Koss Corp. v. Park Bank

• Decision Date: 29 January 2019
• Docket Number: No. 2016AP636,2016AP636
• Parties: KOSS CORPORATION, Plaintiff-Appellant-Petitioner, v. PARK BANK, Defendant-Third-Party Plaintiff-Respondent-Cross-Appellant, v. Michael J. Koss, Third-Party Defendant-Appellant-Cross-Respondent, Grant Thornton LLP, Third-Party Defendant-Cross-Respondent.
• Court: Wisconsin Supreme Court

385 Wis.2d 261

922 N.W.2d 20

2019 WI 7

KOSS CORPORATION, Plaintiff-Appellant-Petitioner,

v.PARK BANK, Defendant-Third-Party Plaintiff-Respondent-Cross-Appellant,

v.Michael J. Koss, Third-Party Defendant-Appellant-Cross-Respondent,Grant Thornton LLP, Third-Party Defendant-Cross-Respondent.

No. 2016AP636

Supreme Court of Wisconsin.

Oral Argument: September 7, 2018

Opinion Filed: January 29, 2019

For the plaintiff-appellant-petitioner and third-party defendant-appellant-cross-respondent, there were briefs filed by Michael S. Yellin, Ralph Weber, and Gass Weber Mullins LLC, Milwaukee, with whom on the brief were Michael J. Avenatti, Ahmed Ibrahim, and Eagen Avenatti LLP, Newport Beach, California. There was an oral argument by Ahmed Ibrahim.

For the defendant-third-party-plaintiff-respondent-cross-appellant, there was a brief filed by Dean P. Laing, Gregory W. Lyons, Joseph D. Newbold, and O'Neil, Cannon, Hollman, DeJong & Laing S.C., Milwaukee. There was an oral argument by Dean P. Laing.

For the third-party-defendant-cross-respondent, there was a brief filed by Joseph L. Olson and Michael Best & Friedrich LLP, Milwaukee. There was an oral argument by Joseph L. Olson.

An amicus curiae brief was filed on behalf of Wisconsin Bankers Association and the American Bankers Association by John E. Knight, James E. Bartzen, Kirsten E. Spira, and Boardman & Clark LLP, Madison.

PATIENCE DRAKE ROGGENSACK, C.J.

¶1 We review a published decision of the court of appeals¹ that affirmed an order of the circuit court² granting summary judgment dismissing Koss Corporation's Uniform Fiduciaries Act (UFA) claim against Park Bank.³

¶2 Our review centers on two related issues: First, consistent with the UFA, we interpret and apply the terms "good faith" as set out in Wis. Stat. § 112.01(1)(c) and "bad faith" employed in § 112.01(9) ; and second, we determine whether summary judgment dismissing Koss Corporation's claim was properly granted.

¶3 We conclude Wis. Stat. § 112.01(1)(c) describes the term "good faith" as honest bank acts, even when negligently done, and consistent with the majority of jurisdictions' interpretations of the UFA, "bad faith" is inconsistent with the statutory criteria for "good faith." Therefore, bad faith pursuant to § 112.01(9), which is an intentional tort, may be shown by acts evidencing bank dishonesty such as a bank willfully failing to further investigate compelling and obvious known facts suggesting fiduciary misconduct because of a deliberate desire to evade knowledge of fiduciary misconduct.

¶4 We further conclude that given the allegations that Koss Corporation asserts in regard to its claim that Park Bank is liable for the intentional tort of bad faith, no proof has been proffered of bank dishonesty wherein Park Bank willfully failed to further investigate compelling and obvious known facts suggesting fiduciary misconduct because of a deliberate desire to evade knowledge of fiduciary misconduct.

¶5 Accordingly, we affirm the court of appeals' affirmance of the circuit court's dismissal of Koss Corporation's claim that Park Bank acted in bad faith in processing the transactions that Sujata Sachdeva initiated. Because we conclude Park Bank is not liable to Koss Corporation, we also affirm the dismissal of Park Bank's third-party claims.⁴

I. BACKGROUND

¶6 In this lawsuit, Koss Corporation seeks to collect millions of dollars from Park Bank that Sachdeva embezzled from its accounts at Park Bank. As Vice President of Finance for Koss Corporation, Sachdeva was one of three people authorized to conduct transactions from Koss Corporation's Park Bank accounts pursuant to bank signature cards.⁵ As was explained by Park Bank's attorney at oral argument, nothing prohibited Sachdeva from exercising her transaction authority for Koss Corporation's accounts at Park Bank through another Koss Corporation employee so long as Sachdeva made the decision to initiate the transaction.

¶7 Sachdeva embezzled approximately $34 million from Koss Corporation over a period of ten years, from about 1999 until she was caught in 2009. In 2010, she pled guilty to six counts of wire fraud in connection with her embezzlement from Park Bank and from Koss Corporation's Chicago banks. She was sentenced to eleven years in prison and ordered to pay $34 million in restitution.

