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Hart Interior Design LLC v. Recorp Investments Inc.

United States District Court, D. Arizona

April 26, 2018

Hart Interior Design LLC 401k Profit Sharing Plan, Plaintiff,
v.
Recorp Investments Incorporated, et al., Defendants.

          ORDER

          Honorable G. Murray Snow United States District Judge

         Pending before the Court are Plaintiff's Motion for Partial Summary Judgment, (Doc. 81), Defendants' Motion for Summary Judgment, (Doc. 83), Plaintiff's Motion to Strike, (Doc. 86), Plaintiff's Motion to Bifurcate Case and Stay, (Doc. 94), and Plaintiff's Motion to Disregard New Arguments, (Doc. 95). The Court rules as follows on these motions as further explained below.

         BACKGROUND

         On June 30, 2000, Paul B. Maniatis organized Carinos Properties, LLC (“Carinos”). (Doc. 82 ¶¶ 1, 3). Carinos's original Operating Agreement states, “This Company has been formed to engage in purchasing, financing, refinancing, developing, managing, operating, selling, exchanging or otherwise disposing of real property, and may engage in any other activities that may be lawfully engaged in by limited liability companies.” (Doc. 84 ¶ 63, Doc. 84-1 Exh. A).[1] Carinos was managed by another of Mr. Maniatis's entities-Defendant Recorp Investments, Inc. (“RII”). (Doc. 82 ¶ 3). On August 9, 2000, Plaintiff Hart Interior Design, LLC 401(k) Profit Sharing Plan (“the Plan”), acquired a 28 percent membership interest in Carinos. (Doc. 82 ¶ 6).

         In September 2000, Carinos purchased more than 1, 250 acres of property near Albuquerque, New Mexico, where five other of Mr. Maniatis's entities owned the surrounding 9, 750 acres. (Doc. 84 ¶¶ 18-19). In June 2001, Mr. Gary Lane of the related company Recorp Management Inc. submitted the “Rio West Community Master Plan” for the 12, 000 acres to establish “land use designations and regulations, intensities, provisions for public facilities, design regulations, phasing schedules, and procedures for administration and implementation.” (Doc. 84-1 Exh. C). Although the trustee of the Plaintiff, Ms. Athena Hart-Kolle, generally knew about the Rio West Community, she understood that Carinos's purpose was simply to “purchase land, hold it and sell it.” (Doc. 82-8, Exh. 7).

         In 2006, Recorp Inc. (a non-existent entity that was allegedly used to refer to all of the Maniatis companies with a stake in Rio West) acquired interests in deep well groundwater appurtenant to the Maniatis-owned properties, and in 2007, Recorp Inc. executed a memorandum of understanding with the local county to develop the deep water wells. (Doc. 84 ¶¶ 25-33). Recorp Inc. continued to develop the water interests, and two water wells were drilled on Carinos's property.

         Defendant IMH Financial Corporation (“IMH”) is an institutional real estate lender and investor that loaned money to Mr. Maniatis. (Doc. 84 ¶¶ 4, 6). In 2010, Mr. Maniatis defaulted on these loans, and in 2012, IMH won a multi-million dollar judgment against Mr. Maniatis in Arizona state court. (Doc. 84 ¶¶ 6, 8). As part of the judgment, Mr. Maniatis transferred ownership of RII to a wholly-owned IMH entity named Stockholder, LLC, and the state court appointed David M. Reaves to serve as the receiver over Stockholder. (Doc. 84 ¶¶ 10-11). Since this transfer and appointment in June 2013, IMH is the sole member of Stockholder, and Stockholder is the sole shareholder of RII. (Doc. 84 ¶ 12). Also, as a result of the winding up of Mr. Maniatis's estate, IMH affiliates gained a 36 percent membership interest in Carinos. (Doc. 84 ¶ 16).

         In short, IMH owns Stockholder; Stockholder owns RII; and RII manages Carinos. IMH owns 36 percent of the membership interest in Carinos, and the Plan owns 28 percent of the same.

         In November 2015, an IMH subsidiary sued Carinos and other Recorp entities in New Mexico state court to recover funds due on an alleged secured debt executed by Maniatis in 2010. (Doc. 84 ¶ 47). In February 2016, IMH sued Carinos in Arizona state court to recover unpaid management fees that Carinos should have paid RII, as well as unpaid funds on an alleged unsecured debt. (Doc. 84 ¶ 49). Neither Carinos nor RII has had any income or funds since at least the filing of the lawsuits in the two states. (Doc. 84 ¶ 54). Consequently, RII notified Carinos's members that Carinos lacked sufficient funds to defend itself, (Doc. 84 ¶ 53), and the Plan subsequently intervened to defend Carinos against the IMH lawsuits. (Doc. 84 ¶ 60).

