Opinion
NOT FOR PUBLICATION
Argued and Submitted at Phoenix, Arizona: July 26, 2007
Appeal from the United States Bankruptcy Court for the District of Arizona. Honorable Sarah Sharer Curley, Bankruptcy Judge, Presiding. Bk. No. 02-15894. Adv. No. 02-01422.
Before: AHART, [ KLEIN and PAPPAS, Bankruptcy Judges.
Hon. Alan M. Ahart, U.S. Bankruptcy Judge for the Central District of California, sitting by designation.
MEMORANDUM
This is an appeal from an Order Incorporating Memorandum Decision entered on September 22, 2006, which incorporated a Memorandum Decision dated September 22, 2006 and awarded $22,000 in punitive damages against Appellant Robert A. Chiti (" Appellant") and in favor of Appellee Spectrum Golf, Inc. (" Appellee"). In addition, pursuant to a prior Memorandum Decision dated February 21, 2006, the bankruptcy court awarded $5,500 in compensatory damages for conversion and breach of fiduciary duty against Appellant and in favor Appellee. We REVERSE.
I. FACTS
During the first part of 2002, Appellant was a general sales manager for Appellee. As part of his employment, Appellant generated a business plan (the " Business Plan"), sought investors, and " was responsible for running the day-to-day operations, including, but not limited to, setting the strategic direction of the company and ensuring that Golf Switch would be the 'number one online tee-time provider in North America.'" Tr. 8/15/05 at pgs. 33-34 and Memo. Dec. 2/21/06 at p. 12. Golf Switch, one of three lines of business of Appellee, developed software to assist the golf industry in determining tee time availability at various golf courses. At the end of March 2002, Appellant ordered Fiesta Bowl tickets and authorized that they be charged to Appellee's corporate credit card. On June 7, 2002, Appellant was terminated from his employment with Appellee. The tickets appeared as a charge on the June 2002 credit card statement of Appellee. On June 12, 2002, Appellee informed Appellant that the amount charged to Appellee's credit card account for the tickets would be taken out of Appellant's final check.
On July 24, 2002, Appellant filed a civil complaint against Appellee in the Scottsdale Justice Court alleging that Appellee had issued a check to Appellant for $2,159.30 but breached an employment termination agreement by failing to pay the balance of six weeks of compensation. The complaint requested damages of $9,379.16, including appropriate taxes, plus interest of approximately $62. Appellant asserts that Appellant did not learn what amounts had been withheld from his compensation until his attorney happened to pull the file from the Scottsdale Justice Court and saw the documentation filed by Appellee. The file included a copy of a letter mailed to the Scottsdale Justice Court, where Damian Greco (" Greco"), Appellee's president and CEO, stated that overall Appellant received $11,076.93 gross payroll as the balance of his severance and that this amount was reduced by $5,500 for the Fiesta Bowl tickets. The record also includes copies of three direct deposit stubs to Appellant's account, all dated July 26, 2002, which reflect that approximately $1,833.33 was deducted from each of the three direct deposits, totaling $5,500. The " net" pay shown on each of the three deposits was only $55.72, $55.72, and $55.75, respectively. On October 1, 2002, since Appellee failed to appear or to respond to mediation, a default judgment was entered against Appellee for $9,526.16 by the Scottsdale Justice Court.
This amount apparently represents six weeks of compensation totaling $11,076.93 plus taxes of $461.53 less the $2,159.30 check.
On October 7, 2002, Appellee filed its Chapter 11 petition. Two days later Appellant caused to serve a Writ of Garnishment in an effort to collect his default judgment against Appellee. On December 15, 2002, the Fiesta Bowl tickets became available. Appellee denied any responsibility to pick up the tickets and indicated it did not want the tickets. Appellant found out that towards the end of the period, Appellee had not claimed the tickets and therefore Appellant took them. Appellant gave some of the tickets away and sold the rest for $1,600, which he kept. He justifies retention of these monies because he said Appellee had withheld funds from his salary.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective dates of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, Apr. 20, 2005, 119 Stat. 23.
