Court Opinion

ID: 4146837
Source: CourtListenerOpinion
Date Created: 2017-02-21 20:18:10.146431+00
Date Added: 2024-06-11T14:37:24.294630
License: Public Domain

FILED
                                                             COURT OF AFTEAl.S
                                                              STATE UFhi
                                                             2011FES 21 1fl 9:2

       IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

JOHN NORTON and KRISTINE       )
NORTON, individually; NORTHLAND)                No. 74058-0-I
CAPITAL, LLC,                  )
                               )                 DIVISION ONE
                 Appellants,   )
                               )
             and               )
                               )
P.R.E. ACQUISITIONS, LLC,      )
                               )
                 Plaintiffs,   )
                               )
             v.                )
                               )                UNPUBLISHED OPINION
U.S. BANK NATIONAL ASSOCIATION,)
d/b/a U.S. BANK,               )                FILED: February 21, 2017
                               )
                 Respondent,   )
                               )
JOSE NINO DE GUZMAN and NDG    )
INVESTMENT GROUP, LLC,         )
                               )
                 Defendants.   )
                               )

      BECKER, J. —This is an appeal from a summary judgment dismissal of a

claim that a bank aided and abetted a customer who operated a Ponzi scheme.

We are asked to reverse our prior determination that a statutory privilege

prohibits discovery of information about the bank's internal investigations and

monitoring. Finding no reason to abandon that decision and insufficient evidence

to defeat summary judgment, we affirm.
No. 74058-0-1/2

       Jose Nino de Guzman was employed by respondent U.S. Bank National

Association until 2006, when he left to form NDG Investment Group LLC. He told

potential investors that their money would fund real estate development projects

in Peru. The Nortons invested $11 million in 2008. They later discovered that

Nino de Guzman was operating a Ponzi scheme and their money was gone.

       The Nortons sued Nino de Guzman and NDG. Both defendants failed to

appear and default judgments were entered. The Nortons also included U.S.

Bank as a defendant. They alleged that after Nino de Guzman stopped working

for the bank, he enlisted bank employees to help him recruit investors. He

deposited money from investors into his accounts at U.S. Bank. According to the

Nortons, under these circumstances, U.S. Bank knew or should have known

about the fraud. Their claims against the bank included aiding and assisting

fraud and negligent supervision.

       During discovery, the Nortons sought information regarding the bank's

systems and investigations to detect fraud and money laundering. U.S. Bank

objected, arguing the information was privileged under the Bank Secrecy Act, 31

U.S.C. § 5318(g). The act requires banks to report known or suspected

violations of federal law to the federal government. 31 U.S.C.§ 5318(g)(1),(4);

12 C.F.R.§ 21.11(a),(b), (c). Banks may not disclose the existence of a report,

or "any information that would reveal the existence" of a report. 12 C.F.R.§

21.11(k)(1)(i).

       The bank sought an order prohibiting discovery of "the existence or non-

existence of any suspicious activity monitoring, investigation, or reporting U.S.
No. 74058-0-1/3

Bank may have conducted relating to the accounts at issue in this case, and to

the methods, policies and procedures U.S. Bank employs generally to monitor for

suspicious activity under the Bank Secrecy Act." The court denied this motion.

U.S. Bank was ordered to comply with the contested discovery requests.

       On discretionary review, this court reversed the order compelling

discovery. Norton v. U.S. Bank Nat'l Ass'n, 179 Wash. App. 450, 324 P.3d 693,

review denied, 180 Wn.2d 1023(2014). We observed that internal memoranda

or forms regarding suspicious activity can reveal whether a bank planned to or

had already filed a report with the federal government. Norton, 179 Wash. App. at

462. Therefore, those documents warrant protection under the Bank Secrecy

Act. Norton, 179 Wash. App. at 462. We held that U.S. Bank cannot be ordered to

"describe or disclose its internal investigations, either generally or those

specifically related to this case." Norton, 179 Wash. App. at 462.

       On remand, the trial court barred discovery of "information and documents

created or prepared as part of any suspicious activity monitoring, investigating or

reporting by U.S. Bank," as well as "the methods, policies and procedures U.S.

Bank employs generally to monitor and detect for suspicious activity."

       On U.S. Bank's motion, the court granted summary judgment and

dismissed the case. The Nortons appeal.
No. 74058-0-1/4

                            DISCOVERY PRIVILEGE

      The Nortons ask us to change our previous decision and allow them to

obtain discovery of internal bank documents that we held were within the scope

of the Bank Secrecy Act discovery privilege.

