CBD970, LLC v. Labyrinth Holdings, Inc. et al

Filing 179

ORDER by Magistrate Judge Kathryn A. Starnella on 12 March 2025. IT IS HEREBY ORDERED that the Motion for Sanctions Against Defendants for Failure to Comply with Memorandum of Understanding in Compliance with D.141, Including Certificate of Conferr al 143 is GRANTED IN PART to the extent that the Court finds Plaintiff is entitled to attorney fees and costs resulting from Defendants breach of the MOU, pursuant to § IV.15 of the MOU. The Motion [#143] is DENIED WITHOUT PREJUDICE in all o ther respects related to the request for fees and costs. The Motion [#143] is DENIED IN PART to the extent it seeks payment of funds from the Court's Registry pursuant to the Memorandum of Understandings penalty provision. IT IS FURTHER ORDERE D that, on or before March 26, 2025, after conferring with Defendants, Plaintiff shall file a Motion for Attorney Fees along with amended billing entries that address the deficiencies identified herein. IT IS FURTHER ORDERED that by March 19, 2025, Mr. Aschner shall provide instructions to Financial Services for remittance of funds.(cmadr, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 20-cv-00617-DDD-KAS
CBD970, LLC, a Colorado Limited Liability Company, also known as CBD970.com,
LLC.
Plaintiff/Counter-Defendant,
v.
LABYRINTH HOLDINGS, INC., a Nevada corporation,
ROBERT HELLMAN, Individually;
JAMES HILL, Individually; and
LABYRINTH HOLDINGS LLC, a California limited liability company;
Defendants/Counterclaimants/Third-Party Plaintiffs,
v.
KENNETH SACK, an individual and Colorado citizen;
ADAM AYERS, an individual and Colorado citizen;
EAGLE SPRINGS ORGANIC, LLC, a Colorado limited liability company; and
ORGANIC GROWERS LLC, a Colorado limited liability Company,
Third-Party Defendants.
_____________________________________________________________________
ORDER
_____________________________________________________________________
ENTERED BY MAGISTRATE JUDGE KATHRYN A. STARNELLA
This matter is before the Court on Plaintiff’s Motion for Sanctions Against
Defendants for Failure to Comply with Memorandum of Understanding in
Compliance with D.141, Including Certificate of Conferral [#143] (the “Motion”).
Defendants filed a Response [#149] in opposition to the Motion [#143], and Plaintiff filed
a Reply [#150]. The Motion [#143] has been referred to the undersigned. See Order
Referring Motion [#144].

The Court has reviewed the briefing, the case file, and the applicable law. For the
following reasons, the Motion [#143] is GRANTED IN PART. 1 The Court finds that
Plaintiff is entitled to an award of attorney fees arising from the breach of the parties’
Memorandum of Understanding, but its claimed fees are grossly excessive. The Motion
[#143] is DENIED WITHOUT PREJUDICE in all other respects related to the request for
fees and costs. The Motion [#143] is DENIED IN PART to the extent it seeks payment of
funds from the Court’s Registry pursuant to the Memorandum of Understanding’s
“penalty” provision. The Court will order Plaintiff to submit an amended motion for attorney
fees that addresses the deficiencies identified herein. 2
I. Background
Plaintiff’s Motion [#143] focuses on the parties’ litigation conduct, so the Court will
briefly focus on the relevant procedural history rather than the substance of their claims.
Plaintiff filed this lawsuit on March 4, 2020, alleging that Defendants breached and/or
fraudulently induced it to enter a contract for a “unique and proprietary extraction

As discussed herein, the Motion [#114] does not truly seek sanctions but rather seeks attorney
fees pursuant to a fee-shifting contractual provision. Under Colorado law, attorney fees available
by statute or as part of a substantive claim are treated as “damages” and are part of that claim,
but “if attorney fees are sought based on a contractual agreement to shift fees to a prevailing
party, they should be treated as costs, at least where the fee-shifting contractual provision is not
the subject of the dispute between the parties and the contract is proved to exist.” Butler v.
Lembeck, 182 P.3d 1185, 1189 (Colo. App. 2007). The Court therefore proceeds by Order rather
than Recommendation because in this context, a finding that Plaintiff is entitled to attorney fees
is non-dispositive. See, e.g., Carbajal v. Lucio, No. 10-cv-02862-PAB-KLM, 2016 WL 7228819,
at *1 (D. Colo. Dec. 14, 2016) (sustaining objection to magistrate judge’s order awarding attorney
fees after reviewing it as non-dispositive, under “clearly erroneous or contrary to law” standard);
Seidman v. Am. Fam. Mut. Ins. Co., No. 14-cv-03193-WJM-KMT, 2016 WL 6518254, at *3-4 (D.
Colo. Nov. 3, 2016) (adopting magistrate judge’s order awarding attorney fees as discovery
sanction after reviewing it as non-dispositive, under “plain error” standard).

1

A nearly identical Order has been contemporaneously issued in the related case, Rifle Onion
Company LLC v. Hellman, No. 20-cv-03514-DDD-KAS.

2

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equipment” that could remove all the tetrahydrocannabinol (“THC”) from Plaintiff’s hemp
crop so that these post-extraction products could be sold without violating state or federal
law. See Compl. [#1], ¶¶ 29-30, 73-85. Defendants counterclaimed and alleged thirdparty claims against individuals and entities associated with Plaintiff, including breach of
contract, negligent misrepresentation, fraud in the inducement, tortious interference with
contract, and unjust enrichment. See Answer, Counterclaims, & Third-Party Compl. [#14]
at 22-26, ¶¶ 69-101.
A.

