| DRS Optronics, Inc. v North Fork Bank |
| 2007 NY Slip Op 06825 [43 AD3d 982] |
| September 18, 2007 |
| Appellate Division, Second Department |
| DRS Optronics, Inc., Appellant, v North Fork Bank,Respondent, et al., Defendants. |
—[*1] Lazer, Aptheker, Rosella & Yedid, P.C., Melville, N.Y. (Joseph C. Savino and Jennifer L.Silvestro of counsel), for respondent.
In an action, inter alia, to recover damages for breach of contract, the plaintiff appeals fromso much of an order of the Supreme Court, Suffolk County (Emerson, J.), dated July 10, 2006, asdenied its motion for summary judgment on the first cause of action alleging breach of contractagainst the defendant North Fork Bank and for leave to amend the complaint, in effect, to assert acause of action against the defendant North Fork Bank for a refund under Uniform CommercialCode article 4-A and to increase the ad damnum clause to recover the total sum of $1,364,369from that defendant.
Ordered that the order is modified, on the law, by deleting the provision thereof denying thatbranch of the plaintiff's motion which was for summary judgment on the first cause of actionalleging breach of contract against the defendant North Fork Bank and substituting therefor aprovision granting that branch of the motion as to liability only; as so modified, the order isaffirmed insofar as appealed from, without costs or disbursements, and the matter is remitted tothe Supreme Court, Suffolk County, for a hearing on the issue of damages in accordanceherewith.
In July 2000 the plaintiff, DRS Optronics, Inc. (hereinafter DRS), and the defendant ElectroDesign Manufacturing, Inc. (hereinafter EDM), entered into a subcontract agreement by whichDRS would provide parts in support of EDM's prime contract with the US Army Aviation &Missile Command (hereinafter AMCOM). On the same date, DRS and EDM entered into acustodial agreement (hereinafter the custodial agreement) with the defendant North Fork Bank(hereinafter North Fork), in order to facilitate payment of DRS by EDM under the subcontract.Under the custodial agreement, North Fork was directed to establish a custodial account in thename of "North Fork Bank, as Custodian for EDM and DRS" (hereinafter the custodial account)to hold payment deposits made by AMCOM with respect to the EDM prime contract. Nopayments could be made out of the custodial account except pursuant to joint written instructionsmade by authorized signatories of DRS and EDM. The parties agreed that North Fork'sresponsibility was purely ministerial and that its liability would be limited to conduct constituting"willful misconduct or gross negligence."
Between November 2001 and September 19, 2002, EDM notified DRS of various AMCOMpayments deposited into the custodial account. On each occasion, DRS sent a writtenauthorization to North Fork and a copy of the authorization to EDM, directing North Fork to wiretransfer a specific dollar amount to DRS in payment of specified invoices, and authorizing NorthFork to transfer the remaining balance of the deposit pursuant to EDM's directions. North Forkwould obtain verbal authorization from EDM and then transfer the amount requested to DRS.
In or about January 2003 DRS became concerned that EDM had become delinquent inpayment since the last payment received on or about September 19, 2002, and requested thatNorth Fork provide it with copies of bank statements for the custodial account. After reviewingthe statements, DRS protested to North Fork that the sum of $562,808 had been deposited intothe custodial account in October 2002 and then disbursed without its approval or knowledge.DRS requested that North Fork not allow any further disbursements without its approval.
Nevertheless, on February 18, 2003, after the sum of about $595,000 was deposited byAMCOM into the custodial account, North Fork permitted EDM to transfer the entire amount outof the custodial account without authorization by DRS. After DRS protested, North Fork's branchemployees reviewed the custodial agreement for the first time and were able to recover all but thesum of $30,514, by debiting other accounts of EDM and a related company, the defendant Imrex,LLC of Great Neck, New York (hereinafter Imrex), and crediting the custodial account.
DRS thereafter commenced the instant action in which it sought to recover more than $2million from EDM and Imrex for breach of the subcontract, and to recover the total sum of$909,062 from North Fork for breach of the custodial agreement. Of the $909,062 sought fromNorth Fork, the sum of $565,500 was held in the custodial account at the time the action wascommenced, and the remaining sum of $343,562 represented funds allegedly paid by AMCOMto EDM and wrongfully released from the custodial account by North Fork. Pursuant to previousmotion practice and stipulations among the parties, judgments have been entered against EDM inthe total amount of $1,364,369 plus interest, the cause of action against Imrex has beendiscontinued, and the funds held on deposit in the custodial account in the sum of $565,500 havebeen turned over to DRS.
Following completion of discovery, DRS moved for summary judgment on the first cause ofaction alleging breach of the custodial agreement against North Fork and for leave to amend itscomplaint, in effect, to assert a cause of action against North Fork for a refund under UniformCommercial Code article 4-A and to increase the ad damnum clause to recover the total sum of$1,364,369 from North Fork based on the new cause of action. DRS contended that pursuant toUCC article 4-A, North Fork must provide a refund of all of the funds transferred from thecustodial account without proper authorization from the time of the account's [*2]establishment. The Supreme Court denied the plaintiff's motion andthe plaintiff appeals.
