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

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Law Office of James Burr Shields 382 East Palm Lane Phoenix, Arizona 85004-1531 (602) 307-0780 (Office) (602) 307-0784 (Facsimile)
James Burr Shields II, State Bar #011711 John A. Conley, State Bar #016429 Blake Simms, State Bar #021595 Attorneys for Plaintiff

IN THE UNITED STATES DISTRICT COURT IN AND FOR THE STATE OF ARIZONA

) ) ) ) ) Plaintiffs, ) ) vs. ) ) 5. Home Mortgage, Inc., an ) Arizona corporation conducting ) business in Arizona, ) 6. Carl Brown; ) 7. Molly Brown; ) 8. Greg Brown; ) 9. Jane Doe Brown; ) 10. Does 1-10; ) 11. XYZ Corporations; ) 12. Black Partnerships; ) ) Defendants. ) _________________________________)

1. 2. 3. 4.

Cathleen Channel, Theresa Wharry, Stacie Hanson, Monique Nichols,

Case No. CIV 2003-0100 PHX ROS PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Pursuant to Rule 56(a), Fed. Rules of Civ. P., Plaintiffs, Cathleen Channel, Theresa Wharry, Stacie Hanson, and Monique Nichols, by and through counsel undersigned, hereby move for summary judgment against Defendants Carl Brown and Molly Brown (referred to, collectively, herein as "the Browns"), husband and wife. As there are no genuine issues of material fact regarding the Browns' liability for Plaintiffs' unpaid wages, Plaintiffs are entitled to judgment as a matter of law. This motion is supported by the following Memorandum of Points and Authorities and Plaintiffs' separately filed Statement of Facts and the exhibits thereto.
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MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION Plaintiffs are former employees of Home Mortgage, Inc. ("HMI"), a judgment debtor in this action. The Browns own 99% of the outstanding shares of HMI. They are also defendants in this litigation. HMI, in early 2002, began withholding Plaintiffs' wages and eventually ceased operations. HMI has never compensated Plaintiffs for the wages it unlawfully withheld from them. As a result, after making several efforts to reach an informal resolution to this matter, Plaintiffs filed suit against HMI. Defendant Carl Brown completely controlled HMI's operations. He was the dominant shareholder. He also held with the corporation numerous officer positions. Defendant Carl Brown, in the fall of 2002, entered into an agreement to sell the company. He, in a somewhat complicated transaction, transferred to Greg Brown, his son and a 1% owner of the corporation, most, if not all, of the company's assets. Gregg Brown then transferred to a third party, PlainsCapital McAfee, those assets. Defendant Carl Brown received into his personal bank account HMI's share of the proceeds of the sale to PlainsCapital McAfee. The first installment of the proceeds of the sale was $700,000. This amount was well in excess of the amount of wages the company owed Plaintiffs. Defendant Carl Brown's act of commingling corporate and personal funds and of siphoning off from the company corporate assets entitle Plaintiffs to pierce HMI's corporate veil and to hold personally liable for their unpaid wages Defendant Carl Brown. Several other factors demonstrate Defendant Carl Brown is HMI's alter ego. For example, there is a conspicuous absence of corporate documents; Defendant Carl Brown used for personal purposes an aircraft the company owned; and the company never held shareholders meetings. Defendant Carl Brown's deposit into his account of the $700,000 proceeds of the sale of corporate assets constitutes cause to pierce HMI's corporate veil. Defendant Carl Brown,
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at the time he wrongfully received into his personal account that $700,000, had in his possession more than enough corporate funds with which to satisfy Plaintiffs' unpaid wages. His refusal to do so entitles Plaintiffs to recover against his personal assets. II. FACTS Plaintiffs, Cathleen Channel, Theresa Wharry, Stacie Hanson, and Monique Nichols, are all seeking from Home Mortgage, Inc. ("HMI"), the judgment debtor in this matter, unpaid wages. [SOF ¶ 1.] HMI is a foreign corporation registered to conduct business in Arizona. [SOF ¶ 2.] HMI was in the business of issuing home loans. [SOF ¶ 3.] Defendant Carl Brown is and was, at all relevant times, a 99% owner of HMI. [SOF ¶ 4.] Defendant Carl Brown, in 1996, founded the company. [SOF ¶ 5.] Defendant Carl Brown's initial position with the company was President. [SOF ¶ 6.] HMI, in or about November of 1999, merged with a company called The Mortgage Bank, Inc. [SOF ¶ 7.] Greg Brown, Defendant Carl Brown's son, was, at the time of the merger, a shareholder in The Mortgage Bank. [SOF ¶ 8.] Greg Brown, after the merger, became an officer of HMI. [SOF ¶ 9.] Carl Brown has always controlled HMI's operations. [SOF ¶ 10.] Defendant Carl Brown was in control of the company's finances. [SOF ¶ 12.] Greg Brown, just after the merger, served HMI by supervising the company's loan officers and branch managers. [SOF ¶ 11.] HMI eventually named Greg Brown President, but Defendant Carl Brown remained in complete control of the company. [SOF ¶ 13.] Defendant Carl Brown is currently President/CEO, Secretary, Treasurer, and Director of HMI. [SOF ¶ 14.] Defendant Carl Brown, during the summer or fall of 2002, began entertaining the idea of selling HMI. [SOF ¶ 15.] A company named PlainsCapital McAfee ("McAfee") eventually expressed an interest in purchasing the company. [SOF ¶ 16.] Greg Brown, at some point, agreed to become the intermediary in the transaction between HMI and McAfee. [SOF ¶ 17.] This was due to McAfee's eventual refusal to have any further interaction with Defendant Carl Brown. [SOF ¶ 18.] Greg Brown, on July 29, 2002, as part of the planned transaction with McAfee,
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entered into with HMI a stock redemption agreement. [SOF ¶ 19.] The stock redemption agreement included a provision giving Greg Brown the right to purchase all fixtures, furniture, and equipment of the company. [SOF ¶ 20]. Greg Brown, for the price of $700,000, did purchase the fixtures, furniture, and equipment. [SOF ¶ 21.] Greg Brown then, as part of a planned transaction with McAfee, agreed to sell to McAfee the fixtures, furniture, and equipment. [SOF ¶ 22]. Greg Brown also agreed to sell his goodwill and signed with McAfee an employment agreement. [SOF ¶ 23.] McAfee, in exchange for the above, agreed to pay Greg Brown $950,000. [SOF ¶ 24.] Greg Brown, on September 17, 2002, received from McAfee the first $850,000. [SOF ¶ 25.] Defendant Carl Brown, that same day, received into his personal, Bank One bank account $700,000, reflecting HMI's share of the proceeds of the sale. [SOF 26.] HMI, at this time, had several functioning business bank accounts. [SOF ¶ 27.] Defendant Carl Brown, however, decided to accept into his personal account these corporate funds. [SOF ¶ 28.] Defendant Carl Brown is unable to provide an explanation as to why he received into his personal account, rather than an HMI business account, these funds. [SOF ¶ 29.] HMI also owned a corporate airplane. [SOF ¶ 30.] The aircraft was a King Air model. [SOF ¶ 31.] Carl Brown admitted using the corporate aircraft to travel to watch Thoroughbred horse racing. [SOF ¶ 32] These were events at which Defendant Carl Brown's horses competed. [SOF ¶ 33.] Defendant Carl Brown admitted these personal trips included travel to "Santa Anita or Del Mar or Hollywood Park or Arlington, in Chicago, and [he] would fly there in order to watch [his] horses race." [SOF ¶ 34.] Defendant Carl Brown has also admitted HMI is in possession of no corporate documents. [SOF ¶ 35.] Defendant Carl Brown explains that the company's lack of corporate documents was related to a dispute the company had with one of its landlords. [SOF ¶ 36.] Defendant Carl Brown alleges the landlord destroyed all of these documents. [SOF ¶ 37.] Further, Defendant Carl Brown never attended and HMI shareholders' meeting and is not sure HMI ever held any shareholders meetings. [SOF ¶ 38.] ***
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III. PROCEDURAL HISTORY On January 15, 2003, after several unsuccessful attempts by Plaintiffs to obtain their withheld wages through less formal means, Plaintiffs filed suit against HMI. On April 21, 2003, Plaintiffs filed an application for default with the necessary supporting documents and also filed a motion for attorney's fees. On April 24, 2003 the clerk entered the default of HMI. On June 6, 2003, Plaintiffs' filed with the Court an Application for Default Judgment, a Proposed Form of Judgment, and a motion for an award of fees and costs. On June 20, 2003, the Court entered judgment for Plaintiffs against HMI. The judgment totaled $232,241.34, plus $285 in costs and $4,390.82 in attorney's fees. On August 26, 2003, Plaintiffs filed a motion for leave to amend their complaint to include as defendants in this case, Carl and Molly Brown, husband and wife, and Greg and Jane Doe Brown, husband and wife. Plaintiff, on the same date, filed a motion to amend the judgment to reflect a prejudgment interest rate