Opinion
SUCV201603069BLS1
08-02-2018
SARROUF LAW, LLP v. FIRST REPUBLIC BANK et al.[1]
File Date: August 6, 2018
MEMORANDUM OF DECISION AND ORDER ON DEFENDANT FIRST REPUBLIC BANK’S MOTION FOR SUMMARY JUDGMENT
Mitchell H. Kaplan, Justice of the Superior Court
The plaintiff, the law firm Sarrouf Law, LLP (Sarrouf), was the victim of a classic internet scam. Defendant, H. Glenn Alberich, of counsel to Sarrouf, responded to an email from a self-identified international businessman seeking legal assistance in the sale of heavy equipment to a Massachusetts customer. Alberich had no prior relationship with this individual, nor was he referred by anyone that Alberich knew. Through communications with his potential client, Alberich learned that as part of the engagement, Alberich would be called upon to receive a check allegedly representing a substantial down payment on the sale price of the equipment-$337,044-deposit it, and then distribute nearly all of it to foreign recipients. Alberich accepted the engagement and caused, what turned out to be, a counterfeit check to be deposited in Sarrouf’s IOLTA account with defendant, First Republic Bank (FRB). Alberich then caused those funds to be wire transferred to recipients in Asia and Southeast Asia, before the check was returned to FRB as uncollectable. FRB charged back to the Sarrouf IOLTA the amount of the wires. In this action, Sarrouf seeks to recover its loss from Alberich and FRB. Count I of Sarrouf’s Complaint asserts a claim of negligence against FRB, and Count II a claim for breach of the California Uniform Commercial Code (CUCC), Sections 1304 and 4103.
The case is presently before the court on FRB’s motion for summary judgment seeking dismissal of the claims against it. For the following reasons, FRB’s motion for summary judgment is ALLOWED.
BACKGROUND
The facts revealed by the summary judgment record, viewed in the light most favorable to Sarrouf, are as follows.
Sarrouf is a law firm based in Boston, Massachusetts. The firm’s principals are Camille Sarrouf, Sr. and Camille Sarrouf, Jr.; the bookkeeper is Mary Bono; and the legal secretary is Karen Beaudoin. In 2006 or 2007, H. Glenn Alberich became "of counsel" to Sarrouf, although he did not work on cases with either of the principals in the firm.
FRB is a California state-chartered bank with branch offices in Boston.
Sarrouf’s Accounts at FRB
In June 2011, Sarrouf opened a client funds account with FRB. As part of the process of establishing this account, FRB provided Sarrouf with a number of documents that Sarrouf was required to execute, including: a Business Account & Disclosure Agreement dated May 2010; a Master Signature Card & Agreement to Open Accounts signed June 7, 2011; a Funds Transfer Agreement & Client Authorization signed June 7, 2011; a Multi-Client Management Master Account Application signed June 7, 2011; and a Partnership Authorization to Open Accounts signed June 7, 2011. The Funds Transfer Agreement & Client Authorization provided, in relevant part:
We may, in our sole discretion, execute a Funds Transfer which causes an overdraft to your account, in which case you are liable for the overdraft and any related fees, as stated in the Disclosure.
...
We are authorized to execute Funds Transfers issued by you or any Authorized Person, without inquiry into the circumstances of the transaction, even if a Funds Transfer benefits the Authorized Person.
...
We may, at our sole discretion, accept your cancellation or amendment to a Funds Transfer. We have no liability if a cancellation or amendment is not affected [sic].
...
All Funds Transfers are subject to verification by us pursuant to the following security procedure, which you agree is a commercially reasonable security procedure.
CALL BACK: If you or an Authorized Person gives Funds Transfer instructions by any method other than in person, we may telephone you or the Authorized Person at one of the telephone numbers listed in our records, or another telephone number as we and you agree upon.
...
You agree that we are liable to you only for our negligent performance or nonperformance of the services provided under his Agreement.
...
All Funds Transfers are governed by federal law and the laws of the state of California, including the Bank Secrecy Act, the Office of Foreign Assets Control (OFAC), the USA PATRIOT Act, and the Uniform Commercial Code as enacted in California ...
FRB sent Sarrouf an updated Business Account Disclosure & Agreement in June 2014.
It explained that:
Our policy is to make funds from your check deposits available to you on the first business day after the day we receive your deposit ... Please keep in mind, however, that after we make funds available to you, and you have withdrawn the funds, you are still responsible for checks you deposit that are returned to us unpaid and for any other problems involving your deposit.
In January 2012, Sarrouf opened an Interest on Lawyers Trust Account (IOLTA) with FRB. The authorized signers on the IOLTA were Camille Sarrouf, Sr., Camille Sarrouf, Jr., Bono, and Beaudoin. Since joining Sarrouf as "of counsel" in 2007, Alberich, with Sarrouf’s permission, listed Sarrouf’s IOLTA information on his annual Board of Bar Overseers renewal form. Prior to October 2015, Alberich had never deposited or withdrawn funds, or requested to do so, from Sarrouf’s IOLTA.
"Henry van den Biggelaar"
On September 23, 2015, an individual who identified himself as "Henry van den Biggelaar" contacted Alberich through a webpage that Alberich maintained advertising his services. Biggelaar’s message read: "I request the help of an attorney to draft a sale agreement. Respond if you are able to help and schedule a time to discuss details. Thank you for your prompt response." Biggelaar’s email address was listed as, "hennyd@bigmechinery.nl." Over the next few days, Alberich and Biggelaar corresponded by email. Alberich did no research regarding either Biggelaar or "bigmechinery."
On September 25, 2015, Biggelaar wrote that:
I am negotiating a transaction about selling a crawler crane to a purchaser living in Massachusetts. I need your firm to help me draft a sale contract for the transaction. Attached are some required details of the crane for your review. Find underneath the name of the proposed buyer for your conflict check. The manufacture and total expenditure is one million six hundred eighty-five thousand tow [sic] hundred twenty dollars (1, 685, 220.00).
Proposed buyer:
Cashman Dredging
549 South Street
P.O. Box 692396
Quincy, MA 02269
Advice on your rate for drafting a PS agreement and forward your engagement letter for our review and signature.
Biggelaar attached a six-page Term Sheet to the email relating to the proposed transaction.
On September 29, 2015, Alberich spoke with Biggelaar for fifteen to twenty minutes on the phone about Biggelaar’s company and crawler cranes, among other things. Biggelaar told Alberich that Cashman Dredging would be represented by a broker in the transaction. Thereafter, Alberich sent Biggelaar a retainer agreement. The agreement was on letterhead that identified Alberich as "of counsel" to Sarrouf, required a $3,000 retainer, and stated that Biggelaar would be billed $400.00 an hour for legal services.
On October 1, 2015, Biggelaar emailed Alberich the signed retainer letter and explained that: "The scope of your engagement would be to draft and execute a standard Purchase& [sic] Sale agreement that would protect all parties involved ... The buyer will be represented by their broker. Existing terms are that buyer will make initial deposit that would cover attorney retainer as soon as the retainer is executed. The initial deposit will be 20% of total amount. It must be received within 5 business days of signing the retainer agreement to show commitment. Full Balance is expected before equipment is shipped ... Kindly advice [sic] on how you want the initial deposit and retainer check written out." Alberich did not know and did not ask Biggelaar why signing the retainer agreement triggered the buyer’s obligation to pay the deposit.
