GRAD v. ASSOCIATED BANK

PETERSON, J.

¶ 1 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.

Associated also argues the circuit court properly dismissed Grad's negligence claim because public policy considerations preclude liability. Because we conclude dismissal was warranted on other grounds, we do not address Associated's public policy argument. See State v. Castillo , 213 Wis. 2d 488, 492, 570 N.W.2d 44 (1997) (appellate courts need not address every issue when one issue is dispositive)

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 Hoid a 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.

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