Dr. Dominick A. Lembo v. Arlene Marchese (082930) (Passaic County and Statewide)

SYLLABUS
This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the
Clerk for the convenience of the reader. It has been neither reviewed nor approved by the
Court. In the interest of brevity, portions of an opinion may not have been summarized.
Dr. Dominick A. Lembo v. Arlene Marchese (A-92-18) (082930)
Argued January 22, 2020 -- Decided June 17, 2020
ALBIN, J., writing for the Court.
In this case, the Court considers whether the trial court properly dismissed the
common law claims of conversion and negligence that Dr. Dominick Lembo brought
against TD Bank National Association, as well as whether the Uniform Fiduciaries Law
(UFL) provides an affirmative cause of action against the bank.
Dr. Lembo employed in his dental practice Arlene Marchese, his office manager,
and Karen Wright, a dental hygienist. Sometime before December 2011, Marchese and
Wright unlawfully took possession of numerous checks totaling several hundred thousand
dollars, forged Lembo’s indorsement on the checks, and deposited the proceeds from the
forged checks into their personal accounts at TD Bank.
In February 2015, Lembo filed a complaint against TD Bank, alleging that “TD
Bank knew or should have known that Marchese and/or Wright were not permitted to
negotiate checks made payable to [Lembo].” The complaint also alleged that by
permitting them to negotiate checks with forged indorsements, TD Bank “aided and
abetted Marchese and Wright in their fraudulent scheme and conduct.” The complaint
did not assert that Lembo had a banking relationship with TD Bank. And Lembo did not
file an action for conversion under the Uniform Commercial Code (UCC) within the
three-year limitations period. Had Lembo done so, TD Bank would have been strictly
liable for depositing or cashing those checks, subject to the defenses in N.J.S.A. 12A:3-
405 or N.J.S.A. 12A:3-406.
In lieu of filing an answer, TD Bank moved to dismiss the complaint for failure to
state a claim. The trial court granted the motion. The court reasoned that the UCC
governed Lembo’s remedies against TD Bank and that “common law negligence is not
such a remedy” in the absence of a “special relationship” between Lembo and the bank.
The court also rejected Lembo’s argument that the Uniform Fiduciaries Law provided the
basis for a cause of action.
The Appellate Division affirmed in part, vacated in part, and remanded for further
proceedings. The Appellate Division first noted that the complaint, on its face, alleges
1
only common law claims and not any express statutory claims against TD Bank. Because
the complaint did not allege facts suggesting a “special relationship” between Lembo and
TD Bank, the Appellate Division found no basis for the negligence claim. Likewise, it
found the common law conversion claim unsustainable because the UCC provided a
remedy for a bank’s payment on a check with a forged indorsement.
But, while conceding that the complaint neither references the UFL nor alleges
that Marchese or Wright were acting as fiduciaries within the meaning of the UFL, the
Appellate Division nevertheless reasoned that the complaint suggests an affirmative
cause of action against TD Bank based on the UFL. On that basis, the Appellate Division
vacated the order dismissing Lembo’s cause of action against TD Bank and remanded to
allow Lembo to amend the complaint and plead a UFL claim.
The Court granted TD Bank’s petition for certification. 238 N.J. 482 (2019).
HELD: The UFL does not authorize an affirmative cause of action against a bank but
rather provides a bank with a limited immunity from liability for failing to take notice of
and action on the breach of a fiduciary’s obligation. The UFL does not displace,
subsume, or supplement common law claims. When an action is brought against a bank,
the UFL provides that a bank’s liability depends on whether the bank acted with actual
knowledge or bad faith in the face of a fiduciary’s breach of his obligations. Whether a
UFL claim was adequately pled in this case is therefore a moot issue. And, recognizing
the predominant role the UCC plays in assigning liability for the handling of checks, the
Court also finds that Lembo had no “special relationship” with the bank to sustain the
common law causes of action.
1. When the Legislature adopted the UFL’s predecessor, the Uniform Fiduciaries Act
(UFA), in 1927, various common law causes of action could be brought against a bank
for the breach of its duty to monitor a fiduciary. No gap in the common law required the
remedy of a new statutory cause of action against a bank. Instead, the Legislature, in
enacting the model UFA, addressed the need to protect banks from lawsuits that would
impose on them an unrealistic obligation to oversee fiduciaries. The UFA relieved banks
of the then-prevailing, “impracticable” common law duty of inquiry in connection with a
bank’s dealings with a fiduciary by setting forth an actual knowledge or bad faith
standard for determining notice. By relaxing the common law standard of care banks
owed in dealing with fiduciaries, the UFA was intended to facilitate banking and
financial transactions and place on the principal the burden of employing honest
fiduciaries. The current version of the UFL, N.J.S.A. 3B:14-52 to -61, which was
enacted in 1981, is substantially similar to its UFA predecessor. (pp. 11-14)
2. The relevant UFL provisions at issue in this case are N.J.S.A. 3B:14-55 and -58. The
Court reviews those provisions in detail and concludes from their plain language that a
bank is not liable in a common law cause of action unless it has “actual knowledge” or
2
“notice” of a breach of a fiduciary duty -- or acts in “bad faith” in depositing or paying on
a check. That heightened standard provides banks with a limited immunity. Nothing in
the plain language of the UFL suggests that the UFL is itself the basis for an affirmative
cause of action. The UFL does not provide for a recovery through a private action or set
forth remedies or a statute of limitations -- all indicia of a statutory cause of action. In
sum, the UFL’s plain language and its legislative history evidence a legislative intent to
provide a limited immunity to banks from common law causes of action -- not to provide
a new affirmative cause of action against a bank. (pp. 15-18)
3. The Court notes that its holding in this matter of first impression is not inconsistent
with past jurisprudence, including New Jersey Title Insurance Co. v. Caputo, 163 N.J.
