KeyBank: New York Appellate Division denies Summary Judgment in Mortgage Lien Release case due to Material Issues of Fact as to Bank Employee’s Intent

By Chris McKibbin

On January 22, 2015, the New York Supreme Court, Appellate Division, released its decision in KeyBank National Association v. National Union Fire Insurance Company of Pittsburgh, Pa. The decision highlights the difficulties which sometimes arise in assessing manifest intent in financial institution losses.

The Facts

The insured, KeyBank, loaned a developer some $20 million for a condominium project. The loan was secured by, inter alia, mortgage liens on the condominium units. As individual condo units were sold, a percentage of the proceeds was to be used to pay down the loan, and to release the liens on those individual units.

The developer ran into financial difficulties.  KeyBank’s employee, Martin, permitted the liens on 20 units to be released without the paydown amounts, which had the effect of causing the developer to retain some $5 million that should have been paid to KeyBank. Martin concealed the shortfall by falsely representing to KeyBank that the units had not closed. KeyBank’s “Suspicious Activity Report” concluded that Martin had contravened KeyBank’s procedures and the loan contracts, but turned up no evidence of financial gain by Martin resulting from his actions.

Manifest Intent Requirement

The relevant provision in National Union’s fidelity bond indemnified KeyBank for:

Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others. Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:


(a)        to cause the Insured to sustain such loss; or


(b)        to obtain financial benefit for the Employee or another person or entity.

KeyBank moved unsuccessfully for summary judgment in 2013. The Appellate Division affirmed the motions court’s ruling, holding that there were material issues of fact as to whether Martin had the manifest intent to cause KeyBank to sustain a loss, and as to whether Martin intended to obtain a financial benefit for the developer.  At first blush, that conclusion may not make a lot of sense. However, a closer analysis demonstrates the logic of the Court’s ruling.

With respect to subparagraph (a) of the manifest intent requirement, the Court adopted the “substantial certainty” threshold, holding that “[m]anifest intent to injure an employer exists as a matter of law where an employee acts with substantial certainty that his employer will ultimately bear the loss occasioned by his dishonesty and misconduct.” Here, the available evidence indicated that Martin was concerned about the condominium project failing, and that his intent was to allow the developer to retain funds needed to complete the project, in order to prevent KeyBank from sustaining an even greater loss.

With respect to subparagraph (b) of the manifest intent requirement, the Court held that there were material issues of fact (including conflicting expert evidence) as to whether the cash flow from the lien releases had, in fact, been used to pay construction costs, rather than simply being pocketed by the developer.

Direct Loss Requirement

The Court also held that summary judgment had been properly denied on the issue of whether KeyBank had suffered a direct loss. Given the factual issues surrounding whether the diverted funds had been applied to construction costs, rather than simply being stolen by the developer, the Court held that KeyBank had failed to demonstrate that there was no material issue of fact as to whether it had sustained a direct loss.


KeyBank demonstrates the difficulties which can arise in assessing manifest intent in the financial institution context. A bank employee involved in extending credit, or similar activities, may have any number of motivations for engaging in conduct which ultimately results in a loss. A careful consideration of the direct evidence of the employee’s intent (if any), together with the surrounding circumstantial evidence, is essential to a proper manifest intent analysis.

KeyBank National Association v. National Union Fire Insurance Company of Pittsburgh, Pa., 2015 WL 263930 (N.Y.A.D. 1 Dept.)


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