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Jonathan E. Perlman v. Wells Fargo Bank

November 22, 2011


The opinion of the court was delivered by: Daniel T. K. Hurley United States District Judge


THIS CAUSE is before the Court upon Defendant's Motion to Dismiss Amended Complaint and/or Motion to Strike Immaterial, Impertinent, and Scandalous Matter [DE # 23]. For the reasons to follow, the Court will grant in part and deny in part Defendant's motion to dismiss, and deny Defendant's motion to strike.


Plaintiff, Jonathan Perlman, is the court-appointed receiver for a number of related entities*fn1 (the "receivership entities") created and used by George Theodule to perpetrate a so-called Ponzi scheme. Theodule targeted the Haitian-American community promising unrealistic returns and succeeded in misappropriating more than $68 million prior to intervention by the Securities and Exchange Commission in December of 2008. To avoid clouding the issues to be resolved in the instant litigation, greater detail regarding the underlying scheme will be presented only as necessary. Because this order addresses a motion to dismiss, the facts are stated under the assumption that the factual allegations in the Amended Complaint are true.

Theodule obtained services from a variety of financial institutions as part of his scheme. This litigation centers around his relationship Wachovia Bank, N.A.*fn2 Theodule had previously banked at Washington Mutual but was advised that his account would be closed due to suspicious activity. Theodule then moved to Wachovia. At Wachovia ("the Bank"), Theodule started by opening four accounts for Creative Capital Consortium, LLC, which were initially classified as relating to a "money service business" and later reclassified as relating to "investment business" and "securities/commodities" business activity. During the five weeks following the initial meeting, a variety of "feeder accounts" were opened by other individuals, including Theodule's wife and sister. These "feeder accounts" transferred $2.2. million directly to the Creative Capital accounts in the first month.

Within six weeks after Theodule opened the Creative Capital accounts, the Bank noted in internal documents that an investment club account belonging to Wealth Builders Circle, LLC suspiciously deposited numerous small-dollar, even-amount checks from individuals totaling $400,000, which was then transferred directly to the Creative Capital accounts. In response, the Bank froze the Creative Capital Accounts but then removed the freeze four days later when a Creative Capital employee provided a "Creative Capital Consortium Business Plan." Plaintiff alleges that the business plan was "nonsensical" on its face, for example, by stating an intention to target "accredited investors" despite the fact that the influx of money into the accounts came from small investors and investment clubs and despite a statement on the Wealth Builders Circle website that investment clubs are suitable for novice investors. From May 9, 2008 to July 31, 2008, $10,067,443.51 were deposited into the Creative Capital accounts and $10,560,239.93 were withdrawn with substantial portions going directly to Theodule and his wife.

On July 24, 2008, the Bank informed Theodule's wife, Dorothy Delisfort, that it was closing the Wealth Builder's Circle, LLC account because there was "no evidence of any investing going on" and "funds were merely washing through the account from hand to hand." Then on August 1, 2008, the Bank closed most of the Creative Capital accounts. Over the course of the five-month relationship, Theodule transferred more than $38 million through the Wachovia accounts, including over $1 million in over-the-counter cash transactions.

In light of this activity, Plaintiff, as receiver for the entities used to perpetrate the scheme, filed a complaint against the Bank for its alleged role in the scheme and the resulting harm to the entities. Importantly, the Receiver does not assert claims for harms inflicted on the investors in the scheme. Rather, the Receiver asserts claims only for harms inflicted on the entities themselves when Theodule and others misappropriated the funds that had been deposited in the entities. Specifically, the Amended Complaint contains counts based on aiding and abetting breach of a fiduciary duty, aiding and abetting conversion, common law negligence, wire transfer liability under federal and state law, avoidance of fraudulent transfers, and aiding and abetting of fraudulent transfers.

