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Strong v. Cochran

United States District Court, D. Utah, Central Division

May 4, 2017

D. RAY STRONG, as Liquidating Trustee of the Consolidated Legacy Debtors Liquidating Trust, the Castle Arch Opportunity Partners I, LLC Liquidating Trust and the Castle Arch Opportunity Partners II, LLC Liquidating Trust, Plaintiff,
KIRBY D. COCHRAN, et al., Defendants.


          TENA CAMPBELL U.S. District Court Judge.

         After three sets of Defendants filed motions to dismiss the original complaint, Plaintiff D. Ray Strong (Trustee) filed a Motion for Leave to Amend Complaint (ECF No. 118). For the reasons set forth below, the Trustee's Motion is GRANTED, but the amendment does not completely moot the pending motions to dismiss.


         This case, although two-and-a-half years old, is in its procedural infancy. It arises out of the Chapter 11 bankruptcy of Castle Arch Real Estate Investment Company, LLC (CAREIC) and related entities.

         In October 2011, a state-appointed receiver filed voluntary Chapter 11 bankruptcy petitions for CAREIC and related entities in the District of Utah. The bankruptcy court appointed Mr. Strong as the Chapter 11 Trustee for CAREIC.

         After the bankruptcy court issued its 2013 Confirmation Order and confirmed the Trustee's Plan of Liquidation, the Trustee pursued this litigation in his capacity as the post-confirmation estate representative and liquidating trustee of trusts formed during the bankruptcy proceedings. He entered a series of tolling agreements with the Defendants. Then, on October 30, 2014, he filed a complaint (the one he now proposes to amend) asserting claims against former managers and members of the CAREIC Board of Directors as well as entities associated with those individuals.[1]

         Since October 2014, the parties have been grappling with issues arising out of an arbitration clause in the 2007 Amended Operating Agreement governing management of CAREIC. As the Trustee notes, “[a]fter a long unproductive detour to arbitration, the cases [i.e., this case and the one consolidated into it[2] returned to this Court.”[3] The Trustee was referring to the court's January 30, 2017 order (ECF No. 92) lifting the stay that had been in place since the court's August 20, 2015 order (ECF No. 55).

         With the stay lifted, the case is now moving forward on the merits. During the last three months the parties held an attorneys' planning meeting, filed a planning meeting report, and either answered the complaint or filed motions to dismiss. In addition, on April 24, 2017, the court entered a scheduling order (ECF No. 136) following the parties' April 12, 2017 initial pretrial conference.[4]

         After some of the Defendants filed motions to dismiss challenging the adequacy of the Trustee's pleading under Federal Rules of Civil Procedure 8 and 9(b) and raising statute of limitations issues, [5] the Trustee filed his motion to amend. His proposed amended complaint would substantially narrow the case. The original complaint asserts nineteen causes of action consisting of a breach of fiduciary duty claim, seven fraud-based claims based on state and federal law (including civil conspiracy and a state RICO claim), eight claims seeking avoidance of fraudulent transfers, one claim for disallowance of bankruptcy claims, and two claims in equity (constructive trust and unjust enrichment). The proposed amended complaint asserts nine causes of action, including the original claims for breach of fiduciary duty, violation of state (but not federal) securities laws, violation of state RICO laws, civil conspiracy, disallowance of claims, and equitable relief, and a new claim against Jeff Austin based on his alleged sale of securities without a license.

         The Trustee's proposed amended complaint winnows down the 440 paragraphs in the original complaint to 332 paragraphs. And the Trustee merges into the proposed amended complaint the parallel allegations from the complaint consolidated into this case from Strong v. Geringer, Case No. 2:15-cv-837.

         The Trustee also says that he has bolstered the original allegations with more details so that he satisfies the pleading standards of Rules 8 and 9(b) of the Federal Rules of Civil Procedure. Three sets of Defendants oppose the motion on the ground that amending the complaint would be futile because it does not correct the pleading and statute of limitations problems raised in the motions to dismiss. Defendants Robert Clawson and Hybrid Advisory Group (the “Clawson Defendants”) also oppose the motion on the bases that the Trustee unduly delayed filing the motion, the Trustee acted in bad faith, and the Trustee's proposed amendment would unfairly prejudice them.


         Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that leave to amend shall be “freely give[n] . . . when justice so requires.” This is a liberal standard, as “[t]he purpose of [Rule 15] is to provide litigants the maximum opportunity for each claim to be decided on its merits rather than on procedural niceties.” Minter v. Prime Equip. Co., 451 F.3d 1196, 1204 (10th Cir. 2006) (internal quotation marks omitted).

In the absence of any apparent or declared reason-such as 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 . . ., futility of an amendment, etc.-the leave ...

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