Ozone International LLC v. Wheatsheaf Group US Inc

• Court: District Court, W.D. Washington
• Decided: March 31, 2021
• Docket: 3:19-cv-06155
• Status: Unknown

Opinion

1 HONORABLE RICHARD A. JONES

8 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON 9 AT SEATTLE

10 OZONE INTERNATIONAL, LLC, No. 3:19-cv-06155-RAJ 11

12 Plaintiff, v.

13 ORDER GRANTING MOTION TO WHEATSHEAF GROUP US, INC., DISMISS 14

15 Defendant.

17 I. INTRODUCTION 18 This matter comes before the Court on Defendant’s motion to dismiss Plaintiff’s 19 first amended complaint. Dkt. # 23. Plaintiff opposes the motion. Dkt. # 26. For the 20 reasons below, the Court GRANTS Defendant’s motion to dismiss. 21 II. LEGAL STANDARD 22 Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint 23 for failure to state a claim. Fed. R. Civ. P. 12(b)(6). The court must assume the truth of 24 the complaint’s factual allegations and credit all reasonable inferences arising from those 25 allegations. Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007). A court “need not 26 accept as true conclusory allegations that are contradicted by documents referred to in the 27 1 complaint.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2 2008). Instead, the plaintiff must point to factual allegations that “state a claim to relief 3 that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 568 (2007). If 4 the plaintiff succeeds, the complaint avoids dismissal if there is “any set of facts 5 consistent with the allegations in the complaint” that would entitle the plaintiff to relief. 6 Twombly, 550 U.S. at 563; Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 7 On a motion to dismiss, a court typically considers only the contents of the 8 complaint. However, a court is permitted to take judicial notice of facts that are 9 incorporated by reference in the complaint. United States v. Ritchie, 342 F.3d 903, 908 10 (9th Cir. 2003) (“A court may . . . consider certain materials documents attached to the 11 complaint, documents incorporated by reference in the complaint”). A court may also 12 “‘take judicial notice of matters of public record outside the pleadings’ and consider them 13 for purposes of the motion to dismiss.” Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 14 649 (9th Cir. 1988). A court may therefore “properly look beyond the complaint to 15 matters of public record and doing so does not convert a Rule 12(b)(6) motion to one for 16 summary judgment.” Mack v. S. Bay Beer Distributors, Inc., 798 F.2d 1279, 1282 (9th 17 Cir. 1986), abrogated by Astoria Fed. Sav. & Loan Ass’n v. Solimino on other grounds, 18 501 U.S. 104 (1991). With these principles in mind, the Court turns to the instant 19 motion. 20 III. BACKGROUND 21 The parties here agree that there are two cases related to this matter: Ozone Int’l, 22 LLC v. Wheatsheaf Group Ltd., No. 2:19-cv-01108-RAJ (W.D. Wash.) (the “First-Filed 23 Lawsuit”), and Brandt v. Beadle, No. 3:19-cv-06159-BHS (W.D. Wash.). Dkt. # 32 at 3. 24 In this case, Plaintiff Ozone International, LLC (“Plaintiff” or “Ozone”) filed a complaint 25 on November 27, 2019. Dkt. # 1. Defendant Wheatsheaf Group US, Inc. (“Defendant” 26 or “Wheatsheaf”) field a motion to dismiss for failure to state a claim on February 27, 27 2020. Dkt. # 12. On May 27, 2020, the Honorable Ronald B. Leighton dismissed the 1 claims for breach of fiduciary duty with prejudice and dismissed the fraud claims without 2 prejudice, permitting Plaintiff to amend its complaint with respect to these claims. Dkt. # 3 18 at 15. Judge Leighton then transferred the case to the undersigned. Id. 4 Plaintiff filed an amended complaint on June 10, 2020. Dkt. # 22. Because the 5 facts have not materially changed from the original complaint, the Court incorporates the 6 facts by reference to its prior order, Dkt. # 18 at 3-7, and briefly recounts them here as 7 relevant to Plaintiff’s remaining claims. 