allowing them to represent PHB. And while ACE contends that the Bilyeas are bound by these admissions that PHB is their alter ego, the Bilyeas argue that as self-representing parties they should not be held to the legal meaning of their prior assertions in the earlier context. However, it is well established "that a party who conducts a case without an attorney is entitled to no more consideration from the court than a party represented by counsel, and is held to the same standards expected of a lawyer." Kelly v. NationsBanc Mortgage. Corp., 199 Ariz. 284, 287, ¶ 16, 17 P.3d 790, 793 (App. 2000); Higgins v. Higgins, 194 Ariz. 266, 270, ¶ 12 981 P.2d 134, 138 (App. 1999); Smith v. Rabb, 95 Ariz. 49, 53 386 P.2d 649, 652 (1963).
A member of a L.L.C. or an officer of a corporation may represent the entity in justice court under specified conditions. Ariz. R. Sup. Ct. 31(d)(3). See also Ramada Inns, Inc. v. Lane & Bird Adver. , Inc., 102 Ariz. 127, 128, 426 P.2d 395, 396 (1967) (stating that a corporation cannot practice law on its own behalf, cannot appear in propria persona, and cannot be represented by an officer who is not an attorney, in the absence of specific statutory authority).
¶28 The evidentiary admissions by Tom Bilyea were sufficient to support ACE's motion for summary judgment, unless the Bilyeas came forward with specific facts to controvert their admissions and create a genuine issue of material fact. But the Bilyeas offered no relevant evidence to refute the alter ego status of PHB. They provided the trial court no copies of bank accounts or bank statements demonstrating a lack of comingling between PHB and the Bilyeas. They did not present any minutes from the PHB's members' meetings, business voting records, tax return documentation, or any evidence tending to prove observance of the corporate (or limited liability) form. Nor did the Bilyeas provide evidence to support that PHB was properly funded at start-up.
¶29 The Bilyeas argued a number of facts and conclusions but did not present appropriate evidence necessary at the summary judgment stage to create a genuine issue of material fact sufficient to preclude summary judgment. See State v. Grounds, 128 Ariz. 14, 15, 623 P.2d 803, 804 (1981) (explaining that argument of counsel does not constitute evidence, but "sworn affidavits, stipulated facts, depositions, and oral testimony" are proper evidence in support of or opposition to motions); Bank of Yuma v. Arrow Constr. Co. , 106 Ariz. 582, 585, 480 P.2d 338, 341 (1971) ("Allegations in pleadings are not evidence; they are statements of facts which the pleader must prove unless admitted by the opposing party.").
¶30 Additionally, ACE attempted to acquire more information from PHB and its members through discovery, specifically, requests for admissions and interrogatories. However, Tom Bilyea responded to each with his assertion of a Fifth Amendment right to silence. As a result, the trial court had before it the assertions of the defendants stating that PHB was the alter ego of Ted Hallett and Tom Bilyea.
¶31 On this record, we agree with the trial court's implicit conclusion that the Bilyeas made several evidentiary admissions that, coupled with the absence of controverting evidence, establish as a matter of law that PHB was the alter ego of its members. See Ryan v. San Francisco Peaks Trucking Co., Inc., ___ Ariz. ___, ¶¶ 15-16, ___ P.3d ___, 2011 WL 3758724 (App. 2011) (explaining the basis for evidentiary admissions); see also Bank of Am. Nat'l. Trust & Sav. Ass'n v. Maricopa County, 196 Ariz. 173, 176, ¶ 11, 993 P.2d 1137, 1140 (App. 1999); Reed v. Hinderland, 135 Ariz. 213, 216, 660 P.2d 464, 467 (1983).
ACE argued below in its motion for summary judgment that defendants admitted that PHB was the alter ego of its members. ACE supported its argument with the doctrine of judicial estoppel in its reply to Bilyea's response to its motion for summary judgment. Judicial estoppel is inapplicable here. See State v. Towery, 186 Ariz. 168, 182-83, 920 P.2d 290, 304-05 (1996) (finding Arizona courts "refuse to invoke judicial estoppel unless the position first asserted was successfully maintained" and successful maintenance of the initial position exists only if relief was granted in the first proceeding). The trial court found no merit to the Bilyeas' argument that they were allowed to represent PHB pro per because of their alter ego status. Although we necessarily conclude that the doctrine of judicial estoppel is not applicable, ACE has consistently asserted that PHB and Bilyeas made dispositive admissions regarding alter ego and identity of PHB and its principals. We therefore analyze this issue under the doctrine of judicial and evidentiary admissions.
