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INTERMEDIARY BANK OWES NO DUTY TO BENEFICIARY OF AN ELECTRONIC FUNDS TRANSFER WHICH WAS BLOCKED BY A GOVERNMENT ORDER.

The First Department, in a full-fledged opinion by Justice Friedman, reversing Supreme Court, dismissed the lawsuit by the intended beneficiary of an electronic funds transfer (EFT) against an intermediary bank which complied with a government order to freeze the transfer. The court held the intermediary bank owed no duty to the intended beneficiary and properly returned the funds to the originator’s bank when the government order was lifted. An intermediary bank simply facilitates the transfer from the originator’s bank to the beneficiary’s bank:

…[B]ased on the allegations of [the beneficiary’s] complaint, … the originator’s bank — rather than … the intended beneficiary of the failed EFT — was plainly “the entity that passed the EFT on to … the [intermediary] bank where it . . . rest[ed]” … until the federal block was released. It follows that [the originator’s bank] was “the only entity with a property interest in the stopped EFT …” and that, upon the release of the block, [the intermediary bank] properly refunded [the originator’s bank’s] payment for the EFT pursuant to UCC 4-A-402(4), given that the EFT had long since been cancelled by operation of law under UCC 4-A-211(4). It also follows that, pursuant to UCC 4-A-212, [the beneficiary] has no claim against [the intermediary bank] with respect to this transaction. [The intermediary bank] “owed nothing to … the beneficiary since an intermediary bank has no legal obligation to the beneficiary” … . Receivers of Sabena SA v Deutsche Bank A.G., 2016 NY Slip Op 05546, 1st Dept 7-14-16

 

BANKING LAW (INTERMEDIARY BANK OWES NO DUTY TO BENEFICIARY OF AN ELECTRONIC FUNDS TRANSFER WHICH WAS BLOCKED BY A GOVERNMENT ORDER)/UNIFORM COMMERCIAL CODE (INTERMEDIARY BANK OWES NO DUTY TO BENEFICIARY OF AN ELECTRONIC FUNDS TRANSFER WHICH WAS BLOCKED BY A GOVERNMENT ORDER)/UCC (INTERMEDIARY BANK OWES NO DUTY TO BENEFICIARY OF AN ELECTRONIC FUNDS TRANSFER WHICH WAS BLOCKED BY A GOVERNMENT ORDER)

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Question of Fact Whether Withdrawal Was Authorized, Despite Absence of Signature

The Second Department, over a dissent, determined the bank had raised a question of fact about whether a $50,000 withdrawal, where the withdrawal slip was not signed, was authorized. The assistant branch manager submitted an affidavit stating that he received authorization by phone from the account holder. The court explained the relevant analytical criteria:

Generally, an unauthorized signature—defined as a signature made without authority, including a forgery (see UCC 1-201[41])—is ineffective to pass title or authorize a drawee bank to pay … . The UCC imposes strict liability on a bank that charges against a customer’s account any item not properly payable, such as a check bearing a forgery of the customer’s signature (see UCC 4-401[2][a]; UCC 4-104[1][g], [j]…). A bank, however, avoids such liability if it demonstrates that the customer’s negligence substantially contributed to the forgery and that the bank acted in good faith and in accordance with reasonable commercial standards (see UCC 3-406 …). Proactive Dealer Servs., Inc. v TD Bank, 2015 NY Slip Op 07016, 2nd Dept 9-30-15

 

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International Bank With a Branch in New York Was Required to Comply with an Information Subpoena—“Separate Entity Rule” Which Prevents New York Courts from Enforcing Restraining Notices and Turnover Orders Directed to Branches of Foreign Banks Located Outside New York, Does Not Prevent New York Courts from Directing the New York Branch of a Foreign Bank to Comply with an Information Subpoena, Even though the Information Sought Relates to Foreign Branches–The Information Sought Is Available Through Electronic Searches Made by the New York Branch of the Bank

The First Department, in a full-fledged opinion by Justice Acosta, determined that defendant international bank, Mega (based in Taiwan with branches in 14 countries), was required to comply with an information subpoena issued to its New York branch. The essence of the action is the collection of a $39 million judgment. It was alleged that Mega was aiding the judgment debtor in preventing collection. Because the information requested was available to Mega through electronic searches conducted from the New York branch, and because Mega had consented to the necessary regulatory oversight in return for permission to operate in New York, Mega was directed to comply with the information subpoena:

The issue is whether the separate entity rule bars New York courts from compelling Mega’s New York branch to produce information pertaining to Mega’s foreign branches.

