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Reefer Systems, Inc. v. Southard Financial LLC

United States District Court, D. Nebraska

September 6, 2016



          LYLE E. STROM, Senior Judge.

         This matter is before the Court on the motion of defendants, Kelly Finnell and Executive Financial Services, Inc. (“EFS”) (hereinafter collectively the “Finnell defendants”), to dismiss (Filing No. 23). The matter has been fully briefed by the parties. See Filing Nos. 23-1, 30, and 33. After review of the motion, the parties' briefs, and the applicable law, the Court finds as follows.


         This case arises out of “the creation, implementation, valuation, and application” of an employee stock ownership plan (“ESOP”) on behalf of the plaintiff, William Willett's (“Willett”) company, Reefer Systems, Inc. (“Reefer”) (Filing No. 1 at 1). In the early part of 2009, Kelly Finnell spoke to Willett about establishing an ESOP for Reefer (Id. at 3). On January 21, 2010, Reefer hired Southard Financial, LLC (“Southard”), at the recommendation of the Finnell defendants, to perform “valuation and financial advisory services” for Reefer and “the yet-to-be formed ESOP.” (Id.); see also Id. at 4 (stating EFS would assist in finding “a valuation expert (appraiser)”).

         Three months later, on April 21, 2010, Reefer and EFS entered into a contract whereby EFS would provide various consulting services “including, without limitation: assisting with the creation and coordination of the ‘ESOP team' . . . drafting the ESOP document and [s]ummary [p]lan [d]escription and submitting the ESOP to the IRS requesting a [f]avorable [d]etermination [l]etter.” (Id.) EFS drafted the ESOP, the trust agreement, and the stock purchase agreement (Id.)

         On December 17, 2010, the ESOP was executed (Id. at 4-5). The trust, set up for the ESOP, under the direction of Daniel Bracht as trustee, paid $10 million for 30% of Reefer's stock. See Id. at 5. That same day, Southard issued a fairness opinion stating that “the stock sale of the ESOP of 30% of [Reefer] for $10 million d[id] not exceed the fair market value of [Reefer] as of December 17, 2010.” (Id.)

         About eight months later, on August 26, 2011, Southard sent Kelly Finnell an email stating:

I am in the process of providing Reefer Systems (Midland Carrier Transicold) with an update valuation as of December 31, 2010.
I am running into the same type of issue we had with Security Seed, where we valued [t]he company on a control basis for a minority purchase under the assumption that the plan would specify that all future valuations would be on the same level.
Doug and I were just looking at the plan document and it does not say that.
Is this something you can help us with?
We would prefer not to have to change the valuation methodology since that would result in a significant drop in value.

(Id.) Three days later on August 29, 2011, Finnell answered the email and allegedly sent, “what purported to be a page from the ESOP [p]lan [d]ocument . . . .” (Id.) The email stated: “When ‘valuing the assets comprising the Trust Fund at their fair market value, ‘the Trustee shall not apply a ‘minority interest discount' or ‘discount for lack of marketability' when valuing [Reefer's] Stock.” (Id. at 5-6).

         On October 30, 2013, “the United States Department of Labor (“DOL”) . . . sent Reefer an audit letter notifying it of an audit of Reefer's ESOP . . . .” (Id. at 6). Then in August of 2015, plaintiffs allege that they “learned that the DOL was taking the position that the initial valuation established by Southard . . . was overstated by millions of dollars.” (Id.)

         Plaintiffs filed the instant action on February 24, 2016, alleging various causes of action against Southard and the Finnell defendants. See generally Filing No. 1 at 6-12. Plaintiffs' claims against the Finnell defendants include: professional malpractice, negligent misrepresentation, fraudulent concealment, and breach of contract. (Id. at 9-12).

         Plaintiffs specifically allege with respect to the professional malpractice claim, that “Finnell and EFS failed to obtain a [f]avorable [d]etermination [l]etter from the IRS and upon information and belief . . . knew the valuation and fairness opinion provided by Southard . . . was unlawful and incorrect and failed to inform [p]laintiffs of this fact.” (Id. at 9). With respect to the negligent misrepresentation claim plaintiffs allege “Finnell and EFS supplied [p]laintiffs with false information that was intended for their guidance . . . [and] failed to exercise reasonable care and competency in supplying information regarding the ESOP.” (Id. at 10). With respect to the fraudulent concealment claim, plaintiffs allege “[i]n effort to conceal their overstatement of the initial valuation relating to the ESOP, [d]efendants conspired to create a false document and fraudulently concealed the fact that the initial valuation was overstated and not consistent with the ESOP plan documents.” (Id.) Finally, with respect to the breach of contract claim, plaintiffs allege “Finnell and EFS breached the agreement in the ways identified above.” (Id. at 11). Through plaintiffs' brief the Court understands the breach of contract claim to be based on the Finnell defendants' failure to obtain a favorable determination letter from the IRS. See Filing No. 30 at 18 (claiming “[p]laintiffs have clearly put the Finnell [d]efendants on notice that they are claiming they failed to obtain a [f]avorable [d]etermination [l]etter and have clearly alleged a breach of contract although the Finnell [d]efendants disagree with such a claim.”).

         On April 20, 2016, the Finnell defendants filed the instant motion to dismiss (Filing No. 23). The Finnell defendants argue plaintiffs' causes of action should be dismissed pursuant to Federal Rules of Civil Procedure 12(b)(6), 12(b)(7), and 9(b). (Id.)


         A. 12(b)(6)

         Determining whether a complaint states a plausible claim for relief is “a context-specific task” that requires a court “to draw on its judicial experience and common sense.” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 677-78, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). Federal Rule of Civil Procedure 8 requires a complaint to present “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). “[A] complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Braden, 588 F.3d at 594 (quoting Iqbal, 556 U.S. at 677-78) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

         When considering a motion to dismiss under Rule 12(b)(6), well-pled allegations are considered to be true and are viewed in the light most favorable to the plaintiff. Braden, 588 F.3d at 591, 595. In viewing the facts in this light, the Court must determine whether the complaint states any valid claim for relief. Jackson Sawmill Co. v. United States, 580 F.2d 302, 306 (8th Cir. 1978). Recitations of elements of a cause of action with mere conclusory statements fail to meet Rule 8's pleading requirements. Iqbal, 556 U.S. at 678. However, a plaintiff may use legal conclusions to provide the framework of a complaint, so long as factual allegations support those legal conclusions. Id. at 678-79. Thus, a dismissal is likely “only in the unusual case in which a plaintiff includes allegations which show on the face of the complaint that there is some insuperable bar to relief.” Jackson Sawmill, 580 F.2d at 306.

         B. 12(b)(7)

         “When deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(7) for ‘failure to join a party under Rule 19, ' Fed.R.Civ.P. 12(b)(7), the Court must first determine if the party is a ‘necessary party' under Rule 19(a)(1).” Rayeman Elements, Inc. v. Masterhand Milling, LLC, No. 8:15CV89, 2015 WL 3658529, at *2 (D. Neb. June 12, 2015) (citing Baker Group, L.C. v. Burlington N. & Santa Fe Ry. Co., 451 F.3d 484, 490 (8th Cir. 2006) (citing Fed.R.Civ.P. 19(a))). Under Rule 19 a party is “necessary” if:

(A) in that person's absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in ...

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