ML Servicing Co. v. Coles

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
ML SERVICING CO., INC., an Arizona corporation; and ML
LIQUIDATING TRUST, Plaintiffs/Appellants,
v.
ASHLEY COLES, individually and in her capacity as Trustee of the
Ashley M. Coles Family Trust, Defendant/Appellee.
No. 1 CA-CV 13-0282
FILED 09-16-2014
Appeal from the Superior Court in Maricopa County
No. CV2011-005890 and No. CV2011-011666 (Consolidated)
The Honorable Arthur T. Anderson, Judge
AFFIRMED
COUNSEL
Stinson Leonard Street LLP, Phoenix
By Michael C. Manning and James E. Holland, Jr.
Hinshaw & Culbertson LLP, Phoenix
By E. Scott Dosek, Jennifer R. Friedman, Michael Ronald Ayers
Co-Counsel for Plaintiffs/Appellants
Kercsmar & Feltus PLLC, Scottsdale
By Todd Feltus and Julia A. Guinane
Counsel for Defendant/Appellee Ashley Coles
ML et al. v. COLES
Opinion of the Court
OPINION
Presiding Judge Patricia A. Orozco delivered the opinion of the Court, in
which Judge Lawrence F. Winthrop and Judge Kenton D. Jones joined.
O R O Z C O, Judge:
¶1 Appellants ML Servicing Co., Inc. (ML Servicing) and ML
Liquidating Trust (collectively Appellants) appeal from the trial court order
dismissing its action pursuant to Arizona Revised Statutes (A.R.S.) section
20-1131 (2010), a statute that prevents creditors of a deceased insured from
claiming life insurance proceeds to repay the decedent’s debts, and from
the trial court’s award of attorney fees to Appellee Ashley Coles (Ashley).1
We find Appellants are creditors of the decedent pursuant to A.R.S. § 20-
1131. Accordingly, we affirm.
FACTS AND PROCEDURAL HISTORY
¶2 Mortgages, Ltd. was one of Arizona’s largest and oldest
private mortgage lenders. It eventually became insolvent and unable to pay
its investors and the substantial loans it had committed to fund. In 2008,
various Mortgages, Ltd. creditors initiated an involuntary Chapter 7
bankruptcy on behalf of Mortgages, Ltd., which was converted into a
voluntary Chapter 11 bankruptcy. That same year, Mortgages, Ltd.’s CEO,
Scott Coles (Scott), died suddenly. Before Mortgages, Ltd.’s bankruptcy,
the company was solely owned by Scott’s revocable trust (the SMC Trust).
¶3 As part of the bankruptcy, Mortgages, Ltd. was reorganized
and renamed ML Servicing Co., Inc. ML Servicing’s purpose is to pursue
and collect assets on behalf of the bankruptcy estate. Also as part of the
bankruptcy, ML Liquidating Trust was created in a U.S. Bankruptcy Court-
approved reorganization plan. ML Liquidating Trust is a liquidating trust
organized under Arizona law, and the owner of ML Servicing.
¶4 Scott owned multiple life insurance policies (the Policies),
insuring his life. Following his death, some of the insurance proceeds,
1 Because several parties involved in this case share the same last
name, for clarity we use the parties’ first names.
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Opinion of the Court
believed to be in excess of $60 million, were paid to Ashley,2 Scott’s widow.
Appellants sued Ashley and alleged the Policies’ premiums (supposedly in
excess of $130,000 annually) were paid with funds Scott misappropriated
from Mortgages, Ltd., and on that basis Appellants sought to recover the
insurance proceeds under a constructive trust theory.
¶5 Appellants also asserted Scott paid the premiums on the
Policies by transferring funds from Mortgages, Ltd. to the SMC Trust at a
time when Mortgages, Ltd. was “insolvent or soon to be insolvent.”
Appellants also alleged that Scott owed a fiduciary duty to Mortgages, Ltd.,
which he breached by transferring money to the SMC Trust while
Mortgages, Ltd. was insolvent.
