Austin v. W. Surprise

NOTICE: NOT FOR PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

AUSTIN RANCH UTILITIES COMPANY; AUSTIN RANCH LLC; and
COURTLAND CAPITAL, LLC, Plaintiffs/Appellants,

v.

WEST SURPRISE LANDOWNERS GROUP, LLC; TAYLOR MORRISON
ARIZONA, INC. fka TAYLOR WOODROW/ARIZONA, INC.;
MANAGEMENT 317 LLC; SURPRISE FOOTHILLS MASTER LLC;
CENTEX HOMES; SS ASSEMBLAGE LLC; FRI SURPRISE 398 LLC and
FRI SURPRISE ASSEMBLAGE, LLC, Defendants/Appellees.

No. 1 CA-CV 13-0585
FILED 09-25-2014

Appeal from the Superior Court in Maricopa County
CV2011-005485
The Honorable Arthur T. Anderson, Judge

AFFIRMED

COUNSEL

Osborn Maledon PA, Phoenix
By William J. Maledon, Maureen Beyers, Chelsea Sage Gaberdiel
Counsel for Plaintiffs/Appellants
Perkins Coie LLP, Phoenix
By Joseph E. Mais, Joel W. Nomkin, Colin P. Ahler
Counsel for Defendants/Appellees West Surprise Landowners Group LLC, Taylor
Morrison Arizona Inc., and Surprise Foothills Master LLC, and
Co-Counsel for Defendant/Appellee Management 317 LLC

Moyes Sellers & Hendricks, Phoenix
By Keith L. Hendricks
Co-Counsel for Defendant/Appellee Management 317 LLC

Fennemore Craig PC, Phoenix
By Kevin J. Bonner
Counsel for Defendant/Appellee Centex Homes

Poli & Ball PLC, Phoenix
By Michael N. Poli, Jeffrey G. Zane
Counsel for Defendant/Appellee SS Assemblage LLC

Rader Lucero PLLC, Phoenix
By Richard J. Trujillo
Counsel for Defendants/Appellees FRI Surprise 398 LLC and FRI Surprise
Assemblage LLC

MEMORANDUM DECISION

Presiding Judge Patricia A. Orozco delivered the decision of the Court, in
which Judge Randall M. Howe and Judge Maurice Portley joined.

O R O Z C O, Judge:

¶1 Austin Ranch Utilities Company, Austin Ranch, LLC, and
Courtland Capital LLC (collectively Austin Ranch) appeal from an order
dismissing with prejudice Count 4 of Austin Ranch’s first amended
complaint and awarding attorney fees and costs in favor of West Surprise
Landowners Group LLC (West Surprise), Centex Homes, SS Assemblage
LLC, Management 317 LLC, Surprise Foothills Master LLC, FRI Surprise
398 LLC, and FRI Surprise Assemblage LLC (collectively Appellees).
Because Austin Ranch cannot establish that Appellees lacked probable
cause for initiating the underlying action, we affirm the dismissal of Count
4 and the award of attorney fees and costs.

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FACTS AND PROCEDURAL HISTORY

¶2 This appeal arises from a dispute between the parties
surrounding the construction of a wastewater treatment facility (the Plant)
in the City of Surprise. Six landowners and home developers (Owners)
entered into a joint development agreement (JDA) to build the Plant in late
2005. In accordance with the JDA, the Owners appointed Austin Ranch
Utilities Company as the coordinator of the project (the Coordinator) to
oversee and direct the Plant’s construction.

¶3 After the construction’s design phase ended, the Coordinator
evaluated the housing market’s declining economic conditions and
concluded that immediately constructing the Plant would be imprudent.
Accordingly, the Coordinator wrote the Owners requesting their
development plans before giving the construction company “notice to
proceed with sewer improvements.” The Coordinator later told the
Owners that “current market conditions and other factors” had caused a
majority of the Owners to delay the development and construction of their
respective projects. The Coordinator also informed the Owners that the
Plant construction company would not receive a notice to proceed with
construction (Notice to Proceed).

