Case Information
*1 Before LOKEN, BEAM, and GRUENDER, Circuit Judges.
____________
GRUENDER, Circuit Judge.
Geoffrey Varga, in his capacity as the official liquidator of Palm Beach Offshore, Ltd. and Palm Beach Offshore II, Ltd. (collectively, “the Palm Beach Funds”), sued U.S. Bank National Association (“U.S. Bank”) for aiding and abetting a breach of fiduciary duty, willful and wanton negligence, and gross negligence. These claims arose from the Palm Beach Funds’ investment through accounts *2 maintained at U.S. Bank in what turned out to be a Ponzi scheme. The district court [1] granted U.S. Bank’s motion to dismiss Varga’s amended complaint. Varga appeals, and we affirm.
I. Background
In this appeal from the grant of a motion to dismiss, we accept as true the well-
pleaded allegations in the amended complaint.
Loftness Specialized Farm Equip.,
Inc. v. Twiestmeyer
,
Tom Petters, through his company Petters Company, Inc. (“Petters Company”), claimed to purchase excess consumer merchandise, such as electronics, from vendors. Petters Company financed these supposed transactions by selling high-yield promissory notes to investors through Petters Capital, Inc. (“Petters Capital”), a wholly owned entity of Petters Company. These promissory notes were to be repaid once the consumer merchandise had been sold to and paid for by retailers, like Sam’s Club and BJ’s Wholesale Club, in transactions that Petters Company was to arrange. This investment structure enabled Petters Company to grow into what appeared to be a multi-billion dollar operation. But the investment scheme peddled by Petters Company was entirely illusory: no vendors ever sold consumer merchandise, and no retailers ever purchased it. Instead, Petters Company generated fake purchase orders and sales confirmations and kept its scheme afloat by recycling funds that it received from new investors to pay off the promissory notes of old investors as they came due. The inevitable collapse of Petters’s Ponzi scheme caused investors to suffer staggering losses.
*3 The Palm Beach Funds, which invested in Petters Company’s promissory notes and are now being liquidated, collectively lost over $700 million to Petters’s scheme. The Palm Beach Funds’ investment was made through another fund called Palm Beach Finance Partners II, LP (“Palm Beach Finance”). Palm Beach Finance received the Palm Beach Funds’ investment in Petters Company’s promissory notes via an escrow account that was maintained at U.S. Bank and was governed by an escrow-account agreement.
What happened to the Palm Beach Funds’ money once it was transferred out of the escrow account forms the heart of this case. The money initially went to a collateral account that also was maintained at U.S. Bank. The collateral account was governed by a collateral-account agreement to which U.S. Bank, Palm Beach Finance, and Petters Capital, among others, were parties. The Palm Beach Funds were not parties to the collateral-account agreement. Once the Palm Beach Funds’ investment reached the collateral account, Varga alleges that a “direct payment system” prescribed that (a) outgoing funds from the collateral account were to be sent directly to the vendors that purportedly sold the consumer merchandise to Petters Company and (b) incoming funds to the collateral account were to come directly from the retailers that purportedly purchased the consumer merchandise from Petters Company. This direct payment system, according to Varga, was designed to prevent a third party from accessing investor funds and to ensure the legitimacy of the merchandise transactions. Because no vendors or retailers were involved in any legitimate transactions, the direct payment system was never followed. Instead, the collateral account played host to the Ponzi scheme with the outgoing funds being sent to Petters Company through sham inventory vendors and the incoming funds (i.e., the investors’ recycled funds) coming from Petters Company.
Varga alleges that Bruce Prevost and David Harrold, in their capacity as directors of the Palm Beach Funds, breached their fiduciary duties to the Palm Beach Funds. Varga additionally alleges that Palm Beach Capital Management, LLC *4 (“PBCM”), which managed the Palm Beach Funds, breached its fiduciary duties to the Palm Beach Funds. In particular, Varga argues that Prevost, Harrold, and PBCM breached their fiduciary duties to the Palm Beach Funds by failing to ensure that the direct payment system was utilized while nonetheless continuing to invest in Petters Company’s promissory notes and by concealing the noncompliance with the direct payment system from the Palm Beach Funds. Varga settled his claims against Prevost, Harrold, and PBCM in a separate proceeding.
