The Water Works Board of the City of Birmingham et al v. U.S. Bank National Association
Filing
155
MEMORANDUM OPINION AND ORDER denying 98 Motion for Summary Judgment; granting in part and denying in part 109 Motion to Exclude; denying 112 Motion to Sever. Signed by U.S. District Judge Lawrence L. Piersol on 06/10/2020. (SLW)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
THE WATER WORKS BOARD OF THE CITY
OF BIRMINGHAM; WASHINGTON
SUBURBAN SANITARY COMMISSION
EMPLOYEES’ RETIREMENT PLAN;
ATLANTIC GLOBAL YIELD
OPPORTUNITY MASTER FUND, L.P.; AND
ATLANTIC GLOBAL YIELD
OPPORTUNITY FUND, L.P.,
CIV. NO. 4:17-CV-04113-LLP
MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING
MOTION TO EXCLUDE EXPERT
TESTIMONY AND DENYING MOTION
FOR SUMMARY JUDGMENT AND
MOTION TO SEVER
Plaintiffs,
vs.
U.S. BANK NATIONAL ASSOCIATION,
Defendant.
Pending before the Court are USB’s Motion for Summary Judgment, Doc. 98, Motion to
Exclude Expert Testimony of Peter Vinella, Doc. 109, and Motion to Sever, Doc. 112. For the
following reasons, the Motion to Exclude Expert Testimony is granted in part and denied in part
and the Motion for Summary Judgment and Motion to Sever are denied.
BACKGROUND
Anderson, Burnham and WLCC
In 2013, Timothy Anderson (“Anderson”) began doing legal work in the area of
economic development for the Wakpamni Lake Community Corporation (“WLCC”).
(“Statement of Material Facts “SOMF” 103.) WLCC is a corporation organized under the laws
of the Oglala Sioux Tribe, a federally-recognized Indian Tribe, and the Wakpamni Lake
Community1, and is wholly-owned by the Wakpamni Lake Community.
(SOMF 4.)
In
approximately April 2014, while Anderson was a partner in the law firm Dilworth Paxson, LLP,
he attended a conference focused on tribal economic development and while there, was asked by
1
The Wakpmani Lake Community is a subdivision of the Wakpamni Lake District, a subordinate governmental unit
of the Oglala Sioux Tribe. SOMF 2‐3.
1
WLCC to attend a meeting wherein John Galanis, father of Jason Galanis, presented the idea for
issuing taxable revenue bonds to fund construction projects in the Wakpamni Lake Community.
(SOMF 103-106.) John Galanis (a/k/a “Yanni”) connected Anderson with Burnham Securities,
Inc. (“Burnham”) based in New York, New York, and his son, Jason Galanis, to serve as the
Placement Agent in the WLCC Bond offerings. (SOMF 107.)
Hugh Dunkerley (“Dunkerley”) was an investment banker at Burnham working on the
WLCC bond deal. (Pentelovitch Decl. Ex. 49, 1005:11-13.) Burnham hired Anderson and his
firm, Dilworth Paxon, to serve as its counsel in the WLCC bond offerings. (SOMF 38, 45-46.)
Anderson received written conflict waivers from Burnham and WLCC in order to represent
Burnham in the WLCC bond issuances. (SOMF 113.)
Acquisition of Hughes Investment Management by GMT Duncan
Dunkerley and Jason Galanis planned to acquire an investment advisor firm, Hughes
Capital Management owned by Frankie Hughes, and have Michelle Morton (“Morton”), then a
founder and CEO of GMT Duncan, run Hughes after the acquisition. (Pentelovitch Decl., Ex.
48, Trial Tr. 932:17-933:15; SOMF 222.) Hughes was a Registered Investment Advisor that had
served for many years as the investment manager to each of Birmingham Water, Washington
Suburban, and The Chicago Transit Authority Retiree Health Care Trust (“RHCT”). (SOMF
40.)
Hughes had discretionary authority to invest money for these entities within certain
guidelines. (Pentelovitch Decl. Ex. 4, Baker Dep. 20:8-21:2; Ex. 9, Johnson Dep. 82:2-12.) The
purchase of Hughes Capital would thus provide a client base for the bonds. (Pentelovitch Decl.
Ex. 48, Trial Tr. 933:9-12.)
In late August 2014, Washington Suburban and Birmingham Water were informed that
GMT Duncan, owned by Morton, would be purchasing Hughes and that Frankie Hughes would
be retained for two years after the purchase. (Pentelovitch Decl. Ex. 4, Baker Dep., 32:7-23; Ex.
9, Johnson Dep. 98:8-13.) On September 1, 2014, Hughes filed a Form ADV with the Securities
and Exchange Commission listing GMT Duncan as the owner of Hughes effective August 12,
2014, and listing Morton and Richard Deary (“Deary”) as partners in GMT Duncan. (SOMF
351.)
2
USB as Indenture Trustee
Anderson had suggested the U.S. Bank National Association (“USB”) would be a good
fit as the indenture trustee on the WLCC bond offerings because USB was a well-known and
reputable financial institution with “serious experience in tribal Indian Country.” (Murzyn Decl.
Ex. 122, Trial Tr. 527-28.) USB is a member of the Federal Deposit Insurance Corporation
(“FDIC”) and is a “financial institution” subject to the provisions of the Bank Secrecy Act
(“BSA”). (SOMF 24, 25.) USB is engaged in the corporate trust business through its division
called Global Corporate Trust Services (“GCTS”) and was known in the corporate trust industry
as being one of the largest and most active indenture trustees in the market. (SOMF 26; Murzyn
Decl. Ex. 7, Graham Dep. at 58:19-59:16.)
Anderson contacted Keith Henselen (“Henselen”) at USB to determine USB’s interest
and pricing to serve as indenture trustee on the WLCC bond issuances. (Murzyn Decl. Ex 8,
Henselson Dep. 27:10-21.) USB’s counsel, who had practiced in the area of indenture trusts and
public finance since 1982, had not previously heard of Burnham prior to the WLCC Bond
transactions, and neither Henselen, nor his supervisor Robert Von Hess (“Von Hess”), had any
prior experience with Burnham. (Murzyn Decl. Ex. 14, Slania Dep. 193:3-6; Ex. 8, Henselen
Dep. 32:8-10; Ex. 16, Von Hess Dep. 47:8-15.) A FINRA BrokerCheck Report indicates that
Burnham had been sanctioned for disclosure issues prior to the WLCC bond issuances. (Murzyn
Decl. Ex. 113.) Also unfamiliar to Henselen, Von Hess, and USB counsel prior to this deal were
WLCC and the Annuity Provider, Wealth Assurance Private Client. (Murzyn Decl. Ex. 14,
Slania Dep. 192:3-18; Ex. 8, Henselen Dep. 22-25, 32:5-7, 205:15-206:4.)
USB did not perform any due diligence on the deal team members. (SOMF 192.) As
part of its Know Your Customer review, USB obtained WLCC’s name, address, federal tax
identification number, and a copy of WLCC’s Articles of Incorporation. (SOMF 169, 191.) At
the time of the August 2014 bond issuance, USB policy classified customers engaging in payday
loan activities as “high risk,” and under USB policy, such accounts may require enhanced due
diligence, formal approval, and increased monitoring. (Murzyn Decl. Ex. 65.) There were
articles on the internet showing that WLCC may have been involved with payday lending
although USB did not perform an internet search on WLCC prior to the August 2014 bond
issuance. (SOMF 191; Murzyn Decl. Ex. 18, Woodward Dep. at 57-59, 102-105; Ex. 51.)
3
Henselen testified that he could not recall doing any inquiry on WLCC’s business type. (Murzyn
Decl. Ex. 8, Henselen Dep. 152:7-19.)
August 2014 Bond Issuance
USB classified the bonds as municipal bonds. (SOMF 179.) Most municipal bonds are
issued to finance a particular project, but the nature of the tribal development project supporting
the bond issuance was unclear from the start which counsel for USB acknowledged as being
unusual.
(Murzyn Decl. Ex. 14, Slania Dep. 195:3-15; 205:8-16.)
A term sheet sent by
Anderson to USB on July 1, 2014, suggested that part of the proceeds would be used to build a
“distribution facility” without any additional detail about what would be distributed from the
facility. (Murzyn Decl. Ex. 7, Graham Dep. 78:6-79:8; Ex. 24.) A draft of the indenture dated
July 23, 2014, that was provided to USB’s counsel suggested that the bond proceeds would be
used to build a “gaming facility.” (Murzyn Decl. Exs. 35, 55.) Under USB policy existing at the
time, gaming was designated under USB policy as an additional risk factor that may render a
customer account high risk, thus requiring additional due diligence. (Murzyn Decl. Ex. 65.)
Typically, a private placement memorandum describing the business purpose of the municipal
bond transaction is provided, but no such memorandum was ever prepared with the WLCC bond
issuances. Contrary to custom and practice in the industry, no construction budget or plans for
the development project were produced. (Murzyn Decl. Ex. 14, Slania Dep. 204:22-205:16; Ex.
13, Pillar Dep. 104:17-105:04; Ex. 89.) Henselen testified at his deposition that he could not
recall what the economic development project was for the August 2014 bond issuance and did
not recall ever seeing a construction budget. (Murzyn Decl. Ex. 8, Henselen Dep. 206:13-23.)
The deal team members changed throughout the August 2014 bond deal. In a draft
Indenture emailed to USB on August 15, 2014, the designated Issuer changed from Wakpamni
Lake Community Development Corporation to Wakpamni Lake Community Corporation and
provided that WLCC shall deliver a letter to USB at closing appointing Wealth Assurance AG as
the Investment Manager. (Murzyn Decl. 8, Henselen Dep. 78:1-15.)
The draft Indenture
received by USB on August 25, 2014, two days prior to closing, showed a change in the
Investment Manager from Wealth Assurance AG to Private Equity Management, LLC. (Murzyn
Decl. Ex. 81.)
4
Ultimately, the Trust Indenture was executed on August 25, 2014, and provided that
WLCC would be issuing $24,844,0892 Special Limited Revenue Bonds (Taxable) to finance the
purchase of an annuity investment in the amount of $22,094,089 as well as economic
development projects for the benefit of the Wakpamni Lake Community, including “projects
near the junction of Routes 18 and 391, including a certain warehouse/distribution center and
other revenue producing enterprises.” In addition to the development project being ill-defined,
another unique aspect of the deal was that it involved an annuity. Deal team members and
USB’s expert testified that they had never been involved with a bond issuance involving an
annuity, especially one that would finance nearly ninety percent of the principal and interest
payments to bondholders. (SOMF 109; Ex. 14, Slania Dep. 148:5-9; Ex. 1, Ambriz-Reyes Dep.
107:12-15; Ex. 16, Von Hess Dep. 22:19-23; Ex. 6, Gadsen Dep. 49:21-25.) Despite the unusual
structure of this bond issuance, Henselen indicated on the “Establish Deal” form that the sources
for all assets and cash transfers were coming from known sources that fit the standard profile for
this product. (Pillar Decl., Ex. O.)
The Annuity Contract provided that the bond proceeds were to be invested in an annuity
provided by Wealth Assurance Private Client in the British Virgin Islands. The August 2014
Annuity Contract stated, wrongly, that Wealth Assurance Private Client was part of the WealthAssurance Group of Companies. (Anderson Decl., Ex. D; Pentelovitch Decl. Ex. 49, Trial Tr.
1014:18-21.) It happened that Wealth Assurance Private Client was not incorporated in the
British Virgin Islands until August 22, 2014, just three days prior to closing. (Pentelovitch Decl.
