Ellerton et al v. Sefton Resources Inc., et al

Filing 109

RECOMMENDATION AND ORDER OF UNITED STATES MAGISTRATE JUDGE by Magistrate Judge Nina Y. Wang on 12/29/16. The Court recommends that 84 MOTION to Dismiss filed by John J. Ellerton be DENIED; that 93 MOTION for Summary Judgment filed by S efton Resources Inc. be GRANTED; 75 MOTION for Sanctions filed by Sefton Resources Inc. be DENIED AS MOOT, and that the court DISMISS Mr. Ellerton's three remaining claims WITH PREJUDICE. Additionally, the Court ORDERS that 89 MOTION for Sanctions Under FRCP 37(d) filed by Sefton Resources Inc. is GRANTED IN PART AND DENIED IN PART. The Clerk of the Court is directed to mail Mr. Ellerton a copy of this Recommendation and Order at his address of record: John J. Ellerton, 2724 Puuhoolai Street, Kihei Maui, Hawaii 96753. (Attachments: # 1 Attachment 1, # 2 Attachment 2, # 3 Attachment 3, # 4 Attachment 4, # 5 Attachment 5) (nmarb, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 15-cv-01212-RM-NYW
JOHN J. ELLERTON,
C&J RESOURCES, INC.
C&J RESOURCES PENSION PLAN & TRUST,
Plaintiffs,
v.
SEFTON RESOURCES, INC.,
MARK R. SMITH,
THOMAS G. MILNE, and
KEITH A. MORRIS,
Defendants.

RECOMMENDATION AND ORDER OF UNITED STATES MAGISTRATE JUDGE
Magistrate Judge Nina Y. Wang
This civil action is before the court on the following motions:
1. Defendant Sefton Resources, Inc.’s (“Sefton”) Motion for Sanctions (“First Motion for
Sanctions”) [#75, filed May 12, 2016];
2. Plaintiff John J. Ellerton’s Motion to Dismiss Without Prejudice [#84, filed June 3,
2016];
3. Sefton’s Motion for Monetary Sanctions Under Federal Rule of Civil Procedure 37(d)
(“Second Motion for Sanctions”) [#89, filed June 10, 2016]; and
4. Sefton’s Motion for Summary Judgment [#93, filed July 25, 2016].

These motions were referred to the undersigned pursuant to the Order Referring Case dated
August 17, 2015 and memoranda dated May 12, 2016 [#76], June 3, 2016 [#86], June 17, 2016
[#90], and July 26, 2016 [#94]. For the following reasons, I respectfully RECOMMEND that the
Motion to Dismiss be DENIED, Motion for Summary Judgment be GRANTED, and the First
Motion for Sanctions be DENIED as moot, and ORDER that the Second Motion for Sanctions is
GRANTED IN PART and DENIED IN PART.
BACKGROUND
This court finds that the factual and procedural history of this action is particularly
relevant to the various pending motions and the requested relief, and thus provides an extensive
discussion of the background of this lawsuit as follows.
I.

Factual Background
The following facts derive from the Verified Complaint, which is signed by Mr. Ellerton

“under oath,” but does not include an attestation verifying the factual contentions under penalty
of perjury. See [#4]. Mr. Ellerton is a founding member of Sefton, which was formed in January
1995. [Id. at ¶ 12]. Sefton became a public company traded on the London Exchange in
December 2000. [Id. at ¶ 17]. After Sefton went public, Mr. Ellerton maintained his position as
its largest individual shareholder. [Id. at ¶ 20]. In October 2010, Sefton and Plaintiff C&J
Resources, Inc. (“C&J”) entered into a Consultancy Agreement, whereby Mr. Ellerton contracted
his services as an independent contractor to Sefton and its subsidiaries. [Id. at ¶ 35]. Mr.
Ellerton alleges that pursuant to the Consultancy Agreement, C&J agreed to provide his services
as Sefton’s Chief Executive Officer and/or Chairman of the Board of Directors, provide his skill
and expertise in running Sefton, promote the interests of Sefton, and insure Sefton’s compliance

2

with all applicable laws and regulations. [Id. at ¶ 36]. C&J and Plaintiff C&J Resources Pension
Plan & Trust (the “Trust”) (collectively, “Corporate Plaintiffs”) are shareholders of Sefton. [Id.
at ¶ 39].
Following an Annual General Meeting in June 2013, Sefton’s Board of Directors was
comprised of Mr. Ellerton and Mark R. Smith, Thomas G. Milne, and Keith A. Morris
(collectively, “Individual Defendants”). [#4 at ¶ 28]. In August 2013, Mr. Ellerton agreed to
temporarily step down as Sefton’s Chairman and Chief Executive Officer “to allow Sefton’s
Board of Directors sufficient time to investigate certain allegations made against [him] on the
internet in a personal lawsuit brought by a third party against [him] some years before.” [Id. at ¶
40]. Mr. Ellerton alleges that his agreement to temporarily step down was premised on two
conditions: “that the Board act in such manner as to preserve the terms of the Consultancy
Agreement with C&J,” and that “the Board conduct a full and thorough investigation into the
allegations as outlined in the August 22, 2013 press announcement by Sefton.” [Id.] On August
20, 2013, “without Mr. Ellerton’s or C&J’s approval or consent,” Sefton’s Board announced that
Mr. Ellerton’s departure was permanent.

[Id. at ¶ 42].

Mr. Ellerton alleges that Sefton

unilaterally terminated and thereby breached the Consultancy Agreement on or about October
23, 2013. [Id. at ¶¶ 44, 49]. C&J thereafter initiated an arbitration proceeding (“Arbitration
Proceeding”) to assert a breach of contract claim. [Id. at ¶ 51]. Plaintiffs claim damages arising
from the alleged breach as follows: Sefton owes C&J “in excess of $316,700,” for breaching the
Consultancy Agreement; Sefton owes C&J “over $40,000 for legal expenses and costs incurred
by C&J” in “actions against Mr. Ellerton while performing his duties for Sefton”; and “Sefton

3

owes the Trust approximately $19,546, for the unpaid pension plan contributions required under
the Consultancy Agreement.” [Id. at ¶¶ 52, 53, 54].
In addition, on or about August 29, 2013, while Mr. Ellerton served as an officer and
director of Sefton, he provided a personal loan worth $10,000 to Sefton (the “Ellerton Loan”).
[#4 at ¶ 56]. Mr. Ellerton expected that Sefton would repay the Ellerton Loan “upon demand
with interest thereon at the current market rate.” [Id. at ¶ 58]. Mr. Ellerton also incurred
business expenses on behalf of Sefton (the “Ellerton Expenses”), for which he used his personal
credit cards. [Id. at ¶ 59]. Plaintiff alleges that he incurred the Ellerton Expenses with the
expectation that Ellerton would repay such funds upon demand, and claims that the total
principal amount of the Ellerton Expenses approximates $35,700 as of the filing of the Verified
Complaint. [Id. at ¶¶ 59, 61].
II.

Insolvency and Derivative Allegations
Of particular relevance to this Recommendation and Order, Mr. Ellerton alleges that the

Board “engaged in several short term financing transactions and borrowings” in 2014 that
increased the balance of Sefton’s subordinated debt. [#4 at 10-11]. For instance, Hawker
Energy, LLC, now known as Hawker Energy, Inc. (“Hawker”), advanced approximately
$1,500,000 to Sefton in the first half of 2014. [Id. at ¶¶ 78, 79]. In July of 2014, the Board
called an Extraordinary General Meeting (the “Meeting”) to approve a restructuring of Sefton’s
activities and the financing from Hawker (“Hawker Transaction No. 1”). The restructuring
proposed that Hawker acquire 80 percent of an oil field owned by Sefton’s principal asset, TEG
USA. TEG USA would own the remaining 20 percent. Hawker would pay TEG $3,000,000 in
an unsecured promissory note to acquire a controlling interest in the oil field. [Id. at ¶ 80]. Mr.

4

Ellerton alleges that prior to the Meeting, the Board issued new shares to the Individual
Defendants, who then back dated the issuance to July 18, 2014 so as to vote the shares at the
Meeting. [Id. ¶ 82]. Mr. Ellerton alleges that the Board “was in possession of price sensitive
information, including Sefton’s production and revenues, status of [debt], the engineering
evaluation of Sefton’s assets and reserves, and other pertinent financial data, as well as
knowledge of the [Meeting] voting,” and did not share this information with Sefton’s
shareholders, and did not share relevant information about Hawker’s financial status. [Id. at ¶
83]. According to Mr. Ellerton, the issuance of additional stock to the Individual Defendants
diluted the shares held by him and the Corporate Plaintiffs and caused the price of Sefton’s stock
to decline. [Id. at ¶ 84]. The Board voted to approve the sale of 80 percent of the oil field to
Hawker. Hawker was “effectively insolvent” at the time of the Meeting, and the insolvency was
not disclosed to Sefton shareholders.

[Id. at ¶¶ 86-88].

Following the Meeting, Hawker

provided Sefton and TEG USA “with approximately $600,000 as a loan.” [Id. at ¶ 92].
In January 2015, Sefton and Hawker entered into a revised agreement (“Hawker
Transaction No. 2”), by which Hawker would acquire 100 percent of TEG USA “in exchange for
an assumption of certain liabilities…, the issuances of 3,000,000 shares of stock in Hawker, and
5,000,000 warrants for Hawker stock,” and would loan funds to TEG USA to acquire an
additional forbearance of bank debt. [#4 at ¶¶ 93, 96]. Mr. Ellerton alleges that Hawker was
insolvent at the time of Hawker Transaction No. 2, and the Board again failed to provide
sufficient information to Sefton’s shareholders to facilitate an informed decision. [Id. at ¶¶ 96,
97].

Furthermore, Sefton’s “true financial condition” was not disclosed to the company’s

shareholders.

[Id. at ¶ 98].

Ultimately, Mr. Ellerton asserts, the “net result of Hawker

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Transaction No. 2, left Sefton still liable on [bank debt], and holding worthless stock of an
insolvent company.” [Id. at ¶ 100]. Mr. Ellerton alleges that, “[b]ased upon the filings to the
[Securities Exchange Commission] by Hawker and Sefton’s own press releases, Sefton lacks
sufficient assets to pay all of its liabilities, including the liabilities owed to the Plaintiffs,” and
that Sefton is insolvent. [#4 at ¶¶ 110, 111].
Mr. Ellerton alleges that he is a shareholder of Sefton and was a shareholder at all times
relevant to the Verified Complaint, and that he has commenced this action “to enforce the rights
that Sefton may properly assert but has failed to enforce.” [#4 at ¶ 120]. Mr. Ellerton further
alleges that he made “numerous written demands upon Sefton and its Board of Directors,
including [the Individual Defendants], to correct the actions taken, including, but not limited to,
restoring Mr. Ellerton to his status as Chairman and CEO of Sefton.” [Id. at ¶ 124]. Mr. Ellerton
participated in the July 2014 Meeting “but was denied the ability to ask questions or seek any
additional information concerning the transactions approved by the Board.” [Id.] Plaintiffs
made demand upon Sefton for, and have been refused, the corporation’s books, records, and
financial information. [Id. at ¶ 125]. They assert that any additional demand that may be
required would be fruitless because the Board is not disinterested and independent. [Id. at ¶
126].
III.

