## Facts

- Barton-Russell Corporation (Barton) was a merchant customer of Broadway National Bank (Broadway) and deposited MasterCard credit-card charge slips through its Broadway merchant account.
- Broadway had an agreement with Chemical Bank (Chemical) under which Chemical, as the network member/processor, processed credit-card transactions generated by Broadway’s merchant customers, including Barton.
- Barton’s principal generated a high volume of suspicious transactions, including repeated charges to a single credit card and many handwritten or improperly completed slips.
- For a series of transactions, Barton used incorrect pre-authorization numbers on the charge slips, or omitted pre-authorization numbers altogether.
- Broadway credited Barton for the deposited slips and made the funds available promptly (allegedly by the next business day), subject to later charge-backs if the transactions were not honored.
- Chemical’s processing and review systems allegedly did not identify the improper or missing pre-authorization numbers, or other warning signs, for several months.
- After the transactions were rejected through the card system, Chemical debited Broadway’s settlement account for the charge-backs, leaving Broadway with substantial losses (alleged to be roughly $148,000, after Broadway charged back what it could to Barton).
- Broadway sued Barton and Chemical, asserting that Chemical’s processing and review practices caused the late discovery of the fraud and increased Broadway’s losses; Broadway pleaded causes of action against Chemical for breach of contract and negligence.
- Chemical moved to dismiss for failure to state a claim under CPLR 3211(a)(7), arguing, among other things, that its contract with Broadway eliminated (or sharply limited) any duty to act with ordinary care in the relevant processing and charge-back functions.

## Issues

1. Whether Broadway’s complaint stated viable causes of action for breach of contract and negligence against Chemical based on alleged failures in processing, review, and timely handling of charge-backs.
2. Whether Chemical could rely on contractual provisions to defeat the claims at the pleading stage by asserting that the agreement abrogated any duty of ordinary care.
3. Whether Broadway sufficiently alleged that Chemical’s delayed detection and handling of the suspect slips could have proximately caused Broadway’s claimed losses.

## Decision

- The court denied Chemical’s CPLR 3211(a)(7) motion to dismiss.
- The court held that Broadway’s allegations concerning Chemical’s processing and review practices were sufficient at the pleading stage to support claims sounding in breach of contract and negligence.
- The court declined to accept Chemical’s position that the contract categorically eliminated Chemical’s obligation to act with ordinary care in performing the processing and related functions at issue.
- The court concluded that the pleaded facts (including the alleged months-long delay and the nature of the irregularities on the slips) supported a plausible claim that earlier detection or earlier notice could have reduced Broadway’s loss, making dismissal inappropriate.

## Legal Principles

- On a CPLR 3211(a)(7) motion, the court accepts the complaint’s factual allegations as true, gives the plaintiff the benefit of favorable inferences, and asks only whether the facts fit a recognized legal theory.
- A party performing bank processing functions may be subject to an obligation of ordinary care in carrying out those services; contract language allocating risk or describing procedures will not be read, at the pleading stage, as a blanket waiver of responsibility for unreasonable processing conduct.
- Where the pleaded facts allege obvious irregularities in submitted charge slips and a substantial delay in detection or charge-back processing, causation and damages generally present fact questions not suited for dismissal at the outset.
- Contract and negligence theories may both proceed at the pleading stage when the alleged misconduct consists of deficient performance of processing and review duties that could foreseeably cause economic loss to the counterparty.

## Conclusion

Broadway stated claims that Chemical’s processing and review practices allowed Barton’s improperly authorized credit-card slips to pass undetected for months, leading to late charge-backs and loss; because the pleadings supported a reasonable inference of breach and causation and the contract did not, as a matter of law, erase ordinary-care obligations, the court denied Chemical’s motion to dismiss.


Broadway National Bank v. Barton-Russell Corp., 585 N.Y.S.2d 933 (1992)