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Kuhn v. Tumminelli

366 N.J. Super. 431, 841 A.2d 496 (App. Div. 2004)

CHECKS; ENDORSEMENTS—A check cashing company or bank that reasonably relies on the authority of a payee’s officer to endorse a check is not liable to the payee if the officer subsequently uses the proceeds for non-company purposes.

A fifty percent member of a limousine company organized as a limited liability company embezzled funds after cashing customers’ checks at a cashing service. The other member became suspicious, but did not take control of the finances from the embezzling member, nor protected the company’s assets during this period. It merely instructed the member not to spend any more company money without permission. It did not notify the cashing service of the problem.

Prior to cashing any checks, the member gave the check cashing service a corporate resolution (provided by the service), which he signed as Secretary and President, authorizing him to cash checks on the company’s behalf under his signature. It was not notarized, and did not contain the date of execution. The member also presented the check cashing service with two letters on the company’s letterhead, signed by him as General Partner. After receiving these letters, the check cashing service called the company and spoke to the member’s wife, who kept the books and records. The service also photocopied the member’s drivers license.

Eventually, the company sued the member and his wife for embezzlement and conversion, and sued the check cashing service for negligence and for failing to comply with statutory check-cashing procedures. It also sued the banks that transferred the money. Judgment was entered against the member and his wife. The remaining claims against the check cashing service and the banks were transferred to the Law Division.

The check cashing service moved for summary judgment on the ground that the member’s endorsements were authorized. The lower court granted the motion, concluding that the member was authorized to cash the checks and that it was his dishonesty that defrauded the company, not the acts of the check cashing service.

The company based its claims against the banks on a provision of the Uniform Partnership Act limiting a partner’s authorization to partnership business. It argued that the member’s endorsement was unauthorized because he used the funds for personal purposes. The lower court and the Appellate Division disagreed. The Uniform Partnership Act did not apply. The company was a limited liability company, and under the Limited Liability Company Act, “a member or manager may lend money to, borrow money from, act as a surety, guarantor or endorser for” (emphasis added) the company. Without a written operating agreement to the contrary, the member had the power to endorse the checks. The Court held that the Legislature did not intend to incorporate any provision of the Uniform Partnership Act into the Limited Liability Company Act. The Limited Liability Company Act contemplates that its provisions will control unless the members agree otherwise in an operating agreement.

In addition to being authorized under the Act to endorse checks, the errant member’s responsibilities at the company could have led one to infer that he had actual authority to receive, endorse, and cash the checks; especially because the company knew he was paying business expenses in cash.

The Court also disagreed with the company’s contention that an authorized endorsement can become unauthorized by a subsequent unauthorized use of the funds. Although the use of the funds was unauthorized, it did not convert an authorized endorsement into a forgery.

The company also claimed that the documentation its member submitted to the check cashing service was defective, thereby showing negligence on the part of the service. Check cashing companies are subject to the provisions of The Check Cashers Regulatory Act of 1993, which require that a person cashing a check on behalf of an entity must submit either “a corporate resolution or other appropriate documentation” prior to cashing the checks. Here, however, the Court held that the documentation obtained by the check cashing service was enough to establish the member’s authorization. To have required more would have been commercially unreasonable. Furthermore, even if a properly executed corporate resolution was required, the partner still could have easily provided such a resolution because he was a fifty percent owner, a member, and the general manager of the limited liability company.

The company further argued that the service should have been alerted by the partner’s actual endorsement, which was only his signature, and which did not specifically indicate he was endorsing the check on behalf of the company. The Court disagreed, finding that this did not invalidate his endorsement. Under the UCC, a principal is bound by the act of its representative even if the representative just signs his or her name. Further, because of the member’s high rank in the company, if the check cashing service had asked the member to endorse the company’s name or state that he was signing on its behalf, he could have done so easily and still would have been able to convert the funds. Finally, even if the member did not have authority, the documents he provided the service established apparent authority. Under the UCC, “[a]pparent authority imposes liability on the principal not as a result of an actual contractual relationship, but because the principal’s actions have misled a third-party into believing that a relationship of authority in fact exists.” Due to the member’s position in the company, it was not unreasonable for the service to rely on his apparent authority.

Under the UCC, any depository bank that pays an instrument on a forged or unauthorized endorsement is strictly liable even if it acted in a reasonable manner. This is the case because it would be the first solvent entity after the one who forged the endorsement, and would be in the best position to guard against forged or unauthorized endorsements. However, this was not the case here. The depository banks paid based on the check cashing service’s stamped endorsement. The banks therefore correctly relied on the service’s transfer warranty. That warranty was to the effect that the check cashing service was entitled to deposit the check and that the company member’s endorsement was authentic and authorized. The drawee-payor banks correctly relied on the depository banks’ warranties.

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