ORDER ON MOTION TO STAY

NINA Y. WANG, Magistrate Judge.

This matter comes before this court on Defendant John R. McKowen's ("Defendant McKowen" or "Mr. McKowen") Motion to Stay Proceedings (the "Motion" or "Motion to Stay"), filed January 23, 2020. [#47]. The undersigned considers the Motion pursuant to 28 U.S.C. § 636(b), the Order Referring Case dated November 12, 2019 [#22], and the Memorandum dated January 24, 2020 [#48]. Having reviewed the Motion and associated briefing, the applicable case law, and the comments offered at the February 25, 2020 Motion Hearing, this court DENIES the Motion to Stay for the reasons stated herein.

BACKGROUND

Plaintiff John Paulson ("Plaintiff" or "Mr. Paulson") initiated this civil action on behalf of himself and a putative class of "all persons or entities who purchased or otherwise acquired securities of GrowCo, [Inc.], a Colorado corporation, from January 2015 until March 2017." [#4 at 2]. Mr. Paulson alleges that he is an investor from California who purchased securities in GrowCo, Inc. ("GrowCo"), a wholly owned subsidiary of Two Rivers Water and Farming Company ("Two Rivers"), between January 2015 and March 2017. See [id. at 2-3]; see also [#47 at ¶¶ 1-3, 7]. According to Plaintiff, GrowCo's securities offerings documents contained material omissions, such as Defendant McKowen's "fraudulent sales of securities," which led to investors like Mr. Paulson purchasing GrowCo securities in reliance upon misleading information. See [#4 at 7-10; #47 at ¶ 9].

In 2019, GrowCo filed for voluntary Chapter 11 bankruptcy with the United States Bankruptcy Court for the District of Colorado ("Bankruptcy court"); Plaintiff alleges that this rendered his investments in GrowCo "effectively worthless." [#4 at 11; #47 at ¶¶ 6, 8]. Currently, GrowCo's Chapter 11 bankruptcy case is proceeding with a hearing on GrowCo's disclosure statement (a condition precedent to plan confirmation). Originally, the hearing was scheduled for January 29, 2020, with a deadline to submit proofs of claim by February 3, 2020. See [#47 at ¶¶ 28-30]. Since the filing of this Motion to Stay, the Bankruptcy Court ordered an Amended Disclosure Statement to be filed by February 12, 2020, which a hearing is scheduled on for March 10, 2020, with a last day to oppose the disclosure statement of March 4, 2020. See In re GrowCo, Inc., Case No. 19-10512 (D. Colo. Bankr. Ct.), [Docket Entry 130].

Believing Defendants' conduct violated the Colorado Securities Act, Colo. Rev. Stat. §§ 11-51-101 et seq., as well as other common law principles, Plaintiff filed suit in the District Court for the City and County of Denver ("Denver District Court"). See [#1; #4]. Mr. Paulson asserts five Colorado Securities Act claims against Defendants for: (1) sale of securities in violation of the Colorado Securities Act ("Claim 1"); (2) providing substantial assistance in the sale of securities by means of untrue statements or omissions in violation of the Colorado Securities Act (pleaded in the alternative) ("Claim 2"); (3) control person liability in the sale of securities by means of untrue statements or omissions in violation of the Colorado Securities Act (also pleaded in the alternative) ("Claim 3"); (4) negligence ("Claim 4"); and (5) negligent misrepresentations and omissions ("Claim 5"), as well as two individual claims against Defendant McKowen for: (6) fraud ("Claim 6") and (7) sale of securities through fraud ("Claim 7"). See generally [#4; #56]. On September 16, 2019, Defendants removed this matter to this District pursuant to 28 U.S.C. §§ 1334(b), 1452, because this civil action related to GrowCo's bankruptcy action. See [#1].

In the Bankruptcy court, GrowCo then filed an adversary proceeding against Plaintiff and sought a temporary restraining order. See GrowCo, Inc. v. Paulson, Case No. 19-01275 (D. Colo. Bankr. Ct.), [Docket Entry 19], attached as [Attach. 1]. In the adversary proceeding, GrowCo argued that the automatic stay under § 362 extended to this action. [Id. at 5-15, 19-20]. The Honorable Joseph G. Rosania, Bankruptcy Judge, denied the motion for temporary restraining order, finding that there was no basis to extend the automatic stay or preclude Mr. Paulson from pursuing this action. [Id. at 23-25].

On December 12, 2019, the undersigned conducted a Scheduling Conference, at which this court set June 30, 2020 as the discovery deadline and the Motion for Class Certification under Rule 23 deadline, February 15, 2021 as the dispositive motion deadline, and April 14, 2021 as the Final Pretrial Conference. See [#36; #37]. On January 23, 2020, Defendant McKowen filed the instant Motion to Stay, requesting that the court stay this civil action for 180 days while the Bankruptcy court considers whether to approve GrowCo's Chapter 11 Reorganization Plan. See [#47 at ¶ 31]. Mr. Paulson opposes the Motion to Stay and contends that GrowCo's Chapter 11 bankruptcy case in no way impacts the relief sought in this civil action against Defendant McKowen or the other named Defendants. See [#58]. Mr. McKowen has since filed his Reply, see [#63], and this court entertained oral argument on the Motion to Stay on February 25, 2020, see [#72]. Because the Motion is ripe for determination, I consider the Parties' arguments below.

