Zayed v. Associated Bank, N.A.

Filing 78

ORDER denying 70 Motion to Dismiss/General. Signed by Senior Judge David S. Doty on 8/4/2015. (DLO)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-232(DSD/JSM)
R.J. Zayed, in His Capacity
As Court-Appointed Receiver
For The Oxford Global Partners,
LLC, Universal Brokerage FX,
and Other Receiver Entities,
Plaintiff,
ORDER
v.
Associated Bank, N.A.,
Defendant.
Attorneys for plaintiff, Brian W. Hayes, Esq. at Carlson
Caspers Vandenburgh Lindquist & Schuman PA, 225 South Sixth
Street, Suite 4200, Minneapolis, MN 55402. D. Timothy McVey,
Esq. at McVey & Parsky, LLC, 30 North LaSalle, Suite 2100,
Chicago, IL 60602. Keith A. Vogt, Esq. at Stadheim & Grear
LTD, 400 North Michigan Avenue, Suite 2200, Chicago, IL 60611.
Attorneys for defendant, Alex C. Lakatos, Esq. at Mayer Brown
LLP, 1999 K Street NW, Washington, DC 20006.
Charles F.
Webber, Esq. at Fagre Baker Daniels LLP, 90 South 7th Street,
Suite 2200, Minneapolis, MN 55402.
This matter is before the court upon the motion to dismiss by
defendant Associated Bank, N.A. (Associated Bank).

Based on a

review of the file, record, and proceedings herein, and for the
following reasons, the court denies the motion.

BACKGROUND
The background of this matter is fully set forth in the
court’s September 30, 2013, order granting Associated Bank’s first
motion to dismiss, and the court recites only those facts necessary
to resolve the instant motion. This receivership action arises out

of a Ponzi scheme committed using Associated Bank accounts.

The

scheme was orchestrated by, among others, Trevor Cook and Patrick
Cook and Kiley used several corporate entities1 (the

Kiley.

Receivership Entities) to perpetuate their scheme, which guaranteed
investors lucrative returns through foreign currency trading with
Crown Forex, S.A., a Swiss company.

Compl. ¶ 3.

Cook pleaded

guilty and Kiley was convicted by a jury for their roles in the
scheme.

Id. ¶ 1.

In furtherance of the scheme, the Receivership Entities opened
accounts with multiple financial institutions, including Associated
Bank.

The Receiver alleges that former Associated Bank Associate

Vice President Lien Sarles was complicit in the fraud, assisted in
masking the true nature of the scheme’s accounts, and falsified
account documents.2 Specifically, the Receiver alleges that Sarles
advised Cook and Kiley to open an account in the name of Crown
Forex LLC, a domestic entity, rather than Crown Forex, S.A., to
avoid regulatory issues.

Id. ¶¶ 5, 38.

At the time, Sarles

allegedly was aware that Crown Forex LLC did not exist.
Nonetheless,

the

account

application,

which

was

Id. ¶ 45.

prepared

by

Associated Bank, stated that Crown Forex LLC documentation was

1

These entities include Oxford Global Partners, LLC; Oxford
Global FX, LLC; Oxford FX Growth, L.P.; Universal Brokerage FX
Management, LLC; Market Shot, LLC; and other entities controlled
by Cook and Kiley. Compl. ¶ 2.
2

Sarles’ brother, Michael Behm, was employed by Kiley and
referred Kiley to Sarles. Compl. ¶ 34.
2

obtained from a “[r]eport from a state registration website.”
¶ 7.

Id.

In addition, a separate Associated Bank form falsely stated

that “Crown Forex LLC is a Limited Liability Company recognized
under

the

laws

Receivership

of

Minnesota.”

Entities

Associated Bank.

opened

Id.
at

¶

least

42.
seven

In

total,

accounts

the
with

Id. ¶ 29.

Over the next two years, investors deposited over $79 million
into the Crown Forex LLC account.

Id. ¶ 33.

These funds were then

transferred to other accounts associated with the scheme. Id. The
Receiver alleges that Sarles assisted Cook and Kiley with these
illegal transfers. Specifically, Sarles allegedly approved over $3
million in transfers from the Crown Forex LLC account to Cook’s
personal accounts, even though he knew that the Crown Forex LLC
account held client investment funds and that Cook had no signatory
authority over the account.

Id. ¶ 10. Sarles continued to approve

these transfers even after Swiss authorities froze the Crown Forex,
S.A. accounts.

Id. ¶¶ 58-60.

Moreover, on June 25, 2009, Cook

withdrew $600,000 from one of the accounts at Associated Bank, for
the alleged purpose of buying a yacht.

Id. ¶ 63.

Although this

withdrawal was investigated by individuals at Associated Bank, it
was ultimately approved.

Id.

