Opinion
No. CIV97-1645PHX ROS (WKU)
July 24, 2000.
Bird Associates seeks leave to amend its answer to assert a counterclaim for declaratory judgment pursuant to 28 U.S.C. § 2201 and leave to add defendants. PacWest Vending, Inc., the plaintiff, argues that an amendment would be futile because (1) the proposed claims are barred by the statute of limitations, (2) there is a state court action presenting the same state law issues and abstention, therefore, should be exercised, (3) there is a lack of personal jurisdiction over the new parties, (4) privilege bars the proposed new attorney parties, and (5) res judicata applies from prior litigation.
Statute of Limitations
The parties agree that Arizona's statute of limitations covering fraudulent conveyances is three years, A.R.S. § 12-543. They disagree as to when the three-year period as applied to this case, began to run. The plaintiff's position is that the latest applicable date the statute of limitations began to run was February 25, 1995, when Curtis Products received actual notice that CAPA had granted 2nds a security interest in the gumball machines. Bird Associates' position is that the statute of limitations did not begin to run until Bird Associates discovered the tortious conduct and was damaged and asserts that damage did not occur until foreclosure on CAPA's security interest was taken in May 1997.
I agree that under the law of Arizona the statute of limitations does not begin to run until the claimant discovers the tortious conduct and has suffered actual injury that has become irremediable. Tullar v. Henderson, 168 Ariz. 577, 816 P.2d 234 (1991); Amfac Distribution Corporation v. Miller, 138 Ariz. 152, 673 P.2d 792 (1983); Commercial Union Ins. Co. v. Lewis Roca, 183 Ariz. 250, 902 P.2d 1354 (Div. 1 App. 1995), reconsideration denied 3/20/95, review denied 9/26/95. Here actual injury did not become irremediable until the foreclosure on the security interest of the CAPA assets in May 1997. Omitted counterclaims filed under Rule 13(f) of the F.R.Civ. P. relate back under Rule 15(f) to the time of the filing of the original answer by that defendant. Unispec Development Corp. v. Harwood K. Smith Partners, 124 F.R.D. 211 (D.Ariz. 1988). Bird Associates' original answer was filed on April 10, 1998, filing 55, less than three years before the accrual of the cause of action. The counterclaim is not barred by the statute of limitations.
Abstention
Chamberlain v. Allstate Insurance Company, 931 F.2d 1361 (9th Cir. 1991), said at 1366:
"Ordinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties." Brillhart v. Excess Ins. Co., 316 U.S. 491, 495, 62 S.Ct. 1173, 1175-76, 86 L.Ed. 1620, (1942). Thus, when a party requests declaratory relief in federal court and a suit is pending in state court presenting the same state law issues, there exists a presumption that the entire suit should be heard in state court. Id.
The pendency of a state court action, however, does not of itself require a district court to refuse declaratory relief in federal court. In deciding whether to grant such relief in a particular case, the Supreme Court has counseled district courts to ascertain whether the questions in controversy between the parties to the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court. This may entail inquiry into the scope of the pending state court proceeding and the nature of defenses open there. The federal court may have to consider whether the claims of all parties in interest can satisfactorily be adjudicated in that proceeding, whether necessary parties have been joined, whether such parties are amenable to process in that proceeding, etc.
Although PacWest states that Curtis Products through Bird Associates has previously argued the same fraudulent conveyance claims in three previous suits and refers to Bird Associates as "surrogate for Curtis Products," it is true, as far as I can tell from the record before me, that there is no previous or existing case, other than this present one, in which Bird Associates is a party. The claims against Bird Associates cannot satisfactorily be adjudicated in any extant state court proceeding, nor have they been. Abstention by this federal court is not appropriate.
Personal Jurisdiction Over the Parties
PacWest urges that a counterclaim would be futile because this court does not have personal jurisdiction over the proposed counterclaim defendants Morgan, 2nds, CAPA, F. Scott, LeRoy, or J. Scott McDearman. Bird Associates respond that the court can obtain personal jurisdiction over the proposed counterdefendants. The evidence, however, is not before me to resolve that issue. If the counterdefendants are added, evidence can be produced in good time and a decision appropriately made.
Res Judicata or Collateral Estoppel
PacWest presents a sweeping declaration that there is a history of "the other litigations in which Curtis Products raised the exact same issues that Bird Associates seeks to litigate in its proposed counterclaim." (Response to Bird Associates' Motions for Leave to Amend, p. 12). It appears to be true that there are or may be issues that previously have been litigated and may by now be final, although there still is some uncertainty about the finality of any of them. The brief of PacWest concludes as follows:
The final order in the Fulton County Suit and the final judgment in the Chancery Court Case absolutely preclude the claims Bird Associates seeks to raise here. Bird Associates' Motion to Amend should be denied as futile.