      An appellate ruling must be followed in all subsequent stages of the same

litigation. State v. Schwab, 163 Wn.2d 664,672, 185 P.3d 1151 (2008), citing

Roberson v. Perez, 156 Wash. 2d 33, 41, 123 P.3d 844(2005); Lutheran Day Care

v. Snohomish County, 119 Wash. 2d 91, 113, 829 P.2d 746 (1992), cert. denied,

506 U.S. 1079 (1993). There is an exception to this doctrine: an appellate court

considering a case for a second time following remand may,"where justice would

best be served," base its decision on the court's opinion of the law at the time of

later review. RAP 2.5(c)(2). A prior ruling may be avoided when it is "clearly

erroneous, and the erroneous decision would work a manifest injustice to one

party," or "there has been an intervening change in controlling precedent

between trial and appeal." Roberson, 156 Wash. 2d at 42, citing First Small Bus.

Inv. Co. of Cal. v. Intercapital Corp. of Or., 108 Wash. 2d 324, 333, 738 P.2d 263

(1987); RAP 2.5(c)(2).

      The Bank Secrecy Act requires banks to establish internal procedures to

detect violations of federal law and to report known or suspected violations to an

agency or office designated by the Secretary of the Treasury. 31 U.S.C.§

5318(g)(1),(4),(h); 12 C.F.R. § 21.11(a),(b),(c). These reports, called

"Suspicious Activity Reports," or "SARs," are confidential. "Banks are prohibited

from responding to a discovery request for a Suspicious Activity Report or any

                                         4
No. 74058-0-1/5

information that would reveal the existence of a Suspicious Activity Report."

Norton, 179 Wash. App. at 455; 12 C.F.R.§ 21.11(k)(1)(i).

      Our earlier decision recognized that the discovery privilege furthers

several policy considerations:

      Release of an SAR could compromise an ongoing law enforcement
      investigation, tip off a criminal wishing to evade detection, or reveal
      the methods by which banks are able to detect suspicious activity.
      Furthermore, banks may be reluctant to prepare an SAR if it
      believes that its cooperation may cause its customers to retaliate.
      Moreover, the disclosure of an SAR may harm the privacy interests
      of innocent people whose names may be contained therein.

Norton, 179 Wash. App. at 456-57 (internal quotations omitted), quoting Cotton v.

PrivateBank & Trust Co., 235 F. Supp. 2d 809, 815(N.D. III. 2002).

       Federal trial courts have recognized a distinction between factual

documents giving rise to suspicious activity, which are not protected because

they are "records made in the ordinary course of business," and internal reports

regarding suspicious activity, which warrant protection. Norton, 179 Wash. App. at

457-58 (internal quotations omitted), quoting Cotton, 235 F. Supp. 2d at 815; see

also Whitney Nat'l Bank v. Karam, 306 F. Supp. 2d 678,682(S.D. Tex. 2004).

       With these cases and relevant policy considerations in mind, we

concluded that the privilege extends to internal reports regarding suspicious

activity. Norton, 179 Wash. App. at 462. Because internal systems to detect and

investigate money laundering will be "Intertwined with the bank's obligation to

report suspicious activity to the government," discovery into those matters "will

produce documents suggesting that a Suspicious Activity Report has been or

                                         5
No. 74058-0-1/6

might be under consideration or has already been filed." Norton, 179 Wash. App.

at 462.

      The Nortons contend that our decision interpreted the privilege too

broadly. In their view, a proper interpretation of the privilege would permit

discovery of "the Bank's policies, procedures and any investigatory or risk

management documents that exist independent of the Bank's reporting

obligations under federal law," including "employee supervisory documents."

Brief of Appellant at 25-26, 33.

      The Nortons assert that recent cases "properly recognize that all

documents generated or received in the ordinary course of business, including

those that may have led up to the filing of a SAR, are discoverable, so long as

they do not reference a SAR itself." Brief of Appellant at 31-32. In support of this

proposition, they cite In re Whitley, No. 10-10426C-7G, 2011 WL 6202895

(Bankr. M.D.N.C. Dec. 13, 2011)(court order). Whitley concluded that internal

bank reports or memoranda regarding investigations into suspicious activity are

not protected. Whitley, 2011 WL 6202895 at *4. Other decisions also support a

less expansive reading of the privilege. For instance, in Wultz v. Bank of China

Ltd., 56 F. Supp. 3d 598, 600, 602-03(S.D.N.Y. 2014), the court declined to

extend the privilege to documents generated in result of a bank's policies and

procedures for filing suspicious activity reports.

       In addition to these trial court decisions, the Nortons cite one relevant

appellate decision, In re JPMorcian Chase Bank, 799 F.3d 36 (1st Cir. 2015).

