Richard N. Golden, Respondent,v.Citibank, N.A., Appellant.

Brief

N.Y.March 25, 2014

APL-2013-00169 Queens County Clerk’s Index No. 31238/10 Appellate Division, Second Department Docket No. 2011-10976 Court of Appeals STATE OF NEW YORK RICHARD N. GOLDEN, Plaintiff-Respondent, against CITIBANK, N.A., Defendant-Appellant. >> >> REPLY BRIEF FOR DEFENDANT-APPELLANT ZEICHNER ELLMAN & KRAUSE LLP Attorneys for Defendant-Appellant 1211 Avenue of the Americas, 40th Floor New York, New York 10036 212-223-0400 Of Counsel: Barry J. Glickman Bruce S. Goodman Date Completed: November 15, 2013 To Be Argued By: Barry J. Glickman Time Requested: 30 Minutes CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. 500.1(f), Defendant-Appellant Citibank, N.A. discloses that Citibank, N.A. is a wholly owned indirect subsidiary of Citigroup Inc. and is not publicly traded. Citigroup Inc. is a publicly traded company that does not have a parent company. No publicly held company owns 10% or more of the stock of Citigroup Inc. TABLE OF CONTENTS TABLE OF AUTHORITIES ........................................................................ ii PRELIMINARY STATEMENT .................................................................. 1 ARGUMENT ................................................................................................ 5 POINT I GATES IS DISPOSITIVE AND PROVIDES CITIBANK WITH A VALID DEFENSE TO PLAINTIFF-RESPONDENT’S CLAIM ON THE CITIBANK OFFICIAL CHECK .................................... 5 POINT II THE AUTHORITY ON WHICH PLAINTIFF- RESPONDENT RELIES IS INAPPOSITE AND PROVIDES NO GROUNDS FOR THIS COURT TO WAVER FROM GATES ................................................... 9 POINT III UNIFORM COMMERCIAL CODE SECTIONS 4-303 AND 4-403 ARE INAPPLICABLE TO CASHIER’S CHECKS........................................................... 13 POINT IV PLAINTIFF-RESPONDENT FAILED TO FOLLOW TRUST ACCOUNT BEST PRACTICES AND, AS A MATTER OF PUBLIC POLICY, SHOULD BEAR THE LOSS, IF ANY ................................................................................... 18 CONCLUSION ........................................................................................... 22 ii TABLE OF AUTHORITIES Page(s) CASES Abilities, Inc. v. Citibank, N.A., 87 A.D.2d 831, 448 N.Y.S.2d 242 (2nd Dept. 1982) .................................16 Banco Di Roma v. Merchants Bank of New York, 92 A.D.2d 42, 459 N.Y.S.2d 592 (1st Dept. 1983) ..................................10 Bobrick v. The Second Nat’l Bank of Hoboken, 175 A.D. 550, 162 N.Y.S. 147 (1st Dept. 1916) ......................................15 Bunge Corp. v. Mfrs. Hanover Trust Co., 65 Misc.2d 829, 318 N.Y.S.2d 819 (Sup. Ct., New York 1971) .........................................................................................................15 Dalessio v. Kressler, 6 A.D.3d 57, 773 N.Y.S.2d 434 (2nd Dept. 2004) ...................................13 Dzuriak v. Chase Manhattan Bank, N.A., 44 N.Y.2d 776, 406 N.Y.S.2d 30 (1978) ....................................................16 First Jersey Nat’l Bank v. Nat’l Bank of N. Am., 563 F. Supp. 901 (S.D.N.Y. 1982) ...........................................................14 First Nat’l Bank v. Rob-Glen Enterprises, Inc., 101 A.D.2d 848, 476 N.Y.S.2d 161 (2nd Dept. 1984) .............................17 Gates v. Manufacturers Hanover Trust Company, 98 A.D.2d 829, 470 N.Y.S.2d 492 (3rd Dept. 1983) ....................... passim Gentner and Co., Inc. v. Wells Fargo Bank, 76 Cal. App. 4th 1165, 90 Cal. Rptr. 904 (Cal. Ct. Appeal. 1999) .........................................................................................................15 Greenberg, Trager & Herbst. LLP v. HSBC Bank USA, 17 N.Y.3d 565, 934 N.Y.S.2d 43 (2011) ..................................................18 iii Hart v. North Fork Bank, 37 A.D.3d 414, 829 N.Y.S.2d 624 (2nd Dept. 2007) ........................ 11, 12 Kaufman v. Chase Manhattan Bank, Nat’l Ass’n, 370 F. Supp. 276 (S.D.N.Y. 1973) .................................................... 