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Upsher-Smith Laboratories, Inc. v. Fifth Third Bank

United States District Court, D. Minnesota

March 22, 2019

UPSHER-SMITH LABORATORIES, INC., Plaintiff,
v.
FIFTH THIRD BANK, Defendant.

          Randy G. Gullickson and Richard T. Ostlund, ANTHONY OSTLUND BAER & LOUWAGIE PA, for plaintiff.

          Jeffrey A. Miller and Victor A. Walton, VORYS, SATER, SEYMOUR AND PEASE LLP, and Jennifer L. Cornell, NILAN JOHNSON LEWIS PA, for defendant.

          MEMORANDUM OPINION & ORDER

          JOHN R. TUNHEIM, UNITED STATES DISTRICT COURT CHIEF JUDGE

         This case arises out of a dispute over fraudulent transactions instigated by an unknown third-party against Plaintiff Upsher-Smith Laboratories, Inc. (“Upsher”). Upsher is a Minnesota-based pharmaceutical company. In 2013, Upsher hired Defendant Fifth Third Bank (“FTB”) to carry out foreign currency transactions on its behalf. In May and June of 2014, an Upsher employee was defrauded into requesting nine separate payments totaling over $52 million in foreign currencies to banks in China and Slovakia. FTB executed the payments at the employee's request. Upsher brought this action against FTB in March 2016, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of Minn. Stat. § 335.4A (“Article 4A”). FTB raised various affirmative defenses.

         Five motions are now before the Court: (1) Upsher's partial motion for summary judgment on its breach of contract claim and some of FTB's affirmative defenses; (2) FTB's motion for summary judgment on all claims; and (3) FTB's motions to exclude the expert testimony of three witnesses. Because the Court finds that Article 4A of the Uniform Commercial Code applies to this dispute and preempts Upsher's breach of contract claim, it will grant summary judgment to FTB on that claim. Because there are genuine disputes of material fact as to whether FTB followed commercially reasonable security protocol in good faith when carrying out the fraudulent transactions, the Court will deny summary judgment for FTB on Upsher's Article 4A claim. Finally, because the expert witness testimony is relevant and reliable, the Court will deny FTB's motions to exclude expert testimony.

         BACKGROUND

         I. UPSHER AND FTB'S BUSINESS RELATIONSHIP

         Upsher is a Minnesota company specializing in the manufacture, distribution, and sale of pharmaceutical products.[1] (Am. Compl. (“Compl.”) ¶ 7, Aug. 7, 2017, Docket No. 65.) FTB is an Ohio banking corporation. (Compl. ¶ 8.) In June 2012, Upsher entered into a credit agreement with a syndicate of banks, allowing it to draw on a credit line for needed funds. (Compl. ¶ 12; Answer to Am. Compl. (“Answer”) ¶ 12, Aug. 21, 2017, Docket No. 69.) JPMorgan Chase (“JPMorgan”), the bank that maintained Upsher's principal operating account, was one of three lead banks involved in the deal. (Compl. ¶ 12, Answer ¶ 12.) FTB was one of several banks designated to provide credit to Upsher should the need arise. (Compl. ¶ 13, Answer ¶13.)

         Upsher at times makes payments to foreign vendors in foreign currencies (“FX transfers”).[2] (Compl. ¶ 16.) Prior to August 2013, Upsher used Cambridge Mercantile Corp. to conduct its FX transfers. (Decl. of Nan Smith (“Smith Decl.”) ¶ 5, July 13, 2018, Docket No. 282.) Around the time Upsher entered into the credit agreement with the syndicate of banks, however, Upsher and FTB began discussing moving Upsher's FX transfer business to FTB. (Decl. of Stephen Robinson (“Robinson Decl.”) ¶¶ 3-10, May 26, 2016, Docket No. 27.) Although the details of those discussions are unclear, Upsher contends that they were initiated by Neil Brenner, an FTB employee based in Minneapolis who was interested in additional business opportunities with Upsher. (Compl. ¶¶ 14-15; Robinson Decl. ¶¶ 5-6, 9.) By August 2013, Upsher had shifted its FX transfer business to FTB. (Compl. ¶ 15.)

