## Facts

- Palmer Paxton Stoutt and related companies maintained an ongoing business relationship with Banco Popular de Puerto Rico.
- In 1995, Stoutt sought a five-year $1.5 million loan from the bank, conditioned on adequate collateral in U.S. Treasury bills.
- Stoutt entered a Treasury-bill “leasing” arrangement through a securities broker-dealer (Euro-Atlantic Securities) intended to supply collateral and generate income to cover leasing costs.
- Banco Popular approved a $300,000 line of credit for Stoutt to use as a deposit in connection with the arrangement.
- A check drawn on another bank was dishonored, leaving an approximately $300,000 overdraft at Banco Popular.
- Banco Popular suspected check kiting and possible money laundering and filed a “Report of Apparent Crime” with the FBI, followed by related communications with investigators.
- Stoutt was arrested and indicted on federal bank-fraud-related charges, but prosecutors later dismissed the charges.
- Stoutt sued Banco Popular in federal court asserting malicious prosecution, unlawful arrest and incarceration, and defamation based on the bank’s report and ensuing cooperation with federal authorities.

## Issues

1. Whether 31 U.S.C. § 5318(g)(3) immunizes a financial institution from civil liability for disclosures to government agencies of possible legal violations.
2. Whether the statutory safe harbor is limited to disclosures made in good faith, such that allegedly malicious or bad-faith reporting falls outside the immunity.
3. Whether the safe harbor covers follow-up communications with law enforcement that relate to the initial report.

## Decision

- The First Circuit affirmed summary judgment for Banco Popular.
- The court held that § 5318(g)(3) provides broad immunity for a bank’s disclosure of possible violations of law to appropriate government agencies.
- The court rejected an implied good-faith requirement; allegations of malice or bad faith did not defeat immunity.
- The court held that immunity extends to subsequent, related communications with law enforcement as part of the disclosure process.
- Because Stoutt’s tort claims were predicated on protected disclosures, they were barred without reaching the merits of the underlying tort elements.

## Legal Principles

- Under 31 U.S.C. § 5318(g)(3), a financial institution is not civilly liable under federal or state law for disclosing a possible violation of law or regulation to an appropriate government agency.
- Courts will not add a good-faith limitation to § 5318(g)(3) absent explicit statutory language; immunity is essentially absolute for covered disclosures.
- The protected “disclosure” includes not only the initial report but also follow-up cooperation and communications with investigators related to the reported suspicions.
- Common-law tort claims (including defamation and malicious-prosecution-type theories) are precluded to the extent they seek liability based on the protected disclosure to authorities.

## Conclusion

The First Circuit held that § 5318(g)(3) broadly immunizes banks from civil suits arising from reports of possible legal violations to law enforcement and related follow-up communications, and that the immunity is not conditioned on proof of good faith.


Stoutt v. Banco Popular de P.R., 320 F.3d 26 (1st Cir. 2003)