Peel v. cPaperless LLC dba SafeSend

UNITED STATES DISTRICT COURT March 14, 2024 SOUTHERN DISTRICT OF TEXAS Nathan Ochsner, Clerk HOUSTON DIVISION TYLER PEEL, et al., § Plaintiffs, § § v. § Case No. 4:23-CV-02417 § CPAPERLESS, LLC d/b/a § SAFESEND, et al., § Defendants. § MEMORANDUM AND ORDER Currently pending before the Court is Plaintiffs’ motion for leave to amend.

ECF No. 30. Defendants have also filed a motion to dismiss, ECF No. 24, and a motion for sanctions, ECF No. 26.1 The primary question before the Court is whether Plaintiffs should be permitted to amend the live pleading, or whether any amendment would be futile. Having reviewed the pleadings, the briefing,2 and the applicable law, the Court concludes that leave to amend should be granted. However, Plaintiffs’ proposed second amended complaint attached to the motion does not adequately address the issues Defendants raise. Accordingly, Plaintiffs’ motion for leave to amend, ECF No. 30, is granted in part and denied in part, and Defendants’ motions,

ECF Nos. 24, 26, will be denied as moot without prejudice to reraising if Plaintiffs’ amended complaint fails to cure all alleged deficiencies.

Background Plaintiff Tyler Peel is a software developer and a member of Acct1st Technology Group, LLC (“Acct1st”), a web-based accounting technology firm. Am. Compl., ECF No. 16 ¶ 1. Defendants include the other members of Acct1st—Jeromy Gensch, Andrew Hatfield, Tess DeGraffenreid, and the Estate of James Beach—and a competitor in the accounting software market, cPaperless, LLC d/b/a SafeSend (“cPaperless”). Id. ¶¶ 2, 20, 40. Acct1st filed for Chapter 11 bankruptcy in 2009. Id. ¶ 34. Allegedly, at some unspecified point, Defendants stole the source code for several popular Acct1st programs, such as “Tic, Tie & Calculate,” “CPA Safe Sign,” and “CPA SafeMail,” and used them to create cPaperless without Peel’s knowledge. Id. ¶¶ 30-40. Peel apparently first learned of this conduct in September of 2021. Id. ¶ 37. Peel, in his individual capacity and derivatively on behalf of Acct1st, asserts violations of the Racketeering Influenced and Corrupt Organizations Act (“RICO”). Id. ¶¶ 51-81. Plaintiffs also raise claims for fraud, theft of trade secrets, and other various causes of action under Texas law.3 Id. ¶¶ 82-134.

Plaintiffs additionally assert non-fraud claims of tortious interference with contracts and prospective business relationships, violations of the Texas Uniform Trade Secrets Act and Texas Theft Liability Act, civil conspiracy, and unjust enrichment against all Defendants. Id. ¶¶ 103-34.

In their motion to dismiss, Defendants argue that the alleged conduct, even if true, all occurred years ago and is therefore barred by the various two-to-four-year statutes of limitations. ECF No. 25 at 1-10. cPaperless was formed in 2008, and because Plaintiffs do not allege any specific dates, Defendants surmise that any claims must have accrued then or shortly thereafter.4 Id. at 5. Defendants also contend the complaint fails to satisfy federal pleading standards. Id. at 10-32.

Defendants further seek dismissal of the derivative action and the claims against the Estate of James Beach as non-viable under Texas law. Id. at 32-35. Attached to the motions are several exhibits, including the public trademark applications and bankruptcy disclosure statements. ECF Nos. 25-2, 25-3, 25-4.5 In response, Plaintiffs apparently concede that their claims would be barred by the applicable limitations periods, but for tolling doctrines such as the discovery rule and fraudulent concealment.6 ECF No. 35 at 3. Plaintiffs contend that the lack

Plaintiffs also filed a motion for leave to amend. ECF No. 30. The proposed second amended complaint only addresses Defendants’ arguments on the derivative action and the claims against the Estate of James Beach. See Proposed Second Am. Compl., ECF No. 30-1. The proposed amendment does not contain any of the allegations or arguments newly raised in Plaintiffs’ response to the motion to dismiss, ECF No. 35, nor does it purport to cure any issues with limitations or pleading standards.