Later in the morning on October 1, 2015, Alberich responded that the checks should be made out as follows: the Deposit Check payable to "H. Glenn Alberich, as attorney for Big Machine" and the Retainer Check payable to "H. Glenn Alberich."
On October 5, 2015, Alberich received at his home office, a "letter of intent" and two checks, which were purportedly sent by the buyer’s insurance broker, Zurich North America. The letter of intent authorized Alberich: "to release $192,900.00 to seller for final inspection cost and insurance coverage to commence inspection and $118,650.00 for service parts for 6 months. Balance funds should be held in trust until final closing." The deposit check was drawn in the amount of $337,044.00, payable to "Sarrouf Law LLP." The retainer check was in the amount of $3,000 and payable to "H. GlennAlberich, Esq. [sic]." In the upper left hand corner of both checks is: "To JP Morgan Chase Bank, N.A. Syracuse, NY 13206" and "RBC Bank." Nothing on the checks struck Alberich as concerning.
On October 5, 2015, Alberich presented the $3,000 retainer check to a teller at Santander Bank where he maintained an account, and the teller accepted the check for deposit. That same day, Alberich sent the $337,044 check to Sarrouf via overnight mail. In his handwritten cover letter to Camille Sarrouf, Jr., Alberich wrote: "Camille-Please deposit the enclosed check in the firm’s IOLTA account. I am preparing a contract for the purchase of heavy equipment, and the enclosed check is a good faith down payment. The closing may not occur for 90 days."
On October 6, 2015 at 8:34 a.m., Alberich sent an email to Bono, with a copy to Camille Sarrouf, Jr., informing Bono that he mailed a check to Camille Sarrouf, Jr. and asking that she deposit the $337,044 check into Sarrouf’s IOLTA. Alberich also requested that Bono scan and email him a copy of the deposit slip as soon as possible. One minute later, Camille Sarrouf, Jr. responded to Alberich’s email asking him if he was "around later for a call" concerning the check. Alberich responded that he would reach out to Camille Sarrouf, Jr. over the next two days, but he never did.
Bono Deposits the $337,044 Check at FRB
Later in the day on October 6, 2015, Bono brought the $337,044 check to FRB’s Post Office Square branch for deposit. Nothing about the check struck Bono as suspicious. She brought the check to the first representative that she saw, Gabriela Perry. Bono and Perry knew each other from previous banking transactions. Bono handed Perry the check and deposit slip. She did not say anything to Perry about the check, the circumstances under which Alberich received the check, or the circumstances under which Bono was depositing it. Bono saw Perry look at the check, turn it over, look at the endorsement, put the deposit slip back on top of the check, and enter information into her computer. Perry recalled that she looked at the check for the amount, the date, whether it was signed, the identity of the payee, whether the name of the payee matched the account, the endorsement, and the nine-digit routing number.
It is FRB’s policy that client representatives should look at a check to determine whether there are signs that the check might be counterfeit, and FRB’s front line employees receive annual training on check fraud awareness. FRB also issues training materials to its employees that describe various features one should look for to determine if a check is valid.
Perry accepted the check for deposit into Sarrouf’s IOLTA and gave Bono a deposit receipt. Bono looked on the deposit receipt to see when the deposited funds would be available, but did not see this information on the receipt. Bono asked Perry when the funds would be available, and Perry told Bono that the funds would be available immediately because FRB does not hold funds in the IOLTA. Bono thought it was strange that there would be no hold, but she did not question Perry any further because she thought that the check was a cashier’s check. Bono’s interaction with Perry on October 6, 2015 lasted approximately one minute.
FRB had a policy in its Boston offices that, for its law firm clients, it did not place holds on checks under $5 million deposited in IOLTAs.
At 12:47 p.m. on October 6, 2015, Alberich forwarded a copy of the $337,044 deposit receipt to Biggelaar. The deposit receipt noted that: "Checks and other items are received for deposit subject to the provisions of the Uniform Commercial Code or any applicable collection agreement. Deposited funds may not be available for immediate withdrawal in accordance with the check hold policy stated in our Account Disclosure. All items are credited subject to final payment. Any item may be charged back at any time before final payment." At 3:37 p.m. on October 6, FRB scanned the $337,044 check to its Image Center, and the check was processed at 4:02 p.m.
Biggelaar Requests Wire Transfers
At 6:07 a.m. on October 8, 2015, Biggelaar sent Alberich an email, which stated, in part:
Glenn,
Attached please find the signed Letter of Intent and instructions on our funds held in your trust account, Effect a swift wire to KIM SREYLOT and ODIKA HOLDING INTERNATIONAL RESOURCES COMPANY LIMITED for the final inspection of the equipment and service parts as agreed by both parties.
Due to the time difference between us we want you to have this transfer executed today before 11:00 a.m. your time and make the value date of the transfer 08 October 2015 in other [sic] for ODIKA HOLDING INTERNATIONAL RESOURCES COMPANY LIMITED and KIM SREYLOT to be able to update their accounts accordingly and proceed as directed.
Report back to me, copying buyer’s representative with receipt of wire transfer and swift reference numbers so we can forward same to them as soon as possible.
...
I await your acknowledgment of instructions and wire transfer updates.
The email also instructed Alberich to wire $192,900 to Sreylot’s account at Union Commercial Bank PLC in Cambodia and $118,650 to Odika Holding International Resources Company Limited’s account at HSBC in Hong Kong. Alberich did not ask Biggelaar about Sreylot’s or Odika Holdings’ role in the transaction. After sending the wire instructions, Biggelaar emailed Alberich six times in twenty-four hours to confirm that Alberich received the wire instructions and to request confirmation that the wires had been sent; Alberich testified at deposition that he did not think this was unusual.
The $3,000 Retainer Check is Returned & the Wire Transfers
At 11:27 a.m. on October 8, 2015, Alberich sent Biggelaar the following email:
Henry:
I just completed two meetings in preparation for a court hearing which just ended. I have forwarded your instructions to my Boston office and advised that the transfers be executed as quickly as possible. Please be advised that the $3,000 check in payment of my retainer fee has been returned by my bank and that amount has been subtracted from my account. I am surprised and puzzled by this turn of events. Would you please contact you[r] buyer and ask them to get this problem resolved quickly.
Best Regards,
Glenn
As noted in the email above, the $3,000 retainer fee check was returned by Alberich’s bank (Santander). The reason for the return was stated as: "Refer to Maker."
At 11:33 a.m. on October 8, 2015, Alberich sent Camille Sarrouf, Jr. the following email:
Alberich did not alert anyone at Sarrouf that his $3,000 retainer check had been returned to Santander.
Camille:
Would you please have Mary [Bono] take care of the transfers described below as quickly as possible. Our client wants these transfers effective as of today. I am in a meeting and cannot call Mary, but time is obviously short to get this done.
Best
Glenn
Camille Sarrouf, Jr. quickly forwarded Alberich’s email to Bono without comment, and both understood that in doing so, Camille Sarrouf, Jr. was instructing Bono to wire the money out of Sarrouf’s IOLTA as requested by Alberich.
Shortly after receiving Camille Sarrouf, Jr.’s email, Bono called Angel Hally, her principal contact at FRB, and said that she needed two wires sent from Sarrouf’s IOLTA. Bono spoke with Hally on a recorded line and told her that the wires, "have to get into their accounts on October 8th, which is today." Hally replied that she, "can’t guarantee they’ll receive it today." Bono responded that she would email instructions to Hally and noted that, "if they get there, they get there. If they don’t they don’t." At 12:16 p.m. on October 8, 2015, Bono sent Hally the wire instructions via email. See Summary Judgment Exhibit 60.
