Case Law Summaries

Michael Gottsegen Trust No. 1 v. Panasia Bank

• Opinion Date: October 26, 2001
• Business Law
• E-Mail

CHECKS; UCC; STATUTE OF LIMITATIONS—The change, from six years to three, to the statute of limitations for bringing an action against a bank for cashing a check despite an unauthorized endorsement was prospective only, not affecting checks cashed before the change was made.

The Internal Revenue Service issued a tax refund check to a Trust. The check was made payable to the Trust and the trustee, but was mailed to the wrong address. A former trustee, who was the brother of the current trustee, intercepted the check, deposited it into his personal checking account, and withdrew the funds for his personal use. The actual trustee demanded payment of the funds from the depositing bank, and filed a claim against the United States and the bank in federal court. When the United States elected to transfer the case to the Court of Claims, the Court determined that it had no supplemental jurisdiction over the bank and dismissed the case without prejudice. The Trust then filed a claim against the bank in state court. It’s claim against the bank was based on a bank’s liability for paying a check over an unauthorized endorsement under section 3-420 of the Uniform Commercial Code (UCC). The bank filed a motion for summary judgment, claiming that federal law preempted the state law on the subject, and since federal law provided no remedy, the bank had no liability to the Trust. The bank also claimed that the lawsuit should have been dismissed because it was filed after the three year UCC statute of limitations had expired. The lower court denied the motions. The Appellate Division affirmed. The bank, to prove its claim of federal preemption, relied on a federal statute that established a fund to compensate payees of U.S. Treasury checks that were lost, stolen or paid on forged endorsements. The Court found that Congress did not intend to create an exclusive remedy that preempted state laws dealing with recovery from a bank for paying treasury checks over an unauthorized endorsement. It noted that the UCC was developed many years before the federal statute was adopted, and that it was inconceivable to the Court that the legislation had intended to preempt and discard a well established set of laws on the subject matter. The bank’s argument that the action was barred because the statute of limitations had expired was based on an amendment to the UCC that was adopted shortly after the check was wrongfully endorsed and deposited. The statute of limitations for bringing an action had previously been six years. The bank argued that the revision should have been applied retroactively. The Court rejected that claim. It noted that New Jersey Courts, as rule of statutory construction, favor prospective application of statutes unless the legislation clearly states that it is to be applied retroactively. It further noted that New Jersey courts have refused to apply retroactively, a shorter statute of limitations than the one that existed at the time an action accrued. The Trust had a right to rely on the six year statute of limitations that existed at the time the cause of action accrued.

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