Drywave Technologies USA, Inc v. Message International, LTD et al

Filing 118

ORDER: The Drywave Parties' 96 Motion to Dismiss Counterclaims is GRANTED IN PART. Counterclaims 4 (Exchange Act) and 7 (abuse of process) are DISMISSED WITHOUT PREJUDICE. By Chief Judge Marcia S. Krieger on 3/28/2018. (msklc3)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 16-CV-1775-MSK-NYW
DRYWAVE TECHNOLOGIES USA, INC.,
Plaintiff,
v.
MESSAGE INTERNATIONAL, LTD.,
KENT MOERK,
RICHARD SMEE, and
JOSEPH MCGOWAN,
Defendants,
and
KENT MOERK,
RICHARD SMEE, and
JOSEPH MCGOWAN,
Counterclaim Plaintiffs, and
DRYWAVE SPECIAL PURPOSE FUND LLC,
Intervening Plaintiff,
v.
DRYWAVE TECHNOLOGIES USA, INC.,
DRYRX LLC,
STEVE HOWE,
NICKOLAY KUKEKOV, and
TODD HOWE,
Counterclaim Defendants.

OPINION AND ORDER ON MOTION TO DISMISS COUNTERCLAIMS

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THIS MATTER comes before the Court on a Motion to Dismiss Counterclaims (# 96),
Response (# 99), and the Reply (# 100).
I. JURISDICTION
The Court has jurisdiction to hear this case under 28 U.S.C. § 1332.
II. BACKGROUND
Drywave Technologies USA Inc. (Drywave) was a startup company that made deeptissue massage beds. This controversy is between two groups that tried to determine its future.
The Plaintiffs/Counterclaim-Defendants are Drywave and its original officers and directors (the
Drywave parties), as well as DryRX LLC, an entity owned by Todd Howe. The
Defendants/Counterclaim-Plaintiffs are Joseph McGowan and fund he created — Drywave
Special Purpose Fund (DSPF), which provided funding to Drywave — and Moerk and Smee,
who invested time as consultants and employees of Drywave (the Investors).
According to the Amended Complaint (#14), as a condition of funding, McGowan
required Drywave to hire certain employees or board members. Drywave contends that the
Investors conspired to interfere with Drywave’s business.
According to the Counterclaims (# 89),1 the Investors were misled in making
investments in and in accepting employment by Drywave based upon misleading financial
information and false promises of future compensation made by Drywave’s officers and directors
Nickolay Kukekov, Steve Howe, and T. Howe. Ten Counterclaims are brought:
(1) fraudulent misrepresentation (DSPF, Moerk, and Smee v. Drywave, S. Howe, and
Kukekov);

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The Court recounts and accepts as true the well-pled facts alleged in the Counterclaims (# 89).
See Dudnikov v. Chalk & Vermilion Fine Arts Inc., 514 F.3d 1063, 1069–70 (10th Cir. 2008).
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(2) negligent misrepresentation (DSPF, Moerk, and Smee v. Drywave, S. Howe, and
Kukekov);
(3) securities fraud under C.R.S. § 11-51-501 (DSPF v. Drywave, S. Howe, and
Kukekov);
(4) securities fraud under Section 10(B) of the Exchange Act (DSPF v. Drywave, S.
Howe, and Kukekov);
(5) breach of contract (Smee v. Drywave);
(6) breach of contract (Moerk v. Drywave);
(7) abuse of process (all Investors v. Drywave, S. Howe, and Kukekov);
(8) breach of promissory notes and standstill agreement (DSPF v. Drywave);
(9) fraudulent transfer (DSPF, Moerk, and Smee v. all Drywave Parties); and
(10) civil conspiracy (DSPF, Moerk, and Smee v. all Drywave Parties).
The Drywave Parties have moved to dismiss Claims 1 and 2 as against S. Howe and
Kukekov, Claims 3, 4, and 7 as to all Drywave Parties, and Claims 9 and 10 as to S. Howe,
Kukekov, T. Howe, and DryRX.
III. LEGAL STANDARD
In reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
the Court must accept all well-pleaded allegations in the complaint as true and view those
allegations in the light most favorable to the nonmoving party. Stidham v. Peace Officer
Standards & Training, 265 F.3d 1144, 1149 (10th Cir. 2001) (quoting Sutton v. Utah State Sch.
for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999)). The Court must limit its
consideration to the four corners of the complaint, any exhibits attached thereto, and any external
documents that are incorporated by reference. See Smith v. United States, 561 F.3d 1090, 1098

