UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW...

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK -------------------------------------------------------------X JEANETTE COSTOSO, individually and on : behalf of all others similarly situated, : CIV. NO. 2:14-04100 (ADS) (ARL) : Plaintiff, : : - against - : : BANK OF AMERICA, N.A., : : Defendant. : : -------------------------------------------------------------X

DEFENDANT’S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION TO DISMISS THE COMPLAINT PURSUANT TO RULE 12(B)(6)

Case 2:14-cv-04100-ADS-ARL Document 15 Filed 09/15/14 of 25 PageID #: 115

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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 1

LEGAL STANDARD ..................................................................................................................... 2

ARGUMENT .................................................................................................................................. 3

I. THE COMPLAINT DOES NOT ALLEGE AN ACTIONABLE BREACH OF CONTRACT CLAIM. ...................................................................................... 3

A. The ACH Network and NACHA Rules ...................................................... 3

B. Summary of Plaintiff’s Allegations. ........................................................... 4

C. BofA Did Not Promise Plaintiff That It Would Comply With The NACHA Rules ............................................................................................ 5

D. The NACHA Rules Did Not Require BofA to Monitor the Purpose for which Payments Were Authorized or Unilaterally Recredit Payments In Connection with Purportedly Illegal Loans. .......................... 7

E. BofA May Impose Overdraft and Returned Item Fees When Plaintiff Did Not Exercise Her Rights to Stop Payment or Obtain a Recredit ..................................................................................................... 10

II. PLAINTIFF’S CLAIM FOR BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING FAILS AS A MATTER OF LAW ........ 11

III. PLAINTIFF HAS NOT ALLEGED A COGNIZABLE UNCONSCIONABILITY CLAIM ...................................................................... 12

IV. PLAINTIFF’S CONVERSION CLAIM FAILS AS A MATTER OF LAW ..................................................................................................................... 15

V. THE UNJUST ENRICHMENT CLAIM FAILS AS A MATTER OF LAW ..................................................................................................................... 16

VI. PLAINTIFF’S CLAIM UNDER NEW YORK GBL § 349 FAILS BECAUSE SHE HAS NOT ALLEGED A DECEPTIVE ACT OR PRACTICE ........................................................................................................... 17

VII. THE ACCOUNT AGREEMENT EXPRESSLY BARS ALL OF PLAINTIFF’S CLAIMS ....................................................................................... 19

CONCLUSION ............................................................................................................................. 20


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TABLE OF AUTHORITIES

Page(s) CASES

Affinion Benefits Group, LLC v. Econ-o-check Corp., 784 F. Supp. 2d 855 (M.D. Tenn. 2011) ...............................................................................8, 9

Atkins v. Wachovia Bank, N.A., No. 0948, 2007 Phila. Ct. Com. Pl. LEXIS 341 (Pa. Super. Ct. Dec. 4, 2007) .....................6, 9

Bell Atl. Corp. v. Twombley, 550 U.S. 544 (2007) ...................................................................................................................2

Broder v. Cablevision Sys. Corp., 418 F.3d 187 (2d Cir. 2005).....................................................................................................11

Chazen v. Centenial Bank, 61 Cal. App. 4th 532 (1998) ....................................................................................................15

Clinton Plumbing and Heating of Trenton v. Ciaccio, Civ. No. 09-2751, 2010 U.S. Dist. LEXIS 113215 (E.D. Pa. Oct. 22, 2010) ....................3, 6, 7

Cole-Hoover v. N.Y. Dep't of Corr. Servs., 02-CV-00826, 2013 U.S. Dist. LEXIS 148989 (W.D.N.Y. Oct. 16, 2013) ..............................7

Cruz v. T.D. Bank, N.A., 855 F. Supp. 2d 157 (S.D.N.Y. 2012) ................................................................................15, 16

Emery v. Visa Int’l Serv. Ass’n, 95 Cal. App. 4th 952 (2002) ....................................................................................................14

Fesseha v. TD Waterhouse Investor Servs., Inc., 761 N.Y.S.2d 22 (N.Y. App. Div. 2003) .................................................................................16

Galvin v. First Nat. Monetary Corp., 624 F. Supp. 154 (E.D.N.Y. 1985) ..........................................................................................13

Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824 (N.Y. 1988) ....................................................................................................13

Hall v. EarthLink Network, Inc., 396 F.3d 500 (2d Cir. 2005).....................................................................................................12

Harris v. Mills, 572, F.3d 66 (2d Cir. 2009)........................................................................................................2

Herr v. Herr, 949 N.Y.S.2d 786 (N.Y. App. Div. 2012) .................................................................................6


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In re NYSE Specialists Sec. Litig., 503 F.3d 89 (2d Cir. 2007).........................................................................................................3

In re: HSBC Bank, USA, N.A., No. 13-md-2451, 2014 U.S. Dist. LEXIS 29050 (E.D.N.Y. Mar. 5, 2014) ......................15, 16

L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419 (2d Cir. 2011).....................................................................................................12

Law Offices of K.C. Okoli, P.C. v. BNB Bank, N.A., 481 F. App’x 622 (2d Cir. 2012) .............................................................................................16

Lebowitz v. Dow Jones and Co., 508 F. App’x 83 (2d Cir. 2013) ...............................................................................................17

Lucker v. Bayside Cemetery, 979 N.Y.S.2d 8 (N.Y. App. Div. 2013) ...................................................................................18

Mangiafico v. Blumenthal, 471 F.3d 391 (2d Cir. 2006).......................................................................................................4

