Paul G. Hyman, Chief Judge
The following is a summary of the relevant allegations contained in the Amended Complaint. Thomas Petters ("Petters") and his co-conspirators conspired to commit and actually did commit the third-largest financial fraud in U.S. history (the "Petters Ponzi Scheme"). GECC is one of the most sophisticated commercial lenders in the word, who at all material times through July 2, 2001, was chartered under the New York State Banking Law and subject to supervision by the State of New York banking authority. Palm Beach Finance Partners, L.P. ("PBF I") and Palm Beach Finance II, L.P. ("PBF II" and together with PBF I, the "Palm Beach Funds") were Delaware limited partnerships which were formed in 2002 and 2004, respectively, to provide financing to Petters and his affiliates. In order to facilitate these financing activities, the Palm Beach Funds formed PBFP Holdings, LLC ("PBFP Holdings").
By 1995, Petters began soliciting "investments" for his scheme. In soliciting investments, Petters represented to investors that the funds invested would be used to finance consumer electronic merchandise transactions. Petters claimed he would arrange for the sale and delivery of the consumer electronic merchandise from suppliers to "big box" retailers, such as Costco and Sam's Club. The financing would allow Petters to pay the suppliers while he awaited payment from retailers. However, unbeknownst to his investors, Petters' operation was nothing more than a Ponzi scheme — there were no true retailers, there was virtually no merchandise, the suppliers were co-conspirators, and the lenders were repaid from monies sourced from other defrauded lenders.
In 1997, Petters began to communicate with GECC about providing financing for his purchase financing operation. By 1998, GECC and Petters agreed that Petters Capital (a special purpose entity or "SPE") would be formed to borrow $50 million on a revolving basis from GECC. According to the terms of the loan agreement, (1) the funds advanced would be used to purchase the consumer electronic merchandise, (2) GECC would be repaid from the sale of the merchandise, (3) retailers would be required to make their payments directly to a GECC-controlled lockbox, and (4) GECC would receive various forms of compensation, including interest and profit sharing "success fees." On March 10, 1998, GECC filed a UCC-1 financing statement ("GECC Financing Statement") with the Minnesota Secretary of State in order to perfect its security interest in the assets of Petters Capital. In 1999, GECC provided another line of credit to a Petters-controlled entity — a $ 55 million line of credit to RedtagBiz, Inc., f/k/a Redtagoutlet.com, Inc. ("Redtag").
Over time, GECC and Petters developed an unusually close relationship, evidenced in part by (1) the profit sharing "success fees" arrangement, (2) the issuance on January 4, 2000, of GECC's recommendation letter praising Petters in his personal and business capacities (the "Recommendation Letter"), (3) GECC's overlooking of Petters' noncompliance with the terms of the loan agreement, (4) GECC's deviation from its standard procedures, and (5) the
In late 2000, GECC uncovered the fraudulent nature of the Petters Ponzi Scheme, including that Petters and his co-conspirators were engaged in a conspiracy to defraud their lenders. This discovery resulted in part from GECC's direct communication with Costco, one of Petters' supposed retailers, during which Costco stated that it had not entered into any purchase orders with Petters as Petters had represented. Upon making this discovery, GECC agreed to keep silent and not disclose its knowledge of the Petters Ponzi Scheme to anyone outside of GECC. Instead, GECC elected to accept a payoff from Petters of the revolving credit line, including payment of the "success fees," and to otherwise join, encourage, aid, abet, facilitate, and substantially assist Petters' conspiracy.
In 2002, the Palm Beach Funds became involved with Petters through Frank Vennes ("Vennes"). Petters, acting through Vennes, used his former relationship with GECC as a selling point to entice the Palm Beach Funds to become lenders/investors in Petters' purchase financing operations. Additionally, Vennes, who was familiar with and influenced by GECC's Recommendation Letter, gave his own positive recommendation of Petters to the Palm Beach Funds. The Palm Beach Funds eventually agreed to become lenders to Petters and filed a UCC-1 financing statement in the Minnesota public records to ensure its position as first lienholder in the collateral it financed. Upon inspection of the public records, the Palm Beach Funds discovered that the GECC Financing Statement was still in effect. Accordingly, the Palm Beach Funds requested the GECC Financing Statement be terminated. Petters, in turn, asked GECC to terminate its Financing Statement. GECC agreed and appointed Petters Capital as its agent to terminate the GECC Financing Statement. Petters, through Petters Capital, filed a UCC-3 financing statement termination ("GECC Termination Statement") on March 5, 2003. The Palm Beach Funds then went ahead with its loans to Petters.
Upon the implosion of the Petters Ponzi Scheme in September 2008, the Palm Beach Funds suffered damages in excess of $1 billion and eventually filed for chapter 11 bankruptcy protection on November 30, 2009. On September 3, 2010, the Plaintiff, as the Palm Beach Funds' Chapter 11 Trustee, filed a Second Amended Joint Plan of Liquidation
In order to state a claim for relief under Federal Rule of Civil Procedure 8(a)
When a plaintiff asserts claims based upon fraud or mistake, simply meeting the pleading requirements of Rule 8(a) is insufficient to survive a Rule 12(b)(6) motion to dismiss. In addition, Federal Rule of Civil Procedure 9(b)
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir.2008) (quoting Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir.2007)). However, "Rule 9(b) does not require a plaintiff to allege specific facts related to the defendant's state of mind." Id. "[M]alice, intent, knowledge, and other conditions of a person's mind" may be pled generally. Fed.R.Civ.P. 9(b).
