Cornerstone v. Kozub

NOTICE: NOT FOR PUBLICATION.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

CORNERSTONE BANK, a North Dakota corporation,
Plaintiff/Appellee-Cross Appellant,

v.

KOZUB HOLDINGS LLC, an Arizona limited liability corporation;
WILLIAM A. KOZUB, an individual,
Defendants/Appellants-Cross Appellees.

No. 1 CA-CV 13-0355
FILED 11-10-2014

Appeal from the Superior Court in Maricopa County
No. CV2012-010521
The Honorable Michael J. Herrod, Judge

AFFIRMED IN PART; VACATED IN PART AND REMANDED

COUNSEL

Berens, Kozub, Kloberdanz & Blonstein, PLC, Scottsdale
By William A. Kozub, Michael T. DePaoli
Counsel for Defendants/Appellants-Cross Appellees

Stinson Morrison Hecker LLP, Phoenix
By Steven H. Williams, Craig A. Morgan, Sharon W. Ng
Counsel for Plaintiff/Appellee-Cross Appellant
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Decision of the Court

MEMORANDUM DECISION

Judge Samuel A. Thumma delivered the decision of the Court, in which
Presiding Judge Margaret H. Downie and Judge Andrew W. Gould
joined.

T H U M M A, Judge:

¶1 William A. Kozub and Kozub Holdings, LLC (collectively
Defendants) challenge the superior court’s imposition of $5,000 in
sanctions under Arizona Revised Statutes (A.R.S.) section 12-349 (2014).1
Cornerstone Bank (Cornerstone) cross-appeals, alleging the superior court
was required to award it reasonable attorneys’ fees after sanctioning
Defendants under A.R.S. § 12-349. Because the superior court properly
imposed sanctions against Defendants, Cornerstone had a right to an
award of reasonable attorneys’ fees. Accordingly, the order and resulting
judgment are affirmed in part, vacated in part and remanded for further
proceedings.

FACTS AND PROCEDURAL HISTORY

¶2 In July 2012, Cornerstone initiated this case by filing a
verified complaint seeking a temporary restraining order (TRO) and
injunctive relief to enjoin Defendants from proceeding with trustee sales
of 11 parcels of real property in North Dakota that were alleged to have
been fraudulently transferred. After notice to Defendants, the superior
court issued the TRO and then, after various filings and oral argument,
reaffirmed the TRO in August 2012. Following an evidentiary hearing,
where Mr. Kozub testified, the court issued Cornerstone’s requested
preliminary injunction.

¶3 Defendants filed an answer to Cornerstone’s complaint,
personally verified by Mr. Kozub, pleading a lack of knowledge as to the
truth of numerous factual allegations in Cornerstone’s complaint. Along
with being a named defendant and the sole member of defendant Kozub

1Absent material revisions after the relevant dates, statutes and rules cited
refer to the current version unless otherwise indicated.

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Holdings, LLC, Mr. Kozub also was counsel for Defendants in the
superior court.

¶4 In December 2012, based on Defendants’ conduct in this
case, Cornerstone filed a motion for sanctions and attorneys’ fees under
A.R.S. § 12-349(A)(1) and (A)(3).2 Among other things, Cornerstone
alleged that Defendants’ actions required Cornerstone “to spend many
hours and thousands of dollars” in litigation because Defendants “pressed
forward, unreasonably expanding these proceedings by forcing
[Cornerstone] to chip away at a false facade to uncover the truth.” After
considering voluminous filings and oral argument, the superior court
issued a lengthy order detailing Defendants’ conduct and concluded that
Defendants’ “misleading representations” were sanctionable. As a result,
the court imposed $5,000 in sanctions against Defendants and in favor of
Cornerstone under A.R.S. § 12-349, but denied Cornerstone’s request for
attorneys’ fees as “being without statutory basis.”

¶5 At Cornerstone’s request, the superior court entered a partial
judgment reflecting these rulings. See Ariz. R. Civ. P. 54(b). This court has
jurisdiction over Defendants’ timely appeal and Cornerstone’s cross-
appeal pursuant to Article 6, Section 9, of the Arizona Constitution and
A.R.S. § 12-2101(A)(1).

DISCUSSION

¶6 Defendants challenge the superior court’s imposition of
sanctions under A.R.S. § 12-349, while Cornerstone argues the court was
required to award it attorneys’ fees after sanctioning Defendants under
the same statute. The court addresses these arguments in turn.