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(10th Cir. 2009). However, a court may consider documents referred to in the complaint if the
documents are central to the plaintiff’s claim and the parties do not dispute the documents’
authenticity. Alvarado v. KOB-TV LLC, 493 F.3d 1210, 1215 (10th Cir. 2007).
A claim is subject to dismissal if it fails to state a claim for relief that is “plausible on its
face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To make such an assessment, the Court first
discards those averments in the complaint that are merely legal conclusions or threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements. The Court then
takes the remaining, well-pleaded factual contentions, treats them as true, and ascertains whether
those facts (coupled, of course, with the law establishing the requisite elements of the claim)
support a “plausible” as compared to a “conceivable” claim. See Khalik v. United Air Lines, 671
F.3d 1188, 1191 (10th Cir. 2012).
IV. DISCUSSION
A. Claims 1 and 2 — Fraudulent and Negligent Misrepresentation
These claims allege that the Drywave Parties misrepresented or failed to disclose material
financial information about Drywave to DSPF, Moerk, Smee and McGowan. The information
was material to the financial investments made by McGowan’s entities and to Moerk’s and
Smee’s agreement to be employed by Drywave. The Motion to Dismiss contends that these
claims are insufficiently pled in accordance with Rules 8(a) and 9(b), that some alleged
representations are opinion rather than fact, and that some alleged representations identified
were not made to Mr. Moerk.
To prove a claim under Colorado law for fraudulent misrepresentation, a plaintiff must
establish that (1) the defendant knowingly misrepresented a material fact, (2) he justifiably relied
on the misrepresentation, and (3) he suffered damage as a result of such reliance. See Barfield v.

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Hall Realty Inc., 232 P.3d 286, 290 (Colo. App. 2010). To prove a claim for negligent
misrepresentation, a plaintiff must allege that (1) the defendant supplied false information in a
business transaction, (2) the defendant failed to exercise reasonable care or competence in
communicating that information, and (3) that he justifiably relied upon the false information.
Campbell v. Summit Plaza Assocs., 192 P.3d 465, 477 (Colo. App. 2008).
The Court begins with the lowest standard for adequate pleading — Rule 8(a). It requires
that plaintiffs to put facts to paper so defendants have notice of the conduct giving rise to the
claim. See Mann v. Boatright, 477 F.3d 1140, 1148 (10th Cir.2007). This rule invokes notice
pleading, but does not require extensive detail that arguably “connects all of the dots”. The
Drywave Parties do not contend that the allegations are too sparse; to the contrary, they complain
that they are voluminous, overly detailed and “littered” with allegations of representations, which
makes them burdensome to address.
Such criticism has some merit, but the Counterclaims nevertheless set out a
straightforward, chronological version of the events, acts, and conduct giving rise to the parties’
dispute and legal claims. The chronological recitation of facts contains many representations
but they are also separately identified as “Misrepresentations” at Paragraphs 117 through 129.
There is no showing that the Drywave Parties are unable to understand the nature of the
allegations or that they are unable to appropriately respond. Thus, there is no reason to dismiss
the Counterclaims under Rule 8.
Rule 9(b) is at the other end of the spectrum. It requires that allegations of fraud be pled
with particularity — “the time, place, and contents of the false representation, the identity of the
party making the false statements and the consequences thereof.” United States ex rel. Sikkenga
v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 726–27 (10th Cir. 2006). However, the

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requirements of Rule 9(b) must be read in conjunction with the principles of Rule 8, which
requires that pleadings “be construed to do substantial justice.” Fed. R. Civ. P. 8(e)–(f); SeattleFirst Nat’l Bank v. Carlstedt, 800 F2d 1008, 1101 (10th Cir. 1986). The purpose of Rule 9(b) is
“to afford defendant fair notice of plaintiff’s claims and factual ground upon which [they] are
based”. Schwartz v. Celestial Seasonings, 124 F3d 1246, 1252 (1997). Review of the entire
complaint or counterclaims is often necessary to determine whether fraud is sufficiently pleaded.
A dismissal for failure for failure to adequately plead particulars in accordance with Rule 9(b) is
akin to a dismissal for failure to state a claim, curable by amendment.
It is helpful to note that the facts alleged in the Counterclaims do not resemble the typical
situation where a publically-traded company publishes disclosures that include false
misrepresentations or omissions. The parties to this litigation are not strangers relying upon
documents as their means of communication. Instead, Drywave is a closely held company that
sought financing and consulting advice. The principals of Drywave were well acquainted with
the investors and consultants, and worked together until disagreements developed. Indeed, this
lawsuit resembles a “business divorce” in which the parties disagree on what happened, but are
well aware of the conversations and communications that are now alleged to be
misrepresentations.
The Drywave Parties globally complain that allegations set out in the chronological
formatting and separate listing of “Misrepresentations” suffer from a variety of defects. They are
too general, too conclusory, and some of them are not actionable because they are opinions or
pertain to future events. In addition, the Drywave Parties complain that the some of the alleged
misrepresentations are not actionable by all of the Investors.