of 10% per annum. On August 29, 2003, the Court granted both Plaintiffs' motion to add Carl and Molly Brown and Greg and Jane Doe Brown as individual defendants and their motion to amend the judgment. On September 11, 2003, Plaintiffs' submitted their amended complaint adding the individual defendants. IV. LEGAL AUTHORITY A. Legal Standard Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Material facts are those that might influence the ultimate disposition of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Such a fact is genuine if there is sufficient evidence upon which a reasonable jury could return a verdict for the nonmoving party. Id. The nonmoving party, in order to withstand a motion for summary judgment, must set forth specific facts demonstrating the existence of genuine issues of material fact. Id. at
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250. The mere existence of some alleged factual dispute will not serve to defeat an otherwise properly supported motion for summary judgment. Id. at 248. Only disputes over facts that could influence the eventual disposition of the lawsuit will preclude the entry of summary judgment. Id. Once the moving party meets its initial burden, the burden to demonstrate the existence of genuine issues of material fact shifts to the nonmoving party. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The moving party must "go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate `specific facts' showing that there is a genuine issue for trial." Id. If the evidence the nonmoving party puts forth is "merely colorable" or "not significantly probative," summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). B. Piercing the Corporate Veil/Alter Ego A party, in order to prevail on its alter ego claims and pierce the corporate veil to hold a shareholder liable for a corporate debt, must demonstrate the corporation is the alter ego or business conduit of the shareholder. Standage v. Standage, 147 Ariz. 473, 476, 711 P.2d 612, 615 (Ariz. Ct. App. 1985). The party must also show observing the corporate form would work an injustice. Id. Finally, a party will have to show there is "such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist." Dietel v. Day, 16 Ariz. App. 206, 208, 492 P.2d 455 (1972). Factors to consider in determining whether to pierce the corporate veil include: (1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the corporation in promoting fraud. Evans v. Multicon Const. Corp., 574 N.E.2d 395, 398 (Mass. Ct. App. 1991) citing PepsiCola Metropolitan Bottling Company, Inc., v. Checkers, Inc., 754 F.2d 10, 14-16 (1st Cir.
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1085). See also, Jacobson v. Buffalo Rock Shooters Supply, 664 N.E.2d 328, 331 (Ill. Ct. App. 1996) (holding "diversion of assets from the corporation by or to a shareholder" is among the factors to consider when determining whether to pierce the corporate veil). Further, "other failure[s] to keep corporate and personal assets separate" will lead to a finding of alter ego status. Morris v. Powell, 150 S.W.3d 212, 220 (Tex.Ct.App. 2004). Applying the various relevant factors, it is clear HMI and Defendant Carl Brown were alter egos. First, Defendant Carl Brown, the 99% shareholder, President/CEO, Secretary, Treasurer, and Director of HMI, exerted over the company complete control. [SOF ¶¶ 14, 12-13.] The deposit into his personal account of the $700,000 McAfee paid for the sale of HMI's assets demonstrates a confused commingling. [SOF ¶ 26.] The assets in exchange for which the company received the $700,000 belonged to the company. The proceeds of the sale, then, also belonged to the company. Defendant has alleged he, by writing out of his personal account personal checks, used the $700,000 to pay creditors of HMI. Defendant Carl Brown, after his deposition, provided documents he claims demonstrates he used these funds to cover corporate debts.1 Even if true, this is further evidence of intermingling of corporate and personal funds and supports Plaintiffs' contention the Court should pierce HMI's corporate veil. Further, the company was undercapitalized. Defendant Carl Brown has testified he, during the course of its active operations, put into the corporation several millions of dollars. Greg Brown has provided similar testimony. A shareholder's act of loaning a corporation significant sums of money is evidence of undercapitalization. Peschel Family Trust v. Colonna, 75 P.3d 793, 798 (Mont. 2003). It is also clear HMI did not observe corporate formalities. There were no