Early Litigation and First Mediation
On August 29, 2022, the parties participated in mediation, which did not resolve

the case, although the parties agreed in principle to a forensic audit of Defendants to
determine whether any money was available and whether continued litigation was
warranted. See Pl.’s Motion to Extend Deadlines [#84] at 2, ¶ 5 (describing mediation
efforts); Motion [#143] at 2, ¶ 2 (similar). The parties disagreed over who would perform
the forensic audit before ultimately deciding that Alvin C. Horton, C.P.A. (“Mr. Horton”)
would act as Auditor. See Response [#149] at 4-5.
B.

Mr. Horton’s Engagement
On or around April 26, 2023, Defendants executed an Engagement Letter with Mr.

Horton, engaging him to:
determine whether Labyrinth Holdings LLC funds were improperly moved
to evade creditors, syphon monies out of the company leaving the company
improperly capitalized, has or should have assets and if not that the assets
were properly disposed of and were arm’s length transactions (or not),
improperly placed liabilities onto their books, failed to record assets or
values on the books, had possession or control of unreported assets, made
improper distributions, had third parties or the defendant(s) personally take
value(s) that should have gone to or remained in the company, improperly
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caused damage or disposed of assets, or improperly diverted monies or
assets.
Engagement Letter [#120-1] 3 at 23; see id. at 25-26 (signatures and dates).
As part of their agreement with Mr. Horton, Defendants agreed to provide him
“promptly, upon request,” any information, financial or otherwise, that he deemed
necessary to complete the audit. Id. at 23. Upon completion of the work, Mr. Horton would
“prepare a condensed report” stating one of three things: (1) the audit was completed and
no inconsistencies or improprieties were found; (2) the work was completed but Mr.
Horton found inconsistencies or improprieties; or (3) Mr. Horton was unable to complete
the audit. Id. at 24.
On July 3, 2023, the parties filed an “Agreed Motion to Stay Case” [#105], attaching
executed counterparts of the Memorandum of Understanding (the “MOU”). See [#105-2]
(Plaintiff’s signed copy of the MOU); [#105-3] (Defendants’ signed copy of the MOU). The
Court stayed the case. See Minute Order [#107].
C.

The Memorandum of Understanding [#105-2]
In the MOU [#105-2], the parties “acknowledge that much of this case pivots upon

the underlying finances centered in this litigation” and state their agreement “to retain a
forensic CPA to conduct an audit of the Defendant(s) in conformity with the scope outlined
in the [Engagement Letter.]” MOU [#105-2] at 2, § II. The parties confirmed that the
Engagement Letter would “sufficiently speak to the terms of the audit” but “further agree[d]

For clarity, in this Order, the Court cites to the first filed versions of the Engagement Letter
[#120-1], the Memorandum of Understanding [#105-2], and Mr. Horton’s Non-Compliance Letter
[#120-2] rather than the versions filed as Exhibits 1 and 2 [#143-1, #143-2] to the current Motion,
which have been re-filed so often that the court-stamped page and document numbers at the top
of each page are completely illegible.
3

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that . . . [i]n the event that the Auditor still cannot obtain the requested documents and
deems them to be needed, he shall inform by email all Parties [sic] counsel and if
warranted halt or stop the audit.” Id. at 3, § IV.3. Additionally, “[a]ny material delay to Mr.
Horton’s services due to unpaid fees or failing to produce requested documents shall be
deemed a material breach of this MOU.” Id. at 4, § IV.9. Defendants agreed to pay
$10,000 into trust (either to the Clerk of Court or to either party’s attorney’s trust account)
“should the auditor’s report find that he could not properly complete the Audit.” Id., § IV.13.
Plaintiff (and the plaintiff in the companion case) retained the right “to file an appropriate
motion before the court seeking compliance, terminating the Audit, seeking specific
performance, as well as seeking that the $10,000.00 placed in escrow pursuant to the
terms of this paragraph so that they shall be forthwith paid over to [Plaintiffs in both cases
and their counsel]. [Defendants] agree not to challenge this tendering and release of
funds in the event of such a breach if represented by the auditor.” Id.
The MOU also contained two provisions regarding attorney fees. First, “[i]n the
event that either party breaches this MOU and the spirit thereof, the party alleging breach
or non-compliance may bring forth a Sanctions Motion, or other appropriate motion,
against the other including an award of attorney fees and costs.” Id. at 5, § IV.15.
Additionally, “[i]n the event litigation arises out of or stemming from this Agreement, the
Prevailing Party shall be entitled to an award of reasonable attorney fees and costs.” Id.
at 6, § V.G. The parties reaffirmed their understanding that “neither party(s) nor their
lawyer(s) can control the Court, can control whether the Court grants the relief requested
herein, or can control the outcome of any judicial decision, judicial request, or what an

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order will say.” Id. at 5, § V.A (emphasis omitted). The parties chose “The Federal Laws
of the State of Colorado, USA” as the governing law. Id. at 6, § V.B.
D.

