Klarkowski v. Define ( 2018 )

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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
SCOTT KLARKOWSKI, et al., Plaintiffs/Appellees,
v.
MICHAEL S. DEFINE, et al., Defendants/Appellants.
No. 1 CA-CV 17-0583
FILED 10-09-2018
Appeal from the Superior Court in Maricopa County
Nos. CV 2013-054397
CV 2013-070433
(Consolidated)
The Honorable John R. Hannah Jr., Judge
AFFIRMED
COUNSEL
The Law Office of Michael S. DeFine, Sun City
By Michael S. DeFine
Counsel for Defendant/Appellant Susan Snyder
Michael S. DeFine, Sun City
Defendant/Appellant
The Law Office of Darrell J. Duncan PLLC, Phoenix
By Darrell J. Duncan
Counsel for Plaintiffs/Appellees
KLARKOWSKI, et al. v. DEFINE, et al.
Decision of the Court
MEMORANDUM DECISION
Judge Michael J. Brown delivered the decision of the Court, in which
Presiding Judge James P. Beene and Judge James B. Morse Jr. joined.
B R O W N, Judge:
¶1 Michael DeFine appeals the superior court’s award of
attorneys’ fees and costs to Scott Klarkowski (“Scott”) and Julie Klarkowski
(together, “the Klarkowskis”).1 Because a reasonable basis exists for the
award, we affirm.
BACKGROUND
¶2 In 2009, Scott and DeFine (Scott’s attorney at the time) formed
a limited liability company, DeKlark Renovations LLC (“the LLC”) to
renovate and sell a residence referred to as the Ivy Property (“the
Property”). Although the parties never reduced the specifics of their
agreement to writing, it is undisputed they agreed to equal ownership
stakes and managerial authority in the LLC. As provided by their oral
agreement, DeFine would provide the purchase money for the Property,
Scott would serve as general contractor for the renovations, and they would
share equally the resulting profit.
¶3 In March 2010, Julie Klarkowski emailed DeFine inquiring
about removing Scott’s name from the LLC based on fear of lawsuits from
creditors. After the exchange of several more emails, DeFine filed an
amendment with the corporation commission purporting to remove Scott
as a member of the LLC in May 2010. Over the next three years, the business
continued as it had prior to this amendment. In June 2013, however, Scott
filed several amendments with the corporation commission that not only
reinstated him as a member of the LLC, but also purported to remove
DeFine as a member. The dispute between Scott and DeFine ultimately
escalated to the point where law enforcement ordered both of them off the
1 Michael DeFine’s wife, Susan Snyder, is also a party to the appeal.
For ease of reference, and because all material aspects of this litigation relate
only to Michael, unless otherwise noted we refer to them collectively as
“DeFine.”
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Property, not to return until either or both obtained a court order allowing
entry.
¶4 In a complaint verified by Michael DeFine, the LLC filed suit
against the Klarkowskis, alleging in part breach of contract, conversion,
fraud, tortious interference, and trespass. The LLC also requested a
declaratory judgment to confirm the Klarkowskis were not legally entitled
to act as members, take any action, or claim ownership for or on behalf of
the LLC. The Klarkowskis, in turn, sued DeFine and his law office alleging
various claims, including legal malpractice, breach of contract, and unjust
enrichment. The Klarkowskis also sought declaratory relief confirming that
Scott “remains and is an equal member” of the LLC. DeFine filed a motion
to intervene in the LLC case, seeking to “join in the declaratory judgment
claim to protect his interest in [the LLC].” His motion was denied as moot
given the superior court’s later decision to consolidate the two cases.
¶5 After consolidation, the superior court granted summary
judgment in favor of the Klarkowskis on four of the LLC’s seven claims
against them. In March 2015, the court appointed a receiver to complete the
renovations and sell the Property. In the subsequent bench trial, the court
found that DeFine’s 2010 filing with the corporation commission was
ineffective and Scott remained a member of the LLC with coequal
ownership interest and management authority. The court confirmed Scott’s
right to have his out-of-pocket expenditures on the Property be treated as
an expense of an LLC member, to be repaid from the net proceeds of the
receiver’s sale of the Property. Regarding the Klarkowskis’ claims against
DeFine, the court granted DeFine’s motion for summary judgment on three
of the claims and the remaining four were tried to a jury, resulting in a
defense verdict. The court entered judgment against the Klarkowskis in the
amount of $1,807.11 for jury fees.