Ex. 1.)
USB was not a signor to the Annuity Contract, but was the designated Payee and was
granted a security interest in the payment stream from the Annuity Investment and in the revenue
stream from the development project, but was not granted a security interest in the Annuity
Investment. (SOMF 237-239.) USB’s expert testified that it is important for an indenture
trustee to ensure it is the payee on the guaranteed investment contract like the annuity contract in
this case. (Murzyn Decl. Ex. 6, Gadsen Dep. 63:23-64:6.) However, Henselen testified that it
was not his practice to review a guaranteed investment contract such as the Annuity Contract if
USB was not a signor thereto. (Murzyn Decl. Ex. 8, Henselen Dep. 63:22-64:4.)
2
WLCC issued a second tranche on August 27, 2014, in the amount of $2,233,347. The August 25, 2014, and the
August 27, 2014, bonds are collectively referred to as the “August 2014 bonds.” (SOMF 7.)
5
The fact that the Annuity Provider was an overseas entity, that the Annuity Investment
would be custodied overseas, and that the Annuity Contract was governed under the laws of the
British Virgin Islands were all unusual components of this deal. Henselen was first informed of
that the Annuity Provider was a British Virgin Islands entity in July 2014 when he was emailed a
“distribution list” listing all of the deal team members, their representatives, and associated
contact information. (Murzyn Decl. Ex. 26.)
Had Henselen reviewed the Annuity Contract that had been emailed to him a couple of
weeks prior to the August 2014 closing3 on the August 2014 bonds, he would have again seen
that Wealth Assurance Private Client with its principal office in Tortola, British Virgin Islands
was the designated Annuity Provider to which USB would be wiring over $22 million of the
bond proceeds for the purchase of the Annuity Investment. (Murzyn Decl. Ex. 22.) Henselen
testified that he was required to know about any overseas wires USB would make because there
were certain reporting requirements associated with overseas wires. (Murzyn Decl. Ex. 14,
Slania Dep. 106-08; Ex. 7, Graham Dep. 76-77; Ex. 1, Ambriz-Reyes Dep. 77-79.) Henselen’s
manager said that he would have expected Henselen to have reviewed any overseas annuity
contract and to have brought to his attention that USB would be making overseas wires, but
Henselen never did so. (Murzyn Decl. Ex. 16, Von Hess Dep. at 54-55.) The Annuity Contract
provided that it was to be governed under the laws of the British Virgin Islands, although
Henselen checked on the “Establish Deal” sheet that “[a]ll aspects of the transaction governed by
U.S. Law.” (Pillar Decl., Ex. O.) The Annuity Contract also provided that Wealth Assurance
Private Client was “not authorized to do business in any jurisdiction other than the British Virgin
Islands” and that the purchase payment must be received at the Home Office in the British
Virgin Islands. (Murzyn Decl. Ex. 27.)
The August 2014 Indenture provided that the proceeds of the August 2014 Bonds shall be
deposited in USB’s Settlement Account and from there, that USB would make payments,
disbursements and deposits as set forth in the Closing Statement, including “the amount of
$22,094,089 for the purchase of the Annuity Investment.” The Closing Statement, signed by
authorized representatives of WLCC, provided that the August 2014 Bonds would be allocated
3
In the text of the email, Anderson wrote “Updated annuity contract and BVI attorney signed‐off annuity documents.”
(Murzyn Decl. Ex. 27.)
6
as follows: 1) $22,094,089 for annuity purchase payment, 2) $2,250,000 for project fund, and 3)
$500,000 for issuance costs, but did but not provide any instructions on where or how USB
would transfer the $22,094,089 to Wealth Assurance Private Client. “Annuity Investment” was
defined in the August 2014 Indenture as “the contract, in the notional purchase amount of
$22,094,089, entered into on the date hereof between [WLCC] and the Annuity Provider.”
“Annuity Provider” was defined in the August 2014 Indenture as “a company that provides
Annuity Investments as part of its regular trade or business.”
Section 12.3 of the August 2014 Indenture provided that:
The Trustee shall have the right to accept and act upon instructions or directions
pursuant to this Indenture sent by unsecured e-mail, facsimile transmission or
other similar unsecured methods, provided, however, that the instructions or
directions shall be signed by a person as may be designated and authorized to sign
for the Corporation, who shall provide the Trustee an incumbency certificate
listing such designated persons.
The persons designated and authorized to sign for WLCC relating to the August 2014 Bond
Indenture, as detailed in the Certificate provided to USB, were Geneva Lone Hill, President of
WLCC, and Wilma Standing Bear, Secretary of WLCC. (Murzyn Decl. Ex. 95.)
On August 26, 2014, Jason Galanis, the Placement Agent with Burnham, sent an email to
Anderson with wire instructions for the $22,092,089 that was to be transferred out of USB’s
settlement account for the purchase of the Annuity Investment and payment of certain closing
costs.
The wire instructions were to a JP Morgan Chase Bank account in Beverly Hills,
California, and the account holder was designated as Wealth Assurance Private Client with an
address in Santa Monica, California. Neither WLCC nor its counsel was copied on the email,
and WLCC did not consent to any change in the Annuity Provider from Wealth Assurance
Private Client, British Virgin Islands, to Wealth Assurance Private Client in California4. On
August 27, 2014, Henselen’s manager confirmed that the bank account information provided in
the Galanis/Anderson email matched the wire information before USB completed the
4
Wealth Assurance Private Client in the United States had been created by Gary Hirst in July 2014 as a Florida
corporation. (Pentelovitch Decl. Ex. 49, Trial Tr. 1011:20‐1012:4.) Dunkerley was the sole managing member and
director. (Pentelovitch Decl. Ex. 49, Trial Tr. 1011:20‐1012:4.) On August 6, 2014, Hirst opened a bank account for
Wealth Assurance Private Client at JP Morgan Chase and Dunkerley became a signor on the account on August 21,
2014. (Pentelovitch Decl. Ex. 49, 1013:2‐15.)
7
$22,092,089 wire to the JPMorgan Chase Account in California. (Murzyn Decl. Ex. 16, Von
Hess Dep. 101:5-102:7.)
Plaintiffs Learn of 2014 Bond Issuance
On or around September 2, 2014, after noticing that money was missing from its
custodial account at Northern Trust in Chicago, Washington Suburban learned that Hughes had
purchased August 2014 Bonds with a face value of $4,118,076 for its account. (SOMF 11, 353.)
When Washington Suburban advised Hughes that the WLCC bonds were not a suitable
investment for Washington Suburban’s holdings with Hughes, Hughes responded in a letter
dated September 2, 2014, signed by Morton and Deary, stating that they had “identified a nongaming opportunity” in the WLCC bonds and stated, untruthfully, that the issuer was the “Oglala
Sioux Tribe” which had “funded a long-term pension plan with the proceeds of the offering.”
(SOMF 356.)
Washington Suburban instructed Hughes to stop trading in its account on
September 8, 2014, and by letter dated September 26, 2014, notified Hughes that it was
terminating its investment advisor relationship. (SOMF 366.)
The Chicago Transit Authority Retiree Health Care Trust (“RHCT”) learned of GMT
Duncan’s acquisition of Hughes by letter dated August 22, 2014. (SOMF 378.) RHCT tasked
its consultant to analyze whether RHCT should continue to engage the firm. (SOMF 378.)
Following the investigation, RHCT was advised to terminate Hughes because of changes in
ownership and management. (Pentelovitch Decl. Ex. 11, Kallianis Dep. 83:14-87:10.) By letter
dated October 27, 2014, RHCT notified Hughes that their relationship would terminate on
November 28, 2014, and that Hughes should liquidate RHCT’s portfolio by that point. (SOMF
381.)
Over the course of several months, RHCT received multiple communications from
Morton and others about Hughes’ supposed efforts to sell the bonds, but Hughes was unable to
liquidate the WLCC Bonds. (SOMF 383; Pentelovitch Decl. Ex. 11, Kallianis Dep. 87:2088:11.) 5
By letter dated September 2, 2014, Birmingham Water received notice from Hughes that
Hughes had purchased the August 2014 WLCC bonds for its account. (SOMF 373.)
5
On May 6, 2020, USB and RHCT filed a Stipulation for Dismissal with Prejudice which this Court granted on May 7,
2020. Docs. 150, 151. RHCT is no longer a party to this action.
8
Depletion of Funds from JPMorgan Account
Dunkerley testified that he was the sole managing member and director of Wealth
Assurance Private Client and had been designated by Hirst as a signor on the JPMorgan Chase
Account on August 21, 2014. (SOMF 314; Pentelovitch Decl. Ex. 49, Trial Tr. 1011:17-19.)
Once USB had wired the $22,094,089 bond proceeds to the JPMorgan Chase account, Dunkerley
received instructions from Jason Galanis to wire the money out of the account to certain
individuals and corporations. (SOMF 320, 331.) One week after the August 2014 Bonds were
issued, over $7.35 million had been withdrawn from the Wealth Assurance Private Client J.P.
Morgan Chase Account. (SOMF 339.) All but slightly more than $1.2 million had been
withdrawn from the account within four weeks after the August 2014 Bonds were issued.
(SOMF 339.)
Acquisition of Atlantic by Hughes
Atlantic Investment Management, LLC (“Atlantic Investment Management”) was a
Registered Investment Advisor that for many years had served as an investment manager for the
Omaha School Employees’ Retirement System (“OSERS”). (SOMF 42.) Atlantic Investment
Management set up the Master Fund and Feeder Fund and made investments for the funds.
(SOMF 43; Murzyn Decl. Ex. 4, Erikson Dep. 31:6-32:15.) The Feeder Fund is the sole owner
of the Master Fund and invested substantially all of its assets in the Master Fund. (SOMF 1415.) In 2013, OSERS invested $100 million in the Feeder Fund and became the sole limited
partner of the Feeder Fund. (SOMF 16; Pentelovitch Decl. Ex. 6, Erickson Dep. 81:21-25.)
By letter dated February 19, 2015, from Atlantic Asset Management to Michael Smith,
Executive Director of OSERS, Atlantic advised OSERS that it had signed a merger agreement
with Hughes, and that the resulting combined business would use the Atlantic name. (SOMF
398.) The letter advised OSERS that Morton was the CEO of Hughes and would become CEO
of Atlantic, and that the Richard Deary was president of Hughes and would become president of
Atlantic. (SOMF 400.) The letter furthermore asked OSERS to sign and return a “consent” to
assignment of its investment management agreement to the newly merged entity. (SOMF 401.)
On March 4, 2015, Ron Sellers (“Sellers”), then the chairman and CEO and owner of Atlantic,
made a presentation to OSERS recommending that OSERS invest an additional $25 million in
the Atlantic Feeder Fund. At the same meeting, Sellers represented to OSERS that he would
9
continue to be involved with Atlantic after the merger with Hughes and represented that the staff
that OSERS had always dealt with would remain with the company. (SOMF 403.) Because
Sellers was OSERS’ long-time trusted advisor, OSERS relied on Sellers’ recommendation and
on March 16, 2015, approved continuation of the existing investment advisory agreement with
Atlantic. (SOMF 404, 406, 409.) The Omaha Board of Education adopted the recommendation
of the OSERS board. (SOMF 407.)
The merger between Hughes and Atlantic was finalized in April 2015. (SOMF 41.)
April 2015 Bond Issuance, $16.2 Million Face Value
USB’s account acceptance procedures changed after the August 2014 bond issuance.
The “Establish Deal” template was revised to include check boxes indicating whether a customer
was involved with internet gambling, payday lending, or was a casino because such businesses
were identified as prohibited and restricted business types. (Pillar Decl. Ex. O; Murzyn Decl.
