Opinion
24633/09.
Decided January 28, 2011.
Jonathan Scher, Esq., The Scher Law Firm, LLP, Carle Place, NY, Attorney for Petitioner.
Richard Marooney, King Spalding LLP, New York, NY, Attorney for Respondents RBC Capital Markets Corporation and Royal Bank of Canada.
New York, NY, Respondent DB Partners I LLC.
CAROLYN E. DEMAREST, J.
This special proceeding was brought, pursuant to CPLR 5225(b), by petitioner, the Scher Law Firm, as nominee and claimants' representative for the plaintiff limited partners of Parklex Associates ("Parklex"), which are the judgment creditors of Fred Deutsch (Deutsch) as a result of the entry of judgement by confession following Deutsch's default upon the settlement of their action againsthim and several other defendants in Holtkamp v Parklex Associates (Kings County, index No. 14514/06) (the "Parklex action"). The proceeding against respondents DB Partners I LLC ("DB Partners"), broker-dealer RBC Capital Markets Corporation ("RBCCM"), formerly RBC Dain Rauscher ("RBC Dain"), and its parent company, the Royal Bank of Canada ("RBC"or "the Bank"), seeks, in satisfaction of the judgment against Deutsch, the turnover of assets held in securities accounts in the name of DB Partners at RBCCM ("DB Partners accounts"), currently subject to restraining notices. Petitioner claims that the assets in the DB Partners' accounts are the proceeds from the sale of the primary asset of Parklex which were fraudulently diverted from Parklex, through various other accounts controlled by Deutsch, and into accounts maintained at RBCCM, also controlled by Deutsch.
This court has issued a number of decisions in connection with the litigation of the Parklex action including Parklex Associates ex rel. Holtkamp v Parklex Associates, 15 Misc 3d 1125(A) (Sup Ct, Kings County April 16, 2007); Parklex Associates ex rel. Holtkamp v Parklex Associates, 15 Misc 3d 1125(A) (Sup Ct, Kings County April 23, 2007); The Scher Law Firm v DB Partners I LLC, 27 Misc 3d 1230(A), (Sup Ct, Kings County 2010). The following related actions remain pending before this court: Parklex Assoc. ex rel. Holtkamp v Parklex Assoc. (index No. 14514/2006), The Scher Law Firm v Nutovic (index No. 24026/2009); Parklex Assoc. v RBC Capital Mkt. Corp. (index No. 25705/2009); The Scher Law Firm, LLP v RBC Capital Mkt. Corp. (index No. 33000/2009); The Scher Law Firm, LLP v Flemming Zulack Williamson Zauderer LLP (index No. 30174/2009); and The Scher Law Firm, LLP v Flemming Zulack Williamson Zauderer LLP (index No. 22887/2010).
Dain Rauscher, a brokerage, was acquired by Royal Bank of Canada in order to provide more financial products to clients in the United States and was integrated into RBC Capital Markets at the end of 2007.
In conjunction with financial advice and services provided to Deutsch by RBC Dain, RBC's International Wealth Management Division(formerly known as RBC Global Private Banking), extended a line of credit to D B Partners and now claims a perfected security interest in those assets which petitioner seeks to acquire. Respondents have moved to dismiss the petition and modify the restraining notices served upon them, claiming that RBC is entitled to liquidate the assets in the DB Partners accounts, which have been pledged as collateral for the line of credit, in order to satisfy DB Partners' obligations to the Bank, including the unpaid balance of loans and attorneys' fees and costs. Petitioner initially cross-moved for partial summary judgment directing the turnover of $361,411.22, the difference between the value remaining in the D B Partners' account and the sum claimed to be due to RBC upon the loans, but has asserted, over the course of the litigation, that it is entitled to summary judgment for the entire balance in the account. These motions were addressed by this court in a decision dated June 3, 2010, (the June 3 Decision) in which it was determined, inter alia, that, RBC has an enforceable contractual right to recover the costs of litigation in defending and enforcing its claim to the collateral held in the D B Partners accounts, but, as to RBC's entitlement to the assets of D B Partners held by RBCCM, questions of fact required an evidentiary hearing. That hearing was held over a three week period in July.
The Scher Law Firm v DB Partners I LLC, 27 Misc 3d 1230(A), 2010 WL 2219610 at *13 (Sup Ct, Kings County 2010).
Prior to the hearing, respondents moved to reargue the June 3 Decision, contending that inappropriate factual findings were made therein and that reliance on certain authority was misplaced. That motion was deferred pending the hearing which was ordered in that decision pursuant to CPLR 3212(c). In fact, some of the findings with which respondents have taken issue have been corroborated by the evidence adduced at the hearing. It is further noted that, while respondents' motion to dismiss was addressed to the legal sufficiency of the petition, petitioner had cross-moved for summary judgment and the parties were placed on notice of the court's intention to treat the motions as seeking summary judgment in light of the nature of the special proceeding and the legal issue presented by respondents' contention that RBC had a superior perfected security interest in the subject of the proceeding pursuant to Uniform Commercial Code (UCC) § 8-510(a) which mandated the dismissal of the petition. The parties were afforded the opportunity to supplement their arguments. The court will further address respondents' motion to reargue at the conclusion of this decision. The facts recited herein are based upon evidence adduced at the hearing and the undisputed submissions of the parties.
BACKGROUND
In late 2005 or early 2006, Ronald Slevin, a financial consultant and Senior Vice President at RBC Dain, and his assistant Linda Rosa (now Linda Kalata) (hereafter "Kalata"), a Senior Financial Associate at RBC Dain, met with Deutsch regarding the establishment of brokerage accounts at RBC Dain. Slevin had not met Deutsch prior to that time, but Deutsch was recommended by one of Slevin's current clients and Slevin had known Deutsch's parents and brother for many years. Mr. Slevin testified that Deutsch mentioned the imminent closing on the sale of a building as one of his reasons for establishing the new account. After several additional meetings, in April of 2006, Deutsch opened the first of several accounts at RBC Dain in his own name. Slevin, with Kalata's assistance, assumed the role of Deutsch's financial consultant and was ultimately responsible for managing the client relationship.
On May 8, 2006, acting as the principal of Parklex's corporate general partner, Parklex Associates, Inc. ("Parklex Associates"), Deutsch sold Parklex's real property located at 112-114 East 32nd Street in Manhattan (the "Parklex office building") and directed that $23,080,351.63 from the sale proceeds be wire transferred, not into a Parklex account, but into an account at J P Morgan Chase in the name of FAL Associates LLC ("FAL Associates"), a Delaware limited liability company formed on May 1, 2006, just seven days before the sale of the Parklex office building. Deutsch is the sole member and principal of FAL Associates.
On May 11, 2006, Diedrich Holtkamp, one of the limited partners of Parklex, on behalf of all of the limited partners of Parklex (the "Parklex plaintiffs"), commenced the Parklex action, alleging, inter alia, that Deutsch had committed fraud by transferring the proceeds of the sale of the Parklex office building to FAL Associates, and seeking an accounting of Parklex's assets.
