Pereira v. United Jersey Bank, NA, No. 94 Civ. 1565 (LAP)

CourtU.S. District Court — Southern District of New York
Writing for the CourtN.J.U.C.C. § 4-214 cmt. ¶ 1
Citation201 BR 644
Decision Date11 October 1996
Docket Number95 Civ. 7955 (LAP) and 95 Civ. 8217 (LAP).,No. 94 Civ. 1565 (LAP),94 Civ. 8256 (LAP),94 Civ. 1844 (LAP),95 Civ. 3685 (LAP)
PartiesJohn S. PEREIRA, Esq., as Chapter 11 Trustee of Estate of Payroll Express Corporation et al., Plaintiff, v. UNITED JERSEY BANK, N.A., Defendant. John S. PEREIRA, Esq., as Chapter 11 Trustee of Estate of Payroll Express Corporation et al., Plaintiff, v. NATIONAL WESTMINSTER BANK NEW JERSEY, Defendant. BETH ISRAEL MEDICAL CENTER, et al., Plaintiffs, v. UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants. FREDERICK GOLDMAN, INC., Plaintiff, v. UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants. NEW YORK CITY TRANSIT AUTHORITY, Plaintiff, v. UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants. COPYTONE, INC., on behalf of itself and all others similarly situated, Plaintiffs, v. UNITED JERSEY BANK, National Westminster Bank New Jersey, and John Does 1 Through 20, Defendants.

201 B.R. 644 (1996)

John S. PEREIRA, Esq., as Chapter 11 Trustee of Estate of Payroll Express Corporation et al., Plaintiff,
v.
UNITED JERSEY BANK, N.A., Defendant.

John S. PEREIRA, Esq., as Chapter 11 Trustee of Estate of Payroll Express Corporation et al., Plaintiff,
v.
NATIONAL WESTMINSTER BANK NEW JERSEY, Defendant.

BETH ISRAEL MEDICAL CENTER, et al., Plaintiffs,
v.
UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants.

FREDERICK GOLDMAN, INC., Plaintiff,
v.
UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants.

NEW YORK CITY TRANSIT AUTHORITY, Plaintiff,
v.
UNITED JERSEY BANK and National Westminster Bank New Jersey, Defendants.

COPYTONE, INC., on behalf of itself and all others similarly situated, Plaintiffs,
v.
UNITED JERSEY BANK, National Westminster Bank New Jersey, and John Does 1 Through 20, Defendants.

Nos. 94 Civ. 1565 (LAP), 94 Civ. 1844 (LAP), 94 Civ. 8256 (LAP), 95 Civ. 3685 (LAP), 95 Civ. 7955 (LAP) and 95 Civ. 8217 (LAP).

United States District Court, S.D. New York.

October 11, 1996.


201 BR 645
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201 BR 646
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201 BR 647
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201 BR 648
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201 BR 649
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201 BR 650
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PRESKA, District Judge

These actions arise from the wrongdoing and ultimate Chapter 11 bankruptcy of Payroll Express Corporation and Payroll Express Corporation of New York (collectively, "Payroll"), which operated a check cashing and payroll distribution business in New York and New Jersey. Plaintiffs Beth Israel Medical Center ("Beth Israel"), Frederick Goldman, Inc. ("Goldman"), New York City Transit Authority ("NYCTA"), and Copytone, Inc. ("Copytone") (collectively, the "Customers") are former customers of Payroll who were victims of Payroll's misappropriation of their money. Defendants United Jersey Bank, N.A. ("UJB") and National Westminster Bank New Jersey ("NatWest")

201 BR 653
(collectively, the "Banks") are banks with whom Payroll maintained checking accounts and were the victims of Payroll's check-kiting scheme

Plaintiff John S. Pereira ("Pereira"), Payroll's Chapter 11 trustee, filed suit against UJB and NatWest to avoid and recover allegedly preferential transfers to UJB and NatWest under 11 U.S.C. §§ 547(b) and 550(a). UJB and NatWest have moved, and Pereira has cross-moved, under Rule 56 of the Federal Rules of Civil Procedure for summary judgment. The Customers filed suit against UJB and NatWest asserting various common law claims based on the Banks' involvement with Payroll and efforts to recover their losses created by Payroll's check-kiting. UJB and NatWest have moved under Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss these claims.

For the following reasons, the cross-motions for summary judgment of the Banks and Pereira are denied; and the Banks' motions to dismiss are granted as to certain claims and denied as to other claims which are stayed pending the resolution of Pereira's preference actions.

