McNally v. The Kingdom Tr. Co.
| Docket Number | 5:21-cv-0068 (TBR) |
| Decision Date | 25 January 2022 |
| Parties | DANIEL MCNALLY, individually and on behalf of all others similarly situated, Plaintiff, v. THE KINGDOM TRUST COMPANY, Defendant. |
| Court | U.S. District Court — Western District of Kentucky |
This matter comes before the Court upon Defendant Kingdom Trust's Motion to Dismiss, (Mot. to Dismiss), Dkt. 7. Plaintiff Daniel McNally has responded, (Resp.), Dkt. 30. Kingdom Trust has replied, (Reply), Dkt. 31. As such briefing is complete and this motion is ripe for adjudication.
For the reasons that follow, Defendant Kingdom Trust's Mot. to Dismiss, Dkt. 7, is GRANTED IN PART AND DENIED IN PART.
This case is a chapter in a long legal story. That story began in 2010 when William Jordan, a financial advisor living in California, started organizing investment funds (“WJA Funds”). See Compl. ¶¶ 2, 65-68. According to the Complaint, the WJA Funds consisted of sixteen private investment funds, including the PMB Fund, LLC, the Urban Produce Fund, LLC, and the Whirl Fund, LLC, just to name a few. See Id. ¶ 59. The Complaint states that the WJA Funds were structured as “independent and separate entities” designed to pool investor money for investments in real estate, private equity, and other securities. Id. ¶¶ 2-3. Along with the WJA Funds, Jordan formed thirteen limited liability companies that were also used to raise money from investors, such as William Jordan Investments and WJA Asset Management, LLC. See Id. ¶ 52-56, 61.
Starting in 2011, Jordan began soliciting funding. See Id. ¶¶ 3, 68, 73. As part of that process, Jordan told potential investors that the WJA funds were “independent and separate entities” and encouraged potential investors to purchase WJA Fund securities to capitalize on Jordan's investing expertise. See Id. As the Complaint describes it, investors flocked to the WJA Funds. Over the next six years, the Complaint alleges that Jordan raised more than $71 million from investors through securities offerings organized by the WJA Funds. See Id. ¶ 66. One of those investors, Daniel McNally, a resident of California, made several investments in the WJA Funds between 2015 and 2016. See Id. ¶ 27. In total, McNally claims that he invested $450, 000 in the WJA Funds. See Id. The record indicates that McNally specifically invested in the PMB Fund, though it is possible that McNally also invested in other funds. See id.; see also Mot. to Dismiss at 2.
Then, in 2014, with the WJA Funds growing, Jordan contracted with Kingdom Trust, a public trust company. See Compl. ¶¶ 3, 30. Kingdom Trust served as the custodian for documents evidencing ownership of each individual WJA Fund and as the custodian for money associated with each individual WJA Fund. See Id. Because of that, the Complaint describes Kingdom Trust as a “de facto bank” for the WJA Funds, see Id. ¶ 3, though Kingdom Trust chooses instead to describe itself as a “non-depository” company, see Mot. to Dismiss at 1.
McNally alleges that Jordan used Kingdom Trust to help create the impression that the WJA Funds were safely in the custody of a third-party custodian. See Compl. ¶¶ 81-83. For example, Jordan allegedly wrote in an email that by opening the custodial accounts, the assets would no longer be under his direct control. See Id. ¶ 85. This, Jordan wrote, made him “happ[y]” because it “g[a]ve [him] a simple answer to the ‘[B]ernard [M]adoff' question[, ]' which of course every client asks.” Id. The Complaint further asserts that Jordan's claims about Kingdom Trust made sense to potential investors, because the investors were required to pay custodial fees to Kingdom Trust. See Id. ¶ 84. And in the investors' minds, their fees were for Kingdom Trust to safeguard the investments. See id.
According to the Complaint, however, Jordan induced McNally and other investors to invest in the WJA Funds through material misrepresentations and omissions. See Id. ¶¶ 77-91. Here, the Complaint states that Jordan prepared subscription agreements and operating agreements and distributed those documents to investors as part of his investment pitches. See Id. ¶¶ 69, 77-80. Allegedly, those documents “grossly overstated the expertise of those involved in managing the investors' money, ” “disclosed only a fraction of the fees levied on investors, ” and “wholly mischaracterized the use of the investors' funds and how [Kingdom Trust] would maintain and supposedly safeguard the investors' funds.” Id. ¶ 78. This mischaracterization, the Complaint asserts, was that the subscription agreements and operating agreements indicated investors' money would be deposited in a particular WJA Fund and kept separate and distinct from the other WJA Funds. See Id. ¶ 79. However, the Complaint maintains that, in reality, investors' money was commingled, treated as one pool of money, misappropriated, and used for payments resembling a Ponzi scheme. See Id. ¶ 80. The Complaint asserts that Jordan retained “personal[] control[]” over each WJA Fund, and in order to meet cash flow needs, Jordan would transfer money between the WJA Funds and other companies that he controlled. See Id. ¶¶ 94- 95. Put differently, when one WJA Fund was low on cash, Jordan would allegedly take new investor money from another WJA Fund and use that money to pay the existing investors. See id.
