3T Oil and Gas Services, LLC v. JPMorgan Chase Bank N.A.

Filing 18

REPORT AND RECOMMENDATIONS re 7 Motion to Dismiss, Motion to Strike filed by JPMorgan Chase Bank N.A.. Signed by Judge Andrew W. Austin. (dl)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
3T OIL AND GAS SERVICES, LLC
V.
JPMORGAN CHASE BANK, N.A.

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A-18-CV-131-LY

REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:

THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are Defendant’s Motion to Dismiss and Motion to Strike Plaintiff’s First

Amended Complaint (Dkt. No. 7); Plaintiff’s Response (Dkt. No. 8); Defendant’s Reply (Dkt. No.
9); and Plaintiff’s Sur-Reply (Dkt. No. 12). The District Court referred the motion to the undersigned
Magistrate Judge for report and recommendation pursuant to 28 U.S.C. §636(b) and Rule 1(c) of
Appendix C of the Local Rules. The Court held a hearing on the motion on August 29, 2018.
I. GENERAL BACKGROUND
3T Oil and Gas Services, LLC procures and distributes oil and gas equipment for
multi-national corporations.

JPMorgan Chase Bank, N.A. is a foreign financial institution

incorporated under the laws of New York and is registered to do business in Texas. This lawsuit is
based 3T’s wire transfer of $186,686 (the “Wired Funds”) to an account at JPMC. Specifically, in
connection with the purchase of oilfield equipment, 3T received instructions from its vendor, DME,
Inc., to wire a down payment for the equipment to DME’s account at JPMC. Shortly thereafter, 3T
received from what it believed to be DME but which later turned out to be a third party
impersonating DME, different wiring instructions. On Friday, February 12, 2016, before it became
aware that the instructions were fraudulent, 3T used the new instructions to wire $186,686 from its

account at the United Bank of Africa, through Standard Chartered Bank, to the account at JPMC that
3T believed belonged to DME.
Two days later—a Sunday—DME contacted 3T to inform 3T that it believed 3T had been
given fraudulent wiring instructions and that 3T should cancel the wire. The next day, a Monday
(and a bank holiday), 3T contacted the FBI to cancel the wire transfer. The FBI informed 3T that
it could not direct JPMC to put a hold on the wire transfer and directed 3T to contact JPMC directly.
3T then called JPMC and informed the customer service representative and a member of JPMC’s
Global Investigations Fraud Unit that it believed it had been induced to wire funds to a fraudulent
account at JPMC’s bank. 3T requested that JPMC hold the Wired Funds until the bank reopened
on Tuesday, February 16, 2016, to allow time for the matter to be investigated. At the close of this
conversation, 3T alleges that JPMC stated that (1) the Wired Funds had arrived in the account at
Defendant’s bank; (2) the account had been “flagged;” and (3) due to the “flagged” status, the Wired
Funds could not be moved out of JPMC’s bank. 3T then called JPMC’s Global Investigations Fraud
Unit and spoke to a Fraud Specialist. The Fraud Specialist confirmed that an alert had been sent out
and that the Wired Funds would not be moved out of the bank. 3T also contacted the originating
bank for the wire transfer and requested that the bank recall the wire transfer, which it did at 2:27
p.m. on that same Tuesday.
On Wednesday, February 17, 2016, 3T met with a banker at JPMC’s branch bank near 3T’s
office. The banker told 3T that the JPMC account 3T had wired the funds to did not belong to DME,
but instead belonged to V.O.I. Enterprises, LLC, a company not known to 3T. More alarmingly, the
banker also informed 3T that JPMC had allowed V.O.I. to withdraw $131,092.82 of the Wired
Funds, and JPMC no longer had any control over those funds. 3T subsequently filed a criminal
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complaint with the FBI and with the Travis County’s Sheriff’s Office. Eventually, JPMC recovered
the remaining $55,593.18 of the original funds, and returned those to 3T. The remaining
$131,092.82 was never recovered.
Accordingly, 3T filed this lawsuit against JPMC, alleging that JPMC made negligent
misrepresentations to 3T that the Wired Funds would not leave the bank, and 3T relied on those false
representations to its detriment. 3T alleges that “[b]ut for Defendant’s representations that the Wired
Funds would not be released, and would remain in Defendant’s bank pending investigation, Plaintiff
would have pursued an emergency temporary restraining order preventing the release of the Wired
Funds as provided by NY CLS UCC § 4-A-503 and TEX. BUS. & COM. CODE § 4A.503.” Dkt. No.
3 at 7. 3T contends that JPMC’s false representations and numerous reconfirmations misled 3T to
believe that a court order was not needed to prevent Defendant from releasing its funds. 3T seeks
$131,092.92 in actual damages as well as exemplary damages.
JPMC moves to dismiss under to Rule 12(b)(6) and to strike, arguing: (1) the negligent
misrepresentation claim is supplanted by Chapter 4A of the Texas Business and Commerce Code,
and (2) the federal Bank Secrecy Act (“BSA”) does not create a private right of action.
II. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss an action for
failure to state a claim upon which relief can be granted. In deciding a Rule 12(b)(6) motion to
dismiss for failure to state a claim, “[t]he court accepts all well-pleaded facts as true, viewing them
in the light most favorable to the [nonmovant].” In re Katrina Canal Breaches Litig., 495 F.3d 191,
205 (5th Cir. 2007) (internal quotation marks omitted), cert. denied, 552 U.S. 1182 (2008). The
Supreme Court has explained that a complaint must contain sufficient factual matter “to state a claim
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to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the
[nonmovant] pleads factual content that allows the court to draw the reasonable inference that the
[movant] is liable for the misconduct alleged.” Id. The court’s review is limited to the complaint,
any documents attached to the complaint, and any documents attached to the motion to dismiss that
are central to the claim and referenced by the complaint. Lone Star Fund V (U.S.), L.P. v. Barclays
Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010).
III. ANALYSIS
A.

