Castillo v. Johnson

• Court: District Court, D. Arizona
• Decided: September 5, 2019
• Docket: 2:17-cv-04688
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 Tisha Castillo, et al., No. CV-17-04688-PHX-DLR

10 Plaintiffs, ORDER

11 v.

12 George Harry Johnson, et al.,

13 Defendants. 14 15 16 This action alleges bribery of the Chairman of the Arizona Corporation Commission 17 (“Commission”) by George Johnson, the owner of Johnson Utilities LLC (“Johnson 18 Utilities”), to allow the company to charge excessive rates, and the illicit transfer of the ill- 19 begotten revenue through a network of affiliated entities. Plaintiffs Tisha Castillo, Karen 20 Christian, and Steve Pratt were ratepayers for water and wastewater services provided by 21 Johnson Utilities.1 Plaintiffs allege that Johnson, Johnson Utilities, Johnson International, 22 Incorporated (“Johnson International”), and lobbyist James Franklin Norton (collectively 23 the “Bribery Defendants”) violated the Racketeer Influence and Corrupt Organizations Act 24 (“RICO”), 18 U.S.C. §§ 1962(c) and (d), by conspiring to unlawfully raise utility rates 25 through racketeering, wire fraud, and bribery of a public servant. Plaintiffs also allege that 26 the Bribery Defendants were unjustly enriched, and that Johnson Utilities violated the 27 Arizona Consumer Fraud Act (“ACFA”), A.R.S. § 44-1522. 28 1 Plaintiffs bring this suit individually and on behalf of others similarly situated. 1 Plaintiffs further allege that Johnson, Johnson Utilities, The George H. Johnson and 2 Jana S. Johnson Revocable Trust, Ultra Management LLC (“Ultra”), Hunt Management 3 LLC (“Hunt”), Roadrunner Transit LLC, Chris Johnson (“Chris”), Barbara Johnson 4 (“Barbara”), Pinetop Trust II, December Companies Incorporated, The B.A.J. Living Trust 5 (“BAJ Trust”), and The Chris Johnson Family Trust (collectively the “Transfer 6 Defendants”) conspired, agreed, and acted to fraudulently transfer the assets of Johnson 7 Utilities to and among themselves in violation of Arizona’s Uniform Fraudulent Transfer 8 Act (“AUFTA”), A.R.S. §§ 44-1004 and -1005. Finally, Plaintiffs seek a declaratory 9 judgment that the Transfer Defendants shared unity of control. 10 Before the Court are Defendants’ motions to dismiss. (Docs. 77 and 78.) The 11 Bribery Defendants move to dismiss the action as barred by the filed rate doctrine (Doc. 12 78), while the Transfer Defendants move to dismiss for lack of subject matter jurisdiction, 13 lack of ripeness, and for failure to state a claim for relief (Doc. 77). The Bribery Defendants 14 and Transfer Defendants cross-join in each other’s motions. The motions are fully briefed, 15 and the Court heard oral argument on May 23, 2019. For the following reasons, 16 Defendants’ motions are denied. 17 BACKGROUND2 18 I. Bribery Scheme 19 As a provider of water and wastewater services in Arizona, Johnson Utilities is 20 subject to regulation by the Commission. (Doc. 44 ¶ 2.) The Commission, which regulates 21 utilities and determines rate adjustments, is comprised of five elected commissioners. (¶ 22 26.) On August 24, 2010, the Commission unanimously rejected Johnson Utilities’ 23 requests (1) for a rate increase premised on an increased rate base and (2) to allow Johnson, 24 the sole employee and ultimate decision maker for Johnson Utilities, to have his personal 25 income taxes reimbursed by payments made by Johnson Utilities’ customers. (¶¶ 11, 28.) 26 Commissioner Gary Pierce voted as part of a unanimous Commission against the requests. 27 (¶ 29.)

