Opinion
INDEX NO. 655851/2016
06-25-2018
FRANK M. WEISER and FRANK M . WEISER, M.D., P.C. Plaintiff v. CITIGROUP, INC., CITIBANK, N.A., CITI PRIVATE BANK, CITI CARDS, CITICORP CREDIT SERVICES, INC. (USA), SUSANNE STROWS, ROSS PERRY, HECHT & ASSOCIATES, LLP, and ROSS D. PERRY CPA, P.C. Defendant.
NYSCEF DOC. NO. 138 DECISION AND ORDER MOT SEQ 005, 006 NANCY M. BANNON, J.:
I. INTRODUCTION
This is an action to recover damages, inter alia, for breach of contract, negligence, conversion, and fraud, arising from the alleged embezzlement of funds by the defendant Susanne Strows from the personal checking account of the plaintiff Frank M. Weiser and the business checking account of the plaintiff Frank M. Weiser, M.D., P.C. (the PC).
Strows, who served as the PC's bookkeeper, moved (SEQ 004) pursuant to CPLR 3211(a) to dismiss certain causes of action against her. By stipulation dated May 10, 2018, the plaintiffs settled their claims against Strows. Her motion was therefore deemed withdrawn in a separate order of this court, also dated June 25, 2018.
The defendant Ross Perry moves (SEQ 005) pursuant to CPLR 3211(a)(7) to dismiss the complaint against him for failure to state a cause of action.
The defendants Citibank, N.A., and Citi Private Bank (together the Citibank defendants), and the defendants Citigroup, Inc. (Citigroup), Citicorp Credit Services, Inc., (USA) (CCSI), and Citi Cards (collectively the Citicard defendants) jointly move (SEQ 006) pursuant to CPLR 3211(a)(1), (3), (5), and (7) to dismiss the complaint against them based on documentary evidence, Frank M. Weiser's lack of standing, the plaintiffs' failure to timely comply with a statutory condition precedent, and for failure to state a cause of action.
Perry's motion (MOT SEQ 005)is denied. The motion of the Citibank and Citicard defendants' (MOT SEQ 006) is granted.
II. BACKGROUND
Three prior motions to dismiss the first amended complaint (MOT SEQ 001, 002, 003) were withdrawn. The instant motions concern the second amended complaint. In their second amended complaint, the plaintiffs allege as follows:
Weiser is a physician and the principal of the PC, which owns and operates a medical practice. Strows served as bookkeeper of the PC for several years, and was a friend of Weiser's family. Weiser, in his capacity as principal of the PC, reposed trust in and relied upon Strows to faithfully manage the PC's books, records, and accounts, and relied on her representations that the credits and debits to the PC's bank accounts were properly made only with respect to the PC's actual obligations and receivables.
Beginning in 2009, without the plaintiffs' permission or knowledge, Strows drafted a total of 132 checks on the PC's business checking account and Weiser's personal checking account, both of which were maintained with the Citibank defendants, and made them payable to her personal creditors, including Citigroup and CCSI, which respectively issued her credit card and managed her credit card account. Strows concealed this conduct from them by representing to Weiser that the checks were to pay legitimate debts of the PC, as well by making entries on the checks after Weiser signed them, referencing her personal credit card and utility accounts, and concealing the true purpose of the payments in the plaintiffs' books and records.
Between 2009 and February 5, 2016, Strows embezzled the sum of $505,558.88 from the PC's bank account, primarily to pay down the balance on her Citicard credit card, and wrongfully drafted checks in the sum of $19,358.65 from Weiser's personal checking account to cover her utility bills, for a total of $524,917.53. The plaintiffs did not learn of the misappropriated funds until February 5, 2016, when the Citibank defendants alerted Weiser of Strows's wrongdoing.