14, 15 Mendelsohn v. JP Morgan Chase Bank, N.A., 63 A.D.3d 1021, 880 N.Y.S.2d 552 (2nd Dept. 2009) .........................9, 10 National Safe Deposit Sav. & Trust Co. v. Hibbs, 229 U.S. 391, 22 S.Ct. 818 (1913) ...........................................................13 People’s Trust Co. v. Smith, 215 N.Y. 488 (1915) .................................................................................13 Quistgaard v. EAB European Am. Bank & Trust Co., 182 A.D.2d 510, 583 N.Y.S.2d 210 (1st Dept. 1992) ..............................13 Riddy v. HSBC USA, Inc., 21 A.D.3d 465, 799 N.Y.S.2d 741 (2nd Dept. 2005) ...............................13 Rosenbaum v. First Nat’l City Bank of New York, 11 N.Y.2d 845, 227 N.Y.S.2d 670 (1962) ................................................11 Taboada v. Bank of Babylon, 95 Misc.2d 1000, 408 N.Y.S.2d 734 (Dist. Ct., Suffolk 1978) ................10 Turbine Fed. Credit Union v. Amsterdam Fed. Sav. & Loan Assoc., 224 A.D.2d 753, 637 N.Y.S.2d 492 (3rd Dept. 1996) ...................... 10, 11 U.S. Printnet v. Chemung Canal Trust Co., 270 A.D.2d 544, 703 N.Y.S.2d 821 (3rd Dept. 2000) ...................... 10, 11 STATUTES N.Y.U.C.C. § 3-302(1) .................................................................................... 8 N.Y.U.C.C. § 3-603 .......................................................................................17 N.Y.U.C.C. § 4-213 .......................................................................................19 iv N.Y.U.C.C. § 4-303 .......................................................................... 13, 14, 16 N.Y.U.C.C. § 4-403 ................................................................................ 13, 16 N.Y.U.C.C. § 4-403, cmt. 2 ...........................................................................16 OTHER AUTHORITIES Alec Rothrock, Colorado Trial Lawyers Association, Trust Accounting 101 (August/September 1999) ....................................21 Julie Anderson Hill, Consumer & Commercial Law, Cashier’s Check Scam Targets Attorneys (September 30, 2010) .........................................................................................................21 Domenick R. Lioce, Florida Lawyers Mutual Insurance Company Advisor, Avoid the Ghosts of Past, Present & Future Trust Accounting Risks (Fourth Quarter 2012) ............................21 Gregory E. Maggs, Determining the Rights and Liabilities of the Remitter of a Negotiable Instrument: A Theory Applied to Some Unsettled Questions, 36 B.C. L. Rev. 619, 652 (1995) ..................15 New York State Bar Association Ethics Opinion 737 (February 1, 2001) ............................................................................. 18, 20 Professional Responsibility and Conduct, Ethics Alert, Internet Scams Targeting Attorneys (January 2011) .........................................................................................................21 Washington State Bar Association, Managing Client Trust Accounts (September 2012) ................................21 PRELIMINARY STATEMENT In its main brief, Citibank, N.A. framed the narrow issue before this Court as follows: whether New York law permits a bank to stop payment on a cashier’s check where (i) there has been a failure of consideration to the bank for its issuance, and (ii) the party seeking payment is not a holder in due course. Plaintiff-Respondent’s brief fails to address this limited issue or to rebut Citibank’s compelling demonstration that Gates v. Manufacturers Hanover Trust Company, 98 A.D.2d 829, 470 N.Y.S.2d 492 (3rd Dept. 1983), is dispositive in its proclamation that “[t]he [Uniform Commercial] code also provides that lack of consideration is a defense against one who does not have the rights of a holder in due course (Uniform Commercial Code, § 3-306, subd [b]).” Id. at 830, 470 N.Y.S.2d at 493. Rather, Plaintiff-Respondent strives to manufacture factual distinctions between Gates and this case where none exist. In short, the Third Department in Gates got it right. Consistent with this, Plaintiff- Respondent similarly ignores overwhelming national authority that is on point and in accord with Gates. 