Brickley v. Scantech Identifications Beam Systems, LLC

Filing 52

MEMORANDUM OPINION. Signed by Judge Royce C. Lamberth. (ad)

UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TE:xAS

CHRIS QUINN, Trustee for the
CryptoMetrics, Inc. Creditors' Trust,
Plaintiffs,

v.

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Case No: 5:13-cv-834-RCL

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SCANTECH IDENTIFICATION BEAMS )
SYSTEMS, LLC, et al.,
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Defendants.
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MEMORANDUM OPINION
I.

INTRODUCTION
On March 2, 2017, this Court granted in part and denied in part several of the defendants'

motions to dismiss [ECF Nos. 31, 32]. Shortly thereafter, defendants Michael Stolzar and Karlen
& Stolzar moved for judgment on the pleadings [ECF No. 36], and plaintiff Chris Quinn, the

trustee for debtor company CryptoMetrics, 1 moved for leave to amend the complaint and file a
second amended complaint [ECF No. 44]. For the reasons stated below, the Court will deny the
trustee's motion for leave to amend, and will grant the Stolzar defendants' motion for judgment
on the pleadings.
II.

BACKGROUND
The full factual background of this case is set forth in this Court's prior opinion. In sum,

the trustee alleges that CryptoMetrics was forced into bankruptcy as the result of the misdeeds of
its senior executives--<lefendants Robert Barra, Joel Shaw, and Michael Vitale-such as waste,

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Mr. Quinn has been substituted as trustee, replacing Douglas J. Brickley.
substitution.

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Defendants do not object to this

mismanagement, self-dealing, and various illegal activities including a bribery scheme to secure
contracts. The trustee alleges that the scheme was structured and implemented under the guidance,
counsel and advice of defendant Michael Stolzar, CryptoMetrics' attorney and a partner in the law
firm of defendant Karlen & Stolzar, who also allegedly drafted highly relevant documents as part
of the scheme. In addition, the trustee alleges that when Barra and Vitale fraudulently concealed
the state of CryptoMetrics' finances in order to obtain third party funding, Stolzar corroborated
Barra's and Vitale's fraudulent statements-which he knew to be false-and made further
fraudulent statements to investors and lenders.
Considering the Stolzar defendants' motion to dismiss, this Court found that the trustee did
not have standing to bring claims for civil conspiracy or legal malpractice, but that the Wagoner
rule did not preclude standing to assert claims that the Stolzar defendants aided in defrauding a
third party. Brickley for CryptoMetrics, Inc. Creditors' Trust v. ScanTech Identification Beams

Sys., LLC, No. 5:13-CV-834-RCL, 2017 WL 838218, at *10-12 (W.D. Tex. Mar. 2, 2017). In
addition, this Court addressed the Stolzar defendants' arguments that the doctrine of in pari delicto
barred the trustee's state law breach of fiduciary duty and RICO claims. Id. at *12. The inpari

delicto doctrine states that "a plaintiff who has participated in wrongdoing may not recover
damages resulting from the wrongdoing," so the Stolzar defendants argued that the trustee,
bringing claims on behald of CryptoMetrics, "[could not] seek recovery from Stolzar or Karlen &
Stolzar, CryptoMetrics' attorneys, who allegedly assisted Barra, Vitale, and Shaw, i.e.,
CryptoMetrics' management, in unlawful conduct." Id.

Under New York law, one of the

exceptions to in pari delicto is the "adverse interest" exception, under which "an agent's acts are
not imputed to the corporation only when the agent has 'totally abandoned his principal's interests
and (acts] entirely for his own or another's purposes."' Id. at *13. Therefore, if Barra, Vitale, and

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Shaw had totally abandoned CryptoMetrics' interests, the in pari delicto defense would

~ot

be

available to the Stolzar defendants. The Court found, however, that "the adverse interest exception
does not apply because the Complaint contains no hint that Barra and Vitale totally abandoned
CryptoMetrics' interests and were acting entirely for their own purposes when concealing
CryptoMetrics' financial issues and fraudulently obtaining funding," and that "the Complaint
makes clear that they were acting to enable CryptoMetrics to survive through 'new sources of
shareholder capital or debt financing."' Id. at *14. The Court dismissed parts of the breach of
fiduciary claim and the RICO claim brought against the Stolzar defendants. Id. at *14, *16.
The trustee now moves for leave to amend the complaint to include facts demonstrating
the applicability of the adverse interest exception to the in pari delicto defense claimed by the
Stolzar defendants. The Stolzar defendants oppose this motion on the grounds that the trustee has
unduly delayed, .is seeking amendment in bad faith, has previously amended his complaint and
failed to avoid dismissal, and that amendment is futile. The Stolzar defendants have also moved
to judgment on the pleadings, asserting the in pari delicto defense against the remaining claim
against them.

