Category: Blog

Very helpful articles for small businesses to stay on top of the latest regulation and more!

Seeking Removal to the Arizona Bankruptcy Court as a Non-Debtor Third Party

Your client, AZ Company, conducts business with Debtor Co. and both have been sued in state court. Debtor Co. has filed for bankruptcy protection under Chapter 11.  You’re now left thinking about strategy and how to best represent your client in light of Debtor Co.’s bankruptcy filing. You dig deep into your brain’s filing cabinets and consider several options: filing an answer in state court, responding with a dispositive motion, and reaching out to the plaintiff’s attorney, among other things. Although it seems like a distant memory from the first year of law school, you also remember that parties have the ability to have an action transferred from a state court to federal court. You recall federal statutes and jurisdictional concepts that enable removing a case from Arizona state court to the District Court for the District of Arizona and even to the Arizona Bankruptcy Court. Where do you begin? 

You know that Debtor Co., with certain time restraints, can seek removal of the state court action based on its debtor status and the direct effect the state court case may have on its bankruptcy. But, you’re left wondering whether your client, AZ Company, has the ability in its own right to remove the state court case as a non-debtor third party to the Debtor’s bankruptcy case. To put it simply, the answer is yes, but there are some limitations and additional considerations.

So, let’s discuss first, what is removal? Removal describes a party’s ability to move a civil action pending in state court to the federal court in the district in which the state court is located. Removal is only proper if the court to which the case is being transferred has jurisdiction over the case. In other words, removal is based on whether the federal court could exercise original or exclusive jurisdiction over the matter. Original jurisdiction refers to the court’s power to hear a case while exclusive jurisdiction refers to the court’s power to hear a case to the exclusion of other courts. According to 28 U.S.C. § 1331, federal district courts have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States. Furthermore, district courts have original and exclusive jurisdiction of all cases under title 11, which encompasses the U.S. Bankruptcy Code. See 28 U.S.C. § 1334(a). As a side note, the bankruptcy court’s power to hear bankruptcy cases and proceedings is derivative to the district court’s jurisdiction.  In re Curtis, 571 B.R. 441, 447 (B.A.P. 9th Cir. 2017). Accordingly, 28 U.S.C. § 157 allows a federal district court to refer cases under and related to the Bankruptcy Code to Bankruptcy Courts. Pursuant to General Order 01-15 of the United States District Court for the District of Arizona, all bankruptcy cases are referred to the Bankruptcy Courts.

There are two main federal statutes that allow for removal of a state court case to federal court: 28 U.S.C. § 1441 and 28 U.S.C. § 1452. Section 1441 is the general removal statute and states that any civil action brought in a State court of which the district court of the United States has original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district in which the action is pending. This means that as a defendant in the state court case, your client, AZ Company, can use the powers of 28 U.S.C. § 1441 to seek removal of the entire state court action to the Debtor’s bankruptcy case.

There is also Section 1452 which is the federal removal statute specific to claims related to bankruptcy cases. Section 1452 states that any party may remove any claim or cause of action other than a proceeding before the United States Tax Court or in a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334. Thus, AZ Company can also utilize Section 1452’s powers to remove the state court case because this federal statute permits any party, including AZ Company, to remove any claim or cause of action to federal court besides those involving tax court cases and governmental police or regulatory power cases.

AZ Company can use Section 1452 to remove the state court case if the district court has jurisdiction over a case “related to” the Bankruptcy Code. Here, Debtor Co. filed for Chapter 11 with the goal of achieving plan confirmation, so the court’s interpretation of “related to” depends on the status of debtor’s bankruptcy plan. If Debtor Co.’s bankruptcy plan has already been confirmed, the term “related to” has a limited meaning and a state court case may only be removed if it involves matters affecting the bankruptcy plan’s interpretation, implementation, consummation, execution, and administration. Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 761 (9th Cir. 2022), cert. denied sub nom. Chevron Corp. v. San Mateo Cnty., CA, 22-495, 2023 WL 3046226 (U.S. Apr. 24, 2023). However, if Debtor Co.’s bankruptcy plan has yet to be confirmed, “related to” is defined much more broadly due to concerns over the state court case’s impact on the bankruptcy case itself, the plan, and its administration. Id.

