Wichansky v. Zowine et al

Filing 591

ORDER granting in part and denying in part 568 Motion for Judgment as a Matter of Law; denying 568 Motion for New Trial. See Order for details. Signed by Judge David G Campbell on 8/31/2016.(DGC, nvo)

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WO

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Marc A Wichansky,
Plaintiff,

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ORDER

v.

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No. CV-13-01208-PHX-DGC

David T. Zowine, et al.,

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Defendants.

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Defendants have filed a renewed motion for judgment as a matter of law and

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motion for a new trial. Doc. 568. The issues are fully briefed (Docs. 581, 583), and no

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party has requested oral argument. For the reasons that follow, the Court will reduce

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some of the punitive damages awards, but otherwise deny Defendants’ motions.

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I.

Background.

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Following nine days of trial, the jury found that Defendant David Zowine had

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breached his fiduciary duties to Plaintiff, and that Defendants Charles Johnson, Martha

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Leon, Pat Shanahan, and Mike Ilardo had aided and abetted Zowine’s breach. Doc. 500.

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The jury awarded $27,625,500 in compensatory and punitive damages against these

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Defendants, with most of the damages assessed against Defendant Zowine. See id. The

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Court entered judgment consistent with the jury’s verdict. See Doc. 535.

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After the close of Plaintiff’s evidence at trial, Defendants made an oral Rule 50(a)

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motion for judgment as a matter of law, which the Court took under advisement. See

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Doc. 474. The Court later denied the motion in part (Doc. 465) and granted it in part

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(Doc. 478). Defendants now seek post-trial relief from the verdict.

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II.

Legal Standard.

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A.

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A party may renew its motion for judgment as a matter of law under Rule 50(b) if

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the court denies the Rule 50(a) motion and the jury returns a verdict against the movant.

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EEOC v. Go Daddy Software, Inc., 581 F.3d 951, 961 (9th Cir. 2009). “Because it is a

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renewed motion, a proper post-verdict Rule 50(b) motion is limited to the grounds

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asserted in the pre-deliberation Rule 50(a) motion.” Id. Thus, a “party cannot raise

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arguments in its post-trial motion for judgment as a matter of law under Rule 50(b) that it

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did not raise in its pre-verdict Rule 50(a) motion.” Freund v. Nycomed Amersham, 347

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Rule 50(b): Renewed Motion for Judgment as a Matter of Law.

F.3d 752, 761 (9th Cir. 2003).

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In evaluating a motion for judgment as a matter of law, a court does not make

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credibility determinations or weigh the evidence. See Reeves v. Sanderson Plumbing

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Prods., Inc., 530 U.S. 133, 150-51 (2000). Instead, the court “must draw all reasonable

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inferences in favor of the nonmoving party.” Id. at 150 (citations omitted). A court can

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grant a Rule 50 motion and overturn the jury’s verdict only if “‘there is no legally

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sufficient basis for a reasonable jury to find for that party on that issue.’” Costa v. Desert

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Palace, Inc., 299 F.3d 838, 859 (9th Cir. 2002) (quoting Reeves, 530 U.S. at 149), aff’d,

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539 U.S. 90 (2003). In other words, the “jury’s verdict must be upheld if it is supported

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by substantial evidence, which is evidence adequate to support the jury’s conclusion,

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even if it is also possible to draw a contrary conclusion.” Pavao v. Pagay, 307 F.3d 915,

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918 (9th Cir. 2002).

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B.

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Under Rule 59(a), a new trial may be granted on all or some of the issues “for any

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reason for which a new trial has heretofore been granted in an action at law in federal

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court.” Fed. R. Civ. P. 59(a)(1)(A). Because “Rule 59 does not specify the grounds on

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which a motion for a new trial may be granted,” the court is bound by historically

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recognized grounds. Zhang v. Am. Gem Seafoods, Inc., 339 F.3d 1020, 1035 (9th Cir.

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2003). These include verdicts against the weight of the evidence, damages that are

Rule 59(a): Motion for a New Trial.

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excessive, and trials that were not fair to the moving party. Molski v. M.J. Cable, Inc.,

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481 F.3d 724, 729 (9th Cir. 2007); see also Passantino v. Johnson & Johnson Consumer

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Prods., 212 F.3d 493, 510 n.15 (9th Cir. 2000) (“The trial court may grant a new trial

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only if the verdict is contrary to the clear weight of the evidence, is based upon false or

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perjurious evidence, or to prevent a miscarriage of justice.”) (citation omitted).

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Although the Court may weigh the evidence and assess the credibility of witnesses

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when ruling on a Rule 59(a) motion, it may not grant a new trial “merely because it might

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have come to a different result from that reached by the jury.” Roy v. Volkswagen of Am.,

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Inc., 896 F.2d 1174, 1176 (9th Cir. 1990) (quotation marks and citation omitted); see also

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Union Oil Co. of Cal. v. Terrible Herbst, Inc., 331 F.3d 735, 743 (9th Cir. 2003) (“It is

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not the courts’ place to substitute our evaluations for those of the jurors.”). A court will

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not approve a miscarriage of justice, but “a decent respect for the collective wisdom of

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the jury, and for the function entrusted to it in our system, certainly suggests that in most

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cases the judge should accept the findings of the jury, regardless of his own doubts in the

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matter.” Landes Constr. Co., Inc. v. Royal Bank of Can., 833 F.2d 1365, 1371 (9th Cir.

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1987) (citations omitted).

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C.

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When discussing the evidence in this Order, the Court will draw reasonable

Discussion of the Evidence in this Order.

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inferences in Plaintiff’s favor.

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reasonably could have viewed it in reaching the verdict. Defendants will not agree with

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the Court’s description because it reflects the view a reasonable jury could have adopted

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in ruling against them, but the Court will not entertain any finding that is against the clear

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weight of the evidence. The Court will provide citations to some of the evidence in the

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record, but by no means to all of the relevant evidence. Occasionally, the Court will

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simply reference the testimony of particular witnesses rather than provide specific page

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citations.

The Court will describe the evidence as the jury

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III.

Statute of Limitations – Accrual and Fraudulent Concealment.1

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The parties agree that Plaintiff’s claim for breach of fiduciary duty against

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Defendant David Zowine is governed by Arizona’s two-year limitations period for torts.

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A.R.S. § 12-542. This action was filed on June 14, 2013. Thus, Plaintiff’s claim is

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timely if it accrued, or the limitations period was tolled until a date, after June 14, 2011.

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A.

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Defendants argue that Plaintiff’s fiduciary duty claim against David Zowine

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accrued before June 14, 2011. Doc. 568 at 3.2 Defendants note that a number of

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witnesses testified that Plaintiff was aware of medical billing issues in 2009 and 2010. In

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addition, Plaintiff testified that his interpersonal conflict with Zowine began in late 2010,

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continued into 2011, and ultimately culminated in Plaintiff seeking dissolution of Zoel

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Holding Company, Inc. (“Zoel”), which he co-owned with Zowine. Doc. 492 at 84-89.

Accrual of Plaintiff’s Claim.

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Defendants contend, pursuant to Walk v. Ring, 44 P.3d 990 (Ariz. 2002), that the

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evidence shows that Plaintiff’s fiduciary duty claim accrued in 2009 or 2010, well outside

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of the two-year statute of limitations period. Plaintiff’s knowledge of billing issues and

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Zowine’s hostile conduct, Defendants assert, triggered a duty to investigate in 2010 and

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early 2011.3

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On August 4, 2016, Defendants David and Karina Zowine notified the Court that
they have filed for Chapter 11 bankruptcy protection. See Doc. 589. Further proceedings
with respect to the Zowines have therefore been stayed. See Doc. 590. The Court must
address portions of the Rule 50(b) motion that involve David Zowine, however, because
the aiding and abetting claims against the other Defendants are derivative and the case
against those Defendants has not been stayed.
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Citations to the docket are to page number added to the top of each page by the
Court’s CM/ECF system, not to original page numbers on the document.
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Curiously, after relying on Walk in their motion, Defendants argue in their reply
that “Walk does not apply.” Doc. 583 at 2. The reply argues that Walk is inapposite
because the defendant in Walk had “specialized knowledge” of the underlying harmful
conduct that is absent here. The Court does not find Walk so limited. The Arizona
Supreme Court articulated a standard applicable to breaches of fiduciary duty – the very
kind of duty at issue in this case. 44 P.3d at 998. In addition, even if specialized
knowledge of the defendant was required, the jury in this case reasonably could have
found that Zowine possessed such knowledge because he was, as several witnesses
testified, in charge of medical billing at the company and knew of the fraud being
perpetrated.
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Walk holds that a claim accrues when an aggrieved party has “reason to connect

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the ‘what’ to a particular ‘who’ in such a way that a reasonable person would be on

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notice to investigate whether the injury might result from fault.” Id. at 996, ¶ 22. The

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Arizona Supreme Court provided this additional explanation:

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The “what” is the fact of injury. With respect to those in a professional or
fiduciary relationship with the tortfeasor, an adverse or untoward result, or
a failure to achieve an expected result, is not, as a matter of law, always
sufficient notice. To trigger the statute of limitations, something more is
required than the mere knowledge that one has suffered an adverse result
while under the care of a professional fiduciary.
Id. at 997, ¶ 26.