Ross Perry and his accounting practice, Ross D. Perry CPA, P.C. (together the Perry defendants), as well as the defendant Hecht & Associates, LLP (Hecht), provided accounting, auditing, and oversight services to the PC from 2009 to 2016. "Perry, who was responsible for monitoring and auditing finances relating to Dr. Weiser's professional and personal accounts and who regularly interacted with Strows . . . took no steps to detect or prevent Strows' theft or notify Dr. Weiser of Strows' malfeasance." (emphasis added). Perry routinely interacted with Strows and used worksheets and ledgers she prepared as part of his rendering of agreed-upon accounting and tax preparation services to the plaintiffs, but "Perry . . . failed to discover Strows' multiple and repeated defalcations and . . . failed to alert Dr. Weiser at any time to the fraud."
Perry allegedly deviated from good accounting practice, in that he failed to detect or notify the plaintiffs of the extensive and repeated misappropriation of the plaintiffs' funds by Strows, that proceeds of checks intended for deposit in the PC's account were in fact never deposited, and that checks used to pay the utility bills of Strows were paid to a service that was not maintained by or related to either of the plaintiffs. He also allegedly deviated from good practice in that he prepared incorrect tax returns, and failed to detect or notify the plaintiffs of inaccuracies and inconsistencies in the plaintiffs' financial documents, including worksheets and ledgers prepared by Strows.
The plaintiffs allege that, as a direct and proximate result of Perry's deviations from good practice in auditing the plaintiffs' books and records and overseeing Strows's activities, the ongoing fraud committed by Strows was permitted to continue unabated, the plaintiffs sustained direct losses arising therefrom, and the plaintiffs incurred expenses in connection with re-reviewing the accounting work that Perry undertook during the time that the thefts were ongoing.
The plaintiffs assert that the Citibank defendants knew or should have known that the subject checks were misappropriated. On July 29, 2016, Weiser provided an itemized list of each and every check allegedly constituting a theft from the PC's business account and his own personal account. The plaintiffs claim that the Citicard defendants received a benefit that they should not have when they accepted payments from the PC's account to pay down Strows's credit card debt.
The plaintiffs assert causes of action against the Citibank defendants to recover for breach of contract (first cause of action), negligence (second cause of action), and violation of UCC 4-401 for the improper honoring of checks and drafts (third cause of action). The plaintiffs assert causes of action against the Citicard defendants to recover for money had and received (fourth cause of action) and conversion (fifth cause of action). They also assert causes of action against Strows to recover for fraud (sixth cause of action), conversion (seventh cause of action), money had and received (eighth cause of action), and unjust enrichment (ninth cause of action), and a professional malpractice cause of action against Hecht and the Perry defendants (tenth cause of action).
III. DISCUSSION
A. MOTION BY ROSS PERRY (SEQ 005)
When assessing the adequacy of a pleading in the context of a motion to dismiss under CPLR 3211(a)(7), the court's role is "to determine whether [the] pleadings state a cause of action." 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 151-152 (2002). To determine whether a claim adequately states a cause of action, the court must "liberally construe" it, accept the facts alleged in it as true, accord it "the benefit of every possible favorable inference" (id. at 152; see Romanello v Intesa Sanpaolo, S.p.A., 22 NY3d 881 [2013]; Simkin v Blank, 19 NY3d 46 [2012]), and determine only whether the facts, as alleged, fit within any cognizable legal theory. See Hurrell-Harring v State of New York, 15 NY3d 8 (2010); Leon v Martinez, 84 NY2d 83 (1994); Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267 (1st Dept. 2004); CPLR 3026. "The motion must be denied if from the pleading's four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." 511 W. 232nd Owners Corp. v Jennifer Realty Co., supra, at 152 (internal quotation marks omitted); see Leon v Martinez, supra; Guggenheimer v Ginzburg, 43 NY2d 268 (1977).
Where, as here, the court considers evidentiary material beyond the complaint, the criterion becomes "whether the proponent of the pleading has a cause of action, not whether he [or she] has stated one" (Guggenheimer v Ginzburg, supra, at 275), but dismissal will not eventuate unless it is "shown that a material fact as claimed by the pleader to be one is not a fact at all" and that "no significant dispute exists regarding it." Id.
