Opinion
1 CA-CV 11-0363
06-12-2012
RCS CAPITAL DEVELOPMENT, LLC, an Arizona limited liability company, Plaintiff/Appellee/ Cross-Appellant, v. A.B.C. DEVELOPMENTAL LEARNING CENTERS (U.S.A.), INC., a Delaware corporation; ABC LEARNING CENTRES LIMITED, an Australian corporation, Defendants/Appellants/ Cross-Appellees.
Baird Williams & Greer LLP By Craig M. LaChance Phoenix And Noel Fidel, Attorney at Law By Noel Fidel Attorneys for Plaintiff/Appellee-Cross Appellant Phoenix Ryley Carlock & Applewhite By David W. Kash Julie E. Maurer Attorneys for Defendants/Appellants/Cross-Appellees Phoenix
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(Not for Publication -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 Maricopa County
Cause No. CV2008-026273
The Honorable Larry Grant
AFFIRMED IN PART; VACATED IN PART
Baird Williams & Greer LLP
By Craig M. LaChance
Phoenix
And
Noel Fidel, Attorney at Law
By Noel Fidel
Attorneys for Plaintiff/Appellee-Cross Appellant
Phoenix
Ryley Carlock & Applewhite
By David W. Kash
Julie E. Maurer
Attorneys for Defendants/Appellants/Cross-Appellees
Phoenix GOULD, Judge
¶1 A.B.C. Developmental Learning Centers (USA) and ABC Learning Centers Limited (collectively "ABC") appeal from a jury verdict awarding RCS Capital Development ("RCS") over $47 million in damages for a breach of contract. ABC also appeals the award of attorneys' fees and costs to RCS. RCS cross-appeals the denial of pre-judgment interest on the verdict. For the reasons stated below, we affirm the verdict in favor of RCS and the denial of prejudgment interest. We vacate the enhancement fee portion of the attorneys' fees award.
FACTUAL AND PROCEDURAL BACKGROUND
¶2 ABC is an international child care company that owns and franchises Tutor Time child care centers. RCS, through its principals, siblings Rick and Cheryl Sodja, develop and operate child care centers. The Sodjas developed and operated Tutor Time Centers in Arizona. Edmond Groves, ABC's former C.E.O., met with Rick Sodja to discuss expanding ABC's operations in the United States.
¶3 The parties began negotiations that resulted in an Exclusive Development Agreement ("EDA"). Under the EDA, RCS was obligated to develop and operate child care centers at sites approved by ABC. Once a center reached "target utilization," as defined in the EDA, or had been operating for two years, ABC was required to purchase the center from RCS at a price specified in the EDA. The purchase price was based upon "Final Three Year Plans" RCS submitted to ABC during the approval process.
¶4 At the time the EDA was signed, there were 31 sites ("Pipeline Sites") in Arizona that RCS had already begun developing. These sites were deemed pre-approved. ABC's accountants prepared a three-year pro forma for these Pipeline Sites. A pro forma is an estimate of future operating profits based on occupancy rates, fees, and expenses.
¶5 The EDA also required ABC to make a $7 million earnest money deposit by September 3, 2008. RCS was to apply this money toward the purchase price of the last five Pipeline Sites. The EDA provided an alternative in the event RCS failed to apply the earnest money deposit to the last five Pipeline sites: ABC was entitled to set-off the deposit against the purchase price. ABC belatedly paid only $2 million of the earnest money deposit.
¶6 As part of the EDA, ABC granted RCS a license to use the Tutor Time brand on its centers. The license allowed RCS to sublicense use of the Tutor Time brand to an "affiliate." These terms were contained in a Trademark, Service Mark and System Sublicense Agreement (the "Sublicense"). The Sodjas operate another company, PDG America, which owns and develops shopping centers. PDG America's site plans and some marketing materials included the Tutor Time logo to indicate the location of Tutor Time centers in PDG America shopping centers. ABC claimed this violated the sublicense terms because PDG America is not an "affiliate" as defined in the EDA. ABC notified RCS of this alleged violation in March 2009, and RCS immediately removed all Tutor Time logos from PDG America materials.
¶7 Pursuant to the EDA, if a party was provided written notice of a default in their contractual obligations, and then failed to cure the default within a prescribed period of time after delivery of the written notice, the non-defaulting party could terminate the contract and sue for breach. On October 1, 2008, RCS sent ABC formal notice of default for failure to pay the $7 million earnest money deposit. RCS sent a second notice of default on October 10, 2008 for ABC's failure to accept site review books and to hold site review meetings to approve non-Pipeline Sites. After the time to cure the earnest money default passed without payment from ABC, RCS filed this action.
¶8 At trial, RCS claimed lost profits of approximately $82 million for 25 Pipeline Sites. RCS was operating six Pipeline Sites under its new brand, Children's Learning Adventure, and so did not include these sites in their claim for lost profits.
