EDWARD J. DAVILA, District Judge.
After losing what she describes as her "entire life savings" to a Ponzi scheme, Plaintiff Linda Buckbee Selleck ("Plaintiff") filed this civil action for professional negligence, fraud and elder abuse against one of the scheme's perpetrators, Defendant Keith Everts Rode ("Rode"), and an accountancy firm, Defendant CliftonLarsonAllen, LLP ("Clifton"), in which Rode was a partner throughout the conduct alleged in the Complaint. Clifton now moves to dismiss all of Plaintiff's claims under Federal Rule of Civil Procedure 12(b)(6). Dkt. No. 51.
Federal jurisdiction arises pursuant to 28 U.S.C. § 1332. After a careful review of the pleadings in light of the parties' arguments, the court has determined that all but one of Plaintiff's claims should be dismissed. Accordingly, Clifton's motion will be granted in part and denied in part for the reasons explained below.
Clifton is the "eighth largest accountancy firm in the United States." Compl., Dkt. Nos. 1,4 at ¶ 10. Rode is a certificated public accountant.
Rode was also one of the founders of GLR Growth Fund, LP ("GLR").
In 2003, Plaintiff made two investments in GLR, for a total of $1,470,000.
Rode prepared Plaintiff's 2004 tax returns while her funds were invested with GLR.
It was later revealed, however, that GLR was a Ponzi scheme.
Plaintiff was unaware of irregularities with her investment until April 2, 2012, when John Geringer, another GLR partner, sent her a letter informing her of a government investigation.
Plaintiff initiated this case on July 2, 2013. She asserts eight claims against Rode and Clifton under California law: (1) professional negligence, (2) breach of fiduciary duty, (3) intentional misrepresentation, (4) negligent misrepresentation, (5) suppression of facts, (6) promises without intention to perform, (7) violation of the Consumer Legal Remedies Act ("CLRA"), California Civil Code § 1750 et seq., and (8) elder abuse. The instant renewed motion to dismiss was filed upon the dissolution of a stay imposed during the pendency of related criminal proceedings.
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests."
Claims that sound in fraud are subject to a heightened pleading standard. Fed. R. Civ. Proc. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.");
When deciding whether to grant a motion to dismiss, the court generally "may not consider any material beyond the pleadings."
In addition, the court must generally accept as true all "well-pleaded factual allegations."
Clifton has a submitted a series of documents in conjunction with its motion. These documents include select portions of Plaintiff's K-1 forms for the years 2003 through 2011, and a cover letter addressed to Plaintiff from Rode which apparently accompanied the K-1 forms.
On a motion to dismiss under Rule 12(b)(6), the court may consider "unattached evidence on which the complaint `necessarily relies' if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the document."
Here, the court does not find it appropriate to consider either the K-1 forms or the cover letter. The latter document is neither referenced in nor relied upon in the Complaint, and Clifton does not convincingly argue otherwise. As to the K-1 forms, while they are referenced by Plaintiff in the Complaint, the court cannot consider these documents to prove the "fact" for which Clifton has submitted them: that Rode prepared those documents as a director of GLR rather than as a Clifton partner. That contention is subject to a reasonable dispute, and the court is unable to resolve the issue through a motion that requires it to "accept as true all factual allegations in the complaint and draw all reasonable inferences in favor of" Plaintiff.
In California, accountants are part of a "skilled professional class" and are subject "to the same rules of liability for negligence in the practice of their profession as are members of other skilled professions."
"The elements of a cause of action for professional negligence are (1) the existence of the duty of the professional to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise; (2) breach of that duty; (3) a causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional negligence."
Clifton's challenges the professional negligence claim on three grounds. First, Clifton argues Plaintiff cannot establish that Clifton provided the services on which Plaintiff bases her claim. Second, Clifton contends that, assuming Plaintiff has successfully alleged that Clifton is vicariously liable, she has nonetheless attempted to impose additional duties outside of those owed by a tax preparer. Third, Clifton argues this claim fails as to the K-1 forms because "Rode obviously issued those forms as one of the managing members of GLR" and because the receipt of such form does not create an accountant-client relationship.
Clifton argues the allegations in the Complaint do not establish that it, as opposed to Rode, provided the tax preparation services on which Plaintiff bases the claim. Stated another way, Clifton contends that Plaintiff was not a client of the firm to whom it owed a duty.
California Business and Professions Code § 5035.2 defines an accountant's "client" as "any person for whom public accountancy services are performed or to whom financial products, financial services, or securities are sold or provided at the licensee's public accountancy practice or through referral to any other location or business in which the certified public accountant has a material interest." "[T]he finding of an accountant-client relationship must be founded upon an agreement which, if not expressed, must at least be implied in fact."