¶6 Judgment was entered directing the clerk of the court to
release the proceeds of the sale of the Property and the receiver released
$67,724.11 to the Klarkowskis and $82,567.39 to DeFine. At the same time,
the superior court dismissed the LLC’s remaining claims against the
Klarkowskis on procedural grounds and denied DeFine’s request to refile
the complaint as a derivative action. The court also noted that requests for
attorneys’ fees by any party could be filed within 20 days and that after
consideration of the requests, the court would enter a final judgment.
¶7 DeFine and the Klarkowskis both filed motions for attorneys’
fees pursuant to Arizona Revised Statutes (“A.R.S.”) section 12-341.01, and
all parties requested costs, including the receiver’s fees. The court granted
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Decision of the Court
the Klarkowskis’ motion in part against DeFine and denied DeFine’s and
the LLC’s motions. In its nine-page ruling, the court found that, by virtue
of their success in the declaratory judgment trial, the Klarkowskis were the
successful party under the totality of the litigation. That decision, the court
explained, not only established the Klarkowskis’ right to be reimbursed for
expenditures on the Property, it also ended DeFine’s ability to use the LLC
as a vehicle to maintain claims against the Klarkowskis. Because the
declaratory judgment terminated DeFine’s unilateral authority to control
the LLC, the LLC’s claims against the Klarkowskis necessarily failed. In
response to DeFine’s argument that he prevailed at the jury trial, the court
explained it had no effect on the affirmative relief the Klarkowskis had
already achieved.
¶8 The Klarkowskis requested $124,628.93 in attorneys’ fees, but
the superior court did not award fees related to the jury trial because those
claims “focused primarily on the tort claim for professional negligence.”
After several other reductions, the court entered judgment against “Michael
S. DeFine and Susan Snyder, husband and wife, for attorneys’ fees of
$89,135.00 and taxable costs of $28,197.60.” This timely appeal followed.
DISCUSSION
¶9 The superior court’s determination of who is the successful
party for purposes of awarding attorneys’ fees lies “within the sole
discretion of the trial court and will not be disturbed on appeal if any
reasonable basis exists for it.” Sanborn v. Brooker & Wake Prop. Mgmt., Inc.,
178 Ariz. 425, 430 (App. 1994) (citation omitted). Substantial deference to
the superior court is appropriate “because that court is better able to
evaluate the parties’ positions during the litigation and to determine which
has prevailed.” Berry v. 352 E. Va., L.L.C., 228 Ariz. 9, 13, ¶ 22 (App. 2011)
(citation omitted); see also Associated Indem. Corp. v. Warner, 143 Ariz. 567,
571 (1985) (“We cannot substitute our discretion for that of the trial judge.”
(quoting Davis v. Davis, 78 Ariz. 174, 179 (1954) (Windes, J., specially
concurring))).
A. Successful-Party Determination
¶10 DeFine argues he is the “successful” party in this litigation
because he successfully defended against all the Klarkowskis’ claims
against him and avoided a greater dollar amount of liability than the
Klarkowskis recovered. A party’s successful defense against a majority of
claims, however, is not dispositive of whether it is “successful” for purposes
of § 12-341.01(A). See Lee v. ING Inv. Mgmt., LLC, 240 Ariz. 158, 161, ¶¶ 9–
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10 (App. 2016). Furthermore, “in a case involving multiple claims and
varied success, the trial court may apply a . . . totality of litigation test.”
