Court Opinion

ID: 4419121
Source: CourtListenerOpinion
Date Created: 2019-07-23 15:02:35.046271+00
Date Added: 2024-06-11T14:27:51.084172
License: Public Domain

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 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

             IMH FINANCIAL CORPORATION, a Delaware
          corporation; EDILIA PROPERTIES, LLLP, an Arizona
          limited liability limited partnership; and RIO VERDE
                120 LIMITED LIABILITY COMPANY, an
                    Arizona limited liability company,
                              Plaintiffs/Appellees,

                                        v.

                RECORP-NEW MEXICO ASSOCIATES III,
                 LP, a New Mexico limited partnership,
                          Defendant/Appellant.

                             No. 1 CA-CV 16-0589
                              FILED 7-23-2019

           Appeal from the Superior Court in Maricopa County
                          No. CV2016-001298
           The Honorable Michael L. Barth, Judge Pro Tempore

                                  AFFIRMED

                                   COUNSEL

Snell & Wilmer, LLP, Phoenix
By Christopher H. Bayley, Benjamin W. Reeves
Counsel for Plaintiffs/Appellees

Jaburg & Wilk, PC, Phoenix
By Neal H. Bookspan, Laura Rogal
Counsel for Defendant/Appellant
                          IMH, et al. v. RECORP
                           Decision of the Court

                      MEMORANDUM DECISION

Judge Diane M. Johnsen delivered the decision of the Court, in which
Presiding Judge Lawrence F. Winthrop and Judge Maria Elena Cruz joined.

J O H N S E N, Judge:

¶1             Recorp-New Mexico Associates III, LP ("Recorp") appeals the
superior court's denial of its motion to set aside default judgment in favor
of IMH Financial Corporation ("IMH"), Edilia Properties, LLLP ("Edilia"),
and Rio Verde 120 Limited Liability Company ("Rio Verde") (collectively
"Plaintiffs"). For the following reasons, we affirm.

             FACTS AND PROCEDURAL BACKGROUND

¶2            In February 2016, IMH filed a derivative action against
Recorp on behalf of Recorp Partners, Inc. ("RPI"), which is wholly owned
by Stockholder, LLC ("Stockholder"). IMH alleged it is the sole owner of
Stockholder. RPI is the general partner of Recorp; IMH claimed Recorp
breached an agreement to pay management fees to RPI. Edilia and Rio
Verde joined IMH's Verified Complaint, alleging Recorp breached separate
note obligations owed to them.

¶3            Recorp did not timely answer or respond to the complaint.
Plaintiffs applied for entry of default, and, after entry of default, they
moved for entry of default judgment. On May 9, 2016, the superior court
entered default judgment against Recorp in amounts totaling $2,001,882.99.

¶4            On June 9, 2016, Recorp moved to set aside the default
judgment under Arizona Rule of Civil Procedure 60(b).1 It asserted its
failure to respond to the complaint was the result of excusable neglect
because it had no money on hand to hire a lawyer to defend it and raising
money from its limited partners took time. Recorp also asserted it had
several meritorious defenses: It challenged IMH's standing to bring a

1      Absent material revision after the relevant date, we cite the current
version of a statute or rule. Recorp's motion cited Rule 60(c), but that
provision was renumbered to Rule 60(b) in 2017. The substance of the rule
was unchanged. See Gonzalez v. Nguyen, 243 Ariz. 531, 532, ¶ 1, n.1 (2018).

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                           IMH, et al. v. RECORP
                            Decision of the Court

derivative action on behalf of RPI, asserted IMH failed to show that Recorp
had not been paid for services it performed, and argued Plaintiffs had failed
to produce notes or other loan documents establishing the other debts.
Recorp also argued Plaintiffs were receiving a large windfall "without
having to do anything more than file a lawsuit." After oral argument, the
court issued an order denying Recorp's motion.

¶5            Recorp timely appealed. We have jurisdiction pursuant to
Article 6, Section 9, of the Arizona Constitution, and Arizona Revised
Statutes ("A.R.S.") sections 12-120.21(A)(1) (2019) and -2101(A)(1) (2019).

                               DISCUSSION

A.     General Principles.

¶6             We review the superior court's denial of a motion to set aside
a default judgment for abuse of discretion. See Daou v. Harris, 139 Ariz. 353,
359 (1984). While the law favors deciding cases on the merits, "trial judges
are in a much better position than appellate judges to determine" matters
such as "excusable neglect or a substantial and meritorious defense." Id.
"Thus, trial courts are given broad discretion [in ruling on a motion to set
aside a default judgment] and we will not upset a trial court's decision
absent a clear abuse of that discretion." Id.; Gonzalez v. Nguyen, 243 Ariz.
531, 534, ¶ 11 (2018).

