Creative Power Solutions v. Energy Services Group et al

Filing 47

ORDER that the Court's October 1, 2021 TRO is dissolved and CPS's motion for a preliminary injunction (Doc. 18 ) is DENIED. See document for complete details. Signed by Judge Douglas L Rayes on 11/17/2021. (RMV)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Creative Power Solutions,
Plaintiff,

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ORDER

v.

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No. CV-21-01559-PHX-DLR

Energy Services Group, et al.,

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Defendants.

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Plaintiff Creative Power Solutions (“CPS”) alleges that Defendants created a shell

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company through which they embezzled $1,738,662 from CPS in violation of, among other

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things, the Federal Civil Racketeer Influenced and Corrupt Organizations Act. (Doc. 10.)

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CPS filed this lawsuit on September 13, 2021 and immediately moved for an ex

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parte temporary restraining order (“TRO”) freezing certain of Defendants’ assets. (Doc.

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11.) CPS worried that Defendants, once receiving notice of this lawsuit, would conceal or

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dissipate their assets, thereby depriving CPS the ability to recover damages. CPS also

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claimed that it was entitled to a constructive trust over the specific assets subject to its

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motion. The Court denied CPS’s motion without prejudice because CPS had not (1)

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substantiated its allegations with sufficient evidence, (2) shown a likelihood that

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Defendants would hide or dissipate their assets to avoid judgment, or (3) shown that any

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of the assets subject to its motion were traceable to the allegedly embezzled funds, a

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prerequisite to its constructive trust remedy. (Doc. 15.)

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On September 27, 2021, CPS renewed its TRO motion. (Doc. 18.) CPS’s renewed

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motion abandons the constructive trust argument, and CPS acknowledged during oral

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argument that it presently has no evidence that any of the specific assets at issue are

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traceable to funds Defendants are alleged to have embezzled. Instead, CPS’s renewed

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motion is based solely on the prospect that Defendants will become insolvent, or hide,

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secret, or dissipate their assets in order to avoid paying a judgment in this case. This time,

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CPS provided (1) declarations from Majed Toqan, President, Director, and shareholder of

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CPS (Doc. 18-1 at 2-5), and Rebecca Dent, a current CPS employee (Doc. 18-2 at 2-6), to

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substantiate CPS’s claim that Defendants secretly siphoned money away from CPS. CPS

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also provided a declaration from a private investigator, Matthew Parker, who opined based

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on his investigation and review that (1) Defendants Brent Gregory and the Montaldeo

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Revocable Trust likely will become insolvent but for its real property assets, (2) Mr.

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Gregory likely “has engaged, and may be continuing to engage, in a pattern of secreting or

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dissipating assets,” and (3) that there are “strong indication[s] of probable illegal

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activity[.]” (Doc. 18-2 at 139-140.) This evidence supplemented a forensic accounting

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report supporting CPS’s allegation that it suffered damages of at least $1,738,662. (Doc.

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18-2 at 9-14.)

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Based on this evidence, the Court granted an ex parte TRO, converted CPS’s TRO

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motion into a motion for a preliminary injunction, and set a preliminary injunction briefing

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and hearing schedule. (Doc. 20.) Thereafter, Defendants appeared and filed a response in

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opposition to CPS’s motion for a preliminary injunction (Doc. 39), CPS filed a reply (Doc.

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43), and the Court heard oral argument on November 17, 2021. Based on this fuller record,

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the Court denies CPS’s motion for a preliminary injunction.

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“A preliminary injunction is an extraordinary remedy never awarded as of right.”

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Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). To obtain a preliminary

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injunction, a plaintiff must show (1) a likelihood of success on the merits, (2) a likelihood

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that irreparable harm will occur in the absence of preliminary relief, (3) a balance of

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equities that favors a preliminary injunction, and (4) that the requested injunction is in the

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public interest. Id. at 20. These elements can be balanced on a sliding scale, with a stronger

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showing of one element offsetting a weaker showing of another, although all factors still

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must be satisfied. See Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131, 1134-

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35 (9th Cir. 2011). The movant bears the burden of proof on each element of the test.

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Envtl. Council of Sacramento v. Slater, 184 F. Supp. 2d 1016, 1027 (E.D. Cal. 2000).

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Defendants raise fair questions about the merits of CPS’s claims, but the Court need

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not prejudge CPS’s complaint to resolve the present motion. Rather, CPS’s motion fails

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because CPS has not shown a likelihood of irreparable harm in the absence of preliminary

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relief. The harm CPS alleges it will suffer in the absence of a preliminary injunction is the

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inability to recover on a potential future judgment in its favor. Of course, there always is

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a chance that the prevailing party in civil litigation will be unable to recover on a judgment.

