Marion, D. v. Bryn Mawr Trust Co. ( 2021 )

J-A28020-19
2021 PA Super 18DAVID H. MARION, RECEIVER FOR IN THE SUPERIOR COURT
BENTLEY FINANCIAL SERVICES, INC. OF PENNSYLVANIA
AND ENTRUST GROUP
Appellant
v.
BRYN MAWR TRUST COMPANY
Appellee No. 2470 EDA 2018
Appeal from the Judgment Entered July 26, 2018
In the Court of Common Pleas of Montgomery County
Civil Division at No: 2003-19232
BEFORE: PANELLA, P.J., STABILE, J., and COLINS, J.*
OPINION BY STABILE, J.: FILED: FEBRUARY 16, 2021
Appellant, David H. Marion, receiver for Bentley Financial Services, Inc.
and Entrust Group, appeals from the July 26, 2018 judgment entered in favor
of Appellee, Bryn Mawr Trust Company (“BMT”). We vacate and remand for
a new trial.
On October 23, 2001, the Securities and Exchange Commission
commenced an action against Robert Bentley for an alleged Ponzi scheme.
The Federal District Court for the Eastern District of Pennsylvania (“District
Court”) appointed Appellant receiver on November 1, 2001. The District Court
also froze the assets of Bentley and two entities he controlled, Bentley
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* Retired Senior Judge assigned to the Superior Court.
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Financial Services (“BFS”) and Entrust Group (“Entrust”). The scheme arose
in 1996 shortly after Main Line Bank (“Main Line”) discovered that Bentley
forged his accountant’s signature on a document. Main Line promptly
demanded repayment of a fully drawn $2 million line of credit within thirty
days. To satisfy Main Line, Bentley sold $2 million dollars of fictitious
certificates of deposit (“CDs”).
Thereafter, Bentley continued to sell fictitious CDs to new investors in
order to pay off previous investors. He also hired a new accountant, Sanford
Goldfein. In October of 1997, Goldfein referred Bentley to BMT for his banking
needs. Goldfein had referred business to William Fink, BMT’s vice president
for commercial lending, on several prior occasions. Initially, Bentley sought a
$2 million line of credit, checking accounts, and wire transfer accounts. BMT
conditionally approved the line of credit pending, among other things, a
favorable credit reference from Main Line. Proof of collateral apparently was
not one of the conditions. Regardless, Bentley withdrew his application for
the line of credit before BMT contacted Main Line. He opened various deposit
and wire transfer accounts with BMT and quickly became one of BMT’s largest
customers.
According to Appellant’s amended complaint, Bentley and his companies
went on to sell more than $4 billion in private, unregistered notes, falsely
leading investors to believe they were buying FDIC-insured CDs. Amended
Complaint, 8/1/12, at ¶¶ 2, 13. Bentley eventually pled guilty to mail fraud
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and was sentenced to serve 55 months in federal prison and pay $38 million
in restitution. The instant action concerns Bentley’s use of his BMT accounts
to deposit and transfer investor funds in furtherance of his fraudulent scheme.
Appellant, as receiver, claims BMT knew of or, at the very least,
deliberately ignored obvious evidence of Bentley’s unlawful activity. Appellant
claims BMT turned a blind eye in order to accommodate a very profitable
customer. BMT denies any awareness of Bentley’s scheme and claims
Bentley’s victims could have been compensated in full but for Appellant’s
errant actions as receiver. In particular, BMT claims Appellant’s expensive
litigation strategy and his decision to redeem some CDs prior to their maturity
more than offset the damages Appellant sought to recover in this case.
Appellant counters that the trial court erred in admitting evidence of
Appellant’s counsel fee expenditures and in permitting the jury to consider the
merit of Appellant’s early redemption of CDs. Appellant notes the SEC and
many of the victims urged early redemption of CDs and all of his decisions and
fee expenditures as receiver, were approved by the District Court.
Appellant filed a complaint against BMT on May 21, 2004, alleging
breach of common law fiduciary duty, breach of the Uniform Fiduciaries Act
(“UFA”), 7 P.S. § 6351, et. seq., aiding and abetting fraud, and negligence.
With leave of court, Appellant filed an amended complaint more than eight
years later, on August 1, 2012. The amended complaint alleged the same
causes of action. On January 24, 2014, the trial court granted BMT’s summary
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judgment motion on aiding and abetting fraud, but denied the motion as to
Appellant’s remaining claims. The trial court concluded Pennsylvania does not
recognize an action for aiding and abetting fraud.
The parties chose a jury on March 9, 2018. At the close of his evidence,
Appellant withdrew his claim for breach of common law fiduciary duty. On
March 16, 2018, the jury returned a defense verdict on Appellant’s UFA and
negligence claims. Appellant filed post-trial motions seeking a new trial that
was denied by the trial court on July 26, 2018. Judgment was entered on the
verdict that same day. This timely appeal followed. Appellant filed a timely
1925(b) statement on August 27, 2018, to which the trial court issued an
opinion on July 2, 2019. Appellant raises the following issues for our review.
(1) Did the trial court err in holding that Pennsylvania law does not
recognize a claim for “aiding and abetting fraud,” when this Court has
expressly recognized such a tort claim consistent with the Restatement
(Second) of Torts as synonymous with the established claim for
“concerted tortious conduct”?
(2) Is the Receiver entitled to a new trial because the trial court
improperly and repeatedly allowed the Defendant to introduce
prejudicial evidence of:
(a) the Receiver’s estimated attorneys’ fees and expenses over
the entire life of the receivership, including this litigation and many other
matters, when the Receiver’s attorneys’ fees and expenses (1) were
completely irrelevant to any issue in this case; (2) had been approved
by the federal court having jurisdiction over and supervising the
Receivership; and (3) in attempting to cure his prior errors, the
trial court gave a confusing and misleading jury instruction on the
subject?
(b) the Receiver’s decision to liquidate Certificates of Deposit
(“CDs”) prior to their maturity, when that decision was also (1)
irrelevant to the issues in this case; (2) was directed and approved by
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the supervising federal court; and (3) in attempting to cure his prior
errors, the trial court gave a confusing and misleading jury instruction
on the subject ?
Appellant’s Brief at 4-5.
A. Aiding and Abetting Fraud.
Appellant’s first argument—that the trial court erred in granting
summary judgment on his aiding and abetting fraud cause of action—presents
a question of law. Our standard of review is de novo and our scope of review
is plenary. Eclipse Liquidity, Inc. v. Geden Holding, Ltd., 200 A.3d 507,
509-10 (Pa. Super. 2018). Summary judgment is appropriate where there is
no genuine issue of material fact as to a necessary element of a cause of
action that can be established by discovery or expert report. Pa.R.C.P. No.
1035.2(1). “In reviewing an order granting a motion for summary judgment,
an appellate court must examine the entire record in the light most favorable
to the non-moving party and resolve all doubts against the moving party.”
Donegal Mut. Ins. Co. v. Fackler, 835 A.2d 712, 715 (Pa. Super. 2003).
Instantly, the trial court granted summary judgment on Appellant’s aiding and
abetting fraud claim because it believed no such cause of action exists in
Pennsylvania.
We begin with a review of Appellant’s allegations. In the amended
complaint, Appellant alleged that BMT failed to follow its own industry-
standard Know Your Customer (“KYC”) policy, and that the account activities
of Entrust were not consistent with that of a custodian of CDs, which Bentley
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claimed Entrust was. Amended Complaint, 8/1/12, at ¶¶ 19-32. Likewise,
Appellant alleged that BFS, a purported broker of securities and CDs, would
have required a line of credit for BFS to operate its business. Id. at ¶¶ 35-
36. Bentley chose not to pursue a line of credit from BMT, and BMT never
inquired whether or from where BFS maintained a line of credit anywhere else.
Id. Appellant alleged that Bentley was, in effect, using the Entrust account
as a revolving line of credit for BFS, and that this should have been obvious
to BMT. Id. at ¶ 37. Appellant alleged that BMT prioritized collecting fees
from Bentley and hoped Bentley would bring BMT more business. Id.
Appellant also alleged that BMT should have asked Main Line about Bentley.
Id. at ¶¶ 38-40.
In opposing BMT’s motion for summary judgment, Appellant argued that
BMT’s conduct was actionable under § 876 of the Restatement (Second) of
Torts:
For harm resulting to a third person from the tortious
conduct of another, one is subject to liability if he
(a) does a tortious act in concert with the other or pursuant
to a common design with him, or
(b) knows that the other’s conduct constitutes a breach of
duty and gives substantial assistance or encouragement to the
other so to conduct himself, or
(c) gives substantial assistance to the other in
accomplishing a tortious result and his own conduct, separately
considered, constitutes a breach of duty to the third person.
