# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

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No. 1 3- 27 09

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Geo ffre y Varg a, in hi s ca pa ci ty as Offi ci al Liq ui da to r of Pal m Beac h Off

sh or e, Ltd ., and Pal m

Beac h Off

sh or e II, Ltd

.

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff - App el la nt

v.

U.S. Ban k Nat io na l As so ci at io n

ll ll ll ll ll ll ll ll ll ll l Defe nd

an t - Ap pe ll ee

__ __ __ __ __ __

App eal fro m

Uni te d S ta te s Di st ric t Co ur t

fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

__ __ __ __ __ __

Su bm it te d: Ju ne 11 , 20 14

Fil ed : Au gu st 21 , 20 14

__ __ __ __ __ __

Befo re LOKEN, BEAM, and GRUENDER, Circu it Ju dg es

.

__ __ __ __ __ __

GRUENDER, Circ ui t J ud ge

.

Geo ffre y Varg a, in hi s cap aci ty as th e of fic ia l li qu id at or of Pal m Bea ch

Offs ho re, Ltd

. an d Pal m Bea ch Offs h o r e I I

, Ltd

. (co ll ect iv el y , “ th e Pal m Bea ch

Fu nd s” ), su ed U.S. Ban k Nati on al Ass oc ia ti on (“ U.S. Ban k” ) fo r ai di ng an d ab et ti ng

a br each of fid uc ia ry du ty, wil lfu l an d wan to n ne gl ig en ce, an d g r o s s n e g li ge nc e.

The se cl ai m s aro se fro m th e Pal m Bea ch Fu nd s’ in ve st m en t t h r o ug h acco un tsm ai nt ai ne d at U.S. Ban k in wha t tu rn ed ou t to be a Po nz i sc he m e. The di st ric t co ur t 1

gr an te d U.S. Ban k’s m ot io n to di sm is s Varg a’s am en de d co m pl ai nt

. Varg a ap pe al s,

an d we a ffi rm

.

I. Ba ck gr ou nd

In th is ap pe al fro m th e gr an t of a m ot io n to di sm is s, we acce pt as tru e th e well

pl ead ed al le ga ti on s in th e am e n d e d c o m pl ai nt

. Lo

ft ne ss Sp eci al iz ed Far m Equ ip

., In c. v. Twi es tmey er , 74 2 F .3d 84 5, 8 54 (8t h C ir. 2 01 4)

.

Tom Pet te rs , th ro ug h his co m pa ny Pe tte rs Co m

pa ny, In c. (“ Pet te rs Co m

pa ny”),

cl ai m ed to pu rch as e ex ces s co ns um er m ercha ndi se , suc h as el ect ro ni cs , fro m ve nd or s.

Pet te rs Co m

pa ny fin an ced th es e su pp o s e d tra ns act io ns by se ll in g hi gh -y ie ld

pr om is so ry no te s to in ve st or s th ro ug h Pet te rs Cap it al

, In c. (“ Pet te rs Cap it al ”), a

who ll y own ed en ti ty of Pet te rs Co m pa ny. The se pr om is so ry no te s were to be rep ai d

on ce th e co ns um er m erch an di se ha d be en so ld to an d pa id fo r by ret ai le rs , li ke Sam ’s

Cl ub an d BJ ’s W ho le sa le Cl ub

, in tra ns act io ns th at Pet te rs Co m pa ny was to arra ng e.

Thi s in ve st m en t st ru ct ur e en ab le d Pet te rs Co m pa ny to gr ow in to wha t ap pe ared to be

a m ul ti -b il li on do ll ar op erat io n. Bu t th e in v e s t men t s ch em e pe dd le d by Pet te rs

Co m pa ny was en ti rel y il lu so ry : no ve nd or s ev er so ld co ns um er m erch an di se , an d no

ret ai le rs ev er pu rch as ed it

. In st ead

, Pet te rs Co m pa ny ge ne rat ed fak e pu rch as e or de rs

an d sa le s co nf

irmatio ns an d ke pt it s sc he m e afl oa t by recycli ng fu nd s th at it rece iv ed

fro m ne w in ve st or s to pa y of f th e pr om is so ry no te s of ol d in ve st or s as th ey cam e du e.

Th e i n ev it ab le co ll ap se of Pet te rs ’s Po nz i sc he m e cau se d in ve st or s to su ffer

st ag ge rin g l os se s.

The Hon or ab le Ri ch ard H. Ky le

, Uni te d St at es Dis tri ct Ju dg e fo r th e Dis tri ct 1

of Mi nn es ot a.

-2

-The Pal m Bea ch Fu nd s, whi ch in ve st ed in Pet te rs Co m pa ny ’ s pr om is so ry no te s

an d are no w be in g li qu id at ed

, co ll ect iv el y lo st ov er $7 00 m il li on to Pet te rs ’s sc he m e.

The Pal m Bea ch Fu nd s’ in v e s tm en t was m ad e th ro ug h an ot he r fu nd cal le d Pal m

B e a c h Fi na nc e Part ne rs II, LP (“ Pal m Bea ch Fi na nc e”). Pal m Bea ch Fi na n c e

rece iv ed th e Pal m Bea ch Fu nd s’ in ve st m en t in Pet te rs Co m pa ny’ s pr om is so ry no te s

vi a an es c r o w acco un t th at was m ai nt ai ne d at U.S. Ban k an d was go ve rn ed by an

es cro w-acc ou nt ag reem en t.

