Markatos v. Citibank, N.A

Background

Louis Markatos sued Citibank, N.A. over seven electronic wire transfers totaling $1,511,700. According to the complaint, internet fraudsters posed as Apple support personnel, Charles Schwab officials, and Federal Reserve officials. They persuaded Markatos to move funds into his Citibank savings account and then wire the money to alleged safe accounts at two banks in Hong Kong. Markatos made the transfers in person at a Citibank branch over 23 days.

Markatos alleged that the transfers showed suspicious activity and that Citibank should have detected, questioned, investigated, or stopped them. He brought one claim for breach of contract, relying on a Client Manual stating that Citibank owed him a duty of ordinary care.

The Client Manual also stated that Citibank would use a security procedure to verify the source of a transfer instruction, but that the procedure was not designed to detect errors in the instruction’s content or prevent duplicate transfers. It assigned responsibility to the customer for losses resulting from incorrect beneficiary information and stated that Citibank’s internal policies would not create a higher standard of care than otherwise applied. The court also considered a Wire Transfer Agreement that it found governed the transfers.

Citibank’s Motion

Citibank moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally valid claim. Citibank argued that Article 4-A of New York’s Uniform Commercial Code provides the exclusive rules for the type of electronic transfers at issue. It also argued that Markatos had not adequately alleged a breach and that the written agreements defeated his claim.

Court’s Analysis

The court held that Article 4-A preempted Markatos’s contract claim. Article 4-A governs electronic funds transfers and assigns rights, duties, and responsibility for losses through detailed rules. The court explained that Markatos’s claim was based on Citibank’s alleged failure to use additional security measures, investigate the transfers, or freeze the account. In the court’s view, those allegations challenged how Citibank processed the authorized transfers and therefore concerned matters governed by Article 4-A.

The court rejected Markatos’s argument that Article 4-A did not apply because the transfers were authorized. It reasoned that imposing common-law or contract liability on a bank for processing a transfer that the customer authorized—even when a third party fraudulently induced that authorization—would conflict with Article 4-A’s allocation of responsibility. The court therefore concluded that the claim was preempted and had to be dismissed.

The court separately ruled that the claim would fail even if it were not preempted. It found no dispute that a contract existed and that Markatos had performed his obligations. But the court concluded that Markatos’s allegation that Citibank breached its duty of ordinary care was a legal conclusion rather than sufficient supporting facts. Markatos did not allege that Citibank failed to follow the security procedure described in the Client Manual. Instead, he alleged that Citibank failed to use other industry practices and internal controls that the Manual did not require.

The court also rejected Citibank’s argument that the Wire Transfer Agreement’s indemnity provision independently barred Markatos’s claim. It stated that the provision did not clearly apply to claims between the contracting parties themselves and therefore applied only to third-party claims.

Disposition

The court granted Citibank’s motion and dismissed the complaint without prejudice because this was the first adjudication of Markatos’s claim on the merits. Markatos was given 30 days from the date of the opinion to file an amended complaint addressing the identified deficiencies. The court stated that any amended complaint must replace the original complaint and include all claims, defendants, and factual allegations Markatos wanted considered. If he did not timely amend, the dismissed claims may be dismissed with prejudice. The clerk was directed to terminate the pending motion.