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Wichansky v. Zowine

United States District Court, D. Arizona

August 31, 2016

Marc A Wichansky, Plaintiff,
v.
David T. Zowine, et al., Defendants.

          ORDER

          David G. Campbell, United States District Judge

         Defendants have filed a renewed motion for judgment as a matter of law and motion for a new trial. Doc. 568. The issues are fully briefed (Docs. 581, 583), and no party has requested oral argument. For the reasons that follow, the Court will reduce some of the punitive damages awards, but otherwise deny Defendants' motions.

         I. Background.

         Following nine days of trial, the jury found that Defendant David Zowine had breached his fiduciary duties to Plaintiff, and that Defendants Charles Johnson, Martha Leon, Pat Shanahan, and Mike Ilardo had aided and abetted Zowine's breach. Doc. 500. The jury awarded $27, 625, 500 in compensatory and punitive damages against these Defendants, with most of the damages assessed against Defendant Zowine. See Id. The Court entered judgment consistent with the jury's verdict. See Doc. 535.

         After the close of Plaintiff's evidence at trial, Defendants made an oral Rule 50(a) motion for judgment as a matter of law, which the Court took under advisement. See Doc. 474. The Court later denied the motion in part (Doc. 465) and granted it in part (Doc. 478). Defendants now seek post-trial relief from the verdict.

         II. Legal Standard.

         A. Rule 50(b): Renewed Motion for Judgment as a Matter of Law.

         A party may renew its motion for judgment as a matter of law under Rule 50(b) if the court denies the Rule 50(a) motion and the jury returns a verdict against the movant. EEOC v. Go Daddy Software, Inc., 581 F.3d 951, 961 (9th Cir. 2009). “Because it is a renewed motion, a proper post-verdict Rule 50(b) motion is limited to the grounds asserted in the pre-deliberation Rule 50(a) motion.” Id. Thus, a “party cannot raise arguments in its post-trial motion for judgment as a matter of law under Rule 50(b) that it did not raise in its pre-verdict Rule 50(a) motion.” Freund v. Nycomed Amersham, 347 F.3d 752, 761 (9th Cir. 2003).

         In evaluating a motion for judgment as a matter of law, a court does not make credibility determinations or weigh the evidence. See Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150-51 (2000). Instead, the court “must draw all reasonable inferences in favor of the nonmoving party.” Id. at 150 (citations omitted). A court can grant a Rule 50 motion and overturn the jury's verdict only if “‘there is no legally sufficient basis for a reasonable jury to find for that party on that issue.'” Costa v. Desert Palace, Inc., 299 F.3d 838, 859 (9th Cir. 2002) (quoting Reeves, 530 U.S. at 149), aff'd, 539 U.S. 90 (2003). In other words, the “jury's verdict must be upheld if it is supported by substantial evidence, which is evidence adequate to support the jury's conclusion, even if it is also possible to draw a contrary conclusion.” Pavao v. Pagay, 307 F.3d 915, 918 (9th Cir. 2002).

         B. Rule 59(a): Motion for a New Trial.

         Under Rule 59(a), a new trial may be granted on all or some of the issues “for any reason for which a new trial has heretofore been granted in an action at law in federal court.” Fed.R.Civ.P. 59(a)(1)(A). Because “Rule 59 does not specify the grounds on which a motion for a new trial may be granted, ” the court is bound by historically recognized grounds. Zhang v. Am. Gem Seafoods, Inc., 339 F.3d 1020, 1035 (9th Cir. 2003). These include verdicts against the weight of the evidence, damages that are excessive, and trials that were not fair to the moving party. Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007); see also Passantino v. Johnson & Johnson Consumer Prods., 212 F.3d 493, 510 n.15 (9th Cir. 2000) (“The trial court may grant a new trial only if the verdict is contrary to the clear weight of the evidence, is based upon false or perjurious evidence, or to prevent a miscarriage of justice.”) (citation omitted).

