Zazzali v. Hirschler Fleischer, P.C., C.A. No. 11–614–LPS.

• Court: United States District Courts. 3th Circuit. United States District Court (Delaware)
• Writing for the Court: STARK
• Citation: 482 B.R. 495
• Docket Number: C.A. No. 11–614–LPS.
• Decision Date: 21 August 2012
• Parties: James R. ZAZZALI, as trustee for the DBSI Estate Litigation Trust and as Trustee for the DBSI Private Actions Trust, Plaintiff, v. HIRSCHLER FLEISCHER, P.C. and John Does 1–10, Defendants.

482 B.R. 495

James R. ZAZZALI, as trustee for the DBSI Estate Litigation Trust and as Trustee for the DBSI Private Actions Trust, Plaintiff,
v.
HIRSCHLER FLEISCHER, P.C. and John Does 1–10, Defendants.

C.A. No. 11–614–LPS.

United States District Court,
D. Delaware.

Aug. 21, 2012.

[482 B.R. 503]

Natasha M. Songonuga, Esq., Gibbons P.C., Wilmington, DE, Brian J. McMahon, Esq., E. Evans Wohlforth, Jr., Esq., Debra A. Clifford, Esq., Gibbons P.C., Newark, NJ, for Plaintiff.

James W. Semple, Esq. & Jody C. Barillare, Esq., Morris James LLP, Wilmington, DE, Dennis J. Quinn, Esq., Andrew J. Morris, Esq., Zachary G. Williams, Esq., Carr Maloney P.C, Washington, DC, for Defendant.

MEMORANDUM OPINION
STARK, District Judge.

Pending before the Court are a Motion to Dismiss for Lack of Subject Matter Jurisdiction (D.I. 10) and a Motion to Dismiss for Failure to State a Claim (D.I. 11) filed by defendant Hirschler Fleischer P.C. (“Defendant”). For the reasons discussed below, the Court will deny Defendant's Motion to Dismiss for Lack of Subject Matter Jurisdiction and grant Defendant's Motion to Dismiss for Failure to State a Claim.

BACKGROUND¹ I. Factual BackgroundA. DBSI Bankruptcy

DBSI, Inc. and related entities (collectively, “DBSI”), all of whom are Idaho real estate investment entities, filed bankruptcy petitions in the United State Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) beginning on November 6, 2008. (D.I. 1 ¶¶ 4, 6) By Order dated October 26, 2010, the Bankruptcy Court confirmed the Second Amended Joint Chapter 11 Plan of Liquidation Filed by the Chapter 11 Trustee and the Official Committee of Unsecured Creditors (“the Plan”). ( Id. ¶ 10) The Plan created two trusts: the DBSI Estate Litigation Trust (“ELT”) and the DBSI Private Actions Trust (“PAT”). ( Id.) The ELT holds the claims of the consolidated bankruptcy estate of the DBSI debtor entities, while the PAT holds the claims of creditors and equity interests holders of DBSI who chose to assign their claims. ( Id.) The Bankruptcy Court appointed James R. Zazzali (“Zazzali” or “Plaintiff” or “Trustee”) as the trustee for the ELT and the PAT. ( Id. ¶¶ 9–11)

B. DBSI's Investment Structure

From 2004 to 2008, DBSI and its affiliates “presented to the world an illusion of a monolith of wealth, competence, and power.” ( Id. ¶ 1) In Private Placement Memoranda (“PPMs”) ² drafted by Defendant, investors were informed that DBSI was a successful real estate holding company with a history of successful and sophisticated real estate ventures, in which no investor had ever lost money. ( Id. ¶¶ 1, 28–30)

DBSI sold tax-advantage instruments called “1031 Exchanges,” named after the section of the Internal Revenue Code authorizing these investments. ( Id. ¶ 25)

[482 B.R. 504]

Through the 1031 Exchanges, DBSI investors obtained “tenant-in-common” (“TIC”) interests in commercial real estate properties. ( Id.) DBSI structured its TIC syndications using a master lease arrangement under which the TIC property was leased to a DBSI affiliate master lessor and then subleased to a tenant. ( Id. ¶¶ 31, 33, 83) DBSI guaranteed that rent from sublessees would be paid to TIC investors. ( Id. ¶ 83) Rent payments from sublessees did not cover both the rent owed to TIC investors and the debt service; consequently, the operation of the underlying properties could not support DBSI's obligations. ( Id. ¶ 98) As the TIC syndication business failed, DBSI raised capital from new TIC syndications of properties purchased for sums exceeding the market value of the properties. ( Id.) DBSI's TIC syndication guarantees were sold on the representation that DBSI had substantial value, even as newly raised investors' funds were being used to pay off existing investors. ( Id.)

