Ponzi Schemes and Bankers: Eighth Circuit Upholds Bank’s Right To Presume A Fiduciary Is Acting Lawfully Under Missouri’s Uniform Fiduciaries LawJune 21, 2017 | Martha Charepoo
Martin Sigillito, the former St. Louis Attorney who was convicted in 2011 for his involvement in a $52 million Ponzi scheme, is 7 years into a 47-year federal sentence, but the Eight Circuit for a second time just decided that many of his investors cannot recoup their losses from a bank where Sigillito kept the accounts he used to defraud them. In Roseman v. St. Louis Bank, 2017 U.S. App. LEXIS 9075 (8th Cir. 2017), St. Louis Bank avoided liability for investors’ losses in the Ponzi scheme. The Eighth Circuit found that St. Louis Bank did not know the money moving through Sigillito’s accounts was being used by him to cover returns on earlier investments. Roseman followed on the heels of another Eighth Circuit case involving similar claims against PNC Bank for investors’ losses in the same Ponzi scheme which also ruled for the bank. Aguilar v. PNC Bank, N.A., 835 F.3d 390 (8th Cir. 2017).
In Roseman, investors sued St. Louis Bank where Sigillito held several commercial accounts from 2006 to 2011, claiming among other things that the bank violated Missouri’s Uniform Fiduciaries Law (“UFL”) because it knew Sigillito was breaching his fiduciary duties, acted in bad faith, and knew the schemer was benefiting himself with the funds. The accounts were business checking and “Interest on Lawyers Trust Account” (IOLTA) accounts that bore only the name of Sigilitto’s law firm or Sigilitto as an attorney.
A three-judge panel affirmed the Eastern District of Missouri’s grant of summary judgment in the bank’s favor, refusing to hold the bank liable for the Ponzi scheme’s victims’ claims, concluding that the investors failed to present evidence that the bank knew or had reason to even suspect that Sigillito was using investors’ funds for other purposes. In doing so, the Eight Circuit shunned the investors’ attempt to apply the UFL as a strict liability statute and instead followed its interpretation of a bank’s duties with respect to fiduciaries under the UFL in Aguilar which held that the statue requires actual knowledge of a fiduciary’s breach of its duties or knowledge of sufficient facts that constitute bad faith on the part of the fiduciary.
Quoting Aguilar, the court stated thatactual knowledge means “an awareness that, at the moment, the fiduciary was defrauding the principal.” To prove awareness, the investors had the burden of presenting “express factual information” that Sigillito was using the fiduciary funds for personal purposes. Several key facts lead the court to conclude that the investors’ evidence was insufficient to prove that the bank knew that Sigillito’s conduct constituted a breach of his fiduciary duty. None of the accounts referenced the British Lending Program (“BLP”), Sigilitto’s name for the investment program he claimed would facilitate loans to an English law firm to fund black lung claims by English coal miners. Also, the bank employee who worked with Sigillito and his assistant on bank transactions knew nothing about the BLP. The court also noted that the multiple-source nature of an IOLTA account made it impossible for the bank to know the source of any single deposit. The court held that simply knowing that Sigilitto was moving large sums of money between his law firm’s accounts was not enough to trigger any duty on the bank’s part to investigate the transactions or suspect that Sigillito was misusing funds.
Nor did the court agree that the bank acted in bad faith despite overdraft activity on the IOLTA account. The court applied Aguilar’s test for bad faith, i.e. “whether it is commercially justifiable for the person accepting a negotiable instrument to disregard and refuse to learn facts readily available.” Per Aguilar, this requires the existence of facts and circumstances that are so obvious that remaining passive is bad faith. The court acknowledged that a bank’s tolerance of significant overdrafts or check kiting can constitute bad faith under the UFL, but only when the bank knows that the account is a fiduciary account containing the principal’s funds. The court explained that an IOLTA account is a fiduciary account but differs from a typical trust account because the funds it contains could be owed to the any of the beneficiaries involved, i.e. the attorney or unrelated third-parties. Thus, the court found that the activity patterns on the IOLTA account would not have caused the bank to know that Sigillito was misappropriating client funds. Moreover, the court believed that the existence of funds in other accounts to cover those overdrafts would have eased any potential concerns.