III.

TRUSTEE'S MOTION FOR LEAVE TO AMEND
A.

Legal Standards

Rule 15 allows a party to amend its pleading once as a matter of course and then "only with
the opposing party's written consent or the court's leave." Fed. R. Civ. P. 15(a). It states that
courts "should freely give leave when justice so requires." Id. § 15(a)(2). Whether to grant leave
to amend is within the discretion of the District Court, and the mandate that leave to amend should
freely be given "is to be heeded," Foman v. Davis, 371 U.S. 178, 182 (1962), but leave to amend
"is by no means automatic." Addington v. Farmer's Elevator Mut. Ins. Co., 650 F.2d 663, 666 (5th

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Cir. 1981).

Courts consider the following factors in deciding whether leave to amend is
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appropriate: "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure
to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by
virtue of allowance of the amendment, [and] futility of amendment." Foman, 371 U.S. at 182.
B.

Analysis

The Stolzar defendants raise the following grounds for denying leave to amend: undue
delay, bad faith, prior failed amendments, and futility of amendment. The crux of defendants'
argument is that the trustee knew of all the facts he now seeks to allege and is seeking to omit facts
from the Second Amended Complaint that formed the basis of this Court's conclusion that the
adverse interest exception to the in pari delicto defense did not apply in this case. This Court
found that the adverse interest exception did not apply because "the Complaint makes clear that
[Barra and Vitale] were acting to enable CryptoMetrics to survive through 'new sources of
shareholder capital or debt financing.' Because, as alleged by the Complaint, Barra and Vitale
acted to 'raise funds for corporate purposes,' the adverse interest exception does not apply. In
addition, with respect to usurpation, the Complaint claims that the formation of BioDentity UAE
was for the purpose of facilitating efforts to market CryptoMetrics' products in the Middle East.
Again, this indicates that it was done to benefit CryptoMetrics, and therefore the adverse interest
exception does not apply." Brickley, 2017 WL 838218, at *14 (internal citations omitted).
The trustee's Second Amended Complaint now omits some of the statements that the Court
relied on in coming to this conclusion. For example, the Court cited to paragraph 259 of the First
Amended Complaint, which described attempts to get a loan to "bridge the gap between the many
current and outstanding liabilities faced by CryptoMetrics and the purported payments that would
be received." Id. This statement was deleted from the Second Amended Complaint. In addition,

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the Second Amended Complaint now includes allegations that. the efforts to obtain funds. benefited
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only Barra, Vitale, Stolzar, and third parties, and that CryptoMetrics received no benefit.
The trustee argues that he is seeking amendment to correct insufficiently stated claims and
amplify and expand upon his prior pleading. The Court finds, however, that the trustee is not
seeking to merely correct an insufficiently stated claim-i.e., that the adverse interest exception
applies-but is instead trying to alter the facts previously pled in order to avoid dismissal. In such
circumstances, leave to amend is not warranted. There is no indication that the trustee was unaware
of the facts that he now seeks to plead-that the defendants totally abandoned the interests of
CryptoMetrics and that CryptoMetrics received no benefit from the scheme. The motion for leave
to amend was made to avoid this Court's conclusion that the claims against the Stolzar defendants
should be dismissed. The fact that the trustee knew of such facts before filing his First Amended
Complaint-and before he was faced with motions to dismiss and this Court's attendant opinion
dismissing certain counts-indicates bad faith. See Wimm v. Jack Eckerd Corp., 3 F.3d 137, 13940 (5th Cir. 1993) (affirming the district court' s conclusion that the plaintiffs motion was filed in
bad faith and with dilatory motive because "[t]he motion [was] obviously interposed by plaintiffs
in an attempt to avoid summary judgment," and "[t]he record reflect[ ed] that plaintiffs ... had
ample opportunity to investigate their claims and to seek leave to amend their complaint"); see
also Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594, 599 (5th Cir. 1981) (finding that bad faith

may bar amendment where the movant withholds asserting facts in order to gain a tactical
advantage"); Nautilus Ins. Co. v. Tanner, No. 7:12-CV-00203-0, 2013 WL 12121956, at *2 (N.D.
Tex. July 30, 2013) ("A party's failure to assert a claim 'as soon as he could have' should factor
into a court's decision whether to grant leave to amend.").

