Peterboro Tool Company, Inc. Profit Sharing Plan and Trust v. People's United Bank, Successor in Interest to Flagship Bank and Trust
Filing
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///ORDER granting 4 Motion to Dismiss. So Ordered by Judge Paul J. Barbadoro.(jna)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Peterboro Tool Co., Inc. Profit
Sharing Plan & Trust
Case No. 11-cv-437-PB
Opinion No. 2012 DNH 026
v.
People’s United Bank, Successor in
Interest to Flagship Bank & Trust
MEMORANDUM AND ORDER
Between 2007 and 2009, the fiduciary for the Peterboro
Tool Co, Inc. Profit Sharing Plan and Trust (“the Plan”) stole
nearly $250,000 from the Plan’s money market account at People’s
United Bank, successor in interest to Flagship Bank and Trust
(collectively “the Bank”).
The Plan brings suit against the
Bank, asserting that the Bank should have detected its
fiduciary’s suspicious withdrawals and protected its funds from
misappropriation.
The Plan argues that the Bank is liable for
(1) negligence; (2) breach of fiduciary duty; and (3) breach of
a bailment agreement.
The Bank moves to dismiss all claims, and
for the reasons provided below, I grant the Bank’s motion.
I.
A.
BACKGROUND
Facts
In 1970, Peterboro Tool Company, Inc. (“the Company”)
established the Plan as a non-contributory profit-sharing plan
for the benefit of its employees.
Since 1996, the Plan has held
assets in a money market account and several certificates of
deposit at the Bank.
For the relevant time period, Bernard R.
Mullan was the Plan’s fiduciary as well as the accountant for
the Company and the Plan.
In his capacity as fiduciary, Mullan
had access to and signatory power over Plan assets, including
bank accounts.
In a series of thefts dating as far back as 1992, Mullan
misappropriated the Plan’s funds for his personal use.
estimates that it has lost $634,467 in total.
The Plan
At issue in this
case is Mullan’s theft of approximately $249,900 from the Plan’s
money market account with the Bank.
Between October 15, 2007 and November 2, 2009, Mullan made
23 separate withdrawals from the money market account, ranging
in size from $1,000 to $40,000.
He made one withdrawal in late
2
2007, four withdrawals in late 2008,1 and the remaining 18
withdrawals between June 29 and November 2, 2009.
As with his
prior thefts, Mullan concealed these 23 illicit withdrawals from
the Company and the Plan by entering fraudulent information on
the Plan’s books.2
He recorded the withdrawals as transfers to a
non-existent account at another financial institution.
Mullan
buttressed the illusion by making annual entries listing the
additional interest that had accrued on the fictitious account,
and he would list the account’s value as having increased
accordingly.
The Plan finally discovered that Mullan had looted
its funds in November 2009, when it replaced Mullan as fiduciary
and investigated its assets.
The Plan asserts that the Bank knew that Mullan was the
Plan’s fiduciary.
It also draws attention to the particular
manner in which two of Mullan’s withdrawals were made.
On July
10, 2009, Mullan withdrew $40,000 from the Plan’s account,
taking $8,000 in cash and placing $32,000 into his own personal
1
The Plan asserts an additional withdrawal of $2,000 in midAugust 2008 that was repaid by Mullan and so has not been
included among the 23 enumerated withdrawals.
2
By the time his thefts were discovered, it appears that Mullan
had not finished creating fraudulent entries to conceal his more
recent withdrawals.
3
account at the Bank.
Ten days later, Mullan withdrew $10,000
from the Plan’s account, taking half in cash and placing the
other half into the same personal account.
The Plan indicates
that other transactions were conducted in a similar manner,
asserting that it is prepared to amend its pleading to “include
elaborate details . . . regarding how much of each withdrawal
was cash and how much was deposited into Mr. Mullan’s account at
the Bank.”
B.
Obj. to Mot. to Dismiss at 12 n.6, Doc. No. 7-1.
Procedural History
On November 12, 2009, the Company (acting on behalf of the
Plan) brought suit against Mullan, and obtained an attachment in
the amount of $225,000.
Subsequently, Mullan filed for
bankruptcy.
On August 2, 2011, the Plan filed suit against the Bank in
New Hampshire Superior Court.
