Airbus DS Optronics GmbH v. Nivisys LLC et al

Filing 294

ORDER: IT IS ORDERED that WWWT Enterprises' motion for summary judgment (Doc. 221 ) is GRANTED as to assumption of liability, and DENIED in all other respects. IT IS FURTHER ORDERED that First Texas Holdings' motion for summary judgment (D oc. 228 ) is DENIED. IT IS FURTHER ORDERED that Nivisys, LLC's motion for summary judgment (Doc. 230 ) is GRANTED as to assumption of liability, and DENIED in all other respects. IT IS FURTHER ORDERED that Plaintiff Airbus DS's motion fo r summary judgment as to alter ego (Doc. 232 ) is DENIED. IT IS FURTHER ORDERED that Plaintiff Airbus DS's motion for summary judgment as to defendants Nivisys, LLC and WWWT Enterprises (Doc. 233 ) is DENIED. IT IS FURTHER ORDERED that the mot ion to exclude expert Timothy Gay (Doc. 268 ) is denied (without prejudice to raising appropriate objections at trial). IT IS FINALLY ORDERED that Plaintiff's motion to strike Defendants'objections (Doc. 272 ) is DENIED as moot [see attached Order for details]. Signed by Senior Judge James A Teilborg on 3/31/17.(MAW)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Airbus DS Optronics GmbH, a foreign company, 10 Plaintiff, 11 12 13 14 ORDER v. Nivisys LLC, WWWT Enterprises LLC, Nivisys Industries LLC, and First Texas Holdings Corporation, Defendants. 15 16 No. CV-14-02399-PHX-JAT AND RELATED COUNTERCLAIM 17 18 Pending before the Court are several motions from each party, including: 19 WWWT’s motion for summary judgment (Doc. 221); First Texas Holding’s motion for 20 summary judgment (Doc. 228); Nivisys, LLC’s motion for summary judgment (Doc. 21 230); Airbus DS’s motion for summary judgment as to alter ego (Doc. 232); Airbus DS’s 22 motion for summary judgment as to defendants Nivisys, LLC and WWWT Enterprises 23 (Doc. 233); Defendants’ motion to exclude Airbus DS’s expert (Doc. 268); and Airbus 24 DS’s motion to strike Defendants’ objections to evidence (Doc. 272). The Court now 25 rules on each motion in turn. 26 I. Background 27 A. The Credit Agreement and Subsequent Transfers 28 Nivisys Industries, LLC (“Industries”) was an Arizona limited liability company 1 that manufactured and sold defense and surveillance technology products. (Doc. 231 ¶ 1). 2 In March 2008, Industries’ members sold the entirety of their interest in the company to 3 private equity firm Relativity Holding, LLC and its subsidiary, Nivisys Holdings, LLC 4 (collectively “Holdings”). (Doc. 222 at ¶ 9). The purchase was financed by a loan (“the 5 Credit Agreement”) from CapitalSource Finance, LLC (“CapSource”). (Doc. 222 at ¶ 10, 6 Doc. 231 at ¶ 5). The Credit Agreement included a $13 million term loan and a $10 7 million revolving line of credit, and granted CapSource a security interest in all of 8 Industries’ and Holdings’ assets. (Doc. 222 at ¶ 15; Doc. 229 at ¶ 4). 9 Between 2008 and 2011, CapSource advanced funds to Industries and Holdings in 10 accordance with the Credit Agreement. But Industries and Holdings were unable to meet 11 their payment obligations, which prompted a total of nine amendments to the Credit 12 Agreement. (Doc. 222 at 27; Doc. 229 at ¶ 5). Despite the amendments, Industries and 13 Holdings were still unable to cure the defaults. As a result, CapSource and First Texas 14 Holdings Corporation (“First Texas”) began communicating about the possibility of First 15 Texas purchasing an interest in Industries’ debt under the Credit Agreement. (Doc. 222 at 16 ¶ 36; Doc. 229 at ¶ 9).1 17 On November 16, 2011, First Texas signed a Loan Purchase and Sale Agreement 18 under which it acquired the option to purchase the Credit Agreement from CapSource. 19 (Doc. 222 at ¶ 44; Doc. 231 at ¶ 20). In February 2012, First Texas exercised its purchase 20 option and acquired Industries’ and Holdings’ debt under the Credit Agreement. First 21 Texas immediately assigned its interest in the Credit Agreement to Nivisys, LLC 22 (“Nivisys”), a wholly-owned subsidiary of First Texas. (Doc. 222 at ¶ 68; Doc. 231 at ¶ 23 28; Doc. 250 at 68). Nivisys then sent a default letter to Industries and Holdings, 24 demanding that they pay the full amount owed under the Credit Agreement. (Doc. 222 at 25 ¶ 73, Doc. 250 at ¶ 73). Industries and Holdings were unable to cure the defaults, and on 26 February 29, 2012, Nivisys filed a receivership suit to enforce its rights under the Credit 27 28 1 There is, however, a dispute regarding whether CapSource first approached First Texas, or whether First Texas first approached CapSource. (See Doc. 250 at ¶ 36). -2- 1 Agreement. (Doc. 222 at ¶ 76; Doc. 250 at ¶ 76). On March 29, 2012, Nivisys assigned 2 its interest in the Credit Agreement to WWWT Enterprises, LLC (“WWWT”), a wholly- 3 owned subsidiary of First Texas. (Doc. 222 at ¶ 80; Doc. 250 at ¶ 80; see also Doc. 234 at 4 ¶ 6). 5 The parties agreed to settle the receivership suit in an agreement dated March 14, 6 2012 (the “Settlement Agreement”). In that agreement, Holdings agreed to surrender the 7 entirety of its membership interest in Industries to WWWT. (Doc. 222-4 at p. 134). Later, 8 on August 1, 2012, WWWT foreclosed on the Credit Agreement. It then entered into an 9 agreement with Industries in which Industries surrendered the collateral secured by the 10 Credit Agreement to WWWT in exchange for partial satisfaction of Industries’ debt (the 11 “Surrender Agreement”). (Doc. 233 at 3; Doc. 234 at Exhibit T; Doc. 234 at Exhibit A, 12 Deposition at 46:14–48:12; 50:15–17; 51:16–62:5). That same day, Industries and 13 Nivisys entered into a contract in which Nivisys agreed to perform certain of Industries’ 14 outstanding manufacturing obligations, in light of the fact that Industries no longer had 15 control of the assets it needed to fulfill them (the “Subcontract Agreement”). (Doc. 234, 16 Exhibit U). After its sales contract obligations had been met, Industries was liquidated 17 and ceased operations. (Doc. 222 at ¶ 120; Doc. 250 at ¶ 120). 