there is no evidence that its employees altered documents. Plaintiffs claim that Citibank Int'l's acts and knowledge should be imputed to Citibank because: 1) Castellanos was employed by Citibank; and 2) Citibank and Citibank Int'l's are related. However, there is no dispute that in 1992, Castellanos was employed by Citibank Int'l and Citibank Int'l was a wholly-owned subsidiary of Citibank. (Castellanos 10/21/96 Aff. P 3; Pelly Aff. P 1) Plaintiffs have presented no evidence demonstrating that I should pierce the corporate veil and that knowledge of the subsidiary should be imputed to the parent corporation.
However, plaintiffs have presented evidence sufficient to create an issue of fact as to whether Citibank Int'l's employees altered the documents. With regard to the alteration of the inspection report, Plaintiffs have offered Hart's statement during her deposition in Kools' action against Jade in which she stated that Castellanos added the product description to the inspection report which read, "Levi JEANS 501 0191 NEW ORLEANS, MADE IN USA LABELS." (Sharrow 7/10/96 Aff., Ex. 10) She stated, "I'm sure that was put on at the bank because there was a problem with that, and I think [Luis Castellanos] said he would go ahead and help and do that." (Id.) Although plaintiffs have submitted also two documents which Citibank has produced which seem to show that Citibank Int'l received two different versions of the fax from Jade on December 2, 1992 -- one with the correct product description and one with the "NEW ORLEANS" description -- this does not refute completely Hart's statement, especially because the inspection certificate actually sent to Citibank from Citibank Int'l contained the "NEW ORLEANS" description. (Regal 1/22/97 Decl. PP 5-6 & Exs. A & B) In addition, Hart's later depositions do not contradict specifically this original statement regarding the inspection report, although they may suggest a confused memory. (Sharrow 7/10/96 Decl., Ex. 10 at 122-23; Sharrow 12/4/96 Decl., Ex. 17 at 50) With regard to the addition of the word "JEANS" on the packing list, as noted above, plaintiffs have submitted evidence sufficient for a reasonable fact-finder to infer that Citibank Int'l altered the document. Although Hart stated during a deposition that she believed someone other than an employee at the bank added the word "JEANS" to the packing list, that statement does no more than create an issue of fact. (Sharrow 12/4/96 Decl., Ex. 17 at 66) Thus, the alteration allegation must be dismissed against Citibank but stands against Citibank Int'l.
Plaintiffs' second fraud allegation -- defendants' failure to disclose prior presentments -- must be dismissed because defendants had no duty to disclose the prior presentments to plaintiffs. There can be no fraudulent failure to disclose absent a duty to disclose. See Zackiva Communications Corp. v. Horowitz, 826 F. Supp. 86, 89 (S.D.N.Y. 1993). Several cases have held that an issuer need not disclose the details of final or prior presentments before paying the beneficiary. See Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230, 237 (3d Cir. 1983); Banque de L'Union Haitienne, S.A. v. Manufacturers Hanover Int'l Banking Corp., 787 F. Supp. 1416, 1422 (S.D. Fla. 1991), aff'd, 959 F.2d 971 (1992); Five Star Parking v. Philadelphia Parking Auth., 703 F. Supp. 20, 22-23 (E.D. Pa. 1989). Plaintiffs cite no case which imposes such a duty. Probably as a result of this difficulty with their fraud theory, plaintiffs reformulate their fraud claim to allege that even though issuers may have no duty to disclose to plaintiffs discrepancies in prior presentments, Citibank should have been aware from the first two presentments that the documents were fraudulent, and that Citibank then committed fraud by paying Jade in bad faith. (Pl. 9/13/96 Mem. at 46-47) However, as noted below, this allegation fails as well because it duplicates the breach of contract claim.
Defendants argue also that the fraud claim must be dismissed because it merely restates the breach of contract claim. It is well settled under New York law that "mere allegations of breach of contract do not give rise to a claim for fraud or fraudulent inducement." Sudul v. Computer Outsourcing Servs., 868 F. Supp. 59, 61-62 (S.D.N.Y. 1994) (citations omitted). "A contracting party's 'mere promissory statement' that he will live up to his contractual obligations cannot be the basis of a fraud claim." Rolls-Royce Motor Cars, Inc. v. Schudroff, 929 F. Supp. 117, 123 (S.D.N.Y. 1996); see also McKernin v. Fanny Farmer Candy Shops, Inc., 176 A.D.2d 233, 234, 574 N.Y.S.2d 58, 59 (2d Dep't 1991). A fraud claim may survive, however, where "the allegations contained [in the fraud claim] are separate and distinct from those giving rise to the breach of contract claim." Tuck Indus., Inc. v. Reichhold Chemicals, Inc., 151 A.D.2d 565, 566, 542 N.Y.S.2d 701, 701 (2d Dep't 1989); Smehlik v. Athletes and Artists, Inc., 861 F. Supp. 1162, 1171 (W.D.N.Y. 1994).