So, you determine that AZ Company can remove the state court action pursuant to either §§ 1441 and 1452. However, there are other issues you should consider before deciding which of these two statutes to use. First, Section 1441 is the more general statute while Section 1452 provides for the removal of any action subject to federal bankruptcy jurisdiction. Section 1452 also provides for specific textual exceptions (tax court and government police and regulatory power cases). Additionally, you should think about joinder of parties as Section 1441 requires joinder by all defendants whereas Section 1452 does not have this unanimity requirement. (“Under the general removal statute, all properly served defendants must join in the removal or else the action is not removal.” In re Mortgages Ltd., 399 B.R. 673, 675 (Bankr. D. Ariz. 2008)). In addition, Section 1452 allows any party to remove the state court case and not just the defendant(s). A factor of significance is also that Section 1441 removes the entire civil action while Section 1452 permits any claim or cause of action to be removed. Also note, both statutes only allow “civil actions” to be removed. For example, a proceeding before the National Labor Relations Board is not a civil action and is not removable to the district court. In re Adams Delivery Service, Inc., 4 B.R. 589 (1982).

 Therefore to summarize, AZ Company, as a non-debtor third party is allowed to seek removal of the pending state court case under either §§ 1441 or 1452, and which statute to use will depend on the limitations set forth above. If AZ Company decides to proceed with the removal of the state court case, then the next procedural step is to file a timely Notice of Removal pursuant to 28 U.S.C. § 1446 and/or Federal Rule of Bankruptcy Procedure 9027. Remember too that if the plaintiff in the state court action disputes the removal, the plaintiff has the ability to file a Motion to Remand, which motion will be ruled upon by the Bankruptcy Court.

Arizona Appellate Court Rules that COVID Closures Do Not Excuse Tenant’s Non-Payment of Rent

by Bradley D. Pack

A “force majeure” clause (sometimes called an “Act of God” clause) is a contract provision that excuses a party from liability if their ability to perform was prevented by extraordinary circumstances beyond the party’s control, like a natural disaster or a riot. These clauses became the focus of heavy litigation during the COVID-19 pandemic when many commercial tenants were forced to temporarily close their businesses due to emergency proclamations and other measures taken to prevent the spread of infection. The Arizona Court of Appeals recently became the first Arizona appellate court to weigh in on the issue of whether a force majeure provision in a lease or other common law defenses relieve a tenant whose business had been shut down of responsibility for paying rent. The short answer, the Court held, is no—at least under the facts of that case.

Vereit Real Estate, LP v. Fitness Int’l LLC, 1 CA-CV 22-0402 (Ariz. App. Apr. 11, 2023) involved three Arizona fitness centers owned by Fitness International. In an effort to curb the spread of COVID-19, then-Governor Ducey issued executive orders that required such centers to close from March to August 2020. Fitness International did not pay rent for the three fitness centers at issue for the months of April through August 2020, leaving over $900,000 in rent unpaid. When the landlords sued for the unpaid rent, Fitness International defended on the ground that it was excused from paying rent under the force majeure provisions of the leases, the common law doctrine of frustration of purpose, and other affirmative defenses. The trial court ruled that none of these defenses applied, and entered judgment in favor of the landlords for the unpaid rent. Fitness International appealed. The Arizona Court of Appeals affirmed the trial court’s ruling in favor of the landlord, holding neither the contractual force majeure clauses at issue in the leases nor any of the common law defenses operated to excuse its payment of rent

The appellate court first noted that “force majeure is not a common law defense applicable when a contract lacks a force majeure provision.” Thus, force majeure clauses must be analyzed under traditional standards of contract interpretation. In this case, all of the leases expressly stated that “Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.” Two of the three leases included the additional language: “Nothing in this Section shall excuse Tenant from the prompt payment of any rental or other charges required of Tenant hereunder.”

