Varga v. U.S. Bank National Associataion

Filing 42

ORDER granting 30 Motion to Dismiss/General; dismissing this action with prejudice. (Written Opinion). Signed by Judge Richard H. Kyle on 07/02/13. (kll)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

Geoffrey Varga,
Plaintiff,
Civ. No. 12-3180 (RHK/JJK)
MEMORANDUM OPINION
AND ORDER
v.
U.S. Bank National Association,
Defendant.

Stephen D. Susman, Susman Godfrey LLP, New York, New York, Edgar G. Sargent,
Susman Godfrey LLP, Seattle, Washington, Ashley McMillian, Susman Godfrey LLP,
Houston, Texas, Steven M. Pincus, Joseph W. Anthony, Steven C. Kerbaugh, Anthony
Ostlund Baer & Louwagie, P.A., Minneapolis, Minnesota, for Plaintiff.
Richard G. Wilson, Wayne S. Moskowitz, Sarah A. Horstmann, Maslon Edelman Borman
& Brand, LLP, Minneapolis, Minnesota, for Defendant.

INTRODUCTION
When Tom Petters’s Ponzi scheme collapsed in 2008, hundreds of investors – from
retirees to hedge funds – lost nearly everything. Two such “losers” were the Cayman
Islands-based hedge funds Palm Beach Offshore, Ltd. and Palm Beach Offshore II, Ltd.
(together, the “Palm Beach Funds” or the “Funds”), which lost over $700 million.
Plaintiff Geoffrey Varga is the Funds’ court-appointed liquidator. He commenced this
action in December 2012 against U.S. Bank National Association (“U.S. Bank”), asserting
claims of negligence and aiding and abetting breach of fiduciary duty for the bank’s role in
certain transactions with the company at the heart of the scheme, Petters Company, Inc.

(“PCI”). Varga later filed an Amended Complaint, which U.S. Bank now moves to
dismiss. For the reasons that follow, its Motion will be granted.
BACKGROUND
I.

Petters, PCI, distressed goods, and the fraud
Petters held himself out as a savvy businessman with extensive contacts in the

“distressed-goods” industry. He claimed he could obtain large quantities of consumer
items – overruns, closeouts, and the like, typically electronics such as flat-screen
televisions – at a steep discount, which he would then sell to big-box retailers such as
Sam’s Club at a hefty profit. To finance these purchases, he borrowed money through
PCI, with the “investments” maturing when the retailer paid for the goods a short time
later. Over more than a decade, Petters, through PCI, claimed to have purchased and sold
more than $30 billion in distressed goods, all “financed” with investor funds.
A typical PCI “deal” was structured as follows. PCI would learn that distressed
goods were “available” for purchase and it would “pre-sell” them at a profit to a big-box
retailer. PCI would then obtain investor funds, in return for which it issued a
high-interest-rate, short-term promissory note secured by the goods themselves, and use
the funds to buy the goods. The funds would be wired to the seller, and the seller, in turn,
would be directed to deliver the goods to the big-box retailer. The retailer would then pay
for the goods, typically within 60 to 90 days, the investor’s promissory note would be paid
with interest, and PCI would keep the remainder.
This was all good in theory, but in reality the PCI deals were fake – Petters and his
associates forged the purchase and sale documents, and the “sellers” of the distressed
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goods were actually Petters’s co-conspirators, who would wire investor funds to PCI
shortly after receiving them. No payments came from retailers because no goods were
actually bought and sold. Instead, PCI paid old promissory notes with the proceeds from
new promissory notes, siphoning off a portion of the funds in the process. The scheme
collapsed in September 2008 when a Petters insider went to authorities; the losses were
staggering, with investors left holding the bag for more than $3 billion. Petters was later
indicted and convicted of 20 counts of fraud, money laundering, and similar crimes and, in
2010, sentenced to 50 years’ imprisonment.
II.

The Palm Beach parties
The Palm Beach Funds were established in the mid-2000s and were investors in PCI

deals, albeit indirectly. They sent their investors’ money to another, related finance fund
called Palm Beach Finance Partners (“Palm Beach Finance”) 1 which, in turn, invested that
money in PCI notes. Palm Beach Finance was founded and controlled by David Harrold
and Bruce Prevost, who were also the controlling directors of the Palm Beach Funds. In
addition, Harrold and Prevost owned and controlled Palm Beach Capital Management,
LLC (“Palm Beach Capital Management”), which managed the investments of both the
Palm Beach Funds and Palm Beach Finance.
III.