Analysis A. Leave to Amend Is Granted Under the Lenient Rule 15(a) Standard.

When leave to amend pleadings is requested before trial, courts must “freely give leave when justice so requires.” FED. R. CIV. P. 15(a). The language of Rule 15 “evinces a bias in favor of granting leave to amend.” Marucci Sports, L.L.C. v. Nat’l Collegiate Athletic Ass’n, 751 F.3d 368, 378 (5th Cir. 2014) (quotation omitted).

Where leave is timely sought, it may only be denied for a “substantial reason.” Smith v. EMC Corp., 393 F.3d 590, 595 (5th Cir. 2004) (quotation omitted); cf. S&W Enters., L.L.C. v. SouthTrust Bank of Ala., NA, 315 F.3d 533, 535 (5th Cir. 2003) (explaining that Rule 16(b) “good cause” governs leave to amend after scheduling order deadline has passed). Such reasons include: (1) undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies, (4) undue prejudice, and (5) futility. Smith, 393 F.3d at 595. However, “[a]bsent any of these factors, the leave sought should be ‘freely given.’” Id. Defendants oppose the motion for leave to amend primarily on the basis that the proposed amendment is futile. ECF No. 33 at 6. This is because Plaintiffs’ proposed second amended complaint does not meaningfully address Defendants’ arguments on the statutes of limitations or the adequacy of pleadings under Rules 8 and 9. Id. at 7. Defendants assert that “when a ‘[p]laintiff has already amended his pleadings once as a matter of course, and his Second Amended Complaint does not cure the deficiencies that have’ been raised by the defendant, the Plaintiff has already ‘pled his best case’ and further amendment should not be permitted.” Id. at 15 (quoting Gaumond v. City of Dallas, No. 3:21-CV-00624-E, 2023 WL 2061170, at *11 (N.D. Tex. Feb. 15, 2023)).

The Court is unconvinced that Plaintiffs have pleaded their “best case.” This is evidenced by the arguments Plaintiffs raised in response to the motion to dismiss and the attached 172-page appendix. See ECF Nos. 35, 35-1. However, with limited exceptions, the Court may not consider evidence outside the pleadings on a motion to dismiss. See FED. R. CIV. P. 12(d); Gray v. GC Services, No. 4:22-CV-02753, 2023 WL 175192, at *2 (S.D. Tex. Jan. 12, 2023), aff’d, No. 23-20056, 2023 WL 6969364 (5th Cir. Oct. 20, 2023) (noting courts may consider documents attached to or referenced in the complaint, and public records subject to judicial notice).

Plaintiffs also may not amend their complaint by response. See Thomas v. City of Galveston, 800 F. Supp. 2d 826, 838 (S.D. Tex. 2011) (“[I]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss.” (quotation omitted)). Before the Court may consider those arguments, Plaintiffs must amend the complaint to adequately plead the factual bases for those arguments.

Because the Court has yet to enter a scheduling order, see Stipulations, ECF Nos. 11, 18, 34, Plaintiffs need not show “good cause” for leave to amend under Rule 16(b). See S&W Enters., 315 F.3d at 535. Further, unlike the circumstances in Gaumond, 2023 WL 2061170, at *11 (striking plaintiff’s second amended complaint for failure to seek leave to amend), Plaintiffs here sought leave to amend, as opposed to directly filing a second amended complaint on the docket without leave. Although Plaintiffs concede that the proposed second amended complaint, ECF No. 35-1, does not purport to cure all deficiencies raised in Defendants’ motion to dismiss, see ECF No. 41 at 2, that does not necessarily equate to “futility.” Instead, this means that Plaintiffs should be afforded one final chance to replead. See U.S. ex rel. Willard v. Humana Health Plan of Tex. Inc., 336 F.3d 375, 387 (5th Cir. 2003) (“A court should not dismiss a plaintiff’s complaint under Rule 9(b) unless the plaintiff has already been given the opportunity to amend.”).

B. The Proposed Amendment Fails to Address Defendants’ Arguments in the Motion to Dismiss Pertaining to Federal Pleading Standards.

