Koss Corporation v. Park Bank

2019 WI 7SUPREME COURT OF WISCONSIN
CASE NO.: 2016AP636
COMPLETE TITLE: Koss Corporation,
Plaintiff-Appellant-Petitioner,
v.
Park Bank,
Defendant-Third-Party
Plaintiff-Respondent-Cross-Appellant,
v.
Michael J. Koss,
Third-Party
Defendant-Appellant-Cross-Respondent,
Grant Thornton LLP,
Third-Party Defendant-Cross-
Respondent.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 379 Wis. 2d 639, 907 N.W.2d 447PDC No: 2018 WI App 1 - Published
OPINION FILED: January 29, 2019
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: September 7, 2018
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Milwaukee
JUDGE: David L. Borowski
JUSTICES:
CONCURRED: A.W. BRADLEY, J. concurs, joined by ABRAHAMSON,
J., and DALLET, J. (opinion filed).
DISSENTED: KELLY, J. dissents joined by R.G. BRADLEY, J.
(opinion filed).
NOT PARTICIPATING:
ATTORNEYS:
For the plaintiff-appellant-petitioner and third-party
defendant-appellant-cross-respondent, there were briefs filed by
Michael S. Yellin, Ralph Weber, and Gass Weber Mullins LLC,
Milwaukee, with whom on the brief were Michael J. Avenatti,
Ahmed Ibrahim, and Eagen Avenatti LLP, Newport Beach,
California. There was an oral argument by Ahmed Ibrahaim.
For the defendant-third-party-plaintiff-respondent-cross-
appellant, there was a brief filed by Dean P. Laing, Gregory W.
Lyons, Joseph D. Newbold, and O'Neil, Cannon, Hollman, DeJong &
Laing S.C., Milwaukee. There was an oral argument by Dean
Laing.
For the third-party-defendant-cross-respondent, there was a
brief filed by Joseph L. Olson and Michael Best & Friedrich LLP,
Milwaukee. There was an oral argument by Joseph Olson.
An amicus curiae brief was filed on behalf of Wisconsin
Bankers Association and the American Bankers Association by John
E. Knight, James E. Bartzen, Kirsten E. Spira, and Boardman &
Clark LLP, Madison.
2
2019 WI 7NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2016AP636
(L.C. No. 2010CV21290)
STATE OF WISCONSIN : IN SUPREME COURT
Koss Corporation,
Plaintiff-Appellant-Petitioner,
v.
Park Bank,
Defendant-Third-Party
Plaintiff-Respondent-Cross-Appellant,
FILED
v. JAN 29, 2019
Michael J. Koss, Sheila T. Reiff
Clerk of Supreme Court
Third-Party
Defendant-Appellant-Cross-Respondent,
Grant Thornton LLP,
Third-Party Defendant-Cross-
Respondent.
REVIEW of a decision of the Court of Appeals. Affirmed.
¶1 PATIENCE DRAKE ROGGENSACK, C.J. We review a
published decision of the court of appeals1 that affirmed an
1
Koss Corp. v. Park Bank, 2018 WI App 1, 379 Wis. 2d 629,
907 N.W.2d 447.
No. 2016AP636
order of the circuit court2 granting summary judgment dismissing
Koss Corporation's Uniform Fiduciaries Act (UFA) claim against
Park Bank.3
¶2 Our review centers on two related issues: First,
consistent with the UFA, we interpret and apply the terms "good
faith" as set out in Wis. Stat. § 112.01(1)(c) and "bad faith"
employed in § 112.01(9); and second, we determine whether
summary judgment dismissing Koss Corporation's claim was
properly granted.
¶3 We conclude Wis. Stat. § 112.01(1)(c) describes the
term "good faith" as honest bank acts, even when negligently
done, and consistent with the majority of jurisdictions'
interpretations of the UFA, "bad faith" is inconsistent with the
statutory criteria for "good faith." Therefore, bad faith
pursuant to § 112.01(9), which is an intentional tort, may be
shown by acts evidencing bank dishonesty such as a bank
willfully failing to further investigate compelling and obvious
known facts suggesting fiduciary misconduct because of a
deliberate desire to evade knowledge of fiduciary misconduct.
2
The Honorable David L. Borowski of Milwaukee County
presided.
3
Wisconsin Stat. § 112.01 (2015-16) is Wisconsin's version
of the UFA.
All subsequent references to the Wisconsin Statutes are
to the 2015-16 version unless otherwise indicated.
2
No. 2016AP636
¶4 We further conclude that given the allegations that
Koss Corporation asserts in regard to its claim that Park Bank
is liable for the intentional tort of bad faith, no proof has
been proffered of bank dishonesty wherein Park Bank willfully
failed to further investigate compelling and obvious known facts
suggesting fiduciary misconduct because of a deliberate desire
to evade knowledge of fiduciary misconduct.
¶5 Accordingly, we affirm the court of appeals'
affirmance of the circuit court's dismissal of Koss
Corporation's claim that Park Bank acted in bad faith in
processing the transactions that Sujata Sachdeva initiated.
Because we conclude Park Bank is not liable to Koss Corporation,
we also affirm the dismissal of Park Bank's third-party claims.4
I. BACKGROUND
¶6 In this lawsuit, Koss Corporation seeks to collect
millions of dollars from Park Bank that Sachdeva embezzled from
its accounts at Park Bank. As Vice President of Finance for
Koss Corporation, Sachdeva was one of three people authorized to
conduct transactions from Koss Corporation's Park Bank accounts
pursuant to bank signature cards.5 As was explained by Park
4
Two justices join in the totality of the decisions
expressed in this opinion: Chief Justice Patience Drake
Roggensack and Justice Annette Kingsland Ziegler. The opinions
of other justices in regard to the issues presented for the
court's review are found in the separate opinions that follow.
5
Sachdeva also served as Secretary and Principal Accounting
Officer for Koss Corporation.
3
No. 2016AP636
Bank's attorney at oral argument, nothing prohibited Sachdeva
from exercising her transaction authority for Koss Corporation's
accounts at Park Bank through another Koss Corporation employee
so long as Sachdeva made the decision to initiate the
transaction.
¶7 Sachdeva embezzled approximately $34 million from Koss
Corporation over a period of ten years, from about 1999 until
she was caught in 2009. In 2010, she pled guilty to six counts
of wire fraud in connection with her embezzlement from Park Bank
and from Koss Corporation's Chicago banks. She was sentenced to
eleven years in prison and ordered to pay $34 million in
restitution.
¶8 One method Sachdeva used to embezzle funds from Koss
Corporation was to order cashier's checks for personal
expenditures. She admits that she used hundreds of cashier's
checks drawn on Koss Corporation's Park Bank accounts to pay for
her purchases from luxury retailers, as well as to pay her
personal credit card bills. She sometimes used the payee's
initials to avoid detection, such as "S.F.A., Inc." for Saks
Fifth Avenue or "N.M." for Nieman Marcus.
¶9 Generally, Sachdeva did not go to the bank herself to
obtain cashier's checks. Instead, she instructed Julie
Mulvaney, another Koss Corporation employee, to call the bank
and request a cashier's check on Sachdeva's behalf. Mulvaney
was not a signatory on Koss Corporation's Park Bank accounts.
Despite the existence of the signature cards, Park Bank's
4
No. 2016AP636
general practice was to allow non-signatories to call and
request cashier's checks on a signatory's behalf.
¶10 After receiving telephone requests for cashier's
checks, Park Bank would place the checks in an envelope to
Sachdeva's attention. Sachdeva would then send another Koss
Corporation employee, usually Betty Caver, to pick up the
envelopes. Caver was not a signatory on Koss Corporation's
account. The employees who picked up the checks were not asked
to present signed documentation from Sachdeva, and Park Bank did
not call Sachdeva to verify the transactions. When the
cashier's checks reached Sachdeva, she would mail them to her
creditors to pay personal debts.
¶11 On one occasion in January of 2004, Betty Caver went
into the bank and endorsed a $60,598.03 counter check6 against a
Koss Corporation account, made payable to cash. Park Bank did
not call Sachdeva to verify the transaction. The funds were
then used to purchase two cashier's checks in the amounts of
$42,441.61 and $18,156.42, which were used to pay Sachdeva's
personal credit card bills to American Express and Comerica
Bank. Koss Corporation does not dispute that Caver, Mulvaney,
and any other employees involved were acting at Sachdeva's
direction.
¶12 Sachdeva also used "petty cash" requests to embezzle
funds. Sachdeva would instruct a non-signatory Koss employee,
6
A counter check is a check available at a bank that can be
used to make a withdrawal from an account at the bank.
5
No. 2016AP636
usually Betty Caver, to go to the bank and endorse a manually
written check made out to "petty cash." Sachdeva would call and
tell the bank the employee was coming. The employee would pick
up cash for Sachdeva, sometimes from a drive-through window,
without being asked for identification. Sachdeva used the cash
to pay her "handyman," as well as to buy shoes, purses, and
dinners. The petty cash requests were often for thousands of
dollars at a time. From 2005 to 2009, there were at least 43
such "petty cash" checks, totaling $171,985.02.
¶13 Sachdeva's third method of embezzling funds, and the
method that eventually led to her downfall, was to request wire
transfers to an out-of-state bank where Koss Corporation
maintained accounts. Between 2004 and 2009, Park Bank made
seven wire transfers totaling $2 million from Koss Corporation's
Park Bank accounts to Koss Corporation's accounts in Chicago
banks. Either Sachdeva or Mulvaney would call Park Bank and
initiate the wire transfer over the phone by providing a
"repetitive code," which was used in lieu of providing account
numbers when the same client regularly wired money between the
same two accounts. Park Bank's policy required a wire transfer
agreement to initiate wire transfers, which Koss Corporation did
not have.
