SCD

INDEX

NO. 5257-

SUPREME COURT - STATE OF NEW YORKIAS TERM PART 18 NASSAU COUNTY

PRESENT:HONORABLE LEONARD B. AUSTINJustice Motion RID: 10-25-

Submission Date: 11-08-Motion Sequence No. : 001,002/MOT D

BARRY BORGEN,Plaintiff

- against -

CITIBANK, N.A., STEALTH WINDOWWORKS OF NEW YORK, INC.,STEALTH WINDOW WORKS OFBROOKLYN, INC. , STEALTH WINDOWWORKS, INC., AVANT GUARDS INC.,NEW YORK STATE DEPARTMENT OFTAXTION AND FINANCE,

Defendants.

COUNSEL FOR PLAINTIFFJeffrey W. Toback, P.18 Franklin AvenueHewlett, New York 11557

COUNSEL FOR DEFENDANTCertilman , Balin , Adler & Hyman , LLP90 Merrick AvenueEast Meadow, New York 11554

ORDER

The following papers were read on Defendant's motion to dismiss Plaintiff'cross-motion to serve an amended summons and complaint:

Notice of Motion dated June 28, 2004;Affirmation of Thomas J. McNamara, Esq. dated June 21, 2004;Defendant's Memorandum of Law;Notice of Cross-motion dated October 22 , 2004;Affirmation of Jeffrey W. Toback , Esq. dated October 22 2004;Plaintiff' s Memorandum of Law;Defendant's Reply Memorandum of Law.

BORGEN v. CITIBANK, N. et a/.,Index No. 5257-

Defendant, Citibank , N.A. ("Citbank"), moves to dismiss this action on the

grounds that Plaintiff lacks standing and the complaint fails to state a cause of action

upon which relief can be granted. Plaintiff cross-moves for leave to serve an amended

summons and amended complaint.

BACKGROUND

Plaintiff, Barry Borgen ("Borgen ), was a 50% shareholder as well as an officer

and director of Stealth Window Works of New York , Inc. , Stealth Window Works of

Brooklyn, Inc. , Stealth Window Works, Inc. and Avant Guards Inc. (collectively

Stealth"

Paul Rouhani ("Rouhani") was the owner of the remaining shares of Stealth and

was also an officer and director of Stealth.

Stealth maintained its business checking accounts with Citibank. Between May

28, 1997 and November 9, 2000 , Citibank was presented with 670 payroll checks drawn

on the Stealth checking accounts. These checks are alleged to have been payable to

either fictitious employees or to employees who were not due salary for the period for

which the checks were drawn. All of the checks were drawn, signed and endorsed by

Rouhani who had the checks cashed and then deposited these funds into his or his

wife s personal account.

Borgen alleges that Citibank either negligently or fraudulently cashed these

checks. Borgen further alleges that all of the checks in question were presented to two

Citibank employees - - Gail Gopulchian and Helen Danisls - - at the Citbank branch

BORGEN v. CITIBANK , N.A., et a/.,Index No. 5257:-

located at 51-31 Northern Boulevard , Woodside and thatthese employees were active

participants in this fraudulent scheme.

As a result of this alleged scheme , $835,568.07 was diverted from Stealth to

Rouhani during the period in question. This diversion of funds caused Stealth to go out

of business.

In this action , Borgen seeks to recover the sum of $417,784.03 from Citibank

which is the amount he claims is his share of the diverted funds.

Borgen also pleads a cause of action against Defendant , New York State

Department of Taxation and Finance. The Department of Taxation and Finance has

determined that Stealth was required to pay $126,006.58iin withholding taxes,

$86 380.20 in corporate taxes and $101 117.62 in unemployment taxes on the wages

paid to the fictitious employees. The amounts due to the 'Department of Taxation and

Finance reflect the amounts which would have been due as taxes had the amounts on

these checks been wages paid to actual employees. Borgen claims that he is

personally liable for these taxes and seeks a judgment declaring that these sums were

not wages paid to employees and , therefore , not subject to withholding, corporate

and/or unemployment taxes.

