Powers Steel v. Vinton Steel

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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
POWERS STEEL & WIRE PRODUCTS, INC.,
Plaintiff/Appellant,
v.
VINTON STEEL, LLC, et al.,
Defendants/Appellees.
No. 1 CA-CV 20-0652
FILED 11-23-2021
Appeal from the Superior Court in Maricopa County
No. CV2018-011427
The Honorable Roger E. Brodman, Judge Retired
AFFIRMED
COUNSEL
The Quinlan Law Firm, LLC, Phoenix
By William John Quinlan, Eric T. Schmitt
Counsel for Plaintiff/Appellant
Curl & Glasson, PLC, Tucson
By J. C. Patrascioiu, James William Rappaport
Counsel for Defendants/Appellees
POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
MEMORANDUM DECISION
Judge James B. Morse Jr. delivered the decision of the Court, in which
Presiding Judge D. Steven Williams and Judge David B. Gass joined.
M O R S E, Judge:
¶1 Powers Steel and Wire Products, Inc. ("Powers Steel") appeals
the grant of summary judgment to Vinton Steel LLC ("Vinton Steel") and its
manager, David Villarreal (collectively "Defendants"). For the following
reasons, we affirm.
FACTS AND PROCEDURAL BACKGROUND
¶2 Powers Steel is a family-owned steel fabricator and
distributor. William Powers1 worked as an employee, director, and officer
at Powers Steel until he retired in December 2017. William still owns
approximately 16.7% of Powers Steel's non-voting shares. Alice Powers
(William's aunt) holds the entirety of Powers Steel's voting stock. Alice's
five children and William hold equal portions of the non-voting shares.
Before William resigned, all shareholders also served as corporate directors.
Powers Steel alleges that William "continues to hold decision-making
powers and responsibilities as a shareholder in [Powers Steel]."
¶3 William did not covenant not to compete with Powers Steel,
and, after retiring, started Powers Reinforcing Fabricators, LLC ("PRF").
¶4 Vinton Steel is a rebar supplier that supplied Powers Steel
until March 2018. When William started PRF, Vinton Steel extended lines
of credit for PRF to purchase steel.
¶5 Powers Steel sued William and PRF in February 2018,
asserting William breached fiduciary duties he owed to Powers Steel. See
generally Powers Steel & Wire Prods. Inc. v. Powers, 1 CA-CV 19-0136, 2021
WL 248634, at *1-2, ¶¶ 2-6, 13 (Ariz. App. Jan. 26, 2021) (mem. decision)
(affirming denial of preliminary injunction and noting superior court's
subsequent grant of summary judgment in favor of William and PRF).
1 We refer to members of the Powers family by their first names.
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
¶6 In August 2018, Powers Steel filed this lawsuit against
Defendants, asserting that they aided and abetted William's breach of
fiduciary duties and tortiously interfered with Powers Steel's business
expectancies.
¶7 Defendants moved for summary judgment. After a partial
ruling and supplemental briefing, the superior court eventually granted
summary judgment to Defendants on all claims. The court held that (1) no
evidence supported a breached duty through a partnership agreement or
steel purchases, (2) any agreement was not a breach but a mere preparation
to compete, and (3) Powers Steel failed to establish non-speculative
damages.
¶8 Defendants sought fees as a sanction. The superior court
found that though "the case was brought for harassment" it could not find
that Powers Steel pursued the case "solely or primarily" to harass
Defendants. But the court also found that Powers Steel sought
unreasonable, disproportional, and inappropriate discovery. The court
further found that Powers Steel "failed to make complete and timely
disclosures," and awarded Defendants $87,877 in attorney fees under A.R.S.
§ 12-349. The court also awarded $10,701 in costs and $26,993 as a sanction
under Rule 68(g).
¶9 Powers Steel timely appealed, and we have jurisdiction under
A.R.S. § 12-2101(A)(1).
DISCUSSION
¶10 We review the grant of summary judgment de novo, "viewing
the facts and reasonable inferences in the light most favorable to the non-
prevailing party." BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236
Ariz. 363, 365, ¶ 7 (2015). We review the imposition of sanctions for an
abuse of discretion. Lund v. Donahoe, 227 Ariz. 572, 578, ¶ 19 (App. 2011).
