Litmath v. US Fire

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

LITMATH, LLC, Plaintiff/Appellant,

v.

UNITED STATES FIRE INSURANCE COMPANY, Defendant/Appellee.

No. 1 CA-CV 22-0223
FILED 6-1-2023

Appeal from the Superior Court in Maricopa County
No. CV2014-014302
The Honorable Katherine Cooper, Judge

AFFIRMED

COUNSEL

Ahwatukee Legal Office PC, Phoenix
By David L. Abney
Co-counsel for Plaintiff/Appellant

Poli Moon & Zane PLLC, Phoenix
By Michael N. Poli, Lawrence R. Moon
Co-counsel for Plaintiff/Appellant

Taylor Young Appeals PLLC, Phoenix
By Taylor C. Young
Co-counsel for Plaintiff/Appellant
Christian Dichter & Sluga PC, Phoenix
By Jeffrey O. Hutchins, Stephen M. Dichter, Gena L. Sluga
Counsel for Defendant/Appellee

MEMORANDUM DECISION

Judge Randall M. Howe delivered the decision of the court, in which
Presiding Judge Samuel A. Thumma and Judge Anni Hill Foster joined.

H O W E, Judge:

¶1 Litmath, LLC appeals the trial court’s order granting
judgment as a matter of law (“JMOL”) to United States Fire Insurance
Company (“USFIC”). For the following reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

¶2 Litmath, an Arizona limited liability company, is owned and
managed by husband-and-wife Ivan and Lilian Vachovsky. In 2006,
Litmath purchased a commercial property in Phoenix, Arizona,
(“Property”) and later purchased insurance for the Property through
USFIC. The Property had been leased as a data and call center until January
2008 and remained vacant thereafter.

¶3 Litmath’s insurance policy with USFIC provided that, in the
event of loss or damage, the insured would be entitled to the actual cash
value (“ACV”) of the property at the time of the loss or damage. The ACV
is “the measure of the value of the item at the time of the damage, not at the
time of its original installation or subsequent repair and replacement.” If
the insured used that amount to repair or replace the damaged property,
the insured would be entitled to receive additional payment necessary to
repair or replace the property, the replacement cost value (“RCV”).

¶4 To receive the RCV rather than merely the ACV, the insured
must actually repair or replace the damaged property “as soon as
reasonably possible after the loss or damage.” If the insured did so, the
insurer would pay the least of the following three options: (1) the limit of
insurance applicable to the property, (2) the cost to replace the damaged
property with one of “comparable material and quality” that is “[u]sed for
the same purpose,” or (3) “[t]he amount actually spent that is necessary to
repair or replace the lost or damaged property.”

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¶5 In October 2010, a hailstorm damaged the vacant Property’s
roof, air conditioning, and ventilation equipment. Shortly after the
hailstorm, Litmath submitted a claim on the Property but withdrew it,
stating that the damage was not substantial. At no point did Litmath repair
the Property. Two years later, after a construction company contacted
Litmath and informed it that the Property had indeed been damaged,
Litmath reopened its claim.

¶6 After reopening the claim, Litmath hired its own contractors,
consultants, and public adjustors (“PA”), each of which provided various
estimates of loss. USFIC hired an independent adjuster and consultants to
evaluate the claim; its total estimate of loss was $1.25 million, while the
ACV estimate was about $922,000. The difference in estimates depended on
the scope of repairs to the Property’s cooling towers or battery system. In
February 2013, USFIC paid Litmath the $922,000 ACV value. After
receiving the funds, Litmath hired another PA, who produced various
estimates of the loss, eventually settling on $2.1 million.

¶7 In December 2014, Litmath sued USFIC for breach of contract
and insurer bad faith. Litmath alleged that USFIC breached the implied
covenant of good faith and fair dealing in “lowballing” the amount of
Litmath’s loss and not adequately and timely investigating Litmath’s claim.
“Lowballing” in the insurance industry “refers to an insurance company
paying less on a claim than it knows or it should know how much it
owes . . . The policyholder is not getting the full benefit that’s owed under
their policy.” Litmath sought compensatory and punitive damages as well
as attorneys’ fees. In January 2015, the Vachovskys sold the Property for
$1.33 million.

