Costoso v. Bank of Am., N.A.

74 F.Supp.3d 558

Jeanette COSTOSO, individually and on behalf of all others similarly situated, Plaintiff

v.BANK OF AMERICA, N.A., Defendant.

No. 14–cv–4100 ADSARL.

United States District Court, E.D. New York.

Signed Feb. 24, 2015.

Darren Kaplan Law Firm, P.C. by Darren T. Kaplan, Esq., of Counsel, New York, NY, Tycko & Zavareei LLP by Hassan Zavareei, Esq., Jeffrey D. Kaliel, Esq., of Counsel, Hausfeld LLP by Gosselin Sathya, Esq., of Counsel, Washington, DC, Kopelowitz Ostrow P.A. by Jason H. Alperstein, Esq., of Counsel, Fort Lauderdale, FL, Stueve Siegel Hanson LLP by Stephen N. Six, Esq., of Counsel, Kansas City, MO, for Plaintiff.

Sidley Austin LLP by Maria B. Earley, Esq., Benjamin R. Nagin, Esq., of Counsel, Washington, DC, for Defendant.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

This action arises from the Defendant Bank of America, N.A. (the “BOFA” or “Defendant”) processing debits on its customers' bank accounts from Payday Lenders it allegedly knew were making unlawful online payday loans in New York. According to the complaint, “[p]ayday loans are short term high interest loans for small amounts of money that typically come due in a matter of days or weeks and require the borrower to provide the payday lender with access to their deposit account for repayment.” (Compl., at ¶ 2.)

The Plaintiff Jeanette Costoso (the “Plaintiff”), individually and on behalf of all others similarly situated, alleges that the Payday Loans issued to her violated the provisions of New York Banking Law § 14–a, subdivision 2 and New York Penal Law § 190.40. (Id. at ¶¶ 23, 24, 94–123.)

On July 2, 2014, the Plaintiff commenced this action seeking monetary damages, restitution, and declaratory and injunctive relief.

On September 15, 2014, the Defendant moved pursuant to Federal Rule of Civil Procedure (“Fed. R. Civ.P.”) 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted.

For the reasons set forth, the motion to dismiss the complaint is granted.

I. BACKGROUND

Unless stated otherwise, the following factual allegations are drawn from the complaint and construed in a light most favorable to the non-moving party, the Plaintiff.

A. The Parties

The Plaintiff, an individual, is a resident of the Incorporated Village of Rockville Centre, Town of Hempstead in Nassau County, New York.

The Defendant is a federally-chartered national banking association headquartered in Charlotte, North Caroline. The Defendant is engaged in the businesses of, among other things, providing retail banking services to consumers, including in New York.

B. The Defendant's Standard Account Agreement

The Plaintiff has deposit accounts with the Defendant, the terms of which are contained in a standardized agreement (the “Account Agreement”), annexed as Exhibit A to the complaint.

Of relevance here, the Account Agreement provides: “From time to time, originators that you authorize may send automated clearing house (ACH) credits or debits for your account. For each ACH transaction, you agree that the transaction is subject to the National Automated Clearing House Association (NACHA) Operating Rules and any local ACH operating rules then in effect” (the Account Agreement, at 45, “NACHA Clause”).

NACHA Rule 3.1–3.1.1 provides that Receiving Depository Financial Institutions (“RDFIs”) such as the Defendant “must accept Entries that comply with these Rules and are received with respect to an account maintained with that RDFI, subject to its right to return Entries under these Rules.” NACHA Rule 3.11 provides that “[a]n RDFI must recredit the accountholder for a debit Entry that was, in whole or in part, not properly authorized under these Rules, as required by these Rules, applicable Legal Requirements, or agreement between the RDFI and the accountholder.” NACHA Rule 8.49 defines “Legal Requirements” as “any law, statute, rule or regulation, or any binding published interpretation of any of the foregoing, issued by any government authority (including courts), and any judicial, governmental, or administrative order, judgment, decree or ruling...”

With regard to debit entries from consumer accounts, the NACHA 2013 Operating Rules Section 2.3, Subsection 2.3.2.3(b) provides that an authorization that is “otherwise invalid under applicable Legal Requirements [ ] does not satisfy the requirements” of an “authorization” under the rules.

The Account Agreement also provides as follows: “If at any time we believe that your account may be subject to irregular, unauthorized, fraudulent, or illegal activity, we may, in our discretion freeze the funds in the account and in other accounts you maintain with us, without any liability to you, until such time as we are able to complete our investigation of the account and transactions.” (Account Agreement, at 20.)

