Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-arwd-6_06-cv-06020/USCOURTS-arwd-6_06-cv-06020-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

HOT SPRINGS DIVISION

JOSEPH McADAMS; JBM, LLC; 

FLORIAN HOMM; ABSOLUTE RETURN 

EUROPE FUND, LTD; THE LOYR FOUNDATIONS;

EUROPE CATALYST FUND; and RICHARD SMYTH; PLAINTIFFS

v. CASE NO. 06-6020

WILLIAM McCORD; DANIEL MOUDY; LYNN 

BRADLEY; DAVID COLWELL; and MOORE

STEPHENS FROST, PLC; DEFENDANTS

WILLIAM McCORD, COUNTER CLAIMANT

v.

JOSEPH McADAMS and FLORIAN HOMM, COUNTER DEFENDANTS

DANIEL MOUDY and WILLIAM McCORD, THIRD PARTY PLAINTIFFS

v.

UCAP, INC., THIRD PARTY DEFENDANT

MEMORANDUM OPINION AND ORDER

Before the Court are the Motion to Dismiss (Doc. 13) by

Defendant Moore Stephens Frost, PLC and related filings (Docs. 14,

27, 35); the Motion to Dismiss by Defendants William McCord and

Daniel Moudy (Doc. 21) and related filings (Docs. 22, 28, 36). The

Court previously converted these two Motions to Motions for Summary

Judgment. (See Doc. 33). Also before the Court is a Motion to

Dismiss by Defendants McCord and Moudy which seeks to dismiss the

claims of Plaintiff Smyth based on a previous settlement agreement

(Docs. 23, 24, 28, 34) and a Second Motion to Strike the Affidavits

of Defendant Smyth filed by Defendants McCord and Moudy (Doc. 39).

Case 6:06-cv-06020-RTD Document 42 Filed 03/27/07 Page 1 of 18 PageID #: <pageID>
 References herein to the “Complaint” or “Plaintiffs’ Complaint” are references to 1

Plaintiffs’ First Amended Complaint.

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This Court previously denied a Motion to Strike the Affidavits of

Smyth (Doc. 29) filed by Defendants McCord and Moudy. (See Doc.

33). This Court held a hearing on September 19, 2006, regarding

these Motions.

I. Factual Background

Plaintiffs filed their Complaint in Garland County Circuit

Court on April 13, 2006, alleging claims of fraud, state and

federal securities violations, breach of fiduciary duty and breach

of contract. Plaintiffs contend Defendants, certain directors

and/or officers of UCAP, conspired to defraud Plaintiffs of ten

million dollars by inducing them to invest in UCAP, a mortgage

lender and brokerage company. Plaintiffs filed an Amended

Complaint on May 11, 2006, deleting Colleen Brewer as a Defendant 1

and adding Moore Stephens Frost (“MSF”). Defendants McCord and

Moudy removed the case to this Court on May 17, 2006.

Defendant William McCord filed counterclaims against

Plaintiffs Florian Homm and Joseph McAdams alleging Homm promised

to remove McCord from a personal guarantee on a note but failed to

do so and he is entitled to indemnity and contribution from

McAdams. Defendants Moudy and McCord further filed Third Party

Complaints against UCAP, Inc. seeking indemnity.

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II. Standard for Motions to Dismiss

This Court originally converted the Motions to Dismiss to

Motions for Summary Judgment. (See Doc. 33) However, upon review

of the arguments of the parties and evidence presented at the

hearing held on September 19, 2006, as well as the intent of the

heightened pleading requirements of the Private Securities

Litigation Reform Act(“PSLRA”) and applicable law, the Court agrees

the proper review of these Motions should be as Motions to Dismiss,

rather than Motions for Summary Judgment. 

A district court should not grant a motion to dismiss unless

it appears beyond a reasonable doubt that the plaintiff can prove

no set of facts which would entitle it to relief. See Conley v.

