Free Trial Brief - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 03-CV-2341-RPM-MJW LEGACY MANUFACTURING, LLC, Plaintiff, vs. STEVE BODEN, DANIEL W. LOYER, MVM PRODUCTS, LLC, and JOHN DOES 1 THROUGH 10, Defendants. DEFENDANTS' TRIAL BRIEF Defendants, by their undersigned counsel, submit the following Trial Brief: I. Legacy cannot establish a claim for breach of contract or fiduciary duty under the LLC agreement because the agreement expressly allows competition by managers of the LLC and because members of the LLC owe no duty not to compete with the LLC. A. Elements of claim for breach of contract.

The elements of a claim for breach of contract are: (1) the defendant entered into a contract with the plaintiff; and (2) the defendant failed to perform the contract. COLO . JURY INSTR.-CIV .4TH 30:1 (2005). See Smith v. Mills, 225 P.2d 483, 484 (Colo. 1950). B. Elements of a claim for breach of fiduciary duty.

The elements of a claim for breach of fiduciary duty are: (1) the defendant was acting as a fiduciary of the plaintiff with respect to a particular subject matter; (2) the defendant breached a fiduciary duty to the plaintiff; (3) the plaintiff had damages; and (4) the defendant's breach of fiduciary duty was a cause of the plaintiff's damages. COLO . JURY INSTR.-CIV .4TH 26:1 (2005). A fiduciary relationship exists whenever one person is entrusted to act for the benefit of or in the interests of another and has the legal authority to do so. RESTATEMENT (SECOND) OF TRUSTS

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§ 2, cmt. b (1959). The existence and breach of a fiduciary duty is a question of fact to be determined by the jury or by the court sitting as the trier of fact. Paine, Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508, 518 (Colo.1986). C. Because the LLC agreement expressly allows members to compete with the LLC, Defendants cannot be liable for breach of contract or fiduciary duty based on competition with Legacy.

Under the Colorado Limited Liability Company Act, COLO . REV . STAT . § 7-80-101 et seq., limited liability companies organized under Colorado law are governed by an Operating Agreement. See COLO . REV . STAT . § 7-80-102(11)(a). With several exceptions not pertinent here, the Operating Agreement "governs the rights, duties, limitations, qualifications, and relations among the managers, the members, the members' assignees and transferees, and the limited liability company," and its provisions control over any provision of the LLC Act to the contrary. COLO . REV . STAT . § 7-80108(1). See COLO . REV . STAT . § 7-80-108(4) ("It is the intent of this article to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements."). The Operating Agreement of Legacy Manufacturing, LLC (Plaintiff's Ex. 134) contains the following provision at ¶ 11.18, which provides in pertinent part: 11.18 Transactions with Company and Otherwise. Any of the Managers, or any agent, servant, or employee of any of the Managers, may engage in and possess any interest in other businesses or ventures of every nature and description, independently or with other persons, whether or not directly or indirectly in competition with the business or purpose of the Company, and neither the Company nor any of the Members shall have any rights, by virtue of this Agreement or otherwise, in and to such independent ventures or the income or profits derived therefrom, or any rights, duties, or obligations in respect thereof. [Emphasis added]. Where the operating agreement of a limited liability company contains a provision similar to ¶ 11.18, courts have held that no cause of action will lie for breach of the operating agreement or for breach of fiduciary duty based on a manager or member's act of competing with the limited liability company. See Stoker v. Bellemeade, LLC, 615 S.E.2d 1, 9-10 (Ga. App. 2005); McConnell v. Hunt Sports Enterp., 725 N.E.2d 1193, 1206-07, 1214-16 (Ohio App. 1999). See COLO . REV . STAT . § 7-80-404(4) ("A member or manager does not violate a duty or obligation to the limited

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liability company solely because the member's or manager's conduct furthers the member's or manager's own interest."). As the court explained in McConnell, 725 N.E.2d at 1215, the provision of the operating agreement expressly allowing competition by members precluded any claim for breach of fiduciary duty arising from such competition as a matter of law: Here, the injury complained of by appellant was, essentially, appellees competing with CHL and obtaining the NHL franchise. The operating agreement constitutes the undertaking of the parties herein. In becoming members of CHL, appellant and appellees agreed to abide by the terms of the operating agreement, and such agreement specifically allowed competition with the company by its members. As such, the duties created pursuant to such undertaking did not include a duty not to compete. Therefore, there was no duty on the part of appellees to refrain from subjecting appellant to the injury complained of herein. See Stoker, 615 S.E.2d at 10 (affirming summary judgment for members of limited liability company on breach of fiduciary duty claim against members based on competition with company where operating agreement expressly allowed members to compete, "These provisions make clear that, despite any duties described in the LLC Act that might otherwise have restrained a member from competing with the LLC, the members exercised the freedom granted by the LLC Act to restrict or eliminate those duties by contract and to engage in activities which competed with the LLC's business."). Accord: Ledford v. Smith, 618 S.E.2d 627, 636 (Ga.. App. 2005) ("Any fiduciary duty of disclosure that the Active Members may have owed Dyna-Vision with respect to such a business arrangement was eliminated by the terms of an operating agreement that allowed the business activity which occurred."). Although ¶ 11.18 of the Legacy Operating Agreement grants the freedom to compete with the company to managers, members of the company similarly owed no duty to refrain from competing with the company because no such duty is imposed either by the Operating Agreement or by Colorado law. Pursuant to COLO . REV . STAT . § 7-80-404(1)(c), the duty to refrain from competing with the limited liability company in the conduct of the limited liability company business is owed by a member only in a limited liability company in which management is not vested in managers.

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Because Legacy had managers, as provided in Section 11 of its Operating Agreement, its members owed no duty to refrain from competing with it under § 7-80-404(1)(c). See COLO . REV . STAT . § 7-80-108(2)(c)(II)(A) (operating agreement can eliminate member's duty to refrain from competition in company without managers); see also COLO . REV . STAT . § 7-80-406 ("A member or a manager may lend money to, act as surety for, and transact other business with the limited liability company and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a member or manager . . . .") (emphasis added). Accordingly, neither Loyer, as a manager of Legacy, nor Boden, as a member of Legacy, can be liable to Legacy for either breach of the Operating Agreement or breach of fiduciary duty based on any activities undertaken in competition with Legacy. II. Issues relating to federal trademark infringement claim. A. Federal Statute of Frauds for trademark assignment.

Legacy's claims for trademark infringement and unfair competition are barred by the federal Statute of Frauds for assignment of a federally registered trademark, 15 U.S.C. § 1060. Legacy has not produced any such written agreement for the assignment of the "World's Best Inkjet Cartridge"® trademark. Legacy has produced no evidence to show that it is the registrant of the trademark, or to show that there has been an executed, written assignment of the trademark from MVM to it, as required by 15 U.S.C. § 1060 for the assignment of a federally registered trademark to be valid and effective. See 15 U.S.C. § 1060(a)(3) ("Assignments shall be by instruments in writing duly executed") Belden v. Zophar Mills, Inc., 34 F.2d 125, 126 (2d Cir. 1929) (oral assignment of federally registered trademark held invalid); Gort Girls Frocks, Inc. v. Princess Pat Lingerie, Inc., 73 F. Supp. 364, 366 (S.D.N.Y. 1947) (where plaintiff's title to trademark rests on assignment from original registrant, assignment must be in writing and duly acknowledged).. Legacy can show only that there were oral promises by Defendants to transfer the trademark to Legacy, which the parties intended to finalize in a written agreement at a later date, but which was never done. Legacy's -4-

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claims for federal trademark infringement or for unfair competition based on Defendants' alleged use of the "World's Best Inkjet Cartridge"® trademark are therefore barred by the Statute of Frauds, 15 U.S.C. § 1060. B. Legacy lacks standing to sue for federal trademark infringement.

