Kent Grp. Partners v. Citizens Bank, N.A.

688 F.Supp.3d 608

KENT GROUP PARTNERS, LLC, Plaintiff, v. CITIZENS BANK, NATIONAL ASSOCIATION, Defendant.

CASE NO. 1:22-CV-01334

United States District Court, N.D. Ohio, Eastern Division

Signed August 21, 2023

Dennis P. Mulvihill, Wright & Schulte, Pepper Pike, OH, Joseph N. Paykin, Paykin Krieg & Adams, Purchase, NY, for Plaintiff.

Kathleen A. Nitschke, Karen L. Giffen, Perez Morris, Cleveland, OH, for Defendant.

MEMORANDUM OPINION AND ORDER

CHARLES E. FLEMING, UNITED STATES DISTRICT COURT JUDGE

Before the Court is Defendant Citizens Bank, National Association's ("Citizens") Motion to Dismiss made pursuant to Fed. R. Civ. P. 12(b)(6). (ECF No. 9). Plaintiff Kent Group Partners, LLC ("KGP") opposes the Motion as to Counts I (UCC 4A), III (Public Nuisance), and IV (Civil Conspiracy), and concedes dismissal of Counts II (Aiding and Abetting Fraud) and V (Ohio Rev. Code Ann. § 1303.44). (ECF No. 10). For the foregoing reasons, Citizens's Motion to Dismiss is GRANTED, and this action is DISMISSED WITH PREJUDICE.

I. FACTUAL BACKGROUND

KGP alleges that Citizens's negligent and reckless failure to engage in reasonable fraud prevention procedures enabled hackers to steal a $6 million wire transfer intended for Sprint, one of KGP's vendors. (ECF No. 1-1, Compl., PageID#10, ¶ 8). KGP claims that, on August 13, 2020, the hackers opened a fraudulent account at Citizens under the name "Forehand Traders, LLC," a business supposedly located in Kalamazoo, Michigan. (Id. at PageID# 10). "Michael Forehand" was the purported owner of the business, supposedly living in Royse City, Texas. (Id. at PageID# 9, ¶ 3). Citizens opened the account having received only the business's Articles of Organization and tax ID number; no evidence of Michael Forehand's identity was requested by Citizens or produced by the hackers prior to the account's opening. (Id. at PageID# 11). It was later determined that Michael Forehand died on February 15, 2020, and the Articles of Organization for Forehand Traders, LLC were filed approximately five months after his death. (Id.).

After opening the fraudulent account, hackers intercepted emails between KGP and Sprint and began communicating with KGP as if they were Sprint employees. (Id. at PageID# 9, ¶ 3). The hackers provided KGP with the fraudulent account's number to receive Sprint's wire transfer. (Id.). KGP addressed the wire transfer to "Sprint," but input the fraudulent account number as the transferee account. (Id.). Thus, the wire instructions contained a legally significant discrepancy: the transferee's name on the wire transfer did not match the name associated with the transferee's account number. (Id.). KGP used its bank, Capital One, to initiate the wire transfer. (Id. at PageID# 13, ¶ 29). Capital One wired the funds to Citizens, which then completed the transfer into the hacker's fraudulent account. (Id.). KGP alleges that the hackers immediately wired the funds out of the account and converted them into cryptocurrency. (Id. at ¶ 31; ECF No. 10, PageID# 64).

KGP's Complaint alleges that Citizens's failure to investigate the fraudulent account's owner violates both the Patriot and Bank Secrecy Acts. (Id. at PageID# 10-15). Specifically, KGP claims that Citizens failed to comply with section 312 and the "Know Your Rights" requirements in the Patriot Act, which obligate banks to implement procedures for "verifying the identity of any person seeking to open an account." (Id. at PageID#10, ¶ 8; 31 U.S.C. § 5318). KGP also claims that Citizens violated 31 C.F.R. 1020.210, which requires banks to submit reports to the U.S. Department of Treasury to ensure compliance with the Bank Secrecy Act. (Id. at PageID# 14, ¶¶ 13-14). KGP claims that Citizens shirks these statutory requirements in order to "expand its customer base, gain fees, and increase its annual revenue." (Id. at PageID# 13, ¶ 27). Each of KGP's causes of action is tied to Citizens's failure to meet its statutory compliance obligations, ultimately resulting in the creation of the fraudulent account used to intercept KGP's wire transfer.

II. MOTION STANDARD

When ruling on a Motion to Dismiss under Fed. R. Civ. P. 12(b)(6), the Court must "construe the complaint in the light most favorable to the plaintiff, accept all well-pleaded factual allegations as true, and examine whether the complaint contains sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Solo v. United Parcel Serv. Co., 819 F.3d 788, 793 (6th Cir. 2016) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007))) (cleaned up). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). This standard is not about the plaintiff's probability of success; rather, it merely demands that a plaintiff plead enough facts for the court to reasonably infer that discovery will be productive. Id. at 793-94 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).