2 Plaintiff-Respondent weaves a complicated tale. Along the way, he blatantly misstates relevant facts in both the Record and the cases he cites, calls attention to irrelevant Uniform Commercial Code provisions, and relies upon inapposite case law that adds nothing to this Court’s analysis of the focused issue before it. For example, Plaintiff-Respondent boldly declares that XOX did not have sufficient funds in its account when the Citibank Official Check was issued. (Plaintiff-Respondent’s Brief, p. 2). He similarly proclaims as fact that Citibank “continued” to refuse to pay the Citibank Official Check after the XOX Check was paid and credited to the XOX Account. (Plaintiff-Respondent’s Brief, p. 3). This is simply not supported by the Record and untrue. (R. 74). In fact, the Record demonstrates that Citibank (i) issued the Citibank Official Check based on provisional credit posted to the XOX Account upon deposit of the XOX Check and (ii) stopped the Citibank Official Check when the XOX Check was returned unpaid on account of an improper indorsement. Id. Consistent with this there is nothing in the Record suggesting that Chase presented the Citibank Official Check for payment after it was dishonored. 3 Further, legal authority upon which Plaintiff-Respondent relies provides only that a bank may stop payment on a cashier’s check where there is evidence of fraud. Fraud is not an issue here. Thus, this discussion is of no moment. The point is that fraud is not the exclusive grounds upon which a bank may stop payment on a cashier’s check. The Order on Appeal 1 thus misstates the law when it concludes that a bank’s entitlement to stop payment on a cashier’s check is limited to circumstances where there is evidence of fraud. Indeed, as the Third Department stated in Gates without equivocation, there are other circumstances in which a bank can stop payment, such as where a bank has a defense of lack of consideration. In misstating the law, and reversing the denial of Plaintiff-Respondent’s motion and awarding summary judgment in his favor on his first cause of action, the Order on Appeal precluded Citibank from proving this bona fide defense. Finally, Plaintiff-Respondent urges that public policy mandates that a bank should not be permitted to stop payment on a cashier’s check based upon circumstances beyond the knowledge of the 1 Capitalized terms used herein shall be as defined in the Brief for Defendant- Appellant dated September 13, 2013. 4 payee. If implemented, such a policy would result in a revolutionary sea change in banking practice. Indeed, under Plaintiff-Respondent’s proposal, a bank could not even stop payment on a fraudulently procured cashier’s check unless the payee had knowledge of the fraud. Plaintiff-Respondent invokes a public policy argument based on no more than a “chicken little” fear that “armed guards” and “armored trucks” would be required at transactions where “large sums of cash” are exchanged instead of cashier’s checks as “cash equivalents.” This alarmist approach ignores the present public policy in New York as expressed in an ethics opinion issued by the New York State Bar Association. As discussed in greater detail below, best practices concerning attorney trust account management dictate that an attorney should not draw funds against cashier’s checks deposited to an attorney’s trust account for which final settlement has not been made by the payor bank. Here, Plaintiff- Respondent, not Citibank, was in the best position to ensure that the Escrow Check would not be dishonored. Instead of making hasty disbursements from his attorney trust account, Plaintiff-Respondent should have been prudent and waited for final settlement of the Citibank Official 5 Check, consistent with public policy and best attorney trust account practices. ARGUMENT POINT I GATES IS DISPOSITIVE AND PROVIDES CITIBANK WITH A VALID DEFENSE TO PLAINTIFF-RESPONDENT’S CLAIM ON THE CITIBANK OFFICIAL CHECK By the Order on Appeal, the Appellate Division, Second Department restated the law on a bank’s right to stop payment on casher’s checks. In doing so, it ignored the dispositive authority of Gates v. Manufacturers Hanover Trust Company, 98 A.D.2d 829, 470 N.Y.S.2d 492 (3rd Dept. 1983). The Second Department’s failure to rely on precedent is intensified by Plaintiff-Respondent’s reliance on a crazy quilt of inapposite authority and a misguided attempt to distinguish Gates. Plaintiff- Respondent’s effort falls flat because Gates is indistinguishable from the case before this Court. Plaintiff-Respondent does not and cannot show that the Order on Appeal is consistent with Gates. Instead, recognizing that Gates presents an insurmountable obstacle to his claim, he simply misstates the 6 facts of the case, and endeavors to manufacture factual distinctions where none exist. In doing so it is clear to us that Plaintiff-Respondent either misreads Gates, or purposefully attempts to confuse and dissemble, because Gates is on all