The Receiver also alleges that

around the same time Associated Bank prepared $3.2 million in
cashier’s checks that included inaccurate remitter information.
Id. ¶ 64.

3

On

November

23,

2009,

the

U.S.

Securities

and

Exchange

Commission brought civil actions against Cook, Kiley, and related
individuals and organizations.

See, e.g., U.S. Commodity Futures

Trading Comm’n v. Cook, No. 09-3332 (D. Minn. filed Nov. 23, 2009).
On December 11, 2009, then Chief Judge Michael J. Davis appointed
R.J. Zayed as Receiver for the Receivership Entities.
The

Receiver

was

given

authority

to

Id. ECF 96.3

“[i]nitiate,

defend,

compromise, adjust, intervene in, dispose of, or become a party to
any actions or proceedings ... necessary to preserve or increase
the assets of the [Receivership Entities] or to carry out his or
her duties pursuant to this Order.”

Id. at 4.

The Receiver was

further authorized “[t]o pursue, resist and defend all suits,
actions, claims and demands which may ... be brought by or asserted
against the [Receivership Entities].”

U.S. Sec. & Exch. Comm’n v.

Cook, No. 09-3333 (D. Minn. filed Nov. 23, 2009), ECF No. 13, at 3.
On April 29, 2013, the Receiver filed suit, alleging claims
for

aiding

and

abetting

fraud,

breach

of

fiduciary

conversion, and false representations and omissions.
dismissed

the

action

on

September

30,

2013,

for

duty,

The court
failure

to

adequately plead knowledge or substantial assistance on the part of

3

On April 4, 2013, Zayed recused himself from this matter.
ECF No. 34, at 1. Chief Judge Davis authorized Tara Norgard,
Brian Hayes, and Russell Rigby “to act on behalf of the Receiver
an in his capacity as the Receiver, with all powers appertaining
thereto.” Id. at 3. The court refers to these individuals
collectively as the Receiver.
4

Associated Bank.
remanded.
2015).

ECF No. 50.

The Eighth Circuit reversed and

Zayed v. Associated Bank, N.A., 779 F.3d 727 (8th Cir.

Associated Bank again moves to dismiss.

DISCUSSION
I.

Standard of Review
To survive a motion to dismiss for failure to state a claim,

“a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009)
(quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

“A claim

has facial plausibility when the plaintiff [has pleaded] factual
content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”

Iqbal, 556

U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)).

Although a complaint need not contain detailed factual

allegations, it must raise a right to relief above the speculative
level.

Twombly, 550 U.S. at 555.

“[L]abels and conclusions or a

formulaic recitation of the elements of a cause of action” are not
sufficient to state a claim.

Iqbal, 556 U.S. at 678 (citation and

internal quotation marks omitted).
The court does not consider matters outside of the pleadings
under Rule 12(b)(6).

Fed. R. Civ. P. 12(d).

The court, however,

may consider matters of public record and materials that do not

5

contradict

the

complaint,

as

well

as

“necessarily embraced by the pleadings.”

materials

that

are

Porous Media Corp. v.

Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999) (citation and
internal quotation marks omitted).
II.

In Pari Delicto
Associated Bank first argues that this action is barred by the

doctrine of in pari delicto.

“The doctrine of in pari delicto is

the principle that a plaintiff who has participated in wrongdoing
may not recover damages resulting from the wrongdoing.” Grassmueck
v.

Am.

Shorthorn

(citation

and

Assoc.,

internal

402

F.3d

quotation

833,

marks

837

(8th

omitted).

Cir.
It

2005)
is

an

equitable defense that “is based upon judicial reluctance to
intervene in disputes between [wrongdoing] parties.” Christians v.
Grant Thornton, LLP, 733 N.W.2d 803, 814 (Minn. Ct. App. 2007)
(citation

and

internal

quotation

marks

omitted).

Judicial

intervention may be warranted, however, if a “paramount public
interest” supports “the enforcement of a public policy which
overrides considerations of a benefit inuring to the wrongdoer.”
Head v. AAMCO Automatic Transmissions, Inc., 199 N.W.2d 444, 448
(Minn. 1972).
Associated Bank argues that it and the Receivership Entities
are at least equally culpable for their participation in the Ponzi
scheme, and as a result, in pari delicto prevents the Receiver from
bringing this action on the entities’ behalf. Under Minnesota law,

6

a receiver typically has the same rights and is subject to the same
defenses as the entity that the receiver represents. See Magnusson
v. Am. Allied Ins. Co., 189 N.W.2d 28, 33 (Minn. 1971).

When an

equity receiver is appointed for a corporation, however, “the
wrongdoer (the corporation) is removed from the picture and, hence,
in pari delicto does not apply.”

Kelley v. College of St.

