Recent EDNY Decisions on Creditor Rights and Obligations

In the past month, EDNY judges have issued two significant opinions regarding creditors.

First,  on April 21, 2014, in In re: HSBC Bank, USA, N.A. Debit Card Overdraft Fee Litigation, 13 MD 2451 (E.D.N.Y), Judge Arthur D. Spatt issued a rare order granting a motion for reconsideration.  This was a class action involving allegations that HSBC customers were improperly charged “overdraft fees” on debit card transactions. Plaintiffs claimed that the bank posted debits in a “largest to smallest” order instead of chronologically in order to maximize overdraft fees for itself, allegedly in violation of the bank’s agreements with customers.

Judge Spatt had initially  dismissed plaintiffs’ claims for violation of New York General Business Law (“GBL”) § 349 and breach of contract. The GBL claim was dismissed as untimely because the federal class action was filed more than three years after the conduct at issue. Upon reconsideration, the Court held that because the plaintiffs had originally filed their claim in New York state court and received a dismissal without prejudice, they should have been entitled to the benefit of tolling under the U.S. Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). Further, the Court recognized that the state court action provided HSBC with timely notice of the GBL claim, and so “HSBC cannot be heard to complain about lack of notice or prejudice in having to defend against this claim.” Id. at 13.

The breach of contract claim had been dismissed for failure to allege a breach of a specific term of the contracts at issue. In granting the reconsideration motion, Judge Spatt said that he now recognized that he had previously “overlooked” some of the provisions in the debit card agreements, in particular a provision stating that debit card transactions would be treated as a “simultaneous withdrawal” from customers’ checking accounts. Id. at 14.

In the second case, in an April 4, 2014 judgment and order in Jiaxing Globillion Import and Export Co. v. Argington, Inc., 11 CV 6291 (JBW) (E.D.N.Y), Judge Jack B. Weinstein granted summary judgment for plaintiff and pierced the corporate veil to hold one of the corporate defendant’s two shareholders liable for the company’s breach of contract. Plaintiff Jiaxing Globallion Import and Export Co. (“JG”) entered into a contract with Argington, Inc., to supply children’s furniture and furniture parts for a contract price of nearly $900,000, and delivered the goods in 28 shipments between 2009 and 2011. Argington paid only for a portion of the shipments, and earlier in the case a default judgment was entered against it for $672,905. The Court granted JG’s summary judgment motion on its claim to pierce the corporate veil, which under governing Missouri law had to be pled as a distinct cause of action. The  grounds for the veil piercing were that the two shareholders (husband and wife)  made all decisions for the company, while not adhering to any  corporate formalities, comingling funds and using corporate funds for their personal expenses, including purchases at Costco, Crate and Barrel, Home Depot, IKEA, Prospect Park Tennis and elsewhere.  Important for the decision was their failure to declare as income the personal expenses the corporation paid for them.  Because of these personal expenses, the company became undercapitalized. Between 2009 and 2012 the company’s debt to vendors went from 0 to $558,000, but instead of paying their vendors the shareholders disbursed $554,000 from the corporation to themselves. They also disbursed to themselves $193,000 in loans.

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