As the sole principal of both entities, on June 21, 2006, Deutsch opened a securities account in the name of Collateral Acquisition LLC ("Collateral Acquisition") and, on June 23, 2006, opened another securities account in the name of Parklex Associates, both at RBC Dain. On June 26, 2006, Deutsch wired $6,104,173.86 into the Parklex Associates account at RBC Dain from an outside account. On June 27, 2006, Deutsch transferred $4,604,173.86 from the Parklex Associates account into the Collateral Acquisition account.
On June 29, 2006, this court issued an order restraining and enjoining the defendants in the Parklex action from distributing any funds out of any and all accounts held or maintained in the name of Parklex or Parklex Associates without further order of the court, pending discovery.
This court's June 3, 2010 Decision erroneously stated that "RBC Dain received actual notice through the subpoena duces tecum that it was enjoined from distributing any funds from Parklex Associates' account" ( The Scher Law Firm v DB Partners I LLC, 27 Misc 3d 1230(A), 2010 WL 2219610 at *9 [Sup Ct, Kings County 2010]). In fact, the June 29, 2006 order only enjoined the defendants in the Parklex action from distributing funds in any Parklex Associates' accounts, but did not explicitly enjoin RBC Dain, which was not a party to the action.
On July 6, 2006, Deutsch opened another securities account at RBC Dain in the name of DB Partners, a limited liability holding company formed in Delaware on July 5, 2006 and wholly owned by Deutsch. On July 10, 2006 and July 14, 2006, Deutsch made two wire transfers from the FAL Associates' account at JP Morgan Chase to the DB Partners account in the amounts of $10,000,000 and $10,035,823.80, respectively. It is not disputed that these funds were actually the proceeds of the sale of the Parklex office building which were the subject of the pending Parlex litigation.
During the fall of 2006, in connection with the Parklex action, the Parklex plaintiffs issued four subpoenas to RBC Dain. The first subpoena duces tecum was issued on September 25, 2006 and sought the production of all account information pertaining to the June 26, 2006 wire transfer into the account of Parklex Associates. RBC Dain responded to the subpoena duces tecum by producing documents. The second subpoena duces tecum was issued on October 17, 2006 and sought account information pertaining to the Collateral Acquisition account, including, but not limited to the June 27, 2006 wire transfer into that account from the Parklex Associates account. This second subpoena was withdrawn and superceded by a third subpoena duces tecum, dated October 26, 2006, seeking the same information sought in the October 17, 2006 subpoena duces tecum, but specifically stating that it was intended to permit the Parklex plaintiffs to track the monies transferred from an account held by Parklex Associates on June 30, 2006, possibly in violation of the June 29, 2010 court order, which was attached to the subpoena. Following communications between RBC Dain's in-house legal counsel and counsel for the Parklex plaintiffs, the Parklex plaintiffs issued a fourth subpoena duces tecum, dated November 2, 2006, seeking the same account information sought by the third subpoena duces tecum.
The subpoena erroneously stated that the transfer was made on June 30, but the RBC Dain account statement for June 2006 for Collateral Acquisition indicates the transfer occurred on June 27, 2006, before entry of the court order (Respondents' Ex. F).
Parklex Associates and other defendants moved to quash the October 26, 2006 and November 2, 2006 subpoenas duces tecum issued to RBC Dain. On December 4, 2006, counsel for the Parklex plaintiffs cross-moved for appointment by the court of an accountant to perform an accounting of Parklex and for enforcement of the subpoenas duces tecum. This cross motion was served, together with supporting papers, upon the Parklex defendants and upon Michael Pysno, Esq., the Senior Associate General Counsel and a Managing Director for RBC Dain. The affirmation of counsel, Austin Graff, Esq., in support of the cross-motion stated that "the [subpoenaed documents] will show that the Defendants transferred the money belonging to the Partnership from the sale of the Partnership's sole asset, . . . and that money was secreted by the Defendant by directives . . . to RBC to transfer such money out of traceable accounts of the Parklex Corporation to new and/or secret accounts" (Graff March 2010 Aff., Exhibit 1, p. 2). The Graff Affirmation contained a detailed description of the several funds transfers in and out of the several accounts controlled by Fred Deutsch, naming Collateral Acquisition Corporation, as well as defendants Parlex Associates and Fred and Arie Deutsch, all account holders at RBC Dain, as complicitous in the alleged fraud. While the four subpoenas duces tecum did not specifically mention DB Partners or the DB Partners accounts at RBC Dain (since that entity was unknown to the Parklex plaintiffs at the time), or refer to the more than $20 million transferred into DB Partners' account from JP Morgan Chase in July 2006, each of the subpoenas duces tecum listed the full caption of the Parklex action which named, among others, Parklex Associates, FAL Associates, and both Fred and Arie Deutsch, as defendants. It is RBC Dain's receipt, by counsel, of these four subpoenas, together with this court's order of June 29, 2006, and the cross-motion of plaintiffs articulating their claims against Deutsch and Parklex Associates, which this court previously found provided notice, and thus "actual knowledge", to RBC Dain of "an adverse claim to all assets attributable to Fred Deutsch" (Decision of June 3, 2010, 27 Misc 3d 1230A, at 7).
Although Mr. Pysno couldn't "recall" whether he read the documents he acknowledged receiving, and claimed not to understand the connection between Parklex and Parklex Associates, his communications with counsel for Deutsch and for Parklex regarding the motion to quash and the need to comply with the subpoenas, and particularly the threats made on behalf of Deutsch that RBC Dain would be held responsible for any damages resulting from unauthorized disclosures, should have alerted Pysno and the parties within RBC Dain who were responsible for advising Deutsch (who were provided with information regarding the subpeonas) of the need for further investigation and vigilance with respect to the funds held in accounts controlled by Deutsch. An e-mail from Slevin addressed to "Fred" Deutsch, dated October 26, 2006, states: "Just want to make sure you see everything. FYI Mike Pysno is the head of RBC's legal dept, to whom everyone in the dept reports. That's why Rich Franchella (Senior Managing Director in NY) and I made sure he took over the case. He understands the importance and seriousness of working for the firm and Ron Slevin's clients at the same time."(Plaintiff's Ex. 41, emphasis in original) Thus, the testimony of the RBC Dain employees, who dealt directly with Deutsch and his attorneys and had actual knowledge of the subpoenas regarding funds held by RBC Dain in various accounts (Pysno, Slevin and Kalata), sustains this court's finding, in its June 3 Decision, that the facts known to them should have created a reasonable suspicion that there existed "a significant probability that an adverse claim exist[ed]", giving rise to a duty to make further inquiry when Deutsch sought to establish a line of credit with RBC, RBC Dain's parent company, and that their failure to do so constituted willful blindness to such risk ( see Securities and Exchange Commission v Credit Bancorp, Inc., 279 F Supp 2d 247, 264 [SDNY 2003], aff'd 386 F3d 438 [2d Cir 2004] (hereinafter "SEC").
