CWT Canada II Limited Partnership v. Danzik

          ORDER

          David G, Campbell, Senior United States District Judge

         Plaintiffs CWT Canada II Limited Partnership and Resource Recovery Corporation (collectively “CWT”) sued Defendants Elizabeth J. Danzik (“Elizabeth”), Danzik Applied Sciences, LLC (“DAS”), Tony Ker (“Ker”), and Richard Carrigan (“Carrigan”) for various claims related to approximately $5 million in unpaid tax credits. Doc. 1; Bridges Doc. 56.^[1]CWT, Ker, Carrigan, and Elizabeth move for summary judgment. Docs. 156; 165. Ker and Carrigan also move to strike a CWT sur-reply. Doc. 175. The motions are fully briefed, and oral arguments will not aide the Court's decision. LR Civ. 7.2(f); Fed.R.Civ.P. 78(b). For the following reasons, the Court will deny CWT's motion in part and grant it in part, deny Ker and Carrigan's Motion, grant Elizabeth's motion in part and deny it in part, and grant Ker and Carrigan's motion to strike.

         I. Background.

         A. The Parties and the Agreement.

         Dennis Danzik (“Danzik”) was the chief executive officer of RDX Technologies, Corp. (“RDX”), a now-defunct corporation. Doc. 1 ¶1. Danzik also owns DAS. Bridges Doc. 1 ¶ 2. Dennis and his spouse, Elizabeth, own Deja II, LLC (“Deja”). Doc. 1 ¶ 1. CWT entered into a transaction to sell their company, Changing World Technologies, L.P. (“Changing World”), to RDX. Bridges Doc. 1 ¶ 2. CWT also entered into a transaction to purchase RDX stock. Id. ¶ 32. Ker was the chairman of the RDX board, and Carrigan was a board member. Id. ¶ 5.

         In 2013, CWT and RDX entered into a Uniform Purchase Agreement (the “UPA”), for Changing World. Id. ¶ 22. Under the UPA, RDX signed two promissory notes totaling $20 million and provided stock to CWT. Id. ¶ 32. Changing World was the holding company and sole member of Renewable Environmental Solutions, LLC (“RES”), which manufactured and sold renewable diesel fuel. Id. Under a federal subsidy program, RES was eligible for tax credits for every gallon of diesel fuel produced. Id. RES owed no taxes because it had no profit, and therefore it received a tax credit payment every year. Id. In 2011, the subsidy program expired and then was renewed retroactively in 2013. Id. ¶ 24. Accordingly, in 2013 or 2014 RES could request millions of tax credits earned in 2012. Id. Under the UPA, “one hundred percent of all amounts received by [RDX] as a result of the reinstatement of any Federal or state tax credit relating to the period prior to and including December 21, 2012 [would] be allocated and distributed to [CWT].” Doc. 158-1 (0607) § 2.3.

         Prior to selling Changing World to RDX, CWT invited Gem Holdco, LLC (“GEM”) to be a limited partner with the CWT parties. Id. GEM wanted to invest enough to own sixty percent of CWT, but it planned to resell the ownership to RDX. Id. By March 2013, CWT realized that GEM was not complying with its contractual obligations to fund the company and obtain its sixty percent interest. As a result, CWT contracted with RDX separately to sell Changing World. Id. ¶ 31.

         B. The New York Action.

         GEM filed an action in New York against CWT for failing to sell it sixty percent of Changing World, and CWT joined Danzik and RDX as defendants. Id. ¶ 39. By August 2014, relations between CWT, Danzik, and RDX began to sour because RDX refused to pay the purchase price for Changing World, to remit the tax credits to CWT, and to provide $1 million in stock. Id. ¶ 40.

         Danzik argued that CWT defrauded RDX because the RES refining process was not the expected quality. Id. ¶¶ 41-42. Danzik further argued that he was holding the tax credit funds for the U.S. government because RES did not produce renewable diesel to be eligible for the tax credit. Id. ¶ 44. In 2015, CWT filed crossclaims in the New York action against Danzik and RDX for the misappropriation of the tax credits and other breaches of the UPA. Id. ¶ 48; Dennis Doc. 60-12 at 30.

         In December 2015, CWT moved for a preliminary injunction to prohibit Danzik and RDX from using or transferring the RES tax credit funds and to require them to deposit the funds into a separate trust account. Dennis Doc. 60-15. The New York Court granted CWT's motion. Dennis Doc. 60-16. Justice Kornreich explained that there was “no question of fact that the [] tax credits d[id] not belong to [Danzik and RDX]. The money either belong[ed] to the CWT parties or the federal government. . . . [R]egardless of the outcome of this litigation, [Danzik and RDX] w[ould] not keep the money.” Id. at 6.

         At a hearing on November 4, 2015, Justice Kornreich granted a motion to strike Danzik and RDX's defenses. See Dennis Doc. 60-19 at 3-4 (“I am striking Mr. Danzik and RDX's, any kind of response they have to [the crossclaim]. There is no answer to that, no opposition to that. There is going to be a default on that if there is a motion for a default judgment.”). This ruling was based on Danzik and RDX's repeated refusals to comply with court orders to produce certain bank records and ESI during discovery. Id. at 3-5.

