Opinion
CIVIL ACTION NO. 1:20-cv-2815-AT
2023-02-13
William N. TURK, et al., Plaintiffs, v. MORRIS, MANNING & MARTIN, LLP, et al., Defendants.
David R. Deary, Pro Hac Vice, Jeven R. Sloan, John William McKenzie, III, Pro Hac Vice, William Ralph Canada, Jr., Pro Hac Vice, Tyler McLean Simpson, Pro Hac Vice, Wilson Edward Wray, Jr., Pro Hac Vice, Loewinsohn Deary Simon Ray LLP, Dallas, TX, Donna Lee, Pro Hac Vice, Loewinsohn Flegle Deary Simon LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA, for Plaintiff William N. Turk. David R. Deary, Pro Hac Vice, Jeven R. Sloan, William Ralph Canada, Jr., Pro Hac Vice, John William McKenzie, III, Tyler McLean Simpson, Wilson Edward Wray, Jr., Pro Hac Vice, Loewinsohn Deary Simon Ray LLP, Dallas, TX, Donna Lee, Loewinsohn Flegle Deary Simon LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA, for Plaintiffs Norman Radow, Carlita B. Turk. Jennifer Peterson, John Earl Floyd, John H. Rains, IV, Bondurant Mixson & Elmore LLP, Atlanta, GA, for Defendants Morris, Manning & Martin, LLP, Timothy Pollock. Brent David Hitson, Burr & Forman LLP, Birmingham, AL, Tala Amirfazli, Burr & Forman, LLP, Atlanta, GA, for Defendants Large & Gilbert, Inc., Conservation Pays, LLC. Samuel Fenn Little, Jr., S. Fenn Little, Jr. P.C., Atlanta, GA, for Defendant Joseph C. Skalski. Anthony Joseph Rollins, Gregory Keith Smith, Colin Dang DeLaney, Jason S. Bell, Smith, Gambrell & Russell, LLP, Atlanta, GA, for Defendants Atlantic Coast Conservancy, Inc., Atlantic Coast Conservatory Properties, LLC, Environmental Research and Mapping Facility, LLC, Robert D. Keller. Dana Kristin Maine, Freeman Mathis & Gary, Atlanta, GA, Travis Martin Cashbaugh, Seyfarth Shaw LLP, Atlanta, GA, for Defendant Bennett Thrasher, LLC. Brandon Parrish, David M. Pernini, Wargo, French & Singer LLP, Atlanta, GA, Ashley Escoe, Alston & Bird LLP, Atlanta, GA, Vernon M. Strickland, Strickland Debrow LLP, Newnan, GA, for Defendants Ornstein-Schuler Investments LLC, Ornstein-Schuler Capital Partners LLC. Carl Edward Volz, Pro Hac Vice, Pontem Law LLC, Chicago, IL, Jill Warner, Michael E. Brooks, Brooks & Warner, LLC, Atlanta, GA, for Defendants Clay Weibel, Weibel & Associates, Inc. Kevin James McDonough, Lauren C. Giles, Miles Hansford & Tallant, LLC, Cumming, GA, for Defendants Lucus Mason, Inc., Lucus Von Esh. Frank Agostino, Pro Hac Vice, Jeffrey Dirmann, Pro Hac Vice, Agostino & Associates PC, Hackensack, NJ, Elizabeth M. Newton, Warren R. Hall, Jr., Hall, Arbery, Gilligan, Roberts & Shanlever, LLP, Atlanta, GA, for Defendants Blethen Mine Consultants, LLC, Marvin Blethen. D. Michael Williams, Donald Brown, Hall Booth Smith, P.C., Atlanta, GA, William Dowdy White, Dentons U.S. LLP, Atlanta, GA, for Defendants Donald R. Sklar, Partnership Tax Solutions, Inc. Christine L. Mast, Joseph Hall Wieseman, Hawkins Parnell & Young, LLP, Atlanta, GA, for Defendants Aaron Kowan, The Private Client Law Group.
David R. Deary, Pro Hac Vice, Jeven R. Sloan, John William McKenzie, III, Pro Hac Vice, William Ralph Canada, Jr., Pro Hac Vice, Tyler McLean Simpson, Pro Hac Vice, Wilson Edward Wray, Jr., Pro Hac Vice, Loewinsohn Deary Simon Ray LLP, Dallas, TX, Donna Lee, Pro Hac Vice, Loewinsohn Flegle Deary Simon LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA, for Plaintiff William N. Turk. David R. Deary, Pro Hac Vice, Jeven R. Sloan, William Ralph Canada, Jr., Pro Hac Vice, John William McKenzie, III, Tyler McLean Simpson, Wilson Edward Wray, Jr., Pro Hac Vice, Loewinsohn Deary Simon Ray LLP, Dallas, TX, Donna Lee, Loewinsohn Flegle Deary Simon LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA, for Plaintiffs Norman Radow, Carlita B. Turk. Jennifer Peterson, John Earl Floyd, John H. Rains, IV, Bondurant Mixson & Elmore LLP, Atlanta, GA, for Defendants Morris, Manning & Martin, LLP, Timothy Pollock. Brent David Hitson, Burr & Forman LLP, Birmingham, AL, Tala Amirfazli, Burr & Forman, LLP, Atlanta, GA, for Defendants Large & Gilbert, Inc., Conservation Pays, LLC. Samuel Fenn Little, Jr., S. Fenn Little, Jr. P.C., Atlanta, GA, for Defendant Joseph C. Skalski. Anthony Joseph Rollins, Gregory Keith Smith, Colin Dang DeLaney, Jason S. Bell, Smith, Gambrell & Russell, LLP, Atlanta, GA, for Defendants Atlantic Coast Conservancy, Inc., Atlantic Coast Conservatory Properties, LLC, Environmental Research and Mapping Facility, LLC, Robert D. Keller. Dana Kristin Maine, Freeman Mathis & Gary, Atlanta, GA, Travis Martin Cashbaugh, Seyfarth Shaw LLP, Atlanta, GA, for Defendant Bennett Thrasher, LLC. Brandon Parrish, David M. Pernini, Wargo, French & Singer LLP, Atlanta, GA, Ashley Escoe, Alston & Bird LLP, Atlanta, GA, Vernon M. Strickland, Strickland Debrow LLP, Newnan, GA, for Defendants Ornstein-Schuler Investments LLC, Ornstein-Schuler Capital Partners LLC. Carl Edward Volz, Pro Hac Vice, Pontem Law LLC, Chicago, IL, Jill Warner, Michael E. Brooks, Brooks & Warner, LLC, Atlanta, GA, for Defendants Clay Weibel, Weibel & Associates, Inc. Kevin James McDonough, Lauren C. Giles, Miles Hansford & Tallant, LLC, Cumming, GA, for Defendants Lucus Mason, Inc., Lucus Von Esh. Frank Agostino, Pro Hac Vice, Jeffrey Dirmann, Pro Hac Vice, Agostino & Associates PC, Hackensack, NJ, Elizabeth M. Newton, Warren R. Hall, Jr., Hall, Arbery, Gilligan, Roberts & Shanlever, LLP, Atlanta, GA, for Defendants Blethen Mine Consultants, LLC, Marvin Blethen. D. Michael Williams, Donald Brown, Hall Booth Smith, P.C., Atlanta, GA, William Dowdy White, Dentons U.S. LLP, Atlanta, GA, for Defendants Donald R. Sklar, Partnership Tax Solutions, Inc. Christine L. Mast, Joseph Hall Wieseman, Hawkins Parnell & Young, LLP, Atlanta, GA, for Defendants Aaron Kowan, The Private Client Law Group. ORDER AMY TOTENBERG, UNITED STATES DISTRICT JUDGE
Having finally resolved Defendants' 13 Motions to Dismiss in this case, the Court once again faces a hotly contested, months long dispute over which of Plaintiffs' claims should proceed past the pleading stage.