On December 30, 2002, Appellee filed a complaint in the bankruptcy court against Appellant for breach of fiduciary duty and usurpation of corporate opportunity (the " Complaint"). The Complaint alleged that Appellant breached his fiduciary duty to Appellee by disclosing the Business Plan to third parties and, as a result of that breach, Appellee was damaged in excess of $1 million. The Complaint further alleged that Appellant usurped Appellee's corporate opportunity by an unauthorized dissemination of the Business Plan and by obtaining tickets to the Fiesta Bowl, purchased on Appellee's corporate credit card, and that Appellant had obtained the tickets for his own personal use. Appellant answered the Complaint.
On August 15, 2005, the bankruptcy court conducted a trial on the merits of the Complaint including whether compensatory damages should be awarded. Greco testified that an accounting was provided to the Scottsdale Justice Court and that Appellant was paid everything but the $5,000. In a Memorandum Decision dated February 21, 2006, the bankruptcy court found Appellant converted Appellee's property when " he obtained [the Fiesta Bowl] tickets post-petition and used those tickets personally without reimbursement to [Appellee]." Memo. Dec. 2/21/06 at p. 10. Although causes of action for turnover under § § 542 and 543 were not pled in the Complaint, pursuant to those Code sections, the court ordered Appellant to turnover the value of the tickets in the amount of $5,500 plus interest from June 30, 2002, to Appellee. Since Appellant had not turned over the tickets, the court held that he was liable to the bankruptcy estate for conversion of the Fiesta Bowl tickets in the amount of $5,500 plus interest from June 2002 until paid in full.
Although Greco testified that Appellant was paid everything but $5,000, he likely meant $5,500 because he was referring to the charge Appellant made on Appellee's credit card for the tickets.
The bankruptcy court also found that Appellant committed a defalcation while acting as a fiduciary. The court stated that since Appellant had been the general manager, the nature of his relationship with Appellee imposed a fiduciary duty upon him and that he breached that duty by stating that he intended to destroy an aspect of Appellee, by causing cash flow problems for Appellee, and by circulating proprietary information to friends and family without proper authorization from the Board of Directors. However, the bankruptcy court was unable to determine that damages resulted from Appellant's breach of fiduciary duty.
Instead, the bankruptcy court stated that it had " already determined that [Appellant] converted the Fiesta Bowl tickets with a value of $5,500, for his own use. The Court may certainly use those damages as a basis to reflect damages for a breach of fiduciary duty." Memo. Dec. 2/21/06 at p. 14. The court held that " whether [Appellant] converted those tickets, or breached his fiduciary duty to [Appellee], he is responsible to return the sum of $5,500, plus interest, to [Appellee] as compensatory damages." Memo. Dec. 2/21/06 at p. 14. The bankruptcy court found that Appellant " took control of the tickets post-petition, with no authority to do so, since he was no longer employed by [Appellee], gave the tickets away and/or sold the tickets with no Court authority to do so, and then kept the proceeds he received." Memo. Dec. 2/21/06 at p. 6. As to Appellee's claim of usurpation of a corporate opportunity, the bankruptcy court did not find a basis to support this claim.
The bankruptcy court concluded that Appellant's conduct was committed with express or implied malice towards Appellee and set a subsequent hearing to assess punitive damages; Nevada law permits the recovery of punitive damages for a breach of fiduciary duty. The court also left for the subsequent hearing the determination of whether Appellant was entitled to a claim for unpaid wages, the amount of said claim, and whether he was entitled to set off or recoup that claim against any damages awarded to Appellee.
On May 9, 2006, the bankruptcy court conducted a hearing to resolve Appellant's Motion for Relief from Judgment, where Appellant argued that there were no compensatory damages and therefore there could be no punitive damages. The court repeatedly stated that the award of actual or compensatory damages was based on two theories: conversion and breach of fiduciary duty, and that even if the $5,500 for that breach was repaid as part of the funds taken out of Appellant's salary, there was still interest on that claim that was not paid, whether it was in the amount of $1.98 or $20 or $30. Tr. 5/9/06 at p. 13. The court denied the Motion for Relief from Judgment.