I. The Superior Court Properly Imposed Sanctions Against
Defendants Under A.R.S. § 12-349(A)(3).

¶7 In substance, Defendants make three arguments challenging
the imposition of sanctions under A.R.S. § 12-349: (1) that the superior
court did not make findings required by A.R.S. § 12-350; (2) that the
findings the court did make lack record support; and (3) that the court’s

2Although Cornerstone also sought sanctions under Arizona Rule of Civil
Procedure 11(a), the superior court did not impose sanctions on that basis.

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sanction amount was arbitrary and violated the statute.3 This court
reviews the imposition of sanctions for an abuse of discretion, viewing
“the evidence in a manner most favorable to sustaining the award and
affirm[ing] unless the trial court’s finding . . . is clearly erroneous.” Phoenix
Newspapers, Inc. v. Dep’t of Corr., 188 Ariz. 237, 243, 934 P.2d 801, 807 (App.
1997). This court will affirm the superior court’s ruling “if it is correct for
any reason apparent in the record.” Forszt v. Rodriguez, 212 Ariz. 263, 265 ¶
9, 130, P.3d 538, 540 (App. 2006). This court reviews the construction of a
statute de novo. See Phoenix Newspapers, 188 Ariz. at 244, 934 P.2d at 808.

¶8 In addressing Defendants’ arguments, this court examines
the superior court’s award of sanctions under A.R.S. § 12-349(A)(3), which
does not involve a review of the merits of the underlying litigation. See
Hamm v. Y & M Enters., 157 Ariz. 336, 338, 757 P.2d 612, 614 (App. 1988)
(sanctions awarded under A.R.S. § 12-349(A)(3) are “not linked to a
decision on the merits” and, instead, based on review of “the course of the
proceedings and the conduct of the parties”). Accordingly, this court need
not, and expressly does not, address Defendants’ arguments under A.R.S.
§ 12-349(A)(1).

A. The Superior Court Made Appropriate Findings.

¶9 Defendants first argue that the superior court did not make
the necessary findings to support sanctions under A.R.S. § 12-349.
Specifically, Defendants argue that “[u]nder A.R.S. § 12-350, the trial court
is required to set down the specific reasons for making any award of
sanctions under A.R.S § 12-349.” By statute, “[i]n awarding attorney fees
pursuant to [A.R.S. §] 12-349, the court shall set forth the specific reasons
for the award.” A.R.S. § 12-350 (emphasis added). Although A.R.S. § 12-
350 requires a recitation of “the specific reasons” in awarding attorneys’
fees under A.R.S. § 12-349, there is no similar requirement for imposing
double damages (sanctions) under A.R.S. § 12-349. Here, the superior court
did not award attorneys’ fees, meaning the “specific reasons” requirement
in A.R.S. § 12-350 was not implicated. Accordingly, the predicate for
Defendants’ challenge to the superior court’s findings—that the court was

3Defendants make other arguments that are not supported by either legal
authority or record citations, which this court does not address. See, e.g.,
Ariz. R. Civ. App. P. 13(a)(6); State v. 1810 E. Second Ave., 193 Ariz. 1, 2 n.2,
969 P.2d 166, 167 n.2 (App. 1997) (holding appellate court will not
consider assertions unsupported by citation to the record).

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required by A.R.S. § 12-350 to identify “the specific reasons” for imposing
sanctions under A.R.S. § 12-349—is lacking.

¶10 Where “specific reasons” are required (when awarding
attorneys’ fees under A.R.S. § 12-349), such reasons “need only be specific
enough to allow an appellate court ‘to test the validity of the judgment.’”
Phoenix Newspapers, 188 Ariz. at 243, 934 P.2d at 807 (App. 1997) (quoting
Miller v. Bd. of Supervisors of Pinal Cnty., 175 Ariz. 296, 299, 855 P.2d 1357,
1360 (1993)). While A.R.S. § 12-350 requires specific reasons for such an
award, it “mandates no particular form for these findings.” Id.

¶11 Even assuming the “specific reasons” requirement of A.R.S.
§ 12-350 applies to the imposition of sanctions under A.R.S. § 12-349, the
superior court’s order provides those reasons. The court included five
single-spaced pages of findings describing Defendants’ actions resulting
in the imposition of sanctions. In those five pages, the superior court
found at least seven different, specific instances in which Defendants
made “misleading representations,” “misled the Court” or “ignore[d] [its]
actual knowledge” in its pleadings. These findings are more than
adequate to allow this court to test the validity of the judgment. Cf. State v.
Richey, 160 Ariz. 564, 565, 774 P.2d 1354, 1355 (1989) (stating superior
court’s only finding that defense presented frivolous allegations did not
constitute sufficient findings to support sanctions). Thus, the court made
sufficient findings in imposing sanctions pursuant to A.R.S. § 12-349. See
Phoenix Newspapers, 188 Ariz. at 243, 934 P.2d at 807.