18 B. 19 Against the backdrop of the facts described above, Industries entered into a 20 contract with Plaintiff, Airbus DS Optronics GmbH, a German corporation (“Airbus”). 21 Under that contract (“the Co-Operation Agreement”), Industries agreed to purchase, and 22 Airbus agreed to supply, certain components of an Industries product. (Doc. 234, Exhibit 23 WW). The Co-Operation agreement was initially effective for a two-year period 24 beginning in September 2008, and thereafter automatically renewed each year for four 25 additional years. (Doc. 234, Exhibit WW at 7). The Co-Operation Agreement Between Airbus and Industries 26 Industries breached the Co-Operation agreement in October 2011. (Doc. 234, 27 Exhibit O). Pursuant to the breach, a German court entered judgment against Industries 28 and awarded it attorneys’ fees and costs for a total amount of $1,269,290.05, plus interest -3- 1 at a rate of 10 percent per annum until paid. (Id.). That judgment was domesticated and 2 entered against Industries in Maricopa County Superior Court on April 16, 2014. (Id.). 3 Airbus now claims that First Texas, WWWT, and Nivisys are liable for the 4 judgment entered against Industries, arguing, inter alia, that the transfers of debt and 5 assets through the Credit Agreement, Settlement Agreement, and Surrender Agreement 6 were fraudulent. Plaintiff Airbus and defendants First Texas, WWWT, and Nivisys 7 (collectively “Defendants”) have each filed separate motions for summary judgment, in 8 addition to several non-dispositive motions. 9 II. Non-Dispositive Motions 10 A. 11 The Court first addresses Defendants’ joint motion seeking to exclude the 12 testimony of Airbus’s expert witness, Timothy Gay. (Doc. 268). In that motion, 13 Defendants argue Gay’s testimony is not admissible under any of the requirements for 14 expert testimony, including qualifications of the witness, knowledge, helpfulness of the 15 testimony, and the reliability of the foundational data. 16 17 18 19 20 Motion to Exclude Expert Witness Federal Rule of Evidence (“Rule”) 702 governs the admissibility of expert opinion testimony: A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: 21 (a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; 22 (b) the testimony is based on sufficient facts or data; 23 (c) the testimony is the product of reliable principles and methods; and 24 25 (d) the expert has reliably applied the principles and methods to the facts of the case. 26 Fed. R. Evid. 702(a)–(d). In Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 27 (1993), the Supreme Court explained that Rule 702 imposes a gatekeeping obligation 28 upon the trial court, requiring it to make a preliminary assessment of the admissibility of -4- 1 expert testimony. To fulfill that obligation, “the trial judge must ensure that any and all 2 [expert] testimony or evidence admitted is not only relevant, but reliable.” Id. at 589; see 3 also Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999) (applying Daubert 4 gatekeeping obligation to all expert testimony, not just scientific). Under Rule 702, the 5 Court must make separate determinations as to whether the expert is appropriately 6 qualified, whether his testimony is relevant, and whether his testimony is reliable. See 7 Daubert, 509 U.S. at 591; see also Mukhtar v. Cal. State Univ., 299 F.3d 1053, 1066 (9th 8 Cir. 2002) (indicating that reliability of an expert’s testimony is a distinct inquiry from 9 whether an expert is qualified). 10 1. Qualifications of Mr. Gay 11 Timothy Gay is a licensed Certified Public Accountant with a Bachelor’s degree in 12 accounting. (Doc. 282-2 at 33:24–334:3). He has had 45 years of accounting experience, 13 with emphases on business valuation and mergers and acquisitions. (Doc. 282-1 at 14 Exhibit D). Although the Court agrees with Defendants’ statement that Gay is not 15 qualified to testify as a legal expert (Doc. 268 at 3), it is satisfied that Gay has sufficient 16 “knowledge, skill, experience, training, [and] education” to serve as a financial expert in 17 this case. 18 2. Relevance of Mr. Gay’s Opinion 19 As to whether his testimony is relevant, Defendants argue that Gay’s expert report 20 veers away from the facts and improperly opines as to the proper application of the law 21 governing successor liability and alter ego. (Doc. 268). Upon review of the report, this 22 Court agrees. Mr. Gay’s expert report contains numerous examples of legal conclusions, 23 couched as Mr. Gay’s “opinions” as to ultimate issues of law. (See, e.g., Doc. 268-19 at 24 1–8; Doc. 268-20 at 1–20). Such expert testimony is inappropriate; an expert may not 25 undertake to “tell the jury what result to reach.” United States v. Duncan, 42 F.3d 97, 101 26 (2d. Cir. 1994). To the extent that Gay’s report seeks to offer legal opinions or 27 conclusions, those opinions are not admissible at trial. 28 Portions, however, of Gay’s expert report, in addition to his deposition testimony -5- 1 and rebuttal report, contain relevant and helpful opinions regarding the valuation of 2 assets. (See, e.g., Doc. 268–19 at 8–9). Contrary to Defendants’ argument, these opinions 3 are capable of offering “appreciable help” to the jury. See United States v.Gwaltney, 790 4 F.2d 1378, 1381 (9th Cir. 1986). As a result, the Court declines to exclude Gay as a 5 witness entirely. At trial, the parties may assert which portions of his opinion testimony 6 they seek to admit. Based on the purpose for which the opinions will be offered, the 7 Court will determine at that time whether the opinion is relevant. 