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As Defendants contend, Plaintiff did know that there were medical billing issues at

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Zoel in 2009 and 2010, even if he did not know they were caused by intentional fraud.

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He also knew that his relationship with Zowine deteriorated in late 2010 and early 2011.

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Plaintiff thus may have known enough about the “what” of his injury to trigger a duty to

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investigate, but that is not sufficient under Walk. Because Plaintiff and Zowine were in a

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fiduciary relationship, Plaintiff must also have known the “who” – that Zowine was

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behind the billing fraud and was deliberately causing the difficulties with Plaintiff. Id.

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Plaintiff testified that he knew of billing issues in 2010, but had no idea that

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intentional billing fraud was occurring or that Zowine was involved in the fraud and

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trying to cover it up. Plaintiff also knew that his relationship with Zowine became

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strained in late 2010 and early 2011, but testified that he thought this was due to

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Zowine’s gambling issues. Plaintiff had no idea that the difficulties were intentionally

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caused by Zowine in order to drive Plaintiff from the business and prevent discovery of

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the billing fraud. Plaintiff’s claim for breach of fiduciary duty was not based merely on

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the existence of billing issues or difficulties in his relationship with Zowine. Rather,

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Plaintiff’s claim was that Zowine breached his fiduciary duties by knowingly engaging in

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billing fraud, attempting to conceal it, and engaging in a campaign of intimidation and

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harassment designed to drive Plaintiff from the business before it could be discovered.4

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Plaintiff testified that he had no reason to connect Zowine to the wrongdoing until

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he received a report on the medical billing fraud from Ron Wise in August 2011 (“Wise

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Report”), which discussed several forms of billing fraud that were occurring at Zoel.

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Doc. 516 at 29-30. After receiving the Wise Report, Plaintiff testified that “[i]t became

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very clear there [were] a lot of different fraudulent activities [and] that [Ron Wise] was

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showing me exactly how they were being done, exactly how it was being pulled off, and

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who was covering it up.” Id. at 30. Plaintiff testified that, after reviewing the Wise

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Report, he “realized . . . this is intentional, this fraud was intentional,” and he “started to

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believe in hindsight at some point that all of these fights, everything was coming

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together, was just a big act to – because Richard [Eden] and I were sniffing into the

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medical billing fraud.” Doc. 493 at 10.

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Whether to credit this version of events was a question reserved for the jury.

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Reeves, 530 U.S. at 150-51. If the jury chose to believe Plaintiff’s testimony, as it

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evidently did, it could reasonably conclude that Plaintiff had no reason to connect Zowine

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to the wrongdoing prior to receiving the Wise Report in August 2011.

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Defendants try to discredit Plaintiff’s testimony, arguing that (1) the Wise Report

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did not specifically link Zowine to any wrongful conduct, and (2) the Report was based

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on information readily available to Plaintiff. See Doc. 583 at 3. These are the very

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arguments Defendants made during trial, and they support one possible interpretation of

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the evidence. But it is by no means the only possible interpretation. The jury could

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reasonably have believed Plaintiff’s testimony that he did not have reason to connect

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Plaintiff clearly knew in 2010 and early 2011 that Zowine was mistreating him,
including in the physical assault that occurred in January 2011. In this respect, Plaintiff
knew the “who” of his personal or physical injuries during that time, and his claims for
such injuries are time-barred. The Court accordingly entered summary judgment on
these claims. Doc. 308 at 8. But as the Court explained in its summary judgment ruling,
to the extent that the gravamen of Plaintiff’s claim is the financial injury he later suffered
from losing his interest in Zoel, Defendants had to show that Plaintiff knew the “who” of
that injury – that Zowine was trying to drive him from the company to cover fraud –
before the statute of limitations was triggered. Id. This factual issue precluded summary
judgment for Defendants and was extensively litigated at trial.
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Zowine to the wrongful conduct until he read the Wise Report. Given this credibility

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determination, the Court cannot conclude that there was no legally sufficient basis for a

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reasonable jury to find for Plaintiff on this issue, Costa, 299 F.3d at 859, or that it was

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against the clear weight of the evidence, Molski, 481 F.3d at 729. The Court accordingly

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cannot conclude that Defendants are entitled to judgment based on the statute of

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limitations.

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Walk further provides that, in determining whether a plaintiff was on notice

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sufficient to trigger the limitations period, the question is whether the plaintiff’s “failure

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to go forward and investigate [his possible cause of action] is not reasonably justified.”

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44 P.3d at 996. For example, a plaintiff would be reasonably justified in declining to

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investigate a claim if the plaintiff “subjectively believed” that the defendant had done

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nothing wrong. Id. (citation omitted). The question is whether a reasonable person in the

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plaintiff’s position would investigate the claim. Id.

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Thus, even if Plaintiff knew, prior to the limitations period, that billing

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irregularities were occurring or difficulties had arisen in his relationship with Zowine, the

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claim for breach of fiduciary duty did not accrue until he knew that Zowine was involved

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in the billing fraud and began mistreating Plaintiff to drive him from the company and

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prevent its discovery. The jury reasonably could have concluded that Plaintiff did not

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have such knowledge before June 14, 2011. Plaintiff testified that he and Zowine had

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been friends and business partners for many years, and that Zowine was the best man at

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his wedding. Doc. 492 at 39-40, 57-58. Defendant Ilardo testified that Plaintiff and

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Zowine were “were like brothers. They got along great. Their families were very close.

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You know, the best of friends.” Doc. 495 at 6. There clearly was sufficient evidence for

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the jury to believe Plaintiff’s claim that he never suspected Zowine would be involved in

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fraudulent operation of the business they jointly owned. As Walk explains, “[t]his is the

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very sort of factual determination that must be left to the jury.” 44 P.3d at 996, ¶ 24.5

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Defendants argue that Plaintiff sustained appreciable, irremediable, and nonspeculative harm before June 14, 2011. The Court agrees. Plaintiff’s damages expert
testified, with hindsight, that Plaintiff’s profits from Zoel in 2010 would have been more
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B.

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Even if Plaintiff’s claim otherwise would have accrued before June 14, 2011, the

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claim is timely if the limitations period was tolled by fraudulent concealment. In Walk,

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the Arizona Supreme Court held that “[f]raud practiced to conceal a cause of action will

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prevent the running of the statute of limitations until its discovery.” 44 P.3d at 999, ¶ 34

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(quotation marks and citation omitted).

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Fraudulent Concealment.

Moreover, if fraudulent concealment is established, the [plaintiff] is
relieved of the duty of diligent investigation required by the discovery rule
and the statute of limitations is tolled until such concealment is discovered,
or reasonably should have been discovered. In fraudulent concealment
cases, the duty to investigate arises only when the [plaintiff] discovers or is
put upon reasonable notice of the breach of trust. Thus, our cases and those
from other jurisdictions that recognize a fiduciary relationship agree that an
actual knowledge standard applies to triggering the statute of limitations for
a plaintiff who establishes a breach of the fiduciary duty of disclosure.

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Id. at ¶ 35 (internal quotation marks and citations omitted).
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Alleged Termination of Fiduciary Duties.

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Defendants argue in their reply brief that the statute of limitations was not tolled

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by withholding information in violation of fiduciary duties because any such duties owed

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by Zowine to Plaintiff ceased once their relationship became adversarial. Doc. 583 at 2.

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The Court rejected this position in a written order (Doc. 481 at 6), declining to instruct

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the jury that fiduciary duties end when parties become adverse (see Doc. 533 at 12-13).

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The Court is convinced that this position is correct for reasons stated in its prior order.

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See Doc. 481 at 6. Moreover, even if the law did provide that fiduciary duties end when

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relationships become adverse, such a rule surely would not apply when one partner

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intentionally makes the relationship adverse in order to drive the other partner from the

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business and prevent discovery of fraud, as Plaintiff proved here.

