Direct Benefits, LLC, et al v. TAC Financial Inc., et al.

Filing 48

MEMORANDUM OPINION. Signed by Judge George Levi Russell, III on 2/20/14. (hmls, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
DIRECT BENEFITS, LLC, et al.,
Plaintiffs,

:
:

v.

:
Civil Action No. GLR-13-1185

TAC FINANCIAL INC., et al.,
Defendants.

:
:
:

MEMORANDUM OPINION
THIS MATTER is before the Court on Plaintiffs’ request to
rescind an asset purchase agreement due to Defendants’ alleged
violations of federal and Maryland securities laws, among other
things.
Inc.,

Pending before the Court is Defendants’, TAC Financial
Roy

Lindberg

Eder,

Rhett

(collectively,

McNulty,

Clark

“Defendants”),

McNulty,

Motion

to

and

Daniel

Dismiss

the

First Amended Complaint for Failure to State a Claim (ECF No.
13); Plaintiffs’, Direct Benefits, LLC and Andrew C. Gellene
(collectively,

“Plaintiffs”),

Cross-Motion for Leave to Amend

the Complaint (ECF No. 20); and Defendants’ Motion for Leave to
File Surreply Arguments in Response to Plaintiffs’ Reply Brief
(ECF No. 47).
The

Court,

having

reviewed

the

pleadings

documents, finds no hearing necessary.
(D.Md. 2011).

and

supporting

See Local Rule 105.6

For the reasons outlined below, the Court will

grant in part and deny in part Defendants’ Motion to Dismiss,
grant Plaintiffs’ Cross-Motion for Leave to Amend, and grant
Defendants’ Motion for Leave to File Surreply.
BACKGROUND1

I.
Plaintiff
liability

Direct

company

Benefits,

that

provides

through their employers.

LLC

(“DB”)

prepaid

is
to

cards

a

limited

the

public

At all times relevant to this action,

DB had a large, diverse client base consisting of over seventyfive

employers,

including

Starbucks,

Genesis

Healthcare,

and

franchisors from Burger King, Taco Bell, IHOP, and Holiday Inn.
Plaintiff Andrew Gellene (“Gellene”) is the president of DB.
A.

DB’s Introduction to TAC Financial
Around October 2010, Plaintiffs began searching for a new

strategic partner that would assist DB with establishing and
maintaining financial processing systems for its business.

By

December 2010, a business associate had referred Plaintiffs to
Defendant
Gellene

TAC

and

discussions

Financial

TAC’s
to

CEO,

Inc.
Roy

determine

(“TAC”).
Eder

the

Upon

(“Eder”),

possibility

the

held
of

referral,

preliminary
a

mutually

beneficial business arrangement between the two entities.
1

Unless otherwise noted, the following facts are taken from
Plaintiffs’ proposed Second Amended Complaint (ECF No. 20-1).
The well-pled allegations in the Second Amended Complaint are
accepted as true and viewed in the light most favorable to
Plaintiffs.
See Erickson v. Pardus, 551 U.S. 89, 94 (2007)
(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56
(2007)).
2

During an introductory call on December 28, 2010, and again
in a letter of intent attached to a January 10, 2011 email, Eder
informed Gellene that TAC was a financial and employee-benefit
services
prepaid

company
cards,

that

provided

mobility

affordable health care.

various

services,

programs,

online

bill

including
pay,

and

To further facilitate discussions, the

parties signed a non-disclosure agreement on January 5, 2011,
and soon thereafter, on January 13, TAC proposed that DB become
its value added reseller, which would have enabled DB to use
TAC’s platform of services for DB’s clients (“VAR Agreement”).
The

proposal

was

memorialized

in

a

non-binding

strategic

alliance term sheet the same day.
Soon thereafter, however, Plaintiffs requested, in lieu of
the previous VAR Agreement, that TAC consider permitting DB to
sell and transfer its principal assets and business to TAC in
exchange for cash and stock as consideration.

TAC agreed to the

request, and the agreement was memorialized in a February 11,
2011 email TAC’s VP of Sales Operations sent to Gellene.
B.

Merger Negotiations and the Due Diligence Process
During

representations

negotiations,
to

Defendants

Plaintiffs

regarding

made

various

TAC’s

business.

Specifically, on February 2, 2011, Eder and the TAC negotiating
team emailed Gellene a discussion document that stated

3

With just two years of selling under our belt, we
have grown our revenue generating cards from 53
cards in 2008 to approximately 18,000 at the end
of 2010 with average revenue per month per card
of $7.00 at a gross margin of just under 50%. We
finished 2011 [sic]2 at $1.1M in revenues and
expect
to
triple
revenues
in
2011
to
approximately $3M in revenues.
(2d Am. Compl. ¶ 12).

On February 16, 2011, a TAC employee sent

Gellene an email stating the valuation of TAC’s common stock was
$1.10 per share.
As part of the due diligence process, on February 26, 2011,
Gellene sent TAC and Eder a letter requesting documentation,
including but not limited to, TAC’s formation, capital stock,
and

financial

data.

Of

the

financial

disclosures,

Gellene

requested copies of TAC’s financial statements covering the last
two

years

and

year-to-date

financials.

In

response,

TAC

informed Gellene that its 2010 financials were not officially
complete and its year-to-date financials were unavailable.
On

March

3,

2011,

Eder

sent

Gellene

an

email

with

an

attachment that represented, “Over the last 18 months, TAC has
grown to 63,000 Members in the U.S., Canada, the United Kingdom,
Puerto Rico, and Mexico.

This growth is due to its overall

services platform, creating safe and healthy financial benefit
environments for families and individuals.”
attachment

2

also

provided

that

TAC’s

(Id. ¶ 14).

services

included

Plaintiffs believe Defendants meant 2010, not 2011.
4

The
“Non-

Qualified

and

Qualified

Affordable

“Discount Auto Insurance.”
C.

Healthcare

Programs”

and

(Id.).

The Asset Purchase Agreement and Discovery of TAC’s Alleged
Omissions
On April 14, 2011, the parties executed an Asset Purchase

Agreement

(“APA”),

which

solidified

TAC’s

purchase

of

DB’s

principal assets consisting of approximately 7,000 prepaid debit
card accounts marketed under the name the Money Manager Card®.
Per the APA, TAC agreed to provide Gellene $50,000 upon signing
the agreement, shares of TAC’s common stock valued at $1.10 per
share, and a nominal purchase price of $819,000 for DB’s assets
as consideration.

