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In re Bill Johnson's Restaurants Inc.

United States District Court, D. Arizona

June 7, 2017

PLATTNER, SCHNEIDMAN, SCHNEIDER, JEFFRIES & PLATTNER, P.C., et al., Defendants. BILL JOHNSON'S RESTAURANTS, INC., et al., Plaintiffs, Bankruptcy No. 2:11-bk-22441-PS, Adversary Proc. No. 2:13-ap-00526-PS


          H. Russel Holland United States District Judge

         Cross-motions for Summary Judgment

         The Plattner and Harmon defendants move for summary judgment.[1] These motions are opposed.[2] Plaintiffs cross-move for partial summary judgment.[3] Plaintiffs' motion is opposed.[4] The Plattner defendants also move to exclude the expert testimony of Mark Harrison.[5] The motion to exclude is opposed.[6]

         Prior to oral argument on the pending motions, plaintiffs advised the court that they had settled with the Plattner defendants, pending approval of the settlement by the bankruptcy court.[7] Therefore, the Plattner defendants' motion for summary judgment and motion to exclude are denied, with leave to summarily renew these motions in the event the bankruptcy court does not approve plaintiffs' settlement with the Plattner defendants.

         The court heard oral argument on the Harmon defendants' motion for summary judgment and plaintiffs' cross-motion for summary judgment on May 16, 2017. What follows is the court's disposition of these two motions.


         Plaintiffs are Bill Johnson's Restaurants, Inc. (“BJRI”) and the CT Trust. The Harmon defendants are Harmon Dugwyler & Company and Blake Harmon.

         For many years, BJRI operated a chain of restaurants in Maricopa County. BJRI was a family-owned and operated company. At all relevant times, the four Johnson siblings, Dena Cameron, Johnny Johnson, Rudy Johnson, and Sherry Novak, were the directors, officers and shareholders of BJRI (referred to herein collectively as the “shareholders”). Dena Cameron also served as the CEO of BJRI until August 2009, when she was replaced by her daughter, Sherry Cameron.

         Defendant Blake Harmon was BJRI's accountant from October 31, 1968 until October 31, 2009 and BJRI's auditor from 1968 until 2006. Harmon also did the personal tax returns for the shareholders as well as for Sherry Cameron. Dena Cameron testified that Harmon “was the go-to person for everything.... I don't think I ... ever made a major decision without discussing it with Mr. Harmon.”[8]

         BJRI was impacted by the recession that began when the housing bubble burst in 2007.[9] BJRI's “[t]otal assets and total equity continuously declined from 2006 to 2009, while total liabilities remained virtually unchanged.”[10] In addition, by the end of 2007, BJRI's Defined Benefit Plan (the pension plan) was underfunded by $2, 291, 725.[11] BJRI also had an outstanding debt of approximately $1.5 million with Chase Bank which had a maturity date of February 23, 2010.[12]

         In the 1970's, BJRI's then-shareholders and directors decided to finance life insurance policies for the benefit of the four Johnson siblings. The policies were to act as an incentive for the shareholders' continued, long-term employment with BJRI. In 2008, BJRI's Board of Directors, which was composed of the shareholders, decided to stop financing the life insurance policies. At that time, there were eight policies, two on each sibling, that were funded by BJRI but owned by a separate trust. Plaintiffs contend that the policies were subject to a split-dollar life insurance arrangement that obligated BJRI to pay the premiums on the policies in exchange for a collateral interest in the proceeds of the policy upon the death of the insured in the amount of premiums paid by BJRI during the life of the policy. Plaintiffs contend that the split-dollar agreement also provided that if the agreement were terminated by either the shareholder or BJRI, the shareholder could repay the amount of premiums that BJRI had paid to date and take over ownership of the policy. But, according to plaintiffs, if the shareholder failed to repay the amount of the premiums within 60 days of the termination of the split-dollar agreement, then the shareholder lost any future interest in the policy, and BJRI could liquidate the policy.[13] In 2008, BJRI was paying approximately $100, 000 in premiums each year on the shareholders' life insurance policies.

         On November 24, 2008, at a special meeting of BJRI's Shareholders and Board of Directors, which was attended by Harmon, the Board authorized BJRI to pay dividends of $382, 500 to each of the shareholders (a total of $1, 530, 000) so that the shareholders could purchase the life insurance policies and take on the responsibility of paying the premiums. The shareholders signed the dividend checks back to BJRI and thus reimbursed BJRI for the premiums that it had paid up to that point in time. Because the shareholders signed the dividend checks back to BJRI, the life insurance transaction was a cashless transaction. At the time of the life insurance transaction, BJRI had a long-term asset on its books of $1, 523, 630, which represented its collateral interest in the life insurance policies. After the policies were purchased by the shareholders, this asset was removed from BJRI's balance sheet.

         Harmon testified that Dena Cameron asked him about the life insurance transaction and that he told her “I thought it would be fair for the company to do that” because it would “[s]ave the company the operating funds they [were] using to pay out for life insurance.”[14]Dena Cameron testified that she discussed the life insurance transaction with Harmon and if he had told her that issuing the dividends would be bad for BJRI, the shareholders would have made a different decision.[15]

         In 2009, the shareholders decided to transfer the property referred to as Big Apple North to Folks, LLC, a limited liability company that was owned and controlled by the shareholders. The shareholders declared a dividend of $2, 058, 500, which they then used to purchase the Big Apple North property from BJRI. As with the life insurance transaction, this was a cashless transaction. After the sale, the property was leased back to BJRI. BJRI was to pay monthly rent, but BJRI only paid the rent once.