8 3. Reliability of Mr. Gay’s Opinion 9 As to Defendants’ argument that Gay’s opinion is so unreliable as to be 10 inadmissible at trial, the Court declines to make such a ruling at the summary judgment 11 stage. Gay’s opinions are not entirely without foundation. His report cites to a lengthy list 12 of sources upon which he relied, including disclosure statements, tax returns, deposition 13 transcripts, third-party appraisals, and codified accounting standards. (Doc. 268-21 at 1– 14 11). These sources are sufficiently reliable to allow Gay to form a valid opinion. To the 15 extent that Defendants argue otherwise, they are free to cross-examine Gay as to his 16 sources and the basis for his opinions at trial. Similarly, Defendants also argue at great 17 length that Gay’s opinions are based on improper methodology. At trial, Defendants may 18 cross-examine Gay in an attempt to discredit his opinions and prove to the jury that his 19 methods were lacking, but the Court will not make such a determination at this stage. 20 B. 21 Defendants also filed objections to several of Airbus’ exhibits (Doc. 270), which 22 Airbus included in its controverting statement of facts to WWWT’s motion for summary 23 judgment (Doc. 250). The Court overrules Defendants’ relevance objections, and notes 24 that to the extent the documents may be irrelevant, the Court will not rely on them in 25 making its decision on summary judgment. See Quanta Indem. Co. v. Amberwood Dev. 26 Inc., No. CV-11-01807-PHX-JAT, 2014 WL 1246144, at *3 (D. Ariz. Mar. 26, 2014) 27 (discussing relevance objections at the summary judgment stage). For purposes of this 28 Order only, the Court also overrules Defendants’ objections as to improperly Defendants’ Objections and Airbus’s Motion to Strike -6- 1 authenticated documents. See id. at *2-*3 (discussing admissibility objections at the 2 summary judgment stage). Finally, to the extent that Defendants object to Timothy 3 Gay’s rebuttal expert report (Doc. 250-26, Exhibit Z), the objection is overruled for the 4 reasons stated in section A above. All objections are overruled without prejudice to a 5 party reasserting the objection, as appropriate, at trial. Because the Court overrules 6 Defendants’ objections, Plaintiff’s motion (Doc. 272) is denied as moot. 7 III. Summary Judgment Motions 8 The Court now addresses Airbus’s substantive arguments against Defendants. 9 Airbus asserts that summary judgment should be granted against defendants WWWT and 10 Nivisys under the theories of successor liability and fraudulent transfer of assets. (Doc. 11 233). WWWT and Nivisys have filed motions for summary judgment arguing that no 12 fraud exists and that successor liability does not apply. (Doc. 221, 230). Airbus also 13 argues that First Texas should be liable for Industries’ debt under the alter ego theory of 14 liability. (Doc. 232). First Texas has also filed a motion for summary judgment, arguing 15 alter ego liability is inapplicable as a matter of law. (Doc. 228). 16 Summary judgment is appropriate when “the pleadings, depositions, answers to 17 interrogatories, admissions on file, and any affidavits show that there is no genuine issue 18 as to any material fact and that the moving party is entitled to judgment as a matter of 19 law.” Assurance Co. of Am. v. Wall & Assocs. LLC of Olympia, 379 F.3d 557 (9th Cir. 20 2004) (citation omitted); see also Fed. R. Civ. P. 56(a). Initially, the party moving for 21 summary judgment has the burden of demonstrating to the Court the basis for and the 22 elements of the causes of action upon which summary judgment should be granted. 23 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the non- 24 movant to establish that a material dispute in fact exists. Id. The non-movant must show 25 more than “some metaphysical doubt as to the material facts;” instead, the non-movant 26 must “come forward with ‘specific facts showing that there is a genuine issue for trial.’” 27 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (emphasis 28 in original) (quoting Fed. R. Civ. P. 56(e) (1963) (amended 2010)). A “genuine” factual -7- 1 dispute exists if the evidence, and not only a party’s bare assertions, would allow a 2 reasonable jury to return a verdict in favor of the non-moving party. Anderson v. Liberty 3 Lobby, Inc., 477 U.S. 242, 248 (1986). Furthermore, the Court construes all disputed 4 facts in the light most favorable to the non-moving party. Ellison v. Robertson, 357 F.3d 5 1072, 1075 (9th Cir. 2004). 6 A. 7 Generally, when a company sells or transfers its assets to another, the successor 8 company is not responsible for the debts and liabilities of the former company. Warne 9 Invs., Ltd. v. Higgins, 195 P.3d 645, 651 (Ariz. App. 2008) (citing A.R. Teeters & 10 Assocs., Inc. v. Eastman Kodak Co., 836 P.2d 1034, 1039 (Ariz. App. 1992)). There is an 11 exception, however, when the successor: (1) expressly or impliedly agreed to assume the 12 liabilities of the former company, (2) is merely a merger or consolidated version of the 13 former company, (3) is a continuation or reincarnation of the former company, or (4) 14 transferred the assets for the fraudulent purpose of escaping liability for the former 15 company’s debts. A.R. Teeters, 836 P.2d at 1039; see also Winsor v. Glasswerks PHX, 16 LLC., 63 P.3d 1040, 1044 (Ariz. App. 2003). Airbus argues that all four of the successor 17 liability exceptions apply in this case; WWWT and Nivisys argue none of the exceptions 18 apply, and neither company is obligated to pay the judgment owed Airbus. The Court 19 must therefore address each exception in turn. 20 Successor Liability 1. Express or Implied Agreement to Assume Liability 21 To determine whether an express assumption of liability occurred, this Court 22 interprets and construes the written agreements between the parties. Schwartz v. Pillsbury 23 Inc., 969 F.2d 840, 845–46 (9th Cir. 1992) (explaining that “the analysis of whether a 24 contracting party has expressly assumed the liabilities of a seller begins by construing the 25 parties’ written agreements”). Airbus points to the Settlement Agreement between 26 Industries, Holdings, and Nivisys (Doc. 222-4 at 134), the Surrender Agreement between 27 Industries and WWWT (Doc. 234, Exhibit T), the Subcontract Agreement between 28 Industries and Nivisys (Doc. 234, Exhibit U), and the Co-Operation Agreement itself -8- 1 (Doc. 276-1, Exhibit WW), to argue that Defendants expressly assumed liability for the 2 debt to Airbus. 