Mill Alley Partners v. Wallace

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

MILL ALLEY PARTNERS, an Arizona general partnership,
Plaintiff/Appellee,

v.

WILLIAM H. WALLACE; CLUB LEVEL, INC.,
Defendants/Appellants.

No. 1 CA-CV 13-0547
FILED 11-20-14

Appeal from the Superior Court in Maricopa County
No. CV2009-032774
The Honorable Michael D. Gordon, Judge

REVERSED; VERDICT REINSTATED

COUNSEL

Mandel Young, PLC, Phoenix
By Robert A. Mandel, Taylor C. Young, Jennifer M. Perkins
Counsel for Plaintiff/Appellee

The Law Offices of Mary T. Hone, PLLC, Scottsdale
By Mary T. Hone
Counsel for Defendants/Appellants

OPINION

Chief Judge Diane M. Johnsen delivered the opinion of the Court, in which
Acting Presiding Judge Lawrence F. Winthrop and Judge John C. Gemmill
joined.

MILL ALLEY v. WALLACE et al.
Opinion of the Court

J O H N S E N, Chief Judge:

¶1 After a jury entered a general verdict in favor of the defendant
on a landlord's claim for breach of a guaranty, the superior court granted a
new trial because it concluded it had erred by allowing the jury to decide
whether the claim was barred by laches or equitable estoppel. Equitable
defenses are for the court to decide, not the jury. But because the landlord
had failed to object, absent fundamental, prejudicial error, the superior
court lacked the power to grant a new trial on that ground. On appeal, the
landlord has not demonstrated it was prejudiced by the error. Accordingly,
and because the superior court properly instructed the jury about when the
claim accrued for purposes of the statute of limitations, we reverse the new-
trial order and reinstate the verdict in favor of the defendant.

FACTS AND PROCEDURAL HISTORY

¶2 Mill Alley Partners leased the second floor of a Tempe
building to William H. Wallace and his company Club Level, Inc.
(collectively "Wallace") for use as a nightclub. Wallace sold the nightclub
in early 2003. In connection with the sale, Wallace guaranteed the first 36
months of a new lease between the new nightclub owner and Mill Alley.

¶3 From the beginning, the new tenant persistently failed to pay
the rent in full and on time, and ultimately closed the nightclub seven
months into the lease. Mill Alley sued Wallace in October 2009, alleging
breach of his guaranty of the lease. In answering the complaint, Wallace
alleged Mill Alley's claim was barred by laches, estoppel and the applicable
six-year statute of limitations. See Ariz. Rev. Stat. § 12-548 (2014).1 During
a three-day trial, the parties put on evidence regarding the tenant's missed
payments, the date the tenant abandoned the space and subsequent
unsuccessful negotiations between Wallace and Mill Alley.

¶4 Over Wallace's objection, the superior court instructed the
jury that Mill Alley's claim accrued for purposes of the statute of limitations
upon a material breach of the guaranty by Wallace. Neither party objected
to the proposed instructions regarding laches or equitable estoppel, nor to
allowing the jury to decide those equitable defenses. During deliberations,
the jury submitted questions regarding the accrual of Mill Alley's claim.
After discussing the issue with counsel, the court concluded it had
instructed the jury incorrectly about when the claim accrued for purposes

1 Absent material revision after the date of the events at issue, we cite
a statute's current version.

2

MILL ALLEY v. WALLACE et al.
Opinion of the Court

of limitations. Over Mill Alley's objection, the court reinstructed the jury
that Mill Alley's claim accrued upon a material breach by the new tenant,
and not by Wallace. After each party gave another closing argument, the
jury returned a general verdict in favor of Wallace.

¶5 A few days later, the superior court sua sponte notified the
parties it was considering ordering a new trial because it had erred by
submitting the equitable defenses to the jury rather than deciding them
itself. In response to the court's invitation to file briefs, Mill Alley moved
for a new trial, arguing (1) the court erred by submitting equitable defenses
to the jury, (2) the mid-deliberation changes to the jury instructions
constituted an irregularity resulting in prejudice, and (3) the amended
instruction on accrual was incorrect as a matter of law. The court granted
a new trial on the basis that it had committed fundamental error in
submitting the equitable defenses to the jury and expressly rejected the
other grounds.