On May 23, 2006, the bankruptcy court held an evidentiary hearing on the wage claim and punitive damages. On June 28, 2006, the trial on the punitive damages claim was concluded.
The parties failed to provide us with a transcript of the punitive damages hearing.
The decision from this latter hearing is embodied in a Memorandum Decision dated September 22, 2006. The bankruptcy court found that Appellant " was still acting improperly although a fiduciary, with no adequate controls in place, at his new [c]ompany." Memo. Dec. 9/22/06 at p. 4. The court reiterated Appellant's conduct that resulted in the finding that he breached his fiduciary duty and found that all the factors for assessing punitive damages were met - his conduct was reprehensible, Appellant's conduct was recidivist, and that the potential harm to Appellee was high. The court held that a multiple of four times the actual damages ($5,500) was reasonable and assessed $22,000 in punitive damages against Appellant. The bankruptcy court addressed Appellant's choice of law argument and found that the state of incorporation, Nevada, provided the law that must be used in assessing whether there was a breach of fiduciary duty. The court then concluded by stating that it shall continue to apply the law of Nevada to this controversy.
II. JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
III. ISSUES
The following are the issues on appeal:
1. Whether the bankruptcy court erred in determining that compensatory damages should be awarded to Appellee.
2. Whether the bankruptcy court erred in awarding punitive damages against Appellant.
3. Whether the bankruptcy court erred when it ignored Appellee's and its attorney's knowing failure to list Appellant as a creditor of the bankruptcy estate and knowing failure to give Appellant notice of important dates and deadlines.
IV. STANDARD OF REVIEW
The standard of review for legal questions is de novo and clearly erroneous for factual findings. Ting v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir. 1998) (citing In re Bammer, 131 F.3d 788, 792 (9th Cir. 1992)(en banc)); Goichman v. Bloom (In re Bloom), 875 F.2d 224, 226 (9th Cir. 1989) (citing Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674, 677 (9th Cir. 1986)). Punitive damages are reviewed for abuse of discretion. Smith's Food & Drug Ctrs., Inc. v. Bellegarde, 114 Nev. 602, 958 P.2d 1208, 1211 (Nev. 1998).
V. DISCUSSION
A. Compensatory Damages
Appellant argues that the bankruptcy court erred in determining that compensatory damages should be awarded to Appellee, despite clear evidence that Appellant did not owe compensatory damages to the bankruptcy estate and despite the bankruptcy court's acknowledgment that those amounts were not due and owing.
The Complaint alleged: (1) breach of fiduciary duty and (2) usurpation of a corporate opportunity for dissemination of proprietary information and use of corporate monies to obtain Fiesta Bowl tickets for Appellee's own benefit. The bankruptcy court held that Appellant breached his fiduciary duty for disseminating proprietary information to his friends and family but did not find that there was a usurpation of a corporate opportunity. Although the Complaint did not allege conversion, the bankruptcy court concluded that Appellant converted the Fiesta Bowl tickets with a value of $5,500. The court then used that amount as a basis to reflect damages for a breach of fiduciary duty. The court " set the actual or compensatory damages at $5,500, and predicated it on two theories: conversion and breach of fiduciary duty." Tr. 5/9/06 at p. 15.
" Claims involving 'internal affairs' of corporations, such as the breach of fiduciary duties, are subject to the laws of the state of incorporation." Davis & Cox v. Summa Corp., 751 F.2d 1507, 1527 (9th Cir. 1985). Appellee is a Nevada corporation. Corporate officers and directors have a fiduciary relationship with their corporation. W. Indus., Inc. v. Gen. Ins. Co., 91 Nev. 222, 533 P.2d 473 (Nev. 1975). The elements of breach of fiduciary duty are (1) the existence of a fiduciary relationship; (2) breach of that duty; and (3) damages proximately caused by such a breach. Cascade Invs., Inc. v. Bank of Am., N.A., CV-N- 99-559-ECR (RAM), at *7 (D. Nev. Sept. 29, 2000) (citing Fid. & Deposit Co. v. Curtis Day, No. C- 92-1714 THE, at *16 (N.D. Cal. Apr. 22, 1993).
