Opinion
CV-21-00133-PHX-JJT
11-02-2022
KeyBank National Association, Plaintiff, v. Neumann Dermatology LLC, et al., Defendants.
ORDER
Honorable John J. Tuchi United States District Judge
At issue is the Motion for Summary Judgment (Doc. 35, “Defs.' Mot.”) filed by Defendants Neumann Dermatology, LLC (“ND”) and Sarah E. Neumann (“Ms. Neumann”), individually and as trustee of the Sarah E. Neumann Revocable Trust (“SN Trust”), to which Plaintiff KeyBank National Association (“KeyBank”) filed a Response (Doc. 39, “Pl.'s Resp.”), and Defendants filed a Reply (Doc. 43, “Defs.' Reply”). Also at issue is Plaintiff's Motion for Summary Judgment (Doc. 37, “Pl.'s Mot.”), to which Defendants filed a Response (Doc. 40, “Defs.' Resp.”), and Plaintiff filed a Reply (Doc. 42, “Pl.'s Reply”). The Court finds these matters appropriate for decision without oral argument. See LRCiv 7.2(f). For the reasons set forth below, the Court grants in part and denies in part both of the parties' summary judgment motions.
I. BACKGROUND
In June 2007, Ms. Neumann, a board certified physician assistant and clinical dermatology provider, formed a holding company to manage her ownership interests in several business ventures. (Defendants' Separate Statement of Facts (“DSOF”), Doc. 36, ¶¶ 1-5.) The original name of the holding company was Sarah E. Neumann, LLC (“SN LLC”). (DSOF ¶ 2.) Ms. Neumann sought advice from a certified public accountant, Dianne McCauley, regarding SN LLC. (DSOF ¶ 3.) Ms. McCauley advised Ms. Neumann that money from her other ventures would be paid to SN LLC as management fees, allowing “all the income from all the revenue streams into one LLC that is taxed as an S-Corporation and allows the LLC to pay a salary to you and take distributions of the profits all through SN LLC.” (DSOF ¶ 4.) The sole member and manager of SN LLC is SN Trust, a revocable trust of which Ms. Neumann is the beneficiary, trustee, and settlor. (Plaintiff's Statement of Facts (“PSOF”), Doc. 38, ¶¶ 2-4.) By virtue of her control of SN Trust, Ms. Neumann is the only individual capable of making decisions for SN LLC. (See Defs.' Mot. at 7 n.1.)
In 2014, SN LLC partnered with Southwest Radiation and an individual named Duane Whitaker to form Hawaii Skin Cancer Center, LLC (“HSCC”). (DSOF ¶ 6.) In preparing to open a new practice, HSCC entered into a lease agreement with KeyBank to finance the purchase of dermatology equipment. (DSOF ¶ 7.) KeyBank required HSCC to execute a Continuing Guaranty (“the Guaranty”), under which SN LLC agreed to guarantee repayment of HSCC's debts to KeyBank, up to 49.5%. (DSOF ¶ 9; PSOF ¶ 8.) Ms. Neumann signed the Guaranty on behalf of SN LLC. (DSOF ¶¶ 10-11.) She subsequently changed the name of SN LLC to Neumann Dermatology, LLC (“ND”). (Defs.' Mot. at 3.)
According to KeyBank, on April 25, 2016, HSCC stopped making the required monthly payments and defaulted on its lease agreement with KeyBank. (PSOF ¶ 8.) KeyBank subsequently filed a complaint for recovery of the outstanding amount due on the lease agreement in New York Supreme Court in Westchester County (“the Underlying Action”). (PSOF ¶ 7.) On December 4, 2018, the New York Supreme Court issued a judgment in the amount of $243,678.93. (PSOF ¶ 9.) Pursuant to the Guaranty, ND owed KeyBank 49.5% of the judgment, or approximately $120,621.07. (Doc. 1, Compl. ¶ 12.)
