Nisenzon v. Morgan Stanley Dw, Inc.
| Decision Date | 13 March 2008 |
| Docket Number | Civil Action No. 05-5832. |
| Citation | 546 F.Supp.2d 213 |
| Parties | Arkadi NISENZON and Lilia Shukhatian, Plaintiffs v. MORGAN STANLEY DW, INC., Defendant/Third-Party Plaintiff v. Citizens Financial Group, Inc., Citizens Bank of Rhode Island, Citizens Bank of Pennsylvania and Michael Kogan, Third-Party Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Harvey A. Sernovitz, Philadelphia, PA, for Plaintiffs.
Matthew R. Salzwedel, David H. Colvin, Kean K. McDonald, Fox Rothschild, LLP, Philadelphia, PA, for Defendant/Third-Party Plaintiff.
Daniel S. Bernheim, Silverman, Bernheim & Vogel, Philadelphia, PA, for Third-Party Defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiffs, Arkadi Nisenzon and Lilia Shukhatian ("Plaintiffs"), husband and wife, have sued defendant, Morgan Stanley DW, Inc. ("Morgan") for damages alleging breach of contract and violation of 13 Pa. C.S.A. § 4401. Plaintiffs claim that Morgan improperly paid two fraudulently indorsed checks drawn on their account at Morgan and improperly debited $300,000 the aggregate amount of the two checks, from that account. Morgan has denied liability to Plaintiffs and at the same time has asserted a third-party indemnification claim against Citizens Financial Group, Inc., Citizens Bank of Rhode Island, and Citizens Bank of Pennsylvania ("Citizens"),2 claiming that Citizens, as the depositary bank, breached its presentment warranties owed to Morgan and is, therefore, liable to the extent of any liability Morgan may have to Plaintiffs. Citizens asserts that Morgan does not have the benefit of any presentment warranties owed by Citizens under Pennsylvania law because it is not a "bank" under the Pennsylvania version of the Uniform Commercial Code ("UCC") and is not, therefore, subject to that body of law governing this kind of transaction. In the alternative, Citizens argues that it succeeds to any defenses Morgan may have against Plaintiffs and asserts that Plaintiffs are precluded from recovery due to what is generally referred to as the "padded payroll" defense, the "intended payee" defense and their own contributory negligence. Finally, both defendants assert that any recovery for Plaintiffs must be discounted by prior monetary recoveries made by Plaintiffs.
A non-jury trial was held before this Court pursuant to its consent jurisdiction on November 14-15, 2007.3 Upon the preparation of the transcript of the trial proceedings the parties submitted additional post-trial briefings including proposed findings of fact and conclusions of law dealing with the issues pertinent to the case. We now set out our findings, conclusions and order for the entry of judgment.4
1. At the time of the filing of the complaint, Plaintiffs Arkadi Nisenzon and Lilia Shukhatian, husband and wife, were residents of the State of New Jersey. (Joint Trial Stip. 1, 2).
2. Defendant Morgan Stanley DW, Inc. was, until April 1, 2007, a Delaware corporation with its principal place of business in the State of New York. Morgan Stanley DW Inc. merged with Morgan Stanley & Co. Incorporated on April 1, 2007. During the period at issue, the account giving rise to Plaintiffs' claim was held and serviced by the former Morgan Stanley DW Inc., broker-dealer entity, not Morgan Stanley & Co. Incorporated. (Joint Trial Stip. 3).
3. Third-party defendant Citizens Bank of Pennsylvania is a domestic financial institution organized under the laws of Pennsylvania and that maintains its principal place of business in Philadelphia, Pennsylvania. (Joint Trial Stip. 4).
4. Third-party defendant Michael Kogan ("Kogan") is a natural person who currently is incarcerated in the United States Penitentiary-Canaan, 3057 Easton Turnpike, Waymart, PA 18472. (Joint Trial Stip. 5).
5. On or about October 3, 2005, Plaintiffs filed this lawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania, alleging that Morgan was liable for breach of contract and for violating 13 Pa.C.S.A. § 4401. Plaintiffs assert that Morgan paid the two fraudulently indorsed checks and improperly charged Plaintiffs' account in the aggregate amount of the checks's value, which was $300,000. (Joint Trial Stip. 22).
6. On or about November 4, 2005, Morgan timely removed the pending action to this Court and filed a Third Party Complaint against Citizens and Kogan. (Joint Trial Stip. 23).
7. On November 19, 2007, the parties voluntarily consented to the exercise of jurisdiction by a United States Magistrate Judge pursuant to 28 U.S.C. 636(c) and Fed.R.Civ.P. 73. (Doc. 45). The matter was referred to this Court on November 22, 2007. (Doc. 46).
