Equity Solutions LLC v. Fowler et al
Filing
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ORDER granting in part and denying in part 61 Motion for Partial Summary Judgment. Summary judgment against Fowler in Count 1 is denied. Summary judgment is granted in favor of Equity and against Spiral on Count 3 in the amount of $4,042,165 .00. IT IS FURTHER ORDERED granting in part and denying in part 63 Motion for Summary Judgment. Summary judgment is granted on Equity's alter ego claim in Count 4 of the Complaint. Summary judgment is denied with respect to Defendants' condition precedent claim. (See document for further details). Signed by Senior Judge Frederick J Martone on 1/27/13.(LAD)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE DISTRICT OF ARIZONA
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Equity Solutions LLC,
Plaintiff,
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vs.
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Reginald D. Fowler; Spiral Inc.,
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Defendants.
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No. CV-12-02646-PHX-FJM
ORDER
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The court has before it plaintiff Equity Solutions LLC’s (“Equity”) motion for partial
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summary judgment on its first and third claims for relief (doc. 61), defendants’ response
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(doc. 70), and Equity’s reply (doc. 76). We also have before us defendants’ motion for
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partial summary judgment on Equity’s alter ego theory of recovery (doc. 63), Equity’s
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response (doc. 72), and defendants’ reply (doc. 77).
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I. Background
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Defendant Reginald D. Fowler is the president and sole shareholder of defendant
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Spiral Inc, which has numerous subsidiaries and affiliates. From September 2009 through
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January 2010, the German entity CSA Beteiligungsfonds 5 AG & Co. (“CSA”) advanced
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approximately €13 million in investment capital to Spiral in exchange for an equity
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investment by CSA into the Spiral affiliates.1
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Between April 2010 and December 2011, Spiral and its affiliates returned
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approximately €10 million of the €13 million advanced by CSA, leaving a balance due of
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approximately € 3 million. On December 21, 2011, Fowler approved the transfer by CSA
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of its interest in the Spiral affiliates to CSA’s successor entity, Equity Solutions LLC, “in full
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and without reservation.” (“Approval”) PSOF ¶¶ 9, 10. The Approval was signed by
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“Reggie Fowler.” On that same day, Fowler also executed a “Statement of Commitment”
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which provided in relevant part:
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I, Mr. Reggie Fowler, hereby irrevocably confirm that I will take over and
purchase from the Equity Solutions LLC the shares of the Spiral-Group, . . .
as originally held by the CSA Beteiligungsfonds . . . at the agreed upon total
price in the amount of 3 million EUR.
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PSOF ¶ 11 (“Statement of Commitment”). Again, the agreement was signed “Reggie
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Fowler.” Equity contends that this language conclusively demonstrates that Fowler signed
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the documents in his individual capacity, making him personally liable on the Spiral debt to
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Equity. Neither Fowler nor Spiral has repaid Equity. This lawsuit followed.
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Plaintiff now moves for summary judgment on its breach of contract claims against
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Fowler and Spiral asserted in Counts 1 and 3, respectively. Defendants seek summary
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judgment on plaintiff’s alter ego claims of liability and their condition precedent argument.
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II. Equity’s Motion for Summary Judgment
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A. Fowler Liability (Count 1)
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Equity argues that Fowler is personally liable on Spiral’s debt to Equity as evidenced
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by his signature on the Statement of Commitment and Approval. Fowler signed the
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agreements “I, Mr. Reggie Fowler,” without any reference to Spiral. Nevertheless, Fowler
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argues that he executed both agreements as president of Spiral, and that CSA and Equity had
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actual knowledge of his corporate role. He contends that during the eight-year relationship
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with CSA, all business matters were conducted by Fowler as president of Spiral. According
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This debt is alternatively described as a loan by CSA to Spiral, secured by an interest
in the Spiral affiliates.
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to Equity, however, Fowler did not disclose his corporate capacity at the time he signed the
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agreements and any evidence to the contrary is barred by the parol evidence rule.
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Courts will generally attempt to enforce a contract according to the parties’ intent.
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Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 152, 854 P.2d 1134, 1138 (1993).
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Extrinsic evidence, including negotiations, prior understandings, and subsequent conduct,
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is admissible for purposes other than varying or contradicting the terms of a final agreement.
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Id.; Pinnacle Peak Devs. v. TRW Invest. Corp., 129 Ariz. 385, 389, 631 P.2d 540, 544 (1980)
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(considering parol evidence “to prove the usages and customs in relation to which the parties
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contracted”). In the absence of fraud or mistake, however, parol evidence “may not be used
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to change, alter or vary the express terms in a written agreement.” Brand v. Elledge, 101
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Ariz. 352, 358, 419 P.2d 531, 537 (1966).