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than $2.6 million – rather than the lower amount Plaintiff actually received – but for
Defendants’ wrongdoing. Doc. 493 at 78-81. The fact that Plaintiff was injured before
June 14, 2011, however, is not enough to trigger the statute of limitations if he did not
have the knowledge required by Walk, as the jury reasonably could have found.
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2.

Sufficiency of the Evidence.

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“In fraudulent concealment cases, the duty to investigate arises only when the

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[plaintiff] discovers or is put upon reasonable notice of the breach of trust.” Walk, 44

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P.3d at 999, ¶ 35 (quotation marks and citations omitted).

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Defendants point to several different witnesses’ testimony. Doc. 568 at 5. The question,

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however, is not whether there was evidence to support Defendants’ position, but whether

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there was sufficient evidence to support Plaintiff’s. As already noted, Plaintiff presented

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evidence that he and Zowine had been friends and business partners for many years.

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Doc. 492 at 39-40, 57-58; Doc. 495 at 6. Plaintiff testified that he never suspected

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Zowine would be involved in fraudulent operation of the business they jointly owned, or

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that the difficulties between them were part of a calculated effort by Zowine to drive him

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from the business and conceal fraud. Plaintiff asserted that he did not begin to suspect

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Zowine’s breaches until he received the Wise Report in August 2011. Doc. 516 at 29-30.

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A reasonable jury could believe this evidence.

To establish notice,

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Plaintiff also presented evidence that Zowine was aware of and failed to disclose

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billing fraud, orchestrated a campaign to drive Plaintiff from the company, and interfered

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with efforts to uncover billing fraud. For example, Plaintiff presented a number of

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witnesses who testified that that Zowine was responsible for billing at Zoel, that Johnson

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and Leon (who were alleged to be most directly involved in the fraud) reported to

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Zowine, and that Johnson and Leon repeatedly refused to cooperate with Plaintiff’s and

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Richard Eden’s efforts to learn more about the billing irregularities. See, e.g., Doc. 476

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at 94-95, 106, 111; 479 at 23-24, 29-30, 33-40, 49-50. Plaintiff also presented evidence

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that, in response to revelations of billing irregularities, Zowine retained a lawyer, Julie

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Nelson, purportedly to investigate billing fraud (Doc. 491 at 126-29), but actually to

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advocate on Zowine’s behalf (Doc. 516 at 133). In purportedly investigating the billing

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problems, Ms. Nelson never spoke with key individuals, including Defendant Leon, and

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never reviewed Leon’s spreadsheets, which were a primary source of the billing fraud.

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Doc. 491 at 126-29. Zowine even tried to turn the tables by claiming in a letter from

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counsel that Plaintiff was in charge of medical billing – when, in fact, Zowine was in

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charge – and that Plaintiff had refused Zowine access to key documents and individuals,

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including Leon – when, in fact, Zowine supervised Leon and acquiesced in her refusal to

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provide billing information to Plaintiff. Id. at 152-55. In addition, Zowine and the other

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Defendants and employees associated with him systematically embarrassed, humiliated,

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and threatened not only Plaintiff (Docs. 479 at 61, 97-98, 105-07; 486 at 109-10; 492 at

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90-91; 493 at 38-39), but also a number of other people associated with Plaintiff,

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including Zoel employees and Plaintiff’s family members (Docs. 476 at 35, 38-39, 49-50,

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55-56; 477 at 84-87, 141; 479 at 54, 58-59, 76, 100-01; 482 at 115; 483 at 82, 87, 94-97,

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108, 124-25, 133; 485 at 32-33, 53; 487 at 129, 134-35; 491 at 18, 42; 516 at 23-24).

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From this and other evidence, a reasonable jury could find that Zowine

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consciously attempted to hide the fraud and blame Plaintiff for billing irregularities, and

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that the difficulties between Plaintiff and Zowine were in fact a calculated effort by

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Zowine – unknown to Plaintiff at the time – to drive Plaintiff from the business and

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prevent discovery of the billing fraud.

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fraudulent concealment and the tolling of the statute of limitations.

The evidence supports Plaintiff’s claim of

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What is more, Walk explains that “if fraudulent concealment is established, the

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[plaintiff] is relieved of the duty of diligent investigation required by the discovery rule

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and the statute of limitations is tolled ‘until such concealment is discovered, or

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reasonably should have been discovered.’” 44 P.3d at 999, ¶ 35. Thus, the jury’s

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reasonable finding of Zowine’s fraudulent concealment would have relieved Plaintiff of

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the duty of diligent investigation until Plaintiff discovered the fraud after reviewing the

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Wise report in August 2011.

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Finally, “an actual knowledge standard applies to triggering the statute of

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limitations for a plaintiff who establishes a breach of the fiduciary duty of disclosure.”

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Id. The Court instructed the jury that shareholders in a closely-held corporation must

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“fully disclose to one another all material facts relating to the corporation’s affairs within

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their knowledge.” Doc. 533 at 13. The evidence at trial supported a jury determination

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that Zowine never disclosed to Plaintiff the existence of billing fraud or that he was

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seeking to drive Plaintiff from the company. In light of this nondisclosure under Walk,

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the limitations period was not triggered until Plaintiff had “actual knowledge” of

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Zowine’s breach. 44 P.3d at 999, ¶ 35.6

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C.

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To be entitled to judgment as a matter of law or a new trial, Defendants must show

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not only that Plaintiff’s fiduciary duty claim against Zowine accrued before June 14,

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2011, but also that the running of the statute of limitations was not tolled. Defendants fail

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on both counts. Examining the evidence in the light most favorable to the jury verdict,

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the Court finds ample evidence for a reasonable jury to find for Plaintiff on the statute of

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limitations issues. Costa, 299 F.3d at 859. The Court cannot conclude that the jury’s

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findings were against the clear weight of the evidence. Molski, 481 F.3d at 729. This

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case ultimately was a credibility determination by the jury, one the Court will not disturb.

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IV.

Statute of Limitations Conclusion.

Causal Nexus between Defendants’ Conduct and Plaintiff’s Damages.

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Defendants contend that “[t]here is no proximate causation between the claimed

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billing issues and the harm to Plaintiff,” arguing instead that Plaintiff’s decision to seek

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dissolution of Zoel was a “self-inflicted wound” that occurred after Plaintiff consulted

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with competent legal counsel. Doc. 568 at 5. It is true that Plaintiff filed the petition for

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dissolution of Zoel, setting in motion the judicial process that resulted in Zowine’s

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purchase of Plaintiff’s shares in Zoel. And granted, at first blush, it seems unlikely that

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Plaintiff’s own request to dissolve Zoel could eventually lead to his recovering damages

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from Zowine for the dissolution.

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Plaintiff argues that Defendants waived their fraudulent concealment argument
by not raising it in their Rule 50(a) motion. Although Defendants did not use the term
“fraudulent concealment” when arguing their motion, they did argue that Plaintiff’s
fiduciary duty claim was barred by the statute of limitations (Doc. 495 at 160-61) and
they did cite Walk, 44 P.3d 990, which permits the tolling of a limitations period based on
fraudulent concealment. The Ninth Circuit has explained that “Rule 50(b) ‘may be
satisfied by an ambiguous or inartfully made motion’ under Rule 50(a).” See Go Daddy
Software, 581 F.3d at 961 (quoting Reeves, 881 F.2d at 1498). The Court concludes that
Defendants sufficiently raised this argument in their Rule 50(a) motion, and it may be
renewed in their Rule 50(b) motion.
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But Plaintiff’s theory of this case from the beginning has been that his request for

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dissolution resulted from Zowine’s deliberate campaign of harassment and intimidation

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designed to drive Plaintiff from the business before fraud could be discovered, and this

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claim was thoroughly vetted before the jury. The jury heard much testimony, from both

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sides, about the events leading up to Plaintiff’s petition for dissolution. The jury heard

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extensive testimony from Plaintiff about why he sought to dissolve Zoel and what caused

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his decision. Because Plaintiff’s state of mind in seeking dissolution was squarely at

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issue, the Court even allowed Defendants to obtain discovery of Plaintiff’s

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communications with his lawyers about the dissolution decision.

Doc. 233.

Those

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communications were presented to the jury, and Plaintiff’s lawyers testified at trial about

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them. After hearing all of this evidence and strenuous arguments by defense counsel, the

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jury found that Plaintiff’s loss of his interest in Zoel was caused by Zowine and the other

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Defendants. This decision was amply supported by the evidence.

