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Rath v. Pitcher

United States District Court, W.D. New York

March 28, 2014

TODD M. RATH, Plaintiff,


DAVID G. LARIMER, District Judge.

Plaintiff Todd M. Rath brought this action against one individual, David C. Pitcher, CPA ("Pitcher"), and a corporation, Davie Kaplan, CPA, P.C., alleging nine causes of action, all relating to defendants' provision of financial services to TGIB Marketing, Inc. ("TGIB"). Defendants have moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

As explained below, the Court is converting defendants' motion into a motion for summary judgment, pursuant to Rules 12(d) and 56. For the reasons that follow, the motion is granted, and the complaint is dismissed.


Before setting forth the factual background of this case, it is necessary to address the appropriate standard of review, because that affects what evidence the Court may consider in deciding defendants' motion. In support of their motion to dismiss, defendants have submitted affidavits and documentary evidence. See Affidavits of David C. Pitcher (Dkt. #7-2) and Shannon Smith (Dkt. #7-3) and exhibits attached thereto. In opposition to the motion, plaintiff has also submitted materials outside the pleadings. See Affidavit of Todd Rath (Dkt. #10-1), and Dkt. #11. Ordinarily, a court may not look beyond the four corners of the complaint in considering a motion to dismiss. See Friedl v. City of New York , 210 F.3d 79, 83 (2d Cir.2000). "However, a court may convert a motion to dismiss into a motion for summary judgment by considering extrinsic evidence, as long as the opposing party receives sufficient notice and an opportunity to respond." Mayo v. Federal Government , ___ Fed.Appx. ___, 2014 WL 928999, at *1 (2d Cir. 2014) (citing Hernandez v. Coffey , 582 F.3d 303, 307-08 (2d Cir. 2009)).

Here, both sides have submitted materials outside the pleadings. They have thus received constructive notice that the Court could convert this to a motion for summary judgment. Indeed, defense counsel stated at oral argument that the Court could do so, and plaintiff's counsel raised no objection. See Tr. (Dkt. #19) at 30. See also Mayo , ___ Fed.Appx. at ___, 2014 WL 928999, at *1 (although district court considered evidence outside the complaint, defendants provided plaintiff with unequivocal notice of the court's ability to treat their motions as motions for summary judgment; since plaintiff was afforded the opportunity to, and did, submit further evidence, district court properly converted motions to dismiss into motions for summary judgment); Pina v. Dora Homes, Inc. , No. 09-CV-1626, 2010 WL 2977409, at *1 (E.D.N.Y. July 22, 2010) ("Since both sides have submitted and relied upon matters outside of the pleadings, the Court need not give notice of its intent to convert") (citing In re G. & A. Books, Inc. , 770 F.2d 288, 295 (2d Cir. 1985)); Druyan v. Jagger , 508 F.Supp.2d 228, 236 (S.D.N.Y. 2007) ("having submitted material outside of the complaint in response to defendants' moving papers, the plaintiff cannot complain that she lacked the requisite notice if the court treats defendants' motion as a motion for summary judgment").

The Court therefore treats the present motion as a motion for summary judgment. Accordingly, the fundamental question is whether, construing all the evidence in the record in the light most favorable to plaintiff, the non-moving party, a rational jury could find in his favor. Rivera v. Rochester Genesee Regional Transp. Auth. , ___ F.3d ___, 2014 WL 518791, at *5 (2d Cir. 2014); McBride v. BIC Consumer Prods. Mfg. Co. , 583 F.3d 92, 96 (2d Cir. 2009); Guilbert v. Gardner , 480 F.3d 140, 145 (2d Cir. 2007).


According to the complaint, plaintiff was employed by, and was a shareholder of, TGIB from January 2002 until early 2008. (Dkt. #1, ¶ 7). The record shows that as of May 9, 2008, Rath owned 300 of TGIB's 1136.4 shares. Dkt. #7-3 at 21.

Defendant Pitcher is a certified public accountant ("CPA") who at all relevant times was employed by Davie Kaplan, which is a New York corporation that is in the business of providing accounting services.

In early 2005, Pitcher, "acting as both TGIB and Rath's CPA, proposed to TGIB and Rath" that TGIB form a so-called 419 plan for TGIB's employees. A 419 plan, which is named after the relevant section of the Internal Revenue Code, see 26 U.S.C. § 419, is a type of employer-sponsored employee welfare benefit plan. See J & M Associates, Inc. v. Callahan , 753 F.Supp.2d 1183, 1186 (S.D.Ala. 2010).

The details of how such plans work are not particularly important for purposes of the pending motions. What matters here is that Pitcher allegedly advised Rath that "TGIB could take large tax deductions" for funding a 419 plan. Complaint ¶ 9.

In fact, plaintiff alleges, this proposed plan was a "tax fiction, " and provided no lawful tax deductions. Complaint ¶ 10. Plaintiff alleges that prior to 2005, the Internal Revenue Service ("IRS") had issued rulings and opinions making clear that 419 plans did not offer the tax advantages claimed by defendants. See Complaint ¶¶ 12, 13; IRS Notice 95-34 (June 5, 1995); IRS Notice 2000-15 (Mar. 20, 2000).

Plaintiff alleges that in reliance on Pitcher's advice, TGIB formed a 419 plan ("Plan") in April 2005, and bought a $2.9 million variable life insurance policy ("Hartford Policy") to fund the Plan. Complaint ¶¶ 15, 17. From May 2005 to May 2007, TGIB allegedly contributed $300, 000 to the plan and the underlying policy. Complaint ¶ 18.

Besides the lack of tax advantages cited above, plaintiff also claims that the Plan and the policy were not suitable for TGIB in several other respects as well. Complaint ¶¶ 20-22. Plaintiff alleges that he "has lost $180, 000 as the direct and proximate cause of being invested in the Hartford Policy, " and that he has incurred $17, 500 in tax liability that he would not have incurred but for the ill-advised Plan and TGIB's purchase of the Hartford Policy. Complaint ¶¶ 24, 27.

According to defendants, in early 2008 Rath informed the other two shareholders, Smith and Thomas Rath, that he intended to leave the company and that he wanted to make arrangements to have his stock shares redeemed.[1] At that point, TGIB was negotiating for a possible sale of the company.

The three shareholders eventually entered into a "Shareholders Agreement Pending Sale of Company" ("Shareholders Agreement") (Dkt. #7-3 Ex. E). The Shareholders Agreement set forth various provisions regarding Rath's compensation in connection with the sale of, and his departure from, the company. Id. That agreement also referenced a "Buy/Sell Agreement" which, among other things, provided for the purchase of a shareholder's shares in the event that a shareholder sought to dispose of his shares. Dkt. #7-3 at 21. The Shareholders ...

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