Ariz. Biltmore Hotel Villas Condos. Ass'n v. Conlon Grp. Ariz., LLC

249 Ariz. 326

469 P.3d 463

ARIZONA BILTMORE HOTEL VILLAS CONDOMINIUMS ASSOCIATION, an Arizona nonprofit corporation, Plaintiff/Appellee,

v.The CONLON GROUP ARIZONA, LLC, a Missouri limited liability company; and Mark Finney, Defendants/Appellants.

No. 1 CA-CV 18-0709

Court of Appeals of Arizona, Division 1.

Filed June 23, 2020

Pettit Kohn Ingrassia Lutz & Dolin, PC, Los Angeles, CA, By Grant D. Waterkotte, Counsel for Plaintiff/Appellee

Dickinson Wright, PLLC, Phoenix, By J. Gregory Cahill, Victoria L. Buchinger, Co-Counsel for Defendant/Appellant The Conlon Group Arizona, LLC

Finney Law Office, LLC, Clayton, MO, By Daniel P. Finney Jr., Co-Counsel for Defendant/Appellant The Conlon Group Arizona, LLC

Shaw & Lines, LLC, Phoenix, By Mark E. Lines, Patrick J. Whelan, Counsel for Defendant/Appellant Mark Finney

Presiding Judge David D. Weinzweig delivered the opinion of the Court, in which Judge Jennifer M. Perkins and Judge James B. Morse Jr. joined.

WEINZWEIG, Judge:

¶1 Arizona's Nonprofit Corporation Act (the "Act") recognizes a procedural safe harbor for a corporate director to avoid an "award of damages" arising from a "conflicting interest transaction" between the director and the corporation. A.R.S. § 10-3861(B)(1). To gain shelter under the Act, a conflicted director must secure approval for the transaction from a majority of disinterested directors after making "required disclosure." A.R.S. § 10-3862(A). We must define the scope of a "transaction" in this appeal and determine whether a director's perfected safe harbor for one agreement extends to damages arising from his conduct in later, unanticipated litigation.

¶2 Mark Finney and The Conlon Group ("TCG") appeal the superior court's judgment against them for breach of contract, breach of fiduciary duty and negligent misrepresentation. We remand for a recalculation of damages but otherwise affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

¶3 Following a bench trial, we view the facts in the light most favorable to upholding the court's ruling. Smith v. Beesley , 226 Ariz. 313, 316, ¶ 3, 247 P.3d 548, 551 (App. 2011).

¶4 This lawsuit involves the Arizona Biltmore Hotel Villas, a group of 78 condominiums near the Arizona Biltmore Hotel. The development is governed by a homeowner association, the Arizona Biltmore Hotel Villas Condominiums Association (the "Association"). Most of the condominiums are vacation rentals whose owners collect rent from the Hotel under a rental pool agreement. TCG owns six of the condominiums. Mark Finney owns and controls TCG. Finney served as president of the Association's Board of Directors (the "Board") from 2004 until 2015.

¶5 Parking for the condominiums is limited to a lot located just south of the development, which has 80 spaces on the north side ("North Spaces") and 103 spaces on the south side ("South Spaces"). Salt River Project ("SRP") maintained control of all the parking spaces under contracts with the federal government. As relevant here, SRP entered two Joint Use Agreements in 1995 that authorized the Hotel to use the North Spaces and the Association to use the South Spaces.

2010 Lawsuit and Hotel Bankruptcy

¶6 A disagreement arose between the Association and the Hotel over access to parking, which escalated into a lawsuit. The Association sued the Hotel in 2010 (the "2010 Lawsuit") for a declaration that the Association had superior and exclusive rights to use the South Spaces under its Joint Use Agreement with SRP.

¶7 Just months later, in February 2011, the Hotel declared bankruptcy, which caused concern among the Association's members over their rental pool agreements and an unpaid promissory note owed by the Hotel to the Association. The Board agreed that the Association needed to hire bankruptcy counsel but left unresolved how fees would be paid.

¶8 As president of the Board, Finney assumed an active role, investigating the "potential costs of litigation" and advising the Board that legal fees could reach $500,000 or more. The Board agreed to propose a special assessment to the Association's members to pay the expected legal fees. In the interim, Finney proposed that TCG—his personal business—immediately hire and fund bankruptcy counsel for the Association. If the Association declined to approve a special assessment to retain counsel, TCG would continue to press the Association's interest in bankruptcy court at TCG's "own expense" in exchange for "all the Association's rights" in the South Spaces "currently being litigated in the 2010 Lawsuit." Given his dual fiduciary responsibilities to the Association and TCG, Finney "openly acknowledged his conflict and excused himself" from the Board's discussion of his proposal. The Board approved Finney's proposal. After the Association members voted against the special assessment in March 2011, TCG and the Association entered a formal agreement in June 2011 (the "Conlon Contract").