Invoking this court’s diversity
jurisdiction, the Bank removed the case to federal court on
September 15, 2011.
II.
STANDARD OF REVIEW
In considering a motion to dismiss under Federal Rule of
Civil Procedure 12(b)(6), I “accept as true the well-pleaded
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factual allegations of the complaint, draw all reasonable
inferences therefrom in the plaintiff's favor and determine
whether the complaint, so read, sets forth facts sufficient to
justify recovery on any cognizable theory.”
Martin v. Applied
Cellular Tech., 284 F.3d 1, 6 (1st Cir. 2002).
To survive a
motion to dismiss for failure to state a claim, the general
standard under Rule 8 of the Federal Rules of Civil Procedure is
that the complaint must “state a claim to relief that is
plausible on its face.”
Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)).
A claim is facially plausible when it pleads
“factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct
alleged.
The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.”
Id.
(citations omitted).
III.
ANALYSIS
The Plan brings claims against the Bank for negligence,
breach of fiduciary duty, and breach of a bailment agreement.
5
The Plan asserts that the Bank should have notified it of
Mullan’s transactions (and/or taken other protective steps)
prior to late 2009 because a reasonably prudent bank should have
been aware, in light of the suspicious circumstances surrounding
the withdrawals, that Mullan may have been breaching his
fiduciary duty to the Plan.
Compl. ¶ 39, Doc. No. 1-1.
Additionally, the Plan faults the Bank for “failing to
establish, maintain, update and follow internal procedures” that
would have more quickly revealed Mullan’s unauthorized conduct.
Id. ¶ 44.
A.
Negligence
1.
Special Relationship
The Plan claims that the Bank’s negligence in disbursing
funds to Mullan breached a duty of care that it owed to the
Plan.
The Bank, relying on Ahrendt v. Granite Bank, 144 N.H.
308 (1999), contends that it had no duty to protect the Plan
from the fraudulent conduct of a third party.
I agree with the
Bank that Ahrendt is controlling on the facts of this case.
To prevail on a claim for negligence, a plaintiff must show
that the defendant breached a duty of care that it owed to the
plaintiff and that the breach proximately caused the plaintiff’s
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claimed injury.
Carignan v. N.H. Int’l Speedway, Inc., 151 N.H.
409, 413 (2004).
The existence of a duty is a question of law.
Id.
In New Hampshire, the general rule is that an individual
has no duty to protect another from the criminal acts of third
parties.
See Marquay v. Eno, 139 N.H. 708, 716 (1995); Walls v.
Oxford Mgmt. Co., 137 N.H. 653, 656 (1993).
A duty may arise,
however, if a special relationship exists.
Marquay, 139 N.H. at
716.
In Ahrendt, the court considered whether a bank has the
requisite special relationship with a depositor.
314.
144 N.H. at
In that case, the eighty-year-old plaintiff signed
handwritten notes stating that she authorized a bank to disburse
nearly $50,000 from her money market account to a man who had
carried out repairs at her home.
Id. at 309-10.
Bearing the
notes, the man came in person to the bank four times, making a
withdrawal exceeding $10,000 on each visit.
Id.
The employee
who processed the first transaction noted that she felt
“uncomfortable” about the situation, but wrote out a bank check
after verifying the plaintiff’s signature and calling her to
confirm her intent.
Id. at 310.
For two of the other three
withdrawals, the bank verified the plaintiff’s signature and
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called to confirm the transaction.
Id.
Shortly after the
fourth transaction, the plaintiff’s family discovered that the
man had been cheating the plaintiff.
Id.
The plaintiff sued the bank, alleging that its agents
should have known that the man was exploiting her, and that it
had failed to exercise due care to protect her.
Id. at 314.
The court ruled in favor of the bank on the basis that it did
not owe the plaintiff a duty: “We decline to hold that the
relationship between a bank and its customer, under the facts of
this case, gives rise to a special duty to protect the customer
from the fraudulent conduct of third parties that the law would
not otherwise impose.”
Id.3
The Plan has failed to identify any material dissimilarity
between the circumstances of this case and the circumstances in
3
Courts in other jurisdictions have reached different
conclusions, and I do not speak to the ultimate wisdom of the
decision in Ahrendt. See, e.g., Mut. Serv. Cas. Ins. Co. v.