"In construing allegations of actual fraud in an action brought by a bankruptcy trustee, the `particularity' standard of ... Rule 9(b) is somewhat relaxed." Cox v. Grube (In re Grube), Adv. No. 10-8055, 2013 WL 343459, at *9 (Bankr.C.D.Ill. Jan. 29, 2013) (citing Zazzali v. AFA Fin. Grp., LLC (In re DBSI, Inc.), 477 B.R. 504 (Bankr.D.Del.2012)); see also, Ivey v. First-Citizens Bank and Trust Co. (In re Whitley), Adv. No. 12-02028, 2013 WL 486782, at *13 (Bankr.M.D.N.C. Feb. 7, 2013); Wiand v. EFG Bank, No. 8:10-C241-T-17MAP, 2012 WL 750447, at *6 (M.D.Fla. Feb. 8, 2012); Tolz v. U.S. (In re Brandon Overseas, Inc.), Adv. No. 09-01971-RBR, 2010 WL 2812944, at *5 (Bankr.S.D.Fla. July 16, 2010). Thus, when a trustee brings a claim for fraud, Rule 9(b)'s particularity requirement is met "`if the person charged with fraud will have a reasonable opportunity to answer the complaint and has adequate information to frame a response ... or if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.'" In re Brandon Overseas, 2010 WL 2812944, at *5 (quoting Kapila v. Arnel (In re Arizen Homes), Adv. No. 08-01639-RBR, 2009 WL 393863, at *2 (Bankr.S.D.Fla. Jan. 22, 2009)).
"Such flexibility afforded to trustees in bankruptcy with respect to the pleading requirements is [usually] appropriate `[g]iven the inevitable lack of knowledge concerning the acts of fraud previously committed against the debtor, a third party.'" In re Arizen Homes, 2009 WL 393863, at *2. However, when a trustee does not suffer from this lack of knowledge, the need to relax Rule 9(b)'s heightened pleading requirements does not exist. In such cases, the trustee will be held to the usual Rule 9(b) standard. See Roberts v. Balasco (In re Ernie Haire Ford, Inc.), 459 B.R. 824, 837 (Bankr.M.D.Fla.2011).
Here, the following claims asserted by the Plaintiff are subject to the pleading requirements of Rule 9(b): (1) civil conspiracy to commit fraud, (2) aiding and abetting fraud, (3) fraud by omission, (4) fraudulent misrepresentation, (5) fraudulent concealment, (6) conspiracy to commit fraudulent concealment, (7) negligent misrepresentation,
GECC contends that the Plaintiff's claims are untimely because the very last GECC act alleged in the Amended Complaint as a basis for the Plaintiff's claims is the March 2003 filing of the GECC Termination Statement. Thus, according to GECC, the statute of limitations on the Plaintiff's claims expired at the latest in March 2007 (using Florida's four-year statute of limitations)
To begin with, the statute of limitations defense is an affirmative defense upon which GECC, as the defendant, bears the burden of pleading and proving. La Grasta v. First Union Sec, Inc., 358 F.3d 840, 845 (11th Cir.2004); see also, Lindley v. City of Birmingham, Ala., No. 12-15073, 2013 WL 1336609, at *2 (11th Cir. Apr. 3, 2013); Steinberg v. A Analyst Ltd., No. 04-60898, 2009 WL 806780, at *8 (S.D.Fla. Mar. 26, 2009); Cantonis v. Stryker Corp., Civ. No. 09-3509 (JRT/JJK), 2010 WL 6239354, at *5 (D.Minn. Nov. 23, 2010). This means that the Plaintiff is not required to affirmatively plead around the statute of limitations defense. La Grasta, 358 F.3d at 845. Accordingly, "a Rule 12(b)(6) dismissal on statute of limitations grounds is appropriate only if it is 'apparent from the face of the complaint' that the claim is timebarred." Id. (emphasis added); see also, U.S. v. Stricker, No. 11-14745, 2013 WL 3838069, at *4 (11th Cir. July 26, 2013); Cantonis, 2010 WL 6239354, at *5. Here, the Court finds that the facts necessary to make a choice of law determination
The Plaintiff asserts that under either Illinois or Minnesota law,
On a Motion to Dismiss, the Court takes the Plaintiffs allegations at face value in assessing whether the Plaintiff plausibly states a claim for relief. Here, the Plaintiff alleges that (1) the Palm Beach Funds did not know of Petters' fraudulent conduct until September 2008, (2) the Palm Beach Funds did not discover Petters' fraud through their own diligence, and (3) the Palm Beach Funds could not have discovered Petters' fraud sooner through reasonable diligence. Am. Compl. ¶¶ 151-156. Furthermore, the Plaintiff alleges
Therefore, because the statute of limitations defense is an affirmative defense and because the Plaintiff plausibly alleges that his causes of action did not accrue until at least 2008 when the Palm Beach Funds discovered Petters' fraud, the Court finds that it would be inappropriate to determine at this stage that the Plaintiff's claims are barred by the statute of limitations. As a result, the Court will deny GECC's Motion to Dismiss on this basis.
The threshold question in any claim of negligence is the existence of a duty of care owed by the defendant to the plaintiff. GECC contends that Count 9 must be dismissed because the Plaintiff fails to properly allege a duty owed by GECC to the Palm Beach Funds. The Court agrees.
In its Amended Complaint, the Plaintiff alleges that: (1) GECC had a special relationship with Petters and Petters Capital; (2) GECC had a duty to disclose the truth to the Palm Beach Funds; (3) GECC knew that the Palm Beach Funds were to be defrauded or that the Palm Beach Funds were within a class of persons GECC knew were to be defrauded; and (4) GECC owed a duty of care to protect the Palm Beach Funds from being defrauded and victimized by Petters and Petters Capital. In his Response in Opposition to the Motion to Dismiss (ECF No. 42), the Plaintiff goes to great lengths to explain why based upon these factual allegations, GECC owed a duty of care to the Palm Beach Funds, asserting that:
To begin with, the Court finds that GECC is not judicially estopped from arguing that it did not owe a duty to the Palm Beach Funds. "Judicial estoppel is an equitable doctrine invoked at a court's discretion." Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir.2002). In order for a court to apply the doctrine of judicial estoppel, "[f]irst, it must be shown that the allegedly inconsistent positions were made under oath in a prior proceeding. Second, such inconsistencies must be shown to have been calculated to make a mockery of the judicial system." Id. (internal quotation marks omitted) (quoting Salomon Smith Barney, Inc. v. Harvey, M.D., 260 F.3d 1302, 1308 (11th Cir.2001)). In deciding whether to exercise their discretion and apply judicial estoppel:
Id. (citing New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 1815, 149 L.Ed.2d 968 (2001)).
In the Professional Recovery Services proceeding,
Accordingly, the Court refuses to exercise its discretion and invoke judicial estoppel as the Court finds that the position taken by GECC in the Professional Recovery Services proceeding is not clearly inconsistent with the position taken by GECC in proceeding currently before this Court.