Gibson, 355 U.S. 41,45-46(1957); see also Coleman v. Watt, 40 F.3d

255, 258 (8th Cir. 1994). The complaint is to be construed in the

light most favorable to the plaintiff. As a practical matter, a

dismissal under Rule 12(b)(6) should be granted only in the unusual

case in which a plaintiff has presented allegations that show on

the face of the complaint that there is some insuperable bar to

relief. See Coleman, 40 F.3d at 258.

As discussed below, the PSLRA requires a heightened standard

of pleading to claims of securities fraud. 

III. Discussion

A. Second Motion to Strike

In their Renewed Motion to Strike Affidavits of Richard P.

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Smyth, Defendants McCord and Moudy contend Smyth’s affidavits do

not contain fact but consist only of opinions, legal conclusions,

and hearsay. Defendants McCord and Moudy argue these affidavits

are not proper for consideration and should be stricken from the

record.

In the Order converting the Motions to Dismiss (Docs. 13 and

21)to Motions for Summary Judgment, the Court denied Plaintiff’s

original Motion to Strike the affidavits of Smyth. In so doing,

the Court acknowledged that it would consider the affidavits in

reviewing the Motions. In the Renewed Motion to Strike, Defendants

offer no new or compelling reasons why the Court should not

consider the appropriate portions of Plaintiff Smyth’s affidavits,

but only restate the original arguments. Accordingly, the Renewed

Motion to Strike Affidavits of Richard P. Smyth by Defendants

McCord and Moudy (Doc. 39) is DENIED.

B. Motion to Dismiss Claims of Plaintiff Smyth

Plaintiff Smyth’s claims in this lawsuit are similar to

allegations he brought in a series of lawsuits against UCAP and the

defendants as officers and directors of UCAP in Superior Court of

Fulton County, Georgia, the Circuit Court of Pulaski County

Arkansas, and the District Court of Arapahoe County, Colorado.

These previous lawsuits were globally settled by the execution of

a Settlement Agreement and Mutual Releases, dated November 4, 2003.

Defendants McCord and Moudy contend Plaintiff Smyth settled

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 At $.085 per share, 3 million shares would be valued at $255,000.00. 2

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all of his claims against them in this November 2003 agreement and

released them from “any and all claims, actions or causes of action

or demands, whether in law or equity . . . presently in existence

or which may arise in the future . . . which could have been

asserted . . ..” 

Pursuant to this settlement agreement, Smyth was paid

$650,000.00 in cash and 3 million shares of UCAP stock. Defendants

McCord and Moudy argue the settlement agreement and release quoted

above covers the present action and Smyth is barred from realleging his claims.

Plaintiffs contend Smyth’s claims are not barred by the

previous settlement agreement since Smyth alleges that he was

fraudulently induced into signing the agreement. They contend

Smyth’s decision to settle was negotiated by UCAP counsel under

McCord’s guidance. As noted above, Smyth settled his claims in

exchange for $650,000.00 in cash and 3 million shares of UCAP

common stock. Smyth contends he accepted the stock based upon the

belief the 3 million UCAP shares had a market value of $2 million.

Plaintiffs contend this belief was inaccurate based upon the false

financial statements and SEC filings. Defendants contend UCAP

stock was trading at $.085 per share on the day the settlement

agreement was signed and Smyth should have known the value of the

stock was less than $2 Million at the time he made the agreement.2

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The settlement agreement at issue is to be construed under

Georgia law, pursuant to its choice of law clause. Georgia law

allows two alternatives to a signatory of a contract who believes

his or her participation in the contract was fraudulently induced.

The signatory can either rescind the contract and sue for fraud or

sue for breach of the contract. See e.g., Ousley v. Foss, 374

S.E.2d 534, 535-36 (1988). Defendants Moudy and McCord contend

Plaintiff Smyth has neither rescinded the contract, nor has he

stated a claim for breach of contract. Plaintiff contends his

allegation that he was fraudulently induced should be given

deference by the Court at this stage of the proceedings.

A review of the Complaint shows no claim for breach of

contract was made by Smyth. Smyth is then limited to a claim for

fraud. However, Smyth never rescinded his settlement agreement.

