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Individual, LLC Seek Dismissal of Conservation Easement Suit

AUG. 7, 2020

Andrew Lechter et al. v. Aprio LLC et al.

DATED AUG. 7, 2020
DOCUMENT ATTRIBUTES

Andrew Lechter et al. v. Aprio LLC et al.

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

ANDREW LECHTER, et. al.
v
APRIO, LLP f/k/a Habif Arogeti
And Wynne, LLP, et. al.

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

CIVIL ACTION:

MOTION TO DISMISS

Pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), defendants Nancy Zak and Forever Forests, LLC hereby move to dismiss all counts in plaintiff's Complaint for permanent injunction that relate to her. Ms. Zak and Forever Forests, LLC jointly and severally respectfully request dismissal for the reasons set forth in the contemporaneously filed Memorandum of Law in Support of Motion to Dismiss.1

Given the complexity of the legal issues raised in the memorandum of law in support of this motion, we respectfully request oral argument.

This the 7th day of August, 2020.

Respectfully submitted,

S. Fenn Little, Jr.
GA Bar Number: 454360


DEFENDANTS ZAK AND FOREVER FOREST, LLC'S
MEMORANDUM OF LAW
IN SUPPORT OF MOTION TO DISMISS

Defendant Nancy Zak respectfully submits this Memorandum of Law in Support of her Motion to Dismiss the Complaint, pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6) and Rule 9(b).

Ms. Zak and Forever Forests, LLC seek dismissal of all counts in the Complaint that relate to them. Plaintiff has failed to plead its claims with the requisite particularity required to show that the claim to relief is plausible on its face. Specifically, Plaintiff failed to: 1) plead its Georgia and Federal RICO claims with the requisite particularity including but not limited to pleading the predicate illegal acts with specificity; 2) plead its fraud claims with specific actions or omissions that constitute fraud or mistake; 3) plead its negligence claims with specificity as particular negligent acts by Ms. Zak and/or Forever Forests and the damages proximately caused by the alleged negligence;1 4) plead with specificity actions including but not limited to predicate acts in the RICO allegations regarding the time and place of the actions to support the claims having occurred within the Statute of Limitations or support the tolling of same; 5) plead with specificity what documents oral representations or omissions were made invalidating the notices investor obligations set forth in the PPM, Operating Agreement and Subscription Agreement including but not limited to the invalidation of the sophisticated investor affidavit, the merger clause of the Operating agreements and the Arbitration Clauses of the Operating Agreements;2 6) plead precisely the basis for fiduciary duty allegedly owed by Ms. Zak and/or Forever Forests to the plaintiffs nor breach thereof.

Courts recognize that financial investment involves attendant risks. The investor who seeks to blame his investment loss on fraud or misrepresentation must himself exercise due diligence to learn the nature of his investment and the associated risks. As the Eleventh Circuit and other courts have recognized, the party claiming fraud and/or misrepresentation must exercise due diligence to discover the alleged fraud and cannot close his eyes and simply wait for facts supporting such a claim to come to his attention.3

But for the specific investment vehicle, Curtis Inv. Co., LLC v Bayerische Hypo-und Verinsbank, AG, 341 Fed. Appx 487 (11th Cir, 2009) is indistinguishable precedent for the instant case. Curtis rejected claims by an investor in a Custom Adjustable Rat Debt Structure (CARDS) where in the IRS rejected a $29 million dollar tax shelter. Curtis filed a complaint alleging Federal RICO, Georgia RICO and Common Law Fraud (including wire and mail fraud). Curtis's RICO claims are dismissed as: • barred by the doctrine of merger • barred by the statute of limitations and not tolled • precluded by failure to allege predicate acts of common law, mail, and wire fraud with sufficient specificity • Curtis's Georgia RICO claims are dismissed as: • barred by the doctrine of merger • precluded by failure to allege predicate acts of common law, mail, and wire fraud with sufficient specificity • Curtis's common law fraud claims are dismissed as: • barred by the doctrine of merger • barred by the statute of limitations and not tolled • precluded by failure to allege fraud with sufficient specificity. (Doc. 113. opinion dismissing complaint, 1:06-CV-2752-WSD). The similarities between the Curtis case and the instant case are no less than astonishing. In affirming Judge Duffey's order the Eleventh Circuit adopted the Fifth circuit's conclusion by quoting the Fifth Circuit in Martinez Tapia v. Chase Manhattan Bank N,A, 149 F.3d 404, 409 (5th Cir 1998):

Courts recognize that financial investment involves attendant risks. The investor who seeks to blame his investment loss on fraud or misrepresentation must himself exercise due diligence to learn the nature of his investment and the associated risks. As several courts have recognized, the party claiming fraud and/or misrepresentation must exercise due diligence t discover the alleged fraud and cannot close his eyes and simply wait for facts supporting such a claim to come to his attention.

