Liability for Bitcoin Fraud
GSR Markets Limited v. McDonald
Date: July 5, 2024
Issue: Did Wells Fargo act negligently for not closing an account that allegedly led to GSR Markets Ltd.’s (GSR) funds being wired to a bitcoin scammer?
Case Summary: In a 3-0 decision, an Eleventh Circuit panel affirmed Wells Fargo’s summary judgment victory, concluding it did not act negligently when it did not close an account that allegedly led to GSR’s funds being wired to a bitcoin scammer.
To prove negligence, a plaintiff must show a duty of care, breach, causation and damages. A duty of care is a legal obligation on an entity to exercise reasonable care to prevent harm or injury to others.
In 2019, GSR, a Hong Kong-based trading company, sued Wells Fargo for negligence, alleging it mishandled an escrow account concerning a deal gone wrong. According to GSR, a cryptocurrency scammer illegally wired funds from an account Wells Fargo refused to close. GSR contended Wells Fargo was “slow to act” when made aware of the escrow agent’s malfeasance, who was a Wells Fargo customer. GSR also claimed Wells Fargo should not have authorized wire transfers from the escrow account. GSR claimed it incurred a $2 million loss in bitcoin cryptocurrency. The Northern District Court of Georgia granted Wells Fargo summary judgment, reasoning banks do not owe a common law duty of care to noncustomers such as GSR.
On appeal, GSR argued the district court wrongly decided that Wells Fargo did not owe it a duty of care. GSR argued a bank may still be liable to a noncustomer for its customer’s misappropriation when a fiduciary relationship exists between the customer and the noncustomer, the bank knows or ought to know of the fiduciary relationship, and the bank has actual knowledge of its customer’s misappropriation. To argue such an exception exists under Georgia law, GSR relied on First American Title Ins. v. Eddings, which ruled a bank may be “liable for its customer’s misappropriation of trust account funds where there is evidence the bank had knowledge that the customer was acting dishonestly or intended to commit a breach of trust.”
However, the Seventh Circuit affirmed. The panel conceded some states, such as Florida, recognize the exception. However, the panel ruled Eddings was unpersuasive because it relied on Georgia cases that did not involve suits by noncustomers against a bank and the cases did not discuss negligence. Due to a lack of Georgia state court decisions on point, the panel presumed Georgia courts would adopt the majority view that banks did not owe a duty of care to noncustomers and thus did not choose to recognize the exception. The panel added it was reluctant to impose a new regime of liability for Georgia’s banks. GSR alternatively contended Wells Fargo had a duty to take reasonable steps to prevent harm because the bank voluntarily administered the escrow account. The panel concluded, however, that Wells Fargo owed no duty of care to GSR, and this proposed exception is not supported by precedent.
Bottom Line: The Eleventh Circuit declined to extend a minority view exception that banks owe a common law duty of care to noncustomers.
Documents: Order
