Lisa Frank v. James A. Green

FILED BY CLERK
IN THE COURT OF APPEALS JAN 20 2009
STATE OF ARIZONA COURT OF APPEALS
DIVISION TWO DIVISION TWO
JAMES A. GREEN, ) 2 CA-CV 2008-0028
) DEPARTMENT A
Cross-Claimant/ )
Counterdefendant/Appellant, ) OPINION
)
v. )
)
LISA FRANK, INC., an Arizona )
corporation, )
)
Cross-Defendant/ )
Counterclaimant/Appellee. )
)
APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY
Cause No. C-20055273
Honorable Deborah Bernini, Judge
AFFIRMED IN PART; VACATED IN PART
Lewis and Roca LLP
By John N. Iurino, Sivan R. Korn, and Tucson
Kimberly A. Demarchi Attorneys for Cross-Claimant/
Counterdefendant/Appellant
McNamara, Goldsmith, Jackson & Macdonald, P.C.
By G. Todd Jackson Tucson
and
Law Offices of Mark Wiemelt, PC
By Robert L. Knechtel Chicago, Illinois
Attorneys for Cross-Defendant/
Counterclaimant/Appellee
B R A M M E R, Judge.
¶1 Appellant James Green appeals from the trial court’s sanctions order striking
his reply to the counterclaim filed against him by appellee Lisa Frank, Inc. (LFI), entering
default in favor of LFI, and dismissing with prejudice his cross-claim against LFI. Green
argues the trial court could not properly dismiss his cross-claim and reply because his
violations of court orders did not prejudice LFI. He additionally contends the trial court
erred by entering default judgment on several of LFI’s claims. We affirm in part and vacate
in part.
Factual and Procedural Background
¶2 This appeal arises from protracted litigation concerning the control and
management of LFI by Green and Lisa Frank Green (Lisa Frank), who served as directors
of LFI. Lisa Frank initiated the action in September 2005 by filing a lawsuit against Green
and LFI. As later amended, Lisa Frank’s complaint sought, inter alia, to remove Green as
director, president, and chief operating officer of LFI; to enforce a stock buy-sell agreement
among herself, Green, and LFI; and to assert a claim against Green for breach of fiduciary
duties.1 Green filed a counterclaim against Lisa Frank and a cross-claim against LFI, seeking
a declaration that the buy-sell agreement was unenforceable, asserting Lisa Frank had
violated her fiduciary duties to him and to LFI, and making additional claims related to an
1
Lisa Frank later dismissed her claims against LFI.
2
airplane purchased by LFI. LFI counterclaimed against Green, seeking an accounting and
alleging he had “expended and diverted corporate funds for personal expenditures, removed
corporate property from LFI’s offices and facilities,” and used corporate property for
personal reasons. LFI also sought damages from Green for breach of fiduciary duty,
conversion, computer fraud under 18 U.S.C. § 1030, and copyright violations. LFI
additionally requested that Green be removed as a director of LFI and that the buy-sell
agreement be enforced.
¶3 In October 2005, the trial court entered a stipulated order, the provisions of
which included temporarily enjoining Green from “removing any intellectual property or
other assets from” LFI. In April 2006, LFI filed a motion asking the court to find Green in
contempt of that order and impose sanctions. LFI asserted that, on at least two occasions
immediately following the entry of the October 2005 order, Green had used a moving van
to remove property from LFI’s premises, including computers containing proprietary LFI
data and artwork, and “items from a locked storage area for original company artwork and
advertising.” LFI also asserted that, prior to the October order, Green had directed LFI
employees to create copies of LFI computer art files on compact discs.
¶4 After a hearing on LFI’s motion in May 2006, the court on May 23 ordered
Green to return within three days specified property, including several computers and storage
media; ordered him not to “alter, delete, remove, or transfer any information” from the
computers or other storage media; and ordered that the parties’ information technology
3
experts would then “segregate and permanently remove” any of Green’s personal files from
the returned computers. The court warned Green that failure to comply with the order could
result in “severe consequences, up to and including incarceration.”
¶5 Although Green returned several computers in compliance with the order, he
did not return one computer containing LFI data until five days after the deadline. In a
previous motion to modify the order, Green had informed the court he was unable to return
that computer on time because he was unable to “insure that he c[ould] access [personal]
photographs [stored on that computer] on a new computer.” In June 2006, attached to
another motion to modify the May 23 order, Green filed a signed but undated declaration
listing items he had returned to the court. In it Green stated that he was not “in possession
or control of any storage media, including, but without limitation . . . [compact discs].”
¶6 LFI filed another motion for sanctions in August 2006, asserting Green had
continued to violate the May order by failing to return a laptop computer and giving a
“pretext” reason for the late return. LFI renewed its motion in July 2007, alleging forensic
analysis of the returned computers had revealed that, after the court had entered its May 2006
order, Green had copied LFI files from those computers in violation of the order.
¶7 After a three-day hearing on LFI’s motion for sanctions in November, the court
in December 2007 issued a ruling containing its findings of fact and conclusions of law. The
court found the evidence presented established that Green had removed computers containing
proprietary LFI data in violation of the October 2005 order. It further found that, the day
4
after the court had entered its May 2006 order requiring Green to return those items and
prohibiting him from copying any data, ten compact discs of material had been copied from
one of the LFI computers in Green’s possession—the same computer Green had not returned
until five days after the deadline to do so. In addition, the court found twenty-two files on
that computer had been “transferred to an attached printer,” over forty LFI graphics files had
been transferred from that computer to one owned by Green, and nine additional LFI files
had been “accessed in a manner consistent with an email attachment.” The court also noted
that Green had not returned the ten compact discs.
¶8 The court found that “Green, and not counsel, [wa]s personally culpable for
wilful and repeated violations of the Court’s Orders . . . including, but not limited to the
removal and retention of hardware, software, computer programs, intellectual and proprietary
LFI property, artwork and graphics in deliberate violation of the Court’s Orders.”
Commenting that it had “considered an array of sanctions, including the imposition of
attorney fees and even incarceration,” the court concluded such sanctions “have failed to
impress Mr. Green in the past and do not address the damage to the intellectual property of
[LFI] that has occurred and continues to occur as a result of Green’s contempt for the judicial
process, court orders and this Court.”
¶9 The trial court entered a sanctions order dismissing Green’s cross-claim against
LFI, striking his reply to LFI’s counterclaim against him, and granting LFI judgment “except
5
for the finding of fraud in paragraph 39 of the Fifth Claim for Relief.” 2 The court also
ordered that a writ of replevin issue to deliver “all computers and digital storage media in
Green’s possession or control to the custody of the Court for forensic review and removal
of LFI data, artwork, or documents.” Additionally, the court terminated Green’s status as a
director of LFI and awarded LFI its reasonable costs, attorney fees, “and all expert witness
costs, expenses and fees incurred in connection with this and prior efforts to secure
enforcement of the Court’s Orders,” as well as attorney fees and costs “as the prevailing party
on its Counterclaim.” The court then signed and entered a judgment in favor of LFI. The
judgment incorporated the sanctions order and declared the buy-sell agreement valid and
enforceable but stated that “LFI’s monetary recovery pursuant to its accounting and damage
claims shall be determined by subsequent proceedings.” This appeal followed.
Jurisdiction
¶10 We first address the fundamental issue of our jurisdiction, as we must. See
Osuna v. Wal-Mart Stores, Inc., 214 Ariz. 286, n.2, 151 P.3d 1267, 1270 n.2 (App. 2007).
Green argues we have jurisdiction to address his appeal, while LFI argues we do not.
Relying on A.R.S. § 12-864, LFI reasons we lack jurisdiction because the trial court’s order
2
The court’s ruling stated that it had struck Green’s reply to LFI’s “March 24, 2006”
counterclaim. But that reply had been superseded by Green’s reply to LFI’s amended
counterclaim. Thus, striking the first reply would have had no effect. Because the court’s
clear intent was to dispose of the claims between LFI and Green, we interpret this ruling as
striking Green’s more recently filed reply and entering judgment in favor of LFI on its
amended counterclaim.
