Brownco v. Schilk

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

BROWNCO OF AZ, LLC, et al., Plaintiffs/Appellants,

v.

PAUL SCHILK, Defendant/Appellee.

No. 1 CA-CV 24-0351

FILED 11-26-2024

Appeal from the Superior Court in Maricopa County
No. CV2022-051095
The Honorable Susanna C. Pineda, Judge

AFFIRMED

COUNSEL

Jaburg & Wilk PC, Phoenix, AZ
By Maria Crimi Speth
Counsel for Plaintiffs/Appellants

Paul Schilk, Harrison Township, MI
Defendant/Appellee

MEMORANDUM DECISION

Judge Angela K. Paton delivered the decision of the Court, in which
Presiding Judge Cynthia J. Bailey and Judge Anni Hill Foster joined.
 BROWNCO, et al. v. SCHILK
Decision of the Court

P A T O N, Judge:

¶1 Brownco of AZ, LLC (“Brownco”), Jonali Marketing, LLC
(“Jonali”), Joel Brown (“Joel”), and Graham Brown (individually
“Graham”) (collectively “Plaintiffs”) appeal the dismissal of their claims
against Paul Schilk based on lack of personal jurisdiction. For the following
reasons, we affirm.

FACTS AND PROCEDURAL HISTORY1

¶2 Joel, the principal of e-printwerx International, LLC, invented
a software application to integrate mailing lists. E-printwerx is an Arizona
company.

¶3 Splash360, Inc. was a Michigan corporation that helped
companies with email automation. Robert Stadwick was the principal of
Splash360. In 2011, Splash360 approached e-printwerx to license the
software application for use on the Splash360 platform.

¶4 Marketing Cloud Services, Inc. (“MCS”) is a Michigan
company that was formed in 2018 to market multiple products, including
those of Splash360. Schilk, who is a Michigan resident, invested in
Splash360 and MCS.2 MCS acquired Splash360 in August 2019.

¶5 By 2020, e-printwerx and MCS d/b/a Splash360 had signed
an agreement under which the two companies began discussing working
together to improve the Splash360 platform and split the net income. In late
2020, Plaintiffs, Stadwick, and MCS d/b/a Splash360 agreed to form a new
entity that would be called Sales Garden. Plaintiffs and Stadwick agreed
that the new entity would own all the Splash360 software code and other
intellectual property related to Splash360.

¶6 In February 2021, Sales Garden, LLC was formed as an
Arizona limited liability company. Brownco, Jonali, Joel, and MCS d/b/a
Splash360 are owners of Sales Garden, LLC. Graham is an owner of
Brownco, which is also an Arizona company.

1 For purposes of this appeal, we rely on facts as alleged in the third
amended complaint for background information but analyze the facts
introduced in evidence in our analysis of personal jurisdiction.

2 Schilk testified at the evidentiary hearing that he invested in Splash360

and was told the “ownership would transfer over” to MCS.

2
 BROWNCO, et al. v. SCHILK
Decision of the Court

¶7 By March 2021, the members of Sales Garden had exchanged
drafts of an operating agreement and intellectual property transfer
agreement, in which MCS d/b/a Splash360 would agree to assign all its
software, hardware, copyrights, and intellectual property to Sales Garden.

¶8 The relationship among the various entities and individuals
became contentious, and in January 2022, Stadwick sent an email to
Graham requesting money from e-printwerx and threatening to terminate
all operations of Sales Garden and the Sales Garden partnership if his
demands were not met. Stadwick copied Schilk on that email. Stadwick
advised third-party vendors that Sales Garden had no contractual rights to
the software application, instructed individuals to halt development on the
project, and deleted his work product from a shared Google drive. At the
end of January 2022, Brownco members, Jonali, Joel, and MCS d/b/a
Splash360 signed the operating agreement and intellectual property
transfer agreement.

¶9 The relationships deteriorated further, and in April 2022,
Plaintiffs sued Stadwick, Schilk, and others alleging that Stadwick extorted
money from the other Sales Garden owners and sabotaged Sales Garden.
In their third amended complaint, Plaintiffs alleged that Schilk engaged in
civil conspiracy, aiding and abetting, unfair competition, and fraud and
violated a preliminary injunction the parties had stipulated to in May 2022.

