London v. Green Acres Trust

Citations: 765 P.2d 538; 159 Ariz. 136; 11 Ariz. Adv. Rep. 83; 1988 Ariz. App. LEXIS 245Docket: 1 CA-CIV 9034

Court: Court of Appeals of Arizona; June 30, 1988; Arizona; State Appellate Court

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Plaintiffs, including May London and others, filed a class action against defendants Green Acres Trust and related entities, alleging deceptive practices in the sale of funeral services and merchandise. The plaintiffs claimed that defendants misrepresented the nature of their offerings, presenting them as prepaid funeral plans while actually selling unregistered securities disguised as 20-year debentures. The complaint highlighted that purchasers completed forms that created the impression of buying "paid up" funeral plans, while defendants allegedly concealed critical information that led to false assurances of guaranteed funeral services at fixed prices.

The case, initiated on March 8, 1976, underwent extensive legal proceedings before trial commenced on January 17, 1983. The trial court issued findings of fact and conclusions of law on August 10, 1983, which were formalized in a judgment on December 19, 1984. This judgment mandated the defendants to provide an accounting of funds received from class members but did not specify the amounts for costs and attorney's fees for the plaintiffs. A supplemental judgment was entered on February 18, 1986, resolving these outstanding issues.

The trial court found that for over six years, the defendants' sales personnel sold unregistered "debentures," redeemable for funeral and cemetery services, violating Arizona securities laws. The principal shareholder, Lisle Hawkins, was associated with both Green Acres Trust and Green Acres Memorial Gardens, further intertwining the entities involved in the alleged misconduct. The defendants raised nine issues on appeal, while the plaintiffs presented one issue for cross-appeal.

Sales personnel misrepresented the nature of debentures, stating they were issued by a trust managed by trustees and that funds would be held by a nonprofit. They failed to disclose critical facts, notably that Green Acres Trust was a subchapter S corporation for the benefit of the Hawkins family, not a nonprofit, and that funds were used for significant unsecured, undocumented loans. The attorney general's consumer fraud division initiated action against the defendants under the Consumer Fraud Act for making fraudulent misrepresentations, leading purchasers to believe they were buying funeral plans that included pre-paid merchandise and services. Instead, the purchasers signed agreements for unregistered debentures with a 4% return, with no obligation for funeral services.

On appeal, several issues are raised, including:

I. Class Action Issues
   A. Proper certification of the class action.
   B. The court's ability to create/expand the class.
   C. Adequacy of legal representation for the class.
   D. Notification adequacy to class members.

II. Duplicative Lawsuits
   - Whether appellants faced multiple lawsuits for the same relief.

III. Statute of Limitations

IV. Burden of Proof

V. Election of Remedies

VI. Award of Attorneys' Fees

VII. Cross-Appeal
   - Appellees challenge the trial court's decision to award only $40,000 in attorneys' fees.

For class action issues, the trial court must assess whether the action meets Rule 23 requirements: numerosity, commonality, typicality, and adequacy of representation. The court certified the lawsuit as a Rule 23(b)(3) class action, indicating common questions of law or fact predominated. Defendants argue that the certification process was flawed due to the lack of an evidentiary hearing on class treatment superiority or the qualifications of representative parties and their counsel.

The absence of a formal evidentiary hearing prior to class action certification does not invalidate the certification. Arizona law and relevant case law do not mandate specific evidentiary findings for class action certification, allowing courts to rely on pleadings and pretrial materials to assess maintainability. Although a hearing may not be strictly required, it is appropriate when the court has genuine doubts about class action propriety. Reversal of certification due to a lack of hearing is only warranted if such a hearing could have impacted the appellant's rights, particularly if the court denies certification without the opportunity for litigation on substantial issues. 

The determination of class action certification rests with the trial court's discretion, and absent abuse of discretion, appellate courts will not interfere. In this case, the trial court had extensive pleadings and discovery materials to support its certification decision on October 6, 1976, and it repeatedly reviewed this decision in light of motions to decertify filed by defendants, rejecting each challenge. 

Regarding the requirement of numerosity, the defendants argue that a class of eight members is insufficient, but there is no strict numerical threshold for class actions. However, if only named representatives constitute the class, the numerosity requirement is not met.

