Zaki v. Capstone ( 2020 )

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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
EMAD ZAKI, Plaintiff/Appellee,
v.
CAPSTONE ASSET MANAGEMENT LLC, Defendant/Appellant.
No. 1 CA-CV 19-0263
FILED 3-5-2020
Appeal from the Superior Court in Maricopa County
No. CV2018-002073
No. CV2018-004485
The Honorable Roger E. Brodman, Judge
AFFIRMED
COUNSEL
Paul M. Levine, P.C., Scottsdale
By Paul M. Levine
Counsel for Plaintiff/Appellee
Engelman Berger, P.C., Phoenix
By Wade M. Burgeson
Counsel for Defendant/Appellant
ZAKI v. CAPSTONE
Decision of the Court
MEMORANDUM DECISION
Presiding Judge Paul J. McMurdie delivered the decision of the Court, in
which Judge Jennifer B. Campbell and Vice Chief Judge Kent E. Cattani
joined.
M c M U R D I E, Judge:
¶1 Capstone Asset Management, L.L.C. (“Capstone”) appeals
the superior court’s order granting a permanent injunction for specific
performance for the sale of two commercial properties to Emad Zaki and
awarding Zaki his attorney’s fees and costs. We affirm.
FACTS AND PROCEDURAL BACKGROUND
¶2 Min Kim is the manager of Capstone. 1 On January 3, 2018,
Capstone and Zaki entered a real estate contract whereby Zaki agreed to
purchase two commercial condominiums from Capstone for $405,000. The
agreement: (1) required Zaki to pay a $5000 earnest money deposit and the
remaining balance at close of escrow; (2) selected Greystone Title Agency
(“Greystone”) to serve as the escrow agent; and (3) stated that Capstone
was obligated to provide Zaki title insurance at the close of escrow. The
contract contained a buyer disapproval clause, which provided if Zaki
“disapproves of the property” he could immediately cancel the contract
without consent from Capstone or deliver written notice of the items he
disapproved of to Capstone. If Capstone did not agree or was unable to
resolve the conflict, Zaki could cancel the contract and retain his deposit, or
proceed as is with the transaction. The agreement provided that the failure
to give written notice of cancellation or disapproval was deemed an election
to proceed with the contract. The parties also included a
time-is-of-the-essence provision. For the transaction, Capstone used Brett
1 Min Kim told his broker and others that he had a terminal illness and
that his father—Andrew Kim—and his sister would be handling his
properties. But Min Kim is alive, and the superior court found that he
handled the communications during the relevant times in question via
email impersonating his father. Given the superior court’s finding, we refer
to all communications as coming from Min Kim.
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Isbell as its broker. Zaki did not have a broker. Greystone opened escrow,
and Zaki paid the $5000 deposit.
¶3 The condominiums are part of a seven-unit association called
the Camino Medical Property Owners Association (the “Association”). The
Association is headed by its President, Kerry Giangobbe, who owns the
other five units.
¶4 On January 9, Greystone sent Giangobbe a one-page
questionnaire, requesting information about the Association and property.
Greystone needed the answers to the questionnaire to close escrow. The
questionnaire asked for such information as the existence of fees and
whether a buyer was required to be approved by the Association before
closure. The questionnaire identified Zaki as the buyer, Capstone as the
owner, and stated that the escrow was scheduled to close on February 28,
2018. Giangobbe did not respond to the questionnaire. Greystone re-sent
the questionnaire to Giangobbe on January 19, 2018.
¶5 Isbell, on behalf of Capstone, also sent a questionnaire to
Giangobbe on January 18, informing her that to close escrow, she needed to
complete it and provide a copy of the Association’s Covenants, Conditions,
and Restrictions (“CC&Rs”) and bylaws. On January 24, 2018, Isbell again
sent the questionnaire and requested a copy of the Association's budget.
Instead of answering the questionnaire and providing the CC&Rs and
bylaws, Giangobbe demanded that both Zaki and Kim call her to address
concerns she had about Zaki because “[h]is phone and current employment
does not exist.” She claimed that the Association had a non-compete clause
restricting the use of the properties, and she needed to approve the buyer
before supplying the information necessary to close escrow.