¶9 The jury returned a verdict for $47,031,574. The judge denied RCS' request for prejudgment interest, finding the verdict was not liquidated. The court awarded RCS $2,126,786.29 in attorneys' fees and $7,270.17 in costs. The attorneys' fee award included a $1,640,000 "enhancement fee" in addition to the hourly fees. The court rejected ABC's objections to the fees and costs and later denied ABC's motion for new trial. ABC filed a timely notice of appeal from the verdict and denial of its motion for new trial. RCS cross-appealed from the denial of prejudgment interest. This court has jurisdiction under Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1), (5)(a) (Supp. 2011).
DISCUSSION
I. Breach of Contract
¶10 ABC challenges the jury's implicit conclusion that RCS did not breach the EDA. The jury was instructed that it could not award damages to RCS if it found that RCS did not perform its obligations under the EDA. The question of whether a contract has been breached is ordinarily a question for the jury. Matson v. Bradbury, 40 Ariz. 140, 144, 10 P.2d 376, 378 (1932). In determining whether there is sufficient evidence to support the jury's verdict, the appellate court resolves every conflict in the evidence and draws every reasonable inference in favor of the prevailing party. St. Joseph's Hosp. & Med. Ctr. v. Reserve Life Ins. Co., 154 Ariz. 307, 312, 742 P.2d 808, 813 (1987). "[I]f there is any substantial evidence from which reasonable men could have found ultimate facts to be such as will sustain the verdict, the judgment will be affirmed." Id.
A. Personal Guaranty From Sodja
¶11 ABC argued that RCS breached the EDA in three respects. First, ABC argues that the jury ignored RCS' failure to provide a separate personal written guaranty from Rick Sodja. ABC relies on the following provision in section 9.4 of the EDA: "Concurrently with the execution of this Agreement, Rick Sodja agrees to guarantee Developer's performance of its obligations under this Section 9.4, on terms acceptable to ABC, acting reasonably." No separate guaranty form relating to this provision is attached to the EDA.
¶12 "When interpreting a contract, . . . it is fundamental that a court attempt to 'ascertain and give effect to the intention of the parties at the time the contract was made if at all possible.'" Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 153, 854 P.2d 1134, 1139 (1993) (quoting Polk v. Koerner, 111 Ariz. 493, 495, 533 P.2d 660, 662 (1975)). The EDA does not clearly state when or how Sodja was supposed to provide a personal guaranty "on terms acceptable to ABC." The meaning of this provision is further confused by the fact the EDA did not include a separate guaranty form for this provision, whereas two other provisions of the EDA requiring personal guarantees did include separate forms appended to the EDA. See EDA § 3.4/Exhibit G & § 3.5/Exhibit K.
¶13 However, even if the EDA required Sodja to execute a separate written guaranty, the evidence supports the jury's implicit conclusion that either: (1) Sodja/RCS did not breach the EDA by failing to sign a separate guaranty form, or (2) the failure to provide such a guaranty was not a material breach. ABC's conduct certainly suggests that it did not believe that Sodja's failure to provide the guaranty was a material breach. See Dev. Found. Corp. v. Loehmann's, Inc., 163 Ariz. 438, 446-47, 788 P.2d 1189, 1197-98 (1990)(whether a breach is material is a question for a jury). ABC never asked Sodja to provide a guaranty at the time the parties executed the EDA on June 26, 2008, nor did ABC mention the guaranty when it submitted its $2 million earnest money payment on September 11, 2008. In fact, ABC never sent any written notice of default concerning the guaranty to RCS until June 24, 2009 - a year after the contract was executed, and eight months after RCS filed its complaint. See EDA, § 12.1(c)(providing that for purposes of the EDA, a party "shall be deemed to be in default" if the party breaches a material provision of the agreement "and fails to rectify the breach within thirty (30) days after delivery of written notice thereof, or such longer period of time as is agreed between the parties.").
B. Sublicense Agreement
¶14 ABC also contends that RCS breached the Sublicense Agreement prior to any alleged breach by ABC. ABC argues that RCS violated the Sublicense when PDG America placed the Tutor Time logo on site plans and marketing materials for shopping centers in which Tutor Time centers were located. ABC also argues that RCS used the Tutor Time logo on signs that directed calls to the Sodjas' competing business, Children's Learning Adventure.
¶15 RCS contends the logos were on PDG America materials prior to the EDA being signed, and that ABC was aware of this when it was negotiating the EDA. Despite this knowledge, ABC executed the EDA and did not object until several months after RCS had filed suit. Once ABC notified RCS about its objection, RCS asserts that it cured the default by immediately removing the Tutor Time logo from PDG America's materials.
¶16 Based on all the evidence, the jury could have reasonably viewed RCS' removal of the logo as having cured any alleged violation of the EDA. The Sublicense Agreement provides that only uncured defaults constitute a breach of the EDA. In addition, the jury could have reasonably concluded that given ABC's apparent lack of concern over RCS' use of the logo both prior to and after the EDA was executed, RCS' use of the logo was not a material breach.