         Before the shift occurred, Nan Smith, Upsher's Corporate Accounting Manager, met with Brenner to discuss how the FX transfer process would work. (1st Decl. of Nathan Colvin (“1st Colvin Decl.”) ¶ 10, Ex. 7 (“Smith Dep.”) at 41, July 13, 2018, Docket No. 212.) Smith recalls that she and Brenner agreed to use the same procedures Upsher had used with Cambridge. (Id.) Brenner also met with Christine Hopper, the Upsher employee tasked with managing its FX transfers, and Seazon Patterson, another employee, to discuss the transition. (1st Colvin Decl. ¶ 7, Ex. 4 (“Hopper Dep.”) at 43-44; 51, July 13, 2018, Docket No. 209.) Like Smith, Hopper expressed a desire to keep the process consistent with the process used with Cambridge. (Id. at 44-45, 53, 57.) Under that process, Upsher employees would send requests for FX transfers to FTB via email, multiple employees would be copied on those emails, and FTB would send an initial response to any Upsher employees originally copied. (Id. at 51-54) Brenner does not recall what procedures he agreed FTB would follow. (5th Decl. of Nathan Colvin (“5th Colvin Decl.”) ¶ 4, Ex. 1 (“Brenner Dep.”) at 77 Aug. 3, 2018, Docket No. 367-1.)

         To set up Upsher's account in its systems, FTB required that Upsher fill out a form entitled “FX Customer Profile” (“FX Profile”). (Compl. ¶ 18; Answer ¶ 18.) The blank FX Profile was sent via email to Smith. (1st Colvin Decl. ¶ 14, Ex. 11 at 2-3, Docket No. 205-1.) That email identified the FX Profile as the only “required documentation” and stated that the “information is being requested, and is required to be returned, at the time of setup of your FX Account to meet compliance requirements.” (Id. at 3.) The FX Profile itself included a statement that the form was “for internal use only.” (Decl. of Steven C. Kerbaugh (“Kerbaugh Decl.”) ¶ 5, Ex. 21 (“FX Profile”), July 13, 2018, Docket No. 305.) Before filling out the FX Profile, Smith replied to the email, indicating she would wait for Seazon Patterson, Upsher's new Accounts Payable Manager, to fill out the form. (1stColvin Decl. ¶ 14, Ex. 11 at 2.)

         On July 30, 2013, Upsher sent the completed FX Profile to FTB. (Compl. ¶ 19.) Upsher listed Christine Hopper as the “primary confirmation contact” for FX trades, Patterson as the “secondary confirmation contact, ” and Smith as an “optional confirmation contact.” (FX Profile.) All three of the employees' email addresses and phone numbers were included on the form, along with the finance department's fax number. (See id.)

         After receiving the FX Profile, FTB set up Upsher's account and sent Upsher a “Foreign Exchange Agreement, ” a standard form used by FTB. (1st Colvin Decl. ¶ 17, Ex. 14 (“FX Agreement”) at 5-10, Docket No. 205-2.) The FX Agreement stated that all FX transactions would be subject to its terms. (FX Agreement ¶ 1.) It also stated that FTB would send Upsher a confirmation for each transaction, indicated that Upsher was “responsible for promptly reviewing each Confirmation, ” and required Upsher to notify FTB within one business day of receipt of said confirmations about any discrepancies. (Id. ¶ 7.) However, neither FTB nor Upsher ever signed the FX Agreement. (Id. at 10.) In fact, in an email, an FTB employee told Smith and Patterson that the “FX Agreement [was] not required to be returned under any deadline” because Upsher expected to request spot-only transactions. (Id. at 1.)

         II. THE FX TRANSFER PROCESS AND PROTOCOL

         Between late August 2013 and May 2014, FTB conducted 61 non-fraudulent FX transfers for Upsher, all within the United Kingdom, Western Europe, or Canada. (Kerbaugh Decl. ¶ 4, Ex. 14 (“Transfer Summ.”) at 2-4, Docket No. 299.) All but two of these transactions involved amounts under $500, 000, and most were under $100, 000. (Id.) As the Upsher employee tasked with managing FX transfers, Hopper sent the payment orders for nearly all of these transactions. (See Smith Dep. at 41-42.)

         The parties dispute the proper characterization of the transactions. Upsher refers to the FX transfers as “foreign currency wire[s]” or “third party funds transfers.” (Compl. ¶ 1.) FTB disputes that the FX transfers at issue were “wire transfers” and refers to them as “foreign exchange . . . trading services.” (Answer at 1-2.) Nomenclature aside, the record indicates that the transactions involved two major steps. First, Upsher went to FTB to exchange U.S. dollars for foreign currency. (See Kerbaugh Decl. ¶ 3, Ex. 11 (“Doyle Rep.”) at 4, n.1, July 31, 2018, Docket No. 296.) Then, FTB initiated a third-party payment of the foreign currency to the beneficiary designated by Upsher.[3] (Id.)

