Ortego et al V Lummi Island Scenic Estates Community Club, Inc et al

MOTION for Partial Summary Judgment Regarding RICO Claims

W.D. Wash.August 25, 2016

DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The Honorable Robert S. Lasnik UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WASHINGTON AT SEATTLE CHARLES E. ORTEGO, et al., Plaintiffs, v. LUMMI ISLAND SCENIC ESTATES COMMUNITY CLUB, INC., et al., Defendants. CASE NO. 2:14-cv-01840-RSL DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS Noted on Motion Calendar: September 16, 2016 Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 1 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - i (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 1 II. THE RICO CLAIMS .......................................................................................................... 1 III. STATEMENT OF UNDISPUTED FACTS ....................................................................... 2 A. LISECC’s Dues Have Always Been Adopted by the Members at Large and Have Always Paid for the Operation of the Water System. ............................. 2 1. 2009............................................................................................................. 2 2. 2010............................................................................................................. 3 3. 2011............................................................................................................. 5 4. 2012............................................................................................................. 8 5. 2013............................................................................................................. 8 6. 2014........................................................................................................... 12 B. LISECC Sought and Followed the Instructions of Professional Reserve Experts. ................................................................................................................. 14 IV. ARGUMENT AND AUTHORITY .................................................................................. 21 A. The Fraud-Based RICO Claims Fail for Lack of Any Fraud. ............................... 21 B. Defendants Have Acted Transparently and With No Intent to Defraud. .............. 23 V. CONCLUSION ................................................................................................................. 23 Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 2 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - ii (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 TABLE OF AUTHORITIES CASES Celotex Corp. v. Catrett, 477 U.S. 317 (2008) ..............................................................................23 Eclectic Props. East, LLC v. Marcus & Millichap Co., 751 F.3d 990 (9th Cir. 2014) ..................21 Howard v. Am. Online, Inc., 208 F.3d 741 (9th Cir. 2000) ............................................................24 Neder v. U.S., 527 U.S. 1 (2009) ...................................................................................................21 U.S. v. Beecroft, 608 F.2d 753 (9th Cir. 1979) ...............................................................................23 U.S. v. Moran, 493 F.3d 1002 (9th Cir. 2007) ................................................................................23 OTHER AUTHORITIES 18 U.S.C. §§ 1341 ..........................................................................................................................21 Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 3 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 1 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 I. INTRODUCTION Plaintiffs are members of the homeowners’ association (“HOA”) Lummi Island Scenic Estates Community Club, Inc. (“LISECC”) and they disagree with various policies adopted and actions taken by LISECC over the years. Although these policies and actions have been implemented with the broad support of LISECC’s members and with complete transparency from LISECC’s Board of Directors, Plaintiffs assert racketeering claims against LISECC and a select number of former and current volunteer members of LISECC’s Board. Because the Racketeer Influenced and Corrupt Organizations Act (“RICO”) was intended to combat the harmful effect of organized crime on the economy of the United States, not as a mechanism to reverse the democratic will of HOA members or to punish elected leaders who have taken views different from Plaintiffs’, Defendants LISECC, Mark Sexton, Ron Bain, Meredith Moench, Leslie and Paul Dempsey, Doug Cash, Timothy Slater, Kent Nielsen, Ken Swanson, and Bridged Lott (and their spouses) move for dismissal of the RICO claims collectively asserted by all the Plaintiffs. II. THE RICO CLAIMS There are two sets of RICO claims asserted in this lawsuit. First, there is a broad-based claim of fraud alleged by all of the Plaintiffs. From what Defendants can discern, Plaintiffs assert a four-pronged fraud scheme arising from actions taken by LISECC after Plaintiff Charles Ortego was removed from the Board by a large majority of the LISECC membership in 2011: (1) enforcing LISECC’s dues requirement; (2) enforcing LISECC’s bound lots policy; (3) determining the amount of dues; and (4) setting LISECC’s reserves policy.1 Second, Plaintiffs Charles Ortego and Anna Ponomareva assert RICO claims regarding their access to LISECC’s water system and actions allegedly taken on these Plaintiffs’ property. This motion addresses only the former, the RICO claims asserted by all of the Plaintiffs. 1 Second Am. Compl., ECF No. 79 at 51:16-18 (“False dues notices (because dues are not due, notices for dues are really mainly for water charges, and bound lots discounts make the amounts wrong for that reason too)”); id. at 52:3-4 (“take money from the 85%, get it into LISECC, then divert it to the 15% which includes most defendants”); id. at 5:2-3, 53:18-20 (“false assurances that LISECC reserves are healthy.”). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 4 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 2 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 III. STATEMENT OF UNDISPUTED FACTS A. LISECC’s Dues Have Always Been Adopted by the Members at Large and Have Always Paid for the Operation of the Water System. Pursuant to Article 4.5.1.1 of LISECC’s Bylaws, LISECC’s dues must be “authorized by the majority vote of the membership present at any meeting of the Community Club ….”2 Each LISECC Board has taken pains to be transparent in proposing budgets and dues to the membership. LISECC dues always have been set in this manner, including during the Board tenure of Plaintiffs Louise Weber, Boyd Barry, and Charles Ortego and each of the Defendants they sued. Moreover, LISECC members always have knowingly approved using dues charged to all lot owners – including those without water service – to pay for the upkeep and operation of the community’s water system.3 1. 