3 In the Settlement Agreement, Nivisys agreed to release Holdings from its 4 obligation under the Credit Agreement in exchange for 100 percent of its interest in the 5 membership units of Industries. (Doc. 222-4 at p. 135). Although Industries’ liability to 6 Airbus was disclosed to Defendants in the Settlement Agreement, the agreement contains 7 no language suggesting Defendants were agreeing to assume responsibility for that 8 liability. (Doc. 222-4 at p. 151, Exhibit C). 9 The Surrender Agreement between Industries and WWWT is the mechanism 10 through which WWWT foreclosed on the Credit Agreement. (Doc. 234, Exhibit T, p. 1). 11 The Surrender Agreement purported to transfer only the “secured collateral” in exchange 12 for partial satisfaction of Industries’ debt. (Id. at 1, § B). It makes no mention of the 13 Airbus Co-Operation Agreement, and therefore could not have included express 14 assumption of liability thereon. 15 The Subcontract Agreement between Industries and Nivisys sets forth an 16 arrangement whereby Nivisys would fulfill certain manufacturing obligations on 17 Industries’ behalf. The Subcontract Agreement did not bind Nivisys to fulfill Industries’ 18 purchasing obligations. Instead, it was an agreement by which Nivisys promised to 19 supply the products necessary to fulfill specific contracts and purchase orders under 20 which Industries was already bound. The Co-Operation Agreement is not listed within 21 those manufacturing obligations. (Doc. 234, Exhibit U, pp. 1, 12). 22 Finally, the language of the Co-Operation Agreement itself prohibits assigning 23 claims or rights under the agreement without prior written consent of the parties; Airbus 24 does not allege, nor does the evidence show, that it consented to any such assignment. 25 (See Doc. 276-1, Exhibit WW at 9.1). Therefore, the Court disagrees with Airbus’s 26 argument that the language of the Co-Operation Agreement made it binding on any future 27 owner of Industries without an express agreement between the parties. In short, there is 28 no evidence in the record to support a finding that any defendant expressly accepted -9- 1 responsibility for Industries’ debt.2 2 Airbus also argues that Nivisys impliedly agreed to assume Industries’ obligations 3 under the Co-Operation Agreement. Neither party has cited, nor has the Court located, an 4 Arizona case setting forth a precise rule that governs a finding of implied liability, but 5 other states with similar fraud statutes have found relevant facts include whether the 6 successor’s conduct shows intent to assume the debt. See United States v. Sterling 7 Centrecorp, Inc., 960 F. Supp. 2d 1025, 1038 (E.D. Cal. 2013) (explaining that implied 8 assumption is a question of fact to be “inferred from the conduct” of the parties outside of 9 any official agreement); Bird Hill Farms, Inc. v. U.S. Cargo & Courier Serv., Inc., 845 10 A.2d 900, 905 (Pa. 2004). 11 Airbus claims Nivisys accepted benefits under the Co-Operation Agreement after 12 it acquired the assets of Industries. (Doc. 233 at 6; see Doc. 266 at 7). Specifically, 13 Airbus argues that Nivisys continued to “utilize the ‘Carl Zeiss’ brand name on its 14 website and marketing materials,” a benefit Airbus asserts was only bestowed upon 15 Nivisys under the terms of the Co-Operation Agreement. (Doc. 233 at 7 n.2; Doc. 266 at 16 7). Defendants argue the use of the Carl Zeiss name was not the kind of beneficial use 17 contemplated by the Co-Operation Agreement, but rather a “permissible fair use” that did 18 not require permission. The Court agrees with Defendants. The evidence provided by 19 Airbus shows Nivisys using the phrase “Developed by Carl Zeiss Optronics” to describe 20 a feature of its products. (Doc. 234, Ex. CC). This constitutes the “classic fair use case,” 21 because Nivisys was using the Carl Zeiss name to describe a component of the product 22 produced by Carl Zeiss. See New Kids on the Block v. News Am. Pub., Inc., 971 F.2d 302, 23 308 (9th Cir. 1992). 24 Airbus also contends that Nivisys impliedly assumed the Co-Operation Agreement 25 by taking on, among other things, the obligation to pay outstanding employee benefits 26 27 28 2 Airbus also seems to argue that the Court should find Defendants expressly assumed Industries’ liability to Airbus because there was no express disclaimer thereof. (Doc. 322 at 4). The Court finds this argument unavailing; the lack of a refusal to assume debts does not prove an express agreement to assume debts. - 10 - 1 and honor product warranties issued by Industries. (Doc. 233 at 7). But employee benefits 2 and product warranties are not included under or relevant to the Co-Operation Agreement 3 between Airbus and Industries. That Nivisys may have voluntarily assumed some of 4 Industries’ obligations does not show, as a matter of law, that it impliedly agreed to take 5 on all of its obligations. See Sonoran Res., LLC v. Oroco Res. Corp., 2015 WL 11089497 6 at *4 (D. Ariz. Apr. 17, 2015) (citing Allstate Ins. Co. v. Countrywide Fin. Corp., 842 F. 7 Supp. 2d 1216, 1230 (C.D. Cal. 2012)) (“A corporation does not assume all of its 8 subsidiary’s debts when it chooses to voluntarily pay for a portion of those debts.”). 