Avrahami v. Clark

• Court: District Court, D. Arizona
• Decided: March 31, 2020
• Docket: 2:19-cv-04631
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 Benyamin Avrahami, et al., ) N o. CV-19-04631-PHX-SPL 9 )

) 10 Plaintiffs, ) ORDER ) 11 vs. ) ) 12 Celia Clark, et al., ) ) 13 ) Defendants. ) 14 ) ) 15

16 Before the Court are several motions to dismiss filed by Defendants.1 For the 17 following reasons, the Complaint (Doc. 1) shall be dismissed without prejudice and 18 Plaintiffs2 shall have leave to file an amended complaint. 19 I. Background 20 This case arises from Plaintiffs and Defendants creating and operating a 21 “microcaptive insurance company.” A microcaptive insurance company is created when 22 23 1 Defendants include: Celia Clark and Clark & Gentry, P.L.L.C. (the “Clark Defendants”); John Garcia, in his capacity as personal representative for the estate Of Craig 24 McEntee and McEntee & Associates P.C. (the “McEntee Defendants”); Neil Hiller and Fennemore Craig, P.C. (the “Hiller Defendants”); Allen Rosenbach and ACR Solutions 25 Group, Inc. (the “ACR Defendants”); Heritor Management, LTD; and Pan American Reinsurance Company, LTD (collectively “Defendants”). (Doc. 1) 26 2 The named plaintiffs include: Benyamin Avrahami and Orna Avrahami (the 27 “Avrahami Plaintiffs”); Feedback Insurance Company, LTD (“Feedback”); BYS Company, ACC, Chandler One, LLC, Junction Development, LLC, O & E Corporation, 28 White Mountain Equities, L.L.C., and White Knight Investment, A.C.C. (the “Insured Plaintiffs”) (collectively “Plaintiffs”). 1 the insurer and insured are related by ownership. (Doc. 1 at 23) Under § 831 of the Internal 2 Revenue Code (“IRC”), in a legal microcaptive insurance arrangement, the insurance 3 premiums paid by the insured subsidiaries are tax deductible by both the insurer and the 4 insured, resulting in significant tax savings. (Doc. 1 at 23) 5 The Avrahami Plaintiffs own several jewelry stores and other properties in Arizona 6 through their corporation American Findings. (Doc. 1 at 25-26) The Insured Plaintiffs are 7 subsidiaries of American Findings. (Doc. 1 at 25-26) In 2007, the Avrahami Plaintiffs 8 consulted with their accounting firm, the McEntee Defendants, about ways to reduce their 9 businesses’ tax burdens. (Doc. 1 at 26) The McEntee Defendants recommended the Hiller 10 Defendants and the Clark Defendants to help the Avrahami Plaintiffs save significantly on 11 their taxes.3 (Doc. 1 at 26) The Avrahami Plaintiffs ultimately retained the Hiller 12 Defendants and the Clark Defendants to help form a microcaptive insurance company. 13 (Doc. 1 at 26-27) In November of 2007, the Avrahami Plaintiffs entered into a retainer 14 agreement by which Celia Clark and Neil Hiller were to act as co-counsel to provide all 15 legal services to form a microcaptive insurance company so that American Findings and 16 the Insured Plaintiffs could receive several tax deductions. (Doc. 1 at 27) The parties 17 created Feedback in 2007. (Doc. 1 at 27) In 2009, Celia Clark began to use the ACR 18 Defendants’ actuary services to assess the premiums that needed to be paid by the Insured 19 Plaintiffs in order to adequately spread the risk of Feedback’s operation—as required by 20 IRC § 831(b). (Doc. 1 at 31) The Insured Plaintiffs payed insurance premiums to Feedback 21 from 2007-2015. (Doc. 1 at 28) As the overall manager of Feedback’s operation, Celia 22 Clark procured Defendant Heritor to manage Feedback during that time. (Doc. 1 at 28) 23 Celia Clark also hired Defendant Pan America to issue premiums to Feedback in order to 24 further “spread the risk” for the microcaptive insurance business. (Doc. 1 at 40-44) 25 However, in May of 2013, the Internal Revenue Service (“IRS”) sent Feedback a statutory 26 notice of deficiency determining that Feedback was not a valid insurance company and that 27 28 3 Defendants Celia Clark and Neil Hiller are licensed attorneys. 1 “the amounts characterized as insurance premiums” were really income to Feedback. (Doc. 2 1 at 59) Celia Clark and Neil Hiller advised Plaintiffs that Feedback was operating as a 3 legal entity and that Plaintiffs should challenge the notice of deficiency in federal tax court. 