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Financial Services Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Eighth Circuit grants Union Pacific $75 million in Tax Relief

August 17, 2017 | Megan Stumph-Turner

Earlier this month, the Eight Circuit Court of Appeals overturned the lower court’s decision in a case that involved a dispute over whether the Railroad Retirement Tax Act (RRTA) requires a railroad to pay taxes upon issuing stock as compensation to employees.

In an opinion mirroring, and even explicitly referencing, the textualist sentiment of Justice Gorsuch’s opinion in Hensen v. Santander, the Eight Circuit addressed the parties’ respective positions as to what the words “money” and “compensation” mean in the context of the RRTA. While the federal government argued that “money” has a broad and sometimes intangible meaning, Union Pacific maintained that “money” must refer to a “medium of exchange” – i.e., something tangible and of value that may be given in exchange for goods or services.  The Eighth Circuit found Union Pacific’s reading of the text to be more compelling than the government’s.

In its discussion, the Court further distinguished the RRTA from FICA, which includes a more all-encompassing definition for compensation subject to taxation.  The Court explained that, since the RRTA and FICA’s predecessor were drafted during the same time period, any difference or distinction between each law’s definition of compensation must have been intentional.

It is certainly worth noting that the Eighth Circuit referenced and rejected a recent holding by the Seventh Circuit in Wisconsin Cent Holding v. United States that stock may be considered “money remuneration” that is tantamount to cash, reasoning that “one cannot pay for produce at the local grocery store with stock.” 

The Eighth Circuit also reversed the lower court’s decision concerning ratification payments made pursuant to a union’s collective bargaining agreements, because those payments were not made pursuant to “employment” of the individual by Union Pacific. 

With that, the Eighth Circuit completely reversed the summary judgment rulings previously entered in favor of the United States and against Union Pacific, thus entitling Union Pacific to a $75 million refund for taxes paid over the course of 10 years on stock compensation and ratification payments.

The full text of the Eight Circuit’s opinion is available here.

New CFPB Rule Prohibits Consumer Waiver of Class Action Litigation

July 16, 2017 | Megan Stumph-Turner

In an effort to afford consumers with greater accessibility to the courtroom, the Consumer Financial Protection Bureau (the “CFPB”) has enacted a new rule that, while it does not ban arbitration clauses outright, does substantially limit a financial institution’s right to mandatory arbitration provisions. Specifically, the new rule prohibits financial institutions and consumers from contracting to waive the consumer’s right to join in class action lawsuits with other consumers against that entity.

The arbitration rule was preceded by a CFPB study, spanning several years, of the prevalence and impact of arbitration clauses in consumer financial contracts. One of the chief concerns of the CFPB is the plain ignorance of consumers with respect to arbitration clauses contained within consumer contracts.  According to the study, more than half of credit card and checking account agreements contain mandatory arbitration provisions. Yet, 3 out of 4 of consumers who entered into agreements with such arbitration clauses were not aware that they had done so. 

CFPB Director Richard Cordray, in his public statement regarding the new rule, further justified the rule on the basis that class action lawsuits are more effective in curbing unsavory lending and servicing practices than arbitration, as the penalties and damages imposed in class action litigation vastly exceed those assessed in arbitration. 

In addition to restricting arbitration provisions, the new rule requires financial institutions to report the results of arbitration to the Bureau so that the results may be assessed for fairness and effectiveness.  It is important to note that the rule only applies to new contracts between consumers and financial institutions, and not those already in effect.

Predictably, commentators and critics have already observed that the new arbitration rule truly stands to benefit the plaintiff’s class action bar, rather than the consumers being represented in class action litigation.  Some also view the arbitration rule as an unjust infringement of the freedom to contract with no rational basis under the law.  Legal challenges to the new arbitration rule in the coming months are unquestionably imminent.  The new arbitration rule may be found here.  

Ponzi Schemes and Bankers: Eighth Circuit Upholds Bank’s Right To Presume A Fiduciary Is Acting Lawfully Under Missouri’s Uniform Fiduciaries Law

June 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. 

About Financial Services Law Blog

The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry.  This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph,  and our Financial Services practice.


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