The Water Works Board of the City of Birmingham et al v. U.S. Bank National Association
Filing
32
MEMORANDUM OPINION AND ORDER granting in part and denying in part 25 Motion to Dismiss for Failure to State a Claim. Signed by U.S. District Judge Lawrence L. Piersol on 7/17/18. (SLW)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
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THE WATER WORKS BOARD OF THE
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CITY OF BIRMINGHAM; WASHINGTON
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SUBURBAN SANITARY COMMISSION
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EMPLOYEES'RETIREMENT PLAN;
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ATLANTIC GLOBAL YIELD OPPORTUNITY
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MASTER FUND,L.P; AND ATLANTIC
GLOBAL YIELD OPPORTUNITY FUND,L.P,
Case No: 4:17-cv-04113-LLP
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AND ORDER ON DEFENDANT'S
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Plaintiffs,
MEMORANDUM OPINION
MOTION TO DISMISS
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vs.
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U.S. BANK NATIONAL ASSOCIATION,
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Defendant.
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Pending before the Court is Defendant's Motion to Dismiss under Fed. R. Civ. P. 12(b)(6)
for failure to state a claim upon which relief can be granted. Doc. 25. The Court has considered
the relevant pleadings and for the reasons set forth below. Defendant's motion is granted in part
and denied in part.
BACKGROUND
This case arises out of the purchase by Plaintiffs of approximately $25 million in bonds
issued by Wakpamni Lake Community Corporation (Wakpamni Corp.), a South Dakota Native
American tribal organization and an affiliate of the Oglala Sioux Tribe of the Pine Ridge
Reservation, South Dakota. Those bonds were part of a scheme involving a series ofsham Native
American tribal bonds sold to unsuspecting investors, with the profits redirected to a group of
criminal conspirators, defined by the Complaint as the "Criminal Defendants," including Jason
Galanis—the scheme's main architect who has already pleaded guilty to criminal charges in the
Southern District of New York—and his associate Hugh Dunkerley.
Beginning in March 2014,the criminal scheme had several components. First, the Criminal
Defendants convinced the Wakpamni Corp. to issue the first series of Tribal Bonds with the
promise that the proceeds would be used to fund community development projects. The trust
indenture for the August 2014 Offering provided that the net proceeds from the purchase of the
bonds would be invested in a variable annuity which would fund interest and principal payments
on the bonds. Wakpamni Corp could then draw certain amounts from the annuity to finance
development projects for the tribe.
Next, on the eve of the first bond offering, an entity controlled by one or more of the
Criminal Defendants purchased Hughes Capital Management LLC (Hughes), an SEC Registered
Investment Advisor. Hughes had been the investment advisor ofPlaintiffs Birmingham Water and
Washington Suburban for many years and had discretionary authority over these Plaintiffs'
accounts pursuant to investment agreements. Then, on or about August 25,2014, Wakpamni Corp.
issued $24,844,089 worth of Special Limited Revenue Bonds (Taxable), Series of 2014, and
delivered them to U.S. Bank as Trustee under an Indenture Agreement of the same date (2014
Indenture). On August 26, 2014, the Birmingham Water and Washington Suburban accounts
controlled by Hughes purchased $8,462,720 worth of tribal bonds in the offering.
An early draft of the 2014 Indenture was circulated to U.S. Bank and other offering
participants and provided that, upon final execution of the indenture, Wakpamni Corp. was to
execute and deliver to U.S. Bank a number of additional closing documents, including "[a] letter
of appointment appointing Wealth Assurance AG as the investment manager with respect to the
Annuity Investment." The Offering Distribution List, which identified the parties involved in the
August 2014 Offering, and the Closing Agenda similarly listed "Wealth Assurance AG" as the
"Annuity Provider." However,the final draft ofthe indenture omitted the requirement that a letter
of appointment of Wealth Assurance AG be presented at closing. Instead, the final 2014 Indenture
provided that the letter of appointment was to appoint Private Equity Management, Limited, as the
investment manager. Further, at closing, Wakpamni Corp. was to execute and deliver to the
Indenture Trustee:
A Closing Statement signed by the President or Vice-President of the [Wakpamni
Corp.] setting forth (i)the amount ofthe proceeds to be received by the[Wakpamni
Corp.] from the sale of the 2014 bonds for funding the purchase of the Armuity
Investment. ..;(ii) the amounts to be paid or reserved for the costs and expenses
ofthe financing; and (iii) the amounts to be deposited in the funds established under
this Indenture.
