Opinion
No. 1 CA-CV 12-0709
11-26-2013
CLARKE LAW FIRM, PLC, Plaintiff/Counterdefendant/Appellee, v. MOHNACH PAYNE INC.; THOMAS PAYNE and BARBARA PAYNE, Defendants/Counterclaimants/Appellants.
COUNSEL Clarke Law Firm, PLC, Scottsdale By Marilee Miller Clarke Co-Counsel for Plaintiff/Appellee/Counterdefendant Broening Oberg Woods & Wilson, PC, Phoenix By Kerry L. Beringhaus and Brian W. Purcell Co-Counsel for Plaintiff/Appellee/Counterdefendant Thomas N. Payne Attorney at Law, Paradise Valley By Thomas N. Payne Counsel for Defendants/Appellants/Counterclaimants
NOTICE: NOT FOR PUBLICATION.
UNDER ARIZ. R. SUP. CT. 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT
AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
Appeal from the Superior Court in Maricopa County
No. CV2009-030194
The Honorable Katherine M. Cooper, Judge
AFFIRMED
COUNSEL
Clarke Law Firm, PLC, Scottsdale
By Marilee Miller Clarke
Co-Counsel for Plaintiff/Appellee/Counterdefendant
Broening Oberg Woods & Wilson, PC, Phoenix
By Kerry L. Beringhaus and Brian W. Purcell
Co-Counsel for Plaintiff/Appellee/Counterdefendant Thomas N. Payne Attorney at Law, Paradise Valley
By Thomas N. Payne
Counsel for Defendants/Appellants/Counterclaimants
MEMORANDUM DECISION
Judge Michael J. Brown delivered the decision of the Court, in which Presiding Judge Andrew W. Gould and Judge Donn Kessler joined. BROWN, Judge: ¶1 Mohnach Payne Inc., Thomas Payne, and Barbara Payne (collectively "MPI," except as otherwise noted) appeal the trial court's judgment in favor of the Clarke Law Firm, PLC (Clarke) on Clarke's claims for breach of contract, fraudulent transfer, and quantum meruit. MPI argues the court erred in granting directed verdicts in favor of Clarke on Clarke's breach of contract claim and MPI's counterclaim for legal malpractice. Regarding the fraudulent transfer and quantum meruit claims, MPI argues the court (1) failed to properly instruct the jury on liability of the marital community, (2) abused its discretion in restricting the time for closing arguments, and (3) improperly prohibited MPI from rebutting a misleading comment made by Clarke's attorney. For the following reasons, we affirm.
BACKGROUND
¶2 In February 2007, MPI sold certain business assets to Smith West, LLC (Smith West). The terms of the sale were set forth in an Asset Purchase Agreement (APA) in which MPI represented, among other things, that it would conduct the business in the "ordinary course of business," as defined in the APA, at all times prior to closing. ¶3 In October 2007, Smith West demanded that MPI (and its shareholders, John Mohnach and Thomas Payne) indemnify Smith West in the approximate amount of $1,500,000 for funds Smith West borrowed to make payments to its vendors after closing for aged, unpaid invoices. Smith West asserted that MPI had breached its representation and warranty to conduct the business in the "ordinary course" by failing to timely pay vendors before closing of the transaction. MPI countered that it had operated its accounts payable consistent with its ordinary business practices. Per the APA, the dispute was referred to arbitration. ¶4 Clarke represented MPI in the arbitration in California. Following a two-day hearing, the arbitrator issued a detailed award finding that MPI had breached its representation and warranty to act in the ordinary course of business. The arbitrator awarded Smith West damages for the funds it paid to vendors on invoices that were more than 45 days old at the time of closing, plus attorneys' fees, in the amount of $1,730,651. ¶5 Because MPI failed to pay Clarke the attorneys' fees incurred in the arbitration proceeding, in 2009 Clarke filed a complaint against MPI for breach of the parties' retainer agreement. The complaint also included a fraudulent transfer claim against MPI as well as Thomas and Barbara Payne and John and Sharon Mohnach, individually, alleging that after entry of the arbitration award in favor of Smith West, Thomas Payne and John Mohnach "improperly" transferred their "most valuable operating assets" to their wives as a means of "insulat[ing] them from execution" of the Smith West judgment. ¶6 In its answer, MPI asserted that Clarke's legal fees were "excessive and unreasonable" and denied that it had made an illicit transfer of assets. MPI also filed a counterclaim for legal malpractice, alleging that (1) Clarke violated the Arizona Rules of Professional Conduct by disclosing privileged information, derived from its legal representation of MPI, in its complaint, (2) to the extent any of MPI's transfers were not "legal and proper," such transfers were conducted based on Clarke's representations that the transfers were "legal and proper," and (3) Clarke violated Arizona Rule of Professional Conduct ER 1.1 by failing to competently represent MPI during the arbitration proceedings. ¶7 Early in the litigation, MPI filed a "certification" that expert testimony was "not necessary to prove the licensed professional's standard of care or liability for the counterclaims in this case." Clarke countered that, pursuant to