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Direct Benefits, LLC v. TAC Financial, Inc.

United States District Court, D. Maryland

August 13, 2019

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

          MEMORANDUM OPINION

          A. David Copperthite, United States Magistrate Judge

         Plaintiffs, Direct Benefits, LLC and Andrew C. Gellene, move this Court to reconsider its July 10, 2019 Memorandum Opinion and Order (ECF Nos. 163, 164) denying their Amended Motion for Permission to File a Fourth Amended Complaint (ECF No. 154), which sought to reinstate three of Defendant TAC Financial, Inc.'s outside directors, Rhett McNulty, Clark McNulty, and Daniel Lindberg, as defendants (the "Motion for Reconsideration") (ECF No. 173). After considering the Motion and the response thereto (ECF No. 177), the Court finds that no hearing is necessary. See Loc.R. 105.6 (D.Md. 2018). For the reasons stated herein, the Court DENIES Plaintiffs' Motion for Reconsideration.

         Factual Background [1]

         This lawsuit arises out of Plaintiffs' allegations that Defendant TAC Financial, Inc. ("TAC") engaged in, inter alia, the illegal and fraudulent sale of securities, fraud, and breach of warranty in connection with the negotiation and execution of an Asset Purchase Agreement ("APA") between Plaintiffs and TAC in 2011. ECF No. 77. Plaintiff Direct Benefits, LLC ("DB") is a limited liability company in the business of providing prepaid cards to the public. Id. at 4-5, ¶ 4. Plaintiff Andrew C. Gellene is the president of DB. Id. at 3, ¶ P2.

         Around October 2010, Mr. Gellene, on behalf of DB, began searching for a strategic partner to assist DB with establishing and maintaining financial processing systems. Id. at 4, ¶ 3. In December 2010, Mr. Gellene was referred to TAC and entered into discussions with TAC's CEO, Roy Eder, to determine the possibility of a mutually beneficial business arrangement between the entities. Id. at 5, ¶¶ 6-7. In an introductory call in late December 2010 and a letter of intent in January 2011, Mr. Eder characterized TAC as a "financial and employee benefit services company" which provided prepaid cards, mobility services, an online bill pay program, and affordable health care programs to customers. Id. ¶ 8. On January 5, 2011, the parties signed a non-disclosure agreement and, shortly thereafter, TAC proposed that DB become a "Value Added Reseller" for TAC. Id. at 5-6, ¶ 9. However, rather than becoming a Value Added Reseller, DB later requested that TAC consider permitting DB to sell and transfer its assets and business to TAC in exchange for TAC providing cash and stock, and TAC agreed to this request. Id. at 6, ¶ 10. The parties ultimately executed the APA on April 14, 2011, with TAC agreeing to purchase DB's principal assets, including 7, 000 prepaid debit card accounts and computer programming software developed by DB and Mr. Gellene, and to pay DB $50, 000. Id. at 4, ¶¶ 1-2. TAC also agreed to employ Mr. Gellene as the vice president of product development for which he would receive an annual salary in addition to yearly bonuses and stock options. Id. ¶ 2.

         During the course of the negotiations, Plaintiffs allege that Mr. Eder and other officers and employees of TAC, under the supervision of the Board of Directors, made false, misleading, and incomplete representations to DB regarding TAC's business operations, assets, and liabilities to induce DB to transfer its assets and business. Id. at 6, ¶ 11. Among other misrepresentations, Plaintiffs allege that TAC misrepresented the number of revenue generating cards it had in its portfolio, its gross profit margin for 2010, its potential for growth, and its projected revenues. Id. at 6-11, ¶¶ 12-13. Plaintiffs also allege that TAC misrepresented the number of members enrolled in its healthcare and automobile insurance programs and misled Plaintiffs by purporting to be a "global company" with members in various countries and territories. Id. at 12, ¶¶ 14-16.