LEGAL STANDARD

I. District Court Discretion to Stay Civil Proceedings

Whether to stay discovery is a matter left to the sound discretion of the trial court. Wang v. Hsu, 919 F.2d 130, 130 (10th Cir. 1990). Indeed, the Federal Rules of Civil Procedure do not expressly provide for a stay of proceedings, but the power to stay "is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254-55 (1936) (citing Kansas City S. Ry. Co. v. United States, 282 U.S. 760, 763 (1931)). In determining whether a stay is appropriate, the court weighs interests such as whether defendants are likely to prevail in the civil action, whether defendants will suffer irreparable harm, whether the stay will cause substantial harm to other parties to the proceeding, and the public interests at stake. United Steelworkers of Am. v. Oregon Steel Mills, Inc., 322 F.3d 1222, 1227 (10th Cir. 2003). The court may also consider plaintiff's interests in proceeding expeditiously with the civil action and the potential prejudice to plaintiff of a delay, the burden on the defendants, and the convenience to the court. String Cheese Incident, LLC v. Stylus Shows, Inc., No. 1:02-cv-01934-LTB-PAC, 2006 WL 894955, at *2 (D. Colo. Mar. 30, 2006) (citing FDIC v. Renda, No. 85-2216-O, 1987 WL 348635, at *2 (D. Kan. Aug. 6, 1987)). Courts in this District generally disfavor the stay of all discovery, see Wason Ranch Corporation v. Hecla Mining Co., No. 07-cv-00267-EWN-MEH, 2007 WL 1655362, at *1 (D. Colo. June 6, 2007), but such a stay may be appropriate pending the resolution pending the resolution of a Motion to Dismiss impacting immunity or jurisdictional issues, Clarendon Nat'l Ins. Co. v. Glickauf, No. 18-CV-02549-CMA-NYW, 2019 WL 1897845, at *2 (D. Colo. Feb. 14, 2019).

II. Automatic Stay of Civil Proceedings Relating to Bankruptcy Petition

"By its terms, § 362 of the Bankruptcy Code automatically stays the commencement or continuation of a judicial proceeding against the debtor that was or could have been initiated before the filing of a bankruptcy petition." TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495, 496 (10th Cir. 2011) (emphasis added) (citing 11 U.S.C. § 362(a)(1)); In re Cowen, 849 F.3d 943, 948 (10th Cir. 2017) ("When a debtor files for bankruptcy, section 362 prevents creditors from taking further action against him except through the bankruptcy court." (internal quotation marks omitted)). "Generally, the stay applies only to the debtor and not to non-debtor co-defendants." In re Expert S. Tulsa, LLC, 506 B.R. 298, 302 (Bankr. D. Kan. 2011). For example, in Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir. 1984), the United States Court of Appeals for the Tenth Circuit ("Tenth Circuit") considered whether the automatic stay should apply to Defendant Peterson—a solvent co-defendant—where a second co-defendant filled for bankruptcy. The Tenth Circuit held that "[e]xtending the stay to protect solvent co-defendants would not advance either of the purposes underlying the automatic stay. Accordingly, we join the other circuit courts in concluding that 11 U.S.C. § 362 stays litigation only against the debtor, and affords no protection to solvent co-defendants." Id.

Indeed, "[i]t is clearly established that the automatic stay does not apply to non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor." In re Peeples, 553 B.R. 892, 899 (Bankr. D. Utah 2016) (internal quotation marks and citation omitted) (explaining that "[t]his principle has been followed even when the action taken was against a former manager of the debtor who argued that `the real party in interest is the Debtor,' and that the proceeding `would adversely affect the administration of the estate.'" (citations omitted)). Courts in other districts have extended this principle to separate legal entities, corporations, partnerships, or non-debtor co-defendants in pending litigation, even "`where the non-debtor is a corporation wholly owned by the debtor.'" In re Lengacher, 485 B.R. 380, 383 (Bankr. N.D. Ind. 2012) (quoting In re Winer, 158 B.R. 736, 743 (N.D. Ill. 1993)); see also id. ("the stay does not prohibit taking discovery from debtors in connection with litigation against non-debtors, even if that information might later be used against the debtors."); Funding Sys. Railcars, Inc. v. Pullman Standard Inc., 34 B.R. 706, 709 (N.D. Ill. 1983).

One narrow exception to this rule exists, however. "The automatic stay may apply to a non-debtor in special circumstances, such as where there is identity of interest between a debtor and a third party so that a judgment against a non-debtor would be binding on a debtor." N.L.R.B. v. McDermott, 300 B.R. 40, 44 n.7 (D. Colo. 2003). Typically, this arises in cases where liability is premised on the non-debtor entity being an alter ego of the debtor such that absent a claim against the debtor, there is no independent basis for the action against the principal. See In re Expert South Tulsa, LLC, 506 B.R. 298, 302 (Bankr. D. Kan. 2011). To extend the automatic stay to a non-debtor under this exception, the debtor must make such a request with the bankruptcy court. See In re Hillsborough Holdings Corp., 130 B.R. 603 (Bankr. M.D. Fla. 1991).

ANALYSIS

Defendant McKowen argues that two main reasons warrant a stay of this civil action for 180 days. See generally [#47; #63]. First, Defendant McKowen contends Mr. Paulson's requested relief necessarily implicates GrowCo's bankruptcy estate and is therefore subject to the automatic stay of discovery in the Bankruptcy court. Second, a weighing of the String Cheese factors warrants a stay. For the following reasons, I respectfully disagree and do not find a stay warranted under the circumstances.

