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In Re Clear Advantage Title, Inc.

2010 WL 4038766 (Bkrtcy. D. N.J. 2010) (Unpublished)

CHECKS — Depository agreements between a customer and a bank may create a special contractual relationship and, if proven, a customer may win damages based on the negligence or recklessness of the bank apart from the usual remedies afforded under the Uniform Commercial Code.

A title agency had a trust account. Over a period of time, a staff attorney, working as a title examiner for the agency, embezzled a significant amount of money. Specifically, the employee was alleged to have presented a series of trust account checks to a bank payable to the bank and requested that the bank provide him with treasurer checks payable to various persons or entities. The employee was alleged to have had such treasurer checks made payable to himself, cash, the agency, and personal creditors. The total amount paid from the unauthorized withdrawal of funds was over $400,000. According to the title company, none of the checks were authorized by it or its authorized representatives, and all bore forged signatures. The employee was not authorized to access the trust account, as memorialized by corporate resolutions in the bank’s files. Each month until the accounts were closed, the bank sent, and the title company received, account statements for each of the accounts. The bank ultimately alerted the title agency about suspicious activity on the accounts. The title agency sued the bank, alleging the bank failed to exercise good faith in executing its obligations owed to the agency.

After a period of discovery, the bank filed a motion for summary judgment to dismiss the complaint. The Court denied the motion, finding that there were open questions of fact as to when the bank first became aware of the forgery scheme, whether it was complicit in the scheme, and whether it had exercised ordinary care in permitting the processing and payment of forged checks. The Court agreed with the title agency that good faith is an issue of fact that should be determined following testimony at trial.

The Court also held that the bank and title agency had a special contractual relationship in which the bank, by virtue of the depository agreements, acknowledged only certain authorized signers on the accounts, and thus assumed a duty to make further inquiry before permitting the employee to withdraw funds from the accounts. As such, the title agency was permitted to pursue claims of negligence and recklessness, apart from the usual remedies afforded under the Uniform Commercial Code in actions against a financial institution. The Court, however, indicated the same agreements imposed a duty on the title agency to promptly review its statements and report any unauthorized activity to the bank.

The Court eventually dismissed the claim under the New Jersey Consumer Fraud Act (CFA) against the bank, finding that the bank did not engage in sharp practices or other prohibited conduct under the CFA. There was no evidence to suggest the bank misrepresented, concealed or omitted any material fact in its dealings with the title agency. Rather, the bank provided regular monthly statements, and allegedly first informed the agency of possible issues.

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