I. Aiding and Abetting.
¶11 Aiding and abetting a breach of fiduciary duty requires: (1) a
breached fiduciary duty; (2) the defendant's knowledge of that breach; (3)
the defendant's substantial assistance in the breach; (4) a causal relationship
between defendant's assistance or encouragement and the breach; and (5)
the breach injured the plaintiff. Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480,
495, ¶ 64 (App. 2008).
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
¶12 Powers Steel's claim is based on two separate alleged duties
—William's duty as an employee during his employment and his alleged
duty as a shareholder following his employment. Both arguments fail.
A. William Did Not Owe a Fiduciary Duty as a Minority
Shareholder of Non-Voting Stock.
¶13 Powers Steel's post-December 2017 claim theorizes that
William, as a minority shareholder in Powers Steel, owed a fiduciary duty.
"The existence of a fiduciary duty is a question of law we review de novo."
Maxfield v. Martin, 217 Ariz. 312, 314, ¶ 12 (App. 2007).
¶14 Generally, shareholders do not assume fiduciary duties when
they acquire shares in a corporation. Compare A.R.S. §§ 10-830(A), -842(A)
(providing fiduciary duties for corporate officers and directors), with A.R.S.
§ 10-622 (providing shareholders have no liability to the corporation or for
the acts or debts of the corporation); see also Duties of shareholders, 6 Ariz.
Prac., Corporate Practice § 6:119 ("As a general rule, shareholders as such
owe no duty to the corporation in which they own shares."). But a majority
shareholder is more akin to an officer or director and "occupies a fiduciary
relation to the holders of the minority stock and the corporation, who can
only act through him." Heffern Coop. Consol. Gold Mining & Milling Co. v.
Gauthier, 22 Ariz. 67, 69-70 (1920); see also Garrett v. Reid-Cashion Land &
Cattle Co., 34 Ariz. 245, 262-63 (1928) (holding that majority corporate
shareholders must exercise their power "with due regard for the interests
of the minority"); accord Steinfeld v. Copper State Mining Co., 37 Ariz. 151, 163
(1930). Thus, a majority shareholder with the ability to manage and control
a corporation owes the same fiduciary duty as an officer or director. Mims
v. Valley Nat'l Bank, 14 Ariz. App. 190, 192 (1971) (citing Steinfeld v. Nielsen,
15 Ariz. 424 (1913)). As the United States Supreme Court held, "[t]he
majority has the right to control; but when it does so, it occupies a fiduciary
relation toward the minority, as much so as the corporation itself or its
officers and directors." S. Pac. Co. v. Bogert, 250 U.S. 483, 487-88 (1919);
accord Pepper v. Litton, 308 U.S. 295, 306 (1939).
¶15 Powers Steel asserts an exception to this general rule such that
minority shareholders in closely held corporations owe a fiduciary duty
"due to close corporations' strong resemblance to partnerships." Even if we
assume that Powers Steel is closely held,2 William's ownership interest in
2 The parties dispute whether Powers Steel is a closely held
corporation. See Albers v. Edelson Tech. Partners, L.P., 201 Ariz. 47, 56, ¶ 38
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Decision of the Court
Powers Steel is not equivalent to a partnership interest and does not give
rise to a fiduciary duty.
¶16 In limited circumstances, Arizona courts have considered
closely held corporations as similar to partnerships. In Funk v. Spalding, our
supreme court addressed a dispute between two 50-50 shareholders in a
business "operated as a partnership." 74 Ariz. 219, 221 (1952). The supreme
court found the two shareholders had a fiduciary relationship based on
their "absolute confidence in each other" and that one shareholder's absence
due to World War II placed a duty on the remaining shareholder to protect
the absent shareholder's interest in the business. Id. at 224. The court held
that the aggrieved shareholder was not required to sue the other
derivatively for his share of profits, in part, because of the fiduciary
relationship between partners. Id. Relying on this distinction, other
Arizona courts have recognized a fiduciary relationship between 50-50
shareholders. See Johnson v. Gilbert, 127 Ariz. 410, 411-12 (App. 1980)
(noting that when 50-50 shareholders "operated more as partners than in
strict compliance with the corporate form," a derivative action for an
accounting was unnecessary), overruled on other grounds by Turley v.
