Bank holding trust accounts not liable for trustee’s breach of trust.

In 2006, Frank Calandra Jr. created and funded a life insurance trust to own a life insurance policy on his wife’s life. Frank named his two children, Kara and Kristin, as well as Edward Stein, as trustees. During the lifetime of Frank’s wife, the sole function of the trustees was to pay the policy premiums. The trustees established a checking account at Signature Bank to hold assets received and to pay the insurance premiums. The contract with the bank provided that each trustee could act individually with respect to the trust account.

In 2007, Stein as trustee requested that the address for the trust account be changed so that the monthly statements of account activity would be sent only to his address. Shortly thereafter, Stein stole $750,000 from the trust account by completing a series of wire transfers and writing checks to his personal business entities. Stein falsely informed the bank officer that these transfers were trust investments. The other trustees learned of the fraud when the SEC obtained an asset freeze against Stein and his business entities in 2009 for securities and wire fraud. Stein was sentenced to nine years imprisonment. The other trustees of the insurance trust sued Signature Bank in the U.S. District Court for the Southern District of New York based upon the bank’s conduct in failing to monitor the account and for processing the checks and wire transfers to Stein’s business entities.

The District Court granted summary judgment for the bank on the grounds that: (1) the bank contract explicitly authorized each trustee to act individually on behalf of the trust; (2) the trust agreement governs only the duties and obligations of the trustees whereas the duties of the bank are set out in the bank contract; (3) it was the duty of the trustees, not the bank, to ensure that the signing authority on the account was consistent with the terms of the trust instrument; (4) the bank met all of its contractual obligations and had no additional obligation to safely protect the trust assets against theft; (5) the bank did not aid and abet Stein in defrauding the trust because the bank did not knowingly or intentionally assist in the embezzlement; (6) it was the duty of the trustees and not the bank to investigate Stein’s actions; and (7) the bank was not grossly negligent in protecting the trust’s funds because under New York law a depository bank has no general duty to monitor fiduciary accounts to safeguard the assets from fiduciary misappropriation.