A federal judge has left Columbus Bank & Trust Co., in a civil suit filed by a title insurance company that claims the bank should have known of fraudulent activity in the trust account of Columbus attorney Michael Eddings.
In a Thursday ruling, U.S. District Court Judge Clay Land denied a motion from CB&T that would have removed the bank from a suit by Santa Anna, Calif.-based First American Title Insurance Company against Eddings in which the bank was also named as a defendant.
The title company claims it is entitled to recover nearly $2 million in losses and legal fees from Eddings.
CB&T could not immediately be reached for comment.
From 2007 through October 2011 (when the trust account was finally closed by CB&T), the trust account ran a negative balance 50 times, First American claims.
“According to First American, CB&T’s negligence caused unauthorized payments to be made from the trust account which ultimately caused damage to First American,” Land wrote in his 13-page ruling.
CB&T asserts that it was unaware of the misappropriation until all of the damage had been done and that it acted reasonably when it learned of the fraudulent conduct, according to the ruling.
Eddings, once a prominent Columbus real estate closing attorney, has been named in numerous federal lawsuits since CB&T alerted the court in October 2011 that there were issues with his law firm’s trust account. Eddings, still a practicing attorney, is also under federal criminal investigation, though no charges have been filed.
There have been more than $1.5 million in claims from large banks, mortgage companies, individuals and real estate agents saying Eddings owes them money related to real estate transactions.
Eddings has contended his office manager and former wife, Sonya Eddings, who is also named in the suit, diverted the funds without his knowledge. In addition to his law practice, Eddings and his wife owned several local restaurants including The Uptown Fish House and the local Coffee Beanery.
There was $472,949.34 in Eddings’ trust account when CB&T raised a legal red flag and asked for help from Muscogee County Superior Court on Oct. 27, 2011, when it appeared the account was going to be overdrawn. Those funds have already been disbursed by a federal court against claims of about $2 million.
For a bank like CB&T to be liable for its customer’s misappropriation of trust account funds, there must be evidence that the bank had knowledge that the customer was acting dishonestly or intended to commit a breach of trust, Land wrote.
In its suit, First American outlines what it claims is a four-year pattern of overdrafts and other actions that should have caused CB&T to know there was fraudulent activity in Eddings’ trust account.
First American’s claims include:
In 2007, the trust account had negative balances 17 times, including one for $120,794.80.
In 2008, the trust account ran negative balances 18 times, including one for $224,335.91.
In March 2009, CB&T learned that the Eddings Law Firm regularly attempted to “re-deposit” duplicate checks in its trust account using a special on-site deposit device. CB&T found the activity was “more than just an error;” it sent up “Red Flags” and resulted in CB&T shutting down the on-site deposit practice.
In 2009, the trust account ran a negative balance 10 times, including one for $250,861.22.
“Though these negative balances alone are not necessarily sufficient to put CB&T on notice that the Eddings Law Firm was misappropriating trust funds from the account, this evidence cannot be ignored in determining whether CB&T had knowledge of the breach of trust,” Land wrote.
First American also claims that on Aug. 29, 2011, almost two months before it went to the Muscogee County Superior Court and raised questions about Eddings’ trust account, CB&T knew that Eddings had failed to make a timely payoff for a loan closing and manufactured a fake wire transfer confirmation to cover the shortfall.
“Notwithstanding these circumstances, the record could be construed to support the finding that CB&T took no action to address the fraudulent activity,” Land wrote.