¶6 Ashley filed a motion to dismiss, arguing that ML Liquidating
Trust was not entitled to the Policies’ proceeds because Arizona’s
exemption statute, codified at A.R.S. § 20-1131, barred any creditor of a
decedent from recovering life insurance proceeds from a beneficiary. The
trial court granted Ashley’s motion and awarded her attorney fees, holding
that Appellants’ claims arose out of contract. The trial court held the
“statute evidences the Legislature’s plain intent to exempt life insurance
proceeds paid to a beneficiary from the claims of creditors of the decedent’s
estate.” The trial court also noted “A.R.S. § 20-1131.A . . . is not ambiguous
and [Appellants’] arguments do not make it so.” The trial court continued,
“The crux of [Appellants’] claims is based on the allegation that Scott paid
insurance premiums in fraud of creditors; it is the premiums, not the
proceeds, which Scott allegedly misappropriated. As such, [Appellants’]
remedy is a return of premiums . . . a claim for which [Appellants] do not
plead.”
¶7 Appellants timely appealed the trial court’s grant of the
motion to dismiss and award of attorney fees. We have jurisdiction
pursuant to Article 6, Section 9, of the Arizona Constitution, A.R.S. §§ 12-
120.21.A.1 (2003), and -2101.21 (Supp. 2013).3
2 Appellants also sued Scott’s ex-wife, Francine Coles. Before oral
argument on appeal, Appellants and Francine Coles reached a settlement
and Francine is no longer a party to this appeal.
3 We cite to the current version of the applicable statutes when no
material revisions have since occurred.
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Opinion of the Court
DISCUSSION
¶8 We review the grant of a motion to dismiss for failure to state
a claim de novo. Coleman v. City of Mesa, 230 Ariz. 352, 355, ¶ 7, 284 P.3d
863, 866 (2012). “The dismissal of a complaint is only appropriate when the
‘plaintiffs would not be entitled to relief under any interpretation of the
facts susceptible of proof.’” Turley v. Ethington, 213 Ariz. 640, 643, ¶ 6, 146
P.3d 1282, 1285 (App. 2006) (quoting Fid. Sec. Life Ins. Co v. State, Dep’t of
Ins., 191 Ariz. 222, ¶ 4, 954 P.2d 580, 582 (1998)). When ruling on a Rule
12(b)(6) motion to dismiss, the trial court may look only to the complaint
itself and consider the well-pled factual allegations contained within the
complaint. Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417, 419, ¶ 7, 189 P.3d
344, 346 (2008). We assume the truth of all well-pled factual allegations and
consider all reasonable inferences drawn from such facts. Id. Nonetheless,
mere conclusory statements inserted as facts are insufficient to state a claim
upon which the trial court may grant relief. Id. Mere legal conclusions do
not suffice because they do “not satisfy Arizona’s notice pleading standard
under Rule 8” of the Arizona Rules of Civil Procedure. Id.
I. Arizona’s Exemption Statute: A.R.S. § 20-1131
¶9 We review issues of statutory interpretation de novo. DeVries
v. State, 221 Ariz. 201, 204, ¶ 6, 211 P.3d 1185, 1188 (App. 2009). The primary
goal in statutory interpretation is to give effect to the Legislature’s intent in
enacting the statute. Id. Under § 20-1131.A, “[l]ife insurance proceeds paid
to a decedent’s beneficiary are exempt from claims of creditors of the
decedent’s estate.” In re Estate of King (King), 228 Ariz. 565, 568, ¶ 10, 269
P.3d 1189, 1192 (App. 2012). Section 20-1131.A provides:
If a policy of life insurance is effected by any person on
the person’s own life . . . in favor of another person having an
insurable interest in the policy, or made payable by
assignment, change of beneficiary or other means to a third
person, the lawful beneficiary or such third person, other than
the person effecting the insurance or the person’s legal
representatives, is entitled to its proceeds against the creditors
and representatives of the person effecting the insurance.