In tandem with the APA, Gellene entered into

an employment agreement whereby he assumed the role of TAC’s VP
of

Product

Gellene

Management.

was

entitled

Under
to,

the

inter

terms

alia,

of

an

the

agreement,

annual

salary

of

$125,000 with the opportunity to earn an additional $50,000 in
annual

incentive

compensation,

a

stock

option

to

purchase

140,000 shares of TAC common stock, reimbursement for business
expenses, and accrued vacation days.
APA

and

thereafter,

TAC

engaged

Around the signing of the
in

various

fundraising

activities via stock offers to potential investors.
Around February 2012, Gellene began to discover, through
internal documents, that TAC failed to disclose several facts
regarding

its

financial

condition

5

throughout

pre-merger

negotiations and the due diligence period in violation of the
warranties provided in the APA.

Specifically, Plaintiffs allege

Defendants made five omissions of fact: (1) during negotiations
TAC was experiencing a substantial reduction in income from its
primary revenue source; (2) TAC experienced a seventy-percent
decline of card usage from May 2010 to February 2011; (3) TAC
owed its card processor, FIS Global, over $300,000; (4) TAC owed
its managerial employees more than $180,000; and (5) TAC did not
have the then-present ability to pay Gellene his $50,000 at
signing or to assume DB’s operating costs.

On March 26, 2013,

Plaintiffs’ counsel sent a letter to TAC disclosing the alleged
omissions and seeking rescission of the APA pursuant to a breach
of the warranties contained therein.

Gellene resigned from his

position at TAC the same day, a little more than two years after
signing the APA.
D.

Procedural History
On April 22, 2013, Plaintiffs filed a ten-count Complaint

against

Defendants

in

this

Court

alleging

violations

of

the

federal and Maryland securities acts as well as various common
law claims.
3,

2013,

(ECF No. 1).

(see

ECF

No.

After amending their complaint on May
6),

Plaintiffs

filed

a

Motion

for

Preliminary and Interlocutory Relief and Request for Expedited
Hearing on May 30, 2013.

(See ECF No. 10).

While Plaintiffs’

request for preliminary and interlocutory relief was pending,
6

Defendants filed the pendant Motion to Dismiss on June 14, 2013,
(ECF No. 13), and Plaintiffs filed their Cross-Motion for Leave
to Amend the Complaint on June 28.

(ECF No. 20).

After a

hearing on July 12, 2013, the Court denied Plaintiffs’ motion
for preliminary and interlocutory relief, referred the case to a
U.S. Magistrate Judge for an early settlement conference, and
stayed the case pending the outcome of mediation.

(See ECF No.

33).
After the settlement discussions proved to be unfruitful,
the Court lifted the stay in this matter and issued a briefing
schedule for submission of the remaining pleadings related to
Defendants’
Plaintiffs
Proposed

Motion

to

submitted

Second

Dismiss.
their

Amended

(ECF

Reply,

No.

which

Complaint,”

43).

Thereafter,

includes

(see

ECF

a

No.

“Revised
46),

and

Defendants filed a Motion for Leave to File Surreply Arguments
in Response to Plaintiffs’ Reply Brief.
II.
A.

(ECF No. 47).

DISCUSSION

Motion to Dismiss
1.

Standards of Review
a.

The

In General

purpose

of

a

motion

to

dismiss

filed

pursuant

to

Federal Rule of Civil Procedure 12(b)(6) is to test the legal
sufficiency of a complaint.

Edwards v. City of Goldsboro, 178

F.3d 231, 243 (4th Cir. 1999).
7

Pursuant to Federal Rule of

Civil Procedure 8(a)(2), a complaint need only contain “a short
and plain statement of the claim showing that the pleader is
entitled to relief, in order to give the defendant fair notice
of what the . . . claim is and the grounds upon which it rests.”
Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41,
47 (1957)) (internal quotation marks omitted).
In

considering

construe

the

a

Rule

complaint

in

12(b)(6)
the

light

motion,
most

this

Court

favorable

must

to

the

plaintiff, read the complaint as a whole, and take the facts
asserted therein as true.
River

Co.,

pleading

176

that

F.3d
offers

See Harrison v. Westinghouse Savannah

776,

783

labels

(4th

and

Cir.

1999).

conclusions

or

But,
a

“[a]

formulaic

recitation of the elements of a cause of action will not do.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550
U.S. at 555).

A complaint is also insufficient if it relies

upon “naked assertions devoid of further factual enhancement.”
Iqbal,

556

U.S.

at

678

(quoting

Twombly,

550

U.S.

at

557)

(internal quotation marks omitted).
A complaint must allege sufficient facts to “cross ‘the
line

between

relief.’”

possibility

and

plausibility

of

entitlement

to

Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir.

2009) (quoting Twombly, 550 U.S. at 557); see also Simmons v.
United Mortg. & Loan Inv., LLC, 634 F.3d 754, 768 (4th Cir.
2011) (“On a Rule 12(b)(6) motion, a complaint must be dismissed
8

if it does not allege enough facts to state a claim to relief
that is plausible on its face.” (quoting Giarratano v. Johnson,
521 F.3d 298, 302 (4th Cir. 2008)) (internal quotation marks
omitted)).
A claim is facially plausible “when the plaintiff pleads
factual content that allows the court to draw the reasonable
inference

that

alleged.”
556).

the

defendant

is

liable

for

the

misconduct

Iqbal, 556 U.S. at 678 (citing Twombly, 555 U.S. at

Thus, if the well-pled facts contained within a complaint

“do not permit the court to infer more than the mere possibility
of misconduct, the complaint has alleged—but it has not shown—
that the pleader is entitled to relief.”

Francis, 588 F.3d at

193 (quoting Iqbal, 556 U.S. at 679) (internal quotation marks
omitted).
b.

Heightened Pleading Standard for Fraud

Where, as here, a claim alleges fraud or mistake, a party
must “state with particularity the circumstances constituting
fraud or mistake.”
heightened

Fed.R.Civ.P. 9(b).

pleading

establishing

the

claimed fraud.

standard,

“who,

what,

a

To satisfy Rule 9(b)’s

plaintiff

when,

where,

must
and

allege
how”

facts

of

the

United States ex rel. Wilson v. Kellogg Brown &

Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (quoting United
States ex rel. Willard v. Humana Health Plan of Tex. Inc., 336

9

F.3d 375, 384 (5th Cir. 2003)).

More specifically, district

courts within the Fourth Circuit have established that:
To state a fraud claim under Maryland law, a plaintiff
must allege five elements with particularity: (1) the
defendant made a false statement of fact; (2) the
defendant knew the statement was false or acted with
reckless disregard for the truth of the statement; (3)
the defendant made the statement for the purpose of
defrauding the plaintiff; (4) the plaintiff reasonably
relied on the false statement; and (5) the plaintiff
was damaged as a result.
Thompson v. Countrywide Home Loans Servicing, L.P., No. L-092549,

2010

Medimmune,

WL

1741398,

Inc.

