Saturday, October 8, 2011

FYI: 6th Cir Rules in Favor of Bank in Action Involving Alleged Ponzi Scheme of Depositor

The U.S. Court of Appeals for the Sixth Circuit recently affirmed the
dismissal of various claims against several banks arising out of the
banks' alleged roles in a purported Ponzi scheme, holding that the lower
courts applied the appropriate statute of limitations period to find that
many of the claims were time-barred. A copy of the opinion is attached.

Between 1998 and 2000, James Carpenter allegedly carried out an alleged
Ponzi scheme wherein numerous investors were sold purportedly fraudulent
debentures in various sham companies. His daughter, a teller at Unizan
Bank, N.A. ("Unizan Bank") also allegedly played a role in purported
fraud. Several of those investors brought a class-action lawsuit against
Carpenter in 2000, which settled out of court. In the settlement, the
investors agreed to release the Carpenters from any further liability.

In several different lawsuits brought in different courts, some of the
plaintiffs who settled with the Carpenters sued various banks used by the
Carpenters in connection with the alleged Ponzi scheme. These plaintiffs
alleged that the banks violated the Ohio Uniform Commercial Code's ("UCC")
"properly payable rule" by issuing payment from their checking accounts
for checks they wrote to Carpenter's alleged sham companies, and for
depositing payment into accounts created for these same companies.

The lower courts dismissed the bulk of the claims as time-barred and for
failure to state a claim. A claim against Unizan Bank which alleged
conspiracy to commit fraud and aiding and abetting fraud was allowed to
proceed. However, the lower court in that matter granted Unizan Bank's
motion for summary judgment on the conspiracy claim because the plaintiff
had released the Carpenters from liability in the settlement. A jury
trial was held on the aiding and abetting fraud claim, which resulted in a
verdict for Unizan Bank. The plaintiffs appealed.

The Sixth Circuit first addressed the plaintiffs' argument that the
various UCC claims were not time-barred because those claims were actually
claims of conversion, and therefore that the statute of limitations should
not have begun until "the wrongdoer is discovered." ORC s. 2305.09. The
Court rejected this argument because the plaintiffs did not plead their
claims as claims of conversion. Further, the Court noted this even if
they had pled their claims as conversion, the conversion claim would be
barred because the UCC provides that actions for conversion may not be
brought by issuers of checks. ORC. s. 1303.60.

Consequently, the Court applied the UCC's three-year statute of
limitations period to hold that the plaintiffs had until 2003, at the
latest, to file their UCC claims. Because the various plaintiffs missed
that deadline, Court held that their actions were time-barred.

Next, the Court examined the plaintiffs' arguments that the lower court
erred in applying the Ohio blue sky law limitations period, rather than
the common law fraud limitations period. As you may recall, the Ohio blue
sky provides a two-year statute of limitations period for securities fraud
claims, whereas the common law fraud limitations period runs for four
years. ORC ss. 1707.43(B); 2305.09(C).

The Court concluded that the "Ohio law applies the blue sky limitations
period to all claims of fraud arising out of the sale of a security, not
just those alleging violation of Ohio's blue sky law." Therefore, the
Court held that the lower court applied the correct limitations period to
these claims.

In addition, the Court considered one plaintiff's argument that once the
lower court declined to grant him class certification, it no longer had
subject matter jurisdiction over his claims. This argument too was
rejected by the Court, which noted that extensive case law provides that
"denial of class certification does not divest federal courts of

Finally, the Court considered the allegations of one plaintiff that sought
to hold Unizan Bank liable for the actions of its employee under the
doctrine of respondeat superior. However, the Court explained that
"[u]nder Ohio law, a settlement with a release of the servant will
exonerate the master." Therefore, the Court held that the release of the
Carpenters in connection with the settlement agreement extinguished this
cause of action.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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