Green v. Lisa Frank, Inc.

211 P.3d 16

221 Ariz. 138

James A. GREEN, Cross-Claimant/Counterdefendant/Appellant, v. LISA FRANK, INC., an Arizona corporation, Cross-Defendant/Counterclaimant/Appellee.

No. 2 CA-CV 2008-0028.

Court of Appeals of Arizona, Division 2, Department A.

January 20, 2009.

Lewis and Roca LLP By John N. Iurino, Sivan R. Korn, and Kimberly A. Demarchi, Tucson, Attorneys for Cross-Claimant/Counterdefendant/Appellant.

McNamara, Goldsmith, Jackson & MacDonald, P.C. By G. Todd Jackson, Tucson, and Law Offices of Mark Wiemelt, PC By Robert L. Knechtel, Chicago, Illinois, Attorneys for Cross-Defendant/Counterclaimant/Appellee.

OPINION

BRAMMER, Judge.

¶ 1 Appellant James Green appeals from the trial court's sanctions order striking his reply to the counterclaim filed against him by appellee Lisa Frank, Inc. (LFI), entering default in favor of LFI, and dismissing with prejudice his cross-claim against LFI. Green argues the trial court could not properly dismiss his cross-claim and reply because his violations of court orders did not prejudice LFI. He additionally contends the trial court erred by entering default judgment on several of LFI's claims. We affirm in part and vacate in part.

Factual and Procedural Background

¶ 2 This appeal arises from protracted litigation concerning the control and management of LFI by Green and Lisa Frank Green (Lisa Frank), who served as directors of LFI. Lisa Frank initiated the action in September 2005 by filing a lawsuit against Green and LFI. As later amended, Lisa Frank's complaint sought, inter alia, to remove Green as director, president, and chief operating officer of LFI; to enforce a stock buy-sell agreement among herself, Green, and LFI; and to assert a claim against Green for breach of fiduciary duties.¹ Green filed a counterclaim against Lisa Frank and a cross-claim against LFI, seeking a declaration that the buy-sell agreement was unenforceable, asserting Lisa Frank had violated her fiduciary duties to him and to LFI, and making additional claims related to an airplane purchased by LFI. LFI counterclaimed against Green, seeking an accounting and alleging he had "expended and diverted corporate funds for personal expenditures, removed corporate property from LFI's offices and facilities," and used corporate property for personal reasons. LFI also sought damages from Green for breach of fiduciary duty, conversion, computer fraud under 18 U.S.C. § 1030, and copyright violations. LFI additionally requested that Green be removed as a director of LFI and that the buy-sell agreement be enforced.

¶ 3 In October 2005, the trial court entered a stipulated order, the provisions of which included temporarily enjoining Green from "removing any intellectual property or other assets from" LFI. In April 2006, LFI filed a motion asking the court to find Green in contempt of that order and impose sanctions. LFI asserted that, on at least two occasions immediately following the entry of the October 2005 order, Green had used a moving van to remove property from LFI's premises, including computers containing proprietary LFI data and artwork, and "items from a locked storage area for original company artwork and advertising." LFI also asserted that, prior to the October order, Green had directed LFI employees to create copies of LFI computer art files on compact discs.

¶ 4 After a hearing on LFI's motion in May 2006, the court on May 23 ordered Green to return within three days specified property, including several computers and storage media; ordered him not to "alter, delete, remove, or transfer any information" from the computers or other storage media; and ordered that the parties' information technology experts would then "segregate and permanently remove" any of Green's personal files from the returned computers. The court warned Green that failure to comply with the order could result in "severe consequences, up to and including incarceration."

¶ 5 Although Green returned several computers in compliance with the order, he did not return one computer containing LFI data until five days after the deadline. In a previous motion to modify the order, Green had informed the court he was unable to return that computer on time because he was unable to "insure that he c[ould] access [personal] photographs [stored on that computer] on a new computer." In June 2006, attached to another motion to modify the May 23 order, Green filed a signed but undated declaration listing items he had returned to the court. In it Green stated that he was not "in possession or control of any storage media, including, but without limitation ... [compact discs]."

¶ 6 LFI filed another motion for sanctions in August 2006, asserting Green had continued to violate the May order by failing to return a laptop computer and giving a "pretext" reason for the late return. LFI renewed its motion in July 2007, alleging forensic analysis of the returned computers had revealed that, after the court had entered its May 2006 order, Green had copied LFI files from those computers in violation of the order.

