2017-00213368-CU-FR

JTS Communities, Inc. vs. ZB, N.A.

Nature of Proceeding: Hearing on Demurrer to Plaintiffs’ First Amended Complaint

Filed By: McWhorter, Robert S.

*** If oral argument is requested, the parties must at the time oral argument is requested notify the clerk and opposing counsel of the causes of action that will be addressed at the hearing. The parties are also reminded that pursuant to local court rules, only limited oral argument is permitted on law and motion matters. ***

Defendants ZB, N.A. dba California Bank & Trust (“ZB”), California Bank & Trust (“CBT”), Dawn Satow (“Satow”) and Jun Enkoji’s (“Enkoji”) (collectively “Defendants”) demurrer to Plaintiffs JTS Communities, Inc., Larry A. Carter, Jack T. Sweigart, and Bristol Insurance Co.’s (“Bristol”) (collectively “Plaintiffs”) first amended complaint (“FAC”) is ruled upon as follows.

Defendants’ request for judicial notice (“RJN”) is GRANTED. In taking judicial notice of these documents, the court accepts the fact of their existence, not the truth of their contents. (See Professional Engineers v. Dep’t of Transp. (1997) 15 Cal.4th 543, 590 [judicial notice of findings of fact does not mean that those findings of fact are true]; Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120-121.) Plaintiffs’ objections to the RJN is DENIED. Plaintiffs object to Exhibits 2 and 3 of the RJN on the ground that Defendants failed to file all exhibits attached to Mr. Craig’s declaration. Plaintiffs have cured this defect by filing those exhibits in opposition to the demurrer.

Overview

In this action, Plaintiffs allege that they were unknowing investors in a Ponzi Scheme perpetrated by Deepal Wannakuwatte (“Wannakuwatte”). JTS and Carter are alleged to be customers of CBT. Plaintiffs allege that “[b]eginning in 2005, and continuing until

2011, Plaintiffs, relying on representations and Wannakuwatte/IMG’s banking and lending relationship with CBT, provided CBT with collateral, totaling approximately $15 million. Wannakuwatte and Defendants led Plaintiffs to believe that the collateral was being used to secure multiple international transactions relating to IMG’s medical supply business.” (FAC, ¶ 16.) “Unbeknownst to Plaintiffs, Wannakuwatte pledged Plaintiffs’ collateral as security for the multiple loans he used to fuel his

scheme.” (FAC, ¶ 17.) “[T]hese loans were not related to international transactions; rather, the loans were simply lines of credit extended by Defendants to IMG, used by Wannakuwatte to fuel his scheme. But for Defendants’ unauthorized use of Plaintiffs’ collateral as security for loans to IMG, Defendants would not have made the loans to IMG.” (FAC, ¶ 17.)

Plaintiffs allege that Defendants “knew Wannakuwatte/IMG was not a creditworthy borrower” and developed a plan in which Wannakuwatte “would have Plaintiffs issue collateral in the form of standby letters of credit (“L/C”), that would be used to secure loans from CBT to IMG.” (FAC, ¶ 28.) Plaintiffs believed that the L/Cs were “only to be issued to CBT so that CBT could issue security (in the form of letters of credit or similar instruments) to IMG’s international manufacturers and/or their banks. . .” (FAC, ¶ 29.) Instead, Defendants “utilized Plaintiffs’ L/Cs as cash for collateral for all of Defendants’ loans to IMG, totaling approximately $20 million.” (FAC, ¶ 30.) The L/Cs named CBT as beneficiary. (FAC, ¶ 34.) Additionally, “Defendants knowingly permitted Wannakuwatte to issue checks and move funds in and out of Plaintiffs’ accounts without Plaintiffs’ knowledge or consent.” (FAC, ¶ 20.)

In 2009, Defendants purportedly terminated the lending relationship with Wannakuwatte. (FAC, ¶ 115.) Despite this termination, Defendants continued to extend the maturity dates of the IMG loans, continued to use Plaintiffs’ letters of credit as collateral, subjecting Plaintiffs to even more risk and motivating Wannakuwatte to accelerate the fraud. (FAC, ¶ 115.)

The Ponzi Scheme collapsed in early 2014, and Defendants were paid in full on the IMG loans in February 2011 by applying Plaintiffs’ collateral. (FAC, ¶¶ 24, 42.) Plaintiffs lost in excess of $30,000,000. (FAC ¶ 24.)

Plaintiffs allege that Satow served as Vice President Commercial Lending Officer, and Relationship Banker/Officer of CBT, and was “the person most responsible for overseeing and managing the recordkeeping of Wannakuwatte and IMG’s loans with CBT, ordering loan documents, obtaining signatures on loan documents, keeping records of loan transactions, and maintaining the loan files for IMG.” (FAC, ¶ 7.) Satow had “specific knowledge with regard to Wannakuwatte/IMG’s lack of creditworthiness as a borrower and the indicia of fraud in Wannakuwatte’s purported business and the various transactions with CBT” and had “specific knowledge regarding Plaintiffs’ status as the grantor of collateral for IMG’s loans, depositors who paid off IMG’s various loans, and Carter and JTS’s status as customers of CBT.” (Id.) Satow knew that Wannakuwatte was not authorized to act on Plaintiffs’ behalf. (Id.)

