UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

WELLS FARGO ADVANTAGE NATIONAL

TAX FREE FUND, et al.,

Plaintiffs,

v.

HELICON ASSOCIATES, INC., a Michigan

Corporation, et al.,

Defendants.

 /

Case No. 2:08-cv-15162

HONORABLE STEPHEN J. MURPHY, III

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART 

DEFENDANT DORSEY & WHITNEY LLP'S MOTION TO DISMISS [docket 

number 15]; GRANTING THIRD PARTY DEFENDANT CRESCENT 

ACADEMY'S MOTION TO DISMISS THE THIRD PARTY COMPLAINTS OF THE 

UNDERWRITERS AND OF DARNELL & MEYERING, P.C. [docket numbers 58 

and 59]; GRANTING DEFENDANT GILLIAM'S MOTION TO STAY THE CASE 

AS TO HIM DUE TO BANKRUPTCY [docket number 74]; DENYING 

DEFENDANTS HELICON AND WITUCKI'S MOTION TO STAY DUE TO

THE BANKRUPTCY OF DEFENDANT GILLIAM [docket number 75];

DENYING AS MOOT DEFENDANTS' EMERGENCY MOTION TO 

ALLOW THE DEPOSITION OF MICHAEL WITUCKI [docket number 76]; and

GRANTING PLAINTIFFS' MOTION TO SUBSTITUTE PARTY [docket number 82]

INTRODUCTION

 This litigation arises out of the issuance, sale and purchase of municipal revenue bonds

in the face value of $7,090,000 (the "bonds") in December 2006 to finance the $5 million

purchase of a school building for a charter school. The plaintiffs are a number of municipal

bond mutual funds that purchased the bonds allegedly in reliance upon disclosures

contained in a Preliminary Official Statement and an Official Statement, both of which were

drafted by defendant Dorsey & Whitney LLP in its role as underwriters' counsel. The

plaintiffs allege that the Official Statements, the Financial Statements and the Financial

Forecast contained misrepresentations of material facts and failures to disclose material
2

facts, including that the Bond issue was illegal, the issuance of the bonds violated the

school's charter contract, various conflicts of interest, inflated student enrollment, an

inflated price being paid for the school building and the use of "equipment leases" to

conceal historic cash flow problems at the charter school. As relevant to the motions

before the Court, plaintiffs bring suit under Section 10(b) of the Securities Exchange Act

of 1934 and SEC Rule 10b-5, state securities statutes of Michigan, Connecticut, Texas,

New Jersey, Massachusetts, and Wisconsin, aiding and abetting common law fraud, and

negligent misrepresentation.

One of the defendants is Dorsey & Whitney, LLP, (the "Dorsey Firm") who was

counsel to the underwriters in the bond transaction and also issued a special tax opinion

in connection with the underwriting. The Dorsey firm has moved to dismiss all counts of

the complaint against it as a defendant. It argues that all the claims should be dismissed

because Dorsey, as underwriter's counsel, did not owe a duty to the defendants for

purposes of the relevant federal and state laws, because Dorsey was not a "seller" or

"agent" of the seller for purposes of the state securities laws and did not have an interest

in the transaction, because the plaintiffs did not allege their claims with sufficient

particularity as to Dorsey and because the facts do not support a claim for negligent

misrepresentation as against Dorsey.

Defendants Herbert J. Sims & Company, Inc. ("Sims") and Municipal Capital Markets

Group, Inc. ("MCM") (collectively, "the Underwriters") and defendant Darnell & Meyering

P.C. ("Darnell") have each filed third party complaints against Crescent Academy for

breach of contract, indemnification, contribution and unjust enrichment. Crescent has

moved to dismiss the third party complaints for failure to state a claim, arguing that the
 1

A Michigan public school academy is essentially a charter school, authorized and

organized under M.C.L. § 380.501 et seq. See generally Council for Organizations and

Others for Educ. About Parochiaid, Inc. v. Governor, 455 Mich. 557, 565 (1997). It is

considered a public school for purposes of Section 2 of Article VIII of the State Constitution,

a school district for purposes of section 1225 and 1351a and is subject to the leadership

and general supervision of the state board over all public education under Section 3 of

Article VIII of the State Constitution and is a body corporate and a governmental agency.

MCL § 380.501(1). A charter school is a school managed by private interests and financed

primarily with local school district funds. Am. Jur. Schools § 3.

3

facts do not state viable claims against Crescent and that Crescent, as a public school

academy, cannot be held bound to any indemnification agreements.

Finally, this order addresses two motions to stay the litigation due to the bankruptcy

of one of the defendants, an emergency motion to take the deposition of one of the

defendants, Michael Witucki, and a motion to substitute the estate of Mr. Witucki as party

defendant because of the recent death of Mr. Witucki. 

FACTS

The complaint alleges the following facts: Crescent Academy ("Crescent") is a

Michigan Public School Academy1

 that was managed by defendant Helicon Associates

("Helicon") and chartered by Bay Mills Community College ("Bay Mills"). Defendant

Michael Witucki was the president and principal owner of Helicon and was also the

manager of SAAS Development, LLC ("SAAS"). Defendant Jeremy Gilliam was a member

of SAAS and an employee or agent of Witucki. Complaint ¶¶ 15-16. It appears from the

complaint that although Crescent was chartered by Bay Mills, it essentially was a creature

of Helicon, in that Helicon was Crescent's sole consultant and educational services provider

and operated Crescent through a consultancy services agreement. Complaint ¶ 14. The

complaint likewise portrays Helicon as a creature of Witucki's, its president and principal

owner. Witucki, acting through Helicon, caused himself to be named as Chief 
4

Administrative Officer of Crescent Academy and caused Gilliam to act as Recording

Secretary to the Crescent Academy Board of Directors. Complaint ¶ 15. Kevin Foley, of

 defendant Foley & Robinette P.C. (the "Foley Law Firm"), was initially a member of SAAS,

but resigned his membership and became counsel to Crescent Academy beginning in the

2005-2006 school year. Complaint ¶ 80. Helicon caused the Foley Law Firm to act as

counsel to Crescent Academy in connection with the purchase of the School Building and

the underwriting and issuance of the Bonds. Complaint ¶ 22.

SAAS was the owner of the School building and at first was Crescent's landlord.

Subsequently, in a series of transactions at issue in this litigation, SAAS sold the school

building to Crescent for the allegedly inflated price of $5,000,000. SAAS purchased the

building, which was an existing office building, in May 2004 for $1.8 million, or $77 per

square foot. SAAS then agreed with Crescent and Helicon to renovate the building to be

the K-8 building for the proposed charter school to provide for 20-25 classrooms.

Complaint ¶ 50. SAAS then leased the school building to Crescent in May 2004, at an

allegedly inflated rate, in a lease signed by Witucki as manager of SAAS, and SAAS began

the proposed renovations. The renovations resulted in a school facility that contained only

15-16 classrooms. Complaint ¶ 57. 

Crescent developed cash flow problems prior to 2006 that were allegedly disguised

by Helicon by the creation of equipment leases at the end of each school year. Complaint

¶ 65-66. The equipment leases aggregated equipment purchased by Crescent with its own

funds during the school year, and, at the end of the school year, Helicon caused Crescent

to sell this equipment to Helicon and Helicon then leased it back to Crescent. Complaint

¶ 67. These equipment leases were called capital leases in the Official Statements, but
5

were really a disguised form of cash-flow borrowing, devised to disguise Crescent's

cash-flow deficiencies. Complaint ¶ 68-69. 

SAAS, operating through Witucki, proposed to Crescent (also operating through

Witucki) that Crescent purchase the school building from SAAS for $5 million and finance

the purchase through the issuance of the Bonds, and also use the Bonds to pay off the

equipment leases. Complaint ¶ 75. Helicon caused Crescent to accept SAAS's proposal.

The plaintiffs allege that these proposed transactions created egregious and irreconcilable

conflicts of interest that needed to be but were not disclosed in the Official Statement

(which is essentially the Bond's prospectus).

Crescent, Helicon and SAAS proceeded with the proposed transactions and hired

various individuals and entities to assist. Defendants Sims and MCM were hired as

underwriters for the proposed bond issue. Complaint ¶¶ 17-18. Sims and MCM retained

defendant Dorsey to act as underwriter's counsel. The Dorsey law firm also served as

special tax counsel in connection with the underwriting and offering of the bonds. The

Dorsey firm, in its capacity as underwriter's counsel, was one of the principal authors of the

Official Statement. Dorsey, in its capacity as special tax counsel, also issued an

unqualified legal opinion that interest on the bonds was not subject to federal income

taxation. Complaint ¶ 19. Darnell & Meyering was hired by Crescent (through Helicon and

Witucki) to audit Crescent and to prepare Crescent's annual financial statements required

by law. The Foley Law Firm was hired to represent Crescent Academy with respect to the

purchase of the School Building and the issuance and underwriting of the Bonds.

Complaint ¶ 22. 

Sims, MCM, the Dorsey Law Firm and the Foley Law Firm determined that Crescent

Academy could not purchase the School Building or directly issue the bonds unless another
6

entity which had those abilities took title to the School Building on behalf of Crescent and

served as a conduit issuer of the Bonds. Complaint ¶ 138. The defendants decided to

have the Charles Doctor Drew Academy ("Drew Academy"), another Michigan charter

school, take initial title to the School Building by purchasing it from SAAS and then sell it

to Crescent Academy, and act as conduit issuer of the Bonds. Drew Academy also

purchased its school building from a company owned and managed by Witucki and

financed through the issuance of municipal bonds issued, underwritten and sold with the

participation of defendants Witucki, Gilliam, Foley, Sims, MCM, the Darnell CPA Firm and

the Dorsey law firm. The Drew Academy Bonds were issued on November 20, 2006, about

three weeks prior to the issuance of the Crescent Academy Bonds. Complaint ¶ 151.

Central Michigan University never gave its approval for Drew Academy to take title to the

Crescent Academy School Building or to act as conduit issuer for the Crescent Academy

Bonds. According to the complaint, the defendants all allegedly knew this but still caused

Drew Academy to act as conduit issuer and to take title to the Crescent Academy School

Building. Complaint ¶ 150-151.