W ha t h ap pe ne d to th e Pal m Bea ch Fu nd s’ m on ey on ce it was t ran sf erre d o ut

of th e es cro w acco un t fo rm s th e he art of th is cas e. The m on e y i n i t i a l l y wen t to a

co ll at eral acco un t th at al so was m ai nt ai ne d at U.S. Ban k. The co ll at eral acco un t was

gove rn ed by a coll at eral -acc ou nt ag reem en t to whi ch U.S. Ban k, Pal m Bea ch Fi na nc e,

an d Pet te rs Cap it al

, am on g ot he rs , were pa rt ie s. The Pal m Bea ch Fu nd s were no t

pa rti es to th e co ll at eral -acc ou nt ag reem en t. Onc e th e Pal m Bea ch Fu nd s’ in ve st m en t

reac he d th e co ll at eral acco un t, Varg a al le ge s th at a “ di r ect pa y m en t syste m ”

pr es cri be d th at (a) ou tg oi ng fu nd s fro m th e co ll at eral acco un t were to be se nt di rect ly

to th e ve nd or s th at pu rp or te dl y so ld th e co ns um er m erch an di se to Pet te rs Co m pa ny

an d (b ) in co m in g fu nd s to th e c o ll at eral acco un t were to co m e di rect ly fro m th e

ret ai le rs th at pu rp or t e d l y pu rch as ed th e co ns um er m erch an di se fro m Pet te rs

Co m pa ny. Thi s di rect pa y m en t syste m , acco rd in g to Varg a, was de si gn ed to pr ev en t

a th ird pa rty fro m acce ss in g in ve st or fu nd s an d to en su re th e le gi ti mac y o f th e

m er c h a n d is e tra ns act io ns

. Bec au se no ve nd or s or ret ai le rs were in vo lv ed in an y

le gi ti m at e tra ns act io ns , th e di rect pa y m en t syste m was ne ve r fo ll owe d. In st ead

, th e

co ll at eral acco un t pl ay ed ho st to th e Po nz i sc he m e wit h th e ou tg oi ng fu nd s be in g se nt

to Pet te rs Co m

pa ny th ro ug h sh am in ve nt or y ve nd or s an d th e in co m in g fu nd s (i.e

., th e

in ve st or s’ recycled fun ds ) co m in g fr om Pet te rs Co m

pa ny.

Varg a al le ge s th at Bru c e Prev os t an d Dav id Harro ld

, in th ei r cap aci ty as

di rect or s of th e Pal m Bea ch Fu nd s, br each ed th ei r fid uc ia ry du ti es to th e Pal m Bea ch

Fu nd s. Varg a ad di ti on al ly al le ge s th at Pal m Bea ch Ca p i t a l M a na ge m en t, LLC

-3

-(“ PBCM ”), whi ch m an ag ed th e Pal m Bea ch Fu nd s, br each ed it s fid uc ia ry du ti es to

th e Pal m Bea ch Fu nd s. In pa rti cu la r, Varg a arg ue s th at Prev os t, Harro ld

, an d PBCM

br each ed th ei r fid uc ia ry du ti es to th e Pal m Bea ch Fu nd s by fai li ng to en su re th at th e

di rect pa y m en t syste m was ut il iz ed whi le no ne th el es s co nt in ui ng to in ve st in Pet te rs

Co m pa ny’ s pr om is so ry no te s an d by co nc eal in g th e no nc om pl ia nc e wit h th e di rect

pa y m en t syste m fro m th e Pal m Bea ch Fu nd s. Varg a se tt le d hi s cl ai ms a g a i n s t

Prev os t, Harr ol d, an d P BCM in a se pa rat e p ro ceed in g.

Thi s cas e co nc ern s Varg a’s fu rth er cl ai m th at U.S. Ban k’s act io ns are su ffi ci en t

to ch arg e it wit h ai di ng an d ab et ti ng th e br each of fid uc ia ry du ty by Harro ld

, Prev os t,

an d PBCM

, wil lfu l an d wan to n ne gl ig en ce, an d gr os s ne gl ig en ce. Varg a al le ge s th at

U

. S

. Ban k kn ew th at th e di rect pa y m en t syste m was no t be in g fo ll owe d. Varg a

fu rth er as se rts th at U.S. Ban k un de rs to od th at th e di rect pa y m en t syste m was an

im po rta nt pr oc ed ur al sa feg ua rd th at was de si gn ed to pr ot ect th e Pal m Bea ch Fu nd s’

in ve st m en t. U.S. Ban k a cq ui red th is kn owl ed ge , acco rd in g to Varg a, by re vi ewin g

the co lla te ra l- ac co unt ag reem en t, th e Pal m Bea ch Fu nd s’ m ar ke tin g an d due -d ili ge nc e

d o c um en ts

, an d th e pr iv at e of feri ng m em or an da fo r th e Pal m Bea ch Fu nd s ’

in ve st m en t i n P et te rs Co m pa ny’ s p ro m is so ry

no te s.

In ad di ti on to ap pr eci at in g th e im po rta nc e of th e di rect pa y m en t syste m , Varg a

al le ge s th at U.S. Ban k pa rti ci pa te d in co nc eal in g fro m th e Pal m Bea ch Fu nd s th e fact

th at th e di rect pa y m en t syste m was no t be in g fo ll owe d. Varg a fir st al le ge s th at U.S.

Ban k pa rti ci pa te d in a so -cal le d “ re-c od in g sc he m e” at th e di rect io n o f t w o of th e

“ fu nd m an ag ers ” fo r th e Pal m Bea ch Fu nd s— id en ti fie d in Varg a’s br ie f as Prev os t

an d Harro ld

. Th is al le ge d sc he m e, whi ch be ga n no la te r th an Decem be r 20 06

, in vo lv ed U.S. Ban k re-c od in g th e acco un t st at em en ts fo r th e co ll at eral acco un t to

in di cat e th at th e in co m in g fu nd s in to th e co ll at eral acco un t were be in g rece iv ed fro m

re t a i l e r s , no t Pet te rs Co m pa ny. Howev er, Varg a ad m it s in hi s am en de d co m pl ai nt

th at

, fro m 20 02 un ti l th e re-c od in g sc he m e be ga n in ap pr ox im at el y Decem be r 20 06

, th e co ll at eral acco un t st at em en ts co rrec tl y li st ed Pet te rs Co m pa ny as th e so ur ce of th e

-4

-in co m in g fu nd s. A cco rd in g to Varg a, U.S. Ban k al so to ld va rio us in di vi du al s

as so ci at ed wit h th e P a l m Bea ch Fu nd s th at th e di rect pa y m en t syste m was be in g

fo ll owe d. The am en de d co m pl ai nt in cl ud es on ly on e ex am ple of th is al le ge d pr act ic e.
Varg a al le ge s th at Jo na th an Sp rin g, a th ird -p art y m ark et er fo r th e Pal m Bea ch Fu nd s

an d an in ve st or in Pet te rs Co m pa ny’ s pr om is so ry no te s, co nt act ed U.S. Ban k

em pl oyee Tho m as Caru th

. Caru th , who was Pa lm Beac h Fi na nc e’s “ m ai n co nt act ”

at U.S. Ban k, to ld Sp rin g th at “ al l wire s se nt ou t of U.S. Ban k go di rect ly to ret ai le rs

an d m an uf

act ur ers ” an d “ wire s re cei ve d c om e d ire ct ly fro m ret ai le rs wit ho ut go in g

th ro ug h i nt erm ed ia rie s.”