28 2 This section draws from the allegations in the complaint, which are accepted as true for purposes of this Order. 1 After Pierce assumed Chairmanship of the Commission in September 2011, 2 Johnson Utilities’ requested rate base increase was voted on again. This time the 3 Commission approved the request, with three votes to grant (including Pierce’s), one 4 abstention, and one dissent. (¶¶ 30-31.) Subsequently, the Commission also re-voted on 5 Johnson Utilities’ request to allow recovery of Johnson’s personal income tax payments 6 from utility revenues. (¶ 32.) Again, Pierce reversed his prior vote and the request was 7 approved by the Commission. (¶ 33.) The new rate base and the ability to seek 8 reimbursement for personal income tax expenses went into effect. 9 Around the time of the Commission’s approval of the rate base increase, a scheme 10 was created to funnel payments from Johnson Utilities to Commissioner Pierce. Norton 11 arranged for his then-wife, Kelly Norton, and her consulting company, KNB Consulting 12 (“KNB”), to enter into a sham consulting contract with Johnson Utilities, and for KNB to 13 hire Commissioner Pierce’s wife, Sherry, enabling Johnson Utilities to funnel bribe 14 payments through KNB and Sherry to Commissioner Pierce. (¶¶ 35, 44.) Under the 15 arrangement, Johnson or his affiliates would pay KNB $6,000 per month, and in turn, KNB 16 was to pay Sherry $3,500 per month from those funds. (¶ 36.) 17 Prior to this agreement, KNB had not been pursuing a consulting contract with 18 Johnson Utilities. (¶ 37.) Nor did KNB interview or receive a resume from Sherry before 19 hiring her. In fact, Sherry had no consulting experience and no history of professional 20 employment for the previous 21 years. (¶ 38.) To make the arrangement appear legitimate, 21 Kelly was asked to have regular meetings and exchange emails with Sherry. (¶ 40.) The 22 arrangement was consummated at a dinner party in September 2011. (¶¶ 41-42.) Sherry 23 subsequently signed an “Independent Contractor Agreement” with KNB, as well as a 24 confidentiality agreement. (¶ 43.) 25 In November 2011, Kelly opened a checking account in KNB’s name and deposited 26 the first $6,000 payment from Johnson. (¶¶ 45-47.) At this point, Sherry had done no work 27 for Johnson or any of his affiliates. Nevertheless, Sherry received a $3,500 check from 28 KNB. (¶ 48.) From December 2011 through June 2012, Johnson made monthly $6,000 1 payments to KNB, and KNB made monthly $3,500 payments to Sherry, which she 2 deposited into an account shared with Commissioner Pierce. (¶¶ 49-63, 65.) Although 3 KNB did not receive payment from Johnson in July, KNB still paid Sherry $3,500. (¶ 65.) 4 In June 2012, Commissioner Pierce again attempted to have the Commission 5 approve the change in personal income tax reimbursement regulations Johnson requested, 6 filing on the Commission’s docket a policy statement concerning “Income Tax Expense 7 for Pass-Through Entities.” (¶ 64.) Commissioner Pierce’s efforts were unsuccessful as 8 the measure failed. (¶ 66.) At this time, Johnson elected to stop funneling bribes to 9 Commissioner Pierce. (Id.) 10 At the direction of Norton, on July 31, 2012, Kelly notified Sherry that her affiliation 11 with KNB had been terminated. (¶ 67.) In response, Sherry emailed Kelly acknowledging 12 the end of the payments from Johnson and stating that Commissioner Pierce “told me about 13 his conversation with [Norton] so I was already aware.” (¶ 68.) After receiving a final 14 $6,000 payment from Johnson in August 2012, Kelly emailed Sherry stating: “Just got my 15 final check in the mail . . . [I] will get a check out to you tomorrow.” (¶¶ 69-70.) Thereafter, 16 Sherry received a $3,500 payment from KNB. (¶ 71.) Johnson and Johnson Utilities are 17 alleged to have engaged in other illicit schemes, an attempted land deal (¶¶ 79-84) and a 18 $25,000 payment (¶¶ 74-78), to bribe Commissioner Pierce. The $25,000 payment was 19 made by Johnson to the Norton’s two days after the personal income tax reimbursement 20 regulation was changed. (¶¶ 74-78.) According to Norton, the payment was a “thank you” 21 from Johnson. (Id.) 22 II. Fraudulent Transfer and Depletion of Johnson Utilities’ Assets 23 Johnson Utilities does not directly provide water or wastewater services to its 24 clients. (¶ 87.) Instead, Johnston Utilities contracts with Ultra for all its operations. (¶ 25 89.) Ultra, however, has no employees. (¶¶ 90, 98.) The entity contracts with Hunt for all 26 the employees and administrative services necessary to complete