At closing, U.S. Bank received a copy of a 25-year term armuity contract in the amount of
$25,250,000 (Annuity Contract) which was issued by Wealth Assurance Private Client
Corporation (Wealth Assurance BVI). The Annuity Contract identified Wealth Assurance BVI as
a British Virgin Islands entity authorized to do business only-in the British Virgin Islands. The
Annuity Contract also required that the annuity purchase payment be wire transferred to "a bank
without any offices and/or branches in the United States." Dunkerly was the signatory for Wealth
Assurance BVI on the Annuity Contract, though he was also listed as a primary representative of
Bumham,the Placement Agent. He was also the signatory on the Placement Agency Agreement.
This rendered Dunkerly the principal of both the Placement Agent and the Aimuity Contract
Provider, two parties to the same deal. The Closing Statement was also signed by Wakpamni
Corp.'s President, Geneva Lone Hill. Also signed by Wakpamni Corps.'s President is alerter dated
August 21, 2014 and addressed to U.S. Bank's Vice President "appoint[ing] Private Equity
Management, Limited, as investment manager in connection with the purchase of the annuity
investment from Wealth Assurance Private Client Corp. and direct[ing] them to take all actions
necessary." Pursuant to the Annuity Contract, the bond proceeds were to be deposited into a
separate segregated account and managed exclusively by Private Equity Management, LLC as
investment manager, with U.S. Bank as the intended custodian of the investment portfolio. The
Annuity Contract and the Investment Management Agreement, a copy of which U.S. Bank appears
to have received with the August 21,2014 letter, were also inconsistent as to who had authority to
direct investments. The Annuity Contract granted Wakpamni Corp. no authority over the
investments while the Investment Management Agreement provided that Wakpamni Corp. would
provide investment guidelines to the manager, had the right to modify them, and could instruct the
manager to "buy, sell or retain any investment." Ultimately, the net proceeds of the bond were
never invested.
The 2014 Indenture also required that the value ofthe Investment Securities be determined
at the end of each month according to directions established by agreement between Wakpamni
Corp. and U.S. Bank. The term "Investment Securities" is defined to include the Annuity Contract
itself. No such agreement was ever put in place and no valuation was conducted.
On August 26, 2014, U.S. Bank received instructions for transferring proceeds ofthe bond
issuance to the annuity provider. These instructions were forwarded from Galanis to U.S. Bank by
counsel for Bumham,Dilworth Paxson LLP (Dilworth). Galanis was listed on the Distribution List
as a primary representative of Bumham, the Placement Agent. Wakpamni Corp. was not copied
on the email nor did Wakpamni Corp. send U.S. Bank any directions regarding the disbursement
ofthe proceeds. The instractions directed U.S. Bank to transfer the annuity purchase amount to an
entity named "Wealth Assurance Private Client Corporation," located in Santa Monica, California,
with a JPMorgan Chase N.A. bank account in Beverly Hills, California (Wealth Assurance US).
Wealth Assurance US is incorporated in Florida, not the British Virgin Islands,though the payment
instructions did not provide this information.
In October 2014, the Criminal Defendants used $15 million of the proceeds of the August
2014 Offering, which they had stolen, and used them to purchase $15 million worth of newly
issued Tribal Bonds (October 2014 Offering). U.S. Bank served as the indenture trustee of the
October 2014 Offering as well. Then, in early April 2015, shortly before the April 2014 Offering,
the parent company of Hughes, an entity controlled by the Criminal Defendants, acquired Atlantic
Asset Management LLC(AAM)and caused it to merge with Hughes. Pursuant to an investment
agreement, AAM had full discretion over Plaintiffs Atlantic Global Yield Opportunity Fund,L.P.'s
(Feeder Fund) and Atlantic Global Yield Opportunity Master Fund, L.P.'s (Master Fund, together
with Feeder Fund "GYOF")investments.' AAM caused GYOF to invest $16.2 million in Tribal
Bonds as part ofthe April 2015 Offering. GYOF was the sole investor in the April 2015 Offering.