The Complaint further asserts that, for its part, Kingdom Trust knew about Jordan's alleged wrongdoings and actively participated in his scheme. See Id. ¶¶ 116-24. To substantiate its claims about Kingdom Trust's role in Jordan's scheme, the Complaint describes Kingdom Trust and Jordan as having a “close and extensive relationship, ” where Kingdom Trust “held no less than 22 accounts for WJA Funds.” Id. ¶ 120. And the Complaint asserts that as custodian for those accounts, Kingdom Trust prepared periodic reports and distributed those reports to WJA Fund investors. See Id. ¶ 121. Allegedly, this process of preparing periodic reports required Kingdom Trust to review in detail the transactions for each of those accounts, which, McNally claims, means that Kingdom Trust must have learned about Jordan's conduct. See Id. ¶ 152. The Complaint also alleges that Kingdom Trust executed and complied with Jordan's improper instructions to commingle, misdirect, misuse, and misappropriate investor money. See Id. Despite obtaining knowledge of Jordan's wrongdoing, the Complaint states that Kingdom Trust still sent the periodic reports to the WJA Fund investors, even though those reports failed to disclose the commingling and misuse of investors' funds. See Id. ¶ 154. Thus, the Complaint concludes, Kingdom Trust misrepresented the true value of the WJA Fund investments and received “substantial compensation” for “turn[ing] a blind eye.” See Id. ¶¶ 154, 194.
According to the Complaint, Kingdom Trust's conduct, which was a substantial departure from the typical activities of a custodian, violated its own contractual obligations and standard of conduct. See Id. ¶ 118. Specifically, the Complaint cites Kingdom Trust's Custodial Services Agreement (“CSA”) with each WJA Fund, which allegedly required Kingdom Trust to “[s]afe-keep the assets in the custodial/trust accounts, ” “[s]egregate such assets from those of any other WJA fund, ” “[m]onitor the transactions in the custodial/trust accounts it maintained for each WJA Fund, ” and “[p]repare and deliver to WJA Fund ‘investors' . . . periodic, detailed statements regarding their investments held . . . in the WJA Funds' accounts.” Id. ¶ 142. Further reinforcing Kingdom Trust's responsibilities and obligations, the Complaint goes on to cite similar language from Kingdom Trust's website. See Id. ¶ 148.
All of this alleged wrongdoing eventually came to light in what the Complaint refers to as the collapse of Jordan's scheme. See Id. ¶ 97.
On August 16, 2017, Jordan was permanently barred from the securities and commodities industries by California regulators. See Id. ¶ 46; see also Mot. to Dismiss at 7.
On May 15, 2018, the Securities and Exchange Commission filed a Complaint against Jordan alleging three counts of fraud. See Compl. ¶ 47; see also SEC v. Jordan, No. 8:18-cv-00852 (C.D. Cal. May 15, 2018). That same day, Jordan consented to an entry of Judgment, and on June 7, 2018, the court in that case entered judgment against him. See Compl. ¶ 47.
On April 29, 2020, McNally filed this Complaint on his behalf and on behalf of the other investors in the United States District Court for the Central District of California. See Ex. 1, Dkt. 21-1. The court there dismissed the case on the basis of a forum selection clause that required the lawsuit to be “instituted in the county courts of Calloway County, Kentucky.” Ex. 5, Dkt. 21-5, at 6-7.
On April 13, 2021, McNally filed this lawsuit in Calloway County court, see Compl., and Kingdom Trust removed the case to the Western District of Kentucky, see Mot. to Remand, Dkt. 15. The Court previously concluded that removal was proper. See Mem. Op., Dkt. 27.
In order to survive a motion to dismiss under Fed.R.Civ.P 12(b)(6), “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 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (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. (citing Twombly, 550 U.S. at 556). “[A] district court must (1) view the complaint in the light most favorable to the plaintiff and (2) take all well-pleaded factual allegations as true.” Tackett v. M & G Polymers, USA, LLC, ...
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