Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00567/USCOURTS-azd-2_07-cv-00567-0/pdf.json

Nature of Suit Code: 380
Nature of Suit: Other Personal Property Damage
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

YF Trust, 

Plaintiff, 

vs.

JP Morgan Chase Bank, N.A., 

Defendant. 

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No. CV 07-567-PHX-MHM

ORDER

On January 12, 2007, Plaintiff YF Trust filed a Complaint in Maricopa County

Superior Court on behalf of its Trustee, Harvard Investments, alleging claims of Failure to

Exercise Ordinary Care pursuant to Arizona Revised Statutes Annotated (“A.R.S.”) § 47-

3404(2) (Count I), and Aiding and Abetting Fraud and Breach of Fiduciary Duty (Count II)

against Defendant JP Morgan Chase Bank, N.A., successor in interest to Bank One Arizona,

N.A. On March 16, 2007, Defendant removed the case to the District Court. (Doc. # 1)

Defendant has moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure

12(b)(6) on the ground that the Complaint fails to state a claim upon which relief may be

granted. Defendant also argues that Plaintiff’s claims are barred by the applicable statutes

of limitations. The Court has reviewed Defendant’s Motion to Dismiss (Doc. # 4), the

Response (Doc. # 6), and Reply (Doc. # 7), as well as the applicable law, and now issues its

Order. 

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I. STANDARD OF REVIEW

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the

complaint. A Rule 12(b)(6) dismissal is proper only where there is either a "lack of a

cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal

theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990). The Ninth

Circuit has stated that "[t]he issue is not whether a plaintiff's success on the merits is likely

but rather whether the claimant is entitled to proceed beyond the threshold in attempting to

establish his claims." De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). The Court

must determine whether or not it appears to a certainty under existing law that no relief can

be granted under any set of facts that might be proved in support of plaintiff's claims. Id.

Rule 12(b)(6) must be read in conjunction with Rule 8(a) which requires "a short and

plain statement of the claim showing that the pleader is entitled to relief." 5A Charles A.

Wright & Arthur R. Miller, Federal Practice and Procedure, § 1356 (1990). The notice

pleading standard set forth in Rule 8 establishes "a powerful presumption against rejecting

pleadings for failure to state a claim." Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th

Cir. 1997). Therefore, a court must not dismiss a complaint for failure to state a claim unless

"it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim

which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also

U.S. v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). 

II. BACKGROUND

When reviewing a motion to dismiss, the Court accepts the allegations in the

complaint as true and construes them in the light most favorable to the plaintiff. Sosa v.

Hiraoka, 920 F.2d 1451, 1455 (9th Cir. 1990) The following facts are alleged in Plaintiff’s

Complaint (Doc. # 1 - 2). YF Trust is an Arizona irrevocable trust, and Harvard Investments

(“Harvard”) is its trustee. (Id., ¶ 1) Harvard is in the business of real estate development in

Arizona. (Id., ¶ 6) Harvard formed entities (the “Project Entities”) to conduct the business

for each of its real estate projects. (Id., ¶ 7) The Project Entities entered into numerous

contracts with service vendors related to the development of the Projects. (Id., ¶ 8) 

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Douglas Ross Zuber was a Vice-President of Harvard. (Id., ¶ 5 ) In this capacity,

Zuber’s responsibilities included the management and supervision of the Projects. (Id., ¶ 9)

Zuber was involved in developing budgets and selecting and contracting with vendors to

provide services required in connection with the development of the Projects. (Id.) From

March 1999, through January 2006, Zuber caused the Project Entities to enter into numerous

contracts with Fictitious Vendors, which were created and controlled by Zuber. (Id., ¶ 11)

During this same period of time, the Project Entities paid the Fictitious Vendors on invoices

totaling in excess of $50,000 for work billed under the Fictitious Vendor Contracts to the

Projects. (Id. , ¶ 14) The Fictitious Vendors did not provide any services to the Projects.

