Phil Rosemann v. St. Louis Bank

Citations: 858 F.3d 488; 2017 WL 2259630; 2017 U.S. App. LEXIS 9075Docket: 15-3965

Court: Court of Appeals for the Eighth Circuit; May 24, 2017; Federal Appellate Court

Original Court Document: View Document

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The case involves an appeal by a group of plaintiffs against St. Louis Bank, stemming from losses incurred due to Martin Sigillito's Ponzi scheme, known as the British Lending Program (BLP). The plaintiffs allege that the bank violated Missouri's Uniform Fiduciaries Law, aided and abetted breaches of Sigillito's fiduciary duties, conspired to breach those duties, and conspired to violate the Racketeer Influenced and Corrupt Organizations Act (RICO). The district court ruled in favor of St. Louis Bank by granting summary judgment, leading to the plaintiffs' appeal. 

Martin Sigillito, an attorney, and J. Scott Brown established the BLP in the late 1990s, initially to provide loans for legal claims related to coal miners in England. However, starting around 2000, the BLP shifted focus to marketing loans for real estate investments in England. During the scheme from 1999 to 2010, Sigillito misappropriated funds deposited into his Interest on Lawyers Trust Account (IOLTA) instead of forwarding them for legitimate investments, ultimately leading to his conviction in 2012 on multiple fraud-related charges.

From 2006 to 2010, Sigillito was a commercial customer at St. Louis Bank, maintaining multiple accounts including business and IOLTA accounts, and having lines of credit known as the MTSA Loans. Most of the BLP investors’ funds, except for plaintiff Phil Rosemann’s, were deposited into the IOLTA and quickly transferred to other accounts. Investors authorized Sigillito to manage their investments, with Rosemann providing handwritten authorizations for specific transactions. Two key bank employees, Craig Hingle and Julie Ohlms, interacted with Sigillito, with Hingle previously having a personal relationship with him from prior employment. Hingle was aware of Sigillito's involvement in the BLP and assisted with securing lines of credit. Ohlms, as Assistant Vice President of Treasury Management, worked on various transactions with Sigillito and his executive assistant, Elizabeth Stajduhar, who managed account reconciliations. Stajduhar began embezzling funds by cashing checks made out to her maiden name. Although Sigillito discovered this and asked Ohlms to monitor these transactions, Ohlms did not realize Stajduhar was Perigen, nor was she informed of any issues regarding BLP. Importantly, neither Stajduhar nor Sigillito provided St. Louis Bank with any documentation regarding BLP transactions or the distribution of investor funds. In May 2010, Stajduhar suspected fraud but did not report it to the bank. Significant transactions took place between 2006 and 2010, particularly in 2008, 2009, and 2010, as outlined in a related district court order.

Sixty-eight plaintiffs initiated legal action against St. Louis Bank, asserting four claims: (1) violation of Missouri’s Uniform Fiduciary Law (UFL); (2) aiding and abetting breach of fiduciary duty; (3) conspiracy to breach fiduciary duty; and (4) conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act (RICO). St. Louis Bank sought summary judgment on all claims, while the plaintiffs requested partial summary judgment on the UFL claim (Count I). The district court ruled in favor of St. Louis Bank, granting its summary judgment motion and denying the plaintiffs' motion for partial summary judgment.

The plaintiffs appealed both the summary judgment granted to St. Louis Bank and the denial of their motion on Count I. The appellate review of such summary judgments is conducted de novo. The plaintiffs argue that the district court erred by concluding that St. Louis Bank was not liable under the UFL, asserting that evidence showed Sigillito, a fiduciary, breached his duty, and that St. Louis Bank had actual knowledge of this breach or acted in bad faith.

According to Missouri's UFL, a bank is not liable for a fiduciary's breach unless it has actual knowledge of the breach or sufficient knowledge to constitute bad faith. The law specifies that a payee is liable to the principal if a check is payable to a fiduciary's personal creditor and delivered to settle a personal debt of the fiduciary, given the creditor's actual knowledge. The plaintiffs failed to demonstrate that St. Louis Bank had actual knowledge or acted in bad faith regarding Sigillito's actions. Thus, the court found that the bank was not liable under the UFL.

Plaintiffs contend that communications between Sigillito, Hingle, and Ohlms demonstrate that Hingle and Ohlms had actual knowledge of Sigillito's misappropriation of fiduciary funds from the IOLTA account to settle his line of credit. For Hingle and Ohlms to have actual knowledge, they needed to be aware that Sigillito was actively defrauding the principal. The district court found that the emails presented by the plaintiffs did not indicate any understanding of the fiduciary nature of the funds or any misappropriation. Evidence showed Sigillito transferring large sums among various accounts, but this did not establish a duty for St. Louis Bank to investigate or indicate that bank employees were aware of any misuse of funds. The nature of IOLTA accounts complicates matters, as they can include various types of funds, including client funds, attorney fees, and third-party payments. Expert testimony illustrated that these accounts could contain funds owed to the lawyer, which supports St. Louis Bank's position. The plaintiffs failed to show that removed funds were improperly taken; instead, it was established that funds could belong to either the clients or the attorneys until fees were earned. The understanding of IOLTA accounts at Allegiant Bank in 2001 aligned with this interpretation, recognizing that such accounts could hold funds belonging to the lawyer as well as clients.