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The Court declines to address these arguments in detail for several reasons. First,
nowhere in the argument is there a good-faith suggestion that the Drywave Parties or their
counsel do not understand the allegations nor that they are unable to respond to them. It appears
that this objection is largely based on form rather than substance. Second, the critique is, itself,
conclusory and inspecific. The Drywave Parties begin with conclusions and then follow with
“examples”. Most striking is the statement that the “remaining allegations regarding
misstatements are conclusory and similarly lacking in particularity” which is followed by
parentheses enclosing a list of numbered paragraphs from the Counterclaims. This approach
does not identify the allegation that is deficient, how it is deficient, nor why the allegation
remains deficient when read with the remainder of the facts alleged in the Counterclaims. The
Court declines the invitation to undertake the job of the Drywave Parties to specify each pleading
deficiency and to explain why it is so severe as to deprive Drywave Parties of fair notice of the
facts upon which the Investors rely.
The Court will limit itself to the single argument made as to a specific allegation. The
Drywave Parties complain that the allegation that “Kukekov and S. Howe falsely represented to
McGowan that Drywave would be ready for a reverse merger at the end of 2014” (# 89 ¶ 122) is
deficient because it does not identify when, where, or how Kukekov and S. Howe made this
statement, let alone particular facts showing that it was false. This allegation does not stand
alone, however. Without comprehensively scouring the Counterclaims, the Court notes that
references to reverse mergers and representations appear elsewhere (¶¶ 17–21, 30, 32, 44–45).
Read together, it is clear that the subject representations were allegedly made by Kukekov and
S. Howe in Spring 2014, made orally by Kukekov and through documentation prepared by
Highland Research Advisors, and by S. Howe through an email dated July 7, 2014. The

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location where the statement was made is not stated, but it is not clear that location is of any
relevance. The significance of the statement is evident — the ability to go through a reverse
merger indicates the marketability of the company and the fact that it has sufficient financial
stability to be traded on the stock exchange. The deficiencies in this allegation do not require
dismissal of Claims 1 and 2.
Similarly, the fact that not all of the alleged misrepresentations were made by all of the
Drywave Parties and that not all of the Investors relied on the same misrepresentations does not
require dismissal of these Claims. To be sure, the allegations could, and perhaps should, be
organized differently but Court declines to dismiss them to correct their formatting at this stage
in the litigation.
B. Claim 3 — Securities Fraud Under the Colorado Securities Act
This claim alleges that the Drywave Parties’ misrepresentations violate the Colorado
Securities Act. Under Colorado law, it is unlawful for any person, in connection with the offer,
sale, or purchase of any security, to directly or indirectly employ a scheme to defraud, make any
untrue statement of a material fact or omit a material fact necessary to make the statements not
misleading, or engage in any act that operates or would operate as a fraud upon any person.
C.R.S. § 11-51-501(1).
This claim draws on the same well of factual allegations as the misrepresentation claims,
so the Drywave Parties raise the same objections as they did to Claims 1 and 2. To the extent
that the motion is premised on the same pleading deficiencies and challenges as to actionability
that were made with regard to Claims 1 and 2, it is denied for the same reasons.