Initial Procedural History
On May 14, 2015, Mr. Ellerton and the Corporate Plaintiffs initiated this action, through

counsel, in the District Court for the City and County of Denver, Colorado. Sefton, as the only
Defendant Plaintiffs had served, removed the matter to the United States District Court for the
District of Colorado on June 10, 2015 on the basis of diversity. See [#1]. The Verified

6

Complaint asserts as follows: First Claim for Breach of Fiduciary Duty brought by Plaintiffs on
behalf of Sefton as to the Board; Second Claim for Civil Conspiracy brought by Plaintiffs on
behalf of Sefton as to the Board; Third Claim for Breach of Duty of Good Faith and Fair Dealing
brought by Plaintiffs on behalf of Sefton as to the Board; Fourth Claim for Breach of Fiduciary
Duty brought by Plaintiffs against Sefton and the Board; Fifth Claim for Breach of Contract
brought by Plaintiff Ellerton against Defendant Sefton; Sixth Claim for Breach of Contract
brought by Corporate Plaintiffs against Sefton; and Seventh Claim for Unjust Enrichment &
Quantum Meruit brought by Plaintiffs against Sefton. [#4].
On August 7, 2015, Sefton filed a “Notice of Filing of Counterclaims and Partially
Unopposed Request to Confirm Automatic Stay and to Confirm Filing of Counterclaims,”
notifying the court that Plaintiffs had filed an Involuntary Petition in the United States
Bankruptcy court for the District of Colorado listing each Plaintiff as “creditor” and asserting
allegations of a breach of contract identical to the allegations of breach asserted in this matter.
[#15]. The same day, Sefton filed a responsive pleading containing eleven counterclaims, noting
its belief that the automatic stay prevented it from filing an answer or motion to dismiss at that
time. See [#16 at n.1]. Plaintiffs thereafter filed a Suggestion of Bankruptcy confirming that
they had commenced an involuntary proceeding under Chapter 7 of Title 11 of the United States
Bankruptcy Code. [#17]. Plaintiffs filed a response to Sefton’s counterclaims on August 28,
2015. [#32].
On October 16, 2015, counsel for Plaintiffs filed a Motion to Withdraw. [#35]. On
December 14, 2015, Mr. Ellerton and Sefton filed a Joint Status Report, in which the Parties
advised that the stay in the bankruptcy action had been lifted, Plaintiff Ellerton represented his

7

intention to pursue this litigation, and Sefton represented its intention to defend against
Plaintiffs’ claims and pursue its counterclaims.1 [#41]. This court thereafter held a Telephonic
Status Conference at which the undersigned granted the Motion to Withdraw and ordered that
counsel for the Corporate Plaintiffs enter an appearance on or before February 1, 2016. This
court advised Mr. Ellerton that to the extent he intended to proceed pro se as an individual, he
was required to comply with the Federal Rules of Civil Procedure, the Local Rules of the District
of Colorado, and the Practice Standards of the Honorable Raymond P. Moore. [#42]. The court
specifically advised that the Corporate Plaintiffs could not proceed without counsel, and warned
that failure to retain representation would result in the court issuing an order to show cause as to
why any claims asserted by the Corporate Plaintiffs should not be dismissed. [#42]. This court
further ordered the Individual Defendants, once and if served, to file a response to the Verified
Complaint on or before February 10, 2016.

Finally, the undersigned set a Scheduling

Conference to be held February 24, 2016. [Id.]
On February 10, 2016, Sefton filed its “Answer, Defenses, and Amended Counterclaims”
against Plaintiffs. [#44].

The Counterclaims plead as follows: (1) Breach of Contract as to

C&J; (2) Breach of the Duty of Good Faith and Fair Dealing as to C&J; (3) Fraud in the
Inducement as to C&J; (4) Breach of Contract as to Mr. Ellerton; (5) Breach of the Duty of Good
Faith and Fair Dealing as to Mr. Ellerton; (6) Fraud in the Inducement as to Mr. Ellerton; (7)
Abuse of Process as to all Plaintiffs; (8) Malicious Prosecution as to all Plaintiffs; (9) Violation
of the Colorado Consumer Protection Act as to Mr. Ellerton; (10) Vicarious Liability as to C&J

1

The Parties attached to their Joint Status Report the order of the Honorable Michael E. Romero
dismissing Plaintiffs’ Involuntary Bankruptcy Petition with prejudice, noting Plaintiffs’ failure to
appear at an evidentiary hearing set for November 12, 2015. [#41-1].
8

and the Trust; (11) Violation of the Racketeer Influenced and Corrupt Organization Act, 18
U.S.C. §§ 1962, 1964(c) as to all Plaintiffs; and (12) Violation of the Colorado Organized Crime
& Control Act, Colo. Rev. Stat. §§ 18-17-101 to 108 as to all Plaintiffs. [#44]. Plaintiffs had not
served the Individual Defendants by that time and thus those Defendants did not join in the
“Answer, Defenses, and Amended Counterclaims.” [Id.]. On February 23, 2016, Mr. Ellerton
filed a Response to Sefton’s Counterclaims. [#48]. However, the Response is dated February 5,
2016—five days before Sefton filed its Amended Counterclaims. See [id.] On March 9, 2016,
Sefton filed a supplemented computation of its damages. See [#55].
IV.

The Corporate Plaintiffs and Individual Defendants
On February 3, 2016, this court issued an Order to Show Cause as to the Corporate

Plaintiffs to explain their lack of prosecution and failure to comply with a court Order, and as to
all Plaintiffs as to why the Individual Defendants should not be dismissed for failure to timely
effect process as to those Defendants. [#43]. On February 22, 2016, Mr. Ellerton, proceeding
pro se, filed a Response to the Order to Show Cause, representing that his former counsel, Mr.
Buechler, had previously withdrawn from this action on the basis of past-due invoices and that
he could re-engage Mr. Buechler if he paid the invoices as well as a retainer for on-going
services. [#46]. Mr. Ellerton further represented that his access to the assets needed to reengage Mr. Buechler were the subject of a dispute currently being adjudicated in his divorce
proceeding in Hawaii state court. [Id.] Plaintiff then requested that the court “provide a
continuance on this action until more discovery is obtained in [the divorce proceeding] and the
results of on-going discussions with Sefton, regarding a possible agreement/settlement to this
action, are determined.” [#46 at 4]. This court denied Plaintiff’s request for an extension of the

9

response deadline in a Minute Order dated February 23, 2016. [#51]. Mr. Ellerton’s Response
to the Order to Show Cause did not address the failure to serve the Individual Defendants. The
Corporate Plaintiffs failed altogether to file a Response to the Order to Show Cause.
This court held a Scheduling Conference on February 24, 2016. The undersigned ordered
in relevant part that the Parties complete discovery by June 24, 2016 and file dispositive motions
by July 25, 2016.

[#52].

At the Scheduling Conference, Mr. Ellerton admitted that the

Corporate Plaintiffs were not currently represented by counsel, and the Individual Defendants
had not been served. On February 25, 2016, this court issued a Recommendation that the
Corporate Plaintiffs and Individual Defendants be dismissed and the First, Second, Third, and
Sixth Claims be dismissed.

With respect to the Verified Complaint, the Recommendation

identified the Fourth, Fifth, and Seventh Claims as pending, to be limited to Mr. Ellerton as an
individual and Sefton as the sole remaining Defendant. [#53]. On October 24, 2016, the court
adopted the Recommendation. [#108].
V.

Current Posture of Case and Pending Motions
The sole remaining Parties to this action are Mr. Ellerton, as Plaintiff and Counterclaim

Defendant, and Sefton, as Defendant and Counterclaim Plaintiff. On April 26, 2016, this court
held a Telephonic Status Conference to discuss matters of timing involving discovery. The same
day, Sefton filed a Motion for Entry of Default as to all Plaintiffs, asserting that the Corporate
Plaintiffs never responded to the Amended Counterclaims, and that Mr. Ellerton’s Response
(dated February 5 but filed February 23) failed to respond to either the Eighth Amended
Counterclaim for Malicious Prosecution arising from the bankruptcy action or numerous factual
allegations and allegations related to punitive damages. See [#68 at 3]. The Motion for Entry of

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Default asked the Clerk of the Court to enter default as follows: (1) Sefton’s First, Second, and
Third Claims for Relief asserted against C&J; (2) Sefton’s Tenth Claim for Relief asserted
against C&J and the Trust; (3) Sefton’s Eighth Claim for Relief and its requests for exemplary or
punitive

damages

under

Colorado

Revised

Statute

§

13-21-102(1)(a)

against

all

Plaintiffs/Counterclaim Defendants; and (4) Sefton’s Seventh, Eleventh, and Twelfth Claims for
Relief as asserted against C&J and the Trust. [Id.] On May 6, 2016, Mr. Ellerton filed a
“Declaration Regarding Sefton Resources, Inc.’s Motion for Entry of Default,” reiterating his
position that Sefton owes him money. See [#72]. Sefton then filed a Reply in support of the
Motion for Entry of Default. [#79].
On May 12, 2016, Sefton filed the pending First Motion for Sanctions seeking dismissal
of Mr. Ellerton’s claims with prejudice citing his “numerous failures to comply with the rules
and orders of this Court, including his failure to provide Initial Disclosures or otherwise advance
this case.” [#75 at 1]. Mr. Ellerton opposed the Motion, and filed a Motion to Dismiss his
claims without prejudice the same day. See [#77]. Mr. Ellerton did not include a certificate of
conferral in his motion.
In a Minute Order dated May 17, 2016, this court considered the Motion for Entry of
Default, First Motion for Sanctions, and Motion to Dismiss and noted, among other things, that
neither Party addressed how the court should resolve the Amended Counterclaims. This court
directed the Clerk of the Court to enter default as to C&J and the Trust only and struck the
Motion to Dismiss with leave to refile. See [#80]; see also [#81].
On June 3, 2016, Mr. Ellerton filed the pending Motion to Dismiss, to which he attached
electronic correspondence from counsel for Sefton indicating Defendant’s intention to pursue its

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Amended Counterclaims against all the Plaintiffs/Counterclaim Defendants.

[#84; #84-5].

Sefton opposed the Motion and filed a Response the same day, articulating its position that the
Amended Counterclaims remain pending against all Plaintiffs regardless of the disposition of the
Motion to Dismiss and the only appropriate disposition of Mr. Ellerton’s claims is with
prejudice, and asking that the court award it fees and costs incurred in defending the lawsuit.2
See [#85].
On June 10, 2016, notwithstanding Mr. Ellerton’s failure to file a Response to the First
Motion for Sanctions, Sefton filed a Reply, reiterating its position that the court should dismiss
all claims against it with prejudice. Sefton also asked that the court enter default as to all
Plaintiffs on all of its Amended Counterclaims due to Plaintiffs’ failure to participate in the
discovery process (as opposed to their failure to respond to the Amended Counterclaims). See
[#88].
Also on June 10, 2016, Sefton filed the pending Second Motion for Sanctions seeking
monetary sanctions for Plaintiffs’ failure to appear for their depositions and failure to respond to
interrogatories and other discovery requests. [#89]. On June 21, 2016, Mr. Ellerton filed a
“Declaration Response Regarding Sefton Resources, Inc.’s Motion for Monetary Sanctions”
again asserting his position that Sefton owes him money. See [#91]. Mr. Ellerton did not
address the contention that he had failed to appear for his deposition or respond to discovery
requests, other than to assert that the court should deny the Second Motion for Sanctions as
“Sefton has for the most part ignored discovery rules.” [Id. at 3]. On July 7, 2016, Sefton filed a

2

Sefton also clarified that it would seek entry of default judgment as to the Corporate Plaintiffs
only once a judgment is entered against Mr. Ellerton. See [#85 at 2, n.1].
12

Reply specifying that it seeks monetary sanctions as an alternative to dismissal and default, and
reimbursement of its expenses in addition to the sanctions. [#92 at 1 n.1].
On July 25, 2016, Sefton filed the pending Motion for Summary Judgment seeking
summary judgment on all claims asserted against it by Mr. Ellerton.3

[#93].

This court

instructed Mr. Ellerton to file a response on or before August 18, 2016. See [#95]. On August 9,
2016, Mr. Ellerton filed a “Response to Defendant’s Motion for Summary Judgment and
Plaintiff’s Motion for Sanctions Against Defendant,” along with a “Declaration By Plaintiff with
Respect to Plaintiff’s Motion for Dismissal Without Prejudice, Defendant’s Counterclaims and
Defendant’s Motion for Monetary Sanctions.” [#96; #97]. On August 10, 2016, Judge Moore
ordered the Response stricken for failure to comply with his Practice Standards and Local Rule
7.1(d) of this District. [#98]. Mr. Ellerton did not re-file a response.
LEGAL STANDARDS
I.

