Café Valley, Inc. v. Navidi

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

CAFÉ VALLEY, INC., an Arizona corporation, Plaintiff/Appellant,

v.

MASSOUD and ZOHREN NAVIDI, husband and wife,
Defendants/Appellees.

No. 1 CA-CV 13-0266
FILED 07-24-2014

Appeal from the Superior Court in Maricopa County
No. CV2012-008660
The Honorable Lisa Daniel Flores, Judge

REVERSED AND REMANDED

COUNSEL

Schmitt Schneck Smyth Casey & Even PC, Phoenix
By David T. Maddox, James L. Williams
Counsel for Plaintiff/Appellant

Wilenchik & Bartness PC, Phoenix
By Dennis I. Wilenchik, Tyler Q. Swensen, Jacob G. Fleming
Counsel for Defendants/Appellees
 CAFE VALLEY v. NAVIDI
Opinion of the Court

OPINION

Judge Maurice Portley delivered the Opinion of the Court, in which
Presiding Judge Lawrence F. Winthrop and Judge Andrew W. Gould
joined.

P O R T L E Y, Judge:

¶1 Café Valley, Inc., challenges the dismissal of its complaint
for declaratory judgment and the award of attorneys’ fees and costs to
Massoud and Zohren Navidi. For the following reasons, we reverse the
dismissal and the award of attorneys’ fees and costs, and remand this
matter to the superior court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND 1

¶2 Café Valley produces and sells bakery products. Massoud
Navidi is the President and Chief Executive Officer of United General
Bakery, Inc., and owns less than one percent of the outstanding shares of
Café Valley. United General Bakery does business as Upper Crust Bakery,
Inc., and directly competes with Café Valley.

¶3 This dispute arose when the Navidis made a request to
inspect and copy Café Valley’s records pursuant to Arizona Revised
Statutes (“A.R.S.”) section 10-1602, 2 which provides that a qualifying
shareholder is entitled to inspect certain corporate records upon five
business days’ written notice. A.R.S. § 10-1602(A). A qualifying
shareholder may also inspect certain other records (board of directors,
financial, accounting, and shareholder records) if: (1) the shareholder
makes a demand to do so in good faith and for a proper purpose; (2) the
shareholder describes the purpose of the inspection and the records to be
inspected with reasonable particularity; and (3) “[t]he records are directly

1 When reviewing an order granting a motion to dismiss, we accept as
true the well-pleaded facts in the complaint. Jeter v. Mayo Clinic Ariz., 211
Ariz. 386, 389, ¶ 4, 121 P.3d 1256, 1259 (App. 2005).

2We cite the current version of applicable statutes absent changes
material to this decision.

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Opinion of the Court

connected with the shareholder’s purpose.” A.R.S. § 10-1602(B)-(C). If a
corporation refuses to allow a shareholder who complies with
§ 10-1602(B)-(C) to inspect records, the shareholder may apply to the
superior court for an order to permit inspection. A.R.S. § 10-1604(B).

¶4 The Navidis made their written demand to inspect and copy
corporate records, financial statements, and accounting documents
pursuant to § 10-1602(A)-(B). Café Valley responded that it would comply
with § 10-1602(A), but would not produce the requested financial
statements and accounting documents because that request did not meet
the statutory requirements. The Navidis objected to the response in a
letter that pressed their request for the financial and accounting
documents pursuant to § 10-1602(B).

¶5 Café Valley then filed this action asking the superior court to
issue a declaratory judgment regarding: (1) the Navidis’ right to demand
records under § 10-1602(B); and (2) whether the Navidis had met the
conditions of §§ 10-1602(C)(1), (3). The Navidis moved to dismiss,
arguing Café Valley did not have a right to sue to prevent inspection
under § 10-1602 and could not rely on Arizona’s declaratory judgment
statutes to circumvent that limitation. In addition, they argued no
justiciable controversy existed and a judicial declaration would not
resolve the parties’ underlying dispute. 3 The superior court granted the
motion and awarded the Navidis their attorneys’ fees and costs. Café
Valley filed this appeal after the entry of the final judgment. 4

DISCUSSION

I. Motion to Dismiss

¶6 Café Valley argues the superior court erred in granting the
Navidis’ motion to dismiss because the complaint stated a valid cause of

3 In the motion to dismiss, the Navidis stated that they had submitted an
updated request to Café Valley designed to assuage Café Valley’s
professed concerns with the Navidis’ document request. Although the
updated request was addressed in the ruling, it was not a factor in the
ruling and is not at issue in this appeal.