Pursuant to 15 U.S.C. § 1114(1), only the "registrant" of a federally registered trademark may bring a civil action for its infringement. Finance Inv. Co. (Bermuda) Ltd. v. Gerberit AG, 165 F.3d 526, 532 (7th Cir. 1998); Berni v. International Gourmet Restaurants of America, Inc., 838 F.2d 642, 645-46 (2d Cir. 1988); DEP Corp. v. Interstate Cigar Co., 622 F.2d 621, 622 (2d Cir. 1980); Gort Girls Frocks v. Princess Pat Lingerie, 73 F. Supp. at 366. Moreover, under 15 U.S.C. §§ 1116 and 1117, only the "registrant" of a federally registered trademark may seek to enjoin its alleged infringement and recover damages for its alleged infringement. See 15 U.S.C. § 1116(a) (injunctive relief allowed only "to prevent a violation of any right of the registrant of a mark registered in the Patent and Trademark Office"); 15 U.S.C. § 1117(a) (affording monetary relief only to "a registrant of a mark registered in the Patent and Trademark Office"); Reliable Tire Distributors, Inc. v. Kelly Springfield Tire Co., 592 F. Supp. 127, 136 (E.D. Pa. 1984). Further, a licensee of a trademark is not a "registrant" under 15 U.S.C. § 1114(1), and therefore cannot sue the owner of the trademark for infringement, even if the license is exclusive. See Silverstar Enterprises, Inc. v. Aday, 537 F. Supp. 236, 239-40 (S.D.N.Y. 1982) (rejecting trademark licensee's contention that it is a "registrant" who has standing to sue for infringement under 15 U.S.C. § 1114). As a leading commentator has explained: A licensee of a mark is, by definition, not the owner of the mark. Thus, if standing to sue for infringement turns on ownership of the mark, a mere licensee has no standing. 5 J.T McCarthy, MCCARTHY ON TRADEM ARKS & UNFAIR COMPETITION § 32:17 (4th ed. 2003). Thus, in DEP v. Interstate Cigar, the Second Circuit affirmed the dismissal of a trademark infringement action under the Lanham Act because the plaintiff was not the "registrant" of the -5-

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trademark at issue and therefore lacked standing to sue for its infringement under § 1114(a). Id., 622 F.2d at 624. See also Gruen Marketing Corp. v. Benrus Watch Co., 955 F. Supp. 979, 983 (N.D. Ill. 1997) ("A licensee lacks standing where the agreement indicates that the licensor retains exclusive ownership of the mark"); Silverstar Enterprises v. Aday, 537 F. Supp. at 240 (licensee of mark cannot sue registrant of mark for infringement because only registrant has standing to sue for infringement under 15 U.S.C. § 1114). Because Defendant MVM Products, LLC is the sole registrant of the federally registered trademark "World's Best Inkjet Cartridge"®, and because Legacy cannot establish that there was a written assignment of the trademark to it, Legacy lacks standing to sue for federal trademark infringement or for unfair competition based on Defendants' alleged use of the "World's Best Inkjet Cartridge"® trademark, even if it was a valid licensee of the mark. C. A trademark cannot be assigned "in gross."

Under 15 U.S.C. § 1060(a)(1), a trademark cannot be sold or assigned apart from the good will it symbolizes; there are no rights in a trademark apart from the business with which the mark has been associated. Marshak v. Green, 746 F.2d 937, 939 (2d Cir. 1984); Mister Donut of America, Inc. v. Mr. Donut, Inc., 418 F.2d 838, 842 (9th Cir. 1969). Section 1060(a)(1) precludes the assignment of a federally registered trademark unless it is assigned with the good will of the business in which the mark is used, or with that part of the good will connected with the use of any symbolized by the mark. DEP Corp. v. Interstate Cigar Co., 622 F.2d at 622. A sale of a trademark divorced from its good will is characterized as an "assignment-ingross." Marshak v. Green, 746 F.2d at 939. An assignment-in-gross of a federally registered trademark is invalid. Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999); Beauty Time, Inc. v. VU Skin Systems, Inc., 118 F.3d 140, 150 (3d Cir. 1997); Green River Bottling Co. v. Green River Corp., 997 F.2d 359, 362 (7th Cir. 1993) ("A trademark cannot be sold `in gross,' that

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is, separately from the essential assets used to make product or service that the trademark identifies"); Visa U.S.A., Inc. v. Birmingham Trust Natl. Bank, 696 F.2d 1371, 1375 (Fed. Cir. 1982) ("A naked transfer of the mark alone--known as a transfer in gross--is invalid"); PepsiCo, Inc. v. Grapette Co., 416 F.2d 285, 287 (8th Cir. 1969); Dresser Ind., Inc. v. Heraeus Engelhard Vacuum, Inc., 395 F.2d 457, 464 (3d Cir.), cert. denied, 393 U.S. 934 (1968); Berni v. International Gourmet Restaurants, 838 F.2d at 646; Gort Girls Frocks, 73 F. Supp. at 366. III. Issues relating to Legacy's claim for breach of contract to assign trademark. A. Legacy has not asserted a claim for breach of contract to assign trademark.

In the Final Pretrial Order, Legacy states as a basis for its claim of breach of contract that Defendants Loyer and Boden "have breached their agreement . . . to transfer ownership of the World's Best Inkjet Cartridge[sic] to Legacy with the United States Patent and Trademark Office." This claim was never asserted in the Verified Complaint, which alleged in Count IV (denominated "Breach of Contract") at ¶ 38 that: Loyer and Boden agreed to work for Legacy to develop customers for Legacy's products, including principally the World's Best Inkjet CartridgesTM and that MVM would cease competing with Legacy and Loyer and Boden would work to procure sales contracts in Legacy's name. Defendants have breached their agreements to work for Legacy's benefit, including the Operating Agreement by which they are bound, and instead have competed with Legacy for their personal benefit to Legacy's detriment, while purportedly engaged on Legacy's behalf. Pursuant to Fed.R.Civ.P. 15(b), Defendants object to any claim for any breach of any contract not specifically pleaded in the Complaint. Moreover, because ownership of the "World's Best Inkjet Cartridge"® trademark is vested in MVM Products, LLC, any purported contract to transfer ownership of the trademark must necessarily have been with MVM, not with Loyer or Boden. In Colorado, contract law precludes a suit against Loyer or Boden as individuals for a contract entered into between Legacy and LLC. Bonfils v. McDonald, 270 P. 650, 653 (Colo.1928); Newport Steel Corp. v. Thompson, 757 F. Supp. -7-

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1152, 1156 (D. Colo. 1990); see O'Brien v. Houston, 262 P. 1020, 1021 (Colo. 1927) (no liability on contract to which one is not party). A corporation is a separate entity distinct from the individuals comprising it. United States v. Van Diviner, 822 F.2d 960, 963 (10th Cir.1987). Personal liability cannot be imposed on an officer of a corporation merely because that individual is serving in such a capacity. Id.; Newport Steel v. Thompson, 757 F. Supp. at 1156. See COLO . REV . STAT . § 7-80-105 ("Members and managers of limited liability companies are not liable under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the limited liability company."). Defendants Loyer and Boden therefore object to this claim to the extent it is asserted against them individually rather than against MVM Products, LLC as the registered trademark owner. B. An "agreement to agree" is not a binding contract.