Payment instructions from the April 2015 Offering were included within the closing
statement itself and signed by both Wakpamni Corp. and Bumham. U.S. Bank was again directed
to send the proceeds to Wealth Assurance US, but this time to a different bank account that was
not in Santa Monica, California. No payments were ever sent to Wealth Assurance BVI,the entity
to which payment was supposed to be made pursuant to the Annuity Contract. The Annuity
Contract associated with the April 2015 Offering also omitted the August 2014 Aimuity Contract's
requirement that the money be wire transferred to a hank outside of the United States. However,
the April 2015 Annuity Contract still contained the warning that the issuer was not authorized to
do business outside of the British Virgin Islands and that the purchase payment must be received
at the "Home Office" (defined as the British Virgin Islands). The Investment Management
Agreement for the April 2015 Offering also listed U.S. Bank as the custodian for the annuity
investments. Again, because the net bond proceeds were stolen, no investments were made.
Finally, as with the 2014 Indenture, the 2015 Indenture required the Investment Securities to be
valued monthly according to a valuation method set forth by agreement between the Wakpamni
'AAM had been the investment advisor of the Omaha School Employees' Retirement System (OSERS), the sole
limited partner ofFeeder Fund. Feeder Fund invested all or substantially all ofits assets m Master Fund. Thus,OSERS
is the ultimate beneficial owner of Master Fund.
Corp. and U.S. Bank. Again, no such agreement was put in place and no valuations were
condueted.
To avoid detection of their fraud, in fall 2015, the Criminal Defendants funded the first
interest payments due on the August and Oetober 2014 bonds—approximately $2.72 million. U.S.
Bank distributed.those funds to the investors. In 2016, however, the Criminal Defendants stopped
funding interest payments, their fraud was uncovered, and they were charged with federal crimes.
STANDARD OF REVIEW
A party may move to dismiss a eomplaint under Rule 12(b)(6)for "fail[ing] to state a claim
upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The purpose of a motion to dismiss is
to test "the sufficiency of a complaint." M.M. Silta, Inc. v. Cleveland Cliffs, Inc., 616 F.3d 872,
876 (8th Cir. 2010). When ruling on a motion to dismiss, a court "must liberally construe a
complaint in favor of the plaintiff," Huggins v. FedEx Ground Package Sys., Inc., 592 F.3d 853,
862 (8th Cir. 2010), and accept as true all of the well-pleaded allegations contained in the
complaint. M.M. Silta, 616 F.3d at 876."To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face."
Ashcroft V. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations omitted). "A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged." Id. "[A] well-pleaded complaint
may proceed even if it strikes a savvyjudge that actual proofofthose facts is improbable, and that
arecovery is very remote and unlikely." Re//^t/anh'c Corp. v. Twombly,550 U.S. 544,556(2007).
ANALYSIS
Plaintiffs' Complaint contains allegations of breach of contract, breach of the implied
covenant of good faith and fair dealing, and negligence. Plaintiffs allege Defendant hreaehed its
obligations under the indenture agreement by failing to disburse the proceeds to the proper person,
failing to require proper written instructions from the Wakpamni Corp., failing to investigate
material deficiencies and inconsistencies in the documents, failing to value or cause to be valued
the Annuity Investment, and failing to notify the Wakpamni Corp. of breaches of the indenture
agreement and potential fraud. Plaintiffs also assert that Defendant hreaehed the implied covenant
of good faith and fair dealing because good faith required more than "blindly following" the
instructions of a "stranger" and required Defendant to question the reeurrence of discrepancies
between documents. Finally, Plaintiffs allege Defendant was negligent in sending the proeeeds to
a sham entity; failing to ensure the instructions were genuine, signed by the right party, and
reasonable and appropriate under the circumstances; failing to conduct an investigation; failing to
value the Annuity investment, and failing to notify the Wakpamni Corporation and the Plaintiffs
of breaches ofthe indenture agreement and the possibility offraud.
Defendant moves to dismiss Plaintiffs' Complaint for failure to state a claim upon which
reliefcan be granted for a number ofreasons. First, Defendant argues that the indenture agreements
expressly preclude Plaintiffs from seeking to impose liability on Defendant for failure to
investigate, detect, and prevent the fraud. Next, Defendant states that it did not breach any
contractual or implied duties, nor did it cause Plaintiffs' loss. Finally, Defendant asserts that
Plaintiffs' negligence claim fails because Defendant owed Plaintiffs no independent duties outside
the indenture contracts.
BREACH OF CONTRACT
The Indenture Agreements designate the laws ofthe State ofSouth Dakota as the governing
law in the interpretation ofthe contract. The South Dakota Supreme Court has set forth its general
principles of contract interpretation as follows:
In interpreting a contract, we seek to ascertain and give effect to the intention ofthe
parties; at the same time, to find the intention ofthe parties we rely on the contract
language they actually used. Malcolm v. Malcolm, 365 N.W.2d 863, 865 (S.D.