4 (Doc. 1 at 62) Plaintiffs did challenge the notice, and ultimately, the tax court determined 5 that Plaintiffs improperly took several tax deductions and owed over $1 million in back 6 taxes, penalties, and interest. (Doc. 1 at 61-62) 7 On July 3, 2019, Plaintiffs filed this class action lawsuit on behalf of themselves 8 and others, asserting thirteen claims arising from Defendants’ creation and management of 9 microcaptive insurance companies. The claims include violations of: the Racketeer 10 Influenced and Corrupt Organizations (“RICO”) Act 18 U.S.C. § 1962(c) (Count I); 11 Conspiracy to Violate Federal RICO 18 U.S.C. § 1962(d) (Count II); Arizona RICO A.R.S. 12 § 13-2312 (Count III); Conspiracy to Violate Arizona RICO (Count IV); Breach of 13 Fiduciary Duty (Count V); Negligence/Professional Malpractice (Count VI); Negligent 14 Misrepresentation (Count VII); Disgorgement (Count VIII); Rescission (Count IX); 15 Breach of Contract (or in the alternative) Breach of the Duty of Good Faith and Fair 16 Dealing (Count X); Fraud (Count XI); Aiding and Abetting (Count XII); and Civil 17 Conspiracy (Count XIII). (Doc. 1) Plaintiffs assert that Defendants fraudulently created a 18 scheme to develop, promote, sell, and implement faulty captive insurance products by 19 giving improper legal, tax, and investment advice to individuals and businesses. Plaintiffs 20 allege that the fraudulent scheme caused damages by exacerbating their tax burdens. 21 Defendants have filed a series of motions to dismiss, which are fully briefed and ready for 22 review. 23 II. Legal Standard 24 A complaint must include “a short and plain statement of the claim showing that the 25 pleader is entitled to relief, in order to give the defendant fair notice of what the [] claim is 26 and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) 27 (internal quotations and citation omitted); see also Fed. R. Civ. P. 8(a). “To survive a 28 motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 1 ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 2 (2009) (quoting Twombly, 550 U.S. at 570). 3 In addition to the requirements of Rule 8(a), when a plaintiff alleges claims that are 4 rooted in fraud, he or she must comply with the heightened pleading standard of Rule 9(b). 5 Cafasso, U. S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054-55 (9th Cir. 6 2011). This requires the plaintiff to set forth an explanation as to the “who, what, when, 7 where, and why” of the alleged offenses. Id. Pleading “every detail in the execution of the 8 conspiracy is unnecessary to establish liability.” Swartz v. KPMG LLP, 476 F.3d 756, 764 9 (9th Cir. 2007). However, “Rule 9(b) does not allow a complaint to merely lump multiple 10 defendants together[,] but requires plaintiffs to differentiate their allegations when suing 11 more than one defendant and inform each defendant separately of the allegations 12 surrounding his alleged participation in the fraud.” Id. at 764-65 (internal quotations and 13 citation omitted). 14 III. Discussion4 15 Defendants asserts several different arguments regarding dismissal under Rule 16 12(b). The Court will analyze each motion in turn. 17 A. Clark and Hiller Defendants’ Motions to Dismiss 18 The Clark and Hiller Defendants assert similar arguments regarding dismissal of 19 Counts I-IV, VIII, IX, and XI-XIII. Therefore, the Court will analyze the similar arguments 20 together and any remaining arguments by each Defendant separately. 21 /// 22 /// 23 ///

24 4 As an initial matter, the Court acknowledges that the parties have wholly ignored 25 the page limit requirements set by the Local Rules when filing their motions and responsive memorandums of law. Both Plaintiffs and Defendants submitted briefing in violation of 26 Local Rule 7.2(e) and the Court’s Order (Doc. 74). In addition, multiple parties attempted to impermissibly incorporate by reference the arguments made by other parties in this case, 27 instead of filing a joint motion. In its discretion, the Court will not order sanctions against the parties at this time. However, the parties are put on notice that failure to adhere to the 28 Local Rules and this Court’s orders going forward is a sanctionable offense. 