The Foley Law Firm issued an opinion to Sims, MCM and the trustee for the Bonds

in connection with the issuance of the Bonds (the "Foley Legal Opinion") that opined that

the issuance of the Bonds and Crescent's financing of the School Building purchase did not

violate Michigan law, did not violate the Charter Contract, and that, in all respects, the

issuance of the Bonds and the School Building purchase were validly authorized. Complaint

¶ 24.

The Complaint alleges that the Official Statements contained false and misleading

statements of material fact, including failing to disclose the various conflicts of interest

between Witucki, Gilliam, Foley and the Foley Firm, Helicon, SAAS and Crescent in
7

connection with the lease and sale of the School Building; violations of Michigan law;

violations of the charter contracts of both Drew Academy and Crescent Academy; and the

lack of prior written approval by Central Michigan University and Bay Mills of the

transactions that would likely result in the revocation of the Crescent Academy Charter

Contract and the consequent inability of Crescent Academy to pay principal and interest

on the Bonds.

The Official Statements were provided by Sims and MCM in connection with the

underwriting of the Bonds and were authored by Sims, MCM and the Dorsey Firm.

Complaint ¶ 204. The Official Statements represent that "All information contained in this

Official Statement and exhibits hereto pertaining to Crescent have been furnished by

Crescent or Helicon for use herein" and "All information in this Official Statement and

exhibits hereto pertaining to Helicon have been furnished by Helicon." Complaint ¶¶

201-202.

The Official Statements also contain the following provision, capitalized, on page ii:

ALL INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM DREW,

CRESCENT, DTC AND OTHER SOURCES WHICH ARE BELIEVED TO BE

ACCURATE AND RELIABLE, BUT NO REPRESENTATION, WARRANTY, OR

GUARANTEE IS MADE AS TO THE ACCURACY OR COMPLETENESS OF ANY

INFORMATION IN THIS OFFICIAL STATEMENT.

After the Bonds were issued, Crescent's chartering entity, Bay Mills, became aware

of the various issues surrounding the Bonds and their illegality under Michigan law and

issued a "Notice of Intent to Revoke" Crescent's charter contract in April 2007. Complaint

¶ 8. Revocation would result in the complete failure of Crescent Academy and leave the

School Building, which was only worth about $3.2 million, as the only security to pay the

Bonds, whose outstanding par value was over $7 million. In response, Crescent Academy

issued a "Plan of Correction" which required, in part, that the Bonds be "unwound" by
8

cancelling the $7,090,00 in Bonds and issuing a separated $3,200,000 bond financing in

April 2008. This resulted in out-of-pocked damages to the Funds of approximately

$3,890,000. Complaint ¶ 9.

The Funds filed this suit against Helicon, the Darnell CPA Firm, the Foley Law Firm,

Sims, MCM, the Dorsey law firm, Witucki, Gilliam and Foley in December 2008. Plaintiffs

allege that the defendants, including the Dorsey Firm, failed to disclose that Witucki and

Gilliam worked for and controlled Crescent, Helicon and SAAS and therefore had conflicts

of interests in the transactions between those entities. Complaint ¶¶ 38-49, 100. Plaintiffs

allege that the Dorsey firm knew or should have known about and disclosed these conflicts

of interest because Dorsey reviewed documents showing Witucki and Gilliam concurrently

worked for Crescent, Helicon and SAAS. Complaint ¶¶ 40, 47, 154, 282, 295-96. Plaintiffs

also allege that Dorsey knew or should have known about other problems with the Bond

transactions, including that using Drew Academy as conduit issuer was a "highly unusual

procedure" and was not "clearly" permitted by Michigan law, that Central Michigan

University could revoke Drew's charter if Drew violated its charter or Michigan law, and that

Central Michigan University had not approved Drew's role as conduit issuer for Crescent

Academy and might not agree with the Dorsey firm's opinions on the legitimacy of the

conduit issue. Complaint ¶¶ 288-291. The complaint alleges that Dorsey knew that Bay

Mills did not approve in writing the Bond issue which "could be viewed by Bay Mills as a

violation of the Crescent Academy's Charter Contract." Complaint ¶¶ 293-94.

Crescent Academy is not a defendant in the main suit by the bondholders, but is a

third party defendant in this action. Defendants Sims and MCM (collectively “the

Underwriters”) and the Darnell CPA Firm have each sued Crescent as a third party

defendant. 
9

In their third party complaint, the Underwriters assert that they were retained by

Crescent to act as underwriters and assist Crescent in obtaining financing for the

acquisition of the school building. Underwriter’s Third Party Complaint, ¶ 4. The

Underwriters assert that, in preparing the Official Statements and proceeding with the

underlying transactions, the Underwriters reasonably relied upon information,

representations of fact and warranties provided by Crescent. Id. ¶ 6. Specifically, and in

order to induce the Underwriters to enter into the Certificate Purchase Agreement and to

make the offering and sale of the Certificates, Crescent represented and warranted that:

1. It has all necessary power and authority to enter into and to perform its duties

related to the transactions;

2. Its execution of the documents and compliance therewith would be duly authorized

by all necessary corporate action and would not constitute a breach of or default

under any law, administrative regulation, decree, resolution, charter, bylaw or

agreement to which it was bound;

3. No other approvals or authorizations were required; 

4. The information contained in the Official Statement relating to Crescent was true

and correct in all material respects and did not contain any untrue or misleading

statement of material fact or omission; and

5. Crescents representations and warranties would remain true and correct on the

date of closing.

The Underwriters’ Third Party Complaint, ¶ 7.

Crescent also agreed to indemnify and hold harmless the Underwriters against any

losses arising out of any information contained in the Official Statement that was untrue or

incorrect in any material respect. Underwriters’ Third Party Complaint ¶ 26. The
10

Underwriters provided Crescent with a copy of plaintiffs’ complaint in the original action and

demanded that Crescent defend, indemnify and hold the Underwriters harmless from

plaintiffs’ claims. Underwriters Third Party Complaint ¶ 28.

The Darnell CPA firm asserts in its third party complaint that Crescent never informed

it that it intended to include the Financial Statements produced by Darnell in an Official

Statement for the purposes of selling securities and that including the Financial Statements

in an Official Statement for the purposes of selling securities was a breach of Crescent’s

contract with Darnell. Darnell also asserts that Crescent’s failure to tell Darnell of its

intended inclusion of the Financial Statements in an Official Statement for the purposes of

selling securities constituted silent fraud, innocent misrepresentation, negligent

misrepresentation or fraud.

The Underwriters’ third party complaint against Crescent asserts six counts. Count

I is a claim for breach of contract; Count II asserts a claim for misrepresentation; Count III

is a Negligence claim; Count IV is a claim for indemnification based upon the

indemnification agreement in the Certificate Purchase Agreement; Count V is a claim for

contribution and Count VI is a claim for unjust enrichment.

The Darnell CPA Firms’ third party complaint against Crescent also asserts six counts:

Count I and Count II are claims for breach of contract; Count III is a claim for

misrepresentation; Count IV is a negligence claim; Count V is a claim for contribution and

Count VI is a claim for unjust enrichment.

Crescent now moves to dismiss both third party complaints.

LEGAL STANDARD

In assessing a motion brought pursuant to Rule 12(b)(6), the Court must presume all

well-pleaded factual allegations in the complaint to be true and draw all reasonable
11

inferences from those allegations in favor of the non-moving party. Bishop v. Lucent

Technologies, Inc., 520 F.3d 516, 519 (6th Cir. 2008). To determine whether a plaintiff has

stated a claim, the Court will examine the complaint and any written instruments that are

attached as exhibits to the pleading. Fed. R. Civ. P. 12(b)(6) & 10(c). Although the

pleading standard is liberal, bare assertions of legal conclusions will not enable a complaint

to survive a motion pursuant to Rule 12(b)(6). Bishop, 520 F.3d at 519.

Although "a complaint need not contain ‘detailed' factual allegations, its ‘[f]actual

allegations must be enough to raise a right to relief above the speculative level on the

assumption that all the allegations in the complaint are true.'" Ass'n of Cleveland Fire

Fighters v. Cleveland, Ohio, 502 F.3d 545, 548 (6th Cir. 2007) (quoting Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555 (2007). "A claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct.

1937, 1949-50 (2009) (citing Twombly, 550 U.S. at 556). Determining whether a complaint

states a plausible claim is context-specific, and requires the reviewing court to draw on its

experience and common sense. Id. at 1950. Where the facts pled do not permit the court

to infer more than the mere possibility of misconduct, the complaint has failed to show that

the pleader is entitled to relief. Id. 

Courts considering motions to dismiss may begin

by identifying allegations that, because they are no more than conclusions, are not

entitled to the assumption of truth. While legal conclusions can provide the

complaint's framework, they must be supported by factual allegations. Where there

are well-pleaded factual allegations, a court should assume their veracity and then

determine whether they plausibly give rise to an entitlement to relief.
12

Iqbal, 129 S.Ct. at 1950. The Court will grant a motion for dismissal pursuant to Rule

12(b)(6) only in cases where there are simply not "enough facts to state a claim to relief

that is plausible on its face." Twombly, 550 U.S. at 570. 

ANALYSIS

I. Dorsey and Whitney LLC's Motion to Dismiss

The first motion before the Court is defendant Dorsey and Whitney LLC's motion to

dismiss all counts of the complaint as to Dorsey. In its motion, Dorsey essentially argues

that its role drafting the Official Statements as underwriters' counsel is insufficient to create

liability to the plaintiffs under relevant federal and state securities statutes or on the

plaintiffs' common law claims of aiding and abetting and negligent misrepresentation. As

discussed below, the Court agrees with Dorsey as to all claims with the exception of the

negligent misrepresentation claim and will dismiss all claims against Dorsey except for

those set forth in the Ninth Claim for Relief.

A. Does the plaintiffs' complaint state a federal securities law claim as to Dorsey?

 The First Claim for Relief asserts a claim for securities fraud under Section 10(b) of

the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants. Dorsey makes

several arguments as to why the First Claim for Relief should be dismissed as to Dorsey,

but the Court will not reach all of those arguments because it finds that the first argument

is dispositive of the claim: the complaint fails to sufficiently plead the element of scienter

as to Dorsey and therefore the federal securities claims must be dismissed as to that

defendant.