         Because of the risks of fraud and money laundering involved in third-party payments, FTB's Policy Manual states that, prior to making any FX transfers, FTB and its counterparty should “mutually agree on procedures and practices to ensure that business is conducted in a safe and sound manner.” (Kerbaugh Decl. ¶ 5, Ex. 25 at 12, 20, Docket No. 309.) Brenner does not recall whether he spoke with Smith, Hopper, or Patterson at any point about the inherent risks involved in the FX transfer process, nor does he recall in detail what procedures they discussed or agreed to follow. (Brenner Dep. at 77, 151) Although a risk disclosure form was attached to the FX Agreement sent to Upsher, (FX Agreement at 11-13), there is no evidence that Brenner or anyone else at FTB required any Upsher employee to acknowledge these risks.

         Whether by explicit agreement or otherwise, the parties followed a pattern of procedures for setting up and confirming FX transfers. First, a senior Upsher employee would notify Hopper of the need for a transfer. (Decl. of Nan Smith ¶¶ 6-7, 9, July 13, 2018, Docket No. 282.) Hopper would then email Brenner at FTB, copying Patterson or, after Patterson's departure from Upsher, her replacement, Hope Jackson.[4] (Id. ¶ 8; see also Hopper Dep. at 65-66, 104.) The initial emails from Hopper included the amount needed in USD, the foreign currency needed, and the foreign beneficiary's details. (Transfer Summ. at 5-6.) FTB would respond to Hopper's request via email, confirming the amount and offering an exchange rate. (Hopper Dep. at 66.) Brenner would “reply all” on emails from Upsher so that anyone originally included would receive his response. (Brenner Dep. at 170; Compl. ¶ 22; Transfer Summ. at 11-12.)

         Following the confirmation email to Hopper, FTB would call Hopper to confirm the details. (Hopper Dep. at 39-40, 67.) FTB would then send a fax confirmation to Upsher's finance department. (Id. at 39, 67.) Each fax contained stated terms, including that Upsher was obligated to notify FTB of discrepancies within 24 hours and that failure to do so would constitute an agreement with the confirmation. (1st Colvin Decl. ¶ 18, Ex. 15 at 2, Docket No. 218.) Hopper would then give a copy of the fax confirmation to Andrea Zimmerman, a senior accountant. (Hopper Dep. at 68.) Zimmerman stapled the faxes to the daily cash reports for Upsher's JPMorgan account. (1st Colvin Decl. ¶ 4, Ex. 1 (“Zimmerman Dep.”) at 57-58, July 13, 2018, Docket No. 206.)

         III. THE FRAUDULENT TRANSACTIONS

         On May 29, 2014, Hopper received an email purporting to be from Mark Evenstad, Upsher's CEO. (Hopper Dep. at 106-107.) That email indicated that Hopper would receive a separate email from an attorney named David Madison, who would write to Hopper from the address davidmadison@lawyer.com. (Kerbaugh Decl. ¶ 5, Ex. 32, Docket No. 316.) The person purporting to be Evenstad gave Hopper the following details: the email from Madison would involve the acquisition of a company by Upsher; Evenstad would need Hopper's assistance as part of that process; he (“Evenstad”) had given full power of attorney to Madison; Hopper should “execute everything [Madison] needs”; for confidentiality reasons, all communications would need to be over email; any questions Hopper may have should be directed to Madison; and, finally, Hopper was the only other employee aware of the acquisition and so should keep all information private pending public announcement. (Id.)

         Hopper replied to the “Evenstad” email that day, indicating she would do her best to complete Madison's requests. (Kerbaugh Decl. ¶ 5, Ex. 22 at 2-3, July 13, 2018, Docket No. 306.) In the past, the real Evenstad had occasionally taken actions that did not adhere to normal protocol, which apparently influenced Hopper's decision to follow the email's instructions. (Smith Dep. at 91, 130, 147-48; 1st Colvin Decl. ¶ 8, Ex. 5 (“Robinson Dep.”) at 35-36.) When Evenstad did so, employees would refer to it as “a Mark E thing.” (See Smith Dep at 147-48.) Hopper later referred to the May 29, 2014 request as a “Mark E thing, ” indicating she may have believed that, while unusual, his request was not entirely out of character. (Id. at 146.)