4During this appeal, Café Valley asked to supplement the record and
have this court take judicial notice of Maricopa County Superior Court
Cause No. CV 2013-007139. The request is denied.

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Opinion of the Court

action for declaratory relief. We review a decision granting a motion to
dismiss de novo. Coleman v. City of Mesa, 230 Ariz. 352, 356, ¶ 8, 284 P.3d
863, 867 (2012).

A. A.R.S. § 10-1604 Does Not Prohibit the Action

¶7 The superior court noted that although a shareholder may
ask a court to compel inspection of corporate records pursuant to
§ 10-1604, the statute does not afford a comparable right to a corporation
faced with a shareholder’s request for documents. The Navidis argue §
10-1604 provides the exclusive framework for resolving disputes arising
out of a shareholder demand to inspect records pursuant to §§ 10-1601 to
-1604, and Café Valley cannot alter the “balance of power” between
corporations and shareholders by initiating a declaratory judgment action.
Café Valley contends, however, that because § 10-1604 allows it to seek
protection from a shareholder’s inspection request by asking the court to
impose reasonable restrictions on the use or distribution of records and to
request an award of its attorneys’ fees if the court denies a shareholder’s
demand to inspect, it does not bar a corporation from filing an action for a
judicial determination of its rights.

¶8 We find unpersuasive the Navidis’ argument that a
corporation may not “circumvent” the procedures set forth in §§ 10-1601
to -1604 by seeking a declaration of a shareholder’s right to inspect
corporate records. A corporation can deny a shareholder’s request to
inspect documents and put the onus on the shareholder to follow and
initiate an action as the statute allows, but the statutes do not prohibit a
corporation from preemptively challenging a shareholder’s demand to
inspect corporate records. See A.R.S. § 10-1604(B); see also State Farm Mut.
Auto. Ins. Co. v. White, 231 Ariz. 337, 341, ¶ 14, 295 P.3d 435, 439 (App.
2013) (stating that the court “will not read into a statute something which
is not within the manifest intent of the legislature as indicated by the
statute itself” (quoting City of Tempe v. Fleming, 168 Ariz. 454, 457, 815 P.2d
1, 4 (App. 1991) (internal quotation marks omitted))). 5

5 We note other courts have considered corporate declaratory judgment
actions concerning a company’s obligation to permit inspection of its
records. See, e.g., Miles v. Bank of Heflin, 328 So. 2d 281, 286-87 (Ala. 1975)
(recognizing that the bank could seek declaratory judgment to limit
information stockholders sought to review); Fritz v. Belcher Oil Co., 363 So.
2d 155, 158-59 (Fla. Dist. Ct. App. 1978) (recognizing that a corporation

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Opinion of the Court

¶9 Further, the fee-shifting scheme set forth in § 10-1604(C)
does not implicitly prohibit an action by the corporation. The relevant
provision states that if the court orders inspection, it shall order the
corporation to pay the shareholder’s fees unless the corporation
establishes it denied the request in good faith; if the court denies the
shareholder’s request for inspection, it may order the shareholder to pay
the corporation’s fees. A.R.S. § 10-1604(C). The Navidis contend the
Legislature structured the statute in this manner — and did not afford the
shareholder the same “good faith” defense available to the corporation —
because the shareholder alone has the power to initiate litigation.
However, a “good faith” defense is inherent in the court’s discretion to
determine whether to order a shareholder to pay a corporation’s fees. Id.
Moreover, if the Legislature had intended to prohibit a corporation from
initiating an action to determine a shareholder’s inspection rights, it
would have done so expressly, rather than impliedly through the statute’s
fee-shifting structure. 6

B. The Parties’ Controversy is Justiciable Under the
Declaratory Judgments Act

¶10 A party may bring an action under Arizona’s version of the
Uniform Declaratory Judgments Act, A.R.S. §§ 12-1831 to -1846 (the
“Act”), to obtain a declaration of its rights under a statute. A.R.S.
§ 12-1832. Although the Act is remedial and must be liberally construed,

can seek declaratory judgment to attempt to limit the rights of
shareholders seeking to inspect and make extracts from the corporate
books and records).

