On the docket: can a lender be used for damages for aiding and abetting a fraudulent transfer?

RMA Journal, The, May, 2004 by Michael L. Weissman

Is their a cause of action under the Uniform Fraudulent Transfer Act for aiding and abetting a fraudulent transfer when the alleged aider and abettor does not receive any of the fraudulently transferred money or property? The ruling in Freeman v. First Union National Bank (Fla.S.Ct. No. SC03-896, January 29, 2004) was made in response to a request emanating from a federal could case, Freeman v. First Union National Bank, 329 F.3d 1231 (11th Cir. 2003). The federal court certified the question to Florida's highest court for decision. The response was that no such cause of action exists.

Unique Gems, a First Union customer, perpetrated a Ponzi scheme involving the assemblage of jewelry kits. Unique Gems gave investors necklace-making kits worth only $100 in return for a $3,000 deposit. After the investors assembled the necklaces, they were directed to return them to Unique Gems and were told they would receive their $3,000 plus $1,800 per kit. But Unique Gems made no effort to market the necklaces. Instead, it promised to pay its current investors to recruit new investors who were to make their own $3,000 deposit. And in classical Ponzi fashion, funds from the new investors were used to repay the earlier investors.

First Union allowed Unique Gems to wire-transfer money procured in the Ponzi scheme to Liechtenstein. When the State of Florida sued Unique Gems, First Union advised Unique Gems by letter dated February 21, 1997, that Unique Gems' account would be closed in 10 days. But that did not happen.

On March 5, 1997, an injunction was entered freezing Unique Gems' account at First Union. Between February 10, 1997, and March 5, 1997, First Union had allowed Unique Gems to transfer $6.6 million to Liechtenstein. (1) First Union notified Unique Gems on March 5, 1997, that its account would be closed in 30 days. But the account was not closed until July 24, 1997, and prior to that time, First Union allowed Unique Gems to wire-transfer an additional $2 million to Liechtenstein.

One of Unique Gems' defrauded creditors sued the bank in federal court for damages for aiding and abetting the fraud. The federal court sought an advisory opinion from the Florida Supreme Court because the determinative issue had never been considered in Florida.

Analyzing the provisions of the Florida Uniform Fraudulent Transfer Act, the Florida Supreme Court ruled that the bank, which had received none of the fruits of the fraud, could not be sued for damages for aiding and abetting Unique Gems' fraudulent transfers.

The court noted that the Act quite specifically set forth the remedies available to a defrauded creditor, and the remedy sought to be asserted against the bank was not one of them. The court was quite clear in stating that the Act did not provide a remedy against a party that did not receive any of the proceeds of the fraudulent conduct, saying, "There simply is no language in FUFTA that suggests the creation of a distinct cause of action for aiding-abetting claims against non-transferees."

In response to an assertion by the defrauded creditor that the requested relief could be granted under a catchall phrase allowing the court to grant "any other relief the circumstances may require," the court declined to do so, explaining that the Act had a "narrow focus." The court refused to recognize a new, independent cause of action under the Act.

What's the point? Banks that unknowingly facilitate a fraud by performing normal banking functions and that do not enjoy any of the fruits of the fraudulent activity will not be held liable for damages for aiding and abetting the fraud.

(1) The Principality of Liechtenstein became a sovereign state in 1806. The economic devastation caused by World War I forced Liechtenstein to enter into a customs and monetary union with Switzerland. Since World War II, the country's low taxes have spurred outstanding economic growth. However, shortcomings in banking regulatory oversight have resulted in concerns about the use of the financial institutions for money laundering. For more, see www.cia.gov/cia/publications/factbook/geos/ls.html.> Contact the author by. e-mail at Michael.Weissman@bridgeviewbank.com or by telephone at 773-975-5308.