Mr. Horton’s Non-Compliance Letter
On September 25, 2023, Mr. Horton wrote Defendants’ counsel a Non-Compliance

Letter [#120-2], which he also sent to Plaintiff’s counsel. See Non-Compliance Letter
[#120-2] at 3 (stating that “Mr. Brand is copied on this letter”). Mr. Horton stated that,
although he had “received some initially supplied documents as early as May 8, 2023[,]
from Mr. Archer,” he had not received numerous documents from Defendants or from
their counsel. Id. at 3-4. Without going into detail about what documents were withheld or
not provided, Mr. Horton explained that he “had several phone calls with [Defendants’
counsel], Mr. Hellman, and his CPA” in which he “explained [his] needs for these
documents and the conversations of course opened up other doors for which [he]
requested, orally, some additional [documents].” Id. at 4.
On July 1, 2023, Mr. Horton had “sent [Defendants’ counsel] yet another request
as there were many holes within the documents provided” and “Mr. Hellman and Mr.
Archer informed [Mr. Horton] that they have the documents but need time to locate them.”
Id. However, as of the date of the Non-Compliance Letter, Mr. Horton was still waiting for
those documents even though “[he] was assured that [Defendants’ counsel’s] clients were
in fact in possession.” Id.
On September 5, 2023, Mr. Horton “again sent an additional request for
documents” that “focuse[d] on what would appear to be differences in how people might
view the financial evidence and these differences needed to be cleared up[.]” Id. Again,
he “spoke to Mr. Hellman and Mr. Archer several times about this production. Mr. Hellman
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appeared to be hesitant about this production and stated that he would talk with
[Defendants’ counsel]. No production has been provided.”
Ultimately, Mr. Horton decided to halt the audit after coming to three conclusions:
(1) “nothing additional shall be produced to further this audit and its conclusion”; (2) “[t]he
company’s external CPA and Mr. Hellman appear to be in conflict”; and (3) “there is also
a material conflict between what Mr. Hellman has told [Mr. Horton] vs. what is showing in
some of the documents which were produced or which [Mr. Horton] obtained.” Id. Mr.
Horton felt that he was “being played so [Defendants] can buy time or waste it,” so he
“call[ed] the end to this process due to non-compliance.” Id.
E.

Subsequent History
On December 8, 2023, Plaintiff (and the plaintiff in the companion case) moved to

enforce the MOU, asking the Court to order Defendants to pay $10,000 as set forth in §
IV.13, and seeking Defendants’ specific performance of the Engagement Letter. See
Motion to Enforce [#120] at 2. At a June 12, 2024 hearing, the Court granted in part the
Motion to Enforce [#120] and ordered Defendants to deposit $10,000 (for this case and
the companion case, No. 20-cv-03514-DDD-KAS) into the Court’s Registry. See
Courtroom Minutes [#141] at 1. The Court also ordered Plaintiff to file any motion for
attorney fees and costs for non-compliance with the MOU. Id. Finally, the Court ordered
the parties to complete the audit contemplated in the MOU, which it construed “as part of
ongoing settlement efforts that began with [a] March 21, 2024 Settlement Conference
[#127].” Minute Order [#142]. On July 2, 2024, Plaintiff filed the pending Motion [#143].

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F.

The Parties’ Arguments
Plaintiff requests sanctions against Defendants “for failure to comply with [the

MOU]” and identifies the elements of breach of contract before asking the Court to impose
sanctions for Defendants’ alleged bad faith conduct pursuant to its inherent authority, as
contemplated in Chambers v. Nasco, Inc., 501 U.S. 32, 45-46 (1991). See Motion [#143]
at 1, 5-7.
Defendants retort that Plaintiff “rel[ies] on the wrong legal standard” because it was
“granted leave to file a motion for sanctions under F.R.C.P. 37(d) [but] the Motion
inexplicably cites only to cases analyzing F.R.C.P. 11.” Response [#149] at 6. They assert
that “delays in providing information to Mr. Horton were not intentional, and were due
largely to the non-existence of records at the time and an inability to articulate why the
financial records provided to Mr. Horton contradicted oral representations made to him.”
Id. at 7. These issues, Defendants argue, were not the product of bad faith or intentional
or fraudulent conduct, and they assert they are in “full compliance” with the Court’s order
to continue with the audit. Id. They further argue that Rule 37 sanctions are inappropriate
because the alleged violation of the MOU was not a discovery violation sanctionable
under that rule. Id. at 9-10.
In further opposition to a fee award, Defendants acknowledge that the MOU
permits Plaintiff to move for attorney fees but argue that it does not require the Court to
award them. Id. at 9-10. Finally, Defendants challenge the reasonableness of Plaintiff’s
attorney fees because they include “time entries with no rational relationship to the parties
MOU or the [Defendants’] breaches of the same[.]” Id. at 12-13 (listing examples of
unrelated line items).
8

In its Reply, Plaintiff clarifies that its Motion [#143] is based upon the Court’s
inherent power but proceeds to discuss the MOU provision that identifies an “additional
remedy of filing a sanctions motion or other appropriate motion ‘in the event that either
party breaches this MOU and the spirit thereof.’” Reply [#150] at 2, 3 (distinguishing MOU
[#105-2] § IV.13 from MOU § IV.15).
Both sides’ arguments miss the point, perhaps because the MOU inaptly used the
term “Sanctions Motion” to describe a fee-shifting provision. The Court is not considering
sanctions against Defendants pursuant to its inherent authority or under the Federal
Rules of Civil Procedure. Defendants correctly argue that Plaintiff has not made the
requisite showing under Rule 11, Rule 37, or Chambers; rather, the Court is considering
whether to assess attorney fees and a “penalty” fee pursuant to the MOU—which
expressly provides for them in the event it is breached. See, e.g., Courtroom Minutes
[#141] at 1 (ordering Plaintiff to file a “Motion for Attorneys’ Fees and Costs as a Sanction
for non-compliance with the MOU”); MOU [#105-2] at 4-5, § IV.13 (contemplating $10,000
“penalty” for non-compliance due to auditor’s inability to complete the audit), 5 § IV.15
(contemplating a “Sanctions Motion, or other appropriate motion, . . . including an award
of attorney fees and costs” in the event of breach). At bottom, this is a question of contract
interpretation, not whether Defendants engaged in conduct that the Court might otherwise
find sanctionable.
II. Legal Standards
A.

