IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
JUDSON C. BALL REVOCABLE TRUST, Plaintiff/Counter-
Defendant/Appellant,
v.
PHOENIX ORCHARD GROUP I, L.P., et al., Defendants/Counter-Claimants/
Intervenors/Appellees.
No. 1 CA-CV 17-0642
FILED 10-2-2018
Appeal from the Superior Court in Maricopa County
Nos. CV2015-011768
CV2016-000284
(Consolidated)
The Honorable Dawn M. Bergin, Judge
AFFIRMED
COUNSEL
Barrett & Matura P.C., Scottsdale
By Jeffrey Matura, Amanda J. Taylor
Counsel for Plaintiff/Counter-Defendant/Appellant
Freeman Law P.L.L.C., Scottsdale
By Shelton L. Freeman, Jason M. Venditti, Elizabeth C. Heims
Counsel for Defendants/Counter-Claimants/Intervenors/Appellees
J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
OPINION
Presiding Judge Kenton D. Jones delivered the Opinion of the Court, in
which Judge Diane M. Johnsen and Judge Paul J. McMurdie joined.
J O N E S, Judge:
¶1 The Judson C. Ball Revocable Trust (the Trust) challenges the
trial court’s determination that it lacked standing to pursue derivative
claims on behalf of Phoenix Orchard Group I, L.P. and Phoenix Orchard
Group II, L.P. (collectively, POG) after its partnership interests in the
entities were rescinded. In this Opinion, we adopt the continuous
ownership rule, which requires a plaintiff in a derivative action to continue
to possess an interest in the entity on whose behalf it sues throughout the
litigation. Because the Trust no longer has any interest in POG, it lacks
standing to pursue its derivative claims. Accordingly, we affirm the court’s
order dismissing the Trust’s claims.
FACTS AND PROCEDURAL HISTORY
¶2 In 2006, the Trust bought limited partnership interests in
POG. Nine years later, the Trust sued POG and related parties,1 alleging
violations of the Arizona Securities Act. See Ariz. Rev. Stat. (A.R.S.) §§ 44-
18012 to -2126. Within its complaint, the Trust demanded either rescission
of its investments or damages, and tendered the securities to POG. See
A.R.S. § 44-2001(A) (stating a fraudulent sale of securities “is voidable at the
election of the purchaser”). In its answer, POG accepted the tender and
counterclaimed for a declaration that the rescission was valid and complete.
1 These defendants included Roger L. and Jean Ellen Stevenson; John
P. and Lillian J. Norton; John R. and Doris Norton; Stevenson Family
Farming, L.P.; Norton Stevenson Farming, L.P.; Cotton Norton Stevenson
Consulting, Inc.; the Stevenson Family Living Trust Dated 7/11/1997; John
P. Norton as Trustee of the Norton Family Living Trust as Restated
November 15, 2002; and Citrines Operations, Inc.
2 Absent material changes from the relevant date, we cite a statute’s
current version.
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
¶3 In January 2016, the Trust filed a separate limited partnership
derivative action on behalf of POG, alleging other partners and participants
had breached the partnership agreements and the offering documents by
making various payments “that appeared to be not allowed within the
offering documents or partnership agreements.”3 See A.R.S. § 29-356. A
few months later, the trial court approved the rescission of the Trust’s
investment in POG and entered final judgment on the Trust’s fraud claims
in the first case, which was later affirmed by this Court. See Judson C. Ball
Revocable Tr. v. Phx. Orchard Grp. I, L.P., 1 CA-CV 16-0557, 2018 WL 283049
(Ariz. App. Jan. 4, 2018) (mem. decision). POG then intervened in the
derivative action and moved to dismiss on the ground that the Trust was
no longer a partner and therefore lacked standing to pursue the derivative
claims. After conducting a detailed analysis of relevant authorities, the
court agreed and dismissed the complaint.
¶4 The Trust timely appealed a final judgment entered pursuant
to Arizona Rule of Civil Procedure 54(b). We have jurisdiction pursuant to
A.R.S. §§ 12-120.21(A)(1) and -2101(A)(1).
