Court Opinion

ID: 4517879
Source: CourtListenerOpinion
Date Created: 2020-03-19 16:02:11.695334+00
Date Added: 2024-06-11T09:22:04.172571
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  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

                        METRO PHOENIX BANK INC,
                        Plaintiff/Appellee/Cross-Appellant,

                                         v.

                     RPM PRIVATE WEALTH LLC, et al.,
                     Defendants/Appellants/Cross-Appellees.

                              No. 1 CA-CV 19-0106
                                FILED 3-19-2020

            Appeal from the Superior Court in Maricopa County
                           No. CV2016-002429
               The Honorable Hugh E. Hegyi, Judge Retired

    AFFIRMED IN PART, VACATED AND REMANDED IN PART

                                    COUNSEL

May, Potenza, Baran & Gillespie, P.C., Phoenix
By Christopher B. Ingle, Michelle L. Mozdzen
Counsel for Plaintiff/Appellee/Cross-Appellant

McCarthy Law PLC, Scottsdale
By Kevin F. McCarthy, Jacob W. Hippensteel
Counsel for Defendants/Appellants/Cross-Appellees
                    METRO PHX BANK v. RPM, et al.
                        Decision of the Court

                      MEMORANDUM DECISION

Presiding Judge Samuel A. Thumma delivered the decision of the Court, in
which Judge Randall M. Howe and Judge Diane M. Johnsen joined.1

T H U M M A, Judge:

¶1             RPM Private Wealth LLC (RPM) and Raymond G. and
Marzita Brehm, individually and in their capacities as trustees of the Three
Musketeers Trust (collectively Appellants), challenge the superior court’s
(1) entry of summary judgment in favor of Metro Phoenix Bank Inc. on
Metro’s claims and Appellants’ counterclaims; (2) denial of sanctions and
(3) denial of their motion for leave to amend the complaint. Metro cross-
appeals the court’s fee award. This court affirms on all issues raised by RPM
but vacates the fee award and remands for further consideration.

                FACTS AND PROCEDURAL HISTORY

¶2             In December 2014, Metro extended a $50,000 line of credit to
RPM. The parties documented the transaction in a Promissory Note, a
Commercial Security Agreement and a Business Loan Agreement. The
Brehms separately guaranteed the line of credit personally and as trustees.
Collectively, these documents are referred to as the Loan Documents.

1 Judge Johnsen was a sitting member of this court when the matter was
assigned to this panel of the court. She retired effective February 28, 2020.
In accordance with the authority granted by Article 6, Section 3, of the
Arizona Constitution and pursuant to A.R.S. § 12-145, the Chief Justice of
the Arizona Supreme Court has designated Judge Johnsen as a judge pro
tempore in the Court of Appeals, Division One, for the purpose of
participating in the resolution of cases assigned to this panel during her
term in office.

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                    METRO PHX BANK v. RPM, et al.
                        Decision of the Court

¶3            The Promissory Note grants Metro, as lender, a setoff right
against other RPM-owned accounts:

             To the extent permitted by applicable law,
             Lender reserves a right of setoff in all
             Borrower’s accounts with Lender (whether
             checking, savings, or some other account). This
             includes all accounts Borrower holds jointly
             with someone else and all accounts Borrower
             may open in the future. However, this does not
             include any IRA or Keogh accounts, or any trust
             accounts for which setoff would be prohibited
             by law. Borrower authorizes Lender, to the
             extent permitted by applicable law, to charge or
             setoff all sums owing on the indebtedness
             against any and all such accounts, and, at
             Lender’s option, to administratively freeze all
             such accounts to allow Lender to protect
             Lender’s charge and setoff rights provided in
             this paragraph.

The Commercial Security and Business Loan Agreements contain virtually
identical terms, while the guaranties grant Metro similar rights against all
accounts held by the Brehms or the Three Musketeer Trust.

¶4             RPM defaulted on the line of credit by failing to timely repay
the loan. On March 10, 2016, Metro, through counsel, emailed a letter to
RPM stating that it had “exercised its right to offset the amount owed”
against an RPM-owned account (the Setoff Account). Appellants objected,
asserting in an emailed letter on March 11, 2016 that the Setoff Account was
a “trust account” and that the funds therein did not belong to RPM. In
response, Metro’s counsel emailed RPM’s counsel later that day that the
funds were “released based on avowal . . . that [they] belong entirely to
third parties.”