6
sanctioning Green is an order of contempt, based on LFI’s request that Green be held in
contempt for disobeying the court’s orders. LFI relies on State v. Mulligan, 126 Ariz. 210,
216, 613 P.2d 1266, 1272 (1980), in which the defendant, besides appealing his criminal
conviction, also sought to appeal several criminal contempt citations. Our supreme court
stated: “We find no authorization of such an appeal from the contempt charges, either by
statute or rules of this court. Findings of contempt are non-appealable orders.” Id. The court
concluded its finding of nonappealability with the observation that Mulligan’s “review
remedy” of the contempt citations was by special action. Id. at 217, 613 P.2d at 1273.
¶11 In its motion for sanctions, LFI asked the trial court to sanction Green pursuant
to Rules 37 and 65(j)(1), Ariz. R. Civ. P., but also argued the court “ha[d] the inherent
authority to sanction those who abuse the judicial process or mishandle
evidence”—presumably a request that the court find Green in civil contempt under § 12-864.
The court’s minute entry granting LFI’s motion cited much of the same authority as LFI and
ordered sanctions “[a]s a result of Green’s wilful violation of the Court’s previous orders
pertaining to the turnover of LFI property and evidence.” Although the court did not cite
§ 12-864 as authority for the sanctions it imposed and did not expressly find Green in
contempt, as we explain below in ¶ 29 infra, it nonetheless appears the court sanctioned
Green pursuant to § 12-864. But, whether the court’s order is correctly characterized as a
discovery sanction, a finding of civil contempt under § 12-864, or some hybrid of the two,
is ultimately irrelevant to our jurisdiction. The question we address is whether the court’s
7
sanctions order is appealable under the statute governing our appellate jurisdiction, A.R.S.
§ 12-2101.
¶12 In concluding we have jurisdiction to address this appeal, we begin with two
principles: one found in § 12-2101 and the other contained within the rationale of the cases
holding that contempt orders are not appealable. The first principle guides our appellate
jurisdiction—we must entertain appeals from superior court orders that finally determine the
merits of a cause or are otherwise made appealable by statute. The second principle limits
our jurisdiction—we may not review lower courts’ contempt orders. We do not find these
principles in conflict here. Rather, we conclude we indeed have jurisdiction over, and must
address on the merits, the superior court order from which Green appeals.
¶13 We first acknowledge that we may not ignore and cannot alter or overrule our
supreme court. See City of Phoenix v. Leroy’s Liquors, Inc., 177 Ariz. 375, 378, 868 P.2d
958, 961 (App. 1993) (“[W]e are bound by decisions of the Arizona Supreme Court and have
no authority to overrule, modify, or disregard them.”). A review of our supreme court’s
decisions in this area, however, reveals clearly that none of them has held unappealable an
order rendered appealable by § 12-2101, even when the order rests in whole or in part on a
finding of contempt.3 Although one could posit the trial court’s order sanctioning Green is
3
Our supreme court has repeatedly ruled that contempt orders are not appealable. But,
unlike the order here, none of the orders addressed in those cases wholly disposed of a
counterclaim and defenses in a civil action, and none of the cases suggests such an order
would not be appealable. See State v. Mulligan, 126 Ariz. 210, 216-17, 613 P.2d 1266, 1272-
73 (1980) (dismissing appeal from criminal contempt orders sentencing defendant to jail);
8
unappealable because it is associated with, or based on, an order sanctioning contempt, we
disagree.
¶14 “In Arizona, our statutes and rules of appellate procedure permit appeals only
from final judgments or orders.” S. Cal. Edison Co. v. Peabody W. Coal Co., 194 Ariz. 47,
Ex parte Wright, 36 Ariz. 8, 16, 281 P. 944, 947 (1929) (holding nonappealable civil
contempt order resulting in fines or imprisonment); Van Dyke v. Superior Court, 24 Ariz.
508, 543, 211 P. 576, 588 (1922) (noting “common-law rule that every court of record is the
exclusive judge of contempts committed against its authority and dignity, and, as a corollary,
that no appeal lies from a judgment in such proceedings, in the absence of constitutional or
statutory authority conferring the right”); Ex parte Brown, 3 Ariz. 411, 412, 77 P. 489, 489
(Terr. 1892) (stating contempt order not appealable and remanding prisoners into sheriff’s
custody). We also note that, although this rule has oft been repeated by this court, none of
those decisions encompasses a final judgment in a civil action based on a contempt order.
See, e.g., State ex rel. Dep’t of Econ. Sec. v. Burton, 205 Ariz. 27, ¶¶ 17-18, 66 P.3d 70, 73
(App. 2003) (no appeal from contempt order for failure to make child support payments);
Danielson v. Evans, 201 Ariz. 401, ¶¶ 34-35, 37, 36 P.3d 749, 759 (App. 2001) (no appellate
jurisdiction over contempt order related to failure to make property settlement payments in
dissolution action); Elia v. Pifer, 194 Ariz. 74, ¶¶ 26, 30, 977 P.2d 796, 802 (App. 1998) (no
appeal from contempt finding for failure to make support payments); Pace v. Pace, 128 Ariz.
455, 456-57, 626 P.2d 619, 620-21 (App. 1981) (same); In re Maricopa County Juv. Action
No. JT-295003, 126 Ariz. 409, 410-11, 616 P.2d 84, 85-86 (App. 1980) (no appeal from
contempt order of imprisonment and fines for actions “obstructing the administration of
justice and lessening the dignity and authority of the Court” in juvenile adjudication); Riley
v. Superior Court, 124 Ariz. 498, 498-99, 605 P.2d 900, 900-01 (App. 1979) (contempt order
of imprisonment and fine against prosecutor in probation violation hearing not appealable);
Haggard v. Superior Court, 26 Ariz. App. 162, 162-63, 547 P.2d 14, 14-15 (1976) (no appeal
from contempt order fining attorney for failure to appear on behalf of client in criminal
prosecution); United Farm Workers Nat’l Union v. Heggblade-Marguleas-Tenneco, Inc., 21
Ariz. App. 514, 514-15, 520 P.2d 1191, 1191-92 (1974) (contempt order for violating
judgment not appealable); Van Baalen v. Superior Court, 19 Ariz. App. 512, 512-13, 508
P.2d 771, 771-72 (1973) (civil contempt order fining attorney for failing to appear in criminal
action not appealable); In re Anonymous, 4 Ariz. App. 170, 171, 418 P.2d 416, 417 (1966)
(same); Herzog v. Reinhardt, 2 Ariz. App. 103, 104-05, 406 P.2d 738, 739-40 (1965) (no
appeal from contempt order enforcing child custody order).
9
¶ 16, 977 P.2d 769, 774 (1999). “In the civil context, the right to appeal is not absolute but
exists only by statute.” Id. Whether an order is final and appealable depends not on its form
but on “‘its substance or effect.’” Props. Inv. Enters., Ltd. v. Found. for Airborne Relief, Inc.,
115 Ariz. 52, 54, 563 P.2d 307, 309 (App. 1977), quoting Connolly v. Great Basin Ins. Co.,
5 Ariz. App. 117, 120, 423 P.2d 732, 735 (1967). An appealable final judgment under
§ 12-2101(B) “‘decides and disposes of the cause on its merits, leaving no question open for
judicial determination.’” 4 Id., quoting Decker v. City of Tucson, 4 Ariz. App. 270, 272, 419
P.2d 400, 402 (1966).
