Zhao et al v. JPMorgan Chase & Co., et al
Filing
52
MEMORANDUM AND ORDER granting 36 Motion to Dismiss. For all of the foregoing reasons, defendants' motion to dismiss is granted in its entirety and with prejudice and defendants' motion to strike is denied as moot. The Clerk of Court is respectfully directed to enter judgment for defendants and terminate this case and any motions pending therein. (Signed by Judge Naomi Reice Buchwald on 3/13/2019) (mro) Transmission to Orders and Judgments Clerk for processing.
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 1 of 24
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------X
HONGYING ZHAO, et al.,
Plaintiffs,
- against MEMORANDUM AND ORDER
JPMORGAN CHASE & CO. and
JPMORGAN CHASE BANK, N.A.,
17 Civ. 8570 (NRB)
Defendants.
--------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
Hongying Zhao and 244 other individuals (“plaintiffs”) bring
this action against JPMorgan Chase Bank, N.A. (“JPMC”) and its
holding company JP Morgan Chase & Co. (“JPMC Holding Company”)
(together, “defendants”).
The First Amended Complaint (“FAC”)
asserts the following claims against both defendants: (1) knowing
participation
in
a
breach
of
trust,
(2)
aiding
and
abetting
embezzlement, (3) aiding and abetting breach of fiduciary duty,
(4) aiding and abetting conversion, (5) aiding and abetting fraud,
(6) unjust enrichment, (7) commercial bad faith, and (8) gross
negligence.
Presently before the Court is defendants’ motion to dismiss
the FAC pursuant to Federal Rule of Civil Procedure 9(b) and
12(b)(6) or, in the alternative, to strike certain allegations
pursuant
to
Rule
12(f).
For
the
reasons
set
forth
below,
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 2 of 24
defendants’ motion to dismiss is granted.
Defendants’ motion to
strike is denied as moot.
BACKGROUND 1
The Complaint’s primary allegation is that defendants knew or
were willfully blind to the fact that non-party Renwick Haddow and
his
company
investors.
stations
in
“Bar
Works”
were
perpetrating
a
fraud
on
their
Bar Works ostensibly owned and rented out co-working
retail
spaces
across
the
United
States,
leasing
specific stations to investors in exchange for monthly payments.
FAC Ex. A, ECF 24-1 ¶¶ 7-8, 18, 39, 47–83.
In reality, Haddow
operated a Ponzi scheme in which Haddow solicited investments for
Bar Works locations that did not exist and paid returns using the
contributions of new investors.
Id. ¶¶ 27–29.
Haddow began soliciting investments for Bar Works in early
2016 under the fictitious alias “Jonathan Black.”
Id. ¶¶ 10, 26.
Plaintiffs allege that Haddow adopted this alias on account of his
well-publicized history as a corporate fraudster.
According to
the FAC, publicization of Haddow’s checkered past began in or about
November 2008, when the Companies Investigation Branch of the
Insolvency Service of the United Kingdom disqualified Haddow from
serving as a director of any company registered in the U.K. on
1 The following facts are largely drawn from the FAC, ECF No. 26, and are
assumed to be true for purposes of this motion. Chambers v. Time Warner, Inc.,
282 F.3d 147, 152 (2d Cir. 2002).
2
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 3 of 24
account of his involvement in a deceptive corporate scheme.
¶ 12.
Id.
Later, in July 2013, the U.K. Financial Conduct Authority
brought a civil action against Haddow and others for allegedly
running various unauthorized collective investment schemes.
A
U.K. court ruled against Haddow and an appeals court dismissed his
appeal – decisions that were publicized in the British press.
Id.
On or about February 4, 2016, Haddow opened depository bank
accounts for two Bar Works entities at JPMC (the “622 account” or
the “379 account”) 2 and in the process disclosed his true identity
to at least one JPMC employee. FAC ¶ 13. At some point, defendants
saw the private placement memorandum (“PPM”) Haddow provided to
plaintiffs to generate interest in Bar Works investments.
130.
Id. ¶
Haddow used the accounts to receive funds from investors,
requesting that each plaintiff send their contributions via wire
transfer to either the 622 or the 379 account.
Plaintiffs cite several examples of account activity that
they allege alerted or should have alerted JPMC to the fraudulent
nature of the Bar Works enterprise.
For one, money was co-mingled
and Haddow was allowed to withdraw the funds without limitation,
id. ¶¶ 14, 25, which he did to pay for lavish personal expenses,
including luxury car purchases, id. ¶ 75.
investor
money
was
wired
into
the
2
379
Nearly $4,000,000 in
or
622
accounts
and
The 622 account belonged to Bar Works Inc. and the 379 account belonged
to Bar Works 7th Avenue Inc. FAC ¶ 23.
3
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 4 of 24
immediately transferred to “known overseas money laundering havens
such as Mauritus, the Seychelles and Morocco.”
Id. ¶¶ 18, 58.
On
one occasion in March of 2017, an individual plaintiff attempted
to send a $35,000 investment to Bar Works Inc., but the funds were
not properly routed to the JPMC accounts.
Id. ¶ 78.
Shortly
thereafter, plaintiff became aware of Haddow’s involvement in the
Bar Works scheme and his bank put in a recall request to JPMC.
