Salba Corp., N.A. et al v. X Factor Holdings, LLC et al

Filing 132

ORDER CONCERNING MOTION TO DISMISS: After consultation with the magistrate judge, the reference [#99] is WITHDRAWN and the 98 Motion to Dismiss (1) All Claims Asserted by Defendants Mitchell A. Propster, Core Naturals LLC, and Natural Guidance LLC and (2) All Defendants' Fraud and Civil Theft Claims is GRANTED in part and DENIED in part. By Judge Robert E. Blackburn on 9/10/2014. (alowe)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Robert E. Blackburn
Civil Action No. 12-cv-01306-REB-KLM
SALBA CORP., N.A., a Canadian corporation,
SALBA SMART NATURALS PRODUCTS, a Colorado limited liabilty company,
WILLIAM A. RALSTON, and
RICHARD L. RALSTON,
Plaintiffs,
v.
X FACTOR HOLDINGS, LLC, an inactive Florida limited liability company, and
ANCIENT NATURALS, LLC, a Florida limited liability company,
MITCHELL A. PROPSTER, a resident of the State of Florida,
CORE NATURALS, LLC, a Florida limited liability company, and
NATURAL GUIDANCE, LLC, a Florida limited liability company,
Defendants and Counter-Claimants.

ORDER CONCERNING MOTION TO DISMISS
Blackburn, J.
This matter is before me on the Motion To Dismiss (1) All Claims Asserted by
Defendants Mitchell A. Propster, Core Naturals LLC, and Natural Guidance, LLC
and (2) All Defendants’ Fraud and Civil Theft Claims [#98]1 filed April 7, 2014, by
plaintiffs. The defendants filed a response [#100], and the plaintiffs filed a reply [#101].
I grant the motion in part and deny it in part.
I. JURISDICTION
I have jurisdiction over this case under 28 U.S.C. § 1331 (federal question), §
1338(a) (trademark and copyright), § 1338(b) (unfair competition claim joined with
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“[#98]” is an example of the convention I use to identify the docket number assigned to a
specific paper by the court’s case management and electronic case filing system (CM/ECF). I use this
convention throughout this order.

copyright or trademark claim), § 1367 (supplemental), and 15 U.S.C. § 1121
(trademark).
II. STANDARD OF REVIEW
The plaintiffs seek dismissal of the counterclaims of the defendants for failure to
state a claim under FED. R. CIV. P. 12(b)(6). In considering a motion under Fed. R. Civ.
P. 12(b)(6), I must determine whether the allegations in the complaint are sufficient to
state a claim within the meaning of Fed. R. Civ. P. 8(a). I must accept all well-pleaded
allegations of the complaint as true. McDonald v. Kinder-Morgan, Inc., 287 F.3d 992,
997 (10th Cir. 2002). “However, conclusory allegations or legal conclusions
masquerading as factual conclusions will not suffice to prevent a motion to dismiss.”
Fernandez-Montes v. Allied Pilots Association, 987 F.2d 278, 284 (5th Cir. 1993);
see also Burnett v. Mortgage Elec. Registration Sys., Inc., 706 F.3d 1231, 1235
(10th Cir. 2013); Ruiz v. McDonnell, 299 F.3d 1173, 1181 (10th Cir. 2002) (“All wellpleaded facts, as distinguished from conclusory allegations, must be taken as true.”),
cert. denied, 538 U.S. 999 (2003).
I review the challenged portion of a complaint to determine whether it “‘contains
enough facts to state a claim to relief that is plausible on its face.’” Ridge at Red Hawk,
L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 570 (2007)); see also Ashcroft v. Iqbal, 556 U.S. 662
(2009); Burnett., 706 F.3d at 1235. “Thus, the mere metaphysical possibility that some
plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the
complaint must give the court reason to believe that this plaintiff has a reasonable