1. Fiduciary relationship
Nevada courts have recognized fiduciary relationships formed by employment, bailment, insurance, and partnerships. Cascade Invs., Inc. v. Bank of Am., N.A., CV-N- 99-559-ECR (RAM), at *3 (D. Nev. Sept. 29, 2000) (citing A.C. Shaw Constr. v. Washoe County, 105 Nev. 913, 784 P.2d 9 (Nev. 1989). " A fiduciary relationship exists when one has the right to expect trust and confidence in the integrity and fidelity of another." Powers v. United Servs. Auto. Ass'n, 114 Nev. 690, 962 P.2d 596, 602 (Nev. 1998).
Here, there is no dispute that Appellant and Appellee had a fiduciary relationship. In 2002, Appellant served as a general sales manager for Appellee. The bankruptcy court found that since Appellant was the general manager, the nature of his relationship with Appellee imposed a fiduciary duty upon him. Thus, we conclude the bankruptcy court did not err in finding a fiduciary relationship.
2. Breach of that duty
There is no dispute that Appellant breached his fiduciary duty. The bankruptcy court held that Appellant breached his fiduciary duty by stating that he intended to destroy an aspect of Appellee by causing cash flow problems for Appellee, and by circulating proprietary information to friends and family without proper authorization from the Board of Directors. Thus, we conclude the bankruptcy court did not err in finding that Appellant breached his fiduciary duty to Appellee.
3. Damages proximately caused by the breach
Once the breach of a fiduciary duty has been shown, damages must be proven that result from the breach. Mort Wallin of Lake Tahoe, Inc. v. Commercial Cabinet, Co., Inc., 105 Nev. 855, 784 P.2d 954, 955 (Nev. 1989). The bankruptcy court determined that Appellant converted the Fiesta Bowl tickets with a value of $5,500 and that the court may use those damages as a basis to reflect damages for a breach of fiduciary duty. This is where the bankruptcy court erred.
Appellant argues that there were no actual damages and that there is overwhelming evidence that Appellant did not owe the $5,500 to Appellee. Appellee argues that there is overwhelming evidence that Appellant converted Appellee's property by purchasing $5,500 in Fiesta Bowl tickets and subsequently not turning the tickets over to Appellee once the tickets were received by Appellant post-petition. Appellee points out that the bankruptcy court's award of damages of $5,500 plus interest was based on conversion as well as on the breach of fiduciary duty claim. Appellee further states that, while Appellant had the right to assert an offset to prove up his proof of claim, he ultimately withdrew that claim.
a. The bankruptcy court erred in finding damages based on conversion
The record shows that the bankruptcy court found that Appellant converted the property of Appellee, the Fiesta Bowl tickets, in December 2002, when Appellant received the tickets post-petition and kept them for his own personal use. However, Appellee's Complaint for damages against Appellant alleged only two causes of action: breach of fiduciary duty and usurpation of corporate opportunity. Nowhere in the Complaint did Appellee allege a conversion by Appellant. In fact, the only mention of the tickets in the Complaint occurred in a one sentence factual allegation in support of Appellee's claim for usurpation of corporate opportunity, which mentions Appellant's purchase of the tickets. Appellee does not allege that Appellant was not authorized to make such a purchase or that Appellee was damaged as a result thereof. By going outside the four corners of the Complaint and finding Appellant liable on a cause of action not pled, and imposing damages accordingly, the bankruptcy court potentially violated Appellant's due process rights by finding Appellant committed a conversion.
Even ignoring the due process consideration, the bankruptcy court erred in finding Appellant liable for " conversion" because the evidence does not demonstrate that Appellee met the burden of proof on the elements of conversion. " Arizona has adopted the following definition of conversion, which is in the Restatement (Second) of Torts § 222A(1) (1965): 'Conversion is an intentional exercise of dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel.'" Miller v. Hehlen, 209 Ariz. 462, 104 P.3d 193, 203 (Ariz. App. 2005). Here, the evidence does not show the elements of conversion have been met, specifically the elements of intent and control over property of another.
