Varga v. U.S. Bank Nat'Lass'N
| Citation | 764 F.3d 833 |
| Decision Date | 21 August 2014 |
| Docket Number | No. 13–2709.,13–2709. |
| Parties | Geoffrey VARGA, in his capacity as Official Liquidator of Palm Beach Offshore, Ltd., and Palm Beach Offshore II, Ltd., Plaintiff–Appellant v. U.S. BANK NATIONAL ASSOCIATION, Defendant–Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
OPINION TEXT STARTS HERE
Ashley McMillian, argued, Houston, TX (Stephen D. Susman, Edgar G. Sargent, on the brief), for appellant.
Richard Gregory Wilson, argued, Minneapolis, MN (Wayne S. Moskowitz, Sarah A. Horstmann, on the brief), for appellee.
Before LOKEN, BEAM, and GRUENDER, Circuit Judges.
Geoffrey Varga, in his capacity as the official liquidator of Palm Beach Offshore, Ltd. and Palm Beach Offshore II, Ltd. (collectively, “the Palm Beach Funds”), sued U.S. Bank National Association (“U.S. Bank”) for aiding and abetting a breach of fiduciary duty, willful and wanton negligence, and gross negligence. These claims arose from the Palm Beach Funds' investment through accounts maintained at U.S. Bank in what turned out to be a Ponzi scheme. The district court 1 granted U.S. Bank's motion to dismiss Varga's amended complaint. Varga appeals, and we affirm.
In this appeal from the grant of a motion to dismiss, we accept as true the well-pleaded allegations in the amended complaint. Loftness Specialized Farm Equip., Inc. v. Twiestmeyer, 742 F.3d 845, 854 (8th Cir.2014).
Tom Petters, through his company Petters Company, Inc. (“Petters Company”), claimed to purchase excess consumer merchandise,such as electronics, from vendors. Petters Company financed these supposed transactions by selling high-yield promissory notes to investors through Petters Capital, Inc. (“Petters Capital”), a wholly owned entity of Petters Company. These promissory notes were to be repaid once the consumer merchandise had been sold to and paid for by retailers, like Sam's Club and BJ's Wholesale Club, in transactions that Petters Company was to arrange. This investment structure enabled Petters Company to grow into what appeared to be a multi-billion dollar operation. But the investment scheme peddled by Petters Company was entirely illusory: no vendors ever sold consumer merchandise, and no retailers ever purchased it. Instead, Petters Company generated fake purchase orders and sales confirmations and kept its scheme afloat by recycling funds that it received from new investors to pay off the promissory notes of old investors as they came due. The inevitable collapse of Petters's Ponzi scheme caused investors to suffer staggering losses.
The Palm Beach Funds, which invested in Petters Company's promissory notes and are now being liquidated, collectively lost over $700 million to Petters's scheme. The Palm Beach Funds' investment was made through another fund called Palm Beach Finance Partners II, LP (“Palm Beach Finance”). Palm Beach Finance received the Palm Beach Funds' investment in Petters Company's promissory notes via an escrow account that was maintained at U.S. Bank and was governed by an escrow-account agreement.
What happened to the Palm Beach Funds' money once it was transferred out of the escrow account forms the heart of this case. The money initially went to a collateral account that also was maintained at U.S. Bank. The collateral account was governed by a collateral-account agreement to which U.S. Bank, Palm Beach Finance, and Petters Capital, among others, were parties. The Palm Beach Funds were not parties to the collateral-account agreement. Once the Palm Beach Funds' investment reached the collateral account, Varga alleges that a “direct payment system” prescribed that (a) outgoing funds from the collateral account were to be sent directly to the vendors that purportedly sold the consumer merchandise to Petters Company and (b) incoming funds to the collateral account were to come directly from the retailers that purportedly purchased the consumer merchandise from Petters Company. This direct payment system, according to Varga, was designed to prevent a third party from accessing investor funds and to ensure the legitimacy of the merchandise transactions. Because no vendors or retailers were involved in any legitimate transactions, the direct payment system was never followed. Instead, the collateral account played host to the Ponzi scheme with the outgoing funds being sent to Petters Company through sham inventory vendors and the incoming funds (i.e., the investors' recycled funds) coming from Petters Company.