2009 In 2009, while Plaintiffs Charles Ortego and Boyd Barry served on the Board, Plaintiff Victor Armfield wrote his fellow members: “At a previous board meeting, the finance chair announced that 71% of each members [sic] yearly dues is used for water related costs! That means that $387 of your dues this year went to water operations.”4 In the Spring 2009 LISECC newsletter, Board member Martha Patterson wrote members about the proposed 2009 budget and dues: [I]n October [2008], I presented a budget based on the ending September figures as is customary and the board met at a special budget meeting for a review…. Our budget now shows total income and total expenses. The accounts for the expenses have been worked and reworked to arrive at “easy to understand” categories for determining where the money is being spent. The CPI [Consumer Price Index] in September was 5.4% which is the number that could be used to increase dues. As a board we decided to keep the dues at last years [sic] figure of $545.08 …. I would recommend that you look over the budget included with your AGM [Annual General 2 Decl. of Mark R. Sexton (“Sexton Decl.”), Ex. 1. 3 Unlike water utilities and most private water systems, LISECC does not charge thousands of dollars for new members to connect to its water system. Rather, all lot owners pay for the water system and are entitled to connect to it. Decl. of Tim Slater (“Slater Decl.”) ¶ 2. 4 Decl. of Jessica L. Goldman (“Goldman Decl.”), Ex. 1 (emphasis added). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 5 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 3 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Meeting] paperwork. I will be happy to answer any budget questions at the AGM in April.5 At this time, the Board reached out to LISECC’s counsel to confirm the issues which required membership approval. Counsel Rich Davis advised on April 7, 2009 that “‘Dues’ are regular fees payable on an annual basis and are used for general operating expenses. Pursuant to the bylaws, ‘annual dues’ shall be levied by the Board on an equitable basis, without distinction or preference of any kind” and require membership approval.6 Further, he explained: “Unlike dues or assessments, [the] monthly water charges will be assessed with distinction. Specifically, they will only be levied against those members who are using water.”7 LISECC members received Mr. Davis’s letter that spring as explained by Plaintiff Victor Armfield: “[T]his year we have a dues charge of $548.00, of which 71% goes toward water…. The club lawyer, in the letter dated April 7, 2009, which you have a copy of says ….”8 At the 2009 AGM, the LISECC budget, including the proposed dues showing that each lot would be charged the same amount in dues, was approved by a majority vote of the members.9 2. 2010 In February 2010, Plaintiffs Louise Weber – an experienced bookkeeper10 – and Mark Mech wrote LISECC members that “[t]he current Board Finance Chairperson reported that 71% of every lot’s annual dues is spent on water related expenses. This means that each lot pays at least $387/year of the $545.08 dues for water operations already.”11 In the Spring 2010 LISECC newsletter, Board member Plaintiff Ortego explained that “the current dues rate of $545.08 per annum per lot … pays for a lot of things…clean water, clean roads, the marina and club house, as well as the cabana and park; and the salaries, parts, 5 Sexton Decl., Ex. 3. 6 Id., Ex. 4 (emphasis added). 7 Id. (emphasis added). 8 Goldman Decl., Ex. 2 (emphasis added); see also Sexton Decl., Ex. 5. 9 Sexton Decl., Exs. 2, 5. 10 Goldman Decl., Ex. 3 (L. Weber Dep.) at 12:10-18, 14:4-15:5. 11 Sexton Decl., Ex. 6 (emphasis added). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 6 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 4 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 equipment, and repairs necessary to keep all of this functioning.”12 He stated that “78% of LISECC revenues were spent providing water services.” Board member Martha Patterson wrote in the newsletter: “The 2010 budget was prepared using the September 2009 account figures and projecting them for the end of the year. In November we met as a board and viewed the proposed budget. Since the CPI for 2009 as of September was 0%, there will be no increase in dues.”13 In March 2010, Ms. Patterson e-mailed Plaintiff Ortego: “The paragraph about who pays for water says the water part of the dues is 90%. Sorry I was wrong about that figure it was 73% on the 2009 budget and will be 75% on the 2010 budget.”14 Plaintiffs Charles Ortego and Anna Ponomareva then joined several others in writing approvingly to LISECC members: “Right now, 73% of LISE expenses have to do with providing water, so non-water users already see 73% of their dues go toward providing water which they do not use. In fact, no-one is exempt from paying their fair share of the cost of providing water.”15 In October 2010, Plaintiff Louise Weber wrote to the state regulators overseeing a loan to LISECC to improve its water system. Reflecting the fact that she is a full-time resident and water user,16 she complained that the loan fees, unlike dues, were “ONLY” being charged to those members with water connections. I have not yet found the documentation regarding the state’s “requirement” (per [LISECC Board president] Boulton) that ONLY those with “water connections” pay for the entire loan and build up of water reserves. All LISE owners have access to water whether they have a water hook up or not, and equally own the water system. We have approximately 442 lots, while only 214 are currently being billed for this DWSRF loan requirement of $49/mo, and those 214 will also be billed an additional fee for water usage once water meters are installed. Please send me all documents, including emails where the state made this requirement that only those owners with a current water hook-up should pay both a $25/mo water reserves loan fee and an 12 Id., Ex. (emphasis added). 13 Id. (emphasis added). 14 Slater Decl., Ex. 1 (emphasis added). 15 Goldman Decl., Ex. 4 (emphasis added). 16 Id., Ex. 12 at Interrog. Nos. 5, 9. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 7 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 5 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 additional $24/mo capital assessment fee in addition to the $545 annual dues (of which at least 70% takes care of the water system operations for the LISE water system).17 Ms. Weber carefully reviewed the 2011 budget and dues proposed by LISECC’s Board – during Plaintiff Charles Ortego’s Board tenure – which showed that, excepting only five lots owned by LISECC and the “bound” lots, the owner of each lot, irrespective of water use or service, was to be charged $625 in dues.18 The proposed budget also spelled out that the dues would be used “75% water/25% other” and set forth all expenses in line items, including the dominant costs associated with maintaining and running the water system.19 3. 