GrowCo's Bankruptcy Case. Mr. McKowen contends that this case is related to GrowCo's Chapter 11 bankruptcy case because Plaintiff seeks rescission of all "investment contracts between GrowCo and the putative class members," which might adversely affect putative class members and their recovery, if any, under GrowCo's Reorganization Plan. See [#47 at ¶¶ 35, 44-71]. Further, Mr. Paulson's request for compensatory damages implicates recovery under a Director and Officers policy of insurance (the "Policy") issued to Two Rivers, which would cover any indemnity GrowCo owes to Mr. McKowen for liability, if any, arising from this civil action. See [#47 at ¶¶ 22-27; #63 at 3-5]. According to Mr. McKowen, because the investment contracts and the Policy are arguably part of GrowCo's bankruptcy estate, they are subject to the bankruptcy automatic stay and therefore render a stay appropriate in this civil action too. See [#47 at ¶¶ 72-78; #63 at 7].

Mr. Paulson responds that his requested relief of recession does not affect GrowCo's bankruptcy estate, because he does not seek rescission from GrowCo but only from "Defendants in their capacity as offeror and sellers of fraudulent securities," which "entails tendering their shares to Defendants, not GrowCo." [#58 at ¶ 12]. According to Mr. Paulson, although GrowCo was the issuer of the securities at issue, Defendants here, including Mr. McKowen, are also considered sellers under the Colorado Securities Act, and the claims against Defendants here do not affect the putative class members' recovery, if any, under GrowCo's Reorganization Plan. See [id. at ¶¶ 29-39, 41-47]. Nor does the Policy implicate GrowCo's bankruptcy estate because GrowCo is no longer a subsidiary covered by the Policy, but regardless the indemnification provision would not apply to Defendant McKowen under the circumstances. See [id. at ¶¶ 14-19]. I respectfully agree with Plaintiff.

To start, this court is unconvinced that Plaintiff's request for rescission or rescissionary damages necessarily relates to and/or affects GrowCo's investment contracts or its bankruptcy estate. The Colorado Securities Act prohibits "any person, in connection with the offer, sale, or purchase of any security" from "directly or indirectly" defrauding others, making untrue statement of facts, making material omissions of fact, making misleading statements, or otherwise engaging in fraud. Colo. Rev. Stat. § 11-51-501(1)(a)-(c). Any person violating § 501(1) in the sale of a security is liable to the buyer for damages, including rescission, among other things. Id. § 11-51-604(3). The Colorado Securities Act defines "sale" or "sell" as "every contract of sale of, contract to sell, or disposition of a or disposition of a security or interest in a security for value" and an "offer to sell" means "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value." Colo. Rev. Stat. § 11-51-201(13)(a). This definition mirrors that of the Securities Act of 1933, 15 U.S.C. § 77b(a)(3), and federal courts have broadly interpreted this definition to encompass the entire selling process, including an issuer's or a seller's agents. See S.E.C. v. Druffner, 353 F.Supp.2d 141, 152 (D. Mass. 2005) (concluding that brokers could be sellers under the Securities Act of 1933). Mr. McKowen may individually (as opposed to GrowCo) constitute a seller under the Securities Act of 1933 as well as the Colorado Securities Act (and subject to the damages provision of § 604(3)), because Colorado courts find "highly persuasive" federal authorities interpreting provisions of the Securities Act of 1933 that parallel provisions of the Colorado Securities Act. See People v. Milne, 690 P.2d 829, 833 (Colo. 1984). Moreover, a claim under § 604(3) does not require any privity of contract between the buyer and seller, see In re Qwest Commc'ns Int'l, Inc. Sec. Litig., 387 F.Supp.2d 1130, 1152-53 (D. Colo. 2005) (relying on Rosenthal v. Dean Witter Reynolds, Inc. 908 P.2d 1095, 1102 (Colo. 1995)), and thus this court is not persuaded that the rescission damages sought necessarily implicate or affect GrowCo's investment contracts.

Nor is this court convinced that Mr. Paulson's compensatory damages against Mr. McKowen implicate or affect the Policy and any duty of indemnity GrowCo may owe to Mr. McKowen thereunder. To be sure, the Policy would become relevant only if Mr. Paulson were to succeed in his claims against Mr. McKowen, assuming the Policy extends to Mr. McKowen. At this stage of litigation, this outcome is merely speculative at best. And even if such recovery "conceivably could have any effect" on GrowCo's estate as Defendant McKowen argues, see [#47 at ¶ 20 (emphasis in original)], this "conceivable effect" relates to the Bankruptcy court's jurisdiction over claims related to bankruptcy proceedings (in addition to quintessential bankruptcy proceedings and claims), not to the breadth of the automatic stay. See In re Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990) (discussing a bankruptcy court's jurisdiction under 28 U.S.C. § 1471(b), now 28 U.S.C. § 1452, "which confers jurisdiction on district courts for cases related to tile 11 proceedings.").

These conclusions are further bolstered by the observations made by Judge Rosania in denying GrowCo's attempt to stay this litigation in the Bankruptcy court. In the adversary action against Mr. Paulson, GrowCo made strikingly similar arguments to the ones advanced by Mr. McKowen here. [Attach. 1]. In denying the temporary restraining order, Judge Rosania observed that GrowCo had already benefitted from an eight-month delay in filing monthly operating report, and Plan and disclosure statement, finding the delay "unfair and unreasonable." [Attach. 1 at 24].