¶15 The judgment from which Green appeals dismissed his cross-claim against LFI
with prejudice and struck his reply to LFI’s counterclaim, “grant[ing] judgment in [LFI’s]
favor . . . except for the finding of fraud.” It declared the buy-sell agreement valid and
enforceable, ordered that agreement to be performed, enjoined Green from using or
distributing LFI’s data and artwork, terminated Green’s status as a director of LFI, and
ordered Green to surrender LFI computers and other materials—all as requested in LFI’s
counterclaim. But, because the judgment leaves open the question of damages, it is not a
final judgment as contemplated by § 12-2101(B). The judgment, however, contains the trial
4
The phrase “on the merits” does not mean the cause of action had to be determined
after trial. A decision is “‘on the merits’ if it finally resolves an action in a manner that
precludes later relitigation of the claims involved. Such a judgment may result from an
actual trial on the substantive issues but it need not do so.” 4501 Northpoint LP v. Maricopa
County, 212 Ariz. 98, ¶ 16, 128 P.3d 215, 218 (2006) (internal citations omitted). A decision
on the merits includes a judgment resulting from a stipulation, a grant of summary judgment,
or a dismissal with prejudice. Id. ¶ 17.
10
court’s findings pursuant to Rule 54(b), Ariz. R. Civ. P., that there are “no remaining issues
on the claims between Green and LFI aside from the monetary amount of LFI’s recovery and
that there is no just reason for delay on this judgment,” and it “directs the immediate entry”
of the judgment. Thus, the judgment is appealable pursuant to § 12-2101(G), which allows
appeal “[f]rom an interlocutory judgment which determines the rights of the parties and it
directs an accounting or other proceeding to determine the amount of the recovery.” See
Bilke v. State, 206 Ariz. 462, ¶ 28, 80 P.3d 269, 275 (2003); Salerno v. Atl. Mut. Ins. Co., 198
Ariz. 54, ¶ 12, 6 P.3d 758, 761-62 (App. 2000).
¶16 In none of the cases reciting the rule that contempt orders are unappealable
were the orders at issue final judgments—unlike the trial court’s order here, they did not
decide the merits of the underlying action, nor did they fall within the definition of an
appealable interlocutory order. See n.1 supra; see also § 12-2101(C) through (L); Van Dyke
v. Superior Court, 24 Ariz. 508, 544, 211 P. 576, 588 (1922) (contempt is not “special
proceeding[]” allowing appeal under statute governing appellate jurisdiction). Accordingly,
we do not find those cases dispositive of our jurisdiction here. The question whether a party
may appeal a contempt order that is, in substance and effect, an appealable order under
§ 12-2101 has not been previously addressed in Arizona. We need not ignore or alter any
prior Arizona case law to find that we have jurisdiction.
¶17 Moreover, the reason behind the rule disallowing appeals from pure contempt
orders is simply inapplicable here. As Division One of this court has explained,
11
The rationale [for the rule] is that parties have already been
given the chance to appeal from the order that forms the basis
for contempt. Enforcement of such orders cannot be held up by
contempt appeals; where review of a contempt order is needed,
it must be by the speedier route of special action petition.
Elia v. Pifer, 194 Ariz. 74, ¶ 30, 977 P.2d 976, 802 (App. 1998). Here, of course, there is no
previous, appealable order or judgment “form[ing] the basis for contempt.” Id. Indeed, there
is no other order to enforce and nothing to be delayed by an appeal; the action between Green
and LFI is over except for the determination of damages. An appeal is the only avenue
available that assures review of the judgment that finally determined Green’s liability to LFI
and disposed of his claims against it.
¶18 Although a finding of criminal contempt is specifically appealable by statute,
see A.R.S. § 12-863(D), there is no such provision in § 12-864, the civil contempt statute.
And our supreme court has previously found civil contempt orders unappealable, noting that
§ 12-864 provides that they be governed by “the practice and usage of the common law.” See
Ex parte Wright, 36 Ariz. 8, 16, 281 P. 944, 947 (1929). Accordingly, one could conclude
not only that the legislature has failed to provide expressly for an appeal from a civil
contempt order, but also that the common law rule that contempt orders are unappealable
controls.
¶19 We disagree with this proposition for three reasons. First, an appeal from a
criminal contempt conviction is markedly different from a typical criminal appeal. A
criminal contempt proceeding may be initiated, inter alia, “upon affidavit of some credible
12
person.” A.R.S. § 12-862(A). Our criminal appeals statute, A.R.S. § 13-4031, permits
appeal only from a “prosecution by indictment, information or complaint,” which would
appear to exclude contempt proceedings initiated by affidavit. And § 12-863(D) provides
that, during an appeal from a conviction for criminal contempt, the execution of sentence is
stayed. The statutes governing most criminal appeals have no equivalent provision. See
A.R.S. §§ 13-4031 through 13-4042. Thus, it appears the legislature included specific
appeal rights under § 12-863(D) because those rights are not conferred elsewhere in our
statutes. The inclusion of appellate rights for criminal contempt does not necessarily suggest
the failure to provide appellate rights for civil contempt in § 12-864 means the legislature
intended to preclude appeal from a civil contempt order; it is reasonable to conclude the
legislature intended § 12-2101 to govern appeals from such orders. Moreover, our supreme
court suggested in Mulligan, 126 Ariz. at 216-17, 613 P.2d at 1272-73, that appeals from
contempt orders were unavailable not because they were precluded by the legislature’s
reference in § 12-864 to the common law, but rather because they were not provided for
elsewhere in our statutes or rules. See also Van Dyke, 24 Ariz. at 543, 211 P. at 588 (no
appeal from civil contempt “in the absence of constitutional or statutory authority conferring
the right”) (emphasis added). Unlike the contempt orders at issue in Mulligan and Van Dyke,
however, there is statutory authority for an appeal from the order at issue here.
¶20 Second, the reason civil contempt orders are typically unappealable is based
on the common law, not on the failure of § 12-864 to provide a right to appeal. See Wright,
13
36 Ariz. at 13, 281 P. at 946. “[A] statutory provision authorized by the Constitution always
supersedes the common law.” State ex rel. Conway v. Glenn, 60 Ariz. 22, 30, 131 P.2d 363,
367 (1942). Thus, to the extent §§ 12-864 and 12-2101 may be in conflict on this question,
we conclude the legislature’s specific delineation of our appellate jurisdiction under
§ 12-2101 controls.
¶21 Third, we find no conflict between §§ 12-864 and 12-2101. Whenever it is
reasonably practical to do so, we must interpret statutes so they are harmonious and
consistent with each other. See Yarborough v. Montoya-Paez, 214 Ariz. 1, ¶ 22, 147 P.3d
755, 761 (App. 2006). And “[s]tatutes should be construed consistent with the common
law.” United Bank v. Mesa N.O. Nelson Co., 121 Ariz. 438, 442, 590 P.2d 1384, 1388
(1979). The most harmonious way to read these statutes is to conclude that contempt orders
are unappealable unless the substance or effect of the order in question—beyond including
a “finding[] of contempt,” Mulligan, 126 Ariz. at 216, 613 P.2d at 1272—qualifies the order
as one of those made appealable pursuant to § 12-2101.
¶22 The Seventh Circuit Court of Appeals in Szabo v. U.S. Marine Corp., 819 F.2d
714 (7th Cir. 1987), has reached a conclusion similar to the one we reach here.
Acknowledging “[t]he general rule . . . that an order of civil contempt is not appealable,” the
court reasoned that “[a] blanket rule against appealing orders of civil contempt would make
no sense” because a contempt order “may . . . be final.” Id. at 716. Noting the existence of
some criticism of the general rule, the court concluded:
14
The fault . . . lies in the statement of the rule rather than the
practice of the courts. . . . [I]t would promote clarity to say that
an order of civil contempt is appealable if and only if it is either
final for purposes of [appeal under 28 U.S.C. §] 1291 or
appealable under a statute allowing the appeal of interlocutory
orders.5
Id.
¶23 Because we conclude we have appellate jurisdiction to review the trial court’s
sanctions order against Green, we need not entertain the parties’ alternative invitation to treat
the appeal as a request for special action relief.
Merits Discussion
Statute of Limitations
¶24 Green argues LFI’s motion for sanctions was time-barred pursuant to A.R.S.
§ 12-865, which provides that “[n]o proceeding for contempt shall be instituted against any
person unless begun within one year from the date of the act complained of.” Assuming,
without deciding, that a motion for sanctions filed during litigation is a “proceeding” within
the meaning of § 12-865, we conclude LFI’s request was not barred. LFI filed its first
motion for sanctions in April 2006, approximately six months after Green had violated the
5
Section 1291, 28 U.S.C., is similar to A.R.S. § 12-2101(B), and provides that federal
courts of appeals “shall have jurisdiction from all final decisions of the district courts.”