The Direct Payment System and the Collateral Account
U.S. Bank’s involvement in this case arises out of the flow of money to and from the

Palm Beach Funds in the PCI deals, which Varga labels the “Direct Payment System.”
1

Palm Beach Finance Partners was actually two related funds, Palm Beach Finance Partners, LP
and Palm Beach Finance Partners II, LP. For ease of reference, they are referred to collectively as
Palm Beach Finance.

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The Funds’ money passed “through what was supposed to be a system of direct payments
to and from” a bank account at U.S. Bank known as the “Collateral Account.” (Am.
Compl. ¶¶ 6, 29.) The Collateral Account was under the “sole dominion and control” of
an entity called Palm Beach Capital Corp., which was controlled by Harrold and Prevost.
The Direct Payment System was structured so that the Palm Beach Funds’
investment money was first transferred to the Collateral Account, and from there sent
directly to the seller of the goods. (Id. ¶ 29.) After the goods were delivered, the big-box
retailers were to make their payments directly to the Collateral Account. (Id.) According
to Varga, this was intended to (1) prevent a third-party from having access to the funds at
any point during the transaction and (2) ensure that all of the deals were legitimate. (Id.
¶ 30; accord, e.g., id. ¶ 29 (“This was a crucial structural safeguard: observable, direct
payments from wholesale retailers to U.S. Bank were supposed to validate the transactions
financed by the [notes] and ensure that the [merchandise] sales proceeds did not pass
through [PCI].”); id. ¶ 38 (“[T]he Direct Payment System and, in particular, its Incoming
Payment component, were intended to ensure that there was an observable direct payment
from a [] Retailer to the Collateral Account for each transaction, demonstrating that a
Merchandise Transaction funded by a Petters [] Note was bona fide.”).) The Direct
Payment System was referenced in the Palm Beach Funds’ offering memoranda to
investors, as well as the Funds’ marketing materials. (Id. ¶¶ 32-33.) And it was
memorialized in the “Collateral Agreement” establishing the Collateral Account, which

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was entered into by and between U.S. Bank, Palm Beach Finance, and a Petters entity
known as Petters Capital, Inc. 2
Of course, it was impossible for money to flow to the Collateral Account from
retailers, because there were no actual sales or any real merchandise being purchased.
Instead, for many years “payments” to the Collateral Account came from PCI, which (as
discovered later) was simply using newly stolen money to pay off old notes.
According to Varga, however, the Palm Beach Funds’ managers and fiduciaries –
Harrold and Prevost, and (derivatively) Palm Beach Capital Management – knew the
Direct Payment System was not being followed and “conceal[ed] this from the Palm Beach
[] Funds while continuing to invest in Petters [] Notes,” thereby breaching their fiduciary
duties. (Id. ¶¶ 47, 52-53.) 3 Varga also alleges that U.S. Bank, too, knew that payments
to the Collateral Account came from PCI rather than retailers, noting that fact on bank
statements it prepared for the Collateral Account. (Id. ¶ 43.) And, he alleges that U.S.
Bank was aware, via the terms of the Collateral Agreement and the Palm Beach Funds’

2

The Court may consider the Collateral Agreement (and its modifications) when ruling on the
instant Motion because it is expressly referenced in the Amended Complaint. See, e.g.,
Moses.com Sec., Inc. v. Comprehensive Software Sys., Inc., 406 F.3d 1052, 1063 n.3 (8th Cir.
2005). Notably, the Palm Beach Funds were not parties to the Collateral Agreement, as their
money was invested in PCI deals only through Palm Beach Finance. Indeed, the only direct
relationship between the Palm Beach Funds and U.S. Bank was through escrow accounts the
Funds held at the bank – when the Funds invested in PCI deals, U.S. Bank would transfer money
from the escrow accounts to the Collateral Account. (Am. Compl. ¶ 6.)
3

Harrold and Prevost have pleaded guilty to securities fraud, admitting among other things that
they misrepresented to the Palm Beach Funds’ investors that payments came directly from big-box
retailers, when they knew that payments actually came from PCI. (See United States v. Vennes et
al., Crim. No. 11-141, Doc. Nos. 32, 34 (4/21/11 Hr’g Trs.).)

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marketing and offering materials (which U.S. Bank had received), that the Direct Payment
System was important to the integrity of the PCI deals. (Id. ¶¶ 49-50.)
IV.

