Sheppard Mullin Financial Institutions Law Blog

To hold a bank liable for aiding and abetting a breach of duty by corporate officers, is it enough to allege generally that the bank knew the officers "were engaged in wrongful or illegal conduct"? No. According to the Fourth District Court of Appeal, a plaintiff must allege the bank had "actual knowledge of the specific breach of fiduciary duty for which it seeks to hold the defendant liable." Thomas H. Casey, as trustee, v. U.S. Bank National Association, et al., 05 C.D.O.S. 2615 (March 28, 2005).

In this case, a bankruptcy trustee sued three banks liable for aiding and abetting certain corporate fiduciaries in looting the debtor corporation. The trustee alleged the banks actually knew the fiduciaries (1) were engaged in "wrongful or illegal conduct," (2) were "making unauthorized cash withdrawals," and (3) were "involved in a criminal or dishonest and wrongful enterprise and were, at the least, laundering money" - but not that the banks knew they were misappropriating funds from the corporation. Held: the trial properly sustained the banks' demurrers.

In providing a very helpful "brief primer on California banking law," the court of appeal reconciled two competing principles: "one that strictly limits a bank's duties to non-depositors and another that extends tort liability to anyone who knowingly aids and abets the tort of another." It also remanded to permit the trustee to allege, if he could, that the banks actually knew the fiduciaries were misappropriating funds from the corporation.

Click here for a copy of the opinion.