Magellan Real Estate Inv. Trust v. Losch

• Decision Date: 28 July 2000
• Docket Number: No. CIV99-1459-PHX-ROS.,CIV99-1459-PHX-ROS.
• Citation: 109 F.Supp.2d 1144
• Parties: MAGELLAN REAL ESTATE INVESTMENT TRUST, Plaintiff, v. Kenneth K. LOSCH, et al., Defendants.
• Court: U.S. District Court — District of Arizona

109 F.Supp.2d 1144

MAGELLAN REAL ESTATE INVESTMENT TRUST, Plaintiff, v. Kenneth K. LOSCH, et al., Defendants.

No. CIV99-1459-PHX-ROS.

United States District Court, D. Arizona.

July 28, 2000.

COPYRIGHT MATERIAL OMITTED

Don P. Martin, Chesica Gilson Hall, Phoenix, AZ, for Plaintiff.

David Eric Rauch, Patricia Lee Refo, Todd Feltus, Snell & Wilmer LLP, Phoenix, AZ, for Defendants.

ORDER

SILVER, District Judge.

In its Complaint, Plaintiff Magellan Real Estate Investment Trust ("Plaintiff" or "the REIT") alleges that the thirteen Defendants, operating under the umbrella of the Magellan corporations, mismanaged Plaintiff's properties and wrongfully drained Plaintiff's assets to fund unrelated projects and enrich themselves at the expense of Plaintiff's investors. Pending before the Court are Defendants' Motion to Dismiss on Grounds of Forum Non Conveniens and Motion to Dismiss the federal and Arizona RICO claims.

Prior to the hearing on June 1, 2000, Defendants filed a Supplemental Reply Memorandum in support of their Motion to Dismiss. Rather than obtaining approval in advance, Defendants requested leave to file the supplement in the text of the pleading. Plaintiff filed a Response in which it both opposed the request for leave to supplement and addressed the contentions raised therein. Over one month later, Plaintiff also filed a Notice of Filing Supplemental Exhibit in Support of its ... Response ... without seeking this Court's leave. Because both parties have fully addressed the issues raised therein, leave to file the Supplemental Reply will be granted. The Court also will consider the Plaintiff's supplemental exhibit. However, as the Court stated at the hearing, in the future the parties should request leave to file a supplement in advance. Leave may be requested by filing a motion to which the proposed supplement is attached as an exhibit, or counsel may stipulate to the filing of the supplement with court approval.

Each party also filed a supplemental memorandum after the hearing, in accordance with this Court's instructions to file supplements addressing new arguments raised for the first time at the hearing. These supplemental memoranda were properly filed.

Background

Plaintiff alleges that the three individual Defendants, Litwin, Losch, and Dewar, formed the Plaintiff REIT to acquire additional capital. (Compl. at ¶ 22). The individuals developed a plan to market shares in the REIT to raise capital for down payments on property and to secure financing for the balance of the property price. (Id.) They planned to pay investors a yearly dividend from rental income obtained by managing the property. (Id.) Investors were required to invest in a minimum of five trust units, and a total of 21,161 trust units were sold for gross proceeds of $21,710,540. Id. at ¶¶ 27, 30. A document entitled "Declaration of Trust" defines the rights, powers, and obligations of the REIT's trustees, including Losch and Litwin, two of the individual Defendants. (Id. at ¶¶ 37-39).

The Declaration of Trust also recognizes three contracts between Plaintiff and Defendant Magellan REIT Management Limited Partnership ("MRLP"). (Id. at ¶ 41). In the first of these, the Property Management Agreement, ("PMA"), Plaintiff agreed to pay MRLP for the day-to-day management, leasing, and maintenance of Plaintiff's properties, including maintenance of accurate records and books. (Id. at ¶¶ 45-46, 51). In the second, the Asset Management Agreement, ("AMA"), Plaintiff agreed to pay MRLP for investment management services including review of the mix of properties, assessment of the properties' performance, and recommendations regarding which should be retained. (Id. at ¶¶ 58-59). In the third, the Services Agreement, ("SA"), Plaintiff agreed to pay MRLP a fee to identify and report to the Trustees additional property suitable for acquisition. (Id. at 65, 67). Each agreement contains a choice of law provision requiring application of the law of Ontario, Canada.

Plaintiff alleges that Defendants engaged in a variety of misconduct. Plaintiff alleges that Defendants caused it to incur unauthorized issuance costs by failing to segregate the costs of issuing and promoting Plaintiff and other investment vehicles, then charging the total costs to Plaintiff (id. at ¶¶ 72-73), as well as by improperly borrowing money from Plaintiff to fund other investment vehicles and then attempting to claim additional issuance costs from Plaintiff to offset the amount borrowed (id. at ¶ 75).