Sec.

at

*3

Litig.,

(D.Md.

27,

2010);

F.Supp.

873

Apr.

953

(D.Md.

(citing Martens Chevrolet, Inc. v. Seney,

In

re

1995)

439 A.2d 534 (Md.

1982)).
“In evaluating whether a cause of action must be pled with
particularity, a court should examine whether the claim requires
an

essential

Healthcare,

showing

238

F.App’x

of

fraud.”

914,

921

Balt.
(4th

Cnty.

Cir.

v.

2007).

Cigna
It

is

axiomatic that claims brought pursuant to the Exchange Act, 15
U.S.C. § 78j(b) (2012), and SEC Rule 10b-5, 17 C.F.R. § 240.10b5 (2014), are subject to Rule 9(b).

See Cozzarelli v. Inspire

Pharm. Inc., 549 F.3d 618, 629 (4th Cir. 2008).
c.

Pleading Standard for Securities Fraud Actions

Iqbal and Twombly notwithstanding, to survive a threshold
dismissal motion, a securities fraud complaint must do more than
state

a

facially

“plausible”

claim.
10

The

Private

Securities

Litigation

Reform

Act

of

1995

(“PSLRA”)

provides

a

special

pleading standard for certain elements of a securities fraud
claim

brought

under

Section

10(b)

of

the

Exchange

Act.

To

succeed in a Section 10(b) private suit, a plaintiff must prove:
(1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale
of a security; (4) reliance upon the misrepresentation
or
omission;
(5)
economic
loss;
and
(6)
loss
causation.
Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309, 1317
(2011)

(quoting

Atlanta,

Inc.,

Stoneridge
552

U.S.

Inv.

148,

Partners,

157

LLC

(2008));

v.

see

Scientific-

also

Matrix

Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 181
(4th Cir. 2009) (quoting the same).
Prior
pleading

to

the

standard

enactment
set

forth

of
in

the
Rule

PSLRA,
9(b)

the

was

the

heightened
principal

mechanism used to determine the sufficiency of a complaint for
securities

fraud

under

Section

10(b)

of

the

Exchange

Act.

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319
(2007).

In

particularity

1995,

Congress

requirement

action lawsuits.

strengthened

vis-à-vis

and

federal

clarified

securities

the
class

Thus, under the PSLRA, to survive a motion to

dismiss, a complaint for violation of the federal securities
laws must meet the heightened requirements set forth under 15
U.S.C. § 78u-4(b).

Matrix, 576 F.3d at 181-82.

11

First, any private securities complaint alleging that the
defendant made a false or misleading statement must “specify
each statement alleged to have been misleading [and] the reason
or reasons why the statement is misleading[.]”
4(b)(1).

15 U.S.C. § 78u–

Second, with respect to each act or omission, the

plaintiff must “state with particularity facts giving rise to a
strong

inference

state of mind.”

that

the

defendant

acted

with

the

required

Id. § 78u–4(b)(2)(A) (emphasis added).

Construing this standard, the Supreme Court of the United
States noted that it must be ascertained “whether all of the
facts

alleged,

taken

collectively,

give

rise

to

a

strong

inference of scienter, not whether any individual allegation,
scrutinized
standard.”

in

isolation,

meets

[the

strong-inference]

Tellabs, 551 U.S. at 323 (emphasis in original).

To

be sure, as has been laconically observed in other contexts, “a
brick

is

not

a

wall.”

Fed.R.Evid. 401 (2012).

See

Advisory

Committee’s

Note,

Thus, to be “strong,” such an inference

of scienter must be more than “permissible” or “reasonable,” “it
must be cogent and compelling” compared to other, nonculpable
explanations.

Tellabs, 551 U.S. at 324.

It follows then that, under the comparative analysis set
forth in Tellabs, the threshold inquiry for a court is whether
the facts alleged “permit an inference of scienter, and if so,
the persuasiveness of that inference.”
12

Matrix, 576 F.3d at 183.

Next,

if

the

court

finds

the

inference

that

the

defendants

“acted innocently, or even negligently, more compelling than the
inference

that

they

acted

with

complaint should be dismissed.

the

requisite

scienter,”

the

Pub. Emps.’ Ret. Ass’n of Colo.

v. Deloitte & Touche LLP, 551 F.3d 305, 313 (4th Cir. 2009).
Under

the

insufficient

strong

to

inference

standard,

support

a

10(b)

Section

negligence

claim.

Id.

is
To

establish a strong inference of scienter “plaintiffs must do
more than merely demonstrate that defendants should or could
have done more.”

Id. at 314.

Indeed, “Congress did not merely

require plaintiffs to . . . allege facts from which an inference
of scienter rationally could be drawn.”
323

(emphasis

scienter

by

recklessness.

in

original).

pleading

Rather,

intentional

Tellabs, 551 U.S. at
plaintiffs

misconduct

must

allege

or

severe

Cozzarelli, 549 F.3d at 623.

In the Section 10(b) context, a reckless act is one that is
“so highly unreasonable and such an extreme departure from the
standard of ordinary care as to present a danger of misleading
the plaintiff to the extent that the danger was either known to
the defendant or so obvious that the defendant must have been
aware of it.”

Pub. Emps.’ Ret. Ass’n, 551 F.3d at 313 (quoting

Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 344 (4th
Cir. 2003)) (internal quotation marks omitted).
“when

the

facts

as

a

whole

more
13

plausibly

Nevertheless,

suggest

that

the

defendant acted innocently—or even negligently—rather than with
intent or severe recklessness, the action must be dismissed.”
Cozzarelli, 549 F.3d at 624.
Furthermore, where, as here, plaintiffs allege fraud claims
against

individual

defendants,

they

“must

allege

facts

supporting a strong inference of scienter as to each defendant.”
Matrix, 576 F.3d at 182 (citing Teachers’ Ret. Sys. of La. v.
Hunter, 477 F.3d 162, 184 (4th Cir. 2007)).

“[I]f the defendant

is a corporation, the plaintiff must allege facts that support a
strong

inference

of

scienter

with

respect

to

at

least

one

authorized agent of the corporation, since corporate liability
derives from the actions of its agents.”

Teachers’, 477 F.3d at

184.
2.

Analysis

The Court will grant Defendants’ Motion to Dismiss as to
Counts VIII, X, and part of IX, but will deny the Motion as to
all other counts.
a.

Federal and State Securities Fraud Allegations
(Counts II and IV)

Defendants’ Motion will be denied as to Plaintiffs’ federal
and state securities fraud claims because the proposed Second
Amended

Complaint

successfully

misrepresentation and scienter.

