NJ Supreme Court Holds That a Non-Customer’s Negligence Claim Against a Bank is Precluded by the UCC

NJ Supreme Court Holds That a Non-Customer’s Negligence Claim Against a Bank is Precluded by the UCC
Banking Alert October 2014

New Jersey Supreme Court Holds That a Non-Customer's Negligence Claim Against a Bank is Precluded by the UCC

In a significant opinion for the banking industry, the New Jersey Supreme Court held that non-customer plaintiffs of a bank are barred from bringing negligence claims by the New Jersey Uniform Commercial Code, Article 4A, see N.J.S.A. 12A:4A-101 et seq. (the “UCC”), for the bank's improper acceptance of orders transferring funds. See ADS Assoc., Inc. v. Oritani Savings Bank, 2014 N.J. LEXIS 923 (N.J. Sept. 30, 2014).  The matter arose out of plaintiff’s creation of a joint venture with Ansel Diaz Sanchez (“Sanchez”). The joint venture was operated through Sanchez’s wholly-owned corporation ADS Associates, Inc. (“ADS”).  In order to pay the expenses of the joint venture, plaintiff and Sanchez opened an account at Oritani Bank (“Oritani”), where ADS already had other bank accounts (the “Joint Venture Account”).  The Joint Venture Account was set up as a “dual-signature checking account” so that both plaintiff and Sanchez had to sign checks drawn from the account.  Plaintiff was also appointed as Treasurer of ADS using an Oritani form resolution, although the same could be rescinded by ADS.  Oritani’s representative explained to plaintiff and Sanchez that ADS was the account holder and that only it would receive statements.  Further, Oritani’s account agreement with ADS provided th at ADS would indemnify it for any losses caused by ADS’s “employees, owners, principals or agents who . . . make any unauthorized charge to [ADS’s] account.”  Thereafter, Sanchez linked the Joint Venture Account to ADS’s other accounts via online banking, enabling Sanchez to transfer substantial sums out of the Joint Venture Account into ADS’s other accounts.  Upon discovering the transfers, plaintiff filed suit against Sanchez and Oritani.

The trial court initially dismissed plaintiff’s individual claims against Oritani, but permitted plaintiff to name ADS as a plaintiff and assert claims on its behalf.  Plaintiff then filed an amended complaint asserting various claims on behalf of ADS and, again, individually, including violations of the UCC and common law negligence.  Just prior to trial, Sanchez signed a resolution removing plaintiff as Treasurer of ADS upon Oritani’s request.  In spite of this, the trial court ruled that plaintiff had standing to bring suit on behalf of ADS as he had a fiduciary duty as one of its officers.  The trial court ruled, however, that plaintiff could not bring claims against Oritani in his own name.  Following trial but before the jury’s verdict, the trial court dismissed all claims brought on behalf of ADS, except for the UCC claims, and held that any common law claims were preempted by the UCC.  The jury returned a verdict in favor of ADS and against Oritani for $295,000.  The trial court nonetheless granted a judgment notwithstanding the verdict and dismissed the remaining UCC claim.  On appeal, the Appellate Division held that, in light of ADS’s termination of the plaintiff as Treasurer, plaintiff could not pursue claims in ADS’s name.  It also held, however, that plaintiff could pursue common law negligence claims against Oritani as he had a “special relationship” with the bank.  This “special relationship” was based on, among other things, the insistence on a “dual-signature checking account” and Oritani’s knowledge of ADS’s other accounts.  Accordingly, the Appellate Division held that Oritani had a duty to disclose to plaintiff that the bank’s online banking would allow Sanchez to move funds between ADS’s account and the Joint Venture Account.

The New Jersey Supreme Court granted certification to determine whether plaintiff, a non-customer of Oritani, could assert common law negligence claims.  The Court began its analysis by noting that the fund transfers at issue were governed by UCC Article 4A.  Moreover, throughout Article 4A, the “word ‘customer’ is used to describe the person or entity entitled to pursue a remedy against a bank” and a “‘customer’ is specifically defined in the statute as ‘a person . . . having an account with a bank or from whom a bank has agreed to receive payment orders.’”  The record, however, was clear: ADS was the customer of Oritani, not plaintiff.  Indeed, ADS was identified as the account holder on the account agreement with Oritani and ADS was to receive the statements.  “Oritani never acted in a manner that could have induced [plaintiff] to believe he was its ‘customer’; indeed, he was expressly told otherwise.”  Accordingly, only ADS could assert a claim under the UCC.

As to plaintiff’s negligence claims, the Court recognized that “no New Jersey appellate court has determined whether a non-customer, who claims damages arising from a funds transfer, may sue a bank under a common law negligence theory independent of” the UCC.  The Court further noted its opinion in City Check Cashing, Inc. v. Manufacturers Hanover Trust Co., 166 N.J. 49 (2001), where it held that, “unless the facts establish a special relationship between the parties . . . that gives rise to a duty, the sole remedies available are those provided in the UCC.”  The Court then reviewed the legislative history of the Article 4A and found that, while “the UCC does not purport to preempt the entire body of law affecting the rights and obligations of parties to a commercial transaction[,]” Article 4A “was intended to define the rights and obligations of the affected parties . . . with respect to the categories of transactions within its reach.”  In that vein, the “dispute in this case arises from a setting directly addressed by Article 4A – a bank’s acceptance of an order transferring funds. . . .Therefore, this matter is among the disputes for which the Legislature intended Article 4A to constitute ‘the exclusive means of determining the rights, duties and liabilities of the affected parties.’” Accordingly, the Court found that permitting plaintiff “to assert a negligence claim, in which he clearly lacks the status of a customer, would contravene the purpose and terms of Article 4A” and affirmed the trial court’s dismissal of the negligence claims against Oritani.  For good measure, the Court also found that there was no “special relationship” between Oritani and plaintiff.

This opinion is significant for banks in that it provides clarity to the potential exposure they face from non-customers for improper funds transfers.  The Supreme Court has made clear that, when it comes to these situations, the UCC governs.

For a copy of this decision, please contact Michael O’Donnell of Riker Danzig's Banking Practice Group.