The obvious problem with that position is that Bird Associates' counterclaim is admittedly defensive in nature or at least partly so. In its Motion for Leave to Amend the Pleadings to Add Counterclaims Pursuant to F. R.Civ. P. 13 and 15 at page 2, Bird Associates says:
The grounds for this motion are: (1) newly-discovered facts . . .; and (2) PacWest's position . . . that because 2nds, Morgan, CAPA, LeRoy and McDearman are not parties, they are not subject to this Court's rulings. Bird Associates must obtain these parties' testimony and have them bound by the Court's decisions in order to properly defend itself and, in the interest of justice, to prevent new litigation on these issues.
It is obvious, by a look at the amended complaint that brings charges against Bird Associates, that the claims of PacWest against Bird Associates have not been litigated anywhere. They are charged with conspiring to enforce a foreign judgment unlawfully, to have authored a letter intended to be used to threaten, intimidate and extort, to have engaged in an abuse of process and, among other things, to have violated the federal and Arizona versions of anti-racketeering acts. The allegation at paragraph 42 of the First Amended Complaint, is that "each defendant acted with an evil hand guided by an evil mind to further the Curtis Conspiracy and the defendants' joint racketeering enterprises." None of that, of course, has been previously litigated. What I am saying is that I cannot simply accept the broad assertion that previous litigation "absolutely preclude[s] the claims Bird Associates seeks to raise here." If specific matters can be said to be subject to res judicata or collateral estoppel, they need to be analyzed specifically and individually, rather than by the broad stroke wielded here.
On the other hand, Bird Associates have not persuaded me that leave should be given to bring in other parties simply for defensive purposes. It has not shown that it must have these new persons or some new cause of action by way of a counterclaim in order for a full resolution of this case to be effected. Whether, for example, there is estoppel in the matter of the priority of the liens by virtue of the declaration of Judge Long on May 7, 1998, in ruling on Curtis' Motion to Strike Morgan's Affidavit in the Fulton County, Georgia, case that "Seconds' security interest had priority over Curtis' judgment" is binding on Bird Associates, when, apparently, the judgment in the case is on appeal. Similarly, exactly what effect Chancellor Brown's Memorandum Opinion and Order of May 18, 2000, in the Tennessee case has on Bird Associates' proposed counterclaim, were it to be filed, has not been explored with specificity.
I grant that there may be some merit to getting all the parties to this heretofore fragmented litigation gathered into one case, but it has not been demonstrated that the issues raised in the First Amended Complaint, including defense to those issues, cannot be resolved justly without bringing in Albert Morgan, Jr., 2nds in Building Materials, CAPA, Inc., F. Scott LeRoy, and Scott McDearman. None of them is needed for just adjudication under Rule 19. The wisdom of bringing any of them in under Rule 20, it seems to me, depends upon the effect of the May 18, 2000, holding of the Tennessee chancery court, because all the entities-other than the attorneys-sought to be brought in here were parties to that Tennessee action.
In this regard Bird Associates has asked that I rule on its motion to amend the answer and add parties without consideration of the chancery court's "interlocutory ruling." In the alternative, it has asked that an opportunity be given it to respond in brief to the issue of whether the ruling affects Bird Associates' right to assert the fraudulent conveyance as a defense. Why I should disregard the chancery court's ruling I do not know, but I shall afford Bird Associates occasion to address for all purposes the effect of the chancery court's recent holding. What is the effect of it on the defense to the plaintiff's claim? What is the effect on any need for adding parties to make binding on them any judgment in this case on issues not already binding because of the Tennessee suit? When discussion of the roles of the Tennessee litigation have more fully been explored, the need or lack of need for joining other parties may be clearer.
The effect of the Georgia court's ruling is also uncertain at this point. Should the pursuit of this present case await the result of the appeal? Should it await the result of an appeal of the Tennessee ruling, if an appeal has been or will be taken? I shall value the best thoughts of counsel for all the parties.
Judicial Proceeding Privilege
The attorneys LeRoy and McDearman, who are proposed by Bird Associates to be made counterdefendants, assert that claims against them cannot be made because LeRoy and McDearman, as lawyers, are entitled to the benefit of the judicial-proceeding privilege which shields them from the claims being asserted against them for their work representing their clients.
Bird Associates responds with two arguments:
(1) the scheme and fraudulent transfer were not undertaken during judicial proceedings and
(2) the privilege does not extend to fraudulent activities.
As to (1), the counterclaim seeks to charge two fraudulent activities. The first, it says, was a collateralization of a "new loan" by a fraudulent security agreement authored and prepared by LeRoy. That occurred in October 1994, well before the entry of a judgment in the Fulton County litigation in Georgia at a time when LeRoy "was aware of Curtis' lawsuit against CAPA for the machines." (Counterclaim for Declaratory Judgment, ¶ 17). The second fraudulent transfer is alleged to have begun in the fall of 1996, at least six months before the jury verdict in the Fulton County, Georgia, action and continued by actions of LeRoy and McDearman in an effort "immediately to protect CAPA's assets," by McDearman's advising the foreclosure on CAPA by 2nds, writing a demand letter, causing PacWest Vending, Inc. to be incorporated on June 12, 1997, holding an auction on July 11, 1997, of CAPA's assets foreclosed on by 2nds, and by both McDearman and LeRoy actually participating in the creation of a transfer of the assets out of CAPA to PacWest. I see no likelihood that those activities would be deemed not to be related to the judicial proceedings.