At bottom, Mr. McKowen seeks to invoke the narrow exception to general rule that a debtor's automatic bankruptcy stay does not extend to nondebtor co-defendants. But for the reasons discussed above, this court does not find that exception applicable here. Indeed, in Robert W. Thomas & Anne McDonald Thomas Revocable Tr. v. Inland Pac. Colorado, LLC, No. 11-CV-03333-WYD-KLM, 2013 WL 708493, at *3 (D. Colo. Feb. 26, 2013), the court found this narrow exception to apply where the plaintiff alleged claims against a solvent co-defendant who was a member and President of the debtor co-defendant and the debtor co-defendant asserted identical and/or similar claims against the solvent co-defendant in the bankruptcy proceedings. No similar circumstances arise here, and the Bankruptcy court has already rejected GrowCo's request to extend the automatic stay to Mr. McKowen or any other party in this civil action. [Attach. 1]. Accordingly, I find that Mr. Paulson's requested relief against Mr. McKowen does not implicate or affect GrowCo's bankruptcy estate and does not warrant a stay of discovery for this reason alone. I now consider whether a stay is appropriate when balancing the String Cheese factors.

The String Cheese Factors. In considering the String Cheese factors, I also conclude that a stay of discovery is not warranted.

First, this court disagrees that Mr. Paulson does not have an interest in proceeding with this matter expeditiously, or that his pursuit of this civil action and involvement in GrowCo's bankruptcy proceeding evinces some sort of dilatory motive. To be sure, class actions, such as the purported class claims asserted here, may be time consuming, and this court has concerns with the apparent lack of formal discovery to date. But this, in addition to Mr. Paulson's participation in GrowCo's bankruptcy proceeding, does not countervail any interest Mr. Paulson has in proceeding expeditiously here. Ultimately, granting a 180-day stay of this matter pending the confirmation of GrowCo's Chapter 11 Reorganization Plan "could substantially delay the ultimate resolution of the matter, with injurious consequences." Chavez v. Young Am. Ins. Co., No. CIVA 06CV02419PSFBNB, 2007 WL 683973, at *2 (D. Colo. Mar. 2, 2007). Thus, this factor weighs against a stay of discovery.

Second, this court is not convinced that allowing discovery to proceed would unduly burden Mr. McKowen. Parties are always burdened in some respect by discovery. See Webb v. Brandon Exp. Inc., No. 09-cv-00792-WYD-BNB, 2009 WL 4061827, at *2 (D. Colo. Nov. 20, 2009). While Mr. McKowen may be correct that the conclusion of the GrowCo bankruptcy proceeding could impact his defense strategy here, see [#47 at ¶ 89; #63 at 8], many of his arguments relate to burdens on GrowCo, a non-party to this matter. And as discussed, this court is not convinced that the automatic stay associated with GrowCo's bankruptcy proceeding necessarily means Mr. McKowen would be unduly burden without a stay in this civil action. Thus, this factor weighs against a stay.

Third, I find that a stay of this civil matter for 180 days is not convenient for the court, nor does it preserve any judicial resources. Mr. McKowen's lone argument is that GrowCo's Chapter 11 Reorganization Plan may impact the court's Rule 23 class certification determination. But this is mere speculation at this point, and Mr. McKowen fails to demonstrate why this necessitates a stay now, especially when the deadline to file a Rule 23 motion is June 30, 2020, another four months away. Thus, this factor weighs against a stay.

Fourth and fifth, the interests of non-parties and the public interest are neutral at best. Mr. McKowen largely regurgitates his arguments as to how Mr. Paulson's requested relief impacts GrowCo and its bankruptcy estate as well as the interest putative class members may have in that estate. But as discussed above, this court is not convinced that this is so. Thus, I find these factors neutral at best if not slightly weighing against a stay.

On balance, the String Cheese factors do not warrant a stay of this matter. Accordingly, I DENY the Motion to Stay.

CONCLUSION

For the reasons stated herein, IT IS ORDERED that:

(1) Defendant McKowen's Motion to Stay [#47] is DENIED.

Proceedings digitally recorded by court personnel. Transcript produced by court-approved transcription service.

THE COURT CLERK: All rise.

THE COURT: Good afternoon, ladies and gentlemen. Be seated, please.

Let's see. We're here this afternoon in GrowCo, Inc., a Chapter 11 case, 19-10512, and then specifically on an adversary proceeding that the Debtor filed on September 30, 2019, GrowCo, Inc. versus John Paulson, adversary proceeding 19-1275.

And for today we had a preliminary hearing on — or just a hearing on Plaintiff's motion for temporary restraining order, filed September 30, 2019, and any response that may be filed thereto.

And the record should reflect there was a response filed thereto yesterday on behalf of Mr. Paulson, and I think his counsel is here today.

So let's start out with appearances, starting with the GrowCo side.

MR. WARNER: Good afternoon, Your Honor. David Warner for GrowCo. Here with me today is the CEO of the company, Mr. John McKowen.

THE COURT: Thank you.

MR. ABELMAN: Good afternoon, Your Honor. Steve Abelman on behalf of John Paulson, and the putative class claimants. I've just recently been retained, so I apologize for the filing yesterday, but that was as quickly as I could get it in.

Also in the courtroom is Steve Miller, who is the class counsel in the underlying action pending before the United States District Court for the District of Colorado.

THE COURT: Okay.

MR. MILLER: Actually, Your Honor, — Steve Miller speaking. I'm local counsel for the class.