The Conlon Contract

¶9 The Conlon Contract required TCG to hire and manage "bankruptcy counsel at its own expense [up to $500,000] to represent [both TCG] and the Association in the [Hotel] Bankruptcy proceedings." In exchange, the Association agreed to "vigorously pursue" the 2010 Lawsuit against the Hotel for "sole control" of the South Spaces under the 1995 Joint Use Agreement, "including any and all necessary appeals, to a final conclusion as needed to obtain control of such parking spaces, all at the Association's sole cost and expense." As relevant here, the Association also promised that it would sublease the South Spaces and "[a]ll revenue or value" derived from them to TCG for 64 years if "the Association successfully obtain[ed] sole control over" the South Spaces in the 2010 Lawsuit, described as the "litigation in Maricopa County Superior Court at CV2010-026686."

¶10 TCG retained a New York law firm to represent the Association in the bankruptcy, but the Association did not prevail in that proceeding. In fact, the bankruptcy court ultimately entered an award adverse to the Association, ordering it to pay the Hotel's attorney fees of $352,692. TCG did not pay the legal fees incurred by the firm it had hired to represent the Association. Nor did TCG pay the adverse fee award.

2010 Lawsuit is Dismissed

¶11 SRP later terminated its Joint Use Agreement with the Association, ending the Association's rights to use the South Spaces and ending the Association's 2010 Lawsuit for control of the South Spaces. The superior court thus granted summary judgment for the Hotel and against the Association in the 2010 Lawsuit. The Association unsuccessfully appealed to this court.¹

¶12 Around this time, the Association's general counsel believed the Association might have remedies against SRP for breach of the 1995 Joint Use Agreement. In March 2013, Finney proposed that the Association sue SRP. The Board's minutes reflect that Finney asked the Board "to place their vote on whether or not to hire a litigation attorney to defend the owner rights to the [South Spaces]." Finney later testified that he understood "owner rights" to mean the rights of his company, TCG. The Board's minutes do not reflect a discussion of anticipated attorney fees or Finney's understanding of "owner rights." Finney did not recuse from the discussion and proposal. The members of the Board, including Finney, unanimously voted to approve Finney's proposal.

2013 Lawsuit

¶13 Finney hired Cheifetz, Iannitelli & Marcolini, P.C. ("CIM") to litigate the Association's claims against SRP. CIM sued SRP and the Hotel on the Association's behalf in 2013, asserting: (1) breach of contract, damages and specific performance against SRP for wrongful termination of the 1995 Joint Use Agreement and the Association's right to use the South Spaces; and (2) for declaratory judgment against the Hotel for exclusive rights to the North Spaces.

¶14 CIM soon raised concerns about the merits of the Association's lawsuit and shared those concerns in a letter to Finney, warning that the Association's breach of contract claim against SRP "may not be very strong and SRP [would] have many defenses to it," and SRP could recover attorney fees and costs if it prevailed. CIM further advised that the declaratory judgment action against the Hotel for the North Spaces was the "stronger of the two" claims. At Finney's direction, CIM sent the letter only to Finney, and Finney did not forward it to the Board. Later, Finney claimed he forwarded CIM's letter to the Association's property manager but could not confirm it was shared with any Board members, and the Board's meeting minutes do not mention CIM's letter. The superior court later found that the Board was not informed of "CIM's concerns about the SRP litigation."

Finney is Ousted and the Association Settles with SRP

¶15 It was not until April 2014, more than one year after the lawsuit was filed, that CIM's attorneys shared their concerns about the case with the Board. Around the same time, the superior court dismissed the Association's declaratory judgment action against the Hotel over rights to the North Spaces and ordered the Association to pay the Hotel's attorney fees. The Association's breach of contract claim against SRP over the South Spaces continued forward and the Association's legal fees mounted. For his part, Finney threatened to sue the Association if it backed down. The Board finally voted to remove Finney and appointed a new president. It also approved a maximum budget of $365,000 for the 2013 Lawsuit and appointed two directors to monitor Finney's litigation management.

¶16 The Association and SRP pursued settlement talks, which Finney tried to derail. CIM became frustrated with Finney's strategy and told him:

Our duty is not to [TCG], it is to our client, the Villas Association, and the [condominium] community as a whole. As a member of the Board you have fiduciary duties. Given these fiduciary duties, we are at a complete loss to understand upon what basis you deem it appropriate to intentionally seek to

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