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As an initial matter, the Court notes that there was highly convincing evidence that

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intentional billing fraud was occurring at Zoel. Plaintiff’s expert, Ron Wise, testified that

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MGA – the Zoel subsidiary responsible for medical billing – intentionally overbilled

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insurance companies and the Arizona Health Care Cost Containment System

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(“AHCCCS”) for home health services provided by MGA nurses. He estimated that at

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least 12,000 hours were overbilled by rounding upward the actual time incurred by the

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MGA nurses. In some cases, the hours were doubled. He testified that another 19,833

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hours were billed at rates higher than the contracts with the insurers or AHCCCS

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allowed, that home nursing services for children were billed for times when the children

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were at school, and that the same nursing services were billed to more than one insurer.

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He also found that the MGA accounting system was structured in a way that made

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detection of the fraud very difficult. Doc. 490 at 88-112. Wise found that the person

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primarily responsible for the billing practices was Martha Leon. Id. at 101-102.

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This is not all. Wendy Britton, who has 30 years of medical fraud investigation

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experience, testified that MGA methodically manipulated data to engage in at least eight

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different kinds of medical billing fraud. Doc. 490 at 35-53. Ms. Britton provided

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specific examples of the various kinds of fraud.

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investigator who looked into billing at MGA found credible allegations of fraud.

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Doc. 491 at 85-88. She was not able to complete her investigation because MGA – under

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the leadership of Zowine and after Plaintiff’s interest in the company had been purchased

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by Zowine – reached a settlement with AHCCCS under which it paid $1,250,000. Id. at

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65, 85-88. Other evidence also suggested that Ms. Leon was primarily responsible for

8

the billing fraud, including her own repeatedly-inconsistent testimony, both in

9

depositions and at trial. And the evidence demonstrated that Ms. Leon reported to

10

Id.

In addition, the AHCCCS

Charles Johnson, who reported to David Zowine.

11

In addition, as noted above, Plaintiff presented substantial evidence that Leon and

12

Johnson refused to cooperate when Plaintiff, through Richard Eden, began investigating

13

billing issues. When Richard Eden’s investigation began encountering resistance from

14

Leon and Johnson, and Eden persisted, Zowine became openly hostile to Eden, calling

15

him a “whiny bitch,” throwing a baby pacifier at him in the office, making obscene

16

suggestions to him and Plaintiff in the office, and attempting to fire him. Doc. 479 at 54-

17

60. As also noted above, Zowine hired a lawyer to “investigate” the fraud, but she in fact

18

became his advocate and did little to conduct an investigation. Zowine even asserted

19

through his lawyer that Plaintiff, not Zowine, was responsible for billing at Zoel, despite

20

overwhelming evidence to the contrary.

21

When a receiver was appointed by the state court to oversee the operations of

22

Zoel, the evidence showed that Zowine harassed, interfered with, and refused to

23

cooperate with the receiver, particularly in any fraud investigation. This included not

24

only resistance in the office, but attempts by Zowine to humiliate the receiver in public.

25

See Doc. 487, 488 (testimony of Edward Burr).

26

From all of this, the jury had ample evidence to support a finding that Zowine and

27

his associates were engaged in deliberate and substantial billing fraud at Zoel, and sought

28

diligently to prevent its discovery.

- 13 -

1

The jury also heard substantial evidence about the campaign Zowine and his

2

associates undertook to harass and intimidate Plaintiff to drive him from the company.

3

The Court will not recount all of that evidence in this order, but much of it is identified in

4

the record citations in Plaintiff’s response. See Doc. 581 at 8-11. These actions included

5

belittling and embarrassing Plaintiff, often in front of the company’s staff; sending

6

Plaintiff offensive and degrading emails, often copied to others in the office7; physically

7

assaulting Plaintiff8; surreptitiously moving Zowine’s part of the business out of the

8

office and to another location; later forcibly removing the company’s server from

9

Plaintiff’s location to Zowine’s location; having Charles Johnson appear at Plaintiff’s

10

office, with legal papers, and inform the employees that they were not to work with or

11

communicate with Plaintiff; and threatening, berating, and intimidating those who

12

continued to show loyalty to Plaintiff. This conduct was described in the testimony of

13

Richard Eden, Jennifer Frankito, Justin Pack, Garrett Brill, Plaintiff, and others.

14

Witnesses testified that Zowine, who is a large and physical man, was intimidating.

15

Edward Burr – the state-court appointed receiver – testified that Zowine had a “cult-like”

16

influence over those loyal to him and was “meanspirited.” Docs. 487 at 150, 488 at 45.

17

Jennifer Frankito described Zowine and his associates as a “pack of wolves.” Doc. 483 at

18

133. Plaintiff testified that he was afraid of Zowine during this time because Zowine

19

generally walked around the office in a group, “almost like a posse of people. It wasn’t

20

just Dave who was already intimidating enough, but he walked in a group that was like –

21

to me, it seemed like a gang.” Doc. 495 at 112. Several witnesses testified that women

22

on Plaintiff’s staff would lock themselves in their offices or leave the premises when

23

Zowine’s associates, including Shanahan and Ilardo, came to Plaintiff’s office after the

24
25
26
27
28

7

Examples include emails Zowine sent to Plaintiff in January of 2011 calling him
a “spineless little bitch” (Trial Ex. 630), mocking him as “Mr. President” (Ex. 179), and
calling him a “big pussy” (Ex. 105).
8

Plaintiff testified that Zowine, who is considerably larger than Plaintiff, entered
Plaintiff’s office, closed the door, grabbed Plaintiff by the neck, called him “El
Presidente,” threw him across the office to the floor, knocking things off the wall, and
jumped on him. Doc. 495 at 111.
- 14 -

1

offices split. Plaintiff testified that the situation eventually became unbearable and he

2

sought dissolution of the company and appointment of a receiver to manage it.

3

From this evidence, a reasonable jury could conclude that (a) Zowine and his

4

associates were engaged in willful and substantial billing fraud unknown to Plaintiff;

5

(b) Zowine sought to prevent Plaintiff from discovering the fraud; (c) when Plaintiff and

6

Richard Eden persisted, Zowine and others undertook an intentional campaign to drive

7

Plaintiff from the business; (d) the unrelenting campaign of harassment led Plaintiff to

8

file for dissolution of the business and seek appointment of a receiver; and (e) as a result,

9

Plaintiff lost his valuable interest in the business and millions of dollars he would have

10

earned had Zowine and the other Defendants not engaged in their deliberate course of

11

conduct.

12

requirement of causation.9

Such conclusions, supported by sufficient evidence, plainly satisfy the

13

In their reply, Defendants argue that Plaintiff’s theory of causation fails because it

14

(1) relies on conduct post-dating Plaintiff’s filing for dissolution, and (2) relies on

15

conduct that Plaintiff did not know about when he filed for dissolution. Doc. 583 at 4.

16

But the events described above, with the exception of Zowine’s interference with the

17

receiver, all occurred before Plaintiff sought dissolution. Defendants ignore Plaintiff’s

18

testimony that the medical billing issues and Defendants’ harassment were the motivation

19

for his decision to seek dissolution. Docs. 493 at 68; 516 at 34, 39-40. This testimony

20

directly links Defendants’ pre-filing conduct with Plaintiff’s decision.

21

The Court concludes that there was a legally sufficient basis for a reasonable jury

22

to find for Plaintiff on the issue of causation. Costa, 299 F.3d at 859. The jury’s finding

23

was not against the clear weight of the evidence. Molski, 481 F.3d at 729.

24

V.

25

Fiduciary Duty Jury Instructions.
Defendants challenge portions of the Court’s fiduciary duty jury instructions.

26
27
9

28

Defendants’ counsel argued strenuously in closing argument that Plaintiff had
failed to prove causation. Doc. 518 at 93-95. He even called it “the most important”
issue the jury had to decide. Id. at 120. The jury nonetheless found causation.
- 15 -

1

A.

2

Plaintiff contends that Defendants waived this issue by failing to renew it in the

3

joint pretrial order or in Defendants’ Rule 50(a) motion during trial. Doc. 581 at 11-12.

4

Defendants raised the issue several times in the proposed joint pretrial order, stating that

5

the nature of the fiduciary relationship changed once the parties’ positions became

6

adversarial. See Doc. 345-1 at 8, 13, 16, 19-21. Defendants subsequently renewed the

7

issue each time jury instructions were discussed (see Docs. 342 at 91; 486 at 168-71),

8

although the Court ultimately declined to adopt Defendants’ position (Docs. 481 at 6; 533

9

at 12-13). Defendants did not reassert this issue in their Rule 50(a) motion (see Doc. 495

10

at 159-184), but this does not result in waiver. A Rule 50(a) motion focuses on the

11

sufficiency of the non-movant’s evidence, not issues of law.

12

occurred, the Court may properly consider jury instruction issues in a Rule 59(a) motion.

