Opinion
1 CA-CV 23-0571
07-18-2024
HERMAN B. SMITH, et al., Plaintiffs/Appellants, v. JAMES S. DELLARIPA, et al., Defendants/Appellees.
Milligan Lawless, P.C., Phoenix By Robert J. Itri, Cober Plucker, Chelsea Gulinson, Elizabeth C. Fine Counsel for Plaintiffs/Appellants. Jennings Haug Keleher McLeod, Phoenix By Blake Whiteman, Joseph A. Brophy Counsel for Defendants/Appellees.
Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court
Appeal from the Superior Court in Maricopa County No. CV2020-011176 The Honorable Daniel G. Martin, Judge; The Honorable Dewain D. Fox, Judge.
Milligan Lawless, P.C., Phoenix By Robert J. Itri, Cober Plucker, Chelsea Gulinson, Elizabeth C. Fine Counsel for Plaintiffs/Appellants.
Jennings Haug Keleher McLeod, Phoenix By Blake Whiteman, Joseph A. Brophy Counsel for Defendants/Appellees.
Judge Jennifer M. Perkins delivered the decision of the Court, in which Presiding Judge Andrew M. Jacobs and Chief Judge David B. Gass joined.
MEMORANDUM DECISION
PERKINS, JUDGE.
¶1 Herman Smith appeals the superior court's judgment on his claims for misappropriation/conversion, breach of fiduciary duty, negligence, fraud, and unjust enrichment. For the following reasons, we reverse and remand.
FACTS AND PROCEDURAL BACKGROUND
¶2 Smith, James Dellaripa, and Brendon Labban set up Southwest Anesthesia Group, PLLC ("SWAG I") as a cost-sharing arrangement to manage and bill their anesthesia practice. In November 2016, Labban left the company and the parties terminated SWAG I.
¶3 SWAG I used an online, external Office Ally account to manage and track billing and collections. Smith also kept a personal record of his billing and collections. In late 2016, Smith noticed he was "not receiving payment for his share of the billings" and his accounts receivable was continuously increasing. He noticed these discrepancies by comparing his separate database with the payments he received. When he asked Dellaripa about these billing discrepancies, Dellaripa responded they were likely due to "computer error" and that he would "look into it." In December 2016, Smith asked the office secretary for access to his billing records in the SWAG I Office Ally account. He received no response despite multiple requests for access. Later that month, Smith went into the SWAG I office to inquire about Office Ally access but was told that "Dellaripa directed [the office secretary] not to give [Smith] access to his accounts." Smith received access to an account in January 2017 but did not attempt to log-in at the time.
¶4 In February 2017, Smith's doctors recommended he stop practicing medicine due to mental health issues and a neurological disorder. Smith took a leave of absence and never returned to his practice. Dellaripa formed Southwest Anesthesia Group, LLC ("SWAG II"), listing himself as its sole member. And he transferred SWAG I's assets into SWAG II.
¶5 In September 2017, Smith attempted to access the Office Ally account using the log-in information he received in January 2017, but he was not able to access his records. Smith texted Dellaripa, asking for account access, and Dellaripa said he "can't help with that" but later said he would "look into it."
¶6 Smith sued Dellaripa and his wife, SWAG II, IOM, LLC, and Chaparral, LLC, (collectively, "Defendants"), claiming fraud, misappropriation/conversion, breach of fiduciary duty, negligence, and unjust enrichment. Smith alleged that Defendants took money owed to him for the services he rendered and deprioritized the collection of his billings. Discovery Issues
¶7 Smith moved to compel access to his Office Ally account as part of the discovery process. He asserted statutory entitlement to SWAG I's records as a former member and manager. He also argued the information in the account was relevant to his claims, requiring disclosure under the discovery rules. Defendants responded that they had provided Smith "paper copies of his records from Office Ally." But as Smith explained, Defendants provided only a .pdf list of Smith's billing records, without claim notes or audit trails, thus limiting his ability to evaluate the status of his billings.
¶8 At oral argument, the superior court acknowledged it "seems crystal clear" that Smith should be able to access his own records in Office Ally. But the court then denied Smith's motion to compel, finding "Dellaripa's billing records are not discoverable in their entirety." The court noted Smith could request access to discrete records by showing their relevance.
¶9 Smith requested clarification from the court on whether Defendants had to provide Smith access to his own records in Office Ally. Defendants responded that they tried to give Smith access to view only his billing records in Office Ally, but "Office Ally subsequently informed the parties that a separate account was not possible, which means that if [Smith] were to receive electronic access to Dr. Smith's billing records, [he] would be able to view [Dellaripa's] billing records." The court clarified that "if it is not possible for Dr. Smith to view his own records electronically on Office Ally without also having access to Dr. Dellaripa's records, then Defendants are not required to provide Dr. Smith such access."