         In the underlying state lawsuits, the Plan challenges the legitimacy and amounts of Carinos's alleged unpaid debts to IMH and RII. (Doc. 91 ¶¶ 15-29). The Plan claims that IMH and RII knew that Carinos could not pay the alleged debts or defend the lawsuits, and the lawsuits would therefore cause Carinos to be in default. (Doc. 91 ¶¶ 28-29). IMH could then obtain a judgment lien against Carinos's properties. (Doc. 29). Plaintiff Plan intervened in the Arizona and New Mexico litigations and Carinos did not default. (Doc. 84 ¶ 60).

         Plaintiff is a qualifying plan under the Employee Retirement Income Security Act (“ERISA”). In the present lawsuit, Plaintiff alleges that RII and IMH are fiduciaries under ERISA, and that their actions surrounding the New Mexico and Arizona lawsuits breached their duties. (Doc. 29). Plaintiff's Motion for Partial Summary Judgment and Defendants' Motion for Summary Judgment both concern the ERISA fiduciary claim and are presently before the Court.

         DISCUSSION

         I. Legal Standard

         The Court grants summary judgment when the movant “shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In making this determination, the Court views the evidence “in a light most favorable to the non-moving party.” Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). Where the parties have filed cross-motions for summary judgment, the Court “evaluate[s] each motion independently, ‘giving the nonmoving party in each instance the benefit of all reasonable inferences.'” Lenz v. Universal Music Corp., 815 F.3d 1145, 1150 (9th Cir. 2015) (quoting ACLU v. City of Las Vegas, 333 F.3d 1092, 1097 (9th Cir. 2003)).

         “[A] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).[2] 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. 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). Substantive law determines which facts are material, and “[o]nly 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). “A fact issue is genuine ‘if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'” Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002) (quoting Anderson, 477 U.S. at 248).

         II. Analysis

         A. Defendant IMH's Control of the Plan's Assets

         The Employee Retirement Income Security Act (“ERISA”) “governs the administration of employer-provided benefit pension plans.” Metro. Life Ins. Co. v. Parker, 436 F.3d 1109, 1111 (9th Cir. 2006). The ERISA statute defines a fiduciary as a person who exercises any discretionary authority respecting management of a plan's assets, renders investment advice for a fee to the plan, or has any discretionary authority in the administration of the plan. 29 U.S.C. § 1002(21)(A)(i)-(iii). In short, a fiduciary is “someone acting in the capacity of manager, administrator, or financial adviser to a ‘plan.'” Pegram v. Herdich, 530 U.S. 211, 222 (2000) (citing 29 U.S.C. § 1002(21)(A)(i)-(iii)). This definition is “functional rather than formal” and depends on the person's exercise of discretionary authority instead of any designations as a fiduciary. Parker v. Bain, 68 F.3d 1131, 1139-40 (9th Cir. 1995); see also Santomenno v. Transamerica Life Ins. Co., 883 F.3d 833, 837 (9th Cir. 2018) (holding that a party not named in the plan may be a functional fiduciary if it exercises discretionary authority of plan assets as described in 29 U.S.C. § 1002(21)(A)). As described in Section II.B, infra, if an ERISA plan holds 25 percent or more of the value of equity interests in an entity, then the plan's assets include the underlying assets of the entity, and any person “who exercises authority or control respecting the management or disposition of such underlying assets . . . is a fiduciary of the investing plan.” 29 C.F.R. § 2510.3- 101(a)(2)(ii). Neither party disputes that the Plaintiff Plan owns a 28 percent interest in Carinos, and therefore, the question is whether IMH exercises authority or control respecting the management or disposition of Carinos's underlying assets.

         IMH's connection to Carinos's assets is not direct. IMH owns Stockholder; Stockholder owns RII; and RII manages Carinos. As further attenuation, the Arizona state court supervises the Stockholder receiver and may override his decisions. However, notwithstanding the indirect chain, the Plan presents contending facts that IMH does exercise discretionary authority over Carinos's assets. IMH represents itself as the owner of Carinos's properties. (Doc. 91, Exhs. 35, 112). IMH has obtained appraisals of the property, (Doc. 91, Exhs. 41-43), and IMH has discussed the sale of Carinos's property to potential buyers, as evidenced by an email from the IMH CEO discussing the sale of various Rio West properties owned by IMH entities including the Carinos properties. (Doc. 91, Exhs. 74-79). IMH controls physical access to Carinos's ...


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