Here, only one of the three fraud allegations is distinct from the breach of contract claim. In support of their breach of contract claim, plaintiffs allege that the contract required defendants to refrain from honoring the letter of credit unless Jade submitted conforming documents, and to act in good faith. Plaintiffs claim that Citibank breached the contract by paying on nonconforming documents, and by paying Jade in bad faith despite awareness of Jade's fraud.
The alteration allegation described above, see supra at 56-60, is an affirmative misrepresentation that is distinct from defendants' breach of contract claim. However, the other two fraud allegations must be dismissed because they duplicate the breach of contract claim. Plaintiffs' third fraud allegation -- that Citibank affirmatively misrepresented that the documents complied with the letter of credit requirements by stating in the payment advice that the documents were "in due form and regular in every respect" -- alleges merely that Citibank honored nonconforming documents, and thus restates the breach of contract claim. Although there was no requirement under the Application Agreement that Citibank make an affirmative statement of Jade's compliance, such a statement cannot be separated from the underlying duty to pay on conforming documents only. Similarly, plaintiffs' second fraud allegation -- Citibank's payment in bad faith despite knowledge of Jade's fraud -- also duplicates the breach of contract claim. The Application Agreement required that defendants act in good faith, and their alleged failure to do so breached a contractual duty. These two fraud allegations are "based solely upon the failure to perform the promise of future acts which constitute the contractual obligations themselves." Chase v. Columbia Nat'l Corp., 832 F. Supp. 654, 660 (S.D.N.Y. 1993) (citing Vanderburgh v. Porter Sheet Metal, Inc., 86 A.D.2d 688, 446 N.Y.S.2d 523, 525 (3d Dep't 1982). Accordingly, only plaintiffs' allegation that Citibank Int'l altered the inspection report and the packing list survives. The other fraud allegations, including those against Citibank, are dismissed.
Defendants argue also that plaintiffs' aiding and abetting claim should be dismissed. Plaintiffs assert that defendants aided and abetted Jade's fraud, and this claim survives. To maintain a claim for aiding and abetting, plaintiffs must show:
(1) the existence of a . . . violation by the primary (as opposed to the aiding and abetting) party; (2) "knowledge" of this violation on the part of the aider and abettor; and (3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.
Morin v. Trupin, 711 F. Supp. 97, 112 (S.D.N.Y. 1989). The plaintiff must allege also that the injury was the direct or reasonably foreseeable result of the aiding and abetting conduct. Id. Plaintiffs adequately allege the existence of a primary fraud. Jade never provided the jeans and Jade's president pleaded guilty to fraud. In addition, plaintiffs have alleged that defendants knew of the fraud (Compl. P 55), and have provided other allegations that support this claim, including the discrepancies in Jade's documents and the circumstances surrounding the first two presentments which plaintiffs claim should have alerted defendants to the fraud. Plaintiffs also have alleged adequately that Citibank Int'l provided substantial assistance to the fraud. As noted above, plaintiffs have adequately alleged at least two affirmative misrepresentations by Citibank Int'l which constitute substantial assistance to the underlying fraud. However, the claim against Citibank is insufficient because plaintiffs have not alleged any substantial assistance by Citibank. Defendants argue that Citibank's payment despite knowledge of the fraud amounts to substantial assistance, but that merely restates the contract claim and cannot form the basis for an independent claim of aiding and abetting fraud. See, e.g., Lucariello v. Clayton D. Masonry Contracting, Inc., 115 A.D.2d 319, 495 N.Y.S.2d 873 (4th Dep't 1985); G.D. Searle & Co. v. Medicore Communications, Inc., 843 F. Supp. 895, 909 (S.D.N.Y. 1994) ("In order to sustain a tort action separate from the breach of contract claim, the tortious conduct must have breached a legal duty existing independently of the contractual relations between the parties."). Finally, plaintiffs have alleged sufficiently that Citibank Int'l's aiding and abetting proximately caused them injury. (Compl. P 57) For those reasons, plaintiffs' claim against Citibank for aiding and abetting fraud is dismissed, but its similar claim against Citibank Int'l survives.
Plaintiffs' fourth claim is for conversion against Citibank, which moves to dismiss, or in the alternative for summary judgment on statute of limitations grounds. Citibank argues that the claim accrued on December 2, 1992, the date on which Citibank reimbursed itself from Oei's Citibank account, and that the three-year statute of limitation has therefore run.