III. DISCUSSION

A. KGP Has Not Stated a Plausible Claim for Relief Under UCC 4A-207(b) (Ohio Rev. Code Ann. 1304.62(B))

Citizens attacks KGP's UCC claim by stating that UCC 4A-207(b) and its Ohio corollary, Ohio Rev. Code Ann. § 1304.62, permit a bank to complete a wire transfer based upon the account number given by the transferor if it does not have actual knowledge that the transferee's name and the name associated with the transferee account number differ. (ECF No. 9, PageID# 55-56). Citizens also claims that, since KGP initiated the wire transfer with its own bank, Capital One, Citizens has no legal obligation to KGP under the UCC or Title 13 of the Ohio Revised Code. (Id. at PageID# 56).

In response, KGP states that Citizens knew or should have known that the transferee's name did not match the name associated with the transferee's account number by the fact that such discrepancy existed when KGP initiated the wire transfer, and minimal due diligence would have revealed that the names were not the same. (ECF No. 10, PageID# 72-73; ECF No. 1-1, PageID# 13, ¶¶ 29-31). KGP also claims that it has standing to assert its UCC claim against Citizens because the UCC does restrict KGP's available recovery to Capital One, and Citizens's failure to comply with the UCC 4A-207(b) directly damaged KGP. (ECF No. 10, PageID# 73-74).

Ohio Rev. Code Ann. 1304.62(B)(1)¹ provides that, when the name of a wire transfer beneficiary does not match the name associated with the account number identified in the wire instructions, and the bank does not know about this discrepancy, the bank "may rely on the number as the proper identification of the beneficiary of the order. The beneficiary's bank needs not determine whether the name and number refer to the same person." Knowledge, as contemplated in section 1304.62(B)(1), is actual, not constructive knowledge. Ohio Rev. Code Ann. § 1301.202(b).² See Squeeze Me Once, LLC v. SunTrust Bank, 630 F. Supp. 3d 763, 774-75 (M.D. La. 2022) (applying a Louisiana statute identical to Ohio Rev. Code Ann. § 1301.202). A party claiming that a bank actually knew about a name discrepancy between wire instructions and the transferee account's owner must plead particular facts supporting the claim of actual knowledge. Flaherty v. Wells Fargo Bank Nat'l Ass'n, 623 F. Supp. 3d 1124, 1131 (D. Nev. 2022) (dismissing claim made under identical Nevada statute when the plaintiff's complaint alleged, without supporting facts, that the bank "knew or should have known that the wire transfer order identified different persons by name and number").

The official comments to the Uniform Commercial Code explain that the "actual knowledge" standard promotes the efficient and economical transaction of banking business, since the great majority of wire transfers are automated and involve almost no human intervention. UCC 4A-207, cmt. 2 (Steven D. Walt & William D. Warren 2019-20 ed.). The risk of loss therefore falls on either (1) KGP, as the entity that dealt with the hackers directly; or (2) Capital One, upon which UCC 4A-207(c) [Ohio Rev. Code Ann. § 1304.62(C)] imposes a duty to investigate discrepancies between a transferee's name and the transferee's account holder upon receipt of wire instructions. Id. at cmt. 3. KGP is apparently aware of the latter, given its pending suit against Capital One in a New York state court. See Kent Group Partners, LLC v. Capital One, N.A., Case No. 64281-21 (Westchester Cnty.).

Here, the Complaint alleges that "Citizens knew or should have known" that the hackers' account was fraudulent. (ECF No. 1-1, PageID# 18, ¶ 72). Rather than alleging facts supporting Citizens's actual knowledge of the name discrepancy, KGP's Complaint repeatedly references a series of circumstances that should have lead Citizens to eventually acquire actual knowledge: that "(a) Michael Forehand died on February 15, 2020; nearly 6 months before the Thief sought to open the Fraudulent Account; (b) the Articles of Organization for Forehand Traders LLC were filed on July 31, 2020; nearly 5 months after Michael Forehand's death; (c) the addresses for Forehand Traders LLC (Michigan) and "Michael Forehand" (Texas) were in different non-contiguous states; and (d) the EIN issued by the Internal Revenue Service on or about August 13, 2020, nearly 6 months after Michael Forehand's death." (Id.). These allegations fall short of alleging that Citizens actually knew that the transferee's name did not match the transferee account's owner. Without factual allegations supporting Citizens's actual knowledge of the name discrepancy, KGP cannot pursue a claim against Citizens under UCC 4A-207(b) (Ohio Rev. Code Ann. § 1304.62(B)). Therefore, KGP's UCC claim must be dismissed. As a result, Citizens's argument...