Accounting malpractice "contemplates a failure to exercise due care and proof of a material deviation from the recognized and accepted professional standards for accountants and auditors, . . . which proximately causes damage to plaintiff." Town of Kinderhook v Vona, 136 AD3d 1202, 1204 (3rd Dept. 2016); see D.D. Hamilton Textiles, Inc. v Estate of Mate, 269 AD2d 214 (1st Dept. 2000); Herbert H. Post & Co. v Sidney Bitterman, Inc., 219 AD2d 214 (1st Dept. 1996)
Perry moves to dismiss the second amended complaint against him on the ground that the one cause of action asserted against him, alleging professional malpractice, fails to state a cause of action. In his affidavit, Perry does not assert that he did not deviate from accepted accounting standards, or that any such deviation was not a proximate cause of the plaintiffs' alleged losses. Rather, he asserts only that he was not expressly retained by the plaintiffs, in writing or otherwise, that he only participated in the preparation and corporate and personal tax returns based upon cash disbursement sheets prepared by Strows, and that he was in no way involved any auditing or compilation services for the plaintiffs. Perry thus avers that he had no occasion or obligation to review checks, bank statements, or any other documents that might have suggested malfeasance on the part of Strows. Perry's attorney, in his affirmation, limits the basis for dismissal to the ground that "case law in the State of New York is uniform to the effect that an accountant in the position of Mr. Perry has no legal liability for such transactions or for any damages as claimed by the plaintiff[s] in this matter."
Where documentary evidence establishes that an accountant was not obligated to undertake a "review" or an "audit," but was only to provide less intensive services, such as compiling financial records or preparing annual tax returns, an accountant cannot be held liable for malpractice in failing to detect the misconduct of the client's bookkeeper. See Italia Imports v Weisberg & Lesk, 220 AD2d 226 (1st Dept. 1995). Here, however, Perry has admitted that there was no such written agreement limiting the scope of his duties as an accountant.
Although Perry asserts in his affidavit that he was not retained to, and in fact did not, provide auditing services to the plaintiffs, the plaintiffs' pleading clearly asserted that he was retained for that purpose. Moreover, the allegations in the second amended complaint, as set forth above in detail, clearly set forth facts sufficient to place Perry on notice that, in providing oversight and auditing services, he deviated from good accounting practice in failing to review cancelled checks or fully review bank account records, and that said deviation proximately prevented the plaintiffs from stanching the loss of funds occasioned by Strows's misconduct.
Moreover, in his answering affidavit, Weiser asserts that Perry and Strows were in touch with each other on a monthly basis, that he had numerous discussions with Perry to ensure that Strows provided him with all financial documents, including ledgers, employees' records, and bank records, and that his understanding that Perry's review of Strows's work "was a part of the services which Perry and I had agreed would be performed on my behalf." As Weiser explained it, Perry was his accountant for almost 35 years, and he placed trust in him. Weiser avers that he had spoken with Perry at least once per month over the relevant time period, and that, in these conversations, he made it clear that he expected Perry to obtain all necessary documentation from Strows so as to ensure that all tax obligations were complied with, all appropriate deductions were identified, and any financial improprieties were discovered and reported. As an example, Weiser states that Strows's thefts in 2014 alone represented 8% of the PC's total annual revenue, and that Perry should, in the exercise of good accounting practice, have identified the nature of those payments and whether they constituted an expense or a loss for tax purposes.
Perry has not shown on this motion that the allegation that he was retained and obligated to perform auditing and oversight services is not a fact at all, and there is certainly a significant dispute regarding that claim. The allegations as to deviation and proximate cause are thus sufficient to state a cause of action. See Symbol Tech., Inc. v Deloitte & Touche, LLP, 69 AD3d 191 (2nd Dept. 2009). The court expresses no opinion as to the ultimate merit of this claim against Perry, only that it would be inappropriate to dismiss it at the pleading stage based on the submissions before the court.
