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Cotter v. Gwyn

United States District Court, E.D. Louisiana

February 13, 2017


         SECTION H



         Before the Court is Defendant Kaplan & Company's Motion to Dismiss (Doc. 45). For the following reasons, the Motion is GRANTED IN PART.


         I. General factual and procedural background

         This matter arises out of the failure of a “commodity pool, ” a type of hedge fund that trades in commodities futures contracts. Level III Trading Partners, L.P. (“Level III” or “the Fund”) was a commodity pool created in February 2007 by Defendant Bruce A. Gwyn (“Gwyn”). According to the Complaint, the Fund attracted approximately $ 2.7 million in investments from its inception in 2007 to its filing for bankruptcy in 2013. From 2007 to 2010, the fund successfully and profitably operated as a commodity pool. Beginning in 2010, however, Gwyn allegedly began divesting the fund of commodities futures and investing its assets in companies controlled by Gwyn and his close business associate, Defendant Andrew V. Reid. The Complaint claims that “[t]his scheme involved [transfers] in the guise of loans, purchases of stock, and purchases of limited liability company membership interests.”[1]These transfers were allegedly part of a larger fraudulent scheme to artificially inflate the stock prices of two public companies, Defendants Treaty Energy Corporation (“Treaty”) and Orpheum Properties, Inc. (“Orpheum”). Gwyn and Reid were officers and directors of Treaty and Orpheum, and they maintained substantial financial interests in both companies. The Complaint also claims that Gwyn misappropriated money from the fund by diverting cash for his own personal use and by improperly charging the fund for fictitious administrative services purportedly performed by Gwyn and his wife, defendant Anne Marie Gwyn.

         In order to hide his self-dealing and the depletion of the fund's assets from its investors, the Complaint alleges that Gwyn disclosed false investment performance reports, false asset values, and fraudulent account statements to the fund's investors. Many of these reports to investors were allegedly prepared and sent by Defendants Turn Key Hedge Funds, Inc. (“Turn Key”) and Michael Lapat. In addition to hiding Level III's value and the nature of its investments from current investors, Gwyn allegedly continued to accept additional investments from current investors, as well as limited partner subscriptions to the Fund from new investors looking to invest in a commodity pool.

         After Level III's investors learned of the scheme, they filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code on August 2, 2013.[2] The bankruptcy court later converted the matter into a voluntary petition for bankruptcy pursuant to Chapter 11.[3] On July 11, 2014, the bankruptcy court confirmed a Chapter 11 plan for reorganization and established a “Litigation Trust.” It appointed Plaintiff, Patrick C. Cotter (“the Trustee”) as the “Trustee of the Litigation Trust created by the plan.”[4] The litigation trustee represents the bankruptcy estate by assuming the obligation to prosecute the bankruptcy estate's claims for the benefit of creditors.[5] The Chapter 11 plan in this case authorizes the trustee to bring all claims on behalf of the bankrupt debtor's estate.[6]

         On September 28, 2015, Cotter filed this action in this Court in his capacity as trustee of the Level III Trading Partners, L.P. Litigation Trust. The Trustee's Complaint asserts seventeen claims for relief against eleven defendants, and he seeks to avoid various pre-petition transactions on behalf of the debtor. The matter was initially referred to the bankruptcy court, but the referral was withdrawn on March 9, 2016. Defendant Kaplan & Company (“Kaplan”) has filed the instant Motion to Dismiss the claims against it. Prior to addressing the merits of this Motion, this Court will discuss the Complaint's allegations involving Kaplan.

         II. Specific allegations against Kaplan & Company

         The Complaint alleges that Kaplan, a CPA firm, was retained by Gwyn at the recommendation of Defendant Turn Key to provide accounting and auditing work for the Fund. Kaplan was responsible for preparing monthly capital and performance reports that were provided to the fund's investors. It also audited financial statements and prepared partnership tax information. The Complaint alleges that beginning in 2010, Kaplan had frequent problems completing its monthly reports “because of untimely, problematic, and inconsistent information and documentation” provided to it by Gwyn. Despite these ongoing issues, Kaplan allegedly “never disclosed any of the problems, irregularities, or inconsistencies to the partnership or its limited partners.”

         According to the Complaint, Kaplan's responsibilities included confirming the accuracy of Turn Key's calculations of the Fund's net asset value. In doing so, it reviewed documents relating to the entities in which the Fund had invested and therefore allegedly knew that Gwyn held an interest in or was otherwise affiliated with those entities and that the entities had no appreciable assets or performed no real business. The Complaint alleges that Kaplan was aware of Gwyn's self-dealing and fraud. In addition, it alleges that Kaplan knew that Gwyn was using the Fund for personal expenses.