fours with this case: Gates Golden Defendant bank issued cashier’s checks upon funds provisionally credited to the account of its customer upon the deposit of checks drawn on accounts at another bank (the “Gates Deposited Checks”). Citibank issued the Citibank Official Check upon funds provisionally credited to the account of its customer upon the deposit of a check drawn on an account at another bank (the “XOX Deposited Checks”). (R. 74, 89). The cashier’s checks were delivered to an attorney acting as escrow agent who deposited them to the credit of his attorney’s escrow account. Plaintiff-Respondent admits he received the Citibank Official Check as escrow agent for Tilton and deposited it to the credit of his attorney’s escrow account. (R. 26-7). The attorney-escrow agent drew checks on his attorney escrow account on the proceeds of the deposited cashier’s checks. Plaintiff-Respondent admits he drew a check on his attorney escrow account on the proceeds of the Citibank Official Check. (R. 27). The bank that issued the cashier’s checks stopped payment when the Gates Deposited Checks were dishonored by the drawee bank. Citibank stopped payment of the Citibank Official Check when the XOX Deposited Check was dishonored by the drawee bank. (R. 74, 90). 7 Much like Plaintiff-Respondent, the attorney-escrow agent in Gates complained that the issuing bank could not stop payment on the cashier’s checks because the bank “accepted” the cashier’s checks when it drew them. See Gates, 98 A.D.2d at 829, 470 N.Y.S.2d at 493. The Third Department rejected that argument. Instead, based on the very facts present here, it held that the bank had a valid defense to the attorney- escrow agent’s claim to payment: The code also provides that lack of consideration is a defense against one who does not have the rights of a holder in due course...[s]imilarly, one who does not have the rights of a holder in due course takes an instrument subject to all defenses of any party which would be available in an action on a simple contract…[a]ccordingly, it is apparent that [the bank’s] acceptance of the checks does not, as plaintiff contends, preclude it from asserting a defense against any party. Id. at 830, 470 N.Y.S.2d at 493-94. Next, plaintiff makes much of the fact that the cashier’s checks in Gates were not drawn to the order of the attorney-escrow agent, but rather indorsed to him. This is a distinction without a difference. In fact, in both Gates and here neither attorney-escrow agent seeking payment 8 of a cashier’s check was a holder in due course because neither gave “value” for such check. Therefore, neither was entitled to payment. Citibank’s main brief contains a comprehensive analysis of what constitutes a “holder in due course” and how such status is relevant to a determination of Plaintiff-Respondent’s claim against Citibank. Briefly, as a matter of law a holder in due course is defined as one who takes a check “for value.” N.Y.U.C.C. § 3-302(1). Unable to dispute the unassailable and inevitable reality that as escrow agent he gave no value for the Citibank Official Check, it is not surprising that Plaintiff-Respondent fails to address this issue. Instead, he dismisses it as “specious.” Under the circumstances, it is all the more transparent that the facts before this Court are precisely those to which the law, as contemplated by Gates, should have been applied. Finally, without any basis in law or in fact, Plaintiff- Respondent resorts to rank speculation in concluding that there was a “strong suggestion” of “fraudulent conspiracy” in Gates. (Plaintiff- Respondent’s Brief, p. 14). It is clear that there is no suggestion of fraud at all in Gates. Plaintiff-Respondent simply makes this argument up out of 9 whole cloth in a feeble attempt to demonstrate that the Order on Appeal was not at odds with Gates. In Gates, the Third Department held without any ambiguity, in a factually similar case, that a bank has a defense to paying a cashier’s check when there has been a failure of consideration to the bank for its issuance, and the party seeking payment is not a holder in due course. The Second Department failed to recognize this valid defense, or even cite Gates. Thus, in granting summary judgment to Plaintiff-Respondent, the Second Department deprived Citibank of the right to establish its defense, and established precedent that is in conflict with