Pro Se Litigants
Mr. Ellerton has been proceeding pro se in this action since the court granted his

attorney’s motion to withdraw on November 6, 2015. See [#38]. “A pro se litigant’s pleadings
are to be construed liberally and held to a less stringent standard than formal pleadings drafted by
lawyers.” Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991) (citing Haines v. Kerner, 404
U.S. 519, 520-21 (1972)). “The Haines rule applies to all proceedings involving a pro se
litigant, including…summary judgment proceedings.” Id. at n.3 (citations omitted). However,
the court cannot be a pro se litigant’s advocate. Yang v. Archuleta, 525 F.3d 925, 927 n.1 (10th
3

The Motion for Summary Judgment is directed at all claims asserted against Sefton by all
Plaintiffs; however, following the court’s October 24, 2016 Order, Mr. Ellerton remains as the
sole Plaintiff and only the Fourth, Fifth, and Seventh Claims as asserted in the Verified
Complaint remain pending against Sefton.
13

Cir. 2008). In addition, a pro se litigant is held to the same procedural rules and substantive law
as a represented party. See Nielsen v. Price, 17 F.3d 1276, 1277 (10th Cir. 1994); Dodson v. Bd.
of Cty. Comm'rs, 878 F. Supp. 2d 1227, 1236 (D. Colo. 2012).
II.

Federal Rule of Civil Procedure 37
Sefton moves for sanctions under Rule 37(b),(c), and (d). Rule 37(b) pertains to a party’s

failure to obey a court order. Pursuant to Rule 37(b)(2)(A), the district court where the action is
pending may order the following sanctions against a party who fails to obey an order to provide
or permit discovery: (i) designating facts as established for purposes of the action;
(ii) prohibiting the non-complying party from supporting or opposing designated claims or
defenses, or from introducing designated matters in evidence; (iii) striking pleadings in whole or
in part; (iv) staying further proceedings until the order at issue is obeyed; (v) dismissing the
action; (vi) rendering a default judgment against the non-complying party; or (vii) treating as
contempt of court the failure to obey the order. Fed. R. Civ. P. 37(b)(2)(A)(i)-(vii).
Rule 37(c) pertains to a party’s failure to disclose, supplement an earlier discovery
response, or admit. Specifically, a party who fails to provide information or identify a witness as
required by Rule 26(a) or (e) may not use that information or witness as evidence in support of a
motion or at a hearing or during trial, unless the failure is “substantially justified or is harmless.”
On motion and “after giving an opportunity to be heard,” the court may also, or instead, order the
non-complying party to pay his opponent’s reasonable expenses caused by the failure to disclose,
may inform the jury of the party’s failure to disclose, or may impose any of the sanctions listed
in Rule 37(b)(2)(A)(i)-(vi). Fed. R. Civ. P. 37(c)(1).

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Finally, Rule 37(d) governs sanctions the court may impose following a party’s failure to
attend his own deposition or serve answers to interrogatories. In either instance, and on motion,
the court where the action is pending may order any of the sanctions listed in Rule
37(b)(2)(A)(i)-(vi) where party with proper notice fails to appear for his deposition, or where a
party who is properly served with interrogatories under Rule 33 fails to serve his answers,
objections, or written response. Fed. R. Civ. P. 37(d)(1)(A). A motion filed pursuant to this
Rule must include a certification that the movant engaged in a robust meet and confer with the
party who has failed to act, in an effort to resolve the dispute without court intervention. Id. at
37(d)(1)(B). In addition to or instead of the sanctions listed in Rule 37(b)(2)(A)(i)-(vi), the court
may order the party failing to act to pay the movant’s reasonable expenses caused by the failure,
“unless the failure was substantially justified or other circumstances make an award of expenses
unjust.” Id. at 37(d)(3).
III.

Federal Rule of Civil Procedure 41
Mr. Ellerton moves to dismiss his lawsuit without prejudice. Pursuant to Rule 41 of the

Federal Rules of Civil Procedure, a plaintiff may dismiss an action without a court order only if
the opposing party has not yet filed an answer or a motion for summary judgment, or if all
parties who have appeared in the action stipulate to the dismissal. Fed. R. Civ. P. 41(a)(1)(A).
Where the opposing party has filed an answer or motion for summary judgment and does not
stipulate to dismiss, the plaintiff must move for dismissal by court order. Id. at 41(a)(1)(B).
And, if a defendant has pleaded a counterclaim before receiving service of plaintiff's motion to
dismiss, the court may dismiss the action over defendant’s objection only if the counterclaim can

15

remain pending for independent adjudication. Id. at 41(a)(2). Unless the court orders otherwise,
an order of dismissal under Rule 41(a)(2) is without prejudice.
IV.

Federal Rule of Civil Procedure 56
Sefton moves for summary judgment on Mr. Ellerton’s three remaining claims.

Summary judgment is appropriate only if “the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Henderson v. Inter–Chem Coal Co.,
Inc., 41 F.3d 567, 569 (10th Cir. 1994). “A ‘judge’s function’ at summary judgment is not ‘to
weigh the evidence and determine the truth of the matter but to determine whether there is a
genuine issue for trial.’” Tolan v. Cotton, 134 S.Ct. 1861, 1866 (2014) (quoting Anderson v.
Liberty Lobby, 477 U.S. 242, 249 (1986)). Whether there is a genuine dispute as to a material
fact depends upon whether the evidence presents a sufficient disagreement to require submission
to a jury or conversely, is so one-sided that one party must prevail as a matter of law. Anderson,
477 U.S. at 248–49; Stone v. Autoliv ASP, Inc., 210 F.3d 1132, 1136 (10th Cir. 2000); Carey v.
U.S. Postal Service, 812 F.2d 621, 623 (10th Cir. 1987). A fact is “material” if it pertains to an
element of a claim or defense; a factual dispute is “genuine” if the evidence is so contradictory
that if the matter went to trial, a reasonable party could return a verdict for either party.
Anderson, 477 U.S. at 248. “Where the record taken as a whole could not lead a rational trier of
fact to find for the non-moving party, there is no ‘genuine issue for trial.’” Matsushita Elec.
Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing First Nat. Bank of Ariz.
v. Cities Service Com, 391 U.S. 253, 289 (1968)).

16

In reviewing a motion for summary judgment the court views all evidence in the light
most favorable to the non-moving party. See Garrett v. Hewlett-Packard Co., 305 F.3d 1210,
1213 (10th Cir. 2002). However, the nonmovant must establish, at a minimum, an inference of
the presence of each element essential to the case. Hulsey v. Kmart, Inc., 43 F.3d 555, 557 (10th
Cir. 1994) (citation omitted). “Although [o]ur summary judgment standard requires us to view
the facts in the light most favorable to the non-moving party[,] it does not require us to make
unreasonable inferences in favor of the non-moving party.” Carney v. City & Cnty. of Denver,
534 F.3d 1269, 1276 (10th Cir. 2008) (quoting Starr v. Downs, 117 F. App’x 64, 69 (10th Cir.
2004)).
When, as here, the moving party does not bear the ultimate burden of persuasion at trial,
it may satisfy its burden at the summary judgment stage by identifying “a lack of evidence for
the nonmovant on an essential element of the nonmovant’s claim.” Adler v. Wal–Mart Stores,
Inc., 144 F.3d 664, 671 (10th Cir. 1998) (citation omitted). See also Anderson, 477 U.S. at 256
(The nonmovant “may not rest upon mere allegation or denials of his pleadings, but must set
forth specific facts showing that there is a genuine issue for trial.”). Conclusory statements
based merely on speculation, conjecture, or subjective belief are not competent summary
judgment evidence. See Bones v. Honeywell Int'l, Inc., 366 F.3d 869, 875 (10th Cir. 2004).
Because Mr. Ellerton failed to file a response to the Motion for Summary Judgment, the
court may deem the properly supported facts offered by Sefton as true, insofar as they are not
contradicted by admissible evidence. See Fed. R. Civ. P. 56(e)(2); Lammle v. Ball Aerospace &
Techs. Corp., Case No. 11-cv-3248-MSK-MJW, 2013 WL 4718928, *1 (D. Colo. Sept. 1, 2013).
As noted above, Mr. Ellerton initiated this action with a Verified Complaint.

17

A Verified

Complaint may be treated as an affidavit for the purposes of summary judgment in some
instances and if it satisfies the standards for affidavits as set forth in Rule 56(c)(4) of the Federal
Rules of Civil Procedure. Lantec, Inc. v. Novell, Inc., 306 F.3d 1003, 1018 (10th Cir. 2002).
Under that Rule, an affidavit used to oppose a motion for summary judgment must be made on
personal knowledge, set out facts that would be admissible in evidence, and show that the affiant
is competent to testify on the matters stated. Fed. R. Civ. P. 56(c)(4). In considering a motion
for summary judgment, the court will disregard allegations of a verified complaint that are
conclusory, vague, or lacking in foundation. Lantec, 306 F.3d at 1019. With respect to the
pending Motion for Summary Judgment, this court has reviewed the exhibits offered by Sefton
so as to ascertain their content and context. Despite Mr. Ellerton’s lack of response, the court
may not enter summary judgment unless Sefton carries its burden under Rule 56 of the Federal
Rules of Civil Procedure.

See Fed. R. Civ. P. 56(e) (instructing summary judgment is

appropriate only when the moving party has met its initial burden of production under Rule
56(c)). See also Reed v. Bennett, 312 F.3d 1190, 1194-95 (10th Cir. 2002) (holding that a party’s
failure to respond to a summary judgment motion is not a legally sufficient basis on which to
grant the motion and enter judgment against that party).
ANALYSIS
Once again, the remaining claims asserted by Mr. Ellerton against Sefton are as follows:


The Fourth Claim for Breach of Fiduciary Duty;



The Fifth Claim for Breach of Contract; and



The Seventh Claim for Unjust Enrichment/Quantum Meruit.

18

Sefton’s twelve Amended Counterclaims remain pending against Mr. Ellerton, C&J, and
the Trust. Sefton does not move for summary judgment on these claims, but asks for default
sanctions arising from purported discovery abuses. A default judgment as a result of discovery
abuses is an “extreme sanction” that is only appropriate if there has been willful misconduct, see
Gates Rubber Co. v. Bando Chemical Indus., Ltd., 167 F.R.D. 90, 106 (D. Colo. 1996). This
court thus reviews the Motion to Dismiss and Motion for Summary Judgment first, before
turning to Sefton’s Motions for Sanctions. As a court sitting in diversity, I apply the substantive
law of Colorado. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 495–97 (1941).4
I.