14

alleges

material

Plaintiffs

allege

misrepresentations

and

Defendants

omissions

of

made

fact

material

regarding

TAC’s

financial health to inflate the value of its stock and induce
Gellene to transfer DB and its principal assets to TAC.
the

misrepresentations,

Plaintiffs

allege

As to

Defendants

mischaracterized its number of revenue-generating cards (“RGCs”)
(2d

Am.

Compl.

¶¶

12-13),

held

itself

out

as

a

growing

multilayered company with varied income streams (id. ¶¶ 8, 14,
20), and claimed its common stock was valued at $1.10 per share
(id. ¶ 18).
i.
As

a

The APA Merger Clause

preliminary

matter,

Defendants

aver

Plaintiffs’

reliance upon pre-merger statements is “unreasonable as a matter
of law” because the APA is a comprehensive document that covers
all representations and warranties applicable to the agreement.
Section 7.2 of the APA provides the “Agreement . . . constitutes
the

sole

understanding

of

the

Parties

with

respect

to

the

subject matter hereof. [sic] contain [sic] the entire agreement
between

the

Parties

with

respect

to

the

transactions

contemplated hereby and supersedes all prior agreements, written
or oral, with respect thereto.”
1).

According

to

Defendants,

(Compl. Ex. A, at 46,3 ECF No.
Plaintiffs

could

not

have

reasonably relied upon their alleged pre-merger statements given
3

All page numbers refer to CM ECF pagination.
15

the merger clause.

The APA’s merger clause, however, merely

references

the

omissions,

allegedly

agreement.

agreement

itself,

made

to

not

the

induce

representations

Plaintiffs

to

and

sign

the

Moreover, although Defendants rely upon Dresner v.

Utility.com, Inc., 371 F.Supp.2d 476, 491-92 (S.D.N.Y. 2005), in
support of their argument, there are district court cases within
the

Fourth

waive

Circuit

one’s

that

right

to

have

claim

rejected

reliance

clauses

upon

purporting

to

misrepresentations.

See, e.g., Jadoff v. Gleason, 140 F.R.D. 330, 334-36 (M.D.N.C.
1991) (rejecting defendant’s argument that the acknowledgements
signed by plaintiffs constituted waiver or conclusive evidence
that

plaintiffs

did

misrepresentations).

not

rely

Conversely,

on

the

there

are

complained
cases

within

of
the

Second Circuit that have foreclosed securities claims based upon
pre-agreement
involve

misrepresentations

provisions

representations.

that

when

the

specifically

subject

agreements

disclaim

such

See, e.g., One Commc’ns Corp. v. JP Morgan

SBIC LLC, 381 F.App’x 75, 79 (2d Cir. 2010) (plaintiff precluded
from alleging reasonable reliance due to the merger clause and
contract provision specifically disclaiming representations that
were not in the agreement); Harsco Corp. v. Segui, 91 F.3d 337,
343 (2d Cir. 1996) (same).

Nonetheless, the Court concludes the

APA merger clause does not prohibit Plaintiffs from claiming
reliance upon Defendants’ alleged pre-merger statements.
16

ii.

Material Misrepresentations/Omissions

In Count II, Plaintiffs allege violations of § 10(b) of the
Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5,4 based upon the aforementioned allegations.
Defendants argue Plaintiffs failed to successfully allege the
first

two

elements

of

a

PSLRA

claim:

(1)

a

material

misrepresentation (or omission); and (2) scienter.

The Court

disagrees.
In their Motion to Dismiss the First Amended Complaint,
Defendants correctly aver that Plaintiffs failed to attribute
their purported true facts to any source and, therefore, could
not properly plead why Defendants’ alleged misrepresentations
and omissions were misleading.
their

proposed

Second

Amended

In response, Plaintiffs filed
Complaint

which,

on

its

face,

appears to provide the missing sources and explanations of why
the representations and omissions were misleading.
claim

Defendants

made

the

following

statements

Plaintiffs

and

omissions

during negotiations to induce Gellene to transfer DB and its
principal assets to Defendants:
- During a December 28, 2010 introductory call and in a
letter of intent attached to a January 10, 2011 email,
Eder

held

TAC

out

to

4

be

a

financial

and

employee

Section 10(b) and SEC Rule 10b-5, which implements §
10(b), prohibits the use of deceptive tactics in connection with
the purchase or sale of any security. See 15 U.S.C. § 78j(b).
17

benefit services company that provided prepaid cards,
a

mobility

services

program,

an

online

program, and affordable health care programs.

bill

pay

(2d Am.

Compl. ¶ 8);
- On February 2, 2011, TAC emailed Gellene a discussion
document that stated, “With just two years of selling
under our belt, we have grown our revenue generating
cards from 53 cards in 2008 to approximately 18,000 at
the end of 2010 with average revenue per month per
card of $7.00 at a gross margin of just under 50%.

We

finished 2011 [sic] at $1.1M in revenues and expect to
triple

revenues

revenues.”

in

2011

to

approximately

$3M

in

(Id. ¶ 12);

- On February 16, 2011, a TAC employee sent an email to
Gellene stating the valuation of TAC’s common stock
was $1.10 per share.

(Id. ¶ 18);

- On March 3, 2011, Eder sent an email to Gellene with
an

attachment

that

represented,

“Over

the

last

18

months, TAC has grown to 63,000 Members in the U.S.,
Canada, the United Kingdom, Puerto Rico, and Mexico.
This growth is due to its overall services platform,
creating

safe

and

healthy

financial

environments for families and individuals.”
14).

benefit
(Id. ¶

The attachment also stated TAC services included
18

“Non-Qualified
Programs”

and

as

Qualified

well

as

Affordable

“Discount

Healthcare

Auto

Insurance.”

(Id.);
- During negotiations, Defendants failed to disclose a
substantial

reduction

in

income

from

their

primary

revenue source as Eder acknowledged in a June 17, 2013
declaration filed in this matter.

(Id. ¶ 19);

- Defendants portrayed TAC as a growing company but the
attachments
and

an

to

the

attachment

received

from

aforementioned
to

a

an

TAC

August

Eder
2012

employee,

declaration,
email

show

Gellene

card

usage

“plummeted almost 70% from May 2010 to February 2011.”
(Id. ¶ 20);
- Defendants

“failed

indebtedness

in

to

an

disclose

amount

[their]

exceeding

past

$300,000

due
to

[their] principal and most essential service provider,
FIS Global, and was in default of [their] agreement
with that service provider.”

(Id. ¶ 21).

A fact that

Gellene did not discover until he reviewed an internal
document in March 2013.
- Defendants
2010

[they

failed
were]

to

(Id.);
disclose

indebted

and

“that

as

past

due

of
to

December
[their]

principal managerial employees in an amount exceeding

19

$180,000[,]” which Gellene discovered in February 2012
through an internal document.

