Bank Held Liable for Checks Improperly Drawn on a Fiduciary Account

by Dan Conlisk

In DeLaRosa v. Farmers State Bank, 2015 WL 6917407 (Mo. Ct. App. Nov. 10, 2015), the Missouri Court of Appeals recently held a bank liable for the misappropriation of funds from an estate where the estate’s personal representative wrote checks from the estate’s account to the bank for personal purposes. As in virtually all estate and trust litigation, the facts of the case are complex. Further, as is also true in many such cases, it went on for years.

In 1991, Nancy Conyer was appointed personal representative of the Estate of Phyllis DeLaRosa (the “Estate”). In 1995 and 1996, Conyer wrote three checks from the Estate’s account to Farmers State Bank (the “Bank”). Id. at *1. The checks were titled in the Estate’s name and reflected that Conyer was the personal representative. Id. Conyer directed that the proceeds of the first check be deposited in her personal accounts, disbursed to her in cash and applied to a personal loan that she had with the Bank. Id. The proceeds of the two other checks were deposited in her personal accounts or distributed to her in cash. Id.

Conyer died later in 1996. The successor personal representative determined that the funds had been misappropriated and, on behalf of the Estate, sued the Bank. Id. In responding to discovery requests in 2006[1], the Bank represented that the proceeds of the checks had been deposited into the Estate’s account. Id. It did not disclose that the funds had actually been deposited in Conyer’s personal account and that it (the Bank) had received a portion of those proceeds in payment of a debt Conyer owed to the Bank. Id. The Bank also claimed that it did not maintain records old enough to account for the transactions. Id.

In 2008, based on the Bank’s claims that the check proceeds had been applied properly – even though the Bank had no documents to support this claim – the circuit court granted summary judgment in favor of the Bank. Id. at **1-2. The Estate appealed. The Court of Appeals reversed. It held, among other things, that “[b]ecause the Bank could not account for the funds beyond its naked, undocumented assertion that it placed the funds on deposit,” there was “an inference that the Bank improperly benefited from the Funds.” Id. at *2. In light of this, the Court ordered that the case be returned to the circuit court to give the Bank the opportunity “to overcome the presumption of bad faith and the presumption that the Bank still owes the funds to the [Estate].” Id.

When the case was returned to the circuit court in 2009, the Bank located records – which it had previously denied existed – showing: (1) how the checks’ proceeds actually were applied; (2) that Conyer did have loans with the Bank at the time the she had written the first check to the Bank from the Estate’s account; and (3) that the Bank received a portion of the proceeds of the first check as a payment on Conyer’s loan. Id. After a trial, the jury awarded the Estate the full amount of the three checks plus interest ($104,660[2]) and punitive damages ($150,000). Id.

On the Bank’s appeal from this verdict, the Court of Appeals found that the Bank properly was held was liable for the misappropriation of Estate assets. Much of the opinion focused on the parties’ dueling interpretations of Missouri’s Uniform Fiduciaries Law (the “UFL,” Mo. Rev. Stat. §469.270). Id. at **3-4. In certain circumstances, the UFL excuses banks from liability for accepting checks that are written by fiduciaries in breach of their fiduciary duties. Id.

But the Court held that the UFL did not provide protection to the Bank in this case, even though the Bank claimed that it did not have actual knowledge that Conyer was breaching her fiduciary duties by writing the checks. The Court reasoned that “[b]ecause the Bank was the payee on the instrument drawn by Conyer [on the Estate’s account], and knowingly accepted a portion of the proceeds as payment for the personal debt of Conyer to the Bank, the Bank is liable [under the UFL] for failing to inquire as to the propriety of the transaction.” Id. at *4. In short, because the Bank knew that the check was drawn on the Estate’s account but the proceeds were being used for a non-Estate purpose, it had a duty to inquire whether the transaction was proper.

As set forth above, only a portion of the proceeds from the first check were used to pay Conyer’s loan to the Bank. Nonetheless, the Court held that the Bank properly was liable for Conyer’s misappropriation of the proceeds of all three checks. It reasoned that “once the Bank accepted debt payments from the proceeds of Conyer’s first check, it had sufficient notice and knowledge of Conyer’s breach of duty on the second and third check transactions.” Id.

Finally, the Court upheld the jury’s award of punitive damages to the Estate. In seeking to have that award set aside, the Bank argued that there was no clear and convincing evidence that it acted intentionally and with evil motive in connection with the check transactions themselves. The Court flatly rejected this argument. It reasoned that DeLaRosa had requested punitive damages based upon the Bank’s effort to “cover up” the truth of the check transactions by concealing documents in discovery requests. Id. at *5. The Court concluded that, even though this cover up happened long after the Bank’s misappropriation of the check proceeds, it bore a sufficiently substantial nexus to the check transactions to support a punitive damage award: “the Bank’s conduct in concealing the records of the proceeds bears a direct relationship to the conversion of those proceeds. That the Bank may have been successful in shielding evidence which showed that it had benefited from the misappropriation for such a long time does not somehow render the subsequent conduct unrelated.” Id. at *5.

While complicated, DeLaRosa makes clear that banks dealing with fiduciaries, such as trustees and personal representatives, are not free to disregard facts indicating that those fiduciaries may be breaching their duties in transactions with the bank. The stakes are high when banks ignore such facts. In DeLaRosa, the Bank was held liable for all of the funds the personal representative misappropriated – plus interest and punitive damages – even though the Bank itself received only a small portion of those funds. Finally, DeLaRose reiterates the well-worn adage that the cover up is often worse than the crime.

 

[1] The opinion does not explain what occurred in the intervening ten years.

[2] Although the three checks totaled $39,000, prejudgment interest increased this amount to $104,660.