143 (2000), on which Lembo relies. In that case, the Court did not indicate that the UFL
gave rise to an affirmative claim but rather confirmed that under the UFL “a bank would
be immune from liability in honoring a fiduciary’s check” unless it is shown that the bank
acted with actual knowledge of the breach of a fiduciary’s obligations or with knowledge
of facts establishing that its actions amounted to bad faith. Id. at 149 (emphasis added).
(pp. 18-20)
4. In rendering this decision, the Court is mindful that interposing an affirmative UFL
cause of action -- particularly in this case -- might undermine the UCC’s comprehensive
framework for allocating and apportioning the risks of handling checks. Generally, a
bank will be strictly liable for accepting a check with a forged indorsement. Lembo’s
complaint alleges that TD Bank accepted checks payable to Lembo with forged
indorsements. In the absence of a defense under either N.J.S.A. 12A:3-405 or N.J.S.A.
12A:3-406, TD Bank would have been strictly liable for conversion of the funds had
Lembo filed a timely UCC claim. “[A]n action for conversion of an instrument . . . must
be commenced within three years after the cause of action accrues,” N.J.S.A. 12A:3-
118(g), and the discovery rule does not extend the limitations period. Lembo did not file
a UCC claim within the requisite three-year statute-of-limitations period. (pp. 21-22)
5. Lembo’s common law conversion claim is preempted by the UCC, and his common
law negligence claim cannot be sustained. Unless the facts establish a special
relationship between the parties created by agreement, undertaking, or contact that gives
rise to a duty, the sole remedies available in cases involving the processing of checks
with forged indorsements are those provided in the UCC. Lembo’s complaint does not
allege that Lembo had a banking or other relationship with TD Bank, much less a special
relationship created by agreement, undertaking, or contact, and the Appellate Division
properly affirmed the dismissal of the common law claims. (pp. 23-24)
REVERSED. The trial court’s order dismissing this action is REINSTATED.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, FERNANDEZ-VINA,
SOLOMON, and TIMPONE join in JUSTICE ALBIN’s opinion. JUSTICE
PATTERSON did not participate.
3
SUPREME COURT OF NEW JERSEY
A-92 September Term 2018
082930
Dr. Dominick A. Lembo and
Belmont Dental Associates,
Plaintiffs-Respondents,
v.
Arlene Marchese, Karen Wright,
Kreinces, Rollins & Shanker, LLC
and Maria T. Rollins, CPA,
Defendants,
and
TD Bank, NA,
Defendant-Appellant.
On certification to the Superior Court,
Appellate Division.
Argued Decided
January 22, 2020 June 17, 2020
Caitlin T. Shadek argued the cause for appellant
(Sherman Wells Sylvester & Stamelman, attorneys;
Caitlin T. Shadek and Anthony J. Sylvester, on the
briefs).
Michael P. De Marco argued the cause for respondents
(De Marco & De Marco, attorneys; Michael P. DeMarco,
on the brief).
1
JUSTICE ALBIN delivered the opinion of the Court.
In this case, two employees of plaintiff Dr. Dominick Lembo, a dentist
and owner of plaintiff Belmont Dental Associates (Lembo), forged
indorsements on checks payable to the dental practice and deposited them into
their personal accounts at defendant TD Bank National Association (TD
Bank). Lembo filed common law causes of action against TD Bank, which
included counts for conversion and negligence. Lembo did not file an action
for conversion under the Uniform Commercial Code (UCC), see N.J.S.A.
12A:3-420, within the three-year limitations period, see N.J.S.A. 12A:3-
118(g). Had Lembo done so, TD Bank would have been strictly liable for
depositing or cashing those checks, subject to the defenses in N.J.S.A. 12A:3-
405 or N.J.S.A. 12A:3-406.