Ethington, 213 Ariz. 640 (App. 2006); see also Wichansky v. Zowine, CV-13-
01208-PHX-DGC, 2016 WL 11002479, at *4 (D. Ariz. Apr. 19, 2016) (finding
50-50 owners of closely held corporation owed each other fiduciary duty).
¶17 But outside the equal-ownership context, Powers Steel does
not cite, and we cannot find, an Arizona case extending the fiduciary duty
of partners to all closely held corporations. Powers Steel primarily relies on
Ohaco Sheep Co. v. Heirs of Ohaco, where the trial court found that four equal
shareholders reconfigured their partnership as a corporation but continued
to operate as a partnership. 148 Ariz. 142, 143-44 (App. 1986). But Ohaco
Sheep does not support Powers Steel's argument. This Court accepted "the
trial court's legal conclusion that, in spite of the corporate form, the parties
dealt with each other as partners." Id. at 145. But we described the trial
court's conclusion as "probably not supportable" and the concession was
made "strictly on the basis that whether the original parties were former
stockholders or former partners the legal result [wa]s the same." Id. at 145
n.3. Other cases cited by Powers Steel are similarly unhelpful. See, e.g.,
Dooley v. O'Brien, 226 Ariz. 149, 151, 154-55, ¶¶ 2, 21-22 (App. 2010) (holding
that a director and minority shareholder in closely held company had a
(App. 2001) (noting closely held companies have (1) few shareholders,
usually "two or three," (2) who are acquainted with each other, (3) are active
in the business, and (4) there is no market for their shares).
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
legal, not contractual, right to personally seek an accounting for purposes
of attorney fee statute).
¶18 In the absence of persuasive Arizona authority, Powers Steel
cites out-of-state cases for the proposition that shareholders in closely held
corporations always owe each other fiduciary duties. See Donahue v. Rodd
Electrotype Co. of New England, 328 N.E.2d 505, 515 (Mass. 1975). But the
Donahue rule is not universal. See Nixon v. Blackwell, 626 A.2d 1366, 1380-81
(Del. 1993) (refusing to create special rules applicable to closely held
corporations); Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App. 1997) ("[A]
co-shareholder in a closely held corporation does not as a matter of law owe
a fiduciary duty to his co-shareholder."); Carson Cheng v. AIM Sports, Inc.,
CV-10-3814-PSG-PLAX, 2012 WL 12953239, *3 (C.D. Cal. May 11, 2012)
(holding that under California law a minority shareholder in a closely held
corporation "did not owe a fiduciary duty to other shareholders"); Bagdon
v. Bridgestone/Firestone, Inc., 916 F.2d 379, 384 (7th Cir. 1990) ("Corporations
are not partnerships. Whether to incorporate entails a choice of many
formalities. . . . So it is understandable that not all states have joined the
parade."); see also Douglas K. Moll, Of Donahue and Fiduciary Duty: Much Ado
About . . .?, 33 W. New Eng. L. Rev. 471, 485 (2011) ("[I]t is simply inaccurate
to read Donahue for the proposition that partnership law applies in its
entirety to closely held corporation disputes.").
¶19 Funk and Johnson persuade us not to follow the Donahue rule.
Because they involved 50-50 shareholders operating as partners, the issue
presented was the plaintiffs' suits against the defendant shareholders
directly rather than derivatively. See Funk, 74 Ariz. at 221, 224; Johnson, 127
Ariz. at 412. Those courts allowed suits directly against defendants who,
by virtue of their equal ownership and the way the corporations were
managed, had the power to control, or at least veto, corporate actions. See
Funk, 74 Ariz. at 224 (finding "Spalding's enforced absence from the
business while engaged in the service of his country placed upon Funk as
manager of the corporation the duty to protect Spalding's interest"); Johnson,
127 Ariz. at 411 (noting that the two owners "could not agree" and a
"deadlock ensued").