1 1. State and Federal RICO Claims (Counts I-IV) 2 i. Rule 9(b) Particularity 3 First, the Clark and Hiller Defendants assert that Plaintiffs impermissibly rely on 4 group pleading for their federal and state RICO claims. (Docs. 28 at 1-3; 31 at 11) Second, 5 Defendants argue that Plaintiffs fail to adequately allege facts necessary to establish a 6 RICO enterprise. (Docs. 28 at 9-11; 31 at 10-15) In response, Plaintiffs argue that they do 7 not have to plead their RICO claims under the heightened particularity standard of Rule 8 9(b). (Doc. 52 at 12) In addition, Plaintiffs assert that they have adequately pled the Clark 9 and Hiller Defendants’ role in the alleged RICO enterprise. (Docs. 52 at 12-18; 51 at 19- 10 22) 11 “To state a civil RICO claim under federal law a plaintiff must allege ‘(1) conduct 12 (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as predicate 13 acts) (5) causing injury.’” Piper v. Gooding & Co. Inc., 334 F.Supp.3d 1009, 1019 (D. 14 Ariz. 2018) (citing Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 15 361 (9th Cir. 2005)). Claims under Arizona’s RICO statutes are interpreted consistently 16 with the federal RICO statutes. See Lifeflite Med. Air Transp., Inc. v. Native Am. Air Servs., 17 Inc., 7 P.3d 158, 162 (Ariz. Ct. App. 2000). 18 First, the Court finds that Plaintiffs’ claims for RICO violations are routed in their 19 fraud allegations and are therefore subject to Rule 9(b). See Schreiber Dist. Co. v. Serv- 20 Well Furniture Co., Inc., 806 F.2d 1393, 1400-01 (9th Cir. 1986). Second, the Court finds 21 that Plaintiffs do not impermissibly rely on group pleading and have sufficiently stated a 22 RICO claim against the Clark and Hiller Defendants. Plaintiffs allege that the Clark 23 Defendants oversaw the creation and management of Feedback as a microcaptive insurance 24 company, continually advised Plaintiffs on the creation and management of Feedback, and 25 was an integral part in the achievement of the alleged RICO enterprise’s goal. (Doc. 1 at 26 26-28, 40-44, 47-54, 62, 66, 68, 81) Furthermore, Plaintiffs allege that the Hiller 27 Defendants acted as “a frontline promoter” in inducing Plaintiffs to hire the Clark 28 Defendants and create a microcaptive insurance company, shared in the responsibility of 1 the alleged RICO enterprise as legal counsel to Plaintiffs, and repeatedly misrepresented 2 to Plaintiffs’ the expected tax benefits from Feedback. (Doc. 1 at 26-27, 47, 56-57, 62, 67, 3 82) The Court finds that these allegations are sufficiently specific under Rule 9(b) to state 4 a RICO claim against the Clark and Hiller Defendants under both state and federal law. 5 ii. State RICO: Service to the Attorney General and 6 Verification 7 The Clark and Hiller Defendants next argue that the state RICO claims must be 8 dismissed because Plaintiffs failed to timely serve the Complaint on the Arizona Attorney 9 General and include a verification with the Complaint as required by A.R.S. § 13- 10 2314.04(H) and (O). (Docs. 28 at 3; 31 at 15-16) In response, Plaintiffs argue that these 11 statutory requirements are procedural in nature and do not apply to cases filed in federal 12 court. (Docs. 51 at 8; 52 at 19) 13 “A federal court exercising supplemental jurisdiction over state law claims is bound 14 to apply the law of the forum state to the same extent as if it were exercising its diversity 15 jurisdiction.” Bass v. First Pac. Networks, Inc., 219 F.3d 1052, 1055 n.2 (9th Cir. 2000). 16 In federal diversity cases, only substantive state law applies to state claims; procedural state 17 law does not. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). It is well-settled in 18 Arizona that A.R.S. § 13-2314.04(H) is procedural in nature, and therefore, the Court finds 19 that it does not bar Plaintiffs’ claims. See Encinas v. Pompa, 939 P.2d 435, 437 (Ariz. Ct. 20 App. 1997) (“The function served by section 13-2314.04(H) is to regulate the method by 21 which [] substantive rights are enforced. This is the classic definition of a procedural 22 rule.”). The Court further finds that A.R.S. § 13-2314.04(O) is also procedural in nature, 23 and conflicts with the express language of Rule 11(a).5 Fed. R. Civ. P. 11(a) (“Unless a 24 rule or statute specifically states otherwise, a pleading need not be verified or accompanied 25 by an affidavit.”). Therefore, the Court finds that A.R.S. § 13-2314.04(O) is inapplicable