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likelihood of mustering factual support for these claims." Id. (emphases in original).2
Nevertheless, the standard remains a liberal one, and “a well-pleaded complaint may
proceed even if it strikes a savvy judge that actual proof of those facts is improbable,
and that a recovery is very remote and unlikely.“ Dias v. City and County of Denver,
567 F.3d 1169, 1178 (10th Cir. 2009) (quoting Twombly, 550 U.S. at 556) (internal
quotation marks omitted). I must assume the truth of all well-pleaded facts in the
complaint, and I must draw all reasonable inferences therefrom in the light most
favorable to the plaintiffs. Dias v. City & County of Denver, 567 F.3d 1169, 1178
(10th Cir. 2009)
III. BACKGROUND
This case concerns disputes about the use by the defendants of trademarks
and other materials related to the Salba trademark used by the plaintiffs. In the
past, both the plaintiffs and the defendants have used the Salba name and

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Twombly rejected and supplanted the “no set of facts” language of Conley v. Gibson, 355 U.S.
41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). The Tenth Circuit clarified the meaning of the “plausibility”
standard:
“plausibility” in this context must refer to the scope of the allegations in a
complaint: if they are so general that they encompass a wide swath of
conduct, much of it innocent, then the plaintiffs “have not nudged their
claims across the line from conceivable to plausible.” The allegations
must be enough that, if assumed to be true, the plaintiff plausibly (not just
speculatively) has a claim for relief.
This requirement of plausibility serves not only to weed out claims that do
not (in the absence of additional allegations) have a reasonable prospect
of success, but also to inform the defendants of the actual grounds of the
claim against them. “Without some factual allegation in the complaint, it
is hard to see how a claimant could satisfy the requirement of providing
not only ‘fair notice’ of the nature of the claim, but also ‘grounds' on which
the claim rests.”
Robbins v. Oklahoma, 519 F.3d 1242, 1247-48 (10th Cir. 2008) (quoting Twombly, 127 S.Ct. at 1974;
internal citations and footnote omitted).

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associated artwork in the sale of chia seeds and related products. In early March
2013, the parties reached a settlement and executed a settlement agreement [#459] at pp. 2 - 67 (Settlement Agreement).
Now, the plaintiffs contend that defendants, X Factor Holdings, LLC and
Ancient Naturals, LLC, violated the settlement agreement by continuing to use the
Salba trademarks owned by the defendants and by using packaging that is illicitly
similar to packaging used by the plaintiffs to sell products under the Salba name.
Defendants, X Factor Holdings, LLC and Ancient Naturals, LLC, are signatories to
the Settlement Agreement. In addition, the Settlement Agreement was signed by
Mitchell Propster, an individual closely related to these two defendant entities, and
two other entities tied to Mr. Propster, Core Naturals, LLC, and Natural Guidance,
LLC. Mr. Propster and defendants, Core Naturals, LLC, and Natural Guidance,
LLC, were not named as defendants in the original complaint [#1], but are named as
defendants in the amended complaint [#62].
In response to the amended complaint [#62], the defendants filed answers [#89 &
#95] in which they assert counterclaims against the plaintiffs. The counterclaiming
defendants allege, inter alia, that the plaintiffs breached the Settlement Agreement by,
inter alia, failing to record trademark transfers, failing to release all payments required
by the agreement, and failing to dismiss this case. In addition, the defendants assert
counterclaims for breach of other contracts, intentional interference with contract,
intentional interference with prospective economic advantage, conspiracy, breach of the
duty of good faith and fair dealing, copyright infringement, abuse of process, fraud,
unjust enrichment, misappropriation of business value, and civil theft. Answers [#89 &

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#95].

