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Conditions Spelled Out in an Irrevocable Stand-By Letter of Credit Had Been Complied With by the Defendant—Plaintiff’s Fraud Cause of Action Dismissed

The Second Department determined the defendant had properly sought (and been paid by the bank) funds pursuant to an irrevocable standby letter of credit (LOC) which was executed by the plaintiff in favor of defendant because the conditions spelled out in the LOC had been complied with. The court explained the relevant analytical criteria:

“Letters of credit are commercial instruments that provide a seller or lender (the beneficiary) with a guaranteed means of payment from a creditworthy third party (the issuer) in lieu of relying solely on the financial status of a buyer or borrower (the applicant). Historically, letters of credit have been used to assure predictability and stability in mercantile transactions by diminishing a seller’s risk of nonpayment and a buyer’s risk of nondelivery due to insufficient funds” … . “By issuing a letter of credit, the [bank] undertakes an obligation to pay the beneficiary, or his [or her] transferee if the letter is negotiable, from the account of its customer” … . Generally, stand-by letters of credit are “meant to be drawn upon only in the event that its applicant fails to make a direct payment to the beneficiary . . . For this reason, to collect upon a stand-by [letter of credit], the beneficiary . . . must present to the issuing bank a default letter stating that the debt had not been satisfied as of a specified date” … . However, “letters of credit must be strictly construed and performed in compliance with their stated terms” … . The rationale for this rule is rooted in the purpose of letters of credit: ” [b]y conditioning payment solely upon the terms set forth in the letter of credit, the justifications for an issuing bank’s refusal to honor the credit are severely restricted, thereby assuring the reliability of letters of credit as a payment mechanism'” … . Accordingly, “to make an issuing bank’s payment obligation conditional, the parties must clearly and explicitly set forth that requirement on the face of the letter of credit” … .

The … defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover damages for fraud, since in [defendant’s] letter to [the bank], it accurately and truthfully represented to [the bank] that [defendant] was the beneficiary of the LOC, and satisfied the two conditions set forth in the LOC pursuant to which payment would be made to it, to wit, by (1) referencing the LOC number, and (2) attaching the LOC. Weiss v Benetton USA Corp, 2015 NY Slip Op 00360, 2nd Dept 1-14-15

 

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Bank Properly Reversed Wire Transfer to Plaintiff’s Account After Learning Payment Was Not Authorized by the Holder of the Account from Which the Money Was Transferred—Plaintiff, Which Had Provided the Fake Buyer with Products Ostensibly Purchased with the Funds Initially Transferred to Plaintiff’s Account, Was Not Entitled to Those Funds Because the Funds Had Been Properly Returned by the Defendant Banks Pursuant to the Wire-Transfer Provisions of the UCC

The Second Department determined summary judgment in favor of the defendant banks (TD Bank and Eastern Bank) was properly granted.  Plaintiff, Golden Door, sold watches worth $71,000 to a fake buyer after the money was wired from the ostensible buyer's (MHIC's) account at defendant Eastern Bank to plaintiff's account in defendant TD Bank.  It turned out that the wire transfer was the result of the “hacking” of ostensible buyer's account. When Eastern Bank was notified the buyer had not authorized the transfer, Eastern Bank notified TD Bank which then reversed the transfer of the $71,000. Plaintiff sued for the $71,000.  The Second Department found that, under the wire-transfer provisions of the UCC, plaintiff was not entitled to the $71,000:

Under Article 4-A, a funds transfer is initiated by a “payment order,” which is an instruction from the person making the payment (the “originator”), to a “receiving” or “intermediary” bank to transfer the funds to the bank account of the beneficiary, normally in the “beneficiary's bank” (UCC 4-A-103, 4-A-104). Here, MHIC was indicated as the originator, Eastern Bank was the receiving bank, Golden Door was the beneficiary, and TD Bank was the beneficiary's bank.

Under Article 4-A, “a beneficiary's bank accepts a payment order when the bank pays the beneficiary by crediting the beneficiary's account and notifying the beneficiary of the right to withdraw the credit” (…see UCC 4-A-209[a]; 4-A-405[1][i]). Once the beneficiary's bank accepts the payment order, a cancellation of the order is not effective unless the beneficiary's bank agrees and, as relevant here, the order was unauthorized in the first place (see UCC 4-A-211[3][b]…). “If the payment order is cancelled . . . the beneficiary's bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution” (UCC 4-A-211[3][b]). Once cancelled, “the acceptance [of the payment order] is nullified and no person has any right or obligation based on the acceptance” (UCC 4-A-211[5], Comment 4, Case #1).

