Clemente Bros. Contracting Corp., et al., Appellants,v.Aprile Hafner-Milazzo,, Defendant, Capital One, N.A., Respondent.BriefN.Y.March 26, 2014To be Argued by: MARA B. LEVIN (Time Requested: 30 Minutes) APL-2013-00129 Suffolk County Clerk’s Index No. 21385/10 Appellate Division-Second Department Docket Nos. 2011-03205 and 2011-10990 Court of Appeals of the State of New York CLEMENTE BROS. CONTRACTING CORP. and JEFFREY A. CLEMENTE, Plaintiffs-Appellants, - against - APRILE HAFNER-MILAZZO a/k/a APRILEANNA MILAZZO, Defendant, - and - CAPITAL ONE, N.A., Defendant-Respondent. BRIEF FOR DEFENDANT-RESPONDENT HERRICK, FEINSTEIN LLP Attorneys for Defendant-Respondent Two Park Avenue New York, New York 10016 Tel.: (212) 592-1400 Fax: (212) 592-1500 Date Completed: September 20, 2013 i CORPORATE DISCLOSURE STATEMENT Respondent/defendant/counterclaim plaintiff Capital One, N.A., for its Corporate Disclosure Statement pursuant to Rule 500.1(f) of the Rules of this Court, states that it is a wholly owned subsidiary of Capital One Financial Corporation, which is publicly traded on the New York Stock Exchange under the ticker-symbol “COF.” Its subsidiaries and affiliates are as follows: Subsidiaries of Capital One, N.A. • 13800 GA. Ave. LLC • Ashburn Village Development Corporation • BHR Properties, LLC • BHR Properties II, LLC • BHR Properties III, LLC • Capital One ACP, LLC • Capital One Agency LLC • Capital One Asset Management LLC • Capital One Auto Receivables, LLC • Capital One Bank (Canada Branch) • Capital One Community Development Corporation II • Capital One Community Renewal Fund, LLC • Capital One (Contracts) Limited • Capital One Digital Payments, LLC • Capital One Energy Holdings Corp. • Capital One Equipment Finance Corp. • Capital One Equipment Leasing, LLC • Capital One Financial Advisors, LLC • Capital One Financing, LLC • Capital One Home Loans Holdings, Inc. • Capital One Home Loans, LLC • Capital One Investment Services LLC • Capital One Leverage Finance Corp. • Capital One Merchant Services Corporation • Capital One MR New Markets, LLC • Capital One Municipal Funding, Inc. • Capital One NA LIHTC, Inc. • Capital One NMTC Manager, Inc. • Capital One Payment Services Corporation • Capital One Properties, Inc. • Capital One Public Funding, LLC ii • Capital One Realty, Inc. • Capital One Reinsurance Company • Capital One Services II LLC • Capital One Services III, LLC • Capital One Services, Inc. (U.K. Branch) • Capital One Services, LLC • Capital One Settlement Services, LLC • Capital One VA Properties, LLC • Chevy Chase Funding LLC • Chevy Chase Mortgage Company • Chevy Chase Real Estate, LLC • COCRF Investor I, LLC • COCRF Investor II, LLC • COCRF Investor III, LLC • COCRF Investor IV, LLC • COCRF Investor IX LLC • COCRF Investor V, LLC • COCRF Investor VI, LLC • COCRF Investor VII, LLC • COCRF Investor VIII, LLC • COCRF Investor X, LLC • COCRF Investor XI, LLC • COCRF Investor XII, LLC • COCRF Investor XIII, LLC • COCRF Investor XIV, LLC • COCRF Investor XV, LLC • COCRF Investor XVI, LLC • COCRF Investor XVII, LLC • COCRF Investor XVIII, LLC • COCRF SubCDE II, LLC • COCRF SubCDE III, LLC • COCRF SubCDE IV, LLC • COCRF SubCDE IX, LLC • COCRF SubCDE VIII, LLC • COCRF SubCDE X, LLC • COCRF SubCDE XI, LLC • COCRF SUBCDE XII, LLC • COCRF SubCDE XIV, LLC • COCRF SUBCDE XV, LLC • COCRF SubCDE XVII, LLC • COCRF SubCDE XVIII, LLC • COCRF SubCDE XIX, LLC • COCRF SubCDE XX, LLC • COCRF SubCDE 21, LLC • COCRF SubCDE 22, LLC • COCRF SubCDE 23, LLC • COCRF SubCDE 24, LLC • COCRF SubCDE 25, LLC • COCRF SubCDE 26, LLC • COCRF SubCDE 27, LLC • COCRF SubCDE 28, LLC • Compass Food Services Corp • CORA, LLC • COSI Receivables Management, Inc. • Cutchco Corp. • Greenpoint Credit, LLC • Greenpoint Mortgage Funding, Inc. • Greenpoint Mortgage Securities Inc. • Greenpoint Mortgage Securities LLC • Guaranty Properties Inc • Headlands Mortgage Company • HRE Corporation • JAMSAB Realty Corp • Marin Conveyancing Corporation • New York Commercial Bank of New York LLC iii • NFB Funding, Inc. • NFB Payroll Services Ltd • North Fork New Markets Credit Corp. • ORAC, Inc. • Place SC Properties 2 LLC • Place SC Properties LLC • Worldscape, Inc. Affiliates of Capital One, N.A. • Capital One Appalachian A, LLC • Capital One Appalachian B, LLC • Capital One Appalachian C, LLC • Capital One Bank (USA), N.A. • Capital One Corporation • Capital One Direct Securities, Inc. • Capital One Foundation, Inc. • Capital One International Holdings Limited • Capital One Philippines Support Services Corp. • Capital One Services (Canada) Inc. • Capital One Services (India) • Capital One Sharebuilder, Inc. • Capital One Southcoast, Inc. • Capital One Support Services Holdings, Inc. • GreenPoint Business Processing Services Private Limited • Hibernia Capital Corporation • North Fork Capital Corp. • NTE B&O, LLC • NTE Kent, LLC • NTE Santa Monica, LLC • Oakstone Ventures, Inc. • Onyx Acceptance Corporation i TABLE OF CONTENTS Page COUNTERSTATEMENT OF QUESTIONS PRESENTED .................................... 1 PRELIMINARY STATEMENT ............................................................................... 3 NATURE OF THE CASE ......................................................................................... 8 A. Capital One Increases Borrowers’ Line of Credit ............................... 10 B. Borrowers Were Provided Monthly Statements of Account ............... 13 C. Clemente Contracting’s Bookkeeper’s Alleged Fraud ........................ 14 D. Borrowers Learn of the Alleged Defalcations ..................................... 16 E. Borrowers Default on Their Obligations Under the Loan Documents and Then Commence an Action Against Capital One ....................................................................................................... 18 ARGUMENT ........................................................................................................... 21 POINT I THE TRIAL COURT AND APPELLATE DIVISION PROPERLY HELD THAT CAPITAL ONE IS ENTITLED TO THE PROTECTIONS OF UCC § 4-406(4) ........ 21 A. The One-Year Notification Period Set Forth in UCC § 4-406 May Be Shortened by Bank Rules and Regulations and/or the Terms and Conditions of a Customer’s Account ................................ 22 B. The Shortening of the Time Period Under UCC § 4-406(4) Has Been Permitted by Every Appellate Court and District Court in Other Jurisdictions That Have Considered the Issue ........................... 30 C. The Shortened Period of 14 Days Was a Reasonable Period of Time for Borrowers to Review Their Statements of Account and Report Suspected Forgeries ................................................................. 33 D. The Record Makes Clear that Capital One Provided Statements of Account to Borrowers on a Monthly Basis ..................................... 37 ii E. Borrowers’ Assertion that UCC § 4-406 is Not Applicable to the Line of Credit is Not Supported by Fact or Law ........................... 39 F. The Disclosure Agreement and Corporate Resolution are Applicable to the Borrowers’ Accounts and Limited the Time- Bar Under UCC § 4-406(4) to 14 Days ............................................... 42 POINT II BORROWERS HAVE MISCONSTRUED CASES FROM THE THIRD AND FOURTH DEPARTMENTS IN THEIR FAILED ATTEMPT TO INVENT A SPLIT AMONGST THE DEPARTMENTS WHERE NONE EXISTS ...................................... 46 POINT III THIS COURT SHOULD AFFIRM THE APPELLATE DECISION WHICH UPHELD THE TRIAL COURT DECISION GRANTING SUMMARY JUDGMENT TO CAPITAL ONE ON ITS COUNTERCLAIMS AGAINST THE BORROWERS FOR BREACH OF THE LOAN DOCUMENTS .................................................................................... 53 CONCLUSION ........................................................................................................ 56 iii TABLE OF AUTHORITIES Page New York State Cases 117-14 Union Tpk. Assoc., L.P. v. Cnty. Dollar Corp., 187 A.D.2d 357, 589 N.Y.S.2d 880 (1st Dep’t 1992) ........................................ 53 Aikens Constr. of Rome, Inc. v. Simons, 284 A.D.2d 946, 727 N.Y.S.2d 213 (4th Dep’t 2001) ................................ 47, 48 Bank of America, N.A. v. Solow, 59 A.D.3d 304, 874 N.Y.S.2d 48 (1st Dep’t 2009) ............................................ 53 Banner Indus. v. Key B. H. Assoc., L.P., 170 A.D.2d 246, 565 N.Y.S.2d 456 (1st Dep’t 1991) ........................................ 53 Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 568 N.Y.S.2d 541 (1991) .......................................................... 24 Calisch Assoc., Inc. v. Manufacturers Hanover Trust Co., 151 A.D.2d 446, 542 N.Y.S.2d 644 (1989) ........................................................ 19 Five Towns Coll. v. Citibank, N.A., 108 A.D.2d 420, 489 N.Y.S.2d 338 (2d Dep’t 1985) ......................................... 34 Garage Mgmt. Corp. v. Chase Manhattan Bank, 22 A.D.3d 432, 803 N.Y.S.2d 60 (1st Dep’t 2005) ............................................ 22 Gluck v. JPMorgan Chase Bank, 12 A.D.3d 305, 785 N.Y.S.2d 77 (1st Dep’t 2004) ...................................... 22, 24 Herzog, Engstrom & Koplovitz, P.C. v. Union Nat’l. Bank, 226 A.D.2d 1004, 640 N.Y.S.2d 703 (3d Dep’t 1996) ........................... 48, 49, 50 In re Ray, 24 Misc. 3d 285, 874 N.Y.S.2d 891 (Sur. Ct. 2009) .......................................... 23 John J. Kassner & Co., v. City of New York, 46 N.Y.2d 544, 415 N.Y.S.2d 785 (1979) .................................................... 23-24 Josephs v. Bank of N.Y., 302 A.D.2d 318, 756 N.Y.S.2d 518 (1st Dep’t 2003) .................................passim iv Ladino v. Bank of America, 52 A.D.3d 571, 861 N.Y.S.2d 683 (2d Dep’t 2008) ........................................... 43 Mansi v. Gaines, 216 A.D.2d 536, 628 N.Y.S.2d 804 (2d Dep’t 1995) ......................................... 22 Marine Midland Bank, N.A. v. Scallen, 161 A.D.2d 103, 554 N.Y.S.2d 541 (1st Dep’t 1990) ........................................ 53 Monreal v. Fleet Bank, 95 N.Y.2d 204, 713 N.Y.S.2d 301 (2000) ...................................................passim New Gold Equities Corp. v. Chemical Bank, 251 A.D.2d 91, 674 N.Y.S.2d 41 (1st Dep’t 1998) ............................................ 30 Parent Teacher Ass’n. v. Manufacturers Hanover Trust Co., 138 Misc.2d 289, 524 N.Y.S.2d 336 (Sup. Ct. Bronx. Cnty 1988) .............. 23, 37 Radon Constr. Corp. v. Colwell, 248 A.D.2d 366, 669 N.Y.S.2d 839 (2d Dep’t 1998) ......................................... 23 Regatos v. N. Fork Bank, 5 N.Y.3d 395, 804 N.Y.S.2d 713 (2005) ............................................................ 24 Robinson Motor Xpress, Inc. v. HSBC Bank, USA, 37 A.D.3d 117, 826 N.Y.S.2d 350 (2d Dep’t 2006) ............................................................................ 39 Royal Arcanum Hosp. Ass'n of Kings Cnty., Inc. v. Herrnkind, 35 Misc. 3d 1205(A), 950 N.Y.S.2d 726 (Sup. Ct. Kings Cnty. 2012) ............. 34 Seaman-Andwall Corp. v. Wright Mach. Corp., 31 A.D.2d 136, 295 N.Y.S.2d 752 (1st Dep’t 1968) .......................................... 53 SOS Oil Corp. v. Norstar Bank of Long Island, 76 N.Y.2d 561, 561 N.Y.S.2d 887 (1990) .......................................................... 44 Weiner v. Spring Mortgage Bankers Corp., 235 A.D.2d 472, 652 N.Y.S.2d 629 (2d Dep’t 1997) ......................................... 24 Wells v. Bank of N.Y. Co., 181 Misc. 2d 574, 694 N.Y.S.2d 570 (Sup. Ct. N.Y. Cnty 1999) ...........................................................................passim Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280, 617 N.Y.S.2d 452 (1994) .............................................. 22, 33, 40 v Other State Cases Absolute Drug Detection Servs., Inc. v. Regions Bank, 116 So.3d 1162 (Ala. Civ. App. 2012) ............................................................... 31 American Airlines Emps. Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) ................................................................................... 30 Bank of America, N.A. v. Putnal Seed & Grain, Inc., 965 So.2d 300 (Fla. Dist. Ct. App. 2007) ..................................................... 31, 51 Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247 (Wis. Ct. App. 1998) ........................................................passim Century Constr. Co., v. Bancorpsouth Bank, 117 So.3d 345 (Miss. Ct. App. 2013) ........................................................... 31-32 FCT Elecs., LP v. Bank of America, N.A., No. CV 106002699, 2011 WL 4908850 (Conn. Super. Ct. Sept. 22, 2011) .................................................. 32, 52 Freese v. Regions Bank, N.A., 644 S.E.2d 549, 552 Ga. App. 717 (Ga. Ct. App. 2007) .................................... 