Sullivan v.
Citibank, N.A.
ZEK successfully defended a bank
against a claim for about $1 million arising from a six-year
fraudulent scheme by a dishonest office manager/bookkeeper
who stole checks payable to a chiropractor or to his practice,
indorsed them in the name of the payee by using the employer's
facsimile signature stamp and then deposited the checks into
her account at the defendant bank. In Sullivan v. Citibank,
N.A., 2003 WL 21465307 (2d Dep't June 23, 2003), the bank
discovered the fraud and reported it to the chiropractor,
who then sued the bank for breach of contract, conversion
under UCC §3-419, etc.
Moving for summary judgment, the bank
raised three UCC defenses: (1) it acted commercially reasonably
(and had no proceeds of the stolen checks in its possession
-§3-419(3)); (2) the plaintiff's lack of oversight of
his finances and office operation constituted negligence that
substantially contributed to the making of any forgeries,
and the bank complied with reasonable commercial standards
(§3-406); and (3) the indorsements on the stolen checks
were actually authorized rather than forged because the plaintiff's
employee used a facsimile stamp of plaintiff's own signature
which he entrusted to her (§3-404).
The bank submitted expert and employee
affidavits demonstrating that it handled the stolen checks
in accordance with reasonable commercial standards applicable
to its business. Plaintiff relied on his attorney's affirmation
opining that the bank's procedures were inadequate.
The IAS court denied the bank's motion
for summary judgment, finding "triable issues of fact
as to whether Citibank acted in accordance with its own procedures,
and whether those procedures comported with reasonable commercial
standards in the industry." The Appellate Division, Second
Department, unanimously reversed, holding that the bank met
its burden of establishing that it was entitled to summary
judgment pursuant to UCC §3-419(3) "by submitting
a detailed comprehensive, expert affidavit concluding that
its procedures in processing stolen checks comported with
reasonable commercial standards regarding the processing of
checks deposited in automated banking machines." The
appellate court did not rule on the bank's other defenses,
finding them "academic."
The decision is important because the
bank defeated the payee's claims on summary judgment. Bank
counsel often believe that defenses based on UCC §§3-419(3)
and 3-406 may be asserted successfully only at trial because
they are fact based, generally requiring a trial. ZEK was
successful in demonstrating plaintiff's negligence based upon
his own testimony of his complete failure to oversee the finances
of his practice. (Although the Court based its written decision
on other grounds, it seemed clear from questioning at oral
argument that payee-plaintiff's substantial negligence was
a real factor in the decision of the Court). At the same time,
we believe that a forceful expert witness affidavit convinced
the Appellate Division of the bank's commercial reasonableness.
Thus, the real significance of the Sullivan
case is that bank defense counsel need not be faced with the
choice of settling or proceeding with the expense and uncertainty
of a trial in order to resolve a forged indorsement claim.
The Sullivan decision provides a firm foundation upon
which to build future summary judgment motions. |