(Id., ¶ 15) On or about January 17, 2006, Harvard learned that Zuber fabricated the Fictitious

Vendor Contracts and the Fictitious Vendor’s invoices paid by Harvard and the Project

Entities. (Id., ¶ 16) 

Harvard subsequently discovered that the payments from the Project Entities to the

Fictitious Vendors were deposited in a series of at least seven accounts which Zuber opened

at the Camp Verde, Arizona, branch of Bank One in the names of the Fictitious Vendors. (Id.,

¶¶ 17, 21-28) Bank One representatives were aware that Zuber was an employee of Harvard,

and although the accounts were opened in the names of the Fictitious Vendors, Bank One

knew the accounts were opened, owned and controlled by Zuber. (Id., ¶¶ 17, 34, 35) Harvard

and all, or substantially all, of the Project Entities were, at all relevant times customers at

Bank One, and all, or substantially all, of the Project Entity checks paid to the Fictitious

Vendors were deposited into the Fictitious Entity Bank One accounts drawn on Project

Entities’ bank accounts at Bank One. (Id., ¶ 18) Zuber was not authorized to sign on any

Harvard bank account or any of the Project Entities’ bank accounts. (Id., ¶ 10) The

converted funds deposited into the Fictitious Vendor Bank One accounts were distributed to

Zuber and others, including Bank One. (Id., ¶¶ 48, 57, 58)

III. DISCUSSION

A. Defendant’s Motion to Dismiss Plaintiff’s Claim for Failure to Exercise

Ordinary Care (Count I)

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Plaintiff alleges in Count I that it is entitled to recover the amount lost by Harvard and

the Project Entities as a result of Defendant’s failure to use ordinary care under A.R.S. § 47-

3404(D). (Id., ¶ 42) Defendant contends that Plaintiff’s Complaint fails to state a claim

“because A.R.S. §§ 47-3404(B) and (D) require that plaintiff bear the loss for the checks paid

by [Defendant] that plaintiff (and its agents) made payable to allegedly fictitious entities.”

(Doc. # 4, p. 1)

Under A.R.S. § 47-3404(B), once a check made payable to a fictitious entity is paid,

the loss is generally borne by the drawer of the check, not the depository bank that took the

check for collection. Section 47-3404(B) provides in pertinent part:

If . . . the person identified as payee of an instrument is a fictitious person, the

following rules apply until the instrument is negotiated by special indorsement:

* * *

2. An indorsement by any person in the name of the payee stated in the

instrument is effective as the indorsement of the payee in favor of a person

who, in good faith, pays the instrument or takes it for value or for collection.

However, A.R.S. § 47-3404(D) renders a bank liable for payment of an employer’s

check to a fictitious payee, even though the employer’s employee caused the check to be

issued to the fictitious payee, if the bank fails to exercise ordinary care in paying or taking

the instrument. Specifically, A.R.S. § 47-3404(D) provides as follows:

[I]f a person paying the instrument or taking it for value or for collection fails

to exercise ordinary care in paying or taking the instrument and that failure

substantially contributes to loss resulting from payment of the instrument, the

person bearing the loss may recover from the person failing to exercise

ordinary care to the extent the failure to exercise ordinary care contributed to

the loss. 

“Ordinary care” is defined in A.R.S. § 47-3103(A)(7) as the “observance of reasonable

commercial standards, prevailing in the area in which the person is located, with respect to

the business in which the person is engaged.” 

Defendant points to Plaintiff’s allegations in the Complaint that Defendant “failed to

observe prevailing reasonable commercial banking standards in the formation and

maintenance of the Fictitious Vendor” accounts and that Defendant “fail[ed] to exercise

ordinary care with regard to the opening, maintenance and use of the Fictitious Vendor

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Accounts.” (Doc. 1 - 2, ¶¶ 40, 41) Defendant argues that the definition of “ordinary care”

in section 47-3103(A)(7) “relates solely to the requirements that a bank must meet in

processing an instrument.” Defendant contends that Plaintiff has not alleged lack of ordinary

care by Defendant in processing the checks and thus the allegations do not shift the burden

of loss to Defendant under the fictitious payee rule. Relying on two cases, one from Arizona

and one from Indiana, that were subsequently vacated, Defendant further argues that “facts

relating to the opening of an account are not sufficient to demonstrate that a drawee or

depositary bank did not exercise ordinary care in allowing the opening of a bank account.”