DISCUSSION
¶5 The Trust had standing to file the derivative claims because it
was a limited partner in POG at the time it filed its complaint. The only
issue on appeal is whether the Trust lost its standing after its partnership
interests were rescinded. Whether a party has standing presents a question
of law subject to de novo review. Home Builders Ass’n of Cent. Ariz. v. Kard,
3 A derivative claim is one brought by a shareholder or partner to
enforce an entity’s cause of action against its officers and directors or third
parties. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95-96 (1991) (citations
omitted). Generally, an action is derivative in nature “if the gravamen of
the complaint is injury to the [entity], or to the whole body of its stock or
property without any severance or distribution among individual holders,
or if it seeks to recover assets for the [entity asserting the claim] or to
prevent the dissipation of its assets.” Albers v. Edelson Tech. Partners L.P.,
201 Ariz. 47, 52, ¶ 17 (App. 2001) (quoting Funk v. Spalding, 74 Ariz. 219, 223
(1952)). Although this case involves a derivative action brought on behalf
of a limited partnership, we look to cases addressing corporate derivative
claims for guidance. See, e.g., Simms v. Rayes, 234 Ariz. 47, 51, ¶¶ 14-15 (App.
2014) (applying cases involving corporate derivative actions to resolve a
derivative claim filed by a partner in a limited liability partnership).
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
219 Ariz. 374, 377, ¶ 8 (App. 2008) (citing Robert Schalkenbach Found. v.
Lincoln Found., Inc., 208 Ariz. 176, 180, ¶ 15 (App. 2004)).
¶6 A limited partner may file a derivative action on behalf of the
limited partnership “if general partners with authority to do so have
refused to bring the action or if an effort to cause those general partners to
bring the action is not likely to succeed.” A.R.S. § 29-356. By statute:
[T]he plaintiff shall be a partner at the time of bringing the
action and:
(1) Shall have been a partner at the time of the
transaction of which he complains; or
(2) His status as a partner shall have devolved upon
him by operation of law or pursuant to the terms of
the partnership agreement from a person who was
a partner at the time of the transaction.
A.R.S. § 29-357. By rule:
The complaint must:
(1) be verified;
(2) allege facts sufficient to show that the plaintiff has
standing to maintain the derivative action; and
(3) allege facts sufficient to show that the plaintiff
satisfies all statutory and other requirements under
the law for maintaining the derivative action.
Ariz. R. Civ. P. 23.1(b).
¶7 The Trust argues that neither the statutes nor the rule
expressly require the plaintiff in a partnership derivative action to continue
to hold a partnership interest after filing the complaint. The Trust points
out that Rule 23.1(b) was amended in 2017 to eliminate language specifying
that a “derivative action may not be maintained if it appears that the
plaintiff does not fairly and adequately represent the interests of the
shareholders or members similarly situated in enforcing the right of the
corporation or association.” In the absence of this language in the current
rule, the Trust contends it need only prove it was a limited partner of POG
when it filed the derivative complaint. Appellees, on the other hand, urge
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
us to join the majority of jurisdictions that have adopted a “continuous
ownership” requirement as a matter of common law.
¶8 As an initial matter, we do not agree that the recent
elimination of the express “fairly and adequately represent” language from
Rule 23.1(b) mandates rejection of the continuous ownership rule in
Arizona. The current version of Rule 23.1(b) states that a derivative
complaint must “allege facts sufficient to show that the plaintiff satisfies all
statutory and other requirements under the law for maintaining the
derivative action.” The current rule’s acknowledgement of requirements
other than those imposed by statute affords room for application of well-
reasoned common law principles where appropriate.
¶9 A derivative action, by its very nature, challenges the power
of the entity’s management. Ala. By-Prods. Corp. v. Cede & Co. ex rel. Shearson
Lehman Bros., Inc., 657 A.2d 254, 264-65 (Del. 1995). Given this inherent
conflict, Delaware courts have held, as a matter of common law, that a
derivative plaintiff must have “an adequate interest in vigorously litigating
the claim.” Id. at 265 (quoting Portnoy v. Kawecki Berylco Indus., Inc., 607 F.2d
765, 767 (7th Cir. 1979)). Once the derivative plaintiff no longer has an
ownership interest in the entity upon whose behalf the suit was brought,
the plaintiff no longer has standing because it has no financial interest in
recovery and “may lose any incentive to pursue the litigation adequately.”
Id. at 265-66 (quoting Portnoy, 607 F.2d at 767).
¶10 Accordingly, in Delaware “[t]o have standing to maintain a
shareholder derivative suit, a plaintiff must be a shareholder at the time of
the filing of the suit and must remain a shareholder throughout the
litigation.” Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 354 (Del. 1988).