¶4 West Surprise disagreed with the Coordinator’s decision and
urged the Coordinator to promptly issue a Notice to Proceed, arguing that
no individual Owner had the “right to unilaterally terminate” the JDA and
that terminating the JDA required a mutual and unanimous decision by the
Owners. West Surprise also pointed to the JDA, which provided that by
accepting the JDA’s terms, each Owner “waives any right to affect, impair
or delay construction of any of [the Plant], to endeavor to stop work
thereon, to endeavor to obtain an injunction or stop order or any similar
matter.” The JDA also stated that each owner,

[A]cknowledges that to stop work would cause great harm to
all other Owners which is not necessarily susceptible to
answer in damages, and therefore waives any such right to
stop work. Each Owner shall have the immediate right to
injunctive relief against any Owner which endeavors to stop
work hereunder.”

¶5 West Surprise filed an arbitration demand (First Arbitration)
in January 2007, alleging that the Coordinator violated the JDA by not
issuing a Notice to Proceed. Following an arbitration hearing, the arbitrator
ruled in favor of West Surprise, requiring in part that: (1) the Coordinator

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issue a Notice to Proceed with construction of the Plant within thirty days;
(2) construction of the Plant commence “with all due haste;” (3) Austin
Ranch complete the Plant’s construction by August 29, 2008, and bear all
additional construction costs in excess of the $580,000 escrowed by the
Owners; (4) Austin Ranch reimburse West Surprise for its attorney fees and
all arbitration fees; and (5) appointing the arbitrator the sole decision maker
for all future disputes arising under the JDA. Austin Ranch and the
Coordinator complied with the Arbitration Award and the Plant was
substantially completed by October 2008.

¶6 During the Plant’s construction, Austin Ranch filed an
Application to Vacate the Arbitration Award in the trial court, which was
granted in June 2008. In vacating the arbitration award, the trial court
found that: (1) the arbitrator “ruled in advance on a host of issues that were
not presented and were not part of the evidence;” (2) an “arbitrator may not
settle on an interpretation of a contract that ‘so directly contradicts the plain
meaning of the parties’ agreement that it effectively rewrites it;” and (3) the
trial court’s order “in no way constitutes a decision on the merits of any
portion of the underlying dispute, much of which may have been correctly
decided.” This court affirmed the trial court’s order of vacatur in Austin
Ranch, L.L.C. et al. v. West Surprise Landowners Group, L.L.C., 1 CA-CV 08-
0837, 2010 WL 363830, at *1, ¶ 1 (Ariz. App. Feb. 2, 2010) (mem. decision).

¶7 Austin Ranch commenced a second action in March 2010 to
recover alleged damages sustained in the First Arbitration and to seek a
declaratory judgment establishing the rights and obligations of the parties.
After the trial court granted Austin Ranch’s motion to compel arbitration as
to West Surprise, the parties agreed to litigate the action before the trial
court. Austin Ranch’s first amended complaint asserted four claims: (1)
declaratory judgment against West Surprise, (2) breach of contract against
West Surprise, (3) unjust enrichment against West Surprise, and (4) bad
faith prosecution of arbitration against all defendants (malicious
prosecution claim or Count 4).

¶8 Appellees moved to dismiss Count 4 under Arizona Rule of
Civil Procedure (Rule) 12(b)(6), which the trial court granted. Judgment
was entered solely on Count 4 with Rule 54(b) language. The trial court
also awarded attorney fees under Arizona Revised Statutes (A.R.S.) section
12-341.01 (West 2014)1 to West Surprise for $69,442, to Centex Homes for
$67,320 and to SS Assemblage LLC for $3,376. Austin Ranch timely

1 We cite the current version of applicable statutes when no revisions
material to this decision have since occurred.

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appealed, and we have jurisdiction under Article 6, Section 9, of the Arizona
Constitution, and A.R.S. §§ 12-120.21.B (West 2014) and -2101.A.1 (West
2014).

