Mitochon Practice Management Systems v. Healthcare Technology Alliance et al

Filing 67

MEMORANDUM DECISION granting 63 Motion to Withdraw and Memorandum in Support of Motion to Withdraw Deemed Admissions. Signed by Judge Dale A. Kimball on 7/21/2014. (jds)

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IN THE UNITED STATES DISTRICT COURT
CENTRAL DIVISION, DISTRICT OF UTAH
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MITOCHON PRACTICE
MANAGEMENT SYSTEMS, LLC, a
California limited liability company,
Plaintiff,

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Civil No. 2:13-cv-00177
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v.
HEALTHCARE TECHNOLOGY
ALLIANCE, LLC, a Utah limited liability
company; RICHARD J. NIELSEN, an
individual; R. J. NIELSEN FAMILY
PARTNERSHIP, LLC, a Utah limited
liability company; AKAMIA PRACTICE
MANAGEMENT, LLC, a Hawaii limited
liability company MEDTRAK DATA
SYSTEMS, INC., a Texas corporation;
VALLI INFORMATION SYSTEMS, INC.,
an Idaho corporation; ROBERT PUTNAM,
an individual; MARK SERVICE, an
individual; ROBERT JENKINS, an
individual,

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MEMORANDUM DECISION &
ORDER
DISTRICT COURT JUDGE
DALE A. KIMBALL

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MAGISTRATE JUDGE
DUSTIN B. PEAD

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Defendants.
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Currently before this Court is Defendants and cross claimants Richard Nielsen
(“Nielsen”) and the R. J. Nielsen Partnership (“Nielsen Partnership”) (collectively,

“Defendants”) motion to withdraw admissions (doc. 63).1 The court has carefully reviewed the
memoranda submitted by the parties. Pursuant to civil rule 7-1(f) of the United States District
Court for the District of Utah Rules of Practice, the court elects to determine the motion on the
basis of the written memoranda and finds that oral argument would not be helpful or necessary.
See DUCivR 7-1(f).2
I. Background
Plaintiff Mitochon Practice Management Systems, LLC (“Plaintiff”) is a business
involved in the healthcare industry. In 2012, Plaintiff began negotiations with Defendant
Healthcare Technology Alliance (“Healthcare Technology”) for the purchase of “practice
management” system software--a comprehensive electronic billing system for healthcare
providers (doc. 2, ¶¶ 16-18).3 Healthcare Technology is a Utah based health care software
provider owned by Defendant Akamai Practice Management, LLC, Defendant MedTrak Data
Systems, Inc., and Defendant Valli Information Systems, Inc. (doc. 2, ¶5). At the time of
Plaintiff’s negotiations with Healthcare Technology, Defendants were also named owners of the
company (doc. 63).
Despite negotiations, the parties were unable to reach an agreement and Healthcare

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Nielsen is the managing member of Nielsen Partnership (doc. 2, ¶3). Based upon
Nielsen’s status as an individual and Nielsen Partnership’s status as a business entity, the court
recognizes each defendant’s varied involvement in the case. However, despite minor factual
nuances, for purposes of this ruling and overall ease of understanding, the court shall refer to
Nielsen and Nielsen Partnership collectively as Defendants throughout.
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This matter is before Magistrate Judge Dustin Pead pursuant to a 28 U.S.C.
§636(b)(1)(A) referral from District Court Judge Dale Kimball (doc. 64).
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As set forth in the complaint, negotiations on Plaintiff’s behalf were conducted by its
affiliate and promoter Mitochon Systems, Inc. (“MSI”) ( doc. 2, ¶16).
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Technology declined to sell Plaintiff the practice management software. Thereafter, Defendants
informed Plaintiff that, as a member of Healthcare Technology and as set forth under the terms of
company’s Operating Agreement (“Operating Agreement”), they could withdraw as a member of
the company and transfer their interest in the practice management software, along with the
associated source code, to Plaintiff (doc. 2, ¶19).4
Accordingly, on October 9, 2012, Plaintiff and Defendants entered into a IT Purchase
Agreement (“IT Agreement”) (doc. 2-2). Under the terms of the IT Agreement, Plaintiff agreed
to pay for the assignment of Defendants’ interest in the practice management software and source
code (doc. 2, ¶22).5 Specifically, under section 2.A of the agreement, Defendants’ warranted that
they “possess[ed] the non-exclusive right and authority to sell, transfer and assign the Intellectual
Technology and the associated source code. . . ” (doc 2-2). However, despite the terms of the
agreement, Defendants ultimately failed to perform their obligation to deliver the software and
source code to Plaintiff (doc. 2, ¶25).
Plaintiff asserts that Defendants’ failure to deliver the assignment of interest was based
upon the remaining members of Healthcare Technology’s anticipatory breach of the company’s
Operating Agreement “by expressly repudiating any obligation to deliver the [software] and the

