Opinion
602302/2008.
Decided July 12, 2010.
Plaintiff JP Morgan Chase Bank, N.A. (Chase), moves, pursuant to CPLR 3212, for an order granting summary judgment on its complaint against its former customer, defendant William Pinzler, and striking defendant's answer and counterclaim. Defendant opposes the motion, which is denied for the reasons below.
BACKGROUND
Defendant, an attorney, has maintained a client trust account with Chase since 1998. At issue in this action is defendant's liability for losses incurred when, as a victim of an internet scam, he deposited counterfeit bank checks from a purported client in his Chase account, Chase made the funds available the following day, and defendant wired money to the purported client. Chase maintains that based on the documents signed by defendant when he opened his account and the relevant provisions of the Uniform Commercial Code, defendant is solely liable for any losses on the account.
In his affidavit, defendant states that in or around November 2007, he responded to an e-mail sent by an individual named Chang Liu, who represented that he was the manager of AsiaLink Industrial Hong Kong (AsiaLink) which was allegedly soliciting US-based attorneys to collect outstanding debts from AsiaLink's customers located in North America. At defendant's request, Liu sent an invoice to establish AsiaLink's ostensible debtor, an entity called "American Plumbing and Heating" based in Ohio. The document showed that the debtor owed more than $300,000. Defendant then sent a retainer agreement to Liu dated November 7, 2007 in which he required a retainer of $25,000 and an additional $25,000 to cover costs and expenses, and Liu signed the agreement and faxed it back.
On December 5, 2007, defendant received what he thought was a check issued by Citibank in the amount of $197,750.00, payable to himself, which referenced American Plumbing and Heating. After receipt of this check, AsiaLink instructed him to deposit the check and wire AsiaLink the money, representing the partial debt paid by American Plumbing and Heating, minus defendant's retainer fee, to a bank in Hong Kong. On December 5, 2007, defendant went to a Chase bank to deposit the check into his escrow account.
According to defendant, as he was depositing the check, a teller informed him that since the check was issued by Citibank, it could be cleared expeditiously, and that he would have access to the funds the next day.
On December 6, 2007, defendant went to the same Chase branch and requested a wire transfer of $147,710.00 to AsiaLink in Hong Kong. According to defendant, he also wrote out some checks in the amount of approximately $24,000.00.
On December 10, 2007, defendant received what he believed to be a second official Citibank check referencing American Plumbing and Heating in the amount of $297,878,70. On December 11, 2007, defendant went to a different Chase branch to wire the entire amount of the check to AsiaLink. According to defendant's affidavit, he was then told that there was a problem with the wire transfer and that the checks may be fraudulent.
Chase maintains that on or around December 11, 2007, the first check was returned from Citibank, with a notation that it was counterfeit and would not be honored. Chase then determined that the second check was also counterfeit. On December 11, 2007, defendant was informed by telephone that both of the Citibank checks were counterfeit, and that he would be held responsible for the amount wired to AsiaLink. According to defendant, upon learning that the checks were fraudulent, he immediately sent a facsimile to Chase, stating that he would not have caused the wire transfers had Chase not told him that he had "available funds." In a letter dated December 14, 2007, to Chase's general counsel, defendant reiterated that he relied on Chase's representations that the funds were available.
On or about December 26, 2007, Chase sent monthly statements to defendant with a negative balance of $160,815.41. On December 28, 2007, Chase sent another monthly statement that contain an ending balance of $0.00 and the notation "Charge-Off Please Reimburse Bank" and the positive amount of $160,815.41.
In a letter dated March 11, 2008, collection counsel for Chase demanded payment. By letter dated March 17, 2008, defendant responded through counsel protesting the charge back.
After not receiving payment from defendant, on May 1, 2008, Chase served defendant with a summons and complaint in this action asserting four causes of action.
In its first cause of action, for breach of contract, Chase alleges that pursuant to the terms and conditions of the relevant bank account and banking card agreement, defendant was obligated to maintain the account with a positive balance and breached his contract with Chase by having a negative balance and damaged Chase in the amount of $160,815.41, plus interest. In its second cause of action, for an account stated, Chase alleges that since defendant did not object in a timely manner to his account statement which showed a "charge off" and a negative balance, he is liable for the statement balance of $160,815.41.
Chase's third cause of action alleges that defendant is liable to Chase based on his breach pursuant to a breach of warranty under UCC § 3-414(1), under which the endorsement on the reverse side of the check warrants the check's validity. The fourth cause of action seeks reasonable attorneys' fees.
