D Stadtler Trust 2015 Trust v. Gorrie

Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 1 of 111 1 WO — 2 — — 3 — — 4 — — 5 — 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA — 8 — 9 D Stadtler Trust 2015 Trust, et al., No. CV-22-00314-PHX-DWL 10 Plaintiffs, ORDER 11 v. 12 Pamela Gorrie, et al., 13 Defendants. — 14 — 15 In this action, Daniel Stadtler (“Stadtler”), in his individual capacity and in his 16 capacity as trustee for the D. Stadtler Trust 2015 (“the Trust”) (collectively, “the Stadtler 17 Parties”), has sued Pamela Gorrie (“Gorrie”), Innovative Global Distributions, LLC 18 (“IGD”), Natural Footprints Organic Farm LP (“NFOF”), and NFF Management LLC 19 (“NFF”) (collectively, “the Gorrie Parties”). (Doc. 131.)1 The Gorrie Parties assert 20 counterclaims against the Stadtler Parties and third-party claims against William Houchin 21 (“Houchin”). (Doc. 77.) Houchin asserts third-party counterclaims against the Gorrie 22 Parties. (Doc. 134.) 23 These sprawling claims arise from a hemp operation in Salome, Arizona. In early 24 2020, IGD purchased a 540-acre parcel of agricultural land from the Trust via seller 25 carryback financing. Then, between April 2020 and May 2021, the parties executed 26 various other documents related to the hemp operation, including several revenue sharing — 27 — — 1 — 28 Gorrie is the sole member of both IGD and NFF. (Doc. 77 at 3 ¶¶ 2, 4.) She is also a limited partner in NFOF; NFF is the general partner. (Id. at 3 ¶ 3.) Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 2 of 111 1 agreements. Ultimately, and for reasons that are disputed, the hemp operation did not 2 succeed and the parties’ relationships deteriorated, leading to this litigation. 3 Now pending before the Court are (1) the Gorrie Parties’ motion for sanctions 4 (Doc. 118); (2) the Gorrie Parties’ motion for leave to file a second amended counterclaim 5 and first amended third-party complaint (Doc. 146); (3) the Stadtler Parties’ motion to 6 dismiss the Gorrie Parties’ counterclaims (Doc. 87); (4) the Gorrie Parties’ partial motion 7 to dismiss the Stadler Parties’ claims (Doc. 136) and the Stadtler Parties’ corresponding 8 motion to strike (Doc. 142); and (5) the Gorrie Parties’ partial motion to dismiss Houchin’s 9 third-party counterclaims (Doc. 158). 10 RELEVANT BACKGROUND 11 The winding history of this dispute, some of which is laid out in previous orders 12 (Docs. 129, 165), is familiar to the parties. Only a brief summary is necessary here. 13 Additional information bearing on the individual motions is provided in the Discussion. 14 I. Facts 15 In 2017, the Trust purchased a 540-acre parcel of agricultural land situated at 68562 16 56th Street, Salome, Arizona (the “Farm”). (Doc. 131 ¶ 12.) 17 In May 2019, Stadtler hired non-party William Dawson (“Dawson”) “to list the 18 [Farm] for sale and to act as broker.” (Id. ¶ 13.) 19 In late 2019, Gorrie became interested in purchasing the Farm for a hemp growing 20 operation. (Id. ¶¶ 14-17; Doc. 77 at 3-4 ¶¶ 8-12.) In November 2019, Dawson (on behalf 21 of Stadtler)2 and Gorrie began discussing the possibility of the Trust selling the Farm to 22 IGD. (Doc. 131 ¶¶ 14-17; Doc. 77 at 4 ¶ 13.) 23 On January 17, 2020, the Trust and IGD executed a real estate purchase contract 24 (the “Farm Purchase Agreement”) under which IGD would buy the Farm from the Trust 25 for $1.4 million. (Doc. 131 ¶¶ 34-35; Doc. 77 at 4 ¶¶ 14-15.) Under the Farm Purchase 26 Agreement, the Trust provided seller carryback financing for a large portion of the 27 2 According to the Stadtler Parties, “[a]ll the material conversations and material 28 information Ms. Gorrie had or gave to Mr. Dawson throughout the negotiations were passed on in precise detail to Mr. Stadtler by Mr. Dawson.” (Doc. 131 ¶ 15.) -2Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 3 of 111 1 purchase price—IGD agreed to pay $20,000 upon signing the agreement, $280,000 at 2 closing, and $1.1 million over the following 18 months (according to a payment schedule). 3 (Doc. 131 ¶ 34; Doc. 77 at 4-5 ¶¶ 16-17.) 4 On February 11, 2020, IGD and the Trust executed an Addendum to the Farm 5 Purchase Agreement (the “Purchase Addendum”). (Doc. 131 ¶ 46; Doc. 77 at 6 ¶ 21.) The 6 Purchase Addendum required IGD to pay $60,000 at closing and then an additional 7 $240,000 within 30 days of closing. (Doc. 131 ¶ 46; Doc. 77 at 6 ¶ 21.) Around the same 8 time, IGD and the Trust executed a Promissory Note for $1.34 million, secured by a Deed 9 of Trust with IGD as the payor and the Trust as the beneficiary. (Doc. 131 ¶ 47; Doc. 77 10 at 5-6 ¶¶ 18-20.) 11 On February 27, 2020, the sale closed. (Doc. 131 ¶ 56; Doc. 77 at 7 ¶ 23.) 12 For reasons that are disputed, the hemp operation struggled to obtain funding. (Doc. 13 131 ¶¶ 58-60, 66-68; Doc. 77 at 7 ¶¶ 24-26.) Thus, IGD did not make the $240,000 14 payment within 30 days of closing. (Doc. 131 ¶ 68; Doc. 77 at 7 ¶ 26.) 15 On April 10, 2020, NFOF and the Trust entered into a revenue sharing agreement 16 (the “April 2020 RSA”). (Doc. 131 ¶¶ 75-81; Doc. 77 at 8-9 ¶¶ 28-31.) At that time, NFOF 17 was leasing the Farm from IGD. (Doc. 131 ¶ 76; Doc. 77 at 7-8 ¶ 28.) 18 On January 10, 2021, IGD and Stadtler executed a second revenue sharing 19 agreement, under which Stadtler agreed to extend a $75,000 line of credit to IGD to fund 20 hemp operations on a three-acre parcel of the Farm (the “Three Acre RSA”). (Doc. 131 21 ¶¶ 94-106; Doc. 77 at 10-11 ¶¶ 37-42.) Gorrie and Dawson personally guaranteed 22 Stadtler’s $75,000 investment (the “Personal Loan and Agreement”). (Doc. 131 ¶¶ 102-05; 23 Doc. 77 at 11 ¶¶ 40-41.)3 24 In March 2021, Gorrie and Houchin were introduced. (Doc. 77 at 25 ¶¶ 12-14; Doc. 25 134 at 13 ¶¶ 22-25.)4 On March 22, 2021, Gorrie, Houchin, and Stadtler met in Blythe, — 26 — — 3 — 27 The extent of the personal guarantee is disputed. (Doc. 131 ¶¶ 102-03; Doc. 77 at 11 ¶ 40.) 28 4 Houchin is Stadtler’s nephew. (Doc. 77 at 12 ¶ 49; Doc. 134 at 12 ¶¶ 15-16.) -3Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 4 of 111 1 Arizona and discussed a potential business relationship related to the hemp operation. 2 (Doc. 77 at 25-26 ¶¶ 14-16; Doc. 134 at 13 ¶¶ 22-27.) 3 On May 11, 2021, IGD and Stadtler executed an Addendum to the Three Acre RSA 4 (the “Three Acre Addendum”). (Doc. 131 ¶¶ 115-18; Doc. 77 at 14-15 ¶¶ 58-60.) Around 5 the same time, the Gorrie Parties and the Stadtler Parties discussed, but did not enter into, 6 a joint venture agreement. (Doc. 131 ¶¶ 111-15; Doc. 121-6 ¶ 7 [Gorrie decl.].) 7 On May 26, 2021, IGD and Houchin executed a joint venture agreement (the 8 “JVA”) under which Houchin would fund hemp cultivation on a 20-acre portion of the 9 Farm. (Doc. 77 at 26 ¶¶ 18-20; Doc. 134 at 12-14 ¶¶ 12-13, 28-34.) Two days later, IGD 10 and Houchin executed an Addendum to the JVA (the “JVA Addendum”). (Doc. 77 at 26 11 ¶¶ 21-22; Doc. 134 at 15-16 ¶¶ 48-53.) 12 For reasons that are disputed, the Gorrie Parties’ relationships with the Stadtler 13 Parties and Houchin ultimately fell apart, leading to this litigation. 14 II. Procedural History 15 On February 11, 2022, the Stadtler Parties filed a complaint in La Paz County 16 Superior Court. (Doc. 1-2 at 10-27.) On February 27, 2022, Gorrie removed the action to 17 this Court. (Doc. 1.)5 18 On May 2, 2022, the Stadtler Parties filed a First Amended Complaint (“FAC”). 19 (Doc. 25.) 20 On May 27, 2022, the Gorrie Parties filed an answer to the FAC, counterclaims 21 against the Stadtler Parties, and third-party claims against Houchin (Doc. 38) and filed a 22 motion for a temporary restraining order (“TRO”) based on their counterclaims (Doc. 39). 23 The TRO sought to block the Trust from pursuing a trustee’s sale of the Farm, which was 24 scheduled for June 9, 2022. (Doc. 39.) However, the parties later agreed to postpone the 25 trustee’s sale pending the resolution of the TRO request. (Doc. 60.) 26 On July 7, 2022, after an evidentiary hearing (Doc. 70), the Court denied the Gorrie — 27 — — 28 — — 5 — The Stadtler Parties challenged the validity of Gorrie’s removal effort (Doc. 11), but the Court eventually denied the Stadtler Parties’ motion to remand (Doc. 21). -4Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 5 of 111 1 Parties’ TRO request. (Doc. 82 at 198-206.) 2 On July 14, 2022, the Gorrie Parties filed their operative pleading, the first amended 3 Answer, Counterclaim and Third-Party Complaint. (Doc. 77.) 4 On August 10, 2022, the Stadtler Parties moved to dismiss the Gorrie Parties’ 5 counterclaims. (Doc. 87.) The motion is now fully briefed. (Docs. 90, 95.) 6 On October 25, 2022, Houchin answered the Gorrie Parties’ first amended 7 third-party complaint. (Doc. 107.) 8 On November 11, 2022, the Gorrie Parties moved for Rule 11 sanctions against the 9 Stadtler Parties’ counsel. (Doc. 118.) The motion is now fully briefed. (Docs. 125, 130.) 10 On December 5, 2022, the Stadtler Parties filed their operative pleading, the Second 11 Amended Complaint (“SAC”). (Doc. 131.)6 12 On December 9, 2022, Houchin filed his operative pleading, the First Amended 13 Answer to Third-Party Complaint and Third-Party Counterclaim. (Doc. 134.) 14 On December 19, 2022, the Gorrie Parties moved to dismiss Counts One through 15 Five of the SAC. (Doc. 136.) On January 4, 2023, the Stadtler Parties filed a motion to 16 strike the Gorrie Parties’ dismissal motion. (Doc. 142.) Both motions are now fully 17 briefed. (Docs. 142, 159, 162.) 18 On January 6, 2023, the Gorrie Parties requested leave to file an amended pleading. 19 (Doc. 146.) The motion is now fully briefed. (Docs. 163, 164, 182, 183.) 20 The same day, the Gorrie Parties filed a second motion for a TRO, again seeking to 21 block the Trust from pursuing a trustee’s sale of the Farm. (Doc. 149.) On January 11, 22 2023, after a hearing (Doc. 157), the Court denied this TRO request. (Doc. 184.) 23 On January 11, 2023, the Gorrie Parties moved to dismiss Counts One, Two, Four, 24 and Five of Houchin’s third-party counterclaim. (Doc. 158.) The motion is now fully 25 briefed. (Docs. 170, 181.) 26 On January 12, 2023, the trustee’s sale of the Farm occurred. (Doc. 179-1.) 27 6 On October 14, 2022, the Stadtler Parties filed a motion for leave to file the SAC. 28 (Doc. 103.) On November 29, 2022, after extensive briefing (Docs. 109, 114, 115, 123, 126), the Court granted the Stadtler Parties’ amendment request. (Doc. 129.) -5Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 6 of 111 1 DISCUSSION 2 Six motions are pending before the Court. First, the Gorrie Parties request sanctions 3 pursuant to Rule 11 of the Federal Rules of Civil Procedure against the Stadtler Parties’ 4 counsel. (Doc. 118.) Second, the Gorrie Parties request leave to file an amended pleading. 5 (Doc. 146.) Third, the Stadtler Parties move to dismiss the counterclaims in the Gorrie 6 Parties’ existing pleading. (Doc. 87.) Fourth, the Gorrie Parties move to partially dismiss 7 the Stadtler Parties’ claims. (Doc. 136.) Fifth, in a related vein, the Stadtler Parties move 8 to strike the Gorrie Parties’ dismissal motion. (Doc. 142.) Finally, the Gorrie Parties move 9 to partially dismiss Houchin’s counterclaims. (Doc. 158.) 10 The Court will address each motion in turn. 11 I. The Gorrie Parties’ Motion For Sanctions 12 In their motion to dismiss and supporting reply, the Stadtler Parties argue that the 13 April 2020 RSA is illusory and unenforceable. (Doc. 87 at 8; Doc. 95 at 3.) However, 14 during earlier stages of the case, the Stadtler Parties made arguments that were premised 15 on the enforceability of the April 2020 RSA. Accordingly, the Gorrie Parties have moved 16 for Rule 11 sanctions against the Stadtler Parties’ counsel. (Doc. 118.) 17 A. Additional Background 18 In April 2020, the Trust and NFOF (which was leasing the Farm from IGD) signed 19 the April 2020 RSA, which provided that the Trust would receive one percent of the net 20 revenue generated by the hemp growing operation (up to $1 million per year) for a period 21 of five years. (Doc. 131 ¶¶ 76-80; Doc. 77 at 7-9 ¶¶ 28-31.) 22 On May 2, 2022, the Stadtler Parties filed their FAC. (Doc. 25.) As relevant here, 23 the FAC asserted a breach of contract claim based on the theory that NFOF breached the 24 April 2020 RSA “by failing to share revenue with the Trust.” (Id. ¶¶ 110-14.) The FAC 25 also alleged that “Gorrie, IGD and/or NFOF induced the Trust and/or Mr. Stadtler to enter 26 into the [April 2020 RSA] so that Mr. Stadtler would not foreclose on the Promissory Note 27 and Deed of Trust.” (Id. ¶ 100.) 28 On May 27, 2022, the Gorrie Parties filed their answer to the FAC and -6Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 7 of 111 1 counterclaims. (Doc. 38.) As relevant here, the Gorrie Parties asserted a dueling breach 2 of contact claim based on the April 2020 RSA. (Id. at 16-17 ¶¶ 66-71.) The Gorrie Parties 3 also identified this counterclaim as part of their basis for seeking a TRO to block the 4 trustee’s sale. (Doc. 39 at 17 [“This is a complicated commercial dispute as to whether 5 payment under the Promissory Note was tied to the [April 2020 RSA] under which the 6 Stadtler and the Trust offered to forbear from foreclosing in return for a portion of the 7 Hemp Project profits; there is simply no other consideration. There are also substantial 8 questions about the later joint ventures which were intended to pay back the loan and 9 Stadtler and the Trust’s role in those. All of these items are substantial, difficult questions 10 which will require substantial litigation. In the interim, no trustee sale should proceed 11 pending the adjudication of these questions.”].) 12 On July 7, 2022, during the first TRO hearing, the Stadtler Parties urged the Court 13 to deny the Gorrie Parties’ TRO request in part because the April 2020 RSA was illusory 14 and unenforceable in light of the Trust’s failure to give consideration. (Doc. 82 at 194-95 15 [“So the [April 2020 RSA] between [NFOF] and the Trust, the Trust gave zero 16 consideration. It was a gift.”].) The Court then asked: “Maybe I’m missing something. 17 How, consistent with Rule 11, can you guys have affirmative claims for breach of the [April 18 2020] RSA when you’re coming in here and saying that the contract is [illusory] and is not 19 backed by consideration?” (Id. at 195.) Counsel for the Stadtler Parties replied: “Can I 20 walk back on that argument then, Your Honor?” (Id.)7 21 On August 10, 2022, the Stadtler Parties moved to dismiss the Gorrie Parties’ 22 counterclaims, arguing, among other things, that the April 2020 RSA is “illusory and 23 unenforceable by either party.” (Doc. 87 at 8.) The Stadtler Parties reiterated this argument — 24 — — 25 — — 7 — The parties dispute whether the request to “walk back” the argument referred to the position that the April 2020 RSA is illusory and enforceable or to the affirmative claim for 26 breach of the April 2020 RSA. (Compare Doc. 125 at 5 with Doc. 130 at 3.) This dispute is immaterial because Rule 11 does not apply to oral statements. Christian v. Mattel, Inc., — 27 — 286 F.3d 1118, 1121 (9th Cir. 2002) (“Rule 11 sanctions are limited to misconduct regarding signed pleadings, motions, and other filings.”). See also id. at 1130 (“[I]t does 28 not authorize sanctions for, among other things, discovery abuses or misstatements made to the court during an oral presentation.”). -7Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 8 of 111 1 in their reply supporting dismissal. (Doc. 95 at 3 [“The [April 2020 RSA] . . . has no 2 enforceable obligations and is illusory and unenforceable by either party.”].) 3 On October 14, 2022, the Stadtler Parties requested leave to file the SAC, asserting 4 that the Court’s comments during the July 7, 2022 TRO proceeding had alerted them to the 5 inconsistency between their affirmative breach claim and their position that the April 2020 6 RSA is unenforceable and that they wished to address this inconsistency by eliminating 7 their affirmative claim for breach of the April 2020 RSA. (Doc. 103 at 2.)8 8 On November 11, 2022, while the Stadtler Parties’ amendment request was pending, 9 the Gorrie Parties moved for Rule 11 sanctions. (Doc. 118.) 10 On November 29, 2022, after a full briefing (Docs. 123, 126), the Court granted the 11 Stadtler Parties’ request to file the SAC. (Doc. 129.) As relevant here, the Court found 12 that the Stadtler Parties had “realized during the July 2022 hearing that [their claim for 13 breach of the April 2020 RSA] lacked merit, then moved in October 2022 to amend the 14 FAC to remove this claim.” (Id. at 6.)9 The Court also noted that, although the Stadtler 15 Parties “could have acted a bit more quickly after the July 2022 hearing to make this 16 amendment request,” the delay was reasonable given their “brief[] confus[ion] about 17 whether and to what extent [IGD’s] bankruptcy filing resulted in a stay of these 18 8 The Stadtler Parties’ exact statement (in their motion for leave to file a SAC) was 19 the following: “As the Court pointed out during the July 7, 2022, evidentiary hearing related to [the Gorrie Parties’] application for injunctive relief, [the Stadtler Parties] have 20 realized that their stance on the 3-acre RSA is unenforceable and illusory is inconsistent with the First Amended Complaint which alleges a claim for a breach of that very 21 agreement.” (Doc. 103 at 2, emphasis added.) However, several facts suggest that the Stadtler Parties intended to refer to the April 2020 RSA, not the Three Acre RSA. First, at 22 the TRO hearing, the Stadtler Parties took the position that the April 2020 RSA was not supported by consideration. (Doc. 82 at 194-95 [“[T]he [April 2020 RSA] between 23 [NFOF] and the Trust, the Trust gave zero consideration.”].) Second, the Stadtler Parties also took this position in relation to the April 2020 RSA (not the Three Acre RSA) in the 24 challenged motion to dismiss (Doc. 87 at 8) and reply (Doc. 95 at 3). Third, the proposed SAC, which was attached to the Stadtler Parties’ motion to file a SAC, omits the claim for 25 breach of the April 2020 RSA but continues to assert an affirmative claim for breach of the Three Acre RSA. (Doc. 103-1 at 32-33.) The now-operative SAC includes the same. 26 (Doc. 131 ¶¶ 123-28.) — 27 — — 9 — In its order granting the Stadtler Parties’ amendment request, the Court “expresse[d] no prejudgment as to [the Gorrie Parties’] pending motion for Rule 11 sanctions,” which 28 “challenges [the Stadtler Parties’] prior conduct related to Count Two, not the current act of amending the FAC to eliminate Count Two.” (Doc. 129 at 9 n.4.) -8Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 9 of 111 1 proceedings.” (Id. at 6-7.) 2 On December 5, 2022, the Stadtler Parties filed their SAC, which does not assert a 3 claim for breach of the April 2020 RSA; as compared to the FAC, the SAC also omits the 4 factual allegation that, to avoid foreclosure, Gorrie induced the Stadtler Parties to enter the 5 April 2020 RSA. (See generally Doc. 131.). 6 The pending motion for Rule 11 sanctions is based on the Stadtler Parties’ assertion 7 in their motion to dismiss the Gorrie Parties’ counterclaims and supporting reply (Docs. 87 8 and 95) that the April 2020 RSA is illusory and unenforceable.10 9 B. Legal Standard 10 Rule 11(b) provides: 11 By presenting to the court a pleading, written motion, or other paper— whether by signing, filing, submitting, or later advocating it—an attorney or 12 unrepresented party certifies that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the 13 circumstances: 14 (1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of 15 litigation; 16 (2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, 17 or reversing existing law or for establishing new law; 18 (3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable 19 opportunity for further investigation or discovery; and 20 (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack 21 of information. — 22 — Id. Rule 11(c)(1) provides, in relevant part: “If, after notice and a reasonable opportunity 23 to respond, the court determines that Rule 11(b) has been violated, the court may impose 24 an appropriate sanction on any attorney, law firm, or party that violated the rule or is 25 responsible for the violation.” Id. However, “[t]he court must not impose a monetary — 26 — — 10 — 27 In other words, although the Stadtler Parties have taken this position in other filings—most notably, in the SAC (i.e., their operative pleading)—the Gorrie Parties’ 28 sanctions request is limited to the statements made in the Stadtler Parties’ motion to dismiss counterclaims (Doc. 87) and reply (Doc. 95). (See generally Doc. 118.) -9Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 10 of 111 1 sanction . . . against a represented party for violating Rule 11(b)(2).” Fed. R. Civ. P. 2 11(c)(5)(A). 3 “The application of Rule 11 is a task that requires sensitivity to two competing 4 considerations.” United Nat’l Ins. Co. v. R&D Latex Corp., 242 F.3d 1102, 1115 (9th Cir. 5 2001). “On the one hand, . . . on occasion attorneys engage in litigation tactics so vexatious 6 as to be unjustifiable even within the broad bounds of our adversarial system, and . . . 7 neither the other parties nor the courts should have to abide such behavior or waste time 8 and money coping with it.” Id. Thus, “the central purpose of Rule 11 is to deter baseless 9 filings.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). “On the other hand, 10 . . . our system of litigation is an adversary one, and . . . presenting the facts and law as 11 favorably as fairly possible in favor of one’s client is the nub of the lawyer’s task.” United 12 Nat’l Ins. Co., 242 F.3d at 1115 . Sanctions therefore should be imposed “only in the most 13 egregious situations, lest lawyers be deterred from vigorous representation of their clients.” — 14 — Id. (citation omitted). See also Townsend v. Holman Consulting Corp., 929 F.2d 1358 , 15 1362 (9th Cir. 1990) (“Our cases have established that sanctions must be imposed on the 16 signer of a paper if either a) the paper is filed for an improper purpose, or b) the paper is 17 ‘frivolous.’ The word ‘frivolous’ . . . is a shorthand that this court has used to denote a 18 filing that is both baseless and made without a reasonable and competent inquiry.”) 19 (citation omitted). 20 C. The Parties’ Arguments 21 The Gorrie Parties move for sanctions under Rule 11, requesting reimbursement 22 “for all fees and costs associated with responding to the Motion to Dismiss.” (Doc. 118 at 23 9.) According to the Gorrie Parties, the Stadtler Parties engaged in sanctionable conduct 24 by arguing that the April 2020 RSA is unenforceable in their motion to dismiss (Doc. 87) 25 and supporting reply (Doc. 95). (Id. at 6-9.)11 The Gorrie Parties note that: (1) in the FAC, 26 11 In their motion for sanctions, the Gorrie Parties also refer to the Stadtler Parties’ position that the Three Acre RSA, rather than the April 2020 RSA, is illusory and 27 unenforceable. (Doc. 118 at 7.) As discussed supra, this discrepancy first appeared in the Stadtler Parties’ motion to amend (although the attached proposed SAC clarified their 28 position). Thus, the Court interprets the Gorrie Parties’ motion for sanctions as requesting sanctions based on the argument actually stated in Plaintiffs’ motion to dismiss and - 10 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 11 of 111 1 the Stadtler Parties asserted a claim for breach of the April 2020 RSA and alleged that 2 Gorrie induced the Trust to enter the April 2020 RSA for the purpose of avoiding 3 foreclosure on the Farm; (2) the FAC has evidentiary value because it was verified by 4 Stadtler (and was the operative pleading when the offending motion and reply were filed); 5 and (3) the Stadtler Parties’ current position, i.e., that the April 2020 RSA is illusory and 6 unenforceable, conflicts with the FAC. (Id. at 3-8.) The Gorrie Parties conclude that the 7 Statler Parties’ assertion in the motion and reply that the April 2020 RSA is unenforceable 8 violated Rule 11 because the argument lacked evidentiary support, was unsupported by 9 existing law, and was made for an improper purpose. (Id. at 6-7.) In a related vein, the 10 Gorrie Parties challenge the timing of the Stadtler Parties’ filings, arguing: “What [the 11 Stadtler Parties’] counsel should have done is seek to amend the verified FAC . . . and then 12 file the appropriate Motion to Dismiss after all parties understood the outcome of the 13 amendment process.” (Id. at 8-9.)12 The Gorrie Parties contend that sanctions are 14 warranted because the “decision to file the Motion to Dismiss and Reply with the offending 15 argument prior to amending the FAC necessarily resulted in additional work.” (Id. at 8.) 16 In response, the Stadtler Parties acknowledge that the FAC included allegations 17 inconsistent with their current position that the April 2020 RSA is illusory and 18 unenforceable. (Doc. 125 at 2-3.) However, the Stadtler Parties argue that Rule 11 19 sanctions are not warranted simply because a party changes its view on a disputed issue 20 over the course of a case: “Plaintiffs are entitled to amend their pleading to remove a claim — 21 — 22 supporting reply—i.e., that the April 2020 RSA is unenforceable. This interpretation is supported by the fact that Stadtler Parties also treat the motion for sanctions as premised 23 on the April 2020 RSA argument. (See Doc. 125 at 2 [“The gravamen of [the Gorrie Parties’] motion is that in the verified Amended Complaint, [the Stadtler Parties] included 24 allegations regarding the [April 2020 RSA] and allege that [the Gorrie Parties] breached that agreement.”].) Alternatively, to the extent the Gorrie Parties seek Rule 11 sanctions 25 based on the Stadtler Parties’ allegations about the Three Acre RSA, this request is denied because it does not appear that the Stadtler Parties are taking the position that the Three 26 Acre RSA is unenforceable. — 27 — — 12 — The Gorrie Parties also suggest that amending the FAC might create “additional exposure under Rule 11” for the Stadtler Parties. (Doc. 118 at 8.) This issue is not properly 28 before the Court, as the Gorrie Parties’ motion for sanctions challenges only the Stadtler Parties’ motion to dismiss and supporting reply. - 11 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 12 of 111 1 . . . that they no longer believe is warranted by the evidence and the law, and Plaintiffs are 2 permitted to move for the dismissal of Defendants’ counterclaim on the same basis.” (Id. 3 at 3.) In their view, the Gorrie Parties’ sanctions request is a tactical maneuver: “At least 4 part of [the Gorrie Parties’] defense and counterclaims rely on their theory that [the Gorrie 5 Parties] entered into the [April 2020 RSA] in exchange for Mr. Stadtler agreeing not to 6 foreclose on the Promissory Note and Deed of Trust. Of course, [the Gorrie Parties] do 7 not want [the Stadtler Parties] to amend their pleading to remove . . . the breach of [April 8 2020 RSA] claim.” (Id. at 3.) The Stadtler Parties assert that, during the TRO hearing, 9 they realized that their affirmative claim for breach of the April 2020 RSA (and factual 10 allegation that Gorrie induced Stadtler to execute the April 2020 RSA for the purpose of 11 preventing foreclosure) was not legally warranted or supported by the evidence. (Id. at 312 5.) After this realization, consistent with Rule 11(b), they changed their position. (Id. at 13 3.) As for the timing of their motion to dismiss, the Stadtler Parties argue that they “could 14 not immediately amend their pleading because [their] claims against [the Gorrie Parties] 15 were stayed by IGD’s July 11, 2022, bankruptcy petition until notice of the lifting of the 16 stay was filed on September 16, 2022.” (Id. at 6.)13 The Stadtler Parties also note that the 17 Gorrie Parties categorically denied the allegations in the FAC and argue that “[if] each of 18 the allegations in the Verified Complaint . . . [is] ‘evidence’ that [the Stadtler Parties] 19 cannot controvert,” then the Gorrie Parties’ denial of those allegations (in a verified 20 amended answer) is also evidence. (Id.) The Stadtler Parties conclude that “it is obvious 21 that [the Gorrie Parties’] motivation for moving for sanctions and opposing [the Stadtler 22 13 The Stadtler Parties initially believed that the stay also prevented them from filing 23 a motion to dismiss the Gorrie Parties’ counterclaims. (Doc. 81 at 2-3.) On August 9, 2022, the Court issued an order explaining that “the automatic stay in this action pertains 24 only to the claims brought against IGD. It does not apply to the counterclaims brought by IGD against the Stadtler Parties, or to any other claims in this action.” (Doc. 85 at 2-3.) 25 The Court also extended the deadline for the Stadtler Parties to respond to the counterclaims to August 23, 2022. (Id. at 3-4.) On August 10, 2022, the Stadtler Parties 26 filed their motion to dismiss. (Doc. 87.) On September 13, 2022, the bankruptcy stay was lifted as to this litigation. (Doc. 96.) On October 14, 2022, the Stadtler Parties requested 27 leave to file a SAC. (Doc. 103.) On November 29, 2022, in an order granting the Stadtler Parties’ amendment request, the Court noted that “[the Stadtler Parties] were briefly 28 confused about whether and to what extent this bankruptcy filing resulted in a stay of these proceedings.” (Doc. 129 at 7.) - 12 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 13 of 111 1 Parties’] motion to amend the Amended Complaint . . . is to try to force [the Stadtler 2 Parties] into making [the Gorrie Parties’] breach of Contract claim for them.” (Id. at 3 10-11.) 4 In reply, the Gorrie Parties reiterate that the Stadtler Parties’ argument that the April 5 2020 RSA is illusory and unenforceable is inconsistent with the allegations in the FAC and 6 “everyone agrees that the inconsistent argument was made while the sworn FAC was the 7 operative pleading.” (Doc. 130 at 2.) The Gorrie Parties contend that “when [the Stadtler 8 Parties] conducted their analysis and made their argument to dismiss the [April 2020 RSA] 9 breach counterclaim based on the best knowledge of their attorneys’ information and belief 10 formed after an inquiry reasonable under the circumstances, that analysis did not take into 11 account the sworn avowals made in the FAC.” (Id. at 3-4.) The Gorrie Parties conclude: 12 “It is simply unreasonable to ignore the fact that a party’s sworn operative pleading 13 completely contradicts an argument seeking to dismiss a claim.” (Id. at 4.) As for the 14 bankruptcy stay, the Gorrie Parties note that because “NFOF was never subject to the 15 bankruptcy stay,” the Stadtler Parties could have moved to amend the FAC as to the NFOF 16 immediately following the July 7, 2022 TRO hearing. (Id.) 17 D. Analysis 18 A request for Rule 11 sanctions “must describe the specific conduct alleged to 19 violate Rule 11(b).” Holgate v. Baldwin, 425 F.3d 671, 677 (9th Cir. 2005) (internal 20 quotation marks omitted). Here, the challenged conduct is the Stadtler Parties’ argument, 21 in their motion to dismiss (Doc. 87) and supporting reply (Doc. 95), that the April 2020 22 RSA is illusory and unenforceable. (Doc. 118 at 7-9.) 23 The challenged conduct did not violate Rule 11(b). At the outset, to the extent the 24 Gorrie Parties focus on the relative timing of the Stadtler Parties’ motion to dismiss and 25 motion to amend their FAC, such arguments are unavailing. (See, e.g., Doc. 118 at 8 26 [“What Plaintiffs’ counsel should have done is seek to amend the verified FAC . . . and 27 then file the appropriate Motion to Dismiss.”].) For one thing, it is not clear that a changed 28 temporal sequence would have alleviated the Gorrie Parties’ Rule 11 concerns, which are - 13 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 14 of 111 1 largely premised on the fact that the FAC was verified, not its status as the then-operative 2 pleading. Indeed, the Gorrie Parties describe amendment of the FAC as “[a] potential Rule 3 11 problem of its own.” (Id. at 8 n.2.) More important, the Stadtler Parties’ decision to 4 file a motion to dismiss before moving to amend the FAC made sense in light of the 5 bankruptcy stay and applicable filing deadlines. Specifically, the deadline for the Stadtler 6 Parties to respond to the counterclaims was August 23, 2022. (Doc. 85 at 3-4.) However, 7 at that time, the bankruptcy stay applied to claims brought against IGD. (Id. at 2-3.) 8 Although the Gorrie Parties are correct that the Stadtler Parties could have moved to amend 9 the FAC as to NFOF (against which the offending breach of contract claim was alleged), 10 the SAC also includes a new fraudulent inducement claim against all of the Gorrie Parties 11 (including IGD). (Doc. 103-1 ¶¶ 140-55; Doc. 131 ¶¶ 140-55.) Thus, following the Gorrie 12 Parties’ logic, the Stadtler Parties would have had to file two motions to amend their 13 pleadings: first, to amend the FAC as to Gorrie, NFOF, and NFF (before the August 23, 14 2022 deadline); second, to amend the SAC as to IGD (after September 13, 2022, when the 15 bankruptcy stay was lifted). Not only it is difficult to see the value of requiring the Stadtler 16 Parties to file multiple amendment requests, but the Gorrie Parties’ emphatic opposition to 17 the Stadtler Parties’ motion to amend the FAC (see Doc. 123) suggests this approach would 18 have led to more motion practice, not less. At any rate, the purpose of Rule 11 sanctions 19 is to deter baseless filings, see Cooter & Gell, 496 U.S. at 393 , not to attack opposing 20 counsel’s tactical decisions about the timing of various motions, however inconvenient 21 they may be. 22 Turning to language of Rule 11(b), the Gorrie Parties argue that the Stadtler Parties 23 engaged in sanctionable conduct because, at least at the time the motion to dismiss and 24 reply were filed, the argument that the April 2020 RSA is unenforceable was neither 25 supported by the evidence nor legally tenable. (Doc. 118 at 7.)14 Rule 11 “provides for 26 14 The Gorrie Parties also indirectly suggest the challenged argument was made for an improper purpose but provide no supporting analysis. (Doc. 118 at 6 [“[T]he argument put 27 forward by [the Stadtler Parties’] counsel violate[s] all three subsections of Rule 11 . . . .”].) In any event, “because the standard governing Rule 11 is objective, the ‘improper purpose’ 28 inquiry subsumes the ‘frivolousness’ inquiry when applied to the filing of complaints. . . . In other words, [papers] are not filed for an improper purpose if they are non-frivolous.” - 14 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 15 of 111 1 the imposition of sanctions when a filing is frivolous, legally unreasonable, or without 2 factual foundation, or is brought for an improper purpose. Frivolous filings are ‘those that 3 are both baseless and made without a reasonable and competent inquiry.’” Est. of Blue v. 4 Cnty. of Los Angeles, 120 F.3d 982 , 985 (9th Cir. 1997) (internal citations omitted). 