Opinion
1 CA-CV 97-0477; 1 CA-CV 98-0060, (Consolidated)
Filed March 16, 1999
Appeal from the Superior Court of Maricopa County, Cause No. CV 95-06068, the Honorable Steven D. Sheldon, Judge.
AFFIRMED IN PART; REVERSED IN PART.
Roelke Wymore, by Douglas G. Wymore, Attorneys for Appellees Appleyard, Janoff Taylors, Phoenix.
Bennett, Burke Carmichael, L.L.P., by William F. Bennett Attorneys for Appellees Grubaugh, Deans, Eliases Patners, Phoenix.
Law Offices of Marshall A. Martin, by Marshall A. Martin, Attorneys for Appellant DeCosta, Scottsdale.
Richard L. Brooks, P.C., by Richard Brooks, Attorney for Intervenor Appellant, Phoenix.
Arizona Corporation Commission, by Brian J. Schulman, Assistant Attorney General and Robert A. Zumoff Attorneys for Amicus Curiae Securities Division, Phoenix.
OPINION
¶ 1 Appellees were limited partners of HV19 Limited Partnership, an Arizona limited partnership ("HV19"). Appellant Raymond DeCosta was another limited partner of HV19. Appellant Richard Brooks was DeCosta's trial counsel. Appellees brought this action against DeCosta and Michael Jamison, general partner of HV19, to recover contributions appellees made to the partnership, alleging, among other things, breach of contract, breach of fiduciary duty and securities fraud. A jury rendered multiple verdicts against DeCosta and Jamison in the sum of $314,039.15. The trial court also awarded appellees attorneys' fees and costs of $213,957.24.
¶ 2 DeCosta appeals from the judgment and from the court's denial of his motion for judgment notwithstanding the verdict. Brooks appeals from a sanction imposed against him by the trial court. For the reasons set forth, we affirm the trial court's judgment and reverse the award of sanctions.
FACTS AND PROCEDURAL HISTORY
¶ 3 In early 1986, Jamison and William Schuck began promoting and selling investments in HV19 through the use of a private placement memorandum ("PPM"), summary sheet, partnership agreement, and other documents. The purpose of the investment was to raise $202,350 to purchase five acres of raw land located in north Phoenix. Twenty-one partnership interests in HV19 were offered at a price of $15,500 each, with $4,000 to be paid as an initial contribution and $1,150 annually thereafter until fully paid. Jamison and Schuck were to be the general partners of HV19, with the investors becoming limited partners. The PPM provided that the purchase price of the property was $202,350. The initial capital contributions from the twenty-one units were to be used to make the $71,000 down payment on the purchase of the property, with the remaining $13,000 to be used for closing costs, management fees, organizational expenses and a cash flow reserve. The subsequent annual payments by the limited partners were to pay annual real estate taxes and annual payments on the purchase money promissory note carried back by the sellers of the property, Thomas and Edna Krumhar. Pursuant to the PPM and the partnership agreement, upon the resale of the partnership property, any profit would be split with the limited partners receiving 75% and the general partners receiving 25%.
¶ 4 The PPM provided that the offering was conditional upon the sale of the twenty-one units and the acquisition by HV19 of the property. It further provided that all money paid by the investors would be placed in a trust and returned to the investors in the event the above conditions were not satisfied by September 1, 1986, unless extended for another sixty days by the general partners. If all the units remained unsold before the offering terminated, or if HV19 was not formed, all monies paid to the partnership for the units were to be refunded promptly with a pro rata share of the accrued interest.
¶ 5 Although all twenty-one units had not been sold, Jamison and Schuck entered into a contract to purchase the property from the Krumhars for $175,000. Simultaneous with this purchase, they sold the property to HV19 for $202,350 with HV19 paying $71,100 and the Krumhars carrying back a promissory note for $131,250 secured by a first position deed of trust. By April 30, 1986, the date escrow closed, Jamison and Schuck had sold only five limited partnership units. DeCosta, an acquaintance of Jamison, was one of these initial investors. Because only five units had been sold by the close of escrow date and HV19 therefore had insufficient funds to make the down payment, DeCosta, at the request of Jamison, loaned HV19 $36,000. DeCosta's loan, which was undisclosed to the other limited partners, was evidenced by a promissory note with a term of six months and an interest rate of 14% and was secured by a second deed of trust on the property.
¶ 6 Jamison and Schuck continued to sell investments in HV19 for over two years after the April 30, 1986 closing date, although DeCosta's loan and second deed of trust were never disclosed to prospective investors. DeCosta's $36,000 loan was not paid on its due date.
¶ 7 The PPM failed to disclose to prospective investors that the purchase price of the property was $175,000 rather than $202,350. Schuck also admitted at trial that the general partners never held the money raised from the limited partners in a trust account but rather used the money and DeCosta's loan to close the escrow. Jamison testified at trial that he told DeCosta that DeCosta's loan was needed because Jamison had not sold sufficient partnership units to complete funding of the partnership.
¶ 8 DeCosta's loan created a cash flow problem for the partnership, because, if all twenty-one units had been sold, the projected annual cash flow would be sufficient only to make payments only on the Krumhars' note and pay annual taxes. The income from the partnership units did not generate sufficient cash flow to service DeCosta's loan.
¶ 9 The partnership did not make the February 1987 payment to the Krumhars and the property went into foreclosure. DeCosta made a second loan to HV19 in July 1987 to redeem the property at the trustee's sale and stop the foreclosure. This loan was also never disclosed to the other limited partners. At Jamison's request, DeCosta handled all negotiations with the Krumhars from 1987 forward, thereby violating paragraph XV of the partnership agreement limiting managerial decisions to the general partners. In negotiating with the Krumhars, DeCosta was acting as a general partner.