Plaintiffs allege that Enkoji was an employee of CBT, and “assisted and was an integral part of the handling and maintaining of Wannakuwatte and IMG’s loans with CBT.” (FAC, ¶ 8.) Enkoji had “specific knowledge regarding Plaintiffs’ status as the grantor of collateral for IMG’s loans, as depositors who paid off IMG’s various loans, and Carter and JTS’s status as a customers of CBT,” and “knew that Wannakuwatte was not authorized to act on Plaintiffs’ behalf, as Wannakuwatte was CEO of IMG, and CBT had not obtained written authorization or consent for Wannakuwatte to act on Plaintiffs’ behalf.” (Id.)

The FAC asserts causes of action for: (1) Aiding and Abetting Breach of Fiduciary Duty, (2) Aiding and Abetting Fraud (Concealment), (3) B&P Code §17200, (4) Fraud (Concealment), (5) Conversion, and (6) Negligence.

Satow and Enkoji demur to each cause of action on the ground that Plaintiffs fail to sufficiently allege a cause of action against them. Defendants demur to the fifth cause of action for conversion on the ground that Plaintiffs fail to state sufficient facts to constitute a cause of action.

As an initial matter, the Court disagrees with Plaintiffs that Defendants are barred from raising the arguments in this demurrer because Defendants raised the same grounds in their prior demurrer, and which the Court overruled, in part. In its ruling the Court overruled Defendants’ demurrer to the Aiding and Abetting Breach of Fiduciary Duty, Aiding and Abetting Fraud (Concealment), Negligence, and B&P Code §17200 causes of action. The Court sustained with leave to amend the demurrer to the Fraud (Concealment), Conversion, and Unjust Enrichment causes of action. It also sustained with leave to amend Satow and Enkoji’s demurrer on the grounds of uncertainty. In sustaining the demurrer for uncertainty, the Court agreed with Defendants’ argument that Plaintiffs “lumped” all the defendants under the term “Defendants”, without specifying the facts upon which each defendant would be liable. Therefore, the uncertainty as to Satow and Enkoji infected each cause of action. Given that Plaintiffs substantively amended the complaint in an attempt to address the Court’s ruling, Defendants are not foreclosed from raising the same grounds for demurrer here.

Satow and Enkoji: Aiding and Abetting Breach of Fiduciary Duty and Aiding and Abetting Fraud (Concealment)

“California courts have long held that liability for aiding and abetting depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted.” (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1145.) “[C]ommon sense tells us that even ‘ordinary business transactions’ a bank performs for a customer can satisfy the substantial assistance element of an aiding and abetting claim if the bank actually knew those transactions were assisting the customer in committing a specific tort. Knowledge is the crucial element.” (Id. at 1146.)

Defendants demur on the ground that Plaintiffs have not pled that Satow or Enkoji had actual knowledge of Wannakuwatte’s wrongful conduct. The Court disagrees.

With regards to Satow, Plaintiffs allege that Satow learned that Wannakuwatte did not have sufficient funds in his CBT account to pay for two IMG letters of credit, and that Wannakuwatte intended to use the funds “from a loan secured by Plaintiffs’ collateral.” (FAC, ¶ 102.) “The fact that Wannakuwatte had to use lines of credit that were collateralized by Plaintiffs in order to pay his outstanding obligations-and had insufficient funds in his CBT accounts — was an early indicator that Wannakuwatte was not a creditworthy borrower, and also, a clear indicia of fraud.” (Id.) Satow “also signed numerous ‘Loan Activity Forms’ for the various IMG/CBT loans, which were collateralized by Plaintiffs. The ‘Loan Activity Forms’ showed that Wannakuwatte was taking substantial and immediate advances as to the loans, and that the loans were not ‘revolving,’ which goes against standard practices and common sense.” (Id. ¶ 103.) Satow was “directly involved” in an attempt to cover-up fraud. (Id. ¶ 106.) Wannakuwatte executed “Commercial Pledge Agreements,” without Plaintiffs’ authorization, which pledged Plaintiffs’ collateral for all of IMG’s loans with CBT. (Id.) Satow knew that Wannakuwatte had no authority to pledge Plaintiffs’ collateral, which was “in direct violation of CBT’s own loan requirements.” (Id. ¶ 106.) Additionally, in June 2008, “CBT’s Terri Henderson directed Satow to obtain a commercial pledge agreement from Plaintiffs for a loan that was collateralized by Plaintiffs. Satow, however, refused to do so. Based on information and belief, the reason Satow refused to obtain a pledge agreement from Plaintiffs – as required by CBT’s Henderson as well as CBT’s own loan requirements – was that she did not want to alert Plaintiffs to the fraudulent use of the collateral, which at that point had been occurring since

2005.” (Id. ¶ 107.) Taking these allegations as true, at this stage of the proceedings, these allegations are sufficient. Whether Satow had actual knowledge is a question of fact, outside the scope of a demurrer.

