United States District Court, D. Colorado
ERIK S. NELSON, and STEVE STEPHENS, Plaintiffs,
STEPHEN E. CSAJAGHY, CONDIT CSAJAGHY, LLC, JAMES E. PENNINGTON, and THE LAW OFFICES OF JAMES E. PENNINGTON, P.C., Defendants.
ORDER ADOPTING AND AFFIRMING MAY 28, 2015 RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE AND DENYING DEFENDANT'S MOTION FOR SANCTIONS
CHRISTINE M. ARGUELLO, District Judge.
This matter is before the Court on the May 28, 2015 Recommendation of Magistrate Judge Mix, to grant in part and deny in part Defendants' Motions to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(1) (Doc. # 69), as well as Defendant Pennington's Motion for Sanctions. (Doc. # 28). For the reasons discussed below, the Court adopts and affirms Magistrate Judge Mix's Recommendation, and denies the Motion for Sanctions.
In a prior lawsuit in this District, Stephen Csajaghy and James Pennington represented Sun River, Energy, Inc. ("the Sun River Lawsuit.") See Sun River Energy, Inc. v. Erik S. Nelson, Steve Stephens, and Coral Capital Partners, Inc., Civil Action No. 1:11-cv-00198-MSK-MEH. In the instant action, Plaintiffs Eric Nelson and Steve Stephens allege that Csajaghy and Pennington, as counsel in the Sun River Lawsuit,  "repeatedly represented that there was no insurance that might potentially cover [Plaintiff's] counterclaims" relating to Sun River's issuance of securities. In fact, Sun River had an active insurance policy which might have provided such coverage; however, Stephens and Nelson did not find out about this policy until approximately a year and a half into litigation, after a nonparty happened to provide documents containing evidence that Sun River had such policy. (Doc. # 1, ¶¶ 5, 36, 55.)
In the Sun River Lawsuit, Stephens and Nelson filed three motions for sanctions relating to alleged discovery abuses arising from this nondisclosure. ( Id., ¶ 42.) After holding a hearing on the motions for sanctions, Magistrate Judge Hegarty concluded that "the evidence... did not establish intentional misrepresentation by [Csajaghy and Pennington]. It did establish that neither attorney ever took a serious look at whether there was applicable insurance, and that they learned of the existence of a "["Directors and Officers"] policy and simply believed that, because no directors or officers (or any individual at all) was named in the counterclaim, the policy would not be relevant." (Case no. 11-cv-00198-MSK-MEH, Doc. # 278.) Additionally, Magistrate Judge Hegarty recommended that Sun River be sanctioned in part because:
[R]egardless of the precise mens rea of Plaintiff's general and outside counsel in failing to investigate properly and disclose the existence of insurance, they must be viewed as significantly culpable, especially when the Defendants' attorney's attempts to bring the failure of disclosure to Plaintiff's counsel's attention did not result in a hard look at the availability of insurance but, rather, brought threats against defense counsel for continuing to seek "nonexistent" insurance information. Mr. Pennington was Plaintiff's employee during the time of Plaintiff's Rule 26 disclosure obligations, most particularly while the policy was still in effect and notice of a claim could still have been provided to the insurance company (through mid-January 2012). He knew Plaintiff had two insurance policies, the D&O and the general liability, and decided not to review them for potential relevance. Although I agree with Mr. Pennington's testimony that it would only make sense for him to access insurance resources if they were available (to pay for cost of defense to the counterclaims), especially when Plaintiff was not even paying Mr. Pennington's salary, let alone his billable hours once he left the company, I cannot help but find that the lack of inquisition from February 2011 to October 2012 exhibited deliberate indifference to the obligation of providing relevant insurance information under Rule 26. Either or both of Mr. Pennington's and Mr. Csajaghy's conduct is relevant in this analysis.