Certain interlocutory decisions are appealable under 28 U.S.C. § 1292. Admittedly, however,
unlike Arizona’s jurisprudence, see Bilke, 206 Ariz. 462, ¶ 28, 80 P.3d at 275; Salerno, 198
Ariz. 54, ¶ 12, 6 P.3d at 761-62, federal law generally does not allow an appeal from an
interlocutory order determining liability but leaving open the question of damages. See
Kasuk v. Bakery & Confectionery Union & Indus. Int’l Pension Fund, 791 F.2d 548, 553 (7th
Cir. 1986); Int’l Controls Corp. v. Vesco, 535 F.2d 742, 748 (2d Cir. 1976).
15
trial court’s October 2005 order by removing computers, files, and data from LFI, and thus
well within the one-year statute of limitations.
¶25 LFI filed its second sanctions motion in August 2006, less than three months
after Green had violated the trial court’s May 2006 order resulting from LFI’s first motion
for sanctions. The court never ruled on the second motion, and LFI renewed it with
additional allegations in July 2007. The court found that LFI had not discovered those
additional allegations—that Green had copied files from an LFI computer he had retained
past the deadline set in the May 2006 order—until June 2007. See City of Tucson v. Clear
Channel Outdoor, Inc., 218 Ariz. 172, ¶ 10, 181 P.3d 219, 225-26 (App. 2008) (“[The]
accrual of a cause of action occurs when the ‘plaintiff knows or, in the exercise of reasonable
diligence, should know the facts underlying the cause.’”), quoting Gust, Rosenfeld &
Henderson v. Prudential Ins. Co. of Am., 182 Ariz. 586, 588, 898 P.2d 964, 966 (1995).
¶26 Green asserts, however, that LFI was not sufficiently diligent in completing its
forensic analysis of the computers he had obtained in violation of the October 2005 order and
the LFI computer he had kept past the deadline imposed in the May 2006 order. But we find
no legal authority suggesting LFI had a duty to exercise reasonable diligence to have the
returned computers forensically analyzed to ensure Green had not further violated the court’s
orders. Nor does the record suggest the trial court’s finding on this matter was erroneous.
See Hrudka v. Hrudka, 186 Ariz. 84, 92, 919 P.2d 179, 187 (App. 1995) (“We will not
disturb a trial court’s factual findings unless clearly erroneous.”). Thus, for each of Green’s
16
violations of the court’s orders, LFI filed its motion seeking contempt sanctions well within
the one-year statute of limitations in § 12-865.6
Basis for Sanctions
¶27 The parties agree a trial court may dismiss a party’s claims, strike its pleadings,
and enter a default judgment against that party for failure to comply with the court’s orders.
Before reaching the question whether sanctioning Green was appropriate, however, we must
first determine on what authority the trial court relied in doing so. As we noted above, see
¶ 11 supra, the answer to that question is not entirely clear.
¶28 The court referred to its “authority and discretion in enforcing obedience of its
orders, including the inherent authority to sanction those who abuse the judicial process.”
Although the court also cited Rule 37(b), Ariz. R. Civ. P., the orders Green violated were not
discovery orders falling within that rule. It also cited Rule 65(j)(1), Ariz. R. Civ. P., allowing
it to find a party in contempt for failing to comply with an injunction. Section 12-864,
governing civil contempt, does not explicitly authorize a trial court to dismiss an action, but
it does provide that contempt “may be punished in conformity to the practice and usage of
the common law.”
6
To the extent Green argues the trial court could not properly consider his previous
violations of its orders when addressing LFI’s final motion for sanctions, we disagree. The
court stated in the May 2006 order that “[n]othing in [this order] will prevent any party from
referring to the issues in the Motion [for sanctions] or renewing the Motion if warranted in
any further court proceeding.” That the court had entered orders attempting to address
Green’s noncompliance with its earlier orders does not preclude it from considering that
noncompliance in later contempt proceedings.
17
¶29 “It is well established that [a trial] court has the authority to dismiss or to enter
default judgment, depending on which party is at fault, for failure . . . to comply with its
orders.”7 Flaksa v. Little River Marine Constr. Co., 389 F.2d 885, 887, 887 nn.2-7 (5th Cir.
1968) (citing cases); see Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991) (court may
“fashion appropriate sanction for conduct” including “outright dismissal”); Shepherd v. Am.
Broad. Cos., 62 F.3d 1469, 1472 (D.C. Cir. 1995) (trial court has inherent authority to
sanction contempt with dismissals and default judgments); United States v. Shaffer Equip.
Co., 11 F.3d 450, 461-62 (4th Cir. 1993) (same); see also Phoenix Newspapers, Inc. v.
Superior Court, 101 Ariz. 257, 258, 418 P.2d 594, 595 (1966) (“[T]his Court has recognized
that the power to punish for contempt is inherent in the courts.”); cf. Precision Components,
Inc. v. Harrison, Harper, Christian & Dichter, P.C., 179 Ariz. 552, 556, 880 P.2d 1098,
1102 (App. 1993) (trial court has inherent authority to sanction misconduct of attorneys
appearing before it). A party is in contempt of court if it “fail[s] to obey a lawful writ,
process, order, [or] judgment of the court.” § 12-864. Thus, it appears the trial court
dismissed Green’s cross-claim and struck his reply to LFI’s counterclaim based on the
court’s inherent authority to sanction a failure to comply with its orders.8
7
This authority is reflected in Rule 41(b), Ariz. R. Civ. P., which permits a trial court
to dismiss an action for failure to comply with its orders.
8
The trial court was not required to identify authority supporting its ruling, and we
may uphold the trial court’s ruling “if it is correct for any reason,” Dube v. Likins, 216 Ariz.
406, n.3, 167 P.3d 93, 104 n.3 (App. 2007), as long as the trial court recites, as it did here,
“the facts constituting the contempt.” State v. Cohen, 15 Ariz. App. 436, 439, 489 P.2d 283,
286 (1971).
18
Nexus Between Conduct and Merits of Claims and Defenses
¶30 Green asserts that, when a court sanctions a party in contempt by terminating
the action, due process is violated if “there is no nexus between the misconduct and the
terminated claims and defenses.” Green contends no such nexus exists here. To comply with
notions of due process, when a court exercises its inherent authority to dismiss a claim for
violations of its orders, “[t]here must be a nexus between the party’s actionable conduct and
the merits of the case.” Halaco Eng’g Co. v. Costle, 843 F.2d 376, 381 (9th Cir. 1988); see
Fjelstad v. Am. Honda Motor Co., 762 F.2d 1334, 1338 (9th Cir. 1985) (“Due process limits
the imposition of the severe sanctions of dismissal or default to ‘extreme circumstances’ in
which ‘the deception relates to the matters in controversy’ and prevents their imposition
‘merely for punishment of an infraction that did not threaten to interfere with the rightful
decision of the case.’”), quoting Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 589, 591
(9th Cir. 1983).
¶31 This nexus requirement, or, more accurately, due process requirement, is
derived from the United States Supreme Court’s decisions in Hammond Packing Co. v.
Arkansas, 212 U.S. 322, 349-54 (1909), and Hovey v. Elliot, 167 U.S. 409, 413-14 (1897).
See Wyle, 709 F.2d at 589, Phoceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d
802, 806 (9th Cir. 1982). In Hovey, the Court held due process prevented the trial court from
summarily striking a defendant’s answer as punishment for failure to comply with the trial
court’s order that the party deposit into court the funds at issue in the lawsuit. 167 U.S. at
19
411-12, 413-14. That rule was substantially modified in Hammond, where the Court found
no due process violation in striking the pleadings of a party that had failed to comply with
a discovery order. The Court reasoned that the refusal to produce the requested materials
“was but an admission of the want of merit in the asserted defense.” 212 U.S. at 351; see
also Societe Internationale Pour Participations Industrielles Et Commerciales, S.A. v.
