Arizona Court of Appeals Division One holds that A.R.S. § 10-3810(A) authorizes the removal of a director for fraudulent conduct for both constructive fraud and actual fraud and that improper litigation conduct of deleting hundreds of business emails warranted dismissal of his complaint.

Two co-directors of a marijuana dispensary became involved in a contentious business dispute.  Plaintiff director contended that defendant director converted his interest, falsified documents, and denied him access to business records and books.  Plaintiff director sought an accounting, a receivership, an injunction against defendant director managing the company, and a declaration of rights.  Plaintiff director claimed he had been denied access to the business’ email account.  Defendant director countered that she did not have access to the email account because plaintiff director had locked her out, and she had been forced to create a new email account to conduct official business.  During the litigation, and after several prior sanctions for litigation misconduct, plaintiff director was ordered to provide access information to the account, which he did.  However, when Defendant director accessed the email account, she found most emails had been deleted.  Defendant director sought an order that plaintiff director be held in contempt, removed as a director and sanction with dismissal.  After an evidentiary hearing, the superior court found that Plaintiff director had engaged in fraudulent activity via spoliation of the emails, that his removal was in the best interest of the company, removed him, and dismissed his complaint.  Plaintiff director appealed.

The court of appeals affirmed.  Under A.R.S. § 10-3810(A), courts may remove directors of a non-profit corporation if they “engaged in fraudulent conduct” and removal is in the best interest of the corporation.  The ordinary meaning of fraud includes both actual and constructive fraud.  Constructive fraud does not require an intent to defraud but it does require a fiduciary or confidential relationship and that the breacher of a duty induced justifiable reliance by the other to his detriment.  Substantial evidence supported the trial court’s finding that plaintiff director owed a fiduciary duty to the corporation to not engage in conduct harmful to it, and that the corporation reasonably relied on his representation he was preserving, not destroying, four years of business email.

The court of appeals also affirmed dismissal of the complaint as a sanction.  By destroying the emails, plaintiff director prejudiced defendants, after several warnings against the spoliation of evidence, and specific warnings his conduct could lead to dismissal.  Neither these warnings nor prior sanctions deterred plaintiff director.  By engaging in egregious conduct, plaintiff director waived his right to be heard on the merits.

Judge Howe delivered the opinion, in which Judges Thumma and Foster joined.

Posted by Emma J. Cone-Roddy