13

Coach, Inc. v. Siskiyou Buckle Co., No. 3:11-CV-00486-HZ, 2012 WL 5303662, at *2

14

(D. Or. Oct. 25, 2012) (citing Murphy v. City of Long Beach, 914 F.2d 183, 187 (9th Cir.

15

1990)).

Waiver.

And even if waiver

16

B.

17

Defendants cite A.R.S. §§ 10-830, 10-840, without elaboration, as setting out the

18

“exclusive director fiduciary duties” in a corporation. Id. These statutes concern the

19

fiduciary duties of directors and officers of corporations. The Court drafted a jury

20

instruction based on these statutes that defined Zowine’s fiduciary duties as a director and

21

officer of Zoel. Doc. 454 at 12. Indeed, Zowine’s counsel agreed that this instruction

22

was “absolutely dead on” and asked that it be given to the jury. Doc. 486 at 155. The

23

Court gave the instruction (Doc. 533 at 12), and the jury found Zowine liable for

24

breaching his fiduciary duties as a director and officer of Zoel – by clear and convincing

25

evidence (Doc. 500 at 1; Doc. 533 at 12).

Jury Instructions.

26

Because Zowine and Plaintiff were also each 50% shareholders of Zoel, the Court

27

gave an instruction on the fiduciary duties of shareholders in a close corporation.

28

Doc. 533 at 13. Zowine objected, arguing that any common law fiduciary duties of

- 16 -

1

shareholders had been abrogated by A.R.S. §§ 10-830, 10-840. The Court disagreed, and

2

explained its reasons in a detailed order. Doc. 481 at 7-10; see also Doc. 454 at 14. The

3

jury found that Zowine had breached his fiduciary duties as a shareholder. Doc. 500 at 2.

4

Defendants do not appear to argue that this instruction was incorrect.

5

Defendants’ present motion argues that the Court erred in not instructing the jury

6

that “Arizona law does not prohibit corporate officers, directors, and shareholders from

7

disputing how to operate the corporation, even to the point of deadlock or hostile

8

takeovers.” Doc. 568 at 6. Defendants also argue that the jury should have been told that

9

“once a dispute has reached the stage of deadlock and dissolution, fiduciary duties are

10

substantially limited by the open and obvious conflict to only those duties necessary to

11

the winding up of corporate affairs.” Id. (citation omitted).

12

Defendants correctly note that directors, officers, and shareholders do not breach

13

fiduciary duties by taking good faith actions that result in corporate deadlock. See A.R.S.

14

§ 10-1430(B)(1) (allowing for dissolution in the event of corporate deadlock); Herbert v.

15

Porter, 845 N.E.2d 574, 579 (Ohio Ct. App. 2006) (no breach of fiduciary duty where

16

shareholder voted in good faith for director of choice, even though it resulted in corporate

17

deadlock). But this case never has been about a good faith disagreement that led to a

18

corporate deadlock. Plaintiff’s theory throughout this litigation has been that Zowine

19

knew of and failed to disclose billing fraud at Zoel, interfered with efforts to uncover the

20

billing fraud, and orchestrated a campaign to drive Plaintiff from the company in an

21

effort to conceal the fraud. The issue of good-faith corporate deadlock was irrelevant to

22

determining whether Zowine breached his fiduciary duties in the manner alleged.

23

Moreover, the Court’s instruction on the duties of directors and officers fully

24

supported any defense Zowine wished to assert. It informed the jury that Zowine was

25

required “to discharge his duties in good faith and with the care an ordinarily prudent

26

person in a like position would exercise under similar circumstances.” Doc. 533 at 12.

27

Further, Zowine was to “fulfill his responsibilities in a manner that he reasonably

28

believe[d] to be in the best interests of the corporation.” Id. The jury was told that

- 17 -

1

Zowine could “rely on information, opinions, reports, or statements prepared by an

2

officer or employee of the corporation whom the director reasonably believes is reliable

3

and competent in the matters presented.”

4

affiliated with Zowine in his disagreements with Plaintiff. Finally, the jury was told that

5

Zowine “is presumed to have acted in accordance with his fiduciary duty,” and that

6

Plaintiff was required to prove that Zowine breached his fiduciary duties by “clear and

7

convincing evidence.” Id. These instructions left ample room for Zowine to argue that

8

his disagreements with Plaintiff, and even the events that led to the petition for

9

dissolution, arose from his good faith efforts to act in the best interest of Zoel.

Id.

This certainly could include others

10

Zowine made such arguments. His counsel asserted in closing argument that

11

Zowine took only those actions he “thoroughly believed [were] in the best interest of the

12

company.” Doc. 518 at 87. Zowine’s counsel argued that Plaintiff, not Zowine, took

13

actions contrary to the company’s interest, and, as a result, “Mr. Zowine was forced to

14

respond and to react to protect his 50 percent interest and to protect the company and to

15

protect the people it serves.” Id. at 87-88. The jury saw things differently.

16

Defendants now assert that the Court should have instructed the jury that the law

17

did not prevent Zowine “from disputing how to operate the corporation, even to the point

18

of deadlock or hostile takeovers.” Doc. 568 at 6. But that was not Zowine’s defense. He

19

did not argue to the jury that he, in good faith, disagreed with Plaintiff to the point of

20

deadlock and dissolution. This was his argument:

21
22
23
24
25
26

Zowine never took a single action to throw [Plaintiff] out of the
company. Not one. He didn’t take a single action to dissolve the company.
The only action he took that had repercussions to move Mr. Wichansky
from the company is to elect to purchase his interest almost two months
later after Mr. Wichansky had moved to judicially dissolve the company. . .
That’s it. You won’t find in evidence a single action taken by Zowine that
was to dissolve the company that was to tear the company apart.
Doc. 518 at 89.

27

Defendants cite AMERCO v. Shoen, 907 P.2d 536 (Ariz. Ct. App. 1995), for the

28

proposition that under Arizona law a director’s failure to disclose his plans for a hostile

- 18 -

1

corporate takeover is not a breach of fiduciary duty. Doc. 568 at 6-7. AMERCO

2

addressed a long-running family dispute for control over U-Haul. 907 P.2d at 537.

3

Because U-Haul was incorporated in Nevada, the dispute was controlled by Nevada law.

4

Id. at 538 n.1. The court found that “[d]irectors may promote takeover of a corporation

5

and have no duty to reveal takeover plans to management” because securities law and

6

public policy do “not exist for the benefit of protecting incumbent management from

7

hostile takeover attempts.” Id. at 546 (internal quotation marks and citations omitted).

8

AMERCO is factually and legally distinguishable from this case, which involves a dispute

9

between co-equal shareholders in a close corporation.10 Because Arizona law imposes

10

additional fiduciary obligations on 50-50 shareholders in a closely-held corporation

11

(Doc. 481 at 7-10), the fiduciary obligations owed by shareholders in a publicly-traded

12

corporation provide little guidance. What is more, AMERCO applies Nevada law, not

13

Arizona law. For these reasons, AMERCO is inapposite.

14

Finally, Defendants seek to distinguish A.R.S. § 29-1034, which sets out the

15

ongoing fiduciary duties during the winding up of a partnership business. Defendants

16

argue that because Zoel was a corporation, rather than a partnership, Zowine did not owe

17

fiduciary duties during the wind-up period.

18

Plaintiff’s fiduciary duty theory did not rely on Defendants’ actions that occurred after

19

Plaintiff filed for dissolution. He focused instead on their actions that caused him to file

20

for dissolution. The critical issue, therefore, was whether Zowine breached his fiduciary

21

duties prior to Plaintiff’s filing for dissolution, not after. Like the other authorities cited

22

by Defendants, this statute is not relevant.

Once again, Defendants are mistaken.

23

Defendants had ample opportunities to convince the Court that its proposed jury

24

instructions were erroneous. Defendants addressed their proposed jury instructions on

25

fiduciary duties when a relationship becomes adversarial (Doc. 486 at 168-172) and on

26
27
28

10

Defendants dispute the characterization of Zoel as a close corporation. Under
Defendants’ view, a close corporation in Arizona must be organized under the close
corporation statutes, A.R.S. §§ 10-1801 et seq. Defendants’ view is incorrect for reasons
explained by the Court in a previous order. See Doc. 481 at 7.
- 19 -

1

corporate deadlock (id. at 172-74). For the reasons stated on the record, in previous

2

orders, and in this order, the Court concludes that the jury instructions did not render the

3

trial unfair to Defendants. See Molski, 481 F.3d at 729. Defendants’ Rule 59(a) motion

4

for a new trial based on the Court’s fiduciary duty instructions is denied.

5

VI.

Aiding and Abetting Claim is Derivative.