The Bank responded with the instant motion to dismiss. Regarding all of the claims, the Bank argues that the Receiver has no standing, that any damages are illusory by virtue of the entities' nature as instrumentalities of the fraud, and that the Receiver's claims are barred by the doctrine of in pari delicto. The Bank also points out that to the extent the Receiver seeks to impose liability for violations of the Bank Secrecy Act, 31 U.S.C. §§ 5311, et seq., such claims fail because the Bank Secrecy Act creates no private cause of action. With respect to the individual claims, the Bank challenges the aiding and abetting claims on the basis that the Receiver has insufficiently alleged actual knowledge and substantial assistance. The Bank also argues that aiding and abetting breach of a fiduciary duty is precluded when, as in the instant case, no honest person existed within the entities to whom the breach could be reported. As to the aiding and abetting conversion claim, the Bank argues that there can be no conversion by Theodule of assets of the entities that were themselves converted from investors. The Bank challenges the negligence claim because it was under no duty to the entities and because the claim is barred by the economic loss rule. Finally, the Bank also challenges the remaining individual claims on bases that will be addressed herein.


As a preliminary matter, this Court has jurisdiction pursuant to 28 U.S.C. §§ 754, 1367, and 1692. Venue is proper because a substantial portion of the events underlying this action took place in the Southern District of Florida. Pursuant to the receivership order this court entered in Securities and Exchange Commission v. Creative Capital Consortium, LLC, the Receiver is authorized and has standing to assert all legal and equitable claims available to the receivership entities prior to the institution of the SEC receivership action. As part of its assessment of jurisdiction, however, and before addressing the substantive elements of the claims, the Court must determine whether the Receiver has standing to assert the claims presented in the Amended Complaint. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94-95 (1998) (finding that standing implicates a federal court's authority to hear a case and must therefore be addressed as a threshold matter).


The first aspect of standing the Court must evaluate is "constitutional standing," which requires

(1) a cognizable injury suffered by the plaintiff that is (2) fairly traceable to the defendant's conduct and is (3) redressable by a court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Based on this conception of standing, it is clear that the Receiver does not have standing to assert claims held by the actual investors in the Ponzi scheme. See, e.g., O'Halloran v. First Union Nat'l Bank of Fla., 350 F.3d 1197, 1202 (11th Cir. 2003); Freeman v. Dean Witter Reynolds, Inc., 865 So. 2d 543, 553 (Fla. Dist. Ct. App. 2003). "Like a trustee in bankruptcy or for that matter the plaintiff in a derivative suit, an equity receiver may sue only to redress injuries to the entity in receivership." Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995). The torts that occurred when Theodule and others solicited investments are not "injure[ies] suffered by the plaintiff" in this case. Therefore, to the extent the Amended Complaint asserts claims based on these torts, such claims must be dismissed for lack of standing. The same cannot be said, however, for claims based on the torts that occurred when Theodule and others embezzled the funds deposited into the receivership entities. These "embezzlement torts" have been found cognizable injuries suffered by entities by other courts in similar circumstances. See, e.g., First Union, 350 F.3d at 1203-04; Scholes, 56 F.3d at 754. The entities "received money from unsuspecting, if perhaps greedy and foolish, investors [that] should have been used for the [entities'] stated purpose." Id. at 754. Thus, when Theodule embezzled the money, he "removed assets from the corporations for an unauthorized purpose and by doing so injured the corporations." Id.

The Bank challenges the application of this principle to the instant case, however, by arguing that since the receivership entities were merely Theodule's alter egos, they were not, in fact, injured by his embezzlement. Def.'s Reply Supp. Mot. Dismiss Am. Compl. at 2 ("[A] company that has no legitimate business operations and exists merely as a vehicle to perpetuate a Ponzi scheme[] cannot be harmed and lacks standing."). This position finds some support in First Union, in which the court, in dicta, observed that if the entity "were merely the alter ego of Payne, [the schemer/embezzler,] we might agree with the district court that there was also no standing for the embezzlement count. Payne could not embezzle funds from himself." 350 F.3d at 1204. The court added that "[a]s long as [the entity] was not merely Payne's alter ego, it is conceivable that Payne could have wrongfully embezzled money from the organization." Id. However, other courts have reached a different conclusion. See, e.g., Scholes, 56 F.3d at 754. In Scholes, the court addressed specifically an equity receiver's standing in a case involving corporations that seemed to be in every sense the alter egos of the embezzler:

How, the defendants ask rhetorically, could the allegedly fraudulent conveyances have hurt Douglas, who engineered them, or the corporations that he had created, that he totally controlled and probably . . . owned all the common stock of, and that were merely the instruments through which he operated the Ponzi scheme? The answer . . . turns out to be straightforward. The corporations, as Douglas' robotic tools, were nevertheless in the eyes of the law separate legal entities with rights and duties.