The Plaintiff makes a brief argument that Florida, like other jurisdictions, recognizes that a legal duty will arise whenever a human endeavor creates a generalized and foreseeable risk of harming others. In so arguing, the Plaintiff contends that the facts and public policy concerns of this case "demand the imposition of a duty." However, in the same case cited by the Plaintiff for the above proposition, Langbehn v. Public Health Trust of Miami-Dade County, the U.S. District Court for the Southern District of Florida noted that "the Florida Supreme Court has recently cautioned that `abstract notions of sound public policy are not proper judicial considerations' in determining whether a duty exists." 661 F.Supp.2d 1326, 1335 (S.D.Fla.2009) (quoting Wallace v. Dean, 3 So.3d 1035, 1041 n.9 (Fla.2009)). The Court agrees and will not impose a duty on GECC based solely upon "abstract notions of sound public policy."
Furthermore, when courts impose a duty based upon the creation of a risk of foreseeable harm, they generally do so only when the defendant has engaged in some affirmative conduct which has directly placed the plaintiff in harm's way. Otherwise, "[g]enerally, no duty is imposed on an individual to protect another from harm," even when his failure to do so may increase the risk of foreseeable harm to that person. Domagala v. Rolland, 787 N.W.2d 662, 668 (Minn.Ct.App.2010); see also, T.W. v. Regal Trace, Ltd., 908 So.2d 499, 503 (Fla. 4th DCA 2005) (noting that although the law generally will recognize a duty when a defendant's conduct creates a foreseeable zone of risk, "a person or entity 'generally has no duty to take precautions to protect another against criminal acts of third parties'"); Iseberg v. Gross, 366 Ill.App.3d 857, 304 Ill.Dec. 1, 852 N.E.2d 251, 254-55 (2006) (same); Plowman v. Glen Willows Apartments, 978 S.W.2d 612, 614 (Tex.Ct.App.1998) (same). In fact, "that an actor realizes or should realize that action on his part is necessary for another's aid or protection does not of itself impose upon him a duty to take such action ... unless a special relationship exists... between the actor and the other which gives the other the right to protection." Id. (internal quotation marks omitted) (quoting Delgado v. Lohmar, 289 N.W.2d 479, 483 (Minn.1979)).
Here, the duty alleged by the Plaintiff is that GECC had a duty to warn the Palm Beach Funds, a party with which GECC indisputably had no direct contact or relationship, that Petters was perpetrating a fraud. Accordingly, without more, public policy considerations and the alleged creation of a risk of harm as a result of GECC's failure to act do not give rise to a duty of care owed by GECC to the Palm Beach Funds.
The Plaintiff also asserts that GECC spoke to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement and that once GECC spoke, GECC had a duty to make a full and fair disclosure, which included a duty to correct the Recommendation
To begin with, the Plaintiff's assertion that GECC spoke to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement is questionable.
728 F.2d 1006, 1018 (8th Cir.1984). The Plaintiff, however, neglects to mention that Rochester Methodist was a fraud case in which an employee of the plaintiff's insurance company made a misrepresentation to the plaintiff regarding a claim which was previously denied by the insurance company. Id. The Rochester Methodist court made the above-cited statement of law in order to reinforce its conclusion that "half truths may amount to fraudulent misrepresentations." Id. The case had nothing to do with negligence, and more importantly, the plaintiff and the defendant insurance company had an ongoing relationship as insurer and insured. Accordingly, the Rochester Methodist opinion provides no support for the proposition that once GECC indirectly spoke to the Palm Beach Funds, a party with whom the GECC had no direct relationship, it owed some kind of negligence-based duty to the Palm Beach Funds to make a full and fair disclosure and to correct prior inaccurate disclosures.
The Plaintiff also cites to Rudolph v. Arthur Andersen & Company, 800 F.2d 1040 (11th Cir.1986), a case involving statements made by an accounting firm in connection with a public securities offering. The statements made by the accounting firm were accurate when made. However, the plaintiff alleged that that accounting firm eventually became aware that DeLorean, the company for whom the accounting report was made, was using its accounting statements and reports to commit a significant fraud. The Rudolph court held:
800 F.2d at 1044-45 (internal citations omitted). The Plaintiff maintains that if the accounting firm in Rudolph had a duty to correct its inaccurate report and disclose DeLorean's fraud to potential investors, then GECC, a sophisticated commercial bank, had a similar duty. However, the duties to the public of an accounting firm or law firm preparing a report which is to be included in a company's public offering are unique. Furthermore, complex securities laws play an important role in defining the duties of professionals working on public securities offerings. GECC, who was not Petters' depository bank, provided no accounting services to Petters, and played no part in any Petters' public securities offerings, had no such public duty.
In W.W. Vincent and Company v. First Colony Life Insurance Company, another case cited by the Plaintiff, the court considered whether the defendant had a duty to speak in the context of a fraudulent concealment claim, not a negligence claim. 351 Ill.App.3d 752, 286 Ill.Dec. 734, 814 N.E.2d 960, 969 (2004). More importantly, the plaintiff and the defendant in W.W. Vincent were parties to a distinct business transaction to which the alleged nondisclosure was material. Id. In fact, the Court specifically noted that "[t]he concealment of a material fact during a business transaction is actionable if done with the intention to deceive under circumstances creating an opportunity and duty to speak." Id. (internal citations omitted) (emphasis added). It was in that context that the court held that the defendant imposed upon itself a duty to disclose by making a misleading statement to the plaintiff. Id.
Similarly, in Jetpay Merchant Services, LLC v. Miller, the plaintiff alleged that the defendants, acting as directors or officers of USN Corporation, misrepresented the way in which USN Corporation shipped goods to its customers, thereby inducing the plaintiff to enter into an agreement it would otherwise have avoided, and further misrepresented that USN Corporation would reimburse the plaintiff for its losses, thereby stringing the plaintiff along and causing the plaintiff to incur additional losses. Civ. Action No. 3:07-CV-0950-G, 2007 WL 2701636, at *1 (N.D. Tex Sept. 17, 2007). In the context of assessing the plaintiffs negligent misrepresentation claims, the court noted that "[e]ven without a special relationship, there is always a duty to correct one's own prior false or misleading statement." Id. at *5 (alteration in original) (quoting Trs. of the Nw. Laundry & Dry Cleaners Health & Welfare Trust Fund v. Burzynski, 27 F.3d 153, 157 (5th Cir.1994), cert. denied, 513 U.S. 1155, 115 S.Ct. 1110, 130 L.Ed.2d 1075 (1995)).
