USA Law and Practice Contributed by: Steven Molo, Robert Kry, Megan Cunniff Church and Walter Hawes, MoloLamken LLP
plaintiff in a scheme involving the deposit of funds into an escrow account at the bank, which the customer claimed would be used to secure loans from other banking institutions and underwriters. The bank’s vice-president allowed the customer to name the account an escrow account even though the proce - dures for setting up an escrow account were not fol - lowed. The vice-president wrote a letter on the bank’s letterhead, falsely inflating the account balance. The customer also paid the vice-president USD100,000 for his assistance. Under these facts, the court found that the bank’s inaction was sufficient to show “substantial assistance” to state a claim for aiding and abetting fraud because banks have a duty to safeguard depos - ited funds when confronted with clear evidence that those funds are being mishandled. In another instance, a court found that the plaintiff failed to state a claim for aiding and abetting fraud where a bank allowed its customer, the perpetrator of a Ponzi scheme, to transfer funds between various accounts. The court held that allowing a customer to transfer funds was a routine business service and not Each state in the United States has its own statute of limitations for fraud, ranging anywhere from two to six years. Under New York law, an action for fraud must be commenced either within six years of the date of the alleged fraud, or within two years of the date the plaintiff discovered the fraud or could with reasonable diligence have discovered it. Federal law also imposes limitation periods that vary by statute. For example, the Securities Exchange Act of 1934 (15 USC Sections 78a et seq) requires that an action be brought two years after the discovery of the fraud, or five years after the fraud occurred, whichever is earlier. 1.5 Proprietary Claims Against Property In general, a plaintiff who obtains a judgment for fraud against a defendant is on par with other unsecured creditors and does not have any special priority over the defendant’s assets. In addition, a plaintiff in a civil action normally cannot recover proceeds of fraud beyond the damages it suffered. Where the govern - “substantial assistance”. 1.4 Limitation Periods
ment has instituted a civil or criminal action for fraud, a defendant may be required to disgorge the proceeds of the alleged fraud. Those funds may be used as restitution to compensate victims. Where the entity or individual alleged to have engaged in fraud is insolvent, different rules govern. For exam - ple, dozens of states have enacted the Uniform Fraud - ulent Transfer Act (UFTA), now known as the Uniform Voidable Transactions Act (UVTA), which permits cred - itors to void a debtor’s transaction when the debtor engaged in a transaction with the intent to defraud a creditor, or when the debtor made a transfer with - out receiving “reasonably equivalent value” in certain circumstances. The US Bankruptcy Code also pro - vides recourse to creditors seeking to avoid fraudulent transfers. Under those laws, a victim of fraud may, in some instances, take priority over other creditors seeking to recover from the fraudulent actor. For example, under federal bankruptcy law, a trustee may avoid a trans - fer of a debtor made with the intention to defraud a creditor so long as the transfer occurred within the two years prior to the debtor’s bankruptcy filing. Either the trustee or an individual creditor may bring an action seeking to avoid the fraudulent transfer. If a fraudulent conveyance is shown, the creditor will be able to claw back the portion of the fraudulent transaction that sat - isfies its individual claim. The preference or priority of a fraud victim may depend on whether the property it seeks to claw back is trace - able or identifiable. In many instances, the victim of fraud does not take priority over other creditors. A victim of fraud may also bring other claims arising out of the fraud to recoup lost property or damages. Those claims include unjust enrichment or conversion, for example. Unjust Enrichment An action for unjust enrichment allows a plaintiff to try to recoup a benefit that was wrongfully retained by a fraudulent party. Although the elements differ slightly from jurisdiction to jurisdiction, in general a plaintiff must prove that:
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