C. Earnest Money Deposit
¶17 ABC contends RCS breached the EDA when it failed to retain the $2 million earnest money deposit pursuant to section 9.4 of the EDA. Section 9.4 provides, in relevant part:
a) On or before September 3, 2008, ABC shall pay to [RCS] the sum of Seven Million Dollars ($7,000,000.00) as an earnest money deposit ("the Earnest Money Deposit"). The Earnest Money Deposit shall be retained by [RCS] subject to the terms of this Agreement.
b) [RCS] shall apply the Earnest Money Deposit towards the Purchase Price of the last five (5) Pipeline Site businesses that ABC is obligated to purchase . . . . If [RCS] fails to comply with this Subsection (b), ABC may set-off the Earnest Money Deposit (or part thereof) against the Purchase Price for the relevant business.
¶18 The parties' intent regarding this provision was hotly contested at trial. ABC argued that the language quoted above was not ambiguous, so the court should not allow testimony regarding the parties' understanding of the language. ABC argued that Groves' testimony regarding the meaning of this language violated the trial court's in limine order. Prior to trial, the court granted ABC's motion in limine to preclude testimony "regarding alleged oral conversations, understandings or unwritten, unsigned side agreements to the EDA[.]"
¶19 ABC contends the court violated its own order and the parole evidence rule when it (1) allowed Groves to testify that he understood that Sodja could use the earnest money deposit however he wanted and (2) allowed Sodja to testify that ABC was aware that Sodja was going to spend the earnest money.
¶20 Prior to this testimony coming in, RCS argued that it should be admitted because it was directly contrary to ABC's trial position that RCS was precluded from using the earnest money at all. The trial court agreed, and amended its ruling on the motion in limine, stating that ABC had opened the door to the question of whether or not the earnest money could be used for any purpose. The court ruled that RCS could offer that testimony "for impeachment purposes only."
¶21 The testimony at issue does not constitute inadmissible parol evidence. Prior understandings and negotiations may be admissible to interpret a contract provision. Taylor, 175 Ariz. at 152, 854 P.2d at 1138. If a judge finds, after considering the proffered testimony, "that the contract language is 'reasonably susceptible' to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties." Id. at 154, 854 P.2d at 1140. The evidence here is being used to explain the parties' intent, which is the goal of contract interpretation. Id.
¶22 Additionally, the evidence did not contradict the contract language. ABC reads section 9.4(a) in isolation. Section 9.4(a) must be read in conjunction with 9.4(b), which anticipated that RCS may not retain the earnest money and provided an alternative set-off provision for such a scenario. Thus, the evidence was consistent with the contract language as a whole and was admissible.
¶23 Because the jury could find that the EDA did not prohibit RCS from spending the earnest money, it could also find that RCS did not breach the contract by spending the earnest money. Based on the lack of any breach by RCS, the jury's verdict in favor of RCS was supported by the evidence.
II. Judgment Amount
¶24 The jury found that RCS' damages were $47,031,574. ABC argues there was no basis in the evidence for this amount, and the verdict is an impermissible compromise verdict. ABC appeals from the denial of its motion for new trial on this basis. On appeal, we resolve every conflict in the evidence and every reasonable inference in favor of sustaining the verdict and will affirm if there is substantial evidence to support the judgment. See St. Joseph's Hosp. & Med. Ctr., 154 Ariz. at 312, 742 P.2d at 813. The amount of the verdict is for the jury to decide, and if "the verdict is within the range of credible evidence, the verdict will not be deemed to be the result of passion and prejudice." Creamer v. Troiano, 108 Ariz. 573, 576, 503 P.2d 794, 797 (1972) (citing Hardy v. S. Pac. Employees Ass'n, 10 Ariz. App. 464, 469, 459 P.2d 743, 748 (1969)); see also Welch v. McClure, 123 Ariz. 161, 164, 598 P.2d 980, 983 (1979) (verdict will be upheld if it is within range which a jury could reasonably have found from the evidence presented).
¶25 RCS relied on the pro forma, Exhibit 30, in support of its claim for lost profits. ABC contends the jury could not rely on the pro forma in determining the Purchase Price because the pro forma provided only speculative evidence of estimated profits.
¶26 "[C]onjecture or speculation cannot provide the basis for an award of damages." Rancho Pescado, Inc. v. Nw. Mut. Life Ins. Co., 140 Ariz. 174, 186, 680 P.2d 1235, 1247 (App. 1984). "While absolute certainty is not required, the court or jury must be guided by some rational standard in making an award." Id. at 184, 680 P.2d at 1245.
¶27 The pro forma provided a reasonable basis for the jury to determine lost profits for the Pipeline Sites. Sodja testified that during their negotiations the parties agreed that the Pipeline Sites would be pre-approved. He also testified that the pro forma was created by ABC's own accountants as a model for the projected financial performance of the Pipeline Sites. Because the Pipeline Sites were pre-approved and not subject to the site review process, no Final Three-Year Plan would be generated for the Pipeline Sites.
