Opinion
129790/02.
Decided September 8, 2006.
Attorneys for Plaintiff Elite Investigations and JMS Investigations Bienenfeld Wertman, P.C., New York, New York, Attorney: Saul Bienenfeld, Esq.
Attorneys for Defendant Bank of New York and Wachovia Bank, NA Rosner Nocera Ragone, LLP New York, New York Attorney: John Nocera, Esq.
In this action, plaintiffs Elite Investigations and JMS Investigations sue the Bank of New York ("BNY") for negligence, breach of fiduciary duty, breach of implied contract, and breach of express contract, claiming that BNY breached its agreement to remove plaintiffs' former employee Syed Ali's ("Ali") signature authority and failed to prevent Ali from misappropriating $499,000. Elite Investigations is a New York City private investigation and security firm that provides security guards and investigation services to corporations and private individuals, and JMS Investigations is its New Jersey counterpart. (Plaintiff companies are hereinafter referred to collectively as "Elite"). BNY moves for summary judgment to dismiss the complaint contending that Elite was in the best position to control and supervise Ali, and all of the payments at issue arose from electronic fund transfers made through Elite's American Express corporate charge card and not through Ali's use of signature power. Elite also seeks leave to amend its answer and add affirmative defenses concerning Elite's corporate charge card agreement with American Express, Elite's authorization of Ali to make charges against Elite's American Express account, and the UCC § 4A-505 one year limitations period. Elite opposes the motion and in its motion papers seeks summary judgment in its favor, although it neither served nor filed a cross motion. For the reasons stated below, BNY's motion to dismiss is granted.
While the complaint alleges Ali misappropriated $750,000, after discovery Elite concedes that the disputed amount is $499,000.
Background:
Ali worked for Elite from 1986 until October 2001. From 1997 to 2001, Ali served as the assistant vice president and was responsible for, among other things, financial operations, payroll accounts, and approving expense reports.
Elite opened its BNY checking account on May 16, 1997. At that time, the BNY signature card listed Joseph M. Saponaro, Syed Ali, Gary Weksler, and Lorraine Oltedal. In 1997, Elite discovered that Ali had misappropriated $70,000 from Elite's payroll account. It thereafter retained Ali as an employee, but removed his check writing privileges and his signature authority on BNY accounts. Elite's president, Joseph Saponaro ("Saponaro"), sent a letter to Jim Lancet, the BNY branch manager, requesting BNY remove Ali's signature authority from Elite's four BNY accounts, allegedly because Lancet advised him to submit a request in writing. BNY removed Ali's signature authority and crossed out his name on the 1997 signature card.
In 1997, Elite opened an American Express Corporate Optima Account in the name of Joseph Saponaro, Elite Investigations. Based on Elite's instructions, American Express issued three credit cards to it: the main corporate account card or the "basic" card issued to Joseph Saponaro and "SubSup-account cards" issued to Gary Weksler and Syed Ali. Pursuant to the American Express Cardmember Agreement, the "basic" account cardholder was contractually liable for all charges made by either of the two "subsup-account" card holders." The Cardmember Agreement provides:
You [Joseph Saponaro-Elite Investigations] promise to pay all charges, including Charges incurred by Additional Cardmembers on your Account. This promise includes any Charge for which you or an Additional Cardmember indicated an intent to incur the Charge, even if you or the Additional Cardmember have not signed a charge form or presented the Card. You also promise to pay any Charge incurred by anyone that you or an Additional Cardmember let use the Card, even though you have agreed not to let anyone else use the Card.
On January 9, 1998, Elite enrolled in American Express's "Express Cash Electronic Payment Program," which allowed the basic cardmember, Saponaro, to input the security code that appeared on Saponaro's card, the last four digits of Saponaro's social security number, and Saponaro's date of birth. Using these codes, the cardmember could initiate an automated clearing house ("ACH") payment against the account via an online or voice response telephone call transaction. An ACH payment is processed through a series of steps whereby American Express transmits a payment request to its bank, Wachovia Bank, N.A. ("Wachovia"), which transmits the request to the receiving bank, BNY, which then submits the payment to American Express.
The Cardmember Agreement provided that upon enrollment in the Express Cash Electronic Payment Program, Elite authorized American Express to initiate ACH payments as follows:
Each time you initiate a transaction under the Program, you instruct and authorize us or our agent to draw a check or initiate an automated clearing house ("ACH") debit in your name on your Bank Account, payable to use or to our agent, in the amount of the transaction. The amount of the transaction is the amount of the Account bill you paid or other funds transfer you authorized, plus any applicable fees or charges.