Section 10(b) of the Securities Exchange Act makes it unlawful to "use or employ, in

connection with the purchase or sale of any security registered on a national securities

exchange or any security not so registered ... any manipulative or deceptive device or
13

contrivance in contravention of such rules and regulations as the Commission may

prescribe as necessary or appropriate in the public interest or for the protection of

investors." 15 U.S.C. § 78j(b). "Under Rule 10b-5, it is illegal for one '[t]o make any untrue

statement of a material fact or to omit to state a material fact necessary in order to make

the statements made, in light of the circumstances under which they were made, not

misleading . . . .' 17 C.F.R. § 240.10b-5." Ley v. Visteon, 543 F.3d 801, 806 (6th Cir. 2008).

 To state a claim under Section 10(b) or Rule 10b-5, "a plaintiff must allege: (1) a

misrepresentation or omission; (2) of a material fact that the defendant had a duty to

disclose; (3) made with scienter; (4) justifiably relied upon by plaintiffs; and (5) proximately

causing them injury." Ley, 543 F.3d at 806 (quoting City of Monroe Employees Ret. Sys.

v. Bridgestone Corp., 399 F.3d 651, 668 (6th Cir. 2005) (other citations omitted).

A 10b-5 claim is a fraud claim and therefore Federal Rule of Civil Procedure 9(b)

applies, requiring that fraud allegations be stated with particularity. Pleading a 10b-5 claim

is further tightened by the Private Securities Litigation Reform Act of 1995 (PSLRA), 15

U.S.C. § 78u-4(b)(1), which establishes strict pleading requirements for Rule 10b-5 claims.

Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308, 313 (2007). The PSLRA requires that

to plead a claim based on a false or misleading statement, a complaint must:

(1) ... specify each statement alleged to have been misleading, the reason or

reasons why the statement is misleading, and, if an allegation regarding the statement

or omission is made on information and belief, the complaint shall state with particularity

all facts on which that belief is formed [and] 

(2) ... 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)(1), 

The statute "requires plaintiffs to state with particularity both the facts constituting the

alleged violation, and the facts evidencing scienter, i.e., the defendant's intention ‘to

deceive, manipulate, or defraud.'" Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst v.
14

Hochfelder, 425 U.S. 185, 194 and n. 12 (1976)). While the PSLRA does not define what

constitutes scienter, the Sixth Circuit has explained that "knowing and deliberate intent to

manipulate, deceive or defraud, and recklessness may constitute scienter." Ley, 543 F.3d

at 809 (citing In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir. 1999). Facts that

are pled that constitute mere negligence cannot create a claim under rule 10b-5. Ernst &

Ernst, 425 U.S. at 214.

The Supreme Court has given the following guidance to district courts considering a

motion to dismiss a § 10b action for failure to adequately allege scienter. As an initial

matter, the court must accept all factual allegations in the complaint as true. Tellabs, 551

U.S. at 322. Second, the court must consider the complaint in its entirety, as well as other

sources appropriate on a motion to dismiss such as documents incorporated into the

complaint by reference and matters of which a court may take judicial notice. Id. at 323.

The inquiry is "whether all of the facts alleged, taken collectively, give rise to a strong

inference of scienter, not whether any individual allegation, scrutinized in isolation, meets

that standard." Id. (citations omitted). Third, "in determining whether the pleaded facts give

rise to a 'strong' inference of scienter, the court must take into account plausible opposing

inferences." Id. The court must consider plausible, nonculpable explanations for the

defendants' conduct, as well as inferences favoring the plaintiff." Id. at 324. The complaint

will survive "only if a reasonable person would deem the inference of scienter cogent and

at least as compelling as any opposing inference one could draw from the facts alleged."

Id. "[T]he inference of scienter must be more than merely ‘reasonable' or ‘permissible' -

it must be cogent and compelling, thus strong in light of other explanations." Id.
15

In Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (overruled on other

grounds by Tellabs), the Sixth Circuit identified nine non-exhaustive factors that a court

may consider as probative of scienter in securities fraud cases.

(1) insider trading at a suspicious time or in an unusual amount;

(2) divergence between internal reports and external statements on the same subject;

(3) closeness in time of an allegedly fraudulent statement or omission and the later

disclosure of inconsistent information;

(4) evidence of bribery by a top company official;

(5) existence of an ancillary lawsuit charging fraud by a company and the company's

quick settlement of that suit;

(6) disregard of the most current factual information before making statements;

(7) disclosure of accounting information in such a way that its negative implications

could only be understood by someone with a high degree of sophistication;

(8) the personal interest of certain directors in not informing disinterested directors of

an impending sale of stock; and

(9) the self-interested motivation of defendants in the form of saving their salaries or

jobs.

Ley v. Visteon Corp., 543 F.3d 801, 810 (6th Cir. 2008) (citing Helwig, 251 F.3d at 552).

Applying these factors to the allegations in the complaint, the Court finds that the facts

alleged are insufficient to create a cogent and compelling inference that the Dorsey law

firm acted with scienter. First, the allegations that "Dorsey" reviewed the Consultancy

Agreement and the board minutes and "learned" that Witucki was President of Helicon and

Chief Administrative Officer of Crescent Academy are legal conclusions that are not entitled

to a presumption of truth under Twombly and Iqbal. The Dorsey firm is an organization, not

an individual. The complaint does not allege how the firm acquired the documents at issue,

who at the firm reviewed them, when or where the attorneys acquired and reviewed the

documents, or any evidence that members of the Dorsey firm recognized the importance
16

of the facts that plaintiffs allege should have alerted them to the conflicts. There are no

allegations in the complaint that suggest that Dorsey had any interest in the success of the

offering itself aside from the fee that it would earn from the transaction; there are no facts

showing that Dorsey created internal documents that diverged from its external statements;

there is no evidence of bribery. The allegations do not explain why the firm had a motive

to defraud or how exactly it learned of the other parties' alleged misconduct. 

The fact that Dorsey earned fees from its services as underwriters counsel and special

tax counsel does not raise an inference of scienter. In Ley v. Visteon, the Sixth Circuit

rejected an argument that an inference of scienter could be raised from the fact that an

auditor earned significant fees from its relationship with a client and wished to continue

earning fees. The Court of Appeals held that such facts at best set forth a motive for the

auditor to have engaged in fraud and "[b]are allegations of motive are insufficient to

adequately plead scienter," absent facts showing that the auditor's fees were more

significant than its fees from other clients or that revenue from that particular client

represented a significant portion of the auditor's income. Ley, 543 F.3d at 816 (quoting

Fidel v, Farley, 392 F.3d 220, 232-33 (6th Cir. 2004) (overruled on other grounds by

Tellabs)). The facts alleged here support at most an inference of negligence on the part

of the Dorsey firm in failing to find or recognize the importance of the conflicts of interest

alleged, on which it is insufficient to base a claim for securities fraud.

In conclusion, the Court holds that plaintiffs have failed to plead facts giving rise to a

strong inference of scienter as to the Dorsey firm, and therefore the Court will not reach the

additional arguments asserted by the parties. The First Claim for Relief will therefore be

dismissed as to Dorsey. 
 2

The Michigan statute that plaintiffs rely upon to impose civil liability, Mich. Comp. Laws

451.810, was repealed effective October 1, 2009 and replaced by The Uniform Securities

Act, Mich. Comp. Laws 451.2101 et seq. See Mich. Comp. Laws 451.2702. The

provisions of the prior statute apply to this action. See Mich. Comp. Laws 451.2703.

17

B. Does plaintiff's complaint state a claim against Dorsey under state securities laws

in Michigan, Connecticut, Texas, New Jersey, Massachusetts and Wisconsin?

The plaintiffs also assert claims for securities law violations under the laws of

Michigan, Connecticut, Texas, New Jersey, Massachusetts and Wisconsin. See Complaint

¶¶ 409-414 (Michigan Uniform Securities Act); Complaint ¶¶ 415-420 (Connecticut Uniform

Securities Act); Complaint ¶¶ 421-426 (Texas Securities Act); Complaint ¶¶ 427-432 (New

Jersey Uniform Securities Act); Complaint ¶¶ 433-438 (Massachusetts Uniform Securities

Act); Complaint ¶¶ 439-444 (Wisconsin Uniform Securities Act). Dorsey has moved to

dismiss each of these claims as against it, arguing that the state securities statutes require

the defendant to be a "seller" or "agent" of a seller of securities or a party that "urged" the

plaintiff to purchase securities and the Dorsey Firm was none of these. For the reasons

stated below, the Court agrees with Dorsey and will dismiss these state securities law

claims as to Dorsey.

1. Michigan

Dorsey moves to dismiss the Third Claim for Relief as to Dorsey on the grounds that

the Michigan securities statute at issue, Mich. Comp. Laws 451.810(a)(2),2 does not create

a cause of action against Dorsey under the facts alleged in the complaint. The statute

imposes liability on a person who 

Offers or sells a security by means of any untrue statement of material fact or any

omission to state a material fact necessary in order to make the statement made, in

the light of the circumstances under which they are made, not misleading, the buyer

not knowing of the untruth or omission, and who does not sustain the burden of proof

that he or she did not know, and in the exercise of reasonable care could not have

known, of the untruth or omission.
18

Mich. Comp. Laws 451.810(a)(2) (2002). The language closely tracks the language of

Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2), and those few courts in

Michigan that have addressed the issue have applied the analysis of the Supreme Court

in Pinter v. Dahl, 486 U.S. 622 (1988) to the question of which parties to a sale of securities

have potential liability under Section 451.810(a)(2). See Montcalm County Bd. of Comm'rs

v. McDonald & Co. Sec., Inc., 833 F. Supp. 1225, 1230-31 (W.D. Mich. 1993); Mercer v.

Jaffe, Snider, Raitt & Heuer, P.C., 713 F. Supp. 1019, 1028 (W.D. Mich. 1989). This Court

finds the reasoning of these decisions persuasive and will apply their standards here. The

"substantial factor" analysis urged by the plaintiff in this case, as the Supreme Court

recognized in Pinter, is not grounded in the language of the statute.

Under the Pinter analysis, a "non-owner cannot be a seller unless he urges a

prospective purchaser to buy" securities, which requires the defendant to have "actually

contacted a buyer and urged the buyer to purchase" the securities. Montcalm County , 833

F. Supp. at 1232 (quoting Smith v. American Nat'l Bank & Trust Co., 982 F.2d 936, 941 (6th

Cir. 1992). The Court agrees with Dorsey that the facts alleged in the complaint do not

support an inference that Dorsey was either a seller or urged the buyers to purchase the

securities at issue here, and therefore the Court will dismiss the Third Claim for Relief as

to Dorsey.

