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Lomeli v. Jackson Hewitt, Inc.

United States District Court, C.D. California

February 20, 2018

LUIS LOMELI, individually and on behalf of a class of similarly situated individuals, Plaintiff,
JACKSON HEWITT, INC.; TAX SERVICES OF AMERICA, INC. d/b/a JACKSON HEWITT TAX SERVICE; JJF & AC, INC. d/b/a Guanajuato Insurance Agency and Jackson Hewitt Tax Service; JUAN FLORES, an individual; and DOES 1-50, inclusive, Defendants.




         Death and taxes are certain, but is a guarantee of 100% accuracy? Plaintiff Luis Lomeli claims that he and the absent class members he seeks to represent were defrauded by Defendants, who guaranteed 100% accurate tax returns, but didn't deliver on their promise.

         Defendants Juan Flores and JJF & AC, Inc. operated a franchise location, under a franchise agreement with Jackson Hewitt, Inc. ("JH, Inc."), and Tax Services of America, Inc. ("TSA").[1] (See generally Second Amended Complaint ("SAC"), ECF No. 73.) On October 19, 2017, the Court granted Jackson Hewitt's Motion to Dismiss Lomeli's First Amended Complaint with leave to amend because he failed to parse out allegations against each defendant specifically, and did not satisfy Rule 9(b)'s heightened pleading standard. (Order, ECF No. 70.)

         Lomeli alleges claims against Defendants for: 1) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(c), 1962(d); 2) negligence; 3) fraud; 4) violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et seq.\ 5) violation of California Business and Professions Code § 17530.5; 6) violation of the California Consumer Legal Remedies Act ("CLRA"), Cal. Civ. Code § 1750, et seq.\ and 7) violation of the California Customer Records Act, Cal. Civ. Code § 1798.80. (See generally SAC.)

         Jackson Hewitt moves to dismiss the SAC because: 1) each cause of action is grounded in fraud, but Lomeli does not meet the requirements of Federal Rule of Civil Procedure 9(b); and 2) for each cause of action Lomeli fails to allege facts sufficient to state a claim for relief under Rule 8. (See generally Mot., ECF No. 74.) Jackson Hewitt asserts other arguments for dismissal in its motion, which the Court details below.

         Jackson Hewitt also moves to strike the class allegations in the SAC. (Mot. to Strike, ECF No. 76.[2]


         The Court set forth the factual background of this class action at length in its Order granting Jackson Hewitt's first Motion to Dismiss, and incorporates that discussion here by reference. (Order 2-7, ECF No. 70.)

         Generally, Lomeli alleges that Jackson Hewitt is: 1) directly liable for fraudulent statements it made to consumers like Lomeli regarding the accuracy of its tax preparation services; and 2) vicariously liable for fraud and other derivative claims for its franchisee's actions in preparing fraudulent tax returns, given Jackson Hewitt's level of control over its franchisees. All of Lomeli's claims spawn from the fraudulent preparation and submission of his 2014, 2015 and 2016 tax returns, which he claims: 1) included additional expenses that were claimed without his approval and after his authorization to file a prior non-fraudulent tax return, resulting in an unwarranted, fraudulent tax refund; and 2) his enrollment in an "Assisted Refund" program that charged him additional fees without his approval.

         A. New Agency Allegations

         Lomeli adds significant allegations regarding Jackson Hewitt's relationship with Flores and JJF & AC, Inc., and parses his allegations to identify each defendant's alleged role in the scheme. In addition to the controls set forth in the Court's prior Order, Lomeli alleges that Jackson Hewitt:

• "exercised direct control over employees of its franchisees, including hiring, direction, supervision, discipline, or discharge of franchisee employees" (SAC ¶19);
• required franchisee employees to take a "Tax Preparer Readiness Test, " and forbade franchisees from employing individuals who didn't complete its training modules or the test (Id. ¶¶ 21-22);
• required franchisees to certify that their employees complied with Jackson Hewitt's directives, including training regarding "fraudulent tax returns and use of the software to prepare tax returns... and programs to 'ensure quality and prevent tax fraud'" (Id. ¶ 24);
• retained "specific control over training related to tax fraud, including fraud by tax preparers, " which was included in its training materials (Id. ¶ 25);
• required franchisees to perform multi-level background checks on employees, which required the employee to meet thresholds of security dictated by Jackson Hewitt (Id. ¶ 26);
• tracked franchisee employees and the returns they worked on through unique identifiers (Id. ¶ 28);
• distributed a "Tax Preparation Compliance Manual, " which "outline[d] Jackson Hewitt's control over fraud prevention training, including training to prevent tax preparer fraud and express guidelines for implementing that training" (Id. ¶ 29);
• provided a "Code of Conduct" that "refer[ed] to the reader as an employee of Jackson Hewitt, " not the specific franchisee (Id. ¶ 31);
• "set[] forth the grounds wherein franchisees must terminate employees, " and operated a program known as the "Red Flag Report, " which "track[ed] tax return filing trends" to identify "a questionable tax situation (i.e. fraud)" (Id. ¶¶ 33-34); and
• required franchisees to appoint a "Tax Return Compliance Designee, " who would report directly to Jackson Hewitt's Chief Tax Compliance Officer ("CTCO").

(Id. ¶35.)

         The CTCO could require corrective actions if the Tax Return Compliance Designee failed to adequately address "tax return preparation concerns." (Id.) At the franchise location in question, Flores was the Tax Return Compliance Designee, and was directly supervised by Jackson Hewitt's CTCO. (Id. ¶¶ 35-38.)

         Jackson Hewitt also controlled the software used by its franchisees to prepare tax returns, and did not permit franchisees to use any other software. (Id. ¶ 40.) When a franchisee completed preparing a return, they had to submit it through Jackson Hewitt's system, which would perform an "error check." (Id.) "Moreover, Jackson Hewitt retained complete and total control over the process of submitting tax returns to the relevant government entities, as it reviewed and approved each return that was prepared by its franchisees before it was filed." (Id. ¶ 42.)

         B. Lomeli's Tax Returns

         As described above, Lomeli claims that Flores, as Jackson Hewitt's agent and with its acquiescence, accepted one return for filing, but then changed deductions in the return to procure an unwarranted, fraudulent tax refund that the IRS issued to Lomeli without his knowledge or approval.

         For Lomeli's 2014 tax return, he claims that after providing documentation to Flores, he received a letter "bearing Jackson Hewitt letterhead stat[ing] that Plaintiffs 2014 income tax return 'ha[d] been completed and filed electronically with the IRS at the IRS Submission Processing Center.'" (Id. ΒΆ 45.) ...

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