615 F.Supp.3d 750
M.D. Tenn.2022Background
- Plaintiffs invested in two purported Clean Energy Advisors (CEA) funds (Utility Solar Fund IV and CEA Utility Income Fund) that later proved to be a Ponzi scheme run by Chris Warren/CEA.
- Plaintiffs sued attorney Brett Mankey (former partner) and his firm Leech Tishman for negligent and fraudulent misrepresentations, civil conspiracy, legal malpractice, negligent retention/supervision, and newly pled federal securities claims (Section 10(b)/Rule 10b-5 and Section 20(a)).
- Plaintiffs allege Mankey and Leech Tishman represented the Funds were legitimate, operational, insured, and carried tax benefits, while relying on unchecked representations from Warren.
- The Amended Complaint added federal securities claims more than five years after the last alleged communications with Mankey (last alleged contact Sept. 7, 2015); defendants moved to dismiss.
- The court held that the Section 1658(b)(2) five-year statute of repose runs from the defendant’s last alleged misrepresentation and rejected Rule 15(c) relation-back as a means to avoid the repose bar.
- Ruling: Counts I (Section 10b/Rule 10b-5), II (Section 20(a)), III (negligence), and VI (civil conspiracy) dismissed with prejudice; Counts IV (negligent misrepresentation), V (fraudulent misrepresentation), and VII (negligent retention/supervision) survive the motions to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| When §1658(b)(2) repose begins for securities fraud | Repose should run from date of sale/purchase of security | Repose begins at date of defendant’s last misrepresentation/omission | Repose runs from defendant’s last alleged misrepresentation; claims against Mankey untimely |
| Can Rule 15(c) relation-back save claims barred by repose | Relation-back applies to statutes of repose (Rule 15(c) makes no distinction) | Relation-back cannot revive claims barred by repose | Relation-back does not overcome §1658(b)(2) repose; invoking it would defeat repose and violate Rules Enabling Act |
| Have plaintiffs pled scienter for §10(b) against Mankey | Allegations that Mankey made specific false statements while lacking verification show recklessness/ scienter | At best negligence; no facts showing Mankey knew statements were false or ignored multiple red flags | Scienter not adequately pled; holistically allegations show negligence at most; §10(b) claim dismissed on merits |
| Does §20(a) control-person claim survive if §10(b) fails | Plaintiffs assert control-person liability over primary violator | §20(a) depends on a viable primary violation | §20(a) claim dismissed as derivative of failed §10(b) claim |
| Are state-law claims timely / procedurally barred | Discovery rule and tolling agreement preserve claims; some identities were privileged and discovered later | Several state claims time-barred; some defenses were forfeited by not raising them earlier | Negligence (Count III) and civil conspiracy (Count VI) time-barred/dismissed; defendants’ statute-of-limitations defenses to negligent/fraud claims barred by Rule 12(g) so Counts IV, V, VII survive dismissal motions |
Key Cases Cited
- CTS Corp. v. Waldburger, 573 U.S. 1 (U.S. 2014) (statute of repose can extinguish a cause of action and is an absolute temporal bar)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (framework for assessing whether pleaded facts give rise to a "strong inference" of scienter)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (U.S. 2011) (scienter includes intent to deceive or recklessness in securities fraud)
- In re Exxon Mobil Corp. Sec. Litig., 500 F.3d 189 (3d Cir. 2007) (repose runs from date of alleged misrepresentation)
- McCann v. Hy-Vee, Inc., 663 F.3d 926 (7th Cir. 2011) (repose period begins at date of fraud, not date of later injury)
- SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., 829 F.3d 173 (2d Cir. 2016) (Section 1658(b)(2) bar applies when no misrepresentation within five years)
- Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016) (statute of repose extinguishes liability; tolling cannot avoid repose)
- Omnicare, Inc. v. 769 F.3d 455 (6th Cir. 2014) (elements and pleading standards for Rule 10b-5 claims and scienter analysis)
- City of Taylor Gen. Emps. Ret. Sys. v. Astec Indus., Inc., 29 F.4th 802 (6th Cir. 2022) (holistic scienter analysis; multiple red flags and insider knowledge required to plead recklessness)