Erdmann v. Burton ( 2016 )

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
KEVIN ERDMANN, an Arizona resident, Plaintiff/Appellee
and
KERRY LECHNER, a Wisconsin resident, Cross-Plaintiff/Appellee,
v.
KENT Aka BRIGHAM BURTON and CARLY BURTON, as Arizona
residents and husband and wife; BURTON PARTNERS, LLC, an Arizona
limited liability company; ZYRAX, LLC, an Arizona limited liability
company, Defendants/Cross-Defendants/Appellants.
No. CA-CV 14-0410
FILED 5-26-2016
Appeal from the Superior Court in Maricopa
No. CV2011-096995
The Honorable Randall H. Warner, Judge
AFFIRMED
COUNSEL
Udall Shumway, PLC, Mesa
By Joel E. Sannes
Counsel for Plaintiff/Appellee Erdmann
Cassett Ricker Law PLLC, Scottsdale
By Keith C. Ricker
Counsel for Cross-Plaintiff/Appellee Lechner
Law Office of Julia Prinz, Pinetop
By Julia Marie Prinz
and
By Seth Kretzer, Bronstone, PA
Co-Counsel for Defendants/Cross-Defendants/Appellants
MEMORANDUM DECISION
Judge John C. Gemmill delivered the decision of the Court, in which
Presiding Judge Diane M. Johnsen and Judge Kent E. Cattani joined.
G E M M I L L, Judge:
¶1 Kent (aka Brigham) Burton, Carly Burton, Burton Partners,
LLC, and Zyrax (collectively “Burton”) appeal a jury verdict and judgment
finding them liable to Kevin Erdmann and Kerry Lechner on claims arising
from various transactions involving the purchase and sale of two
businesses. We affirm.
BACKGROUND
¶2 This dispute arises from two separate business transactions.
The first transaction was Erdmann’s sale of Kebko (a sign manufacturing
company) to Burton. The second was Burton’s sale of House Hunters (a
monthly real estate publication) to Lechner, followed by the assignment by
Burton to Erdmann of a promissory note evidencing a debt owed by
Lechner to Burton.
I. Kebko
¶3 Kebko was a sole proprietorship created by Erdmann in 1993.
Kebko manufactured signs primarily for general contractors, schools,
courthouses, and various municipal buildings. In May 2010, Burton
entered into an agreement to purchase Kebko from Erdmann. The price
was $110,000, with a $55,000 down payment and $55,000 to be paid over
time, as evidenced by a promissory note (“Kebko Note”) secured by a
chattel security agreement and a UCC financing statement.
¶4 Almost immediately after purchasing Kebko, Burton
contacted Erdmann to explain that he was having difficulty getting credit
from banks and suppliers to obtain materials. Erdmann agreed to let
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Burton use several supplier accounts and a Wells Fargo line of credit that
were in Erdmann’s name and for which Erdmann was personally
responsible. The arrangement initially was unwritten, but in September
2010, Erdmann and Burton entered into a detailed written extension
agreement.1
¶5 The extension agreement subordinated Erdmann’s interest in
the Kebko Note until January 2011 to allow Burton to factor2 some of
Kebko’s accounts receivable for short-term operational funding. In
exchange, Burton agreed to pay off all vendor accounts that were
guaranteed in Erdmann’s name, as well as Erdmann’s Wells Fargo line of
credit, within a specific amount of time.
¶6 By the time the extension agreement expired, Burton had not
paid off the accounts and Erdmann had paid some of them himself. The
amount of credit the vendors had extended to Burton, guaranteed by
Erdmann, exceeded $40,000. Additionally, Burton cashed four checks
totaling $3,271 that should have been forwarded to Erdmann under the
extension agreement.