The Supreme Court correctly determined that DRS could not assert a cause of action underUCC 4-A-204 for a refund of all unauthorized transfers made out of the custodial account fromthe time it was established, and therefore that it failed to demonstrate that its proposedamendment to the complaint had merit (see Heckler Elec. Co. v Matrix Exhibits-N.Y.,278 AD2d 279 [2000]). Although the transfers directed by EDM were "fund transfers" governedby article 4-A of the UCC (see UCC 4-A-102, 4-A-103, 4-A-104 [1]; cf. John &Mary Markle Found. v Manufacturers Hanover Trust Co., 209 AD2d 587, 588 [1994]), theremedy provided by UCC 4-A-204 only requires the bank to refund unauthorized transfers to its"customer," which is defined as a person "having an account with a bank" (UCC 4-A-105 [1] [c];see UCC 4-A-104 [1]; Regatos vNorth Fork Bank, 5 NY3d 395, 402 [2005]). DRS did not itself have an account withNorth Fork, but derives its rights to funds deposited in the custodial account only from its statusas a party to the tripartite custodial agreement, under which it has no right to receive funds fromthe account except upon the written consent of EDM. Accordingly, the Supreme Courtprovidently exercised its discretion in denying the plaintiff's motion for leave to amend thecomplaint, in effect, to assert a cause of action for a refund under UCC article 4-A and toincrease the ad damnum clause.
However, the Supreme Court erred in denying summary judgment to the plaintiff as toliability on its first cause of action alleging breach of contract against North Fork. In support ofits motion, DRS demonstrated that North Fork not only breached the custodial agreement, whichis undisputed, but that its breach was grossly negligent, since North Fork failed to "exercise evenslight care" or "slight diligence" in its role as custodian (Food Pageant v Consolidated EdisonCo., 54 NY2d 167, 172 [1981]; see Gentile v Garden City Alarm Co., 147 AD2d124, 131 [1989]). Knowing that the plaintiff was relying on the establishment of a securecustodial account to protect its right to receive payment under the subcontract with EDM, NorthFork wholly failed to fulfill its contractual obligations to establish such an account as custodianon behalf of EDM and DRS, or to implement any procedure to ensure that the two-signaturerequirement would be enforced (see Internationale Nederlanden [U.S.] Capital Corp. vBankers Trust Co., 261 AD2d 117 [1999]; Jewett v Manufacturers Hanover TrustCo., 48 Misc 2d 1094, 1095-1098 [1965]; cf. John & Mary Markle Found. vManufacturers Hanover Trust Co., supra at 588). Instead, it established an account that waslinked to other EDM and Imrex accounts through the bank's cash management system, which, inthe words of North Fork's senior vice-president, is "completely inconsistent" with thetwo-signature requirement, since it enabled EDM to unilaterally direct transfers. In opposition toDRS's prima facie showing of grossly negligent conduct, North Fork failed to submit anyevidence sufficient to raise a triable issue of fact as to whether it exercised even the slightest carein performing its obligations under the custodial agreement. Nor did North Fork submit anyevidence sufficient to raise a triable issue of fact with respect to its defenses that DRSintentionally waived the two-signature requirement or otherwise agreed to any modification ofthat requirement (see Gilbert Frank Corp. v Federal Ins. Co., 70 NY2d 966 [1988];Rose v Spa Realty Assoc., 42 NY2d 338, 343-344 [1977]; Orange Steel Erectors vNewburgh Steel Prods., 225 AD2d 1010, 1012 [1996]). Thus, DRS established itsentitlement to summary judgment as to liability on its first cause of action alleging breach ofcontract against North Fork.
The amount of damages sustained by DRS as a result of North Fork's breach of contract isthe amount that would place it "in the same position as [it] would have been in if the contract hadnot been breached" (Wai Ming Ng v Tow, 260 AD2d 574, 575 [1999]). Since thepurpose of the custodial account was to protect DRS's right to receive payment under thesubcontract out of payments made by AMCOM, DRS's damages consist of the amount ofAMCOM deposits earmarked [*3]for payment of DRS that EDMwas able to divert to other payees as a result of North Fork's breach. The record establishes thatDRS is not entitled to recover any amounts from deposits made into the custodial account on orbefore September 19, 2002, since North Fork complied with the instructions given by DRS onthat date to transfer a specified amount to DRS in payment of its outstanding invoices and DRSauthorized North Fork to transfer the balance of the deposits pursuant to EDM's instructions. Therecord also establishes that DRS is entitled to recover at least the sum of $30,514, which NorthFork was unable to recover after it allowed EDM to transfer the sum of about $595,000 fromAMCOM's deposit on February 18, 2003. However, with respect to the other transfersunilaterally directed by EDM between September 19, 2002 and February 18, 2003, the record isinsufficient to establish what part of these transfers resulted in diversion of AMCOM paymentsthat DRS was entitled to receive. Accordingly, we remit the matter to the Supreme Court, SuffolkCounty, for a hearing on damages. Mastro, J.P., Covello, McCarthy and Dickerson, JJ., concur.