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Zayed v. Associated Bank, N.A.

United States District Court, D. Minnesota

January 31, 2017

R.J. Zayed, In His Capacity as Court-Appointed Receiver for the Oxford Global Partners, LLC, Universal Brokerage, FX, and Other Receiver Entities, Plaintiff,
Associated Bank, N.A., Defendant.

          William W. Flachsbart, Esq. and Flachsbart & Greenspoon, 333 N. Michigan Ave., D. Timothy McVey, Esq. and McVey & Parsky LLC, Keith A. Vogt, Esq. and Takiguchi & Vogt, LLP, and Brian W. Hayes, Esq., Tara C. Norgard, Esq. and Carlson Caspers Vandenburgh Lindquist & Schuman PA, counsel for plaintiff.

          Charles F. Webber, Esq and Faegre Baker Daniels LLP, and Stephen M. Medlock, Esq. and Mayer Brown, LLP, counsel for defendant.


          DAVID S. DOTY, JUDGE

         This matter is before the court upon the motions to exclude expert testimony by Receiver R.J. Zayed and the motions for summary judgment, sanctions, and to exclude expert testimony by defendant Associated Bank. Based on a review of the file, record, and proceedings herein, and for the following reasons, the court grants the motion for summary judgment and denies the remaining motions as moot.


         The background of this matter is fully set forth in the court's September 30, 2013, and August 4, 2015, orders, and the court recites only those facts necessary to resolve the instant motions. See ECF Nos. 50, 78. This receivership action arises out of a criminal Ponzi scheme committed using Associated Bank accounts. The scheme principals included, among others, Trevor Cook, Patrick Kiley, and Chris Pettengill.[1] Compl. ¶ 1, ECF No. 42. The scheme purported to guarantee investors a return in excess of 10% annually through foreign currency trading with Crown Forex, S.A., a Swiss company. Id. ¶ 3. In furtherance of the scheme, the Receivership Entities opened accounts with multiple financial institutions, including Associated Bank. The Receiver alleges that Lien Sarles, a former vice president of Associated Bank, had knowledge of and assisted in the fraud.

         The banking relationship between Sarles and the scheme principals began in December 2007 or January 2008. Sarles Decl. ¶ 8. Kiley was referred to Sarles by Michael Behm, Sarles's stepbrother, for commercial banking services. Id. During the course of the banking relationship, Sarles occasionally socialized with Cook. Sarles Dep. at 64:16-20; 174:10-175:2. During a meeting with Cook, Pettengill, and others, Cook quoted lines, such as “greed is good, ” from the movies Wall Street and Boiler Room, but there is no evidence that Sarles understood that these comments referred to the ongoing Ponzi scheme. See Pettengill Dep. at 124:21-125:20.

         In 2008, Sarles personally assisted Kiley in opening several commercial accounts, including account #1705 registered to Crown Forex LLC, the domestic counterpart to Crown Forex, S.A. Sarles Decl. ¶ 9; see Greenspoon Decl. Ex. 21, ECF No. 235. Kiley and Julia Smith were signatories on the account. See Greenpoon Decl. Ex. 21. The Receiver alleges that the Crown Forex account was integral to the Ponzi scheme. Specifically, investors would deposit money into the account, which was then transferred to other Associated Bank accounts and accounts at other institutions for personal use by the scheme principals. Compl. ¶ 33.

         Sarles opened the Crown Forex account, despite lacking the necessary Secretary of State registration documents. Sarles Decl. ¶ 14. Sarles testified that he opened the account with the understanding that Kiley would provide the documents later. Id.; Sarles Dep. at 109:6-16.[2] Sarles, however, did not follow up to obtain the necessary documentation. He was later informed that the Bank would close or freeze the Crown Forex account for lack of proper documentation, but that never occurred. Sarles Decl. ¶¶ 17, 19.

         Sarles understood that the Crown Forex account was an investment account, but the account opening forms indicate that it was a “Checking/Money Market” account.[3] See id. ¶ 14; Sarles Dep. at 120:1-121:21; Greenspoon Decl. Ex. 21. Although the Crown Forex account was set up to wire investment money to the foreign Crown Forex entity for investment purposes, no international transfers appear to have occurred. See Sarles Dep. at 120:24-121:21; Greenspoon Decl. Ex. 22 at 34830; Id. Ex. 32. Sarles also assisted Cook in opening several other accounts on which Cook was the signatory, including account #2331, whichwas registered to Oxford Global FX, LLC. Sarles Decl. ¶ 10; Greenspoon Decl. Ex. 25 at 56568.