26 5 The Clark Defendants urges the Court to adopt an interpretation found in a 27 concurring opinion from the Eleventh Circuit that interprets Rule 11(a) as applying to both federal and state rules and statutes. (Doc. 65 at 10) However, the Ninth Circuit has not 28 adopted such an interpretation and the Court declines to take such a position at this time. 1 and cannot bar Plaintiffs’ claims. 2 2. Fraud (Count XI) 3 The Clark and Hiller Defendants argue that Plaintiffs fail to adequately plead facts 4 establishing common law fraud. (Docs. 28 at 9; 31 at 8-10) Specifically, they argue that 5 Plaintiffs fail to allege each Defendants’ individual conduct and their knowledge of their 6 false representations. (Doc. 28 at 10) 7 To establish common law fraud in Arizona, a plaintiff must prove: 8 (1) a representation, (2) its falsity, (3) its materiality, (4) the speaker’s 9 knowledge of its falsity or ignorance of its truth, (5) the speaker’s intent that 10 the information should be acted upon by the hearer and in a manner 11 reasonably contemplated, (6) the hearer’s ignorance of the information’s 12 falsity, (7) the hearer’s reliance on its truth, (8) the hearer’s right to rely 13 thereon, and (9) the hearer’s consequent and proximate injury. 14 Taeger v. Catholic Family and Cmty. Servs., 995 P.2d 721, 730 (Ariz. Ct. App. 1999) 15 (citation omitted). When pleading fraud with particularity under Rule 9(b), a plaintiff 16 cannot assert that “everyone did everything.” U.S. ex rel. Anita Silingo v. WellPoint, Inc., 17 904 F.3d 667, 677-78 (9th Cir. 2018) (citation omitted). However, it is unnecessary for a 18 plaintiff to “distinguish between defendants that had the exact same role in a fraud.” Id. 19 In the Complaint, Plaintiffs assert (including dates) that the Clark Defendants made 20 several oral and written misrepresentations regarding the legality of Feedback as a captive 21 insurance company and Feedback’s compliance with IRC § 831(b). (Doc. 1 at 47-57) In 22 addition, Plaintiffs assert (including dates) that the Hiller Defendants made oral and written 23 misrepresentations and omissions that: (1) misstated the tax treatment Plaintiffs would 24 receive under the captive insurance strategies, (2) misrepresented the legality of the 25 insurance provided through the captive insurance companies, and (3) misrepresented that 26 each defendant operated at arm’s-length with the other defendants. (Doc. 1 at 56-57) 27 Plaintiffs further allege that the Clark and Hiller Defendants knew that these 28 representations were false when made and Plaintiffs reasonably relied on the 1 representations because Celia Clark and Neil Hiller were acting as Plaintiffs’ attorneys at 2 the time. (Doc. 1 at 41, 58, 63, 67) Thus, the Court finds that Plaintiffs have adequately 3 pled their allegations of fraud against the Clark and Hiller Defendants. 4 3. Disgorgement, Rescission, Aiding and Abetting, and Civil 5 Conspiracy (Counts VIII, IX, XII and XIII) 6 The Clark and Hiller Defendants assert that Plaintiffs’ claims for rescission, aiding 7 and abetting, and civil conspiracy are improperly pled. (Docs. 28 at 4-6; 31 at 17-18) They 8 argue that aiding and abetting and civil conspiracy are derivative torts and not stand alone 9 causes of action. (Docs. 28 at 4-6; 31 at 17-18) They also argue that rescission is a legal 10 remedy and not an independent cause of action. (Docs. 28 at 4-6; 31 at 17-18) Furthermore, 11 the Clark Defendants argue that the request for disgorgement is also a legal remedy and 12 cannot be pled as a standalone cause of action. (Doc. 28 at 4-5) 13 In response, Plaintiffs argue that Arizona courts recognize both aiding and abetting 14 (when pled along with an underlying tort) and civil conspiracy (when pled along with an 15 underlying tort) as independent causes of action, and therefore, both are sufficiently pled. 16 (Doc. 51 at 10-11) In addition, Plaintiffs assert that it is unsettled in Arizona whether 17 rescission and disgorgement are remedies or standalone causes of action. (Doc. 51 at 10) 18 Plaintiffs argue that this distinction is immaterial, however, and they are entitled to seek 19 relief under each theory in connection with the facts alleged in the Complaint. (Doc. 51 at 20 10) 21 In Arizona, both aiding and abetting and civil conspiracy are derivative causes of 22 action that first require the finding of an underlying violation. See Wells Fargo Bank v. 23 Ariz. Laborers, Teamsters and Cement Masons Local No. 395 Pension Tr. Fund, 38 P.3d 24 12, 23, 26-27 (Ariz. 2002). Furthermore, Arizona courts view rescission and disgorgement 25 as civil remedies. See Cty. of La Paz v. Yakima Compost Co., Inc., 233 P.3d 1169, 1189 26 (Ariz. Ct. App. 2010) (“Generally, three remedies are available for a breach of contract: 27 rescission, continued performance, or termination and damages.”); see also Villa v. Villa, 28 No. 1 CA-CV 15-0099 FC, 2016 WL 6123891, at *3-4 (Ariz. Ct. App. Oct. 20, 2016) 1 (explaining that disgorgement is a remedy that “focuses on the conduct of the party 2 required to return the money, not on the benefit to the party receiving the disgorged funds”). 