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From Banking and Finance Law Daily, August 14, 2014

Negligence claim against bank for not inquiring about account rejected

By Thomas G. Wolfe, J.D.

In rejecting an insurance company’s negligence claim against a bank for the bank’s alleged failure to inquire into whether an investment advisor was authorized by his employer to open a “doing-business-as” account, the U.S. Court of Appeals for the Eighth Circuit determined that the bank owed no recognized duty to the employer under Missouri law. In affirming the dismissal of the insurance company’s negligence claim, the Eighth Circuit was not convinced that the Missouri Supreme Court would be willing to extend a bank’s duty to cover the type of “misuse of the d/b/a account” presented by the facts of the case (National Union Fire Insurance Company of Pittsburgh, PA v. Raczkowski, Aug. 13, 2014, Kelly, Circuit Judge).

Background. In November 2004, Mark Henry, an investment advisor for Investment Centers of America, Inc. (ICA), opened a bank account at Hometown Bank, N.A. Although Henry did not have permission from ICA to open the bank account, Henry established the account as “Mark L. Henry d/b/a Investment Centers of America.”

According to the court record, the only identification Henry provided to Hometown Bank to open the d/b/a account was a driver's license, and Henry was the only signor on the account. Hometown Bank contended that, at the time of the account’s opening, it believed that Henry was “self-employed and acting on his own behalf.”

Hometown Bank allowed Henry to accept checks made out to ICA from its customers and permitted him to deposit approximately $292,000 into the “d/b/a” account. While Henry later withdrew this money for his own personal use, the fraud was discovered in August 2006. Eventually, ICA settled matters with its defrauded customers. At the same time, ICA’s insurer, National Union Fire Insurance Company of Pittsburgh, PA, actually paid the claims on behalf of ICA under an applicable policy.

Lawsuit. National Union then filed a lawsuit against Hometown Bank in the U.S. District Court for the Western District of Missouri, claiming that the bank was negligent by not confirming with ICA that Henry possessed the requisite authority from his employer to open the d/b/a account. National Union sought damages for ICA’s injury and for ICA’s having to settle with customers whom Henry had defrauded.

Trial court. In granting Hometown Bank's motion to dismiss National Union’s action, the federal district court determined that the bank “owed no duty to ICA or National Union.” Finding that National Union had failed to state a viable cause of action, the trial court dismissed the case. National Union appealed that ruling to the Eighth Circuit.

Legal issue. At the outset, the Eighth Circuit noted that the Missouri Supreme Court “has not decided whether a bank has a duty to verify that an individual seeking to open a d/b/a account possesses legal authority to use a particular d/b/a name.” Accordingly, the federal appellate court observed that it was called upon to review how the Missouri Supreme Court would construe the current state of the law.

Hometown Bank argued that since ICA was never actually the bank's customer, Henry was “merely an imposter posing as an agent” of ICA; therefore, the bank never had any relationship with ICA that would impose a duty to ICA on the part of the bank. In contrast, National Union argued that since Hometown Bank believed it had a relationship with ICA indirectly—through Henry’s d/b/a bank account—that belief was sufficient to establish a relationship between the parties and giving rise to a duty owed to ICA by the bank.

Lack of relationship. In reviewing pertinent case law on the issue, the court emphasized that while it would not be difficult for a bank to discern the identity of a natural person, it would be “significantly more difficult” for a bank to discern a person's authority to open a d/b/a bank account. In the court’s view, while a natural person typically carries standard forms of identification, where a d/b/a account is involved, “complex laws govern rights to use fictitious names, labels, and other entity monikers, making identification a much more difficult endeavor for a bank.”

Although the Eighth Circuit acknowledged that, as a result of Henry’s opening of the d/b/a account, Hometown Bank believed it was entering into a relationship “with an entity named Investment Centers of America,” the court declined to find that there was a fiduciary relationship between the parties. The Eighth Circuit asserted that the “weight of authority” on the issue supported its determination.

Lack of duty. While National Union contended that, regardless of the relationship between the parties, the bank still had a duty “to investigate whether ICA had given Henry the authority to open the d/b/a account,” the Eighth Circuit disagreed. Distinguishing other cases where a duty to inquire further was applicable, the court maintained that requiring Hometown Bank to investigate Henry's authority to use the name “Investment Centers of America” was too broad in scope and “admits of no practical limitation.” The court stated, “We are hesitant to recognize such a duty in any event and are particularly hesitant to recognize such a duty in the heavily regulated and statutory laden fields of banking and negotiated instruments.”

Further, the Eighth Circuit stressed that requiring a bank to investigate further in some circumstances—such as the case before it—not only “could be particularly burdensome” but also might “prevent a bank's search from even locating the correct d/b/a entity” in some instances. Underscoring the fact that the Missouri Supreme Court has required courts to consider the “magnitude of the burden” when assessing the existence of a duty, the Eighth Circuit ultimately concluded that it was not convinced that the Missouri Supreme Court would “extend the duty articulated in misuse of the d/b/a account in this case. The burden of imposing this ill-defined and undisputedly broad duty is simply too great in this context.”

The case is No. 13-2184.

Attorneys: Tyson H. Ketchum (Armstrong & Teasdale) for National Union Fire Insurance Company of Pittsburgh, PA. James L. Baker (Merrick & Baker) and James Kevin Checkett (Checkett & Pauly) for Hometown Bank, NA.

Companies: Hometown Bank, N.A.; Investment Centers of America, Inc.; National Union Fire Insurance Company of Pittsburgh, PA

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