Security First Network Bank v. C.A.P.S., Inc

Brief Fact Summary. Consolidated Artist’s Payroll Service, Inc and Saks, Inc. brought suit against Security First Network Bank for the return of money electronically transferred from their accounts without authorization into the account held by a “Marvin Goldman” with Security First Network Bank. Security First Network Bank moves to dismiss.

Synopsis of Rule of Law. Because a receiver is a party to the rules, bound by its obligations as well as entitled to its benefit, it can enforce 2.2.1.1 even though the provision applies only to an obligation from one bank to another.

Facts. Joseph V. Sykes (Sykes), using the name “Marvin Goldman” opened an account with Security First Network Bank. Sykes then fraudulently initiated a debit entry to transfer funds from Saks, Incorporated’s account with LaSalle Bank National Association. Sykes initiated two debit transfers in the amount of $450,000 each from Saks Inc.’s account to his account with Security First Network Bank as Marvin Goldman. The debit transfers were originated through Security First Network Bank using Saks, Inc.’s account number but wrongfully naming the account holder as “Marvin Goldman.”
Sykes also fraudulently initiated a debit entry to transfer funds from Consolidated Artist’s Payroll Service, Inc.’s account with The Northern Trust Company to Syke’s account with Security First Network Bank as Marvin Goldman. Sykes originated three debit transfers in the amount of $175,000 each in the same manner as above.
Neither Consolidated Artist’s Payroll Service, Inc. nor Saks, Inc. authorized the debit transfers. They assert that when Security First Network Bank discovered Sykes’ fraudulent scheme it failed to timely notify LaSalle Bank National Association and The Northern Trust Company. Security First Network Bank refused the banks’ demands it return the money. Saks brought suit against Security First Network Bank alleging negligence and breach of warranties under the 2000 NACHA Operating Rules and the U.C.C. Consolidated Artist’s Payroll Service, Inc. brought suit for breach of Security First Network Bank’s duty to exercise ordinary care under the U.C.C., breach of warranties under the U.C.C. and for violation of the Illinois Consumer Fraud and Deceptive Practices Act.

Issue. Whether Saks, Inc. can enforce Security First Network Bank’s warranty to LaSalle Bank National Association Bank that Saks, Inc. had properly authorized the debit issued.

Held. Yes. Saks, Inc. can enforce Security First Network Bank’s warranty using Section:2.2.1.1.

Discussion. Saks, Inc. has a cause of action for breach of warranty under Section:2.2.1.1. Security First Network Bank broke its promise to LaSalle Banks that the debits were authorized resulting in Saks Inc.’s account being improperly debited. Because Saks, Inc. is a party to the rules it can enforce this provision even though the provision applies only to an obligation from one bank to another.
Saks asserts a claim for breach of transfer warranty under the U.C.C. Saks, Inc. contends that NACHA Operating rule Section:13.1.20 expressly incorporates Article 4 of the U.C.C. to debit entries and therefore Saks can resort to applicable U.C.C. provisions. Security First Network Bank replies that no case has relied on Section:13.1.20 and explains that the reference to the U.C.C. was put into the NACHA rules as a gap filler. Since the Saks can assert a breach of warranty claim directly under the NACHA rules, the court declines to rule on this issue. Thus Saks, Inc.’s U.C.C. claim is dismissed.