Rogers, 357 U.S. 197, 210 (1958).
¶32 The majority of cases applying the due process requirement described by Hovey
and Hammond have addressed discovery violations, where the rule described in Hammond
readily can be applied. See, e.g., Valley Eng’rs Inc. v. Elec. Eng’g Co., 158 F.3d 1051, 1053,
1056 (9th Cir. 1998); Halaco, 843 F.2d at 378, 379-80; Fjelstad, 762 F.2d at 1336, 1338;
Prof’l Seminar Consultants, Inc. v. Sino Am. Tech. Exch. Council, 727 F.2d 1470, 1473-74
(9th Cir. 1984); Wyle, 709 F.2d at 588-89. But we find no cases suggesting due process is
not similarly required when imposing merits-terminating sanctions outside of the discovery
context. Indeed, several appellate courts have relied on Hovey, Hammond, and their progeny
when reviewing merits-terminating sanctions based on conduct not solely related to
discovery. See, e.g., Chen v. Stewart, 123 P.3d 416, 428-29 (Utah 2005) (suborning perjury);
Estrada v. Speno & Cohen, 244 F.3d 1050, 1058-59 (9th Cir. 2001) (failure to appear at
depositions and court hearings); TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 (9th
Cir. 1987) (lying in depositions and recanting before trial to “reap a tactical advantage”);
20
Phoceene Sous-Marine, 682 F.2d at 803-05 (lying to court in support of motion to continue
trial).
¶33 Basing his argument on the due process requirement, Green asserts merits-
terminating sanctions are unavailable unless the conduct “resulted in the absence of relevant
(or potentially relevant) evidence, obstructing the opponent’s ability to litigate the case.” 9
This articulation of the due process requirement is too narrow. For example, merits-
terminating sanctions comply with due process where the conduct for which sanctions were
sought was intended to obtain a tactical advantage, even if an advantage was never actually
realized. See TeleVideo Sys., 826 F.2d at 917. Additionally, the due process requirement is
satisfied when a court terminates a party’s case as a sanction for a planned fraud on the court.
See Chen, 123 P.3d at 428-29. The Hammond due process requirement is met in these cases
because the sanctioned conduct permits an inference that the sanctioned party’s position
lacked merit—just as when the misconduct entails withholding or hiding evidence.
¶34 Nor do we read Hammond as requiring the sanctioned conduct to potentially
interfere with evidence that would, or could, have been presented during the litigation.
Examples of such conduct include refusing to disclose evidence, refusing to attend
depositions, or suborning perjury. The Court in Hammond did not say its conclusion was
based on the materiality of the undisclosed evidence, but rather that a court may presume
9
For purposes of this argument, we will assume, without deciding, that the due process
requirement as Green has articulated it was not met here.
21
materiality from the party’s refusal to produce it. See 212 U.S. at 351. Thus,
Hammond reflects a “constructive waiver” of due process, Ins. Corp. of Ir. v. Compagnie des
Bauxites de Guinee, 456 U.S. 694, 706 (1982), based on a reasonable inference drawn from
the party’s conduct that its position is meritless. See also id. (“Due process is violated only
if the behavior of the defendant will not support the Hammond Packing presumption.”). We
see no reason to limit constructive waiver to misconduct involving material evidence when
other misconduct can be equally suggestive of the relative merits of a party’s
position—essentially, when a party with a meritorious case or defense should have no need
to engage in such activity.
¶35 We therefore conclude that, if the sanctioned conduct invites a negative
inference about the merits of the party’s claims or defenses, the due process requirement of
Hovey and Hammond is met, and merits-terminating sanctions are constitutionally
appropriate. See Chen, 123 P.3d at 429 (“[A] court has the inherent authority to strike a
party’s pleadings and enter a default judgment if the party engages in conduct designed to
improperly influence the court’s decision on the merits of the case, such as perjury or
obstruction of justice, or if the conduct itself tends to demonstrate bad faith or a lack of
merit.”) (emphasis added). Accordingly, we now address whether Green’s conduct in the
trial court permits an inference that his claims and defenses lack merit.
¶36 Here, the litigation concerns the nature of Green’s continuing interest and role
in LFI, including his status as a shareholder and director of the company. Although we find
22
no directly applicable authority, it seems plain that, when a party violates court orders in
order to control or harm the assets at stake in the litigation, such action permits an inference
that the party’s position on the merits is weak.10 A party with a meritorious claim or defense
would have no need to violate court orders to gain or retain control over the asset in
controversy and could await a decision on the merits permitting it to do so lawfully. The
parties here agreed to the orders the trial court entered to protect LFI’s assets during the
litigation. Green, however, violated one such order to improperly obtain and another to
retain LFI’s property—including proprietary intellectual property that Green himself stated
was the “life” of the company, without which LFI would be “[no] good.” Moreover, an LFI
employee testified that possession of the property would give a party seeking to “re-engineer
or re-create” LFI’s proprietary artwork a “big jump.” Green’s acquisition of the property
means he was able to exercise some measure of control over LFI’s proprietary assets and,
therefore, the fate of the company.11
10
We recognize that the property at issue in Hovey was the same money the party in
contempt had refused to deposit with the court. 167 U.S. at 411. That situation is arguably
analogous to the one before us where Green has sought to retain control over assets at the
heart of the contest over control of LFI. But the Supreme Court has never decided whether
it would now reach the same result it did in Hovey given its substantial modification of that
holding in Hammond. The situation in Hovey is nonetheless distinct. The party in Hovey
merely maintained control of an asset in violation of a court order. It did not, as did Green,
actively and improperly seek to obtain an asset not in its possession—conduct even more
indicative of the weakness of Green’s claims and defenses. Additionally, the assets at issue
here are proprietary and unique, placing a wrongful possessor in a position to do significant
harm to LFI’s business interests.
11
That LFI would have legal remedies against Green should he use or disclose its
intellectual property does not change our analysis. The question is not whether Green would
23
¶37 Further, Green’s continued conduct strongly suggests he would have been
unwilling to comply in any meaningful way with future trial court orders, including those
resulting from litigation on the merits. See Chen, 123 P.3d at 429 (dismissal appropriate
when party’s conduct demonstrated bad faith). Indeed, the trial court referred to this
possibility, stating Green had been “cavalier” about the “entire process, from the beginning
right through until today.” The court expressed concern that Green thought himself “above
the process” and ultimately determined lesser sanctions would not ensure compliance with
its orders. See Mindek v. Rigatti, 964 F.2d 1369, 1370 (3d Cir. 1992) (dismissal appropriate
“where the district court judge has properly determined that no other sanction would
adequately ensure future compliance”). A court’s inherent authority to sanction parties for
failing to comply with its orders exists, in part, to prevent “‘disobedience [of] the orders of
the Judiciary, regardless of whether such disobedience interfered with the conduct of trial.’”
Chambers, 501 U.S. at 44, quoting Young v. United States ex rel. Vuitton et Fils, S.A., 481
U.S. 787, 798 (1987); see also Gulf Homes, Inc. v. Beron, 141 Ariz. 624, 628-29, 688 P.2d
632, 636-37 (1984) (affirming discovery sanctions, in part, to prevent “parties to other
lawsuits” from “feel[ing] free[] . . . to flout other discovery orders of other district courts”).
The position Green advocates would allow unscrupulous litigants to violate at will, and
ultimately be successful in using the property, but whether his improper attempt to control
the assets at stake in the litigation permits the inference that his claims and defenses are
meritless.
24
without fear of dismissal, court orders seeking to protect another party’s interests if those
interests were unrelated to discoverable evidence. We decline to adopt such an approach.