Rather than return the money, JPMC held the funds for three weeks
before releasing them to Haddow.
Id.
The FAC alleges that these
actions violated various internal JPMC policies and triggered
unspecified bank monitoring systems. 3
FAC ¶¶ 26, 69-70, 74-75,
89, 105, and 122.
According to the FAC, transaction activity from Haddow’s
accounts
at
JPMC
generated
tens
transaction fees for the bank.
of
thousands
Id. ¶ 30.
of
dollars
in
Plaintiffs further
allege that fees associated with the transactions constituted a
“large percentage of the wired amount.”
Id. ¶ 31.
As a result of
JPMC’s actions, plaintiffs allege that they lost nearly $17 million
in capital that they had invested in Bar Works.
3 The FAC is peppered with irrelevant and inadmissible accusations that
JPMC violated various laws and regulations without private causes of action
including, inter alia, the Bank Secrecy Act, the USA Patriot Act, and relevant
New York laws and regulations. FAC ¶¶ 57-68, 73, 76-77, and 161-162. Paragraph
46 discusses JPMC’s role in the collapse of Enron, and a subsequent written
agreement with the Federal Reserve Bank of New York and the New York State
Banking Department. Given our subsequent dismissal of the FAC in its entirety,
we do not reach defendants’ request that these pleadings be stricken pursuant
to Rule 12(f).
4
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 5 of 24
On June 25, 2017, 27 plaintiffs in the present action filed
a lawsuit against Bar Works and three individual defendants in New
York State Supreme Court, New York County asserting various state
law causes of action, including, inter alia, fraud and breach of
fiduciary duty.
See FAC Ex. A (“State Court Complaint”), ECF No.
26-1; see also Zhao v. Bar Works USA LLC, etc. et al., Index No.
155530/2017.
The state court action resulted in default judgment
against Haddow and others.
Id., NYSCEF Docket No. 162.
On June
30, 2017, the SEC filed a securities fraud action against Haddow
and Bar Works entities.
Securities and Exchange Commission v.
Haddow et al, 1:17-cv-04950.
The initial complaint in this action was filed by a subset of
27 of the current plaintiffs on November 6, 2017.
No. 1.
See Compl., ECF
Plaintiffs subsequently filed the FAC on February 7, 2018,
adding an additional 218 plaintiffs.
See FAC, ECF No. 24.
On May
14, 2018, defendants filed the motion pending before the Court.
ECF No. 36.
Oral argument was held on February 6, 2019.
See Feb.
6, 2019 Hr’g Tr., ECF No. 50.
DISCUSSION
I.
Pleading Standards
On a motion to dismiss under Rule 12(b)(6), we must accept as
true
all
factual
allegations
in
the
complaint
reasonable inferences in plaintiffs’ favor.
and
all
City of Providence v.
BATS Glob. Mkts., Inc., 878 F.3d 36, 48 (2d Cir. 2017).
5
draw
To survive
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 6 of 24
a motion to dismiss, a complaint must include “enough facts to
state a claim to relief that is plausible on its face.”
Corp. v. Twombly, 550 U.S 544, 570 (2007).
Bell Atl.
“A claim has facial
plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009).
In asserting a claim sounding in fraud, plaintiffs must
satisfy the heightened pleading standards of Federal Rule of Civil
Procedure 9(b) by “stat[ing] with particularity the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person's mind may be alleged generally.”
Fed. R. Civ. P. 9(b).
“Plaintiffs must allege facts that give
rise to a strong inference of fraudulent intent.”
Acito v. IMCERA
Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995) (internal quotation
marks and citation omitted).
of fraud.’
“Rule 9(b) applies to ‘all averments
This wording is cast in terms of the conduct alleged,
and is not limited to allegations styled or denominated as fraud
or expressed in terms of the constituent elements of a fraud cause
of action.”
Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)
(internal citation omitted).
“Claims of commercial bad faith,
like claims of fraud, are governed by the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b).”
Fleet Bank, N.A., 459 F.3d 273, 293 (2d Cir. 2006).
6
Lerner v.
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 7 of 24
II.
Holding Company Liability
As an initial matter, defendants move to dismiss all claims
against the JPMC Holding Company, as none of the allegations of
wrongdoing relate to that entity.
See ECF No. 37 at 10.
plaintiffs
defendants’
fail
to
respond
to
Holding
Here,
Company
arguments by submitting a ”partial response” to the motion to
dismiss that “may be deemed an abandonment of the unmentioned
claims.”
Jackson v. Fed. Exp., 766 F.3d 189, 195 (2d Cir. 2014)
(“[A] court may ... infer from a party's partial opposition that
relevant
claims
or
defenses
that
are
not
defended
have
been
abandoned.”); see also Felske v. Hirschmann, No. 10 Civ. 8899
(RMB), 2012 WL 716632, at *3 (S.D.N.Y. Mar. 1, 2012) (“A plaintiff
effectively concedes a defendant's arguments by his failure to
respond to them.”).
The FAC’s sole allegation against the holding company is that
it created and implemented Anti-Money Laundering (“AML”) policies
governing how JPMC managed and monitored the 622 and 379 bank
accounts.
FAC ¶ 37.