On December 19, 2006, counsel for the Parklex plaintiffs wrote a letter to Pysno, informing him that the court had denied defendants' motion to quash, enclosing a copy of the court's order, dated December 18, 2006, which also denied plaintiffs' cross motion for an order directing that the proceeds of the sale of the Parklex office building be deposited into an account supervised by the court. On December 22, 2006, RBC Dain, by letter written by Jessica Haukos, a paralegal in RBC Dain's legal department under the supervision of Pysno, responded to the subpoenas duces tecum and produced documents.
A few months later, in the spring of 2007, Deutsch expressed a desire to obtain a line of credit in the name of DB Partners from the Global Private Banking Division of RBC. Kalata testified that Deutsch wanted greater access to the money in the DB Partners accounts, which, according to Kalata, was fully invested in the market at that time and generating a 15-20% return. Kalata further testified that Slevin asked her to analyze whether it would be financially sensible for Deutsch to maintain the money invested with RBC Dain and borrow from RBC at a lower rate through a line of credit. Testimony at the hearing, as well as documents in evidence, establish that RBC Dain, as a brokerage, and though a wholly-owned subsidiary of RBC, is separate from RBC as a banking institution and that Global Private Banking is a division of RBC independent of RBC Dain (now RBCCM).
On May 3, 2007, RBC's Global Private Banking Division ("Global") made the RBC Premier Line of Credit, a demand discretionary line of credit facility marketed to RBC Dain clients, available to DB Partners in the amount of $16 million, which was increased to $17 million on December 19, 2007. In consideration for the extension of credit by RBC, DB Partners entered into a Pledge and Security Agreement, dated May 3, 2007, which created a first priority continuing security interest in favor of RBC in all of the securities and financial assets in the DB Partners accounts at RBC Dain as collateral. A separate agreement, dated May 3, 2007, was also executed among RBC Global, RBC Dain, and DB Partners, called the Pledged Account Agreement (the "Control Agreement"). Section 1.2 of the Control Agreement granted control over the collateral to RBC, the Bank, as defined in the UCC. Thus RBC perfected its security priority over the D B Partners' account and would be entitled to liquidate the assets in satisfaction of its loan unless it could be established that RBC was aware, at the time the line of credit was extended, that the Parklex partners had a pre-existing adverse claim.
This financial product was only initiated and made available to Dain Rauscher clients beginning in 2007.
Kalata testified that, in 2008, she observed a change in the return on the DB Partners' portfolio which made the interest rate that was being paid to RBC on its line of credit unfavorable to the client. Kalata's analysis prompted RBC Dain to advise Deutsch to begin paying back the loan, which he partially did, leaving approximately $1.7 million still outstanding under DB Partners' line of credit at the end of October 2009. The market value of the assets in the D B Partners' account, on November 11, 2009, was $2,080,718.
On April 13, 2009, the court approved a settlement of the Parklex action, pursuant to which, inter alia, Fred Deutsch executed a confession of judgment in the sum of $15,600,000, to be entered upon his failure to make timely payments under the terms of the settlement, or upon the occurrence of other defined events of default. On July 20, 2009, in Supreme Court, New York County, a judgment was entered thereon which has not been fully satisfied.
Petitioner served a restraining notice and information subpoena pursuant to judgment, dated July 30, 2009, on RBCCM, and served a restraining notice and information subpoena pursuant to judgment, dated August 12, 2009, on RBC, restraining the transfer from any accounts at RBC or RBCCM in which Deutsch has an interest. RBCCM and RBC have frozen all accounts that Deutsch controls in compliance with such restraining notices.
On September 29, 2009, petitioner commenced this turnover proceeding against DB Partners, RBC, and RBCCM, by filing its notice of petition and petition, seeking a judgment pursuant to CPLR 5225 (b) directing them to turn over and deliver the entire balance in the accounts held by RBCCM. In its petition, petitioner asserts that by the July 12, 2006 wire transfer of $10,000,000 and the July 14, 2006 wire transfer of $10,035,823.80, the $20,035,823.80 from FAL Associates' account at JP Morgan Chase was transferred into the accounts of DB Partners at RBC Dain in violation of Debtor and Creditor Law § 273-a and are the proceeds of a fraud perpetrated by Deutsch. RBCCM and RBC, have moved to dismiss the action, claiming that they are entitled to the funds in the DB Partners' accounts. RBCCM and RBC further request, pursuant to CPLR 5240, that the court modify the restraining notices against them to permit them to liquidate the collateral to satisfy the debt owed by DB Partners to RBC under its line of credit and the costs of litigation, including attorneys' fees, to which they are entitled under the loan agreements.
DISCUSSION
It is undisputed that the UCC, and the application of the relevant provisions thereof by the federal courts in SEC v Credit Bancorp, Ltd ( 279 F Supp 2d 247 [SDNY 2003], aff'd 386 F3d 438 [2d Cir 2004]), govern this case. UCC 8-510 (a) provides:
"In a case not covered by the priority rules in Article 9 . . . an action based on an adverse claim to a . . . security entitlement, whether framed in conversion, replevin, constructive trust, equitable lien, or other theory, may not be asserted against a person who purchases a security entitlement or an interest therein, from an entitlement holder if the purchaser gives value, does not have notice of the adverse claim, and obtains control."
In its June 3 Decision, this court found that, based upon the definitions in UCC 8-102 , RBC met the requirements of UCC 8-510(a) to the extent that, by extending credit to D B Partners, it had purchased a security entitlement to the property interest of DB Partners with respect to the financial assets held in the securities accounts maintained at RBCCM, the securities intermediary, and had acquired control thereof through the Pledged Account Agreement. The question remained as to whether RBC Bank, as the entitlement holder, had notice of the adverse claim of the Parklex plaintiffs against the financial assets in the DB Partners accounts at the time the loans were made.
UCC 8-105 (a) (2) and (3) provide:
"(a) A person has notice of an adverse claim if:
. . .
(2) the person is aware of facts sufficient to indicate that there is a significant probability that the adverse claim exists and deliberately avoids information that would establish the existence of the adverse claim; or
(3) the person has a duty, imposed by statute or regulation, to investigate whether an adverse claim exists, and the investigation so required would establish the existence of the adverse claim."
Statutory Duty To Investigate
Although petitioner, in examining the various witnesses, attempted to suggest that employees of RBC involved in granting the loans to D B Partners had an inherent statutory duty, irrespective of specific information known to them, to inquire regarding pending litigation against Deutsch, in fact, no authority has been cited for this proposition and the testimony refutes such an obligation where no other information was known that would require such inquiry. Moreover, the evidence clearly establishes that RBC employees did demand information and make further inquiry when presented with any indication of questionable conduct.
