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Banking Update: Duties of Banks to Embezzled Customers

by Feb 11, 2019Blog0 comments

A recent Wisconsin supreme court decision reviewed the duties a bank has to prevent embezzlement from a customer’s bank account committed by an officer of the customer. In Koss Corp. v. Park Bank, v. Michael J. Koss, Grant Thornton LLP., Koss Corp. sought to collect millions of dollars in damages as a result of a ten year embezzlement operation by its Vice President of Finance, Sujata Sachdeva. Sachdeva embezzled upwards of $34 million from Koss Corp. Primarily through the use of cashier checks, petty cash requests, and wire transfers at Koss’ depository institution, Park Bank, Sachdeva used corporate funds to repeatedly pay off personal debts. Sachdeva was the authorized signatory on Koss’ bank accounts; however, some of the transactions were initiated by Sachdeva’s subordinates at her behest. Through investigation by an American Express’s fraud department employee, Sachdeva was eventually exposed for her wrongdoings and would enter a guilty plea in 2010.

Koss Corp. began suit against Park Bank seeking damages claiming the bank had acted in bad faith, and should have been aware of the fraud taking place. The Wisconsin circuit court granted a summary judgment dismissing Koss Corp.’s Uniform Fiduciaries Act (UFA) claims against Park Bank pursuant to Wis. Stat. § 112.01(1).

The UFA adopted by Wisconsin in 1925 for the purpose of facilitating banking and financial transactions while providing a uniform law. As the business of banking grew, law-makers questioned whether banks should bear the burden of monitoring every transaction ensuring no wrongdoing was present. In order to more efficiently process a high volume of transactions, the UFA shifted the burden to the principle to employ honest fiduciaries, limiting the banks’ oversight responsibility.

Although bad faith is not expressly defined in the Wisconsin statute, the court found that honest banks acts, even done negligently, will be perceived as good faith. Accordingly, bad faith must involve some sort of intentional conduct requiring dishonesty and the willful evasion of knowledge of fiduciary misconduct.
The Court established a four-factor analysis for reviewing whether a bank acts in bad faith: (1) bad faith must be reviewed on a transaction by transaction basis, not in aggregate; (2) whether the bank acted in bad faith must be determined at the time of the breach of fiduciary duty, not retrospectively, (3) bad faith is an intentional tort, mere negligence is insufficient, and (4) bad faith requires an analysis of the bank’s subjective intent. Applying these factors, the court determined that Park Bank’s role in the embezzlement operation was of a passive nature, not deliberately or intentionally done to protect its self-interest, and thus the summary judgment in favor of Park Bank was properly granted.

It should be noted that there was a dissenting opinion joined by two justices, which criticized Park Bank’s acceptance of transactions by Sachdeva’s subordinates, when such subordinates were not authorized signers on the bank account. The dissent felt that a jury should decide whether the bank’s failure to follow its own protocol contributed to Koss’ loss constituting bad faith. The Court majority, however, dismissed this as, at worst, negligence insufficient to establish bad faith, concluding such facts did not create a triable issue.

The Koss case affirms that, under the UFA, the burden is on the depositor, not the bank, to monitor account transactions. A bank should not be liable for a customer’s loss, where the loss results from embezzlement by the customer’s own employee and there is no evidence that the bank acted dishonestly or with bad faith in processing each transaction. Still, a prudent bank should take necessary steps to ensure that it is following its policies in the initiation of deposit transactions, such as request for cash withdrawals, issuance of cashier’s checks, and execution of wire transfers. For more information regarding this case, or to contact a Wisconsin banking attorney, please contact Attorney Andrew Bosshard at Bosshard | Parke Ltd.

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