COURT OF APPEALS
DATED AND FILED
June 7, 2011
A. John Voelker
Acting Clerk of Court of Appeals
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.
STATE OF WISCONSIN
IN COURT OF APPEALS
HERMAN GRAD, MARYA GRAD, KEITH GILLAM, MURIELLE
VENDETTE-GILLAM, IVAN VELEV AND MAIA VELEVA,
ASSOCIATED BANK, N.A.,
APPEAL from a judgment of the circuit court for Brown County:
DONALD R. ZUIDMULDER, Judge. Affirmed.
Before Hoover, P.J., Peterson and Brunner, JJ.
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.
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.1 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.
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
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).
existed, and Oxford never transferred any funds to Crown Forex SA. Instead,
individuals associated with Oxford converted the funds for their own benefit.
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.
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.
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
Associated moved to dismiss Grad’s complaint.
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.
“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
I. Negligence claim
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.
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
In both cases the court held that the bank did not have a duty to the
noncustomer to take certain actions.
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.
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.
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.
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.
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.
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.
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
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.
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
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.
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.
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.
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.”
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.
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.
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.
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’
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
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.
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.
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.
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
State v. Castillo, 213 Wis. 2d 488, 492, 570 N.W.2d 44
II. Aiding and abetting claim
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.
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.
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.”
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.).
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.
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.
However, I do not agree that Grad has failed to state a claim for
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.
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.
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.”
§ 1020.220(a)(1), (2).1 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).
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).
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
All references to Title 31 of the Code of Federal Regulations are to the 2011 version
unless otherwise noted.
Ironic, because the fraudsters’ marketing included a toll-free telephone number which
they advertised to Christian audiences on hundreds of radio stations throughout the country using
the slogan, “follow the money, truth seekers.” United States Commodity Futures Trading
Comm’n v. Cook, 2009 WL 4823369, at *3 (D. Minn. Dec. 8, 2009).
A bank’s responsibility does not end at collecting and verifying the
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 ….”
§ 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.
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
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.
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.
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’
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
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.
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.3
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.”).
Even if Wisconsin law permitted this court to limit the standard of care based on the
identity of the person harmed, I would still conclude that the bank in this case owes a duty to
Grad. Grad alleges that the bank knew the funds in the Crown Forex account were held in trust
on behalf of individuals with whom the bank had no relationship. The court does not discuss this
fact in its analysis of the issue.
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)).
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.
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.
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.
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.
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.