Where the evidence adduced shows nothing more than an unenforceable "agreement to agree" rather than any binding contract, the alleged contract cannot be enforced. See New York Life Ins. Co. v. KN Energy, Inc., 80 F.3d 405, 409-11 (10th Cir. 1996) ("To have an enforceable contract it must appear that further negotiations are not required to work out important and essential terms"); Engineered Data Products, Inc. v. Art Style Printing, Inc., 71 F.Supp.2d 1073, 1078-80 (D. Colo. 1999) (reference in letter of intent to further negotiations needed to reach agreement established only "agreement to agree" rather than binding contract); Griffin v. Griffin, 699 P.2d 407, 409 (Colo. 1985); DiFrancesco v. Particle Interconnect Corp., 39 P.3d 1243, 1248 (Colo. App. 2001) ("Agreements to agree in the future are generally unenforceable because the court cannot force parties to come to an agreement"); Li'l Red Barn, Inc. v. Red Barn System, Inc., 322 F. Supp. 98, 107 (N.D. Ind. 1970), aff'd, 17 U.S.P.Q. 193 (7th Cir. 1972) ("the rule is well established that a mere agreement for the future assignment of a trademark is not an assignment of either the mark itself or the good will attached to it"). See also TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 884

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(7th Cir. 1997) ("Requiring strong evidence to establish an assignment is appropriate both to prevent parties from using self-serving testimony to gain ownership of trademarks and to give parties incentives to identify expressly the ownership of the marks they employ."). C. Damages for breach of contract to assign trademark are limited to expectation damages and reasonably foreseeable consequential damages, subject to the duty to mitigate damages.

Although the alleged contract concerns a federally registered trademark, to the extent the claim is styled as a claim for breach of a contract to assign a trademark, it is a state-law contract claim and therefore governed by state law. See Felix Cinematografica S.R.L. v. Penthouse Intl., Ltd., 671 F. Supp. 313, 315 (S.D.N.Y. 1987). Damages for breach of contract for sale of property. The traditional "expectation" measure of damages for breach of contract for the sale of property is the fair market value of the property, measured at the time of the breach, less the purchase price contracted for. Bennett v. Price, 692 P.2d 1138, 1140 (Colo. App. 1984); Sorenson v. Connelly, 536 P.2d 328, 331 (Colo. App. 1975); see Prospero Associates v. Redactron Corp., 682 P.2d 1193, 1198 (Colo. App. 1983) (contract damages are measured at the time of the breach). Where the fair market value of the property at the time of the breach is less than the purchase price contracted for, then the proper measure of damages is restitution, i.e., the refund of the purchase price. See John v. United Advertising, Inc., 439 P.2d 53, 56 (Colo. 1968); Enerwest, Inc. v. Dyco Petroleum Corp., 716 P.2d 1130, 1132 (Colo. App. 1986) ("Since Dyco received no consideration for the contract price, the Spears are liable to Dyco for restitution of the full amount paid under the contract."). Cf. Piano & Organ Warehouse, Inc. v. Wulf, 423 P.2d 26, 27 (Colo. 1967) (buyer not entitled to damages for breach of contract where market value of property was less than contract price and contract price was not paid). The party seeking to recover damages has the burden of presenting competent evidence which furnishes a reasonable basis for assessing them. Bennett, 692 P.2d at 1140.

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Consequential damages. With regard to consequential damages, there is a distinction between the damages theories available in breach of contract claims and those available in tort claims. Contractual damages are limited to those foreseen by the parties when their bargain was struck. Vanderbeek v. Vernon Corp., 50 P.3d 866, 870 (Colo. 2002). This damages calculation, first applied in Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854), assures that contractual liability is limited to mutually allocated risks which were contemplated and foreseeable at the time of contract negotiations. Genova v. Longs Peak Emergency Physicians, P.C., 72 P.3d 454, 459 (Colo. App. 2003). A foreseeability requirement is inherent in every contract case because contractual liability is determined by whether such liability was within the contemplation of the parties at the time of contracting. Giampapa v. American Family Mut. Ins. Co., 64 P.3d 230, 240 (Colo. 2003). As the Colorado Supreme Court has explained: The Hadley rule is designed to further a fundamental principle of contract law: parties must be able to confidently allocate risks and costs during their bargaining without fear that unanticipated liability may arise in the future, effectively negating the parties' efforts to build these cost considerations into the contract. Under Hadley, a party to a contract is only responsible for those damages that he should reasonably have contemplated as the probable result of a breach at the time the contract was entered into. Because the party is aware, or should be aware, that these damages are a potential consequence of breach, he presumably will take into account the risk that these contingencies will occur while negotiating the contract. Thus, by limiting contractual liability to those damages foreseen by the parties at the time the contract was formed, Hadley ensures that the bargain struck reflects a mutually agreeable allocation of the risks and costs of breach. In other words, Hadley guarantees the fairness of a bilateral agreement by protecting the parties from unanticipated liability arising in the future. Vanderbeek, 50 P.3d at 871. To be recoverable under the Hadley test, consequential damages must be so likely that "it can fairly be said" both parties contemplated these damages as the probable result of the breach at the time the contract was formed. See Vanderbeek, 50 P.3d at 870; see also COLO . JURY INSTR.-CIV .4TH 30:35 (2005) (to award consequential damages, jury must find "at the time the parties entered into

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the contract, the defendant reasonably could have anticipated from the facts or circumstances that the defendant knew or should have known that these damages would probably be incurred by the plaintiff if the defendant breached the contract."). Duty to mitigate damages. Under the doctrine of avoidable consequences, a party claiming breach of contract has a duty to take reasonable steps to mitigate damages. Schneiker v. Gordon, 732 P.2d 603, 611 (Colo. 1987); Tull v. Gundersons, Inc., 709 P.2d 940, 946 (Colo. 1985); Bert Bidwell Inv. Corp. v. LaSalle & Schiffer, P.C., 797 P.2d 811, 812 (Colo. App. 1990). In determining whether the injured party has acted reasonably, the Colorado Supreme Court has held that the injured party should take such steps "as a reasonably prudent man would take in like circumstances." Brenaman v. Willis, 314 P.2d 691, 693 (Colo. 1957). D. Because the theories of relief are inconsistent, Legacy must elect between damages for breach of contract and damages for trademark infringement.

