GO-BEST ASSETS LIMITED vs. CITIZENS BANK OF MASSACHUSETTS

On July 30, 2012 the Supreme Judicial Court ruled that Citizens Bank had no responsibility in a fraud committed by a former Boston lawyer.   In 2000, a Hong Kong company wired $5 million to Morris M. Goldings, Esq., who was a partner in the law firm of Mahoney, Hawkes & Goldings, LLP.  The money was deposited in the firm’s client trust account at Citizen’s Bank.  Goldings used the money for his personal purposes.  The company sued the Bank, claiming the Bank should have known of the misconduct based on a series of dishonored checks and negative balances present in the account prior to the deposit at issue.  Alternatively, the company argued the Bank was obligated to report the dishonored checks to the Board of Bar Overseers pursuant to the Bank’s agreement with the Board, and had it done so, the fraud would have been prevented.        The Court held that the case against the Bank was properly dismissed.  The Bank was not liable unless it had actual knowledge of an intended or apparent misappropriation of funds.  Absent such knowledge, a Bank did not have an obligation to inquire about the withdrawal of deposited funds by a person authorized to draw on the account.  The dishonored checks and negative balances were insufficient to support an inference that the Bank had actual knowledge of any existing or potential wrongdoing. With respect to the requirement to report the previous dishonored checks the Board of Bar Overseers, the Court acknowledged that the Bank’s agreement with the Board executed in accordance with Massachusetts Rule of Professional Conduct 1.15(h) required the Bank to notify the Board of the dishonored checks and that there was no dispute that the Bank did not provide this notification.  However, the Court held that the Board alone has standing to seek a remedy in contract for that breach and there is no separate remedy in tort for the trust beneficiary against the Bank.  The contractual obligation was owed to the Board, not the trust beneficiary and the Court decided there was no duty of care owed by the Bank to the trust beneficiary.