3 The Court finds that Plaintiffs have sufficiently pled each issue in the Complaint. 4 First, Plaintiffs assert an underlying violation of common law fraud and the breach of 5 fiduciary duty as the prerequisite violations for the aiding and abetting claim. (Doc. 1 at 6 135) Second, Plaintiffs assert common law fraud and RICO as the underlying violations 7 for the civil conspiracy claim. (Doc. 1 at 135-37) Third, Plaintiffs assert the breach of 8 fiduciary duties as the underlying violation in support of its request for disgorgement. (Doc. 9 1 at 120). Finally, Plaintiffs assert the claim for common law fraud as the underlying 10 violation in support of its request for rescission. (Doc. 1 at 121) Therefore, because the 11 Court will grant Plaintiffs leave to amend the underlying claims in the Complaint (as 12 discussed below), the Court finds that Plaintiffs have adequately alleged aiding and 13 abetting, civil conspiracy, rescission and disgorgement. 14 4. Clark Defendants: Breach of Contract (Count X)6 15 The Clark Defendants separately argue that the Complaint fails to allege a breach 16 of contract claim against them because Plaintiffs do not allege any specific nonperformance 17 under the retainer agreement. (Doc. 28 at 14) In response, Plaintiffs assert that the 18 Complaint does allege nonperformance under the retainer agreement because the 19 agreement specifically stated that the Clark Defendants would provide services to create 20 an entity that would offer lawful insurance coverage and would legally reduce Plaintiffs’ 21 federal and state taxes under IRC § 831(b). (Doc. 51 at 22-23) Plaintiffs assert that the 22 Clark Defendants failed to fulfill both promises because the tax court determined that 23 Plaintiffs did not receive lawful insurance coverage or a legal reduction in their taxes. (Doc. 24 52 at 22-23) 25 26 6 The Hiller Defendants argue that Plaintiffs have failed to allege any specific contract between them, and therefore, Plaintiffs cannot establish a breach arising out of any such 27 contract. (Doc. 31 at 16) In response, Plaintiffs concede that the breach of contract claim is not direct at the Hiller Defendants. (Doc. 52 at 20) Therefore, the Court finds that 28 dismissal of Count X is warranted as to the Hiller Defendants. 1 The Court finds that, taken as true, Plaintiffs have asserted a claim for breach of 2 contract that is plausible on its face. See Towns v. Frey, 721 P.2d 147, 148 (Ariz. Ct. App. 3 1986) (“If one is going to assert a breach of contract claim against a lawyer, the contract 4 relied upon must itself contain an undertaking to do the thing for the nonperformance of 5 which the action is brought.”). Therefore, the Court will not dismiss Count X against the 6 Clark Defendants. 7 5. Clark Defendants: Conspiracy Claims (Counts IV and XIII) 8 The Clark Defendants argue that Plaintiffs’ claim for civil conspiracy is duplicative 9 of their claim under Arizona’s RICO statute and therefore Count IV should be stricken. 10 (Doc. 28 at 3) In response, Plaintiffs assert that the claims are similar but distinct causes of 11 action. (Doc. 51 at 9-10) 12 The Complaint alleges that the statutory claim for civil conspiracy arises from 13 A.R.S. § 13-2314.04. (Doc. 1 at 106) However, unlike 18 U.S.C. § 1962(d), A.R.S. § 13- 14 2314.04 does not include any express language creating liability for conspiracy to violate 15 Arizona’s RICO statute, A.R.S. § 13-2312. Instead, the definition of “racketeering” as 16 described in A.R.S. § 13-2312 includes “any preparatory or completed offense” in 17 furtherance of a § 13-2312 violation. See A.R.S. § 13-2301(D)(4). The Court finds that 18 because preparatory offenses are included under A.R.S. § 13-2312, Plaintiffs do not and 19 cannot state a separate claim for any statutory conspiracy to violate § 13-2312. Therefore, 20 Count IV fails to state a claim as a matter of law and shall be dismissed with prejudice. 