Heinert v. Bank of Am., N.A.

• Decision Date: 18 October 2019
• Docket Number: 19-CV-6081L
• Citation: 410 F.Supp.3d 544
• Parties: Mary Beth HEINERT and Richard H. Schultz, Jr., on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA, N.A., Citizens Bank, N.A., Perry Santillo, Christopher Parris, Dominic Siwik, Paul Anthony LaRocco, John Piccarreto, and Thomas Brenner, Defendants.
• Court: U.S. District Court — Western District of New York

410 F.Supp.3d 544

Mary Beth HEINERT and Richard H. Schultz, Jr., on behalf of themselves and all others similarly situated, Plaintiffs,

v.BANK OF AMERICA, N.A., Citizens Bank, N.A., Perry Santillo, Christopher Parris, Dominic Siwik, Paul Anthony LaRocco, John Piccarreto, and Thomas Brenner, Defendants.

19-CV-6081L

United States District Court, W.D. New York.

Signed October 18, 2019

Benjamin J. Widlanski, Harley S. Tropin, Rachel Sullivan, Robert J. Neary, Tal J. Lifshitz Kozyak Tropin & Throckmorton, LLP Miami, FL Fernando Santiago, Michael A. Burger, Santiago Burger LLP, Pittsford, NY, George Franjola, Gilligan, Gooding, Franjola & Batsel, P.A., Ocala, FL, for Plaintiffs.

James P. Nonkes, Harris Beach PLLC, Pittsford, NY, Pamela A. Miller, O'Melveny & Myers LLP, Kevin N. Ainsworth, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo PC, New York, NY, Alyssa C. Scruggs, Pro Hac Vice, Michael E. Pastore, Pro Hac Vice, Pete S. Michaels, Pro Hac Vice, Mintz Levin Cohn Ferris Glovsky & Popeo, PC, Boston, MA, for Defendants.

DECISION AND ORDER

DAVID G. LARIMER, United States District Judge

Plaintiffs bring this action on behalf of themselves and over 600 other investors, alleging that several individuals, assisted by employees of defendants Bank of America, N.A. ("Bank of America") and its successor, Citizens Bank, N.A. ("Citizens"), perpetrated a nearly decade-long Ponzi scheme by which the plaintiffs and other putative class members were defrauded of approximately 102 million dollars. (Dkt. #1). Familiarity with the underlying facts, summarized below, is presumed.

Bank of America and Citizens (hereafter, the "defendant banks") now move to dismiss plaintiffs' claims against them – specifically, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and common law conspiracy – for failure to state a claim pursuant to Fed. R. Civ. Proc. 12(b)(6). (Dkt. #17, #18). For the reasons set forth below, those motions are granted.

FACTUAL HISTORY

In brief, plaintiffs allege that they were the victims of a Ponzi scheme orchestrated by the individual defendants, Perry Santillo ("Santillo"), Christopher Parris ("Parris"), Paul Anthony LaRocco ("LaRocco"), John Piccarreto ("Piccarreto"), Thomas Brenner ("Brenner"), and Dominic Siwik ("Siwik") (collectively, "individual defendants").¹ Plaintiffs allege that due to the personal and business banking relationships between the individual defendants and the defendant banks, the defendant banks are likewise liable for the fraudulent scheme.

The plaintiffs allege that in or about 2007 or 2008, several of the individual defendants converted a previously legitimate investment brokerage enterprise into a fraudulent scheme, by which they misused and misappropriated investor funds to pay off previous investors and to fund their own "jet-setting lifestyle." (Dkt. #1 at ¶2.) Plaintiffs contend that defendants, in facilitating the scheme, opened and transferred funds in and out of more than one hundred accounts at Bank of America, and twenty accounts at Citizens.

According to the complaint, some accounts at Bank of America were initially opened in 2005 due to individual defendant Parris's preexisting relationship with Rochester, New York branch manager Derline Cunningham ("Cunningham"). Plaintiffs allege that in the years that followed, Cunningham was a "key player" in the fraudulent scheme, coordinating the opening of new accounts, expediting the availability of funds, lying to creditors, and placing quarterly calls to American Express on Santillo's behalf, falsely confirming that his accounts held sufficient funds to cover his debts, when they did not. (Dkt. #1 at ¶¶4-6).

Plaintiffs contend that after Cunningham left Bank of America in 2016 to assume a branch manager position with Citizens, she directed the individual defendants to transfer their accounts to Citizens, under her management. There, she opened approximately twenty accounts for the individual defendants, and continued to engage in what the plaintiffs describe as "atypical" transactions and transfers on the individual defendants' behalf, to lift holds on large deposits, and to falsely represent to American Express that their accounts had sufficient funds. At some point after the individual defendants transferred their accounts to Citizens, Cunningham requested from them a "loan" of $40,000, which she was given and never repaid.

The Securities and Exchange Commission ("SEC") later conducted a fraud investigation and filed a civil enforcement action against Santillo, Parris, Piccarreto, LaRocco, and Brenner.