Arizona Revised Statutes (A.R.S.) section 12-2602, a party making a claim against a licensed professional must submit a preliminary expert opinion affidavit setting forth the standard of care applicable to the licensed professional's conduct and explaining how the licensed professional's failure to adhere to that standard caused or contributed to the claimant's injury. The trial court determined expert testimony was necessary to prove the requisite standard of care and ordered MPI to file a preliminary expert opinion affidavit. ¶8 MPI then filed an "A.R.S. § 12-2602 certification" of David D. Dodge, who averred that Clarke's representation of MPI during the arbitration proceedings "was below the standard of care expected of a reasonably competent, knowledgeable and experienced lawyer[.]" Dodge further opined that, had Clarke competently appreciated the significance of the "ordinary course of business" issues and properly "marshal[led] the available evidence concerning" the industry's normal "payment practices," no award of damages against MPI would have been entered. ¶9 Clarke subsequently filed an amended complaint asserting a claim of quantum meruit against Thomas Payne and John Mohnach, individually, alleging they were unjustly enriched by Clarke's legal services. MPI filed an amended answer and counterclaim, abandoning two of its claims of legal malpractice, leaving only its claim that Clarke's representation during the arbitration proceeding fell below the requisite standard of care. ¶10 Following extensive motion practice on numerous issues, the trial court entered minute entry rulings: (1) granting partial summary judgment in favor of Clarke on the reasonableness of its hourly fee and the number of hours expended in its representation of MPI; (2) denying cross-motions for partial summary judgment on the legal malpractice claim against Clarke; (3) denying MPI's motion for partial summary judgment on the fraudulent transfer claim; (4) denying MPI's motion for partial summary judgment on the quantum meruit claim; and (5) granting Clarke's motion to strike Dodge's unsworn letters as inadmissible hearsay. ¶11 Approximately two months before the scheduled trial, Clarke filed motions in limine to exclude any expert testimony not previously disclosed; specifically, new opinion testimony by Dodge and damages testimony by Mohnach (who had not previously been disclosed as an expert witness). MPI responded that Dodge's trial testimony would be "confined to opinions that have been disclosed[.]" After hearing argument, the court granted Clarke's motions. Subsequent to that ruling, Clarke filed a supplemental motion in limine to exclude Mohnach's opinion testimony on the basis that he did not prepare the accounting records that he intended to discuss at trial and therefore lacked sufficient foundation to introduce and discuss those documents. The trial court found that pursuant to Arizona Rule of Evidence 602, Mohnach "lacks the personal knowledge necessary to lay foundation for and to authenticate the accounts payable records of Smith West that [MPI] seeks to introduce through [] Mohnach." Furthermore, the court explained that even if these records were "admitted . . . through another witness," Mohnach "lacks the personal knowledge necessary to testify regarding the data contained in those records and/or to interpret them in any way for the jury." ¶12 The matter proceeded to trial. On the first day of trial, John Mohnach testified that, as part of the sale, MPI had to furnish information on its accounts payable and receivable. In the event those representations were inaccurate, the APA provided for indemnification up to $5,000,000. The accounts payable were represented as $5,316,000, but were approximately $6,000,000 at close. Likewise, the accounts receivable were represented as $2,830,000, but were only $2,550,000 at close. ¶13 In October 2007, the same month Smith West demanded indemnification, MPI acquired a new business, CRS Aerospace, for $1,320,000. In October 2008, four months following the arbitrator's entry of judgment in favor of Smith West, John Mohnach and Thomas Payne transferred ownership of CRS Aerospace from MPI to John and Sharon Mohnach and Thomas and Barbara Payne, individually, leaving no residual MPI assets. John Mohnach testified that during the year following its acquisition, CRS Aerospace's equipment depreciated dramatically and the business retained little value. ¶14 Clarke then testified at length regarding the time, effort, and firm resources that were devoted to defending MPI during the arbitration proceedings. She stated that the firm's fees totaled $295,931.89 and, including the 18% rate of interest provided for in the retainer agreement, Clarke's damages equaled $429,971.89. She explained further that she discussed the transfer of MPI's assets to the Paynes and Mohnachs, individually, and warned that such a transfer could constitute a fraud. She also testified that the firm's retainer agreement was with MPI, not any individual. ¶15 The next day of trial, Mohnach again testified and stated