Governing Law
At the outset, the Court notes that the MOU contains a choice-of-law clause

providing that it will be governed by “[t]he Federal Laws of the State of Colorado, USA.”
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See MOU [#105-2] at 6, § V.B. On its face, this is ambiguous, as it suggests that the Court
should apply both state and federal substantive law. Given the Supreme Court’s
reluctance to apply federal common law to private disputes, the Court presumes the
parties intended to invoke Colorado substantive law and federal procedural law, as this
Court routinely does in diversity cases. See, e.g., Miree v. DeKalb County, Ga., 433 U.S.
25, 29 (1977) (holding that state common law, rather than federal common law, governed
the plaintiffs’ breach of contract claim against the county because “only the rights of
private litigants are at issue” and the claim’s resolution will not affect the United States);
Hanna v. Plumer, 380 U.S. 460, 465 (1965) (stating that “federal courts are to apply state
substantive law and federal procedural law”). Moreover, the Court previously applied
Colorado law to interpret the MOU’s provisions. See Order [#168] at 8-10. The Court
therefore applies Colorado substantive law and federal procedural law.
B.

Contract Interpretation
Under Colorado law, contract interpretation is a question of law. See, e.g., Fed.

Deposit Ins. Corp. v. Fisher, 292 P.3d 934, 937 (Colo. 2013). When interpreting a
contract, courts primarily seek “to determine and give effect to the intent of the parties.”
CapitalValue Advisors, LLC v. K2D, Inc., 321 P.3d 602, 605 (Colo. App. 2013). To
determine parties’ intent, courts examine the contract’s language; “[w]ritten contracts that
are complete and free from ambiguity will be found to express the intention of the parties
and will be enforced according to their plain language.” Id. (quoting Ad Two, Inc. v. City
& County of Denver, 9 P.3d 373, 376 (Colo. 2000)).
“A contract is ambiguous where it is reasonably susceptible of more than one
meaning”; however, the parties’ mere disagreement “concerning the meaning of terms
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does not create an ambiguity.” Colo. Intergovernmental Risk Sharing Agency v. Northfield
Ins. Co., 207 P.3d 839, 841 (Colo. App. 2008) (internal quotation marks and citation
omitted). To determine “whether an ambiguity exists, the court may look to the meaning
of words with ‘reference to all contractual provisions and the nature of the transaction
which forms the contract’s subject matter.’” Stroh Ranch Dev., LLC v. Cherry Creek S.
Metro. Dist. No. 2, 935 F. Supp. 2d 1053, 1060 (D. Colo. 2013) (quoting In re Marriage of
Thomason, 802 P.2d 1189 (Colo. App. 1990); May v. United States, 756 P.2d 362, 369
(Colo. 1988) (en banc)).
“[C]ourts must not view clauses or phrases in isolation.” Stroh Ranch Dev., 935 F.
Supp. 2d at 1060 (internal citation and quotation marks omitted) (emphasis in original).
“When faced with conflicting provisions in a contract, a court should adopt, if possible, a
reasonable interpretation of the contract that gives effect to all its provisions. When two
clauses of a contract are in apparent conflict, the clause that gives effect to the primary
purpose of the contract will control.” White River Vill., LLP v. Fid. and Deposit Co. of Md.,
Nos. 08-cv-00248-REB-BNB, 08-cv-00359-REB-BNB, 2009 WL 792728, at *3 (D. Colo.
Mar. 23, 2009) (internal citations and modification omitted).
C.

Contractual Attorney Fee Awards
Under Colorado law, contractual attorney fee provisions are generally enforceable.

See Klein v. Tiburon Dev. LLC, 405 P.3d 470, 475 (Colo. App. 2017); see also, e.g., Brock
v. Weidner, 93 P.3d 576, 580 (Colo. App. 2004) (reversing trial court’s decision not to
award costs and fees to the prevailing party despite existence of contract fee-shifting
provision). Additionally, Colorado public policy mandates that any contractual fee-shifting
provision be limited to “reasonable” attorney fees. Cf. S. Colo. Orthopaedic Clinic Sports
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Med. & Arthritis Surgeons, P.C. v. Weinstein, 343 P.3d 1044, 1048, 1047 (Colo. App.
2014) (holding that a “starkly absolute fee-shifting provision that does not impose a
reasonableness requirement on the amount of attorney fees and costs awarded
contravenes public policy”); Klein, 405 P.3d at 475 (Colo. App. 2017) (citing Weinstein
with approval). When a contract provides for reasonable attorney fees, the burden is on
the party seeking attorney fees to show that a fee award is reasonable. See, e.g.,
Gustafson v. Am. Fam. Mut. Ins. Co., No. 11-cv-01303-PAB-MEH, 2012 WL 5904301, at
*5 (D. Colo. Nov. 26, 2012) (stating that, where a contract provides for “reasonable”
attorney fees, the burden is on the party seeking fees to show reasonableness) (citations
omitted); United States ex rel. Sun Constr. Co., Inc. v. Torix Gen. Contractors, LLC, No.
07-cv-01355-LTB-MJW, 2011 WL 3648287, at *2 (D. Colo. Aug. 18, 2011) (same).
III. Analysis
A.

