Q: Does Negligence Prove Bad Faith Under Wisconsin’s Uniform Fiduciary Act?

A: No. In a recent Wisconsin Supreme Court ruling, the Court found that negligence does not amount to bad faith under the Uniform Fiduciary Act.

On Jan. 29, 2019, The Wisconsin Supreme Court issued its opinion in the Koss Corporation v. Park Bank case (Koss Corp.). The case involved the definition of “bad faith” under Wisconsin’s Uniform Fiduciary Act (UFA). WBA filed an amicus brief as the case worked its way through the court system. Previously, there was little case law in Wisconsin interpreting “bad faith” under the UFA.

Koss Corp. addressed the question of whether a bank can be held liable for the actions of a third party fiduciary. Specifically, whether a bank can be held liable for acting in “bad faith” in its transactions with an employee who embezzled millions from a corporate deposit account. The UFA provides protections from such liabilities and was adopted by Wisconsin in 1925. Section 112.01(9) of the UFA provides standards whereby a bank can obtain protection from claims involving the acts of a customer’s fiduciaries. In this case, that section forms the basis of Koss Corporation’s claim that Park Bank acted in bad faith.

Koss Corporation alleged, based upon 112.01(9), that Park Bank’s transactions were done in bad faith. Because neither 112.01(9) or the rest of the UFA defines bad faith, its definition became the issue before the Court.

The Court ruled that Park Bank did not act in bad faith and negligence does not amount to bad faith.

This ruling is significant in helping banks to understand how to protect themselves from liability when dealing with fiduciaries. WBA recommends that banks consider reviewing their policies and procedures in light of the case and potentially work with their legal counsel for a full analysis of the case's impact.

Read the Court’s opinion here.