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And ordinarily, courts do not freeze defendants’ assets whenever they are sued in order to

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make it easier for plaintiffs to collect on future judgments. Instead, “[a] party seeking an

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asset freeze must show a likelihood of dissipation of the claimed assets, or other inability

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to recover monetary damages, if relief is not granted.” Johnson v. Couturier, 572 F.3d

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1067, 1085 (9th Cir. 2009) (emphasis added). This can be shown, for example, by evidence

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that Defendants will become insolvent or that they have “engaged in a pattern of secreting

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or dissipating assets to avoid judgment.” In re Estate of Ferdinand Marcos, Human Rights

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Litig., 25 F.3d 1467, 1480 (9th Cir. 1994) (emphasis added). CPS has not made this

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showing.

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To begin, Defendants have persuasively shown that the opinion of CPS’s private

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investigator, Mr. Parker, is speculative. Mr. Parker observed numerous real property

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transfers between Mr. Gregory, non-parties Daniel and Peggy Levitin, and the Montaledo

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Revocable Trust, and then concluded without explanation that “[t]here is generally no

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feasible explanation for this type of activity.” (Doc. 18-2 at 145.) Yet in the same section

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of the report, Mr. Parker acknowledges that “there may be plausible explanations related

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to the real property transfers[.]” (Id.) Mr. Parker also investigated three bank accounts

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associated with Mr. Gregory and determined that two contained low dollar amounts

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($500.00 and $300.00) and the third, with BMO Harris Bank, had recent financial activity

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but increased account security prevented him from learning more. Mr. Parker does not

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explain why any of these observations make it likely that Defendants will hide the specific

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assets subject to this motion in order to avoid a judgment in this case. Finally, Mr. Parker

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was unable to locate bank accounts associated with the Montaledo Revocable Trust and

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gave “two probable explanations: (1) there is a bank account in the trust name that was

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outside of the purview of [his] search, or (2) the trust does not hold a bank account in its

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name.” (Id. at 146.) Again, Mr. Parker failed to explain how his inability to locate bank

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accounts associated with the Montaledo Revocable Trust shows that Defendants will be

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unable to pay a judgment in this case. At bottom, Mr. Parker’s opinion appears to be based

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more on speculation than evidence.

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In their response, Defendants fill in some of the details that seemed to have eluded

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Mr. Parker. They explain that the Montaledo Revocable Trust was formed to provide life-

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long care for the Gregorys’ disabled son. (Doc. 39-1 at 6; Doc. 39-7.) The Gregorys have

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transferred most of their assets to the trust for the benefit of their son. (Doc. 39-1 at 6.)

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These assets include several bank accounts, investment accounts, and real estate assets.

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The trust owns free and clear a Flagstaff property worth roughly $1.1 million and a

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Scottsdale property worth roughly $875,000. (Id.; Doc. 39-7 at 39-40.) And as for the

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mysterious BMO Harris Bank account with increased financial security—it is a mortgage

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account, not a bank account. (Doc. 39-1 at 6.) Given this trust was established in 2012—

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well before the allegations of embezzlement in this case—for the purpose of providing

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financial support for the Gregorys’ disabled son, it is especially unlikely that Defendants

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would deplete the trust of its assets in response to this litigation.

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In reply, CPS provides no evidence-based reason to believe that Defendants will

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hide or dissipate these assets to avoid a judgment in this case. Instead, CPS argues that

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Defendants are more likely to secret or transfer these assets now that they know they are

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being accused of wrongdoing. (Doc. 43 at 9.) But if such an argument were sufficient to

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secure an asset-freezing preliminary injunction, then asset freezes would be the norm, not

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the exception. An asset-freezing injunction requires an evidence-based showing that a

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defendant will become insolvent, has engaged in a pattern of secreting or dissipating assets

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to avoid judgment. The evidence before the Court fails to establish that Defendants are at

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risk of insolvency. Indeed, their real estate assets, alone, are worth more than the amounts

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CPS claims were embezzled. And nothing about Defendants’ finances indicates that they

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have engaged in a pattern of secreting or dissipating assets for the purpose of avoiding

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judgments. CPS argues that this pattern is established through the declarations of Mr.

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Toqan and Ms. Dent, who describe what they believe to be a scheme by Defendants to

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secretly siphon away funds belonging to CPS. But even if these allegations are true, that

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does not establish a likelihood that Defendants will secret or dissipate the specific assets at

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issue here, which are held in a trust established for benefit of the Gregorys’ disabled son,

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and which is itself a defendant in this lawsuit.

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IT IS ORDERED that the Court’s October 1, 2021 TRO is dissolved and CPS’s
motion for a preliminary injunction (Doc. 18) is DENIED.
Dated this 17th day of November, 2021.

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Douglas L. Rayes
United States District Judge

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