Defendants claim that the trial judge found only eight class members instead of 500, citing a statement by their counsel as evidence. However, the court clarifies that counsel's statement is not a judicial finding or evidence, and thus, the claim lacks merit. The adequacy of legal representation for the plaintiffs is also challenged by defendants. Rule 23(a)(4) mandates that representative parties must adequately protect the class's interests, which involves assessing the quality of both the representatives and their attorneys. Plaintiffs demonstrated to the court that their legal team was qualified and experienced, and despite some changes in counsel, the trial court had opportunities to reassess representation throughout the litigation. Defendants did not present new arguments on appeal, and the trial court's rejection of their claims was upheld.

Additionally, defendants argue that the trial court failed to provide proper notice to class members, suggesting that only those notified should be considered in the class for potential judgment. Rule 23(c)(2) requires the court to give the best practicable notice to class members, emphasizing that individual notice is mandatory, not discretionary, as established in Eisen v. Carlisle, Jacquelin. The Supreme Court ruled that individual notice is essential for identifiable class members, referencing a case where millions could be identified with reasonable effort.

The court determined that notice by publication did not meet the "best notice" standard under rule 23, despite the $250,000 cost to notify individual class members. The trial court found that defendants intentionally withheld the names of class members, obstructing individual notice. Defendants' claims on appeal that there were no grounds for this finding were rejected, as the record showed their consistent objections to providing class member names. The defendants argued that the class only included individuals who purchased debentures. However, the court's February 17, 1977 order indicated that the class included anyone who purchased or agreed to purchase debentures or funeral plans. The plaintiffs’ second amended complaint further clarified that class members included those who purchased various services and products, not limited to debentures alone. The court's requests for information from defendants indicated they were aware of the broader class definition. Defendants' refusal to provide potential class member names, while insisting on a restrictive class definition, hindered identification of some members. The court concluded that defendants could not benefit from their own wrongdoing and upheld the inclusion of individuals who did not receive notice as part of the class. Additionally, the defendants' argument regarding duplicate suits due to a prior action by the attorney general was also dismissed.

Defendants incorrectly interpret the case's history, asserting that the attorney general's action is duplicative of the plaintiffs' claims. The attorney general's lawsuit, grounded solely in violations of the Arizona Consumer Fraud Act, sought different relief, including an injunction and civil penalties. In contrast, plaintiffs' claims are based on violations of multiple statutes, including the Arizona Prepaid Funeral Plan statutes and Arizona Securities statutes, among others. The consent judgment from the attorney general's case explicitly states it does not preclude other civil actions, confirming that the two cases are not duplicative.

Defendants cite federal cases regarding the preclusion of litigation, but these cases are factually distinguishable. Unlike the multiple pending class actions in those cases, only two actions are involved here, with differing grounds and relief sought.

Regarding the statute of limitations, defendants claim that many class members' claims are barred, arguing for a one-year limitation from the purchase date. However, the trial court determined the statute of limitations begins "one year after discovery." Statutory policies protect against stale claims, but can be tolled if defendants conceal wrongdoing. Here, defendants' actions concealed the facts of the sales, preventing plaintiffs from realizing they were misled. Therefore, the court should not permit defendants to invoke the statute of limitations as a defense.

Lastly, defendants assert that plaintiffs did not meet their burden of proof, which is also contested.

The trial court's role includes weighing evidence, with appellate review favoring the judgment's sustenance as long as evidence supports it. Implied findings necessary for a judgment are acknowledged when supported by evidence not conflicting with express findings. Defendants claimed a lack of evidence for certain allegations in the complaint, but the court found sufficient support after reviewing the record. They contended that multiple orders needed review to understand the relief granted; however, only the findings and judgments from December 19, 1984, and February 18, 1986, were necessary. The appellate court presumes the trial court’s judgment is correct, placing the burden on defendants to demonstrate error, which they failed to do by not specifying unsupported evidence or citing the record.

Regarding election of remedies, defendants argued the trial court required such an election and referenced a May 23, 1980, transcript, which was not included in the appeal record, thus placing the burden on them to provide it. Without this transcript, the court found their argument lacking merit, asserting that class members could either uphold their contracts or rescind for a refund with interest.

On attorney's fees, the trial court awarded $40,000 to plaintiffs' counsel, taking into account the benefit conferred to the class members. This amount was to be paid by the defendants, not from any common fund. Defendants challenged the fee award, arguing the absence of a specific agreement and lack of statutory authority for such an award.