¶38 Green additionally argues dismissal sanctions imposed “where the misconduct
has no impact on the opponent’s ability to litigate the merits” are “purely punitive” and
therefore prohibited. But this argument is logically flawed. Whether the misconduct has
affected litigation on the merits has no correlation to whether the sanctions imposed are
punitive or coercive. In any event, the sanctions here were not purely punitive. Cf. Korman
v. Strick, 133 Ariz. 471, 473-74, 652 P.2d 544, 546-47 (1982) (distinguishing criminal and
civil contempt; criminal contempt sanctions “solely” punitive while civil contempt sanctions
coercive).12 The threat of sanctions promotes compliance with a court’s orders even if the
sanctions threatened are never imposed. Green’s failure to avoid the sanctions here does not
render their imposition improper merely because compliance now, after ample opportunity
to avoid the sanctions, would not reverse the sanctions’ effect. Otherwise, dismissal would
never be an appropriate sanction for civil contempt. That is clearly not the law.
¶39 For the reasons stated, under the circumstances presented here, the trial court’s
dismissal of Green’s claims and entry of default against him complied with due process.
Green’s contumacious conduct permitted the court to infer that his claims and defenses were
12
Despite this distinction in Korman, we note that § 12-864 permits a trial court to
“punish[]” civil contempt.
25
meritless and thus find he had constructively waived a hearing on their merits. See Ins. Corp.
of Ir., 456 U.S. at 706.
Propriety of Dismissal
¶40 That the dismissal here does not violate due process does not end our inquiry.
We agree with Green that, as a general proposition, sanctions for failure to obey a trial
court’s orders should be limited to achieve their desired result. See Hays, 205 Ariz. 99, ¶ 17,
67 P.3d at 698. Moreover, a claim should not be dismissed absent extreme circumstances.
See Birds Int’l Corp. v. Ariz. Maint. Co., 135 Ariz. 545, 547, 662 P.2d 1052, 1054 (App.
1983); Flaksa, 389 F.2d at 887. Arizona courts prefer that claims be adjudicated on their
merits. Cf. Assoc’d Aviation Underwriters v. Wood, 209 Ariz. 137, ¶ 147, 98 P.3d 572, 614
(App. 2004). We review the imposition of sanctions for an abuse of discretion. See Hays
v. Gama, 205 Ariz. 99, ¶ 17, 67 P.3d 695, 698 (2003); Flaksa, 389 F.2d at 887. Whether a
trial court has the discretion to impose the sanction of dismissal depends on whether the
specific facts and circumstances of the case are sufficiently extreme to warrant such a
sanction. See Birds Int’l Corp., 135 Ariz. at 547, 662 P.2d at 1054; Flaksa, 389 F.2d at 887.
¶41 There is little Arizona law outside the discovery context that affords guidance
on what factors a trial court must consider before dismissing an action for the clamant’s
failure to comply with its orders. See, e.g., Carman v. Hefter, 136 Ariz. 597, 601, 667 P.2d
1312, 1316 (1983) (dismissal proper under Rule 41(b), Ariz. R. Civ. P., where party
mentioned insurance twice during trial in violation of court order); Goodman v. Cushman,
26
92 Ariz. 276, 278-79, 376 P.2d 394, 395 (1962) (Rule 41(b) dismissal improper where party
in “substantial compliance” with court’s order to correct complaint to omit certain material).
¶42 However, in addressing the propriety of sanctions for discovery violations
under Rule 37(b), Arizona courts have identified several factors that are equally relevant
here. For example, in Gulf Homes, our supreme court upheld dismissal as a sanction when
a party had acted in “‘flagrant bad faith’” by refusing to respond to questions during a
deposition. 141 Ariz. at 629, 688 P.2d at 637. The court noted that the questions asked
“were material to the claims” and that the party’s refusal to answer injected delay and
“exacerbated the costs inherent in the litigation.” Id. Even assuming Green’s failure to
comply with the trial court’s orders here did not affect LFI’s ability to litigate its claims, the
remaining factors the supreme court discussed in Gulf Homes are present. The trial court
found Green had willfully and repeatedly failed to comply with its orders and had “filed a
declaration” stating that he was no longer in possession of any LFI materials despite having
failed to return ten compact discs containing material copied from an LFI computer.
Moreover, Green’s conduct plainly delayed the proceedings and greatly increased the
expense of the litigation: both parties filed voluminous motions in support of and in
opposition to sanctions, and the court held a lengthy evidentiary hearing to explore Green’s
conduct.
¶43 In Nesmith v. Superior Court, 164 Ariz. 70, 71-72, 790 P.2d 768, 769-70 (App.
1990), Division One of this court reversed a dismissal sanction imposed for discovery
27
violations because: (1) the trial court erred as a matter of law by requiring the sanctioned
plaintiff to turn over original business records; (2) the trial court did not expressly find “that
the plaintiff personally, as opposed to the plaintiff’s attorney, obstructed discovery”; (3) the
trial court did not “thoroughly consider other, less severe sanctions”; and (4) the sanctioned
party did not violate a court order and had, albeit tardily, complied with the discovery rules
before the defendant filed a motion to compel discovery. Here, in contrast, the trial court
expressly found that Green, not his attorney, was responsible for the violations. Moreover,
Green did not violate procedural rules or discovery deadlines but instead ignored a
preliminary injunction and subsequent court orders seeking to enforce that
injunction—orders with which Green still has never fully complied. And the court expressly
found lesser sanctions would be ineffective.
¶44 We draw further guidance from federal courts’ discussions of a trial court’s
inherent authority to dismiss cases for contumacious conduct. For example, in Shaffer, 11
F.3d at 462-63, the Fourth Circuit Court of Appeals stated:
[B]efore exercising the inherent power to dismiss a case, a court
must consider the following factors: (1) the degree of the
wrongdoer’s culpability; (2) the extent of the client’s
blameworthiness if the wrongful conduct is committed by its
attorney, recognizing that we seldom dismiss claims against
blameless clients; (3) the prejudice to the judicial process and
the administration of justice; (4) the prejudice to the victim;
(5) the availability of other sanctions to rectify the wrong by
punishing culpable persons, compensating harmed persons, and
deterring similar conduct in the future; and (6) the public
interest.
28
Other courts have enumerated similar factors. See, e.g., Chavez v. City of Albuquerque, 402
F.3d 1039, 1044 (10th Cir. 2005) (prejudice to other party, interference with judicial process,
litigant’s culpability, advance warning of possibility of dismissal, efficacy of lesser
sanctions); In re Amtrak, 136 F. Supp. 2d 1251, 1267 (S.D. Ala. 2001) (collecting cases and
listing factors: prejudice to other party, interference with judicial process, relationship to
merits, culpability of violating party, willful or bad faith conduct, warning of dismissal as
sanction, availability of lesser sanctions, public interest); Anheuser-Busch, Inc. v. Natural
Beverage Distribs., 69 F.3d 337, 348 (9th Cir. 1995) (public interest “in expeditious
resolution of litigation,” court’s need to manage docket, risk of prejudice to party seeking
sanctions, public policy favoring disposition on the merits, availability of lesser sanctions,
bad faith of violating party, relationship between conduct and merits); Poulis v. State Farm
Fire & Cas. Co., 747 F.2d 863, 868 (3d Cir. 1984) (personal responsibility of party, prejudice
to other party, history of dilatory conduct, willfulness or bad faith, other sanctions, merits of
claim or defense).
¶45 Synthesizing these cases, we conclude the most relevant factors courts have
typically considered are: (1) prejudice to the other party, both in terms of its ability to litigate
its claims and other harms caused by the disobedient party’s actions; (2) whether the
violations were committed by the party or by counsel; (3) whether the conduct was willful
or in bad faith and whether the violations were repeated or continuous; (4) the public interest
in the integrity of the judicial system and compliance with court orders; (5) prejudice to the
29
judicial system, including delays and the burden placed on the trial court; (6) efficacy of
lesser sanctions; (7) whether the party was warned that violations would be sanctioned; and
(8) public policy favoring the resolution of claims on their merits. This list, of course, is not
exclusive. A trial court may identify and address any other relevant circumstances.
