Sun River Energy, Inc. v. Nelson et al

Filing 47

ORDER denying 17 Plaintiff's Motion for Protective Order Regarding Defendants' Subpoena/Subpoena Duces Tecum to Mountain Share Transfer, Inc., by Magistrate Judge Michael E. Hegarty on 04/22/2011.(wjc, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 11-cv-00198-MSK-MEH
SUN RIVER ENERGY, INC.,
Plaintiff,
v.
ERIK S. NELSON,
STEVE STEPHENS, and
CORAL CAPITAL PARTNERS, INC.,
Defendants.

ORDER

Michael E. Hegarty, United States Magistrate Judge.
Before the Court is Plaintiff’s Motion for Protective Order Regarding Defendants’
Subpoena/Subpoena Duces Tecum to Mountain Share Transfer, Inc. [filed March 21, 2011; docket
#17]. The motion is referred to this Court for disposition. (Docket #18.) The matter is fully briefed,
and oral argument would not assist the Court in its adjudication. For the reasons stated below, the
Court DENIES Plaintiff’s motion.
I.

Background
Plaintiff initiated this lawsuit in Denver County District Court on January 10, 2011. (Docket

#1-1 at 2-9.) Defendants removed the case to this District on January 26, 2011, pursuant to diversity
jurisdiction. (See docket #1.) The dispute arises from a contract-based business relationship in
which Defendant Coral Capital accepted 150,000 shares of restricted common stock of Plaintiff as
payment, in lieu of cash, for certain services rendered. (Docket #35 at 2-3.) Plaintiff and Defendant
Coral Capital entered into the contract on October 15, 2007; Plaintiff terminated the contract on
April 24, 2008, effective April 30, 2008. (Id. at 2.) The 150,000 shares were issued on or about

August 7, 2008, to Defendants Erik Nelson, the president of Coral Capital, and Steve Stephens, an
employee of Coral Capital, in equal parts. (Id. at 2, 3.) Plaintiff believes that Defendant Coral
Capital failed to full perform its obligations under the October 15, 2007 contract, that consideration
was not fully paid for the shares issued to Defendants Nelson and Stephens, and that Defendants
Nelson and Stephens have forfeited their right to the shares based upon conduct concerning use and
disclosure of material non-public information regarding Plaintiff. (See id. at 3.)
Plaintiff asserts that Defendants used material non-public information regarding Plaintiff to
sell approximately 75,000 shares of Plaintiff’s stock. (Docket #17 at 2.) Plaintiff explains that
Defendants were under the obligations of confidentiality agreements concerning the material nonpublic information. (Id.) Plaintiff commenced this action after Defendants sold the 75,000 shares,
when Defendants requested the removal of restrictive legends from the shares. (Id.)
Before removal, Plaintiff moved ex parte for a temporary restraining order and preliminary
injunction in Denver County District Court. (See docket #1-1 at 19-26.) The parties stipulated to
a resolution of the request for a temporary restraining order, and the state court entered an order
prohibiting Defendants from selling or transferring any of the shares in Plaintiff at issue until further
order. (Docket #1-2 at 17.) Plaintiff recently renewed its request for a preliminary injunction,
presently pending before the Court. (Docket #40.)
Plaintiff brings five claims: 1) no duty to register transferred shares pursuant to C.R.S. § 4-8401, as to Defendants Nelson and Stephens; 2) declaratory judgment pursuant to C.R.S. § 13-51-101
(regarding no duty to register or remove the restrictive legend from the shares, that Defendants have
no right to the shares and must return the shares to Plaintiff, and that Defendants are obligated to pay
Plaintiff’s costs and fees); 3) breach of contract claim against Defendants Coral Capital and Nelson;
4) breach of fiduciary duty by Defendants Coral Capital and Nelson; and 5) injunctive relief

