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COURT OF APPEALS
DECISION
DATED AND FILED
June 7, 2011
A. John Voelker
Acting Clerk of Court of Appeals
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NOTICE
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This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official
Reports.
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See Wis. Stat. § 808.10 and Rule 809.62.
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Appeal No.
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STATE OF WISCONSIN
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IN COURT OF
APPEALS
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DISTRICT III
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Herman Grad, Marya Grad, Keith Gillam, Murielle
Vendette-Gillam, Ivan Velev and Maia Veleva,
Plaintiffs-Appellants,
v.
Associated Bank, N.A.,
Defendant-Respondent.
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APPEAL
from a judgment of the circuit court for Brown County: DONALD
R. ZUIDMULDER, Judge. Affirmed.
Before Hoover,
P.J., Peterson and Brunner, JJ.
¶1 PETERSON, J. Herman Grad, Marya Grad,
Keith Gillam, Murielle Vendette-Gillam, Ivan Velev, and Maia Veleva (collectively,
Grad) appeal a judgment dismissing their claims against Associated Bank, N.A. Grad’s complaint alleged Associated was
negligent in failing to discover that one of its customers was using Associated’s
services to defraud him. Grad also
alleged Associated aided and abetted the customer’s tortious conduct. The circuit court granted Associated’s motion
to dismiss. We conclude dismissal of Grad’s
negligence claim was proper because a bank’s duty of care to a noncustomer does
not require the bank to affirmatively investigate a customer’s activities for
possible fraud. Furthermore, the circuit court properly
dismissed Grad’s aiding and abetting claim because he did not allege that Associated
intended to assist the customer’s tortious conduct—a necessary element of
aiding and abetting liability. We therefore
affirm.
BACKGROUND
¶2 The following facts are from Grad’s complaint and are taken
as true for purposes of this appeal. From
2006 to 2009, Oxford Global Partners, LLC, perpetrated a massive investment
fraud disguised as a sophisticated foreign currency trading program. Oxford
told potential investors that they would earn steady returns by selling short a
certain foreign currency with a low interest rate and using the proceeds to
purchase a long position in a different currency yielding a higher interest
rate. This would allegedly generate a
“swap credit” that would be paid as interest to the investors. Oxford promised
that any funds invested in the program would be held in a segregated account at
Credit Suisse in Switzerland
in the name of “Crown Forex SA,” a Swiss company. In fact, no such account existed, and Oxford never transferred
any funds to Crown Forex SA. Instead,
individuals associated with Oxford
converted the funds for their own benefit.
¶3 In reliance on Oxford’s
representations, Grad decided to invest in the currency trading program and
appointed Oxford
as “sub advisor” for his investments. In
2008, individuals associated with Oxford
opened an account at Associated in the name of “Crown Forex, LLC.” Oxford
instructed Grad to deposit funds into Associated’s Crown Forex account. Between
March 4 and May 28, 2009, Grad deposited about $10 million into the account. Oxford
then moved these funds into other accounts and ultimately misappropriated them.
¶4 In October 2009, Grad sued Associated, contending it was
negligent in failing to discover and prevent Oxford’s fraudulent conduct. Grad also alleged Associated aided and
abetted Oxford’s
breach of a fiduciary duty to Grad and conversion of Grad’s property.
¶5 Specifically, Grad alleged Associated failed to comply with federal
banking regulations and industry standards in its handling of the Crown Forex
account. Grad also alleged Associated
“turned a blind eye to numerous indicia of fraud surrounding the … [a]ccount.” For instance, although the account was opened
in the name of “Crown Forex, LLC,” there were no companies registered under the
name “Crown Forex” in the United States,
with the exception of an obviously unrelated New Jersey corporation. Additionally, because “Crown Forex, LLC” was
not a validly registered business entity, it did not have a valid taxpayer
identification number, which federal regulations require a bank to obtain
before opening an account. Furthermore,
the address associated with the Crown Forex account was invalid, “Crown Forex,
LLC” did not have a listed phone number, and the account’s signatories were not
registered or licensed investment advisors.
The signatories often transferred large amounts of money from the Crown
Forex account into other accounts they held at Associated, and other funds from
the account were transferred to “offshore banking centers in high-risk
jurisdictions or countries that are known havens for financial secrecy.” Grad alleged that these “conspicuous red
flags … should have caused [Associated] to contact federal law enforcement
immediately, and to take steps to freeze transactions in the account until it
could complete an investigation into their legitimacy.”
¶6 Associated moved to dismiss Grad’s complaint. Following oral argument, the circuit court
granted the motion. The court concluded Grad’s
complaint did not establish that Associated breached a duty of care under the
circumstances because “unless there is notice to the bank of some irregularity
… from a third party … the bank has no duty to a third party.” Grad now appeals.