The tenant acknowledged that the force majeure clause did not excuse payment of rent under the two leases that included the bolded language, but argued that it was excused from paying rent under the lease that did not include it. The court rejected the tenant’s argument. It held that under the plain language of the lease provisions common to all of the leases, “the failure to make lease payments can be cured by the payment of money.” Thus, non-payment of rent is not excused by a force majeure event (here, the COVID-19 pandemic or the emergency proclamation requiring gyms to close).

The court went on to hold that the frustration of purpose doctrine, which “arises when a change in circumstances makes one party’s performance virtually worthless to the other,” did not apply in this case. Initially, the court pointed out that Fitness International did not preserve for appeal its objection to the trial judge’s ruling that even if there was a temporary frustration of purpose (a legal doctrine that no Arizona appellate court has yet recognized), the obligation to pay rent was only “suspended” during the period of time when it was prevented from operating (meaning that it would have to pay the delinquent rent once it began operating again). The appellate court also held there was not a complete frustration of purpose because “Tenant has not shown that a four-month restriction imposed on 15-year commercial leases constitutes such a substantial frustration of purpose that the resulting value of leasing the premises is totally or nearly totally destroyed.” And, the frustration of purpose doctrine applies only “if the risk of loss was not placed on the party seeking relief.” Because the leases required Fitness International to pay rent “even during force majeure events,” the court held, the leases placed the risk of loss on the tenant, and precluded it from asserting a frustration of purpose defense.

Finally, the court rejected a variety of other defenses raised by Fitness International, finding that the defenses had either been waived or were not supported by the evidence.

The holding in Vereit does not necessarily foreclose the availability of defenses for commercial tenants faced with extraordinary disruptions to their business caused by forces beyond their control. The court’s holding that the force majeure clauses at issue did not excuse the payment of rent was heavily dependent on the specific language the parties used in their leases. With the lessons learned from the pandemic, tenants and landlords alike may find themselves negotiating over the language of force majeure clauses harder and more thoughtfully in the future. The benefit of being represented by experienced legal counsel in such negotiations cannot be overstated.

High School Students Learning to Love the Law with Mock Trials

We’re honored to coach students who participate in the Arizona High School Mock Trial program. Teams of students receive a fictional case for which they must learn both sides of the case, and students must act as both attorneys and witnesses. Along with their coaches, each student learns the facts of the case and collaborates with their classmates and coaches to create strategies for trial.

Scott Cohen served as Volunteer Attorney Coach to this group of exceptional youths from BASIS High School in Chandler.

In addition to the procedural aspects of the mock trial, there is a competition for courtroom artists. For seven of the last eight years, a BASIS has won this competition. A special congratulations go to BASIS student artist Keshav Jha, who won the Arizona state courtroom artist contest this year!

It is a privilege to help students develop an understanding and love for the practice of law through the Arizona High School Mock Trial program. We’re especially thrilled to learn that former Mock Trial student Rahul Jayaraman, who helped start the program at BASIS in 2015, will be attending Harvard Law School in the fall.

Well done, students. We’re already excited to see the teams come together next year!

24 years went by in a flash… Engelman Berger celebrates by giving back.

When thinking about the practice of law, it’s easy to forget that law firms are businesses, just like any other. Our firm happens to be in the business of helping other businesses. Businesses are about people, and we are so grateful for the incredible people who make up our firm’s hard-working staff, our clients who trust us to solve all manner of problems, and our colleagues in the practice of law. 

On March 1, 2023, Engelman Berger, PC celebrated its 24th anniversary.  Our team of administrators, support staff, and attorneys know that their contributions make a difference, not only in the legal community but more importantly in the greater Phoenix community as well. That is why each year we celebrate our anniversary with a day of community service.

This year we volunteered at HonorHealth Desert Mission in Sunnyslope. Its mission is to make health and social services available to the most vulnerable in the Phoenix community. Our community service activities extended beyond the actual volunteer day by including an office food drive and financial contributions throughout the month leading up to the firm’s 24th anniversary.  

When David Engelman and Steven Berger started the firm in 1999, it was with two legal secretaries and a mission to be lawyers who listen. Listening to the needs of those we serve, and responding to those needs with action, has been a foundational principle that has allowed us to effectively and efficiently help our clients reach their goals. As our clients’ businesses have grown and expanded, we have too. 

