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Arctic Zero, Inc. v. Aspen Hills, Inc.

United States District Court, S.D. California

November 20, 2017

ARCTIC ZERO, INC., a Delaware Corporation, Plaintiff,
ASPEN HILLS, INC., an Iowa Corporation, THOMAS LUNDEEN, an individual, NANCY LUNDEEN, an individual and DOES 1 through 25, inclusive, Defendants.


          Anthony J. Battaglia United States District Judge

         Presently before the Court are Defendants Aspen Hills, Inc. (“Aspen Hills”) and Thomas and Nancy Lundeen's (collectively referred to as “the Lundeens”) motions to dismiss Plaintiff Arctic Zero Inc.'s (“Plaintiff”) first amended complaint, or in the alternative to stay the action pending resolution of the Iowa State Court Receivership Proceedings. (Doc. Nos. 6, 16.) Having reviewed the parties' arguments and controlling legal authority, and pursuant to Civil Local Rule 7.1.d.1, the Court finds the matters suitable for decision on the papers and without oral argument. For the reasons set forth below, the Court DENIES both Defendants' motions to stay and motions to dismiss.


         Plaintiff is a corporation organized under the laws of the state of Delaware with its principal place of business in San Diego, California. (Doc. No. 3 ¶ 4.) Aspen Hills is a former cookie dough manufacturer, organized under the laws of the state of Iowa with its principal place of business in Garner, Iowa. (Id. ¶ 5; Doc. No. 6 at 8.)[1] The Lundeens are individuals who reside in the state of Iowa and are co-owners of Aspen Hills. (Doc. No. 3 ¶¶ 6, 7.)

         The events leading up to this dispute arose in 2016, when Aspen Hills recalled 287 cases of allegedly negligently manufactured brownie dough. (Doc. No. 6 at 8; Doc. No. 24 at 9.) Currently, there are over $11 million in claims being asserted against Aspen Hills. (Doc. No. 6 at 8.) As a result of the substantial claims asserted against Aspen Hills and the limited assets available for distribution, receivership proceedings involving Aspen Hills commenced in Iowa District Court for Hancock County-A.H. Properties v. Aspen Hills, Inc., Hancock County Case No.: EQCV019535. (Id.)

         Plaintiff and Aspen Hills were in an arrangement that centers on an October 1, 2015 Ingredient Supply Agreement. (Doc. No. 3 ¶ 19.) Under this agreement, Aspen Hills, among other things, agreed to indemnify Plaintiff against any and all claims, warranted that each ingredient conformed strictly to all domestic and foreign regulatory requirements, and merited that each ingredient would be fit and sufficient for the purpose intended. (Id. ¶¶ 20-22; Doc. No. 3-1 at 7.) Additionally, Aspen Hills agreed to reimburse Plaintiff for all costs and expenses incurred as a result of a recall of ingredients supplied by it. (Doc. No. 3-1 at 10.) Section 15(a) of the Agreement provides that:

In the event an Ingredient is the subject of a recall (which includes safety notices) initiated by Arctic Zero, Supplier, or a government or consumer protection agency, Supplier will be responsible for all costs and expenses associated with the recall or notice and shall reimburse Arctic Zero, for all costs and expenses incurred by Arctic Zero related to the recall or notice, including recalling, shipping and/or destroying the Ingredient (and where applicable, any products with which the Ingredient has been packaged, consolidated, processed or commingled), including Arctic Zero's net landed cost of unsold products containing the Ingredient.


         After the recall, Plaintiff allegedly incurred costs and expenses amounting to at least $572, 375.33, including the cost of disposed product, lost revenue, credits for products returned to vendors, and various costs associated with transportation, landfill fees, and testing fees. (Doc. No. 3 ¶ 33.) On December 23, 2016, Plaintiff tendered this documentation of its costs and expenses to Mr. Lundeen. (Id. ¶ 34.)