¶8 After receiving the complaint, USFIC requested under the
insurance policy that the parties first undergo an appraisal process because
of their conflicting damage valuations. When Litmath declined, USFIC
obtained an order staying the case until completion of the appraisal process
to determine the claim’s value. The policy required that in the event of
disagreement about the Property’s value or amount of loss, each party
would select an impartial appraiser, and the appraisers would select a
neutral umpire. If the two appraisers’ valuations differed, the valuation
would be submitted to the umpire.

¶9 Litmath and USFIC each chose an appraiser, who agreed on a
neutral umpire. Litmath’s appraiser opined the RCV to be $2.07 million,
and USFIC’s appraiser opined it to be $526,000. In December 2015, the
umpire determined the RCV to be $1.755 million, and the ACV amount to

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be $1.158 million. Within the next 30 days, USFIC paid Litmath $236,400,
the difference between its ACV estimate and the umpire’s estimate. USFIC
paid Litmath a total of $1.158 million.

¶10 A few years after the appraisal, Litmath moved for partial
summary judgment on the issue of an insurer’s duty of good faith, arguing
that USFIC was vicariously liable for punitive damages its employees and
agents had caused. The court denied the motion. USFIC itself moved for
summary judgment, arguing that the breach of contract claim was moot
because it had fully paid whatever Litmath was owed at the time and that
evidence showed that it never acted in bad faith. The court denied USFIC’s
motion on bad faith and found the breach of contract claim moot.

¶11 USFIC moved in limine to exclude testimony that Litmath
could not afford to make repairs to the Property before it was sold because
such testimony would be “fraud on the Court.” At oral argument, USFIC
also argued that it wanted to preclude testimony that the Vachovskys
themselves could not afford to repair the Property. The court warned
Litmath that “if the Court is going to permit anyone, on behalf of Litmath,
to say Litmath couldn’t afford to fix the building . . . [t]hat will open the
door to cross-examination on the financials of Litmath or the principals
involved . . . if there can be a connection established between the two.”

¶12 The trial court held a jury trial on the bad faith claim. On the
second day of trial and on direct examination, Mrs. Vachovsky testified that
upon receiving the ACV payment, she and her husband, on behalf of
Litmath, called contractors to make the repairs. The contractors, however,
told them that the repairs would cost twice the ACV amount. The
Vachovskys did not use the $922,000 ACV payment to repair the property
because they thought the payment too low to do the repairs.
Mrs. Vachovsky also testified that USFIC undervalued Litmath’s claim
because the ACV payment was not enough to repair the Property based on
their PA’s $2.1 million estimate.

¶13 While still on direct examination, Litmath’s counsel asked
Mrs. Vachovsky without objection:

Q. So the defendant wants to know why Litmath didn’t put
its own money into this building and make the repairs on its
own. Did Litmath have the financial wherewithal to do that?

A. . . . [T]he only asset Litmath owned was the building, and
there was no income coming from that.

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Q. Did you and your husband have the independent financial
wherewithal to have loaned money to Litmath in order to
make the repairs to the building?

A. Yes.

Q. Would that have hurt your family at all financially if you
would have loaned the money?

A. No.

¶14 Later, on cross-examination, USFIC’s counsel asked
Mrs. Vachovsky:

Q. If it had cost a million dollars to repair the building out of
your own pocket, could you have done that without
imperiling any interest of your family?

...

A. We could have done it without impairing the interest of the
family.

¶15 Throughout Mrs. Vachovsky’s cross-examination, Litmath
objected to the questions and moved for mistrial. The court denied the
motions and allowed the testimony because it was “within the proper scope
of cross-examination of what was testified to on direct.” USFIC continued
to ask Mrs. Vachovsky how much money she and her husband could have
spent on the Property:

Q. $3 million, not a problem?

A. I don’t think, at the time, it would have been a problem.

...