 TABLE OF CONTENTS
                BACKGROUND ....................................................................653
                BANKRUPTCY TRUSTEE'S ACTIONS ..................................................654
                 I. Summary Judgment Standard ................................................655
                 II. Preferential Transfers ...................................................656
                 A. Transfer of Payroll's Property Interest................................656
                 B. Antecedent Debt Owed by Payroll........................................657
                 C. Hypothetical Chapter 7 Liquidation.....................................658
                III. Affirmative Defenses to Preference........................................660
                 A. Contemporaneous Exchange...............................................660
                 B. Ordinary Course of Business............................................660
                 C. Setoff.................................................................660
                 IV. Genuine Issues of Material Fact ..........................................663
                CUSTOMERS' ACTIONS ............................................................663
                 I. Motion to Dismiss Standard ...............................................663
                 II. Alleged Facts ............................................................663
                 A. Customers' Agreements with Payroll ....................................663
                 B. Payroll's Wrongful Conduct ............................................664
                 C. Customers' Losses .....................................................665
                 D. Banks' Wrongful Conduct ...............................................665
                III. Choice of Law ............................................................667
                 IV. Customers' Claims ........................................................669
                 A. Negligence ............................................................669
                 B. Aiding and Abetting ...................................................671
                 C. Breach of Fiduciary Duty ..............................................672
                 D. Fraud and Equitable Fraud .............................................673
                 E. Conspiracy to Conceal Payroll's Check-Kiting ..........................674
                 F. Conversion ............................................................675
                 G. Setoff Claims .........................................................676
                CONCLUSION ....................................................................681
                

BACKGROUND

Payroll began its on-site check cashing services in 1967. Typically, the Customers would advance money to Payroll, whether by wire transfers, checks, or otherwise, a few days before each payday for Payroll to use to provide its services. Payroll then was generally required to return excess funds and endorsed paychecks to the Customers.

Robert Felzenberg ("Felzenberg") was President and, along with his wife, a co-owner of Payroll. Over the course of its dealings with the Customers, Payroll began to divert their advanced funds to other companies in which Felzenberg and his wife had

201 BR 654
financial interests and to Felzenberg personally. As a result of these diversions, Payroll began to experience large cash shortages in 1991. Realizing the necessity of concealing its cash shortfall from the Customers in order to continue to receive their advances, Payroll engaged in a check-kiting scheme using its accounts at UJB and NatWest. Each day, Felzenberg would deposit a series of worthless checks from one account into the other and vice versa, taking advantage of the provisional credit which the Banks extended to Payroll upon depositing checks and pending the clearance of the checks through the drawee bank. In this manner, Payroll was able to deceive the Banks as well as the Customers

By May 1992, however, the Banks uncovered Payroll's fraudulent conduct and, by taking measures to protect themselves, such as dishonoring checks drawn by Payroll on its accounts and applying funds deposited in Payroll's accounts to offset their losses, effectively brought both Payroll's check cashing business as well as its wrongdoing to an end. The Customers, unfortunately, did not discover Payroll's wrongdoing until they already made advances for which Payroll never provided check cashing services.

On June 5, 1992, Payroll filed petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey. These proceedings were subsequently transferred to the United States Bankruptcy Court for the Southern District of New York. Also in June 1992, a federal criminal complaint was filed against Felzenberg. On July 13, 1993, Felzenberg pleaded guilty to a four count information, charging Felzenberg with defrauding public agencies of funds, conspiracy to commit wire fraud, bank fraud, and aiding and abetting in the preparation and filing of false tax returns. The instant actions address the appropriate manner in which the losses created by Payroll's wrongful conduct should be allocated.

BANKRUPTCY TRUSTEE'S ACTIONS

Pereira filed adversary proceedings against the Banks under 11 U.S.C. §§ 547(b) and 550(a), alleging that the Banks, through their conduct in recovering some or all of their losses, received preferential transfers that must be returned to Payroll's estate for distribution according to the Bankruptcy Code. By Order of this Court, the reference of these proceedings to the United States Bankruptcy Court for the Southern District of New York was withdrawn in October 1994.

According to Pereira, Payroll's NatWest account experienced its largest deficit due to the check-kiting on April 30, 1992. (Pereira's NatWest Compl. ¶ 23.) This deficit was $13,340,748.01. (Id.) On May 19, 1992, NatWest accepted for deposit $11,145,000 in checks drawn on Payroll's UJB account and which UJB subsequently paid. (Id. ¶ 24.) On May 21, 1992, upon uncovering Payroll's check-kiting, NatWest froze Payroll's NatWest account and began dishonoring checks drawn on this account. (Id. ¶ 26.) These checks totalled $31,713,350 and were deposited by Payroll into its UJB account. (Id.) Further, NatWest accepted a deposit of $11,607,550 in checks drawn on Payroll's UJB account and which UJB subsequently paid. (Id. ¶ 28.) In this manner, Pereira alleges that NatWest was able to transform the peak deficit of $13,340,748.01 into a positive balance of $2,017,756.90 by May 26, 1992. (Id. ¶ 30.) Pereira seeks to recover this sum of $13,340,748.01 from NatWest as a preferential transfer. (Id. ¶ 39.)

As for UJB, Pereira alleges that on May 22, 1992, upon learning from NatWest of Payroll's check-kiting, UJB similarly froze Payroll's account and began dishonoring checks drawn on Payroll's UJB account. (Pereira's UJB Compl. ¶¶ 34-35.) By this point, however, UJB had recently paid millions of dollars for checks drawn on Payroll's UJB account and deposited in its NatWest account. (Id. ¶ 31.) Further, check deposits drawn on Payroll's NatWest...

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