As the Court explained in its 92-page Motion to Dismiss Order from earlier this year (MTD Order, Doc. 290), Plaintiffs in this case are investors who claim they were fraudulently induced into purchasing interests in various LLCs for the purpose of engaging in Syndicated Conservation Easement transactions. Plaintiffs argue that Defendants here — a collection of various lawyers, accountants, consultants, and appraisers — fraudulently represented to Plaintiffs that the transactions were a legitimate tax savings strategy when in fact the transactions were a scam. As a consequence, Plaintiffs claimed tax deductions that they now allege were not legally supportable. And they claim that as a result of Defendants' conduct they have been subjected to intense scrutiny from the IRS and the prospect of personal tax liability.
The Court incorporates by reference the facts discussed in the MTD Order.
Much like the plaintiffs in a parallel case recently decided by this Court, Lechter v. Aprio, LLP, 565 F. Supp. 3d 1279 (N.D. Ga. 2021), Plaintiffs here raised both state and federal RICO claims and state common law claims based on Defendants' alleged misrepresentations and omissions in connection with Syndicated Conservation Easement transactions, which led to Plaintiffs claiming deductions on their personal tax returns. At the outset of the MTD Order, the Court described this case as a "fraternal twin case" to Lechter, noting that the cases were "similar in many ways, but by no means identical." (MTD Order at 2.) Though the Court recognized that the plaintiffs in the two cases presented a similar story, the Court explained, "this story involves a different set of facts, and in some respects the Court reaches different conclusions of law as well." (Id.) Most saliently for present purposes, though the Court declined to hold that the plaintiffs' claims were time barred in Lechter, in this case the Court found that Plaintiffs' common law and Federal RICO claims were barred by the applicable statutes of limitations.
Plaintiffs now seek to revisit that component of the Court's decision in this case, and, alternatively, they request an opportunity to cure the deficiencies identified by the Court through amending their Complaint. Currently pending before the Court are Plaintiffs' Motion for Reconsideration [Doc. 293], Plaintiffs' Motion for Leave to File Third Amended Complaint [Doc. 294], and Defendants' Motion for Leave to File Supplemental Brief [Doc. 337].
I. Background
Plaintiffs filed their original Complaint in this matter on July 3, 2020. (Compl., Doc. 1.) The Complaint was 165 pages long and included 364 paragraphs of allegations. Approximately two months later, the Court set a briefing schedule for Defendants' Motions to Dismiss. (Doc. 111.) Under the Court's briefing schedule, Defendants' Motions were due by November 9, 2020, Plaintiffs' Responses were due by December 22, 2020, and Defendants' Replies were due by January 18, 2021. (Id. at 1-2.) The 31 Defendants who were then included in the case proceeded to file 14 separate Motions to Dismiss. (See Docs. 139, 157, 160, 161, 162, 164, 170, 171, 172, 173, 174, 175, 178, 186.)
After Defendants filed their Motions to Dismiss, the Court held a status conference on December 2, 2020 in which it granted Plaintiffs leave to file an Amended Complaint, thereby mooting Defendants' 14 Motions to Dismiss. (See Minute Entry, Doc. 190.) Plaintiffs filed their First Amended Complaint on January 8, 2021. (First Am. Compl., Doc. 200.) The First Amended Complaint was 266 pages and 472 paragraphs — a significant increase from the original Complaint. The following month, the Court set a briefing schedule for Defendants' next round of Motions to Dismiss. (See Doc. 212.) Under the Court's Scheduling Order, Defendants were directed to file one consolidated Motion to Dismiss not to exceed 50 pages, along with an executive summary not to exceed 3 pages; each set of Defendants was also permitted to file an individual Motion not to exceed 15 pages. (Id. at 1-2.) Plaintiffs were permitted to file one 50-page consolidated Response, along with an executive summary not to exceed 3 pages, and additional 15-page Responses to any of Defendants' individual Motions. (Id. at 2-3.) For their Replies, Defendants were permitted to file a consolidated brief not to exceed 20 pages and individual briefs of no more than 8 pages. (Id. at 3.)
On February 19, 2021, Plaintiffs filed an unopposed Motion for Leave to File a Second Amended Complaint to correct a factual error that had been identified by the OSI Defendants in a sentence of the First Amended Complaint. (Doc. 216.) The Court granted Plaintiffs' request for leave, and Plaintiffs filed their Second Amended Complaint ("SAC") on February 24, 2021. (SAC, Doc. 218.) Like the First Amended Complaint, the SAC spanned 266 pages and 472 paragraphs. Defendants then proceeded to file their Motions to Dismiss, which included one consolidated Motion and twelve individual Motions. (See Docs. 223, 229, 231, 233, 234, 236, 237, 238, 240, 242, 244, 248, 249.) The parties completed the briefing in June 2021, just under three months after Defendants filed their Joint Motion to Dismiss. (See Docs. 223, 279.)
On March 24, 2022, the Court issued an Order resolving Defendants' Motions to Dismiss. (See MTD Order.) In the MTD Order, the Court dismissed 10 of the 12 Counts in the SAC and eliminated 9 of the 21 Defendants from the case. As a result of the MTD Order, only two Counts remain against the following sets of Defendants:
In that same Order, the Court also resolved Plaintiffs' Motion to Strike or Disregard Extrinsic Evidence (Doc. 251).
The 12 Counts were violations of Federal RICO, violations of Georgia RICO, conspiracy to violate Federal RICO, conspiracy to violate Georgia RICO, professional malpractice, negligence, breach of fiduciary duty, fraud, negligent misrepresentation, aiding abetting breaches of fiduciary duty, civil conspiracy, and an alternative claim for rescission. (MTD Order at 24-25.)
A full list of the Defendants in the case and how they were grouped together is included on pages 10 and 11 of the MTD Order.
| Count III | Georgia RICO against the OSI Defendants, the Weibel Defendants, and the Blethen Defendants |
|---|---|
| Count IV | Conspiracy to violate Georgia RICO against the MMM Defendants, the OSI Defendants, the Weibel Defendants, the ACC Defendants, the Blethen Defendants, and Bennett Thrasher |
The Court dismissed the majority of Plaintiffs' claims - namely, Plaintiffs' Federal RICO claims and their state common law claims - on the ground that they were barred by the applicable statutes of limitations. The Court addressed the statutes of limitations in detail in the MTD Order. (See id. at 37-48.) As the Court explained, the relevant statute of limitations was five years for Plaintiffs' Georgia RICO claims and no more than four years for Plaintiffs' Federal RICO claims and each of their common law claims. (Id. at 37). Significantly, the named Plaintiffs had all purchased their interests in the LLCs at issue between 2013 and 2015, but they did not file suit until 2020. (Id.). Therefore, if the statute of limitations for each claim began to run at the time Plaintiffs had purchased their shares, as Defendants had argued in their Motions to Dismiss, then Plaintiffs' Federal RICO and common law claims would all be time barred unless Plaintiffs could establish that the claims were subject to tolling. (Id. at 37-38.)
Relying on Curtis Investment Co. v. Bayerische Hypo-und Vereinsbank, AG, 341 F. App'x 487 (11th Cir. 2009), Defendants had argued that the statute of limitations for an investment fraud claim should begin to run once the plaintiff signs a contract containing terms contrary to the representations that gave rise to the suit. (MTD Order at 40) (citing Defs.' Joint MTD, Doc. 223-1 at 58). And Defendants contended that this was exactly what occurred here. More specifically, Defendants argued that the Investor Agreements Plaintiffs signed when they purchased their shares in the LLCs identified numerous risks associated with the transactions that, according to Plaintiffs, Defendants had previously represented were lawful. The Court identified the following language that had been flagged by Defendants as illustrative:
F. Potential Changes in Law. There can be no assurance that the Internal Revenue Code (the "Code") or existing Treasury regulations thereunder will not be amended in such a manner as to alter the present form of computing the federal income tax liability of Investors, or to otherwise change in a materially adverse way the potential tax consequences from an investment in the Membership interest.