B. The Superior Court’s Findings Are Supported By The
Record.

¶12 Defendants argue the superior court could not have found,
based on the record, that Defendants “[u]nreasonably expand[ed] or
delay[ed] the proceeding,” as required by A.R.S. § 12-349(A)(3). “Under §
12-349(A)(3), the relevant question is whether a party’s (or attorney’s)
actions caused unreasonable delay and expansion of the proceedings.”
Solimeno v. Yonan, 224 Ariz. 74, 81, 227 P.3d 481, 488 (App. 2010). The
superior court’s factual findings are fully supported by the record. Several
examples prove the point.

¶13 Nearly two months after filing the verified complaint,
Cornerstone withdrew its request for an injunction for one parcel
“because – contrary to Defendants’ written and oral representations to the
Court about ownership and damages should an injunction issue –
Cornerstone just learned from a third-party that Defendants stipulated to

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forfeit their rights to the Parcel, by judgment, over five months ago,” yet failed
to notify Cornerstone and the superior court of that fact. In addressing this
aspect of Cornerstone’s request for sanctions, the superior court found
Defendants “were the parties that had the accurate information at hand,
and did not bring that forward” and Defendants’ lack of candor in
pleadings and during oral argument “[did] not appear to be an oversight.”
This finding is fully supported by the record.

¶14 As another example, the superior court found that
Defendants’ answer, personally verified by Mr. Kozub, “pleads precisely
where it benefits Defendants, and imprecisely where it does not; without
regard to what [Mr. Kouzb’s] actual knowledge is.” In one instance, the
answer pleaded a lack of knowledge and information sufficient to form a
belief as to the allegation that a trust Mr. Kozub’s firm represented
entered a settlement agreement that Mr. Kozub himself had reviewed
before the agreement was signed. The answer also claimed a lack of
knowledge about whether Defendants had noticed trustee sales on parcels
and deeds of trust listed with specificity in Cornerstone’s complaint. As
the superior court noted “[i]f [Defendants] did not know, who did?”
Again, this finding is fully supported by the record.

¶15 Similarly, the superior court found it “inconceivable that Mr.
Kozub was not aware of the representation” in the North Dakota litigation
where his firm was counsel of record, and further found Defendants’
alleged lack of knowledge “displays a lack of candor towards the
tribunal.” Among other things, the court found that Defendants “were the
parties that had the accurate information at hand, and did not bring that
forward in the Response or at oral argument” and “obscured the facts”
about an alleged deal to foreclose on certain properties in North Dakota.
All of these findings are fully supported by the record.

¶16 After discussing these and other specific examples, the
superior court concluded that “Defendants and Mr. Kozub repeatedly
blur the lines between Mr. Kozub, Mr. Kozub’s clients, his firm, and
Kozub Holdings.” Such conduct by Defendants supports Cornerstone’s
assertion that Defendants “unreasonably expanded” the proceedings and
caused Cornerstone “to spend many hours and thousands of dollars” as a
result. The record amply supports the superior court’s findings and
imposition of sanctions under A.R.S. § 12-349(A)(3). See Bennett v. Baxter
Group, Inc., 223 Ariz. 414, 422 ¶¶ 31–32, 224 P.3d 230, 238 (App. 2010)
(finding that, after viewing the evidence in a manner most favorable to
sustaining the award, the superior court reasonably could have found
record-supported sanctions under A.R.S. § 12-349).

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C. The Superior Court Did Not Err In The Amount Of
Sanctions Imposed.

¶17 Citing Bennett, Defendants argue the amount of sanctions
imposed was arbitrary and violated A.R.S. § 12-349. The Bennett court,
however, found that attorneys’ fees awarded must be confined to the
specific issues that gave rise to the sanctions. See 223 Ariz. at 422 ¶¶ 31–32,
224 P.3d at 238. Here, no attorneys’ fees were awarded and thus the
proposition cited from Bennett does not apply.