¶7 In April 2011, Burton and Erdmann entered into a settlement
agreement and mutual release. Under the settlement agreement, Erdmann
agreed to release Burton from any and all claims related to the vendor
accounts and credit lines in exchange for Burton assigning to Erdmann 30
payments, together worth approximately $20,000, owed to Burton by
Lechner on a note for the purchase of a business called House Hunters
(“House Hunters Note”). Burton also agreed to pay off the factoring
company to put Erdmann back in first position on the Kebko Note. Burton
assigned the House Hunters Note to Erdmann, and Lechner began making
payments to Erdmann.
¶8 After the date of the settlement agreement, Burton made only
one more payment on the original Kebko Note. At trial, Burton asserted
1 At some point after Burton purchased Kebko from Erdmann but before
the extension and settlement agreements, Burton conveyed Kebko to
Burton Partners, LLC. Both the extension agreement and the settlement
agreement were signed by Kent Burton individually and as a member of
Burton Partners, LLC.
2 Factoring is a process by which a company sells an account receivable at
a discounted price.
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that the payment had been a mistake because he believed the Kebko Note
had been forgiven through the settlement agreement. The settlement
agreement, however, contained several references to the continuing
existence of the Kebko Note. Furthermore, after Burton made the
purportedly mistaken payment, he offered to buy the Kebko Note from
Erdmann for almost half its value, and then apologized for getting behind
on payments. When asked at trial why he would offer to buy a note he no
longer believed existed, Burton responded “[b]ecause I’m a nice guy.”
¶9 Burton also told Lechner, “I’m okay putting the [House
Hunters] note payments on hold for as long as it takes to get you profitable
again.” At that point, Lechner ceased payments to Erdmann on the note.
See infra ¶ 13.
¶10 Eventually Burton advertised to sell Kebko for $285,000. He
stated in the ad that the company had an annual cash flow of $120,000. An
interested party, DPG Investments (“DPG”), initially offered $235,000.
Burton testified that at that point, one year after he purchased it from
Erdmann, he believed Kebko was worth $235,000 and that he had built
Kebko up to be worth more than when he had purchased it. Burton
ultimately sold Kebko to DPG in July 2011 for $150,000 — two and a half
times what DPG privately believed the cash flow was.
¶11 Just before selling Kebko, Burton unilaterally filed a UCC
termination with the Arizona Secretary of State removing Erdmann’s lien
on Kebko, assertedly because he thought the Kebko Note was cancelled in
the settlement agreement. But this was despite the facts that he had made
a payment on the Kebko Note after the settlement agreement, apologized
for his late payment, and offered to buy back the note. See supra ¶ 8. The
UCC security agreement was ultimately restored, thereby protecting
Erdmann’s claim to a portion of the $150,000 DPG paid to Burton for Kebko.
II. House Hunters
¶12 Burton first acquired House Hunters in 2009 for $28,000.
Burton decided to sell House Hunters approximately one year later, and in
October 2010, Lechner contacted Burton to express an interest in buying
House Hunters.3 Burton provided Lechner with some financial statements
and personal assurances, but he would not provide Lechner with verifying
3 After his purchase of House Hunters and before selling it to Lechner,
Burton conveyed House Hunters to Zyrax, LLC.
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information, such as the company’s top-ten paying client list or a list of the
companies that printed and distributed the magazine. Nevertheless, in
December 2010, Lechner agreed to purchase House Hunters for a $20,000
down payment and a $78,000 promissory note (the House Hunters Note) to
be paid over ten years.
¶13 Lechner operated House Hunters from January until June,
2011, losing money each month. Shortly thereafter, Lechner contacted
Burton and detailed the trouble he was having bringing in revenue. At that
point, Lechner questioned the reliability of the financial statements, client
lists, and representations Burton had made about the company. After some
discussion, Burton told Lechner that he (Lechner) could put payments to
Erdmann on the House Hunters Note on hold until House Hunters became
profitable again. See supra ¶ 9.
