Wilderness Training & Consulting et al v. Aspen Education Group et al

Filing 37

MEMORANDUM DECISION and ORDER granting 20 Motion for Writ of Replevin. Signed by Magistrate Judge Paul M. Warner on 2/18/2015. (blh)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH CENTRAL DIVISION

WILDERNESS TRAINING &
CONSULTING, LLC, et al.,

MEMORANDUM DECISION AND
ORDER

Plaintiffs,
Case No. 2:14cv866
v.
ASPEN EDUCATION GROUP, INC., et al.,
Defendants.

District Judge Ted Stewart
Magistrate Judge Paul M. Warner

This matter was referred to Magistrate Judge Paul M. Warner by District Judge Ted
Stewart pursuant to 28 U.S.C. § 636(b)(1)(A).1 Before the court is Wilderness Training &
Consulting, LLC; Lake Montezuma RTC, LLC; Escalante RTC, LLC; Syracuse RTC, LLC; and
Syracuse Institute, LLC’s (collectively, “Plaintiffs” or “Buyers”) motion for a prejudgment writ
of replevin.2 Specifially, Plaintiffs argue that Aspen Education Group, Inc.; Aspen Youth, Inc.;
Turn-About Ranch, Inc.; Island View Residential Treatment Center, LLC; Copper Canyon
Academy, LLC; Aspen Institute for Behavioral Assessment, LLC (collectively, “Sellers”) and
CRC Health Corporation (“CRC Health”) (collectively, “Defendants”) have failed to deliver
monies owed to Plaintiffs that Defendants have received since Plaintiffs purchased the assets of
Sellers in April 2014.

1

See docket no. 21.

2

See docket no. 20.

The court has carefully reviewed the written memoranda submitted by the parties.
Pursuant to civil rule 7-1(f) of the Rules of Practice for the United States District Court for the
District of Utah, the court has concluded that oral argument is not necessary and will determine
the motion on the basis of the written memoranda. See DUCivR 7-1(f).
RELEVANT BACKGROUND
On or about March 7, 2014, Plaintiffs and Sellers entered into an Asset Purchase
Agreement (“Agreement”) pertaining to the purchase of several residential treatment programs
and/or therapeutic boarding schools located in the State of Utah (“Programs”). Section 6.11 of
the Agreement, entitled “Misdirected Payments,” provides as follows:
From and after the Closing, if a Seller or any of its Affiliates receives or
collects any funds relating to any Program . . . , any Accounts Receivable
or any other Purchased Asset, such Seller or such Affiliate shall remit
such funds to Buyers within five business days after its receipt thereof.
For the avoidance of doubt, any funds received after the Closing Date by
any Seller or its Affiliates from or on behalf of any Students or any other
clients of the Program shall be the sole and exclusive property of Buyers
and shall be remitted to Buyers in accordance with the foregoing
sentence.3
It is undisputed that subsequent to the execution of the Agreement and closing of the
transaction, Sellers have received and collected accounts receivable as Misdirected Payments in
connection with the Programs and delivered those funds to CRC Health. Plaintiffs allege that
CRC Health has wrongfully held the Misdirected Payments and has failed to release such funds
to Plaintiffs as required by the Agreement. According to Plaintiffs, as of January 5, 2015, CRC
Health has wrongfully held Misdirected Payments in the amount of $354,899.12. Plaintiffs filed

3

Docket no. 20 at 3.

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this lawsuit against Defendants in state court alleging claims for breach of contract and
conversion.
Defendants removed this matter to federal court and counterclaimed for breach of
contract and breach of the implied covenant of good faith and fair dealing. While Defendants
admit that they did not forward the Misdirected Payments to Plaintiffs, they contend that
Plaintiffs were in material breach of the Agreement at the time Defendants received the funds.
Therefore, Defendants argue, they were no longer obligated to perform under the Agreement
because they were entitled to claim rights of setoff and recoupment. Defendants allege that
Plaintiffs materially breached the Agreement by (1) exercising duress against Sellers to force a
reduction in the purchase price, (2) engaging in bad faith by attempting to force Sellers to double
pay paid time off (“PTO”) to the employees of the Programs, and (3) improperly calculating the
post-closing adjustment of the purchase price.
Plaintiffs now seek a writ of replevin or, in the alternative, writs of attachment and/or
garnishment in this matter. Plaintiffs argue that the impending sale of CRC Health’s parent
company, CRC Health Group, Inc. (“CRC Group”), to Acadia Healthcare Company, Inc.
(“Acadia”) may leave Plaintiffs with no recourse to recover the funds they allege are owed to
them. However, according to Defendants, the sale of CRC Group to Acadia is merely a merger
transaction, not an asset sale. Defendants assert that Acadia will be the new parent entity of
CRC Health, there will be no disruption to CRC Health’s business operations, and CRC Health
will continue as a going concern. Thus, Defendants conclude, there is no risk that the
Misdirected Payments would be unrecoverable if Plaintiffs were to prevail on their claims.

