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Wawel Savings Bank v. First Hope Bank

A-4684-06T1 (N.J. Super. App. Div. 2008) (Unpublished)

BANKS; CHECKS; CERTIFIED CHECKS — Once a bank certifies a check, a new contractual relationship is created between the bank and the payee and it doesn’t matter whether the bank’s customer subsequently wishes to stop payment on such a check.

A homeowner, who had defaulted on his mortgage, made arrangements with the mortgagee to cure the default with a payment that was sent as two certified checks drawn on his business account. The homeowner later filed lost check affidavits with his bank and the amount of the checks sent to the mortgagee was credited back to his business account. New checks were then issued to satisfy property taxes on his house and were made payable to the municipality. The homeowner later filed for bankruptcy. The mortgagee presented the two original certified checks to the bank that had issued the checks from the homeowner’s business account. The mortgagee informed the bank that the checks were not lost, but were being held by its attorney prior to their presentation for payment. After the bank refused to pay the mortgagee, the mortgagee brought a separate action in the lower court for payment of the two checks plus interest, damages, and legal costs. The bank contended that the matter was being resolved between the homeowner and the mortgagee in the bankruptcy proceedings. The lower court did not address whether the award to the mortgagee could have been reduced by any amounts paid back as part of the bankruptcy proceedings and limited its ruling to the matter of bank’s liability for payment on the checks. The lower court agreed with the mortgagee and found that the bank did not have the right to withhold payment on the checks.

On appeal, the Appellate Division pointed out that once a bank certifies a check for payment, the obligation to pay the check becomes the bank’s responsibility unless it was found that the payee procured the check by fraud. It noted that no assertions of fraud were made against the mortgagee and found that it was a bona fide holder of the checks. The Court found that once the checks were certified, a new contractual relationship was created between the bank and the mortgagee and that the homeowner’s business was then discharged of the liability. It rejected the bank’s argument that since the mortgagee did not object to the terms of the homeowner’s bankruptcy plan, which included repayment for funds owed to the mortgagee, that the mortgagee was precluded from seeking recovery from the bank. The Court pointed out that payment arrangements that were approved for a bankruptcy plan affected the obligations of the debtor but did not alter the obligations or liability of a third-party. It agreed with the lower court’s refusal to address the mortgagee’s claims for damages or whether the bank was entitled to any offset resulting from payment made through the bankruptcy plan. The Court’s decision was limited to affirming the lower court’s finding that the bank was liable to the mortgagee for payment of the two certified checks.

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