21 6. Clark Defendants: Breach of Fiduciary Duty (Count V) 22 The Clark Defendants next assert that Plaintiffs improperly group plead their claim 23 for breach of fiduciary duty in violation of Rule 9(b). (Doc. 28 at 12) In response, Plaintiffs 24 assert that Rule 9(b) is satisfied because they allege the existence of an attorney-client 25 relationship with Celia Clark and a breach of that relationship. (Doc. 51 at 18) 26 In Count V of the Complaint, Plaintiffs generally allege that all the Defendants were 27 fiduciaries of Plaintiffs “as the insurance, tax, legal, financial, and investment advisors of 28 Plaintiffs and the members of the Class.” (Doc. 1 at 108) The Complaint also generally 1 alleges the duties required under a fiduciary relationship. (Doc. 1 at 108) However, the 2 Court finds that the Complaint does not adequately describe the relationship between each 3 individual Defendant and the Plaintiffs and how that relationship formed a fiduciary duty. 4 For example, the Complaint does not assert any facts showing that the ACR Defendants, 5 Heritor Management, or Pan American Reinsurance Company served as direct advisors to 6 Plaintiffs, and the Complaint does not otherwise allege a different kind of fiduciary 7 relationship between those Defendants and Plaintiffs. Therefore, the Court finds that 8 Plaintiffs’ claim for breach of fiduciary duty against all Defendants is overly broad in 9 violation of Rule 9(b) and Count V will be dismissed without prejudice. See In re Daisy 10 Syst. Corp., 97 F.3d 1171, 1178 (9th Cir. 1996) (explaining that the existence of a fiduciary 11 relationship is normally a question of fact which turns on the particular facts and 12 circumstances of the relationship at issue). The Court further finds that granting leave to 13 amend the Complaint is warranted in this case. Fed. R. Civ. P. 15(a)(2) (“The court should 14 freely give leave when justice so requires.”). 15 7. Clark Defendants: Professional Malpractice (Count VI) 16 The Clark Defendants argue that Plaintiffs fail to adequately plead a claim for 17 negligence/professional malpractice. (Doc. 28 at 16) The Clark Defendants again assert 18 that Plaintiffs impermissibly lump all Defendants together and fail to distinguish between 19 their differing relationships with Plaintiffs. (Doc. 28 at 16) In response, Plaintiffs assert 20 that they have adequately pled their claim for professional malpractice. (Doc. 51 at 23-24) 21 Plaintiffs argue that they need only show “the existence of an attorney-client relationship 22 which imposes a duty on the attorney to exercise that degree of skill, care, and knowledge 23 commonly exercised by members of the profession.” (Doc. 51 at 24) 24 To withstand dismissal of a professional malpractice claim, a plaintiff must allege 25 that the defendant provided a specified professional service that created a duty to satisfy a 26 standard of care under tort law. See Marshall v. Galvanoni, No. 2:17-cv-00820-KJM-CKD, 27 2017 WL 5177764, at *6 (E.D. Cal. Nov. 8, 2017) (citing In re Daisy Sys. Corp., 97 F.3d 28 at 1175). 1 In Count VI of the Complaint, Plaintiffs generally allege that all the Defendants had 2 a duty “to comply with the applicable standards of care and the applicable provisions of 3 their codes of professional responsibility.” (Doc. 1 at 116) The Court again finds that the 4 Complaint does not adequately describe the relationship between each individual 5 Defendant and Plaintiffs and how the nature of the relationship imposed a specific duty of 6 care on each Defendant. Therefore, the Court finds that Plaintiffs’ claim for professional 7 malpractice is overly broad in violation of Rule 9(b), and Count VI shall be dismissed 8 without prejudice. 9 8. Clark Defendants: Negligent Misrepresentation (Count VII) 10 Finally, the Clark Defendants argue that Plaintiffs impermissibly lump Defendants 11 together and fail to allege which Defendants made false representations under Count VII. 12 (Doc. 28 at 17) In response, Plaintiffs argue that they have pled in great detail the false 13 representation made by each Defendant and why those representations were false. (Doc. 14 51 at 24) 15 The Complaint alleges in several places specific false representations, 16 misstatements of material fact, and omissions of material fact that each Defendant made 17 throughout Plaintiffs’ creation and implementation of Feedback as a microcaptive 18 insurance company. (Doc. 1 at 31-44, 47-58, 81-82, 88-94) Plaintiffs further allege why 19 these representations are false. (Doc. 1 at 31-44, 47-58, 81-82, 88-94) The Court finds that 20 Plaintiffs have sufficiently alleged a claim for negligent misrepresentation and apprised 21 each applicable Defendant of their part in making the allegedly false representations. 