Curtis goes on to state:

Thus, the Fifth circuit has conclude that the statue of limitations begins to run when the plaintiff receives and signs a contract that contains terms "so contrary to the [plaintiff "s] alleged understanding of the deal that upon review of the document, [the plaintiff] would have been put on notice of the [defendant's] alleged fraud. Id. @

Background

The Complaint rests on a theory that is inaccurate by painting a picture of conservation easements as a scheme rather than a valuable tool created by Congress to promote the public policy of protecting America's irreplaceable land resources by permanently limiting the future development of property. As this Court has stated, “[a] conservation easement is a permanent agreement between a property owner and a land trust, non-profit, or government entity through which the owner gives up some of her rights of ownership in order to advance conservation purposes.” Greenberger v. IRS, 283 F. Supp. 3d 1354, 1358 (N.D. Ga. 2017) (emphasis added).

Plaintiffs appear to seek damages from defendants Zak and Forever Forests for their role in putting together a real estate project and opening it up to investors in hopes of raising the capital necessary to effectuate the project. The fact that the shareholders elected the conservation option for the LLC appears to be the nexus and basis the Plaintiff's complaint. The complaint has the appearance of attempting to profit from the IRS strict scrutiny of Conservation Easement Donations supported by the fact that each and every allegation alleged to form a basis for the complaint against Ms. Zak and Forever Forests, LLC either occurred after the IRS began attacking all conservation easement donations or prior to the execution of the Operating agreement acknowledging the PPM and its risk factor disclosures.

The act creating qualified conservation contributions (26 U.S.C. § 170 (h) became law on December 17, 1980 and has been amended three times. This law was enacted due to an increasing awareness of the diminishing quantity and quality of natural areas. (see attached map, Exh. B) which depicts the loss of natural area in just one southeastern state, GA, from 1940 until present other southeastern states show similar loss. Congress took action to mitigate this loss by creating incentives to conserve land through tax deductions.

Congress understood that the Government could not mitigate the loss of natural area alone due to budget and management constraints. Both the United States Government through the Forrest Service and the Department of Natural resources in the several Southeastern States targeted by the IRS refused donations of land from timber companies and others for the express reason “we do not have the resources to manage the donation”. Thus, Sec. 170(h) effectuated a public/private partnership where (A) a qualified real property interest — the natural area; (B) could be donated to a qualified organization — the management; (C) exclusively for conservation purpose — protecting the natural area. Significant tax benefits were the incentive for the owners of the qualified real property interest to participate.

Section 170(h) permits a tax deduction for the charitable contribution of a conservation easement. IRC § 170(h). Specifically, a qualifying conservation easement “allows the property owner to claim a federal tax deduction for up to 50 percent of the owner's adjusted gross income (and 100 percent if she is a rancher or farmer).” Greenberger, 283 F. Supp. 3d at 1358. Congress enacted section 170(h) in 1980, and amended the conservation easement statutory scheme as recently as 2015. See Pub. L. No. 114-113, Title I, § 111(a), 129 Stat. 3046 (2015) (making permanent the 50 percent income limitation (up from 30 percent)).

The federal income tax deduction for the charitable contribution of conservation easements has “enjoyed decades of bipartisan support.” BC Ranch II, L.P. v. Comm'r, 867 F.3d 547, 551 (5th Cir. 2017). Section 170(h) was adopted:

(1) at the behest of conservation activists, not property-owning, potential-donor taxpayers (2) by an overwhelming majority of Congress (3) in the hope of adding untold thousands of acres of primarily rural property for various conservation purposes — acreage that would never become available for conservation if land-owning potential donors were limited to the traditional method of conveyance, i.e., transferring the full fee simple title of such properties.

BC Ranch II, 867 F.3d at 553. Congress thus made and codified a public policy decision in favor of conserving lands and preserving natural resources, and did so despite the loss of significant tax revenue.

Through the use of conservation easements, individuals, families, and partnerships have permanently conserved more than 27 million acres of land in the United States. See National Conservation Easement Database, at https://www.conservationeasement.us/. Conserved lands serve to protect identifiable conservation purposes, such as the preservation of existing natural habitats, open spaces, and scenic views. See IRC § 170(h)(4)(A). Conserved lands also “provide economic benefits to local communities in the form of natural goods and services, opportunities for tourism and outdoor recreation, support for working farms and forests, increased quality of life that attracts business and employees, avoided costs on expensive infrastructure, and places to improve health through exercise.” See The Trust for Public Land, Aug. 2016 at 3, at https://www.tpl.org/sites/default/files/VA%20ROI_report.pdf

Study after study demonstrate the benefits of natural and green space. These benefits include substantial public benefit to air quality — trees and other vegetation can single handedly reduce carbon levels to those of 100 years ago; cleaner water due to decreased erosion and controlled runoff; mental health benefits and reduced crime result from exposure to more greenspace; and exposure to greenspace has a positive effect on healing and reduces medical issues. Increasing green space and natural areas through the use of Sec. 170(h) provides these benefits at a fraction of the cost of Government purchase and management (see footnote 5 for one typical example study).

