UNIFORM FIDUCIARIES LAW; BAD FAITH—Under the Uniform Fiduciaries Law, where facts suggesting fiduciary misconduct are compelling and obvious, it is bad faith to remain passive and not to inquire further.
A New Jersey attorney maintained an attorney trust account and an attorney business checking account at a bank. During a three-month period, the attorney issued 52 checks from his trust account for a substantial amount, to himself. He cashed those checks at the bank, or had them certified, and then cashed them at a casino. He used the proceeds of those checks primarily for casino gambling. When a title company uncovered the embezzlement of the funds, it paid off the outstanding mortgages that were to have been paid off from those funds and instituted suit against the attorney, the bank, and others. In the suit, it alleged that the bank had actual knowledge that the attorney’s intended use of the trust funds would breach fiduciary duties. As such, it claimed that the bank was negligent and acted in bad faith in violation of the Uniform Fiduciaries Law (UFL). The bank denied the allegations and claimed that the action was barred by the UFL because it lacked actual knowledge of the alleged breaches of fiduciary obligations by the attorney, and argued that the certification or payment of the checks did not amount to bad faith. The 52 trust account checks resulted in withdrawals ranging between $36,000 and $57,300 on a weekly basis. Because of the amounts involved, each of the checks required authorization of the branch manager or the assistant branch manager. Both managers admitted that they knew the attorney’s trust account contained client funds and that they were aware of the attorney’s gambling. Moreover, the branch manager knew that the attorney was frequently overdrawing his business account and was spending a considerable amount of time in Atlantic City. The branch manager also knew that the attorney was depositing money from his trust account into his business account and was then going to Atlantic City and withdrawing it or was writing checks in high amounts and having them authorized by the bank branch. Eventually, because the business account was frequently overdrawn despite the fact that the attorney had made large deposits, the bank decided to close the attorney’s business account. That notwithstanding, the bank allowed the attorney to cash a $25,000 trust account check the following day. The lower court held for the bank, ruling that the bank was immune from liability under the UFL because it did not have actual knowledge of the attorney’s breach of duty and did not act in bad faith. The New Jersey Supreme Court reversed and remanded the matter to the Law Division for a plenary hearing. Under the UFL, “bad faith denotes a reckless disregard or a purposeful obliviousness of the known facts suggesting impropriety by the fiduciary, and is not established by mere negligence or careless conduct or by vague suspicion.” “Under the UFL, a financial institution is bound to inquire and may be chargeable with notice of the fiduciary’s misdeeds where it actually knows of the breach of the fiduciary’s obligation, and where it knows of facts such that its action in taking the instrument amounts to bad faith.” The Court, looking to out-of-state cases, concluded that those courts “have interpreted the bad faith standard in the fiduciary context” as pointing to “dishonesty as a guiding principle, characterizing it as a way of distinguishing bad faith from mere negligence.” Consequently, although actual knowledge of, and complicity in, a fiduciary’s misdeeds is not required to impose bank liability under the UFL, “where facts suggesting fiduciary misconduct are compelling and obvious, it is bad faith to remain passive and not inquire further because such inaction amounts to a deliberate desire to evade knowledge.” Therefore, the Court held that it was not proper on summary judgment to determine whether the bank acted in “good or bad faith.” The test “is a subjective one to be determined by the trier of fact, unless only one inference from the evidence is possible. In this case, it was for the jury to determine whether the Bank recklessly disregarded or was purposefully oblivious to facts suggesting impropriety by [the attorney].” Hence, the matter was remanded to the Law Division for a trial to determine whether the bank acted in bad faith in failing to inquire further about the attorney’s withdrawals from his trust account.
Copyright ©2003. Meislik & Meislik. All rights reserved.