The prevailing principle regarding attorney's fees, known as the "American Rule," stipulates that without a specific statute or contract, a victorious party typically cannot recover attorney's fees from the losing party. The trial court did not specify its legal basis for awarding attorney's fees and explicitly excluded A.R.S. 12-341.01, which authorizes fees in contract-related cases, since the case was filed before the statute's effective date. The plaintiffs argue that A.R.S. 44-2001 allows for attorney's fees in securities fraud cases, contingent upon tendering the securities. The defendants counter that no class member has tendered securities and a deadline for tender has not been set, thus no lump sum fee award is warranted. The plaintiffs assert that attorney's fees are permissible in class actions and that such awards are at the trial court's discretion. They argue that the American Rule is not an absolute barrier to fee shifting and claim the court has equitable power to award fees based on the defendants' conduct, referencing bad faith as an exception. While few Arizona cases address this bad faith exception, it has been suggested that it is recognized by the state’s supreme court, as indicated in Taylor v. Southern Pacific Transportation Co., where attorney's fees incurred due to another's wrongful conduct are recoverable as damages.

The court in Taylor established that attorney's fees can be awarded as a sanction in cases of complete disregard for court orders without reasonable justification. This remedy is essential for maintaining courtroom integrity and is applicable in exceptional circumstances. Other legal authorities recognize a common law bad faith exception, which allows for attorney's fee recovery beyond statutory provisions. Bad faith can arise from both litigation conduct and the underlying actions leading to litigation. Awards in such cases serve to "redress the insult to injury" and deter bad faith behavior, similar to other court sanctions. Courts may impose fees for both procedural abuses—such as lack of cooperation—and substantive abuses, including the filing of frivolous motions or refusal to concede clear issues. 

The excerpt notes that the appeal record is incomplete, leaving unknown factors regarding the oral arguments and judicial inquiries that occurred. The litigation has been notably protracted, beginning in March 1976, and has involved extensive disputes over discovery, with defendants employing numerous procedural tactics to challenge the case. Despite the plaintiffs having a previous consent judgment, defendants contested various substantive matters vigorously. Ultimately, findings of fact aligned with the consent judgment, suggesting that the trial court could have justified an attorney's fee award based on the defendants' bad faith. Such awards are supported by A.R.S. 12-341.01(C), applicable to cases filed after the statute's effective date.

The statute's underlying theory is accessible to courts, as established in relevant case law. Defendants have criticized plaintiffs for prolonged litigation, but the record indicates that defendants' actions warrant criticism instead. The trial court's decision to award attorney's fees is deemed within its discretion, and absent an abuse of discretion, appellate intervention is not warranted. Plaintiffs contend that the trial court erred by not applying the lodestar method to enhance attorney's fees. This method involves a two-step process: calculating the lodestar figure by multiplying hours worked by an appropriate hourly rate, followed by adjustments based on factors like litigation complexity and quality of representation. The determination of reasonable fees is left to the trial judge's discretion, reliant on case-specific facts. Plaintiffs presented several arguments for fee enhancement, including their attorneys' qualifications, the complexity of the case, and community rates for similar work. However, the Supreme Court has emphasized that enhancing fees using the lodestar method is rare and requires strong evidence of exceptional service quality. The trial court indicated it considered all relevant factors but prioritized the actual benefits conferred upon the class, suggesting the success may not meet the "exceptional" standard necessary for enhancement. Consequently, without finding an abuse of discretion, the court upholds the trial court's ruling on attorney's fees.

Appellees request attorney's fees on appeal under ARCAP Rule 25, asserting that the appeal is frivolous and intended solely to cause delay. The court agrees, awarding attorney's fees and costs to the appellees/plaintiffs, with the amount to be determined following a statement filed according to ARCAP Rule 21. The trial court's judgment is affirmed, with Judges Shelley and Kleinschmidt concurring. 

The record indicates that court reporters were present during oral arguments regarding attorney's fees; however, the defendants did not provide the transcripts in the appeal record. Consequently, the court presumes the record supports the trial court's decision. 

Additionally, this litigation has led to four reported appellate decisions. The first involved a challenge by class-action defendants against the attorney general's ability to sue under the Consumer Fraud Act, which established that while Securities Act violations could not be alleged, allegations of selling "debentures" could support a Consumer Fraud Act claim. The second decision addressed a defamation suit filed by the Green Acres defendants against the plaintiffs and their attorneys, resulting in a finding of non-liability for the clients and an absolute privilege for the attorneys regarding statements connected to judicial proceedings. However, the Arizona Supreme Court later vacated the appellate court's ruling granting privilege to the lawyers' media communications, deeming them extrajudicial and unrelated to judicial proceedings.