Preemption
As stated above, JPMC argues that 3T’s lawsuit should be dismissed because 3T’s negligent

misrepresentation claim is preempted by Chapter 4A of the Texas Business and Commerce Code.
Specifically, JPMC argues that Chapter 4A provides the exclusive rights and remedies governing
wire transfers, and because 3T’s lawsuit arises from the wire transfer at issue, the negligent
misrepresentation claim is preempted. The Court disagrees.
Chapter 4A of the Texas Business and Commerce Code, TEX. BUS. & COM. CODE § 4A.101,
et seq., incorporates the Uniform Commercial Code1 and governs wire transfers between a bank and
its customers. Contractors Source, Inc. v. Amegy Bank Nat’l Ass’n, 462 S.W.3d 128, 133 (Tex. App.
2015, no. pet. h.). Chapter 4A was “intended to be the exclusive means of determining the rights,
duties and liabilities of the affected parties in any situation covered by particular provisions of the
Article.” TEX. BUS. & COM. CODE § 4A.102 cmt. (emphasis added). “Consequently, resort to
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See TEX. BUS. & COM. CODE § 1.101 (“This title [the Texas Business and Commercial
Code] may be cited as the Uniform Commercial Code.”); Coburn Supply Co. v. Kohler Co., 342 F.3d
372, 376 (5th Cir. 2003).
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principles of law or equity outside of Article 4A is not appropriate to create rights, duties and
liabilities inconsistent with those stated in this Article.” Id. (emphasis added). Courts, however,
“may resort to principles of law or equity outside of Article 4A” as long as those principles do not
“create rights, duties and liabilities inconsistent with” those contained in Article 4A. Cmty. Bank,
FSB v. Stevens Fin. Corp., 966 F. Supp. 775, 780 (N.D. Ind. 1997). Accordingly, “where the
circumstances differ from the situations outlined in Art. 4A, Art. 4A is not the ‘exclusive means by
which a plaintiff can seek to redress an alleged harm arising from a funds transfer.’” Consorcio
Indus. de Construccion Titanes, S.A. de C.V. v. Wells Fargo Bank, N.A., 2012 WL 13019678, at *2
(N.D. Tex. July 12, 2012) (citing Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1273 (11th
Cir. 2003)).2 “Thus, a plaintiff is only restrained from bringing non-Article 4A claims when those
claims ‘create rights, duties and liabilities inconsistent with those stated in this article.” Id.3
Accordingly, the Court must determine whether 3T’s negligent misrepresentation claim falls within
the provisions of Chapter 4A.
In determining whether a claim is preempted under Chapter 4A, courts look to whether
“additional facts or conduct potentially lying outside the scope of Art. 4A are at issue.” Consorcio,
2012 WL 13019678 at * 3. If the conduct at issue or factual circumstances of the claim are “not
addressed squarely by the provisions of the article, courts are more likely to find that preemption