¶20 Thus, as discussed, supra ¶ 14, Arizona law imposes a
fiduciary duty on shareholders who can exercise control over the
corporation. See Steinfeld, 37 Ariz. at 163; Heffern Coop., 22 Ariz. at 70; Mims,
14 Ariz. App. at 192. The same control principle applies to partnerships at
common law. See Jolly v. Kent Realty, Inc., 151 Ariz. 506, 512 n.4 (App. 1986)
("The fundamental requisites of a partnership . . . [include] community of
power in administration."); Tafoya v. Trisler, 8 Ariz. App. 250, 253 (1968)
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
("[T]he right of control or any voice in the control of a business enterprise
should be regarded as an incident of proprietorship, and its presence or
absence may be of great weight in determining whether or not a particular
relation constitutes a partnership." (quoting Holliday v. Taylor, 249 S.W.2d
941, 944 (Tex. Civ. App. 1952))). We decline Powers Steel's invitation to
expand the fiduciary duties of shareholders in Arizona and see no reason
why the same focus on control should not apply if the corporation is closely
held by several shareholders. See American Law Institute, Principles of Corp.
Governance ("Principles") § 1.10 (1994) (stating that a person with less than 25
percent voting shares "is not presumed to be in control of the corporation
by virtue solely of ownership"); see also AMERCO v. Shoen, 184 Ariz. 150,
155 (App. 1995) (noting the Principles "qualif[y] for the deference we
traditionally grant to the Restatements").
¶21 Nearly all the other cases cited by Powers Steel reach a similar
conclusion. See Kortum v. Johnson, 755 N.W.2d 432, 436-37, 443, 445, ¶¶ 4, 8,
27-28, 35 (N.D. 2008) (finding several minority shareholders who
collectively oppressed plaintiff minority shareholder owed a fiduciary
duty); McLinden v. Coco, 765 N.E.2d 606, 609, 615-16 (Ind. Ct. App. 2002)
(finding parties who, along with their sons, each owned 50% of company,
owed fiduciary duties); Rexford Rand Corp. v. Ancel, 58 F.3d 1215, 1219 (7th
Cir. 1995) (noting that "minority shareholders owe a duty of loyalty to a
close corporation in certain circumstances") (emphasis added); Hagshenas v.
Gaylord, 557 N.E.2d 316, 318, 322-23 (Ill. App. Ct. 1990) (holding that 50-50
shareholders in a close corporation owed fiduciary duties); cf. I.P.
Homeowners, Inc. v. Radtke, 558 N.W.2d 582, 591-92 (Neb. Ct. App. 1997)
(ruling that member of close corporation formed to purchase certain real
property breached fiduciary duty by usurping corporation's opportunity to
purchase the property).
¶22 Other states also hinge the existence of a fiduciary duty in a
closely held corporation on the shareholder's ability to exert control. See
Schultz v. Scandrett, 866 N.W.2d 128, 134, ¶ 16 (S.D. 2015) ("[C]ontrolling
shareholders, or a group of shareholders acting together to exercise
effective control, owe a fiduciary duty to minority shareholders in a closely
held corporation."); Advanced Commc'n Design, Inc. v. Follett, 615 N.W.2d
285, 294 (Minn. 2000) ("But where a shareholder has only nonvoting shares
in a closely held corporation and is not a director, as here, clearly any
significant ability to control corporate decision-making is lacking."); Zidell
v. Zidell, Inc., 560 P.2d 1086, 1089 (Or. 1977) ("We have recognized that those
in control of corporate affairs have fiduciary duties of good faith and fair
dealing toward the minority shareholders."); see also A. Richard M.
Blaiklock, Fiduciary Duties Owned by Frozen-Out Minority Shareholders in
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
Close Corporations, 30 Ind. L. Rev. 763, 770-74 (1997) (noting cases "almost
uniformly tie[] the fiduciary duty of the minority shareholders to an ability
to control some aspect of the corporation's activities").
¶23 The record demonstrates that William did not have a
controlling interest in Powers Steel by virtue of his status as a shareholder.
William's shares were non-voting, and Alice alone owned all voting shares.
Alice's five children are also non-voting shareholders who served as
corporate officers. Powers Steel cites William's ability to obtain records and
receive dividends, see A.R.S. § 10-1602(C) (providing shareholder access to
certain records), but neither of these demonstrate control, see Steinfeld, 37
Ariz. at 163 ("Stockholders have merely the right to share in the profits
through dividends, to vote on the choice of directors, and in the
management of the corporation, and, upon dissolution or sale of its assets,
to get their proportion of the proceeds after all debts have been paid.").
