United States District Court, D. Arizona
Brian M. Katt, et al., Plaintiffs,
Jordan J. Riepe, et al., Defendants.
DAVID G. CAMPBELL, District Judge.
Plaintiffs have filed a motion for partial summary judgment (Doc. 102), an application for default judgment against Defendants BizDoc, Inc. and Michael Shumacher (Doc. 96), and a motion to strike (Doc. 134). Defendants E. Duane Weston, Janette S. Riepe, and McCarthy Weston, PLLC (collectively, the "Weston Defendants") have filed a motion for summary judgment on all of Plaintiffs' claims (Doc. 113) and a motion to strike (Doc. 131). The motions are fully briefed, and no party has requested oral argument. For the reasons that follow, the Court will deny Plaintiffs' motion for summary judgment, grant in part and deny in part the Weston Defendants' motion for summary judgment, deny Plaintiffs' motion to strike, deny the Weston Defendants' motion to strike, and deny Plaintiffs' application for default judgment.
This case arises out of Plaintiffs' sale of their vehicle towing business, U.S. Metro Towing and Recovery, LLC. Doc. 111, ¶ 1. In February 2013, Plaintiffs Brian and Rachel Katt and U.S. Metro hired Comprehensive Business Services, LLC, d/b/a WCI Business Opportunities ("WCI Brokers"), and one of its brokers, Dominic Femia, to represent them in the transaction. Id., ¶ 2. One of U.S. Metro's former employees, Jordan Riepe, sought to form his own company with his mother, Defendant Janette Riepe, and expressed interest in purchasing U.S. Metro. Id., ¶¶ 3, 4. The parties eventually agreed on a purchase price of $290, 000. Id., ¶ 12.
Jordan hired attorney Defendant E. Duane Weston and his firm, Defendant McCarthy Weston, PLLC, to represent him in negotiations with the Katts and U.S. Metro. Id., ¶ 5. Janette worked for McCarthy Weston, PLLC as its office manager and paralegal. Id., ¶ 6. In order to secure financing, Femia referred Jordan to Defendant BizDoc, Inc., owned and operated by Defendant Michael Shumacher, and Jordan contacted BizDoc to obtain a $400, 000 loan (the "Loan"). Id., ¶¶ 7, 9. Jordan filled out the necessary paperwork and paid BizDoc a $7, 500 fee. Id., ¶¶ 8, 9.
On June 5, 2013, the Katts and Jordan executed a "Business Assets Purchase Agreement" (the "Purchase Agreement"), in which the parties agreed that (1) the transaction would close on or before July 1, 2013; (2) Mendel Blumenfeld would act as the closing agent and receive and disburse funds; (3) U.S. Metro would transfer its assets free of any liens or encumbrances; (4) U.S. Metro would tender the Bill of Sale and title to all its assets and obtain written consent from the necessary parties to transfer the assets; and (5) U.S. Metro would deliver possession and ownership of all assets at closing. Id., ¶¶ 10, 12. The Purchase Agreement provided that it was the entire agreement of the parties and could not be modified except in writing. Id., ¶ 12.
Although Jordan provided BizDoc with the necessary due diligence information, BizDoc informed Jordan that it would not disburse the funds for the Loan in time for closing. Id., ¶¶ 13, 14. In order to continue the transaction, Jordan requested a loan from BizDoc in the amount of $40, 000 (the "Bridge Loan"), which the parties agreed was to signify an initial payment at closing. Doc. 123, ¶ 18. The effective date of sale would remain July 1, 2013, and the Katts agreed to accept the remaining $250, 000 at a later date. Id. During these negotiations, the Katts were in the process of moving to Texas. Id., ¶ 15.
On June 30, 2013, BizDoc sent an email to Jordan and Janette notifying them that the funds for the Loan would take an additional 60-75 days to disburse, but BizDoc was making arrangements for the Bridge Loan to disburse during the week of July 15. Doc. 111, ¶ 20. Jordan and Janette forwarded a copy of the email to the Katts, and Brian Katt allegedly called BizDoc to confirm. Id., ¶¶ 21, 22.
With these assurances, on July 2, 2013, the parties executed a "First Amendment to Purchase Contract." Id., ¶ 25. Under the First Amendment, the closing date remained July 1, 2013; Jordan was to pay $40, 000 to U.S. Metro by July 17, 2013; and the remaining balance of $250, 000 would be paid by October 1, 2013. Id., ¶¶ 28, 30. Prior to executing the First Amendment, however, the parties learned that Mendel Blumenfeld had not been engaged as the closing agent. Id., ¶ 31. Weston, Jordan's attorney, informed the parties that the funds could be deposited into his firm's trust account to be held for the transaction, and the parties agreed. Doc. 106, ¶ 9. Weston then prepared the Bill of Sale, which was signed by U.S. Metro and the Katts at the closing. Id., ¶¶ 11-13. The Bill of Sale indicated that U.S. Metro "has this day sold to Jordan Riepe the assets identified in the Purchase Agreement free and clear of all liens and encumbrances." Doc. 111, ¶ 39. The Katts gave the property keys to Jordan. Doc. 130 at 6.