5 The Gorrie Parties contend that the Stadtler Parties did not have an “objectively 6 reasonable basis” for asserting that the April 2020 RSA is unenforceable because the 7 allegations in the verified FAC, which are record evidence, contradict that position in two 8 ways: first, the factual allegation that Gorrie induced Stadtler to execute the April 2020 9 RSA for the purpose of preventing foreclosure (Doc. 25 ¶ 100) conflicts with the Stadtler 10 Parties’ contention that the Trust did not give consideration under the agreement; second, 11 the affirmative claim for breach of the April 2020 RSA presumes the agreement is 12 enforceable. (See Doc. 125 at 7-9. See also id. at 9 [“[T]he offending argument is simply 13 one that could not be made in contravention of the verified and sworn FAC.”].) According 14 to the Gorrie Parties, these conflicts demonstrate that the Stadtler Parties did not make a 15 reasonable and competent inquiry before asserting that the April 2020 RSA is 16 unenforceable. (Id. at 8.) 17 In determining whether Rule 11 has been violated, a “court must consider factual 18 questions regarding the nature of the attorney’s prefiling inquiry and the factual basis of 19 the pleading or other paper.” Cooter, 492 U.S. at 399. “Rule 11 . . . imposes an objective 20 standard of reasonable inquiry which does not mandate a finding of bad faith.” Chambers 21 v. NASCO, Inc., 501 U.S. 32, 47 (1991). Here, Stadtler’s declaration that “everything 22 alleged” in the FAC is true is indeed record evidence. (See also Doc. 129 at 7-8.) But the 23 mere fact that the declaration conflicts with the Stadtler Parties’ later argument in their 24 motion papers does not demonstrate that the Stadtler Parties lacked an objectively 25 reasonable basis for making the challenged argument. The Gorrie Parties do not cite, nor 26 can this Court find, any authority compelling the imposition of Rule 11 sanctions, an — 27 — CrossFit Inc. v. Martin, 2017 WL 4224093 , *4 (D. Ariz. 2017) (internal quotation marks 28 omitted). Thus, because the Court finds the Stadtler Parties did not act frivolously, they also did not act with an improper purpose. - 15 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 16 of 111 1 “extraordinary remedy . . . to be exercised with extreme caution,” In re Keegan Mgmt. Co., 2 Sec. Litig., 78 F.3d 431, 437 (9th Cir. 1996), in such circumstances. “A party moving for 3 Rule 11 sanctions bears the burden of establishing non-compliance.” McMillin v. Foster 4 City, 2012 WL 5464606 , *2 (N.D. Cal. 2012). 5 At any rate, the chronology of this dispute demonstrates why Rule 11 sanctions are 6 unwarranted. During the July 2022 TRO hearing, the Stadtler Parties argued that the Trust 7 did not give consideration under the April 2020 RSA, rendering it illusory and 8 unenforceable. In response, the Court questioned the inconsistency between that argument 9 and the Stadtler Parties’ affirmative claim for breach of the April 2020 RSA. (Doc. 82 at 10 194-95.) Since then, for more than six months, the Stadtler Parties have not asserted any 11 arguments inconsistent with their current position that the April 2020 RSA is unenforceable 12 for lack of consideration (see Docs. 87, 95, 103, 125, 126, 131); they also moved to amend 13 the FAC to conform their pleadings to this position when they believed it was reasonable 14 to do so (Doc. 103). These circumstances suggest that the Stadtler Parties simply 15 abandoned a legal claim after realizing it was inconsistent with their view of the facts. See, 16 e.g., Lundstrom v. Young, 2022 WL 15524619 , *3 (S.D. Cal. 2022) (“Plaintiff’s voluntary 17 abandonment of one claim for relief pled in the Second Amended Complaint does not 18 support Rule 11 sanctions.”). 19 The Gorrie Parties’ argument that the challenged position is unwarranted by existing 20 law fails for similar reasons. “A legal argument violates Rule 11(b)(2) if it has ‘no chance’ 21 of success under existing precedent.” Excel Fortress Ltd. V. Wilhelm, 2020 WL 1330664 , 22 *10 (D. Ariz. 2020). The Gorrie Parties do not cite, nor can the Court find, any legal 23 authority suggesting that an argument lacks legal foundation merely because it conflicts 24 with a position previously taken in a verified pleading. Moreover, applying Rule 11 in 25 such a way would effectively require the Stadtler Parties to continue asserting a legal 26 position even after concluding in good faith that the position isn’t supported by their 27 interpretation of the law or the evidence. 28 Finally, it bears emphasizing that “[t]he current version of Rule 11 does not require - 16 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 17 of 111 1 the court to impose any sanction at all upon a finding of a Rule 11(b) violation. Rather, 2 the court has discretion to conclude that, under the circumstances, the violation warrants 3 no sanction.” 1 Gensler, Federal Rules of Civil Procedure, Rules and Commentary, Rule 4 11, at 278 (2020). “Judges therefore should impose sanctions on lawyers for their mode of 5 advocacy only in the most egregious situations, lest lawyers be deterred from vigorous 6 representation of their clients.” United Nat. Ins. Co., 242 F.3d at 1115 . The Stadtler 7 Parties’ challenged conduct falls far below this high standard. Accordingly, the Gorrie 8 Parties’ sanctions request is denied. 9 E. Attorneys’ Fees 10 The Stadtler Parties request “an award of their reasonable attorneys’ fees” 11 associated with responding to the Gorrie Parties’ motion. (Doc. 125 at 11.) 12 “If warranted, the court may award to the prevailing party the reasonable expenses, 13 including attorney’s fees, incurred for the motion.” Fed. R. Civ. P. 11(c)(2). However, the 14 Stadtler Parties do not explain why an award of attorneys’ fees is appropriate here. Further, 15 given that the Court itself identified the conflicting legal positions asserted by the Stadtler 16 Parties as potentially violative of Rule 11 (Doc. 82 at 194-95), the Court does not find that 17 the Gorrie Parties filed this motion in bad faith or that the motion is frivolous. Cf. MetLife 18 Bank, N.A. v. Riley, 2010 WL 4024898 , *4 (D. Nev. 2010) (“Plaintiff requests attorney’s 19 fees for the costs incurred in opposing defendants’ motion for sanctions. The court denies 20 plaintiff’s request because it does not find clear evidence that defendants filed their motion 21 for any of the nefarious purposes advanced by plaintiffs . . . .”). 22 II. The Gorrie Parties’ Motion To File An Amended Pleading 23 The Gorrie Parties seek leave to file a second amended counterclaim against the 24 Stadtler Parties and a first amended third-party complaint against Houchin. (Doc. 146.) 25 This motion was filed on January 6, 2023, more than six months after the expiration of the 26 July 5, 2022 amendment deadline established by the Rule 16 case management order. 27 (Doc. 69 at 1.) 28 … - 17 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 18 of 111 1 A. Legal Standard 2 “[W]hen a party seeks to amend a pleading after the pretrial scheduling order’s 3 deadline for amending the pleadings has expired, the moving party must satisfy the ‘good 4 cause’ standard of Federal Rule of Civil Procedure 16(b)(4), which provides that ‘[a] 5 schedule may be modified only for good cause and with the judge’s consent,’ rather than 6 the liberal standard of Federal Rule of Civil Procedure 15(a).” In re W. States Wholesale 7 Nat. Gas Antitrust Litig., 715 F.3d 716, 737 (9th Cir. 2013), aff’d sub nom. Oneok, Inc. v. 8 Learjet, Inc., 575 U.S. 373 (2015). “Unlike Rule 15(a)’s liberal amendment policy which 9 focuses on the bad faith of the party seeking to interpose an amendment and the prejudice 10 to the opposing party, Rule 16(b)’s ‘good cause’ standard primarily considers the diligence 11 of the party seeking the amendment.” Id. “While a court may take into account any 12 prejudice to the party opposing modification of the scheduling order, the focus of the Rule 13 16(b) inquiry is upon the moving party’s reasons for seeking modification.” Id. (cleaned 14 up). “[C]arelessness is not compatible with a finding of diligence and offers no reason for 15 a grant of relief.” Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 609 (9th Cir. 16 1992). If the moving party “was not diligent, the inquiry should end.” Id. 17 B. The Parties’ Arguments 18 The Gorrie Parties’ proposed amended pleading includes several new counterclaims 19 against the Stadtler Parties and a new third-party claim against Houchin. According to the 20 Gorrie Parties, “[t]he amendments are occasioned both by the continued investigation of 21 this case which brought to light the new potential claims and by the recent filing of both 22 the [SAC] . . . and the First Amended Third-Party Counterclaim, the factual allegations of 23 each tend to demonstrate that the new claims are appropriately brought.” (Doc. 146 at 2, 24 internal citation omitted.) The Gorrie Parties argue that “the interests of justice compel 25 that leave be granted” because “the majority of the amendment to the pleadings is driven 26 by newly taken positions on the part of [the Stadtler Parties] and [Houchin] as enunciated 27 in their respective pleadings.” (Id.) The Gorrie Parties further argue that “the pleadings in 28 this case have not closed and discovery is in its infancy, so no prejudice would be - 18 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 19 of 111 1 occasioned upon any other party.” (Id.) 2 The Stadtler Parties oppose amendment. (Doc. 163.) First, the Stadtler Parties 3 contend that “[t]he purpose of Gorrie’s motion for leave to amend her claims appears to 4 have been in order file an accompanying second application to restrain the Trustee’s sale 5 of the Farm.” (Id. at 2.) Because “[t]hat application has already been denied” and “[t]he 6 Trustee’s sale took place on January 12, 2023,” “amending her pleadings for this purpose 7 is futile.” (Id.) Second, the Stadtler Parties note that “Gorrie’s motion is entirely based on 8 Rule 15(a) despite the fact this Court has twice notified the Parties that ‘Rule 16(b)’s ‘good 9 cause’ standard replaces Rule 15(a)(1)(2)’s more liberal standard” when a motion for leave 10 to amend is filed after the amendment deadline in the scheduling order.” (Id., citation 11 omitted.) The Stadler Parties argue that the request fails under the Rule 16(b) standard 12 because the Gorrie Parties were not diligent in seeking amendment, as all of the new 13 allegations are premised on events that “took place in 2020 and 2021.” (Id.) “Because 14 there is no new evidence in the proposed amended pleading that would not have been 15 discovered ‘in the exercise of due diligence’ until after the amendment deadline had passed 16 and the amendment could have been timely made, good cause is not shown.” (Id. at 6, 17 citation omitted.) 18 In reply, the Gorrie Parties argue that “the current [Case Management Order] is for 19 all intents and purposes a dead letter” and accuse the Stadtler Parties and Houchin of 20 delaying discovery in various ways. (Doc. 182 at 1-4. See, e.g., id. at 4 [“The foregoing 21 all demonstrates absolutely that the failure of this case to proceed forward on the discovery 22 schedule under the [Case Management Order] is fully attributable to the Plaintiff’s decision 23 to file a near frivolous motion to disqualify.”].) According to the Gorrie Parties, the 24 proposed amendments (1) “add[] fraud in the inducement counts as the result of [the 25 Stadtler Parties] fraudulently inducing [the Gorrie Parties] into executing the Farm 26 Purchase Agreement, Promissory Note, Deed of Trust, [Purchase] Addendum . . . and 27 [April 2020 RSA],” (2) “revise[] Count VIII to a tortious interference with business 28 expectancy as [the Gorrie Parties] explained [they] would do in its response to [the Stadtler - 19 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 20 of 111 1 Parties’] motion to dismiss,” and (3) add “a tort of wrongful foreclosure.” (Id. at 4.) As 2 for the fraudulent inducement claims, the Gorrie Parties argue the facts giving rise to the 3 claims “only really became apparent after the filing of the [SAC].” (Id. at 4-5.) As for the 4 wrongful foreclosure claim, “that claim only became ripe when the wrongful foreclosure 5 of the property was immediately pending and now completed.” (Id. at 5.) Finally, the 6 Gorrie Parties argue that “this case remains very much in the early pleading phase, and thus 7 there is ample good cause to ensure that the pleadings contain the most up to date 8 allegations occasioned by this contentious litigation that continues to generate now claims 9 and allegations as the result of the machinations of [the Stadtler Parties].” (Id.) 10 Houchin also opposes amendment. (Doc. 164.) According to Houchin, the 11 proposed new third-party claim is based on representations set forth in the JVA, which was 12 executed in 2021. (Id. at 2.) Moreover, Houchin argues that the motion “fails to identify 13 the substance of the[] supposed ‘newly taken positions’” in Houchin’s third-party 14 counterclaims that drove the Gorrie Parties to seek leave to amend. (Id.) Houchin also 15 contends that granting the Gorrie Parties leave to add the proposed fraudulent inducement 16 claim would be futile. (Id. at 2-7.) 17 In reply, the Gorrie Parties reiterate that “the [Case Management Order] is for all 18 intents and purposes a dead letter” and provide several reasons why amending to add the 19 proposed new fraudulent inducement claim would not be futile. (Doc. 183 at 2-4.) The 20 Gorrie Parties also provide more detail as to the new allegations in Houchin’s pleading that 21 underlie the motion to amend. (Id.) 22 C. Analysis 23 The Court has repeatedly clarified throughout this case that “Rule 16(b)’s ‘good 24 cause’ standard replaces Rule 15(a)(1)(2)’s more liberal standard” when, as here, a motion 25 for leave to amend is filed after the amendment deadline in the scheduling order. (Doc. 26 115 at 2; Doc. 129 at 5-6.) Despite this, the Gorrie Parties mistakenly focus on the Rule 27 15 standard. (Doc. 146 at 2-3.) 28 “Discovery of new information after the deadline for amended pleadings passes is - 20 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 21 of 111 1 a potential basis for good cause to modify the scheduling order.” Story v. Midland Funding 2 LLC, 2016 WL 5868077 , *2 (D. Or. 2016). However, the party seeking amendment must 3 show diligence in seeking amendment after the information was discovered. Id. To 4 determine whether a party exercised diligence, courts typically consider the amount of time 5 between the discovery of the new information and when the party requested leave to 6 amend. Zivkovic v. S. Cal. Edison Co., 302 F.3d 1080, 1087-88 (9th Cir. 2002). “Ideally, 7 a party will move to amend within weeks of learning new information.” Story, 2016 WL 8 5868077 at *2-3. However, “[a] longer delay can still be consistent with diligence, 9 depending on the circumstances of the delay.” Id. at *3. 10 Here, the Gorrie Parties broadly attribute the requested amendments to “the 11 continued investigation of this case which brought to light the new potential claims” and 12 to the facts alleged in the SAC and in Houchin’s amended pleading. (Doc. 146 at 2.) The 13 Stadtler Parties filed the SAC on December 5, 2022 (Doc. 131) and Houchin filed his 14 amended pleading on December 9, 2022 (Doc. 134). The Gorrie Parties filed their 15 amendment request on January 6, 2023. (Doc. 136.) Thus, if the proposed amendments 16 indeed arose from new information that Gorrie discovered when the SAC and Houchin’s 17 amended pleading were filed, the Gorrie Parties’ request would likely meet the “good 18 cause” standard. See, e.g., Aldan v. World Corp., 267 F.R.D. 346, 358 (D. N. Mar. I. 2010) 19 (holding that plaintiff was diligent where there was a delay of a month-and-a-half between 20 discovery of the new information and the motion to amend because that period “included 21 the holiday season”). But see MiCamp Sols. LLC v. Nat’l Processing LLC, 2021 WL 22 289661, *3 (D. Ariz. 2021) (“That Plaintiff filed the motion nearly one month after Ms. 23 Putnam’s deposition . . . does not indicate diligence.”). 24 The problem is that nearly all of the proposed changes arise from facts known to 25 Gorrie before this litigation began. (See, e.g., Doc. 146-1 at 6-7 ¶ 21 [alleging that, in 2020, 26 Dawson knew that “Gorrie had begun to encounter difficulty with her investor consortium 27 as the result of the COVID-19 pandemic and due to internal difficulties within the investor 28 consortium group”]; id. at 7 ¶¶ 22-23 [alleging that Gorrie made certain representations to - 21 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 22 of 111 1 Dawson and Stadtler in 2020]; id. at 7 ¶ 24 [alleging that Dawson made certain 2 representations to Gorrie and some of her investors at the close of escrow on the Farm in 3 2020]; id. at 8-11 ¶¶ 29-41 [alleging that “throughout the remainder of the Hemp Project, 4 Dawson introduced, solicited and attempted to consummate a number of financing ventures 5 all of which did not come to fruition” but “none of the financing ventures were intended to 6 work out” and providing several examples of this behavior during 2020]; id. at 11 ¶¶ 447 46 [alleging that Stadtler had certain knowledge in 2020 before the 30-day timeline 8 provided for in the Addendum to the Farm Purchase Agreement]; id. at 16-17 ¶ 66 [alleging 9 that Dawson engaged in various misconduct while working at the Farm]; id. at 21 ¶¶ 8610 87 [alleging the July 1, 2021 default notice “does not recognize any of the agreements 11 between the parties, does not recognize Stadtler’s agreement not to charge interest on the 12 $240,000 as represented by Dawson and is therefore an improper default”].)15 13 Because diligence is a fact-specific inquiry, the Court addresses each requested 14 amendment in turn. See also Cervantes v. Zimmerman, 2019 WL 1129154 , *5 (S.D. Cal. 15 2019) (“Courts need not find good cause on the whole, but rather may appropriately 16 consider whether the movant has shown good cause for each proposed amendment or group 17 of related amendments.”). 18 1. Proposed Amendments To Counterclaims 19 The Gorrie Parties propose adding four new counterclaims against the Stadtler 20 Parties (three fraudulent inducement claims and a wrongful foreclosure claim), changing 21 their tortious interference with contract counterclaim to a tortious interference with 22 15 One fact alleged in the proposed amended pleading that does not predate this 23 litigation is that “[o]n or about July 11, 2022, Stadtler’s counsel emails the Arizona Department of Agriculture regarding concerns that her client has about the hemp plants on 24 the Farm. However, what is important to note is that Stadtler’s counsel specifically states that ‘[w]hen our client retakes possession of the farm tomorrow . . .’ indicating clearly that 25 Stadtler and his counsel did not believe that there would be a public auction at which the highest bid would win, but instead a faux sales process that would allow Stadtler to take 26 control of the Farm and reap the equity created by Gorrie.” (Doc. 146-1 at 22 ¶ 91.) During the second TRO hearing, the Court noted that the email does not appear “particularly 27 helpful or meaningful or significant.” (Doc. 184 at 48.) The Gorrie Parties’ filings provide no additional clarity. (Docs. 146, 146-1, 182.) Thus, even if this fact was newly 28 discovered, it does not support a finding of diligence because it did not give rise to the pending motion to amend. - 22 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 23 of 111 1 business expectancy counterclaim, omitting a claim for negligence per se, and adding a 2 number of factual allegations to support their new counterclaims. (Doc. 146-1.) 3 a. First Proposed New Counterclaim 4 The first new counterclaim alleges that the Stadtler Parties fraudulently induced the 5 Gorrie Parties into executing the Farm Purchase Agreement, Promissory Note, Deed of 6 Trust and Purchase Addendum (collectively, the “Farm Purchase Documents”) by 7 representing that Stadtler “understood the financial situation prior to the consummation of 8 the Farm purchase transaction and that he would work with [the Gorrie Parties] to ensure 9 the viability and success of the Hemp Project.” (Id. at 24 ¶ 107.) The Gorrie Parties also 10 allege that “Stadtler intentionally failed to disclose that Dawson was not only his broker 11 and representative, but was also his partner in the venture.” (Id. at 25 ¶ 108.) The Gorrie 12 Parties assert that these misrepresentations induced them to enter into the Farm Purchase 13 Documents. (Id. at 24-25 ¶¶ 107-11.) 14 The Gorrie Parties have not established good cause for the untimely assertion of this 15 new counterclaim. Per the Gorrie Parties’ own allegations, the Farm Purchase Documents 16 were executed in 2020 and Gorrie learned in April 2021 that “Dawson was an undisclosed 17 silent partner with Stadtler in the Farm and in the various ventures between the parties.” 18 (Id. at 4-8 ¶¶ 13-27.) The Gorrie Parties also allege that Gorrie realized in May 2021 that 19 “Stadtler’s plan from the outset” was “to starve the Hemp Project with the aim of taking 20 over the project for himself and reaping the financial reward of the Hemp Project while 21 recovering the Farm and relocating IGD to a new location.” (Id. at 21 ¶ 86.) Waiting more 22 than a year after learning of these “new” events to request permission to amend does not 23 demonstrate diligence. Acri v. Int’l Ass’n of Machinists & Aerospace Workers, 781 F.2d 24 1393, 1398 (9th Cir. 1986) (“[L]ate amendments to assert new theories are not reviewed 25 favorably when the facts and the theory have been known to the party seeking amendment 26 since the inception of the cause of action.”).16 27 16 In reply, the Gorrie Parties contend that this new counterclaim “only really became apparent after the filing of the [SAC],” which “demonstrated that Stadtler was now entirely 28 disclaiming what had been represented to Gorrie prior to the close of the escrow, namely that Stadtler would work with Gorrie and partner with her in order to create a highly - 23 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 24 of 111 1 b. Second Proposed New Counterclaim 2 The second new counterclaim alleges that the Stadtler Parties fraudulently induced 3 the Gorrie Parties into executing the April 2020 RSA by “representing that the [April 2020 4 RSA] was intended as a forebearance [sic] of the obligations of the Promissory Note, Deed 5 of Trust and [Purchase] Addendum.” (Doc. 146-1 at 25-26 ¶ 114.) According to the Gorrie 6 Parties, at the time this litigation began, they were unaware that “Stadtler and the Trust 7 intended to assert that the [April 2020 RSA] was instead a gift or illusory contract so that 8 Stadtler and the Trust would not be bound thereby” (id. at 26 ¶ 116); the Stadtler Parties’ 9 intent “only really became apparent after the filing of the [SAC].” (Doc. 182 at 4.)17 10 This argument fails because it is belied by other allegations in the Gorrie Parties’ 11 proposed amended pleading and by the Gorrie Parties’ counsel’s statements to the Court 12 during the second TRO hearing, why establish that the Gorrie Parties had knowledge of 13 the relevant facts long before the SAC was filed. (See, e.g., Doc. 146-1 at 26 ¶¶ 118-19 14 [alleging that “Stadtler and the Trust continued their misrepresentation regarding the [April 15 2020 RSA] from the execution of the [April 2020 RSA] until Dawson’s testimony under 16 oath at the July 7, 2022 hearing before this Court”]; Doc. 184 at 11 [“[T]he fraudulent 17 inducement claims on the [April 2020 RSA] really only came to first awareness when Mr. 18 Dawson sat up there [during the July 2022 TRO hearing] and said, it’s a gift. . . . That’s 19 the first time we’d heard about it.”].)18 A delay of more than five months is not consistent — 20 — profitable hemp business.” (Doc. 182 at 4-5.) However, the Gorrie Parties’ proposed 21 amended pleading does not support this argument. — 17 — 22 As noted above, the relevant chronology is that the Stadtler Parties first took the position that the April 2020 RSA was a gift at the July 7, 2022 TRO hearing and then 23 asserted the argument in a motion to dismiss (filed August 10, 2022) and a motion for leave to file a SAC (filed October 24, 2022). (Docs. 82, 87, 103.) On November 11, 2022, the 24 Gorrie Parties filed a motion for sanctions premised on the Stadtler Parties’ assertion of this position. (Doc. 118.) On November 29, 2022, the Court granted the Stadtler Parties 25 leave to file their SAC. (Doc. 129.) On December 5, 2022, the SAC was filed. (Doc. 131.) — 18 — In a related vein, in their reply, the Gorrie Parties spill much ink arguing that the 26 delayed timing of their motion to amend was caused by the Stadtler Parties filing a motion to disqualify counsel. (Doc. 182 at 1-4.) Given that the Gorrie Parties managed to file a 27 number of motions while the motion to disqualify counsel was pending, this argument is unconvincing. (See, e.g., Docs. 118, 136, 158, 161.) Also, even accepting that the delay 28 of Stadtler’s deposition hindered the Gorrie Parties’ ability to conduct discovery, it is clear from the record that the Gorrie Parties knew Stadtler’s position on the April 2020 RSA - 24 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 25 of 111 1 with diligence. Cf. Cervantes, 2019 WL 1129154 at *7 (a delay of four months “simply 2 cannot show the diligence necessary for a finding of good cause”). 3 Second, and in any event, the date that the Gorrie Parties learned that the Stadtler 4 Parties intended to argue that the April 2020 RSA is unenforceable is beside the point— 5 the second new fraudulent inducement counterclaim does not turn on the enforceability of 6 the April 2020 RSA as a whole. Instead, it arises from the allegation that Stadtler falsely 7 represented to Gorrie that the April 2020 RSA modified the terms of the loan under the 8 Farm Purchase Documents. (Doc. 146-1 at 25-26 ¶ 114 [“Stadtler and the Trust 9 fraudulently induced NFOF into entering into the [April 2020 RSA] by representing that 10 the [April 2020 RSA] was intended as a forebearance [sic] of the obligations of the 11 Promissory Note, Deed of Trust and [Purchase] Addendum as described above.”].) On 12 May 2, 2022, the Stadtler Parties filed their FAC, alleging: “The [April 2020 RSA] . . . was 13 negotiated and executed after closing on the [Farm] and does not contain any language 14 which modified the terms of the Farm Purchase Agreement, Promissory Note or Deed of 15 Trust.” (Doc. 25 ¶ 61.) Thus, even if the Gorrie Parties did not know that the Stadtler 16 Parties would argue the April 2020 RSA was a gift until the SAC was filed, they had notice 17 in May 2022 of the facts giving rise to the second proposed new counterclaim. “Rule 16(b) 18 clearly contemplates that changes in law or newly discovered evidence may justify later 19 amendments to a complaint. That justification erodes, however, when a Plaintiff delays 20 amending his complaint beyond the time he could have discovered the grounds for 21 amendment through the exercise of reasonable diligence.” Del Rio v. Virgin Am., Inc., — 22 — 2019 WL 210957 , *3 (C.D. Cal. 2019) (quotation marks omitted). 23 c. Third Proposed New Counterclaim 24 The third new counterclaim alleges that “Stadtler and the Trust fraudulently induced 25 [the Gorrie Parties] into entering into the [Three Acre RSA] by representing that the [Three 26 Acre RSA] was intended as a further forebearance [sic] of the obligations of the Promissory 27 Note, Deed of Trust and [Purchase] Addendum . . . and that the [Three Acre RSA] would — 28 — despite this handicap. (See, e.g., Doc. 146-1 at 26 ¶¶ 118-19; Doc. 184 at 11.) - 25 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 26 of 111 1 provide additional capital to pay Stadtler.” (Doc. 146-1 at 27 ¶ 123. See also id. at 27 2 ¶ 124 [alleging that Stadtler and the Trust also falsely represented that “Stadtler intended 3 to appropriately fund his obligation under the [Three Acre RSA]”].) 4 The Gorrie Parties have not established good cause for the untimely assertion of this 5 new counterclaim. “Pleadings ‘cannot be a continuously moving target for obvious 6 reasons.’” MiCamp Sols. LLC, 2021 WL 289661 at *3. Like the first two amendments, 7 this proposed counterclaim relies entirely on events that occurred before this litigation 8 began. (See, e.g., Doc. 146-1 at 27 ¶¶ 123-24 [alleging that Stadtler and the Trust made 9 false representations before the Three Acre RSA was executed in January 2021]; id. at 21 10 ¶ 86 [alleging that, by mid-2021, Gorrie understood “Stadtler’s plan from the outset” was 11 to “starve the Hemp Project with the aim of taking over the project for himself and reaping 12 the financial reward of the Hemp Project while recovering the Farm and relocating IGD to 13 a new location”]; id. [alleging that, in 2021, Stadtler expressed that he would not provide 14 additional funding to the Gorrie Parties regardless of the Three Acre Addendum].) 15 d. Fourth Proposed New Counterclaim 16 Next, the Gorrie Parties seek to add a tort claim against the Stadtler Parties for 17 wrongful foreclosure. (Doc. 146-1 at 32-33 ¶¶ 161-67.) The proposed counterclaim 18 alleges that “IGD is not in default of the Promissory Note and Deed of Trust and 19 Addendum” and thus “Stadtler and the Trust have a legal duty not to wrongfully exercise 20 the power to instigate a trustee sale.” (Id. at 33 ¶¶ 163-64.) The trustee sale occurred on 21 January 12, 2023. (Doc. 179-1.) In their reply to the Stadtler Parties’ opposition brief, the 22 Gorrie Parties argue that they acted diligently as to the wrongful foreclosure claim because 23 it “only became ripe when the wrongful foreclosure of the property was immediately 24 pending and now completed.” (Doc. 182 at 5.) 25 The diligence analysis here is complicated by the fact that “Arizona . . . has not 26 expressly recognized the tort of wrongful foreclosure.” In re Mortg. Elec. Registration 27 Sys., Inc., 754 F.3d 772, 784 (9th Cir. 2014). To the extent courts applying Arizona law 28 have recognized such a claim, the case law supports the Gorrie Parties’ position that they - 26 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 27 of 111 1 acted diligently in terms of the timing of their amendment effort. See, e.g., Martinez v. 2 Cenlar FSB, 2014 WL 4354875 , *6 (D. Ariz. 2014) (“Arizona state courts do not recognize 3 the tort of wrongful foreclosure. However, district courts in Arizona have followed the 4 reasoning of other jurisdictions that do recognize the tort of wrongful foreclosure. A 5 wrongful foreclosure claim is available only after a foreclosure had occurred . . . .”) 6 (internal citations omitted). See also Cervantes v. Countrywide Home Loans, Inc., 656 7 F.3d 1034, 1043 (9th Cir. 2011) (“Looking to states that have recognized substantive 8 wrongful foreclosure claims, we note that such claims typically are available after 9 foreclosure . . . .”). 10 However, implicit in these decisions is the assumption that a wrongful foreclosure 11 claim is not subject to A.R.S. § 33-811(C)’s waiver provision. Section § 33-811(C) 12 provides, in relevant part: 13 The trustor, its successors or assigns, and all persons to whom the trustee mails a notice of a sale under a trust deed pursuant to § 33-809 shall waive 14 all defenses and objections to the sale not raised in an action that results in the issuance of a court order granting relief pursuant to rule 65, Arizona rules 15 of civil procedure, entered before 5:00 p.m. mountain standard time on the last business day before the scheduled date of the sale. — 16 — 17 Id. Generally, pre-2018 decisions recognizing the tort of wrongful disclosure under 18 Arizona law have found that § 33-811(C) waiver does not apply to “post-sale” claims. See, 19 e.g., Schrock v. Federal Nat’l Mortgage Assn., 2011 WL 3348227 , *6 (D. Ariz. 2011) 20 (recognizing the tort of wrongful foreclosure under Arizona law and holding that such a 21 tort is not subject to the waiver provisions of § 33-811(C)); Christakis v. Mortg. Elec. 22 Registration Sys., Inc., 2014 WL 5408424 , *4 n.12 (Ariz. Ct. App. 2014) (“Arizona courts 23 have not addressed whether the tort of wrongful foreclosure is a pre-sale claim and thus 24 waived by § 33-811(C), or a post-sale claim, which would remain viable. We observe, 25 however, that the United States District Court for the District of Arizona has held that the 26 tort ripens only after a foreclosure has occurred.”). 27 A 2018 decision by the Arizona Supreme Court, Zubia v. Shapiro, 408 P.3d 1248 28 (Ariz. 2018), casts doubt on the supposed distinction between “pre-sale” and “post-sale” - 27 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 28 of 111 1 claims for purposes of § 33-811(C) waiver. In Zubia, the court clarified that § 33-811(C) 2 waiver applies to any claim for damages that is “based on a defective [trustee] sale.” Id. 3 at 1251. The court reasoned that “[a]llowing a legal challenge based on the invalidity of 4 the trustee’s deed permits an end-run around the § 33-811(C) waiver provision, resulting 5 in legal expense and potential liability arising out of a statutorily valid trustee’s sale, 6 undercutting the finality the legislature intended for trustee sales.” Id. Addressing the 7 plaintiff’s wrongful foreclosure claim, the Zubia court stated: 8 Although we do not preclude the possibility that Arizona may recognize a cause of action for wrongful foreclosure in the future, we do not do so here. 9 As the court of appeals correctly recognized, Zubia’s specific “wrongful foreclosure” allegations would remain subject to the statutory requisites of 10 A.R.S. § 33-811(C), and are waived by her failure to seek and obtain the required injunctive relief. Even if we chose to recognize a cause of action 11 for wrongful foreclosure . . . , it would not apply here, [in part] because . . . Zubia’s claim against Shapiro arises out of the execution and recording of 12 the trustee’s deed. As such, her claim is an objection to the validity of the sale and would, therefore, be precluded by § 33-811(C). — 13 — 14 Id. at 1253-54 (internal citations and quotation marks omitted).19 Accordingly, even if 15 Arizona recognized a cause of action for wrongful foreclosure, such a claim would be 16 waived under § 33-811(C) because the Gorrie Parties did not obtain injunctive relief before 17 the trustee’s sale. (Doc. 184 at 39-49.)20 18 19 Lower courts have generally interpreted Zubia as affirming that wrongful 19 foreclosure is not currently a cognizable claim under Arizona law. See, e.g., 9540, LLC v. Edmonds trustee of CJE Living Tr. Dated Oct. 1, 2007, 2021 WL 6143690 , *1 (Ariz. Ct. 20 App. 2021 ), review denied (2022) (noting that “the superior court properly recognized [that a wrongful disclosure claim] is not a cognizable claim under Arizona law”); Novotny v. 21 Citibank, N.A., 2019 WL 3208113 , *2 (D. Ariz. 2019) (“Plaintiffs allege wrongful foreclosure. . . . Arizona recognizes no such cause of action.”) (citing Zubia, 408 P.3d at 22 1253-54); Bermudez v. DHI Mortg. Co. Ltd., 2018 WL 2008998 , *2 (D. Ariz. 2018) (“As other courts have noted, wrongful foreclosure is not a recognized tort in Arizona. . . . Most 23 recently, in Zubia v. Shapiro, the Arizona Supreme Court again declined to recognize the tort of wrongful foreclosure.”) 