¶6 Wallace appeals from the new-trial order. This court has
jurisdiction pursuant to Arizona Revised Statutes § 12-2101(A)(5)(a) (2014).

DISCUSSION

¶7 We review a ruling on a motion for new trial for an abuse of
discretion. City of Glendale v. Bradshaw, 114 Ariz. 236, 237-38, 560 P.2d 420,
421–22 (1977). Although we apply a more liberal standard when reviewing
an order granting a new trial than an order denying one, see Caldwell v.
Tremper, 90 Ariz. 241, 246, 367 P.2d 266, 269 (1962), "if the lower court
granted a new trial because of instructions believed to be erroneous, which
were in fact proper . . . then the court having misjudged the correctness of
said instruction, there is no discretion to be exercised." City of Phoenix v.
Harlan, 75 Ariz. 290, 293-94, 255 P.2d 609, 611-12 (1953). This is because a
court lacks discretion to make legal error. Id.; Long v. Corvo, 131 Ariz. 216,
217, 639 P.2d 1041, 1042 (App. 1981).

¶8 On appeal, the parties do not disagree that equitable doctrines
such as laches and estoppel are matters for the court to decide, not the jury.
See McCloud v. State, 217 Ariz. 82, 86, ¶ 9, 170 P.3d 691, 695 (App. 2007);
Timmons v. City of Tucson, 171 Ariz. 350, 356-57, 830 P.2d 871, 877-78 (App.
1991). Wallace, however, argues the superior court erred by granting a new
trial because Mill Alley did not object to the jury instructions on laches and
equitable estoppel and agreed that the jury would finally rule on those
defenses. A party's failure to object to an erroneous jury instruction waives
all but fundamental error. See Data Sales Co. v. Diamond Z Mfg., 205 Ariz.

3

MILL ALLEY v. WALLACE et al.
Opinion of the Court

594, 601, ¶ 31, 74 P.3d 268, 275 (App. 2003); Ariz. R. Civ. P. 51(a). For that
reason, absent fundamental error, the superior court may not grant a new
trial based on an erroneous instruction to which no objection was raised at
trial. Long, 131 Ariz. at 217, 639 P.2d at 1042 (new-trial order in such
circumstances "exceeds the court's legal discretion and must be set aside").

¶9 Fundamental error is error that goes to the foundation of the
case and deprives a party of a fair trial. Id.; Maxwell v. Aetna Life Ins. Co.,
143 Ariz. 205, 212, 693 P.2d 348, 355 (App. 1984). "The doctrine of
fundamental error is sparingly applied in civil cases and may be limited to
situations where the instruction deprives a party of a constitutional right."
Bradshaw v. State Farm Mut. Auto. Ins. Co., 157 Ariz. 411, 420, 758 P.2d 1313,
1322 (1988). To prevail on appeal, a party claiming fundamental error also
must show prejudice. See Clark v. Muñoz, 235 Ariz. 201, ___, ¶ 12, 330 P.3d
958, 960 (2014).

¶10 Here, the superior court erred by allowing the jury to finally
decide whether Mill Alley's claim was barred by laches or estoppel. We
need not decide whether the error was fundamental, however, because Mill
Alley cannot explain how it was prejudiced by having the jury rather than
the court decide the equitable defenses. Mill Alley suggests the jury may
have been improperly influenced by the instructions' reference to the
possibility of "undue delay," but the same instructions are given whenever
a jury is asked to give advisory verdicts about laches and estoppel. In any
event, given the general verdict, Mill Alley cannot establish that the jury
found against it based on laches or equitable estoppel rather than on the
statute of limitations.

¶11 Mill Alley, however, also argues the general verdict cannot
stand because the amended instruction the superior court gave on
limitations was confusing and legally incorrect.2 As noted, after receiving
the jurors' questions about accrual, the superior court reinstructed the jury
as follows:

[Wallace has] raised as a defense to plaintiff's claim for breach
of [the] Guarantee Agreement[] . . . that it is time-barred
because plaintiff did not bring its suit within six (6) years . . . .

2 Without filing a cross-appeal, an appellee may argue that a new-trial
order should be sustained on grounds argued but not relied on by the trial
court. Santanello v. Cooper, 106 Ariz. 262, 264-65, 475 P.2d 246, 248-49 (1970).

