Court Opinion

ID: 3195517
Source: CourtListenerOpinion
Date Created: 2016-04-19 17:01:48.408959+00
Date Added: 2024-06-11T13:15:02.149883
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  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

            FIRST UNITED FUNDING, L.L.C., Plaintiff/Appellee,

                                         v.

   LA JOLLA HOLDINGS LIMITED PARTNERSHIP, a Nevada limited
    partnership; JEFF A. SHUMWAY, an individual, FOUR CORNERS
      DEVELOPMENT, LLC, a Nevada limited liability company,
                          Defendants/Appellants.

                              No. 1 CA-CV 14-0659
                                FILED 4-19-2016

            Appeal from the Superior Court in Maricopa County
                           No. CV2010-029732
                 The Honorable J. Richard Gama, Judge

                                   AFFIRMED

                                    COUNSEL

Quarles & Brady, LLP, Phoenix
By Michael S. Catlett, Julia J. Koestner
Counsel for Plaintiff/Appellee

Shumway Law Offices, Scottsdale
By Jeff A. Shumway
Counsel for Defendants/Appellants
                       FIRST UNITED v. LA JOLLA
                          Decision of the Court

                      MEMORANDUM DECISION

Presiding Judge Jon W. Thompson delivered the decision of the Court, in
which Judge Maurice Portley and Judge Patricia K. Norris joined.

T H O M P S O N, Judge:

¶1            Appellant defendants La Jolla Holding, LP and Jeff A.
Shumway (collectively, here, La Jolla) appeal from the trial court’s grant of
           1

a deficiency judgment following First United Funding, LLC’s (FUF’s)
motion for partial summary judgment. La Jolla further challenges the trial
court’s dismissal of its counterclaims and the amount of the final judgment.
Finding no error, we affirm.

            PROCEDURAL AND FACTUAL BACKGROUND

¶2             The facts are largely undisputed. In 2008 FUF, a commercial
lender now in receivership, received from La Jolla an executed promissory
note in the principal amount of $1,200,000. Repayment was secured by a
deed of trust on Arizona real property. On the same day, Shumway
executed a guaranty pursuant to which Shumway unconditionally
guaranteed repayment of all amounts due under the La Jolla note. The
money was transferred and La Jolla defaulted.

¶3             In January 2010, FUF formally noticed both La Jolla and
Shumway of the default and demanded it be cured. Neither party cured
the default. FUF accelerated the note demanding the unpaid principal
balance and accrued interest immediately. As of August 11, 2010, the total
amount due and owing through the date of the trustee’s sale was
$1,385,476.47. The property was sold at trustee’s sale on that date for a
winning credit bid of $795,000. The balance due and owing after
application of the proceeds of the sale was $590,476.47. Additional costs
that accrued included additional property tax, costs of collection, and
interest at the rate of five percent until the entry of final judgment.

1Shumway was also a guarantor to the Four Corners loans, which are not
part of this appeal.

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                       FIRST UNITED v. LA JOLLA
                          Decision of the Court

¶4             FUF filed a verified complaint and then an amended verified
complaint alleging breach of contract as to La Jolla and breach of guaranty
against Shumway.2 FUF’s prayer for damages indicated no payments had
been made on the loan principal of $1,200,000. In their original answer La
Jolla admitted executing the contract and admitted Shumway executed the
guaranty. It asserted affirmative defenses including, among others, the
loan identified in the complaint was void due to fraud, unclean hands,
violations of the truth in lending and consumer fraud laws. In its amended
answer La Jolla again admitted executing the contract, but Shumway
asserted he had “no independent recollection of executing” the guaranty.
La Jolla brought counterclaims against FUF for licensing violations for
acting as a commercial mortgage banker without an Arizona license, under
Arizona Revised Statutes (A.R.S.) § 6-943, “Licensing of mortgage bankers
required; qualifications; application; bond; fees; renewal,” and for unlawful
activity under A.R.S. § 13-2314.04 (2010) “Racketeering; unlawful activity;
civil remedies by private cause of action; definitions” (RICO). In its
pleadings La Jolla did not assert any payments on the loan.3

¶5            Meanwhile, FUF was put into receivership in October 2009
because its debts exceeded its assets. The receiver was charged with
continuing to operate FUF’s business, including pursuing enforcement of
payment obligations owed to FUF from promissory notes and mortgages.
In September 2010, Corey N. Johnston, the president and principal of FUF,
pled guilty in federal court to bank fraud and tax evasion. Johnston
admitted overselling participation in commercial loans to various
participant FDIC-insured banks and underreporting his taxable income.
Johnston admitted that over the course of years he continued to oversell
participation in order to keep paying on earlier loans. At the plea hearing
the government alleged that the fraud may have cost over 79 million
dollars.

