Opinion
No. 1 CA-CV 16-0318
10-24-2017
RES-AZ HP160 LLC, Plaintiff/Appellant, v. GAMMAGE & BURNHAM PLC, et al., Defendants/Appellees.
COUNSEL Sherman & Howard, L.L.C., Phoenix By Bryan A. Albue, Thomas M. Quigley, Gabriel A. Peraza Co-Counsel for Plaintiff/Appellant Bonnett, Fairbourn, Friedman & Balint, P.C., Phoenix By William G. Fairbourn, William F. King Counsel for Defendants/Appellees
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE. Appeal from the Superior Court in Maricopa County
No. CV2014-052666
The Honorable Aimee L. Anderson, Judge
REVERSED AND REMANDED
COUNSEL Sherman & Howard, L.L.C., Phoenix
By Bryan A. Albue, Thomas M. Quigley, Gabriel A. Peraza
Co-Counsel for Plaintiff/Appellant Bonnett, Fairbourn, Friedman & Balint, P.C., Phoenix
By William G. Fairbourn, William F. King
Counsel for Defendants/Appellees
MEMORANDUM DECISION
Presiding Judge James P. Beene delivered the decision of the Court, in which Judge Randall M. Howe and Judge Kent E. Cattani joined. BEENE, Judge:
¶1 Plaintiff RES-AZ HP160, LLC ("HP160") appeals the superior court's judgment in favor of Defendants Gammage & Burnham, P.L.C. and James and Jane Doe Polese (collectively "Gammage"). Because the court erred in granting summary judgment, we reverse and remand for further proceedings.
FACTS AND PROCEDURAL HISTORY
¶2 This appeal arises from HP160's claims against Gammage through Gammage's legal representation of Stephen and Patricia Kohner (collectively the "Kohners"). At all relevant times, Gammage represented the Kohners in their transactions with HP160.
¶3 In 2011, HP160 sued the Kohners to recover on a real estate loan made to one of the Kohners' business entities that they personally guaranteed. The parties entered into a settlement agreement, in which HP160 obtained a judgment against the Kohners for $20,819,862.59 and could seek enforcement after a specified forbearance period.
¶4 In an effort to enforce the judgment, in February 2013, HP160, along with two other creditors, filed an involuntary bankruptcy petition, placing the Kohners into Chapter 7 bankruptcy proceedings ("Kohners' BK Case"). That same day, the Chapter 7 bankruptcy trustee ("Trustee") filed an adversary action in the bankruptcy court against the Kohners, the Kohners' many legal entities and trusts, and Gammage ("BK Adversary Action"). As pertinent here, the Trustee sought to avoid, under both the bankruptcy code and Arizona state law, a series of allegedly fraudulent transfers the Kohners made to one of their trusts ("Treese Trust") pursuant to an agreement between other entities they controlled ("2013 RLK Settlement Agreement"). The Trustee also argued that Gammage conspired to commit fraudulent transfer in its legal representation of the Kohners in making those transfers.
The Kohners' administrative bankruptcy proceedings remain pending in the United States Bankruptcy Court for the District of Arizona, case number 2:13-bk-002159-DPC (consolidated).
The Chapter 7 Trustee's BK Adversary Action remains pending in the United States Bankruptcy Court for the District of Arizona, case number 2:13-ap-00199-DPC.
¶5 In March 2014, HP160 filed the instant action in Arizona state court ("State Action"). HP160 argued Gammage committed (1) fraud, (2) negligent misrepresentation, and (3) aiding and abetting fraud. HP160's claims stemmed from Gammage's preparation and transmission of the Kohners' financial information from 2011 through 2013 during settlement negotiations and HP160's subsequent effort to collect on the judgment ("Financial Representations"). Gammage removed the State Action to the Kohners' BK Case, claiming it was an "otherwise related" case under the bankruptcy code.