This case concerns Varga’s further claim that U.S. Bank’s actions are sufficient to charge it with aiding and abetting the breach of fiduciary duty by Harrold, Prevost, and PBCM, willful and wanton negligence, and gross negligence. Varga alleges that U.S. Bank knew that the direct payment system was not being followed. Varga further asserts that U.S. Bank understood that the direct payment system was an important procedural safeguard that was designed to protect the Palm Beach Funds’ investment. U.S. Bank acquired this knowledge, according to Varga, by reviewing the collateral-account agreement, the Palm Beach Funds’ marketing and due-diligence documents, and the private offering memoranda for the Palm Beach Funds’ investment in Petters Company’s promissory notes.
In addition to appreciating the importance of the direct payment system, Varga alleges that U.S. Bank participated in concealing from the Palm Beach Funds the fact that the direct payment system was not being followed. Varga first alleges that U.S. Bank participated in a so-called “re-coding scheme” at the direction of two of the “fund managers” for the Palm Beach Funds—identified in Varga’s brief as Prevost and Harrold. This alleged scheme, which began no later than December 2006, involved U.S. Bank re-coding the account statements for the collateral account to indicate that the incoming funds into the collateral account were being received from retailers, not Petters Company. However, Varga admits in his amended complaint that, from 2002 until the re-coding scheme began in approximately December 2006, the collateral account statements correctly listed Petters Company as the source of the *5 incoming funds. According to Varga, U.S. Bank also told various individuals associated with the Palm Beach Funds that the direct payment system was being followed. The amended complaint includes only one example of this alleged practice. Varga alleges that Jonathan Spring, a third-party marketer for the Palm Beach Funds and an investor in Petters Company’s promissory notes, contacted U.S. Bank employee Thomas Caruth. Caruth, who was Palm Beach Finance’s “main contact” at U.S. Bank, told Spring that “all wires sent out of U.S. Bank go directly to retailers and manufacturers” and “wires received come directly from retailers without going through intermediaries.”
On the basis of these allegations, Varga sued U.S. Bank. U.S. Bank moved to dismiss the amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court granted U.S. Bank’s motion. This appeal followed.
II. Discussion
We review
de novo
the grant of a motion to dismiss, accepting the well-pleaded
allegations in the complaint as true and drawing all reasonable inferences in favor of
the plaintiff.
Id.
In addition to the allegations in the amended complaint, we also
may consider “materials that are necessarily embraced by the pleadings.”
Mattes v.
ABC Plastics, Inc.
,
A. Aiding and Abetting a Breach of Fiduciary Duty
Under Minnesota law, aiding and abetting the tortious conduct of another has
three elements: “(1) the primary tort-feasor must commit a tort that causes an injury
to the plaintiff; (2) the defendant must know that the primary tort-feasor’s conduct
constitutes a breach of duty; and (3) the defendant must substantially assist or
encourage the primary tort-feasor in the achievement of the breach.”
Witzman v.
Lehrman, Lehrman & Flom
,
An aider and abettor’s knowledge that the primary tortfeasor’s conduct
constitutes a breach of fiduciary duty is a “crucial element” of a claim for aiding and
abetting.
E-Shops Corp. v. U.S. Bank Nat’l Ass’n
,
Varga relies on three allegations in the amended complaint to support his argument that he plausibly pled that U.S. Bank knew of and substantially assisted a breach of fiduciary duty. First, Varga asserts that U.S. Bank’s review of various documents that purportedly mandated the direct payment system suffices to establish U.S. Bank’s knowledge that Prevost, Harrold, and PBCM were breaching their fiduciary duties to the Palm Beach Funds by failing to ensure that the direct payment system was utilized while nonetheless continuing to invest in Petters Company’s promissory notes. The documents alleged to have been reviewed by U.S. Bank include: the collateral-account agreement; the private offering memoranda for the Palm Beach Funds’ investment in Petters Company’s promissory notes; and the Palm Beach Funds’ marketing and due-diligence documents. However, the collateral- account agreement, which established U.S. Bank’s duties in relation to the collateral account, does not mandate that U.S. Bank only accept those deposits that come from retailers. To the contrary, the collateral-account agreement expressly contemplates [2]
instances in which the direct payment system would not be followed. In particular,
the collateral-account agreement provides that U.S. Bank “shall . . . [a]pply and credit
for deposit to the Collateral Account . . . all Collections [defined as “all payments
owing to [Petters Capital] with respect to sales of inventory”] and other Receipts from
time to time tendered by or on behalf of [Petters Capital] for deposit therein.” As this
excerpt makes clear, not only did the collateral-account agreement indicate that
exceptions to the direct payment system may be made, but it also left U.S. Bank with
no discretion to refuse the aforementioned deposits that were made “by or on behalf
of” Petters Capital, a wholly owned entity of Petters Company. In light of this
contractual provision in the collateral-account agreement, it is implausible to
conclude that U.S. Bank knew that the failure to adhere to the direct payment system
*8
and continued investments in Petters Company’s promissory notes constituted a
breach of fiduciary duty by Harrold, Prevost, and PBCM.