With regards to Enkoji, Plaintiffs allege that he was “directly involved” in an attempt to cover-up fraud. (Id. ¶ 106.) Wannakuwatte executed “Commercial Pledge Agreements,” without Plaintiffs’ authorization, which pledged Plaintiffs’ collateral for all of IMG’s loans with CBT. (Id.) Enkoji knew that Wannakuwatte had no authority to pledge Plaintiffs’ collateral, which was “in direct violation of CBT’s own loan requirements.” (Id. ¶ 106.) Additionally, in late December 2008, there was concern regarding IMG Loan no. 181803-0003, which was secured by an L/C in IMG’s name, but funded by Plaintiffs. (Id. ¶ 113.) The L/C was set to mature and was not going to be renewed by the issuing bank. (Id.) To avoid IMG’s collapse, Enkoji advised Valerie Tracy (“Tracy”), CBT’s Vice President in the International Banking Department that it was not necessary for CBT to draw against the IMG L/C, but instead JTS’ Certificate of Deposit would replace the IMG L/C as collateral for the loan. (Id.) Tracy directed Enkoji to obtain a pledge of cash by JTS. (Id.) Instead of obtaining a pledge of cash directly from JTS, Enkoji had Wannakuwatte pledge JTS’ cash through and Assignment of Deposit (“Assignment”) – which Wannakuwatte had no authority to so

do. (Id. ¶¶ 73, 114.) The Assignment “attempted to limit CBT’s prospective liability by including language that ‘Lender has made no representation to Grantor (JTS) about Borrower (IMG) or Borrower’s creditworthiness.’ The Assignment of Deposit Account also listed JTS’s address as IMG’s corporate address in West Sacramento, which insured that JTS would not receive written notifications of the activity on the accounts.” (Id. ¶ 109.) Enkoji and Satow prepared the Assignment “in furtherance of the efforts to conceal fraud from JTS.” (Id. ¶ 114.) Taking these allegations as true, at this stage of the proceedings, these allegations are sufficient. Whether Enkoji had actual knowledge is a question of fact, outside the scope of a demurrer.

The demurrer is OVERRULED.

Fraud (Concealment)and Negligence

Defendants demur on the ground that Plaintiffs have not pled that Satow or Enkoji owed any duty to Plaintiffs to disclose, or that they concealed any material facts pertaining to IMG’s loans. The Court disagrees.

Generally, in a concealment action, a duty to disclose arises from a fiduciary or confidential relationship with the parties. (Warner Constr. Corp. v. L.A. (1970) 2 Cal.3d 285, 294.) In transactions that do not involve fiduciary or confidential relations, a duty to disclose material facts may arise in at least three instances: (1) the defendant makes representations but does not disclose facts that materially qualify the facts disclosed, or that render his disclosure likely to mislead; (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the plaintiff; the defendant actively conceals discovery from the plaintiff. (Id.)

Here, Plaintiffs sufficiently plead the second scenario, and that Satow and Enkoji concealed material facts. See citations to paragraphs 106, 107, 109 and 113 above in the “Aiding & Abetting” section. The demurrer is OVERRULED.

Conversion

The demurrer is OVERRULED. Plaintiffs allege that:

1. Defendants took possession of Plaintiffs’ L/Cs and used them as collateral for approximately $20 million in loans from CBT to Wannakuwatte/IMG. Defendants’ use of Plaintiffs’ cash collateral gave Wannakuwatte immediate access to the cash he needed to perpetrate his scheme and enabled CBT to generate loan fees, interest and other income from the loans, while shifting all risk of loss to Plaintiffs.

2. Without Plaintiffs’ consent, Defendants used Plaintiffs’ Certificate of Deposit as cash collateral for a loan to IMG and allowed Wannakuwatte

to assign the CD as collateral for the loan without Plaintiffs’ knowledge or consent.

3. Defendants worked in concert with Wannakuwatte to open accounts with CBT in Plaintiffs’ name and moved Plaintiffs’ funds in and out of these fraudulent accounts, knowing that neither they nor Wannakuwatte had authority to do so.

4. Defendants blatantly ignored Plaintiffs’ wiring instructions, which directed CBT to use Plaintiffs’ funds to open a Certificate of Deposit, and instead worked in concert with Wannakuwatte to open a fraudulent account in Plaintiffs’ name with actual knowledge that neither they nor Wannakuwatte had authority to do so.

(FAC, ¶ 148.) Taking these allegations as true, at this stage of the proceedings, these allegations are sufficient.

The demurrer is OVERRULED.

B&P Code §17200

The demurrer is OVERRULED. The Court has overruled the demurrer to other causes of action which may act as the predicate for this cause of action.

Defendants shall file and serve an answer by no later than January 22, 2018.