Schenk v. Casebolt

MARVIN J. SCHENK, et al., Plaintiffs/Appellants-Cross Appellees, v. VICTOR S. CASEBOLT II, et al., Defendants/Appellees-Cross Appellants.

No. 1 CA-CV 18-0753

ARIZONA COURT OF APPEALS DIVISION ONE

April 14, 2020

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 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

Appeal from the Superior Court in Maricopa County

No. CV2013-002402

The Honorable Connie Contes, Judge

AFFIRMED IN PART AND VACATED AND REMANDED IN PART

COUNSEL

Broening Oberg Woods & Wilson, P.C., Phoenix

By Robert T. Sullivan, Jathan P. McLaughlin

Counsel for Plaintiffs/Appellants/Cross-Appellees

Sacks Tierney, P.A., Scottsdale

By Michael L. Kitchen

Counsel for Defendants/Appellees/Cross-Appellants Victor S. Casebolt II and Amy J. Strack

MEMORANDUM DECISION

Presiding Judge Samuel A. Thumma delivered the decision of the Court, in which Judge Randall M. Howe and Judge Diane M. Johnsen¹ joined.

THUMMA, Judge:

¶1 This appeal involves a claim and counterclaim for breach of a written contract involving the sale of Marvin J. Schenk's law practice.

¶2 Plaintiffs Marvin J. and Kathryn L. Schenk, husband and wife (collectively Schenk) filed this case in 2013. By the end of that year, Schenk was granted summary judgment on Schenk's claim that defendants Victor S. Casebolt and Amy J. Strack, husband and wife (collectively Casebolt)² materially breached the parties' Office Sharing and Practice Purchase Agreement (PPA) by failing to timely make required payments. The superior court awarded Schenk liquidated amounts of more than $200,000 in damages and $12,000 in attorneys' fees and costs, with interest accruing until paid.

¶3 Years of motion practice then followed. Finally, in May 2018, a jury found Schenk had breached the contractual duty of good faith and fair dealing implied in the PPA and awarded Casebolt $275,000 in damages. The court then awarded Casebolt more than $86,000 in fees and costs, with interest accruing from the entry of the October 2018 final judgment until paid.

¶4 On appeal, Schenk challenges the denial of his motion for judgment as a matter of law on Casebolt's counterclaim, arguing Casebolt was not a party to the PPA (meaning Schenk owed him no duty of good faith and fair dealing) and that Casebolt failed to show damages. Schenk also argues evidence of the superior court's pretrial rulings should have been admitted at trial and that the court erred in awarding Casebolt attorneys' fees. Casebolt's cross-appeal does not challenge the 2014 entry of summary judgment for Schenk but, instead, argues Casebolt is entitled to credits and offsets and that he should have been awarded an additional $188,000 in fees and costs.

¶5 Affirming the liability and damages awards, the court vacates the attorneys' fees and costs awards and remands for the superior court to address which party (if any) is the prevailing party and, after that determination, make any awards of fees and costs that may be appropriate. The final judgment issued on remand also should account for any credits supported by the record and state a net amount of damages owed after accounting for credits and offsets.

FACTS AND PROCEDURAL HISTORY

¶6 In 2006, Casebolt and Sanford J. Germaine were practicing law as Casebolt and Germaine. Schenk was a solo practitioner focusing on collections, as he had for nearly 40 years. The three agreed that Schenk would join the firm to create Casebolt, Germaine & Schenk, PLC (the Firm). They also agreed that, upon Schenk's retirement, the Firm would purchase Schenk's collections practice for a specified price. In March 2006, they memorialized their agreement in the written PPA, with Casebolt and Germaine also agreeing to personally guarantee the amounts owed Schenk. Shortly before entering the PPA, Casebolt and Germaine (but not Schenk) signed a written Operating Agreement of Casebolt, Germaine & Schenk, PLC, governing various aspects of the Firm's financing and management.

¶7 The PPA required Schenk to "use good faith reasonable efforts to integrate the Firm into" his collections practice. The PPA stated Schenk would retire no later than March 2009, and that the Firm would pay $500,000 for his practice, to be paid in installments, starting with a $100,000 payment in April 2006 and "equal quarterly payments" over the next four years, at seven percent interest, simple, per year from the date of his retirement until paid.

¶8 Schenk practiced at the Firm until he retired in March 2009. Casebolt and Germaine then took over Schenk's practice and began making timely payments to him under the PPA.

¶9 Although Schenk and Germaine remained on good working terms, the relationship between Schenk and Casebolt soured. Casebolt later testified that Schenk did "[l]iterally nothing" to integrate him into the collections practice, and both testified that they would not acknowledge each other in the hallways.