DISCUSSION

¶9 We review de novo a complaint’s dismissal under Rule
12(b)(6). Coleman v. City of Mesa, 230 Ariz. 352, 355, ¶ 7, 284 P.3d 863, 866
(2012). “Dismissal is appropriate under Rule 12(b)(6) only if ‘as a matter of
law [] plaintiffs would not be entitled to relief under any interpretation of
the facts susceptible of proof.’” Id. at 356, ¶ 8, 284 P.3d at 867 (quoting Fid.
Sec. Life Ins. Co. v. State, Dep’t of Ins., 191 Ariz. 222, 224, ¶ 4, 954 P.2d 580,
582 (1998)). Although matters outside the pleading may not be considered
without converting a Rule 12(b)(6) motion to a summary judgment motion,
a trial court may consider “[a] complaint’s exhibits, or public records
regarding matters referenced in a complaint” in ruling on a Rule 12(b)(6)
motion. Coleman, 230 Ariz. at 356, ¶ 9, 284 P.3d at 867.

I. The Elements of a Malicious Prosecution Claim2

¶10 Austin Ranch contends its malicious prosecution claim is not
based on West Surprise’s claim that the JDA required immediate
construction of the Plant; rather, they argue it is based on West Surprise’s
damages claim that Austin Ranch argues “had no basis in fact, was asserted
for leverage purposes only, and was later abandoned by Defendants.” We
conclude, however, that damages—as well as injunctive relief—were
remedies sought by West Surprise in its initial demand for arbitration
(Initial Demand) contingent on Austin Ranch’s liability for breach of
contract. During the First Arbitration, the parties agreed that holding the
damages hearing after the Plant’s construction would allow for a more
precise damages award. Therefore, the need for a damages hearing
originated from Austin Ranch’s initial possible breach of contract and

2 Austin Ranch initially argues that this court should recognize a cause
of action for the malicious prosecution of an arbitration and that the trial
court erred by dismissing their claim because it found no such cause of
action recognized in Arizona. We need not decide if a party can bring a
malicious prosecution lawsuit after an arbitration in Arizona because,
under the facts in this case, we affirm the trial court’s finding that West
Surprise had probable cause to bring the arbitration, and, as a result, Austin
Ranch cannot establish a malicious prosecution claim as a matter of law.

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cannot be separated as a different proceeding for the purposes of a later
malicious prosecution claim.

¶11 Establishing a cause of action for malicious prosecution of a
civil proceeding requires a plaintiff to demonstrate that the defendant “(1)
instituted a civil action which was (2) motivated by malice, (3) begun [or
maintained] without probable cause, (4) terminated in plaintiff’s favor and
(5) damaged plaintiff.” Chalpin v. Snyder, 220 Ariz. 413, 418–19, ¶ 20, 207
P.3d 666, 671–72 (App. 2008) (quoting Bradshaw v. State Farm Mut. Auto. Ins.
Co., 157 Ariz. 411, 416–17, 758 P.2d 1313, 1318–19 (1988)). In this case, the
trial court and the parties focused on whether probable cause existed for
West Surprise’s underlying damages claim and whether the underlying
action terminated in Austin Ranch’s favor. Because the question of
probable cause is dispositive, we need not reach the other elements.

II. Probable Cause Existed for West Surprise’s Underlying Damages
Claim

¶12 “The failure to establish a lack of probable cause is a complete
defense to an action for malicious prosecution.” Carroll v. Kalar, 112 Ariz.
595, 596, 545 P.2d 411, 412 (1976). Austin Ranch asserts that the trial court
erred in holding that probable cause existed for West Surprise’s underlying
damages claim.