IV. ANALYSIS
A. Release Provision
The plaintiffs argue that defendants, Mitchell Propster, Core Naturals, LLC, and
Natural Guidance, LLC (collectively the Propster Entities), via the Settlement Agreement
released all claims against the plaintiffs. Based on that release, the plaintiffs assert that
all counterclaims asserted by the Propster Entities must be dismissed.
The Settlement Agreement contains a paragraph containing a release of claims
by the Propster Entities. Settlement Agreement [#45-9] at p. 11, ¶ 12.C. That provision
provides: “Effective upon the parties execution of this Agreement, the Propster Entities,
and each of them . . . fully release and forever discharge and covenant not to sue the
Plaintiffs . . . from and against any and all rights, claims, demands, damages, actions
liabilities and causes of action of any nature whatsoever, known or unknown . . .
including but not limited to any and all claims and liabilities there were asserted or could
have been asserted in” this lawsuit, various license agreements, and the Settlement
Agreement. Id. This is the release provision on which the plaintiffs now rely.
Absent any unsatisfied condition precedent, performance under a contract is
excused by a material breach by the other party. Extreme Const. Co. v. RCG
Glenwood, LLC, 310 P.3d 246, 253-54 (Colo. App. 2012), cert. denied, 2013 WL
4714399 (Colo. 2013). The defendants allege in their counterclaims that the plaintiffs
have committed a number of material breaches of the Settlement Agreement. Taking
the well-pleaded allegations in the counterclaims as true, as I must, I assume for
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purposes of the motion to dismiss that the plaintiffs committed a number of material
breaches of the Settlement Agreement. Under those circumstances, the performance
of the defendants under the Settlement Agreement, including performance of the
release provision on which the plaintiffs rely, is excused. To the extent the motion to
dismiss is based on the release provision of the Settlement Agreement, the motion is
denied.
B. Economic Loss Rule
The plaintiffs contend that the counterclaims of the defendants for civil theft and
fraud must be dismissed because they are barred by the Colorado economic loss rule.
The Colorado Supreme Court has said that “a party suffering only economic loss from
the breach of an express or implied contractual duty may not assert a tort claim for such
a breach absent an independent duty of care under tort law.” Grynberg v. Agri Tech,
Inc., 10 P.3d 1267, 1269 (Colo. 2000). The court described the rule in similar terms in
Town of Alma v. Azco Construction, Inc., 10 P.3d 1256, 1264 (Colo. 2000). The rule
“serves to maintain a distinction between contract and tort law.” Id. at 1262. The failure
to perform a contract generally does not give rise to liability in tort, unless there exist
duties independent of the contract. Id. at 1264. Three factors aid in determining the
source of the duty at issue: (1) whether the relief sought in tort is the same as the
contractual relief; (2) whether there is a recognized non-contractual duty at issue; and
(3) whether the non-contractual duty differs in any way from the contractual duty. See
BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 74 (Colo. 2004) (addressing tort claim
in context of economic loss rule).
In their counterclaims, the defendants allege facts in categories labeled by the
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defendants as (1) The 2005 Agreement; (2) The 2008 Agreement; (3) The 2009
Agreement; (4) Interference by Salba Corp., S.A., Jointly With Salba Smart; and (5)
Defendants’ Breach of Settlement Agreement. Answer [#89], pp. 19 - 30; Answer [#95],
pp. 19 - 28. In their fraud claim, the defendants allege that during the negotiation of the
Settlement Agreement, the plaintiffs represented that they could complete tasks
contemplated in the Settlement Agreement by certain deadlines ultimately stated in the
Settlement Agreement. Some of those deadlines were extended, and, according to the
defendants, the plaintiffs represented that they could complete certain tasks by the
extended deadlines in an effort to induce the defendants to agree to extend the
deadlines. According to the defendants, the plaintiffs “made these representations in
bad faith in order to induce Defendants to sign the Settlement Agreement and assign,
license and transfer intellectual property to Plaintiffs pursuant to same.” “Defendants
justifiably relied on Defendants’ false representations to their detriment.” Answer [#89],
p. 39, ¶¶ 15, 16; Answer [#95], p. 37, ¶¶ 99, 100. In their civil theft claim, the
defendants incorporate all of their previous allegations and allege further that the
plaintiffs knowingly obtained or exercised control over Defendants’ assets without
authorization or by deception, intending to permanently deprive the defendants of the
use or benefit of those assets. Answer [#89], p. 41, ¶ 34; Answer [#95], p. 39, ¶ 118.
The plaintiffs contend that the fraud and civil theft claims of the defendants are
inextricably intertwined with the breach of contract claims of the defendants and, thus,
the fraud and civil theft claims are barred by the economic loss rule. I disagree. The
defendants allege that the plaintiffs made fraudulent representations to the defendants
before the Settlement Agreement was executed in an effort to induce the defendants to