"The tort of conversion is established when one who owns and has a right to possession of personal property proves that the property is in the unauthorized possession of another who has acted to exclude the rights of the owner." Key Bank of New York v. Grossi, 227 A.D.2d 841, 642 N.Y.S.2d 403, 405 (3d Dep't 1996). An action for conversion is subject to a three-year statute of limitations, see N.Y.C.P.L.R. § 214(3) (McKinney 1990), and "accrual runs from the date the conversion takes place . . . and not from discovery or the exercise of diligence to discover," Vigilant Ins. Co. of Amer. v. Housing Auth. of the City of El Paso, Tex., 87 N.Y.2d 36, 44, 637 N.Y.S.2d 342, 347, 660 N.E.2d 1121 (1995).
Here, plaintiffs allege that Citibank converted the funds in Oei's bank account by reimbursing itself from the account even though it had forfeited its right to do so by "making the Payment upon a presentation of documents that did not conform to the terms and conditions of the Letter of Credit." (Compl. PP 69-70) According to the complaint, Citibank paid itself from Oei's account on December 2, 1992. (Compl. P 39) The claim accrued on that date, plaintiffs filed this case on May 17, 1996, and the conversion claim accordingly is time-barred.
Plaintiffs argue, however, that the cause of action did not accrue on December 2, 1992 because Citibank fraudulently concealed its wrongdoing. A defendant may be equitably estopped to assert a statute of limitations defense if the defendant's affirmative wrongdoing and concealment was responsible for the plaintiff's delay in bringing suit. See General Stencils, Inc. v. Chiappa, 18 N.Y.2d 125, 128, 272 N.Y.S.2d 337, 340, 219 N.E.2d 169 (1966). Here, however, it is apparent even from the face of the complaint that Citibank's fraudulent concealment, even if assumed, did not delay plaintiffs' filing of this action. Plaintiffs' conversion claim is based upon Citibank's honor of nonconforming documents. Plaintiffs acknowledge that they received those documents on December 2, 1992. (Compl. P 40) Any alleged concealment would not have prevented plaintiffs from recognizing the existence of a conversion claim.
Moreover, the evidence the parties submitted on their summary judgment motions demonstrates that plaintiffs were aware in December, 1992 and January, 1993 of the discrepancies in the documents. (Sharrow 7/10/96 Decl., Exs. 20-29) In fact, plaintiffs informed Citibank Int'l on January 25, 1993 that the documents were fraudulent. (Sharrow 7/10/96 Decl., Ex. 46) Plaintiffs were aware soon after the conversion of the facts on which the conversion claim is based. Their failure to sue was not due to Citibank's concealment. Thus, plaintiffs' conversion claim must be dismissed as time-barred.
Defendants argue also that Kools lacks standing to bring this action. I previously determined that Kools, as an undisclosed principal, lacked standing, and defendants claim that Kools may not relitigate that issue under the doctrine of res judicata. Plaintiffs argue that I should vacate that decision because defendants willfully concealed evidence at the time of the previous action that Oei disclosed Kools' identity as Oei's principal to Citibank employee Wade Walker at the time he applied for the letter of credit, and thus that Kools was not an undisclosed principal. I need not address this issue now because plaintiffs state that they "are prepared to effect a direct assignment to Kools of Oei's rights as applicant and proceed with the litigation with Kools as assignee and, if necessary, to request leave to amend the complaint to do so." (Pl. 9/13/96 Mem. at 62) Defendants have not opposed this proposal. Moreover, "under New York law . . . . in the absence of clear language expressly prohibiting assignment . . . contracts are freely assignable." Pravin Banker Assoc., Ltd. v. Banco Popular del Peru, 895 F. Supp. 660, 667-68 (S.D.N.Y. 1995); see S & L Vending Corp. v. 52 Thompkins Ave. Restaurant, Inc., 26 A.D.2d 935, 274 N.Y.S.2d 697, 698 (2d Dep't 1966). A New York court upheld an assignment to an applicant of an issuer's rights against a confirming bank for the purpose of "facilitating a recovery as compensation for an alleged wrong." Bellarno Int'l Ltd. v. Irving Trust Co., 165 A.D.2d 809, 809, 560 N.Y.S.2d 287, 288 (1st Dep't 1990). The Application Agreement does not prohibit assignment; in fact, it states, "This Agreement shall be binding upon the Applicant, its successors and assigns . . . ." (Compl., Ex. A P 16) Therefore, Oei may assign his rights under the Application Agreement to Kools, which may file an amended complaint as assignee. Once this is accomplished, Kools will have standing to sue under the Application Agreement.
Defendants move to preclude an award of consequential or punitive damages. I need not decide now whether consequential damages are permitted under a wrongful honor claim because plaintiffs have not presented any evidence that they sustained such damages. Therefore, their request for consequential damages must be stricken.
