Brill v. Andrews

1 WO [5] 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA [8] Brill et al., ) No. CV-19-05844-PHX-SPL ) [9] ) 10 Plaintiffs, ) ORDER vs. ) ) [11] ) Andrews, et al., ) [12] ) 13 Defendants. ) ) 14 ) 15 Pending before the Court is Defendants Nicholas Andrews (“Andrews”), David 16 Prom (“Prom”), USA Bioenergy, LLC (“USA Bioenergy”), and Nicholas Andrews, Inc, 17 dba NB Andrews and Associates’s (“NB Andrews,” and collectively with Andrews, Prom, 18 and USA Bioenergy, the “Defendants”) Motion to Dismiss Amended Complaint (the 19 “Motion”) (Doc. 26). The Motion is fully briefed. For the reasons that follow, the Motion [20] will be granted.1 21 I. Background 22 William Brill (“Brill”) and Jon Corbisez (“Corbisez,” and together with Brill, 23 “Plaintiffs”) filed a complaint alleging three causes of action: (1) breach of contract, (2) 24 breach of the implied covenant of good faith and fair dealing, and (3) fraud in the 25 inducement all arising out of an alleged oral joint venture agreement (Docs. 1; 25) The [26] 27 1 Because it would not assist in resolution of the instant issues, the Court finds the pending motion is suitable for decision without oral argument. See L.R. Civ. 7.2(f); Fed. R. [28] Civ. P. 78(b); Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998). 1 initial complaint was dismissed, and Plaintiffs filed an Amended Complaint (the “Amended 2 Complaint”) which is the operative complaint in this case. In the Amended Complaint, 3 Plaintiffs allege that the individuals involved in this case entered into an oral joint venture 4 agreement on or about May 15, 2019 whose purpose was to engage in the propagation, 5 cultivation, harvest and sale of industrial hemp and creation and growth of hemp seeds for 6 use and sale for the purpose of maximizing the joint venture’s profits, which would then be 7 split equally among the four joint venture partners. (Doc. 25 at 4, ¶ 12) 8 Furthermore, Plaintiffs allege that “included in the Contract was an agreement by the 9 parties to designate United Global Partners, L.L.C., . . . (“UGP”), as their agent-in-fact 10 through which each of the Parties would perform their respective joint venture obligations.” 11 (Doc. 25 at 5, ¶ 15) The parties also agreed that “all monies either loaned to the joint venture 12 by the Parties and/or obtained by third parties and/or investments from third parties would 13 be deposited in UGP’s bank account number xxxxxxxx8656 at JPMorgan Chase Bank, 14 N.A., and not be withdrawn by any of the Parties without the Parties’ unanimous consent, 15 except to pay the business’ usual and customary expenses, a temporary home rented for 16 Plaintiffs Brill and Corbisez while in Arizona, and for a company vehicle that the Plaintiff’s 17 [sic] needed while in Arizona.” (Doc. 25 at 5, ¶ 16) Included in the monies deposited in the 18 UGP account were loans and other funds having an aggregate value in excess of 19 $200,000.00. (Doc. 25 at 6, ¶¶ 17–18) 20 II. Legal Standard 21 A. FRCP 12(b)(1) 22 Federal Rule of Civil Procedure 12(b)(1) “allows litigants to seek the dismissal of an 23 action from federal court for lack of subject matter jurisdiction.” Kinlichee v. United States, [24] 929 F. Supp. 2d 951, 954 (D. Ariz. 2013) (citing Tosco Corp. v. Comtys. for a Better Env’t, [25] 236 F.3d 495, 499 (9th Cir. 2001)). Allegations raised under FRCP 12(b)(1) should be 26 addressed before other reasons for dismissal because if the complaint is dismissed for lack 27 of subject matter jurisdiction, other defenses raised become moot. Kinlichee, 929 F. Supp. 28 2d at 954. A motion to dismiss for lack of subject matter jurisdiction under FRCP 12(b)(1) 1 may attack either the allegations of the complaint as insufficient to confer upon the court 2 subject matter jurisdiction or the existence of subject matter jurisdiction in fact. Renteria v. 3 United States, 452 F. Supp. 2d 910, 919 (D. Ariz. 2006) (citing Thornhill Publ’g Co., Inc. 4 v. General Tel. & Elecs. Corp., 594 F.2d 730 , 733 (9th Cir.1979)); Edison v. United States, [5] 822 F.3d 510, 517 (9th Cir. 2016). When the motion to dismiss attacks the allegations of 6 the complaint as insufficient to confer subject matter jurisdiction, all allegations of material 7 fact are taken as true and construed in the light most favorable to the nonmoving party. 