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enter into the Settlement Agreement. Later, according to the defendants, the plaintiffs
again made fraudulent representations to the defendants in an effort to induce the
defendants to agree to extend some of the deadlines in the Settlement Agreement.
These representations allegedly were made to induce the defendants to enter into a
new agreement, an agreement to extend certain deadlines.
In essence, the defendants allege the plaintiffs knowingly made false
representations concerning their present intention to perform a future act. Such
allegations properly sound in fraud. The fact that the alleged misrepresentations are
tied closely to the breach of contract claim concerning the Settlement Agreement does
not bring the fraud claim within the limits of the economic loss rule. Brody v. Bock, 897
P.2d 769, 775 - 776 (Colo. 1995)(en banc). The same analysis applies to the civil theft
claim.
C. Fraud Pleading - Rule 9(b)
Rule 9(b) of the Federal Rules of Civil Procedure imposes an enhanced pleading
requirement for claims of fraud. To satisfy the requirements of Rule 9(b), a complaint
alleging fraud must state the contents of the false representation, the time and place
where the false representation was made, the identity of the party making the false
statement, and the consequences of the statement. Koch v. Koch Industries, Inc.,
203 F.3d 1202, 1236 (10th Cir. 2000). The defendants argue that the allegations in the
counterclaims of the defendants do not satisfy the specificity requirements of Rule 9(b).
I agree.
The defendants allege that the “Plaintiffs represented to Defendants that
Plaintiffs could complete all their obligations under the Settlement Agreement within 120
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days . . . .” Concerning the extension of deadlines, the defendants allege: “when the
plaintiffs requested a three-month extension, they represented to Defendants that they
could complete all their obligations under the Settlement Agreement within threemonths . . . .” Answer [#89], p. 38, ¶¶ 23 - 24; Answer [#95], pp. 36 - 37, ¶¶ 95 - 96.
There are four plaintiffs named in this case, including two individuals and two
corporations. Fraud allegations which lump the four plaintiffs together as a group do not
satisfy the detailed pleading requirements of Rule 9(b). These allegations do not
identify the party making the false statement. In addition, the allegations in the
counterclaims do not identify the time and place where the false representations were
made. Thus, the fraud allegations of the defendants do not satisfy the pleading
requirements of Rule 9(b). Accordingly, the motion to dismiss must be granted as to the
fraud claims of the defendants.
V. CONCLUSION & ORDERS
The motion to dismiss is denied to the extent it is based on the release provision
of the Settlement Agreement and on the economic loss rule. On the other hand, the
motion is granted as to the fraud claims of the defendants because the fraud allegations
of the defendants do not satisfy the specificity requirements of Rule 9(b).
THEREFORE, IT IS ORDERED as follows:
1. That after consultation with the magistrate judge, the reference [#99] of the
Motion To Dismiss (1) All Claims Asserted by Defendants Mitchell A. Propster,
Core Naturals LLC, and Natural Guidance, LLC and (2) All Defendants’ Fraud and
Civil Theft Claims [#98] filed April 7, 2014, to the magistrate judge is WITHDRAWN;
and
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2. That the Motion To Dismiss (1) All Claims Asserted by Defendants
Mitchell A. Propster, Core Naturals LLC, and Natural Guidance, LLC and (2) All
Defendants’ Fraud and Civil Theft Claims [#98] filed April 7, 2014, is GRANTED in
part and DENIED in part:
a. That the motion is GRANTED under FED. R. CIV. P. 9(b) and 12(b)(6),
as to the counterclaims of the defendants asserting claims of fraud, as alleged in the
Answer and Counterclaims in Response to Amended Complaint [#89] and the
Answer and Counterclaims in Response To Amended Complaint [#95], which
counterclaims asserting fraud are DISMISSED; and
b. That otherwise, the motion is DENIED.
Dated September 10, 2014, at Denver, Colorado.
BY THE COURT:

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