This action was the last of a series of suits filed in Maryland, Connecticut and New York arising from the latest financial fraud by Michael Howard Clott, who 25 years ago during the S&L crisis, as head of First American Mortgage Co. (FAMCO), 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 another financial crime, the federal 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 this case, while facing separate charges in New York, Clott induced investors from Greenwich and Philadelphia in 2009 to invest $9 million in a purported “no-risk” deal, to buy and sell simultaneously portfolios of foreclosed properties from banks, as “show money” deposited in a Rockville title company’s accounts at PNC. The investors, after settling prior actions against the title company and others, belatedly brought suit in December 2012 against PNC for $5 million in remaining damages, asserting claims of knowing participation in breach of fiduciary duty, negligence, and breach of contract, among others.

On the eve of trial in February 2014, the Hon. Michael D. Mason, having already dismissed eight of ten counts against the bank, granted summary judgment dismissing the rest, finding the bank owed no duty to the investors, and had not acted with actual knowledge of any breach or in bad faith. Judge Mason further held the action barred as a matter of law, both by contributory negligence and the statute of limitations as not tolled by the discovery rule, issues commonly left to the jury.

“This was a hard-fought litigation, and we’re pleased that both the trial and appellate courts saw the case the way we did” said L&R’s Robert Ludwig. “The investor-plaintiffs were not customers but virtual strangers to the bank, all transactions were authorized, and by their own admissions they failed to conduct any due diligence to protect themselves and then ignored numerous red flags.”

On appeal, the Maryland Court of Special Appeals summarily affirmed in all respects. It adopted the opinions of the trial court as its own and issued an unreported opinion focused on the statute of limitations, agreeing that plaintiffs “were on inquiry notice that something was amiss more than three years prior to the filing of the action.”  The appellate court rejected the testimony proffered by plaintiffs’ real estate investment expert on multiple grounds, noting it was “undisputed [plaintiffs] made no effort to look into the reputations or backgrounds of [their business associates] for, had [they] done so, [they] would have learned that [Clott’s alias] did not exist.”

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.

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.