2. New Jersey, Massachusetts and Wisconsin

The New Jersey, Massachusetts and Wisconsin statutes are substantially the same

as the Michigan statute, and all three have been interpreted by courts to not permit aiding

and abetting liability; the claims against Dorsey based upon the laws of these jurisdictions

will therefore also be dismissed.
19

a. New Jersey

New Jersey applies the Pinter analysis to the question of who is a seller for purposes

of liability under N.J.S.A. 49:3-71. Zendell v. Newport Oil Corp., 544 A.2d 878, 882-83

(N.J. 1988). The New Jersey courts have held that a seller of a security includes both an

owner who passes title or other interest in a security for value and a person who, motivated

in part by his own financial interest or the interest of the securities' owner, successfully

solicits the purchase of a security. Id. The Appellate Division in Zendell addressed

specifically the question of whether a law firm that provided legal assistance in a limited

partnership offering could be held liable under section 49:3-71, and held that a defendant

is not a "seller" if it had no contact with the plaintiff, did not act as a broker or selling agent,

and had no financial investment in the securities. Id. at 883. 

There are no allegations here that Dorsey had any contact with the plaintiffs, acted as

a broker or selling agent, or had any financial investment in the securities. The Court

therefore finds that Dorsey is not a "seller" for purposes of N.J.S.A. 49:3-71, and will

therefore dismiss the Fourth Claim for Relief as to Dorsey.

b. Massachusetts

Massachusetts courts apply the Pinter analysis to claims brought pursuant to MGLA

110A § 410(a)(2) (2008). Those courts have held that for a defendant to be liable under

Section 410(a)(2), the defendant must solicit a purchase "'motivated at least in part by a

desire to serve his own financial interests or those of the securities owner.'" Cohn v. State

Street Bank & Trust Co., 893 N.E.2d 425, 431 (Mass Ct. App. 2008) (quoting Stolzoff v.

Waste Sys. Int'l, Inc., 792 N.E.2d 1031 (Mass Ct. App. 2003) (other citations omitted). As

discussed above, there are no allegations that Dorsey had a financial interest in Crescent
 3

The Wisconsin Statute relied upon by plaintiff, Wis. Stat. § 551.59, like the Michigan

Act, has been repealed and superceded by the Wisconsin Uniform Securities Law effective

January 1, 2009. As with the Michigan Act, the earlier version of the statute is applicable

to this action. Wis. Stat. § 551.703.

20

Academy or the Bond issuance, or that it was a "seller" or an "agent" of the seller, and

therefore the Seventh Claim for Relief will be dismissed as to Dorsey.

c. Wisconsin

Plaintiffs' Eighth Claim for Relief asserts a claim against Dorsey under Section 551.59

of the Wisconsin Uniform Securities Act.3

 Civil claims under the Wisconsin statute are

limited to those against a defendant who "offers or sells a security." Wis. Stat. §

551.59(1)(a). Wisconsin looks to federal law as persuasive authority for interpreting this

statute. Carney v. Mantuano, 554 N.W.2d 854, 857 (Wis. App. 1996). The Wisconsin

Court of Appeals has determined that attorneys who render legal advice or who draft

documents for use in securities transactions are not subject to civil liability under the

Wisconsin statute. Rendler v. Markos, 453 N.W.2d 202, 206 (Wis. App. 1990).

The facts in the complaint as to Dorsey allege no greater involvement in the sale of

the security than the normal advisory activities of attorneys. Cf. Rendler, 453 N.W.2d at

206 (a claim under Section 551.59 "is not intended to cover professionals such as attorneys

engaging in their traditional advisory functions"). The complaint therefore fails to state a

claim against Dorsey under the Wisconsin Uniform Securities Act and the Eighth Claim for

Relief will be dismissed as to Dorsey.

3. Connecticut and Texas

The Connecticut and Texas statutes at issue are somewhat different than those of

Michigan, New Jersey, Massachusetts, and Wisconsin, in that liability under the
21

Connecticut and Texas statutes is extended beyond the primary actors to encompass a

person who "materially assists" an offerer or seller in the sale of securities.

a. Connecticut: Section 36b-29(a)(2) of the Connecticut Uniform Securities Act

The Fourth Claim for Relief asserts a claim against Dorsey under Section 36b-29(a)(2)

of the Connecticut Uniform Securities Act, Conn. Gen. Stat. § 36b-29(a)(2). The

Connecticut statute provides that 

Any person who ... offers or sells or materially assists any person who offers or sells

a security by means of any untrue statement of a material fact or any omission to

state a material fact ... is liable to the person buying the security. 

Conn. Gen. Stat. § 36b-29(a)(2) (emphasis added). The Connecticut statute therefore

imposes aiding and abetting liability on parties who materially assist sellers. In re Colonial

Ltd. P'ship Litig., 854 F. Supp. 64, 99-100 (D. Conn. 1994) (interpreting predecessor statute

Conn. Gen. Stat. § 36-498(a)). 

To establish liability of a primary violator under section 36b-4, 

the buyer must prove: (1) that the primary violator offered or sold a security by means

of either an untrue statement of material fact, or an omission to state a material fact

necessary to make any statements made, in the circumstances of their making, not

misleading; and (2) that the buyer did not know of the untruth or omission.

Connecticut Nat'l Bank v. Giacomi, 699 A.2d 101, 118 (1997). 

To prove "material assistance," a plaintiff must prove than an aider or abettor

"materially assisted the primary violator: (1) in the offer or sale; and (2) in the violation by

which the primary violator accomplished the offer or sale." Id. at 119. The buyer must also

meet a burden of production that the aider and abettor "knew or should have known" of the

untruth or omission, and, if the buyer does so, the burden shifts to the alleged aider and

abettor to "persuad[e] the fact finder that it did not know, and in the exercise of reasonable

care could not have known, of the untruth or omission." Id. The Connecticut courts have

found that intent to defraud or recklessness is not required to state a claim under section
22

36b-4, and that an aiding and abetting claim may be premised upon mere negligence.

Papic v. Burke, 965 A.2d 633, 644 (Conn. App. 2009); Lehn v. Dailey, 825 A.2d 140, 147-

48 (Conn. App. 2003) (interpreting Conn. Gen. Stat. § 36b-5). 

Dorsey relies upon Berti v. Harlan, 2000 WL 1474882 (Conn. Super. Sept. 22, 2000)

for the proposition that a plaintiff must meet a burden of production as to whether the aider

and abettor knew or should have known of the untruth or omission and "[a] simple pleading

of knowledge will not suffice." Berti, 2000 WL 1474882 at *4. The complaint here,

however, alleges specifically that Dorsey had access to the documents that established the

conflict of interest between Crescent, Helicon and the individual defendants, that the firm

had a duty to review the documents and in fact members of the firm did review the

documents but failed to alert the plaintiffs to such conflicts of interest. This is

distinguishable from the allegations in Berti that the wife of a stockbroker who sold

defective stock "knew or should have known" about her husband's false statements. The

Court determines, therefore, that the complaint has adequately pled negligence on the part

of Dorsey in failing to identify the conflicts of interest inherent in the various transactions

between Crescent, Helicon and the individual defendants. 

The question therefore is whether the facts alleged are sufficient to state a claim that

Dorsey "materially assist[ed]" the primary actors in their alleged misrepresentations and

omisssions. Aid is "'material" if it '"has a natural tendency to influence, or was capable of

influencing, the decision of' the purchaser." Connecticut Nat'l Bank, 699 A.2d at 122

(internal quotations omitted). In Connecticut Nat' Bank, the Connecticut Supreme Court

found that employees of a bank had provided material assistance to the fradulent conduct

of a seller of the securities when they had met with the purchases of the securities,

endorsed the seller, and stated to the purchasers that the bank was confident in the
23

investment. See Connecticut Nat'l Bank, 699 A.2d at 122-23 (statements to potential buyer

that investment was "a home run," a "pretty good project and everyone should make some

money," and the bank "fully endorsed" the project held sufficient to constitute material

assistance). 

The facts alleged in the complaint here as to Dorsey, however, fall far below the

standard set forth in Connecticut Nat'l Bank. Dorsey is merely alleged to have been

providing standard legal services to its client, the underwriters, and is not alleged to have

engaged in any activity aimed at influencing the purchasers of the securities. The parties

have cited no cases, and the Court has found none, which construed the drafting of an

Offering Statement to be sufficient to impose liability under Conn. Stat. § 36b-29, and the

Court is not persuaded that such conduct constitutes "material assist[ance]" for purposes

of the statute. The Court therefore finds that the plaintiffs have failed to allege a claim

against Dorsey under Conn. Stat. § 36b-29 and the Fourth Claim for Relief will be

dismissed as to that defendant.

b. Texas Civ. Stat. Ann. § 581-33(A)(2)

The Texas statute, Section 581-33(A)(2), imposes liability on a person who "offers

or sells a security" by means of an untrue statement or an omission of a material fact, or

who "directly or indirectly with intent to deceive or defraud or with reckless disregard for the

truth or the law materially aids a seller, buyer, or issuer of a security . . .." The complaint

does not allege facts that establish liability as an offerer or seller as to Dorsey under the

statute, which requires that the defendant be either "the person who sold the security

directly to the purchaser or who acted as the vendor's agent and solicited the sale." In re

Enron Corp. Sec. Deriv. & Erisa Litig., 540 F. Supp. 2d 759, 767 (S.D. Tex. 2007). A
24

defendant is only an agent of a seller under Texas law if the seller had a right of control

over it. Id. Dorsey thus is not liable as a primary violator under the Texas statute.

Plaintiffs assert that Dorsey can be held liable under section 581.33(A)(2) because the

complaint alleges that Dorsey "materially aid[ed]" the omissions and misrepresentations of

the offerers and sellers of the securities. There is no clear authority in Texas imposing

liability pursuant to section 581.33(A)(2) on an attorney that drafted an Official Statement.

The Court does not need to reach this issue, however, because it is clear that section

581.33(A)(2) is a fraud statute and does impose a requirement on the plaintiff to plead

scienter, which the plaintiffs here have not adequately alleged. See supra, section IA.