¶13 “Whether a given set of facts constitutes probable cause is
always a question of law to be determined by the court.” Chalpin, 220 Ariz.
at 419, ¶ 20, 207 P.3d at 672 (quoting Wolfinger v. Cheche, 206 Ariz. 504, 509,
¶ 25, 80 P.3d 783, 788 (App. 2003); see also Bradshaw, 157 Ariz. at 419, 758
P.2d at 1321) (“If the operative facts are undisputed, the existence of
probable cause is a question of law to be determined solely by the court.”).
In a civil malicious prosecution action, the test for probable cause contains
both a subjective and an objective component. See id. at 417, 758 P.2d at
1319. “The initiator of the action must honestly believe in its possible merits;
and, in light of the facts, that belief must be objectively reasonable.” Id. “[T]he
test is whether the initiator reasonably believes that he has a good chance
of establishing [his case] to the satisfaction of the court or the jury.” Id.
(citing Restatement (Second) of Torts § 120 at 893 (1977)) (internal quotation
marks omitted). Thus, the relevant questions are, at the time West Surprise
filed the First Arbitration, (1) whether West Surprise believed an arbitrator
might find its case meritorious and (2) whether that belief was reasonable.
West Surprise “did not have to be certain it would prevail; rather, it only
had to reasonably believe in the possibility that the [Arbitrator] would find

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its claim valid.” See id. at 418, 758 P.2d at 1320; see also Smith, 173 Ariz. at
294, 842 P.2d at 1307 (“A certainty of success is not required.”).

¶14 We look first to the issue of objective probable cause before
examining the parties’ subjective beliefs. See, e.g., Chaplin, 220 Ariz. at 419,
¶ 21, 207 P.3d at 672. If West Surprise does not, as a matter of law, have an
objectively reasonable basis for the damages claim against Austin Ranch,
then West Surprise is subject to Austin Ranch’s malicious prosecution
claim. See Wolfinger, 206 Ariz. at 513, ¶ 41, 80 P.3d at 792. A reasonable
person test determines “[w]hether the facts in a particular case are sufficient
to constitute probable cause.” Carroll, 112 Ariz. at 596, 545 P.2d at 412. In
making this objective determination, we ask “upon the appearances
presented . . . would a reasonably prudent [person] have instituted or
continued the proceeding?” Wolfinger, 206 Ariz. at 509, ¶ 28, 80 P.3d at 788
(internal alterations omitted).

¶15 In Smith v. Lucia, we adopted the standard used in Arizona
and federal cases interpreting Arizona Rule of Civil Procedure (Rule) 11 to
define this reasonable person test. 173 Ariz. at 297, 842 P.2d at 1310 (“Cases
decided under Rule 11, Federal Rules of Civil Procedure, which is identical
to Rule 11, Arizona Rules of Civil Procedure, are helpful in determining the
standard by which we may measure the reasonableness of an attorney’s
conduct . . . . We conclude that the Rule 11 objective standard should apply
here.”). “Under Rule 11, an attorney violates the objective standard when:
(1) there was no reasonable inquiry into the basis for a pleading or motion;
(2) there was no chance of success under existing precedent; and (3) there
was no reasonable argument to extend, modify, or reverse the controlling
law.” Wolfinger, 206 Ariz. at 510, ¶ 29, 80 P.3d at 789 (quoting Smith, 173
Ariz. at 297, 842 P.2d at 1310). We later clarified that the proper standard
for the second prong of this test was not whether the initiator had “no
chance” of success under existing precedent, but rather whether the
initiator reasonably believed there was a “good chance” of success. Chalpin,
220 Ariz. at 421, ¶¶ 31–32, 207 P.3d at 674.

¶16 From this record, we conclude that West Surprise had
objective probable cause to file its arbitration demand for breach of contract
against Austin Ranch and seek damages. Whether Austin Ranch failed to
perform its contractual obligations is a legitimate basis for a claim that,
notwithstanding the vacated arbitration award, may still result in a finding
that Austin Ranch materially breached the JDA. See, e.g., United Calif. Bank
v. Prudential Ins. Co. of Am., 140 Ariz. 238, 278–79, 681 P.2d 390, 430–31 (App.
1983) (“a statement by a party to a contract that he will perform only in
accordance with his own erroneous interpretation of that contract is a

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repudiation.”). Here, West Surprise’s Initial Demand asserted that the JDA
created obligations of the parties to the JDA to construct the Plant and that
“time [was] of the essence in the performance of each and every obligation
imposed in the JDA.” Yet, the Coordinator delayed the development and
construction of the Plant. Therefore, if Austin Ranch, the Coordinator, did
not meet its obligations under the JDA, then West Surprise had a good
chance of prevailing on its breach of contract claim.