         By late 2010, Kaplan had stopped preparing monthly reports or verifying monthly partner capital account statements because it was unable to verify the value of the fund's private investments. It sought supporting documentation from Gwyn and Turn Key to verify the Fund's net asset value but never received such. In addition, it had difficulty preparing the annual statement for 2010 for the same reasons. Kaplan allegedly did not at that time explain to the limited partners the reason for the delay or relay its belief that the Fund's private investments were actually worthless.

         Kaplan ultimately issued the financial statements for 2009 and 2010 on October 13, 2011, stating that it was unable to verify the valuation of the investments. These statements were not provided to the limited partners.

         In light of these facts, the Trustee alleges that Kaplan aided Gwyn in misappropriating investor funds and misleading investors regarding the value of their investments. It failed to communicate to the limited partners its assessment of the value of the Fund's investments and thus assisted Gwyn in perpetuating the scheme. The Trustee brings claims against Kaplan for (1) violation of § 10 of the 1934 Securities Exchange Act, (2) violation of state securities laws, (3) professional malpractices and negligence, (4) aiding and abetting Gwyn, (5) breach of contract, (6) civil conspiracy, and (7) misrepresentation and omission. In its Motion, Kaplan seeks the dismissal of each of these claims.


         To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead enough facts “to state a claim for relief that is plausible on its face.”[7] A claim is “plausible on its face” when the pleaded facts allow the court to “draw reasonable inference that the defendant is liable for the misconduct alleged.”[8]A court must accept the complaint's factual allegations as true and must “draw all reasonable inferences in the plaintiff's favor.”[9] The court need not, however, accept as true legal conclusions couched as factual allegations.[10] To be legally sufficient, a complaint must establish more than a “sheer possibility” that the plaintiff's claims are true.[11] If it is apparent from the face of the complaint that an insurmountable bar to relief exists and the plaintiff is not entitled to relief, the court must dismiss the claim.[12] The court's review is limited to the complaint and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint.[13]


         This Court will consider each of Kaplan's arguments in turn.

         I. Breach of Contract

         At the outset, Kaplan argues that the Trustee cannot succeed on its breach of contract claim. It argues that Louisiana law applies to this claim and that under Louisiana law allegations that an accountant breached its duties sounds in tort, not contract. The Trustee rebuts that it is impossible for the Court to engage in a fact-intensive choice of law analysis at this stage.

         While the parties dispute which choice of law provision applies to this claim, this Court agrees with the Trustee that Louisiana Civil Code article 3537, which specifically addresses which law applies to issues of conventional obligations, applies here.[14] Article 3537 states that:

Except as otherwise provided in this Title, an issue of conventional obligations is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue.
That state is determined by evaluating the strength and pertinence of the relevant policies of the involved states in the light of: (1) the pertinent contacts of each state to the parties and the transaction, including the place of negotiation, formation, and performance of the contract, the location of the object of the contract, and the place of domicile, habitual residence, or business of the parties; (2) the nature, type, and purpose of the contract; and (3) the policies referred to in Article 3515, as well as the policies of facilitating the orderly planning of transactions, of promoting multistate commercial intercourse, and of protecting one party from undue imposition by the other.

         This Court agrees with the Trustee that such a determination at this stage would be premature. This Court has not been provided with sufficient facts to engage in the analysis mandated by article 3537. For instance, the Complaint does not provide any information regarding the negotiation or formation of the contract between Kaplan and Level III, nor has the contract been provided to this Court for consideration. For these reasons, Kaplan's request for dismissal of the Trustee's breach of contract claim is denied.

         II. Peremption of Tort Claims

         Kaplan next argues that the Trustee's claims sounding in tort, such as those for malpractice, misrepresentations, and breach of fiduciary duty, are perempted. It argues that Louisiana law applies, and under Louisiana law, claims against accountants are subject to two peremptive periods set forth in Louisiana Revised Statutes § 9:5604, which states that:

No action for damages against any accountant duly licensed under the laws of this state, or any firm as defined in R.S. 37:71, whether based upon tort, or breach of contract, or otherwise, arising out of an engagement to provide professional accounting service shall be brought unless filed in a court of competent jurisdiction and proper venue within one year from the date of the alleged act, omission, or neglect, or within one year from the date that the alleged act, omission, or neglect is discovered or should have been discovered; however, even as to actions filed within one year from the date of such discovery, in all events such actions shall be filed at the latest within three years from the date of the alleged act, omission, or neglect.

