Hart Interior Design LLC 401(k) Profit Sharing Plan v. Recorp Investments Incorporated et al

Filing 103

ORDER: Plaintiff's Motion for Partial Summary Judgment 81 is GRANTED. Defendants' Motion for Summary Judgment 83 is DENIED. Plaintiff's Motion to Strike 86 is DENIED. Plaintiff's Motion to Bifurcate Case and Stay 94 is GRA NTED IN PART AND DENIED IN PART. The Clerk of Court is directed to stay this action. Plaintiff's Motion to Disregard New Arguments 95 is GRANTED IN PART AND DENIED IN PART. The parties are to file a joint status report on or before July 25, 2018, and every 90 days thereafter until the stay has been lifted, or the Court rules otherwise. Signed by Judge G Murray Snow on 4/26/2018. (REK)

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WO

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Hart Interior Design LLC 401(k) Profit
Sharing Plan,

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No. CV-16-02347-PHX-GMS
ORDER

Plaintiff,

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v.

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Recorp Investments Incorporated, et al.,

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Defendants.

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Pending before the Court are Plaintiff’s Motion for Partial Summary Judgment,

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(Doc. 81), Defendants’ Motion for Summary Judgment, (Doc. 83), Plaintiff’s Motion to

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Strike, (Doc. 86), Plaintiff’s Motion to Bifurcate Case and Stay, (Doc. 94), and Plaintiff’s

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Motion to Disregard New Arguments, (Doc. 95). The Court rules as follows on these

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motions as further explained below.

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BACKGROUND

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On June 30, 2000, Paul B. Maniatis organized Carinos Properties, LLC

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(“Carinos”). (Doc. 82 ¶¶ 1, 3). Carinos’s original Operating Agreement states, “This

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Company has been formed to engage in purchasing, financing, refinancing, developing,

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managing, operating, selling, exchanging or otherwise disposing of real property, and

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may engage in any other activities that may be lawfully engaged in by limited liability

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companies.” (Doc. 84 ¶ 63, Doc. 84-1 Exh. A).1 Carinos was managed by another of Mr.

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The Plaintiff requested that the Court strike portions of Defendants’ Statement of
Facts in Document 84-1 for violating the Court’s case management order. (Doc. 86).
The Court denies the motion and considers the disputed material as an index to the

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Maniatis’s entities—Defendant Recorp Investments, Inc. (“RII”). (Doc. 82 ¶ 3). On

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August 9, 2000, Plaintiff Hart Interior Design, LLC 401(k) Profit Sharing Plan (“the

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Plan”), acquired a 28 percent membership interest in Carinos. (Doc. 82 ¶ 6).

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In September 2000, Carinos purchased more than 1,250 acres of property near

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Albuquerque, New Mexico, where five other of Mr. Maniatis’s entities owned the

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surrounding 9,750 acres. (Doc. 84 ¶¶ 18–19). In June 2001, Mr. Gary Lane of the

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related company Recorp Management Inc. submitted the “Rio West Community Master

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Plan” for the 12,000 acres to establish “land use designations and regulations, intensities,

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provisions for public facilities, design regulations, phasing schedules, and procedures for

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administration and implementation.” (Doc. 84-1 Exh. C). Although the trustee of the

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Plaintiff, Ms. Athena Hart-Kolle, generally knew about the Rio West Community, she

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understood that Carinos’s purpose was simply to “purchase land, hold it and sell it.”

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(Doc. 82-8, Exh. 7).

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In 2006, Recorp Inc. (a non-existent entity that was allegedly used to refer to all of

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the Maniatis companies with a stake in Rio West) acquired interests in deep well

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groundwater appurtenant to the Maniatis-owned properties, and in 2007, Recorp Inc.

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executed a memorandum of understanding with the local county to develop the deep

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water wells. (Doc. 84 ¶¶ 25–33). Recorp Inc. continued to develop the water interests,

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and two water wells were drilled on Carinos’s property.

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Defendant IMH Financial Corporation (“IMH”) is an institutional real estate

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lender and investor that loaned money to Mr. Maniatis. (Doc. 84 ¶¶ 4, 6). In 2010, Mr.

