Ozone International LLC v. Wheatsheaf Group Limited

• Court: District Court, W.D. Washington
• Decided: May 6, 2020
• Docket: 2:19-cv-01108
• Status: Unknown

Opinion

HONORABLE RICHARD A. JONES 1

9 UNITED STATES DISTRICT COURT 10 WESTERN DISTRICT OF WASHINGTON AT SEATTLE 11

12 OZONE INTERNATIONAL, LLC, a 13 Washington limited liability company, Case No. 2:19-cv-01108-RAJ 14 Plaintiff, ORDER DENYING 15 vs. DEFENDANT’S MOTION FOR PARTIAL SUMMARY 16 JUDGMENT WHEATSHEAF GROUP LIMITED, a foreign 17 private limited company registered in England and Wales, 18

19 Defendant.

20 21 This matter is the Court on Defendant’s motion for partial summary judgment. 22 Dkt. # 21. Having considered the submissions of the parties, the relevant portions of the 23 record, and the applicable law, the Court finds that oral argument is unnecessary. For the 24 reasons stated below, the Court DENIES the motion without prejudice. 25 I. BACKGROUND 26 Plaintiff, Ozone International, LLC (“Ozone”) is a Washington-based company 27 that developed an ozone machine that significantly extends the shelf life of food and 1 beverage products. Dkt. # 4 at ¶ 1. In 2016, Ozone began discussions with Defendant, 2 Wheatsheaf Group Ltd. (“Wheatsheaf”), a private limited company based in the United 3 Kingdom, regarding Wheatsheaf’s potential acquisition of Ozone. Id. at ¶ 3. For the 4 purposes of facilitating the deal, Wheatsheaf created two subsidiaries: Wheatsheaf Group 5 US Inc. (“WGUS”), a Delaware corporation with a principal place of business in 6 Minnesota, and Wheatsheaf Group US Food Safety LLC d/b/a TriStrata (“TriStrata”), a 7 Delaware limited liability corporation based in Washington. Dkt. # 4, Ex. F. 8 On August 17, 2017, Ozone entered into an Asset Purchase Agreement (“APA”) 9 with TriStrata whereby TriStrata acquired a substantial number of Ozone’s assets, 10 excluding certain contracts (“the Excluded Contracts”) which Ozone retained ownership 11 over. Dkt. #1-1, Ex. A. Wheatsheaf (TriStrata’s parent company) was also a party to the 12 APA “solely for the purposes of Section 6.05 and any provisions of Article I, Article IX, 13 and Article XI as they relate to Section 6.05.” Id. Section 6.05 provides: “Buyer has 14 sufficient cash on hand or other sources of immediately available funds to enable Buyer 15 to make payment of the Purchase Price and consummate the transactions contemplated by 16 this Agreement.” Id. Later in Section 6.07 of the APA, TriStrata represented that it 17 would “be able to pay its debts as they become due” and that “[i]n connection with the 18 transactions contemplated hereby, Buyer has not incurred, and has no plans to incur, 19 debts beyond its ability to pay as they become absolute and matured.” Id. 20 In addition to the APA, TriStrata and Ozone also entered into a Transition 21 Services Agreement (“TSA”), providing for the transition of Ozone’s business to 22 TriStrata over a period of time. Dkt. #1-1, Ex. B. Under Section 3.04 of the TSA, 23 TriStrata agreed to pay a “Transfer Price” for any Excluded Contract where the customer 24 entered into a new contract with TriStrata. Dkt. #1-1, Ex. B. The parties also agreed to 25 cooperate in good faith to set a Transfer Price for the contracts. Id. Customer contracts 26 began to transfer from Ozone to TriStrata in January 2018 and since then 25 contracts 27 have transferred to TriStrata. Dkt. # 26 at ¶ 1. However, the parties have not yet 1 negotiated a final Transfer Price for any of the contracts and TriStrata has not paid for 2 any of the contracts. Id. 3 During the transfer process, TriStrata also agreed to service the Excluded 4 Contracts and, in exchange, Ozone agreed to pay TriStrata a service fee. Dkt. #1-1, Ex. 5 B, § 4.02. The total purchase price ($9.9 million) included a $1.5 million reserve to 6 allow Ozone to pay TriStrata for its continued servicing of the Excluded Contracts under 7 the TSA. Dkt. # 11 at ¶ 12. Ozone maintains that the parties understood that the funds 8 for Ozone to continue operating would come from the Transfer Price payments. Dkt. # 9 26 at ¶ 1. Following the close of the deal, Wheatsheaf routinely invoiced Ozone for 10 services provided under the TSA, however, after Ozone exhausted the $1.5 million 11 reserve, it stopped paying the invoiced amounts. Dkt. # 11 at ¶ 14. According to Ozone, 12 this is because TriStrata has not paid Ozone any of the Transfer Price payments it owes 13 for the 25 transferred contracts and it has been forced to offset this amount under Section 14 4.07 of the TSA. Dkt. # 26 at ¶ 1. 