Bernkopf Goodman LLP v. Hebert et al

Filing 74

Judge Rya W. Zobel: Memorandum of Decision entered denying 35 Motion to Dismiss as moot; denying 44 Motion to Dismiss as moot; granting 53 Motion to Dismiss; granting 57 Motion to Dismiss for Failure to State a Claim (Urso, Lisa)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 11-11495-RWZ

BERNKOPF GOODMAN LLP
v.
WARREN J. HEBERT, et al.
MEMORANDUM OF DECISION
March 5, 2013

ZOBEL, D.J.
Plaintiff Bernkopf Goodman LLP (“Bernkopf”) alleges that defendants Warren J.
Hebert (“Warren”) and Carolyn M. Hebert (“Carolyn”) stole more than $500,000 that
Bernkopf had entrusted to them for federal employment tax payments. Bernkopf sues
not only the Heberts, but also Cornerstone Community Bank (“Cornerstone”) and RBS
Citizens, N.A. (“Citizens”), two banks through which Bernkopf’s money passed.
Cornerstone and Citizens now move to dismiss the counts alleged against them for
failure to state a claim.
I. Background1
Bernkopf is a law firm based in Boston. In 1999, Bernkopf hired CheckMaster
Payroll Service (“CheckMaster”) to pay its weekly federal and state employment taxes,
to issue payroll checks, and to file quarterly federal and state tax returns. CheckMaster
1

As appropriate on a motion to dismiss, the facts are taken as alleged in the complaint.
See Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 4 (1st Cir. 2011).

was a business owned and operated by Warren and Carolyn and based in Rhode
Island.
CheckMaster operated through accounts at Cornerstone, based in Tennessee,
and Citizens, based in Rhode Island. Cornerstone provided transfer services through
the Automatic Clearing House (ACH) network,2 while Citizens held CheckMaster funds
deposited in two accounts designated “Tax” and “Trust.”
The payroll processing system worked as follows: CheckMaster transferred
weekly payments from Bernkopf’s operating account (at TD Bank), through
Cornerstone, to CheckMaster’s accounts at Citizens. CheckMaster was then supposed
to make Bernkopf’s tax payments by transferring money from its Citizens accounts back
through Cornerstone to the IRS. In 2010, however, CheckMaster stopped sending
Bernkopf’s tax payments through Cornerstone to the IRS. Instead, CheckMaster simply
kept Bernkopf’s money.
The IRS alerted Bernkopf in 2011 that it had not received Bernkopf’s tax returns
or tax payments for the second, third, and fourth quarters of the previous year.
Bernkopf spoke with Warren, who insisted that he had properly filed the returns and
payments and that he would resolve the matter. He subsequently provided falsified
documents to Bernkopf and to the IRS to confirm that he had made the payments. The
IRS remained unsatisfied.
Bernkopf met with Warren on August 11, 2011. At that meeting, Warren

2

The ACH network processes large volumes of electronic financial transactions under the
oversight of NACHA (previously the National Automated Clearing House Association). See Intro to
NACHA, NACHA, https://www.nacha.org/intronacha (last visited Feb. 28, 2013).

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informed Bernkopf that CheckMaster was operated entirely by him and his wife, that it
was never incorporated, and that he personally had no liability insurance. He continued
to insist, however, that he had made the promised tax payments. He subsequently
provided falsified bank records to back up his assertions.
Out of patience, Bernkopf filed this suit on August 23, 2011. It named not only
Warren and Carolyn as defendants, but also Cornerstone and Citizens. It asserted
(inter alia) that Cornerstone and Citizens were negligent for failing to ensure that
Bernkopf’s tax payments were sent to the IRS. Carolyn and Citizens moved to dismiss
the original complaint; while those motions were pending, Bernkopf filed an amended
complaint. Cornerstone and Citizens now move to dismiss the amended complaint.
II. Legal Standard
A complaint must contain a “short and plain statement of the claim showing that
the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The court accepts as true all
factual allegations contained in the complaint, but not legal conclusions. Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). If the complaint’s factual allegations fail to state a
plausible claim, the complaint must be dismissed. Id. at 679.
III. Analysis
Cornerstone and Citizens each move to dismiss the claims against them in the
amended complaint. The amended complaint asserts four theories of liability against
these defendants: negligence (Counts XI-XII), breach of fiduciary duty (Counts XIIIXIV), breach of contract (Counts XV-XVI), and violation of Mass. Gen. Laws ch. 93A
(Count VI). In its opposition to each bank’s motion to dismiss, Bernkopf voluntarily
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dismisses its breach of contract and Chapter 93A claims. It additionally presents no
persuasive argument on its fiduciary duty claim against Cornerstone,3 and no argument
whatsoever on its fiduciary duty claim against Citizens. Thus, the only remaining claim
by Bernkopf against Cornerstone and Citizens is for negligence.
The parties dispute which state’s law applies to Bernkopf’s claims. Each party
advances the law of its home state—Massachusetts for Bernkopf, Tennessee for
Cornerstone, and Rhode Island for Citizens. I need not resolve the question, however,
because Bernkopf’s claims must be dismissed regardless of whose law applies.
In order to state a claim for negligence, Bernkopf must show that it was owed a
duty of care. See 74 Am. Jur. 2d Torts § 10. The parties agree that a bank generally
has no duty to monitor the activities of authorized account-holders and prevent
misappropriation. See, e.g., Go-Best Assets Limited v. Citizens Bank of Massachusetts,
972 N.E.2d 426, 431 (Mass. 2012). However, Bernkopf argues that an exception to that
rule applies here. Citing New York law, Bernkopf claims that where a bank knows a
particular account is held by a depositor in a fiduciary capacity for a principal, the bank
has a duty to the principal if it has actual knowledge or notice that funds in the account
are being misappropriated. See Lerner v. Fleet Bank, N.A., 459 F.3d 273, 287-88 (2d

