Court: Appellate Division of the Supreme Court of the State of New York; September 4, 1997; New York; State Appellate Court
Home Savings Bank of America, FSB (Home Savings) engaged the law firm Amoros, Favata and Wallace (AF&W) for representation in home mortgage closings. Home Savings typically deposited checks into a mortgage trust account at National Westminster Bank (NatWest), allowing AF&W to draw checks from this account to disburse funds for closings. It was common for Home Savings to deposit funds shortly before closings, leading AF&W to write checks against uncollected funds, which NatWest would usually honor by extending credit.
However, in October 1994, AF&W checks were paid without sufficient funds, with NatWest covering 46 checks totaling approximately $831,163 against insufficient funds. Throughout November, the account frequently ran a deficit, averaging a negative balance of $425,924, but NatWest did not return any checks until December 7, 1994, when 11 checks totaling about $766,102 were returned due to insufficient funds.
Despite not officially deeming these checks dishonored, NatWest expressed concern about the account's chronic insufficiency and demanded an audit. On December 21, 1994, NatWest informed AF&W that any further checks would be returned if the account remained overdrawn. AF&W protested this policy change, citing a prior agreement for honoring checks with same-day deposits.
On December 27, 1994, while the audit was ongoing, NatWest paid one check of $161,733 against insufficient funds. The audit subsequently revealed that AF&W partner Scott Amoros had embezzled over $900,000 from the mortgage trust account, writing 22 checks since December 1992, which he deposited into another NatWest account he controlled.
NatWest's records indicate that during the time Amoros was misappropriating funds from a trust account, he also withdrew over $800,000 from the Trade Funding Group account through 161 transactions, primarily checks to himself and transfers to his personal accounts. Home Savings filed a lawsuit in January 1995, claiming NatWest should be held liable for Amoros' misappropriation due to negligence in monitoring the AF&W mortgage trust account. Home Savings argues that if NatWest had recognized the signs of unauthorized fund diversion, the misappropriation could have been detected sooner. Generally, banks are not required to monitor fiduciary accounts for misappropriation, assuming fiduciaries will act properly. NatWest's defense for summary judgment relies on this principle, but the court suggests there are exceptions. Specifically, a bank may be liable if it knowingly accepts misappropriated funds for personal obligations or is aware of ongoing diversions. There must be sufficient evidence to raise suspicion of misappropriation, triggering the bank's duty to investigate. Although current evidence does not show NatWest directly benefited from the misappropriation, there are indications, such as checks from the Trade Funding account payable to NatWest, that could suggest liability. Furthermore, $100,000 was transferred to the personal accounts of Scott and Irene Amoros at NatWest, raising additional concerns about the bank's awareness of the misappropriation.
The Amoros’ extensive banking relationship with NatWest raises factual questions regarding whether NatWest received trust funds from the Amoros' personal accounts in repayment of a loan. If a loan did not exist or was not repaid with funds traceable to AF&W’s mortgage trust account, NatWest should be able to clarify this based on its records. Conversely, if funds from the mortgage trust account were used to settle a personal debt to NatWest, the bank could be held liable for participating in the embezzlement. NatWest cannot claim ignorance of the funds' origins if they were transferred through its accounts, as banks are expected to be aware of customer transaction details.
Merely transferring trust funds between accounts or disbursing funds by authorized signatories does not automatically make a bank liable. Liability requires additional circumstances that implicate the bank in the diversion of funds, such as accepting trust funds to satisfy personal obligations or neglecting clear signs of misappropriation. The situation in October 1994, where there was a severe insufficiency of funds in the mortgage trust account coinciding with withdrawals for nontrust purposes, may have put NatWest on notice of potential misappropriation. Although NatWest had been honoring checks drawn on unavailable funds as a business practice, this does not exempt the bank from addressing clear signs of fiduciary misconduct. Insufficient funds in a fiduciary account strongly indicate possible misuse of entrusted funds, highlighting a disparity between available funds and expenditures, which may signal nontrust withdrawals.
Trust account insufficiency is a strong indicator of fiduciary misappropriation, which mandates that depositary banks report dishonored checks to the Lawyers’ Fund for Client Protection when they are presented against an insufficiently funded attorney trust account (22 NYCRR 1300.1 [c]). NatWest acknowledged this rule but failed to report dishonored checks. On December 7, 1994, NatWest dishonored 11 checks from the AF&W mortgage trust account, totaling approximately $766,102, due to insufficient funds, yet no dishonor report was filed. While the bank's failure to report does not solely establish liability for losses due to misappropriation, it is indicative of potential negligence. Given the substantial amount of dishonored checks and the ongoing account insufficiency, there is a question of whether the bank met its common-law obligation to recognize and investigate evident signs of fiduciary misconduct. An earlier inquiry could have potentially uncovered the embezzlement by Amoros, raising the issue of whether the bank was on inquiry notice and whether it had a duty to investigate before the loss escalated. Consequently, the Supreme Court order from January 18, 1996, granting summary judgment in favor of National Westminster Bank USA is reversed, with costs, and the case is remanded for further proceedings. The motion to enlarge the record is granted.