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Restatement (Second) of Torts § 876 (1979).1
First, we consider whether Pennsylvania recognizes a cause of action for
aiding and abetting fraud. In Skipworth v. Lead Indus. Ass’n, Inc., 690
A.2d 169 (Pa. 1997), the plaintiff alleged a personal injury action against
manufacturers of lead-based paint. The Supreme Court rejected the plaintiff’s
market share theory of liability, whereby the known manufacturers of lead-
based paint would have been liable to the plaintiff in proportion to their market
share even though the plaintiff could not identify which defendant
manufactured the paint that caused the injury. The Skipworth Court held
that a claim under § 876 cannot succeed where the plaintiff cannot identify
the specific party who acted in concert with the wrongdoer. Id. at 174-75.
In support of its holding, the Skipworth Court referenced Burnside v.
Abbot Lab., Inc., 505 A.2d 973 (Pa. Super. 1985). In Burnside, the
plaintiffs sued the manufacturers of synthetic estrogen on a theory of
industry-wide liability. Burnside held that a cause of action under § 876 is
not viable where the plaintiff cannot identify the specific defendant who acted
in concert with the wrongdoer. Burnside, 505 A.2d at 983-84. Likewise,
Skipworth cited Kline v. Ball, 452 A.2d 727 (Pa. Super. 1982), wherein this
Court rejected a § 876 claim where the injured plaintiff could not identify
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1 In his response to BMT’s summary judgment motion, Appellant relied on
subsections (b) and (c). Appellant’s Opposition to BMT’s Motion for Summary
Judgment, 11/5/12, at ¶¶ 158-61. In his appellate brief, however, Appellant
relies solely on subsection (b). We confine our analysis accordingly.
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which of several high school boys dared another to knock a trash can off a
railing. Despite its decision to affirm the compulsory nonsuit entered against
the plaintiff, the Kline Court wrote that the plaintiff’s theory under § 876 had
merit and might apply to another case with similar facts. Id. at 728; see also
Cummins v. Firestone Tire & Rubber Co., 495 A.2d 963 (Pa. Super. 1985)
(holding that no § 876 cause of action would lie where the plaintiff could not
identify which automobile parts manufacturer produced the tire and rim
assembly that caused his injury). In summary, the Skipworth Court found
this Court’s interpretations of the concert of action theory under § 876
“eminently reasonable” and expressly adopted them. Skipworth, 690 A.2d
at 175.
Subsequently, in Sovereign Bank v. Valentino and Ganter, 914 A.2d
415 (Pa. Super. 2005), the plaintiff bank alleged that one of its loan officers,
defendant Valentino, established loan accounts under fictitious names and
used the loan proceeds for his personal benefit. Id. at 416-17. Defendant
Ganter allegedly accepted checks drawn on the fictitious accounts and, in
return, wrote checks to Valentino for smaller amounts. Ganter thereby
profited from the scheme and helped Valentino “launder” the loan proceeds.
Id. at 417. The bank alleged a cause of action under § 876, contending
Ganter and Valentino acted in concert to defraud the bank.
This Court wrote that § 876 “addresses the tort of civil aiding and
abetting, which is also known as concerted tortious conduct.” Id. at
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421 (emphasis added). The Court used “aiding and abetting” and “concerted
tortious conduct” interchangeably throughout the opinion. For example, just
prior to quoting at length from the bank’s complaint, the Valentino Court
described it as alleging a “concerted tortious conduct claim.” Id. at 422. The
bank’s complaint, however, repeatedly referred to Ganter’s conduct as “aiding
and abetting” Valentino’s fraudulent scheme. Id. at 422-23. Notwithstanding
the varied terminology, the bank’s cause of action arose in substance under
§ 876(b), and this Court treated it as such. Id. at 424. The Valentino Court
upheld the plaintiff’s verdict on the § 876 cause of action and remanded for
entry of a larger damages award. Id. at 427.
Similarly, in this case, it is clear from Appellant’s amended complaint
and opposition to BMT’s summary judgment motion that, in substance, he
alleged a cause of action under § 876. That Appellant titled the claim “aiding
and abetting fraud” rather than “concerted tortious action” is not significant,
as is clear from Valentino. Because Pennsylvania recognizes causes of action
under § 876, and because Appellant clearly alleged one (fraud is a tort, and
Appellant alleges BMT aided and abetted Bentley’s fraud), the trial court erred
in concluding that Appellant alleged a nonexistent cause of action.2
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2 BMT’s reliance on federal case law is misplaced. Federal courts look to
whether a state’s highest court has recognized a cause of action. The Eastern
District of Pennsylvania has noted, correctly, that the Pennsylvania Supreme
Court has not expressly recognized a claim for aiding and abetting fraud under
§ 876(b) (Skipworth addressed § 876(a)). See, e.g., Fulton Bank, N.A. v.
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Next, we consider whether summary judgment was appropriate despite
the trial court’s errant reasoning. “It is well-settled that we may affirm the
trial court’s order on any valid basis.” Seneca Res. Corp. v. S & T Bank,
122 A.3d 374, 387 n.13 (Pa. Super. 2015). BMT claims Appellant failed to
produce sufficient evidence to avoid summary judgment on the § 876 action,
even if Pennsylvania recognizes that cause of action. Appellant argues he
produced enough evidence to create a genuine issue of material fact on his
§ 876(b) claim, inasmuch as it was evident that BMT was aware of Bentley’s
scheme and permitted him to use BMT accounts in furtherance of it. As noted
above, § 876(b) applies where the actor “knows that the other’s conduct
constitutes a breach of duty and gives substantial assistance or
encouragement to the other so to conduct himself[.]” Restatement (Second)
of Torts, § 876(b).
We first consider the knowledge element. BMT claims it cannot be liable
unless BMT had actual knowledge of Bentley’s scheme, whereas Appellant
argues BMT must be held liable because it willfully ignored numerous red flags.
The Valentino Court offered no specific analysis of the knowledge element,
but the Court applied § 876(b) to a case in which the defendant and the
underlying bad actor had a close relationship. There, Ganter’s knowledge of
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UBS Sec., Inc., 2011 WL 5386376 (E.D.Pa. Nov. 7, 2011). This is of no
moment here, as Valentino relied on § 876(b) to impose liability for a
fraudulent financial scheme, and Valentino is binding on this panel.
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Valentino’s fraudulent scheme was clear, inasmuch as Ganter wrote checks to
Valentino in exchange for checks drawn on Valentino’s fictitious accounts.
In other cases, the relationship between the § 876(b) defendant and the
underlying bad actor was less clear. For example, in Grimm v. Grimm, 149
A.3d 77 (Pa. Super. 2016), the plaintiff’s grandfather, elderly and in declining
mental health, struck the plaintiff in the face with the handle of a shovel. Id.
at 81. Plaintiff brought an action under § 876(b) against his grandfather’s
attorney, alleging the attorney led grandfather to believe that violence toward
family members was appropriate. In upholding the trial court’s order
sustaining the attorney’s preliminary objections, this Court wrote:
As the comment to section 876 makes clear, concerted
tortious action requires the secondary actor to have knowledge of
the primary actor’s tortious actions or the primary actor’s tortious
act must be foreseeable to the secondary actor. See Restatement
(Second) of Torts § 876 cmt b (“although a person who
encourages another to commit a tortious act may be responsible
for other acts by the other, ordinarily he is not liable for other acts
that, although done in connection with the intended tortious act,
were not foreseeable by him”).[3] In this case, that means
Grandson was required to plead that [the defendant attorney]
either knew that Grandfather was going to strike Grandson or that
Grandfather’s striking of Grandson was a reasonable foreseeable
consequence of [the attorney’s] statements to Grandfather.
Id. at 88. Thus, the Grimm Court held that § 876(b) could apply where the
defendant knew of or could reasonably foresee the underlying bad actor’s
misdeed.
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3 We observe that, in the text of the Restatement, comment “b” to § 876
applies to subsection (a).
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The Grimm Court relied in part on HRANEC Sheet Metal v. Metalico
Pittsburgh, Inc., 107 A.3d 114 (Pa. Super. 2014), in which the plaintiff, a
ductwork fabricator, alleged that the defendant, a scrap metal recycling
facility, acted in concert with some of plaintiff’s employees in stealing coiled
stainless steel sheets from the plaintiff’s inventory. The plaintiff alleged the
defendant paid cash for the coils and failed to document the transactions in
accordance with the Scrap Material Theft Prevention Act.4 In reversing the
trial court’s order sustaining the defendant’s preliminary objections, we
reasoned that the defendant “knew or should have known” that the coils were
stolen. Id. at 125. For multiple transactions, the defendant never confirmed
that the persons to whom it paid cash were authorized to deliver the coils on
behalf of the plaintiff; the defendant repeatedly failed to comply with
provisions of the Scrap Material Theft Prevention Act; and the defendant failed
to make any inquiry about the steady supply of new material it was receiving.