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Fairness Prong
¶32 When applying the fairness prong:
The term injustice or unjust act as used in the Arizona cases is not easy to define. Injustice falls within the realm of equity and has been interpreted as: 'Equity is reluctant to permit a wrong to be suffered without remedy. It seeks to do justice and is not bound by strict common law rules or the absence of precedents. It looks to the substance rather than form. It will not sanction an unconscionable result merely because it may have been brought about by means which simulate legality. And once rightfully possessed of a case it willYoungren v. Rezzonico, 25 Ariz. App 304, 306, 543 P.2d 142, 144 (1975) (piercing the corporate veil and finding president of the company liable for debt) (quoting Sanders v. Folsom, 104 Ariz. 283, 289, 451 P.2d 612, 618 (1969)).
not relinquish it short of doing complete justice.'
¶33 The Bilyeas state that the dispute (breach of contract) between the companies at trial is irrelevant and they do not challenge on appeal whether PHB breached the contract. Nor do the Bilyeas challenge whether PHB is insolvent and unable to restore ACE to a position it contemplated as a benefit of its bargain from the construction contract. In fact, the Bilyeas admitted in their motion to reconsider that, "[PHB] is without assets." ACE provided goods and services that PHB did not pay for. The Bilyeas retained benefits through their alter ego PHB. It would be unjust under these circumstances to observe PHB's corporate (or limited liability) form and not hold Tom Bilyea accountable for PHB's breach of contract, essentially leaving ACE without a remedy. Accordingly, we agree with the trial court that ACE is entitled to damages from the Bilyeas.
Marital Community
¶34 We now address the final issue: the liability of the marital community. The trial court found that "[t]he records in the case clearly establish the legal requirements for liability of the defendants Bilyea . . ., and the community liability of these defendants, as well as the corporate liability of [PHB]."
¶35 In Arizona, all property acquired by either spouse during the marriage is presumed to be community property, with only a few exceptions. A.R.S. § 25-211 (Supp. 2010). This presumption may be overcome by a showing of clear and convincing evidence to the contrary. Schlaefer v. Fin. Magmt. Serv., Inc., 196 Ariz. 336, 339, ¶ 10, 996 P.2d 745, 748 (App. 2000). Spouses also have equal control and the power to bind the community. A.R.S. § 25-214(C) (2007).
¶36 Additionally, "either spouse may contract debts and otherwise act for the benefit of the community" subject to the limitation that both spouses must be joined if any transaction involves guaranty, indemnity, or suretyship. A.R.S. § 25-215(D) (2007) (referring to the limitations that § 25-215(D) is subject to in A.R.S. § 25-214(C)). On the underlying debt or obligation, "spouses shall be sued jointly and the debt or obligation shall be satisfied: first, from the community property, and second, from the separate property of the spouse contracting the debt or obligation." Id. Furthermore, the test to determine whether a debt or obligation is a community one is whether it was intended to benefit the community. Cardinal & Stachel, P.C. v. Curtiss, 225 Ariz. 381, 383, ¶ 7, 238 P.3d 649, 651 (App. 2010); Schlaefer, 196 Ariz. at 339, ¶ 10, 996 P.2d at 748.
¶37 ACE, in its first amended complaint, made allegations that Tom Bilyea through PHB was operating to benefit the marital community of the Bilyeas. The Bilyeas' recurring arguments throughout the pleadings were based on their belief that Tom Bilyea the person, the Bilyeas as a couple, and the marital community as a whole, were never parties to the contract in dispute.
¶38 Yet the Bilyeas have not shown by a clear and convincing standard that the debt and judgment created by the breach of contract is not a community debt incurred by Tom Bilyea. No evidence has been submitted that Tom Bilyea, when acting for and on behalf of and in conjunction with PHB, was acting in his sole and separate capacity and not on behalf of the marital community. Nor have the Bilyeas produced any evidence showing that Tom Bilyea's actions as a principal of PHB were not intended to benefit the community. We conclude that the trial court correctly applied the law to these facts in finding that Tom Bilyea bound the marital community during his conduct as a member of PHB.
CONCLUSION
¶39 For these reasons, we affirm the trial court's judgment in favor of ACE.
¶40 ACE has requested attorneys' fees on appeal but does not state the legal basis for a fee award. We therefore deny ACE's request for fees. See ARCAP Rule 21(c)(1); Ezell v. Quon, 224 Ariz. 532, 539, ¶ 31, 233 P.3d 645, 652 (App. 2010). ACE is entitled to an award of taxable costs, however, upon its compliance with Arizona Rule of Civil Appellate Procedure 21.
JOHN C. GEMMILL, Judge
CONCURRING:
JON W. THOMPSON, Presiding Judge
MAURICE PORTLEY, Judge