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Liebing v. Sand

United States District Court, N.D. Iowa, Cedar Rapids Division

March 26, 2018

ROGER LIEBING, et al., Plaintiffs,
v.
ROBERT SAND, et al., Defendants.

          REPORT AND RECOMMENDATION

          C.J. Williams Chief United States Magistrate Judge

         TABLE OF CONTENTS

         I. Background ...................................................................................... 3

         II. The Southern District of Iowa Complaint .................................................. 5

         III. The SDIA Order Dismissing Plaintiffs' Complaint ....................................... 9

         IV. The Instant Complaint ....................................................................... 10

         V. Applicable Law Regarding Defendants' Motion to Dismiss ........................... 18

         VI. Defendants' Motion to Dismiss ............................................................ 19

         A. Standing ...................................................................................... 20

         B. Defendant Prosecutors are Entitled to Immunity From Suit ........................ 21

         C. Defendant Judges are Entitled to Absolute Immunity ................................ 23

         D. Defendant Investigators are Entitled to Absolute Immunity ........................ 26

         E. Other Grounds for Dismissal Against Non-Prison Defendants ..................... 27

         1. Whether Litigation is Barred by the Rooker-Feldman Doctrine ................. 28

         2. Whether Litigation is Barred by Heck v. Humphrey ............................... 30

         3. Whether Litigation is Barred by Issue Preclusion .................................. 31

         4. Whether Plaintiffs Have Exhausted Iowa Tort Claims Act ....................... 32

         5. Whether Claims are Barred by the Statute of Limitations ........................ 32

         F. Claims Against the Prison Defendants .................................................. 33

         1. Failure to Exhaust Administrative Remedies ....................................... 35

         2. Claims Against Defendants in Their Official Capacities .......................... 37

         3. Lack of Substantive Allegations Against Individual Defendants ................. 37

         4. Failing to Allege the Discipline has Been Reversed or Invalidated ............. 38

         5. Failure to Allege Segregation Was Atypical or Significant ....................... 39

         6. Failure to Allege Prejudice Regarding Access to Courts ......................... 41

         G. Defendants' Claim of Qualified Immunity ............................................. 42

         VII. Defendants' Motion For Sanctions ....................................................... 43

         VIII. Conclusion .................................................................................. 45

         This matter is before me for a Report and Recommendation regarding defendants' motions to dismiss the complaint (Doc. 36) and for sanctions (Doc. 38). Plaintiffs allege a violation of constitutional rights and bring this suit pursuant to Title 42, United States Code, Section 1983.[1] For the reasons that follow, I respectfully recommend the Court dismiss the complaint with prejudice. Regarding defendants' motion for sanctions, I respectfully recommend the Court deny defendants' motion for sanctions for failure to comply with Rule 11, but consider imposing sanctions sua sponte because another federal court dismissed many of the same baseless claims.

         I. BACKGROUND

         In June 2011, the State of Iowa charged plaintiff Alan Lucas with the crimes of first degree theft, ongoing criminal conduct, and money laundering. Iowa v. Lucas, FECR094149 (Linn Cnty., Iowa Dist. Ct.). In October 2013, Lucas was convicted in state court of ongoing criminal conduct and first degree theft (the state having dismissed the money laundering charge before trial). The court sentenced defendant to thirty years in prison. Assets seized by the state pursuant to the criminal case, including a BMW vehicle, were liquidated and the proceeds were provided to the clerk of court for distribution to the victims. The Iowa Court of Appeals affirmed Lucas' conviction. See Iowa v. Lucas, 870 N.W.2d 687 (Table), 2015 WL 4468844 (Iowa App. 2015).

         In its opinion, the Iowa Court of Appeals summarized the underlying facts as follows:

Covenant Investment Fund, L.P. (Covenant) is a hedge fund formed by Noah Auwles, who acted as the fund's general partner. It consists of a “family” of different funds, or what is known as “a fund of a fund.” Some of Covenant's investors complained to the Iowa Insurance Commissioner about its poor performance. Auwles was advised to break up Covenant by liquidating each of the funds and distributing the money to the fund's investors. Auwles liquidated one of Covenant's funds, UltraSharp, before selling Covenant.
In May 2010, Auwles sold Covenant to Lucas for the purchase price of one dollar and Lucas's agreement to assume liability for a $62, 540 debt Covenant owed. Lucas owned a number of shell corporations that were not profitable when he took control of Covenant. One of those corporations, Phalanx Technology Holdings, was about to be evicted from its office because it owed $9000 for rent.
When Lucas took control of Covenant, it had $189, 000 in the bank from the UltraSharp liquidation. Although that money was supposed to be distributed to investors, Lucas had spent between $157, 000 and $167, 000 of that $189, 000 within a year of assuming control of Covenant. Lucas used Covenant funds to pay the rent for Phalanx Technology Holdings, start-up expenses for a data center Lucas wanted to build, and the salary of the person hired to raise capital for the data center. Lucas also used Covenant funds to purchase a BMW for business and pay a number of personal expenses, including his wife's credit card debt and the property taxes on his personal residence.