operations for Johnson 27 Utilities. (¶¶ 90, 92.) Johnson Utilities pays Ultra approximately $15.5 million per year 28 in management fees. Of that, $6-7 million is passed through to Hunt and $8-9 million 1 remains with Ultra. (¶¶ 88, 93.) Despite having no employees and providing no services, 2 Ultra is paid millions annually. Ultra is owned by Johnson’s children, Chris and Barbara 3 Johnson, through Pinetop Trust II. (¶ 89.) Hunt’s members are Chris and Margaret 4 Johnson as trustees of the Chris Johnson Family Trust, and Barjo. Barjo’s sole member is 5 Barbara as trustee of the BAJ Trust. (¶¶ 15, 25.) Based on this arrangement, Plaintiffs 6 contend Ultra merely serves as a shell entity that isolates the assets of Johnson Utilities 7 from liability and provides asset protection for the company. (¶¶ 100-04.) Gary 8 Drummond, Johnson’s replacement as manager of Johnson Utilities, has opined to the 9 same. (¶ 105.) 10 DISCUSSION 11 I. The Bribery Defendants’ Motion to Dismiss 12 The Bribery Defendants move to dismiss Plaintiffs’ RICO, CAFA, and common 13 law claims as barred by the filed rate doctrine. (Doc. 78.) Specifically, the Bribery 14 Defendants argue that Plaintiffs’ claims must be dismissed for lack of subject matter 15 jurisdiction pursuant to 12(b)(1), and alternatively pursuant to 12(b)(6). (Id. at 10 n. 6.) 16 Finding “persuasive case law which holds that the filed rate doctrine is not a subject matter 17 jurisdiction issue” but rather a defense on the merits, the Court treats the Bribery 18 Defendants’ motion as a motion to dismiss brought under 12(b)(6). See, e.g., Hoover v. 19 HSBC Mortg. Corp., 9 F. Supp. 3d 223, 237 (N.D. N.Y. 2014) (collecting cases); Perryman 20 v. Litton Loan Servicing, LP, No. 14-CV-221-JST, 2014 WL 4954674, at *6 n. 4 (N.D. 21 Cal. Oct. 1, 2014) (expressing doubt that filed rate doctrine applies to 12(b)(1)). 22 A. Federal Filed Rate Doctrine 23 “The filed rate doctrine is a judicial creation that arises from decisions interpreting 24 federal statutes that give federal agencies exclusive jurisdiction to set rates for specified 25 utilities, originally through rate-setting procedure involving the filing of rates with the 26 agencies.” Carlin v. DairyAmerica, Inc., 705 F.3d 856, 867 (9th Cir. 2013) (emphasis 27 added). The doctrine’s justification is threefold: (1) “federal law require[s] the primacy of 28 filed rates and tariffs,” (2) “federal preemption (or the supremacy of federal law),” and (3) 1 “deference to federal agency expertise (or primary jurisdiction).” Id. at 868. “At its most 2 basic, the filed rate doctrine provides that state law, and some federal law (e.g. antitrust 3 law), may not be used to invalidate a filed rate nor to assume a rate would be charged other 4 than the rate adopted by the federal agency in question.” Wah Chang v. Duke Energy 5 Trading & Mtkg., LLC, 507 F.3d 1222, 1225 (9th Cir. 2007). 6 In short, the federal filed rate doctrine applies when federal statutes create a federal 7 regulatory scheme for setting federal rates. Because no federal rate is implicated here, the 8 federal filed rate doctrine is inapplicable. See, e.g., Pink Dot, Inc. v. Teleport Commc’ns 9 Grp., 107 Cal. Rptr.2d 392, 398 (Cal. Ct. App. 2001) (declining to apply federal filed rate 10 where no federal rate was implicated); Satellite Sys., Inc. v. Birch Telecom of Okla., Inc., 11 51 P.3d 585, 588 (Okla. 2002) (finding that, because the defendant was required to file its 12 tariffs with state commission, “the federal filed tariff doctrine is not controlling in this 13 appeal”). 14 B. Arizona Filed Rate Doctrine 15 Next, the Court looks to whether Arizona has adopted an analogous filed rate 16 doctrine applicable to state ratemaking agencies that would preclude the claims at issue 17 here. This is a complex inquiry that requires the Court to examine whether the state courts 18 have adopted or disclaimed the doctrine and the extent to which the state’s regulatory 19 scheme codifies the doctrine. See, e.g., Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 20 979, 992-93 (9th Cir. 2000); Alston v. Countrywide Fin. Corp., 585 F.3d 753, 764 (3d Cir. 21 2009). These considerations can lead to competing conclusions. 22 For example, Arizona courts have not expressly adopted the filed rate doctrine. 