31 Groue v. Capital One, 47 So.3d 1038 (La. Ct. App. 2010) ..................................................................... 31 National Title Ins. Corp. Agency v. First Union Nat’l. Bank, 559 S.E.2d 668 (Va. 2002) ........................................................................... 30, 51 Peters v. Riggs Nat’l. Bank, N.A., 942 A.2d 1163 (D.C. 2008) ................................................................................ 30 Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567 (Minn. 1997) ..................................................................... 30, 51 Union Planters Bank, Nat’l. Ass’n v. Rogers, 912 So.2d 116 (Miss. 2005) ................................................................................ 30 W.J. Miranda Constr. Corp. v. First Union Nat’l. Bank, 98-29112-CA11, 1999 WL 1567728 (Fla. Cir. Ct. Sept. 24, 1999) ................... 52 vi Federal Cases Broadway Nat’l. Bank v. Progressive Cas. Ins. Co., 775 F. Supp. 123 (S.D.N.Y. 1991) ..................................................................... 40 Chirila v. Bank of America, N.A., No. 3:11-cv-00005, 2013 WL 315218 (D. Nev. Jan. 25, 2013) ......................... 32 Graves v. Wachovia Bank, N.A., 607 F. Supp. 2d 1277 (M.D. Ala. 2009) ....................................................... 31, 52 Houston Contracting Co. v. Chase Manhattan Bank, N.A., 539 F. Supp. 247 (S.D.N.Y. 1982) ..................................................................... 40 Statutes CPLR § 201 ................................................................................................................ 5 CPLR § 5501(b) ....................................................................................................... 41 New York Banking Law § 602 ................................................................................ 43 UCC § 1-102 ...................................................................................................... 32, 40 UCC § 1-201 ............................................................................................................ 40 UCC § 4-103 .....................................................................................................passim UCC § 4-406 .....................................................................................................passim Miscellaneous N.Y. Const. Article VI, § 3 ...................................................................................... 41 NYCRR § 202.70 (Commercial Division Rule 19-a) .............................................. 38 1 COUNTERSTATEMENT OF QUESTIONS PRESENTED Whether the trial court correctly held in its February 8, 2011 decision (the “Trial Court Decision”) (R. 4-9),1 and the Second Department correctly affirmed in its November 14, 2012 decision (the “Appellate Decision”) (R. 385- 87), that respondent/defendant/counterclaim plaintiff Capital One, N.A. (“Capital One”) “established, prima facie, its entitlement to judgment as a matter of law” (R. 6), requiring dismissal of the claims asserted against it in the Complaint (R. 27-45) of appellants/plaintiffs/counterclaim defendants Jeffrey A. Clemente (“Clemente”) and Clemente Bros. Contracting Corp. (“Clemente Contracting”, collectively with Clemente, “Borrowers”) and granting judgment on Capital One’s counterclaims, where: The time to notify Capital One of a forgery pursuant to section 4-406(4) of New York’s Uniform Commercial Code (“UCC”) was shortened, in conformity with both UCC § 4-103 and section 201 of New York’s Civil Practice Law and Rules (“CPLR”), to the reasonable period of 14 days from each month Borrowers’ “statement of account accompanied by items paid in good faith in support of the debit entries” was made available to them pursuant to UCC § 4-406(1), as agreed to by Borrowers at 1 References to “R.” are to the Record on Appeal filed by Borrowers in connection with this appeal. 2 the inception of the banking relationship in both the Corporate Resolution signed by Clemente Contracting (R. 92) and the Miscellaneous Deposit Information Disclosure Statement and Agreement (R. 376-77); and Written notice of the checks alleged to have been forged was not provided by Borrowers to Capital One until on or about March 12, 2010 (R. 209-219), more than 790 days since the first forged check and 70 days after the last forged check had been presented for payment (id.), and at least 60 days after the mailing to Borrowers by Capital One of the last monthly statements of account for Clemente Contracting’s (i) line of credit, which set forth the outstanding principal balance and itemized each draw-down, and (ii) three corporate checking accounts, including Clemente Contracting’s operating account which contained a record of every draw-down against the line of credit and all cancelled checks (including the most recently forged check) written that month on that account (R. 351 at ¶¶ 4-9.) Respondent respectfully submits the answer to this question is in the affirmative. 3 Accordingly, this Court should affirm the Appellate Decision, thereby leaving intact the judgment which dismissed the claims asserted against Capital One in Borrowers’ Complaint and awarded Capital One on its counterclaims the amount of $1,211,536.10 (the “Judgment.”) (R. 13.) PRELIMINARY STATEMENT Article 4 of the UCC is designed to allocate responsibility between the customer and a bank in detecting and reporting potential forgeries. Borrowers’ appeal seeks to turn on its head the basic premise underlying section 4-406 of the UCC requiring that “the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.” (UCC § 4-406(1).) Indeed, the drafters of the UCC recognized “that there is little excuse for a customer not detecting an alteration of his own check or a forgery of his own signature.” (UCC § 4-406, comment 5.) The facts of this case present an egregious circumstance of neglect by a customer in failing to detect and report a scheme of fraudulent activity ongoing for more than two years. Indeed, Borrowers admit that they abdicated the responsibility to monitor and review their statements of account to the very individual they hired (and authorized) to draw-down on Clemente Contracting’s line of credit (the “Line of Credit”) and to write checks on the corporate operating 4 account (the “Operating Account”), even going as far as to authorize that individual, their bookkeeper defendant Aprile Hafner-Milazzo (“Hafner-Milazzo”), to forge Clemente’s name to checks. Yet, Borrowers claim that Capital One should bear the loss for Borrowers’ patent failure, over the course of two and one half years, to supervise or monitor in any fashion whatsoever the activities of Hafner-Milazzo. Indeed, within months of being hired in September 2007 (R. 111), Hafner-Milazzo allegedly began forging checks against Clemente Contracting’s accounts. (R. 209- 219.) For each of the 29 months that Hafner-Milazzo was employed by Clemente Contracting, monthly statements of account (“Statements of Account”) for Clemente Bros.’ (i) Line of Credit (setting forth the outstanding principal balance and each draw-down), and (ii) three checking accounts including Clemente Contracting’s corporate Operating Account, which contained a record of every draw-down made against the Line of Credit and all the cancelled checks written that month on that account, were mailed to Borrowers’ designated address. By his own admission, at no time prior to learning of Hafner-Milazzo’s fraudulent activities were any of these Statements of Account reviewed by Clemente. (R. 121.) The one-year limitation period under UCC § 4-406(4) within which to discover and report any unauthorized signature, which runs from the time the 5 Statements of Account are made available to the customer, was shortened to 14 days for Clemente Contracting’s accounts by both the Corporate Resolution signed by Clemente on behalf of Clemente Contracting (“Corporate Resolution,” R. 92) and the Miscellaneous Deposit Information Disclosure Statement and Agreement (“Disclosure Agreement,” R. 376.) The shortening of the statute of limitations under UCC § 4-406(4) was proper and permissible, consistent with both UCC § 4- 103 and CPLR § 201. This reduced period in which to report a suspected forgery tracks the 14-day period in UCC § 4-406(2), which the New York State legislature has determined is a reasonable amount of time for customers to review their statements of account. While this shortened period provided the Borrowers with sufficient opportunity to review their Statements of Account for unauthorized transactions, they failed to review a single Statement of Account during the time they employed their bookkeeper, constituting a breach of both their statutory duty to “exercise reasonable care and promptness to examine” their statements and cancelled checks (UCC § 4-406(1)) and their contractual obligation to “inspect [their] statement, and any cancelled checks, promptly after [their] receipt and “have at least two people review [their] statements, notices, and returned checks.” (R. 376-77.) Faced with an unfortunate situation of their own creation, Borrowers now seek to avoid the application of UCC § 4-406(4) by alleging that the 6 Corporate Resolution and Deposit Agreement are unenforceable. In so contending, Borrowers mistakenly rely on two decisions, both of which analyzed the propriety of a 14-day provision under UCC § 4-406(2), and extrapolate from those decisions that if Borrowers can establish that Capital One did not exercise ordinary care in handling the items forged by Hafner-Milazzo, then Borrowers are not precluded from recovering against the bank for all of Hafner-Milazzo’s alleged forgeries. Borrowers fail to recognize, however, that UCC § 4-406(4) applies “[w]ithout regard to care or lack of care of either the customer or the bank” and the agreements at issue here, which shortened the limitations period to 14 days, are proper and enforceable since they merely set forth a condition precedent to liability and did not disclaim the bank’s responsibility for its own lack of good faith or failure to exercise ordinary care. An analysis of Capital One’s exercise of ordinary care or lack thereof would only be relevant had Capital One established its right to summary judgment pursuant to UCC § 4-406(2), which would have shifted the burden of proof in order to avoid liability to Borrowers to establish that Capital One acted with a lack of ordinary care in paying the forged items. UCC § 4-406(3). Borrowers similarly attempt to avoid the time bar of their claims by focusing on the Line of Credit, for which they claim UCC § 4-406 is inapplicable while offering no substitute, rather than the Operating Account. Borrowers allege that more than a year after Hafner-Milazzo purportedly began forging checks in 7 January 2008 (R. 210), she began forging unauthorized draw-down requests (beginning in March 2009), the effect of which was simply to transfer funds from the Line of Credit into the Operating Account via internal debits and credits. (R. 174.) Borrowers’ focus is misplaced since it is not the Line of Credit nor the draw- down requests in connection with that line that are the keystones to this case and the principles on appeal, but rather the Operating Account on which the items (i.e., the checks) were drawn. As the trial court held, “any losses sustained by the plaintiffs are directly attributable to the forged checks, not the forged draw-down requests” (R. 7, fn. 1) and Capital One was entitled “to the protection afforded by UCC § 4-406 (4)” with respect to the draw-downs on the Line of Credit. (R. 7.) As set forth more fully below, Capital One has demonstrated through the proper presentation of relevant evidence that: (1) the statute of limitations was properly shortened from one year to the reasonable period of 14 days by both the Corporate Resolution signed by Borrowers and the Disclosure Agreement; (2) the Line of Credit was governed by the Corporate Resolution, the Disclosure Agreement, and UCC § 4-406; (3) the Statements of Account were made available to Borrowers in accordance with UCC § 4-406; (4) Borrowers failed to promptly notify Capital One of any forgery within the shortened statute of limitations; (5) the claims asserted by Borrowers against Capital One were time-barred; and (6) 8 Capital One was properly granted judgment on its counterclaims for breach of the loan documents. Accordingly, this Court should affirm the Appellate Decision in its entirety. NATURE OF THE CASE In April 2007, Borrowers began a banking relationship with North Fork Bank (“North Fork”), Capital One’s predecessor-in-interest by merger, by opening three corporate bank accounts, including the Operating Account, in addition to a $500,000 line of credit. (R. 29 at ¶ 8; R. 90-93; R. 112 at ¶ 8.)2 North Fork required all corporate customers to complete and execute a corporate resolution as a condition to opening any bank account. (R. 90-93.) Clemente Contracting by its principal Jeffrey A. Clemente, as President and Secretary of the Corporation, executed the Corporate Resolution. (R. 93.) The Corporate Resolution provided, among other things, that unless Clemente Contracting notifies Capital One in writing within 14 days of the delivery of any statement of account and cancelled check or other instrument for the payment of money of any claimed errors in such statement or any forgeries of Clemente Contracting’s signature, such statement of account “shall be considered correct for all purposes” and Capital One “shall not be liable for any payments 2 North Fork was acquired by merger by Capital One effective August 1, 2007. (R. 350.) 