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 

 

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 

2 

O P I N I O N 

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 Courtapproved 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. 
ML et al. v. COLES 

Opinion of the Court 

3 

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. 
ML et al. v. COLES 

Opinion of the Court 

4 

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). 
ML et al. v. COLES 

Opinion of the Court 

5 

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 
ML et al. v. COLES 

Opinion of the Court 

6 

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 
ML et al. v. COLES 

Opinion of the Court 

7 

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 
ML et al. v. COLES 

Opinion of the Court 

8 

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 
ML et al. v. COLES 

Opinion of the Court 

9 

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 
ML et al. v. COLES 

Opinion of the Court 

10 

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. 
ML et al. v. COLES 

Opinion of the Court 

11 

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.