¶10 The legislatures that have enacted such exemption statutes
“wanted to encourage individuals to provide for their heirs and in doing
so, protect their heirs from their creditors,” therefore, we construe such
statutes liberally. King, 228 Ariz. at 568, ¶ 12, 269 P.3d at 1192 (citing cases).
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Opinion of the Court
A. Appellants are “Creditors” as Contemplated by the Statute.
¶11 Appellants argue that A.R.S. § 20-1131 does not exempt their
claim because they are not suing as a creditor pursuing collections; rather,
they are suing as the Policies’ owner. We disagree.
¶12 The word “creditor” is not defined in § 20-1131, but the
Legislature defined the term in another title, which may provide us
guidance. In Title 44, Trade and Commerce, the Legislature defined
“creditor” as “a person who has a claim” and defines a “claim” as “a right
to payment, whether or not the right is reduced to a judgment.” See A.R.S.
§ 44-1001 (2013). Additionally, while we have not yet interpreted what
constitutes a creditor under § 20-1131, the rule is well settled that an
undefined statutory term is given its ordinary meaning unless it appears
from the context that a different meaning is intended for the term. Sierra
Tucson, Inc. v. Pima Cnty., 178 Ariz. 215, 219, 871 P.2d 762, 766 (App. 1994).
We also look to an established, widely respected dictionary definition of a
term when attempting to determine the ordinary meaning of a term not
defined in a statute. Id. Black’s Law Dictionary defines “creditor” as “one
to whom a debt is owed . . . a person or entity with a definite claim against
another.” Black’s Law Dictionary 424 (9th ed. 2009). Because the Legislature
did not indicate its intention in § 20-1131 to apply a different meaning to
the term, we adopt these general definitions of “creditor.”
¶13 While we recognize that Appellants may be involuntary
creditors and that Appellants had no control over Scott’s alleged use of
Mortgages, Ltd. funds to pay the Policies’ premiums, Appellants are
creditors just the same. A creditor is one who is owed a debt. See id.
Appellants allege Scott misappropriated their funds, and now seek
compensation for those misappropriated funds. Appellants are simply an
entity to which a debt is owed—even if they did not intentionally loan Scott
money with the intention of being repaid, they nonetheless seek
repayment—which is the ordinary meaning of creditor.
¶14 Appellants assert that their property was wrongfully taken to
pay the Policies’ premiums; therefore, they are the true owner and can sue
to recover its property simply by virtue of ownership. However, in King,
we established that no person or entity owns insurance proceeds until the
insured’s death. See 228 Ariz. at 568, ¶ 15, 269 P.3d at 1192. Appellants
therefore cannot claim to have owned the proceeds predating Scott’s death
because Scott wrongfully took the funds from Mortgages, Ltd. to pay the
Policies’ premiums. The Policies’ proceeds simply did not exist in Scott’s
lifetime, and neither Scott nor Mortgages, Ltd. ever owned the proceeds for
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Appellants to reclaim. See id. Appellants cannot avoid their classification
as a creditor, one to whom a debt is owed, simply by asserting that the
funds they seek to recover are not a debt, but rather Appellants’ property
in the first instance.
B. Section 20-1131.A Bars Appellants’ Recovery of the Proceeds.
¶15 Appellants argue that § 20-1131 only applies to “lawful
beneficiaries” and because Scott did not lawfully own the purchase money,
he could not name a “lawful beneficiary.” However, a “lawful beneficiary”
has nothing to do with the procurement of a policy. Instead, the term
focuses on whether the beneficiary has a proper insurable interest.
¶16 When relating to personal insurance, an “insurable interest”
includes: an individual’s interest in the life of the insured when the
individual has a “substantial interest engendered by love and affection”
when the individual is closely related “by blood or by law.” See id. § 20-
1104.C.1 (2010).