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See also, Centre-Point Merchant Bank Ltd. v. American Exp. Bank Ltd., 913 F. Supp. 202,
206 (S.D.N.Y. 1996) (rejecting defendant’s argument that New York legislature intended to replace
the common law entirely with regard to wire transfers); Zengen, Inc. v. Comerica Bank, 158 P.3d
800, 808 (Cal. 2007) (“This is not to say that the Uniform Commercial Code necessarily displaces
all common law actions based on all activities surrounding funds transfers.”).
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See also, Regions Bank, 345 F.3d at 1275 ( “Therefore, the only restraint on a plaintiff is that
‘resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties
and liabilities inconsistent with those stated in this Article.’”).
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does not apply.” Id. Thus, in Consorcio, 2012 WL 13019678 at * 3, the plaintiff owed monies
under a note to Hoss Equipment Nevada, and when making a payment on the note, mistakenly wired
$100,000 to Wachovia instead of to Hoss’s bank. Hoss’s affiliate, Hoss Equipment Co., Inc. was
in debt to Wachovia, and had a written agreement with Wachovia that any deposits to HEC’s account
would be “swept” by Wachovia and applied to HEC’s Wachovia debt. The plaintiff realized its
mistake within minutes of making the wire transfer, and requested that Wachovia refund the
$100,000. Wachovia refused, and instead applied the $100,000 payment against HEC’s debt. The
plaintiff then sued Wachovia, alleging common law claims of conversion, money had and received,
restitution, and a claim under the Texas Theft Liability Act. As JPMC has done here, the bank
argued that Consorcio’s claims were preempted by Chapter 4A. The district court rejected this
argument, and concluded that Chapter 4A did not preempt the claims since the bank’s refusal to
reverse its set off was a separate transaction from the wire transfer and Chapter 4A did not squarely
address those actions. Id. Similarly, in Regions Bank, 345 F.3d at 1276, the Eleventh Circuit held
that Article 4A did not preempt a state law claim where the beneficiary bank accepted funds when
it should have known that the funds were fraudulently obtained since Article 4A was silent with
regard to such claims. Id.
3T’s negligent misrepresentation claim in this case is similarly not based on the wire transfer
itself, or on any claim that JPMC mishandled the wire transfer, but rather is based on representations
made by JPMC after the wire transfer was completed. Specifically, 3T alleges that after the wire
transfer was completed, JPMC informed 3T that the funds had been flagged and that JPMCwould
not permit the funds to be moved out of the bank. 3T contends that it relied on these representations
and did not seek a court order to prevent JPMC from releasing the funds. None of these allegations
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fall within the provisions of Chapter 4A. Accordingly, 3T’s negligent misrepresentation claim is not
preempted by Chapter 4A.
As noted earlier, a number of courts have reached similar conclusions in similar cases. For
example, in Holcomb v. Wells Fargo Bank, N.A., 155 Cal. App. 4th 490 (2007), as modified (Oct.
22, 2007), the plaintiff made a deposit with his bank and the bank’s branch manager assured him that
there would be no hold on the funds, thereby allowing the plaintiff to immediately write checks
against the deposit. Plaintiff later discovered that the bank had improperly placed a hold on his
account and failed to honor several checks, causing damage to his credit and finances. The plaintiff
sued the bank for its negligent misrepresentations. The court held the plaintiff had alleged a viable
negligent misrepresentation claim, finding that the UCC did not shield the bank from the claim,
because:
Holcomb’s negligent misrepresentation claim, however, does not take issue with
Wells Fargo’s right to charge back, but with statements made by Wells Fargo’s
branch manager, Viles, which induced Holcomb to write checks against his $10,000
deposit. There is nothing in the code prohibiting a claim based on a depositor’s
detrimental reliance on a bank employee’s incorrect statements.
***
Thus, even though the CUCC furnished Wells Fargo with an absolute right to charge
back the check upon U.S. Bank’s dishonor, it does not shield Wells Fargo from
damages due to its branch manager’s alleged negligent misrepresentations regarding
the check’s status.
Id. at 499. Similarly, in Barrett v. JP Morgan Chase Bank, 2016 WL 3523046, at * 7 (S.D. Cal.
June 27, 2016), the district court rejected JPMC’s argument that Article 4A precluded plaintiff’s tort
claims “especially because the alleged misconduct involves actions taken by Defendant’s employees