C. New York State Department of Financial Services (“DFS”) Investigation

On August 5, 2013, DFS, which supervises banking and financial institutions in New York, sent letters to 117 banks, including the Defendant, urging these banks to block online lenders from debiting their customers' deposit accounts. (Compl., at ¶ 41.) DFS informed NACHA and these banks of the identities of 35 such Payday Lenders that may attempt to use banks as conduits for illegal conduct. The letter stated that “[t]he Department has uncovered dozens of out-of-state lenders that have used the Internet to solicit and provide illegal payday loans to consumers in New York”; that “Banks have proven to be ... an essential cog in the vicious machinery that these purveyors of predatory loans use to do an end-run around [the] law”; and that “[t]o address this unlawful activity, DFS [ ] sent letters to 35 payday lenders directing them to cease and desist offering to lend and lending monies at usurious rates in New York.” (Id. at ¶¶ 42–44.)

D. The Defendant's Monitoring Obligations and Practices

The mainstream electronic payments system, which provides individuals and businesses, including Payday Lenders, access to electronic debits and deposits to consumer deposit accounts, is called the “Automated Clearing House” or “ACH Network.” (Id. at ¶ 6.)

On September 1, 2006, the Office of the Comptroller of the Currency (“OCC”) provided guidance for all national banks and examiners on managing the risks of ACH activity, explaining that “[n]ational banks may be exposed to a variety of risks when originating, receiving, or processing ACH transactions, or outsourcing these activities to a third party.” (Id. at ¶ 50.)

The OCC guidance advised:

High–Risk Activities

Banks that engage in ACH transactions with high-risk originators or that involve third-party senders face increased reputation, credit, transaction, and compliance risks. High-risk originators include companies engaged in potentially illegal activities or that have an unusually high volume of unauthorized returns.

Before a bank engages in high-risk ACH activities, the board of directors should consider carefully the risks associated with these activities, particularly the increased reputation, compliance, transaction, and credit risks. The board should provide clear direction to management on whether, or to what extent, the bank may engage in such ACH activities. Some banks have established policies prohibiting transactions with certain high-risk originators and third-party senders.

(Id. ) In a footnote, the OCC explained the risk to certain banks: “Risks may include the risk of legal liability or damage to an institution's reputation when originators or third-party senders facilitate or engage in activities that violate criminal laws.” (Id. at ¶ 51.)

Further, the ACH Network, of which the Defendant is a member, has had, at all relevant times, its own requirements for risk-based transaction monitoring and due diligence. The NACHA Rules govern each member of the ACH Network.

On August 22, 2012, the NACHA Board of Directors adopted the following Policy Statement:

Fraud and various forms of financial abuse have found their way into every facet of the U.S. payment systems. The NACHA Board believes that the Automated Clearing House Network must maintain the highest standards of fraud prevention to retain the integrity of the payment mechanism and the trust and confidence of its users. Therefore, the NACHA Board resolves and strongly urges that all participants implement adequate control systems to detect and prevent fraud and abusive financial transactions.

(Id. at ¶ 59.)

As a result of these risks, the Plaintiff alleges that the Defendant “maintains a sophisticated in-house transaction monitoring operation, utilizing dedicated technology and staffing focused on transaction monitoring to ensure effective compliance with all regulatory bodies” and “was and is aware of the Illegal Payday Loan activity it was processing on its customers' deposit accounts.” (Id. at ¶ 53–54.)

E. The Tools Provided By the ACH Network to Identify Illegal Payday Lenders and Loans

For every ACH transaction, the ACH Network provided the Defendant with the Originator of an ACH entry, the location of the bank account, its customer, and the Receiver.

An Originator is the entity that agrees to initiate ACH entries into the payment system. The Originator is usually a company directing a transfer of funds to or from a consumer's account or another organization's account. Each Originator has a unique “Company Identification Number” that the Plaintiff alleges alerted, or should have alerted, the Defendant when an Payday Lender was attempting to initiate a credit or debit entry to or from one of its customer's accounts.

A Receiver is the natural person or organization that the Originator is requesting the RDFI debit or credit via the ACH Network.

Further, the ACH Network alerted the Defendant to historically high “return rates” on ACH credit or debit transactions initiated by the Originator (or third party payment processor). According to the Plaintiff, such historically high “return rates” “alerted or should have alerted [the Defenda...