Ocean Garden Products Inc. v. Blessings Inc.

          ORDER

          Rosemary Marquze, Judge

         On July 2, 2018, Plaintiff Ocean Garden Products Inc. (“Plaintiff” or “OG”) initiated a lawsuit against Defendants Blessings, Inc. (“Blessings”) and David Mayorquin (“David”), alleging breach of contract and other claims (Doc. 1 in case number CV-18-322)^[1] (the “Contract Action”). The operative pleadings in the Contract Action are Plaintiff’s First Amended Complaint (Doc. 86), which adds Abraham Mayorquin and ADAB Ocean Harvest, S. De R.L. De C.V. (“ADAB Mexico”) as defendants; Defendants’ Answer to First Amended Complaint and Counterclaims (Doc. 92); and Plaintiff’s Answer to the Counterclaims (Doc. 109).

         On May 22, 2019, Plaintiff initiated a separate lawsuit against Defendants David, David’s wife Amanda Lopez Vergara, Abraham, Abraham’s wife Viviana Lopez, ADAB Mexico, ADAB Ocean Harvest LLC (“ADAB Tucson”), and Pacific Ocean Harvest S. De R.L. De C.V. (“Pacific Ocean Harvest”), alleging claims under Arizona’s Uniform Fraudulent Transfer Act (“UFTA”), A.R.S. 44-1004, et seq. (Doc. 1 in case number CV- 19-284) (the “UFTA Action”). The parties jointly moved to consolidate the Contract Action and UFTA Action (Doc. 144), and the Court granted consolidation on June 24, 2019 (Doc. 146). The operative pleadings in the UFTA Action are Plaintiff’s Amended Complaint (Doc. 154), which adds Blessings as a defendant, and Defendants’ Answer to the Amended Complaint (Doc. 206).

         Currently pending before the Court is Plaintiff’s Motion for Preliminary Injunction. (Doc. 149.)^[2] Defendants filed a Response (Doc. 150) and a Supplemental Response (Doc. 158), and Plaintiff filed a Reply (Doc. 167). The Court held an evidentiary hearing on July 23, 2019 and August 22-23, 2019. (Docs. 177, 194, 202.) Based upon an oral stipulation of the parties at the July 23, 2019 hearing, the Court entered temporary injunctive relief pending resolution of Plaintiff’s Motion for Preliminary Injunction. (Doc. 180.)

         I. Background

         Blessings is an Arizona corporation located in Tucson. It is wholly owned by brothers David and Abraham, and David serves as its President and Chief Executive Officer (“CEO”). Blessings began as a seafood distributor for local restaurants in Tucson. In 2006, it purchased a processing facility located on Highland Avenue. In approximately 2008, Blessings began selling processed shrimp to national chains such as Costco and Trader Joe’s.

         In or around 2011 or 2012, Blessings set up ADAB Mexico to process shrimp for Blessings as a maquiladora. ADAB Mexico is a Mexican company located in Nogales, Mexico. Like Blessings, it is wholly owned by David and Abraham. A maquiladora agreement dated May 31, 2012 is signed by David on behalf of both Blessings and ADAB Mexico. According to David, in 2012 and 2013, Blessings paid ADAB Mexico processing fees calculated pursuant to the maquiladora agreement as ADAB Mexico’s total operating expenses plus a 6.5% markup. Starting in 2014, Blessings began paying ADAB Mexico processing fees calculated as 80 cents per pound of shrimp processed by ADAB Mexico. Defendants have not introduced an addendum to the original maquiladora agreement or any subsequent maquiladora agreements.

         In 2012, David learned that Blessings was the subject of a criminal investigation involving sea cucumber exportation, and he retained criminal defense counsel. According to Blessings’ audited 2012 financial statements, the company’s net income in 2012 was $1, 038, 162 and it paid processing fees totaling $674, 699 to ADAB Mexico. The financial statements reflect a shareholder loan receivable of $84, 394.

         On August 28, 2013, Blessings executed an unsecured promissory note in favor of OG for the principal sum of $1, 500, 000. According to Celso Lopez, the Chief Financial Officer of OG, Blessings was supposed to use the loan to purchase domestic shrimp to be processed by Blessings and sold to OG at a discounted price, with the discount credited against the balance of the loan. According to David, the loan was used not only to purchase domestic shrimp but to purchase equipment and supplies, and to hire and train personnel, in service of the domestic shrimp program. Blessings delivered $470, 000 worth of shrimp pursuant to the loan agreement, but $240, 000 worth was returned to Blessings due to quality issues. After accounting for the returned shrimp, the unpaid balance owed under the 2013 note was $1, 273, 633.40. According to Blessings’ audited 2013 financial statements, the company suffered net losses of $980, 822 in 2013 and paid processing fees of $1, 924, 367 to ADAB Mexico. It had $7, 490, 535 in total assets and $6, 856, 667 in total liabilities. The financial statements reflect a shareholder loan receivable of $740, 968.