¶ 10 In October 1987, DeCosta dealt with the Krumhars regarding a partnership overpayment. DeCosta also made a loan to the partnership in December 1987 to pay delinquent property taxes. DeCosta also made undisclosed loans to the partnership to make the 1988, 1989 and 1990 loan payments to the Krumhars. DeCosta made another loan to the partnership in 1994 to settle a foreclosure action initiated due to unpaid property taxes. By August 1994, DeCosta had made eight undisclosed loans to the partnership and was still owed approximately $62,000, not including interest.
¶ 11 In October 1988, DeCosta sent a letter to Jamison stating his intention to become the sole general partner of HV19. Jamison decided to give DeCosta an additional two and three-quarters unsold units in the partnership. In early 1989, Jamison and Schuck notified all the limited partners of their desire that DeCosta be added as a general partner. DeCosta and the other limited partners signed and returned the documents approving of DeCosta as a general partner and his appointment as attorney-in-fact to sign on behalf of the partnership.
¶ 12 In July 1994, an individual who had purchased various tax liens on the partnership property sued DeCosta in his capacity as a second lien holder. Jamison then admitted to DeCosta that he had been diverting partnership contributions for his own use. DeCosta contacted the other limited partners by letter to inform them that Jamison and Schuck were no longer involved with the partnership. At this time, the other limited partners were still unaware of DeCosta's loans or any of the foreclosures involving the property. DeCosta foreclosed on the property in 1996 and received a trustee's deed.
¶ 13 Appellees first initiated a lawsuit against Jamison, Schuck and DeCosta in 1995. Schuck was dismissed from the suit. After a ten day jury trial, the jury returned verdicts against DeCosta in the amount of $314,039.13 on appellees' claims for (1) aiding and abetting a violation of the Arizona securities laws, (2) committing or aiding and abetting a breach of fiduciary duty, and (3) committing a breach of contract. The jury also awarded the same damages against Jamison. The trial court then entered judgment in favor of appellees and against DeCosta and Jamison, jointly and severally, in the amount of $527,996.39, including the amount of the verdicts plus attorneys' fees. The court also denied DeCosta's combined motion for a new trial and judgment as a matter of law. DeCosta then brought this appeal from the judgment and the denial of his post-trial motions, and his trial counsel, Brooks, appealed from a sanctions order entered against him prior to trial. The two appeals were consolidated.
ISSUES
¶ 14 DeCosta raises the following issues on appeal:
1. Whether the trial court erred in denying his motion for partial summary judgment regarding his status as a purported general partner of HV19.
2. Whether the jury verdict was inconsistent, given its special finding that DeCosta became a general partner of HV19 in 1987, because it awarded damages against DeCosta that included partnership contributions made in 1986.
3. Whether the trial court erred in not directing a verdict in favor of DeCosta due to appellees' failure to adequately prove their damages.
4. Whether the trial court erred in giving a jury instruction on the claim of aiding and abetting a breach of fiduciary duty.
5. Whether the trial court erred in allowing appellees to pursue a private cause of action for aiding and abetting securities fraud.
6. Whether the trial court erred in striking DeCosta's counterclaim and third-party complaint and granting sanctions to appellees for the filing of those pleadings. Brooks joins DeCosta's arguments regarding the imposition of the sanctions.
DISCUSSION
I. Denial of Summary Judgment Motion Regarding Partnership Issues
¶ 15 Prior to trial, DeCosta moved for partial summary judgment and dismissal of all of appellees' claims that asserted that HV19 was a limited partnership and that he was general partner of the partnership. Appellees filed a cross-motion for summary judgment seeking a determination that DeCosta became a general partner in HV19 by no later than 1989 and that appellees were all limited partners of HV19. The trial court denied both motions, finding "the existence of facts which must be resolved by a jury."
¶ 16 DeCosta argues that the trial court erred in denying his motion for partial summary judgment and allowing the jury to consider whether he was a general partner of HV19. He contends that he was not a general partner until at least August, 1994, when he says he first became aware of Jamison's malfeasance. However, the jury found in a special interrogatory that DeCosta became a general partner beginning in 1987, the year when he began negotiating with the Krumhars on behalf of the partnership.
¶ 17 We review the trial court's denial of DeCosta's motion for summary judgment for an abuse of discretion. We will reverse if the trial court misapplied the law or the record shows the existence of no real dispute as to any material fact regarding the issue. See Salt River Valley Water Users' Assoc. v. Superior Court, 178 Ariz. 70, 74, 870 P.2d 1166, 1170 (App. 1993).
¶ 18 DeCosta first argues that he could not have become a general partner of HV19 because the partnership was never technically formed. He notes that the certificate of limited partnership for HV19 was not filed until 1994. Under A.R.S. section 29-308 (1989), "[i]n order to form a limited partnership two or more persons must execute a certificate of limited partnership. The certificate shall be filed in the office of the secretary of state." A.R.S. § 29-308(a). DeCosta also argued before the trial court that the limited partnership never formed because, under the terms of the PPM, the proposed limited partnership could not become an actual limited partnership unless a certain number of units had been sold by the deadline stated in the PPM. The deadline was not met.
¶ 19 Appellees responded to DeCosta's partial summary judgment motion regarding the existence of a limited partnership with evidence that DeCosta treated HV19 as a limited partnership for tax purposes, the general partners of HV19 held the partnership out to the limited partners as a limited partnership, property was purchased in the name of the limited partnership, and HV19 filed tax returns showing it as a limited partnership. There was also evidence that appellees all believed the limited partnership to have been formed and that they contributed to it yearly based on this belief. Appellees also noted that the certificate of limited partnership was signed by the parties in 1987, although it was not filed with the secretary of state until 1994.
