Federal Court Denies Defendant Banks’ Motion for Summary Judgment on Plaintiffs’ Knowing Participation in Breach of Fiduciary Duty Claim in Stanford Ponzi Scheme Case
In Rotstain v. Trustmark Nat’l Bank, plaintiffs sued banks for assisting Stanford and his entities regarding a Ponzi scheme. No. 3:09-CV-2384-N, 2022 U.S. Dist. LEXIS 10332 (N.D. Tex. January 20, 2022). Stanford and the entities under his control sold fraudulent certificates of deposit (“CDs”) issued by the Antigua-based Stanford International Bank Limited (“SIBL”). The CDs paid relatively high rates of interest, but SIBL claimed it deployed the funds raised from CD sales only in low risk, high return funds. In reality, the CD proceeds were used to finance Stanford’s own extravagant lifestyle, and to pay off previous investors. In this suit, the plaintiffs allege that the defendant financial institutions provided banking services that supported and furthered Stanford’s scheme. The defendants filed a motion for summary judgment on multiple claims, including knowing participation in breach of fiduciary duty. The court first addressed whether there was such a claim in Texas:
As its sole remaining derivative liability claim, OSIC alleges that the Defendants knowingly participated in breaches of fiduciary duty that harmed Stanford investors. The Court turns to the legal sufficiency of such a claim. Texas has long recognized a claim for knowing participation in a breach of fiduciary duty. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (Tex. 1942). Recent decisions in state and federal courts support its continuing vitality. See, e.g., Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007); D’Onofrio Vacation Publ’ns., Inc., 888 F.3d 197, 216 (5th Cir. 2018); Taylor v. Rothstein Kass & Co., 2020 U.S. Dist. LEXIS 17435, 2020 WL 554583, at *6 n.4 (N.D. Tex. Feb. 4, 2020); Hunter Bldgs. & Mfg., L.P. v. MBI Global LLC, 436 S.W.3d 9, 15 (Tex. App.—Houston [14th Dist.] 2014, pet. denied). At least one of these cases rejects the applicability of the authorities relied on by Defendants in the context of a knowing breach of fiduciary duty. Milligan, Tr. for Westech Capital Corp. v. Salamone, 2019 U.S. Dist. LEXIS 143577, 2019 WL 4003093, at *1-2 (W.D. Tex. Aug. 23, 2019). Based on the foregoing, the Court concludes that Plaintiffs’ fiduciary breach claims are cognizable under Texas law.
Id. The court held that the plaintiff could raise breach of fiduciary duty claims by the Stanford entities against Stanford:
No fiduciary duties were owed to the CD investors directly, but OSIC can sue on behalf of the Stanford entities. The Defendants do not deny that Stanford and Davis owed fiduciary duties to the Stanford entities (of which they served as officers, directors, or both). The Banks instead argue that none of these actors owed fiduciary duties to the Named Plaintiffs as creditors of SIBL. Plaintiffs do not address this argument in their responsive briefing, and the Court treats this argument as abandoned. Nevertheless, OSIC, as assignee of the Receiver, may enforce the fiduciary duties owed by Stanford and Davis to the Stanford entities, including by means of a knowing participation claim under Texas law.
Id. The court next looked at whether the defendant banks’ actions were sufficient to establish participation on fiduciary breaches. The court held:
Defendants object that their “routine” banking services cannot amount to substantial assistance. In support of this proposition, they rely on Fifth Circuit case law holding that “grist of the mill” transactions cannot rise to the level of substantial assistance. See, e.g., Amacker v. Renaissance Asset Mgmt. LLC, 657 F.3d 252, 257 (5th Cir. 2011); Abbott v. Equity Grp., Inc., 2 F.3d 613, 621 n.24 (5th Cir. 1993). Amacker, for instance, holds that merely executing commodities trades on behalf of a third party does not constitute substantial assistance in the context of an aiding-and-abetting claim under the Commodities Exchange Act. 657 F.3d at 252. Thus, the inquiry becomes whether the Plaintiffs’ evidence suggests the Defendants did more than facilitate “grist of the mill” financial transactions. This Court has previously drawn a distinction between common services — which may rise to the level of substantial assistance — and merely routine services — which do not. Order 9 , in Kneese v. Pershing L.L.C., Civil Action No. 3:10-CV-1908-N (N.D. Tex. issued Nov. 14, 2012). And courts determining whether conduct constitutes substantial assistance look to whether the alleged aider exercised professional judgment or discretion in providing service to the primary violator. Id. at 9-10.
Plaintiffs identify evidence that the Defendants engaged with Stanford in significant, nonroutine ways that involved the exercise of substantial professional judgment and discretion. One of the Defendants provided unusual “pouching” services for CD investors’ checks. Several of the Defendants arranged unusual loans or otherwise provided revolving credit for Stanford or his entities. And several of the Defendants lent their reputation to Stanford, allowing him to open new relationships or to avoid scrutiny from other financial institutions with which he became involved. While the latter two examples could fairly be characterized as common banking services, the Court concludes that — viewed holistically — the suite of services that each Defendant offered to Stanford suffices to permit a reasonable jury to find that the Defendants rendered substantial assistance in support of the malfeasance of Stanford or the Stanford entities.
Id. Finally, the court discussed whether the defendant banks had the requisite knowledge of Stanford’s breaches of fiduciary duty:
To succeed on a claim for knowing participation in a breach of fiduciary duties, a plaintiff must prove “(1) the existence of a fiduciary relationship; (2) that the third party knew of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship.” Meadows, 492 F.3d at 639. Defendants do not contest that Stanford and Davis owed fiduciary duties to SIBL nor that the Defendants knew of that fiduciary relationship. Defendants instead argue that the record fails to establish a genuine issue of fact as to their awareness of any conduct constituting participation in the breach of those relationships.
The cases addressing claims for knowing participation in a breach of fiduciary duties establish that the third-party defendant must have had actual knowledge of the breach. See, e.g., CBIF Ltd. P’ship v. TGI Friday’s Inc., 2017 Tex. App. LEXIS 3605, 2017 WL 1455407, at *16 (Tex. App. — Dallas 2017); Seven Seas Petroleum, Inc. v. CIBC World Mkts. Corp., 2013 U.S. Dist. LEXIS 101112, 2013 WL 3803966, at *14 (S.D. Tex. 2013). Courts have made clear that a less culpable mental state, such as constructive knowledge, will not suffice. See Franklin D. Azar & Assocs., P.C. v. Bryant, 2019 U.S. Dist. LEXIS 147393, 2019 WL 5390172, at *4 (E.D. Tex. 2019). As with an aiding-and-abetting claim under the TSA, however, a plaintiff may prevail on a knowing participation claim with circumstantial evidence alone. See Franklin D. Azar, 2019 U.S. Dist. LEXIS 147393, 2019 WL 5390172 at *4 (denying summary judgment based on plaintiff’s circumstantial evidence). Hence, evidence that could support a reasonable finding either way on the issue of actual awareness will suffice to defeat summary judgment.
Id. The court then reviewed the evidence for each defendant bank and held that a fact finder could reasonably hold that they had sufficient knowledge of the fiduciary breaches to be held liable for knowing participation in breach of fiduciary duty.