9 made and charged to the account of [the Borrower] or for any errors in the statement of account as rendered to it.” (R. 92 at ¶ 10.) Similarly, as a matter of course, when a corporate customer opened a new bank account at North Fork, the customer was provided with the Disclosure Agreement (among other standard documents), which set forth the terms and conditions of the customer’s account. (R. 352-53 at ¶ 14; R. 372-79.) The 14-day notice requirement in the Corporate Resolution is also set forth in the Disclosure Agreement: You [the customer] must inspect your statement, and any cancelled checks, promptly after your receipt or after we have made it available to you (for example, by holding at one of our branches for your pickup). You must notify us in writing: a. if your account is held in a branch in New York, within fourteen (14) days from the date your statement is postmarked, or otherwise made available to you … of any errors, discrepancies or irregularities, including, but not limited to, unauthorized signature, alterations, improper charges, unauthorized transfer or withdrawal of funds, non-receipt of an expected statement, or that any deposit was not properly credited to your account. (R. 376-77.) The Disclosure Agreement further provided that “[i]f this is a business account, you agree that you will have at least two people review your statements, notices, and returned checks.” (R. 377) (emphasis added.) 10 A. Capital One Increases Borrowers’ Line of Credit On or about October 26, 2009, approximately two and one half years after Clemente Contracting had opened its bank accounts and the original line of credit, Capital One increased the Borrowers’ Line of Credit to $1,000,000 pursuant to a Restated Promissory Note, dated October 26, 2009, made by Clemente Contracting in favor of Capital One (the “LC Note”)3. (R. 30 at ¶ 15; R. 66.) Pursuant to the terms of the LC Note, Clemente Contracting was entitled to borrow up to the full principal amount of the LC Note, $1,000,000. (R. 66.) The LC Note required Clemente Contracting to make interest payments on the unpaid principal balance of the Line of Credit on the first (1st) day of each month until the maturity date of July 1, 2010, on which date “all unpaid principal and interest shall be due in full.” (R. 66.) Contemporaneously with the Line of Credit, Capital One made a loan to Clemente Contracting in the principal amount of $200,000 (the “Term Loan” and, together with the Line of Credit, the “Loans”) pursuant to a Promissory Note, dated October 26, 2009, made by Clemente Contracting in favor of Capital One (the “Term Note” and, together with the LC Note, the “Notes.”) (R. 69-71.) The Term Note required Clemente Contracting to make monthly payments of principal and interest on the first (1st) day of each month until the maturity date of 3 Capital One had increased Borrowers’ line of credit to $750,000 one year earlier. (R. 112 at ¶¶ 10-11.) 11 November 1, 2014, the date on which “all unpaid principal and interest is due in full.” (R. 69.) Pursuant to identical provisions contained in the Notes, Capital One could declare the entire unpaid balance of the Loans due and payable upon the occurrence of an event of default. (R. 67; R. 70-71.) Events of default, as defined in the Notes, included, among other things: (a) Failure to pay any amount required by this Note when due, or any other obligation owed to the Bank by [the Borrower] or any Guarantor…; (b) Failure to perform or keep or abide by any term, covenant or condition contained in this Note, any Guaranty or any other document given to the Bank in connection with this loan; * * * (d) The happening of any event which, in the judgment of the Bank, adversely affects the [Borrower’s] or any Guarantor’s ability to repay or the value of any collateral. (R. 67; R. 70-71.) The Notes further provided that, on and after the occurrence of an event of default, the unpaid principal sum due under the Notes shall bear interest at a rate equal to five percent (5%) above the contract rate until the entire principal sum has been fully paid. (R. 66; R. 69.) To further secure repayment of the Notes, Clemente Contracting executed and delivered to Capital One a Security Agreement, dated October 26, 12 2009 (the “Security Agreement.”)4 (R. 81.) Pursuant to the Security Agreement, Clemente Contracting granted to Capital One a security interest in “all assets as perfected through existing UCC lien filings”, which consisted of the Collateral. (R. 81.) Pursuant to its terms, the Security Agreement secured (i) Clemente Contracting’s obligation to repay the amount of $1,000,000, as evidenced by the LC Note, together with all interest thereon plus all costs of collection in the event of default; (ii) any and all other liabilities of Clemente Contracting to Capital One under the Security Agreement; and (iii) any and all other liabilities of Clemente Contracting to Capital One, “direct or indirect, absolute or contingent, present or future, due or to become due.” (R. 81.) The Notes were further secured by a certain Personal Guaranty of All Liability, dated April 18, 2007, made by Clemente in favor of North Fork, as predecessor to Capital One (the “Guaranty”), which Guaranty was executed at the inception of the parties’ banking relationship (in connection with the earlier line of credit) and which it is undisputed remained in full force and effect throughout the banking relationship. (R. 31 at ¶ 18; R. 82-84.) (The Notes, the Security 4 The Notes were also secured by an earlier Security Agreement, dated April 18, 2007, executed by Clemente Contracting in connection with the earlier line of credit extended to Clemente Contracting in the amount of $500,000 (which was increased by Capital One to $750,000 in July, 2008). (R. 72-73, R. 112.) Pursuant to that 2007 Security Agreement, Clemente Contracting granted North Fork (as predecessor to Capital One) a security interest in “[a]ll personal property owned or subsequently acquired” by Clemente Contracting as security for “[a]ny and all [] liabilities of Borrower…present or future” (the “Collateral”). (R. 72-73.) That security interest was perfected by the filing on April 19, 2007 of a UCC Financing Statement covering the collateral. (R. 21 at ¶ 12; R. 74-80.) 13 Agreement, the Guaranty and all other documents delivered in connection with the Loans are hereinafter collectively referred to as the “Loan Documents.”) Pursuant to the terms of the Guaranty, Clemente granted to Capital One an absolute, continuing and unconditional guaranty of payment and performance of the Borrower’s obligations. (R. 82.) The obligations guaranteed by Clemente were defined as follows: OBLIGATIONS: Obligations means all amounts due to [Capital One] of any nature, whether they already exist, are incurred at this time, or are incurred in the future, whether they are direct or indirect, whether they are absolute or contingent, whether they are secured or unsecured, whether they are matured or unmatured, whether they were incurred by the Borrower alone or jointly and/or severally with others, whether they were originally contracted with [Capital One] and/or other(s) now or later owing to [Capital One], whether or not they are represented by purchase or repurchase agreements. Obligations include, but are not limited to, all sums just described, late charges, disbursements, legal fees, and any amount still due after [Capital One] take[s] any existing collateral. (R. 82.) Clemente’s liabilities under the Guaranty became immediately due and payable upon, among other things, Clemente Contracting’s default in the prompt payment of amounts due under the Loan Documents. (R. 83.) B. Borrowers Were Provided Monthly Statements of Account As a matter of course, Capital One makes available to its customers, on a monthly basis, a statement of account for each bank account and line of credit 14 that a customer maintains at Capital One. (R. 351 at ¶ 4.) The statements of account are mailed each month to the customer at the address designated by the customer on the signature card associated with the account (unless the customer has requested to receive its statements electronically). (R. 351 at ¶ 4.) The address designated by Clemente Contracting on the signature cards for all three of Clemente Contracting’s bank accounts, including the Operating Account (upon which the allegedly forged checks were written), was “50 S. Bridge St., Staten Island, NY 10309-2619.” (R. 351 at ¶ 5; R. 354-56.) Each month Capital One mailed the Statements of Account for all of Borrowers’ accounts, including the Operating Account (accompanied by copies of cancelled checks drawn on that account) and the Line of Credit (which set forth the principal balance remaining on the Line of Credit and itemized each monthly draw-down) to Clemente Contracting’s designated address. (R. 351-52 at ¶¶ 6-9; R. 357-71.) C. Clemente Contracting’s Bookkeeper’s Alleged Fraud In September 2007, Clemente, on behalf of Clemente Contracting, hired defendant Hafner-Milazzo to act as a secretary/bookkeeper for Clemente Contracting’s day-to-day business. (R. 31 at ¶¶ 17-21.) From the time that Borrowers hired Hafner-Milazzo through February 2010, it is undisputed that Borrowers failed to examine their Statements of Account or the cancelled checks 15 made available to them each month by Capital One. (R. 33 at ¶¶ 32-34.) Throughout that time, Borrowers held Hafner-Milazzo out to Capital One as the authorized -- and trusted -- representative, and it was Hafner-Milazzo, on behalf of Clemente Contracting, who primarily and routinely interfaced with Capital One regarding Clemente Contracting’s various accounts. (R. 23 at ¶ 23.) Failing to take any responsibility for their utter failure to supervise Hafner-Milazzo’s conduct in any way, to review a single Statement of Account or cancelled check during the 29 months for which she acted as their bookkeeper, and having admitted that she was actually authorized by Clemente to forge Clemente’s signature to checks at times (R. 111), Borrowers blame Capital One for failing to detect the purported defalcations.5 In so blaming Capital One, they attempt to make much of Hafner- Milazzo’s first draw-down request dated February 4, 2009, in which she signed her own name requesting a $100,000 draw-down against Clemente Contracting’s Line of Credit to the Operating Account. (App. Br. pp. 13-14; R. 171.)6 Yet, Borrowers do not disclose to the Court that this February 4, 2009 draw-down request, which 5 In February 2010, when Clemente eventually reviewed the Statements of Account, even he couldn’t identify when the forgeries began and which checks were necessarily forgeries. In his written notification to Capital One on March 12, 2010, Clemente identifies forgeries going back at least until January 2008. (R. 209-19.) In addition, Clemente admitted that he authorized Hafner-Milazzo to “forge” his signature on at least four of those checks. (R. 210-11.) 6 References to “App. Br.” are to Borrowers’ Brief, dated July 31, 2013. 