MLSMK Investment Co. v. JP Morgan Chase & Co.
651 F.3d 268
2d Cir.2011Background
- This is an appeal from a district court judgment in a NY federal case involving MLSMK Investment Co. against JPMorgan Chase & Co. and JPMorgan Chase Bank, NA, asserting RICO and NY law claims.
- The district court dismissed all non-negligence claims for failure to plead a strong inference of fraudulent intent under Rule 9(b) and dismissed negligence claims for lack of a duty of care.
- Plaintiff alleged that defendants had actual knowledge of Bernard Madoff’s Ponzi scheme and aided and abetted misfeasance by providing banking services to Madoff, despite MLSMK not being a customer of defendants.
- The complaint described a meeting between defendants and Madoff with questions about cash flow, leverage, and counterparties, but the meeting details were based on information and belief and industry-practice assertions with no independent corroboration.
- The panel found the knowledge allegations were speculative and insufficient to plead actual knowledge or to sustain commercial bad faith or aiding-and-abetting claims, leading to dismissal of those claims.
- Negligence claims were also rejected: one claim failed for lack of asserted actual knowledge; the other failed because alleged non-decisive acts (failure to shut down Madoff’s account) do not establish a duty and are insufficient under Twombly.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| RICO conspiracy viability | MLS MK contends defendants knowingly participated in a fraud scheme. | Defendants argue lack of pleaded knowledge and conspiracy elements. | RICO claim viability reserved; district‑court dismissal affirmed in part; remaining issues to be addressed in separate ruling. |
| Aiding and abetting breach of fiduciary duty | Defendants had actual knowledge of Madoff’s fraud and aided the breach. | No sufficient facts showing actual knowledge or participation. | Claims dismissed for lack of pleaded actual knowledge. |
| Commercial bad faith | Defendants acted with actual knowledge to facilitate fraud. | No factual basis for actual knowledge; standard not met. | Dismissed for failure to allege actual knowledge. |
| Negligence claims | Actual knowledge created a duty to investigate and protect against fraud. | No duty owed to MLSMK as a non-customer and no clear evidence of misappropriation. | Dismissed; no duty or cognizable negligence shown. |
Key Cases Cited
- Kuck v. Danaher, 600 F.3d 159 (2d Cir. 2010) (motion to dismiss standard: plausibility required)
- In re Methyl Tertiary Butyl Ether Prods. Liab. Litig., 488 F.3d 112 (2d Cir. 2007) (fraud pleading heightened standard)
- Chanayil v. Gulati, 169 F.3d 168 (2d Cir. 1999) (knowing participation required for RICO predicate acts)
- SCS Commc’ns, Inc. v. Herrick Co., 360 F.3d 329 (2d Cir. 2004) (elements of aiding and abetting breach of fiduciary duty)
- Prudential-Bache Sec., Inc. v. Citibank, N.A., 73 N.Y.2d 263 (1989) (commercial bad faith requires actual knowledge)
- Webb v. Goord, 340 F.3d 105 (2d Cir. 2003) (conspiracy pleading must show cognizable agreement)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (narrow exception for protecting trust funds; not applicable here)