Turk v. Morris, Manning & Martin, LLP

• Decision Date: 24 March 2022
• Docket Number: CIVIL ACTION NO. 1:20-cv-2815-AT
• Citation: 593 F.Supp.3d 1258
• Parties: William N. TURK, et al., Plaintiffs, v. MORRIS, MANNING & MARTIN, LLP, et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

593 F.Supp.3d 1258

William N. TURK, et al., Plaintiffs,

v.MORRIS, MANNING & MARTIN, LLP, et al., Defendants.

CIVIL ACTION NO. 1:20-cv-2815-AT

United States District Court, N.D. Georgia, Atlanta Division.

Signed March 24, 2022

ATTORNEYS FOR PLAINTIFFS: David R. Deary, Donna Lee, Jeven R. Sloan, John William McKenzie, III, William Ralph Canada, Jr., Wilson Edward Wray, Jr., Loewinsohn Deary Simon Ray LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA, Tyler McLean Simpson, Loewinsohn Flegle Deary Simon LLP, Dallas, TX.

ATTORNEYS FOR DEFENDANTS MORRIS, MANNING & MARTIN, LLP, TIMOTHY POLLOCK : Jennifer Peterson, John Earl Floyd, John H. Rains, IV, Bondurant Mixson & Elmore LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANTS LARGE & GILBERT, INC., CONSERVATION PAYS, LLC: Brent David Hitson, Burr & Forman LLP, Birmingham, AL, Tala Amirfazli, Burr & Forman, LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANT JOSEPH SKALSKI : Samuel Fenn Little, Jr., S. Fenn Little, Jr. P.C., Atlanta, GA.

ATTORNEYS FOR DEFENDANTS ATLANTIC COAST CONSERVANCY, INC., ATLANTIC COAST CONSERVANCY PROPERTIES, LLC, ENVIRONMENTAL RESEARCH AND MAPPING FACILITY, LLC, ROBERT D. KELLER : Anthony Joseph Rollins, Colin Dang Delaney, Gregory Keith Smith, Jason S. Bell, Smith, Gambrell & Russell, LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANT BENNETT THRASHER, LLC: Dana Kristin Maine, Travis Martin Cashbaugh, Freeman Mathis & Gary, LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANTS ORNSTEIN-SCHULER INVESTMENTS LLC, ORNSTEIN-SCHULER CAPITAL PARTNERS LLC: Brandon Parrish, David M. Pernini, Vernon M. Strickland, Wargo, French & Singer LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANTS CLAY WEIBEL, WEIBEL AND ASSOCIATES, INC.: Carl Edward Volz, Pontem Law LLC, Chicago, IL, Jill Warner, Michael E. Brooks, Brooks & Warner, LLC, Atlanta, GA.

ATTORNEYS FOR DEFENDANTS LUCAS MASON, INC., LUCAS VON ESH: Kevin James McDonough, Lauren C. Giles, Miles Hansford & Tallant, LLC, Cumming, GA.

ATTORNEYS FOR DEFENDANTS BLETHEN MINE CONSULTANTS, LLC, MARVIN BLETHEN: Frank Agostino, Jeffrey Dirmann, Agostino & Associates PC, Hackensack, NJ, Elizabeth M. Newton, Warren R. Hall, Jr., Hall, Arbery, Gilligan, Roberts & Shanlever, LLP, Atlanta, GA.

ATTORNEYS FOR DEFENDANTS DONALD R. SKLAR, PARTNERSHIP TAX SOLUTIONS, INC.: D. Michael Williams, Donald Brown, William Dowdy White, Hall Booth Smith, P.C., Atlanta, GA.

ATTORNEYS FOR DEFENDANTS AARON KOWAN, THE PRIVATE CLIENT LAW GROUP: Christine L. Mast, Joseph Hall Wieseman, Hawkins Parnell & Young, LLP, Atlanta, GA.

OPINION AND ORDER

AMY TOTENBERG, UNITED STATES DISTRICT JUDGE

[593 F.Supp.3d 1272]

I. Introduction

Last fall, this Court issued an order resolving various motions to dismiss in a related case, Lechter v. Aprio, LLP , 565 F.Supp.3d 1279 (N.D. Ga. 2021). Like the plaintiffs in Lechter , Plaintiffs in this case claim to have been fraudulently induced into purchasing interests in various LLCs for the purpose of engaging in syndicated conservation easement transactions. At its core, Plaintiffs’ argument is that Defendants — a group of various lawyers, accountants, consultants, and appraisers — fraudulently represented that these transactions were a legitimate tax savings strategy, when in fact the transactions were a scam, and as a consequence of buying into that scam Plaintiffs have been subjected to intense scrutiny from the IRS. Clearly unhappy with this turn of events, Plaintiffs brought suit in federal court, alleging a multitude of tort-based claims against Defendants and asserting that Defendants engaged in a pattern of racketeering activity in violation of federal and Georgia law. Currently pending before the Court are ten motions to Dismiss Plaintiffs’ Second Amended Complaint [Docs. 233, 234, 236, 237, 238, 240, 242, 244, 248, 249], and Plaintiffs’ Motion to Strike or Disregard Extrinsic Evidence [Doc. 251].