6

Defendants Johnson, Leon, Shanahan, and Ilardo argue that they cannot be found

7

liable on the aiding and abetting claims because Defendant Zowine is not primarily liable

8

on the breach of fiduciary duty claims. Doc. 568 at 7. Because the Court has found no

9

basis to overturn the jury’s fiduciary duty verdict, this argument fails.

10

VII.

Aiding and Abetting Liability.

11

Defendants challenge the jury’s aiding and abetting verdict on two fronts. First,

12

they argue there was insufficient evidence to establish that Defendants Johnson, Leon,

13

Shanahan, and Ilardo knew that Zowine was engaging in tortious conduct. Doc. 568 at 7-

14

8. This knowledge component does not require actual and complete knowledge of the

15

primary violation; instead, knowledge may be inferred from the circumstances, and the

16

requirement may be satisfied even though the aider and abettor lacked knowledge of all

17

of the details of the primary violation. Sec. Title Agency, Inc. v. Pope, 200 P.3d 977, 988,

18

¶ 45 (Ariz. Ct. App. 2008) (citing Wells Fargo Bank v. Ariz. Laborers, Teamsters &

19

Cement Masons Local No. 395 Pension Tr. Fund, 38 P.3d 12, 23, 26, ¶¶ 36, 45 (Ariz.

20

2002)). Second, Defendants assert that there was not “any causal connection between the

21

actions of the defendants found liable for aiding and abetting and the damages claimed by

22

Plaintiff.” Id. at 7. “But for” causation is not required; the test is whether Defendants’

23

assistance made it easier for the violation to occur. Sec. Title Agency, 200 P.3d at 988,

24

¶ 47 (citing Wells Fargo Bank, 38 P.3d at 27, ¶ 54).

25

1.

Waiver.

26

As an initial matter, the Court finds that not all of these issues were raised in the

27

Defendants’ Rule 50(a) motion at trial. Counsel for Defendants argued that Plaintiff had

28

not adduced sufficient evidence on the aiding and abetting claim for Defendants Leon

- 20 -

1

(Doc. 495 at 167-68), Johnson (id. at 168-69), and Ilardo (id. at 170), but not Defendant

2

Shanahan. Nor did Defendants’ counsel argue in their Rule 50(a) motion that Plaintiffs

3

had failed to establish a sufficient causal connection between aiding and abetting

4

Zowine’s actions and Plaintiff’s harm. Counsel mentioned causation in passing while

5

describing the required elements of aiding and abetting liability (id. at 166), but did not

6

advance a causation argument with respect to any Defendants. Thus, for purposes of

7

Defendants’ Rule 50(b) motion, these arguments are deemed waived.

8

however, may still consider these arguments under Defendants’ Rule 59(a) motion.

9

2.

The Court,

Defendant Charles Johnson.

10

As noted above, Plaintiff presented substantial evidence through Ron Wise,

11

Wendy Britton, and others that MGA engaged in widespread and intentional medical

12

billing fraud. Johnson was at the center of that alleged fraud. He managed Zoel’s home

13

health care division and directly supervised Defendant Martha Leon, the person primarily

14

responsible for the fraud. Docs. 476 at 102, 105; 479 at 28; 485 at 61, 66, 71, 73, 75; 491

15

at 95-96. When billing issues arose, Johnson and Leon were not forthcoming with

16

information. Doc. 476 at 105. Johnson reported to Zowine on medical billing matters.

17

Doc. 479 at 30-31; 483 at 126-27, 131; 492 at 61-65. After Richard Eden began looking

18

into billing issues, Johnson and Leon were not forthcoming, and Johnson coached Leon

19

in responding. Doc. 486 at 23-27 (“Nice way to respond and phrase.”). In response to

20

another inquiry about billing issues, Johnson wrote simply “[r]ound up.” Id. at 28-30.

21

Johnson and Zowine attempted to blame the billing issues on Eden and Plaintiff.

22

Doc. 479 at 84.

23

In addition, Johnson was heavily involved in Zowine’s surreptitious move of

24

employees, equipment, and computers to a separate office from Plaintiff, a step the jury

25

reasonably could have viewed as central to Zowine’s plan to drive Plaintiff from the

26

company. Zowine directed Johnson to move office materials, including computers, from

27

the Plaintiff’s location to Zowine’s new location. Doc. 485 at 129. Johnson participated,

28

despite having no authorization from Plaintiff, the company’s president. Id. at 125-27.

- 21 -

1

Johnson coordinated and spoke at the meeting before the move, which occurred early in

2

the morning in a grocery store parking lot and involved Defendants Ilardo and Shanahan,

3

among others. Doc. 477 at 47-50; 485 at 127-29, 133. Johnson was involved in selecting

4

which employees would make the move, excluding employees with close ties to Plaintiff.

5

Doc. 485 at 132-33. During the move, Johnson and others took not only their own

6

computers, but also other employees’ property. Id. at 126. They later moved the network

7

servers without Plaintiff’s authorization. Id. at 136-39. Following the move, Johnson

8

returned to Plaintiff’s office with legal papers in hand and instructed the employees that

9

Plaintiff was not allowed in his own office and they were not to communicate or engage

10

in business dealings with him. Docs. 479 at 72; 483 at 78.

11

In addition, Johnson worked with Plaintiff and Zowine from virtually the start of

12

the company. He knew their relationship and the nature of their business dealings. He

13

was closely associated with Zowine in the business. The jury reasonably could have

14

inferred that Johnson fully understood the issues between Plaintiff and Zowine, including

15

the billing fraud at the center of the problems, and that Zowine was acting to prevent

16

discovery of the fraud by driving Plaintiff from the business.

17

Viewing the evidence in the light most favorable to Plaintiff, the Court concludes

18

that the jury had sufficient evidence reasonably to conclude that Johnson knew of

19

Zowine’s breach of fiduciary duty.

20

3.

Defendant Martha Leon.

21

Leon reported to Johnson, who reported to Zowine. Docs. 479 at 30-31; 483 at

22

126-27, 131; 492 at 61-65. Leon handled medical billing in ways different from standard

23

procedures. Doc. 488 at 53-55. Leon was, according to Wise’s testimony, at the center

24

of the billing fraud.

25

attempted to understand the billing problems. She knew that rounding up had been

26

occurring in her spreadsheets for several years.

27

contradictory testimony about her accounting practices, whether she had discussions with

28

Zowine’s billing fraud attorney (id. at 86-89), and whether she had created the formula

She refused to cooperate when Eden, on behalf of Plaintiff,

- 22 -

Id. at 104-05.

She provided

1

that caused some of the billing fraud (id. at 96-98). She moved with Johnson and the

2

other Zowine loyalists to the new offices. Viewing the evidence in the light most

3

favorable to sustaining the verdict, the Court concludes that the jury could reasonably

4

conclude that Leon knew Zowine was committing tortious conduct through his

5

involvement in medical billing fraud and his efforts to hide the fraud from Plaintiff.

6

4.

Defendant Pat Shanahan.

7

Shanahan was a close associate of Zowine. He was part of the sales group at Zoel

8

that Zowine supervised closely, and sat in the “pit” where Zowine’s sales personnel

9

worked. He would therefore have been familiar with Zowine’s open efforts to harass

10

Plaintiff in the office, including his obscene suggestion to Eden and Plaintiff, Zowine’s

11

physical assault of Plaintiff, and the time when Zowine arranged for personnel in the pit

12

to stand and salute as Plaintiff walked in and somebody played “Hail to the Chief” on

13

their computer. Shanahan was also copied on many of the profane and offensive emails

14

Zowine sent to plaintiff.

15

Shanahan was present at the early morning meeting in a grocery store parking lot

16

when the surreptitious office move was arranged. Doc. 477 at 47-50. Shanahan knew

17

that Zowine directed the employees to make the move, that Plaintiff had not approved the

18

move, and that Plaintiff “wasn’t going to know.” Id. at 45-47, 50. Shanahan was later

19

involved in removing the network servers from Plaintiff’s office. Doc. 485 at 137-38. In

20

another incident that occurred after the move, Shanahan blocked Plaintiff from

21

attempting to stop Zowine and others from copying emails at Plaintiff’s office. Doc. 477

22

at 61. When he would visit Plaintiff’s office after the move with other Zowine loyalists,

23

Shanahan engaged in intimidating and harassing conduct toward Plaintiff and employees

24

loyal to Plaintiff. And George Prussin – Plaintiff’s father-in-law – testified that Shanahan

25

called him on the phone, with Zowine in the room, and asked “how does it feel to know

26

your daughter is married to a pedophile?” Viewing the evidence in the light most

27

favorable to the jury’s verdict, the Court concludes that the jury had ample evidence

28

reasonably to find that Shanahan knew of Zowine’s breach of fiduciary duty.

