v.

GOLDFIELD PROPERTY OWNERS ASSOCIATION, an Arizona non-profit corporation, Defendant-Appellee, and

Fountain Foothills Limited Partnership, an Arizona limited partnership; Fountain Foothills 80, L.L.C., an Arizona limited liability company, Defendants-Appellees Cross-Appellants.

No. 1 CA-CV 04-0652.

Court of Appeals of Arizona, Division One, Department C.

September 6, 2005.

Randolph J. Haines, Kathleen N. Kenny-Haines, Fort McDowell, Plaintiffs-Appellants/Cross-Appellees, In propria persona.

Tiffany & Bosco P.A., By Robert A. Royal, Tracy S. Morehouse, Chad A. Hester, Phoenix, for Defendant-Appellee.

Mohr Hackett Pederson Blakley & Randolph P.C., By Robert C. Hackett, Matthew J. Kelly, David W. Garbarino, Phoenix, for Defendants-Appellees/Cross-Appellants.

OPINION

LANKFORD, J.

¶ 1 Plaintiffs Randolph J. Haines and Kathleen N. Kenney-Haines appeal from summary judgment in favor of Defendants Goldfield Property Owners Association ("Association"), Fountain Foothills Limited Partnership and Fountain Foothills 80, L.L.C. (collectively, "Fountain Foothills"). The issue on appeal is: Do Arizona statutes prohibit the distribution of excess assessments to the Association members? The issues raised on cross-appeal by Fountain Foothills are: (1) Did the superior court err in finding that Fountain Foothills' motion to dismiss for lack of standing was moot? and (2) Did the superior court err in denying Fountain Foothills' requests for attorneys' fees?

¶ 2 Our review of the summary judgment is de novo. Summary judgment is appropriate if there are no genuine issues as to any material fact. Ariz. R. Civ. P. 56(c)(1); Orme Sch. v. Reeves,166 Ariz. 301, 305, 802 P.2d 1000, 1004 (1990). We review the evidence "in the light most favorable to the party against whom summary judgment was entered" and review de novo "whether any genuine issues of material fact exist." TWE Ret. Fund Trust v. Ream,198 Ariz. 268, 271, ¶ 11, 8 P.3d 1182, 1185 (App.2000).

¶ 3 This dispute involves the disposition of funds collected by the Association from its members by assessment. The Haineses own property in the Goldfield Ranch development. Fountain Foothills owns approximately

forty-five percent of Goldfield Ranch's total acreage. The original developer of Goldfield Ranch created a Declaration of Reservations, requiring the formation of an association to maintain Goldfield Ranch's roads. The Association, an Arizona non-profit corporation, was formed for that purpose. It later assumed responsibility for the installation and management of electrical facilities in Goldfield Ranch. All Goldfield Ranch property owners are members of the Association.

¶ 4 The Association levied a special assessment of $100 per acre on its members in 1984. The assessment was to pay for the installation of an electrical distribution system.

¶ 5 The Association installed electrical extensions on most of the Goldfield Ranch property. But it did not install them on property owned by Fountain Foothills. Fountain Foothills had determined that the type of electrical line would be incompatible with Fountain Foothills' property development plan.

¶ 6 Fountain Foothills and the Association therefore agreed that the Association would pay Fountain Foothills the estimated cost of installing the electrical extensions on its property, and in return Fountain Foothills would release the Association's obligation to provide the extensions. The Association's board of directors approved the agreement by resolution. The resolution authorized the Association to complete the electrical extensions to the remaining residential portions of Goldfield Ranch. The resolution also approved a pro rata disbursement of any remaining monies to the current Association members.

¶ 7 The Haineses attacked the resolution by seeking a declaratory judgment against the Association and Fountain Foothills. The Haineses argued that Arizona Revised Statutes ("A.R.S.") sections 10-3140(22) (2003), -11301 and -11302 (1997) prohibit the resolution, making it "illegal, ultra vires and void."