8 Renteria, 452 F. Supp. 2d at 919 (citing Federation of African Amer. Contractors v. City of 9 Oakland, 96 F.3d 1204 , 1207 (9th Cir. 1996)). When the motion to dismiss is a factual attack 10 on subject matter jurisdiction, however, no presumptive truthfulness attaches to the 11 plaintiff’s allegations, and the existence of disputed material facts will not preclude the trial 12 court from evaluating for itself the existence of subject matter jurisdiction in fact. Renteria, [13] 452 F. Supp. 2d at 919 (citing Thornhill, 594 F.2d at 733). A plaintiff has the burden of 14 proving that jurisdiction does in fact exist. Renteria, 452 F. Supp. 2d at 919 (citing 15 Thornhill, 594 F.2d at 733). Conclusory allegations of law and unwarranted inferences are 16 insufficient to defeat a motion to dismiss. Rosenbaum v. Syntex Corp., 95 F.3d 922 , 926 17 (9th Cir. 1996). 18 B. FRCP 12(b)(6) 19 Rule 8(a)(2) requires a “short and plain statement of the claim showing that the 20 pleader is entitled to relief,” so that the defendant has “fair notice of what the … claim is 21 and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) 22 (internal quotations omitted). Also, a complaint must contain sufficient factual matter, 23 which, if accepted as true, states a claim to relief that is “plausible on its face.” Ashcroft v. 24 Iqbal, 556 U.S. 662, 678 (2009). Facial plausibility exists if the pleader pleads factual 25 content that allows the court to draw the reasonable inference that the defendant is liable for 26 the misconduct alleged. Id. Plausibility does not equal “probability,” but plausibility 27 requires more than a sheer possibility that a defendant acted unlawfully. Id. “Where a 28 complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short 1 of the line between possibility and plausibility of entitlement to relief.’” Id. (citing Twombly, [2] 550 U.S. at 557 ). 3 Although a complaint attacked for failure to state a claim does not need detailed 4 factual allegations, the pleader’s obligation to provide the grounds for relief requires “more 5 than labels and conclusions, and a formulaic recitation of the elements of a cause of action 6 will not do.” Twombly, 550 U.S. at 555 (internal citations omitted). Rule 8(a)(2) “requires 7 a ‘showing,’ rather than a blanket assertion, of entitlement to relief. Without some factual 8 allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of 9 providing not only ‘fair notice’ of the nature of the claim, but also ‘grounds’ on which the 10 claim rests.” Id. (citing 5 C. Wright & A. Miller, FEDERAL PRACTICE AND PROCEDURE § 11 1202, pp. 94, 95 (3d ed. 2004)). Thus, Rule 8’s pleading standard demands more than “an 12 unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678 13 (citing Twombly, 550 U.S. at 555 ). 14 In deciding a motion to dismiss the Court must construe the facts alleged in the 15 complaint in the light most favorable to the drafter of the complaint and must accept all 16 well-pleaded factual allegations as true. OSU Student Alliance v. Ray, 699 F.3d 1053 , 1061 17 (9th Cir. 2012); Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000). Nonetheless, 18 the Court does not have to accept as true a legal conclusion couched as a factual allegation. 19 Papasan v. Allain, 478 U.S. 265, 286 (1986). 20 Furthermore, a motion to dismiss under Rule 12(b)(6) must rely solely on the 21 contents of the pleadings. See Fed. R. Civ. P. 12(d). A court may, however, consider 22 “matters of judicial notice” without converting a motion to dismiss into one for summary 23 judgment. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Furthermore, a court 24 need not accept as true “allegations that contradict matters properly subject to judicial 25 notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or 26 unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) 27 (internal quotation marks and citations omitted). [28] 1 A court may take judicial notice of documents referenced in the complaint, as well 2 as matters in the public record. Lee v. City of Los Angeles, 250 F.3d 668 , 688–89 (9th Cir. 3 2001), overruled on other grounds by Galbraith v. Cty. of Santa Clara, 307 F.3d 1119 , 4 1125–26 (9th Cir. 2002). In addition, the Court may take judicial notice of matters that are 5 either “generally known within the trial court’s territorial jurisdiction” or “can be accurately 6 and readily determined from sources whose accuracy cannot reasonably be questioned.” 7 Fed. R. Evid. 201(b). Public records, including judgments and other court documents, are 8 proper subjects of judicial notice. See, e.g., United States v. Black, 482 F.3d 1035, 1041 (9th 9 Cir. 2007). However, “[j]ust because the document itself is susceptible to judicial notice 10 does not mean that every assertion of fact within that document is judicially noticeable for 11 its truth.