Berry, 228 Ariz. at 13–14, ¶ 22 (internal quotation and citation omitted). And
when applying the totality of litigation test, the court may consider “other
factors aside from the winning of a money judgment.” See Ayala v. Olaiz,
161 Ariz. 129, 132 (App. 1989).
¶11 DeFine has not shown the superior court abused its discretion
in concluding the declaratory judgment, under the totality of the litigation,
made the Klarkowskis the successful party against both the LLC and
DeFine. The declaratory judgment entitled the Klarkowskis to payment
they would not have otherwise received—reimbursement from the
proceeds of the Property. The Klarkowskis were thus the only party to
obtain affirmative relief in this case. The court also considered important
nonmonetary factors to determine the Klarkowskis were the successful
party, including that the LLC could no longer instigate causes of action
against the Klarkowskis at DeFine’s unilateral behest. DeFine’s argument
to the contrary—that he defeated the claims against him personally—is not
dispositive, especially in light of the court’s proper use of the totality of the
litigation approach. See Lee, 240 Ariz. at 161, ¶ 10. Furthermore, DeFine’s
argument that the LLC disbursed more money to him than the Klarkowskis
after the bench trial is inapposite. This was money DeFine was already
entitled to as a member of the LLC. Absent the declaratory judgment,
DeFine would have received the entire proceeds from the sale of the
Property and the Klarkowskis would have received nothing. Therefore, a
reasonable basis exists for the court’s determination that the declaratory
judgment made the Klarkowskis the successful party.
¶12 In reaching this conclusion, we note the broad discretion
afforded the superior court to determine whether attorneys’ fees should be
awarded is especially appropriate in a case such as this one. With a
complicated procedural history involving several intertwined contract and
tort claims, and where the only affirmative relief obtained was a declaratory
judgment that entitled a party to reimbursement of expenses, the superior
court was in the best position “to evaluate the parties’ positions during the
litigation and to determine which [party] prevailed.” Berry, 228 Ariz. at 13,
¶22.
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Decision of the Court
B. Rejection of Settlement Offers
¶13 Section 12-341.01(A) provides as follows:
In any contested action arising out of a contract, express or
implied, the court may award the successful party reasonable
attorney fees. If a written settlement offer is rejected and the
judgment finally obtained is equal to or more favorable to the
offeror than an offer made in writing to settle any contested
action arising out of a contract, the offeror is deemed to be the
successful party from the date of the offer and the court may
award the successful party reasonable attorney fees.
The second sentence of § 12-341.01(A) obliges a court to compare a written
settlement offer with the “judgment finally obtained” in the case. Hall v.
Read Dev., Inc., 229 Ariz. 277, 279, ¶ 9 (App. 2012). “If the offer is more
favorable than the judgment finally obtained, then the offeror is ‘deemed’
to be the successful party ‘from the date of the offer.’” Id. This court has
explained the phrase “judgment finally obtained” includes “reasonable fees
and costs incurred as of the date the offer was made.” Id. at 283, ¶ 20. We
review the superior court’s resolution of the “settlement comparison test”
called for by this section for abuse of discretion and will uphold it if legally
correct for any reason. Id. at 284, ¶ 26 & n.10 (citation omitted).
¶14 Here, the “judgment finally obtained” by the Klarkowskis,
inclusive of attorneys’ fees and costs, was $183,249.60. Thus, to achieve
successful-party status under the settlement comparison test, DeFine was
required to establish that he made a written settlement offer that exceeded
the judgment finally obtained, evaluated within the context of each
settlement offer.
¶15 DeFine argues the Klarkowskis cannot be the successful party
under the second sentence of § 12-341.01(A) because they did not obtain a
judgment more favorable than any of DeFine’s written settlement offers.
Thus, according to DeFine, he is the “successful party” in the action.
DeFine also contends the superior court abused its discretion by
considering improper factors when comparing the settlement offers to the
final judgment.