Defendants argue that Plaintiffs’ first and proposed second amended complaints fail to satisfy federal pleading standards. Under Rule 8(a) notice pleading standards, a complaint “does not need detailed factual allegations,” but must provide factual allegations that “raise a right to relief above the speculative level.” Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint must therefore “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). However, a complaint that includes only “labels and conclusions, and a formulaic recitation of the elements of a cause of action,” fails to satisfy this pleading burden. Twombly, 550 U.S. at 555 (citation omitted).

Further, when alleging fraud or mistake, Rule 9(b) requires the plaintiff “state with particularity the circumstances constituting fraud or mistake.” FED. R. CIV. P. 9(b). This heightened pleading standard serves as a “gatekeeper to discovery, a tool to weed out meritless fraud claims sooner than later.” United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 2009). “Rule 9(b) requires, at a minimum, that a plaintiff set forth the who, what, when, where, and how of the alleged fraud.”

U.S. ex rel. Steury v. Cardinal Health, Inc., 735 F.3d 202, 204 (5th Cir. 2013) (quotation omitted). Courts must “apply Rule 9(b) to fraud complaints with ‘bite’ and ‘without apology.’” Grubbs, 565 F.3d at 185 (quotation omitted). While Rule 9(b) is relaxed for pleading “state of mind” and where facts “are particularly within the perpetrator’s knowledge,” that narrow exception is not a “license to base claims of fraud on speculation and conclusory allegations.” U.S. ex rel. Willard v. Humana Health Plan of Tex. Inc., 336 F.3d 375, 385 (5th Cir. 2003) (quotation omitted).

As Defendants correctly assert, the heightened pleading standards of Rule 9(b) apply to Plaintiffs’ fraud claims. ECF No. 25 at 11-22; see also Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723 (5th Cir. 2003), opinion modified on denial of reh’g, 355 F.3d 356 (5th Cir. 2003) (noting Rule 9(b) applies to negligent misrepresentation when based on same alleged facts as fraud claims). This includes Plaintiffs’ RICO claims, to the extent they are premised on allegations of mail and wire fraud. See Arruda v. Curves Int’l, Inc., 861 Fed. App’x 831, 834 (5th Cir. 2021) (applying Rule 9(b) to RICO predicate acts of mail and wire fraud). Additionally, “Rule 9(b) applies in fraudulent concealment cases.” Stringer v. Remington Arms Co., L.L.C., 52 F.4th 660, 662 (5th Cir. 2022). Plaintiffs do not dispute that Rule 9(b) applies to their RICO and other fraud-based claims. See ECF No. 35 at 19-30.

Based on the pleadings as they currently exist, as Defendants assert in their motion to dismiss, Plaintiffs fail to plead fraud with particularity. Absent from the complaint are any dates pertaining to the alleged fraud, or even any of the alleged acts of theft. Instead, Plaintiffs vaguely assert that at some point prior to 2021, “Defendants effectively stole the software from Acct1st and incorporated it into their business, cPaperless.” ECF No. 16 ¶ 66. There are no allegations of any specific representations, other than those regarding Peel’s ownership interest in Acct1st and other entities. Id. ¶¶ 19-25. But Plaintiffs do not explain how those representations are fraudulent or even relevant to the harms asserted. Many of the factual allegations are broadly attributed to all Defendants “upon information and belief,” id. ¶¶ 30, 33, 66, 72, without explaining the factual bases for those beliefs. Although Plaintiffs devote eleven pages to pleading RICO violations, no predicate acts are identified in the complaint.7 Plaintiffs’ response relies on predicate acts of wire and mail fraud, ECF No. 35 at 20-23, but no such allegations are pleaded with particularity. Indeed, Plaintiffs fail to plead with particularity any RICO predicate act.8

Indeed, the pleadings fail to explain what harmful conduct took place. As far as the Court can surmise, Peel complains of little more than commonplace commercial activity. Defendants started a business, which went bankrupt, so Defendants started a new business.9 Conclusory statements that Plaintiffs were “defrauded by Defendants,” ECF No. 16 ¶ 39, inter alia, are not entitled to the assumption of truth, see Iqbal, 556 U.S. at 678-79. Even under the more lenient Rule 8(a) notice pleading standards, Plaintiffs must at least plead sufficient factual allegations—as opposed to legal conclusions—to provide fair notice to each Defendant. See Del Castillo v. PMI Holdings N. Am. Inc., No. 4:14-CV-3435, 2015 WL 3833447, at *6 (S.D. Tex. June 22, 2015) (“Plaintiffs should endeavor to explain what role each Defendant played . . . , rather than grouping them together at all times.”).10

Allegations that Peel believed he owned a larger interest in Acct1st and other entities, ECF No. 16 ¶ 56, are irrelevant and unsupported by any allegations that Peel managed Acct1st. See TEX. BUS.