22 Therefore, Count VII will not be dismissed. 23 B. ACR Defendants’ Motion to Dismiss 24 The ACR Defendants argue that: (1) the Complaint fails to state any claim against 25 them; (2) the statute of limitations has expired on all the claims asserted against them; and 26 (3) Plaintiffs failed to establish personal jurisdiction over them. (Doc. 59) 27 1. Rule 12(b)(6) Failure to State a Claim 28 The ACR Defendants argue that the Complaint fails to state any claim against them 1 and only asserts legal conclusions. (Doc. 59 at 5) In response, Plaintiffs assert that the ACR 2 Defendants participated in the RICO enterprise by working with the Clark Defendants to 3 intentionally “reverse-engineer” the premium prices on Plaintiffs’ insurance policies. (Doc. 4 75 at 11) Plaintiffs further assert that the ACR Defendants knowingly participated in the 5 fraudulent scheme by sending the Clark Defendants emails containing misrepresentations 6 and omissions regarding Feedback’s insurance policies and pricing, knowing that Plaintiffs 7 would rely on the information. (Doc. 75 at 13) Finally, Plaintiffs allege that the ACR 8 Defendants worked almost exclusively with the Clark Defendants over several years. (Doc. 9 1 at 31-40) 10 The Court finds that Plaintiffs’ allegations against the ACR Defendants do support 11 a claim for RICO violations (Counts I-IV) and fraud (Count XI). However, the Court finds 12 that Plaintiffs fail to state a claim for breach of fiduciary duty, professional malpractice, 13 disgorgement, and breach of contract (Counts V, VI, VIII, and X). Importantly, as 14 discussed above, Plaintiffs fail to allege an underlying contractual relationship or other 15 direct relationship with the ACR Defendants. Therefore, the Court will dismiss Counts V, 16 VI, VIII, and X as to the ACR Defendants without prejudice. 17 2. Statute of Limitations 18 The ACR Defendants assert that the longest applicable limitations period in this 19 case is six years pursuant to A.R.S. § 12-548. (Doc. 59 at 11) The ACR Defendants argue 20 that the limitations period began to run against them in May of 2013, when the IRS sent 21 Plaintiffs the first notice of deficiency determining that Feedback was not a valid insurance 22 company. (Doc. 59 at 11) The ACR Defendants argue that Plaintiffs fail to allege any 23 reasons why the limitations period should be tolled or continued. (Doc. 59 at 11) 24 In response, Plaintiffs argue that the limitations period has not expired. Citing 25 Coulter v. Grant Thronton, LLP, 388 P.3d 834 (Ariz. Ct. App. 2017), Plaintiffs argue that 26 they reasonably believed that the limitations period did not begin to run until August of 27 2017 when the tax court entered a final judgment on Plaintiffs’ claims. (Docs. 1 at 62-63; 28 75 at 24-25) Plaintiffs assert that, pursuant to the discovery rule, the limitations clock did 1 not begin until the tax court entered its final judgment. (Doc. 75 at 24-25) 2 In the Complaint, Plaintiffs assert that after the IRS sent the first notice of deficiency 3 in May of 2013, the Clark and Hiller Defendants assured Plaintiffs that the deficiency was 4 an error and Feedback was a legal entity. (Doc. 1 at 59) Relying on this assurance, Plaintiffs 5 challenged the deficiency notice in tax court. (Doc. 1 at 62-65) Plaintiffs ultimately lost the 6 challenge and were assessed over $1 million in taxes, penalties and interest in August of 7 2017. (Doc. 1 at 61-63) The Complaint was filed six years and two months after the first 8 notice of deficiency was sent, but less than two years from the date of the final tax order. 9 (Doc. 1) 10 The Court finds that Coulter is applicable to the claims against the ACR Defendants 11 because, like the plaintiff in Coulter, Plaintiffs allege that they reasonable relied on the 12 assurances made by the Clark and Hiller Defendants throughout the tax court proceedings. 13 (Doc. 75 at 24-25) Plaintiffs assert that because of this, they were not put on notice of any 14 claims against any of the Defendants until the tax court issued a final order. The Court 15 finds that, because the Clark and Hiller Defendants (acting as Plaintiffs’ attorneys) made 16 repeated assurances that that the ACR Defendant’s services were legal, the fact-based 17 inquiry to the discovery rule (as defined in Coulter) is applicable to the ACR Defendants. 