Old Republic Nat. Title Ins. v. Bank of East Asia

• Decision Date: 17 October 2003
• Docket Number: No. CIV.A.3:01 CV 1772(SRU).,CIV.A.3:01 CV 1772(SRU).
• Citation: 291 F.Supp.2d 60
• Court: U.S. District Court — District of Connecticut
• Parties: OLD REPUBLIC NATIONAL TITLE INSURANCE CO., and Old Republic National Title Insurance Company, as Subrogee of Eastern Savings Bank, Plaintiffs, v. BANK OF EAST ASIA LIMITED, et al., Defendants.

291 F.Supp.2d 60

OLD REPUBLIC NATIONAL TITLE INSURANCE CO., and Old Republic National Title Insurance Company, as Subrogee of Eastern Savings Bank, Plaintiffs, v. BANK OF EAST ASIA LIMITED, et al., Defendants.

No. CIV.A.3:01 CV 1772(SRU).

United States District Court, D. Connecticut.

October 17, 2003.

Frank J. Silvestri, Jr., Zeldes, Needle & Cooper, Bridgeport, CT, Joseph C. Hutchison, Mead Westvaco, Stamford, CT, Marie A. Casper, Zeldes, Needle & Cooper, Bridgeport, CT, for Plaintiffs.

Scott S. McKessy, Reed Smith, Kenneth Sussmane, Sussmane & Zapfel, New York City, William H. Champlin, III, Tyler, Cooper & Alcorn, Hartford, CT, Christopher Brigham, Updike, Kelly & Spellacy, P.C., New Haven, CT, Frank G. Usseglio, Kenny, O'Keefe & Usseglio, Hartford, CT, Laura Flynn Baldini, Law Offices of Laura Flynn Baldini, Farmington, CT, Francis

Donnarumma, Waterbury, CT, for Defendants.

RULING ON DEFENDANT BANK OF EAST ASIA LIMITED'S MOTION TO DISMISS

UNDERHILL, District Judge.

This action arises out of a fraudulent mortgage loan scheme allegedly perpetrated by Margaret Lee upon Eastern Savings Bank ("ESB"). Plaintiff, Old Republic National Title Insurance Company ("Old Republic"), brings this action as a subrogee to ESB's rights to the mortgage loan proceeds. Old Republic alleges that the Bank of East Asia Limited (the "Bank of East Asia"), the depository bank of the mortgage loan proceeds, negligently negotiated and wrongfully converted the loan proceeds. The Bank of East Asia moves for dismissal, arguing that Old Republic lacks standing and cannot maintain either cause of action against a depository bank. For the reasons that follow, the Bank of East Asia's motion to dismiss is denied.

I. Facts

For purposes of this motion, the factual allegations made in the Amended Complaint are assumed to be true and all inferences are drawn in the light most favorable to Old Republic. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998).¹

In the summer of 1998, Lee submitted to ESB a fraudulent mortgage loan application in order to obtain a mortgage on her sister Nancy Chang's property located at 36 Upland Drive, Greenwich, Connecticut (the "Chang Property"). In furtherance of the application, Lee fraudulently prepared two powers of attorney bearing the forged signatures "Nancy Chang." The two powers of attorney purportedly authorized Lee to mortgage or sell the Chang Property. In October 1998, ESB issued to Lee an approximately one-million-dollar mortgage loan (the "Chang Loan"). M. Dean Montgomery ("Montgomery") represented ESB and Old Republic at the closing of the loan. As part of the Chang Loan transaction, Montgomery, acting on behalf of Old Republic, issued a title insurance policy to ESB, insuring ESB with respect to the Chang Loan. ESB then wire transferred the net proceeds of the Chang Loan to Montgomery's escrow account at People's Bank in Connecticut ("People's Bank").

With a portion of the net loan proceeds, Montgomery, acting on behalf of ESB, purchased ten cashier's checks² from People's Bank.³ Each check identified "Nancy Chang" as the sole payee⁴ and was made payable in the amount of $78,029.08. Montgomery then gave the ten cashier's checks to Lee, apparently with the understanding that Lee would deliver the checks to her sister.

Thereafter, Lee opened three accounts at the Bank of East Asia; two of the accounts purported to be joint accounts with Chang. The accounts were opened without Chang's knowledge or authority. Lee then forged her sister's signature on each of the ten cashier's checks and deposited the checks at the Bank of East Asia.⁵ Throughout the course of October 1998, People's Bank paid out on the ten cashier's checks and, ultimately the Bank of East Asia credited that money to the Lee-Chang joint accounts. Thereafter, ESB received two monthly mortgage loan payments through automatic withdrawals from the joint accounts at the Bank of East Asia. Lee then withdrew and disbursed all remaining funds from the joint accounts without Chang's knowledge or authority.