Summary Judgment
¶10 Defendants moved for summary judgment, arguing that all of Smith's tort claims were time-barred by the two-year statute of limitations, and his fraud and unjust enrichment claims were barred by a three-year limitation. Smith claimed he was of unsound mind from January 2017 to at least December 2019 due to mental illness, tolling the statute of limitations.
¶11 In August 2022, the court found that "no reasonable jury could find that [Smith's] claims accrued after late 2017" or that Smith was of unsound mind. The court granted summary judgment on Smith's claims subject to the two-year limitations period (misappropriation/conversion, breach of fiduciary duty, and negligence), but denied the motion as to the claims subject to a three-year limitations period (fraud and unjust enrichment).
¶12 Defendants later moved for summary judgment on the fraud claim, arguing Smith failed to present evidence of his reliance on fraudulent misrepresentations. The court granted Defendants' motion, concluding that Smith's contentions were insufficient to establish reliance on fraudulent statements.
¶13 Defendants also moved for summary judgment on the unjust enrichment claim, arguing the SWAG I operating agreement precluded equitable remedies and that Smith did not provide evidence of unjust enrichment. Smith argued that no contract governed the parties and that his claim was supported by an expert witness report showing at least three instances in which Smith's clients were billed as services performed by Dellaripa. The expert report showed that Dellaripa had been paid $938.32 for one of these services.
¶14 The court found that the operating agreement did not bar Smith's unjust enrichment claim because the parties terminated SWAG I in November 2016. The court allowed the unjust enrichment claim to proceed only as to the $938.32 in dispute against Defendants. Smith moved to voluntarily dismiss the remaining unjust enrichment claim, which the court granted.
¶15 Smith timely appealed and we have jurisdiction. A.R.S. § 12- 2101(A).
DISCUSSION
¶16 Smith argues the court erred in denying his motion to compel and granting summary judgment on each of his claims. "The court shall grant summary judgment 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 review the court's grant of summary judgment de novo, "viewing the evidence and reasonable inferences in the light most favorable to the party opposing the motion." Zambrano v. M &RC II LLC, 254 Ariz. 53, 55, ¶ 9 (2022) (cleaned up).
I. Motion to Compel
¶17 The superior court has broad discretion in ruling on discovery issues, and we will not disturb its ruling absent a clear abuse of discretion. Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 518, ¶ 41 (App. 2006). "A court abuses its discretion if it commits legal error in reaching a discretionary conclusion, or if the record lacks substantial evidence to support its ruling." Id. We interpret procedural rules de novo, Chartone, Inc. v. Bernini, 207 Ariz. 162, 167, ¶ 14 (App. 2004), and use principles of statutory interpretation, State v. Hansen, 215 Ariz. 287, 289, ¶ 7 (2007).
A. Smith's Entitlement to Office Ally Records Under the Discovery Rules
¶18 Smith argues the court erred in denying his motion to compel because the Office Ally records are relevant to the dispute. "Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case." Ariz. R. Civ. P. 26(b)(1). The court should consider "the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." Id. "A party need not provide discovery or disclosure of electronically stored information from sources that the party shows are not reasonably accessible because of undue burden or expense." Ariz. R. Civ. P. 26(b)(2)(B)(i).
¶19 Smith's records are relevant to the dispute. All of his claims center on billing discrepancies that would be apparent in his billing records. And the court agreed that Smith's records are relevant when it stated it was "crystal clear" Smith should have access to his own Office Ally records.
¶20 The court and Defendants sort Smith's and Dellaripa's records into separate categories and analyze their relevance accordingly. But the records cannot be accessed separately, and are better characterized as one set of records rather than two. The Office Ally account does not hold the discrete records of "Smith" and "Dellaripa," but one set of SWAG I (now SWAG II) records that can only be disclosed in its entirety, or not all.
¶21 The court's analysis and rulings on Smith's and Dellaripa's records as separate thus does not align with the nature of the records. Because a portion of these records are undoubtedly relevant, and cannot be separated from the remaining portions, the motion to compel should have been granted absent a finding of undue burden or privilege. See Ariz. R. Civ. P. 26(b)(1), (b)(2)(B)(i). And even if the records were unduly burdensome to provide, the superior court could have reallocated any such disproportionate burden in service of proportionality. See Ariz. R. Civ. P. 37(h). But Defendants did not argue that providing Office Ally access was unduly burdensome or that the records were privileged. They only argued that the records are not relevant.
¶22 The court therefore abused its discretion in denying the motion to compel because it denied Smith access to relevant information solely because it was integrated with irrelevant information. Without a showing of undue burden or privilege, the court had no basis to deny the motion to compel.