Manheim Dairy Co. v. Little Falls Nat'l Bank, 54 N.Y.S.2d 345 (N.Y. Sup. Ct. 1945) ..............................................................................14, 15

Nayal v. HIP Network Servs. IPA, Inc., 620 F. Supp. 2d 566 (S.D.N.Y. 2009) ......................................................................................13

Ng v. HSBC Mortgage, No. 07-cv-5434, 2011 U.S. Dist. LEXIS 88549 (E.D.N.Y. Aug. 10, 2011) ...........................13

Piven v. Wolf Haldenstein Adler Freeman & Herz LLP, No. 08-cv-10578, 2010 U.S. Dist. LEXIS 27609 (S.D.N.Y. Mar. 12, 2010) ....................12, 16

Schlessinger v. Valspar Corp., 991 N.E.2d 190 (N.Y. 2013) ....................................................................................................18

Stutman v. Chemical Bank, 731 N.E.2d 608 (N.Y. 2000) ....................................................................................................17

Sosnowy v. A. Perri Farms, Inc., 764 F. Supp. 2d 457 (E.D.N.Y. 2011) .......................................................................................4

Spread Enters., Inc. v. First Data Merchant Services Corp., No. 11-cv-4743, 2012 U.S. Dist. LEXIS 119080 (E.D.N.Y. Aug. 22, 2012) .......11, 12, 16, 17

Super Glue Corp. v. Avis Rent A Car Sys., Inc., 517 N.Y.S.2d 764 (N.Y. App. Div. 1987) ...............................................................................13


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Swift County Bank v. United Farmers Elevators, 366 N.W.2d 606 (Minn. Ct. App. 1985) ..................................................................................15

Zinermon v. Burch, 494 U.S. 113 (1990) ...............................................................................................................2, 3

STATUTES

N.Y. Gen. Bus. Law § 349 ...................................................................................................2, 17, 18

OTHER AUTHORITIES

12 C.F.R. 1005.3(a)..........................................................................................................................5

Account Agreement .........................................................................................1, 5, 6, 10, 11, 15, 19

ACH Operations Bulletin #2-2013: High-Risk Originators and Questionable Debit Activity (Mar. 14, 2013) ..............................................................................................3, 4, 8, 10

Fed. R. Civ. P. 12(b)(6)....................................................................................................................2

NACHA Rule 1.8 .............................................................................................................................6

NACHA Rule 2.3.2.3 ...................................................................................................................6, 9

NACHA Rule 2.4.1.1 ...............................................................................................................6, 7, 8

NACHA Rule 2.4.1.2 ...................................................................................................................6, 8

NACHA Rule 3.1.1 ..........................................................................................................................9

NACHA Rule 3.7.1. .......................................................................................................................15

NACHA Rule 3.11.1 ....................................................................................................................8, 9


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INTRODUCTION

Plaintiff claims that the bank with which she has her checking account, Bank of America,

N.A. ( “BofA”), is liable for automated clearing house (“ACH”) payments she authorized,

because the originator of those payments, payday lenders with which BofA had no relationship,

allegedly violated New York law. Plaintiff asserts the extraordinary legal theory that BofA had a

duty under her deposit account agreement (“Account Agreement”), which is attached to the

Complaint as Exhibit A, to monitor the purposes for which she authorized ACH payments and to

unilaterally prevent her from repaying an allegedly illegal loan, even though she never told BofA

that she did not want those payments made. The Complaint contains a host of inflammatory

allegations about payday lenders and the banks with which they do business, but none of it

relates to banks like BofA who simply honor charges on its customers’ deposit accounts. Not

surprisingly, Plaintiff’s complaint is deficient as a matter of law across the board, including

because her deposit Account Agreement expressly provides that BofA has no obligation to

monitor the purposes for which she is making ACH payments.

The gravamen of the Complaint is that the Account Agreement required BofA to comply

with the rules of the National Automated Clearinghouse Association (“NACHA Rules”) and that

those Rules imposed on BofA a duty to monitor the purposes for which Plaintiff was making

ACH payments and to block or recredit Plaintiff’s account for payments that BofA allegedly

knew were being made on illegal payday loans. See Compl., First Claim. Plaintiff’s breach of

contract claim fails for multiple reasons, including (1) the Account Agreement does not require

BofA to comply with the NACHA Rules, and (2) even if BofA was required to comply with the

NACHA Rules, those Rules did not require BofA to monitor the purposes for which Plaintiff was

making payments from her deposit account or to unilaterally recredit her account for payments

on allegedly illegal loans.


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There are important reasons why banks do not have the duty to monitor the purposes of

their customers’ ACH transactions that Plaintiff seeks to impose on BofA in this case. The ACH

system does not provide financial institutions in BofA’s position with sufficient information to

determine if a transaction in which an ACH payment is being made is illegal. Even if it did,

Plaintiff’s theory would require banks to interject themselves into the private affairs of their

customers to determine the legality of the customer’s payments. Imposing on banks an

obligation to police the purposes for which a customer makes ACH payments, with its attendant

potential liability, also would cause an efficient ACH payment system to grind to a halt.

The Complaint asserts additional claims for breach of an Implied Covenant of Good Faith

and Fair Dealing (Second Claim), Unconscionability (Third Claim), Conversion (Fourth Claim),

Unjust Enrichment (Fifth Claim) and violation of New York GBL § 349 (Sixth Claim). These

additional claims rehash the breach of contract claim and fail as a matter of law. Further, all of

Plaintiff’s claims are barred by a release of BofA from liability for payments Plaintiff chose to

make from her deposit account, and by a force majeure clause that relieved BofA from liability

for illegal conduct of third parties and acts of the Plaintiff.

