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NEW YORK v. CITIBANK

May 3, 1982

In the Matter of the Application of the STATE OF NEW YORK, by Robert ABRAMS, Attorney General of the State of New York, Petitioner,
v.
CITIBANK, N. A., Respondent. Pursuant to Executive Law Section 63, Subdivision 12



The opinion of the court was delivered by: SOFAER

MEMORANDUM OPINION AND ORDER

The Attorney General for the State of New York has moved to remand this action, originally brought in the Supreme Court, New York County, under New York Executive Law § 63(12). The case was removed to federal district court by defendant Citibank, under 28 U.S.C. § 1441 (1976). The motion to remand turns on whether federal jurisdiction exists in a case consisting of a state cause of action founded exclusively upon allegations of illegality under federal law.

Executive Law § 63(12) empowers the Attorney General to seek injunctive relief, restitution, and damages for repeated or persistent fraud or illegality in the transaction of business. Pursuant to the requirements of § 63(12), this civil action was commenced by the filing of a petition alleging that Citibank has repeatedly acted in a fraudulent, illegal, and unconscionable manner with respect to certain transactions at its Automatic Teller Machines (ATMs). The petition asserts that many Citibank customers, in the course of banking transactions at ATMs, have been victimized by a criminal scheme resulting in unauthorized ATM cash withdrawals from their accounts. The Attorney General alleges "persistent illegality" under § 63(12) because of Citibank's refusal to reimburse customers who have lost funds as a result of the scheme. The petition describes the scheme as follows:

 
a) The criminal stands at the customer service telephone situated between two ATMs and appears to be speaking to a CITIBANK service representative. The customer enters, goes to one of the machines (machine # 1), and enters ("dips") his card. The criminal tells the customer that machine # 1 is out of order; the criminal urges the customer to use machine # 2. The customer does so, i.e., he dips his card in machine # 2 without first clearing machine # 1. As a result, the customer has activated both machines.
 
b) The customer proceeds with his transaction at machine # 2. However, unknown to the customer, the criminal is observing, usually over the customer's shoulder, the customer's Personal Identification Code (PIC).
 
c) After learning the customer's PIC, the criminal enters it into machine # 1. He then asks the customer's assistance by stating something to the following effect: "Customer service says maybe it's my card that's the problem. They'd like you to use your card (on machine # 1) "to see if it will clear the machine.' "
 
d) The customer, wishing to cooperate with the CITIBANK service representative, permits his Citicard to be dipped once again and possibly even thereafter. Thus, the criminal has duped the customer into performing the three tasks leading to a cash withdrawal. (The three tasks are: first, dipping the card, then entering the PIC number, and then dipping the card again.) The customer feels secure in cooperating since he knows that he has not revealed his PIC.

 Defendant's Verified Petition for Removal, Exhibit A, P 14.

 The Attorney General sues on behalf of two classes of Citibank customers. "Class A" complainants are customers who discovered withdrawals on their accounts as a result of the scenario described in the petition. "Class B" complainants are customers who used ATM, and also claim that unauthorized withdrawals have been debited against their accounts. But Class B customers do not recall the sequence of events described by Class A customers. Some Class B customers claim that "no other person was present in the CITICARD Banking Center at the time of their own acknowledged transaction"; others claim that if another person was present they did not dip their cards for the other person or that they dipped their cards for the other person only once and not twice as required to complete a cash withdrawal transaction. The manner in which withdrawals were accomplished from the accounts of Class B customers is not explained, but all the customers claim that the unauthorized withdrawals occurred on the ATM adjacent to the one used by the customer and immediately after a bona fide transaction by the customer.

 The petition alleges that Citibank has responded to the Class A customer complaints by acknowledging the scheme as described above but insisting that it is not liable for the withdrawals, since the customers caused the loss by permitting (albeit unwittingly) the thieves involved to use their Citicards. The petition also alleges that Citibank insists that Class B complainants are victims of the same scheme that bilked Class A customers. According to the petition, Citibank has "failed to investigate further the possibility of fraud or error" with respect to Class B complaints; has debited allegedly victimized customers' accounts in the amount of the disputed withdrawals plus an overdraft charge for checks subsequently drawn on insufficient funds prior to the customers' discovery of the allegedly unauthorized withdrawals; and has provided "inadequate and ineffective safeguards against the scheme."

 Recognizing that the "application of existing consumer protection legislation" to electronic fund transfers "is unclear," Congress enacted the Electronic Fund Transfers Act ("EFTA"), 15 U.S.C. §§ 1693 et seq. (1978), "to provide a basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund transfer systems." 15 U.S.C. § 1693. The petition filed by the Attorney General explicitly pleads violations of EFTA and Regulation E, which was promulgated thereunder by the Federal Reserve Board.

 Under the heading "Causes of Action-Customers "A' and "B'," paragraph 29 of the petition alleges that respondent's failure to recognize withdrawals made in the course of the criminal scheme as unauthorized and to assume liability for them violate "such customers' rights provided by 15 U.S.C. §§ 1693 et seq., ("Electronic Fund Transfers Act') (including §§ 1693a(11), 1693f, and 1693g) and regulation E issued pursuant thereto by the Federal Reserve System." Specifically, § 1693a(11) defines the term "unauthorized electronic fund transfer." § 1693f prescribes the procedure a financial institution should follow to resolve errors brought to its attention by a customer. And § 1693g sets out the circumstances in which a customer will be liable for an unauthorized transaction and places the burden of proving the customer's liability on the financial institution in any action involving such liability. Paragraph 30, under the same heading, alleges that respondent's refusal to conclude that the accounts of customers "A" and "B" were not in error "violated such customer's rights provided by 15 U.S.C. § 1693 et seq. (including § 1693f) and the regulation...." Paragraph 31 alleges that, as a consequence of the violations of federal law outlined in the previous causes of action, "CITIBANK has engaged in repeated illegal conduct within the meaning and intent of Executive Law Section 63 Subdivision 12." By grounding its allegations of repeated illegal business practices on violations of EFTA, a federal statute, the Attorney General has incorporated EFTA, as an essential part of the claim, into the cause of action created by the State under Executive Law § 63(12).

 The second cause of action, set forth in paragraph 32, alleges that Citibank's failure to adopt reasonable safeguards against the criminal scheme, after learning of its existence, violates EFTA and Executive Law § 63(12). Here, too, federal law is made an essential part of the state-law claim.

 The two remaining causes of action appear under separate headings limiting their applicability to "A" and "B" customers respectively. The third cause of action, under the heading "Customers "A' Only," alleges that Citibank's failure to post warnings about the criminal scheme coupled with its refusal to assume liability for the losses suffered by its customers, constitutes an unfair and unconscionable business practice in violation of Executive Law § 63(12). (Paragraph 33) A fourth cause of action, brought on behalf of "B" customers, alleges violations of the EFTA requirement of a good faith investigation of customers' allegations of error (paragraph 34) and then alleges that this failure constitutes ...


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