¶5           Metro sued Appellants, alleging breach of contract, and
Appellants counterclaimed, alleging breach of contract and conversion.
Metro moved for summary judgment on its claim and on the counterclaims,
arguing (1) RPM conceded liability on the loan; (2) Appellants could show
no breach of the Loan Documents or any resulting damages and (3) there
was no conversion because the setoff “was contemplated, but then reversed
at Defendants’ request before it posted to the account.” Metro offered
account statements to show the setoff “was cancelled before the withdrawal

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                     METRO PHX BANK v. RPM, et al.
                         Decision of the Court

of the funds posted . . . , meaning that no funds were actually withdrawn
from the account.”

¶6            In December 2017, after briefing Metro’s summary judgment
motion, Appellants moved for sanctions against Metro and its counsel. See
Ariz. R. Civ. P. 11 (2020).2 Appellants contended Metro’s position that the
setoff never took place contradicted its earlier position that the setoff had
been reversed. They also contended counsel failed to conduct a reasonable
inquiry into Metro’s prior admission that the setoff had occurred.

¶7           In January 2018, the superior court granted summary
judgment for Metro and denied the request to impose Rule 11 sanctions.
Metro filed an application seeking more than $81,000 in attorneys’ fees. In
April 2018, Appellants moved for leave to amend, to add counterclaims for
consumer fraud, fraud and negligent misrepresentation. The court ordered
Metro to file an amended fee application with unredacted billing
statements. When Metro did so, it increased the claim to $111,851.50, stating
it had inadvertently omitted fees from December 2017 and January 2018.

¶8             The superior court denied Appellants’ motion for leave to
amend, finding the request came “more than two years after the Complaint
was filed, more than sixteen months after the parties’ agreed deadline to
move to amend, and two and a half months after the time set for trial to
begin in this matter.” The court then awarded Metro $25,000 in fees and
entered final judgment.

¶9            Appellants timely appealed, and Metro timely cross-appealed
the fee award. This court has jurisdiction pursuant to Article 6, Section 9, of
the Arizona Constitution and Arizona Revised Statutes (A.R.S.) sections 12-
120.21(A)(1) and -2101(A)(1).

                               DISCUSSION

I.     Appellants’ Appeal.

       A.     The Superior Court Did Not Err in Granting Summary
              Judgment For Metro on Appellants’ Counterclaims.

¶10           Although Appellants do not challenge the entry of summary
judgment against them on Metro’s breach of contract claim, they challenge
the court’s ruling rejecting their counterclaims on various grounds. The

2Absent material revisions after the relevant dates, statutes and rules cited
refer to the current version unless otherwise indicated.

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                    METRO PHX BANK v. RPM, et al.
                        Decision of the Court

superior court granted summary judgment for Metro on those
counterclaims because Appellants (1) failed to disclose any cognizable
damages and (2) the purported setoff (if it occurred) was authorized by the
Loan Documents. This court reviews de novo whether summary judgment
is warranted, including whether genuine issues of material fact exist and
whether the trial court properly applied the law. Dreamland Villa
Community Club, Inc. v. Raimey, 224 Ariz. 42, 46 ¶ 16 (App. 2010). The facts
are construed in favor of Appellants. Melendez v. Hallmark Ins. Co., 232 Ariz.
327, 330 ¶ 9 (App. 2013). This court “will affirm summary judgment if it is
correct for any reason supported by the record.” KB Home Tucson, Inc. v.
Charter Oak Fire Ins. Co., 236 Ariz. 326, 329 ¶ 14 (App. 2014).

              1.     Breach of Contract Counterclaim.

¶11            Even if, as Appellants claim, there were disputed issues of
material fact as to whether the Setoff Account was a “trust account” for
which setoff would be barred by law, this court may affirm summary
judgment if it is correct for any reason supported by the record. Id. at 329 ¶
14. Thus, this court considers the alternative ground of whether Appellants
failed to properly disclose their claimed damages.

