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Valley National Bank v. P.A.Y. Check Cashing

378 N.J. Super. 234, 875 A.2d 953 (App. Div. 2005)

UCC; CHECK CASHERS—There is no private right of action available under New Jersey’s laws governing check cashing businesses for the improper cashing of a check with a corporate payee if the party seeking enforcement is neither the payee nor the check casher’s customer, but a check casher can be treated as a bank under the Uniform Commercial Code and is obligated to give the same warranties of presentment and transfer as any other bank is required to give.

A payor bank “sued [a] check-cashing licensee, as depository bank, for [the] amount paid on [a] check on a car loan made out to [an] individual co-payee and a non-existent corporate automobile dealership co-payee, under the Check Cashers Regulatory Act and for breach of presentment and transfer warranties under the Uniform Commercial Code (UCC).” A borrower had successfully applied to the bank for a car loan and the bank issued a check payable jointly to the borrower and a car dealer. The following day, the borrower presented the check to a licensed check cashing company. The check cashing company had a “ten-point list for use by its employees in evaluating checks prior to cashing them.” The checklist didn’t have “any specific instructions with respect to checks made payable to business entities. ... The back of the check was endorsed by [the borrower] and below his signature was a stamp that read simply [the name of the dealer].” The check cashing firm examined the borrower’s drivers license and obtained a telephone number for the car dealer from “Information.” The employee then telephoned the car dealer and an unidentified person “who answered the phone confirmed that he had stamped the check and authorized [the borrower] to cash the check.” The check was deposited and ultimately paid and charged to the bank’s account. When the borrower never made a loan payment, the bank “discovered that it had never received the title to the vehicle nor perfected the lien.” Its investigation revealed that the borrower disappeared and that the dealer did not exist. It could not verify whether the vehicle existed. The bank, concluding that it had been defrauded, sued the check cashing firm and the borrower, who was never located. The bank contended that the check cashing firm violated N.J.S.A. 17:15A-47(a), which provides that no licensee shall: “[c]ash a check which is made payable to a payee which is other than a natural person unless the licensee has on file a corporate resolution or other appropriate documentation indicating that the corporation, partnership or other entity has authorized the presentment of a check on its behalf and the federal taxpayer identification number of the corporation, partnership or other entity.” Those requirements were neither on the check cashing company’s checklist nor did it have any of the required documents. The bank also contended that the check cashing firm had breached the UCC’s warranties of presentment and transfer. In response, the check cashing firm asserted that it was “entitled to the benefit of the fictitious payee defense” under the UCC. The bank, however, urged “that this defense is only available to [the check cashing firm] when it acts in good faith, which [the bank] contend[ed] [was] wanting here.”

The Check Cashers Act does not expressly provide for a private right of action. Instead, it imposes civil and criminal penalties for violation of the act and permits the Commissioner of Banking to revoke a check casher’s license. On the other than, “it does provide that ‘[p]enalties imposed by the act should not diminish the remedies which may be available to complainants through private actions.’” This required the lower court to decide whether a private right of action existed. Under New Jersey law, courts are to consider “whether the plaintiff is ‘one of the class for whose especial benefit the statute was enacted,’ whether there is any evidence that the Legislature intended to create a private cause of action under the statute, and whether implication of a private cause of action in th[e] case [before the court] would be ‘consistent with the underlying purposes of the legislative scheme.’”

The lower court looked at the legislative history and found that when the governor signed the predecessor bill, the governor thought that the purpose of the cited check-cashing provisions was “clearly to protect payees identified on the payee line of a check as a partnership, professional association, company, corporation or other business entity from having checks payable to them cashed without the authorization.” Here, the bank was neither a payee nor was it a “customer” entitled to certain rights accorded by the Act. Specifically, a “customer” does not include the maker of a check payable to another person. Consequently, by this analysis, the lower court concluded that the bank was “not one of the class for whose especial benefit the statute was enacted and [could not] seek redress directly under the Act.” According to the lower court, that left the bank with its rights and remedies under the UCC.