In its response to defendants' motion to dismiss, plaintiff claimed that defendants had failed to comply with the obligations imposed upon them by the Bank Secrecy Act, as amended by the USA Patriot Act ( 31 USC §§ 5311 et seq), particularly the duty to establish anti-money laundering (AML) procedures and a customer identification program (CIP) as required under 31 USC § 5318(h). These arguments were cited by this court as a reason for the denial of the motion to dismiss. However, testimony was adduced at the hearing from Brian Hansen, Director of AML for RBC Dain at the time, and Sharon Walker, the Director of Compliance/AML for the Bank at the time, which confirmed the separateness of the Bank from RBC Dain and their independent compliance with the legal obligations of the statute. Both individuals testified that they had implemented separate internal security procedures and did not share information with each other or with other units of their respective employers. Hansen testified that his AML team had fully complied with relevant federal and state requirements, had verified Deutsch's identity and, consistent with the Bank Secrecy Act and the USA Patriot Act ( 31 USC § 5318), had monitored Deutsch's accounts, opening up at least five investigatory inquiries regarding suspect transactions. Hansen further testified that, were his team to detect suspicious activity, it would be required to file a Suspicious Activity Report ("SAR") with the federal government but that the filing of such reports must be held in strict confidence, as required by law, and that his team did not typically share their reports with any other team within RBC Dain or with any team at the Bank, including the AML team there.
The Bank Secrecy Act and the USA Patriot Act are intended to protect the security of the United States and to monitor financial transactions for evidence of criminal activity such as money laundering and tax evasion. ( See US Department of Treasury website at www.fincen.gov/statutes_regs/patriot and www.fincen.gov/statutes_regs/bsa.) The duties thereby imposed on financial businesses are not designed for the benefit of private litigants and failure to comply with the statute does not create a private right of action for third parties. In re Agape Litigation, 681 F Supp2d 352, 360-61 [EDNY 2010].
While Mr. Hansen's testimony, and documents admitted in evidence, establish that in July of 2006, the wire transfer, on June 26, 2006, of $6.1 million into the account of Parklex Associates, followed the very next day by the transfer of $4.6 million into the Collateral Acquisition account, "another newly-opened account of Fred Deutsch's", followed by the 6/30/06 wire transfer of $1 million to Parklex Associates, triggered an inquiry regarding "suspicious" activity (Respondents' Ex. AA), a review of Deutsch's business activities convinced the AML officer at RBC Dain that the transfers, intended for investment, were not suspicious. International transfers from the account of respondent D B Partners on July 26, 2006, and in April, 2007, triggered similar inquiries and were similarly found not to be suspicious based upon Deutsch's wife's professional activities as a designer with an apartment in France. An investigation regarding a series of transfers out of the D B Partners' account between March 16 and May 21, 2007, reflected in RBC Dain's computerized AML records, erroneously noted: "A court document was found in which Fred, his father Arie, and his wife "Penny" Baird were sued and accused of fraud by a company (Parklex Associates) that they purchased and [sic] NY high rise from. The case was ultimately dismissed in favor of the Deutsch's [sic]" (Exhibit AA). The Parklex action was in active litigation at the time and no explanation has been offered for this critical error.
Mr. Hansen testified that none of the concerns raised by Dain's AML unit were shared with RBC's AML unit until December 11, 2008, when the history of the various "potentially suspicious" transactions among Deutsch's several accounts at RBC Dain and with RBC Global was contained in an e-mail sent initially to Bob Lacey at RBC, and then to Sharon Walker, with cc's to AML and compliance officers at both RBC Dain and RBC Global, by Elizabeth Fay Thomas, an AML analyst at RBCCM (Respondent's Ex. GG). Mr. Hansen did, however, admit that RBC Dain had failed to comply with CIP requirements to promptly verify the identity of a new account holder with respect to D B Partners. D B Partners opened its account with RBC Dain on July 6, 2006, but was not screened through RemitPro, a verification service routinely used in the CIP process, until May 22, 2007, when D B Partners failed the verification process. A "remediation" procedure using an IRS TIN (taxpayer identification number) was not conducted until July 21, 2009 (Respondents' Exhibit Z).Mr. Hansen insisted, however, that neither the AML/CIP process required under the Patriot Act, nor any other applicable statute, mandates an inquiry into the source of funds or the tracing of funds in a particular transfer except as to a private banking account with a foreign national which respondents do not offer. Mr. Hansen stated that the financial consultant routinely does inquire into the source of funds at the time an account is opened.
No evidence was adduced, however, to support a finding that RBC failed to comply with any specific statutory requirements and this court is satisfied, from the testimony of Mr. Hansen and Ms. Walker, and corroborating documents in evidence, that plaintiffs have failed to establish a breach of statutory or regulatory duty to investigate that would have revealed an adverse claim. Accordingly, this court finds no basis to infer notice of an adverse claim under UCC 8-105 (a)(3).
Awareness of Facts Indicating a Probability of Adverse Claim
Petitioner contends, however, and this court has recognized, that UCC 8-105 (a)(2) might support a finding that RBC had notice of an adverse claim by virtue of information provided to employees of RBC by employees of RBC Dain. Petitioner further argues that the information known to RBC Dain should be imputed to the Bank. The Official Comment to the statutory provision is most instructive regarding the application of what is known as the "willful blindness" test and appears to have guided the federal courts' analysis in SEC as well. Of particular significance here is the caveat that information known to individuals within an organization who are not involved in a specific transaction, and which is not provided to those conducting the transaction, may not provide the basis to impute notice to the entire organization unless the transmission of such information was deliberately impeded ( SEC, 386 F3d at 448; UCC 8-105 , Comment 4).
Petitioner argues that RBC Dain's knowledge of an adverse claim should be imputed to the Bank because RBC Dain and the Bank worked together to approve the line of credit and are not separate entities. In support of this contention, petitioner asserts that because RBC is the parent company of wholly-owned RBC Dain, RBC Dain is therefore owned by the same shareholders as RBC, every employee involved in the transaction was an employee of RBC subject to the same Code of Conduct, and a key employee, Robert DiDiano, who "wore two hats and fulfilled functions for both entities", testified that there was a "partnership" between RBC Dain and the Bank in marketing RBC's Premier Line of Credit to RBC Dain's clients. The evidence does not, however, support the conclusion that RBC was privy to the information known to the employees of RBC Dain or that such information must be attributed to RBC because of a unity of purpose or common ownership. In fact, to the contrary, the evidence establishes that RBC Global was independent of RBC Dain and performed its own due diligence, making its own evaluation of the risk to the Bank, which was not shared by the brokerage, in extending credit to D B Partners.