(Id. ¶ 22); and

- Defendants failed to disclose that they did not have
the

“the

then

obligation

present

under

the

ability

APA

to

to

pay

fulfill

to

DB

[their]

the

sum

of

$50,000 at time of the execution of the APA or to
assume

the

operating

costs

required to do in the APA.”

of

DB

as

[they

were]

(Id. ¶ 23).

In sum, Plaintiffs paint a picture of Defendants deceptively
holding TAC out to be a profitable multi-layered company when,
in actuality, it was sinking in the ocean of financial ruin
without a paddle or life vest.
Defendants

aver

Plaintiffs

fail

to

statements

and

Plaintiffs,

however,

that,

despite

identify

failed
are

specific

to

the

details

demonstrate

not

proposed

required

of

they
to

amendment,
the

alleged

were

false.

“plead

‘detailed

evidentiary matter’ in order to survive a motion to dismiss.”
Keeney v. Larkin, 306 F.Supp.2d 522, 528 (D.Md. 2003) (citing In
re Health Mgmt. Inc. Sec. Litig., 970 F.Supp. 192, 208 (E.D.N.Y.
1997)).

Furthermore, “neither Rule 9(b) nor the PSLRA requires

plaintiff[s] to set forth facts which, because of the lack of
discovery, are in the exclusive possession of the Defendants.”
Id.

20

As to the misrepresentations, Plaintiffs clearly identify
the allegedly misleading statements and provide reasons why the
statements are misleading with exhibits, available to Plaintiffs
at

this

juncture,

to

support

those

reasons.

The

parties’

disagreement over whether TAC intentionally utilized a different
definition of RGCs is best addressed on a motion for summary
judgment

but

because

looking

also

Plaintiffs

presented
although

is

was

not

successfully

inaccurate

Defendants
statements

dispositive

under

to

allege
either

correctly

aver

regarding

tripled

the

the

pending
number

definition.

that

the

in

of

RGCs

Moreover,

alleged

revenues

motion

forward2011

are

generally not actionable,5 such statements are actionable upon a
showing of actual knowledge that the projection is false or
misleading.6

Defendants’

alleged

omissions,

discussed

infra,

intimate Defendants’ actual knowledge of the false or misleading
nature

of

the

projection.

Read

5

collectively,

Plaintiffs’

See Hillson Partners Ltd. P’ship v. Adage, Inc., 42 F.3d
204, 213 (4th Cir. 1994) (“An inability to foresee the future
does not constitute fraud.” (quoting Eckstein v. Balcor Film
Investors, 8 F.3d 1121, 1132 (7th Cir. 1993)) (internal
quotation marks omitted)); Raab v. Gen. Physics Corp., 4 F.3d
286, 290 (4th Cir. 1993) (“[P]rojections of future performance
not worded as guarantees are generally not actionable under the
federal securities laws.” (quoting Krim v. Banctexas Grp., Inc.,
989 F.2d 1435, 1446 (5th Cir. 1993)) (internal quotation marks
omitted)).
6
See 15 U.S.C. § 78u-5(c)(1)(B) (forward looking statements
not accompanied by meaningful cautionary language may be
actionable upon a showing of actual knowledge that the
statements were false or misleading).
21

allegations regarding Defendants’ fraudulent misrepresentations,
including

TAC’s

growth,

profitable

prepaid

card

program,

ancillary services, and international membership, are sufficient
to pass muster.
To

accompany

its

purported

growth,

TAC

allegedly

experienced significant financial challenges, which, according
to

Plaintiffs,

Defendants

negotiations.

failed

Specifically,

to

disclose
allegedly

Defendants

during
omitted

information regarding TAC’s substantial loss of revenue from its
primary

source;

TAC’s

debt

to

managerial

employees

and

card

processor, FIS Global; TAC’s plummeting customer card usage; and
TAC’s then-present inability to pay Gellene his bargained-for
$50,000 and assume DB’s operating costs as provided in the APA.
Defendants

argue

Plaintiffs

either

reasonable

inference

documents
draw.”

do

not

these

allegations

“fail
of

support

to

provide

falsity,
the

are

or

insufficient

details
the

conclusion

to

contents

Plaintiffs

because

make

any

of

the

wish

to

(Defs.’ Opp’n to Pls.’ Cross Mot. for Leave to Amend

Compl., & Defs.’ Reply to Pls.’ Opp’n to the Mot. to Dismiss
[“Defs.’

Opp’n”]

at

5-6,

ECF

No.

31).

The

Court

partially

agrees.
Of the omissions alleged, only Defendants’ alleged thenpresent inability to pay Gellene or assume DB’s operating costs
fails to pass muster.

Although Plaintiffs allege Defendants had
22

a then-present inability to pay Gellene and financially support
DB,

they

do

bargained-for

not

allege

Defendants

compensation

or

failed

support.

As

to
to

provide
the

the

remaining

omissions, Defendants acknowledged a substantial loss in revenue
from its primary customer during negotiations (see Eder Decl. ¶
17,

ECF

No.

15-1),

and

Plaintiffs

provide

documentation

to

support their card usage allegation.
The parties disagree on whether Defendants disclosed their
indebtedness

to

FIS

Global

and

its

employees.

As

alleged,

Defendants failed to provide the amount of the aforementioned
debt in response to the due diligence request.

According to

Plaintiffs, during the due diligence process in March 2013, TAC
claimed it did not have the information available.
Compl. ¶ 53).

(See 2d Am.

In his declaration, however, Eder states that not

only did TAC have the December 2010 financials available, but it
provided them to Plaintiffs prior to signing the APA.
Decl. ¶¶ 29-33).
as

the

Court

information

must

(See Eder

Assuming Plaintiffs’ allegations to be true,
at

regarding

this
its

juncture,
December

TAC

2010

failed

to

indebtedness

disclose
to

FIS

Global and its employees during negotiations with Plaintiffs.
Despite

alleging

falsity,

the

question

remains

whether

Defendants’ alleged misrepresentations and omissions of fact are
material.

23

It

is

analysis

axiomatic

of

the

that

financial

any

new

health

partnership

of

the

requires

entities

an

involved.

Knowledge of TAC’s financial woes, however, are only material if
they

would

have

significantly

altered

the

“total

mix”

of

information made available to Plaintiffs prior to signing the
APA.

See Matrixx Initiatives, Inc., 131 S.Ct. at 1318 (“[The]

materiality

requirement

is

satisfied

when

there

is

‘a

substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly

altered

the

‘total

mix’

of

information

made

available.’” (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238
(1988)).

Indeed, TAC’s representations regarding its growth,

valuation,

ancillary

programs,

and

the

success

of

its

RGCs,

among other things, compelled it to disclose any fact that would
not

render

those

representations

misleading.