Ex. 5, Farrell Dep. 162:4-171:8.) The account acceptance template also included a check box
indicating whether negative news has been obtained about the customer via a “Google” search
on the internet. (Pillar Decl. Ex. O.) In the April 2015 “Establish Deal” form, Henselen
indicated that WLCC was not involving in gaming or payday lending and that negative news had
not been obtained via a “Google’ search on the internet although he could not recall at his
deposition doing any inquiry on WLCC’s business type. (Pillar Decl. Ex. O; Murzyn Decl. Ex.
8, Henselen Dep. 152:7-19.)
There were articles available on the internet linking WLCC to
payday lending and gaming prior to the August 2014 bond issuance. (Murzyn Decl. Ex. 18,
Woodward Dep. 57-59, 102-105; Ex. 51.)
On behalf of Atlantic, Morton executed a “big boy” letter in connection with the
purchase of the entire April 2015 bonds issue, wherein she represented, warranted and
covenanted, among other things, that “(b) We have had such opportunity as we have deemed
adequate to obtain from representatives of [WLCC] such information as is necessary to permit us
to evaluate the merits and risks of our investment in [WLCC]” and “(c) We have sufficient
experience in business, financial and investment matters to be able to evaluate the risks involved
in the purchase of the Securities and to make an informed investment decision with respect to
such purchase.” (SOMF 430.) The big boy letter failed to state that the actual purchaser of the
April 2015 bonds was not Atlantic but instead would be the Atlantic Master Fund. (SOMF 431.)
10
The funds that Atlantic used to purchase the April 2015 bond for the Atlantic Master
Fund came from the $25 million additional investment that OSERS had made in the Atlantic
Feeder Fund in March 2015 on the recommendation of Sellers, the then-CEO of Atlantic.
(SOMF 434.) Atlantic Master Fund is the beneficial owner of the entire 2015 WLCC bond
issuance with a face value of $16.2 million and the Atlantic Feeder Fund is the beneficial owner
of Atlantic Master Fund’s interest. (Pentelovitch Decl. Ex. 2, Kirschner Dep. 46:1-6.)
As was true with respect to the August 2014 Bonds, with respect to the April 2015
Bonds, Burnham was the Placement Agent, Wealth Assurance Private Client in the British
Virgin Islands was the Annuity Provider, and USB was Indenture Trustee. (SOMF 414.) USB
signed the Indenture for the April 2015 bonds on April 1, 2015, and the Closing Statement on
April 16, 2015. (SOMF 415-417.) The 2015 Indenture indicated that WLCC would be issuing
$16,200,000 Special Limited Revenue Bonds (Taxable), the proceeds of which would be used to
help finance the purchase of an annuity investment with a nominal purchase amount of
$19,650,0006 and to finance the Economic Development Project which was defined therein as “a
consumer goods distribution project to be located on the Tribe’s lands, including the equipment,
inventory, operating capital and infrastructure, and other legal purposes for the benefit of the
Wakpamni Lake Community.”
As with the August 2014 bond issuance, USB was identified as the Payee and was
granted a security interest in the payment stream from the Annuity Investment and in the revenue
stream from the project, but was not granted a security interest in the Annuity Investment.
(SOMF 237-239, 418, 423-24.) In large part, the August 2014 and April 2015 Indentures and
Annuity Contracts were substantially identical in form and substance. (SOMF 427.) The
purchase price of the April 2015 Annuity Investment was $19,650,000 and was for a seven-year
term. On the front page of the 2015 Annuity Contract term sheet, the annuity provider was
designated as Wealth Assurance Private Client with a principal place of business in Tortola,
British Virgin Islands and provided that it was “not authorized to do business in any jurisdiction
other than the British Virgin Islands.” The April 2015 Annuity Contract also provided that the
6
The April 2015 Annuity Contract provided that the purchase payment for the annuity was payable in two installments
by WLCC. The first installment of $15,850,00 was payable on or before the Contract Date of April 16, 2015, and the
second payment of $3,800,000 was payable on or before thirty days form the Contract Date. The April 2015 Annuity
Contract provided for the adjustment of incoming payments in the event the second payment was not made.
11
purchase payment was to be received by Wealth Assurance Private Client at its home office in
the British Virgin Islands. Private Equipment Management LLC was identified in the Annuity
Contract as the Investment Manager, although it appears no investment agreement was executed
for the 2015 bond issuance. (SOMF 427.) The April 2015 Closing Statement differed from the
August 2014 Closing Statement in that it included the wire instructions to Wealth Assurance
Private Client’s JP Morgan Chase bank account in Beverly Hills, California, which was the same
account specified in wire instructions provided in the Galanis/Anderson email to USB in August
2014, and to which USB wired the August 2014 Bond proceeds.
Post-April 2015 Bond Issuance
On April 23, 2015, OSERS discovered that Atlantic had purchased the April 2015
WLCC bonds. (SOMF 433, 435.) According to OSERS, the acquisition of the April 2015
Bonds by the Master Fund violated the guidelines contained in the OSERS’ investment
management agreement with Atlantic because, among other reasons, the investment was too
large. (SOMF 432; Pentelovitch Decl. Ex. 4, Erikson Dep., 94:10-19; Kirschner Dep. 48:2349:9, 52:9-13.)
OSERS complained to Atlantic and demanded that the transaction be reversed
and that the purchase price be placed back in the Master Fund. (SOMF 435.)
Immediately prior to the April 2015 bond transaction, the balance in WAPCC’s bank
account at J.P. Morgan Chase was $54.66. (SOMF 440.) After funds from the April 2015 bond
transaction were wired by USB to WAPCC’s bank account at J.P. Morgan Chase, such funds
were withdrawn and used for, among other things, working capital for Hughes and to purchase
the corporation Fondinvest, of which Dunkerley was president. (SOMF 441.) Within one week
after the April 2015 bonds were issued $6.47 million had been withdrawn from WAPCC’s bank
account at J.P. Morgan Chase. (SOMF 442.) Within four weeks after the April 2015 bonds
were issued, all but $20,993.30 had been withdrawn from the account. (SOMF 442.) Atlantic
Asset Management and Hughes were placed into receivership by the United States District Court
for the Southern District of New York upon the petition of the Securities and Exchange
Commission. (SOMF 459.)
12
Criminal Charges
On January 19, 2017, Jason Galanis pleaded guilty in the United States District Court for
the Southern District of New York to securities fraud, conspiracy to commit securities fraud, and
conspiracy to commit investment advisor fraud in connection with the WLCC Bond transactions.
(SOMF 461.) According to Jason Galanis’ plea allocution, he agreed with others to withhold
material information related to conflicts of interest in connection with the purchase and sale of
bonds, and he agreed with others to engage in deceptive and manipulative business transactions
in connection with an investment advisor. (SOMF 462.) On August 11, 2017, the court
sentenced Jason Galanis to 173 months imprisonment and he was ordered to forfeit $43,277,436.
(SOMF 463.) On October 28, 2019, the United States Court of Appeals for the Second Circuit
remanded Jason Galanis’ case back to the district court for a hearing upon his claim that he had
ineffective assistance of counsel in connection with his guilty plea. (SOMF 464.) On November
26, 2019, the court granted Jason Galanis’ November 15, 2019, motion to vacate his conviction
in order to “facilitate a resolution of the case by plea in the WLCC bond case as well as another
criminal case pending against Jason Galanis. (SOMF 465.)
On June 13, 2017, Dunkerley pleaded guilty in the United States District Court for the
Southern District of New York to conspiracy to commit securities fraud, two counts of securities
fraud, bankruptcy fraud, and falsification of records with the intent to obstruct a government
investigation. (SOMF 469.) According to Dunkerley’s plea allocution, he pleaded guilty to,
among other things, misappropriating proceeds of several bond issuances by making or directing
transfer of proceeds to persons and entities not entitled to the funds, and by submitting false
documents in connection with subpoenas served by the Securities and Exchange Commission.
(SOMF 470.)
On May 16, 2018, Morton pleaded guilty to investment fraud and conspiracy to commit
securities fraud in the United States District Court for the South District of New York. (SOMF
472.) Morton’s guilty plea related to actions she took as chief executive officer of Atlantic Asset
Management in connection with the April 2015 bond transactions. (SOMF 473.) As described
by Morton, her crime was that she “agreed with others to purchase bonds for a client account at
Atlantic . . . and knew there was a material conflict of interest in connection with the bonds and
did not disclose it to the client before making the purchase.” (SOMF 473.) On June 20, 2018,
13
Morton made a motion to withdraw her guilty plea and renewed her motion on May 17, 2019.
(SOMF 474.)7
Hirst pleaded guilty in the United States District Court for the Southern District of New
York to conspiracy to commit securities fraud, securities fraud, conspiracy to commit investment
advisor fraud, and investment advisor fraud. (SOMF 475.) According to Hirst’s plea allocution,
he agreed with others to deceive certain clients of Hughes by not disclosing conflicts of interest
of which he was aware prior to Hughes purchasing certain bonds on behalf of its clients and
knowing that the clients would have wanted to know about those conflicts of interest before
approving the bond purchase. (SOMF 475.) On September 11, 2019, Hirst moved to vacate, set
aside, or correct his sentence and the court has not ruled on Hirst’s motion. (SOMF 477.)
DISCUSSION
I.
Motion to Exclude Expert Testimony
Pending before the Court is USB’s Motion to Exclude Expert Testimony. Doc. 109.
Proposed expert testimony must meet three prerequisites to be admissible under Federal
Rule of Evidence 702. Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001). “First,
evidence based on scientific, technical, or other specialized knowledge must be useful to the
finder of fact in deciding the ultimate issue of fact.” Id. “[I]t is the responsibility of the trial
judge to determine whether a particular expert has sufficient specialized knowledge to assist
jurors in deciding the specific issues in the case.” Wheeling Pittsburgh Steel Corp. v. Beelman
River Terminals, Inc., 254 F.3d 706, 715 (8th Cir. 2001). Second, the proposed expert must be
qualified. Lauzon, 270 F.3d at 686. Third, the proposed evidence must be reliable. Id.
“Courts should resolve doubts regarding the usefulness of an expert's testimony in favor
of admissibility.” Marmo v. Tyson Fresh Meats, Inc., 457 F.3d 748, 758 (8th Cir.2006). “As a
general rule, the factual basis of an expert’s opinion goes to the credibility of the testimony, not
the admissibility, and it is up to the opposing party to examine the factual basis for the opinion in
cross-examination.” Bonner v. ISP Techs., Inc., 259 F.3d 924, 929 (8th Cir. 2001) (citation
omitted). However, an expert's opinion must be excluded if it “is so fundamentally unsupported
7
The district court held three‐day evidentiary hearing from March 2, 2020 until March 5, 2020 on Morton’s
Renewed Motion to Withdraw Guilty Plea. United States v. Morton, Civ. No. 1:16‐cr‐00371 (S.D.N.Y). On April 2,
2020, Morton and the Government both filed post‐hearing memorandums of law with regard to Morton’s
Renewed Motion to Withdraw Guilty Plea. Docket 873, 874. The Court has not yet ruled on Morton’s motion.
14
that it can offer no assistance to the jury.” Id. at 929–30 (citation omitted). The proponent of the
expert testimony bears the burden of proving its admissibility by a preponderance of the
evidence. Lauzon, 270 F.3d at 686 (citing Daubert v. Merrell Dow Pharm., 509 U.S. 579, 592
(1993)).
