Arizona Court of Appeals Division One Holds That A.R.S § 33-1005 Creates a Trust Obligation and that Directors of a Corporation May be Held Personally Liable if they Cause a Corporation to Breach that Trust Obligation.

Howard Berger and John McCarthy were the sole directors of Designer Surfaces, Inc., which fabricated and installed countertops.  Designer Surfaces purchased many of the materials it used from Arizona Tile on an open account.  After Designer Surface became insolvent, it failed to pay Arizona Tile for materials Arizona Tile had supplied.  Arizona Tile sued Designer Surfaces for breach of a credit agreement and unjust enrichment and also sued Berger and McCarthy personally for breaching trust obligations they allegedly owed Arizona Tile under A.R.S. § 33-1005.  Mr. Berger moved to dismiss the complaint against him for lack of personal jurisdiction on grounds that he was a resident of California and did not have minimum contact with Arizona, which the trial court denied.  Arizona Tile then moved for summary judgment against Berger and McCarthy for diverting the funds Designer Surfaces allegedly held in trust.  Arizona Tile also sought its attorneys’ fees on the grounds that case against Berger and McCarthy arose out of contract.  The superior court granted summary judgment in favor of Arizona Tile, concluding that A.R.S. § 33-1005 applied to the facts of the case and that Arizona Tile was entitled to attorneys’ fees because the case arose out of contract.  Berger and McCarthy appealed.

The Arizona Court of Appeals affirmed in part and reversed in part.  It first held that the superior court had personal jurisdiction over Berger.  Arizona courts have personal general jurisdiction over any nonresident who has substantial or continuous and systematic contacts with Arizona.  In this case, the Court found that the exercise of general jurisdiction by the superior court was “reasonable and just” because Berger was regularly physically present in Arizona, had offices and property in Arizona, and systematically transacted business in Arizona. 

As for the statutory issue, the Court of Appeals then held that A.R.S. § 33-1005, by its plain language, created a trust obligation upon Designer Surfaces.  A.R.S § 33-1005 provides that “monies paid by or for an owner-occupant . . . to a contractor, as defined in § 32-1101, as payment for labor, professional services, materials, machinery, fixtures or tools for which a lien is not provided . . . shall be deemed for all purposes to be paid in trust and shall be held by the contractor for the benefit of the persons or persons furnishing such labor, professional services, materials, machinery, fixtures or tools.”  In this case, the Court of Appeals found that Designer Surfaces was subject to the provisions of A.R.S § 33-1005 because Designer Surfaces qualified as a “contractor” under A.R.S. § 32-1101.  Therefore, applying the plain language of the statute, the Court of Appeals concluded that A.R.S. § 33-1005 created a trust obligation upon Designer Surfaces in favor of Arizona Tile for the money Designer Surfaces received from the materials Arizona Tile had supplied. 

Next, the Court of Appeal held that Berger and McCarthy could be held personally liable for causing Designer Surfaces to breach its trust obligations.  Although corporate officers and directors are not personally liable for a corporation’s misconduct merely by virtue of their positions, they may be held liable if they direct the corporation to commit a breach of trust.  In this case, because Arizona Tile had provided evidence that Berger and McCarthy decided what accounts to pay and failed to pay Arizona Tile at a time that Designer Surfaces should have been holding funds in trust for Arizona Tile’s benefit, the Court of Appeals concluded that Berger and McCarthy could be liable for the loss resulting from that breach of trust.

Finally, the Court of Appeals held that Arizona Tile was not entitled to recover its attorneys’ fees under A.R.S. § 12-341.01.  The Arizona Supreme Court has acknowledged that, under § 12-341.01(A), attorneys’ fees may be awarded in a cause of action in tort if the cause of action could not exist but for the breach of a contract.  In this case, the Court of Appeals concluded that Arizona Tile was not entitled to attorneys’ fees because the cause of action against Berger and McCarthy for breaching the trust obligations was not “entwined” with the breach of contract between Designer Surfaces and Arizona Tile.

Judge Weisberg authored the opinion; Judges Norris and Downie concurred.