23 Johnson v. First Am. Title Ins. Co., No. CV-08-01184-PHX-DGC, 2008 WL 4850198, at 24 4 (D. Ariz. 2008) (“Arizona has never adopted the filed rate doctrine.”); SolarCity Corp. 25 v. Salt River Project Agric. Improvement, No. 15-CV-374-PHX-DLR, 2015 WL 6503439, 26 at *14 (D. Ariz. Oct. 27, 2015) (“Several states have adopted the doctrine, but Arizona has 27 not.”). And when faced with the issue, Arizona courts have “ducked the question.” Patel 28 v. Specialized Loan Serv., LLC, 904 F.3d 1314, 1333 (11th Cir. 2018) (Johnson, J., 1 dissenting); see, e.g., Qwest Corp. v. Kelly, 59 P.3d 789, 800 (Ariz. Ct. App. 2002) (“We 2 need not determine, however, whether Arizona should adopt this federal doctrine and apply 3 it when a state regulatory agency is involved[.]”). 4 With that said, “the Second Circuit Court of Appeals approved the [Connecticut] 5 district court’s conclusion that Arizona’s constitution, which gives the Commission 6 exclusive authority to set rates of public utilities, essentially codifies the filed rate 7 doctrine.” Qwest, 59 P.3d at 800 (discussing Sun City Taxpayers’ Ass’n v. Citizens Utilities 8 Co., 847 F. Supp. 281 (D. Conn. 1994), aff’d, 45 F.3d 58 (2d Cir. 1995)). The Qwest court 9 observed, however, that “Sun City is a federal case by a circuit court different from the one 10 that serves Arizona” and that “there is persuasive authority” opposing adopting the filed 11 rate doctrine. Id. The Qwest court also “found it significant” that an earlier Arizona Court 12 of Appeals decision did not mention “the filed rate doctrine after thoroughly discussing the 13 Commission’s jurisdiction and finding the judiciary does have the authority to address and 14 is capable of resolving traditional tort . . . claims, even if one of the parties is a regulated 15 utility.” Id. (discussing Campbell v. Mountain States Tel. & Tel. Co., 586 P.2d 993 (Ariz. 16 Ct. App. 1978)). 17 Turning to the Arizona Constitution, the Commission is vested with “full power to 18 . . . prescribe . . . just and reasonable rates and charges to be made and collected.” Ariz. 19 Const. art. 15 § 3. Further, Arizona has a statutory scheme establishing procedures for 20 direct challenges to Commission decisions. Utility customers may complain to the 21 Commission that the rates charged by a public service corporation violate “any provision 22 of law or any order or rule of the commission,” A.R.S. § 40-246(A), and seek a rehearing 23 of the Commission’s decision within twenty days of entry, § 40-253(A). Within thirty days 24 of rehearing or denial of rehearing, the aggrieved party may file an action for judicial 25 review of the decision. § 40-254(A). Arizona courts, in such proceedings, can hear and 26 resolve any claim that a Commission decision offends the federal constitution. See, e.g., 27 Western Gillette, Inc. v. Ariz. Corp. Comm’n, 121 592 P.2d 375 (Ariz. Ct. App. 1979); 28 State ex rel. Corbin v. Ariz. Corp. Comm’n, 693 P.2d 362 (Ariz. Ct. App. 1984). 1 Although the Court recognizes that Arizona’s statutory scheme creates a method for 2 direct challenges, it is less clear whether that scheme prevents collateral attacks and, 3 assuming it does, to what extent. “When state-law regulatory authority provides the basis 4 of the filed rate doctrine, the doctrine should be based on a careful analysis of the text and 5 purpose of the underlying state law, rather than blanket application of the filed rate doctrine 6 to all challenges which touch a regulated industry.” Id. at *8; see also Pink Dot, Inc., 107 7 Cal. Rptr.2d at 398 (“In California, there are limits to the filed rate doctrine, . . . a public 8 utility could be liable for fraud”); Satellite Sys., 51 P.3d at 588 (“Even if a state filed tariff 9 doctrine has been adopted in Oklahoma, it does not bar a common law fraud claim.”). The 10 Arizona Supreme Court “minced no words in its characterization of the Commission’s 11 power: ‘The Commission was not designed to protect public service corporations and their 12 management but, rather, was established to protect our citizens from the results of 13 speculation, mismanagement, and abuse of power.’” Johnson Utilities LLC v. Ariz. Corp. 14 Comm’n, 438 P.3d 656, 660 (Ariz. Ct. App. 2019) (citing Ariz. Corp. Comm’n v. Woods, 15 830 P.2d 807, 817 (Ariz. 1992) (en banc)). Assuming, unlikely though it might be, that 16 Arizona has a filed rate doctrine, the Court doubts that it would bar claims of a utility 17 bribing a commissioner and sheltering improperly obtained revenue, especially given the 18 import Arizona places on protecting consumers from utility overreach. 