¶17 Finally, the First Arbitration found Austin Ranch breached
the JDA. An adjudication in favor of the party who initiated the prior action
establishes probable cause as a matter of law, even if later vacated. Visco v.
First Nat’l Bank of Ariz., 3 Ariz. App. 504, 508, 415 P.2d 902, 906 (1966).
Therefore, we conclude West Surprise had objective probable cause for
filing its Initial Demand.

¶18 Because West Surprise possessed objective probable cause in
initiating the suit against Austin Ranch, we need not address whether West
Surprise had subjective probable cause. See Wolfinger, 206 Ariz. at 511, ¶34,
80 P.3d at 790. (“[T]he subjective component of a probable cause analysis
in a [civil malicious prosecution] claim does not come into play unless the
claim is not objectively reasonable.”). The existence of probable cause is a
complete defense to Austin Ranch’s action for malicious prosecution, see
Carroll, 112 Ariz. at 596, 545 P.2d at 412, and the trial court did not err by
dismissing Count 4.

III. Attorney Fees

¶19 The trial court awarded attorney fees and costs to Defendants
as the prevailing parties under A.R.S. §§ 12-341 (West 2014) and -341.01. On
appeal, Austin Ranch objects to this attorney fees award. Awarding
attorney fees is within the sound discretion of the trial court. Spector v.
Spector, 17 Ariz. App. 221, 230, 496 P.2d 864, 873 (1972). “We view the facts
in the light most favorable to upholding the trial court’s ruling.”
Hammoudea v. Jada, 222 Ariz. 570, 571, ¶ 2, 218 P.3d 1027, 1028 (App. 2009).
We will not reverse such an award absent an abuse of discretion, and “[w]e
will not disturb the trial court’s discretionary award of fees if there is any
reasonable basis for it.” Rudinsky v. Harris, 231 Ariz. 95, 101, ¶ 27, 290 P.3d
1218, 1224 (App. 2012).

¶20 Austin Ranch first argues that the attorney fees award was
inappropriate because a malicious prosecution claim does not arise out of
contract for purposes of A.R.S. § 12-341.01. Although a contract that merely
“puts the parties within tortious striking range” cannot convert tort claims

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into contract claims, a tort claim may arise out of a contract “when the tort
could not exist ‘but for’ the breach or avoidance of contract.” Ramsey Air
Meds, L.L.C., v. Cutter Aviation, Inc., 198 Ariz. 10, 15–16, ¶ 27, 6 P.3d 315,
320–21 (App. 2000); see also Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529,
543, 647 P.2d 1127, 1141 (1982) (“The fact that the two legal theories are
intertwined does not preclude recovery of attorney’s fees under § 12-
341.01(A) as long as the cause of action in tort could not exist but for the
breach of the contract.”).

¶21 While Austin Ranch’s malicious prosecution claim sounds in
tort, it would not have arisen but for the underlying breach of contract
addressed in the First Arbitration. The First Arbitration solely focused on
whether the JDA was breached. Because the malicious prosecution claim
would not have existed but for the JDA and the First Arbitration’s breach
of contract claim, we affirm the attorney fees award in favor of West
Surprise.

¶22 Austin Ranch next challenges the attorney fees and costs
awards to Centex and SS Assemblage. Although Centex and SS
Assemblage are not Owners and not parties to the JDA, the case that Austin
Ranch filed against Centex and SS Assemblage nonetheless would not exist
but for the JDA. Therefore, an award of attorney fees is appropriate under
A.R.S. § 12-341.01.

¶23 Finding no abuse of discretion, we affirm the attorney fees
award to Appellees. Appellees seek attorney fees and costs on appeal
pursuant to ARCAP 21 and A.R.S. § 12-341.01. In our discretion, we decline
to award attorney fees. However, as the prevailing parties, Appellees are
entitled to their costs upon compliance with ARCAP 21.

CONCLUSION

¶24 For the above stated reasons, we affirm the trial court’s
dismissal of Count 4 and the award of attorney fees and costs to Appellees.

:gsh

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