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Keil v. National Westminster Bank, Inc.

311 N.J. Super. 473, 710 A.2d 563 (App. Div. 1998)

UCC; BANK ACCOUNTS; CONFLICTS OF LAW—A New Jersey court should apply New York’s substantive law and New York’s statute of limitation to a case of unauthorized bank account withdrawals where almost all actions took place in New York even if some of the withdrawals took place in New Jersey.

An account holder’s spouse made numerous unauthorized withdrawals from a passbook savings account held at a New York City branch of a New York bank. The account was originally opened when the account holder resided in New York, but the account holder subsequently moved to New Jersey. The record contained conflicting evidence as to whether the unauthorized withdrawals were made in New York or New Jersey, but criminal proceedings concerning the embezzlement took place in New Jersey and the indictment charged that the embezzlement took place in New Jersey. Concededly the account holder was never aware of the spouse’s embezzlement until the account was depleted. The account holder brought an action in New Jersey against the bank, alleging that it improperly permitted the unauthorized withdrawals. At the time of the action, the law in New Jersey differed from current law and from New York law on the question whether the bank or its depositor should have incurred the loss resulting from the unauthorized withdrawal. If New Jersey law were to apply under the facts presented, the depositor would bear the loss. Using applicable New York law, the bank would bear the loss. Under current New Jersey law, not applicable at the time in question, a depositor is only required to act with reasonable diligence unless the bank furnishes a periodic statement of the account, in which case the depositor has a limited period of time in which to advise the bank of any discrepancies. This is intended to provide an incentive to a bank to provide its passbook customers with periodic statements. Under the “old” New Jersey law, depositors had a fixed time period in which to complain. Therefore, the Court analyzed whether the current New Jersey law should have been applied retroactively to the case at hand but decided that, in the absence of express legislative intent, retroactive application would be improper. That is why it was critical to resolution of the dispute that the Court determine which state’s law should apply.

New Jersey has abrogated the traditional rule that the place where the contract was entered into determines the rights and obligations of the parties. Instead, New Jersey courts have adopted a more flexible approach that focuses on the state that has the most significant connection with the parties and the transaction. Guided by the factors in the Restatement (Second) of Conflicts of Laws (1971), the Court was convinced that New York had the more significant relationship with the parties and the transaction. Therefore, New York law was applied.

This, however, did not settle the question. The bank contended that if New York law applied then the New York statute of limitations should apply. When the Appellate Division considered the question, it first needed to determine that there was a governmental interest in applying New Jersey’s statute of limitation. The first prong was easily satisfied: the laws of New Jersey and New York were in conflict with respect to the date upon which the cause of action accrued. The second prong was to determine the interest that each state had in resolving the specific issue in dispute. Reciting that the purpose underlying any statute of limitations is to “stimulate to activity and punish negligence” and “promote repose by giving security and stability to human affairs” and “to avoid harsh results from the mechanical application of the statute,” New Jersey courts have developed and applied a discovery rule. Although New York also has a discovery rule, in the Court’s view, that rule is much more narrowly circumscribed. After a short analysis, the Court concluded by finding that it would be anomalous to hold that New York’s substantive law should be applied but that New Jersey statute of limitations law governs the dispute. In its words, “because the statute in effect at the time of the unauthorized withdrawals did not afford plaintiff a remedy” under New Jersey law “we see no distinct substantial New Jersey governmental interest in applying New Jersey’s statute of limitations and discovery rule to afford access to New Jersey courts.” The record did not show the exact dates of the withdrawals. Therefore, the case was remanded to the Law Division to apply the New York statute of limitations based on when each specific withdrawal had been made.


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