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NC Appeals Court Gives Big Win to Financial Institutions

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  • January 06, 2015

North Carolina Court of Appeals – No Causes of Action against Financial Institutions for Aiding and Abetting Breach of Fiduciary Duty or Bank Secrecy Act Violations 

While many bank employees were counting down to their New Year’s Eve celebrations, the North Carolina Court of Appeals was busy issuing one more opinion in favor of financial institutions. In the December 31, 2014 opinion of Bottom v. Bailey, (COA14-564), the Court affirmed the dismissal of claims against Morgan Stanley Smith Barney for negligence, Bank Secrecy Act violations, aiding and abetting breach of fiduciary duty, civil conspiracy, and unfair and deceptive practices.

The Bottom case involved owners of real property in Buncombe County who sold their property and contracted with a company called 1031 Exchange Services, LLC (1031) to provide tax-deferred property services. The proceeds from sale of the property (approx. $225,000) were deposited by 1031 into a fiduciary account with HomeTrust Bank. The funds were then swept by HomeTrust into general accounts in the name of 1031, commingled with other funds and transferred back and forth between accounts with Morgan Stanley.

In February 2011, the principal of 1031 was federally indicted for engaging in a 10-year check kiting scheme involving improper transfers of funds between HomeTrust and Morgan Stanley. Plaintiffs sued to try to recover their real estate sales proceeds and alleged that Morgan Stanley knew about the suspicious transfers between accounts for several years but failed to take any steps to stop the transfers. Among other things, plaintiffs alleged that Morgan Stanley had failed to file any Suspicious Activity Reports (SARs) with federal agencies as required by the Bank Secrecy Act. The trial court dismissed the claims against Morgan Stanley and the Court of Appeals affirmed.

Three sections of the opinion are worth noting for every financial services company.

(1) Banks owe no duty to non-customers. In their negligence claim, plaintiffs argued that Morgan Stanley owed a duty to non-customers to ensure that bank customers did not use accounts for fraudulent purposes. If adopted, this argument would have vastly expanded the required oversight of financial institutions and caused banks to dramatically re-think their relationships with depository customers. Fortunately, the Court of Appeals rejected plaintiff’s position and held that:

a bank has no duty to anyone but its own customers, and that
despite the fact that a bank account may have been used in
the course of perpetrating a fraud, the bank’s only duty was
to its customers, not to those with whom its customers had

(2) There is no private cause of action for violation of the Bank Secrecy Act. Plaintiffs also argued that under federal law, a bank is required to file certain reports of “suspicious activity” and that Morgan Stanley was liable to plaintiffs for violating this requirement despite suspicions about 1031’s actions. The Court of Appeals rejected this claim holding that (a) the Bank Secrecy Act does not contain an expressed intent to protect third party non-customers of banks and (b) there is no private cause of action for a third party to sue a bank for Bank Secrecy Act violations. In particular, the Court held that the Bank Secrecy Act was intended to set up a reporting mechanism to help law enforcement combat criminal activity, not to provide a new civil claim for private litigants.

(3) No Claim for Aiding and Abetting Breach of Fiduciary Duty. Finally, plaintiffs argued that Morgan Stanley was liable for aiding and abetting 1031’s breach of the fiduciary duty owed to plaintiffs. Courts in North Carolina (both federal and state) have split on whether an aiding and abetting breach of fiduciary duty cause of action is even recognized. In a big victory for banks, the Court of Appeals came down strongly against recognizing such a claim, and cited positively to federal cases that found “that no such cause of action exists in North Carolina.” (Absent a definitive ruling from the North Carolina Supreme Court, plaintiffs will likely continue to assert aiding and abetting breach of fiduciary duty claims against banks, but the Brown decision comes close to putting the final nail in the coffin for this claim under North Carolina law).

Questions regarding this case update or financial services litigation in North Carolina can be addressed to Will Esser at This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.