The U.S. Court of Appeals for the Eleventh Circuit recently held that a noncustomer pled sufficient facts to bring state law negligence and fraud causes of action against a bank when a bank customer engaged in the fraud.
In so ruling, the Court held that "[b]ecause banks do have a duty to safeguard trust funds deposited with them when confronted with clear evidence indicating that those funds are being mishandled, a bank's inaction — that is, its failure to stop the theft of such trust funds — can constitute substantial assistance" sufficient to state a claim for "aiding and abetting fraud" against a bank.
A copy of the opinion can be found here: Link to Opinion
This action arises from a scheme in which the bank's customer stole $750,000 from a business investor. The investor alleged that he was defrauded by the bank customer in a scheme involving depositing funds in an escrow account at the bank. The bank customer allegedly set up a company for individuals to deposit money into the company's escrow accounts with the pretense that the funds would be used to secure loans from global banking institutions and underwriters. Allegedly, the bank customer simply used the deposited funds to pay for the company's operating expenses and personal expenses.
The investor filed a first amended complaint as a matter of right. The bank moved to dismiss the first amended complaint for failure to state a claim. The investor opposed the motion to dismiss and sought leave to file a second amended complaint with additional allegations.
In the proposed second amended complaint, the investor asserted state law causes of action against the bank for negligence, gross negligence, aiding and abetting fraud, and aiding and abetting conversion. Specifically, in his proposed second amended complaint, the investor set forth additional allegations that the bank's vice president who prepared the paperwork to open the company's escrow accounts permitted the customer to name the account as an escrow account even though account had not complied with the bank's procedures for opening an escrow account.
The investor also alleged that several months after opening the account, the bank's vice president wrote a letter on the bank's letterhead representing that the bank customer's company's "[e]scrow account" had "deposits in a business checking and savings account in the seven digit amounts" when in fact the total balance in all the company's accounts with the bank at that time was less than $100,000.
The investor's allegations also indicated that the bank customer paid off the bank vice president for supporting his fraudulent acts. The investor alleged that the customer told an associate that he had loaned a bank employee $100,000 and that the customer paid the vice president $100,000 several months after she opened the company's accounts. The customer allegedly did not pay the bank vice president directly; instead, the company transferred $100,000 from an account with the bank to the bank account of an entity the vice president controlled.
The bank opposed the investor's motion for leave to file a second amended complaint, arguing that the allegations were insufficient to establish that the bank or the vice president knew about the fraudulent scheme or provided substantial assistance to the bank customer. While the motion to dismiss the first amended complaint was pending, the investor pursued discovery in the case.
The trial court granted the bank's motion to dismiss, dismissing the first amended complaint with prejudice. The trial court also denied as futile the investor's motion for leave to file the proposed second amended complaint.
The investor filed a motion for reconsideration of the court's order dismissing his claims with prejudice and denying leave to amend his complaint. In the motion to reconsider, the investor set forth additional allegations based on facts he learned through discovery to support his contentions that (1) the bank vice president knew that the company was supposed to be holding the investor's money in escrow; (2) the bank vice president assisted the bank customer in the fraudulent scheme; and (3) the bank customer paid the vice president $100,000 in exchange for her assistance.
The new allegations stated that the bank customer's company employees met with the bank vice president at her office at the bank, showed her a copy of the escrow agreement between the investor and the company, and told her that the company would be holding the investor's money in escrow.
In addition, the investor now alleged that the bank vice president assured company employees before the investor wired money to the bank that the company would hold his money in the company escrow account with the bank. Allegedly, the bank vice president continued to tell the company employees that the investor's money was being held in the escrow account even though the bank customer had taken the money. The investor also alleged that the bank vice president tried to prevent a bank employee from investigating the company's escrow account in connection with the letter describing the account's funds.
The trial court denied the investor's motion to reconsider, determining that even considering the new allegations, the investor failed to establish that the bank or the bank vice president knew of, or substantially assisted, the bank investor's fraud. The investor appealed the trial court's orders.
The bank subsequently moved to recover its attorney's fees under Florida's offer of judgment statute. The district court granted the bank's motion and the bank appealed the award. A consolidated appeal followed.
