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Wednesday, Nov 29, 2023

Bank Disavows Fraud Liability

If a bank employee allows money to be fraudulently taken from a customer, who is responsible – the bank or the employee?
That’s the question asked by Cyrus Hekmat, an L.A. entrepreneur, who claims that a business development officer at Los Angeles-based 1st Century Bank, a division of MidFirst Bank, aided and abetted taking more than $1.8 million from him.

So far, the answer to Hekmat’s question has been that the bank is not responsible. At least, a trial court ruled that MidFirst Bank could not be held liable for the alleged misconduct of the employee, and that decision was affirmed by an appellate court. Hekmat is hoping to get the California Supreme Court to pick up his dispute.

“This is an important case in that it could set precedent in the state of California for allowing banks to say, ‘we’re not responsible through respondeat superior,’ meaning, ‘we’re not responsible through our employment relationship with our employees for any bad acts or negligence that they do,’” Hekmat said. “And that’s just shocking.”

MidFirst Bank’s attorneys did not respond to requests for comment, but in court filings they argued that under the law an employer cannot be held liable for an employee’s malicious conduct “if the employee substantially deviates from the employment duties for personal purposes.”

Lost money

Hekmat, the founder and chief executive of L.A.-based ExamPerformance.com, an online learning program that prepares and trains students for test taking, said the saga began in 2016 when he agreed to give his first cousin a loan of approximately $1.86 million. The cousin was supposed to repay the loan because he was due to get a finder’s fee of $5 million.

The cousin’s then-girlfriend, whom he later married, worked at 1st Century Bank as a business development officer, and she opened an account for Hekmat, according to court documents. She transferred the $1.86 million from Hekmat’s account to her then-boyfriend’s account. Separately, she handled Hekmat’s application for a line of credit of $2 million to $4 million.

The loan was never paid, and Hekmat later learned that no finder’s fee was due to be paid to his cousin, according to court documents. What’s more, his loan application was never properly processed or submitted to the bank.

Hekmat, who has a background as a real estate attorney at the law firm Paul Hastings and investment firm Indivest Inc. in Los Angeles, also alleges damages for a real estate deal he was putting together at the time.

“In addition to Hekmat’s $1,862,388.89 that was transferred to (the cousin), Hekmat lost $400,000 in escrow deposits which he had made in furtherance of his land assemblage deal, as he was not able to consummate the land assemblage deal due to his inability to fund the required escrow deposits,” according to court documents.

Hekmat’s allegation is that the woman – a bank employee – helped the commission of a fraud by opening Hekmat’s account and then transferring money from it and into her future husband’s account, knowing that the money was not likely to be repaid. He also claims she mishandled his line of credit application. According to one of his filings: “These acts of (the woman) … are all normal activities of bankers and are integral to the business of banking.”
As a result, the bank is responsible or at least partly so, Hekmat argues.

Who’s job?

However, the bank has won in court, at least so far.
The primary point of contention is the doctrine of respondeat superior, which states that an employer is responsible for the wrongful acts of an employee but only so long as such acts occur within the scope of the job. If the acts are outside of that scope, the employer may not be responsible.

MidFirst has argued that since the impetus behind the woman’s alleged misconduct was for personal gain, and clearly outside the scope of the job, MidFirst cannot be held liable.
MidFirst also added, using a separate precedent, that it had no duty to “process, review and respond carefully and completely” to Hekmat’s line of credit request.

One of MidFirst’s legal briefs says, “the law is clear that an employer is not strictly liable for all actions of its employees during working hours,” and that courts have ruled that “an employer will not be held vicariously liable for an employee’s malicious or tortious conduct if the employee substantially deviates from the employment duties for personal purposes.”

It went on to quote a ruling that said, “if an employee’s tort is personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense will not give rise to a cause of action against the employer under the doctrine of respondeat superior.”

Hekmat cited multiple cases in his defense, which found that for a court to impose liability against an employer pursuant to the respondeat superior doctrine, there is not a requirement that the employee’s act benefit the employer.
Briefs have been submitted to the state Supreme Court by both sides.

“There is no hearing date or approximate date as to when this matter will be wrapped up,” an attorney for Hekmat wrote in an email to the Business Journal. “The time for the Supreme Court to decide to grant or deny review is currently set at July 5. It could make a decision by then or extend the date again.”

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