In support of their motion for summary judgment dismissing the complaint, the defendants established prima facie that the cancellation of the payment order was effective. The defendants submitted evidence that TD Bank, the beneficiary's bank, agreed to the cancellation, and that MHIC had not authorized the transfer (see UCC 4-A-211[3][b], Comment 1). The defendants further established prima facie that TD Bank was authorized to recover payment from Golden Door in the amount of the cancelled transfer in accordance with the “law governing mistake and restitution” (UCC 4-A-211[3][b]). The applicable doctrine of restitution is the “discharge for value” rule. Under that rule, ” [a] creditor of another or one having a lien on another's property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor's mistake'” (…quoting Restatement of Restitution § 14[1]). Although Golden Door had made no misrepresentation, the defendants established that Golden Door had notice that the transfer from MHIC was given by “mistake,” or was unauthorized. Specifically, the transfer order indicated that the transferor was MHIC, which was not Golden Door's “customer,” was not indebted to Golden Door, and had no apparent relationship with it or its “customer” (see UCC 4-A-211, Comment 4, Cases #2-#4…). Accordingly, Golden Door could not, under the discharge for value rule, retain the funds that had been transferred into its account. In opposition to the defendants' prima facie showing, Golden Door failed to raise a triable issue of fact. Golden Door V & I Inc v TD Bank, 2014 NY Slip Op 08960, 2nd Dept 12-24-14


 

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Post-Judgment Restraining Order Served On a New York Branch of a Foreign Bank, Pursuant to the Separate Entity Rule, Cannot Extend to Assets Held in Branches of the Bank Which Are Outside of New York

The Court of Appeals, in a full-fledged opinion by Judge Graffeo, over a dissenting opinion, answering a certified question from the Second Circuit, determined the “separate entity” rule prohibited a restraining order served on a New York branch of a bank from extending to assets in other branches of the bank which are outside New York.  Here a restraining order was served on a New York Branch of a foreign bank headquarted in the United Kingdom and the plaintiff sought to apply the restraining order to $30 million held in a branch of that bank in the United Arab Emirates:

The separate entity rule, as it has been employed by lower New York courts and federal courts applying New York law, provides that even when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for certain purposes, particularly with respect to CPLR article 62 prejudgment attachments and article 52 postjudgment restraining notices and turnover orders. In other words, a restraining notice or turnover order served on a New York branch will be effective for assets held in accounts at that branch but will have no impact on assets in other branches… . * * *

In large measure, the underlying reasons that led to the adoption of the separate entity rule still ring true today. The risk of competing claims and the possibility of double liability in separate jurisdictions remain significant concerns, as does the reality that foreign branches are subject to a multitude of legal and regulatory regimes. By limiting the reach of a CPLR 5222 restraining notice in the foreign banking context, the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems … . And although Motorola suggests that technological advancements and centralized banking have ameliorated the need for the doctrine, courts have continued to recognize the practical constraints and costs associated with conducting a worldwide search for a judgment debtor's assets … . Motorola Credit Corp v Standard Chartered Bank, 2014 NY Slip Op 07199, CtApp 10-23-14

 

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No Actionable Violations by Bank Re: Overdraft Charges/Overdraft Charges Are Not Interest

The First Department determined plaintiff had not stated causes of action against a bank based in part upon alleged violations of statements in a checking-account brochure issued by the bank.  The complaint challenged the method used by the bank to impose overdraft charges on plaintiff’s checking account, alleging breach of contract, violations of General Business Law 349 and usury.  With respect to the General Business Law and usuary causes of action, the court wrote:

To state a claim under General Business Law § 349, “a plaintiff must allege that the defendant has engaged in an act or practice that is deceptive or misleading in a material way and that plaintiff has been injured by reason thereof” … . A ” deceptive act or practice'” is defined as “a representation or omission likely to mislead a reasonable consumer acting reasonably under the circumstances'” … * * *  Plaintiff makes no claim that the applicability of his overdraft protection was not disclosed to him. * * *

The third cause of action, alleging usury, was properly dismissed because, as found by the motion court, overdraft charges are not interest. “If an instrument provides that the creditor will receive additional payment in the event of a contingency beyond the borrower’s control, the contingent payment constitutes interest within the meaning of the usury statutes” … . Even assuming a debtor-creditor relationship between the parties, the contingency of an account overdraft would have been within plaintiff’s control … . Feld v Apple Bank for Sav, 2014 NY Slip Op 02662, 1st Dept 4-17-14

 

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No Private Right of Action for Homeowners Against Lenders Under the Home Affordable Modification Program (HAMP)—Home Affordable Modification Program Was Not Enacted Solely for the Benefit of Homeowners(?)