24 20 Several lower courts have found that recognizing the tort of wrongful foreclosure in Arizona would be “futile” as the law currently stands because by the time a wrongful 25 foreclosure claim ripened (i.e., after foreclosure), it would be waived under § 33-811(C). Grady v. Tri-City Nat’l Bank, 2013 WL 2147541 , *2 (D. Ariz. 2013). See also Gray v. 26 Capstone Fin., 2022 WL 2985647 , *4 (D. Ariz. 2022) (“Arizona courts do not recognize a claim for wrongful foreclosure. Put simply, ‘a person who has defenses or objections to a 27 properly noticed trustee’s sale has one avenue for challenging the sale: filing for injunctive relief.’”) (internal citation omitted); Cummings v. Tucker, 2022 WL 2106014 , *3 (D. Ariz. 28 2022) (“Arizona does not recognize ‘wrongful foreclosure’ claims. In fact, under A.R.S. § 33-811(C), Arizona law makes clear that borrowers waive all objections to a trustee’s - 28 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 29 of 111 1 The Court thus agrees with the Stadtler Parties (Doc. 163 at 2) that the proposed 2 amendment is futile—either Arizona does not recognize the tort or the claim would be 3 waived under § 33-811(C) because it relies on the allegation that IGD was not in default 4 (and thus challenges the validity of the sale). (Doc. 146-1 at 33 ¶¶ 163-64). Either way, 5 no set of facts could be proved that would state a valid claim.21 Futility is a basis for the 6 Court to decline to allow an amendment under Rule 16(b). Sweaney v. Ada Cnty., Idaho, — 7 — 119 F.3d 1385, 1392-93 (9th Cir. 1997). 8 e. Amended Tortious Interference Counterclaim 9 Next, the Gorrie Parties propose changing their tortious interference with contract 10 counterclaim to a tortious interference with business expectancy counterclaim. (Doc. 14611 1 at 29.) The Gorrie Parties first expressed their intent to make this amendment in a filing 12 on September 1, 2022. (Doc. 90 at 12 [“[The Gorrie Parties] intend to make a claim for 13 tortious interference with business expectancy claim which will more closely align with 14 the facts underpinning the interference with and termination of the Vermont Hemp 15 Processing Contract when [the Gorrie Parties] seek leave (if agreement between the parties 16 is not obtained pursuant to FRCP 15) to file their Second Amended Answer, Counterclaim 17 and Third Party Complaint.”].) 18 The Gorrie Parties have not established good cause for the untimely assertion of this 19 new counterclaim. The fact that the Gorrie Parties mentioned adding a claim for tortious 20 interference with business expectancy more than four months before requesting leave to do 21 so shows that the Gorrie Parties were not diligent. Del Rio, 2019 WL 210957 , at *3 (“[T]he 22 fact that Plaintiff threatened these newly added claims more than eight months before filing 23 the Motion and four months prior to the scheduling order also casts doubt on the reasonable — 24 — 25 sale not raised in an action that results in an injunction or other relief under Rule 65 of the Arizona Rules of Civil Procedure, prior to the day before the scheduled trustee’s sale. Put 26 simply, ‘a person who has defenses or objections to a properly noticed trustee’s sale has one avenue for challenging the sale: filing for injunctive relief.’”) (internal citations 27 omitted). — 21 — 28 It is undisputed that the Gorrie Parties failed to obtain injunctive relief before the trustee’s sale (Doc. 184) and that the sale occurred on January 12, 2023 (Doc. 179-1). - 29 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 30 of 111 1 diligence of Plaintiff in seeking to file the Proposed SAC. Though the Court would find 2 that Plaintiff did not exercise reasonable diligence even without this fact, it weakens even 3 further Plaintiff’s argument.”). Moreover, the facts underlying the proposed tortious 4 interference with business expectancy counterclaim are identical to those alleged in relation 5 to the existing tortious interference with contract counterclaim. (Doc. 146-1 at 29-30 6 ¶¶ 135-41.) “Counsel’s delayed comprehension of legal theories readily available from the 7 outset of the lawsuit does not establish reasonable diligence.” Agricola Baja Best, S. De. 8 R.L. de C.V. v. Harris Moran Seed Co., 2013 WL 4499118 , *2 (S.D. Cal. 2013). 9 f. Omitted Counterclaim 10 Next, the Gorrie Parties propose eliminating their counterclaim for negligence per 11 se. (Doc. 146-1 at 31.) Because the Court grants the Stadtler Parties’ request to dismiss 12 this counterclaim (as discussed later in this order), this revision is no longer necessary. 13 Thus, it is unnecessary to address whether the Gorrie Parties were diligent in seeking this 14 amendment—the request is instead denied on mootness grounds. 15 2. Proposed Amendments To Third-Party Complaint 16 As for their third-party complaint against Houchin, the Gorrie Parties seek leave to 17 add a claim for fraudulent inducement. (Doc. 146-1 at 38-39 ¶¶ 41-47.) Unlike the Stadtler 18 Parties, who correctly note that the Gorrie Parties’ amendment request is governed by Rule 19 16(b) and identify a lack of diligence as one of the reasons why they oppose the request, 20 Houchin does not cite or rely upon Rule 16 and does not seem to offer any objections 21 premised on a lack of diligence—instead, Houchin relies only on futility. (Doc. 164.) 22 Accordingly, and in the spirit of “the principle of party presentation,” United States v. 23 Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020), the Court will limit itself to Houchin’s 24 futility-based arguments.22 25 22 This outcome should not be viewed as tacit agreement with the Gorrie Parties’ repeated contention that it was permissible to ignore the deadlines in the scheduling order 26 because the order “is for all intents and purposes a dead letter.” (Doc. 182 at 2; Doc. 183 at 2.) The scheduling order states in emphatic terms that “The Deadlines Are Real” and 27 explains that “[t]he Court intends to enforce the deadlines set forth in this Order, and the parties should plan their litigation activities accordingly.” (Doc. 69 at 7.) The Ninth Circuit 28 has provided similar instructions: “A scheduling order ‘is not a frivolous piece of paper, idly entered, which can be cavalierly disregarded by counsel without peril.’ [A] district - 30 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 31 of 111 1 Evaluating the futility of the proposed additional third-party claim is difficult 2 without context. In 2021, Houchin and IGD entered into the JVA. (Doc. 77-5.) Broadly 3 speaking, the JVA governed a joint venture related to the hemp operations on a 20-acre 4 parcel of the Farm. (Id. at 2.) As relevant here, the JVA included “Representations and 5 Warranties” by both IGD and Houchin. (Id. at 7-10.) Among other things, IGD 6 represented that it had “full power and authority to own its properties and to carry on its 7 business as now conducted and as proposed to be conducted” and that it was not subject to 8 any pending or threatened legal claims. (Id. at 8.) 9 On December 9, 2022, Houchin filed third-party counterclaims against the Gorrie 10 Parties, including a fraudulent inducement claim that in large part arises from IGD’s 11 representations in the JVA. (See Doc. 134 at 14-15 ¶¶ 40-46, 17-18 ¶¶ 66-83, 22 12 ¶¶ 117-19.) In relevant part, Houchin alleges that IGD’s representation that its ownership 13 of the Farm was not subject to any legal barriers was false because Stadtler held a security 14 interest in the Farm and IGD had defaulted on the Promissory Note secured by that interest. 15 (Id. at 14-18 ¶¶ 40-46, 17-18 ¶¶ 66-83, 21-22 ¶¶ 116-19.) Houchin further alleges that he 16 “did not know and did not have reason to know that any of the . . . representations were 17 false.” (Id. at 22 ¶ 126.) 18 Houchin’s alleged lack of knowledge forms the basis for the Gorrie Parties’ 19 proposed new third-party claim for fraudulent inducement. According to the Gorrie 20 Parties, if Houchin did not know that IGD had defaulted on its obligations under the 21 Promissory Note, then he “apparently did not engage in even basic conversations with 22 either Dawson or Stadtler.” (Doc. 146-1 at 38 ¶¶ 42-44.) The Gorrie Parties further 23 contend that Houchin’s failure to engage in such conversations demonstrates that he falsely — 24 — 25 court’s decision to honor the terms of its binding scheduling order does not simply exalt procedural technicalities over the merits of [the] case. Disregard of the order would 26 undermine the court’s ability to control its docket, disrupt the agreed-upon course of the litigation, and reward the indolent and the cavalier.” Johnson, 975 F.2d at 610 (citations 27 omitted). To be sure, the discovery process in this case took several unexpected turns following the issuance of the scheduling order due to the bankruptcy filing and the 28 disqualification motion, but nobody has (at least to date) sought any modification of the deadlines in the scheduling order based on those developments. - 31 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 32 of 111 1 represented in the JVA that “he had the opportunity to evaluate the merits and risks of the 2 investment, that he had access and opportunity to review all relevant materials relating to 3 the Company and had made all of the investigations he deemed appropriate prior to making 4 the investment.” (Id. at 38 ¶ 42.) 5 At this point, the Gorrie Parties’ proposed new claim becomes somewhat 6 convoluted because the Gorrie Parties seem to assert an alternative theory in which they 7 accuse Houchin of lying in his pleading. Specifically, the Gorrie Parties allege that either 8 Houchin falsely represented the extent of his knowledge in the JVA or, “if it is as 9 suspected,” Houchin did know about the Farm Purchase Documents and instead entered 10 into the JVA “intend[ing] to falsely pled ignorance and use the alleged made up 11 misrepresentation by Gorrie to assist his uncle in placing [the Gorrie Parties] in an 12 impossible financial condition in order to assist Stadtler in obtaining the trustee sale, 13 seizing the equity in the Farm and taking over the multi-million dollar purchase orders.” 14 (Id. at 38-39 ¶¶ 44-45.) 15 On its face, this alternative scenario fails to state a claim for fraudulent inducement 16 because it doesn’t include any misrepresentation by Houchin that the Gorrie Parties relied 17 upon to their detriment. Instead, it seems to assert that Houchin made truthful 18 representations with the intent to later refute their accuracy. To state a claim of fraudulent 19 inducement, a plaintiff must allege “(1) a representation; (2) its falsity; (3) its materiality; 20 (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) the speaker’s intent 21 that it be acted upon by the recipient in the manner reasonably contemplated; (6) the 22 hearer’s ignorance of its falsity; (7) the hearer’s reliance on its truth; (8) the hearer’s right 23 to rely on it; [and] (9) the hearer’s consequent and proximate injury.” Duncan v. Pub. 24 Storage, Inc., 507 P.3d 509 , 514-15 (Ariz. Ct. App. 2022), review denied (2022). Because 25 the alternate-scenario theory could not support a valid claim for fraudulent inducement 26 (due to the absence of a false statement), amending the Gorrie Parties’ third-party 27 complaint to add a claim based on this theory would be futile. Sweaney, 119 F.3d at 1393 . 28 As for the other theory underlying the Gorrie Parties’ proposed new claim (i.e., in - 32 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 33 of 111 1 the JVA, Houchin falsely represented the extent of his pre-investment investigations and 2 knowledge), Houchin argues that amending to add such a claim would be futile for several 3 reasons, including that the representations underlying the proposed claim constitute 4 opinion or judgment. (Doc. 164 at 4-5.)23 5 “Representations which give rise to an action of fraud must, of course, be of matters 6 of fact which exist in the present, and not merely an agreement or promise to do something 7 in the future, or an expression of opinion or judgment as to something which has happened 8 or is expected to happen.” Waddell v. White, 108 P.2d 565, 569 (Ariz. 1940).24 See also 9 Page Inv. Co. v. Staley, 468 P.2d 589, 591 (Ariz. 1970) (“Actionable fraud must be based 10 upon a misrepresentation of material fact, and not upon an expression of opinion.”). 11 Whether a representation is actionable as fraud requires a “case by case” inquiry. Id. 12 The Gorrie Parties’ proposed claim arises from § 4.02(e) of the JVA, which 13 provides, in relevant part: 14 Houchin is capable of evaluating the merits and risks of an investment in the Company, has had access to and an opportunity to review all relevant 15 materials relating to the Company and its investment in the Company, including without limitation the qualifications of IGD, and the tax and 16 financial implications of an investment in the Company, has made such investigation as it has deemed appropriate for such purpose, and is acquiring 17 a Membership Interest for investment and not with a view to the direct or indirect resale or distribution of all or any part thereof. . . . — 18 — 19 (Doc. 77-5 at 9-10.)25 Although the Gorrie Parties do not directly identify which of the 20 23 Houchin also argues that because “Gorrie is not a party to the JVA,” the Gorrie Parties’ allegation that Gorrie relied upon Houchin’s representations “does not have any 21 bearing on IGD’s purported reliance on any representations.” (Doc. 164 at 6.) The Court disagrees. Reading the proposed pleading in the light most favorable to the Gorrie Parties 22 and given that Gorrie is the sole member of IGD, the Gorrie Parties’ allegation that Gorrie relied on Houchin’s representations allows for a plausible inference that IGD relied upon 23 the representations. 24 24 But see Waddell, 108 P.2d at 569 (“To this there is one exception, that when a promise to perform a future act is made with the present intention on the part of the 25 promisor that he will not perform it, it is such a representation as will give rise to an action of fraud.”). 26 25 The “Company” means an LLC that, under the JVA, IGD was obligated to form 27 “for the purpose of preparing for cultivation of a plot of land . . . planting and cultivating Industrial Hemp on the Plot and harvesting and drying the same for preparation for sale.” 28 (Doc. 77-5 at 2.) The JVA provided that Houchin and IGD would each own half of the Company’s membership shares. (Id.) - 33 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 34 of 111 1 representations in § 4.02(e) were false, the accompanying factual allegations focus on 2 Houchin’s failure to speak with Stadtler or Dawson about IGD’s payments under the Farm 3 Purchase Documents. (Doc. 146-1 at 38 ¶ 44.) Thus, the Court interprets the fraudulent 4 inducement claim as arising from the alleged misrepresentations in § 4.02(e) by Houchin 5 that: (1) he had made “such investigation as [he] . . . deemed appropriate” before investing; 6 (2) he was “capable of evaluating the merits and risks of an investment”; and (3) he “had 7 access to and an opportunity to review all relevant materials” before investing. (Id. at 388 39 ¶¶ 43-47.) 9 As for the first alleged misrepresentation—i.e., Houchin had “made such 10 investigation as [he] deemed appropriate”—Houchin argues that “[r]epresentations that 11 rest entirely on Houchin’s opinion or judgment—as these are—cannot constitute actionable 12 fraud.” (Doc. 164 at 5.) In response, the Gorrie Parties argue that IGD “specifically 13 demanded” that Houchin represent that he had made all of the investigations he “deemed 14 appropriate” before executing the JVA “so that the burden of investigating whether this 15 was a suitable investment for him was solely vested in Houchin.” (Doc. 183 at 3.) 16 The Gorrie Parties’ argument misses the point. “A fraud claim generally fails where 17 the allegedly false representation pertains to ‘matters of estimate or judgment.’” IceMOS 18 Tech. Corp. v. Omron Corp., 2019 WL 1490104 , *6 (D. Ariz. 2019). Houchin’s view of 19 what investigatory efforts were “appropriate” before executing the JVA is a matter of his 20 own judgment. The fact that Houchin failed to take a specific action (such as asking 21 Stadtler about IGD’s ownership of the Farm) does not establish that his subjective belief 22 as to the appropriateness of that action was false. Cf. In re Dupree, 336 B.R. 506 , 517 23 (M.D. Fla. Bankr. 2005) (concluding that the representation “that the investment in the two 24 variable annuities was not . . . ‘appropriate’ for the Plaintiff” was not actionable fraud 25 because “to be actionable . . . a representation must be one of existing fact, and not merely 26 an expression of opinion or expectation”). 27 For similar reasons, the second alleged misrepresentation—i.e., Houchin “is capable 28 of evaluating the merits and risks of an investment in the Company”—is a statement of - 34 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 35 of 111 1 opinion rather than an actionable statement of fact. At bottom, this statement is an attempt 2 by Houchin to provide a subjective evaluation of his own ability to investigate investment 3 opportunities. And as courts have recognized, a statement that is “nothing more than a 4 vague, subjective opinion” is not actionable as fraud. Lomingkit v. Apollo Educ. Grp. Inc., — 5 — 2017 WL 633148 , *16 (D. Ariz. 2017). The Gorrie Parties essentially concede in their 6 reply brief that the challenged statement was a self-assessment by Houchin, albeit while 7 claiming incorrectly that such a self-assessment is a statement of fact. (Doc. 183 at 3 8 [“Houchin represented that he was capable of evaluating the merits and risks of the 9 investment. This statement was not a matter of opinion, but a representation that Houchin 10 actually be capable of the evaluation.”].)26 11 As for the third alleged misrepresentation—i.e., Houchin “has had access to and an 12 opportunity to review all relevant materials”—there are several problems with the Gorrie 13 Parties’ theory. For one thing, the proposed pleading is filled with allegations that Houchin 14 possessed such access by virtue of his closeness to Stadtler. (See, e.g., Doc. 146-1 at 38 15 ¶ 43 [alleging that Houchin was “close” with Stadtler]; id. at 35 ¶ 13 [“Houchin travelled 16 with Stadtler to meetings and that Houchin, Stadtler and Dawson all presented [Houchin] 17 as a sophisticated business who was close with his uncle Stadtler”].) Indeed, in their reply 18 brief, the Gorrie Parties emphasize “the ease with which [Houchin] could have made his 19 investigation” and fault Houchin for “not tak[ing] advantage of the opportunity to review” 20 the materials that were available to him. (Doc. 183 at 3.) Thus, by the Gorrie Parties’ own 21 account, Houchin’s representations in § 4.02(e) regarding his access and opportunity to 22 investigate were true. And as noted above, it would be futile to add a fraudulent 23 inducement claim premised on a true statement. At any rate, the challenged statements — 24 — — 26 — 25 The Court also notes that the Gorrie Parties do not appear to be truly questioning whether Houchin was capable of conducting an investigation—they do not, for example, 26 allege that Houchin lacks sentience or lacks the intellectual capacity and training to evaluate an investment opportunity. Instead, they fault Houchin for failing to have specific 27 conversations with Stadtler and Dawson when evaluating the merits and risks of his investment. But the failure to engage in such conversations does not go to whether Houchin 28 is “capable” of conducting an investigation—it goes to the quality of the investigation he ended up performing. - 35 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 36 of 111 1 regarding access and opportunity are once again non-actionable statements of opinion— 2 they cannot “be measured or quantified” and are “not amenable to general verification or 3 falsification.” Cheatham v. ADT Corp., 161 F. Supp. 3d 815, 828 (D. Ariz. 2016). Cf. 4 Seidman v. Weiler, 2019 WL 2152666 , *5 (Ariz. Ct. App. 2019), as amended (2019) (“The 5 superior court . . . found that ‘newer’ is a relative adjective that derives its meaning from 6 comparing two or more items; the term has no concrete meaning standing alone. We agree. 7 As presented, ‘newer’ has no concrete meaning.”). 8 III. The Stadtler Parties’ Motion To Dismiss Counterclaims 9 Because the Gorrie Parties’ request to file an amended pleading is denied, the Court 10 next turns to the Stadtler Parties’ motion to dismiss the counterclaims alleged in the Gorrie 11 Parties’ operative pleading. 12 A. Additional Background 13 The following additional facts are derived from the Gorrie Parties’ operative 14 pleading, the First Amended Answer, Counterclaim, and Third-Party Complaint (Doc. 77), 15 and are presumed true for purposes of the Stadtler Parties’ motion to dismiss. 16 Gorrie is “a Canadian citizen temporarily living in the state of Arizona.”27 (Id. at 3 17 ¶ 1.) “In late 2019, Gorrie had put together a consortium of investors to fund a hemp 18 farming, processing and sale project” and “intended to seek financing and investment for 19 the purchase of a suitable property and the subsequent improvements necessary to grow 20 and process hemp.” (Id. at 3 ¶¶ 8-9.) “To that end, Gorrie formed the IGD, NFOF and 21 NFF entities . . . .” (Id. at 4 ¶ 10.) 22 In October 2019, Gorrie became interested in the Farm as a locale for the hemp 23 project. (Id. at 4 ¶¶ 11-12.) She reached out to Dawson, the “designated broker” for the 24 Farm, and “the parties began a negotiation and due diligence for the purchase of the same.” 25 (Id. at 4 ¶¶ 12-13.)28 — 26 — — 27 — — 27 — The Gorrie Parties allege that Gorrie “is in the process of obtaining permanent residence status” and that “the action[s] of [the Stadtler Parties] in this matter” are 28 “purposefully” interfering with Gorrie’s ability to obtain such status. (Doc. 77 at 3 ¶ 1.) — 28 — Up until January 2021, “Gorrie communicated with Stadtler through Dawson” and - 36 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 37 of 111 1 In January 2020, Gorrie and Stadtler signed the Farm Purchase Agreement, under 2 which IGD agreed to buy the Farm from the Trust for $1.4 million. (Id. at 4 ¶¶ 14-15.) 3 The Farm Purchase Agreement required IGD to “put down a $20,000 earnest money 4 deposit and pay a further $280,000 towards the purchase price at the time of close of 5 escrow.” (Id. at 4 ¶ 16.) The Trust would then “provide seller carryback financing” for 6 the remaining $1.1 million for 18 months. (Id. at 4 ¶ 17.) The unpaid balance would “carry 7 a simple interest rate of 8%,” amortized over 20 years. (Id.) The Farm Purchase 8 Agreement also included a payment schedule. (Id. at 4-5 ¶ 17.) 9 On February 4, 2020, pursuant to the Farm Purchase Agreement, IGD and the Trust 10 executed a Promissory Note for $1.34 million. (Id. at 5 ¶ 19.) Under the terms of the 11 Promissory Note, IGD agreed to make “[a] onetime payment of $240,000 (in full or in 12 part)” to the Trust within “30 days from the close of escrow.” (Id.) The Promissory Note 13 also “had a final balloon payment mandating payment of the entire unpaid principal and 14 accrued interest be paid on or before August 7, 2021” and “provided for a default interest 15 rate . . . in the event of a declared default.” (Id. at 6 ¶ 19.) 16 On February 11, 2020, IGD and the Trust executed the Deed of Trust, with the Trust 17 as the beneficiary. (Id. at 6 ¶ 20.) 18 The same day, IGD and the Trust also executed the Purchase Addendum (i.e., an 19 addendum to the Farm Purchase Agreement), which lowered the amount due at closing to 20 $60,000. (Id. at 6 ¶ 21.) Like the Promissory Note, the Purchase Addendum required IGD 21 to pay an additional $240,000 within 30 days of the close of escrow. (Id. at 5-6 ¶¶ 19, 22 21.)29 If IGD failed to meet the 30-day deadline, “the Trust had the right to cancel the 23 sale.” (Id. at 6 ¶ 21.) According to the Gorrie Parties, “Stadtler and Gorrie both understood 24 quite clearly that funding for the Hemp Project would follow the close of escrow”—i.e., — 25 — 26 did not have any direct interactions with Stadtler. (Id. at 4 ¶ 13.) — 27 — — 29 — Additionally, the Purchase Addendum included “a pre-payment penalty provision that required that IGD pay the entirety of the interest due under the [Promissory] Note, 28 even if IGD prepaid the balance of the Note prior to when that balance was due.” (Id. at 6 ¶ 21 .) - 37 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 38 of 111 1 that “IGD would not have the $280,000 to close the transaction on February 27, 2020 as 2 Gorrie was still working with various lenders and investors to obtain the funding to 3 capitalize” the project. (Id. at 6-7 ¶ 22.) 4 On February 27, 2020, escrow closed on the Farm and title was conveyed to IGD. 5 (Id. at 7 ¶ 23.) 6 In early 2020, the COVID-19 pandemic hit. (Id. at 7 ¶ 24.) In March 2020, Canada 7 “severely restrict[ed] entry and exit” of the country, causing the hemp project, “which is 8 funded by Canadian investors,” to “come under stress.” (Id.) “American investment and 9 sources of capital had also been severely hampered by the onset of the COVID-19 10 pandemic . . . .” (Id. at 7 ¶ 25.) “As a result of this unfortunate timing, Gorrie 11 communicated to Dawson that IGD would be unable to pay the $240,000 within the 30 day 12 timeframe.” (Id. at 7 ¶ 26.) After Dawson relayed this information to Stadtler, Stadtler did 13 not exercise his right, under the Purchase Addendum, to cancel the sale of the Farm. (Id. 14 at 7 ¶ 27.) 15 Instead, in April 2020, the parties began discussing the possibility of “a revenue 16 share agreement.” (Id. at 7-8 ¶¶ 27, 29.) On April 14, 2020, Dawson and Gorrie met at 17 Dawson’s home in Vail, Arizona. (Id. at 9 ¶ 30.)30 During that meeting, “Dawson 18 represent[ed] that Stadtler [would] not rescind the sale of the Farm and take it back if Gorrie 19 sign[ed]” the proposed revenue sharing agreement. (Id.) Based on Dawson’s 20 representation, Gorrie believed the agreement was intended to modify the Promissory Note 21 and the Deed of Trust. (Id.) 22 The same day, with this understanding in mind, Gorrie signed the April 2020 RSA. 23 (Id. at 8 ¶ 29.)31 At that time, NFOF was the “primary source of funds” for the hemp project 24 and was leasing the Farm from IGD. (Id. at 7-8 ¶ 28.) Thus, April 2020 RSA was between 25 NFOF and the Trust. (Id. at 7-8 ¶¶ 28-29 [“[I]t would make little sense for the revenue 26 30 Angela Dimitriou-Curry was also present at the April 14, 2020 meeting. (Id. at 9 27 ¶ 30) — 31 — 28 The April 2020 RSA is dated April 10, 2020; the Gorrie Parties allege that Dawson backdated the agreement. (Id. at 8 ¶ 29.) - 38 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 39 of 111 1 share to attach to IGD and thwart the parties [sic] intent that Stadtler would get a revenue 2 share on the entire business. Dawson is well aware of this because he has participated in 3 numerous discussions where the structure of the entire business [was] discussed at 4 length.”].)32 5 Under the April 2020 RSA, “[t]he Trust was to receive 1% of net revenue from the 6 harvest, processing and sale of hemp products from the operation of the Farm” paid yearly, 7 up to a maximum allocation of $1 million per year, for “a period not to exceed 5 years.” 8 (Id. at 8 ¶ 29.)33 “[T]he only consideration given by the Trust” in return for the revenue 9 share was “forbearance of the Trust’s legal rights to rescind the contract or initiate a deed 10 of trust or judicial foreclosure, and the written extension of IGD’s payment obligations and 11 the conversion of the same to the outcome of IDG’s Hemp Operation.” (Id. See also id. 12 at 9 ¶ 31 [under the April 2020 RSA, the Trust “trad[ed] its payment schedule with 8% 13 interest for an opportunity to participate in the Hemp Project and potentially reap $5 million 14 from the sale, far more return than would have been possible from the sale”].) Finally, 15 “[a]ny action commenced under the [April 2020 RSA] had to be filed in the Superior Courts 16 in Maricopa County” and “[t]he parties were required to participate in non-binding 17 mediation that had to occur prior to litigation being commenced.” (Id. at 9 ¶ 29.) 18 “IGD spen[t] the remainder of 2020 seeking funding for the Hemp Project,” 19 ultimately raising about $250,000, which IGD used “to substantially improve the Farm by 20 preparing the land for growing and readying one of the wells by improving it and 21 purchasing the appropriate infrastructure for it to irrigate the Farm.” (Id. at 9 ¶ 32. See 22 also id. at 9-10 ¶ 32 [“Indeed, the Farm has potentially increased in value from $2,160,000 23 to $4,158,000 as the result of the efforts of IGD and the capital expenditure of its investors 24 and the efforts of [the Gorrie Parties].”].) During this time, there were “no net revenues to — 25 — — 32 — The Gorrie Parties also note that “the factual background that IGD purchased the 26 Farm from the Trust and was leasing the Farm to NFOF” is explained in the April 2020 RSA’s recitals. (Id. at 9 ¶ 29.) — 27 — — 33 — “Net revenue was calculated as gross revenue less all necessary expenses paid for — 28 — the normal operation of the Farm as determined by . . . NFF.” (Id. at 9 ¶ 29.) - 39 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 40 of 111 1 pay out under the [April 2020 RSA] because no funding ha[d] been obtained to begin 2 farming operations.” (Id. at 10 ¶ 33. See also id. [“The issue, of course, was COVID.”].) 3 “However, towards the end of 2020 and the beginning of 2021, IGD . . . enter[ed] 4 into a purchase order for over $20 million dollars of hemp from Vermont Hemp Processing 5 Inc., one of the largest wholesale purchasers in the United States.” (Id. at 10 ¶ 34.) “With 6 this purchase order in hand, IGD [could] . . . obtain the requisite funding to capitalize the 7 Hemp Project.” (Id.) 8 After learning of the purchase order, Stadtler “bec[ame] interested in participating 9 in a joint venture to share in more profits than the 1% under the [April 2020 RSA].” (Id. 10 at 10 ¶ 35.) Accordingly, Dawson (on behalf of Stadtler) began negotiating a “new joint 11 venture” between IGD and Stadtler and, in January 2021, IGD and Stadtler entered into the 12 Three Acre RSA. (Id. at 10 ¶¶ 36-37.)34 13 As its name suggests, the Three Acre RSA was intended to facilitate hemp 14 operations on a three-acre parcel of the Farm. (Id. at 10-11 ¶ 39.) Under the Three Acre 15 RSA, Stadtler agreed to provide $75,000 of funding “to plant, grow, process and sell on 16 the retail market the output of 3 acres of smokable hemp crop and retail CBD items.” (Id.)35 17 “The invested funds were to be available to IGD on a draw basis from a book keeping 18 service selected by Stadtler.” (Id. at 11 ¶ 39.) In return, “IGD [was] responsible for 19 furnishing the Farm to grow the crop on . . . [and] for the cultivation and processing of both 20 the smokable and bio mass portions of the harvested crop.” (Id.) “The proceeds from the 21 sale were first to be paid back to Stadtler and IGD for any monies expended to grow the 22 crop” and “[a]ny additional proceeds were to be split equally between the parties.” (Id.)36 23 “Stadtler insisted that both Dawson and Gorrie sign personally” the Three Acre — 24 — 25 34 The Three Acre RSA was “drawn up by Dawson.” (Id. at 10 ¶ 37.) 26 35 In paragraph 39, the Gorrie Parties describe the investment as totaling “$75,0000.” (Id. at 10 ¶ 39.) The Court assumes the extra zero is a clerical error. To the extent it was 27 not, the distinction is not material to the Court’s analysis. — 28 — — 36 — The Gorrie Parties allege that “[n]o interest was to be due on the invested funds during the growing season.” (Id. at 11 ¶ 39.) - 40 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 41 of 111 1 RSA, “although the personal guarantee was on a limited basis and only available in the 2 event that the hemp crop failed to repay the loan.” (Id. at 11 ¶ 40.) Thus, the parties 3 executed the “Personal Loan and Agreement.” (Id. at 11 ¶¶ 40-41.) Under the terms of the 4 Personal Loan, when IGD forwarded invoices to the bookkeeping service, the service 5 “would forward payment within one week or the following Friday to ensure that IGD 6 always had funds available to pay expenses as needed.” (Id. at 11 ¶ 41.) 7 Between January 27, 2021 and April 26, 2021, pursuant to the Three Acre RSA, 8 “Stadtler made payments to IGD’s bank account of approximately $62,075.” (Id. at 12 9 ¶ 44.) “However, Stadtler also insisted that Dawson control the expenditure of the funds 10 and that Dawson assume managerial responsibilities at the Farm even though Dawson 11 remained Stadtler’s agent.” (Id. at 12 ¶ 45.) Accordingly, Dawson controlled the bank 12 card for the IGD account that Stadtler was funding. (Id. at 13 ¶ 53.) 13 “In the interim, Stadtler spent considerable time at the Farm.” (Id. at 12 ¶ 47.) 14 During this period, “Stadtler began to make sexually suggestive comments of a personal 15 nature” toward Gorrie, “suggest[ing] that his interest in the joint ventures exceeds a purely 16 business relationship.” (Id. at 12 ¶ 48.) 17 On March 22, 2021, “Stadtler arranged for Gorrie to meet with . . . Houchin, his 18 nephew, suggesting that Houchin [was] interested in investing in another joint venture 19 which could supply the Vermont Purchase Orders.” (Id. at 12 ¶ 49.) At Stadtler’s request, 20 Houchin, Stadtler, and Gorrie planned to meet in Blythe, California to discuss this potential 21 venture. (Id. at 12 ¶ 50.) However, Gorrie was not told the exact location of the meeting 22 until she arrived in Blythe, at which point she was directed to a “rundown motel,” which 23 she thought was odd because Stadtler and Houchin are “wealthy individuals.” (Id. at 13 24 ¶ 51.) When she arrived at the motel room, “both men appear[ed] disappointed that Gorrie 25 [was] accompanied by her son” and “requested that Gorrie instruct her son to wait for her 26 in the car.” (Id.) “Perturbed and disturbed by Stadtler and Houchin’s conduct Gorrie 27 insist[ed] that the door be left open while an hour long meeting is conducted . . . .” (Id. at 28 13 ¶ 52.) - 41 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 42 of 111 1 Meanwhile, “[t]he relationship between Gorrie and Dawson became increasingly 2 strained.” (Id. at 13 ¶ 53.) “[I]nstead of working towards the success of the joint venture, 3 Dawson undermined IGD at each turn at Stadtler’s express direction.” (Id. at 12 ¶ 46.) 