On th e ba si s of th es e al le ga ti on s, Varg a su ed U.S. Ban k. U.S. Ban k m ov ed to

di sm is s th e am en de d co m pl ai nt fo r fai lu re to st at e a cl ai m un de r Fed eral Ru le of Ci vi l

Pr o ced ur e 12 (b )(6 ). The di st ric t co ur t gr an te d U.S. Ban k’s m ot io n. Thi s ap pe al

fo ll owe d.

II

. Dis cus si on

W e rev ie w de no vo th e gr an t of a m ot io n to di sm is s, acce pt in g th e well -p le ad ed

al le ga ti on s in th e co m

pl ai nt as tru e an d dr awin g al l reas on ab le in fere nc es in fav or of

th e pl ai nt iff

. Id

. In ad di ti on to th e al le ga ti on s in th e a men d e d co m pl ai nt

, we al so

m ay co ns id er “ m at eri al s th at are ne ces sa ril y em br aced by th e pl ead in gs .” Mat te s v.

ABC Pl as ti cs , I

nc

. , 32 3 F .3d 69 5, 6 97 n.4 (8 th Ci r. 20 03 ). “ To su rv iv e a m ot io n to

di sm is s, a co m

pl ai nt m us t co nt ai n su ffi ci en t fact ua l m at te r, acce pt ed as tru e, to ‘stat e

a cl ai m to rel ie f th at is pl au si bl e o n i ts face .’ ” Ash cr of t v. Iq ba l , 5 56 U.S. 66 2, 6 78

(2 00 9) (q uo ti ng Bell Atl

. Co rp

. v. Two mbl y , 55 0 U.S. 54 4, 57 0 (2 00 7) ). “ A cl ai m ha s

f a c ia l pl au si bi li ty whe n th e pl ai nt iff pl ead s fact ua l co nt en t th at al lo ws th e co ur t t o

dr aw th e reas on ab le in fere nc e th at th e de fen da nt is li ab le fo r th e m is co nd uc t al le ge d.”

Id

.

-5

-A. Aidi ng an d Abett in g a Brea ch o f Fidu ci ar y Dut y

Und er Mi nn es ot a la w, ai di ng an d ab et ti ng th e to rti ou s co nd uc t of an ot he r ha s

th ree el em en ts : “ (1 ) th e pr im ary to rt- feas or m us t co m m it a to rt th at cau se s an in jury

to th e pl ai nt iff

; (2 ) th e de fen da nt m

us t kn ow th at th e pr im ary t o r t

- f e a s or ’s co nd uc t

co ns ti tu te s a br each of du ty; an d (3 ) th e de fen da nt m us t su bs ta nt ia ll y as si st or

en co ur ag e th e pr i mar y to rt- feas or in th e ach ie ve m en t of th e br each .” W it zma n v.

Leh rma n, Leh rma n & Flo m , 60 1 N.W .2d 17 9, 18 7 (Mi nn

. 19 99 ). W hi le th e pa rti es

di sp ut e whe th er Varg a al le ge d a br each of fid uc ia ry du ty by Prev os t, Harro ld

, an d

PBCM

, we as su m e fo r pu rp os es of th is a p p e a l th at Varg a ha s do ne so

. Varg a’s

ai di ng -an d- ab et ti ng cl ai m no ne th el es s fai ls be cau se he ha s no t al le ge d pl au si bl y th at

U.S. Ban k kn ew th at Prev os t, Harro ld

, an d PBCM ’s co nd uc t co ns ti tu te d a br each of

fid uc ia ry du ty or th at U.S. Ban k su bs ta nt ia ll y as si st ed th at br each of fid uc ia ry du ty.

A n ai de r an d ab et to r’s kn owl ed ge th at th e pr im ary to rtf eas or ’s co n d u c t

co ns ti tu te s a br each of fid uc ia ry du ty is a “ cru ci al el em en t” of a cl ai m fo r ai di ng an d

ab et ti ng

. E-Sh op s Co rp

. v. U.S. Ban k Na t’l Ass ’n

, 67 8 F.3 d 65 9, 66 3 (8 th Ci r. 20 12 )

(q uo ti ng Fed

. Dep os it In s. Co rp

. v. Fi r s t I n t e rs ta te Ban k of Des Moi ne s, N.A.

, 88 5

F.2 d 42 3, 43 1 (8 th Ci r. 19 89 )) (ap pl y in g Mi nn es ot a la w). Kno wled ge i s e v a l ua te d

“ in ta nd em ” wit h th e req u i r e men t t ha t th e ai de r an d ab et to r su bs ta nt ia ll y as si st th e

br each of a fid uc ia ry du ty. W it zma n , 60 1 N

. W. 2 d a t 18 8 (q uo ti ng In re
Temp or oma nd ib ul ar Jo in t (TMJ) Imp la nt s Pro ds

. Li ab

. Li ti

g. , 11 3 F.3 d 14 84

, 14 95

(8 th Ci r. 19 97 )). Co ns eq ue nt ly, “ whe re th ere is a m in im al sh owi ng of su bs ta nt ia l

as si st an ce, a g r e a t e r sh owi ng of sc ie nt er is req ui red .” Id

. (q uo ti ng Ca mp v. Dema

, 94 8 F.2 d 45 5, 45 9 (8t h Cir. 19 91 )). Fact or s th at are rel ev an t to whe th er kn owl ed ge

an d th e re q ui si te de gr ee of as si st an ce ex is t in cl ud e “ th e rel at io ns hi p be twee n th e

de fen da nt an d t he pri m ary to rtf eas or , th e na tu re of the pri m ary to rtf eas or ’s act iv it y , th e na tu re of th e as si st an ce pr ov id ed by t he de f e n d a n t

, a n d th e de fen da nt ’s s ta te of

m in d.” Id

.