¶6 Isbell also emailed Kim, provided him with Giangobbe’s
phone number, and encouraged him to call her “as soon as possible to avoid
more stress on [Zaki].” When Kim did not contact Giangobbe, Isbell
emailed Kim again stating, “your assistance may be needed in order to
resolve this matter.” On January 30, Giangobbe complained to Isbell that
Kim had not called her and demanded he do so. Isbell emailed Kim stating
he “should probably speak to her as soon as possible. She is very combative
and is putting this deal in jeopardy.”
¶7 Finally, on January 30, Giangobbe emailed Kim. In the email,
Giangobbe gave Kim her phone number and told him to contact her “at
[his] earliest convenience.” The next day, Kim responded to the email and
stated he would call her that day. Kim then sent two emails to Giangobbe
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informing her that he was out of the country and unable to find someone
who sold an international calling card. He asked her to communicate via
email because his written English skills were better than his spoken English.
Giangobbe repeatedly asked Kim to call her and requested more
information about Zaki in multiple emails over the next few days. She also
stated that Zaki had no right to any of the asked for financial information.
Kim avoided the request to call Giangobbe again by stating: “I have not
been able to find a way to call you from here. The earliest I am scheduled
to return is next week and there is a possibility of my trip being delayed,
depending on how things work out here.”
¶8 Growing frustrated with Giangobbe’s resistance and Zaki for
not wanting to provide more information about himself to Giangobbe, Kim
decided to “press the matter.” On February 5, he emailed Giangobbe,
stating he had the right as an “owner and member of the [A]ssociation” to
obtain the information requested and was prepared to sue her if she did not
provide the necessary information and documents. He also informed
Giangobbe that his copy of the CC&Rs did not mention a non-compete or a
right to approve a buyer. The next day, Giangobbe offered to “set up a
meeting at our attorney’s office” and gave Kim the Association’s attorney’s
contact information. On February 18, Capstone and Zaki extended the
feasibility period to March 15 and close of escrow to April 3, 2018.
¶9 On March 14, Giangobbe emailed Kim and asked why he had
not contacted the Association’s lawyer yet. Despite more than a dozen
requests by Giangobbe for Kim to call her or the Association’s attorney, he
never did. On March 20, Isbell contacted the Association’s attorney, and
two days later, Giangobbe filled out the questionnaire. However, the
Association incorrectly claimed its Board of Directors had the right to
review and approve the deal before it closed. The next week, Kim’s and the
Association’s attorneys “agreed the Association does not have veto power
over prospective buyers” and that the Association’s attorney would try to
provide a corrected questionnaire. Before he could give the correct
information, the Association hired new counsel, and Giangobbe insisted
that the Board had 30 days to approve Zaki.
¶10 Aware that escrow was not going to close on time, Zaki and
Kim began negotiating alternative ways to transfer the properties.
Negotiations broke down over who was to pay the transfer fees, Zaki’s
refusal to deposit additional funds into escrow, and Kim’s insistence not to
provide the title insurance. The parties failed to reach an agreement, and
escrow did not close on April 3, 2018. Three days later, Kim emailed Isbell
stating, “I feel the Camino property is underpriced.” Later that week, Kim
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requested that the asking price of the properties be increased by $145,000.
Eventually, Kim increased the asking price to $875,000, more than double
the original contract price with Zaki.
¶11 Relations between Kim and Zaki continued to deteriorate,
eventually resulting in both parties suing the other for breach of contract
and breach of the covenant of good faith and fair dealing. Zaki argued
Capstone was obligated to do more to get the Association to comply with
Greystone’s request for information, Capstone acted unreasonably, and
escrow should have been extended to allow Zaki an opportunity “to
complete his due diligence.” Zaki requested specific performance and an
award for his attorney’s fees and costs per the terms of the contract.
Capstone argued that escrow failed to close on time, Zaki never made the
written disapproval required under the contract, and Zaki refused to
deposit additional funds into the escrow which could have extended the
time to close.
¶12 The superior court held an evidentiary hearing on Zaki’s
application for permanent injunction for specific performance. After the
hearing, the court granted the permanent injunction. The court concluded
Capstone’s original owner, Kim, faked his death and was the person
sending the emails pretending to be his father. The court stated “one of the
reasons Ms. Giangobbe was so difficult was because she felt that she was
getting the runaround” by Kim, who refused to call her and only offered
“lame excuses in the process,” and by Zaki, who she claimed had lied to her
and whose “true intent was to move his wife’s ophthalmology practice to
the Property. . . . [when] there already was an ophthalmology practice in
the Association.” The court found that Capstone materially breached the
purchase contract because it “did not act reasonably or timely in dealing
with the Association and that [Capstone’s] conduct was itself an action that
was beyond the risks [Zaki] assumed in the contract.” It also found Zaki
was “not at fault for the failure to close escrow on April 3 and therefore not
in material breach of the contract.” The court ordered that Zaki was entitled
to specific performance of the contract and awarded him attorney’s fees and
costs. Capstone appealed the decision and we have jurisdiction under
Arizona Revised Statutes (“A.R.S.”) sections 12-2101(A)(1)
and -2101(A)(5)(b).