G. Risks of Conservation Easements. . . . You should be aware that conservation easements, the appraisal methodologies and techniques used in establishing the value thereof, and the tax laws applicable thereto, have come under significant scrutiny and criticism by Treasury officials in recent years, and proposed legislative changes have been identified as a means of increasing the Treasury revenues. If these proposed legislative changes were enacted, they would have a material adverse effect on the tax benefits which might otherwise arise from a
charitable donation or an investment in the Membership Interest . . . In addition, there are substantial risks associated with the granting of conservation easements, including, but not limited to, the valuation of the easement itself. . . . Moreover, there is no assurance of the potential tax impact on a particular Investor in the event that the conservation easement is granted.(MTD Order at 40-41) (quoting Defs.' Joint MTD at 40-41). The Court explained,
H. Risk of Audit. . . . In the event of any audit adjustments, a Member might incur attorney's fees, court costs, and other expenses in connection with contesting a proposed deficiency asserted by the IRS . . . Recent scrutiny of conservation easement transactions, as well as recent and proposed changes to IRS forms and reporting requirements for such transactions, may increase the likelihood that the Subsidiary's or the Company's return might be reviewed for possible audit. . . .
I. Appraisal and Valuation Risks. . . . THE VALUATION OF CONSERVATION EASEMENTS MAY BE CONSIDERED ESPECIALLY PROBLEMATIC AND HIGHLY SPECULATIVE [and] SUBJECT TO QUESTION BY THE IRS . . . Qualified appraisals are not to be construed as a guaranty of value, or as an assurance that the value could be sustained on an audit by the IRS. If a lower valuation of the Property is determined, then the amount of the contribution deduction available to Subsidiary and ultimately the Company and the investors will be decreased. If the Subsidiary grants a conservation easement, neither the Company nor the Manager have guaranteed the amount of the appraisal or the amount of the contribution deduction to be allocated to the Investors.
As Defendants point out, these agreements "warned of the very risks Plaintiffs now claim were not disclosed," including "[t]he risks that the IRS may challenge the value of the appraisal," "[t]he 'substantial risks' of conservation easement donations," "[t]he increased scrutinization of conservation easements by the IRS," "[t]he risk of an audit and attendant expenses," "[t]he risk that the IRS may challenge the appraisal as a qualified appraisal," "[t]he risk that any deduction may be reduced," and "[t]he risk of substantial penalties if a deduction was disallowed."(Id. at 41-42) (quoting OSI Defs.' MTD, Doc. 240-1 at 6-7). Based on that language, the Court concluded that the statutes of limitations began to run for Plaintiffs' Federal RICO and state common law claims at the time they signed the Investor Agreements on the ground that the disclaimer language acted as " "sufficient 'storm warnings' to trigger the duty to inquire." (Id. at 42) (quoting Youngblood-W. v. Aflac Inc., No. 4:18-cv-83, 2018 WL 10562576, at *6 (M.D. Ga. Nov. 09, 2018) (quoting Koch v. Christie's Int'l PLC, 699 F.3d 141, 153 (2d Cir. 2012))). The Court noted that this decision was consistent with cases from other Circuits finding that the statute of limitations for investment fraud claims should begin to run from the date the plaintiffs received disclaimers sufficiently disclosing the risks they had complained of. (Id. at 43) (citing Brumbaugh v. Princeton Partners, 985 F.2d 157 (4th Cir. 1993), and Dodds v. Cigna Secs., Inc., 12 F.3d 346 (2d Cir. 1993)).
The Court also acknowledged that it had previously reached a contrary conclusion in Lechter based on the principle that "factual issues may prevent a court from determining at the pleading stage that the disclaimers would 'preclude any reasonable reliance as a matter of law.' " (Id. at 44) (quoting Raysoni v. Payless Auto Deals, LLC, 296 Ga. 156, 766 S.E.2d 24, 26 (2014)). In Lechter, while the plaintiffs had received disclaimers in the Promotional Materials they received for the transactions prior to making the decision to invest, which cautioned, among other things, that Plaintiffs should consult their tax advisors about the transactions, the plaintiffs had also alleged that they received oral representations from Defendants indicating that the transactions were lawful, and that in turn, Plaintiffs could have viewed Defendants as their tax advisors. 565 F. Supp. 3d at 1321-22. The Court therefore concluded, "it would be premature to determine how the disclaimers should be read in conjunction with any additional written or oral misrepresentations Defendants have made, and whether Plaintiffs should have understood these disclaimers as qualifying any other written or oral misrepresentations Defendants may have made." Id. at 1322 (citing Raysoni, 766 S.E.2d at 27).
The Court indicated that it reached a different conclusion here on the ground that "not only are the disclaimers in this case ostensibly more clear and unequivocal than the disclaimers in Lechter, but unlike in Lechter, there are no allegations of contemporaneous oral representations that may inform the Court's analysis." (MTD Order at 45.) The Court also noted that unlike in Lechter there were "virtually no allegations in the SAC that could support Plaintiffs' theory that they were fraudulently deterred from bringing suit despite the clear 'storm warnings' contained in the Investor Agreements." (Id. at 46.) As such, Plaintiffs could not establish that the statutes of limitations should be tolled on a theory of fraudulent deterrence. The Court thus concluded, "The statutes of limitations therefore began to run at the time Plaintiffs signed their Investor Agreements and expired after four years in the case of Plaintiffs' common law and Federal RICO claims." (Id. at 47.)
At the same time, the Court declined to hold that Plaintiffs' Georgia RICO claims were time barred on the ground that those claims were subject to a different standard. The Court explained that unlike Federal RICO claims, "Georgia RICO claims do not accrue until plaintiffs are both aware of the injury and aware that the injury was the result of a pattern of racketeering activity, or else could have discovered both of these things through reasonable diligence." (Id. at 39) (citing S. Intermodal Logistics, Inc. v. D.J. Powers Co., 251 Ga.App. 865, 555 S.E.2d 478, 481 (2001), and Peery v. CSB Behavioral Health Sys., No. 106-172, 2008 WL 4425364, at *20 (S.D. Ga. Sept. 30, 2008)). The Court added, "This is ultimately 'a question of fact which must be resolved by a jury.' " (Id.) (quoting S. Intermodal Logistics, 555 S.E.2d at 482). Applying that standard, the Court could not conclude as a matter of law that Plaintiffs' Georgia RICO claims accrued when they signed the Investor Agreements because "there is a question of fact as to whether by that point Plaintiffs could have discovered through reasonable diligence both that they had been injured and that the injury in question was a result of a pattern of racketeering activity." (Id. at 47) (citing S. Intermodal Logistics, 555 S.E.2d at 481-82).
On April 21, 2022, Plaintiffs filed both a Motion for Reconsideration and a Motion for Leave to File a Third Amended Complaint. (Docs. 239, 294.) Plaintiffs' Motion for Reconsideration was limited to the portion of the MTD Order finding that all of Plaintiffs' claims other than their Georgia RICO claims were time barred. Alternatively, Plaintiffs sought leave to amend the Complaint solely to add new allegations in support of the timeliness of these claims. The next day, April 22, 2022, the Weibel Defendants moved to stay the case pending the outcome of a criminal proceeding involving Defendant Clay Weibel. (Doc. 295.)
A few days later, the Court held an inperson status conference to address Plaintiffs' Motion for Reconsideration and Motion for Leave to Amend. At the conclusion of the status conference, the Court set a briefing schedule for Plaintiffs' Motions. (See Apr. 26, 2022 Docket Order.) Defendants were given until May 24, 2022 to file a consolidated Response to both Motions not to exceed 35 pages. (Id.) Defendants were also permitted to file individual Response briefs by that same date not to exceed 5 pages. (Id.) Plaintiffs were given until June 14, 2022 to file a consolidated Reply in support of both Motions not to exceed 35 pages. (Id.) The Court also stayed the deadline for Defendants to file Answers to the SAC. (Id.)
Several weeks later, the Court stayed the briefing on the Weibel Defendants' Motion to Stay Pending Outcome of Criminal Case until 14 days after the Court resolved Plaintiffs' Motion for Reconsideration and Motion for Leave to File Third Amended Complaint. (See Doc. 310.)
