Five Points Hotel Partnership et al v. Pinsonneault et al

Filing 19

ORDER denying 16 Plaintiffs' Motion to Strike and denying 12 Defendants' Motion to Dismiss. Signed by Judge James A Teilborg on 12/12/11.(LSP)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Five Points Hotel Partnership; Paragon)
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Hotel Corporation,
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Plaintiffs,
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vs.
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Joe Pinsonneault; Jane Doe Pinsonneault,)
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Defendants.
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No. CV 11-548-PHX-JAT
ORDER

Currently pending before the Court are Defendants’ Motion to Dismiss (Doc. 12) and

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Plaintiffs’ Motion to Strike (Doc. 16). The Court now rules on the Motions.

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I. BACKGROUND

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Plaintiff Five Points Hotel Partnership (“Five Points”) is an Arizona general

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partnership that owned a Holiday Inn in Casa Grande Arizona (the “Hotel”). Plaintiff

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Paragon Hotel Corporation (“Paragon,” collectively with Five Points, “Plaintiffs”) is the

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managing general partner of Five Points.

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In March 2005, Five Points sold the Hotel to Casa Grande Resort Living, LLC

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(“Casa”), an Arizona limited liability company. Defendant Joe Pinsonneault (“Defendant”)

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is the sole manager and a member of Casa. Mr. Pinsonneault is a California real estate

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developer who formed Casa for the purpose of purchasing the Hotel.

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Five Points and Casa agreed that Casa would purchase the hotel for $3.8 million.

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Pursuant to the purchase contract, Casa paid nothing at the time of the closing, but assumed

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the Hotel’s bond debt. Casa planned to immediately resell the Hotel.

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Plaintiffs allege the parties agreed that upon resale of the Hotel and a “second

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closing,” the bond trustee and escrow company would reconcile the Hotel’s bond reserve

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accounts and specified operating accounts of the Hotel and pay Five Points any remaining

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funds. At that time, Casa also would pay Five Points any difference between the total payoff

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amount of the bonds and the stated purchase price of the Hotel.

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Plaintiffs allege that Casa did not make any payments on the bond interest after

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purchasing the Hotel. Instead, Casa and Defendant allegedly allowed the bond reserve

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accounts that belonged to Five Points to become depleted, and made no effort to replenish

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them. Defendant never created a bond reserve account for Casa and did not fund a checking

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account for Casa.

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Casa resold the Hotel to Peter Nagra in June 2005 for $6.1 million. After Five Points

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provided the bond payoff amounts to the title agency, Five points requested the escrow

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documents related to the re-sale, believing the re-sale to be the anticipated “second closing”

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that would reconcile the Hotel’s operating and bond reserve accounts. But the title agency

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informed Five Points that because Five Points was not a party to the resale, Five Points

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would not be receiving any supporting documents. The title agency refused to pay any sums

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or provide a reconciliation of the accounts and reserves to Five Points. Defendant had the

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resale proceeds transferred directly from the escrow account into a personal bank account,

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bypassing Casa.

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Because of the failure to reconcile the bond reserve and operating accounts, Five

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Points brought suit in Arizona Superior Court against Casa, Defendant Pinsonneault, and the

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title agency in December of 2005. The trial court granted the title agency’s motion for

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summary judgment and Defendant Pinsonneault’s motion for summary judgment. After a

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bench trial in September 2009, the state court found in favor of Five Points on its remaining

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claims against Casa. On April 26, 2010, the state court entered a judgment in favor of

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Plaintiffs and against Casa in the amount of $300,000 and awarded Plaintiffs $200,000 in

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costs and attorneys fees plus pre- and post-judgment interest.
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Plaintiffs have not been able enforce this judgment because Casa has no assets.

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Plaintiffs therefore brought this action against Defendant Pinsonneault under an alter

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ego/piercing the corporate veil theory to attempt to collect the outstanding judgment from

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Defendant’s personal assets.

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II. MOTION TO STRIKE

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Plaintiffs have moved pursuant to Local Rule of Civil Procedure 7.2(m)(1) to strike

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Defendants’ Reply in Support of the Motion to Dismiss. Plaintiffs argue that the Reply

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improperly attempts to convert Defendants’ Motion to Dismiss into a motion for summary

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judgment. Defendants claim that because they attached documents to their Motion to

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Dismiss, the Court must convert their Motion to a motion for summary judgment, and

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Plaintiffs therefore must demonstrate issues of fact to survive the motion.