See

Matrixx

Initiatives, Inc., 131 S.Ct. at 1321 (“Disclosure is required
under

these

provisions

only

when

necessary

‘to

make

.

.

.

statements made, in the light of the circumstances under which
they were made, not misleading.’” (citing 17 C.F.R. § 240.10b5(b))(alteration in original)); see also Phillips v. LCI Int’l,
Inc.,

190

F.3d

609,

613

(4th

Cir.

1999)

(“If

a

reasonable

investor, exercising due care, would gather a false impression
from a statement, which would influence an investment decision,

24

then the statement satisfies the initial element of a § 10(b)
claim.”).
Viewing the proposed Second Amended Complaint as a whole,
Defendants lauded TAC’s growth and made a projection regarding
tripled revenues with knowledge that the economy precipitated a
decline in revenue from a customer who accounted for more than
fifty-percent

of

TAC’s

bottom

line.

In

addition

to

not

disclosing this decline, TAC also failed to disclose its debt to
managerial employees and card processor, FIS Global, as well as
its

plummeting

potential

customer

seller

significantly

card

would

altering

usage.

have

the

It

viewed

“total

mix”

available prior to signing the agreement.
to

Plaintiffs’

situation

is

the

is

this
of

likely

that

information
information

a
as

made

Of particular import

information

regarding

the

decline of TAC’s principal RGC customer because the agreement
involved the same enterprise.
Therefore, Defendants were required to disclose the alleged
omissions

because

it

would

have

revealed

material

facts

necessary to make TAC’s alleged representations not misleading
under

the

circumstances.

Accordingly,

Plaintiffs

have

successfully alleged Defendants made material misrepresentations
and omissions of fact.

25

iii. Scienter
Plaintiffs have also alleged facts

that give rise to a

strong inference that Defendants acted with scienter.
Scienter is defined as “a mental state embracing intent to
deceive, manipulate, or defraud.”
425 U.S. 185, 193 n.12 (1976).

Ernst & Ernst v. Hochfelder,

In pleading scienter, Plaintiffs

must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind” for each omission.
added).

15 U.S.C. § 78u–4(b)(2)(A) (emphasis

Although the standard requires a showing of scienter

for each omission, the Court must determine “whether all of the
facts

alleged,

taken

collectively,

give

rise

to

a

strong

inference of scienter, not whether any individual allegation,
scrutinized
standard.”

in

isolation,

meets

[the

strong-inference]

Tellabs, 551 U.S. at 323 (emphasis in original).

Although the U.S. Supreme Court has yet to determine whether
scienter

may

be

shown

through

recklessness,

see

Matrixx

Initiatives, Inc., 131 S.Ct. at 1323, the Court will consider
whether
made

Plaintiffs’

the

allegations

aforementioned

sufficiently

material

show

Defendants

misrepresentations

and

omissions of fact intentionally or recklessly.
According

to

misrepresentations

Plaintiffs,
and

Defendants

omissions

26

of

fact

made

the

material

“intentionally

and

willfully with the purpose and intent of inducing DB and Gellene
to enter into the APA and in order that TAC might have access to
DB’s revenue stream, save their salaries and jobs and to stave
off the financial ruin of the company . . . .”
24).

(2d Am. Compl. ¶

During the preliminary injunction phase of this matter,

Eder

acknowledged

that

TAC’s

acquisition

of

DB

made

sense

because “it would help mitigate any revenue decline.”
Decl. ¶ 17).
that

TAC

revenue

One logical inference from the facts alleged is

intentionally

decline

disrupt

the

inference
primary

(Eder

and

withheld

liabilities

loss-mitigating

is

that

TAC

customer’s

information
because

merger.

recklessly

revenue

important for that matter.

it

did

An

was

not

to

logical

disclosure
not

its

want

equally

believed

decline

regarding

of

its

required,

or

Finally, one could also infer TAC’s

liability documentation was truly unavailable at the time of
Plaintiffs’
inferences
opposing
facts

of

request.
of

fraudulent

inference
the

Plaintiffs’

A

of

reasonable
activity

just

nonfraudulent

proposed

allegations

Second

person

a

Complaint

“cogent

deem

compelling

acitivity.

Amended

support

as

would

and

the

as

any

Assuming

the

to

be

true,

compelling”

inference that TAC withheld information related to its revenue
decline and liabilities because it did not want to disrupt the
loss-mitigating merger with Plaintiffs.7
7

This is enough to plead

Although Defendants correctly aver that a motivation to
27

scienter.

Accordingly,

Defendants’

Motion

to

Dismiss

Plaintiffs’ Counts II and IV is denied.8
b.

Illegal Sale of Securities (Counts I and III)

Defendants’ Motion will be denied as to Plaintiffs’ illegal
sale of securities claims because, as alleged, Plaintiffs did
not have access to the kind of information registration would
have disclosed.
Plaintiffs allege Defendants violated Sections 12(1) and 15
of the Securities Act, 15 U.S.C. §§ 77l, 77e, as well as Section
11-501 of the Maryland Corporations & Associations article of
the Maryland Code, Md. Code Ann., Corps. & Ass’ns § 11-501(1)
(West 2014), by offering and selling securities to Plaintiffs
that

were

neither

registered

nor

exempt

from

registration.

Defendants aver these allegations should be dismissed because

engage in fraud to keep a merger on track is insufficient to
support a strong inference of scienter, see, e.g., Phillips, 190
F.3d at 622 (“Allegations that ‘merely charge that executives
aim to prolong the benefits they hold’ are, standing alone,
insufficient to demonstrate the necessary strong inference of
scienter.”); In re Acterna Corp. Sec. Litig., 378 F.Supp.2d 561,
576 (D.Md. 2005) (“The Fourth Circuit has made clear that
allegations, like the ones asserted here, that merely charge
that executives committed fraud to prolong the benefits they
hold or to retain an executive position do not, in themselves,
raise a strong inference of scienter.”), Plaintiffs’ allegations
suggest more than a mere attempt to maintain the status quo. As
alleged, TAC was experiencing a precipitous revenue decline and
engaged Plaintiffs while also engaging in other fundraising
efforts through the sale of stock.
8
Similarly, Defendants’ Motion to Dismiss Plaintiffs’
common law fraud (Count V) and fraudulent inducement (Count VII)
claims is denied.
28

TAC’s offer to Plaintiffs was a private offering exempt from
registration under the federal and Maryland laws.
Defendants,
Plaintiffs
payment

in

exchange

to

Plaintiffs

the

proposed

initiated
TAC’s
be

Second

the

securities

stock,

a

which

private

claimed

to

Amended

have

According to

Complaint

discussion

heavily

offering.

and

favors

sought

finding

Defendants

sufficient

alleges

also

knowledge

in

the
aver

making

similar investments and the express language of the APA notifies
Plaintiffs that the stock would not be registered.
It is unlawful for entities to offer to sell any security
without

filing

a

registration

statement.

