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Pacesetter Consulting LLC v. Kapreilian

United States District Court, D. Arizona

December 2, 2019

Pacesetter Consulting LLC, Plaintiff,
v.
Herbert A. Kapreilian, et al., Defendants.

          ORDER

          Dominic W. Lanza, United States District Judge

         Pending before the Court are (1) a motion to dismiss the second amended complaint filed by defendants Craig Kapreilian, Herbert Kapreilian, Fruit World Nursery, Inc., and Eastside Packing, Inc. (collectively, “Defendants”) (Doc. 103), (2) a motion for leave to file a third amended complaint by plaintiff Pacesetter Consulting LLC (“Pacesetter”) (Doc. 98), and (3) a “Motion for Rule 60 Relief” filed by Pacesetter (Doc. 96). The Court issued a tentative ruling on November 18, 2019 (Doc. 124) and heard oral argument on December 2, 2019. For the following reasons, the Court will deny the motion to dismiss, grant in part and deny in part the motion to amend, and deny the motion for relief.

         BACKGROUND

         The facts as alleged in the second amended complaint (Doc. 87), and as established in other judicial proceedings related to this case, are as follows.[1]

         I. Factual Background

         In early 2005, Craig Kapreilian, along with nonparties John R. Norton III, John P. Norton, and Roger Stevenson, launched Citrines Operations, Inc (“Citrines”). (Id. ¶¶ 1-2.) Citrines' goal was to cultivate two orchards' worth of new, proprietary varieties of mandarins provided by Craig's company, Fruit World Nursery, Inc (“Fruit World”). (Id. ¶¶ 2, 20-22.) Herbert Kapreilian sold land to Citrines at a discount, on the condition that fruit produced from the orchards was packed by his company, Eastside Packing, Inc. (Id. ¶ 4.) The two orchards gave rise to two limited partnerships-Phoenix Orchard Group I and Phoenix Orchard Group II (“POG I” and “POG II”). (Id. ¶ 5.)

         Both orchard groups began seeking investors. (Id. ¶¶ 6-8.) One such investor was the Judson C. Ball Revocable Trust (the “Trust”). (Id. ¶ 7.) By April 2008, the Trust had contributed $200, 000 to each orchard group. (Id.)

         On the surface, it appeared to be a sound investment. The Executive Summary outlining the investment opportunity explained that Craig, through Fruit World, had conducted “14 years of world-leading research and development” that resulted in new mandarin varieties suited to the California growing season. (Id. ¶ 31.) That research enabled Craig to produce the mandarins in a cost-effective way, over most of the year, with high-quality fruit that surpassed what competitors were putting on the market. (Id.) The offering documents projected an annualized return of 22.4% over 25 years, with investors earning back their initial investments in six years. (Id. ¶ 32.)

         Beneath the surface, though, the roots were rotten. None of what Craig claimed about his experience or research was true. (Id. ¶¶ 39-40). The crops were particularly susceptible to freezes, and a 2006 freeze almost entirely wiped out POG I. (Id.) Craig's failures were so severe that he was fired from his position maintaining the orchards. (Id.)

         The trouble didn't end with Craig's lack of expertise, however. The complaint alleges a variety of side-deals, unauthorized transactions, unauthorized debts, and unauthorized personnel decisions made by Citrines and the Kapreilians. (Id. at 10-16, 17, 18.) These all deprived POG members of their decision-making rights and potential profits. (Id. at 3-4, 17.)

         II. State Court Litigation

         Unhappy with the situation, the Trust brought a lawsuit in Maricopa County Superior Court against POG I, POG II, Stevenson, the Nortons, and various business entities they controlled. (Doc. 103-1 at 3-6.) The Trust alleged the same factual background detailed above and brought statutory claims under A.R.S. §§ 44-1991(A), -1999(B), and -2003(A) and tort claims for misrepresentation and nondisclosure. (Id. at 11-13.) The defendants answered and filed a counterclaim seeking rescission of the Trust's interests in the orchard groups under A.R.S. § 44-2001(A). (Doc. 103-2 at 10-20.)

         The state court determined that rescission was appropriate and entered a declaratory judgment to that effect. (Doc. 103-3 at 6.) Rescission satisfied the Trust's statutory claims. (Id.) The court noted, however, that rescission did not satisfy the potential damages under the tort claims and declined to declare the Trust's tort claims satisfied. (Id.) The Trust was unsatisfied with rescission and appealed the decision. Judson C. Ball Revocable Trust v. Phoenix Orchard Group I, LP, 2018 WL 283049, *1 (Ariz.Ct.App. 2018) (mem. decision) (Trust I). The Arizona Court of Appeals affirmed the rescission.