¶ 20 In Brown v. Brown, 15 Ariz. App. 333, 488 P.2d 689 (1971), this court considered the effect of failure to file the certificate of limited partnership on the existence of the partnership as between the parties to the partnership agreement. The plaintiffs in that case, who were two limited partners suing to dissolve the partnership, argued that the trial court erred in finding a limited partnership because the certificate of limited partnership had not been recorded. The court concluded that the certificate requirement in the limited partnership statutes was simply a third-party protection not affecting the existence of the limited partnership as to the partners. See id. at 339, 488 P.2d at 695. The court stated:
The parties are presumed to have had knowledge of the content of the certificate and should be bound by their contractual acts. In the present case the plaintiffs contracted to form a limited partnership and held themselves out to the community as limited partners.
They are thereby estopped because of their actions to assert that, between themselves, a limited partnership was never formed.
Id.
¶ 21 Similarly, there was evidence in this case that the partners held HV19 out to the community and to each other as a limited partnership. Given this proof that all the parties operated as if the limited partnership had formed, the trial court did not err in denying DeCosta's motion for summary judgment regarding formation of the limited partnership.
¶ 22 The trial court also properly ruled that there were questions of fact as to whether and when DeCosta became a general partner of the partnership. In arguing that issue, both parties rely on A.R.S. section 29-319(A) (1989), which then provided that, if a limited partner's participation in the control of the partnership's business approaches the powers of a general partner, the limited partner is liable to persons who transact business with the limited partnership even though they had no knowledge of his participation and control. See Gateway Potato Sales v. G.B. Inv. Co., 170 Ariz. 137, 142-44, 822 P.2d 490, 495-97 (App. 1991). Whether a limited partner has exercised enough control to make him liable as a general partner is a factual question. See id. at 144, 822 P.2d at 497.
¶ 23 The parties dispute whether there were sufficient facts to support a jury question as to whether DeCosta exercised "substantially the same" powers as a general partner under the statute. Both parties on appeal assume the applicability of A.R.S. section 29-319(A) for the issue at hand. That statute does not expressly govern a limited partner's liability to other limited partners.
¶ 24 Because the parties assume the applicability of A.R.S. section 29-319(A) to this issue, we make the same assumption that that statute, at least arguably, analogizes the inter-partner relationship to the partners' relationship to third persons. Acquiescing in this assumption is not a holding to that effect. See, e.g., A.R.S. section 29-307, which can be read to say that a partner in a limited partnership, subject to other relevant law, has the same rights and obligations with respect thereto as a person who is not a partner. With the parties on appeal, who have briefed exclusively A.R.S. section 29-319(A), we use that statute alone to help resolve whether DeCosta could be found to have acted as a general partner.
¶ 25 General partners of a limited partnership owe a fiduciary duty to their fellow general and limited partners. See Johnson v. Weber, 166 Ariz. 528, 530, 803 P.2d 939, 941 (App. 1990). The PPM here also expressly provides that "[t]he General Partners are accountable to the Partnership as a fiduciary and consequently must exercise good faith and integrity in handling Partnership affairs, must not take advantage of the Limited Partners, and must make full disclosure in their dealings with the Partnership." This fiduciary duty of the general partners to the limited partners is particularly important where, as in this case, the partnership agreement vests management of the partnership exclusively in the general partners and prohibits any limited partner from participating in or interfering with the management of the partnership.
¶ 26 Within this legal and factual framework, the trial court did not err in concluding that, if DeCosta acted as a general partner, he could be liable as a general partner for breach of fiduciary duty or for breach of the PPM or partnership agreement.
In response to DeCosta's summary judgment motion, appellees presented evidence that as early as 1987, DeCosta actively participated in the management of HV19 by handling financial matters with the partnership's creditors, paying its taxes, making loans to the partnership and getting involved in zoning matters. Appellees also submitted evidence that in January and February, 1989, DeCosta and each existing limited partner signed and returned to Jamison and Schuck forms entitled "Addition of a General Partner," accepting DeCosta as an additional general partner, and "Special Power of Attorney," appointing DeCosta as the attorney-in-fact to make, execute, acknowledge, file and record documents and other instruments on behalf of the partnership. There was further proof that, after 1989, the partnership reported DeCosta as a general partner on its tax returns. As a general partner DeCosta was obligated under section 10(A) of the PPM to make "full disclosure" of his "dealings" with the partnership, an obligation including disclosure of loans and his managerial conduct.
¶ 27 In weighing the facts pertinent to DeCosta's summary judgment motion, the trial court was compelled to consider the facts and inferences in the light most favorable to appellees. See United Bank of Arizona v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (1991). Given the facts presented by appellees and summarized here, the trial court properly determined that questions of fact existed as to whether and when DeCosta became a general partner of HV19. The jury resolved this issue by finding that he became a general partner in 1987. We find no error in the denial of the summary judgment motion.
¶ 28 DeCosta also argues that, because the trial court had before it uncontroverted admissions of each appellee that the appellees had not relied on specific representations by DeCosta or the fact that he was a general partner in investing in the partnership, he was entitled to summary judgment on this issue. According to DeCosta, absent such reliance, appellees could not argue that he became a general partner by equitable estoppel. See St. Joseph's Hospital and Medical Center v. Reserve Life Ins. Co., 154 Ariz. 307, 317, 742 P.2d 808, 818 (1987) (noting that claim for equitable estoppel arises when one induces another to believe certain facts and the other justifiably relies and acts on the belief causing him injury). However, appellees' claim is that DeCosta breached the contracts and his fiduciary duty by performing acts without disclosure of his loans, creditor status, and managerial duties. Therefore, his liability could not hinge on appellees' knowledge of his acts. The trial court did not err in denying DeCosta's motion for partial summary judgment on this issue.