9 Airbus has not presented evidence to show that Nivisys impliedly assumed Industries’ 10 contractual obligations under the Co-Operation Agreement itself. Accordingly, the Court 11 finds no genuine issue of fact, and holds that no reasonable jury could find there was an 12 express or implied assumption of Industries’ debt. 13 2. Mere Continuation3 14 When a successor company is “substantially the same as the predecessor,” 15 successor liability may be imposed to prevent companies from avoiding debts through 16 mere changes in form. Warne Invest., 195 P.3d at 651–52 (quoting Gladstone v. Stuart 17 Cinemas, Inc., 878 A.2d 214, 222 (Vt. 2005)). Airbus argues that Nivisys is substantially 18 the same, or a “mere continuation,” of Industries. (Doc. 322 at 4.) To determine whether 19 a successor company is a mere continuation of the original, the Court asks: (1) whether 20 there was “insufficient consideration” to support the transfer of assets from one company 21 to the next, and (2) whether there is a “substantial similarity in the ownership or control” 22 of the two companies. Teeters, 836 P.2d at 1040. 23 a. Insufficient Consideration 24 Airbus’s argument that Defendants paid inadequate consideration for the assets of 25 Industries has two parts. First, Airbus contends the Settlement Agreement amounted to a 26 3 27 28 Relying on the same rules for determining mere succession, Airbus also argues that a de facto merger occurred between Nivisys and Industries. Because Airbus asserts that the same rules govern a finding of de facto merger and a finding of mere continuation, the Court will analyze only whether Defendants were mere continuations of Industries. - 11 - 1 “full discharge” of Industries’ debt to WWWT. As a result, Airbus argues the debt 2 purportedly extinguished by the Surrender Agreement did not actually exist at the time 3 that agreement was executed, meaning the Surrender Agreement had no consideration. 4 (Doc. 233 at 14). 5 Citing A.R.S. § 47-9620, Airbus asserts that because Industries did not expressly 6 consent to a partial discharge of the Credit Agreement, the debt thereunder must have 7 been fully discharged such that it no longer existed after the execution of the Settlement 8 Agreement. (Doc. 233 at 13; Doc. 249 at 6). This Court disagrees and finds the 9 Settlement Agreement sufficient to show express consent to a partial discharge. The 10 Settlement Agreement provided that Holdings would be released from further obligation 11 under the Credit Agreement in exchange for 100 percent of its membership interest in 12 Industries, in addition to $200,000 in consideration. The Settlement Agreement went on 13 to clarify that “WWWT is not releasing Nivisys Industries or Nivisys IC-DISC from any 14 claims that WWWT may have against either party that arise from the Credit Agreement.” 15 (Doc. 222-4 at ¶ 6; ¶ 11(a)). The portion of the Settlement Agreement on which Airbus’s 16 argument relies deals only with how certain parties to the agreement (who are not a part 17 of the current suit) would treat the result of the settlement for tax purposes, not whether 18 any party’s obligation to WWWT was extinguished. (Id. at ¶ 13(b)–(c); see also Doc. 258 19 at 12; Doc. 260 at 14). Industries, as a business entity separate and distinct from 20 Holdings, was still obligated to WWWT under the Credit Agreement at the time the 21 Surrender Agreement was executed.4 22 Nevertheless, the Court must also determine whether the debt discharged in 23 consideration for the Surrender Agreement was insufficient. Teeters, 836 P.d2d at 1040. 24 The debt discharged by the Surrender Agreement amounted to over $4.8 million, in 25 exchange for “most of [Industries’] assets” (defined in the agreement as “personal 26 4 27 28 Airbus asserts that the fact WWWT was both an owner and a creditor of Industries necessitates a conclusion that WWWT was attempting to escape Industries’ debt. Although this argument is relevant to Airbus’s fraud claims, the Court does not find that it is relevant to determine whether sufficient consideration was paid for the assets of Industries. - 12 - 1 property”). (Doc. 222-4 p. 11 (Walsh Declaration); Doc. 234. Exhibit T at ¶ 2). Airbus 2 argues WWWT paid nothing for the intangible asset of Industries’ goodwill, therefore 3 rendering the consideration paid inadequate as a matter of law. Airbus bases its argument 4 on the deposition testimony of Defendants’ valuation expert, in which he stated that 5 goodwill was not a part of the assets transferred by the agreement: “[t]here’s no value on 6 goodwill. You don’t sell goodwill.” (Doc. 234, Exhibit MM, at 68:3–4). 7 In support of its argument, Airbus cites Idearc Media, LLC v. Palmisano & 8 Associates, P.C., 929 F. Supp. 2d 939 (D. Ariz. 2013), for the contention that if any 9 intangible property is transferred with the business assets, the consideration paid for the 10 transfer must reflect the value thereof. (Doc. 233 at 15). Idearc involved the sale and 11 purchase of a law firm for which the successor firm paid only $2,500. 929 F. Supp. 2d at 12 949. That amount was purportedly in consideration for the firm’s tangible assets, 13 including a computer, office equipment, and a telephone line. Id. The Court found that 14 $2,500 was insufficient because it discounted the value of the intangible assets: namely, 15 the “knowledge and skill” of the key employee. Id. The Court also explained that because 16 the vast majority of the firm’s value was represented by that intangible property, allowing 17 the successor to escape liability by reorganizing and “simply [ ] arguing that the tangible 18 assets of the business were de minimis” ran contrary to the very purpose of the successor 19 liability exceptions. Id. at 950; see also Warne Invest. 195 P.3d at 651 ¶ 20 (finding the 20 mere continuation exception applied to an asset transfer because no consideration was 21 paid for intangible assets when “both companies were service businesses that did not 22 generate revenue from the use of tangible assets[.]”) 