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Koss Corp. v. Park Bank

Supreme Court of Wisconsin

January 29, 2019

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.

          Submitted on Briefs: oral argument: September 7, 2018

         REVIEW OF DECISION OF THE COURT OF APPEALS Reported at 379 Wis.2d 639, 907 N.W.2d 447');">907 N.W.2d 447 PDC No: 2018 WI.App. 1

          Circuit Court: Milwaukee County: (L.C. No. 2010CV21290) David L. Borowski Judge

          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 Lbrahim, and Eagen Avenatti LLP, Newport Beach, California. There was an oral argument by Ahmed Lbrahaim.

          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

          PATIENCE DRAKE ROGGENSACK, C.J.

         ¶1 We review a published decision of the court of appeals[1] that affirmed an order of the circuit court[2] 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.

         ¶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 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 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 Park Bank 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 check[6] 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, 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 Koss[7] directly and 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 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');">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 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)- (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'1 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'1 Bank, 334 N.E.2d 295, 300 (111. App. 1975) . Adoption of the UFA evinced a recognition of the economic importance of allowing 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' 1 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 Claim[8]

         ¶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 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 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 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 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 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).

         ¶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 (111. 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. 111. 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 (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' 1 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'1 Cas. Co. v. Caswell & Co., 45 N.E.2d 698, 699 (111. 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)).

         ¶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 ...


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