         Although the Court may weigh the evidence and assess the credibility of witnesses when ruling on a Rule 59(a) motion, it may not grant a new trial “merely because it might have come to a different result from that reached by the jury.” Roy v. Volkswagen of Am., Inc., 896 F.2d 1174, 1176 (9th Cir. 1990) (quotation marks and citation omitted); see also Union Oil Co. of Cal. v. Terrible Herbst, Inc., 331 F.3d 735, 743 (9th Cir. 2003) (“It is not the courts' place to substitute our evaluations for those of the jurors.”). A court will not approve a miscarriage of justice, but “a decent respect for the collective wisdom of the jury, and for the function entrusted to it in our system, certainly suggests that in most cases the judge should accept the findings of the jury, regardless of his own doubts in the matter.” Landes Constr. Co., Inc. v. Royal Bank of Can., 833 F.2d 1365, 1371 (9th Cir. 1987) (citations omitted).

         C. Discussion of the Evidence in this Order.

         When discussing the evidence in this Order, the Court will draw reasonable inferences in Plaintiff's favor. The Court will describe the evidence as the jury reasonably could have viewed it in reaching the verdict. Defendants will not agree with the Court's description because it reflects the view a reasonable jury could have adopted in ruling against them, but the Court will not entertain any finding that is against the clear weight of the evidence. The Court will provide citations to some of the evidence in the record, but by no means to all of the relevant evidence. Occasionally, the Court will simply reference the testimony of particular witnesses rather than provide specific page citations.

         III. Statute of Limitations - Accrual and Fraudulent Concealment.[1]

         The parties agree that Plaintiff's claim for breach of fiduciary duty against Defendant David Zowine is governed by Arizona's two-year limitations period for torts. A.R.S. § 12-542. This action was filed on June 14, 2013. Thus, Plaintiff's claim is timely if it accrued, or the limitations period was tolled until a date, after June 14, 2011.

         A. Accrual of Plaintiff's Claim.

         Defendants argue that Plaintiff's fiduciary duty claim against David Zowine accrued before June 14, 2011. Doc. 568 at 3.[2] Defendants note that a number of witnesses testified that Plaintiff was aware of medical billing issues in 2009 and 2010. In addition, Plaintiff testified that his interpersonal conflict with Zowine began in late 2010, continued into 2011, and ultimately culminated in Plaintiff seeking dissolution of Zoel Holding Company, Inc. (“Zoel”), which he co-owned with Zowine. Doc. 492 at 84-89.

         Defendants contend, pursuant to Walk v. Ring, 44 P.3d 990 (Ariz. 2002), that the evidence shows that Plaintiff's fiduciary duty claim accrued in 2009 or 2010, well outside of the two-year statute of limitations period. Plaintiff's knowledge of billing issues and Zowine's hostile conduct, Defendants assert, triggered a duty to investigate in 2010 and early 2011.[3]

         Walk holds that a claim accrues when an aggrieved party has “reason to connect the ‘what' to a particular ‘who' in such a way that a reasonable person would be on notice to investigate whether the injury might result from fault.” Id. at 996, ¶ 22. The Arizona Supreme Court provided this additional explanation:

The “what” is the fact of injury. With respect to those in a professional or fiduciary relationship with the tortfeasor, an adverse or untoward result, or a failure to achieve an expected result, is not, as a matter of law, always sufficient notice. To trigger the statute of limitations, something more is required than the mere knowledge that one has suffered an adverse result while under the care of a professional fiduciary.

Id. at 997, ¶ 26.

         As Defendants contend, Plaintiff did know that there were medical billing issues at Zoel in 2009 and 2010, even if he did not know they were caused by intentional fraud. He also knew that his relationship with Zowine deteriorated in late 2010 and early 2011. Plaintiff thus may have known enough about the “what” of his injury to trigger a duty to investigate, but that is not sufficient under Walk. Because Plaintiff and Zowine were in a fiduciary relationship, Plaintiff must also have known the “who” - that Zowine was behind the billing fraud and was deliberately causing the difficulties with Plaintiff. Id.