There is no indication in the record whether Stealth or the New York State

Department of Taxation and Finance has been served. These parties had not appeared

in this action when these motions had been submitted.

BORGEN v. CITIBANK , N.A., et a/.

Index No. 5257-

Citbank moves to dismiss this action on the grounds that Borgen lacks standing

to bring this action against Citibank. That is , it urges that the claim can be brought only

by Stealth. Citibank further asserts that, pursuant to Uniform Commercial Code ("UCC"

93-405(1 )(b), the fictitious payee or padded payroll RULE, the bank has no liabilty on

this claim. Therefore, the complaint fails to state a cause! of action.

Borgen cross-moves to amend the caption and for leave to serve an amended

summons and amended complaint. The proposed amendment to the caption seeks to

make the various Stealth entities Plaintiffs in the action and delete them as Defendants.

The amendment to the complaint seeks to remedy the procedural and substantive

deficiencies in the original complaint and to add causes of action not previously pled.

Citbank opposes the cross-motion to amend asserting that the proposed amendments

are without merit.

DISCUSSION

Plaintiff' s Cross-Motion to Serve an Amended Summons and Complaintand Citbank' s Motion to Dismiss Pursuant to CPLR 3211 (a)(7)

By moving to serve an amended summons and complaint, Plaintiff is conceding

that the complaint contains the procedural and substantive defects which resulted in

Citbank' s motion to dismiss. In addition to adding causes of action not previously pled,

the proposed amendment seeks to remedy the procedural and substantive defects in

the complaint.

CPLR 305(c) grants the court discretion to permit the service of an amended

summons at any time if the rights of the party against whom the summons is issued are

BORGEN v. CITIBANK , N. et a/.

Index No. 5257-

not prejudiced. In addition , a part should be given leave to serve an amended

pleading in the absence of demonstrable prejudice resulting from delay or surprise.

Fahey v. County of Ontario , 44 N. 2d 934 (1978); and Northbay Construction Co.. Inc.

v. Bauco Construction Corp. 275 AD.2d 310 (2 Dept. , 2000); and CPLR 3025(b).

The Court wil not consider the merits of the proposed amendment unless the

proposed amendment is insufficient as a matter of law or totally devoid of merit.

Sunrise Plaza Assocs.. L.P. v. International Summit Eauities Corp. , 288 A. 2d 300 (2

Dept. 2001): and Norman v. Ferrara , 107 A. 2d 739 (2 Dept. 1985). See also , Siegel

New York Practice3d 9 237.

The Court would be exalting form over substance if it were to grant Citibank'

motion to dismiss without considering the merits of Plaintiff's motion to amend. If the

motion were granted, it would most likely resolve this issue. Plaintiff could , and almost

certainly would, file a new summons and complaint containing the causes of action not

pled in the original complaint.

Additionally, if the Court grants Plaintiff leave to serve an amended summons

and complaint, the amended complaint would supercede the original complaint and

become the complaint in the action. St. Lawrence Explosives Corp. V. Law Brothers

Contacting Corp. , 170 A.D.2d 957 (4 Dept. 1991); and Samide v. Roman Catholic

Diocese of Brooklyn 194 Misc.2d 561 (Sup.Ct., Queens Co., 2003).

When considering a motion to dismiss made pursuant to CPLR 3211 (a)(7), the

Court must determine whether Plaintiff has a cognizable cause of action, not whether it

BORGEN v. CITIBANK , N.A, et a/.,Index No. 5257-

has been properly pled. Guggenheimer v. Ginzburg , 43 N. 2d 268 (1977). See, also

Morris v. Morris , 306 AD.2d 449 (2 Dept. 2003): and Frank v. DaimlerChrysler Corp.

292 AD.2d 118 (1 Dept. 2002). In making such a determination, the court must deem

all of the allegations contained in the complaint as true and must afford the pleader the

benefit of every favorable inference that may be drawn from the pleadings. Leon v.