- 23 -

1

5.

Defendant Mike Ilardo.

2

Mike Ilardo was a childhood friend of Zowine’s. Doc. 520 at 171. Ilardo worked

3

in “the pit” at Zoel and thus would have been familiar with Zowine’s public efforts to

4

humiliate Plaintiff and Eden and Zowine’s assault of Plaintiff. Doc. 495 at 10, 12. Ilardo

5

was present when Zowine played “Hail to the Chief” and had everyone in the pit stand a

6

salute Plaintiff as he entered the office. Id. at 11. Ilardo was involved in the surreptitious

7

office move, and was present for the parking lot meeting beforehand. Doc. 477 at 47-48.

8

Ilardo called some of the employees and invited them to attend the meeting. Doc. 485 at

9

128. After the move, Ilardo and others, including Shanahan, came to Plaintiff’s office in

10

black leather jackets and removed the server without Plaintiff’s authorization. Docs. 491

11

at 39, 495 at 30, 51. Zowine directed Ilardo and others to take the server. Id. at 32-33,

12

51. Ilardo was also present when Zowine attempted to print emails from a computer in

13

Plaintiff’s office resulting in a scuffle and police intervention.

14

Viewing the evidence in the light most favorable to the verdict, the Court concludes that

15

the jury had sufficient evidence reasonably to conclude that Ilardo knew of Zowine’s

16

breach of fiduciary duty.

17

6.

Doc. 495 at 35-37.

Causation Evidence.

18

There was also sufficient evidence for the jury reasonably to find that Defendants’

19

actions made it easier for Zowine to breach his fiduciary duties. Johnson and Leon were

20

integral to the billing fraud. Leon was the primary individual responsible for medical

21

billing, and her spreadsheet was a source of the fraud. Johnson, Shanahan, and Ilardo

22

were all heavily involved in the surreptitious office move.

23

planning, organizing, and executing the move. Shanahan and Ilardo actively participated

24

in efforts to intimidate Plaintiff and his associates. Each of these individuals made it

25

easier for Zowine’s breach to occur. Indeed, Plaintiff and other witnesses testified that

26

they feared and were intimidated by Zowine and the Defendants loyal to him.11

They were involved in

27
11

28

Defendants argue that mere participation in intimidating visits to Plaintiff’s
office was insufficient to support aiding and abetting liability. Doc. 568 at 8. Defendants
note that the jury found Defendants Brett Costello, Kai Knowlton, Rio Mayo, and Mike
- 24 -

1

VIII. Compensatory Damages.12

2

Defendants argue that the compensatory damages award should be remitted

3

because it exceeds the amount calculated by Plaintiff’s expert. Doc. 568 at 8. The Ninth

4

Circuit has approved the use of remittitur in cases of excessive damages awards:

9

When the court, after viewing the evidence concerning damages in a light
most favorable to the prevailing party, determines that the damages award
is excessive, it has two alternatives. It may grant defendant’s motion for a
new trial or deny the motion conditional upon the prevailing party
accepting a remittitur. The prevailing party is given the option of either
submitting to a new trial or of accepting a reduced amount of damage
which the court considers justified.

10

Fenner v. Dependable Trucking Co., Inc., 716 F.2d 598, 603 (9th Cir. 1983) (footnote

11

and citations omitted). Remittitur is appropriate when a jury returns “a verdict that is so

12

grossly excessive as to shock the conscience,” Monsanto Co. v. Ralph, 382 F.3d 1374,

13

1384 (Fed. Cir. 2004) (citation omitted), a determination which “‘is committed to the

14

sound discretion of the trial court,’” Williams v. Bridgeport Music, Inc., No. CV13-

15

06004-JAK, 2015 WL 4479500, at *28 (C.D. Cal. July 14, 2015) (quoting 11 Charles

16

Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2815 (3d ed. 1998)).

5
6
7
8

17

Plaintiff’s damages evidence was presented primarily through an expert witness,

18

Dr. Christopher Young.

Dr. Young calculated Plaintiff’s net historical losses at

19

$10,360,225. Doc. 493 at 93. This amount included profits Plaintiff would have earned

20

from Zoel from the beginning of 2010 through July of 2015; it did not include lost profits

21

for the second half of 2015, any of 2016, or future years. Id. at 80, 84-85, 93-94. Dr.

22

Young testified that this number was “conservative,” and could have been higher. Id. at

23

80-81. He also confirmed that Plaintiff continues to lose money “to this day,” and that a

24
25
26
27

Narducci not liable for aiding and abetting. But the evidence discussed above establishes
that Defendants Johnson, Shanahan, and Ilardo did more than merely participate in the
visits. Moreover, the fact that the jury distinguished among Defendants shows that it
considered the evidence carefully as to each Defendant individually.
12

28

The Court must consider this issue despite the Zowines’ bankruptcy filing
because it affects Defendants Johnson, Leon, Shanahan, and Ilardo, each of whom was
found liable for a percentage of the overall compensatory damages award.
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1

present-day calculation of damages “would be higher.” Id. at 84-85.

2

The jury returned a verdict of $11,000,000 in compensatory damages, which was

3

$639,775 – or about 6.2% – higher than Dr. Young’s calculation. Viewing the evidence

4

in the light most favorable to the verdict, the Court cannot conclude that this award is

5

excessive. An additional 6.2% could represent a modest approximation of Plaintiff’s

6

losses after July 2015, particularly given Dr. Young’s estimate that Plaintiff’s lost annual

7

profits were more than $2,600,000. In addition, the damage award is consistent with Dr.

8

Young’s testimony that his calculation was conservative. Dr. Young confirmed that

9

Plaintiff was continuing to suffer damages not reflected in his calculation, the Court

10

instructed the jury that compensatory damages could include lost salary and profits (Doc.

11

533 at 14), and Zowine himself testified that Zoel continued operations in 2016 and

12

remained profitable. Given these facts, the jury did not act unreasonably in awarding

13

compensatory damages that exceeded Dr. Young’s calculation by $639,775.13

14

IX.

Punitive Damages under Rules 50 and 59.

15

Defendants argue that punitive damages are not appropriate because Plaintiff

16

failed to present sufficient evidence that Defendants’ conduct was “aggravated,

17

outrageous, and performed with an ‘evil mind.’” Doc. 568 at 9-10. Defendants seek

18

relief under both Rule 50(b) and Rule 59(a), but Defendants’ Rule 50(a) argument

19

addressed punitive damages only with respect to Zowine, not Johnson, Leon, or

20

Shanahan. Doc. 495 at 172-73. The Rule 50 argument is waived as to these Defendants,

21

and the Court must consider whether punitive damages awarded against them were

22

appropriate under Rule 59(a).

23

In Arizona, punitive damages may be awarded in aiding and abetting cases. Sec.

24

Title Agency, 200 P.3d at 995, ¶ 82 (citing Rodgers v. Bryan, 309 P.2d 773, 778 (Ariz.

25

1957)). Under Rule 59(a), a court may consider a party’s claim of excessive damages,

26
13

27
28

Defendants assert that the Court’s failure to offset the state court’s $5 million
valuation of Zoel results in a double recovery and fails to give full faith and credit to the
state court’s judgment. Doc. 568 at 8 n.5. The Court has dealt with this argument at
length, and has rejected it for reasons stated in several previous orders. See Docs. 425,
428, 524 at 4-5, 534 at 5-8.
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1

Molski, 481 F.3d at 729, and order a new trial if the award is contrary to the clear weight

2

of the evidence, Passantino, 212 F.3d at 510 n.15.

3

The Court cannot conclude that assessing punitive damages against Defendants

4

Johnson and Leon was contrary to the clear weight of evidence. As discussed above,

5

there was substantial evidence implicating both Johnson and Leon in the medical billing

6

fraud. Knowledge of and participation in deliberate fraud, and then assisting Zowine in

7

attempting to hide it, even at the cost of driving another partner from the business, surely

8

satisfies the Arizona requirement of an “evil mind.” As the Arizona Supreme Court has

9

explained, an evil mind “may be found where defendant intended to injure the plaintiff.

10

It may also be found where, although not intending to cause injury, defendant

11

consciously pursued a course of conduct knowing that it created a substantial risk of

12

significant harm to others.” Rawlings v. Apodaca, 726 P.2d 565, 578 (Ariz.1986).