“Such intentional ignorance is not sufficient to shield [defendant] from liability
under the concerted tort statute.” Id. The panel also wrote that the
defendant encouraged the tortious conduct insofar as the plaintiff’s employees
knew they could receive cash for new coils with no questions asked. Thus,
the HRANEC Court relied on the defendant’s “intentional ignorance” in
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4 73 P.S. § 1943.1, et. seq.
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concluding that the defendant knew or should have known it was participating
in tortious conduct.5
The United States District Court for the Eastern District of Pennsylvania
considered a case with facts somewhat analogous to the instant matter. In
Resolution Trust Corp. v. Farmer, 823 F. Supp. 302 (E.D.Pa. 1993),
abrogated in part on other grounds as stated in Resolution Trust Corp.
v. Baker, 1994 WL 637359, (E.D.Pa. Nov. 14, 1994), the receiver alleged a
§ 876(b)6 claim against former officers, directors, and lawyers of a failed
savings and loan (“S&L”) association, alleging that they knowingly permitted
the S&L to engage in high-risk, poorly documented lending practices. With
regard to knowledge, the court wrote:
Although, mere unknowing participation in another’s
[wrongful act] is an improper predicate to liability, the
requirement of knowledge may be less strict where the alleged
aider and abettor derives benefits from the wrongdoing. Even in
such a situation, the proof offered must establish conscious
involvement in impropriety or constructive notice of intended
impropriety. Such involvement may be demonstrated by proof
that the alleged aider-abettor had general awareness that his role
was part of an overall activity that is improper.
Id. at 309 (internal citations and quotation marks omitted). The plaintiff
alleged the lawyer defendants “knew or recklessly failed to discover the
wrongful conduct of the Director/Officer Defendants . . . and substantially
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5 The HRANEC Court analyzed all three subsections of § 876 and was not
specific as to which it applied.
6 See id. at 309 n.11.
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assisted in the performance of such wrongful conduct[.]” Id. Those
allegations were sufficient to state a claim under § 876(b). Id.
Given this Court’s analysis in Grimm and HRANEC, and the persuasive
authority of Farmer, we conclude that a defendant’s actual knowledge of the
underlying tort is not necessary to sustain a cause of action under § 876(b).
Rather, if the defendant knew or should have known of the underlying bad
actor’s misdeeds, but instead exhibited intentional ignorance, as in HRANEC,
the knowledge element of § 876(b) is satisfied.
In this case, as we explained above, evidence produced in discovery
reveals that Entrust was a sole proprietorship that allowed Bentley to serve as
custodian of his investors’ CDs and thereby eliminated the oversight of a
custodian bank. Plaintiff’s Answer in Opposition to Defendant’s Motion for
Summary Judgment, 11/5/12, at ¶¶ 10-11 (citing the expert report of Charles
L. Williams). Federal Reserve investigators were ill at ease with this
arrangement: “Equally disturbing is the fact that Mr. Bentley serves as
custodian for the same CDs he is brokering even though he is not a registered
custodian as required by statute.” Id. at ¶ 42 (citing a Memorandum of the
Federal Reserve Bank of Philadelphia, attached as Exhibit “OO” to Plaintiff’s
Answer in Opposition to Defendant’s Motion for Summary Judgment and filed
under seal). When Bentley opened his wire and deposit accounts at BMT, BMT
was required, according to its own industry-standard KYC program, to monitor
“out of the ordinary or suspicious activity that is not in keeping with the known
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and usual customer activity[.]” Id. at ¶¶ 26-27. The KYC program was
designed to “deter, detect and prevent all forms of fraudulent and money
laundering activity and suspect transactions that may be directed at the
Bank.” Id. at 27.
As stated above, Bentley abruptly withdrew his application for a line of
credit when BMT conditionally approved the line of credit pending, among
other things, a favorable credit reference from Main Line Bank. Notably,
however, BMT did not confirm the existence of $2 million in CDs or other
collateral to secure the line of credit, and closing the line of credit was not
conditioned on proof of adequate collateral. Id., Exhibit H., at 13-21. After
Bentley withdrew his application for the line of credit, BMT did not contact
Main Line to verify Bentley’s business model or the solvency of his entities.
Id. at ¶¶ 45-55.
BMT counters that there was no need for a credit reference after Bentley
withdrew his request for the line of credit, but several of its officers admitted
they feared that contacting Main Line would have prompted Main Line to
attempt to thwart BMT’s efforts to bring Bentley in as a customer. Id. at
¶¶ 52-54. Also, BMT notes that deposit accounts do not pose the same risk
to a bank as a $2 million line of credit. Regardless, BMT was aware that the
$2 million line of credit was critical to the operation of Bentley’s businesses,
but none of the financial statements or other information provided to BMT
confirmed its existence. Id. at ¶¶ 61-74.
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Furthermore, when Bentley’s heavier than expected use of his BMT wire
accounts caused him to incur unexpected fees (due to a lower than expected
balance), BMT agreed to modify the fee structure. Id. at ¶¶ 96-104 and
Exhibits DD and EE. The volume of transactions through the wire account was
roughly three times what BMT expected (based on Bentley’s Main Line Bank
statements from a single month, September of 1997), but BMT apparently did
not inquire into the reasons for the heavy usage and low balance. Id.
Appellant’s expert wrote that the large increase in account activity should have
been a red flag. Id., Exhibit H at 33.
This is especially true considering that BMT knew that
Bentley had to have a $2 million line of credit at Main Line Bank
to operate his business, but did not have that line of credit facility
when he moved his banking relationship to BMT. BMT should have
had serious questions about how Bentley was able to fund his
business activity that had increased three fold when he did not
have a credit facility to use to finance his business activity.
Id., Exhibit H at 33-34. BMT’s failure to investigate violated its KYC policy.
Id., Exhibit H, at 34-39.
To summarize, Appellant produced evidence that Bentley was a very
large and profitable customer for BMT. BMT, considering itself to be in
competition with Main Line for Bentley’s business, conditionally approved a $2
million line of credit but did not seek proof that Bentley or his businesses had
$2 million in collateral. BMT offered Bentley very favorable fees to move his
business to BMT, and further accommodated Bentley when the high volume
of activity on his wire accounts resulted in additional unexpected fees. BMT
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never inquired as to the reason for the much higher than expected volume of
transactions through the wire account, and never confirmed that Bentley had
a line of credit sufficient to support the high volume of business. Moreover,
Bentley as the principal owner of BFS, also operated Entrust as a sole
proprietorship that was to act as custodian for investor funds. Bentley
essentially controlled investor funds both as the broker-dealer and as
custodian, an arrangement that let the proverbial fox into the hen house.
From the outset of its relationship with Bentley, BMT failed in many respects
to follow its own KYC policy. BMT profited from its relationship with Bentley,
and we conclude that a genuine issue of material fact existed as to whether
BMT exercised intentional ignorance toward Bentley’s unlawful activity.
HRANEC, 107 A.3d at 125.
Next, we consider whether BMT offered substantial assistance or
encouragement to Bentley. Per the comment to § 876, we will consider “the
nature of the act encouraged, the amount of assistance given by the
defendant, his presence or absence at the time of the tort, [and] his relation
to the other and his state of mind[.]” Restatement (Second) of Torts § 876
cmt d. In addition to these factors, courts often consider the duration of the
assistance (Bair v. Purcell, 500 F. Supp. 2d 468, 496 (M.D. Pa. 2007)), and
the foreseeability of the harm that occurred (Jefferis v. Commonwealth,
537 A.2d 355, 358 (Pa. Super. 1988)). We consider both of these additional
factors significant in this case.
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Much of the same evidence relevant to BMT’s knowledge is relevant
here. BMT enticed Bentley as a customer with an attractive fee package and
without a thorough analysis of the financial health of Bentley or his businesses,
violating its own KYC policy. BMT further adjusted its fee structure to
accommodate the high volume of transactions, again without making inquiries
in accord with its KYC policy. These actions and inactions were of assistance
to Bentley in perpetuating his Ponzi scheme.
Regarding BMT’s relationship and presence with Bentley during his
unlawful activity, the summary judgment record reflects that BMT’s officers
remained in close communication with Bentley, BMT’s largest customer, for
the duration of the banking relationship. Likewise, Bentley’s Ponzi scheme
spanned the duration of his banking relationship with BMT. That relationship
spanned roughly four years before BMT terminated it. The harm that
occurred—Bentley defrauding his investors—was foreseeable, given Bentley’s
unusual and unexpected use of his deposit accounts, and BMT’s apparent
failure to adhere to its own KYC policy.