-6

-Varg a rel ie s on th ree al le ga ti on s in th e am en de d co m pl ai nt to su pp or t hi s

arg um en t th at he pl au si bl y pl ed th at U.S. Ban k k ne w of a nd su bs ta nt ia ll y as si st ed a

br each of fi d u c i a r y d ut y

. Fi rs t, Varg a as se rts th at U.S. Ban k’s rev ie w of va rio us

do cu m en ts th at pu rp or te dl y m an da te d th e di rect pa y m en t syste m su ffi ces to es ta bl is h

U.S. Ban k’s kn owl ed ge th at Prev os t, Harro ld

, an d PBCM were br each in g th ei r

fid uc ia ry du ti es to th e Pal m Bea ch Fu nd s by fai li ng to en su re th at th e di rect pa y m en t

syste m was ut il iz ed whi le no ne th el es s co nt in u i ng to in ve st in Pet te rs Co m pa ny’ s

pr om is so ry no te s. The do cu m en ts al le ge d to ha ve be en rev ie wed by U.S. Ban k

in cl ud e: th e co ll at eral -acc ou nt ag reem en t; th e pr iv at e of feri ng m em or an da fo r th e

Pal m Bea ch Fu nd s’ in ve st m en t in Pet te rs Co m pa ny’ s pr om is so ry no te s; an d th e Pal m

Bea ch Fu nd s’ m ark et in g an d du e-d il ig en ce do cu m en ts

. Howev er, th e co ll at eral

acco un t ag reem en t, whi ch es ta bl is he d U.S. Ban k’s du ti es in rel at io n to th e co ll at eral

acco un t, do es no t m an da te th at U.S. Ban k on ly acce pt th os e de po si ts th at co m e fro m

ret ai le rs

. To th e co nt rary, th e co ll at eral -acc ou nt ag reem en t ex pr es sl y co nt em pl at es 2

in st an ces in whi ch th e d ire ct pa y m en t s y st em wou ld no t b e fo ll owe d. In part ic ul ar,

th e co ll at eral -acc ou nt ag reem en t pr ov id es th at U.S. Ban k “ sh al l

. . . [a]pp ly an d cred it

fo r de po si t to th e Co ll at eral Acco un t

. . . al l Co l le ct io ns [d efi ne d as “ al l pa y m en ts

owi ng to [Pet te rs Cap it al ] wit h res pe ct to sa le s of in ve nt or y ”] an d ot he r Rec ei pt s fro m

ti m e to ti m e te nd ered by or on be ha lf of [Pet te rs Cap it al ] fo r de po si t th erei n.” As th is

e x c e rp t m ak es cl ear, no t on ly di d th e co ll at eral -acc ou nt ag reem en t in di cat e th a t

ex cep ti on s to th e di rect pa y m en t syste m m ay be m ad e, bu t it al so le ft U.S. Ban k wit h

no di sc ret io n to refu se th e afo rem en ti on ed de po si ts th at were m ad e “ by or on be ha lf

of ” Pet te rs Cap it al

, a who ll y ow n e d en ti ty of Pet te rs Co m pa ny. In li gh t of th is

co nt ract ua l pr ov is io n in th e c ol la te ral -acc ou nt ag reem en t, it is im pl au si bl e to

co nc lu de th at U.S. Ban k kn ew th at th e fai lu re to ad he re to th e di rect pa y m en t syste m

As no te d ab ov e, whe n de ci di n g a mo t io n to di sm is s, we m ay co ns id er 2

m at eri al s th at ne ces sa ril y are em br aced by th e pl ead in gs

. Se e Mat te s , 32 3 F.3 d at 69 7

n.4

. Dur in g or al arg um en t, Varg a co nc ed ed t h a t t he co ll at eral -acc ou nt ag reem en t,

whi ch was a tt ach ed to U.S. Ban k’s m ot io n t o d is m is s, i s p ro pe rly befo re u s.

-7

-a n d c on ti nu ed in ve st m en ts in Pet te rs Co m pa ny’ s pr om is so ry no te s co ns ti tu te d a

br each of fid uc ia ry du ty by Harro ld

, Prev os t, an d PBCM

. Se e Iq ba l

, 55 6 U.S. at 67 8.

Var g a r e s po nd s by po in ti ng to ot he r la ng ua ge in th e co ll at eral -acc ou nt

ag reem en t— fo r ex am

pl e, th at Pet te rs Cap it al “ ag rees to di rect each [ret ai le r] to m ak e

al l pa y m en ts ” to th e co ll at eral acco un t. The pr iv at e of feri ng m em or an du m qu ot ed in

th e am en de d c om

pl ai nt co nt ai ns a si m il ar s ta te m en t. Bu t an ag reem en t th at Pet te rs
Cap it al wou ld “ di rect ” th e ret ai le rs , who were no t pa rti es to th e co ll a t e r a l

- a cco un t

ag reem en t, to m ak e th e de po si ts in to th e co ll at eral acco un t pr ov id es no in di cat io n of

whe th er th e ret ai le rs ha d ag reed or wou ld ag ree to th is co ur se of act io n. Varg a al so

rel ie s on th e po rti on of th e co ll at eral -acc ou nt ag reem en t th at st at es th at Pal m Bea ch