19 Complicating matters further, were the Court to assume that Arizona has adopted 20 its own version of the filed rate doctrine, applying it to bar Plaintiffs’ RICO claims presents 21 a host of supremacy and preemption issues that neither party has briefed. Some out-of- 22 circuit authorities have weighed in on these issues, finding that a federal law like RICO 23 must be interpreted consistent with a state regulatory scheme because utility regulation is 24 an area of traditional state authority. See, e.g., H.J. Inc. v. Nw. Bell Tel. Co., 954 F.2d 485, 25 495 (8th Cir. 1992) (“allowing a RICO action . . . would similarly disrupt the state 26 administrative process and constitute a ‘collateral attack on a rate order,’ contrary to state 27 law”); Taffet v. S. Co., 967 F.2d 1483, 1494 (11th Cir. 1992) (filed rate doctrine “applies 28 with equal force to preclude recovery under RICO whether the rate at issue has been set by 1 a state rate-making authority”). But, the Ninth Circuit has not weighed in on the question, 2 and district courts within the circuit have offered compelling counter-arguments. For 3 instance, the Perryman court explained: 4 When a federal statute grants strong and pervasive authority to a federal agency, it is understandable why courts interpret the 5 statute to supersede other laws that would stand in the statute’s way. Inconsistent state laws are preempted under the 6 Supremacy Clause, and inconsistent federal laws are interpreted to be subordinate to the “stronger” statute. But it is 7 unclear why the California Insurance Commissioner’s regulatory authority would impede the otherwise appropriate 8 reach of a federal statute. By arguing that California’s state- law regulatory authority bars even otherwise valid federal 9 RICO claims, Defendants’ arguments would seem to stand the Supremacy Clause on its head. 10 11 2014 WL 4954674, at *8. 12 Having exhaustively examined the relevant authorities, the Court is not left firmly 13 persuaded that Arizona has adopted a version of the filed rate doctrine. Moreover, 14 assuming Arizona has adopted a form of the doctrine, it is unclear whether it would apply 15 to the type of conduct at issue here. In an appropriate case, it might be proper to certify 16 these questions to the Arizona Supreme Court. See Outdoor Sys., Inc. v. City of Mesa, 902 17 F.2d 1579 (Table), 1990 WL 68860, at *4 (9th Cir. 1990). This, however, is not an 18 appropriate case because the Court can resolve the pending motion without definitively 19 answering these questions.3 20 Even if the Court were to assume (without deciding) that Arizona has adopted a 21 filed rate doctrine and that it applies to the types of claims alleged here, the doctrine is 22 “open to repudiation by the . . .” relevant agency. Carlin, 705 F.3d at 869. For example, 23 in Perryman the defendants argued that the filed rate doctrine barred the plaintiffs’ claims 24 because the charges applied to their escrow accounts were consistent with the amounts the 25 California Department of Insurance had approved. 2014 WL 4954674, at *1-2. The court 26 disagreed, finding that the California’s Insurance Commissioner had disclaimed authority 27 to regulate the conduct challenged in the complaint. Id. at *8. In support, the court

28 3 For this reason, the Bribery Defendants argument under the Burford abstention doctrine is unavailing. 1 observed that the Commissioner previously found that it “has no jurisdiction” over similar 2 conduct when a state court judge sought guidance on the matter, noting that “another court 3 already attempted to defer to the [] Commissioner on exactly the type of claim before this 4 court, and the Commissioner refused to accept the offered deference.” Id. The court 5 reasoned that “if the [] Commissioner felt that allowing civil actions of this type would 6 undermine the agency’s authority to regulate insurance rates, he would have expressed the 7 opportunity to express an opinion about the reasonableness of the rate pass-alongs when 8 asked directly to do so.” Id. at *9. The court added that it “will not be more concerned 9 with the agency’s authority than the agency itself.” Id. 10 Like in Perryman, the Commission disclaimed jurisdiction over Delton Munday, et 11 al., ACC Docket No. WS-02987A-17-0192, a previous action brought before the 12 Commission that raised similar claims to those alleged here. (See Doc. 96-1 at 105-12.) 13 The Munday plaintiffs’ allegations also concerned the bribery of Chairman Pierce by 14 Johnson Utilities for votes on a rate increase and tax pass-through. (Id. 106-07 ¶ 11.) Aside 15 from challenging the reasonableness of the rate under A.R.S. § 40-246(A), the Munday 16 plaintiffs alleged that Johnson Utilities, Johnson International, R&R Partners, and the 17 Commission violated Arizona’s Civil RICO statute, and brought common law claims for 18 conspiracy, constructive fraud, aiding and abetting, breach of contract, and breach of the 19 implied covenant of good faith and fair dealing. (Id. at 109-12.) 