         Later that day, a man purporting to be Madison called Hopper. He had a foreign accent. (Hopper Dep. at 112.) He told Hopper that if she didn't keep information about the acquisition confidential, the acquisition and people's jobs would be in jeopardy. (Id. at 113.) Madison also told Hopper that he would need information about Upsher's bank accounts. (Id. at 111.) Hopper then asked Smith about the daily transfer limit. (Smith Dep. at 101.) Smith called FTB to ask about the limit, and Melissa Sullivan, an FTB employee, informed her it was $25 million. (Id. at 102; Compl. ¶¶ 33, 35.) Throughout the day, May 29, Hopper and Madison exchanged several more emails. (Kerbaugh Decl. ¶ 5, Ex. 17, Docket No. 302.) Therein, Hopper shared Upsher's account information with Madison and informed him the daily FX transfer limit was $25 million. (Id. at 3.)

         On the afternoon of May 29 and at Madison's direction, Hopper initiated a request for $1, 285, 034 to be transferred to CBSC Investment Bank in China. (1st Colvin Decl. ¶ 27, Ex. 24, Docket No. 205-5.) As usual, she emailed Brenner and Sullivan at FTB, but this time she did not copy another Upsher employee as was her normal practice. (Id.) As such, only Hopper, Brenner, and Sullivan were aware of the request. This was not the only unusual characteristic of the request. In the email, Hopper stated that “this cannot wait the two day cycle we normally do.” (Id. at 2.) She also asked that Brenner and Sullivan contact her directly with questions because the transfer was “a confidential matter.” (Id.) She further requested that they email the confirmation to her directly instead of faxing it and, if unable to do so, that someone call her directly so that she “could be ready to grab [the fax].” (Id.)

         Sullivan completed the trade and emailed Hopper a confirmation but decided to also fax a confirmation to Upsher at the usual fax number. (Id. at 1; Hopper Dep. at 145.) Instead of giving a copy of the fax confirmation to Andrea Zimmerman, Hopper picked up the fax and put it in her desk without recording the transaction in the company ledger. (Hopper Dep. at 146.) Knowing that Zimmerman would see a $1.285 million withdrawal from Upsher's JPMorgan account, Hopper told Zimmerman to expect to see “a wire” and “to keep it quiet.” (Zimmerman Dep. at 118.) Although she was not following protocol, Zimmerman trusted that Hopper was “doing her job” and following directions. (Id. at 120.)

         On June 2 - after a second fraudulent transaction had been completed - JPMorgan emailed Nan Smith to warn her about fraudsters using fake email addresses to obtain cash through wire transfers. (1st Colvin Decl. ¶ 33, Ex. 30, Docket No. 230.) Smith forwarded the email to Hopper and the rest of Upsher's finance department. (Id.) It described the scenario Hopper was involved in almost exactly, stating that “in a typical scenario, a fraudster gains access to the company's email system and uses the CFO's email account to send instructions for a wire payment.” (Id.) The email also instructed employees to “always validate new payment instructions received via email, even if the email is internal and/or from a known sender” and recommended calling the sender “to verify.” (Id.) Hopper does not remember reviewing the email but concedes she probably did. (Hopper Dep. at 178.)

         Between May 29 and June 16, 2014, Hopper requested a total of nine FX transfers at Madison's direction, all of which FTB executed. (Kerbaugh Decl. ¶ 4, Ex. 15 at 2, Docket No. 300.) The transfers ranged in amount from approximately $726, 000 to $12 million, for a total of $52.5 million.[5] (Compl. ¶ 72.) All were to banks in China or Slovakia. (Id. ¶ 20.) In comparison to the usual FX transfers requested by Upsher, these transfers were for much larger sums than was typical and were to countries with which Upsher did not typically transact. (See Id. at ¶ 75; Transfer Summ. at 2.)

         Despite the unusual characteristics of the transactions, including their amounts, short turn-around, and confidential nature, Brenner and Sullivan executed them without question, following Hopper's requests for secrecy. (See Kerbaugh Decl. ¶ 5, Exs. 35, 37, 39, 42, 45, Docket Nos. 319, 321, 323, 326, 331.) However, they did recognize that the requests were out of the ordinary and expressed curiosity about the situation to one another. In one conversation, Brenner repeatedly stated to Sullivan that he thought “something [wa]s going down” at Upsher. (5th Colvin Decl. ¶ 14, Ex. 11 at 1, Docket No. 367-7.) Brenner then stated that he believed that Upsher was “going public, ” which could explain the large requests. (Id. at 2.) He also told Sullivan that Hopper “didn't know anything” and was “kind of just whatever kind of person there.” (Id.)