¶ 8 The superior court upheld the Association's actions. The court determined that the special assessment was to provide electrical extensions on Goldfield Ranch, this goal was attained, the Association over-assessed its members, and Arizona statutes do not prohibit redistribution of the balance. The superior court denied the Haineses' motion for summary judgment, granted the Association's cross-motion, and denied as moot a motion by Fountain Foothills to dismiss for lack of standing. The superior court also denied both defendants' A.R.S. § 12-341.01 fee requests without addressing Fountain Foothills' fee request pursuant to A.R.S. § 12-349.

¶ 9 The superior court entered final judgment, the Haineses timely appealed, and Fountain Foothills timely cross-appealed. We have jurisdiction pursuant to A.R.S. § 12-2101(B) (2003).

¶ 10 We first address the Haineses' argument that the distribution of excess assessment funds is prohibited by statute. Arizona Revised Statute section 10-11301 states: "Except as authorized by § 10-11302, a [non-profit] corporation shall not make any distributions." The Association is a non-profit corporation. A "distribution" is "a direct or indirect transfer of money or other property or incurrence of indebtedness by a corporation to or for the benefit of its members in respect to any of its membership interests." A.R.S. § 10-3140(22).

¶ 11 The parties dispute whether the Association's payments are impermissible corporate distributions or lawful repayments of funds held in trust by the Association on behalf of its members. "The essential elements of a trust are a competent settlor and a trustee, clear and unequivocal intent to create a trust, ascertainable trust res, and sufficiently identifiable beneficiaries." Golleher v. Horton,148 Ariz. 537, 543, 715 P.2d 1225, 1231 (App.1985). Although the trust beneficiaries must be specifically designated, Newhall v. McGill,69 Ariz. 259, 212 P.2d 764 (1949), they need not accept or have knowledge of the trust. O'Brien v. Bank of Douglas, 17 Ariz. 203, 207, 149 P. 747, 749 (1915). "No technical expressions are needed for the creation of an express trust." Id. at 205-06, 149 P. at 748. The trust res may "consist of any type of transferable property, including . . . personalty." Hoyle v. Dickinson,155 Ariz. 277, 280, 746 P.2d 18, 21 (App.1987). A trust for personalty is not required to be in writing, O'Brien, 17 Ariz. at 206, 149 P. at 748, and may be created and proved by parol evidence. Cashion v. Bank of Ariz., 30 Ariz. 172, 181, 245 P. 360, 363 (1926).

¶ 12 The evidence and inferences both support and negate the existence of a trust. Thus, a genuine issue of material fact exists as to whether a trust was created. We begin with the evidence indicating that a trust may exist. The Association's board deposited assessment funds in a separate account, specifically instructed the bank that the Association's access to the funds was limited to use for the installation of electrical extensions, informed the members that the assessment funds were held in a "trust fund account," and stated that its use was restricted to "financing electrical extensions only." Although not originally deposited there, in 2003, the assessment funds were held in an account at Bank One Trust Company—Corporate Trust Services until the Association requested transfer of the funds. This evidence supports the existence of a trust.

¶ 13 However, other evidence casts doubt on the existence of a trust. The minutes of the Association's board meeting in March 1984 referred to the funds, but made no mention of holding the special assessment funds in trust. Supplemental instructions the Association provided to Valley National Bank of Arizona, the institution where the assessment funds were deposited in 1985, refer not to a trust but to "an agency account" that had been "established . . . in the name of [the Association]." Moreover, the bank's instructions did not include terms illustrative of the intent to form a trust. Thus, it is unclear whether a trust had been created when the assessments were first approved and levied, whether a trust was created at a later date, or whether this was a corporate account holding corporate funds. Even if the funds were kept for a time in a bank's "Corporate Trust Services" division, that alone does not show that the funds were in trust.

¶ 14 Other evidence is similarly equivocal. In some letters the Association refers to the special assessment funds as held in trust or as a "trust fund." But other Association letters refer to a "separate interest bearing account" referred to as the "electric fund." The evidence conflicts.

¶ 15 The Haineses rely on Borden v. Baldwin,444 Pa. 577, 281 A.2d 892 (1971), to quell the argument that a valid trust was formed. In Borden, a non-profit corporation attempted to avoid a statutory requirement of voluntary dissolution before any distributions to members by transferring corporate property to a trust. Id. at 894. The corporation then sought to distribute the money held in trust to its members. Id. The court ruled that such payments were improper distributions prohibited by statute because they were nothing more than attempts to effectuate an otherwise prohibited distribution of the non-profit corporation's assets to its members. Id. at 895-96.

