Court Opinion

ID: 2761136
Source: CourtListenerOpinion
Date Created: 2014-12-16 16:02:20.892529+00
Date Added: 2024-06-11T11:14:10.542490
License: Public Domain

IN THE
              ARIZONA COURT OF APPEALS
                                DIVISION ONE

 KCI RESTAURANT MANAGEMENT LLC, an Arizona limited liability
 company, derivatively on behalf of SVP RESTAURANT FINANCING,
              LLC, Plaintiffs/Appellants/Cross-Appellees,

                                       v.

 HOLM WRIGHT HYDE & HAYS PLC; BRAD HOLM and BARBARA
HOLM, husband and wife; and CHRISTOPHER S. WELKER and TERESA
  WELKER, husband and wife, Defendants/Appellees/Cross-Appellants.

                            No. 1 CA-CV 13-0430
                             FILED 12-16-2014

           Appeal from the Superior Court in Maricopa County
                          No. CV2012-018417
                The Honorable J. Richard Gama, Judge

                                 AFFIRMED

                                  COUNSEL

Sherrets Bruno & Vogt LLC, Omaha, NE
By James D. Sherrets, Jason M. Bruno
Counsel for Plaintiffs/Appellants/Cross-Appellees

Jones, Skelton & Hochuli, P.L.C., Phoenix
By Georgia A. Staton, Eileen Dennis GilBride
Counsel for Defendants/Appellees/Cross-Appellants
                        KCI v. HOLM WRIGHT et al.
                           Opinion of the Court

                                OPINION

Judge Maurice Portley delivered the Opinion of the Court, in which
Presiding Judge Patricia A. Orozco and Judge Randall M. Howe joined.

P O R T L E Y, Judge:

¶1            We are asked to resolve whether KCI Restaurant
Management LLC (“KCI”), an ousted member of SVP Restaurant
Financing, LLC (“SVP”), can bring a derivative action on behalf of SVP
despite the plain language in Arizona Revised Statutes (“A.R.S.”) section
29-831 (2014) that only members of a limited liability company can bring
derivative actions. We also address the cross-appeal of Holm Wright Hyde
& Hays PLC, and individual members and their spouses (collectively
“Holm”), challenging the denial of their request for attorneys’ fees. For the
following reasons, we affirm.

           FACTUAL AND PROCEDURAL BACKGROUND

¶2            SVP operates approximately two hundred Pizza Hut
restaurants in five states. SVP had three members—KCI, Jan Kasun, and
David Dolgen. SVP, Kasun, and Dolgen sued KCI in 2009 for breach of
contract, bad faith, breach of fiduciary duty, tortious interference with a
contract, and conversion. See SVP v. KCI, et al., Maricopa County Superior
Court No. CV2009-022740 (“underlying case”). The trial court granted
SVP’s motion for partial summary judgment and entered a final judgment
against KCI for converting $425,000 of SVP’s funds. Kasun and Dolgen then
scheduled a special meeting to expel KCI from SVP. After KCI
unsuccessfully sought a temporary restraining order to prevent the special
meeting, KCI was expelled as a member from SVP.

¶3             KCI then amended its third-party complaint against SVP,
Kasun, and Dolgen in the underlying case to request a judgment declaring
that it was still a member in SVP or, alternatively, damages for breach of
fiduciary duty. Five months later, and alleging it was a member of SVP,
KCI filed this separate derivative action against Holm, SVP’s lawyers in the
underlying litigation, for professional negligence.

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                       KCI v. HOLM WRIGHT et al.
                          Opinion of the Court

¶4             After filing an answer, Holm moved for judgment on the
pleadings arguing that KCI was not a member of SVP and, as a result, did
not have standing to bring the derivative action under A.R.S. § 29-831.
Holm requested the trial court take judicial notice of the underlying case
and preclude KCI from claiming it was a current member of SVP under the
doctrine of judicial estoppel. Although KCI responded and submitted
affidavits claiming it was still an SVP member, the court granted Holm’s
motion for judgment on the pleadings and dismissed the case, but denied
Holm’s request for attorneys’ fees.

                               DISCUSSION

                                       I

¶5          KCI first contends the trial court erred by not converting
Holm’s motion for judgment on the pleadings into a motion for summary
judgment after considering the documents appended to the motion and
response. We agree.

¶6            Arizona Rule of Civil Procedure (“Rule”) 12(c) provides in
relevant part that:

              If, on a motion for judgment on the pleadings,
              matters outside the pleadings are presented to
              and not excluded by the court, the motion shall
              be treated as one for summary judgment and
              disposed of as provided in Rule 56, and all
              parties shall be given reasonable opportunity to
              present all material made pertinent to such a
              motion by Rule 56.