         On April 19, 2013, the Receiver filed this action, alleging claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omission against Associated Bank based on Sarles's relationship with Cook and the other scheme principals. Associated Bank now moves for summary judgment.


         I. Standard of Review

         “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material only when its resolution affects the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party. See id. at 252 (“The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient ....”).

         On a motion for summary judgment, the court views all evidence and inferences in a light most favorable to the nonmoving party. Id. at 255. The nonmoving party, however, may not rest upon mere denials or allegations in the pleadings but must set forth specific facts sufficient to raise a genuine issue for trial. Celotex, 477 U.S. at 324. A party asserting that a genuine dispute exists - or cannot exist - about a material fact must cite “particular parts of materials in the record.” Fed.R.Civ.P. 56(c)(1)(A). If a plaintiff cannot support each essential element of a claim, the court must grant summary judgment because a complete failure of proof regarding an essential element necessarily renders all other facts immaterial. Celotex, 477 U.S. at 322-23.

         II. Aiding and Abetting Claims

         To state a claim for aiding and abetting under Minnesota law, a plaintiff must show that (1) a primary actor committed a tort that caused injury to the plaintiff, (2) the aider and abettor knew that the primary actor's conduct constituted a tort, and (3) the aider and abettor substantially assisted or encouraged the primary actor in committing the tort. Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn. 1999); see also In re Temporoamandibular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484, 1495 (8th Cir. 1997) (same). The elements of knowledge and substantial assistance are analyzed in tandem. Witzman, 601 N.W.2d at 188. “Where there is a minimal showing of substantial assistance, a greater showing of [knowledge] is required.” Id. (citation and internal quotation marks omitted).

         In determining whether the requisite showing of knowledge and assistance exists the court will consider “[f]actors such as the relationship between the defendant and the primary tortfeasor, the nature of the primary tortfeasor's activity, the nature of the assistance provided by the defendant, and the defendant's state of mind.” Id.

         A. Law of the Case

         The Receiver argues that the facts as recited by the Eighth Circuit Court of Appeals in its previous opinion in this matter preclude summary judgment. See Zayed v. Associated Bank, 779 F.3d 727 (8th Cir. 2013). The law is clear, however, that a court is not bound by the facts recited by an appellate decision at the pleading stage when deciding a summary judgment motion. Burton v. Richmond, 370 F.3d 723, 728 (8th Cir. 2004). Therefore, the Eighth Circuit's previous decision does not preclude summary judgment.

         B. Knowledge

         “An aider and abettor's knowledge of the wrongful purpose is a crucial element in aiding or abetting cases.” E-Shops Corp. v. U.S. Bank Nat'l Ass'n, 678 F.3d 659, 663 (8th Cir. 2012) (citation and internal quotation marks omitted). “[W]here the conduct is not a facial breach of duty, courts have been reluctant to impose liability on an alleged aider and abettor for anything less than actual knowledge that the primary tortfeasor's conduct was wrongful.” Witzman, 601 N.W.2d at 188. In other words, “[w]hile knowledge may be shown by circumstantial evidence, courts stress that the requirement is actual knowledge and the circumstantial evidence must demonstrate that the aider-and-abettor actually knew of the underlying wrongs committed.” Varga v. U.S. Bank Nat'l Ass'n, No. 12-3180, 2013 WL 3338750, at *6 (D. Minn. July 2, 2013) (emphasis in original) (citations and internal quotation marks omitted); see also El Camino Res. Ltd. v. Huntington Nat'l Bank, 712 F.3d 917, 922-23 (6th Cir. 2013) (requiring, under the Restatement definition of aiding and abetting, that bank must have more than “strong suspicion of wrongdoing”).[4]

         The Receiver, citing Witzman, argues that constructive knowledge, rather than actual knowledge, may also suffice. See Witzman, 601 N.W.2d at 188 (“In cases where the primary tortfeasor's conduct is clearly tortious or illegal, some courts have held that a defendant with a long-term or in-depth relationship with that tortfeasor may be deemed to have constructive knowledge that the conduct was indeed tortious.”). But the Witzman court only noted in dicta, citing a Second Circuit case, that some courts hold that constructive knowledge can be sufficient in certain circumstances. Even if Minnesota courts would apply a standard of constructive knowledge, it does not apply here because the scheme was not clearly tortious or illegal to those not directly involved; indeed, the scheme involved multiple individuals, business entities, and banks, was furthered by ostensibly legitimate transactions, and went undiscovered for three years. See id. (“[Defendant] may have reasonably believed that these allegedly tortious dealings were legitimate ....”). Further, the two-year banking relationship between the scheme principals and the Bank, including ...

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