Grad v. Associated Bank

Decision Date07 June 2011
Docket NumberAppeal No. 2010AP1461,2009CV2949
CourtCourt of Appeals of Wisconsin


Appeal No. 2010AP1461


Dated: June 7, 2011

A. John Voelker
Acting Clerk of Court of Appeals


This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports.

A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See WIS. STAT. § 808.10 and RULE 809.62.

APPEAL from a judgment of the circuit court for Brown County: DONALD R. ZUIDMULDER, Judge. Affirmed.

Before Hoover, P.J., Peterson and Brunner, JJ.

¶1 PETERSON, J. Herman Grad, Marya Grad, Keith Gillam, Murielle Vendette-Gillam, Ivan Velev, and Maia Veleva (collectively, Grad) appeal a judgment dismissing their claims against Associated Bank, N.A. Grad's

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complaint alleged Associated was negligent in failing to discover that one of its customers was using Associated's services to defraud him. Grad also alleged Associated aided and abetted the customer's tortious conduct. The circuit court granted Associated's motion to dismiss. We conclude dismissal of Grad's negligence claim was proper because a bank's duty of care to a noncustomer does not require the bank to affirmatively investigate a customer's activities for possible fraud.1 Furthermore, the circuit court properly dismissed Grad's aiding and abetting claim because he did not allege that Associated intended to assist the customer's tortious conduct—a necessary element of aiding and abetting liability. We therefore affirm.


¶2 The following facts are from Grad's complaint and are taken as true for purposes of this appeal. From 2006 to 2009, Oxford Global Partners, LLC, perpetrated a massive investment fraud disguised as a sophisticated foreign currency trading program. Oxford told potential investors that they would earn steady returns by selling short a certain foreign currency with a low interest rate and using the proceeds to purchase a long position in a different currency yielding a higher interest rate. This would allegedly generate a "swap credit" that would be paid as interest to the investors. Oxford promised that any funds invested in the program would be held in a segregated account at Credit Suisse in Switzerland in the name of "Crown Forex SA," a Swiss company. In fact, no such account

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existed, and Oxford never transferred any funds to Crown Forex SA. Instead, individuals associated with Oxford converted the funds for their own benefit.

¶3 In reliance on Oxford's representations, Grad decided to invest in the currency trading program and appointed Oxford as "sub advisor" for his investments. In 2008, individuals associated with Oxford opened an account at Associated in the name of "Crown Forex, LLC." Oxford instructed Grad to deposit funds into Associated's Crown Forex account. Between March 4 and May 28, 2009, Grad deposited about $10 million into the account. Oxford then moved these funds into other accounts and ultimately misappropriated them.

¶4 In October 2009, Grad sued Associated, contending it was negligent in failing to discover and prevent Oxford's fraudulent conduct. Grad also alleged Associated aided and abetted Oxford's breach of a fiduciary duty to Grad and conversion of Grad's property.

¶5 Specifically, Grad alleged Associated failed to comply with federal banking regulations and industry standards in its handling of the Crown Forex account. Grad also alleged Associated "turned a blind eye to numerous indicia of fraud surrounding the ... [a]ccount." For instance, although the account was opened in the name of "Crown Forex, LLC," there were no companies registered under the name "Crown Forex" in the United States, with the exception of an obviously unrelated New Jersey corporation. Additionally, because "Crown Forex, LLC" was not a validly registered business entity, it did not have a valid taxpayer identification number, which federal regulations require a bank to obtain before opening an account. Furthermore, the address associated with the Crown Forex account was invalid, "Crown Forex, LLC" did not have a listed phone number, and the account's signatories were not registered or licensed investment

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advisors. The signatories often transferred large amounts of money from the Crown Forex account into other accounts they held at Associated, and other funds from the account were transferred to "offshore banking centers in high-risk jurisdictions or countries that are known havens for financial secrecy." Grad alleged that these "conspicuous red flags ... should have caused [Associated] to contact federal law enforcement immediately, and to take steps to freeze transactions in the account until it could complete an investigation into their legitimacy."