ORGS. CODE §§ 101.251 (governing authority), 101.354 (equal voting rights).

Furthermore, Plaintiffs apparently concede that all claims are barred under the applicable two-to-four-year statutes of limitation but for various tolling principles.11 Although Plaintiffs allege that all “wrongful acts complained of . . . were unlawfully concealed from Peel,” ECF No. 16 ¶ 45, there are no factual allegations supporting such a conclusion.12 Fraudulent concealment must be pleaded with particularity, Stringer, 52 F.4th at 662, and Plaintiffs’ silence is fatal to their RICO claim.13 As for the discovery rule,14 Plaintiffs’ argument that the relevant facts are solely within While Plaintiffs cite Texas law for the discovery rule and fraudulent concealment in response to the motion to dismiss, ECF No. 35 at 6-8, Plaintiffs must rely on federal law for the RICO claim.

The Fifth Circuit applies the “injury discovery” and “separate accrual” rules to RICO claims. Lewis v. Danos, 83 F.4th 948, 955 (5th Cir. 2023). Concepts of “equitable tolling” and “fraudulent concealment” are also available in the RICO context, but only where “such concealment prevented discovery of the injury.” Id. Regardless, “a plaintiff who is not reasonably diligent may not assert ‘fraudulent concealment.’” Klehr v. A.O. Smith Corp., 521 U.S. 179, 194 (1997).

Under federal law, “a civil RICO claim accrues when the plaintiff discovers, or should have discovered, the injury.” Lewis, 83 F.4th at 955. “Knowledge of the wrongdoer is not required to start the clock on the statute of limitations; knowledge of the injury alone suffices for the claim to accrue.” Petrobras Am., Inc. v. Samsung Heavy Indus. Co., 9 F.4th 247, 254 (5th Cir. 2021).

Publicly available documents subject to judicial notice may establish inquiry notice of an injury.

See id. at 255 (considering SEC filings); Glatzer v. Skilling, No. 4:16-CV-1449, 2017 WL 1487675, at *2 (S.D. Tex. Feb. 23, 2017) (concluding RICO claim accrued when the alleged act causing plaintiff’s injury was made in a “public announcement”); Abecassis v. Wyatt, 902 F. Supp. 2d 881, 900 (S.D. Tex. 2012) (“The party invoking fraudulent concealment is generally considered to have constructive knowledge of publicly available information.”). In the RICO context, both defenses require a showing of reasonable diligence. Klehr, 521 U.S. at 194.

ECF No. 35 at 6 (quoting Comput. Assocs., 918 S.W.2d at 456). However, aside from cursorily mentioning “fiduciary duties to Acct1st,” ECF No. 16 ¶¶ 47, 132, Plaintiffs assert no cause of action for breach of fiduciary duty, and there are no factual allegations to support any such duties owed to Peel. More importantly, there appears to be no scenario under which cPaperless owed Plaintiffs any such duty. Once any claims against cPaperless accrued, Plaintiffs arguably were on inquiry notice as to claims against the other Defendants. Cf. Willis v. Maverick, 760 S.W.2d 642, 646 (Tex. 1988) (holding that even in the context of legal malpractice actions, claimants are not excused from exercising “reasonable care and diligence” to discover facts of claim).

Because Defendants raise meritorious arguments under Rule 9(b), Plaintiffs must amend the live complaint to sufficiently allege the who, what, when, where, and how of all fraud-based claims, including any RICO predicate acts. Furthermore, the limitations periods for Plaintiffs’ claims are now squarely at issue in this case.

Therefore, the Court hereby ORDERS Plaintiffs to amend the live pleading to specifically include the following information: 1. A clear timeline of all relevant events, including when cPaperless began advertising Tic, Tie & Calculate and other allegedly stolen software on its public website, when the Acct1st website stopped advertising that same software, and all other facts contained in public records and subject to judicial notice, such as the bankruptcy and trademark filings.