Elizabeth State Bank, 265 F.3d 601, 618 (7th Cir. 2001) (“[A]
bank’s failure to observe ordinary care in handling its
customer’s transactions may support a tort claim[.]”); Norwest
Mortgage, Inc. v. Dime Sav. Bank of N.Y., 721 N.Y.S.2d 94, 95
(App. Div. 2d Dept. 2001) (“Facts sufficient to cause a
reasonably prudent person to suspect that trust funds are being
misappropriated will trigger a duty of inquiry on the part of a
depositary bank[.]”). I do note, however, that Ahrendt
unequivocally states the current law in New Hampshire and that
the Plan has not alleged that the law of any other jurisdiction
should be applied to this case.
8
Ahrendt.
The Plan’s relationship with the Bank was the same
typical bank-depositor relationship present in Ahrendt; none of
the facts alleged tend to show any additional facets of the
relationship that might otherwise bring it within the category
of a special relationship.
Moreover, the factual allegation at
the heart of both claims is the same: an agent of the depositor
defrauded the depositor while acting within the scope of his
apparent authority.
Ahrendt makes clear that a bank ordinarily
has no duty to protect a depositor from the unauthorized acts of
its agent under such circumstances.
2.
144 N.H. at 314.
Alternative Theories for Imposing a Duty
The Plan offers two alternative theories as to why a duty
should be imposed.
Both are unavailing.
The Plan asserts that the Bank voluntarily assumed a duty
to protect its assets against fraudsters because the Bank
established internal fraud-prevention procedures, albeit
measures that turned out to be inadequate.
to Dismiss at 8-9, Doc. No. 7-1.
Pl.’s Obj. to Mot.
Although it is often true that
“one who voluntarily assumes a duty thereafter has a duty to act
with reasonable care,” Walls, 137 N.H. at 659, the Plan’s
attempt to apply the doctrine to this case is unpersuasive.
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First, despite specifically noting certain security and
verification procedures taken by the bank in Ahrendt, the New
Hampshire Supreme Court held that the bank nevertheless had no
duty to protect its depositor from fraud.
144 N.H. at 310, 314.
Second, the Plan has not alleged with particularity any special
procedures not mandated by federal banking regulations that
could justify a duty based on voluntary assumption.4
The next alternative theory is that a duty arose because
the Bank had constructive knowledge of Mullan’s fraud.5
The Plan
relies on a number of decisions from the state courts of New
York for the proposition that when a reasonably prudent person
knows or should know that funds are about to be misappropriated,
a duty arises to make reasonable inquiry to ascertain the true
facts before permitting a withdrawal.
Pl.’s Obj. to Mot. to
Dismiss at 10-13, Doc. No. 4-1 (citing Diamore Realty Corp. v.
Stern, 855 N.Y.S.2d 206, 207-08 (App. Div. 2d Dept. 2008); In re
4
Because certain fraud detection and prevention measures are
mandated by the federal regulatory regime concerning banks, it
cannot be that a bank that complies with required procedures
loses the benefit of Ahrendt and “voluntarily” assumes a duty
that it does not otherwise owe to its depositors.
5
Although
“actual or
facts that
Dismiss at
the Plan frames its argument as based on the Bank’s
constructive knowledge,” the Bank does not allege any
suggest actual knowledge. See Obj. to Mot. to
10, Doc. No. 7-1.
10
Bohenko’s Estate, 3 N.Y.S. 420, 423-24 (App. Div. 4th Dept.
1938); Ben Soep Co., Inc. v. Highgate Hall of Orange Cnty. Inc.,
535 N.Y.S.2d 1018, 1021 (Sup. Ct. 1988)).
Regardless of whether
the Plan has sufficiently pled facts showing that the Bank could
be liable under New York law on the basis of its constructive
knowledge of Mullan’s misappropriation, a theory of liability
premised on constructive knowledge is foreclosed in New
Hampshire by Ahrendt.
B.
Breach of Fiduciary Duty
The Plan contends that it had a fiduciary relationship with
the Bank and that the Bank breached its fiduciary duty.