4 Dawson “intentionally poisoned the hemp plants,” “created a fuel spill on the property,” 5 and “verbally abused workers and refused to pay workers resulting in litigation being filed 6 against the IGD.” (Id.) “[I]t became increasingly clear to Gorrie that Dawson had utterly 7 misrepresented his farming expertise and that he lacks even basic knowledge of farming 8 practices.” (Id. at 13 ¶ 55.) Dawson also “refused to provide invoices showing 9 expenditures that he is making purportedly on behalf of the venture even though he was 10 receiving the money from Stadtler” and “refused to pay . . . venture expenses.” (Id. at 13 11 ¶ 53 [“Indeed, the vast majority of the funds appeared to be expended on the personal 12 expenses of Dawson . . . .”].) After becoming concerned with “Dawson’s practice of 13 withdrawing cash from the account and not providing invoices or receipts to substantiate 14 the expenditures,” on April 20, 2021, “Gorrie [took] back the sole bank card from 15 Dawson.” (Id.) 16 “Following Gorrie’s recovery of the bank card from Dawson, Stadtler made a final 17 payment to the IDG bank account of $3,000 and then [made] no further payments.” (Id. at 18 13 ¶ 54.) 19 The hemp operation continued to experience “setbacks and crop failures” due to 20 “Dawson’s intentional sabotage or incompetence” and “IGD [was] unable to complete the 21 project and . . . indebted to Stadtler for additional monies.” (Id. at 13-14 ¶¶ 56-57.) 22 However, “Stadtler indicated that he was willing to provide additional funding,” on the 23 condition that IGD enter a joint venture with Houchin and “continue to allow Dawson to 24 control the funding.” (Id. at 14 ¶ 57.) On May 11, 2021, Gorrie, “[p]laced into a desperate 25 situation by her lender” but still believing that Stadtler wanted the project to succeed, 26 signed the Three Acre Addendum on behalf of IGD. (Id. at 14 ¶¶ 57-58.) In doing so, 27 Gorrie relied on Dawson’s representation that Stadtler “understood the need for immediate 28 funding due to the fact that the IGD needed to plant the crop as quickly as possible because - 42 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 43 of 111 1 the growing season was coming to a close” and would immediately provide $60,000 in 2 funding. (Id. at 14 ¶ 59.) 3 Under the Three Acre Addendum, the three-acre parcel was increased to six acres 4 (“because IGD had the necessary seed”) and Stadtler agreed to provide an additional 5 $60,000 in funding. (Id. at 14 ¶ 60.) “[T]he additional $60,000 would be distributed on a 6 draw basis with Dawson as Stadtler’s representative to work with Gorrie and Stadtler to 7 furnish the funding in a timely manner needed to finish the crop.” (Id. at 15 ¶ 60.) The 8 Three Acre Addendum also “specifically stated that any prior crop failures were not the 9 fault of IGD due to abnormally high weather temperatures and issues with the greenhouse.” 10 (Id.) Under the terms of the agreement, the proceeds from the six-acre crop would first go 11 Stadtler to repay “the loan”;37 the remaining proceeds would be distributed between 12 Stadtler (25%), Gorrie (50%), and the outstanding balance on the promissory note related 13 to the Farm (25%). (Id.) Finally, the Three Acre Addendum “mandated that IGD would 14 have to work with Stadtler for the next 3 years.” (Id.) 15 “In the intervening timeframe, Stadtler’s nephew, Houchin also entered into a joint 16 venture with IGD to fund another hemp crop to provide product for the Vermont Purchase 17 Orders.” (Id. at 15 ¶ 61.) 18 Meanwhile, the Gorrie Parties were “approached with a number of offers of capital 19 to fund the Hemp Project as the result of the Vermont Purchase Orders.” (Id. at 15 ¶ 62.) 20 However, all of the potential investors were “either dissuaded from investment via the 21 actions of Dawson who sabotage[d] investment calls or by the insistence by Stadtler that 22 Houchin would be the sole investor in the property.” (Id.) Thus, the Gorrie Parties became 23 “reliant upon Stadtler and Houchin’s performance of their respective contractual 24 obligations.” (Id.) 25 However, Stadtler did not provide the additional $60,000 and “refuse[d] to put any 26 further funds into the hemp project.” (Id. at 15 ¶ 63.) Dawson likewise refused to 27 “meaningfully participate” in any accounting. (Id. at 15-16 ¶ 63.) 28 37 Paragraph 60 does not specify which loan was to be repaid. - 43 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 44 of 111 1 In late May 2021, Dawson “purportedly conducted a water analysis and informed 2 IGD that it was not possible to farm hemp at the farm because of the water chemistry.” (Id. 3 at 16 ¶ 64.)38 “Shortly thereafter, . . . Dawson informed IGD that Stadtler [was] insisting 4 that IGD remove all of the improvements at the Farm and move the entirety of the Stadtler 5 and Houchin operations to Stadtler’s farm in Benson, Arizona. In addition, . . . Dawson 6 stated that Stadtler insist[ed] that Gorrie surrender the Farm to Stadtler without recognizing 7 the substantial equity available in the Farm.” (Id. at 16 ¶ 65.) When Gorrie called Stadtler, 8 he reiterated the demands and then asked Gorrie to “turn over IGD’s $7.7 million dollar 9 Vermont Purchase Orders to Stadtler via . . . Dawson so that Stadtler, Dawson and Houchin 10 [could] begin operations to supply the product on this contract.” (Id. at 16 ¶ 66.) Gorrie 11 then “realize[d] Stadtler’s plan from the outset”—“to starve the Hemp Project with the aim 12 of taking over the project for himself and reaping the financial reward of the Hemp Project 13 while recovering the [Property] and relocating IGD to a new location.” (Id.) 14 On July 1, 2021, “Stadtler sent a default notice to IGD.” (Id. at 16 ¶ 67.) He also 15 “refused to further fund” the Three Acre RSA and the Three Acre Addendum. (Id. at 17 16 ¶ 70.)39 17 Based on these facts, the Gorrie Parties assert ten counterclaims against the Stadtler 18 Parties: (1) breach of the April 2020 RSA, Deed of Trust, Promissory Note, and Purchase 19 Addendum; (2) declaratory judgment that the April 2020 RSA modified the terms of the 20 Promissory Note, Deed of Trust, and Purchase Addendum; (3) breach of the Three Acre 21 RSA; (4) fraudulent inducement; (5) tortious interference with contract; (6) breach of the 22 implied covenant of good faith and fair dealing; (7) injunctive relief; (8) negligence per se; 23 (9) estoppel; and (10) breach of fiduciary duty. (Id. at 17-23 ¶¶ 72-121.) 24 … — 25 — — 38 — 26 The Gorrie Parties believe this information was also shared with Houchin. (Id. at 16 ¶ 64.) 27 39 “During the same period, Houchin refuse[d] to finish funding IDG’s first draw 28 request taking the position that due to Stadtler’s default notice, he is excused from further performance under the [JVA].” (Id. at 17 ¶¶ 69-70.) - 44 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 45 of 111 1 B. Legal Standard 2 “[T]o survive a motion to dismiss under Rule 12(b)(6), a party must allege sufficient 3 factual matter, accepted as true, to state a claim to relief that is plausible on its face.” In re 4 Fitness Holdings Int’l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (internal quotation marks 5 omitted). “A claim has facial plausibility when the plaintiff pleads factual content that 6 allows the court to draw the reasonable inference that the defendant is liable for the 7 misconduct alleged.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “[A]ll 8 well-pleaded allegations of material fact in the complaint are accepted as true and are 9 construed in the light most favorable to the non-moving party.” Id. at 1444-45 (citation 10 omitted). However, the court need not accept legal conclusions couched as factual 11 allegations. Iqbal, 556 U.S. at 679-680 . Moreover, “[t]hreadbare recitals of the elements 12 of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678 . 13 The court also may dismiss due to “a lack of a cognizable theory.” Mollett v. Netflix, Inc., — 14 — 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted). 15 C. The Parties’ Arguments 16 The Stadtler Parties move to dismiss all 10 of the Gorrie Parties’ counterclaims. 17 (Doc. 87.) The Gorrie Parties generally oppose the motion. (Doc. 90.) 18 The parties’ arguments regarding each disputed counterclaim are summarized on a 19 claim-by-claim basis in Part III.D below, so there is no need to provide a further summary 20 here.40 However, with respect to several counterclaims, there is no dispute that dismissal 21 is warranted. 22 First, the Stadtler Parties contend that Count Five (tortious interference with 23 contract) fails because the underlying contract is “an unenforceable indefinite quantities 24 contract” and because the claim doesn’t allege damages or that Vermont Processing failed 25 to perform under the contract. (Doc. 87 at 11-12.) In response, the Gorrie Parties agree to — 26 — — 40 — 27 The Gorrie Parties also argue that the Court should deny the motion summarily because “all of the citation references . . . to the relevant pleading were to . . . the prior and 28 now superseded answer, counterclaims, and third party complaint.” (Doc. 90 at 7.) The Court declines this invitation. - 45 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 46 of 111 1 withdraw the claim (albeit while noting their intent to seek leave to assert a new, related 2 claim). (Doc. 90 at 12.) Accordingly, Count Five is dismissed and is not discussed further 3 below. 4 Next, the Stadtler Parties argue that Count Seven, which requests injunctive relief 5 enjoining a trustee sale of the Farm, is mooted by the Court’s decision at the July 7, 2022 6 TRO hearing. (Doc. 87 at 13.) The Gorrie Parties appear to agree, as they do not mention 7 Count Seven in their response. (See generally Doc. 90.) At any rate, it is undisputed that 8 the trustee’s sale has now occurred. Accordingly, Count Seven is dismissed and is not 9 discussed further below. 10 Third, the Stadtler Parties contend that Count Eight (negligence per se) fails because 11 the Gorrie Parties “fail to identify any law or an ordinance or requirement thereof that [the 12 Stadtler Parties] allegedly breached.” (Doc. 87 at 13.) In response, the Gorrie Parties 13 withdraw their negligence per se claim but note they “intend to make a claim for negligent 14 performance of an undertaking” in an amended pleading. (Doc. 90 at 12.) Accordingly, 15 Count Eight is dismissed and is not discussed further below. 16 One final observation is necessary before moving to the disputed counterclaims. 17 The Gorrie Parties’ response brief, although 14 pages long, contains only three case 18 citations. (Doc. 90.)41 This unusual approach was particularly unhelpful here, where the — 19 — — 41 — 20 Also, the first citation is wrong. The Gorrie Parties begin by citing Mattis v. Johnson, 730 P.2d 286 (Ariz. Ct. App. 1986), for the proposition that “the standard of 21 review for grant of a motion to dismiss” is that the Court may “only dismiss if the nonmoving party would not be entitled to relief under any facts susceptible to proof of the 22 relevant claim.” (Doc. 90 at 7.) But this is federal court, not state court, and the relevant pleading standard in federal court—which was established by the Iqbal/Twombly line of 23 cases and has been in place for nearly two decades—is more demanding than the standard urged by the Gorrie Parties. See, e.g., Taylor v. AFS Techs., Inc., 2010 WL 1250733 , *1 24 (D. Ariz. 2010) (“Plaintiff asserts that a motion to dismiss under Rule 12(b)(6) should not be granted ‘unless it appears beyond doubt that the plaintiff can prove no set of facts in 25 support of his claims which would entitle him to relief.’ That is the wrong legal standard. The Supreme Court made clear in [Twombly] that the ‘no set of facts’ language ‘is best 26 forgotten as an incomplete, negative gloss on an accepted pleading standard.’ To survive dismissal, the complaint must plead ‘enough facts to state a claim to relief that is plausible 27 on its face.’ The plausibility standard ‘asks for more than a sheer possibility that a defendant has acted unlawfully,’ demanding instead sufficient factual allegations to allow 28 ‘the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’”) (citations omitted). - 46 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 47 of 111 1 dismissal analysis often turns on nuances of Arizona law that the Court was largely 2 required to discern through its own research. This is not the way motion practice is 3 supposed to work. 4 D. Analysis 5 “When ruling on a Rule 12(b)(6) motion to dismiss, if a district court considers 6 evidence outside the pleadings, it must normally convert the 12(b)(6) motion into a Rule 7 56 motion for summary judgment, and it must give the nonmoving party an opportunity to 8 respond.” United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). “A court may, 9 however, consider certain materials—documents attached to the complaint, documents 10 incorporated by reference in the complaint, or matters of judicial notice—without 11 converting the motion to dismiss into a motion for summary judgment.” Id. at 908 . As 12 relevant here, the Farm Purchase Documents, the April 2020 RSA, the Three Acre RSA 13 (and related the Personal Loan), and the Three Acre Addendum are incorporated by 14 reference throughout the Gorrie Parties’ pleading. (See, e.g., Doc. 77 at 4 ¶ 14, 5 ¶ 18, 6 15 ¶¶ 20-21, 7 ¶ 27, 10 ¶ 37, 11 ¶ 40, 14 ¶ 58.)42 Accordingly, the Court may consider these 16 materials without converting the Stadtler Parties’ motion into a motion for summary 17 judgment. 18 1. Counts One And Two 19 In Count One, the Gorrie Parties allege that “Stadtler and the Trust modified the 20 payment obligations of the Promissory Note, Deed of Trust, and the [Purchase] Addendum 21 . . . with the negotiation and execution of the [April 2020 RSA].” (Doc. 77 at 17 ¶ 73.) 22 The Gorrie Parties further allege that, “by asserting a default of the Promissory Note and 23 Deed of Trust and proceeding forward with trustee’s sale even though there is no default 24 of the same,” the Stadtler Parties breached the April 2020 RSA. (Id. at 18 ¶¶ 74-75. See — 25 — — 42 — 26 Specifically, the Gorrie Parties cite Docs. 17-1 [Farm Purchase Agreement], 17-2 [Promissory Note and Deed of Trust], 17-3 [Purchase Addendum], 17-4 [April 2020 RSA], 27 17-5 [Three Acre RSA and Personal Loan], and 17-7 [Three Acre RSA]. (Doc. 77 at 4 ¶ 14 , 5 ¶ 18, 6 ¶¶ 20-21, 7 ¶ 27, 10 ¶ 37, 11 ¶ 40, 14 ¶ 58.) These documents were attached 28 to the Gorrie Parties’ partial motion to dismiss the Stadtler Parties’ initial complaint. (Doc. 17.) - 47 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 48 of 111 1 also id. at 18 ¶ 76 [“Stadtler and the Trust have breached the [April 2020 RSA] by filing 2 litigation in La Paz County even though the [April 2020 RSA] calls for mandatory 3 mediation prior to the inception of litigation and that any litigation must be filed in 4 Maricopa County.”].) In a related vein, in Count Two, the Gorrie Parties request a 5 declaratory judgment that the April 2020 RSA operated as an accord that “discharged any 6 preexisting duty between them under the Promissory Note.” (Id. at 18-19 ¶¶ 78-82. See 7 also id. at 18 ¶ 80 [alleging the April 2020 RSA was “an acceptance by the Trust and 8 Stadtler to receive alternate performance”].) 9 The Stadtler Parties contend that Count One fails because it “relies on an alleged 10 unwritten modification of a $1.34 million loan,” which is prohibited by A.R.S. § 44-101(9). 11 (Doc. 87 at 7-8.) Alternatively, the Stadtler Parties argue that the April 2020 RSA is 12 “illusory and enforceable” for lack of consideration. (Id. at 8.) Further alternatively, the 13 Stadtler Parties argue that IGD lacks privity to enforce the April 2020 RSA because IGD 14 is neither party to nor a third-party beneficiary of the agreement. (Id. at 8-9.) The Stadtler 15 Parties assert the same challenges in relation to Count Two. (Id. at 9.) 16 a. Consideration For April 2020 RSA 17 The Stadtler Parties contend the April 2020 RSA is illusory and unenforceable 18 because neither the Trust nor NFOF had any enforceable obligations—instead, the 19 agreement “is purely to give the Trust 1% of future net revenue which is not guaranteed.” 20 (Doc. 87 at 8, emphasis omitted.) 21 “Mutuality of obligation is a requirement for a valid contract . . . [and] mutuality is 22 absent when only one of the contracting parties is bound to.” Carroll v. Lee, 712 P.2d 923 , 23 926 (Ariz. 1986). “[I]t is of no consequence that the parties exchanged ‘unlike services.’ 24 Any performance which is bargained for is consideration, and courts do not ordinarily 25 inquire into the adequacy of consideration.” Id. (internal citation omitted). One way a 26 contract may be rendered unenforceable due to a lack of mutuality is when one party’s 27 obligation is illusory. Shattuck v. Precision-Toyota, Inc., 566 P.2d 1332, 1334 (Ariz. 1977) 28 (“[A]n illusory contract is unenforceable for lack of mutuality.”). - 48 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 49 of 111 1 To start, the fact that the Trust was not guaranteed to receive net-revenue payments 2 from NFOF—instead, payment was contingent on NFOF earning a net profit—does not 3 establish that NFOF’s obligations under the April 2020 RSA were illusory. If the hemp 4 operation generated net revenue, NFOF was obligated to share a percentage of that revenue 5 with the Trust. (Doc. 17-4 at 2 [April 2020 RSA].) The right to receive a benefit in a 6 specified circumstance (i.e., if the hemp operation generated net revenue) has value and is 7 not illusory. See, e.g., Havasu Heights Ranch & Dev. Corp. v. State Land Dep’t of State 8 of Ariz., 764 P.2d 37, 45-46 (Ariz. Ct. App.), opinion amended on reconsideration sub 9 nom., 840 P.2d 1024 (Ariz. Ct. App. 1988) (the “preferred right” to renew a lease if the 10 lands are ever reclassified for development, although speculative, is not illusory and 11 constitutes consideration because it has value); Elec. Const. & Maint. Co. v. Maeda Pac. 12 Corp., 764 F.2d 619, 621 (9th Cir. 1985) (“[W]here a subcontractor allegedly agreed to bid 13 only after receiving the general contractor’s promise to accept the bid if it were the low bid 14 and if the general contractor were awarded the prime contract, there is consideration for 15 the general contractor’s promise.”). See also King Cty. v. Taxpayers of King Cty., 989 P.2d 16 1260, 1268 (Wash. 1997) (“[T]he mere possibility the Mariners may breach its promise in 17 the future on its obligation to share profits with the County does not make this provision 18 of the lease illusory. . . . The Mariners made an enforceable promise to share profits. The 19 promise is not illusory.”); Dimension Serv. Corp. v. Don Jacobs, Inc., 2014 WL 97465 20 (Ky. Ct. App. 2014) (“Well-established rules of contract construction prohibit this Court 21 from construing payments to DJ Entities under the profit share agreements as 22 unenforceable ‘illusory promises.’”). 23 As for “the consideration given by the Trust,” the Gorrie Parties allege it “was 24 forbearance of the Trust’s legal rights to rescind the contract or initiate a deed of trust or 25 judicial foreclosure, and the written extension of IGD’s payment obligations and the 26 conversion of the same to the outcome of IDG’s Hemp Operation.” (Doc. 77 at 8 ¶ 29. 27 See also id. at 9 ¶ 30 [alleging that, on April 14, 2020, Dawson orally represented “that 28 Stadtler will not rescind the sale of the Farm and take it back if Gorrie signs the [April 2020 - 49 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 50 of 111 1 RSA]”].) In other words, the Gorrie Parties’ theory is that under the April 2020 RSA, the 2 Trust “trad[ed] its payment schedule with 8% interest for an opportunity to participate in 3 the Hemp Project and potentially reap $5 million . . . .” (Id. at 9 ¶ 31.) These allegations, 4 assumed true, are sufficient to establish that the Trust provided consideration under the 5 April 2020 RSA. Gill v. Kreutzberg, 537 P.2d 44, 46 (Ariz. Ct. App. 1975) (“Forbearance 6 to assert a legal claim is valid consideration for a contract.”). 7 Although the Stadtler Parties are correct that the April 2020 RSA itself makes no 8 reference to such a promise (see generally Doc. 17-4), in Arizona parol evidence may be 9 used to show consideration or lack thereof. Yuma Nat’l Bank v. Balsz, 237 P. 198 , 202 10 (Ariz. 1925) (clarifying that although testimony of conversations may not be introduced to 11 vary the terms of a promissory note, “the parol evidence rule certainly does not exclude 12 evidence having a legitimate bearing on the question of consideration, without which there 13 is no contract to vary”); Solarium Enterprises, LLC v. JW Ranch, Inc., 2022 WL 17685260 , 14 *2 (Ariz. Ct. App. 2022) (“The court may consider parol evidence to evaluate a failure of 15 consideration defense to a promissory note.”). See generally Equitable Trust Co. v. 16 Gallagher, 102 A.2d 538, 542 (Del. 1954) (“Experience . . . produces a multitude of 17 instances in which, without a relaxation of the parol evidence rule to let in accompanying 18 oral covenants, perfectly sound agreements, entered into by both parties in good faith, 19 would be defeated by a legal technicality. Hence, from the very inception of the practice 20 of reporting decisions of the courts, it has consistently been held that parol evidence can 21 be let in to prove that there was consideration for a deed, even though the deed may contain 22 no mention of any consideration, and consequently may appear, so far as the text of the 23 instrument is concerned, to effect a gift. Nor has this wholesome principle lost any of its 24 vigor with the passing of the years.”) (citations omitted). Accordingly, at this stage of the 25 litigation, the Gorrie Parties’ allegations are sufficient to demonstrate mutual 26 consideration. Shattuck, 566 P.2d at 1335 (“It is a long-standing policy of the law to 27 interpret a contract whenever reasonable and possible in such a way as to uphold the 28 contract.”). - 50 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 51 of 111 1 b. Statute Of Frauds 2 Next, the Stadtler Parties contend that, to the extent the Gorrie Parties allege that 3 the terms of the Promissory Note and Deed of Trust were modified, this argument fails 4 under A.R.S. § 44-101(9) because the alleged modification was not in writing. (Doc. 87 at 5 7-8.) 6 Section 44-101(9), Arizona’s statute of frauds, provides: 7 No action shall be brought in any court in the following cases unless the promise or agreement upon which the action is brought, or some 8 memorandum thereof, is in writing and signed by the party to be charged, or by some person by him thereunto lawfully authorized . . . [u]pon a contract, 9 promise, undertaking or commitment to loan money or to grant or extend credit, or a contract, promise, undertaking or commitment to extend, renew 10 or modify a loan or other extension of credit involving both an amount greater than two hundred fifty thousand dollars and not made or extended 11 primarily for personal, family or household purposes. — 12 — Id. An agreement governed by § 44-101 may not be orally modified. See, e.g., Snyder v. — 13 — HSBC Bank, USA, N.A., 873 F. Supp. 2d 1139, 1149 (D. Ariz. 2012) (“A loan modification — 14 — agreement and deed of trust agreement must be in writing and signed by the party to be — 15 — charged to be enforceable. Thus, ‘[a] modification to the material terms of a mortgage loan — 16 — [or loan secured by a deed of trust] must also be in writing and signed.’”) (citation omitted); — 17 — Exec. Towers v. Leonard, 439 P.2d 303, 305 (Ariz. App. Ct. 1968) (“[W]here an original — 18 — agreement comes within provisions of the statute of frauds requiring certain agreements to — 19 — be in writing, the statute of frauds renders invalid and ineffectual a subsequent oral — 20 — agreement changing the terms of the written contract.”). — 21 — With the acknowledgement that the parties have not comprehensively briefed the — 22 — issue—and, thus, the Court may reach a different conclusion at a future stage of the case if — 23 — presented with more developed arguments—the statute of frauds does not compel dismissal — 24 — of Counts One and Two because the Gorrie Parties allege that the April 2020 RSA itself, — 25 — which is “in writing and signed by the party to be charged,”43 was the mechanism for — 26 — — 43 — The parties’ briefing does not focus on the “signed by the party to be charged” 27 requirement of § 44-101. With that said, it appears the requirement is satisfied here. In Arizona, “[t]he ‘party to be charged’ is generally defined as the party against whom the 28 contract is sought to be enforced.” Passey v. Great Western Associates II, 850 P.2d 133, 137-38 (Ariz. Ct. App. 1993). Here, the Gorrie Parties seek to enforce the April 2020 RSA - 51 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 52 of 111 1 modifying the terms of the Promissory Note and Deed of Trust. (See, e.g., Doc. 77 at 18 2 ¶ 74 [“Stadtler and the Trust have breached the [April 2020 RSA] as the result of their 3 failure to abide by the terms of the [April 2020 RSA] which converted the Promissory Note 4 payments to the [April 2020 RSA] payments.”]; id. at 18 ¶ 79 [“Stadtler and the Trust 5 accepted modified payment obligations of the Promissory Note, Deed of Trust, and the 6 [Purchase] Addendum . . . with the negotiation and execution of the [April 2020 RSA]”].). 7 Although the Gorrie Parties seek to rely on oral statements as parol evidence of the 8 consideration underlying this writing, the writing itself is (at least according to the 9 allegations in the Gorrie Parties’ pleading) the ultimate source of the modification. 10 Before turning to other issues, it should be noted that the parties’ briefing related to 11 the statute of frauds is particularly bare-bones. (Doc. 87 at 7-8; Doc. 90 at 7-10; Doc. 95 12 at 2-3.) Neither side attempts to identify a case from Arizona (or elsewhere) evaluating 13 whether a loan agreement may be modified by a subsequent signed writing that does not 14 expressly mention the earlier loan agreement (but which may, via the use of parol evidence, 15 be viewed as modifying the earlier agreement). In a related vein, neither side addresses 16 whether the substance of the April 2020 RSA was sufficiently clear and certain to 17 effectuate a valid modification for purposes of the statute of frauds.44 See generally Custis 18 v. Valley Nat’l Bank of Phoenix, 375 P.2d 558, 561 (Ariz. 1962) (“A memorandum 19 sufficient to satisfy the requirements of the Statute of Frauds need not be a writing intended 20 by the parties to be the integration of their agreement . . . [but] must . . . state with 21 reasonable certainty the subject matter to which the contract relates and the terms and 22 conditions of all of the promises constituting the contract.”). Separately, neither side 23 addresses whether the claim for a “declaratory judgment” in Count Two is properly a — 24 — 25 against the Trust, under the theory that the Trust agreed via the April 2020 RSA to modify the Trust’s rights under certain other contracts. Thus, the Trust seems to qualify as “the 26 party to be charged” for purposes of § 44-101, and it is undisputed that the Trust signed the April 2020 RSA. (Doc. 17-4 at 5.) 27 44 To the extent the Stadtler Parties raise arguments about the sufficiency and 28 substance of the April 2020 RSA, they do so only in relation to their third-party beneficiary arguments, which are addressed infra. - 52 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 53 of 111 1 standalone claim, as opposed to simply one of the remedies the Gorrie Parties might obtain 2 if they prevailed on Count One. See, e.g., Snyder v. HSBC Bank, USA, N.A., 913 F. Supp. 3 2d 755, 770 (D. Ariz. 2012) (“A declaratory judgment action is a remedy for an underlying 4 cause of action; it is not a separate cause of action as Plaintiff alleges.”). Thus, the Court’s 5 analysis here should not be viewed as prejudging any of those issues. Harkening back once 6 again to “the principle of party presentation,” Sineneng-Smith, 140 S. Ct. at 1579 , the Court 7 limits itself to the dismissal argument actually raised in the Stadtler Parties’ motion, which 8 is that the statute of frauds compels dismissal of Counts One and Two because “[i]t is 9 undisputed that the Note and DOT were not modified in writing.” (Doc. 87 at 7-8.) As 10 discussed above, this argument fails because the point is very much disputed—the Gorrie 11 Parties argue that the April 2020 RSA, which is a writing, was the source of the 12 modification. Whether the April 2020 RSA was a sufficient writing to achieve such a 13 modification is not fairly raised by the Stadtler Parties’ motion and is thus a different 14 question for a different day. 15 c. Third-Party Beneficiary 16 The Stadtler Parties next argue that, to the extent IGD is attempting to enforce the 17 April 2020 RSA as a modification to the Promissory Note and Deed of Trust, “IGD lacks 18 privity to do so.” (Doc. 87 at 8.) They continue: “[F]or IGD to recover as a third-party 19 beneficiary to the [April 2020 RSA], the Trust and NFOF must have indicated that intention 20 in the [April 2020 RSA] itself. But the [April 2020 RSA] does not even mention IGD, 21 except to say it is the owner of the Farm, nor does it mention the Note or DOT.” (Id.) In 22 response, the Gorrie Parties argue that not only is “IGD is explicitly listed as both the owner 23 of the Farm as well as the lessor to NFOF” in the April 2020 RSA, but it would directly 24 benefit IGD to “extend or vary the terms of repayment of the Promissory Note.” (Doc. 90 25 at 9.) 26 This dispute arises from the fact that IGD and the Trust are the parties to the Farm 27 Purchase Documents, whereas NFOF and the Trust are the parties to the April 2020 RSA. 28 “[A]s a general rule only the parties and privies to a contract may enforce it.” Treadway - 53 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 54 of 111 1 v. W. Cotton Oil & Ginning Co., 10 P.2d 371, 375 (Ariz. 1932). See also Lofts at Fillmore 2 Condo. Ass’n v. Reliance Com. Const., Inc., 190 P.3d 733, 734 (Ariz. 2008) (same). 3 However, “where one person agrees with another, on a sufficient consideration, to do a 4 thing for the benefit of a third person, the third person may enforce the agreement.” 5 Treadway, 10 P.2d at 375 . “For a person to recover as a third-party beneficiary in Arizona, 6 the contracting parties must intend to directly benefit that person and must indicate that 7 intention in the contract itself.” Sherman v. First Am. Title Ins. Co., 38 P.3d 1229 , 1232 8 (Ariz. Ct. App. 2002). “[T]he third person must be the real promisee. The promise must 9 be made to him in fact . . . and it is not enough that the contract may operate to his benefit 10 but it must appear that the parties intended to recognize him as the primary party in interest 11 and as privy to the promise.” Id. (citation omitted). “Whether a third party is an intended 12 or incidental beneficiary of a contract is a question of law.” Brock Fam. P’ship, LLP v. 13 Tellurian Dev. Co., 2022 WL 678040 , *3 (Ariz. Ct. App. 2022). “[I]n order to allege the 14 right to recover as a third-party beneficiary, a complaint must include a factual allegation 15 that the parties intended to directly benefit the plaintiff, and so indicated in the contract 16 itself.” Nails v. Guilbault, 2022 WL 2132270 , *3 (D. Ariz. 2022) (citations omitted). 17 Here, the Gorrie Parties allege that the April 2020 RSA was intended to directly 18 benefit IGD because the only consideration given by the Trust under the agreement was 19 “forbearance of the Trust’s legal rights to rescind the contract or initiate a deed of trust or 20 judicial foreclosure, and the written extension of IGD’s payment obligations and the 21 conversion of the same to the outcome of IDG’s Hemp Operation.” (Doc. 77 at 8 ¶ 29.) 22 Assuming this is true, IGD was not “merely an incidental beneficiary” but the primary 23 beneficiary of the agreement, “for whose express benefit the contract was entered into and 24 therefore one who can maintain an action on the contract.” Basurto v. Utah Const. & Min. 25 Co., 485 P.2d 859, 863 (Ariz. App. Ct. 1971). 26 Whether the parties identified IGD as such in the April 2020 RSA itself is less clear. 27 The April 2020 RSA does not explicitly identify IGD as a third-party beneficiary. (Doc. 28 17-4.) However, it does describe the relationship between NFOF and IGD: - 54 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 55 of 111 1 “Natural Footprints Organic Farms . . . Leases the Farm from Innovative Global Distributions, LLC (“Farm Owner”) . . . . The Farm owner purchased 2 the Farm from D. Stadtler 2015 Trust . . . . [T]he Company and the Trust have agreed to share the net revenue of the Farm in accordance with Article 3 2 of this Revenue Sharing Agreement . . . .” — 4 — (Id. at 2.) This language, viewed in the light most favorable to the Gorrie Parties, could be — 5 — interpreted as demonstrating the parties’ intent that IGD be the primary beneficiary of the — 6 — April 2020 RSA. It is consistent with the Gorrie Parties’ explanation of why NFOF (rather — 7 — than IGD) was the contracting party—specifically, that “[i]n order for the [April 2020 — 8 — RSA] to make sense it ha[d] to attach the revenue share to NFOF rather than IGD because — 9 — NFOF [was] the primary source of funds for the entirety of the business.” (Doc. 77 at 7-8 — 10 — ¶ 28 .) Accordingly, the Stadtler Parties have not established that Counts One and Two are — 11 — subject to dismissal at this stage of the proceedings. — 12 — 2. Count Three — 13 — In Count Three, the Gorrie Parties allege that “Stadtler and the Trust breached the — 14 — [Three Acre Addendum] by failing to fund the $60,000 called for under the agreement.” — 15 — (Doc. 77 at 19 ¶ 84.) — 16 — The Stadtler Parties contend that Count Three fails because the Three Acre — 17 — Addendum required Stadtler to provided IGD with additional funds only if Stadtler “was — 18 — provided with an accounting justifying the extra funding” and agreed that the additional — 19 — funding was needed to “finish this crop.” (Doc. 87 at 9-10.) The Stadtler Parties thus — 20 — contend that by merely pleading that Stadtler failed to provide the funding, the Gorrie — 21 — Parties have not alleged a breach of the Three Acre Addendum. (Id. at 10.) — 22 — In response, the Gorrie Parties contend that Count Three does not allege that Stadtler — 23 — breached the Three Acre Addendum merely by failing to provide the funding—it also — 24 — alleges that Dawson (acting as Stadtler’s representative) “refused to provide invoices and — 25 — . . . refused to meaningfully participate in any accounting under the [Three Acre — 26 — Addendum] which all parties agreed had to be conducted in a meaningful manner.” (Doc. — 27 — 90 at 10.) Also, the Gorrie Parties assert that “Stadtler told Gorrie that he would not fund — 28 — irrespective of the [Three Acre Addendum] meaning that an accounting would be futile - 55 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 56 of 111 1 because Stadtler had elected to cut off funding irrespective of an accounting.” (Id. at 2 10-11.)45 3 The Court agrees that the Stadtler Parties’ argument misconstrues the allegations 4 giving rise to Count Three. Although Count Three itself alleges only that the Stadtler 5 Parties breached the Three Acre Addendum by failing to provide funding, it also 6 incorporates “all prior factual and legal allegations as if those are fully set out herein.” 