both the Third Department and prevailing national authority. POINT II THE AUTHORITY ON WHICH PLAINTIFF-RESPONDENT RELIES IS INAPPOSITE AND PROVIDES NO GROUNDS FOR THIS COURT TO WAVER FROM GATES The legal authority upon which Plaintiff-Respondent relies is inapposite, and does not dilute overwhelming legal authority that supports a reversal of the Order on Appeal. For example, in one of Plaintiff- Respondent’s many string cited cases, Mendelsohn v. JP Morgan Chase 10 Bank, N.A., 63 A.D.3d 1021, 880 N.Y.S.2d 552 (2nd Dept. 2009), there is no discussion of the critical issues of whether (i) the party seeking payment of the cashier’s check was a holder in due course, or (ii) there was a failure of consideration for the issuance of the check. 2 Significantly, there is no recitation of facts to suggest that Mendelsohn is factually similar. U.S. Printnet v. Chemung Canal Trust Co., 270 A.D.2d 544, 546, 703 N.Y.S.2d 821, 823 (3rd Dept. 2000), and Banco Di Roma v. Merchants Bank of New York, 92 A.D.2d 42, 459 N.Y.S.2d 592 (1st Dept. 1983), are similarly inapposite. They hold only that a bank has a defense to payment of a cashier’s check when it has been procured by fraud. U.S. Printnet, 270 A.D.2d at 546, 704 N.Y.S.2d at 823; Banco Di Roma, 92 A.D.2d at 43-44, 459 N.Y.S.2d at 594. Neither case, however, limits a bank’s entitlement to stop payment on a cashier’s check exclusively to instances of fraud. Fraud is not an issue here. Indeed, Turbine Fed. Credit Union v. Amsterdam Fed. Sav. & Loan Assoc., 224 A.D.2d 753, 754, 637 N.Y.S.2d 492 (3rd Dept. 1996), 2 The Order on Appeal similarly cites Taboada v. Bank of Babylon, 95 Misc.2d 1000, 408 N.Y.S.2d 734 (Dist. Ct., Suffolk 1978), for the proposition that a bank cannot stop payment on a cashier’s check. However, unlike Plaintiff-Respondent, the payee there was a holder in due course because he had given value for the cashier’s check. 11 cited in U.S. Printnet, reaffirms the Gates holding that a party seeking payment of a cashier’s check who is not a holder in due course “takes the instrument subject to the defenses of any party.” Id. at 754, 637 N.Y.S.2d at 492. Notably, both U.S. Printnet and Turbine Federal are Third Department decisions decided long after Gates, and neither purports to limit the holding in Gates. Plaintiff-Respondent’s reliance on Rosenbaum v. First Nat’l City Bank of New York, 11 N.Y.2d 845, 227 N.Y.S.2d 670 (1962), is also misplaced. The issue there was simply whether a bank may recover from the payee of a cashier’s check where the bank paid the check over the stop- payment order of its customer. That is not the issue here. Zheng did not instruct Citibank to stop payment, nor did Citibank pay the Citibank Official Check. Plaintiff-Respondent next cites Hart v. North Fork Bank, 37 A.D.3d 414, 829 N.Y.S.2d 624 (2nd Dept. 2007), for the proposition that a customer’s representation that she made alternate arrangements to pay the payee of a cashier’s check is insufficient to defeat the payee’s claim for payment of that check. Here, the Record demonstrates conclusively that 12 Citibank’s decision to stop payment of the Citibank Official Check was not premised on Zheng’s statement that she made alternate arrangements to fund the business deal with Tilton. (R. 74-5). It similarly shows that by the time Zheng made this representation, Citibank had already stopped payment. Id. Rather, Citibank has consistently explained that it was entitled to and did stop payment on the Citibank Official Check because (i) there was a failure of consideration to Citibank for its issuance, and (ii) Plaintiff-Respondent, as his client’s escrow agent, was not a holder in due course because he admittedly gave no value for the check. The Record, thus, belies Plaintiff-Respondent’s suggestion that Citibank stopped payment on the Citibank Official Check because Zheng told the bank she made alternate arrangements to pay Tilton. (Plaintiff-Respondent’s Brief, p. 3). Under the circumstances, Hart has no applicability here. 3 3 It appears that Plaintiff-Respondent’s reliance on Hart is motivated by inclusion in the Order on Appeal of the Second Department’s statement that “[i]n particular, the hearsay allegations contained in the affidavit of a Citibank employee that the check was stopped because the customer of the bank informed the bank that ‘she made alternate arrangements to have the funds delivered’ is patently insufficient to defeat the plaintiff’s entitlement to judgment as a matter of law in this case.” (R. 106). This is yet additional evidence that the Second Department committed reversible error by misapprehending the facts upon which Citibank based its decision to stop payment. 