At the parties' request, the Court subsequently extended the briefing schedule for Plaintiffs' Motions so that Defendants would have until June 10, 2022 to file their Responses and Plaintiffs would have until July 1, 2022 to file their Replies. (Docs. 309, 311.) Shortly thereafter, the parties filed yet another extension request, which gave Defendants until June 30, 2022 to file their Responses and gave Plaintiffs until August 12, 2022 to file their Replies. (Doc. 313.) The Court granted that request as well. (Doc. 314.)
Then, on September 22, 2022, a few weeks after the parties had finished submitting their briefs, Plaintiffs filed a notice of supplemental authority. (Doc. 329.) In that notice, Plaintiffs discussed a recent decision from the Supreme Court of Georgia involving the statute of limitations framework in Coe v. Proskauer Rose, LLP, 314 Ga. 519, 878 S.E.2d 235 (2022), which was a case about fraud and negligent misrepresentation claims related to the provision of tax advice. The ACC Defendants filed a Response to Plaintiffs' notice of supplemental authority on October 7, 2022. (Doc. 330.) Later that month, multiple additional Defendants sought leave to file a joint Response to Plaintiffs' notice of supplemental authority, which the dismissed Defendants sought to join. (See Docs. 332-34.) Plaintiffs did not respond to Defendants' request for leave, and the Court granted Defendants' request by docket entry on November 9, 2022. Defendants filed their joint Response that day. (Doc. 336.)
In January 2023, Defendants filed yet another Motion that is currently pending before the Court seeking to file an additional supplemental brief in response to Plaintiffs' pending Motions. (See Doc. 337.) In that proposed supplemental brief, Defendants seek to argue that their alleged representations regarding IRS Notice 2017-10 cannot support Plaintiffs' theory of fraudulent deterrence in light of a recent decision by the United States Tax Court. However, the Court need not consider these arguments at this juncture as they are not essential to resolving either of Plaintiffs' pending Motions. As such, the Court DENIES Defendants' Motion for Leave to File Supplemental Brief [Doc. 337] as moot.
Now, after many months of voluminous briefing, Plaintiffs' Motion for Reconsideration and Motion for Leave to File Third Amended Complaint are ripe for the Court's review.
II. Legal Standard
A. Standard for Reconsideration
Under Local Rule 7.2(E), "[m]otions for reconsideration shall not be filed as a matter of routine practice," but only when "absolutely necessary." LR. 7.2(E), NDGa; Bryan v. Murphy, 246 F. Supp. 2d 1256, 1258-59 (N.D. Ga. 2003); Pres. Endangered Areas of Cobb's History, Inc. v. U.S. Army Corps of Eng'rs, 916 F. Supp. 1557 (N.D. Ga. 1995). Reconsideration should only be granted where there is: (1) newly discovered evidence; (2) an intervening development or change in controlling law; or (3) a need to correct a clear error of law or fact. See Smith v. Ocwen Fin., 488 F. App'x 426, 428 (11th Cir. 2012); Bryan v. Murphy, 246 F. Supp. 2d 1256, 1258-59 (N.D. Ga. 2003); Jersawitz v. People TV, 71 F. Supp. 2d 1330 (N.D. Ga. 1999); Paper Recycling, Inc. v. Amoco Oil Co., 856 F. Supp. 671, 678 (N.D. Ga. 1993). Parties may not use a motion for reconsideration to show the court how it "could have done it better," to present the court with arguments already heard and dismissed, to repackage familiar arguments to test whether the court will change its mind, or to offer new legal theories or evidence that could have been presented in the original briefs. Bryan v. Murphy, 246 F. Supp. 2d at 1259; Pres. Endangered Areas of Cobb's History, Inc., 916 F. Supp. at 1560; Brogdon ex rel. Cline v. Nat'l Healthcare Corp., 103 F. Supp. 2d 1322, 1338 (N.D. Ga. 2000); Adler v. Wallace Comput. Servs., Inc., 202 F.R.D. 666, 675 (N.D. Ga. 2001) (citing O'Neal v. Kennamer, 958 F.2d 1044, 1047 (11th Cir. 1992)). If a party presents a motion for reconsideration under any of these circumstances, the motion must be denied. Bryan, 246 F. Supp. 2d at 1259; Brogdon ex rel. Cline, 103 F. Supp. 2d at 1338.
B. Standard for Granting Leave to Amend
Rule 15(a) of the Federal Rules of Civil Procedure provides that a party may amend its pleading (A) once as a matter of course within 21 days after serving it, or (B) 21 days after service of a motion or responsive pleading. Fed. R. Civ. P. 15(a)(1). If a party seeks to amend its pleading outside these time limits, it may do so only by leave of court or by written consent of the adverse party. Fed. R. Civ. P. 15(a)(2). "The court should freely give leave when justice so requires." Id.; accord Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); Shipner v. E. Air Lines, Inc., 868 F.2d 401, 406-407 (11th Cir. 1989) ("Rule 15(a) severely restricts the district court's freedom, directing that leave to amend shall be freely given when justice so requires."). Rule 15(a)'s liberal policy of "permitting amendments to facilitate determination of claims on the merits circumscribes the exercise of the district court's discretion; thus, unless a substantial reason exists to deny leave to amend, the discretion of the district court is not broad enough to permit denial." Id. at 407. Thus, the Court should deny leave to amend only where the amendment will result in undue delay, bad faith, undue prejudice, a repeated failure to cure deficiencies by amendments previously allowed, or futility. Foman, 371 U.S. at 182, 83 S.Ct. 227; Hall v. United Ins. Co. of Am., 367 F.3d 1255, 1263 (11th Cir. 2004) ("[D]enial of leave to amend is justified by futility when the complaint as amended is still subject to dismissal." (quoting Burger King Corp. v. Weaver, 169 F.3d 1310, 1320 (11th Cir. 1999))); cf. Bryant v. Dupree, 252 F.3d 1161, 1163-64 (11th Cir. 2001) (reversing district court's decision to deny leave to amend a complaint because there was no evidence of prejudice to the defendant).
A complaint is futile, inter alia, if it would be subject to dismissal for failing to state a claim for which relief can be provided. See Corsello v. Lincare, Inc., 428 F.3d 1008, 1015 (11th Cir. 2005) (affirming district court's denial of leave to amend a qui tam relator's FCA complaint because proposed amendments "failed to plead specific instances of fraudulent submissions to the government"); see also Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1255 (11th Cir. 2008) ("Because justice does not require district courts to waste their time on hopeless cases, leave may be denied if a proposed amendment . . . fails to state a claim."); Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ("Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense."). Iqbal requires more than facts that are "merely consistent with a defendant's liability" to achieve plausibility. Id. at 678, 129 S.Ct. 1937 (internal quotations omitted).
Finally, the Court may decline leave to amend based on matters complained of by Defendant or based on issues identified sua sponte. See United States ex rel. Brunson v. Narrows Health and Wellness, LLC, 469 F. Supp. 2d 1054, 1055 (N.D. Ala. 2007) (stating that the court "without defendant's help, finds several good reasons why plaintiffs' motion [to amend] should be denied," including undue, unexplained delay, prejudice to the defendant, and lack of particularity). Whether to permit amendment is a legal determination for the Court, subject to de novo appellate review. Mizzaro, 544 F.3d at 1236.
III. Discussion
A. Plaintiffs' Motion for Reconsideration
Plaintiffs' primary argument in their Motion for Reconsideration is that the Court erred by relying on the Eleventh Circuit's decision in Curtis Investment Co., LLC v. Bayerische Hypo-und Vereinsbank, AG, 341 F. App'x 487 (11th Cir. 2009) in holding that Plaintiffs were first injured, and the statute of limitations began to run, at the time they purchased their interests in the LLCs. By doing so, Plaintiffs argue that the Court ignored the requirement that Plaintiffs must have suffered an injury before their claims accrued.