Only a handful of individuals in the United States have the combination of “qualified real property interest,” “conservation purpose,” and income to utilize the deduction incentives to participate in Sec. 170(h) contributions. Thus, groups of individuals joined together to facilitate the donations and receive the incentives legislated by Congress. To participate in one of these partnerships, potential partners would receive a placement memorandum which sets out the terms, risks and proceeds/uses plus other important information regarding the project. The prospective participant also must submit an affidavit that they are a sophisticated investor and can absorb the risk even to the extent of a total loss. Should the prospective participant be accepted, the participant signs an operating agreement confirming that they fully understand the risks and operations of the partnership and that the agreement is the entirety of the agreement between the company and the new partner.

Sometime around 2013 or 2014, the IRS began scrutinizing such partnerships and subsequently started to challenge them on highly technical grounds. The IRS established a “campaign” and appointed a Campaign Executive Champion as well as regional executive champions to effectually halt any further partnership conservation easement deductions through attacks on appraisers, the partnership documents, the deeds of donation, conservation purpose among other technicalities known as “foot-faults”4 This approach departed from prior IRS practice, which previously focused on the valuation of the conservation easement, but accepted the validity of the transactions and partnerships.5 By contrast, the IRS and its Campaign Executive Champion lead task force have not applied any scrutiny, treated the transactions as listed transactions, or applied the tactics set forth in IR 2019-1826 when the contributions of conservation easements are donated by individuals who are high net-worth donors. Only partnerships composed of individuals who join together to purchase control of the conservation important property in partnership and then make a charitable contribution of the conservation easement are subjected to such highly technical challenges and additional scrutiny. Such attacks reached their crescendo in 2019 and continue to date with commitments to audit every partnership donation, zero conservation value determinations in every audit and refusal by the IRS to set forth guidelines for proper execution of donations under §170(h).

Appraisers were the first to see this additional scrutiny of partnership conservation easements. The years 2013 and 2014 saw the beginning of numerous audits of appraisals. An appraisal by a qualified appraiser is necessary to complete IRS Form 8283 and take advantage of the tax deduction incentive created by Congress under Sec. 170(h). An appraiser who grossly overstates or understates the value of a deduction can be penalized 125% of his/her fee. This penalty is unilaterally imposed by the IRS and can only be refunded upon resolution of the donation valuation usually 3-9 years after the unilateral penalty is imposed. In January of this year, the IRS notified appraisers that this penalty would now be at the sole discretion of individual agents and in May of 2020 most appraisers who had any experience at all in conservation easements was notified that they must extend the statute of limitations for §6695A penalties through the end of 2021 or face immediate penalties — due process or not. Agents made it clear that the penalties would be imposed regardless of an extension by orders from above. This was completely new and unforeseeable.7

The appraiser scrutiny was followed by an increase in audits to the point that the IRS campaign executive champion ordered audit of every partnership conservation easement donation made in tax year 2016 and 2017 (it is presumed that order will include 2018, 2019 and 2020 donations). The IRS effectuated a pattern and practice of rendering an initial determination of zero ($0.00) value for the conservation donation thereby forcing the partnerships into appeals and/or tax court.8

Prior to the current era of “no partnership conservation easement donation is acceptable,” the IRS through seminars, opinion letters and audit procedures gave some direction to taxpayers, including but not limited to the proper way to reserve excluded sites within the easement and the proper language for the “proceeds clause.” To ensure that their projects were done correctly, expert consultants began recommending second appraisals, extensive market studies and increased defense budgets in projects to ensure that the donation values were solid.

These additional measures are a big part of the reason for the high percentage of valuations sustained after audit until very recently. As late as 2015, valuation audits were not providing the reduction in donation values that the IRS wanted to achieve. During the time period when the projects that form the alleged basis for this complaint were constructed, addressing the reasonable risks for audit and tax court through the rulings, suggestions and opinions of the IRS were the best practice. These rulings, suggestions and opinions were set forth in PPM's. Experts constructing a partnership that might become a conservation easement donation upon vote of the parties could have had no idea that after the IRS put on seminars and published directions regarding these partnership projects would do an about face, create a “campaign,” issue IR-2017-10, cart blanc deny all conservation deductions at the IRS level, and institute a policy of penalizing every appraiser who prepared an appraisal attached for one of these transactions. Neither could the accountants, attorney's and advisors retained by the investors foresee the policy of blanket denial of valuations based on fluid technicalities which had no relation to the Congressional intent of incentivizing the protection of natural areas from development. Contrary to plaintiffs' assertions, legal conservation easement deductions are still being done and upheld by the courts. The same week that the cases mentioned in the complaint came out, the Eleventh Circuit reversed a Tax Court decision denying a deduction for a conservation easement transaction and reiterated public policy associated with these donations in Champions Retreat. Champions Retreat Golf Founders, LLC v. Comm'r (11th Cir. 2020)(No. 18-14817 decided May 13, 2020)

The Complaint largely casts the statutory tax benefits from conservation easements in pejorative terms as a scheme contrary to the bipartisan sentiments of Congress. This casting is consistent with the broader war waged by the IRS against conservation easements, in which it has challenged the entirety of such charitable deductions based on minor violations of highly technical provisions of the kind set forth above, and has asserted narrow interpretations of the statute and regulations. See, e.g., Top 6 IRS Attacks on Conserv. Easements, G. Rhodes, Law360 (July 5, 2018).