Fi na nc e “ ha s re qu es te d th at

. . . al l co ll ect io ns rece iv ed fro m [ret ai le rs ] an d pr oc eed s

of su ch in ve nt or y an d acco un ts rece iv ab le be

. . . rem it te d by wire tra ns fer di rect ly to ”

th e co ll at eral acco un t. (em ph as is ad de d) Howev er, th e us e of th e wor d “ req ue st ed ”

by Pal m Bea ch Fi na nc e—t he pa rty th ro ug h whi ch th e Pal m Bea ch Fu nd s’ m on ey

flo wed —i nd ic at es th at no ag reem en t ha d be en reac he d on whe th er th e di rect pa y m en t

syste m was, i n fa ct , m an da to ry

. Se e W eb st er’s Thi rd New In te rn at io na l Di ct io na ry

19 29 (2 00 2) (d efi ni ng “ req ue st ” a s “ to as k (as a pe rs on or an or ga ni zat io n) fo r

so m et hi ng ”). Mo reo ve r, ne it he r of th e ab ov e-q uo te d pr ov is io ns im po se an y du ty on

U.S. Ban k to en su re tha t th e ret ai le rs m ad e th ei r de po si ts di rect ly in to th e co ll at eral

acco un t. Co ns eq ue nt ly, far fro m m an da ti ng th e di rect pa y m en t syste m , th e po rti on s

of t h e co ll at eral -acc ou nt ag reem en t an d th e pr iv at e of feri ng m em or an da on whi ch

Varg a rel ie s ac tu al ly ind ic at e th at th e d ire ct pa y m en t s y st em was n ot m an da to ry

.

Varg a al so co nt en ds th at U

. S. Ban k acq ui red kn owl ed ge of th e br each of

fid uc ia ry du ty fro m it s rev ie w of th e Pal m Bea ch Fu nd s’ m ark et in g an d du e-d il ig en ce

m at eri al s. Bec au se th es e do cu m en ts are no t be fo re th e co ur t at th is p r o c e d u r al

jun ct ur e, Varg a as se rts th at we m us t acce pt th e tru th of hi s al le ga ti on th at th es e

do cu m en ts “ req ui red ” th e ret ai le rs to m ak e de po si ts di rect ly in to th e co ll at eral

acco un t. Eve n if th es e do cu m en ts di d so st at e, th ey wou ld be in co ns is te nt wit h th e

-8

-co ll at eral -acc ou nt ag reem en t, th e do cu m en t th a t s p e ci fie d U.S. Ban k’s du ti es in

rel at io n to th e co ll at eral acco un t. As no te d ab ov e, by ex ecu ti ng th e co ll at eral -acc ou nt

ag reem en t, Pal m Bea ch Fi na nc e an d Pet te rs Cap it al

, am on g ot he rs , ag reed to al lo w,

an d in fact req ui red

, U.S. Ban k to acce pt in co m in g fu nd s fro m a so ur ce ot he r th an a

ret ai le r. U.S. Ban k is en ti tl ed to rel y on th e sp eci fic pr ov is io ns in it s co nt ract in th e

face of al le ge d st at em en ts in an ci ll ary do cu m en ts

, li ke th e mar k e t in g an d du edi li ge nc e do cu m en ts at is su e he re, to de te rm in e wha t co nc lu si on to dr aw fro m th e fact

th at th e di rect pa y m en t syste m was no t be in g fo ll owe d. Cf

. W it zma n , 60 1 N.W .2d at

18 8 (p ro vi di ng th at “ th e rel at io ns hi p be twee n th e de f e n d a n t an d th e pr im ary

to rtf eas or ” as well as “ th e na tu re of th e pr im ary to rtf eas or ’s act iv it y ” are pe rm is si bl e

co ns id erat io ns whe n a s c ert ai ni ng de fen da nt ’s kn owl ed ge of a br each of fid uc ia ry

du ty). The refo re, Varg a ha s no t a l l e g e d pl au si bl y th at U.S. Ban k kn ew fro m it s

rev ie w of th e do cu m en ts de sc rib ed ab ov e th at Prev os t, Harro ld

, an d PBCM ’s act io ns

co ns ti tu te d a bre ach of f

id uc ia ry du ty to t he Pal m

Beac h F un ds

.

Seco nd

, Varg a rel ie s on hi s as se rti on th at

, no la te r th an Decem be r 20 06

, U.S.

Ban k be ga n re-c od in g th e acc o u n t s t a t em en ts fo r th e co ll at eral acco un t to id en ti fy

ret ai le rs , no t Pet te rs Co m pa ny, as th e so ur ce of th e fu nd s de po si te d in to th e co ll at eral

acco un t. U.S. Ban k, it is al le ge d, to ok t h i s s t ep at th e di rect io n of Prev os t an d

Harro ld

. Fro m th es e in st ru ct io ns , V a r g a co nt en ds th at U.S. Ban k in ferr ed th at

Prev os t, Harro ld

, an d PBCM were br each in g th ei r fid uc ia ry du ti es by wro ng fu ll y

co nc eal in g th e no nc om

pl ia nc e wit h th e di rect pa y m en t syste m fro m th e Pal m Bea ch

Fu nd s. W e di sa gr ee. The co nt ex t wit hi n whi ch th e r e

- c o d i n g in st ru ct io ns to U.S.

Ban k were m ad e is ke y

. Fo r a p p r o x i mat el y th e pr ev io us fo ur y ears —t ha t is

, fro m

20 02 un ti l ab ou t Decem

be r 20 06 —t he acco un t st at em en ts co rrec tl y rep or te d th at

Pet te rs Co m

pa ny, no t a ret ai le r, m ad e th e de po si ts in to t h e co ll at eral acco un t.

In ferr in g a wron gf

ul sc he m e to co nc eal th e n on co m pl ia nc e wit h t he di rect pa y m en t

syste m whe n th is fact ha d be en fu ll y di sc lo se d fo r ap pr ox im at el y fo ur y ears wit ho ut

an y qu es ti on s fro m th e reci pi en ts of th e acc ou nt st at em en ts is si m pl y no t p la us ib le

. Se e Iq ba l , 5 56 U.S. a t 67 8

. As t he di st ric t co ur t co rrec tl y su m m ari zed , u nd er th es e

-9

-ci rcu m st an ces , “ it is ha rd to un de rs ta nd why U.S. Ban k sh ou ld ha ve un de rs to od [th e

re-c o d in g] as a br each of fid uc ia ry du ty, ‘som eh ow ret ro act iv el y co nc eal [in g]’ th e

so ur ce of th e pa y m en ts fro m th e [Pal m Bea ch Fu nd s].” (s eco nd al te rat io n in or ig in al ).