8 Plaintiff is a Washington-based business that developed chemical-free technology 9 to improve food safety and to extend the shelf life for food and beverages. Dkt. # 22 ¶ 6. 10 In 2017, Wheatsheaf Group Limited (“WGL”), a UK-based corporation, formed two 11 domestic subsidiaries: WGUS FS LLC d/b/a TriStrata Group (“TriStrata”) and Defendant 12 Wheatsheaf. Id. ¶¶ 8-10. Plaintiff entered into two agreements with WGL to facilitate 13 the acquisition of Ozone’s business assets. Id. ¶ 11. Under the Asset Purchase 14 Agreement (“APA”), Ozone transferred almost all of its operating assets to TriStrata for 15 approximately $10 million, while Ozone retained ownership for a limited period of 16 certain “excluded contracts” valued at $35 million. Id. ¶ 12. Under the Transition 17 Services Agreement (“TSA”), TriStrata was obligated to service the excluded contracts 18 with Ozone paying TriStrata servicing fees. Id. ¶ 13. TriStrata would acquire the 19 contracts from TriStrata over a period of years and pay contract acquisition fees covering 20 TriStrata’s purchase of machines and parts from Ozone, with the objective of transferring 21 all contracts and inventory to TriStrata over several years. Id. Ozone established a $1.5 22 million reserve, held and controlled by WGL to be used for any “intercompany charges 23 that arose as a result of the TSA.” Id. ¶ 14. 24 Plaintiff claims that “[a]s a result of the substantial acquisition fees that TriStrata 25 owed to Ozone under the TSA, Ozone became a creditor of TriStrata when the TSA went 26 into effect on September 27, 2017. Id. ¶ 16. Beginning in November 2017, TriStrata 27 began acquiring inventory from Ozone through a series of purchases. Id. ¶ 17. Plaintiff 1 alleges that TriStrata never paid Ozone for the majority of purchases. Id. Beginning in 2 February 2018, TriStrata began to acquire Ozone’s excluded contracts, but Ozone 3 contends that it was never paid for these contracts either. Id. ¶ 18. 4 On January 1, 2019, TriStrata acquired a 90 percent equity interest in Purfresh 5 Inc., a California Corporation. Id. ¶ 22. This purchase was memorialized in a contract, 6 the Unit Pledge Agreement, between Wheatsheaf, TriStrata, and Purfresh, by which 7 Wheatsheaf had the right to compel TriStrata to sell its interest in Purfresh through a call 8 option. Id. ¶¶ 23-26; Dkt. # 22-1 at 2. On May 14, 2019, Wheatsheaf exercised its call 9 option and TriStrata transferred the full Purfresh equity interest to Wheatsheaf. Dkt. # 22 10 ¶ 29. On May 30, 2019, Wheatsheaf shut down and liquidated TriSTrata “through an 11 assignment for the benefit of creditors that commenced a receivership in accordance with 12 RCW 7.08 and 7.60, In the Receivership of WGUS FS, LLC, No. 19-2-14553-6 (King 13 Cty. Sup. Ct.) (the “Receivership”).” Id. ¶ 33. The Receivership was ultimately closed, 14 but, Plaintiff alleges, “the Receiver expressly preserved Ozone’s Transfer-related claims 15 against Wheatsheaf and its Officers.” Id. ¶ 41. 16 The transfer is now the subject of Ozone’s claims. Plaintiff claims that TriStrata 17 was indebted to Ozone at the time of the transfer for approximately $2.5 million in 18 transfer fees, $1 million in improperly collected payments from Ozone’s customer 19 contracts, and over $300,000 for machines and supplies Ozone sold to TriStrata from 20 January 2018 through July 2018. Id. ¶ 43. Plaintiff alleges that the transfer violated 21 provisions of the Washington’s Uniform Voidable Transactions Act (“UVTA”). Id. ¶¶ 22 44-60. 23 On June 24, 2020, Defendant filed the pending motion to dismiss Plaintiff’s First 24 Amended Complaint. Dkt. # 23. On January 29, 2021, Defendant filed a notice of 25 supplemental authority issued in King County Superior Court in WGUS BCO LLC d/b/a 26 Ozark v. Ozone International, LLC, No. 20-2-07562-1-SEA (the “Ozark Litigation”). 