¶10 In mid-2011, the tension between Schenk and Casebolt boiled over when Schenk had a meeting with Germaine to introduce a potential client. After the meeting, Germaine emailed Casebolt that Schenk had "some stipulations before [he] would consider referring the business." Casebolt later testified that Schenk "was insisting that . . . the new potential client['s work] only go to Mr. Germaine and not go to me at all." A few days later, Germaine gave Casebolt a written buy/sell offer for Casebolt's interest in the collections practice and other assets. When no agreement was reached, Germaine left the Firm later in the summer of 2011. Soon after Germaine left, Casebolt sent Schenk a letter stating the payments under the PPA would cease. Casebolt's letter claimed Schenk had "breached [his] express and implied obligations to [Casebolt] under the" PPA by making his client referral to Germaine with stipulations.

¶11 In March 2013, Schenk sued Casebolt, Germaine and the Firm, alleging breach of the express terms of the PPA by failing to make required payments since September 1, 2011. Casebolt and the Firm answered and filed counterclaims alleging (1) breach of the express terms of the PPA; (2) breach of the contractual covenant of good faith and fair dealing implied in the PPA; (3) interference with the operating agreement; and (4) aiding and abetting a breach of fiduciary duty.³

¶12 Schenk moved for summary judgment on his claim against Casebolt, seeking payment of $183,405.23 in principal, $17,596.48 in interest and attorneys' fees and costs to be determined. In opposing the motion, Casebolt argued that Schenk's material breaches of the PPA, including themid-2011 referral with stipulations, suspended the payment obligations to Schenk or, at very least, created an issue of material fact to be decided at trial, thereby preventing entry of summary judgment. In reply, Schenk argued Casebolt cited no express term of the PPA that Schenk allegedly breached and that "Schenk did not violate the duty of good faith inherent in the" PPA. Agreeing that Casebolt cited no express provision of the PPA that Schenk breached, the superior court found Casebolt breached the PPA payment obligation and granted Schenk's motion for summary judgment.

¶13 After further briefing, in March 2014, the superior court issued an order awarding Schenk $201,001.71 ($183,405.23 in principal and $17,596.48 in pre-judgment interest), $11,560.50 in attorneys' fees and $499.08 in costs against Casebolt, "subject to offset for any payments received from other parties." Although first designating the order a final judgment, Ariz. R. Civ. P. 54(b) (2020),⁴ the court later ruled it an interlocutory, non-appealable order pending resolution of Casebolt's counterclaims.

¶14 In 2015, Schenk sought summary judgment on Casebolt's counterclaims. As relevant here, Schenk argued Casebolt cited no express provision of the PPA that Schenk allegedly breached and that his referral of the client to Germaine after he retired could not constitute a breach of the implied covenant of good faith and fair dealing. Casebolt, in response, focused on the implied covenant, arguing that Schenk's post-retirement referral with stipulations "took steps to destroy the firm and eliminate any benefit from the" PPA, meaning "[a]t minimum, questions of fact exist sufficient to demand a trial."

¶15 After briefing, the superior court granted Schenk's motion for summary judgment on all counterclaims except the good faith and fair dealing counterclaim, explaining "that a party may breach the implied covenant of good faith and fair dealing by exercising express discretion in a way inconsistent with a party's reasonable expectation." Accordingly, the court found that "[w]hether, under these circumstances, Plaintiff Marvin J. Schenk breached the implied covenant presents a question of fact [for] the jury."

¶16 In 2018, as trial on the good faith and fair dealing counterclaim approached, the superior court granted Casebolt's motion in limine to preclude admission of the court's rulings on Schenk's motion forsummary judgment on Casebolt's other counterclaims. At the four-day trial, Schenk, Casebolt, Germaine, a representative of the potential client Schenk referred and two experts testified. Casebolt's trial theme was that Schenk's post-retirement referral with stipulations in mid-2011 caused the Firm to break up, that such conduct violated the implied covenant of good faith and fair dealing and that, as a result, Casebolt was entitled to half the value of the collections practice as damages.

¶17 The trial evidence on damages included expert testimony valuing the collections practice in its entirety at $722,000 and evidence that Germaine's buy/sell offer in mid-2011 was for $550,000. After the close of the evidence, Schenk moved for judgment as a matter of law, which the court denied. After deliberation, the jury found for Casebolt and awarded him $275,000 in damages.

¶18 After further motion practice, including Schenk's unsuccessful renewed motion for judgment as a matter of law...