Varga alleges that Bruce Prevost and David Harrold, in their capacity as directors of the Palm Beach Funds, breached their fiduciary duties to the Palm Beach Funds. Varga additionally alleges that Palm Beach Capital Management, LLC (“PBCM”), which managed the Palm Beach Funds, breached its fiduciary duties to the Palm Beach Funds. In particular, Varga argues that Prevost, Harrold, and PBCM breached their fiduciary duties to the Palm Beach Funds by failing to ensure that the direct payment system was utilized while nonetheless continuing to invest in Petters Company's promissory notes and by concealing the noncompliance with the direct payment system from the Palm Beach Funds. Varga settled his claims against Prevost, Harrold, and PBCM in a separate proceeding.
This case concerns Varga's further claim that U.S. Bank's actions are sufficient to charge it with aiding and abetting the breach of fiduciary duty by Harrold, Prevost, and PBCM, willful and wanton negligence, and gross negligence. Varga alleges that U.S. Bank knew that the direct payment system was not being followed. Varga further asserts that U.S. Bank understood that the direct payment system was an important procedural safeguard that was designed to protect the Palm Beach Funds' investment. U.S. Bank acquired this knowledge, according to Varga, by reviewing the collateral-account agreement, the Palm Beach Funds' marketing and due-diligence documents, and the private offering memoranda for the Palm Beach Funds' investment in Petters Company's promissory notes.
In addition to appreciating the importance of the direct payment system, Varga alleges that U.S. Bank participated in concealing from the Palm Beach Funds the fact that the direct payment system was not being followed. Varga first alleges that U.S. Bank participated in a so-called “re-coding scheme” at the direction of two of the “fund managers” for the Palm Beach Funds—identified in Varga's brief as Prevost and Harrold. This alleged scheme, which began no later than December 2006, involved U.S. Bank re-coding the account statements for the collateral account to indicate that the incoming funds into the collateral account were being received from retailers, not Petters Company. However, Varga admits in his amended complaint that, from 2002 until the re-coding scheme began in approximately December 2006, the collateral account statements correctly listed Petters Company as the source of the incoming funds. According to Varga, U.S. Bank also told various individuals associated with the Palm Beach Funds that the direct payment system was being followed. The amended complaint includes only one example of this alleged practice. Varga alleges that Jonathan Spring, a third-party marketer for the Palm Beach Funds and an investor in Petters Company's promissory notes, contacted U.S. Bank employee Thomas Caruth. Caruth, who was Palm Beach Finance's “main contact” at U.S. Bank, told Spring that “all wires sent out of U.S. Bank go directly to retailers and manufacturers” and “wires received come directly from retailers without going through intermediaries.”
On the basis of these allegations, Varga sued U.S. Bank. U.S. Bank moved to dismiss the amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court granted U.S. Bank's motion. This appeal followed.
We review de novo the grant of a motion to dismiss, accepting the well-pleaded allegations in the complaint as true and drawing all reasonable inferences in favor of the plaintiff. Id. In addition to the allegations in the amended complaint, we also may consider “materials that are necessarily embraced by the pleadings.” Mattes v. ABC Plastics, Inc., 323 F.3d 695, 697 n. 4 (8th Cir.2003). “To survive a motion to dismiss, 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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.” Id.
Under Minnesota law, aiding and abetting the tortious conduct of another has three elements: “(1) the primary tort-feasor must commit a tort that causes an injury to the plaintiff; (2) the defendant must know that the primary tort-feasor's conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tort-feasor in the achievement of the breach.” Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn.1999). While the parties dispute whether Varga alleged a breach of fiduciary duty by Prevost, Harrold, and PBCM, we assume for purposes of this appeal that Varga has done so. Varga's aiding-and-abetting claim nonetheless fails because he has not alleged plausibly that U.S. Bank knew that Prevost, Harrold, and PBCM's conduct constituted a breach of fiduciary duty or that U.S. Bank substantially assisted that breach of fiduciary duty.
An aider and abettor's knowledge that the primary tortfeasor's conduct constitutes a breach of fiduciary duty is a “crucial element” of a claim for aiding and abetting. E–Shops Corp. v. U.S. Bank Nat'l Ass'n, 678 F.3d...
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