Aiding and Abetting Fraud; Actual Knowledge
Marion v. Bryn Mawr Trust Co., 253 A.3d 682 (Pa. Super. 2021) (unreported), allocatur granted Oct. 5, 2021, appeal docket 72 MAP 2021
Marion, a court-appointed receiver, filed this action against a bank, Bryn Mawr Trust Co., seeking damages for money lost in a Ponzi scheme. Superior Court summarized the relevant factual background as follows:
On October 23, 2001, the Securities and Exchange Commission commenced an action against Robert Bentley for an alleged Ponzi scheme. The Federal District Court for the Eastern District of Pennsylvania (“District Court”) appointed Appellant receiver on November 1, 2001. The District Court also froze the assets of Bentley and two entities he controlled, Bentley Financial Services (“BFS”) and Entrust Group (“Entrust”). The scheme arose in 1996 shortly after Main Line Bank (“Main Line”) discovered that Bentley forged his accountant’s signature on a document. Main Line promptly demanded repayment of a fully drawn $2 million line of credit within thirty days. To satisfy Main Line, Bentley sold $2 million dollars of fictitious certificates of deposit (“CDs”).
Thereafter, Bentley continued to sell fictitious CDs to new investors in order to pay off previous investors. He also hired a new accountant, Sanford Goldfein. In October of 1997, Goldfein referred Bentley to BMT for his banking needs. Goldfein had referred business to William Fink, BMT’s vice president for commercial lending, on several prior occasions. Initially, Bentley sought a $2 million line of credit, checking accounts, and wire transfer accounts. BMT conditionally approved the line of credit pending, among other things, a favorable credit reference from Main Line. Proof of collateral apparently was not one of the conditions. Regardless, Bentley withdrew his application for the line of credit before BMT contacted Main Line. He opened various deposit and wire transfer accounts with BMT and quickly became one of BMT’s largest customers.
According to Appellant’s amended complaint, Bentley and his companies went on to sell more than $4 billion in private, unregistered notes, falsely leading investors to believe they were buying FDIC-insured CDs. Amended Complaint, 8/1/12, at ¶¶ 2, 13. Bentley eventually pled guilty to mail fraud and was sentenced to serve 55 months in federal prison and pay $38 million in restitution. The instant action concerns Bentley’s use of his BMT accounts to deposit and transfer investor funds in furtherance of his fraudulent scheme.
Slip op. at 1-3. The receiver filed a complaint against the bank, including a claim for aiding and abetting fraud based on pleaded allegations that:
…BMT failed to follow its own industry-standard Know Your Customer (“KYC”) policy, and that the account activities of Entrust were not consistent with that of a custodian of CDs, which Bentley claimed Entrust was. Amended Complaint, 8/1/12, at ¶¶ 19-32. Likewise, Appellant alleged that BFS, a purported broker of securities and CDs, would have required a line of credit for BFS to operate its business. Id. at ¶¶ 35-36. Bentley chose not to pursue a line of credit from BMT, and BMT never inquired whether or from where BFS maintained a line of credit anywhere else. Id. Appellant alleged that Bentley was, in effect, using the Entrust account as a revolving line of credit for BFS, and that this should have been obvious to BMT. Id. at ¶ 37. Appellant alleged that BMT prioritized collecting fees from Bentley and hoped Bentley would bring BMT more business. Id. Appellant also alleged that BMT should have asked Main Line about Bentley. Id. at ¶¶ 38-40.
The bank moved for summary judgment on the aiding and abetting fraud claim, which the trial court granted on the basis that Pennsylvania does not recognize an action for aiding and abetting fraud. The case moved forward to trial on the receiver’s remaining negligence and Uniform Fiduciary Act claims, and the jury found in favor of the bank.
The receiver appealed to Superior Court challenging, inter alia, the trial court’s dismissal of the aiding and abetting claim. On appeal the bank argued that the trial court correctly found that Pennsylvania does not recognize the tort of aiding and abetting fraud, but even if such a tort was recognized, the bank cannot be liable unless it had actual knowledge of Bentley’s scheme. The receiver countered that the bank could be held liable for willfully ignoring numerous red flags.
Superior Court first held that the receiver alleged a cause of action under Restatement (Second) of Torts § 876 (Persons Acting in Concert), which provides that:
For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Superior Court reasoned that the fact that the receiver “titled the claim ‘aiding and abetting fraud’ rather than ‘concerted tortious action’ is not significant,” and that this conclusion is supported by Sovereign Bank v. Valentino and Ganter, 914 A.2d 415 (Pa. Super. 2006), in which the court used the terms “aiding and abetting” and “concerted tortious conduct” interchangeably throughout the opinion. Thus, Superior Court concluded that because Pennsylvania recognizes causes of action under § 876, and because the receiver clearly alleged that the bank aided and abetted that tort, the trial court erred in concluding that the receiver alleged a nonexistent cause of action.
Superior Court further held that “actual knowledge of the underlying tort is not necessary to sustain a cause of action under § 876(b). Rather, if the defendant knew or should have known of the underlying bad actor’s misdeeds, but instead exhibited intentional ignorance,  the knowledge element of § 876(b) is satisfied.” Slip op. at 14. In this case, Superior Court explained:
To summarize, Appellant produced evidence that Bentley was a very large and profitable customer for BMT. BMT, considering itself to be in competition with Main Line for Bentley’s business, conditionally approved a $2 million line of credit but did not seek proof that Bentley or his businesses had $2 million in collateral. BMT offered Bentley very favorable fees to move his business to BMT, and further accommodated Bentley when the high volume of activity on his wire accounts resulted in additional unexpected fees. BMT never inquired as to the reason for the much higher than expected volume of transactions through the wire account, and never confirmed that Bentley had a line of credit sufficient to support the high volume of business. Moreover, Bentley as the principal owner of BFS, also operated Entrust as a sole proprietorship that was to act as custodian for investor funds. Bentley essentially controlled investor funds both as the broker-dealer and as custodian, an arrangement that let the proverbial fox into the hen house. From the outset of its relationship with Bentley, BMT failed in many respects to follow its own KYC policy. BMT profited from its relationship with Bentley, and we conclude that a genuine issue of material fact existed as to whether BMT exercised intentional ignorance toward Bentley’s unlawful activity.
Slip op. at 16-17. Accordingly, Superior Court vacated the trial court’s judgment and remanded for a new trial, including as to the receiver’s aiding and abetting claim under Section 876(b).
The Supreme Court granted allocatur limited to the following issue, as stated by petitioner:
Whether the Superior Court erred when it: (a) recognized a novel cause of action for aiding and abetting fraud; (b) held that actual knowledge is not required to satisfy the elements of the tort; and (c) failed to recognize that the jury’s no-liability finding necessarily barred relief[?]