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C. Claim 4 — Securities Fraud Under the Securities Exchange Act
This claim is brought against all Drywave Parties alleging that their misrepresentations
also violate the Securities Exchange Act. The Securities Exchange Act requires a plaintiff to
allege:
(1) the defendant made an untrue or misleading statement of material fact, or
failed to state a material fact necessary to make statements not misleading; (2) the
statement complained of was made in connection with the purchase or sale of
securities; (3) the defendant acted with scienter, that is, with intent to defraud or
recklessness; (4) the plaintiff relied on the misleading statements; and (5) the
plaintiff suffered damages as a result of his reliance.
In re Level 3 Commc’ns Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012). The level of scienter
required to support a § 10(b) claim is intent to deceive, manipulate, or defraud. Alternatively,
proof of recklessness is sufficient. City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1259–
60 (10th Cir. 2001). The PSLRA imposes a heightened pleading standard for such claims. A
claim must “specify each statement alleged to have been misleading, the reason or reasons why
the statement is misleading, and, if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity all facts on which that belief is
formed.” 15 U.S.C. § 78u-4(b)(1).
The Drywave Parties argue that the Claim 4 does not satisfy the stringent pleading
requirements of the Private Securities Litigation Reform Act (PSLRA). This is correct. The
level of generality that is acceptable for fraud claims is not sufficient for the PSLRA because the
Investors must specify the scienter as to each misrepresentation. This claim does not identify
which of the many alleged misrepresentations fall within it and fails to make any allegation as to
the scienter appropriate to each. Although the Investors properly rely upon Rule 10(c) to
incorporate prior factual allegations into the claim, there is no affirmative statement as to
whether any of the alleged misrepresentations were made with an intent to defraud or
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recklessness. Because this claim does not fairly advise the Drywave Parties of the facts upon
which the Investors rely, it is dismissed.
D. Claim 7 — Abuse of Process
This claim alleges that the filing of instant lawsuit constitutes improper use of the legal
process because (1) Drywave waited to serve McGowan for 192 days, (2) the suit aims to
intimidate and coerce the Investors out of initiating an involuntary bankruptcy case against
Drywave, and (3) the suit lacks factual merit. The Drywave Parties argue that, even if
Drywave’s suit was the result of an improper motive, the Investors cannot show that through the
lawsuit they have improperly employed permissible process.
A claim for abuse is governed by Colorado law. It lies where (1) a party initiates judicial
proceedings (2) in an effort to obtain collateral results that would not be proper in the regular
course of the proceedings (3) which results in damages. Aztec Sound Corp. v. Western States
Leasing Co., 510 P. 2d 897,899 (1973): James H. Moore & Assocs. Realty Inc. v. Arrowhead at
Vail, 892 P.2d 367, 373 (Colo. App. 1994) (citing Restatement (Second) of Torts § 682, cmt. b
(1965)). The essence of the claim is the use of a legal proceeding in a improper manner – for
example, by threatening to give wide publicity to a complaint in order to extort payments from
the defendant. See Cardy v. Maxwell, 9 Misc 2d 329, 169 N.Y.S. 2d 547 (1957). Or, where a
party records liens against his adversary, not because the filer claims an interest in the property,
but in order to compel the adversary to concede a child-custody proceeding. See Arrowhead,
892 P.2d at 373. If, however, the action is confined to its regular and legitimate function, there is
no abuse, even if the plaintiff has an ulterior motive in bringing the action. See Inst. for Prof’l
Dev. v. Regis College, 536 F. Supp. 632, 635 (D. Colo. 1982).

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In assessing the allegations of this claim, the Court assumes, without deciding, that the
action was initiated with an ulterior objective. However, there are no allegations that, if true,
establish that it has been used for that purpose. The first allegation of abuse of process is that
this action was filed to force a settlement (# 89 ¶ 174). It is fair to say that settlements often arise
out of lawsuits, but this allegation fails to identify what process has been misused and how
settlement would be inconsistent with the regular judicial proceedings. The second allegation is
that the Drywave Parties brought claims to intimidate, harass, corerce, extort cooperation from
and decrease the amount owed to DSPF, Moerk, and Smee. (# 89 ¶ 175). This alleges only
ulterior motive, but no improper use of process during the lawsuit. The third allegation is that
the Drywave Parties knew that the Investors intended to file an involuntary bankruptcy petition
against Drywave and this action was designed to delay or prevent such filing (# 89 ¶¶ 176–79).
Again, the allegation pertains to motive, but alleges no improper conduct in this lawsuit.
Because the Investors have not alleged facts showing that the Drywave Parties used any
particular legal tool improperly, they have failed to state a claim upon which relief can be
granted. Accordingly, the claim is dismissed, without prejudice.
E. Claim 9 — Fraudulent Transfer
This claim is brought under the Colorado Uniform Fraudulent Transfer Act (CUFTA).
C.R.S. § 38-8-101 et seq. It alleges that Drywave transferred $1.5 million that had been invested
by DSPF to DryRX, an entity owned by T. Howe while Drywave was insolvent (or it was
rendered insolvent) and that the transfer was made with the intent to hinder, delay and defraud
creditors. See C.R.S. § 38-8-105(1)(a). Alternatively, it alleges that the transfer was made with
Drywave receiving reasonable equivalent value. See C.R.S. § 38-8-105(1)(b). The Drywave
Parties argue that the claim should be dismissed against each of them because it is not properly

