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Direct Benefits, LLC v. Tac Financial Inc.

United States District Court, D. Maryland

February 20, 2014

DIRECT BENEFITS, LLC, et al., Plaintiffs,
TAC FINANCIAL INC., et al., Defendants.


GEORGE L. RUSSELL, III, District Judge.

THIS MATTER is before the Court on Plaintiffs' request to rescind an asset purchase agreement due to Defendants' alleged violations of federal and Maryland securities laws, among other things. Pending before the Court is Defendants', TAC Financial Inc., Roy Eder, Rhett McNulty, Clark McNulty, and Daniel Lindberg (collectively, "Defendants"), Motion to Dismiss the First Amended Complaint for Failure to State a Claim (ECF No. 13); Plaintiffs', Direct Benefits, LLC and Andrew C. Gellene (collectively, "Plaintiffs"), Cross-Motion for Leave to Amend the Complaint (ECF No. 20); and Defendants' Motion for Leave to File Surreply Arguments in Response to Plaintiffs' Reply Brief (ECF No. 47).

The Court, having reviewed the pleadings and supporting documents, finds no hearing necessary. See Local Rule 105.6 (D.Md. 2011). For the reasons outlined below, the Court will grant in part and deny in part Defendants' Motion to Dismiss, grant Plaintiffs' Cross-Motion for Leave to Amend, and grant Defendants' Motion for Leave to File Surreply.


Plaintiff Direct Benefits, LLC ("DB") is a limited liability company that provides prepaid cards to the public through their employers. At all times relevant to this action, DB had a large, diverse client base consisting of over seventy-five employers, including Starbucks, Genesis Healthcare, and franchisors from Burger King, Taco Bell, IHOP, and Holiday Inn. Plaintiff Andrew Gellene ("Gellene") is the president of DB.

A. DB's Introduction to TAC Financial

Around October 2010, Plaintiffs began searching for a new strategic partner that would assist DB with establishing and maintaining financial processing systems for its business. By December 2010, a business associate had referred Plaintiffs to Defendant TAC Financial Inc. ("TAC"). Upon the referral, Gellene and TAC's CEO, Roy Eder ("Eder"), held preliminary discussions to determine the possibility of a mutually beneficial business arrangement between the two entities.

During an introductory call on December 28, 2010, and again in a letter of intent attached to a January 10, 2011 email, Eder informed Gellene that TAC was a financial and employee-benefit services company that provided various programs, including prepaid cards, mobility services, online bill pay, and affordable health care. To further facilitate discussions, the parties signed a non-disclosure agreement on January 5, 2011, and soon thereafter, on January 13, TAC proposed that DB become its value added reseller, which would have enabled DB to use TAC's platform of services for DB's clients ("VAR Agreement"). The proposal was memorialized in a non-binding strategic alliance term sheet the same day.

Soon thereafter, however, Plaintiffs requested, in lieu of the previous VAR Agreement, that TAC consider permitting DB to sell and transfer its principal assets and business to TAC in exchange for cash and stock as consideration. TAC agreed to the request, and the agreement was memorialized in a February 11, 2011 email TAC's VP of Sales Operations sent to Gellene.

B. Merger Negotiations and the Due Diligence Process

During negotiations, Defendants made various representations to Plaintiffs regarding TAC's business. Specifically, on February 2, 2011, Eder and the TAC negotiating team emailed Gellene a discussion document that stated

With just two years of selling under our belt, we have grown our revenue generating cards from 53 cards in 2008 to approximately 18, 000 at the end of 2010 with average revenue per month per card of $7.00 at a gross margin of just under 50%. We finished 2011 [sic][2] at $1.1M in revenues and expect to triple revenues in 2011 to approximately $3M in revenues.

(2d Am. Compl. ¶ 12). On February 16, 2011, a TAC employee sent Gellene an email stating the valuation of TAC's common stock was $1.10 per share.

As part of the due diligence process, on February 26, 2011, Gellene sent TAC and Eder a letter requesting documentation, including but not limited to, TAC's formation, capital stock, and financial data. Of the financial disclosures, Gellene requested copies of TAC's financial statements covering the last two years and year-to-date financials. In response, TAC informed Gellene that its 2010 financials were not officially complete and its year-to-date financials were unavailable.

On March 3, 2011, Eder sent Gellene an email with an attachment that represented, "Over the last 18 months, TAC has grown to 63, 000 Members in the U.S., Canada, the United Kingdom, Puerto Rico, and Mexico. This growth is due to its overall services platform, creating safe and healthy financial benefit environments for families and individuals." ( Id. ¶ 14). The attachment also provided that TAC's services included "Non-Qualified and Qualified Affordable Healthcare Programs" and "Discount Auto Insurance." (Id.).

