Court Revives Tort Claims in Money Laundering Case

(CN) - The 5th Circuit allowed limited tort claims against a company through which a scammer allegedly laundered money from a complex insurance scam.

The receivers for seven insurance companies looted by convicted felon Martin Frankel in the 1990s claimed that Frankel was able to successfully funnel money through Dreyfus Service Corp. before depositing it into Swiss bank accounts.

They sued Dreyfus on tort and civil RICO claims, saying the company turned a blind eye to Frankel's suspicious transactions. Had Dreyfus paid closer attention, they claimed, the insurance companies could have unraveled the fraud and prevented their losses.

They demanded treble damages under the Racketeer Influenced and Corrupt Organizations Act, claiming Dreyfus deliberately ignored red flags.

The district court granted summary judgment to Dreyfus, finding no breach of fiduciary duty or proof of deliberate indifference.

A three-judge panel in New Orleans reversed on some of the tort claims.

"New York law does impose on [Dreyfus] a duty ... to ensure that the transactions it processes on behalf of its customers are authorized," Judge E. Grady Jolly wrote.

Jolly said the receivers raised legitimate questions about whether Dreyfus breached that duty, causing the insurance companies' losses.

"The district court was correct, however, in concluding that the receivers have not stated a viable theory of recovery in tort as to the remaining accounts," Jolly wrote.

"The district court was also correct in finding the plaintiffs' RICO allegations are without merit, as there is no evidence that anyone at [Dreyfus] knew or purposely contrived to avoid knowing that Frankel was engaged in money laundering."

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