         Plaintiff testified that he knew of billing issues in 2010, but had no idea that intentional billing fraud was occurring or that Zowine was involved in the fraud and trying to cover it up. Plaintiff also knew that his relationship with Zowine became strained in late 2010 and early 2011, but testified that he thought this was due to Zowine's gambling issues. Plaintiff had no idea that the difficulties were intentionally caused by Zowine in order to drive Plaintiff from the business and prevent discovery of the billing fraud. Plaintiff's claim for breach of fiduciary duty was not based merely on the existence of billing issues or difficulties in his relationship with Zowine. Rather, Plaintiff's claim was that Zowine breached his fiduciary duties by knowingly engaging in billing fraud, attempting to conceal it, and engaging in a campaign of intimidation and harassment designed to drive Plaintiff from the business before it could be discovered.[4]

         Plaintiff testified that he had no reason to connect Zowine to the wrongdoing until he received a report on the medical billing fraud from Ron Wise in August 2011 (“Wise Report”), which discussed several forms of billing fraud that were occurring at Zoel. Doc. 516 at 29-30. After receiving the Wise Report, Plaintiff testified that “[i]t became very clear there [were] a lot of different fraudulent activities [and] that [Ron Wise] was showing me exactly how they were being done, exactly how it was being pulled off, and who was covering it up.” Id. at 30. Plaintiff testified that, after reviewing the Wise Report, he “realized . . . this is intentional, this fraud was intentional, ” and he “started to believe in hindsight at some point that all of these fights, everything was coming together, was just a big act to - because Richard [Eden] and I were sniffing into the medical billing fraud.” Doc. 493 at 10.

         Whether to credit this version of events was a question reserved for the jury. Reeves, 530 U.S. at 150-51. If the jury chose to believe Plaintiff's testimony, as it evidently did, it could reasonably conclude that Plaintiff had no reason to connect Zowine to the wrongdoing prior to receiving the Wise Report in August 2011.

         Defendants try to discredit Plaintiff's testimony, arguing that (1) the Wise Report did not specifically link Zowine to any wrongful conduct, and (2) the Report was based on information readily available to Plaintiff. See Doc. 583 at 3. These are the very arguments Defendants made during trial, and they support one possible interpretation of the evidence. But it is by no means the only possible interpretation. The jury could reasonably have believed Plaintiff's testimony that he did not have reason to connect Zowine to the wrongful conduct until he read the Wise Report. Given this credibility determination, the Court cannot conclude that there was no legally sufficient basis for a reasonable jury to find for Plaintiff on this issue, Costa, 299 F.3d at 859, or that it was against the clear weight of the evidence, Molski, 481 F.3d at 729. The Court accordingly cannot conclude that Defendants are entitled to judgment based on the statute of limitations.

         Walk further provides that, in determining whether a plaintiff was on notice sufficient to trigger the limitations period, the question is whether the plaintiff's “failure to go forward and investigate [his possible cause of action] is not reasonably justified.” 44 P.3d at 996. For example, a plaintiff would be reasonably justified in declining to investigate a claim if the plaintiff “subjectively believed” that the defendant had done nothing wrong. Id. (citation omitted). The question is whether a reasonable person in the plaintiff's position would investigate the claim. Id.

