The New Jersey Appellate Division and New Jersey Supreme Court recently issued two opinions in favor of one of our banking clients that recognize significant limitations on the potential liability of a bank to non-customers under the common law for dishonoring checks drawn on the bank. Earlier, the Applellate Division had applied the Uniform Commercial Code to dismiss statutory claims that had been asserted against our client. City Check Cashing, Inc. v. Jul-Ame Const., 326 N.J. Super. 505 (App. Div. 1999), and City Check Cashing v. Manufacturers Hanover Trust Co., ____ N.J. _____, (2001) taken together hold that (1) absent extraordinary circumstances, the sole sources of a bank's liability for dishonoring a check is the midnight deadline provision set forth in the Uniform Commercial Code and the return deadlines set forth in federal regulations, and (2) this midnight deadline may be extended by, among other things, clearing house rules promulgated by banks.
The facts giving rise to these opinions are themselves extraordinary. Plaintiff City Check Cashing ("Check Cashing") was a licensed New Jersey check casher. On July 1, 1994 Check Cashing's customer, Misir Koci, presented for cashing a $145,000 check drawn on an account at Manufacturers Hanover Trust Co. ("MHT"). (In 1993, MHT had been merged into Chemical Bank.) Check Cashing contacted Chemical's automated customer service line and was advised that the check was not good. Check Cashing also contacted the drawer of the check who stated (falsely) that he had more than $145,000 in his account. Check Cashing refused to cash the check unless it was certified.
Just two weeks later, on July 14, 1994, Koci faxed to Check Cashing the front of a check for $290,000 that purported to be drawn on the same account at MHT as the earlier $145,000 check. The check also bore the purported certification stamp of MHT. The date on the check plainly appeared to have been altered.
Check Cashing's manager instructed an employee to contact the bank to inquire about the date of the check. Check Cashing did not call the automated customer service line that it had contacted two weeks earlier. Instead, it called a customer service line and spoke to one of Chemical's customer service representatives. During that conversation, Check Cashing's employee read the purported serial number on the certification stamp. Chemical's representative told Check Cashing that the purported serial number did not sound like one used by the bank. Check Cashing's employee then stated that she had a question about the date that appeared on the check. Chemical's employee invited Check Cashing to fax a copy of the check to the bank. She also asked Check Cashing's employee for a telephone number at which the bank could contact Check Cashing. Chemical's employee never advised Check Cashing that the bank would respond to the inquiry about the date of the check or that Check Cashing could presume that the check was legitimate if it did not hear from the bank by a certain time. Check Cashing faxed a copy of the front of the check to Chemical at 11:20 a.m. on July 14, 1994.
Check Cashing contended that Chemical never responded to its inquiry. At approximately 2:00 p.m. on July 14, 1994 Check Cashing cashed the $290,000 check and retained its 1-1/2% check cashing fee. Check Cashing deposited the check into its bank account that afternoon.
The depositary bank presented the check to Chemical Bank through the New York Clearinghouse. Chemical Bank received the check at 11:31 p.m. on Thursday, July 14, 1994.
Chemical determined that the certification stamp that appeared on the check was forged. Further, the check had been drawn on a closed account at MHT. Chemical, therefore, refused to honor the check.
Chemical returned the check to the depositary bank through the New Jersey Clearinghouse's 8:00 a.m. exchange on Tuesday, July 19, 1994. Check Cashing received notice of the dishonor from its bank that day. It immediately contacted Koci (and, among other things, threatened him that "a lot of things can happen for $290,000"). Koci did not repay the money and has since disappeared.
Check Cashing filed a ten-count complaint alleging that (1) the check had been validly certified; (2) the bank had violated the midnight deadline requirement set forth in the Uniform Commercial Code; and (3) the bank was negligent for failing to respond to Check Cashing's faxed inquiry. Following discovery, the trial court granted summary judgment to the Bank and Check Cashing appealed.
