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Koss Corp. v. Park Bank

Court of Appeals of Wisconsin, District I

December 12, 2017

Koss Corporation, Plaintiff-Appellant,
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.

         APPEAL and CROSS-APPEAL from a judgment and an order of the circuit court for Milwaukee County No. 2010CV21290: DAVID L. BOROWSKI, Judge. Judgment affirmed.

          Before Stark, P. J., Hruz and Seidl, JJ.

          STARK, P.J.

         ¶1 Over the course of about twelve years, Sujata Sachdeva embezzled approximately $34 million from her employer, Koss Corporation.[1] After the embezzlement was discovered and Sachdeva was convicted of multiple criminal offenses, Koss sued Park Bank, the financial institution through which Sachdeva obtained a large portion of the embezzled funds. Koss's complaint alleged Park Bank was liable for violating Wisconsin's version of the Uniform Fiduciaries Act (UFA). See WIS. STAT. § 112.01 (2015-16).[2] Park Bank moved for summary judgment, asserting it could not be held liable under the UFA because there was no evidence it acted in bad faith with respect to Sachdeva's transactions. The circuit court agreed and entered a judgment dismissing Koss's claim against Park Bank.

         ¶2 On appeal, Koss argues the circuit court erred in dismissing the action on summary judgment because genuine issues of material fact exist regarding whether Park Bank acted in bad faith, as that term is used in the UFA. We disagree and conclude the undisputed material facts do not demonstrate that Park Bank acted in bad faith. We therefore affirm the judgment dismissing Koss's claim.[3]

         BACKGROUND

         ¶3 Sachdeva was placed at Koss by a temporary employment agency in 1989 or 1990. She worked as a temporary employee in Koss's accounting department for three to five months, at which point she was hired as a permanent employee responsible for "[g]eneral accounting functions." In 1991, Sachdeva was promoted to the position of controller. Approximately one year later, she became Koss's vice president of finance, and at some point she was also named the secretary of Koss's board of directors.

         ¶4 Between about July 1997 and December 2009, Sachdeva embezzled approximately $34 million from Koss. During the time period in which the embezzlement occurred, Koss maintained multiple accounts at Park Bank. It is undisputed that Sachdeva improperly obtained funds from these accounts in three ways.

         ¶5 First, Sachdeva ordered cashier's checks drawn on funds from Koss's Park Bank accounts and then used those checks to pay her personal creditors. Sachdeva's process for obtaining these cashier's checks was as follows. Sachdeva or her assistant, Julie Mulvaney, would call Park Bank and request a cashier's check, providing Park Bank with: (1) the amount of the check; (2) the name of the payee; (3) the account from which the funds should be withdrawn; and (4) the name of the Koss employee who would pick up the check. A Park Bank employee would then process the cashier's check and place the original check, a copy of the check, and a debit memo for the transaction in an envelope labeled either "Koss Corporation" or with the name of the employee expected to pick up the check.

         ¶6 Sachdeva testified at her deposition that she was not required to sign anything or provide any written documentation in order to obtain cashier's checks, and Park Bank's employees did not ask her any security questions to verify her identity. Only Michael Koss (Koss's president, chief executive officer, and chief financial officer), John Koss, Jr. (the vice president of sales), Sachdeva, and the "vice-president of MIS" were authorized to conduct transactions involving Koss's accounts at Park Bank. However, it is undisputed that Mulvaney, who was not an authorized signatory on Koss's accounts, frequently requested cashier's checks at Sachdeva's direction. Holly Pape, a "relationship manager" employed by Park Bank who was assigned to Koss's accounts, testified Mulvaney was permitted to request cashier's checks based on her verbal representations that she was requesting them on Sachdeva's behalf.

         ¶7 After Sachdeva or Mulvaney requested a cashier's check from Park Bank, a Koss employee would go to Park Bank to pick up the envelope containing the check. The employee picking up the envelope was not required to sign anything in order to obtain it. He or she would then return to Koss and give the envelope to Sachdeva or Mulvaney. Sachdeva would subsequently mail the cashier's check to one of her creditors to pay her personal expenses.

         ¶8 Many of the cashier's checks Sachdeva obtained in this manner were made out to entities like American Express and Chase Manhattan Bank and were used to pay Sachdeva's personal credit card bills. Other checks were made out to payees denoted by their initials, such as "N.M., Inc." or "S.F.A., Inc." Sachdeva used these initials to disguise the fact that the checks were being used to pay luxury retailers like Neiman Marcus and Saks Fifth Avenue.

         ¶9 Between December 2004 and December 2009, Sachdeva requested 359 cashier's checks drawn on funds from Koss's accounts at Park Bank. The vast majority of the checks were for over $5, 000, and some were for over $100, 000. Sachdeva would often request multiple cashier's checks in a single day, sometimes payable to the same entity. In total, Sachdeva used cashier's checks obtained through Park Bank to embezzle about $13.3 million from Koss.