15 On March 29, 2019 TriStrata sued Ozone in King County Superior Court alleging 16 breach of contract and requesting a declaratory judgment excusing TriStrata from further 17 performance under the TSA due to Ozone’s “material breach.” Dkt. # 26 at ¶ 4. Two 18 months later, on May 31, 2019, TriStrata filed a petition for receivership in King County 19 Superior Court. Dkt. # 26 at ¶ 6. On July 17, 2019, Ozone filed the instant complaint 20 (Dkt. #1) alleging claims for breach of contract, fraud, negligent representation, and 21 requesting declaratory judgment that Wheatsheaf is an alter ego of TriStrata, along with a 22 motion for a temporary restraining order (“TRO”) and preliminary injunction (Dkt. # 3). 23 On July 22, 2019, the Court denied Ozone’s motion for a temporary restraining order. 24 Dkt. # 13. Wheatsheaf now moves for partial summary judgment as to all of Ozone’s 25 claims and Wheatsheaf’s first counterclaim. Dkt. # 21. 26 II. LEGAL STANDARD 27 Summary judgment is appropriate if there is no genuine dispute as to any material 1 fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 2 56(a). The moving party bears the initial burden of demonstrating the absence of a 3 genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). 4 Where the moving party will have the burden of proof at trial, it must affirmatively 5 demonstrate that no reasonable trier of fact could find other than for the moving party. 6 Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). On an issue where 7 the nonmoving party will bear the burden of proof at trial, the moving party can prevail 8 merely by pointing out to the district court that there is an absence of evidence to support 9 the non-moving party’s case. Celotex Corp., 477 U.S. at 325. If the moving party meets 10 the initial burden, the opposing party must set forth specific facts showing that there is a 11 genuine issue of fact for trial in order to defeat the motion. Anderson v. Liberty Lobby, 12 Inc., 477 U.S. 242, 250 (1986). The court must view the evidence in the light most 13 favorable to the nonmoving party and draw all reasonable inferences in that party’s favor. 14 Reeves v. Sanderson Plumbing Prods., 530 U.S. 133, 150-51 (2000). 15 III. DISCUSSION 16 Wheatsheaf asserts two independent grounds for summary judgment: (1) Section 17 6.05 of the APA does not require Wheatsheaf to guarantee or fund TriStrata’s ongoing 18 performance under the TSA, and (2) Ozone materially breached the TSA, relieving 19 TriStrata and Wheatsheaf of further performance. 1 Ozone argues that the existence of 20 material factual disputes precludes summary judgment. In the event the Court does not 21 deny the motion outright, Ozone asks that the Court deny the motion without prejudice 22 under Fed. R. Civ. P. 56(d) and allow the parties to engage in discovery. 23 1 Wheatsheaf also argues that Ozone’s final claim, declaratory judgment of Wheatsheaf’s 24 alter ego status, is not an independent cause of action and must be dismissed as a matter 25 of law. However, because this argument was raised for the first time in Wheatsheaf’s reply brief, the Court will not consider it. United States v. Boyce, 148 F.Supp.2d 1069, 26 1085 (2001) (holding that “it is improper for a party to raise a new argument in a reply brief[,]” largely because the opposing party may be deprived of an opportunity to 27 respond.). 1 The Court agrees that Wheatsheaf’s motion is premature. Although courts have 2 “discretion to disallow discovery when the non-moving party cannot yet submit evidence 3 supporting its opposition, the Supreme Court has restated the rule as requiring, rather 4 than merely permitting, discovery ‘where the nonmoving party has not had the 5 opportunity to discover information that is essential to its opposition.’ ” Metabolife Int’l, 6 Inc. v. Wornick, 264 F.3d 832, 846 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, 7 Inc., 477 U.S. 242, 250 n. 5 (1986)). In this case, Wheatsheaf brought the instant motion 8 less than two months after Ozone filed suit and before Ozone had the opportunity to 9 obtain any discovery in this action. Dkt. # 25 at ¶ 4. And while Wheatsheaf’s motion is 10 technically permissible under the federal rules, Ninth Circuit precedent counsels against 11 granting such motions if the party opposing summary judgment has not had an 12 opportunity to pursue discovery. “Where . . . a summary judgment motion is filed so 13 early in the litigation, before a party has had any realistic opportunity to pursue discovery 14 relating to its theory of the case, district courts should grant any Rule 56 [(d)] motion 15 fairly freely.” Burlington N. Santa Fe R.R. Co. v. Assiniboine & Sioux Tribes of Fort 16 Peck Reservation, 323 F.3d 767, 773 (9th Cir. 2003). 