23 The facts here are significantly different. Airbus has neither shown nor argued that 24 Industries was a company whose value was based exclusively or primarily on intangible 25 assets. Therefore, in order to show that the consideration paid was inadequate as a matter 26 of law, Airbus must prove beyond genuine dispute the value of Industries’ goodwill at the 27 time of the transfer. It has not done so. In his report, Defendant’s expert valued the assets 28 surrendered at $4.4 million, and concluded that the $4.8 million consideration given by - 13 - 1 WWWT and Nivisys was “reasonable and commensurate” with the value received. (Doc. 2 262-2 at Exhibit 2a, p. 38). In light of this testimony, the Court declines to find that the 3 consideration paid for the Surrender Agreement was insufficient as a matter of law. 4 Neither, however, can the Court grant summary judgment in favor of Defendants 5 on the issue of sufficient consideration. Despite the conclusion of Defendants’ valuation 6 expert, Plaintiff’s expert concluded in his rebuttal report that the assets surrendered were 7 worth more than $13 million at the time of the transfer. (Doc. 250-26 at 7). If the jury 8 accepts Plaintiff’s expert’s testimony, it may reasonably determine that the consideration 9 paid for the asset transfers was insufficient. The Court therefore finds that a genuine 10 dispute of material fact exists as to this issue, and it denies all motions for summary 11 judgment in relevant part. 12 b. Substantial Similarity in Ownership and Control 13 Because the Court finds there is a question of fact as to whether the consideration 14 was sufficient to support the asset transfers, the Court cannot grant judgment in favor of 15 either party on the issue of mere continuation; therefore, it need not address whether there 16 was substantial similarity in ownership and control. See A.R. Teeters & Assocs., 836 P.2d 17 at 1040 (quoting Malone v. American Pharm. Co., 207 Cal. App. 282, 287 (1989)) 18 (explaining that “before one corporation can be said to be a mere continuation or 19 reincarnation of another it is required that there be insufficient consideration running 20 from the new company to the old”). At trial, the jury must determine whether there was a 21 substantial similarity between the ownership and control of the companies. 22 3. Fraudulent Purpose 23 Finally, Airbus argues successor liability should apply because the asset transfers 24 were fraudulent under Arizona’s Uniform Fraudulent Transfer Act (UFTA). See A.R.S. § 25 44-1001 et seq; see also A.R. Teeters, 836 P.2d at 1039 (imposing successor liability if 26 the asset transfers were fraudulent under state law). Under UFTA, fraudulent transfers are 27 divided into two subcategories: constructive and actual. Hullett v. Cousin, 63 P.3d 1029, 28 1031 (Ariz. 2003). - 14 - 1 a. Constructive Fraud 2 A transfer is constructively fraudulent if the debtor made it “without receiving a 3 reasonably equivalent value in exchange” and “the debtor was insolvent at that time or 4 became insolvent as a result of the transfer.” A.R.S. § 44-1005. The parties do not dispute 5 that Industries was either insolvent at the time of the transfer (Defendant’s position) or 6 that the transfer rendered Industries insolvent (Airbus’s position). Therefore, the Court 7 must determine whether reasonably equivalent value was paid to support the asset 8 transfers. 9 As explained in § III(A)(2)(a) above, this Court finds that a genuine issue of fact 10 exists regarding whether the asset transfers were supported by adequate consideration. 11 Similarly, the Court finds a question of fact exists as to whether reasonably equivalent 12 value was exchanged. For the purposes of UFTA, “inadequacy of price does not mean a 13 difference of opinion as to price, but a consideration so far short of the real value of the 14 property as to startle a correct mind or shock the moral sense.” Zellerbach Paper Co. v. 15 Valley Nat’l Bank, 477 P.2d 550, 555 (Ariz. App. 1970). Because neither party has 16 shown, as a matter of law, the value of the assets transferred, this Court cannot determine 17 whether the price exchanged for the assets was so disparate as to shock or startle. Id. The 18 Court therefore denies, in relevant part, each party’s motion for summary judgment on 19 the constructive fraud claims. 20 b. Actual Fraud 21 Next, the Court addresses Airbus’s argument that the transfers were actual fraud 22 under A.R.S. § 44-1004. As a preliminary matter, the Court reject’s Defendants’ 23 argument that Airbus did not adequately allege actual fraud under A.R.S. § 44- 24 1004(A)(1). (Doc. 258 at 10; Doc. 260 at 2–4). The significant difference between a 25 claim for constructive fraud under A.R.S. § 1005 and actual fraud under A.R.S. § 1004 is 26 the mindset required: the defendant must have acted with “actual intent.” See A.R.S. § 27 44-1004(A)(1). And under Rule 9(b), “[m]alice, intent, knowledge, and other conditions 28 of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b); see also Premier - 15 - 1 Financial Servs. v. Citibank, 912 P.2d 1309, 1315 (Ariz. App. 1995) (“Direct proof of 2 fraud, however, is not required.”). The allegations contained in the second amended 3 complaint outline generally several of the indicators of fraudulent intent enumerated by § 4 44-1004(B). Therefore, the complaint’s allegations are sufficiently particular to support 5 an allegation of actual fraud.5 6 UFTA requires that Defendants acted with “actual intent to hinder, delay, or 7 defraud any creditor of the debtor.” A.R.S. § 44-1004(A).6 Airbus, therefore, must 8 present “clear and satisfactory evidence” of Defendants’ fraudulent intent. Gerow v. 9 Covill, 960 P.2d 55, 63 (App. 1998). UFTA outlines 11 non-exclusive factors to consider 10 in determining whether there was fraudulent intent, including: 11 1. The transfer or obligation was to an insider. 12 2. The debtor retained possession or control of the property transferred after the transfer. 13 3. The transfer or obligation was disclosed or concealed. 