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Maniatis defaulted on these loans, and in 2012, IMH won a multi-million dollar judgment

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against Mr. Maniatis in Arizona state court. (Doc. 84 ¶¶ 6, 8). As part of the judgment,

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Mr. Maniatis transferred ownership of RII to a wholly-owned IMH entity named

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Stockholder, LLC, and the state court appointed David M. Reaves to serve as the receiver

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over Stockholder. (Doc. 84 ¶¶ 10–11). Since this transfer and appointment in June 2013,

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IMH is the sole member of Stockholder, and Stockholder is the sole shareholder of RII.

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exhibits and does not consider the short descriptions as additional statements of fact.
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(Doc. 84 ¶ 12). Also, as a result of the winding up of Mr. Maniatis’s estate, IMH

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affiliates gained a 36 percent membership interest in Carinos. (Doc. 84 ¶ 16).

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In short, IMH owns Stockholder; Stockholder owns RII; and RII manages Carinos.

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IMH owns 36 percent of the membership interest in Carinos, and the Plan owns 28

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percent of the same.

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In November 2015, an IMH subsidiary sued Carinos and other Recorp entities in

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New Mexico state court to recover funds due on an alleged secured debt executed by

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Maniatis in 2010. (Doc. 84 ¶ 47). In February 2016, IMH sued Carinos in Arizona state

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court to recover unpaid management fees that Carinos should have paid RII, as well as

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unpaid funds on an alleged unsecured debt. (Doc. 84 ¶ 49). Neither Carinos nor RII has

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had any income or funds since at least the filing of the lawsuits in the two states. (Doc.

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84 ¶ 54). Consequently, RII notified Carinos’s members that Carinos lacked sufficient

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funds to defend itself, (Doc. 84 ¶ 53), and the Plan subsequently intervened to defend

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Carinos against the IMH lawsuits. (Doc. 84 ¶ 60).

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In the underlying state lawsuits, the Plan challenges the legitimacy and amounts of

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Carinos’s alleged unpaid debts to IMH and RII. (Doc. 91 ¶¶ 15–29). The Plan claims

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that IMH and RII knew that Carinos could not pay the alleged debts or defend the

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lawsuits, and the lawsuits would therefore cause Carinos to be in default. (Doc. 91 ¶¶

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28–29). IMH could then obtain a judgment lien against Carinos’s properties. (Doc. 29).

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Plaintiff Plan intervened in the Arizona and New Mexico litigations and Carinos did not

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default. (Doc. 84 ¶ 60).

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Plaintiff is a qualifying plan under the Employee Retirement Income Security Act

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(“ERISA”). In the present lawsuit, Plaintiff alleges that RII and IMH are fiduciaries

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under ERISA, and that their actions surrounding the New Mexico and Arizona lawsuits

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breached their duties. (Doc. 29). Plaintiff’s Motion for Partial Summary Judgment and

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Defendants’ Motion for Summary Judgment both concern the ERISA fiduciary claim and

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are presently before the Court.

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DISCUSSION
I.

Legal Standard

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The Court grants summary judgment when the movant “shows that there is no

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genuine dispute as to any material fact and the movant is entitled to judgment as a matter

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of law.” Fed. R. Civ. P. 56(a). In making this determination, the Court views the

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evidence “in a light most favorable to the non-moving party.”

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Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). Where the parties have filed cross-motions

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for summary judgment, the Court “evaluate[s] each motion independently, ‘giving the

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nonmoving party in each instance the benefit of all reasonable inferences.’” Lenz v.

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Universal Music Corp., 815 F.3d 1145, 1150 (9th Cir. 2015) (quoting ACLU v. City of

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Las Vegas, 333 F.3d 1092, 1097 (9th Cir. 2003)).

Warren v. City of

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“[A] party seeking summary judgment always bears the initial responsibility of

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informing the district court of the basis for its motion, and identifying those portions of

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[the record] which it believes demonstrate the absence of a genuine issue of material

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fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).2 The party opposing summary

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judgment “may not rest upon the mere allegations or denials of [the party's] pleadings,

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but . . . must set forth specific facts showing that there is a genuine issue for trial.” Fed.