The Court does not agree with Defendant’s narrow interpretation of the statutes in

question. Defendant relies on the second sentence of section 47-3103(A)(7), which is limited

to the duty of a bank to examine an instrument taken by the bank by automated means: “[i]n

the case of a bank that takes an instrument for processing for collection or payment by

automated means, reasonable commercial standards do not require the bank to examine the

instrument if the failure to examine does not violate the bank’s prescribed procedures and the

bank’s procedures do not vary unreasonably from general banking usage . . . .” However,

although this provision generally will “protect intermediary banks [and] payor banks, [it] will

less frequently protect depository banks. . . . [I]t does nothing to protect a bank that deals face

to face with the embezzler.” 2 White & Summers, Uniform Commercial Code § 19-3 (5th

ed.) (discussing § 3-103(a)(9) which has been enacted in Arizona as A.R.S. § 47-

3103(A)(7)). As alleged here, Defendant, a small-town bank branch, had substantial contact

with Zuber over a period of seven years. 

Contrary to Defendant’s argument that facts relating to the opening of an account are

not sufficient to demonstrate that a depositary bank did not exercise ordinary care, a bank

may be liable for failing to exercise ordinary care in opening an account, in accepting checks

for deposit into an account, or in permitting withdrawal of funds from an account. 2 White

& Summers, Uniform Commercial Code § 19-4 (5th ed.) “Failure to exercise ordinary care

is to be determined in the context of all facts relating to the bank’s conduct with respect to

the bank’s collection of the check.” Id. 

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Here, the Complaint alleges that Bank One failed to exercise ordinary care or to

observe reasonable commercial banking standards in the formation, maintenance and use of

the Fictitious Vendor Accounts (Doc. 1 - 2, ¶¶ 40, 41); that Bank One opened at least seven

accounts in a small-town branch in the names of the Fictitious Vendors knowing that the

purported account holders did not legally exist (Id., ¶¶ 17-18, 20-29, 38, 52); that Bank One

knew that Zuber was the owner and sole signatory to the Fictitious Vendor accounts because

Zuber’s social security number, and not a separate employer identification number, was used

to establish the accounts (Id., ¶¶ 34, 35); and that Bank One thereafter caused or allowed the

removal of any references to Zuber from the accounts. (Id., ¶ 36)

The Complaint further alleges that Bank One was also the payor and depository bank

for the Project Entity checks issued to the Fictitious Vendors and that these checks were

deposited in the Fictitious Vendor accounts over the course of several years, beginning in

March 1999, and continuing through January 13, 2006 (Id., ¶¶ 30, 39); that said checks

usually indicated that the Fictitious Vendor payee was an “Inc.” or “Assoc.” (Id., ¶ 37); and

that Bank One and/or its representatives knew that Zuber was an employee of Harvard and

owed fiduciary duties to Harvard and the Project Entities during the relevant time period (Id.,

¶¶ 19, 53) Accordingly, Plaintiff’s allegations set forth above, taken as true, adequately state

a claim under A.R.S. § 47-3404(D). 

In its Reply brief, Defendant argues for the first time that in order to bring a claim

under A.R.S. § 47-3404(D), “plaintiff is required to plead a prima facie case for breach of

the duty of care.” Arguments raised for the first time in a reply are generally not considered

because to do so may unfairly deprive the opposing party of the opportunity to make a

meaningful response. See, .e.g., Pacific Coast Federation of Fisherman’s Ass’n v. U.S.

Bureau of Reclamation, 138 F. Supp. 2d 1228, 1248 n.17 (N.D. Cal. 2001). In any event, the

Court finds that the allegations in Plaintiff’s Complaint set forth a prima facie case under

A.R.S. § 47-3404(D). 