Plaintiff further alleges that Defendants made unauthorized alterations in Plaintiff's structure by using Plaintiff's capital to purchase eleven properties, six apartment complexes in California and five in Arizona, and then holding those properties in the name of partnerships in which Plaintiff was merely a limited partner. (Id. at ¶¶ 78-80). Plaintiff alleges that the general partners who controlled the property were companies owned and controlled by the individual Defendants or other companies under Defendants' control, and that their improper control of the properties resulted in unauthorized payments from Plaintiff's assets. (Id. at ¶ 84). Plaintiff alleges that the controlling partners in the limited partnerships also developed new property management agreements governing the 11 properties referenced above, agreements materially different from the three original agreements discussed above. Plaintiff adds that, under the new agreements, it was required to pay increased management fees and other increased expenses to various Defendants. (Id. at ¶¶ 86-87, 95).

Plaintiff further alleges that the three individual Defendants approved payment of fees by Plaintiff to which MRLP was not entitled, including fees for years in which the minimum requirements for fee payment had not been satisfied, as well as refinancing fees not contained in the original agreements. (Id. at ¶¶ 96, 98). According to Plaintiff, unauthorized charges totaled more than $5 million. (Id. at ¶ 99).

Plaintiff also alleges that MRLP breached the three original agreements in several respects, specifically, that: (1) MRLP breached the AMA by failing to provide ongoing asset management reports to Plaintiff and charging Plaintiff several unauthorized charges; (2) MRLP breached the PMA by failing to maintain full and accurate records and books, other required accountings, operating statements, and budgets, failing to keep Plaintiff's funds separate, and charging unauthorized charges; and (3) MRLP breached the SA by failing to provide ongoing analysis and reports regarding acquisition of properties, failing to obtain approval for purchase of one of the properties, and charging unauthorized charges. (Id. at ¶¶ 100-102).

Plaintiff next alleges that the individual Defendants and MRLP (1) caused Plaintiff to make an unauthorized, imprudent, and unsecured loan for $ 2 million and to charge interest at a rate well below the market rate to a company with which Defendants were affiliated; (2) caused Plaintiff to transfer shares in two corporations for no or wholly inadequate consideration; and (3) that both these acts constituted willful conversion of assets for Defendants' own benefit. (Id. at ¶¶ 104, 107, 115-116, 119). Finally, Plaintiff alleges that the individual Defendants and MRLP made various misrepresentations and omissions in furtherance of Defendants' wrongful acts.

Discussion

Motion to Dismiss on the Ground of Forum Non Conveniens

Defendants, the parties moving for dismissal on the ground of forum non conveniens, acknowledge that venue is not improper in Arizona, but argue that a Canadian venue would be more convenient. Defendants have the burden of establishing that: (1) an adequate alternative forum exists; and (2) the balance of relevant private and public interest factors favors dismissal. Alpha Therapeutic Corp. v. Nippon Hoso Kyokai, 199 F.3d 1078, 1090 (9th Cir.1999); Creative Technology, Ltd. v. Aztech System Pte, Ltd., 61 F.3d 696, 699 (9th Cir.1995). Dismissal for forum non conveniens is an "exceptional tool to be employed sparingly." Ravelo Monegro v. Rosa, 211 F.3d 509, 514 (9th Cir.2000).

Generally, Plaintiff is entitled to its choice of forum absent factors weighing strongly in favor of transfer. See Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508, 67 S.Ct. 839, 91 L.Ed. 1055 (1947) (stating that "the plaintiff's choice of forum should rarely be disturbed"). In their Motion, Defendants argue that Plaintiff's choice of an Arizona forum is not entitled to deference because Plaintiff is not an Arizona resident. See Gemini Capital Group, Inc. v. Yap Fishing Corp., 150 F.3d 1088, 1091 (9th Cir. 1998). However, in that action, the Ninth Circuit merely stated that the Plaintiff's choice was entitled to less deference when Plaintiff is not an Arizona resident, not that Plaintiff's choice is entitled to no deference at all. See id. at 1091. In a decision issued after Defendants filed their initial Motion and Reply, the Ninth Circuit expressly stated: "[L]ess deference is not the same thing as no deference." Ravelo Monegro, 211 F.3d at 514. At the hearing Defendants' counsel acknowledged that Plaintiff's choice of forum remains entitled to some deference.

As another preliminary matter, the Court will consider the import of the forum selection clause contained in the three agreements between Plaintiff and MRLP, a clause the parties agree is permissive, rather than mandatory. The clause provides:

The parties hereto irrevocably attorn to the jurisdiction of the courts of the Province of Ontario to resolve any dispute which may arise among them concerning this Agreement and the subject matters hereof.

(PMA § 7.14, AMA § 5.14, SA § 7.14, Exhs. 2-4 to Compl.) At the hearing, Defendants argued that this clause, though not mandatory, is entitled to some weight as an expression of the parties' intent. However, as Plaintiff argued in its posthearing supplement, the standard approach to the issue of forum...