Commercial Division Blog

Posted: March 3, 2023 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Negligence, Motion to Dismiss; Motion for Judgment on the Pleadings

Court Grants Motion To Dismiss Negligence Claims Against Bank

In a Decision and Order, dated January 10, 2023, in Q3 Inv. Recovery Veh. LLC v. McEvoy, Index No. 657090/2020, Justice Andrea Masley granted Signature Bank’s motion to dismiss the amended complaint against it.  Plaintiff had alleged that Signature was negligent and grossly negligent for permitting investor funds deposited into an account at Signature to be fraudulently transferred out of the account rather than invested in a cryptocurrency exchange.  Noting that under New York law banks do not usually owe non-customers a duty to protect them from the intentional torts of their customers, the Court noted there was an exception for trust accounts or fiduciary accounts.  The Court explained:

"Ordinarily, of course, a depositary bank has no duty to monitor fiduciary accounts maintained at its branches to safeguard the funds in those accounts from fiduciary misappropriation. Indeed, "[i]n general, a bank may assume that a person acting as a fiduciary will apply entrusted funds to the proper purposes and will adhere to the conditions of the appointment.... Notwithstanding the aforecited rule, a depositary bank may still be held answerable for the loss of funds misappropriated from a fiduciary account if the bank, with knowledge of the fiduciary's diversion of trust funds, accepts such funds in payment of a personal obligation owed by the fiduciary to the bank or the bank otherwise has actual knowledge or notice that a diversion is to occur or is ongoing. Facts sufficient to cause a reasonably prudent person to suspect that trust funds are being misappropriated will trigger a duty of inquiry on the part of a depositary bank, and a bank's failure to conduct a reasonable inquiry when the obligation to do so arises will result in the bank being charged with such knowledge as inquiry would have disclosed."

(Home Sav. of Am., FSB v. Amoros, 233 AD2d 35, 38-39 [1st Dept 1997] [citations omitted].) Again, this duty to inquire does not impose upon banks "a duty to protect non-customers from a fraud involving depository accounts." (Matter of Agape, 681 F Supp2d at 360 [citation omitted] [finding that a duty is only triggered where trust accounts are concerned].) "The duty is therefore limited to special purpose fiduciary accounts." (AXH Air-Coolers, LLC v. Pioneer Bancorp, Inc., 2021 WL 5446947, * 4, 2021 US Dist LEXIS 224562 [ND NY 2021].)

In the absence of a bank account agreement specifying that the account is a trust account, plaintiff's allegations labeling the Q3I Account as a trust or fiduciary are insufficient to make it so. (Deutsche Bank Tr. Co. Americas v. Rado Ltd. Partnership, 2019 WL 1863272, * 8, 2019 US Dist LEXIS 70046 [SD NY 2019]; Zaz-Huff

Inc., 277 AD2d at 61.) The Q3I Account application (Application), which is a "Business Profile and Account Application," evidences that the Q3I Account is an ordinary depository account and not a trust or fiduciary account. (See NYSCEF 42, Application.) Although there is a separate application to fill out for a fiduciary  account, plaintiff does not allege that Q3I completed the "Fiduciary Client Profile and Account Application." (See NYSCEF 41, Mims aff 5-6; NYSCEF 44, Fiduciary Client Profile Application.) Further, on the Application, the Q3 Managers did not describe themselves as trustees for the Q3 Investors or indicate the account was "in trust for" or that the account would hold property belonging to the Q3 Investors. (See NYSCEF 42, Q3I Account Application Packet at 2-6.) On the Application, the Q3 Managers checked off that the Account was a business checking account for the purposes of "operating." (Id. at 5-6.) There are boxes for "other," but they were left blank. (Id.) Also, the Limited Partnership Banking Agreement designates Signature as "depository." (Id. at 40.) This documentary evidence contradicts plaintiff's conclusory allegation that the Q3I Account is a trust or fiduciary account.

Plaintiff alleges that Signature knew that the Q3I Account was a trust or fiduciary account based on its review of the Investment Documents. (NYSCEF 36, Amended Complaint 27-28.) This too is conclusory. Nowhere in the Investment Documents is it indicated that the Q3 Investors' funds would be held in trust or fiduciary accounts. In fact, Q3I's Limited Partnership Agreement submitted to Signature with the Application actually establishes that the funds provided to Q3I were investments in exchange for limited partnership interests and not funds to be held "in trust" for the Q3 Investors. (NYSCEF 42, Q3I Account Application Packet at 10.)

In addition, plaintiff's own allegations make clear that when the Q3 Investors' funds were deposited in the Q3I Account, it was in exchange for a limited partnership interest, and thus, the property of Q3I. (Id. 19 ["Q3I would take deposits in real currency from limited partners, [and] give them a proportional limited partnership interest in Q3I"], 27 ["Q3I Investors "purchased limited partnership interests in Q3I for the sole purpose of investing in cryptocurrency"], 68 ["According to the PPM, Victims could purchase limited partnership interests in Q3I, and Q3I would use investor funds to invest in cryptocurrencies...."].)

Because plaintiff fails to allege facts to overcome the "strong presumption" that Q3I Account is a conventional, general depository account, and a not a special purpose account, this court finds that the "duty to make a reasonable inquiry" exception does not apply here. As this exception does not apply, Signature, as a bank, did not owe plaintiff, a third-party, non-customer, a duty, and therefore, plaintiff cannot establish its claim for negligence, and in turn, gross negligence. (Home Sav.  of Am., FSB, 233 AD2d at 38; E. Meadow Driving Sch., Inc. v. Bell Atl. Yellow Pages Co., 273 AD2d 270, 271 [2d Dept 2000] ["existence of a duty is necessary to  state a cause of action for gross negligence"].)

Accordingly, plaintiff's claims for negligence and gross negligence against Signature are dismissed.

The attorneys at Schlam Stone & Dolan frequently litigate against banks.  Contact the Commercial Division Blog Committee at if you or a client have questions concerning such litigation.