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We reject Equity’s argument that the documents unambiguously demonstrate that
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Fowler signed the agreements in his individual capacity. Although the documents are signed
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“I, Reggie Fowler,” there is no express indication of Fowler’s capacity. In fact, there is no
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mention of individual or corporate capacity at all. The absence of a reference to corporate
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capacity does not conclusively demonstrate personal liability. Therefore, an ambiguity exists
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as to Fowler’s capacity in executing the documents and we may consider parol evidence to
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determine the parties’ intent.
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It is undisputed that when the debt originated, the agreement was between CSA and
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Spiral. Therefore, when CSA transferred its interest in the debt to Equity, it transferred
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Spiral’s corporate obligation. Fowler approved the transfer and, by way of the Statement of
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Commitment, agreed to pay Equity instead of CSA. If this was a personal guarantee by
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Fowler to pay Spiral’s debt, as Equity contends, then consideration for that promise is
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required. However, none is shown.
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Equity also points to an accounting entry showing that “[t]he [Spiral] debt was
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transferred to Spiral’s shareholder [Fowler] in 2010.” PSOF ¶¶ 5-6. Defendants explain that
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“[b]ecause transactions with foreign entities can be challenging for Subchapter S limited
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liability companies like Spiral, [Spiral’s accountants] recommended that all aspects of the
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CSA transactions be carried on Fowler’s [personal] ledger.” DASOF ¶ 12. Fowler admits
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that in 2010 the Spiral debt to CSA was booked as Fowler’s personal debt. PSOF ¶ 5.
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Nevertheless, between April 2010 and December 2011, “Spiral and/or Spiral Affiliates
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returned approximately € 10 million of the € 13 million advanced by CSA.” Plaintiff’s MSJ
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at 2. Why would Spiral make the payment if the debt had been assumed by Fowler? The
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parties clearly understood that the debt remained with Spiral.
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Finally, Equity argues that when an agent contracts on behalf of an undisclosed
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principal, both the agent and the principal are parties to the contract. Restatement (Third)
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of Agency § 6.03 (2006). Equity contends that Spiral was an undisclosed principal and
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therefore, even if Fowler executed the agreements on behalf of Spiral, both he and Spiral are
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liable. But Spiral was hardly an undisclosed principal.
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Disclosure of the principal requires that the agent give the other party both “notice that
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the agent is acting for the principal and has notice of the principal’s identity.” Id., §
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1.04(2)(a). Fowler, Spiral and CSA had conducted business for years, during which time the
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parties clearly understood that Fowler was acting as president of Spiral. Spiral was a fully
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disclosed principal. Under Arizona law, a corporate officer who signs a contract as the agent
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of a disclosed principal is not a party to the contract and incurs no personal liability.
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Ferrarell v. Robinson, 11 Ariz. App. 473, 475, 465 P.2d 610, 612 (Ct. App. 1970. Equity has
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failed to establish that Fowler is personally liable for Spiral’s debt.
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Summary judgment on Count 1 is denied (doc. 61).
B. Spiral Liability (Count 3)
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Equity moves for summary judgment on its breach of contract claim against Spiral in
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Count 3. It argues that it is undisputed that Spiral was obligated to pay Equity € 3 million
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on February 15, 2012,2 and that Spiral has breached its obligation to do so.
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Spiral moves for summary judgment on its claim that it is not liable under the
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Equity asserts, and Defendants do not dispute, that on February 15, 2012 the
conversion value of € 3 million was $4,042,$165. PSOF ¶ 18.
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Statement of Commitment because CSA/Equity failed to satisfy a condition precedent in a
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“Syndicate Agreement,” whereby it agreed to provide Spiral with € 100 million in working
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capital. Spiral contends that neither CSA nor Equity produced the € 100 million as promised,
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and therefore Spiral is not obligated to repay the advanced funds.
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Spiral refers to a “Syndicate Agreement” without identifying any language in the
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agreement to support the existence of a condition precedent. This is insufficient to support
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a motion for summary judgment on a condition precedent claim.
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Spiral also claims that the money advanced by CSA to Spiral was an equity
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investment, not a loan. Fowler argues alternatively that “[i]t was never the intent to be
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repaid,” Fowler Deposition doc. 64-4 at 32, and “[w]e had agreed to repay back the 3 million
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euros to CSA. That is correct.” Id. at 44. Moreover, during the summer of 2012, Fowler
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confirmed in writing on numerous occasions that Spiral owed the € 3 million to Equity.
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Plaintiff’s SSOF ¶¶ 15-23. No condition precedent was mentioned in these communications.
