Minnesota Bank & Trust v. Principal Securities, Inc.

U.S. District Court, District of Minnesota February 21, 2024

Trial Court Opinion

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
MINNESOTA BANK & TRUST,
Civil No. 22-1104 (JRT/ECW)
Plaintiff,

v.
MEMORANDUM OPINION AND ORDER
PRINCIPAL SECURITIES, INC., GRANTING DEFENDANT’S 12(B)(1)
MOTION TO DISMISS
Defendant.

John Rock and Kathryn A. Stephens, ROCK HUTCHINSON, PLLP, 120 South
Sixth Street, Suite 2480, Minneapolis, MN 55402, for Plaintiff.

Angel West, MAYNARD NEXSEN PC, 9313 Huntington Circle, Johnston, IA
50131; Christopher M. Daniels and Gregory Arenson, PARKER DANIELS
KIBORT LLC, 123 North Third Street, Suite 888, Minneapolis, MN 55401; and
Thomas Clinton Goodhue, MAYNARD COOPER & GALE, P.C., 801 Grand
Avenue, Suite 100, Des Moines, IA 50309, for Defendant.

Plaintiff Minnesota Bank and Trust (“MBT”)1 issued a $5 million commercial loan
to 11 Water, LLC, which was owned by Jack Strommen. Defendant Principal Securities
(“Principal”), Strommen’s brokerage account servicer, executed a control agreement
forbidding transfer of Strommen’s assets that had been pledged as security for the
commercial loan without MBT’s consent. But Principal did just that, allowing Strommen

1 The Court’s references to MBT and Principal throughout this order include their
predecessors in interest operating under different names, including Signature Bank and Princor
Financial Services.
to move assets to First Republic without consulting MBT. MBT claims that it lost lien
priority as a result and was unable to collect on the previously secured collateral when 11

Water later defaulted.
Critically for this motion, though, MBT voluntarily released its claim to Strommen’s
brokerage account between the time when Principal authorized the fund transfer and
when 11 Water defaulted. When MBT voluntarily released its claim to Strommen’s assets,

it disrupted the causal chain between the wrongful conduct—the asset transfer—and
MBT’s injury—its inability to collect. Accordingly, MBT does not have standing and the
Court will grant Principal’s motion to dismiss for lack of subject matter jurisdiction

pursuant to Federal Rule of Civil Procedure 12(b)(1).
BACKGROUND
I. FACTS
MBT issued a $5 million commercial loan to 11 Water in 2015. (Mem. Op. & Order
Den. Def.’s Mot. Dismiss (“MTD Order”) at 2, Jan. 18, 2023, Docket No. 31.) As collateral,

it took a security interest in Strommen’s Principal brokerage account, which contained
over $7 million in assets. (Id.) Principal executed a Control Agreement which
acknowledged MBT’s first lien position and security interest in Strommen’s brokerage
account and promised not to transfer any assets absent MBT’s prior written consent. (Id.)

About one year later, though, Principal allowed Strommen to transfer all assets to another
brokerage firm, First Republic, without notifying MBT or receiving MBT’s consent. (Id. at
3; Compl. ¶ 28, Apr. 28, 2022, Docket No. 1.) Strommen’s account was still worth over $7
million at that time. (MTD Order at 4.)

Once in possession of Strommen’s assets, First Republic refused to acknowledge
MBT’s first lien position. (Compl. ¶ 31.) In fact, First Republic quickly issued an additional
loan to Strommen and titled the brokerage account “Jack B. Strommen, Pledged Collateral
Account F[or] B[enefit] O[f] First Republic Bank.” (See Decl. Kathryn A. Stephens Supp.