20 The Commission dismissed the conspiracy, constructive fraud, aiding and abetting, 21 breach of contract, breach of the implied covenant of good faith and fair dealing, and 22 Arizona RICO claims, deferring to “trial courts of general jurisdiction” on “traditional 23 claims” due to courts superior familiarity and capability with resolving them.4 (Doc. 96-2 24 at 25-26 ¶¶ 31-35.) The Commission reasoned that, although it has “broad constitutional 25 and statutory powers over many aspects of public service corporations,” and “has 26 4 Johnson Utilities and Johnson International moved to dismiss the plaintiffs’ 27 complaint, arguing that “jurisdiction over the unsupported claims lies exclusively in the Superior Court of Arizona” and that the Commission “is constitutionally constrained from 28 adjudicating civil claims pursuant to its limited grant of authority.” (Doc. 96-1 at 115.) R&R Partners and the Commission Utility Division also moved to dismiss. 1 developed specialized expertise in matters related to [] regulation of the service and 2 financial aspects of public service corporations,” “claims based upon theories of tort and 3 contract are far afield of the Commission’s area of expertise and statutory responsibility[.]” 4 (¶ 31.) The Commission also declined to exercise jurisdiction over the non-public service 5 corporation parties. (¶ 35.) 6 The Bribery Defendants argue that the Commission has not repudiated jurisdiction 7 because it declined to dismiss the Munday plaintiffs’ challenge to the reasonableness of the 8 rate finding that it had jurisdiction to assess “the reasonableness of any rates or charges,” 9 that the Munday plaintiffs and Johnson Utilities jointly stipulated to dismiss the challenge 10 to the reasonableness of the rate, and that the Commission left open the opportunity for the 11 plaintiffs to reassert their reasonableness claim in an ongoing action where Johnson 12 Utilities sought to increase its rate base. 13 The Court finds this argument unavailing. Plaintiffs are not challenging the 14 reasonableness of Johnson Utilities’ rate. Plaintiffs are challenging the Bribery 15 Defendants’ conduct in inducing a new, higher rate base. That is, Plaintiffs do not claim 16 the increased rate base was unreasonable. Instead, they challenge whether it was procured 17 through bribery and fraud. The Commission expressly disclaimed jurisdiction over these 18 claims. The Commission also disclaimed jurisdiction over any non-public service 19 corporations. Accordingly, even if Arizona has adopted a filed rate doctrine that would 20 normally apply to claims such as these, the doctrine does not bar Plaintiffs’ claims because 21 the Commission evidently has repudiated the doctrine in this instance. 22 II. The Transfer Defendants’ Motion to Dismiss 23 The Transfer Defendants move to dismiss Plaintiffs’ claims of fraudulent transfer 24 and declaratory judgment for failure to state a claim for which relief can be granted.5 When

25 5 The Transfer Defendants also moved to dismiss these claims for lack of subject matter jurisdiction, arguing that the Court lacks subject matter jurisdiction over Plaintiffs’ 26 state law fraudulent transfer claims because it lacks jurisdiction over Plaintiffs’ RICO, ACFA, and unjust enrichment claims. For reasons explained above, the Court finds that it 27 has jurisdiction over the RICO, ACFA, and unjust enrichment claims. The Court therefore has supplemental and ancillary jurisdiction over Plaintiffs’ fraudulent transfer and 28 declaratory judgment claims. See, e.g., Tomar Elecs., Inc. v. Watkins, No. 09-CV-170- PHX-ROS, 2010 WL 11434976, at *3 (D. Ariz. Sept. 2, 2010). 1 analyzing a complaint for failure to state a claim to relief under Rule 12(b)(6), the well- 2 pled factual allegations are taken as true and construed in the light most favorable to the 3 nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). Legal 4 conclusions couched as factual allegations are not entitled to the assumption of truth, 5 Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009), and therefore are insufficient to defeat a 6 motion to dismiss for failure to state a claim, In re Cutera Sec. Litig., 610 F.3d 1103, 1108 7 (9th Cir. 2010). To avoid dismissal, the complaint must plead sufficient facts to state a 8 claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 9 (2007). This plausibility standard “is not akin to a ‘probability requirement,’ but it asks 10 for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. 