The record shows the bankruptcy court found Appellant liable for conversion as the result of Appellant's failure to turn over the Fiesta Bowl tickets to Appellee when they were received by Appellant in December 2002 and Appellant's subsequent personal use of the tickets. While Appellant's retention and use of the tickets could be deemed an intentional act, Appellee did not want the tickets and they were no longer property of Appellee at the time the tickets were received and used by Appellant because Appellee effectively sold the tickets to Appellant through its set off.
Set off is defined as " the discharge or reduction of one demand by an opposite one, and it has frequently been defined as a cross claim, for which an action might be maintained." Am. Smelting & Ref. Co. v. Swisshelm Gold & Silver Co., 63 Ariz. 204, 160 P.2d 757, 760 (Ariz. 1945) (" Swisshelm") (quoting 47 Am.Jur., Setoff and Counterclaim, § 3, p. 709). Arizona law provides that an employer may withhold the wages of an employee for the purpose of effectuating a set off.
Arizona Revised Statutes (" Ariz. Rev. Stat.") § 23-352 (2007) states that an employer may withhold an employee's wages if there is a reasonable good faith dispute as to the amount of wages due, including any claim of debt, reimbursement, recoupment or set-off. Specifically, Ariz. Rev. Stat. § 23-352 (2007) provides
In July 2002, Appellee chose to set off the value of the Fiesta Bowl tickets by withholding funds from Appellant's final three direct deposits, all dated July 26, 2002, in the total amount of $5,500. The reason for the decision by Appellee to set off this amount is not established by the record. Therefore, it cannot be determined whether Appellee considered that Appellant's credit card charge for the tickets was not authorized or whether Appellee anticipated that it would not have a use for the tickets five months later, in December, due to its own situation, i.e., the possibility of a sale of or bankruptcy filing for Appellee's business. Nevertheless, the record shows that both Appellant and Appellee recognize that the set off constituted a satisfaction of any amount owed to Appellee for the purchase of the Fiesta Bowl tickets. The testimony by Greco on behalf of Appellee included statements admitting that Appellant's final compensation was reduced by the amount paid for the tickets. In addition, the record includes a letter from Greco and evidence of three direct deposit stubs showing that $5,500 was withheld from Appellant's final compensation for the Fiesta Bowl tickets. The fact that Appellee failed to list Appellant as a creditor in its bankruptcy case also tends to show that Appellee believed it was fully repaid for the tickets.
Thus, through the set off, Appellee essentially sold the tickets to Appellant. Consequently, the tickets became Appellant's property in July 2002 as a result of the withholding of the $5,500 from Appellant's final compensation.
It is clear that one cannot convert his own property. See Miller v. Hehlen, 104 P.3d at 203 (" Conversion also requires conduct intended to affect property of another."); Shartzer v. Ulmer, 85 Ariz. 179, 333 P.2d 1084, 1088 (Ariz. 1959) (" It is settled that conversion is any act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein." (quoting Gruber v. Pac. States Sav. & Loan Co., 13 Cal.2d 144, 88 P.2d 137, 139 (Cal. 1939))). Because the Fiesta Bowl tickets were no longer property of Appellee when Appellant used them, Appellant cannot be liable to Appellee for conversion.
Similarly, although not addressed by either Appellee or the bankruptcy court, liability for conversion cannot be found based on the credit card charge in June 2002 for the Fiesta Bowl tickets. It is not clear from the record whether Appellant was authorized to order the tickets, and the record does not show that Appellant purchased the tickets with the intent to use them for his personal use or gain, rather than for a legitimate corporate purpose, such as client development or solicitation of investors. Intent is a necessary element for the tort of conversion. " The intent required is 'an intent to exercise a dominion or control over the goods which is in fact inconsistent with the plaintiff's rights.'" Miller v. Hehlen, 104 P.3d at 203 (quoting Sterling Boat Co. v. Ariz. Marine, Inc., 134 Ariz. 55, 653 P.2d 703, 706 (Ariz. App. 1982) (quoting William Prosser, Handbook on the Law of Torts § 15, at 83 (4th ed. 1971))). Because nothing in the record shows that Appellant originally obligated Appellee to purchase the tickets for other than corporate purposes, or " inconsistent with [Appellee's] rights, " Appellant cannot be liable for conversion based upon the purchase of the Fiesta Bowl tickets. As a result, the bankruptcy court erred in finding damages resulting from a purported conversion.
