Paulson v. McKowen et al

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Philip A. Brimmer
Civil Action No. 19-cv-02639-PAB-NYW
JOHN PAULSON, Individually and on Behalf of all Others Similarly Situated,
Plaintiff,
v.
TWO RIVERS WATER AND FARMING COMPANY,
JOHN R. MCKOWEN,
WAYNE HARDING, and
TIMOTHY BEALL,
Defendants.
ORDER
This matter is before the Court on Plaintiff John Paulson’s Motion to Dismiss
Two Rivers Water and Farming Company as a Party [Docket No. 149]. Defendants
have not filed a response; plaintiff’s certificate of conferral indicates that defendants
John McKowen (“McKowen”), Wayne Harding (“Harding”), and Timothy Beall (“Beall”)
do not oppose the motion. Id. at 1-2. The Court has jurisdiction pursuant to 28 U.S.C.
§ 1332(d).
I. BACKGROUND
A. Factual Background
Plaintiff brings a securities class action against defendants. Docket No. 56.
Plaintiff’s amended complaint alleges that McKowen, Harding, and Beall (collectively,
the “individual defendants”) were officers of defendant Two Rivers Water and Farming
Company (“Two Rivers”). Docket No. 131 at 5.
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 1 of 12

Plaintiff alleges that Two Rivers and McKowen formed GrowCo, Inc. (“GrowCo”)1
to “capitalize on [the] burgeoning marijuana industry in Colorado.” Docket No. 56 at 5,
¶ 17. To support their operations, defendants offered securities to investors (the
“Offerings”). Id. at 6, ¶ 28. With the Offerings, defendants provided “sales
presentations, memoranda of terms, exchange note purchase agreements, exchange
agreements, investor questionnaires, and other documents . . . which purported to
make material disclosures to investors about GrowCo and the Securities Offerings.” Id.,
¶ 27. Plaintiff alleges that the Offering documents omitted material information about
McKowen, including a 1987 disciplinary action, fine, and suspension with the National
Association of Securities Dealers, a 1995 bankruptcy, and a 1992 default judgment in
connection with a complaint before the Indiana Securities division. Id. at 7-8, ¶¶ 30–41.
B. Procedural Background
Defendants dispute these allegations and deny liability for the claims. McKowen
moved to dismiss the complaint, Docket No. 73, on the basis that the inf ormation
underlying the allegations against him “concerned the distant past, was not required to
be disclosed, and was not material to investors’ decisions to purchase GrowCo
securities.” Docket No. 131 at 6. This motion was pending when the parties and
defendants’ insurance carrier, Starstone Specialty Casualty Insurance Company2
1 GrowCo is in bankruptcy, see In re GrowCo., Inc., Case No. 19-10512 (D. Colo.
Bankr.), and is not a party to this action. Docket No. 131 at 5 n.3.
2 It is unclear to the Court what type of insurance policy is at issue and who it
was issued to. The motion for preliminary approval labels Starstone as “defendants’
insurance carrier,” Docket No. 131 at 3, but does not provide information on whether
Starstone issued a policy to Two Rivers, and the individual defendants are third-party
beneficiaries, or whether the policy was issued to both the individual defendants and
2
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 2 of 12

(“Starstone”), agreed to engage in mediation before retired Denver District Court Judge
William Meyer. Id. at 2-3. The parties ultimately reached a settlement in August 2020,
id., and on October 9, 2020 plaintiff filed an unopposed motion (the “motion for
preliminary approval”) for preliminary approval of the settlement (the “Settlement
Agreement”), approval of the notice to the class, preliminary certification of the class for
the purposes of settlement, appointment of class counsel, and the scheduling of a
fairness hearing. Id. at 4.
On January 25, 2021, the magistrate judge granted a motion to withdraw by
counsel for Two Rivers and issued an order to show cause why she should not impose
sanctions on Two Rivers for failure to defend in the absence of legal representation.
Docket No. 137 at 6. On February 24, 2021, the Court entered an order inf orming the
parties that, because granting the motion for preliminary approval of the class action
settlement would trigger proceedings that necessitated Two Rivers’s participation,
through counsel, the Court would not rule on the motion for preliminary approval until
counsel entered an appearance on behalf of Two Rivers. Docket No. 139. On March
10, 2021, the Court entered an order that the Court w ould deny the motion for
preliminary approval without prejudice if Two Rivers did not enter an appearance on or
before March 16, 2021. Docket No. 145. Two Rivers has not entered an appearance,
and the Court has not ruled on the motion for preliminary approval.
On March 15, 2021, plaintiff filed a motion for a status conference regarding Two
Rivers’s failure to hire counsel and failure to respond to the order to show cause.
Two Rivers.
3
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 3 of 12