DISCUSSION
¶7 “A motion to dismiss a complaint for failure to state a claim
tests the legal sufficiency of the complaint.” Watts v. Watts, 137 Wis. 2d 506, 512,
405 N.W.2d 303 (1987). Whether a
complaint states a claim for relief is a question of law that we review
independently. Wausau Tile, Inc. v. County
Concrete Corp., 226 Wis. 2d
235, 245, 593 N.W.2d 445 (1999). We
accept the facts stated in the complaint as true and draw all reasonable
inferences from those facts in favor of stating a claim. Meyer v. Laser Vision Inst., 2006 WI
App 70, ¶3, 290 Wis. 2d
764, 714 N.W.2d 223. A complaint should
be dismissed for failure to state a claim only when it is quite clear there are
no conditions under which the plaintiff can recover. Casteel v. McCaughtry, 176 Wis. 2d 571, 578,
500 N.W.2d 277 (1993).
I. Negligence claim
¶8 To state a claim for negligence, a plaintiff must plead facts
that, if true, would establish four elements:
(1) the existence of a duty of care on the part of the defendant; (2) a
breach of that duty of care; (3) a causal connection between the defendant’s
breach and the plaintiff’s injury; and (4) actual loss or damage resulting from
the breach. Hoida, Inc. v. M & I Midstate
Bank, 2006 WI 69, ¶23, 291 Wis. 2d
283, 717 N.W.2d 17. The first element—duty—involves
two aspects: (1) the existence of a duty of ordinary care; and (2) an
assessment of what ordinary care requires under the circumstances. Id.,
¶27. Although Wisconsin follows the dissent
from Palsgraf
v. Long Island Railroad Co., 162 N.E. 99 (N.Y. 1928), which
concluded that everyone owes a duty to the world at large, this duty is not
unlimited but is restricted to what is reasonable under the circumstances. Hocking v. City of Dodgeville, 2009
WI 70, ¶12, 318 Wis.
2d 681, 768 N.W.2d 552. Thus, where
there is “no duty under the circumstances, no breach occurred, and there [is]
not a viable negligence claim.” Id., ¶13.
¶9 Associated contends it cannot be held liable for Grad’s
losses because it did not have a duty to Grad, a noncustomer, to investigate
and discover Oxford’s
fraudulent conduct. On two previous
occasions, our supreme court has considered the scope of a bank’s duty to a noncustomer
who claims a bank failed to detect and prevent a customer’s fraud. See
Commercial
Discount Corp. v. Milwaukee W. Bank, 61 Wis. 2d 671, 214 N.W.2d 33 (1974); Hoida, 291 Wis. 2d 283. In both cases the court held that the bank
did not have a duty to the noncustomer to take certain actions.
¶10 In Commercial Discount, 61 Wis.
2d at 679, the Simplex Shoe Company had two checking accounts with Milwaukee
Western Bank. Commercial Discount
Corporation had a perfected security interest in Simplex’s funds. Id. Simplex drew checks on the Milwaukee Western
accounts to pay other creditors. Id. at 674,
685-86. Commercial Discount sued
Milwaukee Western for return of the funds paid to the other creditors, alleging
that Milwaukee Western was liable for aiding and abetting Simplex “in diverting
all of said funds to the payment of other obligations.” Id.
at 686.
¶11 Our supreme court affirmed dismissal of Commercial Discount’s
claim. Adopting rationale from Gendler
v. Sibley State Bank, 62 F. Supp. 805 (N.D. Iowa 1945), the court
concluded a bank does not owe a “duty of inquiry” to a third party with an
adverse claim to money deposited unless the bank has specific notice of the
adverse claim. Commercial Discount, 61 Wis. 2d at
687-88. After receiving notice of the
claim, the bank has a duty “to wait a reasonable time … to allow the claimant
to begin legal action.” Id. at
688. However, before receiving notice,
the bank does not have a duty to investigate and detect its customers’
fraud. Id. at 687-88.
¶12 Grad concedes “Commercial Discount held that a
defendant bank was not liable for funds diverted by a fraudster account holder
unless [the bank] had specific knowledge of the fraud[.]” However, he argues that Commercial Discount is
distinguishable because it involved an aiding and abetting claim, not a
negligence claim. See id. at 685-86. We
disagree. The Commercial Discount
court’s reasoning applied generally to “tort” and was not limited to aiding and
abetting liability. The court explained,
“[T]he liability of a bank to an adverse claimant to a deposit is based on tort
and … to constitute a ‘tort’ there must be a duty owing by one party to another
and a breach of that duty.” Id. at
687. Thus, while Commercial Discount did
not explicitly address negligence, its reasoning is equally applicable in the
context of a negligence claim.
¶13 Grad also attempts to distinguish Commercial Discount
because it adopts rationale from Gendler,
an Iowa case. He notes that, unlike Wisconsin,
Iowa follows
the Palsgraf
majority opinion and does not recognize a universal duty of care. See,
e.g., Bain v. Gillispie, 357 N.W.2d 47, 49 (Iowa Ct. App. 1984). However, in Commercial Discount our
supreme court adopted its own characterization of Gendler and incorporated
relevant aspects of Gendler’s reasoning as “the applicable law” of Wisconsin. Commercial Discount, 61 Wis. 2d at
688. Four decades earlier, the court had
adopted the Palsgraf dissent’s universal duty rule in Osborne v. Montgomery, 203
Wis. 223, 234
N.W. 372 (1931). See Bowen v. Lumbermens Mut. Cas. Co., 183 Wis. 2d
627, 644 n.12, 517 N.W.2d 432 (1994) (citing Osborne as the source of
the universal duty rule in Wisconsin).