¶14 In December of 2009, an employee from American
Express's fraud department called Michael Koss7 directly and
7
Michael Koss was Koss Corporation's President, COO, CEO,
and CFO.
6
No. 2016AP636
informed him that Sachdeva had been using wire transfers from
Koss Corporation's Chicago bank account to pay her credit
transactions with American Express. This call led to Sachdeva's
prosecution and eventual guilty plea.
¶15 In 2010, Koss Corporation originally sued Park Bank
for negligence. It later amended its complaint to add a UFA
"bad faith" claim, and to add factual information about the
petty cash and wire transfers. Park Bank filed a third-party
complaint against Michael Koss and against Koss Corporation's
auditors, Grant Thornton LLP, for contribution and equitable
subrogation. In 2013, Koss Corporation dismissed its negligence
claim with prejudice. Its second and third amended complaints
both asserted bad faith under the UFA as the sole claim for
relief.
¶16 In support of its claims, none of Koss Corporation's
factual allegations asserted, or even implied, that Park Bank
acted dishonestly such as being motivated by self-interest with
regard to the transactions Sachdeva initiated. Furthermore,
none of Koss Corporation's allegations assert that Park Bank
suspected that Sachdeva was acting improperly. After
considerable discovery was completed, Park Bank moved for
summary judgment on the UFA bad faith claim.
¶17 On March 11, 2016, the Milwaukee County Circuit Court
granted Park Bank's motion for summary judgment, thereby
dismissing all claims against Park Bank. It also dismissed the
third-party complaint against Grant Thornton LLP and Michael J.
Koss. In regard to the claims against Park Bank, the circuit
7
No. 2016AP636
court first held that Park Bank, as the moving party, had met
its initial burden and that Koss Corporation had failed to
establish the existence of a material factual dispute. The
circuit court concluded that to show bad faith under the UFA,
Koss Corporation would have had to have provided evidence that
Park Bank intentionally ignored evidence of Sachdeva's breach of
her fiduciary obligations, which Koss Corporation had failed to
do.
¶18 The court of appeals affirmed the circuit court's
decision dismissing Koss Corporation's UFA claim. Koss Corp. v.
Park Bank, 2018 WI App 1, ¶2, 379 Wis. 2d 629, 907 N.W.2d 447.
The court of appeals first acknowledged that Wisconsin's version
of the UFA must be interpreted to make Wisconsin law uniform
with the law of other states that have enacted the UFA. Id.,
¶23; Wis. Stat. § 112.01(14). After reviewing case law from
other UFA jurisdictions, the court of appeals created a two-
element test for bad faith that required a showing of:
1) circumstances that are suspicious enough to place a
bank on notice of improper conduct by the fiduciary;
and 2) a deliberate failure to investigate the
suspicious circumstances because of a belief or fear
that such inquiry would disclose a defect in the
transaction at issue.
Koss Corp., 379 Wis. 2d 629, ¶27.
¶19 The court of appeals agreed with the circuit court's
determination that Park Bank had established prima facie
eligibility for summary judgment, id., ¶29, and that Koss
Corporation failed to controvert that eligibility with a genuine
issue of material fact as to whether Park Bank acted with bad
8
No. 2016AP636
faith regarding Sachdeva's embezzlement, id., ¶50. Because the
court of appeals concluded that Park Bank was not liable to Koss
Corporation, the court of appeals did not address Park Bank's
third-party complaints. Id., ¶2 n.3.
¶20 We granted Koss Corporation's petition for review and
now affirm.
II. DISCUSSION
A. Standard of Review
¶21 This case requires us to interpret and apply statutes,
and to review a grant of summary judgment. "Statutory
interpretation and the application of a statute to a given set
of facts are questions of law that we review independently, but
benefiting from the analyses of the court of appeals and the
circuit court." Marder v. Bd. of Regents, 2005 WI 59, ¶19, 286
Wis. 2d 252, 706 N.W.2d 110.
¶22 We also independently review grants of summary
judgment, applying the same methodology as the circuit court and
the court of appeals, while once again benefitting from their
analyses. Dufour v. Progressive Classic Ins. Co., 2016 WI 59,
¶12, 370 Wis. 2d 313, 881 N.W.2d 678. "The standards set forth
in Wis. Stat. § 802.08 are our guides." Id.B. The Uniform Fiduciaries Act
1. History of UFA
¶23 The UFA was approved by the National Conference of
Commissioners on Uniform State Laws in 1922. It was adopted by
Wisconsin in 1925, and is set out in Wis. Stat. § 112.01(1)-
9
No. 2016AP636
(16). Bolger v. Merrill Lynch Ready Assets Tr., 143 Wis. 2d
766, 774, 423 N.W.2d 173 (Ct. App. 1988).
¶24 Prior to the development of the UFA, a bank could be
found liable to a principal in common law negligence if the bank
"negligently assisted a fiduciary in misappropriating [the]
principal's funds." Maryland Cas. Co. v. Bank of Charlotte, 340
F.2d 550, 553 (4th Cir. 1965). Some courts "went so far as to
charge depository banks with constructive notice of fiduciary
misconduct." Bolger, 143 Wis. 2d at 774. The result burdened
banks with the duty of "seeing that fiduciary funds are properly
applied to the account of the principal." Sugarhouse Fin. Co.
v. Zions First Nat'l Bank, 440 P.2d 869, 870 (Utah 1968).
¶25 As banking grew as a business and "[a]s banks began to
process more and more transactions," policymakers questioned
"whether it was wise policy to place the duty of monitoring
fiduciary accounts for wrongdoing on the bank's shoulders."
Attorneys Title Guar. Fund v. Goodman, 179 F. Supp. 2d 1268,
1274 (D. Utah 2001). This led several states, including
Wisconsin in 1925, to adopt the newly drafted UFA. Id.; Bolger,
143 Wis. 2d at 774.
¶26 The UFA's purpose was to "facilitate banking and
financial transactions" by "provid[ing] relief from the dire
consequences of the common law rule," as well as to "place on
the principal the burden of employing honest fiduciaries."
Bolger, 143 Wis. 2d at 774-75; Johnson v. Citizens Nat'l Bank,
334 N.E.2d 295, 300 (Ill. App. 1975). Adoption of the UFA
evinced a recognition of the economic importance of allowing
10
No. 2016AP636
banks to efficiently process a high volume of transactions. For
this reason, courts have long recognized that a return to the
common law rule of liability based on negligence by a bank
"would practically put an end to the banking business," Am. Sur.
Co. of N.Y. v. First Nat'l Bank in W. Union, 50 F. Supp. 180,
185-86 (N.D. W. Va. 1943), and that "[t]he present banking
system under which an enormous number of checks are processed
daily could not function effectively if banks were not required
to make prompt and effective decisions on whether to pay or
dishonor checks." Chazen v. Centennial Bank, 71 Cal. Rptr. 2d
462, 466 (Ct. App. 1998).
2. Koss Corporation's Claim8
¶27 Koss Corporation grounds its claim in Wis. Stat.
§ 112.01(9), which states in relevant part:
If a check is drawn upon the account of a fiduciary's
principal in a bank by a fiduciary, who is empowered
to draw checks upon his or her principal's account,
the bank is authorized to pay such check without being
liable to the principal, unless the bank pays the
check with actual knowledge that the fiduciary is
committing a breach of the fiduciary's obligation as
fiduciary in drawing such check, or with knowledge of
such facts that its action in paying the check amounts
to bad faith. If, however, such a check is payable to
the drawee bank and is delivered to it in payment of
8
In the case before us, Wis. Stat. § 112.01(9) is argued as
a claim against Park Bank, rather than as a defense to a claim
that Park Bank assisted Sachdeva's unlawful conduct.
Accordingly, we shall discuss it as a claim. However, Compare
Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987) (explaining
that the "UFA did not create the cause of action. Rather, the
UFA is a defense."); Manfredi v. Dauphin Deposit Bank, 697 A.2d
1025, 1029-30 (1997) (same).
11
No. 2016AP636
or as security for a personal debt of the fiduciary to
it, the bank is liable to the principal if the
fiduciary in fact commits a breach of the fiduciary's
obligation as fiduciary in drawing or delivering the
check.
¶28 Wisconsin Stat. § 112.01(9), quoted above, provides
three entirely different standards whereby a bank could be
liable: (1) when a bank had actual knowledge of the unlawful
conduct of a fiduciary; (2) when a bank had knowledge of
sufficient facts to show that it acted in bad faith by honoring
a fiduciary's withdrawals from the principal's account; or
(3) when a drawee bank accepts its own check in payment of or as
security for a personal debt of the fiduciary at the drawee
bank, contrary to the interest of the principal.9
¶29 Koss Corporation sued Park Bank alleging that the
bank's transactions with Sachdeva were done in bad faith. Koss
Corporation did not allege, nor has any proof been shown, that
Park Bank had knowledge of Sachdeva's unlawful conduct or that
it paid, or used Koss's funds as security for, personal debts of
Sachdeva at Park Bank. Accordingly, we focus on defining bad
faith.
3. Defining "Bad Faith"
¶30 The UFA does not define bad faith. It does, however,
define good faith. Under the UFA, "[a] thing is done 'in good
9
Maryland Cas. Co. v. Bank of Charlotte, 340 F.2d 550, 554-
55 (4th Cir. 1965) is often cited. There, the Bank of Charlotte
had a monetary interest in the transactions where it received
checks drafted on the corporation's account at the bank and
applied those checks to the employee's private debt at the bank.
12
No. 2016AP636
faith' . . . when it is in fact done honestly, whether it be
done negligently or not." Wis. Stat. § 112.01(1)(c). A bank
does not violate its obligations to its depositor if its
transactions with the depositor's fiduciary are honestly done.
