Merchant & Gould, P.C. v. Stephenson
Filing
85
ORDER denying 66 Motion to Alter/Amend/Supplement Pleadings(Written Opinion) Signed by Magistrate Judge David T. Schultz on 8/28/2019. (KAR)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
______________________________________________________________________
Merchant & Gould, P.C.,
Case No. 18-cv-1688 (JRT/DTS)
Plaintiff,
v.
ORDER
John Stephenson,
Defendant.
______________________________________________________________________
This is a breach of contract action for nonpayment of legal fees. Plaintiff
Merchant & Gould, P.C. (Merchant) moves to amend its complaint to add a new
defendant, Leonard Anderson, and three new claims entitled Joint Venture, Joint
Enterprise, and Third-Party Beneficiary. Revised Motion, Docket No. 66. Unlike the first
proposed amended complaint, the revised version does not seek to add any defendants
whose presence would destroy the Court’s diversity jurisdiction. Defendant John
Stephenson opposes the motion on the basis of futility, stating that Merchant’s
proposed amended complaint fails to plead facts that support its new legal claims. The
Court agrees and denies the motion.
FACTUAL BACKGROUND
Merchant sued Stephenson in Hennepin County District Court to recover
$944,654.40 in unpaid legal bills incurred in connection with patent infringement matters
including two lawsuits in which Stephenson was the sole named plaintiff. See Compl.,
Docket No. 1-1; Proposed Am. Compl. (PAC) ¶ 12, Second Chad Decl. Ex. A, Docket
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No. 69-1. Stephenson removed the case to this Court alleging federal jurisdiction based
on diversity of citizenship. Notice of Removal, Docket No. 1.
On March 14, 2019 Merchant moved to amend its complaint seeking to add
additional claims and defendants. Motion to Amend, Docket No. 33. However, its
proposed amended complaint did not properly plead the citizenship of several potential
additional defendants, whose joinder could have destroyed the Court’s diversity
jurisdiction. Chad Decl. Ex. A (original proposed amended complaint), Docket No. 37-2.
In response to the Court’s direction, the parties filed a Joint Statement on April 25, 2019
in which they acknowledged that granting Merchant’s then-current motion to amend
would destroy complete diversity because three proposed defendants – Mega Internet
Tournaments, L.L.C., Internet Tournament Games, Inc., and GoldenCare USA, Inc. –
are citizens of Minnesota. Docket No. 56.
On May 13, 2019 the Court found the existing motion to amend would deprive
the Court of subject matter jurisdiction and ordered Merchant to inform the Court
whether it wanted a ruling on that motion as presented or whether it intended to file a
revised motion. Order, Docket No. 64. On May 20, 2019 Merchant filed a revised motion
to amend that named Leonard Anderson, a Nevada resident, as the only additional
defendant, thereby preserving complete diversity of citizenship. Docket No. 66.
In its revised Proposed Amended Complaint (PAC), Merchant alleges that
Stephenson signed a Retainer Agreement dated June 1, 2011 for legal services with
Merchant to pursue patent enforcement litigation. PAC ¶ 8-11, Second Chad Decl. Exs.
A, B, C, and D, Docket No. 69-1. Stephenson owns the patent and was the sole named
plaintiff in the two patent lawsuits. Id. ¶¶ 11-12. Merchant asserts that Anderson and
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Stephenson were engaged in a joint venture or enterprise to prosecute the patent
infringement matters. Id. ¶ 15. It alleges Anderson agreed to pay some of Stephenson’s
legal fees in exchange for a share of any profits from the litigation, and that it was an
intended third-party beneficiary of this agreement. Id. ¶¶ 16, 47-51. Merchant states
that, after being retained by Stephenson, it “began providing legal services at the
direction of Defendant John Stephenson and Defendant Leonard Anderson for their
benefit.” Id. ¶ 12.
To support its claims of joint venture, joint enterprise, and third-party beneficiary,
Merchant alleges:
Upon information and belief, both Mr. Stephenson and Mr.