The instant cites no statute, regulation or case that says the use of conservation partnerships in connection with the charitable contribution of a conservation easement is improper. Furthermore, it does not disclose that in multiple published decisions, courts have recognized deductions claimed by conservation partnerships as a matter of law. Most importantly it does not allege any fact which is outside the scope of best practices commonly incorporated or different from the practices which have been recognized as a matter of law to effectuate a partnership that can make the choice as to whether to develop, hold or conserve the development assets controlled by the partnership. Rather, submits nothing other than subjective, self-serving conjecture in lieu of illegal, fraudulent or even negligent actions. inconsistent with the established legal standards.

A. Counts I, II, III, and IV (RICO) Should be Dismissed Pursuant to Rules 12(b)(6) and 9(b) for the Failure to Allege Precise Misconduct.

Under Rule 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). To survive a motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Thus, a plaintiff must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Rather, the plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Id.

Separately, Rule 9(b) provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The standard of review under Rule 9(b) is even more stringent than under Rule 12(b)(6). Accordingly, to satisfy the particularity requirement, the complaint must set forth, “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) [the] same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.” Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (citations omitted) (emphasis added). In other words, much like a good newspaper column, a complaint must allege “the who, what, when, where, and how” of the alleged fraudulent conduct. Id. Absent pleading of each of those crucial elements with specificity and detail, a complaint that alleges fraudulent conduct must be dismissed. The facts and circumstances regarding are even less specific than those set out in Curtis. In the instant case the 37 alleged acts are nothing more than administrative housekeeping.

Specifically, the RICO counts require dismissal because the statute upon which it is premised, section 18 U.S.C. § 1961 et seq. and O.C.G.A. §16-14-1 et. seq. require activity that rises to the level of a felony. Under Georgia Law which is referenced in the complaint a felony is punishable by imprisonment by a year or more. Under the federal criminal statutes purported to form the basis of the illegal activity under in this complaint, 18 U.S.C. § 1343 and §1346 obtain money or property by means of false or fraudulent pretenses. No facts are alleged in the complaint that form the basis of any false or fraudulent pretenses. In fact, the complaint goes through a long list of notices of the status and issues of the projects as they arose. Furthermore, each and every investor, including plaintiffs, executed an affidavit that he/she was a sophisticated investor, was aware of the substantial risks of the investment and was either able to evaluate the investment proposal themselves or had sought competent expert advice before investing. Not one fraudulent statement is set forth in the complaint as a predicate act, only conclusory allegations. Neither is a single statement that the alleged wrongdoings amounted to a felony. The United States Sentencing Guidelines for the criminal statutes can be as low as a level 6 which results in zero to 6 months of imprisonment. A term far less than set forth in the RICO statute predicate acts rising to the level of a pattern of racketeering activity or collection of unlawful debt.

Rule 9(b)'s particularity rule is no mere triviality and “serves an important purpose in fraud actions.” U.S. ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1310 (11th Cir. 2002). The particularity requirement “alert[s] defendants to the precise misconduct with which they are charged.” Id. (emphasis added). It also “ensures that the defendant has sufficient information to formulate a defense by putting it on notice of the conduct complained of. . . .” Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1277 (11th Cir. 2006) (quotations omitted).

The Complaint bases its RICO allegations of malfeasance on a series of unsupported legal conclusions that are inconsistent with the elements of RICO. Plaintiff uses those unsupported legal conclusions to say defendants made false statements because the alleged, unspecified statements are supposedly inconsistent with plaintiff's incorrect statement of the law and status of Conservation Easement incentive deductions. Plaintiffs allege that the sole purpose of the conservation partnerships was a scheme for selling tax deduction shams without economic or environmental substance. Congress when they enacted 26 U.S.C. § 170(h) would have begged to differ. As an initial matter, unsupported legal conclusions masquerading as factual allegations are insufficient for purposes of Rules 12(b)(6) or 9(b). See Iqbal, 556 U.S. at 678-79) (courts “are not bound to accept as true a legal conclusion couched as a factual allegation.”); Suarez v. Sch. Bd., 2014 WL 1946536, at *1 (M.D. Fla. 2014) (a “court will not presume the truth of a complaint's legal conclusions.”). Even if unsupported legal conclusions could be considered, plaintiff's assertions about conservation partnerships are inconsistent with the actual law and therefore cannot supply the basis necessary to say defendants acted in a manner consistent with a pattern and practice of racketeering activity. Absent identifying with particularity, the specific elements of RICO pertaining to Nancy Zak and Forever Forests, LLC and the time and place of each such predicate act the RICO counts must be dismissed.