1985). ... It is a fundamental rule of contract interpretation that the entire contract
and all its provisions must be given meaning if that can be accomplished
consistently and reasonably. [Dail v. Vodicka, 89 S.D. 600, 603, 237 N.W.2d 7, 9
(1975)]. However, when provisions conflict and full weight cannot be given to
each, "the more specific clauses are deemed to reflect the parties' intentions^—a
specific provision controls a general one." State v. Greger, 1997 S.D. 14, 21, 559
N.W.2d 854, 864. Ordinarily, the plain meaning of the contract will be followed
unless there is some ambiguity or different intent manifested. American State Bank
V. Adkins, 458 N.W.2d 807, 809(S.D. 1990).
Prunty Const., Inc., v. City of Canistota, 682 N.W.2d 749, 756 (S.D. 2004)(quoting Carstensen
Contracting, Inc. v. Mid-Dakota Rural Water Sys., Inc., 653 N.W.2d 875, 877(S.D. 2002)).
"The elements of a breach of contract are (1) an enforceable promise;(2) a breach of the
promise; and (3)resulting damages."
Construction, Inc. v. South Dakota Dept. ofTransp.,
793 N.W.2d 36,43(S.D. 2010). Further,"[i]n every breach ofcontract case,there must be a causal
relationship between the alleged damages sustained and the breach." Morris, Inc. v. State, ex rel.
State Dept. ofTransp., 806 N.W.2d 894, 903 (S.D. 2011). This requires Plaintiff 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. § 21-2-1.2 Although contract interpretation is a
question of law, Ziegler Furniture and Funeral Home, Inc. v. Cicmanec, 709 N.W.2d 350, 354
(S.D. 2006),"[wjhether a contract has been breached is a pure question offact for the trier of fact
to resolve." Weitzel v. Sioux Valley Heart Partners, 714 N.W.2d 884, 894(S.D. 2006).
Plaintiffs allege Defendant breached its obligations under the indenture agreement by
failing to disburse the proceeds to the proper person, failing to require proper written instructions
from the Wakpamni Corp., failing to investigate material deficiencies and inconsistencies in the
documents, failing to value or cause to be valued the Annuity Investment, and failing to notify the
Wakpamni Corp. of breaches of the indenture agreement and potential fraud. In its Motion to
Dismiss, Defendant argues Plaintiffs' breach of contract claim fails for lack of breach of promise
and lack of causation.
Specifically, Defendant argues that there is no breach of promise because there are no
provisions in the Indentures that require 1)wire transfer instructions to have come from Wakpamni
Corp.; 2)Defendant to investigate the location of Wealth Assurance; 3)Defendant to "alert" other
parties of information; and 4) Defendant to conduct valuations. Further, Defendant argues that
there is no causation because 1)it was the Criminal Defendants' stealing ofthe bond proceeds that
left the bonds worthless, not Defendant's behavior; and 2)Plaintiffs' valuation argument assumes
that U.S. Bank would conduct the valuation instead ofWakpamni Corp. and assumes that valuation
would have uncovered the fraud.
The Indenture Agreements contain a limitation ofliability clause which provides that U.S.
Bank as Trustee
[SJhall not be answerable for the exercise of any discretion or power under this
Indenture or under any Supplemental Indenture, nor for anything whatever in
connection with the trust, except only its own willful misconduct or negligence.
The Trustee shall not be liable for any action taken by it in good faith and
reasonably believed by it to he within the discretion or power conferred upon it, or
omitted to be taken by it in good faith and reasonably believed by it not to be within
the power or discretion conferred upon it, or taken pursuant to any direction or
instruction by which it is governed under this Indenture or omitted to be taken by
2
S.D.C.L. § 21-2-1 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.
it by reason ofthe lack ofdirection or instruction required for such action,including
but not limited to investment offunds hereunder.
Doc. 150-3 at 41. Plaintiffs essentially maintain that all of Defendant's arguments for dismissal of
the breach of contract claim fail for lack of consideration ofthis clause and the express ohligation
that Defendant must undertake its obligations under the Indenture Agreements in good faith. The
Court agrees and finds that a factual question remains as to whether Defendant indeed carried out
its obligations in good faith.