Thus, the Eighth Circuit once again upholds a very high standard for holding a bank liable for a Ponzi scheme or anyone else’s breach of fiduciary duty under the UFL.
Yesterday, the United States Supreme Court, in a unanimous decision, issued a ruling that resolves a circuit split as to whether or not the purchaser of a defaulted debt is a “debt collector” under the Fair Debt Collection Practices Act (the “FDCPA”). In the first Supreme Court opinion authored by Justice Neil Gorsuch, the Court held that Santander, the purchaser of a defaulted debt, was not a “debt collector” as defined by the Act.
The Supreme Court’s opinion focused on the plain language of the statute, which defines a debt collector as a person or entity who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 USC § 1692a(6). There has been a split among the circuits as to whether that definition is to be applied to a debt buyer who purchases accounts in default, and then collects on those accounts.
The rationale of the opinion was hinged on syntax and legislative intent, in large part. Plaintiff argued that “owed” was to be read as past-tense, meaning that the debt in question used to be owed to another party. But the Court rejected this argument and provided plaintiff a rather costly grammar lesson, reasoning that, had Congress intended for the term “owed” to be read in the past tense, it would have drafted the definition to read “were owed or are due another.” Rather, the Court held, the definition is to be interpreted to mean that a debt collector is someone who does not own the debt, but is collecting on behalf of a separate party who owns or originated the debt.
The Court further reasoned that, had Congress intended for the definition of a “debt collector” to include purchasers of debt, it would have included a distinction between an original creditor and a “current” creditor in the definition, as it had done throughout the Act in other sections.
The Henson outcome will certainly have a chilling effect on FDCPA litigation in many circuits, where successor owners of debt have been ordered to pay immeasurable damages in litigation for purported violations of the FDCPA. The opinion may be found in its entirety here.
In a transparently partisan vote today, the House passed the 2017 Financial CHOICE Act (commonly referred to as “CHOICE Act 2.0”), leaving the future of the bill to be determined by the Senate.
The first version of the anti-Dodd-Frank legislation was introduced by Rep. Jeb Hensarling of Texas in 2016, and it was touted as a bill that would provide relief to financial institutions that have been, as many assert, overburdened by the 2010 Dodd-Frank regulations. The CHOICE Act was then amended, ostensibly to soften some of the anti-regulation sentiment, before being submitted by Committee to the House for vote.
The Executive Summary of the CHOICE Act identifies several key goals of the proposed legislation:
- End bank bailouts, but make modifications to the Bankruptcy Code as an alternative
- Strengthen penalties for fraud and deception to hold Wall Street accountable
- Create more oversight of regulators and take power from Washington
- Create Advantages for Capital Election
- Provide regulatory relief for Main Street/smaller financial institutions
- Considerable reforms to the structure and power of the Consumer Financial Protection Bureau (the “CFPB”).
With respect to the CFPB, the constitutionality of which has already been challenged through the PHH Mortgage litigation (under review in the D.C. Circuit), the current structure would be modified to create more oversight and checks against the power of the Director, in addition to permitting the President to terminate the director at will.
Obtaining the required 60 votes from the Senate will be challenging, so Rep. Hensarling and other supporters of the bill have much work ahead to work across the party line if the CHOICE Act can cross the next threshold in order to be enacted.
The Republican-majority House vote in favor of CHOICE Act 2.0 today echoes the campaign sentiment of President Trump, who consistently promised to “dismantle” Dodd-Frank. BSCR’s Financial Services Law team will continue to monitor the progress of the bill and provide prompt updates as they are received.
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