Taylor v. Scheef & Stone, LLP

• Decision Date: 31 July 2020
• Docket Number: Civil Action No. 3:19-CV-2602-D
• Parties: THOMAS L. TAYLOR III, Plaintiff, v. SCHEEF & STONE, LLP, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

THOMAS L. TAYLOR III, Plaintiff, v. SCHEEF & STONE, LLP, et al., Defendants.

Civil Action No. 3:19-CV-2602-D

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

July 31, 2020

MEMORANDUM OPINION AND ORDER

In this action by Thomas L. Taylor III ("Taylor"), the court-appointed temporary receiver, asserting claims against defendants Scheef & Stone, LLP, Roger Crabb, and Mitch Little (collectively, "Scheef & Stone") for negligence and gross negligence, aiding, abetting, or participating in breaches of fiduciary duties, aiding, abetting, or participating in the fraudulent scheme of Christopher A. Faulkner ("Faulkner"), and fraudulent conveyances, Scheef & Stone moves to dismiss under Fed. R. Civ. P. 12(b)(6) and 9(b). For the reasons that follow, the court grants the motion in part and denies it in part and grants Taylor leave to replead.

I

In June 2016 the Securities and Exchange Commission ("SEC") filed a civil enforcement action against Faulkner and others, alleging that Faulkner and his codefendants orchestrated a massive fraudulent scheme through the offer and sale of oil and gas related securities to public investors.¹ The court appointed Taylor as temporary receiver for the estates of Faulkner, Breitling Energy Corporation ("BECC"), Breitling Oil & Gas Corporation ("BOG"), Breitling Royalties Corporation ("BRC"), Crude Energy, LLC, and Crude Royalties, LLC, among others (collectively, the "Breitling Entities" or "Breitling"). Between 2011 and 2016, Faulkner, as Chief Executive Officer and controlling shareholder, used the Breitling Entities to swindle investors out of millions of dollars and misappropriate approximately $32.8 million of the Breitling Entities' funds through the receipt of transfers and the payment of personal expenses from company bank and credit card accounts.

Scheef & Stone acted as the Breitling Entities' primary outside counsel between April 2010 and the end of 2015 and assisted the Breitling Entities with state and federal securities laws compliance. Despite "a steady drum beat of state securities regulatory inquiries and 'cease and desist' orders and almost non-stop investor claims of fraud" against the Breitling Entities, Scheef & Stone continued to work on "virtually all of the Breitling Entities' Reg D private placement offerings"² and continued "counseling Breitling with respect to federal and state securities laws[.]" Am. Compl. 3. Scheef & Stone allegedly "facilitate[d] the offer and sale to investors of unregistered securities" and "protect[ed] the Breitling Entities from investor claims and regulatory scrutiny [to] keep Breitling in business selling its illicit and illegal securities." Id. at 2. According to the first amended complaint ("amended complaint"), Scheef & Stone was "aware that the Breitling Entities were operating a securities sales 'boiler room' operation and using unlicensed sales personnel—some with prior documented regulatory violations—to engage in 'general solicitation' of investors via Breitling's Website, internet advertising," and "cold calls." Id. Scheef & Stone also allegedly created a "bonus" program that resulted in an excess of $100 million in securities sold by unlicensed Breitling sales staff who received commissions they were not lawfully entitled to receive. And although Scheef & Stone was aware of "the pendency of a major enforcement investigation by the SEC and numerous other regulatory inquiries," Scheef & Stone did not advise the Breitling Entities to disclose the pending investigation to investors and never advised the Breitling Entities to cease offering unregistered securities despite its knowledge that their general solicitation of investors barred the "Reg D" exemption. Id. at 5.

Taylor filed the instant lawsuit against Scheef & Stone, asserting the following claims: negligence and gross negligence; aiding, abetting, or participating in breaches of fiduciary duties;³ aiding, abetting, or participating in Faulkner's fraudulent scheme; and fraudulent conveyances. Scheef & Stone moves to dismiss under Rules 12(b)(6) and 9(b). Taylor opposes the motion.

II

Under Rule 12(b)(6), the court evaluates the pleadings by "accept[ing] 'all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff[s].'" In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (quoting Martin K. Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)). To survive a motion to dismiss, Taylor must allege enough facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant[s] [are] liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.; see also Twombly, 550 U.S. at 555 ("Factual allegations must be enough to raise a right to relief above the speculative level[.]"). "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not 'show[n]'—'that the pleader is entitled to relief.'" Iqbal, 556 U.S. at 679 (quoting Rule 8(a)(2)). Furthermore, under Rule 8(a)(2), a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Although "the pleading standard Rule 8 announces does not require 'detailed factual allegations,'" it demands more than "labels and conclusions." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). And "a formulaic recitation of the elements of a cause of action will not do." Id. (quoting Twombly, 550 U.S. at 555).

