Kamal v. Baker Tilly Virchow Krause, LLC

Background

K. Tausif Kamal and Samuel Edison were among approximately 800 people who purchased or renewed Aspirity notes between July 1, 2015, and April 28, 2017. After Aspirity entered bankruptcy in June 2017 and did not repay the noteholders, Kamal and Edison filed a proposed class action against Baker Tilly US, LLP and Deloitte, LLP.

The amended complaint asserted three Minnesota-law claims: negligence, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty. The plaintiffs alleged that Baker Tilly, which audited Aspirity’s 2015 financial statements, and Deloitte, which later audited Aspirity, were involved in financial reporting concerning a $22 million loan to an entity controlled by Timothy Krieger. They alleged that the reporting made the loan appear collectible and contributed to noteholders’ losses.

Motions to Dismiss

The defendants moved to dismiss under Rule 12(b)(6), which permits dismissal when a complaint does not adequately state a claim for relief. At this stage, the court accepts the complaint’s factual allegations as true and asks whether they plausibly support relief.

Claims Against Deloitte

The court dismissed the negligence claim against Deloitte. The plaintiffs did not identify specific false information in Aspirity’s quarterly reports, its 2016 annual report, or a November 2016 press release that originated with Deloitte. The quarterly reports were unaudited, stated that Aspirity prepared them, and did not attribute representations to Deloitte. The press release was not an audited statement and did not attribute any representation to Deloitte. Although Deloitte audited the 2016 annual report, the plaintiffs did not allege that the information in that report was false. The report instead included a warning that Aspirity might not be able to continue operating and repay the notes.

The court therefore granted Deloitte’s motion to dismiss, and the claims against Deloitte were dismissed with prejudice.

Negligence Claim Against Baker Tilly

The court dismissed the negligence claim against Baker Tilly to the extent it was based on Aspirity’s quarterly reports. Those reports were unaudited, stated that Aspirity prepared them, and did not indicate that Baker Tilly prepared them or supplied the allegedly false information.

The court reached a different result for Aspirity’s 2015 annual report, which Baker Tilly audited. The plaintiffs alleged that Baker Tilly falsely certified that the financial statements fairly presented Aspirity’s financial position, even though the loan was not made at arm’s length and Krieger Enterprises lacked evidence of the liquidity needed to repay it. The complaint also alleged that Baker Tilly had considered a going-concern warning, a material-weakness designation, and the risk of fraud.

The court held that the plaintiffs adequately alleged that they relied on the 2015 annual report, that investors could justifiably rely on an audited financial statement filed with the Securities and Exchange Commission, and that they were within the limited group of people for whose guidance the information was supplied. The negligence claim against Baker Tilly therefore remained to the extent it was based on the 2015 annual report.

Aiding-and-Abetting Claims

The court held that the plaintiffs lacked standing to bring the aiding-and-abetting fraud and breach-of-fiduciary-duty claims because those claims belonged to the bankruptcy estate and were derivative. In other words, the plaintiffs alleged that Krieger’s conduct injured Aspirity first and caused the noteholders’ losses indirectly, rather than alleging that Krieger directly stole from the noteholders. The alleged injury was therefore shared by Aspirity’s creditors generally.

The court also held that the aiding-and-abetting claims failed on the merits. Minnesota law requires actual knowledge that the primary actor’s conduct is wrongful and substantial assistance or encouragement of that conduct. Allegations that the defendants should have known about the misconduct, saw warning signs, or had constructive knowledge were insufficient. The court dismissed Counts 2 and 3 against Baker Tilly with prejudice.

Disposition

Judge Michael J. Davis granted Deloitte’s motion to dismiss, and the claims against Deloitte, LLP were dismissed with prejudice. The court granted in part and denied in part Baker Tilly US, LLP’s motion: Count 1, the negligence claim, remains based on the 2015 annual report, while Count 2, aiding and abetting fraud, and Count 3, aiding and abetting breach of fiduciary duty, were dismissed with prejudice.