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Local rules of civil procedure provide that a motion to strike may be filed only if it

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is authorized by statute or rule, such as Rules 12(f), 26(g)(2) or 37(b)(2)(A)(iii), or if it seeks

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to strike any part of a filing or submission on the ground that it is prohibited by a statute, rule,

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or court order. L.R.Civ.P. 7.2(m)(1). Plaintiffs have not identified which statute or rule

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authorizes their Motion to Strike. Nor have Plaintiffs demonstrated that a statute, rule, or

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court order prohibits all or part of Defendants’ Reply.

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Plaintiffs’ take issue with Defendants’ attempts to unilaterally convert their motion

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to a motion for summary judgment. And, as set out below, the Court finds Defendants’

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attempts unavailing. But that does not mean that the Court should strike the Reply. Because

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Plaintiffs have not articulated a proper legal basis, the Court will deny the Motion to Strike

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the Reply.

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III. MOTION TO DISMISS

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As both Plaintiffs and Defendants have indicated, Defendants attached exhibits to

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their Reply. Defendants have attached: 1) the February 2011 Memorandum decision from

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the Arizona Court of Appeals affirming the trial court in the earlier state action; 2) the

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transcript of Mr. Rhead’s testimony from the underlying state bench trial; and 3) the First

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Amended Complaint from the earlier state court action.
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The Court generally cannot consider material beyond the complaint in ruling on a

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Rule 12(b)(6) motion to dismiss. Intri-Plex Tech., Inc. v. The Crest Group, Inc., 499 F.3d

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1048, 1052 (9th Cir. 2007). The Court can, however, take judicial notice of matters of public

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record without converting a motion to dismiss into a motion for summary judgment. Id. But

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the Court cannot take judicial notice of disputed facts stated in public records. Lee v. City

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of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001). The Court can take judicial notice of

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another court’s opinion “not for the truth of the facts recited therein, but for the existence of

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the opinion, which is not subject to reasonable dispute over its authenticity.” Id. at 690

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(internal citations omitted).

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So, the Court can take judicial notice of the Arizona Court of Appeals decision

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attached to the Motion to Dismiss for the fact of its existence, the parties to the state case,

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and the result of the disposition, but not for the truth of the facts therein, without converting

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the Motion to a motion for summary judgment. The Court can also take judicial notice of

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the attached First Amended Complaint from the state case, without taking judicial notice of

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the disputed facts within the First Amended Complaint. The Court cannot take judicial

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notice of the contents of Mr. Rhead’s testimony.

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The Court will take judicial notice of the attached documents because they are matters

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of public record, but will not take judicial notice of any disputed facts found in the

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documents. The Court will disregard the attached documents to the extent Defendants cite

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them for any disputed issues of fact. The Court therefore will not convert the Motion to

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Dismiss into a motion for summary judgment.

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Defendants are free, as they have threatened, to immediately file a motion for

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summary judgment because the Court will not consider disputed facts when deciding the

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pending Motion to Dismiss. But Plaintiffs correctly point out that they can move for

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discovery pursuant to Rule 56(d) in lieu of responding to the merits of the motion. The Court

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further notes that it allows parties to file only one motion for summary judgment.

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A. LEGAL STANDARD

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The Court may dismiss a complaint for failure to state a claim under 12(b)(6) for two

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reasons: 1) lack of a cognizable legal theory and 2) insufficient facts alleged under a

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cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.

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1990).

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To survive a 12(b)(6) motion for failure to state a claim, a complaint must meet the

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requirements of Federal Rule of Civil Procedure 8(a)(2). Rule 8(a)(2) requires a “short and

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plain statement of the claim showing that the pleader is entitled to relief,” so that the

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defendant has “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell

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Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)(quoting Conley v. Gibson, 355 U.S. 41,

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47 (1957)).

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Although a complaint attacked for failure to state a claim does not need detailed

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factual allegations, the pleader’s obligation to provide the grounds for relief requires “more

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than labels and conclusions, and a formulaic recitation of the elements of a cause of action

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will not do.” Twombly, 550 U.S. at 555 (internal citations omitted). The factual allegations

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of the complaint must be sufficient to raise a right to relief above a speculative level. Id.

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Rule 8(a)(2) “requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief.