The Ponzi scheme collapses and litigation ensues
When the Petters scheme imploded in September 2008, the Palm Beach Funds had

more than $700 million invested in PCI notes. All of that money was lost, and the Funds
went bankrupt. The Grand Court of the Cayman Islands subsequently appointed Varga as
the Funds’ “official liquidator,” authorizing him to “bring all legal actions on behalf of” the
Funds. (Id. ¶ 16.)
In September 2009, Varga commenced an action against Harrold, Prevost, and Palm
Beach Capital Management in the United States District Court for the Southern District of
Florida, alleging that each had breached fiduciary duties owed to the Funds. (Moskowitz
Decl. Ex. 1.) 4 The docket in the Florida action indicates that the case settled in early 2011,
short of trial.
Apparently having failed to recoup all of the Palm Beach Funds’ losses, Varga
aimed his sights elsewhere. And so, on December 6, 2012, he commenced the instant
action against U.S. Bank in the Hennepin County, Minnesota District Court, alleging that
the bank (1) aided and abetted breaches of fiduciary duty by Harrold, Prevost, and Palm
Beach Capital Management, and (2) conspired with Harrold, Prevost, and Palm Beach
Capital Management to conceal that the Direct Payment System “was a sham.” (Doc. No.

4

The Court may consider the Complaint in the Florida action and the materials appended thereto
when ruling on the instant Motion. See, e.g., Blakley v. Schlumberger Tech. Corp., 648 F.3d 921,
931 (8th Cir. 2011) (court may consider “materials that are part of the public record”).

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1, Ex. A.) U.S. Bank timely removed the action to this Court and moved to dismiss; Varga
responded by filing an Amended Complaint (Doc. No. 27) alleging the same aiding-andabetting claim, dropping the conspiracy claim, and adding claims for negligence. U.S.
Bank now moves to dismiss the Amended Complaint. The Motion has been fully briefed,
the Court heard argument on June 17, 2013, and the Motion is now ripe for disposition.
STANDARD OF REVIEW
The Supreme Court set forth the standard for evaluating a motion to dismiss in Bell
Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662
(2009). To avoid dismissal, a complaint must include “enough facts to state a claim to
relief that is plausible on its face.” Twombly, 550 U.S. at 547. A “formulaic recitation of
the elements of a cause of action” will not suffice. Id. at 555; accord Iqbal, 556 U.S. at
678. Rather, the party seeking relief must set forth sufficient facts to “nudge[] the[]
claim[] across the line from conceivable to plausible.” Twombly, 550 U.S. at 570. “The
plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a
sheer possibility that a [party] has acted unlawfully.” Iqbal, 556 U.S. at 678 (quoting
Twombly, 550 U.S. at 556).
When reviewing a motion to dismiss, the Court “must accept a plaintiff’s specific
factual allegations as true but [need] not . . . accept . . . legal conclusions.” Brown v.
Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010) (citing Twombly, 550 U.S. at 556).
The complaint must be construed liberally, and any allegations or reasonable inferences
arising therefrom must be interpreted in the light most favorable to the non-moving party.
Twombly, 550 U.S. at 554–56. “Determining whether a complaint states a plausible
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claim for relief will . . . be a context-specific task that requires the reviewing court to draw
on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.
ANALYSIS
I.

Aiding and abetting
Count I of the Amended Complaint alleges that U.S. Bank aided and abetted

breaches of fiduciary duties owed to the Palm Beach Funds by Harrold, Prevost, and Palm
Beach Capital Management. There are several problems with this claim.
A.

What duties were owed?

It is axiomatic that liability for aiding and abetting a breach of fiduciary duty cannot
exist without an underlying breach of that duty. But this creates a choice-of-law issue.
The Palm Beach Funds were formed in the Cayman Islands and, hence, whatever duties
they were owed must have arisen under Cayman Islands law. See, e.g., Potter v. Pohlad,
560 N.W.2d 389, 391 (Minn. Ct. App. 1997) (under the “internal affairs doctrine,” the
fiduciary duties of a corporation’s directors are “generally governed by the law of the state
of incorporation”); 5 Feiner Family Trust v. VBI Corp., No. 07 Civ. 1914, 2007 WL
2615448, at *5 (S.D.N.Y. Sept. 11, 2007) (applying law of the Cayman Islands in
shareholder derivative suit); Meng v. Schwartz, 305 F. Supp. 2d 49, 58 (D.D.C. 2004)
(applying Bermuda law to breach-of-fiduciary-duty and negligence claims). Here, Varga

5

As the Court is sitting in diversity, it must look to Minnesota’s choice-of-law rules to resolve any
conflict-of-law questions. See, e.g., Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496
(1941). Minnesota courts routinely apply the internal affairs doctrine to breach-of-fiduciary-duty
claims. See, e.g., Transocean Grp. Holdings Pty Ltd. v. S.D. Soybean Processors, LLC, 663 F.
Supp. 2d 731, 742 n.5 (D. Minn. 2009) (Tunheim, J.); Rupp v. Thompson, No. C5-03-347, 2004
WL 3563775, at *3 (Minn. Dist. Ct. Mar. 17, 2004).