¶28 Based on the parties' negotiations, Sodja testified that the pro forma served as the Final Three Year Plan EBITDAfor the Pipeline Sites. In other words, the parties agreed that the operating profits in the pro forma projected the EBITDA for the Pipeline Sites. Sodja testified that although the pro forma was not attached as an exhibit to the EDA, it was specifically referenced in § 9.3 of the EDA. See EDA, § 9.3 ("[N]otwithstanding the foregoing, for all Centers located in the state of Arizona, the purchase price shall be the product of . . . the amount equal to the third year pro forma projected EBITDA of the center as previously agreed to by the parties . . . ."); EDA, Exhibit "E" (listing 31 "Pipeline Sites Submitted and Approved" by the parties).
"EBITDA" denotes earnings before interest, taxes, depreciation, and amortization - i.e., operating profits.
¶29 The pro forma projected that the 31 Pipeline Sites would generate $22,800,354 in earnings. Sodja testified that these projections were reliable evidence of lost future profits because: (1) they were based on RCS' history of operating several other centers, and (2) the Pipeline Sites were far enough along in development that RCS knew the licensing capacity for each. See Rancho Pescado, 140 Ariz. at 184, 680 P.2d at 1245 (holding courts may consider "profit history from a similar business operated by the plaintiff at a different location" as reasonably certain evidence of lost profits).
¶30 ABC asserts that the pro forma was not reliable evidence of lost profits and, therefore, was not admissible. ABC's claim lacks merit. The testimony of Sodja, as well as the terms of the EDA, establish that the pro forma demonstrated lost profits with sufficient certainty to be admissible. ABC's objections go to the weight of this evidence, not its admissbility.
¶31 ABC argues that there was no basis upon which the jury could calculate lost profits because to determine the Arizona Adjusted Purchase Price, the EDA required an "actual" EBITDA and Final Three Year Plan. ABC relies on section 4.3 of the EDA which provides that thirty days after receiving a certificate of occupancy for a center, RCS was to submit a revised pro forma to reflect the actual licensed capacity, final tuition rates, and final rent. This revised pro forma was to constitute the Final Three Year Plan and "shall be the basis of the Agreed Purchase Price (as defined in Section 9 below)." See EDA § 4.3. ABC's position ignores the fact that its breach made it impossible to revise the pro forma to reflect any actual figures because none of the Pipeline Sites ever began operating. ABC's breach excused further performance by RCS. See Allen v. Martin, 117 Ariz. 591, 593, 574 P.2d 457, 459 (1978); Zancanaro v. Cross, 85 Ariz. 394, 400, 339 P.2d 746, 750 (1959). Therefore, it was not error to rely on the pro forma as the Final Three year Plan due to the timing of ABC's breach.
¶32 ABC next argues that if the jury found ABC breached the EDA, it was required to award the full amount of damages RCS asked for, and its failure to award that specific amount establishes that the verdict was an improper compromise or quotient verdict. A compromise verdict is one in which "'some of the jurors have conceded liability against their judgment, and some have reduced their estimate of the damages in order to secure an agreement of liability with their fellow jurors[.]'" State v. Watson, 7 Ariz. App. 81, 88, 436 P.2d 175, 182 (1967) (citation omitted). A quotient verdict is a verdict that is the result of adding the amount each juror would award and dividing that sum by the number of jurors. See Hull v. Larson, 14 Ariz. 492, 497, 131 P. 668, 669-70 (1913) . ABC contends the verdict was impermissible because the verdict was not unanimous, was entered on a Friday afternoon, incalculable, and reached hours after receiving an answer to a jury question. ABC also argues the lost profits were speculative because RCS would not have been able to develop the Pipeline Sites at the time it filed suit.
Although the trial judge characterized the damage award as a compromise verdict, he made this comment prior to the motion for new trial pleadings in which RCS provided the same explanation for the amount of damages as it does on appeal.
To the contrary, Sodja testified RCS was in compliance with the EDA's development schedule at the time of ABC's breach.
¶33 RCS argues that although it asked the jury for $82 million dollars in damages, the amount awarded, $47,031,574, is within the range the jury reasonably could have found based on the evidence presented. At trial, RCS argued that the jury should base its decision on the operating profits shown in the pro forma. RCS asked the jury to take those operating profits of $18,174,000, multiply it by 4.5, and award RCS that amount, $81,786,000, as the Agreed Arizona Purchase Price pursuant to section 9.3 of the EDA.
The EDA section 9.3 provides as follows:
For each Center, the Agreed Purchase Price (herein so-called) shall be the product of (i) the amount equal to the third year pro-form projected EBITDA of the Center as previously agreed to by the parties under the Final Three Year Plan for that Center, and (ii) four (4). Notwithstanding the foregoing, for all Centers located in the State of Arizona, the purchase price shall be the product of (i) the amount equal to the third year pro-forma projected EBITDA of the Center as previously agreed to by the parties under the Final Three Year Plan for that Center, and (ii) four and one half (4 ½)(the " Arizona Agreed Purchase Price "). Provided that, in the event that a Center does not achieve Target Utilization by the end of the third (3rd) anniversary after its commencement of operations, then the actual purchase price for the Business of the Center shall be: if the Center has achieved utilization between seventy percent (70%) and seventy four percent (74%), then the purchase price shall be the product of the actual EBITDA and four (4) for all Centers in states other than Arizona (the " Adjusted Purchase Price "). For Centers in the State of Arizona, the purchase price shall be the product of the actual EBITDA and four and one half (4½) (the " Arizona Adjusted Purchase Price "). In the event the Center has achieved utilization less than seventy-percent (70%), then the purchase price shall be sixty percent (60%) of the Agreed Purchase Price or Arizona Agreed Purchase Price as may be applicable.