4

MILL ALLEY v. WALLACE et al.
Opinion of the Court

The accrual date is triggered by the [tenant's] material breach
of the lease, which is a date that you must determine.

A material breach occurs when a party fails to do something
required, which is so important to the contract that it defeats
the very purpose of the contract.

¶12 Mill Alley argues this amended instruction misstates the law.
It contends that because a guaranty contract is a separate contract,
independent of the underlying obligation, the accrual of a claim for breach
of a guaranty is independent of the accrual of a claim for breach of the
underlying obligation. Although Mill Alley is correct that a guaranty
contract is independent of the underlying obligation, Flori Corp. v.
Fitzgerald, 167 Ariz. 601, 602-03, 810 P.2d 599, 600-01 (App. 1990), it does not
follow that a claim for breach of a guaranty cannot accrue upon a breach of
the underlying obligation. Indeed, several courts have held that a claim
against a guarantor generally accrues when the principal defaults. See Long
Island Trust Co. v. Dicker, 480 F. Supp. 656, 658 (N.D. Tex. 1979), rev'd on other
grounds, 659 F.2d 641 (5th Cir. 1981); California First Bank v. Braden, 264 Cal.
Rptr. 820, 822 (Cal. App. 1989); Haber v. Nasser, 733 N.Y.S.2d 720, 721 (N.Y.
App. Div. 2001); Leedom v. Spano, 647 A.2d 221, 226 (Pa. Super. Ct. 1994);
Sapp v. Wheeler, 741 S.E.2d 565, 570 (S.C. App. 2013); 38 Am. Jur. 2d Guaranty
§ 96 (2014) ("Generally, the statute begins to run on the breach of the
underlying obligation triggering the guarantor's obligations.").

¶13 Notwithstanding any general rule of accrual, the parties may
agree on notice or cure periods that as a practical matter will toll the accrual
of a claim for breach of the guaranty until some point after a breach of the
underlying obligation. See Provident Nat'l Assurance Co. v. Sbrocca, 180 Ariz.
464, 466, 885 P.2d 152, 154 (App. 1994) ("The nature and extent of a
guarantor's liability depends upon the terms of the contract."); United States
v. Gottlieb, 948 F.2d 1128, 1129-30 (9th Cir. 1991) (when guaranty required
written demand for performance, claim for breach did not accrue until after
demand was made); United States v. Brown, 833 F. Supp. 625, 629 (E.D. Mich.
1993); 38 Am. Jur. 2d Guaranty § 96 (2014). But see Henry's Drive-In, Inc. v.
Pappas, 287 A.2d 35, 38 (Md. 1972) (limitations begins to run when plaintiff
could have made demand for performance).

¶14 The guaranty here provided that Wallace's obligation arose
immediately upon the tenant's failure to pay, without any requirement of

5

MILL ALLEY v. WALLACE et al.
Opinion of the Court

notice or demand for performance.3 For that reason, the amended
instruction correctly stated that Mill Alley's claim for breach of the guaranty
accrued as of the date of the tenant's material breach of the lease.

CONCLUSION

¶15 We need not decide whether the submission of laches and
estoppel to the jury constituted fundamental error warranting a new trial
because Mill Alley cannot show it was prejudiced by the error. In the
absence of prejudice, the superior court lacked discretion to grant a new
trial on that ground. Nor did the limitations instruction warrant a new trial;
based on the language of the guaranty, the court correctly instructed the
jury that a claim for breach accrued upon a breach of the underlying
obligation. For these reasons, we reverse the grant of a new trial and order
the verdict reinstated.

¶16 Wallace requests his attorney's fees on appeal, but cites only
Rule 21, Arizona Rules of Civil Appellate Procedure, which does not
provide a substantive basis to award fees. See ARCAP 21(a)(2); see Freeman
v. Sorchych, 226 Ariz. 242, 252, ¶ 31, 245 P.3d 927, 937 (App. 2011). Upon
compliance with Rule 21, Wallace is entitled to his statutory taxable costs
on appeal.

:jt

3 As relevant here, the guaranty provided: "Immediately upon each
and every default by TENANT under the Lease, without any notice to or
demand upon the undersigned, the undersigned shall pay to [Mill Alley]
the sum or sums in default and shall comply with or perform all of the
terms, covenants and conditions of the Lease which shall be binding upon
TENANT as provided in the Lease."

6