¶ 7 After a three-day hearing on LFI's motion for sanctions in November, the court in December 2007 issued a ruling containing its findings of fact and conclusions of law. The court found the evidence presented established that Green had removed computers containing proprietary LFI data in violation of the October 2005 order. It further found that, the day after the court had entered its May 2006 order requiring Green to return those items and prohibiting him from copying any data, ten compact discs of material had been copied from one of the LFI computers in Green's possession—the same computer Green had not returned until five days after the deadline to do so. In addition, the court found twenty-two files on that computer had been "transferred to an attached printer," over forty LFI graphics files had been transferred from that computer to one owned by Green, and nine additional LFI files had been "accessed in a manner consistent with an email attachment." The court also noted that Green had not returned the ten compact discs.

¶ 8 The court found that "Green, and not counsel, [wa]s personally culpable for wilful and repeated violations of the Court's Orders ... including, but not limited to the removal and retention of hardware, software, computer programs, intellectual and proprietary LFI property, artwork and graphics in deliberate violation of the Court's Orders." Commenting that it had "considered an array of sanctions, including the imposition of attorney fees and even incarceration," the court concluded such sanctions "have failed to impress Mr. Green in the past and do not address the damage to the intellectual property of [LFI] that has occurred and continues to occur as a result of Green's contempt for the judicial process, court orders and this Court."

¶ 9 The trial court entered a sanctions order dismissing Green's cross-claim against LFI, striking his reply to LFI's counterclaim against him, and granting LFI judgment "except for the finding of fraud in paragraph 39 of the Fifth Claim for Relief."² The court also ordered that a writ of replevin issue to deliver "all computers and digital storage media in Green's possession or control to the custody of the Court for forensic review and removal of LFI data, artwork, or documents." Additionally, the court terminated Green's status as a director of LFI and awarded LFI its reasonable costs, attorney fees, "and all expert witness costs, expenses and fees incurred in connection with this and prior efforts to secure enforcement of the Court's Orders," as well as attorney fees and costs "as the prevailing party on its Counterclaim." The court then signed and entered a judgment in favor of LFI. The judgment incorporated the sanctions order and declared the buy-sell agreement valid and enforceable but stated that "LFI's monetary recovery pursuant to its accounting and damage claims shall be determined by subsequent proceedings." This appeal followed.

Jurisdiction

¶ 10 We first address the fundamental issue of our jurisdiction, as we must. See Osuna v. Wal-Mart Stores, Inc., 214 Ariz. 286, n. 2, 151 P.3d 1267, 1270 n. 2 (App.2007). Green argues we have jurisdiction to address his appeal, while LFI argues we do not. Relying on A.R.S. § 12-864, LFI reasons we lack jurisdiction because the trial court's order sanctioning Green is an order of contempt, based on LFI's request that Green be held in contempt for disobeying the court's orders. LFI relies on State v. Mulligan, 126 Ariz. 210, 216, 613 P.2d 1266, 1272 (1980), in which the defendant, besides appealing his criminal conviction, also sought to appeal several criminal contempt citations. Our supreme court stated: "We find no authorization of such an appeal from the contempt charges, either by statute or rules of this court. Findings of contempt are non-appealable orders." Id. The court concluded its finding of nonappealability with the observation that Mulligan's "review remedy" of the contempt citations was by special action. Id. at 217, 613 P.2d at 1273.

¶ 11 In its motion for sanctions, LFI asked the trial court to sanction Green pursuant to Rules 37 and 65(j)(1), Ariz. R. Civ. P., but also argued the court "ha[d] the inherent authority to sanction those who abuse the judicial process or mishandle evidence"—presumably a request that the court find Green in civil contempt under § 12-864. The court's minute entry granting LFI's motion cited much of the same authority as LFI and ordered sanctions "[a]s a result of Green's wilful violation of the Court's previous orders pertaining to the turnover of LFI property and evidence." Although the court did not cite § 12-864 as authority for the sanctions it imposed and did not expressly find Green in contempt, as we explain below in ¶ 29 infra, it nonetheless appears the court sanctioned Green pursuant to § 12-864. But, whether the court's order is correctly...