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C&F, Inc. v. East Coast Truck Parts & Sales, Inc.

A-5534-08T2 (N.J. Super. App. Div. 2010) (Unpublished)

CHECKS; UCC — Under the Uniform Commercial Code, a party that takes a negotiable instrument must do so in good faith in order to qualify as a holder in due course, and under this rule, a party who fails to make an inquiry reasonably required by the circumstances of the transaction, so as to remain ignorant of facts that might disclose a defect in the negotiable instrument, cannot claim to be a holder in due course.

An automotive business hired a woman to serve as its receptionist. Prior to hiring her, the principals of the business, two brothers, contacted her prior employers and were told that she was a responsible worker. The brothers had sole responsibility for the company’s bookkeeping and financial operations. Company checks and business records were kept in a drawer in one of the brother’s desk. The receptionist was not allowed access to the company’s checks, and was not given a key to the desk. Approximately one week after her hiring, the brother discovered that two checks were missing from the desk. One brother immediately contacted the police department, and placed a stop-order on the checks. Although the bank complied with the stop-order, the receptionist, over the course of four days, had already cashed the checks at a licensed check cashing establishment. In fact, she had stolen two checks that were sequentially numbered, had forged one brother’s signature, and made the checks payable to herself. However, these checks were not presented or dated in proper order. Neither brother was contacted by the check cashing establishment’s employees to verify the authenticity of the checks. The establishment presented the checks to the business’s bank for payment, but the checks were refused because of the stop-order.

Subsequently, the check cashing establishment sued the business, claiming it was entitled to payment as a holder in due course under the Uniform Commercial Code (UCC), and because of the business’s alleged negligent maintenance and supervision of the stolen checks. The business defended on the basis that the check cashing establishment was comparatively negligent and demanded discovery, specifically inquiring about all of the establishment’s check cashing procedures for check verification, the identity and personnel records of employees who assisted the receptionist, training manuals, any videotapes or audio tapes of the transaction, and phone records.

Instead of providing discovery, the establishment moved for summary judgment, contending that it cashed the checks for value, in good faith, and without notice that they had been dishonored, or that there was any defense against the checks by any person. The business argued that the establishment’s comparative fault was a factual dispute, and that the check cashing company’s motion was premature because the requested discovery was outstanding. The lower court granted summary judgment in favor of the check casher, finding that it showed good faith and was a holder in due course because it stated that it maintained a list of companies for whom it would cash checks, would verify checks from unknown companies, and would only call to verify when the check was of a sufficient size (these checks were not large enough).

On appeal, the Appellate Division reversed, finding the lower court erred in granting summary judgment. The Court found the business’s outstanding discovery requests relevant to its defense that the check cashing establishment was comparatively at fault for cashing the checks, making it especially inappropriate to grant summary judgment while discovery remained incomplete. The Court said that, under the UCC, a party that takes a negotiable instrument must do so in good faith in order to qualify as a holder in due course. Under this structure, a party who fails to make an inquiry reasonably required by the circumstances of the transaction, so as to remain ignorant of facts that might disclose a defect, cannot claim to be a holder in due course. The Court also said the UCC had recently established a comparative negligence test, under which losses are allocated between parties if each had failed to comply with its respective duties. Under this standard, a check cashing establishment must use reasonable and proper methods to detect forgeries.

The Court held that the discovery requests were directly related to whether the check cashing establishment’s verification process was commercial reasonable, and to whether its employees’ daily practice complied with company policy.


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