Defendant answered the complaint and asserted an affirmative defense of equitable estoppel based on allegations that defendant relied to his detriment on the bank teller's representations that the funds associated with the Citibank checks could be paid the next day. Defendant also asserts a counterclaim for negligence, alleging that Chase owed him a duty to exercise ordinary and reasonable care in handling the Citibank check and in supervising the bank teller and that had such care been exercised the fraud would have been discovered and that such negligence is the proximate cause of any amount defendant may owe for breach of contract or negligence. Chase served a reply to the counterclaim.
After issue was joined, the parties appeared for a preliminary conference. On June 11, 2009, defendant, through counsel, served a notice to produce and first set of interrogatories on Chase. Chase did not respond, and instead served this motion for summary judgment on June 19, 2009. Chase argues that it is entitled to judgment as a matter of law as it has shown that defendant breached his account agreement with Chase by maintaining a negative balance within its account based on the return of the counterfeit items, that it provided defendant with statements of account showing the negative balance and defendant did not object, and that defendant is liable to it under UCC § 3-414(1) based on his endorsement on the counterfeit Citibank check and notice of refusal to pay.
In support of its motion, Chase submits that affidavit of Cheryl A. Cimperman ("Cimperman"), a Vice President at Chase and the manager of Chase's Fraud Recovery Investigations Unit. Ciperman describes the sequence of events leading to Chase's discovery that the Citibank checks were counterfeit, and submits monthly statements reflecting the deposits made by defendant and the statement sent to defendant showing a negative balance.
Also attached to Cimperman's affidavit is a copy of the business signature card whereby defendant acknowledged receiving the Account Terms and Conditions of the Business Accounts and Services and the business Banking Card Agreement (hereinafter "account agreement") in effect for the relevant account. Cimperman sets forth those provisions of the account agreement which Chase asserts renders defendant liable for the relevant overdraft on his account.
The first section pointed to be Cimperman is entitled "Final Payment of Items," and provides that:
Any Item you deposited is received for collection only, even if we cash the Item (in whole or in part by a deposit of less cash) or give you credit for it. All Items are credited or cashed subject to final payment.
With respect to "Returned Items and Notice of Claims to the Bank," the account agreement provides that:
If any items are returned by the payor bank for any reason, or if any instrument we or a subsequent collecting agent receives in payment for collected items is not paid, or if any Item drawn on us is not paid, we may charge the item back to your account. . . .If you deposit or cash an Item drawn on us and the Item or any endorsement is asserted to be forged or unauthorized, we may charge back all or any part of the amount of the Item, even if the charge back is made after our midnight deadline. . . .If we receive notice that an Item deposited in your account or that you cashed has not been paid, we may either immediately charge back your account or place a hold on your account and charge your account for the Item when the Item is returned to us.
Under "Cashing Items," the account agreement provides that "[t]he Bank may, in its discretion, refuse to cash any Item payable to you or indorsed by you. If the Bank cashes any such Item and it is returned unpaid, the Bank is authorized to deduct such amount from any account maintained by you. . . ."
The account agreement also provides, in pertinent part that the customer "must maintain sufficient available balances in your account on each business day to cover the aggregate amount of debits to be charged against your account that day."
In opposition to the motion, defendant argues that Chase's negligence offsets defendant's liability under UCC § 4-212 and warrants discovery and trial on the issue of Chase's negligence, and that Chase's failure to exercise reasonable care is independent of defendant's liability under Chase claims for breach of contract or breach of warranty. Specifically, defendant asserts that the Chase teller negligently accepted the Citibank check for deposit and advised defendant that the funds would be available the next day. In addition, defendant contends that had Chase exercised ordinary care in handling the check, it would have immediately observed that the check was counterfeit, since it did not have a routing number that matched the issuing bank, Citibank.
Defendant also argues that there is evidence that it objected to Chase's attempts to collect the negative balance in his account, thus precluding summary judgment on the claim for an account stated.
DISCUSSION
"The proponent of a motion for summary judgment must demonstrate that there are no material issues of fact in dispute, and that it is entitled to judgment as a matter of law." Dallas-Stephenson v Waisman , 39 AD3d 303 , 306 (1st Dept 2007), citing Winegrad v New York University Medical Center, 64 NY2d 851, 853 (1985). Upon proffer of evidence establishing a prima face case by the movant, "the party opposing a motion for summary judgment bears the burden of produc[ing] evidentiary proof in admissible form sufficient to require a trial of material questions of fact.'" People v Grasso , 50 AD3d 535 , 545 (1st Dept 2008), quoting Zuckerman v City of New York, 49 NY2d 557, 562 (1980). The function of the court is one of issue finding, not issue determination. Ferrante v American Lung Assn., 90 NY2d 623, 630 (1997).