Q. [Y]ou could have spent three, $4 million on this without
hurting any family interest; isn’t that right?

¶16 Litmath objected and a discussion ensued between counsel.
Eventually, USFIC’s counsel asked:

Q. [I]s the door open now? . . . You could have spent $4 million
couldn’t you? . . .

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A. Keep in mind, I have already spent [$]4.6 million for this
building . . . Both my husband and I loaned the money to
Litmath, LLC to repay the mortgage because the mortgage
was due. We were also paying and maintaining the building
. . . So you’re asking me, could you spend another four
million? I think that would have been very risky for the
family.

¶17 On the third day of trial, Litmath’s insurance expert testified
that the USFIC policy covered Litmath for the full RCV value through
standard RCV language. He testified that under the policy, however, the
insured must have first repaired or replaced the property to receive the
claim’s full RCV payment. He added that general contractors commonly
used the ACV payment to begin repairs and then completed the project
with the remaining RCV payment received later. An insured could use the
ACV payment to repay a debt, but the insured would not be entitled to the
full RCV payment. On the fourth day of trial, Litmath’s PA also testified
that Litmath had to spend the ACV money to receive the remainder of the
full RCV amount. The same day, Litmath’s real estate expert testified that,
had the Property been repaired, it would have been worth more than $4
million.

¶18 After Litmath’s case in chief, USFIC moved for JMOL. USFIC
argued that no reasonable jury could find that USFIC acted unreasonably
because Litmath’s various repair estimations showed that its claim was
“fairly debatable,” that USFIC was not part of Litmath’s decision to sell the
property “as is” without making repairs, and that its actions did not cause
diminution in the Property’s value or loss of proceeds from its sale. USFIC
argued last that Litmath could have easily repaired the building with
money that USFIC paid or advanced by Litmath’s members. Until Litmath
used the ACV amount to repair the damage, it was not entitled to the RCV
payment under the policy. The court heard oral argument and took the
matter under advisement. Trial proceeded, and on the sixth day of trial the
court granted the motion in part on the RCV payment issue. After USFIC
presented its defense case, it renewed its JMOL motion on the issue of
Litmath’s lost proceeds at the sale.

¶19 The court then granted the motion in its entirety and
dismissed the jury. The court found that the policy required Litmath to use
the ACV amount to repair the Property before receiving the full RCV
payment. If Litmath had made the repairs, it would have been entitled to
the remaining portion of the claim, about $600,000 according to the court’s
calculation. But the court found that Litmath had the right not to repair the

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Property and did not do so, and USFIC did not relieve Litmath from its
obligations under the policy. USFIC’s actions, therefore, were reasonable,
and it was not obligated to pay Litmath more than the ACV amount under
the circumstances. The court also found that USFIC’s actions did not cause
Litmath not to repair the Property. Rather, Litmath decided on its own not
to repair the Property, use the ACV proceeds for other purposes, and to sell
the Property “as is,” which resulted in the diminished value. The court
noted that even if the amount was insufficient to Litmath, the Vachovskys
could have paid for additional repairs to the Property. Any loss from the
sale resulted from Litmath’s conduct. Litmath timely appealed.

DISCUSSION

¶20 Litmath argues that the trial court erred (1) in disregarding
the LLC framework and admitting evidence of the Vachovskys’ personal
finances because the evidence is irrelevant and (2) in granting USFIC’s
motion for JMOL because the evidence shows that USFIC committed the
tort of bad faith against Litmath.

I. Admission of Evidence of the Vachovskys’ Personal Finances

¶21 We will not disturb the trial court’s ruling on the admissibility
of evidence absent a clear abuse of discretion and resulting prejudice.
Lohmeier v. Hammer, 214 Ariz. 57, 60 ¶ 7 (App. 2006). Although Litmath is
correct that the evidence was initially inadmissible and irrelevant, Litmath
opened the door to the evidence during Mrs. Vachovsky’s direct
examination. Under the “open door” doctrine “where one party injects
improper or irrelevant evidence or argument, the ‘door is open,’ and the
other party may have a right to retaliate by responding with comments or
evidence on the same subject.” Pool v. Superior Court, 139 Ariz. 98, 103
(1984). “The rule is most often applied to situations where evidence
adduced or comments made by one party make otherwise irrelevant
evidence highly relevant or require some response or rebuttal.” Id. The
party that opens the door typically is precluded from raising the error on
appeal after first inviting the error. State v. Lucero, 223 Ariz. 129, 135 ¶ 17
(App. 2009) (“[I]nvited error precludes a party who causes or initiates an
error from profiting from the error on appeal . . .[and] the offending party
has no recourse on appeal.”).