Plaintiff’s Motion to Dismiss
Mr. Ellerton moves the court to dismiss his claims without prejudice due to his inability

to afford an attorney and his involvement in a time-consuming divorce action. See [#84]. Mr.
Ellerton filed the Motion to Dismiss on June 3, 2016, which was approximately four months
after Sefton filed its Answer and Amended Counterclaims. See [#44]. Sefton opposes the court
dismissing Mr. Ellerton’s claims without prejudice on the basis that Mr. Ellerton has filed actions
against it in three different forums, each arising from Mr. Ellerton’s work as Sefton’s contract
“Chief Executive Officer and/or Chairman” under a “Consultancy Agreement,” and each action
has caused Sefton to litigate “for a year or more” and expend “hundreds of thousands of dollars
in fees and costs.” [#85 at 3]. Sefton asserts that Mr. Ellerton is abusing the judicial system and
the dismissal of these claims without prejudice will permit him to repeatedly litigate the issues

4

Additionally, the Consultancy Agreement includes a choice-of-law provision that specifies
Colorado law should govern, [#93-5 at ¶ 24], and the Parties’ relationship during the relevant
time period was centered in Colorado. See [#93 at 8 n.2].
19

against Sefton at Sefton’s cost. Mr. Ellerton did not file a reply in support of the Motion to
Dismiss.
“Rule 41(a)(2) is designed to prevent voluntary dismissals that adversely affect the
opposing party.” DeAtley v. Keybank National Association, No. 12–cv–02973–PAB–BNB, 2014
WL 4436808, at *4 (D. Colo. Sept. 9, 2014) (citing Brown v. Baeke, 413 F.3d 1121, 1123 (10th
Cir. 2005)). A court should generally grant a plaintiff’s request for dismissal without prejudice
where legal prejudice to the defendant is not evident. Id. In reaching a determination regarding
legal prejudice, the court should consider such factors as “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 of
litigation.” Ohlander v. Larson, 114 F.3d 1531, 1537 (10th Cir. 1997). These factors are not
exhaustive, and the court should examine the equities facing plaintiff as well as those facing
defendant. Id. The factors need not all be resolved in favor of the moving party for dismissal to
be appropriate, nor must all factors be resolved in favor of the opposing party for the court to
deny the motion. Id. (citing Phillips U.S.A., Inc. v. Allflex U.S.A., Inc., 77 F.3d 354, 358 (10th
Cir. 1996)). Whether to grant plaintiff’s request for dismissal without prejudice lies within the
court’s discretion. Id.
In considering these factors, I note first that Mr. Ellerton brought the Arbitration
Proceeding to assert the same claims regarding the breach of the Consultancy Agreement. He
voluntarily dismissed the Arbitration Proceeding on November 19, 2014, eleven months after he
initiated it and after Sefton had asserted counterclaims. See [#85 at 3; #85-1]. Mr. Ellerton then
filed this action, through Mr. Buechler, on May 14, 2015, asserting claims raised in the

20

Arbitration Proceeding plus additional claims. On July 7, 2015, Mr. Ellerton filed an Involuntary
Petition for Bankruptcy against Sefton in the United States Bankruptcy Court for the District of
Colorado, also through Mr. Buechler, naming himself and the Corporate Plaintiffs as creditors.
[#85 at 3; #85-2]. On October 15, 2015, Mr. Buechler moved to withdraw as counsel in the
bankruptcy action. See [#41-1 at 1]. The following month, Mr. Ellerton attempted to dismiss the
bankruptcy action. See [#85-3]. He then failed to appear (and no counsel for the Corporate
Plaintiffs appeared) at an evidentiary hearing scheduled by the court. See [#41-1 at 2]. Sefton
asked for fees and costs and actual and punitive damages, all of which the bankruptcy court
awarded after finding that Mr. Ellerton and the Corporate Plaintiffs had filed the involuntary
petition in bad faith. See [id. at 6]. The court then dismissed the action with prejudice. See [id.
at 7].
With respect to this litigation, there is no question that Sefton has incurred expense in
defending itself (although the extent of the expense may be in some part due to Sefton’s
litigation strategy), while Mr. Ellerton has failed to show diligence in the prosecution of this
action. Indeed, Mr. Ellerton’s Motion to Dismiss comes only after a significant lapse of time and
expenditure of efforts by Sefton. First, following Mr. Buechler’s withdrawal in this matter, Mr.
Ellerton repeatedly failed to inform himself of the Federal Rules of Civil Procedure, Local Rules
of this District, and the Practice Standards of Judge Moore, see [#59; #80; #98], despite this
court’s clear admonition that it expected Mr. Ellerton to adhere to each set of Rules. See [#42].
Second, in December 2015, after the bankruptcy court dismissed the involuntary petition with
prejudice, Mr. Ellerton unequivocally affirmed his intention to pursue this lawsuit. See [#41 at 1
(“I personally plan to advance this litigation…conduct full discovery to substantiate the facts set

21

forth in the 6 claims…[and] defend[] the unsupported counterclaims filed by Sefton against
myself…”)]. Thus ensued two Status Conferences [#42; #67], Sefton filing an Answer and
Amended Counterclaims [#44], a Scheduling Conference [#52], two motions for entry of default
[#63; #68], and the pending First Motion for Sanctions [#75], before Mr. Ellerton moved to
dismiss this lawsuit without prejudice, almost one year to the day from when Sefton removed the
action to this court. See [#84]. Although this court has continued the Final Pretrial Conference
twice, and thus the case is not yet postured for trial, see [#101; #106], Sefton has moved for
summary judgment and there is no doubt that Sefton has conducted itself over the past year,
including seeking written and deposition discovery, so as to prepare for an eventual trial. See
DeAtley, 2014 WL 4436808 at *4 (“defendant appears to have expended sufficient effort in this
case to proceed to trial, a factor which weighs in defendant’s favor”) (citation omitted). All the
while, Mr. Ellerton, the docket reflects, has not been preparing for trial despite his position as the
prosecuting party. Furthermore, as far as this court can discern, Mr. Ellerton’s circumstances did
not change materially from the time he affirmed his intention to pursue the litigation in
December 2015 until the date he filed the Motion to Dismiss, six months later. The only change
in circumstances is embodied in the First Motion for Sanctions, filed May 12, 2016, in which
Sefton seeks dismissal sanctions for discovery violations. See [#75]. In considering these
circumstances, this court finds that the first two factors weigh in favor of denying the Motion to
Dismiss.
As for Mr. Ellerton’s explanation for seeking dismissal without prejudice, he cites the
loss of Mr. Buechler and his inability to afford a new attorney “in order to comply with the
timetable and schedule set by the Court,” and he cites his divorce action, in which he also

22

proceeds pro se. [#84]. This court considers these reasons as insufficient to warrant dismissal
without prejudice at this juncture in the proceedings. This court granted Mr. Buechler’s motion
to withdraw in November 2015, see [#38], and soon thereafter ordered the Parties to prepare a
proposed scheduling order. See [#42]. This court then held a Scheduling Conference, on
February 24, 2016, at which it set the pre-trial deadlines and dates for this matter. See [#52].
Mr. Ellerton was at all times aware of and appeared to endorse the pre-trial schedule. See [#45;
#52]. There is no indication in the record that Mr. Ellerton, a sophisticated individual who
describes himself in the Verified Complaint as the founder and former President of Sefton, [#4 at
¶¶ 12, 21], was unable to understand the applicable Rules and/or the court’s orders. Indeed, Mr.
Ellerton, by motion filed April 25, 2016, once asked for an extension of time “to comply with
deadlines for March 2016 and April 2016,” i.e., joinder of parties and amendment of pleadings
and designation of principal experts. See [#65]. This court denied that motion during a Status
Conference held on April 26, 2016, and ordered Mr. Ellerton to serve Initial Disclosures no later
than May 3, 2016 and for all Parties to provide documents responsive to outstanding discovery
requests on or before May 9, 2016. See [#67]. Thereafter, Mr. Ellerton never sought an
extension of any pre-trial deadline. I find that Plaintiff has not exercised diligence in adhering to
the pre-trial timeline as set forth in the Scheduling Order; and, by waiting to communicate his
inability to meet the deadlines until one month after Sefton filed for discovery sanctions, has
needlessly delayed the progress of this case. With respect to Mr. Ellerton’s divorce, he was
embroiled in that state court action, which he acknowledged was demanding of his time and
financial resources, at the time he re-committed to pursuing this litigation. See [#41 at 1-2]. He
thus knew of the impact the divorce proceeding might have on this lawsuit well before he filed

23

the Motion to Dismiss. Cf. Ohlander, 114 F.3d at 1538 (“the most persuasive reason to file a
motion to dismiss did not arise until eleven months following the initial proceeding’s initiation”).
Finally, as to the present stage of litigation, the court has not entered a final pretrial order
or set a trial date, but Sefton has filed the pending Motion for Summary Judgment and expended
significant resources in an attempt to resolve this matter. I find that this factor also weighs in
favor of denying the Motion to Dismiss. See Clark v. Tansy, 13 F.3d 1407, 1411 (10th Cir.
1993) (observing that in exercising its discretion under Rule 41(a)(2), the court should consider
“whether the opposing party will suffer prejudice in the light of the valid interests of the
parties”).
This court concludes that the Rule 41(a)(2) dismissal without prejudice that Mr. Ellerton
seeks would result in legal prejudice to Sefton that is not offset by the equities facing Plaintiff,
and, therefore, respectfully RECOMMENDS that the Motion to Dismiss without prejudice be
DENIED.5 See Ohlander, 114 F.3d at 1537. I turn next to the Motion for Summary Judgment,
in which Sefton seeks dismissal of Mr. Ellerton’s claims with prejudice.

5

While the court could recommend granting the Motion to Dismiss with prejudice or impose
other conditions under Rule 41(a)(2), it would first need to give Plaintiff notice of its intention to
dismiss with prejudice and the conditions it would impose, and allow Mr. Ellerton an opportunity
to withdraw the request for voluntary dismissal. See Michigan Surgery Inv., LLC v. Arman, 627
F. 3d 572, 576 (6th Cir. 2010); Webco Indus., Inc. v. Diamond, No. 11-cv-774-JHP-FHM, 2012
WL 5995740, at *4 (N.D. Okla. Nov. 30, 2012). But see U.S. ex rel Stone v. Rockwell Int’l
Corp., 282 F.3d 787 (10th Cir. 2002) (citing the Arman prerequisites with approval, but
distinguishing its case from Arman on the basis that the government did not specify whether it
sought to dismiss the claim at issue with or without prejudice). In accordance with Rule 1 of the
Federal Rules of Civil Procedure, this court finds that consideration of and a recommendation
regarding Sefton’s pending Motion for Summary Judgment is more appropriate.
24

II.

Defendant’s Motion for Summary Judgment
Sefton moves for summary judgment on all claims asserted by Plaintiffs in their Verified

Complaint. In light of the court’s October 24, 2016 Order, this court examines the Motion for
Summary Judgment only as to the three remaining claims for: (1) Breach of Fiduciary Duty, (2)
Breach of Contract, and (3) Unjust Enrichment/Quantum Meruit, and as between Mr. Ellerton
and Sefton. As noted above, Mr. Ellerton did not file a response to the Motion for Summary
Judgment.

Nevertheless, where appropriate, this court considers the statements made in

Plaintiff’s Verified Complaint [#4], which was signed under oath.
A.

