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Wichita Destination Developers Inc. v. Focus Hospitality Services LLC

United States District Court, D. Kansas

February 5, 2019

WICHITA DESTINATION DEVELOPERS, INC., Plaintiff,
v.
FOCUS HOSPITALITY SERVICES, LLC, Defendant.

          MEMORANDUM AND ORDER

          KATHRYN H. VRATIL United States District Judge.

         Wichita Destination Developers, Inc. brings suit against Focus Hospitality Services, LLC to collect a judgment which 5G Studio Collaborative, LLC (“5G Studio”) obtained against GoodSports Enterprises Global, LLC, GoodSports Village Huber Heights, LLC and GoodSports Village Wichita, LLC (collectively, the “GoodSports Entities”).[1] Specifically, Wichita Destination asserts that 5G Studio assigned its right to collect the judgment and that under an alter ego theory, Focus Hospitality is liable for the debt. This matter is before the Court on Focus Hospitality's Motion To Dismiss (Doc. #7) filed July 5, 2018. For the following reasons, the Court overrules the motion.

         Legal Standards

         In ruling on a motion to dismiss under Rule 12(b)(6), Fed. R. Civ. P., the Court assumes as true all well-pleaded factual allegations and determines whether they plausibly give rise to an entitlement of relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). To survive a motion to dismiss, a complaint must contain sufficient factual matter to state a claim which is plausible - and not merely conceivable - on its face. Id. at 679-80; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). To determine whether a complaint states a plausible claim for relief, the Court draws on its judicial experience and common sense. Iqbal, 556 U.S. at 679.

         The Court need not accept as true those allegations which state only legal conclusions. See id.; Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991). Plaintiff bears the burden of framing its complaint with enough factual matter to suggest that it is entitled to relief; it is not enough to make threadbare recitals of a cause of action accompanied by conclusory statements. Twombly, 550 U.S. at 556. Plaintiff makes a facially plausible claim when it pleads factual content from which the Court can reasonably infer that defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 678. Plaintiff must show more than a sheer possibility that defendant has acted unlawfully - it is not enough to plead facts that are “merely consistent with” defendant's liability. Id. (quoting Twombly, 550 U.S. at 557). A pleading that offers labels and conclusions, a formulaic recitation of the elements of a cause of action or naked assertions devoid of further factual enhancement will not stand. Iqbal, 556 U.S. at 678. Similarly, where the well-pleaded facts do not permit the Court to infer more than the mere possibility of misconduct, the complaint has alleged - but has not “shown” - that the pleader is entitled to relief. Id. at 679. The degree of specificity necessary to establish plausibility and fair notice depends on context; what constitutes fair notice under Fed.R.Civ.P. 8(a)(2) depends on the type of case. Robbins v. Oklahoma, 519 F.3d 1242, 1248 (10th Cir. 2008) (citing Phillips v. Cty. of Allegheny, 515 F.3d 225, 232-33 (3d Cir. 2008)).

         Factual Assertions

         Plaintiff alleges the following facts.

         Wichita Destination is a Kansas corporation with its principal place of business in Wichita, Kansas. Petition (Doc. #1-1) ¶ 1.

         Focus Hospitality is an Indiana limited liability company. Id. ¶ 2.

         On June 30, 2016, in the District Court of Dallas County, Texas, 5G Studio obtained a judgment against the GoodSports Entities in the amount of $213, 296.84 plus post-judgment interest (the “Texas judgment”).[2] Id. ¶¶ 5-6.

         On March 21, 2017, GoodSports Village Wichita, LLC filed suit against Wichita Destination in the District Court of Sedgwick County, Kansas (the “Wichita case”). Id. ¶ 11(k). The Wichita case remains pending. In the Wichita case, Focus Hospitality pays the legal fees which GoodSports Village Wichita incurs. Id. ¶ 11(k).[3]

         On November 27, 2017, 5G Studio assigned Wichita Destination all of its “right, title, and interest” in the Texas judgment. Notice Of Assignment Of Judgment, Exhibit B to Motion To Dismiss (Doc. #7); see also Petition (Doc. #1-1) ¶ 7.

         On January 29, 2018, Wichita Destination registered the Texas judgment with the District Court of Johnson County, Kansas. Petition (Doc. #1-1) ¶ 8.