Pl.’s Opp. Def.’s 2nd Mot. Dismiss ¶ 5, Ex. D at 2, July 5, 2023, Docket No. 70.) MBT alleges
that, under this arrangement, First Republic jumped into first lien position and MBT was
unable to regain top priority.2 (See Decl. Matthew R. Eslick (“Eslick Decl.”) ¶ 5, Ex. 4 at 2,

June 14, 2023, Docket No. 48-2; Mem. Opp. Def.’s 2nd Mot. Dismiss (“Opp. Br.”) at 11, July
5, 2023, Docket No. 65.) Shortly thereafter, Strommen executed a security agreement
acknowledging MBT’s claim to his First Republic brokerage account. (See Eslick Decl. ¶ 6,
Ex. 5, June 14, 2023, Docket No. 51.)

About six months after Strommen transferred his brokerage account to First
Republic, 11 Water and MBT renegotiated loan terms. (See Eslick Decl. ¶ 10, Ex. 9, June
14, 2023, Docket No. 55.) The parties extended the maturity date and released
Strommen’s First Republic brokerage accounts as collateral. (Id. at 2.) Accordingly, the

June 2017 renegotiated agreement described the loan as “[u]nsecured.” (Id.) Another

2 Principal now claims that, under Minnesota law, MBT maintained first lien position
throughout. Because Principal raised that argument for the first time at the hearing and MBT did
not have a fair chance to respond, the Court will not accept that claim for purposes of this order.
renegotiated agreement four months later again marked the loan as unsecured. (Eslick
Decl. ¶ 11, Ex. 11 at 2, June 14, 2023, Docket No. 57.)

One year later, in September 2018, Strommen transferred most of his assets out
of his First Republic brokerage account. (Eslick Decl. ¶ 13, Ex. 12 at 5, June 14, 2023,
Docket No. 58.) His balance dropped from over $10.5 million to under $1 million. (See
id.) Around that same time, First Republic noted satisfaction of Strommen’s obligations

to First Republic and authorized removal of First Republic’s name from Strommen’s
brokerage account. (See Eslick Decl. ¶ 14, Ex. 13 at 3, June 14, 2023, Docket No. 59.)
Finally, about one year later, 11 Water defaulted on MBT’s loan with

approximately $3 million outstanding. (MTD Order at 4.) MBT obtained a judgment in
state court holding 11 Water, Strommen, and others jointly and severally liable. (Id.) MBT
entered a notice of partial satisfaction of judgment with the state court, indicating
Strommen’s liability was fully satisfied by a negotiated settlement of $1.25 million. (Eslick

Decl. ¶ 9, Ex. 8 at 3, June 14, 2023, Docket No. 54.) The judgment otherwise remains
unpaid. (MTD Order at 4.)
II. PROCEDURAL HISTORY
MBT filed this action against Principal alleging damages—namely, its inability to

fully collect on the state court judgment—attributable to Principal’s improper transfer of
Strommen’s collateralized brokerage account. (See, e.g., Compl. ¶¶ 45, 47.) MBT sought
recovery for breach of contract, negligence, and promissory estoppel. (Id. ¶¶ 39–57.)
The Court denied Principal’s first motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6). (See generally MTD Order.) But while discovery was ongoing,

Principal filed a second motion to dismiss pursuant to Rule 12(b)(1). (See Mem. Supp.
Rule 12(b)(1) Mot. at 1, June 14, 2023, Docket No. 45.) Principal alleges that discovery
clarified that MBT does not have standing to pursue this action, primarily because MBT’s
injury is not traceable to Principal’s actions. (See id. at 1–2.) Before the hearing on this

motion, fact discovery concluded. (See Pretrial Scheduling Order at 2, Mar. 22, 2023,
Docket No. 36.) MBT thus had an opportunity to bring relevant facts from discovery to
the Court’s attention. (See Tr. Mot. Hearing at 16:14–15, Jan. 23, 2024, Docket No. 118.)