27 Dkt. # 39. The notice included two related orders on cross motions for summary 1 judgment issued by Superior Court Judge Judith Rasmeyer on January 19, 2021. Id. 2 On February 3, 2021, Plaintiff moved the Court to strike the notice as improper 3 because (1) the orders were interlocutory and subject to a pending motion for 4 reconsideration, and (2) Defendant’s notice improperly asserted additional arguments 5 related to the pending motion to dismiss in this case. Dkt. # 40 at 1. Alternatively, 6 Plaintiff requested that the Court withhold consideration of the motion to dismiss here 7 until the Ozark court ruled on Plaintiff’s motion for reconsideration before it and order 8 the parties to file a joint status report on the state court rulings. Id. Defendant opposed 9 the motion, Dkt. # 42, and Plaintiff filed a reply in support of the motion, Dkt. # 44. 10 On March 23, 2021, Defendant filed an update to its notice of supplemental 11 authority indicating that Judge Rasmeyer had entered an order denying Plaintiff’s motion 12 for consideration the day prior. Dkt. # 46. 13 IV. DISCUSSION 14 In addressing the matters before this Court, the Court must consider state court 15 judgments on related matters litigated between the same parties or their privies. See 16 Chao v. A-One Med. Servs., Inc., 346 F.3d 908, 921 (9th Cir. 2003) (holding that “[a] 17 federal court must give to a state court judgment the same preclusive effect as would the 18 courts of the state in which it was rendered”); see also Allen v. McCurry, 449 U.S. 90, 94 19 (1980) (holding that “[u]nder res judicata, a final judgment on the merits of an action 20 precludes the parties or their privies from relitigating issues that were or could have been 21 raised in that action”). In a diversity action such as this, “state law controls whether the 22 previous state court determinations have a preclusive effect on Plaintiff’s claims.” Pac. 23 Boring, Inc. v. Staheli Trenchless Consultants, Inc., 138 F. Supp. 3d 1156, 1162 (W.D. 24 Wash. 2015), aff’d, 708 F. App’x 324 (9th Cir. 2017). Under Washington state law, a 25 decision on a partial summary judgment motion constitutes a final judgment for purposes 26 of collateral estoppel. See 138 F. Supp. 3d at 1163 (holding that with respect to collateral 27 estoppel, “a final judgment includes any prior adjudication of an issue in another action 1 that is determined to be sufficiently firm to be accorded conclusive effect.”) 2 In the Ozark litigation, a WGUS affiliate, Ozark, filed suit against Ozone related 3 to the Receivership. Dkt. # 39 at 1. Ozone asserted an affirmative defense that it argued 4 would allow it “to offset any damages Ozark might recover in this litigation by using 5 amounts Ozone asserted against TriStrata in the Receivership.” Dkt. # 39-1 at 3. Ozone 6 had filed a Receivership Proof of Claim asserting that Ozone was entitled to recover $31 7 million from TriStrata based on TriStrata’s alleged breach of two contracts in the 8 underlying transaction that preceded the Receivership. Id. Ozark moved for partial 9 summary judgment against Ozone’s affirmative defense of setoff. Id. at 2. 10 The Superior Court granted Ozark’s motion and dismissed with prejudice Ozone’s 11 affirmative defense, which sought the right to assert a setoff against Ozark’s claims in the 12 litigation by using amounts Ozone asserted against TriStrata in the Receivership. Id. at 5. 13 Judge Rasmeyer held that Ozone had waived and released any claims it had against 14 TriStrata and that any other recovery against TriStrata is barred by res judicata and 15 collateral estoppel. Id. at 3-4. The order states the following:

16 Following that Proof of Claim, the Receiver proposed a compromise assigning 17 Ozone valuable assets in exchange for waiving and releasing any remaining claims that Ozone might have had against TriStrata. With Ozone’s support, King County 18 Superior Court Judge Marshall Ferguson entered an order approving that compromise on August 16, 2019, and deeming all of Ozone’s remaining claims 19 against TriStrata to be waived and released. (Citation omitted). Judge Ferguson’s 20 order is a final ruling on Ozone’s claims against TriStrata. Accordingly, any other recovery against TriStrata is now barred by the doctrines of res judicata and 21 collateral estoppel. 22 Id. 23 The court rejected Ozone’s argument that it had not waived all claims, noting the 24 following: 25 Ozone’s Proof of Claim, which no doubt asserted its contention against TriStrata, 26 cannot be found to have survived without reference in the detailed and explicit 27 assignment and sale of TriStrata assets and liabilities, which, instead, specifically waived and released all claims and liabilities not otherwise assigned. 1 Id. at 4. 2 In the court’s second order, Judge Rasmeyer denied Ozone’s cross-motion for 3 summary judgment based on the same reasoning: 4

5 The fact that Ozone filed its Proof of Claim in the Receivership does not mean that its $31 million claim was established as a matter of law, or that Ozone may 6 continue to assert that claim against third-parties. Rather, after Ozone filed its Proof of Claim, the Receiver proposed a compromise assigning Ozone valuable 7 assets in exchange for waiving and releasing any remaining claims that Ozone 8 might have had against TriStrata. With Ozone’s support . . . Judge Marshall Ferguson entered an order approving that compromise . . . and deeming all of 9 Ozone’s remaining claims against TriStrata to be waived and released. 10 11 Dkt. 39-2 at 4. 12 Finally, in its order on Ozone’s motion for reconsideration, the court denied 13 reconsideration and reaffirmed its ruling in both orders. Dkt. # 46-1 at 2-3. 14 The Court finds that Superior Court’s orders are clear, final, and dispositive of 15 Plaintiff’s UVTA claims in the instant case. The Court need not wait for the parties to 16 confirm whether they will move for interlocutory appeal because, as noted above, the 17 Superior Court’s decisions serve as final judgments for purposes of collateral estoppel. 18 See 138 F. Supp. 3d at 1163. Additional briefing by the parties on the Superior Court’s 19 denial of Ozone’s motion for reconsideration is unnecessary for the Court to render a 20 conclusion on the preclusive effect of the Superior Court’s judgment on the claims here1. 21 See Chao, supra, 346 F.3d 921; Allen 449 U.S. at 94. 22 The Court finds Plaintiff’s claims seeking recovery as a creditor of TriStrata are 23 unambiguously precluded by the Superior Court’s conclusion that Ozone waived and 24 released any remaining claims it might have had against TriStrata. Under the UVTA, a 25 “creditor” is a person that has a claim. RCW 19.40.011(4). A “claim” under the statute

26 1 The Court declines to address the arguments raised in the notice supplemental authority and objected to by Plaintiffs. The Court instead conducts its own analysis of the state 27 court orders and their effect on the claims at issue. 1 means “a right to payment, whether or not the right is reduced to judgment, liquidated, 2 unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, 3 equitable, secured, or unsecured.” RCW 19.40.011(3). The Superior Court has 4 concluded that Ozone has no right to recovery of payment from TriStrata. Based on this 5 finding, plaintiff is unable to point to factual allegations that “state a claim to relief that is 6 plausible on its face” to survive a motion to dismiss. 7 V. CONCLUSION 8 For the foregoing reasons, Defendant’s Motion to Dismiss First Amended 9 Complaint is GRANTED without prejudice. Dkt. # 23. The Court GRANTS Plaintiff 10 leave to amend the Complaint within fourteen (14) days from the date of this Order. 11 If Plaintiff does not file an amended complaint within that time, the Court may dismiss 12 this action with prejudice. Plaintiff’s Motion to Strike the Notice of Supplemental 13 Authority is DENIED as moot. Dkt. # 40. 14 15 DATED this 31st day of March, 2021. 16 A 17

18 The Honorable Richard A. Jones 19 United States District Judge 20 21 22 23 24 25 26 27