Based on all of the foregoing, we conclude the trial court committed
legal error in granting summary judgment on Appellant’s aiding and abetting
claim. The evidence before us, construed in a light most favorable to
Appellant, establishes a triable issue of fact as to Appellant’s § 876 cause of
action, as that action has been construed by Pennsylvania jurisprudence. The
trial court abused its discretion in granting BMT’s summary judgment motion.
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B. Motion for a New Trial
Appellant argues that he is entitled to a new trial because the trial court
committed prejudicial error by permitting BMT to admit evidence that, as
receiver, he failed to mitigate damages by incurring legal fees and committing
to an early CD redemption strategy.
(i) Standard of Review
The standard of review of an appellate court reviewing a trial court’s
decision denying a motion for a new trial is as follows:
[I]t is well-established law that, absent a clear abuse of discretion
by the trial court, appellate courts must not interfere with the trial
court's authority to grant or deny a new trial.
* * *
Thus, when analyzing a decision by a trial court to grant or deny
a new trial, the proper standard of review, ultimately, is whether
the trial court abused its discretion.
Harman ex rel. Harman v. Borah, [ ] 756 A.2d 1116, 1122 (Pa.
2000).
Moreover, our review must be tailored to a well-settled, two-part
analysis:
We must review the court’s alleged mistake and determine
whether the court erred and, if so, whether the error resulted in
prejudice necessitating a new trial. If the alleged mistake
concerned an error of law, we will scrutinize for legal error. Once
we determine whether an error occurred, we must then determine
whether the trial court abused its discretion in ruling on the
request for a new trial.
ACE Am. Ins. Co. v. Underwriters at Lloyds and Co., 939 A.2d 935, 939
(Pa. Super. 2007) (citing Salsitz v. Allentown Hosp., 814 A.2d 766, 771
(Pa. Super. 2002)), aff’d, 971 A.2d 1121 (Pa. 2009).
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(ii) Mitigation of damages
A party who suffers a loss has a duty to make a reasonable attempt to
mitigate damages, but the burden is on the party who breaches the contract
to show how further loss could have been avoided through the reasonable
efforts of the injured party. Ecksel v. Orleans Construction Co., 519 A.2d
1021 (Pa. Super. 1987), Forest City Grant Liberty Assocs. v. Genro II,
Inc., 652 A.2d 948, 952 (Pa. Super. 1995). Thus, a defendant will not be
penalized beyond the extent of the plaintiff’s damages and the plaintiff will not
be rewarded for its failure to mitigate. Id. In addition, it is axiomatic “that
the doctrine of mitigation of damages addresses the amount of damages to
be awarded once liability has been established; it has no bearing whatsoever
on the underlying determination of liability.” Collincini v. Honeywell, Inc.,
601 A.2d 292, 297 (Pa. Super. 1991) (italics in original; disapproved on
other grounds, Walnut Street Assoc., Inc. v. Brokerage Concepts, Inc.,
20 A.3d 468 (Pa. 2011)), appeal denied, 608 A.2d 27 (Pa. 1992), cert.
denied, 506 U.S. 869 (1992).7 Appellant contends that the trial court erred
in admitting BMT’s evidence alleging that he, as receiver, failed reasonably to
mitigate damages. Specifically, Appellant contends BMT’s criticism of legal
fees incurred by the receiver and the receiver’s early redemption of CDs was
____________________________________________
7 In both contract and tort cases, an injured plaintiff cannot recover damages
for losses that could have been avoided with reasonable effort. Cf.
Restatement (Second) Contracts § 350, Restatement (Second) of Torts
§ 918.
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prejudicial evidence improperly admitted at trial now entitling him to a new
trial.
a. Attorneys’ Fees.
Appellant argues that BMT improperly employed an attack-the-receiver
strategy from its opening statement through trial to argue to the jury that the
receiver could have recovered investors’ money faster if he had not
aggressively pursued a lot of litigation and that instead, the receiver was
motivated by greed. Appellant argues that BMT was permitted, over repeated
objections, not only to question fees incurred from the beginning of the
receivership, but also to question the wisdom of his litigation strategies.
Appellant contends that the court improperly allowed BMT’s damage expert to
testify that the receiver’s legal strategy was flawed and that not pursuing
those strategies would have better served investors. Appellant complains that
BMT’s damage expert was allowed to speculate concerning the amount of
money spent on attorneys’ fees at $250,000 per month between 2001 to 2003
based upon a made-up hourly rate for five to six attorneys. Appellant argues
that these fee numbers were speculative and misleading, since the expert
attempted to extrapolate from fees spent by the receiver unrelated to any
litigation strategy. Appellant argues that the jury was improperly permitted
to conclude that had he pursued a different legal strategy there would not
have been the need for this litigation because the money that went to fees
would have gone to investors. Appellant further claims the trial court
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exacerbated this error by instructing the jury that it “may not award damages
in the nature of legal fees but may consider damages relative to the early
redemption of the certificates of deposit.” N.T. Trial, 3/16/18, at 107-08.
Appellant claims this instruction was inadequate and confusing because he
was not seeking attorneys’ fees as part of his damage claim. Appellant
maintains the instruction did not explain that the receiver’s actions and
expenses were irrelevant as the damages claimed preceded his appointment.
Finally, Appellant repeatedly argues that BMT’s improper defense strategy
produced a gross injustice because references to legal fees that his law firm
collected were designed to suggest to the jury that the receiver in bringing
this litigation created investor losses. Appellant’s Brief at 35-40.
In defense, BMT claimed Appellant ran up excessive attorneys’ fees
throughout the course of his tenure as receiver, including this action, thereby
depleting the money available to remunerate Bentley’s victims.8 BMT argues
that the receiver’s aggressive litigation strategy resulted in his initiating at
least three costly lawsuits, including the present one, that produced no benefit
for investors, but only substantial financial benefit for the firms at which the
receiver was a member, facts which Appellant had no right to conceal from
____________________________________________
8 The fees Appellant paid to his law partners came from the pool of funds in
Bentley’s portfolio. N.T. Trial, 3/14/18, at 153-54. Appellant lodged
numerous objections to BMT’s examination of its defense expert on Appellant’s
counsel fee expenditures. N.T. Trial, 3/15/18, at 204-06, 21. Appellant also
objected to BMT’s cross-examination of him regarding the fees his law firms
received while he was receiver. N.T. Trial, 3/14/18, at 148-52.
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the jury. BMT further maintains its expert did not engage in speculation by
testifying the receiver incurred $250,000 per month in fees between 2001 and
2003, as this number was based upon documents provided through discovery.
BMT argues that it did not present evidence of attorney fees in support of any
affirmative claim for fees, but rather, introduced this evidence solely to
demonstrate that the receiver had resources at his disposal he could have
used to satisfy investor claims without having to sue BMT. Finally, BMT argues
that the admission of attorney fee evidence is moot because the jury did not
believe damages were appropriate in any event, since Appellant failed to prove
that BMT had anything to do with Bentley’s enterprise. Appellee’s Brief at 57-
62.
In our view, the attorneys’ fees evidence was simply irrelevant 9 to any
cause of action or to any alleged duty of Appellant to mitigate damages. As
stated, mitigation evidence has no relevance to issues of liability. Collincini,
601 A.2d at 297. Respecting damages, Appellant sought to recover losses to
investors stemming from the four-year period during which Bentley
maintained accounts at BMT. Amended Complaint, 8/1/12, at ¶¶ 17-61; N.T.
Trial, 3/12/18, at 44; N.T. Trial, 3/15/18, at 187-95. Appellant claimed BFS
was $3 million in debt in late 1997 when Bentley began his relationship with
BMT, and $23 million in debt in October of 2001 when the banking relationship
____________________________________________
9 Evidence is relevant if it has any tendency to make a consequential fact
more or less probable than it would be without the evidence. Pa.R.E. 401.
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ended, for a net loss of $20 million. N.T. Trial, 3/12/18, at 44; N.T. Trial,
3/15/18, at 195. Appellant did not seek to recover attorney’s fees for this
period nor for any other time. BMT does not argue otherwise, but instead,
argues only that the incurring of attorney’s fees reduced funds available to
reimburse investors thereby constituting a failure to mitigate damages.
