Hill v. Opus Corp., Case No. CV 10–04806 MMM (VBKx).

• Decision Date: 14 November 2011
• Docket Number: Case No. CV 10–04806 MMM (VBKx).
• Court: U.S. District Court — Central District of California
• Parties: Jefferson HILL, Tom Roberts, Paul Marshall, Thomas Schaal, Jr., Charles Vogel, John Greer, Claire Janssen, Daniel Haug, Matthew Montgomery, James Fritcher, Sara Gordon, Don Little, Jr., Greg Wattson, Jeffery Dickerson, Randy Ackerman, and Jeff Roberts, Plaintiffs, v. OPUS CORPORATION, a Minnesota corporation, Gerald Rauenhorst T982 Irrevocable Trust f/b/o Grandchildren, Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children, Keith Bednarowski, an individual, Luz Campa, an individual, Mark Rauenhorst, an individual, and Does 1 through 100, inclusive, Defendants.

841 F.Supp.2d 1070

Jefferson HILL, Tom Roberts, Paul Marshall, Thomas Schaal, Jr., Charles Vogel, John Greer, Claire Janssen, Daniel Haug, Matthew Montgomery, James Fritcher, Sara Gordon, Don Little, Jr., Greg Wattson, Jeffery Dickerson, Randy Ackerman, and Jeff Roberts, Plaintiffs,

v.OPUS CORPORATION, a Minnesota corporation, Gerald Rauenhorst T982 Irrevocable Trust f/b/o Grandchildren, Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children, Keith Bednarowski, an individual, Luz Campa, an individual, Mark Rauenhorst, an individual, and Does 1 through 100, inclusive, Defendants.

Case No. CV 10–04806 MMM (VBKx).

United States District Court, C.D. California.

Nov. 14, 2011.

Limited on Preemption Grounds

West's Ann.Cal.Bus. & Prof.Code §§ 17200, 17203Charles E. Hill, Greg K. Hafif, Michael G. Dawson, Law Offices of Herbert Hafif APC, Claremont, CA, for Plaintiffs.

Dennis M. Ryan, John B. Gordon, Peter J. Goss, Woodrow T. Roberts, III, Faegre & Benson LLP, Minneapolis, MN, James Oliva, David F. McDowell, Morrison & Foerster LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' STATE LAW CLAIMS AND RICO CLAIMS

MARGARET M. MORROW, District Judge.

On June 29, 2010, Randy Ackerman, Jeffrey Dickerson, James Fritcher, Sara Gordon, John Greer, Daniel Haug, Jefferson Hill, Claire Janssen, Don Little, Jr., Paul Marshall, Matthew Montgomery, Jeff Roberts, Tom Roberts, Thomas Schaal, Jr., Charles Vogel, and Greg Wattson filed this action against Keith Bednarowski, Luz Campa, Mark Rauenhorst, Gerald Rauenhorst 1982 Irrevocable Trust F/B/O Children (“the Children Trust”), Gerald Rauenhorst 1982 Irrevocable Trust F/B/O Grandchildren (“the Grandchildren Trust”), and Opus Corporation.¹ Plaintiffs allege that they are owed compensation and deferred compensation by their former employer, Opus West Corporation (“Opus West”). They assert that defendants caused Opus West to transfer monies to its parent company, Opus Corporation,² which led Opus West to fail and seek Chapter 11 bankruptcy protection. On July 11, 2011, plaintiffs filed a first amended complaint.³ On August 5, 2011, defendants filed a motion to dismiss plaintiffs' Racketeer Influenced and Corrupt Organizations Act (“RICO”) claim, as well as their state law claims to the extent they are based on ERISA-covered benefit plans.⁴ Defendants also filed a request for judicial notice in support of their motion.⁵ On September 12, 2011, plaintiffs opposed the motion on September 12, 2011,⁶ and defendants filed a reply on October 7, 2011.⁷

I. FACTUAL BACKGROUND

Plaintiffs are former employees of Opus West, a real estate development corporation headquartered in Phoenix, Arizona.⁸ Hill, Marshall, Schaal, Montgomery, Little, Wattson, Dickerson, and Ackerman (the “California plaintiffs”) are California residents, while T. Roberts, J. Roberts, Vogel, Greer, Janssen, Haug, Fritcher, and Gordon (“the Arizona plaintiffs”) are Arizona residents.⁹ The California plaintiffs worked for Opus West for an unspecified period of time.¹⁰ They allege that they entered into an employment relationship with the company in California and worked for it in the state.¹¹ The Arizona plaintiffs were employed in Opus West's Arizona office and worked in Arizona.¹²

Plaintiffs' claims concern a series of multimillion dollar cash and asset transfers that Opus West made to its parent corporation, Opus Corporation (“Opus Corp.”). Plaintiffs contend that Opus West began transferring funds to Opus Corp. on December 21, 2006, and that the transfers continued over the next several years.¹³ In December 2006, Opus West transferred approximately $63,169,000 in assets to Opus Corp.¹⁴ Commencing on March 15, 2007, and continuing through 2008, Opus West transferred $83,128,000 in cash to Opus Corp., allegedly without receiving any consideration in return.¹⁵ Plaintiffs assert, on information and belief, that between 2003 and 2008, Opus transferred in excess of $193,814,000 to the two trust defendants, which plaintiffs denominate the Grandchildren Trust and the Children Trust.¹⁶ In 2006 and 2007, Opus West transferred funds to Opus Corp. for contributions to organizations such as Catholic charities. ¹⁷ All of these transfers were purportedly made at the direction of defendant Mark Rauenhorst, Opus West's President and CEO, who sat on Opus Corp.'s board of directors, as well as at the direction of defendants Keith Bednarowski and Luz Campa.¹⁸ The latter two defendants are trustees of the Grandchildren Trust and the Children Trust.¹⁹