         On February 22, 2018, the Johnson County court held a hearing in aid of execution of the Texas judgment. Id. ¶ 9. At the hearing, Anthony Homer testified as the authorized corporate representative of the GoodSports Entities. Id. ¶ 11. Homer testified as follows: Homer currently works for Focus Hospitality; he formerly worked for the GoodSports Entities. Id. ¶ 10. Jerald Good is an owner of both Focus Hospitality and the GoodSports Entities. Id. ¶ 11(a). The owner(s) created the GoodSports Entities as “single purpose entities” to develop multiple sports fieldhouse projects across the nation. For instance, the owner(s) formed GoodSports Village Wichita to develop a fieldhouse project in Wichita, Kansas. Id. The GoodSports Entities “never had real assets.” Id. ¶ 11(c). None of the GoodSports Entities utilized bank accounts.[4] Id. ¶ 11(d). The GoodSports Entities had no assets or capital. Id. ¶ 11(g). The owner(s) did not prepare financial statements for the GoodSports Entities. Id. ¶ 11(i). The GoodSports Entities did not maintain corporate minute books and did not execute corporate resolutions. Id. ¶ 11(j). The GoodSports Entities incurred more than $2 million in expenses including architectural, engineering, construction and legal fees. Id. ¶ 11(e). The GoodSports Entities did not pay any of their liabilities. Id. ¶ 11(f). Focus Hospitality paid selected liabilities on behalf of the GoodSports Entities. Id. ¶ 11(f). Other creditors did not institute lawsuits against the GoodSports Entities because “there was nothing there to pursue.” Id. ¶ 11(g).

         The GoodSports Entities were and are woefully undercapitalized. Id. ¶ 17. Despite making representations and marketing to the contrary, the GoodSports Entities entered into obligations that they could not satisfy, including obligations underlying the Texas judgment. Id. ¶ 18.

         The GoodSports Entities falsely represented that they maintained separate corporate structures and would receive separate “equity contributions” in fieldhouse projects.[5] Id. ¶ 14. In fact, they did not have separate corporate structures or equity contributions. Id. Instead, Focus Hospitality merely paid selected invoices on behalf of the GoodSports Entities and left unsatisfied the remaining obligations of the GoodSports Entities. Id.

         The GoodSports Entities and Focus Hospitality have common, if not identical, ownership. Id. ¶ 16. The GoodSports Entities existed as a conduit or instrumentality of Focus Hospitality. Id. ¶ 21. Focus Hospitality did not make loans to the GoodSports Entities. Id. ¶ 13. As part of its own bookkeeping, Focus Hospitality kept track of the endeavors of the GoodSports Entities; the GoodSports Entities did not keep their own records and do not have records. Id. ¶ 19. The GoodSports Entities did not observe corporate formalities. Id. Rather, the GoodSports Entities functioned only as a facade for Focus Hospitality. Id. Focus Hospitality dominated the finances, policies and practices of the GoodSports Entities such that they had no separate mind, will or existence of their own. Id. ¶ 20.

         Analysis

         As noted, as assignee of the rights of 5G Studio, based on an alter ego theory, Wichita Destination seeks to recover from Focus Hospitality amounts which the GoodSports Entities owe under the Texas judgment. Focus Hospitality asserts that Wichita Destination cannot prevail because it (1) cannot show that it will suffer injustice if the Court allows the corporate structures to remain intact and (2) has failed to plead fraud with particularity.

         The concept that one corporation can be held liable as the alter ego of another corporation is well settled under Kansas law.[6] See W&W Steel, LLC v. BSC Steel, Inc., 944 F.Supp.2d 1066, 1072 (D. Kan. 2013) (citing Dean Operations, Inc. v. One Seventy Assocs., 257 Kan. 676, 680, 896 P.2d 1012, 1016 (1995)). Courts will not extend the fiction of separate corporate identities to permit one of the corporations to evade its just operations, to promote fraud, illegality or injustice, or to defend crime. See Dean Operations, 257 Kan. at 681, 896 P.2d at 1016. “The courts will disregard the fiction of a separate legal entity when there is such domination of finances, policy, and practices that the controlled corporation has no separate mind, will, or existence of its own and is but a business conduit for its principal.” Id. Courts should reluctantly and cautiously exercise power to pierce the corporate veil. Sampson v. Hunt, 233 Kan. 572, 579, 665 P.2d 743, 751 (1983).

         I. Injustice

         Focus Hospitality asserts that Wichita Destination cannot prevail because it has not sufficiently alleged that it will suffer injustice if the Court allows the corporate structures to remain intact. See Motion To Dismiss (Doc. #7) at 7-9. Determining whether one corporation operates as an instrumentality of another is a question of fact which involves the consideration of many factors. For example, in determining ...


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