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R. Civ. P. 56(e); see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

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586–87 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).

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Substantive law determines which facts are material, and “[o]nly disputes over facts that

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might affect the outcome of the suit under the governing law will properly preclude the

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entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

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“A fact issue is genuine ‘if the evidence is such that a reasonable jury could return a

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The Plaintiff asked the Court to disregard new arguments made for the first time
in reply briefings. (Doc. 95). The Court grants the motion in part and denies the motion
in part. Courts should not consider new arguments presented in a reply brief, see Provenz
v. Miller, 102 F.3d 1478, 1483 (9th Cir. 1996), but courts should allow parties to support
arguments made in the original motion and rebut arguments made in the opposition’s
response. See Rawls v. Maricopa Cty., 2010 WL 2927309 at *1 (D. Ariz. July 23, 2010).
Therefore, the Court will not consider truly new arguments made in either parties Reply
briefs, but it will consider arguments that either support original arguments or rebut
counterarguments.
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verdict for the nonmoving party.’” Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054,

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1061 (9th Cir. 2002) (quoting Anderson, 477 U.S. at 248).

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II.

Analysis

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A.

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The Employee Retirement Income Security Act (“ERISA”) “governs the

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administration of employer-provided benefit pension plans.” Metro. Life Ins. Co. v.

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Parker, 436 F.3d 1109, 1111 (9th Cir. 2006). The ERISA statute defines a fiduciary as a

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person who exercises any discretionary authority respecting management of a plan’s

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assets, renders investment advice for a fee to the plan, or has any discretionary authority

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in the administration of the plan. 29 U.S.C. § 1002(21)(A)(i)–(iii). In short, a fiduciary

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is “someone acting in the capacity of manager, administrator, or financial adviser to a

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‘plan.’”

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1002(21)(A)(i)–(iii)). This definition is “functional rather than formal” and depends on

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the person’s exercise of discretionary authority instead of any designations as a fiduciary.

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Parker v. Bain, 68 F.3d 1131, 1139–40 (9th Cir. 1995); see also Santomenno v.

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Transamerica Life Ins. Co., 883 F.3d 833, 837 (9th Cir. 2018) (holding that a party not

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named in the plan may be a functional fiduciary if it exercises discretionary authority of

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plan assets as described in 29 U.S.C. § 1002(21)(A)). As described in Section II.B, infra,

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if an ERISA plan holds 25 percent or more of the value of equity interests in an entity,

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then the plan’s assets include the underlying assets of the entity, and any person “who

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exercises authority or control respecting the management or disposition of such

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underlying assets . . . is a fiduciary of the investing plan.”

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101(a)(2)(ii). Neither party disputes that the Plaintiff Plan owns a 28 percent interest in

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Carinos, and therefore, the question is whether IMH exercises authority or control

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respecting the management or disposition of Carinos’s underlying assets.

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Defendant IMH’s Control of the Plan’s Assets

Pegram v. Herdich, 530 U.S. 211, 222 (2000) (citing 29 U.S.C. §

IMH’s connection to Carinos’s assets is not direct.

29 C.F.R. § 2510.3–

IMH owns Stockholder;

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Stockholder owns RII; and RII manages Carinos. As further attenuation, the Arizona

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state court supervises the Stockholder receiver and may override his decisions. However,

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notwithstanding the indirect chain, the Plan presents contending facts that IMH does

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exercise discretionary authority over Carinos’s assets. IMH represents itself as the owner

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of Carinos’s properties. (Doc. 91, Exhs. 35, 112). IMH has obtained appraisals of the

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property, (Doc. 91, Exhs. 41–43), and IMH has discussed the sale of Carinos’s property

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to potential buyers, as evidenced by an email from the IMH CEO discussing the sale of

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various Rio West properties owned by IMH entities including the Carinos properties.

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(Doc. 91, Exhs. 74–79).

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evidenced by a January 2017 email where an IMH vice president informed security

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personnel that “IMH authorizes” certain individuals to visit the wells on Carinos’s

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IMH controls physical access to Carinos’s property, as

property. (Doc. 91, Exh. 132).