Buffets, Inc. v. Leischow, 732 F.3d 889, 899, (8th Cir. 2013);
Rheinberger v. First Nat. Bank of St. Paul, 150 N.W.2d 37, 41
(Minn. 1967) (concluding that "[b]ad faith does not exist if the
bank was acting honestly.").
¶31 Accordingly, the definition of good faith under Wis.
Stat. § 112.01(1)(c) implies that bad faith under § 112.01(9)
must involve something more than negligent bank conduct and must
involve conduct during which the bank did not act honestly.
Because § 112.01 is a uniform law, we consider decisions from
other jurisdictions that have defined bad faith. § 112.01(14).
As we do so, we note that variations in facts from which claims
of bad faith arose have resulted in different expressions of the
definition of bad faith, with bank dishonesty expressed in most
decisions. See Attorneys Title Guar. Fund, 179 F. Supp. 2d at
1277 (concluding that "bad faith is the subjective deliberate
desire to evade knowledge because of a belief or fear that
inquiry would disclose a vice or defect in the
transaction . . . [and] bad faith requires dishonesty and
implies wrongdoing or some motive of self-interest" when
considering repetitive nonsufficient fund activities); N.J.
Title Ins. Co. v. Caputo, 748 A.2d 507, 514 (N.J. 2000)
(concluding that when "facts suggesting fiduciary misconduct are
compelling and obvious, it is bad faith to remain passive and
13
No. 2016AP636
not inquire further because such inaction amounts to a
deliberate desire to evade knowledge" of improper trust account
transactions); Rheinberger, 150 N.W.2d at 41 (concluding that
bad faith in making transfers between accounts by a son who had
power of attorney for his mother "does not exist if the bank was
acting honestly").
¶32 As a preliminary matter, we do not apply Wisconsin
common law from other contexts to define "bad faith" under Wis.
Stat. § 112.01(9) because bad faith under the UFA requires
interpretation of a term in a specific statute. Under Wisconsin
common law, the definitions of bad faith and good faith can vary
depending on the context in which they arise. For example, in
contract law, bad faith does not simply mean the absence of good
faith because good faith can be defined in a number of ways by
contract. Amoco Oil Co. v. Capitol Indem. Corp., 95 Wis. 2d
530, 542, 291 N.W.2d 883 (Ct. App. 1980). In an insurance
context, bad faith and good faith have developed definitions
relative to an insurer's obligations. Roehl Trans., Inc. v.
Liberty Mut. Ins. Co., 2010 WI 49, ¶49, 325 Wis. 2d 56, 784
N.W.2d 542.
¶33 That said, our task is to define bad faith as it is
used in Wis. Stat. § 112.01(9). We are required to interpret
and apply the provisions of § 112.01 "to effectuate its general
purpose to make uniform the law of those states which enact it."
§ 112.01(14). Given that legislative directive, as we define
14
No. 2016AP636
bad faith, we consider judicial decisions from other
jurisdictions that have adopted the UFA.10
a. Bad faith principles and criteria
¶34 There are a number of general principles and specific
criteria that appear repeatedly in decisions from other
jurisdictions as courts have considered how to analyze and to
define bad faith. We will not address all of them, but rather,
we will discuss those general principles and specific criteria
that appear most frequently and have been central to the
reasoning of many courts as they sought to analyze and define
bad faith.
¶35 We begin by noting that under the UFA when presented
with the issue of bad faith, generally courts consider the
circumstances surrounding each fiduciary transaction,
individually. They do not aggregate circumstances as though
each transaction were a part of preceding transactions. We
agree that aggregation of transactions is inapposite, relying on
the structure of Wis. Stat. § 112.01(9) and prior UFA decisions.
¶36 Wisconsin Stat. § 112.01(9) states that "[i]f a check
is drawn upon the account of a fiduciary's principal in a bank
by a fiduciary, who is empowered to draw checks upon his or her
10
All states that have adopted the UFA have not adopted the
same version as has Wisconsin, e.g., Peoples Nat. Bank v. Guier,
145 S.W.2d 1042, 1047 (Ky. 1940) (explaining that the Kentucky
version of the UFA does not contain the same provisions as
Wisconsin has in Wis. Stat. § 112.01(9)). Sometimes the
differences in state law matter in regard to the usefulness of a
decision from such a state and sometimes they do not.
15
No. 2016AP636
principal's account," the bank is liable to the principal if
"its action in paying the check amounts to bad faith."11 Section
112.01(9) does not envision aggregation of general protections
from fiduciary misconduct.12 As the Eighth Circuit recently
explained, "[t]he UFA is drawn in terms of specific transactions
made in violation of certain fiduciary obligations." Buffets,
Inc., 732 F.3d at 899. It does not provide "general protection"
to principals, but rather, "provides principals limited
protection against a bank's knowing or bad-faith processing of a
specific transaction that breaches a fiduciary obligation." Id.
at 900; see also Rosemann v. St. Louis Bank, No. 14-CV-983-LLR,
slip op. at *14 (E.D. Mo. Nov. 17, 2015). Furthermore, a bank
has no obligation to piece together various transactions by a
fiduciary, but rather it is permitted to engage in the
presumption that the fiduciary is acting in accord with the
fiduciary's lawful authority for each transaction. Gen. Ins.
Co. of Am. v. Commerce Bank of St. Charles, 505 S.W.2d 454, 457
(Mo. Ct. App. 1974).
11
Wisconsin Stat. § 112.01(9) also provides that if "a
check is payable to the drawee bank and is delivered to it in
payment of or as security for a personal debt of the fiduciary
to it, the bank is liable to the principal if the fiduciary in
fact commits a breach of the fiduciary's obligation as
fiduciary." This appears to assign a bank greater potential for
liability. However, those circumstances are not present in the
matter before us.
12
We also note that the text of Wis. Stat. § 112.01(9)
employs singular forms of nouns and verbs.
16
No. 2016AP636
¶37 This is not to say that when examining an individual
transaction about which the bank has become suspicious, previous
transactions by the fiduciary cannot be examined as the bank
considers whether the fiduciary has breached a fiduciary
obligation in the current transaction. The focus, however, is
on whether the bank exhibited bad faith with regard to the
individual transaction in question at the time the transaction
occurred. Mikrut v. First Bank of Oak Park, 832 N.E.2d 376, 387
(Ill. App. 2005).
¶38 In their decisions, courts often have opined on
whether the standard for bad faith is subjective or objective,
with the majority concluding that the test is subjective. See,
e.g., Caputo, 748 A.2d at 514. The conclusion that bad faith is
determined by a subjective standard contrasts with the due care
or objective reasonableness standard applicable to negligence
determinations because the UFA directs that negligence is
insufficient to support liability for a fiduciary's conduct.
See id. And finally, the vast majority of UFA decisions hold,
and Koss Corporation has repeatedly conceded, that bad faith
under the UFA is an intentional tort. See Lawyers Title Ins.
Corp. v. Dearborn Title Corp., 904 F. Supp. 818, 820 (N.D. Ill.
1995). It would be unusual to conclude that an intentional tort
does not require subjective intent.
¶39 In regard to particular factors that are indicative of
bad faith, most courts have concluded that dishonesty is a
necessary component in the assessment of whether a bank has
acted in bad faith. See, e.g., Caputo, 748 A.2d at 514
17
No. 2016AP636
(explaining that the dishonesty standard "has been a static
epithet in our bad faith jurisprudence"); Research-Planning,
Inc. v. Bank of Utah, 690 P.2d 1130, 1132 (Utah 1984) (reasoning
that bad faith requires a dishonest purpose and implies some
motive of self-interest by the bank); Bd. of Cty. Comm'rs of Hot
Springs Cty. v. First Nat'l Bank of Thermopolis, 368 P.2d 132,
139 (Wyo. 1962) (concluding that bad faith "is not simply bad
judgment" but "imports a dishonest purpose"); Nat'l Cas. Co. v.
Caswell & Co., 45 N.E.2d 698, 699 (Ill. App. Ct. 1942) (holding
that "bad faith imports a dishonest purpose"); Edwards v.
Northwestern Bank, 250 S.E.2d 651, 657 (N.C. 1979) (adopting the
dishonesty standard for bad faith and concluding that dishonesty
"is, unlike negligence, wilful"); C-Wood Lumber Co. v. Wayne
Cty. Bank, 233 S.W.3d 263, 284 (Tenn. Ct. App. 2007) (requiring
a UFA plaintiff to prove that "the bank was acting dishonestly
or that the bank actually knew [the fiduciary] was breaching her
fiduciary obligations").
¶40 When the bank permits a fiduciary to use the
principal's funds to pay his or her personal debt to the same
bank where the principal's account is located, dishonesty of a
type involved in bad faith is shown. Maryland Cas. Co., 340
F.2d at 554 (affirming that "where a bank had both reason to
suspect a misappropriation by the fiduciary and a monetary
interest in the continuance of such activity" dishonesty under
the UFA is evidenced) (citing Union Bank and Trust Co. v. Girard
Trust Co., 161 A. 865 (Pa. 1932)).
18
No. 2016AP636
¶41 In contrast to negligence, dishonesty is viewed as
requiring purposeful bank conduct. See, e.g., Caputo, 748 A.2d
at 513 (concluding that dishonesty is "a way of differentiating
bad faith from negligence in terms of purpose."); Guild v. First
Nat'l Bank of Nev., 553 P.2d 955, 958 (Nev. 1976) (concluding
that a showing of "conscious purposeful misconduct" is required
for bad faith).
¶42 In Davis v. Pa. Co. for Ins. on Lives & Granting
Annuities, 12 A.2d 66 (Pa. 1940), the Pennsylvania Supreme Court
articulated a test for distinguishing bad faith from mere
negligence that has since been repeated in numerous UFA cases
across the country:
At what point does negligence cease and bad faith
begin? The distinction between them is that bad
faith, or dishonesty, is, unlike negligence, willful.
