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Atlas Biologicals, Inc. v. Kutrubes

United States District Court, D. Colorado

March 14, 2019

ATLAS BIOLOGICALS, INC., a Colorado corporation, Plaintiff,
v.
THOMAS JAMES KUTRUBES, BIOWEST, LLC, a Missouri limited liability company, and WENDELL LEINWEBER, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART BIOWEST DEFENDANTS' MOTION TO DISMISS, REJECTING UNITED STATES MAGISTRATE JUDGE'S NOVEMBER 1, 2018 RECOMMENDATION, AND GRANTING IN PART AND DENYING IN PLAINTIFF'S MOTION TO AMEND COMPLAINT

          CHRISTINE M. ARGUELLO, UNITED STATES DISTRICT JUDGE

         This matter is before the Court upon Defendants Biowest, LLC's and Wendell Leinweber's (together, the “Biowest Defendants”) Motion to Dismiss. (Doc. # 25.) The Court, having reviewed all filings, exhibits, and relevant case law, and being fully advised in the premises, grants in part and denies in part the Biowest Defendants' Motion to Dismiss. The Court simultaneously rejects United States Magistrate Judge Michael Hegarty's improperly issued Recommendation on the Motion to Dismiss (Doc.# 49) and grants in part and denies in part Plaintiff Atlas Biologicals, Inc.'s Motion to Amend Complaint (Doc. # 54).

         I. BACKGROUND

         A. PRIMARY SUIT

         This action arises from a separate lawsuit currently pending before this Court, Atlas Biologicals, Inc. v. Kutrubes, No. 15-cv-00355-CMA-KMT (the “Primary Suit”). Plaintiff Atlas Biologicals, Inc. initiated both the Primary Suit and the action presently before the Court. Plaintiff specializes in the production of bovine serum-based products used for cell culture and research.

         In the Primary Suit, Plaintiff filed suit against Thomas Kutrubes (a Defendant in this matter), who began working for it as an intern in college and was ultimately promoted to be its National Sales Manager and a shareholder, and Kutrubes's companies, Peak Serum, Inc. and Peak Serum, LLC (non-parties to this matter).[1]Plaintiff alleges in the Primary Suit that, while Kutrubes was its employee and a shareholder, he illegally used Plaintiff's trademarks, trade secrets, and other confidential and proprietary information, and solicited its customers for his nascent competing business, Peak Serum. Plaintiff asserts claims for trademark infringement under federal and Colorado law; unfair competition (false designation of origin) under federal law; misappropriation of trade secrets under the Colorado Uniform Trade Secrets Act, Colo. Rev. Stat. §§ 7-74-101, et seq.; conversion; violations of the Colorado Consumer Protection Act, Colo. Rev. Stat. §§ 6-1-105, et seq.; breach of fiduciary duty; and breach of contract.

         The Court conducted a five-day bench trial on Plaintiff's claims from March 5, 2018, through March 9, 2018. During the trial, Leinweiber-not a party to the Primary Suit-testified on behalf of Kutrubes that Kutrubes's company, Peak Serum, distributes the product of Leinweber's employer, Biowest LLC. This Court has not yet decided the Primary Suit.

         Approximately a month and a half after the trial concluded, on April 17, 2018, Plaintiff filed an “Emergency Ex Parte” Motion for Pre-Judgment Attachment and for a Temporary Restraining Order and Injunction Against Further Conveyances of Assets by Defendants. Plaintiff stated that on April 4, 2018, “Kutrubes purported to transfer all of his stock in Atlas Biologicals to Biowest LLC . . . whose president and CEO is Wendell Leinweber” and argued that Kutrubes's attempted conveyance of this stock was “an effort to hinder, delay, or defraud creditors and warrants the imposition of a writ of pre-judgment attachment against his Atlas Biologicals stock.” Plaintiff attached as exhibits (1) a letter from Kutrubes's counsel to Plaintiff's counsel, informing them that Kutrubes transferred his stock “to a third party, Biowest, LLC, effective April 4, 2018, ” and that Leinweber was the contact person for Biowest, LLC; and (2) a Transfer and Conveyance of Common Stock, dated April 4, 2018, and signed by Kutrubes.

         The Court heard testimony and argument on Plaintiff's Motion for Pre-Judgment Attachment on April 19, 2018. At the outset, the Court made clear that the hearing was “limited specifically to whether [it could] issue a writ of attachment as to whatever interests there is that [Kutrubes] had in that 7 percent interest” in Plaintiff's shares. It was not concerned with whether Kutrubes's shares had actually transferred to Biowest, LLC because “that [was] a matter for a separate action.” The Court explained that it did not have any jurisdiction over Biowest, LLC or Leinweber. After hearing testimony from Kutrubes and argument from counsel, the Court announced that it would “issue an order of pre-judgment attachment as to whatever interest remains in [Kutrubes] for the 7 percent of stock that he owns in Atlas.” It clarified that it did not know what interest remained and “that would not be decided by [the Court] unless [the parties] file[d] a separate action in this Court for either declaratory judgment or for further undoing the fraudulent conveyance.”