For these, and the other reasons described below, Plaintiff’s complaint should be

dismissed under Rule 12(b)(6).

LEGAL STANDARD

A claim is subject to dismissal under Rule 12(b)(6) if the plaintiff’s complaint does not

contain sufficient allegations of fact to state a claim for relief that is “plausible on its face.” Bell

Atl. Corp. v. Twombley, 550 U.S. 544, 570 (2007); Harris v. Mills, 572 F.3d 66, 72 (2d Cir.

2009). In considering a Rule 12(b)(6) motion, the factual allegations set forth in the complaint

are accepted as true and all reasonable inferences are drawn in favor of the plaintiff. Zinermon v.


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Burch, 494 U.S. 113, 118 (1990); In re NYSE Specialists Sec. Litig., 503 F.3d 89, 91 (2d Cir.

2007).

ARGUMENT

I. THE COMPLAINT DOES NOT ALLEGE AN ACTIONABLE BREACH OF CONTRACT CLAIM.

A. The ACH Network and NACHA Rules

The ACH network allows consumers to make payments electronically from their deposit

accounts. See Compl. ¶ 6. The NACHA Rules set forth the operating rules for financial

institutions which process electronic payments through the ACH network. See Compl. ¶ 7.

Under the NACHA Rules: (1) the payday lender that originated the ACH debit is the

“Originator;” (2) the bank that processed the ACH debit for the payday lender is the “Originating

Depository Financial Institution” or “ODFI;” (3) BofA, which received the ACH debit on the

Plaintiff’s account, is the “Receiving Depository Financial Institution” or “RDFI;” and (4) the

Plaintiff was the “Receiver” of the ACH debit. Id. ¶¶ 6, 56, 64; see also Clinton Plumbing and

Heating of Trenton v. Ciaccio, Civ. No. 09-2751, 2010 U.S. Dist. LEXIS 113215, at *29 (E.D.

Pa. Oct. 22, 2010) (describing the relationship between the parties involved in ACH

transactions).

For purposes of deciding the instant motion to dismiss, BofA has provided copies of

relevant provisions of the 2013 NACHA Rules discussed in this Memorandum, which apply

because the transactions Plaintiff disputes occurred in 2013. See Declaration of Maria B. Earley

in Support of Bank of America’s Motion to Dismiss, dated September 15, 2014 (“Earley

Declaration”), ¶ 2 and Exhibit A. BofA has also provided a NACHA Operations Bulletin that

interprets those rules and describes the obligations of RDFIs and ODFIs with respect to payday

lenders and other high risk originators and alleged unlawful activity. See ACH Operations


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Bulletin #2-2013: High-Risk Originators and Questionable Debit Activity (Mar. 14, 2013)

(“NACHA Bulletin”), Earley Declaration, ¶ 3 and Ex. B. These documents may be considered

in connection with BofA’s motion to dismiss because the Complaint relies on them. See

Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006); Sosnowy v. A. Perri Farms, Inc.,

764 F. Supp. 2d 457, 475 (E.D.N.Y. 2011); Compl. ¶¶ 7-10, 28-34, 36, 46, 55-61, 67, 130, 137,

138, 140, 142, 145, 178.

B. Summary of Plaintiff’s Allegations.

Plaintiff alleges that her “Account Agreement incorporated the NACHA Rules,

promising accountholders that all ACH transactions would be processed strictly in accordance

with the [NACHA] rules and procedures.” Compl. ¶ 137. She also alleges that those Rules

require BofA to comply with due diligence and risk-based monitoring obligations and “require

BofA to block [ACH] transactions [that] it knows to be unlawful or unauthorized under [the]

NACHA Rules” when such diligence and monitoring results in knowledge of unlawful activity.

Compl. ¶¶ 30-32, 138. The Complaint further alleges that BofA breached its promise to process

all ACH transactions in accordance with the NACHA Rules when it honored ACH payments on

payday loans that BofA knew to be unlawful. See Compl. ¶ 140. It also alleges that the

NACHA Rules required BofA to recredit customers’ accounts to the extent that it honored ACH

debits on payday loans that were in violation of applicable “Legal Requirements,” including New

York law. See Compl. ¶ 35. Finally, Plaintiff alleges that BofA violated her Account Agreement

by assessing overdraft and return item fees on ACH payments on payday loans that were

unlawful or unauthorized under the NACHA Rules. See Compl. ¶ 143.

As discussed in the following subsections, Plaintiff’s breach of contract claim fails

because BofA did not promise Plaintiff that it would comply with the NACHA Rules. But even

if BofA had made such a promise, those Rules did not require BofA to monitor the purposes for


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which Plaintiff authorized ACH debits or to recredit Plaintiff’s account if it determined that the

payments were made in connection with alleged illegal payday loans. Finally, BofA was not

prohibited from imposing overdraft and returned item fees under the Account Agreement when

Plaintiff made no effort to stop payment on the ACH debits or obtain a recredit as provided in the

NACHA Rules.

C. BofA Did Not Promise Plaintiff That It Would Comply With The NACHA Rules

Plaintiff claims that BofA promised to process ACH debits to her deposit account strictly

in accordance with the NACHA Rules, based on the allegation that her Account Agreement

incorporated the NACHA Rules. Plaintiff is incorrect as a matter of law for multiple reasons.

First, the sentence that Plaintiff alleges creates an obligation to comply with the NACHA

rules – “you agree that [an ACH] transaction is subject to” the NACHA Rules – does not apply

to plaintiff’s account under the express terms of the Account Agreement. It is in a subsection

entitled “ACH Debits and Credits, ” which is part of a section entitled “Funds Transfer Services”

that expressly states that it does “not apply to transaction governed by Regulation E . . . .”

