Professional Business Automation Technology, LLC v. Old Plank Trail Community Bank, 2014 IL App (3d) 130044-U presents a recent illustration of the Fiduciary Obligations Act, 760 ILCS 65/7 (the “Fiduciary Act”) – a statute that immunizes banks from liability to a corporate customer that gets fleeced by a high-ranking employees.
The only exceptions are where the bank (1) has actual knowledge of a fiduciary’s breach or (2) exhibits bad faith in allowing a questionable transaction to take place. An example would be where a business’s accountant endorses checks payable to the business to herself and the bank sees this and allows it to happen.
In Professional Business, a former member of the plaintiff LLC deposited about $45K over a five-month period in an account he set up under a fictitious but similarly worded (to the plaintiff) entity about 10 days after he resigned as member of the plaintiff LLC. All funds deposited were intended for the plaintiff – the rightful payee.
When plaintiff found out about the ex-member’s scheme, it sued the bank for negligence and conversion on the theory that the bank shouldn’t have allowed the ex-member to open the sham account or to deposit monies in it. The plaintiff also argued that the bank should have been more diligent in verifying the corporate status of the account holder before opening the account. The trial court granted the bank’s summary judgment motion.
Affirming, the court held that the plaintiff failed to show bad faith by the bank or that it had actual knowledge that the former LLC member was breaching obligations owed to his principal.
Actual knowledge means “awareness at the moment of the transaction” that a fiduciary is defrauding the principal or using funds for private purposes in violation of a fiduciary relationship. (¶ 13).
Bad faith means the bank was commercially unreasonable by remaining passive in a dubious situation and refusing to learn readily available facts surrounding the questionable transaction (like a corporate employee endorsing corporate checks to herself).
Here, the plaintiff failed to present any evidence that the bank had actual knowledge that the individual opening the dummy account was violating any fiduciary duties to a corporate principal. The Court also found that the bank followed normal procedures when opening the account and there was nothing to alert the bank that the member was defrauding the plaintiff.
The bank offered sworn testimony (via affidavit) that it adhered to all internal protocols for opening a corporate account as it required the account opener to supply a corporate resolution and a FEIN number.
The bank officer also testified that she looked at the Secretary of State website and didn’t see anything suspicious – even though there was no mention of the account holder entity’s name as a valid corporation.
The Court also found that the bank defeated plaintiff under UCC Section 3-404 and 3-420. The former section relieves a bank from liability where it pays out in good faith to an imposter or fictitious payee. The latter statute (3-420) controls conversion of instruments and only allows actions by parties who actually receive an instrument (i.e., a check). Here, since the plaintiff never actually received the deposited checks, the bank had no conversion liability under the UCC. (¶ 15).
Take-away:
It’s difficult to sue and win against a bank. Not only can the bank rely on the Fiduciary Act, but various sections of UCC Article 3 also provide safe harbors from liability to a bilked bank customer. Business account holders should be vigilant and keep tabs on corporate employees who have broad money depositing and withdrawal authority.
As this case shows, the hurdles a plaintiff must clear to successfully hold a bank responsible for a corporate employee’s misdeeds make it all the more important for a company to have a system of checks and balances: no single employee should have free reign over a firm’s bank deposits and withdrawals. The temptation to cheat is probably too great.