A. Know Your Customer/Anti-Money Laundering “KYC/AML” Standard of Care
KYC/AML customs and practices are not within the common knowledge of laypersons
and the Court finds that Vinella is qualified to testify to such matters, and that his experience in
reviewing and drafting such policies will aid the jury in its understanding of this issue. Vinella
played a lead role in drafting KYC/AML policies and procedures for Citibank’s Global Private
Bank BSA and for a number of other banks. (Druck Decl. Ex. B, Vinella Dep. 173:7-22.) While
serving as President and CEO of Wilmington Trust Conduit Services (“WTCS”), Vinella
evaluated Wilmington Trust’s KYC/AML procedures and drafted new KYC/AML policies and
procedures that applied to issuances of all types of securities. (Murzyn Decl. Ex. 124, Vinella
Dep. 106:14-107:3; Druck Decl. Ex. B, 167:21-170:8, 204:2-10 (“There is no difference from
doing a KYC for a municipal issuer, for a tribal bond, for Frank down the street. It doesn’t
matter what the issuer is, there is not a different standard.”)). Accordingly, the Court concludes
that Vinella is qualified to testify as to the KYC/AML customs and practices of indentured
trustees and as to risk factors that, in his experience, would have prompted an experienced and
knowledgeable corporate trust department to apply heightened scrutiny to this deal.
Any
deficiencies in Vinella’s experience with implementing KYC/AML policies at the deal level may
be explored by USB on cross- examination.
B. Municipal Bond Classification
Vinella opines that the WLCC Bonds should not have been classified as municipal bonds
because, among other things, they were taxable and because an annuity was the primary source
of principal and interest repayment. The Court concludes that Vinella is qualified to opine on
whether the WLCC Bonds were properly classified as municipal bonds. Vinella served as head
of taxable fixed-income research at DBL and of proprietary trading at Smith Barney Shearson.
(Druck Decl. Ex. C, Vinella Rebuttal Report. ¶ 60.)
In this position with Smith Barney
Shearson, Vinella would have been allowed to purchase taxable, fixed-income securities like the
WLCC Bonds, but was prohibited from trading standard tax-free municipal securities. (Druck
Decl. Ex. C, Vinella Rebuttal Report ¶ 60.) In addition, Vinella oversaw the operations of an
15
IDB which traded thousands of municipal bonds daily. (Druck Decl. Ex. C, Vinella Rebuttal
Report ¶ 61.) Any gaps in Vinella’s knowledge relating to municipal bond classification may be
explored on cross-examination and USB witnesses and experts can offer competing testimony as
to the proper classification of the WLCC bonds.
C. Due Diligence Standard of Care
USB argues that Vinella’s testimony on the due diligence obligations of an indenture
trustee prior to accepting a mandate are unreliable because, it contends, that WTCS did not serve
as an indenture trustee on these deals, but rather signed the indenture as an institution providing
services defined in the indenture such as processing wires, holding assets in collateral, and
evaluating collateral. (Reply Br. at 4-5 (citing Druck Decl. Ex. B, Vinella Dep. 132)). USB
argues further that Vinella’s opinions are unreliable because WTCS was not involved with
government-issued securities. (Reply Br. at 6.)
While at WTCS, Vinella was involved in 18 bond deals that closed and over 60 deals that
did not close. (Druck Decl. Ex. B, Vinella Dep. 116:22-23; 133:14-12.) Vinella testified that he
was personally involved in KYC analysis on these deals and testified to the type of due diligence
that he performed. (Druck Decl. Ex. B., Vinella Dep. 102:9-14.) This included a KYC on any
unfamiliar deal team members, including a Google search; a review of every document,
including the indenture; a collateral administration agreement, custody agreement, private
placement memorandum, and investment management agreement. Even though WTCS was not
a signatory to each and every document, Vinella testified that those documents often had
references to the work WTCS did as trustee. (Druck Decl. Ex. B, Vinella Dep. 102:23-103:12;
107:4-108:5, 114-116:21.)
Of the 18 transactions that Vinella was involved in which closed, all of them were private
placements which are exempted from the Trust Indenture Act and thus did not require an
institutional trustee. (Druck Decl. Ex. B, Vinella Dep. 132:2-16.); 15 U.S.C. § 77d(2). WTCS
thus signed the indentures not as an institutional trustee, but as a provider of services defined in
the indenture such as processing wires, holding assets in collateral, and evaluating collateral.
(Druck Decl., Ex. B, Vinella Dep. 132.) WTCS was an unregulated entity and thus had a
contractual relationship with Wilmington Trust Bank to provide any services that needed to be
done by a licensed financial institution. (Druck Decl. Ex. B, Vinella Dep. 111:17-23.) Vinella
testified that because the transactions at WTCS were private placements, WTCS was considered
16
to be a “collateral agent, valuation agent,” not a trustee under the Trust Indenture Act. (Druck
Decl. Ex. B, Vinella Dep. 132:13-16.) Vinella testified that had they done “public deals,”
Wilmington Trust Bank would have signed the indenture as the institutional trustee under the
Trust Indenture Act and would have outsourced operations to WTCS. (Druck Decl. Ex. B,
Vinella Dep. 132:17-22.)
The Court concludes that although not specifically labelled as such in the indentures,
WTCS’s duties, at least pre-default, were largely representative of those of an indenture trustee.
Furthermore, the deals that WTCS were involved with were, like the WLCC Bond deals, private
placements rather than public offerings. (SOMF 9.) The Court concludes that the opinions of
Vinella as to the standard of care prior to accepting a mandate in a private placement bond
offering are reliable and will be of aid to the jury. On cross-examination, USB may explore any
gaps in Vinella’s experience performing due diligence on municipal bond transactions and have
its own experts present competing standards of care.
D. Wire Instructions
USB argues that Vinella’s lack of experience at the deal level disqualifies him from opining
on whether USB should have done further inquiry rather than acting on instructions from
Galanis/Anderson. (Reply Br. at 12.) The Court disagrees.
Vinella reviewed many indentures
throughout his career. (Murzyn Decl. Ex. 124, Vinella Dep. 88:18-90:18.) While at WTCS, the
company’s duties under the indentures included automating wire requests for bond transactions.
(Druck Decl. Ex. B, Vinella Dep. 83:16-86:49.) The Court concludes that Vinella’s opinion on
this subject is thus reliable.
E. Valuation
Vinella opines that USB had a duty under the Indentures to value the Annuity
Investments on a monthly basis. (Druck Decl. Ex. A, Vinella Report. 151.a.) Vinella will not be
permitted testify as to any of USB’s duties that are defined in the Indentures because a party’s
contractual duty is question of law for the court. See Roseth v. Roseth, 829 N.W.2d 136, 142
(S.D. 2013) (stating that contract interpretation is a question of law). However, Vinella may be
permitted to testify as to the valuation customs and practices of indenture trustees in the
industry. See id.
17
F.
USB Policies and Procedures
Under South Dakota law, internal company policies and procedures may be considered by
the jury as evidence of negligence, although it does not establish negligence per se. Morrison v.
Mineral Palace Ltd. P’ship, 603 N.W.2d 193, 197 n.4 (S.D. 1999). In Morrison v. Mineral
Palace Ltd. Partnership, it was established at trial that the defendant had a duty to maintain the
sidewalks abutting his property in reasonably safe condition. Id. The court stated that company
policy directing employees to inspect sidewalks for ice after dark could be considered by the jury
in determining whether failure to do so breached any legal duty the defendant owed to the
plaintiff. Id.
Vinella will be allowed to testify to any instances in which USB failed to comply with its
internal policies and procedures. As in Morrison, the jury may consider whether such
noncompliance breached any legal duty owed by USB to Plaintiffs.
G.
State of Mind Testimony
Vinella opines on what actions USB should and would have taken if USB had acted in
accordance with industry customs and standards and USB policy. Vinella will not be permitted
to testify to actions USB would have taken, but may testify to what actions an indenture trustee
should take. See, e.g., Kruszka v. Novartis Pharm. Corp., 28 F. Supp. 3d 920, 931 (D. Minn.
2014) (citation omitted) (stating that expert testimony on “the intent, motives, or states of mind
of corporations, regulatory agencies and others have no basis in any relevant body of knowledge
or expertise.”).
H.
Causation
Vinella will be permitted to offer his opinion providing that had USB met the standards of
care of an indenture trustee, the WLCC bonds would not have been issued and Plaintiffs’ losses
would have been averted. (Druck Decl. Ex. A, Vinella Report ¶¶ 15(c), 17; Ex. C, Vinella
Rebuttal Report ¶ 128.) The Court will provide the jury a cautionary instruction that whether
USB breached the standards of care of an indenture trustee and whether such breach was the
cause of Plaintiffs’ damages are questions for the jury to decide even though the Court will allow
witnesses determined to be experts to offer their opinions on those subjects for their assistance to
the jury.
Vinella will be allowed to testify that an experienced and knowledgeable trust
department would have declined to serve as indenture trustee to this deal.
18
II.
USB’s Summary Judgment Motion
A. Standard of Review
Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is
appropriate where “there is no dispute as to any material fact and the movant is entitled to a
judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
“The movant ‘bears the initial
responsibility of informing the . . . district court of the basis for its motion,’ and must identify
‘those portions of [the record] . . . which it believes demonstrate the absence of a genuine issue
of material fact.’” Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2001) (en
banc) (quoting Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986)). Once the motion for
summary judgment is made and supported, it places an affirmative burden on the non-moving
party to go beyond the pleadings and cite to particular parts of materials in the record, showing
that there is a genuine issue for trial. See Commercial Union Ins. Co. v. Schmidt, 967 F.2d 270,
271 (8th Cir. 1992); Fed. R. Civ. P. 56(c). The nonmovant must do more than “assert[] ‘the
mere existence of some alleged factual dispute between the parties’; the [nonmovant] must assert
that there is a ‘genuine issue of material fact’” Quinn v. St. Louis Cnty., 653 F.3d 745, 751 (8th
Cir. 2011) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (emphasis omitted)).
B. Negligence Claim
1. Independent Duty
“Tort liability requires a breach of a legal duty independent of contract.’” Kreisers Inc.
v. First Dakota Title Ltd. P’ship, 852 N.W.2d 413, 419 (S.D. 2014) (internal quotation and
citation omitted). “This independent legal duty must arise from extraneous circumstances, not
constituting elements of the contract.” Id. (internal quotation and citation omitted). In contrast,
“negligence that consists merely in the breach of a contract will not afford grounds for a tort
action by third parties and is limited under a breach of contract cause of action . . . .” Id.
(quoting Fisher Sand & Gravel Co. v. S.D. Dep’t of Transp., 558 N.W.2d 864, 868 (S.D. 1997)).
“[I]t is generally recognized that one who undertakes to provide professional services has
a duty to the person from whom the services are performed to use such skill and care ordinarily
exercised by others in the same profession.” Id. at 420 (quotation omitted). “Liability in tort for
breach of that duty may arise as a result of negligence during the performance of the contract,
even if there has been no breach of contract.” Id. “[T]he existence of a duty, i.e., whether a
19
relation exists between the parties such that the law will impose upon the defendant a legal
obligation or reasonable conduct for the benefit of the plaintiff . . .” is for the court to determine,
as a matter of law. Schoenwald v. Farmers Coop. Ass’n of Marion, 474 N.W.2d 519, 520 (S.D.
1991).
In Kreisers, Inc. v. First Dakota Title Ltd. Partnership, the plaintiff was referred to First
Dakota Bank to facilitate its § 1031 tax-deferred construction exchange. 852 N.W.2d at 416.