13 Finally, Plaintiff-Respondent’s reliance upon Dalessio v. Kressler, 6 A.D.3d 57, 773 N.Y.S.2d 434 (2nd Dept. 2004), is also misdirected as that case involved a certified check, not a cashier’s check. Likewise, Quistgaard v. EAB European Am. Bank & Trust Co., 182 A.D.2d 510, 583 N.Y.S.2d 210 (1st Dept. 1992), involves certified checks, not cashier’s checks. Finally, Riddy v. HSBC USA, Inc., 21 A.D.3d 465, 799 N.Y.S.2d 741 (2nd Dept. 2005), did not involve any kind of checks at all. 4 POINT III UNIFORM COMMERCIAL CODE SECTIONS 4-303 AND 4-403 ARE INAPPLICABLE TO CASHIER’S CHECKS Plaintiff-Respondent devotes a significant portion of his brief to a lengthy discussion of legal authority that is not relevant to the limited issues before this Court. For example, Plaintiff-Respondent litters his brief with seriatim references to N.Y.U.C.C. § 4-303. That provision simply 4 The antiquated cases upon which Plaintiff-Respondent relies in support of his claim that the bank, not the attorney, should bear the loss simply have no applicability here. National Safe Deposit Sav. & Trust Co. v. Hibbs, 229 U.S. 391, 22 S.Ct. 818 (1913), involved the wrongful sale of stock certificates. People’s Trust Co. v. Smith, 215 N.Y. 488 (1915), involved the wrongful sale of a bond and mortgage. Neither case involved checks, let alone an attorney disbursing funds from his attorney trust account based upon the proceeds of a cashier’s check. 14 governs the order of priority a bank is to give to certain items. See First Jersey Nat’l Bank v. Nat’l Bank of N. Am., 563 F. Supp. 901, 903 (S.D.N.Y. 1982) (“Section § 4-303 is designed to settle priority disputes between the holder of a check who demands payment and a party who claims funds in the account through one of the ‘four legals’…knowledge or notice of the customer’s death, incompetency, or bankruptcy; the customer’s stop order; legal process; setoff by the payor bank.”). Plaintiff-Respondent prominently highlights Kaufman v. Chase Manhattan Bank, Nat’l Ass’n, 370 F. Supp. 276 (S.D.N.Y. 1973) as a centerpiece of his legal argument. Forty years after that decision was issued we now understand that the court relied on a since discredited and fundamentally flawed legal premise. There, the court reasoned that pursuant to N.Y.U.C.C. § 4-303 a stop-order comes too late if it is received after the bank has accepted an item, and a cashier’s check is accepted when issued. Id. at 278. This logic was expressly rejected in Gates where the Third Department held that “section 4-303 of the code is not controlling for we are not concerned with the timeliness of the stop payment orders. Rather, at issue in this action is [the bank’s] liability to plaintiff on the four 15 [cashier’s] checks issued and accepted.” Gates, 98 A.D.2D at 830, 470 N.Y.S.2d at 493. Thus, Kaufman was effectively overruled by Gates (and the prevailing national authority which is in accord with Gates). 5 Moreover, Kaufman has been justly criticized. A law review article aptly titled “Determining the Rights and Liabilities of the Remitter of a Negotiable Instrument” sums up the prevailing state of the law concluding that “[t]he bank, naturally, may assert its own defenses to payment. For example, unless the person presenting the check has the rights of a holder in due course, the bank could assert as a defense the failure of the remitter to give consideration for it.” Gregory E. Maggs, Determining the Rights and Liabilities of the Remitter of a Negotiable Instrument: A Theory Applied to Some Unsettled Questions, 36 B.C. L. Rev. 619, 652 (1995). See also Gentner and Co., Inc. v. Wells Fargo Bank, 76 Cal. App. 4th 1165, 1175, 90 Cal. Rptr. 904, 912 (Cal. Ct. Appeal. 1999) (rejecting Kaufman’s holding and following prevailing national authority by concluding that “a rule which permits only a person acting in 5 Bunge Corp. v. Mfrs. Hanover Trust Co., 65 Misc.2d 829, 318 N.Y.S.2d 819 (Sup. Ct., New York 1971), and Bobrick v. The Second Nat’l Bank of Hoboken, 175 A.D. 550, 162 N.Y.S. 147 (1st Dept. 1916), upon which Kaufman relied, thus, similarly lend Plaintiff-Respondent no support. 