Jan. 29, 2019 – An employee embezzled $34 million from Koss Corporation over 10 years, drawing on Koss’s bank accounts at Park Bank in Milwaukee. Recently, the Wisconsin Supreme Court ruled Park Bank is not liable despite claims it failed detect the fraud.
Sujata Sachdeva was Koss Corporation’s vice president of finance and was authorized to conduct banking transactions through Koss’s accounts at Park Bank.
Through various methods, Sachdeva initiated transactions – often using other Koss employees – to siphon the embezzled funds for her own personal use. She was caught after requesting multiple wire transfers to an out-of-state bank holding Koss accounts.
An American Express employee called Koss Corporation CEO Michael Koss to inform him that Sachdeva was paying her credit card with wire transfers from Koss’s bank account in Chicago. Ultimately, Sachdeva pled guilty to six counts of wire fraud, was sentenced to 11 years in prison and ordered to repay the $34 million in restitution.
Koss Corporation sued Park Bank, alleging the bank engaged in bad faith by allowing the Sachdeva transactions. The allegations asserted that Park Bank violated the Uniform Fiduciaries Act (UFA), Wis. Stat. section 112.01, which creates liability if banks pay a check with actual knowledge that a client-fiduciary is breaching his or her fiduciary obligations or with knowledge that its action in paying the check amounts to “bad faith.”
The UFA does not define “bad faith,” but says “a thing is done ‘in good faith’ … when it is in fact done honestly, whether it be done negligently or not.”
In Koss Corporation v. Park Bank, 2019 WI 7 (Jan. 29, 2019), a majority (5-2) ruled there was no bad faith by Park Bank and upheld lower court rulings dismissing the case in favor of Park Bank. However, a majority of justices could not agree on reasoning.
Chief Justice Patience Roggensack’s lead opinion, joined by Justice Annette Ziegler, noted that bad faith is an intentional tort and negligence is insufficient to show bad faith.
“[B]ad faith … 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,” Chief Justice Patience Roggensack wrote in a lead opinion.
“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 for security for, personal debts of Sachdeva at Park Bank,” the chief justice wrote.
The lead opinion rejected the claim that Park Bank acted in bad faith because it did not follow its own policies and failure to follow internal procedures contributed to the loss.
“Koss Corporation alleges that Park Bank’s general practice of carelessly failing to follow its own policies facilitated Sachdeva’s embezzlement,” the lead opinion noted.
“However, carelessness is a negligence standard … and negligence is insufficient to support a claim for bad faith under the UFA.” The lead opinion noted that 49 bank employees issued 359 cashier’s checks at Sachdeva’s request but there was no evidence that any of them were dishonest in processing the checks. The lead opinion also found no evidence of bad faith in processing wire transfers and other transactions.
Justice Ann Walsh Bradley wrote a concurring opinion, joined by Justices Shirley Abrahamson and Rebecca Dallet. They agreed that the lawsuit against Park Bank was properly dismissed, but for reasons that differed from the lead opinion.
In addition, A.W. Bradley noted that two other justices dissented, meaning the chief justice’s lead opinion lacks precedential value on the legal standard for bad faith.
“Thus, although set forth in two separate opinions (this concurrence and Justice Kelly’s dissent), five justices would not adopt the legal standard for bad faith set forth by the lead opinion,” wrote Justice A.W. Bradley, who urged the court to adopt “a procedure requiring the author of a lead opinion to include an admonition that it is a lead opinion.”
“The rationale for such a procedure is simple: lest there be confusion that the first appearing opinion be regarded as the majority opinion.”
In this case, the three concurring judges did not agree with the lead opinion’s announced standard for bad faith, concluding that it departs from other jurisdictions, and “uniform laws are to be interpreted uniformly with other jurisdictions.”
“The standard for bad faith that the lead opinion embraces does not closely track the case law in any other jurisdictions,” A.W. Bradley wrote. “Wisconsin stands alone.”
The concurrence said several states have adopted a UFA bad faith standard “to attach liability to a bank in the event the bank does not affirmatively act but simply ‘remains passive’ in the face of compelling and obvious facts suggesting fiduciary misconduct.”
This Caputo standard, adopted by the New Jersey Supreme Court and other jurisdictions, is the preferable standard for Wisconsin, Justice A.W. Bradley explained.
“Although the UFA was certainly enacted to provide relief to banks, it should not make proving a bank’s liability a mountain that is nearly impossible for a bank customer to scale,” wrote Justice A.W. Bradley wrote, noting that summary judgment was still appropriate in favor of Park Bank, “even under the less exacting Caputo standard.”
Justice Daniel Kelly wrote a dissent, joined by Justice Rebecca Bradley. They said certain questions should have been submitted to the jury, not decided on summary judgment, and also offered a different standard in determining a bank’s bad faith: whether it was “commercially unjustifiable for the payee to disregard and refuse to learn facts readily available,” a standard announced by the Fourth Circuit Court of Appeals.
“This standard is compatible with the language of Wis. Stat. § 112.01(9) because it does not limit the tort to instances of fiduciary misconduct,” Justice Kelly wrote.
“Instead, it accurately reflects the statutory structure in that it allows a plaintiff to address the bank’s bad faith independently from that of the fiduciary.”
The dissenters noted that Park Bank disregarded its policies to check whether a person was authorized to transact business on a fiduciary account, even though that information was in the bank records. But a jury should have decided if that intentional act rose to the level of bad faith under the proper legal standard, the dissent said.