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In relevant part, the Healthcare Technology Operating Agreement states:

“No withdrawing Member shall have any rights to any assets of the Company
other than a withdrawing Member shall be entitled to receive complete,
non-exclusive rights to all software intellectual property that has been developed
by the Company as of the date of withdrawal including the current version of the
source code, documentation and ancillary intellectual property that may be
required for its use.” (doc. 21-1).
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Pursuant to Section 4 of the IT Agreement, Plaintiff agreed to make an initial payment of
$110,00 and several subsequent payments of $50,000 to Defendants (doc. 2, ¶23).
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Source Code upon withdrawal, and thus denying [Defendants] access to the Source Code.” (doc.
2, ¶27). Plaintiff further alleges that Healthcare Technology’s motivation in breaching and
retroactively amending the terms of the Operating Agreement was to prevent the Defendants
from assigning the software to Plaintiff under the terms of their IT Agreement (doc. 2, ¶¶28-30).
On March 12, 2013, Plaintiff filed its complaint charging Defendants with breach of the
parties IT Agreement and seeking specific performance thereof (doc. 2).6 On May 3, 2013,
Defendants filed a cross-claim against the other named defendants, including Healthcare
Technology, alleging breach of the Operating Agreement, interference with prospective contract
and breach of fiduciary duties (doc. 21).
On April 14, 2014, Healthcare Technology served Defendants with their First Set of
Discovery Requests, including twenty (20) requests for admission (doc. 65-2). Defendants’
responses to the requests for admission were due thirty (30) days from service, or by May 19,
2012. Defendants failed to meet the thirty day deadline, instead simultaneously filing their
responses (doc. 65-1) and currently pending motion to withdraw admissions (doc. 63) on June
18, 2014.7 In their responses, Defendants admit requests 3, 5, 6, 7, 8, 13, 15 and 16, and deny
requests 1, 2, 4, 9, 10, 11, 12, 14, 17, 18, 19 and 20 (doc. 65-1).

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Plaintiff alleges additional causes of action against the other named defendants for
intentional interference with contractual relations, and intentional interference with prospective
economic advantage (doc. 2).
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Although not relevant under Rule 36, Defendants offer, by way of explanation for their
untimely responses, that attorney Ken Johnsen became suddenly and unexpectedly ill and that
attorney Bryan Fishburn was unable to take over the case until sometime after the admissions
were due (doc. 66).
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II. Analysis
Pursuant to Federal Rule of Civil Procedure 36(a)(3) a request for admission “is admitted
unless, within 30 days after being served, the party to whom the request is directed serves on the
requesting party a written answer or objection . . .” Fed. R. Civ. P. 36 (a)(3). Once a matter is
admitted,
it is conclusively established unless the court, on motion, permits the admission to
be withdrawn or amended. Subject to Rule 16(e), the court may permit withdrawal
or amendment if it would promote the presentation of the merits of the action
and if the court is not persuaded that it would prejudice the requesting party in
maintaining or defending the action on the merits.
Fed. R. Civ. P. 36(b). Thus, as set forth under the rule, amendment or withdrawal is permitted
when “(1) it would promote the presentation of the merits of the action and (2) if the court is not
persuaded that it would prejudice the requesting party in maintaining or defending the action on
the merits.” Questar Exploration & Production, Co. v. Lambeth, 2:08-cv-455-TS, 2009 U.S.
Dist. LEXIS 117673, at *4 (D. Utah Dec. 17, 2009 ) (unpublished). The court discusses each of
these factors herein.
1. Merits Of The Action
Under the first factor, the court focuses on “the importance of having the action resolved
on the merits, and is satisfied when upholding the admissions would practically eliminate any
presentation of the merits of the case.” Raiser v Utah County, 409 F.3d 1243, 1246 (10th Cir.
2005) (citing, Perez v. Miami-Dade County, 297 F.3d 1255, 1265 (11th Cir. 2002) (internal
quotation and citation omitted)). Defendants argue that withdrawal of the admissions is
imperative to its presentation of its case, and that absent withdrawal Defendants can not have a
fair trial (doc. 63). Despite Healthcare Technology’s claims to the contrary (doc. 65), the court
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agrees and concludes that the admissions go to heart of Defendants’ case and directly effect the
merits of the action.
In failing to timely respond to the requests, Defendants admitted matters directly related
to Healthcare Technology’s claim that Defendant was not a “member in good standing” prior to
its withdrawal from the company. Specifically, under Healthcare Technology’s Operating
Agreement, any entitlement to software rights by a withdrawing member is contingent upon the
member’s “good standing of the Company for no less than six consecutive months immediately
preceding the date of withdrawal and settlement in full by the withdrawing member of any
outstanding indebtedness to the Company. . .” (doc. 21-1). Thus, by admitting a failure to
maintain good standing or the existence of a debt, Defendants’ claim that Healthcare Technology
wrongfully breached the Operating Agreement and failed to provide Defendants their rightful
interest in the software could be compromised.8
Accordingly, the Court finds that the admissions at issue concede core elements of
Defendants’ case and that the merits of the action will be subserved by withdrawal of the
admissions.