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Without some factual allegation in the complaint, it is hard to see how a claimant could

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satisfy the requirement of providing not only ‘fair notice’ of the nature of the claim, but also

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‘grounds’ on which the claim rests.” Id. (citing 5 C. Wright & A. Miller, Federal Practice

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and Procedure §1202, pp. 94, 95(3d ed. 2004)).

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Rule 8’s pleading standard demands more than “an unadorned, the-defendant-

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unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009)(citing

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Twombly, 550 U.S. at 555). A complaint that offers nothing more than naked assertions will

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not suffice. To survive a motion to dismiss, a complaint must contain sufficient factual

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matter, which, if accepted as true, states a claim to relief that is “plausible on its face.” Iqbal,

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129 S.Ct. at 1949. Facial plausibility exists if the pleader pleads factual content that allows

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the court to draw the reasonable inference that the defendant is liable for the misconduct
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alleged. Id. Plausibility does not equal “probability,” but plausibility requires more than a

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sheer possibility that a defendant has acted unlawfully. Id. “Where a complaint pleads facts

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that are ‘merely consistent’ with a defendant’s liability, it ‘stops short of the line between

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possibility and plausibility of entitlement to relief.’” Id. (citing Twombly, 550 U.S. at 557).

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In deciding a motion to dismiss under Rule 12(b)(6), the Court must construe the facts

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alleged in the complaint in the light most favorable to the drafter of the complaint and the

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Court must accept all well-pleaded factual allegations as true. See Shwarz v. United States,

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234 F.3d 428, 435 (9th Cir. 2000). Nonetheless, the Court does not have to accept as true

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a legal conclusion couched as a factual allegation. Papasan v. Allain, 478 U.S. 265, 286

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(1986).

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B. ANALYSIS AND CONCLUSION

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Defendants argue that Plaintiffs have failed to allege facts sufficient to state a claim

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for piercing the corporate veil/alter ego; that Plaintiffs’ claims are barred by res judicata; and

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that Plaintiffs’ claims are barred by the statute of limitations.

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1. Failure to State a Claim

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In general, a corporation is treated as a separate entity, and the personal assets of a

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corporate officer may not be reached to satisfy corporate liabilities. Loiselle v. Cosas Mgmt.

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Group, LLC, 228 P.3d 943, 950 (Ariz. Ct. App. 2010). But courts will disregard the

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corporate entity and pierce the corporate veil if there is sufficient evidence that: 1) the

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corporation is actually the alter ego of one or a few individuals and 2) observance of the

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corporate’s separate legal status would sanction a fraud or promote injustice. Employer’s

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Liab. Assurance Corp. v. Lunt, 313 P.2d 393, 395 (Ariz. 1957). “The disregard of the

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corporate fiction has not been [limited] to instances where the incorporation is for fraudulent

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purposes, but may be observed if after organization the corporation is employed for

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fraudulent purposes.” Id. at 396.

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To survive a 12(b)(6) motion to dismiss, Plaintiffs must allege facts sufficient to raise

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a right to relief above a speculative level. Twombly, 550 U.S. at 555 (internal citations

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omitted). Plaintiffs’ claims to relief must be plausible on their face. Iqbal, 129 S.Ct. at 1949.
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Plaintiffs have alleged that: Defendant is Casa’s only known manager and owner;

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Defendant created and ran Casa as his own personal asset; Defendant undercapitalized Casa

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to fulfill its intended purpose; Casa did not have a checking account; Defendant never created

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any bond reserve accounts for Casa; Defendant had the Hotel resale proceeds transferred

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directly from the escrow account into a personal bank account, bypassing the Casa corporate

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form; Because Casa received no funds in a corporate account from the resale, it could not pay

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the money it owed to Five Points under the Agreement of Asset Purchase; and Defendant

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paid for Casa’s legal defense in the underlying state action from his own personal funds.

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Assuming all the foregoing facts are true, as the Court must when deciding a motion to

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dismiss, the Court finds that Plaintiffs have alleged facts sufficient to state a plausible claim

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for piercing the corporate veil/alter ego.

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Defendants mention in their Reply that “an action to pierce the corporate veil is . . .

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not a separate claim.” (Doc. 15 p.6.) But Defendants do not urge this as a basis for

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dismissing the case.

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Some states treat veil piercing/alter ego as an equitable remedy, not a separate cause

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of action. See e.g., Forever Green Athletic Fields, Inc. v. Lasiter Constr., - - - S.W.3d - - -,

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2011 WL 1784350 *19 (Ark. Ct. App. May 11, 2011)(“The doctrine of piercing the corporate

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veil is an equitable remedy; it is not itself a cause of action; rather, it is a means of imposing

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liability on an underlying cause of action, such as a tort or breach of contract.”). Other states

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recognize the alter ego theory as a separate and distinct claim. See, e.g., Saidawi v.