7 (Doc. 77 at 19 ¶¶ 83-84.) Earlier in the pleading, the Gorrie Parties allege that Stadtler 8 violated the Three Acre Addendum by refusing to “meaningfully participate” in any 9 accounting and refusing to provide funding regardless of whether it was needed. (Id. at 10 15-16 ¶¶ 63, 66.)46 Thus, even if the Three Acre Addendum only required Stadtler to 11 provide funding when certain conditions were met (e.g., when he agreed funding was 12 needed), the Gorrie Parties have adequately alleged that Stadtler breached the agreement. 13 3. Count Four 14 Count Four alleges that the Stadtler Parties fraudulently induced the Gorrie Parties 15 to enter into the Three Acre Addendum by making various material misrepresentations. 16 (Id. at 19-20 ¶¶ 86-91.) 17 The Stadtler Parties argue that Count Four should be dismissed because it is “barred 18 by the economic loss rule” and because the Gorrie Parties “failed to adequately allege . . . 19 the nine elements of fraud” with particularity. (Doc. 87 at 10-11.) 20 … 21 … 22 45 In the portion of their reply addressing Counts Three and Four, both of which arise 23 from the Three Acre RSA and Three Acre Addendum, the Stadtler Parties reiterate that the plain language of the agreements establishes that Stadtler was not required to provide funds 24 unless he agreed they were needed (which he did not). (Doc. 95 at 3.) — 46 — 25 The Stadtler Parties also assert that the Gorrie Parties cannot plausibly allege that Stadtler breached the Three Acre Addendum because the Gorrie Parties’ other allegations 26 establish that “a water analysis at the Farm revealed that it would not be possible to grow hemp at the Farm.” (Doc. 87 at 10.) This argument mischaracterizes the Gorrie Parties’ 27 allegations. (See, e.g., Doc. 77 at 16 ¶ 64 [“Dawson purportedly conducted a water analysis and informed IGD that it was not possible to farm hemp at the farm because of the water 28 chemistry.”]; id. at 19-20 ¶ 88 [“Stadtler and the Trust . . . concocted a false narrative that the water on the Farm could not support the Hemp Project . . . .”].) - 56 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 57 of 111 1 a. Economic Loss Rule 2 The economic loss rule (“ELR”) “limit[s] a contracting party to contractual 3 remedies for the recovery of economic losses unaccompanied by physical injury to persons 4 or other property.” Flagstaff Affordable Hous. Ltd. P’ship v. Design All., Inc., 223 P.3d 5 664, 667 (Ariz. 2010). The doctrine is not applied mechanically and instead requires the 6 court to consider the “relevant policy concerns” presented by the individual factual 7 situation. Id. at 673. A federal court adjudicating state-law claims should “approximate 8 state law as closely as possible in order to make sure that the vindication of the state right 9 is without discrimination because of the federal forum.” Ticknor v. Choice Hotels Int’l., 10 Inc., 265 F.3d 931, 939 (9th Cir. 2001) (quoting Gee v. Tenneco, 615 F.2d 857 , 861 (9th 11 Cir. 1980)). “Where the state’s highest court has not decided an issue, the task of the 12 federal courts is to predict how the state high court would resolve it.” Id. (citation omitted). 13 “Federal courts are not free to expand the existing scope of state law without clear guidance 14 from the state’s highest court.” Van Go LLC v. Potts, 2016 WL 4974968 , *4 (D. Ariz. 15 2016). 16 The Arizona Supreme Court has not decided whether the ELR applies to fraudulent 17 inducement claims. “In assessing how a state’s highest court would resolve a state law 18 question—absent controlling state authority—federal courts look to existing state law 19 without predicting potential changes in that law.” Ticknor, 265 F.3d at 939 . In Flagstaff 20 Affordable Housing, the Arizona Supreme Court analyzed the scope of the ELR in the 21 context of construction contracts and emphasized that the “principal function” of the ELR 22 is “to encourage private ordering of economic relationships and to uphold the expectations 23 of the parties by limiting a plaintiff to contractual remedies for loss of the benefit of the 24 bargain.” Id. at 669-71. Initially, lower courts in Arizona reached varying conclusions as 25 to how the Arizona Supreme Court’s view of the ELR, as enunciated in Flagstaff 26 Affordable Housing, applies to fraud claims. In 2011, the Arizona Court of Appeals applied 27 the ELR to dismiss a fraud claim based on defendants’ “alleged failure to adequately 28 perform its promises under the Agreement.” Cook v. Orkin Exterminating Co., 258 P.3d - 57 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 58 of 111 1 149, 153 (Ariz. Ct. App. 2011). In a footnote, the court also “reject[ed] the Cooks’ 2 argument that the ELR does not apply to their fraud and misrepresentation claims,” 3 reasoning that “a contracting party is limited wholly to its contractual remedies for purely 4 economic loss related to the subject of the parties’ contract.” Id. at 153 n.6. However, in 5 2013, the Arizona Court of Appeals held that Cook “did not explicitly address the viability 6 of a claim for fraudulent inducement under the economic loss rule.” Shaw v. CTVT Motors, 7 Inc., 300 P.3d 907, 909 (Ariz. Ct. App. 2013), as amended (Mar. 29, 2013).47 Subsequent 8 decisions by lower courts applying Arizona law have criticized the application of the ELR 9 to bar fraudulent inducement claims as “a misreading of [Cook] that the Arizona Court of 10 Appeals clarified in Shaw.” Barrett-Jackson Auction Co. LLC v. Mountain Sports Int’l 11 Inc., 2020 WL 9349176 , *3-4 (D. Ariz. 2020) (“If the primary function of the doctrine is 12 ‘to encourage private ordering of economic relationships and to uphold the expectations of 13 the parties,’ then certainly it would seem inapposite to hold innocent parties to limited 14 contractual remedies when those contractual remedies were based on intentional 15 misrepresentations made by the other party.”); Jes Solar Co. v. Matinee Energy, Inc., 2015 16 WL 10943562 , *3 (D. Ariz. 2015) (arguing that the footnote in Cook “suggest[s] an overly 17 broad per se ELR, which was expressly rejected in Flagstaff”). See also Munderloh v. 18 Biegler GmbH, 2022 WL 901408 , *13 (D. Ariz. 2022), reconsideration denied in part, — 19 — 2022 WL 1122173 (D. Ariz. 2022), and reconsideration denied, 2022 WL 1719685 (D. 20 Ariz. 2022 ) (“[T]he economic loss doctrine should not apply to claims for fraudulent 21 inducement.”). This Court has made similar observations in earlier cases. BMO Harris 22 Bank NA v. Corley, 2022 WL 4781944 , *12 (D. Ariz. 2022) (applying the ELR to bar a 23 tortious inference claim but noting that the analysis would be different if “potential fraud 24 related to the formation of the underlying contracts [were] alleged here”). 25 Here, acknowledging that “[t]he borders of the rule are hazy because courts are 26 struggling to determine precisely which tort claims are barred,” Firetrace USA, LLC v. — 27 — — 47 — 28 Shaw addressed whether the ELR barred claims under the Consumer Fraud Act. 300 P.3d at 908 . - 58 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 59 of 111 1 Jesclard, 800 F. Supp. 2d 1042, 1050 (D. Ariz. 2010), the Court concludes the Arizona 2 Supreme Court likely would not apply the ELR to bar the Gorrie Parties’ fraudulent 3 inducement claim. In Count Four, the Gorrie Parties allege that Stadtler and the Trust 4 fraudulently induced the Gorrie Parties to execute the Three Acre Addendum by promising 5 that they would “immediately fund the venture,” that “the proceeds of the funds would be 6 utilized to pay a portion of the outstanding amounts due under the Promissory Note,” and 7 that “Stadtler would act in good faith with respect to the continuation of the [Three Acre 8 RSA] as amended by the [Three Acre Addendum].” (Doc. 77 at 19 ¶ 87.) The Gorrie 9 Parties allege that they relied on these promises and that such reliance caused them to lose 10 the value of the Vermont Purchase Orders. (Id. at 20 ¶¶ 89-90.) The Gorrie Parties further 11 allege that “Stadtler and the Trust had no intention of ever performing under the [Three 12 Acre Addendum]” and instead acted to “impoverish[] [the Gorrie Parties] and seiz[e] their 13 corporate opportunity.” (Id. at 20 ¶¶ 88, 91.) 14 Given these allegations, Count Four is distinguishable from the fraud claim in Cook 15 in several ways. First, the Gorrie Parties’ alleged injuries are not limited to the subject of 16 the Three Acre Addendum. Thus, the Cook court’s reasoning that, under Flagstaff 17 Affordable Housing, a contracting party is limited to its contractual remedies for “purely 18 economic loss related to the subject of the parties’ contract,” see 258 P.3d at 153 n.6, is 19 less applicable here. Also, the Gorrie Parties allege that the Stadtler Parties, with the intent 20 of sabotaging the hemp operation, induced the Gorrie Parties to rely on funding that the 21 Stadtler Parties never intended to provide. (Doc. 77 at 19-20 ¶¶ 87-91.) These facts, 22 assumed true, implicate the Shaw court’s “concerns about applying the ELR, which exists 23 ‘to encourage private ordering of economic relationships and to uphold the expectations of 24 the parties’ to any claim of fraud in the inducement, in which it is alleged that the ‘private 25 ordering’ lauded in Flagstaff was based on misinformation intentionally provided by one 26 contracting party to another.” 300 P.3d at 910 n.4. See also Munderloh, 2022 WL 901408 27 at *13 (“[T]he public policy behind the economic loss doctrine is not furthered when the 28 underlying contract is procured by fraud, like it is alleged to be in this case.”); - 59 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 60 of 111 1 Barrett-Jackson Auction, 2020 WL 9349176 at *4 (“[T]he contract law policy of upholding 2 parties’ expectations is not furthered by limiting parties to contractual remedies created as 3 a result of fraud.”); Jes Solar, 2015 WL 10943562 at *5 (“The tort of fraudulent 4 inducement serves the purpose of ensuring the integrity of the contract negotiating process. 5 Fraud is not a loss to be bargained for by contracting parties, and the ELR has no place in 6 fraud cases simply because, as a matter of necessity, damages related to fraud will always 7 be economic.”). Accordingly, Count Four is not subject to dismissal pursuant to the ELR. 8 b. Elements Of Fraud 9 Next, the Stadtler Parties contend that Count Four fails to state a claim for fraudulent 10 inducement because it “does not allege what Mr. Stadtler misrepresented” and because 11 “IGD’s alleged damages as a result of the alleged misrepresentation are not credible.” 12 (Doc. 87 at 10-11.) In response, the Gorrie Parties argue that Count Four pleads fraud with 13 adequate specificity by alleging that Stadtler falsely represented “that he would 14 immediately and timely fund the venture and that he would act in good faith” and that 15 Gorrie relied on that representation in executing the Three Acre Addendum. (Doc. 90 at 16 11-12.) 17 To state a claim of fraudulent inducement, a plaintiff must allege “(1) a 18 representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity 19 or ignorance of its truth; (5) the speaker’s intent that it be acted upon by the recipient in the 20 manner reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s 21 reliance on its truth; (8) the hearer’s right to rely on it; [and] (9) the hearer’s consequent 22 and proximate injury.” Duncan, 507 P.3d at 514-15. 23 Count Four states a plausible claim for fraudulent inducement. The Gorrie Parties 24 allege that Gorrie entered into the Three Acre Addendum because Dawson “represented 25 that Stadtler would immediately fund the $60,000” and that Dawson would collaborate 26 with Gorrie to “furnish the funding in a timely manner needed to finish the crop.” (Doc. 27 77 at 14 ¶¶ 59-60.) The Gorrie Parties further allege that these representations were false 28 and that “Stadtler’s plan from the outset” was “to starve the Hemp Project with the aim of - 60 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 61 of 111 1 taking over the project for himself and reaping the financial reward of the Hemp Project 2 while recovering the Farm and relocating IGD to a new location.” (Id. at 16 ¶ 66.) These 3 factual allegations sufficiently identify the alleged misrepresentations upon which the 4 Gorrie Parties relied.48 5 As for damages, Count Four alleges that as a result of the Gorrie Parties’ reliance 6 on the alleged misrepresentations, the hemp growing operation was unable to “provide 7 product” for the Vermont Purchase Orders, resulting in a loss of value of $7.7 million. 8 (Doc. 77 at 20 ¶¶ 90-91.) In a conclusory sentence, the Stadtler Parties contend these 9 damages are “not credible.” (Doc. 87 at 11.)49 10 Given the procedural posture and the Stadtler Parties’ undeveloped briefing on the 11 issue, the Court is satisfied that the Gorrie Parties have provided enough factual content to 12 state a plausible claim for relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007) (a 13 complaint may survive dismissal under Rule 12(b)(6) even where “recovery is very remote 14 and unlikely”). 15 4. Count Six 16 In Count Six, the Gorrie Parties allege that the Stadtler Parties breached the 17 covenant of good faith and fair dealing as to all of the contracts between the parties. (Doc. 18 77 at 21 ¶¶ 99-104.) 19 The Stadtler Parties contend that Count Six fails because there is “no credible 20 allegation” that the Stadtler Parties impaired the Gorrie Parties’ right to receive benefits — 21 — — 48 — 22 In their reply, the Stadtler Parties suggest that Count Four does not adequately allege “IGD’s reasonable and detrimental reliance in signing” the Three Acre RSA. (Doc. 95 at 23 3, emphasis added.) Because this argument was not raised in their motion, the Court declines to address it. Zamani, 491 F.3d at 997. In any event, the Court notes that the 24 Gorrie Parties allege that their reliance on the Stadtler Parties’ representations was reasonable “because Stadtler and the Trust appeared to want to complete the Hemp Project 25 and mutually reap the benefits, Stadtler had previously funded the project, and [the Gorrie Parties] could not anticipate that Stadtler and the Trust never intended to perform.” (Doc. 26 77 at 20 ¶ 89.) — 27 — — 49 — In their reply, the Stadtler Parties belatedly attempt to provide more detail: “It is not credible that both NFOF and IGD were [not] free to seek funding for the Hemp Operation 28 elsewhere, including from the investors they had earlier asserted were ready to fund the Hemp Operation.” (Doc. 95 at 4.) Once again, this approach is improper under Zamani. - 61 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 62 of 111 1 from their contractual relationships. (Doc. 87 at 12-13 [“It strains the straight face test.”]; 2 Doc. 95 at 4 [noting it is undisputed that the Gorrie Parties occupied the Farm for two years 3 without making any payments toward the purchase price or pursuant to any of the revenue 4 sharing agreements while receiving “well over $100,000 in additional funding from Mr. 5 Stadtler”].) In response, the Gorrie Parties argue their allegations “provide ample showing 6 of a breach of the covenant and fair dealing in the respective contracts”—specifically, they 7 allege that Stadtler never intended to perform and that Dawson (Stadtler’s agent) 8 “sabotaged the venture at every turn at Stadtler’s express direction.” (Doc. 90 at 12.) 9 “Arizona law implies a covenant of good faith and fair dealing in every contract.” 10 Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension 11 Trust Fund, 38 P.3d 12 , 28 (Ariz. 2002). “The implied covenant of good faith and fair 12 dealing prohibits a party from doing anything to prevent other parties to the contract from 13 receiving the benefits and entitlements of the agreement.” Id. A party breaches the 14 covenant “by exercising express discretion in a way inconsistent with a party’s reasonable 15 expectations and by acting in ways not expressly excluded by the contract’s terms but 16 which nevertheless bear adversely on the party’s reasonably expected benefits of the 17 bargain.” Bike Fashion Corp. v. Kramer, 46 P.3d 431, 435 (Ariz. Ct. App. 2002). 18 “Whether a party breached the covenant is a question of fact for the jury.” Cnty. Of La Paz 19 v. Yakima Compost Co., Inc., 233 P.3d 1169, 1183 (Ariz. Ct. App. 2010). 20 Here, the facts alleged are sufficient to state a claim for breach of the covenant of 21 good faith and fair dealing. True, the Gorrie Parties occupied the Farm without making 22 payments toward the purchase price, but such conduct is not inherently inconsistent with 23 an affirmative claim that the Stadtler Parties breached the covenant of good faith and fair 24 dealing. The Gorrie Parties’ pleading contains numerous allegations that Stadtler acted to 25 prevent the Gorrie Parties “from receiving the benefits and entitlements” of the various 26 agreements underlying this litigation, including the following: (1) “at Stadtler’s express 27 direction,” “Dawson undermined IGD” by “intentionally poison[ing] the hemp plants,” 28 “creat[ing] a fuel spill on the property,” and verbally abusing and refusing to pay workers, - 62 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 63 of 111 1 “resulting in litigation being filed against the IGD” (Doc. 77 at 12 ¶¶ 45-46); (2) as 2 Stadtler’s representative, “Dawson spent almost the entirety of the funding [provided by 3 Stadtler to fund the hemp operations] on items for which he provided no farm related 4 receipts . . . [or] on gas, salary and accommodations for himself” (id.); (3) as Stadtler’s 5 representative, Dawson “refused to meaningfully participate . . . in any accounting” to 6 facilitate funding under the Three Acre Addendum (id. at 15-16 ¶ 63); and (4) the Stadtler 7 Parties “concocted a false narrative that the water on the Farm could not support the Hemp 8 Project” (id. at 19-20 ¶ 88). 9 5. Count Nine 10 In Count Nine, the Gorrie Parties request that the Stadtler Parties be “estopped” 11 from arguing that the April 2020 RSA didn’t modify the Promissory Note and Purchase 12 Addendum. (Doc. 77 at 23 ¶¶ 114-16.) 13 The Stadtler Parties contend Count Nine fails because “neither the law nor the clear 14 language of the written contracts [the Gorrie Parties] rel[y] on supports their claim that the 15 unenforceable [April 2020 RSA] obviated IGD’s contractual obligation to make payments 16 on the [Promissory] Note” and because the Gorrie Parties are unable to show that the 17 Promissory Note and the Deed of Trust are “unenforceable.” (Doc. 87 at 13.) In response, 18 the Gorrie Parties contend the facts alleged establish that Stadtler’s conduct caused the 19 Gorrie Parties to refrain from seeking other financing options and to enter into the April 20 2020 RSA; thus, the Stadtler Parties should be estopped from arguing that the April 2020 21 RSA did not modify the Promissory Note and Purchase Addendum. (Doc. 90 at 13.)50 22 As an initial matter, the Court interprets Count Nine as a claim for promissory 23 estoppel. See, e.g., Tiffany Inc. v. W. M. K. Transit Mix, Inc., 493 P.2d 1220, 1224 (Ariz. 24 Ct. App. 1972) (although two kinds of estoppel exist, equitable estoppel and promissory — 25 — — 50 — 26 In their reply, the Stadtler Parties contend that the facts alleged do not establish “injury to [the Gorrie Parties] based on conduct by Mr. Stadtler and the Trust.” (Doc. 95 27 at 4-5 [“[I]ndeed, as stated above, [the Gorrie Parties] are the ones who have greatly benefited from [the Stadtler Parties’] conduct . . . .”].) Because this argument was not 28 raised in the Stadtler Parties’ motion to dismiss (see generally Doc. 87), the Court does not address it. Zamani, 491 F.3d at 997. - 63 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 64 of 111 1 estoppel, only promissory estoppel is available as a cause of action for damages; “equitable 2 estoppel is available only as a defense”).51 “The elements of promissory estoppel are a 3 promise, which the promissor should reasonably foresee would cause the promisee to rely, 4 upon which the promisee actually relies to his detriment.” Contempo Const. Co. v. 5 Mountain States Tel. & Tel. Co., 736 P.2d 13, 16 (Ariz. Ct. App. 1987). To be actionable, 6 the alleged promise must relate “to a situation which one party promises will be true in the 7 future” and not merely to “a past or presently existing state of facts.” Tiffany, 493 P.2d at 8 1224. “To prove promissory estoppel, [a claimant] must show that the defendants made a 9 promise and should have reasonably foreseen that he would rely on that promise; [the 10 claimant] must also show that he actually relied on the promise to his detriment.” 11 Higginbottom v. State, 51 P.3d 972, 977 (Ariz. Ct. App. 2002). Additionally, the claimant 12 must have had “a ‘justifiable right to rely’ on the alleged promise. ‘Reliance is justified 13 when it is reasonable, but is not justified when knowledge to the contrary exists.’” Id. 14 (internal citation omitted). 15 The Stadtler Parties’ arguments for dismissal of Count Nine are somewhat 16 conclusory. After stating the elements of estoppel generally, they argue that Count Nine 17 should be dismissed because the April 2020 RSA is either unenforceable or did not modify 18 IGD’s obligations under the Promissory Note. (Doc. 87 at 13.) On their face, these 19 arguments are identical to those raised in relation to Counts One and Two and fail for the 20 same reasons. Also, as to the first argument, promissory estoppel is “not a theory of 21 contract liability” and thus “may afford relief if ‘some element necessary to the creation of 22 an enforceable contract, such as consideration, is not present.’” Double AA Builders, Ltd. 23 v. Grand State Const. L.L.C., 114 P.3d 835, 843-44 (Ariz. Ct. App. 2005). 24 Nevertheless, the Stadtler Parties’ arguments could be generously interpreted as 25 asserting that the factual allegations underlying Count Nine do not demonstrate that 26 51 The Gorrie Parties’ failure to identify Count Nine as such is not fatal. Moreno v. 27 Minnesota Life Ins. Co., 2015 WL 1457419 , *9 (D. Ariz. 2015) (“Arizona courts have acknowledged that there is no Arizona authority for the proposition that estoppel must be 28 specifically plead as equitable or promissory estoppel.”) (internal quotation marks omitted). - 64 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 65 of 111 1 Stadtler made a promise that reasonably justified IGD’s failure to make payments on the 2 Promissory Note. (See Doc. 87 at 13.)52 Count Nine alleges that the Stadtler Parties 3 induced the Gorrie Parties to execute the April 2020 RSA (under which the Trust was 4 entitled to a certain percentage of the hemp operation’s revenue) by promising to refrain 5 from enforcing the payment terms of the Promissory Note and Purchase Addendum. (Doc. 6 77 at 23 ¶¶ 114-16.) According to the Gorrie Parties, their reliance on this promise was 7 reasonable because the Stadtler Parties chose to refrain from cancelling the sale of the Farm 8 (despite having the right to do so under the Purchase Addendum) when IGD did not timely 9 make the $240,000 payment; instead, the Stadtler Parties agreed to the April 2020 RSA. 10 (Id. at 7-9 ¶¶ 26-29, 23 ¶¶ 114-15.)53 This reliance was to their detriment because Stadtler 11 sent a default notice to IGD on July 1, 2021. (Id. at 16-17 ¶¶ 67-68.) 12 Taking these allegations as true, Count Nine states a plausible claim for promissory 13 estoppel by pleading a promise related to future conduct (i.e., the promise to refrain from 14 enforcing the original payment schedule) that caused the Gorrie Parties to halt their search 15 for additional financing sources for the Farm, which proved detrimental to the Gorrie 16 Parties when Stadtler issued the notice of default. Cf. Tiffany, 493 P.2d at 1225 (finding 17 the elements of promissory estoppel were met where the “defendant promised to supply 18 class C sealcoat chips at a price of $3.50 per ton,” the plaintiff “relied to his detriment on 19 this promise in that it subsequently used the quote to secure its successful bid from the 20 Highway Department,” and “the defendant should reasonably have foreseen that plaintiff 21 would rely on the quote and use it in its bid, if the quote were the lowest”). 22 The Stadtler Parties also argue that Count Nine fails because the Gorrie Parties do 23 not allege that the Promissory Note and the Deed of Trust are “unenforceable.” (Doc. 87 24 52 Although generous, the Court views this interpretation as a reasonable 25 understanding of the Stadtler Parties’ briefing on the issue, particularly given the elements of a promissory estoppel claim. 26 53 The Court acknowledges that this is a liberal interpretation of Count Nine, which 27 neither states for what the “additional financing options” would have been used nor why the reliance was “to their detriment.” (See Doc. 77 at 23 ¶¶ 114-16.) However, given the 28 procedural posture and that Count Nine incorporates all prior allegations (Id. at 23 ¶ 114), the Gorrie Parties have pleaded sufficient facts to support a cognizable claim for relief. - 65 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 66 of 111 1 at 13.) However, the Stadtler Parties do not provide, nor can this Court find, any authority 2 indicating that the Gorrie Parties must plead the existence of an unenforceable contract to 3 state a cognizable claim for promissory estoppel. The Federal Rules of Civil Procedure 4 “explicitly authorize litigants to present alternative and inconsistent pleadings.” 5 Molsbergen v. United States, 757 F.2d 1016, 1018 (9th Cir. 1985). See also Fed. R. Civ. 6 P. 8 (d)(1), (2). In Arizona, promissory estoppel may be pleaded as an alternative to a 7 breach of contract claim. AROK Const. Co. v. Indian Const. Servs., 848 P.2d 870 , 878-79 8 (Ariz. Ct. App. 1993) (“AROK also claims that it is entitled to relief based upon promissory 9 estoppel. We hold that this is a proper claim for relief as an alternative to the contract 10 claim.”). Here, the Gorrie Parties’ allegations suggest they are asserting promissory 11 estoppel as an alternative theory of recovery if the Court determines that the April 2020 12 RSA (or perhaps the alleged conversations with Dawson, i.e., an oral agreement) is 13 unenforceable. 14 6. Count Ten 15 Count Ten alleges that the Stadtler Parties breached the fiduciary duties they owed 16 the Gorrie Parties as joint venturers. (Doc. 77 at 23 ¶¶ 117-21.) 17 The Stadtler Parties contend that Count Ten should be dismissed because the parties 18 were not joint venturers. (Doc. 87 at 13-14.) Instead, the Stadtler Parties argue that as 19 mere “parties to a series of commercial transactions,” they did not owe any fiduciary duties 20 to the Gorrie Parties. (Id. at 14.) Alternatively, “even if there was such a duty, . . . [the 21 Gorrie Parties] do not adequately explain how Mr. Stadtler or the Trust would have 22 breached it.” (Id.) 23 a. Joint Venture 24 The Gorrie Parties allege that the parties were joint venturers “as the result of the 25 joint ventures as provided through the respective contracts.” (Doc. 77 at 23 ¶ 118.) The 26 Stadtler Parties challenge this assertion, focusing on the draft joint venture agreement, 27 which the parties agree was never executed. (Doc. 87 at 13-14.) In response, the Gorrie 28 Parties clarify that Count Ten is based on all of the various contracts executed among the - 66 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 67 of 111 1 parties, not “an unsigned draft document.” (Doc. 90 at 13. See also id. [“[T]he parties had 2 contracts, a common purpose of growing hemp for profit and for paying off the Farm, a 3 community of interest in seeing the venture succeed, and an equal right of control as 4 Stadtler insisted that Mr. Dawson act as a farm manager on the project and control the 5 funding.”].) 6 “A joint venture (or as sometimes called, adventure) is a special relationship 7 between two or more parties to engage in and carry out a single business venture for joint 8 profit without any actual partnership or corporation designation.” Helfenbein v. Barae Inv. 9 Co., 508 P.2d 101, 104 (Ariz. Appt. Ct. 1973). “Such relationship which arises out of 10 express or implied contract is founded upon mutual understanding and agreement between 11 the adventurers . . . and arises only where they intend to associate themselves as such. Such 12 intent may be inferred from the acts and conduct of the parties.” Id. (internal citations 13 omitted). “The elements of a business joint venture generally include: (1) an agreement, 14 (2) a common purpose, (3) a community of interest, (4) an equal right of control, and (5) 15 participation in profits and losses.” Est. of Hernandez by Hernandez-Wheeler v. Flavio, — 16 — 930 P.2d 1309, 1312 (Ariz. 1997).54 17 Here, as for the first element, the Gorrie Parties allege that the parties executed 18 several contracts, including the April 2020 RSA (Doc. 77 at 7-9 ¶¶ 27-29), the Three Acre 19 RSA and Personal Loan (id. at 10-11 ¶¶ 37-41), and the Three Acre Addendum (id. at 1420 15 ¶¶ 58-60). 21 As for the second element, the Gorrie Parties allege that the parties had a common 22 purpose of creating and reaping profits from a successful hemp growing operation on the 23 Farm. (See, e.g., Doc. 77 at 7 ¶ 27 [alleging that instead of cancelling the Farm sale, 24 Stadtler “decide[d] to enter into a revenue share agreement that transformed the 25 arrangement between the parties of simply lender and borrower to joint venturers, and 26 extended the timeframe for payment out to 5 years”]; id. at 11 ¶ 43 [“In late February of — 27 — — 54 — 28 In contrast, a social joint venture requires only the first four elements. Est. of Hernandez, 930 P.2d at 1312 . - 67 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 68 of 111 1 2021, Stadtler flew into Phoenix to meet with Gorrie, tour the Farm and review the progress 2 of the new joint venture.”].) 3 As for the third element, the Gorrie Parties allege that the parties would mutually 4 benefit if the hemp operation succeeded. (See, e.g., Doc. 77 at 9 ¶ 31 [under the April 2020 5 RSA, the Trust would “trading its payment schedule with 8% interest for an opportunity to 6 participate in the Hemp Project and potentially reap $5 million from the sale [of hemp 7 products]”]; id. at 10-11 ¶ 39 [under the Three Acre RSA, profits from the hemp operation 8 (above the amounts invested by the parties) “were to be split equally between the parties”]; — 9 — id. at 14-15 ¶ 60 [under Three Acre Addendum, “after the loan from Stadtler had been 10 repaid,” the remaining proceeds from hemp sales would be divided between Stadtler, 11 Gorrie, and the outstanding balance due on the Farm].) Thus, the Gorrie Parties have 12 pleaded a community of interest in the object of the enterprise. 13 As for the fourth element, “[t]he test is whether there is a right of mutual control 14 over the subject matter of the venture, that is, the means by which the parties intend to 15 obtain their objective.” Ellingson v. Sloan, 527 P.2d 1100, 1103-04 (Ariz. App. Ct. 1974). 16 The Stadtler Parties contend that the parties’ relationship was that of lender-borrower, not 17 joint venturers, because the parties did not have “equality of control.” (Doc. 95 at 5.)55 — 18 — — 55 — The Stadtler Parties raise the “lender-borrower” argument for the first time in their 19 reply, and thus the Court need not address it. Zamani, 491 F.3d at 997. Nevertheless, even properly raised, this argument would not change the Court’s decision. Although Arizona 20 courts have generally been reluctant to find a fiduciary relationship between a lender and borrower, one may exist where “the lender’s activities clearly exceed those of a normal 21 money lender.” Murry v. W. Am. Mortg. Co., 604 P.2d 651, 653 (Ariz. Ct. App. 1979). For example, in Murry, the Arizona Court of Appeals discussed a decision by the California 22 Supreme Court, Connor v. Great Western Savings & Loan Assoc., 447 P.2d 609 (Cal. 1968), which held a lender can be liable to home buyers for damages caused by 23 defective construction. 604 P.2d at 653 . Murry noted that Connor had involved a lender that was “more than a lender content to lend money” and instead “an active participant in 24 a home construction enterprise” with “substantial control over the development.” Id. (“Subsequent cases have rejected a broad reading of Connor . . . .”). Here, the 25 counterclaims describe the Stadtler Parties’ role in the hemp growing operation as far more substantial than that of a “normal money lender.” (See, e.g., Doc. 77 at 7-8 ¶ 28 [describing 26 “the parties intent that Stadtler would get a revenue share on the entire business”]; id. at 8-9 ¶¶ 29-31 [alleging that, under the April 2020 RSA, “the Trust . . . trad[ed] its payment 27 schedule . . . for an opportunity to participate in the Hemp Project”]; id. at 10-11 ¶¶ 38-41 [alleging that the Three Acre RSA required IGD to forward its receipts to a bookkeeping 28 service selected by Stadtler and that “Dawson maintain full control over all funds allocated to the project”]; id. at 12-13 ¶¶ 49-52 [describing a meeting, arranged by Stadtler, about - 68 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 69 of 111 1 However, the mutual control element does not require that “each venturer must have an 2 equivalent amount of control over the venture’s operation,” but instead that “each joint 3 venturer must share, to some extent, in the control of the venture.” Hernandez-Wheeler, — 4 — 930 P.2d at 1313 . Additionally, “[t]he rights of the parties with respect to the management 5 and control of the enterprises may be fixed by agreement so as to effectively place control 6 in the hands of one of the joint venturers.” James Weller, Inc. v. Hansen, 517 P.2d 1110 , 7 1116 (Ariz. Ct. App. 1973) (citation omitted). Here, the facts alleged are sufficient to 8 demonstrate joint control of the hemp operation. The Gorrie Parties held title to the Farm 9 (Doc. 77 at 7 ¶ 23), sought other funding for the project (id. at 9-10 ¶ 32), prepared the land 10 for growing and bought various irrigation infrastructure (id.), and negotiated and entered 11 into a large purchase order for hemp (id. at 10 ¶ 34).56 Meanwhile, the Stadtler Parties 12 “control[led] the expenditure of the funds” and “assume[d] managerial responsibilities at 13 the Farm.” (Id. at 12 ¶ 45.) Also, the Gorrie Parties allege various misconduct by Dawson 14 that indicates he was physically present at the Farm, had the authority to dictate the 15 nutritional balance used for the hemp plants and decide whether employees were paid, and 16 was present for calls with outside investors. (Doc. 77 at 12 ¶ 46, 15 ¶ 62.) The Gorrie 17 Parties also allege that Stadtler required IGD to “enter into a joint venture with Houchin” 18 (id. at 14 ¶ 57) and insisted “Houchin would be the sole investor in the property” (id. at 15 19 ¶ 62). Assumed true, these facts show that both parties had some degree of control and 20 participated in the direction and course of the alleged joint venture. 