The trial court granted TD Bank’s motion to dismiss the complaint for
failure to state a claim, finding that Lembo had no banking or “special
relationship” with TD Bank to sustain the common law causes of action. The
court also rejected Lembo’s argument that the Uniform Fiduciaries Law
(UFL), N.J.S.A. 3B:14-52 to -61, provided an affirmative cause of action
against the bank.
2
The Appellate Division reversed, reading into the complaint the basis for
an affirmative UFL claim, and remanded to allow Lembo to amend the
complaint to assert such a claim.
We conclude that the Appellate Division misconstrued the purpose of the
UFL. The Legislature enacted the UFL not to create an affirmative cause of
action against a bank but to provide a defense when the bank is sued for failing
to take notice of and action on the breach of a fiduciary’s obligation. The UFL
confers a limited immunity on a bank, unless the bank acts in bad faith or has
actual knowledge of a fiduciary breach. We hold that no affirmative cause of
action arises under the statute. Whether a UFL claim was adequately pled is
therefore a moot issue. Recognizing the predominant role the UCC plays in
assigning liability for the handling of checks, we also find that Lembo had no
“special relationship” with the bank to sustain the common law causes of
action.
Accordingly, we reverse the judgment of the Appellate Division and
dismiss the complaint for failure to state a claim.
I.
A.
This appeal comes to us from a motion to dismiss for failure to state a
claim upon which relief can be granted. See R. 4:6-2(e). At this procedural
3
juncture, we must assume that the facts asserted in the complaint are true. See
Banco Popular N. Am. v. Gandi, 184 N.J. 161, 166 (2005). Our recitation of
the facts is derived from the complaint filed by Lembo against TD Bank, the
only remaining defendant in this case.
Dr. Lembo employed in his dental practice Arlene Marchese, his office
manager, and Karen Wright, a dental hygienist. Sometime before December
2011, Marchese and Wright unlawfully took possession of numerous checks
issued by insurance companies to Lembo for dental services rendered to
patients. Without Dr. Lembo’s knowledge or authorization, Marchese and
Wright forged his indorsement on the checks, which totaled several hundred
thousand dollars. Marchese and Wright “negotiated [the] forged checks” with
TD Bank, where each had a personal bank account. They then deposited the
proceeds from the forged checks into their personal accounts at the bank.
In February 2015, Lembo filed a complaint against TD Bank, alleging
that “TD Bank knew or should have known that Marchese and/or Wright were
not permitted to negotiate checks made payable to [Lembo].”1 The complaint
1
The complaint also asserted claims against Marchese and Wright for fraud,
unjust enrichment, conversion, and breach of their duties of honesty and fair
dealing, as well as against Lembo’s certified public accountant and accounting
firm for negligently failing to detect the fraud. Lembo secured a judgment
against Marchese in the amount of $198,584.06 for compensatory damages and
$75,000 in punitive damages and a judgment against Wright in the amount of
4
also alleged that by permitting Marchese and Wright to negotiate checks with
forged indorsements, TD Bank “aided and abetted Marchese and Wright in
their fraudulent scheme and conduct.” The complaint did not assert that
Lembo had an account or banking relationship with TD Bank.
In lieu of filing an answer, TD Bank moved to dismiss the complaint for
failure to state a claim. See R. 4:6-2(e). The trial court granted the motion
and dismissed the complaint with prejudice. The court reasoned that the UCC
governed Lembo’s remedies against TD Bank and that “common law
negligence is not such a remedy” in the absence of a “special relationship”
between Lembo and the bank. The court determined that Lembo failed to
demonstrate the existence of a special relationship with TD Bank. The court
also rejected Lembo’s argument that the Uniform Fiduciaries Law provided the
basis for a cause of action. In dismissing that argument, the court concluded
that Marchese and Wright were acting as errant employees, not fiduciaries, and
that TD Bank had no fiduciary relationship with Dr. Lembo or his dental
practice, who were not bank customers.
$200,000 in compensatory damages and $25,000 in punitive damages.
Ultimately, Lembo dismissed the claim against the accountant and accounting
firm.
5
B.
In an unpublished per curiam opinion, the Appellate Division affirmed in
part, vacated in part, and remanded for further proceedings. The Appellate
Division first noted that the complaint, on its face, alleges only common law
claims, such as negligence and conversion, and not any express statutory
claims against TD Bank. The Appellate Division acknowledged both the
predominant role of the UCC in “allocating and apportioning the risks of
handling checks” and our jurisprudence, which holds that a common law cause
of action against a bank is permitted only in rare instances, such as when the
bank and aggrieved party have a “special relationship,” quoting City Check
Cashing, Inc. v. Manufacturers Hanover Trust Co., 166 N.J. 49, 57, 59-60
(2001). Because the complaint did not allege facts suggesting a “special
relationship” between Lembo and TD Bank, the Appellate Division found no
basis for the negligence claim. Likewise, it found the common law conversion
claim unsustainable because the UCC provided a remedy for a bank’s payment
on a check with a forged indorsement, citing N.J.S.A. 12A:3-420(a). Even if
the complaint intimated a claim under the UCC, the court asserted that such a
claim would be time-barred, citing N.J.S.A. 12A:3-118(g).