11 at 678 (quoting Twombly, 550 U.S. at 556). 12 A. Fraudulent Transfer Claims 13 As a preliminary matter, the Transfer Defendants contend that Federal Rule of Civil 14 Procedure 9(b)’s heightened particularity requirement applies to Plaintiffs’ fraudulent 15 transfer claims. (Doc. 77 at 7.) The Transfer Defendants, however, provide no controlling 16 Ninth Circuit authority that applies the heightened pleading requirement to fraudulent 17 transfer claims under AUFTA. Nor have district courts in this circuit applied Rule 9(b) to 18 AUFTA claims. See e.g., Armed Forces Bank NA v. Dragoo, No. 17-CV-786-PHX-ROS, 19 2018 WL 8621584, at *2-3 (D. Ariz. Sept. 28, 2018); Anderson v. Chandler, No. 12-CV- 20 813-PHX-SMM, 2013 WL 3864225, at *3 (D. Ariz. July 25, 2013); U.S. v. Reading, No. 21 11-CV-698-PHX-JFM, 2012 WL 4120439, at *2-3 (D. Ariz. Sept. 19, 2012). Finding no 22 principled reason for applying Rule 9(b)’s pleading requirements to Plaintiffs’ fraudulent 23 transfer claims, the Court declines to do so. 24 A fraudulent transfer claim is different than the fraud claims to which Rule 9(a) 25 would normally apply. In a common law fraud claim, the defendant is alleged to have 26 made false statements or material omissions to the plaintiff, who is in a position to plead 27 those statements or omissions with specificity. See, e.g., Pence v. U.S., 316 U.S. 332, 338 28 (1942); 2A J. Moore, Federal Practice ¶ 9.03. A fraudulent transfer claim, by contrast, 1 involves a third-party defendant who has no relationship with the plaintiff, and thus the 2 plaintiff usually has insufficient information to plead its claim with specificity. See Concha 3 v. London, 62 F.3d 1493, 1503 (9th Cir. 1995) (opining that Rule 9(b) “requires that 4 plaintiffs specifically plead those facts surrounding alleged acts of fraud to which they can 5 reasonably be expected to have access”). 6 Even if the Court were to apply Rule 9(b)’s heightened pleading standard, Plaintiffs’ 7 complaint contains sufficiently particular allegations. “To comply with Rule 9(b), 8 allegations of fraud must be specific enough to give defendants notice of the particular 9 misconduct which is alleged to constitute the fraud charged so they can defend against the 10 charge and not just deny that they have done anything wrong.” Bly-Magee v. Cal., 236 11 F.3d 1014, 1019 (9th Cir. 2001). For actually fraudulent transfers, “the complaint must 12 allege facts establishing a ‘transfer [was] made . . . by a debtor . . . [w]ith actual intent to 13 hinder, delay or defraud any creditor of the debtor.’” Armed Forces Bank, 2018 WL 14 8621584, at *2 (quoting A.R.S. § 44-1004(A)(1)). The debtor’s actual intent “may be 15 shown by direct proof or by circumstantial evidence from which actual intent may be 16 reasonably inferred.” Warfield v. Alaniz, 453 F. Supp. 2d 1118, 1136 (D. Ariz. 2006). For 17 constructive fraudulent transfer claims, the plaintiff must allege that the debtor did not 18 “receiv[e] a reasonably equivalent value in exchange for the transfer or obligation,” and 19 the debtor either: 20 (a) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were 21 unreasonably small in relation to the business or transaction. 22 (b) Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as 23 they became due. 24 A.R.S. § 44-1004(A)(2); see id. § 44-1005 (debtor’s transfer fraudulent as to creditor when 25 “the debtor made the transfer or incurred the obligation without receiving a reasonably 26 equivalent value in exchange for the transfer or obligation and the debtor was insolvent at 27 that time or the debtor became insolvent as a result of the transfer or obligation”). 28 Plaintiffs’ complaint sufficiently notifies the Transfer Defendants of their alleged 1 role in the fraudulent transfers. Plaintiffs allege that Johnson Utilities funnels money 2 through Ultra and Hunt. Specifically, Johnson Utilities, which has only one employee 3 (Johnson) and does not directly provide water or wastewater services, contracts with Ultra, 4 which has no employees, and which in turn contracts with Hunt for all the employees and 5 administrative services necessary to complete operations for Johnson Utilities. (Doc. 44 6 ¶¶ 87-92, 98.) Plaintiffs also allege that Johnson Utilities pays Ultra $15.5 million in 7 management fees, which account for half of Johnson Utilities’ annual revenue. Ultra, in 8 turn, keeps nearly two-thirds, or $8-9 million of this money, to simply