Courts in other jurisdictions have adopted the continuous ownership
requirement for the same reasons, even when it is not expressly required by
statute. See Portnoy, 607 F.2d at 767; Grosset v. Wenaas, 42 Cal. 4th 1100, 1109-
10 (2008); Timko v. Triarsi, 898 So. 2d 89, 91-92 (Fla. Dist. Ct. App. 2005);
Bacigalupo v. Kohlhepp, 240 S.W.3d 155, 157 (Ky. Ct. App. 2007); White ex rel.
Banes Co. Derivative Action v. Banes Co., 866 P.2d 339, 342 (N.M. 1993).
¶11 Not all jurisdictions have adopted the continuous ownership
requirement. Indeed, the Trust urges us to follow the Supreme Court of
North Carolina in Alford v. Shaw, which found “no requirement of
continu[ous] share ownership” in the plain language of the applicable
statute. 398 S.E.2d 445, 449 (N.C. 1990); accord Ross-Williams ex rel. Sprint
Nextel Corp. v. Bennett, 419 P.3d 608, 626-27 (Kan. App. Ct. 2018). But neither
Alford nor the Trust address the considerations that led Delaware and other
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
jurisdictions to adopt the continuous ownership requirement as a matter of
common law — reasons that we find persuasive.4 Moreover, Alford is
distinguishable because, unlike the present case where the Trust sued for
and obtained rescission, the Alford plaintiff alleged the defendant
corporation wrongfully deprived him of his interest via a fraudulent
merger. Alford, 398 S.E.2d at 451-52. Although equitable considerations
may warrant an exception to the continuous ownership requirement when
the plaintiff is wrongfully deprived of standing, see, e.g., Lewis v. Anderson,
477 A.2d 1040, 1046 n.10 (Del. 1984) (recognizing an exception to the
continuous ownership requirement where the merger that deprived the
plaintiff of ownership is the subject of a claim of fraud) (citing Bokat v. Getty
Oil Co., 262 A.2d 246, 249 (Del. 1970)), we need not and do not address
exceptions that may apply under circumstances not presented here.
¶12 We find the Delaware courts’ reasoning for adopting the
continuous ownership requirement both sound and consistent with
longstanding Arizona common law. Although Arizona’s constitution does
not require standing to sue, we nonetheless generally require that each
party have an actual interest in the outcome of the litigation. See Armory
Park Neighborhood Ass’n v. Episcopal Cmty. Servs. in Ariz., 148 Ariz. 1, 6 (1985).
This ensures that our courts “do not issue mere advisory opinions, that the
case is not moot and that the issues will be fully developed by true
adversaries.” Id. Combining the continuous ownership rule with the
statutory and rule requirements serves that principle by ensuring that a
derivative action is both brought and then maintained by a plaintiff that
continues to have an actual interest in the outcome of the litigation.
¶13 The Trust argues that it has a sufficient incentive to continue
the litigation on behalf of POG because it may recover attorneys’ fees if it
prevails. But the Trust cites no authority for the proposition that the mere
hope of a fee award will encourage a plaintiff to appropriately and
adequately pursue a derivative claim on behalf of a business entity. The
potential to recover fees at the end of a case does not confer standing to
pursue it or ensure that the claims are litigated by true adversaries. Cf. Steel
Co. v. Citizens for a Better Env’t, 523 U.S. 83, 107 (1998) (“Obviously, . . . a
plaintiff cannot achieve standing to litigate a substantive issue by bringing
suit for the cost of bringing suit. The litigation must give the plaintiff some
other benefit besides reimbursement of costs that are a byproduct of the
4 Additionally, Alford relied upon Gaillard v. Natomas Co., 219 Cal.
Rptr. 74 (Ct. App. 1985), which was later disapproved of by the California
Supreme Court when it adopted the continuous ownership requirement.
See Alford, 398 S.E.2d at 449-50; Grosset, 42 Cal. 4th at 1114 n.9.
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
litigation itself [to satisfy Article III of the U.S. Constitution].”); Lewis v.
Cont’l Bank Corp., 494 U.S. 472, 480 (1990) (“[An] interest in attorney’s fees
is, of course, insufficient to create a[] case or controversy where none exists
on the merits of the underlying claim.”) (citing Diamond v. Charles, 476 U.S.
54, 70-71 (1986)); see also Sears v. Hull, 192 Ariz. 65, 71, ¶ 24 (1998) (noting
that Arizona courts consistently require standing similar to that imposed
by the U.S. Constitution “as a matter of judicial restraint”).
