Paulson v. Two Rivers Water & Farming Co.

• Decision Date: 06 March 2020
• Docket Number: Civil Action No. 19-cv-02639-PAB-NYW
• Parties: JOHN PAULSON, Plaintiff, v. TWO RIVERS WATER AND FARMING COMPANY, JOHN R. McKOWEN, WAYNE HARDING, and TIMOTHY BEALL, Defendants.
• Court: U.S. District Court — District of Colorado

JOHN PAULSON, Plaintiff, v. TWO RIVERS WATER AND FARMING COMPANY,JOHN R. McKOWEN, WAYNE HARDING, and TIMOTHY BEALL, Defendants.

Civil Action No. 19-cv-02639-PAB-NYW

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

March 6, 2020

ORDER ON MOTION TO STAY

Magistrate Judge Nina Y. Wang

This matter comes before this court on Defendant John R. McKowen's ("Defendant McKowen" or "Mr. McKowen") Motion to Stay Proceedings (the "Motion" or "Motion to Stay"), filed January 23, 2020. [#47]. The undersigned considers the Motion pursuant to 28 U.S.C. § 636(b), the Order Referring Case dated November 12, 2019 [#22], and the Memorandum dated January 24, 2020 [#48]. Having reviewed the Motion and associated briefing, the applicable case law, and the comments offered at the February 25, 2020 Motion Hearing, this court DENIES the Motion to Stay for the reasons stated herein.

BACKGROUND

Plaintiff John Paulson ("Plaintiff" or "Mr. Paulson") initiated this civil action on behalf of himself and a putative class of "all persons or entities who purchased or otherwise acquired securities of GrowCo, [Inc.], a Colorado corporation, from January 2015 until March 2017." [#4 at 2]. Mr. Paulson alleges that he is an investor from California who purchased securities in GrowCo, Inc. ("GrowCo"), a wholly owned subsidiary of Two Rivers Water and Farming Company ("Two Rivers"), between January 2015 and March 2017. See [id. at 2-3]; see also [#47 at ¶¶ 1-3, 7]. According to Plaintiff, GrowCo's securities offerings documents contained material omissions, such as Defendant McKowen's "fraudulent sales of securities," which led to investors like Mr. Paulson purchasing GrowCo securities in reliance upon misleading information. See [#4 at 7-10; #47 at ¶ 9].

In 2019, GrowCo filed for voluntary Chapter 11 bankruptcy with the United States Bankruptcy Court for the District of Colorado ("Bankruptcy court"); Plaintiff alleges that this rendered his investments in GrowCo "effectively worthless." [#4 at 11; #47 at ¶¶ 6, 8]. Currently, GrowCo's Chapter 11 bankruptcy case is proceeding with a hearing on GrowCo's disclosure statement (a condition precedent to plan confirmation). Originally, the hearing was scheduled for January 29, 2020, with a deadline to submit proofs of claim by February 3, 2020. See [#47 at ¶¶ 28-30]. Since the filing of this Motion to Stay, the Bankruptcy Court ordered an Amended Disclosure Statement to be filed by February 12, 2020, which a hearing is scheduled on for March 10, 2020, with a last day to oppose the disclosure statement of March 4, 2020. See In re GrowCo, Inc., Case No. 19-10512 (D. Colo. Bankr. Ct.), [Docket Entry 130].

Believing Defendants' conduct violated the Colorado Securities Act, Colo. Rev. Stat. §§ 11-51-101 et seq., as well as other common law principles, Plaintiff filed suit in the District Court for the City and County of Denver ("Denver District Court"). See #4]. Mr. Paulson asserts five Colorado Securities Act claims against Defendants for: (1) sale of securities in violation of the Colorado Securities Act ("Claim 1"); (2) providing substantial assistance in the sale of securities by means of untrue statements or omissions in violation of the Colorado Securities Act (pleaded in the alternative) ("Claim 2"); (3) control person liability in the sale ofsecurities by means of untrue statements or omissions in violation of the Colorado Securities Act (also pleaded in the alternative) ("Claim 3"); (4) negligence ("Claim 4"); and (5) negligent misrepresentations and omissions ("Claim 5"), as well as two individual claims against Defendant McKowen for: (6) fraud ("Claim 6") and (7) sale of securities through fraud ("Claim 7"). See generally [#4; #56]. On September 16, 2019, Defendants removed this matter to this District pursuant to 28 U.S.C. §§ 1334(b), 1452, because this civil action related to GrowCo's bankruptcy action. See [#1].

In the Bankruptcy court, GrowCo then filed an adversary proceeding against Plaintiff and sought a temporary restraining order. See GrowCo, Inc. v. Paulson, Case No. 19-01275 (D. Colo. Bankr. Ct.), [Docket Entry 19], attached as [Attach. 1]. In the adversary proceeding, GrowCo argued that the automatic stay under § 362 extended to this action. [Id. at 5-15, 19-20]. The Honorable Joseph G. Rosania, Bankruptcy Judge, denied the motion for temporary restraining order, finding that there was no basis to extend the automatic stay or preclude Mr. Paulson from pursuing this action. [Id. at 23-25].

