952 F. Supp. 2d 850
D. Minnesota
2013
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Background

  • Tom Petters ran a large Ponzi scheme through Petters Company, Inc. (PCI); purported "distressed goods" transactions were fictitious and investors lost billions when the scheme collapsed in 2008.
  • Cayman Islands hedge funds Palm Beach Offshore, Ltd. and Palm Beach Offshore II, Ltd. (the Palm Beach Funds) invested over $700 million in PCI notes via an intermediary, Palm Beach Finance, controlled by David Harrold and Bruce Prevost.
  • The Palm Beach Funds marketed a "Direct Payment System" and a U.S. Bank–maintained "Collateral Account" that, in theory, would receive retailer payments directly to validate transactions; in practice payments to the account came from PCI.
  • Varga was appointed liquidator of the Palm Beach Funds and sued U.S. Bank alleging aiding and abetting breaches of fiduciary duty and negligence for the bank’s role in processing Collateral Account transactions and allegedly concealing the payment source.
  • The Collateral Agreement named U.S. Bank and Palm Beach Finance as parties; the Palm Beach Funds were not parties and had no contractual rights in the Collateral Account; the Agreement permitted the bank to accept deposits tendered by or on behalf of PCI.
  • The district court granted U.S. Bank’s motion to dismiss with prejudice, finding Varga failed to plausibly plead (1) aiding-and-abetting (no actual knowledge and no substantial assistance) and (2) negligence (no duty owed to the Funds).

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether U.S. Bank can be liable for aiding and abetting breaches of fiduciary duty owed to the Palm Beach Funds Varga: Bank knew Direct Payment System was required, knew fiduciaries were not following it, processed payments and altered statements to conceal the source, so had actual knowledge and substantially assisted breaches U.S. Bank: Bank had no actual knowledge of wrongful breaches to the Funds; documents did not require the Direct Payment System; bank was contractually permitted to accept PCI deposits and performed routine banking services Dismissed — Varga failed to plead actual knowledge of a breach and failed to plead substantial assistance; allegations amount to at best constructive knowledge or inaction
Whether the Palm Beach Funds had a legally cognizable duty from U.S. Bank (negligence) Varga: Funds relied on U.S. Bank as custodian and expected the bank to safeguard the Collateral Account and inform them of problems U.S. Bank: Funds were not parties or beneficiaries of the Collateral Agreement; bank had no fiduciary duty or duty to non-customers to prevent fraud in an account Dismissed — no duty owed to the Palm Beach Funds under the agreement or Minnesota law
Whether changes to monthly statements and employee statements could show causation/assistance Varga: Re-coding statements and false employee statements concealed PCI as the source and caused harm to the Funds U.S. Bank: Funds were not shown to have received the statements; any statements were to third parties and there is no allegation bank knew statements were false; failing to alert others is not affirmative assistance Dismissed — no plausible pleading that statements caused harm to the Funds or that bank acted with requisite state of mind
Choice of law for duties underlying aiding-and-abetting claim Varga: Relied on various authorities for fiduciary duties U.S. Bank: Duties arise under Cayman Islands law because Funds were formed in Cayman Islands Court: Noted duties arise under Cayman law; analyzed elements under Minnesota law as parties did not raise choice-of-law issue further Dismissed — pleading defects fatal regardless of choice-of-law nuances

Key Cases Cited

  • Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard for Rule 8)
  • Ashcroft v. Iqbal, 556 U.S. 662 (pleading must contain factual allegations, not legal conclusions)
  • Witzman v. Lehrman, Lehman & Flom, 601 N.W.2d 179 (Minn. 1999) (elements of aiding-and-abetting under Minnesota law)
  • E-Shops Corp. v. U.S. Bank Nat'l Ass'n, 678 F.3d 659 (8th Cir. 2012) (knowledge is crucial element for aiding-and-abetting)
  • Camp v. Dema, 948 F.2d 455 (8th Cir. 1991) (aider-and-abettor must have knowledge; inaction insufficient)
  • Am. Bank of St. Paul v. TD Bank, N.A., 713 F.3d 455 (8th Cir. 2013) (substantial assistance requires affirmative acts)
  • In re Temporomandibular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484 (8th Cir. 1997) (substantial assistance and causation in aiding-and-abetting context)
  • SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011) (bare inference of knowledge insufficient)
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