The Second Department, after finding that the doctrine of judicial estoppel did not apply because there was no final determination adopting the plaintiff’s contrary position in the first litigation, determined the federal Home Affordable Modification Program (HAMP), enacted pursuant to the Emergency Economic Stabilization Act of 2008 (EESA), did not create a private right of action against a lender or loan servicer.  The lender had denied plaintiff’s application for a permanent HAMP loan modification and plaintiff’s brought suit alleging breach of contract (re: a trial period plan or TPP), fraud in the inducement, promissory estoppel and a violation of General Business Law 349:

When, as here, a statute does not provide an express private right of action, the courts will imply a private right of action only upon examination of the following three factors: (1) whether the plaintiff is one of the class for whose particular benefit the statute was enacted; (2) whether recognition of a private right of action would promote the legislative purpose; and (3) whether creation of such a right would be consistent with the legislative scheme” … .

As to the first factor, the Emergency Economic Stabilization Act of 2008 (12 USC §§ 5201-5261; hereinafter the EESA), which authorized the United States Department of the Treasury to promulgate the HAMP, was enacted “to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States” (12 USC § 5201[1]) and “to ensure that such authority and such facilities are used in a manner that (A) protects home values, college funds, retirement accounts, and life savings; (B) preserves homeownership and promotes jobs and economic growth; (C) maximizes overall returns to the taxpayers of the United States; and (D) provides public accountability for the exercise of such authority” (12 USC § 5201[2]). Similarly, Section 201(a)(2)(A)(i) of the Helping Families Save Their Homes Act of 2009 (111 P.L. 22, § 201[a][2][A][i], 123 Stat 1632, 1638) simply articulated a Congressional finding that, in order to reduce the number of foreclosures and stabilize real property values, mortgage lenders should be given authorization to modify mortgage loans consistent with applicable guidelines promulgated by the United States Department of the Treasury pursuant to EESA. Thus, although financially struggling homeowners may derive a benefit from the HAMP, that program was not promulgated solely for their particular benefit … . As to the second factor, the underlying purpose of the HAMP is to incentivize mortgage loan servicers to reduce monthly mortgage payments and, thus, prevent avoidable home foreclosures … . Accordingly, a private right of action against a lender or loan servicer arising from an alleged breach of a TPP agreement is inconsistent with the purpose of HAMP, as judicial recognition of such a private right of action would deter lenders and loan servicers from participating in the HAMP … . As to the third factor, the EESA expressly provides for civil actions by the Secretary of the Treasury (see 12 USC § 5229[a][1]) and for actions seeking equitable relief against the Secretary of the Treasury (see 12 USC § 5229[a][2], [3]), but makes no reference to private rights of action by borrowers against mortgage lenders or loan servicers. Moreover, given that, as noted above, private rights of action could conceivably deter lenders and loan servicers from participating in the HAMP, which would, in turn, undermine the HAMP’s purpose, allowing for a private right of action would be inconsistent with the legislative scheme of EESA. Since the plaintiffs’ claims here are intertwined with the defendants’ alleged obligations under the HAMP, and as no private right of action exists under the HAMP, the Supreme Court should have granted the defendants’ motion to dismiss the amended complaint on the ground that it failed to state a cause of action… . [emphasis added]  Davis v Citibank NA, 2014 NY Slip Op 02557, 2nd Dept 4-16-14

 

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Failure to Provide Pre-Restraint Notice to a Judgment Debtor as Required by the Exempt Income Protection Act Violates Due Process

In a full-fledged opinion by Justice Hall, the Second Department determined that the failure of the judgment debtor’s bank to provide the notice required by the Exempt Income Protection Act (CPLR 5222-a) before restraining the debtor’s account violated due process:

…[T]he statutory mechanism requires the attorney for the judgment creditor to serve a judgment debtor’s banking institution with a copy of the restraining notice, an exemption notice, and two exemption claim forms (see CPLR 5222-a[b][1]). The statute then requires the banking institution, within two business days after receipt of such documents, to serve upon the judgment debtor a copy of the restraining notice, the exemption notice, and the two exemption claim forms (see CPLR 5222-a[b][3]). In this action, the attorney for the judgment creditor properly sent the required documents to the judgment debtor’s bank, but the bank did not timely send the documents to the judgment debtor. As a result, the judgment debtor’s bank account was restrained without any notice to her or any opportunity to claim that certain funds in the account were exempt from debt collection. We conclude that this constituted a violation of the judgment debtor’s due process rights, and, as a remedy, afford the judgment debtor the opportunity to claim exemptions before any funds in her account are turned over. Distressed Holdings LLC v Ehrler, 2013 NY Slip Op 08044, 2nd Dept 12-4-13

 

 

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Bank Was Not a Statutory Lien Law Trustee; Question of Fact Whether Bank Was Aware Funds Were Diverted Lien Law Trust Funds

Plaintiff, a subcontractor in an environmental remediation project run by defendant AAA Environmental, sued on behalf of similarly situated subcontractors alleging that the arrangement AAA had with First Niagara Bank violated Lien Law article 3-A.  By that arrangement, each night funds from AAA’s operational account would be transferred to AAA’s line of credit account to reduce the balance. If the amount to be charged to AAA’s operational account exceeded the funds available, funds would be automatically transferred from the line of credit account to the operational account. Supreme Court determined the arrangement violated the Lien Law finding that Niagara Bank had notice the funds were diverted Lien Law trust funds and the bank was not a holder in due course. The Fourth Department disagreed and held Niagara Bank is not a Lien Law statutory trustee and there was a question of fact whether Niagara Bank had notice it was receiving diverted Lien Law trust funds:

First Niagara is not a Lien Law statutory trustee under the facts of this case and thus cannot be held liable for a violation of the Lien Law on that basis. “A lender is not a statutory trustee because ‘[n]o one other than an owner, contractor, or subcontractor is designated as a prospective trustee in article 3-A [of the Lien Law]’ ” … .  Although the Court of Appeals has held that a lender may become a statutory trustee when a contractor assigns its right of payment from the owner to the lender as security for a loan and the owner makes payments directly to the lender until the contractor’s debt is repaid …, First Niagara received no such assignment here.

…[T]he court erred in determining as a matter of law that it had actual notice that it was receiving diverted Lien Law trust funds, and thus could be held liable under Lien Law § 72 (1).  …

…[T]he court erred in applying a constructive notice standard in determining that First Niagara was not a holder in due course, and thus could be liable under Lien Law § 72 (1).  As the Court of Appeals noted in I-T-E Imperial Corp.—Empire Div. v Bankers Trust Co. (51 NY2d 811), “[w]ith the adoption . . . of the Uniform Commercial Code, the concept of notice under [UCC] article 3 (and by analogy under article 4 as well . . . ) has, as we have held in Chemical Bank of Rochester v Haskell (51 NY2d 85), been changed from an objective to a subjective standard, and that change must be deemed to have amended the Lien Law as well” (id. at 813-814…).

Furthermore, “[t]he purpose of UCC 3-304 (7)—unique to New York and Virginia—[is] to require that questions of notice . . . be determined by a subjective test of actual knowledge rather than an objective test which might involve constructive knowledge” … . Price Trucking Corp… v AAA Environmental Inc…m 1088, 4th Dept 11-8-13

 

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Note and Mortgage Void as Usurious

The Second Department determined a loan transaction and the associated note and mortgage were void because the loan was usurious:

Under the civil usury statute, the maximum interest rate on a loan is 16% per annum (see General Obligations Law § 5-501[1]; Banking Law § 14-a[1]). General Obligations Law § 5-501(6)(a) provides that the 16% maximum interest rate is not applicable “to any loan or forbearance in the amount of [$250,000] or more, other than a loan or a forbearance secured primarily by an interest in real property improved by a one or two family residence.” * * *

