There are a host of legal obstacles to trying to assert a fraud claim against banks for the acts of others, whether they are the banks’ customers, borrowers, or simply in the chain of funds transfers. I have chronicled many cases and situations in this area. See, e.g., Fraud and Aiding and Abetting Claims Against Lender Fail; Federal Court Dismisses Aiding and Abetting Fraud Claim Against Banks Arising from Customer’s Ponzi Scheme.
The principal legal theory that is often tried against banks that do not themselves directly commit the fraud in question is the claim of “aiding and abetting” the fraud of others. “In order to plead properly a claim for aiding and abetting fraud, the complaint must allege: ‘(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud’.” Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 (1st Dep’t 2009)(citation omitted).
As demonstrated by a new decision of the Federal Court in the Southern District of New York (applying New York substantive law), in Huang v. Hong Kong and Shanghai Banking Corporation Ltd., No. 1:20-cv-03548-LTS-SN, (S.D.N.Y. Sept. 9, 2022), this is not so easy to prove against banks in various contexts.
Huang Case Facts
In Huang, the plaintiff claimed that she was defrauded out of her life savings by scammers pretending to be Chinese officials who instructed her to wire large sums of money to bank accounts in Hong Kong. She lost the money she transferred, and could not identify or locate the actual scammers, so she tried to assert claims against others, including the banks that maintained the accounts into which the funds were wired and quickly withdrawn. Plaintiff made a total of four transfers, for each of which defendant HSBC USA served as the “intermediary bank” that accepted and processed the money transfers from plaintiff’s various New York banks. Each wire transfer was sent to a separate HSBC Hong Kong bank account with a different named recipient. HSBC Hong Kong ultimately flagged the last transfer suspecting fraud, for which the funds were released and sent back to plaintiff, but plaintiff ended up sending that money through to another account, and losing that too.
Plaintiff sued HSBC Hong Kong and HSBC USA, attempting to allege three causes of action: aiding and abetting fraud; aiding and abetting conversion; and negligence. The banks moved to dismiss each of these claims, and the District Court granted the motion in its entirety, while affording plaintiff an opportunity to amend one narrow claim under the Uniform Commercial Code (UCC).
Legal Obstacles Of Bank Liability
The banks first argued that all of plaintiff’s common law claims were “displaced” by Article 4A of the UCC, which governs and has comprehensive rules for electronic funds transfers. The banks contended that the crux of these claims was that the bank acted unlawfully by executing a series of wire transfers that it should have rejected as too suspicious, which relates solely to the “mechanics” of a wire transfer—squarely covered by Article 4A.
The Court observed:
If the common law claim is inconsistent with Article 4A (or is expressly addressed by Article 4A), then the common law claim is considered displaced and must be dismissed. See Sheerbonnet, Ltd. v. Am. Exp. Bank, Ltd., 951 F. Supp. 403, 410-11 (S.D.N.Y. 1995). However, if the common law claim does not conflict with Article 4A (and the basis of the claim is not expressly addressed by Article 4A), then the common law claim can survive, and may be brought either alone or in conjunction with UCC claims. See id.
The Court then found that “a plaintiff’s common law claims stemming from a wire transfer are not displaced when the claims ‘are not about the mechanics of how a funds transfer was conducted”—i.e., when the claims are about events that occurred either before or after the processing of the wire transfer.’” (Emphasis original.) Applying that law to the allegations, the Court found that plaintiff’s common law claims were not in fact preempted or displaced by Article 4A. That did not, however, stave off dismissal since the Court proceeded to find that plaintiff had not adequately alleged the common law claims, including the cause of action for aiding and abetting fraud.
Analyzing this claim, the Court started:
Under New York law, tortious aiding and abetting requires proof of: (1) “the existence of a primary violation”; (2) “actual knowledge” on the part of the abettor; and (3) “substantial assistance” in the violation. Kirschner v. Bennett, 648 F. Supp. 2d 525, 533 (S.D.N.Y. 2009). Here, the Bank does not dispute that the scammers engaged in the primary violations of conversion or fraud, but contends, accurately, that Plaintiff has failed to plausibly allege either actual knowledge or substantial assistance on the part of the Bank.
No Actual Knowledge
The Court continued: “In order to plausibly allege actual knowledge, a plaintiff must allege facts indicating that the alleged aider and abettor had direct and clear knowledge of the wrongdoing—’mere notice or unreasonable awareness’ is not enough. Samuel M. Feinberg Testamentary Tr. v. Carter, 652 F. Supp. 1066, 1082 (S.D.N.Y. 1987).”
The Court then applied the law to the allegations and found them to be insufficient to satisfy the element of actual knowledge:
The Court concludes that Plaintiff has failed to allege plausibly that the Bank had actual knowledge that the wire transfers were fraudulently obtained. The possibility that the Bank might have inferred the existence of fraudulent activity is insufficient to support the knowledge element of the claim of aiding and abetting fraud. “It is well settled in the Second Circuit that a bank’s negligent failure to identify warning signs of fraudulent activity, such as atypical transactions—even where such signs converge to form a veritable ‘forest of red flags’— is insufficient to impute actual knowledge of ongoing fraud.” Heinert v. Bank of Am., N.A., 410 F. Supp. 3d 544, 549-50 (W.D.N.Y. 2019) (citation omitted), aff’d, 835 F. App’x 627 (2d Cir. 2020). See also Chemtex, LLC v. St. Anthony Enters., Inc., 490 F. Supp. 2d 536, 547 (S.D.N.Y. 2007) (“[W]hen a defendant is under no independent duty, even alleged ignorance of obvious warning signs of fraud will not suffice to adequately allege ‘actual knowledge.’”) (citation omitted); Pedersen, 527 F. Supp. 3d at 194-95 (dismissing the plaintiffs’ aiding and abetting claims because they “fail[ed] to assert sufficient factual allegations from which the court can plausibly infer that [the bank] had actual knowledge of [the scammer’s] wire fraud scam prior to or at the time of the wire transfer”).
No Substantial Assistance
Further buttressing its conclusion, the Court found that plaintiff’s allegations were insufficient to support the element of “substantial assistance.” The Court observed: “This element is satisfied when an abettor ‘affirmatively assists, helps conceal, or by virtue of failing to act when required to do so, enables the fraud to proceed,’ and when ‘the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated.’ Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001) (citations omitted).”
The Court flatly rejected plaintiff’s arguments, finding that “the law in New York is clear that a bank’s performance of routine banking transactions does not constitute substantial assistance in another’s tort.”
The Court did give plaintiff the opportunity to amend her complaint to try to allege an actual violation of UCC Article 4A, including by identifying the provision allegedly breached.
Frequently, and unfortunately, victims of fraudulent conduct cannot always obtain adequate justice against the actual fraudsters, because, for example, they have absconded without even being identified, or they have no funds from which any compensation can be recovered. In such circumstances, claims of aiding and abetting are available but face their own set of obstacles. These obstacles are particularly formidable when banks are the target of suit.