Prior to signing any closing documents, First Dakota had advertised that it could provide § 1031
tax deferred exchange services. Id. First Dakota did not advertise any limits on the types of §
1031 services it provided, although its policy was to only handle forward or delayed exchanges.
Id. at 416-17. First Dakota was aware of the differences between types of § 1031 exchanges and
commonly had a policy of referring more complex exchanges like construction exchanges to
other providers. Id. at 420. Despite that, representatives from First Dakota did not ascertain
whether the plaintiff wanted anything other than a forward exchange. Id. The court concluded
that in providing these complex § 1031 exchanges, First Dakota was performing professional
services and had, at a minimum, an independent legal duty to exercise reasonable care by
ascertaining whether a client desired a forward exchange (a transaction it was competent to
perform) or some other type of §1031 exchange such as the construction exchange plaintiff
wanted (and which First Dakota was not competent to perform). See id. at 420-21. The court
noted that the plaintiff’s expert had opined that First Dakota “breached the standard of care as a
qualified intermediary by failing to gather necessary information and failing to make certain it
understood what the client was trying to accomplish and how the transaction was structured.”
Id. at 421. The court concluded that this duty of reasonable care existed independent of the
closing contract that the parties subsequently signed. Id.
In the present case, USB held itself out as and was known as experienced and reputable
indenture trustee in the corporate trust industry. Anderson had suggested that USB would be a
good fit as the indenture trustee on the WLCC Bond Offerings because it was a large, wellknown and reputable financial institution with “serious experience in tribal Indian Country.”
(Murzyn Decl. Ex. 122, Trial Tr. at 527-28.) In fact, USB was known in the corporate trust
industry as one of the largest and most active indenture trustees in the market. (Murzyn Decl.
Ex. 7, Graham Dep. 58:19-59:16.) USB’s expert testified that the WLCC bonds were a complex
20
municipal transactions. (Murzyn Decl. Ex. 6, Gadsen Dep. 152:6-9.) Similar to the financial
transaction in Kreisers, there were several features of these bond transactions that were outside
USB’s typical municipal bond experience. (See Murzyn Decl. Ex. 6, Gadsen Dep. 160:19161:13.)
USB’s expert, and others, testified that a trustee should understand the purpose of a
municipal bond issuance since they are typically made to finance specific projects. (Murzyn
Decl. Ex. 6, Gadsen Dep. 159:12-160:18; Ex. 14, Slania Dep. 204:8-21; see also Pentelovitch
Decl. Ex. 7, Farrell Dep. 69:22-70:22.)
From the outset, however, the nature of development
project was ill-defined. (Murzyn Decl. Ex. 14, Slania Dep. 195:12-15 (recognizing that it was
unusual to have no defined development project at the outset of a bond transaction)). A term
sheet sent by Anderson to USB on July 1, 2014, suggested that part of the proceeds would be
used to build a “distribution facility” without any additional detail about what would be
distributed from the facility. (Murzyn Decl. Ex. 7, Graham Dep. 78:6-79:8; Ex. 24.) A draft of
the indenture dated July 23, 2014, that was provided to USB and its counsel suggested that the
bond proceeds would be used to build a “gaming facility.” (Murzyn Decl. Exs. 35, 55.) USB
policy required an account manager to escalate a review of a transaction if gaming was an
intended use and by the time the 2015 bonds were issued, internet gambling was officially
designated on the “Establish Deal” form as a prohibited business and payday lending, a
“restricted business.” (Murzyn Decl. Ex. 8 Henselen Dep. 151:1-18; 152:3-10; Ex. 16, Von Hess
Dep. 65:17-66:3.) Henselen’s supervisor testified that if he had been made aware as an account
manager that a client was potentially involved in gaming, he would raise that issue with his
manager. (Murzyn Decl. Ex. 16, Von Hess Dep. 65:17-67:9.) Additionally, USB never received
a private placement memorandum which was unusual in a private placement bond offering.
(Murzyn Decl. Ex. 6, Gadsen Dep. 122:1-123:1; Ex. 1, Ambriz-Reyes Dep. 124:24-125:18.)
Ambriz-Reyes, an account manager at USB, testified that in her thirty-five years of corporate
trust experience, she could not remember any bond transaction in which she had been involved
with as an indenture trustee in which there was no private placement or offering memorandum
prepared for the transaction.
(Murzyn Decl. Ex. 1, Ambriz-Reyes Dep. 124:24-125:18.)
Additionally, it was unusual in municipal bond transactions for an issuer not to produce a budget
or construction plans. (Murzyn Decl. Ex. 14, Slania Dep. 204:22-205:16; Ex. 13, Pillar Dep.
104:17-105:04; Ex. 89.) Henselen testified that he did not recall ever seeing a construction
21
budget for the development projects associated with the WLCC bonds. (Murzyn Decl. Ex. 8,
Henselen Dep. 206:13-23.)
In addition to understanding the purpose of a municipal bond issuance, USB’s expert
testified that an indenture trustee must understand the characteristics of a bond transaction.
(Murzyn Decl. Ex. 6, Gadsen Dep. 159:12-160:18.) There were several attributes of the WLCC
bond transactions that were unique and USB’s own policies flagged some of these attributes as
escalating the risks associated with the deal. While the details of the development project were
unclear, what was clear from the beginning was that approximately ninety percent of debt
associated with the August 2014 WLCC bond issuance would be serviced by an annuity
investment. Neither the parties, their representatives, nor experts in this case had ever heard of a
municipal bond transaction involving an annuity. (SOMF 109; Ex. 14, Slania Dep. 148:5-9; Ex.
1, Ambriz-Reyes Dep. 107:12-15; Ex. 16, Von Hess Dep. 22:19-23; Ex. 6, Gadsen Dep. 49:2125.) Despite the presence of this unique attribute, Henselen, the account manager of the WLCC
bond issuances at USB, indicated on the “Establish Deal” form that the sources for all assets and
cash transfers were coming from known sources that fit the standard profile for this product.
(Pillar Decl. Ex. O.)
It was also known at the outset of the deal that the Annuity Provider was an entity in the
British Virgin Islands. On July 11, 2014, Henselen received an email from one of the lawyers in
the 2014 WLCC bond deal which attached a “distribution list” identifying all of the parties, their
representatives, and associated contact information.
(Murzyn Decl., Ex. 26.)
Therein, it
identified the Annuity Provider as Wealth Assurance Private Client with a home office in
Tortola, British Virgin Islands. (Murzyn Decl., Ex. 26.) On August 7, 2014, Henselen received
an email from Anderson with an updated draft of the Annuity Contract and in the text of the
email Anderson wrote: “Updated annuity contract and BVI attorney signed-off annuity
documents.” (Murzyn Decl., Ex. 27.) The front page of the draft annuity attached to the email
showed that the nominal purchase price of the annuity contract was $25,250,000 and capitalized
on the front page of the term sheet was the name of the annuity provider, Wealth Assurance
Private Client in Tortola, British Virgin Islands. (Murzyn Decl. Ex. 27.)
Henselen testified that it was his practice to only review documents to which USB was a
signor which, in this case, was the indenture agreement. (Murzyn Decl. Ex. 8, Henselen Dep.
22
63:22-64:4.) This was so even though USB’s expert testified that it is important for an indenture
trustee to ensure it is the payee on the guaranteed investment contract like the annuity contract in
this case which would require review of the Annuity Contract. In addition, Henselen also
testified that it was his responsibility to determine whether or not a deal involved a foreign wire.
(Murzyn Decl. Ex. 6, Gadsen Dep. 63:23-64:6; Ex. 8, Henselen Dep. 90:16-24.) Henselen
testified that USB must be aware whether a transaction involves a foreign wire because there are
certain reporting requirements for foreign wires. (Murzyn Decl. Ex. 8, Henselen Dep. 90:16-24.)
Additionally, according to USB policy, the presence of a foreign wire escalates the risks related
to a particular deal. (Murzyn Decl. Ex. 8, Henselen Dep. 91:22-25.) Henselen’s supervisor
testified that under USB policies, account managers are supposed to be aware if USB would be
making an overseas wire for the payment of an investment and that he would have expected an
account manager to review a guaranteed investment contract if it was an overseas contract.
(Murzyn Decl. Ex. 16, Von Hess Dep. 53:11-55:14.) In the “Establish Deal” form for the
August 2014 WLCC bond offering, Henselen indicated that “[a]ll aspects of the transaction
governed by U.S. Law” despite the choice of law clause in the Annuity Contract providing that
the contract would be governed under the laws of the British Virgin Islands. (Murzyn Decl. Ex.
27.) Henselsen would not have been aware of the foreign law component as he had not reviewed
the Annuity Contract.
USB’s expert testified that an indenture trustee should understand unique characteristics
of this bond transaction:
Counsel: Based on your view of industry customs and practices would a
reasonable trustee looking at whether to accept this deal ask the question of why
an entity of an impoverished tribe would be dealing with a small broker-dealer,
New York broker-dealer placement agent to a project that is going to be funded
mostly from an overseas annuity?
Expert: I guess I would say that the trustee would understand the characteristics
of the transaction which include those in this case and it would be part of the
trustee’s thinking and account acceptance process.
(Murzyn Decl. Ex. 6, Gadsen Dep. 159:20-160:18.) Approximately $22-$23 million dollars of
the $25 million August 2014 bond proceeds were to be wired to an overseas entity in the British
Virgin Islands which Vinella identified as a jurisdiction at risk for financial fraud. (Druck Decl.
Ex. A, Vinella Rpt. 81(e).) Although USB was not always the custodian of a guaranteed
23
investment in a bond offering, neither Henselen nor USB’s counsel had ever worked on a bond
issuance where assets would be custodied outside the United States. (Murzyn Decl. Ex. 8,
Henselen Dep. 26:17-24; Ex. 14, Slania Dep. 34:17-35:16.) An employee of USB’s corporate
trust risk management department testified that whether or not bond funds will remain onshore is
a factor to consider in terms of account acceptance. (Murzyn Decl. Ex. 15, Strodthoff Dep.
79:19-80:8.)
Despite the language in the Annuity Contract providing that the purchase payment must
be received at the “Home Office” (defined in the Annuity Contract as the British Virgin Islands),
on August 26, 2014, acting upon directions in an email from Galanis and forwarded by Anderson
(an email in which neither WLCC nor its counsel was copied), USB wired $22,092,089 to an
entity named Wealth Assurance Private Client located in Santa Monica, California, with a
JPMorgan Chase N.A. bank account in Beverly Hills, California. Neither WLCC nor its counsel
was copied on the wire instructions email despite the fact that Section 12.13 of Indenture
Agreement limited USB’s authority to act on email instructions relating to the Indenture to those
provided by authorized representatives of WLCC. No payments were ever sent to Wealth
Assurance Private Client in the British Virgin Islands, the entity to which payment was supposed
to made pursuant to the Annuity Contracts in all of the WLCC bond issuances.
It is worth noting that in addition to the “red flags” present on the face of this deal, USB
was unfamiliar with many of the parties to this transaction. Representatives from USB were not
familiar with, nor had ever worked with Burnham, WLCC, nor Wealth Assurance Private Client
prior to this deal. (Murzyn Decl. Ex. 14, Slania Dep. 193:3-18; Ex. 8, Henselen Dep. 22-25,
32:5-10, 205:15-206:4; Ex. 16, Von Hess Dep. 47:8-15.).
A FINRA BrokerCheck Report
indicates that Burnham had been sanctioned for disclosure issues in the past and ultimately,
Wealth Assurance Private was not created until August 22, 2012, just three days prior to closing
of the August 2014 bond issuance. (Murzyn Decl. Ex. 113; Pentelovitch Decl., Ex. 1.)