Plaintiffs assert that the transfers continued until July 6, 2009, when Opus West filed a Chapter 11 bankruptcy petition.²⁰ As of that date, Opus West purportedly owed plaintiffs a total of $26,638,236.57 in compensation and deferred compensation.²¹ Plaintiffs contend they learned shortly after the bankruptcy filing that Opus West would not pay the compensation and deferred compensation it allegedly owed.²²

From 2005 through March 31, 2009, plaintiffs had written incentive compensation agreements with Opus West, which they allege were drafted and approved by defendants.²³ In 2006, before any of the acts pled in the complaint took place, Mark Rauenhorst and Gerald Rauenhorst,²⁴ Opus West's founding chairman, stated in a code of conduct provided to all employees that Opus West

“will transact our business fairly, honestly, and in a manner that meets the highest ethical and legal standards. It is the policy of Opus to comply with all federal, state and local laws, rules, and regulations. Opus will respect the rights, and safeguard the well being, of its employees, customers, and business associates. And, finally, Opus will not knowingly enter into a business relationship with any party who conveys the impression that they may violate any aspect of this Code of Conduct.... Each of us will exercise the highest level of integrity, ethics, and objectivity when representing, or negotiating on behalf of Opus, or when participating in activities that may affect the reputation of the company. We will not misuse the authority or influence of our positions in these relationships, nor become involved in situations that create a conflict of interest between Opus and us, such as employment by, financial interest in, or financial gain from a competitor, supplier, agent or customer.” ²⁵

In 2004, defendants selected KMPG, LLC as Opus West's auditor.²⁶ The firm prepared audited financial statements for Opus Corp. and Opus West from 2004 to 2007.²⁷ In 2005, defendants purportedly violated the covenants in various loans Opus West had obtained from lenders, the majority of which were federal banks.²⁸ In 2008, KMPG notified defendants that Opus West's financial statements contained accounting errors, and that the company's 2007 financial statement needed to be corrected and reissued.²⁹ Defendants allegedly hid this information from Opus West's lenders, as well as its secured and unsecured creditors.³⁰

In 2008, KMPG notified defendants that some of Opus West's quarterly financial statements were also erroneous. It advised that defendants had recorded the sale of the Shoppes at Chino Hills, a retail project located in Chino Hills, California, incorrectly.³¹ KMPG allegedly told defendants that had they recorded the Shoppes transaction as required by generally accepted accounting principles (“GAAP”), Opus West would have been in violation of the loan covenants for the quarters ending June 30 and September 30, 2008. ³² Plaintiffs assert that defendants “kept quiet” about this error and did not disclose the violations to Opus West's lenders; rather, they allege, defendants “kept their mouths shut even though they had a legal and contractual duty to disclose the fraud, and went about their business as if nothing wrong had happened.” ³³

Defendants requested and obtained an extension of their loan covenants in 2006, but “intentionally forgot” to tell Opus West's lenders and creditors that the company's financial statements were inaccurate.³⁴ Plaintiffs assert, in fact, that Opus West received an emergency loan from defendants so that it would appear that it was in compliance with the loan covenants on the date the lenders intended to check debt to equity ratios.³⁵ The covenants required that Opus West maintain a four-to-one debt to equity ratio. ³⁶ Once the compliance inspections were complete, Opus West allegedly returned the emergency loan to defendants.³⁷ Plaintiffs assert that defendants conducted these transactions by “intentionally shipping (‘wiring’), or transferring money over the telephone lines” from Opus Corp.'s headquarters in Minneapolis, Minnesota and related Opus entities to Opus West in Phoenix, Arizona.³⁸ Plaintiffs assert that such transfers were made on at least six occasions betweenApril 13, 2007, and September 30, 2008. ³⁹ They contend the transfers were timed so that Opus West would appear to be in compliance with the loan covenants at the end of each quarter of years 2005 to 2008,⁴⁰ and that after quarter's end, Opus West returned the money to defendants.⁴¹ Plaintiffs contend that classifying an emergency loan from a parent corporation as equity on the subsidiary's books, rather than as a liability, violates basic accounting rules.⁴²

Plaintiffs assert that if Opus West's financial statements had been properly recorded in accordance with GAAP and Financial Accounting Standards Board (“FASB”) standards, it would have been out of compliance with the loan covenants in each of years 2005 through 2008.⁴³ Under the terms of the loan agreements, Opus West was required to be in compliance with the covenants on each day the loans were outstanding, not just when the banks were due to perform an inspection or audit.⁴⁴

Plaintiffs allege that defendants knew that their conduct was “wrong, unethical and plainly illegal” at all times, and that it could result in “substantial” civil and criminal penalties.⁴⁵ They assert that Opus Corp., in particular, had a number...