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Giovanni’s Little Place, Inc., 987 S.W.2d 501, 504 (Mo. App. E.D. 1999)(“The alter ego

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theory is a separate and distinct cause of action under Missouri law.”).

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The Court could not find an Arizona case1 specifically addressing whether an alter ego

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claim is a separate and distinct cause of action that can stand alone. Dicta from some

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Arizona cases indicates that a party can bring a separate alter ego claim. See Chaplin v.

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Because the Court is sitting in diversity, the Court applies the substantive law of the
forum state, Arizona. Goldberg v. Pac. Indem. Co., 627 F.3d 752, 755 (9th Cir. 2010).
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Snyder, 207 P.3d 666, 670 (Ariz. Ct. App. 2008)(“The trial court, however, allowed Reliance

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to take its claims of fraud and alter-ego to a jury. Ultimately, Reliance did not request a jury

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instruction for its alter-ego claim.”)(emphasis added); GM Dev. Corp. v. Cmty. Am. Mortg.

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Corp., 795 P.2d 827, 835 (Ariz. Ct. App. 1990)(“In the case before us, the complaint

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contained four counts . . . Count I alleged that [] was responsible for the debt owed by [] and

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[] pursuant to an alter ego theory of liability . . . Clearly, the breach of contract claim requires

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proof of different facts than would be required for the fraud, racketeering, and alter ego

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claims.”).

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Defendants have not argued for dismissal of the case because an alter ego claim theory

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is not a separate and distinct claim. For the purpose of deciding the pending Motion, the

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Court therefore will assume that Arizona recognizes the alter ego theory as a claim that can

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stand alone.

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2. Res Judicata

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Defendants argue that Plaintiffs’ alter ego claim is barred by the doctrine of res

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judicata, or claim preclusion, because Plaintiffs sued Defendant for fraud in the underlying

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state action. Defendants do not contend that Plaintiffs’ alter ego claim was actually decided

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in the underlying action and therefore barred by issue preclusion.

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To determine the preclusive effect of a state court judgment, the Court looks to state

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law. Intri-Plex Tech., 499 F.3d at 1052. “Under Arizona law, a claim is barred by res

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judicata if a court previously issued a final judgment on the merits involving the same cause

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of action with the same parties.” Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz.

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1986). Arizona uses the “same evidence” test for determining whether an action is the same

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cause of action for res judicata purposes. Phoenix Newspapers, Inc. v. Dep’t of Corrections,

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State of Arizona, 934 P.2d 801, 804 (Ariz. Ct. App. 1997). Under the “same evidence” test,

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“If no additional evidence is needed to prevail in the second action than that needed in the

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first, then the section action is barred.” Id.

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Plaintiffs do not dispute the existence of a final judgment and that the parties here

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were a party to that judgment.2 The Court therefore only needs to determine whether the

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pending case is the same case for res judicata purposes.

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Plaintiffs made fraud allegations against Defendant in the underlying action. Plaintiffs

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alleged in state court that Defendant made certain fraudulent misrepresentations regarding

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his intentions to pay certain moneys under the purchase agreement. But Plaintiffs did not

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assert an alter ego claim below, and the state court did not reach that issue.

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Under the “same evidence” test, the Court must decide whether Plaintiffs’ alter ego

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claim here would require different evidence from their fraud allegations in state court. The

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Court finds that Plaintiffs’ alter ego claim does require additional, different evidence.

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Plaintiffs must introduce evidence in this case that Casa is merely the business conduit of

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Defendant. But Plaintiffs did not need to introduce any evidence regarding the relationship

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between Defendant and Casa to prevail on their fraud claims below. Because Plaintiffs’ alter

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ego claim requires additional evidence, the Court finds that their claim is not barred by res

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judicata. See Rousselle v. Jewett, 421 P.2d 529, 531 (Ariz. 1966)(“Rights, claims, or

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demands – even though they grow out of the same subject matter – which constitute separate

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or distinct causes of action not appearing in the former litigation, are not barred in the later

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action because of res judicata.”).