Id. (emphasis added). The court went on to find that, despite their "deep, their utter, complicity in [the] fraud," the entities were "entitled to the return of the moneys . . . that Douglas had made the corporations divert to unauthorized purposes" once they had been "[f]reed from his spell" by the appointment of a receiver. Id. The Court finds this reasoning persuasive. Although the aforementioned dicta from the Eleventh Circuit suggests that it "might" find differently when, as in the instant case, there was indeed an "identity of interests" between the receivership entities and the embezzler, First Union, 350 F.3d at 1204, a contemporaneous opinion by Judge Cudahy, who authored the First Union opinion, elaborates and seems to depart from this thinking. See generally Knauer v. Jonathon Roberts Fin. Grp., Inc. 348 F.3d 230 (7th Cir. 2003) (Cudahy, J.). In Knauer, Judge Cudahy found that a receiver for entities called Heartland and JMS had standing despite an allegation in the receiver's complaint that "[s]imply put, [the embezzlers] were heartland and JMS." While noting that "the Ponzi fraud pervaded the entire entity at all relevant times," id. at 234 n.4, Judge Cudahy nevertheless held that "the diversion of funds [by the embezzlers] from Heartland and JMS did arguably constitute injuries to the Ponzi entities, giving [the receiver] standing . . . ." Id. at 234. Taking these cases together, the Court interprets the statement in First Union less as the pronouncement of a legal rule and more as an alternate basis for departing from the reasoning in Freeman, which the court was in the process of analyzing and distinguishing. Based on the foregoing, the Court will not extend indefinite dicta in First Union as the Bank requests. Instead, the Court adopts the reasoning in Scholes and finds that the receivership entities did suffer an injury for the purposes of the constitutional standing inquiry when Theodule and others embezzled from them.*fn3


Next, the Court must evaluate certain prudential considerations that have been incorporated into the standing doctrine. Included in these considerations is the question "whether the plaintiff is asserting his own legal rights and interests rather than the legal rights and interests of third parties." Saladin v. City of Milledgeville, 812 F.2d 687, 690 (11th Cir. 1987). For the sake of conceptual clarity, this consideration should not be confused with the procedural requirement that an action be prosecuted by the real party in interest under Federal Rule of Civil Procedure 17(a). See, e.g., Rawoof v. Texor Petrol. Co., Inc., 521 F.3d 750, 756-57 (7th Cir. 2008). See also 13A Wright, Miller & Cooper, Federal Practice and Procedure §§ 1527 n.18, 3531 (3d ed. 2008) (noting that "[c]onfusions of standing with real-party-in-interest doctrine occur with some frequency"). However, many courts have noted the common strand running through both doctrines, and some have treated Rule 17(a) as a codification of the prudential standing limitation precluding a plaintiff from asserting the rights and interests of third parties. See, e.g., Rawoof, 521 F.3d at 757; RMA Ventures Cal. v. SunAmerica Life Ins. Co., 576 F.3d 1070, 1073 (10th Cir. 2009). Indeed, the Bank's argument that the Court should dismiss Plaintiff's claims based on prudential standing considerations is couched in "real-party-in-interest" language. Def.'s Reply Resp. Mot. Dismiss Am. Compl., at 6 [DE # 44] ("The real parties in interest are already pursuing their own claims . . . ." "The basic purpose of rules requiring that every action be prosecuted by or on behalf of the real party in interest is . . . ." (emphasis added, capitalization and typeface adjusted)).

Rule 17(a) is "a procedural rule requiring that the complaint be brought in the name of the party to whom the claim 'belongs' or the party who[,] 'according to the governing substantive law, is entitled to enforce the right.'" Rawoof, 521 F.3d at 756 (internal citations omitted). While it is clear that the Receiver is entitled to enforce rights held by the entities, to the extent that Rule 17(a) is meant to "protect[] a defendant against a subsequent claim for the same debt underlying a previously entered judgment," the Bank's concern is well founded. Marina Mgmt. Servs., Inc. v. Vessel My Girls, 202 F.3d 315 (D.C. Cir. 2000). The Bank also faces a class-action lawsuit by the investors in the Ponzi scheme,*fn4 and indeed any recovery procured by the Receiver in this lawsuit would flow, at least in part, to these investors. The Bank's objection also incorporates elements of Rule 19, which requires mandatory joinder of necessary parties. See, e.g., Hammond v. Clayton, 83 F.3d 191, 195 (7th Cir. 1996) ("Rule 19 is designed to protect the interests of absent persons, as well as those already before the court, from duplicative litigation, inconsistent judicial determinations, or other practical impairment of their legal interests.").

