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Bank's Duty to Non-Customers Limited to Actual Knowledge of Misappropriation

In a recent case, Bernkopf Goodman LLP v. Herbert, 2013 WL 803521 (March 21, 2013), Massachusetts Federal District Judge Zobel considered the scope of a bank's duty of care to non-customers in cases of alleged misappropriation by an account holder. The plaintiff, Bernkopf Goodman LLP (the "Firm"), alleged that its payroll company, Checkmaster Payroll Service ("Checkmaster"), had misappropriated funds that were supposed to be used to pay the Firm's taxes. In addition to naming Checkmaster as a defendant, the Firm sued the two banks that Checkmaster used to transfer the Firm's funds that were supposed to be paid to the I.R.S.  The Firm claimed that the banks were negligent in failing to prevent the alleged misappropriation.

Because the parties were located in different states, they disputed which law to apply.  Although the Firm argued for Massachusetts law, it pointed to a New York case as persuasive authority for a rule that would extend a bank's duty of care to a non-customer principal (such as the Firm) if the bank has notice of facts that support the inference of misappropriation of funds from an account held by a depositor in a fiduciary relationship with the principal.  The Firm claimed that the banks were aware of facts that should have prompted them to monitor Checkmaster's transfers and learn of the alleged misappropriation.  The court rejected the Firm's argument that the banks owed a duty to monitor Checkmaster's accounts for suspicious activity and noted that even under New York law the complaint failed to allege the extreme facts generally required to overcome a bank's right to presume that a fiduciary will apply funds held in an account to their proper purposes.

Significantly, the court also noted that the law in Massachusetts is likely even stricter than New York law when it comes to limiting a bank's duties of care to non-customers.  The court looked to the Massachusetts Supreme Judicial Court's 2012 decision in Go-Best Assets Limited v. Citizensbank of Massachusetts, which held that a duty of care to non-customers only arises if a bank has "actual knowledge of an intended or apparent misappropriation."

Finally, the court also held that claims against the bank would also be dismissed if either Tennessee or Rhode Island law applied (the home state for each bank). Based on the foregoing, the court dismissed the Firm's claims against the banks because the banks owed no duty to the Firm to investigate and prevent the alleged misappropriation under any of the possibly applicable state laws.

For more information about our banking law practice, please visit our banking law page.

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