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Atlas Biologicals, Inc. v. Kutrubes.

No. 20-1401. 10/11/2022. D.Colo. Judge Holmes. Ancillary Jurisdiction—Declaratory Relief—Standing—Stock Transfers.

October 11, 2022

In 2006, Kutrubes was employed by Atlas Biologicals Inc., which produces bovine serum-based products for medical, veterinary, and biological sciences research. Kutrubes signed an agreement prohibiting employees from disclosing confidential or proprietary company information without the company’s prior written authorization. Kutrubes was eventually promoted to national sales manager, was elected to Atlas’s board of directors, and ultimately owned 7% of Atlas. In 2014, Kutrubes incorporated the Colorado business Peak Serum, Inc. and began emailing himself information from Atlas’s database, including customer contact lists, product and marketing materials, and its quality manual and organizational chart. In December 2014, Kutrubes tendered his resignation and asked the company to buy out his 7% stake. A few days later, Atlas discovered that Kutrubes had sent company documents to his personal email account and had started soliciting Atlas’s clients and suppliers. Atlas thus declined the resignation, terminated Kutrubes’s directorship and employment for cause on December 27, 2014, and demanded that Kutrubes cease using all materials obtained from Atlas, return those materials to the company, abandon all plans to start a business similar to Atlas, and surrender all shares to Atlas.

In 2015, Atlas sued Kutrubes and Peak Serum, alleging various intellectual property claims, including federal trademark infringement and misappropriation of trade secrets. In 2018, Kutrubes purportedly sold his 7% interest in Atlas to Biowest, LLC, a rival company to Atlas. Kutrubes’s counsel notified Atlas of the sale, but Biowest did not receive delivery of an indorsed certificate for the shares because Atlas had not created stock certificates for Kutrubes’s shares at the time of the purported transfer. Because there were no stock certificates, the transfer’s validity was uncertain. Ultimately, the district court concluded that it did not know whether the stock transfer was valid, but it issued an order of prejudgment attachment for whatever interest Kutrubes had in the stock he owned. The court stated that it could not decide the interest unless the parties filed a separate action for either declaratory judgment or for further undoing the fraudulent conveyance. Atlas then sued Biowest and Kutrubes for declaratory relief to void the purported stock transfer. Biowest moved to dismiss. The district court reasoned that it had ancillary jurisdiction over the claims and concluded that Atlas had standing to sue Biowest. Atlas moved for summary judgment. The district court granted the motion and, upon a stipulated motion by the parties, certified its order as final and entered a final judgment on the declaratory judgment claim. A few days later, the district court entered judgment for Atlas on its claims for federal trademark infringement, Colorado common law trademark and trade name infringement, misappropriation of trade secrets, and breach of fiduciary duty.

On appeal, Biowest argued that the district court lacked ancillary jurisdiction over the declaratory judgment proceedings initiated by Atlas. Ancillary jurisdiction allows courts to conduct proceedings necessary to protect and give effect to their judgments and is appropriate in actions to reach and collect a judgment debtor’s assets held by a third party. If a federal court had jurisdiction of the principal action, it may hear an ancillary proceeding, regardless of other factors that would normally determine subject-matter jurisdiction. Here, whether the transfer to Biowest was effective under Colorado law determines whether the district court’s writ of attachment attached to anything at all. Accordingly, the district court properly extended supplemental ancillary enforcement jurisdiction to Atlas’s declaratory judgment claim.

Biowest also argued that Atlas lacked standing because it was not a party to the contract and, therefore, has no legally enforceable right. Under federal and Colorado law, standing must be assessed in the context of the claim the plaintiff seeks to bring, which here is Atlas’s declaratory judgment claim. To have standing under Colorado law, a plaintiff must allege an injury in fact to a legally protected interest. In the declaratory judgment context, the plaintiff must demonstrate that there is an existing legal controversy that can be effectively resolved by a declaratory judgment. Here, if the stock transfer between Kutrubes and Biowest is valid, this would threaten to cause injury to Atlas because it would hinder Atlas’s ability as a judgment creditor to collect on its judgment and expose it to liability for not properly registering the transfer. Therefore, a declaratory judgment to avoid contingent liability provides the basis for Atlas’s standing.

Biowest also contended that the district court erred in concluding that the transfer was invalid. Title to corporate stock in Colorado can be transferred only as provided by statute. Article 8 of Colorado Uniform Commercial Code governs this stock transfer and provides that a person derives a security interest if the person is a purchaser to whom a security is delivered. Delivery of an uncertificated security to a purchaser occurs when either (1) the issuer registers the purchaser as the registered owner or (2) another person, other than a securities intermediary, either becomes the registered owner of the uncertificated security on behalf of the purchaser or, having previously become the registered owner, acknowledges that it holds for the purchaser. Here, Kutrubes’s attempted transfer of his shares to Biowest did not constitute a delivery of uncertificated securities because (1) neither party disputes that Atlas is the issuer of Kutrubes’s stock, and it did not register Biowest as the registered owner; and (2) Atlas never registered Kutrubes as the owner of the uncertificated securities on behalf of Biowest, and Kutrubes did not claim to hold his shares on behalf of Biowest. Further, the equitable transfer doctrine did not apply because the claim would affect Atlas’s rights as a third party.

The judgment was affirmed.

Official US Court of Appeals for the Tenth Circuit proceedings can be found at the US Court of Appeals for the Tenth Circuit website.

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