But creation and implementation of AML
policies here is not sufficient to bring claims against a party
that was not involved in any alleged non-compliance with those
policies. See Hershfeld v. JM Woodworth Risk Retention Grp., Inc.,
No. 16 Civ. 6369 (BMC), 2017 WL 1628886, at *4 (E.D.N.Y. May 1,
2017) (noting courts refuse to “impute the operating activities of
7
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 8 of 24
an indirectly owned limited liability company to a parent holding
company.”); see also In re WorldCom, Inc. Sec. Litig., No. 02 Civ.
3288 (DLC), 2004 WL 1097786, at *3 (S.D.N.Y. May 18, 2004) (“[I]t
is
a
well-settled
principle
of
corporate
law
that
‘a
parent
corporation and its subsidiary are regarded as legally distinct
entities.’”) (internal citations omitted).
Accordingly, the Court
dismisses all claims against the JPMC Holding Company.
We now
proceed to a discussion of the merits of plaintiffs’ claims as to
JPMC.
III.
Aiding and Abetting Breach of Fiduciary Duty
We first turn to plaintiffs’ knowing participation in a breach
of trust (Count I) and aiding and abetting breach of fiduciary
duty (Count III) claims, which are substantially identical for
purposes of our analysis.
See In re Sharp Int’l Corp., 403 F.3d
43, 49 (2d Cir. 2005) (equating claim for knowing participation in
a breach of trust with claim for aiding and abetting breach of
fiduciary duty). Knowing participation in a breach of trust and
aiding and abetting breach of fiduciary duty both require that
plaintiffs plead: 1) breach by a fiduciary of obligations to
another, 2) that defendants had “actual knowledge” of the primary
violation, and 3) that defendants “substantially assisted” in the
primary violation.
See Lerner, 459 F.3d at 294; see also SPV OSUS
Ltd. v. AIA LLC, No. 15 Civ. 619 (JSR), 2016 WL 3039192, at *6
(S.D.N.Y. May 26, 2016), aff’d sub nom. SPV OSUS Ltd. v. UBS AG,
8
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 9 of 24
882 F.3d 333 (2d Cir. 2018).
“Actual knowledge, not mere notice
or unreasonable unawareness, is therefore essential.”
Samuel M.
Feinberg Testamentary Tr. v. Carter, 652 F. Supp. 1066, 1082
(S.D.N.Y. 1987); see also Kolbeck v. LIT Am., Inc., 939 F. Supp.
240, 246 (S.D.N.Y. 1996) (“New York common law ... has not adopted
a constructive knowledge standard for imposing aiding and abetting
liability. Rather, New York courts and federal courts in this
district, have required actual knowledge.”); see also Ma v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 92 (2d Cir. 2010)
(noting actual knowledge requirement is more stringent than actual
notice requirement).
knowledge
are
allegations.”
Complaints that do not clearly allege actual
“legally
insufficient
due
to
ambiguity
in
the
H2O Swimwear, Ltd. v. Lomas, 560 N.Y.S.2d 19, 21
(1st Dep’t 1990).
A.
Failure to Adequately Plead a Fiduciary Relationship
Between Plaintiffs and Haddow
Central to Counts I and III is the existence and breach of a
fiduciary relationship.
However, neither the FAC nor brief in
opposition to defendants’ motion to dismiss clearly articulate
plaintiffs’ theory under which a fiduciary relationship existed
between plaintiffs and either Haddow or the Bar Works entities. 4
4 We cannot credit plaintiffs’ conclusory allegations that, e.g., “various
‘Bar Works’ entities had fiduciary duties to investors.” FAC ¶ 80; see Zeising
v. Kelly, 152 F. Supp. 2d 335, 348 (S.D.N.Y. 2001); see also, e.g. FAC ¶ 81
(“Haddow and/or the various ‘Bar Works’ entities were in a position of superior
knowledge and expertise to their investors, who reposed their trust and
confidence in the Bar Works Entities.”), id. ¶ 82 (“This created a relationship
9
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 10 of 24
“A fiduciary relationship arises when one has reposed trust or
confidence in the integrity or fidelity on another who thereby
gains a resulting superiority of influence over the first, or when
one assumes control and responsibility over another.”
Fraternity
Fund Ltd. v. Beacon Hill Asset Mgmt. LLC., 376 F. Supp. 2d 385,
413–14 (S.D.N.Y. 2005).
“A simple business transaction between a
potential investor and a company soliciting such investors” does
not give rise to such a special relationship. Elliott v. Qwest
Commc’ns Corp., 25 A.D.3d 897, 898 (3d Dep’t 2006).
Here, there are no allegations that Haddow had a relationship
of trust (or even knew) any of the plaintiffs.
Nor are there
sufficient allegations that the structure of the transaction was
anything more than a traditional investment.
See Ne. Gen. Corp.
v. Wellington Advert., Inc., 624 N.E.2d 129, 131 (N.Y. 1993).
Plaintiffs simply agreed to invest in Bar Works in exchange for a
promise of guaranteed monthly payments – no special relationship
with Haddow inducing their investment, and no post-investment
reliance on Haddow’s discretion suggesting a reposition of trust.