2011 Ms. Weber again corresponded with the State regulators in January 2011. Again she pressed her view that all lots should pay the same amounts to cover costs associated with LISECC’s water system. She explained: “All members of LISE are water customers and can get water at all times whether or not they have a hook up. We also pay dues of $545.07/year which pays for the operation of the water system, as we have very little else to keep up collectively.”20 On the verge of being removed from the Board by LISECC’s members, Plaintiff Ortego took issue with the views of Plaintiffs Louise Weber and Victor Armfield, to whom Mr. Ortego referred as a “group of malcontents,” “finger-pointers,” and “LISECC’s perpetual party of ‘NO!’”21 Mr. Ortego wrote in LISECC’s Spring 2011 newsletter: First of all, clearly understand that the state loan was for the benefit of drinking water users, and the state intended that the loan be paid for by drinking water users. Most lots in LISECC do NOT have water, and it is most likely that most will NEVER have water (there remain less than 10 available connections). Nonetheless, this group of perpetually unhappy property owners, most of whom are full-time residents, want ALL lots to pay for improvements to the water system. In other words, they want the lot owners who have no 17 Id., Ex. 5 (emphasis added). 18 Id., Ex. 6. 19 Id. 20 Id., Ex. 7 (emphasis added). 21 Sexton Decl., Ex. 9. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 8 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 6 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 water, and will likely NEVER have water, to subsidize the bill for those who do not have water.22 In turn, Ms. Weber and Mr. Armfield spearheaded a campaign to remove Mr. Ortego from the Board, a move supported by Plaintiffs LaPriel Barnes, Boyd Barry, Grant Bowery, Linda Fengler, Midiana Bilik-Franklin, Ruth Gross, Joy Krell, Mark Mech, Lee Mundstock, Richard Owen, and John Weber.23 At the March 19, 2011 meeting called by 13 of the Plaintiffs, members voted 95 to 34 to remove Plaintiff Ortego and LISECC president Bill Boulton from the Board.24 Seven LISECC members, including Defendants Mark Sexton, Paul Dempsey, Ken Swanson, Leslie Dempsey, and Meredith Moench, stepped into the void just before the April 2011 AGM of LISECC’s members.25 At the AGM, the new Board addressed the proposed 2011 budget. Ms. Dempsey informs the membership that if the proposed 2011 budget does not pass in the voting today then we will revert back to the 2010 budget. Meredith says the 2011 budget is very flawed. Mark recommends a NO vote on the proposed 2011 budget. Paul moved, Leslie seconded, to approve the 2011 budget. The motion fails. The proposed 2011 budget did not pass.26 The minutes from the AGM explained: “The 2011 Budget did not pass. According to the bylaws we roll back to the 2010 budget. Dues amount for 2011 will be $545.08.”27 Plaintiff Louise Weber immediately joined the Planning and Finance Committees advising the LISECC Board and by October 2011 had volunteered for, and been appointed, LISECC’s treasurer.28 It was her view “that after looking at the percentage amounts of budget categories that went to water and to base expense, that we were better off staying with the one dues system.”29 In the Fall 2011 LISECC newsletter, Defendant Leslie Dempsey reported: 22 Id. 23 Goldman Decl., ECF No. 49, Exs. 51-52. 24 Sexton Decl., Ex. 10. 25 Id, Ex. 11. 26 Id., Ex. 12. 27 Id. 28 Id., Ex. 13. 29 Goldman Decl., Ex. 8. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 9 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 7 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The LISECC Finance Committee presented two different proposals for a new water loan fee schedule to the Board at the August 28, 2011 Board meeting. Both proposals are based on the premise that the water distribution system work that was performed under the scope of the DWSRF loan was a capital improvement to our water system, and as such all members should participate in the repayment.30 The Board convened a special meeting of the LISECC membership on November 5, 2011 to determine the 2012 budget and dues. Leslie Dempsey went over the highlights of the budget and answered questions. The board has rolled back the half dues on bound lots and that is reflected in this proposed budget. $10,000 has been budgeted for doubtful accounts for members who do not pay their dues. LISECC has hired a new attorney and are [sic] anticipating a much lower level of expenses. The board has made changes to how employees are compensated and made a reduction in employee benefits in order to reduce costs. Leslie indicated that the board did not unanimously approve the budget and there was much discussion amongst the board regarding this budget. Leslie states this is a really tight budget that results in lower dues and the incorporation of the water fee into operating expenses. It allocates approximately $22,000 into reserves. Discussion followed.31 The members were presented with the proposed 2012 budget which showed that, with the exception of the five lots owned by LISECC and the “bound lots,” each lot, irrespective of water service, would be charged $496 in dues. This information also was explained as follows: 32 30 Sexton Decl., Ex. 14 (emphasis added). 31 Id., Ex. 15. 32 Id. (highlighting added). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 10 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 8 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The 2012 budget and dues were approved by 77% of LISECC members.33 4. 2012 In August 2012, at a regularly-scheduled monthly meeting, the Board discussed its work on the 2013 budget.34 “[Defendant] Meredith [Moench] went over the 2013 Proposed Budget Draft. The finance committee has prepared the draft budget taking into consideration the 40 lots that are currently non-paying. Discussion followed. [Defendant] Mark [Sexton] recommends the board members take home the proposed budget for review.”35 In the Winter 2012 LISECC newsletter, Ms. Moench reported to LISECC members: The 2013 budget proposal presented here is the result of many hours of work on the part of Finance Committee members. Along with input from Operations, they have scrutinized all club expenses in order to put forward a realistic but lean budget. The new tiered water fee structure developed with input from Planning is a step toward acknowledging diverse patterns of water usage among members while hopefully better encouraging conservation. We have also included funds for completion of our application to the state for additional permitted water connections.36 Plaintiff Louise Weber carefully scrutinized the proposed 2013 budget and dues increase and wrote to fellow LISECC members urging them to vote down the dues increase.37 In December 2012, LISECC conducted a mail-in vote on the proposed budget which was supported by 82% of LISECC’s members.38 5. 2013 In February 2013, Ms. Weber sued LISECC in Small Claims Court alleging that votes on budgets needed to be taken at an in-person meeting of the members, not by mail.39 The 33 Id. 34 Board meetings occur at regularly scheduled times and are open to all LISECC members. Minutes of meetings, quoted herein, were prepared monthly and posted to LISECC’s website. Sexton Decl. ¶ 18. 35 Id., Ex. 17. 36 Id., Ex. 18. 37 Goldman Decl., Ex. 9. 38 Sexton Decl., Ex. 20. 39 Id., Ex. 21. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 11 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 9 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 commissioner ruled in her favor and the Board conducted the in-person vote on the 2013 budget and dues at the AGM later that year.40 In the Spring 2013 LISECC newsletter ahead of the AGM, Board President, Defendant Mark Sexton, provided members with the proposed 2013 budget and dues and wrote that LISECC members “must vote” on the proposed budget at the AGM. The enclosed budget is fundamentally the same as that circulated in November of 2012 and for which 79 members voted in favor and 17 voted against. Please review it carefully. There are two changes but the bottom line is still the same and the 2013 proposed dues increase remains the same. Speaking of our budget, you surely noticed the increase in the dues amount…. I am excited that we finally have budgeted for the engineering work to increase our number of potential water connections…. Additional money has been budgeted for work on the storage tanks in order to keep our water system functioning well.41 The 2013 AGM was presided over by the seven Board members, including Defendants Kent Nielsen, Meredith Moench, Ron Bain, Doug Cash, and Mark Sexton and two individuals Plaintiffs did not sue. Members were provided a two-page “Budget Explanation” from the Board. The 2013 budget being presented to you is essentially the same as the one presented last fall. It is very important that you understand that this 2013 budget is based upon a dues increase of $94/lot, or $7.83 per month ($590/lot/year)*.... Most important, this 2013 proposed budget includes the engineering expense needed to complete our water system analysis, the final step in our application to the state for additional water connections for our members. The board has made this a top priority as we approach the limit of our currently permitted number of connections. As explained previously, the increase in dues is driven by increased costs, including a CPI raise to our employees approved by member vote last year, increased taxes, cost of some supplies and utilities, high legal costs and a reduced income pool as a result of the increasing number of delinquent accounts who are not paying their dues. Budget Failure: If the budget is not approved, according to our bylaws we will revert back to our 2012 budget ($496/lot/year and 40 Id., Ex. 22. 41 Id. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 12 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 10 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 $228/water connection). This would mean higher water charges for members who have water connections but do not use any water…. Fixed expenses such as employee wages, insurance, taxes, permits, administrative costs, and water testing will have to be met. Severe cuts would likely be made in maintenance and engineering, delaying our application once again for more water connections….42 The Board provided the following guide of the impact the proposed dues would have on different types of LISECC members, demonstrating that no matter how much water they used, they would all pay the same dues. 43 At the 2013 AGM, Defendant Meredith Moench “went over the proposed budget and dues increase, explaining that the $10,000 allocated for engineering is for completion of our application to the state for additional water hook-up permits.”44 LISECC’s members approved the proposed 2013 budget and dues increase by a substantial 79% majority.45 42 Id., Ex. 23 (emphasis original). 43 Id. (highlighting added). 44 Id., Ex. 24. 45 Id. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 13 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 11 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 On November 9, 2013, Board members and Defendants Kent Nielsen, Doug Cash, Bridged Lott, Ron Bain, Tim Slater and Mark Sexton convened a special meeting of LISECC’s members so they could determine the 2014 budget and dues. Kent Nielsen states the finance committee has prepared a conservative, but responsible budget that does not include a dues increase and tries to deal with the looming issue of legal expense [caused by Plaintiffs’ state court lawsuit against LISECC]. This includes drawing money from the professional and legal services reserve for the legal expense. Discussion followed.46 Members were presented with the proposed 2014 budget, showing line-item comparisons to prior budgets. It showed that, except only the five lots owned by LISECC and the “bound” lots, every other lot, irrespective of water use, would be charged dues of $590, most of LISECC’s income.47 48 46 Id., Ex. 25. 47 Id. 48 Id. (highlighting added). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 14 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 12 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 LISECC members approved the 2014 budget and dues by 89%.49 6. 2014 In the Summer 2014 LISECC newsletter, the Board addressed in detail the proposed budget and dues that would be presented at that year's AGM to be held in August. Defendant Kent Nielsen explained: Attention will be given to those line items that differ significantly from the 2014 budget. Under Operations, line 1020 shows a $2,000 increase for Building Maintenance. This increase is to put a new coating on the clubhouse roof. Otherwise the proposed expenses are the same. Under Utilities (500) the proposed budget has been increased slightly to cover telephone and website cost. Under Administration, line 640 has been reduced to ~$17,000. This reflects the belief that [Plaintiffs’ Superior Court] lawsuit will be resolved in 2014. Obviously, if the judge does not reach a decision then we will be contacting the members to amend the budget or discuss other revenues from the community. Under Employee, line 730 includes an additional $35,000 to hire a part time General Manager. This is a notable increase in salaries which has resulted in an increase in the dues. There is also an increase in wages for our current staff based on the CPI. They have not had a raise for several years during the recession and the board felt that we need to provide one. Under License & Taxes (800) there is little change. Under Water (900) the higher priority projects have been addressed. Line 910 includes $3,000 for general maintenance with an additional $8,000 to replace two critical valves in the treatment plant. Line 930 has been reduced $2,000 as the renovation to the storage tanks was accomplished in 2013/2014. Line 940 is similar to last year and involves $3,000 for general maintenance with $10000 designated for repair or replacement of roughly 10% of the various valves in the distribution system. This is a forward looking program to keep our water system operating effectively. Line 950 includes $7,500 for engineering services to design a circulation system for our storage tanks to insure water quality. The remaining line items are the same as 2014. To balance the expenses, the income has been increased primarily by a recommended dues increase of $65/year….50 The 2014 AGM was called by Defendants Kent Nielsen, Doug Cash, Ron Bain, Bridged Lott, and Mark Sexton. Mr. Nielsen “went over the 2015 Proposed Budget ….”51 Members 49 Id. 50 Id., Ex. 26. 51 Id., Ex. 27. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 15 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 13 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 received a detailed comparison of the proposed 2015 budget to prior budgets.52 Again, the Board showed that no matter how much water lot owners used, they would all pay the same dues. 53 LISECC members adopted the proposed 2015 budget and dues by a commanding 69%.54 52 Sexton Decl. ¶ 29; Id., Ex. 28. 53 Id., Ex. 28 (highlighting added). 54 Id. Following the filing of this lawsuit, 97% of LISECC members voted in favor of the proposed 2016 budget and dues. Id., Ex. 29. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 16 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 14 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 B. LISECC Sought and Followed the Instructions of Professional Reserve Experts. In 2009, while Plaintiff Charles Ortego served on the Board, LISECC set up a reserve fund to satisfy the requirements of the state loan the HOA had obtained to update a portion of its water distribution system. Board President Bill Boulton wrote to members in the LISECC newsletter: Starting January 1, 2010, LISECC will begin billing Club members who have water connections $24 per month as the DWSRF contract requires for loan repayment…. As a condition of the loan, LISECC must continue to collect $25 per month per water connection as reserves and charge the $24 per month loan repayment fee. These fees will build adequate reserves for future maintenance of our water system and to repay the loan.55 In the Spring 2011 LISECC newsletter, just before he and Plaintiff Charles Ortego were voted off the Board by LISECC’s members, Mr. Boulton advised members: “Our water reserve account will allow for the future replacement of our water system.”56 Mr. Ortego, in turn, wrote: LISECC’s financial health has been improving due to the fact that rather than depleting reserves and raiding interest earnings from reserves, we are now building reserves as a result of the community’s overwhelming majority decision from last year’s AGM to earmark new funds to repaying the state loan and also building adequate financial reserves for future needs.57 Following Mr. Ortego’s removal from the Board, the new Board moved to stabilize the HOA. At the January 2012 Board meeting attended by Plaintiffs Armfield and the Webers, Defendant Meredith Moench reported that “[e]ffective January 2012 RCW 64.38 requires [an] HOA reserve study. [Lee McCollum] made [a] motion for Planning Committee to review RCW and begin analysis of LISECC assets and reserve requirements…. [U]nanimously approved.”58 At the July 2012 Board meeting, Ms. Moench moved that we hire a reserve study professional and that we withdraw money from our reserve account to pay for that with the understanding that we will notify the members…. Mark [Sexton] made a friendly amendment by stating that this motion be pending 55 Id., Ex. 30 (emphasis added). 56 Id., Ex. 9 at 3. 57 Id. at 11 (emphasis added). 58 Id., Ex. 31 at 2. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 17 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 15 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Meredith getting estimates and providing the board with that information. Meredith accepts this friendly amendment.59 The motion passed.60 At the November 2012 Board meeting, Ms. Moench requested “that the board [] help her to decide what the scope of the reserve study would be. She did some research on the reserve studies and provided this information to the board. Discussion followed.”61 In the Winter 2012 LISECC newsletter, Ms. Moench informed members: [T]he Board has agreed to hire a reserve professional to conduct a reserve study analysis for LISECC in 2013…. A modest contribution to reserves is included in the 2013 budget, but it is anticipated that in the future we will be required to increase our reserve funding as a result of this reserve analysis. We currently have approximately $247,000 in reserves.62 At the December 2012 Board meeting, Defendant Ron Bain moved to approve the Level 1 reserve study as quoted in the information Meredith [Moench] has provided…. MOTION: Meredith made a motion to table the motion regarding the Level 1 reserve study…. The motion passed unanimously. Meredith will get a second quote and bring this to the next board meeting.63 At the January 2013 Board meeting, Ms. Moench reported that she “was unable to get a second reserve study bid, because the others who do reserve studies in the area do not have experience with water systems. MOTION: Meredith made a motion to accept the presented bid for full reserve study…. Discussion followed…. The motion passed.”64 At the February 2013 Board meeting, Ms. Moench stated that [LISECC staff] went through all the minutes back to the last audit done in 2002 and pulled out all the motions regarding reserve funds. Att Lilyroth has prepared a spreadsheet of these motions showing the money going in and coming out of reserves. However, the motions are often vague and it is undetermined if the funds were actually moved as the motions suggest. Because of this 59 Id., Ex. 32 at 2. 60 Id. 61 Id., Ex. 33 at 1. 62 Id., Ex. 18 at 2. 63 Id., Ex. 20 at 1. 64 Id., Ex. 34 at 2. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 18 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 16 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 our accountant, Julie Harkness, has recommended that we have a vote at the AGM to establish a new base line of reserves. MOTION: Meredith made a motion to place on the ballot for the AGM a new reserve base line for the reserves for the membership to vote on…. Discussion followed. The motion passed unanimously.65 In the Spring 2013 LISECC newsletter, President Defendant Mark Sexton wrote members: We are proceeding with a reserve study to understand how large our reserve account should be…. We are asking for your support behind the idea that we establish a baseline for our reserves based on our bank account balances on the last day of 2012. Our accounting and documentation has been so lax in the past that we can’t absolutely say what funds were meant for reserves. Drawing a line at 12/31/12 and saying that our balances at that time equals our reserves allows us to have a starting point that is clear.66 Ms. Moench, in turn, reported: On your ballot you will see an item asking for your approval to set the reserve account baseline going forward at $268,553.05. The board is asking you to approve this at the recommendation of our accountant. It is accurate to the best of our knowledge upon review of all past board minutes recorded since our last audit in 2002. Unfortunately, these records are incomplete and it is difficult to reconcile reserve amount activities with current account balances. We therefore need to agree to a baseline amount going forward and be sure to precisely record in our minutes all reserve account activities ….67 At the March 2013 Board meeting, Ms. Moench moved “for the board [to] approve setting the reserve base line for $268,553.05 and add this to the AGM ballot for members to vote on…. Discussion followed. The motion passed unanimously. Meredith states the reserve study site visit is planned for Thursday, March 21, 2013 at 1:00 p.m. at the treatment plant.”68 Plaintiffs Victor Armfield and Louise Weber were well-versed on the Board’s proposal and urged fellow members, including Plaintiff Joy Krell, to reject it. “Vote no on the reserve account at this time. We have not received a final report from the consulting firm that the board voted to hire at the March 16th, 2013 board meeting.”69 65 Id., Ex. 21 at 1; see also Decl. of Meredith Moench, Ex. 1. 