¶12            In opposing Metro’s motion for summary judgment,
Appellants had the burden to provide admissible evidence “set[ting] forth
specific facts showing a genuine issue for trial.” Ariz. R. Civ. P. 56(e). For
damages, Appellants needed to “set forth specific facts,” id., establishing “a
computation and measure” of damages, Ariz. R. Civ. P. 26.1(a)(7), with
“reasonable certainty,” “supply[ing] some reasonable basis for computing
the amount of damage . . . with such precision as, from the nature of [their]
claim and the available evidence, [wa]s possible,” Gilmore v. Cohen, 95 Ariz.
34, 36 (1963). The superior court properly concluded Appellants failed to
meet this standard.

¶13          In granting Metro’s motion for summary judgment, the
superior court noted that, just three weeks before trial, Appellants had
disclosed “no calculation [of] damages” allegedly arising from their
counterclaims.3 Appellants contend they properly disclosed their damages
stemming from the alleged setoff. But, during oral argument on the motion,
Appellants conceded they had not disclosed any damage calculation.

3 Although Brehm requested additional time to provide supplemental
disclosures, the ruling denying that request is not challenged on appeal.

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                     METRO PHX BANK v. RPM, et al.
                         Decision of the Court

Indeed, the only damages evidence in the summary judgment record is Mr.
Brehm’s testimony that

              (1) the trust between himself, his employees,
              and his broker was damaged;

              (2) he suffered “[l]ots of migraines in the
              following two months,” which resulted in “a
              couple doctor visits;”

              (3) his broker “said she didn’t sleep for two
              weeks;” and

              (4) he incurred unspecified expenses in
              transferring his and RPM’s other accounts to a
              different bank, although Metro did not require
              him to do so.

¶14            “Generally, the non-breaching party to a loan agreement” can
recover as damages “the amount that would place him in the same position
in which he would have been had the contract been performed.” Great
Western Bank v. LJC Dev., LLC, 238 Ariz. 470, 480–81 ¶ 36 (App. 2015).
Appellants made no effort on summary judgment to quantify the damages
they contended they incurred as a result of the breach. See, e.g., All American
School Supply Co. v. Slavens, 125 Ariz. 231, 233 (1980) (“Arizona has long held
that damages for breach of contract are those damages which arise naturally
from the breach itself or which may reasonably be supposed to have been
within the contemplation of the parties at the time they entered the
contract.”). Nor have they provided any authority showing they would be
entitled to recover emotional distress damages on their breach of contract
counterclaim. See Restatement (Second) of Contracts § 353 cmt. a (1981)
(“Damages for emotional disturbance are not ordinarily allowed.”).
Accordingly, the court did not err in finding Appellants failed to
substantiate their claim for damages arising from the purported breach of
contract and in granting summary judgment on that basis.

              2.     Conversion Counterclaim.

¶15          Conversion is the “act of wrongful dominion or control over
personal property in denial of or inconsistent with the rights of another.”
Sears Consumer Fin. Corp. v. Thunderbird Products, 166 Ariz. 333, 335 (App.
1990). To show conversion, the claimant must prove it had the right to
immediate possession of the property at the time of the conversion. Id.
Money can be converted if it “can be described, identified or segregated and

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                     METRO PHX BANK v. RPM, et al.
                         Decision of the Court

there is an obligation to treat the funds in a specific manner.” Koss Corp. v.
Am. Exp. Co., 233 Ariz. 74, 90 ¶ 54 (App. 2013).

¶16            Because it turns on the same allegations underlying
Appellants’ breach of contract counterclaim, it is not clear that the
conversion counterclaim could survive under Arizona’s economic loss
doctrine. Even if it could, under Arizona law, the measure of damages for
conversion is the value of the property plus “other damage suffered
because of the wrongful detention or deprivation . . . such as damages for
loss of use.” Collins v. First Financial Services, Inc., 168 Ariz. 484, 486 (App.
1991). Appellants did not show they suffered any compensable damages
from the brief interruption in their enjoyment of the right to immediate
possession of the funds in the Setoff Account. Appellants contend they
“disclosed multiple categories of damages,” including “pre-litigation legal
fees, consequential damages related to moving the funds from [the] Trust
Account to a new bank, punitive damages, and emotional distress
damages,” but they offered no evidence of any such damages beyond
Brehm’s testimony recounted above. They did not “set forth specific facts,”
Ariz. R. Civ. P. 56(e), establishing “a computation and measure” of damages
with reasonable certainty, Ariz. R. Civ. P. 26.1(a)(7). Moreover, they
admitted the setoff did not cause them to miss any payments and that none
of their clients knew about the setoff.