II. Inconsistency in the Jury Verdict
¶ 29 The jury concluded in a special interrogatory that DeCosta did not become a general partner in HV19 until 1987. DeCosta therefore argues that, because many of the partnership units were sold in 1986, the jury verdicts against him for damages identical with those against Jamison, an original general partner, were inconsistent. He contends that, given this inconsistency, he is entitled to a new trial.
¶ 30 When reviewing a jury verdict, we must view the evidence and all inferences therefrom in a light most favorable to sustaining the verdict. See Barnes v. Outlaw, 188 Ariz. 401, 403, 937 P.2d 323, 325 (App. 1996), vacated in part on other grounds, 278 Ariz. Adv. Rep. 21 (Sept. 18, 1998). DeCosta's argument fails because many of the claims asserted against him by appellees did not depend on his status as a general partner of HV19.
¶ 31 The jury concluded that DeCosta aided and abetted Jamison in committing securities fraud. One who aids and abets another's securities fraud is liable as a principal. Such aider and abettor liability is not dependent on one's status as a general partner. Therefore, DeCosta was properly held liable for the same damages as Jamison under this cause of action. See A.R.S. § 44-2001(A) (1994).
¶ 32 The jury also found that DeCosta aided and abetted Jamison's breach of fiduciary duty. Jamison admitted at trial that he had breached fiduciary duties to the limited partners and that the partnership could not have purchased the property without DeCosta's loan. Again, DeCosta's liability as an aider and abettor of Jamison's breach of fiduciary duty was not necessarily related to his status as a general partner.
¶ 33 Therefore, the jury's award of damages against DeCosta was not inconsistent with the theories of liability presented by appellees.
III. Lack of Proof of Damages
¶ 34 DeCosta next contends that the trial court erred in refusing to grant his motion for judgment as a matter of law or judgment notwithstanding the verdict due to appellees' lack of proof of damages. He first claims that appellees failed to timely disclose the measure and computation of damages they were seeking. He also argues that the amount of damages requested and awarded, which was the amount of contributions made by the partners, plus interest, was not the proper measure of damages.
¶ 35 Arizona Rules of Civil Procedure 26.1(a)(7) requires disclosure to any opposing counsel of a party's "computation and measure of damages." DeCosta claims that appellees failed to satisfy such disclosure requirements. However, appellees clearly did notify DeCosta that they sought damages in the amount each appellee contributed to the partnership either as an initial capital contribution or as annual payments. This disclosure was made in the complaint and the first amended complaint, answers to non-uniform interrogatories, disclosures and other correspondence. The purpose of Rule 26.1 is to avoid "trial by ambush." See Bryan v. Riddel, 178 Ariz. 472, 477, 875 P.2d 131, 136 (1994). It is clear from the record that DeCosta was adequately informed as to the damages appellees were seeking and the method of calculating those damages.
¶ 36 We also disagree with DeCosta's argument that appellees were not entitled to damages in the amount of their partnership contributions. DeCosta claims that appellees never timely elected to rescind the contract and that they were therefore required to seek damages for their breach of contract and tort claims which required additional calculations to determine the amount actually lost as a result of their investment. According to DeCosta, appellees should have been required to offer proof of the diminution in value of their investment as a result of the defendants' misstatements or other breach, as well as any benefit they may have received from the partnership. He also contends that the trial court erroneously precluded him from offering evidence of the value of HV19's property. He concludes that appellees failed to provide any evidence by which damages could be computed. He therefore asks this court to enter judgment in his favor.
¶ 37 We agree with appellees that the measure of damages used at trial was consistent with their breach of contract and breach of fiduciary duty theories. Appellees claimed that Jamison and DeCosta had breached their contract by failing to honor the contractual provision in the PPM that stated that all partners would recover their contributions with interest if sufficient partnership units were not sold by the specified date to fully fund the partnership. The units were not sold in time, thus necessitating the loans from DeCosta. The breach of fiduciary duty claim related to this same failure to honor the terms of the contract or to disclose DeCosta's loans to the other limited partners. Although the measure of damages sought by appellees may have resembled rescissory damages, it was actually compensatory damages as provided in the contract itself.
¶ 38 In addition, the statutory recovery appellees sought under the Arizona Securities Act also permitted damages in the amount of their partnership contributions. The relevant statute, A.R.S. section 44-2001(A), allows a plaintiff with a claim thereunder to "recover the consideration paid for the securities with interest thereon." Therefore, under that statute, a plaintiff is expressly permitted to seek the rescissory-type damages that were awarded to appellees. See Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 35, 945 P.2d 317, 346 (App. 1996) (recognizing that under A.R.S. section 44-2001(A) a litigant may seek rescissory damages). Appellees' complaint did not allege that DeCosta violated the securities laws as a principal but rather as an aider and abettor. However, one who aids and abets is liable as a principal.
¶ 39 At trial, each appellee testified as to the amount each had contributed to HV19. There was no evidence that any of the appellees had received any income from the partnership by way of dividend or otherwise. Therefore, appellees' evidence of contributions made to the partnership was consistent with their theories of recovery and was sufficient to support the jury's verdict.
IV. Jury Instruction on Aiding and Abetting Breach of Fiduciary Duty
¶ 40 DeCosta's fourth argument on appeal is that the trial court erred in instructing the jury on a claim of aiding and abetting a breach of fiduciary duty. He claims that this cause of action was not pled in either of appellees' complaints and that he therefore lacked notice of its existence.
¶ 41 At the time of settlement of the jury instructions, DeCosta objected to an instruction on the separate claim of aiding and abetting a breach of a fiduciary duty. His objection was overruled and his motion for judgment notwithstanding the verdict on this issue was also denied. In reviewing the denial of a motion for JNOV, "we view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party." Shoen v. Shoen, 191 Ariz. 64, 65, 952 P.2d 302, 303 (App. 1997), cert. denied, 1998 WL 407143 (U.S. Oct. 5, 1998). Our standard of review is de novo. See id.