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precluding Defendants from selling the shares at issue. (See docket #35.)
Defendants answered Plaintiff’s complaint on February 22, 2011, and asserted eight
counterclaims: 1) breach of contract; 2) violation of C.R.S. § 4-8-401 (regarding the registration of
the transfer of Defendants’ shares fee of any restrictive legend); 3) conversion; 4) civil theft; 5)
tortious interference; 6) common law fraud; 7) breach of fiduciary duty to shareholders; and 8)
declaratory judgment that Plaintiff must remove the restrictive legend and register the transfer of the
shares at issue. (See docket #11.)
In the motion at hand, Plaintiff challenges a subpoena to testify and an accompanying
subpoena duces tecum issued by Defendants on March 9, 2011, to non-party Mountain Share
Transfer, Inc. (“MST”), which is the former transfer agent for certificated shares of Plaintiff.
(Docket #17 at 2.) Plaintiff specifically objects to document request nos. 4-18, the production of
confidential materials, and the deposition of MST. (Id.) Plaintiff believes the subpoena is overly
broad, as it “seeks all documents pertaining to all current or past shareholders of Plaintiff,” not just
information related to Defendants. (Id. at 3.) Plaintiff asserts that “documents pertaining to shares
held or transferred by any person other than Defendants Erik Nelson and Steve Stephens are not
relevant and not intended to lead to the discovery of admissible evidence.” (Id. at 4.)
In response, Defendants contend they properly earned the shares issued to them by Plaintiff,
and “they do not possess and never improperly used non-public information” related to Plaintiff’s
shares. (Docket #31 at 1-2.) Defendants suggest the information they seek from MST is most
pertinent to their counterclaims related to fraud, as Plaintiff’s failure to register transfer of the shares
is allegedly purposeful, with the intent “to manipulate the market for Sun River’s shares for their
own personal benefit by preventing the sale of Sun River shares by Defendants and other
stockholders.” (Id. at 2.) Defendants aver that document request nos. 4-18 are indeed relevant, as

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these requests “seek information on who Sun River allowed to sell, and when and under what
circumstances it refused to register transfer to others.” (Id.)
Defendants contend that Plaintiff is self-dealing by attempting to manipulate “an escalation
of the price of Sun River’s common stock in the public market, with the goal of benefitting certain
insiders to the detriment of common shareholders like Stephens and Nelson.” (Id. at 6.) The
limitation of shares on the public market when the demand for such shares is increasing would cause
the price of the shares to rise; thus, Defendants believe that Plaintiff acted to delay or prevent
Defendants Nelson, Stephens, and other shareholders from selling their shares. (Id.) Defendants
suggest that evidence of this conduct with shareholders other than Defendants bolster their
counterclaims. (Id. at 8.) Defendants refer to two other lawsuits against Plaintiff also alleging an
unlawful scheme by Plaintiff to manipulate the price of its stock shares. (Id. at 8-9.) Similarly,
Defendants assert that the discovery sought in this matter will establish a course of unlawful conduct
by Plaintiff. (Id. at 9.)
Defendants inform the Court that the parties have stipulated to the terms of a confidentiality
agreement, which would alleviate Plaintiff’s concerns regarding the potential disclosure of
confidential information. (Id. at 10.) Regarding the date of MST’s deposition, the original date has
passed, and Defendants indicate that the new date would be scheduled by the customary agreement
of all counsel. (Id.) Defendants challenge Plaintiff’s arguments regarding relevance as conclusory
and reiterate their position that the discovery requested is directly relevant to Defendants’
manipulation defense and the counterclaims asserting unlawful conduct by Plaintiff. (Id. at 10-11.)
In reply, Plaintiff restates its arguments that the subpoena is not appropriately limited in
scope or in time and improperly “invad[es] the privacy rights of all the other shareholders.” (Docket
#43 at 2.) Plaintiff contends that none of Defendants’ counterclaims rely on allegations that Plaintiff

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manipulated its stock price. (Id. at 3.) Plaintiff represents that MST has produced “all documents
pertaining in any way to the Defendants in response to the Subpoena.” (Id.) Plaintiff asks the Court
to 1) enter a protective order precluding the production of documents responsive to Nos. 4-18 of the
subpoena, or 2) in the alternative, set dates and specific shareholder limitations on the scope of the
subpoena. (Id.)
II.