         In addition to these misrepresentations, Plaintiffs allege that TAC omitted a number of key facts during the due diligence process: (1) TAC was experiencing a substantial reduction in income from its primary revenue source; (2) TAC experienced a 70% decline in card usage from May 2010 to February 2011; (3) TAC owed debt in an amount exceeding $300, 000 to its card processing service provider, FIS Global, and was in default under their agreement; (4) TAC owed debt in an amount exceeding $180, 000 to its managerial employees; and (5) at the time of execution of the APA, TAC did not have the ability to fulfill its obligation to pay DB $50, 000 or to assume the operating costs of DB's business. Id. at 13-16, ¶¶ 19-23.

         Upon commencing employment with TAC, Mr. Gellene discovered these alleged misrepresentations and omissions through review of internal documents. See Id. at 6-14, ¶¶ 12-21. On March 26, 2013, Plaintiffs notified TAC of the alleged misrepresentations and omissions and Mr. Gellene resigned his employment with TAC. Id. at 35, 39, ¶¶ 110, 131.

         Procedural Background

         The original Complaint was filed on April 22, 2013, ECF No. 1, and amended as of right on May 3, 2013, ECF No. 6. On February 20, 2014, Judge Russell granted a Motion to Dismiss as to the "Outside Directors," who are the subjects of the omitted proposed Fourth Amended Complaint that is currently at issue. ECF No. 48. At that time, Judge Russell found that "Plaintiffs have failed to allege officer and director liability for any of the remaining individual Defendants. It is well-settled that allegations regarding fraud against individual defendants requires 'facts supporting a strong inference of scienter as to each defendant.'" Id. at 33 (quoting Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 182 (4th Cir. 2009)). On the same day, Plaintiffs filed a Second Amended Complaint. ECF No. 50. Defendants answered on March 6, 2014 and, in addition, filed a counterclaim. ECF No. 51.

         On April 25, 2014, Plaintiffs filed a Second Motion for Leave to Amend the Complaint, ECF No. 64, and a Supplement to the Second Motion, ECF No. 65. Defendants then filed a second Motion to Dismiss. ECF No. 68. Judge Motz[2] again granted the Motion to Dismiss as to the Outside Directors and stated: "[T]he motion to dismiss filed by the Outside Directors claims against them in the second amended complaint is granted. Plaintiff[s] ha[ve] not alleged facts that would establish that the Outside Directors are liable under a 'court control liability' theory." ECF No. 75 at 1. On the same day, Judge Motz granted the Second Motion for Leave to Amend, ECF Nos. 75, 76, and Plaintiffs filed the Third Amended Complaint, ECF No. 77. Defendants Eder and TAC answered the Third Amended Complaint on July 10, 2014. ECF No. 78.

         From July 2014 through October 2014, there were various discovery disputes, conferences with the Court, and other ancillary matters. On October 31, 2014, Plaintiffs filed a Motion for Partial Summary Judgment, ECF No. 98, and Defendants Eder and TAC filed a Cross-Motion for Partial Summary Judgment on Count III of the Third Amended Complaint on December 1, 2014, ECF No. 104. On December 3, 2014, Plaintiffs filed the initial Motion for Leave to File a Fourth Amended Complaint. ECF No. 105.

         On February 20, 2015, the Court administratively closed the case due to a bankruptcy filing by Defendant TAC. ECF No. 125. Upon Plaintiffs' Motion to Restore Case filed on October 18, 2018, ECF No. 126, [3] the Court reinstated the action to active status on March 12, 2019, ECF No. 129.[4]

         On June 18, 2019, the Court held a telephone conference call with counsel and issued a paperless order directing Plaintiffs to file an Amended Motion to File a Fourth Amended Complaint no later than June 25, 2019. ECF No. 153. Plaintiffs then filed the Amended Motion for Permission to File a Fourth Amended Complaint and supporting documents on June 25, 2019. ECF Nos. 154-58. On June 28, 2019, Defendants Eder and TAC filed a Motion to Strike Plaintiffs' Amended Motion. ECF No. 160. In a Memorandum Opinion and Order dated July 10, 2019, this ...


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