KeyBank National Association, successor by merger to Key Equipment Finance, Inc. v. Hawaii Skin Cancer Center, LLC, Southwest Radiation Oncology, Inc., and Neumann Dermatology, LLCf/k/a Sarah E. Neumann, LLC, Supreme Court of the State of New York, County of Westchester, Index No. 52253/2017.
After domesticating the New York Supreme Court's judgment to Arizona and conducting a judgment debtor examination, KeyBank filed the instant action in this Court on January 25, 2021. In its Complaint, KeyBank alleges that both HSCC and ND are insolvent and undercapitalized. (Compl. ¶ 1.) Seeking to recover directly from Ms. Neumann, individually and/or through SN Trust, KeyBank raises three claims for relief. Count One seeks a declaratory judgment that Ms. Neumann, SN Trust, and ND are alter egos of each other and thereby jointly and severally liable for the judgment in the Underlying Action. (Id. ¶¶ 35-37, 50.) Count Two alleges a claim of fraudulent transfer of ND's assets against all Defendants. (Id. ¶¶ 38-43.) Count Three alleges a claim of tortious interference with contractual relations against Ms. Neumann and SN Trust. (Id. ¶¶ 44-49.)
The parties filed cross motions for summary judgment on KeyBank's alter ego claim. Defendants further move for summary judgment on KeyBank's fraudulent transfer and tortious interference claims. The parties have submitted evidence in support of their motions, including certain accounting and tax records for Defendants for the years 2014 to 2018, among other evidence. (DSOF, Ex. A; PSOF, Exs. A through FF; Defendants' Controverting Statement of Facts (“CSOF”), Exs. A through C.) The Court discusses the parties' evidence in further detail below where relevant to its discussion of the issues.
II. LEGAL STANDARD
Under Federal Rule of Civil Procedure 56(a), summary judgment is appropriate when the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to prevail as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). “A fact is ‘material' only if it might affect the outcome of the case, and a dispute is ‘genuine' only if a reasonable trier of fact could resolve the issue in the non-movant's favor.” Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The court must view the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in the nonmoving party's favor. Torres v. City of Madera, 648 F.3d 1119, 1123 (9th Cir. 2011).
The moving party “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] . . . which it believes demonstrate the absence of a genuine issue of material fact.” Celotex, 477 U.S. at 232. When the moving party does not bear the ultimate burden of proof, it “must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial.” Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). If the moving party carries this initial burden of production, the nonmoving party must produce evidence to support its claim or defense. Id. at 1103. Summary judgment is appropriate against a party that “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322.
In considering a motion for summary judgment, the court must regard as true the non-moving party's evidence, as long as it is supported by affidavits or other evidentiary material. Anderson, 477 U.S. at 255. However, the non-moving party may not merely rest on its pleadings; it must produce some significant probative evidence tending to contradict the moving party's allegations, thereby creating a material question of fact. Id. at 256-57 (holding that the plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment); see also Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989) (“A summary judgment motion cannot be defeated by relying solely on conclusory allegations unsupported by factual data.” (citation omitted)).
III. ANALYSIS
A. Alter Ego Claim
The parties cross move for summary judgment on Plaintiff's alter ego claim. “A basic axiom of corporate law is that a corporation will be treated as a separate entity unless there is sufficient reason to disregard the corporate form.” Loiselle v. Cosas Mgmt. Group, LLC, 228 P.3d 943, 950 (Ariz.Ct.App. 2010) (quoting Standage v. Standage, 711 P.2d 612, 614 (Ariz.Ct.App. 1985)). However, Arizona courts will disregard the corporate entity and pierce the corporate veil if a plaintiff pleads facts sufficient to show: (1) that the corporation is the “alter ego or business conduit of a person”; and (2) that disregarding the corporation's separate status is “necessary to prevent injustice or fraud.” Id. (first quoting Dietel v. Day, 492 P.2d 455, 457 (Ariz.Ct.App. 1972), and then quoting State v. Angelo, 800 P.2d 11, 14 (Ariz.Ct.App. 1990)).