We are now a firm of over 15 lawyers who practice in a variety of specialties, including commercial litigation, bankruptcy, real estate, water rights, business formation and reformation, public finance, and cannabis law. As we’ve grown, we continue to come back to those founding principles of listening and service. We are so excited to celebrate this anniversary and are looking forward to an even bigger milestone next year! 

EB Attorneys Steve Berger and Tami Lewis Recognized as Top 100 Lawyers in Arizona for 2021

Engelman Berger congratulates attorneys Steve Berger and Tami Lewis on being recognized as Top 100 Lawyers in Arizona for 2021 by Az Business Magazine. They have been recognized for their professional success and ratings as well as their impact in their law firm, the communities they serve, and the legal profession as a whole.

Steven N. Berger | Shareholder | Engelman Berger

Practice areas: Bankruptcy and reorganization, creditor’s rights, loan workouts, business restructurings, business and real estate disputes, mediation

Tamalyn E. Lewis | Shareholder | Engelman Berger

Practice areas: Bankruptcy and reorganization, creditors’ rights, commercial landlord tenant law, loan workouts, business and financial restructuring, real estate, loan documentation

Each year, the Az Business Magazine’s Editorial Team collaborates with industry experts to select and compile a prestigious group of Arizona’s most talented and successful attorneys.

Congratulations, Steve and Tami!

Care Holiday Party Engelman Berger

EB Sponsoring CARE’s 3rd Annual Holiday Party at ABI Winter Leadership Conference

Engelman Berger is a proud sponsor of the Credit Abuse Resistance Education’s (CARE) 3rd annual holiday party. The event will be held on December 5th, 2019 from 4:30PM-6:00PM at the American Bankruptcy Institute’s annual Winter Leadership Conference at Terranea Resort in Southern California.

We hope our friends and colleagues attending the ABI Winter Leadership Conference will have the chance to attend the wonderful event. To register for the event, visit this link:

Engelman Berger attorney and CARE board/executive committee member, Patrick Clisham, will be attending the CARE event.

Credit Abuse Resistance Education (CARE) is a non-profit organization that aims to teach young individuals the skills of financial literacy. CARE was founded in 2002 by a now-retired Bankruptcy Judge and continues to recruit professionals in the bankruptcy and financial service industries to talk directly with young adults about the importance of personal finance.

Statute Limitations Engelman Berger

Guarantors May Have a New Statute of Limitations Defense

In Monroe v. Arizona Acreage LLC, No. 1 CA-CV 18-0476, 2019 WL 2134794 (Ariz. Ct. App. May 16, 2019), the Arizona Court of Appeals implied that under certain circumstances a general continuing guaranty executed outside the state may be governed by a four year statute of limitations under A.R.S. § 12-544(3), even if the underlying obligation is subject to a six year statute of limitations under A.R.S. § 47-3118. In light of this opinion, counsel for guarantors should consider whether their client’s guaranty was (1) executed out of state, (2) a general, rather than a specific, guaranty and/or executed by a non-owner, and (3) whether more than four years has elapsed since its execution. If the answers to these questions are each “yes,” then Monroe suggests that you may have a meritorious statute of limitations defense. 

Presiding Judge Lawrence F. Winthrop delivered the opinion of the Court, in which Judge Maria Elena Cruz and Chief Judge Samuel A. Thumma joined. 


Two different limited liability companies executed separate promissory notes in favor of multiple lenders in order to develop several acres of land in Mohave County. Both notes were secured by deeds of trust on the land, and personally guaranteed by the same developer. The notes, deeds of trust, and personal guaranties were all executed in Nevada. The borrowers stopped making payments on the notes in June 2008, and in June of 2014, the investors filed two class action lawsuits. The Court entered judgments against the borrowers and guarantor, which they appealed.