16 Borrowers characterize as “Milazzo’s initial criminal conduct” (App. Br. p. 13), was specifically authorized by Clemente and not alleged by Borrowers to have been unauthorized, let alone a forgery. (R. 197.) Indeed, immediately after receiving this request, Capital One specified that only Clemente was an authorized signatory for draw-down requests; Clemente then signed a draw-down request that same day authorizing that very same draw-down. (R. 172.) D. Borrowers Learn of the Alleged Defalcations Borrowers contend that thereafter Hafner-Milazzo forged Clemente’s name to nine draw-down requests to Capital One, pursuant to which Capital One transferred funds from Clemente Contracting’s Line of Credit to its Operating Account (R. 118 at ¶ 33) and that Hafner-Milazzo, since as early as January 12, 2008, had been forging checks drawn on the Operating Account for her own uses. (R. 120 at ¶ 40.) Yet, Borrowers did not discover any of the defalcations until February 2010, when one of their employees found a bank statement and a cancelled check made payable to the “New York Mets” in the trunk of Hafner- Milazzo’s car after she asked him to replace a brake light. (R. 120-21.) This astounding failure to have discovered Hafner-Milazzo’s allegedly fraudulent conduct for more than two years after its inception is inexcusable. Borrowers completely abandoned their contractual and statutory responsibility to promptly review the Statements of Account (and cancelled 17 checks) provided to them by Capital One during their bookkeeper’s tenure. (R. 33 at ¶¶ 31-34.) This duty, which Borrowers failed to uphold, is the cornerstone of UCC § 4-406(1), which requires that “the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.” In addition, this practice was entirely contrary to their contractual obligation to “inspect [their] statements, and any cancelled checks, promptly after [their] receipt” and to “have at least two people review [their] statements, notices, and returned checks.” (R. 376-77.) At no time prior to March 12, 2010 did Borrowers notify Capital One in writing of any purported forgeries or other falsification in any of their accounts (R. 220),7 even though they have alleged that Hafner-Milazzo was forging checks from January 2008 through December 2009. (R. 7.) In fact, Capital One only learned of the alleged forgeries by happenstance when the account was overdrawn and a Capital One representative called Borrowers to so advise, at which time Clemente answered the phone, disclosed the suspected forgeries and stated that his bookkeeper had been arrested. (R. 24 at ¶ 25.) 7 Clemente claims that he informed Capital One of the forgeries on March 2, 2010 in person at his local Capital One branch. (R. 122 at ¶¶ 46-49.) However, the written notification required under the Disclosure Agreement (R. 376) and Corporate Resolution (R. 92) was not provided until March 12, 2010. (R. 209-19.) 18 As described above, the time period in which the Borrowers had to report each alleged forgery to Capital One was 14 days from the time the Statements of Account and cancelled checks containing those forgeries were made available to Borrowers.8 This shortened time period, as the trial court noted (R. 7- 8), was agreed to by the parties in both the Disclosure Agreement (R. 376-377) and the Corporate Resolution, which was signed by Clemente and remained in effect during the entirety of the Borrowers’ relationship with Capital One (and its predecessor North Fork). (R. 92 at ¶ 10.) In fact, the trial court found that Borrowers acknowledged as much as Clemente himself relied on the Corporate Resolution as evidence that he was the only authorized signatory on the accounts. (R. 7-8, 107.) There is no dispute that Borrowers did not notify Capital One of any alleged forgery during this 14-day period. (R. 24 at ¶ 25.) E. Borrowers Default on Their Obligations Under the Loan Documents and Then Commence a Preemptory Action Against Capital One After Borrowers’ rejection of Capital One’s offer of additional credit to help with their working capital shortfall (R. 85-87), Capital One provided written notice, dated March 29, 2010 (the “Adverse Change Default Notice”), to Clemente Contracting (as Borrower) and Clemente (as Guarantor), of the event of 8 The Corporate Resolution requires notification within 14 days “of the delivery or mailing of any statement of account and cancelled check” (R. 92) and the Disclosure Statement requires notification within 14 days “from the date your statement is postmarked, or otherwise made available….” (R. 376.) 19 default under the LC Note and Term Note (i.e., the occurrence of an event that “adversely affects the [Borrower’s or Guarantor’s] ability to repay” the indebtedness), but Capital One took no further action. (R. 23 at ¶ 20.) By Summons and Complaint dated June 29, 2010, Borrowers commenced this preemptory action against Capital One and Hafner-Milazzo asserting four causes of action against Capital One, to wit: (1) declaratory judgment seeking Capital One be barred from recovering under the Loan Documents; (2) negligence in connection with the Line of Credit; (3) attorneys’ fees and relief from the provision in the Loan Documents requiring Borrowers pay Capital One’s attorneys’ fees; and (4) negligence in connection with the forged checks.9 (R. 27-44.) The LC Note matured on July 1, 2010, and Borrowers failed to comply with the terms and conditions of the Loan Documents when they (1) defaulted under the LC Note in failing to repay the principal, interest and other payments due to Capital One on the Maturity Date; and (2) defaulted under the Term Note in failing to satisfy their obligations to Capital One under the LC Note. (R. 22-23 at ¶ 19.) 9 Borrowers have no sustainable claim for negligence as a matter of law since the obligations of the parties are governed by contract. Calisch Assoc., Inc. v. Manufacturers Hanover Trust Co., 151 A.D.2d 446, 447, 542 N.Y.S.2d 644, 645 (1989) (“A cause of action for negligence cannot be based on a breach of a contractual duty” between the depositor and the bank.) 20 By written notice dated July 6, 2010 (the “Maturity Default Notice”), Capital One notified Borrowers that the LC Note was past due, of the cross default under the Term Note, and demanded the immediate payment of all outstanding amounts under the Loan Documents. (R. 23 at ¶ 21; R. 88-89.) By its Answer and Counterclaims dated July 28, 2010, Capital One denied the material allegations in the Complaint and counterclaimed for breach of the LC Note, Term Note, Security Agreements and Guaranty (collectively the “Counterclaims.”) (R. 46-64.) By Notice of Motion, dated September 8, 2010, Capital One moved for summary judgment in its favor on the Counterclaims and for dismissal of the Complaint with respect to the claims asserted against Capital One. (R. 16-17.) The trial court granted Capital One’s motion for summary judgment (R. 4-9) and awarded Capital One the Judgment for $1,211,536 constituting the amount due under Loan Documents, including interest thereon. (R. 12-13.) The Second Department affirmed the Trial Court Decision. (R. 385-87.) 21 ARGUMENT POINT I THE TRIAL COURT AND APPELLATE DIVISION PROPERLY HELD THAT CAPITAL ONE IS ENTITLED TO THE PROTECTIONS OF UCC § 4-406(4) The relationship between the parties and the claims and defenses arising from that relationship are governed by New York UCC’s Article 4. See Monreal v. Fleet Bank, 95 N.Y.2d 204, 207, 713 N.Y.S.2d 301, 303 (2000) (analyzing claims based on allegedly forged checks under Article 4 of the UCC.) While the UCC fastens strict liability on a bank that charges against its customer’s account an item that is not “properly payable,” it also imposes “reciprocal duties on the customer, which limits the bank’s strict liability exposure.” Id. at 207, 713 N.Y.S.2d at 303. Specifically, UCC § 4-406(1) requires a bank to send its customer a “statement of account accompanied by items paid in good faith in support of the debit entries” and the affirmative obligation is on the customer to “exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and [] notify the bank promptly after discovery thereof.” Section 4-406(4) of the UCC dispenses with any analysis as to the customer’s or the bank’s “care or lack of care,” providing the customer with “one 22 year from the time the statement and items are made available to the customer” to assert claims against the bank for an unauthorized signature. If the customer fails to timely provide notice of the forgeries, UCC § 4-406(4) will bar recovery for those items. Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280, 282, 617 N.Y.S.2d 452, 452 (1994); see also Garage Mgmt. Corp. v. Chase Manhattan Bank, 22 A.D.3d 432, 433, 803 N.Y.S.2d 60, 61 (1st Dep’t 2005); Josephs v. Bank of N.Y., 302 A.D.2d 318, 318, 756 N.Y.S.2d 518, 520 (1st Dep’t 2003); Mansi v. Gaines, 216 A.D.2d 536, 628 N.Y.S.2d 804 (2d Dep’t 1995); Wells v. Bank of N.Y. Co., 181 Misc. 2d 574, 578, 694 N.Y.S.2d 570, 574 (Sup. Ct. N.Y. Cnty 1999). A. The One-Year Notification Period Set Forth in UCC § 4-406 May Be Shortened by Bank Rules and Regulations and/or the Terms and Conditions of a Customer’s Account New York courts have consistently held that the one-year condition precedent set forth in UCC § 4-406(4) may be further and significantly abbreviated by a bank’s rules and regulations and/or the terms and conditions of the customer’s bank account. See Gluck v. JPMorgan Chase Bank, 12 A.D.3d 305, 305, 785 N.Y.S.2d 77, 78 (1st Dep’t 2004) (finding that the parties’ Deposit Account Agreement effectively shortened the statutory one-year condition precedent in UCC § 4-406(4) to 60 days); Josephs, 302 A.D.2d at 318, 756 N.Y.S.2d at 520 (limiting plaintiff’s claims based on defendant bank’s rules and regulation which required “notification of forgeries within 30 days of the applicable statement’s 23 closing date”); Radon Constr. Corp. v. Colwell, 248 A.D.2d 366, 669 N.Y.S.2d 839 (2d Dep’t 1998) (“the defendant’s deposit account agreement … required the plaintiff to notify it of any discrepancy in the bank statement within 15 days after receipt of the statement”); Wells, 181 Misc. 2d at 578, 694 N.Y.S.2d at 574 (holding that the plaintiff’s breach of contract claim was “further limited by the [15 day] notification requirement set forth in [the bank’s] rules and regulations”); In re Ray, 24 Misc. 3d 285, 289, 874 N.Y.S.2d 891, 894 (Sur. Ct. 2009) (holding that Terms and Conditions of bank account “served to abbreviate the statutory one-year condition precedent to actions against Chase to 60 days…”); Parent Teacher Ass’n. v. Manufacturers Hanover Trust Co., 138 Misc.2d 289, 295, 524 N.Y.S.2d 336, 340 (Sup. Ct. Bronx. Cnty 1988) (“PTA was under a contractual duty to notify MHT in writing of any forgery or signature not in accordance with the signature card within 14 days.”) Moreover, the shortening of the limitations period is permitted by both the CPLR and Article 4 of the UCC. CPLR § 201 provides that “[a]n action … must be commenced within the time period specified in this article unless a different time is prescribed by law or a shorter time is prescribed by written agreement.” See John J. Kassner & Co., v. City of New York, 46 N.Y.2d 544, 550- 51, 415 N.Y.S.2d 785, 789 (1979) (“parties may cut back on the Statute of Limitations by agreeing that any suit must be commenced within a shorter period 24 than is prescribed by law. Such an agreement does not conflict with public policy but, in fact, ‘more effectively secures the end sought to be attained by the statute of limitations.’ Thus an agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable provided it is in writing”) (internal citations omitted.) Similarly, UCC § 4-103, entitled in part “Variation by Agreement,” provides that “(1) [t]he effect of the provision of this Article may be varied by agreement except that no agreement can disclaim a bank’s responsibility for its own lack of good faith or failure to exercise ordinary care ….” The Official Comment to subsection 4-103(1) states in pertinent part that “this subsection … approves the practice of parties determining by agreement the standards by which [their] responsibility is to be measured.”10 10 While this Court rejected an agreement to vary the statute of repose under UCC Article 4A in Regatos v. N. Fork Bank, 5 N.Y.3d 395, 402, 804 N.Y.S.2d 713, 718 (2005), it did so based on its finding that the language in Article 4A prohibited such a modification. This Court has recognized that the principles applicable to wire transfers pursuant to Article 4A are separate and apart from those related to negotiable instruments under Article 4. Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 369, 568 N.Y.S.2d 541, 547 (1991). (In the case at bar, Article 4A is not applicable to the Line of Credit since the draw-downs from the Line of Credit to the Operating Account were effectuated simply through internal debits and credits at Capital One, and not by wire transfer.) Additionally, the Regatos Court specifically found that the statute of repose was a “jurisdictional attribute of the ‘rights and obligations’ of the parties” and noted that the statute of repose did not appear in the part of Article 4A “touching upon substantive rights and obligations.” Regatos, 5 N.Y.3d at 403, 804 N.Y.S.2d at 717. In contrast, UCC § 4- 406(4) is not merely a statute of limitations, but rather creates a substantive rule of law, a statutory condition precedent to liability and prerequisite of notice which, unlike a statute of limitations, cannot be tolled. Gluck, 12 A.D.3d at 306, 785 N.Y.S.2d at 78; Weiner v. Spring Mortgage Bankers Corp., 235 A.D.2d 472, 474, 652 N.Y.S.2d 629, 631 (2d Dep’t 1997). 