In Sterling Trust Co. v. Adderly, 168 S.W.3d 835, 841 (Tex. 2005), the Texas Supreme

Court interpreted the scienter requirement for section 581.33(A)(2) as requiring at a

minimum recklessness, defined as rendering assistance "'in the face of a perceived risk

that its assistance would facilitate untruthful or illegal activity by the primary violator."

Sterling Trust, 168 S.W.3d at 837. This is a standard that is at least as strict as the scienter

required to be alleged for a 10b-5 violation. The Sterling Trust court specifically rejected

a standard that would impose liability for "preparing financial statement...or giving legal

advice." Sterling Trust Co., 168 S.W. 3d at 842 (quoting Ruder, Multiple Defendants in

Securities Law Fraud Cases, 120 U. Pa. L. Rev. 597, 632-33 (1972)). As with the federal

securities fraud claims discussed, supra, in section IA, the facts alleged in the complaint

fail to create an inference that members of the Dorsey firm were either subjectively aware

of the alleged improper activity, or reckless about its existence, and therefore fails to state

a claim for violation of Tex. Civ. Stat. 581-33(A)(2). The Fifth Claim for Relief will thus be

dismissed as to Dorsey.

C. Do plaintiffs' common law aiding and abetting claims fail to state a claim?
25

Dorsey has also moved to dismiss the Tenth Claim for Relief, which alleges that

Dorsey and the other defendants aided and abetted the fraudulent statements and

omissions of Defendants Helicon, Witucki and Gilliam. Dorsey argues that the plaintiffs'

aiding and abetting common law fraud claims fail as to Dorsey because Fed. R. Civ. P. 9(b)

requires fraud claims to be pled with particularity. 

When a plaintiff charges more than one defendant with fraud, Rule 9(b) requires that

the plaintiff specify as to each defendant what was said, in what form, to whom, when

and where, and the respect to which the statement was fraudulent.

Chase Bank of Texas, N.A. v. Grant Thornton, LLP, No. 236237, 2003 WL 21350362 at *4

(Mich. Ct. App. June 10, 2003) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th

Cir. 1992)). To state a claim for aiding and abetting the making of fraudulent statements

and omissions, the plaintiff must show "the alleged abettor [had] the same degree of

scienter as the person committing the actual fraud." Id. (interpreting MCR 2.112(B)(1)).

Dorsey argues that here the plaintiffs do not allege facts showing that Dorsey acted

with any degree of scienter, but only allege that the firm knew or should have known about

the misrepresentations and omissions in the Official Statement and therefore the complaint

fails to state a claim for aiding and abetting fraud against Dorsey. These are the same type

of allegations made by the plaintiffs in Chase Bank of Texas, which the Michigan Court of

Appeals specifically rejected as sufficient to state a claim for aiding and abetting common

law fraud under Michigan law. The Court agrees that allegations here do not sufficiently

allege scienter as to Dorsey and thus do not state a claim for aiding and abetting common

law fraud. The Tenth Claim for Relief will therefore be dismissed as to Dorsey.

D. Negligent Misrepresentation Claims

Finally, Dorsey has moved to dismiss as to Dorsey plaintiffs' claims of negligent

misrepresentation contained in the Ninth Claim for Relief. A claim for negligent
 4

Plaintiffs argue that this case is distinguishable from Consumer Powers because here,

there is not potentially unlimited liability to unlimited potential plaintiffs. They point out that

Dorsey could easily foresee that a limited number of identifiable institutional investors would

purchase the Bonds because its client, Sims, had identified the Funds as purchasers of the

Bonds and had sent them a Preliminary Official Statement prior to the issuance of the

Bonds. Plaintiff also points out that just four entities collectively purchased $6,520,000 in

face value of the Bonds. Plaintiffs argue that there was here a discrete and readily

26

misrepresentation under Michigan law requires proof that the plaintiff "justifiably relied to

his detriment on information prepared without reasonable care by one who owed the relying

party a duty of care." The Mable Cleary Trust v. The Edward-Mariah Muzyl Trust, 262

Mich. App. 485, 502 (2004). "In determining whether the relationship between the parties

is sufficient to establish a duty, the proper inquiry is "whether the defendant is under any

obligation for the benefit of the particular plaintiff . . . . This analysis concerns whether the

relationship of the parties is of a sort that a legal obligation should be imposed on one for

the benefit of another." Alpha Title Agency Inc. v. Peoples State Bank, No. 243508, 2004

WL 576663 at *2 (Mich. Ct. App. March 23, 2004) (quoting Buczkowski v. McKay, 490

N.W.2d 330 (Mich. 1992) (other citations omitted)).

Dorsey argues that plaintiffs' negligent misrepresentation claim against Dorsey fails

because Michigan law does not recognize a claim for negligent misrepresentation based

upon purported misstatements in public offering materials. In support of this proposition,

Dorsey relies upon In re Consumers Power Co. Sec. Litig., 105 F.R.D. 583 (E.D. Mich.

1985) (Joiner, J.). The court in Consumers Power Co. stated that negligent

misrepresentation claims in Michigan are limited to actions involving closely-held

corporations with a limited number of potential investors, because "recognizing a cause of

action for negligent misrepresentation [against a large, public company] would expose

defendants to a virtually unlimited amount of liability to any member of the public who

happened to buy [the company's stock] during a given period." Id. at 597.4

 Accord In re
identifiable number of purchasers in the primary market, and that Dorsey was not

confronted with potentially unlimited liability to an unlimited number of plaintiffs. 

27

F& M Dist., Inc. Sec. Litig., 937 F. Supp. 647, 658 (E.D. Mich. 1996) (Cook, J.); In re

Rospatch Sec. Litig., 760 F. Supp. 1239, 1261 (W.D. Mich. 1991) (Hillman, J.).

The Sixth Circuit has spoken on this issue and the Court is required on that basis to

deny Dorsey's motion to dismiss the negligent misrepresentation claim. In Molecular Tech.

Corp. v. Valentine, 925 F.2d 910 (6th Cir. 1991), the Sixth Circuit determined that an

attorney and law firm could be held liable for negligent misrepresentations made in

marketing circulars for debentures. In Molecular Tech., Snyder, an attorney-defendant,

received an initial offering circular from the company's corporate counsel, reviewed it,

amended portions and returned it to the company. Molecular Tech., 925 F.2d at 916. On

Snyder's appeal of a jury verdict in plaintiff's favor, the Sixth Circuit found that a reasonable

jury could conclude that the attorney knew or should have known that investors such as the

plaintiffs would be shown the amended offering circular, and that Michigan law "imposes

a duty in favor of all those third parties who defendant knows will rely on the information

and to third parties who defendant should reasonably foresee will rely on the information."

Id. at 915 (emphasis original). As relevant here, the Sixth Circuit explicitly rejected jury

instructions drafted by the district court which incorporated the Consumers Power standard

that limited the class of plaintiffs in a negligent misrepresentation claim. In doing so, the

Sixth Circuit found that the seminal Michigan case on the tort of negligent

misrepresentation, Williams v. Polgar, 391 Mich. 6 (1974), "does not required that the

plaintiff have 'a link . . . such as privity, a bond approaching privity or a fiduciary relationship

' with the defendant in order for a duty of reasonable care to exist." Molecular Tech., 925

F.2d at 916. This is precisely the standard applied by the district court in In re Consumer
 5

The Court in In re Rospatch Securities Litig., 760 F. Supp. 1239 (W.D. Mich. 1991)

distinguished Molecular Tech. on the grounds that Molecular Tech. involved a small,

closely-held corporation with only three investors, and declined to extend to a case

involving a large number of potential investors. This Court, however, does not find the

distinction made in In re Rospatch to be persuasive. The Sixth Circuit did not rely on the

number of investors to find the attorney's conduct actionable, and nothing in Polgar limits

a cause of action in negligent misrepresentation to closely held corporations. 

28

Power. See In re Consumer Power, 105 F.R.D. at 597 (applying the reasoning of

Ultramares v. Touche, 255 N.Y. 170 (1931), which permitted liability for negligent

misrepresentation only "where there is a link between plaintiff and defendant to limit the

potential liability and to make its imposition more just. These links include privity, a bond

so close as to approach privity, or a fiduciary duty").5

This Court is obliged to apply the ruling of the Sixth Circuit in Molecular Tech. that

Michigan law does recognize a cause of action by reasonably foreseeable plaintiffs for

negligent misrepresentation against an attorney who is alleged to have negligently

participated in the drafting of offering materials in a debt offering. Dorsey's attempts to

distinguish Molecular Tech. from the present case are unpersuasive. The Court will

therefore deny Dorsey's motion to dismiss plaintiff's claim of negligent misrepresentation

under Michigan law.

II. CRESCENT ACADEMY’S MOTIONS TO DISMISS THIRD PARTY COMPLAINTS

The Underwriters and Darnell have each filed third party complaints against Crescent

Academy, asserting claims based in contract, indemnity, tort and unjust enrichment.

Crescent has filed motions to dismiss both third party complaints. In its motions to dismiss,

Crescent argues that Michigan governmental immunity bars all tort claims for

misrepresentation, negligence and contribution; that the third party claims for breach of

contract and indemnity fail because Crescent lacked the power to indemnify; and that the

claims for unjust enrichment fail because, Crescent argues, there are express contracts
29

covering the subject matter of this claim. For the reasons stated below, the Court agrees

and will grant Crescent's motions and will dismiss both third party complaints.

A. Does Michigan Governmental Immunity Bar the Underwriters and 

Darnell’s Claims for Misrepresentation, Negligence and Contribution?

Crescent moves to dismiss Count II (misrepresentation), Count III (negligence) and

Count IV (contribution) of the Underwriters' Third Party Complaint, and Count III

(misrepresentation), Count IV (negligence) and Count V (contribution) of Darnell's Third

Party Complaint, because, Crescent asserts, all tort-based claims of misrepresentation,

negligence and contribution are barred by the Michigan law. 

The Government Tort Liability Act, Mich. Comp. Laws 691.1407, grants immunity to

governmental agencies for tort liability if the agency “is engaged in the exercise or

discharge of a governmental function.” Mich. Comp. Laws 691.1407(1). Crescent argues

that public schools are included in the definition of immune “government agencies” by virtue

of being agencies and political subdivisions of the State of Michigan, and under Mich.