Among other issues, on appeal the borrowers and guarantor argued that the promissory notes and guaranties were subject to a four year statute of limitations under A.R.S. § 12-544(3), and that therefore the investors’ actions—brought nearly six years after the default—were time-barred. A.R.S. § 12-544(3) states (with emphasis added):

There shall be commenced and prosecuted within four years after the cause of action accrues, and not afterward, the following actions:

3. Upon a judgment or decree of a court rendered without the state, or upon an instrument in writing executed without the state. This paragraph does not apply to a judgment for support, as defined in section 25-500, and to associated costs and attorney fees.

The investors countered that the notes and guaranties are actually governed by the UCC’s six year limitation for negotiable instruments, found in A.R.S. § 47-3118(A):

Except as provided in subsection E, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date.

Both parties agreed with the maxim that a specific statute of limitations shall prevail over a competing general statute, but disagreed as to which statute is specific and which is general. The Court ultimately sided with the investors, reasoning that A.R.S. § 47-3118(A) is the more recent statute (enacted almost 70 years after § 12-544), that its application to negotiable instruments is more specific than § 12-544’s application to instruments generally, and that this approach is more consistent with the policy purpose of the UCC to create uniformity in commercial transactions. Accordingly, the Court unambiguously held that A.R.S. § 47-3118(A) governs the notes and deeds of trusts, notwithstanding the fact that they were executed out of state.

Personal guaranties, however, are not negotiable instruments, and therefore required another layer of analysis. The Court first observed that, in Arizona, guaranty agreements are “contracts separate from their related instruments” and are generally not subject to the U.C.C. Monroe, 2019 WL 2134794 at 5. However, the Court went on to create an exception to this rule where the borrower is an entity owned by the guarantor and where the guaranty is a “specific” guaranty that obligates the guarantor “to repay only the debts of the particular promissory notes.” Id. Finding that the given facts presented such a situation, the Court held that the statute of limitations for the guaranties would be governed by the U.C.C. and track the six year limitations period for the underlying notes.

It should be noted that the decision appears to be based on the Court’s view that it would be “illogical” for a personal guaranty to expire earlier than the underlying obligation. Although the merits of this practical approach are readily apparent, the Court did not root this conclusion in statutory authority or precedent. The plain language of neither A.R.S. § 12-544 nor § 47-3118 contemplate any such exception, and the sole case cited by the Court to support its distinction between specific and general guaranties in this context – Consolidated Roofing & Supply Co., Inc. v. Grimm, 140 Ariz. 452, 682 P.2d 457 (App. 1984) – relied on prior provisions of the U.C.C. that have since been repealed. Nonetheless, the Court’s decision results in a clear rule that out-of-state “specific” guaranties that are executed by the borrower’s owner are subject to A.R.S. § 47-3118, not § 12-544.


The implication of this rule is that a guaranty will be subject to the four year limitation of A.R.S. § 12-544 in circumstances where (i) the out-of-state guaranty is not a specific guaranty but merely a general continuing guaranty, or (ii) the guaranty is not executed by the borrower’s owner. Accordingly, this decision potentially has significant ramifications for lenders and guarantors alike, albeit in narrow circumstances where the guaranty is executed outside the state but being enforced in Arizona.

Lenders and their counsel generally assume a six year limitation applies to all contracts, and likely will not think to analyze whether they need to bring suit within four years. It is also relatively common for lenders to rely on a single general continuing guaranty executed at the start of the lending relationship that is designed to apply to any and all current and future indebtedness of the borrower, rather than to have the guarantor execute a fresh guaranty specifically identifying the underlying obligations each time a new loan is made. Therefore, if you are counsel for a guarantor being sued on their personal guaranty, you should determine:

(1) Was the guaranty executed out of state?

(2) Has four years lapsed since the breach?

If the answer to both 1 and 2 are yes, then you should also determine:

(3) Is it a specific guaranty?

(4) Is your client an owner of the borrower?

If either 3 or 4 are no, then you may have a meritorious argument pursuant to A.R.S. § 12-544 and Monroe that the case should be dismissed.

If you are a lender, the Monroe decision simply reinforces the need to follow, or at minimum deliberately consider, certain standard provisions and lending practices for your form guaranties, such as:

  • A provision stating that the guaranty is being executed in Arizona;
  • A provision specifically stating the period in which an action for breach of the guaranty must be brought;
  • Include continuing guaranty language, but also specifically reference the primary obligations you know are being guaranteed; and
  • Have guarantors execute updated guaranties executes a new loan agreement or loan modification that increases the indebtedness. 