There, the court declined the bank's "invitation to view the privilege as extending

                                          6
No. 74058-0-1/7

to any document that might speak to the investigative methods of financial

institutions." JPMorgan, 799 F.3d at 44 (internal quotations omitted). It was not

necessary, however, for the court to rule on the reach of the Bank Secrecy Act

and related regulations; the court expressly stated that it was not doing so.

JPMorgan, 799 F.3d at 43.

       These cases provide interpretations of the discovery privilege that differ in

certain regards from the position adopted by this court. But they do not require

that we change our earlier ruling. To the extent that cases such as Whitley,

Wultz, and JPMorgan offer a less expansive reading of the privilege, they are

less likely to advance the policy goals supporting the privilege and are

inconsistent with the cases that we relied on in rendering Norton.

       Appellants contend that the Office of the Comptroller of Currency—the

agency that drafted the regulations at issue—has rejected the interpretation

adopted by this court. They cite a rule stating, "with respect to the SAR

confidentiality provision only, national banks may disclose underlying facts,

transactions, and documents for any purpose, provided that no person involved

in the transaction is notified that the transaction has been reported and none of

the underlying information reveals the existence of a SAR." Confidentiality of

Suspicious Activity Reports, 75 Fed. Reg. 75,576, 75,581 (Dec. 3, 2010)

(emphasis added)(footnote omitted). This amendment, enacted before we

decided Norton, does not change our analysis. The amendment reiterates that

the discovery privilege covers suspicious activity reports as well as information

that would reveal the existence of a report. 12 C.F.R.§ 21.11(k)(1)(i).

                                         7
No. 74058-0-1/8

       In sum, the Nortons have failed to demonstrate the prior decision is clearly

erroneous and would work an injustice, or that there has been an intervening

change in controlling precedent. Roberson, 156 Wash. 2d at 42. We adhere to our

original decision.

                          AIDING AND ABETTING FRAUD

       The Notions assert that even without further discovery, there is sufficient

evidence to warrant a jury's consideration of U.S. Bank's liability for aiding and

abetting fraud.

       We review summary judgment orders de novo, engaging in the same

inquiry as the trial court. August v. U.S. Bancorp, 146 Wash. App. 328, 339, 190

P.3d 86(2008), review denied, 165 Wash. 2d 1034 (2009). All facts and any

reasonable inferences therefrom are viewed in the light most favorable to the

nonmoving party. August, 146 Wash. App. at 339. Summary judgment is proper

when there is no genuine issue as to any material fact and the moving party is

entitled to judgment as a matter of law. August, 146 Wash. App. at 339.

       A person who knowingly assists another to commit a tort, or knowingly

assists another to violate a fiduciary or trust obligation, is liable for proximately

caused losses. LaHue v. Keystone Inv. Co.,6 Wn. App. 765, 783, 496 P.2d 343,

review denied, 81 Wn.2d 1003(1972); see also RESTATEMENT(SECOND)OF

TORTS § 876 (1977). Actual knowledge is required. El Camino Res., LTD v.

Huntington Nat'l Bank, 722 F. Supp. 2d 875(W.D. Mich. 2010), affd, 712 F.3d

917(6th Cir. 2013). The assistance provided must be substantial. Martin v.

                                           8
No. 74058-0-1/9

Abbott Labs., 102 Wash. 2d 581, 596,689 P.2d 368 (1984), citing RESTATEMENT

(SECOND)OF TORTS § 876(a)-(c)(1977).

       The trial court determined there was insufficient evidence that U.S. Bank

had actual knowledge of the fraud or provided substantial assistance.

       Appellants do not identify direct evidence of actual knowledge. They

contend that a jury could infer the bank's actual knowledge of Nino de Guzman's

fraudulent scheme based on "'indifference to the truth' in the face of suspicious

circumstances." Brief of Appellant at 18, quoting United States v. Westerfield,

714 F.3d 480, 485 (7th Cir. 2013). In Westerfield, the defendant, a lawyer and

title agent, was convicted of wire fraud based on her participation in a mortgage

fraud scheme. Westerfield, 714 F.3d at 482. On appeal, Westerfield argued

there was insufficient evidence that she acted with intent to defraud, an element

of wire fraud. Westerfield, 714 F.3d at 484-85. The appellate court disagreed,

finding that sufficient circumstantial evidence showed her intent:

              Overall, the jury learned that Westerfield had helped two
       individuals purchase five homes in a short period of time with
       financing from different lenders at high loan-to-value ratios. She
       rushed the buyers and sellers—who were clueless and obviously
       fake—through the closing process and then gave the mortgage
       proceeds to a third party. Based on this evidence, a reasonable
       jury could conclude that if Westerfield had been unaware that she
       was facilitating an illegal scheme, she only lacked such knowledge
       because she was deliberately ignorant.