¶ 16 In contrast, the assessment funds might not be the Association's property. If the fact finder determines on remand that the special assessments are held in trust for the members, the funds belong to them. The funds would not be part of the Association's earnings, capital or assets. Although the Association placed the funds in bank accounts it controlled, the funds remained the members' property, held in trust by the Association. Section 10-11031 does not prevent a corporation from returning property to its owner. Viewing the facts in the light most favorable to the party against whom summary judgment was entered, the evidence conflicts. Therefore, we remand for a determination at trial of whether a trust exists.

¶ 17 If, on the other hand, the fact finder determines that a trust does not exist, the funds cannot be distributed to the members because Arizona law forbids it. Arizona law bars a non-profit corporation's distribution of its funds. Arizona law defines a "distribution" as:

[A] direct or indirect transfer of money or other property or incurrence of indebtedness by a corporation to or for the benefit of its members in respect of any of its membership interests. A distribution may be in the form of any of the following:

a. A declaration of payment of a dividend.

b. Any purchase, redemption or other acquisition of membership interests.

c. A distribution of indebtedness.

d. Otherwise.

A.R.S. § 10-3140(22).

¶ 18 If the assessment funds became the Association's property, the Association could not transfer them to its members. A redistribution of the assessment funds would constitute a "direct . . . transfer of money . . . for the benefit of [the Associations's] members." A.R.S. § 10-3140(22). Thus, A.R.S. § 10-11301 would prohibit distribution of the funds to the members if the funds were corporate property.

¶ 19 We now address Fountain Foothills' arguments on cross-appeal. Fountain Foothills first argues that the superior court erred by not dismissing the complaint for lack of standing. In contrast, the Association has never challenged the Haineses' standing in this case. The superior court found the standing issue moot based on its substantive summary judgment ruling. Even if the Haineses lack standing to sue Fountain Foothills, we are free to consider the merits of this appeal because the Association is a party and has never raised the issue. Cf. Dillard Dep't Stores, Inc. v. Assoc. Merch. Corp.,162 Ariz. 294, 296 n. 3, 782 P.2d 1187, 1189 n. 3 (App.1989) ("[L]ack of standing is not a jurisdictional defect in a state court appeal; thus, if appellee does not assert the issue, we may consider the merits of appellant's claim without deciding the issue of standing."); State v. B Bar Enter., Inc.,133 Ariz. 99, 101 n. 2, 649 P.2d 978, 980 n. 2 (1982).

¶ 20 In any event, the Haineses have standing to sue Fountain Foothills. "To have standing to sue in an Arizona court, a plaintiff need only `plead damage from an injury peculiar to him or at least more substantial than that suffered' by the community at large." Fillmore v. Maricopa Water Processing Sys., Inc., 211 Ariz. 1, ¶ 11, 116 P.3d 613 (App.2005). The Association assessed the Haineses because they are Goldfield Ranch property owners. The Association and Fountain Foothills entered into an "Acknowledgment and Release" providing for, among other things, the redistribution of assessment funds from which Fountain Foothills will benefit. It is this agreement that the Haineses seek to have declared void. Fountain Foothills is a party to the agreement that the Haineses seek to have declared void and that the Haineses contend adversely affects their interests.

¶ 21 Fountain Foothills also argues that the superior court erred by refusing to award fees. We review de novo the superior court's application of both A.R.S. §§ 12-341.01 and -349. See Hanley v. Pearson,204 Ariz. 147, 148, ¶ 5, 61 P.3d 29, 30 (App.2003) (A.R.S. § 12-341.01); Phoenix Newspapers, Inc. v. Dep't of Corr.,188 Ariz. 237, 244, 934 P.2d 801, 808 (App.1997) (A.R.S. § 12-349). Fountain Foothills contends that fees should have been awarded because this case arose out of contract and was brought without substantial justification. See A.R.S. §§ 12-341.01(A), -349. The superior court, however, ruled correctly regarding Fountain Foothill's fee requests.