There is no dispute that Kalata and Slevin were the financial consultants who advised Deutsch, and Kalata, especially, acted as the "relationship manager" who arranged for the line of credit from RBC Global, which was also to be applied to pay off the margin account at RBC Dain (Petitioner's Ex. 5(b), E-mail of March 9, 2007 from Kalata to Olszowy, the Credit Officer at RBC Global responsible for the D B Partners line of credit). No employee of the Bank had direct contact with Deutsch, but rather, all information was obtained and transmitted by Kalata or Slevin to Global's employees. Kalata testified that, although she was aware of the Parklex subpoenas, she did not provide such information to the RBC Global personnel who were responsible for evaluating whether the line of credit should be extended because she was not asked. Ms. Kalata further testified that, although she was the conduit for all information provided to RBC, she had discretion to withhold information adverse to her client. When the RBC Global Risk Management people demanded explanations for adverse information regarding a tax lien and civil judgment and an affidavit of counsel regarding other possible liens, judgments and litigation, Kalata obtained the information from Deutsch, resisting, on his behalf, the requested affidavit regarding pending litigation.
It is clear from the testimony of the RBC Dain employees that the brokerage, though a wholly-owned subsidiary of RBC, operated independently and in its own interest. This separation is further evidenced by the disclosure and information sharing authorization form signed by Deutsch on May 15, 2007, which explicitly described the separateness of RBC Dain and RBC Global, stating that "RBC Dain Rauscher and Global Private Banking operate as separate entities. RBC Dain Rauscher is a wholly owned subsidiary of Royal Bank of Canada. Global Private Banking is a division of Royal Bank of Canada." Moreover, the authorization form states that the "RBC Premier Line of Credit is a service provided by Global Private Banking and is subject to their terms and conditions, including credit approval. RBC Dain Rauscher does not obtain or review any measure of the client's credit worthiness and does not participate in the decision to grant or deny credit." (Exhibit EE to Petition of 9/29/09) The form was required to authorize RBC Dain to share with RBC Global information relating to Deutsch's accounts at RBC Dain because, as explained by Sharon Walker, "[p]rivacy laws restrict financial institutions from sharing"(Transcript of Hearing at 1521). Petitioner's suggestion that this court impute to the Bank the knowledge actually possessed by its subsidiary RBC Dain and impose a duty to investigate facts not known to the Bank employees merely because RBC Dain, a separate corporation, is a wholly-owned subsidiary that markets the Bank's products to its clients, flies in the face of the well-recognized purpose of incorporation. Rather, the facts known to the Bank's employees must be independently assessed to determine whether such employees were willfully blind to petitioner's adverse claim to the assets in the D B Partners' account.
The willful blindness test of UCC 8-105 (a)(2) is a two prong test. The first prong "turns on whether the person is aware of facts sufficient to indicate that there is a significant probability that an adverse claim exists" (UCC 8-105 , Comment 4; see also S.E.C., 386 F3d at 448). "Whether facts known to a person make the person aware of a significant probability' that an adverse claim exists turns on facts about the world and the conclusions that would be drawn from these facts, taking account of the experience and position of the person in question" (UCC 8-105 , Comment 4). The second prong of the test of UCC 8-105 (a) (2) "turns on whether the person deliberately avoids information' that would establish the existence of the adverse claim" ( id.). "The test is the character of the person's response to the information the person has. The question is whether the person deliberately failed to seek further information because of concern that suspicions would be confirmed "( id.). The willful blindness test applies only to those individuals who worked on the transaction. As this court held in its June 3 Decision, "knowledge may not be imputed throughout an organization under the UCC, and . . . only the knowledge of the specific individuals that conducted the transaction is relevant to establishing whether the organization had notice of an adverse claim" ( The Scher Law Firm v DB Partners I LLC, 27 Misc 3d 1230(A) at *13; see also UCC 8-105 , Comment 4). However, "[a]n organization may also deliberately avoid information' if it acts to preclude or inhibit transmission of pertinent information to those individuals responsible for the conduct of purchase transactions" (UCC 8-105 , Comment 4; see also S.E.C., 386 F3d at 448).
This court previously found, in its June 3 Decision, that RBC Dain, through the Parklex subpoenas, letters and motion papers served upon its attorney, Michael Pysno, had actual notice of an adverse claim against the financial assets of Fred Deutsch held in the various accounts he controlled at RBC Dain. However, evidence at the hearing established that such information was not communicated to the RBC employees who worked on the loan extended to D B Partners. Nor did RBC Dain's AML unit alert RBC's AML staff to the suspicious activity it had observed regarding the transfer of funds in and out of the various brokerage accounts held by companies known to be controlled by Fred Deutsch. Rather, the trial testimony and documents confirm that the Bank employees responsible for conducting due diligence and approving the line of credit were working only for the Bank, separate from RBC Dain. Although Kalata facilitated the transaction as RBC Dain's representative, her role was limited to providing the requested information to Adam Olszowy, a credit officer at RBC Global who was primarily responsible for the diligence preliminary to granting the line of credit to D B Partners. Clearly, the Bank and RBC Dain had very separate roles and different interests in the transaction. RBC Dain wanted to service the needs of their affluent client who had place millions of dollars in the hands of the securities brokers, while the Bank, though desirous of providing credit at a profit, also wanted to be assured of the integrity of its collateral.
In support of their defense to the demand that RBCCM turn over the assets of D B Partners to petitioner instead of the Bank which holds a secured interest thereto, respondents produced nine witnesses employed by the Bank at the time who participated in granting the line of credit. All but Sharon Walker (and Brian Hansen for RBCCM) were called by petitioner. To determine whether the Bank had notice of an adverse claim, this court must assess whether the individuals at the Bank who worked on the transaction, namely Adam Olszowy, Lorraine McKeon, Armen Gemdjian, Zoraya Espaillat, Charles Fletcher, Dave Penn, Robert DiDiano and Regina Lee, were "aware of sufficient facts to indicate a significant probability of an adverse claim" since the "two-part test [of UCC § 8-510(a)(2)] does not impose a duty of inquiry or due diligence absent circumstances giving rise to a reasonable suspicion" ( SEC, 386 F3d at 448). Upon the evidence presented, this court finds that the Bank employees who were directly involved in the transaction did not possess such facts and made reasonable efforts to be assured that no such adverse claims existed. Although, had they been made aware of the information known to RBC Dain, they would be charged with a duty of further inquiry, it is clear that they did not have such information, nor can the Bank be accused of having acted to preclude or inhibit transmission of pertinent information.