The mere failure to make inquiry, even though there be
suspicious circumstances, does not constitute bad
faith unless such failure is due to the deliberate
desire to evade knowledge because of a belief or fear
that inquiry would disclose a vice or defect in the
transaction,——that is to say, where there is an
intentional closing of the eyes or stopping of the
ears.
Id. at 69 (internal citations omitted). The court's reasoning
supports the conclusion that "a thing is done in bad
faith . . . only when it is done dishonestly and not merely
negligently." Id. at 68. Many states use this "dishonesty
standard" to define bad faith. See, e.g., Smith v. Halverson,
273 N.W.2d 146, 151-52 (S.D. 1978); Sugarhouse Fin. Co., 440
P.2d at 870.
19
No. 2016AP636
¶43 However, the dishonesty involved in bad faith does not
require "a high degree of moral guilt." Maryland Cas. Co., 340
F.2d at 554; see also Caputo, 748 A.2d at 514 (dishonesty
"should not be interpreted as having sinister implications").
"Neither criminal fraud nor downright corruption is an essential
ingredient of legal 'bad faith.'" Maryland Cas. Co., 340 F.2d
at 554. Rather, "wrongdoing or some motive of self-interest" by
the bank is required for bad faith. Sugarhouse Fin. Co., 440
P.2d at 870.
¶44 In addressing dishonesty, none of these opinions
eliminated the subjective purpose requirement that has been a
necessary component of bad faith under the UFA. In Caputo, for
example, the New Jersey Supreme Court explained that the
dishonesty standard is "a way of differentiating bad faith from
negligence in terms of purpose." Caputo, 748 A.2d at 514. In
Maryland Cas. Co., where the Bank of Charlotte permitted a
fiduciary to credit checks written on the principal's account to
her personal debt at the bank, the Fourth Circuit asked whether
it was commercially unjustifiable for the payee to "disregard
and refuse to learn facts readily available." Maryland Cas.
Co., 340 F.2d at 554. The Eighth Circuit has recently
reaffirmed that a bank cannot be liable for failing to
investigate suspicious circumstances unless that failure to
investigate is due to "the deliberate desire to evade knowledge
because of a belief or fear that inquiry would disclose a vice
or defect in the transaction." Buffets, Inc., 732 F.3d at 901
(citations omitted); see also Nations Title Ins. of N.Y., Inc.
20
No. 2016AP636
v. Bertram, 746 N.E.2d 1145, 1151 (Ohio App. 3d 2000)
(concluding that "failure to make inquiry, even though there be
suspicious circumstances, does not constitute bad
faith . . . unless such failure is due to the deliberate desire
to evade knowledge because of a belief or fear that inquiry
would disclose a vice or defect in the transaction").
Subjective intent grounded in dishonest purpose has been
required in the majority of UFA decisions.
¶45 Koss Corporation points to language from a few
opinions that it contends evidences an objective test for bad
faith, citing Caputo, Master Chem. Corp. v. Inkrott and UNR-
Rohn, Inv. v. Summit Bank of Clinton Cty.
¶46 In Caputo, the court reasoned that "where facts
suggesting fiduciary misconduct are compelling and obvious, it
is bad faith to remain passive and not inquire further because
such inaction amounts to a deliberate desire to evade
knowledge." Caputo, 748 A.2d at 514.
¶47 Master Chem. Corp. v. Inkrott, 563 N.E.2d 26, 31 (Ohio
1990), employs similar language in explaining that a bank acts
in bad faith when "facts and circumstances" are "so cogent and
obvious that to remain passive would amount to a deliberate
desire to evade knowledge because of a belief or fear that
inquiry would disclose a defect in the transaction." According
to Koss Corporation, the words "would amount to a deliberate
desire" taken from Inkrott and Caputo suggest that an actual,
subjective desire to evade knowledge need not exist. Koss
Corporation also asserts that because courts deciding summary
21
No. 2016AP636
judgment motions under the UFA have asked whether "a trier of
fact could conclude that it was commercially unjustifiable for
[the bank] to disregard and refuse to learn facts readily
available," as occurred in UNR-Rohn, Inc. v. Summit Bank of
Clinton Cty., 687 N.E.2d 235, 239 (Ind. App. 1997) an objective
standard is inferred.
¶48 Koss Corporation's arguments are interesting, but when
the quoted language is read in context, they do not support the
use of an objective standard to define bad faith. For example,
in Caputo, the court clarified the phrase, "amounts to a
deliberate desire to evade knowledge." The court explained that
it was "differentiating bad faith from negligence in terms of
purpose." Caputo, 748 A.2d at 514. The court further clarified
that the required determination was "whether the bank recklessly
disregarded or was purposefully oblivious to facts suggesting
impropriety by Caputo." Id. Caputo explained that "bad faith
denotes a reckless disregard or purposeful obliviousness of the
known facts suggesting impropriety by the fiduciary." Id. The
court's reasoning is based on a subjective test. Stated
otherwise, negligence, for which an objective standard is
employed, is insufficient to support bad faith under Wis. Stat.
§ 112.01(9).
¶49 The existence of facts suggesting fiduciary misconduct
can, of course, serve as strong evidence of bank dishonesty,
such as when facts are so "compelling and obvious" that the
factfinder may be able to infer dishonesty on the part of a bank
employee. The focus, however, must be on the employee's state
22
No. 2016AP636
of mind, not on the circumstances alone. This is what the
Caputo decision meant by describing fiduciary misconduct as
"compelling and obvious" to the bank's employee; otherwise, it
would not have held that "the test for good faith or bad faith
is a subjective one." Caputo, 748 A.2d at 514. To focus
exclusively on facts suggesting fiduciary misconduct, without
considering their effect on the employee's state of mind, would
be to transform the test for "bad faith" into an objective one,
and would thereby cause Wisconsin's interpretation of the UFA to
be inconsistent with the majority of other jurisdictions that
have adopted the UFA.
¶50 Similarly, the "commercially unjustifiable" language
from cases similar to Inkrott, 563 N.E.2d at 31, and UNR-Rohn,
Inc., 687 N.E.2d at 239, does not support Koss Corporation's
contention when read in context. As a starting point, Koss
Corporation focuses exclusively on the words "commercially
unjustifiable" without considering the context in which the term
"commercially unjustifiable" is employed. Courts ask whether it
was commercially unjustifiable to "disregard and refuse to learn
facts readily available." Id. To "refuse" to learn facts is to
deliberately choose not to learn them. This necessarily implies
a subjective suspicion that such facts may exist.
¶51 Koss Corporation asserts that if we conclude that bad
faith requires a deliberate failure to investigate suspicious
circumstances, such a conclusion would swallow the "actual
knowledge" prong of the UFA. We disagree. The actual knowledge
phrase in Wis. Stat. § 112.01(9) requires the bank to have
23
No. 2016AP636
"actual knowledge that the fiduciary is committing a breach of
the fiduciary's obligation as fiduciary." § 112.01(9). Bad
faith, on the other hand, requires a bank to have knowledge of
compelling and obvious facts that raise a subjective suspicion
that a fiduciary has breached its fiduciary obligations.
Furthermore, with knowledge of such compelling and obvious
facts, the willful failure to further investigate those facts
must be due to the bank's desire to avoid potentially obtaining
actual knowledge of a fiduciary's misconduct. Buffets, Inc.,
732 F.3d at 901; see also Mikrut, 832 N.E.2d at 385 (explaining
that to establish bad faith, evidence must be presented that the
bank suspected the fiduciary was acting improperly and
deliberately refrained from investigating so that the bank could
avoid knowledge that the improper fiduciary conduct).
b. The test for bad faith13
¶52 From the foregoing discussion, we recognize several
UFA foundational principles that form the framework for
analyzing a bank's conduct when bad faith is alleged. First,
bad faith is reviewed on a transaction by transaction basis,
such that the facts known to each individual bank employee are
not aggregated to form collective knowledge of the bank. Colby
v. Riggs Nat'l Bank, 92 F.2d 183, 195 (D.C. Cir. 1937)
(concluding that "[i]t must be remembered also that practically
13
We do not adopt the court of appeals test because, as we
explain below, we set out a test that is more consistent with
the majority of jurisdictions that have defined bad faith under
the UFA than is the test chosen by the court of appeals.
24
No. 2016AP636
all the clues are not known to any one employee of the bank, and
that the facts known to any one employee are not sufficient to
arouse suspicion."). Second, whether a bank acted in bad faith
is determined at the time of the breach of fiduciary duty, not
by looking back at transactions that occurred many months
earlier. Bolger, 143 Wis. 2d at 777-78 n.5.
¶53 Third, bad faith is an intentional tort; negligence by
a bank is insufficient to show bad faith. Lawyers Title Ins.
Corp., 904 F. Supp. at 820 (citing Restatement (Second) of Torts
§ 8A cmt.b (1965)); Wis. Stat. § 112.01(1)(c). Fourth,
considerations of bad faith require analyses of a bank's actions
to determine its subjective intent. Caputo, 748 A.2d at 514;
Attorneys Title Guar. Fund, 179 F. Supp. 2d at 1277 (concluding
that bad faith "is the subjective deliberate desire to evade
knowledge").
¶54 In regard to specific evidence necessary to support an
allegation that a bank acted in bad faith, a claimant who shows
bank dishonesty will be successful. A majority of courts have
held that "[b]ad faith does not exist if the bank was acting
honestly." Rheinberger, 150 N.W.2d at 41; Official Comm. of
Unsecured Creditors of Allegheny Health, Educ. & Research Found.
v. Pricewaterhouse Coopers, LLP, 2:0001684, slip op. at *12
(W.D. Penn. July 19, 2011); Guild, 553 P.2d at 958.