¶17 In this case, Ashley had an insurable interest in the policy,
because she was married to Scott. Thus, she was related to the insured
individual by law and had a “substantial interest engendered by love and
affection,” pursuant to A.R.S. § 20-1104.C.1. Therefore, we hold that Ashley
is a beneficiary as contemplated by the statute, even if Scott secured the
Policies through unlawful means.
¶18 Accordingly, because Appellants are creditors and Ashley
has an insurable interest under the statute; we find that § 20-1131 bars
Appellants from recovering the proceeds of the Policies.
C. The Legislature Provided a Remedy at Law for this Situation
in § 20-1131.B.
¶19 Appellants argue that the “Legislature never intended to
prevent rightful owners from recovering proceeds of their property.” For
the reasons discussed above, we reject this argument. The Legislature did
however, intend for defrauded creditors to be able to recover the funds that
were fraudulently used to pay the premiums of a decedent’s life insurance
policy. Defrauded creditors have a means by which to recover fraudulently
taken premiums. See A.R.S. § 20-1131.B. In the event that life insurance
premiums were paid in fraud of the decedent’s creditors, § 20-1131.B
provides, “the amount of any premiums for insurance paid in fraud of
creditors, with interest, shall inure to their benefit from the proceeds of the
policy.” This is the appropriate remedy at law, which would have made
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Appellants whole from Scott’s alleged wrongdoing. Yet, Appellants chose
not to pursue this relief.
¶20 Although Appellants contend that the “near-universal rule
[among other jurisdictions] is that state exemption statutes do not apply to
life insurance policies purchased with stolen funds,” Appellants cite no
binding Arizona authority, and we have found none. While we agree that
exemption statutes should not be used as a shield for fraud, we must not
give an absurd construction to the statute either. See State v. Affordable Bail
Bonds, 198 Ariz. 34, 37, ¶ 12, 6 P.3d 339, 342 (App. 2000) (“[S]tatutes must
be given a sensible construction that accomplishes the legislative intent and
which avoids absurd results.”). When construing statutes, we follow the
basic rules that “the words of a statute must be construed in conjunction
with the full text of the statute” and that we should “not interpret the
language of a statute so as to render it meaningless.” Golder v. Dep’t of
Revenue, State Bd. of Tax Appeals, 123 Ariz. 260, 265, 599 P.2d 216, 221 (1979).
Section 20-1131 provides a remedy for the harmed party when insurance
premiums have been paid by fraudulent means. Subsection B would be
meaningless if we accepted Appellants’ interpretation of § 20-1131 and
allowed them to recover the insurance proceeds because Scott’s alleged
misappropriation of funds resulted in the fraudulent payment of the
Policies’ premiums.
¶21 For these reasons, we find the trial court properly dismissed
the claims that Appellants assert as to the proceeds of the Policies, and we
affirm the trial court’s order granting Ashley’s motion to dismiss.
II. Constructive Trust
¶22 Appellants argue that § 20-1131 is inapplicable in this case
because they possess a constructive trust on funds used to pay the Policies’
premiums, and therefore they own the proceeds. Appellants argue that a
constructive trust may trace and recover proceeds of unlawfully taken
property without being subject to exemption statutes. Appellants seek a
constructive trust over the Policies’ proceeds because Scott allegedly
misappropriated funds from Mortgages, Ltd. to the SMC Trust to pay the
premiums. Ashley, however, argues that the issue of constructive trust has
been waived as applied to her because it was not raised before the trial
court. See, e.g., Odom v. Farmers Ins. Co. of Ariz., 216 Ariz. 530, 535, ¶ 18, 169
P.3d 120, 125 (App. 2007) (“Generally, arguments raised for the first time
on appeal are untimely and deemed waived.”). Nonetheless, we have
discretion to allow a party to raise an argument for the first time in oral
argument. See Long v. City of Glendale, 208 Ariz. 319, 329 n.7, ¶ 36, 93 P.3d
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519, 529 n.7 (App. 2007). The record before us indicates that the parties
discussed the issue of Appellants’ constructive trust claim at length at oral
argument on the motion to dismiss in the trial court. Therefore, we find
Appellants have not waived the constructive trust argument and address
this issue.