Finally, nothing in the record suggests that Powers Steel sought to be
treated as a partnership. See Myrland v. Myrland, 19 Ariz. App. 498, 502
(1973) (noting when determining the existence or non-existence of a
partnership, "the facts, circumstances, and most important, the intention of
the parties control").
¶24 Powers Steel also cites assertions made by William in his
amended counterclaim in the parallel litigation that he still has a
"reasonable expectation" to an "effective say in the management of [Powers
Steel]." But this document was generated after the court granted summary
judgment and is attached to Powers Steel's motion for reconsideration. Our
review "is limited to the record before the court when it considered the
motion for summary judgment." Desert Mountain Props. Ltd. P'ship. v.
Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 215, ¶ 94 (App. 2010), aff'd, 226 Ariz.
419 (2011). Even if we considered the complaint, we would find it
unpersuasive. An expectation of an "effective say in management" is not
the same as control. Moreover, William sued derivatively as a shareholder,
not as a partner, and as a minority shareholder he may argue that the
controlling shareholders and directors owe him a fiduciary duty. See Mims,
14 Ariz. App. at 192; Myrland, 19 Ariz. App. at 502; cf. Funk, 74 Ariz. at 224(noting plaintiff sued directly not derivatively); Johnson, 127 Ariz. at 412(same).
¶25 Because Powers Steel did not operate as a partnership and
Powers Steel presented no evidence that William could exert control as a
minority owner of non-voting stock, William did not owe Powers Steel a
fiduciary duty by virtue of his stock ownership. The court correctly granted
summary judgment to Defendants.
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
B. Defendants Did Not Aid and Abet a Breach During
William's Employment.
¶26 Employees owe fiduciary duties to their employers during
their employment. Pope, 219 Ariz. at 492, ¶ 52. The crux of Powers Steel's
remaining claim lies in its theory that Vinton Steel agreed to a partnership
with William during the last few days in which William was employed at
Powers Steel. Allegedly, the partnership included (1) preferential pricing,
(2) a line of credit, and (3) for William to serve as Vinton Steel's "depot" in
Phoenix. Powers Steel also asserts that William made large and suspicious
steel purchases from Vinton Steel during his last two months of
employment.
¶27 We agree with the superior court that a reasonable jury could
not believe such a partnership was formed while William was still
employed at Powers Steel. Powers Steel relies almost exclusively on
William's hearing testimony in a different case about a misdated bank
application that purportedly memorialized the partnership.3 All parties
agree the date on the application was incorrect and, in a clarifying affidavit,
William later denied Powers Steel's allegations and explained that his
confusion at the hearing was based on that incorrect date. We reject Powers
Steel's argument that the affidavit should be discounted as a "sham." See
MacLean v. State Dep't of Educ., 195 Ariz. 235, 241, ¶ 20 (App. 1999) (holding
affidavits "may supplement or clarify prior inconsistent deposition
testimony if the affiant was confused at deposition and the affidavit
explains those aspects of the deposition testimony" (cleaned up)). Apart
from William's later-clarified testimony, and the incorrectly dated bank
application, no evidence suggests that Vinton Steel and William negotiated
an agreement during his employment at Powers Steel. Thus, we conclude
that "reasonable people could not agree with the conclusion advanced by"
Powers Steel. See Orme Sch. v. Reeves, 166 Ariz. 301, 309 (1990). Accordingly,
the superior court properly granted summary judgment on this ground.
¶28 However, even if we were to assume that Powers Steel
presented evidence that William and Defendants agreed to the alleged
partnership, we would likewise affirm because such actions would not
amount to a breached fiduciary duty.
3 The court noted Defendants were not parties to the other proceeding
but did not rule on their hearsay objection to William's prior testimony. See
Ariz. R. Evid. 803(25).
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
1. William's Alleged Actions Were Permitted
Preparations to Compete.
¶29 In Arizona, an employee owes a fiduciary duty of loyalty to
the employer that precludes him from soliciting employees or customers
for a rival business before the end of his employment, or from engaging in
other similar acts in direct competition with his employer. See Pope, 219
Ariz. at 492, ¶ 55; see also Restatement (Third) of Agency § 8.01 (2006).
However, that duty allows for pre-termination preparation for competition.