On December 12, 2019, the undersigned conducted a Scheduling Conference, at which this court set June 30, 2020 as the discovery deadline and the Motion for Class Certification under Rule 23 deadline, February 15, 2021 as the dispositive motion deadline, and April 14, 2021 as the Final Pretrial Conference. See [#36; #37]. On January 23, 2020, Defendant McKowen filed the instant Motion to Stay, requesting that the court stay this civil action for 180 days while the Bankruptcy court considers whether to approve GrowCo's Chapter 11 Reorganization Plan. See [#47 at ¶ 31]. Mr. Paulson opposes the Motion to Stay and contends that GrowCo's Chapter 11 bankruptcy case in no way impacts the relief sought in this civil action against Defendant McKowen or the other named Defendants. See [#58]. Mr. McKowen has since filed his Reply, see [#63], and this courtentertained oral argument on the Motion to Stay on February 25, 2020, see [#72]. Because the Motion is ripe for determination, I consider the Parties' arguments below.

LEGAL STANDARD

I. District Court Discretion to Stay Civil Proceedings

Whether to stay discovery is a matter left to the sound discretion of the trial court. Wang v. Hsu, 919 F.2d 130, 130 (10th Cir. 1990). Indeed, the Federal Rules of Civil Procedure do not expressly provide for a stay of proceedings, but the power to stay "is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254-55 (1936) (citing Kansas City S. Ry. Co. v. United States, 282 U.S. 760, 763 (1931)). In determining whether a stay is appropriate, the court weighs interests such as whether defendants are likely to prevail in the civil action, whether defendants will suffer irreparable harm, whether the stay will cause substantial harm to other parties to the proceeding, and the public interests at stake. United Steelworkers of Am. v. Oregon Steel Mills, Inc., 322 F.3d 1222, 1227 (10th Cir. 2003). The court may also consider plaintiff's interests in proceeding expeditiously with the civil action and the potential prejudice to plaintiff of a delay, the burden on the defendants, and the convenience to the court. String Cheese Incident, LLC v. Stylus Shows, Inc., No. 1:02-cv-01934-LTB-PAC, 2006 WL 894955, at *2 (D. Colo. Mar. 30, 2006) (citing FDIC v. Renda, No. 85-2216-O, 1987 WL 348635, at *2 (D. Kan. Aug. 6, 1987)). Courts in this District generally disfavor the stay of all discovery, see Wason Ranch Corporation v. Hecla Mining Co., No. 07-cv-00267-EWN-MEH, 2007 WL 1655362, at *1 (D. Colo. June 6, 2007), but such a stay may be appropriate pending the resolution pending the resolution of a Motion to Dismiss impacting immunity or jurisdictional issues,Clarendon Nat'l Ins. Co. v. Glickauf, No. 18-CV-02549-CMA-NYW, 2019 WL 1897845, at *2 (D. Colo. Feb. 14, 2019).

II. Automatic Stay of Civil Proceedings Relating to Bankruptcy Petition

"By its terms, § 362 of the Bankruptcy Code automatically stays the commencement or continuation of a judicial proceeding against the debtor that was or could have been initiated before the filing of a bankruptcy petition." TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495, 496 (10th Cir. 2011) (emphasis added) (citing 11 U.S.C. § 362(a)(1)); In re Cowen, 849 F.3d 943, 948 (10th Cir. 2017) ("When a debtor files for bankruptcy, section 362 prevents creditors from taking further action against him except through the bankruptcy court." (internal quotation marks omitted)). "Generally, the stay applies only to the debtor and not to non-debtor co-defendants." In re Expert S. Tulsa, LLC, 506 B.R. 298, 302 (Bankr. D. Kan. 2011). For example, in Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir. 1984), the United States Court of Appeals for the Tenth Circuit ("Tenth Circuit") considered whether the automatic stay should apply to Defendant Peterson—a solvent co-defendant—where a second co-defendant filled for bankruptcy. The Tenth Circuit held that "[e]xtending the stay to protect solvent co-defendants would not advance either of the purposes underlying the automatic stay. Accordingly, we join the other circuit courts in concluding that 11 U.S.C. § 362 stays litigation only against the debtor, and affords no protection to solvent co-defendants." Id.

Indeed, "[i]t is clearly established that the automatic stay does not apply to non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor." In re Peeples, 553 B.R. 892, 899 (Bankr. D. Utah 2016) (internal quotation marks and citation omitted) (explaining that "[t]his principle has been followed even when the action taken was against a former manager of the debtor who argued that 'the real party in interest is the Debtor,'and that the proceeding 'would adversely affect the administration of the estate.'" (citations omitted)). Courts in other districts have extended this principle to separate legal entities, corporations, partnerships, or non-debtor co-defendants in pending litigation, even "'where the non-debtor is a corporation wholly owned by the debtor.'" In re Lengacher, 485 B.R. 380, 383 (Bankr. N.D. Ind. 2012) (quoting In re Winer, 158 B.R. 736, 743 (N.D. Ill. 1993)); see also id. ("the stay does not prohibit taking discovery from debtors in connection with litigation against non-debtors, even if that information might later...