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These facts and others indicate that a reasonable jury could find that IMH

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“exercises any authority or control respecting management or disposition of [the Plan’s]

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assets . . . .” 29 U.S.C. § 1002(21)(A)(i). Therefore, the Court denies Defendants’

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Motion for Summary Judgment concerning IMH’s status as an ERISA fiduciary.

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B.

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Federal regulations dictate which of ERISA pension plan investments are covered

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by ERISA. 29 C.F.R. § 2510.3–101(a)(1). The rule at issue in this case is an exception

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to an exception of the standard rule. First, the standard rule: “Generally, when a plan

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invests in another entity, the plan’s assets . . . do not . . . include any of the underlying

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assets of the entity.” 29 C.F.R. § 2510.3–101(a)(2). The exception to the general rule:

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for substantial investments in private entities without public reporting obligations, the

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plan’s assets include “an undivided interest in each of the underlying assets of the entity,”

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and any person “who exercises authority or control respecting the management or

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disposition of such underlying assets . . . is a fiduciary of the investing plan.” 29 C.F.R. §

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2510.3–101(a)(2)(ii). Last, the exception to the exception: ERISA regulations do not

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apply to the underlying assets of these excepted private entities if “[t]he entity is an

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operating company.” 29 C.F.R. § 2510.3–101(a)(2)(i)–(ii).

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Defendants’ Real Estate Operating Company Exception

The term “operating company” includes a “real estate operating company.” 29

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C.F.R. § 2510.3–101(c).
An entity is a “real estate operating company” for the period beginning on
an initial valuation date . . . or for the 12 month period following the
expiration of an annual valuation period . . . if:
(1) On such initial valuation date, or on any date within such annual
valuation period, at least 50 percent of its assets . . . are invested in real
estate which is managed or developed and with respect to which such entity
has the right to substantially participate directly in the management or
development activities; and
(2) During such 12 month period . . . such entity in the ordinary course of
its business is engaged directly in real estate management or development
activities.
29 C.F.R. § 2510.3–101(e).
The initial valuation period is “[t]he first date on which an entity makes an
investment,” and the annual valuation period is “a preestablished annual period, not
exceeding 90 days in duration, which begins no later than the anniversary” of the initial
valuation date. 29 C.F.R. § 2510.3–101(d)(5)(i)–(ii). Under this rule, an entity’s status
as a real estate operating company may fluctuate from year to year depending on whether
it met the requirements to qualify for that annual period. See CREF Real Estate Account,
S.E.C. No-Action Letter, 1993 WL 386656 at *9–*10 (July 22, 1993) (explaining that a
real estate account is only subject to ERISA “[t]o the extent (and for such time as) the
[real estate] account does not qualify as a REOC”).
The parties have not presented any case law interpreting the regulation’s definition
of a real estate operating company or the “ordinary course of business” requirement.
Given the lack of interpretive authority, the Court considers the specific examples in the
regulation for guidance. In one example, a limited partnership primarily engages in
investing in real property, but gives responsibility for management and maintenance to
the lessees. This limited partnership is not a real estate operating company “merely
because it assumes the risks of ownership of income-producing real property.” 29 C.F.R.
§ 2510.3–101(j)(7). The next example is similar, except the lessees are not responsible
for management and maintenance. Instead, the limited partnership hires independent
contractors to negotiate individual leases, maintain the common areas, and conduct
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maintenance activities, and the limited partnership has the responsibility to supervise and

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terminate the contractors.

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operating company, and the fact it hires contractors and “does not have its own

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employees who engage in day-to-day management and development activities is only one

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factor in determining whether it is actively managing or developing real estate.” 29

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C.F.R. § 2510.3–101(j)(8). In the final example, a limited partnership makes convertible

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loans to finance purchases of real property. The loan terms give the limited partnership

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rights to substantially influence the management of the property, and the limited

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partnership ratably shares any capital expenditures relating to the property. Lastly, the

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limited partnership “in the ordinary course of its business, routinely exercises its

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management rights and frequently consults with and advises the borrower and the

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property manager.” 29 C.F.R. § 2510.3–101(j)(9). The limited partnership in this final

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example is a real estate operating company. Id.