         Meanwhile, despite the rapid depletion of funds from Upsher's JPMorgan account, no one at Upsher other than Hopper or Zimmerman noticed something unusual was occurring until June 9. (1st Colvin Decl. ¶ 5, Ex. 2 (“Bodin Dep.”) at 96, Docket No. 207.) On that date, Nancy Bodin, who audited Upsher's ledger and bank accounts, noticed that there was a $1.2 million deduction from the JPMorgan account that was unaccounted for in the company ledger. (Id. at 95.) Bodin emailed Hopper, Zimmerman, and Jackson about the discrepancy. (Id. at 97-98, 99.) When Hopper told Jackson, who was her senior, that she could not share details of the transaction, Jackson went to her own manager, Bruce Loch, who wanted to wait before contacting Mark Evenstad about the issue. (1st Colvin Decl. ¶ 21, Ex. 18 (“Jackson Dep.”) at 91-92, Docket No. 221.) After word got to Nan Smith and then Robinson, Upsher's CFO, Robinson informed her that he would talk to Evenstad. (Smith Dep. at 146-47.) Meanwhile, Upsher's operating account dipped to almost -$1 million. (Zimmerman Dep. at 162.)

         On June 12, Robinson finally asked Evenstad about the $1.2 million FX transfer that was unaccounted for. (Robinson Dep. at 71-72.) Evenstad replied that he was not sure whether he had authorized that transaction. (Id.) Robinson then looked for Hopper, who was out for a long weekend and would not be returning until June 17. (Id. at 72-73.) While she was away, however, Hopper placed requests for two more FX transfers at Madison's direction. (Hopper Dep. at 277-281.) FTB carried them out. (See Compl. ¶ 72.)

         Robinson and Evenstad finally realized Upsher had been defrauded on June 17, when Hopper shared a copy of the initial email from “Evenstad” with Robinson. (Robinson Dep. at 83-85.) Upsher and FTB then communicated about the fraudulent transactions for the first time. (Id. at 86.) FTB was able to recover $12 million of the total sum lost and returned it to Upsher. (Id. at 87.)

         Following Upsher's discovery of the fraud, the FBI began investigating what it told Evenstad was a “worldwide foreign crime.” (Evenstad Dep. at 69.) At the same time, PricewaterhouseCoopers (“PwC”) conducted an internal investigation and determined that the “tone at the top” of the company was “inappropriate” such that “the finance staff felt the fraudulent email could have been truthful” and “did not feel comfortable enough to communicate with [Evenstad] or any supervisor.” (1st Colvin Decl. ¶ 60, Ex. 57 at 2, Docket No. 271.) PwC also found issue with the finance department's failure to review the company's journals sooner. (1st Colvin Decl. ¶ 61, Ex. 58 at 4, Docket No. 272.) Upsher now exists as Acova, LLC, with Evenstad as CEO. (Evenstad Dep. at 10-11.)

         On August 7, 2017, Upsher filed a First Amended Complaint, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and failure to comply with Article 4A of the UCC. (Compl.) FTB asserted the following affirmative defenses: (1) Upsher's claims are barred by the terms and conditions of contractual or other documents, the parties' past practices and/or course of performance; (2) impossibility and/or impracticability of performance; (3) estoppel, laches, waiver and/or unclean hands; (4) contributory and/or comparative fault, contributory and/or comparative negligence, and/or Minn. Stat. § 604.01; (5) Upsher's failure to exercise ordinary care; and (5) the applicable statutes of limitations and/or repose. (Answer ¶¶ 106-08, 114-15, 117.) FTB further asserts that any alleged damages were caused by Upsher's or its employee's actions, over which FTB had no control. (Id. ¶ 112.)

         FTB moves for summary judgment on each of Upsher's claims. FTB also presents three motions to exclude expert testimony. Upsher moves for summary judgment on its breach of contract claim and on FTB's affirmative defenses.

         DISCUSSION

         I. CROSS MOTIONS FOR SUMMARY JUDGMENT

         A. Standard of Review

          Summary judgment is appropriate where there are no genuine issues of material fact and the moving party can demonstrate that it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). A fact is material if it might affect the outcome of the suit, and a dispute is genuine if the evidence is such that it could lead a reasonable jury to return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A court considering a motion for summary judgment must view the facts in the light most favorable to the nonmoving party and give that party the benefit of all reasonable inferences to be drawn from those facts. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate if the nonmoving party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

         B. Choice of Law

         FTB and Upsher dispute whether Minnesota, New York, or Ohio law governs this dispute. Because the Court finds that its conclusions would be the same under any state's laws, it will not undergo a choice-of-law analysis.

         C. Article 4A of the ...


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