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DISCUSSION
In this case, the laws of Utah govern the procedure for the issuance of a prejudgment
writ. See Fed. R. Civ. P. 64(a). 4 Under rule 64A of the Utah Rules of Civil Procedure, “[a] writ
of replevin, attachment[,] or garnishment is available after the claim has been filed and before
judgment only upon written order of the court.” Utah R. Civ. P. 64A(a). For the court to issue a
prejudgment writ, the elements of rule 64A must be satisfied, in addition to the grounds for the
specific writ. See Utah R. Civ. P. 64A(c). Under rule 64A, a party must establish each of “the
requirements listed in subsections (c)(1) through (c)(3),” and also “at least one of the
requirements listed in subsections (c)(4) through (c)(10).” Id. These requirements are as
follows:
(c)(1) that the property is not earnings and not exempt from execution;
and
(c)(2) that the writ is not sought to hinder, delay or defraud a creditor of
the defendant; and
(c)(3) a substantial likelihood that the plaintiff will prevail on the merits
of the underlying claim; and
(c)(4) that the defendant is avoiding service of process; or
(c)(5) that the defendant has assigned, disposed of or concealed, or is
about to assign, dispose of or conceal, the property with intent to defraud
creditors; or
(c)(6) that the defendant has left or is about to leave the state with intent
to defraud creditors; or
(c)(7) that the defendant has fraudulently incurred the obligation that is
the subject of the action; or
(c)(8) that the property will materially decline in value; or
(c)(9) that the plaintiff has an ownership or special interest in the
property; or
(c)(10) probable cause of losing the remedy unless the court issues the
writ.
4

Pursuant to rule 64 of the Federal Rules of Civil Procedure, “every remedy is available that, under the law of the
state where the court is located, provides for seizing a person or property to secure satisfaction of the potential
judgment.” Fed. R. Civ. P. 64(a). Thus, the Utah Rules of Civil Procedure regarding the issuance of writs apply in
this matter.

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Utah. R. Civ. P. 64A(c)(1) to (c)(10).
Defendants do not dispute that Plaintiffs have met the first two requirements under rule
64A as (1) “the property is not earnings and not exempt from execution” and (2) “the writ is not
sought to hinder, delay or defraud a creditor of the defendants.” Utah R. Civ. P. 64A(c)(1)-(2).
However, Defendants argue that Plaintiffs have failed to demonstrate that there is a “substantial
likelihood that [they] will prevail on the merits of the underlying claim.” Utah R. Civ. P.
64A(c)(3).
To prevail on their breach of contract claim, Plaintiffs must show (1) the existence of a
contract, (2) performance by Plaintiffs, (3) failure to perform by Defendants, and (4) damages.
See, e.g., Bair v. Axiom Design, LLC, 20 P.3d 388, 392 (Utah 2001). Defendants assert that
because Plaintiffs materially breached the Agreement first, Defendants were excused from
performance. As noted above, Defendants allege that Plaintiffs first breached the Agreement by
(1) placing Defendants under duress to force a reduction in the purchase price for the Programs,
(2) forcing Defendants to double pay their employees PTO, and (3) improperly calculating the
post-closing adjustment of the purchase price. Under Utah law, “[o]nly a material breach will
excuse further performance by the non-breaching party.” Cross v. Olsen, 303 P.3d 1030, 1035
(Utah Ct. App. 2013). “[A] breach which goes to only a part of the consideration, is incidental
and subordinate to the main purpose of the contract, and may be compensated in damages does
not warrant a rescission of the contract” such that performance by Defendants would be excused.
Id.
The court concludes that Plaintiffs have demonstrated their substantial likelihood of
success on the merits of their breach of contract claim. Plaintiffs have established that