¶ 42 We agree with appellees that DeCosta was adequately put on notice as to their claim for aiding and abetting a breach of fiduciary duty. The complaints clearly pled a breach of fiduciary claim against DeCosta and Jamison. However, DeCosta states that his first notice of a separate claim for aiding and abetting a breach of fiduciary duty came at the time of the settling of the jury instructions and therefore he had no opportunity to defend against this claim.
¶ 43 The record reveals otherwise. The joint pretrial statement, which was signed by DeCosta's trial counsel, discloses the issue as follows in the section entitled "Plaintiffs' Statement of Other Issues of Fact or Law They Believe To Be Material":
1. Whether defendants' acts and/or omissions constitute participation in, substantial assistance, or otherwise aiding and abetting the breach of fiduciary duty of other defendants?
¶ 44 Appellees' trial counsel also clearly set forth their theory of recovery based on DeCosta's conduct in aiding and abetting Jamison's breach of fiduciary duty in his opening statement. For instance, after describing the fiduciary duty owed by general partners to limited partners and the breach that occurred in this case due to the false statements and inadequate disclosures, appellees' counsel stated that "[c]ertainly in this case Mr. DeCosta aided and abetted and participated in and certainly gave substantial assistance to the breaches of those duties." Given DeCosta's failure to object to the assertion of this claim when it was disclosed in the joint pretrial statement and plaintiffs' counsel's opening statement, the court did not err in treating the claim as if it had been raised in the pleadings. See Ariz. R. Civ. P. 15(b) ("When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.") In any event, "[f]ailure to formally amend the pleadings will not affect a judgment based upon competent evidence." Electrical Advertising, Inc. v. Sakato, 94 Ariz. 68, 71, 381 P.2d 755, 756-57 (1963).
¶ 45 DeCosta agrees with the general proposition that "a trial court has a duty to instruct the jury on all legal theories supported by the evidence." Gemstar Ltd. v. Ernst Young, 185 Ariz. 493, 503, 917 P.2d 222, 232 (1996). However, he claims that he could not have reasonably understood that there would be a separate claim of aiding and abetting a breach of fiduciary duty based upon the evidence presented at trial. Given the disclosure of this claim in the joint pretrial statement and opening statements as mentioned above, he could not have been surprised. The trial court did not err in instructing the jury on this cause of action.
V. Private Cause of Action for Aiding and Abetting Securities Fraud
¶ 46 Count One of appellees' complaint alleged that Schuck and Jamison were liable for securities fraud pursuant to A.R.S. section 44-1991 (1994), and that DeCosta was secondarily liable for securities fraud as an "aider and abettor" of the fraudulent practices of Schuck and Jamison. Appellees moved for summary judgment on this count. DeCosta made a cross-motion for summary judgment, arguing that there is no private cause of action for aiding and abetting securities fraud under Arizona law. The trial court denied both motions, ruling by minute entry that aiding and abetting securities fraud is a cognizable claim under Arizona law and that there were material questions of fact regarding DeCosta's liability under that cause of action. DeCosta reargued his position on this issue in his combined motions for "judgment as a matter of law and for judgment notwithstanding the verdict and/or new trial" filed after the conclusion of trial. These motions were also denied by the trial court. He now argues on appeal that the trial court erred in denying his motions because there is no such claim under Arizona law. We review the trial court's decision de novo, see Shoen v. Shoen, 191 Ariz. at 65-66, 952 P.2d at 303-04, and conclude that such a claim does exist in this state.
¶ 47 The Arizona Supreme Court recognized a private cause of action for aiding and abetting securities fraud in State v. Superior Court, 123 Ariz. 324, 331, 599 P.2d 777, 784 (1979), overruled in part by State v. Gunnison, 127 Ariz. 110, 618 P.2d 604 (1980). The court noted the similarity between A.R.S. section 44-1991 and the antifraud provision of the 1933 Securities Act, 15 U.S.C. § 77q (1970), and that defendants who aided and abetted another's violation regarding fraud in the sale of stock in violation of the Federal Securities Exchange Act were liable as principals. The court therefore concluded that there was "no reason why one who aids and abets another in violating A.R.S. § 44-1991 should not also be held liable as a principal" and held that such liability would attach upon satisfaction of the following prerequisites:
(1) a primary violation has occurred; (2) knowledge of or a duty of inquiry with regard to the primary violation by the person charged; and (3) a necessary contribution to the underlying scheme by the person charged.
Id.
¶ 48 In State v. Superior Court, the court held that the plaintiffs had properly stated an aiding and abetting claim and a claim of inducing an unlawful sale or purchase of securities under A.R.S. section 44-2003 against the defendant Arizona Corporation Commission and that the Commission's motion to dismiss those counts was therefore properly denied. See id. at 330-31, 599 P.2d at 784-85. In a supplemental opinion, the court dismissed the complaint with leave to amend due to its adoption of a scienter requirement under section 44-1991, but this opinion did not change the substantive holding of the original opinion, which continues as valid precedent. See id. at 334, 599 P.2d at 788. Therefore, DeCosta's statement in his opening brief that no Arizona case law gives a plaintiff the right to bring a private cause of action for aiding and abetting securities fraud is incorrect.
¶ 49 DeCosta nevertheless argues that we should not follow State v. Superior Court because of the United States Supreme Court's later opinion in Central Bank v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In Central Bank, the Court held that a private plaintiff is not entitled to maintain an aiding and abetting action under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1988), or Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1993). The Court held that "neither the text of Section 10(b), nor policy considerations, nor congressional silence in the face of a long history of private and SEC aiding and abetting actions under that section justified the existence of such an action." Richard M. Weinroth, Liability of Attorneys in Securities Transactions: A Reevaluation in light of Central Bank, 31 Ariz. Att'y 19, 20 (Aug./Sept. 1994) ("Weinroth"). DeCosta contends that because A.R.S. section 44-1991 is virtually identical to Rule 10b-5 and 15 U.S.C. § 77q(a) of the Securities Exchange Act of 1933, we should follow the holding in Central Bank.