         Although the Trust maintained its tort claims, they ultimately failed. (Doc. 103-6.) The state court determined that Judson Ball, representative for the Trust, didn't read any of the relevant materials before investing. (Id. at 5, 7-8, 11.) Because it was Ball's “extreme carelessness” that led to his alleged injuries, rather than misrepresentations made by the defendants, the court granted summary judgment in favor of the defendants. (Id. at 2, 5, 11.) That decision is currently on appeal. Judson C. Ball Revocable Trust v. Phoenix Orchard Group I, 2019 WL 2373855 (Ariz.Ct.App. 2019) (Trust III).

         While that litigation was ongoing, the Trust also brought a derivative action in state court against both orchard groups. Judson C. Ball Revocable Trust v. Phoenix Orchard Group I, 431 P.3d 589, 591 (Ariz.Ct.App. 2018) (rev. denied April 30, 2019) (Trust II). The state court dismissed the action after the rescission, holding that the Trust, because it no longer had an interest in the orchard groups, no longer had standing. Id. The Trust appealed but the Arizona Court of Appeals affirmed, concluding that, “because the Trust no longer possesses any ownership interest in POG, ” it no longer had standing to pursue the derivative action. Id. at 594.

         III. The Federal Case

         At some point in this affair, the Trust assigned its “right, title, interest, and claims to economic damages” to Pacesetter. (Doc. 87 at ¶ 7.) Pacesetter filed this action in January 2019, alleging the same factual background detailed above but bringing a variety of tort claims against the Kapreilians, their respective companies, and other entities responsible for the “side deals” that deprived the orchard groups of profits. (Doc. 1.) The complaint was amended the next month (Doc. 7), and then, after receiving leave from the Court, was amended again in June 2019 (Docs. 84, 87).

         In the course of discovery, Pacesetter became aware of a transfer of some of POG I's property to Agriculture Capital, LLC (“Agriculture Capital”) in November 2016. (Doc. 83 at 1.) Defendant Tom Avenelis, the owner of the farm management company now overseeing the orchards, is a member in Agriculture Capital. (Id.) “Because [Pacesetter] has a direct claim to conversion of POG assets . . . counsel requested a disclosure of the sale and closing documents” related to the property. (Id.) After Avenelis refused the request, the parties filed a notice of discovery dispute. (Id.) The Court construed the notice as a motion to compel and denied the motion. (Doc 92 at 17-18.) Specifically, the Court concluded that, because Agriculture Capital was a non-party to this litigation and because the relevance of the documents was unclear, an informal request for the documents was improper. (Id. at 19.)

         Pacesetter now seeks leave to amend its complaint for a third time. (Doc. 98.) The proposed amendment adds new defendants and three new causes of action, two of which are premised on the sale of property from POG I to Agriculture Capital. (Doc. 98 at 3; Doc. 98-1 at 1, 36-39.) Pacesetter has also filed a Rule 60 motion for relief from the Court's order in the discovery dispute, arguing that the short page limit on briefs led to “judicial surprise” and that new evidence has come to light that calls the Court's decision into doubt. (Doc. 96 at 1.) Avenelis has filed a response opposing the motion to amend, and Mark Bassetti has also filed a brief preserving an argument he plans to make in a motion to dismiss. (Docs. 106 and 107.) Avenelis has also filed a response to the Rule 60 motion. (Doc. 100.)

         Separately, the Kapreilians and their companies, Fruit World and Eastside Packing, have filed a motion to dismiss the second amended complaint. (Doc. 103.) They primarily argue that the Court lacks personal jurisdiction over them. (Id. at 5-6.) Even if jurisdiction is appropriate, Defendants argue the complaint should still be dismissed because it is barred by claim preclusion. (Id. at 5.) Pacesetter opposes the motion, arguing that jurisdiction is proper and that claim preclusion does not apply. (Doc. 111.)

         ANALYSIS

         I. Defendants' Motion to Dismiss

         Defendants raise essentially two arguments in their motion to dismiss. The first is that the Court lacks personal jurisdiction over them. The Kapreilians and their companies are all citizens of California, and they argue that their contacts with Arizona are insufficient to establish either general or specific jurisdiction for this action. (Doc. 103 at 6-10.) Second, even if personal jurisdiction exists, Defendants contend that Pacesetter's claims have already been litigated in the state court proceedings. (Id. at 10.) This action, they continue, must therefore be dismissed under the doctrine of claim preclusion. (Id. at 10-17.) The Court will address the jurisdictional question first.

         A. Persona ...


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