Adam Olszowy, the credit officer responsible for conducting diligence, searching for derogatory information, preparing an Electronic Transaction Request (ETR), and ensuring that all the relevant departments within the Bank reviewed the necessary documentation, testified credibly that he had never heard of Parklex and had no reason to connect the Parklex action, which came up on his computer screen as he searched for derogatory information regarding Fred Deutsch, to D B Partners' request for a line of credit. Mr. Olszowy testified that he would like to have known about the Parklex litigation and that such information as was known to RBC Dain should have been conveyed to him. Olszowy commenced his diligence based upon information provided by Linda Kalata, however, Olszowy testified that the information Kalata provided was preliminary and that he and his team at the Bank performed their own diligence, consulted their own internal legal counsel and relied upon their own compliance and risk management departments. An email sent from Olszowy to Kalata on March 21, 2007, responding to Kalata's request for an evaluation of the maximum credit available on the D B Partners' portfolio, is consistent with other emails in expressly advising "[a]pproval is subject to satisfactory completion of due diligence and the credit approval process."(Petitioner's Exhibit 5(I)) Kalata's testimony also corroborated Olszowy's assertion that the Bank, and not RBC Dain, was responsible for conducting the due diligence required to approve the line of credit.
Lorraine McKeon, now the head of credit at the Bank, was a senior credit officer at the time and Olszowy's immediate supervisor. Although not intimately involved in the actual review of documents, she was consulted by Olszowy during the diligence process and was also included on many of the emails Olszowy sent. Ms. McKeon testified that she never learned of the Parklex subpoenas and had no hint of the pending litigation at the time the loans were extended, noting that it would not be in the Bank's interest to ignore such derogatory information.
Olszowy's testimony revealed that, although the Bank was unsuccessful in discovering the Parklex action, it did make a good faith effort to perform due diligence. Bank employees complied with the usual procedure for approving a loan. Olszowy conducted his own diligence, searched for derogatory information on the appropriate websites, obtained approval from the document control unit and compliance department, each of which performed a separate review function, and prepared the ETR to be ultimately reviewed by Group Risk Management. In order to verify the identity of the borrower, consistent with CIP protocol, Olszowy gathered the certificate of formation, the operating agreement, and corporate resolutions for DB Partners from Kalata. He also gathered corporate documents for Management Services, LLC, DB Partners' sole member. A deposit application was prepared for DB Partners and the identity of Deutsch as sole principal was verified by requiring photocopies of his passport photo and driver's license. The application identified the source of funds in the DB Partners accounts as "Business/Employment/Real Estate Proceeds." Information publicly available corroborated to the Bank's satisfaction that Deutsch was a recognized entrepreneur and real estate investor.
Zoraya Espaillat, a document control unit analyst at the time, also verified the identity of the borrower and conducted searches through the Office of Foreign Asset Control ("OFAC") and World Check databases. Armen Gemdjian, a compliance analyst, was responsible for reviewing the derogatory information found by Olszowy, and also conducting her own searches to make sure that, according to her own testimony, the transaction "made sense."
Upon learning of a tax lien and a civil judgment against Deutsch, Olszowy consulted with Group Risk Management as to how best to minimize the risk of the transaction and to resolve or obtain comfort on the derogatory information discovered. On June 5, 2007, Olszowy sent an email to Kalata requesting proof that the liens he had discovered were satisfied, noting "the line of credit has not yet been approved, [and] information regarding the aforementioned items will be required."(Petitioner's Exhibit 13 (A)). Charles Fletcher, at the time a senior manager of Group Risk Management within the Bank, and Dave Penn, the Bank's Director of Risk Management, who later filled in for Fletcher while he was on vacation, advised Olszowy regarding the conditions for loan approval in light of this information. Fletcher initially reviewed the ETR prepared by Olszowy to determine the advisability of extending credit to D B Partners based upon the proffered collateral and was aware of the tax lien and civil judgment that threatened to be a priority claim against the security. Upon review of the explanation for the lien and judgment contained in a communication from Deutsch's lawyer, Fletcher left for a two-week vacation and was succeeded by Penn, who also reviewed the tax lien and civil judgment information and conferred with counsel for the Bank, Regina Lee. Satisfied that the issues were resolved, Penn made no further inquiry. Neither Fletcher, nor Penn, had any knowledge of the Parklex litigation, nor were they specifically concerned about possible litigation since the collateral in the D B Partners account at Dain was deemed sufficient to secure the loan obligation. Regina Lee testified that she had no independent recollection of the D B Partners loan, although she was apparently consulted during the vetting process.
In an email from Olszowy to Kalata sent on June 7, 2007, Olszowy informed Kalata that Group Risk Management within the Bank had provided DB Partners with conditional approval of the line of credit, contingent upon the receipt and satisfactory review of a letter from Deutsch's attorney addressing the federal tax lien and the civil judgment found against Deutsch, as well as a statement that there were no other liens filed or pending against Deutsch, and the submission of annual financial statements on DB Partners going forward. At the end of his email, Olszowy wrote, "[p]lease note that no advances can be made until the Bank receives and approves the aforementioned letter from Deutsch's attorney" (Petitioner's Exhibit 15).
Olszowy received proof that the civil judgment had been satisfied and a letter from Ira Stechel, Deutsch's attorney, stating that the tax liens had been released, attaching copies of an IRS Release of Levy, but Deutsch was unwilling to provide a general letter from his attorney stating that there were no liens filed or pending against him, claiming that an attorney would be unable to make such a statement. Kalata, on Deutsch's behalf, requested that the Bank waive this requirement. On Monday, June 18, 2007 at 1:22 PM, Olszowy sent an email to the Group Risk Management team at the Bank requesting that they waive the requested letter based upon the facts that the Bank had run a Westlaw search on the borrower which had resulted in no negative information, Deutsch had provided proof of satisfaction of the two derogatory items filed against him, internal counsel was attending a Law Group Conference (and apparently was unavailable), Deutsch had handled his personal affairs in a satisfactory manner and had an immediate funding need, and that the existing relationship with RBC Dain had been handled satisfactorily (Respondents' Exhibit O). At 4:00 PM of the same day, Olszowy sent an email, addressed primarily to Kalata and McKeon, but copied to Ronald Slevin and Robert DiDiano, informing that the Bank's Group Risk Management department had refused to approve RBC Dain's request for waiver of the letter from Deutsch's attorney. Kalata replied, requesting an immediate conference call, stating, "[Deutsch] works with many lawyers — how can one speak for all the others? This is ridiculous."(Petitioner's Exhibit 18B) Although the Bank ultimately waived the letter requirement, it did so only after some resistance. The string of emails reflects the tension between RBC Dain and the Bank and their respective business concerns.
Critical to petitioner's argument, that the Bank should be held accountable for the information known to RBC Dain because the two companies form a single entity, is the allegedly dual role played by Robert DiDiano, Head of Credit and Banking Products for the Caribbean and U.S.A. for the Bank, who supervised both McKeon and Olszowy. DiDiano testified that, beginning in 2007, an "alliance" or "partnership" was formed between RBC Wealth Management and RBC Dain to market securities-based lending to the clients of RBC Dain, but that the two entities maintained their separate functions (Transcript of Hearing at 1345). DiDiano explained that the Premier Line of Credit provided to D B Partners was a product of Royal Bank of Canada's Global Private Banking division that would be initially presented to the Financial Advisor at Dain Rauscher, who would then suggest it to his or her client as a financial tool. "It was a bank facility, with separate due diligence, separate bank credit analysis, separate bank underwriting" (Transcript of Hearing at 1335). Only if the Dain Rauscher client found a need for the product, and an application was approved by the Risk Management department of the Bank, would an RBC Dain client become a client of the Bank. The products offered by DiDiano's Global Private Banking team were also made available to other clients of the Bank in the United States, Latin America and around the world (Transcript of Hearing at 1342).