25 In this case, Borrowers’ time within which to report suspected forgeries to Capital One was shortened from one year to 14 days by agreement of sophisticated parties in a banking relationship through both the terms of the Corporate Resolution, executed by Clemente Contracting as a condition to establishing its banking relationship with Capital One (and which Clemente Contracting admitted was in effect and enforceable against Capital One) (R. 8; R. 111 at ¶ 6), as well as the terms of the Disclosure Agreement, the compliance of which was properly required by Capital One. See, e.g., Wells, 181 Misc. 2d at 578, 694 N.Y.S.2d at 574 (“Contrary to plaintiff’s arguments, it has been held that compliance with notification requirements set forth in the drawee bank’s rules and regulations is required for account holders to recover.”) The Corporate Resolution, which was signed by Clemente as Clemente Contracting’s President and Secretary (R. 93), abbreviates the statutory period found in UCC 4-406(4) from one year to 14 days, and requires Clemente Contracting to provide written notice within that time, failing which Capital One is absolved from any liability for paying on an allegedly forged instrument. (R. 92 at ¶ 10.) Specifically, the Corporate Resolution provides: [U]nless the Corporation shall notify the Bank in writing within fourteen calendar days of the delivery or mailing of any statement of account and cancelled check, draft or other instrument for the payment of money (hereinafter 26 referred to as an ‘Instrument’) of any claimed errors in such statement, or that the Corporation’s signature upon any such returned Instrument was forged, or that any such Instrument was made or drawn without the authority of this Corporation … said statement of account shall be considered correct for all purposes and said Bank shall not be liable for any payments made and charged to the account of the Corporation or for any other errors in the statement of account as rendered to it. Id. (emphasis added.) The Disclosure Agreement similarly provides: You [the customer] must inspect your statement, and any cancelled checks, promptly after your receipt or after we have made it available to you (for example, by holding at one of our branches for your pickup). You must notify us in writing: a. if your account is held in a branch in New York, within fourteen (14) days from the date your statement is postmarked, or otherwise made available to you … of any errors, discrepancies or irregularities, including, but not limited to, unauthorized signatures, alterations, improper charges, unauthorized transfer or withdrawal of funds, non-receipt of an expected statement, or that any deposit was not properly credited to your account. (R. 376-77.) The First Department’s decision in Josephs v. Bank of N.Y. is particularly on point. Josephs, like the instant case, involved claims against a bank based on checks allegedly forged by the plaintiff’s employee over a period of several years. 302 A.D.2d 318, 756 N.Y.S.2d 518. The alleged fraud was discovered on August 29, 2000, and the plaintiff notified the bank shortly thereafter. Id. at 318, 756 N.Y.S.2d at 520. The First Department affirmed the trial 27 court’s order dismissing the plaintiff’s claims with respect to all allegedly forged checks reflected on the account statement made available to her prior to August 1, 2000, holding: Pursuant to UCC 4-406(4), any claims regarding forged checks made available to plaintiff prior to September 1, 1999 were properly barred. Additionally, pursuant to defendant bank’s rules and regulations, which required notification of forgeries within 30 days of the applicable statement’s closing date, the motion court properly precluded any claims regarding forged checks reflected on statements made available to plaintiff prior to August 1, 2000. Id. Significantly, Josephs also affirmed the dismissal of the plaintiff’s separate action seeking a declaratory judgment stating that the plaintiff was obligated to pay the sums owed to the bank pursuant to three lines of credit allegedly wrongfully depleted by means of the employee’s embezzlement and forgery. In rejecting that claim, this Court held: Plaintiff agreed to pay the outstanding principal balance of the loans, and there is no basis for plaintiff’s contention that she should be excused from her contractual repayment obligation. Id. at 319; 756 N.Y.S.2d at 520 (emphasis added.) The facts underlying Wells v. Bank of N.Y. are strikingly similar to the situation at bar. In that case, the plaintiffs alleged that their bookkeeper drew checks on the corporate plaintiff’s account by forging the signature of the 28 corporation’s principal for about three years. 181 Misc. 2d at 576, 694 N.Y.S.2d at 573. The bank moved to dismiss the breach of contract claim, relying on the one- year limitation set forth in UCC 4-406(4) and the shortened notification requirement set forth in the bank’s rules and regulations, which required plaintiffs to “promptly examine its bank statements and to notify the bank of errors, discrepancies or irregularities in its [bank] statements or canceled checks within 15 days of receipt of the statement.” Id. at 578, 694 N.Y.S.2d at 574. The court granted the motion, noting that “compliance with notification requirements set forth in the drawee bank's rules and regulations is required for account holders to recover,” and holding that plaintiffs were “precluded from continuing any action based on alleged forged checks, where it did not report the alleged fraud within 15 days after the monthly statement showing the discrepancy was received by it.” Id. at 578, 694 N.Y.S.2d at 574. Here, Borrowers allege that “[c]ommencing on a date unknown to the [Borrowers], but subsequent to the date that [Hafner-Milazzo] began providing services to [Clemente Contracting] in 2007, [Hafner-Milazzo] forged and unlawfully altered the amount and payee of checks drawn on [Clemente Contracting’s] accounts maintained with Capital One.”11 (R. 35 at ¶ 47.) Borrowers 11 On March 12, 2010, Clemente identified checks going back as far as January 12, 2008 as being forgeries and claimed that as much as $457,029.58 may have been stolen by Hafner-Milazzo. (R. 209-19.) 29 further allege that they first learned of Hafner-Milazzo’s alleged embezzlement scheme in February 2010, when a forged check in the approximate amount of $19,000 made payable to the “New York Mets” was brought to their attention by another employee. (R. 33 at ¶ 32.) Only then -- two and a half years after hiring Hafner-Milazzo -- did Borrowers initiate a review of their banking records to detect any forgeries or alterations. (R. 33 at ¶ 34; R. 121.) Thus, by their own admission, Borrowers failed to comply with their duties under § UCC 4-406(1) both to “exercise reasonable care and promptness” to examine the Statements of Account and to “notify the bank promptly” of any discrepancies found therein. This is especially significant based on the written notice Borrowers provided to Capital One on or about March 12, 2010, long after the 14-day period had expired, alleging that the last forged draw-down request was dated November 23, 2009 and the last forged check was presented on December 31, 2009. (R. 8; R. 196; R. 209- 19.) Based on the foregoing law and facts, Borrowers are statutorily and contractually barred from asserting claims or defenses against Capital One predicated upon the alleged forgeries and alterations. See, e.g., Josephs, 302 A.D.2d at 318, 756 N.Y.S.2d at 520. Such preclusion not only defeats Borrowers’ request for a declaratory judgment barring Capital One from enforcing the terms of the Loan Documents, but also constitutes a bar against recovery for Borrowers’ 30 claims of negligence and for declaratory relief. See New Gold Equities Corp. v. Chemical Bank, 251 A.D.2d 91, 92, 674 N.Y.S.2d 41, 42 (1st Dep’t 1998). B. The Shortening of the Time Period Under UCC § 4-406(4) Has Been Permitted by Every Appellate Court and District Court in Other Jurisdictions That Have Considered the Issue Eleven states, in addition to New York, have held that the time period in which to report suspected forgeries under UCC § 4-406(4) (or its equivalent) can be shortened by agreement between the customer and bank. This list includes three high courts: Peters v. Riggs Nat’l. Bank, N.A., 942 A.2d 1163, 1168 (D.C. 2008) (“following the terms of the contract, Ms. Graves had sixty days from the mailing of her account statements to discover and report unauthorized transactions”); American Airlines Emps. Fed. Credit Union v. Martin, 29 S.W.3d 86, 97 (Tex. 2000) (“The Deposit Agreement is consistent with the UCC … [and] we note that other jurisdictions have enforced shortened notice periods ranging from fourteen to sixty days”); and National Title Ins. Corp. Agency v. First Union Nat’l. Bank, 559 S.E.2d 668, 672 (Va. 2002) (“we conclude that a bank and its customer may contractually shorten the one-year period contained in Code § 8.4-406(f).”)12 12 In addition, the high courts of Minnesota and Mississippi have allowed agreements between a bank and customer to shorten the notification period under UCC § 4-406(2). Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567 (Minn. 1997) (upholding a customer agreement which shortened the statutory 30-day notification period for § 4- 406(2) to 20 days); Union Planters Bank, Nat’l. Ass’n v. Rogers, 912 So.2d 116 (Miss. 2005) (upholding a customer agreement which shortened the 30-day notification period for § 4-406(2) to 15 days). 31 Further, the intermediate appellate courts of six states have similarly held that the reporting period under UCC § 4-406(4) can be shortened by agreement: Absolute Drug Detection Servs., Inc. v. Regions Bank, 116 So.3d 1162, 1165 (Ala. Civ. App. 2012) (“the deposit agreement, however, expressly shortens the period to 30 calendar days”);13 Bank of America, N.A. v. Putnal Seed & Grain, Inc., 965 So.2d 300, 301 (Fla. Dist. Ct. App. 2007) (“The 60-day notice requirement only creates a condition precedent which Putnal must comply with before it may seek reimbursement”); Freese v. Regions Bank, N.A., 644 S.E.2d 549, 552 Ga. App. 717 (Ga. Ct. App. 2007) (“The UCC permits parties to a contract of deposit to agree between themselves as to their duties and the legal consequences which flow therefrom….The 30-day limitation is not manifestly unreasonable”); Groue v. Capital One, 47 So.3d 1038, 1043 (La. Ct. App. 2010) (“because plaintiff failed to notify Capital One of the initial forgeries in the time frame set forth in the parties’ agreement and because the [30-day] notification period expressed therein is not manifestly unreasonable, the agreement precludes plaintiff from recovery”); Century Constr. Co., v. Bancorpsouth Bank, 117 So.3d 345, 348 (Miss. Ct. App. 2013) (“From a plain reading of the statute, the one-year 13 This decision is consistent with an earlier decision of the District Court for the District of Alabama. Graves v. Wachovia Bank, N.A., 607 F. Supp. 2d 1277, 1280 (M.D. Ala. 2009) (“the court notes that the Deposit Agreement does not eliminate Wachovia’s duty of good faith, nor does it limit the measure of damages; it simply reduces the time period [to 40 days] in which a customer must report any forged or missing signatures before any such claims are extinguished.”) 