FIRST UNION NATIONAL BANK v. EDWARDS SONS INC (1999)

Order, Supreme Court, New York County (Ira Gammerman, J.), entered January 6, 1999, which granted defendants' motion to dismiss the complaint for failure to state a cause of action, unanimously affirmed, with costs.

 Plaintiff banks were allegedly defrauded of some $354 million by entities not named as defendants in this lawsuit.   Subsequent to the fraud, those entities are said to have invested the fraudulently obtained funds through defendant brokers.   In this action, plaintiffs seek to recover the funds of which they were defrauded from defendant brokers upon the theory that although defendants did not have actual knowledge that the funds transferred to them for investment were fraudulently obtained, they were on notice of facts and circumstances that would have led an ordinarily prudent broker to investigate and ascertain the provenance of the funds.   We agree with Supreme Court that plaintiffs have not alleged a viable theory of recovery.   It would conflict with the strong public interest in maintaining the finality of payments of money in business transactions to require frequent inquiries by firms into the sources of funds paid in the ordinary course of business (see, Banque Worms v. BankAmerica Intl., 77 N.Y.2d 362, 372-373, 568 N.Y.S.2d 541, 570 N.E.2d 189).   Accordingly, the victim of a fraud cannot pursue the money taken from him by the wrongdoer into the hands of a third person, who has received such funds “in good faith in the usual course of business and for valuable consideration” (Aneless Corp. v. Woodward, 262 N.Y. 326, 329-330, 186 N.E. 800), and, as in cases involving commercial paper, merely failing to investigate upon acquiring information that would give rise to reasonable suspicion, while perhaps an act of negligence, does not constitute subjective bad faith or dishonesty (see, Hartford Acc. & Indem. Co. v. Am. Express Co., 74 N.Y.2d 153, 162-163, 544 N.Y.S.2d 573, 542 N.E.2d 1090;  Chemical Bank of Rochester v. Haskell, 51 N.Y.2d 85, 91-92, 432 N.Y.S.2d 478, 411 N.E.2d 1339;  Manufacturers & Traders Trust Co. v. Sapowitch, 296 N.Y. 226, 229-230, 72 N.E.2d 166;  Restatement of Restitution § 174, and comment c thereto;  see also, SEC v. Lehman Bros., 157 F.3d 2, 6-7 (1st Cir.1998)).  Majer v. Schmidt, 169 A.D.2d 501, 564 N.Y.S.2d 722, relied upon by plaintiffs, does not require a result contrary to the one we have reached.   The transfer of funds at issue in that case was made to settle litigation and, unlike the presently challenged deposits of funds with defendant brokers, was not executed in the ordinary course of business.   Moreover, the facts alleged in Majer gave rise to an issue of subjective bad faith on the part of the transferees (see, 169 A.D.2d at 503-504, 564 N.Y.S.2d 722), wholly absent herein.   We note, finally, that even if inquiry notice were an adequate predicate for liability under the circumstances alleged, and it is not, it is not readily apparent from the complaint how an investigation by defendants would have uncovered the fraud by which plaintiffs had been victimized, and this would independently require dismissal of the complaint (see, Manufacturers & Traders Trust Co. v. Sapowitch, 296 N.Y. supra, at 230;  Kinstlinger v. Manufacturers Trust Co., 280 A.D. 729, 734, 117 N.Y.S.2d 147).

MEMORANDUM DECISION.