Crawford Supply Group, Inc. v. LaSalle Bank, N.A. 2010 U.S. Dist. LEXIS 4691 (N.D. Ill. 2010)

March 11, 2010

Various family trusts, trust beneficiaries, and businesses of the family of Siegfried and Miriam Fieger (plaintiffs) sued LaSalle Bank, N.A. (LaSalle) for allegedly assisting the Fieger family accountant, Robert Rome in the embezzlement of nearly $6 million.

Seven different plaintiffs maintained checking accounts at LaSalle, and from 2003 – 2007, Rome embezzled approximately $2.6 million from those accounts. He also allegedly transferred an additional $3.1 million in the plaintiffs’ funds from other banks to his accounts at LaSalle.

In his capacity as accountant, trustee, executor and fiduciary to the plaintiffs, Rome had the authority to manage their funds, sign checks, and deposit and transfer funds on their behalf. The plaintiffs alleged that LaSalle improperly honored checks from Rome, allowed him to deposit trust funds in his individual accounts, and made unauthorized transfers for him. Additionally, Rome set up a joint checking account in his name, and allegedly forged the signature of the other account owner – an individual trust beneficiary – that Rome used to launder some of the embezzled money.

The plaintiffs alleged that LaSalle knew Rome was acting as their fiduciary, and that LaSalle knew or should have known that he was breaching his fiduciary obligations when he transferred funds to his own accounts. The plaintiffs asserted that LaSalle’s conduct was either knowing assistance of Rome’s actions or bad faith. The plaintiffs believed that the size and frequency of Rome’s transactions were “red flags” that should have made LaSalle suspicious of Rome’s activities.

According to the plaintiffs, LaSalle’s failure to investigate Rome’s embezzlement prevented them from uncovering the extent of Rome’s actions and LaSalle’s involvement in his conduct. The plaintiffs asserted a variety of causes of action, including violation of Illinois’ Fiduciary Obligations Act, 760 ILCS 65/1 et seq. (Fiduciary Obligations Act) for LaSalle’s alleged knowledge that Rome breached his fiduciary duties, and failure to investigate Rome in a manner that amounted to bad faith. LaSalle moved to dismiss the plaintiffs’ claims for procedural reasons and on the grounds that their claims were precluded by the Fiduciary Obligations Act.

In Illinois, the Fiduciary Obligations Act governs liability between a bank and a fiduciary acting in his or her fiduciary capacity. The purpose of the act is to place the burden of hiring honest fiduciaries on the principal, rather than on banking institutions. Section 65/2 of the act provides that, “A person who in good faith pays or transfers to a fiduciary any money or other property which the fiduciary as such is authorized to receive, is not responsible or the proper application thereof by the fiduciary.” Under the act, a bank will usually not be liable to the principal for the fiduciary’s actions, absent actual knowledge that the fiduciary is breaching his or her fiduciary duties. Accordingly, under the act, a bank will not be liable for negligence and a plaintiff cannot succeed in an action against a bank without proving actual knowledge or bad faith.

The court granted LaSalle’s motion to dismiss the plaintiffs’ claims because the plaintiffs failed to allege sufficient facts to create the inference that LaSalle had actual knowledge of Rome’s embezzlement, or that LaSalle was otherwise acting in bad faith when it dealt with Rome. The court distinguished what LaSalle “should have known” from what LaSalle actually knew.

Illinois courts routinely hold that a fiduciary’s deposit or transfer of money from fiduciary accounts into the fiduciary’s individual accounts, by itself, does not support an inference of the bank’s actual knowledge or bad faith. Likewise, the court found that the plaintiffs’ complaint failed to show that LaSalle suspected Rome of wrongdoing, or that LaSalle intentionally chose not to investigate him. Accordingly, the Fiduciary Obligations Act provided LaSalle with a blanket defense to the plaintiffs’ claims, which claims the court dismissed. (Although the court dismissed all of the plaintiffs’ claims, it stated that the individual beneficiary whose name was on the fraudulent account may be able to sue LaSalle for negligence in her individual capacity.)

The plaintiffs in this case sought recovery from LaSalle for the millions of dollars lost due to their accountant’s embezzlement. In this case, Illinois’ Fiduciary Obligations Act provided a strong defense for the corporate fiduciary against the plaintiffs’ actions. Nevertheless, corporate fiduciaries should always be mindful of the risk of fraud, and should have sophisticated risk management policies and procedures in place. This case should also serve as a reminder to high net worth individuals and trust beneficiaries to be mindful of threats to the family’s wealth. Prudence requires a regular review of account statements and financial transactions, regardless of who is designated as the family’s managing agent.