Praither v. Northbrook Bank & Trust Co.

• Decision Date: 30 July 2021
• Docket Number: 1-20-1192
• Citation: 2021 IL App (1st) 201192,192 N.E.3d 747,455 Ill.Dec. 918
• Parties: John PRAITHER and Marcello Caliva, Individually and on Behalf of a Class of Similarly Situated Individuals, Plaintiffs-Appellants, v. NORTHBROOK BANK & TRUST COMPANY, an Illinois Chartered State Bank; and Tamer Moumen, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

2021 IL App (1st) 201192

192 N.E.3d 747

455 Ill.Dec. 918

John PRAITHER and Marcello Caliva, Individually and on Behalf of a Class of Similarly Situated Individuals, Plaintiffs-Appellants,

v.NORTHBROOK BANK & TRUST COMPANY, an Illinois Chartered State Bank; and Tamer Moumen, Defendants-Appellees.

No. 1-20-1192

Appellate Court of Illinois, First District, SIXTH DIVISION.

Filed July 30, 2021

Alexander N. Loftus, of Loftus & Eisenberg, Ltd., of Chicago, for appellants.

Michael P. Conway, Kristina K. Cercone, and Taylor M. Grode, of Jones Day, of Chicago, for appellee Northbrook Bank and Trust Company.

No brief filed for other appellee.

JUSTICE HARRIS delivered the judgment of the court, with opinion.

¶ 1 Plaintiffs, John Praither and Marcello Caliva, individually and on behalf of a class of similarly situated individuals, appeal the judgment of the circuit court granting defendant Northbrook Bank & Trust Company's (Northbrook) motion to dismiss plaintiffs’ second-amended complaint pursuant to section 2-615 of the Code of Civil Procedure (Code) ( 735 ILCS 5/2-615 (West 2016) ). On appeal, plaintiffs contend the court erred in dismissing their second-amended complaint where the complaint sufficiently pled facts that (1) defendant Northbrook failed to exercise ordinary care to protect plaintiffs from defendant Tamer Moumen's fraud, (2) Northbrook was liable for violations of the Fiduciary Obligations Act (Act) ( 760 ILCS 65/1 et seq. (West 2016)), and (3) Northbrook aided and abetted Moumen's breach of fiduciary duty. For the following reasons, we affirm.

¶ 2 I. JURISDICTION

¶ 3 The trial court dismissed plaintiffs’ second-amended complaint on October 29, 2020. Plaintiffs filed their notice of appeal on November 3, 2020. Accordingly, this court has jurisdiction pursuant to Illinois Supreme Court Rule 301 (eff. Feb. 1, 1994) and Rule 303 (eff. July 1, 2017), governing appeals from final judgments entered below.

¶ 4 II. BACKGROUND

¶ 5 Plaintiffs invested in hedge funds managed by Moumen. As part of his investment business, Moumen maintained three accounts at Northbrook. Two accounts, the Crescent Ridge Volatility Fund (CRVF) and the Crescent Ridge Energy Fund (CREF), were set up to receive initial investments. The third fund, Crescent Ridge Capital Partners (CRCP), belonged to the partnership managing the funds, which was an entity created and controlled by Moumen. To invest in a fund, parties such as plaintiffs wired money into the CRVF or CREF. Plaintiffs wired the money from their personal bank accounts or an IRA custodian.

¶ 6 Plaintiffs alleged that Moumen set up the Northbrook accounts as part of a Ponzi scheme in which he used money from new investors to pay other investors. Plaintiffs also alleged that Moumen used the money from the CRVF and CREF for personal expenses. In March 2017, Moumen was arrested by the Federal Bureau of Investigation (FBI), and in October 2017, he was sentenced to 10 years in prison. He was also ordered to pay restitution in the amount of $7,570,831.59.

¶ 7 In October 2018, plaintiffs filed a complaint against Northbrook and Moumen. The complaint alleged three counts: count I (negligence), count II (aiding and abetting breach of fiduciary duty) against Northbrook, and count III (unjust enrichment) against Moumen. Northbrook filed a motion to dismiss, arguing that plaintiffs failed to identify a source of duty on Northbrook's part toward noncustomers such as plaintiffs and that no laws or regulations obligated Northbrook to freeze Moumen's accounts or alert investors of Moumen's actions. The trial court granted the motion.

¶ 8 Plaintiffs subsequently filed a first-amended complaint, which added a count against Northbrook for breach of the Act. Northbrook filed a motion to dismiss the three counts against them, and the trial court granted the motion without prejudice, finding that plaintiffs failed to allege facts sufficient to support their claims. Plaintiffs subsequently filed a second-amended complaint against defendants Northbrook and Moumen. Counts I through III alleged negligence, aiding and abetting breach of fiduciary duty, and violations of the Act against Northbrook. Count IV alleged a claim of unjust enrichment against Moumen.