Undisputed Material Facts6

The following facts are taken from Sefton’s “Statement of Undisputed Material Acts [sic]
in Support of Its Motion for Summary Judgment,” (“SUF”) in accordance with Fed. R. Civ. P.
56(e). Sefton and C&J are parties to the Consultancy Agreement, effective October 1, 2010.
[SUF ¶ 5; #93-5; #45 at 7, ¶ 7]. As part of the Consultancy Agreement, C&J agreed to provide
Mr. Ellerton’s services as “contract Chief Executive Officer (‘CEO’) and/or Chairman of the
Client.” [SUF ¶ 6; #93-5 at ¶ 2.1]. The Consultancy Agreement provides as follows:
The Client, in accordance with its expense reimbursement policy from time to
time, will reimburse the Consultancy Company for payment of all necessary
documented business expenses, including travel and entertainment expenses,
which the Consultancy Company incurs in the performance of the Services within
6

Sefton contends that the court should deem all Requests for Admissions propounded by it to
Mr. Ellerton as admitted as a result of Plaintiffs’ failure to timely respond to Sefton’s Requests
for Admission. See [#93 at 7]. Rule 36(a)(3) expressly provides that “a matter is admitted
unless, within 30 days after being served, the party to whom the request is directed serves on the
requesting party a written answer or objection addressed to the matter and signed by the party or
its attorney.” Fed. R. Civ. P. 36(a)(3). The Rule is not self-executing, but in reviewing the four
Requests for Admissions propounded on Mr. Ellerton, see [#93-6 at 8], I find that they are
appropriately deemed admitted. Nevertheless, this court notes that some of the admissions are
not material to the disposition of the Motion for Summary Judgment.
25

ten (10) days of submission of such documentation. The documentation of
business expenses shall include the amount, time, place and type of expense, the
reason, and nature of the expense, the name, occupation, address and any other
pertinent information concerning each person who is entertained, in each case,
sufficient to establish the business relationship to the Client, and all available
receipts supporting the foregoing. [SUF ¶ 8; #93-5 at ¶ 6].
…
In the event this Agreement is terminated pursuant to Clause 9.1.1, 9.1.2, 3.1
(other than for death of the Consultant), 3.1, 3.2, or 3.3, or any combination of the
foregoing named Clauses, the Client shall, subject to Clause 3.2, pay to the
Consultancy Company, not later than ten (10) days after the Termination Date, (a)
the Fee through the Termination Date, and (b) reimbursement for any
unreimbursed expenses of the Consultancy Company under Clause 6. For the
purpose of this Agreement, the termination pursuant to this provision shall be
deemed for Cause. [SUF ¶ 9; #93-5 at ¶ 9.3].
…
The Consultancy Company represents and warrants that it is an independent
contractor and that the Consultant is its employee or consultant. Nothing in this
Agreement shall render the Consultancy Company or the Consultant an employee,
worker, agent or partner of the Client or of any Group Company and the
Consultancy Company shall not, and shall procure that the Consultant shall not,
hold itself out as such. [SUF ¶ 10; #93-5 at ¶ 7.1].
… The Consultancy Company shall not assign, transfer or subcontract any of its
rights or obligations under this Agreement. [SUF ¶ 11; #93-5 at ¶ 11.8].
…
This Agreement sets out the entire agreement and understanding between the
parties in respect of the subject matter of this Agreement and supersedes and
extinguishes any and all other agreements, either oral or in writing, between the
parties with respect to the Consultancy Company’s provision of services to the
Client which shall cease to have any further force or effect. This agreement can
only be amended by the parties in writing, executed by each of the parties. [SUF
¶ 12; #93-5 at ¶ 9].
Sefton’s counsel took Mr. Ellerton’s deposition on September 22, 2015 as part of the
bankruptcy action. See [#93-7]. During the deposition, Mr. Ellerton testified that repayment of

26

the Ellerton Loan was to be made under the “third-party expenses” provision of the Consultancy
Agreement. [SUF ¶ 14; #93-7 at 133:5-14, 135:21-136:20, 138:24-139:3].7 The only documents
related to the Ellerton Loan are Mr. Ellerton’s personal check and Sefton’s publicly issued
financial statements, neither of which indicates a due date or repayment terms. [SUF ¶ 15; #93-7
at 133:5-14]. The Consultancy Agreement is the contract to which Mr. Ellerton referred in his
testimony regarding a contract with Sefton that governs the Ellerton Expenses and use of his
credit cards. [SUF ¶ 16; #93-7 at 126:8-126:17]. Pursuant to the Consultancy Agreement,
Sefton paid business expenses incurred by Mr. Ellerton to C&J, who then reimbursed Mr.
Ellerton. [SUF ¶ 17; #93-7 at 128:12-24, 129:9-11]. Mr. Ellerton temporarily stepped down
from his roles with Sefton effective August 22, 2013, following internet allegations against him
related to his conduct with a third party. [SUF ¶ 18; #93-8].
B.

Application
1.

Breach of Fiduciary Duty as Between Mr. Ellerton and Sefton

Mr. Ellerton claims that Sefton, as an insolvent company, held and controlled all of its
assets for the benefit of its creditors and shareholders and owes a fiduciary duty to him in his role
as a shareholder. [#4 at ¶¶ 150-153]. Plaintiff alleges that Sefton breached its fiduciary duty by
“engaging in the Hawker Transactions at a time when both Sefton and Hawker were insolvent
[and] wrongfully issuing the directors sufficient shares of stock to insure the approval of the
Hawker Transactions.” [Id. at ¶ 154]. Sefton argues that Colorado law does not recognize a
fiduciary duty owed by an employer to an independent contractor or by a corporation to a
7

“A deposition lawfully taken and, if required, filed in any federal- or state-court action may be
used in a later action involving the same subject matter between the same parties, or their
representatives or successors in interest, to the same extent as if taken in the later action.” Fed.
R. Civ. P. 32(a)(8).
27

creditor, and Mr. Ellerton as a shareholder lacks standing to assert this claim directly against
Sefton. [#93 at 9-10].
Before there can be a breach of a fiduciary duty, a fiduciary relationship must exist.
Vikell Investors Pacific, Inc. v. Kip Hampden, Ltd., 946 P.2d 589, 596 (Colo. App. 1997).
Whether a legal duty is owed a party and the scope of such duty are questions of law for a court
to decide. Glover v. Southard, 894 P.2d 21 (Colo. App. 1994). A confidential or fiduciary
relationship may arise “when one party justifiably imposes special trust and confidence in
another, so that the first party relaxes the care and vigilance that he would normally exercise in
entering into a transaction.” Nicholson v. Ash, 800 P.2d 1352, 1355 (Colo. Ct. App. 1990).
Varying circumstances can give rise to this type of relationship, and, where it is shown to exist,
“the person in whom the special trust is placed owes a duty to the other party similar to the duty
of a fiduciary.” Id. (citations omitted).
Directors of a corporation and its controlling stockholders owe a fiduciary duty to the
remaining stockholders. Bithell v. Western Care Corp., 762 P.2d 708, 714 (Colo. App. 1998);
United States v. Gates, 376 F.2d 65 (10th Cir. 1967). However, “courts routinely hold that a
corporation owes no fiduciary duty to its shareholders or members.” Town of Smyrna, Tennessee
v. Municipal Gas Authority of Georgia, 129 F. Supp. 3d 589, 602-03 (M.D. Tenn. 2015) (citing
Bateman v. JAB Wireless, No. 2:14–cv–147–RJS, 2015 WL 4077923, at *4 (D. Utah Jul. 6,
2015) (“[Plaintiffs] have directed the court to no Utah or Colorado authority recognizing a
fiduciary relationship between a corporation and its shareholders.”).

See e.g., Radol v.

Thomas, 772 F.2d 244, 258 (6th Cir. 1985) (“Liability for breach of the directors’ fiduciary
obligation could not possibly run against the corporation itself, for this would create the

28

absurdity of satisfying the shareholders’ claims against the directors from the corporation, which
is owned by the shareholders. There is not, and could not conceptually be any authority that a
corporation as an entity has a fiduciary duty to its shareholders.”). Without a fiduciary duty,
there can be no breach.8
Typically, dissatisfied shareholders assert claims for breach of fiduciary duty on behalf of
the corporation against a director or third party.

See Combs, 382 F.3d at 1200 (applying

Colorado law to hold that “a stockholder cannot maintain a personal action against a director or
other third party whose action causes harm to the corporation. Generally, it is the corporation, or
a stockholder in a derivative action…, who must pursue such a claim.”) (quoting Nicholson, 800
P.2d at 1356). Indeed, Colorado law expressly requires that claims of waste and corporate asset
mismanagement, as well as claims regarding a corporation’s failure to properly and timely
inform its shareholders regarding offers to purchase, be brought as a derivative action. Id. (citing
River Mgmt. Corp. v. Lodge Props. Inc., 829 P.2d 398, 404 (Colo. Ct. App. 1991); Colt v. Mt.
Princeton Trout Club, Inc., 78 P.3d 1115, 1119 (Colo. App. 2003)). This is because generally
such claims “allege injury to the corporation and, thus, can only be raised by the corporation
itself or by the stockholders in a derivative suit.” River Mgmt. Corp., 829 P.2d at 403 (citation
omitted). Plaintiffs originally asserted this claim as to all Defendants and included “Derivative

8

In addition, Sefton owes no duty to Mr. Ellerton in his role as employee or independent
contractor. Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196, 1200, n.2 (10th Cir. 2004)
(noting that while an employee generally owes fiduciary duties to his or her employer, the
employer generally does not owe a reciprocal duty) (collecting cases); Bithell, 762 P.2d at 714
(noting same with respect to independent contractors). To the extent Mr. Ellerton holds himself
out as a creditor of Sefton, Colo. Rev. Stat. § 7-108-401(5) specifies that “[a] director or officer
of a corporation, in the performance of duties in that capacity, shall not have any fiduciary duty
to any creditor of the corporation arising only from the status as a creditor”; however, as
addressed herein, the Individual Defendants are no longer parties to this action.
29

Allegations” in the Complaint, see [#4 at ¶¶ 120-130, 149-156]; and Sefton filed the Motion for
Summary Judgment, which includes arguments against Plaintiffs’ ability to bring a direct action
versus a derivative action, before the court had dismissed the Corporate Plaintiffs or Individual
Defendants. In its current and operative form, however, the Complaint does not provide for a
derivative action because Sefton is the only remaining defendant.
An exception to the general rule that shareholders address malfeasance through a
derivative

action

applies

if

the

shareholder

can

demonstrate

that

he

was

“injured directly or independently of the corporation.” Pernick v. Computershare Trust Co., Inc.,
136 F. Supp. 3d 1247, 1258, 1259 (D. Colo. 2015) (“Whether a cause of action is individual or
derivative must be determined from the nature of the wrong alleged and the relief, if any, which
could result if plaintiff were to prevail.”) (quoting Kramer v. W. Pac. Indus., 546 A.2d 348, 351
(Del. 1988) (emphasis in original). See also Nicholson, 800 P.2d at 1357. In other words, the
shareholder may bring a direct action against the corporation, its officers, directors, and other
shareholders to enforce a right that is personal to him; in this scenario the individual shareholder
recovers damages. See Murray v. Sevier, 145 F.R.D. 563, 573 (D. Kan. 1993). “A shareholder
does not acquire standing to maintain a direct action when the alleged injury is inflicted on the
corporation and the only injury to the shareholder is the indirect harm which consists of the
diminution in the value of his or her shares.” Pernick, 136 F. Supp. 3d at 1259 (citation
omitted).
The Fourth Claim for Relief arises from the Hawker Transactions and the sale of Sefton
assets. See [#4 at ¶¶ 64-106]. The claim does not appear to be personal to Mr. Ellerton, nor does
he provide any basis for finding that he suffered an injury sufficiently unique so as to permit an

30

individual lawsuit.

Indeed, the Verified Complaint suggests that the Hawker transactions

affected Mr. Ellerton and his fellow shareholders equally. See Barnes v. Harris, 783 F.3d 1185,
1194 (10th Cir. 2015) (observing that “debt is not an intrinsic harm”) (citation omitted). For
instance, Plaintiff alleges that “The Board of Directors, including Mr. Smith, Mr. Milne and Mr.
Morris, did not share this information with Sefton’s shareholders as a whole, nor did they share
relevant information about Hawker’s financial status.” [#4 at ¶ 82 (emphasis added)]. The claim
also references all of Sefton’s creditors and shareholders with respect to the duties and
obligations owed by Sefton and the Individual Defendants and the damages suffered. [Id. at ¶¶
150-156].9 Furthermore, even if Mr. Ellerton had produced evidence sufficient to permit an
individual lawsuit, it is clear from the Verified Complaint that the alleged wrongdoing is
attributed to the Individual Defendants, not Sefton. In short, I find that Mr. Ellerton cannot
maintain an individual lawsuit against Sefton.
In light of Mr. Ellerton’s failure to show a fiduciary duty owed to him by Sefton, this
court respectfully recommends that the Motion for Summary Judgment be granted as to this
claim.
2.