32 notice provision established by the section 75-4-406(f) ‘may be varied’ by the deposit agreement [to sixty days]”) and Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247, 252 (Wis. Ct. App. 1998) ([W]e conclude that the fourteen-day period is not ‘manifestly unreasonable’ . . . and that Borowski’s action against Firstar Bank is . . . barred.”) Lastly, at least one federal district court and one trial court have also upheld these agreements: Chirila v. Bank of America, N.A., No. 3:11-cv-00005, 2013 WL 315218 at *5 (D. Nev. Jan. 25, 2013) (“the three-year statute of limitations on actions against a bank to recover amounts drawn by forged checks may be varied by agreements such as the [60-day] Agreement in this case because Nevada law expressly provides for such agreements.”); and FCT Elecs., LP v. Bank of America, N.A., No. CV 106002699, 2011 WL 4908850 at *11 (Conn. Super. Ct. Sept. 22, 2011) (“The [30-day] shortened statute of limitations contained in the Deposit Agreement is not contrary to public policy and enforcing the shorter reporting requirements is consistent with decisions from other jurisdictions.”) Significantly, not a single case could be identified wherein a court refused to permit the reporting period under UCC § 4-406(4) to be shortened by agreement. Consistent with the underlying purpose of policies of the Uniform Commercial Code “to make uniform the law among the various jurisdictions” (UCC § 1-102(2)(c)), this Court should hold that the reporting period under UCC § 33 4-406 (4) can be shortened by agreement. See Monreal, 95 N.Y.2d at 209, 713 N.Y.S.2d at 304 (“One of the Uniform Commercial Code’s basic purposes is to ‘make uniform the law among the various jurisdictions’”) citing Woods, 84 N.Y.2d at 285, 617 N.Y.S.2d at 284 (recognizing that consideration of decisions from other jurisdictions to achieve uniformity furthers “the goal of the UCC-‘to simplify, clarify and modernize the law governing commercial transactions’ (UCC 1-102[2][a] ).”) C. The Shortened Period of 14 Days Was a Reasonable Period of Time for Borrowers to Review Their Statements of Account and Report Suspected Forgeries The reasonableness of the abbreviation of the reporting period to 14 days which serves to bar Borrowers’ claims under UCC § 4-406(4) must be viewed in light of the specific statutory language in UCC § 4-406(2) recognizing 14 days to be a reasonable time to require a customer to examine its bank statement and report any unauthorized signature or alteration. Accordingly, the reduction of Borrowers’ time to report alleged forgeries to 14 days under UCC § 4-406(4) is therefore sustainable as that shortened time period is one specifically recognized as reasonable by New York’s legislature at the time it adopted the UCC in 1962, and the legislature has not altered, changed or modified that period in any manner even though the drafters of the model UCC did so more than 20 years ago. The balancing of protections in each of these two sections of 4-406 34 highlights this result. Pursuant to UCC § 4-406(2), if a customer fails to report the first of multiple forgeries by the same individual within 14 days of having the statement of account showing that first forgery made available, the customer is precluded from recovering on any subsequent forgery, regardless of how long the fraudulent scheme continued. However, to balance the preclusive effect that results from failing to examine the first statement of account showing the payment of a forged item, UCC § 4-406(3) provides the customer with the opportunity to establish a lack of ordinary care on the part of the bank.14 This “balancing of rights under the UCC represents the ultimate distillation of a painstaking process of evolution, pursuant to which the risk of loss in commercial matters has been attempted to be adjusted in a fair and equitable manner.” Five Towns Coll. v. Citibank, N.A., 108 A.D.2d 420, 429-30, 489 N.Y.S.2d 338, 345 (2d Dep’t 1985). In other words, pursuant to UCC § 4-406(2), the bank is protected from all subsequent forgeries if the customer fails to detect the first act of an ongoing bad actor. In exchange, the customer receives the affirmative defense of proving a lack of ordinary care on the part of the bank. Irrespective of the reporting 14 In addition, subsection (a) of 4-406(2) requires that the bank demonstrate that it has suffered a loss as a result of the customer’s failure to identify and report suspected forgeries. In situations such as this case, the payments made by the bank coupled with the customer’s long delay in reporting the forgeries, establishes that the bank has suffered a loss. See Royal Arcanum Hosp. Ass'n of Kings Cnty., Inc. v. Herrnkind, 35 Misc. 3d 1205(A) at *8, 950 N.Y.S.2d 726 (Sup. Ct. Kings Cnty. 2012) (“Here, [the bank] suffered a loss by reason of [the customer’s] failure to notify it of the allegedly unauthorized withdrawals since it made payments from the accounts.”) 35 period, the interests of the customer and the bank are thus balanced in UCC § 4- 406(2). The shortened period in this case under UCC § 4-406(4) does not require this balancing of interests because the customer is not precluded from reporting subsequent forgeries by its failure to examine the first statement of account and report the first alleged forgery. In exchange, the customer cannot be relieved of its failure through the affirmative defense of lack of ordinary care on behalf of the bank. Thus, the selection of a 14-day period in which to review a statement of account under UCC § 4-406(2), where the penalty for failing to identify and report suspected forgeries will often prove more severe, demonstrates the inherent reasonableness of 14 days for a customer to review their statements and report forgeries under UCC § 4-406(4).15 In this case, the shortened period for reporting forgeries after Borrowers’ failure to detect the first forgery did not curtail their opportunities to review the Statements of Account sent to them each and every month and to uncover and object to suspected forgeries found within the shortened period. Not only does 14 days provide a commercial customer with sufficient opportunity to 15 The model UCC expanded this time period to 30 days when it revised Articles 3 and 4 in 1991. In the more than 20 years since this change, New York’s legislature has not seen fit to adopt these revisions, including this extended reporting period. It is respectfully submitted that this decision of the legislature to continue to embrace a 14-day review period acknowledges 14 days as a reasonable period of time for customers to review their statement of account. 36 review its statements for suspicious entries, it is incumbent on commercial customers to do so in order to protect their business’ assets. In fact, Capital One contractually obligates its corporate customers to have “at least two people review [their] statements, notices, and returned checks” (R. 377), for the purpose of protecting against the very behavior that befell Borrowers. Had Borrowers complied with this obligation and reviewed just one of the 24 Statements of Account sent to them between January 2008 (when the alleged forgeries began) and January 2010 (which contained the last allegedly forged check), Borrowers would have discovered that they had hired and harbored a thief. Their failure to have done so is through no fault of Capital One. The Court of Appeals of Wisconsin analyzed the propriety of shortening the statute of limitations under section 4-406 to 14 days in Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247 (Wis. Ct. App. 1998). In a situation similar to the instant case, the borrower brought a cause of action against his bank after his girlfriend systematically stole $150,000 from both his and his father’s account using forged instruments. Id. at 248-49. Summary judgment was granted to the bank and the customer appealed. As with Clemente Contracting’s claims, the customer argued that there were issues of fact regarding whether the bank had acted negligently in paying the forged instruments. The Borowski court disagreed, holding that “whether a bank is at fault is not material if the customer 37 does not give the bank timely notice under § 404.406(4) that something is amiss.” Id. at 251. While Borowski contended that the 14-day period was unreasonably short, the Borowski court disagreed, concluding that “the fourteen-day period is not ‘manifestly unreasonable’ as that term is used in § 404.103(1).” Id. at 252-53. In so holding, the court considered the policy underlying the Article 4 which requires “persons to be vigilant in the conduct and safeguarding of their own affairs,” (id. at 252), the shortening of the statute of limitations by statute in several states and by case law in other states, including Parent Teacher Ass’n., 138 Misc.2d 289, 524 N.Y.S.2d 336. Id. at 252. Based on the will of the legislature, the fact that Borrowers’ opportunity to review each month their Statements of Account and report any suspected forgeries was not prejudiced, and the compelling analyses of several other jurisdictions addressing this issue, this Court should affirm the Appellate Decision enforcing, pursuant to UCC§ 4-406(4), the mutually agreed-upon shortening of the notice period to 14 days under both the Corporate Resolution and Disclosure Agreement. D. The Record Makes Clear that Capital One Provided Statements of Account to Borrowers on a Monthly Basis Borrowers contend that the trial court erred in finding that the Statements of Account and accompanying items were provided to them. (App. Br. 38 pp. 32-33.) However, this argument is without merit as the court’s finding was directly supported by the record. In its Statement of Undisputed Material Facts, submitted in accordance with Rule 19-a(a) of the Rules of the Commercial Division of the Supreme Court (NYCRR 202.70), Capital One alleged that “Clemente failed to examine [Clemente Contracting’s] statements of account and cancelled checks made available to them each month by Capital One.” (R. 108 at ¶ 29.) Borrowers responded that they “neither admit nor deny” the allegations, and then specifically admitted that it was part of Hafner-Milazzo’s “function to examine such statements of account and cancelled checks as were sent” to them. (R. 347 at ¶ 29.) This response is deemed an admission pursuant to Rule 19-a(c), which provides that “[e]ach numbered paragraph in the statement of material facts required to be served by the moving party will be deemed to be admitted for purposes of the motion unless specifically controverted by a correspondingly numbered paragraph in the statement required to be served by the opposing party.” (emphasis added.) Additionally, Capital One provided the affidavit of Anne Marie Immerso, sworn to November 15, 2010 (“Immerso Affidavit”), in which Ms. Immerso stated that the “monthly Operating Account statements mailed to Clemente [Contracting] were accompanied by copies of cancelled checks drawn on the Operating Account.” (R. 352 at ¶ 9.) Finally, the record is devoid of any denial 39 that the Statements of Account were provided to Borrowers, and even their Complaint does not allege that Capital One failed to provide them with the Statements of Account. (R. 27-43.) Indeed, Borrowers have admitted that at least one Statement of Account was found in the trunk of Hafner-Milazzo’s car. (R. 120- 21 at ¶ 41.) That Borrowers’ bookkeeper may have intercepted the Statements of Account sent to Borrowers on a monthly basis by Capital One has no bearing on the application of UCC § 4-406 to bar Borrowers’ claims. (R. 7.) As the Second Department held in Robinson Motor Xpress, Inc. v. HSBC Bank, USA [W]here the statements are provided as directed by the customer, or in a manner of which the customer is aware but to which the customer does not object, the statements are “made available” within the meaning of the statute, and the bank is entitled to the protections afforded by UCC 4-406(4) even if the statements are thereafter intercepted by a dishonest employee or other ill- intentioned third party. 37 A.D.3d 117, 119-20, 826 N.Y.S.2d 350, 354 (2d Dep’t 2006) (internal citations omitted) (emphasis added.) The trial court’s holding is entirely consistent with Robinson. (R. 7, citing Robinson Motor, 37 A.D.3d at 120, 826 N.Y.S.2d at 354.) (“Capital One is … entitled to the protection afforded by UCC § 4-406 (4) even if the statements were thereafter intercepted by Hafner-Milazzo.”) E. Borrowers’ Assertion that UCC § 4-406 is Not Applicable to the Line of Credit is Not Supported by Fact or Law Borrowers contend that UCC § 4-406 is not applicable to the Line of 40 Credit because “[t]here is no evidence that a draw down request constitutes an ‘item’ under the Uniform Commercial Code.”16 (App. Br. p. 26.) Substantively, Borrowers do not cite to a single case, treatise or commentator in support of their proposition that UCC § 4-406 does not apply to the Line of Credit nor do they suggest what provision of the UCC should apply. In contrast, the trial court specifically held that Capital One was entitled “to the protection afforded by UCC 4-406 (4)” with respect to the draw-downs from the line of credit. (R. 7.) While Borrowers fixate on the Line of Credit, this focus is entirely misguided. Notably, Borrowers did not suffer any damages from the alleged fraudulent draw-down requests since the effect of such requests was simply to direct Capital One to transfer funds from one of Borrowers’ accounts (Line of Credit) to another of Borrowers’ accounts (Operating Account).17 Rather, 16 Even if Borrowers were correct, this Court should interpret the definition of the term “item” broadly to encompass draw-down requests. See Broadway Nat’l. Bank v. Progressive Cas. Ins. Co., 775 F. Supp. 123, 128 (S.D.N.Y. 1991) (“Article 4 of the [UCC], which governs Bank Deposits and Collections, suggests that ‘items,’ as used in the banking industry generally, is a broad enough term to encompass credit card sales slips.”) citing UCC § 4-104(g); Houston Contracting Co. v. Chase Manhattan Bank, N.A., 539 F. Supp. 247, 248, fn. 1 (S.D.N.Y. 1982) ("The soundness of a non-restrictive interpretation of ‘item’ is suggested by the expansive language of the UCC itself. ”); see also Woods, 84 N.Y.2d at 284, 617 N.Y.S.2d at 284 (“The UCC defines a “bank” as “any person engaged in the business of banking” (UCC 1-201 [4]), a definition we are obligated to construe liberally to promote the underlying purposes and policies of the UCC (UCC 1- 102 [1]).”) 