¶ 22 We first address the superior court's ruling regarding A.R.S. § 12-341.01. The statute limits a fee recovery to a "successful party" in "an action arising out of a contract." A.R.S. § 12-341.01(A). Although our ruling on appeal deprives Fountain Hills of its previous status as the successful party, it may yet prevail on remand. Whether this is an action arising out of a contract is an issue presented to us that may arise on remand. We therefore decide the question.

¶ 23 We analyze the "essence of the action to determine whether it arises out of a contract." ASH, Inc. v. Mesa Unified Sch. Dist. No. 4,138 Ariz. 190, 193, 673 P.2d 934, 937 (App.1983). If "the duty breached is not imposed by law, but is a duty created by the contractual relationship, and would not exist `but for' the contract, then breach of either express covenants or those necessarily implied from them sounds in contract." Barmat v. John & Jane Doe Partners A-D et al.,155 Ariz. 519, 523, 747 P.2d 1218, 1222 (1987). However, "when the cause of action arises from statutory rather than contractual obligations, the `peripheral involvement of a contract does not require the application of A.R.S. § 12-341.01(A).'" A.H. By & Through White v. Ariz. Prop. and Cas. Ins. Guar. Fund,190 Ariz. 526, 529, 950 P.2d 1147, 1150 (1997) (quoting O'Keefe v. Grenke,170 Ariz. 460, 472-73, 825 P.2d 985, 997-98 (App.1992)). Thus, although a contract may be a factual predicate to the action, if it is not the "essential basis" of the action, § 12-341.01 does not apply. Hanley, 204 Ariz. at 151, ¶¶ 17-18, 61 P.3d at 33 (holding that A.R.S. § 12-341.01 did not apply because "the essential basis for the dispute was the meaning of [a statute], and the case did not therefore arise out of a contract.").⁷

¶ 24 This case does not arise out of contract because its essential basis is statutory. The Haineses requested a judgment declaring how A.R.S. § 10-11301 applies to the resolution authorizing redistribution of the excess assessment funds. Thus, the basis of this action is a statute, not a contract. The superior court correctly denied fees pursuant to A.R.S. § 12-341.01.

¶ 25 We now consider the superior court's denial of Fountain Foothills' fee request as a sanction. Fee awards are appropriate sanctions when a party brings a claim without substantial justification. A.R.S. § 12-349(A)(1). A claim "without substantial justification" is one that has three elements: It "constitutes harassment, is groundless[,] and is not made in good faith." See A.R.S. § 12-349(A)(1), (F). To support a fee award, "all three elements must be present." Phoenix Newspapers, 188 Ariz. at 244, 934 P.2d at 808.

¶ 26 Fountain Foothills alleges that the Haineses wrongfully named Fountain Foothills as a defendant without a proper basis and for the purpose of harassment. However, the record did not compel the superior court to find that the Haineses' claim was groundless, made in bad faith, or initiated for the purpose of harassment. The Haineses challenged the application of A.R.S. § 10-11301 to the Association's actions. The superior court could properly have determined that contentions made by the Haineses were, at the least, "fairly debatable." Johnson v. Mohave County,206 Ariz. 330, 334-35, ¶¶ 17-19, 78 P.3d 1051, 1055-56 (App.2003) (reversing award of attorneys' fees under A.R.S. § 12-349 because claim, though unsuccessful, was fairly debatable). Thus, the superior court did not err by declining to sanction the Haineses pursuant to A.R.S. § 12-349.

¶ 27 The Haineses request an award of attorneys' fees under Rule 25 of the Arizona Rules of Civil Appellate Procedure on the grounds that Fountain Foothills' cross-appeal is frivolous. Rule 25 authorizes an award of fees as a sanction if an appeal "is frivolous or taken solely for the purpose of delay." ARCAP 25. "The determination to award or decline attorney's fees [pursuant to Rule 25] is within this Court's discretion." Ariz. Dep't of Revenue v. Gen. Motors Acceptance Corp.,188 Ariz. 441, 446, 937 P.2d 363, 368 (App.1996). Moreover, we impose Rule 25 sanctions "with great reservation." Ariz. Tax Research Ass'n v. Dep't of Revenue,163 Ariz. 255, 258, 787 P.2d 1051, 1054 (1989). Provided that there is no allegation of improper motive, an argument is not objectively frivolous for purposes of Rule 25 sanctions "if the issues raised are supportable by any reasonable legal theory, or if a colorable legal argument is presented about which reasonable attorneys could differ." Matter of Levine,174 Ariz. 146, 153, 847 P.2d 1093, 1100 (1993).

