Evans v. ZB, N.A.

          MEMORANDUM AND ORDER RE: MOTION TO DISMISS

          WILLIAM B. SHUBB, UNITED STATES DISTRICT JUDGE

         Ronald C. Evans, Joan M. Evans, and Dennis Treadaway (collectively “plaintiffs”) initiated this action on behalf of over fifty people against defendant ZB, N.A., a national banking association, doing business as California Bank & Trust (“CB&T”), for allegedly knowingly providing substantial assistance to a fraudulent scheme initiated by International Manufacturing Group, Inc. (“IMG”). Presently before the court is defendant's Motion to Dismiss plaintiffs' First Amended Complaint. (Docket No. 44).

         I. Relevant Allegations and Procedural Background

         IMG is a California corporation allegedly created to import latex surgical gloves and related medical products manufactured in Asia for resale in the United States. (Compl. ¶ 1 (Docket No. 42).) As has since been determined, IMG was operating a Ponzi scheme directed by its Chief Executive Officer, Deepal Wannakuwatte (“Wannakuwatte”), who has pled guilty to federal fraud charges and is serving twenty years in prison. (Compl. ¶¶ 78, 85.) IMG solicited investors by telling them their money would be used to purchase latex gloves from Asian manufacturers that would then be sold to IMG's purported customers. (Compl. ¶ 1.) In exchange for the money, IMG issued promissory notes. (Compl. ¶ 91.) The investors' funds were not, however, used for the intended purpose. (Compl. ¶ 6.) Instead, the funds were deposited at CB&T and used to pay back prior investors. (Compl. ¶ 24.)

         Before October 2009, CB&T made nine loans to IMG. (Compl. ¶ 95.) CB&T monitored, on a daily basis, the deposits of investor money into IMG's accounts. (Compl. ¶ 24.) At the inception of the loans, the monthly interest was to be paid out of the IMG General Account #7631 with automatic debits. (Compl. ¶ 25.) However, the automatic debit process did not work because there were insufficient funds. (Id.) IMG accrued millions of dollars in overdraft fees at CB&T. (Id.)

         Despite being aware of IMG's insufficient cashflow, over the course of their lending relationship, CB&T ignored IMG's defaults and waived late charges and interest penalties, granted 20 maturity date extensions and 21 collateral swaps, adjusted loan rates of interest over 20 times, and accepted personal guarantees from Wannakuwatte at least 7 times. (Compl. ¶¶ 58, 62, 100.)

         IMG had both cash investors as well as investors who provided Standby Letters of Credit (“SLOC's”) in favor of CB&T. (Compl. ¶ 16). The purpose of each SLOC was for CB&T to finance and thereby monitor the manufacturing of medical gloves in Asia being purchased by IMG as part of IMG's business. (Compl. ¶ 19.) SLOCs were not intended to be direct loan payments to IMG. (Id.) After continued defaults by IMG, CB&T foreclosed on the SLOC pledged by a non-local investor. (Id.) CB&T, however, refused to foreclose on the security pledged by eight local Sacramento area SLOC investors. (Id.)

         Sometime in 2009, but prior to October 2009, CB&T submitted “bogus” sales invoices to draw upon a $9 million SLOC obtained by applicant Jamestown Health & Medical Supply, LLC from Bank of America for CB&T. (Compl. ¶¶ 63, 121.) In October 2009, CB&T gave notice to IMG that it was terminating further secured lending but would still allow IMG to deposit new investors' money into IMG's Wholesale Account #4841. (Compl. ¶ 29.) CB&T was repaid in full by February 2011. (Compl. ¶ 30.)