¶16 DeFine points to five settlement offers, asserting each of them
qualify him as the “successful party” under the statute. First, on December
9, 2013, and “in open court,” DeFine offered the Klarkowskis an “equal
50/50 split of [the] LLC.” Second, on January 14, 2014, DeFine offered the
Klarkowskis his ownership interest in the LLC for $191,000. Third, on
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Decision of the Court
March 7, 2014, DeFine offered to buy out the Klarkowskis’ interest in the
LLC or have his interest bought out by the Klarkowskis with the price
determined by the following formula: “provable expenses + 1/2 (average
of 3 most recent comps – all expenses [including the LLC’s attorneys’ fees,
costs, operating expenses, and debt]).” Fourth, during a September 23,
2015, settlement conference, DeFine allegedly offered to split the proceeds
from the sale of the house evenly with the Klarkowskis. Fifth, on October
16, 2015, DeFine offered to split the net proceeds from the Property and
make Scott the sole member of the LLC, with both parties to bear their own
fees and costs.
¶17 DeFine’s first and fourth offers cannot make him the
“successful party” under the second sentence of § 12-341.01(A). The statute
states twice that it applies to “written” offers only. Conceding this fact,
DeFine argues that because the statute “does not say who has to write it” a
court-made record of the settlement offer in a minute entry satisfies the
statute. Such an interpretation would contradict the statute’s plain
language, which speaks of offers “made in writing to settle.” A.R.S.
§ 12-341.01(A). Plainly, offers are not “made in writing” when delivered
orally, even if a court records them after the fact in a minute entry. Rather,
the second sentence of § 12-341.01(A) requires the offeror, when a
settlement offer is made, to do so in writing to qualify for treatment as the
“successful party.” Moreover, as the superior court noted, because the first
offer would have left expense allocation issues unresolved, whether the first
offer was more favorable to the Klarkowskis than the judgment they finally
obtained is speculative at best. Accordingly, the court acted within its
discretion when it rejected DeFine’s argument that these two settlement
offers, neither of which were in writing, meant he should be “deemed to be
the successful party.”
¶18 Nor did the superior court abuse its discretion when it
concluded that DeFine’s second offer would not have been as favorable to
the Klarkowskis as the judgment they finally obtained. The court rejected
this offer as a basis for making DeFine the successful party because it found
“the Klarkowskis would have lost more than $45,000 had they accepted
DeFine’s offer.” The court reached this conclusion by adding the total
expenses actually incurred to finish work on the Property, approximately
$170,558.58, and the $191,000 DeFine set as his buyout price. The court then
subtracted that amount from the $314,770.17 net proceeds from the
Property sale. DeFine faults the court for using actual expenses incurred in
developing the Property, and the actual proceeds from its sale, instead of
Scott’s estimates of those figures at the time DeFine made the offer. The
decision to use actual expenses and proceeds from the sale provides a more
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accurate comparison with the “judgment finally obtained” and was well
within the court’s discretion when conducting the settlement comparison
test.
¶19 The superior court also acted within its discretion when it
concluded that the third settlement offer was less favorable to the
Klarkowskis than the final judgment. Because DeFine, in part, based the
amount he would pay the Klarkowskis on an average of the three most
recent “comps,” this offer, like the first, left important issues unresolved
and its favorability to the Klarkowskis is unknown. The court also signaled
that resolution of this issue might be especially difficult in light of the
parties’ history of disagreement on the price of the Property. In addition to
the uncertain benefit, this offer would have required the Klarkowskis to pay
part of the LLC’s attorneys’ fees in the litigation. DeFine objects to the
court’s decision, arguing that the formula would have resulted in his offer
being greater than what the Klarkowskis won at trial. DeFine’s argument,
however, merely illustrates the soundness of the court’s conclusion. DeFine
is unable to point to concrete numbers that show the formula was certain to
produce a more favorable outcome for the Klarkowskis than the trial. This
demonstrates the court acted within its discretion when it held the third
settlement offer too indeterminate to qualify DeFine as the successful party.
¶20 Regarding the fifth settlement offer, the superior court found
it was less favorable to the Klarkowskis than the judgment finally obtained
because, although they would have received half the sale proceeds of the
Property, it would have required them to bear their own attorneys’ fees and
costs. At that point in the litigation, the Klarkowskis had incurred a
substantial amount of attorneys’ fees and costs, and DeFine has not
challenged, much less shown, that any of the claimed fees or costs were
unreasonable. Thus, he has failed to show his offer was more favorable to
the Klarkowskis than the judgment finally obtained. DeFine argues the
court erred in applying the statute because it should not have included
Klarkowskis’ attorneys’ fees in the amount of the “judgment finally
obtained.” DeFine, however, ignores our decision in Hall, where we held
that § 12-341.01(A) requires a court to consider “reasonable fees and costs
incurred as of the date the offer was made.” Hall, 229 Ariz. at 283, ¶ 20.