THE COURT: Okay. In the class action suit.

MR. MILLER: Yeah.

THE COURT: Okay.

MR. MILLER: Well, it's actually the attorneys are actually from out of state.

THE COURT: Okay. Anybody else, or anybody on the phone?

MR. WARNER: No, Your Honor.

THE COURT: Okay. Mr. Warner, you filed a motion for temporary restraining order. Mr. Abelman has responded.

I just want to make sure that we're on the same page here.

GrowCo filed a three count complaint. The first claim is a declaration to extend the stay to the class action lawsuit, which I think is what we're here for today.

The second claim is permanent injunction.

The third claim is violation of the stay.

Well, you're not going to get a permanent injunction at a TRO hearing.

And on the violation of the stay, first, the email that was alleged to violate the stay, that is a disputed fact.

And second, that, whatever violation that did occur, is not continuing, as far as I'm concerned, with respect to the email.

So that what we're really here for today is the burden of proof is on GrowCo to establish that the automatic stay under 362 should be extended and stay the securities fraud lawsuit.

MR. WARNER: Thank you. We agree, Your Honor.

And I would just — the relief we're seeking today is that the Court enter the TRO and set a final hearing on the preliminary injunction.

And I would like to, if it pleases the Court, to make an offer of proof today?

THE COURT: Sure.

MR. WARNER: Thank you very much, Your Honor.

There are some factual inaccuracies in the response yesterday that we need to address right away, because clearly our legal argument rests on accurate factual recitations.

And so I would say that Mr. McKowen is likely to testify to those inaccuracies.

Mr. Paulson alleges that Mr. McKowen has had his securities license permanently revoked following charges of fraud in connection with the securities transaction.

And Mr. Paulson is alleging that that information should have been disclosed prior to his investment.

Mr. McKowen, and other witnesses, if necessary, will testify that the FINRA records show, and we can certainly add those records to our exhibit list, Your Honor, I just didn't have time since 6:00 o'clock last night to do that, that the charges of fraud were dismissed, Mr. McKowen's security license was suspended for a year in or around the '80s.

He never paid the fees to renew his license. This was over 33 years ago, and Mr. McKowen has since participated in several transactions where he's raised capital for publicly traded companies. During those transactions, counsel advised Mr. McKowen that it wasn't necessary to disclose the suspension.

Again, the fraud charges were dropped, and there was no permanent revocation.

Mr. McKowen will also testify that the class period for the class action lawsuit filed by Mr. Paulson is January of 2015 through March of 2017. This is important, because coverage is sought under the policy at issue for GrowCo for allegations regarding things that occurred during that class period.

Mr. Paulson made his three investments in GrowCo from August of 2016 through November of 2016.

Mr. McKowen will testify that he resigned from Two Rivers, GrowCo, and all of the affiliates of GrowCo, as an executive officer and a board member in May of 2016, before Mr. Paulson invested in GrowCo. And Mr. McKowen was not reinstated as a control person of GrowCo until October of 2017.

So Mr. McKowen never solicited an investment from Mr. Paulson.

And then the other thing — the factual thing that we would rebut, Your Honor, is Mr. Paulson's response that Two Rivers is not a majority owner of GrowCo, and, therefore, would not qualify as a subsidiary of Two Rivers under that insurance policy.

The policy provides that the insurer is liable to pay any losses arising from a claim made by an insured during the time that the entity was a subsidiary.

Mr. McKowen will testify that during the class period, Two Rivers owned 20,000,000 shares out of the 30,005,000 shares issued, approximately 66 2/3 percent, of GrowCo.

Thus, the allegations of paragraph 11 of the response that GrowCo is not currently a subsidiary because it currently doesn't own 50 percent of the voting securities, is irrelevant because we're outside of the class period and the beneficiaries of the policy are seeking coverage for acts that occurred during the class period while GrowCo was a subsidiary of Two Rivers.

Now, I don't mean to concede that point, Your Honor, that GrowCo does not continue to be a subsidiary, but that is a little bit more in-depth factual argument, and I think irrelevant, since we're seeking coverage during the class period. But we can go into that if the Court thinks it's relevant.

The insurance company has not taken a position that there's no coverage, and, thus, GrowCo is a subsidiary under the policy, has a claim against Two Rivers and others, for the wrongs that occurred while GrowCo was a subsidiary of Two Rivers.

And that my — kind of my rebuttal argument, Your Honor, to those factual allegations in there. The rest of my presentation today will just focus on the proof and evidence that we have to prove the elements necessary to obtain a temporary restraining order.

Mr. McKowen is available to testify that he, Mr. Harding, and Mr. Bell, were officers and directors of GrowCo during some or all of the time periods at issue, and he would authenticate and lay the foundation for our exhibit 3, which is the by-laws of GrowCo as business records of the regularly conducted activity.

Mr. McKowen would testify that the by-laws contain an indemnification provision that requires GrowCo to indemnify its officers and directors as provided in the Colorado Business Corporations Act.

And Mr. McKowen would also testify that GrowCo is required under the Colorado Business Corporations Act to indemnify its officers and directors.

Mr. McKowen would also authenticate and lay the foundation for admission of exhibit 4, which is the declarations of the policy of insurance. He would do that under Federal Rule of Evidence 803(6), a business record.

And Mr. McKowen would testify that they contain directors' and owners' coverage, and that under Section 5 of the declarations, there is a presumption of indemnification, and any payments by the insurance company are subject to a deductible of $250,000.00 per claim that GrowCo would be obligated to pay.