The cases cited by the Plaintiff, including specifically Rudolph, W.W. Vincent, Jetpay, and Rochester Methodist, are factually dissimilar from the case now before the Court and thus provide little support for the proposition that once GECC "spoke" to the Palm Beach Funds, a party with whom the GECC had no direct relationship, it owed some kind of negligence-based duty to the Palm Beach Funds to make a full and fair disclosure and to correct prior inaccurate disclosures. In the absence of any kind of alleged relationship between GECC and the Palm Beach Funds, the Court finds that the duty to make a full and fair disclosure after choosing to speak is not applicable here. Accordingly, the fact that GECC allegedly spoke to the Palm Beach Funds did not give rise to any kind of duty which required GECC to make a "full and fair disclosure" and to correct any and all prior misstatements.
The Plaintiff also contends that GECC had a duty to disclose and warn the Palm Beach Funds of Petters' fraud since it had "special knowledge" of material facts to which the Palm Beach Funds did not have access.
However, like the duty to make a full and fair disclosure upon speaking, the duty to disclose "special knowledge" of material facts arises only in the context of a business transaction to which both the plaintiff and the defendant are a party or where both parties had some kind of preexisting relationship. Stephenson v. Deutsche Bank AG, 282 F.Supp.2d 1032, 1060-61 (D.Minn.2003);
Accordingly, the Court finds that the duty to disclose "special knowledge" of material facts to which another party did not have access is inapplicable in the case now before the Court and does not support the Plaintiff's allegation that GECC had a duty to disclose certain information to the Palm Beach Funds.
Lastly, the Plaintiff contends, albeit briefly, that GECC had a duty to prevent the criminal actions of Petters because GECC had a special relationship with Petters and had the ability to control Petters. For the reasons discussed below, the Court finds that the Plaintiff does not allege a plausible duty of care owed by GECC to the Palm Beach Funds based upon GECC's alleged special relationship with Petters.
As a general rule, there is no duty to control the conduct of a third person so as to prevent him from causing physical harm to another unless: (a) a special relation exists between the actor and the third person which imposes a duty upon the actor to control the third person's conduct, or (b) a special relation exists between the actor and the other which gives to the other a right to protection. Restatement (Second) of Torts § 315 (1965); Reider v. Dorsey, 98 So.3d 1223, 1226-27 (Fla. 3d DCA 2012) (noting that Florida follows the Restatement (Second) approach); Estate of Johnson v. Condell Mem'l Hosp., 119 Ill.2d 496, 117 Ill.Dec. 47, 520 N.E.2d 37, 40 (1988) (same, as to approach followed by Illinois); Jaramillo v. Weaver, No. A06-2343, 2007 WL 4303775, at *4 (Minn. Ct.App. Dec. 11, 2007) (same, as to approach followed by Minnesota). Here, the Plaintiff contends that a special relationship existed between Petters and GECC such that GECC had the ability to control Petters' conduct and that as a result, GECC had a duty to control Petters' conduct by disclosing the nature of Petters' fraudulent enterprise to the Palm Beach Funds.
To begin with, the types of "special relationships" which give rise to negligence-based duties of care typically fall into the following five categories:
Restatement (Second) of Torts §§ 315-20. Within these five categories, courts have recognized special relationships in a variety of contexts, including but not limited to: employer-employee, landlord-tenant, landowner-invitee, school-minor, university-adult student, car rental agency-customer, and innkeeper-guest. Janis v. Pratt & Whitney Can., Inc., 370 F.Supp.2d 1226, 1230-31 (M.D.Fla. 2005). The alleged relationship between GECC and Petters, however, does not fall into any of the five categories and bears no resemblance to the examples of recognized special relationships. Although the foregoing list of recognized relationships is not necessarily an exclusive one, under the special relationship exception to the general rule, "the Restatement suggests that the duty to aid or protect another will be imposed only in relationships involving some degree of dependence or mutual dependence." Newton v. Tinsley, 970 S.W.2d 490, 493 (Tenn.Ct. App.1997) (citing Restatement (Second) of Torts § 314A cmt. b (1964)).
Additionally, it is highly implausible that GECC could have controlled the criminal conduct of Petters, who by all accounts was a professional fraudster who orchestrated a multi-billion dollar Ponzi scheme, by refusing to authorize the filing of the GECC Financing Statement or by "correcting" the Recommendation Letter. See Am. Compl. ¶ 238, ¶ 240. Further, it is equally implausible and logically circular that (1) GECC's duty of care to the Palm Beach Funds arose from its ability to control Petters by means of exposing Petters' fraudulent conduct; (2) the only way GECC could have fulfilled its duty of care would have been to expose Petters' fraudulent conduct; and (3) GECC breached its duty of care to the Palm Beach Funds by failing to expose Petters' fraudulent conduct. This kind of circular logic flies in the face of the well-established law of negligence.
For these reasons, the Court finds that the Plaintiffs contention that he properly alleges that GECC had a duty to disclose Petters' fraud because of GECC's special relationship with Petters is unpersuasive.
Although the Plaintiff need not meet the heightened Rule 9(b) standards when pleading a claim for negligence, the Plaintiff must still allege a "plausible"
In Count 9, the Plaintiff makes the following allegations regarding the duty of care owed by GECC to the Palm Beach Funds:
Am. Compl. ¶¶ 233-40. Accepting these allegations as true for the purposes of the Motion to Dismiss, the Plaintiff still fails to allege a plausible duty of care. The conclusory statement that GECC "owed a duty of care" is insufficient. The Plaintiff must allege sufficient facts which plausibly establish that GECC owed a duty of care to the Palm Beach Funds. The Plaintiff fails to do so. As discussed above, not one of the theories advanced by the Plaintiff is applicable here such that the Court can find that the factual allegations contained in the Amended Complaint plausibly establish a duty of care.