         The unpaid balance of the 2013 promissory note was subsumed into a June 1, 2014 unsecured promissory note executed by Blessings in favor of OG. Blessings did not pay the amount due under the 2014 note. Blessings also began defaulting on invoices for shrimp delivered to Blessings by OG during the 2014-2016 time frame.^[3] According to Blessings’ audited 2014 financial statements, the company’s net income in 2014 was $236, 541, and it paid processing fees of $1, 156, 874 to ADAB Mexico. It had $9, 942, 012 in total assets and $9, 179, 497 in total liabilities. The financial statements reflect a shareholder loan receivable of $823, 417. For the first time, the financial statements also reflect a note receivable from ADAB Mexico in the amount of $1, 312, 270, of which $480, 997 was classified as a current asset based on management’s averment that this portion of the note was expected to be repaid in the near future.^[4]

         In approximately 2015, Blessings lost Trader Joe’s as a customer after Trader Joe’s rejected shrimp delivered by Blessings due to high sodium levels. The shrimp rejected by Trader Joe’s had been processed by Blessings after being purchased from OG. OG took possession of the shrimp for a period of time before asking Blessings to attempt to resell it. The parties dispute responsibility for the quality issues that caused Trader Joe’s to reject the shrimp.

         On November 18, 2015, Blessings sent OG a proposed repayment plan containing provisions for the repayment of Blessings’ debt to OG. Blessings alleges that the proposal resulted in a modification agreement which OG later breached; OG denies entering into any modification agreement. The record does not contain a written modification agreement signed by Blessings and OG, although it contains some conflicting evidence regarding whether the parties operated for a time pursuant to the provisions of Blessings’ November 18, 2015 proposal. According to Blessings’ draft 2015 financial statements, the company’s net income in 2015 was $15, 392, and it paid processing fees of $480, 997 to ADAB Mexico. It had total assets of $7, 767, 322 and total liabilities of $7, 033, 030. The financial statements reflect a loan receivable from ADAB Mexico of $2, 677, 683, classified entirely as a current asset, and a shareholder loan receivable of $838, 417.

         In January 2016, Lance Leonard replaced Javier Corella as the CEO of OG. Later that year, OG sued Blessings in Arizona state court. OG obtained a default judgment in that lawsuit, but the judgment was later overturned on the grounds of insufficient service and OG voluntarily dismissed the case. Also in the year 2016, Trader Joe’s sued Blessings in arbitration for delivering contaminated shrimp.^[5] By the end of 2016, the loan receivable from ADAB Mexico had increased to approximately $2.99 million.

         In 2017, David and Blessings were publicly indicted on charges arising from the sea-cucumber investigation. Costco, Blessings’ largest customer, stopped doing business with Blessings after the criminal indictment was publicly reported. Plaintiff and Defendants dispute whether OG was aware of the criminal investigation prior to the indictment becoming public. Ultimately, David pled guilty to a misdemeanor and Blessings pled guilty to a felony, and they were ordered to pay a criminal fine of nearly $1 million. In order to separate himself from David after the indictment, Abraham founded ADAB Tucson, which resells shrimp, and Pacific Ocean Harvest, which processes shrimp for ADAB Tucson.

         ADAB Mexico no longer does any business with Blessings; however, it continues to operate and process food products for other customers. According to David, ADAB Mexico’s profits in 2018 were approximately $600, 000. Although David and Blessings’ controller Erin McGinnis at one point concluded that the ADAB Mexico loan was uncollectable, ADAB Mexico has recently made irregular payments on the loan.

         Blessings no longer processes shrimp but continues to operate as a seafood distributor for local restaurants in Tucson. Although Blessings’ current finances are not clear from the record presently before the Court, it appears that the company is insolvent and has been since at least 2017. David testified at the preliminary injunction hearing that, if Ocean Garden were to obtain a judgment for $2.4 million in this case, neither David, Blessings, nor ADAB Mexico would be able to pay the judgment. OG seeks damages of over $5 million in these consolidated actions. (See Docs. 86, 154.)

         Blessings owns the processing facility on Highland Avenue, subject to a mortgage. It also owns a vacant lot on Thornydale Road, free and clear of a mortgage. The Highland Avenue and Thornydale properties are encumbered by a National Bank of Arizona loan and by the criminal fine owed to the United States government. David and Abraham each own a residential property in Tucson, subject to mortgages. Defendants have not disclosed or presented evidence showing how much equity exists in these four properties.

         II. Discussion

         Plaintiff seeks preliminary injunctive relief with respect to the UFTA Action. As an initial matter, Defendants argue that Plaintiff should have sought a writ of attachment under A.R.S. § 12-1521 rather than a preliminary injunction. However, Defendants concede that Arizona’s UFTA expressly provides for the remedy of injunctive relief. Furthermore, the Court finds that the determination of whether to grant preliminary injunctive relief in this matter is governed by federal, rather than state, law.

         The court may issue a preliminary injunction on notice to the adverse party pursuant to Federal Rule of Civil Procedure 65. In determining whether to grant preliminary injunctive relief, the Court considers: (1) whether the movant is likely to succeed on the merits; (2) whether the movant is likely to suffer irreparable harm in the absence of preliminary injunctive relief; (3) the balance of equities between the parties; and (4) the public interest. Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). The Ninth Circuit follows a “sliding scale” approach to preliminary injunctions. Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131-32 ...