Appeals Court Rules Small Business Cannot Sue Bank Over Embezzlement


A small business may not sue a bank for allowing a minority shareholder to embezzle, the Illinois Second District Court of Appeal has ruled. In Time Savers, Inc. v. LaSalle Bank, N.A., 02-06-0198 (Feb. 28, 2007), the company had sued its bank for breach of contract, common-law fraud, conspiracy to defraud, aiding and abetting and violating the Illinois Fiduciary Obligations Act.

The case stems from bad loans taken out by the minority shareholder in construction and maintenance equipment supplier Time Savers (TSI), Stephen Harrison. He owned 20% of the company and shareholder Lawrence Kozlicki owned the remaining 80%. Harrison also owned another business, RDSJH Equipment Venture, that does the same kind of equipment supply business. Kozlicki has no ownership interest in RDSJH, but the two companies did business together. Between 1997 and 2001, Harrison, through TSI, refinanced existing loans and took out new ones with LaSalle Bank seven times. With these loans, Harrison financed new equipment purchases for RDSJH; the equipment was then rented to TSI, allowing RDSJH to enrich itself at TSI’s expense.

Kozlicki and TSI contended that LaSalle suspected or knew that the loans were for Harrison’s personal benefit, but failed to alert Kozlicki or investigate further. TSI pointed to various documents and communications, as well as the fact that some funds were deposited into an RDSJH account. The complaint at issue in this appeal is the third amended complaint by TSI; the company voluntarily dismissed the original complaint and the DuPage County trial court dismissed the first, second and third amended complaints at LaSalle’s request. (The bank also moved for sanctions after the third amended complaint was dismissed.) The final dismissal is the subject of this appeal.

In its analysis, the Second District sided with the trial court. Most importantly, it found that TSI had failed to show that LaSalle or its employees had actual knowledge of Harrison’s embezzlement. Documents cited did not demonstrate Harrison’s wrongdoing, and because the bank knew Harrison was a shareholder in both TSI and RDSJH and the two companies did business together, there was no reason that the bank should have suspected anything unusual from the entanglement of the companies’ finances. For the same reasons, the court said, the bank knew nothing that would have obligated it to investigate the situation further, and the plaintiff could not show that it deliberately failed to investigate.

Thus, the charges of conspiracy, aiding and abetting and violation of the Fiduciary Obligations Act failed. The common-law fraud count failed, wrote the court, because TSI failed to cite specific examples of false representations made by LaSalle. Thus, the appeals court upheld the trial court’s dismissal of TSI’s complaint with prejudice.

The Chicago business trial attorneys and commercial litigation lawyers at Lubin Austermuehle represent businesses and individuals in Chicago and throughout the Midwest who are seeking to recoup the costs of fraud, embezzlement and other financial crimes. To learn more about our firm and see our favorable results in past cases, please visit our Web site.

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