Here, Plaintiff does not allege the existence of an express agreement between herself and Clifton for accountancy services. In addition, she does not plausibly allege that anyone at Clifton, other than Rode, provided her with any type of service.
In order to assert an implied-in-fact professional negligence claim against Clifton for the acts of Rode, the Complaint must establish a basis for vicarious liability. Such a theory must be pled with more than just conclusions to be plausible.
The allegations in the Complaint are insufficient vicariously impute Rode's conduct to Clifton on an agency theory. To the extent Plaintiff relies on an ostensible agency, she has not pled what is necessary to raise the doctrine. "An agency is ostensible when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his agent who is not really employed by him." Cal. Civ. Code § 2300. Ostensible agency has three elements: (1) "[t]he person dealing with an agent must do so with a reasonable belief in the agent's authority," (2) "such belief must be generated by some act or neglect by the principal sought to be charged," and (3) "the person relying on the agent's apparent authority must not be negligent in holding that belief."
With this authority in mind, missing from the Complaint is what Clifton did to make Plaintiff believe that Rode was acting as its agent, as opposed to what Rode did to create that impression. The fact that Rode used a Clifton email address, mailed her documents from Clifton's business address, or engaged in other unspecified communications with Plaintiff are not actions taken by Clifton and cannot insinuate an ostensible agency.
Moreover, Plaintiff's argument that Clifton may have negligently represented to her that Rode was its agent is irrelevant at this point. Though she surmises in her opposition to this motion to that Clifton did not have policies and procedures in place to prevent a partner from using firm equipment and firm addresses, email or otherwise, she did not include these facts in the Complaint.
That does not end the matter, however, because Plaintiff alternatively argues her allegations are sufficient to impose liability on Clifton under the law of partnerships. In the Complaint, Plaintiff alleges that Clifton provided her with "accountancy services" when it prepared or reviewed K-1 forms for filing with her federal and state tax returns, and provided her advice with regard to the filing of K-1 forms. Aside from these allegations, Plaintiff argues that "nothing more is required" for Clifton to be held liable for Rode's actions because Rode, as a Clifton partner performing services for Plaintiff, "made his partnership liable for his actions since actions were within the same type of business" that Clifton provides.
As Clifton points out in response, whether or not Rode was providing services to Plaintiff "within the same type of business" as Clifton is not the standard by which partnership liability is examined. But Plaintiff has nonetheless alleged enough facts to satisfy the standard that does apply. Under Minnesota law,
Contrary to Clifton's own interpretation of this provision, § 5051(d) could encompass the preparation of federal and state tax returns and related schedules. Referenced in the provision is the preparation or certification of "reports . . . for filing with a court of law with any governmental agency, or for any other purpose." Since tax returns and K-1 forms are prepared for filing with a governmental agency and is the exact conduct that Plaintiff attributes to Rode in the Complaint, the court finds Plaintiff has plausibly alleged a potential basis to impose liability on Clifton under partnership law.
Plaintiff alleges in the Complaint that "as part of the process of providing tax filing forms, preparing [Plaintiff's] tax returns, and advice to [Plaintiff]," Clifton failed to conduct "any due diligence relating to the GLR Ponzi Scheme, including but not limited to performing any audits or examinations of books or records of account, balance sheets, and other financial, accounting and related schedules, exhibits, statements or reports of the GLR Ponzi Scheme." Compl., at ¶ 36.
In light of this allegation, Clifton argues that Plaintiff's negligence claim should be dismissed because it assumes duties that a tax preparer does not have. In particular, Clifton believes that Plaintiff cannot rely on the receipt of tax-related services from Rode to claim a breach of the investigatory duties associated with an accountant because a tax preparer's professional standards permit reliance on information submitted by third-parties. Stated differently, Clifton asserts that tax preparers have not duty to inquire into the truthfulness of the information used to prepare returns.
This argument is unpersuasive because it is based on a restrictive reading of the Complaint. Here, Plaintiff does not allege she became Clifton's client solely for the preparation of tax returns or that Clifton was just her tax preparer; to the contrary, Plaintiff alleges she was a "client" of Clifton's "accountancy partnerships" under California Business and Professions Code § 5035.2. Compl., at ¶¶ 30, 31. Based on these statements and construing the allegations in the light most favorable to Plaintiff, the court disagrees with Clifton that the nature of the parties' relationship should be governed solely by the active conduct cited in the pleading when Plaintiff directly alleges that the scope of her relationship with Clifton was something broader. Discovery may prove otherwise, but at this stage the court must accept Plaintiff's allegations as true. Accordingly, Clifton's argument on this issue is rejected.