Varg a fu rth er co nt en ds tha t U

. S. Ba nk’ s act of re-c od in g th e acco un t st at em en ts

am ou nt ed to su bs ta nt ia l as si st an ce of a br each of fid uc ia ry du ty. In or de r to pr ov id e

su bs ta nt ia l as si st an ce, “ [t]he de fen da nt m us t ha ve so m e de gr ee of kn owl ed ge th at hi s

act io ns are ai di ng th e p rimary vi ol at or .” Ca mp , 94 8 F .2d at 4 60 ; se e W it zma n , 60 1

N.W .2d at 18 8 ( r e l yin g on Ca mp an d ex pl ai ni ng th at “ de fen da nt ’s st at e of

m in d

. . . co m e[s ] in to pl ay ” whe n de t erm in in g whe th er co nd uc t co ns ti tu te s

su bs ta nt ia l as si st an ce). “ [S]om e el em en t of bl am ewo rth in es s” m us t be pr es en t in th e

de fen da nt ’s as si st an ce. Ca mp , 94 8 F.2 d at 46 0. Co ns eq ue nt ly, co nd uc t th at

in ad ve rte nt ly ad va nc es th e br each of a fid uc ia ry du ty do es no t am ou nt to su bs ta nt ia l

as si st an ce. I

d

. W hi le U.S. Ban k’s re-c od in g of th e acco un t st at em en ts m ig ht be

co ns is te nt wit h a reco gn it io n th at it was he lp in g to m is le ad th e reci pi en ts of th e

acco unt st at em en ts or ot he rwis e ai di ng a br each of fid uc ia ry du ty, Varg a’s al le ga ti on s

fai l to rai se m or e th an a sh eer po ss ib il it y of m is co nd uc t. Se e Iq ba l

, 55 6 U.S. at 67 8

(“ The pl au si bi li ty st an da rd

. . . as ks fo r m or e th an a sh eer po ss ib il it y th at a de fen da nt

ha s act ed un la wfu ll y .” (q uo ti ng Two mbl y , 55 0 U.S. at 55 6) ); Rit ch ie v. St

. Lo ui s

Jew is h Li gh t

, 63 0 F.3 d 71 3, 71 7 (8 th Ci r. 20 11 ) (“ The fact s pl ead ed

. . . do no t pe rm it

us to in fe r more th an th e m ere po ss ib il it y of m is co nd uc t. Thu s, [th e] co m pl ai nt

m erel y all eg ed , bu t d id no t s ho w, th at [pl ai nt iff ] is en ti tl ed to rel ie f.”).

Co ns id e r i n g t h e f

act s as al le ge d by Varg a, th e on ly p la us ib le in fere nc e to be

dr awn fro m U.S. Ban k’s re-c od in g of th e acco un t st at em en ts is th at U.S. Ban k si m pl y

was fo ll owi ng a cu st om er’s di rect io ns fo r rep or ti ng th e ul ti m at e so ur ce of th e

in co mi n g f

u n d s in to th e co ll at eral acco un t. W he n U.S. B an k ag reed to re-c od e th e

acco un t st at eme n t s , it kn ew th at th e reci pi en ts of th es e st at em en ts ha d kn own fo r

ap pr ox im at el y fo ur y ears th at Pet te rs Co m pa ny was th e so ur ce of th e in co m in g fu nd s

in to th e co ll at eral acco un t. Mo r eo ve r, th e co ll at eral -acc ou nt ag reem en t in fo rm ed

-1 0-U.S. Ban k of th e fact th at Pet te rs Cap it al

, a who ll y own ed en ti ty of Pet te rs Co m pa ny,

m ay be de po si ti ng th e fu nd s th at it rece iv ed fro m th e ret ai le rs in to t h e co ll at eral

acco un t. The co ll at eral -acc ou nt ag reem en t al so de sc rib es th e in co m in g de po si ts to

th e co ll at eral acco un t as “ al l pa y m en ts owi ng to [Pet te rs Cap it al ] wit h res pe ct to th e

sa l e s of in ve nt or y .” Co ns eq ue nt ly, in th e ab se nc e of fu rth er al le ga ti on s ab ou t th e

su bs ta nc e of th e re-c od in g in st ru ct io ns to U.S. Ban k or an y a l l e g at io n ab ou t U.S.

Ban k’s kn owl ed ge of ho w Prev os t, Harro ld

, an d PBCM in te nd ed to us e th e acco un t

st at em en ts

, U.S. Ban k co ul d on ly pl au si bl y un de rs ta nd th at i t w a s as si st in g it s

cu st om er wit h rep or ti ng th e ul ti m at e so ur ce (ret ai le rs ), rat he r th an th e in te rm ed ia te

so ur ce (Pet te rs Co m

pa ny), of th e in co mi n g fu nd s in to th e co ll at eral acco un t.

Acco rd in gl y , Varg a ha s no t al le ge d pl au si bl y th at U.S. Ban k i n f e r r e d t ha t it was

as si st in g with an y so rt of con ceal m en t or oth erwi se fu rth eri ng a b reac h of fid uc ia ry

du ty by Prev os t, Harr ol d, an d P BCM

. Se e Iq ba l , 55 6 U.S. at 67 8.