contract with Hunt. 9 (¶¶ 91, 93.) Chris Johnson has stated he does not know why Ultra was created (¶ 96), and 10 Hunt’s Chief Operating Officer has stated that nobody from Hunt actually works with Ultra 11 because it has no employees (¶ 97). Based on Johnson Utilities’ arrangement with Ultra 12 and Hunt, Plaintiffs allege that “Ultra provides nothing in value for the money” it receives, 13 and that it is a “shell entity that collects millions in dollars from Johnson Utilities.” (¶¶ 14 101-02.) Gary Drummond, Johnson’s replacement as manager of Johnson Utilities, 15 believes the same. (¶ 105.) The arrangement outlined in the complaint states plausible 16 claims for fraudulent transfer and provides sufficiently specific notice of the alleged 17 misconduct so that the Transfer Defendants can defend against the charges. 18 B. Declaratory Judgment 19 Finally, the Transfer Defendants seek to dismiss Plaintiffs’ declaratory judgment 20 claim. In effect, Plaintiffs’ claim seeks a determination that the Transfer Defendants are 21 an alter ego of Johnson, Barbara, and Chris. (¶¶ 173-74.) Although Arizona does not 22 recognize “alter ego as an independent cause of action,” Plaintiffs may seek derivative 23 liability under an alter ego theory against the Transfer Defendants if they can “prove both 24 (1) unity of control and (2) that observance of the corporate form would sanction a fraud 25 or promote injustice.” Jes Solar Co. Ltd. v. Manitee Energy Inc., No. 12-CV-626-TUC- 26 DCB, 2019 WL 2869666, at *9 (D. Ariz. July 3, 2019). 27 “Arizona courts consider various factors when determining whether unity of interest 28 and ownership exists under the alter ego doctrine, such as commingling of personal and 1 corporate funds and assets, failure to keep funds from various entities separate, and 2 unauthorized diversion of corporate funds or assets for non-corporate purposes.” Id. at *8. 3 At the motion to dismiss stage, a plaintiff alleging alter ego liability “must do more than 4 make conclusory statements regarding an alter ego relationship between individual and 5 corporate defendants; the plaintiff must allege specific facts supporting application of the 6 alter ego doctrine.” Barba v. Lee, No. 09-CV-1115-PHX-SRB, 2009 WL 8747368, at *4 7 (D. Ariz. Nov. 4, 2009). 8 Taking the facts alleged in the complaint as true, as the Court must, Plaintiffs have 9 pled a cognizable alter ego theory by alleging that the Transfer Defendants intermingled 10 assets and employees between various corporations, transferred corporate funds without 11 adequate consideration by funneling money through Ultra, and controlled, dominated and 12 operated the entities as their individual business and alter ego. For instance, Plaintiffs 13 allege that Ultra is owned by Chris and Barbara through Pinetop Trust II. (Doc. 44 ¶ 89.) 14 Ultra, which does not conduct business with other entities and has no employees, appears 15 to merely act as a middleman between Johnson Utilities and Hunt, collecting millions in 16 management fees in exchange for no consideration. (¶¶ 92, 98.) In addition to owning the 17 entity, Ultra pays Chris and Barbara as its managers. (¶¶ 92.) Notwithstanding his 18 ownership of Ultra, his role as the company’s manager, and his membership in Hunt, Chris 19 is unaware why Ultra was created, who created it, how much money flows through the 20 company, or how much Ultra pays Hunt. (¶¶ 92-96). Drummond, Johnson Utilities’ 21 manager, believes Hunt and Ultra were created to isolate Johnson Utilities’ assets from 22 liabilities. (¶ 105.) 23 CONCLUSION 24 The Court is unpersuaded that Arizona has adopted a version of the filed rate 25 doctrine. Nor is the Court persuaded that the doctrine, assuming one has been adopted, 26 would apply to the type of conduct at issue here. Nevertheless, even assuming that Arizona 27 has adopted a filed rate doctrine and that it applies under these circumstances, the doctrine 28 does not bar Plaintiffs’ claims because the Commission repudiated the doctrine in this || instance. The Court therefore denies the Bribery Defendants’ motion to dismiss. The 2|| Court also denies the Transfer Defendants’ motion to dismiss, finding that Plaintiffs have plead sufficient facts to state claims for fraudulent transfer and declaratory judgment. 4|| Accordingly, 5 IT IS ORDERED that Defendants’ motions to dismiss (Docs. 77, 78) are DENIED. 6 Dated this 5th day of September, 2019. 7 8 Les Ue 10 Wy 11 Upited States Dictic Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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