¶18 Defendants also cite Bennett for the proposition that
damages must be shown before sanctions can be imposed. Although
Bennett vacated an attorneys’ fees award because some of those fees were
not attributable to the sanctionable conduct, that court affirmed a sanction
award imposing $4,000 in damages. See id. at 422 ¶¶ 34–35, 224 P.3d at
238. Thus, Defendants’ argument that “the trial court may award fees and
expenses as damages arising from the conduct described in the four
subsections, and these damages may be doubled” is not supported by
Bennett or any other authority offered. See id. Therefore, the superior court
did not err in imposing $5,000 in sanctions under A.R.S. § 12-349(A)(3).

II. Because Sanctions Were Properly Imposed On Defendants Under
A.R.S. § 12-349(A)(3), Cornerstone Was Entitled To An Award Of
Reasonable Attorneys’ Fees.

¶19 Cornerstone’s cross-appeal challenges the superior court’s
order denying an award for attorneys’ fees under A.R.S. § 12-349(A) when
the court had imposed sanctions against Defendants. In response,
Defendants argue the cross-appeal “evidences extreme bad faith” by
Cornerstone and constitutes “an intentional misreading of the words in
A.R.S. § 12-349.” Contrary to Defendants’ argument, the plain language of
A.R.S. § 12-349(A) shows that Cornerstone is entitled to an award of
reasonable attorneys’ fees.

¶20 As applied, the statute provides that, “if the attorney or
party . . . [u]nreasonably expands or delays the proceeding,” the superior
court “shall assess reasonable attorney fees, expenses and, at the court’s
discretion, double damages of not to exceed five thousand dollars.” A.R.S.
§ 12-349(A)(3) (emphasis added). Under this portion of A.R.S. § 12-349,
“the fee award is mandatory. The judge must award fees” where factually
supported. Phoenix Newspapers, 188 Ariz. at 243, 934 P.2d at 807; see also
Democratic Party v. Ford, 228 Ariz. 545, 548 ¶10, 269 P.3d 721, 724 (App.
2012) (stating if party makes showing required by A.R.S. § 12-349, “the

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award of attorney fees becomes mandatory”); City of Casa Grande v. Ariz.
Water Co., 199 Ariz. 547, 555 ¶27, 20 P.3d 590, 598 (App. 2001) (noting
A.R.S. § 12-349(A) “mandates an award of attorney’s fees if a party”
violates the statute). Having found Defendants’ actions warranted
sanctions, the superior court was statutorily required to award
Cornerstone reasonable attorneys’ fees. Therefore, the order denying
Cornerstone reasonable attorneys’ fees is vacated.

III. Attorneys’ Fees On Appeal.

¶21 Defendants request taxable costs and attorneys’ fees on
appeal. Because Defendants are not the prevailing parties, their request is
denied.

¶22 Cornerstone requests taxable costs and attorneys’ fees on
appeal pursuant to A.R.S. § 12-349 for Defendants’ arguments on appeal
and Defendants’ response to Cornerstone’s cross-appeal. Having
prevailed, Cornerstone is awarded its taxable costs on appeal contingent
upon compliance with Arizona Rule of Civil Appellate Procedure 21.
Turning to Cornerstone’s request for attorneys’ fees, although rejecting the
merits of Defendants’ appeal, this court does not find Defendants’
arguments on appeal were wholly “without substantial justification.”
A.R.S. § 12-349(A)(1); see also A.R.S. § 12-349(F). The arguments
Defendants made in response to Cornerstone’s cross-appeal, however,
were without substantial justification.

¶23 Contrary to Defendants’ argument that the cross-appeal “is
nothing more than an intentional misreading of the words in A.R.S. § 12-
349,” the plain language of that statute required the superior court to
assess reasonable attorneys’ fees in favor of Cornerstone and against
Defendants. Defendants cite no authority supporting their argument on
the cross-appeal. Given the statutory language stating “the court shall
assess reasonable attorney fees” if sanctions are assessed, A.R.S. § 12-350
(emphasis added), Defendants’ argument on the cross-appeal is
groundless and not made in good faith. Accordingly, in exercising its
discretion and as a sanction, this court awards Cornerstone its reasonable
attorneys’ fees incurred in responding to Defendants’ arguments in
response to Cornerstone’s cross-appeal, contingent upon compliance with
Arizona Rule of Civil Appellate Procedure 21.

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CONCLUSION

¶24 That portion of the order and resulting judgment denying
Cornerstone’s request for reasonable attorneys’ fees under A.R.S. § 12-
349(A)(3) is vacated and this matter is remanded to the superior court for
further proceedings not inconsistent with this memorandum decision. In
all other respects, the order and resulting judgment are affirmed.

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