Defendants argue that they are entitled to summary judgment because Plaintiff cannot establish both elements of its alter ego claim. (Defs.' Mot. at 4-7.) Plaintiff contends that it is entitled to summary judgment because it has sufficiently established both elements. (Pl.'s Mot. 4-7.) The Court discusses each element in turn, mindful that although summary judgment may be appropriate where all material factual issues are undisputed, “the determination of whether there are sufficient grounds for piercing the corporate veil should ordinarily not be disposed of by summary judgment in view of the complex questions often involved, especially if fraud is alleged.” See William M. Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.95 (West 2022), and cases cited therein.
1. Unity of Interest and Ownership
“[A]lter-ego status . . . exist[s] when there is such a unity of interest and ownership that the separate personalities of the corporation and owners cease to exist.” Dietel, 492 P.2d at 457. Relevant factors to consider in determining the existence of an alter ego relationship include common officers or directors; under-capitalization; failure to maintain a separate corporate identity; plaintiff's lack of knowledge of the corporation's separate existence; diversion of corporate property for personal use; lack of corporate formalities; and failure to maintain books and records of account in reasonable order. See Deutsche Credit Corp. v. Case Power & Equip. Co., 876 P.2d 1190, 1195-96 (Ariz.Ct.App. 1994); Norris Chem. Co. v. Ingram, 679 P.2d 567, 571 (Ariz.Ct.App. 1984); Ariz. Pub. Serv. Co. v. Ariz. Corp. Comm 'n, 746 P.2d 4, 8 (Ariz.Ct.App. 1987). The actions of the corporation and owners must be “so closely intermixed] . . . such as to justify finding a merger of identities.” Honeywell, Inc. v. Arnold Constr. Co., 654 P.2d 301, 307 (Ariz.Ct.App. 1982).
Here, the undisputed material facts establish the requisite unity of interest and ownership between Ms. Neumann, SN Trust and ND. As for SN Trust, Ms. Neumann is the settlor, trustee, and beneficiary of the trust, which is in turn revocable. (PSOF ¶¶ 2-3.) SN Trust failed to retain any separate identity for the purposes of distribution of assets from ND. Even though SN Trust is nominally the member of ND, ND made distributions directly to Ms. Neumann, skipping SN Trust entirely. (Id. ¶¶ 10-29.) Significantly, Defendants do not argue that SN Trust is not Ms. Neumann's alter ego. (See Defs.' Resp. at 4-8.)
As Plaintiff acknowledges, the question of unity of interest and ownership between ND and Ms. Neumann is “a bit trickier.” (Pl.'s Mot. at 6.) Defendants point out that ND was created as a legitimate holding company to assist Ms. Neumann in managing her business ventures and streamline her income for tax purposes. (Defs.' Resp. at 6-7.) ND filed separate taxes and maintained separate balance sheets and bank accounts. (See PSOF ¶¶ 10-29.) While Defendants do not dispute that Ms. Neumann “is the only individual capable of making decisions for ND LLC,” Defendants correctly note that this fact alone is not sufficient to establish that ND is Ms. Neumann's alter ego. (Defs.' Resp. at 7 & n.1.) See Ferrarell v. Robinson, 465 P.2d 610, 613 (Ariz.Ct.App. 1970).
However, the fact that Ms. Neumann had sole decision-making authority for ND does not stand alone. The flow of income through ND-or not-demonstrates that Ms. Neumann exercised control over ND in such a way that gives lie to ND's corporate independence. According to an email from an accountant with whom Ms. Neumann consulted, Ms. McCauley, the purpose of ND was to “allow [Ms. Neumann] to bring all the income from all the revenue streams into one LLC that is taxed as an S-Corporation and allows the LLC to pay a salary to [her] and take distributions of the profits all through SN LLC.” (CSOF ¶ 31.) Thus, in each of 2014, 2015, and 2016, ND received several hundred thousand dollars from one of Ms. Neumann's business ventures, Ahwatukee Skin & Laser, LLC (“ASL”), and Ms. Neumann received hundreds of thousands of dollars from ND in turn. (PSOF ¶¶ 10-21.) Then, starting in 2017-after HSCC defaulted on the lease- the flow of money from ASL to ND dried up, while the flow of money directly from ASL to Ms. Neumann increased substantially. (Id. ¶¶ 22-29.) The diversion of funds away from ND after the triggering of its guarantor obligations demonstrates that Ms. Neumann exercised control over ND and its revenue streams in a manner consistent with her interests.
