Wednesday, January 18, 2023

FYI: 5th Cir Rejects Allegations That Bank Owed Fiduciary Duty to Non-Customer

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the ruling of a trial court rejecting various claims by a non-customer that a bank owed a fiduciary duty to ensure that assets were kept in a trust for the non-customer.


In so ruling, the Fifth Circuit held:


  • The plaintiff's negligence claim was time-barred under Texas' two-year statute of limitations because the plaintiff brought the suit five years after the subject transfers; and


  • Texas courts require a substantial amount of evidence to show that a bank has accepted a fiduciary duty to ensure that assets were kept in a trust for a non-customer third party, and the plaintiff did not provide sufficient evidence here


A copy of the opinion is available at:  Link to Opinion


An investor and the CEO of an oil company developed a business relationship. Throughout that relationship, the investor provided loans, cash advances, and funds to the CEO and the oil company.


The investor alleged that, without his knowledge, the CEO transferred a number of the investor's shares from the agreed upon trust account into the accounts of various corporations beneficially owned or controlled by the CEO.


The investor and the CEO continued to have a business relationship until 2016, at which point the CEO's actions and words made the investor concerned he would not receive his shares back from the CEO.


In late 2017, as part of a larger suit against the CEO, the investor also sued the banks the accounts were in for (1) breach of trust and fiduciary duty, (2) negligence, and (3) conspiracy to commit theft.


The trial court granted summary judgment on all counts relating to the banks and awarded them attorneys' fees under the Texas Theft Liability Act ("TTLA"). The investor timely appealed.


The investor's claims were predicated on his theory that the banks owed him a fiduciary duty. Therefore, said the investor, the banks should have asked for his consent before transferring the shares.


First, the investor claimed that the banks were negligent in failing to obtain the consent of the owner of shares before transferring such shares because that failure went against industry and company policy.


Under Texas law, any injury incurred from the banks' alleged negligence in transferring the shares without the investor's consent arose at the time of the transfer. Therefore, without reaching the merits, the Fifth Circuit concluded that the negligence claim was time-barred under Texas' two-year statute of limitations because the investor brought the suit five years after the transfer.


Second, the investor asked the Fifth Circuit to find that the account at issue was a "special account," a fixture of Texas law that can create a fiduciary duty from a bank to a non-client.


Such accounts are formed when "a customer deposits funds for a specific purpose and the bank agrees to be responsible for the safe-keeping, return, or disbursement of the same funds that were entrusted to it."  Bandy v. First State Bank, Overton, 835 S.W.2d 609, 618-19 n.4 (Tex. 1992). Texas courts generally require explicit proof that the bank agreed to such a duty. See Villarreal v. First Presidio Bank, No. EP-15-CV-88-KC, 2017 WL 1063563, at *7 (W.D. Tex. 2017). The presumption is always that no such special account exists, and "[t]he burden is upon one who contends that the bank is his trustee or owes a duty to restrict the use of funds for certain purposes."  Citizens Nat'l Bank of Dall. v. Hill, 505 S.W.2d 246, 248 (Tex. 1974).


Therefore, the only question was whether the banks expressly accepted a duty to ensure the stocks were kept in trust for the investor.


The banks provided evidence that the customer agreement they signed with the CEO when he opened his accounts stated that the banks' nature of services will be solely to execute transactions and act as broker-dealer and custodian, and could not be modified except by "a written instrument signed by an authorized representative" of the bank, and "only the undersigned has any interest in the Account(s) established pursuant to this agreement."  


Therefore, the Fifth Circuit held that no jury could find that the banks showed an express agreement that they "owe[d] a duty to restrict the use of the funds for certain purposes."  Citizens Nat'l, 505 S.W.2d at 278. The Appellate Court held that the trial court thus did not err in granting summary judgment in favor of the banks.


Lastly, the investor contended that the banks conspired with the CEO to steal the investor's money because each had knowledge of, agreed to and intended a common objective or course of action: the theft of the investor's shares in the oil company.


In Texas, "[t]he essential elements [of civil conspiracy] are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result."  Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983). To establish a meeting of the minds, "there must be an agreement among [the alleged conspirators] and each must have a specific intent to commit the act."  San Antonio Credit Union v. O'Connor, 115 S.W.3d 82, 91 (Tex. 2003).


The Fifth Circuit observed that the investor's theory appeared to be that the " meeting of the minds" occurred when the banks transferred the funds without the investor's consent, because if the banks knew that the funds were meant to be held in trust for the investor, then agreeing to transfer them without the investor's consent was evidence of their mutual intent to steal from the investor.


However, even in a summary judgment posture, the Fifth Circuit held that the investor did not provide enough evidence to show that the banks owed a fiduciary duty. Without such a duty, the banks' transfer was nothing more than compliance with its customer's request and, without further evidence, could not demonstrate an intent of minds to steal from the investor. The Fifth Circuit ruled that summary judgment on this claim was therefore correct.


Accordingly, the Fifth Circuit affirmed the decision of the trial court.




Ralph T. Wutscher
Maurice Wutscher LLP
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