¶23 We address one further point because a cost-shifting issue is likely to arise on remand. See Buckholtz v. Buckholtz, 246 Ariz. 126, 131, ¶ 17 (App. 2019). In discussing the motion to compel issue, the parties did not address their obligation to confer about the disclosure of electronic information under Rule 26.1(c)(1). The better practice is to make a record of compliance, but here the record is silent. Rule 26.1(c)(1) requires parties to confer when disclosure reveals the existence of electronically stored information. The process ensures parties plan for producing such information and assess the burdens and benefits of doing so. See Ariz. R. Civ. P. 26(c)(1). And the process ensures parties consider any undue burden in production and how to handle inadvertent production of materials subject to a privilege. Parties then can present focused disputes to the superior court under Rule 26(d). Failing to follow the process can result in delays and inefficiencies. The superior court may consider whether the parties here followed the process and, if not, any resulting delays and inefficiencies when it considers any cost-shifting orders under Rule 37(h) on remand.
B. Smith's Statutory Entitlement to Office Ally Records
¶24 Smith also argues he has a right to access the Office Ally records as a former member and manager of SWAG I. Members of an LLC may inspect any company record regarding the affairs of the company. A.R.S. § 29-607 (repealed 2018); see A.R.S. § 29-3410(B). And "a person dissociated as a member may have access to the records to which the person was entitled while a member." A.R.S. § 29-3410(F); see A.R.S. § 29-3602(16) ("A person is dissociated as a member if . . . [t]he limited liability company dissolves and completes winding up.").
¶25 Defendants insist that the members of SWAG I were tasked with keeping their own records and therefore the records in Office Ally should not be considered the business records of SWAG I. But Smith and Dellaripa were equal members and managers of the LLC. And at all times, Dellaripa and SWAG I office staff could access all the records because there is no actual separation between the storage of Smith and Dellaripa's records. The billing statements housed in Office Ally are the business records of SWAG I. And, as a member of the LLC, Smith had a right to access the records. A.R.S. § 29-607 (repealed 2018); see A.R.S. § 29-3410(B). A ruling denying access to records Smith had a statutory right to access is an error of law and thus an abuse of discretion. We reverse the court's rulings on the motion to compel and remand for further proceedings.
II. Statute of Limitations
¶26 Smith argues the court erred in granting summary judgment on his tort claims because the jury was entitled to decide whether the statute of limitations tolled because Smith had an unsound mind. The misappropriation/conversion, breach of fiduciary duty, and negligence claims have a two-year statute of limitations. See A.R.S. § 12-542. "A cause of action does not accrue until the plaintiff knows or with reasonable diligence should know the facts underlying the cause." Doe v. Roe, 191 Ariz. 313, 322, ¶ 29 (1998).
¶27 The statute of limitations is tolled if the plaintiff was of unsound mind when the cause of action accrued. A.R.S. § 12-502. A person is of unsound mind if he is unable to (1) "manage daily affairs" or (2) "understand legal rights and liabilities." Doe, 191 Ariz. at 326, ¶ 42. In ruling on a motion for summary judgment, the court must determine if "there is credible evidence of the plaintiff's inability to manage daily affairs." Doe, 191 Ariz. at 327, ¶ 44 (emphasis in original).
¶28 The record supports the court's finding that all of Smith's claims accrued no later than the end of 2017. Smith became concerned about billing discrepancies sometime in 2015 or 2016; began inquiring about the discrepancies in December 2016; and he began directly investigating the discrepancies in September 2017. Thus, the claims with a two-year statute of limitations expired by December 2019, unless the statute of limitations was tolled.
¶29 Smith presented admissible evidence that he may have been of unsound mind after the claims accrued. Smith's doctors testified to his "inability to carry out multi-step tasks," a general concern with Smith's "day to day functioning," and that his global assessment of functioning score dropped from 60 to 20 out of 100. His doctor confirmed that "the more stressful the activity, the less likely Dr. Smith would be able to engage in it." But Smith testified in his deposition that, since 2017, he has managed his personal finances, household matters, schedule, and medications. Smith also stated that in 2017, he retained an attorney to help file a disability claim, purchased property, and hired an attorney to update his trust.
¶30 This record contains conflicting, admissible evidence as to whether Smith was of unsound mind. The court therefore erred by granting summary judgment. See id. at 327, ¶ ¶ 44-45 ("When the plaintiff has alleged facts indicating inability to manage daily affairs, it is the court's duty to deny summary judgment."). We reverse the court's summary judgment ruling on the tort claims and remand for further proceedings.
III. Fraud and Unjust Enrichment
¶31 Smith argues he was not able to provide evidence of his unjust enrichment claim because he was denied access to Office Ally. We agree the denial of the motion to compel substantially limited Smith's ability to support his claim for unjust enrichment. Smith also argued the Office Ally account contains evidence relevant to Smith's fraud claim, and we agree that subsequent discovery and disclosure may bring up additional relevant facts. Because we reverse the court's ruling on the motion to compel, we also reverse the court's grant of summary judgment on the fraud and unjust enrichment claims and remand for further proceedings.
CONCLUSION
¶32 We reverse and remand.