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: MATTHEW DOLLINGER, ESQ. (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, CAPITAL ONE, N.A., Defendant-Respondent. REPLY BRIEF FOR PLAINTIFFS-APPELLANTS DOLLINGER, GONSKI & GROSSMAN Attorneys for Plaintiffs-Appellants Clemente Bros. Contracting Corp. and Jeffrey A. Clemente One Old Country Road, Suite 102 Carle Place, New York 11514 Tel.: (516) 747-1010 Fax: (516) 747-2494 Date Completed: October 7, 2013 ro/1 0584ReplyBrief. wpd (i) TABLE OF CONTENTS Paae No. Preliminary Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Point I Capital One has not Established that it is Entitled to the Protections of UCC §4-406( 4) with Respect to the Line of Credit Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Point II Assuming that they Apply, Capital One Never Satisfied the Requirements of UCC §4-406, the North Fork Bank Corporate Resolution or the North Fork Bank Miscellaneous Deposit Information Disclosure Statement and Agreement, and Plaintiffs' Right to Pursue an Action Against Capital One Should not have Been Declared Time Barred ................................... 10 Point III The Fourteen-Day Rule is Manifestly Unreasonable ................ 16 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 roll 0584ReplyBrief. wpd (ii) TABLE OF CASES AND AUTHORITIES Paa:eNo. Borowski v. Firstar Bank Milwaukee. N.A., 217 Wis.2d 565, 579 N.W.2d 247 (Wis.App. 1998) ................................. 9, 12 Regatos v. North Fork Bank, 5 N.Y.3d 395, 838 N.E.2d 629, 804 N.Y.S.2d 713 (2005) ........................................ 16, 17 STATUTES UCC Article 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 UCC §4-103(a) .................................................. 16 I ucc §4-406 ................................... 2, 3, 5, 6, 8, 9, 10, 11, 13 ucc §4-406(1) ................................................. 2, 8 UCC§4-406(4) ............................................... 2, 3, 11 ro/10584ReplyBrief.wpd PRELIMINARY STATEMENT Capital One granted Contracting a Line of Credit and set the rules for how funding that Line of Credit was to be accomplished. The funding rules, which the bank created, are set forth in a bank letter [143] 1 which clearly states that advances are not automatic but are "at the discretion of the Bank". Unlike a traditional Line of Credit, and more in keeping with a Building Loan, advances needed to be requested, and the purpose of the advance and the expected repayment date needed to be provided by Contracting to Capital One. Advances were permitted to "be requested via faxed letter (original to follow in the mail)" and such requests were required to be signed by an authorized signer [143]. Plaintiffs claim Capital One breached its obligation under the Line of Credit by failing to follow its own rules, reasonable banking procedure and ordinary care, and consequently funding forged and fraudulent draw down requests. Plaintiffs sought a Declaratory Judgment and Damages from Capital One resulting from its breach of care in handling the Line of Credit. Notably, if not for Capital One's lack of care in processing draw down requests from the Line of Credit, there would have been no money in Contracting's operating account for co-defendant Milazzo to steal. 1 Pages designated [_] refer to pages in the Record on Appeal. 1 roll 0584ReplyBrief. wpd In its Answer [ 46] Capital One counterclaimed for judgment on the Line of Credit Promissory Note and the Term Note based upon plaintiffs' alleged default on those Notes [46]. Capital One's counterclaims against the plaintiffs do not pertain to Contracting's operating account. The Appellate Division's characterization of this case as an action "to recover damages for the payment of forged checks" [385], is simply incorrect. The Supreme Court awarded Capital One Summary Judgment, dismissed plaintiffs' claims as against Capital One based upon the absolute time bar set forth in UCC §4-406( 4) and awarded Capital One a money judgment on the two Promissory Notes for sums funded and not repaid. On appeal, the plaintiffs have made the following arguments. First, UCC §4- 406 is not applicable to the subject Line of Credit account. Second, even if UCC §4- 406 controls the Line of Credit relationship between the parties, Capital One did not satisfy its notice obligation under 4-406( 1) to provide copies of the "items paid in good faith". Therefore UCC §4-406(4) was not properly applied. Plaintiffs asserted causes of action in this lawsuit against Capital One seeking Declaratory Judgment and Damages due to Capital One's breach of the Line of Credit contract [27]. These causes of action do not concern Contracting's operating account 2 ro/10584ReplyBrief.wpd and are not controlled by §4-406 of the UCC. They were timely brought. Therefore, the UCC §4-406 analysis is erroneous, and the