As to (2), the parties have presented several cases from the appellate courts of Arizona. The most appropriate are Linder v. Brown Herrick, 189 Ariz. 398, 943 P.2d 758 (App. 1997), and Giles v. Hill Lewis Marce, 195 Ariz. 358, 291 Ariz. Adv. Rep. 40, 988 P.2d 143 (1999). Both cases emphasize the policy reasons for the rule that protects attorneys from suit by their adversaries.
In holding that an attorney's conduct during the course of judicial proceedings is absolutely privileged, our Supreme Court explained:
In the area of absolute privileges one of the most common is that involving the participant in judicial proceedings. The socially important interests promoted by the absolute privilege in this area include the fearless prosecution and defense of claims which leads to complete exposure of pertinent information for a tribunal's disposition. The privilege protects judges, parties, lawyers, witnesses and jurors. The defense is absolute in that the speaker's motive, purpose or reasonableness in uttering a false statement do not affect the defense. Whether the privilege exists is a question of law for the court, and may be properly raised in a motion to dismiss. . . .Linder, supra, 943 P.2d at 766. See, also , the same or similar language in Giles, supra, 988 P.2d at 145.
Bird Associates asserts that there is no authority in Arizona cases that a litigation privilege extends to fraudulent conduct, but, the Linder case says:
[T]he Linders' fraud claims against opposing counsel are not recognized by Arizona law. . . . No authority exists in Arizona for bringing a claim of fraud against an opposing attorney for statements made during litigation. To the contrary, case law narrowly limits claims against opposing counsel. Our law is clear. . . . In affirming the trial court's dismissal of the plaintiff's complaint [in Lewis v. Swenson, 126 Ariz. at 562, 617 P.2d at 70], the Lewis court, in an opinion authored by now Justice O'Connor, quoted from Norton v. Hines, 49 Cal.App.3d 917, 123 Cal.Rptr. 237, 240 (1975):
Clearly, an adverse party is not an intended beneficiary of the adverse counsel's client. If a cause of action exists against attorneys . . ., it must be pleaded as an action for malicious prosecution. We see no reason to extend applicable law now found in cases involving attorneys and third parties when there is sound and recognized public policy for limiting the cause of action to malicious prosecution. Lewis, 126 Ariz. at 564, 617 P.2d at 72. . . .Linder, supra, 943 P.2d at 765.
The later case, Giles v. Hill Lewis Marce, supra, says:
We agree with the Gileses that Linder and Lewis are not controlling for several reasons . . . They addressed only the question of whether negligence or fraud claims could be asserted against opposing counsel. . . .
In both Linder and Lewis, the public policy for not permitting fraud and negligence claims against opposing counsel was premised upon the absolute privilege from defamation afforded participants in judicial proceedings. . . .Giles, supra, 988 P.2d at 145.
The present state of the Arizona law appears to be that the privilege does attach to claims of fraud done by opposing counsel during litigation. Furthermore, it seems to me most likely that the acts claimed against the proposed counterdefendants LeRoy and McDearman, which began in the midst of the Georgia litigation and immediately continued as an ongoing process during a time when the judgment in that case was not and still is not final, would be deemed under Arizona law to be sufficiently related to judicial proceedings to be protected by the privilege.
In Giles, supra, while not allowing suit upon opposing counsel for fraud or negligence, did allow suit against opposing counsel for malicious prosecution, as well as abuse of process.
Bird Associates' Reply to Plaintiff's Separate Response to Bird Associates' Motions to Amend Re Attorneys LeRoy and McDearman in footnote one says that: "[I]n short, if, as plaintiff argues at page 4, lines 4-5, Bird Associates' claim against Messrs. McDearman and LeRoy are not cognizable in Arizona, the forum, then PacWest's claims against Bird Associates is not cognizable in the Arizona forum and must be dismissed." That issue is not before me, but it may come. I do note that part of the claim against Bird Associates is phrased in terms of abuse of process. First Amended Complaint, ¶ 37.
IT THEREFORE IS ORDERED that
1. resolution of the Motion for Leave to Amend the Pleadings to Add Counterclaim Pursuant to F. R. Civ. P. 13 and 15, filed March 3, 2000, shall be held in abeyance until briefing has been complete on the subject of the effect of the memorandum opinion and order in the Chancery Court of Hamilton, Tennessee, in cause number 97-0657, dated May 18, 2000;
2. Bird Associates shall have until August 11, 2000, to file and serve its brief regarding the effect of the above-mentioned chancery court opinion and order dated May 18, 2000, and to express its position as to whether this present litigation should proceed prior to a resolution on the appeal in the Georgia case and the Tennessee case; and
3. the plaintiff shall have until August 18, 2000, to respond to Bird Associates' brief.