At 12:41 p.m., Hally sent Jason Sanchez (an FRB employee) an email stating that the wire transfers "appear not in line with the expected activity stated on the KYC [Know Your Customer] form in file ...," and there were no foreign wires listed on the Business Information Form. Prior to October 8, 2015, Sarrouf had not sent any wire transfers to foreign accounts from its IOLTA at FRB; although, it had sent three foreign wire transfers from its Client Account in 2014 and 2015, each no greater than $25,800.
After receiving the email, Hally performed a "call back" by calling Bono on a recorded line to confirm the written instructions. Hally confirmed with Bono: (i) that the wires were to be sent from the IOLTA; (ii) the amount of the wires; and (iii) the banks to which the wires were to be sent. Hally went on to ask Bono: "A quick question for you, Mary, one of the questions we ask to help protect against fraud. Have you verbally confirmed with the persons requesting these wires that they’re both valid wire requests?" Bono answered, "Yes."
Bono testified at deposition that: "I don’t believe I asked him [Alberich] or he asked about the wires being valid. I’m referring to that he asked me to send out these wires, and I’m saying that he knows they’re valid; so, therefore, he wouldn’t be asking me to send them if they weren’t valid. I don’t know the people involved. I’m just following my instructions."
As Hally spoke to Bono, she completed FRB’s Funds Transfer Callback Verification form in which she described the purpose of the transfer as real estate related. Hally testified at her deposition that she never asked Bono what the purpose of the transfer was and does not remember anyone at Sarrouf telling her what the purpose of the transfer was; she admitted that the purpose of the transfer listed on the form was wrong and that it was her "misunderstanding."
After completing the call back to Bono and the Funds Transfer Callback Verification form, Hally processed the wires for release. FRB did not consider either Cambodia or Hong Kong to be a "high" risk country for fraud. However, since the wires were initiated by email, greater than $50,000, and being sent to a foreign country, FRB’s "Red Flag" process was triggered.
The two wire transfers triggered a "Red Flag Alert" at FRB for the additional reason that there was no history of wire transfers to the beneficiaries in the last twelve months.
As part of the Red Flag process, FRB completed a "Red Flag Wire Alert Checklist" for each wire. The checklist asked, among other things, whether the request from the client indicates any red flags, such as grammatical/spelling errors or inconsistent font/text formats, a sense of urgency to wire immediately, or a client who is busy and cannot be reached by phone or requests a callback to a phone number not on file. As noted, nothing that Bono communicated to FRB met any of these checklist criteria.
The Red Flag Wire Alert Checklist required that the following questions be answered "yes" or "no":
Question 20: "Does this wire align to the client’s occupation/line of business as noted in Bank records?"
Question 21: "Is the source of funds for this wire legitimate (ex: not a recent large UCF deposit, loan advance)?"
Question 22: "Does wire make sense to the account’s activity pattern and/or wire purpose provided by client?"
Question 23: "Research on wire BNF shows this is a known/reasonable entity & no match for negative news[.] [S]pecify web search results: ____"Quality control for FRB answered, "yes" to each of these four questions. Nonetheless, according to Don Coker, Sarrouf’s "banking expert consultant" in this case, he believes that the correct answers to those questions was, "no." See Summary Judgment Exhibit 128: "Plaintiff’s Supplemental Answer to Interrogatory Number 2 of Defendant, First Republic Bank’s, First Set of Interrogatories" at 2-7 (detailing Coker’s anticipated expert testimony).The Red Flag Wire Alert Checklist provides that: "For any ‘NO’ boxes checked (except for Q1 & 4), STOP. Do not proceed with releasing wire until further due diligence completed. Document due diligence performed to address & clear any ‘NO’ boxes in the narrative box below ..."
The checklist also asked if the wire aligns with the client’s occupation/line of business as noted in FRB’s records. FRB sees large dollar transactions for law firms "all the time," and Sarrouf’s IOLTA statements showed several large dollar transactions in the past.
The checklist asked if research on the wire beneficiary shows if the beneficiary is a "known/reasonable entity & no match for negative news." In order to answer this question, FRB performs a Google search. FRB knows that not all individuals have an internet presence, and if the individual does not have an internet presence, it focuses on whether there is any negative news such as illegal activity tied to the person. With respect to Kim Sreylot, an individual, FRB found nothing to show that Sreylot was not an existing person. FRB relied on the fact that Sarrouf, who validated and requested the wire transfer, appeared to know to whom it was sending the wire. With respect to Odika Holdings, FRB verified that it was a registered entity in Hong Kong.
At 2:14 p.m. and 2:16 p.m. on October 8, 2015, "Quality Control PBCS" at FRB sent emails to employees at FRB stating that after review, it recommended that the wires be approved for release, attaching the following documents: Completed Red Flag Wire Alert Checklist, Original Wire Request and Callback Verification Form, and Callback Recording.
Sarrouf points to the following FRB internal materials. FRB maintains written bank policies and procedures in what FRB calls, "the Big Green Book." According to the Big Green Book, foreign wire transfers, "should be initiated with only collected funds in the account." Also, on May 1, 2015, FRB posted an article entitled, "Fraud Awareness: The Retainer Fee Scam" to its internal database known as "Collaborate." Under the heading "Tips to Avoid Being Scammed," the article noted that: "Remember that ‘Available funds’ does not equal ‘collected’ funds. Although funds may [be] available within two days, it does not guarantee that the actual check will be paid. Counterfeit checks often take up to a week to get returned because fraudsters put fake routing numbers on the checks or the remitter bank is an international bank."
At 2:20 p.m. on October 8, 2015, FRB released the $192,900 wire, and at 2:23 pm., it released the $118,650 wire. FRB uses intermediary banks to send international wires because it is a domestic bank. FRB used Standard Chartered Bank as the intermediary bank for the $192,900 wire to Sreylot in Cambodia and HSBC Bank USA as the intermediary bank for the $118,650 wire to Odika Holdings in Hong Kong. The $192,900 was credited to the Cambodian account on October 9, 2015 and deducted from that account on October 10, 2015. The $118,650 wire was credited to the Hong Kong account on October 9, 2015. The record does not reflect when those funds were withdrawn.
The $337,044 Check is Returned
At 8:23 p.m. on October 8, 2015 EDT, FRB received an Electronic Advance Return Notification System (EARNS) message that JPMorgan had returned the $337,044 check as "Refer to Maker." JP Morgan did not state the reason for the return as "counterfeit." The term "Refer to Maker" can mean a number of things, including: an invalid account number, a typographical error on the check, or that the check is counterfeit. At 8:44 p.m. on October 8, 2015, an FRB employee who worked in San Francisco emailed Jason Sanchez (Sarrouf’s Preferred Banker at FRB) and other FRB employees alerting them that the $337,044 check had been returned. Sanchez did not learn about the returned check until shortly before 9:00 a.m. on October 9, 2015. At 12:03 p.m. on October 9, Sanchez emailed Camille Sarrouf, Sr., Camille Sarrouf, Jr., Bono, and Beaudoin this information. Camille Sarrouf, Jr. quickly forwarded the email from Sanchez to Alberich, and at 12:52 p.m. on October 9, Alberich responded to Camille Sarrouf, Jr. as follows:
Camille:
Your email came through without any message. I was informed yesterday by my bank that the check sent to me as a retainer for this new matter (i.e. purchase/sale of large machinery) was returned to the maker, which is Zurich North America, acting on behalf of their customer, Cashman Dredging. Cashman is buying a huge crawler crane from our client Big Machinery of the Netherlands, and Cashman was given the responsibility of paying my retainer. I informed our client that the retainer check had been returned and he immediately notified Zurich, which apologized and said they were sending a new check.