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999 (9th Cir. 2018). 12 III. Analysis 13 At the outset, the Court notes that the crux of Plaintiffs’ claims is that Defendants 14 wrongfully converted assets of the joint venture, monies held in UGP’s accounts, for their 15 own benefit and in violation of the parties’ oral agreement. Plaintiffs also allege that such 16 wrongful actions led to the alleged joint venture not being able to realize the benefits of the 17 agreement between the parties. (Doc. 25 at ¶¶ 12, 22, 31, 49) Plaintiffs have alleged that the 18 Court has jurisdiction over this case under 28 U.S.C. § 1332 (a)(1), the diversity of 19 citizenship statute. (Doc. 25 at 2–3, ¶¶ 1–8) Diversity only exists where the citizenship of 20 each plaintiff is different from the citizenship of each defendant. Caterpillar, Inc. v. Lewis, [21] 519 U.S. 61, 68 (1996). 22 Defendants’ main argument regarding jurisdiction is that the claims in the Amended 23 Complaint cannot lie as a direct action against the Defendants; instead, such claims must be 24 brought as a derivate action on behalf of UGP, which would destroy diversity and mandate 25 dismissal with prejudice. (Doc. 26 at 6–10) The citizenship of the parties for purposes of 28 26 U.S.C. § 1332 is as follows and undisputed: Brill and Corbisez are citizens of the State of 27 Colorado; Andrews and Prom are citizens of the State of Arizona; USA Bioenergy is a 28 limited liability company organized and existing under the laws of the State of Arizona, 1 which sole member at the time this action commenced was Prom, making USA Bioenergy 2 a citizen of the State of Arizona; NB Andrews is a limited liability company organized and 3 existing under the laws of the State of Arizona, which sole shareholder at the time this action 4 commenced was Andrews, making NB Andrews a citizen of the State of Arizona. 5 It is a well-settled principle in matters of subject matter jurisdiction and diversity of 6 citizenship that a limited liability company, like a partnership, is considered a citizen of all 7 jurisdictions in which its members, or partners, are citizens. See Johnson v. Columbia Props. 8 Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Accordingly, UGP, with Andrews, Prom, 9 Brill, and Corbisez as members, is a citizen of both the States of Arizona and Colorado for 10 purposes of 28 U.S.C. § 1332 . The Court now turns to the argument that UGP must be 11 joined to this action under various Arizona statutes. 12 Defendants attached various agreements to the Motion in support of their argument 13 regarding subject matter jurisdiction. It is true that in some circumstances, a Court can look 14 to matters outside the complaint without converting a motion to dismiss into a motion for 15 summary judgment. See, e.g., Lee v. City of Los Angeles, 250 F.3d at 688–89; Gov’t 16 Computer Sales, Inc. v. Dell Mktg., 199 Fed. Appx. 636, 638 (9th Cir. 2006) (holding that 17 conversion to a motion for summary judgment is not required if the motion to dismiss 18 attaches or relies upon documents that are integral to plaintiff’s claims). Defendants 19 attached the following to the Motion: (1) UGP’s operating agreement (the “Operating 20 Agreement”), (2) the Avalons Gardens Agreement, (3) two promissory notes between UGP 21 and third parties. (Doc. 26 at 5–6) Plaintiffs argue that some of those documents simply 22 arose in the course of the original oral agreement between the parties, that the UGP 23 operating agreement does not contain an integration clause, and that prior to the execution 24 of the Operating Agreement, UGP was a citizen of the State of Arizona. (Doc. 27 at 4–5) 25 Plaintiffs also argue that Defendants misapprehended the nature of the causes of action in 26 the Amended Complaint. Indeed, Plaintiffs argue that “[t]hese causes of action [are] all 27 based upon an oral contractual relationship between Brill and Corbisez . . . and Andre[w]s 28 and Prom . . . . Paragraphs 12 through 16 of the Amended Complaint establish the offer, 1 acceptance and consideration exchanged between the citizens of the two different states.” 