¶6           FUF filed a motion for partial summary judgment on the
counts against La Jolla. Copies of the loan and guarantee documents were
attached to FUF’s separate statement of facts. FUF’s receiver submitted a

2 There are other defendants below which are not part of the current
judgment or appeals.

3 Notably, one of the issues on appeal is whether La Jolla was correctly
credited with a $35,000 principal payment. La Jolla contends that payment
should be credited to another party.

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                         FIRST UNITED v. LA JOLLA
                            Decision of the Court

declaration outlining La Jolla’s default, supporting the damages
calculation, and detailing the facts surrounding the trustee’s sale.

¶7             La Jolla submitted a responsive brief asserting that FUF
fraudulently induced it to enter into the contract by making material
misrepresentations and it requested additional discovery pursuant to Ariz.
R. Civil. P., Rule 56(f). The request for additional discovery was granted.
Approximately three months later, La Jolla filed a supplemental response
asserting FUF violated the duty of good faith and fair dealing by failing to
disclose that FUF was “an insolvent Ponzi scheme” or induced it to make a
mistake of fact as to the risks of doing business with FUF . Thus, it asserted,
the loan and guarantee were void or voidable. It also filed a sur-response
addressing the need for a fair market value determination.4

¶8             After consideration of the responsive briefs and controverting
facts, the trial court granted FUF’s motion for summary judgment on the
counts against La Jolla. The trial court found dispositive that it was
undisputed that La Jolla received the loans sums, FUF complied with loan
documents, and that La Jolla defaulted. The trial court found FUF did not
have a duty to disclose its financial status to La Jolla. The court also found
the loan and guarantee documents expressly waived any claim of fraud or
damages based on representations made outside of the agreement. The trial
court concluded:

         the Court concurs with Plaintiff that the Ponzi-scheme
         orchestrated by Plaintiff’s prior CEO did not result in these
         individual Defendants’ default, nor did this scheme increase
         the risk of default. These Defendants were not the victims of
         this scheme; those individual investors who purchased
         oversold participation in these loans were the victims.

¶9             FUF next filed a motion to dismiss the counterclaims against
it. The trial court granted that motion. In the final judgment, under Rule
54(b), the court awarded FUF $539,296.82, prejudgment interest, and
attorneys’ fees in the amount of $60,455. La Jolla filed a motion to amend
the final judgment by $35,000 or, in the alternative, a motion for a new trial,
which the trial court denied. La Jolla appeals from both of these rulings.

4   The fair market value of the property was later determined by stipulation.

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                         FIRST UNITED v. LA JOLLA
                            Decision of the Court

                                    ISSUES

¶10             La Jolla raises four issues on appeal:

           a.   Whether the trial court erred in considering loan and
                guaranty documents that were either not authentic or “are, or
                may be, forgeries” in granting summary judgment to FUF;

           b. Whether the trial court erred when it found La Jolla had
              waived a fraud in the inducement claims in the loan and
              guaranty documents;

           c. Whether the trial court erred in granting La Jolla a $35,000
              credit in the final judgment for a principal payment; and

           d. Whether the trial court erred in dismissing La Jolla’s
              counterclaims.

                                 DISCUSSION

¶11          FUF, through its receiver, asserts it loaned money to La Jolla
that was never paid back, Shumway failed to perform under his duty as
guarantor, and FUF suffered damages due to La Jolla’s default. FUF asserts
that defendants were not victims of Johnston’s scheme and that La Jolla
received every penny that they were promised. The trial court agreed,
finding no genuine issue of material fact and that FUF was entitled to
judgment as a matter of law.

¶12            We review the grant of summary judgment de novo. Lewis v.
Debord, 236 Ariz. 57, 59, ¶ 5, 335 P.3d 1136, 1138 (App. 2014). Summary
judgment is appropriate when no genuine issue of material fact exists and
the moving party is entitled to judgment as a matter of law. Ariz. R. Civ. P.
56; Johnson v. Earnhardt's Gilbert Dodge, Inc., 212 Ariz. 381, 385, ¶ 15, 132 P.3d
825, 829 (2006). We view the evidence in the light most favorable to the
party against whom summary judgment was granted. Estate of Hernandez
v. Flavio, 187 Ariz. 506, 509, 930 P.2d 1309, 1312 (1997). Summary judgment
may be granted where the facts produced in response to summary
judgment have so little probative value, given the quantum of evidence
required, that reasonable people could not agree with the conclusion. See
Orme Sch. v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990).