Anderson were contributing money, property, time, and/or skill under an
express or implied agreement whereby they exercised joint proprietorship
and control, and shared or hoped to share profits, in a joint venture or
enterprise with respect to the [Retainer] Agreement. Defendants’ intent to
share profits is demonstrated by an email from Defendant Stephenson
from Defendant Anderson on July 13, 2011. This email, produced by
Defendant Stephenson, provides for Defendant Anderson to share in the
revenues of Defendants’ efforts to enforce the ‘237 patent.
Defendants, individually and collectively, have disregarded any
distinctions between them and commingled their funds as relevant to the
payment of services under the [Retainer] Agreement. For example, Mr.
Stephenson acted as the sole owner of the ‘237 patent in all pertinent
Patent Office proceedings and as the sole individual plaintiff in the
litigations. Despite this, Mr. Anderson, individually or as CEO of
GoldenCare USA, Inc., at various times, treated invoices submitted by
[Merchant] under the [Retainer] Agreement as his own, having paid the
invoices by check directly to [Merchant] (and in many cases referenced
the invoice numbers on the checks). Moreover, Mr. Stephenson and Mr.
Anderson both participated in decisions relating to litigation strategy in
connection with the ‘237 patent.
Id. ¶¶ 16-17.
Merchant states that “[o]n at least one occasion, Defendant Leonard G.
Anderson personally made payment to Plaintiff for legal services provided under the
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[Retainer] Agreement,” “[o]n at least a dozen occasions, GoldenCare USA, Inc. made”
such payments, and “[u]pon information and belief, Mr. Anderson was the Chief
Executive Officer of GoldenCare USA, Inc., at the time” the payments were made. Id. ¶¶
13-14. Merchant claims this conduct “has created a joint liability [between Anderson and
Stephenson] for the sums due to [Merchant] under [its Retainer] Agreement [with
Stephenson].” Id. ¶ 18.
DISCUSSION
I.
Rule 15 Standard
Under Federal Rule of Civil Procedure 15(a), a court should freely give leave to
amend a complaint when justice so requires. The decision whether to grant leave to
amend is entrusted to the sound discretion of the district court. Niagara of Wis. Paper
Corp. v. Paper Indus. Union–Mgmt. Pension Fund, 800 F.2d 742, 749 (8th Cir. 1986).
There is no absolute right to amend, and a court may deny the motion in circumstances
such as when the amendment will cause or is the result of undue delay, bad faith,
dilatory motive, repeated failure to cure deficiencies in previous amendments, undue
prejudice to the non-moving party, or futility. Baptist Health v. Smith, 477 F.3d 540, 544
(8th Cir. 2007).
“Denial of a motion for leave to amend on the basis of futility means the district
court has reached the legal conclusion that the amended complaint could not withstand
a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure.” Zutz v.
Nelson, 601 F.3d 842, 850 (8th Cir. 2010) (internal quotation marks omitted). Thus, in
assessing futility under Rule 15, all well-pleaded factual allegations in the proposed
amended complaint must be accepted as true. Butler v. Bank of Am., N.A., 690 F.3d
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959, 961 (8th Cir. 2012). However, mere “labels and conclusions” or “a formulaic
recitation of the elements of a cause of action” need not be credited. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007)). The well-pleaded factual allegations must nudge the complaint over the line
from the merely possible to the plausible. See id. (citing Twombly, 550 U.S. at 556-57).
In determining whether a plaintiff has stated a plausible claim, the Court considers only
the materials that are necessarily embraced by the pleadings and exhibits attached to
the complaint. Cox v. Mortgage Elect. Registration Sys., Inc., 685 F.3d 663, 668 (8th
Cir. 2012); see also Kushner v. Beverly Enterprises, Inc., 317 F.3d 820, 831 (8th Cir.
2003) (court may consider the complaint and documents whose contents are alleged in
a complaint and whose authenticity no party questions, but which are not physically
attached to the pleading).
II.
Analysis
A.