I hope this is the returned check that you were referencing because the only other check we received was the one in the amount of $337,044.00 which I asked to be deposited in the Sarrouf IOLTA account. Yesterday, per our client’s instructions, we wired two payments to overseas entities from the funds in the IOLTA account. I would hope that our bank would not have wired those funds unless the $337,044.00 check had already cleared. In other words, I hope your email, entitled "Returned Deposit Item" did not refer to the $337, [0]44.00 check.
Best,
Glenn
At 1:51 p.m. on October 9, 2015, Hally called Beaudoin on a recorded line. She explained that "Refer to Maker" meant something was wrong with the check, but there were many different reasons for a check to be returned as "Refer to Maker." Hally encouraged Beaudoin to reach out to the person who gave Sarrouf the $337,044 check. Bono joined the call and asked Hally, "The wires can’t be called back, they’ve already gone through, right?" Hally answered that FRB could attempt to recall the wires, but because they were international, "it’s very slim that we might get the funds back." Hally instructed Beaudoin to email her the request to recall the wires so that she could immediately submit the recall request. At 2:04 p.m., Beaudoin sent the confirming email.
At 3:23 p.m. on October 9, 2015, Alberich emailed Cameron Sarrouf, Jr. that he believed that "the whole machinery transaction is a fraud." Alberich wrote that he "spoke to someone at Cashman Dredging and they said their name has been used in a number of fake deals ... [and] they buy most of their machinery from another company."
The Recalls
Hally began processing the recalls as soon as she finished speaking with Beaudoin and Bono and had received the confirmation email. FRB issued the recall request for the $118,650 wire at 2:37 p.m. and the recall request for the $192,900 wire at 2:38 p.m.
After Hally sent the recall requests, Alberich called Hally on a recorded line and attempted to speak to her. Hally told Alberich that she could not provide him any information because he was not an authorized signatory on Sarrouf’s IOLTA.
Since FRB used Standard Chartered Bank as the intermediary bank to send the $192,900 to Cambodia and HSBC Bank USA as the intermediary bank to send the $118,650 to Hong Kong, FRB directed its recall notices to these banks. FRB’s initial recall request for both wires stated, "URGENT PLS RETURN [WIRE] DTD 10/8/15 PER CLIENT REQUEST." On October 14, 2015, FRB sent additional recall messages to the intermediary banks reporting that Sarrouf was a victim of fraud. In addition, on October 14, 2015, Katherine August de-Wilde, President of FRB, ordered that a "Hold Code 89" be placed on all eleven Sarrouf accounts at FRB. A "Hold Code 89" is placed on an account for the benefit of a client where account information or client information has been compromised.
On October 21, 2015, Standard Chartered Bank responded to FRB again and advised that the wired funds were credited to the beneficiary’s account on October 9, 2015, and the beneficiary bank (Union Commercial) was contacting the beneficiary to return the funds. Also on October 21, 2015, HSBC Bank USA responded to FRB acknowledging FRB’s recall request and reporting that it had relayed the recall request to HSBC Hong Kong.
FRB subsequently reached out to the beneficiary banks, Union Commercial Bank in Cambodia and HSBC Hong Kong in Hong Kong, even though such communications were not standard operating procedure.
On October 26, 2015, Standard Chartered Bank advised FRB that the funds had been credited to the beneficiary’s account in Cambodia on October 9, 2015 and that the beneficiary fully utilized the funds on October 10, 2015. On November 3, 2015, HSBC Bank USA advised FRB that it had contacted HSBC Hong Kong several times but HSBC Hong Kong had made payment to the beneficiary on October 9, 2015.
In consequence, neither wire transfer could be reversed, and Sarrouf’s IOLTA was charged back $311,550-the aggregate amount of the two wire transfers.
As a result, Sarrouf’s IOLTA was overdrawn by $259,312. On October 23, 2015, FRB and Sarrouf entered into an agreement whereby Sarrouf deposited funds ($311,550) into the IOLTA to restore it to its previous balance ($52,238). FRB and Sarrouf also agreed that this deposit would not be construed as a concession of liability or admission of wrongdoing and reserved all rights.
On October 4, 2016, Sarrouf filed this action. In Count I, Sarrouf alleges that FRB "was negligent in failing to inspect the fake check for clear signs that it was counterfeit and fraudulent, and accepting the counterfeit check for collection, and informing Sarrouf Law that the check deposited in the IOLTA account was immediately available for withdrawal, and in processing a wire transfer request to countries associated with counterfeit check scams." Complaint at para. 22. Sarrouf contends that as a direct and proximate result of FRB’s negligence, it sustained a loss in the amount of $311,550.
Count II is a claim against FRB "predicated upon breach of [CUCC] Sections 1203 and 4103." In Count II, Sarrouf alleges that:
On pages eight and nine of its memorandum in support of its motion for summary judgment, FRB notes that, "[f]ollowing amendments in 2007, § 1203 now concerns lease agreements; presumably, Sarrouf meant to cite the previous § 1203, now at § 1304, which provides that ‘[e]very contract or duty within this code imposes an obligation of good faith in its performance and enforcement.’ "
25. In accepting and submitting for collection a counterfeit check without inspecting the check for signs that the item was a fake counterfeit and fraudulent check, the Defendant, First Republic Bank, violated its obligation to exercise ordinary care in the handling of the item.
26. In accepting and submitting for collection a counterfeit check without inspecting the check for signs that the item was fraudulent and a fake counterfeit check, the Defendant, First Republic Bank, breached its obligation of good faith and the observance of reasonable commercial standards of fair dealing.
Complaint at paras. 25-26. Sarrouf claims that as a result of FRB’s "breach of its obligation of good faith," it suffered damages in the amount of $311,550.
DISCUSSION
Summary judgment will be granted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Mass.R.Civ.P. 56(c); Cassesso v. Commissioner of Corr., 390 Mass. 419, 422 (1983). To prevail on summary judgment, the moving party must affirmatively demonstrate the absence of a triable issue, and that the summary judgment record entitles it to a judgment as a matter of law. Pederson v. Time, Inc., 404 Mass. 14, 16-17 (1989). "[A]ll evidentiary inferences must be resolved in favor of the [nonmoving party]." Boyd v. National R.R. Passenger Corp., 446 Mass. 540, 544 (2006).
The nonmoving party, however, cannot defeat a motion for summary judgment by merely asserting that facts are disputed. Mass.R.Civ.P. 56(e); LaLonde v. Eissner, 405 Mass. 207, 209 (1989). Rather, to defeat summary judgment, the nonmoving party must "go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Kourouvacilis v. General Motors Corp., 410 Mass. 706, 714 (1991). "Conclusory statements, general denials, and factual allegations not based on personal knowledge [are] insufficient." Cullen Enters., Inc. v. Massachusetts Prop. Ins. Underwriting Ass’n, 399 Mass. 886, 890 (1987), quoting Madsen v. Erwin, 395 Mass. 715, 721 (1985).