In this example, the limited partnership is a real estate

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The Federal Register entry for the REOC final rule also provides some guidance.

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Because “many real estate companies have characteristics of both operating companies

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and investment funds,” the regulations “intended to provide guidance in determining

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whether the operating company exclusion would be available for such companies.” 51

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Fed. Reg. 41262, 41270 (Nov. 13, 1986). “[M]ere equity ownership of real property is

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not sufficient to qualify for the real estate operation company exception.” Id. at 41274.

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“[W]hether a company is actively involved in the management or development of a

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particular parcel of real estate is ultimately a factual question that must be resolved on a

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case by case basis.” Id. at 41275. The final rule is meant “to ensure that only those

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entities which demonstrate a substantial ongoing commitment to managing and

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developing real estate will qualify for treatment as real estate operating companies . . . .”

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Id. at 41275.

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In the Defendants’ motion for summary judgment, HMI and RII ask the Court to

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affirmatively grant their REOC defense. Defendants claim that Carinos is a qualified

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REOC under the two prong test in 29 C.F.R. § 2510.3–101(c) that (1) at least 50 percent

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of Carinos’ assets are real estate during the annual valuation period, and (2) Carinos

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engaged directly in real estate management or development in the ordinary course of

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business. Because an entity is only subject to ERISA for such time as it does not qualify

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as a REOC, the Court considers only the time period when the Defendants need to invoke

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the REOC defense. The Plan’s amended complaint alleges that IMH and RII breached

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their ERISA fiduciary duties by failing to provide material information to the Plan and by

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pursuing litigation against Carinos. (Doc. 29 at ¶¶ 30–55). The alleged misconduct first

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took place as early as IMH’s acquisition of its interests in Carinos in 2015 and lasted

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through the filings of the lawsuits in 2016.

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Concerning the first prong, the parties do not dispute that more than 50 percent of

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Carinos’ assets are real estate. Concerning the second prong, various facts contend

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against Defendants’ assertion of the REOC exception. The Defendants repeatedly point

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to the wells on Carinos’ property as evidence of real estate development, but the mere

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existence of the two wells is not enough to warrant the REOC exception; Carinos must

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also directly engage in managing or developing the wells. The record does not support

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this conclusion. In June 2016, IMH participated in a conference call concerning a

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strategic plan for the wells on Carinos’s property. (Doc. 84-13, Exh. NNN). The

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meeting summary notes that “IMH is one of the parties involved in the ownership of this

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site but, [sic] serves as the only entity expressing an interest and willingness to invest in

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the development of this water resource.” Id. It further states that the two wells on

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Carinos’s property “have been left unmaintained for several years. They have been

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vandalized, suffered from corrosion and formed periodic leaks causing uncontrolled and

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unpermitted flow from the wells onto the well site.”

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immediately moved to repair the leaks. Id. No Carinos representatives participated in the

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meeting, and nothing mentions Carinos in the summary report. Id. The condition and

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maintenance of the wells in June 2016 contend against Defendants’ assertion that Carinos

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was directly engaged in management or development activities during the applicable time

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frame.

Id.

IMH, and not Carinos,

Therefore, the Court denies Defendants’ motion for summary judgment

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concerning the REOC exception.

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Similarly, in the Plaintiff’s motion for partial summary judgment, the Plan asks the

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court to affirmatively deny Defendants’ affirmative defense that Carinos is a real estate

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operating company and exempt from ERISA requirements. (Doc. 81 at 2; Doc. 16 at 7;

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Doc. 40 at 9). As noted, the Court independently evaluates cross motions and gives the

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nonmoving party the benefit of all reasonable inferences. Lenz v. Universal Music Corp.,

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815 F.3d 1145, 1150 (9th Cir. 2015). The Plan’s motion is based solely on Carinos’s

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failure to meet the “ordinary course of business” prong in the REOC regulatory

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definition. Again, to qualify as a REOC, an entity must engage directly in real estate

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management or development activities in the ordinary course of business, and it must do

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so during the applicable time period. 29 C.F.R. § 2510.3–101(e)(2).