         The Court issued the Writ of Attachment on April 24, 2018, pursuant to Colorado Rule of Civil Procedure 102. It ordered the Sheriff of Larimer County to “attach and safely keep any stock of [Plaintiff] owned by [Kutrubes] which may be found within the County of Larimer.” Plaintiff subsequently informed the Court that it had served the Writ of Attachment on Kutrubes on May 3, 2018, and that it had “surrendered [Kutrubes's] stock certificates to the Larimer County Sheriff on May 9, 2018.”

         B. THIS ACTION

         Plaintiff initiated the action presently before the Court on April 25, 2018, one day after the Court issued the Writ of Attachment in the Primary Suit, seeking to “void the purported transfer of stock” from Defendant Kutrubes to Defendant Biowest, LLC. (Doc. # 1 at 1.) Plaintiff asserts four claims for relief: (1) “declaratory judgment that the purported transfer is void;” (2) avoidance of the purported transfer under the Colorado Uniform Fraudulent Transfer Act (“CUFTA”), Colo. Rev. Stat. § 38-8-105(1)(a), as “actual fraud;” (3) avoidance of the purported transfer under CUFTA, Colo. Rev. Stat. §§ 38-8-105(1)(b) or -106(1), as “constructive fraud;”[2] and (4) civil conspiracy between Defendants “to fraudulently convey” Defendant Kutrubes's stock to the Biowest Defendants. (Id. at 13-18.) Defendant Kutrubes filed an Answer to the Complaint on June 1, 2018. (Doc. # 20.)

         The Biowest Defendants filed the Motion to Dismiss presently before the Court on June 25, 2018. (Doc. # 25.) They argue that Plaintiff's claims against them must be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction or, alternatively, pursuant to Rule 12(b)(6) for failure to state a claim. (Id.) Plaintiff responded to the Biowest Defendants' Motion to Dismiss on July 23, 2018, rebutting some of the Biowest Defendants' arguments in a brief rife with typographical errors. (Doc. # 30.) The Biowest Defendants replied in support of their Motion to Dismiss on August 6, 2018. (Doc. # 33.)

         United States Magistrate Judge Michael Hegarty issued a Report and Recommendation on the Biowest Defendants' Motion to Dismiss on November 1, 2018, advising the Court that it should dismiss in their entireties Plaintiff's First and Fourth Claims and should dismiss Plaintiff's Second and Third Claims as alleged against Defendant Leinweber.[3] (Doc. # 49.)

         The Biowest Defendants objected to the Magistrate Judge's Recommendation on November 15, 2018, reprising their argument that the Court lacks jurisdiction to adjudicate Plaintiff's claims. (Doc. # 52.) Plaintiff responded in support of Magistrate Judge Hegarty's jurisdictional analysis on November 29, 2018. (Doc. # 56.)

         Plaintiff also filed an Objection to the Recommendation on November 15, 2018. (Doc. # 53.) Plaintiff argues that the Recommendation must be rejected for three reasons: (1) the Magistrate Judge was “without statutory authority” to issue a Recommendation; (2) Plaintiff has standing to request a declaratory judgment; and (3) the Magistrate Judge's analysis of the Third Claim is flawed. (Id. at 1-2.) The Biowest Defendants filed a Response to Plaintiff's Objection on November 29, 2018 (Doc. # 55), to which Plaintiff replied on December 6, 2018 (Doc. # 58).

         Also on November 15, 2018, Plaintiff filed a Motion to Amend Complaint pursuant to Federal Rule of Civil Procedure 15(a)(2). (Doc. # 54.) It asserts that its requested amendment corrects defects Magistrate Judge Hegarty discussed in the Recommendation and will thereby “simplify[] the matters for the [C]ourt to decide on [the Biowest Defendants'] [M]otion to [D]ismiss.” (Id. at 3-4.) The Biowest Defendants responded to Plaintiff's Motion to Amend on December 6, 2018, arguing that Plaintiff's “protracted failure to correct” its Complaint “after being appraised of” a “substantive pleading error” “months earlier” “goes unexplained and is devoid of any showing of good faith mistake or neglect.” (Doc. # 57 at 2.) The Biowest Defendants also argue that Plaintiff's proposed amendment would be futile because the Court would still not have jurisdiction over the action. (Id. at 2-3.) Plaintiff replied in support of its Motion to Amend Complaint on December 20, 2018. (Doc. # 63.)