         Applicability of Louisiana law aside, this Court is unable to make a determination regarding the passing of peremption without a factual determination regarding when the claim arose. Even Kaplan points out that “Plaintiff's Complaint fails to point to a specific action or date on which Kaplan allegedly committed an action or omission which would form the basis of Plaintiff's” claims. In addition, it is not clear when Plaintiff should have been aware of the claim. Kaplan argues that certainly the Plaintiff should have been on notice of its claim against Kaplan by June 12, 2012 when the National Futures Association (“NFA”) took emergency action against Level III and Gwyn. The Trustee points out, however, that nothing in the NFA's notice suggests that Kaplan was engaged in any wrongful conduct. Regardless, a finding of when Plaintiff should have discovered his claim against Kaplan is a factual determination inappropriate for resolution at this stage. Accordingly, this Court cannot say that Plaintiff's claims are perempted by Louisiana's one-year peremptive period.

         Likewise, this Court does not find that Plaintiff's claims are perempted by the three-year period. As Kaplan points out, the Complaint alleges that Kaplan stopped providing accounting services for the Fund in June of 2012. The bankruptcy proceeding began on August 2, 2013, and, on October 1, 2013, the Trustee was given an additional two years within which to bring any claims that were actionable at the time of the filing of the bankruptcy.[15] Accordingly, the Trustee's claims are likewise not perempted on the face of the Complaint by the three-year period.

         III. Accountant Review Panel

         Kaplan next argues that the claims alleging that it breached its duties of professional care are premature because they have not yet been submitted to a public accountant review panel. Louisiana Revised Statutes § 37:105(a) states that:

[N]o action against a certified public accountant or firm or his insurer may be commenced in any court before the claimant's request for review has been presented to a public accountant review panel established pursuant to this Part and the panel has issued a written opinion. Compliance with the requirements of this Part is not to be deemed optional.

         Kaplan argues that this law is procedural and this Court must therefore apply it to this matter regardless of which state's substantive law applies. The Trustee rebuts on two grounds. First, he argues that the law is substantive, not procedural, and that since Illinois substantive law applies to this dispute, it is inapplicable here. Second, he argues that even if Louisiana law applies, he is not required to comply with this statute because Kaplan is licensed in Illinois, not Louisiana.

         At the outset, this Court agrees with the Trustee that the accountant review panel requirement is a substantive law.[16] As a result, the accountant review panel requirement applies only if Louisiana substantive law applies to the Trustee's claims against Kaplan. The choice of law for claims of professional malpractice are determined by Louisiana Civil Code article 3543, which states that:

Issues pertaining to standards of conduct and safety are governed by the law of the state in which the conduct that caused the injury occurred, if the injury occurred in that state or in another state whose law did not provide for a higher standard of conduct.
In all other cases, those issues are governed by the law of the state in which the injury occurred, provided that the person whose conduct caused the injury should have foreseen its occurrence in that state.
The preceding paragraph does not apply to cases in which the conduct that caused the injury occurred in this state and was caused by a person who was domiciled in, or had another significant connection with, this state. These cases are governed by the law of this state.

         The conduct that caused the alleged injury-Kaplan's malpractice and breach of professional duties-occurred at its offices in Illinois. The injury was felt by Level III and its investors in Louisiana. Therefore, the law of Illinois applies only if the law of Louisiana does not provide for a higher standard of conduct. “In Illinois, the established standard of care for all professionals is stated as the use of the same degree of knowledge, skill and ability as an ordinarily careful professional would exercise under similar circumstances.”[17] Similarly, in Louisiana accountants are obligated to exercise at least the degree of care, skill, and diligence that is exercised by prudent practicing accountants in their locality.[18] Since Louisiana does not require a higher standard of conduct for accountants than Illinois, Illinois law applies to Plaintiff's professional malpractice claims. Louisiana's accountant review panel law is therefore inapplicable to this case. Plaintiff's motion is denied with respect to these claims.

         IV. Aiding and Abetting

         Plaintiff's Complaint alleges that Kaplan is liable for aiding and abetting the breaches of fiduciary duty, breaches of partnership agreement, and conversion of partnership property committed by Level III and Gwyn. Kaplan argues that there is no cause of action for aiding and abetting under Louisiana law, and these claims should therefore be dismissed. This Court agrees that Louisiana does not recognize an independent cause of action for aiding and abetting;[19] however, Illinois law applies to these claims just as it does to Plaintiff's professional malpractice claims. Under Louisiana Civil Code article 3543, Illinois law will apply unless Louisiana law provides for a higher standard of conduct. Louisiana law does not recognize an independent cause of action for aiding and abetting. “If Louisiana law does not provide a cause of action for aiding and abetting breach of fiduciary duty, then the law of the place of the conduct prescribes a higher standard of conduct and would apply for that reason.”[20] Accordingly, Illinois law applies to Plaintiff's aiding and abetting claims. Illinois law specifically provides for the cause of action of aiding and abetting.[21] Kaplan's argument for dismissal of Plaintiff's aiding and abetting claims therefore fails.

         V. Securities ...

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