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Defendants IMH and RII state that Carinos has been consistently working on

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developing the property by developing master plans, obtaining impact studies and other

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reports, entering into development agreements with local entities, drilling for water, and

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maintaining these wells. (Doc. 88 at 7). These activities, however, occurred years prior

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to the alleged fiduciary breaches.

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The record describes the state of Carinos’s property during the applicable time

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period. In an October 2015 letter, and again in a November 2015 letter, the Stockholder

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Receiver stated that Carinos does “not conduct any business other than to hold

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undeveloped land, and thus the only records of the entities generated post-receivership

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would have been the tax returns.” (Doc. 82-6, Exh. 5; Doc. 91-15, Exh. 153). And,

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Carinos’s tax returns support the Stockholder’s claim that Carinos does not conduct

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business other than holding undeveloped land. In 2014, Carinos had $266.00 in cash and

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had no new liabilities or income during the year. (Doc. 82-19, Exh. 17). In 2015, which

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is the last tax year provided in the record, Carinos had $0.00 in cash and incurred $3,650

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in professional fees and $266 in receivership fees. It had no other new income or

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liabilities during 2015. (Doc. 82-19, Exh. 18). These tax returns list Carinos’s principal

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business activity as “investment,” which is internally consistent with Carinos holding

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more than $1 million worth of assets in land. (Doc. 82-19, Exhs. 18–19).3 And again,

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the June 2016 conference call indicates that “IMH . . . serves as the only entity expressing

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an interest and willingness to invest in the development of this water resource[,]” which

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“have been left unmaintained for several years.” (Doc. 84-13, Exh. NNN). All of these

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facts support the understanding of the Plan’s Trustee that Carinos’ purpose was to

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“purchase land, hold it and sell it.” (Doc. 82-8, Exh. 7).

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Even when viewing the record in a light most favorable to Defendants, it does not

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create a triable issue of fact concerning Carinos’ direct engagement in real estate

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management or development during the periods at issue. As a matter of law, Carinos has

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not demonstrated a substantial ongoing commitment to managing and developing real

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estate. Therefore, the Court grants Plaintiff’s Motion for Partial Summary Judgment.

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C.

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In its complaint, the Plan generally alleges that IMH and RII breached their

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ERISA fiduciary duties by pursuing unmerited litigation against Carinos, and RII

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additionally breached its fiduciary duty by failing to provide material information to the

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Plan. (Doc. 29 at ¶¶ 30–55). In their motion for summary judgment, IMH and RII asked

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the Court to hold that neither party breached its fiduciary duty. (Doc. 83).

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Whether Defendants Violated Fiduciary Duties

1.

The Arizona and New Mexico Lawsuits

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An ERISA fiduciary must act “with the care, skill, prudence, and diligence under

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the circumstances then prevailing that a prudent man acting in a like capacity and familiar

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with such matters would use in the conduct of an enterprise of a like character and with

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like aims.” 29 U.S.C. § 1104(a)(1)(B). The duties of an ERISA fiduciary are the

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“highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996)

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(quotation omitted). The simple act of a fiduciary having conflicting interests is not a per

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Also of note—from 2006 to present, the Rio West entities, including Carinos,
have leased the property to cattle ranchers, but the agreement states that the rancher
lessee “shall, at its own cost and expense, keep and maintain the Premises, all fences and
improvements on the Premises, and all facilities appurtenant to the Premises in good
order and repair . . . .” (Doc. 84-1 Exh. S). Again, an entity that invests in real
property—but gives responsibility for management and maintenance to the lessees—is
not a real estate operating company. 29 C.F.R. § 2510.3–101(j)(7).
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se violation of ERISA, but neither does a conflicting interest excuse a fiduciary from

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meeting its obligations to a qualifying plan. See Friend v. Sanwa Bank California, 35

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F.3d 466, 469 (9th Cir. 1994).

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There is a question of fact concerning defendants’ alleged breach of their fiduciary

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duties. The Plan alleges that the litigation in Arizona and New Mexico concern suspect

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debts that allow IMH to obtain judgment liens on Carinos’ property. (Doc. 29). To

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support this claim, the Plan points to its potential defenses in the underlying Arizona and

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New Mexico suits.