66 Sexton Decl., Ex. 22 at 1. 67 Id. at 2 (emphasis original). 68 Id., Ex. 35 at 2. 69 Goldman Decl., Ex. 10. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 19 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 17 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 On March 17, 2013, Defendant Mark Sexton signed the contract with Reserve Consultants, Ltd. to perform a Standard Full Reserve Study (Level 1) which provides every requirement of the Washington … Homeowners’ Association Act as applicable, an executive summary, 30-year spreadsheet detailing costs and contributions in constant and inflated dollars, a Fully Funded Balance table to gauge the Association’s overall health, and the component worksheets detailing quantity counts, cost estimates, and estimated repairs.70 On April 13, 2013, LISECC’s members convened for the AGM. Ms. Moench reported: [T]he board hired a Reserve Study Consultant to prepare a full reserve study to give LISECC an idea as to how much money should be held in reserves. This study will help us budget for future needs. The preliminary report indicates that LISECC is currently 88% funded; this is considered exceptional. On the ballot, the board is asking the members to approve the reserve baseline of $268,553.05 as recommended by accountant, Julie Harkness. Meredith states this is the reserve bank account balance as of 12-31-12.71 A majority of 86% of the members voted to set the reserve account baseline to $268,553.05.72 In May 2013, members of the Finance Committee and the LISECC Board members – including Plaintiff Louise Weber – reviewed a draft of the reserve analysis.73 Defendant Kent Nielsen, a Board member and the chair of the Finance Committee, compiled the comments about the draft report and submitted those comments to the LISECC Board for discussion at the May 2013 Board meeting.74 Ms. Weber and Plaintiff Armfield attended that Board meeting where the Board discussed the “general list of comments and potential suggestions for the reserves” which Mr. Nielsen “has provided.” 75 He reported that “[t]he main item he wants to draw awareness to is the leak in the dam. It will need to be fixed at some point and the reserve specialists have recommended adding this to the reserve study. This will add $9,000 or so dollars per year to fund 70 Sexton Decl., Ex. 36 at 1. 71 Id., Ex. 24 at 1. 72 Id. at 2. 73 Decl. of Kent Nielsen (“Nielsen Decl.”) ¶ 2. 74 Id. ¶ 3 & Ex. 1. 75 Sexton Decl., Ex. 37 at 2. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 20 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 18 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 the reserve. Discussion followed.”76 Mr. Nielsen advised the reserve experts about the comments from the Board and from Plaintiff Louise Weber which led the reserve experts to increase the recommended annual contribution to LISECC’s reserve account.77 LISECC received the final 78-page Reserve Study on May 31, 2013 from civil engineer Bob Steimer of Reserve Consultants.78 The Reserve Study explained that its purpose is to recommend a reasonable annual reserve Contribution Rate made by an association to its reserve account. Reserve accounts are established to fund major maintenance, repair, and replacement of common elements … expected to be necessary within the next thirty years. A Reserve Study is intended to project adequate funds for the replacement or major repair of any significant component of the property as it becomes necessary without relying on special assessments. It is a budget planning tool which identifies the current status of the reserve account and a stable and equitable Funding Plan to offset the anticipated future major shared expenditures.79 Mr. Steimer concluded that LISECC’s reserve account was 80% funded.80 “At 80%, Lummi Island Scenic Estates is considered well funded.”81 The Study explained that the “fully funded balance” would be $335,443 and recommended an annual contribution of $114 per lot for 2014 with an annual increase thereafter commensurate with the rate of inflation.82 On June 14, 2013, the Finance Committee, including Defendants Neilsen, Moench and Leslie Dempsey, met and discussed the Reserve Study’s recommendation to put $16,357 into reserve this year and the recommended reserve for 2014 will be $45,800. This is a large increase, but there are several items that are scheduled for repair this year and next to be taken out of reserve. This exchange will help keep the effective increase at a more manageable number. The reserve study will also be circulated to the board next week.83 76 Id. 77 Nielsen Decl. ¶ 4. 78 Sexton Decl., Ex. 38. 79 Id. at 6. 80 Id. at 4. 81 Id. at 14 (emphasis added). 82 Id. at 4, 13. 83 Nielsen Decl., Ex. 2. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 21 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 19 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Plaintiff Armfield attended the June 23, 2013 Board meeting.84 Kent Nielsen “went over the detail of the final reserve study. Kent suggested placing the completed reserve study on the website…. MOTION: Tim [Slater] made a motion to adopt the Reserve Study prepared by Reserve Consultants on 5-31-13…. Discussion followed. The motion passed unanimously.”85 The Reserve Study was posted to the LISECC website shortly thereafter.86 In the Fall 2013 LISECC newsletter, Board President Defendant Kent Nielsen explained: Everyone realizes the fundamental importance of a reserve. It is literally the “rainy day” fund. Most of us have thought of it as a savings account that sits passively on the sidelines waiting to be called in emergency. The concept of the reserve in our current analysis is that of a dynamic, integrated, long range element linked closely with our operating budget. The analysis evaluates all of the components of our community, such as the docks, the clubhouse, the treatment plant, and so on. Each component is evaluated as to the replacement cost and lifespan. A time line is created for the progressive replacement of each component. Then, the available funds are projected into the future with these replacement cycles identified. Finally, it is possible to calculate the annual contribution necessary to keep the reserve solvent. With judicial [sic] use of funds, the reserve will not drop below a critical level, will grow, and in the end prevent the need for assessments. That makes the organization a much more stable financial institution. The good news is that our reserve is 80% funded. That is considered a very good position when compared to similar communities…. The complete reserve analysis is available on our website under the financial documents…. We now have a long range planning tool and the funds to handle each component in turn. The flow of funds from the reserve to the operational budget will be transparent. Funds will be identified in the reserve account as to the component. The minutes of the monthly board meeting will specifically identify those funds, how much, and the purpose of the funds.87 LISECC then undertook an audit by an independent accountant. At the October 20, 2013 Board meeting, she advised “that LISECC is a pretty healthy organization and the fact that LISECC has over $250,000 in reserves shows that the volunteer board members are being good custodians of LISECC’s assets and preparing for future needs.”88 84 Sexton Decl., Ex. 39 at 1. 