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B. Defendant’s Motion to Dismiss Plaintiff’s Claim for Aiding and Abetting

Fraud and Breach of Fiduciary Duty (Count II)

In Count II of its Complaint, Plaintiff alleges that Defendant aided and abetted Zuber

in committing fraud and breaching his fiduciary duty to Plaintiff. Defendant has moved to

dismiss these claims for failing to meet the heightened pleading requirement under Rule 9(b)

of the Federal Rules of Civil Procedure. The legal standards with respect to complaints are

found in Rules 8 and 9 of the Federal Rules of Civil Procedure. Rule 8(a) requires only a

short and plain statement of the claim, and this requirement is liberally construed. Rule 9(b),

however, provides that allegations of fraud must be pleaded with particularity. Under Ninth

Circuit law, the two rules are to be read in conjunction. Rule 9(b) “only requires the

identification of the circumstances constituting fraud so that the defendant can prepare an

adequate answer from the allegations.” Bosse v. Crowell Collier and Macmillan, et al., 565

F.2d 602, 611 ( 9th Cir. 1977). “While mere conclusory allegations of fraud will not suffice,

statements of the time, place and nature of the alleged fraudulent activities will.” Id.

In a claim for aiding and abetting a tort, a plaintiff must plead with particularity that

(1) the primary tortfeasor committed a tort that caused injury to the plaintiff, (2) the

defendant knew that the primary tortfeasor’s conduct constituted a breach of duty; and (3)

the defendant must have substantially assisted or encouraged the primary tortfeasor in the

achievement of the breach. See Wells Fargo Bank v. Arizona Laborers, Teamsters and

Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 485, 38 P.3d 12, 23

(2002). Under Rule 9(b), the knowledge element for aiding and abetting may be averred

generally. In addition, such knowledge may be inferred from the circumstances. See Wells

Fargo, 201 Ariz. at 485, 38 P.3d at 23. The “substantial assistance” requirement “can take

many forms . . . .” Id. at 488. Ordinary course transactions can constitute substantial

assistance “such as where there is an extraordinary economic motivation to aid in the fraud.”

Id. 

Here, with respect to Plaintiff’s claims of aiding and abetting fraud and breach of

fiduciary duty, Plaintiff’s Complaint alleges that Bank One opened at least seven accounts

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in the names of the Fictitious Vendors knowing that the purported account holders did not

legally exist (Id., ¶¶ 17-18, 20-29, 38, 52); that Bank One knew that Zuber was the owner and

sole signatory to the Fictitious Vendor accounts because Zuber’s social security number, and

not a separate employer identification number, was used to establish the accounts (Id., ¶¶ 34,

35); and that Bank One thereafter caused or allowed the removal of any references to Zuber

from the accounts. (Id., ¶ 36) The Complaint further alleges that Bank One was also the

payor and depository bank for the Project Entity checks issued to the Fictitious Vendors and

that these checks were deposited in the Fictitious Vendor accounts over the course of several

years, beginning in March 1999, and continuing through January 13, 2006 (Id., ¶¶ 30, 39);

that said checks usually indicated that the Fictitious Vendor payee was an “Inc.” or “Assoc.”

(Id., ¶ 37); and that Bank One and/or its representatives knew that Zuber was an employee

of Harvard and owed fiduciary duties to Harvard and the Project Entities during the relevant

time period (Id., ¶¶ 19, 53) 

The Complaint also alleges that Defendant knowingly benefitted from Zuber’s fraud

and breach of fiduciary duty, and that between August 16, 2002, and January 17, 2006,

Defendant received no less than $30,736.17 directly from the Fictitious Vendor Accounts in

satisfaction of Zuber’s personal debt to Defendant. (Id., ¶¶ 57, 58) Accordingly, taking the

allegations set forth above as true, the Court finds that Plaintiff’s Complaint sufficiently sets

forth the time, place and nature of the alleged fraudulent activities. Plaintiff’s Complaint

thus satisfies requirements of Rule 9(b) in pleading aiding and abetting liability so that

Defendant can prepare an adequate answer from the allegations. See Bosse, 565 F.2d at 611.

C. Defendant’s Motion to Dismiss Plaintiff’s Claims Based on the Statute of

Limitations

Defendant correctly states that any action to enforce an obligation, duty or right

arising under the fictitious payee statute must be brought within three years after the cause

of action accrues. See A.R.S. § 47-3118(G)(3). Relying on cases from other jurisdictions,

Defendant argues that “[t]he statute of limitations for claims arising under A.R.S. § 47-

3404(D) began to run at the latest when [Defendant] exercised dominion over the checks.”