The court repeatedly restated the universal
duty rule thereafter. See, e.g., Schilling v. Stockel, 26 Wis. 2d 525, 531-32, 133 N.W.2d 335 (1965); Longberg
v. H. L. Green Co., 15 Wis. 2d
505, 515-16, 113 N.W.2d 129 (1962).
Against this historical backdrop, there can be little doubt that the
court decided Commercial Discount with full recognition of the universal duty
rule. In light of the rule, Commercial
Discount delineates the scope
of a bank’s duty to a noncustomer under circumstances similar to those here. Commercial Discount is therefore
relevant authority on the issue before us, despite its reliance on Gendler.
¶14 Moreover, our supreme court recently confirmed the limited
scope of a bank’s duty to noncustomers in Hoida, 291 Wis. 2d 283. There, a bank’s customer “fraudulently
misappropriated approximately $650,000 of [a] project’s construction loan
proceeds.” Id., ¶1. A subcontractor sued the bank, arguing the
bank was negligent for failing to take certain steps that allegedly would have
detected the customer’s conduct and prevented the subcontractor’s losses. Id. The subcontractor alleged the bank failed to
follow “basic industry standards” that would have required it “to identify the
subcontractors and materialmen for the project; to verify that sufficient work
on the project had been completed to ‘justify disbursement’; and to collect
lien waivers … before disbursing funds from [the] loan.” Id.,
¶20. The subcontractor claimed that “if
the [bank] does not complete these tasks, it is reasonably foreseeable that
subcontractors and materialmen will be harmed.”
Id.
¶15 The court rejected the subcontractor’s negligence theory,
holding that the bank’s “duty of ordinary care under the circumstances did not
include the obligation to undertake the [fraud prevention] tasks [the
subcontractor] seeks to impose on [it].”
Id.,
¶39. The court noted the bank had “no
special relationship, such as a fiduciary relationship” with the subcontractor,
id.,
¶34, and concluded the bank’s duty to the subcontractor did not extend to
detecting and preventing its customer’s fraudulent activities, even if industry
standards would have required the bank to take action, see id., ¶44.
¶16 Grad asserts Hoida is inapplicable because, in
that case, the bank had a contract with its customer that limited its liability
by disclaiming certain duties. See id., ¶38. However, the subcontractor in Hoida
was not a party to that contract.
We do not read Hoida as resting on the bank’s contract
with the customer. Rather, the contract
in Hoida
was one factor in the court’s analysis of “what a reasonable [bank] … would be
obliged to do in similar circumstances.”
Id.,
¶34. The absence of a contract between
Associated and Oxford
in this case does not make Hoida inapplicable.
¶17 Grad also contends our reading of Hoida and Commercial
Deposit conflicts with Wisconsin’s
universal duty rule. However, both Hoida
and Commercial
Deposit teach that, although in Wisconsin
every person owes a duty to the world, that duty is not boundless. See
Hoida,
291 Wis. 2d
283, ¶¶27, 30 n.15. Our supreme court
recently reaffirmed this view, stating, “While Wisconsin has adopted the
minority view from [Palsgraf], which established that everyone owes a duty to the
world at large, the duty owed to the world is not unlimited but rather is
restricted to what is reasonable under the circumstances.” See Hocking, 318 Wis. 2d 681, ¶12. Hoida and Commercial Deposit establish
the duty of care that is reasonable under circumstances where a noncustomer
sues a bank for failing to detect or prevent a customer’s fraud. Both cases hold that a bank’s duty to
noncustomers does not extend to monitoring its customers’ accounts for
fraudulent activities.
¶18 Contrary to the dissent’s assertion, we do not read Commercial
Discount and Hoida “for the broad proposition
that a bank has no duty to monitor its customers’ accounts for fraudulent
activity.” See dissent, ¶40. A bank may
have a duty to monitor customers’ accounts; however, the issue in this case is
whether the bank owes that duty to
noncustomers. Based on Commercial
Discount and Hoida, we conclude a bank does not.
¶19 The dissent also criticizes our reliance on Grad’s status as a
noncustomer, suggesting that consideration of Grad’s status conflicts with the universal
duty rule. See dissent, ¶44. We
disagree. Grad’s status as a noncustomer
is one fact that is pertinent to establishing the bank’s duty of care under the
circumstances. As our supreme court explained
in Hoida:
[W]hat is within the duty of ordinary care depends on
the circumstances under which the claimed duty arises. For example, what is comprised within ordinary care may depend on the relationship
between the parties or on whether the alleged tortfeasor assumed a special
role in regard to the injured party.
Hoida, 291 Wis. 2d 283, ¶32
(emphasis added). Thus, while not
determinative, Grad’s status as a noncustomer is relevant to the duty analysis.