See

15

U.S.C.

77e(c); Md. Code Ann., Corps. & Ass’ns § 11-501(1).

§

The law

exempts, however, transactions that are private offerings.

See

id.

number

and

considered

in

§

77d(a)(2);

sophistication
determining

the

id.

of

§

the

private

11-602(9).

Although

transferees

may

nature

of

an

be

the

offering,

the

pivotal

inquiry is whether the purchaser had “access to the kind of
information which registration would disclose.”

SEC v. Ralston

Purina Co., 346 U.S. 119, 124-27 (1953); see also United States
v. Custer Channel Wing Corp., 376 F.2d 675, 678 (4th Cir. 1967)
(“‘[S]ophistication’ is not a substitute for ‘access to the kind
of

information

which

registration

would

Ralston Purina Co., 346 U.S. at 127)).

disclose.’”

(quoting

Therefore, the parties’

squabbles regarding the initiation of the sale and the number of
29

transferees

involved

need

not

be

resolved

at

this

juncture

because Plaintiffs allege they did not have access to the kind
of information a registration statement would have disclosed.
See generally Schedule A to the Securities Act, 15 U.S.C. § 77aa
(listing the information required in a registration statement).
The burden is on Defendants to prove the exemption applies.
Ralston

Purina

Co.,

346

U.S.

at

126.

As

mentioned

in

the

previous section, Plaintiffs allege they did not receive all of
TAC’s financial information prior to signing the APA, including
the

omissions

employees
customer.

as

of
well

TAC’s
as

indebtedness

the

loss

of

to

FIS

revenue

Global
from

and

its

its

primary

This missing information is exactly what is required

to be furnished in a registration statement.

See 15 U.S.C. §

77aa(25).

did

Although

Defendants

contend

they

provide

the

information, (see Eder Decl. ¶¶ 29-30), the Court must accept as
true Plaintiffs’ allegation they did not receive it.

Moreover,

even if Defendants provided the missing liability information
after signing the APA, the information is alleged to have been
unavailable prior to signing the agreement.

See Custer Channel,

376 F.2d at 678 (“Even the few purchasers shown by the evidence
to have gained access to the pertinent information when they
later became directors of the corporation, lacked such access at
the time they purchased most of their stock.”).

30

Without this

information, the Court does not find, at this juncture, that the
private offering exemption applies.
Finally, Defendants argue Plaintiffs’ allegations of state
liability for illegal sale of securities is barred by the oneyear statute of limitations.
§ 11-703(f).

See Md. Code Ann., Corps. & Ass’ns

Under Maryland law, a person may file suit upon

receipt of the security or of the consideration paid for the
security.

See

id.

§

11-703(b)(1),(2);

see

also

Mathews

v.

Cassidy Turley Md., Inc., 80 A.3d 269, 286 (Md. 2013) (“[T]he
statute provides a remedy only when a sale has been completed”
(citing Md. Code Ann., Corps. § Ass’ns § 11-703(b)(1))).

Under

the applicable statutory scheme, a “‘[S]ale’ . . . includes
every contract of sale of, contract to sell, or disposition of a
security or interest in a security for value.”

Id. § 11-101(p).

In their brief Plaintiffs allege the limitation period has not
run because the sale was not completed until Spring 2013.
proposed

Second

Amended

Complaint,

however,

allegations regarding the timing of the sale.

provides

The
no

In fact, the only

document that references a time period is Exhibit Y, a March 29,
2013 letter from TAC’s counsel claiming TAC had not delivered
the stock certificates because Plaintiffs requested they wait to
avoid tax liability.

(See ECF No. 20-1, at 87-90).

Moreover,

the letter intimates that the parties did not agree upon the
number of shares until an unspecified date in 2012.
31

(See id. at

88).

The four corners of the proposed Second Amended Complaint

allege a sale of unregistered stock without any indication of
the time the sale was completed.

Moreover, although Plaintiffs

claim to have submitted the consideration necessary in their
brief, this lacks a time period as well.

Therefore, the Court

will not dismiss this count on statute of limitations grounds at
this time.
Accordingly, Defendants’ Motion to Dismiss Counts I and III
is denied.
c.

Breach of Contract Claims (Counts VI and X)

Plaintiffs
contract

have

claims.

intentionally,

In

successfully
Count

recklessly

VI,

and/or

alleged

their

Plaintiffs

breach

aver

negligently

of

Defendants

breached

the

warranties contained in paragraphs 4.5, 4.6, 4.7, 4.9, and 4.11
of the APA.

Because the alleged breach is primarily based upon

the material misrepresentations and omissions addressed supra,
Plaintiffs

have

successfully

alleged

Defendants

breached

the

warranties contained in the APA.
In

Count

X,

Plaintiffs

allege

Defendants

owe

Gellene

reimbursement for payments he made for goods and services on
behalf of TAC.

The exhibit applicable to this claim provides

the amount of business expenses owed to Gellene is $41,246.28.
(See 2d Am. Compl. Ex. AD, at 103, ECF No. 20-1).

Gellene’s

employment agreement provides that TAC would reimburse Gellene
32

“for

reasonable

business

expense

[sic]

business

and

travel

related expenses submitted with appropriate documentation on a
monthly basis.”
Although

(2d Am. Compl. Ex. AC, at 102, ECF No. 20-1).

Plaintiffs

aver

Gellene

submitted

the

requisite

documentation on a monthly basis as agreed, they fail to allege
the expenses were reasonable.
Accordingly, the Court denies Defendants’ Motion to Dismiss
Count VI, but grants the Motion as to Count X.
d.
With

the

Officers and Directors Liability (Count VIII)
exception

of

Eder,

Plaintiffs

have

failed

to

allege officer and director liability for any of the remaining
individual

Defendants.

It

is

well-settled

that

allegations

regarding fraud against individual defendants requires “facts
supporting a strong inference of scienter as to each defendant.”
Matrix, 576 F.3d at 182 (citing Teachers’, 477 F.3d at 184).
Plaintiffs have not presented more than conclusory statements
regarding Defendants’, Rhett McNulty, Clark McNulty, and Daniel
Lindberg, knowledge of the alleged actions.
As a result, Defendants’ Motion to Dismiss Count VIII is
granted as to each individual Defendant except Eder.
e.