¶13          On appeal, La Jolla first asserts the trial court erred in relying
on unauthenticated documents when granting summary judgment on
FUF’s claims of breach of contract and breach of guaranty. In response, FUF

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                        FIRST UNITED v. LA JOLLA
                           Decision of the Court

maintains La Jolla did not contest the authenticity of the documents until
after the ruling on the motion for summary judgment and, therefore,
waived this issue.5, 6 We agree that this issue is waived because it was not
timely raised below. This case was heavily litigated, yet nowhere in the
prior two and a half years, and through summary judgment, did La Jolla
challenge the documents as forged or the authentication by the receiver as
insufficient.7 Failure to object or move to strike the proffered underlying
documents on a motion for summary judgment, constitutes a waiver of that
claim. See Airfreight Express, Ltd., v. Evergreen Air Ctr, 215 Ariz. 103, 112, ¶
26, 158 P.3d 232, 241 (App. 2007) (late allegations that the declaration
supporting summary judgment was “suspect” were waived on appeal).8

¶14           La Jolla next claims the trial court erred when it found La Jolla
had waived its fraud in the inducement claims. We will reverse the trial
court’s determination that a claim was waived only if it is clearly erroneous.
Meineke v. Twin City Fire Ins. Co., 181 Ariz. 576, 580, 892 P.2d 1365, 1369
(App. 1994), citing Goglia v. Bodnar, 156 Ariz. 12, 19, 749 P.2d 921, 928 (App.
1987). The trial court's decision will be affirmed if it is correct for any
reason. Cross v. Cross, 94 Ariz. 28, 31, 381 P.2d 573, 575 (1963).

¶15         The trial court ruled that the documents integration clauses
waived any claim for damages or rescission based on representations not

5FUF further notes that the documents submitted in support of the motion
for summary judgment were authenticated as true and accurate copies by
a representative of FUF’s receiver.

6Specifically, after the ruling on the motion for partial summary judgment
FUF sought leave to amend its complaint to add another defendant and to
add a claim of unjust enrichment against another party. Neither change
effected La Jolla. La Jolla first made his unsubstantiated challenge to the
veracity of the documents in his amended answer.

7 On appeal La Jolla asserts that the documents should have been
authenticated by Johnston. The receiver, it asserts, could not authenticate
the documents because he was not present when they were signed.

8 We note, although we need not discuss, that the Uniform Commercial
Code on Negotiable Instruments, A.R.S. § 47-3308 (2005) requires any
challenge to the authenticity of an instrument must be made in the
pleadings or is deemed admitted.

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                        FIRST UNITED v. LA JOLLA
                           Decision of the Court

contained in the applicable agreements. The court also found La Jolla was
not defrauded, suffered no actual damages9, and never offered to restore
FUF to its prior position. A person who asserts they have been defrauded
may litigate to rescind the contract or to affirm the contract and sue for
damages. Jennings v. Lee, 105 Ariz. 167, 171, 461 P.2d 161, 165 (1969);
Mahurin v. Schmeck, 95 Ariz. 333, 342, 390 P.2d 576 (1964). A party seeking
to rescind a contract must restore or offer to restore to the other party
anything received under the contract. Jennings, 105 Ariz. at 171, 461 P.2d at
165. Because such has not happened here, and there are no damages, we
cannot find error in the trial court’s ruling.

¶16            La Jolla next argues the trial court erred in failing to revise
the final judgment to credit another party with a payment of $35,000. We
review the denial of a motion to amend judgment under an abuse of
discretion standard. See Mullin v. Brown, 210 Ariz. 545, 547, ¶ 2, 115 P.3d
139, 141 (App. 2005). Given the receiver submitted a declaration to the court
stating the $35,000 was from La Jolla and Shumway admitted in his
deposition that the money came from La Jolla, we cannot find the trial court
abused its discretion in denying the motion to amend.

¶17           Finally, La Jolla cursorily asserts the trial court erred in
dismissing its counterclaims of violation of licensing regulations and RICO

9 Additionally, we note that that any assertion of fraud must be pled with
specificity. Ariz. R. Civ. P. 9(b). To establish fraud, a plaintiff must show
that the defendant made a false material representation that he knew was
false or was ignorant of its truth, with the intention that the hearer of the
representation act on it in a manner reasonably contemplated, that the
hearer was ignorant of the representations falsity, rightfully relied on the
truth of the representation, and sustained consequent and proximate
damage. See Echols v. Beauty Built Homes, Inc., 132 Ariz. 498, 500, 647 P.2d
629, 631 (1982). However, bare allegations that a thing is “fraudulent” is
insufficient to comply with the rule. In re Cassidy's Estate, 77 Ariz. 288, 291,
270 P.2d 1079, 1082 (1954). At the least, La Jolla has failed to show actual
damages. It has been a long standing principal that a showing of actual
damages is essential to making out a case of fraud and failure to prove this
element is fatal to any claim of fraud. See Cullison v. Pride O'Texas Citrus
Assoc., 88 Ariz. 257, 259, 355 P.2d 898, 889 (1960). Given this result we need
not explore whether any of the alleged representations were material or
whether La Jolla satisfied any other element in pleading fraud.