The Retainer Agreement
Merchant’s own allegations state that its written contract for legal services is only
with Stephenson, not Anderson or any other person or entity. See Compl. ¶¶ 5-6 and
Ex. B (signed Retainer Agreement) 1, Docket No. 1-1; PAC ¶¶ 5, 8-11 and Exs. B, C, D,
Docket No. 69-1; see also Oct. 10, 2018 Order Denying Stephenson’s Motion to
Dismiss, at 2, 8 (“The language of the Retainer unambiguously names Stephenson as
Merchant’s client in the Infringement Matter.”), Docket No. 22; Stephenson Decl. (June
26, 2018) ¶ 4 (“I entered into a retainer agreement with Merchant & Gould P.C. which is
1
The signed Retainer Agreement is attached as Exhibit B to both the original complaint
[Docket No. 1-1 at 18-23] and the proposed amended complaint [Docket No. 69-1 at 2931, 35-37].
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dated June 1, 2011, for legal services regarding a patent infringement matter venued in
Oklahoma.”), Docket No. 4. 2
The Retainer Agreement is addressed only to Stephenson, is signed only by
Stephenson, and identifies “you”, i.e., Stephenson, as the “Client” in connection with
patent infringement matters involving the ‘237 Patent. See Retainer Agreement at 1, 3,
Compl. Ex. B, Docket No. 1-1. The “Standard Terms of Representation,” which are
expressly incorporated into the Retainer Agreement, state that it is the Client’s
responsibility to pay for the legal services and to “direct the strategic and management
decisions affecting the subject matter of our representation.” Id. at 2, 4-5. Neither
Anderson nor any other person or entity is named or referred to in the Retainer
Agreement.
Merchant nonetheless asserts that Anderson breached the Retainer Agreement
by not paying Stephenson’s legal fees. PAC ¶¶ 19, 25-26, Docket No. 69-1. It alleges
the existence of a “joint venture or enterprise” between Stephenson and Anderson and
that Merchant is a “third-party beneficiary.” Id. ¶¶ 15-16, 40-42, 44-46, 48-51. Merchant
does not claim there is any written joint venture agreement, or any other written
agreement, between Stephenson and Anderson that identifies Merchant as an intended
third-party beneficiary. Rather, it points to conduct, specifically, that Anderson and his
company, GoldenCare USA, Inc., paid some of Stephenson’s legal fees, that Anderson
“participated in in-person meetings, telephone conferences, and email exchanges
2
The issue of who is Merchant’s client first arose when Stephenson unsuccessfully
moved to dismiss this lawsuit for lack of personal jurisdiction over him. In opposing the
present motion to amend, Stephenson again contends he is not Merchant’s client and
submits an earlier version of the retainer agreement that names Mega Internet
Tournaments, LLC as the client, which he signed as manager of the LLC. See
Stephenson Decl. (Mar. 21. 2019) ¶ 4 and Ex. A, Docket Nos. 49, 49-1.
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relating to the federal lawsuits and appropriate strategy” and “in decisions relating to
litigation strategy,” and that Stephenson and Anderson intended to share in any
recovery obtained as a result of the two patent lawsuits. Id. ¶¶ 12-17.
B.
Third-Party Beneficiary
“A nonparty becomes legally entitled to a benefit promised in a contract . . . only
if the contracting parties so intend.” Syngenta Seeds, Inc. v. Bunge North America, Inc.,
773 F.3d 58, 64 (8th Cir. 2014) (quoting Astra USA, Inc. v. Santa Clara Cnty, Cal., 563
U.S. 110, 117 (2011)); see also Hickman v. SAFECO Ins. Co. of Am., 695 N.W.2d 365,
369-70 (Minn. 2005) (third party may enforce a contract as an intended beneficiary if
recognition of third-party beneficiary rights is “appropriate” and either the “duty owed” or
“intent to benefit” test is met). Mere knowledge by the contracting parties that a third
party would profit from their contract is not the same thing as their intending that he
benefit from it. See Hibbs v. K-Mart Corp., 870 F.2d 435, 441 (8th Cir. 1989) (landowner
was not third-party beneficiary of sublease agreement).
