Free Order on Motion for Summary Judgment - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pending before the Court is Plaintiff's Motion for Summary Judgment (Doc. #103), Motion to Expedite (Doc. #117), Motion to Compel Discovery (Doc. #127), and Defendant's Motion for Leave to File Third Party Complaint (Doc. #129). Also pending before the Court is the parties' stipulated dismissal of Defendants Greg and Melanie Brown (Docs. #83,84). For the following reasons, Plaintiff's Motion for Summary Judgment is denied, Defendant's Motion for Leave is denied, Defendants Greg and Melanie Brown are dismissed, and all other motions are denied as moot. I. PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
Document 146 Filed 06/21/2007 Page 1 of 6

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

CATHLEEN CHANNEL; THERESA) WHARRY; STACIE HANSON;) ) MONIQUE NICHOLS; ) ) Plaintiffs, ) ) ) vs. ) ) HOME MORTGAGE, INC., an Arizona) corporation conducting business in) Arizona; CARL BROWN; MOLLY) BROWN; GREG BROWN; MELANIE) B R O W N ; D O E S 1 - 1 0 ; X Y Z) C O R P O R A T I O N S ; B L A C K) ) PARTNERSHIPS; ) ) ) Defendants. )

No. CV 03-0100-PHX-ROS ORDER

Case 2:03-cv-00100-ROS-MEA

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On December 10, 2003, the Court entered default judgment in favor of Plaintiffs against Defendant Home Mortgage, Inc. ("HMI"). Plaintiffs are now seeking to enforce that judgment against Carl and Molly Brown by piercing HMI's corporate veil. A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Substantive law determines which facts are material, and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Also, the dispute must be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995). There is no issue for trial unless there is sufficient evidence favoring the non-moving party; if the evidence is merely colorable or is not significantly probative, summary judgment may be granted. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). However, because "credibility determinations, the weighing of evidence, and the drawing of inferences from the facts are jury functions, not those of a judge, . . . the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor" at the summary judgment stage. Id. at 255 (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970)); see Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). A basic axiom of corporate law is that a corporation will be treated as a separate entity unless sufficient reason appears to disregard the corporate form. Standage v. Standage, 711 P.2d 612, 614-15 (Ariz.App. 1985). As a separate entity, the personal assets of an individual -2Document 146 Filed 06/21/2007 Page 2 of 6

Case 2:03-cv-00100-ROS-MEA

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stockholder may not normally be reached to satisfy corporate debts. Honeywell, Inc. v. Arnold Construction Co., Inc., 654 P.2d 301 (Ariz. App. 1982). An obvious corollary to that proposition is that assets of a validly formed corporation should be distinct and protected from the debts of individual shareholders. However, where the corporation is shown to be the alter ego or business conduit of a person, and where observing the corporate form would work an injustice, a court may properly "pierce the corporate veil." Dietel v. Day, 492 P.2d 455. This "alter ego" status exists where there is "such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist." Standage, 711 P.2d at 615. Arizona courts will pierce a corporate veil and impose personal liability if the business is conducted on a personal rather than a corporate basis, and if the business was established without an adequate financial basis. Keams v. Tempe Technical Institute, Inc., 993 F.Supp. 714, 723 (D.Ariz. 1997). Plaintiffs argue that Carl Brown was the alter ego of HMI because: · In the fall of 2002, Carl Brown sold a significant portion of HMI's assets. This was accomplished by transferring HMI's assets to his son Greg Brown, who then sold them to a third party. After this sale, the proceeds ($700,000) were deposited into Carl Brown's personal bank account. Peschel Family Trust v. Colonna, 75 P.3d 793, 798 (Mont. 2003) (stating factors that favor a finding of alter ego status include when the shareholder's personal funds are commingled with the corporation's funds). Carl Brown was a 99% shareholder of HMI, and was the president, CEO, Secretary, Treasurer, and Director of HMI and exerted complete control over the corporation. Id. (when the shareholder owns all or most of the corporation's stock, the shareholder is a director and/or president of the corporation, and the shareholder makes all the corporate decisions without consulting the other directors or officers). When Carl Brown used the proceeds of the sale to pay off corporate debts, he wrote checks out of his personal account. Id. (commingling of funds). HMI was undercapitalized, as evidenced by Carl Browns deposition testimony that he put several million dollars into the corporation. Id. (loans to the corporation and undercapitalization).

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HMI did not observe corporate formalities - there were no shareholder meetings, no board resolutions, or meeting minutes. Id. (a shareholder making all the corporate decisions without consulting the other directors or officers). Plaintiffs also state that there are almost no corporate records. Carl Brown used the company airplane for personal reasons. If the corporate form is recognized, an injustice will be promoted, as Plaintiffs will be unable to collect their unpaid wages because HMI has no resources. Dietel, 492 P.2d at 455 (stating that only where observing the corporate form would work an injustice, a court may properly pierce the corporate veil).