Martinez , 84 N. 2d 83 (1994); and Elmore v. City of New York, - AD.3d - ,

2005WL301170 (2 Dept. 2005).

In essence, the standard for dismissing an action pursuant to CPLR 3211 (a)(7) is

similar if not identical to the standard for denying a motion for leave to serve an

amended complaint. A motion to dismiss made pursuant to CPLR 3211 (a)(7) wil be

granted when the complaint fails to state a cause of action. A motion for leave to

amend wil be denied only if the proposed amendment is without merit. In either case,

the Court must determine whether the complaint or the proposed amended complaint

alleges causes of action on which Plaintiff can obtain reli

In view of this, the Court wil determine Plaintiffs motion to amend and treat

Citbank' s motion papers as opposition to the motion to amend.

Standing

The first issue the Court must resolve is whether Borgen has standing to bring

this action. Standing involves the question of whether the party bringing the action has

sufficient interest in the controversy so that he or she is the proper person to bring the

action. See, Siegel New York Practice3d 9136.

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Index No. 5257-

A shareholder, including a shareholder in a close corporation , lacks standing to

sue individually to recover for damages sustained by the corporation. Abrams v. Donati

66 N. 2d 951 (1985); Lawrence Ins. Grp.. Inc. v. KPMG Peat Marwick. L.L.P. , 5 A.

918 (3 Dept., 2004); and Brancaleone v. Mesagna , 290 AD.2d 467 (2 Dept. , 2002).

Borgen alleges that he owned 50% of the shareslof Stealth. As such , he seeks

to recover 50% of the amount allegedly diverted from the now defunct corporations.

The money alleged to have been misappropriated 'was misappropriated from

Stealth. The checks were drawn on Stealth accounts. If ianyone has the right to

recover these sums, it is Stealth. Therefore, Plaintiff's application to amend the caption

to add Stealth as party Plaintiffs and delete Stealth as party Defendants should be

granted.

Citbank' s Motion to Dismiss

Citbank' s motion is premises upon the fictitious payee or padded payroll rule of

UCC 93-405(1 )(b) which states:

(1) An indorsement by any person in thename of a named payee is effective if:

(b) a person signing as or on behalf ofthe maker or drawer intends the payee to haveno interest in the instrument. . .

Losses resulting from forged instruments are generally aUocated to the drawee bank.

Getty Petroleum Corp. v. American Express Travel Related Services Co. , 90 N.

322 (1997).

BORGEN v. CITIBANK, N.A., et a/.

Index No. 5257-

The fictitious payee or padded payroll rule incorporated into UCC 93-405, creates

an exception to this general rule. When a check is issued to a fictitious payee, the

drawer is required to bear the loss since the drawer is better able to prevent such

forgeries by using reasonable care in the selection and supervision of its employees.

Guardian Life Ins. Co. of America V. Chemical Bank. 94 N. 2d 418 (2000). The drawer

is in a better position to cover the loss with insurance. Merrill Lynch. Pierce Fenner &

Smith. Inc. V. Chemical Bank, 57 N. 2d 439 (1982). Ths loss incurred by the drawer

viewed as business risk rather than a banking risk. Prudential-Bache Securities. Inc. v.

Citibank. N. , 73 N. 2D 263 (1989). See Arrow Transport Systems. Inc. v.

FleetBoston Financial Corp. , 6 Misc.3d 1012(A), (Sup.Ct., Nassau Co. , 2005).