Additionally, "[a] bank has no duty to third parties to disclose information about a [bank] customer's account." Kesselman v. Nat'l Bank of Ariz., 188 Ariz. 419, 422, 937 P.2d 341 (Ariz.Ct.App. 1996).
Based upon the Plaintiffs allegations and for the additional reasons just discussed, the Court finds that the Plaintiff fails to plausibly allege a duty of care.
In addition to the Plaintiff's failure to allege a duty of care, Count 9 also fails to state a claim on the basis that the Plaintiff does not adequately allege how GECC breached its alleged duty of care. The only allegation pertaining to GECC's breach is the following: "GECC breached [its] duty by knowingly placing its agent (Petters Capital) in a position to commit fraud upon the Palm Beach Funds (via the GECC [Termination Statement]) and its agent did so while acting within the granted scope of authority." Am. Compl. § 237. Accepting this allegation at face value, it appears that the Plaintiff alleges that GECC had an overarching duty to protect the Palm Beach Funds from all aspects of Petters' fraudulent conduct and breached this general duty of protection by "knowingly" allowing Petters Capital, as its agent, to defraud the Palm Beach Funds by filing the GECC Termination Statement. Not only is the statement that GECC acted "knowingly" confusing in the context of a negligence claim, but it is entirely implausible that GECC breached whatever alleged duty of care it owed to the Palm Beach Funds simply by authorizing GECC to file a UCC termination statement. Accordingly, the Court finds that the Plaintiff fails to plausibly allege the element of breach.
For the reasons just discussed, the Court finds that Count 9 must be dismissed as the Plaintiff fails to plausibly allege a duty of care or a breach of that duty and thus, fails to state a claim for negligence.
The Plaintiff institutes various fraud claims — five in total — which at their core, all generally seek to remedy the same alleged wrongdoing: GECC's failure to alert the Palm Beach Funds to Petters' fraudulent conduct after GECC allegedly discovered this fraudulent conduct. For the reasons discussed below, the Court finds that all five counts fail to state claims for relief which are facially plausible.
In Count 3 of the Amended Complaint, the Plaintiff asserts a cause of action against GECC for fraud by omission. In Count 5 of the Amended Complaint, the Plaintiff asserts a cause of action against GECC for fraudulent concealment. Fraud by omission and fraudulent concealment are very similar forms of common law fraud. Fraud by
R.J. Reynolds Tobacco Co. v. Martin, 53 So.3d 1060, 1068-69 (Fla. 1st DCA 2010) (citing Friedman v. Am. Guardian Warranty Servs., Inc., 837 So.2d 1165, 1166 (Fla. 4th DCA 2003); Gutter v. Wunker, 631 So.2d 1117, 1118 (Fla. 4th DCA 1994)). The scenarios which may give rise to a duty to speak include: (a) one party to a transaction who speaks has a duty to say enough to prevent his words from misleading the other party; (b) one party to a transaction who has special knowledge of material facts to which the other party does not have access may have a duty to disclose those facts to the other party; (c) one party to a transaction who stands in a confidential or fiduciary relation to the other party to a transaction has a duty to disclose material facts. Klein v. First Edina Nat. Bank, 293 Minn. 418, 196 N.W.2d 619, 622 (Minn.1972); Friedman, 837 So.2d at 1166.
As discussed in Section III, supra,
Because Counts 3 and 5, which seek damages on account of GECC's alleged fraudulent concealment or fraud by omission, fail to plausibly allege that GECC had a duty to speak, the Court will dismiss Counts 3 and 5 for failure to state a claim.
In Count 4, the Plaintiff asserts a claim for fraudulent misrepresentation. In Count 8, the Plaintiff asserts a claim for fraud. Fraud and fraudulent misrepresentation refer to the same cause of action — common law fraud.
In Count 4, the Plaintiff re-alleges paragraphs 1 through 165 and includes the following additional allegations:
Am. Compl. ¶¶ 193-198. These allegations are insufficient. To begin with, the Plaintiff's fraudulent misrepresentation claim must be dismissed because it fails to identify a single false statement of material fact. The alleged falsity of the Recommendation Letter does not qualify as the identification of a false statement of material fact. The Recommendation Letter is a letter, not a fact, and it contains several different statements of fact. In order to state a claim for fraudulent misrepresentation, the Plaintiff must identify the false statement or statements of material fact which form the basis of the Plaintiff's fraudulent misrepresentation claim. It must not be left to GECC, as the defendant, or the Court to guess which statements in the Recommendation Letter are the allegedly false ones.
Furthermore, when pleading fraud, Rule 9(b) of the Federal Rules of Civil Procedure requires that the plaintiff must state with particularity the circumstances constituting the fraud. "Circumstances" constituting fraud which must be pled with particularity include such matters as "time, place, and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby." Moua v. Jani-King of Minn, Inc., 613 F.Supp.2d 1103, 1110 (D.Minn.2009) (quoting Commercial Prop. Invs., Inc. v. Quality Inns Int'l, Inc., 61 F.3d 639, 644 (8th Cir.1995)); see also, Chi. Materials Corp. v. Hildebrandt (In re Hildebrandt), Adv. No. 08-A-00336, 2008 WL 5644893, at *4 (Bankr.N.D.Ill.Dec. 18, 2008) (noting that "circumstances must include the Vho, what, when, where, and how: the first paragraph of any newspaper story'"). Because the Plaintiff fails to identify even a single false statement of material fact, the Plaintiff not only fails to satisfy Rule 9(b), but he also fails to satisfy Rule 8(a) with respect to the threshold element of fraudulent misrepresentation.
Even if the Court assumed that it was sufficient for the Plaintiff to allege that the Recommendation Letter was false, the Plaintiff also fails to plausibly allege that
The Plaintiff also alleges that the "[t]he Palm Beach Funds, through their agent, justifiably relied upon the Recommendation Letter." Am. Compl. ¶ 197. However, the Plaintiff, earlier in the Amended Complaint, also alleges the following:
Am. Compl. ¶ 127 (emphasis in original). This earlier and more specific allegation indicates that the Palm Beach Funds never actually saw the Recommendation Letter. Instead, the Palm Beach Funds allegedly relied on the representations of Vennes — not GECC — who was "influenced" by the Recommendation Letter.