¶55 Bad faith requires some evidence of bank dishonesty
such as a bank willfully failing to further investigate
compelling and obvious known facts that suggest fiduciary
misconduct because of a deliberate desire to evade knowledge of
25
No. 2016AP636
fiduciary misconduct. Caputo, 748 A.2d at 514; see also Trenton
Trust Co. v. W. Sur. Co., 599 S.W.2d 481, 492 (Mo. 1980)
(concluding that the failure to further investigate suspicious
circumstances is not bad faith "unless such failure is due to
the deliberate desire to evade knowledge because of a belief or
fear that inquiry would disclose a vice or defect in the
transaction"). Bank inaction under those circumstances is an
intentional tort. Id.; see also Davis, 12 A.2d at 69
(explaining that the distinction between negligence and bad
faith "is that bad faith, or dishonesty, is, unlike negligence,
wilful").
C. Application
¶56 The evidence presented by Koss Corporation does not
raise a genuine issue of material fact as to whether Park Bank
acted in bad faith during any transaction related to Sachdeva's
embezzlement.14 We first address Koss Corporation's arguments
that Park Bank's policies and general practices constitute bad
faith; then we address the three types of transactions Sachdeva
employed: cashier's checks, petty cash requests, and wire
transfers.
1. Policies and General Practices
¶57 Many of Koss Corporation's allegations in regard to
bad faith are driven by Koss Corporation's assertion that Park
14
Generally, the determination of bad faith is for the
trier of fact unless only one finding can be made as a matter of
law. N.J. Title Ins. Co. v. Caputo, 748 A.2d 507, 514 (N.J.
2000).
26
No. 2016AP636
Bank's general practice of not enforcing bank policies
contributed to Koss Corporation's loss. For example, Koss
Corporation asserts that Park Bank had a "practice of giving out
cashier's checks . . . to persons not authorized on the
signature card," had "inadequate policies to detect suspicious
activity," and "routinely violated" its stated wire transfer
policy. These allegations could go toward proving negligence.
However, negligence is not at issue; Koss Corporation has
voluntarily dismissed its negligence claim. Park Bank's general
practices do not suggest that any employee of Park Bank
deliberately failed to investigate compelling and obvious known
facts that suggested impropriety by Sachdeva because of the
belief or fear that such inquiry would disclose fiduciary
misconduct.
¶58 Koss Corporation cites to Inkrott, 563 N.E.2d 26, in
which the Supreme Court of Ohio found bad faith under the UFA
when a bank had "established a procedure where a transfer from
one corporate account to another would be presumed correct and
would not be questioned." Id. at 31. Koss Corporation contends
this suggests that a bank's policy, itself, is sufficient to
support a finding of bad faith. However, assuming without
deciding that the Inkrott decision is not an outlier, Inkrott is
distinguishable from the case now before us.
¶59 In Inkrott, the court determined that the policies
enacted by the bank were "more than negligent," they were
"designed to promote [the bank's] own self-interest in
derogation of the Uniform Commercial Code and beyond the
27
No. 2016AP636
protections provided by the Uniform Fiduciaries Act." Id. at
31. In other words, the Inkrott decision concluded that in
establishing bank policies, the bank enacted deficient
procedures for the purpose of allowing the bank to avoid
discovering evidence of misconduct by fiduciaries. Here, there
has been no offer of proof that Park Bank established deficient
bank policies in order to avoid discovering fiduciary
misconduct.
¶60 Koss Corporation's allegation is quite the opposite.
Koss Corporation alleges that Park Bank's general practice of
carelessly failing to follow its own policies facilitated
Sachdeva's embezzlement. However, carelessness is a negligence
standard, Zastrow v. Journal Commc'ns, Inc., 2006 WI 72, ¶30,
291 Wis. 2d 426, 718 N.W.2d 51, and negligence is insufficient
to support a claim for bad faith under the UFA. O'Neal v. Sw.
Mo. Bank of Carthage, 118 F.3d 1246, 1251 (8th Cir. 1997).
2. Cashier's Checks
¶61 Koss Corporation alleges that Park Bank's processing
Sachdeva's requests for cashier's checks constituted bad faith.
Koss Corporation points to Park Bank's method of readying
cashier's checks for non-signatories, as well as Holly Pape's
testimony, years after cashier's checks were issued, that the
number of cashier's checks Mulvaney ordered was "strange."15
15
Holly Pape was the Park Bank employee assigned to work
with Koss Corporation.
28
No. 2016AP636
¶62 Over the ten years of Sachdeva's embezzlement, 49 bank
employees issued the 359 cashier's checks to Koss Corporation
employees at Sachdeva's request.16 Koss Corporation has provided
no evidence that any of those 49 employees was dishonest in
processing Sachdeva's requests because the employee believed the
transaction in which he or she engaged was improper for Sachdeva
to have initiated. Stated otherwise, there is no evidence that
any Park Bank employee had knowledge of compelling and obvious
facts that suggested impropriety by Sachdeva that the employee
willfully failed to further investigate because of a deliberate
desire to evade knowledge of Sachdeva's misconduct or that such
an employee shared his or her suspicions with another employee.17
¶63 Another problem for Koss Corporation is the relevance
of the evidence it did present. That a non-signatory made
requests for cashier's checks and later picked them up is not
relevant to the issue of bad faith. Koss Corporation does not
dispute that its employees were acting at Sachdeva's direction,
or argue that any of its other employees stole money. Koss
Corporation does not explain how Mulvaney's being a non-
signatory amounted to an obvious and compelling fact that
16
Park Bank issued more than 60,000 cashier's checks during
that same period of time.
17
Although we do not examine transactions collectively when
reviewing a claim of bad faith, we note that Park Bank provided
monthly statements to Koss Corporation. Those monthly
statements included a complete listing of every transaction
Sachdeva initiated, including the date and the amount of each
transaction.
29
No. 2016AP636
Sachdeva was breaching her fiduciary obligations to Koss
Corporation.
¶64 With respect to the $60,568.03 counter check that a
non-signatory drafted, cashed and used to purchase two cashier's
checks, Koss Corporation has never asserted that this
transaction was not personally initiated by Sachdeva or honestly
completed by Park Bank. Koss Corporation appears to argue that
Park Bank was negligent in permitting a non-signatory this much
latitude, but negligent conduct is not sufficient to support bad
faith, which is grounded in intentional conduct. It is
undisputed that Sachdeva, a signatory and Vice President of
Finance for Koss Corporation, carried out each cashier's check
transaction personally or through an agent. There is no genuine
issue of material fact as to whether Park Bank acted in bad
faith regarding any of the cashier's checks.
3. The Petty Cash Requests
¶65 Koss Corporation's argument surrounding petty cash
requests fails for reasons similar to those applied above to
cashier's checks. It is true that on 43 occasions, Sachdeva
drafted checks for petty cash at Koss Corporation's offices and
that Park Bank allowed non-signatories to retrieve the cash at
Sachdeva's request.18
¶66 Furthermore, Koss Corporation provides no proof that
Park Bank did not cash Koss Corporation checks in the honest
18
During that same period of time, Park Bank cashed more
than 7.6 million checks for its customers.
30
No. 2016AP636
belief that Sachdeva had authority to draft them and to
authorize a Koss Corporation employee to cash them. And
finally, no evidence has been proffered that any Park Bank
employee knew compelling and obvious facts that suggested
impropriety by Sachdeva and then willfully failed to further
investigate those facts because of a deliberate desire to evade
knowledge of misconduct by Sachdeva. Accordingly, there is no
genuine issue of material fact as to whether Park Bank acted in
bad faith under the UFA with regard to Sachdeva's petty cash
requests.
4. Wire Transfers
¶67 Koss Corporation's final argument is that Park Bank's
violation of its own wire transfer policy by conducting wire
transfers without a wire transfer agreement in place constituted
bad faith. Between 2004 and 2009, Park Bank made seven wire
transfers totaling $2 million from Koss Corporation's Park Bank
accounts to Koss Corporation's accounts with Chicago banks.19
¶68 Koss Corporation requested wire transfers over the
phone, sometimes by a non-signatory, in violation of Park Bank's
wire transfer policy. Sachdeva later used wire transfers from
Koss Corporation's Chicago banks to pay more than $16 million in
credit card bills. However, Sachdeva's misconduct with regard
to Koss Corporation's Chicago banks does not give rise to a
triable issue of fact in the matter before us.
19
During that same period of time, Park Bank made more than
40,000 wire transfers on behalf of its customers.
31
No. 2016AP636
¶69 No evidence has been proffered that Park Bank did not
honestly complete the wire transfers or that any Park Bank
employee who participated in them was suspicious that Sachdeva
was violating her fiduciary obligation to Koss Corporation in
commencing the transfers. Additionally, Koss Corporation does
not dispute that each wire transfer was to another Koss
Corporation bank account. Koss Corporation retained possession
of the funds after each wire transfer. Koss Corporation also
does not explain why wire transfers that were admittedly sent to
other Koss Corporation bank accounts would have raised
suspicions on the part of any Park Bank employee. Accordingly,
there is no genuine issue of material fact as to whether Park
Bank acted in bad faith with regard to any of the seven wire
transfers.
D. Summary Judgment
¶70 Summary judgment is granted when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Dufour, 370
Wis. 2d 313, ¶12; Wis. Stat. § 802.08(2).
¶71 While discovery was extensive and conducted for years,
no proof has been proffered from which a factfinder could find
that any Park Bank transaction was not honestly done. There is
much here from which a claim of negligence could be made.
However, negligence is not sufficient to establish bank
liability for transactions that were honestly done.
32
No. 2016AP636
Rheinberger, 150 N.W.2d at 41; Pricewaterhouse Coopers, LLP,
2:0001684, slip op. at *12; Guild, 553 P.2d at 958; Wis. Stat.