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Furthermore, the trustee is not seeking to simply allege new facts, but wants to omit
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previously pied facts relied on by this Court in order to assert a theory ofliability inconsistent with
the original theory asserted. Cf Travis v. City of Grand Prairie, No. 3:14-CV-3650-P, 2015 WL
13002069, at *7 (N.D. Tex. Aug. 6, 2015), aff'd sub nom. Travis v. City of Grand Prairie, Texas,
654 F. App'x 161 (5th Cir. 2016) (finding that the proposed amendment was a bad faith attempt
to avoid dismissal because "[i]nstead of alleging new facts to support his claims, portions of
Plaintiffs proposed amended complaint merely omit information in order to raise a fact issue").
The changes made are substantive, not simply corrections as argued by the trustee; they alter the
theory on which the Stolzar defendants' liability rests. This supports a finding of bad faith. Cf

Jackson v. NA.A.C.P., 575 F. App'x 256, 259 (5th Cir. 2014) (finding that the district court did
not abuse its discretion in denying a motion to amend where the plaintiffs "had already been given
two opportunities to amend their complaint, and in one of those instances acted in bad faith by
misrepresenting substantive changes as 'corrections'").

IV.

DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS

In its prior opinion, the Court addressed the in pari delicto defense to the trustee's breach
of fiduciary duty claims against the Stolzar defendants. It found that "the in pari delicto defense
appears on the face of the Complaint, i.e., that one wrongdoer, CryptoMetrics via the trustee, is
seeking to recover from another, the Stolzar defendants, when CryptoMetrics' own intentional
wrongdoing (through its officers) contributed to its injuries." Brickley, 2017 WL 838218, at *14.
It also concluded that "[t]he face of the Complaint also shows that neither exception to the in pari

delicto defense applies. First, the adverse interest exception does not apply because the Complaint
contains no hint that Barra and Vitale totally abandoned CryptoMetrics' interests and were acting
entirely for their own purposes when concealing CryptoMetrics' financial issues and fraudulently

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obtaining funding. . . . In addition, the face of the .Complaint shows that the corporate insider
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exception to the in pari delicto defense does not apply." Id.
The trustees' complaint contained four breach of fiduciary duty claims, the fourth of which
was that Stolzar breached his fiduciary duties by issuing the two Stolzar Opinion Letters that
contained representations he knew or should have known were false when made and that he knew
was a condition precedent to the finalization of the MBRO Loan. The Court found that "[i]n their
motion to dismiss, the Stolz~r defend~nts only specifically address the first three breach of
fiduciary duty claims in the context of the in pari delicto defense. The Court will not, therefore,
determine whether the in pari delicto defense applies to the fourth claim in Count XIV, and will
not dismiss that claim." Id. at *13 n.4. The Court dismissed the first three breach of fiduciary
claims, but found that "[b ]ecause the defendants did not specifically raise an in pari delicto defense
to the fourth claim in Count XIV, it remains." Id. at *14. After this Court issued its opinion, and
before the trustee moved for leave to amend, the Stolzar defendants filed their answer and moved
for judgment on the pleadings. In their answer, they raise the in pari delicto defense to the last
remaining breach of fiduciary duty claim against them.
The Court will grant the Stolzar defendants' motion for judgment on the pleadings and will
dismiss the final claim against them. The only reason the Court did not previously address the
applicability of the in pari delicto defense to the fourth breach of fiduciary duty claim was because
the Stolzar defendants had not specifically raised it in their motion to dismiss. Now that the
defense has been raised, the Court finds that its reasoning for finding that the in pari delicto defense
applies to the other breach of fiduciary duty claims applies equally to the fourth claim regarding
the Stolzar Opinion Letters. The fourth claim will be dismissed.

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V.

CONCLUSION
For the foregoing reasons, the Court will deny the trustee's motion for leave to amend, and

will grant the Stolzar defendants' motion for judgment on the pleadings. A separate Order

accompanies this Memorandum Opinion.
It is SO ORDERED.

Date: May ,§, 2017
RQYCe:Laffiberth
United States District Judge

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