This is precisely what the superior court did here. For these reasons, we
conclude the court did not abuse its discretion in deciding the “judgment
finally obtained” by the Klarkowskis was more favorable than any of these
five settlement offers.
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C. DeFine’s Personal Liability for Fees and Costs
¶21 In awarding fees against DeFine, the superior court reasoned
that because “[the LLC] and DeFine were aligned against the Klarkowskis
throughout the litigation” so closely, the Klarkowskis’ victory against the
LLC with respect to the declaratory judgment was also a victory against
DeFine. The LLC’s claims, the court explained, relied on “DeFine’s claimed
authority to act unilaterally on behalf of [the LLC].” But when the court
declared Scott was still a member of the LLC, “DeFine’s claim of authority
evaporated.” As a result, DeFine could no longer use the LLC “as a vehicle
for maintaining causes of action against Klarkowski.”
¶22 DeFine argues the superior court erred in holding him
responsible for attorneys’ fees because the LLC, not he, was “adverse” to
the Klarkowskis on the relevant claims. “[T]o recover attorneys’ fees under
A.R.S. § 12–341.01, it is necessary that the parties be adverse.” Pioneer
Roofing Co. v. Mardian Const. Co., 152 Ariz. 455, 466 (App. 1986).
“Adversity” for purposes of § 12-341.01 does not depend solely on “the
parties’ alignment in the pleadings, but rather must be ascertained from the
opposing positions or interests of the parties.” Id. The superior court found
that DeFine and the LLC were aligned in that they advocated an identical
theory in all subsequent “proceedings up to and including the declaratory
judgment trial.” So aligned were the interests of these two that the court
allowed DeFine to personally participate in the declaratory judgment trial,
even though the LLC’s claim against the Klarkowskis was technically the
only one at issue in the trial. Accordingly, the court did not abuse its
discretion in finding DeFine’s positions and interests so substantively
similar to the LLC’s throughout the litigation as to make him “adverse” to
the Klarkowskis for purposes of § 12-341.01.
¶23 DeFine also argues the superior court inappropriately held
him personally liable for the debts of the LLC “despite no claim to pierce
the corporate veil, no evidence [of] alter ego, and the trial court’s rejection
of [his] attempt to pursue [the LLC]’s claims in a derivative lawsuit.”
Relying only on A.R.S. § 29-651, DeFine contends that “limited liability
company members are not liable for the company’s debts.” However, the
Arizona Limited Liability Company Act imposes joint and several liability
on “all persons who assume to act as a limited liability company without
authority to do so . . . for all debts and liabilities incurred by the persons so
acting.” A.R.S. § 29-652. Significantly, each of the LLC’s claims against the
Klarkowskis were premised on DeFine’s alleged authority to act
unilaterally on the LLC’s behalf and deal with Scott as an outsider. But
because Scott was still a member of the LLC, DeFine never actually had
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such authority. The LLC’s case against the Klarkowskis was therefore an
unauthorized action by DeFine purporting to act as the LLC for which
DeFine may be held “jointly and severally liable for all debts and liabilities
[he] incurred,” which in this case includes attorneys’ fees. See id. Despite
DeFine’s assertion to the contrary, nothing about the court’s imposition of
a judgment against him for attorneys’ fees in this case is inconsistent with
Arizona law.