Often an injured party will incur costs in an attempt to mitigate
damages, and it is beyond dispute that the injured party may claim those
costs as damages. Restatement (Second) Contracts § 347(b) and cmt. c
(incidental losses include costs incurred in a reasonable effort, whether
successful or not, to avoid loss). See also Comdyne I, Inc. v. Corbin, 908
F.2d 1142, 1149-50 (3rd Cir. 1990) (the corollary to the principle established
in New Jersey and elsewhere, that one wronged by the actions of another is
required to mitigate damages, is that a wronged party may recover for
expenditures made in a reasonable effort to avert the harm caused by a
defendant). What is reasonable or excessive in terms of costs may be a triable
issue, but since Appellant did not claim fees as damages, the reasonableness
of those fees was not at issue in this case and, therefore, irrelevant to any
damages claimed in this litigation.
Just as problematic was BMT’s use of fees as a mitigation defense done
with the benefit of hindsight to question the receiver’s litigation strategy.
Whether or not it is reasonable to pursue litigation and incur fees cannot be
determined, as BMT has done, by looking at the ultimate outcome of a case.
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Rather, if the issue is relevant, the decision must be viewed under the
circumstances existing as of the time the decision was made to pursue
litigation. Reasonableness "is to be determined from all the facts and
circumstances of each case, and must be judged in the light of one viewing
the situation at the time the problem was presented." Prusky v. Reliastar
Life Insurance Co., 532 F.3d 252, 259 (3rd Cir. 2008) (citing In re Kellett
Aircraft Corp., 186 F.2d 197, 198 (3rd Cir. 1950)). To hold otherwise
retroactively punishes a claimant for an adverse outcome based upon a
reasonable decision to pursue litigation when made. BMT’s argument that the
receiver pursued at least three suits that produced no benefit to the estate
questions the receiver’s judgment based upon outcome and not the wisdom
of the decision when made to pursue those claims.10 Obviously, BMT’s
mitigation argument would fail if the receiver had succeeded in any of those
other claims, but that analysis likewise comes into view only with the benefit
of hindsight.
____________________________________________
10 We note further that even if relevant, BMT provided no expert legal
testimony to establish that the receiver, through counsel, made decisions that
fell below the relevant standard of care in order to establish that counsel’s
actions were unreasonable. See Storm v. Golden, 538 A.2d 61 (Pa. Super.
1988) (expert testimony generally is necessary to establish negligent practice
in any profession and the requirement applies equally in legal malpractice
claims, as for example where a complex determination is required of a claim
of breach of duty involving an attorney’s choice of trial tactics in which a
layperson’s judgment obviously requires guidance).
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We also find merit to Appellant’s argument that if courts permit evidence
of legal fees incurred to pursue a claim as evidence of a failure to mitigate
damages, then every damages verdict would be subject to reduction by the
amount of those fees. When fees are not claimed as a part of damages, a
defendant is not entitled to claim the benefit of fees expended by an opposing
party to mitigate damages caused by his wrongful conduct. To hold otherwise
would leave an injured party in the position of either not pursuing a culpable
party, or having its claim reduced by fees incurred to hold a responsible party
liable for damages. Such an argument holds a plaintiff at an unfair advantage
and allows a culpable defendant to use the fact of the plaintiff’s suit as a sword
against the plaintiff to reduce his own liability for damages.
Further, we agree that BMT’s expert testimony regarding the amount of
fees and how they were incurred was impermissibly speculative.
Expert testimony is incompetent if it lacks an adequate basis in
fact. The expert is allowed only to assume the truth of testimony
already in evidence. While an expert’s opinion need not be based
on an absolute certainty, an opinion based on mere possibilities is
not competent evidence. This means that expert testimony
cannot be based solely upon conjecture or surmise. Veiner v.
Jacobs, 834 A.2d 546, 558 (Pa. Super. 2003); see also
Cuthbert v. City of Philadelphia, [ ] 209 A.2d 261, 264
(Pa.1965).
Wright v. Eastman, 63 A.3d 281, 283 (Pa. Super. 2013). However, contrary
to Appellant’s assertion, it does appear that BMT’s expert arrived at $250,000
per month as the average of legal fees from October 23, 2001 through the
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end of 2004,11 based upon discovery documents. Nonetheless, there does not
appear to be any basis in fact for the hourly rate assumed of $285 an hour,
or for the number of attorneys who worked on this project or any other
matters.12 N.T. Trial, 3/15/18, at 205-06. Nor did BMT attempt to review the
reasonableness of time spent by whatever number of attorneys worked on
this or other projects. By assuming various scenarios, including the most
aggressive scenario that employed five attorneys, without any analysis of
whether the work performed was necessary, BMT’s damages expert was
allowed to speculate and to manipulate his calculations to produce a desired
result. Moreover, we agree that this expert’s wholesale inclusion of legal fees
for all professional services rendered to the receiver—even outside this
litigation—impermissibly allowed the jury to conclude that the receiver should
____________________________________________
11 The fees Appellant paid to his law partners came from the pool of funds in
Bentley’s portfolio. N.T. Trial, 3/14/18, at 153-54. Appellant lodged
numerous objections to BMT’s examination of its defense expert on Appellant’s
counsel fee expenditures. N.T. Trial, 3/15/18, at 204-06, 221. Appellant also
objected to BMT’s cross-examination of him regarding the fees his law firms
received while he was receiver. N.T. Trial, 3/14/18, at 148-52.
12 BMT’s defense expert, Paul Pocalyko, calculated alternative scenarios in
which the receiver would have employed zero, one, two, three, four and five
full-time attorneys. Pocalyko calculated the receiver incurred legal fees of
approximately $250,000 per month from 2001 through 2003, equivalent to
paying five attorneys $285 per hour, eight hours per day. He offered his
opinion that had the receivership not incurred legal fees it would have had
funds necessary to distribute 100% of allowed claims by February 28, 2005.
Employing five full-time attorneys would have allowed for full distribution as
of February 28, 2007. Id. Defendant’s Exhibit 101, Supplemental Expert
Report of Paul W. Pocalyko, at 12-13.
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have incurred no fees at all. This is an untenable position that would preclude
a receiver from fulfilling his or her court obligation to marshal all of an estate’s
assets for the benefit of its claimants. If adopted, it would relieve BMT and
other similarly situated parties of the prospect of facing any litigation.
BMT further argues that any error was harmless because the attorneys’
fee evidence was relevant to damages, a question the jury never reached.
“The harmless error doctrine underlies every decision to grant or deny a new
trial.” Grove v. Port Auth. of Allegheny Cty., 218 A.3d 877, 888 (Pa.
2019). “A new trial is not warranted merely because some irregularity
occurred during the trial or another trial judge would have ruled differently;
the moving party must demonstrate to the trial court that he or she has
suffered prejudice from the mistake.” Id. “Further, ‘when improperly
admitted testimony may have affected a verdict, the only correct remedy is
the grant of a new trial.’” Deeds, 110 A.3d at 1012 (quoting Greisser v.
National R.R. Passenger Corp., 761 A.2d 606, 608 (Pa. Super. 2000)).
BMT relies on our Supreme Court’s opinion in Hart v. W.H. Stewart,
Inc., 564 A.2d 1250 (Pa. 1989) (plurality). There, the trial court erroneously
permitted evidence that the injured plaintiff continued to receive his full salary
after his injury. The jury found the defendant not liable on the plaintiff’s
design defect claim and therefore did not reach damages. The Supreme Court
held that erroneously admitted damages evidence is harmless where the jury
has found for the defendant on the liability issue. Id. at 1252. Hart is
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factually distinguishable because there is no indication that the defendant
Hart argued that the plaintiff filed suit to enrich himself. Further, only two of
the six sitting Justices signed the opinion announcing the judgment of the
court. The other four concurred in the result only. Thus, even if the Hart
OAJC intended to create a blanket rule on this issue, it did not create binding
precedent.
BMT also relies on Valentine v. ACME Markets, 687 A.2d 1157 (Pa.
Super. 1997), in which the trial court erroneously admitted evidence of the
slip-and-fall plaintiff’s prior and subsequent falls. The trial court reasoned that
the plaintiff’s repeated falls could have been related to a medical condition
and not to a defectively designed checkout counter. Id. at 1160. This Court
concluded that the trial court erred because there was no evidence as to the
cause of the plaintiff’s other falls. Id. The error permitted the jury to conclude
that the plaintiff repeatedly slipped and fell for no apparent reason. Id.Nonetheless, this Court found the error harmless because the jury found no
design defect. Id. The instant case is distinguishable because, as we discuss
in more detail below, BMT expressly invited the jury to consider whether
Appellant brought this action for the benefit of his law firm rather than for
Bentley’s victims. Furthermore, Valentine did not create a blanket rule
holding that evidence erroneously admitted on a question the jury did not
reach can never taint the jury’s finding on a question it did reach.
