The opinion of the court was delivered by: John Gleeson, United States District Judge
TD Bank filed this interpleader action asserting that it faces mutually exclusive demands to a sum of money exceeding $2 million in one of the bank's accounts. Max Kahan, Inc., a claimant to the funds, contended that an interpleader is inappropriate and moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). After oral argument on August 4, 2010, I denied the motion to dismiss and granted TD Bank's request that it be permitted to deposit the disputed funds with the Clerk of Court. I promised that an opinion would follow explaining the reasons for those decisions; this memorandum decision is that opinion.
In June 2006, Xiuqing Yao opened an account at JP Morgan Chase ("Chase"). As proof of identity, he provided a Chinese passport and a Chinese National Identification Card bearing his name and photograph. Yao's business partner, Wenru Yang, was given a power of attorney to conduct transactions on the account. The Chase account manager for Yao's account was Julia Fan, whose office is in Manhattan. From June 2006 until the events giving rise to this case, Yao and Yang always contacted Fan when they wanted to transfer money from the account.
On September 14, 2009, a rogue pretending to be Yao walked into a Chase branch in Flushing, Queens. To perpetrate his fraud, the imposter presented a fake Chinese passport with Yao's name and the same passport number as Yao's passport. He directed Chase to transfer $1.9 million from Yao's account to an HSBC account in Hong Kong in the name of Golden On Star Limited. The next day, the villain called the Flushing branch again to ask why the money had not been transferred. A Chase employee replied that the bank would need a copy of Yao's National Identification Card before the transfer could be completed. The charlatan dutifully complied, faxing a fake National Identification Card with Yao's name and the correct identification number. Deceived, Chase sent the $1.9 million to Golden On Star's account on September 16, 2009. On September 18, 2009, the swindler again entered the Flushing branch and procured the transfer of another $190,000 to Golden On Star's account.
Max Kahan, Inc. ("Kahan") is a gold dealer based on 47th Street in Manhattan. According to Kahan, it was introduced to Golden On Star in September 2009 by a longstanding customer. Kahan delivered 20 kilos of gold bars, 1,310.05 ounces of fine gold bars, and 100.875 ounces of platinum "to an individual who represented that he was authorized to accept the merchandise on behalf of Golden On Star Limited." Weinstein Decl. ¶ 8. In exchange for the precious metals, $2.089 million was transferred from Golden On Star's HSBC account to Kahan's business deposit account at TD Bank. Those transfers occurred between September 18, 2009 and September 21, 2009. Kahan asserts that it had no reason to doubt the money's provenance.
Chase began to suspect a fraud on September 23, 2009, when Fan noticed the activity in the account. Fan knew that Yao, who was having difficulty securing a visa, was not in the United States. She contacted Yao, who claimed to know nothing about the transactions. But by then, it was too late to recall the money. After learning of the subsequent transfers to Kahan's account, Chase contacted TD Bank, told TD Bank that the money was derived from a fraud on Chase, and demanded that TD Bank pay the $2.089 million to Chase.
Upon learning of the fraud, the United States Attorney for the Eastern District of New York commenced an in rem action against the money in Kahan's account. That case was assigned to me, and on the government's application I issued a preliminary order of forfeiture. See United States v. TD Bank Account Number 7920060725, No. 09-CV-4663 (E.D.N.Y. Oct. 28, 2009) (Summons and Warrant for Arrest of Articles in Rem). In compliance with my order, the money was paid to the United States Secret Service pending the outcome of the in rem action. Kahan filed an answer and counterclaim, asserting that it was the lawful owner of the funds. Chase did not file a claim and never formally appeared in the forfeitureaction.
After further investigation, the government decided to abandon the forfeiture action. I granted the government's motion to dismiss on April 28, 2010. Prior to the dismissal, the parties disputed where the money should go once the seizure warrant was vacated. Kahan wanted the government to write a check to Kahan so that Kahan could dispose of the funds as it wished. The government argued that the money should instead be wired back to Kahan's TD Bank account. Though Chase was not a party, it wrote a letter to the court supporting the government's view. I agreed with the government, and ordered the Secret Service to restore the status quo ante by returning the money to the TD Bank account.
After the forfeiture action was dismissed, Kahan wrote to TD Bank demanding that TD Bank turn over the funds once they were returned. A few days later, Chase wrote to TD Bank reiterating its request that the money be remitted to Chase instead. Shortly after the Secret Service wired the funds back to Kahan's account, TD Bank commenced this interpleader action, naming Kahan and Chase as adverse claimants to the $2.089 million.*fn1 The complaint asserts that TD Bank "cannot determine which of the Interpleader Defendants possesses the highest and best claim to the Funds under the law and, thus, cannot determine the person or persons to whom it should pay the Funds or any portion thereof." Compl. ¶ 1. Kahan now moves for an order dismissing the action and directing TD Bank to release the money to Kahan.
This case involves property law's eternal triangle of owner, crook, and subsequent recipient.*fn2 The unidentified crook defrauded Chase and gave the proceeds to Kahan in exchange for gold and platinum. The crook is nowhere to be found, leaving two parties, Chase and Kahan, as possible candidates to bear the loss. The usual principle of risk allocation is nemo dat quod non habet -- no-one can give what he or she does not have -- and the thief has no power to pass title. Unless the subsequent recipient of property can invoke some exception to that maxim, the initial victim of a theft prevails and the loss falls on the recipient of the property. See, e.g., Mitchell v. Hawley, 83 U.S. (16 Wall.) 544, 550 (1872) ("No one in general can sell personal property and convey a valid title to it unless he is the owner or lawfully represents the owner. Nemo dat quod non habet."); cf. Jeffrey Hackney, Book Review, 117 Law Quarterly Review 150, 153 (2001) ("are we wholly sure that Nemo was not a Roman pawnbroker?").
The law provides a broad exception to the rule of nemo dat quod non habet in the case of money, a commodity whose ready transferability is essential to keep the wheels of commerce well greased. Where the property is money, even an outright thief has the power to pass title to a good faith holder for value. See, e.g., Newton v. Porter, 69 N.Y. 133, 137 (1877). Accordingly, Kahan will be entitled to the keep the money, free of any claim by Chase, if it can show that it acted in ...