21 For similar reasons, the facts alleged demonstrate that both parties participated in 22 the gains and losses of the joint venture. “The term ‘losses’ is not limited to monetary 23 losses, but includes time expenditures and out-of-pocket expenses, especially where one 24 party in a joint venture furnishes property and the other only services.” Ellingson, 527 P.2d 25 26 the possibility of Houchin investing in the hemp operation]. — 56 — 27 Some of these responsibilities were explicitly pursuant to the agreements between the parties—under the Three Acre RSA, for example, “IGD [was] responsible for 28 furnishing the Farm to grow the crop on” and “for the cultivation and processing of . . . the harvested crop.” (Id. at 10-11 ¶ 39.) - 69 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 70 of 111 1 at 1103. According to the Gorrie Parties, if the hemp operation succeeded, the parties 2 shared the profits; if the hemp operation suffered losses, Stadtler would not be repaid for 3 his investments and the Gorrie Parties would risk losing the value of the hemp purchase 4 orders and their efforts to substantially improve the Farm (e.g., “by preparing the land for 5 growing”) would be in vain. (Doc. 77 at 7-10 ¶¶ 27-39; 14-16 ¶¶ 57-63.) See also 6 Ellingson, 527 P.2d at 1103 (“By agreeing to an exchange of services for a share of the 7 profits to be derived from the joint venture, the parties provided for Sloan’s participation 8 in any losses.”). 9 Accordingly, the Gorrie Parties have adequately pleaded the existence of a joint 10 venture between the parties. This conclusion is supported by the general rule that “whether 11 the relationship of joint venturers exists depends upon the intention of the parties.” Tiffany 12 Const. Co. v. Hancock & Kelley Const. Co., 539 P.2d 978, 983 (Ariz. App. Ct. 1975). 13 “Such intent may be inferred from the acts and conduct of the parties. Resolution of this 14 issue is for the trier of fact.” Helfenbein, 508 P.2d 101 at 104 (internal citations omitted). 15 See also Mann v. GTCR Golder Rauner, L.L.C., 425 F. Supp. 2d 1015, 1023 (D. Ariz. 16 2006) (finding a genuine issue of material fact as to the parties’ intent to form a joint 17 venture and noting “[g]enerally, it is inappropriate to resolve issues of credibility, motive, 18 and intent on motions for summary judgment”); Ellingson, 527 P.2d at 1104 (“Where there 19 is a question as to the existence or nature of a joint venture, each case must be resolved 20 upon its own facts.”). 21 b. Breach Of Fiduciary Duty 22 The Stadtler Parties contend that, even if the parties were joint venturers, Count Ten 23 still fails because “[the Gorrie Parties] do not adequately explain how Mr. Stadtler or the 24 Trust would have breached [their fiduciary duties].” (Doc. 87 at 14.) In response, the 25 Gorrie Parties seem to suggest that because “the parties were joint venturers,” it necessarily 26 follows that they “owed each other fiduciary duties.” (Doc. 90 at 13.) 27 “Partnerships, joint ventures, and corporations are all owed fiduciary duties by those 28 empowered to act on behalf of such businesses.” In re Sky Harbor Hotel Properties, LLC, - 70 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 71 of 111 — 1 — 443 P.3d 21, 23 (Ariz. 2019). See also Marmis v. Solot Co., 573 P.2d 899, 902 (Ariz. Ct. 2 App. 1977 ) (suggesting that joint ventures create “concomitant fiduciary obligations 3 between the joint venturers”). The fiduciary obligations between joint venturers, which 4 may include “good faith, loyalty, fairness, and honesty,” “must be determined from the 5 contract of the parties and the nature of the joint venture.” Marmis, 573 P.2d at 902 -03 6 (internal quotation marks omitted). 7 The Gorrie Parties’ operative pleading is replete with allegations that, if true, could 8 constitute a breach of the fiduciary duties the Stadtler Parties owed to the Gorrie Parties as 9 joint venturers. To name a few, the Gorrie Parties allege that (1) “Dawson intentionally 10 poisoned the hemp plants by using an improper nutrition balance” (Doc. 77 at 12 ¶ 46); (2) 11 “Dawson . . . verbally abused workers and refused to pay workers resulting in litigation 12 being filed against the IGD” (id.); (3) “Dawson spent almost the entirety of the funding 13 [from Stadtler] on items for which he provided no farm related receipts for cash 14 withdrawals, and those that he did, he spent on gas, salary and accommodations for 15 himself” (id.); (4) Dawson “sabotage[d]” calls with potential investors (id. at 15 ¶ 62); 16 (5) Stadtler dissuaded outside investors by insisting “Houchin would be the sole investor” 17 (id.); and (6) the Stadtler Parties “concocted a false narrative that the water on the Farm 18 could not support the Hemp Project” (id. at 19-20 ¶¶ 88). Accordingly, Count Ten is not 19 dismissed on this ground.57 20 … 21 … 22 … — 23 — — 24 — — 57 — The Stadtler Parties also request that the Court award them attorneys’ fees under A.R.S. § 12-341.01 because the Gorrie Parties’ counterclaims “arise out of contract.” (Doc. 25 87 at 14.) The Court declines to do so, at least at this stage of the case. The Stadtler Parties’ motion resulted in the dismissal of only a handful of the Gorrie Parties’ counterclaims and 26 some of the remaining counterclaims sound in contract. The Stadtler Parties have also asserted their own contract-based claims that remain unresolved. It is far too early to make 27 any determinations regarding fee-shifting under § 12-341.01. See generally Cramton v. Grabbagreen Franchising LLC, 2022 WL 1719687 , *19-20 (D. Ariz. 2022) (discussing 28 the complexity of the fee-shifting analysis under § 12-341.01 in multi-party cases involving both tort and contract claims). - 71 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 72 of 111 1 IV. The Gorrie Parties’ Motion For Partial Dismissal Of The SAC 2 The Gorrie Parties move to dismiss Counts One through Five of the SAC under Rule 3 12(b)(6). (Doc. 136.) In response, the Stadtler Parties move to strike the Gorrie Parties’ 4 motion to dismiss as procedurally improper under Rule 12(h). (Doc. 142.) 5 The following procedural history provides context for these dueling motions. On 6 May 2, 2022, the Stadtler Parties filed the FAC. (Doc. 25.) On May 27, 2022, the Gorrie 7 Parties answered the FAC. (Doc. 38.) On July 14, 2022, the Gorrie Parties answered the 8 FAC. (Doc. 77.) On October 29, 2022, after a full briefing (Docs. 103, 109, 114, 115, 123, 9 126), the Court granted the Stadtler Parties leave to file the SAC. (Doc. 129.) On 10 December 5, 2022, the Stadtler Parties did so. (Doc. 131.) On December 19, 2022, the 11 Gorrie Parties move to dismiss Counts One through Five of the SAC. (Doc. 136.) The 12 Stadtler Parties filed a response opposing dismissal and, concurrently, a motion to strike 13 the Gorrie Parties’ motion, arguing that the Gorrie Parties are precluded from filing a Rule 14 12(b)(6) motion by Rule 12(h). (Doc. 142.) More specifically, the Stadtler Parties argue 15 that because the Gorrie Parties answered the FAC and Counts One through Five of the SAC 16 are “essentially the same” as Counts Three through Seven of the FAC, their motion to 17 dismiss is impermissible under Rule 12(h)(2). (Id. at 4-5.) Noting the Gorrie Parties have 18 not filed a timely answer to the SAC, the Stadtler Parties ask the Court to either “enter a 19 judgment against the [Gorrie Parties] pursuant to Rule 55 . . . and request a hearing on the 20 default judgment” or “require [the Gorrie Parties] to file an answer to the SAC.” (Id. at 5.) 21 The Stadtler Parties are correct that the Gorrie Parties’ Rule 12(b)(6) motion is 22 untimely. The Gorrie Parties filed an answer to the claims now alleged in Counts One 23 through Five of the SAC in July 2022, nearly half a year before they filed the pending 24 motion to dismiss.58 The approach is verboten under Rule 12(b), which provides that “[a] 25 motion asserting any of [the Rule 12(b)] defenses must be made before pleading if a 26 58 The SAC did not include any new claims as compared to the FAC. (Compare Doc. 27 25 ¶¶ 123-72 with Doc. 131 ¶¶ 107-75.) More specifically, the FAC asserted nine claims. (Doc. 25 ¶¶ 123-72.) The SAC asserted six of the nine claims from the FAC, omitting 28 claims for receivership, breach of the April 2020 RSA, and promissory estoppel. (Doc. 131 ¶¶ 123-72.) - 72 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 73 of 111 1 responsive pleading is allowed.” Moreover, “[t]he filing of an amended complaint will not 2 revive the right to present by motion defenses that were available but were not asserted in 3 a timely fashion prior to the amendment of the pleading.” Jaeger v. Howmedia Osteonics 4 Corp., 2016 WL 520985 , *4 (N.D. Cal. 2016) (internal quotation marks omitted). 5 With that said, “it is well recognized that a district court may treat an untimely 6 motion to dismiss under Rule 12(b)(6) as a motion for judgment on the pleadings under 7 Rule 12(c).” Cartessa Aesthetics LLC v. Aesthetics Biomedical Inc., 2021 WL 778541 , *4 8 (D. Ariz. 2021). See also Elvig v. Calvin Presbyterian Church, 375 F.3d 951, 954 (9th Cir. 9 2004) (“A Rule 12(b)(6) motion must be made before the responsive pleading. Here, the 10 Defendants filed their motion to dismiss after filing their answer. Thus, the motion should 11 have been treated as a motion for judgment on the pleadings, pursuant to Rule 12(c) or 12 12(h)(2).”) (citation omitted). The Ninth Circuit has lauded the “practical wisdom” of this 13 approach, which promotes efficiency. Cf. In re Apple iPhone Antitrust Litig., 846 F.3d 14 313, 317-19 (9th Cir. 2017). See also 1 Gensler, Federal Rules of Civil Procedure, Rules 15 and Commentary, Rule 12, at 344 (2022) (“Technically, a ‘Rule 12(b)(6)’ motion filed 16 after the defendant has answered is procedurally improper. That being said, . . . [t]he very 17 sensible prevailing practice of the courts is to treat a post-answer ‘Rule 12(b)(6)’ motion 18 as a Rule 12(c) motion.”). 19 Here, although the claims alleged in the SAC are essentially identical to those 20 alleged in FAC, and thus the arguments now raised in the Gorrie Parties’ motion to dismiss 21 were available to them when they answered the FAC,59 reaching the merits of their motion 22 to dismiss furthers the interests of judicial economy. If the Court rejected the Gorrie 23 Parties’ motion to dismiss on procedural grounds now, they could simply answer the SAC 24 and refile the same motion under Rule 12(c), which is “functionally identical” to a Rule 25 12(b)(6) motion. United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 26 — 59 — In fact, it appears counsel for the Gorrie Parties may have taken a motion intended 27 to address the FAC and filed it in relation to the SAC, as the motion refers to the claims by their count numbers in the FAC and addresses claims that the Stadler Parties omitted from 28 the SAC. (See, e.g., Doc. 136 at 15-16 [arguing for dismissal of a promissory estoppel claim].) - 73 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 74 of 111 1 1047, 1054-55 n.4 (9th Cir. 2011) (“Rule 12(c) is ‘functionally identical’ to Rule 12(b)(6) 2 and . . . ‘the same standard of review’ applies to motions brought under either rule.”). 3 Addressing the merits now will avoid the unnecessary duplication of resources. 4 Accordingly, the Court will treat the Gorrie Parties’ motion to dismiss as a motion 5 for judgment on the pleadings. See also Fed. R. Civ. P. 1 (the Rules “should be construed, 6 administered, and employed by the court and the parties to secure the just, speedy, and 7 inexpensive determination of every action and proceeding”). 8 A. Additional Background 9 The following additional facts are derived from the SAC and are presumed true for 10 purposes of the Gorrie Parties’ motion. 11 In 2019, Gorrie and Dawson began discussing the possibility of IGD purchasing the 12 Farm. (Doc. 131 ¶¶ 12-14.) During those discussions, Gorrie represented to Dawson “that 13 she had the financial wherewithal to purchase the [Farm] and had the financing and 14 expertise to run a profitable hemp growing operation.” (Id. ¶ 16. See also id. ¶¶ 17-28 15 [describing various specific representations by Gorrie].) However, according to the 16 Stadtler Parties, those representations were false. For example, “Gorrie falsely represented 17 prior to closing that IGD had already filed all of the requisite forms for the Hemp license 18 and paid the filing fee to obtain this license.” (Id. ¶ 28.) Additionally, around January 13, 19 2020, “Gorrie showed Mr. Dawson a Bank of America account showing a $5 million 20 deposit that she misrepresented to Mr. Dawson was available to her . . . to purchase the 21 [Farm] and begin the Hemp Operation.” (Id. ¶ 31.) 22 Relying on Gorrie’s representations, on January 17, 2020, the Trust and IGD 23 executed the Farm Purchase Agreement, under which IGD would purchase the Farm for 24 $1.4 million. (Id. ¶¶ 34-35.) The Farm Purchase Agreement also provided that IGD would 25 pay $20,000 in “earnest money” upon signing and another $280,000 at closing. (Id. ¶ 34.) 26 IGD would then remit the remaining $1.1 million to the Trust “in payments according to 27 an agreed-upon payment schedule over 18 months.” (Id.) 28 Around the same time, Gorrie and Dawson met with several “Canadian Investors” - 74 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 75 of 111 1 in Arizona. (Id. ¶ 36.) Two of the investors “reaffirmed to Mr. Dawson that they would 2 provide several hundred thousand dollars to fund Ms. Gorrie and her entities’ acquisition 3 of the [Farm] and commencement of the Hemp Operation on the same terms that Ms. 4 Gorrie had previously represented to Mr. Dawson . . . could be performed.” (Id. ¶ 37.) 5 On January 27, 2020, one of the investors “wired $20,000[] to Pioneer Title as the 6 earnest money to be paid under the Farm Purchase Agreement.” (Id. ¶ 40.) However, the 7 investors ultimately did not invest “anywhere near the amount of money Ms. Gorrie had 8 misrepresented to Mr. Dawson . . . that they would.” (Id. ¶ 38.) 9 On February 6, 2020, Gorrie sent Dawson “evidence to show that . . . two ‘reps and 10 silent partners’ were ready to invest $5 million in the purchase of the [Farm]” and in the 11 hemp growing operations. (Id. ¶ 41.) 12 On February 10, 2020, “Gorrie represented that [the] investors ‘need us to close the 13 property and the fund will be build (sic) once we have a company running.’” (Id. ¶ 42. See 14 also id. ¶¶ 43-44 [alleging that Gorrie represented to Dawson that the investors “would not 15 be able to loan any funds to acquire the [Farm] and fund the Hemp Operation until after 16 closing”].) Therefore, Gorrie requested that “Stadtler lower the down payment for the 17 purchase of the [Farm]” to $60,000, with $240,000 due 30 days after closing, “so that her 18 investors would enough time to fund the remaining down payment for the purchase of the 19 [Farm] and capitalize the Hemp Operation so it could get off the ground in a prompt 20 manner.” (Id. ¶ 45.) 21 On February 11, 2020, relying on “Gorrie’s assertion that IGD had funding available 22 once the Parties closed on the [Farm],” “Stadtler agreed to sign an [Purchase] Addendum,” 23 which lowered the down payment to $60,000 and required IGD to pay an additional 24 $240,000 within 30 days of closing. (Id. ¶ 46.) 25 The same day, “Gorrie signed a Promissory Note Secured by Deed of Trust and the 26 Deed of Trust . . . with IGD as Payor and the Trust as Beneficiary” for $1.34 million. (Id. 27 ¶ 47.) Under the Promissory Note, $240,000 was due on March 27, 2020; another payment 28 was due on July 7, 2020, another on January 6, 2021, and the entire principal and interest - 75 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 76 of 111 1 were due on or before August 7, 2021. (Id. ¶ 48.) The same day, Gorrie and Stadtler signed 2 a “Supplement to Escrow Instructions,” under which “Gorrie agreed to personally 3 guarantee the Promissory Note.” (Id. ¶ 49.) 4 On February 18, 2020, “Gorrie forwarded an email from The Funding Ninjas stating 5 it could invest in IGD’s business if she would send documentation related to officers, 6 assets, [and] cash flow.” (Id. ¶ 51.) Gorrie stated: “This guy is serious. Needs this and 7 can close.” (Id.) However, she did not send the requested information to the Funding 8 Ninjas, who ultimately “never invested in IGD or NFOF.” (Id. ¶ 52.) 9 On February 21, 2020, one of the Canadian investors wired $30,000 to Pioneer Title 10 as part of the down payment for the Farm. (Id. ¶ 53.) On February 26, 2020, a different 11 Canadian investor wired another $10,000 to Pioneer Title, completing the $60,000 down 12 payment. (Id. ¶ 54.) 13 On February 27, 2020, “Gorrie made her sole monetary investment in the purchase 14 of the [Farm] by sending a Fry’s Food Store money order for $352.58 to Pioneer Title to 15 fund closing costs.” (Id. ¶ 55.) 16 The same day, the sale of the Farm closed and title was recorded in IGD’s name. 17 (Id. ¶ 56.) However, as of closing, neither IGD nor Gorrie had “a license to grow and 18 harvest hemp” or funding for the $240,000 payment (which was due at the end of March 19 2020). (Id. ¶¶ 57-58.) 20 On March 11, 2020, Gorrie told Dawson that “she had secured $20 million in 21 financing from a hard money lender called Main Street Lending.” (Id. ¶ 59.)60 However, 22 “[t]his funding never materialized.” (Id. ¶ 60.) 23 The Stadtler Parties allege that “[a]fter closing, it soon became clear Ms. Gorrie did 24 not know how to go about getting a Hemp Operation up and running.” (Id. ¶ 62.)61 “By 25 60 “Post-closing Mr. Dawson continued in his role as agent for Mr. Stadtler. All the 26 material conversations and material information Ms. Gorrie had or gave to Mr. Dawson throughout the post-closing were passed on in precise detail to Mr. Stadtler by Mr. 27 Dawson.” (Id. ¶ 61.) — 28 — — 61 — The SAC provides several examples illustrating Gorrie’s alleged lack of know-how. (See, e.g., id. ¶¶ 63-65.) - 76 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 77 of 111 1 mid-March, Ms. Gorrie and IGD had not secured liability insurance for the [Farm]” and 2 “Gorrie had no funding for IGD to make payments on the [Farm] or to fund the startup of 3 the Hemp Operation.” (Id. ¶¶ 65-66.) On March 15, 2020, Gorrie asked Dawson where 4 she could get a $200,000 loan. (Id. ¶ 67.) 5 “By the end of March 2020, Ms. Gorrie had defaulted on the Promissory Note by 6 failing to pay the $240,000[] within 30 days of closing.” (Id. ¶ 68.)62 7 “After she defaulted on the Promissory Note, Ms. Gorrie began to represent to Mr. 8 Dawson that she had entered into negotiations with a new investment group based in 9 Australia” that could “provide the full purchase price to acquire the [Farm] and capitalize 10 the Hemp Operation in the form of a loan.” (Id. ¶¶ 70, 72.) She “also represented that she 11 could obtain financing from a former State Senator Silver and/or investors associated with 12 him.” (Id. ¶ 71.) However, the Gorrie Parties “never secured funding from any source.” 13 (Id. ¶ 74.) 14 At the end of March 2020, “Gorrie’s then-attorney . . . drafted a proposed Revenue 15 Sharing Agreement between NFOF and the Trust for the Hemp Operation.” (Id. ¶ 75.) At 16 that time, NFOF was leasing the Farm from IGD for the hemp operation. (Id. ¶ 76.) On 17 April 10, 2020, IGD and the Trust executed the April 2020 RSA. (Id. ¶ 77.) The April 18 2020 RSA did not contain any language modifying the terms of the Farm Purchase 19 Agreement, Promissory Note, or Deed of Trust. (Id. ¶ 81.) The Stadtler Parties contend 20 that “[t]he Trust was not required to provide any consideration” under the April 2020 RSA. 21 (Id. ¶ 78.) Additionally, the agreement “did not require NFOF to actually generate any 22 revenue such that no performance by NFOF was actually required if the Hemp Operation 23 did not generate revenue.” (Id. ¶ 79.) 24 In July 2020, Gorrie told Dawson that she was communicating with “Senator Silver 25 and Charles Arnold of RBC Hemp,” both of whom were interested in investing in the hemp 26 operation, but that “she was reluctant to give Senator Silver or Mr. Arnold controlling — 27 — — 28 — — 62 — At that time, “Stadtler was undergoing treatment for an illness.” (Id. ¶ 69.) Therefore, he asked Dawson “to continue to help him with the [Farm].” (Id.) - 77 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 78 of 111 1 equity in the Hemp Operation.” (Id. ¶ 83.) 2 The Stadtler Parties allege that Gorrie convinced Dawson that “any minute[] she 3 would be getting funding to pay for the [Farm] and the Hemp Operation” by “forward[ing] 4 multiple introductory emails with possible lenders, investors, buyers, and business 5 channels as evidence she was about to sign a contract for financing” and also “Googled 6 potential avenues of funding and business and forward[ing] the ideas to investors and Mr. 7 Dawson.” (Id. ¶¶ 84-85.) However, “she never actually followed through or took the steps 8 necessary to make any of it happen.” (Id. ¶ 84.) “When Mr. Dawson pressed her for 9 information on why the funding was not forthcoming, Ms. Gorrie would claim either that 10 the investors wanted too big of a share, were frauds, or that the inquiry was disrespectful 11 and inappropriate.” (Id. ¶ 86.)63 At some point, “Gorrie began claiming that obtaining 12 funding was less important than obtaining purchase orders.” (Id. ¶ 88.) “This conduct 13 continued for the remainder of 2020, into January 2021, and beyond.” (Id. ¶ 91.) 14 “In late December 2020, the Hemp Operation was struggling.” (Id. ¶ 92.) “Gorrie 15 contacted Mr. Dawson regarding the possibility of obtaining additional funding from Mr. 16 Stadtler or the Trust.” (Id. ¶ 93.) She stated that if the operation had a successful crop, 17 “investors such as Senator Silver or the other groups of investors that Ms. Gorrie 18 represented she was in negotiations with during this time period would be more likely to 19 invest in the [Farm] and in the Hemp Operation.” (Id. ¶ 94.) “In other words, Ms. Gorrie 20 claimed she needed money to start a ‘showroom model’ of what she could grow,” and that 21 “if she could just get a ‘Model Home’ to display as evidence of her potential success,” 22 investors would provide funding and “she would be able to pay her debt.” (Id. ¶ 95.) In 23 pursuit of this goal, in January 2021, Gorrie asked Stadtler to fund the cost of starting hemp — 24 — — 25 — — 63 — Also, “Gorrie repeatedly misrepresented that the Hemp Operation was instrumental to her getting a visa to remain in the United State[s], that the expiration of her visa was 26 imminent, and that if she lost the Hemp Operation, she would not get another visa and would be deported.” (Id. ¶ 87.) “Whenever she had a disagreement with Mr. Dawson or 27 anyone else about the Property or Hemp Operations, she would claim the person was ‘destroying her visa’ or ‘in the way of my immigration’ or some other immigration-related 28 accusation.” (Id. ¶ 110.) However, “[a]ll of Ms. Gorrie’s assertions relating to her immigration status being linked to the Hemp Operation turned out to be false.” (Id. ¶ 90.) - 78 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 79 of 111 1 operations on a small three-acre parcel of the Farm, which would then serve as an “example 2 of success to show her purported investors and buyers.” (Id. ¶ 96.) 3 On January 10, 2021, IGD and Stadtler signed the Three Acre RSA, under which 4 IGD would provide “the land, management, purchase of seed, care, harvesting, and a UCC 5 1 lien on the crop ‘for cost of investment provided by Stadtler’” in exchange for a $75,000 6 line of credit from Stadtler. (Id. ¶¶ 97-98.) IGD would use the revenue generated by the 7 three-acre operation to repay the credit used. (Id. ¶ 98.) Pursuant to the Three Acre RSA, 8 “Stadtler loaned at least $75,000[] to IGD.” (Id. ¶ 106.) However, “IGD never registered 9 the requisite UCC 1 lien” and “never used any revenue generated from the three-acre Hemp 10 Operation to repay Mr. Stadtler.” (Id. ¶¶ 99-100.) 11 In conjunction with the Three Acre RSA, Stadtler and IGD also signed a Personal 12 Loan, under which Gorrie personally guaranteed Stadtler’s $75,000 loan to IGD. (Id. 13 ¶ 102.)64 Neither the Three Acre RSA nor the Personal Loan altered IGD’s obligations 14 under the Promissory Note. (Id. ¶¶ 101-05.) 15 By late April 2021, “Gorrie had yet to obtain a successful, commercially significant 16 yield” and “remained in default under the Promissory Note and Deed of Trust.” (Id. 17 ¶¶ 107-08.) 18 On May 11, 2021, after discussing (but not signing) a possible joint venture 19 agreement, IGD and Stadtler instead executed the Three Acre Addendum, which modified 20 the Three Acre RSA by, among other things, increasing the three acres to six acres, altering 21 the parties’ respective obligations (increasing IGD’s farming obligations and adding 22 another line of credit from Stadtler), and changing the distribution of profits going forward. 23 (Id. ¶¶ 111-17.) Like the Three Acre RSA, the Three Acre Addendum did not change the 24 parties’ obligations under the original Promissory Note and Deed of Trust. (Id. ¶¶ 118-19.) 25 Ultimately, “Gorrie, IG and NFOF defaulted on every agreement they signed with 26 Mr. Stadtler and the Trust.” (Id. ¶ 120.) The only payment the Gorrie Parties made was 27 the original $60,000 down payment for the Farm in February 2020. (Id. ¶ 121.) 28 64 Dawson also signed the Personal Loan as a guarantor. (Id. ¶ 103.) - 79 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 80 of 111 1 On July 6, 2021, “Pioneer Title sent a default notice to . . . Gorrie under the 2 Promissory Note and Deed of Trust.” (Id. ¶ 122.) 3 Based on these allegations, the Stadtler Parties assert six claims against the Gorrie 4 Parties: (1) breach of the Three Acre RSA and Personal Loan, as amended by the Three 5 Acre Addendum; (2) breach of Gorrie’s personal guarantee of the Personal Loan; (3) unjust 6 enrichment; (4) fraudulent inducement; (5) negligent misrepresentation; and 7 (6) conversion/replevin. (Id. ¶¶ 123-72.) 8 B. Legal Standard 9 A motion for judgment on the pleadings under Rule 12(c) is “functionally identical” 10 to a Rule 12(b)(6) motion to dismiss. Cafasso, 637 F.3d at 1054 -55 n.4. Therefore, a Rule 11 12(c) motion “is properly granted when, taking all the allegations in the non-moving 12 party’s pleadings as true, the moving party is entitled to judgment as a matter of law.” 13 Fajardo v. Cty. of L.A., 179 F.3d 698, 699 (9th Cir. 1999). “For purposes of the motion, 14 the allegations of the non-moving party must be accepted as true, while the allegations of 15 the moving party which have been denied are assumed to be false.” Hal Roach Studios, 16 Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1550 (9th Cir. 1989). 17 C. Analysis 18 1. Counts One And Two 19 Count One alleges that IGD “breached the Three Acre RSA, Personal Loan, and the 20 [Three Acre] Addendum by failing to pay amounts due and owing.” (Doc. 131 ¶ 125.) 21 Gorrie, who “personally guaranteed the Personal Loan,” is “responsible for all obligations 22 under these agreements.” (Id. ¶ 126.) Count Two alleges that Gorrie breached her personal 23 guarantee of the Personal Loan and the Promissory Note. (Id. ¶¶ 129-32.) 24 The Gorrie Parties contend that Counts One and Two fail because the Three Acre 25 Addendum released them from claims arising under any prior agreements between the 26 parties. (Doc. 136 at 14.) More specifically, they argue the Three Acre Addendum 27 operated as a forbearance agreement, tying “repayment . . . of the amounts due for the Farm — 28 — - 80 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 81 of 111 1 to the outcome of the joint venture entered into between the parties.” (Id.)65 2 This argument turns on the meaning of the Three Acre Addendum—specifically, on 3 whether the Three Acre Addendum extinguished the parties’ obligations under the Three 4 Acre RSA, Personal Loan, and Promissory Note. “Under Arizona law, contracts are to be 5 given a reasonable construction and read in light of the parties’ intentions as reflected by 6 their language and in view of all circumstances.” Chopin v. Chopin, 232 P.3d 99 , 101 7 (Ariz. Ct. App. 2010) (internal quotation marks omitted.) Although contract interpretation 8 is a question of law, the contracting parties’ intent is question of fact left to the factfinder. — 9 — Id. at 102 . 10 On a motion for judgment on the pleadings, before accepting the Stadtler Parties’ 11 allegations about the parties’ intent, the Court must consider whether the Three Acre 12 Addendum is reasonably susceptible to the interpretation offered through such allegations. 13 Travelers Indem. Co. v. Crown Corr, Inc., 2011 WL 6780885 , *6 (D. Ariz. 2011), aff’d on 14 other grounds, 589 F. App’x 828 (9th Cir. 2014) (“If the Court finds that the writing is 15 ‘reasonably susceptible’ to the interpretation suggested by those allegations, the Court may 16 consider whether that interpretation could entitle the Plaintiff to relief in deciding a motion 17 to dismiss.”). If the Court determines that the written language is not susceptible of the 18 meaning asserted, “[d]ismissal of any claims depending solely upon such an interpretation 19 is appropriate because the proponent ‘would not be entitled to relief under any 20 interpretation of the facts ‘susceptible of proof.’” Long v. Cty. of Glendale, 93 P.3d 519 , 21 528 (Ariz. Ct. App. 2004). 22 The following allegations provide context. According to the Stadtler Parties, in 23 January 2021, when the hemp operation was struggling, Gorrie asked about the possibility 24 of obtaining additional funding from Stadtler. (Doc. 131 ¶¶ 92-93.) She represented that — 25 — — 26 — — 65 — The Gorrie Parties also argue that the April 2020 RSA “only required payment once net revenue had been earned, a condition that [the Stadtler Parties] did not plead, and 27 indeed, could not, because the [Three Acre Addendum] demonstrated had not occurred and that this was no party’s fault.” (Doc. 136 at 14.) The significance of this point is unclear 28 because the Stadtler Parties no longer assert that the Gorrie Parties breached the April 2020 RSA. (See generally Doc. 131.) - 81 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 82 of 111 1 a successful crop could serve as a “showroom model” that would attract other investors so 2 that “she would be able to pay her debt.” (Id. ¶¶ 94-95.) Therefore, she requested that 3 Stadtler fund the starting costs for a hemp operation on three acres of the property. (Id. 4 ¶ 96.) On January 10, 2021, IGD and Stadtler executed the Three Acre RSA. (Id. ¶ 97.) 5 Under that agreement, IGD would provide “the land, management, purchase of seed, care, 6 harvesting, and a UCC 1 lien on the crop.” (Id. ¶ 98.) In return, Stadtler would provide a 7 $75,000 line of credit to IGD. (Id.) The Three Acre RSA required IGD to first repay 8 Stadtler and then any remaining revenue would be split between the parties. (Id.) The 9 Stadtler Parties also allege that, in conjunction with the Three Acre RSA, “IGD and Mr. 10 Stadtler personally signed a ‘Personal Loan and Agreement’ pursuant to which Ms. Gorrie 11 agreed to personally guarantee Mr. Stadtler’s interest-free loan to IDG of $75,000.[]” (Id. 12 ¶ 102.) “The Personal Loan . . . only related to the Three Acre RSA” and was personally 13 guaranteed by Gorrie and Dawson. (Id. ¶¶ 103-04.) As for the Three Acre Addendum, the 14 Stadtler Parties contend it amended the Three Acre RSA in the following ways: (1) the 15 three acres increased to six acres; (2) “IGD’s obligations increased to include curing of the 16 flower of the hemp plant”; and (3) the distribution of profits changed such that the $75,000 17 loan from Stadtler would be repaid first, and as for the remaining revenue, 25% would go 18 to Stadtler, 50% to IGD, and 25% toward the outstanding balance due under the Farm 19 Purchase Agreement. (Id. ¶ 117.) Under the Three Acre Addendum, Stadtler agreed to 20 extend another line of credit (up to $60,000), but only if “he agreed such funds were 21 necessary to the Hemp Operations.” (Id.) The Three Acre Addendum did not amend any 22 other agreement between the parties. (Id. ¶¶ 118-19.) From these allegations, the Stadtler 23 Parties suggest the following interpretation—the Three Acre Addendum altered certain 24 terms of the Three Acre RSA, but it did not affect any legal claims arising from prior 25 agreements between the parties and did not affect the terms of any agreement between the 26 parties other than the Three Acre RSA. (Doc. 142 at 10-11.) 27 The language of the Three Acre Addendum is reasonably susceptible to this 28 meaning. The agreement is entitled “Addendum to the Original Personal Loan and - 82 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 83 of 111 1 Agreement, Revenue Sharing Agreement between Pamela J. Gorrie dba Innovative Global 2 Distribution LLC (the Borrower) and Dan Stadtler (the Lender) executed January 14, 2021 3 between the parties.” (Doc. 17-7 at 2.)66 Immediately below the title, the Three Acre 4 Addendum provides: “The following changes shall be made to the above mentioned 5 agreements, this Addendum shall supersede only those parts of the original agreements 6 dealing with the changes contained in this Addendum.” (Doc. 17-7 at 2.) Thus, it clearly 7 provides that the agreement is intended to alter only the Three Acre RSA and Personal 8 Loan.67 Also, although the Three Acre Addendum acknowledges that the lack of revenue 9 generated by the original three-acre crop is neither Stadtler’s fault nor IGD’s fault, it does 10 not discuss legal claims arising under other agreements between the parties. (Id. [“There 11 has been no fault from Dan Stadtler to fund the amount that was agreed to between the 12 parties for the first 3 acre crop. . . . There has been no fault by IGD LLC, to continue in a 13 good and fair husbandry manner to grow the desired crop, abnormally high weather 14 temperatures were a major factor in the failure of the seedlings. IGD LLC, chose to slow 15 down in its final planting schedule in the greenhouse in order to correct a few problems 16 with the greenhouse which led to some failure of the hemp plants to grow successfully. 