shareholder's meetings. [SOF ¶ 38.] There are no board resolutions or meeting minutes.

Plaintiffs' counsel did not, at the time of the deposition, possess these documents. Defendant Carl Brown has agreed to allow Plaintiffs' counsel to, for the purposes of asking questions about these documents, reopen his deposition. Defendant Carl Brown's cancer treatment has caused the parties to postpone this questioning.
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[SOF ¶ 35.] There is an almost complete absence of corporate records. [SOF ¶ 35.] HMI was, due to Defendant Carl Brown's refusal to deposit in an HMI bank account the $700,000 for the sale of HMI's assets, insolvent. Finally, Defendant Carl Brown, by depositing into his own account siphoned off assets of the corporation. Several courts have held that commingling of corporate and personal funds supports a finding of alter ego status. See, e.g., Nelson Elec. v. N.L.R.B., 638 F.2d 965, 968 (6th Cir. 1981); Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 781 (Ill. Ct. App. 2005); Apollo Plaza Ltd., v. Antietam Corp., 751 N.E.2d 336, 340 (Ind. Ct. App. 2001); Lambert v. Farmers Bank, Frankfort, Ind., 519 N.E.2d 745, 748 (Ind. Ct. App. 1988); Peschel Family Trust v. Colonna, 75 P.3d 793, 798 (Mont. 2003); Berlin v. Boedecker, 887 F.2d 1180, 1188 (Mont. 1994); Drilcon, Inc. v. Roil Energy Corp., Inc., 749 P.2d 1058, Galin Partnership v. Flynn, 744 N.Y.S.2d 345, 45-46 (A.D. 2002). Defendant Carl Brown's acts of depositing into his personal bank account corporate assets and paying out of his personal bank corporate obligations constitutes an intermingling of corporate and personal assets sufficient to warrant piercing the corporate veil. See Berlin v. Boedecker, 887 F.2d 1180, 1188 (Mont. 1994). His personal use of the company aircraft also warrants piercing the corporate veil. See, e.g., Lambert v. Farmers Bank, Frankfort, Ind., 519 N.E.2d 745, 748 (Ind. Ct. App. 1988). Courts have held a shareholder's act of siphoning off corporate assets and diverting them for the shareholder's use warrants piercing the corporate veil. See, e.g., Trustees Nat. Elevator Industry Pension v. Lutyk, 332 F.3d 188, 195 (3d Cir. 2003); Crane v. Green & Freedman Baking Co., Inc., 134 F.3d 17, 23-24 (1st Cir. 1998); Laborers' Pension Trust Fund v. Sidney Weinberger homes, Inc., 872 F.2d 702, 705 (6th Cir. 1988); Labadie Coal Co. v. Black, 672 F.2d 92, 98-99 (D.C. Cir. 1982); Scott Bros. v. Warren, 582 S.E.2d 224, 227 (Ga. Ct. App. 2003); Hunting v. Elders, 597 S.E.2d 803, 808-09 (S.C. Ct. App. 2004). Defendant Carl Brown, by depositing into his personal bank account at least $700,000 in corporate assets, siphoned off and diverted corporate assets. [SOF ¶ 26.] This diversion of corporate assets, in and of itself, is sufficient to allow Plaintiffs to pierce the
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corporate veil. Finally, courts have held a company's failure to maintain corporate records can lead to a finding of alter ego status. See, e.g., Standage v. Standage, 147 Ariz. 473, 476, 711 P.2d 612, 615 (Ariz. Ct. App. 1985); People v. V & M Industries, Inc., 700 N.E.2d 746, 752 (Ill. Ct. App. 1998); Fairfield Dev., Inc. v. Georgetown Woods, 768 N.E.2d 463, 470-71 (Ind. Ct. App. 2002); Apollo Plaza Ltd., v. Antietam Corp., 751 N.E.2d 336, 340 (Ind. Ct. App. 2001). Defendant Carl Brown has acknowledged a lack of corporate documents. Allowing Defendant Carl Brown's identity to remain separate from HMI's would, in this case, promote an injustice. Plaintiffs, if the Court does not allow them to pierce HMI's corporate veil, will be unable to collect their unpaid wages. Those wages have, as of the date of this filing, been due an payable for over four years. V. CONCLUSION Plaintiffs are former employees to whom HMI owes wages. Defendant Carl Brown is and was the 99% shareholder, President/CEO, Secretary, Treasurer, Director, and overall authority of HMI. Defendant, when he agreed to allow HMI to sell off its assets, received into his personal checking account the $700,000 the company received for the sale. The assets sold were corporate assets and, as such, the proceeds of that sale were corporate funds. Defendant Carl Brown's act of depositing into his personal bank account the $700,000 in sale proceeds occurred at a time HMI owed Plaintiffs wages. It would have taken to pay Plaintiffs' wages only a small fraction of that $700,000. Defendant Carl Brown's act of siphoning and diverting these corporate resources is enough to warrant a finding of alter ego status and of piercing HMI's corporate veil, which would make him liable for Plaintiffs' wages. Defendant Carl Brown, in addition to siphoning off company resources, also commingled corporate and personal assets. He did so by, apparently, paying out his personal account HMI obligations. His personal use of the company's airplane is a further confusion of personal and corporate assets. Finally, HMI's dearth of corporate records
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demonstrates it was Defendant Carl Brown's alter ego. Plaintiffs, based on the foregoing, request that the Court hold HMI and Defendants Carl Brown and Molly Brown are alter egos and allow Plaintiffs to pierce HMI's corporate veil and hold personally liable them personally liable for their (Plaintiffs') unpaid wages. RESPECTFULLY SUBMITTED this 9th day of November, 2006. LAW OFFICE OF JAMES BURR SHIELDS

____s/ W. Blake Simms__________________ James Burr Shields Blake Simms Attorneys for Plaintiffs CERTIFICATE OF SERVICE I hereby certify that on the 9th day of November, 2006, I electronically submitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: John E. Karow, Esq. 11350 North 104th Place Scottsdale, Arizona 85259 Attorney for Defendants Dennis Hall, Esq. 14614 North Kierland Boulevard, Suite 300 Scottsdale, Arizona 85254 Attorneys for Defendant Greg Brown ____s/ Gail Ivey___________________

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