A bank may be held liable to the drawer when it cashes or accepts for deposit

check issued to fictitious payees if the bank engaged in "commercial bad faith" in that

the bank had actual knowledge of the fraud such that the court can find the bank

knowingly and intentionally participated in the fraudulent scheme. Prudential-Bache

Securities. Inc. V. Citbank. N. supra. See also, Burns & Beck v. Citbank. N. , 226

AD.2d 142 (1 bept. 1996); and Peck v. Chase Manhattan Bank. N. , 190 A. 2d 547

(1 st Dept. 1993). The rationale behind this exception is that, when the bank has actual

knowledge of the facts underlying the scheme, it has become an active participant in the

transaction and liable thereby. Getty Petroleum COrD. V. American Express Travel

Related Services Co.. Inc. supra; and Peck v. Chase Manhattan Bank. N. supra.

BORGEN v. CITIBANK, N.A., et a/.,Index No. 5257-

First Cause of Action

The first cause of action contains the basic factual allegation which give rise to

this action. It then alleges that Citibank knew or should have known that the

endorsement on the checks was fraudulent and that the bank failed to use ordinary care

when cashing these checks.

This action fails to state a cause of action. UCC 93-405(1 )(b) clearly bars such

a claim. See Getty Petroleum Corp. V. American Express Travel Related Services Co..

Inc. supra; and Merrill Lynch. Pierce Fenner & Smith. tnd. v. Chemical Bank supra.

Therefore, leave to serve an amended complaint alleging this cause of action must be

denied.

Second Cause of Action

The second cause of action incorporates by reference the factual allegations

surrounding this case and then alleges that as a result of paying these checks cause

damages to Borgen.

Borgen lacks standing to bring this action (Subhead note B, supra). The proper

party to bring any claim to recover on the forged indorsements is Stealth. Therefore,

the second cause of action is without merit. Leave to serve an amended complaint

containing this cause of action must be denied.

Third and Fourth Causes of Action

The third cause of action alleges that by cashing the checks in question , Citibank

breached its contract with Stealth. The fourth cause of action alleges that by cashing

BORGEN v. CITIBANK, N. et a/.

Index No. 5257-

the checks in question , Citbank breached its contract with Borgen.

Both of these causes of action are barred by the fictitious payee rule incorporated

in UCC 93-405(1 )(c). Furthermore, the fourth cause of action which seeks recovery on

behalf of Borgen individually is barred because he lacks standing to bring the claim.

Therefore, leave to serve an amended complaint as to the third and fourth

causes of action must be denied.

Fifth Cause of Action

The fifth cause of action alleges that all of the checks in question were delivered

to Gail Gopulchian and/or Helen Daniels, employees of Citbank, at the Citibank branch

located at 51-31 Northern Boulevard, Woodside, New York. Gopulchian and/or Daniels

are alleged to have knowingly cashed the checks payable to fictitious payees and

deposited the funds into the personal account of Rouhani and/or his wife, Mahavash

Rouhani.

This cause of action , while not properly pled, contains sufficient factual

allegations at the pleading stage of this litigation to establish a cognizable cause of

action for commercial bad faith. See, Prudential-Bache Securities. Inc. v. Citbank.

supra; and Calisch Assocs.. Inc. v. Manufacturers Hanover Trust Co. , 151 AD.

446 (1 Dept. 1989).

Stealth alleges that all of the checks in question ware drawn to fictitious payees.

All of the checks were presented for payment to two specific employees of Citibank at a

specific branch. These employees are claimed to have approved the checks for

BORGEN v. CITIBANK , N.A., et a/.

Index No. 5257-

payment or cashing and then deposited the money into the personal account of Paul

and Mahavash Rouhani. At the pleading stage of the litigation , the Court must infer that

these actions gave Citibank knowledge and notice that these checks were being issued

to fictitious payees. Peck v. Chase Manhattan Bank. N. supra.

While the proposed amended complaint alleges sufficient facts to support the

cause of action for commercial bad faith , the action is not properly pled. Since Stealth

has a cognizable cause of action to recover for commercial bad faith, Plaintiff is granted

leave to serve an amended complaint containing the fifth cause of action repled to make

the appropriate allegation necessary to properly plead this cause of action. CPLR

3211(e).

