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WBK Industry News - Litigation Developments

Eleventh Circuit Rules Bank’s Failure to Stop Theft of Deposit Funds Can Constitute Aiding and Abetting

The Eleventh Circuit recently held that a plaintiff could state claims for negligence, gross negligence, and aiding and abetting fraud against JP Morgan Chase Bank (the “Bank”) for its failure to stop the theft of deposit funds.  Based on the allegations of the complaint, knowledge of an employee who had assisted in the fraud could be imputed to the bank.  Because the knowledge was imputed to the Bank, the Bank’s failure to take action to stop the theft was sufficient to constitute both a breach of duty to constitute negligence and “substantial assistance” for aiding and abetting fraud.

In Chang v. JP Morgan Chase Bank, N.A., the plaintiff, Hsi Chang (“Chang”), alleged that a third party to the action, Charles Gordon, stole $750,000 from Chang.  Gordon owned a Florida corporation called OPT Title, and a Panamanian corporation, Ziggurat.  Ziggurat purported to help its clients secure multi-million dollar loans.  Gordon told clients that they had to deposit a certain percentage of the amount to be financed in an escrow account, which was maintained by OPT Title at the Bank.  Instead of keeping the funds in the escrow account, however, Gordon used the money to pay both Ziggurat operating expenses and his own personal expenses.  Chang was a Ziggurat client, and wired $750,000 to the OPT Escrow Account to secure financing to build a Caribbean resort.  Gordon told Chang that if his loan did not close within 90 days, the funds would be refunded.  Instead of keeping the money in escrow, however, Gordon immediately transferred it to another account.

A week before Chang’s wire transfer to the bank, Olga Padgett-Perdomo (“Perdomo”), an employee of the Bank, met with two people conducting due diligence for Chang at the Bank.  Perdomo assured them that OPT Title had a good relationship with the Bank.  The due diligence team showed Perdomo the agreement that OPT Title would hold Chang’s funds in escrow, and Perdomo reassured them that the funds would be held safely in an escrow account at the Bank.  After Chang sent his money to the Bank, Perdomo represented that Chang’s money was in the OPT Escrow Account, even though it had already been transferred.  Perdomo had also attempted to prevent a Bank employee from reviewing the OPT Title accounts after being confronted because the accounts contained much less than the $1,000,000 deposited in them.  Chang further alleged that Gordon secretly paid Perdomo $100,000, which Perdomo admitted under oath during discovery.  Although she testified that it was a loan, she admitted that there was no written loan agreement, there were no repayment terms, and she had never repaid any money to Gordon.

The district court dismissed Chang’s complaint and later denied his motion for reconsideration because it found that Chang had failed to establish that either the Bank or Perdomo knew of or assisted Gordon’s fraud.  On appeal, the Eleventh Circuit disagreed.

With respect to the negligence claim, the Eleventh Circuit noted that although Florida does not generally recognize a duty of banks to noncustomers, banks can be liable in negligence to noncustomers for its customer’s misappropriation when there is a fiduciary duty between the customer and noncustomer, the bank knows of the fiduciary relationship, and the bank has actual knowledge of the misappropriation.

Chang had sufficiently alleged a fiduciary duty because there was an agreement between Chang and OPT Title to hold Chang’s money in escrow.  The Bank had knowledge of the fiduciary duty because Perdomo had seen the escrow agreement between Chang and OPT Title during Chang’s due diligence.  That knowledge could be imputed to the Bank because generally, knowledge of an employee is imputed to her employer.  Although an exception exists when the employee acts adversely to the employer’s interests, Perdomo’s interests were not entirely adverse because she had learned of the fiduciary duty in the course of her work with the Bank, and brought the Bank a short term benefit when OPT Title deposited funds.  The Bank also collected wire and service fees from OPT Title.

Chang’s allegations were also sufficient to show that the Bank knew of the misappropriation.  The allegations supported an inference that Perdomo knew of the misappropriation, because she allowed OPT Title to label its account as an escrow account without complying with the proper procedures; she told Chang’s due diligence team that OPT Title would hold the money in the OPT Escrow Account before he wired it; she continued to represent that the money was in the escrow account even though Gordon had taken it out; she tried to prevent an employee from investigating the escrow account; and she had secretly received $100,000 from Gordon.  Perdomo’s knowledge of the misappropriation was imputable to the Bank on the same basis as the imputation of her knowledge of the fiduciary duty.

In addition, Chang stated a claim for aiding and abetting fraud.  The biggest hurdle to that claim was the element that the defendant “provided substantial assistance to advance the commission of the fraud.”  The Eleventh Circuit found that the Bank had a fiduciary duty to Chang because it knew that OPT Title was supposed to hold his funds in escrow, and it also knew about Gordon’s fraud.  Since it owed Chang a fiduciary duty, failure to warn Chang or to stop the fraud constituted “substantial assistance” for aiding and abetting the fraud.  The Eleventh Circuit therefore reversed the district court’s order and remanded the case, ordering the district court to permit Chang to file an amended complaint.