Green v. Lisa Frank, Inc (1/20/2009)

January 27, 2009

Arizona Court of Appeals Division Two Holds that a Trial Court May Enter Default Judgment as a Sanction for Civil Contempt Not Involving a Discovery Violation, and Such an Order May Be Appealable Under A.R.S. § 12-2101.

In litigation between corporate directors, the trial court entered stipulated orders providing for the temporary protection of the corporation’s intellectual property.  The court later found one director, James Green, in civil contempt for having taken and retained property in violation of court orders.  Following a hearing on a motion for sanctions, the court issued an order dismissing Green’s cross-complaint against the corporation and striking Green’s reply to the corporation’s counterclaim against him.  The sanctions order granted judgment to the corporation on all claims, except with respect to an allegation of fraud against Green.  The court terminated Green’s status as a director and awarded attorneys’ fees and costs to the corporation.  Green appealed.

The Court of Appeals first considered whether it had jurisdiction to consider the civil contempt order.  The Arizona Supreme Court has held that a civil contempt order is not appealable, e.g., Ex parte Wright, 36 Ariz. 8, 16 (1929), but has not considered the question in the context of a contempt order that is otherwise appealable under A.R.S. § 12-2101.  In this case, because the trial court’s order disposed of all issues other than damages, and included findings pursuant to Rule 54(b), Ariz. R. Civ. P., the order was an appealable interlocutory order under A.R.S. § 12-2101(G).  Wright and other cases rejecting appeals of civil contempt sanctions are therefore inapplicable.

On the merits, the Court of Appeals concluded that the dismissal/default was not an excessive sanction and did not violate due process rights despite that Green’s contempt did not involve a discovery violation.  Due process is satisfied, and dismissal is constitutionally permissible, if there is a sufficient nexus between the misconduct and the merits of the case to permit an inference that the sanctioned party’s position lacked merit.

To determine the propriety of a trial court contempt sanction, the Court of Appeals considered a non-exhaustive list of factors, including (1) prejudice to the other party, both in terms of its ability to litigate its claims and other harms caused by the disobedient party’s actions; (2) whether the violations were committed by the party or by counsel; (3) whether the conduct was willful or in bad faith and whether the violations were repeated or continuous; (4) the public interest in the integrity of the judicial system and compliance with court orders; (5) prejudice to the judicial system, including delays and the burden placed on the trial court; (6) efficacy of lesser sanctions; (7) whether the party was warned that violations would be sanctioned; and (8) public policy favoring the resolution of claims on their merits.  A finding of prejudice is not required to support a dismissal or default judgment as a proper contempt sanction. 

Under the findings of facts on the record, the trial court did not abuse its discretion by the sanction imposed for Green’s civil contempt.

The trial court did err, however, by removing Green as a director of the corporation.  Entry of a default judgment establishes as proven all well-pleaded facts, but does not hold the party in default to have admitted conclusions of law.  Accordingly, if a complaint fails to state facts legally entitling a plaintiff to a recovery, a default judgment rendered thereon is void.  Because the allegations of fraud supporting the request for Green’s removal pursuant to A.R.S. § 10-809(A) were not pleaded with particularity, the trial court’s entry of default on that claim did not satisfy the factual showing required for his removal under the statute.  The trial court also erred by entering judgment on the corporation’s copyright infringement claim.  Because federal district courts have exclusive original jurisdiction to consider such infringement civil actions, the trial court lacked subject matter jurisdiction over that claim.       

Judge Brammer wrote the opinion, in which Judge Pelander concurred.  Judge Howard dissented, concluding that the Arizona Supreme Court’s decision in Wright applied and that the Court of Appeals, therefore, did not have jurisdiction to consider the appeal of the contempt order.