b. The bankruptcy court did not find damages based on breach of fiduciary duty
The bankruptcy court stated that it could not find damages for breach of fiduciary duty based upon Appellant's dissemination of the Business Plan or the alleged intent to destroy an aspect of Appellee's business. The only basis on which the court found damages in favor of Appellee was the purported conversion of the Fiesta Bowl tickets by Appellant. Accordingly, because the bankruptcy court found that no other damages were demonstrated for breach of fiduciary duty, the court erred in finding actual or compensatory damages.
c. There were no damages as a result of Appellee's set off
The bankruptcy court committed clear error in finding damages owing to Appellee based on the value of the Fiesta Bowl tickets because, at the time Appellee filed its Complaint against Appellant, no damages based on the purchase of the tickets could be claimed, as Appellee was made whole through its use of the remedy of set off. By withholding $5,500 from Appellant's final compensation, Appellee was wholly repaid for the value of the tickets.
More importantly, by Appellee's choice to utilize the self-help remedy of set off, Appellee waived its right to assert a cause of action and claim damages based on the transaction giving rise to the set off. The Supreme Court of Arizona has recognized " the defense of payment" in the situation of a set off, and held that the original owner of converted property " may either acquiesce in the conversion and [seek a remedy such as set off], or refuse to acquiesce therein and ask for damages for the conversion." Swisshelm, 160 P.2d at 760. In the Swisshelm case, an employee of Swisshelm converted ore and other property belonging to Swisshelm, some of which was sold to a third party. Id . at 758. At a trial on a claim brought by the employee for unpaid wages, Swisshelm stated that the wages were withheld as set off for the property taken by the employee. Id . at 758. The trial court essentially approved the set off in its findings of fact by stating that the employee received far more from the property than the claim for unpaid wages, and entered judgment in favor of Swisshelm. Id . at 758. Swisshelm later sued the third party who purchased the ore from the employee for the value thereof. Id . at 757. The Arizona Supreme Court stated that Swisshelm was precluded from asserting a claim against the third party by virtue of its decision to set off the value of the ore. Id . at 760 (" In adopting this position, Swisshelm may be said to have waived the tort [of conversion]. By so doing it approved of the sale and ratified the payment by the [third party] to [the employee].") The Arizona Supreme Court held that " Swisshelm waived the tort [of conversion] and proceeded in assumpsit by way of setoff. . ." Id . at 760.
As mentioned above, Appellee did not assert a cause of action against Appellant based on the purchase of the Fiesta Bowl tickets. However, because this transaction was the basis for the bankruptcy court's finding of damages, this memorandum discusses the legality and propriety under Arizona law of this finding.
Similarly, in this case, Appellee had the option to sue Appellant for the value of the Fiesta Bowl tickets on the ground of conversion. Appellee chose not to do so. Rather, Appellee asserted its right under the Arizona statute to set off the value of the tickets from Appellant's wages. At that point, Appellee was made whole and waived its right to later assert a claim based on an alleged debt owing for the tickets, such as a claim for conversion.
The bankruptcy court acknowledged the possibility of a set off of the value of the Fiesta Bowl tickets. However, the court went on to find that, even if the principal value of the tickets were repaid through the set off, any damages resulting from interest owing were sufficient compensatory damages to justify judgment in favor of Appellee and the award of punitive damages.
d. The bankruptcy court erred in finding interest as damages
The bankruptcy court repeatedly stated that even if the $5,500 were repaid as part of the funds taken out of Appellant's salary, there was still interest on that claim that was not paid, whether it was in the amount of $1.98 or $20 or $30.