¶6 In the BK Adversary Action, Gammage moved to dismiss the Trustee's conspiracy to commit fraudulent transfer claim. In September 2014, the bankruptcy court dismissed the conspiracy claim finding that (1) the complaint did not plead facts sufficient to establish the elements of the claim, dismissing it without prejudice and with leave to amend, and (2) the Trustee did not have standing to pursue a claim for conspiracy to commit fraudulent transfer against Gammage on behalf of a hypothetical lien creditor under the bankruptcy code, dismissing the claim with prejudice. Upon HP160's subsequent motion, the bankruptcy court remanded the State Action because Gammage's notice of removal was procedurally defective. The bankruptcy court also found that equitable considerations weighed in favor of remand; namely that because the bankruptcy court dismissed the only count in the Trustee's complaint naming Gammage, the State Action was remote from the BK Adversary Action, despite the two actions sharing many common facts. In November 2014, the Trustee amended its complaint in the BK Adversary Action a second time to add a count of legal malpractice against Gammage.
¶7 In May 2015, HP160 amended its complaint in the State Action to add a count of conspiracy to commit fraudulent transfer. In November 2015, Gammage moved for summary judgment, arguing that HP160 lacked standing to pursue its claims because the Trustee in the BK Adversary Action was seeking to avoid the same allegedly fraudulent transfers at issue in the State Action. Gammage claimed that HP160, as an individual creditor, was barred from bringing any claim based on the "same transaction" or with a similar "object and purpose," regardless of whether those claims were technically part of Kohners' bankruptcy estate. The superior court agreed and granted summary judgment in favor of Gammage.
HP160's original complaint also named as defendants George Winney and his spouse. Winney was an attorney at Gammage and at various times provided legal counsel to the Kohners. On remand to state court from the bankruptcy court in September 2014, the parties stipulated to exclude the Winneys as defendants going forward.
¶8 HP160 unsuccessfully moved for reconsideration, to vacate and set aside the judgment, and for a new trial. Final judgment was entered and HP160 timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes section 12-2101(A).
DISCUSSION
¶9 Entry of summary judgment is proper "if the moving party shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(a). We determine de novo whether any genuine issue of material fact exists and whether the trial court erred in applying the law, and will uphold the court's ruling if correct for any reason. Logerquist v. Danforth, 188 Ariz. 16, 18 (App. 1996). We construe the evidence and reasonable inferences in the light most favorable to the non-moving party. Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Tr. Fund, 201 Ariz. 474, 482, ¶ 13 (2002).
¶10 HP160 argues the superior court erred in granting summary judgment by finding it lacked standing to pursue its State Action claims because they are based on the same transaction or with a similar object and purpose as the Trustee's claims in the BK Adversary Action. HP160 contends it alone may pursue its claims against Gammage because they are particularized to it as an individual creditor of the Kohners.
¶11 A bankruptcy trustee may bring claims based on the debtor's rights and on certain rights of the debtor's creditors. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1093 (2d Cir. 1995). "Whether the rights belong to the debtor or the individual creditors is a question of state law." Id. (citation omitted). Arizona recognizes a state law cause of action against a judgment debtor's attorney, here Gammage, who conspires to defraud the judgment creditor, here HP160. See McElhanon v. Hing, 151 Ariz. 386, 394 (App. 1985) (vacated on other grounds, 151 Ariz. 403, 408 (1986)).
¶12 To determine if a claim belongs to the debtor or the creditor, "the focus of the inquiry is on whether the Trustee is seeking to redress injuries to the debtor itself caused by the defendants' alleged conduct." Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th Cir. 2005). When a third party injures not the debtor itself, but a creditor, the bankruptcy trustee is precluded from bringing suit against the third party. Id. at 1002-03 (citing Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994)). In other words, when a creditor has an injury that is "particularized" to it, that personal claim is the creditor's "property" and may only be asserted by it, to the exclusion of the trustee. See Hirsch, 72 F.3d at 1093-94; see also In re Seven Seas Petroleum, Inc., 522 F.3d 575, 586 (5th Cir. 2008) (holding that creditor's claims alleged "a direct injury . . . that was independent of any injury to [the debtor]"); cf. In re Bernard L. Madoff Inv. Sec., LLC, 740 F.3d 81, 92-93 (2d Cir. 2014) (holding that creditor's claims were not particularized injury traced to third party's conduct in conspiracy with debtor for fraudulent transfers because claims did not allege that third party made any misrepresentations directly to creditor).