Attorney Fees and Costs
Here, the parties do not dispute the MOU’s existence, its validity, or the Court’s

power to enforce it while this litigation remains pending. See, e.g., Response to Motion to
Enforce [#134] at 7 (recognizing the Court’s “substantial discretion in managing discovery
matters, which can include unconventional procedures in unique circumstances if
deemed necessary for the fairness and effectiveness of the proceedings” and agreeing
that “the [Defendants] will honor any Order this Court enters” related to the MOU,
“including an order to proceed with the Audit”).
Therefore, to resolve Plaintiff’s Motion [#143], the Court must answer three
questions: (1) whether Defendants breached or failed to comply with the MOU, as Mr.
Horton found in September 2023; (2) whether the MOU provides for attorney fees in the
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event of breach or non-compliance; and (3) whether Plaintiff has shown that its requested
attorney fees are reasonable.
1.

Breach

Here, the parties do not dispute that Mr. Horton found Defendants were in noncompliance with MOU and that their failure to provide requested documents significantly
delayed the 2023 audit, though Defendants assert that they “made a good faith effort to
get Mr. Horton each of the documents he requested.” See Non-Compliance Letter [#1202] at 4 (calling “the end to this process due to non-compliance” based on Defendants’
failure to produce requested documents); but see Response [#149] at 5.
Under the MOU, Mr. Horton was entitled to request “additional documents,
records, and electronically stored information as he deems fit,” and if he “cannot obtain
the requested documents and deems them to be needed, he shall inform by email all
Parties[’] counsel and if warranted halt or stop the Audit.” MOU [#105-2] at 3-4, §§ IV.1,
3. The MOU provided that “[a]ny material delay to Mr. Horton’s services due to unpaid
fees or failing to produce requested documents shall be deemed a material breach of this
MOU.” Id. at 4, § IV.9. If Mr. Horton “[found] that he could not properly complete the
Audit[,] Plaintiffs shall have the right to file an appropriate motion before the court seeking
compliance, terminating the Audit, seeking specific performance, as well as seeking that
the $10,000.00 placed in escrow . . . be forthwith paid over to [Plaintiff and its counsel].”
Id., § IV.13. Moreover, Defendants “agree[d] not to challenge this tendering and release
of funds in the event of such a breach if represented by the auditor.” Id.
Taken as a whole, these provisions unambiguously vested Mr. Horton with broad
discretion over which documents he might deem necessary and empowered him to stop
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the audit if he could not obtain those documents, following notice to both parties. Mr.
Horton was empowered to determine whether Defendants were non-compliant or in
breach for purposes of the penalty provision, and the MOU provided that any material
delay in Mr. Horton’s services would constitute a material breach. Whether Defendants
acted in good faith or bad faith has nothing to do with whether they breached the MOU.
Defendants’ non-compliance or breach hinged on whether they provided Mr. Horton with
requested documents and whether their failure to do so resulted in “material delay”. Id.,
§ IV.9.
Ultimately, on September 25, 2023, Mr. Horton exercised his prerogative and
informed both parties that he had found Defendants non-compliant and that he would halt
the audit. See Non-Compliance Letter [#120-2] at 4. He provided several examples of
conversations and requests that went unanswered. Id. Mr. Horton’s Non-Compliance
Letter [#120-2] plainly establishes that Defendants breached the MOU: he determined
that their failure to produce requested documents had materially delayed resolution of the
audit, and that determination was his to make. Cf. MOU [#105-2] at 4, § IV.13 (stating
that Defendants “agree[d] not to challenge [the] tendering and release of funds in the
event of such a breach if represented by the auditor”). Moreover, as Defendants
acknowledge, the Court has also found that they breached the MOU, in ordering them to
tender $10,000 to the Court’s Registry. See Response [#149] at 3 (stating that “[o]n June
12, 2024, the Court determined that [Defendants] breached the MOU and ordered that
[they] deposit $10,000 in the Court’s registry, as required by [§ IV,] ¶ 13 of the MOU”).
The Court need not and therefore does not make any additional finding that the
Defendants’ conduct was done willfully or in bad faith or was otherwise sanctionable. In
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2023, Defendants plainly breached the MOU by failing to provide Mr. Horton with
requested documents.
2.