BNY's collection entry reports from December 15, 1999 to August 6, 2001 contained the ACH payment requests and listed the amount of money that BNY debited and transferred to American Express. The reports named Joseph Saponaro as the individual cardmember who made the ACH request.
Elite's BNY checking account was subject to the bank's Contract Rules and Regulations for Non-Personal Checking Accounts (the "Account Agreement"), which provided:
We may periodically prepare and furnish you with a statement of account and may enclose cancelled checks and other vouchers for the period covered by the statement. We will send the statement to you at your last address shown on our books.
It is your duty to promptly examine the statement. If you believe the statement, cancelled checks or other vouchers contain an error or that some other discrepancy or irregularity exists, you agree to notify us in writing within 30 days after the date you receive the statement. If you do not give us such notice, the statement, cancelled checks and vouchers will be deemed correct and be binding on you, and we will be released of all liability to you.
In 2001, Elite advised BNY that it believed that the bank improperly applied service charges to its account. Elite and BNY settled this dispute in exchange for Elite providing BNY with a general release for all claims. The General Release dated May 17, 2001 released BNY "from all actions, causes of action, suits, debts, dues, sums of money, accounts, covenants, contracts, controversies, agreements promises, damages, judgments, executions, claims, and demands whatsoever, in law, or equity, which against the RELEASEE, the RELEASOR, RELEASOR'S agents, administrators, attorneys, successors and assigns ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of this RELEASE."
On March 20, 2002, Elite's counsel sent BNY a letter alleging that a series of unauthorized transfers totaling $499,000 had been made from its BNY account. Saponaro, Gary Weksler, and Elite's accountant Neil Blumstein attest that Ali reviewed both the BNY and American Express statements during the twenty month time period when he misappropriated $499,000 from Elite. Elite finally detected Ali's scheme when Elite experienced a cash flow problem and noticed large expenses listed on the BNY account statements.
Contentions:
BNY contends that Elite was in the best position to control and prevent the transactions at issue and it cannot now shift responsibility to BNY for its losses. Accordingly, it moves to dismiss the complaint for the following reasons: 1) Elite continued to employ Ali and gave him authority to review its bank and charge card statements after discovery of Ali's previous $70,000 misappropriation of payroll funds, 2) Elite entrusted Ali with a corporate charge card, 3) Elite authorized American Express to initiate ACH payments, and all transactions at issue were made under the name Saponaro, rendering the transactions at issue "authorized" pursuant to UCC § 4A-202(1), 4) Elite never advised BNY that American Express was not authorized to make ACH requests, 5) Elite failed to timely review its BNY statements and failed to timely notify BNY of any alleged unauthorized transactions, and thus BNY was obliged to make the payments based upon National Automated Clearing House ("NACHA") Rules, 6) Elite never advised American Express that Ali was not authorized to incur charges, 7) Elite released BNY of all claims in the May 2001 General Release, and 8) Elite has suffered no cognizable loss because the ACH payments that BNY made satisfied a bona-fide enforceable debt that Elite owed to American Express.
Elite contends that BNY owed contractual and fiduciary duties to Elite to ensure that Ali had no access to Elite's BNY accounts based on its 1997 promise to remove Ali's signature authority. Elite does not dispute that NACHA Rules govern ACH payment requests but argues that BNY should have nonetheless further investigated the ACH requests or warned Elite that Ali could access funds in the BNY accounts through means other than signature power.
Discussion:
Although Elite maintains that its 1997 discussion with BNY's branch manager and written request to remove Ali's signature authority sparked a duty to protect Elite from Ali's misappropriation, the record reflects that BNY had no practical way to determine that Ali initiated the $499,000 electronic fund transfers. The entire amount in dispute arose from American Express ACH payment requests triggered by Saponaro's security codes. Pursuant to the American Express Cardmember Agreement for the Express Cash Electronic Payment Program, Elite authorized American Express to initiate ACH payments and Saponaro agreed to pay all charges made with his corporate charge card. NACHA Rules, which govern ACH electronic fund transfer payments, provide that once the cardmember requests an ACH payment, American Express acts as an "Originator," and initiates the payment by transmitting a "Pre-arranged Payment and Deposit" request to its bank, Wachovia. Wachovia serves as the "Originating Depository Financial Institution" ("ODFI"), and transmits the request to the "Receiving Depository Financial Institution" ("RDFI"), here BNY.