( Id. at 9) (emphasis added). At a final pretrial conference in July of 2013, Chief Judge Krieger "sustain[ed] in part Sun River's Objections (Doc # 279), adopt[ed] in part [Judge Hegarty's] Recommendation (Doc.# 278), and grant[ed] in part the Defendants' motion for sanctions (Doc. # 254) for the reasons stated on the record." (Case no. 11-cv-00198-MSK-MEH, 294.) In October of 2013, Chief Judge Krieger held a bench trial in the Sun River Lawsuit and awarded monetary sanctions against Pennington and Csajaghy in the amount of $20, 345, for their failure to disclose the possibly relevant insurance policy. (Case no. 11-cv-00198-MSK-MEH, Doc. # 367 at 3.) Final Judgment was entered against Pennington and Csajaghy in the amount of $20, 435. (Case No. 11-cv-00198-MSK-MEH, Doc. # 338). Stephens and Nelson indicate that, after they obtained Final Judgment, they "undertook reasonable efforts to collect, " and when those efforts failed, they initiated this case. (Doc. # 72 at 2, n.1.) Specifically, they filed their Complaint in September of 2014, alleging two claims against Csajaghy, Pennington, and their respective law firms, relating to the nondisclosure of the insurance policy: (1) Fraudulent Misrepresentation and (2) Fraudulent or Negligent Nondisclosure. (Doc. # 1 at 14-15.)
Defendants Pennington and Csajaghy and their respective law firms filed Motions to Dismiss (Doc. ## 16, 17.) These Motions were referred to United States Magistrate Judge Kristen L. Mix pursuant to 28 U.S.C. § 636 and Fed.R.Civ.P. 72. (Doc. # 54.) On May 28, 2015, Magistrate Judge Mix issued a Recommendation to grant in part and deny in part Defendants' Motions to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(1) (Doc. # 69). Specifically, Magistrate Judge Mix recommended that Defendants' Motions be granted to the extent that the Motions argued that Plaintiffs failed to state a claim, but denied to the extent they argued that Plaintiffs' claims were barred by the doctrine of claim preclusion or because the claims were an alleged violation of the Federal Rules of Civil Procedure. (Doc. # 69 at 20, 25, 29-31.)
Thereafter, Plaintiffs filed an objection to Magistrate Judge Mix's Recommendation, arguing that she erred in determining that Plaintiffs failed to state a claim for fraudulent representation and negligent misrepresentation. (Doc. # 72.) Defendant Pennington and the Law Offices of James E. Pennington, P.C., filed an Objection, in part, to Magistrate Judge Mix's Recommendation, arguing that the case should not be dismissed without awarding attorney fees. (Doc. # 70.) Defendants Csajaghy and Condit Csajaghy, LLC also filed an Objection, contending that Magistrate Judge Mix should have concluded that Plaintiffs also failed to state a claim because an alleged violation of the Federal Rules of Civil Procedure does not give rise to an independent cause of action. (Doc. # 71.) Plaintiffs responded to both of Defendants' Objections. (Doc. ## 74, 75.)
A. JUDGE MIX'S RECOMMENDATION
When a magistrate judge issues a recommendation on a dispositive matter, Fed.R.Civ.P. 72(b)(3) requires that the district judge "determine de novo any part of the magistrate judge's [recommended] disposition that has been properly objected to." In conducting its review, "[t]he district judge may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions." Id.
Plaintiffs first object to Judge Mix's determination that they failed to state a claim for fraudulent misrepresentation, contending that Judge Mix applied the wrong legal standard. Specifically, Plaintiffs contend that to state such a claim under Colorado law, a plaintiff need only show that an individual making a false statement either knew that statement was false or made the statement with "reckless disregard for its truth or falsity." (Doc. # 72 at 8.) They argue that they have alleged adequate facts here to meet the latter standard because "[Pennington and Csajaghy] admitted that they did not read the policies. Thus, they could not possibly have known whether there was insurance coverage or not when they represented there were no applicable insurance policies." ( Id. )
Plaintiffs are correct that a misrepresentation may still be considered fraudulent under Colorado law even if the individual making the misrepresentation did not believe it to be false. See Forsyth v. Associated Grocers of Colo., Inc., 724 P.2d 1360, 1363 (Colo.App. 1986) (noting that a defendant can be liable for fraudulent misrepresentation either if he or she made a statement "knowing it to be false" or if he or she was "aware" that he or she "did not know whether it was true or false"); CO-JI CIV 4th § 19:1 (same). In this case, Plaintiffs' claim would require a substantial, and impermissible leap of logic: the ...