Westerfield, 714 F.3d at 486.

       Here, there is evidence that two U.S. Bank employees accepted

compensation from Nino de Guzman, himself a former employee of the bank, in

exchange for helping him recruit investors. Both employees personally invested

                                         9
No. 74058-0-1/10

in NDG. One of the employees assisted with the opening of numerous NDG

accounts at U.S. Bank that Nino de Guzman then used for large international

wire transfers. Based on their dealings with Nino de Guzman, these employees

likely violated bank policies regarding conflicts of interest and outside

employment.

       The employees' conduct may be suspicious in a general sense, but it does

not demonstrate that their professed ignorance of the Ponzi scheme was

deliberate. At most, the evidence demonstrates that the employees had actual

knowledge of Nino de Guzman's investment venture and were willing to assist

him with it despite the potential conflict of interest. Evidence that large amounts

of money moved in and out of the NDG accounts is insufficient, without more, to

attribute knowledge to the bank.

       There is evidence that a bank branch manager lowered the risk score on

accounts associated with Nino de Guzman, making it less likely that the accounts

would receive scrutiny. The manager testified that he did not know about the

fraud. Appellants contend that a jury could reject this testimony and infer that the

opposite is true. The possibility that a witness may have perjured himself is

speculative. Speculation does not create an issue of material fact. Seven

Gables Corp. v. MGM/UA Entm't Co., 106 Wash. 2d 1, 12, 721 P.2d 1(1986). In

the absence of evidence that the manager altered forms for the purpose of

assisting Nino de Guzman and with knowledge of his scheme, the manager's

conduct does not create liability for the bank.

                                         10
No. 74058-0-1/11

       In sum, the record does not support an inference that the bank had actual

knowledge of fraud. Unlike in Westerfield, the evidence does not support a

theory of deliberate indifference to the truth. The trial court properly dismissed

the aiding and abetting claim for insufficient evidence.

                           NEGLIGENT SUPERVISION

       The Nortons also appeal the dismissal of their claim that the bank

negligently supervised its employees.

       A negligence action requires proof that the defendant owed the plaintiff a

duty of care. Zabka v. Bank of Am. Corp., 131 Wash. App. 167, 170, 127 P.3d 722

(2005), review denied, 158 Wn.2d 1012(2006). The trial court concluded that

the negligence claim failed because the bank owed no duty of care to the

Nortons, given that they were not customers of U.S. Bank and did not have any

special relationship with the bank.

       The court relied on Zabka in resolving this issue. Zabka involved plaintiffs

who attempted to invest in a company by wiring money into the company's bank

account. Zabka, 131 Wash. App. at 168-69. The money was stolen by the

company principals, and the plaintiffs sued the bank for negligence. Zabka, 131
Wash. App. at 168-69. The court concluded the plaintiffs could not bring a

negligence claim against the bank because the bank owed them no duty of care;

the bank "never had any business relationship with the Zabkas; they were merely

depositors into a checking account." Zabka, 131 Wash. App. at 173.

       The facts of this case are similar to those in Zabka. The Nortons were not

customers of U.S. Bank. Their only connection to the bank appears to be that

                                         11
No. 74058-0-1/12

they invested with NDG, and NDG and Nino de Guzman maintained accounts at

U.S. Bank. Even if the Nortons could prove that the bank failed to follow its own

standards and procedures in monitoring NDG's accounts, that evidence would be

inadequate to create a duty owed by the bank to the Nortons. Zabka, 131 Wn.

App. at 173.

       Appellants contend that Zabka does not apply, citing the principle that "the

duty of supervision extends to reasonably foreseeable victims of the defendant's

employees." Brief of Appellant at 21, citing McKown v. Simon Prop. Group, Inc.

182 Wash. 2d 752, 764, 344 P.3d 661 (2015); see also Appellant's Statement of

Additional Authorities, citing N.L. v.' Bethel Sch. Dist., 186 Wash. 2d 422, 378 P.3d

162(2016). But cases such as McKown and Bethel do not limit the applicability

of Zabka to this case. Because appellants cannot demonstrate that U.S. Bank

owed them a duty of care under the circumstances here, summary judgment on

their negligence claim was proper.

       The Nortons contend that U.S. Bank proximately caused their damages,

primarily because the bank gave the fraudulent scheme an "imprimatur of

legitimacy." Brief of Appellant at 23. They allege that they might not have

invested with Nino de Guzman if he had not had a relationship with a reputable

bank. In light of our conclusion that appellants cannot satisfy the duty element,

we need not address the issue of causation.

                                         12
No. 74058-0-1/13

      Affirmed.

WE CONCUR:

                   13