¶ 28 We deny the Haineses' request for an award of fees under Rule 25. "The line between an appeal which has no merit and one which is frivolous is very fine, and we exercise our power to punish sparingly." Hoffman v. Greenberg,159 Ariz. 377, 380, 767 P.2d 725, 728 (App.1988). Fountain Foothills' standing argument was not totally baseless. In addition, although Fountain Foothills' request for fees was without merit, the record does not establish frivolousness, intentional delay, or an improper motive. We therefore decline to award attorneys' fees to the Haineses.

¶ 29 For the foregoing reasons, we affirm the superior court's judgment regarding attorneys' fees and standing. However, we reverse the superior court's summary judgment in favor of the Association and Fountain Foothills and remand for a factual determination of whether a trust exists.

SNOW, P.J. and OROZCO, J., concurring.

Footnotes

1. The exceptions authorized by A.R.S. § 10-11302 are not applicable.

2. The presence or absence of terms such as "trustee," "trust," or "settlor" are not dispositive of whether a trust was formed. In fact, despite the lack of words indicating trust formation, the supplemental instructions are addressed to the "Valley National Bank of Arizona Trust Division." Nevertheless, the transfer of title to a trustee is not conclusive, but is only evidence of intent and creation of a trust, and "[w]hether the transfer of bare legal title when considered in light of the parties' conduct demonstrates a clear intent to create a trust is a factual issue properly determined by the trier of fact." Golleher, 148 Ariz. at 544, 715 P.2d at 1232. The conflicting evidence raises an issue appropriate for submission to a jury.

3. These letters are dated 2003, years after the Association was formed and special assessments were levied.

4. A trust involves "a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (the beneficiary)." Black's Law Dictionary 1513 (7th ed.1999). While a trustee holds legal title to the trust res, the beneficiary of a trust "gains a beneficial interest in the trust property." In re Naarden Trust,195 Ariz. 526, 529, ¶ 11, 990 P.2d 1085, 1088 (App.1999); Restatement (Third) of Trusts § 42, cmt. a (2003) ("[B]eneficiaries hold the beneficial interests (or `equitable title') in the trust property, while the trustee (ordinarily) holds `bare' legal title to the property.").

. The Haineses concede that they "could have" made an argument that the articles of incorporation prohibited distribution, but that they chose not to. Thus, the argument is waived on appeal. See State v. Serna,176 Ariz. 267, 270 n. 4, 860 P.2d 1320, 1323 n. 4 (App.1993) ("Defendant's failure to argue and support this contention in the trial court and in his brief constitutes an abandonment and waiver of the issue."). Nevertheless, if statutory law is inapplicable, the Association is bound by its articles. See Lurie v. Ariz. Fertilizer & Chem. Co.,101 Ariz. 482, 485, 421 P.2d 330, 333 (1966) ("With respect to matters to which statutes do not apply, the articles of incorporation of the corporation control and are its fundamental and organic law."). We do not address whether the articles of incorporation might prohibit the redistributions because the issue was waived.

6. Fountain Foothills and the Association, in their combined response, state that "Appellants may not even be `members' of the association because they . . . own the property `as CO-TRUSTEES OF THE RANDOLPH AND KATHLEEN HAINES FAMILY TRUST . . . ." However, trustees have "the power to perform, without court authorization, every act which a prudent man dealing with the property of another would perform for the purposes of the trust" including the power to "[p]rosecute or defend actions, claims or proceedings for the protection of trust assets and of the trustee in the performance of his duties." A.R.S. § 14-7233(A), (C)(25) (1995).

7. Similarly, an action arising out of a trust relationship is not one arising out of a contract within the meaning of the statute. Naarden, 195 Ariz. at 530, ¶ 18, 990 P.2d at 1089.