To the extent Legacy seeks to recover damages (or restitution) for breach of the alleged contract to assign the trademark rather than specific performance, it is foreclosed from seeking damages or a injunctive relief for trademark infringement. See Kalish v. Brice, 315 P.2d 829, 831 (Colo. 1957) (filing suit to recover consideration allegedly paid under contract is inconsistent with affirmance of contract and effectively repudiates contract, so that contract cannot be enforced by specific performance). Just as one who has no ownership or possessory interest in property cannot sue for trespass or damage to that property, see Sullivan v. Clements, 1 Colo. 261, 262 (1871); Browder v. U.S. Fidelity & Guar. Co., 893 P.2d 132, 135 (Colo. 1995) ("The Browders sustained no injury to their interest until they owned the motel property."); Cook v. Rockwell Intl. Corp., 778 F. Supp. 512, 515 (D. Colo. 1991) ("in Colorado, one must have either title to or possession of property to maintain an action for trespass."), so, too, one who has no right or ownership interest in a trademark cannot sue for its infringement. If Legacy elects to sue for damages for breach of contract to assign the -11-

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trademark rather than for specific performance, then it is foreclosed from relief for infringement of the trademark, since only the holder of a federally registered trademark has the right to recover damages for its infringement or seek an injunction against its infringement. See 15 U.S.C. §§ 1114(1), 1116(a), and 1117(a). IV. Issues relating to defamation claims. A. Elements of a claim for defamation by libel.

In Colorado, the elements of a cause of action for defamation by libel are: (1) a written defamatory statement of and concerning the plaintiff; (2) published to a third party; (3) with fault amounting to at least negligence on the part of the publisher; and (4) either actionability of the statement irrespective of special damages or the existence of special damages to the plaintiff caused by the publication. Williams v. District Court, 866 P.2d 908, 911 n.4 (Colo.1993); Card v. Blakeslee, 937 P.2d 846, 850 (Colo. App. 1996); see Walters v. Linhof, 559 F. Supp. 1231, 1234 (D. Colo. 1983); Stump v. Gates, 777 F. Supp. 808, 825 (D. Colo. 1991), aff'd, 986 F.2d 1429 (10th Cir. 1993). Publication of a defamatory matter is its communication intentionally or by a negligent act to one other than the person defamed. See RESTATEMENT (SECOND)
OF

TORTS § 577 (1977).

Colorado has codified the publication requirement in COLO . REV . STAT . § 13-25-125.5, which provides in relevant part as follows: No action for libel or slander may be brought or maintained unless the party charged with such defamation has published, either orally or in writing, the defamatory statement to a person other than the person making the allegation of libel or slander . . . . Libel is characterized either as per se or per quod. To be libelous per se, a statement: must contain defamatory words specifically directed at the person claiming injury, which words must, on their face, and without the aid of intrinsic proof, be unmistakably recognized as injurious.

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Lininger v. Knight, 226 P.2d 809, 813 (Colo. 1951); see also Inter-State Detective Bureau, Inc. v. Denver Post, Inc., 484 P.2d 131, 133 (Colo. App. 1971). Libel per se is actionable without an allegation of actual damages. Inter-State Detective, 484 P.2d at 133. A court decides the legal question whether a writing constitutes libel per se. Id.; Lininger, 226 P.2d at 813. See Stump v. Gates, 777 F. Supp. at 825. Any libel that, unlike libel per se, does not carry a defamatory imputation on its face is libel per quod which is actionable only where special damages are pleaded. See, e.g., Lind v. O'Reilly, 636 P.2d 1319, 1321 (Colo. App. 1981); Inter-State Detective, 484 P.2d at 133. Libel per quod exists where the person to whom the defamatory statement applies can only be ascertained by introducing extrinsic proof. Lind, 636 P.2d at 1320. "Special damages" are limited to specific monetary losses that a plaintiff incurs because of the defamatory publication. Id., 636 P.2d at 1321. Special damages must result "from conduct of a person other than the defamer or the one defamed and must be legally caused by the defamation." Id., citing RESTATEMENT (SECOND) OF TORTS § 575, cmt. b (1977). B Necessity of pleading each defamatory statement as a separate claim for relief.

In its Verified Complaint, Legacy identified only three statements attributed to Defendants and alleged to be defamatory. Under Colorado law, however, each publication of a libel is a separate and independent claim, and each must be pleaded as a separate cause of action. Lininger v. Knight, 226 P.2d at 812. As the Colorado Supreme Court stated in Lininger, id., "No law is better settled than that each publication of a libel is a separate and independent claim, and that each must be pleaded as a separate cause of action." Accord: Pittman v. Larson Distrib. Co., 724 P.2d 1379, 1387 (Colo. App. 1986) ("[e]ach statement, as a separate publication, constitutes a distinct claim for relief"); Corporon v. Safeway Stores, Inc., 708 P.2d 1385, 1389 (Colo. App. 1985) ("each defamatory statement upon a separate publication is a separate claim").

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Legacy may claim that Defendants had "notice" of such claims because of statements made by Legacy's counsel during depositions. However, giving "notice" of a claim is the function of a complaint under Fed.R.Civ.P. 8(a). Rule 8(a)(2) requires a pleading to contain "a short and plain statement of the claim showing that the pleader is entitled to relief." The purpose of a modern complaint under Rule 8 is "to give opposing parties fair notice of the basis of the claim against them so that they may respond to the complaint, and to apprise the court of sufficient allegations to allow it to conclude, if the allegations are proved, that the claimant has a legal right to relief." Monument Builders of Greater Kansas City, Inc. v. American Cemetery Ass'n, 891 F.2d 1473, 1480 (10th Cir. 1989). Put more succinctly, the complaint "must give the defendant `fair notice of what the plaintiff's claim is and the grounds upon which it rests.'" Green Country Food Market, Inc. v. Bottling Group, LLC, 371 F.3d 1275, 1279 (10th Cir. 2004), quoting Conley v. Gibson, 355 U.S. 41, 47 (1957). Rule 8(a)(2) is intended to afford an adverse party notice of the claims asserted against it so that it may investigate and adequately respond to the charges. Mountain View Pharmacy v. Abbott Labs., 630 F.2d 1383, 1388 (10th Cir. 1980). Rule 8(a)(2) therefore requires the plaintiff to allege specific facts on those material elements that must be proved to recover on each claim; conclusory allegations without supporting factual averments are insufficient to state a claim on which relief can be based. Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991). This requirement is particularly appropriate in a defamation case. A leading commentator on the federal rules points out that "a defamation complaint must give the defendant sufficient notice of the communications claimed to be defamatory so that the defendant may adequately defend itself." 2 MOORE 'S FEDERAL PRACTICE 3D ¶ 12.34[1][b] at 12-64 (2005). See McGeorge v. Continental Airlines, Inc., 871 F.2d 952, 955 (10th Cir. 1989) ("in the context of a defamation claim, Fed.R.Civ.P. 8(a) requires that the complaint provide sufficient notice of the communications complained of to allow Continental to defend itself."); e.g., Bushnell Corp. v. ITT Corp., 973

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F. Supp. 1276, 1287 (D. Kan. 1997) ("Paragraph 16 of plaintiff's complaint is not sufficient. Although three allegedly defamatory statements are listed, the allegation does not identify with necessary specificity who made the statements and to whom the statements were made. The allegation states that `ITT, its distributors and employees' made the statements to `Bushnell's customers and the industry in general,' but such a generic statement does not provide adequate details about the alleged defamation to enable defendant to defend the allegation. Nor does the complaint give any time frame for the alleged statements, a fact of particular importance to a defendant in considering the application of the statute of limitations. The court concludes that plaintiff's allegations of defamation did not give defendant `sufficient notice of the communications complained of' to allow defendant to answer and defend this claim."). Where, however, there is no pleading served that gives the Defendant `fair notice of what the plaintiff's claim is and the grounds upon which it rests,' there is no claim in issue. The Court may not assume that a plaintiff can prove facts that it has not alleged, or that the defendant has violated laws in ways that the plaintiff has not alleged. See Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). C. New defamation claims do not relate back so as to avoid the statute of limitations.

