Castillo v. Johnson

          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 ...