Punitive damages are not typically recoverable in a breach of contract action. Rocanova v. Equitable Life Assurance Society, 83 N.Y.2d 603, 613, 612 N.Y.S.2d 339, 342, 634 N.E.2d 940 (1994). However, "where the breach of contract also involved a fraud evincing a high degree of moral turpitude and demonstrating such wanton dishonesty as to imply a criminal indifference to civil obligations, punitive damages are recoverable if the conduct was aimed at the public generally." Id. (citations and quotations omitted). Here, plaintiffs have failed to allege any conduct aimed at the public generally which would justify such an award. Therefore, the demand for punitive damages in connection with the wrongful honor claim is stricken.
Punitive damages are recoverable in a fraud action "where the defendant's fraudulent conduct is gross, wanton, or deliberate and demonstrates a high degree of moral culpability." Coldwell Banker Residential Real Estate Servs., Inc. v. Eustice, 190 A.D.2d 839, 840, 594 N.Y.S.2d 52, 53 (2d Dep't 1993). A plaintiff need not demonstrate that the acts were aimed at the public generally to obtain punitive damages in a fraud action. Borkowski v. Borkowski, 39 N.Y.2d 982, 983, 387 N.Y.S.2d 233, 233, 355 N.E.2d 287 (1976). I cannot say now that plaintiffs could prove no facts that would entitle them to punitive damages on the fraud claim. Therefore, defendants' motion to strike the demand for punitive damages on the fraud claim is denied.
Finally, defendants move to strike plaintiffs' jury demand, arguing that the Application Agreement contains a waiver of jury trial. The Application Agreement consists of three pages. On the first, the applicant lists information specific to the particular transaction, such as the documentary requirements for the letter of credit. The next two pages are a form, containing 19 paragraphs governing the transaction. Paragraph 19 of the Application Agreement, the paragraph immediately above the signature lines, provides, "The Applicant and the Bank hereby waive all rights to trial by jury in any action, proceeding or counterclaim arising out of or relating to this agreement or any letter of credit issued by the Bank pursuant thereto." (Compl., Ex. A P 19)
"It is elementary that the Seventh Amendment right to a jury is fundamental and that its protection can only be relinquished knowingly and intentionally." National Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977). A presumption exists against the waiver of a jury trial. Id. "In addressing jury waiver clauses, courts have consistently examined the following factors: negotiability of the contract terms, disparity in bargaining power between the parties, the business acumen of the party opposing the waiver, and the conspicuousness of the jury waiver provision." Sullivan v. Ajax Navigation Corp., 881 F. Supp. 906, 911 (S.D.N.Y. 1995).
Here, the evidence is sufficient to prove that Oei knowingly and intentionally waived his right to a jury. First, there is no indication that the terms of the Application Agreement were not negotiable. Simply because Oei did not negotiate these provisions, and because the form was created by Citibank, does not mean that the waiver or other terms in the application agreement were not negotiable. The Application Agreement was not like a ticket sold to a passenger boarding a cruise ship. See Sullivan, 881 F. Supp. at 911. Second, there was little disparity in bargaining power. Oei was Citibank's longtime customer (Walker 10/28/96 Aff., Ex. A), and Citibank had an interest in accommodating him. Moreover, there is evidence that Oei approached another bank as well for a letter of credit. (Sharrow 12/4/96 Aff., Ex. 19) Third, Oei was an experienced businessman. He was a product manager with IBM for many years. Fourth, the jury waiver provision was highly conspicuous. The provision was set off in its own paragraph, right above the signature line. It was not "set deeply and inconspicuously in the contract." National Equip. Rental, Ltd., 565 F.2d at 258; see also Orix Credit Alliance, Inc. v. Better Built Corp., 1990 U.S. Dist. LEXIS 8106, No. 89 Civ. 7333, 1990 WL 96992, at *2 (S.D.N.Y. July 2, 1990); National Westminster Bank, U.S.A. v. Ross, 130 Bankr. 656, 667 (S.D.N.Y. 1991), aff'd sub. nom., Yaeger v. National Westminster, 962 F.2d 1 (1992) ("the waiver provision is set off in its own paragraph less than two inches above the signature line and, like the balance of the Guaranty, is printed in small but entirely legible text."). Oei had the Application Agreement for at least several days and had the opportunity to read it. (Walker 10/28/96 Aff., Ex. E) Oei waived his right to a jury trial knowingly and intentionally, and plaintiffs' demand for a jury trial is stricken.
* * *
For the foregoing reasons, defendants' motion to dismiss, or in the alternative for summary judgment, is granted as to the conversion claim and is granted as to Citibank on the fraud and aiding and abetting fraud claims, but denied as to the other claims. Defendants' Rule 9(b) motion is denied. In addition, Citibank's motions to strike plaintiffs' claim for consequential and punitive damages on the wrongful honor claim and the demand for a jury trial are granted, but their motion to strike the demand for punitive damages on the fraud claim, is denied. Plaintiffs' cross motion for summary judgment on the wrongful honor claim is granted.
Dated: New York, New York
March 20, 1997
Michael B. Mukasey,
U.S. District Judge