         Thus, even if Plaintiff knew, prior to the limitations period, that billing irregularities were occurring or difficulties had arisen in his relationship with Zowine, the claim for breach of fiduciary duty did not accrue until he knew that Zowine was involved in the billing fraud and began mistreating Plaintiff to drive him from the company and prevent its discovery. The jury reasonably could have concluded that Plaintiff did not have such knowledge before June 14, 2011. Plaintiff testified that he and Zowine had been friends and business partners for many years, and that Zowine was the best man at his wedding. Doc. 492 at 39-40, 57-58. Defendant Ilardo testified that Plaintiff and Zowine were “were like brothers. They got along great. Their families were very close. You know, the best of friends.” Doc. 495 at 6. There clearly was sufficient evidence for the jury to believe Plaintiff's claim that he never suspected Zowine would be involved in fraudulent operation of the business they jointly owned. As Walk explains, “[t]his is the very sort of factual determination that must be left to the jury.” 44 P.3d at 996, ¶ 24.[5]

         B. Fraudulent Concealment.

         Even if Plaintiff's claim otherwise would have accrued before June 14, 2011, the claim is timely if the limitations period was tolled by fraudulent concealment. In Walk, the Arizona Supreme Court held that “[f]raud practiced to conceal a cause of action will prevent the running of the statute of limitations until its discovery.” 44 P.3d at 999, ¶ 34 (quotation marks and citation omitted).

Moreover, if fraudulent concealment is established, the [plaintiff] is relieved of the duty of diligent investigation required by the discovery rule and the statute of limitations is tolled until such concealment is discovered, or reasonably should have been discovered. In fraudulent concealment cases, the duty to investigate arises only when the [plaintiff] discovers or is put upon reasonable notice of the breach of trust. Thus, our cases and those from other jurisdictions that recognize a fiduciary relationship agree that an actual knowledge standard applies to triggering the statute of limitations for a plaintiff who establishes a breach of the fiduciary duty of disclosure.

Id. at ¶ 35 (internal quotation marks and citations omitted).

         1. Alleged Termination of Fiduciary Duties.

         Defendants argue in their reply brief that the statute of limitations was not tolled by withholding information in violation of fiduciary duties because any such duties owed by Zowine to Plaintiff ceased once their relationship became adversarial. Doc. 583 at 2. The Court rejected this position in a written order (Doc. 481 at 6), declining to instruct the jury that fiduciary duties end when parties become adverse (see Doc. 533 at 12-13). The Court is convinced that this position is correct for reasons stated in its prior order. See Doc. 481 at 6. Moreover, even if the law did provide that fiduciary duties end when relationships become adverse, such a rule surely would not apply when one partner intentionally makes the relationship adverse in order to drive the other partner from the business and prevent discovery of fraud, as Plaintiff proved here.

         2. Sufficiency of the Evidence.

         “In fraudulent concealment cases, the duty to investigate arises only when the [plaintiff] discovers or is put upon reasonable notice of the breach of trust.” Walk, 44 P.3d at 999, ¶ 35 (quotation marks and citations omitted). To establish notice, Defendants point to several different witnesses' testimony. Doc. 568 at 5. The question, however, is not whether there was evidence to support Defendants' position, but whether there was sufficient evidence to support Plaintiff's. As already noted, Plaintiff presented evidence that he and Zowine had been friends and business partners for many years. Doc. 492 at 39-40, 57-58; Doc. 495 at 6. Plaintiff testified that he never suspected Zowine would be involved in fraudulent operation of the business they jointly owned, or that the difficulties between them were part of a calculated effort by Zowine to drive him from the business and conceal fraud. Plaintiff asserted that he did not begin to suspect Zowine's breaches until he received the Wise Report in August 2011. Doc. 516 at 29-30. A reasonable jury could believe this evidence.

