Kamal v. Baker Tilly U.S., LLP

• Decision Date: 15 March 2023
• Docket Number: 21-cv-1549 (MJD/DTS)
• Parties: K. Tausif Kamal, et al., Plaintiffs, v. Baker Tilly US, LLP, Defendant.
• Court: U.S. District Court — District of Minnesota

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K. Tausif Kamal, et al., Plaintiffs, v. Baker Tilly US, LLP, Defendant.

No. 21-cv-1549 (MJD/DTS)

United States District Court, D. Minnesota

March 15, 2023

REPORT AND RECOMMENDATION

DAVID T. SCHULTZ, UNITED STATES MAGISTRATE JUDGE

INTRODUCTION

Defendant Baker Tilly US, LLP (Baker Tilly) moved to strike or dismiss Plaintiffs' class allegations arguing, among other things, that individual issues will predominate. [Dkt. No 98] Plaintiffs oppose the motion, arguing common evidence or an inference of reliance will suffice to meet the requirements for class certification. Because it is apparent from the pleadings that individual issues will predominate the Court recommends Baker Tilly's motion [Dkt. No. 98] be granted.

FINDINGS OF FACT

The Court has recounted the underlying facts of this case previously and adopts those recitations by reference. See Mem. of Law & Order on Mot. to Dismiss, at 2-19; Dkt. No. 80. Plaintiffs K. Tausif Kamal and Samuel Edison purported to sue Baker Tilly and Deloitte, LLP on behalf of themselves and those similarly situated for (1) negligence, (2) aiding and abetting fraud, and (3) aiding and abetting breach of fiduciary duty. Am. Compl. Dkt. No. 55. The Defendants moved to dismiss the Complaint, and the Court granted in part and denied in part that motion. Dkt. No. 80. All claims against Deloitte were dismissed. Id. One claim remains against Baker Tilly: negligence relating to representations made about non-party Aspirity's 2015 10-K. Id. at 25.

In short, Plaintiffs and the purported class of approximately 800 others all purchased or renewed notes from Aspirity after July 1, 2015. The noteholders were never paid back and Aspirity declared bankruptcy in 2017. Plaintiffs now claim that Aspirity's auditor, Baker Tilly, falsely certified Aspirity's 2015 10-K. They contend Baker Tilly knew of red flags raising doubt about Aspirity's financial health, including the legitimacy and collectability of outstanding loans, but did not disclose those doubts appropriately in the 10-K including through a going concern qualification. In support of their claim, Plaintiffs note that the 10-K failed to identify a debt acquired during a 2015 restructuring. Am. Compl. at 96, 100, passim; Dkt. No. 55.

Baker Tilly now moves to dismiss or strike from the Amended Complaint all class allegations. Mot. to Strike or Mot. to Dismiss; Dkt. No. 98. They argue a class cannot be certified because, among other reasons, individual issues will predominate. In particular, Baker Tilly claims each individual member of the class will have to present evidence that they relied on the Baker Tilly-audited 10-K, failing Rule 23(b)(3)'s dictates. Mem. of Law in Support of Baker Tilly's Motion to Strike or Dismiss Class Allegations [Def. Mem.] at 312; Dkt. No. 100. Plaintiffs disagree. They contend class certification is possible, because they can prove “indirect reliance” through common evidence or through “a legitimate inference of reliance based on the nature of the alleged misrepresentations.” Pl.'s Opp to Baker Tilly US, LLP's Motion to Strike or Dismiss Class Allegations [Pl. Mem.] at 13; Dkt. No. 116.

CONCLUSIONS OF LAW

I. Legal Standard

Courts may strike pleadings under Federal Rule of Civil Procedure 12(f) for being “insufficient . . . redundant immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). Although striking a pleading is disfavored, courts' discretion to do so is liberal. Donelson v. Ameriprise Fin. Servs., Inc., 999 F.3d 1080, 1091-92 (8th Cir. 2021). Where “a portion of the complaint lacks a legal basis,” striking may be appropriate. Id. (citing BJC Health Sys v Columbia Cas. Co., 478 F.3d 908, 916-18 (8th Cir. 2007)).

In the Eighth Circuit, a court may grant a motion to strike class allegations even before plaintiffs have filed a motion to certify the class, because allowing “unsupportable class allegations” is both impertinent and contrary to the interests of judicial economy. Donelson, 999 F.3d at 1092. Where it is “apparent from the pleadings that the class cannot be certified,” striking the class allegations is proper. Id.

Class certification requires the Plaintiff to demonstrate

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a).