Comp. Laws 380.501 and 503, which state that a public school academies are government

agencies and that they and their incorporators, employees and others have governmental

immunity as provided in Mich. Comp. Laws 691.1407. Crescent argues that “governmental

function” has been broadly construed to “encompass most of the activities undertaken by

governmental agencies.” Hyde v. Univ. of Michigan Bd. Of Regents, 426 Mich. 223, 243

(1986) (quoting Ross v. Consumer Powers Co., 420 Mich. 567, 621 (1984)) and that the

construction encompasses the alleged negligence and misrepresentation at issue here.

Neither the Underwriters nor Darnell assert that the acts at issue here were not engaged

in by Crescent in the discharge of a government function, so the Court will presume that

they were.
30

1. Underwriter’s argument - Crescent Waived Immunity

The Underwriters argue that Crescent has waived its governmental immunity in the

context of its financing transactions with the Underwriters. The Underwriters argue that

Crescent’s power to waive its governmental immunity is “implied or incident to” its power

under Mich. Comp. Laws 380.504a to enter into “binding legal agreements,” and that

Crescent waived its governmental immunity by implication when entering into the financing

agreements.

Crescent argues in response that governmental immunity is one of the “characteristics

of government” and therefore cannot be waived by a governmental agency’s conduct.

Mack v. City of Detroit, 467 Mich. 186, 199-200 (2002). The Court finds that Mack is

dispositive of this issue. In Mack, the Michigan Supreme Court held that the Charter of the

City of Detroit could not create a private right of action against the City for discrimination

on the basis of sexual orientation because such an action would contravene the

Governmental Tort Liability Act. Mack, 467 Mich. at 194-95. The Michigan Supreme Court

specifically held that government agencies are immune unless the legislature has removed

the “veil” of sovereign immunity and that the governmental agency itself is powerless to do

so. Id. Given the broad holding in Mack that a government agency is powerless to remove

the veil of sovereign immunity, the Court now finds that Crescent did not implicitly waive

its governmental tort immunity by entering into the financing agreements. The

Underwriters’ tort-based claims for misrepresentation, negligence and contribution will be

dismissed. 
31

2. Darnell’s Argument - Misrepresentation, Negligence

and Contribution Claims are Contract Claims, Not Tort Claims

Darnell cites Ross v. Consumers Power Co., 420 Mich. 567, 693 (1984), for the

proposition that Mich. Comp. Laws 380.503(7) grants immunity from tort liability, not for

contract liability. Darnell argues that its misrepresentation, negligence and contribution

claims are based in contract, not tort, and therefore are not barred by governmental

immunity.

The Court disagrees. The misrepresentation, negligence and contribution claims

asserted in Darnell’s third party complaint are claims traditionally construed as tort claims.

See Restatement (Second) Torts § 525 (Fraudulent Misrepresentation); § 552 (Negligent

Misrepresentation); § 23 (Contribution), and Darnell does not provide the Court with any

authority for construing them as contract claims.

The Court will therefore grant Crescent’s motion to dismiss Counts II

(Misrepresentation), III (Negligence) and V (Contribution) of the Underwriters’ Third Party

Complaint and Count III (Misrepresentation), Count IV (Negligence) and Count V

(Contribution) of Darnell’s Third Party Complaint on the grounds of governmental immunity.

B. Did Crescent Lack the Power to Indemnify the Underwriters?

Crescent argues that the Underwriters’ claim for express indemnification should be

dismissed because Crescent lacked the power to enter into the indemnification agreement.

Crescent does not deny that it entered into an explicit agreement with the Underwriters

agreeing to indemnify them for any losses resulting from untrue or incorrect information in

the Official Statement. Crescent argues, however, that the agreement is unenforceable

because, as a public school academy, it lacked the power to enter into such an agreement.

The Court agrees, for the reasons stated below, and will grant Crescent's motion to dismiss

the Underwriters' indemnification claim.
32

Public school academies are governmental agencies. Mich. Comp. Laws 380.501(1).

A governmental agency has no inherent powers, and can only exercise those powers that

have been conferred upon it by the Michigan Constitution and valid statutes. McIlmurray

v. Office of Racing Comm'r, 130 Mich. App. 271, 277 (1983); see also Michigan Mun.

Liability and Property Pool v. Muskegon County Bd. of County Road Commissioners, 235

Mich. App. 183, 190 (1999) (local governmental units "have no inherent powers and

possess only those limited powers which are expressly conferred upon them by the state

constitution and valid state statutes or which are necessarily implied therefrom") (quoting

Hanselman v. Wayne Co. Concealed Weapon Licensing Bd., 419 Mich. 168, 187 (1984)).

A power is "necessarily implied" when it is essential to the exercise of authority that is

expressly granted. Conlin v. Scio Twp., 262 Mich. App. 379, 385 (2004). 

The powers of a public school academy are set forth in Mich. Comp. Laws 380.501

et seq. The statute does not expressly grant public school academies the power to enter

into indemnification agreements. See Mich. Comp. Laws 380.501 et seq. Crescent

therefore may only enter into an indemnification agreement if that power is necessarily

implied from a power that is expressly granted to public school academies. The question

of whether Crescent's power to enter an agreement here may be implied is determined by

using the usual tools of statutory interpretation to ascertain and give effect to the intent and

purpose of the legislature. Michigan Mutual, 235 Mich. App. at 189.

The Underwriters argue that the power to enter into indemnification agreements is

necessarily implied from the powers given to public school academies in section 504a of

the revised school code to "enter into binding legal agreements with persons or entities as

necessary for the . . . financing . . . of the public school academy," Mich. Comp. Laws
33

380.504a(d), and the power to "borrow money and issue bonds in accordance with section

1352(a) . . . ." Mich. Comp. Laws 380.504a(g). 

The only Michigan case that has dealt with the power of a public school to enter into

an indemnification agreement is Huntington Leasing Co. v. Manistee Intermediate School

Dist., No. 250492, 2005 WL 991309 (Mich. App. April 28, 2005). In that case, the Michigan

Court of Appeals found that the power to indemnify was not necessarily implied from the

power to hire employees, independent contractors and other third parties. In Huntington

Leasing, the Manistee Intermediate School District (MISD) entered into a relationship with

a service provider to Local Internet Services (LIS) to proved equipment and services to the

school district, which the school district used to sell internet services at a profit. The

superintendent of the school district agreed to secure financing for the equipment from

Huntington Leasing Co. (Huntington) and also signed an indemnity agreement on behalf

of MISD, under which the school district agreed to indemnify an attorney who wrote an

opinion letter, which (incorrectly) opined that the school district’s conduct in obtaining the

financing was legal. When the school district was sued by Huntington for breach of

contract, the school district sued the attorney, Mr. Kivela, for legal malpractice, and Kivela

countersued MISD for indemnification pursuant to the indemnification agreement.

The trial court granted MISD summary disposition on Kivela’s indemnification claim,

and the Court of Appeals affirmed, on the grounds that the indemnification agreement was

an ultra vires act. The Court of Appeals held that local governmental units such as school

boards do not have inherent powers, but only those “limited powers which are expressly

conferred by the state constitution or state statutes or necessarily implied therefrom.”

Huntington, 2005 WL 991309 at * 2 (quoting Michigan Municipal Liability & Prop. Pool v.

Muskegon Co. Bd. of Co. Rd. Comm’rs, 235 Mich. App. 183, 190 (1999) (other citations
 6

Sec. 601a. (1) An intermediate school district has all of the rights, powers, and duties

expressly stated in this act; may exercise a power implied or incident to any power

expressly stated in this act; and, except as provided by law, may exercise a power

incidental or appropriate to the performance of any function related to the operation of the

intermediate school district in the interests of public elementary and secondary education

in the intermediate school district, including, but not limited to, all of the following:

...

(d) Hiring, contracting for, scheduling, supervising, or terminating employees, independent

contractors, and others to carry out intermediate school district powers. An intermediate

school district may indemnify its employees.

...

Mich. Comp. Laws 380.601a 

34

omitted)). The Court of Appeals held that the statute that gave intermediate school districts

their implied and incidental powers did not explicitly give such school districts the authority

to enter into an indemnity agreement such as the one at issue here, and the power to

indemnify was not necessarily implied from the power to hire employees, independent

contractors and other third parties. Id. at * 3. The court noted in particular that the statute

explicitly gave the school districts the power to indemnify its employees but said nothing

about the power to indemnify others and the court “must assume that this omission was

intentional.” Id.6

The Underwriters point out that Huntington Leasing is an unpublished, per curiam

opinion by the Michigan Court of Appeals, is therefore not binding precedent, and further

argue that it is distinguishable both on its facts and on the law. The Underwriters argue

that the indemnification agreement in Huntington Leasing involved an agreement to

indemnify an attorney for his own malpractice, whereas the indemnification agreement here

was for Crescent to indemnify the Underwriters for Crescent’s own factual representations,

made with the full knowledge and consent of Crescent’s board. Further, the Underwriters

argue, Huntington Leasing involved an intermediate school district rather than a public
 7 In support of this argument, the Underwriters cite Cain v. Lansing Housing Comm’n,

235 Mich. App. 566 (1999). In Cain, the defendant commission had entered into an annual

financing contract with the Federal Department of Housing and Urban Development (HUD)

in which the HUD required the commission to waive its sovereign immunity in order to

secure HUD funds. The court of appeals held that the power to waive its sovereign

immunity was implied by the authorization in Mich. Comp. Laws 125.969, which authorizes

municipal housing authorities to do any and all things necessary to secure the financial aid

or cooperation of the federal government in housing facilities, and one of the “things

necessary” to secure HUD funds was to accept all contract terms that HUD deems

appropriate in order to provide federal financial assistance. Cain, 235 Mich. App. at 569.

The holding in Cain, however, would appear to have been overruled by Mack’s holding that

a governmental entity cannot waive immunity by its own action, because governmental

immunity is a “characteristic of government.”

