Opinion ID: 2585167
Heading Depth: 4
Heading Rank: 3

Heading: the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach.

Text: Gomez, 145 Ariz. at 178, 700 P.2d at 876 (citing RESTATEMENT (SECOND) OF TORTS § 876(b)). ¶ 35 The Funds allege that Symington misrepresented material facts by submitting false financial statements. Such proof, if introduced by the Funds, will establish primary, tortious conduct by Symington. ¶ 36 Because aiding and abetting is a theory of secondary liability, the party charged with the tort must have knowledge of the primary violation, and such knowledge may be inferred from the circumstances. See In re American Continental Corp./Lincoln Sav. and Loan Sec. Litig., 794 F.Supp. 1424, 1436 (D.Ariz.1992) (American Continental). Unquestionably, the Bank was aware of Symington's duty under the Permanent Commitment to provide accurate financial information to the Funds. The Triparty Agreement references the requirements of the Permanent Commitment in several sections. ¶ 37 Evidence supporting the inference that the Bank had knowledge of Symington's fraud is contained, among other places, in the financial statements Symington provided to the Bank on May 4 and June 21, 1990. Those statements contained information the Bank knew was false: (1) Symington overstated the value on Alta Mesa by $2 million and understated his personal liability on Alta Mesa by $1 million. The Bank knew Alta Mesa was worth $1 million less as a result of an appraisal conducted by the Bank in November 1989, which reduced the property's value by one-half; [12] (2) Symington represented $791,000 in readily marketable securities. The Bank knew these securities were actually in spendthrift trusts and thus inaccessible to creditors; (3) Symington responded no to the question on the financial statement: Are there any suits, judgments, tax deficiencies, or other claims pending or in prospect against you? (Emphasis added). The Alta Mesa loan had been in technical default since March 15, 1990, and the Bank obviously knew it. ¶ 38 The Funds' banking expert set forth several aspects of Symington's financial statement the Bank knew were false. Jeffery P. Gaia Declaration at ¶ 44. [13] The Bank's knowledge of Symington's false and misleading representations is also reflected in the Bank's own memoranda. On June 7, 1990 (23 days before the take-out), Jeff White's memo to the Bank's Senior Loan Committee requesting authority to charge off the $1.2 million shortfall on the Mercado loan described Symington's then-existing financial condition. A financial statement was provided to the Senior Loan Committee with White's memo. The memo demonstrates the Bank's knowledge: Symington's stated net worth is almost entirely vested in commercial real estate, indicated market values of which he has stated do not accurately reflect the current market. Contingent debt also appears not to have been fully accounted for on his recent statement. Marketable securities shown on the statement are held in an irrevocable family trust of which Symington is the beneficiary. Trustor is unknown, trustee is Mellon Bank, and Symington claims that the asset cannot be liquidated or pledged. (Emphasis added). White later testified that he determined that the listed real estate values were inaccurate. Thus, the Bank had knowledge of these matters. ¶ 39 When White received Symington's May 4, 1990 financial statement, he knew the Funds were also entitled to receive a financial statement under the terms of the Permanent Commitment. The Funds produced evidence affirming that the Bank understood the Funds received the same false financial statements that it did. White testified: Did you expect that Mr. Symington would have submitted the same numbers reflecting his financial conditions to both First Interstate Bank and to the pension funds? A: I would hope so, yes. This statement raises the inference that the Bank knew that fraud was being committed against the Funds. ¶ 40 On June 8, 1990, the Senior Loan Committee conditionally approved White's requested $1.2 million write-off in his June 7 memo but asked that he obtain an accurate financial statement from Symington. The Senior Loan Committee was concerned about the statement, as Ward Wilson, a member of the committee testified: Q: Given that Mr. Symington had warranted the values in his financial statement only a month prior to your consideration of it, did it occur to you that the inflated values could have been the result of intentional misstatements by Mr. Symington? MR. CARDENAS: Objection to characterization with respect to inflated values. A. I believe that we were concerned about that. ¶ 41 On June 26, 1990, Symington resubmitted his personal financial statement dated June 21, 1990, to the Bank. This statement also failed to provide current market values or disclose contingent debt. Regarding the securities listed on the financial statement, Symington produced a letter from the trustee of a trust of which he was the beneficiary, disclosing that the readily marketable securities listed on his financial statement at a value of $791,000 were, in fact, not readily marketable but were held in trust subject to a spendthrift provision. [14] The June 21 financial statement also included one other change. Symington unilaterally changed the certification language on the statement from the Bank's standard language that the statement was accurate to a statement that the figures were merely Symington's best efforts to arrive at accurate figures. ¶ 42 The Senior Loan Committee found the updated financial statement just as disconcerting. Ward Wilson testified: Q. Okay. Upon getting that information, did you feel as though Mr. Symington had provided accurate and honest information about the current state of his financial condition to First Interstate? MR. CARDENAS: Objection; calls for speculation. A. Our concern about that was heightened. ¶ 43 Evidence that the Bank knew Symington had misled the Funds can also be seen in a letter dated June 25 from Jeff White to the Senior Loan Committee at the Bank, updating the Committee on the status of the Mercado loan. White's letter discusses perceived impediments to the funding of the Permanent Commitment. White listed the Mercado limited partners as potential impediments. The limited partners were upset because mathematical errors relating to the partners' return on investment calculations were found after the formation of the partnership. The limited partners were threatening to exercise their rescission rights and demand refund of their initial $500,000 investment. Regarding this situation, White states, [t]his threat currently prevents Mercado's counsel from issuing [the Funds] ... a `clean' opinion letter, a condition precedent to closing.  (Emphasis added). White goes on to explain to the Senior Loan committee [i]f the limiteds are not satisfied with our subordination language as proposed, they pose a real threat to the permanent loan closing. Our paying off the limiteds, as Symington had earlier proposed, is not deemed a viable option as it would have the effect of dissolving the existing borrowing entity, giving the Permanent Lender [the Funds] a clear out. ¶ 44 In addition to the threat by the limited partners, White also described the risk to funding stemming from improvements undertaken on the Mercado project to prepare it for tenancy by Arizona State University (ASU), which intended to occupy the space as a downtown campus. White informed the Senior Loan Committee Mercado has requested that FIAZ [the Bank] provide bridge financing for the ASU build-out in an attempt to both keep the subs working, and to avoid having to disclose the situation to the Permanent Lender at closing.  (Emphasis added). This statement is in reference to $600,000 worth of tenant improvements completed for the ASU space in the Mercado. Despite nearly half of the improvements being completed, the Mercado Partnership had not made any progress payments to the contractors. The Bank was concerned that the Partnership's lack of progress payments may have violated ¶ 29 of the Permanent Commitment by failing to pay debts as they became due. ¶ 45 This accumulation of evidence raises the inference that the Bank knew Symington was engaged in false representations to the Funds. Accordingly, a jury could find that the Bank's actions and internal communications provide evidence of a resolute strategy to avoid having the Funds learn what it knew about Symington's financial situation. A showing of actual and complete knowledge of the tort is not uniformly necessary to hold a secondary tortfeasor liable under an aiding and abetting theory. FDIC v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423 (8th Cir.1989) (bank can be held liable for aiding and abetting a customer who defrauded another bank if bank has a general awareness of the customer's fraudulent scheme, notwithstanding the fact that the bank may not have had actual knowledge of the scheme or an intent to participate in the fraud; general awareness of the fraudulent scheme can be established though circumstantial evidence). The knowledge requirement can be met, even though the bank may not have known of all the details of the primary fraudthe misrepresentations, omissions, and other fraudulent practices. Aetna Cas. and Sur. Co. v. Leahey Const. Co., Inc., 219 F.3d 519, 536 (6th Cir.2000) (Leahey) (citing Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1012 (11th Cir.1985) (Woods) (internal citations omitted)). ¶ 46 The third requirement, substantial assistance by an aider and abettor, can take many forms, but means more than a little aid. In re American Continental, 794 F.Supp. at 1435 (quoting Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 496 (7th Cir.1986); see also CPC Int'l Inc. v. McKesson Corp., 70 N.Y.2d 268, 519 N.Y.S.2d 804, 514 N.E.2d 116 (1987) (broker aided and abetted primary fraud by providing false financial information used to present enhanced financial picture to others)). The legal elements of aiding and abetting a tortfeasor have been explored most comprehensively by the federal courts in the context of aiding and abetting securities fraud. See Schatz v. Rosenberg, 943 F.2d 485 (4th Cir.1991); Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646 (9th Cir.1988); Metge v. Baehler, 762 F.2d 621 (8th Cir.1985); Monsen v. Consolidated Dressed Beef Co., Inc., 579 F.2d 793 (3d Cir.1978). But cf. Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) (aiding and abetting liability abolished under § 10(b) of the Securities and Exchange Act of 1934, but secondary actors not completely absolved from liability). ¶ 47 For example, in Metge, the court stated that [a]lthough the facts ... are unremarkable taken in isolation, we find that taken together, they present what should have been a jury issue on the question of aiding-and-abetting liability. 762 F.2d at 630. Metge involved a suit by investors against a lender for aiding and abetting an issuer of securities who ultimately filed for bankruptcy. The investors alleged that the lender engaged in a series of banking strategies to keep a failing securities issuer in business. In evaluating the record, the court sought to determine whether the lender knew that the thrift certificates being issued were worthless and that because of the lender's involvement, the financial life of the issuer was prolonged in the lender's own interest and at the expense of the certificate holders. The court noted that, viewed separately, most of the banking transactions were unremarkable events, but viewed in conjunction with other evidence, they suggest an unusual pattern of extraordinary attempts to prolong the issuer's financial viability to the detriment of the investors. [15] Id. at 626; see also K & S Partnership v. Continental Bank, N.A., 952 F.2d 971, 979 (8th Cir.1991). ¶ 48 Other courts have commented that executing transactions, even ordinary course transactions, can constitute substantial assistance under some circumstances, such as where there is an extraordinary economic motivation to aid in the fraud. See Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983) (broker's processing of transactions