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Carpel v. United Jersey Bank

A-5993-98T5 (N.J. Super. App. Div. 2000) (Unpublished)

SUCCESSOR LIABILITY; ASSIGNMENTS—A successor in interest may become such by an assignment of rights and there is no need for there to be a merger or consolidation.

An investor participated in a plan that provided a return on equipment leases. He was then approached with another investment idea which involved a “cash out” of equipment leases in the initial venture. Initially, the investor refused to participate in the venture because he felt there would be no security as there was with the equipment leases where, upon default, he would have had a direct interest in the equipment. He was told, however, that his investment would be safe because it would be placed in an escrow account and only the bank would handle the resulting transactions. It was explained that the bank would purchase the leases at the investment company’s direction, and pay the investor his investment. The investor was also told that the bank would not pay out any money to the investment company unless presented with valid leases which it would hold for collection. Under this plan, the bank would be acting as a collection agent. Based on these representations by the investment company, the investment was made. The investment company and a related company entered into an escrow agreement with the bank. The agreement essentially “called for the bank to do nothing more than deposit the funds in [a] segregated escrow account and for the benefit of the [investment company] and distribute them in accordance with the directions” of a related management company. Under this arrangement, the bank merely cleared and deposited subscribers’ checks, and dispersed the proceeds according to instructions. “In that context, the bank was neither a collateral agent nor a trustee.” Had it been a trustee, the bank would have had an enhanced fiduciary duty. The investor took a third-party check and endorsed it as follows: “Pay to the order of [the bank], As Escrow Agent.” The check was delivered to the bank. Even though, according to the agreement between the investment company and the bank, investors were to make checks payable to the investment company, the bank accepted the check anyway and then deposited the money into the “segregated account.” Apparently, the representatives of the investment company had not instructed the investor to write the check to the investment company because it had not told the investor that the bank was acting only as a collector. On the other hand, the investor, not knowing that the bank’s engagement under its agreement with the investment company was very limited, thought that endorsing the check in that fashion “as Escrow Agent,” was purposeful in that it was designed to insure that the bank would fulfill its duties as had been described by the representative of the investment company. On instructions from the management company, the bank dispersed the funds to the investment company. Later, after the money was gone, the representative of the investment company pled guilty to securities and bankruptcy fraud. The investor then sued the bank, alleging breach of fiduciary duty and negligence. Testimony at trial was to the effect that the bank’s agreement with the investment company and the management company did not create a true escrow agreement because the investor was never made a party. Testimony was also offered that the bank had violated recognized banking standards and practices by accepting the investor’s check which had been made payable to the bank, not the investment company. In the view of the investor’s expert, the bank should have contacted the investor to determine the investor’s understanding of the escrow conditions. The expert’s theory was that had this been done, the investment company’s fraudulent statements and manipulations would have been discovered. The lower court held for the bank, emphasizing that the investor was not a party to the bank’s agreement with the investment company and its management company. Therefore, the investor was not protected by the fiduciary duty an escrow agent generally owes to a depositor. The lower court further held that the endorsement, alone, could not create an escrow arrangement. “It is axiomatic that merely labeling a specific delivery of property as an escrow does not make it such.” In fact, misuse of the term does not create a fiduciary duty where one would not ordinarily exist. The Appellate Division concurred, holding that the agreement between the bank, the investment company and the management company was not an escrow agreement. In its view, “a true escrow agreement is tripartite and requires a depositor, an obligor and the escrow holder.” Therefore, the only duties that the bank assumed were voluntary and were those contained in its agreement with the investment company and its management company. Under that agreement, the bank’s duty was to wait until the checks cleared and disperse the money in accordance with the management company’s instructions. The investor was a stranger to that agreement and was not owed a fiduciary duty by the bank. As to the endorsement of the check, the Court held that the investor could not “unilaterally foist a fiduciary duty upon [the bank] merely by naming it as ‘escrow agent.’” The Court, however, did find that the bank might have been at fault in violating the special endorsement. The bank’s agreement was that it would accept checks made payable to the investment company but, in this case, the check that it received was nonconforming. According to the investor’s expert testimony, the bank should have inquired as to why the check was nonconforming. According to the Court, the lower court judge was wrong to ignore that expert’s testimony and should not have granted summary judgment in favor of the bank. In reaching this conclusion, the Appellate Division rejected the bank’s argument that because it had deposited the check precisely where it was intended to go, the investor had no cause to complain. According to the Court, the issue to be decided by the lower court on remand was whether the bank had a duty to the investor to determine why the check was written in the fashion that it was. On its remand, the Court pointed out that the question would not be whether “the bank had an obligation to police the offering, but whether the bank owed a duty to inquire when it received the investor’s check made payable to the bank rather than the investment company.”


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