§ 112.01(1)(c). Furthermore, there was no proffer of proof from
which a factfinder could infer dishonesty by finding that Park
Bank willfully failed to further investigate compelling and
obvious known facts suggesting Sachdeva's embezzlement because
of Park Bank's desire to evade further knowledge out of fear
that it would find her misconduct. We conclude that the court
of appeals did not err in affirming the circuit court's summary
judgment that dismissed Koss Corporation's complaint against
Park Bank.
E. Third Party Claims
¶72 Park Bank brought third-party claims against Grant
Thornton LLP and Michael Koss for contribution and equitable
subrogation, contingent on Park Bank's having liability to Koss
Corporation. Because we conclude that Park Bank is not liable
to Koss Corporation, we affirm the circuit court's dismissal of
Park Bank's third-party claims without further comment.
III. CONCLUSION
¶73 We conclude Wis. Stat. § 112.01(1)(c) describes the
term "good faith" as honest bank acts, even when negligently
done, and consistent with the majority of jurisdictions'
interpretations of the UFA, "bad faith" is inconsistent with the
statutory criteria for "good faith." Therefore, bad faith
pursuant to § 112.01(9), which is an intentional tort, may be
shown by acts evidencing bank dishonesty such as a bank
willfully failing to further investigate compelling and obvious
33
No. 2016AP636
known facts suggesting fiduciary misconduct because of a
deliberate desire to evade knowledge of fiduciary misconduct.
¶74 We further conclude that given the allegations that
Koss Corporation asserts in regard to its claim that Park Bank
is liable for the intentional tort of bad faith, no proof has
been proffered of bank dishonesty wherein Park Bank willfully
failed to further investigate compelling and obvious known facts
suggesting fiduciary misconduct because of a deliberate desire
to evade knowledge of fiduciary misconduct.
¶75 Accordingly, we affirm the court of appeals'
affirmance of the circuit court's dismissal of Koss
Corporation's claim that Park Bank acted in bad faith in
processing Sachdeva's transactions. Because we conclude Park
Bank is not liable to Koss Corporation, we also affirm the
dismissal of Park Bank's third-party claims.
By The Court.—The decision of the court of appeals is
affirmed.
34
No. 2016AP636.awb
¶76 ANN WALSH BRADLEY, J. (concurring). I agree with
the lead opinion1 that summary judgment was properly granted to
1
I use the term "lead" opinion because I am concerned that
without this cue, the reader may mistakenly believe that the
lead opinion has precedential authority. Although five justices
join in the mandate of the opinion to affirm the court of
appeals, it represents the reasoning of only two justices
(Roggensack, C.J., joined by Ziegler, J.). I, along with
Justices Abrahamson and Dallet, join in the mandate, but would
rely on contrary reasoning. Justice Kelly, joined by Justice
Rebecca Grassl Bradley, does not join in the mandate of the
court, and would adopt a legal standard for bad faith that is
also contrary to the lead opinion's formulation. Thus, although
set forth in two separate opinions (this concurrence and Justice
Kelly's dissent), five justices would not adopt the legal
standard for bad faith set forth by the lead opinion.
In order to alert the public, litigants and courts, I urge
the court to adopt a procedure requiring the author of a lead
opinion to include an admonition that it is a lead opinion. The
rationale for such a procedure is simple: lest there be
confusion that the first appearing opinion be regarded as the
majority opinion.
Recently such confusion arose in news reports referring to
this court's opinion in State v. Mitchell, 2018 WI 84, 383
Wis. 2d 192, 914 N.W.2d 151, cert. granted, 2019 WL 166881 (U.S.
Jan. 11, 2019) (No. 18-6210), announcing that the United States
Supreme Court granted certiorari in that case. The first
appearing opinion gave no alert that it was anything other than
a majority opinion. Some media reports apparently assumed that
the first appearing opinion garnered sufficient votes and
referred to it as a majority opinion. See Kevin Lessmiller and
Barbara Leonard, Unconscious Driver DUI Case Taken Up by Supreme
Court, Courthouse News Service (Jan. 11, 2019),
https://www.courthousenews.com/justices-take-up-unconscious-
drivers-dui-case/. Litigants and courts may inadvertently make
the same erroneous assumption.
(continued)
1
No. 2016AP636.awb
Park Bank. See lead op., ¶71. I write separately, however,
because in interpreting a uniform law, the lead opinion unearths
a heretofore unknown standard for bad faith.
¶77 The lead opinion errs in its creative exercise in two
ways. First, this new standard for bad faith runs afoul of the
legislative directive that uniform laws are to be interpreted
uniformly with other jurisdictions. Second, the legal standard
The only reference to "lead opinions" in our Internal
Operating Procedures (IOPs) states that if during the process of
circulating and revising opinions, "the opinion originally
circulated as the majority opinion does not garner the vote of a
majority of the court, it shall be referred to in separate
writings as the 'lead opinion.'" Wis. S. Ct. IOP III(G)(4)
(Feb. 22, 2018). The potential confusion that arises from
mislabeling a lead opinion is exacerbated because the
precedential effect (or lack thereof) of a lead opinion is
uncertain. This remains an uncertainty even though two prior
certifications from the court of appeals have asked us to
resolve the issue. State v. Dowe, 120 Wis. 2d 192, 192–93, 352
N.W.2d 660 (1984); State v. Hawley, No. 2015AP1113-CR,
unpublished certification, 2-3 (Nov. 21, 2018); see also State
v. Lynch, 2016 WI 66, ¶145, 371 Wis. 2d 1, 885 N.W.2d 89(Abrahamson and Ann Walsh Bradley, JJ., concurring in part,
dissenting in part).
In the midst of the potential confusion and uncertainty,
the very least we can do is to alert the reader to beware that
no part of the rationale in the first appearing opinion has
garnered a majority vote. Unlike the first appearing opinion
in Mitchell, 383 Wis. 2d 192, which completely failed to advise,
the lead opinion here takes a first step. It announces that
only two justices join the opinion in totality. But that leaves
unanswered the question of whether any of the separate writings
join in part.
When the opinion originally circulated as the majority
fails to garner sufficient votes during the process of revising
and circulating opinions, it should as clearly as possible
advise the reader of its status. It is not something that
should be hidden or left for the reader to figure out.
2
No. 2016AP636.awb
for bad faith that the lead opinion embraces is too exacting on
bank customers with Uniform Fiduciaries Act (UFA) claims.
¶78 Because I determine that Wisconsin should adopt a bad
faith standard that promotes uniformity among the states,
vindicates the purpose of the UFA, and provides bank patrons
with a meaningful check on bank behavior, I respectfully concur.
I
¶79 The Uniform Law Commission, which has a diverse
representation from all fifty states, promulgates uniform laws
for consideration by state legislatures. "The purpose of
uniform laws is to establish both uniformity of statutory law
and uniformity of case law construing the statutes, ensuring
certainty and guidance to litigants who rely on the courts to
interpret uniform statutes in a predictable and consistent
manner." Estate of Matteson v. Matteson, 2008 WI 48, ¶42, 309
Wis. 2d 311, 749 N.W.2d 557 (citing M.J. Wallrich Land & Lumber
Co. v. Ebenreiter, 216 Wis. 140, 143, 256 N.W. 773 (1934)). In
this context, the goal is to provide uniformity and
predictability for both banks and those who use them, regardless
of the state in which the banking transaction occurs.
¶80 At issue here is the bad faith provision set forth in
Wisconsin's enactment of the UFA. Wis. Stat. § 112.01(9). It
is substantially identical to other state enactments throughout
3
No. 2016AP636.awb
the country.2 Pursuant to this provision, a bank that wrongfully
cashes a check can be liable to a defrauded principal if one of
two possibilities is fulfilled: (1) the bank has actual
knowledge that the fiduciary is committing a breach of his or
her obligations or (2) the bank acts in "bad faith."
§ 112.01(9).3 The question before us is the standard that must
be fulfilled for a plaintiff to prove "bad faith" in this
context.
¶81 The lead opinion observes that "bad faith" is
inconsistent with "good faith," a defined term in the statute.
Lead op., ¶3; see Wis. Stat. § 112.01(1)(c). Using the
definition of "good faith" as a springboard, it concludes that
"bad faith pursuant to § 112.01(9), which is an intentional
tort, may be shown by acts evidencing bank dishonesty such as a
bank willfully failing to further investigate compelling and
obvious known facts suggesting fiduciary misconduct because of a
2
See, e.g., Ariz. Rev. Stat. Ann. § 14-7507; 760 Ill. Comp.
Stat. 65/8; Ind. Code § 30-2-4-8; Md. Code Ann., Est. & Trusts
§ 15-207; Minn. Stat. § 520.08; N.J. Stat. Ann. § 3B:14-55; N.C.
Gen. Stat. § 32-9; Ohio Rev. Code Ann. § 5815.07; 7 Pa. Cons.
Stat. § 6392.
3
Wis. Stat. § 112.01(9) provides:
If a check is drawn upon the account of a fiduciary's
principal in a bank by a fiduciary, who is empowered
to draw checks upon his or her principal's account,
the bank is authorized to pay such check without being
liable to the principal, unless the bank pays the
check with actual knowledge that the fiduciary is
committing a breach of the fiduciary's obligation as
fiduciary in drawing such check, or with knowledge of
such facts that its action in paying the check amounts
to bad faith.
4
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deliberate desire to evade knowledge of fiduciary misconduct."
Lead op., ¶3.
¶82 Wisconsin Stat. § 112.01 does not define "bad faith."
However it does provide some guidance to our endeavor, dictating
that our state's UFA "shall be so interpreted and construed as
to effectuate its general purpose to make uniform the law of
those states which enact it." § 112.01(14). Thus, we look to
the case law of other states to guide our analysis.