DISCUSSION
I. STANDARD OF REVIEW
The Constitution limits federal-court jurisdiction to cases or controversies.
Spokeo, Inc. v. Robins,

578 U.S. 330, 337

 (2016) (citing U.S. Const. art. III, § 2).  Accordingly, 
MBT must demonstrate standing by showing that it suffered an injury in fact that is fairly 

traceable to Principal’s conduct and likely to be redressed by the relief sought.  Id. at 338. 
    A Rule 12(b)(1) motion challenges the Court’s subject matter jurisdiction, including 
for lack of standing, and “requires the Court to examine whether it has authority to decide 
the claims.”   Damon v. Groteboer,

937 F. Supp. 2d 1048, 1063

 (D. Minn. 2013).  The party 

seeking  to  invoke  a  federal  court’s  subject  matter  jurisdiction  bears  the  burden  of 
showing that the court has jurisdiction.  Schubert v. Auto Owners Ins. Co.,

649 F.3d 817, 822

 (8th Cir. 2011).  A court must dismiss an action if it lacks subject matter jurisdiction.  
Fed. R. Civ. P. 12(h)(3).                                                 

    “A court deciding a motion under Rule 12(b)(1) must distinguish between a ‘facial 
attack’ and a ‘factual attack.’”  Osborn v. United States,

918 F.2d 724

, 729 n.6 (8th Cir. 
1990).  In deciding a facial attack, “the court restricts itself to the face of the pleadings, 
and the non-moving party receives the same protections as it would defending against a 

motion brought under Rule 12(b)(6).”

Id.

 (internal citations omitted).  The Court also 
accepts as true all facts alleged in the complaint, construing all reasonable inferences in 
the plaintiff’s favor.  Carlsen v. GameStop, Inc.,

833 F.3d 903, 908

 (8th Cir. 2016).  In 

contrast, “[i]n a factual attack, the court considers matters outside the pleadings” and the 
non-moving party does not “enjoy the benefit of the allegations in its pleadings being 
accepted as true.”  Osborn,

918 F.2d at 729

 n.6 (citations omitted).  “The general rule is 
that a complaint should not be dismissed unless it appears beyond doubt that the plaintiff 

can prove no set of facts in support of his claim which would entitle him to relief.”

Id.

 
(citations and internal quotation marks omitted).                         
    MBT contends a factual challenge is premature, and the Court must constrain itself 
to the pleadings and a Rule 12(b)(6) standard of review.  But pre-discovery factual 

challenges are proper as a general matter and are proper here.  See Johnson v. United 
States,

534 F.3d 958, 962

 (8th Cir. 2008); Carlsen,

833 F.3d at 908

.      
    The only facts that present jurisdictional problems for MBT were within MBT’s 
control—the circumstances behind the voluntary release of its own security interest.  

Even if there were facts for which jurisdictional discovery would be appropriate, MBT 
should have submitted an affidavit requesting such discovery rather than attempting to 
constrain the Court to a facial evaluation.  See Johnson,

534 F.3d at 965

 (“Courts look to 
decisions under Rule 56 for guidance in determining whether to allow discovery on 

jurisdictional facts.”); Fed. R. Civ. Pro. 56(d) (identifying affidavit or declaration as the 
appropriate means for a nonmovant to gain responsive discovery).  And fact discovery 
proceeded for four months after Principal filed this motion, the salient results of which 

MBT was given an opportunity to raise to the Court at the hearing on this motion.  
Accordingly, the Court will proceed with Principal’s factual challenge to its jurisdiction. 
II.  ANALYSIS                                                             
    For  MBT  to  have  standing,  it  must  show  that  its  inability  to  recover  the 

collateralized loan is “fairly traceable” to Principal’s unnoticed transfer of Strommen’s 
brokerage account.  See Spokeo,

578 U.S. at 338

.  MBT claims it does not need to satisfy 
the usual standing requirements, including traceability, because this is a contract dispute.  
Not so.  See In re Bioserv Corp., No. 22-1213,

2023 WL 4084824

, at *5 (B.A.P. 9th Cir. June 

20, 2023); cf. Carlsen 833 F.3d at 909–10 (analyzing the typical three standing factors in a 
breach of contract action).  Rather, it is the “irreducible constitutional minimum” that 
injury, causation, and redressability be established for Article III jurisdiction to be proper 
in any case.  Lujan v. Defs. of Wildlife,

504 U.S. 555

, 560–61 (1992).    
    Principal argues four intervening events disrupt the causal chain required for 
standing: (1) MBT’s failure to demand Strommen obtain a letter of credit from First 

Republic when the funds were first transferred, (2) MBT’s voluntary release of its security 
interest in 2017, (3) MBT’s settlement with Strommen in state court, and (4) various acts 
of third parties.  Because the second event is sufficient to deprive the Court of standing, 
the Court will constrain its analysis to the voluntary releases.          