         Dena Cameron testified that the shareholders “had talked about doing” this type of transaction “in the past, mostly from a liability standpoint because Bill Johnson's was a C corporation and if you had a problem at one restaurant, you had a problem at five restau-rants.”[16] She further testified that “it was always our desire to ... have the restaurants kind of under separate entities.... [I]t was just, in my mind, a smarter way of doing business.”[17]

         Harmon testified that he did not have “anything to do with the creation of Folks [LLC] and the transfer” of the Big Apple North property but if he had thought this transfer were harmful to BJRI, he would have said something to the shareholders.[18] Dena Cameron testified that it was Harmon's idea to issue a dividend so the shareholders could purchase the Big Apple North property.[19]

         In August 2011, BJRI filed a petition for bankruptcy and became a debtor in possession. In January 2013, a third-party CEO of BJRI was appointed. The third-party CEO sought permission from the bankruptcy court to hire special counsel to prosecute claims against the shareholders and the Harmon defendants. On April 17, 2013, the bankruptcy court approved the hiring of special counsel. And, on May 3, 2013, plaintiffs commenced this adversary proceeding in bankruptcy court. The referral to the bankruptcy court was withdrawn in January 2017[20] and the matter was transferred to this court.

         In their third amended complaint, plaintiffs assert professional malpractice, aiding and abetting, and civil conspiracy claims against the Harmon defendants. Plaintiffs' claims are based on their contention that the 2008 life insurance transaction and the 2009 Folks transaction were undertaken on the advice and counsel of the Harmon defendants and that these transactions rendered BJRI insolvent, which resulted in BJRI filing bankruptcy. Plaintiffs' claim for damages includes the costs incurred in the related bankruptcy proceeding, as well as the amounts currently owed to creditors, including $9.1 million owed to Pension Benefits Guaranty Corporation, which were claims associated with BJRI's underfunded pension plan.


         Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The initial burden is on the moving party to show that there is an absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). If the moving party meets its initial burden, then the non-moving party must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). In deciding a motion for summary judgment, the court views the evidence of the non-movant in the light most favorable to that party, and all justifiable inferences are also to be drawn in its favor. Id. at 255. “[T]he court's ultimate inquiry is to determine whether the ‘specific facts' set forth by the nonmoving party, coupled with undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence.” T.W. Elec. Service, Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987).

         First, the Harmon defendants have joined in a statute of limitations argument raised by the Plattner defendants.[21] In Arizona, tort claims such as plaintiffs have asserted here are subject to a two-year statute of limitations. A.R.S. § 12-542. “The general rule is that a tort claim accrues when a plaintiff knows, or through the exercise of reasonable diligence should know, of the defendant's wrongful conduct.” Taylor v. State Farm Mut. Auto. Ins. Co., 913 P.2d 1092, 1095 (Ariz. 1996).

         The Plattner defendants argue that plaintiffs' claims based on the life insurance transaction accrued on or about November 24, 2008 and that plaintiffs' claims based on the Folks transaction accrued in June 2009. The Plattner defendants contend that on the date of these transactions, the shareholders were aware that they were transferring assets from BJRI to themselves because they approved the transactions. The Plattner defendants argue that this approval equates to knowledge by BJRI. Thus, the Plattner defendants argue that BJRI knew the basis for plaintiffs' claims on the date of the transactions, both of which took place more than two years before plaintiffs commenced this action.

         This argument fails because “the doctrine of adverse domination ... act[s] to toll the statute of limitations.” F.D.I.C. v. Jackson, 133 F.3d 694, 698 (9th Cir. 1998). “The doctrine [of adverse domination] tolls the accrual of a cause of action based on the premise that a corporation does not have knowledge of a claim until the wrongdoing directors are no longer in control.” USACM Liquidating Trust v. Deloitte & Touche, 754 F.3d 645, 649 (9th Cir. 2014). Although no Arizona court has ever held that the doctrine applies in Arizona, the Ninth Circuit has predicted that the Arizona Supreme Court would so hold. Jackson, 133 F.3d at 698. The causes of actions that plaintiffs are asserting could not have been discovered until the third-party CEO was appointed and could objectively review the conduct of the shareholders and the Harmon defendants. The statute of limitations was tolled until Hartley, the third-party CEO, was appointed in January 2013. Plaintiffs filed their claims in May 2013, which makes plaintiffs' claims timely.

         The Harmon defendants next argue that plaintiffs claims are barred by the doctrine of in pari delicto. “The doctrine of in pari delicto dictates that when a participant in illegal, fraudulent, or inequitable conduct seeks to recover from another participant in that conduct, the parties are deemed in pari delicto, and the law will aid neither, but rather, will leave them where it finds them.” Smith ex rel. Estates of Boston Chicken, Inc. v. Arthur Andersen L.L.P., 175 F.Supp.2d 1180, 1198 (D. Ariz. 2001). However, “where the parties are not equal in guilt (in pari delicto) but where one of them, although participating in the wrong, is less guilty than the other, the party more at fault cannot employ the doctrine of pari delicto to shield his deliberate invasion of the rights of the former.” Brand v. Elledge, 360 P.2d 213, 217 (Ariz. 1961) (citation omitted). The Harmon defendants argue that the doctrine of in pari delicto applies because the conduct of the shareholders can be imputed to BJRI, which means that BJRI participated in the same wrongdoing (the dividend transactions) for which BJRI now seeks to recover.

         But contrary to the Harmon defendants' contention, the actions of the shareholders cannot necessarily be imputed to BJRI. If the shareholders, at the time the dividend transactions, “were acting in a manner adverse to the interests of the corporation, the so-called ‘adverse interest exception' applies, with the result that the actions of the agents are not imputed to the corporation.” In re Crown Vantage, Inc., No. 02-3836 MMC, 2003 WL 25257821, at *7 (N.D. Cal. Sept. 25, 2003). There are questions of fact as to ...

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