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has cited cases from several jurisdictions regarding different duties ostensibly owed to the
Funds (see Mem. in Opp’n at 14-17), yet none arises under Cayman Islands law.
To be sure, the Amended Complaint does allege that the Palm Beach Funds were
owed “the duties of care, loyalty, and good faith” (Am. Compl. ¶¶ 69-70), although neither
it nor Varga’s Memorandum has identified the source of those duties. See Henneberry v.
Sumitomo Corp. of Am., 532 F. Supp. 2d 523, 552 (S.D.N.Y. 2007) (“Simply stating a
duty existed does not make it so.”). More problematic, the Amended Complaint fails to
specify which of these duties were ostensibly breached here. Such broad-brush
generalizations will not suffice. See Twombly, 550 U.S. at 555 (pleading rules require
“more than labels and conclusions”). 6
B.

Was there a breach?

In any event, it appears clear that at least some fiduciary duties were owed to the
Funds under Cayman Islands law. See, e.g., In re Refco Inc. Sec. Litig., 826 F. Supp. 2d
478, 500 (S.D.N.Y. 2011). What is not clear is whether Varga has sufficiently pleaded
breaches thereof. 7
For example, the Amended Complaint alleges that Harrold, Prevost, and Palm
Beach Capital Management directed U.S. Bank to “re-code” the Collateral Account’s
monthly bank statements to “indicate[] that the source of the payments was a” big-box
6

This problem was highlighted at oral argument, when Varga’s counsel asserted breaches of the
duties of “care and candor” (6/17/13 Hr’g Tr. at 32-33 (emphasis added)) – the latter never having
been alleged.
7

The parties dispute whether Federal Rule of Civil Procedure 9(b)’s heightened pleading
requirements apply to the aiding-and-abetting claim. (Def. Mem. at 21; Mem. in Opp’n at 14-15.)
The Court need not resolve that dispute, because the Amended Complaint fails to adequately plead
this claim even under the liberal requirements of Federal Rule of Civil Procedure 8.

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retailer, in order to “conceal” that “payments were [actually] being received from” PCI.
(Am. Compl. ¶ 44; accord, e.g., Mem. in Opp’n at 10.) But the Amended Complaint
nowhere identifies who received these monthly statements, and presumably it would have
only been the parties to the Collateral Agreement (which established the Collateral
Account). It is unclear, therefore, how this alleged “concealment” could have misled the
Palm Beach Funds, which were not parties to the agreement and are not alleged to have
seen the monthly statements. Without any indication otherwise, this allegation does not
plausibly plead a breach of fiduciary duty. See, e.g., Hamilton v. Bangs, McCullen,
Butler, Foye & Simmons, LLP, 687 F.3d 1045, 1051-52 (8th Cir. 2012) (plaintiff must
show breach of fiduciary duty proximately caused his injuries); In re Refco, 826 F. Supp.
2d at 500 (noting that Cayman Islands cases “require a showing of proximate cause” to
establish breach of fiduciary duty). 8
It could be argued that the Funds were aware of the changes to the monthly account
statements because their directors (Harrold and Prevost) were so aware – indeed, they
allegedly ordered it. (Am. Compl. ¶ 77.) But Varga does not press this argument, in fact
taking pains to distinguish between Harrold and Prevost, on one hand, and the Palm Beach
Funds (of which they were directors) on the other. (See Mem. in Opp’n at 16.) This is
likely because without drawing such a distinction, everything Harrold and Prevost knew

8

Varga stands before the Court only on behalf of the Funds and not anyone else. Accordingly,
breaches of fiduciary duties owed to others, such as investors, would not aid his cause. For this
reason, the guilty pleas by Harrold and Prevost do not automatically satisfy Varga’s obligation to
plead a breach of fiduciary duty – Harrold and Prevost pled guilty to misleading investors, not the
Palm Beach Funds themselves.

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would have also been known by the Funds, belying the contention that Harrold and Prevost
“concealed” information from the Funds – the crux of Varga’s claims.
C.

Did U.S. Bank have knowledge and substantially assist?