As a provider of professional services, the Court concludes that at a minimum, USB
owed bondholders an independent duty to understand the structure of this complex transaction,
the nature of the development project, and to recognize the “red flags” present on the face of this
deal, and if present, to investigate them further. Whether there was negligence by USB and
whether that negligence proximately caused damages to Plaintiffs is for the jury to decide.
24
Questions of material fact exist on these issues and Plaintiffs’ negligence claim will be heard by
a jury.
2. Proximate Causation
i.
Superseding Cause
USB argues that it is entitled to summary judgment because the criminal acts of third
parties were the superseding cause of Plaintiffs’ losses. With regard to the August 2014 bonds,
Hirst pleaded guilty to securities fraud and investment advisor fraud, and conspiracy to commit
both, as a result of his signing the trade tickets for purchases by Birmingham Water, Washington
Suburban, and RHCT despite knowing that it was improper to do so.8 (SOMF 475-76.)
Morton pleaded guilty to conspiracy to commit securities fraud and investment advisor fraud for
failing to disclose material conflicts of interest to the client before purchasing the April 2015
WLCC bonds.
(SOMF 473.)9
In both the 2014 and 2015 bond issuances, Dunkerley
misappropriated the bulk of the proceeds from the sale of the bonds and pleaded guilty to such
crimes. (SOMF 469-70.)
“Proximate cause is defined as ‘a cause that produces a result in a natural and probable
sequence and without which the result would not have occurred. Such cause need not be the
only cause of a result. It may act in combination with other causes to produce a result.’”
Howard v. Bennett, 894 N.W.2d 391, 395 (S.D. 2017) (quoting Hamilton v. Sommers, 855
N.W.2d 855, 867 (S.D. 2014)). However, “[w]hen the natural and continuous sequence of causal
connection between the negligent conduct and the injury is interrupted by a new and independent
cause, which itself produces the injury, that intervening cause operates to relieve the original
wrongdoer of liability.” Id. (quoting Braun v. New Hope Twp, 646 N.W.2d 737, 740 (S.D. 2002)
(stating also that a superseding cause arises because an “intervening force prevents the original
actor’s antecedent negligence from becoming a legal cause in bringing about the harm to
another.”). “An intervening cause that cuts off liability is a superseding cause if it ‘so entirely
supersede[s] the operation of the defendant’s negligence that it alone, without his negligence
contributing thereto, produces the injury.’” Id. (quoting Braun, 646 N.W.2d at 740).
8
Hirst has since moved to vacate, set aside, or correct his sentence, but the court has not ruled on Hirst’s motion.
(SOMF 477.)
9
Morton has since moved to withdraw her guilty plea, but the court has not yet rule don Morton’s motion. (SOMF
474.)
25
When harm results from an intentional tortious or criminal act of a third party, “under the
rules set forth in 302B, 448, and 449 of the Restatement (Second), the defendant will be liable
only if the risk created by the defendant’s negligence included the hazard that the defendant’s
conduct would induce a third party to commit such an act.” Snell v. Norwalk Yellow Cab, Inc.,
212 A.3d 646, 670 (Conn. 2019).
A defendant’s liability in such cases depends on the
foreseeability of the third party’s criminal misconduct. Id.; see also Santaiti v. Town of Ramapo,
162 A.D.3d 921, 927 (N.Y. App. Ct. 2018) (“[A]lthough ‘an intervening intentional or criminal
act will generally sever the liability of the original tort-feasor,’ this principle ‘has no application
when the intentional or criminal intervention of a third party or parties is reasonably
foreseeable.’”); Small v. McKennan Hosp., 437 N.W.2d 194, 202 (S.D. 1989) (stating that
Restatement (Second) of Torts § 448 indicates that a criminal act can be a superseding cause if it
was not foreseeable); Wallinga v. Johnson, 131 N.W.2d 216, 219 (Minn. 1964) (“A criminal
intervening force [ ] cannot be a legally effective superseding cause unless it possesses the
attribute of unforeseeability.”).
“[I]n any case where there might be a reasonable difference of opinion as to the
foreseeability of a particular risk [or] the reasonableness of the defendant’s conduct with respect
to it . . . the question is for the jury.” Howard v. Bennett, 894 N.W.2d 391, 395 (S.D. 2017). It a
question of law for the court only where the facts are not in dispute and reasonable minds could
not differ. Id.; see also Holmes v. Wegman Oil Co., 492 N.W.2d 107, 114 (S.D. 1992).
The Court concludes that it is for a jury to determine whether the criminal acts of third
parties in this case were foreseeable and within the scope of the risk created by any conduct by
USB determined by the jury to be negligent. See Snell, 212 A.3d at 758. The August 2014 bond
issuance involved an undefined development project that was, contrary to custom and practice in
the industry, primarily funded by an annuity, the provider of which was located in a country
which Plaintiffs’ expert identified as a jurisdiction at risk of financial fraud. The deal involved
unfamiliar deal team members, many of whom changed throughout the transaction. The Court
finds that under the facts of this case, reasonable minds could differ on the foreseeable risk
created by USB’ alleged negligence.
26
ii.
In Pari Delicto
USB moves for summary judgment under the doctrine of in pari delicto, on claims by the
Master Fund and Feeder Fund relating to the April 2015 WLCC Bond Issuance.
In South Dakota, courts recognize the doctrine of in pari delicto which provides that:
… where one is engaged with another in the simultaneous [wrongful conduct] . . .
he cannot recover damages for injuries inflicted upon him through the negligence
of his joint wrongdoer unless the violation . . . was not a contributing cause of the
injuries . . .
Quick v. Samp, 697 N.W.2d 741, 747 (S.D. 2005) (citation omitted).
USB argues that because Morton, as CEO of Atlantic, had control over the Feeder Fund
and Master Fund when it came to the WLCC Bond purchase, and used both entities to
fraudulently divert the OSERS investment to purchase the tribal bonds, the Feeder Fund and
Master Fund are precluded from recovering damages under the doctrine of in pari delicto.
(Reply Br. at 30-31.) In order for USB to avail itself of the defense of in pari delicto, it must
prove that Morton’s wrongful conduct can be imputed to plaintiffs Feeder Fund and Master
Fund. In re E.S. Bankest, L.C., Bankruptcy No. 04-18602, 2010 WL 2926203, at *2 (S.D. Fla.
Jul. 23, 2010) (“[I]f wrongful conduct cannot be “imputed” to the corporation, there is no in pari
delicto either.”) (citing O’Halloran v. Price WaterhouseCoopers LLP, 969 So.2d 1039, 1044
(Fla. Ct. App. 2007)).
USB cites to Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833 (8th Cir. 2005) in
support of its affirmative defense. In Grassmueck, a bankruptcy trustee for various investment
partnerships sued the American Shorthorn Association (“ASA”) for breaching its duties of care
to investment partnerships by disregarding protocols for certifying and registering shorthorn
cattle as purebred. Id. at 836. The investment partnerships purchased cattle from Hoyt Entities
by assuming notes owed to Hoyt Entities equal to the price of the cattle. Id. Investors became
partners in the investment partnerships by assuming portions of those notes. Id. at 835. In the
lawsuit, the trustee plaintiff alleged that “ASA aided ‘the Hoyts by failing to exercise reasonable
care in the performance of their registration and certification obligations to the detriment of the .
. . [p]artnerships.” Id. at 846.
27
ASA argued that Hoyt’s fraud was chargeable to the investment partnerships and thus,
that the doctrine of in pari delicto barred their negligence action. Id. at 837. The district court
acknowledged that under the Uniform Partnership Act, the normal rule of imputing knowledge
from one partner to the partnership does not apply when the partner in question is acting
fraudulently. Id. The court stated that “[t]his is known as the ‘adverse interest exception’ to the
imputation rules. The refusal to impute knowledge to the principal of an agent who is acting
adversely to the principal is an acknowledgement that the usual legal fiction of complete agentprincipal communication is unjustified where the agent is acting adversely.” Id.
However, the district court concluded that the adverse interest exception was qualified in
the circumstances of the case by the “sole actor doctrine” and granted summary judgment in
favor of ASA. Id. at 838. “The sole actor doctrine provides that ‘where the principal and agent
are one and the same,’ the agent’s knowledge is imputed to the principal despite the fact that the
agent is acting adversely to the principal.’” Id. (citation omitted); see also Quick v. Samp, 697
N.W.2d at 744 n.4 (citing Grassmuek, 402 F.3d at 838). “Where the principal and agent are alter
egos, there is no reason to apply an adverse interest exception to the normal rules imputing the
agent’s knowledge to the principal, because ‘the party that should have been informed [of the
fraudulent conduct] was the agent itself albeit in its capacity as principal.’”
Id. (citation
omitted). The district court found that the investment partnerships were mere alter egos of Hoyt
during the period in which he defrauded investors, and held that Hoyt’s knowledge was thus
properly imputed to the partnerships. Id.
On appeal, the court affirmed the district court’s application of the “sole actor doctrine”
under the facts of the case. The court stated that the investment partnerships lacked independent
identities and that there was no way to identify any of the individual investment partnerships
because they commingled all assets and liabilities. Id. at 840-41. Additionally, Hoyt was made
general partner of all of the investment partnerships and in that capacity, received a power of
attorney from each investor, thus enabling him to act on the investor’s behalf with respect to the
investment partnerships. Id. at 841. The Eighth Circuit Court of Appeals concluded that Hoyt
dominated both the investment partnerships and Hoyt Entities, that his fraud was thus chargeable
to the investment partnerships, and affirmed summary judgment for ASA under the doctrine of
in pari delicto. Id.
28
In the present case, Plaintiffs argue that the adverse interest exception applies because
Morton was acting entirely in her own interests and adversely to the interests of the Feeder Fund
and Master Fund. (Opp. Br. at 54.) USB contends that Plaintiffs have not shown that the
interests of Morton and Atlantic varied from those the Master Fund and Feeder Fund to meet the
adverse interest exception. Additionally, USB argues that because Atlantic and Morton, as CEO,
so controlled the Feeder Fund and Master Fund, any malfeasance by Atlantic is directly
attributable to the Feeder Fund and Master Fund. (Reply Br. at 30-31.)
The relationship between Atlantic, the Feeder Fund, and the Master Fund is somewhat
complex. The Court understands from the record that the Master Fund is a Cayman Islands
exempted limited partnership. (Statement of Material Facts “SOMF” 13.) Its general partner is
Atlantic GYOF GP, LLC, a Delaware limited liability company that has been replaced by GYOF
GP, LLC. (SOMF 13.) The Feeder Fund is a Delaware limited liability partnership. (SOMF
12.) The parties dispute the identity of the general partner for the Feeder Fund. USB contends
that Atlantic GYOF GP, LLC is the Feeder Fund’s general partner whereas Plaintiffs contend
that Atlantic GYOF, LLC is the general partner. (SOMF and Response 12; Murzyn Decl. Ex.
12, Kirschner Dep. at 63:13-64:1; Pentelovitch Decl. Ex. 27.) The replacement general partner
of the Feeder Fund is Goldin Associates, LLC. (SOMF 12.) The sole limited partner of the
Feeder Fund is OSERS which invested $100 million in the Feeder Fund in 2013 and $25 million
in 2015. (Pentelovitch Decl., Ex. 6, Erickson Dep. 26:22-27:17; 81:21-82:3; Pentelovitch Decl.,
Ex. 38.) The Feeder Fund is the sole owner of the Master Fund and invested substantially all of
its assets in the Master Fund. (SOMF 14, 15.) According to the limited partnership agreements
of both the Master Fund and Feeder Fund, the general partners of each entity had the sole
authority to make investments on behalf of the partnership and could delegate any and all such
responsibilities to an Investment Manager, including, but not limited to, Atlantic Asset
Management where Morton served as CEO. (Pentelovitch Decl. Exs. 27-29.)