For background, the Plaintiff in Curtis had entered a loan agreement for a CARDS transaction that the defendants there had represented would be a 30-year loan when in fact the defendants allegedly intended to terminate the loan after a year. Id. at 489. The Eleventh Circuit explained, "The gravamen of Curtis's amended complaint is that it was fraudulently induced by the defendants to enter into the CARDS transaction, because they knowingly misrepresented to Curtis that the transaction would be a long-term arrangement when in truth and in fact the defendants intended that the arrangement would last only for a single year." Id. After the plaintiff signed the agreement, the defendants terminated the loan after a year and the plaintiff sued, raising state common law and Georgia RICO claims, much like Plaintiffs here. Id. at 489-90. Applying Georgia law, the Eleventh Circuit found that the statute of limitations began to run when the plaintiff signed an agreement that, contrary to defendants' prior representations, explicitly warned the plaintiff that the loan could be terminated after a year. Id. at 495.
The Court reached the same conclusion with respect to Plaintiffs' Federal RICO and common claims in this case. As the Court noted in the MTD Order, "[l]ike the plaintiff in Curtis, Plaintiffs signed agreements that contradict Defendants' alleged prior representations and Plaintiffs' understanding of the deal." (MTD Order at 40.) And here, just like in Curtis, the Court found that Plaintiffs were injured when they signed agreements containing disclaimers that contradicted Defendants' alleged prior representations, i.e., the representations that the transactions at issue were lawful. The Court explained, "[T]he Investor agreements Plaintiffs signed contained clear warnings that Plaintiffs' claimed tax deductions may be disallowed, just like the clear warnings in the agreement in Curtis stating that repayment may be required after a year." (Id. at 42.) That holding was also consistent with investment fraud cases in the Second and Fourth Circuits, which held that the plaintiffs there were injured the moment they signed investment agreements containing express disclaimers with language contrary to the defendants' prior representations. (See id. at 43.)
Plaintiffs argue that this component of the MTD Order rests on clear error because unlike the plaintiff in Curtis Plaintiffs here did not suffer an injury that would trigger the statute of limitations at the time they signed the agreements. Rather, they contend that there are a number of factual differences between this case and Curtis that should lead the Court to reach a different conclusion about when Plaintiffs first suffered an injury.
For instance, Plaintiffs emphasize that the specific types of alleged misrepresentations at issue in this case are different than the representations in Curtis. They assert that in this case the representations at issue are about the legality of — and Plaintiffs' entitlement to — promised tax benefits, whereas in Curtis the representations were about the promised duration of a loan. They argue that in Curtis it was clear all along that the loan could be terminated within a year, but at the time Plaintiffs signed the Investor Agreements in this case it was not yet clear whether the IRS would allow Plaintiffs' claimed tax deductions. They add that if the IRS or Tax Court had upheld the deductions Plaintiffs would not have suffered any injuries at all. Plaintiffs also claim that the representations contained within the disclaimers in this case do not necessarily contradict Defendants' prior representations because the disclaimers only warned them of a "risk" of an audit rather than what Plaintiffs allege here, which is that an audit and disallowance of the deductions was inevitable. Plaintiffs argue that this is distinguishable from the disclaimers in Curtis that "clearly and unequivocally permitted the defendant 'to demand payment of the entire loan after a single year.' " (Doc. 293-1 at 8) (quoting Curtis, 341 F. App'x at 489).
In their Reply, Plaintiffs argue that the factual situation in this case is more analogous to the situation in Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, 784 F.3d 771 (11th Cir. 2015). As Plaintiffs explain, the plaintiffs in Kipnis participated in a CARDS transactions between 2000 and 2001. Id. at 774-76. In 2007 the IRS issued a notice of deficiency related to the transaction, which the Tax Court upheld in 2012 on the ground that the transaction lacked economic substance. Id. at 776-77. The plaintiffs filed their lawsuit after the Tax Court case had concluded and the defendants argued that the plaintiffs' claims were barred by the applicable statutes of limitations. Id. at 777. On appeal, the Eleventh Circuit certified the question of when the claims accrued to the Supreme Court of Florida on the ground that the case depended "wholly on interpretations of Florida law." Id. at 783. The Supreme Court of Florida ultimately applied a "special rule" called the finality accrual rule, which applies "when the Plaintiff's damages exist by virtue of an enforceable court judgment." See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, 202 So.3d 859, 862 (Fla. 2016). Based on that rule, the court determined that the claims did not accrue until the Tax Court case had concluded. Id. at 866. Though the plaintiffs there alleged that they had incurred damages such as fees they paid for entering into the transactions and legal and accounting expenses they incurred over the course of the audit and Tax Court case, the court determined that, under the finality accrual rule, these injuries did not ripen until the Tax Court case was over. Id. at 865. The Eleventh Circuit later adopted that decision based on the authoritative interpretation from the Supreme Court of Florida. See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, 844 F.3d 944, 945 (11th Cir. 2016). Plaintiffs argue that the Court should reach a similar conclusion here and find that the statutes of limitations for their claims should not begin to run until the associated Tax Court proceedings have concluded.
As additional support, Plaintiffs direct the Court to the Supreme Court of Georgia's recent decision in Coe v. Proskauer Rose, LLP, 314 Ga. 519, 878 S.E.2d 235 (2022), which is another, more recent, case involving alleged fraudulent tax advice where the court declined to hold that the plaintiffs' claims were time barred. The plaintiffs in Coe had invested in a tax savings strategy in 2002 after the law firm Proskauer Rose issued an opinion representing that there was a greater than 50% chance that the plaintiffs' claimed tax deductions would be upheld. Id. at 239. In 2005, the IRS issued an audit of the plaintiffs' tax returns. Id. Plaintiffs later filed suit against Proskauer Rose alleging that the firm had misrepresented that the tax strategy was legal despite knowing that the IRS was auditing and disallowing similar tax strategies. Id. at 240. However, the plaintiffs did not file suit against Proskauer Rose based on its representations until 2015, after the Tax Court proceeding related to Plaintiffs' tax returns had concluded. Id. at 239. On appeal, the Georgia Court of Appeals found that the plaintiffs' claims accrued at the time of the transactions in 2002 and were not tolled, and the Supreme Court of Georgia later granted cert. on the question of whether the plaintiffs' claims were time barred. Id. at 241. Upon review, the Supreme Court of Georgia rejected the plaintiffs' contention that they had not been injured until the conclusion of the Tax Court proceeding; however, the court found that there was a genuine dispute of material fact regarding whether the statute of limitations should be tolled based on the defendant's fraudulent concealment of the plaintiffs' injuries. Id. at 243, 247. Thus, the claims were not time barred even though the complaint had been filed nearly 15 years after the transactions at issue. By analogy, Plaintiffs argue that the present case is yet another situation in which the years' old claims related to the provision of tax advice should be allowed to move forward based on a theory of fraudulent concealment.
Plaintiffs' raise one additional argument for reconsideration — one based on a misreading of a sentence in the MTD Order. In the sentence in question, the Court stated that Plaintiffs' Georgia RICO claims were not time barred based on Plaintiffs' receipt of the disclaimers because "there is a question of fact as to whether by that point Plaintiffs could have discovered through reasonable diligence both that they had been injured and that the injury in question was a result of a pattern of racketeering activity." (Id. at 47) (citing S. Intermodal Logistics, 555 S.E.2d at 481-82). The Court placed an emphasis on the "and" in that sentence for a reason; it was because the second part of the sentence was the key. As the Court explained in the MTD Order, in contrast to Federal RICO claims, "Georgia RICO claims do not accrue until plaintiffs are both aware of the injury and aware that the injury was the result of a pattern of racketeering activity, or else could have discovered both of these things through reasonable diligence." (Id. at 39.) Applying that standard, for purposes of the Georgia RICO claims the court found that Plaintiffs could have discovered through reasonable diligence that they had been injured, which is what the Court determined for the Federal RICO and common law claims, but there was nevertheless a question of fact as to whether Plaintiff could have discovered through reasonable diligence that they had been injured specifically by a pattern of racketeering activity, which is an issue unique to the tolling analysis for Georgia RICO claims. Therefore, as the Court stated in the MTD Order, it could not determine as a matter of law that Plaintiffs' Georgia RICO claims were time barred on the theory that they should have discovered both that they were injured and that they had been injured by a pattern of racketeering activity. Consequently, unlike Plaintiffs' Federal RICO and common law claims, Plaintiffs' Georgia RICO claims were not time barred.