Account Agreement at pp. 43-45. ACH debits to consumer deposit accounts plainly are subject

to Regulation E. See 12 C.F.R. 1005.3(a) (Regulation E encompasses “any electronic fund

transfer that authorizes a financial institution to debit or credit a consumer’s account.”).

Therefore, that section, and the language on which plaintiff’s breach of contract theory is entirely

based, are not applicable to the transactions at issue in this case.

Second, Plaintiff’s tortured interpretation of that sentence cannot stand because it directly

conflicts with the express terms of the Account Agreement which state that BofA did “not have

to inquire about the . . . application of any withdrawal or payment from an account.” Account

Agreement, “Some General Terms” at p. 5. A general reference to the transactions being


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“subject to” the NACHA Rules simply cannot be interpreted to override an express provision

directly on point. Herr v. Herr, 949 N.Y.S.2d 786, 789 (N.Y. App. Div. 2012) (“Where a

contract . . . employs contradictory language, specific provisions control over general

provisions.”) (citations omitted).

Third, other provisions of the “ACH Debits and Credits” subsection on which Plaintiff

relies are flatly inconsistent with Plaintiff’s claim that BofA had a duty to monitor the purposes

for which ACH debits are being paid. Those provisions state that BofA “may rely on the

representations and warranties in [the NACHA Rules]” and “either credit or debit [the] account

as instructed by the originator of the ACH transaction.” Account Agreement at p. 45. As

described below, see infra., Section I.D, the NACHA Rules provide that the ODFI is responsible

for the valid authorization of every ACH debit processed in its name. NACHA Rules 2.3.2.3 and

2.4.1.1. Therefore, the ODFI warrants to the RDFI that the ACH debit was properly authorized

by the Receiver in accordance with the NACHA rules. Id; NACHA Rule 2.4.1.2. The ACH

Debits and Credits subsection, to the extent it applied to Plaintiff’s account, thus provided that

BofA could rely on that representation and debit Plaintiff’s account as directed. See Atkins v.

Wachovia Bank, N.A., No. 0948, 2007 Phila. Ct. Com. Pl. LEXIS 341, at *17 (Pa. Super. Ct.

Dec. 4, 2007) ( “Plaintiff agreed, with respect to ACH transactions, to be bound by NACHA

Operating Rules and, as set forth in said rules, to allow [the RDFI] to rely on the, representations

and warranties of the originator of an ACH entry.”).

Fourth, the NACHA Rules expressly state that receivers such as Plaintiff do not have

rights to enforce the Rules. See NACHA Rule 1.8 (“[n]”othing in these Rules is intended to, and

nothing in these Rules is implied to, give any legal or equitable right, remedy, or claim to any . .

. Receiver . . . .”); see also Clinton Plumbing and Heating of Trenton v. Ciaccio, 2010 U.S. Dist.


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LEXIS 113215, at *30-34 (Receiver lacks standing to bring a claim pursuant to the warranty

provisions of the NACHA Rules). Thus, to the extent that the Account Agreement incorporated

the NACHA Rules by reference, it also incorporated the prohibition on Plaintiff asserting any

claim for violation of those Rules.

Finally, the sentence on which Plaintiff relies does not provide that BofA would strictly

comply with the NACHA Rules with respect to her ACH transactions. Indeed, it does not state

that BofA will perform any obligation, but rather merely provides acknowledgement from the

accountholder that the ACH Rules may limit the BofA’s obligations to honor ACH debits.

Indeed, the words “subject to” should be read to “indicate a condition to one party’s duty of

performance and not a promise by the other.” Cole-Hoover v. N.Y. Dep't of Corr. Servs., 02-

CV-00826, 2013 U.S. Dist. LEXIS 148989, at *5 (W.D.N.Y. Oct. 16, 2013) (citing Burgess

Constr. Co. v. M. Morrin & Son Co., Inc., 526 F.2d 108, 113 (10th Cir.1975), cert. den., 429

U.S. 866 (1976)). Thus, even if it applied, far from imposing an obligation on BofA, this

sentence conditions BofA’s obligations under the Account Agreement to the extent those

obligations conflict with the NACHA Rules.

D. The NACHA Rules Did Not Require BofA to Monitor the Purpose for which Payments Were Authorized or Unilaterally Recredit Payments In Connection with Purportedly Illegal Loans.

Even if Plaintiff could successfully establish that BofA promised Plaintiff it would

comply with the NACHA Rules with respect to her ACH transactions, Plaintiff’s breach of

contract claim fails as a matter of law because nothing in those Rules required BofA to monitor

the purposes for which ACH transfers were made from Plaintiff’s account or unilaterally recredit

Plaintiff’s account if BofA determined that the transfers were made in connection with illegal

payday loans. Indeed, Plaintiff’s claims regarding the requirements of the NACHA Rules in this

respect are fundamentally incorrect for several reasons.


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Plaintiff is incorrect to the extent that she claims that the NACHA Rules imposed a duty

on the BofA to monitor the purposes for which Plaintiff initiated ACH payments from her

account. The ODFI represents and warrants to the RDFI that the ACH debit transactions the

ODFI processes for the Originator are properly authorized and comply with the NACHA Rules.