Attorney Fees Provision

Having found that Defendants breached the MOU, the Court considers whether
that breach entitles Plaintiff to attorney fees. Defendants argue that “[t]hough the MOU
permits Plaintiff to file a motion for sanctions” in event of breach or non-compliance, “it
does not mandate that the Court award any such sanctions.” Response [#149] at 9-10.
They add that “[h]ad the parties intended that any breach of the MOU, of any nature,
would result in an award of attorneys’ fees to the non-breaching party, they could have
contracted for the same and included a provision requiring the Court to award fees in the
event of a breach.” Id. at 10. Because they did not act in bad faith, they argue that fees
are unwarranted. For at least three reasons, the Court is unpersuaded by Defendants’
attempt to overcomplicate this straightforward provision. Cf. Butler v. Lembeck, 182 P.3d
1185, 1189 (Colo. App. 2007) (stating that courts “interpret fee-shifting provisions in a
contract in a common sense manner”) (citing Agritrack, Inc. v. DeJohn Housemoving,
Inc., 25 P.3d 1187, 1192 (Colo. 2001) (rejecting “an overly technical reading of a fairly
simple [fee-shifting] provision”)).
First, the MOU was not intended to require the Court to do anything. The MOU
unmistakably articulates in capitalized text that the parties understand that neither they
nor their lawyers have any control over the outcome, including nature and scope, of any
judicial decision. MOU [#105-2] at 5, § V.A. However, the provision “permit[ting] Plaintiff
to file a motion for sanctions” seeking attorney fees in event of breach would be
superfluous if it did not also permit the Court to grant those fees. Cf. People ex rel. Rein
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v. Jacobs, 465 P.3d 1, 11 (Colo. 2020) (“In construing a contract, [the court] interpret[s]
the contract in its entirety, seeking to harmonize and give effect to all of its provisions so
that none will be rendered meaningless.”) (citation omitted).
Additionally, the MOU clearly expresses the parties’ intent for attorney fees to be
available in the event of a breach that resulted in delay or further litigation. Three
provisions of the MOU point to this conclusion. First, the parties agreed that “[a]ny material
delay to Mr. Horton’s services due to unpaid fees or failing to produce requested
documents shall be deemed a material breach of this MOU.” MOU [#105-2] at 4, § IV.9.
Not just a breach but a material breach. Second, the parties agreed the party alleging
breach or non-compliance may bring a motion that seeks attorney fees and costs. Id. at
5, § IV.15. Third, the parties agreed that “[i]n the event litigation arises out of or stemming
from this Agreement, the Prevailing Party shall be entitled to an award of reasonable
attorney fees and costs.” Id. at 6, § V.G. Defendants’ reading of the MOU as authorizing
attorney fees only where the breach “[was] done in bad faith, or [was] intentionally dilatory
or obstructive,” Response [#149] at 10, finds no support in the “material breach” provision,
the two attorney fee provisions, or elsewhere in the MOU.
Therefore, the Court finds that the MOU unambiguously allows Plaintiff to move
for (and the Court to award) attorney fees in the event of a material breach of the MOU.
Here, Mr. Horton found, and the Court agrees, that Defendants’ failure to produce
requested documents in 2023 caused material delay in his ability to complete the audit.
See Non-Compliance Letter [#120-2] at 4. This was a “material breach” of the MOU, which
allows for “an award of attorney fees and costs.” MOU [#105-2], §§ IV.9, 15.

16

Finally, Defendants’ failure to comply with the MOU plainly delayed resolution of
this lawsuit and led to additional litigation in the form of motions practice—Plaintiff had to
file a Motion to Enforce the MOU [#120]. The MOU plainly provides for attorney fees “[i]n
the event litigation arises out of or stemming from this Agreement.” Id. at 6, § V.G. The
Court finds that reasonable attorney fees are warranted arising from Defendants’ breach
of the MOU in 2023, pursuant to §§ IV.13 and V.G.
3.

Reasonableness

Having found that attorney fees are warranted pursuant to § IV.15 of the MOU, the
Court must consider what is reasonable. Plaintiff seeks $96,546.38 in fees and $1,695.77
in costs for “counsel’s billing for the months from November 2022 through April 2024.”
Motion [#143] at 6, ¶ 24. It argues that “all such fees are directly related to the discovery
abuses of the Defendants” and that there is a “reasonable nexus to the monies spent.”
Id. Defendants argue that Plaintiff’s submitted invoices are “woefully deficient to serve as
the basis for a demand of $98,242.15 in attorneys’ fees and costs” because they “mostly
include time entries with no rational relationship” to the MOU or Defendants’ alleged
breaches thereof. Response [#149] at 12 (emphasis in original).
The Court agrees with Defendants. Plaintiff cannot reasonably assert that every
hour of time billed on this case (and its companion case) since November 2022
reasonably arose from Defendants’ alleged breach in September 2023. The Court also
notes several obvious problems with Plaintiff’s submitted billing records that must be
addressed before the Court can determine a reasonable fee.
First, Plaintiff included some bills for work that was performed months or years
prior. For example, in the February 2023 billing period—which predates Defendants’
17

breach by seven months—Plaintiff’s counsel billed 1.75 hours for “Legal research and
prepared and filed memorandum on the issue of redactions to ECF No.’s 10-2 and 10-3
in accordance with the Court’s June 8, 2020, Order (ECF 31).” See Billing Entries [#1433] at 15. However, Plaintiff responded to the Minute Order [#31] just two days later, on
June 10, 2020. See Reply [#32]. The work identified in this time entry predated the MOU’s
execution by nearly three years. The same billing period included 4 hours for “Legal
Research,

prepared

and

filed

our

Reply

in

Opposition

to

[D.69]

Defendants/Counterclaimants/Third-Party Plaintiffs’ (“LabX Parties”) Response to
Movants’ [D.58] Motion to Extend Discovery Cutoff, Dispositive Motions, and Expert
Witness Disclosure and Rebuttal Expert Witness Disclosure Deadline[s.]” See Billing
Entries [#143-3] at 14. Plaintiff filed the relevant reply brief on April 26, 2022—one year
before the MOU was executed. See Reply [#71]. Of course, time spent on briefs filed in
2020 and 2022 cannot be reasonably attributed to Defendants’ breach of the MOU in
September 2023.
Second, Plaintiff argues that it is entitled to all fees and costs incurred “from
November

2022

through

April

2024”