¶ 50 In State v. Gunnison, 127 Ariz. at 112, 618 P.2d at 606, the Arizona Supreme Court noted that although we are not bound by the United States Supreme Court's interpretation of the federal securities laws, harmony with the high court helps to maintain consistency in the application of the law. Therefore, "[u]nless there is a good reason for deviating from the United States Supreme Court's interpretation, we will follow the reasoning of that court in interpreting sections of our statutes which are identical or similar to federal securities statutes." Id. at 112-13, 618 P.2d at 606-07. We find good reasons here to interpret our securities antifraud statutes differently and to recognize in this state a private cause of action for aiding and abetting securities fraud.
¶ 51 The Court in Central Bank resolved the case by reference to the statutory text of Section 10(b), which does not expressly mention aiding and abetting liability. The Court concluded that it was "inconsistent with settled methodology in § 10(b) cases to extend liability beyond the scope of conduct prohibited by the statutory text" and that "[t]he issue . . . is not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by the statute." 511 U.S. at 177.
¶ 52 Like the federal statute, A.R.S. section 44-1991 does not expressly impose liability for aiders and abettors. However, there are important differences between the Arizona Securities Act and the federal securities laws that warrant a different conclusion here than that reached by the Court in Central Bank. First, the Arizona Securities Act expressly provides for a private cause of action for primary violations of the antifraud statute, A.R.S. section 44-1991. See A.R.S. §§ 44-2001 to -2003 (1994). In contrast, the federal private right of action for primary securities fraud is a judicially created, implied right. See Superintendent of Ins. of New York v. Bankers Life Casualty Co., 404 U.S. 6, 13 n. 9 (1971). Therefore, our securities statutes expressly provide for broader rights for private parties. Indeed, A.R.S. section 44-2003 provides that a civil action for a violation of A.R.S. section 44-1991 may be initiated against any person who made, participated in, or induced the unlawful sale or purchase. This section indicates a legislative intent to extend civil liability to others in addition to the actual seller. There is no federal equivalent to A.R.S. section 44-2003. See Standard Chartered PLC v. Price Waterhouse, 190 Ariz. at 18, 945 P.2d at 329.
¶ 53 Additionally, Arizona courts have consistently construed the Arizona Securities Act in an expansive fashion resulting in greater liability than exists under federal securities law. See Weinroth, supra, at 21. For instance, unlike causes of action under Rule 10b-5, reliance is not required to find a violation of A.R.S. section 44-1991. See Central Bank, 511 U.S. at 178; Rose v. Dobras, 128 Ariz. 209, 214, 624 P.2d 887, 892 (App. 1981).
¶ 54 The Arizona Securities Act's legislative history also warrants a broader interpretation of liability than that recognized in Central Bank. The legislature stated:
The intent and purpose of the Act is for the protection of the public, the preservation of fair and equitable business practices, the suppression of fraudulent or deceptive practices in the sale or purchase of securities, and the prosecution of person engaged in fraudulent or deceptive practices in the sale or purchase of securities. This Act shall not be given a narrow or restrictive interpretation or construction, but shall be liberally construed as a remedial measure in order not to defeat the purpose thereof.
1951 Ariz. Sess. Laws ch. 18, § 20 (emphasis added).
¶ 55 The above sources' call for liberal interpretation contrasts sharply with the United States Supreme Court's statement in Central Bank, that "[t]he ascertainment of congressional intent with respect to the scope of the liability created by a particular section of the Securities Act must rest primarily on the language of that section." 511 U.S. at 175 (quoting Pinter v. Dahl, 486 U.S. 622, 653 (1988)). This court need not be so constrained, and, in fact, it would be inconsistent with our state tort principles to be so constrained.
¶ 56 Courts in this state have recognized the tort principle embodied in Restatement (Second) of Torts section 876 (b) (1977) that a person who aids and abets a tortfeasor is himself liable for the resulting harm to a third person. See, e.g., Gemstar Ltd. v. Ernst Young, 183 Ariz. at 159, 901 P.2d at 1189; Gomez v. Hensley, 145 Ariz. 176, 178, 700 P.2d 874, 876 (App. 1984). The Arizona Securities Act expressly provides that the Act is not intended to limit any common law right of any person for acts involved in the sale of securities. See A.R.S. § 44-2005 (1994). In contrast, "[t]here is no federal general common law," Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938), and so courts do not apply such principles when interpreting federal statutes. See Connecticut National Bank v. Giacomi, 659 A.2d 1166, 1186 (Conn. 1995) (dissenting opinion).
¶ 57 Finally, we note that, when the Arizona legislature made extensive revisions to the Arizona Securities Act in 1996, two years after Central Bank, it specifically did not "[determine] whether or in what circumstances aiding and abetting liability exists under title 44, chapter 12." 1996 Ariz. Sess. Laws ch. 197, § 11. Although the 1996 amendments are inapplicable to this case, this statement by the legislature shows intent to leave the existence of aiding and abetting liability to the Arizona courts.
¶ 58 For all the above reasons, we conclude that, notwithstanding Central Bank, State v. Superior Court remains valid precedent for its holding that a private cause of action for aiding and abetting securities fraud exists in Arizona. Therefore, the trial court's denial of DeCosta's motions regarding this issue was not in error.