While conceding that the complaint neither references the UFL nor
alleges that Marchese or Wright were acting as fiduciaries within the meaning
6
of the UFL, the Appellate Division nevertheless reasoned that the complaint
suggests an affirmative cause of action against TD Bank based on the UFL.
The Appellate Division determined that the UFL authorizes an affirmative
cause of action when a fiduciary breaches its obligation to a principal by
forging a check and the bank “takes the instrument with actual knowledge of
the breach or with knowledge of facts that [its] action in taking the instrument
amounts to bad faith,” quoting N.J.S.A. 3B:14-55. It then gleaned from a
liberal reading of the complaint a viable allegation that, under the UFL,
Marchese and Wright were acting in a fiduciary capacity as “constructive
trustees,” see N.J.S.A. 3B:14-53(b), and that TD Bank knowingly “accepted
the checks with forged [i]ndorsements and deposited them in” Marchese’s and
Wright’s personal accounts. Those allegations, in the Appellate Division’s
view, sufficiently satisfied the bad faith elements for a UFL cause of action
under N.J.S.A. 3B:14-55 and -58(b).
On that basis, the Appellate Division vacated the order dismissing
Lembo’s cause of action against TD Bank and remanded to allow Lembo to
amend the complaint and plead a UFL claim.
We granted TD Bank’s petition for certification. 238 N.J. 482 (2019).
7
II.
A.
TD Bank’s primary argument is that the UFL did not create an
affirmative cause of action against a depository bank and, on that basis alone,
the Appellate Division’s decision must be reversed. TD Bank contends that
the UFL was enacted “to protect banks from the undue burden of monitoring
fiduciary accounts” and to make “defenses available to a bank for alleged theft
by a fiduciary.” It submits that the UFL does not supersede the UCC.
According to the bank, the Appellate Division has taken a time-barred UCC
claim on a forged indorsement and breathed life into it through the UFL, thus
undermining the UCC’s statutory framework for allocating the risk of loss on a
forged instrument.
In addition, TD Bank asserts that, as described in the complaint,
Marchese and Wright were employees -- not fiduciaries -- who wrongfully
took possession of checks payable to their employer and forged indorsements .
In the bank’s view, “forgers cannot be fiduciaries.” The bank also rejects the
notion that Marchese and Wright, who took the checks without any lawful
authority, could be considered “constructive trustees” under the UFL.
8
B.
Lembo submits that the complaint clearly alleges that TD Bank, by
permitting Marchese and Wright to negotiate checks with forged indorsements,
“aided and abetted [them] in their fraudulent scheme and conduct.” Asserting
that the UFL establishes an independent cause of action separate from claims
available under the UCC, Lembo argues that, viewing the complaint with
“liberality,” “a cause of action is suggested by the facts . . . [that] may be
articulated” by an amendment to the complaint.
Lembo further claims that, for purposes of the UFL, Marchese and
Wright fit the definition of fiduciary in N.J.S.A. 3B:14-53(b) by acting as
“constructive trustees” -- taking unlawful possession of dental-practice checks,
forging indorsements, depositing the ill-gotten funds into their personal
accounts, and unjustly enriching themselves. According to Lembo, whether
TD Bank acted in bad faith under the UFL -- that is, whether the “[b]ank
recklessly disregarded or was purposefully oblivious to facts suggesting
impropriety by Marchese and Wright” -- is for a jury to determine.
Lembo asks this Court to affirm the Appellate Division’s remand.
III.
The core issue in this appeal is whether the Uniform Fiduciaries Law is
the source of an affirmative cause of action against a bank. That is the only
9
basis for relief that the Appellate Division gleaned from a liberal review of the
complaint. Without a UFL cause of action, therefore, the complaint cannot b e
sustained. Only if a direct cause of action can arise from the UFL must we
address whether a UFL claim has been sufficiently pled in the complaint, even
under our generous standard of review for a Rule 4:6-2(e) motion.
A.
Whether the UFL gives rise to an affirmative cause of action against a
bank is a matter of statutory interpretation. To discern the meaning of a
statute, we begin with its plain language. DiProspero v. Penn, 183 N.J. 477,
492 (2005). If the statutory language clearly reveals the Legislature’s intent,
then our interpretive mission comes to an end. Nicholas v. Mynster, 213 N.J.
463, 480 (2013). Only when the wording of the statute leaves in doubt the
Legislature’s intent do we turn to extrinsic aids, such as “legislative history,
committee reports, and contemporaneous construction.” DiProspero, 183 N.J.
at 492-93 (quoting Cherry Hill Manor Assocs. v. Faugno, 182 N.J. 64, 75
(2004)).
