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COMPANIA SUD-AMERICANA DE VAPORES, S.A. v. IBJ SCH

February 24, 1992

COMPANIA SUD-AMERICANA DE VAPORES, S.A., Plaintiff, against IBJ SCHRODER BANK & TRUST COMPANY, Defendant.


The opinion of the court was delivered by: SHIRLEY WOHL KRAM

MEMORANDUM OPINION AND ORDER

 SHIRLEY WOHL KRAM, U.S.D.J.

 I. Background

 CSAV is a Chilean company engaged in shipping goods to North and South America, Northern and Southern Europe and Asia. Its 1989 assets were worth $ 500 million dollars. Schroder is a banking institution with its principal place of business in New York. For many years, Schroder was one of CSAV's leading U.S. banks providing CSAV with credit and deposit services. CSAV also conducted foreign currency transactions with Schroder for more than forty years. At least between 1984 and 1990, these transactions between the parties proceeded as follows:

 (1) Upon receipt of foreign currencies *fn2" in payment for CSAV's shipping services, CSAV's European agents remitted the funds to local European banks ("correspondent banks") where Schroder maintained foreign currency accounts ("nostro accounts").

 (2) The correspondent banks, upon crediting Schroder's "nostro accounts" with CSAV's foreign currencies, would notify Schroder of the remittance by means of an interbank telex called a "SWIFT."

 (3) Upon receipt of the SWIFT, Schroder's back office would notify a Schroder foreign exchange trader who would determine the rate that would be applied to the conversion.

 (4) After determining the exchange rate, an internal transaction ticket would be completed, and the foreign exchange trader would generally place a phone call to a designated person, usually Henrietta Suttie, the Chief Accountant in the Finance Department of Chilean Line, Inc. ("Chilean Line"), CSAv's wholly-owned New York subsidiary. *fn3"

 (5) In the phone call to Chilean Line, the Schroder trader informed CSAV of the contract number, the amount of foreign currency involved, the exchange rate to be applied, the U.S. dollar amount to be credited, and the "maturity date" or "value date" on which the U.S. dollars would be received.

 (7) Schroder sent written confirmations of each foreign exchange transaction to both CSAV in Chile and Chilean Line in New York. These confirmations included the amount of foreign currency, the exchange rate, the U.S. dollar amount and the value date.

 (8) When the conversion was completed, Schroder paid CSAV the U.S. dollar proceeds of these foreign currency exchange transactions by depositing the dollar proceeds into CSAV's demand deposit account ("DDA account") at Schroder in New York.

 (9) CSAV routinely transferred those dollars out of its account at Schroder and into its operations account at Chase Manhattan Bank ("Chase"). CSAV directed Schroder to wire-transfer funds to Chase an average of once a day.

 According to the complaint, between 1984 and 1990, 1,087 foreign currency transactions were executed by Schroder on CSAV's behalf. Complaint, at para. 23. These transactions continued until mid-1990. In June 1990, however, CSAV decided to ask other European and American banks for quotations on foreign currency exchanges. After discovering that other banks had superior exchange rates, and complaining to Schroder about its foreign currency exchange rates, *fn4" CSAV took its foreign exchange business elsewhere, specifically to Deutsche Bank Hamburg, in July or August of 1990.

 The instant action arises out of the above foreign currency exchange transactions. CSAV alleges that between January 1, 1984 and May 31, 1990, Schroder charged an exchange rate for the conversion of foreign currency into dollars that was "unreasonably and grossly in excess of the prevailing market rate of exchange at the time, and well in excess of rates and margins being charged by other banking institutions." Complaint, at para. 18. According to CSAV, between January 1, 1984 and May 31, 1990, Schroder executed 175 separate conversions of the Belgian franc into dollars, *fn5" and the difference between the market rate and the rate charged by Schroder for this currency rose steadily throughout this period. For example, in 1984 Schroder charged an average of 1.35% above the New York Interbank rate (the "market rate" or "interbank rate"), the rate that applies between banks, for conversions of the Belgian franc. By 1990, the difference between the average Schroder rate and the market rate had escalated to 12.96%. Complaint, at para. 19. As a result, CSAV alleges common law fraud, breach of contract, breach of fiduciary duty and violations of civil RICO, 18 U.S.C. § 1962.

 II. Standards for Summary Judgment

 Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). In testing whether the movant has met this burden, the Court must resolve all ambiguities against the movant. Lopez v. S.B. Thomas, Inc., 831 F.2d 1184, 1187 (2d Cir. 1987) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993, 994 (1962)).

 The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Adickes v. S.H. Kress and Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598, 1608 (1970). The movant may discharge this burden by demonstrating to the Court that there is an absence of evidence to support the non-moving party's case on which that party would have the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548, 2552 (1986). *fn6" The non-moving party then has the burden of coming forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The non-movant must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348, 1356 (1986). Speculation, conclusory allegations and mere denials are not enough to raise genuine issues of fact. To avoid summary judgment, enough evidence must favor the non-moving party's case such that a jury could return a verdict in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505, 2510 (1986) (interpreting the "genuineness" requirement).

 III. CSAV's Claims7

 A. Common Law Fraud

 The five elements of an action for common law fraud are "representation of material fact, falsity of that representation, scienter, reliance and damages." Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980), cert. denied, 449 U.S. 1123, 67 L. Ed. 2d 109, 101 S. Ct. 938 (1981); accord Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 302 N.Y.S.2d 799, 803, 250 N.E.2d 214, 217 (1969). CSAV contends that it has established these elements, and that Schroder's motion for summary judgment on its fraud claim must therefore be denied. The Court disagrees.