¶6 Associated moved to dismiss Grad's complaint. Following oral argument, the circuit court granted the motion. The court concluded Grad's complaint did not establish that Associated breached a duty of care under the circumstances because "unless there is notice to the bank of some irregularity . from a third party ... the bank has no duty to a third party." Grad now appeals.


¶7 "A motion to dismiss a complaint for failure to state a claim tests the legal sufficiency of the complaint." Watts v. Watts, 137 Wis. 2d 506, 512, 405 N.W.2d 303 (1987). Whether a complaint states a claim for relief is a question of law that we review independently. Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 245, 593 N.W.2d 445 (1999). We accept the facts stated in the complaint as true and draw all reasonable inferences from those facts in favor of stating a claim. Meyer v. Laser Vision Inst., 2006 WI App 70, ¶3, 290 Wis. 2d 764, 714 N.W.2d 223. A complaint should be dismissed for failure to state a claim only when it is quite clear there are no conditions under which the plaintiff can recover. Casteel v. McCaughtry, 176 Wis. 2d 571, 578, 500 N.W.2d 277 (1993).

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I. Negligence claim

¶8 To state a claim for negligence, a plaintiff must plead facts that, if true, would establish four elements: (1) the existence of a duty of care on the part of the defendant; (2) a breach of that duty of care; (3) a causal connection between the defendant's breach and the plaintiff's injury; and (4) actual loss or damage resulting from the breach. Hoida, Inc. v. M & I Midstate Bank, 2006 WI 69, ¶23, 291 Wis. 2d 283, 717 N.W.2d 17. The first element—duty—involves two aspects: (1) the existence of a duty of ordinary care; and (2) an assessment of what ordinary care requires under the circumstances. Id., ¶27. Although Wisconsin follows the dissent from Palsgraf v. Long Island Railroad Co., 162 N.E. 99 (N.Y. 1928), which concluded that everyone owes a duty to the world at large, this duty is not unlimited but is restricted to what is reasonable under the circumstances. Hocking v. City of Dodgeville, 2009 WI 70, ¶12, 318 Wis. 2d 681, 768 N.W.2d 552. Thus, where there is "no duty under the circumstances, no breach occurred, and there [is] not a viable negligence claim." Id., ¶13.

¶9 Associated contends it cannot be held liable for Grad's losses because it did not have a duty to Grad, a noncustomer, to investigate and discover Oxford's fraudulent conduct. On two previous occasions, our supreme court has considered the scope of a bank's duty to a noncustomer who claims a bank failed to detect and prevent a customer's fraud. See Commercial Discount Corp. v. Milwaukee W. Bank, 61 Wis. 2d 671, 214 N.W.2d 33 (1974); Hoida, 291 Wis. 2d 283. In both cases the court held that the bank did not have a duty to the noncustomer to take certain actions.

¶10 In Commercial Discount, 61 Wis. 2d at 679, the Simplex Shoe Company had two checking accounts with Milwaukee Western Bank.

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Commercial Discount Corporation had a perfected security interest in Simplex's funds. Id. Simplex drew checks on the Milwaukee Western accounts to pay other creditors. Id. at 674, 685-86. Commercial Discount sued Milwaukee Western for return of the funds paid to the other creditors, alleging that Milwaukee Western was liable for aiding and abetting Simplex "in diverting all of said funds to the payment of other obligations." Id. at 686.

¶11 Our supreme court affirmed dismissal of Commercial Discount's claim. Adopting rationale from Gendler v. Sibley State Bank, 62 F. Supp. 805 (N.D. Iowa 1945), the court concluded a bank does not owe a "duty of inquiry" to a third party with an adverse claim to money deposited unless the bank has specific notice of the adverse claim. Commercial Discount, 61 Wis. 2d at 687-88. After receiving notice of the claim, the bank has a duty "to wait a reasonable time ... to allow the claimant to begin legal action." Id. at 688. However, before receiving notice, the bank does not have a duty to investigate and detect its customers' fraud. Id. at 687-88.

¶12 Grad concedes " Commercial Discount held that a defendant bank was not liable for funds diverted by a fraudster account holder unless [the bank] had specific knowledge of the fraud[.]" However, he argues that Commercial Discount is distinguishable because it involved an aiding and abetting claim, not a negligence claim. See id. at 685-86. We disagree. The Commercial Discount ...

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