The Court concludes that a reasonable inference can be made that Atlantic Asset
Management was acting adversely to the Feeder Fund and Master Fund. OSERS is the sole
limited partner of the Feeder Fund, having invested approximately $125 million dollars in the
Fund. The Feeder Fund transferred substantially all of its assets to the Master Fund. In
purchasing the April 2015 WLCC Bonds, Atlantic/Morton allegedly engaged in fraudulent
29
conduct by failing to disclose multiple conflicts of interest and the fact that the purchases were
outside the investment advisory agreement with OSERS, the sole limited partner of the Feeder
Fund. The Master Fund’s April 2015 bond holding and the Feeder Funds’/OSERS beneficial
interest in such holding are now virtually worthless.
In addition, USB has not shown that the Feeder Fund and Master Fund are alter egos of
Atlantic Asset Management such that Morton’s knowledge of the fraud may be imputed to the
Feeder Fund and Master Fund.10 Unlike in Grassmueck, there is insufficient evidence in the
record for the court to conclude that the Feeder Fund, Master Fund and Atlantic are “one and the
same.” Grassmueck, 402 F.3d at 837. The fact that the general partners of the Feeder Fund and
Master Fund could delegate investment management authority to Atlantic Asset Management,
and perhaps did so, is insufficient for the Court to rule as a matter of law that the Feeder Fund
are alter egos of Atlantic Asset Management are thus in pari delicto.
A. Breach of Contract
“The elements of a breach of contract are (1) an enforceable promise; (2) a breach of the
promise; and (3) resulting damages.” Bowes Constr., Inc. v. S.D. Dept. of Transp., 793 N.W.2d
36, 43 (S.D. 2010).
Further, “[i]n every breach of contract case, there must be a causal
relationship between the alleged damages sustained and the breach.” Morris, Inc. v. State, ex rel.
State Dept. of Transp., 806 N.W.2d 894, 903 (S.D. 2011). This requires Plaintiffs to show that
the damages were “proximately caused [by]... or, which, in the ordinary course of things, would
be likely to result from” the breach. See S.D.C.L. § 21-2-1.11
10
Even though Morton invested the Master Fund’s assets in the April 2015 bond does not mean that it had authority
to invest those assets.
11
South Dakota law provides:
For the breach of an obligation arising from contract, the measure of damages, except where
otherwise expressly provided by this code, is the amount which will compensate the party aggrieved
for all the detriment proximately caused thereby, or which, in the ordinary course of things, would
be likely to result therefrom. No damages can be recovered for a breach of contract which are not
clearly ascertainable in both their nature and their origin.
S.D.C.L. § 21‐2‐1.
30
Although contract interpretation is a question of law, Ziegler Furniture & Funeral Home,
Inc. v. Cicmanec, 709 N.W.2d 350, 354 (S.D. 2006), “[w]hether a contract has been breached is
a pure question of fact for the trier of fact to resolve.” Weitzel v. Sioux Valley Heart Partners,
714 N.W.2d 884, 894 (S.D. 2006).
The goal of contract interpretation is to determine the parties' intent. Tri-City Ass., L.P.
v. Belmont, Inc., 845 N.W.2d 911, 915 (S.D. 2014). To determine intent, we look “to the
language that the parties used in the contract[.]” Detmers v. Costner, 814 N.W.2d 146, 151 (S.D.
2012)). We do not, however, interpret “particular words and phrases ... in isolation.” Casey
Ranch Ltd. P'ship v. Casey, 773 N.W.2d 816, 821 (S.D. 2009). Nor do we interpret language “in
a manner that renders a portion of [the contract] meaningless.” Estate of Fisher v. Fisher, 645
N.W.2d 841, 846 (S.D. 2002) (citation omitted). Instead, we interpret the contract to give “a
reasonable and effective meaning to all [its] terms[.]” Casey Ranch, 773 N.W.2d at 821.
1. Wire Instructions
Plaintiffs argue that Section 12.13 of the August 2014 Indenture prohibited USB from
releasing bond proceeds based on email instructions from Galanis, forwarded by Anderson,
because the emails were not signed by authorized representatives of WLCC. Section 12.13,
which is titled “Electronic Communications,” provides in relevant part:
The Trustee shall have the right to accept and act upon instructions or directions
pursuant to this Indenture sent by unsecured e-mail, facsimile transmission or
other similar unsecured methods, provided, however, that the instructions or
directions shall be signed by a person as may be designated and authorized to sign
for the Corporation, who shall provide to the Trustee an incumbency certificate
listing such designated persons . . . If the Corporation elects to give the Trustee email or facsimile instructions . . . and the Trustee in its discretion elects to act
upon such instructions, the Trustee’s understanding of such instructions shall be
deemed controlling. The Trustee shall not be liable for any losses, costs or
expenses arising directly or indirectly from the Trustee’s reliance upon and
compliance with such instructions notwithstanding such instructions conflict or
are inconsistent with a subsequent written instruction. The Corporation agrees to
assume all risks arising out of the use of such electronic methods . . . .
(SOMF 271.)
USB argues that 12.13 does not impose any duty or obligation on USB, but rather grants
USB a permissive right, which, if exercised by USB, serves as an affirmative defense to certain
31
claims. (Opening Br. at 45.) Because WLCC did not elect to give USB email instructions, USB
argues that this provision does not apply. USB argues that construing Section 12.13 as imposing
an affirmative duty on USB conflicts with Section 10.1 of the August 2014 Indenture which
provides that “[t]he permissive rights of [USB] shall not be construed as duties.”
In response, Plaintiffs construe Section 12.13 as giving USB the right to act upon
instructions pursuant to the Indenture sent by unsecured e-mail, but only if such instructions or
directions are from a person designated and authorized to sign for WLCC. The Court agrees.
Any other construction of Section 12.13 would render meaningless the limitation on USB’s right
to accept unsecured email directions pursuant to the Indenture and would have the effect of
allowing USB to accept electronic instructions from anyone, not just authorized WLCC signers.
(Opening Br. at 21 (citing Tri-City Assocs., L.P., 845 N.W.2d at 915 (stating that a contract must
be interpreted in a manner that does not render a portion of the contract meaningless)).
2. Section 10.9 – Good Faith
USB argues that because it acted on a good faith belief that the instructions it received
were genuine and passed or signed by the proper person, it may not be held liable under Section
10.9 of the Indenture Agreements. Section 10.9 of the Indenture Agreements provides that:
The Trustee shall be fully protected and shall incur no liability in acting or
proceeding in good faith upon any resolution, opinion, notice, telegram, request,
requisition, consent, waiver, certificate, statement, affidavit, voucher, bond, or
other paper or document which it shall in good faith believe to be genuine and to
have been passed or signed by the proper board or person or to have been
prepared and furnished pursuant to any of the provisions of this Indenture, and the
Trustee shall be under no duty to make any investigation or inquiry as to any
statements contained or matters referred to in any such instrument but may accept
and rely upon the same as conclusive evidence of the trust and accuracy of such
statements.
(SOMF 266.)
USB argues that it is entitled to summary judgment on Plaintiff’s breach of contract
claim because Plaintiffs have failed to show that USB did not have a “good faith” belief, which
it defines as “honesty in fact concerning conduct or a transaction,” that the email by Anderson
was genuine and that the email was passed or signed by the proper person. In support, USB cites
testimony from lawyers working on the transaction who believed that the terms of the 2014
32
Indenture did not require that the wire transfer email be provided by WLCC. (Opening Br. at
47.) USB contends that in the Closing Statement delivered to USB pursuant to Sections 2.11 and
2.12 of the August 2014 Indenture, WLCC authorized USB bank to purchase the Annuity
Investment and that Anderson’s email relates to this authorization. (Opening Br. at 47-48.)
Plaintiffs argue that pursuant to the South Dakota U.C.C., in addition to proving the
subjective element of “honesty in fact,” USB must prove the objective element of the observance
of “reasonable commercial standards and fair dealing.” (Opp. Br. at 27 (citing S.D.C.L. § 57A1-201(b) (20)).
The Court was unable to locate any caselaw that would support the application of the
U.C.C. to a breach of trust indenture claim as urged by Plaintiffs. If breach of trust indenture
claims were governed by the U.C.C., it would appear that such claims would also be subject to
the four-year statute of limitations governing contracts under the U.C.C. See U.C.C. § 2-725(1).
Instead, in cases involving an alleged breach of a trust indenture, courts have applied state law
breach of contract statutes of limitations. See Cruden v. Bank of N.Y., 957 F.2d 961, 967 (2d Cir.
1992) (applying New York’s 6-year breach of contract statute of limitations to breach of trust
indenture claim).
In addition, the Court was unable to locate any cases suggesting that “reasonable
commercial standard and fair dealing” applied to breach of trust indenture claims. A federal
district court in California stated that “[i]n the indenture trustee context, acting in good faith
means that the trustee does not have actual knowledge of contradicting information in the
particular certificate of opinion.” In re Med. Capital Secs. Litig., Civ. No. ML 10-2145 DOC,
2010 WL 11508332, *4 (C.D. Cal. 2010) (citing Robert I. Landau & John E. Krueger, Corporate
Trust Admin. & Mgmt. 67 (5th ed. 1998)); c.f. Caplin v. Marine Midland Grace Tr. Co. of N.Y.,
406 U.S. 416, 439 (1972) (“While the indenture trustee may rely on certificate or opinions
concerning the trust of statements and the correctness of opinions ‘in the absence of bad faith’
(15 U.S.C. § 77ooo(a)(2) [(“TIA”)], it is not exempt from liability ‘for its own negligent action,
its own negligent failure to act, or its own willful misconduct’ (15 U.S.C. § 77ooo(d)), save for
errors in judgment made in good faith.”).
The Indentures in this case are governed by South Dakota law. Under South Dakota law,
acting in good faith means “performing honestly, with proper motive, even if negligently. The
33
standard for determining good faith is a defendant’s honest belief in the suitability of the actions
taken.” B.W. v. Meade Cty., 534 N.W.2d 595, 598 (S.D. 1995) (internal citations omitted); see
also S.D.C.L. § 55-7-3; Domson, Inc. v. Kadrmas Lee & Jackson, Inc., 918 N.W.2d 396, 404
(S.D. 2018).
“Good faith is ordinarily a fact issue for the jury.” Cont’l Grain Co. v. Heritage Bank,
548 N.W.2d 507, 513 (S.D. 1996) (Konenkamp, J., concurring) (citing Kunkel v. United Security
Ins. Co., 168 N.W.2d 723, 730 (S.D. 1969)). In addition, the Court concludes that questions of
material fact exist as to whether USB had a good faith belief the Galanis/Anderson email was
“passed or signed by the proper board or person” or was otherwise “furnished pursuant to any of
the provisions of [the Indenture].” See Indenture, Section 10.9. While Section 12.13 of the
August 2014 Indenture provided that USB was entitled to rely on electronic instructions only
from authorized representatives of WLCC, Galanis and Anderson were not authorized
representatives of WLCC. In addition, Henselen testified that he never looked at the Indenture
to see if the wire instructions complied with the Indenture’s terms. (Murzyn Decl. Ex. 8,
132:17-131:13.) Jurors could thus reasonably infer from this that Henselen did not have a good
faith belief that the wire instructions email was “passed or signed by the proper board or person”
or was otherwise “furnished pursuant to any of the provisions of [the Indenture].” U.S. Nat’l
Bank of Oregon v. Boge, 311 Or. 550, 564-65 (Or. 1991) (“If a party fails to make an inquiry for
the purpose of remaining ignorant of facts . . . he may be found to have acted in bad faith.”).