Even if Varga had successfully pleaded a breach of fiduciary duty by Harrold,
Prevost, and/or Palm Beach Capital Management, he would have discharged only a portion
of his burden. To state a claim for aiding and abetting such a breach under Minnesota
law, 9 he must also plead facts showing that U.S. Bank (1) had knowledge of the breach and
(2) substantially assisted it. E.g., Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d
179, 187-88 (Minn. 1999); In re Tempromandibular Joint (TMJ) Implants Prods. Liab.
Litig., 113 F.3d 1484, 1495 (8th Cir. 1997) (aiding and abetting liability “attaches when
one actor knows that the other’s conduct constitutes a breach of duty and gives substantial
assistance or encouragement to the other so to conduct himself”) (internal quotation marks
omitted). Knowledge and substantial assistance are evaluated “in tandem,” with a greater
showing of one requiring a lesser showing of the other. Witzman, 601 N.W.2d at 188. In
the Court’s view, the Amended Complaint falls short on both.
1.

Knowledge

Knowledge is a “crucial element in aiding and abetting cases.” E-Shops Corp. v.
U.S. Bank Nat’l Ass’n, 678 F.3d 659, 663 (8th Cir. 2012); accord, e.g., Camp v. Dema, 948
F.2d 455, 459 (8th Cir. 1991) (“[T]he knowledge element is critical.”). While knowledge
9

Because the alleged duties arise under Cayman Islands law, it is possible that a claim for aiding
and abetting also arises under Cayman Islands law. As neither party raises this choice-of-law
issue, the Court follows their lead and analyzes the elements of aiding and abetting under
Minnesota law. See, e.g., BBSerCo, Inc. v. Metrix Co., 324 F.3d 955, 960 n.3 (8th Cir. 2003)
(law of forum applies by default when choice of law not raised by either party).

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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.” Wiand v. Wells Fargo Bank, N.A.,
__ F. Supp. 2d __, 2013 WL 1401414, at *3 (M.D. Fla. Apr. 5, 2013) (emphases in
original); accord, e.g., Camp, 948 F.2d at 459. Constructive knowledge will not suffice,
El Camino Res. Ltd. v. Huntington Nat’l Bank, 712 F.3d 917, 922 (6th Cir. 2013), and it is
not enough to plead awareness of the conduct in question, Camp, 948 F.2d at 459, that it
raised “red flags,” Wiand, 2013 WL 1401414, at *3 (quoting Lerner v. Fleet Bank, N.A.,
459 F.3d 273, 294 (2d Cir. 2006)), or even that it amounted to gross negligence, Camp, 948
F.2d at 463. Rather, Varga must plead facts plausibly suggesting U.S. Bank was aware of
the wrongfulness of the challenged conduct. Witzman, 601 N.W.2d at 187; Camp, 948
F.2d at 459.
Here, while the Amended Complaint pleads facts showing U.S. Bank was aware
certain conduct was being undertaken by the Palm Beach Funds’ fiduciaries, it is sorely
lacking in facts suggesting the bank had actual knowledge such conduct was wrongful.
Varga alleges that U.S. Bank knew (1) the importance of the Direct Payment System;
(2) the Funds’ fiduciaries (Harrold, Prevost, and Palm Beach Management) were aware the
system was not being followed; and (3) the fiduciaries were concealing the source of
incoming payments from the Funds. According to Varga, U.S. Bank must have known
from these facts that Harrold, Prevost, and/or Palm Beach Management were breaching
fiduciary duties, because of the Direct Payment System’s “significance” to the investments

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and the fact that “it was reflected in legally binding documents such as the Collateral
Agreement and” the Funds’ offering documents. (Mem. in Opp’n at 21-22.)
But even accepting these allegations as true, they do not adequately plead that U.S.
Bank knew a breach of fiduciary duty to the Funds was taking place. 10 To be sure, the
Amended Complaint alleges that the Direct Payment System was intended to mitigate risks
associated with the Funds’ investments. Yet despite Varga labeling the system as
“crucial” (Am. Compl. ¶ 75), nothing in the Collateral Agreement or the Funds’ offering
documents mandated that funds travel in the fashion described. Indeed, those documents
made clear only that PCI would “direct each [retailer] to make all payments” to the
Collateral Account (Geist Decl., Ex. B § 1(b) (Collateral Agreement) (emphasis added);
Moskowitz Decl. Ex. 1, attach. A-1 at 12 (offering memorandum)); they did not require
payments be made in this way. The recitals to the Collateral Agreement, too, noted only
that Palm Beach Finance had “requested that . . . all collections received from [retailers] be
. . . remitted by wire transfer directly to” the Collateral Account. (Geist Decl. Ex. B,
Recital C (emphasis added).) Further, the Collateral Agreement expressly contemplated
that money could be tendered to the Collateral Account by PCI, and U.S. Bank had no
discretion to refuse that money. (Id. § 4(a) (“The Bank shall . . . [a]pply and credit for
deposit to the Collateral Account . . . Receipts [defined as all cash, checks, or other items of
value that PCI paid to or deposited with U.S. Bank] from time to time tendered by or on
behalf of [PCI] for deposit therein.”).)