III. Trial
¶14 Erdmann filed a complaint against Burton and Lechner for
breach of contract and conversion. Several days later, Erdmann filed an
amended complaint adding Burton Partners, LLC, and Zyrax, LLC, as
parties and asserting additional claims for fraudulent inducement and
intentional interference with contract. Burton filed a counterclaim against
Erdmann, and Lechner filed a cross-claim against Burton for breach of
contract, fraudulent inducement, negligent misrepresentation, non-
disclosure, consumer fraud, breach of the covenant of good faith and fair
dealing, and unjust enrichment.
¶15 After four days of trial, the jury returned a verdict finding
against Burton on all counts, including: (1) for Erdmann on his claims
against Burton; (2) for Erdmann on his claims against Burton Partners, LLC;
(3) for Erdmann on his claims against Zyrax; (4) for Erdmann on his claim
against Burton and Burton Partners for punitive damages; (5) for Lechner
on his claims against Zyrax; (6) for Lechner on his claims against Burton;
and (7) for Lechner on his claims against Burton and Zyrax for punitive
damages. The jury found against Erdmann on his claims against Lechner,
and against Burton on his claims against Lechner and Erdmann.
Additionally, the jury returned three interrogatories that found for Lechner
against Burton and/or Zyrax for fraud, and for Erdmann against Burton
and/or Burton Partners for fraud and conversion.
¶16 The trial court entered judgment in favor of Erdmann against
Burton in the amounts of $39,917.48 for compensatory damages, $93,235.60
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for punitive damages, and $51,556.28 for attorney fees and costs. The trial
court entered judgment in favor of Lechner against Burton and Zyrax in the
amounts of $25,793.10 for compensatory damages against Zyrax, $30,346.19
for compensatory damages against Burton, $15,000 for punitive damages
against Burton and Zyrax, and $24,605 for attorney fees. Burton filed a
motion for new trial that was denied. Burton timely appeals. This court
has jurisdiction under Arizona Revised Statutes (“A.R.S.”) sections 12-
120.21(A)(1) and -2101(A)(1).
ANALYSIS
¶17 Burton presents five issues on appeal, which we address in
the following sequence. First, whether the settlement agreement contained
a clause that precluded either party from rescinding the agreement due to
misrepresentation. Next, whether the trial court should have forced
Erdmann to elect a remedy. Third, whether the trial court’s failure to rule
on piercing the veil regarding Burton’s relationship to Burton Partners
exacerbated juror confusion and led to duplicative damages. Fourth,
whether Erdmann and Lechner’s tort claims were barred by the economic
loss doctrine (ELD). And, finally, whether Erdmann and Lechner were
entitled to punitive damages.
I. Burton Waived His Contention That the Settlement Agreement
Precludes Rescission
¶18 Burton argues that paragraph 6 of the settlement agreement
precludes any rescission of the agreement due to misrepresentation or
fraud.4 This provision was raised in Burton’s initial answer and his
unsuccessful motion to dismiss. At trial, the settlement agreement itself
4 Paragraph 6 of the settlement agreement provides:
No Reliance on a Party. In entering into this Agreement, each
party assumes the risk of any misrepresentation, concealment
or mistake. If any party should subsequently discover that
any fact relied upon by the party in entering into this
Agreement was untrue or that any fact was concealed from
that party or that the party’s understanding of the facts or of
the law was incorrect, such party shall not be entitled to any
relief in connection therewith including, without limitation
upon the generality of the foregoing, any alleged right or
claim to set aside or rescind this Agreement. This Agreement
is intended to be and is final and binding upon the parties.
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was entered into evidence for the jury to consider. But Burton did not ask
the court to rule at trial as a matter of law that paragraph 6 precludes any
rescission of the agreement, and he did not argue the provision to the jury.
Burton has therefore waived this argument. See Airfreight Exp. Ltd. v.