Sixth Cause of Action

The sixth cause of action seeks recovery for fraud on behalf of Borgen who has

no standing to maintain this cause of action. Therefore, Plaintiffs motion to serve an

amended complaint alleging this cause of action must be denied.

Seventh Cause of Action

The New York State Department of Taxation and Finance has determined that

Stealth and Borgen , individually, are liable for taxes , penalties and interest in the sum of

$313,504.40. These are taxes which would have been due had the checks issued to

the fictitious payees been genuine.

Plaintiff seeks a judgment vacating this determination.

BORGEN v. CITIBANK , N.A., et a/.,Index No. 5257-

Appeals from determinations made by the Department of Taxation and Finance

regarding tax liabilty must be taken to the Division of Tax Appeals. See, Tax Law

Article 40. Decisions of the Division of Tax Appeals which are not subject to any further

administrative appeals are subject to judicial review pursuant to CPLR Article 78. Such

special proceedings must be commenced in the Appellate Division , Third Department.

Tax Law 92016.

There are no allegations that Plaintiffs have followed the statutorily prescribed

procedures for obtaining a review of the determination of the Department of Taxation

and Finance. This matter was not commenced as an Article 78 proceeding and was not

commenced in the Appellate Division, Third Department as required by statute.

This Court cannot discern that Plaintiff has exhausted his administrative

remedies. Certainly, this Court has no jurisdiction over this issue. Thus, leave to serve

an amended complaint alleging this cause of action is denied. In the amended caption,

Plaintiff shall omit the New York State Department Of Taxation and Finance as a party

Defendant.

Eighth, Ninth, Tenth and Eleventh Causes of Action

The eighth and ninth causes of action seek to recover from Citbank amounts

alleged to have been levied against Stealth and Borgen by the New York State

Department of Taxation and Finance as taxes due on the wages allegedly paid to the

fictitious payees. The tenth and eleventh causes of action seek to recover amounts

BORGEN v. CITIBANK , N. et a/.

Index No. 5257-

assessed by the Internal Revenue Service as payroll taxes on the wages paid to the

fictitious payees.

Borgen claims that, since these are withholding and/or payroll taxes, he is

personally liable for the amounts assessed.

The ninth cause of action in the proposed amended complaint contains the same

allegations as are plead in the fifth cause of action of the complaint. The eighth , tenth

and eleventh causes of actions allege new causes of action not previously pled.

Citibank does not address the merits of the fifth cause of action in its motion to

dismiss. The damages Plaintiffs seek to recover are consequential damages resulting

from Citibank cashing payroll checks payable to fictitious payees. Thus, if the action

were dismissed on the fictitious payee rule , these causes of action , which are

dependent upon that cause of action would also have to be dismissed. However, since

Stealth is being permitted to maintain an action for commercial bad faith, the Court will

permit Stealth , as a Plaintiff, to plead these additional causes of action.

Further, inasmuch as Borgen is personally liable for these taxes, he should also

be permitted to assert these claims.

Since the action for commercial bad faith wil survive the motion to dismiss and

since Citbank does not oppose this amendment, the motion for leave to serve an

amended complaint to add the eighth , ninth, tenth and eleventh causes of action is

granted.

BORGEN v. CITIBANK , N. et a/.

Index No. 5257-

Twelfth Cause of Action

This cause of action is unrelated to the payroll checks. Borgen alleges that after

Stealth closed its business , Rouhani received checks payable to Stealth , endorsed

them and deposited them into a bank account with Citibank maintained in the name of

Stealth Windows, Inc.

Borgen seeks to recover from Citibank the sums deposited by Rouhani into the

Stealth Windows, Inc. account the amounts which were properly payable to Stealth.

While Borgen is not the proper party to maintain this action, Stealth would have a

cause of action against Citibank for conversion.

A deposifory bank converts an instrument and is liable when it is pays on a

forged indorsement. UCC 93-419( 1 )( c). However, a depository bank is not liable to the

true owner beyond the amount remaining in its hands if the bank acted in good faith and

within reasonable commercial standards. Sullivan v. Citibank. N. , 306 AD.2d 459 (2

Dept. 2003); and Lawyer s Fund for Client Protection of the State of New York v.