NACHA Rules 2.4.1.1 and 2.4.1.2. The RDFI, which has no relationship with the Originator and

thus no ability to determine the validity of the authorization that the Originator obtained from the

Receiver, is entitled to rely on that representation. See Affinion Benefits Group, LLC v. Econ-o-

check Corp., 784 F. Supp. 2d 855, 876 (M.D. Tenn. 2011) (“Because the consumer’s

bank…itself has no direct relationship with the Originator or the Originator’s bank, the

consumer’s bank relies on a series of warranties received from the Originator through its bank

that it has received proper authorization from the consumer before initiating a debit.”); NACHA

Bulletin. Only after the Receiver notifies the RDFI in accordance with the NACHA Rules that a

transaction previously charged to her account was not authorized, do the NACHA rules provide

the RDFI to return the debit to the ODFI so that the receiver’s account can be recredited.

NACHA Rule 3.11.1. Here, it was the ODFI that processed the ACH debits for the payday

lender and thus was required to determine that the Originator’s ACH debit complied with the

requirements of the NACHA Rules. NACHA Rule 2.4.1.2.

Plaintiff also is incorrect to the extent that she asserts that an ACH debit is considered

“unauthorized” under the NACHA Rules, and therefore subject to reversal by the RDFI, merely

because it was honored by the RDFI in connection with an alleged illegal transaction. See

Compl. ¶ 35 (BofA obligated to recredit account for ACH debit entries that were in violation of

“Legal Requirements”). The NACHA Rules require an ACH authorization for a consumer

account to be readily identifiable, have clear and understandable terms, and provide that the


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customer may revoke the authorization only by notifying the originator in the time and manner

stated in the authorization. NACHA Rule 2.3.2.3. The NACHA Rules further provides that “[a]

purported authorization . . . that is . . . invalid under applicable Legal Requirements . . . does not

satisfy the requirements of Section 2.3.” Id. Here, although Plaintiff has made general

allegations that the payday loans for which she provided her ACH authorizations were

purportedly illegal, she does not identify which New York Laws were purportedly violated or

assert that such alleged illegality invalidated her ACH authorization. Plaintiff’s theory thus fails

as a matter of law to the extent that Plaintiff has not alleged that the illegality invalidated

Plaintiff’s ACH authorization.

Finally, Plaintiff is incorrect to the extent that she claims that the NACHA Rules created

an obligation on BofA to recredit ACH transactions on its own initiative and without any request

from her. The NACHA rules require RDFIs, like BofA, to honor all debits presented subject to a

right of return. NACHA Rule 3.1.1; see also Affinion Benefits Group, LLC v. Econ-o-check

Corp., 784 F. Supp. 2d at 876 (RDFIs must honor ACH debits based on the warranties provided

by the ODFI and the Originator); Atkins v. Wachovia Bank, N.A., 2007 Phila. Ct. Com. Pl.

LEXIS 341, at *17 (“pursuant to NACHA Operating Rules…the RDFI, must accept credit, debit

and zero dollar transactions with respect to accounts maintained with them.”) (emphasis in

original). The NACHA Rules provide a mechanism for customers to dispute the validity of an

ACH debit and be recredited, but they do not permit an RDFI to unilaterally block or reverse a

transaction. In particular, “[a]n RDFI must promptly recredit the amount of a debit Entry to a

Consumer Account of a Receiver . . . if it receives notification from the Receiver in accordance

with Section 3.12….” NACHA Rule 3.11.1 (emphasis added). Here, the Complaint does not

allege that Plaintiff notified BofA that the ACH transactions were unauthorized or requested that


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the transactions be recredited. Absent such notification or request, Plaintiff’s claim that BofA

was obligated under the NACHA Rules to recredit ACH debits initiated by payday lenders must

fail.

At bottom, even if the Plaintiff can successfully establish that BofA agreed with her to

process her ACH transactions in strict accordance with the NACHA Rules, the Complaint does

not allege any basis on which to conclude that BofA failed to fully comply with that promise.

E. BofA May Impose Overdraft and Returned Item Fees When Plaintiff Did Not Exercise Her Rights to Stop Payment or Obtain a Recredit

The Account Agreement provides that BofA may impose an overdraft fee if it chooses to

honor a debit to Plaintiff’s deposit account that causes an overdraft and a returned item fee if

BofA returns an ACH debit because the Plaintiff has insufficient funds in her account to cover

the debit. See Account Agreement, “Insufficient Funds – Overdrafts and Returned Items,” at p.

12. As described above, the Account Agreement also provides that BofA was not obligated to

determine the purposes for which the Plaintiff was making ACH payments. Further, “the ACH

message itself, like any check or other payment instrument, provides no information about the

substance of the transaction” that would permit BofA to determine whether Plaintiff’s ACH

payments were made in connection with allegedly illegal payday loans. NACHA Bulletin.

Here, Plaintiff never notified BofA that those transactions were unauthorized or otherwise illegal

or requested that BofA reverse or recredit her for those ACH debits. In light of this, the Account

Agreement in no way suggests that the fees would not be imposed in connection with

transactions authorized by Plaintiff that she now alleges were illegal. This claim for breach of

contract should likewise be dismissed.


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II. PLAINTIFF’S CLAIM FOR BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING FAILS AS A MATTER OF LAW

Plaintiff alleges that BofA breached an implied covenant of good faith and fair dealing

incorporated into the Account Agreement by processing ACH transactions it knew or should

have known were initiated by illegal payday lenders and by imposing overdraft and returned item

fees as a result of honoring those transactions. See Compl. ¶ 148. This claim should be

dismissed for at least two reasons.

