A federal judge from the District of Minnesota has denied a CPA firm’s bid to dismiss a lawsuit by NBA Hall of Famer Kevin Garnett, alleging professional malpractice, breach of fiduciary duty, and aiding and abetting.
The defendants, Welenken CPAs and Michael A. Wertheim, had sought to dismiss the claim for lack of personal jurisdiction. However, the court found Garnett has established that the defendants had sufficient minimum contacts with Minnesota, and exercising personal jurisdiction over them would not be unreasonable.
Throughout his illustrious career as a professional basketball player, Garnett relied on Charles A. Banks, IV, a “long-term trusted wealth manager, confidant, and personal friend.” In 2010, Banks hired Wertheim on behalf of Garnett. Originally, Wertheim was hired to file income tax returns, but he ended up taking a much larger role in Garnett’s financial life and in the businesses in which Garnett had an interest. For instance, Wertheim prepared financial statements, became the registered agent for businesses in which Garnett had an interest, and created budgets and spending limits for Garnett. Ultimately, instead of simply preparing income tax returns, the defendants “provided accounting services to Banks, Garnett, and virtually all of the businesses Garnett shared with Banks.” Although Wertheim represented Garnett, he took direction from Banks and had little to no direct contact with Garnett.
In June 2017, Banks “was sentenced to federal prison for admittedly defrauding” a different professional basketball player. Seeking to investigate Banks for himself, Garnett and his counsel obtained records from the defendants and discovered evidence that Banks had also allegedly been defrauding Garnett, creating a joint investment venture between Banks and Garnett that he called Hammer Holdings, LLC. Allegedly, Banks used Hammer as an individual bank account.
Garnett alleges that Wertheim was fully aware of Banks’s actions, and that he even actively worked with Banks to conceal Banks’s actions from Garnett.
Garnett’s sister, Sonya Garnett, served as Garnett’s primary point of contact for entities and persons involved in his business endeavors. While Wertheim had little contact with Kevin Garnett, he interacted hundreds of times with Sonya, according to the court. They contacted one another primarily through email, but they also met once in person on Jan. 6, 2016, at Sonya ‘s home in Minnesota.
“Notably, although Garnett alleges that Wertheim was aware of Banks’s fraud at the time of the meeting, Wertheim did not discuss Banks’s actions with Ms. Garnett,” wrote the court. “During the time that the defendants served as accountants for Hammer and Garnett, Defendants mailed at least one invoice to Garnett in Minnesota and addressed that invoice to Ms. Garnett’s attention. The invoice described the work Welenken did for Garnett as ‘tax return planning, consultation, government correspondence, personal financial statement, bookkeeping and general business consultation, meeting.’”
After discovering Banks’s fraud, Garnett sued the defendants in Hennepin County District Court. The defendants removed the case to the federal court on Sept. 5, 2018 and filed the motion to dismiss.
“Viewing the evidence in a light most favorable to Garnett, the defendants’ relevant contacts with Minnesota, can be summarized as: (1) hundreds of emails with Ms. Garnett regarding Garnett’s finances; (2) a face to face meeting with Ms. Garnett during which Garnett’s finances were discussed and during which Wertheim did not reveal what he knew about Banks’s fraud; and (3) invoices for financial services sent to Garnett in Minnesota,” according to the court.
“The defendants’ main argument is that the third factor of the Eighth Circuit’s test is not met here. They contend that the contacts cited above do not relate to the underlying action and essentially argue that there is an insufficient relationship between the defendants, the forum, and the cause of action. The defendants believe that, since neither Hammer nor Banks’s fraud was discussed with Garnett or Ms. Garnett during any of the defendants’ contacts with Minnesota, Minnesota is not related to the current lawsuit.”
The fault in the defendants’ argument was that “Garnett’s claims do not arise from any affirmative action by the defendants. Instead, Garnett’s claims are all based on the defendants’ alleged decision not to act, i.e. their decision to remain silent regarding Banks’s fraudulent activities.”
The court continued: “The question at issue here is whether a defendant’s inaction in a given state can provide sufficient minimum contacts in that state. While uncommon, courts have grappled with this question before. In Wien Air Alaska, Inc. v. Brandt, 195 F.3d 208 (5th Cir. 1999), the Fifth Circuit considered a claim that arose out of an attorney-client relationship. In that case, an attorney defendant had negotiated a series of business transactions on behalf of his client while also having an undisclosed financial interest in the transaction. Id. at 209-11. Despite years of phone and mail contacts, and one in-person meeting in Texas, the attorney defendant had never disclosed his financial conflicts to the client. Id. The client eventually brought claims alleging fraud, fraudulent inducement, breach of contract, and breach of fiduciary duties. Id. at 211.”
The court concluded that “Garnett and Banks entered into a business relationship with the defendants. While the defendants may have initially been hired to file income taxes, Garnett alleges that the relationship expanded such that the defendants were providing accounting services to Garnett, Banks, and the businesses that they controlled or had an interest in.
“Importantly, beyond just having a fiduciary relationship with an in-state plaintiff, the defendants were consistently in contact—through email—with Ms. Garnett regarding the finances of Garnett; traveled to Minnesota and neglected to discuss Banks’s fraud; and sent at least one invoice to Minnesota for the multitude of services — including financial services — they provided. The defendants had a duty to disclose Banks’s activities, yet failed to do so despite significant contacts with Minnesota. In this way, the defendants directed material omissions into Minnesota, and the court’s exercise of personal jurisdiction is proper.”
Kevin Garnett v. Welenken CPAs and Michael A. Wertheim; D. Minn.; Civil No. 18-2590 (JRT/ECW), 2019 U.S. Dist. LEXIS 40792 *; 2019 WL 1206729; 3/13/19
Attorneys of Record: (For Plaintiff) Mark F. Gaughan, ERICKSON, BELL, BECKMAN & QUINN, P.A., Roseville, MN, and Richard C. Ebeling, LANZA REICH & DANIEL, LLP, New York, NY. (For Defendants) M. Gregory Simpson, Robert W. Vaccaro, and Timothy R. Schupp, MEAGHER & GEER, PLLP, Minneapolis, MN.