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By way of example, deemed admissions that could support a failure to be a member in
good standing include admissions that Defendants: did not make a capital contribution (Request
For Admission No.1), did not pay additional capital calls (Request For Admission No. 2), failed
to forward documents to other Healthcare Alliance members (Request For Admission No. 4),
participated in negotiations regarding the sale of the source code between July 10, 2012, and
August 29, 2012 (Request For Admission No. 9), deceived Healthcare Alliance members
concerning negotiations with Plaintiff (Request For Admission No. 10), did not possess a
contractual right to the source code (Request For Admission No. 11), did not pay outstanding
indebtedness to Healthcare Technology, acknowledged that the sale of software to Plaintiff
would be detrimental to the interests of Healthcare Technology (Request for Admission No. 14)
and owed Healthcare Technology $103,920.12 as of the date of its withdrawal (Request for
Admission No. 19) (doc. 65-1).
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2. Prejudice
The second factor focuses on the issue of prejudice. “The party who obtained the
admission (here, the plaintiff) bears the burden of demonstrating to the court that withdrawal of
the admission will [cause prejudice]. . .” Ropfogel v. U.S., 138 F.R.D. 579, 582 (D. Kan. 1991).
By way of instruction, the Tenth Circuit provides, “[m]ere inconvenience does not constitute
prejudice for this purpose. ‘The prejudice contemplated by Rule 36(b) is not simply that the party
who obtained the admission now has to convince the jury of its truth. Something more is
required.’” Raiser v. Utah County, 409 F.3d 1243, 1246 (10th Cir. 2005) (quoting Bergmann v.
United States, 820 F.2d 1117, 1121 (10th Cir. 1987)). Rather, “‘[t]he prejudice contemplated by
Rule 36(b) . . . relates to the difficulty a party may face in proving its case, e.g., caused by the
unavailability of key witnesses, because of the sudden need to obtain evidence with respect to the
questions previously deemed admitted.’” Id. (quoting, Hadley v. United States, 45 F.3d 1345,
1348 (9th Cir. 1995)).
Healthcare Technology asserts that it will be prejudiced if the deemed admissions are
withdrawn because at this late juncture it is unable to conduct follow up discovery or serve
additional production requests based upon Defendants’ denials (doc. 65). Under the parties’
original scheduling order, the fact discovery deadline was set for May 28, 2014 (doc. 61).
Healthcare Technology’s opposition, however, references a informal stipulation between the
parties agreeing to extend the deadline to June 30, 2014 (doc. 65, p.2).9 Given the parties’
informal stipulation, along with Healthcare Technology’s ability to file a formal motion

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The docket does not reflect the submission of a stipulated amended scheduling order
filed with the court.
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requesting an extension to conduct limited follow up discovery, the court finds that the prejudice
alleged does not outweigh the court’s interest in resolving the underlying dispute on its merits.
See Questar Exploration & Production v Lambeth, 2:08-cv-455-TS, 2009 U.S. Dist. LEXIS
117673, at *7 (D. Utah Dec. 17, 2009 ) (unpublished) (“the need to expend additional time and
resources to conduct additional discovery to convince the jury of its claim, without more, is not
the kind of prejudice contemplated by Rule 36(b)).
Accordingly, for the reasons now stated herein, Defendants’ motion to withdraw deemed
admissions is GRANTED.

IT IS SO ORDERED.

DATED this 21st day of July, 2014.

BY THE COURT:

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Dustin B. Pead
U.S. Magistrate Judge

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