Because each separate publication constitutes a separate and distinct claim for defamation, each separate publication is subject to a separate and distinct statute of limitations bar. Walker v. Associated Press, 417 P.2d 486, 488 (Colo. 1966); Russell v. McMillen, 685 P.2d 255, 258 (Colo. App. 1984); Corporon v. Safeway Stores, 708 P.2d at 1390. The one-year statute of limitations, COLO . REV . STAT . § 13-80-103(1)(a), thus runs against each such separate publication independently. Walker, 417 P.2d at 488; Dorr v. C.B. Johnson, Inc., 660 P.2d 517, 520 (Colo. App. 1983); Corporon, 708 P.2d at 1390; Russell, 685 P.2d at 258.

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Therefore, an amendment to a complaint which asserts a defamation claim based on a publication for which the statute of limitations has already run does not relate back under Fed.R.Civ.P. 15(c) to save the claim from the bar of limitations. "The doctrine of relation back in [Rule] 15(c) does not permit a party to maintain a claim for libel filed after the statute of limitations has run." Even v. Longmont United Hosp. Assn., 629 P.2d 1100, 1103 (Colo. App. 1981); see Walker v. Associated Press, 417 P.2d at 488. This is because each allegedly libelous publication, being a separate and distinct claim for relief, does not arise from the same "conduct, transaction, or occurrence" as any other libelous publication set forth in the complaint so as to relate back under Rule 15(c). Rickman v. Cone Mills Corp., 129 F.R.D. 181, 185-86 (D. Kan. 1989) (new defamation claims asserted in amended pleadings were based on separate publications on which one-year statute of limitations had already run and thus did not relate back under Fed.R.Civ.P. 15(c) because each publication is separate and distinct claim for relief subject to separate and distinct statute of limitations under Kansas law). See generally 6A Wright & Miller, FEDERAL PRACTICE &

PROCEDURE § 1497 at 71-73 (2005) (stating that "amendments alleging the separate publication of a libelous statement . . . may be subject to the defense of statute of limitations because of a failure to meet the [same] transaction standard" of Rule 15(c). See Lininger v. Knight, 226 P.2d at 812; Pittman v. Larson Distrib. Co., 724 P.2d at 1387; Corporon v. Safeway Stores, 708 P.2d at 1389; Walker v. Associated Press, 417 P.2d at 488; Russell v. McMillen, 685 P.2d at 258; Dorr v. C.B. Johnson, 660 P.2d at 520; Even v. Longmont United Hosp. Assn., 629 P.2d at 1103; Rickman v. Cone Mills, 129 F.R.D. at 185-86. D. Requirement that the defamatory statement be "of and concerning" the plaintiff.

To be a actionable, the alleged defamatory statement must be "of and concerning" the plaintiff. Inter-State Detective Bureau. v. Denver Post, 484 P.2d at 133. In Stump v. Gates, 777 F. Supp. at 825-26, the District Court held that publication of a police report that the plaintiffs' father

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committed suicide was not libelous per se of the plaintiffs because it was specifically directed at the deceased, not at the plaintiffs. See Dorr v. C.B. Johnson, 660 P.2d at 519 (publication not actionable when it does not refer to plaintiff); Martin v. Weld County, 598 P.2d 532, 535 (Colo. App. 1979). Consequently, a corporation lacks standing sue for a defamatory statement that is only about its officers, employees, or shareholders. See McBride v. Crowell-Collier Pub. Co., 196 F.2d 187, 189 (5th Cir. 1952); Life Printing & Pub. Co. v. Field, 58 N.E.2d 307, 310 (Ill. App. 1944). Cf. M.L. Foss, Inc. v. Liberty Mut. Ins. Co., 885 P.2d 284, 286 (Colo. App. 1994) (corporation cannot recover damages for emotional distress on behalf of an individual who si not party to suit). E. Defamation defenses: qualified privilege and substantial truth.

Legacy's claims for defamation are barred by the qualified privilege that attaches to statements made to those with a common interest in the subject matter, and because Defendants' statements are true or substantially true, which is an absolute defense pursuant to COLO . CONST . art. II, § 10 and COLO . REV . STAT . § 13-25-125. Section 13-25-125 provides that the defendant may allege both truth of the matter charged as defamatory, and any mitigating circumstances to reduce the amount of damages; and that whether he proves the justification or not, he may give in evidence the mitigating circumstances. One who is alleged to have defamed another has a constitutional and statutory right to assert the truth of the defamatory statement as a defense and have the factfinder decide such a defense. Churchey v. Adolph Coors Co., 759 P.2d 1336, 1341 (Colo. 1988). This issue turns not upon literal truth of every word published, but on the truth of "the gist, or the sting" of the published matter. Stated differently, the question is whether the publication as a whole "produces a different effect upon the reader than that which would be produced by the literal truth of the matter." Gomba v. McLaughlin, 504 P.2d 337, 339 (Colo. 1972). Substantial truth is an absolute defense. Id.; Lindemuth v. Jefferson County School Dist. R-1, 765 P.2d 1057, 1058 (Colo. App. 1988); Miles v. Ramsey, 31 F. Supp.2d 869, 875 (D. Colo. 1998).

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If the persons involved share common interests in the subject matter of an allegedly defamatory statement, a qualified privilege exists. Dominguez v. Babcock, 727 P.2d 362, 365-66 (Colo. 1986); Price v. Conoco, Inc., 748 P.2d 349, 350-51 (Colo. App. 1987); Patane v. Broadmoor Hotel, Inc., 708 P.2d 473, 475 (Colo. App.1985); RESTATEMENT (SECOND) OF TORTS § 596 (1977). Because all the alleged statements identified by Legacy in its Verified Complaint as defamatory were made to persons who shared a common interest in the subject matter with Defendants, such that Legacy must prove that the alleged statements were made by Defendants with either knowledge of their falsity or reckless disregard for their truth or falsity, and all of these alleged statements were true or substantially true. Dominguez v. Babcock, 727 P.2d at 366. F. Proof of special damages is required to establish a claim for product disparagement or business libel.

The tort of disparagement consists of the following elements: (1) a false statement; (2) published to a third party; (3) derogatory to the plaintiff's title to his property or its quality, to his business in general or to some element of his personal affairs; (4) through which defendant intended to cause harm to the plaintiff's pecuniary interest or either recognized or should have recognized that it was likely to do so; (5) malice; and (6) special damages. Thompson v. Maryland Cas. Co., 84 P.3d 496, 507 n.16 (Colo. 2004); Williams v. Burns, 540 F. Supp. 1243, 1248 (D. Colo.1982). Special damages are an essential element of a claim for business disparagement or trade libel. As the Colorado Court of Appeals explained in Teilhaber Mfg. Co. v. Unarco Materials Storage, Inc., 791 P.2d 1164, 1167 (Colo. App. 1989), cert. denied, 803 P.2d 517 (Colo. 1991): In a product disparagement action, the plaintiff must always prove special damages. He is required to establish a pecuniary loss that has been realized or liquidated, as in the case of specific lost sales. If a plaintiff cannot show special damages, no cause of action is established. To make the required showing, a plaintiff usually must identify those persons who refuse to purchase his product because of the disparagement. [Citations omitted].