It is time that "false representations need not be made directly to the party claiming to have relied on them, but may instead be indirect, `where a party makes false representations to another with the intent or knowledge that they be exhibited or repeated to a third party for the purpose of deceiving him.'" Amerigas Propane, L.P. v. BP Am., Inc., 691 F.Supp.2d 844, 853 (N.D.Ill.2010) (quoting St. Joseph Hosp. v. Corbetta Const. Co., Inc., 21 Ill.App.3d 925, 316 N.E.2d 51, 72 (1974)); Harrell v. Branson, 344 So.2d 604, 606 (Fla. 1st DCA 1977). "However, this requires reliance on the particular statement at issue, even though it is not made directly to the complaining party." Amerigas Propane, 691 F.Supp.2d at 853. Based upon the conflicting allegations discussed above, the Plaintiff does not plausibly allege that the Palm Beach Funds relied directly upon the allegedly false Recommendation Letter or the allegedly false statements of fact contained therein.
For the reasons discussed above, the Court finds that the Plaintiff fails to state a cause of action for fraudulent misrepresentation based upon the Plaintiff's failure to sufficiently allege pursuant to Rule 9(b): (1) A false statement of material fact; (2) GECC's intent that the statement induce the Palm Beach Funds to act; and (3) the Palm Beach Funds' reliance on the statement
Count 8 is simply titled "fraud," which the Court assumes to mean "common law fraud."
As discussed above, the elements of common law fraud are as follows: (1) a false statement of material fact; (2) defendant's knowledge that the statement was false; (3) defendant's intent that the statement induce plaintiff to act; (4) plaintiff's reliance upon the truth of the statement; and (5) plaintiff's damages resulting from reliance on the statement. Wernikoff, 315 Ill.Dec. 524, 877 N.E.2d at 16. The following allegations are contained in Count 8 of the Amended Complaint:
Am. Compl. ¶¶ 223-31.
As indicated by the recitation of the allegations contained in Count 8, the Plaintiff fails to allege any elements of common
For these reasons, Count 8 fails to state a claim for fraud which is plausible on its face and will be dismissed.
In Count 7 of the Amended Complaint, the Plaintiff asserts a cause of action for negligent misrepresentation. GECC contends that Count 7 must be dismissed for failure to state a claim for the same general reasons that the fraudulent misrepresentation and fraud claims are deficient. The Court agrees.
The tort of negligent misrepresentation has been applied in narrow circumstances,
Gilchrist Timber Co. v. ITT Rayonier, Inc., 696 So.2d 334, 337 (Fla.1997) (citing Restatement (Second) of Torts § 552 (1977)); see also, Florenzano v. Olson, 387 N.W.2d 168, 174 n.3 (Minn.1986) (adopting the Second Restatement's definition of negligent misrepresentation); McMahan v. Deutsche Bank AG, No. 12 C 4356, 2013 WL 1403073, at *7 (N.D.Ill. Apr. 5, 2013) (same). A defendant's liability for negligent misrepresentation is limited to loss suffered: (1) by the person or one of a limited group of persons for whose benefit and guidance the misrepresenter intends to supply the information or knows that the recipient intends to supply it; and (2) through reliance upon it in a transaction that the misrepresenter intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. Gilchrist Timber, 696 So.2d at 337 (citing Restatement (Second) of Torts § 552). However, "[t]he liability
Based upon the above definition, the Plaintiff must allege the following elements in order to state a claim for negligent misrepresentation: (1) a misrepresentation of material fact in the course of the defendant's business, profession, or employment, or in any other transaction in which he has a pecuniary interest; (2) the defendant either knew of the misrepresentation, made the misrepresentation without knowledge of its truth or falsity, or should have known the representation was false; (3) the defendant intended to induce another to act on the misrepresentation; and (4) injury resulted to a party acting in justifiable reliance upon the misrepresentation. Smith v. Questar Capital Corp., No. 12-cv-2669 (SRN/TNL), 2013 WL 3990319, at *12 (D.Minn. Aug. 2, 2013) (citing Baggett v. Elec. Local 915 Credit Union, 620 So.2d 784, 786 (Fla. 2d DCA 1993)). Essentially, the elements of negligent misrepresentation and the elements of fraudulent misrepresentation are identical, except that the defendant need not know the statement is false and that the defendant and the plaintiff must have some kind of relationship such that the defendant owes a duty to the plaintiff to communicate accurate information. McMahan, 2013 WL 1403073, at *7 (internal quotations and citations omitted).
Here, the basis of Count 7, just like the basis of Count 4, is the alleged falsity of the Recommendation Letter. Accordingly, in addition to re-alleging paragraphs 1 through 165, the Plaintiff makes the following allegations:
Am. Compl. ¶ 213-222. Again, as with Count 4, the Plaintiff fails to identify a single false statement of material fact. Alleging that the Recommendation Letter is false does not qualify as an identification of a false statement of material fact. The Recommendation Letter contains numerous statements of fact. In order to state a claim for negligent misrepresentation, the Plaintiff must identify the particular false
Additionally, and equally as importantly, the Plaintiff fails to allege that GECC had a pecuniary interest in supplying the alleged misinformation. Unless the defendant has a public duty to supply the information at issue, a plaintiff may state a claim for negligent misrepresentation "only when the defendant has a pecuniary interest in the transaction in which the information is given. If he has no pecuniary interest and the information is given purely gratuitously, he is under no duty to exercise reasonable care and competence in giving it." Blumstein v. Sports Immortals, Inc., 67 So.3d 437, 440 (Fla. 4th DCA 2011) (quoting Restatement (Second) of Torts § 552 cmt. c).