DISCUSSION
¶13 Following a bench trial, we view the facts in the light most
favorable to affirming the court’s ruling. Bennett v. Baxter Grp., Inc., 223
Ariz. 414, 417, ¶ 2 (App. 2010). We review de novo contract interpretation.
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Grosvenor Holdings, L.C. v. Figueroa, 222 Ariz. 588, 593, ¶ 9 (App. 2009).
“Implied in every contract is a covenant of good faith and fair dealing,
which requires each contracting party to refrain from acting in a manner
that would impair the right of the other to receive the benefits of their
agreement.” FL Receivables Tr. 2002-A v. Ariz. Mills, L.L.C., 230 Ariz. 160, 169,
¶ 41 (App. 2012). Determining whether a party breached the covenant of
good faith and fair dealing is a fact question, which we will not disturb
unless the court’s finding was clearly erroneous. Wells Fargo Bank v. Ariz.
Laborers Local No. 395 Pension Tr. Fund, 201 Ariz. 474, 493, ¶¶ 69–70 (2002);
Maleki v. Desert Palms Prof’l Props., L.L.C., 222 Ariz. 327, 333, ¶ 28 (App.
2009).
A. The Superior Court Did Not Err by Concluding Capstone
Materially Breached the Implied Covenant of Good Faith and Fair
Dealing.
¶14 The superior court concluded Capstone breached the
covenant of good faith and fair dealing when it: (1) failed to timely and
reasonably deal with the Association, and (2) insisted the purchase contract
was no longer valid when escrow did not close on April 3. The court
reasoned that the Capstone breach was material, thus excusing Zaki from
performance.
1. Capstone Violated the Covenant of Good Faith and
Fair Dealing.
¶15 A party breaches the implied covenant of good faith and fair
dealing when one party exercises discretion retained or not foreclosed
under a contract in such a way as to deny the other a reasonably expected
benefit of the bargain. Sw. Sav. & Loan Ass’n v. SunAmp Sys., Inc., 172 Ariz.
553, 558–59 (App. 1992). “The implied covenant of good faith and fair
dealing prohibits a party from doing anything to prevent other parties to
the contract from receiving the benefits and entitlements of the agreement.
The duty arises by operation of law but exists by virtue of a contractual
relationship.” Wells Fargo Bank, 201 Ariz. at 490, ¶ 59. “[O]ur supreme court
has warned that in determining contract rights, courts are not constrained
by textual omissions to abandon common sense and experience or to ignore
the surrounding circumstances of an agreement.” SunAmp Sys., 172 Ariz. at
560.
¶16 There is sufficient evidence to demonstrate that Capstone
materially breached the contract. First, Kim acknowledged Zaki had no
rights to obtain documents from the Association and was aware the
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Association would only be responsive to the owner of the property. Yet,
despite more than a dozen requests by Giangobbe for Kim to call her, he
refused to call and only offered unconvincing excuses. Kim never called
and made no contact with the Association or its attorney from February 6
to March 20. However, when Capstone’s broker finally contacted the
Association’s attorney, the questionnaire was completed two days later.
Had Capstone made a reasonable effort to communicate with Giangobbe
and the Association, the deal may have closed as scheduled.
¶17 Capstone, through Kim, contributed significantly to the
Association’s delay and ignored Isbell’s advice to extend the close of
escrow. Capstone also tried to negotiate an unreasonable deal to sell the
properties for cash without the use of title insurance. The deal was so
unreasonable Isbell testified he never thought to suggest it because he had
“never seen that happen” in eight years of experience and approximately
500 transactions. Capstone also attempted to sell the commercial properties
to Giangobbe while the sale was pending, but the asking price was more
than Giangobbe could afford.