Kimberli Palmer, COO of St. Louis Bank, explained that IOLTA Accounts differ from typical trust accounts due to the presence of funds from multiple, changing beneficiaries, and the Bank lacked detailed records regarding these funds. Employees of St. Louis Bank, including Hingle and Ohlms, did not know the sources of the funds in Sigillito’s IOLTA account and were unaware of any breach of fiduciary duty by Sigillito. Furthermore, Sigillito's assistant, Stajduhar, confirmed that the Bank was not informed about the BLP, and she did not provide any relevant documentation or breakdowns regarding transactions involving investor funds. Consequently, the plaintiffs could not demonstrate that St. Louis Bank had actual knowledge of Sigillito's misappropriation of fiduciary funds.

Regarding allegations of bad faith, the plaintiffs contended that the Bank covered up two material overdrafts in the IOLTA. The first overdraft, on April 20, 2009, amounted to $249,032.46, which Sigillito rectified by transferring funds from the Business Account. The second overdraft on May 20, 2009, occurred when Sigillito wired $141,000 from the IOLTA, resulting in an overdraft of $143,839.12. The plaintiffs argued that these overdrafts should have alerted St. Louis Bank to Sigillito’s potential misappropriation of client funds, particularly since the Bank had to use its line of credit to cover the overdrafts. They cited legal precedents indicating that dishonored checks in client accounts suggest improper commingling of funds and that ignoring obvious signs of a fiduciary breach constitutes bad faith. The standard for bad faith involves whether it is commercially unjustifiable to ignore readily available facts when circumstances indicate a potential breach.

A bank can be deemed to act in bad faith if it remains passive in the face of clear evidence suggesting a defect in a transaction, indicating a desire to avoid knowledge of the defect. Bad faith is established when a bank tolerates severe overdraft practices or evidence of check kiting, but only when it knows the account in question is a fiduciary or segregated account containing the principal’s funds. The distinction is crucial, as overdrafts in a personal account do not necessarily imply a fiduciary duty. 

In this case, the IOLTA account, while a fiduciary account, operates differently from a traditional trust account. The funds in an IOLTA may belong to multiple beneficiaries, attorneys, and third parties, complicating the bank's ability to ascertain specific fiduciary obligations. Expert testimony indicated that the IOLTA activity was consistent with typical attorney practices, and there was no evidence suggesting St. Louis Bank should have known of any misappropriation of client funds by Sigillito. 

The bank believed that IOLTA accounts could contain varied funds, including attorney fees, and thus, even if it recognized some fiduciary obligations, it could not be assumed to be acting in bad faith from overdrafts or check kiting. Testimony clarified that the overdrafts were due to Sigillito’s errors in account management rather than any wrongdoing by the bank. Consequently, the evidence did not support a finding that St. Louis Bank acted in bad faith.

Plaintiffs assert that St. Louis Bank is liable under the Uniform Fiduciaries Law (UFL) because it was aware that Sigillito was misusing fiduciary funds for personal gain. They argue that Sigillito's personal debts, specifically the 4316 and 4382 Loans, render St. Louis Bank strictly liable for those payments. Sigillito, as a personal guarantor of these loans, allegedly had a personal financial interest at stake. However, on appeal, the plaintiffs shifted focus to a $600,000 loan to Rosemann, claiming Sigillito’s collateral for this loan was linked to fiduciary funds and that he benefited from the loan repayment through the return of his collateral. St. Louis Bank contends that the plaintiffs lack legal authority supporting their claims about fiduciary-related debt benefiting a fiduciary personally. The court cites that the loans in question were commercial, not personal, and the bank had no knowledge of any personal debts incurred by Sigillito. Testimonies confirmed that the loans were issued to Martin T. Sigillito Associates and not classified as personal debts. Consequently, the court upheld the denial of summary judgment for the plaintiffs on their UFL claim and granted summary judgment to St. Louis Bank. Additionally, the plaintiffs challenge the district court's summary judgment on their common-law claims of aiding and abetting breach of fiduciary duty and conspiracy to breach fiduciary duty, as well as their RICO conspiracy claim.

To establish St. Louis Bank's liability for aiding and abetting Sigillito's breach of fiduciary duty under Missouri law, plaintiffs must demonstrate that the bank had knowledge of Sigillito's misconduct and provided substantial assistance or encouragement. Mere failure to object or passive presence during the wrongdoing is insufficient; the bank must have actively participated in facilitating the breach.

For a civil conspiracy claim, plaintiffs must prove the following elements: (1) the involvement of two or more persons; (2) a shared objective; (3) mutual agreement on the course of action; (4) one or more unlawful acts; and (5) resulting damages. A unity of purpose between St. Louis Bank and Sigillito must be shown to establish a meeting of the minds.

In a RICO conspiracy claim, plaintiffs are required to demonstrate not only the elements of a RICO violation but also that St. Louis Bank explicitly agreed to partake in the enterprise's affairs. Evidence of mere association or knowledge of the conspiracy is inadequate; plaintiffs must prove the bank's awareness of the enterprise's scope and intent to engage in it.

The plaintiffs argue that St. Louis Bank's management of overdrafts and related emails demonstrate knowledge of Sigillito's breach. However, the court finds the evidence provided insufficient to create genuine issues of material fact regarding the bank’s knowledge or involvement. The plaintiffs failed to show that any funds used by Sigillito from his IOLTA account were improperly appropriated, leading the court to affirm the district court's summary judgment in favor of St. Louis Bank on the relevant counts.