Ultimately, BizDoc failed to fund the Bridge Loan by July 17, 2013, and on July 24, 2013, the parties executed a "Second Amendment to Purchase Contract" to extend the deadline for the payment of the $40, 000 Bridge Loan until August 2, 2013. Doc. 111, ¶¶ 40, 41. Jordan and Janette continued to check on the status of the Loans. Id., ¶ 43.
On July 26, 2013, BizDoc informed Jordan and Janette via email that the funding would take a few more days. Id., ¶ 44. On August 1, 2013, BizDoc sent the following email to Janette:
[M]y best guess for a funding date on the bridge loan would be next Friday, August 9, 2013 (give or take 2 business days). I will have documents over tomorrow for the senior secured bridge loan of $65, 000 for review. Quite frankly, I do not know how to get comfortable moving forward with the $400, 000 permanent funding terms sheet at this point. As I have repeatedly said the purchase price is extremely over valued... and now we are dealing with an adversarial relationship and threats toward you of litigation from the seller.
Id., ¶ 46; Doc. 111-14. Janette responded to BizDoc that this was the first time she had heard that the business was overvalued. Doc. 111, ¶ 48. She also relayed the contents of the email to Brian Katt, but did not mention BizDoc's concern that U.S. Metro was overvalued. Id., ¶¶ 49-50. Shortly thereafter, BizDoc forwarded a loan agreement to Jordan, which he completed and returned. Id., ¶ 51. BizDoc never disbursed any funds for the transaction. Id., ¶ 53.
The Katts and U.S. Metro nonetheless continued with the sale, executing a "Third Amendment to Purchase Agreement." Id., ¶ 54. The purchase price was increased to $300, 000, of which $281, 298.04 represented a carryback loan from U.S. Metro to Jordan. Id., ¶ 55. Jordan executed a promissory note and agreed to pay $4, 220 per month, $3, 000 of which was paid directly to U.S. Metro and $1, 220 to Sovereign/Santander Bank ("Santander") for a tow truck payment. Id., ¶¶ 56-57. Santander refused Jordan's November payment because U.S. Metro leased the truck and did not obtain Santander's consent to sell it. Id., ¶ 59. Jordan eventually discovered that all of the tow trucks had been pledged as collateral, and they were all repossessed by December 2013. Id., ¶¶ 64-67. In addition, several of U.S. Metro's contracts had been inactive or never existed. Id., ¶ 68. Plaintiffs never received full payment for the sale of their business, and Jordan and Janette allegedly refused to return U.S. Metro's assets to the Katts. Doc. 106, ¶¶ 21, 23.
On March 14, 2014, Plaintiffs filed a complaint against Jordan, Janette, J.A.R.R. Towing & Recovery LLC, Weston, McCarthy Weston, PLLC, Femia, WCI Brokers, Shumacher, and BizDoc alleging (1) breach of fiduciary duty, (2) constructive fraud, (3) fraud, (4) deceit, (5) negligence, (6) breach of contract, (7) tortious breach of the covenant of good faith and fair dealing, (8) unjust enrichment, (9) declaratory relief, and (10) RICO violations. Doc. 1. Plaintiffs move for summary judgment on count one. The Weston Defendants move for summary judgment on all counts. Plaintiffs also ask the Court to enter a default judgment against BizDoc and Shumacher.
II. Motions for Summary Judgment.
A. Legal Standard.
A party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, shows "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Summary judgment is also appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. Only disputes over facts that might affect the outcome of the suit will preclude the entry of summary judgment, and the disputed evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When presented with cross-motions for summary judgment, "the court must consider each party's evidence, regardless under which motion the evidence is offered." Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir. 2011).
B. Breach of Fiduciary Duty.
Both Plaintiffs and the Weston Defendants seek summary judgment on this claim. Plaintiffs argue that Weston agreed to act as escrow agent for the transaction when he offered to hold the funds in his firm's trust account and subsequently breached the fiduciary duties arising out of that capacity. Defendants assert that there is a question of fact as to whether Weston agreed to act in such a capacity, and even if he did, he did not breach his duties as escrow agent.
Defendants admit that Weston agreed to act as escrow agent at least for the first funding scenario, i.e., the $40, 000 Bridge Loan. Doc. 111, ¶ 37. The testimony of Femia and Janette confirms this fact. See Doc. 105-2 at 5-6; Doc. 105-3 at 5-6. Plaintiffs argue that Weston breached his fiduciary duties in the following ways: (1) failing to disclose that it would be a conflict of interest for him to represent Jordan and serve as the escrow agent, (2) failing to create escrow instructions, and (3) failing to hold the Bill of Sale in trust and permitting it to be turned over to Jordan. Doc. 103 at 11-12. Defendants assert that Weston did not breach any fiduciary duties because no escrow was ever opened, and Weston could not have violated escrow instructions because none were ever created.
In Arizona, "[t]he escrow relationship gives rise to two distinct fiduciary duties." Maganas v. Northroup, 663 P.2d 565, 568 (Ariz. 1983). These include: (1) the duty "to act in strict compliance with the terms of the escrow agreement" and (2) the duty "to disclose known fraud." Id. Generally, an escrow agent has no duty to "police the affairs of its depositors" and has "no duty to go beyond the escrow instructions and notify any party to ...