         Mr. and Mrs. Lundeen are purportedly the corporate alter egos of Aspen Hills acting as the President, Secretary, and Treasurer to the company. (Id. ¶¶ 5, 6, 7.) Plaintiff argues that as “insiders, ” the Lundeens in 2016 began to transfer large amounts of money to themselves, leaving Aspen Hills insolvent. (Id. ¶ 36.) In total, the alleged dividends transferred to the Lundeens during 2016 totaled $1, 781, 700. (Id. ¶ 44.) Thus, after the supposed fraudulent transfers, Aspen Hills was only left with approximately $250, 000 or less in cash with an excess of approximately $9, 000, 000 in liabilities. (Id. ¶ 47.)

         On or about December 28, 2016, the Honorable Rustin Davenport, District Court Judge for the Second Judicial District of Iowa signed the “Order Granting the Joint Motion for the Appointment of a Receiver” (the “Receivership Order”). (Doc. No. 6 at 9.) The Receivership Order includes a number of elements including that it prohibits any litigation against Aspen Hills without first obtaining leave of the court. (Id.)

         Currently, Aspen Hills alleges that the business wind-down process is underway with the Iowa Court exercising jurisdiction over all receivership property. (Id. at 10.) Moreover, on April 11, 2017, Judge Davenport signed the “Order on Claims Process” to establish an orderly process to address and resolve any claims that have been, or may be asserted against Aspen Hills in light of the financial resources that are available. (Id.)

         On March 6, 2017, Plaintiff filed its complaint against all Defendants. (Doc. No. 1.) On April 26, 2017, Plaintiff filed its amended complaint alleging causes of action for (1) negligence; (2) express indemnity; (3) breach of contract; (4) declaratory relief only as to Aspen Hills; and (5) fraudulent transfers. (See generally Doc. No. 3.) On May 19, 2017, and June 6, 2017, respectively, Aspen Hills and the Lundeens filed the present motions, their motions to dismiss or stay the action. (Doc. Nos. 6, 16.) On June 2, 2017, and June 20, 2017, Plaintiff responded in opposition to the motions. (Doc. Nos. 13, 24.) Subsequently on June 28, 2017, Defendants filed a joint motion to continue the hearing on their various motions, (Doc. No. 28), which was granted on June 30, 2017, (Doc. No. 30). This Order now follows.


         A. Motion to Dismiss

         A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). However, “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks and citation omitted).

         In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Additionally, courts generally do not look beyond the complaint for additional facts when deciding a Rule 12(b)(6) motion. See United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003). Further, legal conclusions need not be taken as true “merely because they are cast in the form of factual allegations.” See Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Similarly, “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

         B. Motion to Stay

          A court's power to stay proceedings is incidental to the inherent power to control the disposition of its cases in the interests of efficiency and fairness to the court, counsel, and litigants. See Landis v. N. Am. Co., 299 U.S. 248, 254-55 (1936); Single Chip Sys. Corp. v. Intermec IP Corp., 495 F.Supp.2d 1052, 1057 (S.D. Cal. 2007). A stay may be granted pending the outcome of other legal proceedings related to the case in the interests of judicial economy. See Leyva v. Certified Grocers of Cal., Ltd., 593 F.2d 857, 863-64 (9th Cir. 1979). Discretion to stay a case is appropriately exercised when the resolution of another matter will have a direct impact on the issues before the court, thereby substantially simplifying the issues presented. See Mediterranean Enters. v. Ssangyong Corp., 708 F.2d 1458, 1465 (9th Cir. 1983).

         In determining whether a stay is appropriate, a district court “must weigh competing interests and maintain an even balance.” Landis, 299 U.S. at 254-55. “[I]f there is even a fair possibility that the stay . . . will work damage to someone else, the stay may be inappropriate absent a showing by the moving party of hardship or inequity.” Dependable Highway Express, Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007) (citation and internal quotation marks omitted). “A stay should not be granted unless it appears likely the other proceedings will be concluded within a reasonable time in relation to the urgency of the claims presented to the court.” Leyva, 593 F.2d at 864.