Breach of Contract as Between Mr. Ellerton and Sefton

Mr. Ellerton alleges that he “entered into agreements with Sefton to loan the Ellerton
Loan and for the reimbursement of the Ellerton Expense,” that these agreements constitute
contracts, and that the loan and sums were payable upon demand. [#4 at ¶ 158]. Mr. Ellerton
9

This court notes that Colorado courts expressly do not allow plaintiffs to bring traditionally
derivative claims in their individual capacity “based upon a hybrid status” of shareholder/creditor
or shareholder/independent contractor.” Combs, 382 F.3d at 1201-02 (“when a shareholder does
not possess the right to bring a suit in his individual capacity as a shareholder against the
corporation, as is the case here, he does not gain that right merely because he also serves the
corporation in another capacity”) (citations omitted).
31

further alleges that he has made a demand for the amount owing and Sefton refuses to pay. [Id.
at ¶ 159]. Sefton argues that Mr. Ellerton cannot demonstrate he entered into a written contract
with Sefton, and the Colorado statute of frauds would preclude enforcement of an oral contract.
[#93 at 12-13].
Under Colorado law, a breach of contract claim requires the plaintiff to prove “(i) the
existence of a binding agreement; (ii) the plaintiff’s performance of its obligations (or some
justification for its non-performance); (iii) the defendant’s failure to perform its obligations; and
(iv) resulting damages.” Xtreme Coil Drilling Corp. v. Encana Oil & Gas (USA), Inc., 958 F.
Supp. 2d 1238, 1243 (D. Colo. 2013) (citing W. Distrib. Co. v. Diodosio, 841 P.2d 1053, 1058
(Colo. 1992)). “Contract formation in Colorado requires evidence ‘that the parties agreed upon
all essential terms,’” and that a meeting of the minds occurred. Ragab v. Howard, 841 F.3d
1134, 1137 (10th Cir. 2016) (quoting I.M.A., Inc. v Rocky Mountain Airways, Inc., 713 P.2d 882,
888 (Colo. 1986); Agritrack, Inc. v. DeJohn Housemoving, Inc., 25 P.3d 1187, 1192 (Colo.
2001)). The evidence may consist of the parties’ “conduct, their oral statements and their
writings, and other evidence illuminating the circumstances surrounding the making of an
agreement.” Id. (quoting I.M.A., 713 P.2d at 888). The court should not create or enforce a
contract between parties “when the contract itself does not clearly demonstrate the parties’
intent.” Id. (citing Newton Oil Co. v. Bockhold, 176 P.2d 904, 908 (Colo. 1946)). Pursuant to
Colorado’s statute of frauds, with exceptions not relevant here, an agreement the terms of which
prevent performance within one year of its execution is void if not reduced to writing and signed
by the party whose performance is owed. Colo. Rev. Stat. § 38-10-112(1)(a).

32

According to the Verified Complaint, the scope of Mr. Ellerton’s breach of contract claim
is limited to the Ellerton Loan and Ellerton Expenses. See [#4 at ¶¶ 158-161]. While the
question of whether a contract exists is generally a matter of fact to be determined by the jury,
such is the case only where “the evidence is conflicting or admits of more than one inference.”
New York Life Ins. Co. v. K N Energy, Inc., 80 F.3d 405, 409 (10th Cir. 1996) (quoting I.M.A.,
Inc., 713 P.2d at 887). In considering the facts before it, this court concludes that there is no
genuine issue of material fact that precludes summary judgment with respect to the breach of
contract claim.
In his deposition relating to the bankruptcy proceeding, Mr. Ellerton referenced an audit
report to support his claim that Sefton owes him repayment for the Ellerton expenses. [#93-7 at
125:7-126:7]. However, when asked expressly if he has a written contract “in which Sefton
agreed to reimburse any credit cards,” Mr. Ellerton identified the Consultancy Agreement and
represented that he customarily used credit on Sefton’s behalf and submitted, himself or through
C&J, expense accounts to Sefton for reimbursement. [Id. at 126:8-17, 127:7-25, 127:25-128:4].
The Consultancy Agreement is not between Mr. Ellerton and Sefton, but rather is between C&J,
no longer a plaintiff in this action, and Sefton. [#93-5]. The disbursement provision provides
that the Client, i.e., Sefton, will reimburse the Consultancy Company, i.e., C&J, for payment of
all necessary documented business expenses. [Id. at § 6].
With respect to the Ellerton Loan, Mr. Ellerton testified that he personally loaned the
money to Sefton in September 2013, after the Board had “ousted [him] as the CEO and as a
director,” but before they had canceled the Consultancy Agreement. [#93-7 at 131:13-132:22].
When asked about the presence of a formal document memorializing the Ellerton Loan, he

33

testified that “[i]t’s on the financials,10 and I believe I have a canceled check and/or a second
thing showing it was on my personal account,” but he could not reference a document
formalizing the terms of the Ellerton Loan. [Id. at 133:5-14]. He stated that he understood the
money to be a loan because he articulated as much when he wrote the check to Sefton, the
canceled check is in his name rather than from C&J, and Sefton recorded the money as a loan.
[Id. at 134:3-18, 135:8-10]. Mr. Ellerton testified as to terms of repayment that “[b]asically it
was just assumed that while I was still involved, we would sort that out,” and “[a]s it turns out
when they canceled the agreement, then it became due and payable.” [Id. at 135:14-20]. When
asked how he knew the loan had become due and payable, he responded “[t]hat’s what the
agreement says. Any moneys owed becomes due and payable within ten days…[i]n the
consulting agreement between C&J and Sefton.”

[Id. at 135:21-136:2].

Mr. Ellerton

acknowledged that C&J and Sefton are the only parties to the Consultancy Agreement, [id. at
128:7-11], and admitted that in his individual capacity he is not a party to the Consultancy
Agreement. [Id. at 126:22-127:2]. It is undisputed that C&J could not assign or transfer any of
the rights provided in the Consultancy Agreement and the parties to the Agreement could not
modify it except in writing signed by C&J and Sefton. [#93-5 at ¶¶ 9, 11.8].
With respect to a formal, written contract, Mr. Ellerton’s testimony demonstrates that the
Consultancy Agreement is the only relevant contract in existence and he was not a party to it.
[#93-5 at ¶ 6; #93-7 at 126:23-127:11]. Generally, a nonparty who is not specifically referred to
by the terms of an agreement cannot enforce contract provisions, or be bound by them. See
Chandler-McPhail v. Duffey, 194 P.3d 434, 438 (Colo. App. 2008). Mr. Ellerton is referred to as
10

Sefton refers to the “financials” cited by Mr. Ellerton as its “publicly filed financial
statements.” [#93 at 13-14].
34

the “Initial Consultant” in the Consultancy Agreement, which also refers to “other person(s) as
the Consultancy Company may propose and the Client may accept, as a Suitable Substitute, as
provided in Clause 2.1 in substitution of the Initial Consultant from time to time.” [#93-5 at 5, 6,
§ 2.1].

The contract contemplates that Mr. Ellerton, as the “Initial Consultant” could be

substituted with “any Consultant with a level of skill and expertise, in the opinion of the Client,
broadly similar to those of the Initial Consultant for providing the Services and that is qualified
under the AIM Rules if and to the extent applicable (any such substitute, a ‘Suitable
Substitute’).” [Id. at § 2.1]. There is no indication that Mr. Ellerton, as the Initial Consultant, or
any Suitable Substitute, can enforce the Consultancy Agreement without C&J or the
disbursement provision. Moreover, there are no loan provisions in the Consultancy Agreement.
See [#93-5].
To the extent Mr. Ellerton claims his personal check or Sefton’s publicly filed financial
statements create a contract regarding the Ellerton Loan, this court respectfully disagrees. Under
Colorado law a contract may be evidenced by two or more writings. Grizzly Bar, Inc. v.
Hartman, 454 P.2d 788, 791 (Colo. 1969) (en banc). In determining whether a binding contract
exists, I consider if the terms of the writings are specific enough to constitute a contract, and if
the parties intended the writings to be a binding contract. See New York Life Ins. Co., 80 F.3d at
410. The personal check and the financial statements are not signed by Sefton as the party to be
charged, and they do not include the terms or conditions of the contract, the interest or property
affected, or the consideration to be paid. See id. at 409 (“a contract is an agreement to do or not
to do a particular thing…‘[i]f essentials are unsettled, and no method of settlement is agreed
upon, there is no contract.... If the writing leaves the agreement of the parties vague and

35

indefinite as to an essential element thereof, it is not a contract and cannot be made one by
parol.’”) (quoting Greater Serv. Homebuilders' Inv. Ass'n v. Albright, 88 Colo. 146, 293 P. 345,
348-49 (1930)). Furthermore, Mr. Ellerton has put forward no evidence to demonstrate that
Sefton intended to be bound by a contract with him as an individual regarding the Ellerton Loan,
the Ellerton Expenses, or any other subject. Mr. Ellerton testified that he expected Sefton would
repay the Ellerton Loan “upon demand with interest thereon at the current market rate,” and that
he incurred the Ellerton Expenses with the expectation that Ellerton would repay such funds
upon demand. [#4 at ¶¶ 58, 59, 61]. However, his deposition testimony demonstrates that he
and Sefton never settled on essential terms to govern repayment of any money loaned or
expenses incurred.

See [#93-7 at 134:3-18, 135:8-10].

His deposition testimony also

demonstrates that his expectation regarding reimbursement of the Ellerton Expenses derives
from the business expenses clause in the Consultancy Agreement, to which he admits he is not a
party. [Id. at 135:21-136:2].
Finally, to the extent Mr. Ellerton claims an oral contract exists between him and Sefton
because he articulated that the money at issue was a loan, any such contract is subject to the
state’s statute of frauds. There is no indication that the purported oral contract would be
performed within a year. See Colo. Rev. Stat. § 38–10–112(1)(a). Even accepting the Verified
Complaint as an affidavit, there is no allegation that Mr. Ellerton expected to be repaid within a
year. Indeed, his testimony shows that he had no specific anticipation for when Sefton would
repay the loan.

Rather, Mr. Ellerton thought the Consultancy Agreement governed the

repayment of the loan, and the Consultancy Agreement was to be effective “October 1, 2010
until December 31, 2012, and continuing thereafter for consecutive annual calendar year

36

periods…until terminated by either the Client or by the Consultancy Company.” [#93-5 at 6, ¶
3.1].

The fact that he believed the Ellerton Loan became due and payable when Sefton

terminated the Consultancy Agreement, which happened mere days after he wrote the personal
check, does not change the analysis or demonstrate an oral contract that would be performed
within a year.

See Whatley v. Crawford & Co., 15 F. App’x 625, 635 (10th Cir. 2001)

(recognizing “the statute of frauds permits enforcement only of contracts that may be fully
performed within one year,” and observing that the “mere allegation that an employment contract
was breached within one year does not place it beyond the reach of the statute of frauds.”)).
And, as mentioned above, the personal check and Sefton’s financial statements are insufficient to
remove any oral contract from the statute of frauds. See Peace v. Parascript Mgmt., Inc., 59 F.
Supp. 3d 1020, 1027 (D. Colo. 2014) (instructing that the “memorandum or note necessary to
bring an oral contract outside of the Statute of Frauds must show on its face or by reference to
other writings (1) the names of the parties, (2) the terms or conditions of the contract, (3) the
interest or property affected, and (4) the consideration to be paid therefor,” and the “writing must
be in confirmation of the contract.”) (quoting Nations Enters., Inc. v. Process Equip. Co., 579
P.2d 655, 658 (Colo. App. 1978) (internal quotation marks omitted).
Based on the record before it, this court finds that Mr. Ellerton has not marshaled
evidence of a written or an oral contract with Sefton in response to the Motion for Summary
Judgment, and thus recommends entry of summary judgment in favor of Sefton on this claim.11

11

This court also notes that Mr. Ellerton does not assert a claim for breach of an implied in fact
contract or breach of contract as third-party beneficiary, and naturally Sefton does not brief
either issue. Mr. Ellerton was represented by an attorney at the time he filed the Complaint and
thus his pleading is not entitled to the liberal construction that the court affords his pro se filings.
Additionally, the court will not “supply additional factual allegations to round out a plaintiff's
37

3.