¶17           To the extent Appellants claim they were entitled to
emotional distress damages on their conversion counterclaim that could not
properly be quantified, they have shown no authority for such a claim.
Moreover, they have waived any such contention on appeal. Metro, in its
answering brief, showed that such damages are not compensable on a
conversion claim. See Farmers Ins. Exchange v. Henderson, 82 Ariz. 335, 343
(1957) (noting proper recovery for conversion is “the value of the property
[taken plus] interest”); accord Restatement (Second) of Torts § 927 (1979);
Restatement (Second) of Torts § 222A cmt. c (1965). Appellants failed to cite
any supporting authority in their reply.4 For these reasons, the court did not
err in granting summary judgment on the conversion counterclaim.

4The only authority Appellants cite in reply, Murray v. Farmers Ins. Co., 239
Ariz. 58 (App. 2016), was depublished, meaning it cannot be cited here,
Ariz. R. Sup. Ct. 111(c)(1)(C). The case also does not discuss or mention a
conversion claim.

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                     METRO PHX BANK v. RPM, et al.
                         Decision of the Court

       B.     Denial of Rule 11 Motion.

¶18            Appellants argue Metro and its counsel violated Rule 11 by
taking the position on summary judgment that the setoff never took place,
a position they claim is inconsistent with Metro’s earlier admissions that the
setoff took place but was quickly reversed. By signing a filing, the attorney
or party “certifies that to the best of the person’s knowledge, information,
and belief formed after reasonable inquiry . . . the factual contentions have
evidentiary support or, if specifically so identified, will likely have
evidentiary support after a reasonable opportunity for further investigation
or discovery.” Ariz. R. Civ. P. 11(b)(3). In assessing whether to impose
sanctions, a court evaluates the conduct under an objective reasonableness
standard. Cal X-Tra v. W.V.S.V. Holdings, L.L.C., 229 Ariz. 377, 410 ¶ 113
(App. 2012). The superior court’s ruling on Appellants’ motion for Rule 11
sanctions is reviewed for an abuse of discretion. Id.

¶19          In denying the motion for sanctions, the superior court noted
Metro promptly and appropriately took steps to clarify when it discovered
the inaccuracy. There is no suggestion or finding that Metro or its counsel
knowingly made a material misrepresentation. Appellants had the
opportunity to, and did, dispute Metro’s changed position in their response
to Metro’s summary judgment motion. On this record, Appellants have not
shown the superior court abused its discretion in denying Rule 11
sanctions.

       C.     Denial of Leave to Amend Counterclaims.

¶20            Appellants contend the court erred in denying them leave to
amend their counterclaims to allege consumer fraud, fraud and negligent
misrepresentation. Leave to amend should be liberally granted, MacCollum
v. Perkinson, 185 Ariz. 179, 185 (App. 1996); Ariz. R. Civ. P. 15(a)(1), but is
properly denied in cases of undue delay, bad faith, dilatory motive, futility,
repeated failure to cure deficiencies by previous amendments, or undue
prejudice, Carranza v. Madrigal, 237 Ariz. 512, 515 ¶ 13 (2015); Timmons v.
Ross Dress For Less, Inc., 234 Ariz. 569, 572 ¶ 17 (App. 2014). The denial of a
motion to amend a pleading is reviewed for an abuse of discretion.
Timmons, 234 Ariz. at 572 ¶ 17.

¶21           The superior court denied Appellants’ request because it
came too late. Appellants contend they did not seek to allege new facts, only
new legal theories, rendering the court’s ruling an abuse of discretion. See,
e.g., MacCollum v. Perkinson, 185 Ariz. 179, 185 (App. 1996) (“Denial of leave
to amend is generally an abuse of discretion where the amendment merely

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                    METRO PHX BANK v. RPM, et al.
                        Decision of the Court

seeks to add a new legal theory.”). However, neither MacCollum nor any
other Arizona case suggests that a party may add new legal theories at any
time.