Section 10.9 of the Indenture Agreements specifically addresses the Trustee's reliance on
documents without investigation by stating:
The Trustee shall be fiilly 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 ofthe truth and accuracy ofsuch statements.
Doc. 150-3 a-t 43. Although Defendant relies on this provision to argue that they had no contractual
obligation to investigate, the Court finds Plaintiffs' more nuanced reading of the provision to be
more accurate. Any right to rely on instructions without investigation or inquiry is qualified hy the
"good faith" requirement that precedes it. "In other words, if U.S. Bank did not in good faith
believe that the instructions it received were 'genuine and . .. passed or signed by the proper hoard
or person," it would not be excused from inquiry. Again, a fact question remains as to whether
Defendant in good faith believed that the instructions arrived at Defendant's door through the
proper channels.
Defendant also argues that it eannot be held liable for "investment losses" under Section
5.8 ofthe Indenture Agreements which states that "[i]n no event shall the Trustee be liable for the
selection of investments or for investment losses incurred thereon." However, this misconstrues
the intent of the breach of contract claim. Plaintiffs are not trying to hold Defendant liable for the
selection of their investments or losses on those investments. Instead, Plaintiffs seek to hold
Defendant liable for allegedly failing to act in good faith in carrying out its contractual duties as
Trustee, including valuing those investments. Section 1.2 of the Indenture Agreements provides
that the value of the "Investment Securities," which is defined to include the Annuity Contract
itself, is to be determined at the end of each month according to an established agreement between
the Defendant as Trustee and the Wakpamni Corp. There is no evidence that an agreement was put
in place or that any valuations were done by either Defendant or Wakpmani Corp., a requirement
clearly presented in the Indenture Agreement.
Finally, as to Defendant's argument that Plaintiffs have not set forth plausible facts which
may establish causation, the Court disagrees. South Dakota law requires the damages to "in the
ordinary course of things" be likely to result from the breach. See S.D.C.L. § 21-2-1. The Court
finds the foreseeable that fraudulent activity could be enabled by the breach of an Indenture
Agreement to be a factual question to be left for resolution by the finder of fact. Therefore, with
respect to Plaintiffs' breach of contract claim. Defendant's Motion to Dismiss is denied.
BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Plaintiffs also assert that Defendant breached the implied covenant of good faith and fair
dealing because good faith required more than "hlindly following" the instructions of a "stranger"
and required Defendant to question the recurrence of discrepancies between documents. South
Dakota law imposes upon every contract an implied covenant of good faith and fair dealing. See
Garrett v. BankWest, Inc., 459 N.W.2d 833, 841 & n. 7(S.D. 1990). "This covenant affords only
contract remedies, there is no independent tort for its hreach." Taylor Equip., Inc. v. John Deere
Co., 98 F.3d 1028, 1031—32 (8th Cir. 1996). The South Dakota Supreme Court adopted for all
contracts the definition of "good faith" found in South Dakota's uniform commercial code—
"honesty in fact in the conduct or transaction concerned." S.D.C.L. § 57A-1-201(19). The duty of
good faith thus permits an aggrieved party to hring an action for breach ofimplied covenant when
the other party "by [its] lack of good faith, limited or completely prevented the aggrieved party
from receiving the expected benefits of the bargain. A breach of contract claim is allowed even
though the conduct failed to violate any of the express terms of the contract agreed to by the
parties." Garrett,459 N.W.2d at 841 (citations omitted)."The meaning ofthe covenant varies with
the covenant varies with the context ofthe contract. Ultimately, the duty 'emphasizes faithfulness
to an agreed common purpose and consistency with the justified expectations ofthe other party.'"
Nygaard v. Sioux Valley Hosps. & Health Servs., 731 N.W.2d 184, 194 (S.D. 2007)(quoting
Garrett, 459 N.W.2d at 841).
Despite this imposition ofSouth Dakota law.Plaintiffs do not point to, and the Court cannot
find, any restriction South Dakota law has imposed on a party's freedom of contract and its ability
to contract over the implied covenant of good faith and fair dealing. The parties in this case did
eontract over such an obligation in Section 10.1 ofthe Indenture Agreements:"The Trustee hereby
aceepts the trusts imposed upon it by this Indenture and agrees to perform said trusts, but only
upon and subject to the following express terms and conditions, and no implied covenants or
obligations shall be read into this Indenture against the Trustee."^ South Dakota public policy
strongly favors freedom to contract. Unruh Chiropractic Clinic v. De Smet Ins. Co. of South
Dakota, 782 N.W.2d 367, 372—73 (S.D. 2010). "Although freedom of eontract is not absolute,"
Plaintiffs must identify policy concerns to justify abridging freedom ofcontract in the case at hand.
