United States District Court, D. Arizona
ORDER
DOUGLAS L. RAYES UNITED STATES DISTRICT JUDGE.
This
action alleges bribery of the Chairman of the Arizona
Corporation Commission (“Commission”) by George
Johnson, the owner of Johnson Utilities LLC (“Johnson
Utilities”), to allow the company to charge excessive
rates, and the illicit transfer of the ill-begotten revenue
through a network of affiliated entities. Plaintiffs Tisha
Castillo, Karen Christian, and Steve Pratt were ratepayers
for water and wastewater services provided by Johnson
Utilities.[1] Plaintiffs allege that Johnson, Johnson
Utilities, Johnson International, Incorporated
(“Johnson International”), and lobbyist James
Franklin Norton (collectively the “Bribery
Defendants”) violated the Racketeer Influence and
Corrupt Organizations Act (“RICO”), 18 U.S.C.
§§ 1962(c) and (d), by conspiring to unlawfully
raise utility rates through racketeering, wire fraud, and
bribery of a public servant. Plaintiffs also allege that the
Bribery Defendants were unjustly enriched, and that Johnson
Utilities violated the Arizona Consumer Fraud Act
(“ACFA”), A.R.S. § 44-1522.
Plaintiffs
further allege that Johnson, Johnson Utilities, The George H.
Johnson and Jana S. Johnson Revocable Trust, Ultra Management
LLC (“Ultra”), Hunt Management LLC
(“Hunt”), Roadrunner Transit LLC, Chris Johnson
(“Chris”), Barbara Johnson
(“Barbara”), Pinetop Trust II, December Companies
Incorporated, The B.A.J. Living Trust (“BAJ
Trust”), and The Chris Johnson Family Trust
(collectively the “Transfer Defendants”)
conspired, agreed, and acted to fraudulently transfer the
assets of Johnson Utilities to and among themselves in
violation of Arizona's Uniform Fraudulent Transfer Act
(“AUFTA”), A.R.S. §§ 44-1004 and -1005.
Finally, Plaintiffs seek a declaratory judgment that the
Transfer Defendants shared unity of control.
Before
the Court are Defendants' motions to dismiss. (Docs. 77
and 78.) The Bribery Defendants move to dismiss the action as
barred by the filed rate doctrine (Doc. 78), while the
Transfer Defendants move to dismiss for lack of subject
matter jurisdiction, lack of ripeness, and for failure to
state a claim for relief (Doc. 77). The Bribery Defendants
and Transfer Defendants cross-join in each other's
motions. The motions are fully briefed, and the Court heard
oral argument on May 23, 2019. For the following reasons,
Defendants' motions are denied.
BACKGROUND[2]
I.
Bribery Scheme
As a
provider of water and wastewater services in Arizona, Johnson
Utilities is subject to regulation by the Commission. (Doc.
44 ¶ 2.) The Commission, which regulates utilities and
determines rate adjustments, is comprised of five elected
commissioners. (¶ 26.) On August 24, 2010, the
Commission unanimously rejected Johnson Utilities'
requests (1) for a rate increase premised on an increased
rate base and (2) to allow Johnson, the sole employee and
ultimate decision maker for Johnson Utilities, to have his
personal income taxes reimbursed by payments made by Johnson
Utilities' customers. (¶¶ 11, 28.) Commissioner
Gary Pierce voted as part of a unanimous Commission against
the requests. (¶ 29.)
After
Pierce assumed Chairmanship of the Commission in September
2011, Johnson Utilities' requested rate base increase was
voted on again. This time the Commission approved the
request, with three votes to grant (including Pierce's),
one abstention, and one dissent. (¶¶ 30-31.)
Subsequently, the Commission also re-voted on Johnson
Utilities' request to allow recovery of Johnson's
personal income tax payments from utility revenues. (¶
32.) Again, Pierce reversed his prior vote and the request
was approved by the Commission. (¶ 33.) The new rate
base and the ability to seek reimbursement for personal
income tax expenses went into effect.
Around
the time of the Commission's approval of the rate base
increase, a scheme was created to funnel payments from
Johnson Utilities to Commissioner Pierce. Norton arranged for
his then-wife, Kelly Norton, and her consulting company, KNB
Consulting (“KNB”), to enter into a sham
consulting contract with Johnson Utilities, and for KNB to
hire Commissioner Pierce's wife, Sherry, enabling Johnson
Utilities to funnel bribe payments through KNB and Sherry to
Commissioner Pierce. (¶¶ 35, 44.) Under the
arrangement, Johnson or his affiliates would pay KNB $6, 000
per month, and in turn, KNB was to pay Sherry $3, 500 per
month from those funds. (¶ 36.)
