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Cal X-tra v. W.V.S.V. Holdings L.L.C. - 4/24/2012

Arizona Court of Appeals Division One Holds That (1) Relief from a Judgment Obtained by Extrinsic Fraud Is Appropriate under Rule 60(c) and (2) A.R.S. § 29-833(A) Does Not Permit an Award of Attorneys’ Fees in Favor of a Derivative Plaintiff Against Its Opponent in That Litigation.


This case involves a complicated factual and procedural history regarding a series of land transactions and three pieces of litigation related to those transactions.  10K L.L.C. purchased the 10K Property and hired Phoenix Holdings II, L.L.C. as its exclusive manager.  Phoenix Holdings recommended that 10K purchase the Spurlock Property, which was adjacent to the 10K Property and owned by Spurlock Land, L.L.C.  The two parcels were collectively known as the Sun Valley Property.  Phoenix Holdings then found a buyer for the Sun Valley Property, Breycliffe, L.L.C.  In 1998, 10K executed two contracts, one with Spurlock to purchase the Spurlock Property and one with Breycliffe to sell the Sun Valley Property.  The agreements were contingent upon each other and were set up to close escrow at the same time.  Several years passed, but the transactions never closed, resulting in litigation among the parties in 2002.  That litigation ended in a settlement agreement, two restated agreements regarding the land transactions, and a stipulated judgment entered by Judge Magnum.

Breycliffe’s interest in the restated agreement was assignable.  Phoenix Holdings, unbeknownst to 10K, began marketing Breycliffe’s interest on Breycliffe’s behalf.  One potential investor was Conley Wolfswinkel, who had previously been convicted of nine felony convictions and had two billion dollar judgments entered against him.  The 10K investors instructed Phoenix Holdings to stop marketing Breycliffe’s interest and to not offer Breycliffe’s interest to Wolfswinkel.  Phoenix Holdings did not obey these instructions, and shortly after the 2002 Magnum Judgment, Wolfswinkel committed to purchase Breycliffe’s interest and to acquire the Sun Valley Property through West Valley Sun Valley Holdings, L.L.C. (“WVSV”).  When the 10K investors learned of this, they notified Wolfswinkel and WVSV that they believed that Phoenix Holdings’ actions were unauthorized and breaches of fiduciary duty and that, because of those and other breaches, they did not consider 10K bound by the 2002 Magnum Judgment and were not obligated to close the land transaction.

This led to another round of litigation in 2003.  WVSV, with Breycliffe’s support, requested specific enforcement of the land agreements.  The 10K investors filed a derivative action, including a request for declaratory relief that the Breycliffe agreement was unenforceable.  Judge Galati issued a series of orders in this litigation, including that 10K’s claim for declaratory relief was an impermissible collateral attack on the 2002 Magnum Judgment.  Judge Galati also granted WVSV’s request for specific performance of the land contracts.  10K filed a motion for relief from the 2002 Magnum Judgment under Rule 60(c), but that motion was denied.  These rulings required 10K to sell the Sun Valley Property to WVSV.

In consolidated appeals from the 2002 and 2003 litigation, the primary issue was whether Phoenix Holdings’ alleged breach of trust, aided by Breycliffe, in obtaining the 2002 Magnum Judgment was extrinsic fraud entitling 10K to invalidate the judgment.  In a memorandum decision, the Court of Appeals concluded that the trial court did not err in finding the 10K had failed to adequately plead the existence of extrinsic fraud in obtaining the 2002 Magnum Judgment.  10K’s petition for review in the Arizona Supreme Court was denied.  Although 10K still had ongoing litigation with Phoenix Holdings for alleged breaches of fiduciary duties, 10K was forced to sell the Sun Valley Property to WVSV.

On remand from the memorandum decision, 10K’s claims included claims against WVSV, Wolfswinkel, and Breycliffe for aiding and abetting breach of fiduciary duties.  In 2006, 10K served a supplemental disclosure statement concerning hundreds of documents that a 10K investor said had been delivered to him by the ex-wife of one of the principals of Phoenix Holdings (“Taylor documents”).  The documents showed that the principals of Phoenix Holdings also controlled or were affiliated with Breycliffe and that Phoenix Holdings and its principals had conspired to further the interests of Phoenix Holdings and Breycliffe by defrauding 10K and the court.  The trial court granted sanctions for nondisclosure of these documents and found that they were authentic.