¶7             The court received and indicated that it considered
documents Holm attached to its motion as well as KCI’s affidavits attached
to its response. Because the attachments were outside the pleadings, the
court should have treated Holm’s motion as one for summary judgment.
Ariz. R. Civ. P. 12(c) (quoted in Am. Fed’n of State, Cnty. & Mun. Emps. v.
Lewis, 165 Ariz. 149, 151, 797 P.2d 6, 8 (App. 1990)). We will review it as
such. We review a motion for summary judgment de novo and view all
facts in favor of the opposing party. Mousa v. Saba, 222 Ariz. 581, 585, ¶ 15,
218 P.3d 1038, 1042 (App. 2009) (citing Eller Media Co. v. City of Tucson, 198
Ariz. 127, 130, ¶ 4, 7 P.3d 136, 139 (App. 2000)). “[W]e . . . will affirm only
if there is no genuine [dispute] of material fact and the movant is entitled
to judgment as a matter of law.” Yollin v. City of Glendale, 219 Ariz. 24, 27,

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                         KCI v. HOLM WRIGHT et al.
                            Opinion of the Court

¶ 6, 191 P.3d 1040, 1043 (App. 2008) (citing Lemons v. Showcase Motors, Inc.,
207 Ariz. 537, 539, ¶ 6, 88 P.3d 1149, 1151 (App. 2004)).

                                          II

¶8             KCI also raises two substantive arguments on appeal. First,
claiming that it is a member of SVP, KCI argues there is a genuine issue of
material fact precluding summary judgment. Second, KCI contends it can
prosecute the derivative action because it only needed to be a member of
the limited liability company at the time it demanded SVP take action.

                                          A.

¶9             We begin our review by looking at the plain language of
§ 29-831, the statute authorizing a derivative action, and, if the language is
clear and unambiguous, we need not resort to other methods of statutory
construction. Wells Fargo Credit Corp. v. Tolliver, 183 Ariz. 343, 345, 903 P.2d
1101, 1103 (App. 1995). Indeed, “where the language is plain and
unambiguous, courts generally must follow the text as written.” Canon Sch.
Dist. No. 50 v. W.E.S. Constr. Co., 177 Ariz. 526, 529, 869 P.2d 500, 503 (1994).

¶10          Section 29-831 gives a member the right to bring a derivative
action on behalf of the limited liability company if one or more of the
statutory conditions are met.1 The statute mandates that the member must

1   Section 29-831 provides as follows:

                A member may bring an action in the right of the
                limited liability company to recover a judgment in its
                favor if all of the following conditions are met:

                1. Either of the following:

                (a) Management of the limited liability company is
                vested in a manager or managers who have the sole
                authority to cause the limited liability company to sue
                in its own right.

                (b) Management of the limited liability company is
                reserved to the members and the plaintiff does not
                have the authority to cause the limited liability

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                        KCI v. HOLM WRIGHT et al.
                           Opinion of the Court

be “a member of the limited liability company at the time the action is
brought and was a member of the limited liability company at the time of
the transaction of which he complains . . . .” A.R.S. § 29-831(4). The statute’s
plain language mandates that KCI may prosecute its derivative action only
if it was a member of SVP both at the time of the transaction of which it
complains and at the time it filed the derivative lawsuit. The only question
here is whether KCI was a member of the limited liability company at the
time it filed this lawsuit.

                                      B.

¶11           KCI contends that it was a member at the time of this lawsuit
and the trial court improperly applied judicial estoppel to find otherwise.
We agree the court should not have considered judicial estoppel because

              company to sue in its own right under the provisions
              of an operating agreement.

              2. The member has made demand on the manager or
              those members with such authority requesting that the
              manager or the members cause the limited liability
              company to sue in its own right.

              3. The members or managers with such authority have
              wrongfully refused to bring the action or, after
              adequate time to consider the demand, have failed to
              respond to the demand.

              4. The member is a member of the limited liability
              company at the time the action is brought and was a
              member of the limited liability company at the time of
              the transaction of which he complains or his status as
              a member of the limited liability company thereafter
              devolved on him pursuant to the terms of an operating
              agreement from a person who was a member at such
              time.

              5. The member fairly and adequately represents the
              interests of the members, except those members that
              would be defendants in the action, in enforcing the
              right of the limited liability company.

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                        KCI v. HOLM WRIGHT et al.
                           Opinion of the Court

Holm was not a party in the underlying case. See State v. Towery, 186 Ariz.
168, 182, 920 P.2d 290, 304 (1996) (judicial estoppel only applies to prevent
a party from taking an inconsistent position in a successive or separate
action where: “(1) the parties [are] the same, (2) the question involved [is]
the same, and (3) the party asserting the inconsistent position [was]
successful in the prior judicial proceeding.” (citing Standage Ventures, Inc. v.
State, 114 Ariz. 480, 562 P.2d 360 (1977))).