See Iqbal
,
Varga responds by pointing to other language in the collateral-account agreement—for example, that Petters Capital “agrees to direct each [retailer] to make all payments” to the collateral account. The private offering memorandum quoted in the amended complaint contains a similar statement. But an agreement that Petters Capital would “direct” the retailers, who were not parties to the collateral-account agreement, to make the deposits into the collateral account provides no indication of whether the retailers had agreed or would agree to this course of action. Varga also relies on the portion of the collateral-account agreement that states that Palm Beach Finance “has requested that . . . all collections received from [retailers] and proceeds of such inventory and accounts receivable be . . . remitted by wire transfer directly to” the collateral account. (emphasis added) However, the use of the word “requested” by Palm Beach Finance—the party through which the Palm Beach Funds’ money flowed—indicates that no agreement had been reached on whether the direct payment system was, in fact, mandatory. See Webster’s Third New International Dictionary 1929 (2002) (defining “request” as “to ask (as a person or an organization) for something”). Moreover, neither of the above-quoted provisions impose any duty on U.S. Bank to ensure that the retailers made their deposits directly into the collateral account. Consequently, far from mandating the direct payment system, the portions of the collateral-account agreement and the private offering memoranda on which Varga relies actually indicate that the direct payment system was not mandatory.
Varga also contends that U.S. Bank acquired knowledge of the breach of
fiduciary duty from its review of the Palm Beach Funds’ marketing and due-diligence
materials. Because these documents are not before the court at this procedural
juncture, Varga asserts that we must accept the truth of his allegation that these
documents “required” the retailers to make deposits directly into the collateral
account. Even if these documents did so state, they would be inconsistent with the
*9
collateral-account agreement, the document that specified U.S. Bank’s duties in
relation to the collateral account. As noted above, by executing the collateral-account
agreement, Palm Beach Finance and Petters Capital, among others, agreed to allow,
and in fact required, U.S. Bank to accept incoming funds from a source other than a
retailer. U.S. Bank is entitled to rely on the specific provisions in its contract in the
face of alleged statements in ancillary documents, like the marketing and due-
diligence documents at issue here, to determine what conclusion to draw from the fact
that the direct payment system was not being followed.
Cf. Witzman
,
Second, Varga relies on his assertion that, no later than December 2006, U.S.
Bank began re-coding the account statements for the collateral account to identify
retailers, not Petters Company, as the source of the funds deposited into the collateral
account. U.S. Bank, it is alleged, took this step at the direction of Prevost and
Harrold. From these instructions, Varga contends that U.S. Bank inferred that
Prevost, Harrold, and PBCM were breaching their fiduciary duties by wrongfully
concealing the noncompliance with the direct payment system from the Palm Beach
Funds. We disagree. The context within which the re-coding instructions to U.S.
Bank were made is key. For approximately the previous four years—that is, from
2002 until about December 2006—the account statements correctly reported that
Petters Company, not a retailer, made the deposits into the collateral account.
Inferring a wrongful scheme to conceal the noncompliance with the direct payment
system when this fact had been fully disclosed for approximately four years without
any questions from the recipients of the account statements is simply not plausible.
See Iqbal
,
Varga further contends that U.S. Bank’s act of re-coding the account statements
amounted to substantial assistance of a breach of fiduciary duty. In order to provide
substantial assistance, “[t]he defendant must have some degree of knowledge that his
actions are aiding the primary violator.”
Camp
,
Considering the facts as alleged by Varga, the only plausible inference to be
drawn from U.S. Bank’s re-coding of the account statements is that U.S. Bank simply
was following a customer’s directions for reporting the ultimate source of the
incoming funds into the collateral account. When U.S. Bank agreed to re-code the
account statements, it knew that the recipients of these statements had known for
approximately four years that Petters Company was the source of the incoming funds
into the collateral account. Moreover, the collateral-account agreement informed
*11
U.S. Bank of the fact that Petters Capital, a wholly owned entity of Petters Company,
may be depositing the funds that it received from the retailers into the collateral
account. The collateral-account agreement also describes the incoming deposits to
the collateral account as “all payments owing to [Petters Capital] with respect to the
sales of inventory.” Consequently, in the absence of further allegations about the
substance of the re-coding instructions to U.S. Bank or any allegation about U.S.