         A. Judicial Notice

         As a threshold issue, the Court will first turn to Plaintiff and Defendants' requests for judicial notice. (Doc. Nos. 6-2, 8, 9, 15, 16-9, 26.) Aspen Hills requests judicial notice of (1) a copy of the Receivership Order dated December 28, 2016; and (2) a copy of the April 11, 2017, Order on Claims Process. (Doc. No. 6-2 at 2; Doc. No. 8 at 2; Doc. No. 9 at 2.)[2] Plaintiff seeks judicial notice of (1) the joint motion for appointment of a receiver filed on December 23, 2016; (2) the Receivership Order; (3) the motion to intervene filed by the Lundeens on April 5, 2017, in Iowa District Court for Hancock County; and (4) the Fourth Report of Receiver, filed on May 16, 2017, in Iowa District Court.[3] (Doc. No. 15 at 2; Doc. No. 26 at 2.) Finally, the Lundeens request judicial notice of (1) the files in the case of A.H. Properties, LLC v. Aspen Hills, Inc., Case No. EQCV019535; and (2) Exhibits A through F of the declaration of Johannes H. Moorlach. (Doc. Nos. 16-9 at 1-2.)

         Federal Rule of Evidence 201(b) provides the criteria for judicially noticed facts: a judicially noticed fact must be one not subject to reasonable dispute in that it “(1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). A court “must take judicial notice if a party requests it and the court is supplied with the necessary information.” Fed.R.Evid. 201(c).

         The Court finds judicial notice of both Plaintiff and Defendants' documents warranted as they are documents of public record related to the Iowa state proceedings. See United States v. S. Cal. Edison Co., 300 F.Supp.2d 964, 973 (E.D. Cal. 2004) (“Federal courts may ‘take notice of proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to the matters at issue.'” (citing U.S. ex rel Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992)). Moreover, “[j]udicially noticed facts often consist of matters of public record.” Botelho v. U.S. Bank, N.A., 692 F.Supp.2d 1174, 1178 (N.D. Cal. 2010) (citations omitted). However, while “[a] court may take judicial notice of the existence of matters of public record, such as a prior order or decision, ” it should not take notice of “the truth of the facts cited therein.” Marsh v. San Diego Cty., 432 F.Supp.2d 1035, 1043 (S.D. Cal. 2006).

         Accordingly, with the limitation stated above in mind, the Court GRANTS Plaintiff, Aspen Hills, and the Lundeens' unopposed requests for judicial notice.

         B. Aspen Hills and the Lundeens' Motions to Stay these Proceedings

          The Court now turns to the merits of Defendants' motions to stay. (Doc. Nos. 6, 16-1.) Aspen Hills requests that this Court stay the instant action under the Colorado River and Burford doctrines to allow the Iowa State receivership proceedings to complete its process. (Doc. No. 6 at 18-23.) The Lundeens similarly assert that the Colorado River factors weigh heavily in their favor as well as argue that a stay is appropriate under the Princess Lida doctrine. (Doc. No. 16-1 at 12-14, 21.) In opposition, Plaintiff mounts that there are no grounds for abstention. (Doc. No. 13 at 19-21; Doc. No. 24 at 27-31.)

         At the outset, the Court notes that it does not find abstention appropriate under the Burford doctrine. Aspen Hills argues that under First Penn-Pac. Life Ins. Co. v. William R. Evans, Chtd., 304 F.3d 345 (4th Cir. 2002), this Court should abstain from interfering with the state court receivership under the Burford doctrine. (Doc. No. 6 at 22.) However, not only is this a fourth circuit case and thus not dispositive, but the court in this case clearly stated that the underlying policy of the Burford doctrine is that

Courts should abstain from deciding cases presenting “difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar, ” or whose adjudication in a federal forum “would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.”