First, the implied covenant of good faith and fair dealing cannot impose obligations that

are inconsistent with the express terms of the contract. Broder v. Cablevision Sys. Corp., 418

F.3d 187, 198-99 (2d Cir. 2005). As noted above, the Account Agreement expressly states that

BofA did not have an obligation to inquire about the application of any ACH payments from her

account. See Account Agreement, “Some General Terms,” at p. 5. As described in Section VII,

the Account Agreement also expressly provides that BofA is released from all claims for

payments made from Plaintiff’s account. Plaintiff thus cannot use the implied covenant of good

faith and fair dealing to create an obligation to monitor the purposes of her ACH payments when

the express provisions of the Account Agreement state that BofA does not have any such

obligation. Nor can she use the covenant of good faith and fair dealing to impute liability on

BofA for processing ACH debits when the Account Agreement releases it from liability for

claims related to those payments.

Second, the alleged breach of the implied covenant of good faith and fair dealing is based

on the exact same conduct that serves as the predicate for the breach of contract claim. It is well-

settled that New York law does not recognize a separate claim for breach of the implied duty of

good faith and fair dealing that is predicated on the same facts as a claim for breach of contract.

See Spread Enters., Inc. v. First Data Merchant Services Corp., No. 11-cv-4743, 2012 U.S. Dist.


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LEXIS 119080, at *7 (E.D.N.Y. Aug. 22, 2012); Hall v. EarthLink Network, Inc., 396 F.3d 500,

508 (2d Cir. 2005). Here, the same alleged underlying facts and conduct – that BofA honored

ACH debits originated by illegal payday lenders and assessed overdraft and/or returned item fees

as a result – also underlie Plaintiff’s breach of contract claim. See Compl. ¶ 140 (alleging that

BofA breached its contract with Plaintiff when it processed payday loan transactions) and ¶¶

141-142 (alleging breach of contract because BofA imposed overdraft and/or returned item fees

after honoring ACH debits). Thus, Plaintiff’s claim for breach of the covenant of good faith and

fair dealing is nothing more than a rehash of her breach of contract claim and should be

dismissed as duplicative. See Spread Enters., Inc., 2012 U.S. Dist. LEXIS 119080, at *13-14

(dismissing claim for breach of covenant of good faith and dealing because it was duplicative of

the breach of contract claims); Piven v. Wolf Haldenstein Adler Freeman & Herz LLP, No. 08-

cv-10578, 2010 U.S. Dist. LEXIS 27609, at *22-23 (S.D.N.Y. Mar. 12, 2010) (same); L-7

Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 433 (2d Cir. 2011) (noting that the lower court

should have dismissed duplicative breach of contract and breach of covenant of good fair and

fair dealing as duplicative).

III. PLAINTIFF HAS NOT ALLEGED A COGNIZABLE UNCONSCIONABILITY CLAIM

The Complaint asserts an unconscionability claim on the basis that (a) BofA did not

adequately disclose that it would impose overdraft and returned item fees in connection with

ACH payments for illegal payday loan transactions, (b) BofA did not obtain affirmative consent

to process such ACH payments that resulted in the imposition of overdraft and returned item

fees, and (c) BofA did not alert consumers that such ACH payments would cause overdraft or

returned item fees. See Compl. ¶ 151.


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This claim is defective as a matter of law because, under New York law, the doctrine of

unconscionability is an affirmative defense to the enforcement of a contract and may not be used

to seek affirmative relief. Ng v. HSBC Mortgage, No. 07-cv-5434, 2011 U.S. Dist. LEXIS

88549, at *21-23 (E.D.N.Y Aug. 10, 2011); see also Galvin v. First Nat. Monetary Corp., 624 F.

Supp. 154, 158 (E.D.N.Y. 1985) (“the doctrine of unconscionability is in the nature of an

affirmative defense, and does not give rise to a cause of action”); Super Glue Corp. v. Avis Rent

A Car Sys., Inc., 517 N.Y.S.2d 764, 766 (N.Y. App. Div. 1987) (“The doctrine of

unconscionability is to be used as a shield, not a sword, and may not be used as a basis for

affirmative recovery.”).

Further, the bases on which Plaintiff alleges the Account Agreement was unconscionable

are legally insufficient. The Account Agreement plainly states that BofA was not responsible for

determining the purposes for which she made payments from her account. Plaintiff offers no

plausible theory under which BofA was prohibited from assessing overlimit and returned item

fees when Plaintiff did not exercise her right to stop payment or obtain a recredit.

More fundamentally, BofA acted entirely properly when it honored the ACH payments

authorized by Plaintiff and in no way was the Account Agreement or BofA’s conduct

“unconscionable.” New York law defines an “unconscionable contract” as an agreement that is

“so grossly unreasonable or unconscionable in the light of the mores and business practices of

the time and place as to be unenforceable according to its literal terms.” Gillman v. Chase

Manhattan Bank, N.A., 534 N.E.2d 824, 828 (1988); Nayal v. HIP Network Servs. IPA, Inc., 620

F. Supp. 2d 566, 571 (S.D.N.Y. 2009). Here, the Account Agreement and BofA’s conduct were

entirely within appropriate “mores and business practices” and not “grossly unreasonable” in

light of them.


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To start with, the information received by BofA when it pays an ACH debit is factually

insufficient to allow BofA to comply with any duty to determine whether an ACH payment is

being made in connection with an illegal transaction. See supra Section I.D. Even if BofA could

operationally determine the Originator receiving the payment, BofA has no information

regarding the purpose of the payment or any other details regarding any transaction for which the

payment is being made. Thus, for example, even if BofA was able to determine that a payment

was being made to a payday lender, it would not be able to determine the purpose of the payment

and, if it was a loan payment, whether the lender was appropriately licensed or the interest rate

and other loan terms complied with applicable law.