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See also Henderson v. Times-Mirror Co., 669 F. Supp. 356, 362 (D. Colo. 1987); Williams v. Burns, 540 F. Supp. at 1251 ("In disparagement actions, the plaintiff must always plead and prove special damages."). The Complaint does not plead any special damages incurred by Legacy as a result of any alleged business disparagement or trade libel, and there is no attempt to plead special damages with the specificity required by Fed.R.Civ.P. 9(g). See, e.g., Woodmont Corp. v. Rockwood Center Partnership, 811 F.Supp. 1478, 1484 (D. Kan. 1993) ("In Paragraph 14 of the complaint, plaintiff has merely made the general allegation that defendants' public statements damaged its business reputation. It has not named any customer whose business was lost as a result of the statement, nor has it alleged the amount of such loss. The plaintiff's allegations are insufficient, in our judgment, to satisfy the dictates of Rule 9(g).") (internal citation omitted). G. Defamation claims are not assignable.

"The general rule, established by the great weight of authority, is that if a cause of action is of such a nature that on the death of the party entitled to sue, the right of action would survive to his personal representative, it may be assigned; but, if the cause of action is such that it would not survive, it may not be made the subject of a valid assignment." Olmstead v. Allstate Ins. Co., 320 F. Supp. 1076, 1078 (D. Colo. 1971) (applying Colorado law). The survivability of claims is governed by C OLO . REV . STAT . § 13-20-101(1). That section provides, in relevant part: All causes of action, except actions for slander or libel, shall survive and may be brought or continued notwithstanding the death of the person in favor of or against whom such action has accrued...[Emphasis added.] Under § 13-20-101(1), therefore, causes of action for slander and libel do not survive the death of the claimant. While the Colorado Supreme Court has not yet addressed this particular issue, § 13-20-101(1) specifically precludes the descendability, and thus the assignability, of claims for

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libel and slander. "The general rule is that assignability and descendability go hand in hand." Micheletti v. Moidel, 32 P.2d 266, 267 (Colo. 1934). Cf. Gruschus v. Curtis Pub. Co., 342 F.2d 775, 776 (10th Cir. 1965) (New Mexico law) (recognizing that actions for defamation do not survive the death of the party who was defamed); U.S. Fax Law Center, Inc. v. iHire, Inc., 362 F. Supp.2d 1248, 1251-53 (D. Colo. 2005), reconsideration denied, 373 F. Supp.2d 1208 (D. Colo. 2005) (same). V. Issues relating to counterclaim for conversion. A. Elements of conversion.

Conversion is defined as any distinct, unauthorized act of dominion or ownership exercised by one person over personal property belonging to another. Byron v. York Inv. Co., 296 P.2d 742, 745 (Colo. 1956); Glenn Arms Associates v. Century Mortg. & Inv. Corp., 680 P.2d 1315, 1317 (Colo. App. 1984). Although the act of conversion takes place at the time the converter takes dominion over the property, predicates to a successful claim for conversion are the owner's demand for the return of property, and the controlling party's refusal to return it. See Finance Corp. v. King, 370 P.2d 432, 435 (Colo. 1962). B. Damages for conversion.

The measure of damages for conversion is the fair market value of the converted property at the time and place of the conversion, plus legal interest from the time of conversion to the time of trial. Culpepper v. Pearl Street Bldg., Inc., 877 P.2d 877, 882 n.6 (Colo. 1994); Masterson v. McCroskie, 573 P.2d 547, 551 (Colo. 1978); . VI. Sanctions for failure to disclose witnesses pursuant to Fed.R.Civ.P. 37. One of the witnesses disclosed by Legacy for trial is Legacy's attorney, Thomas List, Esq.; another witnesses disclosed by Legacy for trial is Golnar Fozi, purportedly to testify concerning matters relating to settlement that are inadmissible under Fed.R.Evid. 408. At no time, however, did

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either party disclose Mr. List or Ms. Fozi as a person with knowledge under Fed.R.Civ.P. 26(a). Pursuant to Fed.R.Civ.P. 37(c)(1), Legacy may therefore not call Mr. List or Ms. Fozi as a witness at trial. Rule 37(c)(1) provides that a party who "without substantial justification fails to disclose information required by Rule 26(a) . . . is not, unless such failure is harmless, permitted to use as evidence at a trial . . . any witness or information not so disclosed." This provision of Rule 37(c) is self-executing. See Ortiz-Lopez v. Sociedad Espanola de Auxilio Mutuo Y Beneficiencia, 248 F.3d 29, 35 (1st Cir. 2001) (a court order need not first be violated before the court may impose the sanction provided under Fed.R.Civ.P. 37(c)); Palmer v. Rhodes Machinery, 187 F.R.D. 653, 657 (N.D. Okla. 1999) (there is no "one warning" exception contemplated by Fed.R.Civ.P. 26(a)). The automatic and self-executing nature of Rule 37(c) recognizes that consistent enforcement of sanctions is an essential component of an effective case management system and is necessary not only to punish discovery violations in particular cases but also to deter discovery abuses by future litigants. See Klonoski v. Mahlab, 156 F.3d 255, 269 (1st Cir. 1998), cert. denied sub nom. Mary Hitchcock Mem. Hosp. v. Klonoski, 526 U.S. 1039 (1999). Here, Legacy lacked substantial justification for its failure to disclose Mr. List or Ms. Fozi as a potential witness under Rule 26(a). As Legacy's attorney, Mr. List was obviously well-known to Legacy, as was his invovlement in the facts and transactions giving rise to Legacy's claims for relief in this case. Moreover, this failure to disclose is not harmless because of the protection of the attorney-client privilege. Legacy's offer of Mr. List as a witness effects a waiver of the attorneyclient privilege, at least as to confidential communications and transactions covered by his testimony. See People in Interest of E.H., 837 P.2d 284, 292 (Colo. App. 1992); see also COLO . REV . STAT . § 13-90-107(1)(b). In contrast, if Defendants had disclosed Mr. List under Fed.R.Civ.P. 26(a), no waiver of the privilege would have resulted. See Stone v. Satriana, 41 P.3d 705, 710-11 (Colo.