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management and accounting fees.

As one example, IMH and RII are suing Carinos for unpaid
Carinos’ documents indicate that it owed RII

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$1,662.73 as of December 31, 2012, but IMH and RII revised those calculations to assess

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management fees of $87,500 and accounting fees of $63,743.35 from 2004 to 2017.

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(Doc. 91 at 7, ¶¶ 19–22). The Plan also points to evidence that RII is unable to claim a

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basis for revising the account to assess the maximum assessable amount under Carinos’

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operating agreement. (Doc. 91 at 8, ¶ 25). As another example, the Plan points to

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evidence that IMH and RII cannot authenticate the debt that Carinos owes IMH in the

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Arizona litigation. (Doc. 91 at 8, ¶ 26). If the debts and fees in the underlying suits are

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legitimate, then the Defendants’ pursuit of them would not generally breach their

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fiduciary responsibilities.

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However, the Plan has shown a question of fact concerning the legitimacy of the debts

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and fees. If so, a jury could conclude that IMH and RII breached their ERISA fiduciary

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duties to care for the Plan’s assets.

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2.

See Pegram v. Herdich, 530 U.S. 211, 225–26 (2000).

Disclosure of Material Information

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“The duty of loyalty is one of the common law trust principles that apply to

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ERISA fiduciaries, and it encompasses a duty to disclose.” King v. Blue Cross and Blue

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Shield of Illinois, 871 F.3d 730, 744 (9th Cir. 2017) (quoting Washington v. Bert

26

Bell/Pete Rozelle NFL Ret. Plan, 504 F.3d 818, 823 (9th Cir. 2007) (internal quotation

27

marks and citation omitted)). In the Ninth Circuit, ERISA fiduciaries have “an obligation

28

to convey complete and accurate information material to the beneficiary’s circumstance,

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1

even when a beneficiary has not specifically asked for the information.” Farr v. U.S.

2

West Communications, Inc., 151 F.3d 908, 914 (9th Cir. 1998) (quoting Barker v.

3

American Mobil Power Corp., 64 F.3d 1397, 1403 (9th Cir. 1995).

4

Around September 2015, the Plan began requesting communications and reports

5

regarding the management, maintenance, or sale of Carinos. (Doc. 84-16, Exh. 7). Later

6

that month, the Plan reviewed various documents provided in response to that request.

7

Id. At a February 2016 meeting of Carinos members, meeting notes indicate that the Plan

8

had reviewed additional documents provided to the Plan. Id. Although RII responded to

9

these requests and provided some of the requested documents, there is some evidence that

10

they did not provide a complete record of all material information.

11

declaration, Mr. Thor Kolle, one of the Plan’s trustees, testified that prior to this present

12

lawsuit, neither RII nor IMH provided the Plan with all of their requested documents,

13

including documents concerning the sale and appraisal or offers for Carinos’ real estate.

14

(Doc. 91, Exh. 154). He further stated that he received various documents from IMH as a

15

result of the present lawsuit that were responsive to his previous request, which the

16

Defendants had previously withheld.

17

documents provided in result of this lawsuit as “business records of Carinos, grazing

18

leases on Carinos’ property . . . , communications between various parties involved with

19

the Rio West project; and memorandums, site assessments, and other evaluations of the

20

Rio West property”). The Plan alleges that the withheld information concerned the sale

21

of the property and informed the legitimacy of the Arizona and New Mexico lawsuits,

22

and is therefore material to the beneficiary’s circumstances. (Doc. 91 at 9, ¶ 31).

Id.

In a sworn

See also Doc. 91, Exh. 155 (describing

23

Considering Mr. Kolle’s declaration, there is a question of fact whether RII met its

24

“obligation to convey complete and accurate information material to the beneficiary’s

25

circumstance.”

26

summary judgment concerning its fiduciary duty to disclose material information.

27
28

3.

Farr, 151 F.3d at 914.

The Court denies Defendants’ motion for

Losses Resulting from Breach

A fiduciary is liable only for “losses to the plan resulting from each such breach.”