B. Counts VI Through X and XII should be dismissed because they fail to satisfy Rule 9(b)'s particularity requirement

Ms. Zak and Forever Forests, LLC seek dismissal of counts all counts in the Complaint that relate to them. Specifically, and as set forth below, she and Forever Forests, LLC seek to dismiss Counts VI through X and XII (Negligence/fraud),9 counts because the complaint fails to state a claim with for which relief can be granted on these counts. Similarly, to the RICO counts these counts allege some aspect of fraudulent activity. Yet, these counts fail to state with sufficient particularity allegations supporting those claims.

1. The Particularity Requirement of Rule 9 b) applies to claims that sound in Fraud

The particularity requirement of Rule 9(b) applies to all claims that sound in fraud, regardless of whether those claims are grounded in state or federal law. See, Llado-Carreno v. Guidant Corp., 2011 WL 705403, at *5 (S.D. Fla. 2011) (emphasis added); see, e.g., Thompson v. Relation Serve Media, Inc., 610 F.3d 628, 633 (11th Cir. 2010) (“Because Rule 10b–5 sounds in fraud, the plaintiff must plead the elements of its violation with particularity.”) (emphasis added). Therefore, courts have held that Rule 9(b) applies in cases like this one and to counts like Counts VI through X and XII, where the plaintiff has alleged violations of section 6700.10 See, e.g., U.S. v. Hempfling, 2005 WL 2334713, at *4-5 (E.D. Cal. 2005) (holding section 6700 sounds in fraud); cf. Carlson v. U.S., 754 F.3d 1223, 1226-27 (11th Cir. 2014) (holding section 6701 requires the government to prove fraud,” and that it must do so “by clear and convincing evidence.”). In the instant case, Plaintiffs conclusory statements allege that all defendants acted in consort to commit fraud analogous to § 6700 et seq. However, the Plaintiff's complaint fails to specifically allege acts in support the elements of fraud that they will have to prove at trial.

2. The Particularity Requirement of Rule 9 b) applies to damages

Most obviously, the complaint fails to allege actual or even nominal damages. The reason for this failure to allege is likely due to the fact that as of the date of this filing, no damages have vested. Foundational law regarding Tort requires a negligent action that proximately causes injury to another. Each of the underlying projects mentioned as the nexus of the complaint are still in some stage of due process without a final resolution. Despite conclusory allegations in these counts, Plaintiffs fail to set forth “what loss the defendants proximately caused Plaintiffs. The Plaintiffs purchased and interest in an investment LLC. that purchased a controlling interest in a land holding LLC. The landholding LLC paid substantial fees to professionals to assist in providing information and advice as to whether the landholding LLC should develop the land, hold the land for investment or conserve the land from development in perpetuity. The members including Plaintiffs voted to conserve the land. The investors were allowed to take a charitable deduction for Conserving the land under 26 U.S.C. 170(h). Some investors likely took advantage of the deduction under § 170 (h).11 The charitable donation by the landholding LLC in each case was audited by the IRS and the defense of the audit was funded through the capital raised in the initial offering as well as any income from the landholding LLC or sale of the remaining assets of the landholding LLC. Plaintiffs have put forth nothing other than speculative conclusory statements as to damages that may or may not vest.

3. The Particularity Requirement of Rule 9 b) applies to applicable law

In addition to Champions Retreat Golf Founders, LLC v. Comm'r; 18-14817, May 20, 2020 (11th Cir. 2020), numerous other partnership donations of Conservation Easements resulted in tax deduction incentives for the investors. Such success undercuts the Plaintiff's conclusory subjective statement that all “syndicated easements” are tax fraud schemes. But the Complaint cites no statute, regulation, or case stating that partnerships may not be used in connection with the charitable contribution of conservation easements.12 Instead, without citation to any authority, the Complaint simply declares ipse dixit that conservation partnerships “exist solely as a conduit for selling tax deductions,” that conservation partnerships “are shams,” and that conservation partnerships “lack economic substance.” Compl. ¶ 5. As discussed above, courts may ignore such unsupported legal conclusions couched as factual allegations. See, e.g., Iqbal, 556 U.S. at 678-79. The Complaint ignores that in multiple published decisions, courts have recognized deductions claimed by conservation partnerships. In Kiva Dunes Conservation, LLC, for example, a partnership placed a conservation easement on a golf course in 2002, and shortly thereafter donated the easement to a land trust. See Kiva Dunes Conserv., LLC v. Comm'r, T.C.M. Memo. 2009-145. The IRS challenged the deduction on multiple grounds and imposed accuracy-related penalties. Id. Following a trial on the merits, the U.S. Tax Court found that the fair market value of the easement was $28.6 million, effectively affirming 94% of the original valuation.

Bosque Canyon Ranch II involved two partnerships, BCR I and BCR II, which acquired thousands of acres of land in 2003 and 2005 respectively. BC Ranch II v. Comm'r, 867 F.3d 547, 549 (5th Cir. 2017). The IRS disallowed all of the charitable deductions for the conservation easement contributions with respect to both partnerships and imposed gross valuation misstatement penalties. Following trial, the Tax Court denied the deductions because it concluded that (1) certain reserved rights caused the conservation easement donations to fail the perpetuity requirement, (2) the required “baseline documentation” failed to satisfy the regulatory requirements, and (3) the transactions with the partners involved disguised sales. Id. at 551, 555. The Tax Court also imposed gross valuation overstatement penalties. The Fifth Circuit vacated all four holdings, held that the conservation easements satisfied both the perpetuity and baseline documentation requirements, and remanded the case to the Tax Court for further fact finding consistent with its rulings. Id. at 556-60.