85 Id. at 2. 86 Nielsen Decl. ¶ 5. 87 Sexton Decl., Ex. 40 at 3-4 (emphasis added). 88 Id., Ex. 41 at 1. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 22 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 20 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 LISECC’s subsequent Boards have complied with the recommendations of the Reserve Study and have transparently accounted for transfers into and out of the reserve account.89 In the Summer 2014 LISECC newsletter, Defendant Mark Sexton wrote: The reserve study validated that LISE has been financially sound and responsible. The application of reserve accounting in our budget process has shown that we are continuing to add to our reserve account. The study showed that we were 80% funded, which they felt was very good. We are now 82% funded, and at the completion of the 2015 budget cycle we are projecting an increase to 87% of our funding goal.90 At the August 2014 AGM, Mr. Nielsen reported that “the LISECC reserve funds appear to be in healthy shape at 80% funded, providing that LISECC continues to make contributions in a timely fashion.” He “went over the 2015 Proposed Budget and discussed the reserve, which is scheduled to be 86% funded by the end of 2015. $335,000 is considered fully funded for the reserve fund. Discussion followed.”91 At the August 2015 AGM, Defendant Tim Slater “discussed the reserve summary he prepared. According to the Reserve Study we will be fully funded at $335,000 but we still need to contribute to prepare for any expenses that come up.”92 Defendant Ken Swanson advised that “the Reserves are in great shape. So far this year we have collected 81% of the dues and last year we collected 88% at this time.”93 On July 21, 2016, following a site visit, Reserve Consultants LLC issued a Reserve Study Update.94 It was prepared by reserve study professionals and “meets the requirements of the Washington Homeowners’ Association Act.”95 As of May 31, 2016, LISECC’s reserve account balance was $379,045.96 The report concludes that LISECC’s “fully funded balance” would be 89 Sexton Decl. ¶ 43; id., Ex. 42; id., Ex. 26 at 4-5; id., Ex. 43 at 1; id., Ex. 44 at 2; id, Ex. 45 at 2; id., Ex. 46 at 2; id., Ex. 47 at 2. 90 Id., Ex. 26 at 2 (emphasis added). 91 Id., Exs. 27, 28 at 1 (emphasis added). 92 Id., Ex. 29 at 1. 93 Id. at 2. 94 Sexton Decl., Ex. 48. 95 Id. at 3. 96 Id. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 23 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 21 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 $393,557, making LISECC 96% “funded at [the] time of [the] study,” which is considered “well funded.”97 IV. ARGUMENT AND AUTHORITY The RICO claims asserted by all the Plaintiffs are based on alleged mail and wire fraud pursuant to 18 U.S.C. §§ 1341 and 1341.98 Plaintiffs assert a four-pronged fraud scheme arising from: (1) the enforcement of the dues requirement; (2) the enforcement of the bound lots policy; (3) the determination of the amount of dues; and (4) the reserves policy.99 “The mail and wire fraud statutes are identical except for the particular method used to disseminate the fraud, and contain three elements: (A) the formation of a scheme to defraud, (B) the use of the mails or wires in furtherance of that scheme, and (C) the specific intent to defraud.”100 The failure to establish any of these elements is fatal to a RICO claim. Summary judgment is warranted because there is no scheme to defraud and because there is no evidence Defendants intended to defraud anyone. A. The Fraud-Based RICO Claims Fail for Lack of Any Fraud. A scheme to defraud requires a misrepresentation or concealment of a material fact.101 There has been no such misrepresentation or concealment in regards to Plaintiffs’ alleged four- pronged fraud scheme. As to the first prong, the “dues are not due” charge, this Court has held that LISECC properly and lawfully required that owners in LISE Divisions 1 and 2 pay dues.102 As set forth in Defendants’ second motion for summary judgment, the same also is true for the owners in all of 97 Id. 98 Second Am. Compl. ECF No. 79 at 51:10, 51:15, 52:9-54:7. 99 Id. at 51:16-18 (“False dues notices (because dues are not due, notices for dues are really mainly for water charges, and bound lots discounts make the amounts wrong for that reason too)”); id. at 52:3-4 (“take money from the 85%, get it into LISECC, then divert it to the 15% which includes most defendants”); id. at 5:2-3, 53:18-20 (“false assurances that LISECC reserves are healthy.”). 100 Eclectic Props. East, LLC v. Marcus & Millichap Co., 751 F.3d 990, 997 (9th Cir. 2014). 101 Neder v. U.S., 527 U.S. 1, 22-24 (2009). 102 Order Granting in Part Mot. to Dismiss, ECF No. 40. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 24 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 22 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 the other LISE divisions.103 Defendants have not misrepresented or concealed any material fact regarding the obligation of LISECC members to pay dues. Regarding the second prong, this Court has held that Defendants properly and lawfully have applied LISECC’s longstanding bound lots policy.104 Defendants have not misrepresented or concealed any material fact regarding the lawful bound lots policy. As prong three, Plaintiffs allege that LISECC has charged too much in dues because a portion of the dues pays for LISECC’s water system which Plaintiffs allege “benefit[s] a minority of LISE owners including most defendants” who are full-time residents of LISE “whilst oppressing and financially harming the 85% majority” who are part-time LISE residents and use less water than the full-time residents.105 Setting aside the fact that Plaintiffs and Defendants are comprised of a mix of full-time and part-time LISE residents and the conundrum of how an “85% majority” could be “oppress[ed],” Plaintiffs fail to point to a single misrepresentation or concealment of material fact by Defendants regarding who pays dues and how dues are used.106 Defendants’ budgeting and spending on behalf of the HOA has been completely transparent to LISECC’s members. It is not enough that Plaintiffs vehemently disagree with LISECC’s policy of charging all members equally for upkeep of LISECC’s water system.107 Plaintiffs allege as the final prong of their fraud claim that Defendants have made “false assurances that LISECC reserves are healthy.”108 Defendants, volunteer members or former 103 Defs.’ Mot. for Partial Summ. J. re: Plat Covenants, ECF No. 90; Defs. Reply Brief in Supp. of Mot. for Partial Summ. J. re: Plat Covenants, ECF No. 106. 