3

As to the latter, Bernkopf argues only that “[u]nder Tennessee law, a bank that knows its
depositor is holding funds in its accounts as a fiduciary . . . itself also owes a fiduciary duty to the
depositor’s principals which is ‘akin to a fiduciary duty.’” Docket # 67, at 6-7 (quoting Chambers v. First
Trust & Sav. Bank, No. 030A1-9108-CH00293, 1992 WL 40191, at *4. (Tenn. Ct. App. Mar. 4, 1992)).
The argument is meritless. In the quoted section, Chambers held only that a quasi-fiduciary relationship
was created when a bank’s vice-president personally acknowledged court-ordered restrictions on
permissible withdrawals when opening guardianship accounts for two minor children. Id. No such
circumstances are present in this case, and Bernkopf cites no other authority for the asserted fiduciary
duty. Indeed, as Chambers itself recognizes, Tennessee law generally places no duty whatsoever on a
bank toward a fiduciary depositor’s principal absent “actual knowledge that the fiduciary is committing a
breach of his obligation . . . or . . . bad faith.” Id. at *2 (quoting Tenn. Code Ann. § 35-2-107).

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Cir. 2006).
To show that defendant banks had actual knowledge or notice of CheckMaster’s
misappropriation, Bernkopf makes the following factual allegations. As to Cornerstone,
Bernkopf alleges:
(1) Cornerstone and CheckMaster entered into an agreement for ACH transfer
services under which Cornerstone was to transfer tax payments from customers
to CheckMaster and then from CheckMaster to the IRS.
(2) Cornerstone transferred some funds from customers to CheckMaster that it did
not subsequently transfer from CheckMaster to the IRS.
(3) Cornerstone communicated directly with Warren about irregularities in making
tax payments to the IRS.
As to Citizens, Bernkopf alleges:
(1) Citizens maintained two accounts for CheckMaster, designated “Tax” and
“Trust.”
(2) These accounts showed a pattern of weekly or bi-monthly deposits without
corresponding debits, and occasional withdrawals of large sums.4
(3) The “Tax” account also shows other large withdrawals that Bernkopf claims were
used to settle lawsuits similar to the present one.5
(4) Citizens was served with a search warrant in September 2010 requiring it to
provide the Rhode Island State Police with CheckMaster’s account records.

4

For instance, the “Tax” account shows $336,000 in periodic deposits from Seekonk Supply, with
only $92,000 in corresponding debits and a six-month period of few or no corresponding debits. It
likewise shows $325,000 in deposits from High Tech Turning, with only $73,000 in corresponding debits
and seven months of few or no corresponding tax debits. Bernkopf alleges a similar pattern was repeated
with respect to other customers.
5

For instance, the “Tax” account paid $7,450 to the client escrow of law firm Revens, Revens
and St. Pierre (“Revens”) to settle a suit with CheckMaster customer Aspects, Inc.; it paid $133,418.96 in
April 2010 and $2,246.37 in October 2010 to settle a suit with CheckMaster customer Mount St. Rita
Health Centre; and it paid checks totaling $182,701.54 to settle a suit with CheckMaster customer Scott
Motors. Likewise, the account shows a withdrawal of $255,000 on September 23, 2010, and Citizens
issued two corresponding checks to the Revens on the same date. One check for $250,000 was
deposited to Revens’ client fund escrow for settlement of a claim by Seekonk Supply, and one check for
$5,000 was paid to Revens for legal fees.