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3. Statute of Limitations

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Defendants argue that Plaintiffs’ alter ego claim is “(at most) governed by the

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‘general’ limitations period set forth in A.R.S. §12-550,” which provides a four year

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limitation for all actions other than recovery of real property for which no limitation is

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otherwise prescribed. (Doc. 12 p.13.) Defendants further argue that the claim accrued in

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2005 at the time of the second closing or resale. Defendants therefore contend that the statute

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of limitation ran on Plaintiffs’ claim in 2009, at the latest.

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A party can raise a statute of limitations defense if it appears from the face of the

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The state court entered summary judgment in favor of Defendant on all of Plaintiffs’
claims against him.
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complaint that the claim is barred. Doe v. Roe, 955 P.2d 951, 961 (Ariz. 1998). But the

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defense is not favored in Arizona, and courts will not resolve statute of limitations issues

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based on disputed facts. Id.

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Generally, a claim does not accrue and the statute of limitations does not begin to run

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until a plaintiff discovers or by the exercise of reasonable diligence should discover that the

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claim exists. Anson v. Am. Motors Corp., 747 P.2d 581, 584 (Ariz. Ct. App. 1987). A

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plaintiff does not need to know all the facts underlying a claim to trigger accrual, but the

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plaintiff must possess at least a minimum requisite amount of knowledge to recognize that

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a wrong occurred and caused injury. Doe, 955 P.2d at 961. “When discovery occurs and a

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cause of action accrues are usually and necessarily questions of fact for the jury.” Id.

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Defendants claim that the general four-year statute of limitations applies to an alter

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ego claim. The Court could not find an Arizona case that addresses which statute of

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limitation applies to alter ego claims. But the Court finds persuasive opinions from other

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states finding that the limitation for enforcing judgments applies to subsequent, stand-alone

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alter ego causes of action. See, e.g., Norwood Group, Inc. v. Phillips, 828 A.2d 300, 302

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(N.H. 2003)(holding that where a party first obtains a judgment against a corporation and

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later sues corporate stockholders to cast them in judgment under the doctrine of piercing the

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corporate veil, the suit against the stockholders is an action on a judgment and is governed

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by the twenty-year statute of limitations for actions to enforce a judgment.); cf Matthews

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Constr. Co. v. Rosen, 796 S.W.2d 692, 694 (Tex. 1990)(holding that once the plaintiff filed

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suit against the corporation, the limitations period was tolled as to the corporation’s alter ego

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until final judgment against the corporation).

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The general statute limiting the time within which a judgment must be enforced allows

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a judgment creditor to collect on the judgment within five years after entry of the judgment.

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In re Smith, 101 P.3d 637, 639 (Ariz. 2004)(citing A.R.S. §12-1551(A)). A.R.S. §12-

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1551(A) provides, “The party in whose favor a judgment is given, at any time within five

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years after entry of the judgment and within five years after any renewal of the judgment

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either by affidavit or by an action brought on it, may have a writ of execution or other
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process issued for its enforcement.”

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The Court finds that an Arizona court would likely apply this five-year statute of

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limitation to enforce a judgment to Plaintiffs’ alter ego claim. Because judgment did not

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enter on the underlying state cause until April of 2010, Plaintiffs’ claim falls well within the

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five-year period.

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But even if the Court were to apply the general four-year limitation to the claim as

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urged by Defendants, the Court would not grant the motion to dismiss. “The trial court

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should not grant a motion to dismiss unless it appears certain plaintiff will not be entitled to

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relief under any set of facts susceptible of proof under the claims stated.” Anson, 747 P.2d

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at 582. The Court cannot determine with certainty from the face of the pending Amended

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Complaint that Plaintiffs’ alter ego claim accrued back in 2005. The Court finds that when

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Plaintiffs discovered or should have discovered that Casa was merely an alter ego of

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Defendant is a question of fact that the Court cannot resolve on a motion to dimiss.

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The Court will deny the motion to dismiss Plaintiffs’ claim on statute of limitations

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grounds because the Court finds that A.R.S. §12-1551 (A) is the applicable statute of

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limitations and that the statute did not begin to run until judgment against Casa was entered.

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Alternatively, the Court denies the motion to dismiss on statute of limitations grounds

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because it is not clear from the face of the Amended Complaint when the alter ego claim

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accrued.

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Accordingly,

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IT IS ORDERED DENYING Plaintiffs’ Motion to Strike (Doc. 16).

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IT IS FURTHER ORDERED DENYING Defendants’ Motion to Dismiss (Doc.

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12).
DATED this 12th day of December, 2011.

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