Smyth never tried to repay the shares or cash he received under the

settlement agreement with UCAP. Even if Smyth can show fraudulent

inducement, under these facts and applicable Georgia law, it

appears beyond a reasonable doubt that Plaintiff Smyth can prove no

facts which would entitle him to relief. See Conley v. Gibson, 355

U.S. 41,45-46 (1957); see also Coleman v. Watt, 40 F.3d 255, 258

(8th Cir. 1994). Accordingly, the Motion to Dismiss claims of

Plaintiff Smyth based upon settlement agreement is GRANTED. 

C. Motion to Dismiss- by Moore Stephens Frost, PLC

Moore Stephens Frost is a public accounting firm in Little

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Rock which conducted the fiscal year-end 2001 and 2002 audits for

UCAP which were included in UCAP’s SEC filings for those years.

MSF moves to dismiss Plaintiffs’ complaint because Plaintiffs

failed to plead the fraud claims with particularity, cannot satisfy

the elements of an Arkansas Securities Act claim, cannot bring

claims against MSF for breach of contract or fiduciary duties as

MSF was not in privity of contract with Plaintiffs and because the

claims are barred by the applicable statutes of limitation.

Plaintiffs contend that UCAP’s officers, with the active

participation of MSF, engaged in a scheme from 2000 to April 15,

2004, to defraud Plaintiffs and the investing public of over $10

million, using material misrepresentations of fact and omissions of

material facts in SEC documents. Plaintiffs claim MSF’s work was

grossly deficient and MSF had knowledge of UCAP’s financial

irregularities, but remained silent. Plaintiffs also contend their

claims against MSF were filed within the statutes of limitations

period.

i. Federal Securities Fraud Claims

The Private Securities Litigation Reform Act of 1995, Pub.L.

No. 104-67, 109 Stat. 737 (the Reform Act), dictates a modified

analysis of a Motion to Dismiss from that reflected above because

of special heightened pleading rules. As always, the Court must

view the factual allegations in the light most favorable to the

plaintiff, Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th

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Cir. 1997), but at the same time, in the context of securities

fraud, must “disregard ‘catch-all’ or ‘blanket’ assertions that do

not live up to the particularity requirements of the [Reform Act],”

Florida State Bd. of Admin. v. Green Tree, 270 F.3d 645, 660 (8th

Cir. 2001).

Rule 10b-5, promulgated by the Securities and Exchange

Commission under section 10(b) of the Act, prohibits fraudulent

conduct in the sale and purchase of securities,” and section 20

extends liability for this conduct to any “controlling person.” In

re Navarre Corp. Sec. Litig., 299 F.3d 735, 741 (8th Cir.2002)

(citing 15 U.S.C. §§ 78j, 78t(a); 17 C.F.R. § 240.10b-5).

“Complaints brought under Rule 10b-5 and section 10(b) are governed

by special pleading standards adopted by Congress in the [Reform

Act]. These pleading standards are unique to securities and were

adopted in an attempt to curb abuses of securities fraud

litigation.” Navarre Corp., 299 F.3d at 741.

Congress enacted two heightened pleading requirements in the

Reform Act. First, the Reform Act requires the plaintiff's

complaint to specify each misleading statement or omission and

specify why the statement or omission was misleading. 15 U.S.C. §

78u-4(b)(1) (Supp. IV 1998). If the allegation “is made on

information and belief, the complaint shall state with

particularity all facts on which that belief is formed.” Id.

Similarly, Rule 9(b) of the Federal Rules of Civil Procedure has

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long required that “in all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with

particularity.” The text of the Reform Act was designed “to embody

in the Act itself at least the standards of Rule 9(b).” Greebel v.

FTP Software, Inc., 194 F.3d 185, 193 (1st Cir.1999).