Supreme Court's conclusion that UCC §4-406( 4) precludes plaintiffs from asserting their claims and entitles Capital One to summary judgment on its counterclaims should be reversed. If UCC §4-406 applies to this Line of Credit, plaintiffs are entitled to the same benefits the Bank is entitled to receive from its application. Though Capital One claims to have sent plaintiffs statements of account pertaining to the Line of Credit, Capital One admittedly did not provide copies of the "items" allegedly paid in good faith [7, 35]. It is undeniable that the draw down requests, which undisputably existed at the time, were not provided. Therefore, assuming the Trial Court and Capital One were correct and UCC §4-406 applies, and assuming the Line of Credit Monthly Statements were provided, as Capital One claims, and assuming Clemente did not review them, Capital One's failure to provide the items paid in good faith should have prevented Capital One from relying upon, and the Supreme Court from applying, UCC §4-406(4) and, based thereon, dismissing the Complaint. Capital One's effort to discredit the plaintiffs' focus on the Line of Credit and Capital One's written funding procedure [143] only serve to highlight their importance. Capital One's repeated insistence that the plaintiffs did not suffer any 3 ro/10584ReplyBrief.wpd 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)" (Respondent's Brief p.40) is a completely incorrect statement of the facts. There was no segregated or dedicated "Line of Credit account". There were never any funds set aside or ear-marked as belonging to the plaintiffs. There was a Line of Credit which was an open line, which was funded at Capital One's discretion following the submission and approval of a draw down request by the borrower - or someone purporting to act on behalf of the borrower- on the account. The loss was occasioned by the funding of the draw down, which is what created plaintiffs' obligation to Capital One. The plaintiffs were damaged immediately upon the funding of the draw down requests. These facts are entirely supported by Capital One's own counterclaims [ 46] in which the Bank sought and was granted judgment for the sums funded from the Line of Credit, which sums Capital One claimed in its pleading were due and owing and had not been repaid. Similarly, Capital One's attempt to give short shrift to their own procedure for the submission of draw down requests [143] only serves to highlight the importance of that writing. According to Capital One, plaintiffs "have greatly overstated the 4 ro/1 0584ReplyBrief. wpd purpose and effect of that letter" (Respondent's Brief, p. 42), that letter only serves to provide a "mechanism" and despite the terms of that document, original signatures were not required to be provided (Respondent's Brief, p.42). If the interpretation of that letter is required, a question of fact exists that should have resulted in the denial of Capital One's motion. The operating account has nothing to do with either plaintiffs' claims against Capital One or Capital One's claims against the plaintiffs. The lawsuit between these two parties concerns their contractual relationship under the Line of Credit. Capital One had the right not to fund [143]. Capital One funded what plaintiffs contend are forged fraudulent draw down requests. Plaintiffs did not know about the forgeries and never saw the documents on which Capital One relied to fund them. Plaintiffs' failure to review the monthly statements is not dispositive because the fraudulent forged draw down requests were not "items" disclosed. UCC §4-406 does not resolve this case. Capital One's motion for summary judgment should have been denied. Plaintiffs' Complaint should not have been dismissed and judgment should not have been awarded to Capital One on its Counterclaims. 5 ro/10584ReplyBrief.wpd POINT I CAPITAL ONE HAS NOT ESTABLISHED THAT IT IS ENTITLED TO THE PROTECTIONS OF UCC §4-406(4) WITH RESPECT TO THE LINE OF CREDIT ACCOUNT Capital One has not demonstrated by reference to case law, treaties or commentary, that UCC §4-406 is applicable to Line of Credit accounts created by the execution of a Promissory Note and implemented by the submission of draw down requests. Notably, this Line of Credit account does not function as a checking account. This Line of Credit required the submission of a draw down request which was evaluated by Capital One, and Capital One had the power to object to, question and deny the application [143]. Significantly, Capital One's correspondence refers to a "Loan Agreement" [143], which, if it exists, does not appear in the record. It is undisputed that there is evidence in the Record of a breach of care by Capital One in the processing of draw down requests. Capital One never notified plaintiffs of Milazzo's initial unauthorized conduct, in