Similarly, Pine Mountain Preserve LLLP involved a partnership that acquired land and placed three conservation easements on much of that land within a two-year period. See Pine Mountain Pres. LLLP v. Comm'r, 151 T.C. No. 14 (2018). The IRS broadly challenged all three conservation easements. The Tax Court denied two of the conservation easement donations on technical grounds, demonstrating the immense complexity of the conservation easement requirements. Id. at 16, 18. The partnership then prevailed on the merits with respect to the third conservation easement, overcoming myriad attacks leveled by the IRS. Id. at 20. A separate Tax Court opinion in Pine Mountain upheld the valuation of the third conservation easement, which allowed the numerous partners to claim their distributive shares of the full charitable deduction for that conservation easement. Pine Mountain, T.C. Memo 2018-214.

Kiva Dunes, BC Ranch II, Pine Mountain and Champion's Retreat all refute the notion that taxpayers can never use partnerships with multiple investors in connection with conservation easement transactions. They also necessarily undermine the allegations of scienter. The Complaint points to no contrary published cases (nor any statutes or regulations) concerning the validity of conservation partnerships nor allege with any specific particularity a basis for ignoring the warnings, risks, responsibilities and commitments of the PPM, Operating Agreements and Subscription Agreements. In sum, this complaint is premised on the flawed assertion that Ms. Zak should have known that certain, unspecified statements or administrative emails she allegedly made were incorrect and misleading, notwithstanding that such statements are consistent with the applicable judicial authorities.

The closest thing to “authority” the Complaint cites for its claim that partnerships may not be used in connection with conservation easements is IRS Notice 2017-10. But “IRS notices do not have the force and effect of law.” U.S. v. Busch, 2017 WL 6987666, at *4 (N.D. Tex. 2017). Rather, IRS Notices are merely announcements or positions of the IRS, are not authoritative, and are not binding on courts. Id.; Guilzon v. Comm'r, 985 F.2d 819, 822 (5th Cir. 1993).13 Notably this notice which Plaintiff's purport as evidence the Ms. Zak and Forever Forests, LLC knew or should have known their actions in construction of Conservation Easements occurred almost to the day seven (7) years after the closing of Maple Landing and Oakhill Woods the two projects for which these Defendants had any role.

4. The Particularity Requirement of Rule 9 b) applies to role, time and place.

Plaintiff alleges that defendants collectively engaged in some 77 acts of fraud and misrepresentation in furtherance of the three alleged schemes. Compl. ¶ 329. Of those 77 allegations of alleged fraud, not once is Ms. Zak or Forever Forests mentioned specifically. Paragraph 234 enumerates some 37 actions. However, the complaint fails to specify how administrative activities such as sending copies of K-1's and notice of audit are fraudulent. In fact, the complaint goes so far as to misstate that the PPM's, Operating Agreements and Subscription agreements which transparently set for the risks, purpose and terms of the projects are “promotional materials”. The Complaint fails, however, to distinguish between which of the 77 allegations Ms. Zak and/or Forever Forests engaged in and how the emails and other notices in paragraph 234 are fraudulent. But, for the administrative action of sending certain notices from the IRS, the most recent activity by Ms. Zak or Forever Forests occurred in 2010. Curtis is directly on point with regard to the issues of "time barred" and particularity:

Finding a claim that a plaintiff was fraudulently induce through the promise of a legitimate tax shelter to purchase commercial property was time-barred because the document marketing the investment "contained a host of prior warnings making it plain that [the plaintiff] was purchasing, to put it mildly, a highly speculative investment. Curtis at 495 citing Brumbaugh v Princeton Partners, 985 f 2d 157, 162 (4th Cir. 1993).

The Complaint claims that false statements were made.14 But it lumps all defendants together, so one cannot tell who the alleged speaker was at any point in time, or to whom the statements were provided, or to which transaction they purportedly related. That alone fails to satisfy Rule 9(b). See Brooks, 116 F.3d at 1381.15

Just as importantly, the alleged false statements are untethered in time or place. For instance, the Complaint alleges at ¶ 7 that all of the defendants “knew, or had reason to know that: (1) the syndicates they organized, promoted, sold, and/or opined on had no business purpose other than tax avoidance; (2) the customers did not join together for the purpose of carrying on a business and sharing in the profits or losses or both of that business; and, (3) the syndicates lack economic substance and are shams.” To which of the 77 allegations and/or 37 actions? The Complaint does not say, even though plaintiff presumably could not have brought this action unless it possessed the information, and one is required by the Federal Rules to provide that level of specificity.