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More to the point is Deeds v. Univ. of Pennsylvania Med. Ctr., 110
A.3d 1009, 1012 (Pa. Super. 2015), appeal dismissed, 128 A.3d 764 (Pa.
2015), wherein this Court ordered a new trial, based on a violation of the
collateral source rule, even though the jury found the defendant not liable.
While the primary focus of the collateral source rule is to avoid the
preclusion or diminution of the damages otherwise recoverable
from the wrongdoer based on compensation recovered from a
collateral source, in some instances, the violation of the collateral
source rule can affect the jury’s deliberation and decision on the
issue of liability.
Deeds, 110 A.3d at 1013 (quoting Nigra v. Walsh, 797 A.2d 353, 360 (Pa.
Super. 2002)); see also, Lobalzo v. Varoli, 185 A.2d 557, 561 (Pa. 1962)
(“When an error in a trial is of such consequence that, like a dash of ink in a
can of milk, it cannot be strained out, the only remedy, so that justice may
not ingest a tainted fare, is a new trial.”).
Instantly, we note the following statement in BMT’s brief to this Court:
“At least three [lawsuits], including the present one, produced no benefit
for Bentley’s investors but substantial financial benefit, in the form of
legal fees, for the law firms at which [Appellant] was a member at the
time.” BMT’s Brief at 57 (emphasis added). This statement from BMT’s Brief
echoed its opening argument at trial:
Another thing [the defense expert] will tell you is that [Appellant]
could have recovered the investors’ money even faster . . . if he
had not aggressively pursued a lot of litigation. From the sampling
of records we have, [Appellant] was spending $250,000 a month
on legal fees, most of which were going to the law firm
where he was a partner.
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N.T. Trial, 3/12/18 records, at 61-62 (emphasis added). Thus, at the very
opening of trial BMT invited the jury to infer that Appellant filed meritless
lawsuits, including this one, for the financial benefit of his law firm rather than
the financial benefit of Bentley’s victims. Because the fee evidence from this
case and several others filed by Appellant as receiver was not relevant to the
merits of any of the causes of action that went to the jury, and because BMT
invited the jury to consider it for that purpose and to prejudice the jury against
the receiver and his law firm, we conclude, in accord with Deeds, that the
trial court’s error was not harmless.
We further conclude that the trial court’s attempt to provide a curative
instruction regarding the jury’s consideration of fees does not require a
different result: “If you believe that damages are appropriate in this case,
you may not award damages in the nature of legal fees but may consider
damage relative to the early redemption of the certificates of deposit.” N.T.
Trial, 3/16/18, at 107-08 (emphasis added). As we explained above,
Appellant was not seeking to recover fees. Rather, BMT insinuated that
Appellant incurred excessive fees at the expense of the receivership estate.
To the extent the trial court intended this instruction to alleviate any unfair
prejudice arising from its decision to admit evidence of Appellant’s counsel
fees, the court missed the mark. The instruction did not address Appellant’s
concern that the jury not be permitted to consider BMT’s argument that if fees
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were not incurred, more money would have been available to distribute to
investors.
Upon review, we conclude that the attorneys’ fee evidence, admitted
ostensibly for the purpose of demonstrating a failure to mitigate damages,
was admitted in error, that the error was not harmless, and that the trial
court’s denial of Appellant’s motion for a new trial based upon this error was
an abuse of discretion.13
b. Liquidation and Redemption of CDs
Appellant sets forth several arguments in support of his position that
the trial court erred in permitting the jury to consider the effect of Appellant’s
early redemption of CDs under BMT’s mitigation of damages defense.
Appellant argues that as receiver, he was entitled to the same immunity as a
court trustee in bankruptcy who acts in accord with court-approved decisions.
Permitting BMT to challenge his federal court-approved decision as receiver to
redeem and liquidate CDs was an attempt to collaterally attack and set aside
a valid court order. Appellant also contends it was error to allow BMT to assert
that he violated a court order that permitted him to hold CDs to their maturity.
On the substance of BMT’s mitigation defense, Appellant argues his liquidation
and redemption strategy of CDs was irrelevant to his claim for damages, since
____________________________________________
13 Because we find prejudicial error in the trial court’s admission of attorneys’
fee evidence, we do not address BMT’s argument that Appellant’s § 876 claim
was doomed to fail even if the trial court had not granted summary judgment
on that claim.
- 32 -
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the claimed damages arose years prior to trial and years after BMT’s wrongful
conduct. More to the point, Appellant contends that his litigation and
redemption strategies were not proper evidence of a failure to mitigate
damages, but just the opposite: those strategies demonstrated that as
receiver, he acted prudently to mitigate damages and fulfill his duties to
marshal and distribute funds to the victims.
In response, BMT argues that its sole motivation to introduce evidence
regarding the receiver’s premature liquidation of CDs was to demonstrate the
negative impact on the estate and that if the receiver had not done so,
sufficient funds would have been available to repay investors fully. BMT also
disputes that the receiver should enjoy immunity for his actions.
We reject Appellant’s claim that, as receiver, he was entitled to
immunity for his actions because they were approved by the district court and,
therefore, BMT should have been precluded from challenging his early
redemption of CDs. Our state law is silent as to whether and to what extent
the duty to mitigate damages should apply when the plaintiff is a court-
appointed receiver. Appellant, citing Atlantic Tr. Co. v. Chapman, 208 U.S.
360, 364 (1908), and Witt v. Commonwealth, 425 A.2d 374, 376 (Pa. 1981)
(plurality), asserts that his status as an officer of the court should preclude
BMT from challenging his court-approved liquidation and redemption strategy.
While both of these cases support the general proposition that Appellant, as a
receiver, may be considered an agent of the court, neither of these cases goes
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so far as to hold that this status insulates him from affirmative defenses
asserted by third parties in response to suit initiated by the receiver against
those parties.
Citing Yadkin Valley Bank & Tr. Co. v. McGee, 819 F.2d 74, 76 (4th
Cir. 1987), Appellant further attempts to draw an analogy between himself
and bankruptcy trustees, who enjoy immunity from suit where they act with
the approval of the bankruptcy court after full disclosure to the court and
creditors. However, Appellant recognizes that immunity from suit is not
pertinent here, as Appellant is not the defendant. Nonetheless, Appellant
argues from Chapman, Witt, and Yadkin that BMT’s mitigation of damages
defense must fail because actions Appellant took with approval of the federal
court and are not subject to question in this state court action. Appellant cites
no authority for this proposition and woefully underdevelops his argument to
support an extension of immunity to defeat affirmative defenses raised to a
receiver suit. Moreover, our research has revealed no authority to extend
official immunity as far as Appellant suggests. We note, however, our concern
with any position that would allow a receiver to use immunity as both a sword
and a shield in an action brought by a receiver against third parties.
We do observe that in O’Melveny & Myers v. Federal Deposit Ins.
Corp., 512 U.S. 79 (1994), the United States Supreme Court held that state
law governs the available defenses to a receiver’s state law cause of action.
There, the FDIC, as receiver, sued a failed S&L’s former counsel for
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malpractice. The federal district court granted summary judgment,
concluding that the receiver stood in the shoes of the S&L and therefore could
not prosecute the alleged wrongdoing of insiders. A unanimous Supreme
Court reversed, holding that California law, rather than federal common law,
governed the “imputation of knowledge to corporate victims of alleged
negligence.” Id. at 84-85. The O’Melveny Court also examined whether
federal law preempted state law on the point in question, noting that it “would
not contradict an explicit federal statutory provision” and would not “adopt a
court-made rule to supplement federal statutory regulation that is
comprehensive and detailed[.]” Id. at 85. The Court examined the federal
statute governing the FDIC’s powers and duties as receiver and found no basis
for displacing California law in that case. Id. at 85-87.
Prior to O’Melveny, some federal courts held that the FDIC, when
acting as receiver, had no duty to mitigate damages. See Resolution Trust
Corp. v. Farmer, 823 F. Supp. 302, 312 (E.D.Pa. 1993) (holding that RTC,
as receiver, owed no duty to mitigate damages in discharging its discretionary
actions as receiver); Federal Deposit Ins. Corp. v. White, 828 F. Supp. 304(D.N.J. 1993) (holding that the parties responsible for the failed bank would
not have their liability “excused or diminished” because of the alleged
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mistakes of the receiver). After O’Melveny, lower federal courts split on
whether the “no duty” rule survived.14
For our purposes, O’Melveny clarifies that, absent federal preemption,
state law governs the available defenses to a receiver’s state law causes of
action. As stated above, an injured party under Pennsylvania law has a duty
to take reasonable action to mitigate damages when that party suffers a loss.