which she requested a draw down under Contracting's Line of Credit in her own name despite Capital One's clear mandate that the application be made by Jeffrey Clemente, the only authorized individual [143,171].2 2 Capital One's contention that this unauthorized and criminal action by Milazzo was authorized by Clemente is wholly disingenuous (Respondent's Brief p. 16). The fact that, after being 6 ro/10584ReplyBrief.wpd Significantly, the Record discloses that as time went on, Capital One received further evidence discrediting the authenticity of the draw down requests. According to Capital One's records- to the extent that they have been produced- Milazzo frequently sent Capital One two pieces of correspondence when requesting a single draw down on the Line of Credit account; one from herself and one purportedly signed by Jeffrey Clemente [183, 184, 185, 186, 199, 200]. She did that on August 6, 2009 [183,184] and in the letter, of that pair, which Milazzo signed in her own name, she indicates that the need for the draw down is her own and that the Line of Credit is hers as well. She states, "I need to draw down on my line of credit $75,000.00. Please deposit to my operating account" [183]. The operating account she identifies is not her own but that of Contracting. Needless to say, Capital One never notified Clemente of Milazzo's conduct despite its clear irregularity. Furthermore, Capital One funded these draw down requests. That funding turned into a counterclaim and a money judgment. Whether or not, in funding that alleged draw reprimanded, Milazzo obtained Clemente's signature on a draw down request [172, 197] does not establish that her original conduct was authorized by him or relieve Capital One of the duty to exercise ordinary care in the handling of such improprieties, especially after becoming aware of Milazzo's proclivity. As it turns out, since Milazzo subsequently obtained Clemente's signature, this draw down is not one of the nine fraudulent draw downs we are presently aware of [ 118, 172]. 7 ro/10584ReplyBrief.wpd down request, Capital One failed to exercise ordinary care, is a question of fact. The Judgment awarded was premature. It is also undisputed that Capital One never fulfilled the requirements of UCC §4-406(1 ), as Capital One never provided plaintiffs with copies of draw down requests along with the "Monthly Line of Credit Notes" allegedly sent to the plaintiffs [357],3 in connection with the Line of Credit account, regardless of whether those draw down requests were legitimate or forgeries submitted by Milazzo. If UCC §4-406 applies to this situation, then Capital One's failure to provide copies of the written draw down requests it received, in accordance with UCC §4- 406( 1 ), and its decision to fund draw down requests which are of questionable validity on their face, is fatal to Capital One's position that plaintiffs' time to pursue its claim against Capital One for breach of its duty of care expired. As Capital One notes, 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." It is only then that there are any time constraints on the customer to act on an affirmative duty to exercise reasonable care and promptness to examine the 3 These purported "Monthly Line of Credit Notices" were annexed to the affidavit of Ann Marie hnmerso, submitted by Capital One in reply, in further support of its motion for summary judgment [350, 357]. 8 ro/10584ReplyBrief. wpd statements and items and notify the bank of any unauthorized signatures or alterations of an item. If the Line of Credit is an account to which UCC Article 4 applies and the draw down requests are items within the meaning of UCC §4-406, requiring the customer to report unauthorized signatures or alterations in a timely manner after receiving the items, then plaintiffs are still entitled to seek recovery from Capital One on the forged draw down requests because those draw down requests were neither sent nor made available to the plaintiffs as required by statute. See, e.g., Borowski v. Firstar Bank Milwaukee. N.A., 217 Wis.2d 565, 579 N.W.2d 247 (Wis. App. 1998). The Supreme Court should not have even reached the §4-406(4) analysis on which its decision is predicated and summary judgment should not have been awarded. 