Second, Congress stated in the Reform Act that a plaintiff's

complaint must “state with particularity facts giving rise to a

strong inference that the defendant acted with the required state

of mind.” 15 U.S.C. § 78u-4(b)(2); Green Tree, 270 F.3d at 654. The

Reform Act requires the court to dismiss the complaint if these

requirements are not met. 15 U.S.C. § 78u-4(b)(3). “[U]nder the

Reform Act, a securities fraud case cannot survive unless its

allegations collectively add up to a strong inference of the

required state of mind.” Green Tree, 270 F.3d at 660.

“Congress has effectively mandated a special standard for

measuring whether allegations of scienter survive a motion to

dismiss. While under Rule 12(b)(6) all inferences must be drawn in

plaintiffs' favor, inferences of scienter do not survive if they

are merely reasonable . . .. Rather, inferences of scienter

survive a motion to dismiss only if they are both reasonable and

‘strong’ inferences.” Id. (quoting Greebel, 194 F.3d at 195-96)

(alterations in original).

The alleged false and misleading statements that form the

basis for Plaintiffs fraud claim are in UCAP financial statements,

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press releases and annual filings made with the Securities and

Exchange Commission for fiscal years 2001 and 2002, and periodic

filings for December 31, 2002 and March 31, 2003. However, the

Complaint does not identify any misleading statements or omissions

by MSF. Under the PSLRA, “the circumstances of the fraud must be

state with particularity, including ‘such matters as the time,

place and contents of false representations, as well as, the

identity of the person . . . and what was obtained or given up . .

.. This means who, what, when, where, and how.” In re: K-Tel

Int’l , Inc. Sec. Lit., 300 F.3d 881, 890 (8th Cir. 2002 )(quoting

Parnes v. Gateway 2000, Inc., 122 F.3d 539, 549-50 (8th Cir.

1997)). The only statement related to Defendant MSF appears to be

a public filing on February 14, 2003 containing financial

information for the period ending September 30, 2002. Plaintiffs

contend this release was improper because it occurred after Don

Cole, a non-party to this suit and one of MSF’s partners, was

deposed. There nothing further provided in the Complaint

regarding the statement, its contents, or the outcome. General

allegations are made in the Complaint including a reduction in

equity of $3.5 Million that was undisclosed and insider

transactions that were not properly recorded. However, there are

no specific statements, dates, or other relevant information pled

regarding these allegations. 

In addition to this lack of particularity, the Complaint fails

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to meet the scienter pleading requirement under the PSLRA. A

plaintiff meets the scienter requirement by showing a deliberate

intent to deceive or recklessness. The Complaint can not rest on

“catch-all or blanket” assertions or conclusory claims of “fraud”

or recklessness” to meet the PSLRA’s standard. The Complaint fails

to identify actual statements made by MSF, how, when, why, and in

what context. Also crucial is that the Complaint does not allege

why MSF should have known these “statements” were false at the time

they were made. In total, the Complaint fails to plead the federal

securities fraud claim against MSF with the required particularity

under the PSLRA and is DISMISSED.

ii. Common Law Fraud Claim

Plaintiffs’ common law claim is similar to the federal

securities act claim. Plaintiffs must plead this claim with

particularity under Federal Rule of Civil Procedure 9(b). Again,

it is the “who, what, where, when, and how” of the alleged fraud

that must be pled. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552,

550 (8th Cir. 2006). 

Plaintiffs have not alleged the “who, what, where, and how” of

their common law claims against MSF. Similar to the Federal

Securities law claims, Plaintiffs have not specified what

statements made by MSF were fraudulent and when and how those

statements were made. For the reasons recited above concerning

Plaintiffs’ federal securities law claims, the common law fraud

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claim against Defendant MSF is DISMISSED.

iii. Arkansas Securities Act Claims

Plaintiffs allege claims against MSF for primary liability and

aiding and abetting liability. MSF contends the Arkansas

Securities Act Claims must be dismissed for the same reasons as the

federal securities fraud claims, specifically, for a failure to

plead the claims with particularity. MSF contends the claims for

aiding and abetting liability also must fail because there is no

allegation of an agency relationship, no allegations of an

underlying securities violation, and no allegations that MSF

“materially aided” in any underlying securities violation - all of

which MSF contends are essential elements of the claim. MSF

further alleges the transactions do not involve “securities” under

Arkansas law and that the claims are time barred by the applicable

statute of limitations.