The RDFI is required to accept entries of ACH payments pursuant to Subsection 4.1.3 of NACHA Rules, which provide, "Subject to its right to return or reject entries under these rules, an RDFI must accept credit, debit, and zero dollar entries that comply with these rules and are received with respect to any account maintained with that RDFI." UCC § 4A-501 recognizes rules among financial institutions. UCC § 4A-501(b)(ii) provides that ". . . a funds transfer system rule governing rights and obligations between participating banks using the system may be effective even if the rule conflicts with this Article and indirectly affects another party to the funds transfer who does not consent to the rule." Comment 2 to that subsection explains that UCC § 4A-501(b)(ii) refers to ACH transfers made through an automated clearing house or a Federal Reserve Bank, and that banks' rights and obligations are governed by the "uniform rules adopted by various associations of banks in various parts of the nation." Thus, based upon NACHA Rules and Elite's enrollment in the "Express Cash Electronic Payment Program," BNY was obligated upon receipt of an ACH request, to debit money from Elite's bank account and credit plaintiff's American Express charge account, thereby paying Elite's debt to American Express.
The debits to Elite's BNY accounts were "authorized" payments because the individual identified as the payment request sender was Saponaro, Elite permitted American Express to initiate ACH payments on its behalf, and Elite never instructed BNY to deny ACH payment orders. UCC § 4A-202(a) provides that "A payment order received by the receiving bank is the authorized order of the person identified as sender if the person authorized the order or is otherwise bound by it under the law of agency." Under UCC § 4A-202(b), if the bank adheres to commercially reasonable security measures to which the customer agreed and the customer has not instructed the bank to deny electronic fund payment orders, then the receiving bank's acceptance of the payment order is an effective customer order. See Banque Worms v. BankAmerica Intern., 77 NY2d 362, 375 (1991).
Conclusion:
The only claim is a breach of BNY's 1997 agreement to remove Ali's signature authority. BNY did not breach this agreement, nor did it owe Elite duties outside its contractual duties to protect Elite from Ali's future misappropriation of funds. The legal relationship between a bank and its customer is a contractual one of debtor and creditor, which does not in and of itself give rise to fiduciary duties. See Bank Leumi Trust Co. of NY v. Block 3102 Corp., 180 AD2d 588 (1st Dept. 1992). Thus, the negligence and breach of fiduciary duty claims also do not state causes of action. BNY did not breach an agreement with its customer, and because the entire amount at issue arose from electronic fund transfers triggered by Saponaro's security codes and requested by American Express, BNY had no practical way to determine that Ali was making charges against the accounts. Moreover, to the extent that Ali's malfeasance occurred prior to May 17, 2001, the General Release signed by Elite released BNY from liability.
The cases that Elite cites have no bearing on a bank's obligation to honor electronic fund transfer orders, and are irrelevant because they involve a bank's commercial unreasonableness or a clear violation of a customer's instructions. See Tonelli v. Chase Manhattan Bank, N.A., 41 NY2d 667 (1977) (holding that a bank that delivers a cashier's check to a thief in exchange for the customer's certified check without the payee's indorsement is not commercially reasonable because possession of an unendorsed note is insufficient evidence of title); John Mary Markle Foundation v. Manufacturers Hanover Trust Co., 209 AD2d 587 (2nd Dept. 1994) (involving a bank that transferred funds at the request of one party directly in violation of a corporate resolution filed with the bank that required two signatories to authorize the transfer). Tonelli v. Chase Manhattan Bank, N.A., supra, noted that it did not involve the situations where "the drawer has authorized the wrongdoer to draw and issue checks" or where the bank claimed "plaintiff was remiss in examining monthly statements and could have discovered fraudulent scheme." Id. at 672. Here, Elite gave Ali an American Express "subsup account" card, and BNY alleges that Elite should have been diligent and examined its bank and corporate charge card statements rather than permit Ali, a dishonest employee, to examine financial statements.
Because the complaint is dismissed, there is no need for BNY to file and serve an amended answer.
Accordingly, it is
ORDERED that BNY's motion is granted, and Elite's Verified Complaint is dismissed, and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.