9 roll 0584ReplyBrief. wpd POINT II ASSUMING THAT THEY APPLY, CAPITAL ONE NEVER SATISFIED THE REQUIREMENTS OF UCC §4-406, THE NORTH FORK BANK CORPORATE RESOLUTION OR THE NORTH FORK BANK MISCELLANEOUS DEPOSIT INFORMATION DISCLOSURE STATEMENT AND AGREEMENT, AND PLAINTIFFS' RIGHT TO PURSUE AN ACTION AGAINST CAPITAL ONE SHOULDNOTHAVEBEENDECLAREDTIMEBARRED Capital One made UCC §4-406 the lynchpin of this case and the Trial Court agreed. We submit that this was error. ButifUCC §4-406 is applicable to the parties' Line of Credit relationship, UCC §4-406 protects the plaintiffs in this instance, not Capital One. Article 4 of the Uniform Commercial Code is designed to allocate responsibility between the customer and the bank in detecting and reporting potential forgeries. However, as previously noted, the reciprocal duties imposed on the customer do not come into play until the bank has met its initial burden. As Capital One noted, an account holder incurs a duty under UCC §4-406 only when his unauthorized signature appears on an "item" which is sent to the customer. Under the North Fork Bank Corporate Resolution [90], which Capital One represented and the Supreme Court concluded modified UCC §4-406, the account holder corporation incurs a duty to notify the bank of any claimed error or forgery 10 ro/10584ReplyBrief.wpd only when a "statement of account and cancelled check, draft or other instrument for the payment of money" has been delivered or mailed to it [92]. Under the North Fork Bank document entitled Miscellaneous Deposit Information Disclosure Statement and Agreement [372], which Capital One argued and the Supreme Court agreed modified UCC §4-406(4), the account holder incurs a duty to inspect statements and canceled checks and notify the bank of any errors, discrepancies or irregularities only after statements are received or made available. Despite the Supreme Court's conclusion and Capital One's claims to the contrary, there is absolutely no evidence in the record that any of these provisions were fully satisfied by Capital One as to the Line of Credit. The Supreme Court basically held that delivery of the "items" pertaining to the Line of Credit was not required because the draw downs appeared as credits on the monthly statements for the operating account [7]. This holding is not consistent with the statutory requirements and is not supported by the case law. Although plaintiffs do not agree that a Line of Credit account under which the bank may decline or withhold payment is covered by UCC §4-406, it is interesting to note that even handwritten notes have been held to be "items" which are required to be supplied by the bank to its customer, within the meaning of the UCC. See 11 roll 0584ReplyBrief. wpd Borowski v. Firstar Bank Milwaukee. N.A., 217 Wis.2d 565, 579 N.W.2d 247 (Wis. App. 1998) (case involving forged checks and requests for money including forged notes requesting cashier's checks). Significantly, Capital One argues, in a footnote, that this Court should interpret the definition of the term "item" broadly to encompass draw down requests (Respondent's Brief, footnote 16, p. 40). Though bank employee, Anne Marie Immerso, states by way of Reply Affidavit [350] that Capital One mailed the plaintiffs' Monthly Line of Credit Notices, which she describes as monthly notices setting forth the principal balance on the Line of Credit, Immerso does not contend that the supporting "items", the draw down requests themselves, were also supplied. Without these supporting items, which indisputably exist,4 the time within which plaintiffs were required to notify Capital One of any fraud, forgeries or errors never commenced. Furthermore, the sample operating account statement Immerso provided as part of her Reply Affidavit to which Immerso cites, does not include copies of cancelled checks [362-371]. This belies Immerso's claim that the operating account statements were sent with supporting "items" [352]. 4 The draw down requests that are part of the Record were only provided to plaintiffs by Capital One after plaintiffs became aware of Milazzo's defalcations. 12 ro/1 0584ReplyBrief. wpd Though Immerso claims to have personal knowledge, she did not handle the Line of Credit on Capital One's behalf. That task fell to Kenneth Rosen and Ashok Kirpalani, according to the bank's records. Notably, they did not supply affidavits in support of Capital One's motion. Since Capital One did not satisfy UCC §4-406 and plaintiffs have presented evidence that Capital One did not exercise ordinary care in the handling of Contracting's accounts, and in particular the Line of Credit Line account, summary judgment should have been denied and plaintiffs afforded the opportunity to complete discovery and conduct a plenary trial of the issues. In a desperate effort to avoid a trial which would spotlight Capital One's failure to exercise ordinary care in managing Contracting's substantial Line of Credit, Capital One argues that forgeries involving the Line of Credit are of no importance because they caused no damages to the plaintiffs. Capital One argues that the unauthorized withdrawals from the Line of Credit account were processed through the Contracting operating account, and because of that, Capital One's conduct regarding the Line of Credit account did not cause any damages and is, therefore, irrelevant. The only thing that matters, according to Capital One, is that the bank was not timely notified of forgeries involving the Operating Account. 