Pope, 219 Ariz. at 492, ¶ 53; see also McCallister Co. v. Kastella, 170 Ariz. 455,
457 (App. 1992) ("Thus, before the end of his employment, [an employee]
can properly purchase a rival business and upon termination of
employment immediately compete." (quoting Restatement (Second) of
Agency § 393 cmt. E)); Taser Int'l, Inc. v. Ward, 224 Ariz. 389, 394-95, ¶ 19
(App. 2010); Restatement (Third) of Agency § 8.04.
An agent who plans to compete is free to make extramural
arrangements for setting up a new business, such as
incorporating a new firm and arranging for space and
equipment. On the other hand, an agent or employee is not
free, while still employed, to commence doing business as a
competitor or to solicit customers away from the principal.
Restatement (Third) of Agency § 8.04 cmt c.
¶30 The duty of loyalty when preparing to compete focuses on
protecting an employer's customers and other employees, the loss of which
undoubtably can damage a business. See Restatement (Third) of Agency
§ 8.04 cmt. c ("[A]n agent or employee is not free, while still employed . . .
to solicit customers away from the principal."); Principles § 5.06 cmt. e
(noting duty breached if director solicits employees or customers while still
employed). But there is no allegation in this record that William solicited
Powers Steel employees or customers. The activity for which Powers Steel
faults William is the solicitation of its supplier—Vinton Steel. Suppliers are
not customers. See Wolfe Elec., Inc. v. Duckworth, 266 P.3d 516, 525-27 (Kan.
2011) (finding soliciting employer's suppliers did not violate a covenant not
to solicit customers). Powers Steel does not cite, and we cannot find, an
Arizona case concluding that such act violates the duty of loyalty. A search
of out-of-state cases similarly reveals no persuasive authority.
¶31 Instead, the Restatement of Agency acknowledges that an
employee preparing to compete may take actions "not equally available to
third-party competitors as a practical matter." Restatement (Third) of
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
Agency § 8.04 cmt. c. As an example, the Restatement notes that "an agent's
work may require the agent to develop and maintain good relationships
with the principal's customers and suppliers; the agent knows their identity
and has ongoing and specific associations with them that a third party
external to the principal's organization would likely not have developed."
Id.
¶32 "The line separating mere preparation from active
competition may be difficult to discern in some cases." Pope, 219 Ariz. at
492, ¶ 54 (cleaned up). This is not such a case. William's activity was
manifestly preparatory. See Taser, 224 Ariz. at 395, ¶ 22 (holding that
development of a business plan did not compete with employer's business
activities, no matter the level of included detail); Maryland Metals, Inc. v.
Metzner, 382 A.2d 564, 571 (Md. 1978) (holding conduct was "manifestly
preparatory in nature" where employees "contacted and consulted with
various municipal agencies, utility companies, construction contractors,
manufacturers and engineers concerning [a future business] and the
purchase of equipment necessary to operate and maintain the . . . business");
Midwest Janitorial Supply Corp. v. Greenwood, 629 N.W.2d 371, 374, 376 (Iowa
2001) (finding that seeking a line of credit from a bank was preparatory and
not actionable); cf. Pope, 219 Ariz. at 485-86, 489, 495-97, ¶¶ 9, 31, 68-70, 76
(affirming aiding and abetting verdict when competitor plotted with
employee to solicit multiple co-workers).
¶33 William's position as an officer of Powers Steel does not
change the analysis. "The mere fact that the director or senior executive
makes preparations to compete before resigning from office is . . . not a
breach of duty. It is the nature of the preparations and the extent to which
they substantially hinder the business of the corporation that are
significant." Principles § 5.06 cmt. e; accord Restatement (Third) of Agency §
8.04. William's preparations to compete included arranging future steel
purchases from Vinton Steel. Such activity does not rise to the level of a
substantial hindrance of Powers Steel's business. See Principles § 5.06 cmt.
e. We similarly reject Powers Steel's argument that William had a duty to
disclose his preparations. See Restatement (Third) of Agency § 8.04 cmt. c
(noting "an employee or other agent who plans to compete with the
principal does not have a duty to disclose this fact to the principal").