10

Recall that the fiduciary duties arose under Cayman Islands law. In other words, Varga must
allege that U.S. Bank knew what such duties were and that the fiduciaries were breaching them.

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Moreover, Varga’s allegations ignore the transactions’ context – he overlooks that
the Palm Beach Funds were timely paid on their investments in PCI notes for several years
without any problems, apparently with full knowledge by the fiduciaries that the Direct
Payment System was not being followed and that funds were being received from PCI, not
retailers. Given this fact, the Court perceives no reason why U.S. Bank would (or should)
have leapt to the conclusion that the Funds’ fiduciaries were breaching their obligations by
“ignoring” the Direct Payment System. 11
Varga also attempts to show knowledge by pointing out that the Funds’ fiduciaries
directed U.S. Bank to change the Collateral Account’s monthly statements. (Mem. in
Opp’n at 18-19, 22.) But as noted above, there is no allegation the Palm Beach Funds saw
those “misleading” statements, or more importantly, that U.S. Bank knew the Funds saw
them. Moreover, the account statements prior to the change (which occurred in December
2006) showed that payments were being received directly from PCI. Hence, it is hard to
understand why U.S. Bank should have understood this change as a breach of fiduciary
duty, “somehow retroactively conceal[ing]” the source of the payments from the Funds
(assuming they had seen the statements in the first place). (Def. Mem. at 27.)
At bottom, the Amended Complaint, in the Court’s view, pleads nothing more than
facts suggesting U.S. Bank should have known duties were being breached. This does not
suffice. E.g., SEC v. Shanahan, 646 F.3d 536, 547 (8th Cir. 2011) (“[A] bare inference

11

This same logic undermines Varga’s contention that U.S. Bank knew the fiduciaries were
breaching duties by continuing to invest in PCI notes notwithstanding the failure to adhere to the
Direct Payment System. (Mem. in Opp’n at 23-24.)

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that the defendant must have had knowledge of the primary violator’s transgressions is
insufficient.”) (quoting Camp, 948 F.2d at 459).
2.

Substantial assistance

Even if Varga had made some minimal showing of knowledge, his claims would
falter on the element of substantial assistance. Substantial assistance requires an
“affirmative step” on the part of the aider-and-abettor, Am. Bank of St. Paul v. TD Bank,
N.A., 713 F.3d 455, 463 (8th Cir. 2013), that is a “substantial factor” in causing the breach
of duty, Camp, 948 F.2d at 460. It is not enough for an aider-and-abettor to act in some
way that incidentally advances the breach. Id. Rather, the conduct in question must be
undertaken with “some degree of knowledge” (1) of its wrongful purpose and (2) that it is
aiding the tortfeasor. Id.; accord, e.g., In re TMJ, 113 F.3d at 1496 (noting that assistance
must be undertaken “with the intention of advancing the tortious activity”). “If it were
otherwise, aiding and abetting would be indistinguishable from simply aiding. This
would cast too wide a net, bringing under it parties involved in nothing more than routine
business transactions.” Camp, 948 F.2d at 459.
To determine what constitutes substantial assistance, courts generally consider the
five factors listed in the comments to section 876 of the Restatement (Second) of Torts.
See, e.g., Witzman, 601 N.W.2d at 188; In re TMJ, 113 F.3d at 1495. Those factors are:
the nature of the act encouraged, the amount of assistance given, the aider-and-abettor’s
presence or absence at the time of the tort, its relation to the primary actor, and its state of
mind. In re TMJ, 113 F.3d at 1495. Considering those factors here, and remaining
“[m]indful of the potentially devastating impact aiding and abetting liability might have on
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commercial relationships,” K & S P’ship v. Cont’l Bank, N.A., 952 F.2d 971, 980 (8th Cir.
1991), the Court concludes that the Amended Complaint does not plausibly suggest U.S.
Bank substantially assisted the fiduciaries in breaching duties owed to the Funds.
Taking the final factor first, little in the Amended Complaint suggests that U.S.
Bank acted with a culpable state of mind. And indeed, it strains logic to assume that a
large commercial bank would knowingly aid breaches of fiduciary duties in connection
with transactions worth hundreds of millions of dollars, potentially putting itself on the
hook for that amount in the process, without some kind of incentive. But the Amended
Complaint pleads none. Nothing indicates that U.S. Bank was collecting hefty fees from
either the fiduciaries or the Palm Beach Funds, through the Collateral Account or
otherwise, that might justify taking such a huge financial risk. The Amended Complaint
simply offers no answer to the critical question: What financial incentive did U.S. Bank
have to act in this fashion? Or put more succinctly: Why?
The “relationship” factor also militates against substantial assistance. The
Amended Complaint suggests no relationship between U.S. Bank and the fiduciaries
(Harrold, Prevost, and Palm Beach Capital Management) who allegedly breached their
duties. At most, there existed a relationship between the bank and entities controlled by
the fiduciaries, including the Palm Beach Funds and Palm Beach Finance, but these were
simply arms-length, commercial relationships. See Witzman, 601 N.W.2d at 189
(“‘[S]ubstantial assistance’ means something more than the provision of routine
professional services.”).