16 good faith and who has given value to recover in these type of situations makes more sense than a blanket rule that a cashier’s check can never be refused because it is accepted when issued.”). Plaintiff-Respondent’s discussion of N.Y.U.C.C. § 4-403 is also a red herring. In fact, Plaintiff-Respondent concedes that § 4-403 “does not apply to Cashier’s Checks.” (Plaintiff-Respondent’s Brief, p. 18). Section 4-403 concerns only the right of and manner by which a customer may request that a bank stop payment of a check, including cashier’s checks. See N.Y.U.C.C. § 4-403, cmt. 2 (“The position taken by this section is that stopping payment is a service which depositors expect and are entitled to receive from banks notwithstanding its difficulty.”). Nothing in § 4-403 concerns a bank’s entitlement to stop payment on a cashier’s check because it has its own defense to payment. Dzuriak v. Chase Manhattan Bank, N.A., 44 N.Y.2d 776, 406 N.Y.S.2d 30 (1978), and Abilities, Inc. v. Citibank, N.A., 87 A.D.2d 831, 448 N.Y.S.2d 242 (2nd Dept. 1982), provide no viable legal precedent that may be helpful to this Court. Both state that N.Y.U.C.C. §§ 4-303 and 4-403 govern only the right of a customer to stop payment on a cashier’s check; neither 17 addresses a bank’s right to assert its own defense to payment of a cashier’s check. In each case, the court held that a remitter of the cashier’s check (i.e., the issuing bank’s customer) cannot require the issuing bank to stop payment. Citibank does not dispute this proposition which has nothing to do with the case before this Court. Finally, the import of Plaintiff-Respondent’s reference to N.Y.U.C.C. § 3-603 is unclear as that provision simply provides that the liability of a party on an instrument is discharged to the extent of its payment or satisfaction to the holder. See First Nat’l Bank v. Rob-Glen Enterprises, Inc., 101 A.D.2d 848, 476 N.Y.S.2d 161 (2nd Dept. 1984). Had, for example, Citibank paid the Citibank Official Check, § 3-603 would lend support to a claim that such payment would have discharged its obligations to Plaintiff-Respondent. This is decidedly inapplicable to the issues on appeal. 18 POINT IV PLAINTIFF-RESPONDENT FAILED TO FOLLOW TRUST ACCOUNT BEST PRACTICES AND, AS A MATTER OF PUBLIC POLICY, SHOULD BEAR THE LOSS, IF ANY Plaintiff-Respondent invokes the notion that public policy ought to weigh on this Court’s determination of this case. Indeed, as set forth above we believe that the law is clear. Equally clear is that public policy in New York is expressed in New York State Bar Association Ethics Opinion 737 (February 1, 2001) which warned attorneys against writing checks on their attorney trust account against deposited checks that have not been finally settled, even cashier’s check. The NYSBA explained that “[a] bank or cashier’s check may also be subject to a stop payment…” (ROA 3) 6 See also Greenberg, Trager & Herbst. LLP v. HSBC Bank USA, 17 N.Y.3d 565, 934 N.Y.S.2d 43 (2011) (finding that a law firm that deposited a cashier’s check to an attorney trust account and then drew funds against that deposit before final settlement was in the best position to prevent the loss when it turned out the check was a counterfeit). 6 “ROA” refers to the Other Authorities Cited in the Reply Brief of Defendant- Appellant Citibank, N.A. 19 Here, Plaintiff-Respondent deposited the Citibank Official Check to the credit of his attorney trust account on December 30, 2009. (R. 25). Plaintiff-Respondent claims that on December 31, 2009, Chase allegedly informed him that the funds were “available” for withdrawal. (R. 58-9). However, it is also indisputable from the Record that Chase did not inform Plaintiff-Respondent that it had received final settlement of the Citibank Official Check. See N.Y.U.C.C. § 4-213. On December 31, 2009, Plaintiff-Respondent drew the Escrow Check. without waiting for final settlement of the Citibank Official Check. (R. 27). As a result, it is indisputable that Plaintiff-Respondent failed to follow “best practices” in managing his attorney trust account, and hastily disbursed funds represented by the deposit of the Citibank Official Check. “Best practices” mandate that an attorney-escrow agent not draw checks against deposits to an attorney trust account that have not been finally settled, including deposits of cashier’s checks. Plaintiff-Respondent was thus in the best position to avoid the overdraft of his attorney trust account had he simply adopted best practices and waited for the Citibank Official Check to be finally settled. 