Plaintiffs misread the Court's Order as stating that there were two independent factual questions about (1) whether Plaintiffs could have discovered that they had been injured, and (2) whether they could have discovered that they had been injured specifically because of a pattern of racketeering activity. And they argue that if there was a factual question about the first issue — whether Plaintiffs could have discovered whether they had been injured — on the Georgia RICO claims, there must be a question of fact on that issue as to the Federal RICO claims as well. But again, the Court only found that there was a question of fact on the second issue, which is an issue unique to the tolling analysis for Plaintiffs' Georgia RICO claims and is not a factor in the tolling analysis for Plaintiffs' remaining claims. Thus, Plaintiffs are incorrect when they say the Court "reached a different conclusion on the federal RICO claim despite the same standard applying to that limitations analysis" and "[t]he same conclusion the Court reached with respect to the Georgia RICO claim should apply to the federal RICO claim." (Doc. 293-1 at 3.) Plaintiffs' misconstruction of that component of the MTD Order is not a sufficient ground for reconsideration.
Though Plaintiffs' make a better argument that reconsideration is warranted based on the various factual differences between this case and Curtis, the Court does not find that reconsideration is warranted on that ground either — at least on the current pleadings. In Plaintiffs' view, the gravamen of the complaint in Curtis was that the plaintiff was fraudulently induced to enter into a CARDS transaction by the defendants there knowingly misrepresenting that the loan in question was a long-term loan when in fact the defendants fully intended to terminate the loan within a year. By comparison, the allegations in this case are that Plaintiffs were fraudulently induced to enter SCE Strategy transactions by Defendants knowingly misrepresenting that the transactions were lawful when in fact they knew that they were not. Though there are certainly factual differences between the two cases, at bottom, both cases involve Plaintiffs who claim that they were fraudulently induced to invest in a tax savings strategy based on the Defendants' material misrepresentations about the nature of the transaction.
Nonetheless, Plaintiffs insist that the analysis the Eleventh Circuit applied in Curtis does not apply here because this is not an investment fraud case and Plaintiffs were never defrauded into purchasing their shares. But as Defendants point out, that argument directly contradicts Plaintiffs' own allegations in the SAC. Defendants point to Plaintiffs' allegations that the purpose of Defendants' scheme was to "sell" the idea that purchasing shares in the LLCs would lead to "corresponding tax deduction[s]," (SAC ¶ 1); that the purpose of the Promotional Materials Defendants prepared for the transactions "was to convince potential participants to participate" in the transactions i.e., to invest in the LLCs by purchasing shares, (id. ¶ 169); that Plaintiffs purchased ownership interests in the LLCs based on the Promotional Materials and Defendants' advice and representations, (id. ¶ 173); and that "selling, and implementing the SCE Strategy involved numerous false and misleading misrepresentations and omissions that amount to a scheme or artifice to defraud," (id. ¶ 339; see Doc. 317 at 8-9). Furthermore, a key component of Plaintiffs' damages theory in this case is that they suffered an injury because they paid substantial sums to invest in transactions that were allegedly a sham, and that they did so based on Defendants' alleged fraudulent conduct. In their Reply, Plaintiffs concede that they seek damages for paying money into the LLCs, but they argue that those injuries still would not have accrued until the tax deductions were disallowed at the partnership level. The Court finds this argument especially puzzling because if Plaintiffs were not injured until the LLCs were injured then Plaintiffs' injuries might well be deemed derivative of the injuries to the LLCs and Plaintiffs then would not have standing.
Defendants included multiple examples of Plaintiffs' allegations to that effect in their Joint Response. (See Doc. 317 at 9-10.)
The Court addressed the issue of standing in detail in the MTD Order and ultimately allowed Plaintiffs' claims to proceed on the ground that "further factual development may be needed to determine whether this is a situation in which the plaintiff shareholders were injured by 'acts of racketeering activity that target the plaintiff,' or whether it is one in which the plaintiff shareholders suffered injuries 'only as a result of harm to the corporation.' " (MTD Order at 35-36) (internal citations omitted). However, if Plaintiffs were correct that, contrary to their allegations in the SAC (a) this is not an investment fraud case about activity that targeted Plaintiffs, (b) there could not have been any injury to Plaintiffs until there was an injury to the LLCs, (c) Plaintiffs' only injuries were the injuries that directly flowed from the injuries to the LLCs, and (d) if the LLCs had never been injured then Plaintiffs never would have been injured either, then Plaintiffs would not have standing to bring any of their claims, including the claims that the Court has already permitted to move forward.
Additionally, there are strong arguments that the disclaimers Plaintiffs received representing that the transactions at issue were a substantial risk directly contradicted by Defendants' alleged prior representations that there was little to no risk. In Curtis the disclaimers at issue explicitly warned the plaintiff of the very risk that the plaintiff complained of there, the risk that the loan could be terminated within a year. In the instant case the disclaimers also explicitly warned Plaintiffs of the risks they complain of here, including audits, disallowance of their claimed tax deductions, and the potential for personal tax liability. Plaintiffs argue that the situation in Curtis is distinguishable because in that case it was clear all along that the defendants intended to terminate the loan early, so there was no chance that the plaintiff would get the long-term loan that it expected. The Court notes by comparison that Plaintiffs say in their brief, "Plaintiffs allege Defendants designed, developed, promoted, and implemented the SCE strategy despite knowing that it was fatally flawed from the outset and would never pass muster with the IRS if scrutinized." (Id. at 9) (emphasis in original); (see also SAC ¶ 3) ("The SCE Strategy, however, was not properly and legitimately valued or implemented and was never intended to be. It also intentionally did not comply with Section 170(h) of the Code. The SCE Strategy was fatally flawed from the outset."). Even if Plaintiffs are ultimately correct that the representations in the disclaimers do not directly contradict the prior representations in the same way as the written representations in Curtis and arguably wove in conjunction with the original disclosures a confusing or misleading message, the Court cannot conclude that the Court committed clear error of law or fact on that ground based on the allegations of the SAC.
Relatedly, even if Plaintiffs are ultimately correct that the factual situation here is more analogous to the situation in Kipnis, Plaintiffs fail to establish grounds for reconsideration on that basis because the Court finds Kipnis to be distinguishable on multiple grounds. For one thing, in Kipnis the court was applying a rule that appears to be unique to Florida law and that has apparently never been recognized by Georgia courts. In addition, Kipnis did not involve clear and unequivocal disclaimers that should act as "storm warnings" and trigger the statute of limitations under Georgia law, which is the relevant state law that applies in this case. Indeed, Georgia law suggests that plaintiffs should be on notice of their injuries, and the statute of limitations should begin to run, once they receive "storm warnings" that should have alerted them in the exercise of due diligence that "something was amiss." Bauer v. Weeks, 267 Ga.App. 617, 600 S.E.2d 700, 703 (2004); Youngblood-W., 2018 WL 10562576, at *6. The clear and unequivocal disclaimers in this case would surely qualify. (See MTD Order at 42) (noting that "Plaintiffs had certainly received 'sufficient "storm warnings" to trigger the duty to inquire' by the time they signed their investor agreements."). That is, at least as Plaintiffs' claims are currently plead.
The Court also notes that the various orders in Kipnis were all issued several years before the MTD Order, yet Plaintiffs did not bring those orders to the Court's attention until their Reply in support of their Motion for Reconsideration.
Even though the current pleadings suggest that Plaintiffs' claims accrued at the time they purchased their shares, and that Plaintiffs have failed to provide sufficient allegations of fraudulent concealment to toll their claims, the Supreme Court of Georgia's recent decision in Coe clearly suggests that Plaintiffs' claims could potentially still be timely even if Plaintiffs were injured at the time they purchased their shares. See 878 S.E.2d at 247 (finding that "the Court of Appeals erred in determining that the Coes failed, as a matter of law, to exercise reasonable diligence to discover Proskauer's allegedly fraudulent acts" even though they were injured at the time that they purchased their shares). Plaintiffs failed to include sufficient allegations of fraudulent concealment in the SAC to toll the years' old investment fraud claims at issue here, but this defect could potentially be cured through an amended complaint. By the same token, if Plaintiffs are able to provide "allegations of contemporaneous oral representations that may inform the Court's analysis," (MTD Order at 45), the Court could potentially conclude, as it did in Lechter, that "it would be premature to determine how the disclaimers should be read in conjunction with any additional written or oral misrepresentations Defendants have made, and whether Plaintiffs should have understood these disclaimers as qualifying any other written or oral misrepresentations Defendants may have made." 565 F. Supp. 3d at 1322.
