Chang v. Wells Fargo Bank, N.A.

Background

Annie Chang, Tiger Chang Investments, LLC, Asians Investing in Real Estate, LLC, Melanie Gonzales, Gary Gonzales, and G&M You-Nique Property LLC brought a putative class action against Wells Fargo Bank, N.A. The complaint alleged that Jerome and Shaun Cohen and their entities, Equitybuild, Inc. and Equitybuild Finance, LLC, operated an alleged real-estate investment Ponzi scheme. According to the complaint, Equitybuild obtained investor money through promised real-estate returns, misrepresented and misused the funds, commingled money, made payments to earlier investors, and took undisclosed fees. The alleged scheme became public when the Securities and Exchange Commission filed an enforcement action on August 15, 2018.

The plaintiffs alleged that Wells Fargo was the only bank used by Equitybuild and processed all of the scheme’s transactions. They claimed Wells Fargo knew or should have known that investor funds were being misused, commingled, transferred to the Cohens and related entities, and used for Ponzi payments. The complaint asserted three causes of action under California law: aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and negligence.

Legal standard and choice of law

Wells Fargo moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally recognized claim supported by enough plausible facts. Because the claims involved fraud, the court also considered Federal Rule of Civil Procedure 9(b), which requires fraud allegations to describe the circumstances of the alleged fraud with particularity, while allowing a party’s knowledge and intent to be alleged generally.

The parties both applied California law, and neither disputed its application. The court therefore applied California law without conducting a fuller choice-of-law analysis.

Aiding and abetting fraud

Under the standard accepted by the parties, a claim for aiding and abetting requires allegations that the defendant knew of the underlying wrongful conduct and gave substantial assistance or encouragement, or that the defendant’s own conduct separately breached a duty and substantially assisted the wrongful result.

The court held that the complaint plausibly alleged Wells Fargo’s actual knowledge of the specific fraud. The complaint directly alleged that Wells Fargo reviewed Equitybuild and its accounts under its Bank Secrecy Act and anti-money-laundering duties and learned that investor funds were being commingled, transferred to the Cohens and unrelated entities, and used for Ponzi payments. Supporting allegations included that Wells Fargo processed all transactions, manually processed numerous wires, deviated from ordinary banking practices, used modified direct-deposit forms for investor distributions, knew Equitybuild was the only bank customer involved in the transactions, knew that Equitybuild frequently bounced checks, and had records showing that investor payments greatly exceeded money received from property-related sources.

The court also found that the complaint adequately alleged substantial assistance. The alleged assistance included receiving investor money, permitting commingling, transferring money to the Cohens’ personal accounts, allowing investor money to be used for payments to earlier investors, and modifying or accepting modified direct-deposit forms. The court concluded that these allegations were sufficient at the pleading stage and denied Wells Fargo’s motion to dismiss the aiding-and-abetting-fraud claim.

Aiding and abetting breach of fiduciary duty

Under California law, this claim requires a third party’s breach of fiduciary duties, the defendant’s actual knowledge of that breach, substantial assistance or encouragement, and conduct that substantially contributed to the plaintiffs’ harm.

The court held that the plaintiffs adequately alleged that Wells Fargo knew the accounts contained investor money subject to fiduciary duties and knew that Equitybuild and the Cohens were misusing and misappropriating those funds. The allegations described commingling, transfers to the Cohens, Ponzi payments, and a purported shell operation in which property-related income was much lower than the amounts paid to investors. For the same reasons supporting the fraud claim, the court found substantial assistance adequately alleged and denied the motion to dismiss this claim.

Negligence

The plaintiffs alleged that Wells Fargo owed them a duty to safeguard and manage Equitybuild’s funds or, alternatively, a duty of care because it knew about the fiduciary relationship, held fiduciary funds, and knew or was on notice of the risk of misuse. Wells Fargo argued that it owed no duty to the plaintiffs because they were not its customers and that the complaint also failed to adequately allege breach or causation.

The court explained that California generally does not impose on a bank a duty to noncustomers to investigate or disclose suspicious activity by an account holder. California recognizes only narrow exceptions involving extraordinary and specific facts, including certain forged-check situations. The court held that the complaint’s allegations—that Wells Fargo knew the nature of Equitybuild’s business, held investor funds, allowed transfers and commingling, used modified payment forms, observed Ponzi payments, and saw bounced checks—did not establish a duty of care under that limited exception. The Bank Secrecy Act also could not supply the asserted duty because it does not create a private right of action.

The court separately held that, even assuming a duty existed, the plaintiffs had not plausibly alleged breach or proximate cause. Treating ordinary banking transactions such as receiving wires, executing transactions, and transferring payments as negligent conduct was not enough, and the complaint did not plausibly allege that the plaintiffs would not have lost their investments but for Wells Fargo’s conduct.

The court granted Wells Fargo’s motion to dismiss the negligence claim, with leave to amend. It cautioned that the claim would be dismissed without leave to amend next time unless the plaintiffs alleged affirmative conduct suggesting that Wells Fargo expressly took on a direct duty to them, rather than a general duty to safeguard or investigate the account.

Disposition

Judge Haywood S. Gilliam, Jr. denied Wells Fargo’s motion to dismiss the aiding-and-abetting-fraud and aiding-and-abetting-breach-of-fiduciary-duty claims. The court granted the motion to dismiss the negligence claim with leave to amend. The court directed the plaintiffs to file any amended complaint within 28 days and barred them from adding new claims or parties in that amended complaint.