Pick a name, any name: Bank not liable for fraudulent use of d/b/a name

Posted on 08/21/2014 at 01:12 PM by John Lande

In 2004, a fraudster in Missouri by the name of Henry opened a bank account at Hometown Bank under the name "Mark L. Henry d/b/a Investment Centers of America." Henry did not have authority or permission from Investment Centers to open such an account. For nearly two years, Henry deposited $292,000 into the account and withdrew the money for his personal use. Hometown Bank allowed Henry to open the account because it believed that Henry was self-employed and operating on his own behalf.

Eventually, the fraud was uncovered. Investment Centers settled with customers defrauded by Henry. Investment Centers had an insurance policy with National Union. National Union reimbursed customers based on the insurance policy. National Union then filed a lawsuit against Hometown Bank. National Union argued that Hometown Bank was negligent when it did not check with Investment Centers to confirm Henry had authority to open the d/b/a account. The district court dismissed the case against Hometown Bank because it concluded that Hometown Bank owed no duty to National Union, and the Eighth Circuit Court of Appeals agreed. The court found persuasive the argument that it is relatively easy for a bank to discern the identity of a natural person. It is significantly more difficult, however, to determine whether a person has authority to open a d/b/a account. The court noted that complex laws govern rights to use fictitious names. Based on this analysis, the court concluded that a bank owes no duty to a non-customer who has been the victim of fraud.

Thus, Hometown Bank was not liable to National Union. It is important to note that Investment Centers had no relationship with Hometown Bank other than the fraudulent account. It is also important to note that this case is premised on Missouri law. Moreover, this case likely would have turned out differently if Investment Centers had been a bank customer and Henry tried to open a fraudulent d/b/a account. Even though the court declined to require banks to verify the authority of a person to open a d/b/a account, banks should be prepared to verify the authority of individuals to open accounts in the names of bank customers. In those cases, it should be relatively easy for a bank to verify whether an individual has authority to open an account.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- John Lande

Categories: Banking Law, John Lande

 

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