All things considered, the Court finds that Plaintiffs have failed to provide an adequate basis for the Court to reconsider its prior determination that Plaintiffs' common law and Federal RICO claims are time barred. Plaintiffs' Motion for Reconsideration [Doc. 293] is therefore DENIED. However, the Court recognizes that this is a potentially curable defect. And for the reasons discussed below, Plaintiffs' additional allegations in the proposed Third Amended Complaint address and arguably cure the pleading deficiencies flagged by the Court to date.
B. Plaintiffs' Motion for Leave to Amend
In their Motion for Leave to File Third Amended Complaint, Plaintiffs request leave to amend the Complaint solely to add additional allegations to support the timeliness of their claims. The additional allegations appear in paragraphs 372 through 395 of Plaintiffs' proposed Third Amended Complaint. (See Doc. 294-2 ¶¶ 372-95.) These additional allegations are designed to mirror the allegations the Court previously found sufficient to survive a Motion to Dismiss in Lechter.
Plaintiffs emphasize that the Court previously found the allegations in the SAC insufficient compared to those in Lechter because Plaintiffs did not include allegations of contemporaneous written or oral communications that could have informed Plaintiffs' reading of the disclaimers and did not include robust fraudulent deterrence allegations. Plaintiffs now claim that they have included allegations to that effect in the proposed Third Amendment Complaint.
For example, Plaintiffs add multiple paragraphs of allegations in support of their theory that Defendants acted as Plaintiffs' tax advisors, (see id. ¶¶ 389-95), and provided several specific examples of Defendants providing Plaintiffs with advice in connection with Plaintiffs' decisions to invest. In one paragraph, Plaintiffs have added allegations that before Plaintiff William Turk purchased his LLC interests, Frank Shuler of OSI advised him that the transactions were lawful, and that OSI could not wait for the deductions to be challenged so that Defendants could prove their legality. (Id. ¶ 373.) In another paragraph, Plaintiffs add that Matt Ornstein of OSI told Plaintiff Norman Radow before he invested that he should be confident in the legality of the transaction, there was no risk, and the appraisal valuations were "rock solid." (Id. ¶ 375.) Plaintiffs argue that like in Lechter, these additional allegations of contemporaneous oral representations could have informed Plaintiffs' understanding of the disclaimers and should prevent the Court from determining as a matter of law that the disclaimers put Plaintiffs on notice of their claims.
Plaintiffs have also included additional post-investment allegations in support of their theory that Defendants fraudulently concealed Plaintiffs' injuries. Like the plaintiffs did in their complaint in Lechter, Plaintiffs seek to include allegations of representations Defendants made in response to the IRS's audit notices emphasizing that the audit was just the first step in the process, and that Defendants were prepared to defend the legality of the deductions before the Tax Court. (Id. ¶¶ 383, 385, 386.) In each of these communications, Plaintiffs allege that Matthew Kaynard of OSI "reiterated and reassured" the LLC members "that they 'should have claimed their proportional share of the charitable contribution deductions' " notwithstanding the pendency of the audit. (Id.) Plaintiffs argue that these representations could have fraudulently deterred Plaintiffs from bringing their claims earlier such that the statute of limitations for raising their claims would be tolled.
Plaintiffs contend that because the Court previously found in Lechter that substantially similar allegations in that case were sufficient to overcome the disclaimers at issue there, the new allegations in the proposed Third Amended Complaint would cure the deficiencies in the SAC and should lead the Court to reach the same conclusion regarding the disclaimers at issue here. As a consequence, Plaintiffs argue that the proposed amendment would not be futile.
Plaintiffs acknowledge that if the Court were to allow the amendment it would be their third iteration of the Complaint in the case. As previously noted, Plaintiffs amended the Complaint for the first time after Defendants had already completed a full round of briefing on their Motions to Dismiss, which encompassed 14 separate Motions to Dismiss on behalf of the 31 Defendants. And Plaintiffs amended the Complaint a second time to correct a factual error at the OSI Defendants' request. However, Plaintiffs argue that the second amendment should not count against them because it was not substantive. Though Plaintiffs concede that their first amendment was substantive in nature, they contend that they still have not had an adequate opportunity to address the deficiencies at issue here because, at the time Plaintiffs provided their first substantive amendment, they did not have the benefit of the Court's guidance in the MTD Order. In other words, Plaintiffs assert that before the Court issued the MTD Order they did not have fair notice of the defects in the SAC and a meaningful opportunity to fix them. Even though the Court has already considered and rejected Plaintiffs' allegations once, Plaintiffs point to language from this Court's decision in Smith v. Ocwen Financial, No. 1:11-cv-484, 2011 WL 13217843 (N.D. Ga. June 10, 2011) stating that "a plaintiff should usually be allowed one opportunity to amend the complaint upon dismissal." Id. at *1.
Plaintiffs also heavily rely on the Eleventh Circuit's decision in Bryant v. Dupree, 252 F.3d 1161 (11th Cir. 2001). In Bryant, the Eleventh Circuit held that it was an abuse of discretion for the district court to deny the plaintiffs leave to amend the complaint after a dismissal when the plaintiffs' prior amendment had been as a matter of course and thus did not qualify as "at least one chance" to amend the complaint before dismissal with prejudice. Id. at 1163-65. Plaintiffs contend that like the plaintiffs in Bryant they have not had at least one chance to amend the Complaint prior to dismissal with prejudice. They emphasize that they had not received guidance from the Court about the deficiencies in the SAC prior to the MTD Order, and that the Court's prior decision in Lechter resulted in the opposite conclusion. As such, Plaintiffs claim that like in Bryant this was a situation in which "[r]ather than indicating infirmities in the complaint, the district court's prior opinion created the exact opposite impression." Id. at 1164. For all these reasons, Plaintiffs argue that just like in Bryant "it cannot be said that the plaintiffs failed to correct defects of which they had notice." Id.
On the question of prejudice, Plaintiffs note that under Bryant the lengthy nature of the litigation alone does not constitute undue prejudice. Id. at 1164-65. Relying on Georgia Power Co. v. Charter Communications, LLC, No. 1:11-cv-4461, 2013 WL 12247036 (N.D. Ga. May 28, 2013), Plaintiffs add that any potential prejudice to Defendants is even further reduced by the fact that discovery has not yet commenced and discovery will likely be stayed until the conclusion of the criminal matter involving Mr. Weibel. See id. at *6 (finding that decision to grant plaintiff leave to amend the complaint would not unduly prejudice defendants because "this case is under a stay, and discovery has not yet begun"). Plaintiffs suggest that if discovery cannot proceed anyway given the posture of this case, the Court might as well give Plaintiffs the opportunity to cure the deficiencies in the SAC during the pendency of the stay and have the parties brief another round of Motions to Dismiss in the interim. To minimize the potential prejudice that Defendants might face from having to brief an additional round of Motions to Dismiss, Plaintiffs suggest that the briefing could be limited to 10 pages for each side solely on the question of whether Plaintiffs' claims are still time barred, and the parties could incorporate by reference their prior briefing on the merits of any claims that the Court allows to move forward based on the amendment. Finally, Plaintiffs argue that they did not unduly delay filing their request for an amendment, which was filed shortly after the Court issued the MTD Order, and that they have not sought to file the amendment in bad faith or for an improper purpose.
