When Can a Lender Be Sued for Damages for Aiding and Abetting a Fraudulent Transfer?
July 27, 2004
Michael Weissman - Chicago
The ruling in Freeman v. First Union National Bank 2004 Fla. LEXIS 106; 29 Fla. L. Weekly S36 was made in response to a request emanating from a federal court case, Freeman v. First Union National Bank, 329 F.3d 1231 (11th Cir. 2003). The federal court certified the following question to Florida’s highest court for decision: is there 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 response was that no such cause of action exists.
First Union had a customer named Unique Gems that perpetrated a Ponzi scheme. 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 ten days. But that did not happen.
Between February 10, 1997 and March 5, 1997 First Union allowed Unique Gems to transfer $6.6 million to Liechtenstein. On March 5, 1997 an injunction was entered freezing Unique Gems’ account at First Union. 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 $2.0 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 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 set forth quite specifically the remedies available to a creditor – the remedy sought to be asserted against the bank was not one of them. 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 facilitate a fraud by performing normal banking functions but
do not enjoy any of the fruits of the fraudulent activity will not be held
liable for damages for aiding and abetting the fraud.
For more information e-mail Michael L. Weissman at
michael.weissman@hklaw.com or call toll free, 1-888-688-8500.