VI. Dismissal of DeCosta's Counterclaim and Third-Party Complaint and Award of Sanctions
¶ 59 After appellees filed their original complaint in April 1995, DeCosta filed an answer. Appellees subsequently obtained leave of the court to file an amended complaint, which they did on August 1, 1996. The first amended complaint was very similar to the initial complaint, although it provided more specificity than the original regarding the alleged misrepresentations and omissions of the defendants. The first amended complaint also realleged the original "Fraud" claim as "Fraud and/or Constructive Fraud" and added a claim for an accounting. On September 20, 1996, DeCosta filed his answer to the first amended complaint, which, for the first time, also contained a counterclaim, crossclaim and third-party complaint. This pleading was filed without leave of the court.
¶ 60 Appellees moved to strike the counterclaim and third-party complaint and moved for sanctions. They argued that DeCosta's counterclaim was a compulsory counterclaim under Ariz. R. Civ. P. 13(a) and was barred because it was not asserted in DeCosta's original answer and DeCosta did not receive prior leave of the court. They further argued that the third-party complaint should be stricken under Ariz. R. Civ. P. 14(a) because DeCosta did not receive leave of the court. The court granted appellees' motion to strike DeCosta's counterclaim and third-party complaint. The court also awarded appellees attorneys' fees as sanctions and subsequently denied DeCosta's motion for reconsideration. DeCosta argues that the trial court's dismissal of his counterclaim and third-party complaint was in error.
¶ 61 DeCosta now contends that, pursuant to Ariz. R. Civ. P. 15(a), he had a right to file the new responsive pleading of his choice without prior leave of the court when he was served with appellees' first amended complaint. Rule 15(a)(2) provides that a party must respond to an amended pleading within ten days after service of such pleading. DeCosta claims that, notwithstanding his previous answer's lack of a counterclaim or third-party complaint, he was entitled to plead de novo in answer to the first amended complaint without leave of court. He primarily relies on Campbell v. Deddens, in which Division Two of this court stated that "[w]here a complaint is amended in a material way . . . a defendant has a right to plead de novo to the amended complaint and such right is one of which he cannot be deprived." 21 Ariz. App. 295, 297, 518 P.2d 1012, 1014 (1974). Although this statement supports DeCosta's argument, the facts and procedural history in Campbell are distinguishable from the instant case.
¶ 62 In Campbell, the plaintiff filed a complaint in Cochise County alleging that the defendant had wrongfully refused to issue a driver's license to him. With leave of court, the plaintiff amended his complaint to additionally allege a breach of duty owed to the plaintiff for which monetary damages were requested. Before expiration of the time to answer the amended complaint, the defendant moved for a change of venue to Maricopa County. The trial court ruled that the motion for change of venue was not timely because the defendant had already filed an answer to the original complaint. In holding that the motion was timely, Division Two held:
When [plaintiff] filed an amended complaint, such pleading superseded his original complaint which then became functus officio [citations omitted]. Since the amended complaint took the place of the original, all subsequent pleadings are based on the amended complaint [citations omitted]. Consequently, [defendant's] answer to the amended complaint became his first responsive pleading to the merits of [plaintiff's] claim even though [defendant] had responded to the original complaint [citations omitted].
21 Ariz. App. at 297, 518 P.2d at 1014.
¶ 63 The purpose of the Campbell rule is to ensure that a plaintiff may not pursue two complaints in the same action and also that the plaintiff can proceed based on the defendant's one answer. See Mohave Concrete and Materials, Inc. v. Scaramuzzo, 154 Ariz. 28, 30, 739 P.2d 1345, 1347 (App. 1987). However, the doctrine in Campbell does not resolve whether a defendant has a right, without leave of court, to plead a counterclaim for the first time in an answer to an amended complaint that, unlike the amended complaint in Campbell, does not amend the original complaint in a material way. We believe that, under the facts of this case, the answer is no.
¶ 64 DeCosta is correct in stating that Rule 15(a) does not by its terms limit the issues that can be alleged in response to an amended pleading. However, the rule does state that the pleading must be "in response to [the] amended pleading." In addition, a pleader must seek leave of court under Rule 13(f) to assert counterclaims that were omitted from the original pleading, or under Rule 13(e) for those that matured after the original pleading, or under Rule 15(d) for those that arise out of more recent transactions or occurrences. Given this treatment of counterclaims, DeCosta did not have a right to assert counterclaims in his amended answer to the same extent he did in his original answer. See Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706, 713 (S.D.N.Y. 1982). This result is especially compelling given that, unlike Campbell, appellees' first amended complaint was based on the identical transactions that were the subject matter of the original complaint and did not subject DeCosta to any different or increased liability. Although DeCosta clearly had a right to respond to the claims in the first amended complaint pursuant to Rule 15(a)(2), he was required to obtain prior leave of court to amend his original answer and assert a new counterclaim.
¶ 65 Our research uncovered one case from another jurisdiction dealing with an analogous issue and supporting DeCosta's argument. In Joseph Bancroft Sons Co. v. M. Lowenstein Sons, Inc., 50 F.R.D. 415 (D. Del. 1970), the defendant was granted leave to amend its counterclaims. The plaintiff then filed a reply to the defendant's amended pleading and, without seeking leave to amend its own complaint, asserted three new claims of its own. The court denied the defendant's motion to strike the plaintiff's new claims, and said that "[s]ince the amending pleader [the defendant] chooses to redo his original work, . . . he can hardly be heard to complain that claims filed against him are improper because they should have been asserted in response to his original pleading." 50 F.R.D. at 419. However, the court also commented:
Justice would not be served by striking the counterclaims; serious questions of res judicata would arise from the failure to present them here; and their trial in a separate action would only duplicate much of what will happen here. No prejudice to defendant appears, and no claim of surprise is made.
Id. Other courts considering cases factually similar to Joseph Bancroft have reached the contrary conclusion. See Owens-Illinois, Inc. v. Lake Shore Land Co., Inc., 610 F.2d 1185 (3rd Cir. 1979); Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706 (S.D.N.Y. 1982). We agree with appellees here that DeCosta could not file his counterclaim without leave of court.