To resist summary judgment on this issue, Defendants argue that Plaintiff has failed to present any evidence of Ms. Neumann's (1) intermingling of corporate actions with personal actions; (2) blending or confusing of the existence of any entities; (3) comingling funds; or (4) diversion of property for personal use. (Defs.' Resp. at 6-7.) The Court does not agree with this characterization of the evidence, based on the flow of moneys controlled by Ms. Neumann described above. Moreover, the factors that Defendants list are but several of numerous factors for the Court to consider, not essential elements of Plaintiff's claim. See Deutche Credit Corp., 876 P.2d at 1195-96. To demonstrate entitlement to summary judgment on the first element of its alter ego claim, Plaintiff has the burden to show that the undisputed material facts establish “such a unity of interest and ownership [between Ms. Neumann and ND] that the separate personalities of the corporation and owner[] cease to exist.” See Dietel, 492 P.2d at 457. The Court finds that Plaintiff has made this showing and is therefore entitled to summary judgment on the first element of its claim.
2. Fraud or Injustice
To pierce the corporate veil, a plaintiff must also demonstrate that disregarding the corporation's separate status is “necessary to prevent injustice or fraud.” Loiselle, 228 P.3d at 950. “A fraud or injustice arises if observance of the corporate form would confuse the opposing parties and frustrate their efforts to protect their rights, while allowing the party responsible to evade liability.” Keg Rests. Ariz., Inc. v. Jones, 375 P.3d 1173, 1184 (Ariz.Ct.App. 2016) (citing Gatecliff v. Great Republic Life Ins. Co., 821 P.2d 725, 729 (Ariz.Ct.App. 1991); see also Towe Antique Ford Found. v. I.R.S., 999 F.2d 1387, 1391-92 (9th Cir. 1993) (“[P]iercing the corporate veil is an equitable remedy used to curb injustices resulting from the improper use of a corporate entity. Because the remedy is equitable, no concrete formula exists under which a court will disregard the separate identity of the corporate entity. Use of this remedy depends entirely upon the circumstances of each case.” (quoting Hando v. PPG Indus., Inc., 771 P.2d 956, 960 (Mont. 1989))).
Here, Plaintiff concedes that Ms. Neumann “has not committed an express fraud . . . [nor] overtly misrepresented the truth,” but argues that allowing her to use ND's corporate form to avoid liability “would sanction an unconscionable result merely because it was brought about by means which simulate legality.” (Pl.'s Mot. at 7.) For their part, Defendants question whether an alter ego claim can survive absent a showing of express fraud. (Defs.' Resp. at 9.) In any event, Defendants contend that Plaintiff has failed to produce evidence to support a showing of either fraud or injustice. (Defs.' Mot. at 9-10; Resp. at 9.) They note that “Sarah E. Neumann, LLC” is typed out on the Guaranty, demonstrating that Plaintiff cannot have been confused by ND's corporate form because Plaintiff “knew precisely who was executing the Guaranty.” (Defs.' Resp. at 9.)
The Court finds that neither party has met their burden to establish entitlement to summary judgment on the second element of Plaintiff's alter ego claim. Evaluating and weighing the evidence presented thus far, a reasonable factfinder could come out either way on the question of whether piercing the corporate veil is necessary to prevent injustice.
