Connie E. Lee Living Trust et al v. Lebenthal et al

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
Connie E. Lee Living Trust, et. al., 	)
)
Plaintiffs, 	) 	ORDER DENYING DEFENDANT
) 	JAMES LEBENTHAL’S MOTION
vs. 	) 	TO DISMISS
)
James B. Lebenthal, and DOES 	) 	Case No. 1: 20-cv-130
1 to 10, inclusive, 	)
)
Defendants. 	)
______________________________________________________________________________
Before the Court is Defendant James Lebenthal’s motion to dismiss for failure to state a
claim filed on August 14, 2020. See Doc No. 11. The Connie E. Lee Living Trust, Connie Lee,
and Donald Lee filed a response in opposition to the motion on September 4, 2020. See Doc. No.
20. The Defendant filed a reply brief on September 18, 2020. See Doc. No. 25. For the reasons
set forth below, the motion to dismiss for failure to state a claim is denied.
I. 	BACKGROUND
Plaintiff Connie E. Lee Living Trust (“Lee Trust”) is a trust organized under the laws of
the State of North Dakota and established on November 21, 2011. The Trust acts by and through
its co-trustee plaintiffs Connie E. Lee and Donald Lee (“the Lees”) 1 . 	The Lees are a married
couple, both residing in North Dakota, and at the relevant time, were over the age of sixty-five
years old.
Defendant James B. Lebenthal is a resident of the State of New York and was Chief
Investment Officer and Chief Executive Officer of Lebenthal Asset Management (“LAM”).
Defendant Alexandra Lebenthal is a resident of the State of New York and was President and Chief
1 Collectively, the Trust, Connie Lee, and Donald Lee will be referred to as “Plaintiffs.”
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Executive Officer of Lebenthal Holdings, LLC (“Holdings”). 	James and Alexandra Lebenthal
were both officers and shareholders of Holdings; Holdings is the parent company of LAM. 	On
December 15, 2020, Alexandra Lebenthal was dismissed from this action for lack of personal
jurisdiction. See Doc. No. 31.
In the complaint, the Plaintiffs allege James and Alexandra Lebenthal breached their
fiduciary duties owed to them as prospective clients. 	See Doc. No. 1, p. 9. The Plaintiffs state
that because James and Alexandra Lebenthal were investment advisor representatives licensed
with the United States Securities and Exchange Commission (“SEC”), and were officers and
shareholders of Holdings and LAM, the Defendants owed them a fiduciary duty under common
law and federal securities statutes, which required them to give faithful, honest service, and act in
the Plaintiffs’ best interests. 	The Plaintiffs allege the Defendants received nonpublic financial
information to develop a comprehensive written investment allocation strategy for the Plaintiffs.
The Plaintiffs state James Lebenthal utilized all the information he obtained from the
Plaintiffs to build a financial profile for the Plaintiffs and build an asset allocation model. 	The
Plaintiffs contend James Lebenthal was specifically informed in December 2014, that the Plaintiffs
were selling a real estate asset with significant capital gains and the Plaintiffs had planned to rely
on Internal Revenue Code Section 1031 to defer capital gain taxes in order to purchase another
real estate asset. 	This like-kind exchange is a common mechanism to exchange appreciated
property for new property without incurring capital gain taxes. The Section 1031 exchange (“1031
exchange”) would have allowed the Plaintiffs to defer all the capital gains tax on the sale and to
invest all the proceeds into one more replacement real estate asset(s). 	The Plaintiffs had an
estimated closing date on the real estate sale in early January 2015, and were reviewing possible
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replacement assets in December 2014; the Plaintiffs state these facts were disclosed to James
Lebenthal in December 2014.
At a January 6, 2015, meeting the Plaintiffs expressed to Lebenthal the potential of
deferring the taxes and any investment recommendations would need to generate returns greater
than the tax deferral and real estate asset benefits. 	It is alleged the estimated taxes would have
been approximately $500,000. At the same meeting, James Lebenthal gave the Plaintiffs a printed
power point presentation. The power point displayed LAM as the asset manager and displayed
James Lebenthal as the CEO. 	The Plaintiffs contend the power point was a marketing piece
emphasizing the fiduciary duty the Defendants owed the Plaintiffs.
The Plaintiffs allege the actions of the Defendants fell below the industry standard of care.
The Plaintiffs argue the Defendants breached this duty by ignoring the tax deferral benefits and
inducing the Plaintiffs to abandon their planned 1031 exchange. The Plaintiffs further allege the
Defendants violated N.D.C.C. §§ 10-04-02 and 10-04-17 by acting in concert, as joint-venturers,
co-conspirators, partners, alter egos, aiders, and co-participants, and as agents of each other within
the course of their employment and duties with Holdings and LAM, respectively. The Plaintiffs
argue the Defendants are liable for each other’s behavior under employment; agency; securities
law, industry custom, and practice.
The Plaintiffs filed this action in the Northeast Central Judicial District of North Dakota
against James B. Lebenthal, Alexandra Lebenthal, and DOES 1 to 10, alleging the Defendants
breached their fiduciary duty, engaged in constructive fraud, acted negligently, and violated the
North Dakota Securities Act. In response to the complaint, the Defendants removed the action to
this Court and James Lebenthal filed the instant motion to dismiss for failure to state a claim on
August 14, 2020. See Doc. No. 11. The Plaintiffs filed a response in opposition to the motion on
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September 4, 2020, requesting the Court deny the motion and allow the Plaintiffs leave to file an
amended complaint. 	See Doc. No. 20. 	On September 18, 2020, James Lebenthal filed a reply
brief. 	See Doc. No. 25. 	On August 14, 2020, James Lebenthal filed a motion requesting oral
argument regarding his motion to dismiss. See Doc. No. 14. On October 19, 2017, the Plaintiffs
filed a Financial Industry Regulatory Authority (“FINRA”) arbitration action against Lebenthal &
Co. LLC, Lebenthal Wealth Advisors, LLC, Alexandra Lebenthal, and James Lebenthal. 	The
record is scarce pertaining to the nature of the arbitration. 	However, the record reveals the
arbitration took place on February 20, 2020, - February 29, 2020, in Bismarck, North Dakota.
