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Zazzali v. Ellison

United States District Court, D. Idaho

September 24, 2013

JAMES R. ZAZZALI, as Trustee for the DBSI Estate Litigation Trust and as Trustee for the DBSI Private Actions Trust, Plaintiff,
v.
MARK ELLISON, Defendant

Order Filed: May 9, 2013

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For James R. Zazzali, as Trustee for the DBSI Estate Litigation Trust and as Trustee for the DBSI Private Actions Trust, Plaintiff: Debra A Clifford, LEAD ATTORNEY, Mark Barry Conlan, GIBBONS PC, Newark, NJ; Keely E. Duke, Kevin Alan Griffiths, LEAD ATTORNEYS, Duke Scanlan & Hall, PLLC, Boise, ID; E. Evans Wohlforth, Jr., PRO HAC VICE, Gibbons P.C., Newark, NJ.

For Mark Ellison, Defendant: Tracy Jack Crane, LEAD ATTORNEY, Anderson Julian and Hull, Boise, ID; Walter H Bithell, LEAD ATTORNEY, Pamela Simmons Howland, HOLLAND & HART, Boise, ID.

OPINION

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ORDER ON REPORT AND RECOMMENDATION

Honorable Edward J. Lodge, U.S. District Judge.

On May 9, 2013, United States Magistrate Judge Mikel H. Williams issued a Report and Recommendation in this matter, Dkt. 31. Pursuant to 28 U.S.C. § 636(b)(1), the parties had fourteen days in which to file written objections to the Report and Recommendation. Plaintiff filed his limited objection on May 23, 3013, Dkt. 32. No objections or response to Plaintiff's limited objection was filed by Defendant. The matter is now ripe for the Court's consideration.

DISCUSSION

Pursuant to 28 U.S.C. § 636(b)(1)(C), this Court may accept, reject, or modify, in whole or in part, the findings and recommendations made by the magistrate judge. Where the parties object to a report and recommendation, this Court shall make a de novo determination of those portions of the report which objection is made. Id. Where, however, no objections are filed the district court need not conduct a de novo review. In United States v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003), the court interpreted the requirements of 28 U.S.C. § 636(b)(1)(C):

The statute [28 U.S.C. § 636(b)(1)(C)] makes it clear that the district judge must review the magistrate judge's findings and recommendations de novo if objection is made, but not otherwise. As the Peretz Court instructed, " to the extent de novo review is required to satisfy Article III concerns, it need not be exercised unless requested by the parties." Peretz, 501 U.S. at 939 (internal citation omitted). Neither the Constitution nor the statute requires a district judge to review, de novo, findings and recommendations that the parties themselves accept as correct. See Ciapponi, 77 F.3d at 1251 (" Absent an objection or request for review by the defendant, the district court was not required to engage in any more formal review of the plea proceeding." ); see also Peretz, 501 U.S. at 937-39 (clarifying that de novo review not required for Article III purposes unless requested by the parties) . . . .

See also Wang v. Masaitis, 416 F.3d 992, 1000 & n.13 (9th Cir. 2005). Furthermore, to the extent that no objections are made, arguments to the contrary are waived. See Fed.R.Civ.P. 72; 28 U.S.C. § 636(b)(1) (objections are waived if they are not filed within fourteen days of service of the Report and Recommendation). In this case, an objection was filed so the Court is required to conduct a de novo determination of the portion of the Report and Recommendation objected to.

FACTUAL BACKGROUND

The Court adopts and incorporates by reference the factual background from the Report and Recommendation on pages 1- 5.

OBJECTION

Judge Williams recommends that the negligent misrepresentation claim contained in Count 15 be dismissed without leave to amend as Idaho law does not allow such a claim except between an accountant and his client. Judge Williams indicates the Trustee has argued in favor of Idaho law applying to the other state law claims and the court should be consistent and dismiss a claim that is not allowed under Idaho law. The Trustee argues that it is premature to dismiss the claim as the alleged negligent misrepresentations by Ellison

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may have occurred towards investors outside Idaho and other states may allow a negligent misrepresentation claim.

The Court finds the most prudent course of action at this time is to grant the motion to dismiss Count 15 but grant Plaintiff leave to amend the allegations in the Complaint with specificity as to what states (for which a claim for negligent misrepresentation is recognized as a cause of action under the facts of this case) the Defendant made alleged negligent misrepresentations. Any alleged negligent misrepresentations that occurred in Idaho towards Idaho investors will not be allowed to proceed as Idaho does not recognize such a claim under the facts of this case and those facts should not be included in the amended allegations.