As an initial matter, the fact that Plaintiff does not allege an express fraud is not fatal to its claim. Arizona courts consider “injustice” as an alternative to “fraud” for the purposes of establishing the second element of alter ego liability. See Loiselle, 228 P.3d at 950; see also, e.g., Keg Rests., 375 P.3d at 1182 (“[T]o establish that [defendant] is liable under the alter-ego theory, [plaintiff] must show that . . . observance of the corporate form would sanction a fraud or promote an injustice.” (emphasis added)); TBS Properties LLC v. United States, No. 20-CV-195-PHX-DWL, 2022 WL 783040 at *8-9 (D. Ariz. Mar. 15, 2022) (noting that a party pursuing an “injustice” theory on the second element “need not proffer evidence of outright fraud”). Moreover, the fact that ND and SN Trust were initially set up for legitimate business purposes does not render them immune from attack based on subsequent actions. See Five Points Hotel P'ship v. Pinsonneault, 835 F.Supp.2d 753, 759 (D. Ariz. 2011) (“The disregard of the corporate fiction has not been [limited] to instances where the incorporation is for fraudulent purposes, but may be observed if after organization the corporation is employed for fraudulent purposes.” (quoting Employer's Liab. Assurance Corp. v. Lunt, 313 P.2d 393, 395 (Ariz. 1957))).
As discussed, Plaintiff has presented evidence that Ms. Neumann caused funds that previously flowed from ASL to ND to instead flow directly to her, bypassing ND and depleting the funds from which Plaintiff sought to recover. An email exchange between Ms. Neumann and Ms. McCauley dated after ND defaulted on the Guaranty, in which Ms. Neumann inquired about ND's remaining assets and Ms. McCauley informed her that ND's assets were nearly depleted, further supports Plaintiff's theory that Ms. Neumann diverted the funds to avoid paying Plaintiff. (PSOF ¶ 32, Exs. EE and FF.) Indeed, as Plaintiff notes, the record shows “no demonstrable reason [for this diversion] other than to avoid allowing ND to pay the debts it owed.” (Pl.'s Resp. at 5.) Based on this evidence, a reasonable factfinder could conclude that Ms. Neumann deliberately used ND's corporate form to avoid paying the Guaranty, unfairly depriving Plaintiff of the money it was owed through means that merely “simulate legality.” See Youngren v. Rezzonico, 543 P.2d 142, 144 (Ariz.Ct.App. 1975) (“Equity . . . will not sanction an unconscionable result merely because it may have been brought about by means which simulate legality.”).
However, such a finding is not mandated by the evidence. As Defendants note, Plaintiff has presented no evidence that ASL was under any obligation to transfer money to ND. (Defs.' Reply at 4-5.) Thus, the diversion of ASL's funds was not improper per se. Nor is the fact that Plaintiff did not receive the benefit of its bargain under the Guaranty itself sufficient to establish the requisite injustice. See Dietel, 492 P.2d at 458 (“While it is clear that plaintiffs did not receive the benefit of their bargain, that alone . . . is not sufficient to justify the disregarding of the corporate entity.”). The questions of whether the diversion and depletion of funds was unfair, and whether Plaintiff's resulting inability to recover was unconscionable, might therefore hinge on an evaluation of Ms. Neumann's intent-a factintensive question that might involve assessment of her credibility. Evaluating and weighing the evidence, a reasonable factfinder could conclude that Plaintiff has not sufficiently demonstrated that Ms. Neumann diverted the funds from ASL with the intent to deprive Plaintiff of the money it was owed, and therefore find that Plaintiff has not met its burden to establish the requisite injustice or unconscionability.
In sum, the question of whether piercing the corporate veil of ND and SN Trust is necessary to prevent injustice is an issue best resolved at trial after weighing the evidence and resolving disputed inferences. See Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 988 (9th Cir. 2006) (“[W]here divergent ultimate inferences may reasonably be drawn from the undisputed facts, summary judgment is improper.” (citation omitted)). Thus, neither party is entitled to summary judgment on the second element of Plaintiff's alter ego claim.