Also in 2006, 10K filed another action pursuant to Rule 60(c) arguing that the 2003 Galati Judgments should be vacated because of the extrinsic fraud by Phoenix Holdings, its principals, and Breycliffe as shown by the Taylor documents.

The 2006 litigation was transferred to Judge Trujillo and held in abeyance pending the outcome of the 2003 litigation, which was before Judge Burke.  Trial in the 2003 litigation was set for October 2007.  Phoenix Holdings, its principals, and Breycliffe settled with 10K before trial, leaving only WVSV and Wolfswinkel facing 10K’s claim for aiding and abetting breach of fiduciary duty.  On cross-motions for partial summary judgment, Judge Burke ruled in favor of WVSV, concluding that the Court of Appeals memorandum decision was law of the case and barred the constructive trust remedy that 10K sought in connection with the Sun Valley Property.

10K’s theory at trial was that WVSV and Wolfswinkel were aware of Phoenix Holdings’ fiduciary relationship to 10K and its improper actions in directing the sale of the Sun Valley Property to Breycliffe.  Before trial, Judge Burke ruled that evidence of Wolfswinkel’s criminal convictions and the significant civil judgments against him would be admissible under Rule 404(b) to show why the 10K investors instructed Phoenix Holdings not to market the Breycliffe interest to Wolfswinkel.  The jury returned a verdict in favor of 10K for the requested amount of $210,000,000 and found that WVSV and Wolfswinkel were 10% at fault.  The jury also awarded $150,000,000 in punitive damages.

Judge Burke granted WVSV’s Rule 50 motion, concluding that Wolfswinkel’s and WVSV’s reliance on the Galati Judgments immunized them against the claims asserted by 10K and that he should have exercised more control over the admission of the Wolfswinkel bad acts evidence and related arguments by counsel.  He entered judgment in favor of WVSV and Wolfswinkel.

Meanwhile in the 2006 litigation, the parties filed cross-motions for summary judgment focusing on the Taylor documents.  10K argued that the documents showed that the Galati Judgments had been obtained through extrinsic fraud and barred summary judgment in favor of WVSV.  WVSV argued that the documents were inadmissible hearsay, which, at least, precluded summary judgment in 10K’s favor.  WVSV also argued that Judge Galati would have ruled the same way even with the documents, that the law of the case precluded summary judgment, and that by proceeding with the 2003 litigation 10K had elected the remedy of damages and could no longer pursue the constructive trust remedy.  Judge Trujillo ruled in favor of 10K.  He set aside the Galati Judgments, which would allow 10K’s claim that the 2002 Magnum Judgment was the result of extrinsic fraud and would vacate the order requiring specific performance of the land transactions.

Based on Judge Trujillo’s rulings, 10K moved under Rule 60(c) to vacate Judge Burke’s post-trial rulings in the 2003 litigation.  Judge Burke vacated his order granting judgment as a matter of law but affirmed his decision granting a new trial.  Judge Burke did not change his ruling that 10K was not entitled to a constructive trust.

Judge Trujillo denied WVSV’s motion for a new trial in which it argued that its reliance on the Galati Judgments precluded relief.  His final judgment vacated the Galati Judgments, ordered WVSV to pay restitution to 10K in the amount 10K was ordered to pay in attorneys’ fees under the Galati Judgments, and awarded attorneys’ fees and costs to 10K pursuant to A.R.S. § 29-833(A).

The appeals in the 2003 litigation and 2006 litigation were consolidated.  The Court of Appeals’ lengthy decision affirmed the vacatur of the Galati Judgments and the award of restitution to 10K, but reversed the trial court’s grant of attorneys’ fees and costs to 10K.

The Court first concluded that Judge Trujillo did not err in vacating the Galati Judgments.    The Court noted that extrinsic fraud, including “deception practiced by the successful party in purposely keeping his opponent in ignorance,” may justify vacating a prior judgment.  Vacatur of a judgment in a collateral proceeding may also be proper when a fiduciary provides false information or refuses to reveal the truth and profits by its fraud.  The Court concluded that 10K presented admissible evidence showing that Phoenix Holdings and Breycliffe wrongfully withheld information during the 2003 litigation leading to the Galati Judgments and that the Taylor documents provided 10K a prima facie defense to the entry of those judgments.  The 10K investor who testified about his receipt of the Taylor documents did so based on his own personal knowledge, and the ex-wife’s statements to the investor regarding the documents were statements of a party opponent because she was a party to the litigation at that time.  Her statements were also statements against pecuniary interest. The Court noted that a forensic examiner provided evidence that the documents were authentic.