17 This has been corrected and new planting have resumed in the greenhouse.”].)68 18 Because the Three Acre Addendum is reasonably susceptible of the interpretation 19 suggested by the Stadtler Parties, the Court next turns to whether that interpretation would 20 entitle the Stadtler Parties to relief. In Count One, the Stadtler Parties allege that IGD and — 21 — — 66 — The Farm Purchase Agreement, Purchase Addendum, and the Promissory Note 22 were executed by IGD and the Trust, not Stadtler; they were also executed in 2020, not 2021. (Doc. 131 ¶¶ 35, 46-47.) 23 67 The Three Acre Addendum also states: “Once the loan from Stadtler has been repaid 24 the remaining money from the sales of the hemp shall be divided in the following manner, 25% of the remaining sales of the hemp product shall be paid directly to Stadtler. 75% of 25 the remaining sales of the hemp product shall be split in two ways, 50% shall go directly to Pamela J. Gorrie dba IGD LLC, 25% of the remaining sales of the hemp product shall 26 be paid to Pioneer Title Agency Collections Dept. to be credited towards the remaining outstanding balance on the [Farm].” (Doc. 17-7 at 3.) 27 68 This language is difficult to square with the Gorrie Parties’ position that the Three 28 Acre Addendum made it unreasonable for the Stadtler Parties to believe that Gorrie had any hemp-growing expertise. - 83 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 84 of 111 1 Gorrie breached the Three Acre RSA, Personal Loan, and Three Acre Addendum by failing 2 to obtain a UCC lien and failing to pay the amounts due under the three agreements. (Doc. 3 131 ¶¶ 98-99, 125.) Under the Stadtler Parties’ interpretation of the Three Acre 4 Addendum, these allegations are sufficient to state a claim for relief. Similarly, in Count 5 Two, the Stadtler Parties allege Gorrie breached her personal guarantee of the Personal 6 Loan and the Promissory Note by failing to pay the Stadtler Parties the money due under 7 those documents. (Id. ¶¶ 130-32.) These allegations, assumed true, are also sufficient to 8 state a claim under the Stadtler Parties’ interpretation of the Three Acre Addendum. 9 Accordingly, the Court denies the Gorrie Parties’ motion for judgment on the 10 pleadings as to Counts One and Two. 11 2. Count Three 12 Count Three alleges that the Gorrie Parties have been unjustly enriched, to the 13 Stadtler Parties’ detriment, in several ways: (1) owning and using the Farm for two years 14 without making payments toward its purchase price; (2) taking over $100,000 in funding 15 from Stadtler; and (3) selling farm equipment owned by Stadtler and keeping the proceeds. 16 (Doc. 131 ¶¶ 134-39.) 17 The Gorrie Parties contend that Count Three is not based on a cognizable legal 18 theory because “the myriad contracts entered into between the parties under which the 19 [Stadtler Parties] sought payment under the Farm Purchase Documents . . . remove the 20 analysis of this matter as an equitable matter and render this matter of contractual 21 interpretation.” (Doc. 136 at 16.) In response, the Stadtler Parties argue that “the request 22 for relief does not only arise from agreements but also through the [Gorrie Parties’] 23 conversion of [the Stadtler Parties’] property as asserted in Count 6.” (Doc. 142 at 11.)69 24 “To recover under a theory of unjust enrichment, a plaintiff must demonstrate five 25 elements: (1) an enrichment, (2) an impoverishment, (3) a connection between the 26 enrichment and impoverishment, (4) the absence of justification for the enrichment and 27 69 Count Six alleges the conversion of personal property owned by Stadtler and farm 28 equipment “paid out of Ms. Gorrie’s accounts using Mr. Stadtler’s funds.” (Doc. 131 ¶¶ 162-70.) - 84 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 85 of 111 1 impoverishment, and (5) the absence of a remedy provided by law.” Freeman v. Sorchych, — 2 — 245 P.3d 927, 936 (Ariz. Ct. App. 2011). Here, the Gorrie Parties argue that the fifth 3 element is not fulfilled because the parties’ relationship is governed by various express 4 contracts. See, e.g., Trustmark Ins. Co. v. Bank One, Arizona, NA, 48 P.3d 485 , 492 n. 5 5 (Ariz. App. Ct. 2002) (noting that the “absence of a legal remedy” element is controlled by 6 whether there is a contract governing the parties’ relationship). 7 The Court agrees with the Stadtler Parties that, to the extent their unjust enrichment 8 claim arises from the conversion of Stadtler’s personal property, it is not governed by a 9 contract. However, Count Three also alleges unjust enrichment based on “the benefit of 10 the ownership and use of the [Farm]” and the receipt of over $100,000 in funding from 11 Stadtler. Taking the allegations in the SAC as true, the Farm Purchase Agreement and 12 Three Acre RSA (and Three Acre Addendum) governed the Gorrie Parties’ possession of 13 the Farm and the funding provided by Stadtler. (See, e.g., Doc. 131 ¶¶ 34-36, 46-50, 14 124-28.) 15 Nevertheless, even though Count Three seems based in part on subject matters 16 covered by agreements between the parties, it may proceed as an alternative theory of 17 recovery at this stage of the litigation. Although Arizona law precludes recovery on an 18 unjust enrichment claim where a valid and enforceable contract governs the subject matter 19 of the lawsuit, Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401 , 408-09 20 (9th Cir. 1992), under Rule 8(e), a plaintiff may plead unjust enrichment as an alternative 21 theory of recovery if the plaintiff has not already received the benefit of the bargain, 22 Isofoton, S.A. v. Giremberk, 2006 WL 1516026 , *3-4 (D. Ariz. 2006) (“The mere existence 23 of a contract governing the dispute does not automatically invalidate an unjust enrichment 24 alternative theory of recovery.”); Summers v. Gloor, 368 P.3d 930, 934 (Ariz. Ct. App. 25 2016) (“Here, however, the jury apparently rejected [Gloor’s] claim that the loan contract 26 contemplated repayment in-kind. The parties’ relationship relative to the bakery product 27 was therefore not governed by any contract, and Gloor was entitled to seek equitable relief 28 as an alternative.”); U.S. Bank Nat’l. Ass’n. v. Casa Grande Reg’l Med. Ctr., 2006 WL - 85 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 86 of 111 1 1698288, *6 (D. Ariz. 2006) (“[A]n unjust enrichment claim may be brought in the 2 alternative, subject to a single recovery, so long as the unjust enrichment claim does not 3 seek to relieve the plaintiff of the effects of an express provision in the contract.”). Here, 4 the Stadtler Parties allege that they have not received the benefit of their bargains. (See, 5 e.g., Doc. 131 ¶¶ 120-21 [“With the exception of the illusory and unenforceable [April 6 2020 RSA], Ms. Gorrie, IGD and NFOF defaulted on every agreement they signed with 7 Mr. Stadtler and the Trust. . . . The only sum [the Gorrie Parties] paid [the Stadtler Parties] 8 was the original February 2020 down payment . . . .”].). 9 3. Counts Four And Five 10 Count Four is a claim for fraudulent inducement. The Stadtler Parties allege that 11 the Gorrie Parties made various material misrepresentations on which the Stadtler Parties 12 relied when taking various actions with respect to the hemp operations, such as agreeing to 13 seller carryback financing for the Farm and lending equipment and money to NFOF. (Doc. 14 131 ¶¶ 140-55.) Count Five, which is a claim for negligent misrepresentation, arises from 15 similar allegations. (Id. ¶¶ 156-61.) 16 a. Economic Loss Rule 17 The Gorrie Parties contend that Counts Four and Five are barred by the ELR. (Doc. 18 136 at 8-10.) Perhaps recognizing the tension between this argument and their previous 19 assertion that the ELR does not bar their fraudulent inducement counterclaim (see Doc. 90 20 at 11), the Gorrie Parties seek to distinguish the Stadtler Parties’ fraudulent inducement 21 and negligent misrepresentation claims by arguing that Counts Four and Five request 22 damages that “mirror the damage claims for the alleged breach of contract.” (Doc. 136 at 23 9.) In Count Four, the Stadtler Parties allege that they made certain decisions in reliance 24 on the Gorrie Parties’ misrepresentations, such as transferring title of the Farm to IGD and 25 lending funds to NFOF, and that these decisions caused the Stadtler Parties to suffer losses 26 “in a sum to be determined at trial.” (Doc. 131 ¶¶ 140-46, 155.) Count Five alleges similar 27 facts. (Id. ¶¶ 156-61.) 28 On the one hand, the Gorrie Parties’ position is not frivolous. Unlike the Gorrie - 86 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 87 of 111 1 Parties’ fraudulent inducement counterclaim, which alleges damages distinct from the 2 subject matter of the agreements between the parties (specifically, the loss of the Vermont 3 Purchase Orders) (Doc. 77 at 20 ¶ 90), the Stadtler Parties allege unspecified “losses” from 4 their transactions with the Gorrie Parties. It is possible these alleged damages are limited 5 to the risks the parties contracted for in their various agreements. If so, as compared to the 6 Gorrie Parties’ fraudulent inducement claim, there is a stronger argument that Counts Four 7 and Five would be barred by the ELR. Cook, 258 P.3d at 153 (“[T]he contract law policy 8 of upholding the parties’ expectations favor limiting the Cooks’ claims to those in contract 9 and, where there has been no injury besides that to the subject property, there is no strong 10 policy reason to impose tort liability. . . . Because the Cooks are seeking remedies for 11 purely economic loss from Orkin’s alleged failure to adequately perform its promises under 12 the Agreement, the ELR bars their tort claims.”). On the other hand, construing the 13 pleadings in the light most favorable to the Stadtler Parties, it is not clear that the damages 14 alleged in Counts Four and Five were bargained for by the parties. Also, as discussed 15 supra, although the scope of the ELR is “hazy,” Firetrace USA, 800 F. Supp. 2d at 1050 , 16 courts in Arizona have generally declined to apply the ELR to claims alleging fraudulent 17 inducement or negligent misrepresentation, reasoning that the policy underlying the ELR 18 does not support limiting parties to contractual remedies that were created by 19 misrepresentations. See, e.g., BMO Harris Bank NA, 2022 WL 4781944 at *12; Barrett20 Jackson Auction, 2020 WL 9349176 at *3-4; Martin, 2018 WL 2431837 at *7; Maki, 2016 21 WL 11474775 at *4; Jes Solar, 2015 WL 10943562 at *5. See also Miidas Greenhouses, 22 LLC v. Glob. Horticultural, Inc., 244 P.3d 579, 582 (Ariz. Ct. App. 2010) (under Flagstaff 23 Affordable Housing, the “different policies . . . served by tort and contract law . . . should 24 serve as the bases for determining when a party should be entitled to seek tort remedies 25 and when the party should be limited to contract remedies” by the ELR). 26 The Court acknowledges that in the case cited by the Gorrie Parties, CIT Fin. LLC 27 v. Treon, Aguirre, Newman & Norris PA, 2016 WL 6610604 (D. Ariz. 2016), the court 28 applied the ELR to bar a fraudulent inducement claim. However, the CIT Finance court - 87 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 88 of 111 1 also noted that the ELR is not a per se rule precluding tort liability—“rather, a court must 2 examine each case to determine whether ‘the facts preponderate in favor of the application 3 of tort law or commercial law exclusively or a combination of the two.’” Id. at *5. There, 4 the defendants allegedly misrepresented the “the quality and capabilities of the equipment” 5 covered by the parties’ contract. Id. Noting that “[t]his allegation is indistinguishable from 6 the allegation underlying Plaintiff’s breach of contract claim,” the court found that the 7 contract claims predominated and thus, the ELR barred the tort claims. Id.70 In contrast, 8 here the alleged misrepresentations giving rise to the tort claims are distinguishable from 9 the allegations underlying the Stadtler Parties’ contract claims. (Compare Doc. 131 10 ¶¶ 123-25 [alleging that IGD breached the Three Acre RSA, Personal Loan, and Three 11 Acre Addendum by “failing to pay amounts due and owing”] with id. ¶¶ 140-54 [alleging 12 the Gorrie Parties mispresented that “although funding from the prior investors had not 13 materialized, they had other funding sources including hard money lenders and other 14 investors,” that “they were competent to run Hemp Operation and knew how to run such a 15 business,” and that they had “relationships within the pharmaceutical industry . . . [and] 16 and relationships with alleged investors, lenders, the Australian Investment Group, 17 Canadian Investors, and the Silverman Investment Group”].)71 Assuming the truthfulness 18 of the Stadtler Parties’ allegations, this case is more analogous to Jes Solar, where the 19 plaintiff sought “damages directly related to losses caused by fraudulent misrepresentations 20 made by the Defendants which induced the Plaintiffs to enter into contractual agreements 21 and to perform, pursuant to provisions of those contracts, which caused them economic 22 losses.” 2015 WL 10943562 at *5. The Jes Solar court found that the ELR did not bar the 23 plaintiffs’ fraudulent inducement claim because “[f]raud is not a loss to be bargained for — 24 — — 70 — 25 But see KD & KD Enterprises, LLC v. Touch Automation, LLC, 2006 WL 3808257 , *2 (D. Ariz. 2006) (“Fraud and contract claims are independent and compatible even when 26 the fraudulent allegations concern the quality and characteristics of goods.”). — 27 — — 71 — See also Morris v. Achen Const. Co., 747 P.2d 1211, 1213 (Ariz. 1987) (“It is clear that the tort of fraudulently inducing one to enter into a contract can be committed without 28 there also being a breach of the contract itself. Indeed, the tort of fraudulent inducement would necessarily be completed before a breach of the contract could occur.”). - 88 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 89 of 111 1 by contracting parties.” Id. Similarly, here, taking the allegations in the SAC as true, the 2 risk of the alleged misrepresentations was not bargained for or allocated in the agreements. 3 See also Barrett-Jackson Auction, 2020 WL 9349176 at *4 (“The Court is unconvinced 4 that the Arizona Supreme Court would expand the doctrine’s applicability to include fraud 5 and negligent misrepresentation done to induce a party to enter a contract given Arizona’s 6 ‘narrower’ approach to the doctrine.”); Maki, 2016 WL 11474775 at *4 (“Plaintiff argues 7 that his claim does not arise out of the contract, but out of the allegedly fraudulent 8 misrepresentations that induced him to enter into the contract. This Court has specifically 9 addressed this type of fraud claim and held that it is not precluded by the economic loss 10 doctrine.”); KD & KD Enterprises, 2006 WL 3808257 at *2 (“The key rationale underlying 11 the economic loss doctrine presupposes that there has been a fair and equitable negotiation 12 of the allocation of risk between the parties. . . . Fraudulent misrepresentation, however, 13 undermines the ability of parties to negotiate freely, and therefore negates the presumption 14 that an equitable negotiation has occurred. It is unreasonable to restrict a party to 15 contractual limitations of liability when fraudulent representations resulted in an unequal, 16 unfair bargaining process. In such a situation the traditional concern of tort law prevails— 17 protecting society from an unreasonable risk of harm.”). 18 The Gorrie Parties also argue that the ELR bars Counts Four and Five because the 19 Stadtler Parties had a contractual remedy under the Purchase Addendum, which “provided 20 for all contingencies” and existed “irrespective of whether the promise to pay was 21 intentionally fraudulent,” if IGD failed to pay the $240,000 within 30 days of closing. 22 (Doc. 136 at 9-10.) As relevant here, the Purchase Addendum provides: “Buyer 23 understands and is aware that if the Buyer meets a portion of the terms and conditions 24 contained in line 7, but fails to fulfill all the terms and conditions therein without an 25 agreement between Buyer & Seller for any extensions of time, Seller shall have the right 26 to cancel this sale and the Buyer will for fit [sic] all monies paid to the Seller.” (Doc. 1727 3 at 2 ¶ 9.) Line 7 reads: “Buyer and Seller have agreed to change the amount of down 28 payment money required to close escrow on this purchase contract to be $60,000[]. Buyer - 89 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 90 of 111 1 shall be required to deposit an additional $240,000[] within 30 days from close of escrow 2 which will complete the down payment required under the original [Farm Purchase 3 Agreement] . . . .” (Id. at 2 ¶ 7.) 4 As a factual matter, the provision allowing the Trust to cancel the sale if IGD failed 5 to timely pay the $240,000 does not establish that the Stadtler Parties had a contractual 6 remedy for any and all misrepresentations by Gorrie. The Stadtler Parties allege that they 7 continued to detrimentally rely on misrepresentations by Gorrie as the business relationship 8 progressed, long after the 30-day cancellation window had closed. (See, e.g., Doc. 131 9 ¶¶ 147-51 [alleging that the Gorrie Parties misrepresented their ability to pay for the Farm 10 according to the timeline set forth in the Promissory Note and Deed of Trust, their ability 11 to qualify for loans, the extent to which investors were seriously interested in financing the 12 hemp operation, and their experience and qualifications to run a hemp operation].) In other 13 words, the Stadtler Parties allege that the Trust decided to refrain from exercising its 14 contractual right to cancel the sale (and chose to enter into other agreements with the Gorrie 15 Parties) because Gorrie continued to misrepresent both her ability to establish and run a 16 hemp operation and the availability of funding. Thus, the fact that the Trust could have 17 cancelled the sale upon IGD’s failure to pay $240,000 within 30 days of closing does not 18 establish that Counts Four and Five are barred by the ELR. 19 b. Reasonable Reliance 20 Next, the Gorrie Parties contend that the “proof of funds” upon which Stadtler 21 allegedly relied when executing the Farm Purchase Agreement “does not even begin to 22 meet anything a reasonable person would rely on to close a sale, and therefore the 23 reasonable reliance standard is not met.” (Doc. 136 at 10-11. See also id. at 11 [describing 24 the document as an “obvious scam”].) Also, they assert that neither IGD nor Gorrie 25 transmitted the document to Stadtler. (Id.) In response, the Stadtler Parties argue that “not 26 only is reasonableness of reliance a question of fact . . . , but the referenced document . . . 27 is not the only document [the Stadtler Parties] include to demonstrate the multiple 28 falsehoods told by Ms. Gorrie . . . to induce [the Stadtler Parties] to enter into the - 90 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 91 of 111 1 agreements.” (Doc. 142 at 8.) 2 The “proof of funds” is a reference to paragraph 142 of the SAC, which alleges that 3 before entering into the Farm Purchase Agreement, Gorrie showed Stadtler and Dawson 4 “bank statements showing a deposit of $5 million, and a loan contract from ‘silent partners’ 5 for $5 million and represented to [the Stadtler Parties] that these were evidence they had 6 funding ready and available to purchase the [Farm].” (Doc. 131 ¶ 142.) This is one of a 7 number of alleged funding-related misrepresentations by the Gorrie Parties that give rise 8 to Count Four. (See id. ¶¶ 140-51.) 9 “A fraud claim requires justifiable reliance on the misrepresentation.” Gray v. 10 Shaw, 2007 WL 5439746 , *5 (Ariz. Ct. App. 2007). See also St. Joseph’s Hosp. & Med. 11 Ctr. v. Rsrv. Life Ins. Co., 742 P.2d 808, 813 (Ariz. 1987) (noting that Arizona follows the 12 definition of negligent misrepresentation provided by the Restatement (Second) of Torts 13 § 552, which describes “liability for pecuniary loss caused to them by their justifiable 14 reliance upon the information”). 15 The Stadtler Parties are correct that reasonableness of reliance is generally “a 16 question of fact for the jury.” Pluto Properties, LLC v. Hendricks & Partners, Inc., 2009 17 WL 3644803 , *3 (Ariz. Ct. App. 2009). But see id. (“When the facts are undisputed, 18 however, the court may determine as a matter of law whether a party was justified in relying 19 upon a representation.”). Moreover, the Stadtler Parties allege numerous other 20 misrepresentations by Gorrie to support their claims for fraudulent inducement and 21 negligent misrepresentation. (See, e.g., Doc. 131 ¶ 141 [alleging the Gorrie Parties 22 misrepresented that they were able and intended to perform under the Farm Purchase 23 Agreement, Promissory Note, Deed of Trust, and Purchase Addendum]; id. ¶ 143 (alleging 24 the Gorrie Parties misrepresented that “they had other funding sources including hard 25 money lenders and other investors lined up”]; id. ¶ 144 [alleging that the Gorrie Parties 26 misrepresented that “they were competent to run Hemp Operation and knew how to run 27 such a business”].) Thus, the Stadtler Parties’ fraudulent inducement and negligent 28 misrepresentation claims do not turn on whether reliance on the “proof of funds” document - 91 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 92 of 111 1 was justified. 2 c. Rule 9(b) 3 The Gorrie Parties also seek to dismiss Counts Four and Five on the ground that the 4 Stadlter Parties failed to adequately plead the elements of fraud with particularity as 5 required by Rule 9(b). (Doc. 136 at 11.) 6 As noted elsewhere, a fraudulent inducement claim requires “(1) a representation; 7 (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of 8 its truth; (5) the speaker’s intent that it be acted upon by the recipient in the manner 9 reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s reliance 10 on its truth; (8) the hearer’s right to rely on it; [and] (9) the hearer’s consequent and 11 proximate injury.” Duncan, 507 P.3d at 514-15. Meanwhile, “[a] person may be liable for 12 negligent misrepresentation if he fails to exercise reasonable care and competence in 13 obtaining or communicating information and thereby, in the course of his business or 14 employment, provides false information for the guidance of others in their business 15 transactions, causing the recipients of the information to incur damages because they 16 justifiably relied on the false information.” PLM Tax Certificate Program 1991-92, L.P. 17 v. Schweikert, 162 P.3d 1267, 1270 (Ariz. Ct. App. 2007). Federal rules require that the 18 circumstances constituting fraud be stated “with particularity.” Fed. R. Civ. P. 9(b). See 19 also Van Go, 2016 WL 4974968 at *3 (“Where a plaintiff alleges fraud or 20 misrepresentation, Rule 9(b) imposes heightened pleading requirements. While malice, 21 intent, knowledge, and other conditions of mind may be alleged generally, the 22 circumstances constituting fraud must be pled with particularity.”).72 23 The Gorrie Parties argue that the SAC is marred by the following defects: (1) the 24 72 The Gorrie Parties assert, and the Stadtler Parties don’t seem to dispute, that claims 25 for negligent misrepresentation are, like claims for intentional misrepresentation and fraud, subject to Rule 9(b)’s heightened pleading requirements. Even though this issue may be 26 more complicated than the parties’ briefing lets on, the Court will assume that the Gorrie Parties are correct. Casey v. Wright Med. Tech., Inc., 2020 WL 736306 , *4-5 (D. Ariz. 27 2020) (noting that “[w]hether Rule 9(b) applies to negligent misrepresentation claims is an issue that has divided numerous courts of appeals” and that “district courts in the Ninth 28 Circuit have issued conflicting rulings”); Sweeney v. Darricarrere, 2009 WL 2132696 , *12 n.109 (D. Ariz. 2009) (same) - 92 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 93 of 111 1 SAC does not demonstrate that the Gorrie Parties knew the alleged misrepresentations were 2 false; (2) the SAC offers only conclusory allegations as to whether the Gorrie Parties did 3 not intend to perform under the Farm Purchase Agreement; (3) the SAC doesn’t allege that 4 the Stadtler Parties were ignorant of the alleged misrepresentations’ falsity; (4) the SAC 5 doesn’t specify “who made the allegedly offending representations”; (5) to the extent 6 Counts Four and Five are alleged against NFOF and NFF, the SAC fails to allege sufficient 7 facts demonstrating fraud and, as to the Farm Purchase Agreement specifically, NFOF did 8 not exist at the time the contract was executed; and (6) to the extent Counts Four and Five 9 rely on the Three Acre Addendum, the plain language of the agreement demonstrates that 10 “it would have been entirely unreasonable for [the Stadtler Parties] to have relied on [the 11 Gorrie Parties’] professed expertise on running a hemp operation.” (Doc. 136 at 12-14.) 12 The Court will address each alleged defect in turn.73 13 First, the Gorrie Parties argue that paragraphs 141 and 142 of the SAC, specifically, 14 “do not meet element (4) of fraudulent inducement because [the Stadtler Parties] simply 15 stated that IGD and Gorrie did not intend to pay without more specificity as to why [the 16 Stadtler Parties] believe that to be the case.” (Doc. 136 at 12-13.) As noted, the fourth 17 element of a fraudulent inducement claim requires a plaintiff to prove “the speaker’s 18 knowledge of its falsity or ignorance of its truth.” Duncan, 507 P.3d at 515. Paragraphs 19 141 and 142 of the SAC allege that the Gorrie Parties “materially misrepresented to [the 20 Stadtler Parties] that they could and would pay for the [Farm] under the terms contemplated 21 in the Farm Purchase Agreement and addenda thereto, Promissory Note or Deed of Trust” 22 and the Gorrie Parties “showed [the Stadtler Parties] and Mr. Dawson, inter alia, bank 23 statements showing a deposit of $5 million, and a loan contract from ‘silent partners’ for 24 $5 million and represented to [the Stadlter Parties] that these were evidence they had 25 funding ready and available to purchase the [Farm].” (Doc. 131 ¶¶ 141-42.) The Gorrie — 26 — — 73 — 27 The Court notes that not all of these alleged defects seem to implicate Rule 9(b). At any rate, because the Gorrie Parties group all of these challenges together under the 28 assertion “each fraudulent inducement claim fails to plead all elements with particularity” (Doc. 136 at 12), the Court will follow the same organizational structure here. - 93 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 94 of 111 1 Parties’ characterization of these allegations as “simply stat[ing] that IGD and Gorrie did 2 not intend to pay” (Doc. 136 at 12-13) is somewhat confusing. But more important, even 3 assuming the Stadtler Parties did not make specific allegations explaining why they believe 4 Gorrie never intended to perform under the Farm Purchase Agreement, the absence of such 5 allegations is not fatal to their fraudulent inducement claim. The SAC alleges that Gorrie 6 made numerous misrepresentations about her funding, the extent to which her residency 7 relied on the success of the hemp operation, what she intended to do after IGD obtained 8 title to the Farm, and whether IGD had already completed the application process for a 9 hemp license. (See, e.g., Doc. 131 ¶¶ 17-31.) The SAC also alleges the Gorrie Parties 10 knew that they did not have the funding required to adhere to the payment schedule in the 11 Farm Purchase Agreement, knew they would not qualify for loans that would cover those 12 amounts, and knew that Gorrie did not have the experience or qualifications to run a 13 successful hemp operation. (Id. ¶¶ 148-51.) Taking these allegations as true, the SAC 14 clearly alleges that Gorrie knew her representations were false and thus sufficiently pleads 15 the fourth element of fraudulent inducement. Although a fraud claim can arise from a 16 contracting party’s misrepresentation that she intended to perform under an agreement, 17 such an allegation is not a required element of the claim. See, e.g., McAlister v. Citibank 18 (Ariz.), a Subsidiary of Citicorp, 829 P.2d 1253, 1260 (Ariz. Ct. App. 1992) (“Fraud can 19 be based upon unfulfilled promises or expressions concerning future events only if 20 statements regarding those events ‘were made with the present intent not to perform.’”) 21 (citation omitted). Further, in the Court’s view, the allegations that Gorrie knew she did 22 not have and could not obtain sufficient funding and did not have the expertise to run the 23 hemp operation allow for a plausible inference that the Gorrie Parties did not intend to 24 perform under the relevant agreements. 25 Second, as for the Farm Purchase Agreement, the Gorrie Parties contend that the 26 SAC fails to allege that Gorrie knew the alleged misrepresentations were false when she 27 made them. (Doc. 136 at 12-13.) This is incorrect. After alleging numerous 28 misrepresentations by the Gorrie Parties, the SAC states: “[The Gorrie Parties] knew that - 94 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 95 of 111 1 their representations were false.” (Doc. 131 ¶ 147. See also id. ¶¶ 149-51 [alleging the 2 Gorrie Parties knew that (1) the Gorrie Parties could not qualify for loans, (2) “no other 3 investors were seriously interested” in the hemp operations, (3) Gorrie “had no experience 4 or qualifications to run a profit-generating Hemp Operation,” and (4) the Gorrie Parties 5 “had no credible prospect of growing and yielding a sufficient hemp crop to make a 6 profit”].) Under Rule 9(b), “[m]alice, intent, knowledge, and other condition of mind of a 7 person may be averred generally.” If the Stadtler Parties cannot prove that Gorrie knew 8 her statements were false, they will not prevail on that claim at summary judgment or trial. 9 At this stage, however, the Court does not “test the evidence.” Cooper v. Pickett, 137 F.3d 10 616, 627 (9th Cir. 1997). 11 Third, the Gorrie Parties argue that “[t]he SAC nowhere alleges that [the Stadtler 12 Parties] were ignorant of any of [the Gorrie Parties’] representations[’] falsity.” (Doc. 136 13 at 13.) Again, this is incorrect: The SAC alleges that the Stadtler Parties “believed [the 14 Gorrie Parties’] representations were truthful and justifiably relied on their truthfulness and 15 took actions as a result to Mr. Stadtler’s and the Trust’s detriment.” (Doc. 131 ¶ 152.) The 16 SAC also alleges facts demonstrating why the Stadtler Parties believed the representations 17 were truthful, including that Gorrie purported to substantiate some of the alleged 18 misrepresentations by sending various documents to the Stadtler Parties. (See id. ¶¶ 2219 23, 31, 142-43.) 20 In a related vein, the Gorrie Parties contend that paragraph 147 of the SAC, which 21 alleges that the Gorrie Parties “knew they did not have the funds to pay $240,000[] at 22 closing” (id. ¶ 147), does not demonstrate that Gorrie falsely represented that IGD had the 23 funds or that the Stadtler Parties believed that was so. (Doc. 136 at 13.) According to the 24 Gorrie Parties, “[the Stadtler Parties] both knew and contracted that the Trustee was not 25 going to be fully paid prior to the transfer of title and thus there is no falsity to allege for 26 this non-existent representation.” (Id.) 27 To plead fraud, a plaintiff “must set forth an explanation as to why the statement or 28 omission complained of was false or misleading.” Van Go, 2016 WL 4974968 at *3 - 95 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 96 of 111 1 (citation omitted). Here, viewing paragraph 147 in the light most favorable to the Stadtler 2 Parties, the Court interprets it as alleging that, at closing, the Stadtler Parties did not know 3 that the Gorrie Parties had not secured outside funding sources to cover the $240,000 4 payment that would be due by the 30-day deadline. This interpretation is supported by 5 other allegations in the SAC. (See, e.g., Doc. 131 ¶¶ 44-46.) Thus, the fact that the Stadtler 6 Parties knew the Gorrie Parties did not have this funding available before closing does not 7 undermine the allegation that Gorrie falsely represented that certain investors had agreed 8 to fund the $240,000 after closing. 9 Fourth, the Gorrie Parties contend the SAC is unclear as to who made the alleged 10 misrepresentations because, at several points, the statements are “attributed to the [Gorrie 11 Parties] as a whole.” (Doc. 136 at 13.) In the Court’s view, this is contrived confusion. 12 First, many of the alleged misrepresentations are attributed to Gorrie specifically. (See, 13 e.g., Doc. 131 ¶¶ 41-44, 59-60, 70-73.) Second, to the extent some of the 14 misrepresentations are attributed to the Gorrie Parties generally, there is a reasonable 15 inference that Gorrie is the alleged speaker, given that the rest of the Gorrie Parties are 16 entities incapable of speaking on their own and the Stadtler Parties do not allege the 17 existence of any other human speaking on those entities’ behalf. If anything, it is possible 18 Gorrie made the misrepresentations in her capacity as a member or partner of the entities; 19 however, this level of detail is not required at the pleading stage. Rule 9(b) requires that a 20 complaint “identif[y] the circumstances of the alleged fraud so that defendants can prepare 21 an adequate answer.” Cooper, 137 F.3d at 627 (internal quotation marks omitted). 22 Requiring the Stadtler Parties to specify, for each misrepresentation, whether Gorrie was 23 speaking on behalf of herself, IGD, NFOF, or NFF would require Rule 9(b) to carry more 24 weight than it was meant to bear. 25 Fifth, the Gorrie Parties contend that the SAC fails to state a “legally cognizable 26 fraud claim against NFOF” because it does not allege that “funds were actually lent or 27 transferred to NFOF, that there was a contract regarding this loan arrangement, that farm 28 equipment was actually lent to NFOF, or that there was a contract regarding this farm - 96 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 97 of 111 1 equipment lending arrangement.” (Doc. 136 at 13.) The Gorrie Parties also argue that 2 NFOF could not have fraudulently induced the Stadtler Parties into executing the Farm 3 Purchase Agreement because NFOF did not exist at that time. (Id.) 4 These arguments are unavailing. The SAC alleges that the Gorrie Parties made 5 misrepresentations both before and after the execution of the Farm Purchase Agreement 6 (including misrepresentations after NFOF came into existence in March 2020) that were 7 intended, inter alia, to induce Stadtler to “lend funds and farm equipment to NFOF” and 8 also alleges that “Gorrie, IGD, and/or NFOF took the Equipment belonging to Mr. Stadtler 9 and would not allow him to retrieve it.” (Doc. 131 ¶¶ 146, 169.) Thus, even if Stadtler did 10 not lend funds to NFOF, and even if the fraudulent inducement claim rests in part on 11 conduct that occurred before NFOF came into existence, the SAC alleges that Gorrie 12 knowingly made false material representations that she intended Stadtler to act upon and 13 that Stadtler’s belief in and reasonable reliance on those representations resulted in NFOF 14 obtaining possession of his farm equipment. These allegations, assumed true, are 15 sufficient. 