Plaintiffs here bring what may be best described as a fraternal twin case to Lechter — similar in many ways, but by no means identical. These Plaintiffs present a familiar story, and their claims face similar hurdles to those raised by the Plaintiffs in Lechter. But this story involves a different set of facts, and in some respects the Court reaches different conclusions of law as well.

II. Background¹

A. Overview of the SCE Strategy

Like the plaintiffs in Lechter , Plaintiffs

[593 F.Supp.3d 1273]

here contend that a distinct group of Defendants advanced a fraudulent scheme to induce them and other investors to buy into a flawed tax saving strategy. Plaintiffs refer to this strategy as the Syndicated Conservation Easement Strategy, or "the SCE Strategy." (Second Am. Compl. ("SAC"), Doc. 218 ¶ 1.)

The SCE Strategy revolved around the donation of conservation easements to land trusts. As Plaintiffs explain in the SAC, a conservation easement is an encumbrance placed on a property to preserve the property for conservation purposes. (Id. ¶ 2.) The conservation easement is formalized in a written agreement between the landowner and another party, typically a land trust or government entity, that permanently restricts the use or development of the land for the purpose of achieving certain conservation or preservation goals. (Id. ¶ 46.)

Although tax deductions generally are not permitted for donations of a partial interest in property, the Tax Code contains an exception for a "qualified conservation contribution." (Id. ¶ 47.) A "qualified conservation contribution" is defined as a donation of (1) "a qualified real property interest," (2) "to a qualified organization," (3) "made exclusively for conservation purposes." (Id. ¶ 48); see 26 U.S.C. § 170(h). As Plaintiffs explain in the SAC, when done properly "conservation easements can and do confer legitimate tax advantages to the donor in additional to environmental benefits to the public," and donors of conservation easements "may realize a noncash charitable contribution deduction for the value by which the easement impairs the fair market value of the property." (SAC, Doc. 218 ¶ 2.)

The SCE Strategy involved one specific type of conservation easement transactions — syndicated conservation easement transactions. (Id. ¶ 4.) These transactions involved the donation of easements through land owned collectively by the members of an LLC — or "Syndicate" — instead of by any one individual. This mechanism enabled multiple investors to participate in certain high-value transactions that they would otherwise be unable to pursue individually. (Id. ) Notably, the Syndicates are taxed as partnerships and therefore are not liable for income tax; instead, the individual partners are liable for income tax for the partnership's income, losses, deductions, and credits that "flow through to the partners" based on their proportionate shares in the partnership. (Id. ¶ 50.) The Syndicates are, however, required to file an annual partnership tax return stating the partnership's overall income and losses and to provide both the IRS and individual partnership members with statements called "K-1s" reporting the individual members’ respective shares of the partnership income and losses. (Id. ¶ 51.) The individual members are then required to report their shares of the partnership's income and losses on their individual tax returns as they are stated in the K-1s. (Id. ¶ 52.)

In the SAC, Plaintiffs describe four representative transactions performed by Defendants for four different Syndicates. Plaintiffs allege that the steps Defendants followed to complete these transactions "were uniform ... in every material way." (Id. ¶ 53.) First, the "Sponsors" would

[593 F.Supp.3d 1274]

create the LLCs and acquire the subject property. (Id. ¶ 53(a).) Next, the Sponsors would perform a "due diligence" period during which they would obtain an initial appraisal of the land; the initial appraisal would provide an estimate of the value of the land based on the "Highest and Best Use" — or "HBU" — of the property. (Id. ¶ 53(b).) The Sponsors would then send "Promotional Materials" to potential investors. The Promotional Materials would present the potential investors with several options for what to do with the land, including the option to place a conservation easement on the land. (Id. ¶ 53(e).) The Promotional Materials would include the initial appraisal and "tout the tax benefits of a conservation easement for potential participants ... promising them a legal return of more than 2.5 times the amounts paid into the Syndicate(s)." (Id. ) Sometime thereafter, the Sponsors would obtain a second appraisal for the property. (Id. ¶ 53(g).) Defendants would also prepare a "Conservation Easement Deed" for the transaction, (id. ¶ 53(h)), and prepare a Baseline Documentation Report — or "BDR" — that "ascertains the conservation values, substantiates the purported conservation purpose, and establishes the condition of the property at the time of the gift," (id. ¶ 53(i)). The Syndicate would then donate the conservation easement to a land trust and donate the remaining fee simple interest in the subject property to one of the land trust's affiliates. (Id. ¶ 53(j).) The donation of the conservation easement would then be reported to the IRS as a charitable contribution in an amount based on the value of the appraisal. (Id. ¶ 54.) Finally, each of the Syndicates’ members would report their shares of the charitable contribution as charitable deductions on their individual tax returns as reflected in the K-1s provided to them by the Syndicates’ tax return preparers. (Id. )

Plaintiffs contend that since as early as 1984 the IRS has taken the position that overvaluation of charitable contributions in conservation easement transactions "was improper and would not be tolerated." (Id. ¶ 122) (citing IRS News Release, IR-81-122). One particular concern was the idea that the promoters of conservation easement transactions could pitch conservation easement transactions with inflated valuations to potential investors and attempt to conceal the inflated charitable...