¶34 In response to the motion for new trial and on appeal, RCS contends the verdict can be explained as the minimum purchase price in the EDA section 9.3, less the $2 million Earnest Money Deposit credit to which ABC was entitled under section 9.4(b). The EDA provides that if the centers are not operating at target utilization, then the minimum purchase price is sixty percent of the Agreed Arizona Purchase Price. See EDA § 9.3. RCS argues that sixty percent of the Agreed Arizona Purchase Price is $49,071,414. RCS contends that this amount was further reduced by $2 million to credit ABC for the Earnest Money Deposit it paid to RCS. The jury award was $39,840.60 less than this amount. RCS argues this difference is a minor deviation and not significant enough to warrant reversal.
In making this argument, RCS fails to consider EDA section 9.4(c), which states that if ABC fails to purchase the Pipeline Sites for any reason other than a breach by RCS, RCS is entitled to keep the Earnest Money Deposit. RCS' explanation for the verdict is inconsistent with section 9.4(c). ABC would not be entitled to a credit for the $2 million because it breached the EDA. RCS would get to keep that $2 million.
ABC contends that this explanation of the verdict still does not account for the remaining $5 million Earnest Money Deposit RCS claimed it was owed. EDA section 9.4(b) provided that ABC would be entitled to a credit against the purchase price for the Earnest Money Deposit it paid. Therefore, the $5 million would have not changed the amount of the verdict.
¶35 Like future lost wages in a tort case, adequate compensation for lost profits "may require trusting the jury to fairly evaluate evidence that is inherently uncertain but is the best evidence available." Felder v. Physiotheraphy Assoc., 215 Ariz. 154, 162, ¶ 39, 158 P.3d 877, 885 (App. 2007). "Reasonable certainty as to the amount of lost profits can be shown by books of account, record of previous transactions or tax returns, . . . or the 'profit history from a similar business operated by the plaintiff at a different location.'" Id. at 164, ¶ 47, 158 P.3d at 887 (quoting Rancho Pescado, 140 Ariz. at 184, 680 P.2d at 1245)). It is the jury's function to weigh this evidence. Id.; see also Short v. Riley, 150 Ariz. 583, 586, 724 P.2d 1252, 1255 (1986) (holding accuracy of profit history from similar business operated by plaintiff went to weight of evidence which was for jury to decide); Creamer, 108 Ariz. at 576, 503 P.2d at 797 (holding that amount of verdict is to be determined by the jury, not trial or appellate judges and if the "verdict is within the range of credible evidence, [it] will not be deemed to be the result of passion or prejudice."). "[T]he amount of damages may be established with proof of a lesser degree of certainty then required to establish the fact of damages." Rancho Pescado, 140 Ariz. at 184, 680 P.2d at 1245.
¶36 The jury had evidence that lost profits could range from the minimum purchase price of $49,071,414 to as much as $81,786,000. Although future earnings are speculative by nature, see Felder, 215 Ariz. at 162, ¶ 39, 158 P.3d at 885, RCS adequately established a history of successfully developing and operating child care centers in Arizona. As noted above, the pro forma provided reasonably certain evidence of the projected profits within this range. The fact that the jury may have discounted the projected profits for any number of reasons, including that the evidence was based on estimates, does not render the verdict erroneous. It was specifically within the jury's province to determine the appropriate amount of lost profits RCS established.
¶37 Additionally, ABC did not request a special verdict or interrogatories which may have provided more detail regarding the amount of the verdict. See Ariz. R. Civ. P. 49(g), (h). The jury was only given a general verdict. We find no error.
¶38 Furthermore, the trial court heard the same evidence as the jury, and ABC made the same arguments in its motion for new trial. Unlike the appellate court, the trial judge "has a special perspective of the relationship between the evidence and the verdict." Hutcherson, 192 Ariz. at 53, 961 P.2d at 451. We review the denial of a motion for new trial for an abuse of discretion. Id. The court concluded the verdict was not contrary to the evidence, nor in violation of the instructions. We find no abuse of discretion in denying ABC's motion for new trial based on the amount of the verdict.
¶39 Finally, ABC argues that RCS cannot recover lost profits because it did not seek specific performance of the contract. ABC does not cite any authority supporting its position that RCS had to seek specific performance to recover lost profits. As noted above, the pro forma provided the jury with evidence of a range of lost profits that could be determined with reasonable certainty. The amount of the verdict was reasonably supported by the evidence.
The complaint asked for specific performance. RCS dropped this claim when ABC when into receivership and it was clear that ABC could not follow through with its obligation to purchase Pipeline Sites.