2. William Did Not Usurp a Corporate Opportunity.
¶34 Powers Steel also argues that William usurped a corporate
opportunity by not informing Powers Steel that Vinton Steel desired a
"depot" in the Phoenix market. In their answering brief, Defendants did not
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
address the argument that failure to inform Powers Steel of the desire for a
depot was equivalent to usurping a corporate opportunity. Instead,
Defendants argue that there is no evidence they agreed to establish a depot
and note that Defendants "never established a depot in Phoenix because it
was not in [their] best interests." In our discretion, we decline to regard
Defendants' response as a confession that William usurped a corporate
opportunity. See Nydam v. Crawford, 181 Ariz. 101, 101 (App. 1994).
¶35 "Arizona courts have adopted a somewhat narrow view of the
corporate opportunity doctrine," Taser, 224 Ariz. at 398, ¶ 33 n.20, which
generally "prohibits fiduciary usurpation of a corporate opportunity."
AMERCO, 184 Ariz. at 158. Our supreme court directs that the test "is
whether the director has a specific duty to act in regard to the particular
matter as a representative of the company. If there is no such duty, the
director may acquire outside interests although the corporation may be
more or less interested." Tovrea Land & Cattle Co. v. Linsenmeyer, 100 Ariz.
107, 122 (1966); see also Zeckendorf v. Steinfeld, 12 Ariz. 245, 261-62 (1909)
(holding that corporation must have "an interest, actual or in expectancy, in
the property" to prevent acquisition by officer or director), modified, 225 U.S.
445 (1912).
¶36 The opportunity must actually exist and not be merely
"abstractly contemplated." Taser, 224 Ariz. at 399, ¶ 36. The doctrine does
not extend to all business ideas discussed or learned about in the course of
employment because "such [an] extension would have the effect of
unnecessarily restraining competition" and "would effectively transform
[an at-will] employment relationship to one bound by a de facto non-
compete agreement." Id. Further, a corporate opportunity does not exist if
it is not available to the corporation. See Zeckendorf, 12 Ariz. at 262 (noting
no lost opportunity when corporation lacked resources to purchase
disputed property).
¶37 The present facts fall outside the prohibitions of the corporate
opportunity doctrine. Powers Steel neither alleged that it desired to operate
as a depot, nor that Vinton Steel would be willing to extend the same
alleged offer to Powers Steel. See Rankin v. Frebank Co., 121 Cal.Rptr. 348,
356 (Cal. Ct. App. 1975) (finding no lost opportunity when no evidence
"remotely implies that [the offeror] would have been willing to sell his note
at a discount to the corporation"); see also 3 Fletcher Cyc. Corp. § 862.10
(stating corporation can have no expectancy in an opportunity if the
offering "party refuses to deal with it"). Finally, no depot was ever
established, with PRF, Powers Steel, or any other company, leaving it as an
abstract business idea. See Taser, 224 Ariz. at 399, ¶ 36.
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Decision of the Court
¶38 We similarly reject any argument that preferential pricing and
credit for steel purchases were corporate opportunities. Prohibiting
William from negotiating for the purchase of steel from Vinton Steel after
the conclusion of his employment would amount to enforcing a non-
existent non-compete agreement with Powers Steel. See id. On this record,
William did not usurp a corporate opportunity.
3. Vinton Steel Did Not Aid and Abet a Misuse of
Corporate Property.
¶39 Finally, Powers Steel asserts that William breached his duties
through large steel orders placed with Vinton Steel in the last months of his
employment. Powers Steel argues this was a misuse of its property for the
benefit of William and Defendants. See Restatement (Third) of Agency §
8.05. But Powers Steel fails to argue or explain how Defendants, who are in
the business of selling steel, aided and abetted this alleged breach. Indeed,
Powers Steel conceded that Defendants did not learn of William's pending
retirement until after William had placed all but one of the seven allegedly
suspicious orders. There is no evidence in the record that Defendants
possessed even circumstantial knowledge sufficient to present an aiding
and abetting claim on this ground. See Dawson v. Withycombe, 216 Ariz. 84,
102, ¶ 50 (App. 2007) ("[I]t must be shown that the defendants knew the
conduct they allegedly aided and abetted was a tort.").
¶40 In sum, Defendants cannot be liable for aiding and abetting
because William either did not breach a fiduciary duty or Defendants
lacked knowledge of the breach. Accordingly, the superior court properly
granted summary judgment.
II. Intentional Interference.
¶41 Powers Steel also appeals the grant of summary judgment on
its claim for intentional interference with a business expectancy.