16 Sixth, to the extent Counts Four and Five rely on the Three Acre Addendum, the 17 Gorrie Parties contend that “the Parties came to an agreement regarding the past history of 18 the crop failures. Therefore, it would have been entirely unreasonable for [the Stadtler 19 Parties] to have relied on [the Gorrie Parties’] professed expertise on running a hemp 20 operation.” (Doc. 136 at 14.)74 As relevant here, the Three Acre Addendum provides: 21 There has been no fault from Dan Stadtler to fund the amount that was agreed to between the parties for the first 3 acre crop. . . . There has been no fault 22 by IGD LLC, to continue in a good and fair husbandry manner to grow the desired crop, abnormally high weather temperatures were a major factor in 23 the failure of the seedlings. IGD LLC, chose to slow down in its final planting schedule in the greenhouse in order to correct a few problems with 24 the greenhouse which led to some failure of the hemp plants to grow successfully. This has been corrected and new planting have resumed in the — 25 — — 26 — — 74 — Similarly, in their reply, the Gorrie Parties argue that “it is impossible for Stadtler to argue that he relied on Gorrie’s expertise” because he knew at closing that “Gorrie did 27 not have a license to grow and harvest Hemp” and she asked Dawson “how to get the property certified as organic.” (Doc. 159 at 5.) As this argument was raised for the first 28 time in reply, the Court need not address it. Zamani, 491 F.3d at 997. Nevertheless, even if it had been properly raised, this argument is unpersuasive. - 97 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 98 of 111 1 greenhouse. — 2 — (Doc. 17-7 at 2.) This language does not establish that, as a matter of law, it was — 3 — unreasonable for the Stadtler Parties to believe Gorrie had hemp-growing expertise. If — 4 — anything, it suggests that IGD and Stadtler agreed, at that time, that IGD had the ability to — 5 — operate a successful hemp operation given the right circumstances (i.e., weather, — 6 — greenhouse conditions, and funding). — 7 — Accordingly, the Court denies the Gorrie Parties’ motion for judgment on the — 8 — pleadings as to Counts Four and Five. — 9 — V. The Gorrie Parties’ Motion For Partial Dismissal Of Third-Party Counterclaims — 10 — In the final motion before the Court, the Gorrie Parties move to dismiss Counts One, — 11 — Two, Four, and Five of Houchin’s operative pleading. (Doc. 158.) — 12 — A. Additional Background — 13 — The following facts are derived from Houchin’s operative pleading, his First — 14 — Amended Answer to Third-Party Complaint and Third-Party Counterclaim (Doc. 134), and — 15 — are presumed true for purposes of the Gorrie Parties’ motion to dismiss. — 16 — Houchin learned of the hemp operation from Stadtler, who is Houchin’s uncle. (Id. — 17 — 12 ¶ 15, 13 ¶ 20.)75 After Houchin expressed interest, “Stadtler told Houchin that there — 18 — may be an opportunity to invest in the business and asked Houchin if he wanted to see the — 19 — [Farm].” (Id. at 13 ¶ 21.) — 20 — “[I]n early 2021, Houchin and Stadtler traveled to Blythe to visit the [Farm] . . . and — 21 — to meet with Gorrie.” (Id. at 13 ¶ 22.) “The meeting lasted approximately 20 minutes, — 22 — with Gorrie spending the majority of that time explaining to Houchin the supposed hemp — 23 — operation.” (Id. at 13 ¶ 25.) During the meeting, “Gorrie indicated that she had — 24 — relationships with seed distributors, had done an internship with a seed distributor, and was — 25 — working with a Senator on another project.” (Id. at 13 ¶ 26.) “At the end of the meeting, — 26 — Houchin told Gorrie that he would put additional thought into entering into the business — 27 — — 28 — — 75 — Before 2018, Houchin did not know Stadtler and was “unaware of the family relationship.” (Doc. 134 at 12 ¶ 16.) - 98 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 99 of 111 1 relationship she proposed with IGD.” (Id. at 13 ¶ 27.) 2 On May 26, 2021, Houchin and IGD executed the JVA. (Id. at 12 ¶ 12.) The 3 purpose of the JVA was to “(a) prepare a 20-acre plot of [the Farm] for cultivation; (b) plant 4 and cultivate industrial hemp on the plot; and (c) harvest and dry the hemp in preparation 5 for sale.” (Id. at 12 ¶¶ 13-14.) “Pursuant to the JVA, IGD was to create a limited liability 6 company (the ‘JV LLC’) in order to carry out the purpose of the venture.” (Id. at 13 ¶ 29.) 7 “Houchin and IGD were to each own 50% of the membership interests in the JV LLC.” 8 (Id. at 13 ¶ 30.) “Notwithstanding the foregoing, the JVA provided that if the hemp 9 harvested by IGD averaged less than one (1) pound per plant, Houchin would receive 60% 10 of the profit therefrom and IGD would receive 40%.” (Id. at 13 ¶ 31.) “Alternatively, if 11 the hemp harvested by IGD averaged more than one (1) pound per plant, Houchin and IGD 12 would split the profit therefrom equally.” (Id. at 14 ¶ 32.) Before the JVA was executed, 13 the Gorrie Parties told Houchin that Dawson was the “farm manager” and “was 14 experienced in farming operations and capable of managing the operations of the venture” 15 on the twenty-acre plot. (Id. at 14 ¶¶ 35-36.) 16 The JVA required IGD contribute the 20-acre plot to the venture and “to provide 17 day-to-day oversight over the venture’s operation” on that plot. (Id. at 14 ¶¶ 33-34.) The 18 JVA also required Houchin to “contribute cash funding in seven (7) phases” over 24 weeks. 19 (Id. at 14 ¶¶ 37-38. See also id. at 14 ¶ 39 [“Houchin was to provide the ‘funding for each 20 phase within three (3) business days following IGD’s request for such funding, provided 21 that any such request shall be accompanied by confirmation, in a form satisfactory to 22 Houchin, that any pending phase [is] complete.’”].) 23 The JVA also included the following representations and warranties: 24 IGD represented and warranted that it had “full power and authority to own its properties and to carry on its business as now conducted and as proposed 25 to be conducted[.]” . . . IGD further represented and warranted that [t]here are no claims, demands, disputes, actions, suits, proceedings or 26 investigations pending or, to the best of IGD’s knowledge, threatened against or directly or indirectly affecting IGD . . . . IGD also represented and 27 warranted that it “[was] able to bear the economic risk of an investment in the [LLC] for the duration of [the JVA].” — 28 — - 99 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 100 of 111 1 (Id. at 14-15 ¶¶ 40-44.) According to Houchin, “the accuracy of the representations and 2 warranties made by IGD in the JVA was a condition precedent to Houchin’s performance 3 under the JVA.” (Id. at 15 ¶ 46.) 4 “On May 27, 2021, IGD notified Houchin that it was in the process of creating the 5 JV LLC but that it would not be able to get an EIN for the JV LLC ‘for a few business 6 days.’ . . . As a result, IGD requested interim funding from Houchin until the JV LLC’s 7 bank account could be established.” (Id. at 15 ¶¶ 48-49.) “Accordingly, Houchin executed 8 a First Addendum to Joint Venture Agreement dated May 28, 2021” (“JVA Addendum”). 9 (Id. at 15 ¶ 50.) The JVA Addendum modified Houchin’s contribution obligations under 10 the JVA; specifically, Houchin agreed to provide $72,300 of “interim funding” to IGD “as 11 soon as practical” after execution of the JVA Addendum. (Id. at 15 ¶ 51.) IGD agreed to 12 “hold and control” the interim funding for the “express and sole purpose” of the joint 13 venture and was required to transfer the interim funding into the LLC’s bank account “upon 14 formation of the entity and establishment of its bank account.” (Id. at 15-16 ¶¶ 52-53.) 15 On May 28, 2021, pursuant to the JVA Addendum, Houchin transferred $72,300 to 16 IGD. (Id. at 16 ¶ 54.) However, the interim funding was not deposited into JV LLC’s bank 17 account. (Id. at 16 ¶ 55.) The same day, “IGD and Gorrie terminated Dawson from his 18 position as farm manager.” (Id. at 16 ¶ 56.) 19 On July 5, 2021, IGD asked Houchin to remit “the remaining amount under phase 20 one,” totaling $27,250, as well as an additional $5,000 for “an accountant’s retainer.” (Id. 21 at 16 ¶ 57.) The same day, IGD also asked Houchin to remit $73,000 for phase two of the 22 JVA. (Id. at 16 ¶ 58.) “At the time of IGD’s request, IGD had not provided Houchin with 23 verification that the JV LLC had been formed or that its bank account had been 24 established.” (Id. at 16 ¶ 59.) When Houchin requested that verification, IGD confirmed 25 the LLC had been formed (under the name “PGHF1 LLC”) and that IGD was the LLC’s 26 manager; however, IGD “had not obtained an EIN for the JV LLC or established its bank 27 account.” (Id. at 16 ¶¶ 60-62.) Houchin also asked for confirmation that phase one had 28 been completed. (Id. ¶ 63.) “Despite requesting Houchin’s contribution for phase two, - 100 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 101 of 111 1 IGD confirmed that phase one was not complete.” (Id. at 16 ¶ 64.)76 2 In early July 2021, Houchin learned that Stadtler, who held a security interest in the 3 Farm, was asserting a breach of the agreement secured by the Farm. (Id. at 17 ¶ 66.) The 4 Gorrie Parties did not notify Houchin of this fact, “despite requesting additional funds from 5 him” during the same period. (Id. at 17 ¶ 67.) 6 On July 15, 2021, “Houchin asked IGD its position with respect to the breach 7 asserted by Stadtler” and “notified IGD that a breach of any agreement with Stadtler 8 secured by the Property constituted a breach of the JVA.” (Id. at 17 ¶¶ 68-69.) In response, 9 IGD described its contractual relationship with Stadtler as “very complicated” and stated 10 that the notice of default sent by Stadtler was “not a notice of default at all” because it 11 “fail[ed] to comply with even the most basic requirements of those documents.” (Id. at 17 12 ¶ 70.) “IGD did not provide Houchin with copies of any of the underlying documents or 13 with an explanation as to how it planned on addressing Stadtler’s asserted breach.” (Id. at 14 17 ¶ 71.) Houchin later learned that, on or about July 15, 2021, “Stadtler recorded a Notice 15 of Trustee’s Sale related to the [Farm].” (Id. at 17 ¶ 72.) 16 “On August 19, 2021, Houchin, again, asked that IGD explain what—if anything— 17 it planned to do with respect to the pending trustee’s sale and its implications” on the JVA. 18 (Id. at 17 ¶ 73.) “IGD failed to provide Houchin with any substantive information” in 19 response. (Id. at 18 ¶ 74.) After this correspondence, “IGD ceased communicating with 20 Houchin.” (Id. at 19 ¶ 84.) 21 Based on these allegations, Houchin asserts third-party counterclaims against the 22 Gorrie Parties, alleging (1) breach of the JVA, (2) breach of the implied covenant of good 23 faith and fair dealing, (3) unjust enrichment, (4) fraudulent inducement, (5) negligent 24 misrepresentation, and (6) breach of fiduciary duty. (Id. at 19-24 ¶¶ 85-147.) 25 B. Legal Standard 26 “[T]o survive a motion to dismiss under Rule 12(b)(6), a party must allege sufficient 27 76 At the same time, IGD indicated that the remaining amount due under phase one 28 was $37,500, rather than $32,250 (i.e., the total IGD asked for on July 5, 2021). (Id. at 17 ¶ 65 .) - 101 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 102 of 111 1 factual matter, accepted as true, to state a claim to relief that is plausible on its face.” In re 2 Fitness Holdings, 714 F.3d at 1144 (internal quotation marks omitted). “A claim has facial 3 plausibility when the plaintiff pleads factual content that allows the court to draw the 4 reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting 5 Iqbal, 556 U.S. at 678 ). “[A]ll well-pleaded allegations of material fact in the complaint 6 are accepted as true and are construed in the light most favorable to the non-moving party.” 7 Id. at 1444-45 (citation omitted). However, the court need not accept legal conclusions 8 couched as factual allegations. Iqbal, 556 U.S. at 679-80 . Moreover, “[t]hreadbare recitals 9 of the elements of a cause of action, supported by mere conclusory statements, do not 10 suffice.” Id. at 678 . The court also may dismiss due to “a lack of a cognizable theory.” 11 Mollett, 795 F.3d at 1065 (citation omitted). 12 C. Analysis 13 As an initial matter, the JVA is incorporated by reference throughout Houchin’s 14 pleading. (See, e.g., Doc. 134 at 12 ¶ 12, 13 ¶ 28, 14-15 ¶¶ 40-46.) Accordingly, the Court 15 may consider the JVA (Doc. 77-5) without converting the Gorrie Parties’ motion to dismiss 16 into a motion for summary judgment. Ritchie, 342 F.3d at 907-08 . 17 1. Counts One And Two 18 In Count One, Houchin alleges that IGD breached the JVA by making certain 19 representations and warranties that were either false when made or rendered false after the 20 JVA’s effective date. (Doc. 134 at 19 ¶¶ 85-93.) In Count Two, Houchin alleges that IGD 21 breached the implied covenant of good faith and fair dealing by making false 22 representations and warranties in the JVA that interfered with Houchin’s ability “to receive 23 the full benefit of the bargain.” (Id. at 20 ¶¶ 94-105.) 24 For context, both IGD and Houchin made representations and warranties in the JVA. 25 (Doc. 77-5 at 7-10.) As relevant here, in § 4.01 of the JVA, IGD represented and warranted 26 that: (1) “IGD . . . has full power and authority to own its properties and to carry on its 27 business as now conducted and as proposed to be conducted . . . ”; (2) “There are no claims, 28 demands, disputes, actions, suits, proceedings or investigations pending or, to the best of - 102 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 103 of 111 1 IGD’s knowledge, threatened against [IGD] . . . which presently or with the passage of 2 time would be reasonably likely to have a Material Adverse Effect on IGD’s performance 3 of its obligations under this Agreement, the Limited Liability Company Agreement or the 4 Related Agreements”; and (3) “IGD is able to bear the economic risk of an investment in 5 the Company for the duration of this Agreement.” (Id. at 7-9.) The JVA also included an 6 indemnification provision requiring IGD to “indemnify and hold harmless Houchin at all 7 times from and after the Closing Date, against and in respect of Losses arising from or 8 relating to . . . any breach of any of the representations or warranties made by IGD in this 9 Agreement or the Related Agreements.” (Id. at 13 [JVA § 7.02].) 10 In their motion to dismiss, the Gorrie Parties contend that Houchin waived any 11 claims arising from IGD’s representations in the JVA (which are the representations upon 12 which Counts One and Two rely). (Doc. 158 at 8-9.) The Gorrie Parties point to § 6.02 of 13 the JVA (entitled “Houchin’s Conditions Precedent”), which provides, in relevant part: 14 The obligation of Houchin to consummate the Joint Venture and Related Transactions is subject to the satisfaction, prior to or on the Closing Date, of 15 each of the following conditions, the failure of any one of which shall excuse Houchin from consummating the Joint Venture and Related Transactions 16 unless any such conditions are waived (in whole or in part) by Houchin in writing. . . . (g) Due Diligence. Houchin shall have reviewed, investigated, 17 ascertained and verified to its satisfaction, in its sole discretion, the business and affairs of IGD and all facts, IGD information and other matters regarding 18 IGD referred to in this Agreement or given or provided in connection with this Agreement, including without limitation, an independent review of the 19 past financial statements of IGD. — 20 — (Doc. 77-5 at 12-13.) Based on this language, the Gorrie Parties contend that “[f]ollowing — 21 — consummation of the JVA, Houchin waived his claim for breach of contract and breach of — 22 — the implied covenant of good faith and fair dealing for the representations alleged in — 23 — Houchin’s Counterclaim.” (Doc. 158 at 9.) Houchin responds that “waiver is ‘a question — 24 — of fact to be determined by the trier of fact.’” (Doc. 170 at 10.) — 25 — At first blush, the Gorrie Parties seem to be advancing a claim of waiver by conduct, — 26 — which, as Houchin correctly notes, is a question of fact for the jury. Jones v. Cochise Cnty., — 27 — 187 P.3d 97, 105 (Ariz. Ct. App. 2008) (“Arizona courts have held waiver is ‘a question of — 28 — fact to be determined by the trier of fact.’”) (citation omitted); Concannon v. Yewell, 493 - 103 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 104 of 111 1 P.2d 122 , 123 (Ariz. Ct. App. 1972) (“It is, of course, true that one party may waive any 2 provision of a contract made for his benefit. . . . Waiver need not be expressed but may be 3 inferred from conduct and is therefore a question of fact to be determined by the 4 [factfinder].”). However, in their reply, the Gorrie Parties clarify that they view the due 5 diligence provision as a “condition precedent” that obligated Houchin “to conduct an 6 investigation of IGD prior to providing funding.” (Doc. 181 at 7.) Thus, according to the 7 Gorrie Parties, Houchin “knowingly waived his right to investigate these issues, which he 8 could have so easily done, and therefore dismissal of the breach of contracts claims is 9 appropriate.” (Id.) 10 It is unclear why the “due diligence provision,” assuming it operated as a condition 11 precedent to Houchin’s performance under the JVA, would bar Houchin from asserting his 12 breach of contract claim in Count One. “To determine what the parties intended, we 13 ‘consider the plain meaning of the words in the context of the contract as a whole.’” MTR 14 Builders, Inc. v. Jahan Realty Mgmt. Corp., 2016 WL 1425797 , *4 (Ariz. Ct. App. 2016) 15 (citation omitted). A “condition precedent” is “an act or event, other than a lapse of time, 16 that must exist or occur before a duty to perform something promised arises.” Biltmore 17 Bank of Arizona v. First Nat. Mortg. Sources, L.L.C., 2008 WL 564833 , *7 (D. Ariz. 2008). 18 Even if the due diligence provision was a condition precedent and was not fulfilled before 19 the JVA was executed, that would at most excuse Houchin’s obligations under the JVA, 20 not IGD’s obligations, and certainly would not preclude Houchin from asserting a breach 21 of contract claim against IGD.77 22 Moreover, in taking this position, the Gorrie Parties effectively interpret the “due 23 diligence” provision as a contractual waiver of Houchin’s legal right to assert a breach of 24 contract claim based on IGD’s representations. “The purpose of contract interpretation is 25 to determine and enforce the parties’ intent.” US W. Commc’ns, Inc. v. Arizona Corp. 26 Comm’n, 915 P.2d 1232, 1235 (Ariz. Ct. App. 1996). “To determine the parties’ intent, 27 77 Alternatively, if the due diligence provision were construed as a condition precedent 28 to the formation of the JVA, it could be argued that the JVA was not formed, see Biltmore Bank, 2008 WL 564833 at *7; however, the Gorrie Parties do not take this position. - 104 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 105 of 111 1 we ‘look to the plain meaning of the words as viewed in the context of the contract as a 2 whole.’” ELM Ret. Ctr., LP v. Callaway, 246 P.3d 938 , 941-42 (Ariz. Ct. App. 2010). 3 “Waiver is the voluntary and intentional relinquishment of a known right or such conduct 4 as warrants an inference of the relinquishment of such right.” City of Tucson v. Koerber, — 5 — 313 P.2d 411, 418 (Ariz. 1957). See also Cavallo v. Phoenix Health Plans, Inc., 518 P.3d 6 759, 765 (Ariz. 2022) (intent to waive a known right is required for waiver). Here, 7 Houchin’s representations in the “due diligence” provision, in general and as “conditions 8 precedent,” do not evince an intent to waive his ability to assert the breach of contract claim 9 alleged in Count One. This is particularly so because, under this interpretation, the due 10 diligence provision would conflict with the indemnification provision, which generally 11 obligates IGD to indemnify Houchin for “[l]osses arising from or relating to . . . any breach 12 of any of the representations or warranties made by IGD in this Agreement or the Related 13 Agreements.” (Doc. 77-5 at 13 [JVA § 7.02].) See also ELM Ret. Ctr., 246 P.3d at 942 14 (“In interpreting a contract, . . . each part of a contract must be read together, ‘to bring 15 harmony, if possible, between all parts of the writing.’”). 16 As for Count Two, the waiver argument is unavailing because “the covenant of good 17 faith and fair dealing may not be waived” in an agreement. Cavallo, 518 P.3d at 766. See 18 also Sky Harbor Hotel, 443 P.3d at 24 (parties may not “erase,” “limit,” or “eliminate” the 19 covenant of good faith and fair dealing in an operating agreement). 20 2. Counts Four And Five 21 In Count Four, Houchin alleges that the Gorrie Parties made various false 22 representations, both in the JVA and elsewhere, that Houchin relied upon in deciding to 23 participate in the joint venture. (Doc. 134 at 21-23 ¶¶ 116-30.) Similarly, in Count Five, 24 Houchin alleges that the Gorrie Parties negligently “provided inaccurate, material 25 information to Houchin for the purpose of guiding Houchin’s decision in relation to the 26 JVA” and that Houchin reasonably relied on that information to guide his decisions 27 regarding the joint venture. (Id. at 23-24 ¶¶ 131-40.) 28 The Gorrie Parties contend that Counts Four and Five are barred by the ELR and - 105 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 106 of 111 1 fail to establish justifiable reliance. (Doc. 158 at 3-5, 7-8.) They also argue that Count 2 Four, specifically, lacks the particularity required by Rule 9(b) and impermissibly relies on 3 a future promise. (Doc. 158 at 6-7.) 4 a. Economic Loss Rule 5 The Gorrie Parties contend that Counts Four and Five are barred by the ELR because 6 the claims are inseparable from the “essence” of the JVA, request damages identical to 7 those sought in the breach of contract claim, and seek purely economic damages. (Id. at 48 5. See also id. at 3 [“State and federal courts in Arizona have repeatedly found that the 9 ELR applies to fraud and negligent misrepresentation claims, especially when those losses 10 are purely economic.”].) In response, Houchin argues that, in Arizona, the ELR is limited 11 to products liability claims and construction defect cases. (Doc. 170 at 3.) Houchin then 12 analogizes to Griffey v. Magellan Health Inc., 562 F. Supp. 3d 34 , 41 (D. Ariz. 2021), 13 arguing that “Griffey makes it clear that . . . this Court will not extend the [ELR] without 14 direction from the Arizona Supreme Court.” (Doc. 170 at 4-5.) 15 Although the Court disagrees with Houchin’s position that Griffey is “binding law” 16 that precludes the Court from applying the ELR outside products liability and construction 17 defect cases, it is also clear the scope of the ELR is not as broad as the Gorrie Parties 18 contend. In Flagstaff Affordable Housing, the Arizona Supreme Court explained that 19 “application of the economic loss doctrine should rest on explicit consideration of the 20 relevant tort and contract law policies.” 223 P.3d at 672 n.5. See also Greyhound Lines 21 Inc. v. Viad Corp., 2016 WL 6833938 , *7 (D. Ariz. 2016) (noting that, in Flagstaff 22 Affordable Housing, “the Arizona Supreme Court explained that application of the doctrine 23 to various tort claims requires a context-specific analysis that must take into account the 24 policies behind contract and tort law”). “While tort law seeks to promote safety and spread 25 the costs of accidents, contract law ‘seeks to preserve freedom of contract and to promote 26 the free flow of commerce.’ Thus, if ‘common law contract remedies provide an adequate 27 remedy because they allow recovery of the costs of remedying the defects . . . and other 28 damages reasonably foreseeable to the parties upon entering the contract[,]’ there is no - 106 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 107 of 111 1 strong policy reason to also provide a tort remedy.” Id. 2 Here, the Court is not convinced that the Arizona Supreme Court would apply the 3 ELR to bar Houchin’s tort claims. In Count Four, Houchin alleges that the Gorrie Parties 4 made various misrepresentations, including not only the information expressly warranted 5 in the JVA but also other information regarding Gorrie’s ability to oversee a successful 6 hemp operation and Dawson’s participation therein (which was not memorialized in the 7 JVA). (Doc. 134 at 21-22 ¶¶ 116-21.) According to Houchin, the Gorrie Parties knew 8 these representations were false and made them for the purpose of inducing Houchin to 9 participate in the joint venture. (Id. at 22 ¶¶ 122-27.) Although some of these allegations 10 overlap with Houchin’s breach of contract claim, others contain distinct facts outside the 11 scope of the JVA. (Compare id. at 19 ¶¶ 85-93 with id. at 21-22 ¶¶ 116-27.) Count Five 12 relies on allegations similar to those that give rise to Count Four. (Id. at 23-24 ¶¶ 131-40). 13 These distinctions, combined with the previously discussed policy concerns that may arise 14 when the ELR is applied to a claim of fraudulent inducement, weigh against dismissing 15 Counts Four and Five on this ground.78 16 Finally, as for the Gorrie Parties’ contention that the ELR bars Counts Four and Five 17 because Houchin could have cancelled the JVA during the “due diligence” period (Doc. 18 158 at 5), this argument fails on the facts. Houchin alleges that he learned that the Gorrie 19 Parties’ representations were false after the due diligence period ended—e.g., in early July 20 2021, Houchin learned that Stadtler held a security interest in the property and was 21 asserting a breach of the Farm Purchase Documents. (Doc. 134 at 17 ¶ 66.) And, consistent 22 with the observation above that Counts Four and Five are not wholly derivative of 23 Houchin’s contract claim, some of the alleged misrepresentations do not constitute 24 breaches of the JVA. (See, e.g., id. at 16 ¶ 56 [alleging that IGD and Gorrie fired Dawson 25 on May 28, 2021, two days after the parties executed the JVA].) 26 78 The Gorrie Parties also emphasize the fact that Houchin seeks “purely economic 27 damages” as determinative of whether the ELR applies. (Doc. 158 at 5 [“[P]urely economic damages are sought which alone suggest that the ELR is an appropriate bar.”].) 28 But “[i]n Arizona the ELR is not a per se rule denying tort liability to all plaintiffs who suffer only economic losses.” Jes Solar, 2015 WL 10943562 at *3. - 107 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 108 of 111 1 b. Rule 9(b) 2 The Gorrie Parties argue that Count Four fails under Rule 9(b) because Houchin 3 fails to allege “with particularity” the materiality of and Houchin’s justifiable reliance on 4 the alleged misrepresentations. (Doc. 158 at 6.) According to the Gorrie Parties, because 5 of these alleged defects, “IGD cannot adequately answer Houchin’s fraud claim.” (Id.) 6 Rule 9(b) requires that the circumstances constituting fraud be stated “with 7 particularity.” In other words, [a]verments of fraud must be accompanied by ‘the who, 8 what, when, where, and how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, — 9 — 317 F.3d 1097, 1106 (9th Cir. 2003) (citation omitted). However, “malice, intent, 10 knowledge, and other conditions of mind may be alleged generally.” Van Go, 2016 WL 11 4974968 at *3. 12 Houchin has adequately pleaded the circumstances constituting fraud under Rule 13 9(b). Count Four alleges that IGD and Gorrie (the “who”) made specific false 14 representations about IGD’s business affairs and the Gorrie Parties’ ability to run a hemp 15 operation (the “what”). (Doc. 134 at 22 ¶¶ 117-20.) Count Four further alleges that the 16 representations were false because IGD had potential claims pending against it and had 17 defaulted on the Promissory Note and the Gorrie Parties did not know how to oversee the 18 joint venture’s operations (more of the “what”). (Id. at 22 ¶¶ 119-21.) Count Four alleges 19 that the misrepresentations were made before the JVA was executed (the “when”) both in 20 conversations with Houchin and as express representations in the JVA (the “where” and 21 “how”). (Id. at 22 ¶¶ 117-27.) Count Four also alleges that the Gorrie Parties knew the 22 representations were false and made them knowing that Houchin would rely upon them in 23 deciding to participate in the joint venture. (Id. at 22 ¶¶ 124-26.) Additionally, Count Four 24 alleges that Houchin did not know the representations were false and relied upon them to 25 his detriment. (Id. at 22-23 ¶¶ 126-28.) Finally, Count Four alleges that “but for [the 26 Gorrie Parties] making said representations . . . , [Houchin] would not have participated in 27 the joint venture” (demonstrating materiality). (Doc. 134 at 22 ¶ 127].) These allegations 28 are sufficient to meet Rule 9(b)’s heightened pleading requirements. - 108 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 109 of 111 1 c. Future Promise 2 The Gorrie Parties also contend that Counts Four and Five should be dismissed 3 because they rely on a future promise. (Doc. 158 at 7.) Specifically, Houchin alleges that, 4 before the JVA was executed, Gorrie represented that “Dawson would manage the 5 operations on the JVA Plot,” yet Dawson was terminated two days after the JVA was 6 executed (and immediately after IGD received funding from Houchin). (Doc. 134 at 16 7 ¶ 56, 22 ¶ 121.) According to the Gorrie Parties, this allegation cannot support a fraudulent 8 inducement or negligence misrepresentation claim because it is a promise to perform a 9 future act. (Doc. 158 at 7.)79 10 “Representations which give rise to an action of fraud must, of course, be of matters 11 of fact which exist in the present, and not merely an agreement or promise to do something 12 in the future . . . .” Waddell, 108 P.2d 565 at 569 . Similarly, “no claim of relief for 13 negligent misrepresentation can be premised upon a promise of future conduct.” 14 McAlister, 829 P.2d at 1261 . “To this there is one exception, that when a promise to 15 perform a future act is made with the present intention on the part of the promisor that he 16 will not perform it, it is such a representation as will give rise to an action of fraud.” 17 Waddell, 108 P.2d at 569 . 18 Here, interpreting the allegations in the light most favorable to Houchin, Counts 19 Four and Five rest on the premise that Gorrie made a future promise to Houchin (i.e., that 20 Dawson would manage the relevant hemp operations) with no intention of performing 21 consistent with the promise. This allegation is plausible in light of the other factual 22 allegations in the pleading. That IGD terminated Dawson only two days after the JVA was 23 executed, immediately after receiving funding from Houchin under the JVA, allows for the 24 plausible inference that Gorrie did not intend to allow Dawson to oversee the hemp 25 operations when she made the promise to Houchin. Twombly, 550 U.S. at 556 . — 26 — — 27 — — 79 — The Gorrie Parties also argue that “IGD fulfilled the future promise to perform the act by allowing Dawson to oversee the operations on the JVA plot of land,” which shows 28 that “IGD had the intention of performing consistent with the alleged representation.” (Doc. 158 at 7.) These are factual arguments not appropriate on a motion to dismiss. - 109 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 110 of 111 1 d. Justifiable Reliance 2 Finally, the Gorrie Parties argue that, as a matter of law, Houchin could not have 3 justifiably relied on the alleged misrepresentations because (1) he signed the JVA, which 4 included conditions precedent requiring him to independently investigate IGD’s 5 representations; and/or (2) his close relationship with Stadtler makes the alleged reliance 6 “hard to believe.” (Doc. 158 at 8.) 7 The “conditions precedent” argument fails here for the same reasons it failed in 8 relation to Counts One and Two. Also, as discussed, Houchin’s fraudulent inducement 9 claim does not rely solely on the representations in the JVA. At any rate, Arizona courts 10 have emphasized that contracting parties cannot rely upon such provisions to avoid fraud 11 claims. See, e.g., Wagner v. Rao, 885 P.2d 174, 177 (Ariz. Ct. App. 1994) (“Although 12 parties may contractually disclaim potential tort liability by a clear expression of intent to 13 do so, our courts have carved out an exception for cases involving fraud. . . . [A] seller 14 should not be permitted to hide behind an integration clause to avoid the consequences of 15 a misrepresentation.”) (citations omitted); S Dev. Co. v. Pima Cap. Mgmt. Co., 31 P.3d 16 123, 128 (Ariz. Ct. App. 2001) (“[W]e find merit in the appellees’ argument that the 17 existence of an ‘as is’ provision in a purchase contract generally operates only as a waiver 18 of breach of warranty claims, not tort claims.”). 19 As for Houchin’s familial relationship with Stadtler, the Gorrie Parties’ argument is 20 fact-based and thus not appropriate on a motion to dismiss. At this juncture, the Court 21 assumes the allegations underlying Houchin’s counterclaims are true. In re Fitness 22 Holdings, 714 F.3d at 1144 . Houchin alleges that he did not know (until after the JVA was 23 executed) about Stadtler’s security interest in the Farm or that IGD had defaulted on the 24 Promissory Note. (Doc. 134 at 17 ¶¶ 66-73.) That Stadtler is Houchin’s uncle does not 25 render his reliance on the accuracy of the Gorrie Parties’ affirmative representations about 26 IGD unreasonable as a matter of law. 27 … 28 … - 110 - Case 2:22-cv-00314-DWL Document 203 Filed 03/14/23 Page 111 of 111 1 Accordingly, 2 IT IS ORDERED that: 3 (1) The Gorrie Parties’ motion for sanctions (Doc. 118) is denied. 4 (2) The Gorrie Parties’ motion for leave to file a second amended counterclaim 5 and first amended third-party complaint (Doc. 146) is denied. 6 (3) The Stadtler Parties’ motion to dismiss (Doc. 87) is granted in part and 7 denied in part. Counts Five, Seven, and Eight of the Gorrie Parties’ First Amended 8 Answer, Counterclaim, and Third-Party Complaint (Doc. 77) are dismissed without leave 9 to amend. 10 (4) The Stadtler Parties’ motion to strike (Doc. 142) is denied. 11 (5) The Gorrie Parties’ partial motion to dismiss the SAC (Doc. 136), which the 12 Court has construed as a Rule 12(c) motion, is denied. 13 (6) The Gorrie Parties’ partial motion to dismiss Houchin’s third-party 14 counterclaims (Doc. 158) is denied. 15 Dated this 13th day of March, 2023. — 16 — — 17 — — 18 — — 19 — — 20 — — 21 — — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — — 28 — - 111 -