         Plaintiff also presented evidence that Zowine was aware of and failed to disclose billing fraud, orchestrated a campaign to drive Plaintiff from the company, and interfered with efforts to uncover billing fraud. For example, Plaintiff presented a number of witnesses who testified that that Zowine was responsible for billing at Zoel, that Johnson and Leon (who were alleged to be most directly involved in the fraud) reported to Zowine, and that Johnson and Leon repeatedly refused to cooperate with Plaintiff's and Richard Eden's efforts to learn more about the billing irregularities. See, e.g., Doc. 476 at 94-95, 106, 111; 479 at 23-24, 29-30, 33-40, 49-50. Plaintiff also presented evidence that, in response to revelations of billing irregularities, Zowine retained a lawyer, Julie Nelson, purportedly to investigate billing fraud (Doc. 491 at 126-29), but actually to advocate on Zowine's behalf (Doc. 516 at 133). In purportedly investigating the billing problems, Ms. Nelson never spoke with key individuals, including Defendant Leon, and never reviewed Leon's spreadsheets, which were a primary source of the billing fraud. Doc. 491 at 126-29. Zowine even tried to turn the tables by claiming in a letter from counsel that Plaintiff was in charge of medical billing - when, in fact, Zowine was in charge - and that Plaintiff had refused Zowine access to key documents and individuals, including Leon - when, in fact, Zowine supervised Leon and acquiesced in her refusal to provide billing information to Plaintiff. Id. at 152-55. In addition, Zowine and the other Defendants and employees associated with him systematically embarrassed, humiliated, and threatened not only Plaintiff (Docs. 479 at 61, 97-98, 105-07; 486 at 109-10; 492 at 90-91; 493 at 38-39), but also a number of other people associated with Plaintiff, including Zoel employees and Plaintiff's family members (Docs. 476 at 35, 38-39, 49-50, 55-56; 477 at 84-87, 141; 479 at 54, 58-59, 76, 100-01; 482 at 115; 483 at 82, 87, 94-97, 108, 124-25, 133; 485 at 32-33, 53; 487 at 129, 134-35; 491 at 18, 42; 516 at 23-24).

         From this and other evidence, a reasonable jury could find that Zowine consciously attempted to hide the fraud and blame Plaintiff for billing irregularities, and that the difficulties between Plaintiff and Zowine were in fact a calculated effort by Zowine - unknown to Plaintiff at the time - to drive Plaintiff from the business and prevent discovery of the billing fraud. The evidence supports Plaintiff's claim of fraudulent concealment and the tolling of the statute of limitations.

         What is more, Walk explains that “if fraudulent concealment is established, the [plaintiff] is relieved of the duty of diligent investigation required by the discovery rule and the statute of limitations is tolled ‘until such concealment is discovered, or reasonably should have been discovered.'” 44 P.3d at 999, ¶ 35. Thus, the jury's reasonable finding of Zowine's fraudulent concealment would have relieved Plaintiff of the duty of diligent investigation until Plaintiff discovered the fraud after reviewing the Wise report in August 2011.

         Finally, “an actual knowledge standard applies to triggering the statute of limitations for a plaintiff who establishes a breach of the fiduciary duty of disclosure.” Id. The Court instructed the jury that shareholders in a closely-held corporation must “fully disclose to one another all material facts relating to the corporation's affairs within their knowledge.” Doc. 533 at 13. The evidence at trial supported a jury determination that Zowine never disclosed to Plaintiff the existence of billing fraud or that he was seeking to drive Plaintiff from the company. In light of this nondisclosure under Walk, the limitations period was not triggered until Plaintiff had “actual knowledge” of Zowine's breach. 44 P.3d at 999, ¶ 35.[6]

         C. Statute of Limitations Conclusion.

         To be entitled to judgment as a matter of law or a new trial, Defendants must show not only that Plaintiff's fiduciary duty claim against Zowine accrued before June 14, 2011, but also that the running of the statute of limitations was not tolled. Defendants fail on both counts. Examining the evidence in the light most favorable to the jury verdict, the Court finds ample evidence for a reasonable jury to find for Plaintiff on the statute of limitations issues. Costa, 299 F.3d at 859. The Court cannot conclude that the jury's findings were against the clear weight of the evidence. Molski, 481 F.3d at 729. This case ultimately was a credibility determination by the jury, one the Court will not disturb.

         IV. Causal Nexus between Defendants' Conduct and ...


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