20 Plaintiff-Respondent posits that attorneys should be permitted to rely upon a cashier’s check as a cash equivalent, and immediately use the funds represented by cashier check, because if not it “would have a chilling affect [sic] upon the entire economy.” (See Plaintiff-Respondent’s Brief, p. 24). 7 The Ethics Opinion cited above addressed, and expressly rejected, an identical concern that prohibiting attorneys from drawing checks against cashier’s checks for which final settlement has not been made “will engender delay and inconvenience and may adversely affect the economy.” New York State Bar Association Ethics Opinion 737. (ROA 3-4) The NYSBA concluded that such consideration was “beside the point,” and that the “principle [that attorney’s should not draw funds against uncleared cashier’s checks] must hold …no matter what may be the detriment to third parties of withholding the use of that client’s funds.” (ROA 4) This policy is harmonious with that in other jurisdictions, in which attorneys have been cautioned against drawing escrow checks before final settlement of a cashier’s check deposited to an attorney trust account, 7 Plaintiff-Respondent spins a dystopian tale of “armed guards” and “armored trucks” transporting “large sums of cash” if attorneys are not permitted immediate and unfettered use of funds represented by cashier’s checks. Of course, if immediate funds are required, an attorney may avoid such a doomsday scenario by requiring a wire transfer. 21 and placed the risk that the cashier’s check may be dishonored upon the attorney, not the issuing bank. 8 In short, the public policy for which Plaintiff-Respondent advocates simply does not exist. To the contrary, that a cashier’s check may be dishonored for any number of reasons is a well known possibility. Consequently, proper attorney trust account management dictates that attorneys not disburse funds against cashier’s checks for which final settlement has not been made by the payor bank. 8 See Washington State Bar Association, Managing Client Trust Accounts (September 2012) (“The only items that are recognized as collected when deposited are cash and wire transfers. All other deposit items, including cashier’s checks…will have varying times for collection; check with your bank to determine the length of time you need to wait before making a disbursement.”) (ROA 22); California Committee of Professional Responsibility and Conduct, Ethics Alert, Internet Scams Targeting Attorneys (January 2011) (cautioning attorneys not to write escrow checks against cashier’s checks for which final payment has not been made) (ROA 52); Alec Rothrock, Colorado Trial Lawyers Association, Trust Accounting 101 (August/September 1999) (“It is appropriate to make essentially contemporaneous deposits and disbursements from the trust account only when the trust account deposit is made with certified or cashier’s checks or other instruments generally regarded as reliable, or the risk of noncollectibility is otherwise minimal, as with checks for small amounts. Even then, the lawyer bears the ethical and perhaps civil liability risk that such instruments will be dishonored.”) (ROA 62); see also Julie Anderson Hill, Journal of Consumer & Commercial Law, Cashier’s Check Scam Targets Attorneys (September 30, 2010) (“The obvious lesson here is that an attorney should not transfer money from the trust account until he or she is sure the cashiers’ check has been paid by the bank that issued the check.”) (ROA 71); Domenick R. Lioce, Florida Lawyers Mutual Insurance Company Advisor, Avoid the Ghosts of Past, Present & Future Trust Accounting Risks (Fourth Quarter 2012) (“Never disburse funds in reliance on funds deposited with a cashier’s check until the funds are ‘collected’ by the bank.”). (ROA 75) 22 CONCLUSION For the foregoing reasons, Citibank respectfully requests that this Court issue an order reversing the Order on Appeal, together with such other and further relief as is just and proper. Dated: New York, New York November 15, 2013 ZEICHNER ELLMAN & KRAUSE LLP By: ______________________________ Barry J. Glickman Bruce S. Goodman Attorneys for Defendant-Appellant 1211 Avenue of the Americas New York, New York 10036 (212) 223-0400