2015 WL 4468844, at *1. Lucas unsuccessfully appealed the court's order of restitution. Iowa v. Lucas, 884 N.W.2d 222, (Table), 2016 WL 1705511 (Iowa App. 2016). Lucas had absented himself from trial after the first day and the State subsequently charged him with failure to appear. He was convicted and unsuccessfully appealed that conviction as well. Iowa v. Lucas, 885 N.W.2d 220 (Table), 2016 WL 3272899 (Iowa App. 2016). The State of Iowa also brought a civil suit against Lucas and business entities he controlled for ongoing criminal conduct, consumer fraud, and Blue Sky law violations. The state court entered default judgment against Lucas and his business entities; he again unsuccessfully appealed the entry of default judgment. State ex rel Miller v. Lucas, 839 N.W.2d 675 (Table), 2013 WL 4769374 (Iowa App. 2013).

         Following Lucas' conviction and appeals, on September 9, 2014, Lucas was convicted of contempt for violating a protective order by writing letters to the partners in Covenant Investment Fund. Iowa v. Lucas, FECR 094149. Judge Nancy Baumgartner, named as a defendant in the instant litigation, was the judge who entered the judgment against Lucas. On February 16, 2017, Judge Christopher Bruns, also named as a defendant in the instant litigation, found Lucas in contempt of court a second time for contacting the victims of his crimes. Id. Appeals of those contempt convictions are pending.

         On July 14, 2016, the same plaintiffs in this case filed a similar lawsuit against many of the same defendants in the United States District Court for the Southern District of Iowa (SDIA), No. 16-CV-419. On August 8, 2016, the District Court dismissed the complaint. (16-CV-419, Doc. 8). Plaintiffs allege the dismissal was without prejudice. (17-CV-142, Doc. 42-1, at 10). This is not accurate. There is nothing in the order stating that the dismissal was without prejudice. Thus, the dismissal is properly considered to be with prejudice. Semtek Int'l v. Lockheed Martin Corp., 531 U.S. 497, 506 (2001) (holding that where a court does not specify that an involuntary dismissal is without prejudice, the dismissal operates as one with prejudice). Plaintiffs did not appeal that order. They did, however, later file a motion to set aside and vacate the judgment under Federal Rule of Civil Procedure 60(b). The motion was denied. (16-CV-419, Doc. 12). Plaintiffs did not appeal that order either.

         II. THE SOUTHERN DISTRICT OF IOWA COMPLAINT

         Because it is important to the issue of sanctions, I will summarize plaintiffs' Southern District of Iowa (SDIA) complaint so that a comparison can later be made between that complaint and the one filed in this Court.

         In the SDIA case, plaintiffs filed the action pro se. In a 99-page complaint, plaintiffs sought relief for Lucas' allegedly wrongful arrest and conviction, and for the subsequent loss of cash assets and personal property seized by the State of Iowa as part of the prosecution. Plaintiffs also sought injunctive relief. In the SDIA case, plaintiffs alleged that Covenant Investment Fund (CIF) was organized under Delaware law and attracted limited parties from eight states, including Iowa. Its general partner, Covenant Asset Management, LLC (CAM) was allegedly a limited liability company based in Cedar Rapids, Iowa. CAM's sole business was managing the assets of CIF. CIF and CAM shared offices with Covenant Benefits, LLC and Covenant Advisors. Noah Auwles was “[a]t the center of all of the[se] Covenant entities.” (16-CV-419, Doc. 8, at 7).

         Plaintiffs further alleged that in 2008, the United States economy suffered significant losses and CIF lost most of its original investment. Plaintiffs alleged that from August 2009 through January 2010, a number of limited partners of CIF approached Lucas about taking over CIF. In 2010, plaintiffs alleged that Lucas, through his company Prosapia Financial, LLC (Prosapia) arranged for Prosapia Capital Management (PAM) to purchase 100% of Auwles' interest in the Covenant entities. Lucas took over as the operating manager of CIF and CAM.

         In the SDIA complaint, plaintiffs alleged that the CIF limited partners or investors were informed of these changes and at least one requested to withdraw his investment. When the request was denied, the investor filed a complaint with the Iowa Insurance Division (IID). On August 20, 2010, the IID issued a cease and desist order barring CIF from selling securities. Lucas ignored this order because he believed Iowa did not have jurisdiction.

         In the fall of 2010, one of CIF's sister holdings, Phalanx Technology Holdings, LLC (Phalanx), purchased a 2006 BMW valued at more than $42, 000.

         In May 2011, Iowa law enforcement officials, acting at the direction of the Iowa Attorney General's Office, executed a seizure warrant, seizing the BMW, Phalanx's cash accounts, and cash accounts in the name of Asherlee Management Services.

