Gilbert Tuscany Lender, LLC and Chandler Heights McQueen Lender, LLC (collectively, the “Lenders”) loaned funds to three entities (the “Borrowing Entities”) in order to develop a shopping center in Gilbert and a residential subdivision in Chandler, Arizona. The funds were submitted to a title company, and as the Borrowing Entities needed additional funds, they would submit draw requests and supporting documentation to the Lenders. Chad Kennedy was a member of each of the Borrowing Entities, and even though he had no authority to do so, Kennedy opened an account at a Wells Fargo branch as the owner of a sub-contractor Sun West Builders, LLC. Kennedy submitted false invoices and misappropriated over $600,000 from the Lenders. The Borrowing Entities defaulted on the loans and the Lenders sued Wells Fargo claiming that Wells Fargo negligently allowed Kennedy to open a corporate bank account without determining whether he was authorized to do so. The Superior Court granted Wells Fargo’s motion for summary judgment, holding that Wells Fargo did not owe a duty of care to non-customers.
The Arizona Supreme Court considers two factors to determine whether a duty exists: the relationship between the parties and public policy considerations. The Court of Appeals found that there was no special relationship between Wells Fargo and the Lenders, and the Lenders even acknowledged they were not customers or depositors of Wells Fargo. The Court further noted that courts in several jurisdictions, including Arizona, have rejected the argument that banks owe a duty to non-customers.
The Court of Appeals then examined the public policy factor, which may be found either in a statute or common law. The Lenders claimed that the Bank Secrecy Act (the “Act”), 31 U.S.C. §§ 5311-5332, created a duty of care. But the Court found that the Act does not create a duty on behalf of Wells Fargo to third parties, but, rather, to the government, and that no private right of action existed under the Act. The appellate court also rejected the Lenders’ claim that § 324A of the Restatement (Second) of Torts creates a duty because there was no physical harm to the Lenders. And the Court rejected the Lenders’ assertion that the current movement is to “de-emphasize relationship as the best test of duty,” as each of the cases cited by the Lenders relied on either a statute or a section of the Restatement that created a duty.
The Lenders’ final arguments were that the banking industry’s standard practice and Wells Fargo’s internal policies created a duty. But the Court explained that an industry standard determines whether a duty has been breached, not whether a duty exists in the first place. And Wells Fargo’s internal policies are designed to protect the bank, not strangers who do not have any business with the bank.
Judge Orozco authored the opinion; Presiding Judge Gould and Judge Downie concurred.
Posted by: Joshua Ernst