¶46 Most of the factors described above are present here. Again, it was Green
personally, not his attorney, who continuously and willfully violated the trial court’s orders
and made misrepresentations to the court about those violations. Green’s transgressions
resulted in significant delays and expensive, unnecessary litigation requiring extensive filings
and lengthy evidentiary hearings that included expert testimony. His conduct thus burdened
the trial court and hindered timely resolution of the merits of the claims.13 The orders Green
violated were in place to protect LFI’s significant interest in its property, both physical and
intellectual. Green contests none of this, arguing only that dismissal sanctions are
inappropriate because his violations did not interfere with LFI’s ability to litigate the case.
We recognize that such prejudice is one factor a trial court may consider before imposing
sanctions and that prejudice to LFI’s ability to litigate its claims is not apparent from the
record. A finding of prejudice, however, is not required to support dismissal. See Halaco
13
Green cites Hernandez v. City of El Monte, 138 F.3d 393, 399 (9th Cir. 1998), for
the proposition that “[t]he costs of additional litigation caused by a party’s misconduct are
insufficient prejudice to support dismissal.” But that does not make costs and delays
irrelevant to the analysis. The Ninth Circuit also stated in Hernandez that excessive delays
and consumption “‘of the court’s valuable time’” favored dismissal. Id., quoting Ferdik v.
Bonzelet, 963 F.2d 1258, 1261 (9th Cir. 1992).
30
Eng’g Co., 843 F.2d at 382 (finding of prejudice “purely optional”). Even assuming the
absence of that factor, the court did not abuse its discretion given the presence of several
other factors favoring dismissal.
¶47 Green also argues the trial court failed to consider whether LFI was prejudiced
and, “[f]or this reason alone, the trial court’s Ruling should be vacated.” But the court
clearly did consider the harm Green’s conduct had caused to LFI, finding there had been
“damage to [its] intellectual property.” Moreover, that the court made no finding of
prejudice to LFI’s ability to litigate the action does not require the conclusion the court
wholly failed to consider that factor. It is equally possible the court considered it but did not
find it dispositive. Additionally, whether dismissal sanctions are appropriate is a fact-
intensive inquiry and may involve consideration of many factors, including some we have
not identified here. We see no reason for a trial court to articulate its findings on every
conceivable factor. Accordingly, for the reasons stated, we conclude the court did not abuse
its discretion in striking Green’s reply, dismissing his cross-claim, and entering judgment in
favor of LFI.
Termination of Directorship
¶48 Green argues the trial court erred in terminating him as director of LFI because
it explicitly rejected a “finding of fraud” and failed to make any other findings permitting his
removal under A.R.S. § 10-809. We review de novo questions of law, including the
interpretation of statutes, but will not disturb a trial court’s factual findings unless they are
31
clearly erroneous. See Spaulding v. Pouliot, 218 Ariz. 196, ¶ 8, 181 P.3d 243, 246 (App.
2008).
¶49 In its counterclaim against Green, LFI sought Green’s removal as director of
LFI pursuant to § 10-809(A). After striking Green’s reply to LFI’s counterclaim and entering
his default, the trial court “granted judgment in [LFI’s] favor . . . except for the finding of
fraud” relating to LFI’s claim that Green should be removed as a director pursuant to
§ 10-809. Nonetheless, the trial court terminated “Green’s status as director of LFI . . . for
a period of two years.” See § 10-809(B).
¶50 “An entry of default establishes as proven all well-pleaded facts.” Moran v.
Moran, 188 Ariz. 139, 146, 933 P.2d 1207, 1214 (App. 1996). It does not, however, hold
the party in default “to have admitted conclusions of law.” Id. Accordingly, “[i]f a
complaint fails to state facts legally entitling plaintiff to a recovery, a default judgment
rendered thereon is void.” Price v. Sunmaster, 27 Ariz. App. 771, 774, 558 P.2d 966, 969
(1976). The trial court’s judgment in favor of LFI on its claim to have Green removed as a
director was therefore only proper if LFI’s counterclaim alleged facts sufficient to entitle LFI
to relief under § 10-809(A). See Price, 27 Ariz. App. at 774, 558 P.2d at 969.
¶51 Section 10-809(A) permits judicial removal of the director of a corporation if
the court finds (1) the director “engaged in fraudulent conduct or intentional criminal
conduct” and (2) “[r]emoval is in the best interest of the corporation.” In its counterclaim,
LFI enumerated “a series of actions” Green had undertaken “in furtherance of [his] own
32
personal interests,” alleged those actions were “fraudulent,” and asserted, based on Green’s
actions, “his continued association with LFI . . . is not in [its] best interests.”
¶52 Because the trial court entered default against Green, LFI’s allegation
concerning its best interests is deemed admitted. See Moran, 188 Ariz. at 146, 933 P.2d at
1214. As we explain, however, and as the court implicitly found, LFI’s assertion that
Green’s actions were fraudulent was not a “well-pleaded” fact that the entry of Green’s
default could be deemed to have established. See id.
¶53 An allegation of fraud must be pled with particularity. Ariz. R. Civ. P. 9(b).
“Although there is no ‘magic language’ required to state a claim for fraud,” a claimant must
“plead all the essential elements of . . . fraud” in his complaint. Linder v. Brown & Herrick,
189 Ariz. 398, 404-05, 943 P.2d 758, 764-65 (App. 1997). Fraud may be either actual or
constructive. See Brazee v. Morris, 68 Ariz. 224, 227-28, 204 P.2d 475, 476-77 (1949). A
showing of actual fraud requires:
(1) a representation, (2) its falsity, (3) its materiality, (4) the
speaker’s knowledge of its falsity or ignorance of its truth,
(5) the speaker’s intent that the information should be acted
upon by the hearer and in a manner reasonably contemplated,
(6) the hearer’s ignorance of the information’s falsity, (7) the
hearer’s reliance on its truth, (8) the hearer’s right to rely
thereon, and (9) the hearer’s consequent and proximate injury.
Taeger v. Catholic Family & Cmty. Servs., 196 Ariz. 285, ¶ 28, 995 P.2d 721, 730 (App.
1999); see also Echols v. Beauty Built Homes, Inc., 132 Ariz. 498, 500, 647 P.2d 629, 631
(1982). Constructive fraud, in contrast, is “‘a breach of legal or equitable duty which,
33
without regard to moral guilt or intent of the person charged, the law declares fraudulent
because the breach tends to deceive others, violates public or private confidences, or injures
public interests.’” Dawson v. Withycombe, 216 Ariz. 84, ¶ 72, 163 P.3d 1034, 1057 (App.
2007), quoting Lasley v. Helms, 179 Ariz. 589, 591, 880 P.2d 1135, 1137 (App. 1994).
Although constructive fraud “does not require a showing of intent to deceive or dishonesty
of purpose, it does require a fiduciary or confidential relationship,” a “breach of duty by the
person in the confidential or fiduciary relationship,” and that the person in breach “induce[d]
justifiable reliance by the other to his detriment.” Dawson, 216 Ariz. 84, ¶ 72, 163 P.3d at
1057 (citation omitted).
¶54 Despite its enumeration of Green’s allegedly fraudulent activities, LFI failed
to allege in its counterclaim any facts constituting the elements of actual fraud. See Taeger,
196 Ariz. 285, ¶ 28, 995 P.2d at 730. Regarding constructive fraud, although LFI’s
counterclaim does assert Green breached fiduciary duties he owed LFI, it does not allege any
facts that would support a finding that Green induced LFI to rely on him to its detriment.
Dawson, 216 Ariz. 84, ¶ 72, 163 P.3d at 1057. Because LFI failed to plead “the
circumstances constituting fraud . . . with particularity” as required by Rule 9(b), the trial
court properly declined to find that the entry of default established LFI’s fraud allegation as
proven. See Moran, 188 Ariz. at 146, 933 P.2d at 1214.
¶55 Notwithstanding LFI’s failure to properly plead—and the trial court’s correct
refusal to find—fraud, the court, without explanation, entered judgment in LFI’s favor,
34
removing Green as director pursuant to § 10-809.14 In the absence of fraud, § 10-809 permits
a director’s removal only if he or she engaged in intentional criminal activity. But LFI did
not plead any facts alleging that Green had engaged in intentional criminal conduct. Because
LFI failed to allege facts sufficient to entitle it to relief under § 10-809, the court erred by
removing Green as a director of LFI, and we must therefore vacate that portion of its
judgment. Price, 27 Ariz. App. at 774, 558 P.2d at 969.