¶22           Appellants’ reliance on Spitz v. Bache & Co., 122 Ariz. 530
(1979), is equally misplaced. There, the court granted leave to amend in a
case that “was still in the discovery stage,” noting the opposing party did
not argue “the amendment . . . would cause undue delay.” Id. at 531. Here,
the deadlines for discovery and to amend pleadings expired long before
Appellants sought leave to amend. Moreover, Appellants offered no
compelling reason for their delay, instead acknowledging that “the Fraud
and Misrepresentation arguments” they sought to press had “existed in the
undercurrent of this case since its inception.” On this record, the court did
not abuse its discretion in denying leave to amend. See Contractor & Mining
Service & Supply, Inc. v. H & M Tractor & Bearing Corp., 4 Ariz. App. 29, 32
(1966) (affirming denial of leave to amend complaint sought “well after the
pre-trial order was issued . . . and further discovery precluded”).

II.   Metro’s Cross-Appeal.

¶23           Metro challenges the $25,000 fee award under the terms of the
Loan Documents. Generally, contractual attorney fee provisions are
enforced according to their terms, Harle v. Williams, 246 Ariz. 330, 333 ¶ 10
(App. 2019), although a provision mandating an unreasonable fee award
will not be enforced, McDowell Mountain Ranch Community Ass’n v. Simons,
216 Ariz. 266, 270 ¶ 16 (App. 2007).

¶24          The Promissory Note provides:

             Lender may hire or pay someone else to help
             collect this Note if Borrower does not pay.
             Borrower will pay Lender that amount. This
             includes, subject to any limits under applicable
             law, Lender’s attorneys’ fees and Lender’s legal
             expenses, whether or not there is a lawsuit,
             including attorneys’ fees . . . and appeals.

The Commercial Security and Business Loan Agreements contain the same
language with the addition that Borrower/Grantor “agrees to pay upon
demand all of Lender’s costs and expenses, including Lender’s attorneys’
fees and Lender’s legal expenses, incurred in connection with the
enforcement of this Agreement.” The guaranties contain the same language
as the Commercial Security and Business Loan Agreements, but refer to

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                     METRO PHX BANK v. RPM, et al.
                         Decision of the Court

“Guarantor” and “Guaranty” as opposed to “Borrower” or “Grantor” and
“Agreement.”

¶25           Metro contends under McDowell that the court should have
granted its entire fee claim because Appellants did not show it was “clearly
excessive.” 216 Ariz. at 271 ¶ 20; see also Bocchino v. Fountain Shadows
Homeowners Ass’n, 244 Ariz. 323, 326 ¶ 15 (App. 2018) (“Even a contractual
entitlement to ‘all’ attorney fees incurred can be overcome by an
evidentiary showing that the fees were ‘clearly excessive.’”). While
Appellants objected to $24,482.70 in fees claimed in Metro’s original
application, the superior court expressly rejected most of their objections
when affording Metro the opportunity to file an amended application.
Appellants also objected to Metro’s addition of the December 2017 and
January 2018 fees, which totaled $30,431.00, and $452.50 in fees relating to
a disclosure issue. The record is unclear, however, whether the superior
court considered any of the objected-to fees to be clearly excessive.

¶26           Even if the court accepted all of Appellants’ objections —
including their “overruled” objections to Metro’s original application — the
result would have reduced the claimed amount by $55,366.20, not the more
than $86,000 implicit in the award made. Accordingly, the record does not
support the court’s decision to reduce the fee award to $25,000. Thus, the
fee award is vacated, and the issue remanded for entry of a new fee award
consistent with this decision. See McDowell, 216 Ariz. at 271 ¶ 21 (“[T]he trial
court’s discretion is more narrowly circumscribed when the parties
contractually agree that the prevailing party shall be awarded all its
attorneys’ fees.”).

III.   Attorneys’ Fees and Costs on Appeal.

¶27           Metro’s request for its attorneys’ fees and costs incurred in
this appeal pursuant to the Loan Documents is granted contingent upon
compliance with Arizona Rule of Civil Appellate Procedure 21. Given this
ruling, and in the exercise of its discretion, the court denies Metro’s request
for sanctions under Arizona Rule of Civil Appellate Procedure 25.

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                    METRO PHX BANK v. RPM, et al.
                        Decision of the Court

                              CONCLUSION

¶28            The judgment, with the exception of the award of attorneys’
fees, is affirmed; the award of attorneys’ fees is vacated and remanded for
further proceedings consistent with this decision.

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

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