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Chase VP may have aided and abetted title company’s theft

By Lisa Milam-Perez, J.D.

The alleged victim of a $750,000 theft perpetrated by a title company should have been allowed to amend his negligence claim against JP Morgan Chase Bank for the role allegedly played by a bank vice president, who opened the bank account from which the money was stolen. The plaintiff argued that the bank employee knowingly assisted the title company in stealing money from his escrow account and failed to warn him or stop the fraud in its tracks. Vacating its prior opinion on petition for rehearing, the Eleventh Circuit found the plaintiff’s amendment to add claims against Chase for aiding and abetting and conversion would not necessarily have been futile, and the district court erred in denying the plaintiff’s motion for leave to amend, and in dismissing his suit with prejudice (Chang v. JP Morgan Chase Bank, NA, January 6, 2017, Pryor, J.).

Theft from bank account. Seeking to secure financing through the title company for a client looking to build a Caribbean resort, the plaintiff followed the title company’s instructions and transferred $750,000 into an escrow account that the title company maintained with the bank. The bank needed proof of his liquidity in order to provide financing, the title company told him, so he transferred a percentage of the total amount to be financed into the account. The title company didn’t hold his money in escrow, though—it diverted the funds to the company president’s Panamanian company. The title company president pled guilty to wire fraud, but the plaintiff never recovered the funds.

Tort claims. The plaintiff sued Chase for negligence and gross negligence, alleging that a bank vice president helped to perpetrate the scheme. She opened a bank account for the title company and labeled it an escrow account even though the title company hadn’t complied with Chase procedures for opening an escrow account. Then she wrote a letter overstating the balance in that account after the title company stole the plaintiff’s money from the account, and received a $100,000 kickback loan from the title company’s president for her efforts.

Denying the plaintiff’s motion to amend his complaint to add claims against Chase for aiding and abetting fraud and conversion, the court dismissed his suit altogether, finding the allegations were insufficient to show the bank knew of the fraud, or that there was an illicit quid pro quo arrangement in a secret loan to the bank vice president in exchange for covering up the fraud. The court also awarded Chase $48,700 in attorneys’ fees.

Chase could be liable. The Eleventh Circuit reversed. If true, the facts alleged were enough to establish that Chase owed a duty of care to the plaintiff and thus could be held liable for negligence. Moreover, the plaintiff also could state claims against the bank for aiding and abetting and conversion under Florida law, given the allegations that the bank vice president gave substantial assistance to the title company’s misappropriation. It would not have been futile to add these claims, the appeals court held, and the district court should have granted leave to amend.

Negligence. Normally a bank doesn’t owe a duty of care to a noncustomer. However, a bank may be liable to a noncustomer for misappropriation by its own customer when there is a fiduciary relationship between the customer and noncustomer and the bank knows or should know of that relationship, and the bank has actual knowledge of misappropriation by its customer. Here, the allegations were enough to establish that the title company owed the plaintiff a fiduciary duty and that the bank, through its vice president, new of that fiduciary relationship. Further, there were evidence the bank (again, through its vice president) knew that its customer, the title company, was misappropriating funds from the escrow account.

The vice president’s knowledge of the fiduciary relationship between the plaintiff and the title company could be imputed to Chase, the appeals court reasoned; although she was certainly working to further her own interests at this point, her interests were not entirely adverse to the bank’s, since Chase realized a short-term benefit from her actions in the form of very substantial deposits, as well as wire and service fees. Likewise, the plaintiff’s allegations also supported an inference that the VP knew the title company was misappropriating the client’s money, and this knowledge could be imputed to the bank. Thus, the noncustomer plaintiff stated a plausible negligence claim against Chase.

Aiding and abetting. No Florida court has explicitly recognized a cause of action for aiding and abetting fraud, the appeals court noted, but the state’s courts have assumed such a cause of action exists, and have presumed that such a claim would require a claimant to show there was an underlying fraud, that the defendant knew of the fraud, and that the defendant substantially assisted in the fraud. As noted above, there was enough to go on to establish that the bank had knowledge of the underlying fraud.

Furthermore, the appeals court said, the plaintiff plausibly alleged that Chase offered substantial assistance in perpetrating the fraud through its inaction. Chase knew the title company was holding the plaintiff’s funds and knew of the title company’s ongoing fraud, so it owed a fiduciary duty to the plaintiff. As such, the bank had a duty to warn him—or to stop the fraud. Consequently, the plaintiff had a viable claim for aiding and abetting fraud and for aiding and abetting conversion, and the district court erred in refusing to allow him to amend his complaint accordingly.