A. Because § 20-1131 Provides an Adequate Remedy at Law, a
Constructive Trust is not the Appropriate Remedy.
¶23 A constructive trust is an equitable remedy. See Turley, 213
Ariz. at 643, ¶ 8, 146 P.3d at 1285 (“A constructive trust is an equitable
doctrine that prevents one person from being unjustly enriched at the
expense of another. . . . It arises by operation of law and not by agreement
or intention.” (internal quotation marks omitted)). A constructive trust is
an appropriate remedy when property has been obtained through
unconscionable conduct, “such as fraud, . . . to prevent the title holder from
continuing to reap the benefits of ownership.” Murphy Farrell Dev., LLLP v.
Sourant, 229 Ariz. 124, 130, ¶ 23, 272 P.3d 355, 361 (App. 2012).
¶24 The imposition of a constructive trust is unavailable, and in
fact improper, when an adequate remedy at law is available to the harmed
party. See, e.g., Sult v. O’Brien, 15 Ariz. App. 384, 388, 488 P.2d 1021, 1025
(1971) (“The maxim that equity follows the law is strictly applicable
whenever the rights of the parties are clearly defined and established by
statutory provisions.”); see also Loiselle v. Cosas Mgmt. Grp., LLC, 224 Ariz.
207, 211, ¶ 14, 228 P.3d 943, 947 (App. 2010) (noting that the “doctrine that
equity will grant no relief when there is an adequate remedy at law is
limited to cases in which there is an adequate legal remedy against the
defendants that are before the court.”).
¶25 Appellants argue that this court adopted a “near-universal”
rule that exemption statutes do not apply to constructive trusts in Harmon
v. Harmon, 126 Ariz. 242, 244 n.2, 613 P.2d 1298, 1300 n.2 (App. 1980). We
disagree with this interpretation of Harmon. While Harmon recognizes that
the tracing feature of a constructive trust may permit plaintiffs “to reach
property otherwise exempt from the reach of creditors,” id., the mention of
a tracing feature in a footnote in that case does not establish that the holder
of a constructive trust has rights superior to those of other creditors.
Moreover, Harmon was discussing the election of remedies between a
constructive trust and other remedies available to a prevailing party. See id.
at 244, 613 P.2d at 1300. “A person who has been unjustly enriched at the
expense of another is required to make restitution to the other.” Id. at 245,
613 P.2d at 1301. This restitution, however, may be in the form of a
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judgment at law or a decree in equity, and courts are “cautious in their
acceptance of petitions for constructive trusts.” Id. at 244–45, 613 P.2d at
1300–01.
¶26 As discussed above, § 20-1131 provides a proper remedy at
law when creditors have been defrauded in order to pay life insurance
premiums—the creditor may recover the amount of premiums paid in
fraud of the creditor, plus interest. A.R.S. § 20-1131.B. This is an adequate
remedy at law because it makes Appellants whole by placing them in the
same position they would have been in but for Scott’s alleged misuse of
those funds to pay the Policies’ premiums.
B. Section 20-1131 is Constitutional as Applied.
¶27 Appellants argue that because they “own” the proceeds of the
policies, § 20-1131 constitutes an unconstitutional taking. As previously
stated, life insurance proceeds are not owned by anyone until the death of
the insured. King, 228 Ariz. at 568, ¶ 15, 269 P.3d at 1192. Therefore,
Appellants could not assert ownership of the Policies prior to Scott’s death.
And after Scott’s death, the insurance companies correctly paid the Policies
to Ashley because Appellants never had a property interest in the proceeds.
For these reasons, § 20-1131 does not constitute an unconstitutional taking
of Appellants’ property.
III. Attorney Fees
¶28 After granting Ashley’s motion to dismiss, the trial court also
awarded attorney fees to Ashley under A.R.S. § 12-341.01.A (2010).