with knowledge of fraudulent nature was done to generate commissions); IIT, an Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 921-22 (2d Cir.1980) (defendant performed challenged transaction knowing it violated client's policy, with heightened economic motive to do so). ¶ 49 There is no doubt that the Bank here had a heightened economic motive to assist Symington. Not only did the Bank have the typical motivations of a construction lender, i.e., to ensure nothing happens to jeopardize permanent funding, but in this case, the Bank had added incentive to ensure the permanent financing by virtue of its knowledge of Symington's much weakened financial condition. The Bank knew that Symington was the personal guarantor on the Mercado loan in the event the Funds found reason not to advance permanent funding. The Bank also knew Symington's personal guarantee was becoming less and less valuable in part because the Bank knew Symington was unable to fulfill his financial obligations on the Alta Mesa loan. ¶ 50 In addition, Jeff White's June 7, 1990 letter to the Senior Loan Committee evidences the Bank's knowledge of Symington's inability to provide collateral of a value sufficient to cover the $1.2 million shortfall occasioned by the Funds' decision to hold back part of the $10 million take-out for improvements to the Mercado. These circumstances heightened the Bank's motive to aid and abet in a fraud designed to secure the permanent loan. ¶ 51 Accordingly, the Funds presented evidence of business strategies undertaken by the Bank to prolong Symington's financial life, raising reasonable inferences that it knew of, and gave substantial assistance to, Symington's material misstatements. Moreover, if [a] ... method or transaction is atypical or lacks business justification, it may be possible to infer the knowledge necessary for aiding and abetting liability. Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir.1975); see also Woods at 1012 (for purposes of establishing liability as an aider and abettor, knowing assistance of a securities violation can be inferred from atypical business actions). ¶ 52 Here, as noted, the Funds' banking expert offered evidence that the Bank's forbearance from enforcement of the Alta Mesa loan was contrary to prudent banking practices for purposes of securing the Mercado take-out. Gaia Declaration at ¶¶ 37, 39, 40, 43. In addition, the Bank's own employee testified that a forbearance not accompanied by a credit authorization request is unusual if, as here, it extends the maturity of the loan. The Alta Mesa forbearance was not accompanied by a credit authorization request. ¶ 53 The Bank argues that the single act the Funds complain about is the forbearance on the Alta Mesa loan. Indeed, the Funds do complain about the forbearance and argue that the Bank's decision to extend rather than foreclose the loan provided substantial assistance to Symington by enabling him to claim falsely that he met the requirements of the Permanent Commitment. But it is not solely the forbearance that creates the problem; it is also the Bank's failure to report Symington's false representations to federal banking officials as required by law, where it was admittedly knowledgeable of the false financial statement. See 12 C.F.R. § 21.11 (1989). ¶ 54 Moreover, substantial assistance does not mean assistance that is necessary to commit the fraud. Leahey at 537. The test is whether the assistance makes it easier for the violation to occur, not whether the assistance was necessary. Id. (quoting Camp v. Dema, 948 F.2d 455, 462 (8th Cir.1991) (internal quotations omitted)). ¶ 55 Finally, the Funds' claim of aiding and abetting is further supported by allegations that the Bank, with full knowledge that Symington's financial statements were false, convened the June 8, 1990 meeting and communicated directly with the Funds regarding the Permanent Commitment due on June 30. The Funds were represented in the meeting by legal counsel, Sam Coppersmith. Specifically, it appears the Bank called the meeting with Coppersmith and Symington representatives because the Funds had announced their intention to reduce the amount of the permanent loan by $1.2 million in order to compensate for Mercado tenant improvements which apparently had been funded by the Bank but were not a part of the basic construction costs. The Bank desired to secure the full $10 million take-out, including the $1.2 million, by exploring, with the Funds, ways to eliminate or otherwise deal with the shortfall or gap financing as it was described. If successful, the Bank would receive full reimbursement of the $10 million. The meeting would thus have had no purpose without the presence of the Funds. ¶ 56 At that time, the Bank knew that Symington was in default on Alta Mesa. Internal documents regarding the Mercado loan referenced Alta Mesa as a related debt. The Bank also knew that Symington had submitted false financial statements relative to Mercado, and that just days earlier the Bank had signed a forbearance agreement with Symington on Alta Mesa to keep him financially viable until the day after the permanent loan was due to be funded. Nevertheless, the Bank, with a clear opportunity to speak, kept this information from Coppersmith and pressed for closing the permanent loan at the full $10 million or for an alternate method of handling the gap problem. ¶ 57 Convening the meeting to discuss the loan and potential shortfall in these circumstances, without disclosure of the facts, would justify a reasonable inference that the Bank aided and abetted by knowingly assisting Symington's tortious conduct. If true, this goes well beyond mere self protection in the midst of a financial transaction gone sour. In sum, it can be inferred that had the Funds been made aware of what the Bank knew, the Funds might well have chosen to withdraw from the obligation under the Permanent Commitment, and the Bank was fully knowledgeable of that prospect. ¶ 58 These facts raise inferences sufficient to take the issue to the jury under the applicable preponderance standard. [16]