¶83 The lead opinion correctly observes that other
jurisdictions have been inconsistent in defining bad faith when
it states, "variations in facts from which claims of bad faith
arose have resulted in different expressions of the definition
of bad faith, with bank dishonesty expressed in most decisions."
Lead op., ¶31 (citations omitted). However, it errs when it
deviates from the legislative directive that the interpretation
of our uniform laws be consistent with the interpretations
adopted by our sister states.
¶84 Contrary to the directive, the lead opinion adopts a
standard for bad faith that is inconsistent with the majority of
our sister states that have interpreted the uniform act. It is
not even consistent with a minority of states' interpretations.
The standard for bad faith that the lead opinion embraces does
not closely track the case law in any other jurisdictions.
Wisconsin stands alone.
II
¶85 Although there has been some inconsistency in
interpretation among the various states, not all expressions of
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the definition of bad faith are created equal. The standard
this court adopts should promote uniformity and vindicate the
purpose of the UFA, while at the same time avoid placing an
inordinate and nearly impossible burden on bank patrons.
¶86 Several courts have adopted such a standard. They
interpret the UFA bad faith standard to attach liability to a
bank in the event the bank does not affirmatively act but simply
"remains passive" in the face of compelling and obvious facts
suggesting fiduciary misconduct. See; In re Broadview Lumber
Co., 118 F.3d 1246, 1251 (8th Cir. 1997); Maryland Cas. Co. v.
Bank of Charlotte, 340 F.2d 550, 554 (4th Cir. 1965); Time
Savers, Inc. v. LaSalle Bank, N.A., 863 N.E.2d 1156, 1165 (Ill.
App. Ct. 2007);; New Jersey Title Ins. Co. v. Caputo, 748
A.2d 507, 514 (N.J. 2000). As the New Jersey supreme court
stated the standard in Caputo:
[B]ad faith denotes a reckless disregard or purposeful
obliviousness of the known facts suggesting
impropriety by the fiduciary. It is not established
by negligent or careless conduct or by vague
suspicion. Likewise, actual knowledge of and
complicity in the fiduciary's misdeeds is not
required. However, where facts suggesting fiduciary
misconduct are compelling and obvious, it is bad faith
to remain passive and not inquire further because such
inaction amounts to a deliberate desire to evade
knowledge.
Caputo, 748 A.2d at 514.
¶87 I would adopt the Caputo standard in Wisconsin. This
standard is preferable to that proffered by the lead opinion
because it promotes uniformity and emphasizes that no "high
degree of moral guilt" is required on the part of the bank. See
Wis. Stat. § 112.01(14); Maryland Cas. Co., 340 F.2d at 554.
6
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"Neither criminal fraud nor downright corruption is an essential
ingredient of legal 'bad faith.'" Maryland Cas. Co., 340 F.2d
at 554. The Caputo standard would permit bank patrons with
legitimate claims a better chance at relief. Otherwise, it is
the rare customer indeed that will be able to demonstrate
"willful" and "deliberate" actions on the part of a bank.
¶88 Importantly, such a standard also remains consistent
with the purpose of the UFA. The UFA was instituted to provide
banks with relief from the dire consequences of the previous
common law rule that entities dealing with fiduciaries had the
duty to assure that fiduciary funds were properly applied to the
account of the principal. Bolger v. Merrill Lynch Ready Assets
Tr., 143 Wis. 2d 766, 774, 423 N.W.2d 173 (Ct. App. 1988); see
Master Chem. Corp. v. Inkrott, 563 N.E.2d 26, 29 (Ohio 1990)
("By altering the common law, the Act relaxes some of the
harsher rules which require of a bank and of individuals the
highest degree of vigilance in the detection of a fiduciary's
wrongdoing.") (internal quotations and citations omitted). It
was meant to "facilitate banking and financial transactions and
place on the principal the burden of employing honest
fiduciaries[,]" thereby relieving banks of their previously
onerous duty. Bolger, 143 Wis. 2d at 775 (citing Johnson v.
Citizens Nat'l Bank of Decatur, 334 N.E.2d 295, 300 (Ill. App.
Ct. 1975)).
¶89 Although the UFA was certainly enacted to provide
relief to banks, it should not make proving a bank's liability a
mountain that is nearly impossible for a bank customer to scale.
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The Caputo standard strikes the right balance by furthering the
purpose of the UFA while at the same time allowing bank patrons
a more significant check on bank behavior.
III
¶90 I conclude that even under the less exacting Caputo
standard, summary judgment for Park Bank is appropriate. Koss
has not put forth evidence sufficient to create a genuine issue
of material fact that Park Bank remained passive in the face of
"compelling and obvious" facts suggesting fiduciary misconduct.
¶91 The sheer number of transactions and number of Park
Bank employees involved in cashing Koss checks belie Koss's
assertion that a nefarious pattern was apparent. Over the ten
years of Sachdeva's embezzlement, a period during which Park
Bank issued greater than 60,000 cashier's checks, forty-nine
bank employees issued the 359 cashier's checks requested by
Sachdeva. Lead op., ¶62, n.16. Neither "the amount and number
of transactions carried out on an account containing fiduciary
funds, nor the mere names of payees on checks drawn on that
account, are sufficient to create bad faith liability based on
the bank's action in paying such checks." Heffner v. Cahaba
Bank & Tr. Co., 523 So. 2d 113, 115 (Ala. 1988).
¶92 Indeed, Koss itself did not notice the fraud for
years. Even viewed in the light most favorable to Koss, the
facts of this case do not present the "compelling and obvious"
suggestion of fiduciary misconduct so as to foist liability onto
Park Bank.
¶93 For the above stated reasons, I respectfully concur.
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No. 2016AP636.awb
¶94 I am authorized to state that Justice SHIRLEY S.
ABRAHAMSON and Justice REBECCA FRANK DALLET join this
concurrence.
9
No. 2016AP636.dk
¶95 DANIEL KELLY, J. (dissenting). There is no bad
faith, Park Bank says, when it disburses funds from fiduciary
accounts while intentionally remaining ignorant of whether the
individuals making the requests have authority to transact
business on those accounts. The court agreed——not as a matter
of fact, but of law. Because the law does not require that
conclusion, I respectfully dissent.
*
¶96 Bad faith does not exist in a vacuum——it occurs in the
context of a specific relationship. Here, Koss Corporation
tells us the bad faith took place within a relationship created
by statute as well as the documentation requested and maintained
by Park Bank. With respect to the latter, Park Bank provided a
copy of its Depository Declaration form to Koss Corporation to
complete and return. The form's purpose is to identify the Koss
Corporation employees who have authority to transact business on
the company's accounts:
The persons and the number thereof designated by name
or title on the reverse side opposite the accounts
("authorized person") are authorized, for and on
behalf of the Depositor, (a) to sign checks, drafts
notes, bills, certificates of deposit and other orders
for payment or withdrawal of money from the accounts
and to issue instructions regarding them, (b) to
endorse for cash, deposit, negotiation, collection or
discount by the Bank any and all checks, drafts,
notes, bills, certificates of deposit or other
instruments or orders for the payment of money owned
or held by the Depositor.
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Koss Corporation identified its President & CEO,1 Vice-President
of Finance,2 Vice-President of Sales,3 and Vice-President of MIS
as the only "authorized persons" to transact business on its
general account.
¶97 Koss Corporation subsequently submitted a Corporate
Authorization Resolution to Park Bank, which (as with the
Depository Declaration) identified the employees authorized to
transact business on its accounts. It provided that "[a]ny
agent listed below, subject to any written limitations, is
authorized to exercise the powers granted as indicated
below: . . . (3) Endorse checks and orders for the payment of
money or otherwise withdraw or transfer funds on deposit with
this Financial Institution." The resolution identified only
three people: Michael J. Koss, John C. Koss Jr., and Sujata
Sachdeva. Together, the resolution and Depository Declaration
serve as the "signature card," and so I will refer to them as
such.
¶98 Park Bank had Koss Corporation's completed signature
card on file before Ms. Sachdeva embarked on her embezzlement
spree, and it remained on file all during her criminal behavior.
So that is the documentary aspect of Koss's relationship with
Park Bank.
1
Michael Koss
2
Koss Corporation's Vice-President of Finance was Sujata
Sachdeva.
3
John C. Koss Jr.
2
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¶99 The statutory aspect of the Park Bank/Koss Corporation
relationship arises from Wis. Stat. § 112.01(9), a provision
that received such intense, but narrow, inspection that its
significance seems to have become a little warped. The court's
analysis, with a heavy assist from the parties, gives the
impression that § 112.01(9) created a bank-specific tort of "bad
faith." It didn't. Customers were free to bring bad faith
actions against banks before adoption of § 112.01(9), and they
can, right now, bring those claims without ever mentioning this
statute. And that is true because § 112.01(9) does nothing but
give banks limited immunity from liability for improper
transactions on fiduciary accounts.
¶100 The statute starts with a grant of immunity, followed
by two potentially relevant exceptions.4 The immunity provision
says: "If a check is drawn upon the account of a fiduciary's
principal in a bank by a fiduciary, who is empowered to draw
checks upon his or her principal's account, the bank is
authorized to pay such check without being liable to the
principal . . . ." Wis. Stat. § 112.01(9). The relevant
exception clauses say the immunity applies "unless the bank pays
the check [1] with actual knowledge that the fiduciary is
committing a breach of the fiduciary's obligation as fiduciary
in drawing such check, or [2] with knowledge of such facts that
its action in paying the check amounts to bad faith." Id.4
The lead opinion lists all three potential exceptions to
immunity. See lead op., ¶¶27-28. However, because the facts of
this case do not implicate the third exception, I will confine
my attention to the first two.