Appellants challenge this award contending that attorney fees are not
recoverable under § 12-341.01 because the dispute did not arise from
contract.
¶29 We review the trial court’s decision to award attorney fees to
a successful party under § 12-341.01.A de novo. Rudinsky v. Harris, 231 Ariz.
95, 101, ¶ 27, 290 P.3d 1218, 1224 (App. 2012). Section 12-341.01 permits the
trial court to award attorney fees to the “successful party” in a “contested
action arising out of contract” in order to “mitigate the burden of the
expense of litigation to establish a just claim or a just defense.” See Rudinsky,
231 Ariz. at 101, ¶ 27, 290 P.3d at 1224.
¶30 The meaning of “arises out of contract” is broad for the
purposes of this statute. Id. For instance, for the purposes of § 12-341.01,
an action is considered to have arisen out of contract when the plaintiff
asserted a contract and the defendant successfully proved that no contract
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existed. Id. Moreover, a trial court may award attorney fees under § 12-
341.01 to the successful party even on contract claims that are interwoven
with tort claims. Id. at 102, ¶ 30, 290 P.3d at 1225; see also Sparks v. Republic
Nat. Life Ins. Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141 (1982) (“The
language is broad enough, however, that it could be argued, as plaintiffs do
here, that attorney’s fees may be recoverable in tort cases which find their
basis in contract.”).
¶31 The test to determine if an action arises out of contract is
whether the plaintiff would have a claim “even in the absence of a contract.”
See Ramsey Air Meds, L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 15–16, ¶ 27,
6 P.3d 315, 320–21 (App. 2000). A “tort claim will ‘arise out of a contract’
only when the tort could not exist ‘but for’ the breach or avoidance of
contract.” Id.; see also Sparks, 132 Ariz. at 543, 647 P.2d at 1141 (“The fact
that the two legal theories are intertwined does not preclude recovery of
attorney’s fees under § 12-341.01(A) as long as the cause of action in tort
could not exist but for the breach of the contract.”).
¶32 In their Complaint, Appellants argue that (1) Ashley was
unjustly enriched by policy proceeds and Appellants’ impoverishment was
directly linked to Ashley’s enrichment; (2) payment of policy premiums
constituted fraudulent transfer from Mortgages, Ltd. to the SMC Trust; (3)
Appellants were entitled to a constructive trust on the wrongfully paid
Policies’ premiums; (4) wrongful distribution; and (5) corporate trust fund
doctrine. In evaluating these claims, we must ask whether Appellants have
a claim even in the absence of the insurance contract. The answer to that
question is no. Although we recognize that Appellants’ claims sound
primarily in tort or quasi-contract and that neither Mortgage’s, Ltd. nor
Appellants ever had a contract directly with Ashley, Appellants’ claims
would not exist without the Policies’ proceeds which came from Scott’s
insurance contract with the life insurance companies. The only reason that
Appellants have these claims against Ashley is because the Policies from
the insurance contracts were paid out to Ashley.
¶33 Therefore, we agree with the trial court that the “insurance
contract is at the core of this action” and acknowledge that there was a
reasonable basis for the trial court’s discretionary award of fees.
Accordingly, we agree with the trial court that this action arose out of
contract, for purposes of A.R.S. § 12-341.01.A and will not disturb the trial
court’s award of fees. See Rudinsky, 231 Ariz. at 101, ¶ 27, 290 P.3d at 1224.
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IV. Request for Attorney Fees
¶34 Ashley requests attorney fees and costs pursuant to A.R.S. §§
12-341, -341.01.A, and ARCAP 21. In our discretion, we decline to award
attorney fees on appeal. We award Ashley her costs on appeal upon
compliance with ARCAP 21.
CONCLUSION
¶35 For the above reasons, we affirm the trial court’s orders
granting Ashley’s motion to dismiss and granting Ashley’s reasonable
attorney fees and costs.
:gsh
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