Fi na ll y , Varg a rel ie s on hi s as se rti on th at U.S. Ban k em pl oyees fal se ly to ld

in di vi du al s as so ci at ed wit h th e Pal m Bea ch Fu nd s th at th e di rect pa y m en t syste m was

be in g fo ll owe d. Alt ho ug h Varg a co nt en ds th at m is rep res en ta ti on s li ke th is oc cu rred

on m ul ti pl e oc cas io ns , th e am en de d co m pl ai nt id en ti fie s on ly on e sp eci fic in st an ce:

a m is rep res en ta ti on by U.S. Ban k em pl oyee Caru th to Sp rin g, a th ird -p art y m ark et er

fo r th e Pal m Bea ch Fu nd s an d an in ve st or in Pet te rs Co m p an y ’s pr om is so ry no te s.

Caru th was Pal m Bea ch Fi na nc e’s “m ai n co nt act ” at U.S. Ban k. Varg a pr im ari ly

arg ue s th at Caru th ’s m is st at em en t co ns ti tu te s su bs ta nt ial as sis ta nc e. Howev er, Varg a

ha s no t al le ge d th at Caru th kn ew th at hi s st at em en t to Sp rin g was fal se

. Abs en t su ch

an al le ga ti on , Varg a’s arg um en t fo r su bs ta nt ia l as si st an ce ne ces sa ril y fai ls

. S ee

Ca mp , 94 8 F. 2 d a t 4 6 0 (ex pl ai ni ng th at de fen da nt ’s co nd uc t m us t ha ve “ so m e

el em en t of bl am ewo rth in es s” ); E-Sh op s Co rp

. , 67 8 F.3 d at 66 4 (“ The re are no fact ua l

al le ga ti on s th at [th e ba nk ] kn ew th e in fo rm at io n it pr oc es se d

. . . [was ] fal se a t th e

ti m e of rece ip t

. ” ); se e al so To pc hi an v. JPMor

ga n Ch as e Ban k, N.A.

, --- F.3 d ---,

20 14 W L 37 03 99 5, at *7 (8t h C ir. J ul y 28

, 20 14 ) (“ The fact s th at [th e pl ai nt iff ] ha s

al le ge d m ig ht be co ns is te nt wit h [a ba nk ex ecu ti ve ] ha vi ng kn own th at hi s st at em en t

-1 1-was fal se , bu t th e al le ge d fact s ar e eq ua ll y co ns is te nt wit h a sc en ari o in whi ch [th e

ba nk ex ecu ti ve ] fu l l y a nd reas on ab ly be li ev ed th at hi s st at em en t was tru e.”).

Mo reo ve r, ev en if we can in fer t ha t Ca ru th kn ew th at hi s s ta te m en t was fal se , t he re

are no al le ga ti on s fro m whi ch we can in fer th at Caru th un de rs to o d o r e v en sh ou ld

ha ve un de rs to od th at hi s m is st at em en t ai de d Prev os t, Harro ld , a nd PBCM ’s b reac h

of fid uc ia ry du ty to th e Pal m Bea ch Fu nd s. Se e Ca mp , 94 8 F.2 d at 46 0 (“ The

de fen da nt m

us t ha ve so m e de gr ee of kn owl ed ge th at hi s ac t i o n s are ai di ng th e

pr im ary vi ol at or .”).

Varg a’s f u r t h er as se rti on th at

, at un sp eci fie d ti m es , un na m ed U.S. Ban k

em pl oyees m ad e m is st at em en ts to un na m ed in di vi du al s as so c i a te d wit h th e Pal m

Bea ch Fu nd s fare s no be tt er. Not on ly do es Varg a fai l to al le ge th at th e un na m ed

U.S. Ban k em

pl oyees kn ew th at th e i r st at em en ts were fal se , bu t th e am en de d

co m pl ai nt la ck s an y in di cat io n of whe th er th es e em pl oyees h a d acce ss to reco rd s

reg ard in g th e co ll at eral acco un t or whe th er th ey un de rs to od or ev en sh o u ld ha ve

un de rs to od th at th ei r st at em en ts were ai di ng a br each of f id uc ia ry du ty by Prev os t,

Harro ld

, an d PBCM

. The se al le ga ti on s are th eref or e in su ffi ci en t to st at e a pl au si bl e

cl ai m

. Se e C.N. v. W

il lma r Pub

. Sc hs

. , In de

p. Sc h. Dis t. No

. 34 7

, 59 1 F.3 d 62 4, 63 4

(8 th Ci r. 20 10 ) (rejec ti ng al le ga ti on s th at m is co nd uc t oc cu rred “ on un sp eci fie d da te s

a n d un de r ci rcu m st an ces no t de sc rib ed ” be cau se “ [s ]uch va gu e al le ga ti on s ne it he r

pr ov id e [d efen da nt ] wit h fai r no ti ce of th e na tu re of [p l a i n ti ff’s] cl ai m s an d th e

gr ou nd s up on whi ch th os e cl ai m s res t no r pl au si bl y es ta bl is h [p la in ti ff’s] en ti tl em en t

to an y re l i e f

” ) ; Br ad en v. W

al -Ma rt St or es , I

nc

. , 5 88 F.3 d 58 5, 59 4 (8 th Ci r. 20 09 )

(“ [S]om e fact ua l al le ga ti on s m ay be so in de te rm in at e th at th ey req ui re ‘furt he r fact ua l

en ha nc em en t’ in ord er t o s ta te a cl ai m .” (q uo ti ng Iq ba l , 55 6 U.S. at 67 8) ).

Co ns id eri ng U.S. B an k’s kn owl ed ge an d as si st an ce in ta nd em , s ee W it z m a n , 60 1 N

. W. 2d at 18 8, we ag ree wit h th e di st ric t co ur t th at Varg a ha s no t st at ed a pl au si bl e cl ai m

. W e co ns eq ue nt ly affi rm th e gr an t of U.S. Ban k’s m ot io n to di sm is s
Varg a’s cl ai m

for aid in g a nd ab et ti ng a br each of f id uc ia ry du ty.

-1 2-B. Neg li ge nce

Varg a al so br ou gh t cl ai m s ag ai ns t U. S. Ban k fo r wil lfu l an d wan to n ne gl ig en ce

an d fo r gr os s ne gl ig en ce. In or de r to su c c e e d o n th es e cl ai m s, Varg a m us t, am on g

ot he r th in gs , al le ge th e ex is te nc e of a du ty. Se e Lo ui s v. Lo ui s , 63 6 N.W .2d 31 4, 31 8

(Mi nn . 2 00 1)

. Und er Mi nn es ot a la w, wh et he r a d ut y ex is ts is ge ne ral ly an is su e of

la w. Se e id

.