         On June 3, 2016, after holding a contempt hearing, Justice Kornreich found Danzik and RDX in civil and criminal contempt for violating the attachment order and a later-granted temporary restraining order requiring Danzik and RDX to set aside the tax credit funds. Dennis Doc. 60-22. Justice Kornreich proceeded to the merits and found that there was “no question that [Danzik and RDX] willfully violated the Attachment Order and the TRO.” Id. at 9.

         In August 2016, Justice Kornreich granted CWT's unopposed motion for default judgment against Danzik and RDX on their crossclaims. Dennis Doc. 60-2.^[2] In assessing whether CWT had a viable cause of action against Danzik and RDX for purposes of entering default judgment, Justice Kornreich explained that the breach of trust crossclaim “concerns [Danzik and RDX's] breach of their obligation to hold the tax credits in constructive trust for [CWTs], as required by the UPA.” Id. at 5-6. She concluded that Defendants' “right to the tax credits under the UPA is clear, and any defense RDX may have had has been stricken.” Id. at 6. A final judgment was entered the following month against Danzik and RDX in the amount of $7, 033, 491.13. Dennis Doc. 60-3.

         C. The Current Litigation.

         On March 4, 2016, CWT sued Elizabeth and Deja, alleging that Elizabeth received $730, 000 that Danzik stole from CWT, and that she defrauded CWT in a separate RDX stock transaction. See Doc. 1 ¶ 1. Next, CWT sued DAS, Carrigan, and Ker, alleging that they knew of and aided in Danzik's fraudulent theft scheme. Bridges Doc. 1. Ker filed a counterclaim to that suit. See Bridges Doc. 81. Finally, Danzik and RDX sued CWT and various parties related to CWT, alleging that they defrauded Danzik into purchasing Changing World. Dennis Doc. 1. On September 27, 2017, the Court granted the parties' motion to consolidate these actions and directed the parties to make subsequent filings in the Elizabeth Action. See Doc. 96. The Court granted motions to dismiss Ker's abuse of process counterclaim and the Dennis Action. See Doc. 119.

         The remaining claims include fraud against Carrigan and Ker (Bridges Doc. 56 ¶¶ 95-100); conversion against DAS (id. ¶¶ 101-11); tortious interference with contractual relations against Carrigan and Ker (id. ¶¶ 112-19); breach of trust against Carrigan and Ker (id. ¶¶ 120-30); breach of fiduciary duty against Carrigan and Ker (id. ¶¶ 131-39); aiding and abetting fraud, conversion, breach of trust/misappropriation of trust assets and breach of fiduciary duty against DAS, Bridges, Carrigan, and Ker (id. ¶¶ 140-51); unjust enrichment and restitution against DAS (id. ¶¶ 152-57); constructive trust against DAS (id. ¶¶ 158-62); fraudulent transfers under A.R.S. § 44-1004(A)(1) against DAS (id. ¶¶ 163-68); fraudulent transfers under A.R.S. § 44-1004(A)(2) against DAS (id. ¶¶ 169-75); fraudulent transfers under A.R.S. § 44-1005 against DAS (id. ¶¶ 176-82); and common law conspiracy to commit fraudulent transfers against DAS, Carrigan, and Ker (id. ¶¶ 183-87).^[3]Claims for defamation under Arizona and Canadian law remain in Ker's second amended counterclaim against CWT. See Doc. 99 ¶¶ 63-76.

         In the Elizabeth Action, the remaining claims include fraud against Elizabeth and Deja (Doc. 1 ¶¶ 95-109); conversion against Elizabeth and Deja (id. ¶¶ 110-15); money had and received against Elizabeth and Deja (id. ¶¶ 116-22); breach of contract against Deja (id. ¶¶ 123-28); conversion of the tax credits against Elizabeth (id. ¶¶ 129-38); money had and received related to the tax credits against Elizabeth (id. ¶¶ 139-45); unjust enrichment and restitution against Elizabeth and Deja (id. ¶¶ 146-51); unjust enrichment and restitution against Elisabeth (id. ¶¶ 152-57); constructive trust against Elizabeth and Deja (id. ¶¶ 158-62); and accounting against Elizabeth and Deja (id. ¶¶ 163-67).

         II. 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 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).

         III. Discussion.

         A. CWT's Motion.

         CWT moved for summary judgment on the conversion claim against Ker and Carrigan, on the issue of whether Ker and Carrigan could relitigate issues decided in the New York action, and on Ker's defamation counterclaims. See Doc. 156.

         1. Conversion Claim.

         a. Notice of Conversion Claim Against Ker and Carrigan.

         CWT argues that summary judgment should be granted against Ker and Carrigan for conversion, but Ker and Carrigan argue that CWT never pled a conversion claim against them. Docs. 156 at 11; 165 at 9. Ker and Carrigan argue that the only count related to their conversion of the tax credits is a claim for aiding and abetting conversion. Doc. 165; see also Bridges Doc. 56 ¶¶ 140-51.