Although he worked with financial consultants at RBC Dain in marketing the Bank's financial facilities, including the Premier Line of Credit secured by assets held in the RBC Dain accounts, Mr. DiDiano was exclusively an employee of the Bank. He received copies of Olszowy's e-mails and participated in the e-mail discussion on June 20-21of Risk Manager Dave Penn's acceptance of Deutsch's attorney's letter regarding the tax lien as resolving the matter, in which Penn states: "while not a condition of funding, we would encourage obtaining a representation and warranty from each of the borrower and Mr. Deutsch that there are no outstanding liens, judgments, or litigation, etc. as recommended by internal counsel" (Petitioner's Exhibit 61). DiDiano was aware of Deutsch's resistance to providing such a representation, but did not find the resistence suspicious and did not interpret Penn's suggestion as a mandatory pre-condition to funding the line of credit. The loan was funded the next day, on June 22, 2007.
Petitioner argues that the failure to insist upon the warranty regarding litigation, or to further investigate when Deutsch resisted supplying it, constituted willful blindness on the part of the Bank. This court finds, however, that the request for the warranty was merely a precautionary suggestion, not based on any particular known facts, and therefore did not give rise to a duty to make further investigation. ( See SEC, 386F3d at 448; 279 F Supp 2d at 264 ("In the absence of suspicious circumstances, the willful blindness test does not impose a duty of inquiry or a due diligence requirement").
Petitioner argues that Olszowy was misled by RBC Dain and turned a blind eye to the risks, against the judgment of Penn, by not obtaining the letter from Deutsch's attorneys stating no outstanding liens, judgments or litigation existed. However, the possibility that RBC Dain may have misled the Bank by not advising its employees of the adverse information in the possession of RBC Dain, or that the Bank may have erred in relaxing its demands, or was careless in conducting its diligence, is insufficient to impute notice of an adverse claim to the Bank. "In the absence of evidence that the parties conducting the . . . transactions either saw or knew of the [Parklex action], notice of an adverse claim cannot be charged to those individuals" ( SEC, 386 F3d at 450, paraphrasing the decision of the District Court at 279 F Supp2d at 268). As the District Court noted in SEC, "[t]o an extent, the U.C.C. also rejects the notion of the collective knowledge' of an organization which might impute knowledge possessed by certain employees through out a corporation" ( 279 F Supp 2d at 265). ( See also, Gutekunst v Continental Insurance Co., 486 F 2d 194, 196[2d Cir 1973](New York rule applied in holding that notice to one bank branch does not constitute constructive notice to any other branch). No evidence was presented to contradict the corroborated testimony that the individuals conducting due diligence for the Bank performed their diligence in good faith, had no knowledge of the Parklex action, and were unaware of any facts sufficient to indicate that there was a substantial probability that the Parklex action represented an adverse claim to the assets of D B Partners. [*15]Thus, notice of an adverse claim, pursuant to UCC 8-105 (a) (1) and (2), cannot be attributed to the Bank.
Deliberate Avoidance / Preclusion or Inhibition
Comment 4 to UCC § 8-105 states: "An organization may also deliberately avoid information' if it acts to preclude or inhibit transmission of pertinent information to those individuals responsible for the conduct of purchase transactions. "Petitioner contends that Kalata not only had notice of the Parklex action through the subpoenas served on RBC Dain and was wilfully blind to the evidence of the adverse claim to all of the assets of Fred Deutsch held in RBC Dain accounts, but also sought to inhibit the transmission of what she knew regarding the Parklex action to the employees of the Bank. Testimony from Kalata, Slevin and Pysno, as well as email correspondence introduced at trial, indicate that all three had actual knowledge of the subpoenas and did not question Deutsch about the Parklex action. Pysno, who testified that he did not know of the proposed D B Partners' line of credit at the time the Bank was conducting its diligence, cannot be responsible for inhibiting the transmission of information, however, the facts may well support a finding that Kalata and Slevin were willfully blind to the significant probability that there existed an adverse claim to the assets of D B Partners held by RBC Dain, and that Kalata inhibited the transmission of relevant information to the Bank, testifying that she didn't mention the Parklex subpoenas because she wasn't asked, even as she pressed for a waiver of Penn's request for a letter warranting that no liens, judgments or litigation was pending against Deutsch.
There is no doubt that Kalata considered Deutsch to be her client and acted on his behalf and in his best interest, even to the detriment of RBC Dain's parent company in failing to alert RBC's employees to the information she had. On October 6, 2006, she wrote an email to Rich Franchella, the New York Branch Director of RBC Dain at the time, noting that their new client, Deutsch, was very upset that RBC Dain's legal department had responded to one of the subpoenas without notifying him or the sales team and had purportedly supplied the wrong account information. According to Kalata's email, Deutch had threatened to take his money out of RBC Dain "just when we got him to sign fee documents for a $7mm investment program!!!" (Petitioner's Exhibit 4). Evidence was introduced of email communication between Deutsch and Kalata from December of 2006, in which Kalata informed Deutsch that she had discussed with Pysno the extent to which the subpoenas would be answered by RBC Dain's legal department. With reference to the information contained in the account statements, Deutsch wrote, "I want less rather than more included" to which Kalata wrote, "I understand your need for less." (Petitioner's Exhibit 38). In light of these communications, which occurred no more than three months before she began the process of securing the line of credit from RBC, Kalata's testimony that she was oblivious to the possible defects in D B Partners' credit-worthiness and made no connection between the Parklex action and D B Partners is not credible. Clearly Kalata was willfully blind to the significant probability of an adverse claim and deliberately avoided information that would confirm such suspicions. In failing to convey relevant information to Olszowy and other Bank employees, she also deprived them of the information of such adverse claim that might well have caused them to make further inquiry. [*16]
However, Ms. Kalata's willful blindness cannot be attributed to the Bank which had no such information. Although petitioner presented evidence that, had the Bank employees charged with performing due diligence asked certain questions or clicked certain website links, they may have acquired knowledge of the pending lawsuit and thus been alerted to the adverse claim, the testimony of every Bank employee involved in approving the transaction established that no one at the Bank had knowledge of the Parklex action or any reason to suspect an adverse claim to the collateral held in the D B Partners' account at RBC Dain. The fact that the Bank relied upon certain, apparently inaccurate, representations made by Kalata in an e-mail to Olszowy on June 5, 2007, in which she responded to a list of questions posed by Olszowy regarding the length of time Deutsch had been known to Slevin and how long Deutsch and D B Partners had been clients of Dain, factors significant to the evaluation by the Bank of the need for greater due diligence, does not suggest any failure of diligence by the Bank since these were facts within the experience of RBC Dain's employees, not susceptible of independent corroboration. Moreover, there is no logical reason for Olszowy to doubt the reliability of such representations. Nor was any evidence presented that the Bank's standard diligence procedures were ineffective or that any Bank employee deliberately suppressed, avoided or disregarded information that should have aroused their suspicions. In fact, the voluminous record before the court establishes that all those at the Bank who contributed to the diligence and approval process freely exchanged and jointly considered the information provided to and discovered by Bank personnel.
