Dec. 12, 2017 – An employee embezzled about $34 million from her employer through banking transactions. The employer sued the bank, asserting a violation of the Wisconsin Uniform Fiduciaries Act, but a state appeals court recently upheld dismissal of the case.
Koss Corp. sued Park Bank after learning that one of its employees, Sujata Sachdeva, used the bank to siphon millions of dollars over 12 years. Sachdeva was ultimately convicted on multiple criminal charges, but Koss sued the bank to recover losses.
Koss maintained numerous accounts at Park Bank. Sachdeva, who worked in Koss’s accounting department, drew funds on those accounts with cashier's checks she was authorized to request. A signature was not required to obtain the checks, and the bank allowed Sachdeva’s assistant to request them on Sachdeva’s behalf.
Sachdeva used the cashier’s checks to pay personal creditors, including high-end retailers. During a five-year period, she requested 359 cashier’s checks.
She also wrote 43 checks drawn on accounts payable to Koss’s “petty cash” box and requested numerous wire transfers despite the absence of a wire transfer agreement with the bank, which had policies against wire transfers absent an agreement. The bank wired more than $16 million to pay Sachdeva’s personal credit card bills.
In 2009, an American Express employee called Koss’s CEO to report that funds had been wired from Koss’s account to pay Sachdeva’s credit card bill, which uncovered the scheme. She pled guilty to federal wire fraud and received 11 years in prison. The court ordered $34 million in restitution but, of course, Sachdeva did not have that money.
Koss filed a lawsuit against Park Bank, arguing the bank violated Wisconsin’s Uniform Fiduciaries Act (UFA) by ignoring “red flags” and violating its own policies. To prove a UFA violation, there must be evidence that a party acted in bad faith.
The Milwaukee County Circuit Court dismissed the case on summary judgment, concluding the bank “may have been negligent in its treatment of the Koss accounts” but provided “no evidence that Park Bank intentionally ignored Sachdeva’s embezzlement.”
In Koss Corp. v. Park Bank, 2016AP636 (Dec. 12, 2017), a three-judge panel for the District I Court of Appeals affirmed, noting that under UFA, banks are not liable to principals based on mere negligence. Only “bad faith” amounts to a violation.
Under Wis. Stat. section 112.01(9), the bank is not liable when an authorized employee draws checks “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.”
The term “bad faith” is not defined in the law. Thus, the court looked to other jurisdictions that have explored the issue to determine proof elements.
“[W]e conclude bad faith under the UFA requires proof of two elements: 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 deficit in the transaction at issue.” The panel reiterated that mere negligence is not enough.
Park Bank presented evidence that Sachdeva’s cashier’s checks were among more than 60,000 cashier’s checks that 49 different Park Bank employees issued during the same time period, and the seven wire transfers were among 40,000 wire transfers.
Park Bank also noted that it provided Koss with monthly statements, noting each transaction, and provided other evidence that Park Bank had no cause for concern or belief that investigating the transactions would uncover a fraudulent scheme.
“Thus, unless contradicted, the evidence Park Bank submitted in support of its summary judgment motion showed that Park Bank did not act in bad faith in connection with Sachdeva’s transactions,” wrote Appeals Court Judge Lisa Stark.
In addition, the panel ruled that Koss did not submit evidence sufficient to demonstrate a genuine issue of material fact on the issue of bad faith.
Although the transactions “may appear suspicious or odd in hindsight, Koss has not cited any evidence to indicate that, in the larger context of Koss’s banking practices and the banking practices of Park Bank’s other corporate clients, the transactions were suspicious enough to put Park Bank on notice of Sachdeva’s conduct,” Stark wrote.