¶20 Despite the holdings of Hoida and Commercial Deposit, Grad
cites three cases from other jurisdictions to support his argument that a bank
owes noncustomers a duty to investigate and detect customers’ fraud. See
Wymore
State Bank v. Johnson Int’l Co., 873 F.2d 1082 (8th Cir. 1989); Patrick
v. Union State Bank, 681 So. 2d 1364 (Ala.
1996); Sun ’n Sand, Inc. v. United Cal. Bank, 582 P.2d 920 (Cal. 1978). However, as the Fourth Circuit has noted, “Courts
in numerous jurisdictions have held that a bank does not owe a duty of care to
a noncustomer with whom the bank has no direct relationship.” Eisenberg v. Wachovia Bank, N.A.,
301 F.3d 220, 225 (4th Cir. 2002) (collecting cases). Grad’s reference to isolated cases does not
convince us to depart from the principle set forth in Hoida and Commercial
Discount, particularly in light of the substantial authority from other
jurisdictions supporting our position.
¶21 Grad also relies heavily upon Associated’s alleged violations
of federal banking regulations to support his claim that Associated had a duty
to detect and prevent Oxford’s
fraud. Yet, there is no private right of
action for violation of the relevant federal banking regulations. See
B.E.L.T.,
Inc. v. Wachovia Corp., 403 F.3d 474, 476 (7th Cir. 2005) (regulation
requiring banks to notify Treasury Department of “any known or suspected Federal
criminal violation” does not create a private right of action for damages); Hanninen
v. Fedoravitch, 583 F. Supp. 2d 322, 326 (D. Conn. 2008) (neither USA
Patriot Act nor Bank Secrecy Act authorizes private right of action); El
Camino Res., Ltd. v. Huntington Nat’l Bank, 722 F. Supp. 2d 875,
923 (W.D. Mich. 2010) (Bank Secrecy Act does not create private right of
action). Indeed, Grad does not contend
that the federal banking regulations create a private right of action.
¶22 Instead, Grad argues that the federal regulations impose a
common law duty of care upon Associated.
We disagree. Multiple federal
courts have concluded that, because the federal banking regulations do not authorize
a private right of action, they cannot be used to create a common law duty of
care. For instance, in In re
Agape Litigation, 681 F. Supp. 2d 352, 357-58, 360 (E.D.N.Y. 2010),
victims of a Ponzi scheme sued the bank where they had deposited their funds
and alleged the bank “breached a duty of care imposed by the monitoring
requirements of the Bank Secrecy Act[.]”
After restating the general rule that banks do not have a duty to
protect noncustomers from customers’ intentional torts, the Agape
court held that the plaintiffs could not rely on the Bank Secrecy Act
to create a duty. Id. at 360. The court concluded, “[B]ecause the Bank
Secrecy Act does not create a private right of action, the Court can perceive
no sound reason to recognize a duty of care that is predicated upon the
statute’s monitoring requirements.” Id.
¶23 Similarly, in Marlin
v. Moody National Bank, N.A., 2006 WL 2382325, at *7 (S.D. Tex. Aug.
16, 2006), plaintiffs alleged that “the Bank Secrecy Act imposes a duty on
banks to investigate, prevent money laundering, and report suspicious
activity.” Again, the court flatly
rejected the plaintiffs’ argument:
The obligation under [the Bank Secrecy Act] is to the
government rather than some remote victim. The [bank’s] obligation is not to roam through
its customers looking for crooks and terrorists. By that act, banks do not become guarantors of
the integrity of the deals of their customers. It does not create a private right of action
and, therefore, does not establish a standard of care.
Id.; see also Armstrong v. American
Pallet Leasing, Inc., 678 F. Supp. 2d 827, 875 (N.D. Iowa 2009) (“Because
the Bank Secrecy Act does not permit a private right of action, it follows that
it cannot be construed as giving rise to a duty of care flowing to plaintiffs
in this case.”); Aiken v. Interglobal Mergers & Acquisitions, 2006 WL
1878323, at *2 (S.D.N.Y. July 5, 2006) (court may not impose duty of care based
on Bank Secrecy Act because it does not permit a private right of action).
¶24 The dissent argues that the federal cases we cite are “of
limited value in determining the scope of the duty of care in this case”
because they come from jurisdictions that do not subscribe to Wisconsin’s universal duty rule. See
dissent, ¶47. The dissent takes issue
with the fact that these jurisdictions limit duty based on certain factors,
particularly foreseeability of harm. See id. However, even in Wisconsin, the scope of a defendant’s duty
of care is not unlimited. See Hocking,
318 Wis. 2d
681, ¶12. Furthermore, we do not agree
that the holdings in Agape, Marlin, Armstrong,
and Aiken
rely upon each jurisdiction’s distinct conception of duty. These cases do not analyze factors like
foreesability of harm in order to conclude that federal banking regulations do
not impose a duty of care. Instead, they
conclude that, because a bank’s obligation under the regulations is “to the
government rather than some remote victim,” the regulations should not be used
to impose common law liability. See Marlin, 2006 WL 2382325, at *7.