13

There was also substantial evidence implicating Johnson and Shanahan in

14

Zowine’s campaign to drive Plaintiff from the company. Johnson was the primary person

15

who organized the surreptitious office move, which was deliberately concealed from

16

Plaintiff, and he later returned to Plaintiff’s office and instructed the employees not to

17

communicate with Plaintiff. Shanahan was involved in both the office move and the

18

moving of a server, both of which were concealed from Plaintiff. And Shanahan was

19

among the employees of Zowine who came to Plaintiff’s office several times and sought

20

to intimidate Plaintiff and other employees. Shanahan also claimed to Plaintiff’s father-

21

in-law that Plaintiff was a pedophile. This satisfies the Arizona “evil mind” standard.

22

Defendants contend that punitive damages awards against Johnson, Leon, and

23

Shanahan are inappropriate because Plaintiff’s counsel did not specifically request such

24

damages during his closing argument. Docs. 568 at 9-10; 583 at 7. But Defendants cite

25

no authority for the proposition that punitive damages may be awarded only if they are

26

requested in closing argument. The Court’s jury instructions stated that punitive damages

27

could be awarded in this case, and set forth the proper standard for awarding them.

28

Doc. 533 at 23. Defendants do not contend that these instructions were improper.

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1

The Court will not grant Rule 59(a) relief based on the jury’s decision to assess

2

punitive damages awards against Defendants Johnson, Leon, and Shanahan.

3

X.

Constitutionality of the Punitive Damages.

4

Defendants argue that the punitive damages awards are constitutionally excessive.

5

Doc. 568 at 10-12. Defendants seek remittitur or a new trial for the punitive damages

6

assessed against Defendants Zowine, Shanahan, and Johnson. Once again, the Court will

7

not consider Defendants’ argument with respect to Zowine based on the bankruptcy stay.

8

“The purpose of punitive damages is not to compensate the plaintiff, but to express

9

society’s disapproval of outrageous conduct and to deter such conduct by the defendant

10

and others in the future.” Hawkins v. Allstate Ins. Co., 733 P.2d 1073, 1080 (Ariz. 1987)

11

(citations omitted). The Due Process Clause of the Fourteenth Amendment “imposes a

12

substantive limit on the size of punitive damages awards.” Honda Motor Co., Ltd. v.

13

Oberg, 512 U.S. 415, 420 (1994) (citations omitted). The Supreme Court has provided

14

two relevant guideposts for reviewing punitive damages awards: “(1) the degree of

15

reprehensibility of the defendant’s misconduct; [and] (2) the disparity between the actual

16

or potential harm suffered by the plaintiff and the punitive damages award.” Sec. Title

17

Agency, 200 P.3d at 998, ¶ 94 (citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538

18

U.S. 408, 418 (2003)).14

19

With respect to the first guidepost, courts are directed to consider several factors,

20

none of which is dispositive on the issue of reprehensibility. Id., ¶ 95 (citing State Farm,

21

538 U.S. at 419). Courts should consider whether:

22
23

the harm caused was physical as opposed to economic; the tortious conduct
evinced an indifference to or a reckless disregard of the health or safety of
others; the target of the conduct had financial vulnerability; the conduct

24
25
26
27
28

14

A third guidepost, the difference between the punitive damages awarded by the
jury and the civil penalties authorized or imposed in comparable cases, is not relevant
when liability is based on a common-law tort. Sec. Title Agency, 200 P.3d at 998, ¶ 94
n.19 (“We do not analyze the third guidepost because it neither weighs for nor against the
punitive damages award in this case. Aiding and abetting is a common-law tort, and we
agree with the Tenth Circuit that ‘a violation of common law tort duties [may] not lend
[itself] to a comparison with statutory penalties.’”) (quoting Cont’l Trend Res., Inc. v.
Oxy USA Inc., 101 F.3d 634, 641 (10th Cir. 1996)).
- 28 -

1
2
3

involved repeated actions or was an isolated incident; and the harm was the
result of intentional malice, trickery, or deceit, or mere accident.
Id. (citing State Farm, 538 U.S. at 419).

4

With respect to the second guidepost, in the case of a substantial compensatory

5

damages award, “a 1:1 ratio” between compensatory and punitive damages “is a fair

6

upper limit.” Exxon Shipping Co. v. Baker, 554 U.S. 471, 513 (2008); see also Sec. Title

7

Agency, 200 P.3d at 1000-01, ¶¶ 103-08 (reducing punitive damages to $6,100,290,

8

representing a 1:1 ratio to compensatory damages). The Supreme Court has made clear

9

that there is no bright-line ratio that punitive damages may not exceed. Sec. Title Agency,

10

200 P.3d at 1000, ¶ 103 (citing State Farm, 538 U.S. at 424).

11

A.

12

Defendants argue that the punitive damages imposed against Defendant Shanahan

13

Pat Shanahan.

are unconstitutionally excessive. Doc. 568 at 12-15. The Court agrees.

14

The jury found Shanahan responsible for $27,500 of the compensatory damages

15

(Doc. 500 at 2-4) and $750,000 in punitive damages (id. at 5). The jury was justified in

16

finding Shanahan’s conduct reprehensible. He was a full participant in efforts to harass

17

Plaintiff and those loyal to him; he used intimidation at the request of Zowine; he

18

characterized Plaintiff as a pedophile; and he was fully aware of the hostile and

19

demeaning actions of Zowine that he was supporting. This conduct included repeated

20

actions, not an isolated incident, and was intentional, not negligent.

21

But the Court finds the 1 to 27 ratio between Shanahan’s compensatory and

22

punitive damages to be clearly excessive. The jury found that Shanahan caused only

23

.25% of the damages suffered by Plaintiff, resulting in an award of $27,500. Doc. 500 at

24

4. The Court can see no basis in the evidence to hold Shanahan accountable for 27 times

25

more in punitive damages, reprehensible though his conduct was. Considering all of the

26

evidence, the Court concludes that the punitive damages against Shanahan should be

27

reduced to $55,000, which represents a 1:2 ratio. This ratio furthers the purposes of

28

punitive damages, respects the jury’s finding of reprehensibility, and yet preserves

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1

Shanahan’s Fourteenth Amendment rights.

2

B.

3

The jury found Johnson responsible for $550,000 of the compensatory damages

4

(Doc. 500 at 2-4) and $1,500,000 in punitive damages (id. at 5). The Court agrees that

5

these punitive damages are unconstitutionally excessive.

Charles Johnson.

6

Johnson engaged in reprehensible conduct, sanctioning fraud and helping to

7

conceal it even at the cost of driving Plaintiff from his business. But the compensatory

8

damages award against Johnson was substantial, and the Court concludes that punitive

9

damages three times greater than such an award are clearly excessive. State Farm Mut.

10

Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003) (“When compensatory damages are

11

substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach

12

the outermost limit of the due process guarantee.”).

13

punitive damages award against Johnson should be reduced to $550,000, which

14

represents a 1:1 ratio. This ratio furthers the purposes of punitive damages, respects the

15

jury’s assessment of reprehensibility, and preserves Johnson’s Fourteenth Amendment

16

rights.15

17

XI.

The Court concludes that the

Security for Stay Pending Appeal.

18

The Court has previously issued orders addressing the supersedeas bonds required

19

to secure Plaintiff’s judgment pending resolution of Defendants’ post-trial motion.

20

Docs. 551, 559, 572. Defendants Johnson, Leon, Shanahan, and Ilardo have posted

21

surety bonds that satisfy the Court’s orders. Docs. 576, 577, 578, 579.

22

For purposes of appeal, Defendants Leon’s and Ilardo’s existing bonds are

23

sufficient. Defendant Johnson should post a bond in the amount of $1,100,000 for

24

appeal, and Defendant Shanahan may reduce his bond for appeal to $82,500.

25

IT IS ORDERED:

26

1.

Defendants’ renewed motion for judgment as a matter of law and for a new

27
28

15

The $500.00 award of punitive damages against Defendant Leon raises no
constitutional concerns.
- 30 -

1

trial (Doc. 568) is granted in part and denied in part with respect to Defendants

2

Charles Johnson and Pat and Sarah Shanahan as set forth above.

3
4
5
6
7
8
9
10
11

2.

The motion is denied with respect to Defendants Martha Leon and Michael

and Alisa Ilardo as set forth above.
3.

The proceedings as to Defendants David Zowine and Karina Zowine

remain stayed due to their bankruptcy filing.
4.

The bonds of Defendants Martha Leon and the Ilardos are sufficient for

appeal.
5.

Defendants Pat and Sarah Shanahan may post a bond in the amount of

$82,500 to stay execution during the appeal.
6.

Defendant Charles Johnson shall post a bond in the amount of $1,100,000

12

to stay execution of the judgment on appeal.

13

Dated this 31st day of August, 2016.

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