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Covina 2000 Ventures Corp. v. Lynch

April 21, 2008


The opinion of the court was delivered by: Denise Cote, District Judge


Defendant Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch") moves for summary judgment, and plaintiffs move for partial summary judgment, on plaintiffs' complaint, which alleges that defendants took more than twelve million dollars from plaintiffs' corporate accounts without authorization. The plaintiffs having failed to complain of the transfers within the one-year statutory limitations period, their common-law causes of action are precluded. As a consequence, Merrill Lynch's motion is granted.


The following facts are undisputed. Youxin (Kevin) Ma ("Ma"), a Chinese businessman, established the two plaintiff companies, Covina 2000 Ventures Corp. ("Covina") and George Brothers Investment Co. Ltd. ("George Brothers"), in 2000. Ma opened corporate accounts at Merrill Lynch on behalf of the two companies, signing a Customer Agreement for each account, and depositing a significant amount of capital in each. Defendant Irene S. Ng ("Ng")*fn1 was designated by Merrill Lynch to be the companies' representative.

Pursuant to the terms of the agreements originating these accounts, monthly statements reflecting account activity were to be sent to Ma at an address he provided. The agreements provided, in pertinent part, that the monthly statements were to be deemed "conclusive if not objected to by written notice delivered to [Merrill Lynch] within ten (10) days after delivery or communication of the reports or statements to [the account holder] by [Merrill Lynch]." The monthly statements themselves carried a similar disclaimer. Further, the agreements contained an acknowledgement that any communication sent from Merrill Lynch to the client is deemed to be given to the client "personally" upon sending, regardless of whether the client received the communication.

Between June 19, 2002 and April 12, 2004, more than $9 million was transferred out of the Covina and George Brothers accounts and into third-party accounts in California in more than twenty-five separate wire transfers.*fn2 For twenty-four of these transfers, Merrill Lynch received letters of authorization bearing the apparent signature of Ma, as the representative of Covina and George Brothers. Although there was no agreement between the plaintiffs and Merrill Lynch regarding a security procedure to authenticate wire transfers from the Covina and George Brothers accounts, twenty-one of the letters of authorization received by Merrill Lynch bear a notation indicating that the requests for wire transfers were confirmed with the client --- that is, with Ma.

During the time period when these transfers were made, Merrill Lynch had extensive office practices and procedures, followed in the regular course of its business, to ensure that monthly statements and other communications to its customers were properly addressed and mailed to the address selected by the customer. The addresses entered into Merrill Lynch's system for Covina and George Brothers were provided by Ma. These statements are the official record of all financial and securities transactions in customer accounts. Merrill Lynch's monthly statements show that the plaintiffs' accounts were charged for each allegedly unauthorized wire transfer. Ma claims that he did not receive monthly statements from Merrill Lynch "on a regular basis" between 2002 and 2004, the period when the transfers in question took place, and did not review any statements he did receive. Ma never notified Merrill Lynch that he was not receiving the statements.

Plaintiffs first objected to the allegedly unauthorized transfers on December 27, 2006, when they filed the complaint in this action. This was more than four years after the first --and more than two years after the most recent -- allegedly unauthorized wire transfer. An amended complaint was filed on March 14, 2007.*fn3 In the plaintiffs' own words, the complaint describes a complex scenario "involving a former child television actress, forged documents, international intrigue, theft, utter mismanagement, and the disappearance of millions of dollars involving a Tiburon, California couple hiding from the FBI in Japan." The complaint alleged that Merrill Lynch and Ng had defrauded the plaintiffs by transferring funds out of their accounts to third parties in California, stringing the plaintiffs along by offering them oral assurances that their funds were invested in "balanced and conservative" investment products and were therefore difficult to liquidate upon plaintiffs' request. The complaint further alleged that the defendants had ceased to inform the plaintiffs of activity in their accounts to conceal the fraud, and that the defendants had fabricated the letters of authorization and forged Ma's signature.

The amended complaint brings six causes of action: for breach of contract, breach of fiduciary duty, fraud, conversion, negligence, and breach of the covenant of good faith and fair dealing. Plaintiffs seek actual damages caused by defendants' alleged conduct, punitive damages, interest, and fees and costs.

Defendants have moved for summary judgment on the complaint, arguing principally that under Article 4-A of the New York Uniform Commercial Code, which they claim governs this dispute, plaintiffs' claims are barred by the statute's one-year limitations period.


Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination, the court must view all facts in the light most favorable to the non-moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Sista v. CDC Ixis N. Am., Inc., 445 F.3d 161, 169 (2d Cir. 2006). When the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" contained in the pleadings. Fed. R. Civ. P. 56(e); accord Sista, 445 F.3d at 169. That is, the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Only disputes over material facts -- facts that might affect the outcome of the suit under the governing law -- will properly preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

The parties agree that New York law governs this dispute. Merrill Lynch contends that plaintiffs' six common-law claims are precluded by Article 4-A of the New York Uniform Commercial Code ("UCC"), which governs funds transfers and generally displaces the common law with respect to actions covered by its provisions. Article 4-A was enacted "to correct the perceived inadequacy of attempting to define rights and obligations in funds transfers by general principles of common law or by analogy to rights and obligations in negotiable instruments law or the law of check collection." Grain Traders, Inc. v. Citibank, N.A., 160 F.3d 97, 102 (2d Cir. 1998) (citation omitted). Quoting the Official Comment to Article 4-A, the Second Circuit has observed that its drafters made clear that the Article's provisions represent a careful and delicate balancing of competing interests and are intended to be the exclusive means of determining the rights, duties, and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

Id. at 102-03 (citation omitted). In interpreting this Official Comment, the Circuit "agree[d] with those courts that have interpreted the above language to preclude common law claims when such claims would impose liability inconsistent with the rights and liabilities expressly created by Article 4-A." Id. at 103. Thus, on its motion for summary judgment, Merrill Lynch bears the burden of demonstrating that plaintiffs' common-law claims would ...

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