Even if one could tell which transactions the statements concern, one still has no idea when the vast majority of the statements occurred. Were most of them made a decade ago? Again, the Complaint does not say. Consequently, no specificity is provided as to the speaker, the time or the place of the statements or with respect to which transactions such statements relate, making it impossible to formulate a defense to them, in violation of Rule 9(b).

Furthermore, by lumping everything together and offering no details, the Complaint fails to identify the distinctions between the statements made in connection with the role that Ms. Zak and Forever Forests, LLC allegedly played and the other defendants. Which “iterations,” or “permutations” involved Ms. Zak, and/or Forever Forests, how were they different, to whom were they directed, what was the nature of the action and when did they occur? The Complaint does not say, yet such information is crucial to an elementary understanding of plaintiff's allegations of fraud. See Mizzaro, 544 F.3d at 1237. The purpose of the particularity requirement is to “alert defendants to the precise misconduct with which they are charged,” and ensure that they have “sufficient information to formulate a defense by putting [them] on notice of the conduct complained of.” U.S. ex rel. Clausen, 290 F.3d at 1310; Wagner, 464 F.3d at 1277. That fundamental information is missing, and a complaint which merely says that some statements were made at some point in connection with some transactions that some defendants should have known were inaccurate does not meet the requirements of Rule 9(b). Plaintiff fails to aver that precise and sufficient information that would enable Ms. Zak to “formulate a defense.” Wagner, 464 F.3d at 1277. Similarly, the district court dismissed the government's counterclaim in a tax case because the government failed “to allege the time, place, and amount of the conveyance or the injury” suffered by the government. Eastwood v. U.S., 2007 WL 2815560, at *4 (E.D. Tenn. 2007) (ruling that “[w]ithout any specific information regarding the [allegedly fraudulent] transfer, Mr. and Ms. Eastwood cannot adequately defend against Defendants' allegations.”).

In sum, where multiple defendants are accused of fraudulent conduct, the plaintiff must identify the role of each defendant in the alleged scheme. See Brooks v. Blue Cross & Blue Shield, 116 F.3d 1364, 1381 (11th Cir. 1997) (“in a case involving multiple defendants . . . the complaint should inform each defendant of the nature of his alleged participation in the fraud.”) (citations omitted).

5. The Particularity Requirement of Rule 9 b) applies to breach of contractual rights

The complaint specifically fails to allege with particularity a basis for invalidating the contractual commitments expressed in the PPMs, Operating Agreements and Subscription Agreements. Ms. Zak and Forever Forests, LLC participated in the construction of a real estate project that could provide investors the opportunity to develop the land held by the landholding LLC, hold onto the land to benefit from appreciation gains or make a decision to protect the land from development through a donation of the development rights to a charitable organization. While the complaint makes conclusory allegations that Ms. Zak and Forever Forests, LLC were some type of advisor/fiduciary, the complaint alleges not facts in support that they were anything other than developers who sold an interest in a real estate project. The PPM, operating agreements and the subscription agreements set out the details of what the purchasers of an interest in the real estate project would acquire and the risks involved. Upon the closing of the deal, their job was completed and they participated in no material way after that point.

In Curtis Inv. Co., LLC v Bayerische Hypo-und Verinsbank, AG, 341 Fed. Appx 487 (2009) the Eleventh Circuit Court of Appeals upheld the dismissal of a complaint of a RICO, common law fraud and breach of duty of good faith claim regarding the sheltering of a $29 million dollar capital gain through a structure known as a Custom Adjustable Rate Debt Structure (“CARDS”). Like the instant situation, Curtis centered on a rather complex set of agreements and structuring documents to facilitate the transaction. Like the instant complaint, Curtis averred that it was fraudulently induced by defendants to enter into the transaction. Similar to the instant situations, the IRS disallowed the nearly $29 million short term capital loss Curtis had claimed for the transaction. Quoting the Fifth Circuit in Martinez Tapia v. Chase Manhattan Bank N,A, 149 F.3d 404, 409 (5th Cir 1998)

Courts recognize that financial investment involves attendant risks. The investor who seeks to blame his investment loss on fraud or misrepresentation must himself exercise due diligence to learn the nature of his investment and the associated risks. As several courts have recognized, the party claiming fraud and/or misrepresentation must exercise due diligence t discover the alleged fraud and cannot close his eyes and simply wait for facts supporting such a claim to come to his attention.

The Curtis Court goes on to discuss the effects of the merger clause in the relevant agreement as baring the fraud and RICO claims. And, that the plaintiff's claim he was fraudulently induce through the promise of a legitimate tax shelter to purchase commercial property was time barred, because the document marketing the investment “contained a host of prior-warnings making it plain the the plaintiff was purchasing, to put it mildly, a highly speculative investment. Id at 494. The PPMs provided to Defendants and acknowledged in their respective subscription affidavits as having been received and considered go to great length highlighting risks of participation in the investment, disclaiming that they were giving any advice and strongly recommending that the potential investor seek expert guidance and advice on his/her own behalf before making an investment.16

In addition, to upholding the dismissal of the mail, wire fraud and RICO claims in Curtis on the basis that the predicate acts were not plead with the particularity required by Rule 9(b), the Curtis court held that a merger or entire agreement clause bars purchasers from asserting reliance on the alleged misrepresentation not contained within the contract. Curtis, p. 491 (and 494 regarding common law fraud claim).