Here, as discussed extensively in Section III(A), supra, the Plaintiff fails to allege that GECC had a public duty to provide the information at issue. Accordingly, the Plaintiff must allege that GECC had some kind of pecuniary interest in the transaction
In order to state a claim for civil conspiracy, the Plaintiff must allege the following: "(1) an agreement between two or more parties; (2) to perform an unlawful act; (3) the doing of some overt act in pursuance of the conspiracy, and (4) damage to plaintiff as a result of the acts done under the conspiracy." Bray & Gillespie Mgmt. LLC v. Lexington Ins. Co., 527 F.Supp.2d 1355, 1370 (M.D. Fla. 2007) (citing Fla, Fern Growers Ass'n v. Concerned Citizens of Putnam Cnty., 616 So.2d 562, 565 (Fla. 5th DCA 1993)); see also, Vance v. Chandler, 231 Ill.App.3d 747, 173 Ill.Dec. 525, 597 N.E.2d 233, 236 (1992) (citations omitted); Tatone v. Sun-Trust Mortg., Inc., 857 F.Supp.2d 821, 838-39 (D.Minn.2012). "[E]ach [co-conspirator] 'need only know of the scheme and assist in it in some way to be held responsible for all of the acts of his coconspirators.'" SunGard Pub. Sector, Inc. v. Innoprise Software, Inc., No. 6:10-cv-1815-Orl-28GJK, 2012 WL 360170, at *7 (M.D.Fla. Feb. 2, 2012) (quoting Charles v. Fla. Foreclosure Placement Ctr., LLC, 988 So.2d 1157, 1160 (Fla. 3d DCA 2008)). A civil conspiracy claim is not an independent cause of action. Behrman v. Allstate Life Ins. Co., 178 Fed.Appx. 862, 863 (11th Cir.2006). "Thus, `an actionable conspiracy requires an actionable underlying tort or wrong.'" Bray & Gillespie Mgmt. LLC, 527 F.Supp.2d at 1370 (quoting Fla. Fern Growers Ass'n, 616 So.2d at 565); see also, Tatone, 857 F.Supp.2d at 839.
Count 1 of the Amended Complaint asserts a claim for civil conspiracy to commit fraud. The crux of the cause of action is that GECC conspired with Petters and Petters Capital to commit fraud upon the Palm Beach Funds. Thus, common law fraud is the underlying tort.
The Plaintiff sufficiently alleges the first, second, and fourth elements of a civil conspiracy. As to the first and second element — an agreement between two or more parties to perform an unlawful act — the Plaintiff alleges:
Am. Compl. ¶¶ 169-72. These allegations are sufficient to allege a tacit agreement between GECC and Petters, and as discussed above, the Plaintiff sufficiently alleges the elements of common law fraud, which is the underlying tort or "unlawful act." The Plaintiff also properly alleges the fourth element of civil conspiracy — damage to plaintiff as a result of the acts done under the conspiracy. The Plaintiff alleges that "[a]s a result of the Conspiracy, and GECC's joinder thereof, and the actions and inactions committed by Petters and Petters Capital ... and GECC ... in furtherance of the Conspiracy, the Palm Beach Funds were damaged in excess of $1 Billion." Am. Compl. ¶ 173.
Finally, the Plaintiff sufficiently alleges the third element of conspiracy — the doing of some overt act in pursuance of the conspiracy. The Plaintiff alleges that GECC knowingly assisted, furthered, encouraged and concealed Petters' fraud by, among other things:
Am. Compl. ¶ 171. Some of these allegations, as discussed in Section V(B), infra, amount to little more than failing to blow the whistle on Petters' fraud. The Court has already found that GECC had no duty to the Palm Beach Funds to disclose Petters' fraud, and mere inaction may not be enough to constitute an "overt act." However, the remaining allegations, when considered in the context of the detailed allegations in paragraphs 1 through 165, plausibly amount to at least one affirmative overt act which furthered the Petters' conspiracy. Accordingly, the Court finds that these allegations are sufficient to establish at this stage in the proceedings that GECC committed an overt act in furtherance
For the reasons just discussed, the Court finds that the Plaintiff states a claim for conspiracy to commit fraud.
In Count 6 of the Amended Complaint, the Plaintiff asserts a claim for conspiracy to commit fraudulent concealment. The crux of this cause of action is that GECC conspired with Petters and Petters Capital to commit fraud concealment with respect to the Palm Beach Funds. Thus, fraudulent concealment is the underlying tort. As with the claim for conspiracy to commit fraud, the Plaintiff must allege the elements of civil conspiracy along with the elements of fraudulent concealment in order to properly state a claim for conspiracy to commit fraudulent concealment. For the reasons discussed below, the Court finds that the Plaintiff fails to do so.
Although Count 6 contains allegations which would be sufficient to establish a claim for fraudulent concealment against Petters, Count 6 contains virtually no allegations relating to GECC's alleged participation in a conspiracy to commit fraudulent concealment. There is no allegation that GECC and Petters had an agreement, either tacit or explicit, to commit fraudulent concealment. There is no allegation that GECC did any overt act in pursuance of an alleged conspiracy. In fact, the only allegation in Count 6 that even mentions GECC is the following: "GECC had actual knowledge of the Conspiracy." Am. Compl. ¶ 207. Accordingly, Count 6 fails to state a claim for conspiracy to commit fraudulent concealment and will be dismissed.
In Count II of the Amended Complaint, the Plaintiff asserts a claim for aiding and abetting fraud. Liability for aiding or abetting fraud requires a showing that an underlying fraud existed, the defendant had actual knowledge of the fraud, and the defendant substantially assisted the commission of the fraud. ZP No. 54 Ltd. P'ship v. Fid. & Deposit Co., 917 So.2d 368, 372 (Fla. 5th DCA 2005); E-Shops Corp. v. U.S. Bank Nat'l Ass'n, 795 F.Supp.2d 874, 877 (D.Minn.2011); Sirazi v. Gen. Mediterranean Holding, SA, No. 12 C 0653, 2013 WL 812271, at *7 (N.D.Il. Mar. 5, 2013) (quoting Thornwood, Inc. v. Jenner & Block, 344 Ill.App.3d 15, 278 Ill.Dec. 891, 799 N.E.2d 756, 767 (2003)).