First Cause of Action — Breach of Contract
Chase contends that defendant received the account terms and conditions which provide, in essence, that defendant is responsible for the return of any unpaid checks and any negative balance in his account. According to Chase, since defendant agreed by contract that Chase may charge back any item to his account if it becomes overdrawn due to a return of a deposited check, defendant breached his contract when he allowed his account to remain in a negative balance.
Chase's right to recovery depends on the application of the charge-back provisions of the Uniform Commercial Code, which are largely consistent with the terms of the account agreement.
The terms of the defendant's account agreement appears to provide more leniency to Chase than the UCC § 4-212(1)with regard to the time allowed to charge back a customer's account, stating that the charge-back may take place after the midnight deadline. However, UCC § 4-103 provides that parties may vary the terms of the UCC by written agreement, as long as the terms are reasonable. In any event, in this case, defendant is not challenging the timing of the charge-back.
"Under the Uniform Commercial Code, unless a contrary intent appears, the settlement given by a collecting bank (in this case Chase) is provisional before the settlement is final and the collecting bank is an agent of the owner during the collections process (UCC § 201(1))," therefore . . . "keep[ing] the risk of loss upon the owner of the item rather than the bank and giv[ing] the depository bank a right to reimbursement superior to the right of the owner to the proceeds." Allen v. Carver Federal Savings Loan Assoc., 123 Misc 2d 704, 705 (App Term 1st Dept 1984) (internal citation omitted). Thus, under UCC § 4-212(1), a collecting bank can charge back a customer's account when the bank makes the provisional settlement but does not receive final payment as long as the bank acts in a timely manner.
Section 4-212(1) provides that:
(1) If a collecting bank has made provisional settlement with its customer for an item and itself fails by reason of dishonor, suspension of payments by a bank or otherwise to receive a settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account or obtain refund from its customer whether or not it is able to return the items if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. These rights to revoke, charge-back and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.
UCC § 4-212 (4)(b) provides that a bank's "right to charge-back is not affected by [the bank's] failure . . . to exercise ordinary care with respect to the item any bank but any banking so failing remains liable." The drafters of the Code interpret this provision to mean that "charge back is permitted where nonpayment results from the depository bank's own negligence. . .[but that] the charge-back does not relieve the bank from any liability for failure to exercise ordinary care in handling an item." Comments 5, 6 to UCC 4-212 . Furthermore, "[w]hile a bank and a customer may vary the provisions of UCC article 4, the agreement may not abrogate the bank's responsibility to exercise good faith and ordinary care." Herzog, Engstrom Kopolovitz, P.C. v. Union National Bank, 226 AD2d 1004, 1005 (3d Dept 1996)
UCC § 4-103 (5) does not define "ordinary care" but the drafters of the Code indicate that the term is "used with its normal tort meaning and not in any special sense relating to bank collections." UCC, 4-103, Comment 4. Moreover, the breach of duty of ordinary care "is recognized as a proper basis for a negligence claim against a collecting bank. . . ." Broadway National Bank v. Barton-Russell Corp., 154 Misc 2d 181, 195-196 (Sup Ct NY Co. 1992).
Defendant argues that triable issues of fact exist as to whether Chase acted negligently based on his statements that the bank teller informed him that he would have access to the funds the next day, and that in reliance on this representation, he wired the funds to his purported client on the day after he deposited the first counterfeit check.
In addition, defendant asserts that since the Citibank check had the wrong routing number for the bank, Chase failed to use ordinary care when it failed notice that it was a counterfeit check. Defendant further contends that, if Chase had implemented proper techniques to detect fraudulent checks, and trained its employees to recognize such checks, it would have detected that defendant's first check was counterfeit.
With respect to defendant's position, it should be noted that assertions that the collecting bank negligently misrepresented the status of funds to a customer has generally been found to be insufficient to preclude summary judgment on a charge back claim by a collecting bank against its customer. See e.g. Call v. Ellenville Nat'l Bank , 5 AD3d 521 (2d Dept 2004); Allen v. Carver Federal Savings Loan Assoc., 123 Misc 2d 704; Chase v. Morgan Guarantee Trust Co., 590 FSupp 1137, 1139 (SD NY 1984).
However, those precedents are not fatal to defendant's negligence counterclaim, particularly as no discovery has been conducted. In fact, a trial court recently denied as premature a motion for summary judgment by Chase in a case that is strikingly similar to the instant one. See JP Morgan Chase Bank, N.A. v Cohen 26 Misc 3d 1215[A], *8, 2009 NY Slip Op 52725[U](Sup Ct, Albany County 2009). The defendant in JP Morgan Chase Bank, N.A. v Cohen, was an attorney who was the victim of an internet scam by a purported client who sent the attorney counterfeit bank checks. As in this case, the attorney wired funds to a fake client after the amounts from the counterfeit checks were provisionally settled, and Chase then sued the attorney for the resulting negative balance.