To determine whether the interest charged exceeded the usury limit, we must apply the traditional method for calculating the effective interest rate as set forth in Band Realty Co. v North Brewster (37 NY2d 460, 462). Viewing the loan as a one-year loan, the total annual interest is $43,175 ($33,000 in annual interest at 12% on $275,000, plus $10,175 in retained interest fees). The net loan funds advanced, i.e., the loan principal ($275,000) minus the retained interest ($10,175), equals $264,825. Expressed as a percentage of the net loan funds advanced, the $43,175 in total annual interest equals 16.3% of $264,825. The effective interest rate of 16.3% exceeds the civil usury limit, and the loan was therefore usurious.  Oliveto Holdings Inc v Rattenni, 2013 NY Slip Op 06844, 2nd Dept 10-23-13

 

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Action By Israeli Citizens Against Bank Which Allegedly Funded Groups that Committed Bombings and Rocket Attacks Allowed to Go Forward in New York Applying Israeli Negligence Law

In a full-fledged opinion by Justice Feinman, the First Department determined that Israeli law should be applied in a civil action by 50 Israeli citizens who were injured or who represent persons killed in bombings and rocket attacks carried out in Israel by Palestine Islamic Jihad and Hamas.  The opinion includes very detailed explanations of American and Israeli tort law (including the different roles of foreseeability in each), the factors that determine choice of law, and forum non conveniens. The action is against the Bank of China (BOC) and alleges the bank was negligent in supplying funds to the groups which carried out the bombings and attacks.  BOC argued that no duty ran from the bank directly to those injured by the intentional torts of others.  But, under Israeli law, a duty arises when an act is foreseeable and when an act violates a statute.  The court explained:

…[T]he Israeli law of negligence “differs slightly” from New York law in that duty is divided into fact and notional duty and depends on foreseeability …. …[T]he analysis of whether a duty is owed involves an inquiry into whether a reasonable person could have foreseen the occurrence of the damage under the particular circumstances alleged; whether as a matter of policy, a reasonable person ought to have foreseen the occurrence of the particular damage; and whether the occurrence causing the damage was foreseeable … . This differs from New York law, where the foreseeability of harm does not define duty and, absent a duty running directly to the injured person, there is no liability in damages, however careless the conduct or foreseeable the harm … .

In addition, the claim of breach of statutory duty …has no equivalent in New York law. … Israel’s tort of breach of a statutory duty “acts as a civil private right of action for the violation of any enactment” issued by the Knesset, the Israeli parliament. The plaintiff must be able to show that the defendant was under a duty imposed by an enactment, the enactment was created for the benefit of the plaintiff, the defendant breached that duty, and the breach caused an injury to the plaintiff of the type that the enactment was intended to prevent …. …[T]he enactments at issue are section 4 of the Prevention of Terrorism Ordinance, sections 145 and 148 of the Penal Law, and section 85 of the Defense Regulations (Emergency Period), all of which prohibit aiding and abetting terrorism, specifically by the giving of money to any terrorist organization, the payment of any contribution to any unlawful association including terrorist groups, and the performance of any service for or holding of funds of any unlawful organization … . Elmaliach v Bank of China Ltd, 2013 NY Slip Op 05858, 1st Dept 9-17-13.

 

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Bank Account in Name “Ann … or Thomas…” Could Be Turned Over to Pay Debt Owed by Thomas 

In finding that the funds held in a bank account in the name of “Ann Sledjeski or Thomas Sledjeski” should have been turned over to pay Thomas Sledjeski’s debt, the Second Department wrote:

The Supreme Court should have granted the unopposed petition pursuant to CPLR 5225(b) to direct Hudson City Savings Bank to turn over the funds of an account it held in the name of “Ann Sledjeski or Thomas Sledjeski,” to partially satisfy a judgment entered in favor of the petitioner and against Thomas C. Sledjeski. ” [T]he opening of a joint bank account creates a rebuttable presumption that each named tenant is possessed of the whole of the account so as to make the account vulnerable to levy of a money judgment by the judgment creditor of one of the joint tenants'” (…see Banking Law § 675[b]). Therefore, the petitioner was not required to establish that the judgment debtor was the sole contributor of funds to the account. Moreover, since none of the respondents appeared or answered the proceeding, they failed to rebut the presumption …  Matter of JRP Old Riverhead, Ltd v Hudson City Sav Bank, 2013 NY Slip Op 03484, 2nd Dept, 5-15-13

 

 

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