B. Fraudulent Transfer Claim
Defendants move for summary judgment on Plaintiff's fraudulent transfer claim. Under Arizona's Uniform Fraudulent Transfer Act (“UFTA”),
[a] transfer made . . . by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer . . . [w]ith actual intent to hinder, delay or defraud any creditor of the debtor[,] [or] [w]ithout receiving a reasonably equivalent value in exchange for the transfer . . ., and the debtor . . . [i]ntended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.A.R.S. § 44-1004(A). The UFTA enumerates the following factors for courts to consider, among other factors, in evaluating the “actual intent” prong:
1. The transfer or obligation was to an insider.
2. The debtor retained possession or control of the property transferred after the transfer.
3. The transfer or obligation was disclosed or concealed.
4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
5. The transfer was of substantially all of the debtor's assets.
6. The debtor absconded.
7. The debtor removed or concealed assets.
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.
9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
10. The transfer occurred shortly before or shortly after a substantial debt was incurred.
11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.Id. § 44-1004(B); see also Gerow v. Covill, 960 P.2d 55, 63 (Ariz.Ct.App. 1998) (“The statute provides a non-exclusive list of factors to consider when determining if actual intent to hinder, delay or defraud exists. . . . No further evidence of the common law elements of fraud are needed once actual intent is shown.” (citations omitted)).
Here, the transfers that Plaintiff alleges to be fraudulent within the meaning of the UFTA are the transfers of ND's assets to Ms. Neumann, through SN Trust, that left ND's capital insufficient to meet its obligations to Plaintiff under the Guaranty. (Compl. ¶¶ 38-43.) Defendants argue that Plaintiff's fraudulent transfer claim fails because Plaintiff has not, and cannot, establish that ND made any transfers to Ms. Neumann with the “actual intent to hinder, delay or defraud” or that any transfers were made “without receiving reasonably equivalent value in exchange.” (Defs.' Mot. at 7-8.) Defendants point out that ND's transfers to Ms. Neumann were consistent with the purpose of ND to serve as a holding company for her multiple ventures. (Id.)
In its Response, Plaintiff cites to the evidence that ND distributed hundreds of thousands of dollars to Ms. Neumann in 2016-the year of the default by HSCC that triggered ND's guarantor obligations-and distributed more than $7,000 to Ms. Neumann in 2017, despite showing a loss for that year. (Pl.'s Resp. at 7-8.) Plaintiff argues that, “[i]n other words, instead of paying off the liabilities from its income before distributing net profit to [Ms.] Neumann, ND distributed its gross profit to [Ms.] Neumann.” (Id.) Plaintiff discusses the factors enumerated in the UFTA for determining “actual intent to hinder, delay or defraud” and argues that the evidence is sufficient to support a finding that the transfers were made with the requisite intent. (Id.)
Considering the statutory factors and viewing the evidence in the light most favorable to Plaintiff as the non-moving party, the Court agrees with Plaintiff. While Defendants are correct that Plaintiff has produced no evidence that any transfers were made “without receiving reasonably equivalent value in exchange,” Plaintiff has produced evidence sufficient to satisfy its burden of production on the “actual intent to hinder, delay or defraud” prong of fraudulent transfer liability. Plaintiff has produced evidence demonstrating that ND made the transfers to an insider, Ms. Neumann, see A.R.S. § 44-1004(B)(1); that Ms. Neumann retained possession of the assets after the transfers, given that the assets were effectively in her possession prior to the transfer because ND is essentially an alter ego, see id. § 44-1004(B)(2); that the transfers occurred after ND was threatened with suit and/or shortly before or shortly after a substantial debt was incurred, see id. §§ 44-1004(B)(4), (B)(10); that the transfers were of substantially all of ND's assets, see id. § 44-1004(B)(5); and that ND became insolvent after the transfers in that it cannot meet its obligations to creditors, including Plaintiff, see id. § 44-1004(B)(9).
Based on this evidence, a reasonable factfinder could conclude that the transfers of ND's assets to Ms. Neumann were made with the “actual intent to hinder [or] delay” Plaintiff's recovery from ND under the Guaranty. Thus, Defendants are not entitled to summary judgment on Plaintiff's fraudulent transfer claim.