See, e.g., State Court Complaint ¶ 47.
of high trust and confidence whereby the Bar Works Entities, and ultimately Bar
Works Inc. was/were entrusted with Plaintiffs (sic) investment funds deposited
into the 622 Account and the 379 Account.”), id. ¶¶ 8, 144 (defendants had
actual knowledge that “Bar Works was a Ponzi Scheme”), id. ¶¶ 45, 133 (defendants
had actual knowledge that “Haddow was a thief and/or an embezzler”). These
allegations are “legal conclusions masquerading as factual conclusions” and
insufficient to survive a motion to dismiss. Smith, 291 F.3d at 240 (internal
citations and quotations omitted).
10
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 11 of 24
Nevertheless, plaintiffs at oral argument urged the Court to
consider Meinhard v. Salmon for the proposition that a fiduciary
relationship existed between plaintiffs and either Haddow or Bar
Works. 164 N.E. 545 (1928).
misguided.
Plaintiffs’ reliance on Meinhard is
In that seminal case, Chief Judge Cardozo held that
“[j]oint adventurers, like copartners, owe to one another, while
the enterprise continues, the duty of the finest loyalty.”
463-464.
Id. at
While Meinhard serves as a cornerstone of joint venture
jurisprudence, plaintiffs’ manifest failure to plead the elements
necessary
to
establish
citation inapposite. 5
a
joint
venture
renders
plaintiffs’
See Zeising v. Kelly, 152 F. Supp. 2d 335,
347-348 (S.D.N.Y. 2001) (dismissing breach of fiduciary duty claim
for failure to adequately plead the existence of a joint venture).
Because plaintiffs’ fail to plausibly allege the existence of
a fiduciary relationship between plaintiffs and Haddow or Bar
Works, we dismiss Counts I and III of the FAC.
5
“Perhaps, the most important criterion of a joint venture is the joint
control or management of the joint property used in accomplishing its aims.”
Allen Chase & Co. v. White, Weld & Co., 311 F. Supp. 1253, 1260 (S.D.N.Y. 1970)
(internal citation omitted). At minimum, plaintiffs fail to plead that “each
party had some degree of joint management control over the venture” or that
“there was a provision for the sharing of both losses and profits.” Kidz Cloz,
Inc. v. Officially For Kids, Inc., 320 F. Supp. 2d 164, 171 (S.D.N.Y. 2004);
see also Jade Apparel, Inc. v. Steven Schor, Inc., No. 11 Civ. 2955 (KNF), 2013
WL 498728, at *6 (S.D.N.Y. Feb. 11, 2013) (dismissing breach of fiduciary duty
claim because of “undisputed evidence that sharing losses was not discussed in
the ... agreement”). Bar Works controlled the work space leases “without the
guidance or control of the Plaintiff investors,” State Court Complaint ¶ 114,
and a review of the PPM referenced in the FAC reveals no intention for investors
to share in Bar Works’ losses. See Zhao v. Bar Works USA LLC, etc. et al.,
Index No. 155530/2017 case, NYSCEF Docket No. 6.
11
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 12 of 24
B.
Failure to Adequately Plead Actual Knowledge of the
Alleged Fiduciary Relationship
Even assuming that there was a fiduciary relationship between
investors and Haddow, these claims fail for the additional reasons
that plaintiffs do not adequately plead that defendants had actual
knowledge of that relationship.
A necessary predicate of actual
knowledge of a breach of fiduciary duty is knowledge of a fiduciary
relationship itself.
Plaintiffs allege that defendants knew that
Haddow and/or Bar Works “were using the 622 Account and the 379
Account as fiduciary accounts,” FAC ¶ 83, and that Bar Works had
failed to “invest customer property pursuant to [the PPM], which
defendants had seen,” id. ¶ 130.
Merely stating that JPMC knew
Haddow was using the JPMC accounts as fiduciary accounts is plainly
conclusory
ordinary
(and
elides
depository
the
accounts
fiduciary or trust accounts).
fact
that
rather
the
than
JPMC
accounts
specially
were
designated
Additionally, the mere fact that
JPMC had access to the PPM is irrelevant without sufficiently
particular factual allegations that the PPM contained specific
indications that the relationship between Haddow and/or Bar Works
and investors rose to the level of fiduciary.
See Berman v. Morgan
Keegan & Co., No. 10 Civ. 5866 (PKC), 2011 WL 1002683, at *7
(S.D.N.Y. Mar. 14, 2011) (“Rule 9(b) applies ... to ... claims
alleging aiding and abetting breach of fiduciary duty sounding in
fraud.”).
12
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 13 of 24
C.
Failure to Adequately Plead Actual Knowledge of Breach
of Alleged Fiduciary Relationship
Plaintiffs also fail to adequately allege that defendants had
actual knowledge of any breach of obligations running from Haddow
or Bar Works to plaintiffs.
Plaintiffs’ argument that JPMC’s
knowledge of frequent withdrawals, wire transfers to accounts in
countries recognized as money laundering havens, and the single
transfer recall request constitute “actual knowledge” of a breach
of fiduciary duty or fraudulent scheme is unpersuasive.
adequately
alleging
the
existence
or
JPMC’s
Without
knowledge
of
a
fiduciary relationship between Haddow and investors, these “red
flag” allegations – which may well have “put [JPMC] on notice that
some impropriety may have been taking place,” Lerner, 459 F.3d at
294 – fall short of creating the “strong inference of actual
knowledge” of a primary violation that is required to state a claim
for aiding and abetting liability.
