Summary
requiring plaintiffs to make a "reasonable inquiry" where the promised return on risk-free bank notes was extraordinary
Summary of this case from Crigger v. Fahnestock and Company Inc.Opinion
December 14, 1999
Order, Supreme Court, New York County (Charles Ramos, J.), entered on or about January 27, 1999, which, insofar as appealed from, granted defendant' s motion to dismiss the complaint for failure to state a cause of action, unanimously modified, on the law, to deny the motion with respect to the sixth cause of action, for conversion, insofar as based on acts allegedly perpetrated in or after April 1991, and otherwise affirmed, without costs.
Sean F. O'Shea, for plaintiffs-appellants.
Paul K. Stecker, for defendant-respondent.
ELLERIN, P.J., WILLIAMS, WALLACH, BUCKLEY, FRIEDMAN, JJ.
The complaint alleges that from 1985 through 1996 a former employee (Helliwell) of defendant bank perpetrated a "Ponzi" scheme, in which he solicited plaintiffs (many of whom appear to have been friends and family members) to invest in a purported "Trust B" account. Helliwell falsely represented to plaintiffs that the funds would be used to purchase notes issued and guaranteed by the bank. The funds plaintiffs entrusted to Helliwell were allegedly deposited into Helliwell's personal accounts at the bank and converted to his personal use.
We affirm the dismissal of plaintiffs' causes of action against the bank for fraud and breach of contract on the ground that, assuming the truth of the facts alleged in the complaint, the guaranteed rate of return on risk-free bank notes that Helliwell promised was so extraordinary as to require plaintiffs to make reasonable inquiry into the scope of Helliwell's actual authority (see, Collision Plan Unlimited v. Bankers Trust Co., 63 N.Y.2d 827, 831). Plaintiffs do not claim to have made such inquiry. Accordingly, their reliance on any appearance that Helliwell had authority to act for the bank with respect to the represented investment opportunity was unreasonable as a matter of law (cf.,Hallock v. State of New York, 64 N.Y.2d 224, 231).
We also conclude that the doctrine of authority by estoppel (see, Restatement [Second] of Agency § 8B) is inapplicable, since reasonable reliance, which as indicated is lacking, is essential to establishing such authority (see, Matter of Karavos Compania Naviera v. Atlantica Export Corp., 588 F.2d 1, 11). Nor can liability be imposed on the bank based on the doctrine of respondeat superior, since Helliwell's scheme cannot be considered to have been within the scope of his employment (see, Overton v. Ebert, 180 A.D.2d 955, 957, lv denied 80 N.Y.2d 751; City of New York v. Corwen, 164 A.D.2d 212, 218). Regarding plaintiffs' negligence-based causes of action, we find they were properly dismissed as plaintiffs fail to allege any facts showing a special duty running from the bank to them (see, Gottlieb v. Sullivan Cromwell, 203 A.D.2d 241, 242).
However, we reinstate plaintiffs' sixth cause of action, for conversion, insofar as it is based on acts allegedly perpetrated in or after April 1991, on the ground that the complaint alleges facts, which, if proven, could support imposition of liability on the bank as a joint tortfeasor. If a bank, having actual notice or knowledge that a fiduciary is misappropriating trust funds on deposit with it, cooperates in the diversion, it may be held liable as a participant in the wrongdoing (see, Raymond Concrete Pile Co. v. Federation Bank Trust Co., 288 N.Y. 452, 458, adhered to on rearg 290 N.Y. 611 ; Matter of Knox, 64 N.Y.2d 434, 438;Liffiton v. National Sav. Bank, 267 App. Div. 32, 38, affd 293 N.Y. 799;Home Sav. v. Amoros, 233 A.D.2d 35).
THIS CONSTITUTES THE DECISION AND ORDER OF SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.