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Estate of Paley v. Bank of America

420 N.J. Super. 39, 18 A.3d 1033 (App. Div. 2011)

CONSUMER FRAUD ACT; BANKS; UCC; CHECKS — In cases where the Uniform Commercial Code provides a remedy for the precise situation presented, a bank’s customer’s remedies are exclusively governed by the UCC and not the Consumer Fraud Act.

A bank customer sued her bank, notably alleging a violation of the Consumer Fraud Act (CFA) arising from the bank’s failure to prevent forged checks from being negotiated on her account. She had opened a money market account in her name with a predecessor of the bank. When she opened the account, she submitted a signature card. She testified at trial that personnel at the bank told her the signature card would be used to check the signatures on checks presented for cashing. The bank representative conceded that she could not locate that card, and that normal practice would have been to have the customer sign a new card. The money market account was subject to federal regulations that permitted up to three checks per month. The customer had used the account infrequently, no more than several times a year.

After losing a leg to diabetes, the bank customer hired a home health aide to assist her. At the time, her money market account balance was over $45,000. Three years later, when a check the customer wrote on the account was returned for insufficient funds, she discovered the aide had negotiated 188 checks on the account. The aide had either made the checks out to herself or made them payable to third parties, often exceeding the three check monthly limit. The bank testified that excessive activity notices were sent to the customer. The customer denied receiving them. The customer filed a fraud claim with the bank, which was denied. The bank told the customer she had waited too long to report the missing funds, as she received monthly statements and did not notify the bank of any problems, and that the same individual had perpetrated the entire fraud.

The customer had always signed her name with her middle initial, yet none of the forged checks contained the middle initial. Further, her signature was noticeably different from that of the aide. The bank testified that as part of its procedures it no longer sight-reviewed every check to compare it to a signature card, and no longer verified signatures on checks made out for less than $500. The bank stopped doing so because it handled too many checks to make this practical. Rather, the bank engaged in an automated review system that it argued constituted ordinary care under law.

While a jury found that the bank had committed a violation of the CFA, and awarded $8,500 in damages, the lower court nullified the award, holding that the Uniform Commercial Code (UCC) provided a remedy for the precise situation presented, and the UCC counseled against providing additional remedies to address such a customer’s basic claim.

On appeal, the Appellate Division affirmed, holding that the bank’s conduct in failing to inform the customer that it no longer used customer signature cards for purposes of detecting forged checks, was not actionable as an unconscionable business practice under the CFA. And that was true, even if the bank failed to detect the $48,000 in forged checks written on the customer’s account, since the bank’s fraud detection practices conformed to the UCC. The Court said that allocation of any negligence between the parties rested with the UCC because the UCC governs the rights, duties, and liabilities of banks and customers concerning commercial paper. The UCC established a comparative negligence test by which losses are to be allocated between a customer and its bank if each had failed to comply with its respective duties. Under the UCC, the bank had to demonstrate that it used reasonable and proper methods to detect forgeries, but the tellers and bookkeepers of the bank were not to be held to the degree of expertise which a handwriting expert possessed.

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