Solid Q Holdings v. Arenal Energy et al

Filing 21

MEMORANDUM DECISION AND ORDER denying 15 Motion to Stay. Signed by Judge David Nuffer on 10/30/15 (alt)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
SOLID Q HOLDINGS, LLC, a Utah limited
liability company,
Plaintiff,

MEMORANDUM DECISION AND
ORDER DENYING
DEFENDANT’S MOTION TO STAY

v.
ARENAL ENERGY CORPORATION, a
Texas corporation; RICHARD REINCKE, an
individual; ERIC JOHNSON, an individual;
BRIAN CHAPLIK, an individual; GUS
SHOUSE, an individual; TOM BUIEL, an
individual; and CHRIS COTA, an individual,

Case No. 2:15-cv-00419-DN
District Judge David Nuffer

Defendants.

Defendant, Arenal Energy Corporation (“Arenal”), filed this motion to stay (“Motion to
Stay”) 1 in response to Plaintiff’s Complaint (“Federal Complaint”). 2 Arenal argues that a stay is
warranted because the Utah Court of Appeals is considering the arbitrability of the case. 3
Plaintiff, Solid Q Holdings, LLC (“Solid”), opposes the Motion to Stay. 4 After review of the
parties’ documents on file in this case, and for the reasons set forth in this order, the Motion to
Stay is DENIED.

1

Motion for Stay of Proceedings (“Motion to Stay”), docket no. 15, filed August 5, 2015.

2

Complaint (“Federal Complaint”), docket no. 2, filed June 15, 2015.

3

Motion to Stay at 1.

4

Opposition to Motion for Stay Proceedings (“Opposition Memorandum”), docket no. 16, filed August 19, 2015.

BACKGROUND
The parties’ dispute arises out of losses Solid allegedly suffered after investing with
Arenal in 2012. 5 Solid alleges that Arenal requested a $150,000 loan to prepare for a public
offering. 6 Solid claims that Arenal made false representations and material omissions in order to
secure the loan. Arenal allegedly misrepresented to Solid, among other things, that it possessed
valuable proprietary products (including a valuable patent pending product); 7 would be retaining
a public policy management firm as a government contracting representative; 8 and was working
with Major General James Comstock for product promotion and to market to the military. 9
Arenal also allegedly failed to disclose certain material information concerning Arenal’s
previous lawsuits. 10
Solid alleges that it relied on these misrepresentations and material omissions to its
detriment. 11 As a result, Solid entered into a series of promissory notes, beginning in July of
2012, ultimately loaning Arenal $150,000. 12 Arenal provided 1,500,000 shares of common stock
as collateral. 13 Solid alleges that Arenal eventually breached the promissory notes and failed to
make payments. 14 As penalty for breach of the promissory notes—but not in satisfaction of the
obligation to repay the notes—Solid took ownership of the 1,500,000 shares of common stock. 15
5

Federal Complaint at ¶¶ 47–48.

6

Id. at ¶ 14.

7

Id. at ¶ 16.

8

Id. at ¶ 22.

9

Id. at ¶ 20.

10

Id. at ¶¶ 40–46.

11

Id. at ¶¶ 39, 68.

12

Id. at ¶ 52.

13

Id. at ¶ 73.

14

Id. at ¶ 57.

15

Id. at ¶¶ 58–59.

2

Solid also demanded payment on the interest and principal. 16 Solid alleges that Arenal ultimately
defaulted by failing to pay and meet other obligations in the promissory notes and the
accompanying addenda. 17 It is Solid’s position that it has suffered financial loss due to Arenal’s
shares decreasing in value due to Arenal’s misrepresentations and material omissions.
Solid filed a complaint 18 against Arenal and others in the Fourth Judicial District Court in
the State of Utah on August 1, 2013 (“State Complaint”). 19 Solid, in the State Complaint, sought
damages for alleged breach of contract, 20 breach of contract on personal guarantees, 21 civil
conspiracy, 22 and fraud. 23 In response, Arenal filed a Motion to Compel Arbitration and to Stay
Proceedings, 24 which the state trial court denied. 25 Arenal filed an interlocutory appeal on the
issue of arbitrability 26 which is currently pending before the Utah Court of Appeals. 27
Solid later filed this action in the Central Division of the United States District Court,
District of Utah on June 15, 2015. 28 In the present action, Solid advances several causes of action
against Arenal and others including a violation of Section 10(b) of the Securities Exchange Act

16

Id. at ¶¶ 58–60.

17

Federal Complaint at ¶¶ 62–63.