¶18 Weeks before the April deadline for closing escrow, Kim told
Isbell: “Please do not send me any further updates on [Zaki and
Giangobbe], or their shenanigans. Escrow has been terminated, he has
rejected all available paths forward, and his chance to buy the property has
been lost. This is a complete waste of our time now.” Isbell responded, “I
don’t know how you can terminate escrow until [Zaki] is in some sort of
default though. Which I don’t believe has happened, at least not yet.”
Within days of the scheduled sale to Zaki falling through, Kim stated the
properties were worth more. Isbell noted the property was priced
reasonably and should not be increased because of the unfriendly seller’s
market, but Capstone still raised the price of the properties by $145,000 later
that week and by $470,000 by the time of trial.
¶19 It was reasonable for Zaki to rely on Capstone to timely deal
with the Association if Capstone was the only one with rights to the
necessary information. Instead of making a phone call to ease Giangobbe’s
concerns, Capstone manipulated its bargaining power amidst the chaos to
deny Zaki his reasonably expected benefit of the bargain. See Wells Fargo
Bank, 201 Ariz. at 490, ¶ 59. Although it was not necessarily unreasonable
for Kim to express a desire to communicate with the Association in writing
rather than by phone, Kim’s less-than-forthright dealings with Giangobbe
significantly contributed to the delay in closing. Thus, the court did not
abuse its discretion by finding Capstone materially breached the contract
by violating the implied covenant of good faith and fair dealing.
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2. The Court’s Conclusion Did Not Contradict the
Express Terms of the Contract.
¶20 Capstone argues the superior court erred by “skipp[ing] the
initial analytical step of first determining what contractual duties existed
under the [agreement].” Capstone contends the utilization of the implied
covenant: (1) ignored the contractual obligations put on Zaki,
(2) improperly forced Capstone to deal with the unreasonably combative
Association, and (3) prevented Capstone from using a provision directly
expressed in the contract. Based on these errors, Capstone reasons it did not
materially breach the contract, and the court should have found Zaki
materially breached his contractual obligations because escrow did not
close. We disagree.
¶21 “The purpose of contract interpretation is to determine the
parties’ intent and enforce that intent.” Figueroa, 222 Ariz. at 593, ¶ 9. To
establish a breach of contract, the plaintiff must prove that: (1) a contract
existed, (2) the defendant failed to perform its obligation under the contract;
and (3) the failure resulted in damages. Graham v. Asbury, 112 Ariz. 184, 185
(1975). The court may make equitable considerations to determine whether
the contract has been breached, including: “the parties’ relative hardships,
the parties’ misconduct, public interest, and adequacy of other remedies.”
Swain v. Bixby Vill. Golf Course Inc., 247 Ariz. 405, 413, ¶ 33 (App. 2019).
¶22 A party may breach the implied covenant of good faith and
fair dealing “even if the express terms [of the agreement] speak to a ‘related
subject.’” Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 424, ¶ 17 (App. 2002).
“The duty of good faith extends beyond the written words of the
contract. . . . [A] party may nevertheless breach its duty of good faith
without actually breaching an express covenant in the contract.” Wells Fargo
Bank, 201 Ariz. at 491, ¶¶ 63–64. Although the covenant of good faith and
fair dealing “cannot directly contradict an express contract term,” a party
can breach the implied covenant “both by exercising express discretion in a
way inconsistent with a party’s reasonable expectations and by acting in
ways not expressly excluded by the contract’s terms but which nevertheless
bear adversely on the party’s reasonably expected benefits of the bargain.”
Kramer, 202 Ariz. at 423–24, ¶ 14. Implied contractual terms “are as much a
part of a contract as are the express terms.” Wells Fargo Bank, 201 Ariz. at
490, ¶ 59.
¶23 First, Capstone argues that the contract “makes clear that Zaki
had the ability to issue written ‘disapprovals,’ which Capstone could elect
to correct or not correct. . . . Zaki could then either cancel the contract or
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proceed to closing.” Therefore, because Zaki did not cancel escrow, he
continued at his own risk. After proceeding at his own risk, Capstone
maintains that Zaki could have fully funded escrow if he wanted to extend
the deadline to close, but by not doing so, Zaki materially breached when
Capstone rightfully enforced the time-is-of-the-essence clause.
¶24 It is uncontested that escrow never closed. However, Zaki had
the right to assume Capstone would timely deal with the Association to
achieve escrow closure. See Kramer, 202 Ariz. at 423, ¶ 14. No additional
duties were mandated upon Capstone by the court outside of the
commitments already implied in the contract. See SunAmp Sys., 172 Ariz. at558–59. The fact that Zaki had duties under the contract to make written
complaints about his disapproval of the property does not negate
Capstone’s obligations to act in good faith under the implied covenant. See
id.; Nolan v. Starlight Pines Homeowners Ass’n, 216 Ariz. 482, 489, ¶ 27 (App.
