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Keywords

litigationmotiontrustbankruptcybailcivil proceduremotion to dismiss
defendantmotiontrustbankruptcybailmotion to dismiss

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Zazzali v. Eide Bailly LLP, Not Reported in F.Supp.2d, 2013 WL 6045978

Facts

DBSI, Inc. and its related entities filed for bankruptcy in 2008, leading to the creation of the Estate Litigation Trust and the DBSI Private Actions Trust. Zazzali, as the trustee, claims that DBSI operated a Ponzi scheme, where returns to earlier investors were paid using funds from new investors. He alleges that Eide Bailly, engaged to audit DBSI's financial statements, knowingly facilitated this scheme by failing to adhere to professional standards and certifying fraudulent statements.

DBSI, Inc. and its related entities filed for bankruptcy in the United States District Court of Delaware in 2008.

Issue

The main legal issues are whether Zazzali has standing to bring claims on behalf of the PAT and whether the claims against Eide Bailly should be dismissed for failure to state a claim.

Defendant argued in its motion to dismiss for lack of standing that Zazzali purports to bring claims on behalf of individual investors and creditors who have assigned their claims to the PAT, and this exceeds Zazzali's authority under the Bankruptcy code.

Rule

The court applied the legal principles regarding standing under the Bankruptcy Code and the requirements for stating a claim under Federal Rule of Civil Procedure 12(b)(6).

The R & R rejected Eide Bailly's argument, finding that the cases relied upon by Eide Bailly do not apply because they address the standing of bankruptcy trustees and not post-conformation trustees like Zazzali.

Analysis

The court found that Zazzali, as a post-confirmation trustee, had standing to pursue claims on behalf of the PAT, rejecting Eide Bailly's argument that he lacked authority under the Bankruptcy Code. The court also analyzed the sufficiency of the claims, determining that while some claims were inadequately pled, others could proceed.

The R & R said, because Zazzali is not a bankruptcy trustee the Bankruptcy Code and cases bearing on the Code do not apply, the matter is governed by the mandates of the Plan and/or the PAT Agreement.

Conclusion

The court adopted the magistrate judge's recommendations, denying Eide Bailly's motion to dismiss for lack of standing and granting in part and denying in part the motion to dismiss for failure to state a claim.

The Court ADOPTS the Report and Recommendations.

Who won?

James R. Zazzali prevailed in part, as the court found he had standing to bring claims on behalf of the PAT and allowed some claims to proceed.

Zazzali claims DBSI was engaged in an elaborate Ponzi scheme, where guaranteed returns to earlier investors could only be satisfied by the flow of funds from newly-deceived investors.

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