Applicable Law
The depository agreement between Sarrouf and FRB states that it is governed by the law of California. Under California law, choice-of-law provisions in a contract apply to all claims arising from or relating to the contract, including "tortious breaches of duties emanating from the agreement or the legal relationship it creates." Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1155 (Cal. 1992). In consequence, the court will apply California law in its analysis of both claims asserted against FRB.
Additionally, for the reasons explained, infra, under California law, the UCC, as enacted in California, displaces the common-law tort claims asserted in the Complaint.
Like courts in Massachusetts, California courts consider case law from other jurisdictions in applying and interpreting the UCC. See Fariba v. Dealer Servs. Corp., 178 Cal.App.4th 156, 166 n.3 (4th Dist. 2009) ("Case law from other jurisdictions applying our Commercial Code, the Uniform Commercial Code, or the uniform code of other states, is considered good authority in litigation arising under the California act"). See also Reading Co-Op. Bank v. Suffolk Constr. Co., 464 Mass. 543, 550 n.7 (2013) ("We note that authority from other jurisdictions is especially relevant in the context of the UCC, which seeks to ‘make uniform the law among the various jurisdictions’ "). The court will therefore rely on case law from several jurisdictions in considering the claims asserted under provisions of the CUCC, where there is no California case directly on point.
Count I: Sarrouf’s Claim "Predicated on Negligence"
In Count I Sarrouf asserts that FRB "was negligent in failing to inspect the fake check for clear signs that it was counterfeit and fraudulent, and accepting the counterfeit check for collection, and informing Sarrouf Law that the check deposited in the IOLTA account was immediately available for withdrawal, and in processing a wire transfer request to countries associated with counterfeit check scams." Complaint at para. 22.
As a starting point, CUCC § 1103 states:
(a) This code shall be liberally construed and applied to promote its underlying purposes and policies, which are:
(1) to simplify, clarify, and modernize the law governing commercial transactions;
(2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
(3) to make uniform the law among the various jurisdictions.
(b) Unless displaced by the particular provisions of this code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.
As a result, "the UCC expressly displaces common law, to the extent that its ‘particular provisions’ apply." Chino Commercial Bank, N.A. v. Peters, 190 Cal.App.4th 1163, 1170 (4th Dist. 2010) (Chino), citing U. Com. Code com., 23A pt. 1 West’s Ann. Cal. U. Com. Code (2010 pocket sup.) foll. § 1103, p. 7. ("[T]he Uniform Commercial Code is the primary source of commercial law rules in areas that it governs ... Therefore, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the Uniform Commercial Code provides otherwise. In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies").
Massachusetts courts have reached a similar conclusion. See Gossels v. Fleet Nat’l Bank, 453 Mass. 366, 370 (2009) ("Where a UCC provision specifically defines parties’ rights and remedies, it displaces analogous common-law theories of liability"); Cook v. Bank of America, N.A., 30 Mass.L.Rptr. 332, *3 (Mass.Super.Ct. Aug. 2, 2012) (Fabricant, J.) (same). See also Prestige Imports, Inc. v. South Weymouth Savings Bank, 75 Mass.App.Ct. 773, 784 n.13 (2009) ("[A]n integrated view of Article 4 leads to a conclusion that the common law does not roam freely over and through specific Code provisions but supplies a loss-allocation framework only when specific Code provisions do not").
In this case, Sarrouf’s allegations of negligence are effectively predicated on two transactions between it and FRB: (1) FRB’s acceptance of the Deposit Check for deposit in the IOLTA; and (2) FRB’s execution of Sarrouf’s instructions to wire transfer funds from the IOLTA before the Deposit Check settled.
Acceptance of the Check for Deposit
In Chino, the court explained that the UCC provisions that apply when a bank accepts what turns out to be a counterfeit or altered check for deposit are those relating to "the right of charge-back."
Under the UCC, each time the Bank credited [depositor’s] account for an altered check, this was merely a provisional settlement. (Cal. U. Com. Code, § 4201, subd. (a).) Once the check was dishonored, the Bank had the right to revoke the provisional settlement and to charge back the amount of the credit. (Cal. U. Com. Code, § 4214, subd. (a).) Consistent with this principle, the written account agreement stated, "We will give only provisional credit until collection is final for any items, other than cash, we accept for deposit ..."
"The right to charge back is not affected by ... failure by any bank to exercise ordinary care with respect the item, but a bank so failing remains liable." (Cal. U. Com. Code, § 4214, subd. (d), italics added ...).Id. at 1171-72.
The Chino court then went on to explain that: "[t]his liability for failure to exercise ordinary care arises under the UCC; it differs from common-law negligence to the extent set forth in the UCC. For example, the UCC provides that, subject to exceptions not applicable here, ‘action or nonaction consistent ... with a general banking usage ... is prima facie the exercise of ordinary care." Id. In other words, common-law principles of negligence do not define what constitutes "ordinary care" under these circumstances, the UCC does. Whether there exist disputed issues of fact regarding the question of FRB’s exercise of "ordinary care," as defined by the UCC, will be discussed infra in connection with the court’s consideration of Count II.
See also Dixon, Laukitis, and Downing, P.C. v. Busey Bank, 993 N.E.2d 580, 585-86 (Il.App.Ct. 2013) (Dixon) ("Provisions such as section 4-202 of the UCC displace common-law negligence principles; UCC compliance is non-negligent as a matter of law ... We disagree that ... [the bank] owed [the depositor] a common-law duty of reasonable care ... [T]he duty owed to [the depositor] by [the bank] was defined under the parties’ account agreement and the UCC").
In Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 958 N.E.2d 77, 85 (N.Y.App.Ct. 2011) (Greenberg, Trager), the New York Court of Appeals addressed this concept somewhat differently: "However, the duty a collecting bank owes to a depositor is that of ordinary care in handling the item ... The UCC does not define ‘ordinary care, ’ but it should be read as to have its normal tort meaning ... Other courts have determined that while ‘ordinary care’ [should be understood to have] its normal tort meaning, the realities of the modern banking system cannot be ignored." This court concludes that, under California law, the question whether FRB has met the standard of ordinary care is best considered in the context of the contractual agreement between Sarrouf and FRB, as supplemented by the UCC.
The Wire Transfers
The second transaction between Sarrouf and FRB involved Sarrouf’s direction that FRB wire transfer funds from the IOLTA. Article 4A of the UCC governs wire transfers, and California has adopted Article 4A as division 11 of the CUCC. See Chino, 190 Cal.App.4th at 1173. "[R]esort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article." Id. at 1174 (citation omitted). CUCC § 11212 provides that:
If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement to the extent provided in the agreement or in this division, but does not otherwise have any duty to accept a payment order or, before acceptance, to take any action, or refrain from taking action, with respect to the order except as provided in this division or by express agreement. Liability based on acceptance arises only when acceptance occurs as stated in Section 11209, and liability is limited to that provided in this division. A receiving bank is not the agent of the sender or beneficiary of the payment order it accepts, or of any other party to the funds transfer, and the bank owes no duty to any party to the funds transfer except as provided in this division or by express agreement.
A "receiving bank" is "the bank to which the sender’s instruction is addressed," in this case FRB. See CUCC, § 11103. "[N]othing in article 4A makes a receiving bank liable for its negligence in accepting a duly authorized and error-free wire transfer." Chino, 190 Cal.App.4th at 1174. There is nothing in the summary judgment record to suggest that FRB did not accept a duly authorized and error-free wire transfer on October 8, 2015-FRB sent the wires exactly as Bono had instructed it to do so.