Unjust Enrichment/Quantum Meruit

Finally, Mr. Ellerton claims unjust enrichment/quantum meruit to the extent a contract
does not govern the debt Sefton allegedly owes to him, i.e. the Ellerton Loan, the Ellerton
Expenses, and his services to Sefton. [#4 at ¶¶ 173, 174]. Sefton argues that Mr. Ellerton cannot
pursue this claim against Sefton because the debt at issue is covered by the Consultancy
Agreement and, as a subcontractor who worked for C&J, his remedy lies with C&J.
“Unjust enrichment is a claim in quasi-contract based on principles of restitution.” West
Ridge Group, LLC v. First Trust Co. of Onaga, 414 F. App’x 112, 120 (10th Cir. 2011)
(citing DCB Constr. Co. v. Central City Devp. Co., 965 P.2d 115, 118 (Colo. 1998) (en banc)).
It is a “remedy designed to avoid benefit to one to the unfair detriment of another.” Id. (quoting
Salzman v. Bachrach, 996 P.2d 1263, 1265 (Colo. 2000) (en banc)). “A party claiming unjust
enrichment must prove that: (1) the defendant received a benefit, (2) at the plaintiff’s expense,
(3) under circumstances that would make it unjust for the defendant to retain the benefit without
commensurate compensation.” Sterenbuch v. Goss, 266 P.3d 428, 431 (Colo. App. 2011).
Importantly, an unjust enrichment claim “is a remedy designed for circumstances in which other
remedies are unavailable”; and thus, it is not available as a mere alternative legal theory when
the subject is covered by an express contract.” West Ridge Group, LLC, 414 F. App’x at 120
(citing Interbank Investments, LLC v. Eagle River Water & San. Dist., 77 P.3d 814, 819 (Colo.
App. 2003)). Whether a party is entitled to recovery on a theory of unjust enrichment requires a
trial court to “engage in a highly fact-intensive inquiry,” Dudding v. Norton Frickey &

complaint or construct a legal theory on a plaintiff's behalf.” Whitney v. State of New Mexico,
113 F.3d 1170, 1173-74 (10th Cir. 1997) (citing Hall, 935 F.2d at 1110). Therefore, I decline to
address either issue sua sponte.
38

Associates, 11 P.3d 441, 445 (Colo. 2000), and to “make extensive factual findings to determine
whether a party has been unjustly enriched.” Lewis v. Lewis, 189 P.3d 1134, 1140 (Colo. 2008).
As many courts have noted, the third prong, i.e., whether enrichment of the defendant is unjust,
poses the greatest challenge to trial courts. See, e.g., id. at 1142.
Sefton cites to the Verified Complaint and Mr. Ellerton’s testimony during his deposition
related to the bankruptcy proceeding to contend that Mr. Ellerton’s unjust enrichment claim
derives exclusively from expenditures that are covered by the Consultancy Agreement. [#93 at
17]. Indeed, Mr. Ellerton alleges that he “conferred benefits upon Defendant Sefton, including,
but not limited to, the Ellerton Loan, the Ellerton Expenses,” and his services. [#4 at ¶ 174]. In
response, Sefton raises two arguments. Under the first, Mr. Ellerton cannot recover for unjust
enrichment because the Consultancy Agreement covers the expenditures at issue; second,
because he conferred a benefit on Sefton pursuant to a third party contract between C&J and
Sefton, Mr. Ellerton as an individual cannot pursue recovery from Sefton. [#93 at 17].
To resolve this issue, this court examined the evolution of the common law unjust
enrichment claim in Colorado courts.

In DCB Construction Co., Inc. v. Central City

Development Co., the Colorado Court of Appeals considered a situation in which a contractor,
hired by a commercial lessee to perform improvements on a building, brought an unjust
enrichment action against the lessor after the lessee failed to make payments under the contract,
and relied on the Restatement of Restitution to hold, “[a] person who has conferred a benefit
upon another as the performance of a contract with a third party is not entitled to restitution from
the other merely because of a failure of performance by the third person.” 940 P.2d 958, 963
(Colo. App. 1996) (quoting Restatement of Restitution § 110 at 455). Accord Redd Iron, Inc. v.

39

International Sales and Services Corp., 200 P.3d 1133, 1138 (Colo. App. 2008). The DCB
Construction court further held that, absent a showing that the contract with the third party is
“rescindable because of fraud, mistake or duress,” the fact that the third party (C&J here) fails to
deliver to plaintiff, i.e. Mr. Ellerton, the consideration called for by the contract “provides no
proper basis for a claim of unjust enrichment against a person [Sefton] who may have benefitted
from [Mr. Ellerton’s] performance of its contractual obligation.” 940 P.2d at 963. The Colorado
Supreme Court affirmed the ruling, and held in relevant part that for liability for unjust
enrichment to attach to the lessor, the contractor must show the lessor has “engaged in some
form of improper, deceitful, or misleading conduct.” See DCB Const. Co., Inc. v. Cen. City Dev.
Co., 965 P.2d 115, 117, 120 (Colo. 1998) (en banc) (observing that it was “important to
articulate a general rule, applicable in this context, that provides more stability and predictability
than an ad hoc review.”). Accord R.A.S. Builders, Inc. v. Euclid & Commonwealth Associates,
965 P.2d 1242, 1244 (Colo. 1998). Thereafter, divisions of the Colorado Court of Appeals
applied “differing conclusions regarding the applicability of DCB’s ‘improper conduct’
requirement in other contexts, before the Colorado Supreme Court announced that the
‘particularized analysis for the third prong of unjust enrichment’ enunciated in DCB was limited
to the landlord-tenant contractor context.” Redd Iron, Inc., 200 P.3d at 1137 (quoting Lewis, 189
P.3d at 1143 and n.3) (“our DCB holding requiring malfeasance applies only in situations where
a landlord receives a benefit from a failed contract between a tenant and a party working at the
tenant's behest.”).
The Colorado Court of Appeals then applied this framework in Redd Iron, Inc. v.
International Sales and Services Corp, to determine what a subcontractor must demonstrate to

40

establish that a landowner or general contractor’s retention of benefits is unjust for purposes of
the third prong. 200 P.3d at 1138 (“While the inquiry will depend to a large extent on the facts
of the specific case, see DCB, 965 P.2d at 120, certain generally applicable principles can be
gleaned from our supreme court’s cases, from the authorities on which the supreme court has
relied, and from cases from other jurisdictions that have addressed the issue.”). Ultimately, the
Redd Iron court concluded that the subcontractor must “establish some basis for finding
injustice” beyond the mere showing that the owner or contractor benefitted from services
provided and the subcontractor was not paid for his work. Id.
This court finds the Redd Iron test to be instructive in this case. I begin with the basic
principle that “[a] person who has conferred a benefit upon another as the performance of a
contract with a third party is not entitled to restitution from the other merely because of a failure
of performance by the third person.” DCB Construction Co., Inc. 940 P.2d at 963 (quoting
Restatement of Restitution § 110 at 455).

As Redd Iron observed, neither the rule articulated in

Restatement of Restitution § 110 nor the illustrations that follow it, “suggest that the rule is
limited to any specific context.” 200 P.3d at 1138. Next, pursuant to Redd Iron and the law on
which that court relied, I consider whether Mr. Ellerton has carried his burden of demonstrating
the existence of circumstances that would make Sefton’s retention of the alleged benefits
conferred unjust. I need not conclude that Redd Iron’s analysis pertains precisely to the set of
facts presented here, or decide the type of circumstances that would render Sefton’s retention
unjust, because Mr. Ellerton has provided no evidence to satisfy his burden. See Redd Iron, 200
P.3d at 1139 (“[Plaintiff] was required to prove all three elements of [the unjust enrichment]
claim, as well as the value of the benefit it conferred”) (citation omitted). Even assuming that

41

Sefton received a benefit at Mr. Ellerton’s expense, Sefton’s failure to pay either him or C&J for
the Ellerton Loan and Ellerton expenses does not in isolation establish the third prong. See id. at
1140 (“[s]uch a determination requires a ‘highly fact-intensive inquiry’”) (citing Dudding, 11
P.3d at 445). See also Restatement (First) of Restitution § 1 (1937), comment c (“Even where a
person has received a benefit from another, he is liable to pay therefor only if the circumstances
of its receipt or retention are such that, as between the two persons, it is unjust for him to retain
it. The mere fact that a person benefits another is not of itself sufficient to require the other to
make restitution therefor.”). Nor does the Verified Complaint allege specific facts so as to create
a genuine issue of material fact with respect to the elements of unjust enrichment. See generally
[#4]. Mr. Ellerton does not describe the expenses or provide a standard by which the court or a
factfinder could determine a reasonable reimbursement for those expenses. Similarly, there is no
evidence regarding the terms of the Ellerton loan or how the parties anticipated repayment of the
loan. Therefore, regardless of whether the claim for unjust enrichment derives from benefits Mr.
Ellerton conferred on Sefton in furtherance of his “initial consultant” position with C&J, [#93-7
at 135:14-136:6], or from benefits he simply bestowed on Sefton absent any agreement with
C&J, see [#93-7 at 138:3-140:22], Mr. Ellerton has provided no facts to counter Sefton’s Motion
for Summary Judgment, and he cannot rely on his pleading to create a genuine issue of fact.
Accordingly, based on the record before it, this court respectfully recommends that
Sefton’s Motion for Summary Judgment be GRANTED as to each of Mr. Ellerton’s three
remaining affirmative claims.

42

III.

Motions for Sanctions
A.

First Motion for Sanctions

On May 12, 2016, Sefton filed the First Motion for Sanctions seeking dismissal of Mr.
Ellerton’s claims pursuant to Federal Rules of Civil Procedure 16(f)(1)(C), 37(b)(2)(A),
37(c)(1)(C), and 41(b), as well as D.C.COLO.LCivR 41.1, for his “numerous failures to comply
with the rules and orders of this Court, including his failure to provide Initial Disclosures or
otherwise advance this case.” [#75]. Sefton argues the sanction of dismissal is appropriate
because Mr. Ellerton has generally failed to adhere to court-ordered deadlines and has failed to
meaningfully participate in the discovery process. For instance, Sefton asserts, Mr. Ellerton
appeared at the April 26, 2016 Status Conference by telephone without first seeking leave of
court; he failed to serve his Initial Disclosures and accompanying documents by the courtordered deadline of May 3, 2016, and had not provided any documents by the time Sefton filed
the Motion; Mr. Ellerton never responded to discovery requests served on him and rather
propounded discovery requests in excess of the limit set forth in the Scheduling Order; he failed
to appear for his noticed deposition in Colorado; he failed to serve the Individual Defendants,
failed to properly respond to this court’s Order to Show Cause, and failed to properly respond to
Sefton’s Amended Counterclaims; and he repeatedly fails to confer with Sefton’s counsel prior
to filing motions, and once failed to update the court with his mailing address. [Id. at 2-4].
Sefton argues that these transgressions warrant, at a minimum, precluding Mr. Ellerton from
presenting any witnesses or evidence that he has not timely disclosed, but contends that dismissal
sanctions are more appropriate.

43

Sefton, for the first time in its Reply in support of the First Motion for Sanctions, appears
to seek entry of default as to its counterclaims against Mr. Ellerton for discovery violations. See
[#88]. See also [#89 at 1, n.1 (“Sefton also seeks dismissal with prejudice of all claims against
Sefton and entry of default on all of Sefton’s Counterclaims, but these sanctions are addressed
more fully in Sefton’s separate Motion for Sanctions [ECF No. 75] and its Reply in Support of
that Motion”)]. Contrary to Sefton’s assertion, it did not move for entry of default as to its
counterclaims in the First Motion for Sanctions, but rather requested that discovery sanction for
the first time in its Reply.

Compare [#88] with [#89].