About the Author: Michael Rolland is a member of the civil litigation and commercial transactions practice groups with the law firm of Engelman Berger, P.C. Michael has a special interest in the intersection of technology and the law, and writes on tech law issues.

Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.

Engelman Berger Blog

Rejection of Trademark License Not Tantamount to Revocation

Have you ever worried about the status of your intellectual property rights if the licensor filed bankruptcy? Outside of bankruptcy, it was settled law that a licensor who breaches cannot revoke its rights under a contract, absent some special contract terms or unique aspect of law. In a bankruptcy, however, revocation was a serious concern in entertainment law and the fashion industry, for example. Days ago, the U.S. Supreme Court clarified your rights and ended any chance of debtors licensing away their intellectual property rights, declaring bankruptcy, and then re-trading them.

In Mission Product Holdings, Inc. v. Tempnology, LLC, nka Old Cold LLC, 2019 WL 2166392, the Supreme Court addressed the issue of whether a debtor-licensor’s rejection of a contract deprives the licensee of its rights to use the trademark. The Supreme Court held that it does not.  Succinctly put, “A rejection breaches a contract but does not rescind it.” Accordingly, those rights conveyed by the contract survive the breach and remain in place.

This case arises in the context of a licensing agreement but should apply equally to all contracts with debtors. Tempnology primarily manufactured workout clothing designed to keep you cool and marketed those products under the brand name “Coolcore.” It used trademarks to distinguish its gear from the competition. Tempnology entered into a contract with Mission Product Holdings which gave Mission an exclusive license to distribute certain Coolcore products in the U.S. It also granted Mission a non-exclusive license to use the Coolcore trademarks. Before the agreement expired, Tempnology filed a voluntary petition under Chapter 11 of Title 11 of the U.S. Code a/k/a the Bankruptcy Code. Tempnology then asked the bankruptcy court to allow it to “reject” the licensing agreement.

The bankruptcy court approved the rejection, thereby relieving the debtor of any obligation to continue to perform and giving counterparty Mission a pre-petition claim for damages. Tempnology wanted more. Tempnology sued for declaratory judgment asking the court to determine that rejection was tantamount to rescission in that it terminated the rights it granted Mission to use Coolcore trademarks. While the bankruptcy court agreed with Tempnology, the Bankruptcy Appellate Panel for the First Circuit disagreed. The First Circuit Court of Appeals rejected the BAP’s analysis and an opinion out of the Seventh Circuit, and reinstated the bankruptcy court’s decision. 

Numerous courts have struggled with the ramifications of a debtor’s rejection of a contract pursuant to Section 365 of the U.S. Bankruptcy Code. Over time, two views emerged.  Some courts concluded that a contract breach should have the same consequences as a breach outside of bankruptcy. Under this scenario, a breach allows the counterparty a suit for damages while leaving intact the rights the counterparty received under the agreement. Other courts have held that a contract breach is more akin to a rescission in a non-bankruptcy environment. In this paradigm, the counterparty still has a suit for damages but the rejection terminates the entire agreement and corresponding contractual rights conferred upon the counterparty. 

As Professor Baird wrote and Justice Kagan quoted for the majority: “A debtor’s property does not shrink by happenstance of bankruptcy, but it does not expand, either.” This principle applies equally to personal property contracts as it does to license agreements. In fact, the hypothetical Justice Kagan weaves throughout the opinion is that of a law firm’s lease of a copier. Thus, we are guaranteed to see various applications of Tempnology as debtors and creditors explore the boundaries of this latest Supreme Court decision.

About the Author: Scott Cohen has practiced commercial bankruptcy, creditors’ rights, and insolvency litigation for 27 years. He is a Board Certified Specialist in Business Bankruptcy Law and a past Bankruptcy Section Chair of the State Bar of Arizona.

Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.

