Koss Corp. v. Park Bank, No. 2016AP636, 2019 WL 350386, 385 Wis.2d 261 (Wis. 01/29/19)
In an action that created a new standard of faith in Wisconsin under its Uniform Fiduciaries Act (“UFA”), the Supreme Court of Wisconsin (the “Court”) ruled in favor a bank involving the unauthorized disbursement of funds due to fraudulent actions. The majority opinion created a standard by which a bank is judged by each individual transaction, rather than looking at the bank’s action in the aggregate.
Sujata Sachdeva, an acting vice president of Koss Corp. (“Koss”) embezzled nearly $34 million from Koss through a series of methods including the unauthorized distribution of checks, disbursement of petty cash and payment of illegal wire transfers through Koss’ corporate banking partner, Park Bank (“Park Bank”). When an American Express employee notified Koss that corporate funds were used to pay Sachdeva’s personal credit card bills, Sachdeva was arrested. She pleaded guilty to six counts of wire fraud and was sentenced to 11 years in prison. Koss then sued Park Bank in Wisconsin state court for negligence and later amended the complaint to include a UFA bad faith claim. Park Bank then filed a third‑party complaint against Michael Koss and the auditors of Koss for contributory negligence.
Koss dismissed its negligence claim with prejudice and focused instead on its bad faith argument under the UFA. The trial court granted summary judgment in favor of Park Bank and the Wisconsin Court of Appeals affirmed this decision. Koss then appealed to the Court.
Koss argued that Park Bank had acted in bad faith in honoring the withdrawals from Koss accounts as Park Bank had sufficient knowledge of the operations and compliance protocols of Koss to detect such bad faith. As the UFA did not define “bad faith”, the Court focused its analysis on this issue. The majority stated that bad faith is determined by whether the bank willfully failed to investigate fiduciary misconduct in order to deliberately evade knowledge of any bad acts. The Court first determined that bad faith must be reviewed on a transaction by transaction basis, including the facts and circumstances known to the parties at the time of each transaction. The Court also reasoned that while bad faith is an intentional tort, negligence by a financial institution such as Park Bank is insufficient to argue acts of bad faith. With this standard of reasoning, the Court then looked to the subjective intent of Park Bank. In respect of Park Bank’s alleged bad faith in issuing cashier checks, Koss argued that any issuance to unauthorized persons without proper compliance controls to prevent such activity amounted to bad faith, rather than negligence. The Court disagreed and noted that no evidence was submitted that showed any hint of dishonesty over the course of issuing the checks, which was undertaken by 49 different employees and resulted in the issuance of 359 fraudulent checks. More importantly, there was no showing that Park Bank employees failed to perform proper investigative and compliance control measures currently in place at Park Bank during that time. In respect of Park Bank’s alleged disbursement of petty cash requests, the Court found no evidence of dishonesty or bad faith in Park Bank’s performance of this task. In respect of Park Bank’s failure to properly police wire transfers, the Court found the evidence that each transfer went to other Koss accounts compelling as this would not warrant additional investigation on the part of Park Bank and doing so would create an undue burden on banks in state of Wisconsin.
In a concurring opinion, three members of the Court argued that Wisconsin should adopt a more uniform approach to the bad faith as done by other states rather than adopting its own unique analysis. A dissenting opinion by two members of the Court held that Park Bank had remained intentionally ignorant when disbursing the funds as the individuals in question were not authorized to perform those transactions. Furthermore, one of the dissenting Justices wrote that a separate analysis of the transactions completed by Sachdeva herself rather than those carried out by agents or employees of Koss would have allowed the case to be brought before a jury for further consideration on the merits.
Article courtesy of Michael Robson of Greenberg Traurig, LLP