¶25 Moreover, the dissent’s claim that the federal regulations form
a basis for common law liability is unconvincing. See dissent, ¶¶48-49. As the dissent recognizes, such a regulation
must express a legislative intent that the regulation could become a basis for
civil liability. See id., ¶48. The dissent concedes the relevant banking
regulations contain no such expression. See id., ¶49. Instead, the dissent infers the expression
from the absence of an expression to the contrary. See
id. We cannot make such a leap.
¶26 The circuit court in this case noted that the banking industry
“is among the most highly regulated industries that we have. It is regulated at the Federal level. It is regulated at the State level. …
[N]owhere do I hear anyone saying that any banking regulation … would carry
with it some duty that the civil courts could … enforce[.]” The court concluded that if the banking
industry “should be subjected to the type of lawsuits that would be suggested
in this case,” such a decision “should be made by the [legislature].” We agree, and we therefore decline to hold
that federal banking regulations create a common law duty of care. Thus, because Associated’s duty of care to
Grad did not require Associated to investigate and detect Oxford’s fraud, we conclude the circuit court
properly dismissed Grad’s negligence claim.
¶27 The dissent points out that we decline to reach Associated’s
argument that public policy factors preclude liability. See
dissent, ¶50. However, there is no need
for us to address public policy, given that we conclude Associated’s duty of
care to Grad did not require Associated to investigate and detect Oxford’s fraud. “An appellate court should decide cases on
the narrowest possible grounds.” State
v. Castillo, 213 Wis. 2d
488, 492, 570 N.W.2d 44 (1997).
II. Aiding and abetting claim
¶28 In addition to his negligence claim, Grad also contends
Associated is liable for aiding and abetting Oxford’s intentional torts—namely, breach of
fiduciary duty and conversion. A person
is liable in tort for aiding and abetting if the person: (1) undertakes conduct that, as a matter of
objective fact, aids another in the commission of an unlawful act; and (2)
consciously desires or intends that his conduct will yield such assistance. Winslow v. Brown, 125 Wis. 2d 327, 336,
371 N.W.2d 417 (Ct. App. 1985). Intent
is therefore an essential element of an aiding and abetting claim: “Mere presence, with no effort to prevent
unlawful conduct, is not aiding and abetting unless an intent to assist is
communicated.” Id. at 336-37.
¶29 Grad’s complaint does not allege that Associated intended to
assist Oxford
in breaching a fiduciary duty to Grad or converting his property. To the contrary, Grad’s complaint alleges
that, had Associated known about the fraud, it would have “[frozen] the
accounts and immediately report[ed] the suspicious facts and circumstances to
law enforcement.” This assertion forms
the crux of Grad’s negligence claim—he alleges Associated was negligent
because, had it detected Oxford’s
fraudulent conduct, it would have somehow acted to prevent the fraud. This allegation is inconsistent with a theory
that Associated intended to assist Oxford’s
intentional torts.
¶30 Despite his complaint’s failure to allege intent, Grad contends
a jury could “infer the intent required for aiding and abetting from [Associated’s]
inaction in the face of wrongdoing.” We
disagree. Wisconsin
courts have consistently held that a defendant’s mere presence at the
commission of a tortious act is insufficient to support an inference of intent to
assist, even if the defendant does not attempt to stop the tortious act. For instance, in Winslow, 125 Wis. 2d at 329, the
plaintiff was riding a bicycle on a trail reserved for bicycle use when he was
struck by an automobile in which the defendants were passengers. He sought damages from the passengers,
alleging that they aided and abetted the driver’s tortious conduct. Id. We concluded the circuit court properly
dismissed the aiding and abetting claim because “passively accompanying a
driver on an unlawful trip does not raise an inference of a willingness to
assist.” Id. at 336-37; see also Edwardson v. American Family Mut. Ins. Co.,
223 Wis. 2d
754, 765, 589 N.W.2d 436 (Ct. App. 1998)
(Mere presence, with no effort to prevent the tortious act, is not sufficient
to impose aiding and abetting liability.).
¶31 Grad cites Fredrickson v. Kabat, 266 Wis. 442, 446-47, 63
N.W.2d 756 (1954), for the proposition that a jury may infer intent to aid and
abet based on “evidence that a person is present at the commission of [a tort],
without disapproving or opposing it[.]”
However, the relevant quotation from Fredrickson actually
reads:
A mere bystander at the commission of an assault and
battery does not become liable as a participant because he does not interfere
to prevent it. But, “evidence that a
person is present at the commission of an assault and battery, without
disapproving or opposing it, is evidence from which, in connection with other circumstances, the jury may infer that he
assented thereto, and lent to it his countenance and approval, and was thereby
aiding and abetting the same.”
Id.
(emphasis added; citation omitted) (quoting Rhinehart v. Whitehead,
64 Wis. 42,
45, 24 N.W. 401 (1885)). Thus, Fredrickson,
like Winslow,
holds that a defendant’s mere presence, combined with failure to try to prevent
a tortious act, does not allow a jury to infer intent to assist. Rather, there must be “other circumstances”
showing that the defendant “assented [to the tortious act], and lent to it his
countenance and approval[.]” Fredrickson,
266 Wis. at
446-47. Here, Grad has not alleged any
such “other circumstances” that would allow a jury to infer that Associated
intended to assist Oxford’s
tortious conduct. Accordingly, the
circuit court properly dismissed Grad’s aiding and abetting claim.