We cannot find in the plain language or history of the UFL a legislative
intent to create an affirmative cause of action against a bank for the breach of a
duty to monitor a fiduciary’s activities. Because, as Justice Holmes has
written, “a page of history is worth a volume of logic,” N.Y. Tr. Co. v. Eisner,
10
256 U.S. 345, 349 (1921), the backdrop to the current version of the UFL
sheds meaning and light on its language. We therefore begin with the UFL’s
predecessor, the Uniform Fiduciaries Act (UFA), N.J.S.A. 3A:41-1 to -14
(repealed 1981).
B.
In 1927, New Jersey adopted in full the model Uniform Fiduciaries Act
drafted by the National Conference of Commissioners on Uniform State Laws.
See Sponsor’s Statement to S. 71 5 (L. 1927, c. 30). At the time of the UFA’s
passage, various common law causes of action could be brought against a bank
for the breach of its duty to monitor a fiduciary. See, e.g., Md. Cas. Co. v.
Bank of Charlotte, 340 F.2d 550, 553 (4th Cir. 1965) (“At common law a
[bank] was often held liable to the principal if it negligently assisted a
fiduciary in misappropriating the principal’s funds.”). No gap in the common
law required the remedy of a new statutory cause of action against a bank.
Instead, the Legislature, in enacting the model UFA, addressed the need to
protect banks from lawsuits that would impose on them an unrealistic
obligation to oversee fiduciaries.
The purpose of the UFA was “to relieve banks of their common-law duty
of inquiring into the propriety of each transaction conducted by a fiduciary and
to prevent banks and others who typically deal with fiduciaries from being
11
held liable for a fiduciary’s breach of duty.” See 9 C.J.S. Banks and Banking
§ 362 (2020) (citing DeLaRosa v. Farmers State Bank S/B, 474 S.W.3d 240,
244 (Mo. Ct. App. 2015)); see also Sugarhouse Fin. Co. v. Zions First Nat’l
Bank, 440 P.2d 869, 870 (Utah 1968). The Legislature evidently decided that
a bank could not feasibly shadow the activities of fiduciaries to ensure they
were acting in good faith on behalf of their principals. See Colby v. Riggs
Nat’l Bank, 92 F.2d 183, 198 (D.C. Cir. 1937); New Amsterdam Cas. Co. v.
Nat’l Newark & Essex Banking Co., 117 N.J. Eq. 264, 283 (Ch. 1934), aff’d
o.b., 119 N.J. Eq. 540 (E. & A. 1936). To address that concern, the UFA
conferred on banks limited immunity from lawsuits alleging liability for a
fiduciary’s breach of duty.
The Legislature made clear its purpose in the Sponsor’s Statement to the
bill that became the UFA. The Sponsor’s Statement explained that banks, for
many years, had “been suffering from the uncertainty of the law created by
conflicting decisions, many of which have imposed an impracticable duty of
inquiry in connection with the handling and payment of checks drawn or
endorsed by officers of corporations or other fiduciaries to their personal
order.” Sponsor’s Statement to S. 71 5 (L. 1927, c. 30). The Statement further
explained that
[t]he general purpose of the act is to establish uniform
and definite rules in place of the diverse and indefinite
12
rules now prevailing as to “constructive notice” of
breaches of fiduciary obligations. In some cases there
should be no liability in the absence of actual
knowledge or bad faith; in others there should be action
at peril. In none of the situations here treated is the
standard of due care or negligence made the test.
[Ibid. (emphasis added).]
The Legislature intended the UFA to cover situations involving a bank’s
transactions with a person it “knows to be a fiduciary” when there are
“questions relating to notice of the breach of fiduciary obligations.” Ibid. The
UFA relieved banks of the then-prevailing, “impracticable” common law duty
of inquiry in connection with a bank’s dealings with a fiduciary by setting
forth an actual knowledge or bad faith standard for determining notice. See
Md. Cas. Co., 340 F.2d at 553 (“The Uniform Fiduciaries Act did away with
the [banks]’s liability for negligence and substituted a new test. For the [bank]
to become liable under this Act it must be found either that it had actual
knowledge of the misappropriation or that it acted in bad faith.”). Thus, under
the UFA, the standard was not whether a reasonable person acting with due
care would have been on notice of a breach of a fiduciary obligation. See New
Amsterdam Cas. Co., 117 N.J. Eq. at 271 (“The standard of due care or
negligence and the doctrine of constructive notice in respect of bank deposits
13
of fiduciary funds find no recognition in the Fiduciaries Act. It definitely
declares bad faith to be the test of liability.”).
By relaxing the common law standard of care banks owed in dealing
with fiduciaries, the UFA was intended “to facilitate banking and financial
transactions and place on the principal the burden of employing honest
fiduciaries, by relieving the bank of the responsibility of seeing that the
fiduciary uses the entrusted funds for proper purposes.” 9 C.J.S. Banks and
Banking § 362 (footnote omitted); see also Springfield Township v. Mellon
PSFS Bank, 889 A.2d 1184, 1187 (Pa. 2005); Sugarhouse Fin. Co., 440 P.2d at
870.