 1. CSAV's Contentions

 CSAV's basic contention is that it was fraudulent for Schroder to promise that it would give CSAV favorable exchange rates and then charge rates significantly above the prevailing market rate.

 a. Elements of Common Law Fraud

 (i) Schroder's Representations

 Between 1979 and 1981, Geis had a series of "good will" meetings with Schroder's foreign exchange traders in New York. According to CSAV, Geis was told by Schroder's traders that "CSAV was considered a preferred client within the bank . . . and that CSAV was given preferential treatment within the [foreign exchange] department." Geis Tr., at 48. The nature of the preferential treatment was that CSAV's foreign currency remittances "[were] given rates normally credited to larger amounts," Geis Tr., at 48, and the rate applied to CSAV's conversions was the "million dollar rate." Id. at 65-66. Geis was also told that the "million dollar rate" was Schroder's best rate for corporate accounts, and was at or near the interbank rate. Id. at 48, 65-66, 78, 93, 310-11, 378.

 (ii) CSAV's Reliance

 CSAV also contends that it relied upon Schroder's representations that CSAV would receive favorable exchange rates. CSAV argues that an internal Schroder memorandum specifically describes CSAV's reliance upon Schroder's representations, This memorandum states:

 Barry [Geis] also informs that all CSAV agents are instructed to remit to Schroder, New York and we have converted such payments for CSAV at the spot rate . . . .

 Exhibit "H" to DiNatale Aff. According to CSAV, this memorandum establishes that CSAV expected Schroder to convert foreign currencies for CSAV at the "spot price," which was equivalent to the "million dollar rate," at or near the interbank rate and Schroder's best rate for corporate accounts. Geis Tr., at 48, 93, 310-11, 378. In addition, CSAV contends that reliance is established as it continued to remit its European currencies exclusively to Schroder for conversion.

 (iii) Scienter

 CSAV contends that the scienter requirement is established because Schroder knew that CSAV was relying upon Schroder to convert CSAV's currencies at or near the interbank rate, and not treat CSAV as a trading partner, see, e.g., Exhibit "H" to DiNatale Aff. ("Barry [Geis] informs me that . . . we have converted such payments for CSAV at the spot rate"); Suttie Tr., at 96 ("you know we never trade"), and despite this knowledge, Schroder converted CSAV's currency at grossly unfavorable rates. *fn8"

 b. The Confirmations Were Part of the Scheme to Defraud

 CSAV also alleges that as part of its scheme to defraud, Schroder failed to advise CSAV, and omitted from its written confirmations, the prevailing market rate of exchange, the actual rate at which Schroder executed each trade with its correspondent banks, the amount or percentage of Schroder's margin or profit, the extent to which Schroder's rate of exchange exceeded the market rate, and any administrative and other expenses Schroder incurred on CSAV's behalf. Complaint, at para. 35.

 Further, in response to Schroder's argument that there is no fraud because each confirmation sent to CSAV truthfully and accurately reflected the rate that had been applied to each conversion, CSAV argues that it is irrelevant that the confirmations reflected the actual numerical rates at which the conversions were accomplished, because Schroder knew that CSAV expected that the rates disclosed on the confirmations were what Schroder had represented the rates would be -- i.e., at least as good as Schroder's best corporate account rates and at or near the interbank rates.

 2. Discussion

 The Court disagrees with CSAV's contentions and finds, as a matter of law, that Schroder is entitled to summary judgment on CSAV's common law fraud claim.

 a. Absence of Justifiable Reliance

 Under New York law, a plaintiff must establish that his reliance was justifiable, both in the sense that the party claiming to have been defrauded was justified in believing the representation and that he was justified in acting upon it. 2 New York Pattern Jury Instructions, PJI 3:20, commentary, at 95 (Supp. 1991). Thus, the question becomes under what circumstances is a plaintiff's reliance justified. It is well established that when matters are peculiarly within the knowledge of the defendant, a plaintiff may rely on defendant's representations without prosecuting an investigation, as he has no independent means of ascertaining the truth. Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980), cert. denied, 449 U.S. 1123, 67 L. Ed. 2d 109, 101 S. Ct. 938 (1981); see e.g. Tahini Investments, Ltd. v. Bobrowsky, 99 A.D.2d 489, 490, 470 N.Y.S.2d 431, 433 (2d Dept. 1984) (defendant did not disclose that drums of industrial waste had been buried underground at 93 acre farm; no need for plaintiff to investigate if drums were peculiarly within the seller's knowledge); Todd v. Pearl Woods, Inc., 20 A.D.2d 911, 248 N.Y.S.2d 975 (2d Dept. 1964), aff'd, 15 N.Y.2d 817, 257 N.Y.S.2d 937, 205 N.E.2d 861 (1965) (failure to check defendant's representations against public records no bar to fraud claim). By contrast, when misrepresentations concern matters that are not peculiarly within the defendant's knowledge, as in this case, New York courts have rejected claims of justifiable reliance because:

 [if plaintiff] has the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations (Citations Omitted).

 Mallis v. Bankers Trust Co., 615 F.2d at 80-81 (citing Schumaker v. Mather, 133 N.Y. 590, 597, 30 N.E. 755, 757 (1892)); see also Heineman v. S & S Machinery Corp., 750 F. Supp. 1179, 1186-87 (E.D.N.Y. 1990) (fraud "cannot be based on a failure to make simple inquiries" where the information allegedly not disclosed could have been easily ...


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