18

Civil Complaint (“State Complaint”), Exhibit A, docket no. 15-1, filed August 5, 2015.

19

Solid Q Holdings, LLC v. Arenal Energy Corporation, Case No. 130401096, Fourth Judicial District, Utah
County, State of Utah.
20

State Complaint at ¶¶ 47–77.

21

Id. at ¶¶ 58–64.

22

Id. at ¶¶ 65–69.

23

Id. at ¶¶ 70–80.

24

State Court Docket at 2 (“State Court Docket”), Exhibit A, docket no. 15-1, filed August 5, 2015.

25

Id. at 6.

26

Id. at 10.

27

Motion to Stay at 2 (citing Utah Court of Appeals Case No. 20140252-CA).

28

Federal Complaint at 1.

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of 1934 and Rule 10b-5, 29 control person liability of federal securities violations, 30 and Utah
securities violations. 31
STANDARD OF REVIEW
“It is well settled that the district court has the power to stay proceedings pending before
it and to control its docket for the purpose of ‘economy of time and effort for itself, for counsel,
and for litigants.’” 32 Thus, “[t]he granting of the stay ordinarily lies within the discretion of the
district court.” 33 When determining whether to grant a motion to stay in general, courts will
determine “(1) whether a stay would promote judicial economy; (2) whether a stay would avoid
confusion and inconsistent results; and (3) whether a stay would unduly prejudice the parties or
create undue hardship.” 34 Moreover, “where a movant seeks relief that would delay court
proceedings by other litigants he must make a strong showing of necessity because the relief
would severely affect the rights of others.” 35 “Thus, even when the relief sought is only a stay of
the case in which the motion is made, ‘the supplicant for a stay must make out a clear case of
hardship or inequity in being required to go forward, if there is even a fair possibility that the
stay for which he prays will work damage to someone else.’” 36

29

Id. at ¶¶ 72–84.

30

Id. at ¶¶ 85–92.

31

Id. at ¶¶ 93–104.

32

Pet Milk Co. v. Ritter, 323 F.2d 586, 588 (10th Cir. 1963) (quoting Landis v. N. Am. Co., 299 U.S. 248, 254
(1936)).
33

Id.

34

Gale v. Brinker Int’l Payroll Co., L.P., 1:09-CV-129 TS, 2010 WL 3835215, *1 (D. Utah Sept. 29, 2010) (citation
and quotation marks omitted).
35

Commodity Futures Trading Comm'n v. Chilcott Portfolio Mgmt., Inc., 713 F.2d 1477, 1484 (10th Cir.1983).

36

Id. (quoting Landis, 299 U.S. at 255).

4

ANALYSIS
Arenal, in its Motion to Stay, asserts that the “[c]ontinuation of proceedings in [federal
court] while an appeal concerning arbitrability of the parties’ respective claims largely defeats
the point of the appeal, unnecessarily creates a conflict with the Utah state courts, and creates a
risk of inconsistent handling of the case by two tribunals.” 37 Arenal provides several arguments
in support of its Motion to Stay, which are addressed below.
A. The Parties, Issues, and Relief are Different
Arenal argues that a stay of this federal action is appropriate because the state and federal
actions involve identical parties, issues and relief. 38 Solid opposes Arenal’s arguments,
contending that the parties, issues, and relief are different. 39 Arenal replies that the additional
individuals listed in the federal action are inconsequential because they were not involved in any
securities-related matters of Arenal, and Solid’s “federal securities claims are simply the state
court fraud claims regarding the promissory note, recast as a federal securities violation.” 40
The parties in the state and federal action are not substantially similar. The federal action
includes four additional individuals, and excludes another. 41 Whether the newly added
individuals were involved in any securities-related matters cannot be properly resolved on this
Motion to Stay.
Furthermore, the issues and requested relief also differ. The State Complaint alleges
claims of breach of contract, conspiracy, and fraud. 42 The Federal Complaint alleges federal and
37

Motion to Stay at 2.

38

Id. at 6.

39

Opposition Memorandum at 5.

40

Reply to Plaintiff’s Opposition to Defendant Arenal Energy Corporation’s Motion for Stay of Proceedings
(“Reply”), 4–5, docket no. 18, filed September 2, 2015.
41

Federal Complaint at 1.

42

State Complaint at 1–2.