¶10 Schilk moved to dismiss for lack of personal jurisdiction. The
superior court conducted an evidentiary hearing addressing personal
jurisdiction and heard testimony from Schilk and Graham.3

¶11 After analyzing whether Schilk’s activities directed at
Arizona met specific-jurisdiction requirements, the superior court granted
Schilk’s motion to dismiss for lack of personal jurisdiction. The court also
denied Plaintiffs’ motion for an adverse inference related to document
production or for delayed ruling pending production. The court entered
partial final judgment, and this appeal followed.

¶12 We have jurisdiction pursuant to Arizona Revised Statutes
(“A.R.S.”) Section 12-2101(A)(1).

3 Other plaintiffs testified at the hearing but did not provide information

relevant to personal jurisdiction.

3
 BROWNCO, et al. v. SCHILK
Decision of the Court

DISCUSSION

I. The superior court did not have personal jurisdiction over Schilk.

¶13 Plaintiffs argue the superior court erred in granting Schilk’s
motion to dismiss for lack of personal jurisdiction—a ruling we review de
novo. Duckstein v. Wolf, 230 Ariz. 227, 233, ¶ 19 (App. 2012).

¶14 Personal jurisdiction is based on either general or specific
jurisdiction. Wal-Mart Stores, Inc. v. LeMaire, 242 Ariz. 357, 359, ¶ 4 (App.
2017). Because Plaintiffs do not argue that Schilk is subject to general
jurisdiction in Arizona, we confine our analysis to specific jurisdiction. See
In re Marriage of Peck, 242 Ariz. 345, 348, ¶ 8 (App. 2017). The superior court
may exercise specific jurisdiction over a defendant if he purposefully
availed himself of the “privilege of conducting activities in the forum,” the
“claim arises out of the defendant’s forum-related activities,” and “the
exercise of jurisdiction is reasonable.” Shute v. Carnival Cruise Lines, 897
F.2d 377, 381 (9th Cir. 1990), reversed on other grounds, 499 U.S. 585 (1991)
(cleaned up); Beverage v. Pullman & Comley, LLC, 232 Ariz. 414, 417, ¶ 9
(App. 2013). The central inquiry focuses on the “relationship among the
defendant, the forum, and the litigation.” Shaffer v. Heitner, 433 U.S. 186,
204 (1977). This nexus requirement among the defendant, the forum, and
the litigation is “the key to exercising specific jurisdiction.” Williams v.
Lakeview Co., 199 Ariz. 1, 4, ¶ 11 (2000).

¶15 The specific-jurisdiction inquiry is focused on a defendant’s
“purposeful conduct” directed to the state. Plan. Grp. of Scottsdale, L.L.C. v.
Lake Mathews Min. Prop’s., Ltd., 226 Ariz. 262, 266-68, ¶¶ 18-25 (2011)
(rejecting the distinction between the “purposeful availment” test and the
“purposeful direction” test). “Jurisdiction is proper only if the contacts
proximately result from actions by the defendant himself that create a
substantial connection with the forum state.” Batton v. Tennessee Farmers
Mut. Ins. Co., 153 Ariz. 268, 271 (1987) (cleaned up). The failure to show a
causal connection between a defendant’s Arizona activity and a plaintiff’s
claim is “fatal” to the exercise of specific jurisdiction. Williams, 199 Ariz. at
4-5, ¶ 13. A plaintiff bears the burden of making a prima-facie showing of
jurisdiction. See A. Uberti and C. v. Leonardo, 181 Ariz. 565, 569 (1995) (noting
the non-moving party must make a prima facie jurisdictional showing);
Macpherson v. Taglione, 158 Ariz. 309, 311-12 (App. 1988).