6. The Complaint is time barred by the Statute of Limitations

The project documents would also have put the Plaintiff on notice of alleged fraud thereby triggering the statute of limitations to begin running when the Plaintiff receives and signs a contract that contains a merger or entire agreement clause. See Curtis at 493 citing McGill v Goff, 17 F.3d 729, 733 (5th Cir. 1994).17

The contract documents are never even mentioned in the instant complaint. In light of the holding in Curtis, the claims alleged in the complaint fail due to the presence of the project construction documents. Ms. Zak and Forever Forests, LLC participated in putting together a real estate project that could provide investors the opportunity to develop the land held by the landholding LLC, hold onto the land to benefit from appreciation gains or make a decision to protect the land from development through a donation of the development rights to a charitable organization. While the complaint makes conclusory allegations that Ms. Zak and Forever Forests, LLC were some type of advisor, the complaint ignores the project construction documents including but not limited to the notice of risk, the entirety of the agreement language and the arbitration clause. Each and all of which result in the failure of the instant complaint to state a claim on which relief can be granted under Curtis.

WHEREFORE, Ms. Zak and Forever Forests, LLC respectfully request that the Court dismiss all counts in the Complaint that relate to Ms. Zak and Forever Forests, LLC for the reasons stated herein.

This the 7th day of August, 2020.

Respectfully submitted,

S. Fenn Little, Jr.
GA Bar Number: 454360
Attorney for Nancy Zak
And Forever Forests, LLC

FOOTNOTES

1In the interest of judicial economy and given relationship between Ms. Zak and Forever Forests, LLC this motion and the Memorandum are consolidated for motion and argument purposes.

1All three of the cases mentioned in the complaint have not reached final ruling, nor have any bills for back taxes, penalties or interest been issued against the partnership or the plaintiff investors.

2The PPM, Operating agreement and subscription documents for Maple Landing are attached hereto as exhibit A. The other agreements for the other projects contain substantially the same language and have not been attached due to redundancy.

3Curtis Inv. Co., LLC v Bayerische Hypo-und Verinsbank, AG, 341 Fed. Appx 487 (11th Cir, 2009). Holding that RICO, Common Law Fraud claims were barred by merger clause and failure to particularize and the granting of motion to dismiss the complaint affirmed.

4“foot-faults” seek to utilize alleged technical issues with the construction of the partnership and the donation documents to support a zero charitable contribution value. Prior to the creation of the “campaign” most differences were resolved through the normal tax protocol of audit and internal revenue appeals.

5It should be noted that approximately 87 percent of the valuation audits were resolved in favor of the taxpayer.(see attached empirical study exhibit C)

6IR-2019-182 is the policy IR which sets out the scrutiny including criminal investigation that the partnerships will undergo. Exhibit D.

7For example a defendant in this case had completed over 100 Conservation Easement appraisals and only once up until the May letter had gross overvaluation been alleged. That penalty was later refunded to said defendant because the allegation of gross overvaluation did not stand.

8It appears that the IRS has now begun the process of issuing a FPAA order of zero value before without giving the partnership full due process at the audit level (See, Hancock County Land Acquisitions v IRS, 1:20-CV-3096-AT, NDGA).

9The first count XI (malpractice) does not include Nancy Zak or Forever Forests, LLC as defendant or in any of its allegations. Count XI, on page 173 is a general prayer for relief and is covered with this memo in general.

10Section 6700 of the tax code sets forth the standards that the IRS usually relies on regarding attacks on Conservation Easement Partnerships. Thus, it is particularly pertinent for citation in this matter.

11The only persons who would know whether the deduction was taken would be the person filing the tax return, neither partnership or any of its managers, partners etc. would be privy to the individual's tax returns.

12In fact, Champions retreat specifically finds no fault with partnership donations.

13See also Treas. Policy Statement (Mar. 5, 2019) (Sub regulatory guidance, such as Notices, are “not intended to affect taxpayer rights or obligations independent from underlying statutes or regulations. Unlike statutes and regulations, sub regulatory guidance does not have the force and effect of law.”); Treas. Reg. § 1.6011-4 (even if a transaction is reportable due to an IRS Notice, it “shall not affect the legal determination of whether the taxpayer's treatment of the transaction is proper.”).

14The words fraud or false statement occur some 200 times in the complaint.

15The complaint also cites Forever Forest's website and undated statements, but fails to identify what is false about any of the statements, or the “manner in which they misled” the reader. Mizzaro, 544 F.3d at 1237.

16The project documents for Maple Landing are attached hereto as exhibit A. The documents for the other two projects are substantially similar with regard to the disclaimers, risk notifications, merger and arbitration clauses.

17Entirety/merger language is found in paragraph 15 of the redemption agreement.

END FOOTNOTES

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