Financial services firm owed no duty to clients of the firm’s customer and was not liable in negligence for those clients’ losses due to the customer’s check kiting scheme using the customer’s account at the firm; no private right of action exists under Bank Secrecy Act. Bottom v. Bailey, 767 S.E. 2d 883 (N.C. Ct. 2014).
Investors who owned real property contracted with a provider of intermediary services (the “intermediary”) to facilitate a tax-deferred sale of the real property under Section 1031 of the Internal Revenue Code. The proceeds of the sale were deposited into a fiduciary account at a bank. Without the investors’ knowledge, the bank automatically transferred the majority of the proceeds into a separate account in the name of the intermediary at the bank. The owner of the intermediary conducted a check kiting scheme for ten years, transferring funds back and forth between the separate account at the bank and a different account at Morgan Stanley Smith Barney (“Morgan Stanley”).
Eventually, the bank notified the intermediary that the account at the bank contained insufficient funds to cover certain certified checks that had been issued to Morgan Stanley, and placed a hold on the intermediary’s account at the bank. After receiving notice that the intermediary’s account had been frozen, the investors sought return of their funds from the bank, which refused. The investors then brought an action against the intermediary, its individual owner, the bank, and Morgan Stanley. Among the investors’ claims were allegations that Morgan Stanley was liable to them for common law negligence and for violations of N.C. Gen. Stat. §32–9 and the Bank Secrecy Act, 31 U.S.C. §5311.
The North Carolina Court of Appeals affirmed a trial court decision dismissing the investors’ negligence claim against Morgan Stanley. The court, relying on prior cases holding that securities brokerage firms and banks have no legal duty to their customers’ clients, concluded that, because Morgan Stanley had no relationship with the investors, it owed them no legal duty and could not be liable to them for negligence. The court also ruled that Morgan Stanley could not be liable under a North Carolina statute (N.C. Gen. Stat. §32-9 (2013)) addressing the liability of a bank for paying checks drawn by a fiduciary on his principal’s account in breach of the fiduciary’s obligation. The statute in question only applied to fraudulent withdrawals from an account of the principal; here, the account at Morgan Stanley was not in the name of the investors, they were not principals and they could not bring a claim under that statute.
As a matter of first impression, the court also held that the Bank Secrecy Act, 31 U.S.C. § 5311, does not create a private cause of action. Accordingly, the trial court did not err in dismissing the claims thereunder.