14 15 4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. 16 5. The transfer was of substantially all of the debtor's assets. 17 6. The debtor absconded. 18 7. The debtor removed or concealed assets. 19 8. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. 20 21 22 23 24 25 26 27 28 5 Defendants also argue that UFTA does not apply because the only assets transferred under any of the transactions at issue were transferred pursuant to the enforcement of a valid security interest. See A.R.S. § 44-1001(1)(a) (defining an asset as property except “to the extent that it is encumbered by a valid lien.”). But Airbus’ position is that fraud tainted the entirety of the transactions involved here, not just the transfer of physical assets. Moreover, the statutory reach of UFTA is broad, and “clearly includes any transaction in which a property interest was relinquished.” Kaufmann v. M & S Unlimited, LLC, 121 P.3d 181, 184 (Ariz. App. 2005). Accordingly, the Court finds that UTFA applies. 6 Actual fraud may also be present if the transfer was made without the receipt of “reasonably equivalent value” in return. A.R.S. § 44-1004(A). The Court has already determined that a question of fact exists as to whether the consideration for the asset transfers was reasonable. See also A.R.S. § 44-1008(E)(2). - 16 - 1 2 9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. 3 10. The transfer occurred shortly before or shortly after a substantial debt was incurred. 4 11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A.R.S. § 44-1004(B). Even when the factors above weigh in favor of finding fraud, they are nonetheless not conclusive. Premier Financial, 912 P.2d at 1313 n.2. They are merely indicia from which fraud may be inferred. Id. Airbus has presented evidence of the factors indicating fraud in this case. For example, the transactions in question were all made among wholly-owned insiders (Doc. 234, ¶ 5, 16), the asset transfers were not disclosed to Airbus after they were made (Doc. 234, ¶ 56), the Surrender Agreement transferred substantially all of Industries’ assets (Doc. 222, ¶ 119; Doc. 231, ¶ 43; Doc. 234, ¶ 38), and the parties agree that Industries was insolvent or became insolvent shortly after the transfer was made (Doc. 222, ¶¶ 10– 40). Accordingly, Airbus has established a prima facie case for fraud. But Defendants have also offered evidence to refute a finding of fraud: for example, they have presented evidence that the transfers were made for adequate consideration. See supra § III(A)(2)(a). A finding of “actual intent” as a matter of law is appropriate only if the evidence presents no genuine issue of fact. See In Re Beverly, 374 B.R. 221, 235 (9th Cir. BAP 2007) (noting “actual intent” under the UFTA is a typically a question of fact). Viewing the evidence in the light most favorable to the non-moving party, the Court finds a genuine issue of material fact exists as to actual intent. Thus, the Court declines to enter summary judgment in either party’s favor.7 26 27 28 7 Similarly, because questions of fact exist as to whether the asset transfers were made for a fraudulent purpose, questions of fact also exist as to whether the security interests purportedly transferred thereby were valid. Accordingly, the Court cannot enter summary judgment on WWWT’s counterclaims. - 17 - 1 B. 2 Airbus’s fraudulent transfer claims are governed by the same rules for a finding of 3 fraud to impose successor liability. See A.R.S. § 44-1001, et. seq. The Court therefore 4 adopts its reasoning from above and declines to enter summary judgment in favor of any 5 party on the issue of fraudulent transfer. Fraudulent Transfer Claims 6 C. 7 Next, the Court addresses the parties’ motions for summary judgment regarding 8 whether First Texas may be held liable for the allegedly fraudulent transfers as the alter 9 ego of WWWT and Nivisys. The parties argue, at some length, about the effect this 10 Court’s ruling on the Motion to Dismiss (Doc. 195) had on Airbus’s alter ego claim. In 11 that Order, the Court agreed with Defendants that alter ego is not a standalone cause of 12 action in Arizona, but must be tied to a substantive claim as a “basis for relief.” (Doc. 195 13 at 5). But the Court also found that Airbus had sufficiently pleaded alter ego as it related 14 to the claims of fraudulent transfer. The Court’s Order stated, in relevant part: 15 16 17 18 19 20 21 22 Alter Ego Liability The Court must first determine which of Defendants’ “corporate forms” the SAC seeks to disregard, and for which substantive claims. Plaintiff pleads that the “observance of the corporate form of WWWT, Nivisys, and Nivisys Industries would work substantial injustice on” Plaintiff and that “the corporate veil of WWWT, Nivisys, and/or Nivisys Industries should be pierced and disregarded such that their respective members and parent companies are liable for the debt owed to” Plaintiff. (Doc. 112 at 7). Plaintiff must tie this theory of derivative liability to a substantive cause of action in the SAC; it cannot seek to reach Nivisys Industries’ members for the judgment domesticated in Maricopa County Superior Court. The SAC contains claims of fraudulent transfer . . . . 25 Plaintiff’s fraudulent transfer claim is asserted against WWWT and/or Nivisys and Nivisys Industries as the transferor and transferee in certain transactions, (Doc. 112 at 6), but Plaintiff seeks to hold First Texas derivatively liable for the acts of its subsidiaries. (Id. at 6-7, 8). Thus, Plaintiff seeks to disregard the corporate form of WWWT and Nivisys[.] 26 (Doc. 195 at 6). Consistent with that Order, the Court will now undertake to determine 27 whether Airbus has presented sufficient facts to establish, as a matter of law, “that First 28 Texas should be held derivatively liable for WWWT’s and/or Nivisys’s [allegedly] 23 24 - 18 - 1 fraudulent transfers.” (Id.) (footnote omitted). 