Indeed, the proposed order that

accompanies the First Motion for Sanctions specifies that “Sefton’s Amended Counterclaims
[ECF No. 44] remain pending.” See [#75-3]. As an initial matter, Mr. Ellerton never responded
to the First Motion for Sanctions, and thus Sefton’s Reply is essentially an improper
supplemental brief to the Motion filed without leave of court. In addition, this court will not
entertain a request for entry of default, or any other request, that is raised for the first time in a
reply. See D.C.COLO.LCivR 7.1(d) (“A motion shall not be included in a response or reply to
the original motion. A motion shall be filed as a separate document.”). To the extent Sefton
seeks entry of default on its Amended Counterclaims as a sanction for discovery violations, as
opposed to dismissal of Mr. Ellerton’s affirmative claims, it must move accordingly in
compliance with the Federal Rules of Civil Procedure and the Local Rules of Civil Practice for
this District. See Minshall v. McGraw Hill Broadcasting Co., Inc., 323 F.3d 1273, 1288 (10th
Cir.

2003)

(noting

that

an

argument

“first

raised…in

[a]

reply

brief…is

waived”) (citing Coleman v. B-G Maintenance Management of Colorado, Inc., 108 F.3d 1199,

44

1205 (10th Cir. 1997) (“It is not sufficient to merely mention an issue in a reply brief. Issues not
raised in the opening brief are deemed abandoned or waived.”).12
Because the First Motion for Sanctions is directed at Mr. Ellerton’s affirmative claims,
and this court respectfully recommends that the court dismiss Mr. Ellerton’s claims with
prejudice pursuant to Sefton’s Motion for Summary Judgment, I respectfully recommend that the
First Motion for Sanctions be DENIED AS MOOT.
B.

Second Motion for Sanctions

On June 10, 2016, Sefton filed the Second Motion for Sanctions seeking monetary
sanctions against Plaintiffs pursuant to Rule 37(d)(1)(A)(i)-(ii), on the basis that Plaintiffs failed
to respond to discovery requests and failed to appear for their individual and Rule 30(b)(6)
depositions. [#89]. Sefton represents that its counsel conferred in good faith with Mr. Ellerton
regarding the requested relief in an attempt to avoid court intervention, and that Mr. Ellerton
“simply reiterated that Sefton is ‘well aware of [his] financial situation,’” and “refused to
respond to discovery.” [Id. at 1-2]. On June 21, 2016, Mr. Ellerton filed a Response that did not
12

This court makes no finding in this Recommendation as to whether entry of default is
appropriate, but notes that entry of default for failure to comply with discovery is an
extraordinary remedy and it does not appear that Sefton moved for a motion to compel discovery
that resulted in an order from the court that warned Mr. Ellerton that failure to appropriately
respond could lead to the entry of default against him. In addition, as discussed briefly below,
some of Sefton’s discovery requests as written appear overbroad on their face, and therefore, not
susceptible to an order compelling response to the request. See Bat v. A.G. Edwards & Sons,
Inc., No. 04-CV-02225-REB-BNB, 2005 WL 6776838, at *3 (D. Colo. Nov. 18, 2005)
(“Indiscriminate use of blockbuster interrogatories, such as these, do not comport with the just,
speedy, and inexpensive determination of the action. To require answers for them would more
likely cause delay and unreasonable expense of time, energy, and perhaps money.”). Though it
may not act as Mr. Ellerton’s advocate, see Yang, 525 F.3d at 927 n. 1, “the court also remains
mindful of the admonition that its inherent power to sanction must be exercised with restraint
and discretion,” Cache La Poudre Feeds, LLC v. Land O'Lakes, Inc., 244 F.R.D. 614, 636 (D.
Colo. 2007), and any discovery sanction should be limited to what is proportionate to the
offense.
45

expressly address the contentions raised in Sefton’s Motion, other than to assert that “Sefton’s
Counterclaim and requests for monetary sanctions should be denied, as Sefton has for the most
part ignored discovery rules…” [#91]. Sefton filed a Reply on July 7, 2016.13
Sefton argues that Plaintiffs failed to respond to discovery requests and failed to appear
on June 6, 2016 for their depositions that were properly noticed on May 19, 2016, and attaches
the propounded requests and notices of deposition to its Motion. [#89-2; #89-3]. See also [#894 through -6]. The Corporate Plaintiffs did not respond, and Mr. Ellerton does not refute
Sefton’s contentions in his Response. [#91].

While Mr. Ellerton’s “Declaration Response

Regarding Sefton Resources, Inc.’s Motion for Monetary Sanctions” is over 150 pages with
attachments, Mr. Ellerton never correlates the attached documents to the propounded discovery
requests and any correlation is not self-evident to this court. See [#91; #91-1]. Nor does it
appear that Mr. Ellerton objected to the discovery requests, despite the fact that some of the
requests are objectionable on their face. See, e.g., [#89-2 at 10 (“Identify all criminal, civil,
domestic, bankruptcy, administrative agency, or other legal matters in which you have been
involved, either as a party or a witness, by providing for each such matter the approximate date
that the matter was initiated, the parties to the matter, the venue of the matter, and any other
identifying information, such as case or matter numbers”); #89-2 at 12 (“Identify all
communications between you and Carol Ellerton from July 14, 2014, to the present. For each
and every communication, identify all individuals who participated in the communication(s); the
13

In the Reply, Sefton specifies that the monetary sanctions requested in the Motion “are an
alternative to dismissal and default,” which are the primary sanctions sought, and that it is
entitled to reimbursement of its expenses in addition to the dismissal and default sanctions. [#92
at 1, n.1 (emphasis in original)]. For the reasons stated above, the request for dismissal sanctions
is moot in light of this court’s recommendation regarding the motion for summary judgment, and
Sefton did not seek default sanctions in an affirmative motion.
46

time, date, and location for the communication(s); the topics discussed; the positions of each
party to the communication(s); any representations made by you by the participating
individual(s); any actions taken as a result of the alleged communication(s); and any witnesses to
the alleged communication(s)”)].
As to the failure to appear for deposition, Sefton noticed all depositions to be held at its
counsel’s office in Denver, Colorado. See [#89-3]. Mr. Ellerton lives in Hawaii and courts in
this District expect and generally require parties to hold a deposition at a location convenient for
the deponent, including parties. See D.C.COLO.LCivR 30.1 (“Before sending a notice to take a
deposition, counsel or the unrepresented party seeking the deposition shall make a good faith
effort to schedule it in a convenient and cost effective manner”); Metrex Research Corp. v.
United States, 151 F.R.D. 122 (D. Colo. 1993). On June 6, 2016, the Clerk of the Court
docketed a Declaration of Mr. Ellerton, dated May 25, 2016, representing that he was unable to
travel to Colorado for the noticed depositions due to “limited financial capabilities.” [#87]. In
that same filing, Mr. Ellerton contends that Sefton took his deposition, and that of Carol Ellerton
in the third quarter 2015. [Id. at 2]. The record before the court also includes copies of
electronic correspondence between Mr. Ellerton and counsel for Sefton in which Mr. Ellerton
writes on June 10, 2016, “You are well aware of my financial situation and yet you failed to
propose alternate ways for my deposition (video conferences etc.,) as we did for Sefton’s CEO
last year.”). [#91-1 at 79].
Although Mr. Ellerton’s June 6 submission was not docketed or recognized as a motion
for protective order when filed, this court construes it as such under the liberal interpretation
provided for pro se filings. In its Reply in support of the Motion, filed after Mr. Ellerton’s June

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6 submission, Sefton does not address why it chose not to pursue the depositions through another
mechanism, such as depositions noticed within the vicinity of Mr. Ellerton’s residence in Hawaii
or by video or telephone conference. Therefore, in its discretion, this court declines to sanction
Mr. Ellerton for failing to appear in Denver for the depositions.
However, Mr. Ellerton’s financial situation does not excuse his failure to propound Initial
Disclosures or to respond to the written discovery requests, with objections if appropriate, as
directed by the court on April 26, 2016 [#67]. See United States v. Distefano, 279 F.3d 1241,
1245 (10th Cir. 2002) (holding that litigants proceeding pro se must still comply with the same
procedural standards as those represented by counsel). Indeed, Rule 37(d)(2) explicitly provides
that “a failure described in Rule 37(d)(1)(a) is not excused on the ground that the discovery
sought was objectionable, unless the party failing to act has a pending motion for protective
order under Rule 26(c).” Fed. R. Civ. P. 37(d)(2). Accordingly, Sefton is entitled to its
reasonable expenses, including attorney’s fees, caused by Plaintiffs’ failure to comply with
written discovery, “unless the failure was substantially justified or other circumstances make an
award of expenses unjust.” Fed. R. Civ. P. 37(d)(3). This court does not find a basis in the
record for applying this exception; therefore, this court GRANTS IN PART and DENIES IN
PART the Second Motion for Sanctions and AWARDS Sefton its attorney’s fees and costs
associated with its efforts to obtain responses to its written discovery requests from Plaintiffs.
To the extent the Parties cannot reach agreement as to the amount of expenses to be awarded,
Sefton shall file a properly supported Motion for Attorney’s Fees and Costs on or before
January 17, 2017.

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CONCLUSION
For the foregoing reasons, I respectfully RECOMMEND that:
1. Mr. Ellerton’s Motion to Dismiss Without Prejudice [#84] be DENIED;
2.

Sefton’s Motion for Summary Judgment [#93] be GRANTED;

3. The court DISMISS Mr. Ellerton’s three remaining claims WITH PREJUDICE; and
4. Sefton’s Motion for Sanctions [#75] be DENIED AS MOOT.14
Additionally, IT IS ORDERED:
1. Sefton’s Motion for Monetary Sanctions Under Federal Rule of Civil Procedure 37(d)
[#89] is GRANTED IN PART and DENIED IN PART;

14

Within fourteen days after service of a copy of the Recommendation, any party may serve and
file written objections to the Magistrate Judge’s proposed findings and recommendations with
the Clerk of the United States District Court for the District of Colorado. 28 U.S.C. § 636(b)(1);
Fed. R. Civ. P. 72(b); In re Griego, 64 F.3d 580, 583 (10th Cir. 1995). A general objection that
does not put the District Court on notice of the basis for the objection will not preserve the
objection for de novo review. “[A] party’s objections to the magistrate judge’s report and
recommendation must be both timely and specific to preserve an issue for de novo review by the
district court or for appellate review.” United States v. One Parcel of Real Property Known As
2121 East 30th Street, Tulsa, Oklahoma, 73 F.3d 1057, 1060 (10th Cir. 1996). Failure to make
timely objections may bar de novo review by the District Judge of the Magistrate Judge’s
proposed findings and recommendations and will result in a waiver of the right to appeal from a
judgment of the district court based on the proposed findings and recommendations of the
magistrate judge. See Vega v. Suthers, 195 F.3d 573, 579-80 (10th Cir. 1999) (District Court’s
decision to review a Magistrate Judge’s recommendation de novo despite the lack of an objection
does not preclude application of the “firm waiver rule”); International Surplus Lines Insurance
Co. v. Wyoming Coal Refining Systems, Inc., 52 F.3d 901, 904 (10th Cir. 1995) (by failing to
object to certain portions of the Magistrate Judge’s order, cross-claimant had waived its right to
appeal those portions of the ruling); Ayala v. United States, 980 F.2d 1342, 1352 (10th Cir. 1992)
(by their failure to file objections, plaintiffs waived their right to appeal the Magistrate Judge’s
ruling). But see, Morales-Fernandez v. INS, 418 F.3d 1116, 1122 (10th Cir. 2005) (firm waiver
rule does not apply when the interests of justice require review).
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2. Sefton is directed to submit an itemization of costs and fees associated with the Motion
for Monetary Sanctions Under Federal Rule of Civil Procedure 37(d), with appropriate
support, on or before January 17, 2017;
3. The Clerk of the Court is directed to mail Mr. Ellerton a copy of this Recommendation
and Order at his address of record: John J. Ellerton, 2724 Puuhoolai Street, Kihei
Maui, Hawaii 96753; and
4. Within five (5) business days of Judge Moore’s disposition of this Recommendation, the
Parties shall FILE a Joint Status Report with the court that reflects how they intend to
proceed should any claims or counterclaims remain pending.

BY THE COURT:

DATED: December 29, 2016

s/ Nina Y. Wang__________
United States Magistrate Judge

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