2 (Doc. 27 at 4–5) 3 The Court finds that it can properly consider those documents because they are 4 integral to Plaintiffs’ claims. Indeed, one crucial fact that Plaintiffs have not addressed or 5 rebutted in their arguments is the fact that monies in dispute were all deposited in, and 6 allegedly wrongfully withdrawn from, one of UGP’s bank accounts. (Doc. 25 at 5, ¶ 16, 21) 7 Plaintiffs argue that such documents are irrelevant to the causes of action in the Amended 8 Complaint and impermissibly request the Court to go outside of the four corners of the 9 Complaint. (Doc. 27 at 9) The Court is not persuaded by Plaintiffs’ argument. Although the 10 Court understands the parties entered into an oral agreement to form a joint venture, 11 subsequent events mandate that UGP be joined. All the monies which were allegedly 12 wrongfully converted by the Defendants came from one of UGP’s bank accounts. The 13 parties agreed, and Plaintiffs do not dispute, that they designated UGP as their agent-in-fact 14 for the joint venture and each party would perform his respective joint venture obligations 15 through UGP. (Doc. 25 at 5, ¶ 15–16) Plaintiffs are now asking for damages which would 16 compensate them for the monies allegedly wrongfully taken out of UGP’s bank account. 17 Additionally, Plaintiffs alleged that such wrongful conversion of funds rendered UGP 18 insolvent. (Doc. 25 at 10, ¶ 22) 19 Under Arizona law, which applies to this case based on diversity of citizenship, “[a] 20 person that receives a distribution that violates § 29-3405 is personally liable to the limited 21 liability company but only to the extent that the distribution received by the person exceeded 22 the amount that could have been properly paid to that person under § 29-3405.” A.R.S. § 23 29-3406(A). A.R.S. § 29-3405 states that “[a] limited liability company may not make a 24 distribution, including a distribution under § 29-3707, if after the distribution either of the 25 following applies: 1. The company would not be able to pay its debts as the debts become 26 due in the ordinary course of the company's activities and affairs.” A.R.S. § 29-3405. The 27 Court finds that because of the fact that the parties placed all the joint venture funds in one 28 of UGP’s bank accounts and the allegedly wrongful distributions rendered UGP insolvent, 1 UGP must be joined in this action because the Defendants, if found liable, would be first 2 and foremost liable to UGP. The Court cannot conclude that because an alleged prior oral 3 agreement existed between the parties, the monies deposited in the account are irrelevant to 4 UGP. Indeed, UGP, at least partially, operated as the agent and entity representing the joint 5 venture. The parties agreed to fulfill their obligations through UGP. 6 Furthermore, if the Court decided otherwise, and Plaintiffs prevailed, the repayment 7 of the monies would likely material adversely affect UGP’s creditors. A.R.S. § 29-3807 8 states that 9 The court, in its discretion, at any stage in a direct or derivative 10 proceeding, may: 11 1. Treat a direct action as a derivative action subject to, or 12 exempt from, any provisions of this article the court chooses 13 and order recovery to be paid to the limited liability company if 14 the court finds that doing so is reasonably necessary to avoid 15 any of the following: . . . . 16 (b) Materially adversely affecting the interests of the company's 17 creditors. 18 A.R.S. § 29-3807. The fact that Plaintiffs themselves, in the Amended Complaint, 19 mentioned that investments were made in the joint venture by third parties and debt was 20 incurred in connection with such investments supports the Court in its exercise of discretion 21 to treat the direct action as a derivative action. (Doc. 25 at 5–6, ¶¶ 16–19) Indeed, although 22 the Operating Agreement does not contain an integration clause and the business of UGP is 23 stated in broad terms—to conduct any lawful business allowed under the Arizona Limited 24 Liability Company Act—all relevant activities for the joint venture appear to have taken 25 place through UGP. The Court cannot conclude that the alleged oral agreement between the 26 parties overrides those facts and allows Plaintiffs to bring a direct action when such action 27 would clearly and likely materially adversely affect the interests of UGP’s creditors, 28 specifically the creditors who were involved in the activities of the alleged joint venture. 