Maryland Wage Payment and Collection Act Claim
(Count IX)

Plaintiffs allege Defendants owe Gellene $7,449 in salary,
five weeks of vacation pay for 2011-2012, plus prorated vacation

33

pay

for

2013,

and

$100,000

in

bonuses,

in

violation

of

the

Maryland Wage Payment and Collection Act (“Wage Act”), Md. Code
(1991, 1999 Repl. Vol.), Lab. & Empl. §§ 3-501 et seq. (West
2014).

The

employee

.

Wage
.

.

Act
all

provides
wages

due

“each
for

employer
work

shall

that

the

pay

an

employee

performed before the termination of employment, on or before the
day on which the employee would have been paid the wages if the
employment had not been terminated.”

Id. § 3-505(a).

Although

the term “wages” may include bonuses, see id. § 3-501(c)(2), a
wage is more accurately defined as “all compensation that is due
to

an

employee

for

employment,”

remuneration promised for service.”

including

“any

other

Id. § 3-501(c)(1), (2)(v).

Moreover, an employer is not required to pay accrued leave if a
limitation is provided for in the employer’s written policy.
See id. § 3-505(b)(1).
As

written, Plaintiffs’ allegations regarding the salary

and accrued vacation owed to Gellene are sufficient to withstand
Defendants’ Motion.

Plaintiffs’ allegations are less about the

frequency of the payments, which Defendants contest, and more
about the salary amount owed to Gellene.

Moreover, Gellene’s

employment

an

agreement

clearly

references

entitlement

to

accrued vacation and, at this juncture, there is no indication
Defendants’ written policy limited the payment of this accrued
vacation

upon

termination.

Moreover,
34

Gellene’s

ability

to

receive $50,000 in annual incentive compensation was premised
upon

his

achievement

of

goals

outlined

in

the

Incentive

Compensation Plan (“ICP”).
Plaintiffs
ICP.

allege,

however,

(2d Am. Compl. ¶ 121).

that

TAC

never

provided

the

According to Plaintiffs, Gellene

“met and exceeded every employment goal set for him . . . .”
(Id.

¶

119).

Given

the

alleged

omission

of

the

ICP,

and

therefore a lack of information regarding the goals outlined
therein, Plaintiffs’ allegation regarding Gellene’s performance
is sufficient to withstand a motion to dismiss.

As a result,

Plaintiffs’ have successfully alleged Gellene’s entitlement to
the $100,000 bonus payment.
Finally,

Gellene’s

reimbursable

business

expenses

are

considered “wages” under the Wage Act, but Plaintiffs fail to
allege the expenses were reasonable.

As the Court of Appeals of

Maryland explained, “Once a bonus, commission or fringe benefit
has been promised as a part of the compensation for service, the
employee

would

be

entitled

to

its

enforcement

as

wages.”

Whiting-Turner Contracting Co. v. Fitzpatrick, 783 A.2d 667, 672
(Md.

2001).

Therefore,

Gellene’s

business

expenses

are

considered “wages” under the Wage Act if the they were promised
as part of the compensation for his service and if all agreed-to
conditions have been satisfied.

As previously mentioned, the

reimbursement of Gellene’s business expenses was included in his
35

employment agreement, thereby satisfying the first prong of the
wage

test.

reimbursement

As

to

was

the

second

that

prong,

only

submit

Gellene

the

the

condition

to

appropriate

documentation on a monthly basis for a reimbursement of the
expenses

TAC

deemed

reasonable.

In

the

breach

of

contract

section supra, the Court concluded Plaintiffs have failed to
allege the business expenses were reasonable.
Accordingly,

Defendants’

Motion

to

Dismiss

Count

IX

is

granted as to business expenses but denied as to the salary and
vacation pay.
B.

Motion for Leave to File Surreply
Defendants’

Motion

for

Leave

to

File

Surreply

will

be

granted because Plaintiffs submitted a new complaint with their
Reply.
Unless otherwise ordered by the court, surreply memoranda
are not permitted to be filed.
2011).

See Local Rule 105.2(a) (D.Md.

“Surreplies may be permitted when the moving party would

be unable to contest matters presented to the court for the
first time in the opposing party’s reply.”

Khoury v. Meserve,

268 F.Supp.2d 600, 606 (D.Md. 2003) (citing Lewis v. Rumsfeld,
154

F.Supp.2d

56,

61

(D.D.C.

2001)).

In

their

Reply

to

Defendants’ opposition, Plaintiffs attached an amended complaint
with new allegations presented to the Court for the first time.

36

Defendants’ proposed surreply is meant to address the procedural
dysfunction of Plaintiffs’ pleading.
Accordingly, Defendants’ Motion for Leave to File Surreply
is granted.
C.

Motion for Leave to Amend the Complaint
Plaintiffs’ Cross-Motion for Leave to Amend the Complaint

will be granted, but their attempt to file a “Revised Proposed
Second Amended Complaint” must fail.
A party may amend its pleading once as a matter of course,
but after the first amendment, the party must obtain written
consent

from

the

Fed.R.Civ.P. 15(a).

opposing

“should

be

or

leave

of

the

court.

The court should freely give leave to amend

“when justice so requires.”
amend

party

denied

Fed.R.Civ.P. 15(a)(2).

only

when

the

amendment

Leave to
would

be

prejudicial to the opposing party, there has been bad faith on
the part of the moving party, or the amendment would have been
futile.”
The

Court

Laber v. Harvey, 438 F.3d 404, 426 (4th Cir. 2006).
grants

Plaintiffs’

Motion

for

Leave

to

Amend

the

Complaint because the analysis above illustrates that none of
the aforementioned conditions for denial apply.
Plaintiffs’

attempt

to

submit

however, is procedurally improper.

an

additional

amendment,

After amending the complaint

once as a matter of course and submitting a motion to amend for
the Court’s consideration, Plaintiffs now seek a third bite at
37

the apple without requesting leave of the Court.
the

third

amendment

futile

in

light

of

the

Not only is

Court’s

partial

denial of Defendants’ Motion to Dismiss, it is also prejudicial
to

Defendants

allegations.

who

would

Therefore,

have

to

address

Plaintiffs’

a

Revised

new

set

Proposed

of

Second

Amended Complaint is not properly before this Court and will not
be considered.
III. CONCLUSION
For

the

foregoing

reasons,

the

Court

will,

by

separate

order, GRANT IN PART and DENY IN PART Defendants’ Motion to
Dismiss (ECF No. 13); GRANT Plaintiffs’ Cross-Motion for Leave
to

Amend

Motion

the

for

Complaint

Leave

to

(ECF

File

No.

20);

Surreply

and

GRANT

Arguments

in

Defendants’
Response

to

Plaintiffs’ Reply Brief (ECF No. 47).

Entered this 20th day of February, 2014

________/s/_________________
George L. Russell, III
United States District Judge

38