C. The Asset Purchase Agreement and Discovery of TAC's Alleged Omissions

On April 14, 2011, the parties executed an Asset Purchase Agreement ("APA"), which solidified TAC's purchase of DB's principal assets consisting of approximately 7, 000 prepaid debit card accounts marketed under the name the Money Manager Card®. Per the APA, TAC agreed to provide Gellene $50, 000 upon signing the agreement, shares of TAC's common stock valued at $1.10 per share, and a nominal purchase price of $819, 000 for DB's assets as consideration. In tandem with the APA, Gellene entered into an employment agreement whereby he assumed the role of TAC's VP of Product Management. Under the terms of the agreement, Gellene was entitled to, inter alia, an annual salary of $125, 000 with the opportunity to earn an additional $50, 000 in annual incentive compensation, a stock option to purchase 140, 000 shares of TAC common stock, reimbursement for business expenses, and accrued vacation days. Around the signing of the APA and thereafter, TAC engaged in various fundraising activities via stock offers to potential investors.

Around February 2012, Gellene began to discover, through internal documents, that TAC failed to disclose several facts regarding its financial condition throughout pre-merger negotiations and the due diligence period in violation of the warranties provided in the APA. Specifically, Plaintiffs allege Defendants made five omissions of fact: (1) during negotiations TAC was experiencing a substantial reduction in income from its primary revenue source; (2) TAC experienced a seventy-percent decline of card usage from May 2010 to February 2011; (3) TAC owed its card processor, FIS Global, over $300, 000; (4) TAC owed its managerial employees more than $180, 000; and (5) TAC did not have the then-present ability to pay Gellene his $50, 000 at signing or to assume DB's operating costs. On March 26, 2013, Plaintiffs' counsel sent a letter to TAC disclosing the alleged omissions and seeking rescission of the APA pursuant to a breach of the warranties contained therein. Gellene resigned from his position at TAC the same day, a little more than two years after signing the APA.

D. Procedural History

On April 22, 2013, Plaintiffs filed a ten-count Complaint against Defendants in this Court alleging violations of the federal and Maryland securities acts as well as various common law claims. (ECF No. 1). After amending their complaint on May 3, 2013, (see ECF No. 6), Plaintiffs filed a Motion for Preliminary and Interlocutory Relief and Request for Expedited Hearing on May 30, 2013. (See ECF No. 10). While Plaintiffs' request for preliminary and interlocutory relief was pending, Defendants filed the pendant Motion to Dismiss on June 14, 2013, (ECF No. 13), and Plaintiffs filed their Cross-Motion for Leave to Amend the Complaint on June 28. (ECF No. 20). After a hearing on July 12, 2013, the Court denied Plaintiffs' motion for preliminary and interlocutory relief, referred the case to a U.S. Magistrate Judge for an early settlement conference, and stayed the case pending the outcome of mediation. (See ECF No. 33).

After the settlement discussions proved to be unfruitful, the Court lifted the stay in this matter and issued a briefing schedule for submission of the remaining pleadings related to Defendants' Motion to Dismiss. (ECF No. 43). Thereafter, Plaintiffs submitted their Reply, which includes a "Revised Proposed Second Amended Complaint, " (see ECF No. 46), and Defendants filed a Motion for Leave to File Surreply Arguments in Response to Plaintiffs' Reply Brief. (ECF No. 47).


A. Motion to Dismiss

1. Standards of Review

a. In General

The purpose of a motion to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6) is to test the legal sufficiency of a complaint. Edwards v. City of Goldsboro , 178 F.3d 231, 243 (4th Cir. 1999). Pursuant to Federal Rule of Civil Procedure 8(a)(2), a complaint need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the... claim is and the grounds upon which it rests." Twombly, 550 U.S. at 555 (quoting Conley v. Gibson , 355 U.S. 41, 47 (1957)) (internal quotation marks omitted).

In considering a Rule 12(b)(6) motion, this Court must construe the complaint in the light most favorable to the plaintiff, read the complaint as a whole, and take the facts asserted therein as true. See Harrison v. Westinghouse Savannah River Co. , 176 F.3d 776, 783 (4th Cir. 1999). But, "[a] pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555). A complaint is also insufficient if it relies upon "naked assertions devoid of further factual enhancement." Iqbal , 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557) (internal quotation marks omitted).

A complaint must allege sufficient facts to "cross the line between possibility and plausibility of entitlement to relief.'" Francis v. Giacomelli , 588 F.3d 186, 193 (4th Cir. 2009) (quoting Twombly, 550 U.S. at 557); see also Simmons v. United Mortg. & Loan Inv., LLC , 634 F.3d 754, 768 (4th Cir. 2011) ("On a Rule 12(b)(6) motion, a complaint must be dismissed if it does not allege enough facts to state a claim to relief that is plausible on its face." (quoting Giarratano v. Johnson , 521 F.3d 298, 302 (4th Cir. 2008)) (internal quotation marks omitted)).

A claim is facially plausible "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 (citing Twombly, 555 U.S. at 556). Thus, if the well-pled facts contained within a complaint "do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown- that the pleader is entitled to relief." Francis , 588 F.3d at 193 (quoting Iqbal , 556 U.S. at 679) (internal quotation marks omitted).

b. Heightened Pleading Standard for Fraud

Where, as here, a claim alleges fraud or mistake, a party must "state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). To satisfy Rule 9(b)'s heightened pleading standard, a plaintiff must allege facts establishing the "who, what, when, where, and how" of the claimed fraud. United States ex rel. Wilson v. Kellogg Brown & Root, Inc. , 525 F.3d 370, 379 (4th Cir. 2008) (quoting United States ex rel. Willard v. Humana Health Plan of Tex. ...

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