New York Federal Court Holds Bank Had No Duty to Reverse Fraudulent Payment Order or Freeze Customer’s Account

The United States District Court for the Northern District of New York recently granted a bank’s motion to dismiss, holding that the bank had no duty to reverse a non-customer’s payment order or freeze a customer’s account in which fraudulent funds were deposited. Pedersen v. MidFirst Bank, 2021 WL 1062591 (N.D.N.Y. Mar. 19, 2021). In the case, Plaintiffs executed a contract to purchase real estate. Days prior to the closing, Plaintiffs received emails, which appeared to be from their escrow agent, instructing Plaintiffs to wire escrow funds to the title company’s trust account at Defendant Midfirst Bank (“Midfirst”). Thereafter, Plaintiffs requested wire transfers from their respective banks, and the proceeds were deposited into the title company’s account at Midfirst that same day. When Plaintiffs realized that the request to transfer funds was fraudulent, Plaintiffs sent recall requests to Midfirst, explaining that the transfers were the product of fraud. Midfirst rejected Plaintiffs’ requests but suggested that it would return the funds if Plaintiffs’ banks executed hold harmless agreements. Midfirst ultimately reneged on its offer and claimed that the title company declined Midfirst’s request for authorization to return the funds. Plaintiffs then brought a claim for the following causes of action against Midfirst: (1) aiding and abetting fraud, (2) aiding and abetting conversion, (3) aiding and abetting breach of fiduciary duty, (4) conversion, (5) negligence, and (6) unjust enrichment, and the following causes of action against the title company: (1) fraud, (2) conversion, (3) breach of fiduciary duty, (3) negligence, and (5) unjust enrichment. Plaintiffs settled with the title company, but Midfirst moved to dismiss.

The Court granted Midfirst’s motion to dismiss. The Court found that to the extent that Plaintiffs’ claims were based on Midfirst’s processing of the wire transfer, they were preempted by Article 4A of the Uniform Commercial Code and thus, dismissed. Specifically, “‘Article 4A displaces any common law claim if the UCC’s provisions squarely cover the transaction at issue, . . . and was intended to be the exclusive means of determining the rights, duties and liabilities of banks and their customers with respect to such transfers.’” However, to the extent that Plaintiffs’ claims were based on Midfirst’s actions before and after the processing of the wire transfer, such claims were not preempted. Nonetheless, the Court found that Plaintiffs failed to state claims of negligence, aiding and abetting, conversion, and unjust enrichment. Most importantly, the Court agreed with Midfirst that it had no duty to reverse the payment order or freeze the title company’s account. The Court noted that “‘[b]anks do not owe a duty of care to non-customers to protect them from the tortious conduct of the banks’ customers.’” Next, the Court found that Plaintiffs failed to assert sufficient facts from which the Court could plausibly infer that Midland had actual knowledge of the title company’s alleged wire fraud scam prior to or at the time of the wire transfer. Lastly, the Court found that Plaintiffs failed to state a claim for conversion and unjust enrichment because Plaintiffs did not allege any wrongful or improper act of dominion by Midfirst in contravention of Plaintiffs’ rights. Accordingly, the Court granted Midfirst’s motion to dismiss.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.