35

school academy, and therefore involved a different empowering statute, Mich. Comp. Laws

380.601a, rather than the statute at issue here, Mich. Comp. Laws 380.504a, which

identifies the powers granted to public school academies like Crescent.7 

The Court agrees with the Underwriters that Huntington Leasing is not fully on point

because the court there found that the power to indemnify was not implied from the power

to hire independent contractors such as the attorney who prepared the opinion letter in that

case. The Underwriters argue here that the power to indemnify is implied from the powers

conferred by Mich. Comp. Laws 380.504a(d) “[t]o enter into binding legal agreements with

persons or entities as necessary for the . . . financing . . . of the public school academy”

and from 380.504a(g) to “borrow money and issue bonds in accordance with section

1351(a) . . .” 

Recognizing the merits of the Underwriters' arguments, the Court is still not persuaded

that the power to enter into an indemnification agreement with an underwriter is necessarily

implied from the power to enter into financing agreements and the power to borrow money

and issue bonds. Michigan courts are reluctant to find implied powers. See Michigan

Mutual, 235 Mich. App. at 193 ("we will not infer a power that is not essential to the proper
36

exercise of expressly conferred authority"), and the power to indemnify is not inherent in

government entities. Wheeler v. City of Sault Ste. Marie, 164 Mich. 338 (1911). The Court

has come across no Michigan case finding the power to indemnify implied from any power

expressly conferred on a governmental agency. Rather, the few Michigan cases that have

addressed the issue have found that the power to indemnify was not implied from the

express powers given to the local government entities and governmental agencies. See

Michigan Mutual, 235 Mich. App. at 188 (power to enter into indemnification agreement as

a condition to hiring an engineer or consultant not necessarily implied from county road

commission's power to hire such professionals); Huntington Leasing, 2005 WL 991309 at

* 2 (power to enter into indemnification agreement with attorney not necessarily implied

from power to hire employees, independent contractors and other third parties). The Court

also notes that there is authority for the proposition that indemnification agreements that

purport to indemnify underwriters for federal securities violations are void as a matter of

public policy. See, e.g., Heizer Corp. v. Ross, 601 F.2d 330, 334 (7th Cir. 1979); Globus

v. Law Research Serv., Inc., 287 F. Supp. 188, 199 (S.D.N.Y. 1968), rev'd in part on other

grounds, 418 F.2d 1276 (2d Cir. 1969). While not directly applicable to these state law

issues, this undercuts the Underwriters' argument that such indemnifications are

"necessary" to obtaining financing and issuing bonds. 

The Court finds that the power to bind itself to the instant indemnification agreement

is not necessarily implied by or incident to the powers expressly granted to public school

academies in Mich. Comp. Laws 380.504a(d) and (g) to enter into binding legal agreements

as necessary for its financing and to borrow money and issue bonds. Crescent’s motion

to dismiss the Underwriters’ indemnification claim will therefore be granted.

C. Should Darnell’s Breach of Contract Claims be Dismissed?
37

There is no express indemnification agreement between the Darnell CFA Firm and

Crescent. The Darnell CFA Firm’s Third Party Complaint against Crescent contains two

breach of contract claims but no claim pursuant to an express indemnification agreement

between the Darnell CFA Firm and Crescent. Nonetheless, Crescent argues that the

Darnell CFA Firm’s breach of contract claims should be construed as claims for

indemnification and should be dismissed for the same reasons that the Underwriters’

indemnification claim should be dismissed. Crescent argues, alternatively, that the breach

of contract claims should be dismissed because the element of damages is not adequately

alleged in the third party complaint. Finally, Crescent argues that the second breach of

contract claim should be dismissed because the Michigan Accountant Liability Act does not

support a claim in favor of an accountant against its client. 

Count I of the Darnell Firm’s third-party complaint asserts that Crescent, in its contract

with Darnell, represented that it had reviewed, approved and accepted responsibility for the

Financial Statements and related notes and acknowledged and agreed that it was

responsible for the fair presentation of the Financial Statements in conformity with generally

accepted accounting principles (GAAP). Darnell alleges that, under its contract, Crescent

was also responsible for identifying and disclosing all related party transactions, and to the

extent that the financial statements are found to contain material omissions or are false and

misleading on account of Crescent’s failure to disclose the School Building Lease as a

related party actions, then Crescent is contractually liable for any resulting damages.

Count I of the Darnell CFA Firm’s third party complaint also asserts that Crescent Academy

was contractually responsible for identifying and ensuring compliance with all applicable

laws and regulations and that Crescent affirmatively represented in its contract with Darnell

that there were no violations or potential violations.
38

Crescent argues that Darnell’s breach of contract claims should be construed as

indemnification claims because Darnell’s only allegations of damages is that it may suffer

them in the event Darnell is found liable to the plaintiffs in the original action. Crescent

argues that damages are an essential element of any breach of contract action, and

because Darnell currently has no damages, its claim for breach of contract is correctly

construed as a claim for indemnification. Darnell argues in response that the agreements

between it and Crescent were not indemnity agreements, which are defined as a contract

or assurance by which one person engages to secure another against an anticipated loss

or to prevent him from being damaged by the legal consequences of an act or forbearance

on the part of one of the parties or of some third party. Rather, Darnell argues that

Crescent agreed in its contracts with Darnell to perform certain acts that it failed to do and

as a result Darnell was damaged. Darnell argues that the result of accepting Crescent’s

arguments would be to insulate a government entity from the consequence of breach of

contract, and the Michigan Supreme Court has stated that government entities are not

immune from breach of contract suits in Ross v. Consumers Power Co., 420 Mich. 567

(1984).

The Court finds that Darnell's failure to allege that it has sustained damages as a

result of Crescent's alleged breach requires dismissal of Darnell's breach of contract

claims. Damages are an element of a breach of contract claim under Michigan law. Alan

Custom Homes, Inc. v. Krol, 256 Mich. App. 505, 521 (2003). The only allegations

concerning damages contained in Darnell's third party complain are that "[i]n the event that

Darnell & Meyering, P.C. are found liable to Plaintiffs in the original action, Darnell &

Meyering, P.C. will have suffered damages as a direct and proximate cause of Crescent

Academy's breaches of contract." Darnell Third -Party Complaint at ¶¶ 18, 25. While Fed.
39

Civ. P. 14(a) provides a mechanism for defendants to file third party complaints against a

non-party “who is or may be liable to it for all or part of the claim against it,“ the rule does

not alter the substantive requirements of pleading claims under state law. Roe v. Bryant

& Johnson Co., 193 F. Supp. 804, 805 (E.D. Mich. 1961). To the extent that Darnell seeks

to be protected from future losses, that would constitute an indemnity claim, not a breach

of contract claim. See Melbourne v. Lawn Works, 2007 WL 675395 at * 5 (Mich. Ct. App.

March 6, 2007) (indemnity applies irrespective of whether party seeking to be indemnified

suffers actual loss). Darnell's third party complaint fails to allege that Darnell has already

suffered damage as a result of Crescent's alleged breach and therefore Counts I and II fail

to state a claim for relief.

Count II of the Darnell CFA Firm’s third party complaint asserts a second claim of

breach of contract based upon the engagement letter between Darnell and Crescent. In

Count II, Darnell asserts that Crescent breached its contract with Darnell by using the

Financial Statements for purposes inconsistent with that contract and that Crescent violated

the Michigan Accountant Liability Act, Mich. Comp. Laws 600.2962, by failing to disclose

that Crescent intended to include the Financial Statements in an Official Statement for the

purposes of selling securities. Crescent argues that the Michigan Accountant Liability Act

does not support a claim in favor of an accountant against its client. Darnell does not

respond to this argument in its response and it may be deemed admitted, which is an

additional reason for granting Crescent's motion to dismiss Count II of Darnell's Third Party

Complaint.

D. Should the Claims for Unjust Enrichment be Dismissed?

Crescent argues that the claims for unjust enrichment in Count VI of both the

Underwriters’ and Darnell’s third party complaints should be dismissed because there is an
40

express contract covering the same subject matter and because the complaint fails to

allege all the elements of a claim of unjust enrichment under Michigan law. 

Unjust enrichment is an equitable doctrine, under which a person who has been

unjustly enriched at the expense of another is required to make restitution to the other.

Estate of McCallum, 153 Mich. App. 328, 335 (1986). The courts will only imply a contract

if there is no express contract covering the same subject matter. Belle Isle Grill Corp. v.

City of Detroit, 256 Mich. App. 463, 478 (2003). A plaintiff who has an express contract

with a defendant, however, may bring a claim for unjust enrichment against that defendant

if the subject matter of the parties’ express contract is not the same as the subject matter

of the contract to be implied in order to avoid unjust enrichment. Cascade Electric Co. v.

Rice, 70 Mich. App. 420, 426 (1976).

Crescent argues in the first instance that Darnell's and the Underwriters' claims for

unjust enrichment should be dismissed because there is an express contract covering the

same subject matter as the claim for unjust enrichment. The Court disagrees and finds that

the subject matter of both unjust enrichment claims differs from the subject matter of the

breach of contract claim. The subject matter of the breach of contract claims is the 2006

bond transaction in which the Underwrites and Darnell were directly involved, while the

subject matter of the unjust enrichment claims is the subsequent transaction (with which

neither the Underwriters nor Darnell were involved) in which Crescent and the Bondholders

agreed that Crescent would unwind the previous bonds, issue replacement bonds totaling

$3,200,000.00, be relieved of any obligation to repay the Bondholders the $3,800,000

difference between the two bond issues and leave the Bondholder to sue the defendants

for that money. The Underwriters and Darnell argue that it would be unjust to permit

Crescent to retain this benefit if the Underwriters and Darnell have to pay that same
41

amount in damages to the Bondholders as a result of Crescent’s misrepresentations and

omissions.

Crescent raises in its reply a second argument in support of its motion to dismiss the

unjust enrichment claim. In its reply, Crescent argues that the Underwriters’ argument in

their response brief shows that they cannot establish that the defendant received a benefit

from the plaintiff. The elements of a claim of unjust enrichment are (1) the receipt of a

benefit by the defendant from the plaintiff, and (2) an inequity resulting to plaintiff because

of the retention of the benefit by the defendant. Belle Isle Grill Corp., 256 Mich. App. at

478. Crescent argues that the alleged benefit came from the Bondholders allowing

Crescent to retain the money from the initial bond offering rather than from the

Underwriters, and therefore unjust enrichment does not apply. The Underwriters have not

responded to this argument because it appears for the first time in Crescent’s reply brief.