17 Borrowers argue that they were injured by the draw-downs because “[t]he obligation to pay interest on the outstanding balance under the Line of Credit Promissory Note accrued on the date funds were disbursed.” (App. Br. p. 30.) This oversimplifies the chain of events in this case. It was the checks forged by Hafner-Milazzo that caused Borrowers’ loss. Subsequently, when Borrowers refused Capital One’s offer of additional credit, 41 Borrowers’ alleged damages arose when Hafner-Milazzo forged checks, the effect of which was the claimed unauthorized transfer of funds out of Clemente Contracting’s Operating Account to a third party (mainly, Hafner-Milazzo). The trial court agreed, and held, that Borrowers’ purported losses were caused by the forged checks drawn against the Operating Account, and not by the Line of Credit: The court notes that the forged draw-down requests did not result in any defalcations since all draw-downs by Hafner-Milazzo were deposited into Clemente [Contracting’s] operating account. Thus, any losses sustained by the [Borrowers] are directly attributable to the forged checks, not the forged draw-down requests. (R. 7, fn. 1.) Similarly unavailing (and irrelevant) is Borrowers’ contention that Capital One did not exercise ordinary care when it failed to enforce “a condition [it] imposed as a pre-requisite for the approval of draw-down requests” requiring Borrowers to fax and also to mail the original draw-down request to Capital One. (App. Br. pp. 13-14.)18 However, a review of the letter from Capital One to Capital One declared an Adverse Change Default based on the bank’s judgment that Borrowers’ ability to repay the bank was adversely affected. (R. 85.) Several months later, Capital One declared Borrowers in default, and it was only at that point that the demand for a full repayment of the Line of Credit, including accrued interest, was made. 18 Borrowers’ arguments regarding whether or not Capital One exercised ordinary care are wholly irrelevant to this appeal. If this Court were to find that the reporting period under UCC § 4-406(4) was property shortened, that section acts as a complete bar to Borrowers’ claim without respect to the exercise of ordinary care. If instead this Court were to find that the reporting period was improperly shortened, the Court cannot make findings of fact regarding Capital One’s exercise of ordinary care and must remand this action for further proceedings. N.Y. Const. Art. VI, § 3; CPLR 5501(b). 42 Borrowers allegedly “imposing this pre-requisite” establishes that Borrowers have greatly overstated the purpose and effect of that letter. (R. 143.) Significantly, the letter merely provides a mechanism by which “[a]dvances under the line can be requested,” nowhere stating that the receipt of the original faxed letter was a pre- requisite to completing the draw-down, or that an original signature was required to be provided to the bank. (Id.)19 F. The Disclosure Agreement and Corporate Resolution are Applicable to the Borrowers’ Accounts and Limited the Time-Bar Under UCC § 4-406(4) to 14 Days Borrowers argue that neither the Disclosure Agreement nor the Corporate Resolution was binding on them (App. Br. pp. 41-42), and advance five “reasons” why this Court should disregard the rules and regulations set forth in the parties’ agreements governing the terms of the bank accounts: (i) the Corporate Resolution was for the benefit of North Fork and was somehow cancelled or nullified by Capital One’s acquisition of North Fork (even though Borrowers accounts were not closed and the banking relationship continued uninterrupted) (App. Br. p. 42); (ii) the Disclosure Agreement was a North Fork document that did not inure to the benefit of Capital One (App. Br. p. 41); (iii) the Corporate 19 Borrowers, without any support in the record, allege that Hafner-Milazzo performed “cut and paste forgeries.” (App. Br. p. 28.) It is sheer speculation as there is no evidence in the record to establish whether Hafner-Milazzo simply signed Clemente’s name in a manner that resembled Clemente’s actual signature, or forged the instruments in some other manner. 43 Resolution does not apply to draw-downs on the Line of Credit. (App. Br. p. 42); (iv) the Disclosure Agreement was provided for the first time in Capital One’s reply submission in support of its motion for summary judgment and should not have been considered (App. Br. p. 41); and (v) Capital One did not provide evidence that Borrowers ever received the Disclosure Agreement. (App. Br. p. 41.) Each of these arguments is without merit and failed to raise an issue of fact before the trial court. Borrowers’ first three arguments are foreclosed by New York Banking Law § 602, which governs the effect of a bank merger. This section provides that the receiving bank, here Capital One, “shall be considered the same business and corporate entity” as the bank merged into it, and that all of the property, rights and powers of the merged bank shall vest in the receiving bank. Specifically, section 602 states that “any reference to a merged corporation in any contract, will or document, whether executed or taking effect before or after the merger, shall be considered a reference to the receiving corporation if not inconsistent with the other provisions of the contract, will or document.” N.Y. Bnk. Law 602 (3); Ladino v. Bank of America, 52 A.D.3d 571, 861 N.Y.S.2d 683 (2d Dep’t 2008) (“no formal assignment is required to effect a transfer of assets of a merged corporation to the receiving corporation.”) (citation omitted.) Further, Borrowers have failed to point to any language in the 44 Corporate Resolution that would limit its use or application. This argument was totally unpersuasive when made to the trial court, which held that there was “no evidence in the record that Clemente Contracting revoked or modified the corporate resolution.” (R. 8.) Nor do Borrowers explain or qualify their repeated reliance upon the terms of the Corporate Resolution -- which they now contend is ineffective -- in support of their own claims. (R. 8) (“In fact, the [Borrowers] rely on the resolution in opposition to Capital One’[s] motion for summary judgment insofar as they assert that Jeffrey Clemente was the only authorized signatory on the accounts maintained by Clemente [Contracting] at Capital One.”) Similarly unavailing as matter of law is Borrowers’ third argument that the Corporate Resolution is not applicable, by its terms, to the Line of Credit. (App. Br. p. 42.)20 Borrowers offer nothing in support of this contention and the Corporate Resolution, by its very terms, applies to the line. The Corporate Resolution specifically states that it applies to loans (R. 91 at ¶ 6), and it is evident 20 Borrowers cite SOS Oil Corp. v. Norstar Bank of Long Island, 76 N.Y.2d 561, 570, 561 N.Y.S.2d 887, 891 (1990) to support the proposition that the Court should read the Corporate Resolution strictly against Capital One and find that it does not apply to the Line of Credit. However, the facts of that case lend no support for Borrowers’ position. In SOS, the defendant bank misread a check in the amount of $255,000 by the depositor to the bank and credited only $25,000. When the bank raised the customer’s requirement to provide prompt notice of any errors to the bank under the corporate resolution, this Court held that “[b]y its very language, paragraph 9 plainly is directed to situations where [the bank] is acting as depositary and the customer receives both a statement of account and the underlying instruments of payment, such as checks, that are the basis for the claim of error-not the situation at issue here.” In the instant case, there is no such ambiguity. The Corporate Resolution, by its clear terms, applies to loans, which would encompass the Line of Credit. (R. 91 at ¶ 6.) 45 from the face of the Corporate Resolution that the shortened statute of limitation is applicable to all deposits, withdrawals and loans. (R. 92 at ¶ 10.) Next, in response to Borrowers’ argument to the trial court that Borrowers were not bound by the shortened time period in the Corporate Resolution (even though they had relied on that very document as evidence that only Clemente was authorized to sign draw-down requests and checks) (R. 128.), Capital One further buttressed its position by providing the Disclosure Agreement (R. 372), yet another document that contractually obligated Borrowers to report a purported forgery within 14 days, through the Immerso Affidavit. (R. 352 at ¶ 14 (“when a corporate customer opened a new bank account at North Fork, the customer was provided with [the Disclosure Agreement] … which set forth the terms and conditions of the customer’s account.”)21 Finally, despite Borrowers’ suggestion to the contrary, it is clear from the Trial Court Decision that Borrowers’ argument that the Disclosure Agreement should not apply was considered by the trial court and rejected (“Contrary to [Borrowers’] contentions, the North Fork rules and regulations remained in effect after North Fork merged with Capital One.” (R. 7.) 21 Borrowers’ final argument, that there is no evidence that they received the Disclosure Statement, ignores the record which establishes that all corporate bank customers were provided with a copy of the Disclosure Statement. (R. 352-53 at ¶ 14.) 46 POINT II BORROWERS HAVE MISCONSTRUED CASES FROM THE THIRD AND FOURTH DEPARTMENTS IN THEIR FAILED ATTEMPT TO INVENT A SPLIT AMONGST THE DEPARTMENTS WHERE NONE EXISTS Borrowers allege that the Appellate Decision is in conflict with a decision from each of the Third and Fourth Departments holding that “banks are obligated to act in good faith and exercise ordinary care in handling matters governed by agreements with customers, and a bank is not exonerated from liability in honoring forged checks because of a customer’s failure to timely report them, if the customer can establish that the bank did not observe standards of ordinary care.” (App. Br. pp. 33-34.) Contrary to Borrowers’ argument, neither case addresses a bank’s duty of care when seeking the protection of UCC § 4- 406(4). Instead, the holdings in both the Third and Fourth Department cases focus on a bank’s attempt to remove the due care analysis when seeking protection under UCC § 4-406(2), which section is not at issue here. In analyzing the Third and Fourth Departments’ decisions, Borrowers ignore the distinction between the conditional protections of UCC § 4-406(2), which bars claims for all forgeries based upon the failure to report the first forgery, and UCC § 4-406(4), which bars claims on a forgery-by-forgery basis. This distinction was aptly noted by this Court in Monreal, 95 N.Y.2d at 208-09, 713 N.Y.S.2d at 304: 47 [A] comparison of UCC 4-406(2) and UCC 4-406 (4) provides the key to our determination. The 14-day period under UCC 4-406 (2)(b) runs from the point at which “the first item and statement was available to the customer.” By way of contrast, UCC 4-406(4) conspicuously omits the word “first,” stating merely that the one-year period runs from “the statement and items.” We are satisfied that this distinction was legislatively willed and that each statement therefore carries its own one-year period. (emphasis in original, internal citations omitted.) Consistent with this Court’s edict, the Fourth Department in Aikens Constr. of Rome, Inc. v. Simons, held: We reject the contention of NBT Bank that plaintiff is precluded from asserting that claim based on plaintiff’s failure to notify NBT Bank of the forgeries within 14 days of the first bank statement in which the forged checks appeared, as required by the account rules and regulations. 