¶13 Here, HP160, a creditor, did not sue the Kohners, the debtors. It sued Gammage, a third party. And the basis for HP160's claims is Gammage's conduct that caused a direct injury to HP160, independent of any injury to the Kohners—that conduct being Gammage's preparation and transmission of the Kohners' Financial Representations to HP160 in 2011-2013 during settlement negotiations up to and including HP160's attempt to collect on the judgment.
¶14 HP160's amended complaint alleged several particularized claims that Gammage conspired with the Kohners to defraud HP160, and in furtherance of those efforts, made misrepresentations directly to HP160. HP160 argued Gammage
made numerous and material misrepresentations in litigation settlements and otherwise regarding the financial condition, assets and income of Kohners and Kohners' ownership of various entities . . . result[ing] in financial damage to HP160 by, among other things, preventing and interfering in HP160's efforts to collect on a judgment it holds against Kohners. In addition, [Gammage] ha[s] conspired with Kohners to commit fraudulent transfers, which have damaged HP160.HP160 further contended that Gammage "has a close personal and business relationship with Kohners and has provided legal representation to Kohners and Kohners' family members for over twenty years." Because of that relationship and Gammage's preparation, review, approval, and transmission of the Kohners' Financial Representations to HP160, Gammage "had independent personal knowledge of the contents . . . and of their truth and accuracy." HP160 further alleged that Gammage misrepresented the Kohners' financial condition through the Financial Representations, as well as through letters Gammage sent directly to HP160. HP160 claimed, among other things, that Gammage failed to identify the Kohners' (1) ownership in real property; (2) additional sources of income; (3) life insurance policies; and (4) involvement in and/or control of various trusts and legal entities, and the value of those entities.
¶15 Additionally, HP160 alleged that the Kohners and Gammage "were engaging in efforts to hide Kohners' assets . . . engaging in business transactions and activities . . . outside the context of an attorney-client relationship," and that certain transactions were an "attempt to hinder, delay and defraud [HP160]." In fact, HP160 alleged that Gammage was listed as either a statutory agent or was responsible for forming various legal entities the Kohners owned and controlled. Thus, Gammage knew or should have known about the Kohners' many business dealings, and knew or should have known that the information disclosed in the Financial Representations was "materially and intentionally deficient with respect to other legal entities owned, or controlled by Kohners." HP160 alleged that Gammage's intent and motivation was to hide the Kohners' assets and Gammage knew at the time it provided the Financial Representations to HP160 that they "were incomplete, and materially false and misleading." HP160 asserted that it had suffered damages of at least $1,759,000.00, the value of the assets the Kohners transferred to the Treese Trust pursuant to the 2013 RLK Settlement Agreement.
¶16 In granting summary judgment, the superior court found:
That the Trustee's claims share the same object and purpose and arise from the same transaction alleged in [HP160's] First Amended Complaint.
That while the present action has different bodies of law and different theories of liability from the pending bankruptcy matter, they are similar in object and purpose to the bankruptcy trustee's fraudulent transfer claims.
That [HP160] lacks standing to pursue any claims that are similar in object and purpose to the bankruptcy trustee's fraudulent transfer claims.
That both the pending lawsuit before this Court and the pending bankruptcy court proceeding challenge the same pre-petition "transfer" of cash and promissory notes to the same trust.
That both lawsuits arise from the same "transfer of property in question".
That both lawsuits concern the same underlying focus-specifically, a transfer by the debtor to a third party. As such, the Trustee's ongoing prosecution of its fraudulent
conveyance action in the bankruptcy court deprives [HP160] of standing to pursue its individual claims.