Benedict, 901 F. Supp. 2d 1123, 1129 (D. Minn. 2012); see also
Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 1995) (“[T]he
defense of in pari delicto loses its sting when the person who is
in pari delicto is eliminated.”).

Indeed, an equity receiver is

permitted to bring claims that would otherwise “be barred by a
corporation’s own fraud had the corporation brought the claims on
its own behalf.”

Kelley, 901 F. Supp. 2d at 1129.

Moreover, the Receiver was granted authority to “pursue,
resist and defend all suits, actions, claims and demands which may
... be brought by or asserted against the [Receivership Entities].”
U.S. Sec. & Exch. Comm’n v. Cook, No. 09-3333 (D. Minn. filed Nov.
23, 2009), ECF No. 13, at 3; see also Equity Trust Co. v. Cole, 766
N.W.2d 334, 341 (Minn. 2009) (“[T]he purpose and scope of a
receivership is defined by court order.”).

“Because this case

involves a Ponzi scheme, the Receivership Entities are considered
victims of the fraud and thus creditors of the Ponzi scheme.”
Zayed v. Peregrine Fin. Grp., Inc., No. 12-269, 2012 WL 2373423, at
*2 (D. Minn. June 22, 2012); see also German-Am. Fin. Corp. v.

7

Merchs. & Mfrs. State Bank of Minneapolis, 225 N.W. 891, 893 (Minn.
1929) (stating that a receiver for an insolvent corporation may sue
for the benefit of its creditors “even though the defense set up
might be valid as against the corporation itself”). Thus, it would
defeat one of the purposes for which the Receiver was appointed to
bar this action based on in pari delicto.

See Jones v. Wells Fargo

Bank, N.A., 666 F.3d 955, 966 (5th Cir. 2012) (declining to apply
in pari delicto where doing so “would undermine one of the primary
purposes of the receivership established ... and would thus be
inconsistent with the purposes of the doctrine”).
Associated Bank argues that courts routinely apply in pari
delicto to bar actions where, as alleged here, the receiver asserts
“a claim for tort damages from entities that derived no benefit
from the embezzlements, but that were allegedly partly to blame for
their occurrence.” Knauer v. Jonathon Roberts Fin. Grp., Inc., 348
F.3d 230, 236 (7th Cir. 2003); see also Christians, 733 N.W.2d at
815 (“[W]hen a defendant’s only sin is its failure to prevent
transgressions by the plaintiff, no benefit flows to the public
from rewarding the transgressor.” (citation and internal quotation
marks omitted)).
court

cannot

At this stage in the proceedings, however, the

determine

the

extent

to

which

Associated

Bank

participated in and benefitted from the Ponzi scheme. See Pearlman
v. Alexis, No. 09-20865, 2009 WL 3161830, at *3 (S.D. Fla. Sept.
25, 2009) (declining to apply in pari delicto on motion to dismiss

8

because doing so required “an essentially equitable and necessarily
factbound apportionment of responsibility”); Marwil v. Ent & Imler
CPA Grp., PC, No. 03-678, 2004 WL 2750255, at *10 (S.D. Ind. Nov.
24, 2004) (declining to apply in pari delicto at the pleading
stage, where receiver alleged that defendant “recklessly ignor[ed]
and

perpetuat[ed]”

receiver entity).

the

fraudulent

misrepresentations

of

the

Likewise, the court cannot determine at this

time whether the conduct of Cook and Kiley should be imputed to the
Receivership Entities for purposes of the in pari delicto defense.
See Grassmueck, 402 F.3d at 841 (applying in pari delicto where
partnership was alter ego of general partner).

The appointment of

the Receiver and the Receiver’s allegations regarding Associated
Bank’s participation in the scheme, though relevant considerations
for

purposes

of

dispositive.

the

in

pari

delicto

doctrine,

are

not

yet

As a result, dismissal on the basis of in pari

delicto is not warranted at this time.
III. Res Judicata
Associated Bank next argues that this action is barred by res
judicata. In October 2009, six defrauded investors sued Associated
Bank in Wisconsin state court for the bank’s alleged participation
in the Ponzi scheme.

See Grad v. Assoc. Bank, N.A., 801 N.W.2d

349, 2011 WL 2184335, at *1 (Wis. Ct. App. June 7, 2011).

The

investors argued - based on similar facts as those alleged in the
instant

action

-

that

Associated

9

Bank

negligently

failed

to

discover and prevent fraudulent conduct by Oxford Global Partners,
LLC, a Receivership Entity, and that the bank aided and abetted
Oxford’s breach of its fiduciary duties and conversion of property.
Id.

The district court dismissed the complaint and the Wisconsin

Court of Appeals affirmed, finding in part that the investors “did
not allege that Associated intended to assist the customer’s
tortious conduct - a necessary element of aiding and abetting
liability.” Id. at *1. Associated Bank argues that Grad precludes
the Receiver’s claims here.
When determining the preclusive effect of a state court’s
judgment on subsequent claims, federal courts sitting in diversity
refer to the law of the state “from which the judgment is taken.”
Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996)
(citation and internal quotation marks omitted).