Gateway State Bank , 273 AD.2d 565 (3 Dept. 2000); and UCC 93-419(3).

The allegations in the proposed amended complaint are sufficient to support a

claim for conversion on behalf of Stealth although such claim is not properly pled. The

complaint alleges that the checks were payable to the order of Stealth. The

indorsements on these checks were forged by Rouhani who deposited these checks

into an account maintained in the name of Stealth Windows, Inc. The Stealth

Windows, Inc. account was opened by Rouhani after Stealth went out of business.

BORGEN v. CITIBANK , N. et a/.

Index No. 5257-

Stealth alleges that the deposit of these checks into the Stealth Windows , Inc. account

was approved and facilitated by Helen Daniels, the same bank employee who is alleged

to have assisted Rouhani in cashing the fictitious payee payroll checks.

These allegations are sufficient, if properly pled, to sustain a cause of action on

behalf of Stealth for conversion on the grounds that Citibank did not act in good faith or

in a commercially reasonable manner when it permitted Rouhani to deposit checks

payable to Stealth into an account maintained in the name of Stealth Windows , Inc.

Since the action as presently constituted seeks recovery on behalf of the wrong

party and also is not properly pled, Plaintiff is granted leave to replead to allege this

cause of action on behalf of the proper party and to properly plead the necessary

elements of this cause of action. CPLR 3211 (e)

Defendant's Request to Disqualify Plaintiffs Attorney

In its reply memorandum of law, Defendant asserts that the Court should

disqualify Plaintiff's counsel. The basis of this application is that counsel is now seeking

to represent parties he had previously named as Defendants in this action; to wit:

Stealth Window Works of New York , Inc. , Stealth Window Works of Brooklyn , Inc.,

Stealth Window Works, Inc., and Avant Guards, Inc.

A request for such relief in a memorandum of law submitted as opposition to

Plaintiff' s cross-motion and as a reply in support of Defendant's motion to dismiss is the

improper method for seeking to disqualify Plaintiff's counsel. CPLR 2215.

BORGEN v. CITIBANK, N.A., et a/.,Index No. 5257-

If Citibank seeks to disqualify Plaintiff's attorney, it should do so on proper papers

using proper motion procedures as set forth in CPLR 2214.

Accordingly, it is

ORDERED , that Citibank's motion to dismiss the complaint is denied as

academic; and it is further,

ORDERED , that Plaintiff's cross-motion to amend the caption is granted;

The new caption shall ve as follows:

SUPREME COURT - STATE OF NEW YORKCOUNTY OF NASSAU

BARRY BORGEN , STEALTH WINDOWWORKS OF NEW YORK, INC.,STEALTH WINDOW WORKS OF BROOKLYNINC., STEALTH' WINDOW WORKS, INC.,AVANT GUARDS INC., Index No 5257-

Plaintiffs,

against

CITIBANK, N.A.,

Defendants,

and it is further

ORDERED , the Plaintiff's cross-motion for leave to serve an amended complaint

is granted to the extent or permitting it to serve an amended complaint containing the

fifth, eighth , ninth, tenth, eleventh and twelfth causes of action as set forth in the

proposed amended complaint; and it is further

BORGEN v. CITIBANK, N.A., et a/.,Index No. 5257-

ORDERED, that Plaintiff is granted leave to replead the fifth and twelfth causes

of action consistent herewith; and it is further

ORDERED that the amended complaint shall be served within 20 days of the

date of this order. The answer shall be served within 20 days thereafter; and it is further

ORDERED, that counsel for the parties are directed to appear for a preliminary

conference on April 18 , 2005 at 9:30 am.

This constitues the decision and Order of the Court.

f) Dated: Mineola, NY

Febru ry 24 2005 Hon. LE NARD B. AUSTIN , J.

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