The separate entity rule is that “each branch of a bank is a separate entity, in no way concerned with accounts maintained by depositors in other branches or at the home office” … . The continuing validity of this arcane rule was recently upheld by the Court of Appeals … , solely with respect to restraining notices and turnover orders affecting assets located in foreign branch accounts  * * *. … [T]he rule does not bar the court’s exercise of jurisdiction over Mega to compel a full response to the information subpoena.

Moreover, public policy interests and innovations in technology support such an exercise of jurisdiction. … “[B]road post-judgment discovery in aid of execution is the norm in federal and New York state courts” … , and “New York law entitles judgment creditors to discover all matters relevant to the satisfaction of a judgment” … . * * *

“The information requested by the Information Subpoena can be found via electronic searches performed in [the bank’s] New York office, and [is] within this jurisdiction” … . Matter of B&M Kingstone, LLC v Mega Intl. Commercial Bank Co., Ltd., 2015 NY Slip Op 06482, 1st Dept 8-11-15

 

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No Survivorship Language in Joint Bank Account Documents/Evidence the Joint Account Was Created as a Matter of Convenience/Summary Judgment Should Not Have Been Granted Awarding Plaintiff Half the Funds in the Account Upon the Death of the Other Person Named on the Account

The Fourth Department noted that Supreme Court erred in concluding a joint bank account was a joint tenancy with right of survivorship and granting the aspect of plaintiff’s motion for summary judgment seeking half the funds in the account upon the death of the other party named on the account. There was no survivorship language in the account documents, and there was evidence tending to rebut any statutory presumption of a joint tenancy (i.e., evidence the account was created as a matter of convenience):

Contrary to the court’s determination, we conclude that the statutory presumption of joint tenancy set forth in Banking Law § 675 does not apply to the joint account inasmuch as “the account documents do not contain the necessary survivorship language” … .

We note in any event that the statutory presumption may be rebutted “by providing direct proof that no joint tenancy was intended or substantial circumstantial proof that the joint account[s] had been opened for convenience only” … . Even assuming, arguendo, that the statutory presumption of joint tenancy applies to the joint accounts, we conclude that defendant submitted evidence tending to rebut the statutory presumption that is sufficient to raise a triable issue of fact whether, “at the time the accounts were created, the accounts were opened as a matter of convenience” … . In particular, defendant submitted evidence establishing, inter alia, that decedent was the sole depositor of the joint accounts, and that plaintiff never withdrew funds from the joint accounts during decedent’s lifetime … . In addition, defendant submitted evidence establishing that decedent’s creation of a joint tenancy with the right of survivorship in the joint accounts “would represent a substantial deviation from [her] previously expressed testamentary plan” … , Harrington v Brunson, 2015 NY Slip Op 05309, 4th Dept 6-19-15

 

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Presumption, Pursuant to Banking Law 675, that a Joint Bank Account Created a Joint Tenancy with Right of Survivorship Is Not Triggered Unless the Signature Card for the Account Indicates a Right of Survivorship Was Intended

The Third Department determined petitioner, whose name was on a joint bank account with decedent and another, was not entitled to one-half of the proceeds in the account upon decedent’s death. The court explained that the presumption (Banking Law 675) that a joint bank account creates a joint tenancy with right of survivorship is triggered only when the signature card for the account indicates the parties intended the right of survivorship to apply.  Here the signature card made no mention of the right of survivorship:

Banking Law § 675 (a) provides, in relevant part, that, “[w]hen a deposit of cash . . . has been made . . . in the name of [the] depositor . . . and another person and in form to be paid or delivered to either, or the survivor of them, such deposit . . . and any additions thereto made, by either of such persons, . . . shall become the property of such persons as joint tenants and the same, together with all additions and accruals thereon, . . . may be paid or delivered to either during the lifetime of both or to the survivor after the death of one of them.” Further, Banking Law § 675 (b) provides that “[t]he making of such deposit . . . in such form shall, in the absence of fraud or undue influence, be prima facie evidence, in any action or proceeding to which the . . . surviving depositor. . . is a party, of the intention of both depositors . . . to create a joint tenancy and to vest title to such deposit . . ., and additions and accruals thereon, in such survivor.” Thus, “[w]here an account has been formed in compliance with the statute, it is presumed, absent a showing of fraud or undue influence, that the depositors intended to create a joint tenancy with rights of survivorship” … . That said, the statutory presumption embodied in Banking Law § 675 (b) will not be triggered unless the signature card for the account in question specifically references rights of survivorship … . Assuming the statutory presumption has been invoked, the burden then shifts to the party challenging the survivorship rights “to establish — by clear and convincing evidence — fraud, undue influence, lack of capacity or, as [respondent] asserts here, that the account[] [was] only opened as a matter of convenience and [was] never intended to be [a] joint account[]” … .

Here, the signature card for the Citizens money market account contains no survivorship language. Accordingly, under prevailing case law, petitioner simply is not entitled to the presumption afforded by Banking Law § 675 (b) … . Matter of Farrar, 2015 NY Slip Op 04902, 3rd Dept 6-11-15

 

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14-Day Period for Notifying a Bank of Improperly Paid Items Reasonable Under the Facts

The Court of Appeals, in a full-fledged opinion by Judge Lippman, over a dissent, determined that shortening the period during which a bank must be informed of an improperly paid item from one year to 14 days was reasonable under the facts.  The court noted that the party which agreed to the shortened period was a sophisticated business entity and the shortened period may not be reasonable in other circumstances, with less sophisticated parties, for example. The improperly paid items in this case were checks and drawdown requests forged by an employee.  Summary judgment was granted in favor of the bank because the bank had not been notified of the forged items within 14 days:

[With respect] to the application of UCC 4-406 (4), the UCC permits parties to alter the provisions of article 4 by agreement (see UCC 4-103 [1]). The Official Comments go so far as to say that there exists a “blanket power to vary all provisions of the Article” (id. at Comment 2). But that power is not boundless:”[N]o agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable”(UCC 4-103 [1]).

The application of these limitations raises two issues: first, whether parties can vary the one-year period by agreement; we hold that they can; and second, whether shortening the one-year period to 14 days is manifestly unreasonable; we hold that it is not, at least under these facts. Clemente Bros Contr Corp v Hafner-Milazzo, 2014 NY Slip Op 03291, CtApp 5-8-14

 

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Failed Attempt to Circumvent the Banking Law by Making a High-Cost Home Loan to a Limited Liability Company to which the Home Had Been Transferred

The Second Department determined summary judgment should have been granted on defendants’ counterclaim alleging plaintiff’s violation of the Banking Law which prohibits “high-cost home loans” (Banking Law 6-1).  Plaintiff had attempted to circumvent the law by making the loan to a limited liabilIty company to which the defendants-owners had transferred the home. The Second Department determined the provisions of the Banking Law relating to “high-cost home loans” which (1) prohibited “subterfuge” to circumvent the law, (2) prohibited the consolidation of loan payments made payable in advance, (3) required certain notices, and (4) prohibited excessive points and fees, applied to the transaction in issue:

The defendants established their prima facie entitlement to judgment as a matter of law on their first counterclaim, which was to recover damages and for declaratory relief for violations of Banking Law § 6-l, which imposes limitations and prohibits certain “practices for high-cost home loans” (Banking Law § 6-l[2]). The defendants established, prima facie, that the subject loan was a “high-cost home loan” (Banking Law § 6-l[1][d]; see Banking Law § 6-l[1][f][i]-[iii]; [g][ii]…). …[U]nder the circumstances of this case, Banking Law § 6-l applies to the … loan, even though it was made to a limited liability company, and not to “a natural person” (Banking Law § 6-l[1][e][ii]). The provisions of Banking Law § 6-l apply “to any person who in bad faith attempts to avoid the application of this section by any subterfuge” (Banking Law § 6-l[3]). Here, the defendants made a prima facie showing that a representative of [plaintiff] attempted, in bad faith, to avoid the application of the statute by “subterfuge,” and that, thus, the statute applied to the Aries loan (Banking Law § 6-l[3]). Moreover, the defendants’ submissions demonstrated, prima facie, that [plaintiff] violated the provisions of Banking Law § 6-l(2) by consolidating the first 12 payments and having them “paid in advance from the loan proceeds provided to the [defendants]” (Banking Law § 6-l[2][e]); engaging in “loan flipping” (Banking Law § 6-[2][i]); making the loan “without due regard to repayment ability” (Banking Law § 6-l[2][k]); failing to provide required notices (see Banking Law § 6-l[2][e]; [2-a][a]); and financing points and fees, as defined in Banking Law § 6-l(1)(f), “in an amount that exceeds three percent of the principal amount of the loan” (Banking Law § 6-l[2][m]).  Aries Fin., LLC v 12005 142nd St., LLC, 2015 NY Slip Op 03115, 2nd Dept 4-15-15

 

Questions of Fact Whether Name Added to Bank Account Created a Convenience Account or a Joint Tenancy with Right of Survivorship

The Fourth Department determined there was a question of fact whether plaintiff’s adding another’s (John’s) name to a bank account was done for convenience or to provide John with a right to the funds:

There is no dispute that the account in which the funds had been deposited was designated a joint account. The sole question is whether that account was a convenience account, in which case the money deposited therein would be considered “the sole property of [plaintiff]” and could not be used to satisfy a judgment against John (… see Banking Law § 678). Otherwise, if the account was a joint tenancy account with a right of survivorship or a tenancy in common account, John would be deemed to have “an ownership interest in one half of the moneys deposited therein” … . Defendant contends that, by placing John’s name on the bank account as a joint tenant, the account is presumed to be a joint tenancy account with a right of survivorship (see Banking Law § 675). We reject that contention. “Although the bank account is designated as joint,’ the account documents do not contain the necessary survivorship language, and thus the statutory presumption of a right of survivorship does not apply” … .

We agree with defendant that plaintiff failed to establish as a matter of law that she intended to create a convenience account (see Banking Law § 678), as opposed to either a joint tenancy account with right of survivorship (see § 675), or a tenancy in common account (see EPTL 6-2.2 [a]). …  Plaintiff stated that she added John’s name to the account because she was “fearful for [her] own safety” and “feared the risk of additional violence against [her].” Plaintiff wanted to make sure that, if anything happened to her, “the funds [would] be available for the welfare of [her] granddaughter.” Those statements seemingly establish that plaintiff “did not have a present intention to transfer an interest in the [money] to [John], despite having placed his name on the [account]” … . Moreover, John made no deposits or withdrawals to the account, which also supports plaintiff’s position that the account was opened as a matter of convenience only … .

Nevertheless, we conclude that plaintiff’s statements raise a triable issue of fact whether she intended John to have a right of survivorship in the joint tenancy account. …[W]hile the signature card’s reference to a document stating that rights of survivorship are created when obtaining a joint bank account is insufficient to invoke the statutory presumption of Banking Law § 675 … , it is a factor that may be considered when determining whether the bank account is a joint tenancy account with survivorship rights … . Sweetman v Suhr, 2015 NY Slip Op 02583, 4th Dept 3-27-15

 

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The “Strict Compliance” Rule Re: Documents Required for a Drawdown from a Letter of Credit Explained

The First Department, in a full-fledged opinion by Justice Saxe, determined that minor discrepancies in the documents required by a letter of credit as a prerequisite for a drawdown did not violate the “strict compliance” rule.  Here a true copy of a document, rather than the original, was submitted.  The true copy was deemed to satisfy the “strict compliance” rule:

…[A]pplying the standard of strict compliance, plaintiff’s drawdown request should have been honored because, under these circumstances, the production of a true copy of amendment 2, instead of an original, was sufficient even to satisfy the strict compliance standard.