         II. THE MAGISTRATE JUDGE'S RECOMMENDATION

         A. APPLICABLE LEGAL STANDARDS

         A district court may “designate a magistrate judge to conduct hearings, including evidentiary hearings, and to submit to a judge of the court proposed findings of fact and recommendations for the disposition, by [the] judge of the court, ” of a motion to dismiss, as well as other dispositive motions. 28 U.S.C. § 636(b)(1)(b); see also Fed. R. Civ. P. 72(b). The Local Rules of Practice for this District similarly provide that “[o]n reference or order by a district judge, ” a magistrate judge may “hold hearings and make recommendations on dispositive matters.” D.C.COLO.LCivR 72.1(c)(3) (emphasis added). Neither federal law nor the Local Rules explicitly authorize a magistrate judge to make a recommendation on a dispositive motion without a referral from the district court.

         B. ANALYSIS

         The Court begins its analysis by rejecting the Magistrate Judge's Recommendation (Doc. # 49) because Magistrate Judge Hegarty was without authority to make a recommendation. This Court referred the Biowest Defendants' Motion to Dismiss to the Magistrate Judge one day after it was filed (Doc. # 26), but approximately two months later, on August 16, 2018, the Court withdrew its referral of the Motion to the Magistrate Judge (Doc. # 35). Thus, when Magistrate Judge Hegarty issued his Recommendation on the Biowest Defendants' Motion to Dismiss on November 1, 2018, the Motion to Dismiss was not referred to him. The Magistrate Judge erred by issuing the Recommendation on a dispositive motion that had not been referred to him, [4] and the Court, therefore, rejects the Recommendation. (Doc. # 49.)

         III. THE BIOWEST DEFENDANTS' MOTION TO DISMISS

         A. APPLICABLE LEGAL STANDARDS

         The Biowest Defendants seek dismissal of Plaintiff's claims against them pursuant to Rule 12(b)(1) on the grounds that the Court lacks subject matter jurisdiction over the action. (Doc. # 25 at 1.) Should the Court determine that it has subject matter jurisdiction over Plaintiff's claims, the Biowest Defendants alternatively argue that the action must be dismissed pursuant to Rule 12(b)(6) for failure to state a claim. (Id. at 8.)

         1. Rule 12(b)(1)

         Dismissal pursuant to Rule 12(b)(1) is appropriate if the Court lacks subject matter jurisdiction over claims for relief asserted in the complaint. “The burden of establishing subject matter jurisdiction is on the party asserting jurisdiction.” Port City Props. v. Union Pac. R.R. Co.24, 518 F.3d 1186, 1189 (10th Cir. 2008). Rule 12(b)(1) challenges are generally presented in one of two forms: “[t]he moving party may (1) facially attack the complaint's allegations as to the existence of subject matter jurisdiction, or (2) go beyond allegations contained in the complaint by presenting evidence to challenge the factual basis upon which subject matter jurisdiction rests.” Merrill Lynch Bus. Fin. Servs., Inc. v. Nudell, 363 F.3d 1072, 1074 (10th Cir. 2004) (quoting Maestas v. Lujan, 351 F.3d 1001, 1013 (10th Cir. 2003)); see Ruiz v. McDonnell, 299 F.3d 1173, 1180 (10th Cir. 2002). When reviewing a facial attack, a court takes the allegations in the complaint as true but, when reviewing a factual attack, the court does not presume the truthfulness of the complaint's factual allegations and may consider affidavits or other documents to resolve jurisdictional facts. Holt v. United States, 46 F.3d 1000, 1002-03 (10th Cir. 1995). The Biowest Defendants' Motion to Dismiss launches a facial attack on the Court's subject matter jurisdiction. See (Doc. # 25 at 2.) The Court therefore accepts as true Plaintiff's allegations in its Complaint for purposes of this Order.

         2. Rule 12(b)(6)

         Rule 12(b)(6) provides that a defendant may move to dismiss a claim for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.” Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003) (citations and quotation marks omitted).

         “A court reviewing the sufficiency of a complaint presumes all of plaintiff's factual allegations are true and construes them in the light most favorable to the plaintiff.” Hall v. Bellmon, 935 F.2d 1106, 1109 (10th Cir. 1991). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pleaded facts which allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The Iqbal evaluation requires two prongs of analysis. First, the court identifies “the allegations in the complaint that are not entitled to the assumption of truth, ” that is, those allegations which are legal conclusion, bare assertions, or merely conclusory. Id. at 679-81. Second, the court considers the factual allegations “to determine if they plausibly suggest an entitlement to relief.” Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 679.

         However, the court need not accept conclusory allegations without supporting factual averments. S. Disposal, Inc., v. Tex. Waste, 161 F.3d 1259, 1262 (10th Cir. 1998). “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. “Nor does the complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Id. (citation omitted). “Where a complaint pleads facts that are ‘merely consistent ...


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