As to the element — or our allegation, Your Honor, that any judgment entered against Mr. McKowen, Mr. Harding, and Mr. Beal, would have preclusive effect on GrowCo, I would point the Court to the complaint from the class action lawsuit, which is included in our exhibits.

And Mr. McKowen would testify that it is alleged in that complaint that GrowCo's security offerings contained material omissions. It is alleged — I'm sorry, did I forget to give you something?

THE COURT: I don't have the exhibits.

MR. WARNER: Oh, I'm sorry. Here. May I approach?

THE COURT: Yes, please.

MR. WARNER: Thank you. I apologize.

THE COURT: Thank you. There we go. Okay.

MR. WARNER: I was so excited to get right into it.

(Pause)

THE COURT: Okay, so Debtor did — or Plaintiff did file a list of witnesses and exhibits, saying it may or will call Mr. McKowen, and then attached six exhibits, or five exhibits. You've referred to 3 and 4, and now you're referring to, I think, what's on there —

MR. WARNER: Exhibit 2. Thank you, Your Honor.

So exhibit 2, if the Court takes judicial notice of that, you can see, and Mr. McKowen would testify, that it's alleged that GrowCo did these things. In fact, paragraph 83 of the second claim for relief of the complaint specifically states that:

"GrowCo knowingly and/or recklessly offered and sold its securities through Plaintiff and the other class members through material omissions, as more fully outlined above, in violation of the Securities Act, and is thus liable."

Paragraph 90 is similarly written. It contains a similar accusation that GrowCo is liable. And Mr. Paulson's claim for common law negligence and negligent misrepresentation necessarily require allegations against GrowCo.

If this lawsuit proceeds, these findings of fact would have — and if they prevail, these findings of fact would have preclusive effect on GrowCo. That also relates to our — even though I know Your Honor said that it isn't particularly relevant for today, relates to our claim for violation of the automatic stay.

Moving on to the next point that we made in our pleadings, Your Honor, that allowing the class action lawsuit to continue would deplete insurance policy proceeds. This is a little bit of a complicated factual issue, but I'll try to simplify it through this offer of proof today.

It is simply that Mr. McKowen will testify that GrowCo raised approximately $18.9 million dollars from investors. That money was deposited into the accounts of Two Rivers and TR Capital. TR Capital is another subsidiary of Two Rivers.

After Mr. McKowen became involved again and was reinstated, he personally helped to fund not only this bankruptcy case, but an investigation or a forensic accounting of the records of the businesses involved, and discovered that a substantial amount of the monies that were raised were transferred to Two Rivers, or cannot be accounted for.

GrowCo intends to bring claims against Two Rivers and several individuals who served as officers and directors of the various corporate entities involved, in an attempt to recover those missing funds.

Two Rivers and/or its subsidiaries and officers and directors, are insured under the policy. And the policy's aggregate liability limit is $4,000,000.00.

The acts of these potential defendants may be covered under the policy, and would greatly exceed $6,000,000.00 in damages.

Thus, the policy proceeds will be a significant source of recovery for the bankruptcy Estate, and by extension, creditors of GrowCo's bankruptcy Estate.

Any policy proceeds expended to defend the class action or satisfy any judgments rendered in the class action would reduce this pool of funds available to satisfy the claims of GrowCo.

The other point, Your Honor, that we made is that Mr. Paulson has alleged that he has lost all of his money. Mr. McKowen will testify that that's not true, that Mr. Paulson's investment is not worthless. He has exchange notes that, at the very least, can be converted into equity in the greenhouses that I think the Court has heard about previously, and I'll talk a little bit more about those in connection with the description of the Plan.

And the Plan of reorganization, Mr. McKowen will testify as to the Plan of reorganization. And a lot of these facts have just kind of coalesced, and I'll describe them for everyone here for the first time.

I apologize, due to the press of other business, I wasn't able to get that Plan filed this week as we had previously told the Court we would try to do.

But that Plan would be described by Mr. McKowen, and what he would say is that there are legitimate claims against Two Rivers with respect to the funds that were diverted, and Two Rivers also has a common membership interest in GCP-1, which I believe is one of the owners of the greenhouses. Is that correct, Mr. McKowen?

MR. McKOWEN: Yes.

MR. WARNER: Owns the first greenhouse that was completed. And that could result in a significant cash flow to settle not only the Two Rivers debt owed to GrowCo, but the claims from GrowCo against Two Rivers.

GrowCo also asserts that GrowCo's ownership interest in GCP-1 and GCP-2 is likely to result in a significant cash flow in the near future.

As I alluded to earlier, Mr. McKowen just again became a managing director of GCP-1 in March of 2019. Within 10 days of being appointed to the board of GCP-1, Mr. McKowen convinced the other board members to lease the greenhouse to a new tenant. That new tenant immediately began plans to grow a hemp seed crop, which just this month they began harvesting.

The type of seed the tenant is growing and harvesting is extremely valuable, due to many factors which Mr. McKowen can testify to.

GCP-1 receives 11.25 percent of the gross sales of the new tenant as its rent payments, and the tenant is projecting sales of $18 million in 2019, and $35 million in 2020.

So GCP-1 has two forms of membership interests: Preferred and common. And Mr. McKowen will testify that it's likely that the preferred members of GCP-1 will be trued up sooner than previously anticipated, and the common membership interests owned by Two Rivers and GrowCo will be paid in the near future.