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prior to and after the wire transfer.”4 Based on this case law, the Court rejects JPMC’s preemption
argument. As the Eleventh Circuit noted in Regions Bank, permitting banks “to use Article 4A as
a shield for fraudulent activity” was not the intent of the drafters of Article 4A. 345 F.3d at 1276.
B.

Bank Secrecy Act

JPMC also argues that any suggestion that JPMC owed a legal duty to 3T under the federal
Bank Secrecy Act (“BSA”) fails since the BSA does not provide for a private right of action. It asks
the Court to strike any claim made pursuant to the BSA. At the hearing, 3T stated unequivocally,
on the record, that it is not pursuing any claim under the BSA. Further, the Court does not read the
Amended Complaint as attempting to state a claim under the BSA. Instead, the Amended Complaint
rather clearly sets out a single claim, the negligent misrepresentation claim just discussed.
Accordingly, the Court recommends that the District Court DENY the Motion to Strike.
IV. RECOMMENDATION
In light of the foregoing, the undersigned RECOMMENDS that Defendant’s Motion to
Dismiss and Motion to Strike Plaintiff’s First Amended Complaint (Dkt. No. 7) be DENIED.
V. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing objections
must specifically identify those findings or recommendations to which objections are being made.
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Several other courts have reached similar conclusions. See, e.g., Regions Bank, 345 F.3d
at 1276 (holding that Article 4A did not preempt a state law claim if money is transferred by wire
to a party that knows or should have known that the funds were obtained illegally); Centre-Point
Merchant, 913 F.Supp. at 207 (holding that breach of contract and negligence claim for failing to
follow rollover instructions did not relate to funds transfers and thus were not preempted by Article
4A); Schlegel v. Bank of America, N.A., 271 Va. 542, 555 (Va. 2006) (holding that common law
claims for conversion and breach of contract arising from the second bank transaction, i.e., the
freezing of the funds instead of returning the funds was not a situation covered by any provision of
Article 4A).
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The District Court need not consider frivolous, conclusive, or general objections. See Battle v.
United States Parole Comm’n, 834 F.2d 419, 421 (5th Cir. 1987).
A party’s failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the Report
shall bar that party from de novo review by the District Court of the proposed findings and
recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
District Court. See 28 U.S.C. § 636(b)(1)(c); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass
v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
SIGNED this 16th day of October, 2018.

_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE

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