18 Therefore, Plaintiffs’ claims are time barred under A.R.S. § 12-548. 19 3. Jurisdiction 20 Finally, the ACR Defendants argue that the Complaint must be dismissed because 21 Plaintiffs fail to establish personal jurisdiction against them. (Doc. 59 at 11-17) The ACR 22 Defendants assert that they are not subject to general jurisdiction in Arizona and Plaintiffs 23 cannot establish specific jurisdiction. (Doc. 59 at 13-17) The ACR Defendants further 24 assert that the Court should not grant leave to conduct discovery on the issue of jurisdiction 25 because such discovery would be futile. (Doc. 79 at 16) 26 In response, Plaintiffs argue that the Court has personal jurisdiction via the federal 27 28 1 RICO statutes.7 (Doc. 75 at 27-30) Plaintiffs also argue that they have made a prima facie 2 showing of specific jurisdiction under the “effects test.” (Doc. 75 at 27-30) Alternatively, 3 Plaintiffs motion the Court to allow the parties to engage in limited discovery for the 4 purpose of establishing personal jurisdiction. (Doc. 76) 5 Because the Court finds that Plaintiffs have adequately pled a federal RICO claim 6 against the ACR Defendants, the Court finds that Plaintiffs have established personal 7 jurisdiction (and thereby supplemental jurisdiction) pursuant to 18 U.S.C. § 1965(b). 8 Therefore, the Court will deny Plaintiffs’ motion to conduct jurisdictional discovery. 9 C. McEntee Defendants’ Joinder in Motions to Dismiss 10 On September 6, 2019, the McEntee Defendants filed a Joinder to the Clark and 11 Hiller Defendants’ Motions to Dismiss. (Doc. 36) In response, Plaintiffs argue that the 12 joinder is untimely and should be stricken. (Doc. 53 at 8) Specifically, Plaintiffs argue that 13 the time for the McEntee Defendants to file a responsive pleading expired on August 30, 14 2019. (Doc. 53 at 8) In addition, Plaintiffs argue that the McEntee Defendants have already 15 answered the Complaint without asserting any argument for dismissal, and therefore, any 16 requests for dismissal under Rule 12(b) have been waived. (Doc. 53 at 8-9) Plaintiffs do 17 conceded that the McEntee Defendants may still file a Rule 12(c) motion. (Doc. 53 at 8) 18 The Court finds that the McEntee Defendants’ joinder is untimely. Therefore, the 19 Court will strike the joinder. However, to the extent that Plaintiffs’ amended complaint 20 changes the allegations made against the McEntee Defendants, they are free to request 21 leave to amend their answer. Otherwise, the Court will grant the McEntee Defendants leave 22 to file a Rule 12(c) motion once Plaintiffs have filed an amended complaint. Accordingly, 23 IT IS ORDERED that, for the reasons stated above, the Clark Defendants’ Motion 24 to Dismiss and Strike (Doc. 28) is granted in part and denied in part. 25 26 7 “In any action under section 1964 of this chapter in any district court of the United States in which it is shown that the ends of justice require that other parties residing in any 27 other district be brought before the court, the court may cause such parties to be summoned, and process for that purpose may be served in any judicial district of the United States by 28 the marshal thereof.” 18 U.S.C. § 1965(b). 1 IT IS FURTHER ORDERED that, for the reasons stated above, the Hiller 2| Defendants’ Motion to Dismiss (Doc. 31) is granted in part and denied in part. 3 IT IS FURTHER ORDERED that, for the reasons stated above, the ACR 4| Defendants’ Motion to Dismiss (Doc. 59) is granted in part and denied in part. 5 IT IS FURTHER ORDERED that, for the reasons stated above, the McEntee 6 | Defendants’ Joinder (Doc. 36) is stricken as untimely. The McEntee Defendants shall have 7 | leave to amend their answer and/or file a Rule 12(c) motion within fourteen (14) days of 8 | Plaintiffs filing an amended complaint. 9 IT IS FURTHER ORDERED that Plaintiffs’ Motion for Leave to Take Jurisdictional Discovery (Doc. 76) is denied. 11 IT IS FURTHER ORDERED that the Complaint (Doc. 1) is dismissed without 12| prejudice. Plaintiffs shall have thirty (30) days from the date of this Order to file an □ amended complaint. If no amended complaint is filed within 30 days, the Clerk of the Court 14 shall, without further Court order, dismiss this case with prejudice. 15 Dated this 31st day of March, 2020. 16

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