¶22 Here, the court did not err in admitting evidence of the
Vachovskys’ personal finances. Litmath opened the door to this evidence
during Mrs. Vachovsky’s direct examination. Without objection, Litmath’s
counsel asked her whether she and her husband had “the independent

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financial wherewithal to have loaned money to Litmath in order to make
the repairs.” Without objection, she answered, “Yes.” Counsel also asked
her whether lending Litmath the money would have “hurt [her] family at
all financially.” Again, without objection, she replied, “No.” She also
testified that she and her husband had lent Litmath money before to pay
the mortgage, and that Litmath did not repair the Property because USFIC
undervalued its claim in paying about $922,000. All this was during her
direct examination by Litmath’s attorney.

¶23 By opening the door to the Vachovskys’ finances, Litmath
made the evidence relevant and admissible on the causation issue. The
evidence was relevant to refute Litmath’s claim that USFIC’s conduct led
Litmath to do a forced sale of the Property at a lower value and, as a result,
caused Litmath’s loss in proceeds. Showing that the Vachovskys had the
money to repair the Property demonstrated that Litmath could have gained
access to funds to repair the Property before selling it but chose not to do
so. Thus, the evidence is relevant to demonstrate that USFIC did not act
unreasonably or cause Litmath’s alleged losses upon selling the Property.

¶24 Litmath argues that the evidence was unfairly prejudicial
because USFIC did not assert an alter ego theory or present facts to pierce
the LLC’s veil. Litmath also argues that the elicited testimony led the jury
to blame the Vachovskys as “greedy manipulators,” even though Litmath
relied on receiving the full RCV payment in good faith to commence
repairs. Litmath has not shown unfair prejudice, however. The
admissibility of evidence of the Vachovskys’ personal wealth is not
predicated on USFIC first piercing the corporate veil. The point of piercing
the LLC’s veil under an alter ego theory is to hold persons such as an LLC’s
members liable for the LLC’s debts and obligations. See Keg Restaurants
Ariz., Inc. v. Jones, 240 Ariz. 64, 73 ¶ 31 (App. 2016) (“[W]hen a subsidiary
corporation is merely the parent corporation’s alter ego and when
observing the corporate form would work an injustice, a court may
properly ‘pierce the corporate veil’ and hold the parent corporation liable
for the acts of its subsidiary.”). Admitting evidence of the Vachovskys’
personal wealth was not to hold them liable for Litmath’s debts or
obligations, but to show that USFIC did not cause a diminution in the
Property’s value. See infra ¶¶ 29–30.

¶25 Further, while the Vachovskys were not obliged to lend
Litmath money, see A.R.S. § 29–3304(A) (stating that an LLC’s members are
“not personally liable, directly or indirectly, by way of contribution or
otherwise,” for an LLC’s liability solely because they are members), asking
about their financial resources on direct examination—while precluding

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cross-examination on the topic—could have produced misleading
testimony on causation, that USFIC “lowballed” its payment and Litmath
was indeed forced to sell the Property. This would have left a one-sided
presentation for the jury’s consideration. Cf. E.E.O.C. v. Gen. Telephone Co.
of N.W., Inc., 885 F.2d 575, 578 (9th Cir. 1989) (“[F]acilitating one-sided
presentation of a defense prevents the factfinder from getting ‘the full
picture’ of a defendant’s conduct by precluding the plaintiff from enjoying
a fair opportunity to challenge the evidence and the defendant’s theory in
offering it.”). Thus, once Litmath’s counsel opened the door to the
Vachovskys’ personal finances, USFIC was entitled to a “fair opportunity
to challenge the evidence.” Id. Even though the court dismissed the jury
before they were asked to deliberate on the case, Litmath had opened the
door, and the evidence added to the record. The trial court had authority to
consider the “entire record” before it in rendering its decision. See Schwab
v. Ames Const., 207 Ariz. 56, 59 ¶ 15 (App. 2004). Litmath did not show,
based on the record, how the admitted evidence unfairly prejudiced
Litmath. See Walsh v. Walsh, 230 Ariz. 486, 494 ¶ 24 (App. 2012) (stating not
all errors warrant reversal; this court will reverse only if a party suffers
prejudice from the error, and the prejudice “appear[s] affirmatively from
the record”). Therefore, Litmath has shown no reversible error.