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Defendants breached the Agreement by failing to remit the Misdirected Payments to Plaintiffs.
Defendants’ affirmative defenses and counterclaims have failed to persuade this court that
Plaintiffs are not likely to prevail on their claims. Even assuming the truth of Defendants’
alleged “first breaches,” the court is not persuaded that any of these circumstances would
constitute a material breach of the Agreement thus excusing Defendants from specific
performance.
Under Utah law, “conversion is an act of willful interference with a chattel, done without
lawful justification by which the person entitled thereto is deprived of its use and possession.”
Allred v. Hinkley, 328 P.2d 726, 728, Utah 1958). “[A] party alleging conversion must show that
he or she is entitled to immediate possession of the property at the time of the alleged
conversion.” Fibro Trust, Inc. v. Brahman Fin., Inc., 974 P.2d 288, 295-96 (Utah 1999).
Because Plaintiffs have shown that Defendants willfully retained the Misdirected Payments
without lawful justification and that Plaintiffs were entitled to immediate possession of them
“five business days after . . . receipt,”5 Plaintiffs are likely to prevail on their conversion claim as
well.
Furthermore, Plaintiffs have met at least one of the other requirements of rule 64A.
Specifically, Plaintiffs have demonstrated that they have an ownership or special interest in the
Misdirected Payments. See Utah R. Civ. P. 64A(c)(9). And, while the risk might be minimal,
the court cannot ignore Plaintiffs’ concern regarding the impending sale of CRC Group to
Acadia notwithstanding Defendants’ assertion that the Misdirected Payments will be recoverable
should Plaintiffs prevail on their claims. See Utah R. Civ. P. 64A(c)(10).
5

Docket no. 20 at 3.

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As noted above, Plaintiffs seek a writ of replevin or, in the alternative, writs of
attachment or garnishment. Under rule 64B, “[a] writ of replevin is available to compel delivery
to the plaintiff of specific personal property held by the defendant.” Utah R. Civ. P. 64(B)(a).
For the court to issue a prejudgment writ of replevin, the court must also find that “the plaintiff is
entitled to possession” and “the defendant wrongfully detains the property.” Utah R. Civ. P.
64B(b)(1)-(2). For a writ of attachment to issue, the court must find that (1) “the defendant is
indebted to the plaintiff,” (2) “the action is upon a contract or is against a defendant who is not a
resident of this state,” and (3) “payment of the claim has not been secured by a lien upon
property in this state.” Utah R. Civ. P. 64C(b)(1)-(3). And “[a] writ of garnishment is available
to seize property of the defendant in the possession or under the control of a person other than
the defendant.” For a writ of garnishment to issue, the court must find that (1) “the defendant is
indebted to the plaintiff,” (2) “the action is upon a contract or is against a defendant who is not a
resident of this state,” (3) “payment of the claim has not been secured by a lien upon property in
this state,” (4) “the garnishee possesses or controls property of the defendant,” and (5) “the
plaintiff has attached the garnishee fee established by Utah Code Section 78A-2-216.”
Defendants assert that the Misdirected Payments sought by Plaintiffs are not “specific
personal property” as contemplated by the law governing replevin. While the court agrees with
Defendants that a writ of replevin is not the appropriate remedy in this instance, the court
concludes that Plaintiffs have demonstrated that a writ of attachment should issue. Specifically,
in addition to the requirements set forth in rule 64A(c)(1) to (c)(10), Plaintiffs have demonstrated
that (1) Defendants are “indebted” to Plaintiffs in the amount of $354,899.12; (2) this is an action
based upon a contract, (3) none of the defendants are residents of this Utah, and (4) “payment of

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the claim has not been secured by a lien upon property” in Utah. Utah R. Civ. P. 64C(b)(1)-(3).
Accordingly, this court concludes that Plaintiffs have satisfied the requirements for the issuance
of a prejudgment writ of attachment.
Based on the foregoing, the court GRANTS Plaintiffs’ motion for a prejudgment writ of
attachment. Within ten (10) days of the date of this order, Defendants shall deposit $354,899.12
with the clerk of the court to be held pending resolution of the parties’ respective claims.
Furthermore, on an ongoing basis, Defendants shall deposit with the clerk of court any additional
funds identified as Misdirected Payments that Defendants have received since January 5, 2015,
or that Defendants will receive in the future.
IT IS SO ORDERED.
DATED this 18th day of February, 2015.
BY THE COURT:

________________________________
PAUL M. WARNER
United States Magistrate Judge

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