¶7             A party moving to set aside a default judgment under Rule
60(b) must show (1) it acted promptly in seeking relief; (2) its failure to file
a timely answer was excusable under one of the six subdivisions of Rule
60(b); and (3) it had a meritorious defense. Daou, 139 Ariz. at 358-59. To
prevail, the moving party must show "some substantial evidence" that it is
entitled to relief. See Richas v. Rozar, 133 Ariz. 512, 514 (1982) (quotation
omitted).

¶8           Because the superior court's order did not explain its
reasoning, we do not know the court's actual reason or reasons for denying
Recorp's motion.2 But after reviewing the record, we conclude the court

2       We do not know whether the superior court explained its reasoning
on the record at the conclusion of the oral argument because Recorp failed
to make the transcript of the proceeding part of the record on appeal. When
a party does not provide us with a transcript, "we presume the evidence
and arguments presented at the hearing support the trial court's ruling."
Blair v. Burgener, 226 Ariz. 213, 215, 217, ¶¶ 1, 9 (2010).

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                           IMH, et al. v. RECORP
                            Decision of the Court

reasonably could have found that Recorp failed to establish either excusable
neglect or a meritorious defense (or both), and thus, the court did not abuse
its discretion in denying the motion.

B.     Excusable Neglect.

¶9           Recorp argues it failed to respond to the complaint due to
"excusable neglect," one of the permitted grounds for relief. See Ariz. R.
Civ. P. 60(b)(1). Excusable neglect "is such as might be the act of a
reasonably prudent person under similar circumstances." Daou, 139 Ariz.
at 359.

¶10             The only evidence Recorp offered in support of its "excusable
neglect" argument was an affidavit executed by Donald Hulke, President of
RPI, the general partner of Recorp. There, Hulke asserted that Recorp had
no money to defend IMH's lawsuit and stated that because "[t]he limited
partners . . . have been unwilling to participate in capital calls," Recorp "had
to look to the limited partners to personally loan funds to [it] to defend
against the IMH lawsuit." The affidavit also stated generally that the only
means Recorp had to contact its limited partners was by mail, and because
its contact information for its limited partners was out-of-date and some
may have died, communicating with the limited partners was difficult.
Finally, the affidavit stated that Hulke "asked IMH for a twenty-day
extension to file [Recorp's] Answer, so that [Hulke] could again
communicate with the limited partners of Recorp III and try to obtain
funding to defend against the lawsuit," but IMH denied the request.

¶11            Recorp cites no authority for the proposition that an entity's
inability to afford a lawyer to defend it may constitute excusable neglect
under Rule 60. But even accepting that premise for purposes of argument,
the Hulke affidavit did not demonstrate that Recorp made reasonable
efforts to raise money to hire a lawyer. The affidavit offered no facts
regarding the timing or nature of any efforts it made to raise funds for its
defense. In place of specific facts showing its efforts, the affidavit offered
broad generalizations. For example, the affidavit stated that "[i]t is difficult
to locate legal heirs of deceased limited partners, or of limited partners who
have moved," and it "takes time" to communicate by mail, but did not state
what Recorp actually did to contact the limited partners or when it did so.

¶12            Recorp also argues IMH effectively "manufactured" Recorp's
inability to hire counsel by causing RPI to refuse to give Recorp money for
a lawyer. Recorp asserts that "[t]he conduct of IMH was not only
methodical in its scheme, but also diabolical for the swiftness of execution

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                           IMH, et al. v. RECORP
                            Decision of the Court

and the unwavering refusal to accommodate, in any way, the known
infirmities of Recorp." But Recorp cites no legal authority for the
proposition that, as general partner, RPI was obligated to pay for a lawyer
for Recorp. Nor does Recorp offer authority for its assertion that IMH was
obligated to cause RPI to fund the defense or was obligated to allow Recorp
an indefinite extension of time to raise the money itself.

¶13            Under these circumstances, the record supports the superior
court's denial of Recorp's motion based on Recorp's failure to demonstrate
that it acted reasonably under the circumstances.3

C.     Meritorious Defense.

¶14            To show a meritorious defense, a moving party must show
"facts which, if proven at trial, would constitute a meritorious defense."
Gonzalez, 243 Ariz. at 534, ¶ 12 (quoting Union Oil Co. of Cal. v. Hudson Oil
Co., 131 Ariz. 285, 289 (1982)). While the evidence of a meritorious defense
need not be "new evidence" or in a particular form such as an affidavit or
deposition, there must exist somewhere in the record "some legal
justification for the exercise of the power, some substantial evidence to
support it." Gonzalez, 243 Ariz. at 534, ¶¶ 12-13 (quoting Richas, 133 Ariz. at
514).

¶15           On this issue, Recorp first argues that "IMH's derivative status
is contestable" and "IMH may lack capacity to sue Recorp" because "[t]he
record does not reflect that IMH has proven that it meets" standing
requirements or that it followed the demand process of A.R.S. §§ 10-3631
(2019) and -3632 (2019).4 But Recorp has failed to cite any specific

3       We note that Recorp could have looked into hiring an attorney for
the limited purpose of asking the court for more time to respond—the kind
of step a reasonably prudent person might have taken to avoid missing a
court deadline. See Ariz. R. Civ. P. 6(b)(1) (time extensions for good cause);
see also Ariz. R. Sup. Ct. 42, ER 1.2(c) (allowing lawyers to provide limited-
scope representation if reasonable under the circumstances).