Evergreen Ctr., Inc., 215 Ariz. 103, 109, ¶ 17 (App. 2007) (on a similar set of
facts, holding “a party must timely present his legal theories to the trial
court so as to give the trial court an opportunity to rule properly”) (quoting
Payne v. Payne, 12 Ariz. App. 434, 435 (1970)). Accordingly, we decline to
reverse the jury’s verdict on the ground that the settlement agreement bars
rescission due to fraud.
II. Burton Waived His Argument That the Trial Court Should Have
Forced Erdmann to Elect a Remedy
¶19 Burton argues that the trial court improperly allowed
Erdmann to proceed under two inconsistent theories, and as a result the
jury was confused and returned inconsistent verdicts with damages for
both breach of contract and rescission of the settlement agreement. Election
of remedies is characterized as an affirmative defense that is waived unless
timely asserted. See Estate of Wesolowski v. Indus. Comm’n, 192 Ariz. 326, 329,
¶ 10 (App. 1998). Burton failed to raise this defense until this appeal.
Burton did not object to the final instructions given to the jury, the
additional instructions given after the jury asked about damages, or the
verdicts as being duplicative or incongruent after they were read. These
repeated failures to object waived this argument on appeal.5 See Montano
v. Scottsdale Baptist Hosp., Inc., 119 Ariz. 448, 453 (1978) (a party may not
claim a jury instruction was in error on appeal if he or she did not object
before the jury receives the instructions and retires to consider its verdict);
Trustmark Ins. Co. v. Bank One, Arizona, NA, 202 Ariz. 535, 543, ¶ 38-39 (App.
2002) (a party must object when the verdict is rendered if it believes the jury
was confused or the verdict was contrary to law, otherwise the party waives
objection to error; furthermore, if a party believes the verdict is inconsistent,
defective, or nonresponsive, it must move under Ariz. R. Civ. P. 49(c) for
resubmission of the case to the jury); see also Ariz. R. Civ. P. 51(a) (“No party
may assign as error the giving or the failure to give an instruction unless
that party objects thereto before the jury retires to consider its verdict,
stating distinctly the matter objected to and the grounds of the objection”).
5 In the final judgment, the trial court avoided duplicative damages by not
awarding Erdmann damages against Burton for breaching the settlement
agreement.
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III. The Trial Court Did Not Err in Declining to Grant a New Trial
Based on Failing to Address the Veil-Piercing Issue
¶20 We apply an abuse of discretion standard when reviewing a
trial court’s denial of a motion for new trial. Styles v. Ceranski, 185 Ariz. 488,
450 (App. 1996).
¶21 Burton argues that the trial court should have ruled on
whether to pierce the corporate veil. He asserts that the court's failure to
do so led to improper duplicate awards for Erdmann against both Burton
and Burton Partners and to Lechner receiving more money than he
requested. The record does not support these assertions.
¶22 The record shows that both Burton and Burton Partners were
instrumental in creating the debt on which Erdmann sued. Burton was the
original purchaser of Kebko and the original party to use Erdmann’s lines
of credit. The extension agreement and settlement agreement were signed
by “Kent Burton, Member and Individually” for Burton Partners. Thus, it
was not improper for the jury to conclude that both Burton and Burton
Partners could be held responsible for the damages incurred.
¶23 As for Lechner’s damages, Burton argues that the trial court’s
instructions to the jury did not address the veil-piercing issue and therefore
led to the jury erroneously awarding Lechner double the amount he
requested. But Burton misstates the total amount requested by Lechner and
does not account for each month of lost profits. The jury awarded Lechner
$25,793.10 against Zyrax for the down payment and the monthly payments
to Erdmann on the House Hunters Note. The jury also awarded Lechner
$30,346.19 against Burton for the profits Lechner lost due to Burton’s fraud.
¶24 The trial court did not abuse its discretion in denying Burton’s
motion for new trial regarding these issues.
IV. Burton Waived His Argument that the Economic Loss Doctrine
Precluded Tort Claims Against Him
¶25 The ELD is a common law rule that limits contracting parties
to their contractual remedies when damages are purely economic and there
is no physical injury to persons or property. Flagstaff Affordable Hous. Ltd.