By the Court.—Judgment affirmed.
Not recommended for
publication in the official reports.
¶32 brunner, j.
(concurring in part; dissenting in part). I
agree that Grad has failed to allege that Associated Bank in any way intended
to assist Oxford’s
intentional torts, and fully join Part II of the court’s opinion.
¶33 However,
I do not agree that Grad has failed to state a claim for negligence. If
Grad’s allegations are true, the Crown Forex account was so obviously
fraudulent that, had Associated Bank bothered to look, it would have discovered
the sham and prevented the misappropriation of millions of dollars. The court today concludes that, despite
numerous federal banking regulations requiring Associated Bank to know its
customers and what they are up to, the bank has no affirmative duty to
investigate its customers’ potential fraud.
I cannot agree with that conclusion because it is inconsistent with Wisconsin law.
¶34 Wisconsin
subscribes to the minority view of Palsgraf
v. Long Island Railroad Co., 162 N.E. 99 (N.Y. 1928), which holds that
everyone owes a duty to the world at large to refrain from acts that may harm
others. See Hocking v. City of Dodgeville, 2009 WI 70, ¶12, 318 Wis. 2d 681, 768
N.W.2d 552. Citing Hoida, Inc. v. M & I Midstate Bank,
2006 WI 69, ¶¶30-32, 291 Wis. 2d
283, 717 N.W.2d 17, the Hocking
court emphasized that the duty “is not unlimited but rather is restricted to
what is reasonable under the circumstances.”
Hocking, 318 Wis. 2d 681, ¶12.
¶35 The
pertinent regulations require that banks know who they are dealing with. Banks must implement a written Customer
Identification Program that includes risk-based procedures sufficient for the
bank to “form a reasonable belief that it knows the true identity of each
customer.” 31 C.F.R.
§ 1020.220(a)(1), (2). At a minimum, the bank must collect, before
opening an account, the prospective business customer’s name, address, and
taxpayer identification number. 31
C.F.R. § 1020.220(a)(2)(i)(A)(1)-(4).
¶36 But
that is not all. Within a reasonable
time after the account is opened, the bank must use that information to verify the customer’s identity. 31 C.F.R. § 1020.220(a)(2)(ii). If a bank cannot verify a business customer’s
true identity, it must take additional steps to “obtain information about
individuals with authority or control” over the account. 31 C.F.R. § 1020.220(a)(2)(ii)(C). And a bank’s identification program must
provide for circumstances in which it will refuse to open an account, or close
an account after attempts to verify a customer’s identity have failed. 31 C.F.R. § 1020.220(a)(2)(iii)(A),
(C).
¶37 Grad
alleges Associated Bank completely abdicated its duties under these
regulations. Associated Bank permitted Oxford to open the
account in the name of a nonexistent company.
Because the company’s existence was complete fantasy, the business did
not have a valid taxpayer identification number. Oxford
provided a fake address. Associated Bank
apparently did not even obtain a valid phone number.
¶38 A
bank’s responsibility does not end at collecting and verifying the customer’s
identity. The financial institution must
“maintain a due diligence program that includes policies, procedures, and
controls that are reasonably
designed to detect and report any … suspicious activity conducted through or
involving any private banking account that is established, maintained,
administered, or managed in the United States by such financial institution.” 31 C.F.R. § 1010.620(a). The program
must, at a minimum, ascertain the identity of all nominal and beneficial owners
of the account, the source of the deposited funds and the purpose for which the
funds are to be used. 31 C.F.R. § 1010.620(b)(1), (3). Further, the bank must “[r]eview the activity
of the account to ensure that it is consistent with the information obtained
about the client’s source of funds, and with the stated purpose and expected
use of the account ….” 31 C.F.R. § 1010.620(b)(4). Any suspicious activity conducted “to, from,
or through” the account must be reported to federal authorities. Id.; see also 12 C.F.R. § 208.62 (2011);
31 C.F.R. § 1020.320.
¶39 Grad
alleges Associated Bank’s program to ferret out suspicious activity was
woefully inadequate. The program
allegedly failed to account for large, round-dollar wire transfers out of the
Crown Forex account soon after the funds were deposited. The outgoing funds were allegedly directed to
offshore banking centers in high-risk jurisdictions or countries known for
financial secrecy. All this, and
Associated Bank was allegedly aware the entire time that the money in the Crown
Forex account was held in trust and invested on behalf of the plaintiffs.