Thus, it is not clear that Mr. Paulson has lost his investment. The Plan of reorganization is soon to be filed, and due to these recent events, as recently as this month, these new deals that are made are likely to result in significant returns to investors of GrowCo.

At its root, Your Honor, our argument is that if this is allowed to continue, GrowCo will not be protected by the effects of this action due to the allegations of misconduct against GrowCo that are clearly made in the complaint. Any findings of fact in that case would necessarily include findings against GrowCo.

And I think the next strongest argument, Your Honor, is that the Estate assets will likely be depleted, including these insurance policy proceeds.

And then I'm not exactly — I haven't investigated this fully, Your Honor, but I also think that it's likely that these claims that Mr. Paulson is bringing against Two Rivers are probably direct claims that GrowCo could bring itself. And those claims themselves are probably property of the Estate.

Thank you for your time, Your Honor. I know that was a long presentation.

THE COURT: Let me ask you a question.

MR. WARNER: Sure.

THE COURT: So you're asking for a temporary restraining order today to stop the lawsuit, but ultimately you're asking for a preliminary injunction and/or a permanent injunction to indefinitely stay the lawsuit, right?

MR. WARNER: Right, Your Honor. Yes.

THE COURT: So you know in the Purdue Pharma case, Judge Drain did the extraordinary act of extending the stay, but for three weeks. So I just want to make sure I understand what you're asking for. Thank you.

Mr. Abelman?

MR. ABELMAN: Thank you, Your Honor.

We're not here to discuss the merits of the class action or determine the coverage of the insurance policy.

We're here on a request for a TRO, and the requisite standards for a TRO have not been met.

The Debtor has not been able to show that there's immediate threat of irreparable harm.

If you look at the motion which seeks the TRO, it talks about GrowCo will likely be contractually obligated to fund legal defenses, or indemnify Mr. McKowen and Two Rivers.

Even if that's true — and by the way, what I hear is that the by-laws require indemnification pursuant to Colorado law. Even if that's true, the indemnification claim is nothing more than a general unsecured claim.

And so the obligation to fund any sort of indemnification claim is no different than any other obligation that they have that's a pre-Petition obligation.

And then at the same time there's the allegation that they intend to propose a Plan that will have a hundred percent payout. So whatever indemnification claim there is will be dealt with pursuant to the Plan.

But that is not a basis to extend the automatic stay. If that were a basis to extend the automatic stay, then every guarantor of a loan would come into this Court and ask that the stay be extended to protect the guarantor so that the guarantor's right of subrogation against the bankruptcy Estate does not create a bigger claim. It's just not — that's not the appropriate basis under cognizable Tenth Circuit law, which I referenced in my pleading, as to extending the narrow — the very rare extension of the automatic stay.

In addition, to the extent that the allegations in this case are proven to be true, to the extent that there was misconduct and failure to disclose information under applicable securities laws, then public policy generally provides that the right of indemnification does not cover such misconduct by an individual.

There was reference made that somehow that to the extent that the class prevails, that this would have a preclusion effect upon GrowCo. That cannot be proven.

The Schedules themselves reflect that Mr. Paulson purchased debt instruments from GrowCo. So GrowCo — or purchased debt instruments for which GrowCo is obligated.

The Schedules show that that claim is undisputed, non-contingent, not subject to a setoff.

So the debt instruments reflect money that was actually provided to the benefit of GrowCo. Whether there's a judgment against Mr. McKowen and Two Rivers doesn't advance the claim against GrowCo. The claim against GrowCo, the undisputed claim against GrowCo, is for a set liquidated amount.

So this litigation has absolutely no preclusive effect upon the underlying indebtedness.

There is also a reference to the insurance policy. And Debtor's counsel at one point said it's an Estate asset. And I think that's not quite accurate.

The policy, which is an exhibit, shows that the named insured is Two Rivers. It's not GrowCo. So it's not an asset of the Estate.

But even if — and we have no reason to dispute that the Debtor may have claims against that policy. Okay, well, that doesn't make the policy an asset of the Estate. The policy is available to anybody who has claims that are covered by that policy.

So, for instance, if you had — if the building were — if the greenhouse where GrowCo is located is next to another building that's owned by a third party, we'll call it Paulson. If Paulson owned a building next to the grow facility, and some trucking company had a truck lose control and smashes into the greenhouse, and then careens into the Paulson building, then both GrowCo and Paulson have claims against the trucking company's insurer.

That doesn't give GrowCo some sort of preeminent right to proceed against the trucking company's insurance.

So that's, in essence, what is being requested here is a stay to prevent parties who have claims which should be litigated in the U.S. District Court from proceeding to the merits on those claims.

Thank you.

THE COURT: Thank you. Mr. Warner?

MR. WARNER: Your Honor, the argument that an asset that would benefit the Estate is contradicted by the case law on this issue.

There are several cases where Bankruptcy Courts have held that even if the debtor is not the insured, if it could benefit from the policy proceeds, those proceeds are assets of the Estate.

And if, as counsel for Mr. Paulson has argued, his claims are liquidated in an amount that's certain, then why should he get to jump the line in front of all of the other creditors when GrowCo is seeking to get those funds for the benefit of everyone? I think that's fundamentally unfair, and puts him at an advantage of other creditors.

Finally, Your Honor, I would just like to emphasize that Mr. Paulson's ability to seek relief, even if the Estate is extended for a sufficient time for the Debtor to file a Plan of reorganization, and if events change or facts change after the Estate is extended, he won't be prejudiced, because he could again seek relief from stay to pursue that cause of action.