Id.; see also Nigerian Nat’l
Petroleum Corp. v. Citibank, N.A., No. 98 Civ. 4960, 1999 WL
558141, at *1–2, 7–8 (S.D.N.Y. July 30, 1999) (noting that bank’s
knowing
disregard
of
several
indications
of
fraud,
including
transfer of funds from a company’s account to a personal account,
did not amount to bank’s having actual knowledge of the fraudulent
scheme).
A review of the cases cited by plaintiffs in their opposition
brief demonstrates that the type of red flag allegations necessary
13
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 14 of 24
to support a strong inference of actual knowledge are absent in
this case.
In Lerner, for example, an aiding and abetting breach
of fiduciary duty claim survived because plaintiffs alleged that
the defendant banks knew that: 1) an attorney was comingling client
funds deposited
in
fiduciary
bank
accounts
in
breach
of
his
fiduciary duties to those clients; 2) the attorney’s fiduciary
accounts
were
overdrawn;
3)
numerous
checks
written
on
the
attorney’s fiduciary accounts were dishonored for insufficient
funds; and 4) the attorney transferred funds from the fiduciary
accounts to her personal accounts.
Id.
Given that plaintiffs had
plausibly alleged that defendants in Lerner knew of the nature and
purpose of the attorney fiduciary accounts, it was clear that
defendants were not simply aware of “red flags,” they had actual
knowledge of a primary violation itself. 6
Id. (“[Attorney’s]
commingling of funds was not only an indication of a breach of
fiduciary duty — it was, in and of itself, a breach.).
Plaintiffs’ citation to Mazzaro de Abreu v. Bank of Am. Corp.,
525 F. Supp. 2d 381, 389 (S.D.N.Y. 2007) and Oster v. Kirschner,
77 A.D.3d 51, 55 (1st Dep’t 2010) are equally unpersuasive.
In
6 In their reply brief (and at oral argument), plaintiffs repeatedly –
and erroneously – claim Lerner held that the actual knowledge standard for an
aiding and abetting breach of fiduciary duty is a lesser standard than is
required for aiding and abetting fraud. See ECF No. 44 at 21; Feb. 6, 2019
Hr’g Tr., ECF No. 50. But Lerner simply holds that banks have actual knowledge
of a breach of fiduciary duty when they are aware of behavior that was “in and
of itself, a breach” of fiduciary duty – such as an overdrawn attorney fiduciary
account. Lerner, 459 F.3d 273, 294. Here, unlike in Lerner, plaintiffs have
failed to allege defendants had actual knowledge of behavior that was “in and
of itself, a breach” of fiduciary duty. Id.
14
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Mazzaro, allegations that the defendant bank knew the identities
of the recipients of transferred funds, and further knew those
recipients were “black market currency traders,” were sufficient
to plead actual knowledge.
525 F. Supp. 2d at 389; see also Rosner
v.
F.
Bank
of
China,
349
App’x
637,
639
(2d
Cir.
2009)
(distinguishing Mazzaro on the grounds that the Mazzaro plaintiffs
pled actual knowledge, rather than constructive knowledge, that
transfers were to black market currency traders).
Moreover, the
Mazzaro plaintiffs also pled that an employee of the Mazzaro
defendant told the fraudulent actor that he could “more effectively
could conceal the fraud by opening a separate bank account.”
at 390.
Id.
In Oster, an SEC proceeding revealed that defendant law
firm had actual knowledge of their clients’ criminal backgrounds
and the law firm had drafted the private placement memorandum used
to perpetrate the Ponzi scheme. 77 A.d.3d at 55.
These cases present factual scenarios different in kind from
the allegations contained in the FAC. Here the factual allegations
are limited to ones about activity in ordinary depository accounts
and what JPMC should have known, as opposed to what they actually
15
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 16 of 24
knew 7, see, e.g., FAC ¶ 18 (defendants had “actual notice” Haddow
was laundering Plaintiffs’ money). 8
In a last-ditch effort to salvage their allegations of actual
knowledge, plaintiffs rely on a theory of conscious avoidance to
attach liability to JPMC.
See FAC ¶ 50 (“JPMC ignored, or was
willfully blind to the suspicious and inexplicable activity in the
622 Account and the 379 Account.”); see also ECF No. 44 at 25
(pointing to Haddow’s alleged status as a “notorious fraudster” in
the U.K. to support a conscious avoidance argument).
To survive
a
avoidance,
motion
to
dismiss
under
a
theory
of
conscious
plaintiffs must allege facts such that “it can almost be said that
the defendant actually knew [of the underlying tort] because he or
she suspected a fact and realized its probability, but refrained
from confirming it in order later to be able to deny knowledge.”
In re Stillwater Asset Backed Offshore Fund Ltd., No. 16 Civ. 8883
(ER), 2018 WL 1610416, at *11 (S.D.N.Y. Mar. 30, 2018); see also
Zamora, 2015 WL 4653234, at *3.