On appeal, the Eleventh Circuit determined that the central issue in the appeal was whether the trial court erred in denying the investor's motion to reconsider, thereby preventing him from amending his complaint.
As you may recall, in Florida, a negligence action requires that a plaintiff establish that the defendant owed a duty, that the defendant breached the duty, and that this breach caused the plaintiff damages. Consequently, the Court had to determine whether the allegations were sufficient to establish that the bank owed a duty to the investor, a noncustomer.
The Eleventh Circuit noted that Florida, like other jurisdictions, recognizes as a general matter that a bank does not owe a duty of care to a noncustomer that has no direct relationship with the bank. However, the Court explained that an exception to this rule is triggered when a fiduciary relationship exists between a customer of the bank and the noncustomer, the bank knows or ought to know of the fiduciary relationship, and the bank has actual knowledge of its customer's misappropriation.
The Court held that the investor stated a claim for relief with respect to the negligence cause of action, as the investor's allegations were sufficient to establish that a fiduciary relationship existed between the investor and the company because the investor alleged that the company held the money in escrow for the investor.
Next, the Eleventh Circuit determined that the investor's allegations were sufficient to infer that the bank knew of the fiduciary relationship between the investor and the company, a bank customer. Specifically, the investor alleged that company employees met with the bank vice president at her office at the bank, showed her a copy of the escrow agreement between the investor and the company, and told her that the company would be holding the investor's money in escrow.
Moreover, the Eleventh Circuit determined that the bank vice president's knowledge should be imputed to the bank because under Florida law, the knowledge an agent or employee acquires within the scope of her authority generally may be imputed to her principal or employer.
An exception to the imputation rule in Florida occurs when an agent acts adversely to the corporation. In this situation, the knowledge is not imputed to the corporation. The Court, however, noted that this exception requires the agent's interest be "entirely adverse" to the principal's interests. In other words, the agent's act must be neither intended to benefit the corporation nor cause short or long term benefit to the corporation.
The Eleventh Circuit determined that the vice president's knowledge could be imputed to the bank because the vice president's interests were not entirely adverse to the bank. The investor's allegations indicated that the vice president acts brought some short term gain to the bank, namely the business of an escrow account at the bank.
The Eleventh Circuit then determined that the investor's allegations were sufficient to establish that the bank had knowledge of the bank customer's misappropriations.
In support of this conclusion, the Court cited the allegations that the bank vice president (1) allowed the company to label its account as an escrow account, even though she and the company had not complied with the bank's procedures for opening an authorized escrow account; (2) assured the company employees before the investor wired money to the bank that the company would hold his money in the company escrow account with the bank; (3) continued to tell the company employees that the investor's money was being held in the escrow account even though the bank customer had taken the money; (4) tried to prevent a bank employee from investigating the company's escrow account in connection with the letter; and (5) surreptitiously received $100,000 from the bank customer.
The Eleventh Circuit held it was reasonable to infer from these allegations that the bank vice president was assisting the bank customer in his fraudulent scheme, and to conclude that the bank vice president knew that the bank customer was misappropriating money from the company escrow account.
Next, the Eleventh Circuit determined that the investor alleged sufficient facts to state a claim for aiding and abetting fraud.
The Court noted that, "[a]lthough no Florida court has explicitly recognized a cause of action for aiding and abetting fraud, Florida courts have assumed a cause of action" for aiding and abetting fraud with the following elements: (1) the existence of an underlying fraud; (2) that the defendant had knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the commission of the fraud.
The Court was satisfied that the first two elements were plainly met. The Court determined that the investor had plausibly alleged the third element of substantial assistance.
"Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 295 (2d Cir. 2006). The Eleventh Circuit noted that "[m]ere inaction constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff."
The Court held that "[b]ecause banks do have a duty to safeguard trust funds deposited with them when confronted with clear evidence indicating that those funds are being mishandled, a bank's inaction — that is, its failure to stop the theft of such trust funds — can constitute substantial assistance." Id.
Consequently, the Court held that the investor's allegations were sufficient to show that the bank's inaction met the "substantial assistance" element for aiding and abetting fraud.
The Eleventh Circuit reversed the trial court's ruling, and remanded the case. The attorney fees award in favor of the bank was also summarily overturned.
Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com
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