P’ship v. Design Alliance, Inc., 223 Ariz. 320, 323, ¶ 12 (2010). Application of
the ELD is a legal question that we review de novo. Id., 223 Ariz. at 322, ¶
9.
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¶26 Erdmann and Lechner assert that Burton waived his
argument that the ELD bars relief on all tort claims. We agree. The general
rule for waiver is that, absent exceptional circumstances, this court will not
consider an argument raised for the first time on appeal. See Englert v.
Carondelet Health Network, 199 Ariz. 21, 26, ¶ 13 (App. 2000); see also Trantor
v. Fredrikson, 179 Ariz. 299, 300 (1994). The parties dispute whether the ELD
is an affirmative defense, but that makes no difference. Burton did not raise
the ELD at any point during the trial. We therefore conclude that Burton
waived his argument that the ELD precluded the tort claims.
V. The Award of Punitive Damages Was Not Error
¶27 We view the evidence in the light most favorable to
upholding the jury verdict awarding punitive damages and we will affirm
if any substantial evidence exists permitting reasonable jurors to reach such
a result. See Arellano v. Primerica Life Ins. Co., Co., 235 Ariz. 371, 378-79, ¶
35 (App. 2014)
¶28 Burton argues that Erdmann and Lechner were not entitled to
punitive damages for two reasons. First, Burton claims that punitive
damages were not appropriate for either party because the evidence
presented did not support a finding of “something more” than just the
underlying tort. Second, Burton claims that Lechner failed to plead
punitive damages and was therefore precluded from recovering them.
Alternatively, Burton argues that the $96,000 punitive damages award to
Erdmann was disproportionate to the conversion claim.
A. Burton Waived His Argument Regarding Punitive Damages
Sought by Lechner
¶29 Burton argues that Lechner was not entitled to punitive
damages because he did not ask for them in his complaint or in the joint
pretrial statement. But the jury instructions stated that “Lechner has
requested an award of punitive damages” against Burton, and Burton did
not object to the jury instructions on punitive damages. “When issues not
raised by the pleadings are tried by express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the
pleadings.” Ariz. R. Civ. P. 15(b). Because Burton did not object to the
instructions, the punitive damages are treated as if they had been raised in
the pleadings. See Montano, 119 Ariz. at 453; see also Ariz. R. Civ. P. 51(a).
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Therefore, the court did not err in allowing the jury to consider awarding
punitive damages in favor of Lechner.
B. The Evidence Permitted the Jury to Award Punitive Damages
to Erdmann and Lechner
¶30 A plaintiff may recover punitive damages by proving through
clear and convincing evidence that the defendant “engaged in aggravated
and outrageous conduct with an evil mind.” Hyatt Regency Phoenix Hotel
Co. v. Winston & Strawn, 184 Ariz. 120, 132 (App. 1995) (internal quotations
omitted). An evil mind may be inferred through evidence that the
defendant “continued his actions despite the inevitable or highly probable
harm that would follow.” Gurule v. Illinois Mut. Life and Cas. Co., 152 Ariz.
600, 602 (1987). Evidence of subjective intent to injure is not required, only
a “conscious disregard of a substantial risk of significant harm to others.”
Warner v. Sw. Desert Images, LLC, 218 Ariz. 121, 130 ¶ 24 (App. 2008).
¶31 The record shows multiple instances in which Burton acted in
a way that created a substantial risk of harm to Erdmann and Lechner.
Supporting the award to Lechner, Burton’s misstatements regarding the
financial status of House Hunters created a substantial risk that Lechner
would be financially harmed by purchasing it. The jury heard evidence that
Burton provided multiple false documents and statements to entice
Lechner to buy a failing company.