Clifton finally argues the professional negligence claim must be dismissed to the extent it is based on Rode's preparation of K-1 forms because, according to Clifton, it is "obvious" that Rode prepared those a manager of GLR and not as a Clifton partner. It also argues that Plaintiff cannot assert a professional negligence claim based on allegedly inaccurate K-1 forms.
These arguments are ineffective as reasons for dismissal. The first is unsupportable because it relies on the cover letter that, as noted above, is not properly considered for this motion. It also relies on an inference about the role Rode occupied when preparing the K-1 forms which the court cannot accept at this time. As already noted, whether Rode was acting a GLR director or a Clifton partner with respect to Plaintiff is a reasonably disputed fact incapable of resolution on a motion to dismiss.
Second, while it may be correct that the provision of a K-1 form is not sufficient to create an accountant-client relationship (
Because all of Clifton's arguments are rejected, the motion to dismiss will be denied as the claim for professional negligence.
Plaintiff alleges that a confidential relationship existed between her and Rode that, by virtue of Rode's partnership in the firm, translated into a similar relationship with Clifton. Compl., at ¶ 45. According to Plaintiff, this duty required Rode and Clifton to "make a full disclosure of material facts" that might affect her decision-making, and to "use reasonable care, skill, and diligence" in undertaking their duties as Plaintiff's financial advisors and accountants.
"The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach."
For one to be properly charged with a fiduciary obligation, he or she "`must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.'"
Confidential relationships, on the other hand, "do not fall into well-defined categories of law and depend heavily on the circumstances."
Here, Plaintiff argues that her relationship with Rode and Clifton was fiduciary as a matter of law because she alleges the existence of an accountant-client relationship. But Plaintiff has not cited, and this court has not located, existing California authority confirming that the accountant-client relationship is categorically considered to be a fiduciary one. Plaintiff's reliance on
Thus, Plaintiff must plead a confidential relationship to sustain this claim. She has not done so in a manner that satisfies Rule 9(b) because Plaintiff does not explain how and why her relationship with Rode and Clifton was something more or different than simply that of accountant and client. Plaintiff merely alleges in a conclusory manner that she entrusted Rode and Clifton to "fulfill their legal duties as financial advisors and accountants." Compl., at ¶ 45. But as described above, a confidential relationship requires more than just one party placing trust in another because of the latter's superior knowledge or expertise in a specific area.
Absent more specific facts establishing the basis for a confidential relationship, Plaintiff has not stated a plausible claim for breach of fiduciary duty against Clifton. That claim will be dismissed with leave to amend.
Plaintiff's third through sixth claims are for different species of fraud. Clifton argues these claims cannot withstand a challenge under Rule 9(b) because Plaintiff did not specify each participant's role in the alleged fraudulent conduct. The court agrees that Plaintiff's claims are deficient in that way.
The purpose of the Rule 9(b) pleading standard is "to ensure that adequate notice is provided to the parties accused of fraudulent conduct in order to allow for a meaningful defense."
In some respects, Rule 9(b)'s heightened pleading requirement also acts to bar the assertion of weak or unfounded — and potentially costly — claims of fraudulent conduct.
It is therefore unsurprising that, when Rule 9(b) must be satisfied, "everyone did everything" allegations are not permitted.
Under this authority, the pleading method utilized by Plaintiff in the Complaint does not comport with Rule 9(b). Plaintiff refers to both Rode and Clifton as the "Accounting Defendants," as if they are the same. But her other allegations establish that Rode and Clifton are not the same. To that end, Plaintiff alleges that Rode was simultaneously a GLR manager as well as a Clifton partner. Plaintiff also indicates that she interacted exclusively with Rode, that he prepared her tax returns and K-1 forms, and that he communicated with her regarding her finances. Under these circumstances, Rule 9(b) requires that Plaintiff specifically allege just that, and in the context of fraudulent misrepresentations or omissions, she must state who is responsible for making the misrepresentation or omission, when and how it was made, what is false or misleading about the conduct, and why any particular statement was false.
Plaintiff argues she should be excused from separately specifying the roles of Rode and Clifton because, legally speaking, she contends that Clifton, as a partnership, is responsible for the conduct of its individual partners. The court rejects this argument. Plaintiff cites no authority for this proposition in the context of Rule 9(b), and the court does not see why Clifton should receive less notice about its alleged participation in fraudulent conduct simply because Plaintiff asserts joint and several or vicarious liability. Moreover, discernment between the acts of Rode and Clifton is particularly important for this case since Plaintiff alleges that Rode occupied a dual position, one with GLR and one with Clifton.