Accordingly, in this case, the CUCC displaces Sarrouf’s negligence claim based upon the wire transfers. Courts from other jurisdictions that have confronted similar negligence claims, generally in cases where a plaintiff law firm that has been the victim of a counterfeit check and/or wire transfer scheme and has pursued a claim based on negligence against a defendant collecting or receiving bank, have dismissed such claims, often concluding that the UCC governs the rights of the parties. See, e.g., Dixon, 993 N.E.2d at 585 (dismissing law firm’s negligence claim against collecting bank in case involving returned check and subsequent funds transfer, explaining that "[p]rovisions such as section 4-202 of the UCC displace common-law negligence principles and UCC compliance is non-negligent as a matter of law"); Law Offices of Oliver Zhou v. Citibank, N.A., 2016 WL 2889060, *3-*5 (S.D.N.Y. May 17, 2016) (Zhou) (dismissing lawyer’s claims of negligence, breach of contract, misrepresentation, fraudulent concealment, and aiding and abetting claims against collecting bank in case involving counterfeit check scheme); Greenberg, Trager, 958 N.E.2d at 84-85 (affirming dismissal of law firm’s negligence claim against collecting bank in case involving counterfeit check and wire transfer scheme, noting that "any inherent risk in that item remains with the depositor and not the collecting bank ... (a) collecting bank acts as the agent of its customer, and until such time as the collecting bank receives final payment, the risk of loss continues in the customer, the owner of the item"); Simmons, Morris & Carroll, LLC v. Capitol One, N.A., 144 So.3d 1207, 1219 (La.Ct.App.2d Cir. 2014) (explaining that plaintiff law firm "was in the best position to protect itself from the loss it suffered at the hands of the scam artists" and bank had no duty to protect law firm from harm and noting that "[t]hough a harsh result, jurisprudence from other states has favored the bank over similar victims who fell prey to such scams"); Colucci, Colucci, Marcus & Flavin, P.C. v. Citizens Bank of Mass., 2018 WL 1567605, *1-*2 (D.Mass. Mar. 30, 2018) (dismissing negligent misrepresentation, promissory estoppel, and Chapter 93A claims against collecting bank on summary judgment in case involving law firm that deposited counterfeit check into IOLTA and later wired funds from IOLTA to another entity).
Sarrouf cited no case in which a law firm that was the victim of this type of scam successfully argued that it could recover sums charged back to its account under a claim asserting a right of recovery under common-law negligence, nor could this court find one.
FRB also argues that Sarrouf’s negligence claim in Count I is barred by the economic loss doctrine. The court agrees.
Under California law (as in Massachusetts), the economic loss doctrine "bars a tort action in the absence of personal injury or physical damage to other property." Robinson Helicopter Co. v. Dana Corp., 22 Cal.Rptr.3d 352, 355 (Cal. 2004). "Economic loss consists of damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits-without any claim of personal injury or damages to other property." Id. at 357-58 (citation omitted). "The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise ... Quite simply, the economic loss rule ‘prevent[s] the law of contract and the law of tort from dissolving one into the other.’" Id. at 358 (citation omitted). Here, the relationship between Sarrouf and FRB is governed by the depository agreements, as supplemented by the UCC. Again, courts in other jurisdictions have applied the economic loss doctrine in dismissing a plaintiff law firm’s negligence claim in cases where the law firm is a victim of a counterfeit check scam. See, e.g., Dixon, 993 N.E.2d at 588 (concluding that economic loss doctrine precluded law firm’s negligence claim against bank arising from counterfeit check scam where account agreement and UCC set forth bank’s duties and defined ordinary care); Taylor Anderson, LLP v. U.S. Bank Nat’l Ass’n, 2014 WL 1292804, *6 (D.Colo. Mar. 31, 2014) (reasoning that economic loss doctrine barred law firm’s negligence claim against bank based on counterfeit check scam).
In consequence, this court grants summary judgment dismissing Count I, alleging a claim of negligence.
Count II: Sarrouf’s Claim Predicated Upon Breach of CUCC
In Count II, Sarrouf claims that FRB breached its obligation of good faith and violated its obligation to exercise ordinary care under CUCC §§ 1304. Under CUCC § 1304, "[e]very contract or duty within this code imposes an obligation of good faith in its performance and enforcement." The comment to CUCC § 1304 goes on to explain that:
Sarrouf also cites CUCC § 4103(a) in support of its claim that FRB violated its obligation of good faith. That section, however, simply provides that: "The effect of the provisions of this division may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable." It does not itself suggest a definition of either good faith or ordinary care.
This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this Act. It is further implemented by Section 1-303 on course of dealing, course of performance, and usage of trade. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, are a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
West’s Ann. Cal. Com. Code § 1304, Comment 1 (emphasis added). See also Joffe v. United California Bank, 141 Cal.App.3d 541, 550 (Cal.Ct.App. 1983) (observing that the UCC comments are important aids in construing the California provisions). In other words, the bank must perform its contractual obligations to its depositor in "good faith."
The term "good faith" under CUCC § 1201(b)(20) is defined as, "honesty in fact and the observance of reasonable commercial standards of fair dealing." In determining whether FRB acted in conformity with the reasonable commercial standards of fair dealing, the court should consider the fairness of FRB’s actions, "rather than any negligence on its part." Wachovia Bank, N.A. v. Federal Reserve Bank of Richmond, 338 F.3d 318, 323 (4th Cir. 2003). The "good faith" obligation is not intended to reintroduce a negligence standard into the bank’s contractual undertakings.
In consequence, the question of whether FRB acted in good faith or with ordinary care must be addressed in light of the parties’ contractual agreements, the CUCC, and the specific transaction being examined. There is no separate claim available to Sarrouf for a violation of CUCC §§ 1304 and 4103.
This is not a position that Sarrouf actually argues in his brief, but the court will do its best to address the claims for violation of requirements imposed on FRB by the CUCC in this format.
Acceptance of the Check for Deposit
As explained above, under CUCC § 4103, a bank is required to exercise "ordinary care" in accepting a check for deposit and action or non-action consistent with a general banking usage is prima facie the exercise of ordinary care. See Chino, 190 Cal.App.4th at 1172. In Chino, the Court held that when the bank officer examined the check in question and no irregularities were readily apparent on its face and the amount of the check did not raise a red flag, "[t]hese procedures were consistent with national standards for accepting checks for deposit." Id.
Courts in other jurisdictions have been even more specific in explaining what ordinary care requires of a bank under the UCC when it accepts a check for collection. In Dixon, the Illinois Appellate Court explained that the parties’ "account agreement placed the risk of loss on [the depositor] until final settlement ... The language in the agreement tracks the risk of loss language of the UCC. [The depositor] opted to write checks ... before [the] final settlement. The terms of the account agreement did not require [the bank] to investigate the genuineness of the check or specially warn [the depositor] not to rely on the funds until the deposited check settled." Dixon, 993 N.E.2d at 586. It then held that section 4-202 defines the limits of the ordinary care that a collecting bank owed to its depositor and "timely compliance with the section 4-202 responsibilities constitutes ordinary care per the UCC and is not negligent as a matter of law." Stated differently, timely performance of these specific obligations meets the ordinary care requirements of a collecting bank-in this case FRB. See also Zhou, 2016 WL 2889060, *4 ("Were collecting banks required to ensure the validity of all checks at the time of deposit ... there would no need for the UCC provision allowing for provisional settlement and charge back").
CUCC § 4-202 states that:
(a) A collecting bank shall exercise ordinary care in all of the following:
(1) Presenting an item or sending it for presentment.