The attorney asserted a negligence defense against Chase based on allegations that the branch manager assured him that the "funds were good" after the attorney informed a another Chase employee that he did not want to transfer the proceeds of the checks until they "had cleared and represented good funds." 23 Misc 2d at 1215[A], at *6. The court found that given "the lack of pretrial discovery" and the "fact-intensive inquiry" required to determine if the bank acted negligently, it was premature to grant summary judgment in favor of the bank. Id.
Furthermore, defendant does not base his negligence counterclaim solely on the negligent representations of the teller, but also on the alleged failure of Chase to recognize that the bank check from Citibank was defective on its face, including because it did not have the correct routing number, and its failure to train its employees to identify fraud.
Accordingly, at this stage in the action and in light of defendant's counterclaim for negligence, summary judgment is denied on the first cause of action.
Second Cause of Action — Account Stated:
Chase argues that it is able to recover against defendant on the basis of the account stated. "The receipt and retention of an account, without objection, within a reasonable period of time, coupled with an agreement to make partial payment, gives rise to an account stated entitling the moving party to summary judgment in its favor." Morrison Cohen Singer Weinstein, LLP v Ackerman, 280 AD2d 355, 356 (1st Dept 2001).
Chase contends that defendant did not dispute the December monthly statements which indicated the negative balance until at least five months later. As such, defendant allegedly failed to contact Chase to raise timely objections, and is now liable on the account stated. Defendant states that he immediately protested the charges to his account on December 11, 2007 and then again on December 14, 2007, a submits evidence to support this statement. Moreover, when Chase commenced collection proceedings, his counsel protested in writing within seven days. In considering a summary judgment motion, evidence should be viewed in the "light most favorable to the opponent of the motion." People v Grasso, 50 AD3d at 544, citing Marine Midland Bank, N.A. v Dino and Artie's Automatic Transmission Co., 168 AD2d 610 (2d Dept 1990).
Here, the record is sufficient to raise a triable issue of fact as to whether defendant's objections were timely and reasonable under the circumstances. Accordingly, summary judgment on the account stated claim is denied.
Third Cause of Action — Breach of UCC § 3-414 (1)
In its third cause of action, Chase argues that defendant is liable to Chase for the amount of the first counterfeit check based on his breach of his indorser's warranty.
UCC § 3-414 (1) provides as follows:
Unless the indorsement otherwise specifies (as by such words as "without recourse") every indorser engages that upon dishonor and any necessary notice of dishonor and protest he will pay the instrument according to its tenor at the time of his indorsement to the holder or to any subsequent indorser who takes it up, even though the indorser who takes it up was not obligated to do so.
As the Court stated in Welbilt Construction Corp. v Kornicki ( 26 AD2d 661, 662 [2d Dept 1966]), "[t]hough loosely said to be secondarily liable, when sued upon his contract of indorsement, an indorser is absolutely liable thereon." See also Bruce v Martin, 1993 US Dist LEXIS 21382, *23 n 5 (SD NY 1993), holding that "[t]he maker of the note bears primary liability, and the indorser of the note is secondarily liable."
Defendant deposited a check for $197,750.00, which he endorsed. The deposit ticket stated that the deposit was subject to the terms of the UCC. Moreover, defendant does not deny that Chase informed him of the dishonor. Accordingly, pursuant to UCC § 3-414 (1), defendant is liable to pay for the check which he endorsed, even if the check was dishonored as being counterfeit.
That being said, however, as indicated above, there are questions of fact as to defendant's counterclaim for negligence entitles defendant to damages against Chase in connection with the transaction at issue. When, as here, "a viable counterclaim arises from the same transaction as is involved in the main action and is inseparable from or inextricably intertwined with that transaction, summary judgment should be denied." Yoi-Lee Realty Corp. v. 177th Street Realty Assocs, 208 AD2d 185, 189 (1st Dept 1995); see also, Pronti v. Grigoriou , 49 AD3d 1135 (3d Dept 2008). In view of defendant's negligence counterclaim, which arises from the same transaction involving the deposit of the counterfeit check, Chase is not entitled to summary judgment.
CONCLUSION
Accordingly, it is
ORDERED that Chase's motion for summary judgment is denied without prejudice to renewal upon completion of discovery; and it is further
ORDERED that the parties shall appear for a compliance conference in Part 11, room 351, 60 Centre Street on July 22, 2010, at 9:30 am.