For these reasons, the Court denies USB’s motion for summary judgment on this claim.
3. Section 1.2 - Payment to Annuity Provider and Valuation
a. Payment to Annuity Provider – August 2014 Bonds
The Indentures provided that USB was required to pay bond proceeds as set forth in the
Closing Statement12 and for the purchase of the Annuity Investment. Specifically, Section 2.12
of the Indentures provided:
12
The Closing Statement did not specify to whom USB was deliver bond proceeds for the purchase of the Annuity
Investment. Instead, it specified that the $24,844,089 in bond proceeds would be disbursed as follows: $22,094,089
annuity purchase payment; $2,250,000 for the Project Fund re: Junction 18 Development; and $500,000 for Payment
of Issuance Costs.
34
The proceeds of the [ ] Bonds shall be paid over to the Trustee and deposited by
the Trustee in the “Settlement Account,” which is hereby established. From the
Settlement Account the Trustee shall make the payments, disbursements and
deposits as set forth in the Closing Statement required by Section 2.11, including,
inter alia, the amount of $22,094,089 for the purchase of the Annuity Investment.
USB’s argues that the August 2014 Indenture did not prohibit USB from relying on the
directions in Anderson’s email requesting that USB wire $22,094,089 for the purchase of the
Annuity Investment because neither the Indenture nor the Closing Statement identified the
Annuity Provider or the address to which to send the purchase price of the Annuity Investments.
Section 2.11 of the Indenture clearly allows USB to make payments and disbursements as
provided in the Closing Statement, signed by authorized representatives of WLCC. Just because
the Closing Statement did not provide to whom or where USB was supposed to make payments
for the purchase of the Annuity Investment does not mean that USB was contractually free to
disburse more than $22 million in bond proceeds to any entity designated in Galanis/Anderson
email.13 The terms of the Indenture do not give USB this discretion. What the terms of the
Indenture do provide is that USB shall make a payment of $22,094,089 for the purchase of the
“Annuity Investment,” defined in Section 1.2 of the Indenture as:
[T]the contract, in the notional purchase amount of $22,094,089, entered into on
the date hereof between [WLCC] and the Annuity Provider, whereby the Annuity
Provider shall pay income to [WLCC] at stated intervals and amounts, as
provided therein.
The $22,094,089 Annuity Contract referenced in the Indenture designates as the Annuity
Provider Wealth Assurance Private Client, a British Virgin Islands corporation, with a home
office located in Tortola, British Virgin Islands. In lieu of alternate wire instructions in the
13
The Court also notes USB’s argument that it had no contractual obligation to determine whether or not
Wealth Assurance Private Client satisfied the definition of an “Annuity Provider”—a company that provides Annuity
Investments as part of its regular trade or business—provided in the Indenture. Reply Br. at 19‐20. If USB had no
contractual limitation on the annuity provider to which it could wire the bond proceeds, and no implied duty to
investigate whether the entity designated as the recipient of the funds was an Annuity Provider, USB would be
contractually free to wire the money to any entity designated in the Anderson/Galanis email.
USB acknowledges in its brief that “WLCC chose [Wealth Assurance Private Client] as the Annuity Provider
before the Closing Statement was signed and delivered to [USB].” Reply Br. at 19. USB is correct. As shown in the
distribution sheet emailed to Henselen (account manager of the WLCC bonds at USB) at the early stages of the deal,
and as shown in the Annuity Contract that had been emailed to Henselen prior to closing, WLCC chose Wealth
Assurance Private Client, a British Virgin Islands company as the Annuity Provider. Yet, without WLCC’s consent, USB
proceeded to wire $22,094,089 to a completely different entity‐‐Wealth Assurance Private Client in Santa Monica,
California.
35
Closing Statement, the Court concludes that USB was contractually obligated to wire the bond
proceeds to the Annuity Provider designated in the Annuity Contract that was referenced in
Section 1.2 of Indenture.
The fact that USB was not a signor to the Annuity Contract does not mean that the Court
may not interpret the Annuity Contract and the Indenture together. In South Dakota, “[a]ll
writings that are executed together as part of a single transaction are to be interpreted together.”
MetaBank v. Conduent Business Servs., LLC, Civ. No. 19-4138, 2020 WL 2065279, at *2 (J.
Schreier) (Apr. 29, 2020) (quoting Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D. 1990)). “[I]t is
not critical whether the documents were executed at exactly the same time or whether the parties
to each agreement were identical.” Id. (quoting Baker, 456 N.W.2d at 306). “Where several
writings are connected by internal references to each other, even if they . . . were not among all
of the same parties, they will constitute a single contract as long as they involve the same subject
matter and prove to be parts of an entire transaction.” Id. (quoting Baker, 456 N.W.2d at 306).
South Dakota courts consider numerous factors in determining whether two contracts
must be interpreted together, including whether one contract was an inducement for a party to
enter the other. Id. at *3 (citing Kramer v. William F. Murphy Self-Declaration of Trusts, 816
N.W.2d 813, 815 (S.D. 2012)). “[H]inging one contract upon the execution of another contract .
. . heightens the need for joint interpretation.” Dakota Gasification Co. v. Nat’l Gas Pipeline Co.
of Am., 964 F.2d 732, 735 (8th Cir. 1992). Courts also consider whether contracts were executed
on the same day and whether one contract references another. MetaBank, 2020 WL 2065279 at
*3 (citing Kramer, 816 N.W.2d at 815-16).
Such factors evince whether two contracts
“‘represent successive steps’” in the same transaction and thus, whether the parties intended
them to be read as one. Id. (citing Kramer, 816 N.W.2d at 816 (quoting Dakota Gasification
Co., 964 F.2d at 734-35).
Here, the August 2014 Indenture and the August 2014 Annuity Contract were executed
within one day of each other on August 25 and August 26, respectively. Although USB was not
a signor to the Annuity Contract, it received copies of the Annuity Contract to keep as Trustee
and because it was the designated therein as the Payee of the Annuity Investment. USB received
and retained copies of the Indenture and Closing Statement as well. The August 2014 Indenture
specifically references not only the Closing Statement, but also the Annuity Contract. Section
36
2.12 provides that USB shall pay bond proceeds for the purchase of the Annuity Investment,
defined as “the contract, in the notional purchase amount of $22,094,089, entered into on the
date hereof between [WLCC] and [the Annuity Provider]. . . .” Although the Annuity Contract
does not expressly state that it was entered into in reliance upon the Indenture, the Annuity
Contract does reference and define the Trust Indenture as “that certain Trust Indenture executed
and delivered prior to the execution and delivery of [the Annuity Contract] by and between
[WLCC] and [USB].” Similar to the MetaBank case, the Court concludes that the Annuity
Contract “has no meaning outside the context of the” Indenture Agreement and the parties would
not have entered into the Annuity Contract absent the Indenture Agreement. MetaBank, 2020
WL 2065279 at *3. “This shows that the two contracts14 ‘represent successive steps’ in the same
transaction and thus, that the parties intended them to be read as one.” Id. (citing Kramer, 816
N.W.2d at 816 (quoting Daktoa Gasification Co., 964 F.2d at 734-35)).
In doing so, the Court concludes that absent directions in the Closing Statement as to
whom and where USB was to make payment for the purchase of the Annuity Investment, USB
was contractually obligated to make payment to Wealth Assurance Private Client, a British
Virgin Islands corporation.
For this reason, USB’s motion for summary judgment as to this claim is denied.
b. Valuation – August 2014 and April 2015 Bonds
Plaintiffs contend that USB was required under Section 1.2 of the August 2014 and April
2015 Indentures to value the Annuity Investment on a monthly basis. The Court agrees.
Section 2.12 of the Indenture provides that the bond proceeds are to be transferred by
USB to the Settlement Account out of which, per Section 2.12’s terms, USB was to make
payment for the purchase of the “Annuity Investment.”
Under Section 1.2, an “Annuity
Investment” is defined as an “Investment Security” whose value “shall be determined as of the
end of each month” as “established by agreement between [WLCC] and [USB.]”
USB’s Motion for Summary Judgment is thus denied as to this claim.
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The parties do not dispute that the Closing Statement, which is also referenced in the Indenture, is be
interpreted together with the Indenture.
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1. Unauthorized Requisition Payments
Plaintiffs argue that USB breached the Indentures by paying operating expenses of the
Project Fund without having requisitions signed by the President or Vice President of WLCC.
Opp. Br. 14. USB had paid several requisition requests signed by Raycen Raines, who was not
the President or Vice President of WLCC and was not otherwise an authorized signor for
WLCC. (Murzyn Decl. Ex. 54.) Section 5.7(b) of the Indentures provides that “payments shall
be made from the Project Fund by the Trustee for Costs” of the Tribe’s development project
“upon the order for [WLCC], and receipt of a requisition [ ] signed by the President or the VicePresident of the Corporation and by its Secretary, and approved by the Developer. . . .” Section
8.9 of the Indentures provides that “[WLCC] shall not make any payment or requisition for
Operating Expenses in excess of the amount of the annual budget then in effect.” Plaintiffs
argue that USB breached Section 8.9 of the Indentures because it made payment for Project
Operating Expenses without having an annual budget. Opp. Br. at 38.
USB contends that the damages flowing from USB’s conduct are speculative.
In
response, Plaintiffs argue that additional money would have been available for Plaintiffs’
recovery absent USB’s conduct since Section 5.7(a) of the Indentures provides that in the event
of default, “amounts on deposit in the Project Fund shall not be disbursed, but shall instead by
applied to the payment of debt service or redemption price of the [ ] Bonds to the extent other
funds are not available to make such payments.” The Court will allow Plaintiffs to present
evidence in support of this claim. USB’s motion for summary judgment is denied as to this
claim.
I.
USB’s Motion to Sever
Pending before the Court is USB’s Motion to Sever. Doc. 112. USB’s Motion to Sever
is denied for the reasons set forth by the Court in its April 10, 2020, telephonic conference. Doc.
148. The Court finds that the 2014 Claims and 2015 Claims arise from the same set of facts, are
substantially similar, and that witnesses and evidence will largely be duplicative between the two
sets of claims. Any juror confusion may be cured by proper jury instructions. Most importantly,
the Court does not find any prejudice, let alone unfair prejudice, to USB will result by trying the
claims in a single trial.
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Accordingly, it is hereby ORDERED that:
1) USB’s Motion for Summary Judgment, Doc. 98, is DENIED; and
2) USB’s Motion to Exclude Expert Testimony of Peter Vinella, Doc. 109, is
GRANTED IN PART and DENIED IN PART as follows:
a. Vinella will not be permitted to testify to actions USB would have taken, but
may testify to what actions an indenture trustee should take; and
b. Vinella’s opinions in his Report and in his Rebuttal Report cover
approximately 170 pages. The Court is not going to go through and rule on
each opinion as some of that would be advisory opinions as some of the
opinions might not even be offered at trial. Instead, the Court in its
discussions on pages 14 through 18 of this Memorandum Opinion sets forth
some of the guidelines the Court will use when ruling on objections at trial;
and
3) USB’s Motion to Sever, Doc. 112, is DENIED.
Dated this 10th day of June, 2020.
BY THE COURT:
________________________________
Lawrence L. Piersol
United States District Judge
ATTEST:
MATTHEW W. THELEN, CLERK
______________________________
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