Pursuant to FINRA practices, FINRA sets the venue where the Plaintiffs reside.
II. 	STANDARD OF REVIEW
Rule 8(a)(2) of the Federal Rules of Civil Procedure requires a pleading to contain a “short
and plain statement of the claim showing that the pleader is entitled to relief.” 	Fed. R. Civ. P.
8(a)(2). Rule 12(b)(6) of the Federal Rules of Civil Procedure mandates the dismissal of a claim
if there has been a failure to state a claim upon which relief can be granted. In order to survive a
motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009). 	A plaintiff must show that success on the merits is more than a “sheer
possibility.” Id. A complaint is sufficient if its “factual content . . . allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. The court must
accept all factual allegations as true, except for legal conclusions or “formulaic recitation of the
elements of a cause of action.” Id. at 681. Detailed factual allegations are not necessary under the
Rule 8 pleading standard, rather a plaintiff must set forth grounds of its entitlement to relief which
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“requires more than labels and conclusions, and a formulaic recitation of the elements of a cause
of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint does
not “suffice if it tenders a naked assertion devoid of further factual enhancement.” Ashcroft, 556
U.S. at 678. The determination of whether a complaint states a claim upon which relief can be
granted is “a context-specific task that requires the reviewing court to draw on its judicial
experience and common sense.” Id. at 679. Dismissal will not be granted unless it appears beyond
doubt the plaintiff can prove no set of facts entitling plaintiff to relief. 	Ulrich v. Pop Cnty, 715
F.3d 1054, 1058 (8th Cir. 2013).
III. 	LEGAL DISCUSSION
James Lebenthal contends the Plaintiffs have failed to meet the pleading standards required
under United States Supreme Court and Eighth Circuit precedent, failed to state claims upon which
relief can be granted, and this action should be dismissed pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure. The Plaintiffs assert they sufficiently alleged James Lebenthal breached
his fiduciary duty, engaged in constructive fraud, acted negligently, and violated the North Dakota
Securities Act.
The pleading standard under Rule 12(b)(6) contemplates that plaintiffs will often be unable
to prove definitely the elements of the claim before discovery, particularly in cases where the
necessary information is within the control of the defendants. 	Ash v. Anderson Merchandisers,
LLC, 799 F.3d 957, 961 (8th Cir. 2015). The pleading standard only requires the plaintiff allege
sufficient facts to state a plausible claim. Id. The Court finds the Plaintiffs have pled sufficient
facts in their complaint to support their claims against James Lebenthal. The motion to dismiss
the Plaintiffs’ claims against James Lebenthal is denied.
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The Plaintiffs requested leave to file an amended complaint in their response brief. 	See
Doc. Nos. 20 and 22. 	The Defendant opposed the motion in his reply brief. 	See Doc. No. 25.
Federal Rule of Civil Procedure 15(a) states:
(a) Amendments Before Trial.
(1) Amending as a Matter of Course. A party may amend its pleading once as
a matter of course within:
(A) 21 days after serving it, or
(B) if the pleading is one to which a responsive pleading is required, 21 days
after service of a responsive pleading or 21 days after service of a motion
under Rule 12(b), (e), or (f), whichever is earlier.
(2) Other Amendments. In all other cases, a party may amend its pleading only
with the opposing party’s written consent or the court’s leave. The court should
freely give leave when justice so requires.
Fed. R. Civ. P. 15(a). Rule 15(a)(2) provides that the Court may permit a party to amend
the pleadings when justice so requires. It is generally left to the court’s discretion whether to grant
leave to file an amended pleading. Gamma-10 Plastics, Inc. v. Am. President Lines, Ltd., 32 F.3d
1244, 1255 (8th Cir. 1994); Williams v. Little Rock Mun. Water Works, 21 F.3d 218, 224 (8th
Cir. 1994); Brown v. Wallace, 957 F.2d 564, 566 (8th Cir. 1992). “Unless there is a good reason
for denial, ‘such as undue delay, bad faith, or dilatory motive, repeated failure to cure deficiencies
by amendments previously allowed, undue prejudice to the non-moving party, or futility of the
amendment, leave to amend should be granted.’” Becker v. Univ. of Neb. At Omaha, 191 F.3d
904, 907-08 (8th Cir. 1999) (original citation omitted). Fed. R. Civ. P. 15(a). This is the Plaintiffs’
first request to amend the complaint. 	At this stage, the Court concludes it is in the interests of
justice to grant the Plaintiffs leave to file an amended complaint to assert additional claims
supported by the pleadings and record.
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IV. 	CONCLUSION
The Court has carefully considered the entire record, the parties’ briefs, and the relevant
case law. For the reasons set forth above, the Court DENIES James Lebenthal’s motion to dismiss
for failure to state a claim (Doc. No. 11), finds MOOT the Defendant’s motion to requesting oral
arguments (Doc. No. 14), and GRANTS the Plaintiffs leave to file an amended complaint (Doc.
No. 22). The Plaintiffs shall file an amended complaint within thirty (30) days from the date of
this order.
IT IS SO ORDERED.
Dated this 4th day of January, 2021.
/s/ Daniel L. Hovland
Daniel L. Hovland, District Judge
United States District Court
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