¶ 9 Plaintiffs alleged the following facts in the second-amended complaint. Plaintiffs invested in CRVF and CREF by wiring money into the funds from "either their personal bank account or an IRA Custodian." The fund accounts were held at Northbrook. Plaintiffs "relied on the fact that the money was being sent to a reputable bank trust for deposit when choosing to invest in CRVF or CREF." Once they made an investment in one of these funds, plaintiffs became limited partners "upon subscription and acceptance by" Moumen, the general partner. From February 2013 to February 2017, investors deposited $6.6 million into the CRVF and CREF accounts at Northbrook.

¶ 10 As the general partner, Moumen was entitled to charge a management fee equal to 1% annually of each limited partner's share, plus a performance allocation of 17.5% of the funds’ annual income. The complaint stated that "[t]his fee structure is quite common in *** hedge funds" like CRVF and CREF. This fee structure was outlined in the private placement memorandum (PPM), a copy of which was given to Northbrook.

¶ 11 Plaintiffs alleged that "Moumen misappropriated investor funds by causing funds to be transferred" from the accounts at Northbrook to his personal accounts, as shown by the following:

a. In March 2015, an investor wired $42,000 from his individual retirement account (IRA) with Kingdom Trust to the CRVF, and the next day Moumen wired $42,000 from the CRVF account to his personal brokerage account at TD Ameritrade.

b. In November 2014, an investor deposited $200,000 into the CRVF, and that same day, Moumen transferred $38,000 to a Bank of America account in his name. Moumen transferred another $150,000 to a personal brokerage account at TD Ameritrade.

c. On January 27, 2015, investors wired $169,000 to the CRVF, which had a balance of $0, and that day Moumen transferred $18,000 to his personal account at Bank of America. Moumen then purchased a cashier's check to pay rent on his personal residence.

d. On February 3, 2016, an investor wired $240,000 into the CRVF, which had a balance of $152. Moumen then transferred $92,000 to the CRCP and, the next day, wired $90,188 from the CRCP account to Tesla Motors for purchase of a vehicle.

e. On August 25, 2016, an investor deposited $47,000 into the CRVF, which was overdrawn at the time. Four days later, Moumen transferred $46,600 to his personal account at Bank of America. He used these funds to pay a personal tax liability.

Moumen also used funds from new investors to pay earlier investors. On May 13, 2015, after an investor deposited $131,000 into the CRVF, Moumen paid $36,000 from this account to another investor. Likewise, On August 31, 2015, after an investor wired $250,000 into the CRVF, Moumen paid an earlier investor $75,000 from the account.

¶ 12 Plaintiffs alleged that, pursuant to regulations prescribed under the Bank Secrecy Act (BSA) ( 12 U.S.C. § 5311 et seq. (2018) ), Northbrook must collect information about the holders of all of its accounts. Therefore, in accordance with its obligations under the BSA, Northbrook "developed, administered, and maintained a program that ensured compliance with the BSA." "[U]pon information and belief," Northbrook complied with the controlling regulations. Plaintiffs alleged that "Northbrook Bank was fully compliant with the BSA and by complying with the BSA and its various requirements to ‘know the customer,’ Moumen and the [funds], it had actual knowledge of Moumen's fraudulent scheme soon after it became clear Moumen was not investing client money in any way."

¶ 13 Although Northbrook was compliant with federal regulations, the complaint alleged that it did not enforce or implement the policies put in place to prevent money laundering. One requirement was the appointment of a third-party administrator to oversee the funds’ transactions. Northbrook contacted Moumen and informed him that he needed an administrator and even threatened to terminate its business relationship with Moumen. Moumen, however, never named a third-party administrator.

¶ 14 Plaintiffs alleged that Northbrook also contacted Moumen to inquire about several transfers of money into his personal account. Moumen told Northbrook that he was paying himself fees by using his personal account as a pass-through account. Northbrook accepted Moumen's explanation. Plaintiffs alleged that Northbrook enabled Moumen to perpetrate his scheme by failing "to adhere to the regulatory guidance, banking industry standards, and its own policies" and by not responding to "the obvious suspicious nature of the transactions."

¶ 15 In December 2016, Northbrook was served with a subpoena from the FBI seeking records for the Northbrook fund accounts. Northbrook contacted Moumen "within days of receiving the federal subpoena." Northbrook also filed a Suspicious Activity Report. See 12 C.F.R. § 21.11 (2010). A few months later, Moumen was arrested by the FBI. In October 2017, Moumen was sentenced to 10 years in prison and ordered to pay plaintiffs $7,570,831.59 in restitution.

¶ 16 Northbrook filed a section 2-615 motion to dismiss, arguing that count I fails because plaintiffs did not allege a source of duty on the part of Northbrook and, furthermore, they failed to identify any regulation or industry standard that would have obligated Northbrook to freeze Moumen's accounts or alert investors of his actions. Counts II and III fail because plaintiffs did not allege facts showing Northbrook actually knew of or refrained in bad faith from investigating Moumen's activities.

¶ 17 After a hearing, the trial court granted the motion to dismiss with prejudice. The court again found the complaint did not allege sufficient facts to support plaintiffs’ conclusions. Plaintiffs filed a notice of...