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David Cohain D.D.S., et al v. Laura Klimley

August 31, 2011

DAVID COHAIN D.D.S., ET AL.,
PLAINTIFFS,
v.
LAURA KLIMLEY, ET AL.,
DEFENDANTS.
D. KENT SISSEL, ET AL.,
PLAINTIFFS,
v.
LAURA KLIMLEY, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.:

MEMORANDUM OPINION & ORDER

These cases arise from Plaintiffs' purchase of debt instruments ("Notes") from VWE Group, Inc., a greeting card company, before VWE filed a bankruptcy petition on June 1, 2004. Plaintiffs allege that they have not recovered any money on the Notes, that the Notes were issued as part of an illegal Ponzi scheme, and that the Defendants were complicit in that scheme. Defendant Laura Klimley served as Vice President and as a director of VWE, and Defendant John Palmero served as an officer, director, and controller of VWE.

Plaintiffs in these actions originally brought claims for violations of the federal securities laws and the RICO statute, as well as for fraud, fraudulent conveyance, waste of corporate assets, self-dealing and deepening insolvency, civil conspiracy, and breach of fiduciary duty. (See Cohain Cmplt. ¶¶ 44-81; Sissel Cmplt. ¶¶ 44-81) The Sissel plaintiffs also brought a claim for violation of Iowa's Blue Sky Law. (Sissel Cmplt. ¶¶ 82-87) In a Memorandum Opinion and Order dated September 20, 2010 ("Opinion & Order"), this Court granted Defendants' motions to dismiss the Sissel and Cohain plaintiffs' claims in their entirety. (08-cv-5047, Dkt. No. 47; 09-cv-4527, Dkt. No. 24)

Plaintiffs in both actions now seek leave to amend their complaints to add several new claims arising under state law: aiding and abetting fraud, aiding and abetting larceny, conversion, aiding and abetting conversion, and money had and received. For the reasons stated below, Plaintiffs' motions for leave to amend their complaints will be DENIED.

BACKGROUND

The Notes held by Plaintiffs -- which were offered throughout VWE's existence -- had "terms from 90 days to 5 years, interim maturity periods of between 1 and 3 years, and interest rates from 10 to 23%." ( Proposed Amended Complaint ("PAC") ¶ 13) However, Plaintiffs allege that VWE never paid the amount owing under the Notes and that "[a]t the time of the [bankruptcy] filing, the aggregate outstanding principal amount of the Notes [was] more than $26 million dollars." (PAC ¶ 13) In October 2007, Alicia Eimicke -- Klimley's sister and VWE's former president -- was indicted on 35 counts of theft, securities fraud and racketeering in connection with the Company's Notes issuance program. (PAC ¶ 43) Eimicke pled guilty to those charges on March 28, 2008, allegedly admitting that the Notes issued by the Company were part of an "illegal [P]onzi scheme." (Id.)

Although the Defendants here were not charged in the criminal proceeding, Plaintiffs allege that they -- in their capacities as director and officer, respectively -- promoted the issuance of the Notes despite their knowledge of VWE's deepening insolvency. (PAC ¶ 23) Plaintiffs also claim to have purchased Notes in reliance on the Defendants' false representations of VWE's financial health, and allege that VWE "instituted and maintained a policy of not disseminating" financial information to purchasers of the Notes. (PAC ¶¶ 27, 30, 34-40) Plaintiffs further allege that "there is little or no possibility that the Company will successfully emerge from its Chapter 11 bankruptcy filing or generate any meaningful sum from the sale of its assets for repayment of Plaintiffs." (PAC ¶¶ 12, 41)

In the Opinion & Order, this Court granted Defendants' motions to dismiss the Cohain and Sissel actions in their entirety.*fn1 The Court found that Plaintiffs' Securities Exchange Act claims were time-barred; that their RICO claims were pre-empted by Section 107 of the Private Securities Litigation Reform Act; that the claims for fraudulent conveyance, breach of fiduciary duty, waste of corporate assets, self-dealing, and deepening insolvency belonged to the trustee in bankruptcy rather than to the noteholders; and that the Sissel Plaintiffs' claim under Iowa's Blue Sky Law was improper because New York law governs their action. (See generally Opinion & Order (08-cv-5047, Dkt. No. 47; 09-cv-4527, Dkt. No. 24)) This Court also found that the Sissel and Cohain claims for fraud and civil conspiracy were inadequately pled.

The Court's Opinion & Order gave Plaintiffs leave to amend their complaints "within ten calendar days," or by September 30, 2010. (Opinion & Order at 42) Plaintiffs obtained an extension of this deadline to October 11, 2010. (08-cv-5047, Dkt. No. 48) On October 12, 2010, Plaintiffs filed their motions for leave to file an amended complaint (08-cv-5047, Dkt. No. 49; and 09-cv-4527, Dkt. No. 25), and on October 14, 2010, they filed amended motions for leave to file an amended complaint. (08-cv-5047, Dkt. No. 51; 09-cv-4527, Dkt. No. 27) A proposed amended complaint is attached as an exhibit to each of Plaintiffs' motions. (08- cv-5047, Dkt. No. 51 (Ex. 1); 09-cv-4527, Dkt. No. 27 (Ex. 1)) The PAC in each case adds causes of action for aiding and abetting fraud, aiding and abetting larceny, conversion, aiding and abetting conversion, and money had and received, but contains no new factual allegations.*fn2

(PAC ¶¶ 89-106)

DISCUSSION

I. STANDARD FOR GRANTING LEAVE TO AMEND

Under the Federal Rules of Civil Procedure, leave to amend should be "freely give[n] . . . when justice so requires." Fed. R. Civ. P. 15(a)(2). District courts "ha[ve] broad discretion to decide whether to grant leave to amend." Joblove v. Barr Labs., Inc., 429 F.3d 370, 404 (2d Cir. 2005). Leave to amend may properly be denied in cases of "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 the allowance of the amendment, futility of amendment, etc." Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2007). "[W]here the plaintiff is unable to demonstrate that he ...


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