2. Factual allegations explaining with particularity how each Defendant’s actions harmed Plaintiffs and how each Defendant fraudulently concealed those facts.

No. 35-1 at 125-34. In 2018, when Beach updated and amended the trademark to “TICTIE CALCULATE,” the owner’s name is listed as “CPAPERLESS, LLC.” Id. at 111. Attached to the application is another specimen, consisting of a “screenshot from website at point of sale.” Id. at 113. Those screenshots show “TicTie Calculate” publicly advertised as a product for sale on cPaperless’s SafeSend website as of April 24, 2018. Id. at 117-19. Even if Plaintiffs’ ignorance of trademark filings was excused, the cPaperless website evidence was publicly available.

3. Factual allegations supporting fraudulent concealment for every year that cPaperless publicly advertised that it owned Tic, Tie & Calculate.

4. An explanation of how Plaintiffs acted with reasonable diligence from the 2009 Acct1st bankruptcy through 2021.

5. Facts showing that Acct1st’s claims survived bankruptcy or accrued after discharge.

6. Identify each alleged act of racketeering activity for Plaintiffs’ RICO claim. Include the statute or law that is alleged to have been violated, and the facts surrounding each violation.

7. Describe how the alleged acts of racketeering activity form a pattern of racketeering activity.

8. Describe how the alleged acts of racketeering activity are related to one another.

9. To the extent Plaintiffs intend to rely on predicate acts of wire or mail fraud, state with particularity the circumstances of the fraud, including the time, place, participants, and content of those predicate acts.

10. An explanation of how the alleged acts of racketeering activity pose any threat of continued criminal activity.

11. Explain whether the pattern of racketeering activity and the alleged RICO enterprise are separate or have merged into one entity.

12. Provide detail as to how each Defendant allegedly violated each subsection of the RICO statute.

13. Identify misrepresentations made to Plaintiffs, including how those statements were fraudulent, how Plaintiffs reasonably relied on those statements, and the time, place, participants, and content of the misrepresentations.

14. Factual allegations supporting causes of action against each Defendant.

15. Any other amendments necessary to cure the deficiencies identified in Defendants’ motion to dismiss.

Strnad v. Behrend, No. SA-07-CV-680-XR, 2008 WL 11333923, at *4 (W.D. Tex. Feb. 27, 2008) (listing information that plaintiff must include in his revised RICO cause of action).

Plaintiffs are additionally reminded that Rule 11 of the Federal Rules of Civil Procedure requires all representations to the Court be certified as “nonfrivolous,” with adequate “evidentiary support,” and based on “an inquiry reasonable under the circumstances.” FED. R. CIV. P. 11(b). The reasonableness of such investigation is evaluated “at the time counsel signed the document.” Worrell v. Houston CanA Acad., 287 Fed. App’x 320, 325 (5th Cir. 2008) (cleaned up). In other words, Plaintiffs cannot simply repurpose the existing complaint with a few minor adjustments and comply with their Rule 11 obligations. Any facts that have come to light since the filing of the original complaint cannot be ignored. This includes information in the public documents on which Plaintiffs base their arguments, including the website archives. See id. at 325-26 (affirming sanctions where counsel failed to perform a basic search on the defendant’s public website). Failure to comply with the instructions in this Order may result in dismissal or other appropriate sanctions. See FED. R. CIV. P. 11(c), 41(b).

Conclusion For the reasons stated above, Plaintiffs’ motion for leave to amend, ECF No. 30, is GRANTED IN PART AND DENIED IN PART. Plaintiffs’ proposed second amended complaint, ECF No. 30-1, does not cure all deficiencies raised in Defendants’ motion to dismiss. ECF No. 25. Therefore, Plaintiffs shall file an amended complaint in compliance with the Court’s instructions no later than April 15, 2024. Defendants’ motion to dismiss, ECF No. 24, and motion for sanctions, ECF No. 26, are DENIED as MOOT without prejudice to refiling.

IT IS SO ORDERED.

Signed on March 14, 2024, at Houston, Texas.

Dena kerma Dena Hanovice Palermo United States Magistrate Judge