JAMES R. ZAZZALI, as Trustee for the DBSI Estate Litigation Trust and as Trustee for the DBSI Private Actions Trust, Plaintiff,
EIDE BAILLY LLP, JOHN DOES 1-50 and ABC ENTITIES 1-50, Defendants.
ORDER ADOPTING REPORT AND RECOMMENDATION ON MOTIONS TO DISMISS
MARSHA J. PECHMAN, Chief District Judge.
This matter is before the Court on the Report and Recommendation ("R&R") of the Honorable Magistrate Judge Ronald E. Bush (Dkt. No. 107), the objections of Plaintiff James R. Zazzali (Dkt. No. 114), and the objections of Defendant Eide Bailly LLP (Dkt. No. 113). The Court considered the R&R, the objections, Eide Bailly's response to Zazzali's objections (Dkt. No. 122), Zazzali's response to Eide Bailly's objections (Dkt. No. 123) and all related documents. The R&R addresses two motions: (1) Eide Bailly's motion to dismiss for lack of standing, and (2) Eide Bailly's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted. The Court ADOPTS the Report and Recommendations.
DBSI, Inc. and its related entities filed for bankruptcy in the United States District Court of Delaware in 2008. (Dkt. No. 1 at 5.) The Bankruptcy Court confirmed a plan which created four trusts, including the Estate Litigation Trust ("ELT") and the DBSI Private Action Trust ("PAT"). (Id. at 6.) Plaintiff James R. Zazzali is the court approved Trustee for the PAT and ELT trusts. (Id.)
Zazzali claims DBSI was engaged in an elaborate Ponzi scheme, where guaranteed returns to earlier investors could only be satisfied by the flow of funds from newly-deceived investors. (Dkt. No. 1 at 17.) Zazzali asserts Eide Bailly was engaged to and did audit financial statements for DBSI, and Eide Bailly auditors facilitated DBSI's Ponzi scheme by purposefully failing to perform audits in accordance with applicable professional standards, certifying fraudulent financial statements, and issuing deceptive audit opinions, all while knowing their statements would be used in DBSI offering materials and relied upon by the investing public. (Id. at 18.)
Zazzali brought 16 claims against Eide Bailly on behalf of one or both trusts, and Eide Bailly moved to dismiss the claims, bringing one motion to dismiss for lack of standing and one motion to dismiss for failure to state a claim upon which relief can be granted. (Dkt. Nos. 80 and 81.) The R&R recommended denying the motion to dismiss for lack of standing, and granting in part and denying in part the motion to dismiss for failure to state a claim. (Dkt. No. 107.) Both parties objected, and each objection is addressed below.
I. Lack of Standing
Defendant argued in its motion to dismiss for lack of standing that Zazzali purports to bring claims on behalf of individual investors and creditors who have assigned their claims to the PAT, and this exceeds Zazzali's authority under the Bankruptcy code. (Dkt. No. 80-1 at 5.) Eide Bailly asserts the Court must dismiss claims on behalf of PAT for lack of subject matter jurisdiction because Zazzali lacks standing. (Id.) Eide Bailly argues bankruptcy laws do not authorize a trustee to assert claims for the benefit of third parties rather than the estate as a whole. (Id. at 6.)
The R&R rejected Eide Bailly's argument, finding that the cases relied upon by Eide Bailly do not apply because they address the standing of bankruptcy trustees and not post-conformation trustees like Zazzali. (Dkt. No. 107 at 17.) The R&R said, because Zazzali is not a bankruptcy trustee the Bankruptcy Code and cases bearing on the Code do not apply, the matter is governed by the mandates of the Plan and/or the PAT Agreement. (Id. at 18.) Judge Bush found there was no apparent legal authority or policy impediment to preclude creditors assigning their claims to a private right of action trust pursuant to a plan of liquidation, or to the private action trustee pursuing those claims, and thus Zazzali has standing. (Id. at 20.)
Eide Bailly relies on Williams v. California 1st Bank for the proposition that, in the Ninth Circuit, a trustee cannot pursue claims of third parties even when the claims are assigned. 859 F.2d 664, 666 (9th Cir. 1988). The R&R rejects the reliance on Williams, pointing out, like the Supreme Court case it relies upon, Williams addresses the standing of a trustee in bankruptcy, and at issue here is a post-confirmation trustee. (Dkt. No. 107 at 17, discussing Caplin v. Marine Midland Grace Trust Co. of N.Y. , 406 U.S. 416 (1972)). Judge Bush instead relies on Grede v. Bank of NY Mellon , 598 F.3d 899, 902 (7th Cir. 2010), where the Seventh Circuit expressly addressed the issue of permissible duties of a trustee after bankruptcy. (Dkt. No. 107 at 17.)
In its Objections, Eide Bailly argues there is a circuit split, and the Seventh Circuit's decision in Grede expressly distinguished Williams. (Dkt. No. 113 at 5.) It is true that Grede uses the phrase, "We must choose between the second circuit's holding and the ninth's." 598 F.3d at 901. However, this is both dicta and an overgeneralization of Williams, which has been rejected in other cases. In fact, Williams does not address the bankruptcy/post-bankruptcy issue at all; Williams stands for the proposition that a trustee in bankruptcy does not have standing to pursue claims on behalf of third parties even when those claims are assigned. Williams, 859 F.2d at 665, 666.
Contrary to Eide Bailly's suggestions, at least one opinion in the Ninth Circuit has followed Grede and held a post-confirmation trustee has standing to pursue the assigned claims of third parties. In Calvert v. Zions Bancorporation, the United States Bankruptcy Court for the Western District of Washington specifically found Caplin and Williams do not apply to a post-confirmation trustee, because once there is a confirmed plan the liquidating trustee is bound by the terms of the new contract and contract principles apply. 485 B.R. 604, 611 (W.D. Wash. 2013.) Calvert clearly states a post-confirmation trustee, like Zazzali, has standing to pursue assigned claims. Id. at 612.
Calvert relies on a Delaware case, Zazzali v. Hirschler Fleischer, P.C. 482 B.R. 495 (Del. 2012), which is extremely factually similar to the case presented here. Hirschler stems from the same alleged DBSI Ponszi scheme, and was brought against DBSI's legal counsel. In that case, the defendants raised the same standing arguments as Eide Bailly presents here. The court in Hirschler found, on factual circumstances almost identical to those presented here, the post-confirmation trustee in that case had standing. Id. at 510-11. That court rejected nearly identical arguments about the applicability of Caplin and Williams. Id. at 509-10. Likewise, Defendant's objections here are unfounded and the Court adopts the R&R's finding that Plaintiff does have standing to pursue claims on behalf of PET.
II. Dismissal for Failure to State a Claim
Defendant's motion to dismiss for failure to state a claim brings forth multiple arguments with respect to each claim brought by Plaintiff. The R&R recommends granting the motion as to some claims and not to others, and both parties ...