Here, the Plaintiff fails to sufficiently allege the existence of an underlying fraud. As previously noted by the Court, fraud is not simply a generic term for wrongdoing. Rather, it is a specific tort, the elements of which must be alleged with particularity under Rule 9(b). It is true that the hallmark of a Ponzi scheme, which is inherently fraudulent in nature, is "that the entity gives the false appearance of profitability by seeking investments from new sources rather than earning profits from assets already invested." Carney v. Lopez, No. 3:12-cv-00182 (SRU), 2013 WL 1274741, at *9 (D.Conn. Mar. 28, 2013). Accordingly, when properly pled, the existence of a Ponzi scheme can be the basis for a claim for common law fraud or aiding and abetting fraud. However, in the operative part of Count 2, the Plaintiff makes virtually no allegations which refer to the specifics of the underlying fraud. Although the Plaintiff "re-alleges paragraphs 1 through 165" within Count 2, this is not sufficient to put GECC or the Court on notice as to which of the
Further confusing the issue is the fact that the Plaintiff asserts four allegedly separate and distinct fraud claims against GECC (fraud by omission, fraudulent misrepresentation, fraudulent concealment, and fraud) in addition to two other conspiracy claims (Conspiracy to commit fraud and conspiracy to commit fraudulent concealment). The Plaintiff undoubtedly understands that fraud comes in many forms and that any one of these forms could potentially serve as the basis for the Plaintiffs aiding and abetting claim. Without any specific allegations as to the underlying fraud in Count 2, it is impossible to know which form of fraud the Plaintiff is referring to when, for example, the Plaintiff alleges:
Am. Compl. ¶¶ 176-183. Accordingly, the Plaintiff fails to allege with the requisite specificity required by Rule 9(b) the underlying fraud upon which Count 2 is based.
Furthermore, the Plaintiff fails to allege that GECC provided "substantial assistance" to Petters' fraud. As to this element, the Plaintiff alleges that GECC knowingly assisted, furthered, encouraged and concealed Petters' fraud by, among other things:
Am. Compl. ¶ 171. Out of these sixteen specific instances, at least eight ((a), (b), (d), (e), (f), (g), (i), and (o)) consist of nothing more than a failure to act. Under limited circumstances, courts have held that inaction can form the basis of aiding and abetting liability if it rises to the level of providing substantial assistance. Matthews v. Eichorn Motors, Inc., 800 N.W.2d 823, 831 (Minn.Ct.App.2011). However, "state and federal courts generally have held that a defendant's failure to act does not constitute `substantial assistance.'" Id.; see also, Sharp Int'l Corp. v. State Street Bank and Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43, 49 (2d Cir.2005) (internal citation marks omitted) (quoting Kaufman v. Cohen, 307 A.D.2d 113, 760 N.Y.S.2d 157, 170 (2003)); Hines v. FiServ, Inc., No. 8:08-cv-2569-T-30AEP, 2010 WL 1249838, at *4 (M.D.Fla. Mar. 25, 2010). The Court finds that these allegations, which amount to nothing more than inaction, do not rise to level of substantial assistance and thus cannot provide the basis for aiding and abetting liability.
The remaining allegations, even when taken together, do not amount to "substantial assistance." Substantial assistance requires an affirmative step on the part of the aider-and-abettor that is a "substantial factor" in causing the breach of duty. Varga v. U.S. Bank. Nat'l Ass'n, 952 F.Supp.2d 850, 859 (D.Minn.2013) (citing Am. Bank of St. Paul v. TD Bank, N.A., 713 F.3d 455, 463 (8th Cir.2013)). "To determine what constitutes substantial assistance, courts generally consider the five factors listed in the comments to section 876 of the Restatement (Second) of Torts." Id. "Those factors are: the nature of the act encouraged, the amount of assistance given, the aider-and-abettor's presence or absence at the time of the tort, its relation to the primary actor, and its state of mind." Id. (citing In re Tempromandibular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484, 1495 (8th Cir.1997)). Courts must also consider "the potentially devastating impact aiding and abetting liability might have on commercial relationships." Id.
Assuming it were true that GECC did every one of the things alleged in paragraphs
For the reasons just discussed, the Court will dismiss Count 2 for failure to state a claim for aiding and abetting fraud which is plausible on its face.
The crux of the Plaintiffs Amended Complaint is that GECC discovered Petters' fraud and arranged not to be among his victims, but did not alert anyone else, which meant that Petters was able to continue to perpetrate his Ponzi scheme. "On the one hand, this seems repugnant; on the other hand, ... [the] discovery that [Petters] was rife with fraud was an asset of [GECC], and [GECC] had a fiduciary duty to use that asset to protect its own shareholders[.]" In re Sharp Int'l Corp., 403 F.3d at 52. Whatever GECC knew about Petters' fraud, it came by that knowledge through diligent inquiries that any other lender, including the Palm Beach Funds, could have made. The Plaintiff fails to establish any general duty on the part of GECC "to precipitate its own loss in order to protect lenders that were less diligent." Id. at 53.
That being said, for the reasons discussed in the preceding sections, the Court grants GECC's Motion to Dismiss in part and will dismiss without prejudice Counts 2 through 9 of the Plaintiff's Amended Complaint for failure to state a claim upon which relief can be granted. With regard to Counts 2 through 8, the Plaintiff fails to meet the pleading requirements articulated in Federal Rule of Civil Procedure 9(b). With regard to Count 9, the Plaintiff fails to meet the pleading requirements articulated in Federal Rule of Civil Procedure 8(a). Finally, the Court denies GECC's Motion to Dismiss as to Count 1, as the Court finds that the Plaintiff sufficiently alleges the elements of a claim for civil conspiracy to commit fraud.
In the event the Plaintiff elects to file a second amended complaint and GECC files a motion to dismiss that complaint, the Court shall not consider any new arguments which could have been raised in a previous motion to dismiss but were not. Finally, should the Plaintiff file a second amended complaint which fails to comply
The Court, being fully advised in the premises and for the reasons discussed above, hereby
1. GECC's Motion to Dismiss (ECF No. 32) is
2. The Motion to Dismiss is granted to the extent it requests dismissal of Counts 2 through 9 and denied to the extent it requests dismissal of Count 1.
3. Counts 2 through 9 of the Amended Complaint (ECF No. 26) are
Restatement (Second) of Torts § 317.
Restatement (Second) of Torts § 552 cmt. d (emphasis added); see also, Sports Immortals, Inc., 67 So.3d at 440-41.