IV. ANSWER TO JURY QUESTION DID NOT PROVIDE NEW EVIDENCE
¶40 ABC argues that the trial court's answers to a series of jury questions added new evidence not presented at the trial resulting in the incalculable verdict. The court answered "yes" to the following jury questions: whether there was a signed copy of Exhibit K to the EDA; if the jury was to take this "unsigned exhibit at face value[;]" and if all the exhibits were attached to the EDA at the time the parties signed the EDA. The court answered no when asked if this exhibit had to be signed by both parties in order to be valid. The court also instructed the jury that its decision "must be based upon the evidence presented."
¶41 When the parties discussed these questions with the trial judge, ABC objected that the jury may confuse Exhibit K to the EDA with a personal guaranty from Sodja which ABC claimed was never provided and constituted a breach by RCS. See supra ¶¶ 11-13. ABC also argued that the answers provided evidence that was not provided during the trial.
The jury question specifically referred to the exhibit beginning on page CL00059 entitled "Guaranty of Sublease."
¶42 On appeal, ABC argues only that the answers provided additional evidence. Even if the court's answers provided evidence not submitted at trial, ABC failed to show how this was prejudicial. See Kirby v. Rosell, 133 Ariz. 42, 45, 648 P.2d 1048, 1051 (App. 1982) (holding "only prejudicial extraneous matter will suffice to impeach a verdict and that proof of actual prejudice is not required." (emphasis added)). Extraneous material "may be deemed prejudicial without proof of actual prejudice if it relates to the issues of the case and there is a reasonable possibility of prejudice." Id.; see also Dunn v. Maras, 182 Ariz. 412, 421, 897 P.2d 714, 723 (App. 1995). Whether the Guaranty of Sublease was signed was never an issue at trial. ABC only argued that Sodja's failure to sign a separate personal guaranty constituted a breach. There was no suggestion that a separate personal guaranty form was ever provided. Furthermore, it was not disputed the Sodja failed to sign a personal guaranty. Sodja admitted he did not sign a separate personal guaranty because he believed signing the EDA itself constituted his personal guaranty. Thus, the answers provided to the jury did not relate to the issues of the case, and ABC was not prejudiced.
On appeal, ABC did not raise jury confusion until the reply brief. We decline to consider arguments raised for the first time in a reply brief. See Phelps, 210 Ariz. at 404 n.1, 111 P.3d at 1004 n.1.
V. AWARD OF ATTORNEYS' FEES AND COSTS TO RCS
¶43 As the prevailing party at trial, RCS was entitled to recover its costs and reasonable attorneys' fees from ABC pursuant to EDA § 20. We review the award of attorneys' fees for an abuse of discretion and will affirm the award if it is supported by reasonable evidence. See Fulton Homes Corp. v. BBP Concrete, 214 Ariz. 566, 569, ¶ 9, 155 P.3d 1090, 1093 (App. 2007). RCS' attorneys' requested $2,126,786.89 in attorneys' fees, consisting of $486,786.89 in hourly charges and an enhancement fee of three percent of the judgment, or $1,640,000, as agreed to by RCS.
¶44 RCS' fee affidavit breaks down the charges by date, attorney initials, task performed, hours, and charge per task. ABC argues the affidavit does not satisfy the requirements set forth in Schweiger v. China Doll Rest., Inc., 138 Ariz. 183, 188, 673 P.2d 927, 932 (1983). China Doll requires that the fee affidavit "must indicate the agreed upon hourly billing rate between the lawyer and the client[,]" and "should indicate the type of legal services provided, the date the service was provided, the attorney providing the service (if more than one attorney was involved in the [matter]), and the time spent in providing the service." Id. "[T]he fee application must be in sufficient detail to enable the court to assess the reasonableness of the time incurred." Id. RCS' fee affidavit and application adequately set forth these facts. In response to ABC's objections below, RCS fully identified the attorneys' initials given in the original fee application and the hourly rate for each attorney. Thus, the trial court had sufficient information from which "to assess the reasonableness of the time incurred." Id.
¶45 ABC argues RCS was not entitled to recover fees associated with a failed motion for summary judgment. Although "time spent on unsuccessful issues or claims may not be compensable[,]" a single action may involve related legal theories, some successful and some not. Id. at 188-89, 673 P.2d at 932-33. "[W]here a party has accomplished the result sought in the litigation, fees should be awarded for time spent even on unsuccessful legal theories." Id. at 189, 673 P.2d at 933. We find no abuse of discretion in including these fees.
¶46 ABC challenges the inclusion of fees incurred for a mock jury and fees incurred in a Nevada lawsuit. ABC had the burden of proving these fees were clearly excessive. See McDowell Mountain Ranch Comty. Ass'n v. Simmons, 216 Ariz. 266, 271, ¶ 20, 165 P.3d 667, 672 (App. 2007). ABC alleged the Nevada lawsuit had nothing to do with this case and that the mock jury was not necessary. RCS avowed that the fees incurred for these two items were reasonable. Given ABC's burden of proof on this issue, we find no abuse of discretion in allowing these fees. Id. at ¶ 21 (holding trial court has broad discretion in determining reasonable amount of attorneys' fees).