Although the enactment of New Jersey’s UCC in 1961 repealed certain
portions of the UFA that are not relevant to this case, the remaining parts of
the UFA served as a model for the UFL. See N.J. Title Ins. Co. v. Caputo, 163
N.J. 143, 149 (2000). The current version of the UFL is substantially similar
to its UFA predecessor. Compare N.J.S.A. 3B:14-55, with N.J.S.A. 3A:41-6
(repealed 1981); compare N.J.S.A. 3B:14-58, with N.J.S.A. 3A:41-7 (repealed
1981). With that history in mind, we turn to the UFL, N.J.S.A. 3B:14-52
to -61, which was enacted in 1981, L. 1981, c. 405, replacing the UFA.
14
C.
The relevant UFL provisions at issue in this case are N.J.S.A. 3B:14-55
and -58. We first look at N.J.S.A. 3B:14-55, which states:
If a check or other bill of exchange is drawn by a
fiduciary as such or in the name of his principal by a
fiduciary empowered to draw the instrument in the
name of his principal, payable to the fiduciary
personally, or payable to a third person and by him
transferred to the fiduciary, and is thereafter transferred
by the fiduciary, whether in payment of a personal debt
of the fiduciary or otherwise, the transferee is not bound
to inquire whether the fiduciary is committing a breach
of his obligation as fiduciary in transferring the
instrument, and is not chargeable with notice that the
fiduciary is committing a breach of his obligation as
fiduciary unless he takes the instrument with actual
knowledge of the breach or with knowledge of facts
that his action in taking the instrument amounts to bad
faith.
That provision simply provides, for example, that when, from all
appearances, a fiduciary draws a check from the principal’s account to pay a
debt of the principal, the bank is not on notice of a breach of a fiduciary
obligation unless the bank takes the check “with actual knowledge of the
breach or with knowledge of facts that . . . amounts to bad faith.” See N.J.S.A.
3B:14-55. Thus, the UFL immunizes the bank from a negligence-type action
premised on the common law duty to exercise due care.
15
We turn next to N.J.S.A. 3B:14-58, which provides:
a. If a fiduciary makes a deposit in a bank to his
personal credit of checks drawn by him upon an account
in his own name as fiduciary, or of checks drawn by
him upon an account in the name of his principal, if he
is empowered to draw thereon, or, except as provided
in subsection b. of this section, if he otherwise makes a
deposit of funds held by him as fiduciary, the bank
receiving the deposit is not bound to inquire whether
the fiduciary is committing thereby a breach of his
obligation as fiduciary. The bank is authorized to pay
the amount of the deposit of any part thereof upon the
personal check of the fiduciary without being liable to
the principal, unless the bank receives the deposit or
pays the check with actual knowledge that the fiduciary
is committing a breach of his obligation as fiduciary in
making the deposit or in drawing the check, or with
knowledge of facts that its action in receiving the
deposit of paying the check amounts to bad faith.
b. In the case of an instrument payable to the principal
or the fiduciary as fiduciary, the bank has notice of the
breach of fiduciary duty if the instrument is deposited
to an account other than an account of the fiduciary, as
fiduciary, or an account of the principal.
Subsection (a) of that provision provides, for example, that when a
fiduciary draws a check from the fiduciary’s account or the principal’s account
and deposits that check “in a bank to his personal credit,” the bank has no duty
to inquire whether the fiduciary is in breach of his fiduciary obligation -- with
two exceptions. See N.J.S.A. 3B:14-58(a). If the bank deposits or pays on a
check “with actual knowledge that the fiduciary is committing a breach of his
16
obligation . . . or with knowledge of facts that its action in receiving the
deposit of paying the check amounts to bad faith,” then the bank faces legal
liability. Ibid. (emphases added). Subsection (b) makes clear that when a
check is made payable to the fiduciary or the principal and the check is not
deposited in the fiduciary’s or principal’s account, “the bank has notice of the
breach of fiduciary duty.” See N.J.S.A. 3B:14-58(b).
Thus, a bank is not liable in a common law cause of action unless it has
“actual knowledge” or “notice” of a breach of a fiduciary duty -- or acts in
“bad faith” in depositing or paying on a check. That heightened standard
provides banks with a limited immunity.