Ordinarily the court may refuse to reach issues raised for the first time in a reply brief on

the grounds that such issues are not properly before the court. United States v. LopezMedina, 461 F.3d 724, 743 n.4 (6th Cir. 2006). The Court, however, held a hearing on the

motion, at which time the Underwriters had an opportunity to respond to the argument, and

there was some briefing following the hearing on other issues. The Court finds that the

record before it is adequate to determine the issue and it would be inefficient to ignore the

argument, because it is clear that neither the Underwriters nor Darnell have a claim for

unjust enrichment under Michigan law. 

The facts alleged in the third party complaints do not state a claim for unjust

enrichment against Crescent, because there is no allegation that Crescent received a

benefit directly from the third party plaintiffs. The benefit that both Darnell and the

Underwriters claim that Crescent received is the $3,890,000 value that Crescent received
42

when the bondholders agreed to unwind the initial Certificates of Participation without

requiring Crescent to return the money Crescent received from those Certificates. That

money did not come from either the Underwriters or Darnell, but rather from the

bondholders, and both the Underwriters and Darnell were paid for their services to

Crescent. The third party complaints do not allege that Crescent obtained a benefit from

the third party plaintiffs and therefore fail to state a claim for unjust enrichment. Crescent's

motion to dismiss Count VI of the Underwriters' third party complaint and Count VI of

Darnell's third party complaint will therefore be granted. 

III. JEREMY GILLIAM’S MOTION TO STAY ACTION BECAUSE OF BANKRUPTCY

On August 3, 2009, defendant Jeremy Gilliam filed a Chapter 7 petition for bankruptcy.

He has also filed a motion in this action to stay all proceedings against him due to the

bankruptcy. The automatic stay of 11 U.S.C. § 362(a)(1) applies to stay all proceedings

against a defendant during the pendency of a bankruptcy, subject to certain exceptions not

relevant here. No party has opposed Gilliam's motion and the Court will therefore grant

Gilliam's motion to stay all proceedings as to him during the pendency of his bankruptcy

.

IV. DEFENDANTS’ MOTION TO STAY ACTION DUE TO GILLIAM’S BANKRUPTCY.

Defendants Witucki and Helicon have moved for an order of this Court staying this

litigation while Jeremy Gilliam’s bankruptcy is pending. Defendants acknowledge that

ordinarily 11 U.S.C. § 362(a)(1) does not stay a matter as to solvent co-defendants in a civil

matter. In Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196 (6th Cir. 1983), the

Sixth Circuit affirmed the district court’s refusal to stay an action against joint tortfeasors

of a Chapter 11 debtor. In so doing, the court held that section 362(a) “fails to intimate,

even tangentially, that the stay could be interpreted as including any defendant other than
43

the debtor . . . It is universally acknowledged that an automatic stay of proceedings

accorded by § 362 may not be invoked by entities such as sureties, guarantor, coobligators or others with a similar legal or factual nexus to the Chapter 11 debtor.” Lynch,

710 F.2d at 1196. Extending a stay to non-bankrupt co-defendants is justified only in

“unusual circumstances.” In re Delta Airlines, 310 F.3d 953, 956 (6th Cir. 2002). “Unusual

circumstances” may include “when the debtor and the non-bankrupt party are closely

related or the stay contributes to the debtor’s reorganization.” Patton v. Bearden, 8 F.3d.

343, 349 (6th Cir. 1993). 

The plaintiffs point out that the Sixth Circuit has stated that extensions of the

automatic stay to non-debtor parties, “although referred to as extensions . . . were in fact

injunctions issued by the bankruptcy court after hearing and the establishment of unusual

need to take this action to protect the administration of the bankruptcy estate.” Patton, 8

F.3d at 348. Plaintiffs argue therefore that the protection the defendants seek should be

issued by the bankruptcy court, not the district court, because the automatic stay seeks to

protect the parties in the bankruptcy action, not to protect the solvent co-defendants in a

civil suit. The Court agrees that it does not have the power to extend the automatic stay

to the non-bankrupt codefendants, and that such power resides with the bankruptcy court.

Defendants Witucki and Helicon argue, however, that the Court should stay this matter

as to them based upon the Court’s inherent power to stay to control its docket. The federal

court’s power to stay its proceedings in the interests of docket control was set out in Landis

v. North American Co., 299 U.S. 248 (1936), in which the Supreme Court held that district

courts had the power to stay, using the exercise of judgment, balancing competing

interests, but that courts should exercise this power carefully and reluctantly.
44

Witucki and Helicon rely primarily on Stoller v. Baldwin-United Corp., 41 B.R. 884

(S.D. Ohio 1984), a case in which a district court in the Southern District of Ohio imposed

a limited stay during a defendant's bankruptcy pursuant to the Court’s inherent power to

control its docket. Stoller was a securities case involving allegations of market fraud

against two Chapter 11 debtors, which was at the time perhaps the largest bankruptcy case

in American history, as well as several other corporations. The district court conducted a

balancing test in which it considered potential damage to the reorganization, the small

benefit to the plaintiffs of going forward while the bankruptcy was continuing, and concluded

that a temporary stay of six months as to the non-debtor defendants was appropriate to (1)

minimize the effect of the adversary litigation on the reorganization proceedings; (2) permit

the Court to determine the motions to dismiss presently before it; (3) defer briefly to the

bankruptcy examiner who was examining the same securities fraud claims at issue in the

adversary proceeding; (4) permit some of the reorganization proceedings to complete in

the stay period; and (5) due to the involvement of the director/defendants in the

reorganization proceedings. Stoller, 41 B.R. at 892-93. 

Plaintiffs argue, correctly, that Stoller is highly distinguishable from the present case.

First, they point out that this case, which involves an individual’s bankruptcy, is very

different from Stoller, which involved perhaps the largest bankruptcy in history at that point.

Second, the co-defendants in Stoller were directors of the bankrupt defendant corporations,

were actively involved in the debtor companies’ reorganization efforts, and whose efforts

in the reorganization would be hampered due to the demands placed upon them in

defending themselves in the related case. Third, the court in Stoller made a finding, based

upon the bankruptcy judge’s finding, that a stay would actually benefit the plaintiffs in Stoller

because the bankruptcy examiner would be investigating the potential fraud committed by
45

the debtor companies and would therefore be developing the factual record himself.

Plaintiffs point out that there is no such benefit to a stay here, because there is nothing that

will occur in Gilliam’s bankruptcy that will aid the plaintiffs’ case. Rather, the plaintiffs

argue, they will be prejudiced by a stay because of the unnecessary delay in waiting to

proceed against three defendants in this litigation, which was commenced in December

2008 but in which discovery has been stayed due to the pending motions to dismiss and

the automatic stay of discovery contained in the PSLRA.

The Court agrees with the plaintiffs that Stoller is distinguishable. Further, the Court

finds that defendants have not met their burden of showing unusual circumstances that

would justify staying this action as to the non-bankrupt defendants. Their arguments as to

prejudice are not persuasive because the parties would be entitled to Gilliam's testimony

and documents, as Gilliam's bankruptcy would not prevent the parties from deposing him,

seeking documents from him, and compelling his testimony at trial under those discovery

rules applicable to non-party witnesses. The fact that Gilliam would be entitled to repeat

discovery when the bankruptcy stay is lifted is insufficient to establish unusual

circumstances that would justify a general stay until his bankruptcy proceedings are

complete. See Lynch, 710 F.2d at 1100 (refusing to invoke inherent power of court to stay

proceedings where duplicative litigation is the congressionally-sanctioned result of

bankruptcy law).

The motion to stay the entire litigation due to Gilliam's bankruptcy is therefore denied.
46

VI. DEFENDANTS’ EMERGENCY MOTION TO DEPOSE MICHAEL WITUCKI 

This motion is moot due to the November 5, 2009 death of Mr. Witucki.

VII. PLAINTIFFS' MOTION TO SUBSTITUTE PARTY FOR DECEASED DEFENDANT

MICHAEL WITUCKI

Finally, plaintiffs have moved to substitute the Estate of Michael Witucki for Michael

Witucki as party defendant under Rule 25 of the Federal Rules of Civil Procedure. The

motion appears to be timely and is unopposed and will therefore be granted.

ORDER

WHEREFORE, for the reasons stated above, defendant Dorsey & Whitney's Motion

to Dismiss (docket number 15) is GRANTED IN PART AND DENIED IN PART. All claims

against Dorsey & Whitney in this action are DISMISSED except for plaintiffs' claim of

negligent misrepresentation contained in the Tenth Claim for Relief.

IT IS FURTHER ORDERED that the motion of third-party defendant Crescent

Academy to dismiss the Underwriters' Third-Party Complaint (docket number 58) is

GRANTED. The Underwriters’ Third Party Complaint is DISMISSED.

IT IS FURTHER ORDERED that the motion of third-party defendant Crescent

Academy to dismiss Defendant Darnell & Meyering, P.C.'s Third-Party Complaint (docket

number 59) is GRANTED. Darnell & Meyering P.C.'s Third-Party Complaint is

DISMISSED.

IT IS FURTHER ORDERED that Defendant, Jeremy Gilliam's Amended Motion to

Stay Proceedings Due to Bankruptcy (docket number 74) is GRANTED and this action is

STAYED as to defendant Jeremy Gilliam only.

IT IS FURTHER ORDERED that Defendants, Michael Witucki and Helicon Associates,

Inc.'s Motion to Stay Proceedings Due to Defendant Jeremy Gilliam's Bankruptcy (docket

number 75) is DENIED
47

IT IS FURTHER ORDERED that Defendants, Michael Witucki, Jeremy Gilliam, and

Helicon Associates, Inc.'s Emergency Motion to Allow the Deposition of Michael Witucki

(docket number 76) is DENIED AS MOOT; and

IT IS FURTHER ORDERED that plaintiffs' motion to substitute the Estate of Michael

Witucki as party defendant is GRANTED and the Estate of Michael Witucki is substituted

as defendant in place of Michael Witucki.

SO ORDERED.

s/Stephen J. Murphy, III 

STEPHEN J. MURPHY, III

United States District Judge

Dated: March 15, 2010

I hereby certify that a copy of the foregoing document was served upon the parties and/or

counsel of record on March 15, 2010, by electronic and/or ordinary mail.

Alissa Greer 

Case Manager