Second, even if banks had access to information about their accountholders’ transactions,

they cannot review all of the literally millions of transactions that are processed automatically to

determine if they are legal. Here, Plaintiff alleges that BofA had a duty to determine whether

Plaintiff’s payday loan violated New York law. Under Plaintiff’s theory, BofA also would have

the unbearable burden to review transactions of depositors for compliance with virtually any

federal, state or local law. That burden, together with the attendant potential liability if BofA

made an incorrect determination and wrongfully refused to honor a customer’s payment order,

would cripple the efficient ACH payment system. See Emery v. Visa Int’l Serv. Ass’n, 95 Cal.

App. 4th 952, 964 (2002) (requiring financial institutions to police the actions of third parties

would have a “substantial chilling effect” on payment systems by “imposing debilitating costs

and improperly shifting law enforcement functions to private entities.”); Manheim Dairy Co. v.

Little Falls Nat'l Bank, 54 N.Y.S.2d 345, 357 (N.Y. Sup. Ct. 1945) (Banks are liable for injury

based on its failure to honor a check). In addition, imposing a duty on banks to monitor the

purposes for which their customers make payments would inappropriately interject banks into


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their customers’ private affairs. See Chazen v. Centenial Bank, 61 Cal. App. 4th 532, 537 (1998)

(the public policy of favoring confidentiality “militate against imposing on banks a duty to

monitor for wrongdoing.”); see also Swift County Bank v. United Farmers Elevators, 366

N.W.2d 606, 609 (Minn. Ct. App. 1985) (“Banks have no general duty to monitor their

depositors’ checking accounts.”); Manheim Dairy Co., 54 N.Y.S.2d at 357 (Banks have no duty

“to inquire into the disposition” of deposit accounts, which even if “draw[n] to the full,” is “no

concern to the bank.”).

Finally, if Plaintiff did not want the ACH payments to be made from her account, all she

needed to do was terminate the authority she provided her payday lenders and notify BofA of

such termination or request that BofA stop payment from her account. NACHA Rule 3.7.1. The

Account Agreement also provided Plaintiff with a right to stop payment on her ACH debits by

contacting BofA. See Account Agreement, “Stop Payment Orders and Postdating Orders” at

pgs. 36 -37, and “Definitions” at p. 3 (ACH debit included in definition of “Item”). Here

Plaintiff has not alleged that she asked BofA to stop payment on the ACH debit she authorized or

requested a recredit for the transaction. In that instance, Plaintiff cannot impose on BofA a duty

to unilaterally determine to block or recredit her account for the payment she authorized.

IV. PLAINTIFF’S CONVERSION CLAIM FAILS AS A MATTER OF LAW

Plaintiff alleges that BofA wrongfully collected overdraft fees and returned item fees and

is liable for the tort of conversion because it took specific and readily identifiable funds from

consumers’ accounts. See Compl. ¶ 157. The claim fails as a matter of law and should be

dismissed.

Contrary to the allegations in the complaint, money in a bank account is not “sufficiently

specific and identifiable . . . to support a claim for conversion against [a] bank.” Cruz v. T.D.

Bank, N.A., 855 F. Supp. 2d 157, 174 (S.D.N.Y. 2012); See In re: HSBC Bank, USA, N.A., No.


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13-md-2451, 2014 U.S. Dist. LEXIS 29050, at *42 (E.D.N.Y. Mar. 5, 2014). When plaintiff

opened her account, she created a contractual relationship with the Bank in which money that she

deposited in the account became the property of the Bank. See Cruz, 855 F. Supp. 2d at 175; see

also Law Offices of K.C. Okoli, P.C. v. BNB Bank, N.A., 481 F. App’x 622, 627 (2d Cir. 2012)

(“money deposited in a general account at a bank does not remain the property of the

depositor…the money deposited becomes the property of the depositary bank) (applying New

York law). Thus, the appropriate remedy if BofA imposed excess fees is breach of contract and

not the tort of conversion. See In re: HSBC Bank, USA, N.A., 2014 U.S. Dist. LEXIS 29050, at

*42-43 (dismissing conversion claim).

This claim fails for the additional reason that it does not allege independent facts

sufficient to give rise to tort liability. See Piven, 2010 U.S. Dist. LEXIS 27609, at *26. A claim

for conversion “cannot be predicated on a mere breach of contract claim.” Id. Here, Plaintiff’s

conversion claim is simply a restatement of the breach of contract claim based on BofA’s

assessment of overdraft fees. Compare Compl. ¶¶ 141-142 with Compl. ¶ 157. Accordingly, the

conversion claim should be dismissed. See Piven, 2010 U.S. Dist. LEXIS 27609, at *28

(dismissing conversion claim because it was a restatement of the breach of contract claim);

Fesseha v. TD Waterhouse Investor Servs., Inc., 761 N.Y.S.2d 22, 24 (N.Y. App. Div. 2003)

(affirming dismissal of conversion claim that was “nothing more than a restatement of

[plaintiff’s] breach of contract claim.”).

V. THE UNJUST ENRICHMENT CLAIM FAILS AS A MATTER OF LAW

New York does not recognize unjust enrichment claims where there is a valid enforceable

contract. See In re: HSBC Bank, USA, N.A., 2014 U.S. Dist. LEXIS 29050, at *43-44 (unjust

enrichment is an action in quasi-contract, which does not lie where an enforceable, binding

agreement exists defining the rights of the parties.”) (citations omitted); Spread Enters., Inc.,


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2012 U.S. Dist. LEXIS 119080, at *14-15 (same). Here, there is no dispute here about the

validity of the Account Agreement. Accordingly, Plaintiff’s unjust enrichment claim should be

dismissed.

