Lesser v. TD Bank, N.A.

Background

Joseph S. Lesser and Loeb Partners Realty LLC sued TD Bank, N.A., Capital One, N.A., and unidentified Doe Banks. They alleged that former employee Thomas Kennedy intercepted and misappropriated two categories of checks: “inbound checks” made payable to the plaintiffs and “outbound checks” written by Lesser and payable to third parties. Kennedy allegedly endorsed the checks with his own signature and deposited them into accounts at the defendant banks. The complaint alleged that the banks honored at least $120,870.20 in checks and did not notify the plaintiffs of suspicious activity.

The plaintiffs asserted negligence, conversion, and claims under New York Uniform Commercial Code section 3-419. TD and Capital One separately moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint plausibly states a legal claim. Magistrate Judge Gabriel W. Gorenstein recommended granting Capital One’s motion without prejudice; denying TD’s motion as to the section 3-419 and conversion claims based on inbound checks; and granting TD’s motion as to negligence. The parties objected to parts of that recommendation.

Court’s Analysis

The court reviewed the objections and adopted the report and recommendation in full.

Claims against Capital One

The existing complaint tied Capital One only to outbound checks. Under the common-law rule discussed in the opinion, a check drawer generally cannot sue a depositary bank directly for collecting an improperly endorsed check; the drawer’s remedy is against the drawee bank. Because the complaint alleged that Capital One was involved only with outbound checks, the court granted Capital One’s motion and dismissed the claims against it without prejudice.

The plaintiffs had cited documents suggesting that three inbound checks may have been drawn on accounts at Capital One, but those allegations were not properly part of the existing complaint, and the court declined to take judicial notice of the documents. The court granted the plaintiffs leave to amend their complaint to add allegations concerning those three checks. It stated that any amendment concerning outbound checks would be futile, while Capital One could argue in a future motion that the plaintiffs had ratified its conduct regarding the inbound checks.

Claims against TD

The court denied TD’s motion as to the section 3-419 and common-law conversion claims based on inbound checks. The complaint plausibly alleged that Kennedy was an employee of Loeb Realty who handled mail containing checks payable to both Loeb Realty and Lesser. Drawing reasonable inferences for the plaintiffs, the court held that the allegations were sufficient at the pleading stage to show that Kennedy could have acted as an agent for the plaintiffs when he took possession of the checks. That made the plaintiffs’ status as the checks’ “true owners” sufficiently plausible for purposes of section 3-419.

The court also held that the complaint plausibly alleged that TD failed to act according to reasonable commercial standards. The complaint alleged that Kennedy deposited checks payable to the plaintiffs while endorsing them in his own name. The court noted that New York courts have generally treated a depositary bank’s acceptance of a check endorsed by someone other than the named payee as commercially unreasonable. TD’s reliance on automated banking procedures did not establish reasonableness on a motion to dismiss because the complaint did not require the court to assume that TD’s procedures were reasonable or standard in the industry.

The court rejected TD’s argument that section 3-419 required an express allegation of a forged endorsement. It held that New York law imposes liability when a bank pays a check over a forged endorsement or negotiates a check improperly, so a specific allegation of forgery was not required.

The court also allowed the common-law conversion claim based on inbound checks to remain. It explained that section 3-419 has the attributes of common-law conversion and that a properly pleaded section 3-419 claim also sufficiently pleads common-law conversion. The common-law claim could not be used to evade limits imposed by the Uniform Commercial Code, but TD had not shown that the claim should be dismissed where the section 3-419 claim itself was adequately pleaded.

The court granted TD’s motion as to the negligence claim. It held that the negligence claim was duplicative of and precluded by the section 3-419 and conversion claims. The court also rejected the plaintiffs’ theory that Lesser’s unrelated TD accounts created a separate duty requiring TD to prevent Kennedy’s conduct involving another customer’s account. The court stated that it need not resolve that duty question because the negligence claim would still be precluded.

Disposition

The court adopted Judge Gorenstein’s report and recommendation in full. It granted Capital One’s motion, dismissing the claims against Capital One without prejudice. It denied TD’s motion with respect to the plaintiffs’ section 3-419 and conversion claims based on inbound checks, and granted TD’s motion as to the negligence claim. The opinion also states that the plaintiffs could amend their complaint to add allegations concerning three inbound checks drawn on Capital One accounts.