The e-mail stated that Slevin had known Deutsch for 20 years and that both Deutsch and D B Partners had been clients for two years (Petitioner's Exhibit 12). In fact, Slevin testified that he had known Deutsch's brother and father a significant amount of time, but had only met Deutsch in late 2005 or early 2006. Furthermore, at the time of Olszowy's email, Deutsch and DB Partners had been clients of RBC Dain for less than a year.
Motion to Reargue and Vacate
In its Motion to Reargue and Vacate this court's June 3 Decision, respondents take issue with certain alleged "findings of fact" that respondents claim were unsupported by the record before the court, insisting that, having moved to dismiss based on the sufficiency of the pleadings, they were unaware of the court's intention to treat petitioner's motion for summary judgment as addressed to the entire complaint. This argument has already been addressed in this decision. In fact, the court advised the parties that, based upon respondents' claims that UCC 8-510(a) required the dismissal of all of petitioner's claims, it did not perceive a legally relevant distinction between that increment of value in the accounts attributable to the loan balance and the remainder claimed by RBC as litigation costs. Thus, the parties were placed on notice of the court's intention to treat petitioner's motion for partial summary judgment as applicable to the entire claim and that respondents' motion to dismiss would similarly be addressed as one for summary judgment. The parties were afforded the opportunity to supplement their submissions and further argument was heard. Moreover, a hearing was ordered to address those very issues of fact which were deemed critical to any findings. As noted, many of the "findings" of which respondents complain regarding the information available to RBC Dain have been corroborated at trial. Where any speculation by the court suggested by the motion papers has been refuted by [*17]the evidence, the "corrected" findings are contained herein. Thus, much of respondents' motion is now moot. The Motion to Reargue and Vacate the earlier June 3 Decision is therefore denied. However, for the purpose of clarification, the court will address some of respondents' concerns.
This court previously found that "[t]he uncontroverted facts demonstrate that RBC Dain had actual knowledge that Fred Deutsch, a named defendant in the Parklex action, as the sole principal of Parklex Associates, was the trustee of the funds described in the June 29, 2006 court order and that funds were transferred out of Parklex Associates' account at RBC Dain and into Collateral Acquisition's account at RBC Dain, also controlled by Fred Deutsch, just two days before the court order was issued"( The Scher Law Firm v DB Partners I LLC, 27 Misc 3d 1230(A) at *8). Clearly, Deutsch, as a fiduciary to Parklex, was possessed of the proceeds of the sale of its sole asset as a trustee. When he transferred those funds, first to FAL's account at Chase, and then to D B Partners' account at RBC Dain, allegedly in contravention of petitioner's rights, he effected a potentially fraudulent conveyance. "Under [New York] state law, assets acquired by fraud are subject to a constructive trust for the benefit of the defrauded party" ( Securities and Exchange Commission v Credit Bancorp, Ltd, 290 F 3d 80, 88 [2d Cir 2002]). D B Partners thus became a constructive trustee of the funds. The court did not intend to suggest that the D B Partners' account was actually a trust account. A review of the allegations spelled out in the motion papers supplied to RBC Dain's counsel Michael Pysno clearly should have alerted an experienced attorney, like Pysno, to the possibility that RBC Dain was in possession of the fraudulently-conveyed funds. However, to the extent that the court held that RBC Dain "had actual knowledge that Fred Deutsch . . .was the trustee of the funds", this finding must be modified. Although the evidence confirmed the court's finding that RBC Dain had actual notice of an adverse claim to assets held in accounts controlled by Fred Deutsch through the subpoenas, court order and Graff Affidavit in Support of the Cross-Motion, as well as the several communications he had with counsel on both sides of the Parklex action, there is no evidence that RBC Dain had actual knowledge of the validity of such allegations and could not, therefore "know" that Deutsch was the trustee of the funds described in the June 29, 2006 order.
Moreover, the evidence at trial confirmed that RBC Dain was not required to research the source of specific funds, and was actually prohibited from sharing client information with other financial institutions. RBC Dain could not, therefore, have verified the source of funds deposited by Deutsch into various RBC Dain accounts, much less have determined whether consideration had been provided for the transfer of those funds from other sources. Accordingly, this court's erroneous statements that "[w]ith a modicum of inquiry, RBC Dain would have learned that no consideration was provided by DB Partners and that the monies were fraudulently conveyed, as defined by Debtor and Creditor Law § 273-a" ( 27 Misc 3d 1230(A) at *10) and "[t]hus, RBC Dain, as custodian of those trust funds, had reason to expect to be held accountable to the plaintiffs in the Parklex action"( Id. at *11) are stricken. Under New York law, a banking institution does not owe a duty of care to the creditors of its depositor who may have been defrauded. ( In re Agape Litigation, 681 F Supp 2d at 360-361; Tzaras v Evergreen International Spot Trading, Inc., 2003 WL 470611, at 7 [SDNY]; Century Business Credit Corp. v North Fork Bank, 246 AD2d 395, 396 [1st Dept 1998]) . Even if a fraudulent conveyance under Debtor and Creditor Law were established, petitioner would not necessarily prevail over the secured interest of the Bank since, analogous to UCC 8-510(a), Debtor and Creditor Law § 278 provides that a [*18]creditor may have a fraudulent conveyance set aside or a levy attached except against "a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser."
CONCLUSION
Because this court finds that RBC did not have notice of an adverse claim against its secured collateral in the DB Partners' accounts or an awareness of facts sufficient to indicate a significant probability of the existence of an adverse claim, respondent RBC's motion to dismiss this turnover proceeding will be granted unless it is determined that the value of the assets in the D B Partners' account or any other asset of Fred Deutsch in the possession of respondents exceeds the sum due to RBC, in which case, petitioner's motion for judgment will be granted to the extent of directing the turnover to petitioner of any excess funds. The restraining notices against any assets of Fred Deutsch held in accounts at RBC or RBC Dain will be modified upon respondents' submission of a current accounting of the value of those assets and an itemization of the sums alleged to be due to RBC from D B Partners. Respondent RBC shall submit an Order on notice, with the required affidavits and documentation attached, within 20 days.
The Motion to Reargue and Vacate is denied.
This constitutes the decision, order, and judgment of the court.