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Distributor Label Products, Inc. v. Fleet National Bank

401 N.J. Super. 345, 950 A.2d 939 (App. Div. 2008)

CHECKS — If a bank exercises ordinary care when it accepts checks fraudulently endorsed by an employee of its customer, it is not liable to its customer for paying those checks.

A business account holder at a bank sought to hold the bank liable for checks drawn on its account. The checks had been fraudulently indorsed and then debited from its account. It had knowledge that one of its employees was embezzling funds by having the checks deposited into the employee’s bank account. The employee had been fraudulently indorsing the checks and marking others “for deposit only” with its account number. The lower court granted summary judgment in favor of the drawee bank. The account holder appealed.

The Appellate Division affirmed the lower court ruling. It held that the bank had no liability to its account holder, given that the account holder failed to exercise ordinary care in its permitting an employee to commit fraud and embezzle the checks at issue. Secondly, the Court found that had the bank exercised ordinary care when it accepted the fraudulently indorsed checks from the depository bank; in fact, the account holder’s expert had stated the bank had paid the checks properly and had no obligation to review the endorsements on the checks it received. It noted that, under state law, an account holder can only recover against the party who paid the instrument if that party failed to exercise ordinary care when doing so and if such failure substantially contributed to the loss. In this instance, the Court concluded that since the account holder, itself, had failed to exercise ordinary care and this substantially contributed to the loss, its claim against the drawee bank was barred.

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