In response, Defendants first emphasize that Plaintiffs previously included a request for an amendment in the Motion to Dismiss briefing, and the Court already denied that request in the MTD Order. They note that the Court already considered and rejected that request and found that "the wiser course is to proceed with discovery on Plaintiffs' remaining claims." (MTD Order at 91-92.) Defendants argue that the present Motion is effectively a motion for reconsideration of the Court's prior determination not to allow that requested amendment.
Defendants also argue that they would be prejudiced by a further amendment because they have already gone through two full rounds of briefing on their Motions to Dismiss. They indicate that if the Court were to allow the proposed amendment it would trigger yet another set of Motions to Dismiss and further voluminous briefing. This would be on top of the over 960 pages of briefs that Defendants have already filed in response to Plaintiffs' cumulative pleadings in this case, exclusive of exhibits. (See Doc. 316 at n.2.)
Although Defendants agree with Plaintiffs' assertion that Plaintiffs should have "at least once chance" to amend the Complaint, they argue that Plaintiffs' reliance on Bryant is misplaced. Defendants argue that in Bryant the plaintiff only had one substantive opportunity to amend the Complaint as of right and the plaintiff had not previously sought to amend the Complaint with leave from the Court. In contrast, Plaintiffs in this case have already had one substantive opportunity to amend the Complaint with the Court's leave. For that reason, Defendants argue that this case is more analogous to the Eleventh Circuit's decision in Blackburn v. Shire US Inc., 18 F.4th 1310 (11th Cir. 2021).
In Blackburn, like in this case, the plaintiff had made one prior substantive amendment to the Complaint that was not as of right. Id. at 1317. The amendment there required leave from the court because it had been filed after a motion for judgment on the pleadings. Id. The court found that the case was distinguishable from Bryant on the ground that the plaintiffs prior amendment had not been "as a matter of course" like the plaintiff's amendment in Bryant. Id. at 1318. In addition, unlike in Bryant, the court found that the district court did not abuse its discretion when it denied the plaintiff leave to amend the complaint an additional time because the plaintiff had already amended the complaint once with leave, and the parties had already engaged in voluminous briefing. Id. at 1318. Under the circumstances, the court determined that allowing the plaintiff to amend the complaint again "would be contrary to promoting judicial efficiency." Id. Defendants argue that those same considerations are equally applicable here.
Defendants also reference language from the Eleventh Circuit's decision in Eiber Radiology, Inc. v. Toshiba America Medical Systems, Inc., 673 F. App'x 925 (11th Cir. 2016), stating, "We have never required district courts to grant counseled plaintiffs more than one opportunity to amend a deficient complaint, nor have we concluded that dismissal with prejudice is inappropriate where a counseled plaintiff has failed to cure a deficient pleading after having been offered ample opportunity to do so." Id. at 930. Defendants argue that Plaintiffs should not be afforded more than one opportunity to amend the complaint because, as was the case in Eiber, it appears that prior to the MTD Order Plaintiffs already "possessed the facts and evidence that would have been necessary" to include the allegations they now seed to include in a Third Amended Complaint. Id. Plaintiffs simply failed to include these additional allegations earlier.
Even if the Court were to consider the amendment, Defendants claim that allowing such an amendment would be futile. Defendants argue that notwithstanding Plaintiffs' efforts to add allegations more akin to those in Lechter, this case is distinguishable from Lechter because, as the Court already noted, the disclaimers in this case are more clear and unequivocal than the disclaimers in Lechter. They assert that even if the Court were to consider Plaintiffs' additional allegations of Defendants' pre-investment representations, Plaintiffs' claims would still be time barred because the clear and unequivocal disclaimers they received put Plaintiffs on notice of their claims and triggered the statutes of limitations. Defendants also note that Plaintiffs' proposed additional allegations include admissions that Plaintiffs also had their own tax advisors, which Defendants believe undercuts Plaintiffs' argument that they were relying on Defendants as their own advisors. With respect to the post-investment representations, Defendants argue that Plaintiffs have not identified any actual fraud on the part of Defendants, as opposed to merely statements of opinion or predictions about the outcomes of audits and Tax Court proceedings, which cannot serve as the basis for fraudulent concealment. Lastly, Defendants state that nothing prevented Plaintiffs from performing their own due diligence.
As a threshold matter, the Court is not convinced by Defendants' argument that Plaintiffs' motion for leave is effectively a motion for reconsideration. Though Defendants are correct that the Court previously denied Plaintiffs' request for an amendment in the Motion to Dismiss briefing, that was just a generic request from Plaintiffs that they be allowed to cure any and all of the deficiencies in the SAC in the event that the Court dismissed any of their claims. The present request is a more narrow and targeted one, directed solely at the timeliness question, which Plaintiffs have now properly raised through a formal motion.
The Court also notes that Plaintiffs' allegations in the proposed Third Amended Complaint are a significant improvement over the allegations in the SAC. And though Defendants are correct that Plaintiffs have technically had at least one opportunity to amend the Complaint, the Court is hesitant to deny Plaintiffs a chance to cure the pleadings through "one opportunity to amend the complaint upon dismissal." Smith, 2011 WL 13217843, at *1 (emphasis added). This is especially so given that the Court reached a contrary conclusion in Lechter. Moreover, if the parties cannot proceed with discovery anyway due to the pendency of the criminal matter involving Mr. Weibel, the Eleventh Circuit's "judicial efficiency" rationale for denying leave to amend in Blackburn arguably would not apply in this case.
That said, it may make a substantive difference that most of the relevant disclaimer language in Lechter was in the Promotional Materials the plaintiffs received when the defendants initially pitched the transactions to them before they had made the decision to invest, whereas most of the relevant disclaimer language in this case was in the Investor Agreements that Plaintiffs signed at the point at which they actually purchased their shares. Plaintiffs implicitly acknowledge this distinction in their Reply, where they include side-by-side comparisons of "Language in Investor Agreement in Turk" and "Language in private placement memorandum in Lechter." (See Doc. 327 at 12-14.) Moreover, at least as the Court understands it, unlike the Investor Agreements, the Promotional Materials were not "signed agreements that contradict Defendants' alleged prior representations and Plaintiffs' understanding of the deal." (MTD Order at 40) (emphasis added). At this juncture, the Court need not further analyze these possible distinctions, or others, without the benefit of a final version of the amended complaint authorized or the parties' briefs.
Although Defendants raise legitimate concerns that they would be prejudiced by another amendment if it would trigger an additional round of voluminous briefing, the Court is well aware of the parties' respective positions at this juncture. Given the case's current posture, the Court agrees with Plaintiffs that only very limited briefing should be required given the narrow scope of Plaintiffs' amendment, which is limited to the statute of limitations issues described above. Under the circumstances, Plaintiffs' proposal to limit the briefing on any future motions to dismiss sufficiently mitigates Defendants' prejudice concerns. Accordingly, the Court GRANTS Plaintiffs' Motion for Leave to File Third Amended Complaint [Doc. 294].
IV. Conclusion
For the foregoing reasons, Plaintiffs' Motion for Reconsideration [Doc. 293] is DENIED, but Plaintiffs' Motion for Leave to File Third Amended Complaint [Doc. 294] is GRANTED. Defendants' Motion for Leave to File Supplemental Brief [Doc. 337] is DENIED as moot.
Plaintiffs are directed to file their proposed Third Amended Complaint by February 23, 2023, and Defendants are directed to either move to dismiss the new Complaint or file an Answer 14 days after the filing of Plaintiffs' Third Amended Complaint. In the event that Defendants move to dismiss the Third Amended Complaint, Defendants are directed to file a consolidated brief not to exceed 10 pages, which shall be limited to the issue of whether any portion of Plaintiffs' claims are time barred. If Defendants are unable to prepare an agreed upon joint filing, each set of Defendants should file an individual brief not to exceed 2 pages. For their Replies, Defendants may alternatively file either a consolidated Reply brief not to exceed 5 pages or individual Reply briefs not to exceed 1 page. Whether or not Defendants submit individual briefs, Plaintiffs should address their responses to the arguments raised by Defendants in a single consolidated 10-page filing. The parties may incorporate by reference any arguments they have raised in the prior briefings.
IT IS SO ORDERED this 13th day of February, 2023.