Id. at 348. Similarly, in Tucker v. First Maryland Sav. & Loan, Inc., 942 F.2d 1401, 1407 (9th Cir. 1991), the Court concluded that Burford abstention “is designed to limit federal interference with the development of state policy. It is justified where the issues sought to be adjudicated in federal court are primarily questions regarding that state's laws.” Such concerns about state law policy considerations are not readily apparent in the instant action nor has Aspen Hills alleged any facts to support such a finding. Thus, the Court will focus its attention on both parties' arguments under the Colorado River doctrine.

         Under the Colorado River doctrine, a federal court may abstain from exercising its jurisdiction in favor of parallel state proceedings where doing so would serve the interests of “[w]ise judicial administration, giving regard to the conservation of judicial resources and comprehensive disposition of litigation.” Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 15 (1983). Only in “exceptional circumstances, ” may a federal court decline its “‘virtually unflagging obligation' to exercise federal jurisdiction, in deference to pending parallel state proceedings.” Montanore Minerals Corp. v. Bakie, 867 F.3d 1160, 1165 (9th Cir. 2017) (citation omitted). A stay is preferable to dismissal because it “ensures that the federal forum will remain open if, for some unexpected reason, the state forum proves to be inadequate.” Daugherty v. Oppenheimer & Co., Inc., No. C 06-7725-PJH, 2007 WL 1994187, at *3 (N.D. Cal. July 5, 2007).

         Colorado River and Ninth Circuit opinions identify non-exhaustive factors that are relevant to whether it is appropriate to stay proceedings: “(1) which court first assumed jurisdiction over any property at stake; (2) the inconvenience of the federal forum; (3) the desire to avoid piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether federal law or state law provides the rule of decision on the merits; (6) whether the state court proceedings can adequately protect the rights of the federal litigants; (7) the desire to avoid forum shopping; and (8) whether the state court proceedings will resolve all issues before the federal court.” R.R. St. & Co. Inc. v. Transp. Ins. Co., 656 F.3d 966, 978-79 (9th Cir. 2011); Holder v. Holder, 305 F.3d 854, 870 (9th Cir. 2002). These factors should be weighed in a “pragmatic, flexible manner with a view to the realities of the case at hand” and “with the balance heavily weighted in favor of the exercise of jurisdiction.” Moses, 460 U.S. at 16, 21. Factors that are irrelevant to the particular inquiry are disregarded. See Nakash v. Marciano, 882 F.2d 1411, 1415 n.6 (9th Cir. 1989).

         “The threshold question in deciding whether Colorado River abstention is appropriate is whether there are parallel federal and state suits.” ScripsAmerica, Inc. v. Ironridge Global LLC, 56 F.Supp.3d 1121, 1147 (C.D. Cal. 2014) (citing Chase Brexton Health Servs., Inc. v. Maryland, 411 F.3d 457, 463 (4th Cir. 2005)). In the Ninth Circuit, “exact parallelism [between the two suits] . . . is not required. It is enough if the two proceedings are ‘substantially similar.'” Nakash, 882 F.2d at 1416.

         Here, the state court action and this action both name Aspen Hills as a Defendant. (Doc. No. 16-3 at 2; Doc. No. 16-6 at 2.) Moreover, the claims that are the subject of the present motion-negligence, express indemnity, and breach of contract-are substantially similar if not identical to the causes of action listed in the proof of claim filed by Plaintiff in the Iowa state court petition. (Doc. No. 3; Doc. No. 6-7.) Further, the relief Plaintiff seeks also appears to be substantially identical. In state court, Plaintiff seeks, inter alia, damages in the amount of at least $622, 375.33, attorney's fees, and other damages for Aspen Hills's alleged fraudulent transfers in an effort to delay or defraud creditors. (Doc. No. 6-7 at 7-8.) In this case, Plaintiff similarly seeks damages, but in the amount of $572.375.33, in ...

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