Engelman Berger Blogs


The Arizona legislature recently signed into law the nation’s first fintech regulatory sandbox, which started accepting applications on August 3, 2018. Participants in the sandbox will enjoy a reprieve from many of the licensing and regulatory burdens of companies in the financial sector, so the program offers a great incentive for financial technology (aka, “fintech”) companies to settle and operate in Arizona. This is the last of a five part series on how to apply and participate in the sandbox. If you are new to the series, go back and read the first four parts, which discuss the history of sandbox programs, the benefits of participation in the Arizona sandbox, eligibility requirements, and the application process. This part five will explain the rules you will be subject to once in the sandbox. The official website for the fintech sandbox was recently launched and can be viewed HERE, and the full text of the law can be viewed HERE.


Operating restrictions: Sandbox participants are only permitted to test their innovation for a period of 24 months, and only on 10,000 Arizona consumers. If the participant demonstrates “adequate financial capitalization, risk management process and management oversight,” then the AG’s office may agree to expand the size of the participant’s test market to 17,500 consumers. Consumer lenders are permitted to issue consumer loans up to $15,000 (except loans to a single consumer may not exceed $50,000), and money transmitters may engage in transactions up to $2,500 (aggregate of $25,000). Money transmitters that satisfy the capitalization and management requirements to increase the market size to 17,500 may also be eligible to increase their transaction limits to $15,000 (aggregate of $50,000).

Statutory Compliance: As was discussed at greater length in part two, the primary benefit of the sandbox is exemption from all state licensing and regulatory obligations except for the ones specifically identified by the sandbox program. I will not attempt to itemize the specific statutory requirements that continue to apply in the sandbox or their implications for each industry, but suffice to say, participants must take special care that they do not violate the rules they are still subject to. Critically, the sandbox does not exempt participants from federal statutes and regulations.

Document retention and reporting requirements: The recordkeeping requirements normally applicable to companies in the financial sector are replaced by the sandbox’s simpler requirement: participants must retain records, documents and data produced in the ordinary course of business. The sandbox does not currently have a period reporting requirement, but sandbox participants must be ready to disclose records, documents, and data to the AZ AG upon request at any time. The AZ AG will also have the authority to establish a periodic reporting requirement in the future as it sees fit. These records will be used by the AG’s office in connection with their oversight role, and will not be considered public records generally available to the public. However, the records may be disclosed to other state, federal, and even foreign authorities.

Consumer Protection: Sandbox participants will still be required to take certain steps to ensure that their products and services do not harm consumers. For example, if the innovation fails before the end of the testing period, participants are obligated to promptly notify the AG’s office and report on the steps it took to protect its consumers. If the participant becomes aware of a data breach compromising sensitive data, the participant is still subject to the requirements of A.R.S. § 18-545, which requires prompt notice to affected consumers.

Finally, before providing a product or service, participants will need to make a clear and conspicuous disclosure in English and Spanish, and for online transactions the consumer must acknowledge receipt. The disclosure must include five statements: (1) the name, registration number, and contact information for the participant, (2) that the participant does not have an Arizona license but is authorized under the sandbox program, (3) that the state of Arizona does not endorse the innovation, (4) that the product is in a test phase that may terminate upon a specified date, and (5) that consumers can contact the Arizona AG’s office to complain.

Don’t Be A Fraudster: All sandbox participants are still subject to the Arizona Consumer Fraud statute (A.R.S. § 44-1521 et seq.), which generally prohibits false, deceptive, or misleading statements in connection with an advertisement or sale. Violators are subject to civil penalties and may get booted from the program. Unsurprisingly, participants will also get booted from the program for violation of state or federal criminal laws.


Arizona’s fintech sandbox program is a tremendous opportunity for startups as well as established financial services companies that are developing new innovative products. Not only does it provide a safe and less costly way to test your innovation in the marketplace prior to a full launch, but it also puts you in a good position to immediately take advantage of any similar sandbox program launched by the CFPB in the coming years.

About the Author: Michael Rolland is a member of the civil litigation and commercial transactions practice groups with the law firm of Engelman Berger, P.C. Michael has a special interest in the intersection of technology and the law, and writes on tech law issues.


Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.