While the Court is not persuaded that it must dismiss the case on prudential grounds-which the Court notes do not carry the same weight and are not as absolute as the Article III limits on standing discussed above-the Court is nevertheless concerned about persisting issues relating to duplicative litigation and the potential for inconsistent verdicts. Other courts facing similar circumstances have only obliquely addressed the concerns presented by the instant case. In First Union, for example, the court noted without explicating a discrete rule that, "[w]here . . the trustee is litigating in concert with investors . . . we find the concern that the trustee is somehow displacing the rights of the investors to be misplaced." 350 F.3d at 1203. Similarly, in Scholes, another case in which a trustee attempted to recover for entities invovled in a Ponzi scheme, the court evaluated alternative approaches to obtaining recoveries for the benefit of corporate creditors (including the Ponzi scheme investors) and noted that it "appears no debtors or creditors connected with Douglas's enterprise prefer the bankruptcy route to the receivership route." 56 F.3d at 755. The court also discussed individual suits by the investors or a class action, concluding that neither were preferable to the trustee's suit per se. Id. In the instant case, by contrast, the investors and the trustee are not "litigating in concert" to the same extent as in First Union (in which both the trutee and a class of investors were named plaintiffs), and at least one investor has elected an alternative approach to the trustee's instant action.

In Caplin v. Marine Midland Grace Trust Co. of New York, the Supreme Court cautioned against trustees supplanting "the persons truly affected." 406 U.S. 416, 434 (1972). Unlike the constitutional standing requirements addressed in Part II.A. supra, these prudential concerns are not necessarily threshold determinations. Therefore, the Court will withhold a determination of how best to handle these concerns until after the pleading stage, to the extent that any of the related actions proceed that far.


The Court will now address the Bank's substantive challenges to the Complaint. Granting a motion to dismiss is appropriate when a complaint contains simply "a formulaic recitation of the elements of a cause of action." Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion to dismiss, a complaint must contain factual allegations that "raise a reasonable expectation that discovery will reveal evidence" in support of the claim and that plausibly suggest relief is appropriate. Id. On a motion to dismiss, the complaint is construed in the light most favorable to the non-moving party, and all facts alleged by the non-moving party are accepted as true. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Wright v. Newsome, 795 F.2d 964, 967 (11th Cir. 1986). The threshold is "exceedingly low" for a complaint to survive a motion to dismiss for failure to state a claim upon which relief can be granted. Ancata v. Prison Health Servs., Inc., 769 F.2d 700, 703 (11th Cir. 1985). Regardless of the alleged facts, a court may dismiss a complaint on a dispositive issue of law. See, e.g., Marshall County Bd. Of Educ. v. Marshall County Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993).


The Bank also argues the Amended Complaint should be dismissed based on the doctrine of in pari delicto. "The equitable defense of in pari delicto, which literally means 'in equal fault,' is rooted in the common-law notion that a plaintiff's recovery may be barred by his own wrongful conduct." Pinter v. Dahl, 486 U.S. 622, 632 (1988). As this Court has previously held, see Perlman v. Alexis, No. 09-20865, 2009 WL 3161830, *2 (S.D. Fla. Sept. 25, 2009), in pari delicto is an affirmative defense requiring the defendant to prove facts independent of the elements of the plaintiff's cause of action. See, e.g., Knauer, 348 F.3d at 237 n.6 (7th Cir. 2003) ("[I]n pari delicto is an affirmative defense and generally dependent on the facts, and so often not an appropriate basis for dismissal."); Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 346 (3d Cir. 2001) ("An analysis of standing does not include an analysis of equitable defenses, such as in pari delicto."); Court-Appointed Receiver of Lancer Mgmt. Grp. LLC v. Lauer, No. 05-60584, 2010 WL 1372442, *3 (S.D. Fla. Mar. 31, 2010). ...

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