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(5) Citizens initially froze the accounts in response to the search warrant, then
released the funds after Warren threatened legal action.
(6) A branch manager at Citizens had knowledge of other lawsuits or threatened
lawsuits concerning CheckMaster, and had communications with Warren.
Even if Lerner applied here, these allegations would fail to state a claim. The
Second Circuit in Lerner held that a bank may be liable under New York law if it has
“notice or knowledge” that a fiduciary is misappropriating funds from a fiduciary
account. 459 F.3d at 287 (quoting In re Knox, 477 N.E.2d 448, 451 (N.Y. 1985)). It
repeated, however, that this liability was an exception to the general rule. See id. at
287 (“As a general matter, ‘a depositary bank has no duty to monitor fiduciary accounts
maintained at its branches in order to safeguard funds in those accounts from fiduciary
misappropriation.’” (quoting Norwest Mortgage, Inc. v. Dime Sav. Bank of N.Y., 721
N.Y.S.2d 94, 95 (App. Div. 2001)). Likewise, Lerner emphasized that “[t]he bank has
the right to presume that the fiduciary will apply the funds to their proper purposes
under the trust.” Id. (quoting Bischoff ex rel. Schneider v. Yorkville Bank, 112 N.E. 759,
760 (N.Y.1916)). A bank loses the right to this presumption only when faced with
“circumstances which reasonably support the sole inference that a misappropriation is
intended.” Id. (emphasis added) (quoting Bischoff, 112 N.E. at 761).6
The Lerner plaintiffs stated a claim by alleging the defendant banks there knew
facts that supported the “sole inference” of misappropriation. But the facts alleged in

6

A few lines later in the opinion, Lerner parenthetically quoted language from Norwest Mortgage
stating that “[f]acts sufficient to cause a reasonably prudent person to suspect that trust funds are being
misappropriated” could trigger a duty of care. 459 F.3d at 288 (quoting 721 N.Y.S.2d at 95). I agree with
the Fifth Circuit that generally speaking, the underlying facts will only be “sufficient to cause a reasonable
person to suspect” if they support the “sole inference” of misappropriation. See Chaney v. Dreyfus Serv.
Corp., 595 F.3d 219, 233 (5th Cir. 2010).

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that case were a far cry from those alleged here. In Lerner, an attorney named Schick
solicited millions of dollars from investors for a get-rich-quick scheme. He deposited
those funds in IOLA7 escrow accounts. Under New York’s IOLA system, the banks
administering these accounts—Fleet, Sterling, and Republic—had agreed to report to
the state IOLA fund any overdrafts on those accounts. Id. at 279-280. That, however,
they failed to do. When Schick began writing overdrafts on his IOLA accounts with
Fleet—having embezzled a substantial amount of the money he had deposited—Fleet
simply extended him “automatic loans” to cover the insufficient funds. Id. at 281.
Eventually, the Fleet branch manager confronted Schick about the overdrafts. Schick
responded that if Fleet bounced his checks and reported him to the state IOLA fund, he
would be disbarred and would be unable to bring Fleet any more business. (At the time,
Schick was depositing an average of $60 million to $80 million per month with the
bank.) Fleet would also be stuck with the “automatic loans” it had already extended
him. To avoid that outcome, Fleet agreed not to report any bounced checks by Schick,
and to respond to any inquiries about the overdrawn IOLA accounts by saying they had
“double-digit million-dollar balances.” Id. at 282. Fleet additionally agreed to mark
Schick’s bounced checks as “Refer to Maker” to avoid suspicion. The other banks
adopted similar mechanisms to hide Schick’s overdrafts. Id. at 282-83.
The facts alleged in Lerner thus showed unmistakably that the banks were
aware of suspicious circumstances giving rise to the “sole inference” of

7

IOLA stands for “Interest On Lawyer Account,” the same mechanism known in other
jurisdictions as IOLTA (“Interest On Lawyers’ Trust Account”). The interest earned on these accounts is
given to the state for charitable purposes, often providing civil legal services for the indigent. See Brown
v. Legal Found. of Wash., 538 U.S. 216, 220-223 (2003).