104 Order Granting Defs.’ Mot. for Summ. J. re: Bound Lots Claims, ECF No. 80. 105 Second Am. Compl., ECF No. 79 at 2:4-9, 3:1-9. 106 See supra § III.A. 107 As with all of their allegations, Plaintiffs are not exactly of one mind. So, for example, Plaintiff Victor Armfield wrote to LISECC members in 2009: “We have to start pulling together and have one equal amount of dues… The water system is a capital improvement that all LISE owners will benefit from. All lots have equal access to water and all lots are guaranteed a water hook up…. According to our bylaws, the loan repayment should be shared equally by all lots, as the ownership is by all lots.” Goldman Decl., Ex. 1. Likewise, Plaintiff Louise Weber wrote to the Board in 2009: “Our water distribution pipes, owned collectively and equally by every lot in LISE, run through or along each and every parcel. Therefore, the service of water is ‘rendered’ or made available to each lot. So, the dues paid by the LISE Owners already pay for this service, and have since the inception of this Community Club.” Id., Ex. 11. 108 Second Am. Compl., ECF No. 79 at 5:2-3. Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 25 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 23 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 members of LISECC’s Board, are not reserve experts and, hence, they engaged an outside reserve analyst and an outside accountant to evaluate LISECC’s reserves and advise on the best practices going forward. According to these independent experts, LISECC’s reserve account in 2013 was “well funded” and today it remains “well funded.”109 LISECC’s independent accountant concluded that “the fact that LISECC has over $250,000 in reserves shows that the volunteer board members are being good custodians of LISECC’s assets and preparing for future needs.”110 Defendants have accurately reported these expert conclusions to LISECC’s members. Plaintiffs have failed to offer any evidence – and none exists – of a scheme to defraud, a prerequisite to their RICO claim. B. Defendants Have Acted Transparently and With No Intent to Defraud. Good faith is a complete defense to allegations of mail and wire fraud.111 The evidence here supports only one conclusion. Defendants acted honestly and transparently in advising LISECC’s members about each of the four issues on which Plaintiffs rest their fraud claim. The minutes of the regularly-scheduled Board meetings and AGMs – meetings which Plaintiffs frequently attended – and the quarterly newsletter demonstrate that Defendants intended to protect and strengthen their HOA and that Defendants did what they said they would do.112 For this reason too, Plaintiffs’ RICO claim fails. V. CONCLUSION “One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses.”113 Because the undisputed evidence demonstrates that Defendants did not misrepresent or conceal any material fact and that Defendants acted in good 109 Sexton Decl., Ex. 38 at 14; id., Ex. 48 at 3. 110 Id., Ex. 41 at 1. 111 U.S. v. Moran, 493 F.3d 1002, 1012-1013 (9th Cir. 2007); U.S. v. Beecroft, 608 F.2d 753, 757 (9th Cir. 1979). 112 See supra § III. 113 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (2008). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 26 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 24 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 faith, Plaintiffs’ four-pronged RICO fraud claim fails. Defendants respectfully move for summary judgment dismissal of such claims and the related RICO conspiracy claims.114 DATED this 25th day of August, 2016. Respectfully submitted, SUMMIT LAW GROUP PLLC Attorneys for Defendants By s/ Jessica L. Goldman Philip S. McCune, WSBA #21081 Jessica L. Goldman, WSBA #21856 Summit Law Group 315 Fifth Avenue South, Suite 1000 Seattle, WA 98104 Telephone: (206) 676-7000 Fax: (206) 676-7001 philm@summitlaw.com jessicag@summitlaw.com 114 Howard v. Am. Online, Inc., 208 F.3d 741, 751 (9th Cir. 2000). Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 27 of 28 DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 25 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 CERTIFICATE OF SERVICE I hereby certify that on this day I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following: Attorneys for Plaintiffs Catherine C. Clark Law Office of Catherine C. Clark PLLC 2200 Sixth Avenue, Suite 1250 Seattle, WA 98121 cat@loccc.com Attorneys for Defendants Slater W. Scott Clement Clement & Drotz, PLLC 100 W. Harrison St., Ste. N-350 Seattle, WA 98119 sclement@clementdrotz.com lmckeon@clementdrotz.com (Legal Assistant) DATED this 25th day of August, 2016. s/ Katie Angelikis Katie Angelikis, Legal Assistant Case 2:14-cv-01840-RSL Document 109 Filed 08/25/16 Page 28 of 28 [PROPOSED] ORDER GRANTING DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 1 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The Honorable Robert S. Lasnik UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WASHINGTON AT SEATTLE CHARLES E. ORTEGO, et al., Plaintiffs, v. LUMMI ISLAND SCENIC ESTATES COMMUNITY CLUB, INC., et al., Defendants. CASE NO. 2:14-cv-01840-RSL [PROPOSED] ORDER GRANTING DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS Noted On Motion Calendar: September 16, 2016 This matter came before the Court on Defendants’ Motion for Partial Summary Judgment Regarding RICO Claims. The Court, having reviewed the briefs of the parties and the evidence at issue, finds that there are no issues of disputed material fact and GRANTS Defendants’ Motion for Partial Summary Judgment Regarding RICO Claims. Each and every RICO claim asserted jointly by all Plaintiffs is hereby DISMISSED WITH PREJUDICE. DATED this _____ day of _______________, 2016. THE HONORABLE ROBERT S. LASNIK UNITED STATES DISTRICT COURT JUDGE Case 2:14-cv-01840-RSL Document 109-1 Filed 08/25/16 Page 1 of 3 [PROPOSED] ORDER GRANTING DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 2 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Presented by: SUMMIT LAW GROUP PLLC Attorneys for Defendants By s/ Jessica L. Goldman Philip S. McCune, WSBA #21081 Jessica L. Goldman, WSBA #21856 philm@summitlaw.com jessicag@summitlaw.com Case 2:14-cv-01840-RSL Document 109-1 Filed 08/25/16 Page 2 of 3 [PROPOSED] ORDER GRANTING DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING RICO CLAIMS - 3 (CASE NO. 2:14-cv-01840-RSL) SUMMIT LAW GROUP PLLC 315 FIFTH AVENUE SOUTH, SUITE 1000 SEATTLE, WASHINGTON 98104-2682 Telephone: (206) 676-7000 Fax: (206) 676-7001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 CERTIFICATE OF SERVICE I hereby certify that on this day I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following: Attorneys for Plaintiffs Catherine C. Clark Law Office of Catherine C. Clark PLLC 2200 Sixth Avenue, Suite 1250 Seattle, WA 98121 cat@loccc.com Attorneys for Defendants Slater W. Scott Clement Clement & Drotz, PLLC 100 W. Harrison St., Ste. N-350 Seattle, WA 98119 sclement@clementdrotz.com lmckeon@clementdrotz.com (Legal Assistant) DATED this 25th day of July, 2016. s/ Katie Angelikis Katie Angelikis, Legal Assistant Case 2:14-cv-01840-RSL Document 109-1 Filed 08/25/16 Page 3 of 3