¶40 Given
Wisconsin’s formulation of duty and the circumstances of this case, what
possible justification can there be for granting Associated Bank’s motion to
dismiss on duty grounds? Despite Hoida’s repeated directive that a
party’s duty of ordinary care depends on what is reasonable under the
circumstances, see Hoida, 291 Wis. 2d 283, ¶¶30-32, the court concludes that this
case is controlled by two decisions with different facts: Commercial Discount Corp. v. Milwaukee
Western Bank, 61 Wis. 2d
671, 214 N.W.2d 33 (1974), and Hoida. Neither stands for the broad proposition that
a bank has no duty to monitor its customers’ accounts for fraudulent activity.
¶41 In
Commercial Discount, 61 Wis. 2d at 685-88,
our supreme court held that no aider and abettor liability attached to a bank
that merely completed transactions at its customer’s behest. The court construed the plaintiff’s “aider
and abettor” allegation as “charging the defendant with knowledge that the
funds deposited and drawn on the [customer’s] account belonged to another
person.” Id.
at 687. The court concluded that even if
the bank had such knowledge, it amounted only to the “means” of determining
whether the money was properly deposited or withdrawn. Id. at
687-88. In other words, a bank is
entitled to assume that, absent contrary notice by a third party, a business
customer has authority over the funds deposited to, and withdrawn from, its
account. That is not the same as holding
that a bank has no duty to investigate and detect its customers’ fraud.
¶42 Hoida is also inapposite. In that case, a real estate developer
obtained a loan from M & I Bank, who in turn hired McDonald Title Company
to disperse construction funds to a general contractor. Hoida,
291 Wis. 2d
283, ¶¶3‑6. Hoida, a subcontractor
who had not been paid, filed suit against M & I and McDonald Title after an
investigation uncovered that the developer and general contractor had
misappropriated a large amount of the loan.
Id., ¶¶7, 11, 13. Hoida alleged that M & I and McDonald
Title were required to identify Hoida as a subcontractor on the project, verify
that the progress on the project was sufficient to justify the release of funds
requested by the general contractor and the developer, or secure lien waivers
from Hoida. Id.,
¶20. Our supreme court, in concluding
that neither M & I nor McDonald Title had a duty to prevent Hoida’s losses,
extensively analyzed the contracts between the developer, M & I and
McDonald Title to establish the standard of care, which did not include the
affirmative acts alleged by Hoida. Id.,
¶¶35, 38-40. Again, Hoida does not stand for the broad
rule that a bank has no duty to monitor its customers’ accounts for fraud.
¶43 In
addition, Grad draws a valid distinction between Hoida and the present case.
The court does not read Hoida
as resting on M & I’s contracts with the developer and McDonald Title, see majority, ¶16, but those contracts
plainly informed the Hoida
court’s duty of care analysis, see Hoida,
¶¶35, 38-40. Here, there is no contract
from which we may determine the scope of Associated Bank’s duty of care. Hoida
is therefore of limited value in determining what is reasonable under the
circumstances of this case.
¶44 The
court places great emphasis on the fact that Grad was not an Associated Bank
customer. The significance of this fact
is not immediately apparent to me. If Wisconsin is to remain a
Palsgraf minority state, then as
long as Associated Bank owed a duty of care to someone, anyone injured by a breach of that duty is entitled to recover
damages. Indeed, that is Justice
Andrews’ primary point in his Palsgraf
dissent. See Palsgraf, 162 N.E. at 103 (Andrews, J., dissenting)
(“There needs be duty due the one complaining, but this is not a duty to a
particular individual because as to him harm might be expected. Harm to [someone] being the natural result of
the act, not only that one alone, but all those in fact injured may
complain.”). Wisconsin’s duty rule holds that each person
is obligated to refrain from acts that will cause foreseeable harm to others
“even though the nature of that harm and the identity of the harmed person or
harmed interest is unknown at the time of the act.” Dixson
v. Wisconsin Health Org. Ins. Corp., 2000 WI 95, ¶22, 237 Wis. 2d 149, 612
N.W.2d 721. The court’s analysis misses
the mark because it focuses on the identity of the harmed person rather than
the foreseeability of the harm. See Antwaun A. v. Heritage Mut. Ins. Co.,
228 Wis. 2d
44, 56, 596 N.W.2d 456 (1999) (existence of a duty hinges on
foreseeability). In doing so, the court
treats injured parties differently depending solely on whether they happened to
use Associated Bank’s services.
¶45 The
federal cases cited by the court add little to the analysis. It is well established that federal courts
are courts of limited jurisdiction, and may hear actions only where authorized
by Congress. Lawrence Twp. Bd. of Educ. v. New Jersey, 417 F.3d 368, 371 (3rd
Cir. 2005). Because the federal banking
regulations Grad cites are silent as to whether they permit a private cause of
action, it is no surprise that federal courts have declined to create one. See Alexander
v. Sandoval, 532 U.S.
275, 286-87 (2001) (“Without [such language], a cause of action does not exist
and courts may not create one, no matter how desirable that might be as a
policy matter, or how compatible with the statute.”). That does not, however, preclude this court
from permitting Grad’s suit. See id. at 287 (“Raising up
causes of action where a statute has not created them may be a proper function
for common-law courts, but not for federal tribunals.”).