Bank’s knowledge of how Prevost, Harrold, and PBCM intended to use the account
statements, U.S. Bank could only plausibly understand that it was assisting its
customer with reporting the ultimate source (retailers), rather than the intermediate
source (Petters Company), of the incoming funds into the collateral account.
Accordingly, Varga has not alleged plausibly that U.S. Bank inferred that it was
assisting with any sort of concealment or otherwise furthering a breach of fiduciary
duty by Prevost, Harrold, and PBCM.
See Iqbal
,
Finally, Varga relies on his assertion that U.S. Bank employees falsely told
individuals associated with the Palm Beach Funds that the direct payment system was
being followed. Although Varga contends that misrepresentations like this occurred
on multiple occasions, the amended complaint identifies only one specific instance:
a misrepresentation by U.S. Bank employee Caruth to Spring, a third-party marketer
for the Palm Beach Funds and an investor in Petters Company’s promissory notes.
Caruth was Palm Beach Finance’s “main contact” at U.S. Bank. Varga primarily
argues that Caruth’s misstatement constitutes substantial assistance. However, Varga
has not alleged that Caruth knew that his statement to Spring was false. Absent such
an allegation, Varga’s argument for substantial assistance necessarily fails.
See
Camp
, 948 F.2d at 460 (explaining that defendant’s conduct must have “some
element of blameworthiness”);
E-Shops Corp.
,
Varga’s further assertion that, at unspecified times, unnamed U.S. Bank
employees made misstatements to unnamed individuals associated with the Palm
Beach Funds fares no better. Not only does Varga fail to allege that the unnamed
U.S. Bank employees knew that their statements were false, but the amended
complaint lacks any indication of whether these employees had access to records
regarding the collateral account or whether they understood or even should have
understood that their statements were aiding a breach of fiduciary duty by Prevost,
Harrold, and PBCM. These allegations are therefore insufficient to state a plausible
claim.
See C.N. v. Willmar Pub. Schs.
,
Indep. Sch. Dist. No. 347
,
Considering U.S. Bank’s knowledge and assistance in tandem, s ee Witzman , 601 N.W.2d at 188, we agree with the district court that Varga has not stated a plausible claim. We consequently affirm the grant of U.S. Bank’s motion to dismiss Varga’s claim for aiding and abetting a breach of fiduciary duty.
B. Negligence
Varga also brought claims against U.S. Bank for willful and wanton negligence
and for gross negligence. In order to succeed on these claims, Varga must, among
other things, allege the existence of a duty.
See Louis v. Louis
,
Varga asserts that U.S. Bank had a duty to provide information to the Palm
Beach Funds about the flow of funds in and out of the collateral account. Varga
bases this argument on
Klein v. First Edina National Bank
,
Relying on Klein , Varga argues only that special circumstances existed here because U.S. Bank knew or had reason to know that the Palm Beach Funds placed their trust and confidence in U.S. Bank to counsel and inform them about whether the direct payment system was being followed. U.S. Bank knew or had reason to know of this reliance, Varga argues, based on the escrow-account agreement and the collateral-account agreement as well as U.S. Bank’s role in the Palm Beach Funds’ investment in Petters Company’s promissory notes. The parties’ contracts are of no help to Varga. Neither the escrow-account agreement, which defined U.S. Bank’s duties to the Palm Beach Funds, nor the collateral-account agreement, which specifically disclaimed U.S. Bank’s duties to third parties like the Palm Beach Funds, evidence the special circumstances contemplated by Klein . Moreover, as noted *14 above, the collateral-account agreement expressly required U.S. Bank to accept deposits that did not comply with the direct payment system.
Nor does the allegation that the Palm Beach Funds referred its investors and
third-party marketers to U.S. Bank to have their questions about the escrow and
collateral accounts answered establish the special circumstances contemplated by
Klein
. The relevant contracts establish what can only be described as an ordinary,
arm’s-length commercial relationship between U.S. Bank and the Palm Beach Funds,
and “[c]ourts applying Minnesota law have been reluctant to impose a duty to
disclose material facts in arm’s-length business transactions between commercial
entities.”
Driscoll v. Standard Hardware, Inc.
,
III. Conclusion
For the reasons set forth above, we affirm.
______________________________
Notes
[1] The Honorable Richard H. Kyle, United States District Judge for the District of Minnesota.
[2] As noted above, when deciding a motion to dismiss, we may consider
materials that necessarily are embraced by the pleadings.
See Mattes
,