         ¶10 Sachdeva also embezzled funds from Koss by stealing money intended for Koss's petty cash box. It is undisputed that, between July 2005 and November 2009, Sachdeva wrote forty-three checks drawn on Koss's accounts that were payable to "Petty Cash." The checks ranged in amount from $500 to $9, 400, and the total amount of all forty-three checks was $171, 985. A Koss employee would take each check to Park Bank, endorse and cash it, and then return to Koss with the money. These employees were not authorized signatories on Koss's accounts at Park Bank. After an employee returned to Koss with money intended for the corporation's petty cash box, Sachdeva would take some of the money and instead use it to pay her personal expenses.

         ¶11 Sachdeva also used wire transfers as part of her embezzlement scheme. Between December 2004 and December 2009, Park Bank made seven wire transfers, totaling $2 million, from Koss's accounts at Park Bank to its accounts at a bank in Chicago. Either Sachdeva or Mulvaney requested those wire transfers. The requests were made over the phone, despite the fact that Koss did not have a wire transfer agreement on file with Park Bank, and, under those circumstances, Park Bank's own policies prohibited it from fulfilling wire transfer requests made by telephone. From February 2008 to December 2009, Koss's Chicago banks wired over $16 million from Koss's accounts to American Express, at Sachdeva's direction. That money was used to pay Sachdeva's personal credit card bills.

         ¶12 Sachdeva's embezzlement was discovered on December 18, 2009, when an American Express employee called Michael Koss and reported that Sachdeva had used funds wired from Koss's bank accounts to pay her personal credit card bills. Sachdeva was subsequently indicted on federal charges, and in 2010 she pled guilty to six counts of wire fraud. She was sentenced to eleven years in prison and was ordered to pay Koss $34 million in restitution.[4]

         ¶13 Koss filed the instant lawsuit against Park Bank on December 17, 2010. Koss's complaint asserted a single cause of action for negligence, based on Park Bank's issuance of the cashier's checks that Sachdeva used to pay her personal expenses. Koss later filed a first amended complaint, which added factual allegations regarding the petty cash checks and wire transfers described above. The first amended complaint reasserted Koss's negligence claim and added a second cause of action, which alleged Park Bank had acted in bad faith in connection with Sachdeva's transactions and was therefore liable for violating the UFA. In November 2013, Koss voluntarily dismissed its negligence claim against Park Bank. It later filed second and third amended complaints, both of which asserted a single cause of action for breach of the UFA.

         ¶14 Park Bank subsequently moved for summary judgment, arguing it could not be held liable under the UFA because there was no evidence it acted in bad faith with respect to Sachdeva's transactions. In response, Koss argued the evidence was sufficient to create a genuine issue of material fact as to whether Park Bank acted in bad faith. In particular, Koss cited evidence indicating that:

• Pape, Park Bank's relationship manager for Koss's accounts, told Michael Koss after Sachdeva's embezzlement was discovered that the number of cashier's checks Mulvaney had requested was "strange";
• Park Bank issued cashier's checks based on verbal requests by Sachdeva and Mulvaney, the latter of whom was not a signatory on Koss's accounts;
• Park Bank gave cashier's checks ordered by Sachdeva or Mulvaney to Koss employees who were not signatories on Koss's accounts and did not require those employees to provide signatures or verify their identities in any way;
• Park Bank allowed a Koss employee who was not a signatory on Koss's accounts to endorse a counter check payable to "Cash" for $60, 000, which money then funded two cashier's checks requested by Sachdeva; and
• Sachdeva testified at her deposition that one of the reasons she chose to use Park Bank to obtain cashier's checks for her embezzlement scheme was because Park Bank made it easy for her to do so.

         ¶15 Koss further asserted Park Bank ignored "red flags" associated with the cashier's checks and petty cash withdrawals-including the use of payees designated by initials-and "routinely violated its own policies in its handling of Sachdeva's wire transfer requests." Koss also contended Park Bank's "policies to detect suspicious activity were inadequate." Finally, Koss observed its banking expert had opined that Park Bank's conduct amounted to bad faith.

         ¶16 On March 11, 2016, the circuit court issued a twenty-four-page written decision granting summary judgment in favor of Park Bank. The court concluded "bad faith" under the UFA "requires a showing of some indicia of dishonest conduct or a showing of facts and circumstances '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.'" While the court acknowledged that determining the existence of bad faith is "an extremely fact-specific analysis, " it concluded Koss had not provided any evidence to indicate Park Bank had acted in bad faith by failing to investigate and discover Sachdeva's misconduct. The court explained that, while Park Bank "may have been negligent in its treatment of the Koss accounts, " Koss had not "provided any evidence that Park Bank ...


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