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misappropriation. Schick drew repeated overdrafts on accounts explicitly marked as
fiduciary; and when the banks confronted him about these overdrafts, he recruited them
to conceal the insufficient funds. On such extreme facts, it was appropriate to find that
the banks breached a duty of care towards Schick’s investors by failing to expose the
misappropriation. See id. at 289-90; cf. Go-Best, 972 N.E.2d at 237 (“If presented with
comparable facts, we, too, would likely allow a negligence claim to proceed.”).
But as Lerner recognized, less extreme facts generally will not state a claim.
Overdrafts in fiduciary accounts are “particularly probative in signaling
misappropriation”; indeed, that is precisely why the banks in Lerner were required to
report overdrafts on IOLA accounts. Id. at 288. But even overdrafts will not always
provide sufficient notice of misappropriation, if they are only small or occasional. Id.
Furthermore, the banks’ active participation in concealing Schick’s activities weighed
heavily in showing that they had sufficient notice of misappropriation. See id. at 290.
Here, by contrast, Bernkopf does not allege that CheckMaster overdrew its
accounts at Cornerstone or Citizens. Nor does it allege that either bank actively
concealed any misappropriation by CheckMaster. Instead, Bernkopf claims that
Cornerstone and Citizens should have monitored CheckMaster’s transfers into and out
of its accounts, noticed a suspicious pattern of debits and credits, and realized (even
though CheckMaster never overdrew its accounts) that CheckMaster was
misappropriating funds. Bernkopf cites no case extending a bank’s duty of care so far.
See Chaney, 595 F.3d at 234 (“The Receivers have cited no cases suggesting some
broad duty for financial institutions to monitor all their accounts for suspicious activity
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and to investigate that activity upon discovery. We will certainly not act to impose such
an expansive obligation.”).8 Bernkopf alleges additional facts that help its case
somewhat: unspecified communications between Cornerstone and Warren about
irregularities in CheckMaster’s tax payments, the search warrant served on Citizens
and its temporary freeze on CheckMaster’s accounts, an unspecified Citizens branch
manager with knowledge of other lawsuits against CheckMaster, and unspecified
communications between that branch manager and Warren. But even taken as a
whole, and combined with the alleged suspicious activity in CheckMaster’s accounts,
these allegations come nowhere near the extreme facts of Lerner. As a matter of law,
these facts did not raise the “sole inference” that CheckMaster was misappropriating
Bernkopf’s funds. Cornerstone and Citizens thus had no duty of care towards Bernkopf.
Furthermore, even if Bernkopf’s allegations sufficed to meet the Lerner standard,
its burden is likely even higher than that. In Massachusetts, the Supreme Judicial Court
recently decided that a duty of care to non-customers only arises if a bank has “actual
knowledge of an intended or apparent misappropriation of funds.” Go-Best, 972 N.E.2d
at 431. Likewise in Tennessee, a bank only owes such a duty if it has “actual
knowledge that the fiduciary is committing a breach of his obligation” or “knowledge of
such facts that its action . . . amounts to bad faith.” Tenn. Code Ann. § 35-2-107; see
also McLemore v. Regions Bank, 682 F.3d 414, 425 (6th Cir. 2012). Even if Bernkopf’s
8

The closest Bernkopf comes is Newton v. Scott, a case from the New York Appellate Division
decided in 1938. 254 A.D. 140 (1938). In that case, however, the bank at issue was small, and the
fiduciary’s transactions were observed by the bank’s secretary “practically every day.” Id. at 144. Thus,
even assuming Newton remains good law, it is distinguishable. And to the extent that Bernkopf draws
support from Fine v. Sovereign Bank, Civil Action No. 06-11450-NG, 2011 WL 2134380 at *6 (D. Mass.
May 27, 2011), the rule applied there has since been clarified by the Supreme Judicial Court of
Massachusetts. See Go-Best, 972 N.E.2d 426.

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allegations did show Cornerstone and Citizens had some notice of CheckMaster’s
misappropriation, they certainly do not show actual knowledge or bad faith. See GoBest, 972 N.E.2d at 432 (“[A] risk of misappropriation is not enough to support an
inference that the bank had actual knowledge . . . .”); McLemore, 682 F.3d at 425
(“[T]he district court held that only plaintiffs’ allegations of ‘knowing’ or ‘bad faith’
conduct survived. Plaintiffs do not quarrel with this conclusion.”).
As for Rhode Island, its courts apparently have not yet considered whether a
bank owes any duty in the circumstances presented here. Cf. Volpe v. Fleet Nat’l Bank,
710 A.2d 661, 664 (R.I. 1998) (a bank “owes no duty of care to a noncustomer with
whom it has no relationship” absent “extraordinary circumstances”). Even if Rhode
Island were to adopt the Lerner rule, however, Bernkopf’s allegations fail that standard
for the reasons described above.9
IV. Conclusion
Because Bernkopf fails to allege facts showing that Cornerstone and Citizens
owed it a duty of care, the banks’ motions to dismiss the counts against them in the
amended complaint (Docket ## 53 and 57) are ALLOWED, and those counts are
DISMISSED. Carolyn’s and Citizens’ motions to dismiss the counts against them in the
original complaint (Docket ## 35 and 44) are DENIED AS MOOT.
March 5, 2013

/s/Rya W. Zobel

9

Given this conclusion, I need not decide whether Bernkopf has sufficiently alleged that
CheckMaster’s accounts at Citizens were fiduciary accounts, or whether Cornerstone and Citizens had
notice or knowledge of that fact. See Chaney, 595 F.3d at 233-34. I also need not reach the alternative
arguments raised by Cornerstone and Citizens under the law of the case, judicial estoppel, and the
economic loss doctrine.

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DATE

RYA W. ZOBEL
UNITED STATES DISTRICT JUDGE

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