6 The Navidis argue by analogy that we would not allow a party to seek
declaratory judgment to prevent a subpoena for documents when Arizona
Rule of Civil Procedure (“Rule”) 45 allows a person commanded to
produce documents to object to a subpoena. See Ariz. R. Civ. P. 45(c)(5);
see also, e.g., Valley Nat’l Bank v. Hartford Accident & Indem. Co., 57 Ariz. 276,
282-83, 113 P.2d 359, 362 (1941) (holding court could not decide by
declaratory judgment whether probate court in separate action had the
power to reduce the amount of trustee’s surety bond). Rule 45, however,
provides its own mechanism to challenge a subpoena. Because the
Navidis made their request pursuant to statute, a declaratory judgment
action is an appropriate mechanism to attempt to limit the inspection and
copying of documents.

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A.R.S. § 12-1842, “it is well settled that a declaratory judgment must be
based on an actual controversy which must be real and not theoretical.”
Planned Parenthood Ctr. of Tucson, Inc. v. Marks, 17 Ariz. App. 308, 310, 497
P.2d 534, 536 (1972). Thus, to vest the court with jurisdiction to render a
judgment in a declaratory judgment action, the complaint must set forth
sufficient facts to establish that there is a justiciable controversy, i.e., one
that “arises where adverse claims are asserted upon present existing facts,
which have ripened for judicial determination.” Id.

¶11 Café Valley alleged the Navidis were requesting corporate
records pursuant to § 10-1602(B), but had not met the conditions of
§ 10-1602(C) and therefore had no right to inspect the categories of records
set forth in § 10-1602(B). Café Valley pled that despite its refusal to allow
the Navidis to inspect such documents, the Navidis continued to demand
access to the records. The Navidis moved to dismiss Café Valley’s
complaint on the grounds that no justiciable controversy existed because
the parties had a “mere difference of opinion.” The allegations in the
complaint set forth sufficient facts to establish a real dispute based upon
an actual controversy between Café Valley and the Navidis concerning
their rights under Arizona law. See Planned Parenthood, 17 Ariz. App. at
310, 497 P.2d at 536. Thus, Café Valley sufficiently alleged a justiciable
dispute over which the court may assume jurisdiction pursuant to the Act.

¶12 The superior court refused to consider Café Valley’s request
for declaratory judgment because records disputes between the parties
may continue and any declaratory judgment rendered in this action
would not address possible future disputes. “The court may refuse to
render or enter a declaratory judgment or decree where such judgment or
decree, if rendered or entered, would not terminate the uncertainty or
controversy giving rise to the proceeding.” A.R.S. § 12-1836; accord
Merritt-Chapman & Scott Corp. v. Frazier, 92 Ariz. 136, 139, 375 P.2d 18, 20
(1962) (“The court may properly refuse to enter a declaratory judgment
where it will be necessary to bring another action to settle the controversy
between the parties.”). For example, in Merritt-Chapman, the Arizona
Supreme Court affirmed the superior court’s dismissal of an action in
which the plaintiff sought a declaration that he could maintain an action
for indemnification against a decedent’s employer because any decision
rendered on that question would not terminate the controversy between
the plaintiff and the employer (i.e., whether the plaintiff was entitled to
indemnification) and it would still be necessary to bring another action to
settle the controversy. 92 Ariz. at 139, 375 P.2d at 20. In this case,
however, if the court had resolved Café Valley’s claim, it would have
resolved the parties’ then-existing controversy concerning the Navidis’

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inspection demand. Even if Café Valley and the Navidis might develop
additional disputes in the future, that does not provide a basis for the
court to decline to resolve the present dispute. 7

II. Attorneys’ Fees and Costs

¶13 Café Valley also challenges the superior court’s award of
attorneys’ fees and costs to the Navidis. Because we reverse the dismissal,
we also reverse the award of attorneys’ fees and costs.

¶14 On appeal, both parties request an award of attorneys’ fees
and costs. We deny the Navidis’ request because they did not prevail on
appeal.

¶15 Café Valley makes its request pursuant to A.R.S. § 12-349,
which provides for an award of attorneys’ fees as a sanction for an
unjustified action. Because the Navidis did not defend this appeal
without substantial justification or primarily for delay or harassment, and
did not unreasonably expand or delay the proceeding, we decline to
award Café Valley fees pursuant to § 12-349. However, as the prevailing
party, Café Valley is entitled to its appellate costs upon compliance with
ARCAP 21.

CONCLUSION

¶16 Based on the foregoing reasons, we reverse the dismissal of
Café Valley’s declaratory judgment claim and the award of attorneys’ fees
and costs, and remand this matter to the superior court for further
proceedings.

:gsh

7 Accordingly, we reject the Navidis’ argument that this court should
affirm the dismissal of Café Valley’s complaint on the basis that the action
is now moot because the Navidis have sent additional demands for
inspection raising new issues.

7