Analysis
Under Rule 26, “[p]arties may obtain discovery regarding any nonprivileged matter that is

relevant to any party's claim or defense. ... Relevant information need not be admissible at the trial
if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Fed.
R. Civ. P. 26(b)(1). The party objecting to discovery must establish that the requested discovery
does not fall under the scope of relevance as defined in Rule 26(b)(1). Simpson v. University of
Colo., 220 F.R.D. 354, 359 (D. Colo. 2004). Although the motion at hand challenges a subpoena,
which is typically governed by Rule 45, the motion does not seek to quash the subpoena but requests
review of the scope of discovery sought. As Rule 26 governs the scope of discovery, it is the
appropriate rule to apply in the adjudication of Plaintiff’s request. See, e.g., Rendon Group, Inc. v.
Rigsby, 268 F.R.D. 124, 126 (D.D.C. 2010) (“Rule 26 of the Federal Rules of Civil Procedure
defines and governs the scope of discovery for all discovery devices, and, therefore, Rule 45 must
be read in light of it.”) (citing 9A Charles A. Wright & Arthur R. Miller, Federal Practice and
Procedure § 2452 at 392-393 (3d ed. 2008)).
The decision to issue a protective order rests within the sound discretion of the trial court.
Wang v. Hsu, 919 F.2d 130, 130 (10th Cir. 1990). Such protection is warranted, upon a showing of
good cause, to “protect a party or person from annoyance, embarrassment, oppression, or undue
burden or expense.” Fed. R. Civ. P. 26(c). A party seeking a protective order under Rule 26(c)

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cannot sustain the burden of demonstrating good cause merely by relying upon speculation or
conclusory statements. Tolbert-Smith v. Bodman, 253 F.R.D. 2, 4 (D.D.C. 2008). The movant must
show specific facts demonstrating that the challenged discovery will result in a clearly defined and
serious injury to the party seeking protection. Id.; see also Exum v. United States Olympic Comm.,
209 F.R.D. 201, 206 (D. Colo. 2002).
Here, the Court finds Plaintiff does not meet its burden necessitating the issuance of a
protective order. The Court disagrees with Plaintiff’s argument that the information sought is
irrelevant to Defendants’ claims or defenses; review of Defendants’ Answer and Counterclaims
demonstrates that Defendants assert as affirmative defenses Plaintiff’s “wrongful acts and omissions
and other illegal conduct,” and that any damages Plaintiff has suffered “were proximately caused
by [it’s] own acts, omissions, and dealings.” (Docket #11 at 9.) Furthermore, Defendants’
Counterclaims rely heavily on allegations of attempts by Plaintiff “to manipulate upward the price
of Sun River’s common stock in order to issue the sellers fewer Sun River shares.” (Id. at 19.)
Defendants specifically assert that Plaintiff’s “support of the actions of Brech, Cicerone, and
McMillan is an attempt to convert Nelson’s and Stephen’s property and unjustly enrich Sun River
and its agents.”1 (Id.)
In the alternative to precluding the disclosure of documents responsive to request nos. 4-18,
Plaintiff asks that the Court limit the scope of the subpoena to certain dates and shareholders. The
Court finds this limitation unnecessary, as the terms of the document requests refer to a relevant time
period of May 3, 2006 (or August 7, 2008) through the present, and the players identified in the
document requests are each included in the factual background recounted by Defendants in their
Answer and Counterclaims.
1

The subpoena at issue seeks documents related to securities holdings and activities related
to Plaintiff by Brech, McMillan, and Cicerone. (Docket #17-1 at 9-10.)
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Regarding the remaining objections proffered by Plaintiff, that is, confidentiality and
adequate preparation time for the deposition of MST, the Court believes these issues are, in essence,
settled. The parties submitted a stipulated protective order governing confidential documents for
the Court’s review on April 13, 2011; the Court denied this request without prejudice and instructed
the parties to re-file a proposed order inclusive of a mechanism by which the parties may challenge
the designation of information as confidential. (See docket #45.) The original date for the
deposition of MST has passed; thus, the parties are hereby instructed to agree on a mutuallyconvenient future date, within the discovery period. As the Court rejected Plaintiff’s arguments
regarding relevance above, all objections are therefore resolved, and the Court finds no basis on
which to grant Plaintiff’s motion.
III.

Conclusion
Accordingly, the Court DENIES Plaintiff’s Motion for Protective Order Regarding

Defendants’ Subpoena/Subpoena Duces Tecum to Mountain Share Transfer, Inc. [filed March 21,
2011; docket #17] as stated herein.
Dated at Denver, Colorado, this 22nd day of April, 2011.

BY THE COURT:

Michael E. Hegarty
United States Magistrate Judge

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