And even if his claim is liquidated or is known in a certain amount, just the policy being used to defend people against the lawsuit is going to be depleted, even if he doesn't ultimately prevail.

And so I think that argument also is misleading, because the Debtor will be injured in any amount that that policy is depleted.

Thank you, Your Honor.

THE COURT: Thank you. GrowCo filed a Chapter 11 case January 24, 2019. It caught my attention because GrowCo was previously involved in the marijuana business. We had a status conference on March 5, 2019, at which I heard Mr. Wadsworth saying many of the same things, Mr. Warner saying over six months later.

Judge Martinez issued his opinion in the Way to Grow case on September 18, 2019, affirming the decision of the Bankruptcy Court dismissing the Way to Grow case because it was involved in the marijuana business. And I cite the case for the proposition that cannabis companies, marijuana businesses, under the state of the law in the Tenth Circuit are not welcome in Bankruptcy Court.

So I went back and listened to the tape of the March 5th status conference, and I reviewed the file. And by doing that, I'm making the following findings of fact:

The Debtor raised $18-to-$20 million dollars over three years, beginning in 2014, to build greenhouses for marijuana business, and cannot account for $10 million.

One greenhouse was built and used to grow marijuana. The second greenhouse was not completed.

The Debtor claims the greenhouse that was completed is now being rented for a legal purpose, growing hemp.

The Debtor filed its bankruptcy case on the eve of the State Court trial brought by Blue & Green. The Debtor has no employees, no ongoing business, no bank account, and the IRS proof of claim reflects 2018 corporate income tax returns have not been filed.

The Debtor has been in Chapter 11 for almost nine months, with little or no activity, and has obtained one three month extension of the exclusive period, which, by the way, Mr. Paulson wrote a letter to the Court on June 10 objecting to the motion to extend the exclusive period, but we didn't catch it.

So that order was entered over an objection, and for that I apologize.

The Debtor has requested another three month extension in the case, and then another objection was filed by a third party, not Mr. Paulson, and that motion is pending.

The Debtor has not filed a Plan or disclosure statement.

The Debtor did not file any monthly operating reports until August 30, 2019.

The Debtor has not filed its August 2019 monthly operating report, which was due last month.

The Debtor has retained no professionals, such as accounts or special litigation counsel.

So in order to extend the automatic stay, it's an extraordinary remedy. In the Purdue Pharma case, Judge Drain extended the stay for three weeks to protect the Sackler family to allow them to produce documents to parties, and he talked about the reason he did that was to avoid destroying the value of the debtor.

So in order to get a preliminary injunction or a temporary restraining order, the first thing the Debtor needs to do is to show a likelihood of success on the merits that this is a viable reorganization, subject to me applying the extraordinary standing of extending the automatic stay to third parties.

The Debtor's last monthly operating report showed the only asset it had was Debtor's counsel retainer, note receivable GCP-1 $600,000.00, note receivable Two Rivers $520,000.00, membership interests GCP-1, GCP-2, GCP-SU, value unknown.

The litigation claims the Debtor talks about worry me, because I'm not sure to what extent that the Debtor, as a Chapter 11 Debtor-in-possession, or that any Chapter 7 Trustee might be pursuing litigation claims related to the marijuana business. And so that's never been explained to me.

Everybody cited Judge Martinez's case, if I can find it here, of Global Logistic Solutions. In that case, Judge Martinez talked about the standard for extending the stay.

Here, the Debtor cited the A.H. Robbins case as authority to extend the stay, but in A.H. Robbins there was a real viable reorganization.

Judge Martinez said "the purposes of 362 that may be furthered by extending the stay, including (1) to protect the debtor from an uncontrollable scramble for its assets," well, I don't know what the assets are. I don't see any assets.

And if there are litigation claims to be pursued, six months of water has gone under the bridge on that one.

"(2) to preclude one creditor from pursuing a remedy to the disadvantage of the other creditors."

Mr. Paulson is just tired of waiting for the bankruptcy Chapter 11 case to file a Plan, much less to pursue the litigation. And I have no evidence of how the Debtor is going to fund any litigation, and that seems logical to me since I haven't seen a motion to employ special counsel.

And the third factor, and the most important, was: "To provide the debtor an opportunity to formulate a plan of reorganization." Well, folks, that's not happening here. There is no Plan in prospect.

I just gave you the record of the status of the case. The twin goals of Chapter 11 of retaining jobs in a going concern value of a business do not exist here. There is no business to reorganize.

An over eight month delay in filing the monthly operating reports, and Plan and disclosure statement, is unfair and unreasonable.

This company does not need Chapter 11 to pursue litigation. And you've already had the benefit of the automatic stay for eight months without any progress, and now you want me to enter a temporary restraining order, turned into a permanent injunction, stopping Mr. Paulson from pursuing his legal rights.

And that's not going to happen today, for those reasons set forth on the record.

The motion for TRO is denied.

And if the Debtor wishes for me to set a hearing on a preliminary injunction, or otherwise pursue the complaint, you can file something.

So we'll be adjourned in GrowCo v. Paulson.

Have a good afternoon.

THE COURT CLERK: All rise.

(Time noted: 1:39 p.m.)

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CERTIFICATE

I, RANDEL RAISON, certify that the foregoing is a correct transcript from the official electronic sound recording of the proceedings in the above-entitled matter, to the best of my ability.