We know of no exception under our state law that would insulate a receiver
from this duty when asserted as an affirmative defense to suit initiated by a
receiver against a third party. Thus, Pennsylvania law does not prohibit BMT’s
mitigation of damages defense. The question is whether the defense has any
merit.
First, we reject Appellant’s assertion that his actions postdating the
period in which damages were incurred are irrelevant to a claim that there
was a failure to mitigate damages. All attempts at mitigation occur after an
initial loss occurs. Instead, we believe the pertinent inquiry is whether
Appellant acted reasonably. BMT claims Appellant should have held CDs
longer to accrue a larger amount of income. Had he done so, BMT argues, he
could have compensated the victims in full without incurring legal fees.
____________________________________________
14 Compare RTC v. Massachusetts Mut. Life Ins. Co., 93 F. Supp. 2d 300(W.D.N.Y., 2000) (holding that the no duty rule did not survive O’Melveny),
with FDIC v. Healy, 991 F. Supp. 53 (D. Conn. 1998) (holding that the no
duty rule survived O’Melveny). An exhaustive review of O’Melveny and its
progeny would be outside the scope of this opinion.
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As noted above, the duty to mitigate damages is one whereby an injured
party is expected to take reasonable action to avoid further loss. Allowed
investor claims were set at $369.9 million as reported by the receiver as of
August 30, 2002. See Defendant’s Trial Exhibit 100, Expert Report of Paul W.
Pocalyko, at 5. In other words, Appellant would have made Bentley’s investors
whole by paying this amount. Ultimately, Appellant compensated the investor
victims 92% of their allowed claims.15 Appellant therefore did not cause
further loss to investors, but instead recouped almost the whole of allowed
investor claims. BMT proposed an alternative mitigation strategy that it claims
could have resulted in a 100% payment of allowed claims as of March 31,
2007, if investor funds were held longer to accrue additional interest, id. at
11, and by February 28, 2005 had the receiver not incurred legal fees. Id. at
13. In effect, BMT argues that a better mitigation strategy was available to
the receiver.
We will address the merits of BMT’s proposed mitigation strategy in
detail below. We note at the outset that BMT’s legal argument rests on a
flawed premise:
Where a choice has been required between two reasonable
courses, the person whose wrong forced the choice cannot
complain that one rather than the other was chosen. The rule of
mitigation of damages may not be invoked by a contract breaker
____________________________________________
15 It is not clear to us when final distribution to 92% of allowed claims was
achieved, but it is certain that percentage was reached prior to any other
alternative mitigation date suggested by BMT.
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as a basis for hypercritical examination of the conduct of the
injured party, or merely for the purpose of showing that the
injured person might have taken steps which seemed wiser or
would have been more advantageous to the defaulter. One is not
obligated to exalt the interests of the defaulter to his own probable
detriment.
Kellett, 186 F.2d at 198.16 Thus, the existence of an alternative mitigation
strategy does not establish that the injured party’s strategy was unreasonable.
To place the parties’ arguments in context, we set forth in detail our
understanding of Bentley’s Ponzi scheme and how it relates to the receiver’s
mitigation efforts and BMT’s critique thereof. Appellant testified that he was
under pressure from Bentley’s investors, as well as the SEC, the FDIC, and
the Federal Reserve, to recover as much money as possible and as quickly as
possible because many of the investors were in serious financial distress. N.T.
Trial, 3/14/18, at 129-30. Appellant testified that some of the instruments
were for more than $100,000—above the limit for FDIC insurance at the time,
and he was concerned that the issuing banks would go out of business prior
to the instruments’ maturity date. Id. at 134-35. The victims received 92%
of their lost principal as of the time of trial. Id. at 144. Thus, Appellant claims
he undertook a reasoned—and court-approved—strategy that resulted in
quicker, but less than full, compensation to Bentley’s investors.
____________________________________________
16Although not binding on us, we may cite federal authority for its persuasive
value. Bochetto v. Piper Aircraft Co., 94 A.3d 1044, 1050 (Pa. Super.
2014).
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Pre-recorded testimony of Robert Bentley was introduced at trial.17
Bentley explained that his troubles and hence, his illegal scheme, began in
June 1996 after he forged his then-accountant’s name to a Main Line
document, leading the bank to withdraw a $2 million line of credit that had
been fully drawn. Plaintiff’s Trial Exhibit 141, Testimony of Robert Bentley,
3/12/18, at 57:05 to 57:17; 102:18 to 102:23.18 In order to make payment
to Main Line, Bentley created fraudulent CDs to sell to investors. Id. at 57:10
to 57:17. Bentley told investors he had one-year CDs at an interest rate he
made up to sell the fraudulent CDs. Id. at 103:13 to 103:17. By doing so,
he no longer had dollar for dollar, asset for asset and thus was “under water”.
Id. at 57:05 to 57:17. Investors wired in funds to purchase the fraudulent
CDs and instead of purchasing CDs, Bentley used the money to pay off the $2
million line of credit to Main Line. Id. 103:18 to 103:23. As a broker of CDs,
Bentley sold CDs to institutional investors. Id. at 66:11 to 66:15. The money
was to flow through a custodian, not BFS, to purchase CDs from issuing banks
and then back through the custodian when CDs matured so that principal and
interest could be paid back to investors and commissions to Bentley as the
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17 As part of his guilty plea arrangement with the federal government, Robert
Bentley was obligated to cooperate fully with the government in its
investigation of his fraudulent scheme, as well as with the receiver and anyone
else who requested his assistance. Plaintiff’s Trial Exhibit 141, at 171:15-
171:05 (reference is to the page and line number as it appears in the exhibit).
18 The references are to the page and line numbers, as they appear in the
Exhibit.
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broker. Id. at 17:04 to 17:21. Initially, Bentley used Kislak National Bank as
a custodian. Id. at 74:02 to 74:08. Eventually, Bentley formed Entrust as a
sole proprietorship to act as custodian. Id. at 32:21 to 33:01. Unlike a
corporation that would have to be a SEC-registered entity, Entrust, with
Bentley as the sole proprietor, was not required to similarly register and could
act as a custodian for CDs under Pennsylvania law. Id. at 33:05 to 34:04.
With BFS and Entrust under Bentley’s control, Bentley was impermissibly able
to commingle new funds with funds returned by issuing banks that were to be
repaid to investors. Id. at 133:01 to 133:06. Bentley, therefore, had access
to all incoming and outgoing investor funds.
In order to cover his shortfall or debt, Bentley engaged in a Ponzi
scheme whereby he had to attract new money to satisfy the repayment of CDs
purchased with old money. Id. at 357:13-16. Until caught, he was able to
do this through a number of artifices. Among other things, Bentley
represented to his investors that they were purchasing CDs for a fixed term
at some interest rate and that they were purchasing FDIC certificates. Id. at
103:01, 132:01, 358:21. Many of Bentley’s investors were small institutions
that would not agree to long-term investments. Id. at 133:21. Bentley
described how the commingling of money from investors was used in
furtherance of his Ponzi scheme to purchase CDs to fund the operations of
BFS to satisfy obligations of other investors and to compensate him
personally. Id. at 131:08-20. For instance, a credit union would purchase a
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CD from a bank believing it was for a one-year increment, when the CD’s
maturity date actually may have been 10 years out.19 Id. at 132:01-05. The
CD however was callable, meaning that the issuing bank could terminate the
CD well before the planned maturity date. Id. at 132:01, 132:05. If the CD
was called after six months, the money would sit in Entrust’s wire account,
which Bentley controlled, for another six months until its maturity date. Id. at
132:06-11. Once CDs were called, Bentley was under an obligation to
immediately repay the principal and interest on those CDs through the
termination date to his investors. Id. at 133:11-14. He did not do so because
he would have had to disclose that the CDs he purchased were callable, a type
of investment that many of his investors were not willing to accept given the
interest rate risk attendant to them. Id. at 133:17-24. During the time in
which a CD would have matured, Bentley would have 10, 20, 30, or 40 other
institutions that also had CDs called. Id. at 132:12-15. Money in the account
would then quickly grow to two, three, or four million dollars. Id. During that
time, other credit unions were purchasing CDs and other CDs were coming to
maturity on a daily basis. Id. at 132:19-24. Bentley was able to hide the
true status of investor funds because the funds were maintained in the
commingled account. Id. at 133:01-06. As long as the interest rate offered
by Bentley was attractive, Bentley was able to attract new investors or, in
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19 Longer term CDs would pay higher interest rates.
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other words, new money, to pay off old ones. Id. at 358:04-07. As described
by Bentley, it was more of a numbers game, making sure he had a large pool
or a larger pool of investors that were looking at rates because each
institution’s cash position may be different. Id. at 358:08-11. One way
Bentley was able to attract a larger pool of investors to raise additional funds
was by increasing interest rates being offered. Id. at 358:17-21.