For the reasons stated above regarding Plaintiff’s failure to

plead with particularity, the Motion to Dismiss the Arkansas

Security Act claims against MSF is GRANTED. 

iv. Breach of Contract and Breach of Fiduciary Duty Claims

MSF argues Plaintiffs have failed to adequately present a

breach of contract or breach of fiduciary duty claim against it.

As noted by MSF, the Complaint is ambiguous as to whether MSF was

to be named in these claims. However, Plaintiffs in their reply to

MSF’s Motion to Dismiss fail to address the breach of contract and

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breach of fiduciary duty claims and apparently agree these claims

should be dismissed against Defendant MSF. Accordingly, the Motion

to Dismiss is GRANTED as to the breach of contract and breach of

fiduciary duty claims against Defendant MSF.

v. Statutes of limitation

MSF contends the statute of limitations for Plaintiffs’ claims

under 10(b)(5) of the Securities Exchange Act were not brought

within the Applicable two year/five year statute of limitation

under the Sarbanes-Oxley Act. MSF also contends the common law

fraud claim and Arkansas Securities act claim are barred by a

three-year statute of limitations. Plaintiffs have stated a claim

sufficient to survive a Motion to Dismiss on this point, given the

possible applicability of equitable tolling. The Motion to Dismiss

is DENIED to the extent it seeks dismissal due to the statue of

limitations. 

D. Motion to Dismiss - by Defendants McCord and Moudy

Defendants McCord and Moudy move to dismiss the complaint for

failure to state claims on many of the same reasons as MSF, namely

that Plaintiffs failed to sufficiently plead the fraud claims with

particularity and within the statute of limitations periods.

McCord and Moudy further state Plaintiffs lack standing to assert

their claims for breach of fiduciary duties in their individual

capacities as they can show no harm to themselves that is separate

from the alleged harm to UCAP. Finally, McCord and Moudy claim

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Plaintiffs failed to allege a breach of contract claim as neither

of them entered into a contract with Plaintiffs.

Plaintiffs contend their amended complaint contains numerous

specific instances of alleged fraud by McCord and Moudy in their

capacities as officers of UCAP. Plaintiffs contend their claims

are not barred by the statutes of limitations as they first

discovered the fraud on April 15, 2004, when UCAP filed an amended

Form 8K with the SEC that for the first time alerted the public

that UCAP would have to restate its financial statements for 2001

and 2002. Plaintiffs contend their federal claims were filed

within two years of this date or, alternatively, equitable tolling

is proper. Plaintiffs contend their state claims are subject to

equitable tolling due to fraudulent concealment.

Plaintiffs contend their breach of fiduciary duty claims are

proper as they have alleged McCord and Moudy “engaged in self

dealing, looting of UCAP, payment of compensation and expenses,”

all of which damaged UCAP yet resulted in a separate and distinct

financial loss to Plaintiffs.

i. Federal Securities Fraud Claims

Pursuant to the analysis regarding the Federal Securities

Fraud Claims against Defendant MSF, the Federal Securities Fraud

claims against Defendants McCord and Moudy also are dismissed for

failure to plead with particularity. The same claims and

paragraphs of Plaintiffs’ Complaint which alleged these claims

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against Defendant MSF allege these claims against Defendants McCord

and Moudy. Accordingly, the Court does not reach McCord and

Moudy’s claims regarding the statute of limitations for Federal

Securities Claims. 

ii. Common Law Fraud Claims

As the Motion to Dismiss the Federal Securities Fraud Claims

against Defendants McCord and Moudy involve the same parts of the

Complaint as the claims against Defendant MSF, so also do the

Common Law Fraud Claims. As discussed above, these claims are

subject to dismissal for failure to plead with particularity.