4      The statutes Recorp cites govern Arizona corporations and do not
necessarily establish the standing and demand requirements applicable
here. Stockholder is an Arizona limited liability corporation; the
requirements to bring a derivative suit asserting the rights of an Arizona
limited liability corporation are set out in A.R.S. § 29-831 (2019). RPI is a
Delaware corporation; derivative suits asserting its rights are governed by

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                            IMH, et al. v. RECORP
                             Decision of the Court

requirement that it contends IMH failed to meet and has not otherwise
explained its argument. Because Recorp has failed to raise the issue of
IMH's derivative status with any specificity, the issue is waived. See Winters
v. Ariz. Bd. of Educ., 207 Ariz. 173, 177, ¶ 13 (App. 2004).

¶16            Recorp next argues that "IMH did nothing to prove the
existence of its damages." But the affidavit attached to Plaintiffs' motion for
entry of default judgment met the "sum certain" requirements for entry of
default judgment. See Ariz. R. Civ. P. 55(b)(1)(A) ("If the plaintiff's claim is
for a sum certain . . . the court—on the plaintiff's motion, with an affidavit
showing the amount due and without a hearing—may enter judgment for
that amount."). Therefore, the burden was on Recorp to offer evidence
contradicting Plaintiffs' claimed damages. Because Recorp did not offer
facts to contradict the figures in Plaintiffs' affidavit, Recorp failed to raise a
meritorious defense with respect to damages.

¶17            Recorp also argues it has a meritorious defense because
Plaintiffs failed to produce various documents establishing their claims.
But again, Plaintiffs' "sum certain" affidavit, along with the verified
complaint, were sufficient evidence of Recorp's breaches and Plaintiffs'
resulting damages; Plaintiffs had no burden to produce other documents or
otherwise prove their claims in response to Recorp's motion for relief from
the default judgment. See Ariz. R. Civ. P. 55(b)(1)(A) (containing no
requirement to attach supporting documents to the affidavit to establish the
amount due). Recorp also argues that RPI may not have provided the
services for which IMH sued for compensation and asked the superior court
that Recorp "be allowed to explore and prove" that defense at trial. But
Recorp failed to support this contention with any facts. Its unsupported
argument in its brief cannot constitute a meritorious defense. See United
Imports, 134 Ariz. at 46 (lawyer's conclusion "carries no weight").

¶18            Nor do the facts Recorp did include in its affidavit establish a
meritorious defense to the claims in the complaint. In his affidavit, Hulke
stated only that he "ha[s] not seen an executed copy of a promissory note or
other loan documentation" establishing the Edilia or Rio Verde debts, and
that to his knowledge, Recorp "is not in possession" of documents
establishing those debts. Neither assertion establishes an affirmative
defense to a breach of contract claim nor negates any element of breach; if
the fact that Hulke had not seen or Recorp did not possess documents could

Delaware law. See A.R.S. § 10-3637 (2019) (derivative proceedings
concerning foreign corporation governed by the laws of that corporation's
jurisdiction of incorporation).

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                            IMH, et al. v. RECORP
                             Decision of the Court

constitute a defense to breach, Recorp could avoid liability by having its
general partner avoid looking at the contracts or by discarding them. Cf.
Thomas v. Montelucia Villas, LLC, 232 Ariz. 92, 96, ¶ 16 (2013) (elements of
breach of contract claim are (1) existence of the contract; (2) breach; and (3)
resulting damages).

¶19            Finally, Recorp argues that the superior court abused its
discretion because it granted plaintiffs a windfall even though "[n]othing in
the record indicates that IMH has incurred damages at all, let alone in such
a large amount." Again, however, Plaintiffs' affidavit was sufficient to
establish damages for purposes of a default judgment. See Ariz. R. Civ. P.
55(b)(1)(A). Although a court may consider the amount of a damages
award as one factor, among others, in deciding to set aside a judgment, see
Amanti Elec., Inc. v. Engineered Structures, Inc., 229 Ariz. 430, 433, ¶ 10 (App.
2012), simply pointing out that the award is large, without more, does not
create a meritorious defense.

                                CONCLUSION

¶20            For the foregoing reasons, we hold the superior court did not
abuse its discretion in denying Recorp's motion to set aside entry of default
judgment. We therefore affirm the superior court's order. We award
Plaintiffs their costs on appeal and, pursuant to A.R.S. § 12-341.01 (2019),
their reasonable attorney's fees, both conditioned upon compliance with
Arizona Rule of Civil Appellate Procedure 21.

                            AMY M. WOOD • Clerk of the Court
                            FILED: AA

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