III

The court begins with Scheef & Stone's contention that Taylor's negligence and gross negligence claims are time-barred.

A

Limitations is an affirmative defense. See Rule 8(c)(1). To obtain a Rule 12(b)(6) dismissal based on an affirmative defense, the "successful affirmative defense [must] appear[] clearly on the face of the pleadings." Cochran v. Astrue, 2011 WL 5604024, at *1 (N.D. Tex. Nov. 17, 2011) (Fitzwater, C.J.) (alterations added) (quoting Clark v. Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir. 1986)). In other words, Scheef & Stone is not entitled to dismissal under Rule 12(b)(6) unless Taylor has "pleaded [him]self out of court by admitting to all of the elements of the defense." Id. (quoting Sivertson v. Clinton, 2011 WL 4100958, at *3 (N.D. Tex. Sept. 14, 2011) (Fitzwater, C.J.)).⁴

Under Texas law, the statute of limitations for negligence actions is two years. See Tex. Civ. Prac. & Rem. Code Ann. § 16.003(a) (West 2017). The "limitations period begins to run when 'the claimant discovers or should have discovered through the exercise of reasonable care and diligence the facts establishing the elements of his cause of action.'" Janvey ex rel. Sharp Capital, Inc. v. Thompson & Knight LLP, 2003 WL 21640573, at *2 (N.D. Tex. July 8, 2003) (Lynn, J.) (quoting FDIC v. Shrader & York, 991 F.2d 216, 221 (5th Cir. 1993)). But if, as in a claim brought by a receiver, a wrongdoing corporate officer's knowledge of the facts giving rise to the negligence claim is imputed to the corporation, the claim accrues when the officer acquires such knowledge. See, e.g., id. at *3 ("[T]o hold that [the receiver's] claim[] . . . [is] barred by the statute of limitations, the Court would have to hold (1) that [the officer] discovered . . . the facts giving rise to these claims; (2) that [the officer's] knowledge is imputed to [the corporation]; and (3) that certain exceptions . . . do not apply.").

B

Relying on FDIC v. Ernst & Young, 967 F.2d 166, 170-71 (5th Cir. 1992), Scheef & Stone contends that Faulkner's knowledge should be imputed to the Breitling Entities because Taylor's allegations demonstrate that Faulkner conducted a fraud on behalf of the corporation by raising approximately $150 million in gross proceeds, only a portion of which benefited him personally. And because Taylor's "last specific factual allegation of negligence—the alleged disregard of notice of a lawsuit against Breitling—is dated June 2015," Scheef & Stone asserts that the two-year statute of limitations for Taylor's negligence claims had already expired by June 2017, before the court's August 2017 and September 2017 orders tolling any applicable statute of limitations. Ds. Br. 12.

C

As the court concluded in Taylor v. Rothstein Kass & Co., 2020 WL 554583 (N.D. Tex. Feb. 4, 2020) (Fitzwater, J.), Scheef & Stone "is not entitled to dismissal based on the statute of limitations because it is not clear from the face of the pleadings that Faulkner's knowledge should be imputed to the Breitling Entities." Id. at *3. Although "the general rule [is] that courts are to impute an officer/director's knowledge to the corporation" so long as "the officer/director is acting on the corporation's behalf[,] . . . there is an exception to imputation." Askanase v. Fatjo, 130 F.3d 657, 666 (5th Cir. 1997) (citing Ernst & Young, 967 F.2d at 171). Where a "plaintiff can show that the officer/director was acting adversely to the corporation and entirely for his own or another's purpose, the[] limitations will be tolled." Id. (emphasis added) (citing Shrader & York, 991 F.2d at 223-24). Courts have refused to impute the knowledge of principals to controlled entities where the officers "allegedly filled their own pockets while fraudulently extending the life of the institution they continued to milk" and where they "systematically looted [the company] of its most profitable and least risky businesses as well as millions of dollars in income[.]" Askanase v. Fatjo, 828 F. Supp. 465, 471 (S.D. Tex. 1993) (citing Schacht v. Brown, 711 F.2d 1343, 1347-48 (7th Cir. 1983)) (denying motion...