On June 25, 2018, plaintiffs commenced an action, based largely on the facts that underlie this matter, in the United States District Court for the Middle District of Florida. While motions to dismiss that action were pending, plaintiffs voluntarily discontinued the Florida action, and commenced the instant action here, on behalf of themselves and a proposed class of approximately 637 investors who were allegedly defrauded by the individual defendants.²

DISCUSSION

I. Standard on a Motion to Dismiss

In considering a motion to dismiss for failure to state a claim under Fed. R. Civ. Proc. 12(b)(6), the Court is limited to consideration of the facts stated in the complaint, as well as such materials as are attached thereto or incorporated by reference. Yao-Yi v. Wilmington Trust Co. , 301 F. Supp. 3d 403, 413 (W.D.N.Y. 2017). In considering the motion, the court accepts all factual allegations in the complaint and draws all reasonable inferences in plaintiffs' favor. To survive dismissal, a complaint must set forth sufficient facts to "state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

With respect to claims of aiding and abetting fraud and/or aiding and abetting a breach of fiduciary duty sounding in fraud, the Second Circuit also applies the heightened pleading standard of Fed. R. Cir. Proc. 9(b), which requires that "the circumstances constituting fraud or mistake shall be stated with particularity." See Lerner v. Fleet Bank, N.A. , 459 F.3d 273 at 290 (2d Cir. 2006) ; Yao-Yi , 301 F. Supp. 3d 403 at 418 ; Rosner v. Bank of China , 2008 WL 5416380 at *3-*4, 2008 U.S. Dist. LEXIS 105984 at *10 (S.D.N.Y. 2008).

II. Aiding and Abetting

Initially, plaintiffs allege that defendants Bank of America and Citizens aided and abetted the individual defendants in committing fraud and breach of fiduciary duty. (Dkt. #1 at ¶¶157-174).

A. Fraud – Actual Knowledge

In order to plead a cause of action against a bank for aiding and abetting fraud committed by account-holders, a complainant must plausibly allege: (1) the existence of a fraud; (2) the defendant bank's knowledge of the fraud; and (3) that the defendant bank provided substantial assistance to advance the fraud's commission. Lerner v. Fleet Bank. N.A. , 459 F.3d 273, 292 (2d Cir. 2006).

With respect to the element of knowledge, plaintiffs must plausibly allege actual knowledge of the underlying fraud on the part of the defendant banks: constructive knowledge is not sufficient, nor is "a lower standard such as recklessness or willful blindness." Rosner , 2008 WL 5416380 at *7, 2008 U.S. Dist. LEXIS 105984 at *22 (quoting Pension Comm. Of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC , 446 F. Supp. 2d 163, 202 n.279 (S.D.N.Y. 2006) ). See also In re Agape Litig. v. Cosmo , 773 F. Supp. 2d 298, 308 (E.D.N.Y. 2011).

Here, the complaint alleges that Bank of America and Citizens had actual knowledge of the individual defendants' fraudulent actions, because: (1) frequent atypical transactions and suspicious activity took place by and between the individual defendants' accounts; (2) with respect to Bank of America, an internal investigation was made in 2014 during which Parris was questioned about a pattern of unusual transactions; and (3) Cunningham, in her capacity as a branch manager, made false statements to American Express concerning the individual defendants' account balances.

None of these allegations is sufficient to plausibly allege that either of the defendant banks had actual knowledge of the individual defendants' actions. Initially, the complained-of actions were undertaken exclusively by Cunningham, and plaintiffs make no allegation that the defendant banks were aware of Cunningham's role in a fraudulent scheme. See generally In re Agape Litig. , 773 F. Supp. 2d 298, 315 (close relationship between a bank employee and perpetrators of a Ponzi scheme is insufficient to give rise to an inference that the bank had actual knowledge of the scheme); Renner v. Chase Manhattan Bank , 2000 WL 781081 at *11-*12, 2000 U.S. Dist. LEXIS 8552 at *34-*37 (S.D.N.Y. 2000) (fact that bank's branch manager had an ongoing relationship with fraudsters is insufficient to impute actual knowledge of the fraud to the bank, without allegations that the bank defendant had reason to believe that the bank manager was engaged in, or assisting, fraudulent conduct). Plaintiffs also do not specifically allege that Bank of America's internal investigation revealed, or otherwise placed Bank of America on notice, of the alleged fraudulent scheme.

It is well settled in the Second Circuit that a bank's negligent failure to identify warning signs of fraudulent activity, such as atypical transactions – even where such signs converge to form a veritable "forest of red flags’ " – is insufficient to impute actual knowledge of ongoing fraud. See e.g., Lerner , 459 F.3d 273 at 292-94 (bank's knowledge of "red flags", i.e., that attorney's fiduciary accounts were frequently overdrawn and contained insufficient funds, and that attorney repeatedly transferred funds from fiduciary accounts to his own personal accounts, did not give the bank actual knowledge that the attorney was engaged in fraud); Rosner (collecting cases, and finding that allegations that a bank processed frequent atypical, non-routine transactions, and/or...