¶16 Here, there is insufficient evidence in the record satisfying the
nexus requirement to establish personal jurisdiction over Schilk. At the
evidentiary hearing, Graham asserted broadly that MCS, in which Schilk

4
 BROWNCO, et al. v. SCHILK
Decision of the Court

was a shareholder, destroyed Brownco’s property via shared ownership in
Sales Garden. He testified that Schilk’s role in MCS was as a “director, a
co-owner, a shareholder” and a “confidante of Robert Stadwick.”4 Graham
also testified that Schilk was involved in the negotiations to form Sales
Garden. He stated that Schilk knew Sales Garden was an Arizona business.
He testified that Schilk asked for and used a Sales Garden email address,
the footer of which identified Schilk as a member of “Team Sales Garden”
and listed an address in Arizona. Graham testified that Schilk also had
access to Sales Garden Google documents, which were the “crown jewels”
of the business. The record shows Schilk described Graham in an email as
“not ethical,” hypothesized that Graham would “continue to cheat us,” and
asked a third-party how to change a payment gateway for a software
account.5 But even if all these activities are true, none of them relate to the
asserted causes of action against Schilk for civil conspiracy, aiding and
abetting, unfair competition, fraud, and violation of the preliminary
injunction. Plan. Grp., 226 Ariz. at 266, ¶ 16.

¶17 The record also contains evidence that Stadwick copied Schilk
on the email Graham believes to have been blackmail. But jurisdiction
cannot be based on the activities of third parties; instead, jurisdiction must
be based on the defendant’s actions directed at the forum state. See Smith
& Wesson Corp. v. The Wuster, 243 Ariz. 355, 359, ¶ 19 (App. 2017).

¶18 The only specific factual allegations against Schilk in the third
amended complaint pertain to (1) Schilk emailing Graham in May 2021 and
seeking reimbursement for Splash360 monthly charges that he requested
Sales Garden absorb going forward, (2) Schilk and Stadwick working with
another defendant to enable that defendant’s companies to continue to use
the Splash360 platform directly through Stadwick in circumvention of
agreements with Plaintiffs, and (3) Schilk asking Graham in October 2021
to move the Sales Garden domain name into an account that was separate
from other domain names.

¶19 Plaintiffs argue that because Schilk failed to controvert
allegations one and two, the superior court should have taken those
allegations as true, citing Scott v. Kemp, 248 Ariz. 380, 386, ¶ 13 (App. 2020)

4 Schilk denied being a board member of either Splash360 or MCS and

denied he was an officer of MCS.

5 The parties did not testify about the relevance of the software account, and

Schilk testified that he must have switched topics in the email from his
unhappiness with Graham to a work-related issue.

5
 BROWNCO, et al. v. SCHILK
Decision of the Court

(quoting from Boschetto v. Hansing, 529 F.3d 1011, 1015 (9th Cir. 2008) that
“[u]ncontroverted allegations in the plaintiff’s complaint must be taken as
true.”). But a plaintiff cannot rely solely on the allegations in their
complaint and must submit facts demonstrating personal jurisdiction.
Armstrong v. Aramco Servs. Co., 155 Ariz. 345, 348 (App. 1987); see also
Macpherson, 158 Ariz. at 311-12. Courts may consider “affidavits,
depositions, and exhibits and conduct an evidentiary hearing if necessary”
when analyzing a motion to dismiss for lack of personal jurisdiction.
Gatecliff v. Great Republic Life Ins. Co., 154 Ariz. 502, 506 (App. 1987).

¶20 Schilk denied that he directed or caused any actions to take
place in Arizona and denied purposely engaging in activities in the state,
such as conducting business, entering contracts, or intentionally targeting
the state’s residents. And the parties provided no testimony or any other
evidence about any of these three specific factual allegations. But in his
opening statement, Schilk argued that in May 2021, he informed Plaintiffs
about using his personal credit card for Splash360 expenses intended to be
attributed to Sales Garden per the operating agreement. He argued that
those were company expenses and not his personal obligation and that any
damages pertained to the company, not Plaintiffs.