Nothing in the plain language of the UFL suggests that the UFL is itself
the basis for an affirmative cause of action. The UFL does not provide for a
recovery through a private action or set forth remedies or a statute of
limitations -- all indicia of a statutory cause of action. Indeed, the Legislature
knows how to craft a statutory scheme that provides for a cause of action to
complement or supplant the common law. For example, the New Jersey
Consumer Fraud Act, N.J.S.A. 56:8-1 to -224, specifically “provides a private
cause of action to consumers who are victimized by fraudulent practices in the
marketplace.” Steinberg v. Sahara Sam’s Oasis, LLC, 226 N.J. 344, 360-61
(2016) (quoting Gonzalez v. Wilshire Credit Corp., 207 N.J. 557, 576 (2011));
17
see also D’Annunzio v. Prudential Ins. Co. of Am., 192 N.J. 110, 120 (2007)
(holding that the Conscientious Employee Protection Act, N.J.S.A. 34:19-1
to -8, “authorizes an aggrieved employee to bring a civil suit against an
employer who retaliates in violation of the statute” (citing N.J.S.A. 34:19-5));
Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124,
130 (2001) (explaining that New Jersey’s Law Against Discrimination,
N.J.S.A. 10:5-1 to -49, “provides a mechanism by which victims of
discrimination may seek redress for their injuries” (citing N.J.S.A. 10:5 -13)).
In sum, the UFL’s plain language and its legislative history evidence a
legislative intent to provide a limited immunity to banks from common law
causes of action -- not to provide a new affirmative cause of action against a
bank.
D.
Few jurisdictions have squarely addressed the issue before us. The
United States Court of Appeals for the Seventh Circuit, for instance, found that
the Illinois “UFA did not create the cause of action. Rather, the UFA is a
defense to such an action unless the bank has actual knowledge that the
fiduciary is breaching his fiduciary obligations or the bank acts with bad
faith.” See Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987); cf. Master
Chem. Corp. v. Inkrott, 563 N.E.2d 26, 29 (Ohio 1990) (“The Uniform
18
Fiduciaries Act provides a defense, when asserted under Civ. R. 8(C), for those
who knowingly deal in good faith with an authorized fiduciary.”).
Although this is the first time this Court has directly addressed this
issue, nothing in our jurisprudence is inconsistent with the position we take
today. In New Amsterdam Casualty Co., the plaintiffs brought suit “purely in
tort for damages,” alleging that the defendant banks were “participants” in a
receiver’s embezzlement of funds from an insolvent company. 117 N.J. Eq. at
269. The plaintiffs claimed that the banks from “which the checks were drawn
and the banks receiving them, respectively, paid and received them with actual
knowledge that [the receiver] was committing breaches of his obligations as
receiver, or with knowledge of such facts as amounted to bad faith.” Ibid. The
chancery court stated that the UFA “renders a bank immune from liability in
honoring a fiduciary’s check, ‘unless the bank pays the check with the actual
knowledge that the fiduciary is committing a breach of his obligation as
fiduciary.’” Id. at 270 (emphasis added) (quoting N.J.S.A. 3A:41-7 (repealed
1981)).
Contrary to Lembo’s assertion, New Jersey Title Insurance Co. did not
sanction an affirmative cause of action under the UFL. In that case, an
attorney embezzled real-estate-closing funds from his attorney trust account at
National State Bank, issuing dozens of checks to himself and cashing them
19
either at the bank or at Atlantic City casinos, instead of paying off mortgages.
163 N.J. at 145-46. New Jersey Title Insurance Company satisfied the
outstanding mortgages and then filed an action against the bank, alleging that
the bank “had ‘actual knowledge that . . . [the attorney’s] intended use of the
trust funds would breach fiduciary duties,’ and that the [b]ank was negligent
and acted in bad faith in violation of N.J.S.A. 3B:14-55.” Id. at 146.
In New Jersey Title Insurance Co., neither the Supreme Court nor the
Appellate Division, see 319 N.J. Super 311 (App. Div. 1999), identified the
precise causes of action set forth in the complaint filed against the bank.
Neither court stated that the cause of action was a statutory claim based on the
UFL. Our Court was presented with two issues -- defining the “bad faith”
standard under the UFL and determining whether the bank lost its UFL
immunity because it acted in “bad faith.” 163 N.J. at 145, 150. The Court did
not indicate that the UFL gave rise to an affirmative claim but rather
confirmed that under the UFL “a bank would be immune from liability in
honoring a fiduciary’s check” unless it is shown that the bank acted with actual
knowledge of the breach of a fiduciary’s obligations or with knowledge of
facts establishing that its actions amounted to bad faith. Id. at 149 (emphasis
added).
20
Because we hold that the UFL does not provide an affirmative cause of
action, the Appellate Division erred in remanding to allow Lembo to amend
the complaint to assert such a claim. 2
IV.
In rendering this decision, we are mindful that interposing an affirmative
UFL cause of action -- particularly in this case -- might undermine the UCC’s
“comprehensive framework for allocating and apportioning the risks of
handling checks.” City Check Cashing, Inc., 166 N.J. at 57. Lembo is simply
attempting to outflank that comprehensive scheme by bringing back to life a
time-barred UCC conversion claim.