¶32 In regard to the punitive damage award to Erdmann, Burton
repeatedly failed to pay off the credit lines and vendor accounts for which
Erdmann was liable. See supra ¶¶ 4–6. Burton cashed multiple checks that
belonged to Erdmann without repaying him. Burton’s knowledge of the
potential infirmity of the House Hunters Note, coupled with his willingness
to offer it to Erdmann in exchange for Erdmann’s release of more
substantial claims, demonstrated Burton’s disregard for the risk of harm to
Erdmann. Also, after Lechner began having financial difficulty, Burton told
him he could cease payments to Erdmann. Furthermore, the record shows
that Burton attempted to sell Kebko for nearly twice what he had bought it
for and represented it as a profitable business with considerable gross
income and cash flow, while at the same time failing to make payments on
Erdmann’s credit lines and accounts. Finally, before selling Kebko to a new
buyer, Burton unilaterally removed the UCC lien so that Erdmann would
have no claim to payment from the new buyer. See supra ¶ 11.
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¶33 Fraud alone does not support punitive damages. Echols v.
Beauty Built Homes, Inc., 132 Ariz. 498, 501 (1982). But based on the record
in this case, the jury could have found by clear and convincing evidence
that Burton’s conduct was aggravated and outrageous, evincing an evil
mind. Therefore, we decline to set aside the punitive damages awards.
C. The Amount of Punitive Damages Awarded Was Not
Excessive
¶34 Because of constitutional concerns, the amount of punitive
damages awarded is subjected to more rigorous appellate review. Kline v.
Kline, 221 Ariz. 564, 572 ¶ 29 (App. 2009). We will uphold the awarding of
punitive damages if “any reasonable view of the evidence would satisfy the
clear and convincing standard.” Hyatt Regency, 184 Ariz. at 132. And we
will affirm the amount of punitive damages awarded “unless it is so
unreasonable in light of the circumstances as to show passion or prejudice.”
Rustin v. Cook, 143 Ariz. 486, 491 (App. 1984).
¶35 Burton argues that Erdmann’s punitive damage award of
$93,235.50 is excessive because it was based solely on the conversion claim.
However, the jury also found Burton had defrauded Erdmann, and
returned a general verdict for $39,917.48 in compensatory damages based
on all of Erdmann's claims, including negligent misrepresentation, fraud,
interference with contract, conversion, and breach of contract. Burton did
not object to the use of a general verdict, and the jury therefore did not
separate the amount of damages attributable to the various claims. Because
Burton did not object to the general verdict form for compensatory damages
and because the special interrogatories reveal the jury found for Erdmann
on fraud and conversion, we may presume for these purposes that the tort
damages were determined by the jury to be $39,917.48. See Dunlap v. Jimmy
GMC of Tucson, Inc., 136 Ariz. 338, 341 (App. 1983) (a general verdict will be
upheld if evidence on one count, issue or theory is sufficient to sustain the
verdict.”); see also Mullin v. Brown, 210 Ariz. 545, 551-52 ¶¶ 25-26 (App.
2005). An award of $93,235.50 in punitive damage, establishing a ratio of
2.3:1, is not excessive. See Arellano, 235 Ariz. at 380, ¶ 45 (permitting
punitive damage ratio of 4:1).
VI. Fee Requests
¶36 Erdmann and Lechner both request attorney fees and costs on
appeal. Erdmann cites Arizona Revised Statutes section 12-341.01 and
paragraph 12 of the settlement agreement with Burton. Lechner requests
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fees and costs “on the same basis” “as he did at the trial court level.” In
accordance with Arizona Rule of Civil Appellate Procedure (ARCAP)
21(a)(2), this court will exercise its discretion to award an amount of
reasonable attorney fees and also taxable costs to Erdmann and Lechner
upon their compliance with ARCAP 21.
CONCLUSION
¶37 Based on the foregoing, we conclude that the evidence
supports the general verdict and the damages awarded. We further
conclude that the trial court did not abuse its discretion in denying a new
trial. We therefore affirm the judgment of the trial court.
:ama
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