United States District Court, W.D. Texas
CHRIS QUINN, Trustee for the CryptoMetrics, Inc. Creditors' Trust, Plaintiffs,
SCANTECH IDENTIFICATION BEAMS SYSTEMS, LLC, et al., Defendants.
C. LAMBERTH UNITED STATES DISTRICT JUDGE
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,  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.
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-defendants Robert Barra,
Joel Shaw, and Michael Vitale-such as waste, 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 Karl en & 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.
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 in pari 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 Shaw had totally abandoned
CryptoMetrics' interests, the in pari delicto
defense would not 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.
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.
TRUSTEE'S MOTION FOR LEAVE TO AMEND
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 Cir. 1981). Courts consider the following factors in
deciding whether leave to amend is 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.
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).
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, the Second Amended Complaint now includes
allegations that the efforts to obtain funds benefited only
Barra, Vitale, Stolzar, and third parties, and that
CryptoMetrics received no benefit.
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. JackEckerd
Corp.,3 F.3d 137, 139- 40 (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 ...