The Court rejected WVSV’s argument that it was entitled to summary judgment in the 2006 litigation because the Galati Judgments were law of the case.  The law of the case doctrine is a rule of policy, not a rule of law, the Court said, and there is an exception to that doctrine when there has been a change in the essential facts or issues.  Extrinsic fraud fits into this exception and allows for a collateral attack of a judgment.

WVSV also argued that it was entitled to summary judgment because 10K elected to pursue damages, rather than rescission of the agreement, in the 2003 litigation.  The Court rejected this argument also.  10K was compelled by the Galati Judgments and the Court’s earlier memorandum decision to seek damages, rather than rescission.  10K also requested a constructive trust on the property and unsuccessfully sought consolidation of the 2003 and 2006 litigation.  Thus, the “election” of the damages remedy was not voluntary.

WVSV also argued that because it was an innocent party and relied on the Galati Judgments in agreeing to purchase the Breycliffe interest, it should have been granted a new trial in the 2006 litigation.  Although the Restatement (Second) of Judgments § 74 supported WVSV’s argument, the Court noted that the fraud in obtaining the Galati Judgments overrode WVSV’s reliance argument.  Breycliffe is a member of WVSV, and as Breycliffe’e assignee, WVSV stands in the shoes of Breycliffe.  Also, there was evidence in the record that WVSV had an active role in obtaining the fraudulent judgments.

The Court of Appeals also affirmed the trial court’s order requiring that WVSV pay restitution for the attorneys’ fees previously paid by 10K to WVSV under the Galati Judgments because this result flows directly from the vacatur of the Galati Judgments.

WVSV argued that the trial court’s award of attorneys’ fees to 10K pursuant to A.R.S. § 29-833(A) was improper because that statute is not a fee-shifting statute that allows a derivative plaintiff to recover fees from an opponent, but instead a fee-sharing statute that allows the derivative plaintiff to recover fees from the entity on whose behalf it is suing.  The Court agreed with WVSV.  The Court said that the statute was susceptible to more than one interpretation and thus, in the absence of case law in Arizona, looked to case law from other states, which support the conclusion that the statute is a fee-sharing statute.  This conclusion is also consistent with the Court’s previous interpretation of a similar statute applicable to partnerships.

10K argued that the trial court erred in granting a new trial in the 2003 litigation based on admission of Wolfswinkel’s 14-year-old convictions and substantial civil judgments.  The Court first concluded that the trial court had not erred in admitting the evidence.  But the Court also concluded that the trial court did not abuse its discretion in vacating the jury’s verdict and ordering a new trial based on its finding that the trial ended up focusing more on Wolfswinkel’s past than the aiding and abetting allegations.

The Court rejected WVSV’s argument that Judge Burke should not have reversed his grant of judgment as a matter of law based on Judge Trujillo’s rulings.  The Court disagreed that the evidence did not support a conclusion that WVSV had provided the “substantial assistance” required for an aiding and abetting claim. Although some of Phoenix Holdings’ wrongful conduct occurred before WVSV and Wolfswinkel got involved in the transactions, their participation allowed Phoenix Holdings to complete the wrongful agreement and perfect the harm suffered by 10K.

The Court also rejected WVSV’s argument that it was entitled to judgment as a matter of law because 10K’s theory of aiding and abetting was not subject to meaningful pretrial disclosure.  The Court said that this claim was belied by the record.

10K argued the Judge Burke erred in denying its request for a constructive trust on its motion for summary judgment.  The Court concluded that the trial court had not abused its discretion in refusing to impose a constructive trust on the Sun Valley Property because “the equities in this case are not so clear at this time” to require that remedy.  10K would be permitted to pursue this claim on remand, however.

The Court rejected WVSV’s argument that it should have been awarded attorneys’ fees because 10K’s post-trial motion to disqualify Judge Burke did not satisfy Rule 11 and that the aiding and abetting claim was not brought with reasonable cause.  The Court concluded that WVSV had not demonstrated that 10K lacked a reasonable basis for those claims.

Finally, the Court rejected both parties’ requests for attorneys’ fees because neither party prevailed entirely and because the case would continue on remand.

Judge Winthrop authored the opinion; Judges Norris and Irvine concurred.

Posted by: Kathy O'Meara

Posted On: 5/31/2012