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                         FIRST UNITED v. LA JOLLA
                            Decision of the Court

as against FUF. 10 We will uphold a dismissal when it is certain that an
appellant could not prove any set of facts entitling him or her to relief.
Wallace v. Casa Grande Union High Sch. Dist. No. 82, 184 Ariz. 419, 424, 909
P.2d 486, 491 (App. 1995).

¶18           In ruling on the motion to dismiss, the trial court stated on the
licensing claim:

         the Court notes that no authority has been provided that a
         party can assert a private cause of action under Arizona’s
         licensing statutes. That issue aside, this Court concurs with
         Plaintiff that the claim, if viable, is time barred. A.R.S. § 12-
         541(5) requires this claim to be filed within one year of the
         date it accrued. It is undisputed it was not timely filed.

¶19            Here, likewise, La Jolla has not provided any authority
allowing a private right of action on the licensing of mortgage bankers. The
plain language of the statute does not indicate such a right and we know of
none. See, e.g., Napier v. Bertram, 191 Ariz. 238, 240, 954 P.2d 1389, 1391
(1998) (addressing whether passenger had private right of action on taxi’s
failure to comply with insurance coverage requirements). There being no
legal basis for this claim, the trial court is affirmed.

¶20             On the issue of the civil RICO11 claim the trial court stated:

10   The appeal in this regard is also noncompliant with ARCAP 13(a)(7).

11   Racketeering is defined in A.R.S. § 13–2301(D)(4) (Supp. 2015) as:

         [A]ny act, including any preparatory or completed offense,
         that is chargeable or indictable under the laws of the state or
         country in which the act occurred and, if the act occurred in a
         state or country other than this state, that would be
         chargeable or indictable under the laws of this state if the act
         had occurred in this state, and that would be punishable by
         imprisonment for more than one year under the laws of this
         state and, if the act occurred in a state or country other than
         this state, under the laws of the state or country in which the
         act occurred, regardless of whether the act is charged or
         indicted . . . .

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                        FIRST UNITED v. LA JOLLA
                           Decision of the Court

       Defendants Shumway claim that Plaintiff engaged in a
       scheme to defraud by failing to reveal Corey Johnston’s Ponzi
       scheme against Plaintiff’s participant banks. However, this
       Court has previously ruled that Plaintiff did not defraud these
       Defendants as they received all they bargained for in the
       context of the parties’ transaction. Further, the applicable
       statute places upon claimant a requirement that it plead at
       least two criminal acts of racketeering. In compliance with
       the statute, these Defendants allege that Plaintiff failed to
       disclose the existence of a Ponzi scheme and failed to provide
       information about its finances or source of funds. However,
       these positions were previously presented and rejected by
       this Court. . . . Finally, this Court concurs with Plaintiff that
       Defendants have also failed to satisfy RICO’s continuity
       requirement and further, failed to plead RICO’s causation
       requirements.

¶21            We agree with the trial court that La Jolla received the benefit
of its bargain. In order to sustain a RICO claim, La Jolla must have suffered
damages. See Hannosh v. Segal, 235 Ariz. 108, 114, ¶¶ 17-19, 328 P.3d 1049,
1055 (App. 2014) (holding internet gambler had no injury under RICO,
where there was no allegation of cheating, because “Hannosh got what he

Section 13-2314.04. Racketeering; unlawful activity; civil remedies by
private cause of action; definitions

       A. A person who sustains reasonably foreseeable injury to his
       person, business or property by a pattern of racketeering
       activity, or by a violation of § 13-2312 involving a pattern of
       racketeering activity, may file an action in superior court for
       the recovery of up to treble damages and the costs of the suit,
       including reasonable attorney fees for trial and appellate
       representation. If the person against whom a racketeering
       claim has been asserted, including a lien, prevails on that
       claim, the person may be awarded costs and reasonable
       attorney fees incurred in defense of that claim. No person may
       rely on any conduct that would have been actionable as fraud
       in the purchase or sale of securities to establish an action
       under this section except an action against a person who is
       convicted of a crime in connection with the fraud, in which
       case the period to initiate a civil action starts to run on the date
       on which the conviction becomes final.

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                       FIRST UNITED v. LA JOLLA
                          Decision of the Court

bargained for: an opportunity to win”). That conclusion being sufficient,
the trial court is affirmed.

                              CONCLUSION

¶22          For the above stated reasons, the trial court is affirmed. FUF
is awarded its attorneys’ fees pursuant to A.R.S. § 12-341.01 (2008) and its
costs pursuant to A.R.S § 12-341 (2008) after compliance with ARCAP 21.

                                  :ama

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