284 A.D.2d 946, 947, 727 N.Y.S.2d 213, 214 (4th Dep’t 2001) (emphasis added.) In Aikens, the language in the bank’s rules and regulations mimicked UCC § 4-406(2), which precludes a customer from “asserting against the bank … an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized 48 signature or alteration.” (emphasis added); See Aikens, 284 A.D.2d at 947, 727 N.Y.S.2d at 214. The protections of UCC § 4-406(2), which bar a customer’s claims for all forgeries by the same forger based on a failure to detect the first forgery, is subject to UCC § 4-406(3), which allows a customer to avoid the preclusive effect of UCC § 4-406(2) by establishing a lack of ordinary care by the bank. Aikens held that under UCC § 4-103, the bank and customer could not agree to “abrogate the bank’s responsibility [under UCC § 4-406(3)] to exercise good faith and ordinary care.” Aikens, 284 A.D.2d at 947, 727 N.Y.S.2d at 215. Aikens is squarely in line with this Court’s holding in Monreal and the plain language of UCC § 4-406, but is distinct from both the case at bar and well established case law from the First and Second Departments that have upheld as entirely proper a shortening of the limitations period in 4-406(4). See Point I (A), supra, at pp. 2230. In the present case, Capital One invoked the protection of UCC § 4-406(4), which serves to bar a customer’s claim against the bank each time that customer fails to report a forgery contained in the statement of account within the requisite time, “[w]ithout regard to care or lack of care of either the customer or the bank.” Similarly, Borrowers’ contention that the Third Department’s decision in Herzog, Engstrom & Koplovitz, P.C. v. Union Nat’l. Bank, 226 A.D.2d 1004, 49 640 N.Y.S.2d 703 (3d Dep’t 1996) is contrary to the Appellate Decision in this case thereby constituting a split amongst departments is also misplaced. Herzog, like Aikens, does not address the unconditional protections of UCC § 4-406(4), but instead focuses on the conditional protections of UCC § 4-406(2). The bank in Herzog argued that it was “entitled to summary judgment as it is undisputed that plaintiff did not notify [the bank] of the forgeries until … almost nine months after it received its bank statement that included the first forged check.” Id. 1004-5, 640 N.Y.S.2d at 704. (emphasis added.) Herzog describes Union National Bank’s rules which “essentially track the UCC [§ 4-406(2)] except that they provide that customers who fail to provide notice of a forgery within 14 days of receipt of their bank statement are precluded from asserting claims against defendant without regard to whether defendant exercised ordinary care in processing the forged check.” Id. The Herzog court rejected the bank’s rules, holding that a bank and customer may not “abrogate the bank’s responsibility to exercise good faith and ordinary care” under UCC § 4-406(3). Id. at 1005, 640 N.Y.S.2d at 704. Borrowers seize on this language to argue that the Third Department has held that statute of limitations applicable to UCC § 4-406(4) cannot be altered. However, Herzog is not a case where the statute of limitations under § 4-406(4) was shortened, but rather where the 14-day limitations period contained in § 4-406(2) was applied, but the bank 50 extinguished the affirmative defense available to a customer to avoid the preclusive effect by establishing lack of ordinary care under § 4-406(3). Nowhere does the Third Department cite to UCC § 4-406(4), whereas the court cites UCC § 4- 406(1)-(3) on multiple occasions in its analysis. Thus, the purported department split simply does not exist; neither the Third nor the Fourth Department has refused to permit a shortened statute of limitations to bar forgeries under § 4-406(4). The cases cited by Borrowers do not address the unconditional protections of UCC § 4-406(4), nor do they stand for the proposition that the care or lack of care by a bank or customer is at all relevant to an analysis under UCC § 4-406(4). The cases cited by Borrowers construe UCC § 4-406(2) and are not at odds with the precedent of the First and Second Departments, including the Second Department’s holding in the Appellate Decision in the case at bar. In addition, Borrowers’ assertion that the shortening of the reporting period under UCC § 4-406(4) is inconsistent with UCC § 4-103 has been routinely rejected by courts faced with that argument. (App. Br. p. 33.) For example, the Court of Appeals of Wisconsin held in Borowski that “it is not the agreement between Borowski and Firstar Bank that gives the bank immunity even if it is negligent, it is § 404.406(4); all the agreement does is reduce the time within which the customer must notify the bank of an unauthorized signature or an 51 alteration from one year to fourteen days.” 579 N.W.2d at 251. This rationale is entirely consistent with that expressed by other jurisdictions considering the issue as to whether the shortening of the section 4- 406(4) limitations period abrogates the bank’s duty to exercise ordinary care or act in good faith. Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567, 574 (Minn. 1997) (“Cases interpreting very similar agreements have held that ‘the fact that the resolution merely sets forth a condition precedent to liability does not disclaim the bank’s responsibility for its own lack of good faith or failure to exercise ordinary care. . .”); see also National Title Ins. Corp. Agency v. First Union Nat. Bank, 559 S.E.2d 668, 671 (Va. 2002) (“The Deposit Agreement does not absolve First Union of its duty to exercise ordinary care or good faith, nor does it limit the measure of damages. Instead, Paragraph 12 merely varies the effect of Code § 8.4-406(f) in that the period of time in which National Title must report an unauthorized signature or alteration on an item, without having its claim for losses precluded by the bar in subsection (f), is shortened from one year to 60 days”); Bank of America, N.A. v. Putnal Seed and Grain, Inc., 965 So.2d 300 (Fla. Dist. Ct. App. 2007) (“The agreement between the parties does not disclaim the bank’s responsibility to exercise ordinary care and it does not limit the bank’s damage for its failure to exercise such care… The 60-day notice requirement only creates a condition precedent which Putnal must comply with before it may seek reimbursement.”); 52 W.J. Miranda Constr. Corp. v. First Union Nat’l. Bank, 98-29112-CA11, 1999 WL 1567728 (Fla. Cir. Ct. Sept. 24, 1999) (“The contractual provision at issue here - Paragraph 12 of the Deposit Agreement - does not modify or seek to disclaim the bank’s responsibility to exercise good faith and ordinary care. Instead, by its terms, it simply shortens, from 1-year to 60 days, the period prescribed by § 674.406(6) within which Miranda must notify First Union of a claim concerning an unauthorized signature on one of its checks”); FCT Elecs., LP v. Bank of America, N.A., No. CV 106002699, 2011 WL 4908850 at *10 (Conn. Super. Ct. Sept. 22, 2011) (“the Deposit Agreement does not contain an unlawful disclaimer of the defendant’s liability; it does not absolve the defendant of its duty to use good faith and ordinary care. Rather, the Deposit Agreement provides a condition precedent to the institution of a suit, requiring that the plaintiff notify the defendant within thirty days after sending the monthly statement if there are any unauthorized transactions reflected in that monthly statement”); Graves v. Wachovia Bank, N.A., 607 F. Supp. 2d 1277, 1280 (D. Ala. 2009) (“the Deposit Agreement does not eliminate Wachovia’s duty of good faith, nor does it limit the measure of damages; it simply reduces the time period in which a customer must report any forged or missing signatures before any such claims are extinguished.”) 53 POINT III THIS COURT SHOULD AFFIRM THE APPELLATE DECISION WHICH UPHELD THE TRIAL COURT DECISION GRANTING SUMMARY JUDGMENT TO CAPITAL ONE ON ITS COUNTERCLAIMS AGAINST THE BORROWERS FOR BREACH OF THE LOAN DOCUMENTS The trial court properly held that Capital One “established, prima facie, its entitlement to judgment as a matter of law.” (R. 6.) In order to establish a prima facie case against Clemente Contracting for judgment on the Notes, Capital One needed to show only that Clemente Contracting (1) executed the Notes; and (2) failed to make, or cause to be made, payment in accordance with the terms of the Notes. See Banner Indus. v. Key B. H. Assoc., L.P., 170 A.D.2d 246, 565 N.Y.S.2d 456 (1st Dep’t 1991); Marine Midland Bank, N.A. v. Scallen, 161 A.D.2d 103, 105, 554 N.Y.S.2d 541, 543 (1st Dep’t 1990); Seaman-Andwall Corp. v. Wright Mach. Corp., 31 A.D.2d 136, 137, 295 N.Y.S.2d 752, 754 (1st Dep’t 1968), aff’d, 29 N.Y.2d 617, 324 N.Y.S.2d 410 (1971). Similarly, in order to establish a prima facie case against Clemente for judgment on the Guaranty, Capital One needed to show only the existence of the Guaranty and Clemente’s nonpayment. See Bank of America, N.A. v. Solow, 59 A.D.3d 304, 304, 874 N.Y.S.2d 48, 48-49 (1st Dep’t 2009); 117-14 Union Tpk. Assoc., L.P. v. Cnty. Dollar Corp., 187 A.D.2d 357, 589 N.Y.S.2d 880 (1st Dep’t 1992). Capital One submitted undisputed evidence to the trial court that 54 Clemente Contracting executed both Notes (R. 66-68; R. 69-71), and submitted an affidavit of Borrowers’ default in payment after due demand. (R. 23 at ¶ 20.) Capital One also submitted proof that Clemente executed the Guaranty, which was absolute and unconditional (R. 82-84), and an affidavit of Clemente’s default in payment after due demand. (See R. 23 at ¶ 21.)22 Accordingly, Capital One sustained its burden of demonstrating its entitlement to summary judgment as a matter of law on its counterclaims against the Borrowers and the holding of the trial court should not be overturned. In a desperate attempt to avoid repayment, the Borrowers raced to the courthouse and commenced this action, days before their loan matured, seeking, among other things, (1) a declaratory judgment barring Capital One from enforcing the terms of the Loan Documents on the grounds that Capital One “failed to comply with its contract” with the Borrowers (R. 37 at ¶ 58); and (2) damages allegedly arising from Capital One’s purported negligence. (R. 39 at ¶ 68.) Borrowers’ argument that summary judgment was not appropriate because discovery is necessary as there are “many facts that are within the exclusive knowledge of Capital One” (App. Br. p. 22), was unavailing to the trial court and remains unavailing on this appeal. Indeed, Borrowers failed below and 22 In fact, Borrowers admit to having executed the LC Note and the Guaranty, respectively, and do not dispute that they have failed to make payment in accordance with the terms of those documents. (R. 30-31 at ¶¶ 15, 17, 18.) 55 fail here to identify a single document that does or even may exist or anticipated deposition testimony that would lead to a different result than that reached by the trial court.23 Additionally, Borrowers argue that Capital One failed to establish “the prerequisites for the application of UCC § 4-406” as a matter of law. (App. Br. p. 23.) However, as discussed above, Capital One established that the Statements of Account were made available to Borrowers on a monthly basis (R. 351-52 at ¶¶ 4- 9), that Borrowers failed to review their Statements of Account (R. 347 at ¶ 29) and did not report in writing any of the forgeries to Capital One until March 12, 2010 (R. 209-19), more than 60 days after the last Statement of Account reflecting a forged instrument was provided to them for review. (R. 351 at ¶ 4.) The trial court correctly held that Capital One established its entitlement to the protections of UCC § 4-406. (R. 4-9.) Capital One respectfully submits that the trial court properly found that Capital One established its entitlement to summary judgment on the Loan Documents, that such decision was properly affirmed by the Second Department and that no evidence to refute that entitlement has been presented by Borrowers now. Accordingly, the Appellate Decision affirming the grant of summary 23 It bears noting that prior to the motion for summary judgment being filed with the trial court, Capital One responded to Appellant’s First Notice for Discovery and Inspection and First Set of Interrogatories and thereafter amended and supplemented those responses. (R. 144-70; R. 326-42.) judgment on the counterclaims asserted by Capital One should be affirmed. CONCLUSION For all of foregoing reasons, this Court should affirm the Decision of the Appellate Division, Second Department. Dated: New York, New York September 20, 2013 HF 8558642v.ll #10159/0005 Respectfully submitted, HERRICK, FEINSTEIN LLP By: Mara B. Levin Christopher P. Greeley Attorneys for Capital One, NA. 2 Park A venue New York, New York 10016 Phone: (212) 592-1400 Fax: (212) 592-1500 56
