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Judson C. Ball Revocable Trust v. Phoenix Orchard Group I, L.P.

Court of Appeals of Arizona, First Division

October 2, 2018

JUDSON C. BALL REVOCABLE TRUST, Plaintiff/Counter-Defendant/Appellant,
v.
PHOENIX ORCHARD GROUP I, L.P., et al., Defendants/Counter-Claimants/ Intervenors/Appellees.

          Appeal from the Superior Court in Maricopa County Nos. CV2015-011768 CV2016-000284 The Honorable Dawn M. Bergin, Judge.

          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

          Presiding Judge Kenton D. Jones delivered the Opinion of the Court, in which Judge Diane M. Johnsen and Judge Paul J. McMurdie joined.

          OPINION

          JONES, 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I, L.P. and Phoenix Orchard Group II, L.P. (collectively, POG) after its partnership interests in the entities were rescinded.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.) §§ 44-1801[2] 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.

         ¶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, 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 ...


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