that, before the MPI/Smith West sale, MPI generally paid vendors in the 75 to 80-day range. Although Mohnach presented this testimony at the arbitration hearing, he claimed that his testimony was undermined by Clarke's failure to include a supplier ledger, in its entirety, that demonstrated the business's pre-sale payment practices (the accounts payable I documents). Mohnach also testified that his arbitration testimony that Smith West paid vendors, post-closing, in the 75 to 90-day range was weakened by Clarke's failure to submit a supplier ledger that would have confirmed Smith West's delayed payment practices (the accounts payable II documents). Mohnach also testified that CRS Aerospace was eventually sold for $610,000, but the parties realized no profit because the company's liabilities exceeded the sale price. ¶16 The following day, Clarke testified she relied on Mohnach's opinion that only the explanatory and summation pages of the accounts payable I documents were relevant and informative and therefore she only included those pages as an exhibit for the arbitration hearing. ¶17 At that point, MPI attempted to present the testimony of its expert, David Dodge. After reciting his qualifications to testify regarding the standard of care owed by an attorney to a client, Dodge testified that he reviewed the accounts payable I and accounts payable II documents to evaluate whether Clarke had competently defended MPI during the arbitration proceedings. Clarke immediately objected and the court held a sidebar conference. Noting that the court's pretrial motion in limine ruling precluded the introduction of any undisclosed opinion testimony, Clarke argued that Dodge's testimony was inadmissible. Clarke pointed out that at Dodge's deposition, he specifically testified that he had not reviewed the accounts payable documents and was instead relying on assumptions provided by Mohnach and Payne as to the content of those documents to form his opinions. In response, MPI argued that an expert can testify about "anything, even if it is not admissible[.]" The court ordered that Dodge was prohibited from discussing his review of the accounts payable documents, and any other evidence that was not previously disclosed, but allowed Dodge's testimony to proceed. ¶18 Upon questioning, MPI asked Dodge twice for his opinion based on "all" the documents he had reviewed. Clarke objected and requested to voir dire Dodge, which the court granted. Clarke asked Dodge a single question: "[W]ere any of the opinions that you intend to offer today based at all upon the records or the documents that Mr. Payne has provided to you since the time of your deposition?" Dodge answered: "Most of them, yes." Dodge also admitted that, in preparing his opinions for trial, he "didn't make a distinction between records that were
Thomas Payne represented MPI and the individual defendants/counterclaimants in the trial court. On appeal, he represents himself as well as Barbara Payne and MPI. John and Sharon Mohnach, who were defendants/counterclaimants in the trial court, did not appeal the judgment entered against them.
produced before the deposition or after the deposition." Clarke moved to exclude Dodge's testimony, explaining to the court that Dodge's deposition testimony was entirely based on secondhand interpretations of documents and supplied assumptions. Moreover, because Dodge admitted he did not distinguish between evidence he reviewed before or after his deposition, Clarke argued it was impossible for Dodge to testify about his opinions at the time of his deposition. Because there had been no supplemental disclosure subsequent to Dodge's deposition, the court found that Clarke was "severely prejudiced" and unable to properly cross-examine Dodge. ¶19 After additional voir dire of Dodge and extensive discussion between counsel and the trial court, the court ultimately concluded that Dodge could not testify because the basis for his opinions was not disclosed. The court then granted Clarke's motion to exclude Dodge for noncompliance with Arizona Rule of Civil Procedure 26.1. Following the court's ruling, MPI argued that the sanction was too severe and a lesser sanction should be imposed. MPI did not, however, suggest any alternative, lesser sanction. The court then granted Clarke's motion for directed verdict on the malpractice claim because the only expert testimony that could have established the requisite standard of care and causation had been excluded. ¶20 The next day, MPI requested that the court reconsider its entry of a directed verdict and instead declare a mistrial, which the court denied. The court also entered a directed verdict on Clarke's breach of contract claim, finding reasonable persons could not disagree that Clarke had substantially performed the terms of the retainer agreement. ¶21 On the final day of trial, the court informed the jury that "as a matter of law the legal malpractice claim [had been] dismissed" and that judgment had been entered in favor of Clarke in the amount of $429,971.89 on the breach of contract claim. The jury