¶8 One method Sachdeva used to embezzle funds from Koss Corporation was to order cashier's checks for personal expenditures. She admits that she used hundreds of cashier's checks drawn on Koss Corporation's Park Bank accounts to pay for her purchases from luxury retailers, as well as to pay her personal credit card bills. She sometimes used the payee's initials to avoid detection, such as "S.F.A., Inc." for Saks Fifth Avenue or "N.M." for Nieman Marcus.

¶9 Generally, Sachdeva did not go to the bank herself to obtain cashier's checks. Instead, she instructed Julie Mulvaney, another Koss Corporation employee, to call the bank and request a cashier's check on Sachdeva's behalf. Mulvaney was not a signatory on Koss Corporation's Park Bank accounts. Despite the existence of the signature cards, Park Bank's general practice was to allow non-signatories to call and request cashier's checks on a signatory's behalf.

¶10 After receiving telephone requests for cashier's checks, Park Bank would place the checks in an envelope to Sachdeva's attention. Sachdeva would then send another Koss Corporation employee, usually Betty Caver, to pick up the envelopes. Caver was not a signatory on Koss Corporation's account. The employees who picked up the checks were not asked to present signed documentation from Sachdeva, and Park Bank did not call Sachdeva to verify the transactions. When the cashier's checks reached Sachdeva, she would mail them to her creditors to pay personal debts.

¶11 On one occasion in January of 2004, Betty Caver went into the bank and endorsed a $60,598.03 counter check⁶ against a Koss Corporation account, made payable to cash. Park Bank did not call Sachdeva to verify the transaction. The funds were then used to purchase two cashier's checks in the amounts of $42,441.61 and $18,156.42, which were used to pay Sachdeva's personal credit card bills to American Express and Comerica Bank. Koss Corporation does not dispute that Caver, Mulvaney, and any other employees involved were acting at Sachdeva's direction.

¶12 Sachdeva also used "petty cash" requests to embezzle funds. Sachdeva would instruct a non-signatory Koss employee, usually Betty Caver, to go to the bank and endorse a manually written check made out to "petty cash." Sachdeva would call and tell the bank the employee was coming. The employee would pick up cash for Sachdeva, sometimes from a drive-through window, without being asked for identification. Sachdeva used the cash to pay her "handyman," as well as to buy shoes, purses, and dinners. The petty cash requests were often for thousands of dollars at a time. From 2005 to 2009, there were at least 43 such "petty cash" checks, totaling $171,985.02.

¶13 Sachdeva's third method of embezzling funds, and the method that eventually led to her downfall, was to request wire transfers to an out-of-state bank where Koss Corporation maintained accounts. Between 2004 and 2009, Park Bank made seven wire transfers totaling $2 million from Koss Corporation's Park Bank accounts to Koss Corporation's accounts in Chicago banks. Either Sachdeva or Mulvaney would call Park Bank and initiate the wire transfer over the phone by providing a "repetitive code," which was used in lieu of providing account numbers when the same client regularly wired money between the same two accounts. Park Bank's policy required a wire transfer agreement to initiate wire transfers, which Koss Corporation did not have.

¶14 In December of 2009, an employee from American Express's fraud department called Michael Koss⁷ directly and informed him that Sachdeva had been using wire transfers from Koss Corporation's Chicago bank account to pay her credit transactions with American Express. This call led to Sachdeva's prosecution and eventual guilty plea.

¶15 In 2010, Koss Corporation originally sued Park Bank for negligence. It later amended its complaint to add a UFA "bad faith" claim, and to add factual information about the petty cash and wire transfers. Park Bank filed a third-party complaint against Michael Koss and against Koss Corporation's auditors, Grant Thornton LLP, for contribution and equitable subrogation. In 2013, Koss Corporation dismissed its negligence claim with prejudice. Its second and third amended complaints both asserted bad faith under the UFA as the sole claim for relief.

¶16 In support of its claims, none of Koss Corporation's factual allegations asserted, or even implied, that Park Bank acted dishonestly such as being motivated by self-interest with regard to the transactions Sachdeva initiated. Furthermore, none of Koss Corporation's allegations assert that Park Bank suspected that Sachdeva was acting improperly. After considerable discovery was completed, Park Bank moved for summary judgment on the UFA bad faith claim.

¶17 On March 11, 2016, the Milwaukee County Circuit Court granted Park Bank's motion for summary judgment, thereby dismissing all claims against Park Bank. It also dismissed the third-party complaint against Grant Thornton LLP and Michael J. Koss. In regard to the claims against Park Bank, the circuit court first held that Park Bank, as the moving party, had met its initial burden and that Koss Corporation had failed to establish the existence of a material factual dispute. The circuit court concluded that to show bad faith under the UFA, Koss Corporation would have had to have provided evidence that Park Bank intentionally ignored evidence of Sachdeva's breach of her fiduciary obligations, which Koss Corporation had failed to do.

¶18 The court of appeals affirmed the circuit court's decision dismissing Koss Corporation's UFA claim. Koss Corp. v. Park Bank, 2018 WI App 1, ¶2, 379 Wis....