Go-Best Assets Ltd. v. Citizens Bank of Mass.
2011 Mass. App. LEXIS 704
Massachusetts Appeals Court
May 12, 2011
Misrepresentation, Aiding and Abetting, Breach of Fiduciary Duty, Fraud, Conversion.
Upon review the appellate court decided 1) the trial court erred in granting summary judgment on the negligence claim against Citizens Bank because there was a genuine issue of fact as to whether the latter exercised reasonable care in complying with Massachusetts law 2) the trial court also erred in granting summary judgment on the aiding and abetting claim against the bank 3) the trial court was right in granting summary judgment for the partners.
Facts
Investors adversely affected by a $5 million Ponzi scheme run by a Massachusetts attorney, Mr. Morris M. Goldings, filed a complaint against Citizens Bank for negligence, misrepresentation, aiding and abetting, breach of fiduciary duty, fraud and conversion, and against the defendant’s partners on the grounds of aiding and abetting the defendant.
Issue 1: Whether a bank that has sufficient notice of wrongdoing (consisting of repeated overdrafts and insufficient funds) may have a duty to make further inquiry or to take steps to prevent diversion of funds?
Yes. Although a bank does not generally have such a duty, an exception exists if there is a chronic insufficiency of funds in a client funds account. The appellate court made clear that this duty is only triggered if there a history of overdrafts, a single or isolated overdraft will not trigger a bank’s duty. This conclusion was drawn by relying on Massachusetts Rules of Professional Conduct 1.15. Moreover, once a bank becomes aware of such overdrafts it needs to report it to the Board of Bar Overseers.
Issue 2 Was the account created by Mr. Goldings a trust account?
Yes. According to Massachusetts Rules of Professional Conduct 1.15 an account is a trust account if it is held “for clients and in any other fiduciary capacity in connection with a representation.” The appellate court held that this account was labeled as a “client account” and as such implying a fiduciary duty.
Issue 3 Does intentional and improper transferring of money into the client’s account give raise to a claim of aiding and abetting fraud?
Yes. The appellate court held that the trial court gave a very narrow interpretation of the knowledge requirement of aiding and abetting of fraud. Knowledge means that “the defendant actually knows about its substantial, supporting role in an unlawful enterprise.” Maruho Co. v. Miles. Considering the history of insufficiency of funds, the bank’s employee had such knowledge.
Dissent
Judge Berry J. wrote the dissenting opinion. According to Judge Berry, Rule 1.15 of the Massachusetts Rules of Professional Conduct, did not apply to the case because that was essentially a commercial activity and a business deal, as such it did not have anything to do with attorney-client representation. Moreover, to establish aiding and abetting, actual knowledge of fraud is necessary and in this case the bank’s employee did not possess the neccessary knowledge.
Prepared by BH
