Negligence claim against M&T Bank dismissed in dispute over $425K investment for student housing project

PHILADELPHIA – A federal court judge has granted a M&T Bank’s motion to dismiss negligence claims against it, but retained charges for alleged conversion of a financial instrument and banking violations of the Pennsylvania Commercial Code (PCC).

Apple Alley Associates - a business partnership based in Langhorne and comprised of Coach Partners and a number of passive, limited partners - was engaged in the construction of a three-story student housing building located directly across from Penn State University’s Worthington Scranton campus in Dunmore in 2011.

According to the lawsuit, the sole manager of Coach Partners was Dennis Dunn. In this capacity, the suit says Dunn conducted all business, including communicating financial information relating to the student housing project, on behalf of both Coach Partners and Apple Alley.

In order to finance this project, Apple Alley approached limited partners to solicit investments over a four-month period spanning April to August 2011. Apple Alley’s investment inquiries yielded nine checks from investors totaling $425,000, the suit says.

These nine checks were intended to be deposited into Apple Alley’s account with Keystone Community Bank and used to fund the student housing project.

However, in its lawsuit Apple Alley alleges Dunn, acting in his capacity as sole manager of Coach Partners, did not deposit the $425,000 of investor funds into Apple Alley’s bank account.

According to the lawsuit, William Larkin, an Apple Alley partner and certified public accountant, noticed in March 2013 the K-1 tax forms provided to investors showed a slight profit in 2012.

Larkin felt the forms instead should have indicated a substantial tax loss and requested an opportunity to review Apple Alley’s financial books.

Larkin received Apple Alley’s financial records in April 2013 and learned through subsequent investigation the $425,000 in investor funds were never deposited into Apple Alley’s account with Keystone Community Bank, it is alleged.

Through Larkin’s investigation, it’s alleged Dunn double-endorsed the checks over to both Apple Alley Associates II, LP and Higher Education Solutions, LLC – an unrelated entity that lists Dunn as sole owner – and then cashed the checks for deposit into Higher Education Solution’s account with M&T Bank, essentially diverting the funds from their intended destination with Apple Alley.

The suit says Dunn accomplished this by listing himself as “Managing Partner” of Apple Alley and mailing the checks to an M&T Bank employee who previously worked for a bank at which Dunn was an officer/equity holder.

“Apple Alley alleges that this employee knew that depositing these checks into the Higher Education Solutions, LLC account violated the bank’s internal operating procedures, as well as the Pennsylvania Commercial Code (“PCC”), and that this employee knowingly facilitated the unauthorized deposits,” reads an opinion from U.S. District Court for the Eastern District of Pennsylvania Judge Cynthia M. Rufe filed April 23.

Following these financial information disclosures, Dunn was removed from his managerial capacity at Coach Partners and replaced with Larkin in June 2013.

Apple Alley Associates initially filed suit in December 2013, charging M&T Bank with negligence in allowing the unauthorized financial transactions to be made to the Higher Education Solutions account and for conversion of a financial instrument.

Last December, M&T Bank filed a motion to dismiss all of Apple Alley’s claims against it, which then came before Rufe.

“M&T Bank moves to dismiss Apple Alley’s PCC claim for conversion of financial instruments, arguing that under Pennsylvania’s Uniform Fiduciaries Act, because Apple Alley’s fiduciary, Dunn, endorsed the checks deposited, M&T Bank is not liable to Apple Alley as a matter of law,” Rufe wrote.

“Based on the allegations in this case, Dunn owed Apple Alley a fiduciary duty, as the managing member of Coach Partners, which was the general partner of Apple Alley. Apple Alley pled that Dunn had exclusive control and authority over the financial decisions of Apple Alley, and the limited partners of Apple Alley had empowered Dunn to endorse and deposit checks on its behalf.

“In endorsing the checks payable to Apple Alley as ‘Managing Partner’ of Apple Alley, he indicated to the bank that he was acting in a fiduciary role, and not an individual one,” stated Rufe.

Rufe’s view that Dunn deposited the $425,000 in checks into an account for an organization at which he was the sole owner made the Uniform Fiduciaries Act applicable in this case, but also noted M&T Bank cannot be held liable for Dunn’s actions unless it was proven it had knowledge Dunn was acting in bad faith.

Rufe added the aforementioned alleged connection between Dunn and the M&T Bank employee was grounds enough to suggest such knowledge of bad faith on the part of M&T Bank may have taken place, and therefore retained the allegations of violating banking standards under Pennsylvania state law’s PCC.

M&T Bank also held it could not be negligent in this matter, citing Pennsylvania state law’s economic loss doctrine – which requires an injured party to have suffered not just an economic loss, but also physical injury or property damage. Since Apple Alley is only claiming an economic loss, Rufe dismissed all of the negligence claims against M&T with prejudice.

The plaintiffs are seeking damages in excess of $75,000 in this case, along with any other relief the court deems appropriate. The plaintiffs are represented by Francis J. Sullivan, Michael J. Shavel and Michael Kevin Martin, of Hill Wallack LLP in Yardley.

The defendant is represented by Christine M. Kovan and Steven J. Adams of Stevens & Lee P.C., of King of Prussia and Reading, respectively.

United States District Court for the Eastern District of Pennsylvania case 2:13-cv-07258