Yao-Yi v. Wilmington Trust Co.

• Decision Date: 26 September 2017
• Docket Number: 6:14-CV-06631 EAW
• Citation: 301 F.Supp.3d 403
• Parties: LIU YAO-YI, et al., Plaintiffs, v. WILMINGTON TRUST COMPANY, Defendant.
• Court: U.S. District Court — Western District of New York

301 F.Supp.3d 403

LIU YAO-YI, et al., Plaintiffs,

v.WILMINGTON TRUST COMPANY, Defendant.

6:14-CV-06631 EAW

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

Signed September 26, 2017

Filed September 27, 2017

Alan L. Rosca, James P. Booker, Peiffer Rosca Wolf Abdullah Carr & Kane, Cleveland, OH, Joseph C. Peiffer, Peiffer Rosca Wolf Abdullah Carr & Kane, LLC, New Orleans, LA, Paul J. Scarlato, Goldman Scarlato & Penny, P.C., Wayne, PA, Jason J. Kane, Peiffer Rosca Wolf Abdullah Carr & Kane, LLP, Pittsford, NY, for plaintiffs.

Robert J. Lane, Jr., Jeffrey Thomas Fiut, Karalyn Mena Rossi, Hodgson Russ LLP, Buffalo, NY, for defendant.

DECISION AND ORDER

ELIZABETH A. WOLFORD, United States District Judge

INTRODUCTION

Plaintiffs, Taiwanese investors, bring this putative class action against defendant Wilmington Trust Company ("Defendant" or "Wilmington"), alleging claims for aiding and abetting fraud, aiding and abetting conversion, aiding and abetting breach of fiduciary duty, gross negligence, and breach of fiduciary duty. (Dkt. 16). Presently before the Court is Defendant’s motion to dismiss Plaintiffs’ First Amended Complaint (the "amended complaint") pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). (Dkt. 19). Because Plaintiffs have plausibly asserted claims for aiding and abetting a breach of fiduciary duty, gross negligence, and breach of fiduciary duty, Defendant’s motion to dismiss those claims is denied. However, Plaintiffs have failed to plausibly allege claims for aiding and abetting fraud, and aiding and abetting conversion. Therefore, for the reasons set forth below, Plaintiffs’ claims for aiding and abetting fraud and aiding and abetting conversion are dismissed.

FACTUAL BACKGROUND

Plaintiffs are Taiwanese residents¹ who purchased interests in investment funds, known as the Bio Profit Series, LLC ("BPS") Funds. (Dkt. 16 at ¶¶ 1, 39-50). Plaintiffs allege that between 2005 and 2013, the BPS Fund managers operated the Funds as a Ponzi scheme, causing Plaintiffs’ investment to lose value. As a result, Plaintiffs filed this action against Wilmington—the bank at which the BPS Fund managers maintained their accounts—alleging that Wilmington knowingly assisted in the Ponzi scheme, was grossly negligent in failing to discover the scheme, and breached its fiduciary duties.

The following recitation of facts is taken from Plaintiffs’ amended complaint, which is over 70 pages long and contains approximately 300 numbered paragraphs. Plaintiffs allege that Velocity Investment Group, Inc. ("Velocity"), based in Pasadena, California, was an entity owned and controlled by Michael Wang ("Wang") with the assistance of Wendy Ko ("Ko") (collectively, "the Fund managers"), both of whom were also located in California. (Id. at ¶¶ 17, 60). Through Velocity, Wang and Ko managed the California-based BPS Funds and solicited investors to invest in such funds by informing them that the investor money would be primarily used for buying and making residential loans, secured by first or second deeds of trust and mortgages on real property located in California, and buying and making commercial loans, secured by real property. (Id. at ¶ 17).

Plaintiffs allege that BPS consisted of several California-based investment funds purporting to invest in real estate—including BPS Funds I, II, III, and V, and Velocity Valley & Grand ("VVG") (id. at ¶ 2)—although these entities actually functioned as one fraudulent entity with investor funds being commingled among the BPS Funds’ Wilmington escrow/custodial/trust accounts (id. at ¶ 3). Plaintiffs’ amended complaint alleges that, in order to assure the investors that their invested monies were safe, the Fund managers entered into "escrow and/or custodial/trust agreements" with Wilmington for the BPS Funds, and established "custodial/escrow/trust accounts" for such funds with Wilmington. (Id. at ¶ 4). Plaintiffs further allege that the escrow/custodial/trust accounts were opened for the benefit of the investors and/or for the safekeeping of their funds, and Wilmington—the trustee, custodian and/or escrow agent—undertook certain custodial/escrow duties to those investors, including the duties to monitor those accounts, oversee the transactions in the accounts, safeguard the investor money while in its custody, and transfer the investor money to the BPS Fund in which such money was intended to be held for use according to each fund’s Private Placement Memorandum ("PPM") and Subscription Agreement provisions (the "Use of Proceeds Provisions"). (Id. at ¶ 5).