         Under the liberal rules of pleading, a plaintiff need only provide a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a). A pleading must give fair notice of the claims against each Defendant. See Rynn v. McKay, No. CV-18-00414-PHX-JJT, 2018 WL 3926666, at *2 (D. Ariz. Aug. 16, 2018) (group pleading fails to comply with Rule 8(a)(2) because it does not give fair notice of the claims against each defendant with the requisite specificity). Plaintiffs' complaint need not contain a specific legal theory so long as the complaint, fairly read, contains the factual basis to provide notice of the absent claim. See Pickern v. Pier 1 Imports (U.S.), Inc., 457 F.3d 963, 968 (9th Cir. 2006) (affirming summary judgment where the complaint did not give fair notice of the factual basis for a claim raised for first time in opposition to summary judgment); Am. Timber & Trading Co. v. First Nat'l Bank of Or., 690 F.2d 781, 786 (9th Cir. 1982) (“A party need not plead specific legal theories in the compliant, so long as the other side receives notice as to what is at issue in the case.”).

         CWT's second amended complaint alleges conversion as its second cause of action against DAS. Bridges Doc. 56 ¶¶ 101-11. CWT first alleges that Danzik and RDX received specific sums of money in an aggregate amount of about $ 6 million in the form of tax credit payments from the United States Treasury. Id. ¶ 102. CWT next alleges that “Danzik, acting in concert with Bridges, Carrigan, Ker and other RDX insiders, diverted the funds to accounts in the name of DAS and/or to other accounts that Danzik controlled.” Id. ¶ 103. The complaint then states that DAS received identified funds that rightly belong to the CWT parties, the CWT parties have a possessory interest to these funds that is superior to that of DAS, DAS failed to return the tax credit funds and has “exercised dominion of them for its own purpose, and DAS therefore converted the tax credits. Id. ¶ 101-07. In its sixth cause of action, CWT alleges that Carrigan and Ker are liable for aiding and abetting Danzik and RDX's conversion of the credits. Id. ¶ 141.

         CDX's complaint does not assert a conversion claim against Ker and Carrigan. The eleven factual allegations associated with the conversion claim mainly relate to DAS's actions and liability in relation to the tax credits. Specifically, the complaint alleges that “DAS has unlawfully converted the Tax Credits funds to its own use” (Bridges doc. 56 ¶ 107), and “DAS is liable for conversion in an amount to be determined at trial” (id. ¶ 111). The only reference to Ker and Carrigan states that “Danzik, acting in concert with Carrigan and Ker . . . diverted the funds to accounts in the name of DAS.” Id. ¶ 103. These allegations do not support a claim for conversion against Carrigan and Kerr. See Bodley v. Macayo Rests., LLC, 546 F.Supp.2d 696, 698 n.2 (D. Ariz. 2008) (new factual theories in response to summary judgment do not preclude summary judgment); Kreiger v. Nationwide Mut. Ins., No. CV11-01059-PHX-DGC, 2012 WL 1029526, at *5 (D. Ariz. March 27, 2012) (where the complaint does not mention the facts the legal theory rests on it fails to give adequate notice to the parties); Stokes v. Arpaio, No. CV 04-2845-PHX-DGC (MEA), 2008 WL 3286175, at * 6 (D. Ariz. Aug.7, 2008) (“Plaintiff's new allegations [challenging a different policy] cannot properly be construed as falling within the First Amended Complaint”).

         CWT argues that the parties have been on notice of the conversion claim since the beginning of the case because Ker and Carrigan's possible conversion came up during discovery and because CWT asserted a claim for breach of fiduciary duty, which put them on notice that they could be held liable regardless of their tortious intent. See Doc. 170 at 9-10. CWT cites to several documents outside of the complaint that demonstrate Carrigan and Ker knew about the conversion claim. See id. (citing Bridges Doc. 54 at 11 (stating that Carrigan, as a corporate director, was liable for the theft of the tax credits); Bridges Doc. 70 at 5 (stating that Danzik gave testimony that Carrigan was an accomplice to the theft); Doc. 136 at 7 (stating “Ker and Carrigan are liable because they caused RDX to deposit and use the CWT Parties' tax credits”). Further, CWT points to Ker and Carrigan's deposition questioning about an auditor's report that noted lack of oversight of closely related transactions. Doc. 170 at 10.

         CWT's arguments are unavailing. The test for notice is based primarily on the complaint. CWT cites Sagana v. Tenorio, 384 F.3d 731 (9th Cir. 2004), for the proposition that a party can be put on notice of a claim if the other party seeks discovery on that issue. See Doc. 170 at 10. But Sagana addressed not only a complaint but an accompanying settlement agreement. Indeed, the Ninth Circuit looked to the text of the settlement agreement to determine whether the plaintiff's right to pursue a particular claim had been preserved. The court of appeals found the factual basis for the claim clearly set out in the settlement agreement and also found that the complaint contained ...