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pleaded, and against S. Howe, Kukekov, and T. Howe because no recovery can be had against
them under CUFTA.
The Drywave Parties’ objections premised on Rules 8(a) and 9(b) are not well founded.
As to Rule 8, the allegations are simple and straight forward. It is not necessary to identify
which provision is applicable to the claim because only one provision fits the alleged facts. As
to Rule 9(b), it is not clear that the heightened pleading requirements of such rule are applicable
to all fraudulent conveyance claims. First, it is important to note that fraudulent conveyance
claims are not the same as fraud claims. But, in addition, there are two different flavors of
fraudulent conveyance claims. The first arise from transfers of property based made with an
intent to hinder, delay and defraud creditors. The second are based on transfers of property for
less than fair consideration.
As to the second type of transfer, Rule 9(b) generally does not apply. In re Vaughan Co.
Realtors, 481 B.R. 752, 757, 763 (Bankr. D.N.M. 2012). But as to the first type of transaction,
there is some disagreement among courts. Some apply a strict standard of pleading that requires
identification of the property transferred, the transferor, the transferee and the date of the
transaction. See In re Greater Se. Cmty Hosp. Corp I, 341 B.R. 91 (Bankr. D.D.C. 2006). Other
courts take a more lenient approach finding that the complaint must simply allege sufficient facts
upon which to conclude that money was transferred from a debtor to a defendant and the transfer
violated the Uniform Fraudulent Transfer Act. See Miller v. Rodak, No. 1:12-CV-0076, 2012
WL 3156538 (D. Utah Aug. 3, 2012); Pernick v. Computershare Trust Co., 136 F. Supp. 3d
1247, 1273 (D. Colo. 2015). The Court finds the reasoning of the decisions applying a more
lenient standard to be persuasive and is unaware of any binding precedent to the contrary. Here,
both types of fraudulent transfer claims are alleged. As between the theories, there is no

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discernable difference in the facts that must be alleged in order to advise the Drywave Parties of
the transfer that the Investors believe was fraudulent and why. It is sufficient that the transferor,
transferee, amount and approximate time period is disclosed.
The second challenge is that no claim has been stated against S. Howe, Kukekov, or T.
Howe because no recovery can be made against them. The remedies available in a fraudulent
conveyance action fall into two tiers. The primary remedy is found in C.R.S. § 38-8-109(2) —
recovery of the assets, or their value, from the initial transferee or the person for whose benefit
the transfer was made. In lieu of that, a creditor may obtain a judgment in the amount against the
person who acts with wrongful intent in the amount of one and one-half the value of the asset
transferred or the one and one-half of the amount necessary to satisfy the creditor’s claim,
whichever is less. C.R.S. § 38-8-108(1)(c). Contrary to the suggestions of the Drywave Parties,
liability under CUFTA does not grow out of the respective ownership interests of S. Howe,
Kukekov, or T. Howe in the transferor or transferee entities. It grows, instead, out of the
allegations that S. Howe, Kukekov, and T. Howe intended to hinder, delay, or defraud creditors
of Drywave.
F. Claim 10 — Conspiracy
Drywave Parties’ only basis for dismissal of the conspiracy claim is that it is based on the
misrepresentations and fraudulent transfer theories in Claims 1, 2, and 9. Because none of such
claims are dismissed and no independent reason is shown for dismissal of this claim, it will
proceed.
V. CONCLUSION
For the foregoing reasons, the Counterclaim Defendants’ Motion to Dismiss (# 96) is
GRANTED IN PART. The counterclaim under the Exchange Act (Claim 4) and counterclaim

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for abuse of process (Claim 7) are DISMISSED WITHOUT PREJUDICE. The Motion is
DENIED in all other respects. The parties have 14 days from the date of this order to file an
answer or any motion to amend.
Dated this 28th day of March, 2018.
BY THE COURT:

Marcia S. Krieger
Chief United States District Judge

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