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Greenberg, Trager & Herbst, Llp v. Hsbc Bank Usa and Citibank

October 13, 2011


The opinion of the court was delivered by: Ciparick, J.:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

In this dispute between a law firm and two banks, the issues presented are (1) the scope of the duty a payor bank owes to a non-customer depositor of a counterfeit check and (2) the scope of the duty a depository bank owes its customer when it acts as a collecting bank during the check collection process.

We conclude that neither the depository/collecting bank nor the payor bank violated any duty owed to the depositor and that summary judgment dismissing the complaint was properly granted.


Plaintiff Greenberg, Trager and Herbst, LLP (GTH) is a law firm primarily involved in construction litigation law. In September 2007, a partner at GTH received an e-mail from a representative of Northlink Industrial Limited (Northlink), a Hong Kong company. The e-mail stated that Northlink was looking for legal representation to, among other things, assist it in the collection of debts owed by its North American customers. A series of e-mails followed discussing the nature of Northlink's desired representation. At some point, GTH indicated a willingness to represent Northlink and requested a $10,000 retainer. The law firm was informed that a Northlink customer had sent a payment to GTH and that GTH could take its retainer from those funds. A Citibank check for $197,500 was received by GTH and GTH was instructed, via e-mail, to remit the funds to Northlink while retaining $10,000 as a retainer. The e-mail also provided wiring instructions to Citibank in Hong Kong. On Friday, September 21, 2007, GTH deposited the check into its attorney trust account at HSBC.

The next business day, Monday, September 24th, the HSBC account reconciliation department processed the check and pursuant to the federal funds availability law provisionally credited GTH's account for $197,750. HSBC, like most commercial banks, presents its checks through the Federal Reserve Bank. HSBC determines which Federal Reserve Bank should receive the check for presentment to the appropriate payor bank by utilizing the American Banking Association (ABA) routing number located on the bottom of the check. The routing number is part of the microencoding number (MICR) on the bottom of every check. The routing number on the bottom of this check read 026009645. According to HSBC, this routing number indicated that the check should be sent to the Federal Reserve Bank of Philadelphia (FRBP) for presentment to the appropriate payor bank. Accordingly, HSBC sent the check to FRBP for processing. FRBP presented an image replacement document (IRD)*fn1 of the check to Citibank's Item Processing North Department in Englewood Cliffs, New Jersey (Item Processing North) that same day.

According to Citibank, Item Processing North processes only checks with the following three routing numbers: 02100089, 021272655 and 221172610. If a check contains a routing number other than one of these three routing numbers, the check cannot be processed by Item Processing North because it only has access to account information associated with the three routing numbers. Because the routing number was not recognized by Item ProcessingNorth, the automated sorting system directed the IRD to the reject pocket. This happens when there is an issue with the MICR on the check.*fn2 An Image Processing North clerk examined the IRD and determined that the routing number was not a number that belonged to Image Processing North. Image Processing North sent the IRD back to FRBP, with the notation "sent wrong." The FRBP sent the IRD back to HSBC.

HSBC received the IRD with the notation "sent wrong" the next day, September 25, 2007.*fn3 According to HSBC, when a check is returned for reasons other than dishonor, such as a damaged or illegible routing number, it is known in the industryas an "administrative return." HSBC also noted that when a payor bank dishonors a check, HSBC typically receives an Electronic Advance Return System (EARNS) notification. HSBC did not receive such a notice on September 24 or 25. Because the check was marked "sent wrong," HSBC assumed that there was a problem with the routing number that required repairing. HSBC then repaired the routing number by utilizing the partial routing number located on the top right hand corner of the check. HSBC, using the repaired routing number, determined that the check actually belonged to Citibank, Las Vegas. HSBC placed the repaired routing number on the bottom of the check. On September 26, 2007, HSBC sent the check to the Federal Reserve Bank, San Francisco (FRBS). HSBC never informed GTH of the "administrative return" of the check.

On September 27, 2007, a GTH partner called a representative of HSBC inquiring as to whether the check had "cleared" and if the funds were available for disbursement. According to GTH, a five year banking relationship existed between them.*fn4 GTH was informed that the funds were available. Later that day, GTH wired $187,500 from its account to Hong Kong pursuant to the wiring instructions it received from Northlink. GTH claims that, but for the assurance that the check had"cleared," it would not have forwarded the funds. On September 28, 2007, HSBC confirmed to GTH that the wire transfer had been consummated.