¶42 The relevant elements of a claim for tortious interference are:
"the existence of a valid . . . business expectancy; the interferer's knowledge
of the . . . expectancy; intentional interference inducing or causing a breach
or termination of the . . . expectancy; and resultant damage to the party
whose . . . expectancy has been disrupted." Wallace v. Casa Grande Union
High Sch. Dist. No. 82 Bd. of Governors, 184 Ariz. 419, 427 (App. 1995). The
interference must also "'be "improper" for liability to attach.'" Safeway Ins.
Co. v. Guerrero, 210 Ariz. 5, 10, ¶ 15 (2005) (quoting Wagenseller v. Scottsdale
Mem'l Hosp., 147 Ariz. 370, 388 (1985)). Several factors determine whether
conduct is "improper," but our supreme court directs that we "give the
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
greatest weight" to "the nature of the defendant's conduct and the
defendant's motive." Id. at 12, ¶ 22. But the "improper action" standard
"must be applied with discrimination, particularly where the conduct in
question takes place in the context of competitive business activities." Bar J
Bar Cattle Co. v. Pace, 158 Ariz. 481, 483 (App. 1988).
¶43 Conduct may be improper where it is "unlawful," that is "in
violation of statutory provisions or contrary to established public policy."
Restatement (Second) of Torts § 767 cmt. c. Here, Powers Steel argues
Defendants' conduct was "unlawful because they aided and abetted
[William's] breach of his fiduciary duties." We reject that argument for the
reasons stated above. See supra ¶¶ 25, 27, 40.
¶44 Powers Steel also argues that "the evidence here shows that
Vinton and Villarreal entered the Partnership Agreement with the intention
of putting [Powers Steel] out of business for the benefit of their partner
[William]." The superior court concluded this assertion was "speculative"
and "nonsensical."
¶45 This Court previously rejected a similar argument as too
speculative. See Bar J Bar, 158 Ariz. at 485 (rejecting argument that
defendant "had an improper motive in that he was acting out of ill will").
"One who interferes with the contractual rights of another for a legitimate
competitive reason does not become a tort-feasor simply because he may
also bear ill will toward his competitor." Id. Accordingly, a business
"competitor does not act improperly if [its] purpose at least in part is to
advance [its] own economic interests." Miller v. Hehlen, 209 Ariz. 462, 471,
¶ 32 (App. 2005) (quoting Bar J Bar, 158 Ariz. at 485); see Safeway Ins., 210
Ariz. at 12, ¶ 23 (rejecting argument "that lawyers have an improper motive
simply because they seek to increase their fees by maximizing an award for
a client").
¶46 "A question of fact as to a specific motive is only material if
one of the possible motives supported by the record may be considered
improper . . . ." Neonatology Assocs., Ltd. v. Phx. Perinatal Assocs. Inc., 216
Ariz. 185, 189, ¶ 15 (App. 2007). Powers Steel does not allege an improper
motive. To the extent that Defendants offered William and PRF competitive
steel pricing or a generous line of credit for steel purchases, this is nothing
"more nefarious than business competition." Id. Summary judgment on
Powers Steel's tortious interference with a business expectancy claim was
therefore appropriate. See id. at 187, 189, ¶¶ 4, 15 (affirming summary
judgment on tortious interference claim where there was no "evidence of
anything more nefarious than business competition").
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POWERS STEEL v. VINTON STEEL, et al.
Decision of the Court
III. Attorney Fees.
¶47 Powers Steel challenges the superior court's award of
attorney fees to Defendants, claiming that it "did not bring unnecessary,
unsubstantiated claims warranting sanctions." But the superior court did
not award fees on that basis. Instead, the superior court awarded attorney
fees as a discovery sanction. See A.R.S. § 12-349(A)(4). After considering
the superior court's well-reasoned sanction order, we conclude the court
did not abuse its discretion. See Lund, 227 Ariz. at 578-79, ¶ 19.
¶48 Defendants seek attorney fees on appeal under A.R.S. § 12-
349, asserting the "appeal was brought without substantial justification and
primarily for harassment." We respectfully disagree and decline to award
attorney fees. However, as the prevailing parties, Defendants are awarded
their costs upon timely compliance with ARCAP 21.
CONCLUSION
¶49 We affirm.
AMY M. WOOD • Clerk of the Court
FILED: AA
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