The Appellate Division affirmed in part and reversed in part the trial court's grant of summary judgment. First, the Appellate Division held that Chemical had returned the check within its midnight deadline as properly extended and, therefore, could not be held liable under the UCC. City Check Cashing, 326 N.J. Super. at 513-519. The UCC's midnight deadline requires a bank to return a dishonored check to the bank from which it received the check by midnight of the banking day following the banking day on which it receives the check. N.Y.U.C.C. § 4-301; N.J.S.A. § 12A:4-301.1 A bank that fails to return a check within this midnight deadline will be held strictly liable for the face amount of the check. N.Y.U.C.C. § 4-302; N.J.S.A. § 12A:4-302. Check Cashing argued that Chemical had violated the midnight deadline because it received the check on July 14, 1994, but did not return it until Tuesday, July 19, 1994.
The Appellate Division carefully analyzed the time sequence relating to Chemical's handling of the check to reach its conclusion that the July 19, 1994 return of the check was timely. Under Section 4-104(b) of the UCC, a banking day is that part of a business day in which a bank is carrying out substantially all of its banking functions. The court first found that the bank was not carrying on substantially all of its banking functions at 11:31 p.m. on Thursday, July 14, 1994. Among other things, none of the branches of the bank were open past 8:00 p.m. Therefore, the Appellate Division held that the midnight deadline did not begin to run until Friday, July 15, 1994.
Second, the Appellate Division found that the midnight deadline did not run on either Saturday, July 16, 1994 or Sunday, July 17, 1994 because these were not "banking days" under the Code. Again, it was dispositive that the bank was not carrying out substantially all of its banking functions on those dates. While some of Chemical's branches were open to the public on Saturdays or Sundays, the functions the bank performed were limited.
Third, the Appellate Division relied upon the New Jersey Clearinghouse Rules to extend the bank's deadline to return the check from midnight on July 14, 1994 until Tuesday, July 19, 1994. The Appellate Division held that the UCC provides that the requirements of the midnight deadline may be varied by clearing house rules. Here, the New Jersey Clearinghouse Rules – the clearing house that Chemical used to return the check – provided that checks could properly be returned in the morning exchange on the second business day following the bank's receipt of the check. The Appellate Division held this extension of the midnight deadline applied.
The Appellate Division, however, found that the bank owed a duty to Check Cashing to respond within a reasonable time to its faxed inquiry concerning the date of the check by advising Check Cashing that the check had not been certified. The Appellate Division also found that the purported certified nature of the check supported the imposition of a duty upon the bank because certified checks are ordinarily considered the equivalent of cash. Chase filed a petition for certification with the New Jersey Supreme Court from the Appellate Division's determination that the plaintiff's common law negligence claim could proceed to trial. The petition was granted.
On January 17, 2001, the Supreme Court reversed the Appellate Division's determination that Chemical owed a duty of care to Check Cashing. The Supreme Court held that the only duty that the bank owed to Check Cashing was to return the check within the midnight deadline.
The Supreme Court recognized that the UCC provided a comprehensive framework relating to the handling of checks. The Supreme Court further observed that a court should only look to the common law to impose duties that are not found within the UCC under very limited circumstances.
The Supreme Court held that the imposition of common law duties was only appropriate where there existed a "special relationship" between the bank and the non-customer plaintiff and that a special relationship only exists where the bank has made an agreement, undertaking or contact with the non-customer.
The Supreme Court held that the requisite special relationship did not exist: (1) there was no evidence of any agreement with Check Cashing; (2) there was no undertaking on the part of the bank; and (3) the contact between the bank and Check Cashing was inadequate to create the required special relationship.
Taken together, the holdings of the Appellate Division and the New Jersey Supreme Court will make it far more difficult for non-customers to successfully maintain actions against banks for alleged late return of checks or for alleged negligence in the handling of checks.
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1 Although the Court applied New York's version of the UCC because the check had been forwarded to Chemical in New York, it stated that its analysis would have been the same under New Jersey law.