Absent from the FAC are particular
7
Plaintiffs’ remaining conclusory pleading that JPMC knew “Haddow and
Bar Works Inc. were breaching their fiduciary obligations to the Plaintiffs and
other investors in the Bar Works Entities,” (FAC ¶¶ 55, 84, 119, 120), is a
legal conclusion masquerading as a factual conclusion and insufficient to
survive a motion to dismiss. Smith, 291 F.3d at 240 (internal citations and
quotations omitted).
8
Plaintiffs also argue that either: 1) JPMC’s anti-money laundering
procedures detected Haddow’s scheme and established JPMC’s actual knowledge of
the scheme, or alternatively, 2) JMPC must have failed to effectively execute
its own anti-money laundering procedures. FAC ¶¶ 61, 69, 70. As a matter of
law, alleged failure to comply with “vague and unspecified” AML controls is
insufficient to infer actual knowledge. Zamora v. JPMorgan Chase Bank, N.A.,
No. 14 Civ. 5344, 2015 WL 4653234, at *3 (S.D.N.Y. July 31, 2015).
16
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 17 of 24
and non-conclusory allegations that defendants determined to evade
learning of facts confirming underlying fraudulent activity.
See
In re Stillwater Asset Backed Offshore Fund Ltd., No. 16 Civ. 8883
(ER), 2018 WL 1610416, at *11 (S.D.N.Y. Mar. 30, 2018) (dismissing
aiding and abetting claims when pleadings “[fail] to establish
facts showing that [defendants] specifically avoided learning of
the conversion or breach of fiduciary duty that they suspected had
occurred, and merely state in a conclusory fashion that the lenders
failed to perform adequate due diligence and ‘turned a blind eye’
to information that ‘should have at least prompted further inquiry’
into potential misconduct.”).
D.
Failure to Plead Substantial Assistance
Plaintiffs’ failure to adequately plead the existence of a
duty or actual knowledge of a breach of that duty necessitates
dismissal of Counts I and III.
Morever, plaintiffs have failed to
adequately plead substantial assistance.
This failure provides an
additional and independent ground for dismissal.
Ltd.
2016
fiduciary
WL
3039192,
duty
assistance”).
claims
at
*6
(aiding
require
a
and
See SPV OSUS
abetting
showing
of
breach
of
“substantial
“[T]he mere fact that participants in a fraudulent
scheme use accounts at a bank to perpetrate it, without more, does
not in and of itself rise to the level of substantial assistance.”
Mazzaro, 525 F. Supp. 2d at 390 (internal citations and quotations
omitted).
Substantial assistance may only be found where the
17
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 18 of 24
alleged aider and abettor “affirmatively assists, helps conceal or
fails to act when required to do so, thereby enabling the breach
to occur.”
In re Sharp Int’l Corp., 403 F.3d 43, 50 (2d Cir.
2005).
Plaintiffs’ primary argument is that several examples of
JPMC’s inaction constitute substantial assistance, including a
failure to report allegedly suspicious or illegal activity.
FAC ¶¶ 76, 77.
See
But “the mere inaction of an alleged aider and
abettor constitutes substantial assistance only if the defendant
owes a fiduciary duty directly to the plaintiff.”
Kaufman v.
Cohen, 307 A.D.2d 113, 126, 760 N.Y.S.2d 157, 170 (1st Dep’t 2003)
(emphasis added).
The only rationale offered by plaintiffs for
finding a duty running from JPMC to Bar Works investors is that
JPMC “knew that the activity in the 622 Account was not consistent
with the purported business purpose of the account.”
FAC ¶ 76.
In the absence of a fiduciary or trust account, however, mere
knowledge that a business may not be using the funds in their
depository account in a manner consistent with their promotional
material does not trigger a duty to act. In re Agape Litig., 681
F. Supp. 2d 352, 360 (E.D.N.Y. 2010) (“Neither the Plaintiffs nor
the Court have been able to locate a case which even suggests that
New York law imposes upon banks a duty to protect non-customers
from a fraud involving depository accounts.”); see also Renner v.
Chase Manhattan Bank, No. 98 Civ. 926 (CSH), 1999 WL 47239, at *14
18
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 19 of 24
(S.D.N.Y. Feb. 3, 1999) (refusing to “depart from the general rule
that a bank cannot be held accountable for the ways in which its
customers manage their accounts” in the absence of a fiduciary
account). 9
Plaintiffs’ sole allegation of an affirmative action that
could constitute substantial assistance is the recall request that
plaintiffs allege was declined by JPMC in contravention of an
unspecified internal policy in early 2017.
FAC ¶ 78.
“Financial
transactions that are not considered ‘atypical’ or ‘non-routine’
do not constitute substantial assistance.”
Rosner v. Bank of
9
For the first time at oral argument, plaintiffs’ counsel cites to a
footnote in Lerner for the proposition that a defendant bank has a duty to a
non-customer in the absence of a fiduciary account. See Feb. 6, 2019 Hr’g Tr.,
ECF No. 50. But the complaint in Lerner included specific allegations that the
defendant bank knew that the accounts at issue were intended to be trust accounts
for client funds:
because of (a) written ‘escrow’ agreements provided to the
Banks, (b) references to ‘escrow’ agreements in wire transfer
requests and/or confirmations, and (c) numerous occasions on
which there were insufficient funds in order to honor checks
drawn by Schick on such accounts and Schick expressly remarked
to bank officers, in words or substance, that outstanding
checks drawn on such accounts ‘had’ to be covered because the
funds involved were the property of others.