Under Wisconsin

law, “a final judgment is conclusive in all subsequent actions
between the same parties [or their privies] as to all matters which
were litigated or which might have been litigated in the former
proceedings.”

N. States Power Co. v. Bugher, 525 N.W.2d 723, 727

(Wis. 1995) (citation and internal quotation marks omitted).

In

order for a subsequent claim to be res judicata, there must be “(1)
an identity between the parties or their privies in the prior and
present suits; (2) an identity between the causes of action in the
two suits; and, (3) a final judgment on the merits in a court of
competent jurisdiction.”

Id. at 728.

10

Associated Bank argues that the Receiver stands in privity
with the Grad plaintiffs.

The court disagrees.

“Privity exists

when a person is so identified in interest with a party to former
litigation that he or she represents precisely the same legal right
in respect to the subject matter involved.”
Milwaukee, 643 N.W.2d 72, 78 (Wis. 2002).

Pasko v. City of

The interests and legal

rights pursued by the Receiver here are different than those at
issue in Grad, however.

In Grad, the plaintiff investors were

seeking recovery on their own behalf.

In contrast, the Receiver

“represents the interest of the compan[ies] in receivership.”
Feinstein v. Long, Nos. 11-57, 11-58, 2011 WL 3555727, at *4 (E.D.
Wis. Aug. 11, 2011).

Thus, the Receiver is pursuing this action to

redress injury to the Receivership Entities, even though doing so
will necessarily benefit the individual investors.

See Compl. ¶¶

83, 88, 94, 98; Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 795
(6th Cir. 2009) (stating that the purpose of a receiver is to
“marshal the receivership entities’ assets ... so that the assets
may be distributed to the injured parties in a manner the court
deems equitable”).

This difference in interests is sufficient to

preclude a finding of privity.

See Pasko, 643 N.W.2d at 79-80

(finding the interests of police officers in seeking promotions
differed from their union’s interest in ensuring promotions for all
of its members); Treter v. Valona, 706 N.W.2d 703, 2005 WL 2649123,
at *7 (Wis. Ct. App. Oct. 18, 2005) (finding tenant’s interest in

11

reacquiring conveyed property on behalf of corporation differed
from the interests of the corporation’s creditors, who also sought
to void the conveyance).

As a result, dismissal is not warranted

on the basis of res judicata.
IV.

Standing
Associated

Bank

lastly

argues

that

prudential standing to pursue this action.

the

Receiver

lacks

Prudential standing

requires that a plaintiff claim an injury to its own legal rights
and interests rather than the legal rights or interests of third
parties.
on

other

See Allen v. Wright, 468 U.S. 737, 751 (1984), abrogated
grounds

by

Lexmark

Int’l,

Inc.

Components, Inc., 134 S. Ct. 1377 (2014).

V.

Static

Control

It provides “assurance

that the most effective advocate of the rights at issue is present
to champion them.”

Duke Power Co. v. Carolina Envtl. Study Grp.,

Inc., 438 U.S. 59, 80 (1978).
Associated

Bank

argues

that

the

claims

asserted

by

the

Receiver should instead be pursued by the defrauded investors.
Specifically, Associated Bank argues that this action will likely
have preclusive effect on subsequent claims brought by investors,
thereby violating the “deep-rooted historic tradition that everyone
should have his own day in court.”

Richards v. Jefferson Cnty.,

517 U.S. 793, 798 (1996) (citation and internal quotation marks
omitted). The court is unaware of any case dismissing a receiver’s
claims on behalf of a receivership entity on prudential standing

12

grounds.

In contrast, courts routinely hold that receivers have

standing to assert claims on behalf of a receivership entity even
though the
investors.

receiver

is

acting

for

the benefit

of individual

See, e.g., Marion v. TDI Inc., 591 F.3d 137, 147-49 (3d

Cir. 2010); Scholes, 56 F.3d at 753-54; see also Zayed v. Buysse,
No. 11-1042, 2011 WL 2160276, at *4-5 (D. Minn. June 1, 2011)
(finding the Receiver in the instant action had standing to pursue
fraudulent transfer and unjust enrichment claims, despite argument
that such claims are best pursued by Cook’s individual creditors).
Indeed, as stated previously, the Receiver was granted authority to
pursue claims such as this on behalf of the Receivership Entities
and for the benefit of investors.

As a result, the Receiver has

prudential standing to pursue this action.

CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that the
motion to dismiss [ECF No. 70] is denied.

Dated:

August 4,2015
s/David S. Doty
David S. Doty, Judge
United States District Court

13