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The face of the Statement of Commitment shows that Spiral agreed to repay the
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monies advanced by CSA/Equity. Fowler admitted in both his deposition testimony and in
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communications between the parties that Spiral owes the money. Spiral’s only defense to
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the repayment obligation–the condition precedent–is not supported by any reference to the
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record. Therefore, we deny Defendants’ motion for summary judgment on its claim that a
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condition precedent existed that excused Spiral’s obligation under the Statement of
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Commitment (doc. 63). We grant Equity’s motion for summary judgment on its claim in
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Count 3 that Spiral is obligated under the Statement of Commitment to repay the € 3 million
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(doc. 61).
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III. Defendants’ Motion for Partial Summary Judgment - Count 4
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In Count 4, Equity seeks a declaration that Fowler is the alter ego of Spiral and as
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such he is personally liable for Spiral debts. Defendants move for summary judgment on
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Count 4, arguing that no evidence exists to support Equity’s alter ego claim.
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A legitimate purpose of incorporation is to avoid personal liability. “[I]f the corporate
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fiction is too easily ignored and personal liability imposed, then incorporation is
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discouraged.” Dietel v. Day, 16 Ariz. App. 206, 208, 492 P.2d 455, 457 (Ct. App. 1972).
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Corporate status will not be disregarded unless there is a “unification of interests and
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intermingling of funds, so that the corporation loses its separate identity.” Chapman v. Field,
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124 Ariz. 100, 102, 602 P.2d 481, 483 (1979).
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In analyzing an alter ego claim, we will consider factors such as failure to maintain
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separate corporate identity, undercapitalization, commingling of corporate and personal
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finances, failure to maintain books and records, and diversion of corporate property for
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personal use. Deutsche Credit Corp. v. Case Power & Equip. Co., 179 Ariz. 155, 160, 876
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P.2d 1190, 1195 (Ct. App. 1994). Mere identity of ownership, as in the case of a sole
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shareholder is insufficient to establish an alter ego. Cooper v. Indus. Comm’n, 74 Ariz. 351,
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353-54, 249 P.2d 142, 143-44 (1952). Even when the conduct of the stockholders is “not a
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model of corporate management,” unless there is fraud or evidence that the other party was
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misled, courts will refuse to pierce the corporate veil. Chapman, 124 Ariz. at 103, 602 P.2d
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at 484.
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Here, it is undisputed that Spiral has existed as a separate legal entity since 1991 and
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has had a business relationship with CSA since 2005. It is also undisputed that during its
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relationship with CSA, Spiral has consistently held itself out as a separate corporate entity,
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and Fowler has represented himself as president. Spiral has regularly employed an
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accounting firm that has kept separate books and records for the corporation. There is no
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allegation that Spiral was undercapitalized. Nor is there any suggestion that Spiral was
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operated as a sham, or that Equity or CSA was misled.
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Equity mischaracterizes evidence in support of its alter ego theory. It argues that
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Spiral and its subsidiaries, many of which are neglected and “disregarded” entities, share
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corporate resources, such as accounting and information technology. It contends that Spiral
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affiliates do not have arm’s length leases in place and do not pay rent. But the business
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relationship between Spiral and its affiliates is not relevant to the relationship between
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Fowler and Spiral.
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Equity also contends that Fowler transferred Spiral real property to his fiancée on
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October 31, 2012. But Equity’s reference to the record does not demonstrate that it was
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Spiral’s property that was transferred. See Plaintiff’s SSOF ¶ 28, ex. 15 at 37-38 (indicating
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that the property was owned by Fowler) (Q: “So the house you live in now was Mr. Fowler’s
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house? A: yes)).3
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Finally, Equity points to two post-receivership instances where Fowler attempted to
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divert Spiral assets to himself. While problematic if true, this is not sufficient evidence to
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show that there has been such a unification of interests and intermingling of funds that Spiral
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has lost its separate identity.
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We grant Defendants’ motion for summary judgment on Count 4 of the Complaint
(doc. 63).
IV.
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IT IS ORDERED GRANTING IN PART AND DENYING IN PART plaintiff’s
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motion for summary judgment (doc. 61). Summary judgment against Fowler in Count 1 is
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denied. Summary judgment is granted in favor of Equity and against Spiral on Count 3 in
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the amount of $4,042,165.00.
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IT IS FURTHER ORDERED GRANTING IN PART AND DENYING IN PART
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defendants’ motion for partial summary judgment (doc. 63). Summary judgment is granted
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on Equity’s alter ego claim in Count 4 of the Complaint. Summary judgment is denied with
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respect to Defendants’ condition precedent claim.
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DATED this 27th day of January, 2014.
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Equity also cites to the Receiver’s Report at pages 25-26, but the Receiver’s Report
filed at DSOF, ex. 1 contains only 12 pages.
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