(2) Sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank’s transferor after learning that the item has not been paid or accepted, as the case may be.
(3) Settling for an item when the bank receives final settlement.
(4) Notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.
(b) A collecting bank exercises ordinary care under subdivision (a) by taking proper action before its midnight deadline following receipt of an item, notice, or settlement. Taking proper action within a reasonably longer time may constitute the exercise of ordinary care, but the bank has the burden of establishing timeliness.The "midnight deadline" is defined as "midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later." CUCC § 4104(a)(10). Here, FRB complied with these statutory obligations by presenting the $337,044 check for collection before its midnight deadline and very promptly sending notice of the returned check to Sarrouf.
Applying the CUCC as interpreted in Chino, and the cognate provisions of the UCC as interpreted by other jurisdictions, the court holds that FRB used ordinary care when it accepted the Deposit Check from Sarrouf. A visual examination showed no obvious signs of fraud; it was made out to the Sarrouf law firm, and presented for deposit by one of the four individuals authorized to act on behalf of Sarrouf with respect to the IOLTA, a person well known to the FRB employee who accepted the check from prior banking transactions.
The cases that Sarrouf relies on in support of its contention that FRB did not act with ordinary care in accepting the Deposit Check all involved cases in which the check was payable to someone other than the person presenting the check for deposit, and the court found that the bank violated the duty of ordinary care owed to the drawer of the check. See E.F. Hutton & Co. v. City Nat’l Bank, 149 Cal.App.3d 60, 65 (Cal.App. 1983) (where a cause of action was stated by drawer of eighteen checks against a collecting bank that accepted the checks made payable to eighteen different individuals with forged endorsements in favor of the depositor) and cases cited there.
The Wire Transfer
Chino addresses the same claim raised by Sarrouf in this case concerning the wire transfer. The depositor had fallen victim to a scam and directed the defendant bank to issue wire transfers to the perpetrators of the scheme before the counterfeit check settled. The court sets forth in full the California Appeals Court’s explanation as to why the depositor had no claim under the CUCC for honoring the depositor’s instructions to wire the funds because it is dispositive of Sarrouf’s claim in this case.
Article 4A of the UCC governs funds transfers, which include wire transfers. (4 Witkin, Summary of Cal. Law (10th ed. 2005) Negotiable Instruments, § 132, p. 505.) Article 4A has been adopted in California as Division 11 of the California Uniform Commercial Code.
"In the drafting of Article 4A, a deliberate decision was made to write on a clean slate and to treat a funds transfer as a unique method of payment to be governed by unique rules that address the particular issues raised by this method of payment. A deliberate decision was also made to use precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability, rather than to rely on broadly stated, flexible principles. In the drafting of these rules, a critical consideration was that the various parties to funds transfers need to be able to predict risk with certainty, to insure against risk, to adjust operational and security procedures, and to price funds transfer services appropriately. This consideration is particularly important given the very large amounts of money that are involved in funds transfers.
"Funds transfers involve competing interests-those of the banks that provide funds transfer services and the commercial and financial organizations that use the services, as well as the public interest. These competing interests were represented in the drafting process and they were thoroughly considered. The rules that emerged represent a careful and delicate balancing of those interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article." (U. Com.Code com., 23D West’s Ann. Cal. U. Com.Code foll. § 11102, pp. 27-28.)
"This is not to say that the Uniform Commercial Code necessarily displaces all common-law actions based on all activities surrounding funds transfers ... ‘[T]he exclusivity of Article [4A] is deliberately restricted to "any situation covered by particular provisions of the Article." Conversely, situations not covered are not the exclusive province of the Article.’ [Citation.]" (Zengen, Inc. v. Comerica Bank (2007) 41 Cal.4th 239, 254, 59 Cal.Rptr.3d 240, 158 P.3d 800.)
Section 4A-212 of the UCC (see Cal.U.Com.Code, § 11212) provides that the liability of a "receiving bank" for "acceptance" of "a payment order" "is limited to that provided in this Article ... [T]he bank owes no duty to any party to the funds transfer except as provided in this division or by express agreement."
A wire transfer is a "payment order." (Cal.U.Com.Code, § 11103, subd. (a)(1).) In this instance, the Bank was a "receiving bank." (Cal.U.Com.Code, § 11103, subd. (a)(4); see also Cal.U.Com.Code, §§ 11103, subds. (a)(1), 11104, subd. (d); Zengen, Inc. v. Comerica Bank, supra, 41 Cal.4th at pp. 248-49, 59 Cal.Rptr.3d 240, 158 P.3d 800.) The Bank "accept[ed]" the wire transfers by executing them. (Cal.U.Com.Code, § 11209, subd. (a).) Thus, the Bank’s liability for that acceptance is limited to its liability, if any, under article 4A.
Article 4A includes specific provisions governing the liability of a receiving bank. For example, it addresses a receiving bank’s liability for unauthorized wire transfers (Cal.U.Com.Code, §§ 11201-04), erroneous wire transfers (Cal.U.Com.Code, §§ 11205, 11207, 11208), amended and canceled wire transfers (Cal.U.Com.Code, § 11211), and erroneously executed wire transfers (Cal.U.Com.Code, §§ 11302-05). However, nothing in article 4A makes a receiving bank liable for its negligence in accepting a duly authorized and error-free wire transfer.Chino, 190 Cal.App.4th at 1173-74.
Just as in Chino, in this case, FRB received unambiguous instructions to wire funds from a person authorized to act with respect to the IOLTA. FRB confirmed the instructions on a recorded line, inquired of the person if she knew the persons who had requested the wires, and received an affirmative response. FRB even went through additional precautionary steps before executing the orders that were not required by its depository agreements with Sarrouf. It looked for any adverse information concerning the wire recipients on the internet and confirmed that the corporate recipient existed. Neither the duty of ordinary care nor good faith (honesty in fact and the observance of reasonable commercial standards of fair dealing) required more.
Sarrouf has submitted "Plaintiff’s Supplemental Answer to Interrogatory Number 2 of Defendant, First Republic Bank’s, First Set of Interrogatories" as part of the summary judgment record. It contains proffered opinion testimony from Don Coker, Sarrouf’s "banking expert consultant" in this case. Sarrouf did not actually refer to Coker’s opinions in its memorandum in opposition to FRB’s motion for summary judgment, but it did discuss them in its supplemental memorandum. The court finds that his opinions do not create triable issues of material fact in this case. Coker opines, among other things, that FRB violated its Foreign Wire Transfer Policy by making the two wire transfers with uncollected funds and that the violation of its own policy was inconsistent with reasonable commercial banking practices; he also opines that FRB did not appropriately follow its other wire transfer policies or follow FRB checklists. However, it is clear that under the UCC, a bank’s failure to follow internal guidelines or procedures does not result in a breach of contract. See Gossels v. Fleet Nat’l Bank, 453 Mass. 366, 375 (2009) ("Elevating a bank’s internal manuals to a set of affirmative disclosure requirements on par with the requirements of the UCC would vitiate the goal of ‘mak[ing] uniform the law among the various jurisdictions.’ G.L.c. 106, § 1-102"); Schultz v. Bank of Am., 990 A.2d 1078, 1087 n.10 (Md. 2010) ("The Bank’s internal guidelines alone do not establish the reasonable commercial standards in the banking industry because a bank’s own standards may be more or less strict than the industry standard"); Fireman’s Fund Ins. Co. v. Security Pacific Nat’l Bank, 85 Cal.App.3d 797, 829 (Cal.Ct.App. 1978) ("A self-imposed rule from a bank’s internal operations manual would have even less effect than a statute").