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Finally, it is noteworthy that U.S. Bank was not retained to provide investment or
other advice to the fiduciaries, but simply was hired to process the transactions – take
money from Palm Beach Finance, distribute it to the “sellers,” and then receive and process
payments back from the “buyers” after the goods were sold. This shows that both the
amount and the nature of the assistance given was small. U.S. Bank simply did what any
bank does on a daily basis.
In sum, the relevant factors do not plausibly suggest substantial assistance here.
None of Varga’s arguments to the contrary is availing.
Varga first attempts to show substantial assistance by noting that U.S. Bank
accepted and processed payments “despite its awareness that the direct payment system
was required by the Collateral Agreement and promised in” the Funds’ offering
documents. (Mem. in Opp’n at 26 (emphases added).) But as already discussed, these
assertions are inaccurate. Neither the Collateral Agreement nor the Funds’ offering
documents required that money travel via the Direct Payment System – they simply
indicated that PCI would direct retailers to make payments to the Collateral Account,
saying nothing about what would happen if retailers failed to follow those directives.
Varga also argues that U.S. Bank “should not have . . . accept[ed] deposits directly from”
PCI (id. at 26), but yet again, the Collateral Agreement belies that argument. (See supra at
13 ( “The Bank shall . . . [a]pply and credit for deposit to the Collateral Account . . .
Receipts from time to time tendered by or on behalf of [PCI] for deposit therein.”).)
Varga’s primary bone of contention appears to be that U.S. Bank processed
payments, knowing they were coming from PCI and not retailers, “without ever alerting
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the [Palm Beach] Funds and other interested parties to the failure to follow” the Direct
Payment System. (Mem. in Opp’n at 26.) But even assuming U.S. Bank would have
been permitted to make such disclosures without violating the confidentiality of its
customers, failing to alert others cannot constitute substantial assistance as a matter of law:
“Liability [must be] based on [U.S. Bank’s] affirmative acts, not acts it should have taken.”
Am. Bank, 713 F.3d at 463 (emphasis added); accord, e.g., Benford v. City of Minneapolis,
Civ. No. 10-4539, 2012 WL 6200365, at *6 (D. Minn. Dec. 12, 2012) (Montgomery, J.)
(“Generally speaking, knowledge of a violation combined with inaction does not constitute
‘substantial assistance.’”).
Varga also attempts to show substantial assistance by pointing out that a U.S. Bank
employee (Thomas Caruth) informed a third-party (Jonathan Spring, who was both an
investor in and a marketer of the Palm Beach Funds) that payments were being made by
retailers, and that he made similar misrepresentations to other third parties. (Mem. in
Opp’n at 27; Am. Compl. ¶¶ 39, 56.) Even assuming that allegation as true, there are no
facts alleged to suggest this was anything other than an error by Caruth – notably, the
Amended Complaint does not allege Caruth knew the information he was providing was
inaccurate. See E-Shops, 678 F.3d at 664 (no substantial assistance when complaint
contained no allegations bank knew information it provided was false). 12 And certainly
nothing in the Amended Complaint indicates that Caruth made these statements for the
purpose of furthering breaches of fiduciary duties. More importantly, the “false”
12

At oral argument, Varga’s counsel asserted that Caruth “said something . . . false [while] [h]e
knew the truth.” (6/17/13 Hr’g Tr. at 32.) But the Amended Complaint contains no such
allegation.

