Not Maintaining Security Deposit in New York Bank Branch Violates GOL § 7-103; No Damages

On August 5, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Urban Soccer Inc. v. Royal Wine Corp., 2016 NY Slip Op. 26250, holding that the failure to deposit a security deposit in the New York branch of a New York bank violated General Obligations Law § 7-103, but that it was a technical violation from which no damages flowed. The court explained:

[A]s an alternative means of recovering the Security Deposit in the event its contract claim fails (which, as noted, it does), Urban contends that Royal's alleged breach of GOL § 7-103 is an independent basis for awarding it the Security Deposit. § 7-103 applies to all money deposited or advanced on a contract or license agreement for the use or rental of real property as security for performance of the contract or agreement or to be applied to payments upon such contract or agreement when due. . . .

Urban [claims] that Royal violated § 7-103(2), which requires the Security Deposit to be maintained in a banking organization having a place of business within the state. It is undisputed that Royal placed the Security Deposit in a Wells Fargo account at a branch in New Jersey. It also is undisputed that Wells Fargo has branches in New York, that is, Wells Fargo has a place of business within the state. The parties dispute whether § 7-103(2) requires the Security Deposit to be placed in a New York branch. While the statute does not expressly address this question, Urban avers that the so-called separate entity rule, pursuant to which branches of banks in different jurisdictions are treated as separate entities for the purposes of enforcing judgments, should impel the court to interpret § 7-103(2) to require the Security Deposit to be maintained at a New York branch. . . .

Urban avers that the purpose of § 7-103(2) is to ensure that deposits are easily recoverable in New York by tenants once a judgment has been obtained against a landlord. Royal does not dispute these concerns, but claims that the separate entity rule is more concerned with foreign (i.e., non-U.S. based) branches, not branches in another state. . . .

To be sure, Royal does not cite any case to suggest that the separate entity rule only applies to international branches. Indeed, if § 7-103(2) was enacted for the purpose of ensuring that a security deposit can be recovered easily in New York, it would be irrational for that statute to permit a deposit to be maintained in a New Jersey branch, as enforcing the judgment would require the tenant to commence proceedings in New Jersey. The point of the statute is for tenants to easily procure and enforce judgments to recover their deposits in New York. The court does not believe the Legislature intended § 7-103 to be interpreted to provide for such an easily exploitable loophole that would undermine the benefits of the in-state requirement.

Nonetheless, unlike § 7-103's prohibition on commingling, the parties do not cite any authority that sets forth the consequences of maintaining the Security Deposit outside of New York. As noted earlier, not all violations of § 7-103 result in forfeiture, such as failure to provide timely notice of the bank account information. Neither the statute nor any case law cited by the parties (or independently reviewed by the court) provides for a remedy. It, therefore, is unclear what damages, if any, are appropriate for this violation committed by Royal.

Under these circumstances, where no commingling occurred, where Urban did not suffer any damages, and where the subject contract provides that Royal is entitled to the Security Deposit, the court holds that Urban is not entitled to relief. . . . [T]he requirement to maintain the Security Deposit in a New York branch is a technical statutory violation that, like failure to provide notice and unlike commingling, is not a fiduciary violation. Hence, . . . Royal's violation does not result in forfeiture.

(Internal quotations and citations omitted) (emphasis added).