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¶101 The first exception to immunity depends on the nature
of the fiduciary's actions. That is, the analysis focuses on
the fiduciary's culpable conduct in relation to his company. If
the fiduciary is "committing a breach of the fiduciary's
obligation," and the bank knows it, there is no immunity from
liability. Id. I'll refer to this exception as a "Fiduciary
Breach Exception." The second exception, however, depends on
the bank's conduct in relation to the company. If the bank's
knowledge of relevant facts makes the transaction an act of bad
faith, there is no immunity. That is to say, Wis. Stat.
§ 112.01(9) provides no defense against a common-law claim of
bad faith. I'll refer to this exception as a "Bad Faith
Exception."
¶102 The difference between the Fiduciary Breach Exception
and the Bad Faith Exception is important because Koss
Corporation's complaint described two conceptually distinct
categories of transactions. The first comprises those in which
Ms. Sachdeva personally contacted Park Bank to initiate the
process. The second encompasses those initiated by Koss
Corporation employees who were not listed on the signature card
maintained by Park Bank. The court collapsed the two, and
applied an analysis to the resulting mélange that was suitable
for only one of the categories. In doing so, it missed Park
Bank's potential bad faith with respect to many of the
transactions described by Koss Corporation.
¶103 A proper assessment of Park Bank's potential liability
requires us to test the two categories of suspect transactions
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against the two exceptions to the immunity provided by Wis.
Stat. § 112.01(9). The four possible permutations are as
follows:
1. Did the transactions initiated by Ms. Sachdeva
create a Fiduciary Breach Exception to immunity
(Combination 1)?
2. Did the transactions initiated by Ms. Sachdeva
create a Bad Faith Exception to immunity (Combination
2)?
3. Did the transactions initiated by unauthorized
Koss employees create a Fiduciary Breach Exception to
immunity (Combination 3)?
4. Did the transactions initiated by unauthorized
Koss employees create a Bad Faith Exception to
immunity (Combination 4)?
Because my purpose in this dissent is simply to demonstrate that
Koss Corporation identified matters that should have gone to the
jury for its consideration, I will not assess each of the
combinations; addressing only the fourth should be sufficient to
make the point.
*
¶104 With respect to Combination 4, the task is to
determine whether Park Bank acted in bad faith when it processed
a transaction on a fiduciary account without first checking the
fiduciary's name against the signature card. And so we arrive
at the heart of the lead opinion, to wit, the definition of "bad
faith." It said that, for purposes of Wis. Stat. § 112.01(9),
"bad faith" means "acts evidencing bank dishonesty such as a
bank willfully failing to further investigate compelling and
obvious known facts suggesting fiduciary misconduct because of a
deliberate desire to evade knowledge of fiduciary misconduct."
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Lead op., ¶¶3, 73. I disagree with this formulation because it
improperly mixes elements of the Fiduciary Breach Exception with
elements of the Bad Faith Exception.
¶105 As I mentioned above, the Fiduciary Breach Exception
inquires into the fiduciary's fidelity to his company. The Bad
Faith Exception does not. With respect to this exception, the
terms of Wis. Stat. § 112.01(9) require only that the bank know
of facts sufficient to demonstrate it——the bank——had acted in
bad faith in conducting the transaction. And although bad faith
may arise out of knowledge of a fiduciary's misconduct, the
statute's terms do not limit the tort to such a situation. Nor
does the statute's context or structure suggest such a reading
is necessary, or even reasonable. So when the court borrowed
"fiduciary misconduct" from the Fiduciary Breach Exception and
imported it into the Bad Faith Exception, it gratuitously and
atextually limited the type of facts that could establish a
bank's bad faith.
¶106 I agree with Justice Ann Walsh Bradley that we should
adopt a definition of "bad faith" that comports with our sister
states. However, I would not adopt (as she does) the Caputo
standard because it, too, conflates the Fiduciary Breach
Exception with the Bad Faith Exception. The New Jersey Supreme
Court said:
[B]ad faith denotes a reckless disregard or purposeful
obliviousness of the known facts suggesting
impropriety by the fiduciary. It is not established
by negligent or careless conduct or by vague
suspicion. Likewise, actual knowledge of and
complicity in the fiduciary's misdeeds is not
required. However, where facts suggesting fiduciary
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No. 2016AP636.dk
misconduct are compelling and obvious, it is bad faith
to remain passive and not inquire further because such
inaction amounts to a deliberate desire to evade
knowledge.
N.J. Title Ins. Co. v. Caputo, 748 A.2d 507, 514 (N.J. 2000).
The references to the fiduciary's "impropriety," "misdeeds," or
"misconduct" (if we adopted this test) would read into the Bad
Faith Exception limiting factors that simply do not exist in the
statute's language.
¶107 I think the United States Court of Appeals for the
Fourth Circuit more accurately assesses bad faith in this
context:
Neither criminal fraud nor downright corruption is an
essential ingredient of legal 'bad faith.' The 'bad
faith' test was borrowed from the Uniform Negotiable
Instruments Act. The standard used in construing the
term under that Act has not been evil motive. Instead
courts have asked whether it was 'commercially'
unjustifiable for the payee to disregard and refuse to
learn facts readily available. At some point, obvious
circumstances become so cogent that it is 'bad faith'
to remain passive.
Maryland Cas. Co. v. Bank of Charlotte, 340 F.2d 550, 554 (4th
Cir. 1965) (citations and footnote omitted). This standard is
compatible with the language of Wis. Stat. § 112.01(9) because
it does not limit the tort to instances of fiduciary misconduct.
Instead, it accurately reflects the statutory structure in that
it allows a plaintiff to address the bank's bad faith
independently from that of the fiduciary.
*
¶108 Applying those principles to this case inevitably
leads to the conclusion that the circuit court should have
allowed Koss Corporation to submit the Combination 4
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transactions to the jury. Everyone acknowledges that Park Bank
allowed Koss Corporation employees who were not listed on the
signature card to request and pick up cashier's checks. See
lead op., ¶63.5 They also agree that Park Bank allowed one such
employee to draft a counter check against Koss Corporation's
account, cash it, and use the proceeds to purchase two cashier
checks. Id., ¶64. The facts of record demonstrate that a jury
could find Park Bank acted in bad faith when it remained
intentionally ignorant of whether the individuals transacting
business on Koss Corporation's accounts had the authority to do
so.
¶109 In summarily dismissing the significance of this
conduct, the court illustrated the defect in its analytical
structure. It said that "Koss Corporation does not explain how
Mulvaney's being a non-signatory amounted to an obvious and
compelling fact that Sachdeva was breaching her fiduciary
obligations to Koss Corporation." Id., ¶63. That misses the
point. If we were analyzing this case under the Fiduciary
Breach Exception to immunity, we would be interested in Ms.
Sachdeva's conduct toward Koss Corporation. But we aren't doing
that analysis, and so we aren't particularly interested in Ms.
Sachdeva's behavior. We are instead assessing Koss
5
Although these employees were not listed as individuals
authorized to transact business on Koss Corporation's accounts,
they were, nonetheless, fiduciaries. According to Wis. Stat.
§ 112.01(1)(b), a "fiduciary" includes an "agent" of a
corporation. It is fair to say that the Koss Corporation
employees were holding themselves out as agents of the company
when they transacted business on Koss Corporation's accounts.
8
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Corporation's claims under the Bad Faith Exception to immunity,
which means the proper focus is on Park Bank's conduct toward
Koss Corporation.
¶110 Properly re-oriented, the undisputed facts reveal a
pattern of conduct that should cause any corporate officer's
heart to fearfully skip a beat, or several. Park Bank said,
unapologetically(!), that its policy is to remain intentionally
and steadfastly ignorant of whether an individual has the
authority to transact business on a fiduciary account. Avoiding
that knowledge takes some effort because the information resides
in the bank's own records. It's in the signature card, the
specific purpose of which is to tell the bank which of Koss
Corporation's employees may access the company's accounts. Yet
the bank deliberately and consistently refused to consult the
signature card to determine whether it was helping an
unauthorized person gain access to a fiduciary account.
¶111 This is not evidence of negligence, as the court would
have it. Id., ¶57. Negligence would be a bank employee
forgetting to check the signature card, or checking so cursorily
that the names failed to register in his mind, or a training
regimen that failed to teach employees to check the signature
cards, or an inconstant enforcement of a policy to check the
signature cards. None of that is at issue here. What Park Bank
did was intentional. It chose to ignore its depositors'
signature cards. It chose not to know whether the Koss
Corporation employees with whom it was dealing had the authority
to access the company's accounts. It chose to have a policy of
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ignorance with respect to its customers' instructions. The
consequence of those intentional choices was that it disbursed
enormous sums of money to people who were not authorized to
access Koss Corporation's accounts.
¶112 This does not mean, however, that Park Bank is
necessarily liable to Koss Corporation. It is possible that a
jury would find no bad faith in Park Bank's conduct. Further,
Koss Corporation must still prove that Park Bank's actions were
the proximate cause of its damages. If Park Bank had called
Koss Corporation when an unauthorized employee tried to access
its accounts, perhaps Ms. Sachdeva's embezzlement attempt would
have been revealed. We know this is possible, because her
scheme came to light when American Express observed suspicious
activity on Koss Corporation's account and called to
investigate. Or perhaps Park Bank's call would have gone to Ms.
Sachdeva, who would have been in a position to ratify what the
unauthorized employee was doing.
¶113 These "perhaps" are within the jury's province, and a
jury should have been allowed to consider them. Caputo, 748
A.2d at 514 ("The test for good or bad faith is a subjective one
to be determined by the trier of fact unless only one inference
from the evidence is possible."). By concluding, as a matter of
law, that Park Bank's intentional ignorance of its own records
could not amount to bad faith, we erred.
¶114 For the foregoing reasons, I respectfully dissent.
¶115 I am authorized to state that Justice REBECCA GRASSL
BRADLEY joins this dissent.
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1