Engelman Berger Blogs

Case Alert – Ruffino v. Lokosky In The Age Of Email, Service By Publication Is On The Way Out

In Ruffino v. Lokosky, No. 1 CA-CV 17-0353, 2018 WL 3384998 (Ariz. Ct. App. July 12, 2018), the Arizona Court of Appeals held that, under some circumstances, alternative service by email, or even social media, may be a more appropriate means of providing notice of a lawsuit than service by publication.

Judge Paul J. McMurdie delivered the opinion of the Court, in which Presiding Judge Diane M. Johnsen and Judge David D. Weinzweig joined.

Ruffino filed suit against Lokosky for defamation and other related torts for a series of statements by Lokosky on her website. After several failed attempts to serve Lokosky at three addresses identified through skip tracing, Ruffino proceeded with service by publication. Lokosky failed to appear, and the superior court entered a default judgment awarding Ruffino $264,062.50 in damages and injunctive relief. The default judgment was later amended to permit Ruffino to take control of Lokosky’s website, and it was at this point that Lokosky first appeared in the action. Lokosky sought a temporary restraining order and also asked the court to set aside or vacate the default judgment under Arizona Rules of Civil Procedure (“Rule”) 55(c) and 60(b).

After an evidentiary hearing on the issue of service, the superior court made a factual finding that “Ruffino could have communicated with Lokosky about service through several online channels,” which the court later clarified included Lokosky’s email address, phone number, and social media that Ruffino had previously used to communicate with her.  Id. at ¶ 6.

Under Rule 4.1(l)(1), service by publication may be made only if “the serving party, despite reasonably diligent efforts, has been unable to ascertain the person’s current address;” or “the person to be served has intentionally avoided service of process;” and  “service by publication is the best means practicable in the circumstances for providing the person with notice.”

The court held that Ruffino had failed to satisfy the requirement of Rule 4.1(l)(1)(A)(i) that he make “reasonably diligent efforts” to ascertain Lokosky’s current address prior to effecting service by publication, because he did not attempt to contact the defendant via available online channels. Id. at ¶ 14 (“A reasonably diligent effort by Ruffino would have included reaching out to Lokosky via telephone, email, or even social media to verify her correct address.”).

The court further held that, even if the plaintiff had made such reasonably diligent efforts, service by publication would still not be available because under the circumstances it was not the best means practicable to provide notice, as required by Rule 4.1(l)(1)(B). The court stated that “[g]iven our present society, we agree with the superior court that modern methods of communication, especially email, were more likely to give Lokosky notice of a suit than publication in a newspaper distributed in a rural area 70 miles from Lokosky’s Scottsdale home.” Id. at ¶ 16 (emphasis added).

Civil litigators should all sit up and take notice of the court’s opinion in Ruffino. In most civil disputes between parties that already know each other—which includes the vast majority of business disputes—the parties will have already communicated by email, phone number, or social media. Ruffino effectively eliminates the availability of service by publication in these cases. However, Ruffino also sends a strong message to lower courts that service by email, and even social media, should be taken seriously as viable methods of satisfying due process. In theory, our courts have always had the procedural authority under Rule 4.1(k) to approve these methods of service (and Rule 5(c)(2)(D) contemplates service after appearance by electronic means), but there has never been clear precedent from our court of appeals blessing these methods as not only valid, but also superior to service by publication.

Going forward, if the current address of the defendant is not known and cannot be discovered through conventional means, litigators should always ask their clients whether they are able to contact the defendant via email or social media. If so, use those channels to ask the defendant for a current address and, if possible, to send a copy of the service package. Be sure to document your efforts. If the defendant does not cooperatively provide you with a current address, Ruffino provides a strong basis to move for alternative service using the online channel available to you.

This is a sensible and very welcome decision by the court. Despite historical acceptance of service by publication, the idea that publication of a summons in the back pages of some obscure physical newspaper is an effective way to give notice in our modern age borders on absurdity.

About the Author: Michael Rolland is a member of the civil litigation and commercial transactions practice groups with the law firm of Engelman Berger, P.C. Michael has a special interest in the intersection of technology and the law, and writes on tech law issues.

Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.