See Richland State Bank V. Household Credit Servs., Inc., 340 F.Supp.2d 1051, 1058-59(D.S.D.
2004){ciimg Hieb v. Opp,458 N.W.2d 797, 801 (S.D. 1990); Computrol, Inc., v. Newtrend, L.P.,
203 F.3d 1064,1070(8th Cir. 200)(basis for enforcement oflimitation ofliability clause is strong
public policy favoring freedom of contract)). Plaintiffs have not done so. Therefore, Plaintiffs'
claim for breach ofimplied covenant of good faith and fair dealing is dismissed.
NEGLIGENCE
Finally, Plaintiffs allege Defendant was negligent in sending the proceeds to a sham entity;
failing to ensure the instructions were genuine, signed by the right party, and reasonable and
appropriate under the circumstances; failing to eonduct an investigation; failing to value the
Annuity investment, and failing to notify the Wakpamni Corporation and the Plaintiffs ofbreaches
of the indenture agreement and the possibility of fraud. "The three necessary elements of
actionable negligence are:(1)a duty on the part ofthe defendant;(2)a failure to perform that duty;
and (3) an injury to the plaintiff resulting from such a failure." Kuehl v. Homer (J.W.) Lumber
Co., 678 N.W.2d 809, 812(S.D. 2004). However, to be liable in tort, there must be "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)."This independent legal duty must arise from extraneous circumstances, not
constituting elements ofthe contract."Id. (internal quotations omitted).
^ The Court did, however,find three cases within the Eighth Circuit which the Court believes to be persuasive evidence
of what the Supreme Court of South Dakota would do if the question were before it. When presented with the exact
same language as presented in the Indenture at hand providing that "no implied covenants or obligations shall be read
into this Indenture" all three cases expressed no hesitancy in finding the clause valid. See Brooks v ArkansasLouisiana Pipe Line Co., 77 F.2d 965 (8th Cir. 1935j; First Nat Bank v. Am. Lenders Facilities, Inc., 2002 WL
31163123 at *6(D. Mirm. 2002);
LoanAuth ofthe State ofMissouri v. Wells Fargo Bank, N.A., 2011
WL 6010683 at *7(E.D. Mo. 2011).
10
Plaintiffs in this case cite primarily to case law from the state of New York for support in
asserting that "indenture trustees owe note holders an extracontractual duty to perform basic,
nondiscretionary, ministerial functions redressable in tort if such a duty is breached." The caselaw
demonstrates that the distinction between an ordinary trustee and an indenture trustee is an
important one. "The leading authorities make clear that, unlike those of an ordinary trustee, the
duties of an indenture trustee are generally defined by and limited to the terms of the indenture."
Harriet & Henderson Yarns, Inc. v. Castle, 75 F. Supp. 2d 818, 830 (W.D. Tenn. 1999)(citing
Elliot Assocs. V. J. Henry Schroder Bank & Trust Co., 838 F.2d 66, 71 (2nd Cir. 1988); LNCInv.,
Inc. V. First Fidelity Bank,935 F. Supp. 1333, 1346(S.D.N.Y. l996)-,Lorenzv. CSXCorp., 1 F.3d
1406, 1415 (3rd Cir. 1993)(applying New York law); Meckel v. Continental Res. Co., 758 F.2d
811, 816 (2nd Cir. 1985); Shawmut Bank, N.A. v. Kress Assocs., 33 F.3d 1477 (9th Cir. 1994)
(applying California law)). Under New York common law, however, two additional duties are
imposed upon an indenture trustee: 1) the duty to avoid conflicts of interest; and 2) the duty to
perform basic, nondiscretionary, ministerial duties. See LNC Inv., Inc., 935 F. Supp. at 1346
(S.D.N.Y. 1996). However, these Indenture Agreements are not governed by New York common
law. They are governed by South Dakota law.
The Parties have not cited any South Dakota case law providing for additional eommon
law duties for indenture trustees, specifically.