Merchant has not pleaded facts to plausibly establish it was an intended
beneficiary of any contract between Stephenson and Anderson. First, Merchant does
not plead that there is any written contract between Stephenson and Anderson. Thus,
there is no language for the Court to examine to determine whether it manifests an
intent that Merchant be able to enforce the purported contract as a third-party
beneficiary. Cf. Hickman, 695 N.W.2d at 370-71 (express language in insurance
contract established the parties intended to give a borrower such as plaintiff, though not
identified by name, the benefit of some of the promised insurance proceeds); Nassar v.
Chamoun, Case A11-793, 2012 WL 426595, at *2 (Minn. Ct. App. Feb. 13, 2012)
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(purchase agreement between homeowner and developer lacked “an express
manifestation of intent, or anything else in the contract indicating intent to benefit
neighboring homeowners” who therefore were “at best, incidental beneficiaries” and
were precluded from enforcing the agreement).
Second, Merchant cites no caselaw in which a nonparty has enforced an oral
contract as a third-party beneficiary. It presents no authority to guide the Court on how
to infer contractual intent in the circumstances here. Merchant has not pleaded any
statement, written or oral, by Stephenson or Anderson that expresses their intention to
make Merchant a third-party beneficiary of a purported contract between them, thus
making Anderson legally obligated to Merchant to pay the patent litigation fees. Instead,
Merchant asserts that Anderson agreed to pay Stephenson’s legal fees in return for a
share in the profits of the litigation. By itself, however, that agreement is not sufficient to
plead a plausible claim for third-party beneficiary. Though it establishes that
Stephenson and Anderson intended to benefit each other, as to Merchant it merely
establishes that Merchant would also benefit from the arrangement. See Hibbs, 870
F.2d at 441.
Merchant also appears to assert that the intent to benefit Merchant can be
inferred from Stephenson’s and Anderson’s conduct in creating a joint venture or joint
enterprise. But the failure to plead a plausible claim for intended third-party beneficiary
cannot be cured by recasting the allegation as one for joint venture or joint enterprise.
Nor has Merchant pleaded a plausible claim for joint venture or enterprise as a standalone cause of action (if there is such a thing) because its pleading fails to allege (other
than conclusorily) the element of control that is critical to both doctrines.
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C.
Joint Enterprise and Joint Venture
Merchant alleges that Stephenson’s and Anderson’s “conduct has created a joint
liability among them for the sums due to Plaintiff under the [Retainer] Agreement” [PAC
¶ 18] and purports to plead “causes of action” for Joint Venture and Joint Enterprise [id.
¶¶ 15-18, 39-46]. But neither doctrine is properly invoked here to hold Anderson “jointly
and severally liable” for Stephenson’s alleged breach of the Retainer Agreement that
Anderson did not sign, that does not name Anderson as a third-party beneficiary, and
that expressly disavows any obligation by Merchant to anyone but Stephenson.
A joint enterprise exists when (1) two or more persons have a mutual
understanding for a common purpose, and (2) each has a right to a voice in the
direction and control of the means used to carry out their common purpose. Delgado v.
Lomar, 289 N.W.2d 479, 482 (Minn. 1979). A joint venture exists when two or more
parties have a relationship that contains the following elements: (1) the parties must
combine their money, property, time, or skill in a common undertaking, (2) each party
must have ownership of the property involved in the venture and the mutual right of
control over that property, (3) there must be an express or implied agreement to share
profits but not necessarily losses, and (4) there must be a contract, either express or
implied, showing that the parties in fact formed a joint venture. Meyers v. Postal Finance
Co., 278 N.W.2d 614, 617-18 (Minn. 1979) (citing Rehnberg v. Minnesota Homes, 52
N.W.2d 454, 457 (1952)).
Merchant alleges that the purpose of the joint venture or enterprise was to retain
Merchant to pursue the two patent infringement lawsuits. PAC ¶¶ 40-42, 44. It states
that Anderson (or his corporation) paid some of Stephenson’s legal fees directly to
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Merchant; that he participated in some meetings, emails, and telephone conferences
regarding the two lawsuits, including litigation strategy and decision-making; and that he
and Stephenson intended that Anderson share in any money recovered if the lawsuits
were successful. Id. ¶¶ 12-17.