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2002). Because Legacy never previously disclosed Mr. List under Fed.R.Civ.P. 26(a), but instead waited until the pre-trial order to disclose him as a witness, after discovery was already closed, Defendants were unable to conduct any discovery from Mr. List, such as obtaining his files or taking his deposition concerning his communications with Legacy. Accordingly, Mr. List should be precluded from testifying at trial as a sanction for failure to disclose him as a potential witness pursuant to Fed.R.Civ.P. 37(c)(1). And, because Ms. Fozi was never disclosed, she should also be precluded from testifying at trial as a sanction for failure to disclose her as a potential witness pursuant to Fed.R.Civ.P. 37(c)(1). VII. Provisions of Fed.R.Civ.P. 30(b)(4) governing videotaped depositions. Rule 30(b)(4) provides in pertinent part: Unless otherwise agreed by the parties, a deposition shall be conducted before an officer appointed or designated under Rule 28 and shall begin with a statement on the record by the officer that includes (A) the officer's name and business address; (B) the date, time, and place of the deposition; (C) the name of the deponent; (D) the administration of the oath or affirmation to the deponent; and (E) an identification of all persons present. If the deposition is recorded other than stenographically, the officer shall repeat items (A) through (C) at the beginning of each unit of recorded tape or other recording medium. See also Fed.R.Civ.P. 30(f)(1) ("The officer must certify that the witness was duly sworn by the officer and that the deposition is a true record of the testimony given by the witness. This certificate must be in writing and accompany the record of the deposition."). This rule has been interpreted to required that the video operator shall take an oath before a judge or clerk of the court to record all proceedings accurately and completely, and certify as to the correctness and completeness of the video tape and that the witness was duly sworn by him. See, e.g., Continental Federal Sav. and Loan Ass'n v. Delta Corp., 71 F.R.D. 697, 703 (W.D. Okla. 1976).

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VIII. Legacy may not recover attorney fees on its claim for breach of fiduciary duty. Legacy is expected to seek attorney fees under the so-called "breach of fiduciary duty" exception to the American Rule on attorney fees. An analysis of the controlling authority, however, reveals that this exception to the American Rule applies only to breaches of trusts, not to every claim of breach of fiduciary duty. The so-called "American Rule" on attorney fees holds that each party must bear its own costs of litigation. Arcambel v. Wiseman, 3 U.S. (3 Dall.) 305 (1796) (origin of the American Rule, noting that "The general practice of the United States is in opposition" to taxing counsel fees against the losing party). Under the American Rule, attorney fees may not be awarded to the prevailing party for costs of litigation in the absence of an express provision in a contract, court rule, or statute authorizing an award of attorney fees. See Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240, 263 (1975); see generally C. McCormick, HANDBOO K
ON THE

LAW

OF

DAMAGES § 61 (1935);

RESTATEMENT (SECOND) OF TORTS § 914(1) (1979); RESTATEMENT (SECOND) OF CONTRACTS § 356, cmt. d (1979). The rationale for the American rule has been explained thus: [T]he losing party is not necessarily in an sense a wrongdoer, even of the substantive law claim he pursues or defends. And even if he has committed some tort for which he is liable, it does not follow that his defense (or claim) is a dishonest one. It is desirable to keep courts open for the litigation of disputes of all sorts. The plaintiff who honestly brings a claim is entitled to the courts even though the claim may be turned down; the defendant who honestly presents a defense, is equally entitled to use the courts for that purpose, even though it turns out that, in the eyes of judge or jury, the defense was not meritorious. The honestly suing plaintiff or the honestly defending defendant will be forced to pay court costs and his own attorneys' fees if he loses. To superadd the burden of unknown amounts of fees for his opponent may discourage his legitimate use of the courts as resolvers of controversies . . . . Related closely to this idea is the idea that, except in the case of those who wrongly use the judicial process for harassment, dishonest claims or defenses or the like, the cost of litigation is a private cost. The fact that one party is found to be "wrong" in some sense in breaching a contract or committing a tort, does not mean he was "wrong" in litigating the issues. Litigation cost, including lawyer's fees, investigation costs, and similar expense, can be seen as the cost a man must pay to protect or insure his property or money. D. Dobbs, HANDBOOK ON THE LAW OF REMEDIES 201 (1973).

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Other rationales advanced for the American rule are that poor plaintiffs will be discouraged from bringing legitimate suits if they are held liable for the defendant's attorney fees upon losing, and, similarly, that defendants might be discouraged from asserting legitimate, but disputed, defenses for fear of a loss of additional expenses. Additional rationales include the notion that responsibility for one's own legal expenses is thought to promote settlement, and the difficulty of ascertaining reasonable attorney fees in every case would pose a substantial burden on judicial administration. See Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718 (1967). There is also the problem of who is the "prevailing" party in cases where the plaintiff succeeds only on part of the relief sought. See, e.g., Overland Dev. Co. v. Marston Slopes Dev. Co., 773 P.2d 1112, 1115-16 (Colo. App. 1989). Although it has been criticized and is subject to a number of statutorily and judicially created exceptions, the American Rule remains in force. See Bernhard v. Farmers Ins. Exchange, 915 P.2d 1285, 1287 (Colo. 1996). Consequently, "it is entitled to the respect of the court, till it is changed, or modified, by statute." Arcambel v. Wiseman, 3 U.S. (3 Dall.) at 306. Colorado has traditionally followed the American rule on attorney fees. Bernhard v. Farmers, 915 P.2d at 1288; Bunnett v. Smallwood, 793 P.2d at 160-61. See Beebe v. Pierce, 185 Colo. 34, 38, 521 P.2d 1263, 1265 (1974); Publix Cab. Co. v. Colorado Natl. Bank, 139 Colo. 205, 230, 338 P.2d 702, 715 (1959); Denver Bldg. & Constr. Trades Council v. Shore, 132 Colo. 187, 201-02, 287 P.2d 267, 274 (1955); Farmers Alliance Mut. Ins. Co. v. Ho, 68 P.3d 546, 550 (Colo. App. 2002); City of Holyoke v. Schlachter Farms R.L.L.P., 22 P.3d 960, 964 (Colo. App. 2001); Thurman v. State Farm Mut. Auto. Ins. Co., 942 P.2d 1327, 1329-30 (Colo. App. 1997); Lyons v. Teamsters Local Union 961, 903 P.2d 1214, 1222 (Colo. App. 1995); Swartz v. Bianco Family Trust, 874 P.2d 430, 435 (Colo. App. 1993); Davis v. Gourdin, 831 P.2d 497, 500 (Colo. App. 1992); Rhodes v. Copic Ins. Co., 819 P.2d 1060, 1062 (Colo. App. 1991); Avco Financial Servs. of Colo.,

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Inc. v. Gonzales, 653 P.2d 751 (Colo. App. 1982); Joslin v. McGee, 5 Colo. App. 531, 534, 39 P. 349, 350 (1895); see also Public Service Co. v. Continental Cas. Co., 26 F.3d 1508, 1522 (10th Cir. 1994) (applying Colorado law); Cement Asbestos Prods. Co. v. Hartford Accident & Indemn. Co., 592 F.2d 1144, 1148 (10th Cir. 1979). Under the American Rule as followed in Colorado, a court ordinarily has no discretion to award attorney fees to the prevailing party in the absence of any specific contractual, statutory, or procedural rule authorizing their recovery. Avco Financial Servs. of Colo., Inc. v. Gonzales, 653 P.2d 751, 751 (Colo. App. 1982). Where attorney fees are awarded to the prevailing party in the absence of any specific contractual, statutory, or procedural rule authorizing their recovery, the award is subject to reversal either as legal error, Cohen v. Empire Cas. Co., 771 P.2d 29, 31 (Colo. App. 1989); Lanes v. O'Brien, 746 P.2d 1366, 1375 (Colo. App. 1987), or as an abuse of discretion. Van Schaack Holdings, Ltd. v. Fulenwider, 768 P.2d 740, 743 (Colo. App. 1988); Johnson v. S.W. Devanney & Co., 719 P.2d 734, 737 (Colo. App. 1986). Here, there is no contract, statute or court rule that authorizes an award of attorney fees to Legacy in this case. Nevertheless, Legacy is expected to contend that the so-called "breach of fiduciary duty" exception to the American Rule supports an award of fees in this case. In reality, however, no such exception has been recognized in Colorado. In Buder v. Sartore, 774 P.2d 1381 (Colo. 1989), the Colorado Supreme Court first recognized an exception to the American Rule in cases involving a breach of an express trust. In Buder, the defendant, who was the plaintiffs' father, received from his own father cash gifts, typically in the form of checks made directly payable to the plaintiff children, with the tacit understanding that he was to safeguard the money and invest it on behalf of the children. The father would then deposit the funds in bank accounts that were specifically designated as being trust accounts for the children. The father, however, began investing some of this money in "penny