Further, as stated above, the court must determine whether the facts alleged fit any cognizable legal theory. Here, the plaintiffs' allegations against Perry are also sufficient, for pleading purposes, to support a cause of action for breach of contract, in that they also allege that Perry did not fully perform the services for which he was retained and paid.
Consequently, Perry's motion to dismiss the second amended complaint against him must be denied. B. THE MOTION OF THE CITIBANK AND CITICARD DEFENDANTS (SEQ 006)
1. Failure to State a Cause of Action
(a) Claims Against Citi Private Bank and Citi Cards
The Citibank and Citicard defendants have established that Citi Private Bank is a division of Citibank, N.A., while Citi Cards is simply a brand name used by CCSI, and that both Citi Private Bank and Citi Cards are not separately incorporated entities. An unincorporated division of a corporation is not a jural entity amenable to suit in its own right. See Sheldon v Kimberly-Clark Corp., 111 AD2d 912 (2nd Dept. 1985); see generally M.I.F. Secs. Co. v R. C. Stamm & Co., 94 AD2d 211 (1st Dept. 1983); Logistics Indus. Corp. v Wacks, 44 AD2d 800 (1st Dept. 1974). Nor is a trademarked brand name that is not independently incorporated amenable to suit. See Holtzman v KTB Athletics SB TM, 113 AD3d 656 (2nd Dept. 2014). Hence, Citi Private Bank and Citi Cards are not real parties in interest, no causes of action may be asserted against them, and the complaint must thus be dismissed as against them.
(b) Claims Against Citibank, N.A.
Citibank, N.A., correctly contends that UCC 3-405(1)(c), known as the "fictitious payee" or "padded payroll" rule, precludes recovery on a claim alleging wrongful payment of unauthorized checks under UCC 4-401 , et seq., against both a drawee and depositary bank where, as here, an employee "starts the wheels of normal business procedure in motion to produce a check for a non-authorized transaction." Prudential-Bache Sec., Inc. v. Citibank, N.A., 73 NY2d 263, 271 (1989). It further correctly argues that the UCC bars an employer's common-law causes of action against drawee and depositary banks, such as the claims asserted here against it by the plaintiffs to recover for breach of contract and negligence. See id.; Merrill Lynch, Pierce, Fenner & Smith, Inc. v Chemical Bank, 57 NY2d 439 (1982); Touro College v Bank Leumi Trust Co., 186 AD2d 425 (1st Dept. 1992); Calisch Assocs. v Manufacturers Hanover Trust Co., 151 AD2d 446 (1st Dept. 1989); Retail Shoe Health Com. v Manufacturers Hanover Trust Co., 160 AD2d 47 (1st Dept. 1990).
UCC 3-405(1)(c) provides that "[a]n indorsement by any person in the name of the named payee is effective if . . . an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest."
"[W]here the drawer's agent or employee prepares the check for signature or otherwise furnishes the
signing officer with the name of the payee[,] [t]he principle followed is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee. The reasons are that the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees[.]UCC 3-405 , Official Comment ¶ 4; see Guardian Life Ins. Co. v. Chemical Bank, 94 NY2d 418 (2000); Prudential-Bache Sec., Inc. v Citibank, N.A., supra. "[T]here can be little doubt but that the outcome, so far as the adoption of section 3-405 of the Uniform Commercial Code is concerned, was calculated to shift the balance in favor of the bank in situations in which the drawer's own employee has perpetrated the fraud or committed the crime giving rise to the loss." Merrill Lynch, Pierce, Fenner & Smith, Inc. v Chemical Bank, supra, at 445.