However, we also observed in Fisher Sand & Gravel Co. [v. South Dakota Dept.
ofTransp., 558 N.W.2d 864 (S.D. 1997)] if the relationship of the parties is such
as to support a cause ofaction in tort, that cause of action is not to be denied because
the parties happened to also have made a contract." Id. 19, 558 N.W.2d at 869
{fyyxoiing Redgrave v. Boston Symphony Orchestra, Inc., 557 F. Supp. 230, 238(D.
Mass. 1983)). Furthermore,"it is generally recognized that one who undertakes to
provide professional services has a duty to the person for whom the services are
performed to use sueh skill and eare ordinarily exercised by others in the same
profession." Limpert v. Bail, 447 N.W.2d 48, 51 (S.D. 1989) (citation omitted).
And,"[Ijiability in tort for breach ofthat duty may arise as the result of negligenee
during the performanee of the contract, even if there has been no breach of
contract." Id. (citation omitted).
Kreisers, 852 N.W.2d at 420.
This Court has previously analyzed the "independent legal duty" doctrine under South
Dakota law in light ofKreisers. In GSAA Home Equity Trust 2006-2 ex rel. LL Funds LLC v. Wells
Fargo Bank, N.A., 133 F. Supp. 3d 1203 (D.S.D. 2015), this Court declined to extend the
"independent legal duty" doetrine to a claim where the plaintiff had merely alleged that the
11
defendant, a mortgage-baeked securities trust servieer, entered into contracts in which they agreed
to perform services in regard to the trust. "Courts in New York, Texas, and South Dakota have
recognized that certain professionals 'may be subject to tort liability for failure to exercise
reasonable care, irrespective oftbeir contractual duties."Id. at 1222. "'Professionals' who have an
independent duty to exercise reasonable care include lawyers, accountants, veterinarians, doctors,
and architects." Id. at 1223 (internal citations omitted). "Courts have also found an independent
duty when a party holds itself out to the plaintiff as an expert in a particular area." Id. (citing
Kreisers for holding that "company owed independent duty of care to ascertain what type oflike-
kind property exchange client wanted where company advertised that it performed exchanges
without limitation but did not actually perform the type of complex exchange the client desired.").
The plaintiff in GSAA Home Equity Trust could not cite to any cases "holding that the servieer or
master servieer of a mortgage-backed securities trust perform 'professional' services that give rise
to an independent duty of care" nor "offer any facts or argument suggesting that the work was
analogous to professions where courts have found such an independent duty," this Court dismissed
the claim.
Plaintiffs have not yet offered any facts suggesting that the work of an indenture trustee is
similar to that of lawyers, veterinarians, doctors, accountants, and architects—^professions where
South Dakota courts have found an independent duty. However, the Indenture Agreements
themselves provide that U.S. Bank as Trustee "shall not be answerable for the exercise of any
discretion or power under this Indenture or under any Supplemental Indenture, nor for anything
whatever in connection with the trust, except only its own willful misconduct or negligence.'" Doe.
150-3 at 41 (emphasis added). Although "'this carve-out language' ... by itself, does not excuse
[Plaintiffs] from identifying an independent duty," see GSAA Home Equity Trust, 133 F. Supp. 3d
at 1224, at this early stage of litigation, the Court does not have enough evidence before it to
establish what would be expected of Defendant in the industry, nor what representations were
made by Defendant regarding its expertise in this area prior to entering into the Indenture
Agreements. Where discovery has not yet been completed and where the Indenture Agreement
itself allows for liability in the ease of willful misconduct or negligence, the Court cannot say as a
matter of law that no independent legal duty exists in this ease. Therefore, the Plaintiffs have
presented enough plausible facts for their cause of action for negligence to survive this motion to
dismiss.
12
CONCLUSION
In liberally construing the complaint in favor of the Plaintiffs, the Court finds that
Plaintiffs' allegations concerning breach of contract and negligence are pleaded with sufficient
particularity to survive Defendant's Motion to Dismiss. Howeyer, Plaintiffs' claims for breach of
implied warranty of good faith and fair dealing is dismissed. Accordingly,
IT IS ORDERED that Defendant's Motion to Dismiss, Doc. 25, is:
1. DENIED with respect to Plaintiffs' breach of contract and negligence claims;
and
2. GRANTED with respect to Plaintiffs' breach ofimplied covenant of good faith
and fair dealing claim.
Dated this 1 ^ day of July, 2018.
BY THE COURT:
Lawrence L. Piersol
United States District Judge
ATTEST:
MATTHEW W. THELEN, Clerk of Courts
By
(SEAL)
_, Deputy
13
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