L&R Obtains Summary Judgment for PNC Bank in Maryland $5 Million Banking Suit

In March 2014, L&R obtained summary judgment in Maryland state court for client PNC Bank, N.A., dismissing the rest of a suit arising out of a $9 million distressed real estate investment scheme.  Ivanhoe Investment Partners, LP, et al. v. The PNC Financial Services Group, Inc., et al.   This action was the last of a series of civil suits filed in Maryland, Connecticut and New York arising from the latest financial fraud by Michael Howard Clott, who 25 years ago, as head of First American Mortgage Co. (FAMCO) during the S&L crisis, pled guilty to “one of the largest [frauds] brought to prosecution in the federal system in” Maryland. E.F. Hutton Mortg. Corp. v. Equitable Bank, 678 F. Supp. 567, 570 (D. Md. 1988). At sentencing for a subsequent financial crime, the judge reportedly proclaimed that Clott could not be stopped “short of isolating him from all contact with humanity, like putting him on a desert island,” and even then “[h]e’d fleece the pigeons that landed there.”

In 2009, while facing charges in New York, Clott induced investors from Greenwich and Philadelphia to invest $9 million in a purported “no-risk” deal, to simultaneously buy and sell bulk portfolios of foreclosed properties from banks, as “show money” deposited in a title company’s accounts at PNC Bank.  The investors, after filing prior actions against the title company and others, brought suit against PNC asserting claims of knowing participation in breach of fiduciary duty, negligence, breach of implied contract, breach of contract for intended third-party beneficiaries, negligent misrepresentation, conversion, banking malpractice, and wrongful involvement in litigation.

In December 2013, the trial court dismissed eight of ten counts against the bank, permitting plaintiffs’ two negligence claims to proceed pursuant to Chicago Title Ins. Co. v. Allfirst Bank, 394 Md. 270 (2006).  On summary judgment in March 2014, the court dismissed the remaining claims, finding the bank owed no duty to the investors under Chicago Title, had not acted with actual knowledge of any breach or in bad faith, and that the action was further barred by contributory negligence and the statute of limitations.

The court observed that “as a general rule, banks don’t owe duties to non-account holders.”  Under the exception in Chicago Title, however, a duty may exist where there is “some type of intimate nexus that is established and based upon the facts of [the] case.”  Here, based upon the facts in the record, plaintiffs did not fall within the exception, particularly as there was “no evidence that the defendant, PNC, was aware of the plaintiff’s reliance on any of their actions.”

The court found, based upon the record evidence, that PNC had not acted with actual knowledge of any breach of fiduciary duty by the fiduciaries or in bad faith.  The court rejected plaintiffs’ argument that the bank was chargeable with knowledge of alleged suspicious account activity and obligated to investigate, finding that PNC did not act in a commercially unjustified manner under the circumstances.

The court also ruled that plaintiffs’ action was barred by contributory negligence and the statute of limitations, finding as a matter of law that plaintiffs were both contributorily negligent and on inquiry notice well before December 2009, more than three years before suit was filed.  The court made extensive findings based on undisputed facts and admissions developed in discovery that the investors could not simply rely on Clott, but rather ignored repeated red flags and failed to investigate, illustrated particularly by the primary investor request that the investment manager obtain bank statements on plaintiffs’ purported account, who failed to do so.

The case is currently on appeal to the Maryland Court of Special Appeals.

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603 or Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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