Fraud Against Computers Claim
¶56 Green contends the trial court’s rejection of LFI’s fraud allegation also
precludes judgment against him on LFI’s claim pursuant to 18 U.S.C. § 1030. That statute
governs civil and criminal liability for “fraud and related activity in connection with
computers.” 18 U.S.C. § 1030. None of its subsections, however, require a finding of actual
fraud. Green apparently refers to subsection (a)(4), which requires a finding that a person
accessed a protected computer with “intent to defraud” and in furtherance of “the intended
fraud.” Assuming, arguendo, that the court’s rejection of LFI’s fraud allegation also
implicitly rejected any assertion of intent to defraud, however, other subsections of 18 U.S.C.
§ 1030 require no such finding. For example, subsection (a)(5)(C) prohibits intentional
unauthorized access “caus[ing] damage and loss.” In any event, LFI did not explicitly allege
14
LFI suggests the trial court terminated Green’s directorship as a sanction for his
noncompliance with court orders and, therefore, the court was not bound by the requirements
of § 10-809. But § 10-809 governs judicial removal of corporate directors, and we neither
find nor has LFI cited, any authority suggesting a trial court may circumvent the statutory
prerequisites for removal by characterizing its ruling as a sanction.
35
fraud in this portion of its complaint, instead asserting Green had damaged it by “absconding
with and retaining information belonging to LFI.” Pending LFI’s proof of damages, this
conduct falls within 18 U.S.C. § 1030(a)(5)(C), and the court properly entered default on that
claim.
Copyright Infringement Claim
¶57 Last, Green contends the trial court lacked subject matter jurisdiction to enter
judgment in favor of LFI on its copyright infringement claim brought pursuant to Title 17 of
the United States Code. He further asserts the court’s judgment regarding that claim must
therefore be vacated. As Green notes, subject matter jurisdiction cannot be waived and may
be raised at any stage of a proceeding. See Switchenberg v. Brimer, 171 Ariz. 77, 82, 828
P.2d 1218, 1223 (App. 1991). “A judgment may be attacked as void” if the court that entered
it lacked subject matter jurisdiction. In re Adoption of Hadtrath, 121 Ariz. 606, 608, 592
P.2d 1262, 1264 (1979). Whether a judgment is void is a question of law we review de novo.
In re Estate of de Escandon, 215 Ariz. 247, ¶ 7, 159 P.3d 557, 559 (App. 2007).
¶58 Pursuant to 28 U.S.C. § 1338(a), federal district courts alone have “original
jurisdiction of any civil action arising under any Act of Congress relating to . . . copyrights.”
This includes jurisdiction over claims, like LFI’s, that arise out of Title 17, U.S.C. See id.
LFI does not suggest otherwise or provide any response to Green’s assertion. See In re 1996
Nissan Sentra, 201 Ariz. 114, ¶ 7, 32 P.3d 39, 42 (App. 2001) (failure to address in
answering brief issues raised on appeal “can be considered a confession of error”).
36
Accordingly, we vacate the portion of the trial court’s judgment relating to LFI’s copyright
infringement claim as void for lack of subject matter jurisdiction.
Disposition
¶59 For the reasons stated above, we vacate those portions of the trial court’s ruling
granting LFI judgment on its claim of copyright infringement and terminating Green’s LFI
directorship. We affirm the remainder of the judgment.15
J. WILLIAM BRAMMER, JR., Judge
CONCURRING:
JOHN PELANDER, Chief Judge
H O W A R D, Judge, dissenting.
¶60 I must respectfully dissent from the majority because only the legislature can
change a statute and only the supreme court can change its interpretation of a statute. Under
15
Because we affirm the trial court’s entry of default as to the buy-sell agreement, we
do not reach LFI’s argument that the issue is moot.
37
the current state of the law, this court does not have jurisdiction over this appeal from the
trial court’s civil contempt order issued under A.R.S. § 12-864.16
¶61 “‘[T]he right to appeal exists only by force of statute.’” Osuna v. Wal-Mart
Stores, Inc., 214 Ariz. 286, ¶ 9, 151 P.3d 1267, 1270 (App. 2007), quoting Cordova v. City
of Tucson, 15 Ariz. App. 469, 470, 489 P.2d 727, 728 (1971) (alteration in Osuna). In Ex
parte Wright, 36 Ariz. 8, 13, 281 P. 944, 946 (1929), our supreme court said: “Cases falling
within section 4474 [now A.R.S. § 12-864] . . . must be governed by the ‘practice and usage
of the common law.’ According to such practice and usage the contemnor is not entitled to
a jury trial nor to an appeal or to bail.” See also Van Dyke v. Superior Court, 24 Ariz. 508,
537, 544, 211 P. 576, 585-86, 588 (1922). Additionally, in State v. Mulligan, 126 Ariz. 210,
216, 613 P.2d 1266, 1272 (1980), the court stated: “We find no authorization for such an
appeal from the contempt charges, either by statute or rules of this court. Findings of
contempt are non-appealable orders.”
¶62 We have no authority to ignore or alter supreme court pronouncements.
Phoenix Newspapers, Inc. v. Dep’t of Corrs., 188 Ariz. 237, 241, 934 P.2d 801, 805 (App.
1997). Section 12-864 still contains the same language requiring that contempt cases be
governed by the “practice and usage of the common law.” And the contempt statutes still do
16
The majority points out some ambiguity in the record as to whether the trial court’s
order was a contempt order under § 12-864 or a discovery sanction. Supra, ¶ 11. But Green
himself argues on appeal that the order was a contempt order governed by § 12-864.
Moreover, as the majority later discusses, the orders that Green violated were not discovery
orders. Supra, ¶¶ 27-29.
38
not explicitly provide for an appeal from civil contempt, although they do provide for an
appeal from criminal contempt. See A.R.S. §§ 12-861, 12-863. Therefore, according to the
binding precedent in Wright, which has never been overruled, the legislature has specifically
provided that no appeal will lie from a civil contempt order.
¶63 The order here determines a party’s liability, and it has Rule 54(b), Ariz. R.
Civ. P., language making it procedurally a final order. Most final orders are substantively
appealable pursuant to A.R.S. § 12-2101(B), and interlocutory orders determining a party’s
rights may be appealable under § 12-2101(G). But a specific statute controls over a general
statute. See La Canada Hills Ltd. P’ship v. Kite, 217 Ariz. 126, ¶ 9, 171 P.3d 195, 198 (App.
2007). By requiring civil contempts to be “punished in conformity to the practice and usage
of the common law,” § 12-864, the legislature has specifically directed that such contempt
orders are substantively not appealable. See Wright, 36 Ariz. at 13, 281 P. at 946.
Accordingly, the general appeal statute cannot confer substantive appealability on an order
that the legislature has specifically determined is not subject to appeal.
¶64 Moreover, the general appeal statute, § 12-2101, existed in its present form
when the supreme court issued Mulligan. The supreme court did not say that, if a contempt
order was case-dispositive, it was exempt from the broad language that “[f]indings of
contempt are non-appealable orders” and was instead governed by the general appeal statute.
Mulligan, 126 Ariz. at 216, 613 P.2d at 1272. And I do not see how the nature of the
sanction imposed by the nonappealable contempt order can invest this court with jurisdiction
39
the legislature has withheld. Additionally, as stated above, we have no power to ignore or
alter supreme court pronouncements. See Phoenix Newspapers, 188 Ariz. at 241, 934 P.2d
at 805. Nor can we guess how that court might resolve an issue in the future. See State v.
Keith, 211 Ariz. 436, ¶ 3, 122 P.3d 229, 230 (App. 2005).
¶65 I would dismiss Green’s appeal for lack of jurisdiction and, therefore, I dissent.
JOSEPH W. HOWARD, Presiding Judge
40