Plaintiff also suggests in her opposition that "pleading fraud is relaxed in circumstances where matters are within the opposing party's knowledge." See Fed. R. Civ. P. 9(b) ("Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally."). That may be true, but the rule does not assist Plaintiff with her fraud claims. Here, Plaintiff cites to certain categories of fraudulent statements and omissions as a basis for these claims. Compl., at ¶ 54. Since the statements and omissions were allegedly made or directed to Plaintiff, Plaintiff is certainly capable of providing the "`the who, what, when, where, and how' of the misconduct charged."
Furthermore, at least one of the fraud claims is missing facts establishing a requisite element. Plaintiff's sixth claim is for "promises without intention to perform" in violation of California Civil Code §§ 1572(4) and 1710(4). Such a claim for promissory fraud "requires proof that the defendant made a misrepresentation of fact or a promise without any intention of performing it."
For these reasons, the third, fourth, fifth and sixth claims, all of which are rooted in fraud, will be dismissed with leave to amend.
The CLRA makes unlawful "unfair methods of competition and unfair or deceptive acts or practices." Cal. Civ. Code § 1770(a);
Plaintiff alleges that Rode and Clifton violated the CLRA, and in particular § 1770(a)(7), by misrepresenting that her tax returns from 2004 through 2011 were true and correct. Compl., at ¶ 94. But with respect to the returns, Plaintiff has not alleged that she qualifies as a "consumer" under § 1761(d). Within the CLRA claim itself, Plaintiff does not state that she actually paid for the preparation of the returns, and the allegation she believes satisfies this requirement is insufficient for that purpose; Paragraph 75 only states that Rode and Clifton made certain representations to induce Plaintiff to pay for preparation of the returns, not that she actually made any payment to either of them.
Moreover, Plaintiff has not stated facts that support the other claimed CLRA violation as to Clifton.
In addition, Plaintiff has included within her CLRA claim language that does not exist in the statute's definition of unlawful practices ("engaging in illegal transactions"). If, as her opposition suggests, Plaintiff is attempting to incorporate other subdivisions of § 1770(a) into her pleading, she can certainly do so without leaving Clifton and the court guessing as to which sections she intends to invoke.
Thus, the CLRA claim will be dismissed with leave to amend.
California Welfare and Institutions Code § 15610.30 prohibits financial abuse of an elder. A defendant violates this statute if the defendant, either by himself or with the assistance of another, takes, secretes, appropriates, obtains, or retains real or personal property of an elder for a wrongful use, with intent to defraud, or by undue influence. Cal. Welfare & Inst. Code § 15610.30(a). An "elder" is defined as any person residing in California who is age 65 or older. Cal. Welfare & Inst. Code § 15610.27. The plaintiff must have been an "elder" at the time of the violation in order to state a claim for financial elder abuse.
Clifton argues this claim must be dismissed because it consists only of the elements of a § 15610.30 claim along with conclusory statements. The court disagrees with Clifton, however, because Plaintiff incorporates the Complaint's preceding allegations into this claim which, taken together, could certainly encompass conduct prohibited by § 15610.30.
However, the court finds that Plaintiff must reveal her exact birthdate in order to state a plausible elder abuse claim under these circumstances. Plaintiff only alleges that in 2011 she "resided in California and was 65 years old." With the notable absence of an earlier year from the sentence, it is reasonably inferred that Plaintiff actually reached the age of 65 in 2011, but was not age 65 in earlier years. As such, simply parroting the statutory language from § 15610.27 is not enough for this case. Since all of the fraudulent conduct attributed to Rode and Clifton also concluded in 2011 — the same year Plaintiff turned 65 — the legal viability of Plaintiff's claim seems to turn on the exact date upon which she qualified for protection under § 15610.30. And because her birthdate is a fact easily supplied by Plaintiff without the need for the claim to proceed to discovery, the court will require Plaintiff to allege it in any amendment to this claim.
Accordingly, the elder abuse claim will be dismissed with leave to amend.
Clifton challenges Plaintiff's damages allegations with arguments to which Plaintiff does not directly respond. Clifton first argues that, for the fraud claims at least, she has not identified damages with particularity. Plaintiff must do so for any damages she claims resulted from fraud, especially because her Complaint contains other, non-fraud claims as well.
Similarly, Plaintiff must provide more factual detail in support of her request for punitive damages if she chooses to seek them against Clifton. Punitive damages are only awarded "where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice." Cal Civ. Code. § 3294(a). Although Clifton may be deemed liable for Rode's misconduct as a result of the partnership to which he belonged, liability for punitive damages is not similarly imputed under California law.
Based on the foregoing, Clifton's Motion to Dismiss is GRANTED IN PART and DENIED IN PART. It is DENIED as the first claim for Professional Negligence. It is GRANTED as to all other claims and damages allegations asserted in the Complaint, which are DISMISSED WITH LEAVE TO AMEND.
Any amended complaint must be filed on or before March 7, 2016.