Generally, a bank will be strictly liable for accepting a check with a
forged indorsement. See N.J.S.A. 12A:3-420 and cmt. 1 (stating that this
section “covers cases in which a depositary or payor bank takes an instrument
bearing a forged indorsement”); see also Leeds v. Chase Manhattan Bank,
N.A., 331 N.J. Super. 416, 422 (2000) (“As a depository bank under the
Uniform Commercial Code, [the defendant bank] is strictly liable for
conversion on a forged or stolen instrument.” (citation omitted)). Lembo’s
complaint alleges that TD Bank accepted checks payable to Lembo with forged
2
Given our resolution of this issue, we do not address Lembo’s claims that
Marchese and Wright were acting in the role of “constructive trustees” to
qualify as fiduciaries under the UFL.
21
indorsements. In the absence of a defense under either N.J.S.A. 12A:3-405 or
N.J.S.A. 12A:3-406,3 TD Bank would have been strictly liable for conversion
of the funds had Lembo filed a timely UCC claim.
“[A]n action for conversion of an instrument . . . must be commenced
within three years after the cause of action accrues,” N.J.S.A. 12A:3-118(g),
and the discovery rule does not extend the limitations period, N.J. Lawyers’
Fund for Client Prot. v. Pace, 186 N.J. 123, 125-26 (2006). Lembo did not file
a UCC claim within the requisite three-year statute-of-limitations period. 4
3
N.J.S.A. 12A:3-405 provides a limited defense to a bank when the bank has
acted in good faith and an employer -- to whom a check is payable -- entrusts
“responsibility” for the check to an employee, who then forges an indorsement.
Additionally, N.J.S.A. 12A:3-406(a) provides a limited defense when the
person to whom a check is made payable fails “to exercise ordinary care.”
However, if the bank also fails to exercise ordinary care that substantially
contributes to the loss, then the loss is allocated between the person and the
bank. See N.J.S.A. 12A:3-406(b).
4
In recognizing the primacy of the UCC in assigning responsibility for checks
with forged indorsements, the Appellate Division held in Leeds that the actual
knowledge or bad faith defense of the UFL could not be invoked by a bank as
a defense to a UCC strict-liability claim based on a bank’s “accepting a
forged/altered check for deposit.” 331 N.J. Super. at 424-28. In that case, an
attorney altered a client’s settlement check and made it payable to himself, and
then deposited the check in his attorney trust account at the defendant bank.
Id. at 419. The Appellate Division rejected “the argument that the shield of
the UFL super[s]edes the liability imposed by § 3-420,” reasoning that a bank
is not insulated from liability because “a dishonest fiduciary, indeed a forger”
converts funds entrusted to him “for which the bank would otherwise be
strictly liable” by depositing the forged check. Id. at 427.
22
We concur with the Appellate Division that Lembo’s common law
conversion claim is preempted by the UCC. We also agree with its conclusion
that the common law negligence claim cannot be sustained.
In light of the UCC’s well-delineated scheme assigning and allocating
liability in the processing of checks with forged indorsements, “[a]bsent a
special relationship, courts will typically bar claims of non-customers against
banks.” See City Check Cashing, Inc., 166 N.J. at 60. Accordingly, “unless
the facts establish a special relationship between the parties created by
agreement, undertaking or contact, that gives rise to a duty, the sole remedies
available are those provided in the Code.” See id. at 62.
Lembo’s complaint does not allege that Lembo had a banking or other
relationship with TD Bank, much less a special relationship “created by
agreement, undertaking or contact.” See ibid. That Marchese and Wright had
personal accounts at TD Bank where the forged checks were cashed and
deposited did not establish a “special relationship” between TD Bank and
Lembo. The Appellate Division therefore properly affirmed the dismissal of
the common law claims.
Because we hold that the UFL does not give rise to an affirmative cause
of action, we need not address whether such a claim has been sufficiently pled
in the complaint, even under the permissive standard of Rule 4:6-2(e). See
23
Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989)
(stating that a complaint should be searched “with liberality to ascertain
whether the fundament of a cause of action may be gleaned even from an
obscure statement of claim, opportunity being given to amend if necessary”
(quoting Di Cristofaro v. Laurel Grove Mem’l Park, 43 N.J. Super. 244, 252
(App. Div. 1957))).
V.
In summary, we hold that the UFL does not authorize an affirmative
cause of action against a bank but rather provides a bank with a limited
immunity from liability for failing to take notice of and action on the breach of
a fiduciary’s obligation. The UFL does not displace, subsume, or supplement
common law claims. When an action is brought against a bank, the UFL
provides that a bank’s liability depends on whether the bank acted with actual
knowledge or bad faith in the face of a fiduciary’s breach of his obligations.
We thus reverse the judgment of the Appellate Division remanding the
matter to allow Lembo to amend the complaint to state a claim under the UFL
and reinstate the trial court’s dismissal of this action.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, FERNANDEZ-
VINA, SOLOMON, and TIMPONE join in JUSTICE ALBIN’s opinion.
JUSTICE PATTERSON did not participate.
24