2 Generally, corporations are treated as separate legal entities unless “sufficient 3 reason appears to disregard the corporate form.” Dietel v. Day, 492 P.2d 455, 457 (Ariz. 4 App. 1972). A corporate entity should be disregarded only when there is evidence to 5 show that: (1) the parent company exerts control over the subsidiary companies such that 6 the separateness of the subsidiaries has ceased, and (2) observing the corporate fiction 7 would sanction injustice or fraud. Keg Restaurants Arizona, Inc. v. Jones, 375 P.3d 1173, 8 1180 (Ariz. App. 2016); see also Loiselle v. Cosas Mgmt. Grp., 228 P.3d 943, 950 (Ariz. 9 App. 2010). 10 To establish that the separateness of the three companies had ceased, Airbus must 11 show that First Texas had “substantially total control” over WWWT and Nivisys. Keg 12 Restaurants, 375 P.3d at 1182 (quoting Oldenburger v. Del E. Webb Dev. Co., 765 P.2d 13 531, 536 (Ariz. App. 1988)); Taeger v. Catholic Family & Cmty. Servs., 995 P.2d 721, 14 733 (Ariz. App. 1999). Substantially total control can be proven through factors 15 including, inter alia, stock ownership by the parent, the existence of common officers or 16 directors, a failure to maintain corporate formalities necessary for a separate corporate 17 existence, and the parent’s payment of salaries or other expenses for the subsidiary. 18 Gatecliff v. Great Republic Life Ins. Co., 821 P.2d 725, 728 (Ariz. 1991). 19 Here, there is no genuine dispute that First Texas wholly owns both WWWT and 20 Nivisys. (See Doc. 261 at 4–5). There is also a substantial similarity between the directors 21 and officers of all three companies. At all relevant times, Thomas Walsh was the CEO 22 and sole director of First Texas, the President and sole manager of WWWT, and the 23 manager of Nivisys. (Doc. 234 at 7–8). Daniel Duarte was the CFO of First Texas, the 24 Secretary of WWWT (until August 15, 2012), and the Secretary and co-Manager of 25 Nivisys (Id.). But these facts alone do not prove that First Texas had actual control over 26 the decisions of WWWT and Nivisys. The parties have also presented conflicting 27 evidence regarding whether corporate formalities were observed. For example, Airbus 28 points to a laundry list of mistakes regarding who had the authority to act on behalf of - 19 - 1 which company and when. (Doc. 232 at 9). But Airbus has presented no evidence that 2 these mistakes were coupled with a failure to observe formalities such as meetings, 3 voting, or minutes; and Defendants have presented evidence that the three companies 4 maintained separate financial reporting. See Honeywell, Inc. v Arnold Const. Co., Inc., 5 654 P.2d 301, 307 (Ariz. App. 1982) (finding no merger of corporate identity when “the 6 formalities of corporate meeting were observed and the books were kept in some form of 7 order”); Seymour v. Hull & Moreland Engineering, 606 F.2d 1105, 1112 (9th Cir. 1979) 8 (finding a corporate shield was adequate when the parent and subsidiaries kept separate 9 financial records). Airbus also claims that First Texas, through a third subsidiary 10 company not included in this action, managed payroll and financial disbursements on 11 behalf of Nivisys. (Doc. 232 at 9). But Airbus has put forth no evidence to show that this 12 management included a co-mingling of funds or amounted to financing the activities of 13 Nivisys. See Honeywell, 654 P.2d at 307. 14 Moreover, Airbus must also prove that observing the corporate form of First 15 Texas, WWWT, and Nivisys would sanction fraud. Keg Restaurants, 375 P.3d at 1182. 16 This Court has already determined questions of fact exist as to whether the conduct in 17 question was undertaken with fraudulent intent, see supra § III(B)(3)(b), and the motions 18 for summary judgment on the alter ego claims similarly raise material questions of fact as 19 to whether fraud occurred. Accordingly, the Court denies the motions for summary 20 judgment on the issue of whether First Texas may be held liable for the actions of 21 WWWT and Nivisys under the theory of alter ego liability. 22 IV. Conclusion 23 The Court finds that material questions of fact exist on Airbus’s claims and as to 24 WWWT’s counter-claims in this case. At trial, the following issues remain to be 25 determined by the jury: (1) whether Nivisys is a mere continuation or merger of 26 Industries; (2) whether the transfer of assets was for the fraudulent purpose of escaping 27 liability for Industries’ debts; (3) whether the asset transfers were constructively 28 fraudulent because they were not made in exchange for reasonably equivalent value; (4) - 20 - 1 whether the asset transfers were undertaken with actual intent to defraud Airbus as a 2 creditor of Industries; and (5) whether alter ego liability should apply. 3 Accordingly, 4 IT IS ORDERED that WWWT Enterprises’ motion for summary judgment (Doc. 5 6 7 221) is GRANTED as to assumption of liability, and DENIED in all other respects. IT IS FURTHER ORDERED that First Texas Holdings’ motion for summary judgment (Doc. 228) is DENIED. 8 IT IS FURTHER ORDERED that Nivisys, LLC’s motion for summary 9 judgment (Doc. 230) is GRANTED as to assumption of liability, and DENIED in all 10 11 12 other respects. IT IS FURTHER ORDERED that Plaintiff Airbus DS’s motion for summary judgment as to alter ego (Doc. 232) is DENIED. 13 IT IS FURTHER ORDERED that Plaintiff Airbus DS’s motion for summary 14 judgment as to defendants Nivisys, LLC and WWWT Enterprises (Doc. 233) is 15 DENIED. 16 17 18 IT IS FURTHER ORDERED that the motion to exclude expert Timothy Gay (Doc. 268) is denied (without prejudice to raising appropriate objections at trial). IT IS FINALLY ORDERED that Plaintiff’s motion to strike Defendants’ 19 objections (Doc. 272) is DENIED as moot. 20 Dated this 31st day of March, 2017. 21 22 23 24 25 26 27 28 - 21 -

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