17 To obtain a continuance under Rule 56(d), the nonmoving party must show “by 18 affidavit or declaration that, for specified reasons, it cannot present facts essential to 19 justify its opposition. The declaration must be timely and specifically identify relevant 20 information where there is some basis for believing the information sought actually 21 exists. Emp’rs Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox, 353 F.3d 22 1125, 1129 (9th Cir. 2004). If a court concludes additional discovery is warranted, it 23 may: (1) defer considering the motion or deny it; (2) allow time to obtain affidavits or 24 declarations or to take discovery; or (3) issue any other appropriate order.” Fed. R. Civ. 25 P. 56(d). 26 Here, Ozone meets the requirements for relief under Rule 56(d). First, Ozone’s 27 request was timely submitted in its opposition to Wheatsheaf’s summary judgment 1 motion. In support of its request, Ozone submits the accompanying declaration of its 2 counsel, James Morrison. See Dkt. # 25. Mr. Morrison’s declaration identifies with 3 adequate specificity several areas in which the requested discovery is relevant to matters 4 at issue in the summary judgment motion. For example, Ozone contends that discovery 5 may yield evidence regarding “the amounts owed by TriStrata to Wheatsheaf under the 6 Transfer Price” as well as information related to Ozone’s declaratory judgment alter ego 7 claim and context of the parties’ negotiations of the APA and TSA. See Dkt. # 25. 8 Wheatsheaf argues that discovery will not aid Ozone in opposing its motion for 9 partial summary judgment because construction of Section 6.05 is a “pure legal question” 10 and “all facts necessary to conclude Ozone materially breached the TSA” are undisputed 11 and in Ozone’s possession. Dkt. # 27 at 14. However, contract interpretation is not a 12 “pure legal question” if a contract provision is subject to multiple reasonable 13 interpretations. See Hall v. Custom Craft Fixtures, Inc., 87 Wash. App. 1, 10, 937 P.2d 14 1143 (1997) (“Summary judgment is not proper if the parties’ written contract, viewed in 15 light of the parties’ other objective manifestations, has two or more reasonable but 16 competing meanings.”). Likewise, the “materiality” of any alleged breach is a question 17 of fact and, contrary to Wheatsheaf’s representation, it is not clear to the Court that the 18 facts regarding Ozone’s alleged material breach are “undisputed.” See Bailie Commc'ns, 19 Ltd. v. Trend Bus. Sys., 53 Wash. App. 77, 82 (1988). 20 Even if a dispute of material fact is not readily apparent from this limited factual 21 record—a conclusion the Court declines to reach at this stage—summary judgment in 22 Wheatsheaf’s favor is inappropriate given that Ozone has had no opportunity to engage in 23 discovery and develop its theory of the case. See Burlington, 323 F.3d at 774 (“[T]he 24 party making a Rule 56(f) motion cannot be expected to frame its motion with great 25 specificity as to the kind of discovery likely to turn up useful information, as the ground 26 for such specificity has not yet been laid.”). Accordingly, the Court GRANTS Ozone’s 27 Rule 56(d) request for additional discovery and denies Wheatsheaf’s motion for partial 1 summary judgment without prejudice to refiling after the parties have engaged in a 2 reasonable amount of discovery. See Burlington Northern, 323 F.3d at 773–74. 3 As a final matter, the Court notes that it appears the parties did not meet and 4 confer prior to the filing of this motion. See Dkt. # 24 at 4. This is unacceptable. The 5 meet and confer requirement is clearly articulated in the Court’s standing order. See Dkt. 6 # 14 at 4. It is a requirement, not a suggestion. Although the Court declines to strike 7 Wheatsheaf’s motion on this basis, the Court will not hesitate to do so in the future. 8 IV. CONCLUSION 9 For the above reasons, Defendant’s motion for partial summary judgment is 10 DENIED without prejudice. Dkt. # 21. Defendant’s motion to stay discovery is 11 DENIED as moot. Dkt. # 30. 12 DATED this 6th day of May, 2020. 13

14 A

15 16 The Honorable Richard A. Jones 17 United States District Judge

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