978-1285770178 Case Printout Case CPC-05-05 Part 2

Unlock access to all the studying documents.

View Full Document

last few months of Designer Surfaces’ operation, he, McCarthy, and an employee decided what to do with the corpo-

clear and unambiguous, we do not employ any other methods of construction. N. Valley Emergency Specialists,

sons furnishing such labor, professional services, [or] materials.” A.R.S. § 33–1005 also provides that such “monies

shall neither be diverted nor used for any purpose other than to satisfy the claims of those for whom the trust is cre-

ated,” and “shall be paid when due to the person or persons entitled thereto.” Applying the statute’s plain language,

we conclude that A.R.S. § 33–1005 created a trust obligation upon Designer Surfaces in favor of Arizona Tile, which

governed Designer Surfaces’ use of the subject monies.

[7] ¶ 22 Turning now to the issue of personal liability, Defendants argue that no evidence showed that they decided

to pay certain suppliers but not Arizona Tile and that nothing in the statutory language imposes personal liability on

corporate officers or directors for a breach of the corporation’s fiduciary duties. Arizona Tile responds by pointing

out that a corporation can act only through its agents or officers. See Lois Grunow Mem’l Clinic v. Davis, 49 Ariz.

277, 284, 66 P.2d 238, 241 (1937). By statute, each corporation must have a board of directors, A.R.S. § 10-801(A),

¶ 23 Arizona Tile relies upon Seven G Ranching Co. v. Stewart Title & Trust of Tucson, 128 Ariz. 590, 627 P.2d

1088 (App.1981), in which we held that “[a]ny officer who causes the corporate trustee to commit a breach of trust

causing loss to the trust administered by the corporation is personally liable for the loss to the beneficiaries of the

trust.” Accordingly, 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.

¶ 24 In Jabczenski v. Southern Pacific Memorial Hospitals, Inc., 119 Ariz. 15, 20, 579 P.2d 53, 58 (App.1978), we

acknowledged the nonliability of corporate directors for a tort committed by the corporation unless they participated

in or acquiesced in or were “guilty of negligence in the management and supervision of the corporate affairs causing

or contributing to the injury.” We also held that “[a] director who actually votes for the commission of a tort is per-

FN6. In similar circumstances courts in other states have found that exceptions exist to the limited liability

enjoyed by corporate officers. See, e.g., Chem-Age Indus., Inc. v. Glover, 652 N.W.2d 756, 773–76

(S.D.2002) (officers and directors with discretion in managing corporation have fiduciary duty “to control

the corporation in a fair, just, and equitable manner”); Granewich v. Harding, 329 Or. 47, 985 P.2d 788,

793-94 (1999) (one who knowingly aids another’s breach of fiduciary duty also is liable for the breach);

the personal liability of a corporate officer or director is consistent with the reasoning of the Bankruptcy Appellate

Panel of the Ninth Circuit in In re Baird, 114 B.R. 198 (9th Cir. BAP 1990). There, the court had to determine

whether to except from discharge under U.S.C.A. § 523(a)(4) a debt for which the debtor’s solely owned corporation

debt on the ground that Baird had committed a defalcation “while acting in a fiduciary capacity” Id. at 201–02.

¶ 27 The court noted that federal law has defined “fiduciary capacity” to apply only to express or technical trust rela-

tionships. Id. at 202. To be non-dischargeable, the debt had to “arise from a breach of trust obligations imposed by

law, separate and distinct from any breach of contract.” Id. Thus, “[i]f state law create[d] an express or technical

statutes created express trusts. Id. Some courts had found that those statutes that imposed only criminal penalties did

not create a fiduciary relationship, id., while statutes such as New York’s, which both designated funds held by a

contractor as trust funds and imposed detailed accounting obligations regarding such funds, created a fiduciary rela-

tionship that resulted in such debt not being subject to discharge. Id. at 203 (citing In re Kawczynski, 442 F.Supp.

413 (W.D.N.Y.1977)).

¶ 30 The court next considered whether Baird‘s corporation had committed a defalcation and if so, whether Baird

could be personally liable. Id. at 204. The court stated that a “defalcation” occurs when a party fails to account for

money or property that has been entrusted to it. It held that evidence that the homeowner had paid Baird Construc-

tion, which had not in turn paid the subcontractor, established a prima facie case. Id. Therefore, without any rebuttal

trust property … [and] a breach of trust even if the officer did not personally profit from the transaction.” The court

reasoned that if the fiduciary relationship were not imposed upon the corporate officer charged with maintaining the

trust relationship, the purpose of § 523(a)(4) would easily be avoided. Therefore, because David Baird “was the only

person responsible for disbursing [corporate] funds, … [he] directly and actively participated in the defalcation and

c[ould] be held personally liable.” Id. at 205.

socs., Inc. v. Novick, 923 P.2d 216, 217 (Colo.App.1995). The Colorado court upheld the personal liability of the

chief financial officer (“CFO”) of a corporation that had accepted payment from home buyers but had failed to pay a

materials supplier. Id. at 218. The court observed that the statute “is to protect homeowners, laborers, and providers

of construction materials from dishonest or profligate contractors … [and thus] imposes duties on contractors to see

that the subcontractors are paid.” Id. at 219. Because the CFO had used funds received from home sales to repay a

imposed by § 33-1005 because they failed to pay Arizona Tile the funds that Designer Surfaces had received from or

for various homeowners. Defendants responded that the federal court’s Baird analysis should be restricted to the

context of the bankruptcy code and was not binding on Arizona state courts. Although we are not bound by the

Baird court’s interpretation, Defendants cite no persuasive ground for restricting the case to the bankruptcy setting.

They also argued that Designer Surfaces had many employees, three or four of whom were responsible for daily

benefit of its suppliers, by failing to pay those funds over to the suppliers when due, and by using those funds “for

any purpose other than to satisfy the claims of those for whom the trust [was] created.” Furthermore, Defendants

were corporate officers and the only directors of Designer Surfaces; they authorized these wrongful actions and as a

result can be personally liable for the damage caused by the corporation’s breach of trust. Defendants have not

shown that a material question of fact existed that precluded summary judgment, and for the reasons stated, we up-

to A.R.S. § 12-341.01 (2003). We generally review an award of attorneys’ fees for an abuse of discretion. Ofaly v.

Tuscon Symphony Soc‘y, 209 Ariz. 260, 265, ¶ 17, 99 P.3d 1030, 1035 (App.2004). If the superior court commits an

error of law when exercising its discretion, we may find an abuse. Fuentes v. Fuentes, 209 Ariz. 51, 56, ¶ 23, 97

P.3d 876, 881 (App.2004). Additionally, interpretation and application of the attorney fee statute present questions

of law subject to de novo review. Chaurasia v. Gen. Motors Corp., 212 Ariz. 18, 26, ¶ 24, 126 P.3d 165, 173

suant to § 12-341.01(A) based upon facts which show a breach of contract, the breach of which may also constitute

a tort. The fact that the two legal theories are intertwined does not preclude recovery of attorneys’ fees under § 12–

341.01(A) as long as the cause of action in tort could not exist but for the breach of the contract.” See also Pettay v.

Ins. Mktg. Servs. Inc. (West), 156 Ariz. 365, 752 P.2d 18 (App.1987) (tort claim that defendants fraudulently in-

duced plaintiffs to enter contract was intertwined with breach of contract claim); Jerman, 145 Ariz., at 403, 701 P.2d