ORDER

IT IS ORDERED:

1. The Order and Report and Recommendation (Dkt. 31) shall be INCORPORATED by reference and ADOPTED in its entirety unless otherwise modified by this Order.
2. Defendant's Motion to Dismiss (Dkt. 13) is GRANTED IN PART AND DENIED IN PART consistent with the Report and Recommendation and this Order. Counts 12 (general negligence) and those portions of Counts 11 and 16 which deal with misappropriation are dismissed without leave to amend. Counts 7, 8, 9, and 18 (legal malpractice, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty) are dismissed with leave to amend as stated in the Report and Recommendation. Count 15 (negligent misrepresentation) is dismissed with leave to amend to incorporate specific allegations of negligent misrepresentation outside the State of Idaho and in such states that recognize a claim of negligent misrepresentation. Idaho claims of negligent misrepresentation by Defendant are dismissed without leave to amend. Claims for punitive damages arising from state law cause of action are dismissed, with leave to amend as stated in the Report and Recommendation and in accordance wit the requirements of Idaho Code § 6-1604. The motion to dismiss is denied as to all other Counts not specifically identified above. Plaintiff may file their amended complaint within thirty (30) days of the date of this Order.

REPORT AND RECOMMENDATION ON MOTION TO DISMISS

Honorable Mikel H. Williams, United States Magistrate Judge.

Pending before the Court is a motion to dismiss filed on behalf of Defendant Mark Ellison. (Dkt. 13). This case was referred to the undersigned United States Magistrate Judge for all dispositive and non-dispositive matters on October 16, 2012. (Dkt.10, p. 2). Having reviewed the pleadings and affidavits pertinent to the motion (Dkts. 13, 13-1, 13-2, 19, & 23), and having entertained oral argument on February 5, 2013, the Court hereby enters the following Report and Recommendation.

BACKGROUND

This is another case arising from the collapse of DBSI, Inc, for many years a large and successful real estate company located in Boise Idaho.[1] The Plaintiff is

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James T. Zazzali, the court-approved Trustee of two trusts created by the DBSI Plan of Liquidation and confirmed by Order of the United States Bankruptcy Court for the District of Delaware on October 26, 2010. (Complaint, p. 4, Dkt. 1). The first of these trusts, the Estate Litigation Trust (" ELT" ) was created to hold all causes of action belonging to DBSI Debtor Entities, whereas the Private Action Trust (" PLT" ) consists of claims by creditors and equity holders of DBSI which have been assigned to the Trust. ( Id. ¶ 1). The Defendant is Mark Ellison, a co-founder of DBSI who, from 2004 onwards, was also the head of its in-house legal department. The Trustee alleges that Ellison, along with several other individuals who are defendants in a companion case,[2] was responsible for perpetrating a Ponzi scheme that led to the eventual collapse of DBSI after the downturn in the real estate market in 2008. The Trustee has brought claims under federal and Idaho anti-racketeering statutes, as well as claims for securities fraud, common law fraud, negligence, and breach of fiduciary duty.

The events giving rise to this lawsuit are complex and are set forth in more than five hundred paragraphs of factual allegations. With some emendations, these allegations largely tell the same story as does the complaint in the Zazzali v. Swenson matter. Rather than entering into a detailed factual discussion here, the Court will incorporate by reference the background discussion in its January 25, 2013 Report and Recommendation in that case. ( See Case No.12-00224, Dkt. 256, at 3-8). As in Zazzali v. Swenson, the overarching questions are not so much whether the Complaint describes the overall fraud in sufficient detail, but whether Ellison's role in it has been pled with sufficient particularity to satisfy the standards of Rule 8(a), Rule 9(b), and the Private Securities Litigation Reform Act (" PSLRA" ). Therefore, the Court will focus its factual discussion on those allegations that address Ellison's individual actions, rather than those allegations that simply lump him together with the rest of the defendants alleged to have played a role in the fraud.

Ellison was one of DBSI's original principals who set up the company along with his colleague, Douglas Swenson, in the late 1970s. He left DBSI in 1992 to work in a private law firm but maintained his relationship with DBSI as its outside counsel. Twelve years later, he returned as inside counsel in October of 2004, which is when the Trustee alleges that DBSI had begun to take on characteristics of a Ponzi scheme. (Complaint, ¶ ¶ 4 & 15-18, Dkt. 1).

The Complaint does not contain a lot of detail regarding Ellison's overall role at DBSI from 2004 onward, other than to state generally that he was tasked with " respond[ing] to any legal questions or issues presented to him by Douglas Swenson or other members of the management team." ( Id., 18). However, the Complaint does discuss in some detail his alleged role in drafting and/or signing off on various Private Placement Memoranda (" PPMs" ). The PPMs were a series of offering documents distributed to potential investors in ...


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