¶14 The Trust also suggests that Delaware adopted the
continuous ownership rule because it was consistent with that state’s
recognition of a shareholder’s right to bring a direct claim for injury to the
organization. It argues we should decline to follow Delaware’s lead
because Arizona law authorizes a direct claim only if a shareholder suffers
“an injury separate and distinct from the [entity].” To the contrary,
however, Delaware generally applies the same rule as Arizona: “[T]o have
standing to sue individually, rather than derivatively on behalf of the
corporation, the plaintiff must allege more than an injury resulting from a
wrong to the corporation.” Kramer, 546 A.2d at 351 (citations omitted);
compare Albers, 201 Ariz. at 52, ¶ 18 (“A shareholder may maintain a direct
action . . . when . . . the injuries or damages were sustained by individual
shareholders rather than by the corporation.”), with El Paso Pipeline GP Co.
v. Brinckerhoff, 152 A.3d 1248, 1260 (Del. 2016) (“[T]o prove that a claim is
direct, a plaintiff must demonstrate that the duty breached was owed to the
stockholder and that he or she can prevail without showing an injury to the
corporation.”) (quotation omitted). Thus, there is no material difference
between Arizona and Delaware law that would justify rejection of the
sound policy analysis relied upon by Delaware in adopting the continuous
ownership rule.
¶15 Finally, relying on Workman v. Verde Wellness Center, Inc., 240
Ariz. 597 (App. 2016), the Trust contends that continuous ownership is not
necessary in the absence of a requirement in statute or rule that the plaintiff
fairly and adequately represent the interests of the entity. See also Lewis v.
Chiles, 719 F.2d 1044, 1050 n.1 (9th Cir. 1983) (noting the “fairly and
adequately” requirement “has served as an anchor for the concept that
ownership must extend throughout the life of the litigation”). The plaintiff
in Workman was a member of the board of a nonprofit corporation who sued
to dissolve the corporation under A.R.S. § 10-11430(B), which explicitly
grants a director the right to sue for dissolution. Workman, 240 Ariz. at 604-
05, ¶¶ 20-23. The board voted to remove her as a director a few hours after
she filed suit and then argued she lacked standing to maintain the case. Id.
In evaluating the argument, this Court inferred that the corporation had
removed the plaintiff from the board because of her suit and held that the
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Opinion of the Court
corporation could not moot her claim by ousting her from the board. Id. In
coming to that conclusion, we made note of the “fairly and adequately”
language in the applicable version of Rule 23.1(b) and then broadly
explained that “[t]he reason for the requirement is because the derivative
plaintiff essentially stands in the shoes of the corporation to enforce the
rights of the corporation, and the primary interest the shareholder has in
doing so is by virtue of the related interest in protecting his or her shares.”
Id. at 604, ¶ 21. Workman does not suggest that principle would not apply
absent the language now omitted from Rule 23.1(b). In any event, to the
extent the continuous ownership requirement would apply to a corporate
dissolution, this Court merely applied an exception to the standing rule, not
applicable here, where the plaintiff’s “loss of ownership ‘is the result of
corporate action in which the holder did not acquiesce.’” Workman, 240
Ariz. at 604, ¶ 21. See supra ¶ 11 (acknowledging possible exceptions to the
continuous ownership rule).
¶16 In sum, we adopt the continuous ownership rule and hold
that, to maintain standing in a derivative action, the plaintiff must not only
possess an ownership interest when commencing suit, but must also
continue to maintain its ownership interests throughout the litigation.
Because the Trust no longer possesses any ownership interest in POG, we
conclude, as did the trial court, that the Trust lacks standing to maintain the
derivative action.
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J. BALL TRUST v. PHX. ORCHARD, et al.
Opinion of the Court
CONCLUSION
¶17 The trial court’s order dismissing the Trust’s derivative
complaint is affirmed.
¶18 Both parties request an award of attorneys’ fees incurred on
appeal pursuant to A.R.S. § 12-341.01(A) (authorizing an award of
attorneys’ fees to the successful party in an action arising out of a contract).
The Trust’s complaint, alleging other partners and participants in POG had
violated partnership and operating agreements, arose out of contract for
purposes of A.R.S. § 12-341.01(A). See Jerman v. O’Leary, 145 Ariz. 397, 403
(App. 1985) (citing Sparks v. Republic Nat’l Life Ins., 132 Ariz. 529, 544 (1982)).
Accordingly, POG, as the successful party, is awarded its costs and
reasonable attorneys’ fees incurred on appeal upon compliance with
ARCAP 21(b).
AMY M. WOOD • Clerk of the Court
FILED: AA
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