Estate of Pacheco v. Hartford Fire Insurance Co. – 9/22/2008

September 30, 2008

Arizona Court of Appeals Division Two Holds that Surety is Liable for Fiduciary Breach by Principal Resulting from Failure to Repay Funds Misappropriated from Estate Prior to the Inception of the Suretyship.

A court-appointed guardian and conservator (“Conservator”) misappropriated money from the estate of her aunt (“Aunt”), who was suffering from dementia.  Later, Conservator obtained a $200,000 surety bond from an insurer (“Hartford”) to protect the Estate against potential fiduciary violations by Conservator.  Following a sale of Estate property, the trial court ordered Conservator to deposit all sums from the sale into a restricted account and to provide a full accounting of her expenditures as conservator.  When she failed to comply, the court rescinded her appointment and, after a bench trial, entered a surcharge judgment against Conservator of nearly $199,000, based on Estate assets not accounted for, plus costs and fees.

The trial court then considered cross-motions for summary judgment regarding whether Hartford would be liable for the misappropriations by Conservator that occurred before the issuance of the security bond.  The Court ruled against Hartford, concluding that Conservator, having engaged in fiduciary malfeasance, had a continuing duty to recover misappropriated or mismanaged assets, which duty continued into the period of the suretyship.  The court ordered Hartford to pay the estate the $200,000 bond amount, plus prejudgment interest from the date of the surcharge judgment. Hartford appealed, and the Estate cross-appealed the trial court’s denial of its request for attorney fees. 

The Court of Appeals affirmed the trial court, holding that because Conservator had a duty to account for and pay over any funds owed to the Estate during the term of the suretyship, Hartford was liable for harm to the Estate caused by Conservator’s fiduciary breach.  Under the facts submitted, the Court rejected Hartford’s claim that the bond was void because of material omissions by Aunt’s attorney, who failed to notify Hartford of Conservator’s prior misappropriations.  The Court also rejected Hartford’s contention that it could not be held liable for an amount more than the penal sum of its security bond, ruling instead in accordance with the general rule in Arizona that a party is entitled as a matter of right to prejudgment interest on a liquidated claim.  Finally, the Court found that the trial court did not abuse its discretion in denying the Estate’s request for an award of attorney fees.  

Judge Vásquez authored the opinion; Judges Howard and Brammer concurred.