Dooley v. O’Brien – 12/28/2010

January 7, 2011

Arizona Court of Appeals Division One Reverses Award of Attorneys’ Fees Because Actions for Breach of a Fiduciary Duty Implied by Law, Fraudulent Conveyance, and Accounting Do Not “Aris[e] Out of a Contract” Within the Meaning of A.R.S. § 12-341.01.

In 1994, Dooley, Fencl, O’Brien, and Falkenberg formed Corvallas Development Corporation as a vehicle for investing in real estate development ventures.  Dooley, Fencl, and Falkenberg owned stock in the corporation and served on its board of directors.  O’Brien served as the corporation’s manager.  In 1998, the group began working on developing the Merrill Ranch property, purportedly for Corvallas.  But there was a falling out, and Fencl, O’Brien, and Falkenberg decided to develop the property without Dooley.  The three formed a new limited liability company and conveyed the Merrill Ranch property to that company.

Dooley sued the others in 1999 for breach of fiduciary duty, fraudulent conveyance, and accountings.  The defendants re-conveyed the Merrill Ranch property to Corvallas to defeat a lis pendens Dooley filed, and, in 2004, the parties agreed to the appointment of a Special Master to perform accountings.  The Special Master submitted his report in 2007, and the trial court adopted the report over Dooley’s objections.  The trial court then granted the defendants’ motion for summary judgment on all but one claim and denied Dooley’s cross-motions.  The parties then dismissed all remaining claims and counterclaims with prejudice.  The court granted defendants’ applications for attorneys fees pursuant to A.R.S. § 12-341.01(A).

Dooley appealed the fee award, arguing that his claims against the defendants did not “aris[e] out of a contract” as is required under § 12-341.01 for a prevailing party to win attorneys’ fees.  The Court of Appeals agreed, relying heavily on Barmat v. John and Jane Doe Partners A-D, 155 Ariz. 519, 524, 747 P.2d 1218, 1223 (1987), in which the Arizona Supreme Court stated, “The legislature clearly did not intend that every tort case would be eligible for an award of fees whenever the parties had some sort of contractual relationship or ingenious counsel could find authority for an implied-in-law contractual claim.”

Beginning with the claim for breach of fiduciary duty, the Court noted that the relationship between the parties was of directors and officers of a corporation to its shareholders and that the “duties of a director or officer of a corporation are implied by law,” not created by contract.  The parties agreed that a contract had created the relationship between them.  The Court stressed, however, that neither the mention of a contract in the complaint nor the defendants’ contention that they breached no contractual obligation brought Dooley’s claims within the language of A.R.S. § 12-341.01(A).

Likewise, Dooley’s fraudulent conveyance claim was based on a duty imposed by law, specifically Arizona’s Uniform Fraudulent Transfer Act, A.R.S. §§ 44-1001 to -1010.  Thus, it also did not “aris[e] out of a contract” and could not support the fee award.

Finally, Dooley’s claims for accountings, like his claim for breach of fiduciary duty, arose out of the fiduciary relationship between the parties.  No contract was necessary for Dooley to demand these accountings, and therefore fees were not available to the defendants on this claim.

Judge Swann authored the court’s opinion; Judges Hall and Weisberg concurred.