¶46 Perhaps
recognizing that we are not bound by a federal court’s refusal to recognize a private
cause of action, the court cites four district court cases holding that the
federal banking regulations do not impart a common-law duty of ordinary
care. See majority, ¶¶22-23 (citing In re Agape Litig., 681 F. Supp. 2d 352 (E.D.N.Y. 2010); Armstrong v. American Pallet Leasing, Inc.,
678 F. Supp. 2d 827 (N.D. Iowa 2009); Marlin
v. Moody Nat’l Bank., N.A., 2006 WL 2382325 (S.D. Tex. Aug. 16, 2006);
and Aiken v. Interglobal Mergers &
Acquisitions, 2006 WL 1878323 (S.D.N.Y. July 5, 2006)).
¶47 None
of those district court cases hold even persuasive value. As the court concedes, these authorities are
premised on the federal courts’ refusal to recognize a private cause of action,
see majority, ¶22, a conclusion which
is not binding on this court, see Alexander,
532 U.S.
at 287. And in any event, none of those
decisions applied the law of jurisdictions that subscribe to Wisconsin’s view of duty. They are therefore of limited value in
determining the scope of the duty of care in this case. See Del
Lago Partners, Inc. v. Smith, 307 S.W.3d 762, 767 (Tex. 2010) (under
Texas law, duty requires balancing of a number of factors, including risk,
foreseeability, likelihood of injury, and the consequences of placing the
burden on the defendant); J.A.H. v.
Wadle & Assocs., P.C., 589 N.W.2d 256, 258 (Iowa 1999) (duty
involves balancing the relationship between the parties, reasonable
foreseeability of harm to the injured person, and public policy considerations
to determine whether a particular person is entitled to be protected from a
particular type of harm); Palsgraf,
162 N.E. at 99 (under New York law, duty is predicated upon foreseeability of
injury to the person harmed). What is
more, Marlin, which was
subsequently cited by Armstrong,
did not provide even a single authority for its conclusion that “[b]anks have
no duty to non-customers.” See Marlin, 2006 WL 2382325, at
*7. And Armstrong is not even on point, as the issue there was whether
the bank and its customers had a fiduciary relationship, not whether the bank
owed its customers a duty of ordinary care.
See Armstrong, 678 F.
Supp. 2d at 874-75.
¶48 Instead,
Wisconsin law will, under certain
circumstances, look to the content of statutes and regulations to discern the
requisite standard of care. This is so
when the harm inflicted was the type the statute was designed to prevent, the
person injured was within the class of persons sought to be protected, and
there is some expression of legislative intent that the statute become a basis
for the imposition of civil liability. Taft v. Derricks, 2000 WI App 103,
¶12, 235 Wis. 2d
22, 613 N.W.2d 190.
¶49 Here,
the banking regulations Grad cites were designed to ferret out precisely the
type of criminal enterprise that caused Grad’s injury. See 31
U.S.C. § 5311 (2010). Although the
statutes and regulations do not explicitly permit a private cause of action,
“the requisite [legislative] intent [regarding civil liability] may be supplied
by necessary implication from the language of the statute.” Nordeen
v. Hammerlund, 132 Wis. 2d
164, 168-69, 389 N.W.2d 828 (Ct. App. 1986).
Congress knew how to preclude liability for financial institutions, and
has provided only one “safe harbor,” found in 31 U.S.C. § 5318(g)(3)
(2010), which immunizes against civil liability for voluntary disclosures of
possible violations of laws or regulations.
Notably, Congress has not similarly immunized financial institutions for
their failure to make required
reports or keep required records.
Indeed, Associated Bank may be subject to civil penalties for its
failure to do those things. See 31 C.F.R. § 1010.820.
¶50 If
it is appropriate to preclude liability in this case, it must be done by
application of public policy, an issue that the court declines to reach. See majority,
¶1 n.1. But what public policy is served
by shielding from liability a bank that, contrary to federal regulations,
allowed a customer to create an account with totally false information, never
verified that information, and never investigated transfers of huge sums in
suspicious configurations to high-risk jurisdictions? Based on Grad’s allegations, each of the
public policy factors often cited by Wisconsin
courts supports the imposition of liability in this case. Grad’s injury followed directly from Associated
Bank’s negligence, which was so egregious that it should be required to
compensate Grad for his losses. The harm
that flowed from Associated Bank’s negligence was in no way extraordinary or
unforeseen. Imposing liability in this
case would not place any higher burden on financial institutions than that
already placed by federal regulations.
Given the public concern for protecting investors and the stability of
our financial system, I cannot conceive of a case in which public policy is
more supportive of allowing a third party to proceed against financial
institutions for their negligent failure to follow banking laws. The matter should at least be remanded for
further proceedings, as application of public policy is a matter best left
until after a jury has found the relevant facts. See Kessel
v. Stansfield Vending, Inc.,
2006 WI App 68, ¶36, 291 Wis. 2d
504, 714 N.W.2d 206.
¶51 Federal
banking regulations make clear that a financial institution may not stand idly
by as its accounts are used for fraud.
Because I conclude that those regulations establish a standard of care
that Associated Bank has allegedly breached, I respectfully dissent.