¶ 66 DeCosta did orally move for leave to amend his answer at the hearing on appellees' motion to strike his counterclaim and third-party complaint, and the trial court denied the motion. Although leave to amend is to be freely given, the trial court has broad discretion to allow or deny an amended pleading. See Romo v. Reyes, 26 Ariz. App. 374, 375, 548 P.2d 1186, 1187 (1976). Rule 13(f) provides that "[w]hen a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice so requires, he may by leave of court set up the counterclaim by amendment." DeCosta's oral motion for leave to amend to set up his counterclaim failed to state any of the grounds provided in the rule concerning why the counterclaim was previously omitted. Additionally, DeCosta argues that his proposed counterclaim was not compulsory because it did not arise from the same transactions that were the subject of appellees' complaint but rather from the foreclosure that occurred many years after the sale of the partnership units. If DeCosta is correct, he would not be precluded from raising his claim later in a separate action. We conclude that the trial court did not abuse its discretion in denying DeCosta's oral motion to amend.
¶ 67 The trial court also did not err in striking DeCosta's third-party complaint in which he sought to recover against HV19 and other limited partners for the sums he loaned to the partnership. Rule 14(a) governs the procedure for allowing a defendant to file a third-party complaint:
14(a) When defendant may bring in third party . . . The third-party plaintiff need not obtain leave to make service if the third party plaintiff files the third-party complaint not later than 10 days after serving the original answer. Otherwise the third-party plaintiff must obtain leave on motion upon notice to all parties to the action. . . . Any party may move to strike the third-party claim.
Because DeCosta filed his third-party complaint eight months after filing his original answer, the court properly struck it. As discussed earlier, because the first amended complaint did not materially amend the original, DeCosta was not entitled to plead de novo. The court also did not abuse its discretion in denying DeCosta's subsequent oral motion to obtain leave to file the third-party complaint given its late date.
¶ 68 As mentioned above, in addition to granting appellees' motion to strike DeCosta's counterclaim and third-party complaint, the trial court also granted appellees' request for attorneys' fees as sanctions pursuant to Ariz. R. Civ. P. 11. The court subsequently awarded appellees $6,000 against DeCosta, DeCosta's trial attorney, Richard Brooks, and Jamison, jointly and severally. DeCosta and Brooks both appeal these sanctions.
¶ 69 Shortly after DeCosta filed his counterclaim, crossclaim and third-party complaint, Jamison filed an answer, representing himself as being the "Managing General Partner" of HV19 and admitting on behalf of HV19 each and every allegation of the counterclaim, crossclaim and third-party complaint. Appellees moved to strike Jamison's answer as violating A.R.S. section 29-209(c)(4) (1998), which prevents a general partner from confessing judgment on behalf of the partnership unless authorized by the other partners. DeCosta at first opposed appellees' motion to strike Jamison's answer but later abandoned this opposition. However, DeCosta did not abandon his position regarding Jamison's answer on behalf of the partnership until after appellees filed their motion.
¶ 70 In moving for sanctions against DeCosta, his counsel and Jamison, appellees argued that there was no factual or legal basis for the counterclaim, the third-party complaint, or Jamison's answer and implied that Jamison and DeCosta were in collusion to impose liability on appellees for the partnership debts. Appellees also argued that DeCosta's pleadings were an attempt to unnecessarily expand and delay the proceedings and that most of the third-party defendants named other than the partnership had previously been dismissed from the case with prejudice.
¶ 71 We review orders imposing Rule 11 sanctions for an abuse of discretion. See James, Cooke Hobson, Inc. v. Lake Havasu Plumbing Fire Protection, 177 Ariz. 316, 319, 868 P.2d 329, 332 (App. 1993). In its minute entry and subsequent order awarding the sanctions against DeCosta and Brooks, the trial court adopted the reasons set forth in appellees' motions. In later specifying the amount of fees awarded, the trial court noted that the award of sanctions had been made because of DeCosta's failure to seek leave of the court prior to filing the third-party complaint, which had the effect of unreasonably attempting to expand or delay the proceedings.
¶ 72 Under Rule 11, a lawyer's signature on a pleading or other document constitutes certification that, to the best of the signer's knowledge, the pleading is well grounded in fact, is warranted by existing laws, and is not interposed "to harass or to cause unnecessary delay or needless increase in the cost of litigation." Ariz. R. Civ. P. 11(a). In order to justify its conclusion that a party's claims or defenses are frivolous, the trial court must make specific findings. See Wells Fargo Credit Corp. v. Smith, 166 Ariz. 489, 497, 803 P.2d 900, 908 (App. 1990). No such specific findings were made here.
¶ 73 We agree with DeCosta that, given the interplay of Rules 15 and 13, as well as the Campbell case, he had a rational basis on which to conclude that he had a right to plead de novo following appellees' amended complaint. The purpose of Rule 11 is not to penalize counsel for advocating the losing, but fairly debatable, side of a complex procedural issue. Therefore, the trial court abused its discretion in awarding the sanctions based on DeCosta's filing of the counterclaim and third-party complaint without prior leave of court. The sanctions against DeCosta and Brooks are reversed.
CONCLUSION
¶ 74 For the reasons set forth above, we affirm the trial court's judgment in favor of appellees as well as the court's denial of DeCosta's post-trial motions. We reverse the sanctions imposed against DeCosta and Brooks in the amount of $6,000 and we grant appellees' request for attorneys' fees on appeal under A.R.S. section 12-341.01(A).
___________________________________ Rudolph J. Gerber, Presiding Judge Department A
CONCURRING:
_______________________________ Noel Fidel, Judge
_______________________________ Sarah D. Grant, Judge