         On January 21, 2014, one day after IMG filed for bankruptcy protection, Ronald Evans and his wife, Joan Evans, each invested $50, 000 with IMG. (Compl. ¶¶ 40, 48.) Between 2007 and 2014, and presumably before IMG filed for bankruptcy on May 30, 2014, Dennis Treadaway invested more than $2 million with IMG. (Compl. ¶ 49.) On May 8, 2014, Wannakuwatte pled guilty to federal fraud charges.^[1] On May 30, 2014, IMG and Wannakuwatte both declared bankruptcy. (Compl. ¶ 78.) On May 6, 2016, IMG's bankruptcy trustee filed a fraudulent conveyance action in the IMG Bankruptcy Proceeding against CB&T seeking to avoid and recover IMG's loan repayments on the loans. (Compl. ¶ 77, 84.) The trustee's complaint revealed facts about CB&T's confidential relationship with IMG. (Compl. ¶ 84.)

         On May 26, 2017, plaintiffs filed this action against CB&T for allegedly aiding and abetting the torts of IMG. This court dismissed plaintiffs' complaint because it found that CB&T did not owe a duty to plaintiffs that would give rise to tort liability. (Mem. & Order at 2-3 (Docket No. 28).) Further, this court found that plaintiffs did not plead sufficient facts to give rise to a plausible inference that defendant knew IMG was misappropriating funds. (Id. at 3-4.)

         The Ninth Circuit reversed. The court first found that, under California law, if a bank knowingly takes part in a fraud, it has a duty to “make good the loss that results from the misappropriation.” (Mem., No. 18-15094, at 3 (Docket No. 37).) The court then found plausible plaintiffs' allegations that CB&T knew IMG's business “was a sham” because through its monitoring of the account, CB&T knew that IMG had “virtually no income from its latex glove import business.” (Id. at 4.) It is also plausible, the court continued, that CB&T knew it IMG was misappropriating funds because CB&T knew it was being repaid with investor funds and not revenue. (Id. at 5.) Plaintiffs' allegations of CB&T's “atypical banking procedures” while IMG was in default were sufficient to allege that CB&T helped facilitate IMG's solicitation of cash. (Id. at 6.) The court thus found that plaintiffs plausibly stated three claims for relief: (1) aiding and abetting fraud; (2) breach of fiduciary duty; (3) conspiracy to commit fraud. (Id. at 8-9.) Because the question of whether the statute of limitations bars these claims “involve[s] factual determinations, ” the Ninth Circuit left it for this court to consider on remand. (Id. at 11.)

         Plaintiffs filed a First Amended Complaint alleging six claims: (1) Aiding and Abetting Fraud; (2) Securities Fraud pursuant to California Corporations Code §§ 25110, 25401, 25504.1; (3) Conspiracy to Commit Fraud; (4) Aiding and Abetting Breach of Fiduciary Duty; (5) Intentional Interference with Contract; and (6) violation of California Penal Code § 496. (Docket No. 42.) Defendant moves to dismiss all claims. (Docket No. 44.)

         II. Request to Seal

         As a preliminary matter, the court considers defendant's Request to Seal Ronald Evans and Treadaway's Victim Impact Statements (Ex. H), submitted on November 15, 2019. Pursuant to Local Rule 141(a), “[d]ocuments may be sealed only by written order of the Court, upon the showing required by applicable law.” E.D. Cal. L.R. 141(a).

         The documents at issue here appear to contain information which is sensitive and confidential. (See Declaration of Jarrett Osborne-Revis, Req. to Seal, Ex. H, at ¶ 8.) This information was designated “Confidential” in the accompanying criminal action. (Id. ¶ 6.) The information is not publicly available. (Id. ¶ 7.) Further, his information would invade the privacy of the individuals if this request to seal were not granted. (Req. to Seal at 4.) Accordingly, the court concludes that CB&T has presented “good cause” to rebut the presumption in favor of public access. See Kamakana v. City & Cty. of Honolulu, 447 F.3d 1172, 1189 (9th Cir. 2006).

         III. Legal Standard

         On a Rule 12(b)(6) motion, the inquiry before the court is whether, accepting the well-pleaded allegations in the complaint as true and drawing all reasonable inferences in the plaintiff's favor, the plaintiff has stated a claim to relief that is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court, however, is “not required to accept as true allegations . . . that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Seven Arts Filmed Entm't, Ltd. v. Content Media Corp. PLC, 733 F.3d 1251, 1254 (9th Cir. 2013). “The ...