• California Court of Appeal Reaffirms That Banks Owe No Duty To Non-Depositors
  • April 13, 2005 | Author: Donald R. Brown
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • In a March 28, 2005 decision, Casey v. U.S. National Bank Association, et al., that is slated for publication, the California Court of Appeal, Fourth Appellate District, held that a bank cannot be liable to a non-depositor on a theory of aiding and abetting wrongful conduct by a depositor, even if the bank knew that the depositor was engaging in criminal conduct toward the non-depositor, unless the bank had specific knowledge "of the object to be attained" by the depositor's conduct. Citing well-established policies of customer privacy and efficient processing of banking transactions, the court held that a bank has no duty to investigate suspicious transactions or alert non-customers of possible harm arising from such transactions.

    Casey arises out of the bankruptcy of DFJ, which operated a Ponzi scheme and defrauded investors of more than $36 million. The trustee for DFJ's bankruptcy estate alleged that DFJ's officers opened accounts at the defendant banks in the names of fictitious entities and funded those accounts by looting funds from DFJ (which itself had obtained the funds by looting investors through its Ponzi scheme). The banks allegedly allowed the accounts to be opened through improper signature cards and invalid tax ID numbers and then allowed the accounts to be depleted through forged checks, large cash withdrawals involving "unmarked duffel bags," and the payment of checks in amounts that exceeded "not to exceed" limits. According to the trustee, the banks "willfully ignored clearly fraudulent and criminal activity in order to profit from fees, interest, and other benefits generated by the money laundering scheme." Standing in the shoes of DFJ, the trustee asserted claims against the banks for aiding and abetting the officers' breach of their fiduciary duties to DFJ, and for violation of Business & Professions Code § 17200.

    On appeal from the trial court's dismissal of the trustee's complaint for reasons of standing, the court of appeal upheld the dismissal of the complaint, but for a different reason, which is that the trustee failed to allege with specificity both that the banks knew that the DFJ officers were stealing funds from DFJ and that the banks knowingly assisted the officers in laundering the stolen funds. It was not sufficient for the trustee to allege generally that the banks knew the officers were "involved in a criminal or dishonest and wrongful enterprise and were, at the very least, laundering money," that the officers "were engaged in wrongful or illegal conduct . . . in breach of their fiduciary duties," or that "each [bank] acted with knowledge of the primary wrongdoing and realized that its conduct would substantially assist the accomplishment of the wrongful conduct."

    While the court's decision is nominally based on the trustee's failure to adequately plead the elements for aiding and abetting liability, the substantive basis for the court's decision is that, under California law, a bank has no duty to "police" account activity. As the court explained, a contrary rule would require banks to intrude on their customers' right of privacy and make it impossible for banks to comply with rules requiring banking transactions "to be processed quickly and automatically and impos[ing] strict deadlines for the payment or timely dishonor of checks." Thus a bank "owes no duty to non-depositors to investigate or disclose suspicious activities on the part of the accountholder." (The court did note an exception to this principle, where a depositor attempts to deposit a check, payable to someone else, into a personal account under circumstances suggestive of fraud.)