The presentment and transfer warranties apply to banks. Therefore, the threshold issue was whether the check cashing company was a “bank” to which the UCC applied. Under the UCC’s definitions, a “bank” means “a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company.” It was obvious to the lower court that a “‘check casher’ [was] not expressly included in the definition of a ‘bank.’” Consequently, the Court thought that “[t]o decide whether a ‘check casher’ is engaged in’ the business of banking,’ it [would be] fruitful to look at the types of business in which banks engage. [It began] with the definitions of bank, savings bank, savings and loan associations and credit union” as found in Title 17 of New Jersey’s Statutes. Under Title 17, the powers of banks include “the power to issue cashier’s checks, treasurer’s checks and money orders; to guarantee signatures and endorsements, to be a member of the Federal Reserve System and the Federal Deposit Insurance Corporation; to make and invest in secondary mortgages and to purchase, hold and invest in mortgages and securities sold by the Federal Home Mortgage Corporation. Banks and savings banks are also empowered to make loans and investments, and to extend credit through the use of credit cards ... They may also deal in promissory notes, drafts, bills of exchange, mortgages, and other financial vehicles. ... They can issue letters of credit, receive interest and non-interest bearing demand and time deposits, maintain savings departments for the receipt of interest and non-interest bearing deposits, and make secured and unsecured loans, among other powers.” Savings and loan associations, though not having all of the powers granted to banks and savings banks, share a number of the powers, as do credit unions. According to the Court, “[b]y comparison, the check cashing business is quite narrow in scope, being confined to the cashing of checks. Nevertheless, dealing in negotiable checks is part of the business of banking.” Check cashing licensees are also subject to regulations and supervision of the Commissioner of Banking and Insurance. Further, as the governor observed when signing the bill, check-cashing establishments were “more and more becoming the financial institution of choice for many of our citizens in our most economically distressed areas… .” Based on all of the foregoing, the lower court found that the check cashing company came within the definition of a “bank.” Thus, according to the lower court, the UCC applied to it and “to the negotiation of the check in question.” In fact, the check cashing company “did not dispute that it was subject to [the UCC] as a person engaged in the business of banking.”

Here, the check cashing company was acting as the “depository bank” which “means the first bank to take an item… .” It was also “a ‘collecting bank’ defined as ‘a bank handling an item for collection except the payor bank.’” The bank making the loan “having issued a check on its own account was both the drawer and the drawee. Thus it was the ‘payor bank’ as defined by [the UCC].”
“As a depository and collecting bank, [the check cashing company] by transfer warranted to its collecting bank, [the check cashing company’s own bank], that it was entitled to enforce the item and that all signatures on the item were authentic and authorized.” This transfer warranty, however, ran “only to collecting banks and not to payor banks. The warranties running to payor banks are the presentment warranties found in [the UCC].” The presentment warranty runs from the collecting bank, i.e., the bank used by the check cashing firm to the drawee bank. Essentially, both the collecting bank and the check cashing firm warranted to the bank that issued its own check to the borrower “that they were persons entitled to obtain payment of the check on behalf of the payees.” This is also “a warranty that there are no unauthorized or missing endorsements.”

The check cashing company asserted that it was entitled to certain protections under the UCC “which governs instruments, including checks, issued to fictitious payees. There was no question that the check had been issued to a fictitious co-payee and that under such circumstances, the stamped endorsement in the name of the automobile dealer “would be effective as the endorsement of [the automobile dealer] in favor of the [check cashing firm].” On the other hand, to avail itself of this defense, the check cashing firm had “the burden to prove that it acted in ‘good faith’ in taking the check for collection.” Under the UCC, “good faith” means “honesty in fact and the observance of reasonable commercial standards of fair dealing.” That burden rests on the party taking the check. “Honesty in fact ‘is determined by looking to the mind of a particular holder.’ ... This is a subjective standard with respect to the particular actor and not a prudent man standard. ... The test is neither freedom from negligence nor awareness of circumstances calculated to arouse suspicions.” No showing of intent is required. According to the lower court, although “no case in New Jersey [had] yet specifically construed the two-prong test for good faith, ..., it should be interpreted in accordance with prior cases construing [the UCC].” Prior case law in New Jersey and, for example, in the District of Columbia and the State of Illinois, “has held that when a bank accepted a check to a corporate payee for deposit into an individual account he has, as a matter of law, failed to act in accordance with reasonable commercial standards. ... New York also has found that negotiation of a corporate two-party check in the absence of a signature guarantee as to the non-customer co-payee “is a patent indication of the absence of good faith and adherence to reasonable acceptable commercial banking standards.” Further, the check cashing company clearly violated “established law when it took a check payable to a corporate co-payee and cashed it for the individual co-payee.” It violated the Check Cashers Regulatory Act and “violated its own internal, albeit insufficient guidelines for cashing checks.”

On appeal, the Appellate Division affirmed the lower court’s holding for the reasons given by the lower court.

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