C. Tortious Interference Claim
Defendants move for summary judgment on Plaintiff's claim of tortious interference with contractual relations. Under Arizona law, “[t]ort liability may be imposed upon a defendant who intentionally and improperly interferes with the plaintiff's rights under a contract with another if the interference causes the plaintiff to lose a right under the contract.” ABCDW, LLC v. Banning, 388 P.3d 821, 830-31 (Ariz.Ct.App. 2016) (citing W. Prosser & W. Keeton, Law of Torts § 129 (5th ed. 1984)). To prevail on a tortious interference claim, a plaintiff must establish: (1) the existence of a valid contractual relationship; (2) the interferer's knowledge of such relationship; (3) intentional interference inducing or causing a breach; (4) resultant damage to the party whose relationship has been disrupted; and (5) that the defendant acted improperly. Id.
Defendants argue that Plaintiff's tortious interference claim fails on the third and fifth elements because Plaintiff cannot show that Ms. Neumann, individually or as trustee of SN Trust, had the intent to induce or cause a breach of the Guaranty and cannot show that Ms. Neumann acted improperly. (Defs.' Mot. at 8-9.) Plaintiff responds that it can establish both elements because the evidence shows that Ms. Neumann “intentionally dried up the revenue stream to ND such that it could not meet its obligations on the Guaranty, causing a breach of the Guaranty by ND,” and that she “accepted distributions from ND before any of ND's liabilities to [Plaintiff] were discharged, similarly leading to the breach of the Guaranty.” (Pl.'s Resp. at 8-9.) Defendants reply that such evidence fails to show that Ms. Neumann took any action with the intent to induce or cause a breach of the Guaranty. (Defs.' Reply at 6-7.) They argue that Plaintiff has not produced anything but a mere conclusion to support its allegation that Ms. Neumann acted improperly. (Id.)
While the Court does not agree with Defendants' contention that Plaintiff has failed to carry its burden of production on the intent element, it agrees that Plaintiff has failed to carry its burden on the impropriety element. Here, a reasonable factfinder could find that Ms. Neumann diverted funds from ND and continued to accept distributions from ND with the intent to render ND's assets insufficient to meet its obligations under the Guaranty. That is enough to satisfy the intent element. See Banning, 388 P.3d at 437 (“[A] plaintiff must show that the defendant either intended or should have known that a particular result was likely to be produced by his conduct.” (citing Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12 (2002))).
However, Plaintiff has not sufficiently established that Ms. Neumann's actions were “improper as to motive or means.” See Safeway Ins. Co., Inc. v. Guerrero, 106 P.3d 1020, 1026 (Ariz. 2005). As Defendants note (Defs.' Reply at 7), Plaintiff merely concludes that the evidence described above shows that Ms. Neumann's actions were “highly improper.” (See Pl.'s Resp. at 9.) But Plaintiff has not shown that Ms. Neumann used any improper means in diverting or accepting funds from ND. Further, while Ms. Neumann's motive in carrying out these actions may have been to render ND insolvent, such evidence of intent cannot satisfy the impropriety element-lest the two elements merge entirely. Indeed, the impropriety element calls for a distinct analysis, which involves “weighing the social importance the defendant seeks to advance against the interest invaded.” Safeway, 106 P.3d at 1026-27; see also id. (“Our case law thus emphasizes that a plaintiff must show more than the defendant's knowledge that his or her conduct would induce a breach to establish intentional interference with contractual relations.”). Plaintiff fails to address this analysis or to account for the distinction between the two elements. (See Pl.'s Resp. at 8-9.)
In sum, Plaintiff has failed to meet its burden of production on the fifth element of its tortious interference claim and Defendants are therefore entitled to summary judgment on that claim.
IT IS THEREFORE ORDERED denying in part and granting in part Defendants' Motion for Summary Judgment (Doc. 35), and dismissing Plaintiff's tortious interference claim (Count Three).
IT IS FURTHER ORDERED denying in part and granting in part Plaintiff's Motion for Summary Judgment (Doc. 37).
IT IS FURTHER ORDERED that this matter will proceed to trial as to Plaintiff's alter ego claim (Count One) and fraudulent transfer claim (Count Two), and the Court will set a pretrial status conference by separate Order.