Since any loss claimed by the plaintiffs here was concededly caused primarily by Strows's alleged misconduct, Citibank, N.A., as the drawee bank, cannot be held liable for failing to detect Strows's purported fraud and conversion, since the plaintiffs were in a better position to prevent the loss by "by supervising [their] employee[ ] . . . and examining records relating to a fraud that had been in progress for . . . years." Prudential-Bache Sec., Inc. v Citibank, N.A., supra, at 271; see Touro College v Bank Leumi Trust Co., supra.
There is no merit to the plaintiffs' contention that Citibank, N.A., owed an additional duty to inquire into the validity of checks made payable to Citigroup or CCSI, which are corporate entities independent of Citibank, N.A. Thus, any additional duty of inquiry imposed upon a bank "receiving checks payable to itself" (Arrow Builders Supply Corp. v Royal Natl. Bank, 21 NY2d 428, 431 [1968]) is not implicated here.
In addition, UCC 4-103(3) provides that, "in the absence of special instructions, action or non-action consistent with clearing house rules and the like or with a general banking usage not disapproved by this Article, prima facie constitutes the exercise of ordinary care." See Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d 340 (1989). Since the plaintiffs have neither alleged that they provided Citibank, N.A., with special instructions, nor that Citibank, N.A. deviated from applicable check clearing house rules, they have not, in any event, stated a cause of action against Citibank, N.A., based on breach of ordinary care in the processing of the subject checks.
Consequently, the complaint fails to state a cause of action against Citibank, N.A., and must be dismissed as against it.
(c) Claims Against Citigroup, Inc., and Citcorp Credit Services, Inc. (USA)
The plaintiffs assert that, inasmuch as Citigroup and CCSI were neither drawee banks nor depositary banks, but simply the payees of the majority of the allegedly unauthorized checks, they cannot avail themselves of the defenses provided by UCC 3-405(1) (c), which they argue are available only to such banks. They further allege that, by accepting checks in payment of Strows's personal credit card balance, Citigroup and CCSI converted the PC's property and is liable for money had and received.
However,
"Nothing in UCC 3-405 limits the protection of the fictitious payee rule to banks. Comment 4 to UCC 3-405 indicates that the rule was intended to protect all holders of negotiable instruments: 'The principle followed [in UCC 3-405 ] is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee.' Equally significant is that the Code itself does not distinguish between bank and nonbank holders."Getty Petroleum Corp. v American Express Travel Related Servs. Co., 90 NY2d 322, 328 (1997).
In Getty, the plaintiff's bookkeeper altered numerous checks to make them payable American Express, which accepted the checks and credited them to her American Express credit card account. In reversing a determination holding American Express liable to the bookkeeper's employer for gross negligence, the Court of Appeals held that the "fictitious payee" or "padded payroll" rule applies to immunize nonbank payees such as American Express from liability for accepting forged or misappropriated checks. The Court explained that "a transferee's lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under section 3-405." Id at 331.
"Rather, there is a 'commercial bad faith' exception to UCC 3-405 , applicable when the transferee 'acts dishonestly--where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme."Id., quoting Prudential- Bache Sec. v Citibank, supra, at 275. Here, the second amended complaint does not allege sufficiently specific facts describing how, Citigroup or CCSI aided and abetted Strows's fraud and wrongdoing, as opposed to unknowingly receiving a benefit therefrom.
As with Citibank, N.A., the applicability of UCC 3-405 defeats the plaintiffs' common-law causes of action asserted against Citigroup and CCSI.
2. Timeliness of Claims
The causes of action against the Citibank defendants are time-barred in any event.
UCC 4-406(1) provides that
"When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof."UCC 4-406(4) provides that
"Without regard to care or lack of care of either the customer or the bank a customer who does not
within one year from the time the statement and items are made available to the customer (subsection (1)) discover and report his unauthorized signature or any alteration on the face or back of the item or does not within three years from that time discover and report any unauthorized indorsement is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration."A deposit account agreement that shortens the period for complying with this condition precedent is enforceable. See Gluck v JPMorgan Chase Bank, 12 AD3d 305 (1st Dept. 2004); Josephs v Bank of N.Y., 302 AD2d 318 (1st Dept. 2003). Here, the Citibank defendants submit a deposit account agreement, showing that the parties agreed in writing to shorten that period to 30 days after the plaintiffs received his monthly account statements. See Josephs v Bank of N.Y., supra (enforcing 30-day period).