8. Subject matter jurisdiction is proper under 28 U.S.C. Section 1332(a), 28 U.S.C. Section 1367(a), and Federal Rule of Civil Procedure 14. Venue is proper under 28 U.S.C. Section 1391(a) in that a substantial part of the events or omissions giving rise to the parties' claims occurred in this District. (Joint Trial Stip. 24).
9. In or around May 2000, Plaintiffs opened and thereafter, through approximately November 4, 2005, jointly maintained with Morgan an "Active Asset" brokerage account, No. * * * * *7847 (the "Active Asset account") which permitted them to write checks which would be charged by Morgan upon their Active Asset Account. (Joint Trial Stip. 6; Ex. 1).
10. The checks provided to Plaintiffs featured the name "Morgan Stanley Active Assets Account" in the upper left hand corner of the check. (Exs.P-74, C-17).
11. When Plaintiffs opened their account, they signed a Morgan account application in which they acknowledged that they "ha[d] received the Client Account Agreement and agree to abide by its terms as currently in effect or as they maybe amended from time to time." (Exs.C-28, MS-2).
12. An Active Asset account is a multifaceted brokerage account, not a traditional checking or savings account, which Morgan offers to its individual brokerage clients. (Ex. MS-3).
13. In offering such accounts, Morgan has, where appropriate, entered into arrangements with licensed banks and other agents to assist in offering certain check-writing privileges on the accounts. Morgan had such an arrangement in this case with Bank One. Morgan, however, upon final presentation of the checks, had the ultimate authority to pay or decline payment on a particular check. (Exs. MS-3, C-29; N.T. 197, 202, 203, 208-09, 223-Day 2).
14. The Client Account Agreement which Morgan typically enters into with its clients, including these Plaintiffs, provides that "the checking feature is intended to provide clients with easy access to the assets in their accounts; the Active Asset Account is not a bank account." (Exs. MS-3 at 8, C-29).
15. Plaintiffs' Client Account Agreement also provided that: (Exs. MS-3 at 13, C-29).
16. Plaintiffs' Client Account Agreement also provided that: (Exs. MS-3 at 4, C-29).
17. During the time Plaintiffs' account with Morgan remained open, Plaintiffs wrote checks on their account to various payees, which Morgan, upon final presentation through the federal clearinghouse system, debited from Plaintiffs' account in the normal course. (Joint Trial Stip. 7; N.T. 200-03, 208-09 — Day 2).
18. During the time Plaintiffs' account with Morgan remained open, they received monthly account statements showing the trading activity on their account as well as any deposits or withdrawals made by them from their account using the checks provided to them by Morgan. (Exs.P-4, 18).
19. On or about July 21, 2000, third-party defendant Michael Kogan established, in the name of his company, Kogan & Company, Inc., a business checking account with Mellon Bank (n/k/a third-party defendant Citizens Bank). The account number provided was 610165-321-1. (Exs.MS-1, C-32, P-28).
20. During 2002, Plaintiff Arkadi Nisenzon utilized Kogan as an investment advisor. Kogan represented himself to be a highly successful day trader associated with a broker dealer known as Penn Financial Group ("Penn Financial"), in Jenkintown, Pennsylvania. (Joint Trial Stip. 8).
21. Upon Nisenzon's initial introduction to Kogan and Penn Financial, Kogan introduced himself as the president and owner of Penn Financial but explained at that same time that Eric Laucius was, in fact, falsely held out to hold those positions. (N.T. at 132-37 — Day 1).
22. Nisenzon did no investigation into the background of Kogan or Penn Financial. Rather, he relied exclusively on the referral to Kogan from his Morgan broker, Ilana Margolin. (N.T. at 126-28, 130-31, 140-42 — Day 1).
23. Although initially referred to Kogan because of his personal financial losses as a day trader, Nisenzon did not invest his own money, but rather invested $270,000 of his father-in-law's money with Kogan. In light of the significant returns reflected on fraudulent statements issued by Penn Financial, Nisenzon decided to invest some of his own funds with Kogan. (N.T. at 142-44, 149-50, 155-61, 168-70, 177-79, 181 — Day 1).
24. Nisenzon invested his own funds despite the fact that: trade statements for his father-in-law's account reflected unusually high rates of return (approximately 130%), with most individual trades earning a profit; the trade statements frequently failed to list "debit" and "credit" totals and contained certain other inconsistencies; he was provided with no receipts or confirmation tickets for...
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