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1

29 U.S.C. § 1109(a). As of July 2017, the Plan had spent approximately $100,000 to

2

intervene and defend the New Mexico and Arizona lawsuits, and that cost continues to

3

increase. (Doc. 84 at 9, ¶ 61). If, as described in II.C.1, supra, the state court lawsuits

4

are based on unfounded fees and debts and constitute a breach of ERISA fiduciary duties,

5

then the Plan’s expenditure to defend the lawsuits would be losses resulting from a

6

fiduciary breach.

7

Judgment concerning IMH’s and RII’s breach of fiduciary duties.

8

III.

Accordingly, the Court denies Defendants’ Motion for Summary

Plaintiff’s Request to Bifurcate and Stay

9

The Plan asked the Court to bifurcate the issue of Defendants’ breach of fiduciary

10

duties from the ERISA coverage issue pursuant to Rule 42(b). (Doc. 94). Rule 42(b)

11

states that a court may order a separate trial of separate issues for convenience, to avoid

12

prejudice, or to expedite and economize.

13

bifurcate trials. United States v. 1,071.08 Acres of Land, Yuma and Mohave Counties,

14

564 F.2d 1350, 1352 (9th Cir. 1977). “‘The piecemeal trial of separate issues in a single

15

lawsuit . . . is not to be the usual course,’ however, and will be ordered only where the

16

party seeking separate trials meets his or her burden of proving that bifurcation is

17

necessary.” Lassley v. Secura Supreme Inc. Co., 2015 WL 5634307 at *2 (D. Ariz., Sept.

18

15, 2015) (quoting 9A Charles Alan Wright & Arthur R. Miller, et al., Fed. Prac. & Proc.

19

Civ. § 2388 (3d ed.)). The Plan has not yet met such a burden. The Court therefore

20

denies the motion without prejudice.

A District Court has broad discretion to

21

The Plan also requested the Court to stay the current litigation pending the

22

outcome of the lawsuits in Arizona and New Mexico. (Doc. 94). The Plan argues that

23

the alleged fiduciary breach depends on whether the state lawsuits have merit, and the

24

Court should postpone the present lawsuit until the state courts decide if those lawsuits

25

have merit. Id. A federal court does not usually postpone the exercise of jurisdiction for

26

the resolution of concurrent state proceedings, and will only do so for rare and

27

exceptional cases when the clearest of justifications support it. R.R. Street & Co. Inc. v.

28

Transport Ins. Co., 656 F.3d 966, 977–79 (9th Cir. 2011) (citing Colorado River Water

- 14 -

1

Conservation Dist. v. United States, 424 U.S. 800 (1976)).

2

The Plan presents clear justifications to support a stay in this current case. Its

3

claim in the present lawsuit (that RII and IMH breached their ERISA duties in their

4

actions surrounding the New Mexico and Arizona lawsuits) depends, at least to some

5

extent, on who prevails on the underlying claims. Consequently, the Court would need to

6

determine the merits of the underlying lawsuits. To avoid the risk of inconsistent rulings

7

on issues of state law, the Court grants Plaintiff’s motion to stay this lawsuit pending the

8

resolution of the New Mexico and Arizona Litigation.

9

CONCLUSION

10

For the reasoning described above, the Court rules as follows:

11

IT IS HEREBY ORDERED that:

12

1.

Plaintiff’s Motion for Partial Summary Judgment (Doc. 81) is GRANTED;

13

2.

Defendants’ Motion for Summary Judgment (Doc. 83) is DENIED;

14

3.

Plaintiff’s Motion to Strike (Doc. 86) is DENIED;

15

4.

Plaintiff’s Motion to Bifurcate Case and Stay (Doc. 94) is GRANTED IN

16
17
18
19
20
21

PART AND DENIED IN PART. The Clerk of Court is directed to stay this action;
5.

Plaintiff’s Motion to Disregard New Arguments (Doc. 95) is GRANTED

IN PART AND DENIED IN PART.
6.

The parties are to file a joint status report on or before July 25, 2018, and

every 90 days thereafter until the stay has been lifted, or the Court rules otherwise.
Dated this 26th day of April, 2018.

22
23
24

Honorable G. Murray Snow
United States District Judge

25
26
27
28

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