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stocks", which were purchased in his name as custodian for the children under the Uniform Gifts to Minors Act (UGMA). See § 11-50-101 et seq., C.R.S. After these penny stocks crashed, the plaintiffs sued their father, alleging that he breached his fiduciary duty as a trustee to them when he invested their money improperly in penny stocks. The trial court found that the father had breached his fiduciary duty as custodian of the children's funds under the UGMA by failing to invest the children's funds as a prudent person would. Significantly, one of the legal bases for the trial court's finding was the "fiduciary duty owed by a trustee under General Trust Law." Buder, 774 P.2d at 1385. See § 15-1-304, C.R.S. The supreme court, in affirming the judgment for the children, expressly analogized the father's status as a custodian under the UGMA to that of a trustee. Buder, 774 P.2d at 1390. The trial court also awarded the children their attorney fees notwithstanding the absence of any provision in the UGMA that authorized the court to assess fees. The supreme court affirmed this award based on the rationale that: the object of an award of attorney fees in a breach of trust action is to make the injured party whole again, is, in our view, equally applicable in an action against a custodian for breach of fiduciary duty. The fundamental purpose of performing an accounting in this case, that of making the children whole by returning them to the position they would have enjoyed had Buder not imprudently invested their funds, would be frustrated by requiring them to pay attorney fees out of their funds. Id., 774 P.2d at 1391. The court thus continued the analogy previously drawn between the trustee of an express trust and the custodian of minor children's funds. In reaching this result, Buder followed the Colorado Court of Appeals' decision in Heller v. First National Bank, 657 P.2d 992 (Colo. App. 1982). Heller involved an action to protect a trust estate from the breach of the "prudent investor" rule by the trustee. The plaintiff was the beneficiary of an express trust her mother created, and which the defendant bank managed. The bank made some bad investments with the trust money and made some improper distributions, resulting in a depletion of the trust corpus. The trial court found for the beneficiary, and awarded her not only the -26-

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amount of improper distributions from the trust with interest but also her attorney fees incurred in bringing the action against the trustee. The court in Heller affirmed the award of fees, holding that attorney fees may be assessed in a breach of trust action as "an exception to the general rule prohibiting awards of attorney's fees absent statutory or contractual provisions." Id., 657 P.2d at 999. Citing only a treatise for support, the court stated that "The object of an award of attorney's fees in a breach of trust action is to make the injured party whole." Heller, 657 P.2d at 999. See G. Bogert, LAW OF TRUSTS & TRUSTEES § 871 (Rev. 2d ed. 1995) (court has discretion to award fees to trust beneficiary in suit against trustee for breach of trust); but see RESTATEMENT (SECOND) OF TRUSTS §§ 197-212 (1959) (listing remedies of beneficiaries against trustee for breach of trust; recovery of attorney fees by beneficiaries is not included among these remedies). Nothing in Heller suggests that the court intended this exception to the American Rule to be extended beyond situations involving the breach of an express trust by the trustee, and the supreme court's application of the rule in Buder to the analogous situation of a breach of fiduciary duty by the custodian of a minor's funds does not suggest that it should be extended to fiduciaries in general either. Subsequently, in In re Conservatorship of Roth, 804 P.2d 265 (Colo. App. 1990), a division of the Colorado Court of Appeals held that attorney fees were recoverable by a minor's estate against a bank that had sought to apply funds in the estate toward satisfaction of a debt owed by the estate's conservator. In Roth, the conservator pledged the minor's estate's funds, which were placed in a restricted account in the claimant bank, as collateral against a loan from the bank; the letters of conservatorship, however, provided that there could be no withdrawal of funds from the restricted account without prior court order and approval of the minor's guardian ad litem. When the conservator defaulted on the loan, the bank brought an action seeking court approval to execute on the funds in the minor's estate's account as collateral. The trial court held that the bank could not

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execute on the funds in the estate because the bank had become a "custodian" of the funds when it agreed to the restriction on the estate's account. As a "custodian" of the funds, the bank was a fiduciary under § 15-1-107, C.R.S., and was therefore liable for breach of fiduciary duty when it accepted the funds in the minor's estate's account as collateral for the loan. The trial court awarded the minor's estate attorney fees under the "breach of trust" exception adopted in Buder and Heller, and the Court of Appeals affirmed, holding that the claim, which involved the breach by the fiduciary of a restricted account for a minor, "falls within the exception set out in Heller." Roth, 804 P.2d P.2d at 267. Once again, the situation for which attorney fees were awarded under the "breach of trust" exception to the American Rule involved a corpus of funds being held in trust by a fiduciary for a designated beneficiary, and a breach of the fiduciary's duty to preserve and protect those funds for the use of the beneficiary. See also In re Estate of Shuler, 981 P.2d 1109, 1113 (Colo. App. 1999) (discussing applicability of exception to American Rule in action by beneficiary of decedent's estate for breach of fiduciary duty against personal representative of estate). As these decisions indicate, this limited exception to the American Rule is equitable in nature, and derives from the court's power in equity to oversee and enforce trustees' performance of their duties for the benefit of the equitable owners of the trust corpus, the trust beneficiaries. See Kaitz v. District Court, 650 P.2d 553, 555 (Colo. 1982) (action by beneficiaries against trustee for breach of fiduciary duty alleging failure to preserve trust funds is equitable in nature); see also Bogert, TRUSTS & TRUSTEES § 871 (discussing court's powers in equity as source of authority to award fees). For this reason, this exception applies only to actions for breach of trust. A close analysis of the leading cases discussing this exception, e.g., Buder, Heller, and Roth, discloses that it was initially carved out for actions brought by a beneficiary involving the breach by the trustee of an express trust, and that it has been confined to this or a legally analogous situation.

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As shown above, in Heller there was an express trust and the breach thereof by the trustee bank with a consequent suit by the trust's beneficiary; in Buder the father was the custodian of his minor children's funds, and, as such, owed a fiduciary duty to them to avoid imprudent investments; and in Roth, the bank was a custodian of a minor's estate's account and thus owed a fiduciary duty to the minor as beneficiary of the estate. As the Court of Appeals observed in Stevens v. Moore & Co. Realtor, 874 P.2d 495, 497-98 (Colo. App. 1994), these decisions: simply recognize that: "The award of attorney fees in a breach of trust action is an exception to the general rule prohibiting awards of attorney's fees absent statutory or contractual provisions." Heller v. First National Bank, supra, 657 P.2d at 999. This limited exception is equitable in nature and applies to breach of trust actions. As the Court of Appeals further acknowledged in Stevens, neither Buder nor Heller support the expansion of this exception beyond the breach of an express trust