II. Insurance Bad Faith

¶26 Initially, USFIC argues that Litmath waived the argument
that the court erred in granting USFIC JMOL because it failed to develop it
or cite portions of the record under Arizona Rule of Civil Appellate
Procedure (“Rule”) 13(a). Although some arguments on this issue are not
fully developed, the brief is not so deficient as to warrant waiver. See Ramos
v. Nichols, 252 Ariz. 519, 523 ¶ 10 (App. 2022) (stating that courts prefer to
decide cases on their merits). We thus address Litmath’s arguments.

¶27 We review a ruling on a JMOL motion de novo but view the
evidence in the light most favorable to the nonmoving party. Torres v. Jai
Dining Servs. (Phx.) Inc., 252 Ariz. 28, 30 ¶ 9 (2021); Spooner v. City of Phoenix,
246 Ariz. 119, 123 ¶ 7 (App. 2018). The trial court considers “the entire
record” in determining a JMOL motion. See Schwab, 207 Ariz. at 59 ¶ 15; see
also Glazer v. State, 237 Ariz. 160, 167 ¶ 29 (2015) (“The standards for
granting or denying a motion for JMOL and a motion for summary
judgment are the same.”). A court may properly grant JMOL against a party
only when a “reasonable jury would not have a legally sufficient
evidentiary basis to find for the party” on an issue that is necessary to the
party’s claim or defense. Ariz. R. Civ. P. 50(a); Dupray v. JAI Dining Servs.
(Phx.), Inc., 245 Ariz. 578, 582 ¶ 11 (App. 2018). We will uphold a grant of

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JMOL if “the facts produced in support of the claim or defense have so little
probative value, given the quantum of evidence required, that reasonable
people could not agree with the conclusion advanced by the proponent of
the claim or defense.” Jones, 240 Ariz. at 72 ¶ 28 (quoting Felder v.
Physiotherapy Assocs., 215 Ariz. 154, 162 ¶ 36 (App. 2007)).

¶28 Bad faith insurance claims derive from the duty of good faith
and fair dealing. Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256,
259 (1990). An insurance company breaches that duty, and “the tort of bad
faith arises[,] when the insurance company intentionally denies, fails to
process or pay a claim without a reasonable basis for such action.” Cavallo
v. Phx. Health Plans, Inc., 254 Ariz. 99, 104 ¶ 19 (2022) (quoting Noble v. Nat’l
Am. Life Ins. Co., 128 Ariz. 188, 190 (1981)). The insured has the burden to
prove that its insurer “unreasonably investigate[d], evaluate[d], or
processe[d] a claim (an ‘objective’ test), and either [knew] it [was] acting
unreasonably or act[ed] with such reckless disregard that such knowledge
may be imputed to it (a ‘subjective’ test).” Nardelli v. Metro. Grp. Prop. & Cas.
Ins. Co., 230 Ariz. 592, 597–98 ¶ 19 (App. 2012); Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 516 ¶ 32 (App. 2006).

¶29 Here, Litmath did not demonstrate that USFIC acted
unreasonably or intended to do so. The record shows that USFIC timely
investigated, evaluated, and processed Litmath’s claim. After Litmath
reopened its claim in 2012, two years after the hailstorm, USFIC hired an
independent adjuster and consultants to evaluate the claim. They produced
an estimate shortly thereafter and paid Litmath about $922,000 for the ACV
amount. Meanwhile, Litmath hired different adjusters, contractors, and
consultants who produced varying estimates before presenting its final
estimate in January 2014. Because of the difference in loss valuation, USFIC
requested the parties seek an appraisal by a neutral umpire pursuant to the
policy. The umpire estimated the RCV amount to be $1.755 million, and the
ACV amount to be $1.158 million. Within 30 days of the umpire’s estimate,
USFIC paid Litmath the $236,400 difference in the ACV amount to match
the umpire’s ACV estimate. Even if USFIC had retained biased adjusters to
provide a low-balled estimate, USFIC reasonably and promptly complied
with the umpire’s estimate.