Merchant does not plead that it had an attorney-client relationship with Anderson.
By its own allegation, Merchant knew Anderson not only paid some of its fees but also
participated in decisions relating to litigation strategy. Id. ¶ 17. If Merchant had wanted
Anderson to be legally liable for payment of fees, it could have protected itself by either
revising its Retainer Agreement with Stephenson (which it had already done once) or by
contracting directly with Anderson. It did neither. Instead, Merchant in essence seeks to
impose on Anderson the rights and obligations of a client – to control the litigation and
pay the legal fees – by asserting its “joint venture” and “joint enterprise” theories while
also pleading the seemingly obvious fact that Stephenson alone was its client. But the
tenets of contract law and the rules governing attorney-client relationships are not so
easily evaded, nor are the requirements for a joint venture or enterprise so easily
stretched to fit the circumstances here.
The fact that Anderson paid some of the legal fees or may have benefited from
the legal services does not establish an attorney-client relationship or give Anderson the
independent right to control litigation strategy or decision-making. See McIntosh County
Bank v. Dorsey & Whitney LLP, 745 N.W.2d 538, 549 (Minn. 2008) (discussing contract
theory of an attorney-client relationship). To the contrary, the Minnesota Rules of
Professional Conduct are clear that a “lawyer shall not permit a person who . . . pays
the lawyer to render legal services for another to direct or regulate the lawyer’s
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professional judgment in rendering such legal services.” Minn. R. Prof. Conduct 5.4(c)
(“Professional Independence of a Lawyer”); see also Rule 1.8(f) (third party’s payment
of client’s legal fees shall not interfere with the lawyer-client relationship or the lawyer’s
professional judgment).
As a non-client, Anderson (or any third party) had no right to control the litigation.
Merchant’s Retainer Agreement with Stephenson states:
As discussed, you will be our client in this matter, hereafter referred to as
“you” or the “Client.” You have agreed that our representation of you in
the matter described below does not give rise to a lawyer-client
relationship between our firm and any other company. . . . If, however,
you enter an agreement with another company related to licensing or
enforcement of the patent, please let us know.
***
Standard Terms of Representation
. . . Unless modified in writing by mutual agreement, these terms will be an
integral part of our agreement with you. . . .
***
Client Responsibilities. You agree to pay our statements for services
and expenses as provided below. . . . You also will assist us by making
business, strategic, and technical decisions appropriate to enable
completion of the work and performance of the services, and will direct
the strategic and management decisions affecting the subject matter
of our representation. . . .
***
Insurance Coverage. If the services we are engaged to perform relate to
the defense of your intellectual property rights, your CGL or other liability
insurance may provide some reimbursement for the associated legal fees.
. . . It is your responsibility to pay the firm for services rendered and to
obtain reimbursement from the insurer.
Payment of Statements. . . . If any statement remains unpaid for more
than 90 days, we may suspend performing services for you . . . and []
assess interest . . . for any unpaid balance. . . .
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***
Termination of Engagement. . . . Such termination shall not, however,
relieve you of the obligation to pay for all services already rendered . .
..
Retainer Agreement at 1, 4-6 (emphasis added), Docket No. 1-1.
Whether Stephenson acquiesced to Anderson’s influence, heeded his advice, or
deferred to his judgment regarding the litigation does not change the fact that, under the
facts pleaded by Merchant, including the Retainer Agreement attached to its pleading,
Anderson did not have the legal right to control the “strategic and management
decisions affecting the subject matter of [Merchant’s] representation” in the two patent
lawsuits. Merchant has not pleaded any plausible contract-based claims against
Anderson.
