Munn v. APF Management Company, LLC.

Background

Molly Munn contributed $400,000 to become a member and 50% owner of APF Management Company, LLC, which was formed in 2011. The Petrillo Defendants collectively owned the other half. After APF obtained a multimillion-dollar state-court judgment against Munn and others, Munn, her father, and her family business entered into a bankruptcy settlement with APF. The settlement released claims against APF and its professionals that arose before June 14, 2019.

Munn alleged that she later reviewed APF’s tax forms and discovered that she had been allocated losses in 2011 and 2012 but not in later years. She claimed that APF and the other defendants failed to provide her with partnership tax returns and tax allocation forms, and that the defendants improperly classified expenses so the Petrillo Defendants would receive larger loss allocations.

Claims and Motions

Munn’s Second Amended Complaint asserted three counts:

The Selznick Defendants and the APF Defendants moved to dismiss. Their arguments included that the bankruptcy settlement barred some claims, that the federal tax claim was legally deficient, that the state-law claims lacked a basis for federal jurisdiction, and that the tortious-interference theory was not recognized under New York law. Munn primarily argued that the court had federal-question jurisdiction and addressed only some of the defendants’ other arguments.

Count II: Federal Tax Claim

The court held that Section 7434 applies when a defendant files a fraudulent information return concerning payments purportedly made to the plaintiff. Munn alleged that the defendants’ returns were fraudulent because they classified expenses as capital contributions and thereby produced larger loss allocations for the Petrillo Defendants. She did not allege that the returns reported payments purportedly made to her.

The court concluded that being indirectly affected by an allegedly fraudulent return was not enough to bring a Section 7434 claim. Because Munn did not allege fraud concerning payments purportedly made to her, the court held that she failed to state a claim under Section 7434. It did not reach the defendants’ alternative arguments about whether the partnership returns qualified as information returns or whether Munn adequately alleged damages.

Counts I and III: State-Law Claims and Jurisdiction

The court held that the federal Declaratory Judgment Act did not independently create federal jurisdiction over Count I. Munn’s document-access claim depended on state law, and the alleged obligation to provide the documents would exist regardless of whether the forms complied with federal tax law.

The court also held that Count III did not establish federal-question jurisdiction. Even assuming the tort claim required consideration of federal tax law, the court found that any federal issue would be fact-specific and not important to the federal legal system as a whole. The dispute concerned Munn’s alleged right to loss allocations under APF’s operating agreement, not the interpretation of federal tax law.

Because Count II was dismissed and Counts I and III did not independently arise under federal law, the court declined to exercise supplemental jurisdiction, meaning jurisdiction over related state-law claims, over Counts I and III. The court added that Munn had not responded to several dismissal arguments and therefore would have treated those claims as abandoned even if it had exercised supplemental jurisdiction.

Leave to Amend and Disposition

The court declined to grant leave to amend. Munn had already amended twice, had received notice of alleged pleading deficiencies, did not request another amendment, and did not identify facts that would cure the problems. The court stated that the problems with the claims were substantive and that better pleading would not cure them.

The court granted the defendants’ motions to dismiss. Count II was dismissed with prejudice. Counts I and III were dismissed without prejudice. The clerk was directed to terminate the pending motions and close the case.