THE COMPLAINT STATED A CAUSE OF ACTION FOR NEGLIGENT SUPERVISION OF DEFENDANT INVESTMENT BANK’S EMPLOYEE WHO ALLEGEDLY DEFRAUDED PLAINTIFFS OF $25 MILLION TO COVER THE EMPLOYEE’S LOSSES; THE ARGUMENT THAT PLAINTIFFS COULD NOT SUE THE BANK BECAUSE THEY WERE NOT BANK CUSTOMERS WAS REJECTED (CT APP).

​The Court of Appeals, in a full-fledged opinion by Judge Cannataro, over a two-judge dissent, reversing the appellate division, determined plaintiffs (charitable foundation) stated a cause of action against defendants (investment bank) for negligent supervision of an employee who allegedly defrauded the foundation of $25 million. Plaintiffs were not customers of defendants (investment bank). Rather, plaintiffs were approached by defendants’ employee to invest $25 million, allegedly as part of a fraudulent scheme to cover the employee’s losses. The argument that plaintiffs could not sue because they were not defendants’ customers was rejected by the majority:

… [T]he complaint adequately alleged that defendants were on notice of the employee’s propensity to commit fraud prior to his interactions with plaintiffs and their resulting losses. * * *

When an employer has notice of its employee’s propensity to engage in tortious conduct, yet retains and fails to reasonably supervise such employee, the employer may become liable for injuries thereafter proximately caused by its negligent supervision and retention … . As every Department of the Appellate Division has recognized, a defendant is on notice of an employee’s propensity to engage in tortious conduct when it knows or should know of the employee’s tendency to engage in such conduct … . * * *

… [P]laintiffs were not customers of defendants, as that term is typically understood, but plaintiffs alleged that they were prospective customers who were solicited by [defendants’ employee] to participate in a financing arrangement related to one of defendants’ legitimate business deals, supported by defendants’ genuine documentation and information, which he was given access to by defendants as part of his employment. We hold that these allegations support the existence of a duty on the part of defendants to non-negligently supervise [the employee] for plaintiff’s benefit … . Moore Charitable Found. v PJT Partners, Inc., 2023 NY Slip Op 03185, CtApp 6-13-23

Practice Point: Here the complaint stated a cause of action for negligent supervision against an investment bank based on fraud allegedly committed by a bank employee, even though the plaintiffs were not customers of the bank. The Court of Appeals found a duty to supervise the employee for the plaintiffs’ benefit.