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Galanty v. Onbank & Trust Co.

97-301 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)

AGENCY; FORGERY—A bank without knowledge or reason to believe that written instructions delivered by a party’s known agent have been forged is not liable for losses incurred where the principal breaches its duty to promptly notify the bank of the forgery.

In September 1995, investors in a leasing company that subsequently went bankrupt sought to “roll-over” their husbands’ pension funds into self-directed Individual Retirement Accounts (IRAs) with the defendant bank. A broker handled all of these transactions. Initially, the bank would not transfer the investor’s funds due to a lack of authorization. In response, the broker faxed letters of authorization to the bank which were purportedly signed by the investors. Pursuant to those letters, the bank invested the balance of the investors’ accounts in the leasing company. In March of 1996, the leasing company filed for bankruptcy protection. A lawsuit followed where the investors alleged that the bank breached its duty to employ adequate security measures that would have prevented the unauthorized purchases. The Court found that the signatures on the authorization from the brokers were forged. Statements received by the investors reflected the transfers to the leasing company and the particular lease transactions into which these monies were invested, although the investors testified that they did not read the statements carefully and that they did not notice the account activity. The investors testified that they had not informed the bank of the unauthorized transfers until July of 1996. The District Court dismissed the investors’ complaint with prejudice.

The Court found that it was unnecessary to determine the parameters of the bank’s obligation to employ security measures because the bank had acted at the direction of the investor’s agent, the broker. The Court was persuaded that the investors specifically chose this bank in order to invest in this leasing company. The broker had been the only one who dealt directly with the bank and with the leasing company, and in that sense the broker was the investors’ agent. As a result, the letters faxed to the bank were entirely consistent with the course of dealing that existed between the parties. There is no evidence that the bank knew about the alleged forgeries or had a reason to suspect that they were forgeries. Further, the bank had no duty to verify the authenticity of the signatures. The Court also found that the investors had ratified the transfers by failing to notify the bank until seven months after the transfers had occurred. The investors had duty to take action as soon as the improper transfers were discovered.


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