¶12          We, however, find that KCI’s admission in the underlying
case supports the ruling.2 An admission in a pleading can bind a party:

              [T]his is a rule not of evidence but of pleading.
              When the parties have framed the issues for
              resolution, they may not change them absent an
              amendment of the pleadings or trial of the issue
              by consent. A party so bound is often said to
              have made a judicial admission.

Bank of Am. Nat. Trust & Sav. Ass'n v. Maricopa Cnty., 196 Ariz. 173, 176,
¶ 11, 993 P.2d 1137, 1140 (App. 1999) (quoting Black v. Perkins, 163 Ariz. 292,
293, 787 P.2d 1088, 1089 (App. 1989)). If, however, a party seeks to use an
opponent’s admission in a different proceeding, the admission is only
evidentiary, and the admitting party is entitled to attempt to overcome the
apparent inconsistency. See Fox v. Weissbach, 76 Ariz. 91, 95, 259 P.2d 258,
260 (1953).

¶13             At Holm’s request, the trial court took judicial notice that KCI
acknowledged in the underlying case that it had been expelled as a member
of SVP. Although contending in this case that it is one of the three members
of SVP and was a member at the time of the transactions, KCI attempted to
back away from its earlier, contrary admission in the underlying case by
submitting two affidavits attempting to prove that it was an SVP member.
See id. at 95, 259 P.2d at 261 (the party whose prior pleading is admitted as

2 We can, however, affirm the judgment if the court was “correct in its ruling

for any reason.” Phelps Dodge Corp. v. El Paso Corp., 213 Ariz. 400, 404 n.7,
¶ 17, 142 P.3d 708, 712 n.7 (App. 2006) (quoting City of Tucson v. Morgan, 13
Ariz. App. 193, 195, 475 P.2d 285, 287 (1970)); see Dube v. Likins, 216 Ariz.
406, 417 n.3, ¶ 36, 167 P.3d 93, 104 n.3 (App. 2007) (in examining the trial
court’s ruling, we noted that we may affirm the trial court if it is correct for
any reason supported by the record).

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                         KCI v. HOLM WRIGHT et al.
                            Opinion of the Court

an admission is entitled to present evidence to overcome the apparent
inconsistency).

¶14            The affidavits, however, do not challenge KCI’s earlier
judicial admission that it is not an SVP member nor create a genuine issue
of material fact. The Scott Seldin affidavit identified Seldin as the manager
of another limited liability company, which is the sole member of KCI, and
declared that Kasun and Dolgen made “improper attempts” to expel KCI.
The affidavit also stated that “[t]here is no basis for the expulsion of KCI as
a member of SVP” and “KCI has not been paid anything for its membership
interest in SVP, KCI has not agreed to withdraw or transfer its membership
interest in SVP, and KCI is still a member of SVP.” The Seldin affidavit,
however, provides only conclusory statements and does not undermine
KCI’s acknowledgment in the underlying action that it had been ousted and
seeks to set aside its ouster. See Florez v. Sargeant, 185 Ariz. 521, 526, 917
P.2d 250, 255 (1996) (“[A]ffidavits that only set forth ultimate facts or
conclusions of law can neither support nor defeat a motion for summary
judgment.”). Moreover, calling the expulsion an “attempt to expel” is a
legal conclusion that fails to create a genuine dispute of material fact. See
id; In re Sherer’s Estate, 10 Ariz. App. 31, 455 P.2d 480 (App. 1969) (mere
conclusions of ultimate fact and law do not satisfy the rule’s requirement
that specific facts be set forth which show a genuine dispute of material fact
to be decided at the trial); see also Ariz. R. Civ. P. 56(e)(1) (“An affidavit used
to support or oppose a motion shall . . . set out facts that would be
admissible in evidence . . . .”). The Seldin affidavit, as a result, does not
undermine KCI’s admission in the underlying litigation.

¶15           Likewise, the Sheldon Lerner affidavit does not create a
genuine dispute of material fact. The affidavit, from a Pennsylvania lawyer
KCI retained as an expert to review Holm’s obligations to its client, notes
that “[w]hether the attempt to expel KCI was warranted is an issue of
contract interpretation of the Operating Agreement and fact to be
determined by a Court or jury as appropriate.” Again, the affidavit does
not contradict KCI’s acknowledgement in the underlying action that it had
been expelled from SVP. As a result, the affidavits do not create a genuine
issue of material fact about KCI’s status at the time it filed its derivative
lawsuit. Consequently, because KCI had been removed from SVP before it
filed this derivative lawsuit, it could not file the derivative lawsuit as a
matter of law.