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Defendant contends that because the Complaint was not filed until January 12, 2007, nearly

eight years after Zuber opened the first bank account and more that six years after Zuber

opened the last bank account, Plaintiff’s claim under the fictitious payee rule is therefore

barred by the statute of limitations. 

The Court, however, is required to apply Arizona law to the case before it, and

Arizona courts apply the “discovery rule” to claims arising from commercial disputes. See

Gust, Rosenfeld & Henderson v. Prudential Ins. Co. of Am., 182 Ariz. 586, 589, 898 P.2d

964, 967 (1995). Under the “discovery rule”, “a cause of action does not accrue for

limitations purposes until the plaintiff knows or with reasonable diligence should know the

facts underlying the cause.” CDT, Inc. v. Addison, Roberts, & Ludwig, C.P.A., P.C., 198

Ariz. 173, 176, 7 P.3d 979, 982 (App. 2000) (quoting Doe v. Roe, 191 Ariz. 313, 955 P.2d

951 (App. 1998)). Defendant has given no indication that Arizona courts would deviate from

this longstanding rule in the context of this case, and the Court finds it inappropriate to

deviate from it now. 

Here, Plaintiff has alleged that it was not until January 2006 that Harvard learned that

Zuber fabricated the Fictitious Vendor Contracts and the Fictitious Vendor’s invoices and

that it subsequently discovered that payments from the Project Entities were deposited in the

Bank One accounts at issue. (Doc. # 1 - 2, ¶¶ 16, 17) Plaintiff filed its Complaint on January

12, 2007, approximately one year later. Accordingly, applying the discovery rule, and taking

Plaintiff’s allegations as true, Plaintiff’s claim under A.R.S. § 47-3404(D) is timely. 

 With respect to Plaintiff’s claims for aiding and abetting fraud and breach of fiduciary

duty, the statute of limitations is the same as for the underlying actions. A claim of fraud

must be made within three years after the action accrues. See A.R.S. § 543(3). A claim for

breach of fiduciary duty must be commenced within two years after the cause of action

accrues. See A.R.S. § 542; CDT, Inc., 198 Ariz. at 175, 7 P.3d at 981. An action sounding

in fraud accrues upon “the discovery of the aggrieved party of the facts constituting the fraud

or mistake.” See A.R.S. § 543(3) Citing Hays v. Bank of Arizona, 57 Ariz. 8, 11, 110 P.2d

235, 237 (1941), Defendant argues that “[i]t is black-letter law that the knowledge of the

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agent in regard to any business he conducts that affects his principal is imputed to the

principal. . . . [t]hus, any knowledge Zuber had at the time of the transactions in question is

imputed to Harvard.” The Hays court, however, noted that this general rule of law “is

qualified by the exception that if in the particular transaction in question the agent had an

interest which is adverse to that of the principal no such imputation exists.” Here, Zuber’s

interest was adverse to his employer, Harvard, thus his knowledge at the time of the 

transactions is not imputed to Harvard. Relying on In re American Continental

Corporation/Lincoln Savings and Loan Securities Litigation, 794 F. Supp. 1424 (D. Ariz.

1992), Defendant argues that the exception has no application here, where the failure of the

agent to act upon or reveal the information “injures innocent third parties.” Id. at 1463.

Defendant, however, fails to reveal who the “innocent third party” is in this case. Taking the

allegations in the Complaint as true, which we must in reviewing a motion to dismiss, it is

certainly not the Defendant.

The Complaint alleges that Harvard first learned of Zuber’s fraudulent activities in

January 2006. (Doc. # 1 - 2, ¶ 16) Plaintiff filed its Complaint on January 12, 2007,

approximately one year later. Accordingly, Plaintiff’s claims are not barred by the applicable

statutes of limitations.

III. CONCLUSION

In light of the foregoing,

IT IS ORDERED denying Defendant’s Motion to Dismiss. (Doc. # 4)

DATED this 25th day of March, 2008.

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