Sarrouf primarily relies on two cases to support its contention that triable issues of material fact exist concerning whether FRB was required to take additional steps to protect Sarrouf from falling victim to this scam: Maine Family Federal Credit Union v. Sun Life Assurance Co. of Canada, 727 A.2d 335, 342-43 (Me. 1999) (Maine Family); and Experi-Metal, Inc. v. Comerica Bank, Case No. 09-14890, 2011 WL 2433383 (E.D.Mich. June 13, 2011) (Duggan, J.) (Experi-Metal). Neither is on point or persuasive.
Maine Family dealt with the issue of whether the Maine Family Federal Credit Union was a "holder in due course" of certain checks. Maine Family, 727 A.2d at 336-38. In Maine Family, the jury found that the plaintiff credit union had not acted in good faith and, therefore, was not a holder in due course. Id. at 338. The credit union appealed, and the Supreme Judicial Court of Maine noted that the question before it was whether any reasonable view of the evidence, along with the justifiable inferences therefrom, could possibly support the jury’s conclusion that the credit union was not a holder in due course. Id. at 340. The Maine Family court explained that the Credit Union had to prove that it was a holder in due course and adopted the following two-part test to address this question:
The factfinder must therefore determine, first, whether the conduct of the holder comported with industry or "commercial" standards applicable to the transaction and, second, whether those standards were reasonable standards intended to result in fair dealing. Each of those determinations must be made in the context of the specific transaction at hand. If the factfinder’s conclusion on each point is "yes," the holder will be determined to have acted in good faith even if, in the individual transaction at issue, the result appears unreasonable. Thus a holder may be accorded holder in due course status where it acts pursuant to those reasonable commercial standards of fair dealing-even if it is negligent-but may lose that status, even where it complies with commercial standards, if those standards are not reasonably related to achieving fair dealing.Id. at 343. In Maine Family, the Credit Union had permitted the fraudfeasors to deposit checks in their account that were not drawn in their names but rather indorsed for payment over to them by the fraudfeasors, and then allowed the fraudfeasors to withdraw the funds before the checks settled, which they never did because the drawer of the checks learned of the fraud and stopped payment before settlement. Clearly, Maine Family is very different from a case in which the check was made payable to the bank’s depositor, the depositor did nothing to investigate the background of the payer, and the depositor then requested wire transfers to the fraudfeasors who had scammed it.
Moreover, since that decision issued, other courts have questioned whether Maine Family has any application to cases other than those involving holder in due course status. In Choice Escrow & Land Title, LLC v. BancorpSouth Bank, 754 F.3d 611, 623 n.6 (8th Cir. 2014), the U.S. Court of Appeals for the Eighth Circuit noted that:
The litigants propose a test for fair dealing first articulated by the Supreme Judicial Court of Maine in Maine Family Federal Credit Union v. Sun Life Assurance Co. of Canada, 727 A.2d 335, 342-43 (Me. 1999). For several reasons, we do not believe the application of the Maine Family test in this case would be appropriate. For one, the Maine Family test has been criticized for conflating fair dealing with due care. See Travelers Cas. & Sur. Co. of Am. v. Wells Fargo Bank N.A., 374 F.3d 521, 527 (7th Cir. 2004); White, Summers & Hillman, Uniform Commercial Code § 1:10 (6th ed.). For another, the Maine Family test seems tailored to the context of that case, which concerned a holder in due course, and its application in the Article 4A context would distort the balance of rights and obligations that Article 4A attempts to strike between the bank and its institutional customer.
This court agrees with the Eighth Circuit that applying Main Family outside of the particular facts raised by that case introduces negligence concepts into "good faith" as defined in the UCC, where it is intended to address "fair dealing." See also Wachovia Bank, N.A. v. Federal Reserve Bank of Richmond, 338 at 323 (4th Cir. 2003).
Experi-Metal, 2011 WL 2433383 (E.D.Mich. June 13, 2011), is an unpublished decision from the U.S. District Court for the Eastern District of Michigan, which cites Maine Family favorably, in dicta. Id. at *11-*12 (discussing Maine Family). Plaintiff Experi-Metal, Inc. filed suit against defendant Comerica Bank to recover losses which it suffered when it fell victim to a phishing scam in which it revealed its Comerica confidential identification password to a scammer, who used it to transfer $5 million into a sweep account that usually only had small sums in it, and then issued ninety-three wire transfer directions over the course of a few hours from that account. The issue before the Experi-Metal court was whether the bank accepted the wire transfer orders in good faith. The court first noted that "[t]he parties agree that the burden falls upon Comerica to prove that it accepted the payment orders in good faith." Id. at *11. It then held that "where the burden falls is dispositive in this matter ... Comerica was required to present evidence from which this Court could determine what the ‘reasonable commercial standards of fair dealing’ are for a bank responding to a phishing incident such as the one at issue and thus whether Comerica acted in observance of those standards. Comerica presented no such evidence and thus it has not satisfied its burden of showing that it satisfied the objective prong of the "good faith.’" Id. at *13.
The Experi-Metal court also found that the plaintiff’s expert had not offered any useful testimony regarding what "reasonable commercial standards of fair dealing" are for banks in addressing phishing attacks like the one at issue in this case, but plaintiff did not have the burden of proof.
Experi-Metal does not provide persuasive authority in support of Sarrouf’s claim in this case. Experi-Metal dealt with liability resulting from unauthorized fraudulent wire transfer orders sent to a bank by a third party after a phishing attack. The Michigan court noted that: "Pursuant to Section 440.4702, wire transfer orders are effective as orders of the customer, even though the customer did not authorize the payment orders, if: (1) the bank and customer agreed that the authenticity of payment orders would be verified pursuant to a security procedure; (2) the security procedure is commercially reasonable; and (3) the bank proves that it accepted the orders in good faith and in compliance with the security procedure and any written agreement or instruction of the customer. Mich. Comp. Laws § 440.4702(2)." Experi-Metal, 2011 WL 2433383 at *1 (emphasis added). In the instant case, FRB called Sarrouf back on its telephone number on file, spoke to a person known to it to be authorized to act with respect to the IOLTA, and confirmed the transaction, asking if it knew the recipient of the wire transfer.
In Greenberg, Trager, the New York Court of Appeals held that it was the plaintiff law firm, not the bank, which was in "the best position to guard against the risk of a counterfeit check by knowing its client. Additionally the UCC has the objective of promoting certainty and predictability in commercial transactions. By prospectively establishing the rules of liability that are generally based not on actual fault, but on allocating responsibility to the party best able to prevent loss by the exercise of care, the UCC not only guides commercial behavior but also increases certainty in the marketplace and efficiency in dispute resolution." Greenberg, Trager, 958 N.E.2d at 86 (internal quotations and citations omitted). Similarly, Sarrouf (and Alberich) were in the best position to determine whether Biggelaar was a legitimate client and the checks and the wire transfer requests were authentic and part of a legitimate commercial transaction.
Alberich did not speak with anyone at Cashman Dredging, until October 9, 2015, the day after he requested the wire transfers. A person at Cashman Dredging told him that the company’s name had been used in a number of fake deals and the company buys most of its machinery from another company.
ORDER For the foregoing reasons, Defendant First Republic Bank’s Motion for Summary Judgment is ALLOWED.