Lerner, 459 F.3d at 281 n.2.
Here, there are no allegations in the FAC of
overdrawn accounts, escrow agreements, or concessions from Haddow that the funds
in the accounts – which had been transferred to Bar Works as an investment
rather than to hold in trust - were the property of others. Most importantly,
as discussed supra, the behavior observed by the defendant bank in Lerner was
“in and of itself, a breach” of fiduciary duty. Id., 459 F.3d at 294. Thus,
to the extent Lerner establishes a duty from banks to non-customers in the
absence of a fiduciary account, that duty is only triggered once a bank has
specific actual knowledge of a breach of fiduciary duty. As discussed supra,
plaintiffs have failed to plead such actual knowledge here.
Plaintiffs’
citation to Liu Yao-Yi v. Wilmington Tr. Co. for the proposition that Defendants
owed a duty to plaintiffs is similarly unpersuasive.
301 F. Supp. 3d 403
(W.D.N.Y. 2017).
Liu Yao-Yi, like Lerner (and unlike the instant action),
involved “escrow/custodial/trust accounts.” Id. at 410.
19
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 20 of 24
China, 528 F. Supp. 2d 419, 427 (S.D.N.Y. 2007).
Moreover,
“violation of an organization’s internal policy with respect to
financial
transactions
does
not
in
and
of
itself
constitute
substantial assistance.” Mazzaro, 525 F. Supp. 2d at 391 (internal
citations omitted).
The mere fact that JPMC declined the request
and released the funds to Haddow, absent allegations that JPMC was
notified
of
the
reason
for
the
recall
request,
violated
any
standard banking procedures, or provided services above and beyond
ordinary banking services, is insufficient to state an aiding and
abetting claim. 10
See Nigerian Nat. Petroleum Corp., No. 98 CIV.
4960 (MBM), 1999 WL 558141, at *8 (S.D.N.Y. July 30, 1999).
IV.
Other Aiding & Abetting Claims
While the Court has addressed plaintiffs’ allegations in the
context of their breach of trust and aiding and abetting fiduciary
duty claims, “the elements of aiding and abetting a breach of
fiduciary duty, aiding and abetting a conversion, and aiding and
abetting a fraud are substantially similar.” Kirschner v. Bennett,
648 F. Supp. 2d 525, 533 (S.D.N.Y. 2009)); see also SPV OSUS Ltd.
10 Plaintiffs’ cite to Mansor – an out of district case wholly dissimilar
to the present case – for the proposition that the removal of restraints on
transfers constitutes substantial assistance. 183 F. Supp. 3d 250 (D. Mass.
2016).
In Mansor, the court found substantial assistance at the motion to
dismiss stage when: a specific employee acquired knowledge of the illegal
account activities and “engaged in various efforts” to assist in the fraudulent
activity, including removal of multiple restraints on fraudsters’ transactions.
Id. at 268. Here, plaintiffs do not plead that the individual who released the
individual plaintiff’s funds was aware of Haddow’s fraudulent activity, or that
funds were released to Haddow more than once.
20
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 21 of 24
v. AIA LLC, No. 15-CV-619 (JSR), 2016 WL 3039192, at *6 (S.D.N.Y.
May 26, 2016), aff’d sub nom. SPV OSUS Ltd. v. UBS AG, 882 F.3d
333 (2d Cir. 2018).
requires,
inter
alia,
A claim for commercial bad faith also
actual
knowledge
of
wrongdoing
complicity of bank principals in that wrongdoing.
and
Musalli Factory
For Gold & Jewellry v. JPMorgan Chase Bank, N.A., 261 F.R.D. 13,
24 (S.D.N.Y. 2009), aff’d sub nom. Musalli Factory for Gold &
Jewellry Co. v. JPMorgan Chase Bank, N.A., 382 F. App’x 107 (2d
Cir. 2010); Lerner, 459 F.3d at 293.
Here, the primary violations underlying plaintiffs’ aiding
and betting conversion (Count IV), aiding and abetting fraud (Count
V), and
commercial bad faith (Count VII) all involve the same
underlying conduct as their breach of trust (Count 1) and aiding
and abetting breach of fiduciary duty (Count III).
See FAC ¶ 120
(Breach of Fiduciary Duty) (“The Defendants knew Haddow, Bar Works
Inc. and/or the Bar Works Entities breached that fiduciary duty by
engaging in embezzlement”); ¶ 135 (Conversion) (“Haddow, Bar Works
Inc. and/or the Bar Works Entities converted millions of dollars
of Plaintiffs’ money.”); ¶ 142 (Fraud) (“Haddow, Bar Works Inc.,
and/or the Bar Works Entities were engaged in a fraud ... and
converted millions of dollars of Plaintiffs’ money.”); ¶ 157
(Commercial Bad Faith) (“Defendants had actual knowledge of the
facts and circumstances of the illegitimate scheme by Haddow, Bar
Works Inc. and/or the Bar Works Entities.”).