These are the same claims and paragraphs of the complaint as

discussed above regarding Defendant MSF and the same analysis

applies to Defendants McCord and Moudy. The claims for Common Law

Fraud are DISMISSED.

iii. Arkansas Securities Act Claims

McCord and Moudy contend Plaintiffs can not bring their claims

under the securities laws of Arkansas because they are not legal

entities, are not Arkansas Residents, are sophisticated investors,

and did not purchase securities. Specifically, McCord and Moudy

contend Plaintiffs do not meet the statutory requirement for “an

offer to sell . . .[a security] . . .made in this state,” that as

sophisticated investors they lack standing, and Plaintiffs failed

to establish they purchased “securities” within the meaning of the

Arkansas Securities Act. Similar to the claims against Defendant

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MSF, the Arkansas Securities Act Claims fail to meet the pleading

requirements for these types of claims and those claims are

DISMISSED.

iv. Breach of Fiduciary Duty Claims

McCord and Moudy contend Plaintiffs have not alleged the

Defendants breached any duty to UCAP resulting in a direct injury

to plaintiffs that is distinct and separate from harm caused the

corporation. Plaintiffs contend they have shown evidence of self

dealing and looting, among others, which resulted in a separate and

distinct financial loss to Plaintiffs. 

Given the standard of a Motion to Dismiss, and construing the

Complaint in the light most favorable to the Plaintiff, the Court

finds that Plaintiffs have alleged enough to survive the Motion to

Dismiss. Plaintiffs have stated many claims of self-dealing and

provided examples of separate and distinct losses to the separate

Plaintiffs. Accordingly, the Motion to Dismiss the Breach of

Fiduciary Duty Claims is DENIED.

v. Claims for Breach of Contract

McCord and Moudy contend Plaintiff Homm and Plaintiff McAdams

failed to state a claim for breach of contract. These Defendants

argue Plaintiffs Homm and McAdams fail to properly plead the cause

of action they seek. Plaintiffs Homm and McAdams do not address

this argument in their response. The breach of contract claims

brought by Plaintiff Homm and Plaintiff McAdams are one sentence

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each and do not set out the necessary elements to sustain these

claims. Accordingly, the Motion to Dismiss Plaintiff Homm and

Plaintiff McAdams’ claims for Breach of Contract against Defendants

McCord and Moudy is GRANTED. 

IV. Conclusion

For the reasons stated herein, The Motion to Strike Affidavits

of Plaintiff Smyth is DENIED, the Motion to Dismiss Claims of

Plaintiff Smyth based on Settlement Agreement is GRANTED.

Defendant MSF’s Motion to Dismiss is GRANTED in part and DENIED in

part. It is GRANTED as to Plaintiffs’ Federal Securities Fraud

Claims against MSF, GRANTED as to Plaintiffs’ Common Law Fraud

Claim against MSF, GRANTED as to Plaintiffs Arkansas Securities Act

Claims against MSF, Granted as to the Breach of Contract and Breach

of Fiduciary Duty Claims against MSF, and DENIED as to Defendant

MSF’s argument that Plaintiffs’ Claims are barred by the statute of

limitations. Defendant McCord and Moudy’s Motion to Dismiss is

GRANTED in part and DENIED in part. The Motion is GRANTED as to

Plaintiffs Federal Securities Fraud Claims against Defendants

McCord and Moudy, GRANTED as to Plaintiffs’ Common Law Fraud Claims

against Defendants McCord and Moudy, GRANTED as to Plaintiffs’

Arkansas Securities Act Claims against Defendants McCord and Moudy,

DENIED as to Plaintiffs’ Breach of Fiduciary Duty Claims against

Defendants McCord and Moudy, and GRANTED as to Plaintiffs’ Claims

for Breach of Contract against Defendants McCord and Moudy. These

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dismissals are without prejudice. Plaintiffs will be given ten

(10) days from the date of this Order to file an Amended Complaint.

IT IS SO ORDERED.

 /s/ Robert T. Dawson 

Dated: March 27, 2007 Robert T. Dawson

United States District Judge

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