The
Bank responds that its relationship with the Plan was not a
fiduciary one.
I agree with the Bank.
A fiduciary relationship is a “comprehensive term and
exists wherever influence has been acquired and abused or
confidence has been reposed and betrayed.”
Lash v. Cheshire
Cnty. Sav. Bank, 124 N.H. 435, 438 (1984) (per curiam) (quoting
Cornwell v. Cornwell, 116 N.H. 205, 209 (1976)).
“As a general
rule, the relationship between a bank and a customer is not a
fiduciary one unless the law otherwise specifies.”
N.H. at 311.
Ahrendt, 144
The relationship between an ordinary depositor and
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a bank is contractual in nature and does not create fiduciary
obligations.
Id. at 311-12.
In this case, the Plan asserts that the suspicious nature
of Mullan’s transactions gave rise to a fiduciary duty by the
Bank.
Without more, however, an authorized agent’s suspicious
withdrawals from a bank account do not give rise to a fiduciary
relationship between the bank and its depositor.
Id.
Ahrendt
addressed precisely that situation, and found that no fiduciary
obligations existed.
Id.
Furthermore, the cases where a bank
was found to have a fiduciary duty to a customer all involved
particular relationships of trust or confidence that have no
parallels to the facts of this case.
See, e.g., Appeal of
Concerned Corporators of Portsmouth Sav. Bank, 129 N.H. 183,
205-06 (trustees of mutual savings banks owe fiduciary
obligations to prudently invest depositors’ funds); Murphy v.
Fin. Dev. Corp., 126 N.H. 536, 541 (1985) (bank acting as
mortgagee had fiduciary duty to obtain fair and reasonable price
under the circumstances for mortgagor); Lash, 124 N.H. at 437-39
(bank had fiduciary duty where customers obtained loan from bank
and bank disbursed loan to third-party creditor of customers
without customer authorization).
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The Plan posits an additional argument in favor of the
existence of a fiduciary duty by drawing attention to the
court’s statement in Ahrendt that “[a] fiduciary relationship .
. . can arise under certain facts if equity so requires.”
N.H. at 311.
144
Taking this statement to mean that a fiduciary
duty can arise simply out of a weighing of equitable
considerations, the Plan regurgitates the basic facts of the
case and asserts that “it would be inequitable to hold that the
Bank has no duty to [the Plan] to prevent . . . such a blatant
misappropriation.”
Pl.’s Surreply at 5, Doc. No. 15.
The Plan
fails, however, to satisfactorily explain why equity requires an
outcome in this case that it did not require in Ahrendt, and
fails to point to any facts that would distinguish the nature of
the relationship between the Bank and the Plan from the nature
of the parties’ relationship in Ahrendt.
I therefore dismiss
the Plan’s claim for breach of fiduciary duty.
C.
Bailment
The Plan’s final claim is that the Bank is liable as a
bailee for its failure to safeguard the Plan’s funds.
The
relation between a bank and its depositor, however, is not a
bailor-bailee relationship, but a contractual debtor-creditor
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relationship where title of the funds passes from depositor to
bank.
Ahrendt, 144 N.H. at 311 (banks have “debtor-creditor”
relationships with depositors); see Dean Witter Reynolds, Inc.
v. Variable Annuity Life Ins. Co., 373 F.3d 1100, 1107 (10th
Cir. 2004) (“Unlike a bailment, a general deposit passes title
to the financial institution, which is required to repay the
loan from its own funds upon demand.”).
In this case the Plan
has not alleged the existence of anything other than a
traditional bank-depositor relationship, and the Plan’s
citations to bailment cases involving banks’ night depositories
are inapposite.
A bailment claim cannot be sustained on these
facts.
IV.
CONCLUSION
For the foregoing reasons, the Bank’s motion to dismiss
(Doc. No. 4) is granted.
The clerk is directed to enter
judgment accordingly and close the case.
SO ORDERED.
/s/Paul Barbadoro
Paul Barbadoro
United States District Judge
January 31, 2012
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cc:
David W. Rayment, Esq.
Mark Sutherland Derby, Esq.
William B. Pribis, Esq.
David E. Barry, Esq.
Michele E. Kenney, Esq.
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