Suing the Bank for Failing to Discover Fraud
When a bank customer is the victim of financial fraud, can that customer sue the bank for failing to discover the fraud? That was the question the California Court of Appeal decided this week in Kurtz-Ahlers LLC v. Bank of America. But first, a bit of background.
Tort Talk Blog has for years primarily discussed physical torts. These are the kinds of torts caused by someone else’s negligence or worse, such as Los Angeles car or motorcycle accidents, trip and falls, and dog bites.
There is a whole host of other types of torts that don’t necessarily cause physical pain and suffering. As my law school professor described them, these are the kinds of torts that don’t make you “black and blue”. I loved this torts class so much that I received the First Honors Award for the highest grade in the course. Moving on from this shameless plug…
What type of torts are these? Think defamation and slander. Someone spreading false information about you is not necessarily injuring your physical body, but it can damage your reputation and possibly your livelihood. The law can award damages for these wrongs just the same as if someone were injured in a rear-end truck accident. A recent example is the case where Elon Musk was sued for his alleged defamatory tweet (the jury found for Musk) and also when Richard Jewell successfully sued several news outlets for falsely claiming he was the Olympic bomber in 1996. Financial fraud falls into the rubric of torts that don’t make you “black and blue.”
Back to this case. Elizabeth Mulder ran a book-keeping business in Orange County. One of her clients was Kurtz-Ahlers, LLC. Mulder had Kurtz-Ahlers open a bank account titled “Income Tax Payments”, ostensibly for Kurtz-Ahlers to deposit her estimated tax payments into this account. Whenever Mulders gave her client the estimated tax amounts, the checks were made payable to this account instead of the Internal Revenue Service or Treasury Department. Instead of actually using this money for tax payments, Mulder had access to the account and used it for her own lavish lifestyle, ultimately absconding with over $700,000 from Kurtz-Ahlers. Mulder was eventually arrested and is now in federal prison. She was the subject of an episode of American Greed.
Kurtz-Ahlers sued Bank of America when the bank denied her reimbursement claim. Kurtz-Ahlers claimed that the bank had an affirmative duty to “police” the account and insure that no fraud was taking place. The Court of Appeal rejected this argument.
First, the Court noted that banks do not owe fiduciary duties to deposit holders. Banks instead are governed by contract law. The contractual relationship does not involve any implied duty to supervise account activity. The Court noted that since in this case, the bank account was labeled “Income Tax Payments” and the checks going into that account were made payable to “Income Tax Payments”, there was no duty to investigate further. Requiring the bank to investigate further would create a new duty and impose an unfair burden on banks who are merely contractually obligated to deposit money. For this important public policy reason, the Court ruled in favor of Bank of America.
The outcome could be different if a depositor attempts to deposit money into an account with the improper payee. But this case holds that the burden of ferreting out fraud belongs to the bank account owner and not the bank.
For questions about your Los Angeles financial torts case, the Rabbi Lawyer is ready to assist, 24/6.