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                       KCI v. HOLM WRIGHT et al.
                          Opinion of the Court

                                      C.

¶16         KCI also argues that we should interpret A.R.S. § 29-831(4) to
require membership status only when the demand is made. We disagree.

¶17           Section 29-831(4) provides:

              The member is a member of the limited liability
              company at the time the action is brought and
              was a member of the limited liability company
              at the time of the transaction of which he
              complains or his status as a member of the
              limited liability company thereafter devolved
              on him pursuant to the terms of an operating
              agreement from a person who was a member at
              such time.

(Emphasis added.)

¶18            Although there is no dispute that KCI was a member of SVP
at the time it alleges Holm was negligent, the plain language of § 29-831(4)
requires that KCI also needed to be a member at the time the derivative
lawsuit was filed. Id. There is nothing in the statute that supports KCI’s
argument that a derivative action can be brought so long as the entity was
a member at the time of the transaction or demand. See City of Phoenix v.
Donofrio, 99 Ariz. 130, 133, 407 P.2d 91, 93 (1965) (“[C]ourts will not read
into a statute something which is not within the manifest intention of the
legislature as gathered from the statute itself.”).3 And KCI has not
articulated a legal basis for ignoring the plain language of the statute.
Consequently, because KCI was ousted as a member before it filed its
derivative action, it cannot as a matter of law maintain the derivative action
on behalf of SVP.

3 KCI also challenges A.R.S. § 29-831’s constitutionality. KCI did not raise
the issue with the trial court, and we will not address it. See McDowell
Mountain Ranch Land Coalition v. Vizcaino, 190 Ariz. 1, 5, 945 P.2d 312, 316
(1997) (declining to consider constitutional claims not first made to the trial
court); Cullum v. Cullum, 215 Ariz. 352, 355 n.5, ¶ 14, 160 P.3d 231, 234 n.5
(App. 2007) (generally, issues raised for the first time on appeal are waived).

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                       KCI v. HOLM WRIGHT et al.
                          Opinion of the Court

                                      III

¶19          In its cross-appeal, Holm asserts that the trial court erred in
refusing to award attorneys’ fees under A.R.S. § 29-833(B) (2014) because
no reasonable attorney would have brought the derivative action. Section
29-833(B) provides:

              In an action instituted in the right of any
              domestic or foreign limited liability company
              by a member or members, the court having
              jurisdiction on final judgment and a finding that
              the action was brought without reasonable
              cause may require the plaintiff or plaintiffs to
              pay to the parties named as defendants the
              reasonable expenses, including attorney fees,
              incurred by them in the defense of such action.

¶20            “Reasonable cause” to bring an action is an objective standard
that asks whether any reasonable attorney would have thought the claim
was tenable. Cal X-Tra v. W.V.S.V. Holdings, L.L.C., 229 Ariz. 377, 412, ¶ 121,
276 P.3d 11, 46 (App. 2012). However, even if a trial court finds that a
derivative action was brought without reasonable cause, the statute still
gives the court discretion to grant or deny a request for attorneys’ fees
because the statute says “may” and not “shall.” See, e.g., Associated Indem.
Corp. v. Warner, 143 Ariz. 567, 570, 694 P.2d 1181, 1184 (1985) (explaining
that the legislature’s use of “may” gives the trial court discretion to award
attorneys’ fees). Consequently, we will not overturn the trial court’s
decision if the record reasonably supports it. See West v. Salt River Agric.
Improvement & Power Dist., 179 Ariz. 619, 626, 880 P.2d 1165, 1172 (App.
1994).

¶21           Although the trial court agreed that KCI could not proceed
with its derivative claim, which would support Holm’s argument that KCI
did not have a viable derivative cause of action for professional negligence,
the court nevertheless exercised its discretion and denied the fee request.
Because the court reviewed the pleadings and exercised the discretion
given by statute, we cannot find as a matter of law that the court abused its
discretion by denying the request. Cf. Orfaly v. Tucson Symphony Soc'y, 209
Ariz. 260, 267, ¶ 25, 99 P.3d 1030, 1037 (App. 2004) (court not required to
explain factual basis of fee award, which we will affirm if the record reflects
a reasonable basis for it).

                                      9
                      KCI v. HOLM WRIGHT et al.
                         Opinion of the Court

                                   IV

¶22           Holm has requested its attorneys’ fees incurred on appeal
under A.R.S. § 29-833(B). Having considered the merits on appeal, we
exercise our discretion and award Holm a reasonable sum for its attorneys’
fees on appeal and for its costs on appeal upon compliance with ARCAP
21.

                            CONCLUSION

¶23          Based on the foregoing, we affirm the judgment.

                                 :ama

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