¶17 We disagree with the superior court. While HP160's claims refer to the same fraudulent transfers as in the BK Adversary Action, only HP160 can pursue its claims against Gammage for several reasons. First, the Trustee is attempting to avoid or challenge the Kohners' fraudulent transfers. HP160 is not. In its attempt to avoid those transfers, the Trustee brought claims against the recipient of those transfers, the Treese Trust. HP160 did not. HP160 sued Gammage for alleged misrepresentations Gammage made directly to HP160. Cf. In Nat'l Am. Ins. Co. v. Ruppert Landscaping Co., Inc., 187 F.3d 439, 441 (4th Cir. 1999) (creditor lacked standing to bring its claims because they shared the "same underlying focus" and were "so similar in object and purpose" as the bankruptcy trustee's fraudulent conveyance claims because both actions challenged the legality of the transactions between debtor and third party); N. Trust Bank, FSB v. Wells Fargo Bank, N.A., 464 B.R. 269, 270 (E.D. Va. 2012) (creditor lacked standing to pursue its claims because they were claims of the bankruptcy estate and based upon the same "underlying focus" and challenged fraudulent transfers that trustee was seeking to avoid); In re Tessmer, 329 B.R. 776, 780 (M.D. Ga. 2005) (heir of debtor's deceased husband precluded from bringing claim against recipient of fraudulent transfer because it was based on the "same transaction" trustee was seeking to avoid).
¶18 Second, the Trustee cannot bring HP160's claims against Gammage because Gammage's conduct did not injure the Kohners. It injured HP 160. See Smith, 421 F.3d at 1002-03 (when a third party injures not the debtor itself, but a creditor, the bankruptcy trustee is precluded from bringing suit against the third party); Steinberg, 40 F.3d at 893 (holding that trustee is confined to enforcing entitlements of debtor and has no right to enforce entitlements of creditors).
¶19 Third, the Kohners, as debtors, could not bring HP160's claims against Gammage because, as HP160 alleges and the record suggests, the Kohners conspired with Gammage to defraud their creditors. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991) ("[W]hen a [debtor] has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors.").
¶20 Fourth, HP160 did not sue the Kohners, as debtors, for fraud, negligent misrepresentation, aiding and abetting fraud, and conspiracy to commit fraudulent transfer. It sued Gammage, a third party. Cf. Ivester v. Miller, 398 B.R. 408, 414, 430 (M.D. N.C. 2008) (creditor lacked standing to pursue its claims against debtor because they were subject to the automatic stay and they were "similar in object and purpose" to the fraudulent transfer claims brought by the bankruptcy trustee).
¶21 Last, HP160's claims against Gammage (for misrepresentations made by a third party directly to a creditor during litigation) do not interfere with the Trustee's pursuit of its claims (for avoidance of fraudulent transfers made by the debtors on behalf of all the creditors). HP160's claims here are not competing claims of the bankruptcy estate. Cf. In re Bridge Info. Sys. Inc., 325 B.R. 824, 828-33 (E.D. Mo. 2005) (creditor lacked standing to pursue its claims against third party despite that third party made misrepresentations directly to creditor because injury was inflicted on debtor, thus creditor was interfering with trustee's pursuit of claims).
¶22 We note that the Trustee's claim for legal malpractice against Gammage in the BK Adversary Action does not change our analysis. In pertinent part, the Trustee alleged Gammage committed malpractice by subjecting the Kohners and their various legal entities to a $6,000,000 judgment and "entering into business dealings with [the Kohners] . . . under terms that were unfavorable to [the Kohners]." In April 2016, the Trustee settled its legal malpractice claim with Gammage for $600,000. Although the Trustee's claims arise from the same general series of events and broad course of conduct carried out by Gammage, they are asserted on behalf of the injured party—the debtors. See Seven Seas, 522 F.3d at 585 ("[I]t is entirely possible for a bankruptcy estate and a creditor to own separate claims against a third party arising out of the same general series of events and a broad course of conduct.").
¶23 Thus, HP160 alone has standing to pursue its claims against Gammage, to the exclusion of the Trustee, the debtors, and any other creditor, because Gammage's alleged conduct injured only HP160 and HP160's claims are particularized to it. We conclude that the superior court erred in applying the law. Dismissal on summary judgment was inappropriate.
Because we reverse the grant of summary judgment and remand for further proceedings, we need not address HP160's arguments related to collateral estoppel and request for a new trial. --------
CONCLUSION
¶24 Because we find the superior court erred in granting summary judgment in favor of Gammage, we reverse and remand for further proceedings consistent with this decision.