Docket No. 146. Plaintiff requested that the Court hold a status conf erence and, if the
status conference could not be held before March 16, that the Court hold in abeyance a
ruling on the motion for preliminary approval until the Court held a status conference.
Id. at 5. This motion is currently pending. On April 6, 2021, plaintiff filed a motion to
dismiss Two Rivers as a party. Docket No. 149.
C. Settlement Agreement
The motion for preliminary approval seeks certification of a settlement class
consisting of
All persons or entities who currently hold claims based on Securities of
GrowCo, and who purchased or otherwise acquired the securities through
Offerings listed below, during the time period beginning October 2014
through December 2017 (the “Class Period”), and suffered Alleged
Losses. For the avoidance of doubt, persons or entities who purchased or
otherwise acquired the securities during the Class Period who have
assigned the securities to VitaNova Partners, LLC are not excluded as
Class Members by virtue of such assignment:
Name Type Approximate
Amount Raised
Date Range
GrowCo Partners 1, LLC Equity $ 3,349,151 December 2014 - January 2015
$4 Million Note Debt $ 4,000,000 March 2015 - September 2015
GCP Super Units LLC Equity $ 5,297,157 July 2015 - October 2017
$1.5 Million Note Debt $ 100,000 April 2016
$6 Million Note Debt $ 6,000,000 March 2016 - July 2016
$7 Million Note Debt $ 2,977,000 January 2016 - September 2017
$2 Million Note Debt $ 1,080,000 February 2017 - September 2017
$2 Million Note Debt $ 440,000 June 2017
Docket No. 131 at 3; see also id. at 29, 32 ¶¶ 1.i, 1.s. There are no subclasses. The
following are excluded from the Class:
(1) the Defendants; (2) the officers and directors of Two Rivers and
GrowCo during the Class Period as set forth in Exhibit E to the Settlement
Agreement for securities purchased at the time or after they were officers
or directors; (3) any judge or judicial officer who may hear any aspect of
4
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 4 of 12

this Action and his or her law clerks; and (4) except as provided in the
Settlement Agreement, all persons or entities released in the Settlement.
Also excluded from the Settlement Class are the persons and/or entities
who validly request exclusion from the Settlement Class within the time
period set by the Court in the Preliminary Approval Order.
Id. at 3-4.
In exchange for the release of all claims of the Settlement Class against all
defendants, the Settlement Agreement provides that Starstone will pay $1.5 million for
the benefit of the Class. Id. at 7. The parties agree that this amount provides a
“substantial and immediate benefit to the Class” and is appropriate given that GrowCo
is in bankruptcy and Two Rivers’s financial situation makes it unlikely that it will be able
to satisfy a judgment. Id. at 8. The parties arrived at this amount after reviewing
defendants’ insurance policy, which covers claims up to $2 million minus the cost of the
defense. Id. The $1.5 million figure “represents substantially all of the remaining
insurance coverage net of defense costs to date.” Id. Plaintiff also considered that, if
he persisted with litigation, “the amount of insurance coverage available to satisfy a
judgment would be substantially less than the Settlement because as defense costs
increase, available funds for settlement decrease.” Id.
II. ANALYSIS
Plaintiff asks the Court to dismiss Two Rivers without prejudice from this lawsuit
pursuant to Fed. R. Civ. P. 41(a)(2) in order to allow the settlement approval process to
move forward. Docket No. 149 at 4-5. Rule 41(a)(2) states that, “[e]xcept as provided
in Rule 41(a)(1), an action may be dismissed at the plaintiff’s request only by court
order, on terms that the court considers proper. . . . Unless the order states otherw ise,
5
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 5 of 12

a dismissal under this paragraph (2) is without prejudice.” Fed. R. Civ. P. 41(a)(2).
Despite Rule 41(a)(2)’s reference to “an action,” dismissal of all claims against a single
defendant is permitted. See Janny v. Palmer, No. 17-cv-02194-KLM, 2020 WL
2800784, at *9 (D. Colo. May 29, 2020) (dismissing fewer than all defendants pursuant
to Rule 41(a)(2)); Blaize-Sampeur v. McDowell, 2007 WL 1958909, at *2 (E.D.N.Y.
June 29, 2007) (noting that, although the Second Circuit had previously stated
otherwise, it had “since adopted the approach of the majority of courts in other circuits –
that is, that Rule 41(a) does not require dismissal of the action in its entirety” and
permits dismissal of all claims as to a single defendant); 9 Charles Alan Wright & Arthur
R. Miller, Federal Practice and Procedure § 2362 (4th ed. 2020) (“The power to drop
some plaintiffs or defendants from the suit plainly exists, either explicitly in the Federal
Rules or in the district court's inherent power. Nevertheless, it seems undesirable and
unnecessary to invoke inherent power to avoid an artificial limit on Rule 41(a) that
results from a highly literal reading of one word in that Rule.”).
Rule 41(a)(2) “is designed primarily to prevent voluntary dismissals which unfairly
affect the other side, and to permit the imposition of curative conditions.” Frank v.
Crawley Petroleum Corp., 992 F.3d 987, 998 (10th Cir. 2021) (quoting Brown v. Baeke,
413 F.3d 1121, 1123 (10th Cir. 2005)). In the absence of “legal prejudice” to the
defendant, a court should normally grant the dismissal. Brown, 413 F.3d at 1123.
“[P]rejudice is a function of . . . practical factors including: the opposing party’s effort
and expense in preparing for trial; excessive delay and lack of diligence on the part of
the movant; insufficient explanation of the need for a dismissal; and the present stage
6
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 6 of 12

