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From Banking and Finance Law Daily, October 1, 2014

Bank avoids UCC, negligence liability for challenged electronic funds transfers

By Thomas G. Wolfe, J.D.

Since an individual who sued a bank for allegedly mishandling electronic funds transfers on a company checking account did not himself qualify as the bank’s “customer” under the New Jersey Uniform Commercial Code, the bank was not subject to state statutory liability. Moreover, since there was no “special relationship” between the individual and the bank, the Supreme Court of New Jersey determined that the individual could not assert a common-law negligence claim against the bank because it would contravene the language and purpose of the New Jersey UCC provisions governing funds transfers (ADS Associates Group, Inc. v. Oritani Savings Bank, Sept. 30, 2014, Patterson, Justice).

A dissenting opinion was issued in the case, contending that the individual should have been deemed a “customer” of the bank. Furthermore, even if the individual was a non-customer—in keeping with the majority view—the individual still should have been allowed to advance his common-law negligence claim against the bank, the dissenter maintained.

Background. Asnel D. Sanchez owned a corporation, ADS Associates, Inc., and ADS had several banking accounts with Oritani Savings Bank. Later, in October 2003, as part of a joint venture, Brendan Allen and Sanchez opened up a separate business checking account at a branch of Oritani Savings. Since the joint venture was operated through ADS, it was decided that the business checking account be opened in the name of ADS. Allen served as ADS’s Treasurer.

Under the terms of the new checking account between ADS and Oritani Savings, the account required the signatures of both Sanchez and Allen for each check drawn on the account. However, despite that restriction, Sanchez linked the new ADS checking account to other ADS accounts within his control. In particular, through a series of Internet banking transactions, Sanchez electronically transferred a substantial sum of money from the newly established ADS checking account with Allen to Sanchez’s other ADS accounts. For example, from October 2013 through June 2004, Sanchez made 85 transfers, which totaled nearly $614,000.

According to the court’s relaying of the facts, only ADS, as the official checking account holder, received periodic account statements. It was understood that Allen would not separately receive these checking account statements, and it was Sanchez’s responsibility to review the statements and report any errors or discrepancies to the bank. Eventually, in June 2004, Allen discovered that Sanchez had made Internet transfers of money from their dual-signature account.

Sanchez refuted the suggestion that he “stole money” from the ADS checking account. Rather, Sanchez maintained that the joint venture “was unprofitable and that, by the conclusion of the project, ADS was subject to numerous liabilities for which he [Sanchez] was the personal guarantor.” Also Sanchez indicated that he was “forced to file for bankruptcy.”

Lawsuit. In May 2006, Allen sued Sanchez and Oritani Savings. In particular, Allen asserted claims against the bank for breach of contract, conversion, violation of various UCC provisions, general liability, negligence, gross negligence, breach of fiduciary duty and good faith, violations of the New Jersey Consumer Fraud Act, and common-law fraud. In response, the bank asserted counterclaims against Allen and ADS; the bank also asserted cross-claims against Sanchez.

Procedural context. The state trial court dismissed Allen’s claims. However, despite Sanchez’s issuance of a corporate resolution denying Allen the authority to maintain an action on ADS’s behalf, the trial court permitted Allen to assert certain claims on ADS’s behalf against Oritani Savings. While a jury returned a verdict in favor of ADS, the trial judge entered a judgment notwithstanding the verdict in favor of Oritani Savings, based on an indemnification provision in the business checking agreement governing ADS’s account with the bank.

On appeal, the New Jersey Appellate Division panel reversed the trial court’s determination, finding instead that the ADS resolution signed by Sanchez deprived Allen of authority to assert a claim on behalf of ADS. Ultimately, while the intermediate appellate court determined that Allen could not be considered a “customer” of the bank under Article 4A (Funds Transfers) of the New Jersey UCC, it still held that Allen was entitled to bring a common-law negligence claim against Oritani Savings under New Jersey law. The bank appealed that decision to the Supreme Court of New Jersey.

New Jersey UCC. As underscored by the New Jersey Supreme Court, Article 4A “defines in detail the rights and obligations of banks and their customers in the event that funds are transferred in accordance with a payment order that the customer has not authorized. Throughout the statutory provisions and their official comments, the word ‘customer’ is used to describe the person or entity entitled to pursue a remedy against a bank if the statutory requirements for a cause of action are met.”

Under the New Jersey UCC (N.J.S.A. 12A:4A-105(1)(c)), the term “customer” is defined as “a person, including a bank, having an account with a bank or from whom a bank has agreed to receive payment orders.” In ruling that the statutory definition of a bank “customer” did not apply to Allen, the New Jersey high court determined that: (i) ADS, not Allen, executed the October 2003 checking account agreement; (ii) ADS, not Allen, was the official account holder for the subject checking account at Oritani Savings Bank; (iii) ADS, not Allen, was entitled to receive account statements from the bank, and that was communicated to Allen; and (iv) the factual record contained no evidence that Oritani Savings ever agreed to receive a payment order from Allen.

Common-law negligence. In addressing the common-law negligence claim, the New Jersey Supreme Court noted that it was focusing only on whether Allen individually was permitted to assert the claim, not whether ADS could assert the claim.

In generally surveying the New Jersey UCC on the issue, the court acknowledged that, under certain limited circumstances, “a common law duty, in fact, may arise and that its breach may be actionable in spite of the existence of the [UCC].” However, the court emphasized that the Official Comment to Article 4A of the New Jersey UCC indicated that the statutory framework was “intended to prescribe detailed requirements for funds transfers so that parties affected by such transfers may comply with those requirements and anticipate the risks assumed.” In particular, the court noted that the Official Comment (to N.J.S.A. 12A:4A-102) stated 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 the Article.

Consequently, the court determined that the state trial court had properly dismissed ADS and Allen’s common-law negligence claim against Oritani Savings because ruling otherwise would contravene the terms and objectives of Article 4A of the New Jersey UCC. Further, in reviewing case law on the issue, the court stressed that no duty of care arose on the part of the bank because the court could find no “special relationship” between Allen and the bank under the circumstances of the case.

Dissent. Justice Albin filed a dissenting opinion in the case. “I do not believe that the UCC or the common law immunizes a bank from liability when it violates established norms of commercial conduct,” he maintained.

Final disposition. In keeping with its majority opinion in the matter, the Supreme Court of New Jersey reversed the Appellate Division panel and reinstated the judgment of the state trial court.

The case is No. A-114-11.

Attorneys: Gregg S. Sodini (Law Offices of Gregg S. Sodini, LLC) for Oritani Savings Bank. Gary S. Newman (Newman & Denburg LLC) for ADS Associates Group, Inc.

Companies: ADS Associates Group, Inc.; Oritani Savings Bank

MainStory: TopStory BankingOperations NewJerseyNews StateBankingLaws

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