13 roll 0584ReplyBrief. wpd Capital One's argument has no merit. There were clear immediate financial repercussions suffered from the criminal conduct of Milazzo and Capital One's failure to exercise ordinary care in the handling of the Line of Credit account, from the moment the fraudulent draw down requests were honored. Interest accrued immediately on all draw downs that were funded, and the accrued interest improperly forms a part of Capital One's judgment amount. Therefore, the defalcations Milazzo processed through the Line of Credit Account caused immediate damages to the plaintiffs. The fact that Capital One allegedly offered the plaintiffs additional credit before declaring an Adverse Charge Default (Respondent's Brief, footnote 17, pp. 40- 41) is completely irrelevant. Interest accrued immediately, not only when the default was declared by Capital One. Furthermore, even if it were true that plaintiffs would not be able to establish all of the damages they claim are a consequence of Capital One's failure to exercise ordinary care in the handling of the Line of Credit account, because some stolen funds were disbursed by forged check, that goes to damages, not liability. Plaintiffs should not have been prematurely deprived of the right to establish Capital One's lack of care in paying the items in question. Capital One argues that plaintiffs "greatly overstated the purpose and effect" of the instruction letter Capital 14 ro/10584ReplyBrief.wpd One provided [143] (Respondent's Brief, p. 42), but that letter was the only guideline Capital One issued and was the only procedure plaintiffs had to rely upon. Significantly, though Capital One issued the letter it did not abide by the letter's terms. Most significantly, it did not require an original authorized signature. Capital One's cavalier failure to follow its own rules is astounding and inexcusable. Whether under the totality of the facts, Capital One is liable for its breach of care is a matter to be explored. Discovery, depositions and a trial are required. Summary judgment was prematurely granted to Capital One on an erroneous basis. The Supreme Court and Appellate Division Orders should be reversed. 15 ro/1 0584ReplyBrief. wpd POINT ill THE FOURTEEN-DAY RULE IS MANIFESTLY UNREASONABLE Requiring the plaintiffs to discover and report the unauthorized disbursements from Contracting's Line of Credit account within fourteen days of the time the statements were allegedly made available is manifestly unreasonable. The application of a fourteen-day rule would act as a complete bar to the bank customer's claims against Capital One after fourteen days regardless of whether or not the bank was, in fact, guilty of a breach of ordinary care. In fact, that appears to have been Capital One's goal (Respondent's Briefp. 41, footnote 18). UCC §4-103(1) specifically provides that, "The effects of the provisions ofthis 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 unauthorized Line of Credit draw down requests in this case are very similar to the unauthorized wire transfers in Regatos v. North Fork Bank, 5 N.Y.3d 395, 838 N.E.2d 629, 804 N.Y.S.2d 713 (2005). In that situation, albeit under a different statute, this Court held that, "Only when a commercially reasonable security procedure is in place (or has been offered 16 ro/10584ReplyBrief.wpd to the customer) may the bank disclaim its liability for unauthorized transfers." ld. at 402. This Court concluded in Regatos that, "Permitting banks to vary the notice period by agreement would reduce the effectiveness of the statute's one-year period of repose as an incentive for banks to create and follow security procedures." Id. The same reasoning should apply here. Whether or not the security procedure Capital One implemented [143] is commercially reasonable should be scrutinized. Clearly, Capital One doesn't think much of it (Respondent's Brief pp. 41-42). Allowing Capital One to rely on the fourteen-day limitation period it created in its own banking documents does not provide much incentive to Capital One to create and follow security procedures for commercial transactions that are commercially reasonable. Under the circumstances of this case, the shortened period of fourteen days is manifestly unreasonable. 17 roll 0584ReplyBrief.wpd CONCLUSION Based upon the foregoing, defendant's motion for summary judgment should not have been granted, the plaintiffs' Complaint should not have been dismissed and judgment should not have been awarded to the defendant on its counterclaims. Dated: Carle Place, New York October 7, 2013 DOLLINGER, GONSKI & GROSSMAN Attorneys for Plaintiffs-Appellants By: ~~~" MATTHEW DOLLINGER, ESQ. ~ One Old Country Road, Suite 102 P.O. Box 9010 Carle Place, New York 11514 (516) 747-1010 18