As part of a judgment, a court may award interest on any debt or liability demonstrated on the part of the defendant. Under Arizona law, a debt is defined as a promise to pay. In this case, there is no evidence that Appellant ordered the tickets for his own use, rather than for corporate purposes. Consequently, no showing has been made that Appellant made an express or implied promise to Appellee to repay the amount charged to Appellee's credit card for the purchase of the tickets. Therefore, no debt arose with respect to the purchase of the tickets by virtue of any promise to repay.
The Arizona Supreme Court defined debt as follows:
Debt can also arise based on a party's liability under a legal cause of action, such as an action under a breach of contract or tort. The debt in such a situation arises at the time liability is imposed. According to Arizona law, liability is imposed the " instant. . .the wrong was done." Kain v. Ariz. Copper Co., 14 Ariz. 566, 133 P. 412, 415 (Ariz. 1913) (" [T]he liability arises immediately upon such breach of contract or disregard of duty, and an action to recover the damages, which are the measure of such liability, may be immediately maintained." (quoting Lattin v. Gillette, 95 Cal. 317, 30 P. 545, 546 (Cal. 1892))). Accordingly, a judgment may award interest against a defendant from the moment liability arises against him. However, logically, interest cannot be awarded as damages absent a determination that the defendant is liable under the claimed cause of action in the first place.
Here, the bankruptcy court awarded interest on the principal award of damages in the amount of $5,500, which was based on the court's finding that Appellant converted Appellee's property. Because the court erred in awarding damages against Appellant for conversion, the award of interest on such damages cannot be affirmed. Further, because the bankruptcy court did not find damages against Appellant on any other grounds for breach of fiduciary duty, there exists no basis whatsoever for an award of interest in this case.
In conclusion, because damages must be shown as an element of a claim for breach of fiduciary duty, and because Appellee failed to demonstrate any damages, the bankruptcy court erred in rendering judgment against Appellant and in favor of Appellee. The court found no damages shown under any allegations of breach of fiduciary duty, other than those based on an alleged act of conversion. However, the bankruptcy court erred in finding conversion where it was not sufficiently pled or demonstrated through evidence. Moreover, Appellee waived any claim for conversion through its decision to set off the charge for the tickets. Finally, because there are no underlying damages or liability owing from Appellant to Appellee, no interest could have accrued that would justify an award of compensatory damages based on any interest. Thus, we conclude the bankruptcy court erred in finding actual or compensatory damages.
B. Punitive Damages
Appellant argues that the bankruptcy court erred in awarding punitive damages. Appellant cites to State Farm Mutual Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003) for the proposition that should the court determine punitive damages, the court must do so without violating Appellant's due process rights. Without citing any authority, Appellant argues that if the action for breach of fiduciary duty took place in a state other than where the entity was incorporated, the court has to apply the law where the act occurred, which in this case would be Arizona, and in Arizona, punitive damages cannot be awarded absent actual damages. Appellant asserts that he does not owe Appellee $5,500, that there has been no harm to Appellee because Appellee kept Appellant's funds and has been paid for the Fiesta Bowl tickets, that Appellee failed to prove any actual damages, and that the bankruptcy court did not find any actual damages based on Appellant's conduct.
Appellee argues that since Appellee was incorporated in Nevada, Nevada law applies. Appellee states that there was ample evidence to justify an award of punitive damages - that Appellant intended to injure Appellee by converting estate assets for his own personal use and to disseminate Appellee's proprietary information to others without any authorization. Appellee argues that Appellant presented no evidence to the contrary that his conduct qualified as express malice, since he had the ability and intent to destroy Appellee. Appellee also states that Appellant's conduct had not changed, so the amount of punitive damages was appropriate to punish and deter him. Appellee argues that given the fact that it sought the statutory maximum of $300,000 in punitive damages but was awarded only $22,000, or four times the actual damages, the punitive damages award was well within the statutory restrictions, so this award must be upheld.