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statements were made to investors, not the Palm Beach Funds themselves. Varga,
therefore, cannot show that the statements caused any harm to the Funds, the only entities
he represents here. See In re TMJ, 113 F.3d at 1495 (“[T]he alleged substantial assistance
must be the proximate cause of the plaintiffs’ harm.”).
Lastly, Varga points to the changes to the Collateral Account monthly statements,
arguing they constituted substantial assistance. (Mem. in Opp’n at 28-29.) But this
contention, too, fails for lack of causation, absent some allegation the Palm Beach Funds
actually saw the statements.
For all of these reasons, the Court concludes that the Amended Complaint fails to
plead facts suggesting knowledge or substantial assistance on the part of U.S. Bank. The
aiding-and-abetting claim must be dismissed.
II.

Negligence
The remaining claims, labeled “willful and wanton negligence” (Count II) and

“gross negligence” (Count III), respectively, allege that U.S. Bank breached duties owed to
the Palm Beach Funds, based on the same facts recited above. Under Minnesota law,
which both parties agree applies to these claims, the elements of negligence are (1) a duty,
(2) breach, (3) causation, and (4) damages. E.g., Gilbertson v. Leininger, 599 N.W.2d
127, 130 (Minn. 1999). U.S. Bank argues that these claims fail due to the absence of an
enforceable duty; the Court agrees.
“Any legal analysis of an action . . . alleging negligence must begin with an inquiry
into whether the [defendant] owed the [plaintiff] a duty.” Louis v. Louis, 636 N.W.2d
314, 318 (Minn. 2001). “Existence of a duty in a negligence case is a question of law.”
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Funchess v. Cecil Newman Corp., 632 N.W.2d 666, 672 (Minn. 2001). Here, Varga
argues that U.S. Bank knew the Palm Beach Funds “were placing their trust in U.S. Bank
and relying on [it] as custodian of the Collateral Account.” (Mem. in Opp’n at 32.) As a
result, he contends that the bank had a “duty to safeguard” the Collateral Account “for [its]
beneficiaries.” (Id. (quoting Am. Compl. ¶ 82).) He further asserts that the Funds were
“relying on U.S. Bank to counsel and inform them” and, hence, they were owed a duty “not
to misrepresent the source of incoming payments.” (Id. at 33.)
But rather than support these contentions, the facts pleaded in the Amended
Complaint undermine them. The Palm Beach Funds were not parties to the Collateral
Agreement, belying Varga’s assertion that they were “placing their trust in” U.S. Bank and
“relying on” it as “custodian” of the Collateral Account. Furthermore, the Collateral
Agreement makes clear that the funds in the Collateral Account were held only for the
benefit of the parties to that agreement – in other words, not the Palm Beach Funds. (Geist
Decl. Ex. B § 1(a).) And, the Collateral Agreement also makes clear that U.S. Bank
would owe no liability to third parties – which necessarily includes the Palm Beach Funds
– for actions taken (or not taken) by the bank pursuant to the agreement. (Id. § 9(a)(1).)
There is simply no support for the contention that the Palm Beach Funds were somehow
beneficiaries of the Collateral Account, and therefore owed a duty by U.S. Bank. 13
As for the allegation that the Palm Beach Funds were “relying on U.S. Bank to
counsel and inform them,” Varga nowhere identifies where that (supposed) duty emanated
13

Indeed, had the Funds been third-party beneficiaries of the Collateral Account under the terms
of the Collateral Agreement, Varga likely would have asserted a breach-of-contract claim against
U.S. Bank.

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from. And nothing in the nature of the relationship between the Funds and U.S. Bank
suggests the bank had any obligation to inform the Funds about anything, least of all the
nature of the transactions in an account in which the Funds had no ownership interest.
Distilled to its essence, Varga’s allegation boils down to a complaint that U.S. Bank
breached a duty to prevent fraud from passing through one of its accounts. No such duty
exists. See Hurley v. TCF Banking & Sav., F.A., 414 N.W.2d 584, 587 (Minn. Ct. App.
1987) (noting that a bank “is not in a fiduciary relationship with a customer, rather the
relationship is one of debtor and creditor,” and without “special circumstances,” it owes no
duty); see also Guardian Angel Credit Union v. MetaBank, No. 08-cv-261, 2011 WL
2784078, at *6 (D.N.H. July 14, 2011) (noting that “a bank does not have a general duty to
protect non-customers from torts involving its accounts”).
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED that U.S. Bank’s Motion to Dismiss (Doc. No. 30) is GRANTED, and this
action is DISMISSED WITH PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: July 2, 2013

s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge

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