but

it

inexplicably,

and

without

any

acknowledgement, also attached October 2022 billing entries totaling $10,327.50. See
Billing Entries [#143-3] at 3-4. This month of billing falls outside Plaintiff’s already
expansive time period and should not be included.
Third, Plaintiff has redacted several billing entries, which prevents the Court (or
Defendants) from knowing what they are for, whether they are reasonable, and whether
they are related to Defendants’ breach of the MOU. See, e.g., id. at 13 (fully redacted
entry for 1.5 hours), 15 (fully redacted entry for 1.5 hours), 40 (fully redacted entry for
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11.25 hours). In a particularly egregious example, Plaintiff’s counsel block-billed 42.10
hours in January 2023 for a partially redacted entry that states “[REDACTED] (Spent
week doing so for 3 hours per day. In person. 18 hours.) Helped formulate trial arguments
with expert as to issues of liability and narrow damages. (7 hours). [REDACTED] Sourced
and compared with bate stamped documents (8 hours).” Id. at 12. The Court cannot
determine what counsel spent these 42 hours doing, whether it was reasonable to spend
that much time, or whether those activities had anything to do with Defendants’ breach of
the MOU.
Plaintiff claims that, between October 2022 and April 2024, counsel spent over 213
hours on this case. See id. at 2. That may be so, but not all that time is reasonably
attributable to Defendants’ breach of the MOU. For example, “basic princip[le]s of linear
time” prevent the Court from attributing time spent between October 2022 and April 2023
selecting an auditor in this case to Defendants’ failure to provide Mr. Horton with
documents from May 2023 through September 2023. Cordova v. Aragon, 569 F.3d 1183,
1194 (10th Cir. 2009) (applying basic principles to question how conduct that occurred
after an alleged violation caused that violation). Given these concerns, the Court finds
that Plaintiff has not met its burden of showing that the requested $98,242 in costs and
fees are reasonable. Given the numerous glaring issues with Plaintiff’s submitted billing
records, the Court lacks sufficient information to conduct its own independent review.
Therefore, Plaintiff’s Motion [#143] is granted in part. The Court finds that Plaintiff
is entitled to reasonable attorney fees attributable to Defendants’ breach of the MOU.
However, the Motion [#143] is denied without prejudice in all other respects related to
the request for fees and costs. The Court will not grant any fees at this time because
19

Plaintiff has not supported and substantiated its request. The Court encourages Plaintiff
to address the deficiencies it has discussed here, namely: (1) inclusion of more than 100
billed hours that predate both the Engagement Letter and the MOU; (2) the inclusion of
October 2022 billing, which fell outside the already broad scope of time Plaintiff claims;
(3) redactions that make it impossible for the Court or Defendants to know what work was
performed; and (4) attempts to attribute all costs of litigation after September 25, 2023, to
the breach of the MOU, no matter how attenuated.
If Plaintiff would like the Court to award attorney fees, it must file a renewed motion,
after conferring with Defendants, that identifies and substantiates only those costs and
fees reasonably attributable to Defendants’ breach of the MOU. By way of example, this
may include any time and costs associated with moving to enforce the MOU and
participating at the June 12, 2024 Status Conference. Defendants will be permitted to
respond, to the extent they wish to challenge the reasonableness or amount of any fees.
Because the Court finds that Plaintiff should be awarded its fees and costs, the parties
need not (and should not) brief the issue of whether fees and costs should be awarded.
B.

Payment of Funds from Court Registry
Finally, the Court addresses Plaintiff’s request for payment of $5,000 from the

funds deposited into the Court’s Registry. See Motion [#143] at 7. 4
As already discussed, Defendants agreed to pay $10,000 in trust (either to the
Clerk of Court or to either party’s attorney’s trust account) “should the auditor’s report find

Plaintiff in the companion case, No. 20-cv-03514, has also requested payment of $5,000 from
the funds deposited into the Court’s Registry. See Motion for Sanctions [#114] at 7, Case No. 20cv-03514. Thus, Plaintiffs in both cases seek a total of $10,000 from the Court’s Registry.

4

20

that he could not properly complete the Audit.” MOU [#105-2] § IV.13. The MOU permits
Plaintiff in this case and the plaintiff in the companion case “to file an appropriate motion
before the court . . . seeking that the $10,000.00 placed in escrow pursuant to the terms
of this paragraph so that they shall be forthwith paid over to [Plaintiffs in both cases and
their counsel].” Id. Further, Defendants agreed “not to challenge this tendering and
release of funds in the event of such a breach if represented by the auditor.” Id.
At the June 12, 2024 Status Conference, the Court ordered Plaintiff to deposit
$10,000 (total for this case and the companion case, No. 20-cv-03514-DDD-KAS) into
the Court’s Registry, as contemplated by the MOU § IV.13, after finding that Defendants
breached the MOU. Courtroom Minutes [#141] at 1. In a July 22, 2024 Order [#148], the
Court ordered transfer of the $10,000 from the Court’s Registry to Mr. Horton as payment
of his retainer so he could resume and complete the audit and in order to facilitate the
“ultimate resolution of this case and the [companion case.]” Order [#148] at 3-4; see also
id. at 2 (noting that the MOU, § IV.7 requires Defendants to pay Mr. Horton’s retainer and
fees). The Court further stated that it “will require LabX Parties to replenish the funds in
the Court’s Registry by a date certain” because “(a) [those monies were] originally placed
in the Court’s Registry pursuant to § IV(13) of the MOU and (b) the Court has made no
findings as to how those MOU-required funds should ultimately be allocated[.]” Id.
On September 23, 2024, Defendants deposited another $10,000 into the Court’s
Registry. See Receipt [#153]. On October 15, 2024, during a status conference, the Court
and the parties discussed Mr. Horton’s latest invoice for time spent on the audit and
whether Defendants’ recently deposited funds should be used to pay Mr. Horton. See
Courtroom Minutes [#154] at 1; see also Minute Order [#155] at 2 (noting that Mr. Horton
21