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Defendant Carl Brown argues that a finding of alter ego is not warranted because: 11 · 12 and was responsible for all of the daily operations of HMI.. 13 · 14 their capitalization requirements. 15 · 16 HMI's operations is only evidence that the corporation is closely held. 17 · 18 bank account, there is no evidence that the funds were used for personal reasons. 19 Rather, all evidence shows that the proceeds of the sale were used to pay off corporate 20 debt - there was no diversion of funds. 21 · 22 will of HMI. 23 · 24 reimbursed to the company. 25 Taking into consideration all of the factors, the Court concludes that there is a genuine 26 issue of material fact as to whether Carl Brown was the alter ego of HMI. While absence of 27 corporate records and the fact that Carl Brown controlled almost all aspects of HMI's 28 -4Case 2:03-cv-00100-ROS-MEA Document 146 Filed 06/21/2007 Page 4 of 6

At the times relevant to this litigation, Greg Brown was President and CEO of HMI

HMI was licensed by the Arizona State Banking Department, showing that HMI met

The fact that Carl Brown is a majority shareholders and controlled several aspects of

While the proceeds of the sale of the corporation did get deposited into Carl Brown's

The destruction of the corporate records was caused by HMI's landlord, against the

Any funds expended through Carl Brown's personal use of HMI airplane was

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business weigh in favor of an alter ego finding other facts weigh against it. First, it appears undisputed that while Carl Brown placed the proceeds of the sale of HMI's assets into his personal bank account, those proceeds were eventually used to pay the corporate debts. Cf. Dietel, 492 P.2d at 457. Further, there is a dispute as to whether HMI was undercapitalized. Peschel Family Trust, 75 P.3d at 798. The Motion for Summary Judgment will be denied. II. STIPULATED DISMISSAL OF DEFENDANTS GREG AND MELANIE BROWN On March 9, 2006, Plaintiffs and Defendants Greg and Melanie Brown stipulated to Greg and Melanie Brown's dismissal. Accordingly, they are dismissed from the case, each party to bear their own attorneys' fees and costs. III. DEFENDANTS' MOTION FOR LEAVE Defendant Carl Brown is seeking leave to file a third party complaint against Greg Brown, asserting claims for negligence and breach of contract. Rule 14 states: At any time after commencement of the action a defending party, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff. The third-party plaintiff need not obtain leave to make the service if the third-party plaintiff files the third-party complaint not later than 10 days after serving the original answer. Otherwise the third-party plaintiff must obtain leave on motion upon notice to all parties to the action. Rule 14(a) gives courts discretion to deny a party leave to file a third-party complaint. Bank

21 of the West v. Estate of Leo, 231 F.R.D. 386, 389 (D.Ariz. 2005). Further, a party must 22 show "good cause" to modify a scheduling order. Fed. R. Civ. P. 16(b). The Court's 23 deadline for filing procedural motions was May 5, 2006. 24 At this stage of the litigation, the Court will not allow Defendants to file a third party 25 complaint against Greg Brown. The Defendants had ample time to file such a motion prior 26 to the Court's Rule 16 deadline and no good cause exists at this very late stage of the 27 litigation. 28 -5Case 2:03-cv-00100-ROS-MEA Document 146 Filed 06/21/2007 Page 5 of 6

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IV.

PLAINTIFFS' MOTION TO COMPEL DISCOVERY Plaintiffs filed a Motion to Compel Discovery on May 11, 2007, seeking to retake the

deposition of Carl Brown. The Court's Rule 16 Order states that all depositions should have been taken by October 6, 2006. Accordingly, Plaintiffs' Motion is denied. V. CONCLUSION Accordingly, IT IS ORDERED THAT Plaintiff's Motion for Summary Judgment (Doc. #103) is DENIED. IT IS FURTHER ORDERED THAT Defendants Greg and Melanie Brown are DISMISSED. IT IS FURTHER ORDERED THAT Defendant Carl Brown's Motion for Leave to File Third Party Complaint (Doc. #129) is DENIED. IT IS FURTHER ORDERED THAT Carl Brown's Motion to Expedite (Doc. #117) is DENIED. IT IS FURTHER ORDERED THAT Plaintiffs' Motions to Compel Discovery, for Discovery Sanction, and for Permission to Submit Supplemental Brief (Doc. #127) is DENIED. IT IS FURTHER ORDERED THAT a joint proposed pre-trial order, motions in limine, jury questionnaires with case status (5 questions per side) are due on July 20, 2007, with responses to the motions in limine due on August 3, 2007. IT IS FURTHER ORDERED THAT a Final Pretrial Conference is set for September 13, 2007 at 1:30 p.m. IT IS FURTHER ORDERED THAT a status conference is set for September 17, 2007 at 3:00 p.m. IT IS FURTHER ORDERED THAT trial is set for September 18, 2007 at 8:30 a.m. DATED this 20th day of June, 2007.

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