¶47 ABC challenges the travel costs for RCS' attorney to depose Groves in Australia. The cost of depositions is a recoverable cost under A.R.S. section 12-332(A) (2003). "The cost of depositions may include the travel expenses of an attorney to attend the other party's deposition outside of Arizona." Ponderosa Plaza v. Siplast, 181 Ariz. 128, 134, 888 P.2d 1315, 1321 (App. 1993) (citing Young's Market Co. v. Laue, 60 Ariz. 512, 141 P.2d 522 (1943)). "Whether such expenses are reasonable and necessary is to be determined by the trial court in its discretion." Fowler v. Great Am. Ins. Co., 124 Ariz. 111, 114, 602 P.2d 492, 495 (App. 1979). ABC argues these costs were not recoverable because Groves was a witness for RCS. Although RCS introduced portions of Groves' deposition testimony in its case in chief, Groves was not a voluntary witness for RCS. RCS had to obtain a court order to depose Groves because Groves refused to be deposed voluntarily. On the record before us, we cannot say the trial court abused its discretion by allowing travel expenses for Groves' deposition.
The holding in Young's Market did not limit travel costs to depositions of the opposing party. See 60 Ariz. at 517, 141 P.2d at 524.
¶48 ABC also argues that the three percent "enhancement fee" is not recoverable because it results in a double recovery for RCS' attorneys. ABC asserts that the enhancement fee is a bonus, or "success fee," and therefore is not recoverable as "reasonable" attorney's fee under the EDA.
¶49 An award of attorney's fees is mandatory under the EDA. See, EDA, § 20 (stating that the "prevailing [p]arty, as determined by the court, shall be entitled to receive its costs and reasonable attorneys' fees"); McDowell Mountain Ranch Community Ass'n Inc. v. Simons, 216 Ariz. 266, 165 P.3d 667 (App. 2007). However, under the terms of the EDA and pursuant to Arizona law, any such award must be reasonable. McDowell, 216 Ariz. at 270, ¶ 16, 165 P.3d at 671 (holding that a contract awarding unreasonable fees will not be enforced, even when the contract provides for an award of "all attorney fees and costs incurred.").
¶50 The trial court had broad discretion in determining the amount of fees to award RCS, and it was not bound by the terms of the fee agreement. Schweiger, 138 Ariz. at 188, 673 P.2d at 932; see also Fulton Homes, 214 Ariz. at 569, ¶ 9, 155 P.3d at 1093 (trial court has broad discretion deciding amount of attorney's fees). In determining the reasonableness of fees, courts consider several factors, including time and labor required, complexity of the issues, skill required, likelihood that acceptance of the case will preclude other employment by the lawyer, and the amount involved and results obtained. See Ariz. R. Sup. Ct. 42, ER 1.5(a).
¶51 The record does not support the trial court's finding that the enhancement fee was reasonable. The trial court did not state any reason for awarding the enhancement fee other than the fact RCS agreed to pay for it. RCS failed to offer any evidence that the hourly rate did not adequately compensate its attorneys given the complex nature of the litigation, the amount of time and effort involved, the amount of damages sought, and the amount of the judgment. Additionally, there was no evidence that representation of RCS caused its counsel to forego other employment.
¶52 RCS' enhancement fee is best characterized as a bonus. RCS entered into an hourly fee agreement with its counsel. At oral argument, counsel for RCS confirmed that its hourly rate had not been reduced in exchange for the enhancement fee. Therefore, the enhancement fee was more than simple compensation for services rendered.
¶53 The purpose for awarding reasonable fees is to defray the costs of the litigation incurred by a prevailing party. See In re Struthers, 179 Ariz. 216, 222, 877 P.2d 789, 795 (1994) (holding that the "purpose in awarding fees to a successful litigant is not to provide the lawyer with a double payment bonus, but to defray the client's litigation expenses"). Imposing liability on ABC for a bonus such as the enhancement fee does not serve this purpose. RCS' litigation costs were properly defrayed when the court ordered ABC to pay their counsel's hourly fees.
¶54 RCS' reliance on cases involving "hybrid," or blended fee agreements is misplaced. For example, in Arnal v. Travelers Prop. Cas. Ins. Co., Nos. 2:04-cv 1563-PHX-JWS, 2:04-cv-539-TUC- JWS, 2007 WL 1412492 (D. Ariz. May 4, 2007), the court awarded fees based on an agreement where counsel agreed to reduce their normal hourly rate of $280/hour to $100/hour in exchange for a 20% contingency fee. Id. at *2, *5. The court concluded that given the number of hours counsel worked on the case, the hourly fees in combination with the contingency fee approximated counsel's normal hourly rate of $280/hour. Id. at *5. See also Gametech Int'l, Inc. v. Trend Gaming Sys., L.L.C., 380 F. Supp. 2d 1084, 1095-96 (D. Ariz. 2005) (awarding fees for a blended fee agreement where counsel agreed to reduce his normal hourly rate of $200/hour to $165/hour in exchange for an 8% contingency fee).