Varg a as se rts t h at U.S. Ban k ha d a du ty to pr ov id e in fo rm at io n to th e Pal m

Bea ch Fu nd s ab ou t th e flo w of fu nd s in an d ou t of t h e c o l l at eral acco un t. Varg a

ba se s th is arg um en t on Kl ei n v. Fir st Edi na Na ti on al Ban k

, 19 6 N.W .2d 61 9 (Mi nn

. 19 72 ) (p er cu ria m ), whi ch he ld th at whe n a ba nk tra ns act s bu si ne ss wit h a cu st om er,

th e ba nk “ ha s no sp eci al du ty to co un se l th e cu st om er an d in fo rm hi m of ev ery

m at eri al fact rel at in g to th e tra ns act io n

. . . u nl es s sp eci al c i r cu m st an ces ex is t.” Id

.

at 62 3. One su ch sp eci al c i r c u ms ta nc e is “ whe re th e ba nk kn ows or ha s reas on to

kn ow th at th e cu st om er is pl aci ng hi s tru st an d co nf id en ce in th e ba nk an d is rel y in g

on th e b an k s o t o c ou ns el an d i nf or m hi m .” Id

.

Rel y in g on Kl ei n , Varg a arg ue s on ly th a t sp eci al ci rcu m st an ces ex is te d he re

be cau se U.S. Ban k k n e w o r ha d reas on to kn ow th at th e Pal m Bea ch Fu nd s pl aced

th ei r tru st an d co nf

id en ce in U.S. Ban k to co un se l an d in fo rm th em ab ou t whe th er th e

di rect pa y m en t syste m was be in g fo ll owe d. U.S. Ban k kn ew or ha d reas on to kn ow

of th is rel ia nc e, Varg a arg ue s, ba se d on th e es cro w-acc ou nt ag reem en t an d th e

co ll at eral -acc ou nt ag reem en t as well as U.S. B an k’s ro le in th e Pal m Beac h Fu nd s’

in ve st m en t in Pet te rs Co m pa ny’ s pr om is so ry no te s. The pa rti es ’ co nt ract s are of no

he lp to Varg a. Neit he r th e es cro w-acc ou nt ag reem en t, wh i c h d e f i n ed U.S. Ban k’s

du ti es to th e Pal m Bea ch Fu nd s, no r th e co ll at eral -acc ou n t a g r eem en t, whi ch

sp eci fic al ly di sc la im ed U.S. Ban k’s du ti es to th ird pa rti es li ke th e Pal m Bea ch Fu nd s,

ev id en ce th e sp e c i al ci rcu m st an ces co nt em pl at ed by Kl ei n

. Mo reo ve r, as no te d

-1 3-ab ov e, th e co ll at eral -acc ou nt ag reem en t ex pr es sl y req ui red U.S

. Ban k to acce pt

de po si ts th at di d n ot co m pl y wit h t he di rect pa y m en t s y st em

.

Nor do es th e al le ga ti on th at th e Pal m Bea ch Fu nd s refe rred it s in ve st or s an d

th ird -p art y m ark et e r s to U.S. Ban k to ha ve th ei r qu es ti on s ab ou t th e es cro w an d

co ll a t e r a l acco un ts an swe red es ta bl is h th e sp eci al ci rcu m st an ces co nt em pl at ed by

Kl ei n

. The r e l e va nt co nt ract s es ta bl is h wha t can on ly be de sc rib ed as an or di na ry ,

arm ’s-le ng th co m

m erci al rel at io ns hi p be twee n U.S. Ban k an d th e Pal m Bea ch Fu nd s,

an d “ [c]ou rts ap pl y in g Mi nn es ot a la w ha ve be en rel uc ta nt to im po se a du ty to

di sc lo se m at eri al fact s in arm ’s-le ng th bu si ne ss tra ns act io ns be twee n co m m erci al

en ti ti es .” Dri sc ol l v. St an da rd Har dw ar e, In c. , 78 5 N.W .2d 80 5, 81 3 (Mi nn

. Ct

. App

. 20 10 ). Mo reo ve r, Varg a ha s no t refe rred us to an y Mi nn es ot a cas e la w, an d we ha ve

no t lo cat ed an y on ou r own , th at im po se s a du ty on a ba nk to in fo rm it s cu st om er of

m at eri al in fo rm at io n u nd er ci rcu m st an ces th at are re m ot el y si m il ar t o t ho se pre se nt

he re. In de ed

, th e pr im ary cas e th at Varg a ci te s in fav or of im po si ng su ch a

du ty— Kl ei n —ac tu al ly un de rm in es hi s arg um en t. The Kl ei n co ur t fo un d th at a ba nk

di d no t ha ve a du ty to in fo rm a cu st om er of m at eri al in fo rm at io n no twi th st an di ng th e

twen ty-y ear rel at io ns hi p be twee n th e ba nk an d th e cu st om er. 19 6 N.W .2d at 62 3; se e

No rw es t Ban k Has ti ng

s v. C la pp , 39 4 N.W.2d 17 6, 17 9 (Mi nn . C t. App . 1 98 6) (“ If

[th e Kl ei n pl ai nt iff ’s] t w e n ty-y ear rel at io ns hi p wit h he r ba nk er was in su ffi ci en t to

es ta bl is h rel ia nc e, cert ai nl y [m eet in g y ou r ba nk er twi ce an d ha vi ng on e sh or t m eet in g

wit h hi m ] was in su ffi ci en t.”)

. W e th us a f f i rm th e gr an t of U.S. Ban k’s m ot io n to

di sm is s Var ga ’s neg li ge nc e cl ai m s.

II I. Con cl us io n

Fo r th e rea so ns set for th ab ov e, we affi rm

.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __

-1 4-