Strict compliance has been said to require that “the papers, documents and shipping directions . . . be followed as stated in the letter [of credit],” that “[n]o substitution and no equivalent, through interpretation or logic, will serve,” and that “[t]here is no room for documents which are almost the same, or which will do just as well” … . Even slight discrepancies in compliance with the terms of a letter of credit have been held to justify refusal to pay … .

“The [strict compliance] rule finds justification in the bank’s role in the transaction being ministerial . . . and to require it to determine the substantiality of discrepancies would be inconsistent with its function” … . The “reason for the strict [compliance] rule is to protect the issuer from having to know the commercial impact of a discrepancy in the documents” … .

However, as this Court has recently observed, “According to the official UCC commentary, the strict compliance standard does not require that the documents presented by the beneficiary be exact in every detail” (BasicNet S.P.A v CFP Servs., Ltd., __ AD3d __, __, 2015 NY Slip Op 02080, [1st Dept 2015]) [summarized directly below]. The doctrine of strict compliance “does not mean slavish conformity to the terms of the letter of credit . . . [and] does not demand oppressive perfectionism” (id., quoting Official Comment 1, reprinted in McKinney’s Cons Laws of NY, Book 62½, UCC 5-108 at 367). Ladenburg Thalmann & Co, Inc. v Signature Bank, 2015 NY Slip Op 02224, 1st Dept 3-19-15

 

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(1) The Effect of Minor Discrepancies Re: the Submissions Required by a Standby Letter of Credit (SLC) (2) The Criteria for Interpreting an SLC (3) the Nature of an SLC and (4) the “Independence Principle” as Applied to an SLC Discussed in Some Depth

The First Department, in a full-fledged opinion by Justice Andrias, reversed Supreme Court and determined the issuer of standby letters of credit (SLC) was required to honor them.  The opinion is detailed and fact-based.  Among the legal issues discussed are: (1) minor discrepancies re: the documents required to be submitted (for a drawdown) by the terms of an SLC do not violate the “strict compliance” rule; (2) how to interpret an SLC; (3) the nature of an SLC  (versus a guaranty); and (4) the “Independence Principle” which requires that an SLC be deemed separate and distinct from the other contractual agreements underlying the transaction:

Under New York law, in order to recover on its claim that the issuer wrongfully refused to honor its request to draw down on a letter of credit, the beneficiary must prove that it strictly complied with the terms of the letter of credit … . “The corollary to the rule of strict compliance is that the requirements in letters of credit must be explicit, and that all ambiguities are construed against the [issuer]” … . The reasoning is that “[s]ince the beneficiary must comply strictly with the requirements of the letter, it must know precisely and unequivocally what those requirements are” … . “Where a letter of credit is fairly susceptible of two constructions, one of which makes fair, customary and one which prudent men would naturally enter into, while the other makes it inequitable, the former interpretation must be preferred to the latter, and a construction rendering the contract possible of performance will be preferred to one which renders its performance impossible or meaningless” … . * * *

There are three parties to an SLC: the applicant who requests the SLC; the beneficiary to whom payment is due upon the presentation of the documents required by the SLC; and the issuer which obligates itself to honor the SLC and make payment when presented with the documents the SLC requires. In turn, there are three corresponding agreements: the agreement between the applicant and the beneficiary, which creates the basis for the SLC; the agreement between the issuer and the applicant; and the SLC itself … .

“[A] fundamental principle governing these transactions is the doctrine of independent contracts, [which] provides that the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the … contract and separate as well from any obligation of the issuer to its customer under their agreement” … .

From the beneficiary’s perspective, the independence principle makes a letter of credit superior to a normal surety bond or guaranty because the issuer is primarily liable and is precluded from asserting defenses that an ordinary guarantor could assert. Indeed, “a letter of credit would lose its commercial vitality if before honoring drafts the issuer could look beyond the terms of the credit to the underlying contractual controversy or performance between its customer and the beneficiary”… . BasicNet S.P.A. v CFP Servs. Ltd., 2015 NY Slip Op 02080, 1st Dept 3-17-15

 

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