The plaintiffs allege that, after Weiser signed the subject checks, Strows altered the face of the checks by inscribing the account numbers of her credit card and utility providers on the memo line, in order to permit the recipients to credit her personal accounts accordingly. The Citibank defendants establish, with documentary evidence, that, every 30 days from 2009 through February 2016, they provided monthly statements of account to the plaintiffs in connection with both the PC account and Weiser's personal account, along with copies of all cancelled checks showing the alterations'. The plaintiffs admit that they did not notify the Citibank defendants of the alleged alterations until July 26, 2016. Since all of the alleged alterations and misappropriations of checks occurred no later than February 5, 2016, the plaintiffs failed to satisfy the condition precedent of timely notification as to all of the subject checks, and the complaint must be dismissed as against the Citibank and Citicard defendants on that ground as well.
Contrary to the plaintiffs' contention, there is no basis upon which the Citibank or Citicard defendants may be equitably estopped from asserting that the claims against it are time-barred, since there are no allegations in the second amended complaint that they concealed information from the plaintiffs that would have permitted the plaintiffs to otherwise timely assert any cause of action. Rather, the only allegations are that they failed to detect that the subject checks were being used to pay Strows's personal credit card account, instead of for legitimate business purposes.
3. Lack of Standing
As a general rule, "'an individual shareholder cannot secure a personal recovery for an alleged wrong done to a corporation.'" MatlinPatterson ATA Holdings, LLC v Federal Express Corp., 87 AD3d 836, 839 (1st Dept. 2011), quoting New Castle Siding Co. v Wolfson, 97 AD2d 501, 502 (2nd Dept. 1983), affd, 63 NY2d 782 (1984). The fact that an individual closely affiliated with a corporation, even a sole shareholder, is incidentally injured by an injury to the corporation does not confer on the injured individual standing to sue on the basis of either that indirect injury or the direct injury to the corporation. See New Castle Siding Co. v Wolfson, supra.
The Citibank and Citicard defendants correctly contend that Weiser, in his individual capacity, lacks standing to assert a cause of action to recover from any of them for losses sustained by the PC. Hence, to the extent that Weiser seeks to recover against those defendants for the $505,558.88 loss allegedly sustained by the PC, his claims must be dismissed. Regardless of whether Weiser would have had standing to seek recovery from Citibank, N.A., of the $19,358.65 in checks allegedly misappropriated from his personal checking account, he lacks standing in his individual capacity to recover from the Citibank or Citicard defendants for losses to his individual account, since those checks were only paid to and accepted by Strows's utility providers, and not paid to or accepted by Citigroup or CCSI.
IV. CONCLUSION
In light of the foregoing, it is
ORDERED that the motion of the defendant Ross Perry (SEQ 005) to dismiss the second amended complaint as against him is denied; and it is further,
ORDERED that the motion of the defendants Citibank, N.A., Citi Private Bank, Citicorp Credit Services, Inc., (USA), and Citi Cards (SEQ 006) to dismiss the second amended complaint as against them is granted, and the second amended complaint is dismissed as against those defendants; and it is further,
ORDERED that defendant Ross Perry shall serve and file an answer to the second amended complaint within 10 days after service upon him of this decision and order with notice of entry (see CPLR 3211[f]); and it is further,
ORDERED that all remaining parties shall appear for a preliminary conference on September 6, 2018, at 2:30 p.m.
This constitutes the Decision and Order of the court. Dated: June 25, 2018
ENTER: /s/_________
J.S.C.