D. Procedural Compliance
¶24 DeFine argues the superior court improperly granted the
Klarkowskis’ motion for attorneys’ fees because the Klarkowskis did not
comply with Arizona Rule of Civil Procedure (“Rule”) 54(h)(2)(A) because
the February 21, 2017, form of judgment neither stated the specific sum of
attorneys’ fees awarded by the court, nor included a blank in the form of
judgment to allow the court to include an amount later. However, by its
terms, subsection (h) of Rule 54 does not apply when Rule 54 otherwise
allows for a later motion for attorneys’ fees or request for costs. Rule
54(h)(1) (“Except as otherwise allowed by this rule . . . .”). One such
exception is a motion for fees filed pursuant to Rule 54(g)(2). The
Klarkowskis’ motion for attorneys’ fees complied with the requirements of
Rule 54(g)(2) and was therefore not subject to Rule 54(h)(2)(A).
¶25 DeFine also appears to argue that because the release of the
proceeds from the sale of the Property effectively meant all claims and
liabilities against the LLC had been adjudicated, the decision was subject to
Rule 54(b), meaning the Klarkowskis were required to move for attorneys’
fees within 20 days of the release of those funds under Rule 54(g)(3)(A)(i).
However, because the court never entered judgment under Rule 54(b), and
no party moved for judgment under that Rule, the parties were permitted
to wait until the conclusion of the action before moving for attorneys’ fees.
See Rule 54(g)(3)(A)(ii).2
2 DeFine does not contest the reasonableness of the amount of fees
awarded. Instead, he suggests the Klarkowskis’ failure to adequately
discuss the Warner factors in their motion for attorneys’ fees somehow
taints the superior court’s award. See Warner, 143 Ariz. at 570. However,
DeFine cites no authority requiring the Klarkowskis to explicitly analyze
those factors in their motion. Furthermore, even though it was not required
to do so, the court did provide analysis of at least some of the factors. See
Tucson Estates Prop. Owners Ass’n, Inc. v. McGovern, 239 Ariz. 52, 56, ¶ 12
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E. Recovery of Costs
¶26 Finally, DeFine challenges the superior court’s award of
taxable costs to the Klarkowskis under A.R.S. § 12-341. To the extent DeFine
argues the Klarkowskis were not entitled to recover costs because they were
not the successful party in the litigation, we conclude the court did not
abuse its discretion for the same reasons outlined above. DeFine also
argues the court erred by granting the Klarkowskis the receiver’s fees as
costs, because the Klarkowskis allegedly sought those fees as damages at
the jury trial. Nothing in the record supports this assertion. DeFine’s
appellate briefing is contradictory on this point, also claiming “[t]he only
damages the Klarkowskis sought were an equal interest in [the LLC] and
their expectancy interest from the sale of [the Property].” Moreover, DeFine
sought half of the receiver’s fees as costs himself in his motion for fees and
costs. DeFine fails to show how the court’s inclusion of the receiver’s fees
as taxable costs was an abuse of discretion, and we affirm the court’s
decision on this matter.
F. Fees and Costs on Appeal
¶27 DeFine requests attorneys’ fees incurred on appeal under
§ 12-341.01(A). Because DeFine has not prevailed on appeal, we deny his
request. The Klarkowskis also request attorneys’ fees on appeal but fail to
provide any substantive basis for the request, as required by Arizona Rule
of Civil Appellate Procedure (“ARCAP”) 21(a)(2) (“A claim for fees under
this Rule must specifically state the statute, rule, decisional law, contract, or
other authority for an award of attorneys’ fees.”). Although we may
nonetheless exercise our discretion to award fees despite this failure, we
decline to deviate from the rule in this case. See ARCAP 21(a)(2) (stating
that “the appellate court may decline to award fees” if a party fails to
provide a substantive basis for the fee request). We therefore deny the
Klarkowskis’ request for attorneys’ fees. As the successful party on appeal,
however, we award the Klarkowskis their taxable costs upon compliance
with ARCAP 21.
(App. 2016) (“We may uphold a decision on attorney fees . . . even if the
trial court gave no reasons for denying the request for fees.”). Thus,
DeFine’s concern over the Warner factors is misplaced.
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CONCLUSION
¶28 For the foregoing reasons, we affirm the superior court’s
judgment awarding attorneys’ fees and costs to the Klarkowskis.
AMY M. WOOD • Clerk of the Court
FILED: JT
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