21
Accordingly, for the
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 22 of 24
reasons stated above, we find plaintiffs have failed to state
claims for these causes of action as well.
V.
A.
Remaining Claims
Aiding and Abetting Embezzlement
Count II (aiding and abetting embezzlement) is dismissed
because it alleges “violation of a criminal statute for which there
is no express or implied private right of action.”
Zamora v.
JPMorgan Chase Bank, N.A., No. 14 Civ. 5344, 2015 WL 4653234, at
*2
(S.D.N.Y.
July
31,
2015)
(dismissing
aiding
and
abetting
embezzlement claim for failure to state cognizable claim); see
also Cohain v. Klimley, Nos. 08 Civ. 5047, 09 Civ. 4527, 2011 WL
3896095, at *4 (S.D.N.Y. Aug. 31, 2011) (no private right of action
for larceny/embezzlement).
B.
Unjust Enrichment
“To prevail on a claim for unjust enrichment in New York, a
plaintiff must establish 1) that the defendant benefitted; 2) at
the plaintiff’s expense; and 3) that ‘equity and good conscience’
require restitution.”
Kaye v. Grossman, 202 F.3d 611, 616 (2d
Cir. 2000) (internal citation omitted).
To survive a motion to
dismiss, an unjust enrichment claim “requires some type of direct
dealing or actual, substantive relationship with a defendant.”
Reading Int’l, Inc. v. Oaktree Capital Mgmt. LLC, 317 F. Supp. 2d
301, 334 (S.D.N.Y. 2003).
22
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 23 of 24
Plaintiffs’ unjust enrichment claim is dismissed because they
have failed to adequately plead that a relationship existed between
themselves
and
defendants. 11
The
claim
also
fails
because
plaintiffs failed to allege that defendants were unjustly enriched
at the expense of plaintiffs, as “[p]laintiffs’ financial position
would be exactly the same today whether [defendant] was paid the
fees or not.” Nagelberg v. Meli, 299 F. Supp. 3d 409, 418 (S.D.N.Y.
2017); see also Grossman, 202 F.3d at 616.
C.
Gross Negligence
To state a claim for gross negligence, “a plaintiff must
allege (1) that the defendant owed him or her a cognizable duty of
care; (2) that the defendant breached that duty; and (3) that the
plaintiff suffered damage as a proximate result of that breach.”
Di Benedetto v. Pan Am World Serv., 359 F.3d 627, 630 (2d Cir.
2004). Further, there must be allegations of “conduct that evinces
a
reckless
disregard
for
intentional wrongdoing.”
the
rights
of
others
or
smacks
of
Anwar v. Fairfield Greenwich Ltd., 728
F. Supp. 2d 372, 432 (S.D.N.Y. 2010) (internal citations and
quotations omitted).
Because plaintiffs fail to plausibly allege
that JPMC owed a duty of care to plaintiffs or that their conduct
11
Plaintiffs’ citation to Chen v. New Trend Apparel, Inc. is unpersuasive.
See ECF No. 44 at 35.
Plaintiffs cite to Chen for the proposition that
“defendant’s awareness of the plaintiff and of the potential negative impact of
its own conduct on the plaintiff may serve as further indication of the required
closeness between the parties.” 8 F. Supp. 3d 406, 465 (S.D.N.Y. 2014). But
for the same reasons plaintiffs’ aiding and abetting claims fail, plaintiffs
also fail to sufficiently plead defendants’ awareness of “potential negative
impact of its own conduct on the plaintiff.”
23
Case 1:17-cv-08570-NRB Document 52 Filed 03/13/19 Page 24 of 24
amounts to a reckless disregard for plaintiffs' rights, they fail
to state a claim of gross negligence and Count VII is dismissed.
See In re Terrorist Attacks on Sept.
765,
830
(S.D.N.Y.)
11,
2001,
349 F.
Supp.
2d
("Banks do not owe non-customers a duty to
protect them from the intentional torts of their customers."); see
also Smith, 291 F.3d at 240.
CONCLUSION
For
dismiss
all
is
of
the
granted
foregoing
in
its
reasons,
entirety
and
defendants'
with
defendants' motion to strike is denied as moot.
is
respectfully directed to
enter
judgment
motion
prejudice 12
to
and
The Clerk of Court
for
defendants
and
terminate this case and any motions pending therein.
SO ORDERED.
Dated:
New York, New York
March/3, 2019
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
12 At oral argument, plaintiffs urged the Court to dismiss the FAC without
prejudice, arguing that Haddow is currently in federal custody and that he "is
the person who would have more detailed information as to who the particular
people were at Chase at particular times and conversations." Feb. 6, 2019 Hr'g
Tr., ECF No. 50 at 22:24, 24:4-6.
The Court is skeptical that Haddow has any
motivation to cooperate with plaintiffs and, in any event, plaintiffs have
already obtained a default Judgement against Haddow in state court, which is
sufficient to pursue Haddow's liability to plaintiffs.
Zhao v. Bar Works USA
LLC, etc. et al., Index No. 155530/2017, NYSCEF Docket No. 162.
Plaintiff's
request is denied.
24
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