In addition to the mandates of Rule 23(a), a class action must fall within one of three categories of class actions. Id. at 23(b)(1-3). Plaintiffs seek certification under 23(b)(3), which provides for class certification if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class is superior to other available methods for fairly and efficiently adjudicating the controversy.”^[1] Fed.R.Civ.P. 23(b)(3); Am. Compl. at 35; Dkt. No. 55. This requirement ensures “proposed class members are sufficiently cohesive to warrant adjudication by representation.” In re Zurn Pex Plumbing Prods. Liab. Lit., 644 F.3d 604, 618 (8th Cir. 2011) (quoting Amchen Prods. Inc. v. Windsor, 521 U.S. 591, 623 (1997)). This inquiry is limited to whether, “common evidence could suffice to make out a prima facie case for the class.” Id. (internal citations and quotation marks omitted); see also Blades v. Monsanto Co., 400 F.3d 562, 566 (8th Cir. 2005) (“The nature of the evidence that will suffice to resolve a question determines whether the question is common or individual. If . . . the members of a proposed class will need to present evidence that varies from member to member, then it is an individual question.”). The court must examine “the underlying elements necessary to establish liability for plaintiffs' claims.” Id. at 569. “[O]nly if those elements can be proved on a systematic, and classwide basis” is predominance met. Id. Predominance is a qualitative, rather than a quantitative question; that there is “a common question” is not dispositive. Ebert v. Gen. Mills, Inc., 823 F.3d 472, 478 (8th Cir. 2016).

The Eighth Circuit has repeatedly explained that fraud cases are often unsuitable for class certification precisely because there are individual reliance issues in such cases. In re St. Jude Med. Inc., 522 F.3d 836, 838 (8th Cir. 2008) (“Because proof often varies among individuals concerning what representations were received, and the degree to which individual persons relied on representations, fraud cases are often unsuitable for class treatment.”) (citing Fed.R.Civ.P. 23 advisory committee's note); Johannesohn v. Polaris Indus. Inc., 9 F.4th 981, 985 (8th Cir. 2021) (upholding denial of class certification where defendant presented evidence challenging some plaintiffs' reliance on the alleged misrepresentations and stating “fraud cases are ill-suited for class actions”); see also In re Zurn Pex Plumbing Products Liab. Lit., 644 F.3d 640, 619 (8th Cir. 2011); Blades v. Monsanto, 400 F.3d at 566. Other courts have held similarly. E.g., CGC Holding Co., LLC v. Broad & Cassel, 773 F.3d 1076, 1089 (10th Cir. 2014) (“[I]n cases arising from fraud, a plaintiff's ability to show a causal connection between defendants' misrepresentation and his or her injury will be predicated on a plaintiff's alleged reliance on that misrepresentation. Put simply, causation is often lacking where plaintiffs cannot prove that they relied on defendants' alleged misconduct.”)

Baker Tilly argues that certification under 23(b)(3) is improper because individual issues will predominate, precluding class certification. At bottom, Baker Tilly claims that individual evidence will be required to prove the reliance element of Plaintiffs' negligent misrepresentation claim. Def. Mem. of Law in Support of Baker Tilly US, LLP's Motion to Strike or Dismiss Class Allegations (Def. Mem.) at 6-12; Dkt. No. 100.

A. Negligent Misrepresentation: Causation and Reliance

Minnesota has adopted the Restatement (Second) of Torts § 552 for liability to third parties who rely on an accountant's allegedly negligent audit. See Bonhiver v. Graff, 311 Minn. 111, 122 (Minn. 1976). To prove such a claim under the Restatement, the plaintiff must establish: (1) a duty of care owed by the defendant to the plaintiff; (2) the defendant supplied false information to the plaintiff; (3) the plaintiff justifiably relied on that information; and (4) the defendant failed to exercise reasonable care in communicating the information. Williams v. Smith, 820 N.W.2d 801, 815 (Minn. 2012) (citing Bonhiver, 311 Minn. at 122.); see also TCF Banking and Sav., F.A. v. Arthur Young & Co, 706 F.Supp. 1408, 1418 (D. Minn. 1988) (analyzing Bonhiver). Thus, a plaintiff must demonstrate not simply that they suffered a loss, but that the loss resulted from their own justifiable reliance on information from the auditor.

As a threshold matter, the parties appear to disagree about how reliance and causation fit into the analysis of a negligent misrepresentation claim. Plaintiffs contend that the Aspirity Notes would not have been available for sale or renewal but-for Baker Tilly's audit. Pl. Mem. at 12; Dkt. No 121. According to Plaintiffs, Aspirity's former chief executive will testify that, had Baker Tilly issued a going concern warning in connection with the 2015 10-K, Aspirity would have ceased selling the Notes. Plaintiffs claim therefore, that “[e]very individual who purchased or renewed a note after Baker Tilly's 2015 audit report was released [] necessarily did so in reliance on the information Baker Tilly supplied in that report.” Id. Plaint...