Additionally, DBSI created Accountable Reserves. (Id. ¶¶ 32, 35) In its PPMs, DBSI informed investors that it would set aside five percent of investors' funds to pay the costs of maintaining the properties and these funds would be kept in the Accountable Reserves. ( Id. ¶ 37) DBSI informed investors that any amount of their invested funds not used for property maintenance would be returned to the TIC owners. ( Id. ¶ 37; see id., Ex. B) Only approximately $18 million of the Accountable Reserves funds were used as represented, whereas $82 million of Accountable Reserves were spent for unauthorized purposes, including misappropriation by DBSI executives. ( Id. ¶¶ 51 –52)

In the fall of 2008, “the world learned” that DBSI was running an elaborate Ponzi scheme. ( Id. ¶¶ 2, 24)

C. Defendant's Involvement with DBSI

At all times relevant to the Complaint, Defendant served as legal counsel to DBSI. ( Id. ¶ 28) Defendant advised DBSI on creation of the master lease structure and various § 1031 issues. ( Id. ¶ 91) From 2004 until 2006, Defendant drafted all of the PPMs used by DBSI in connection with their TIC syndications and provided material and substantial advice to DBSI regarding the drafting of PPMs. ( Id. ¶¶ 28–29) After 2006, DBSI continued to use language drafted and/or reviewed by Defendant in subsequent PPMs. ( Id. ¶ 78) The allegedly misleading language that Defendant drafted included statements that DBSI would use Accountable Reserves only for specified purposes, as well as false statements about DBSI's net worth, loan-to-loan value ratios, and related financial disclosures. ( Id. ¶¶ 44, 60, 68, 76, 87; see also id., Ex. A; id., Ex. B; id., Ex. C)

II. Procedural History

On July 11, 2011, the Trustee filed a complaint, on behalf of the ELT and PAT, against Defendant and John Does 1–10 for their role in the DBSI fraud. ( See D.I. 1 and, hereinafter, “Complaint”) In the Complaint, the Trustee asserts fifteen counts on behalf of one or both of the trusts.³ On behalf of both trusts, the Trustee asserts the following claims: violation of the Racketeer Influenced and Corrupt Organizations (“RICO”) Act, 18 U.S.C. § 1961 et seq. and violation of the Idaho RICO statute, Idaho Code § 18–708(c) (Count 1), and conspiracy to violate the federal and Idaho

[482 B.R. 505]

RICO statutes (Count 2). On behalf of the ELT, the Trustee asserts the following claims: professional malpractice (Count 3), aiding and abetting breach of fiduciary duty owed to DBSI (Count 4), and avoidance and recovery of actual and constructive fraudulent transfers (Counts 9–15). On behalf of the PAT, the Trustee asserts the following claims: aiding and abetting fraud (Count 5), civil conspiracy (Count 6), aiding and abetting breach of fiduciary duty owed to owners of reserve funds (Count 7), and aiding and abetting breach of fiduciary duty owed to creditors (Count 8).

On October 7, 2011, Defendant filed the pending motions to dismiss. ( See D.I. 10; D.I. 11) The parties completed briefing on the pending motions on January 13, 2012. ( See D.I. 27; D.I. 28) The Court held oral argument on June 6, 2012. See Mot. Hr'g Tr., June 6, 2012 (hereinafter “Tr.”).

After the hearing, the Court ordered supplemental briefing regarding (1) what notice, if any, Defendant received regarding the DBSI bankruptcy, confirmation of the Second Amended Joint Chapter 11 Plan of Liquidation, and the possibility that Defendant might be subject to suit; and (2) the applicability and impact of equitable mootness on the issues pending before the Court. ( See D.I. 34) The parties completed this supplemental briefing on June 20, 2012. ( See D.I. 38; D.I. 39)

LEGAL STANDARDS I. Motion to Dismiss for Lack of Standing

“A motion to dismiss for want of standing is ... properly brought pursuant to Rule 12(b)(1), because standing is a jurisdictional matter. Pursuant to Rule 12(b)(1), the Court must accept as true all material allegations set forth in the complaint, and must construe those facts in favor of the nonmoving party.” Ballentine v. United States, 486 F.3d 806, 810 (3d Cir.2007) (internal citations omitted); see also Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 102, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (noting that standing is “threshold jurisdictional question”). A court may grant a motion to dismiss for lack of standing only if, after, “accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief.” Maio v. Aetna, Inc., 221 F.3d 472, 481–82 (3d Cir.2000) (internal quotation marks omitted).

There are three requirements for Article III standing: (1) injury in fact, which means an invasion of a legally protected interest that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) a causal connection between the injury and the challenged conduct, which means that the injury fairly can be traced to the challenged action of the defendant and has not resulted from the independent action of some third party not before the court; and (3) a likelihood that the injury will be redressed by a favorable decision, which means that the prospect of obtaining relief from the injury as a result of a favorable ruling is not too speculative. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).

In addition to establishing Article III standing, a party must establish “prudential standing.” See Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11–12, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004); Twp. of Lyndhurst v. Priceline.com Inc., 657 F.3d 148, 154 (3d Cir.2011). Prudential standing embraces the following principles:

(1) the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the

[482 B.R. 506]

legal rights or interests of third parties; (2) even when the plaintiff has alleged reasonable injury sufficient to meet the requirements of Article III, the federal courts will not adjudicate abstract questions of wide public significance which amount to generalized grievances pervasively shared and most appropriately addressed in the representative branches; and...