Merchant’s allegations of “joint venture” and “joint enterprise” regarding the
conduct of Anderson and Stephenson do not save its proposed amendment. Given that
the purported joint venture or enterprise was the litigation itself, Merchant’s factual
allegations fail to satisfy the element of “control” that is required for both doctrines. See
Dorsey & Whitney LLP v. Grossman, 749 N.W.2d 409, 416 (Minn. Ct. App. 2008)
(exercise of substantial influence over decisions does not amount to joint control for
purposes of joint venture analysis); Goodbye Vanilla, LLC v. Aimia Proprietary Loyalty
U.S. Inc., 304 F. Supp. 3d 815, 822-24 (D. Minn. 2018) (applying Minnesota law) (no
joint venture where plaintiff did not identify facts to show defendant had authority to
make independent decisions about the endeavor or exercise control over it). The
allegations also fail to satisfy the joint venture requirement that each party must own the
property in the venture and have mutual right of control of it. Here, the property or
12
subject matter of the purported venture is the patent and the patent infringement
litigation, and the PAC clearly states that Stephenson owns the patent and was the sole
plaintiff in the two lawsuits.
Though the control element of “joint enterprise” is worded differently than the
control element of a “joint venture,” the end result is the same. In the context of joint
enterprise the element is described as “a right to a voice in the direction and control of
the means used to carry out the common purpose.” See Delgado, 289 N.W.2d at 482.
Simply stated, even if both Stephenson and Merchant allowed Anderson to voice
opinions regarding the direction and control of the litigation, the fact remains that
Anderson was not a client of the firm. As such, he had no right to any voice in the
direction or control of the litigation. Merchant’s Retainer Agreement reflects its
awareness that its duty extends only to its client and not to third parties, even those who
may provide funds for the litigation. As the Retainer Agreement makes clear, if
Stephenson and Anderson had disagreed over the course of the litigation, only
Stephenson had the right to control and direct the litigation. Without an independent
right to control the venture or enterprise, this control element is not met. 3
Other courts have rejected “joint venture” arguments in analogous cases
involving payment disputes between contracting parties. For example, in Ringier v. Land
O’Lakes, Inc. the Eighth Circuit held that the plaintiff printer, which contracted with a
publisher to provide printing services, failed to establish the existence of a joint venture
between the publisher and its customer, and the printer could not recover from the
3
Nor has Merchant alleged any facts (much less identified any writing) to establish that
Stephenson gave Anderson a contractual right to a voice in the control of the litigation.
The mere fact that Anderson paid some fees is not sufficient, as that may only have
been the quid pro quo for a share in the profits of litigation controlled by Stephenson.
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customer the publisher’s debt owed to the plaintiff for printing services. 106 F.3d 825,
827-29 (8th Cir. 1997) (applying Minnesota law). The fact that the publisher received a
share of the customer’s profits as part of its publishing fee, that the customer made a
direct payment to the printer, and that the customer benefited from the printing services
did not create a joint venture in the particular facts of that case. Id. at 828-29. In a
reverse scenario, the Minnesota Court of Appeals in Dorsey & Whitney LLP v.
Grossman rejected a “joint venture” theory asserted by clients who failed to pay legal
fees to their patent lawyers. There, the clients appealed money judgments against them
by arguing that their relationship with the law firm was a joint venture not subject to the
attorney-lien statute. 749 N.W.2d at 415-17. Though not identical to those cases, the
facts pleaded by Merchant here also fail to establish a joint venture or joint enterprise
between Anderson and Stephenson that would support making Anderson liable to
Merchant for payment of Stephenson’s legal fees.
III.
Conclusion
Merchant has not pleaded facts sufficient to state a plausible claim that it is an
intended third-party beneficiary of any contract between Stephenson and Anderson.
Merchant’s joint venture and joint enterprise theories fail, as Anderson was not its client,
did not own the patent, and had no legal right to control Merchant’s handling of the two
patent lawsuits. In addition, the Court notes that Merchant has not made any argument
that specifically relates to adding Anderson to its existing claim against Stephenson for
“unjust enrichment.” Therefore, Merchant’s proposed amended complaint is denied as
futile.
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CONCLUSION
IT IS HEREBY ORDERED that Plaintiff’s Motion for Leave to Amend its
Complaint [Docket No. 66] is DENIED.
Dated: August 28, 2019
s/ David T. Schultz
DAVID T. SCHULTZ
United States Magistrate Judge
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