On October 2, 2007, HSBC received an EARNS notice from Citibank that the check was being dishonored as "RTM [return to maker] Suspect Counterfeit." An HSBC Branch Manager later contacted GTH, informing them that the check had been dishonored and returned as counterfeit. HSBC then revoked its provisional settlement and charged back GTH's account.

On October 17, 2007, GTH commenced this action against HSBC and Citibank sounding in conversion and conspiracy;*fn5 negligence and negligent misrepresentation by HSBC for failure to inform GTH that the check had been returned and dishonored on September 25, and for informing GTH over the phone that the funds had "cleared" and were available for disbursement; and negligence by Citibank for failing to detect that the check was counterfeit when it was originally presented to Image Processing North on September 24. Both Citibank and HSBC moved for summary judgment dismissing the complaint. Supreme Court ruled from the bench that HSBC had no duty under the Uniform Commercial Code (UCC) to inform GTH that the check had been returned "sent wrong" on September 25th, but rather that the dishonor actually took placewhen HSBC discovered the check was "Suspect Counterfeit." The court granted both HSBC and Citibank's motions and dismissed the complaint in its entirety.

The Appellate Division affirmed, holding that because the check had not been dishonored pursuant to UCC 4-212,*fn6 HSBC had no duty to inform GTH of the administrative return of the check. The court further held that, even if an HSBC employee misrepresented that the check had cleared, GTH's reliance on such a misrepresentation does not give rise to an action for negligent misrepresentation barring a fiduciary relationship, which, it said, does not exist between a bank and its customer. The court additionally found that if the principle of estoppel governs the case, GTH was in the best position to guard against the risk of a counterfeit check by knowing its client. The court finally stated that the personnel at Citibank were not in a position to discern whether the check was counterfeit and had no duty to inform HSBC at that time (see Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 73 AD3d 571, 572 [1st Dept 2010]). We granted GTH leave to appeal (15 NY3d 707 [2010]) and now affirm.


The manner in which checks are processed by banks is governed by the Uniform Commercial Code. The UCC defines a "Depository Bank" as "the first bank to which an item is transferred for collection" (UCC 4-105 [a]). A "Collecting Bank" is defined as "any bank handling the item for collection except the payor bank" (UCC 4-105 [d]). A "Payor Bank" is defined as "a bank by which an item is payable as drawn or accepted" (UCC 4-105 [b]). An "Intermediary Bank" is defined as "any bank to which an item is transferred in course of collection except the depository or payor bank" ([UCC 4-105 [c]).

In a typical check presentation scenario, a bank customer deposits a check at its bank, the depository bank. After deposit by the customer, the depository bank either presents the check to the payor bank, or as is more commonplace, the depository bank sends the check to a clearing house, which acts as an intermediary bank. Once the depository bank sends the check to the intermediary bank, the depository bank becomes a collecting bank. The intermediary bank then presents the check to the payor bank (at which time the intermediary bank is also a collecting bank). When the check is received by the payor bank, it either pays the check, returns the check or dishonors the check.

The UCC prescribes the duties the various banks owe to a depositor. A collecting bank must use ordinary care in presenting a check or sending a check for presentment, sending notice of dishonor or non-payment or returning a check, and settling the check when the collecting bank receives final settlement from the payor bank (see UCC 4-202 [1]). A collecting bank has until midnight of the next banking day (its "midnight deadline" (UCC 4-104 [h]) to take the above actions when receiving a check, notice of dishonor or final settlement of the check (see UCC 4-202 [2]). In other words, whenever a collecting bank receives a check from a depositor or notice or settlement from the payor bank it must act on it by midnight the next banking day.

A payor bank must, by its "midnight deadline" (UCC 4-104 (h)]), pay the item (see UCC 4-302), return the item or send written notice of dishonor or nonpayment (see UCC 4-301). Final settlement of a check occurs when the payor bank has paid the item or fails to return the check, or sends written notice of dishonor or non-payment of the check by its midnight deadline (see UCC 4-301 [1], 4-302 [a]).

Pursuant to the Expedited Funds Availability Act (12 USC § 4001), banks are required to make funds from a deposited check available for the depositor's withdrawal within certain short time periods (see 12 USC § 4002 [b] [1]). The purpose of the "[a]ct is to provide faster availability of deposited funds" (Haas v Commerce Bank, 497 F Supp 2d 563, 565 [SD NY 2007]). This availability is provisional and the collecting bank has the right to charge ...

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