¶30 Moreover, Litmath did not show that USFIC’s actions caused
the Property to be sold for $1.33 million or caused a forced sale of the
Property. The record shows that USFIC followed the policy in not
providing the remaining portion of the RCV amount unless Litmath
commenced repairs to the Property. The insurance policy and testimony
from Litmath’s experts are clear that had Litmath used the ACV amount to

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repair the Property, USFIC would have paid it the remaining RCV amount.
This is a common provision in insurance contracts. See, e.g., Tritschler, 213
Ariz. at 510 ¶ 9. Also, Litmath’s real estate expert testified that, had Litmath
repaired the Property, it would have sold for more than $4 million. But
Litmath chose not to make the repairs and instead sold the Property for a
lower value before the appraisal ended at the beginning of litigation.
Litmath then chose to use the money to pay off the Vachovskys for loans
they had made to Litmath, which it was entitled to do. As the evidence
revealed, however, Litmath did not then have money for the repairs. Yet
the Vachovskys were financially capable of supplying Litmath with the
funds to do the repairs. Litmath’s choices caused its losses. USFIC’s actions
were reasonable, and where an insurer acts reasonably, it has not
committed bad faith. Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95,
104 (App. 1986). The court considered the entire record in rendering its
decision, and Litmath did not show that USFIC committed bad faith
practices.

¶31 Litmath nevertheless argues that USFIC’s breach of the duty
of good faith and fair dealing absolved it from repairing the Property and
that the Vachovskys did not use the ACV payment for repairs because
USFIC “lowballed” the ACV amount. But Litmath never had a duty to
repair the Property, as its insurance expert testified, nor did USFIC have a
duty under the policy to pay Litmath the RCV amount before it started the
repairs. See Rawlings v. Apodaca, 151 Ariz. 149, 155 (1986) (The insured is not
entitled “to payment of claims that are excluded by the policy, nor to
protection in excess of that which is provided for in the contract, nor to
anything inconsistent with the limitations contained in the contract.”).
Litmath could have used the ACV payment to start repairs and then
subsequently receive the full RCV payment to complete them. Litmath’s
insurance expert testified that general contractors typically work on
projects this way. And although Litmath may not have had the funds to
repair the Property because the Vachovskys used USFIC’s ACV payment
for another purpose, evidence shows that the Vachovskys themselves had
the financial capability to lend Litmath up to $3 million if the ACV payment
did not suffice to cover the repairs. Then they would have received the RCV
payment.

¶32 Even if evidence of their personal finances had not been
admissible, Litmath did not suffer prejudice. See Ariz. R. Civ. P. 61 (“Unless
justice requires otherwise, an error in admitting or excluding evidence . . .
is not grounds for granting a new trial, for setting aside a verdict, or for
vacating, modifying, or otherwise disturbing a judgment or order.”); see also
supra ¶¶ 24–25. The record provides sufficient evidence—even without that

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of the Vachovskys’ personal finances—that USFIC did not act in bad faith
and did not preclude Litmath from repairing the Property. USFIC timely
and reasonably followed the insurance policy by paying Litmath the ACV
value that the neutral umpire estimated. Litmath’s own conduct in failing
to repair the Property with the full ACV amount precluded a profitable sale.
USFIC was entitled to judgment regardless of the admissibility of the
Vachovskys’ financial ability to fund the repairs. Therefore, the court did
not err in granting USFIC’s JMOL motion.

CONCLUSION

¶33 For the foregoing reasons, we affirm. Both parties request
attorneys’ fees and costs under Rule 21, A.R.S. § 12–341, and A.R.S. § 12–
341.01, which authorizes a discretionary fee award to the successful party
in an action arising out of a contract. Litmath also requests costs under
A.R.S. § 12–331 and A.R.S. § 12–342. USFIC is the successful party on appeal
and may recover reasonable attorneys’ fees and taxable costs incurred in
this court upon compliance with Rule 21.

AMY M. WOOD • Clerk of the Court
FILED: AA

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