         In the SDIA complaint (Case No. 16-CV-419, Doc. 1), plaintiffs sought the following relief:

Injunctive Relief: CIF will suffer irreparable harm if its funds are distributed to its so-called limited partners by the Iowa AG and the Linn County Court. Its funds could be lost forever. It will be divested of its property without due process. CIF will win on the merits as it has complete ownership of its property by way of a real “legitimate claim of entitlement” under Delaware law. The public interest is served by the constitutional rights being upheld and protected.
Count One: Declare CIF is a Delaware limited partnership and under Delaware law, its partners, both limited and general, have no property interest and are not co-owners of and in CIF's assets because Delaware law denies partners, limited and general partners, any “legitimate claim of entitlement” as owners or co-owners of partnership property, thus, any and all partners have no ownership interest in partnership property.
Count Two: Declare that Phalanx Technology Holdings, L.C. is the only rightful owner of its automobile registered and titled in Phalanx's name and that no limited or general partner of its parent has any interest in its protected property interest.
Count Three: Declare that the bank account at Kerndt Brother's Bank on May 17th, 2010 containing nearly $190, 000 was the partnership property of CIF, as the title holder of the account, and that no limited partner or general partner of CIF has any property interest in it because limited and general partners have no “legitimate claim of entitlement” to corporate property owned by the partnership.
Count Four: [Declare that] General partners of Delaware limited partnerships have a property interest in the management of the partnership's business and affairs because Delaware law 15-401(f) provides a “legitimate claim of entitlement” and that Delaware law states that interest is “personal property.” Count Five: Declare that under Iowa law one must have an ownership interest in the property to be a victim of a crime of theft under 714.1(2) and that with no interest in the claimed property no theft occurred.
Count Six: Declare that the State of Iowa lacked probable cause by the use of false affidavits and false testimony to obtain a warrant to search. Also declare that the statements in the affidavits for search and the minutes of testimony are intentionally false and violate Alan Lucas's constitutional rights to be free of a conviction by false testimony and the right not to be arrested without probable cause.
Count Seven: Further relief, based on the declaration that the original accounts belonged to CIF and its subsidiaries, plaintiffs demand the immediate return to CIF the funds seized as CIF is the rightful owner of the funds seized.
Count Eight: Further relief, immediate return to CIF the full and maximum value of the 2006 BMW as of the date of May 16, 2011.
Count Nine: Further relief, the payment of pre-judgment interest, for count seven and count eight, as afforded by Iowa law for the abuse of seizure and loss to CIF for the funds from May 16, 2011 until present at the rate of 5% annually.
Count Ten: Further relief, permanently enjoin the Iowa Attorney General Office from attempting to seize any further property from CIF and any of its affiliates to distribute to any partner, limited or otherwise.
Count Eleven: Further relief, permanently enjoin the Iowa Attorney General's office from regulating any of CIF internal affairs in violation of the Commerce Clause of the United States Constitution. And permanently enjoin the Iowa Attorney General's office from executing any judgment it received in Iowa State Courts against CIF, any of CIF subsidiaries, CIF's general partners and affiliates of the general partners, in connection and deriving from the original warrant on May 16, 2011.
Count Twelve: Further relief, vacate any and all Iowa State Court judgments against any and all general partners of Covenant Investment Fund and the affiliates of the General Partners in accordance with Count Eleven.
Count Thirteen: Further relief, vacate the criminal case judgment, for a Franks violation, in Iowa District Court No. FECR094l49 against Alan Lucas for the reasons in Count Six.
Count Fourteen: Further relief, vacate criminal cases against Alan Lucas stemming out of the Iowa District Court No. FECR094149 case, "failure to appear" case number FECR105992 as invalid due to Franks violation in the FECR094149 case.
Count Fifteen: Enjoin the Clerk of Court in Linn County from executing the State court judgments in favor of the Iowa Attorney General against Alan Lucas, which require the funds in its possession to be distributed to Hansons, Hosch, and Millers. Instruct and order the Linn County Clerk Court to immediately return the funds to CIF as it is the proper owner of such funds in the Clerk's possession.
Count Sixteen: Award compensatory damages in the amount of $450, 000 in to-date attorney's fees and loss of use of funds in business. Punitive damages award for $3, 000, 000 for “conscience shocking behavior” and “inhumane abuse of power.”

(Case No. 16-CV-419, Doc. 1) (paragraphing altered).

         III. THE SDIA ORDER DISMISSING PLAINTIFFS' COMPLAINT

         In an order dated August 8, 2016, the Honorable Stephanie M. Rose, United States District Court Judge for the Southern District of Iowa, dismissed plaintiffs' complaint. The court held that plaintiffs' assertion that Lucas is actually innocent and that his criminal convictions should be overturned are claims that can only properly be brought by filing a petition for writ of habeas corpus and not as a cause of action under Title 42, United States Code, Section 1983. (No. 16-CV-419, Doc. 8, at 8).

         The court further held that any claim for damages for alleged due process violations related to the state's seizure of assets as part of Lucas' criminal prosecution were barred because plaintiffs failed to show that Lucas' conviction or sentence had been reversed on appeal, expunged by executive order, declared invalid by a state tribunal, or called into question by a federal court's issuance of a writ of habeas corpus, citing Heck v. Humphrey, 512 U.S. 477, 486-87 (1994). (Id., at 8-9).

         Finally, with respect to plaintiffs McCool and Liebing, the court found the complaint only stated their residency and their status as partners in CIF. The court found that the complaint failed to make any assertion that either plaintiff suffered any injury, or that defendants caused them any injury. ...


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