    Because MBT released its security interest in Strommen’s brokerage account in 
June 2017 when it extended the loan maturity date, MBT’s later inability to collect the 
collateral is not fairly traceable to Principal’s earlier improper transfer.3  After all, whether 

the interest was released from a Principal or First Republic account, the end result would 
be the same.  By the time MBT tried to collect, a waived security interest would do it no 
favors.  And although MBT theorizes that it may not have executed the release absent 
Principal’s transfer, causation must be  more than speculative for a litigant to have 

standing.  See, e.g., Allen v. Wright,

468 U.S. 737

, 758–59 (1984).  The Court sees no 
concrete factual basis to presume that MBT would not have released its security interest 
had the funds remained with Principal, nor why the release was a necessary response to 
the asset transfer.  Accordingly, the Eighth Circuit’s teaching that subsequent conduct 



    3 The Court notes that Principal only learned about the releases through discovery.  Thus, 
though Principal tries to repackage some of its 12(b)(6) proximate cause arguments as 12(b)(1) 
traceability issues, this issue is genuinely new since the Court denied Principal’s first motion to 
dismiss.                                                                  
“forced” by a breach is caused by the defendant is inapposite.  See ABF Freight Sys., Inc. 
v. Int’l Bhd. of Teamsters,

645 F.3d 954, 961

 (8th Cir. 2011).            

    What is more, MBT’s interest in the First Republic brokerage account remained 
valuable when it executed the voluntary release in 2017.  As of September 2018, the 
account had nearly $11 million dollars in assets.  That would have been more than enough 
to satisfy the outstanding loan amount.  Thus, MBT’s inability to collect is attributable to 

its release of an interest in those funds, not the details of where those funds were kept. 
    MBT protests that it had already been injured by the time it executed the voluntary 
release because, as part of the account transfer, First Republic supplanted MBT’s first lien 

priority.  But lien priority is not inherently meaningful.  First Republic’s leapfrogging would 
only have been injurious if MBT was unable to collect as a result.  MBT did not even 
attempt to do so before releasing its interest.  MBT had suffered no concrete injury from 
loss of first lien status at the time it released the funds in 2017.      

    Ultimately, MBT’s injury is attributable to its own conduct.  By executing the 
voluntary release, MBT laid down its best weapon to safeguard its interests and now asks 
for the Court’s protection because it is unarmed.  That is not the role of an Article III 
tribunal, though. See ABF Freight,

645 F.3d at 961

 (“A plaintiff who causes its own injury 

does not satisfy the traceability prong.”).                               
                          CONCLUSION                                     
    When MBT released Strommen’s brokerage accounts as collateral in 2017, it broke 
the causal chain between Principal’s wrongdoing and MBT’s harm.  Accordingly, MBT’s 
injury is not traceable to Principal’s conduct, the Court lacks standing, and the Court will 
grant Principal’s Motion to Dismiss pursuant to Rule 12(b)(1).

ORDER

     Based on the foregoing, and  all the files,  records, and  proceedings  herein,  IT IS 
HEREBY ORDERED that: 
     1.  Defendant’s Motion to Dismiss [Docket No. 44] is GRANTED; 
     2.  Plaintiff's Motion for Summary Judgment [Docket No. 107] is DENIED as moot, 
        and; 
     3.  Plaintiff's action is DISMISSED with prejudice. 
LET JUDGMENT BE ENTERED ACCORDINGLY. 

DATED:  February 21, 2024                         Joan W. (ean 
at Minneapolis, Minnesota.                         JOHN R. TUNHEIM 
                                            United States District Judge 

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