of litigation.” Frank, 992 F.3d at 998 (quoting Brown, 413 F.3d at 1123). These factors,
however, are “neither exhaustive nor conclusive.” Id. The Court should “endeavor to
insure substantial justice is accorded to both parties, and theref ore the court must
consider the equities not only facing the defendant, but also those facing the plaintiff.”
Id.
The Court first considers prejudice to Two Rivers and then considers the equities
facing plaintiff. In this case, there is no apparent prejudice to T wo Rivers from its
dismissal. The factors of the stage of litigation and the opposing party’s effort and
expense in preparing for trial, Frank, 992 F.3d at 998, are either neutral or weigh
against finding prejudice. Two Rivers had legal representation in this case until January
2021 and participated in settlement negotiations, but, since its attorney withdrew on
January 25, 2021, has refused to comply with Court orders requiring it to retain counsel.
See, e.g., Docket Nos. 137, 145. While Two Rivers has expended some effort and
expense in this case, the Court stayed discovery and pending motions briefing in light of
the parties’ mediation. See Docket Nos. 100, 103. This case is not so far along that
Two Rivers’s effort and expense to this point supports a finding of prejudice.
The second factor, excessive delay and lack of diligence on the part of the
movant, Frank, 992 F.3d at 998, weighs against a finding of prejudice. There has been
no delay or lack of diligence on the part of plaintiff; to the contrary, plaintiff is attempting
to move the Settlement Agreement forward. Plaintiff did not seek dismissal of Two
Rivers until this point because, before Two Rivers stopped participating in the litigation,
there was no need to dismiss Two Rivers. It is Two Rivers’s failure to retain counsel
7
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 7 of 12

that has stalled this case, not any action by plaintiff.
The third factor, explanation of the need for dismissal, Frank, 992 F.3d at 998,
also weighs against a finding of prejudice. Plaintiff has adequately explained the need
for dismissal of Two Rivers at this stage of the litigation. The Court has informed
plaintiff that, so long as Two Rivers is a defendant in this case, it must participate in any
class action certification and settlement proceedings through counsel. See Docket No.
145. In response to this, plaintiff seeks to dismiss Two Rivers so that the preliminary
approval proceedings may continue.
In addition to these factors, the Court “should be sensitive to other
considerations unique to the circumstances of each case.” Brown, 413 F.3d at 1124.
The Court does not find any other considerations that would indicate prejudice to Two
Rivers. Indeed, despite Two Rivers’s dismissal from this case, if the Court approves
the Settlement Agreement then Two Rivers will be released from all claims.3 Docket
No. 149 at 6; Docket No. 131 at 43-44 (releasing all claims if Settlement Agreement is
approved). Therefore, the Court finds that there is no prejudice to Two Rivers by
dismissing it from this case without prejudice.
However, the Court must also endeavor to “insure substantial justice” and
determine the equities facing plaintiff. See Frank, 992 F.3d at 998. Plaintiff desires to
3 If the Court approves the Settlement Agreement and the $1.5 million balance of
the insurance policy is used to pay the individual defendants’ liabilities in this case, then
Two Rivers will not have any insurance coverage left for other liabilities not at issue in
this case. However, that would be true regardless of whether Two Rivers was
dismissed from this case or not, so does not constitute legal prejudice. See Frank, 992
F.3d at 1001 (finding no legal prejudice where defendant was no better off whether or
not court granted motion for voluntary dismissal).
8
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 8 of 12