2007).
¶25 Next, Capstone claims the Court’s findings concerning the
Association’s irrational behavior means Capstone was not in breach when
escrow failed to close. Although the court found that the Association acted
unreasonably and Zaki failed to timely close, substantial evidence supports
the court’s conclusion that Capstone did not reasonably and timely deal
with the Association, obligations it had under the implied covenant. The
superior court did not “force” Capstone to deal with the combative
Association as it claims. The court explicitly stated Capstone was not
obligated “to sue the Association or to take extraordinary efforts to force
the Association to behave,” but instead found an obligation “to act
reasonably and timely when dealing with the Association.” The court held
that Capstone should have done more to ease the Association’s concerns
and doubts instead of avoiding communication.
¶26 Finally, Capstone claims the court erred when it found
Capstone materially breached by exercising its right to use the
time-is-of-the-essence provision under the contract. The court’s ruling did
not contradict the time-is-of-the-essence requirement because Capstone’s
improper behavior did not occur when it utilized the contract provision as
Capstone claims. Instead, Capstone breached the implied covenant when it
employed the clause to get out of the sale, knowing the Association had lied
on the questionnaire. Capstone not only knew of the false information on
the questionnaire but also demonstrated its eagerness to break the
agreement with Zaki to sell the property for more money. Therefore,
requiring Capstone to act in good faith did not contradict the terms of the
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contract or prohibit Capstone from exercising its rights under the
agreement. See Nolan, 216 Ariz. at 489, ¶ 27.
3. Capstone’s Material Breach Excused Zaki’s Failure to
Timely Close.
¶27 During the trial, Zaki testified that he was ready, financially
able, and willing to close but would not negotiate a new deal without title
insurance. Zaki stated he did not want to deposit the remaining $405,000
into escrow because the exact amount was not known, he did not want his
money tied up if escrow was unlikely to close, and he did not want the
funds to be released directly to Kim without title insurance. Based on these
reasons, the superior court concluded Capstone’s material breach excused
Zaki’s funding of escrow, and Zaki was neither at fault for the failed closing
of escrow nor required to fund escrow when it would have been futile.
¶28 The evidence supports the superior court’s conclusions. As
discussed above, Capstone failed to timely deal with the Association and
used the contract’s time-is-of-the-essence clause in bad faith. Meanwhile,
Zaki was deprived of his rights under the contract because: (1) he was
ready, able, and willing to close, (2) his demand for title insurance and
concern about having his money tied up was reasonable in such an unusual
transaction where Capstone’s broker had concerns over Kim’s alleged
faking of his death and email impersonations, and (3) if Zaki had fully
funded escrow, the title agency would not have closed on time. See United
Cal. Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238, 283 (App. 1983) (“A
repudiating party is not entitled to demand performance from the innocent
party or use the latter’s failure to tender as a defense to the
claimant. . . . [T]he law does not require the nonbreaching party to do a
futile or useless act.”). Thus, the court did not err by finding Capstone’s
material breach excused Zaki’s performance to timely close escrow because
Zaki acted in good faith, and Capstone’s material breach occurred first. See
Murphy Farrell Dev., LLLP v. Sourant, 229 Ariz. 124, 133, ¶ 33 (App. 2012)
(“[A]n uncured material breach of contract relieves the non-breaching party
from the duty to perform and can discharge that party from the contract.”);
Zancanaro v. Cross, 85 Ariz. 394, 400 (1959) (“Ordinarily the victim of a minor
or partial breach must continue his own performance, while collecting
damages for whatever loss the minor breach has caused him; the victim of
a material or total breach is excused from further performance. . . .” (citation
omitted)).
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ATTORNEY’S FEES AND COSTS
¶29 Both Zaki and Capstone request an award of attorney’s fees
and costs on appeal according to the contract and under A.R.S. § 12-341.01.
Because Zaki has prevailed on appeal, we award him reasonable attorney’s
fees and costs according to the terms of the contract, subject to compliance
with Arizona Rule of Civil Appellate Procedure 21.
CONCLUSION
¶30 We affirm the superior court’s judgment.
AMY M. WOOD • Clerk of the Court
FILED: AA
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