Nevada Revised Statutes (" Nev. Rev. Stat.") § 42.005 (2007) provides for an award of punitive damages upon a showing of fraud, oppression or malice by clear and convincing evidence. Specifically, it states
1. Except as otherwise provided in N.R.S. 42.007, in an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud or malice, express or implied, the plaintiff, in addition to the compensatory damages, may recover damages for the sake of example and by way of punishing the defendant. Except as otherwise provided in this section or by specific statute, an award of exemplary or punitive damages made pursuant to this section may not exceed:
(a) Three times the amount of compensatory damages awarded to the plaintiff if the amount of compensatory damages is $100,000 or more; or
(b) Three hundred thousand dollars if the amount of compensatory damages awarded to the plaintiff is less than $100,000.
Punitive damages may be assessed for beach of fiduciary duty. Clark v. Lubritz, 113 Nev. 1089, 944 P.2d 861, 867 (Nev. 1997).
Both the states of Nevada and Arizona require that there first be an award of actual or compensatory damages before punitive damages may be awarded. Sprouse v. Wentz, 105 Nev. 597, 781 P.2d 1136, 1138 (Nev. 1989)(" Compensatory damages must be awarded before the court can award punitive damages."); Wyatt v. Wehmueller, 167 Ariz. 281, 806 P.2d 870, 874 (Ariz. 1991) (" A plaintiff must be entitled to actual damages before being entitled to punitive damages.")
As stated above, Appellee did not show that it had suffered any actual or compensatory damages. Because punitive damages cannot be awarded absent actual damages, Appellee is not entitled to punitive damages. We conclude the bankruptcy court abused its discretion on this issue.
C. Failure to list Appellant as a creditor
Appellant argues that the bankruptcy court erred when it ignored Appellee's and its attorney's knowing failure to list Appellant as a creditor of the bankruptcy estate and knowing failure to give Appellant notice of important dates and deadlines. Appellant asserts that although the bankruptcy judge stated that she was unhappy with the parties, she never rebuked or censured Appellee for failing to reveal to the court that $5,500 was not due and owing to the estate and that the court forced Appellant to withdraw his proof of claim but failed to give any basis for an award of interest.
This argument provides no basis whatsoever for reversing the bankruptcy court's ruling. The record simply does not show that the bankruptcy court forced Appellant to withdraw his proof of claim or that Appellant was entitled to any monies from the estate.
VI. CONCLUSION
The bankruptcy court found that the only actual or compensatory damages due from Appellant were the $5,500 charge used to purchase the Fiesta Bowl tickets and interest from June 2002. Appellee lawfully offset the full amount of this charge against the final compensation due Appellant. The bankruptcy court erred in finding a conversion and any damages resulting from the purported conversion. There was no other determination of compensatory damages based on the breach of fiduciary duty alone. Because there are no underlying damages, no interest could have accrued. Therefore, the bankruptcy court erred in awarding compensatory damages. Since punitive damages cannot be awarded in the absence of compensatory damages, Appellee is also not entitled to punitive damages. We REVERSE the order of the bankruptcy court.
No employer may withhold or divert any portion of an employee's wages unless one of the following applies:
1. The employer is required or empowered to do so by state or federal law. 2. The employer has prior written authorization from the employee. 3. There is a reasonable good faith dispute as to the amount of wages due, including the amount of any counterclaim or any claim of debt, reimbursement, recoupment or set-off asserted by the employer against the employee.
Ariz. Rev. Stat. § 23-350 (2007) defines wages as
nondiscretionary compensation due an employee in return for labor or services rendered by an employee for which the employee has a reasonable expectation to be paid whether determined by a time, task, piece, commission or other method of calculation. Wages include sick pay, vacation pay, severance pay, commissions, bonuses and other amounts promised when the employer has a policy or a practice of making such payments.
The word 'debt' is as applicable to a sum of money promised at a future day as to a sum now due and payable; the former is a debt owing; the latter, a debt due. Anderson's Law Dictionary, 315. A sum of money which is payable is a debt, 'without regard to the fact whether it be payable now or at a future time.' The money need not be immediately payable; obligations yet to become due constitute indebtedness, as well as those already due. 'A party becomes indebted when he enters into an obligation to pay.'
City of Phoenix v. Phoenix Civic Auditorium & Convention Ctr. Ass'n, Inc., 99 Ariz. 270, 408 P.2d 818, 831 (Ariz. 1965)(internal citations omitted).