Plaintiffs allege that their money was being converted, with Wilmington’s assistance, by the Fund managers. Pursuant to instructions in the offering memoranda, investors sent their money, through checks made payable to "Wilmington Trust Company as Escrow Agent for [each BPS Fund, respectively]," to Velocity’s offices with the understanding that it would be transferred to a Wilmington escrow account. (Id. at ¶¶ 66, 68). After their money was deposited in certain Wilmington escrow or custodial accounts, instead of being invested in real estate loans as represented in each BPS Fund’s offering materials, investor money was "improperly - and knowingly - transferred by Wilmington," at the request of the Fund managers, to other BPS Funds’ escrow/custodial/trust accounts held by Wilmington, commingled in those accounts with money of investors in other BPS Funds, and/or paid out of the Wilmington accounts as "interest" or "redemption" to other BPS investors. (Id. at ¶ 6). Plaintiffs allege that as a result of their participation in the scheme, Wilmington profited in fees from serving as the trustee, custodian, and/or escrow agent for the BPS Funds. (Id. at ¶ 10).

Plaintiffs contend that while misconduct occurred in several escrow/custodial accounts, BPS Fund I became the "epicenter" of the scheme. (Id. at ¶¶ 12, 23). Ultimately, through an investigation by the Securities and Exchange Commission ("SEC"), the Ponzi scheme was exposed and Plaintiffs discovered their monies were gone. (Id. at ¶ 13).

Plaintiffs allege that Wilmington engaged in the fraudulent scheme in four ways: (1) using new-investor monies to make "interest" and redemption payments to existing investors; (2) commingling investor money among the BPS Funds, in violation of its custodial and fiduciary duties to investors; (3) diverting investor money from the custodial accounts it managed and oversaw without the investors’ knowledge or permission; and (4) assisting the Fund managers in their fraud, breach of fiduciary duty to the BPS Fund investors, and conversion of investor money in violation of its own fiduciary duties to such investors. (Id. at ¶ 14). Plaintiffs further allege that the investors, when deciding to invest in the BPS Funds, understood and believed Wilmington’s role to be that of an escrow agent for their funds, and that the accounts in which their money was going to be held were to be escrow—or trust—accounts. (Id. at ¶ 27).

Plaintiffs allege that Wilmington entered into escrow/custodial agreements with each BPS Fund, respectively, of which the BPS Fund investors were third-party beneficiaries. (Id. at ¶ 28). Pursuant to those agreements, Wilmington undertook various duties, including to monitor and safeguard the BPS Fund investors’ monies and to disburse those funds pursuant to the terms of the BPS Funds’ offering materials. (Id. ). Plaintiffs similarly allege that these offering materials indicated that Wilmington was the escrow agent for the respective BPS Fund’s investor proceeds (id. at ¶ 65), and that Wilmington may be held liable to the investors for the loss of the funds held in the escrow accounts in cases of gross negligence or willful misconduct (id. at ¶ 69).

Plaintiffs allege that Wilmington assigned the same two individuals to oversee and manage all BPS Fund custodial/trust/escrow accounts, Sally Molina ("Molina") and Scott Huff ("Huff") (id. at ¶¶ 30, 201), and that those employees developed a close working relationship with Ko and Wang, a keen understanding of the scheme’s business and operations, and extensive knowledge of the sources and destinations of the BPS Funds’ cash inflows and outflows (id. at ¶ 31). For example, Plaintiffs allege that upon the deposit of new investor money in the BPS Fund accounts, Wilmington’s trust account specialist overseeing those accounts was frequently contacted by the "BPS Funds’ principals" and directed to transfer the new investor money from the respective account in which it was deposited chiefly to the BPS I custodial/escrow account. (Id. at ¶ 32). Wilmington would then be directed by the BPS Funds’ principals to wire massive amounts from the BPS I custodial/escrow account to "clearly improper uses" as alleged in the amended complaint, including payments to Wang and his family. (Id. at ¶ 33). These transactions occurred for about seven years, concluding in 2013, and involved around $150 million in investor monies. (Id. at ¶ 143). Plaintiffs allege that as a result of the Fund manager’s scheme and Wilmington’s misconduct, they have "lost a substantial portion of the money they invested in the BPS Funds." (Id. at ¶¶ 252, 263, 275, 287, 298).

PROCEDURAL HISTORY

Plaintiffs filed their initial complaint on November 6, 2014. (Dkt. 1). Defendant moved to dismiss that complaint on May 1, 2015. (Dkt. 13). Plaintiffs thereafter filed the operative pleading in this case—the amended complaint—on May 22, 2015. (Dkt. 16). Defendant filed the pending motion to dismiss on June 19, 2015. (Dkt. 19). On July 24, 2015, Plaintiffs filed their response papers, and Defendant replied on August 7, 2015. (Dkt. 24; Dkt. 26). Plaintiffs obtained permission to file a sur-reply (Dkt. 28; Dkt. 29), which was filed on August 18, 2015 (Dkt. 31).

The Court scheduled oral argument for November 13, 2015. (Dkt. 32). Oral argument was rescheduled for January 4, 2016. (Dkt. 33). Prior to oral argument, Plaintiffs filed a notice of supplemental authority on December 17, 2015. (...