VI. PLAINTIFF’S CLAIM UNDER NEW YORK GBL § 349 FAILS BECAUSE SHE HAS NOT ALLEGED A DECEPTIVE ACT OR PRACTICE

As her final claim for relief, Plaintiff alleges that BofA violated New York’s Consumer

Protection Act, N.Y. Gen. Bus. Law § 349 et seq., by (1) violating state public policy by

processing debits on illegal payday loans, (2) falsely representing that BofA would act in

accordance with NACHA Rules, (3) honoring ACH debits Plaintiff authorized to repay allegedly

illegal payday loans, and (4) charging overdraft or returned item fees in connection with

honoring such debits despite no express or implied authorization for such fees in the contract.

This claim also should be dismissed because it is insufficient as a matter of law.

Section 349(a) declares “deceptive acts or practices in the conduct of any business, trade

or commerce or in the furnishing of any service in [New York]” to be unlawful. N.Y. Gen. Bus.

Law § 349(a). To establish a claim for relief under § 349(a), a plaintiff must allege and prove (1)

that the defendant engaged in a “consumer-oriented” act or practice, (2) that the act or practice

“was misleading in a material way,” and (3) that the plaintiff was injured as a result of the

deceptive act or practice. Stutman v. Chemical Bank, 731 N.E.2d 608, 611 (N.Y. 2000); see also

Lebowitz v. Dow Jones and Co., 508 F. App’x 83, 85 (2d Cir. 2013). To establish the second

element, a plaintiff must allege and prove an act or practice that is “likely to mislead a reasonable

consumer acting reasonably under the circumstances.” Stutman, 731 N.E.2d at 611-12 (quoting

Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, 647 N.E.2d 741, 745

(N.Y. 1995)). Crucially, § 349 prohibits only conduct that deceives consumers; it does not grant


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a private remedy for every improper or illegal business practice. Schlessinger v. Valspar Corp.,

991 N.E.2d 190, 193 (N.Y. 2013).

Here, Plaintiff fails to allege any conduct on the part of BofA that was deceptive under

Section 349(a). To the extent she alleges that BofA violated public policy and unspecified rules

and laws by honoring ACH debits for repayment of purported illegal payday loans and also

charged overdraft and returned item fees when the Account Agreement did not allow them, the

Complaint does not allege that Plaintiff was mislead or deceived by any of these actions. Nor

could she make such an allegation when the Account Agreement expressly provides that BofA

was not required to determine the purposes for which Plaintiff was making payments, and the

Account Agreement authorized BofA to impose overlimit and returned item fees when Plaintiff

did not exercise her right to stop payment or obtain a recredit.

The only allegation in the Complaint that suggests that Plaintiff may have in any way

been mislead or deceived is BofA represented that would act in accordance with the NACHA

Rules and not process illegal transactions, when in fact it did not. Compl. ¶ 140. However, as

noted above, the provision on which Plaintiff relies to establish this obligation does not apply to

Plaintiff’s account, BofA did not otherwise promise Plaintiff it would comply with the NACHA

Rules. See supra Section I.C. But even if it had, it fully complied with those rules. Id. Further,

the NACHA Rules do not impose on BofA a duty to determine if an ACH payment was being

made in connection with an illegal transaction. See supra Section I.D. Finally, under New York

law, a breach of contract claim cannot be recast as a deception claim under Section 349(a):

Section 349 does not apply where “[t]he conduct of which [the plaintiff] complains is essentially

that [the defendant] failed to satisfy [its] contractual duties . . . .” Lucker v. Bayside Cemetery,

979 N.Y.S.2d 8, 17-18 (N.Y. App. Div. 2013).


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VII. THE ACCOUNT AGREEMENT EXPRESSLY BARS ALL OF PLAINTIFF’S CLAIMS

Finally, all of Plaintiff’s claims are barred by the express terms of the Account

Agreement. It states that “[w]hen [BofA] permit[s] a withdrawal or payment from an account at

the request of any signer, or the agent of any signer, in accordance with the terms of this

Agreement, the withdrawal or payment is a complete release and discharge of [BofA] from all

claims regarding the withdrawal.” Account Agreement, “Some General Terms” at p. 5. In

addition, the Account Agreement provides that BofA “is not liable to [Plaintiff] for any claim,

cost, loss or damage caused by an event beyond [BofA’s] reasonable control” and specifically

identifies “the potential violation of any guideline, rule or regulation of a governmental

authority” and “[Plaintiff’s] acts” as “circumstances beyond [BofA’s] reasonable control.”

Account Agreement, “Indemnification and Limitation of Liability,” at p. 34.

Here, Plaintiff’s claims are barred by the express language of the Account Agreement

that states she releases and discharges BofA for all claims regarding the payments she made from

her deposit account. Her claims are further barred because they are claims that are based on

alleged violations of New York law by her payday lenders and her own acts in obtaining those

loans.


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CONCLUSION

For the foregoing reasons, the Court should grant BofA’s motion to dismiss, and dismiss

each of the claims asserted against BofA with prejudice.

Dated: Washington, D.C. Respectfully Submitted, September 15, 2014 SIDLEY AUSTIN LLP By: __/s/ Maria B. Earley____________________ Maria B. Earley (admitted pro hac vice) [email protected] James A. Huizinga (admitted pro hac vice) [email protected] 1501 K Street, N.W. Washington, DC 20005 Tel: (202) 736-8000 Fax: (202) 736-8711

Benjamin R. Nagin [email protected] 787 Seventh Ave New York, NY 10019 Tel: (212) 839-5300 Fax: (212) 839-5599 Counsel for Defendant Bank of America, N.A.


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