Prior
to this agreement, KNB had not been pursuing a consulting
contract with Johnson Utilities. (¶ 37.) Nor did KNB
interview or receive a resume from Sherry before hiring her.
In fact, Sherry had no consulting experience and no history
of professional employment for the previous 21 years. (¶
38.) To make the arrangement appear legitimate, Kelly was
asked to have regular meetings and exchange emails with
Sherry. (¶ 40.) The arrangement was consummated at a
dinner party in September 2011. (¶¶ 41-42.) Sherry
subsequently signed an “Independent Contractor
Agreement” with KNB, as well as a confidentiality
agreement. (¶ 43.)
In
November 2011, Kelly opened a checking account in KNB's
name and deposited the first $6, 000 payment from Johnson.
(¶¶ 45-47.) At this point, Sherry had done no work
for Johnson or any of his affiliates. Nevertheless, Sherry
received a $3, 500 check from KNB. (¶ 48.) From December
2011 through June 2012, Johnson made monthly $6, 000 payments
to KNB, and KNB made monthly $3, 500 payments to Sherry,
which she deposited into an account shared with Commissioner
Pierce. (¶¶ 49-63, 65.) Although KNB did not
receive payment from Johnson in July, KNB still paid Sherry
$3, 500. (¶ 65.)
In June
2012, Commissioner Pierce again attempted to have the
Commission approve the change in personal income tax
reimbursement regulations Johnson requested, filing on the
Commission's docket a policy statement concerning
“Income Tax Expense for Pass-Through Entities.”
(¶ 64.) Commissioner Pierce's efforts were
unsuccessful as the measure failed. (¶ 66.) At this
time, Johnson elected to stop funneling bribes to
Commissioner Pierce. (Id.)
At the
direction of Norton, on July 31, 2012, Kelly notified Sherry
that her affiliation with KNB had been terminated. (¶
67.) In response, Sherry emailed Kelly acknowledging the end
of the payments from Johnson and stating that Commissioner
Pierce “told me about his conversation with [Norton] so
I was already aware.” (¶ 68.) After receiving a
final $6, 000 payment from Johnson in August 2012, Kelly
emailed Sherry stating: “Just got my final check in the
mail . . . [I] will get a check out to you tomorrow.”
(¶¶ 69-70.) Thereafter, Sherry received a $3, 500
payment from KNB. (¶ 71.) Johnson and Johnson Utilities
are alleged to have engaged in other illicit schemes, an
attempted land deal (¶¶ 79-84) and a $25, 000
payment (¶¶ 74-78), to bribe Commissioner Pierce.
The $25, 000 payment was made by Johnson to the Norton's
two days after the personal income tax reimbursement
regulation was changed. (¶¶ 74-78.) According to
Norton, the payment was a “thank you” from
Johnson. (Id.)
II.
Fraudulent Transfer and Depletion of Johnson Utilities'
Assets
Johnson
Utilities does not directly provide water or wastewater
services to its clients. (¶ 87.) Instead, Johnston
Utilities contracts with Ultra for all its operations.
(¶ 89.) Ultra, however, has no employees. (¶¶
90, 98.) The entity contracts with Hunt for all the employees
and administrative services necessary to complete operations
for Johnson Utilities. (¶¶ 90, 92.) Johnson
Utilities pays Ultra approximately $15.5 million per year in
management fees. Of that, $6-7 million is passed through to
Hunt and $8-9 million remains with Ultra. (¶¶ 88,
93.) Despite having no employees and providing no services,
Ultra is paid millions annually. Ultra is owned by
Johnson's children, Chris and Barbara Johnson, through
Pinetop Trust II. (¶ 89.) Hunt's members are Chris
and Margaret Johnson as trustees of the Chris Johnson Family
Trust, and Barjo. Barjo's sole member is Barbara as
trustee of the BAJ Trust. (¶¶ 15, 25.) Based on
this arrangement, Plaintiffs contend Ultra merely serves as a
shell entity that isolates the assets of Johnson Utilities
from liability and provides asset protection for the company.
(¶¶ 100-04.) Gary Drummond, Johnson's
replacement as manager of Johnson Utilities, has opined to
the same. (¶ 105.)
DISCUSSION
I.
The Bribery ...