In January 1999, Chang informed Montgomery that she had not executed a power of attorney in favor of Lee, had not authorized the mortgage to be placed on her property, and had not received any of the proceeds of the mortgage. Two weeks later, Montgomery informed People's Bank that the ten cashier's checks were fraudulently endorsed.

In September 1999, Old Republic paid ESB approximately one-million dollars in settlement of ESB's claims under the title insurance policy issued by Old Republic National Title Insurance Company, and became subrogated to ESB's claims. In the present action, Old Republic seeks to recover the $780,291 paid out over the ten fraudulently endorsed checks.

II. Allegations and Defenses

Old Republic claims that, pursuant to New York statutory and common law,⁶ it is entitled to recoup the $780,291 because the Bank of East Asia wrongfully negotiated and converted the ten cashier's checks. More specifically, Old Republic claims that the Bank of East Asia, the depository bank, negligently negotiated the cashier's checks by failing to exercise ordinary care in processing the cashier's checks in which ESB had a legal interest when it allowed Lee to open joint accounts without her sister's approval, accepted the ten fraudulently endorsed cashier's checks, presented the checks to People's Bank and then paid out on the ten forged cashier's checks. See New York Uniform Commercial Code ("NY UCC" or the "Code") § 4-401; Broadway Nat. Bank v. Barton-Russell Corp., 154 Misc.2d 181, 585 N.Y.S.2d 933, 944 (N.Y.Sup.1992).

In addition, Old Republic argues that the Bank of East Asia converted funds of ESB by making or obtaining payment on the ten cashier's checks for a person other than the named payee (Nancy Chang), that is, for a person not entitled to enforce the instrument or to receive payment. NY UCC § 3-419(1)(c) (an instrument is converted when it is paid on a forged indorsement); see also Vigilant Ins. Co. of America v. Housing Authority of the City of El Paso, Texas, 87 N.Y.2d 36, 637 N.Y.S.2d 342, 660 N.E.2d 1121 (1995) ("Conversion is the unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights.").

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Bank of East

Asia moves to dismiss, arguing that the Amended Complaint fails to state a claim against the Bank of East Asia for which relief can be granted. The Bank of East Asia makes three principal arguments in support of its claim. The defendant first argues that Old Republic does not have standing to enforce a negotiable instrument on behalf of Montgomery. Second the Bank of East Asia argues that, even if Old Republic has standing to assert claims on behalf of Montgomery, a remitter does not have legally enforceable rights in a cashier's check. Third, the defendant argues that, if a remitter can enforce a cashier's check, the remitter can only enforce it against People's Bank, the issuing bank, not the Bank of East Asia, the depository bank.

III. Standard of Review for a Motion to Dismiss

When deciding a motion to dismiss for failure to state a claim, the court "must accept the factual allegations of the complaint as true and must draw all reasonable inferences in favor of the plaintiff." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir.1996); Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir.1995). The court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial, but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). It is only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief" that it is appropriate to grant a motion to dismiss for failure to state a claim. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir.1994).

IV. Discussion

A. Standing

The Bank of East Asia first argues that Old Republic, standing in the shoes of ESB, lacks standing to assert claims on behalf of Montgomery, ESB's agent. In this case, Montgomery was acting as ESB's agent. ESB wired in excess of $940,000 to Montgomery's account at People's Bank. With a portion of the loan proceeds, Montgomery purchased from People's Bank ten cashier's checks made payable to "Nancy Chang" and delivered the checks to Lee. Moreover, the funds, which ESB wired to Montgomery to purchase the cashier's checks, at all times belonged to ESB. Although Montgomery purchased the checks, he did so on behalf of ESB, and the funds used to purchase the checks, therefore, belonged to ESB. Accordingly, ESB had a direct and legal interest in the funds, purchased by its agent, and deposited at the Bank of East Asia. Thus, ESB has standing to assert any claims available to Montgomery with respect to the cashier's checks.

Montgomery is proceeding upon his rights in a separate state court action he commenced against People's Bank to recover, in part, on the proceeds of the cashier's checks. The Bank of East Asia argues that permitting Old Republic to maintain the present action could lead to double recovery and inconsistent rulings. Double recovery and inconsistent rulings will not result, however, because whichever action (the Montgomery-People's Bank action or the current action) proceeds to judgment first, that action will provide a claim preclusion bar in the subsequent action. Moreover, if the Bank of East Asia is found liable either in the current lawsuit or in a subsequent lawsuit commenced by People's Bank,⁷ payment on either judgment would bar collection of the other. Obviously, the defendant is potentially liable to either the agent or the principal, but not both on the same claim. See Prevor-Mayorsohn Caribbean, Inc. v. Puerto Rico Marine...