¶21 Plaintiffs argue that Schilk’s “direct participation in the affairs
of Sales Garden, and his participation through his ownership in MCS
constitutes sufficient purposeful” conduct such that the superior court can
exercise personal jurisdiction over Schilk, citing Scott, 248 Ariz. at 385-88.
In Scott, this court found the superior court could exercise personal
jurisdiction over individual defendants who were the owner and
management partners of entities involved in personal-injury claims alleged
to have occurred in Arizona skilled-nursing and long-term care facilities.
Id. at 383, ¶ 1, at 384-85, ¶¶ 4-7, at 392, ¶ 41. We addressed the ownership
interests of the various individuals and entities. Id. at 384-85, ¶¶ 4-7. But
the purposeful conduct sufficient to exercise personal jurisdiction included
the managers signing to renew the license of an Arizona facility, the state
requirement that the applicant list all partners to obtain a state permit,
submitting annual federal Medicare cost reports for the Arizona facility,
preparing and certifying reports for the Arizona facility, contracting to
provide proper and adequate care in Arizona, and managing entities
created to provide services to Arizona residents. Id. at 389-90, ¶¶ 26-34.
Scott does not stand for the blanket proposition that ownership or
investment in an entity that in turn invests in an Arizona entity is sufficient
to exercise personal jurisdiction.

6
 BROWNCO, et al. v. SCHILK
Decision of the Court

¶22 Plaintiffs’ conclusory allegations in the third amended
complaint cannot support the exercise of specific jurisdiction. See
Armstrong, 155 Ariz. at 348; Macpherson, 158 Ariz. at 311-12. Plaintiffs failed
to meet their burden of showing a nexus among Schilk, Arizona, and the
litigation.

II. The superior court did not err in denying Plaintiffs’ motion for
adverse inference or delayed ruling.

¶23 Plaintiffs argue the superior court erred in denying their
motion for an adverse inference pursuant to Arizona Rule of Civil
Procedure (“Rule”) 37 or for delayed ruling on personal jurisdiction. The
motion was related to document production requested of Stadwick 6 and
Schilk. We review the denial of a Rule 37 motion for abuse of discretion.
See Takieh v. O'Meara, 252 Ariz. 51, 61, ¶ 34 (App. 2021).

¶24 Plaintiffs requested bank statements from Schilk and
signatory cards for the Splash360 and MCS bank accounts. Plaintiffs
argued that the bank statements for the Splash360 account would show
what Schilk and Stadwick did with money that Graham wired to Splash360
from the Sales Garden account and whether Schilk and Stadwick were
diverting monthly subscriptions away from Sales Garden. Schilk
responded that the information sought was not reasonably calculated to
lead to admissible evidence. The record shows that Sales Garden was not
even formed until 2021, so any bank documents from Splash360—which
MCS acquired in 2019 and Schilk testified dissolved in 2020—would have
no relevance.

¶25 As for documents requested related to the MCS bank account,
Plaintiffs sought documents showing the signatories on the account,
arguing those documents would show the extent to which Schilk had
control over the accounts. Schilk claimed that he was not authorized to
produce the documents. At the evidentiary hearing, Schilk testified that
although his name was on the account for mailing purposes, he was not
authorized to produce those records because he is not an officer of MCS and
stated that the official address for the bank account is Stadwick’s corporate
attorney.

¶26 Plaintiffs argue the superior court erred in denying their
request for an adverse inference because Rule 37(c) permits the court to

6 Any failure by Stadwick to produce documents does not impact the
analysis of the superior court’s personal jurisdiction over Schilk.

7
 BROWNCO, et al. v. SCHILK
Decision of the Court

impose the sanction provided in Rule 37(g)(2)(B) of a presumption that lost
electronically-stored information was unfavorable to a party. But Rule
37(g)(2)(B) requires the court to find that a party acted with the intent to
deprive another party of the information’s use in litigation. The court made
no such finding here and the record contains no evidence of intent of
deprivation. Schilk did not claim that he lost the requested electronically-
stored information. The superior court did not abuse its discretion in
denying the motion for adverse inference or the alternative request to delay
ruling on the motion to dismiss for lack of personal jurisdiction.

CONCLUSION

¶27 For the foregoing reasons, we affirm the superior court’s
ruling. We award costs to Schilk upon compliance with Arizona Rule of
Civil Appellate Procedure 21.

AMY M. WOOD • Clerk of the Court
FILED: AGFV

8