had exhausted $9,600 of the $10,000 retainer and he requested an additional $5,000 to
complete the audit). Plaintiff argued that the monies in the Court Registry should be paid
to Plaintiff as sanctions for Defendants’ breach of the MOU. See Minute Order [#155] at
2. Defendants stated they would prefer to have the funds withdrawn from the Registry. Id.
Ultimately, the Court ordered that $5,000 be taken from the Court’s Registry to pay Mr.
Horton. Courtroom Minutes [#154] at 2; see also Minute Order [#155] at 2 (ordering
withdrawal of $5,000).
Mr. Horton completed his audit, and his final invoice reflected an additional $5,000
in fees. See Final Billing Record [#173]. 5 On February 10, 2025, the Court notified the
parties of Mr. Horton’s final billing, the amount of remaining funds in the Court Registry,
and that $5,000 will be drawn from the Registry to pay Mr. Horton for the audit’s
completion. Minute Order [#172] at 1-2. Additionally, the Court set a deadline for
Defendants to object to the disbursement of funds to Mr. Horton, see id. at 2, and the
deadline passed without any objections filed. Therefore, on February 24, 2025, the Court
ordered that $5,000 be withdrawn from the Registry and paid to Mr. Horton, leaving any
accrued interest. 6 Minute Order [#175]. As of the date of this Order, the Registry contains
$141.86 in interest. In total, Defendants paid $20,000 into the Court Registry, which funds
were used to achieve the audit’s completion, pursuant to the MOU’s requirement that
Defendants pay Mr. Horton’s retainer and fees. See MOU [#105-2], § IV.7 (“Defendants

Pursuant to court order, the Final Billing Record [#173] is filed under Level 1 restriction, which
limits access to the parties and the Court. See Minute Order [#172].

5

As of February 10, 2025, the Registry contained $132.48 in accrued interest. See Minute Order
[#172] at 1.

6

22

agree to timely remit payment to Mr. Horton, including payment of the retainer and any
applicable retainer refill requests”).
Pursuant to the MOU [#105-2] § IV.13, funds are placed in the Court Registry “for
the equal benefit of each Plaintiff in the two separate cases” and “are considered a
penalty” for Defendants’ non-compliance with the audit and breach of the MOU. MOU
[#105-2], § IV.13. As already discussed with respect to attorney fees, however, the MOU
does not require the Court to order payment of any Registry funds to Plaintiff. See id.
(contemplating Plaintiff’s filing a motion for payment of those funds to it); id. § V.A
(acknowledging the parties have no control over whether the court grants the requested
relief).
Moreover, penalty provisions are unenforceable on grounds of public policy
because “[t]he central objective behind the system of contract remedies is compensatory,
not punitive,” and “[p]unishment of a promisor for having broken his promise has no
justification on either economic or other grounds[.]” RESTATEMENT (SECOND) OF CONTS. §
356, cmt. a (AM. L. INST. 1981) (Oct. 2024 update); cf. Rohauer v. Little, 736 P.2d 403,
410 (Colo. 1987) (noting that stipulated liquidated damages that are “so disproportionate
to any possible loss” constitute a penalty); DBA Enters, Inc. v. Findlay, 923 P.2d 298, 303
(Colo. App. 1996) (stating, “a liquidated damages provision which amounts to a penalty
is not enforceable”); Clinger v. Hartshorn, 911 P.2d 709, 711 (Colo. App. 1996) (stating,
“a contract provision which purports to award a non-breaching party an asset valued at
substantially more than any actual damage may represent an unenforceable penalty
clause”). However, where a provision is unenforceable as a penalty, a court may award
actual damages. See Yerton v. Bowden, 762 P.2d 786, 788 (Colo. App. 1988) (remanding
23

for the trial court to determine actual damages for breach of contract if it determines the
liquidated damages provision is unenforceable as a penalty).
Here, the Court has already granted Plaintiff’s Motion [#143] to the extent it seeks
recoupment of fees and costs—i.e., actual damages—incurred as a result of Defendants’
breach of the MOU. The request of Plaintiff in this case and of the plaintiff in the
companion case for a combined total of $10,000 is on top of any fee and cost award and
is pursuant to the MOU’s expressly identified “penalty provision.” This requested sum
exceeds actual damages and contradicts the compensatory objectives that the system of
contract remedies provides. Therefore, the Motion [#143] is denied in part to the extent
it seeks payment of funds from the Court’s Registry pursuant to the MOU’s “penalty”
provision.
IV. Conclusion
Based on the foregoing,
IT IS HEREBY ORDERED that the Motion [#143] is GRANTED IN PART to the
extent that the Court finds Plaintiff is entitled to attorney fees and costs resulting from
Defendants’ breach of the MOU, pursuant to § IV.15 of the MOU. The Motion [#143] is
DENIED WITHOUT PREJUDICE in all other respects related to the request for fees and
costs. The Motion [#143] is DENIED IN PART to the extent it seeks payment of funds
from the Court’s Registry pursuant to the Memorandum of Understanding’s “penalty”
provision.
IT IS FURTHER ORDERED that, on or before March 26, 2025, after conferring
with Defendants, Plaintiff shall file a Motion for Attorney Fees along with amended billing
entries that address the deficiencies identified herein. On or before April 9, 2025,
24

Defendants may file a response challenging the amount or reasonableness of Plaintiff’s
requested fees. No reply brief will be permitted.
IT IS FURTHER ORDERED that the Court’s Financial Services shall remit all
accrued interest within the Registry to Nadav Aschner, Esq. of The Rodman Law Group,
LLC, as counsel for Defendants in this case and the companion case, Rifle Onion Co. v.
Hellman, No. 20-cv-03514-DDD-KAS, per instructions that Mr. Aschner shall separately
provide Financial Services.
IT IS FURTHER ORDERED that by March 19, 2025, Mr. Aschner shall provide
instructions to Financial Services for remittance of funds.

Dated: March 12, 2025

BY THE COURT:

Kathryn A. Starnella
United States Magistrate Judge

25