¶55 Likewise, RCS' citation to cases involving contingency fee awards and lodestar "upward adjustments" lacks merit. See Lange v. Penn Mut. Life Ins. Co., 843 F.2d 1175, 1183, 1185-86 (9th Cir. 1988)(court discussed lodestar analysis with respect to plaintiff's contingency fee agreement); Beaty v. BEG Holdings, Inc., 222 F.3d 607, 609, 612 (9th Cir. 2000)(same). This case involves an hourly fee agreement, not a contingency fee. Jerman v. O'Leary, 145 Ariz. 397, 403, 701 P.2d 1205, 1211 (App. 1985).
The lodestar method of calculating attorneys' fees is "used when fees are not paid on an hourly basis and it becomes incumbent upon the court to establish a formula to construct a reasonable fee under the circumstances." Jerman, 145 Ariz. at 403, 701 P.2d at 1211; see also Schweiger, 138 Ariz. at 186 n.5, 673 P.2d at 930 n.5.
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¶56 We emphasize that hybrid fee arrangements are permissible in Arizona. See Arizona Ethics Opinion 03-06 ("Hybrid fee arrangements that combine aspects of contingent and hourly fee arrangements are permissible if the resulting fee is reasonable and all requirements of [Arizona Rules of Supreme Court ("Ariz. R. Sup. Ct.") 42,] ER 1.5 are met."). However, the issue is not whether it was proper for RCS to pay a bonus/ enhancement fee to its counsel, but whether ABC is required to reimburse RCS for the bonus/enhancement fee.
¶57 In summary, the enhancement fee is more in the nature of a bonus as opposed to simple compensation for services rendered, and the trial court made no findings showing that the enhancement fee/bonus was reasonable or justified in this case. We therefore vacate the portion of the attorneys' fees award representing the three percent enhancement fee, but affirm the remaining award of attorneys' fees and costs.
CROSS-APPEAL
DENIAL OF PREJUDGMENT INTEREST
¶58 RCS cross-appeals the denial of prejudgment interest. Whether a party is entitled to prejudgment interest is a question of law that we review de novo. In re U.S. Currency in the Amount of $26,980, 199 Ariz. 291, 298, ¶ 24, 18 P.3d 85, 92 (App. 2000). RCS argues that its claim for damages could be computed with exactness, albeit within a range. The trial court denied prejudgment interest, concluding there was no way to determine how the jury came to decide the amount of the verdict. In other words, the trial court found that the damages were not liquidated.
¶59 "A claim is 'liquidated' when 'it is subject to mathematical computation without reliance on opinion or discretion.'" Paul A. Peterson Constr., Inc. v. Ariz. State Carpenter's Health & Welfare Trust Fund, 179 Ariz. 474, 484, 880 P.2d 694, 704 (App. 1994) (citation omitted). RCS contends its claim was liquidated because it provided a formula to determine lost profits. RCS also argues the fact that the amount the jury awarded was different from the amount sought does not preclude an award of prejudgment interest. Peterson, 179 Ariz. at 485, 880 P.2d at 705 (citing Suciu v. Amfac Distrib. Corp., 138 Ariz. 514, 521, 675 P.2d 1333, 1340 (App. 1983)).
¶60 RCS' claim for lost profits was not liquidated. Although RCS provided a formula based on the EDA, the figures used in that formula were admittedly estimates. The pro forma contained projected operating profits for the Pipeline Sites. "Such estimates will sustain an award for damages, but do not reach the level of exactitude required for an award of prejudgment interest." Custom Roofing Co., Inc. v. Alling, 146 Ariz. 388, 391, 706 P.2d 400, 403 (App. 1985). As discussed above, lost profits are inherently uncertain. See Felder, 215 Ariz. at 162, ¶ 39, 158 P.3d at 885. The pro forma included projections of expenses such as labor, which were a matter of opinion or discretion. Like the construction contract in Custom Roofing, the amount of lost profits was a decision left to the discretion of the jury and, therefore, not a liquidated sum. We affirm the denial of prejudgment interest.
ATTORNEYS' FEES AND COSTS ON APPEAL
¶61 Both parties request an award of reasonable attorneys' fees and costs on appeal. The EDA and A.R.S. section 12-341.01(A) (West 2012), authorize an award of fees and costs to the prevailing party. Although we affirmed the judgment in favor of RCS, we vacated a substantial portion of the attorneys' fee award and denied relief on RCS' cross-appeal. Therefore, neither party was entirely successful. We hold that neither party is entitled to an award of fees on appeal as the "prevailing party" under the EDA or section 12-341.01(A).
CONCLUSION
¶62 We affirm the judgment in favor of RCS. We vacate the award of the three percent enhancement fee, but otherwise affirm the award of attorneys' fees and costs to RCS. We affirm the denial of prejudgment interest and order that each party shall bear its own attorneys' fees and costs on appeal.
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ANDREW W. GOULD, Judge
CONCURRING:
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MAURICE PORTLEY, Presiding Judge
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ANN A. SCOTT TIMMER, Judge