1 The two promissory notes submitted by Defendants have allegedly not been repaid, 2 which means that creditors still have potential claims against UGP for non-payment or 3 default. Letting Plaintiffs proceed with their direct action against Defendants would leave 4 UGP incapable to fulfill its obligations, past due or not, to his creditors while a derivative 5 action would potentially result in UGP receiving the recovery and being able to fulfill such 6 obligations. It is not true that, as Plaintiffs argued, the fact that the creditors were not parties 7 to the oral agreement and that they have their own right of direction action against UGP 8 negates the need to treat this case as a derivative action. Indeed, even if the creditors brought 9 an action against UGP, and Plaintiff were allowed to proceed in this case as a direct action, 10 UGP would still be insolvent although the allegedly wrongful distributions belonged to 11 UGP. Accordingly, the Court finds that it must treat this action as a derivative action on 12 behalf of UGP and that UGP must be joined as a Plaintiff. Because UGP was a citizen of 13 both Arizona and Colorado at the time this case began and Defendants are citizens of the 14 State of Arizona, complete diversity of citizenship is absent and such joinder destroys 15 diversity of citizenship which deprives the Court of jurisdiction over the first two counts of 16 the Amended Complaint. 17 Turning now to Plaintiffs’ fraud in the inducement claim, the Court finds that it must 18 be dismissed under Rule 12(b)(6). Plaintiffs argue that Andrews and Prom representation 19 that no funds would be disbursed from UGP’s bank account without the unanimous consent 20 of all the parties was a material inducement relied upon by Plaintiffs inducing them to enter 21 into the joint venture, and Plaintiffs had the right to rely upon it. (Doc. 25 at 19, ¶ 43) 22 Plaintiffs further argue that Andrews and Prom knew the representation was false when they 23 made it and that they had no intention of complying with such representation. (Doc. 25 at 24 18–19, ¶ 42) A representation is actionable as fraud when it relates to a present or 25 preexisting fact, “and cannot be based on unfulfilled promises or statements as to future 26 events.” Ahmed v. Collins, 23 Ariz. App. 54 , 56–57 (Ct. App. 1975). Unkept promises 27 relating to future events are, at most, a breach of contract. Id. at 57 . However, an established 28 exception to this general rule is a promise made without present intention to perform; there, 1 “the misstatement of the present intention is regarded as a misrepresentation of fact.” Id. 2 Here, the Court finds that Plaintiffs’ own allegations in the Amended Complaint 3 contradict their argument of fraud in the inducement. Indeed, as previously stated, the 4 parties agreed that all monies in the relevant UGP bank account would not be withdrawn 5 without the unanimous consent of the parties, “except to pay the business usual and 6 customary expenses.” (Doc. 25 at 20, ¶ 46) So in essence, Plaintiffs fraud in the inducement 7 claim rests on Defendants’ alleged lack of intent not to disburse monies without the 8 unanimous consent of the Parties, but at the same time, Plaintiffs have alleged that all parties 9 knew monies could be disbursed without such consent in some situations. Additionally, 10 Plaintiffs have alleged that Defendants had exclusive control over such bank account. (Doc. 11 25 at 6, ¶ 19) It follows that no one other than Defendants would have been able to make 12 distributions then. Accordingly, the Court finds that Plaintiff failed to state a claim upon 13 which relief can be granted in count III of the Amended Complaint and the count will be 14 dismissed with prejudice. 15 Finally, Defendants have requested that, pursuant to 28 U.S.C. § 1919 , the Court 16 award them their just costs incurred in bringing the Motion. The Court may, under that 17 provision, order the payment of just costs if an action was dismissed for lack of jurisdiction. [18] 28 U.S.C. § 1919 . The Court will consider ordering payment of Defendants just costs 19 incurred in bringing the Motion. Accordingly, Defendants must submit a statement of costs 20 and supporting memorandum explaining why such costs are just to the Court within 14 days 21 of entry of this Order. Such submission shall be treated like a motion for attorneys’ fees and 22 costs only for purposes of the right to file a response and reply and deadlines to file such 23 responsive pleadings. 24 Accordingly, 25 IT IS ORDERED: 26 1. That Defendants’ Motion to Dismiss the Amended Complaint (Doc. 26) is 27 granted in full; 28 2. that the Amended Complaint is dismissed in full with prejudice; and 1 3. that Defendants shall file, within 14 days of the entry of this Order, a statement 2.| of costs incurred in bringing the Motion with a supporting memorandum explaining why such costs are just; and 4 4. that the Court shall retain jurisdiction solely for the purpose of ruling on Defendants request for an award of costs under 28 U.S.C. § 1919 . 6 IT IS FURTHER ORDERED that the Clerk of Court shall terminate this action 7 | and enter judgment accordingly. 8 Dated this 24th day of June, 2020. [9] ll United States District kadge