dismiss Two Rivers from this case, but the Court will also consider the interests of the
proposed class members. The $1.5 million proposed settlement comes from the
defendants’ $2 million insurance policy. Docket No. 131 at 8. It represents
substantially all of the remaining policy coverage due to expenses associated with the
costs of defending against this litigation. Id. Plaintiff believes that settlement is
appropriate because GrowCo is in bankruptcy, Two Rivers is likely unable to satisfy a
judgment, and plaintiff would therefore need to seek recovery from the personal assets
of defendants, which is “questionable.” Id. The proposed notice to the class states that
“Defendants have a single insurance policy that covers the claims asserted up to
$2,000,000.” Id. at 67. The Court has not located any other description of the
insurance policy. The Court therefore has no reason to believe that dismissing Two
Rivers from this lawsuit would impact the obligation of Starstone in relation to the
Settlement Agreement.4 Accordingly, the Court finds that dismissal of Two Rivers
insures substantial justice.
Because this case is brought as a class action, the Court must also consider
whether dismissal of Two Rivers is permissible under Fed. R. Civ. P. 23(e). Rule 23(e)
states:
The claims, issues, or defenses of a certified class—or a class proposed
to be certified for purposes of settlement—may be settled, voluntarily
dismissed, or compromised only with the court's approval. The following
procedures apply to a proposed settlement, voluntary dismissal, or
4 It would be relevant, for instance, if the dismissal of Two Rivers from this case
absolved Starstone of any obligation to pay the $1.5 million. However, plaintiff has
provided no indication that this is the case; to the contrary, plaintiff states that granting
the motion to dismiss will benefit the proposed class by allowing the Settlement
Agreement to move forward. Docket No. 149 at 5-6.
9
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 9 of 12

compromise:
(1) Notice to the Class.
. . . .
(B) Grounds for a Decision to Give Notice. The court must direct
notice in a reasonable manner to all class members who would be
bound by the proposal if giving notice is justified by the parties’
showing that the court will likely be able to:
(i) approve the proposal under Rule 23(e)(2); and
(ii) certify the class for purposes of judgment on the
proposal.
Fed. R. Civ. P. 23(e). Plaintiff argues that the dismissal of Two Rivers does not
implicate Rule 23(e) because it would not constitute a dismissal of the class claims,
issues, or defenses, and would not change the terms of the Settlement Agreement.
Docket No. 149 at 6.
The Court finds that notice to the class proposed for the purposes of settlement
is not required because the dismissal of Two Rivers is without prejudice. Where the
dismissal of a defendant is without prejudice, the Court need not provide notice to the
proposed class under Rule 23(e). See Newby v. Enron Corp., 2007 U.S. Dist. LEXIS
5111, at *93-94 (S.D. Tex. Jan. 24, 2007) (finding notice to class members not required
under Rule 23(e) where voluntary dismissal of fewer than all defendants was without
prejudice and “there is no resolution of any of the claims on the merits that would bind
the class members”); Joseph v. Am. Modification Agency, Inc., 2012 U.S. Dist. LEXIS
115955, at *12-13 (S.D.N.Y. Aug. 16, 2012) (“Where, as here, the proposal is to
dismiss the claims without prejudice and the class is not bound by any determination,
notice may not be required.”); cf. Robb v. Stericycle, 2005 U.S. Dist. LEXIS 41627, at
*27-28 (W.D. La. Aug. 19, 2005) (granting voluntary dismissal of fewer than all
10
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 10 of 12

defendants under Rule 41(a)(2) without providing notice to the class pursuant to Rule
23(e) because it “would afford no benefit or protection to the class members”), report
and recommendation adopted, 2005 U.S. Dist. LEXIS 41631, abrogated on other
grounds by Braud v. Transp. Serv. Co. of Ill., 445 F.3d 801, 804 n.7 (5th Cir. 2006).
Because dismissing Two Rivers without prejudice will not bind prospective class
members, notice to the proposed class is unnecessary.
Accordingly, the Court will grant plaintiff’s motion to dismiss because there is no
prejudice to Two River from its dismissal and notice to the class is not required under
Rule 23(e).5
III. CONCLUSION
For the foregoing reasons, it is
ORDERED that Plaintiff John Paulson’s Motion to Dismiss Two Rivers Water
and Farming Company as a Party [Docket No. 149] is GRANTED.
ORDERED that defendant Two Rivers is DISMISSED without prejudice. It is
further
ORDERED that Plaintiff John Paulson’s Motion for Status Conference Regarding
Defendant’s Failure to Hire Counsel and Failure to Show Cause [Docket No. 146] is
DENIED as moot. It is further
ORDERED that Plaintiff’s Request for Judicial Notice in Support of its Motion to
5 Plaintiff asks the Court to take judicial notice of Two Rivers’s appearance,
through counsel, in proceedings in the Bankruptcy Court for the District of Colorado to
show that Two Rivers has counsel but refuses to participate in this litigation. Docket
No. 151 at 1. Because the Court will grant plaintiff’s motion to dismiss without the need
to consider this request, the Court will deny the request as moot.
11
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 11 of 12

Dismiss [Docket No. 151] is DENIED as moot.
DATED June 29, 2021.
BY THE COURT:
PHILIP A. BRIMMER
Chief United States District Judge
12
Case No. 1:19-cv-02639-PAB-NRN Document 153 filed 06/29/21 USDC Colorado
pg 12 of 12