Bentley also engaged in what he described as mismatching CDs. For
example, if there were 11 months remaining on a CD and a potential customer
wanted a 12-month CD, he would mismatch the maturity dates on CDs and
issue a customer a receipt that said 12 months when in fact it was only going
to earn 11 months’ interest. Id. at 23:21. This created a situation where
cash flows from assets and liabilities would not align. Moreover, the changing
of maturity dates and the failure to disclose that practice was illegal because
in doing so, Bentley was deemed to have created investment certificates. Id.
at 56:01.
Appellant alleged that due to Bentley’s illegal Ponzi scheme, investors
suffered damages of approximately $20 million for the period June 1996
through October 2001. In defense, BMT presented the expert testimony of
Paul W. Pocalyko, an individual certified in public accounting, fraud
examination, and financial forensics. In an initial expert report dated July 27,
2012, Pocalyko set forth his understanding of the receivership as follows. On
October 24, 2001, the receivership took possession of approximately $328.4
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million in CDs. Defendant’s Trial Exhibit Exhibit 100, Expert Report of Paul W.
Pocalyko, at 16. The portfolio had a weighted average interest rate of 5.33%
and varying maturity dates through August 2018. Id. The receiver allowed
claims totaling approximately $369.9 million, which included investment
principal, accrued prior to the receivership, and vendor claims. Id. at 5. On
April 22, 2003, the receiver made the first distribution to allowed claimants
totaling $220.5 million. Id. at 16. To fund that distribution, as well as future
ones, the receiver liquidated an unknown quantity of CDs prior to their final
maturity dates, forfeiting future interest income and at times incurring early
redemption penalties and fees. Id. It was Pocalyko’s opinion that the
receiver’s early redemption of CDs was to the detriment of allowed claimants
and severely impacted the receivership’s ability to recover sums in order to
satisfy the obligations of BFS. Id. He further opined that if the receiver held
CDs to maturity through October 31, 2003, the receivership would have had
funds necessary to satisfy 100% of allowed claims, and if the CDs were held
to maturity through June 30, 2004, the receivership would have had funds
necessary to pay 100% of allowed claims plus post-receivership interest.20
Id. at 18. Pocalyko’s initial report estimated administrative expenses at
$50,000 per month but did not account for attorney fees. Id. at 16-17.
____________________________________________
20 We note that not all CDs matured by June 30, 2004, as some were not due
to mature until 2018. See Expert Report, Paul Pocalyko, CPA/CFF, CFE, MBA,
7/27/12, Defense Exhibit 100 at 16.
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Pocalyko authored a supplemental report dated August 21, 2015, based
upon additional documentation provided by the receiver. Defendant’s Exhibit
101, Supplemental Expert Report of Paul W. Pocalyko, at 6. In particular, the
supplemental report revised its estimate of administrative expenses of
$50,000 per month to approximately $300,000 per month from October 2001
through August 2003, for professional services to include attorneys’ fees,
accounting services, receiver compensation and consulting. Id. at 7.
Receivership administrative and operating costs were calculated at
approximately $24,000 per month for items such as temporary help, rent, and
insurance. Id. The supplemental report also considered the receivership’s
tax liability on income earned on CDs and cash balances at the rates of 39.1%
in 2001 to 35% in 2006 and beyond, noting that for the year ending 2013,
the effective income tax rate increased to 39.6%. Id. at 8-9. Early
redemption penalties actually paid by the receiver net of refunds and credits
were considered and calculated at $209,519. Id. at 9-10. Finally, the
supplemental report assumed a 1.5% annual interest rate on cash accounts
held by the receiver, compounded monthly. Id. at 10. Based upon these
revised considerations, Pocalyko opined that but for the receiver’s decision to
liquidate CDs prematurely, the receivership would have had funds necessary
to pay 100% of allowed claims in the first quarter of 2007. Id. at 11.
BMT’s alternative mitigation strategy, in simple terms, does nothing
more than deprive investors of the time value of their money after the allowed
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claim date to provide them the full amount of their claims as of the claim date.
In effect, BMT’s mitigation strategy is dependent upon the receiver keeping
investor’s money longer in order to pay investors back their allowed claims
with the income earned on their money. This alternative strategy does not
demonstrate a failure to reasonably mitigate damages by Appellant. It is a
strategy that would have paid investors 100% of their allowed claims with
income earned on their own money, investments each of them could have
made when paid their allowed claims.
More importantly, BMT’s mitigation strategy was dependent upon
continuing some of the same wrongful actions committed by Bentley. One of
the principal illegalities in Bentley’s Ponzi scheme was the holding of investor
funds past the maturity date of their CDs when investor funds were to be
returned immediately upon the maturity of those instruments. BMT’s
alternative mitigation strategy proposed precisely the same extended
withholding of investor funds that was not agreeable to investors when BFS
brokered and purchased the CDs. Much of BMT’s proposed mitigation strategy
required that the receiver continue to withhold from investors the funds from
matured CDs in order to accrue additional income in an interest-bearing
account.
Another key component of Bentley’s Ponzi scheme involved the sale of
“privately-issued, unregistered BFS notes and obligations” and “unregistered
investment contracts,” which BFS investors “were led to believe were bank-
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issued, FDIC-insured” CDs or direct interests therein. BMT Motion for
Summary Judgment, 9/21/12, at Exhibit A; Plaintiff’s Trial Exhibit 141,
Testimony of Robert Bentley, 3/12/18, at 120:11 to 138:18. BMT’s mitigation
strategy does not address holding these unacceptable investments, but as
stated, advocates that the receiver should have held CDs to maturity, which
as stated by Bentley, was longer than was acceptable to investors.
Admittedly, the district court in its November 1, 2001 order authorized the
receiver to maintain unmatured CDs placed by Bentley in financial institutions
until maturity. This authorization, however, was given with the caveat that
the receiver shall have no liability for allowing such CDs to remain in those
institutions chosen by the Bentley defendants. We do not interpret this portion
of the order, as BMT improperly argued numerous times throughout trial (N.T.
Trial, 3/14/18, at 161-62; N.T. Trial, 3/15/18, at 198), that the receiver was
obligated to maintain those CDs in those institutions to maturity. Rather, we
interpret this portion of the order only as a recognition that the receiver was
to take charge of tainted assets and that he would incur no liability for not
disturbing the placement of those CDs immediately until he could reasonably
act to remedy the situation.
Appellant responded to pressure from Bentley’s investors, as well as the
SEC, the FDIC, and the Federal Reserve, to recover as much money as
possible and as quickly as possible because many investors were in serious
financial distress. To this end, Appellant, as receiver, embarked upon an early
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liquidation of CD strategy that the district court approved. Investors were
paid 92% of their allowed claims. BMT presented a tainted mitigation defense
by advocating some of the same wrongful strategies engaged in by Bentley
during the perpetuation of his Ponzi scheme. BMT’s further attempt to
demonstrate that 100% mitigation of damages to investors was possible
proposed nothing more than to pay allowed claims with money earned on
investors’ own money. In our opinion, this did not demonstrate a failure on
the part of the receiver to reasonably mitigate damages. To be clear, we do
not hold as a general proposition, that a defendant may not challenge a
receiver’s actions in response to a receiver suit. We hold only that under the
facts of this case, BMT’s mitigation defense, as that pertains to the early
liquidation of CDs, did not demonstrate a failure to act reasonably on the part
of the receiver. Therefore, it was error for the trial court to permit BMT to
assert its alternative mitigation strategy to the damages claimed by the
receiver. Doing so constituted an abuse of discretion by the trial court thereby
entitling Appellant to a new trial on this basis as well.
III. Conclusion
In summary, we have concluded that the trial court erred in granting
summary judgment on Appellant’s § 876(b) “aiding and abetting fraud” claim.
Pennsylvania recognizes a claim under § 876(b) regardless of whether the
claimant titles it “concerted tortious action” or “aiding and abetting fraud.”
The trial court further committed prejudicial error in permitting BMT to
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introduce evidence of the attorneys’ fees Appellant incurred throughout his
receivership, and in permitting BMT to assert its mitigation defense strategy
regarding the early liquidation and redemption of investor CDs. These errors
were not harmless and permeated both the liability and damages phase of the
trial. We conclude that these combined errors constitute an abuse of
discretion by the trial court not to grant Appellant a new trial. Based on all of
the foregoing, we vacate the judgment and remand for a new trial, which shall
include Appellant’s § 876(b) cause of action.
Judgment vacated. Case remanded. Jurisdiction relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 2/16/21
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