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state securities violations with facts not present in the State Complaint, such as Arenal’s alleged
material omissions. 43 The State and Federal Complaints request different relief and are based
upon different claims which raise different issues.
B. Federal Courts are not Required to Stay a Claim for a Pending State Appeal
Arenal argues that this action should be stayed because “all of the causes of action in both
the Federal Court Action and the State Court Action are subject to the same arbitration
provisions . . . pending appeal before the Utah Court of Appeals.” 44 In opposition, Solid argues
that the state district court denied Arenal’s motion to compel arbitration, and no arbitration
agreement exists. 45 Solid points out that Arenal has failed “to attach to its motion any agreement
between Plaintiff and the defendants . . . because no such agreement exists. In other words,
Arenal argues that this action is subject to an arbitration agreement but does not include any such
agreement and does not request that the Court compel arbitration in this action.” 46 In its reply,
Arenal attaches an Agreement 47 signed by Shaun Shelton. Arenal argues that although Solid did
not sign the Agreement, Mr. Shelton (who owns Solid) did, and “[i]t is well established that a
claim against a non-signatory ‘that is based upon the same operative facts and is inherently
inseparable from the claims against a signatory will always contain issues referable to arbitration
under an agreement in writing . . . .’” 48 Arenal concludes that the state appellate court must

43

Federal Complaint at 10–13.

44

Motion to Stay at 11.

45

Opposition Memorandum at 6.

46

Id.

47

Advisory Board – Brownfield Site Consulting Agreement, Exhibit 1, docket no. 18-1, filed September 2, 2015.

48

Reply at 9–10 (citing Hill v. G E Power Systems, Inc., 282 F.3d 343, 347 (5th Cir. 2002) (internal quotation marks
and citation omitted)).

6

decide the merits of the existence of an arbitration agreement before Solid can commence an
action in federal court. 49
In support of its argument that a stay is required while an appeal is pending from a denial
of a motion to compel arbitration, Arenal cites cases such as Blinco v. Green Tree Servicing, 50
Bradford-Scott Data Corporation, Inc. v. Physician Computer Network, Inc., 51 and
ExpressScipts, Inc. v. Aegon Direct Marketing Servs., Inc. 52 These cases are distinguishable from
the present case. Arenal’s cited cases indicate that when an appeal is filed from a denial of a
motion to compel arbitration, a district court is divested of its power to proceed with a case. The
above reasoning applies to cases being appealed in the same judicial system. All of Arenal’s
cited cases deal with the federal system. That is, they hold that a federal district court which has
denied a motion to compel arbitration is divested of its power to proceed with the case if the
order denying the motion to compel arbitration is appealed. Here, a state trial court denied a
Motion to Compel Arbitration, a state appellate court is deciding the appeal, and a federal
district court is considering the merits of different claims.
C. The State Securities Violation in not Precluded
Arenal further contends that the causes of action in the federal action “arise from the
same transactions and facts relating to the same parties” and should have been filed with the state
action. 53 Solid responds that the federal court maintains exclusive jurisdiction over the two
federal securities claims. 54 Solid, however, fails to significantly address whether the state

49

Id. at 8–9.

50

366 F.3d 1249 (11th Cir. 2004).

51

128 F.3d 504 (7th Cir. 1997).

52

No. 4:06-CV-1410 CAS, 2007 WL 1040938 (E.D. Mo. Apr. 3, 2007).

53

Motion to Stay at 11.

54

Opposition Memorandum at 3.

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securities claim in this case should have been filed in the state action. In reply, Arenal points out
that Solid makes no argument that the state securities claim should have been included in the
State Complaint, and asserts the two federal securities claims are “simply the state court fraud
claims regarding the promissory note.” 55
Federal courts have exclusive jurisdiction over federal securities claims pursuant to the
1934 Act. 56 “Where exclusive jurisdiction exists, only the federal courts can provide affirmative
relief.” 57 Solid is therefore correct that the federal securities claims could not have been filed in
the state action. Arenal fails to support with any authority its argument that the state securities
claim should have been filed previously in the state action.
Having considered all of the arguments above, Arenal has failed to make out the “clear
case of hardship or equity” required for a stay. 58 Thus, its Motion to Stay must be denied.
CONCLUSION
It is therefore ORDERED that Arenal’s Motion for Stay of Proceedings 59 is DENIED.
Dated October 30, 2015.
BY THE COURT:
____________________________
David Nuffer
United States District Judge

55

Reply at 5.

56

15 U.S.C. § 78aa(a); Hill v. Vanderbilt Capital Advisors, LLC, 702 F.3d 1220, 1222 (10th Cir. 2012).

57

Levy v. Lewis, 635 F.2d 960, 967 (2d Cir. 1980).

58

Landis, 299 U.S. at 254.

59

Docket no. 15.

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