WASHINGTON - A state appeals court in Louisiana has exonerated two banks of responsibility for a phony investment scheme run by a customer.
The Louisiana Court of Appeal for the Fourth Circuit last Friday overturned a $4.5 million jury award against Bank of LaPlace and First National Bank of Commerce, saying bankers are not liable for their customers' misdeeds.
"Banks handle a high volume of transactions and cannot be required to supervise the checking account activity of their customers, nor should they be potentially liable for the fraudulent activities of their customers," the court said.
Industry advocates praised the decision, saying it clarifies that bankers are not liable for people who use their accounts to perpetrate a crime.
"This is important because if the trial court decision had been allowed to stand, banks would have been subject to immeasurable exposure for the wrongful acts of their customers," said Mary E. Arceneaux, general counsel to the Louisiana Bankers Association.
"Banks would have been charged with being the policeman of their own customers, and that is not practical."
"Here you have a court recognizing the realities of the business," added Michael Crotty, deputy general counsel for litigation at the American Bankers Association. "So long as banks are doing what they are supposed to by doing, they are safe from lawsuits looking for the deep pockets."
The case centers on Lynn Paul Martin, who convinced people that he could provide a 60% annual return on investments in a travel company. But the business was fictitious - Mr. Martin simply used new investor money to pay off old investors.
Robert J. Guidry, a New Orleans businessman, lost $5.5 million when the pyramid collapsed in 1988. He sued the banks where he and Mr. Martin held accounts, charging the institutions should have informed him that Mr. Martin might be breaking the law.
A jury sided with Mr. Guidry in April 1994, holding the banks and Mr. Martin liable. But because Mr. Martin is bankrupt, the banks would have been forced to pay the entire award.
The appeals court saved the banks from that bill, ruling that the trial judge's instructions to the jury were "confusing and misleading." The court also examined the facts of the case, finding no evidence to support Mr. Guidry's charges.