Frederick v. Smith
416 N.J. Super. 594
| N.J. Super. Ct. App. Div. | 2010Background
- Four consolidated actions allege Maxwell B. Smith defrauded investors in Healthcare Financial Partnership (HFP).
- Smith instructed investors to send checks payable to Merrill Lynch or directly to Merrill Lynch, lacking any customer relationship with Merrill Lynch.
- Smith opened a Merrill Lynch personal account used to receive funds and further the alleged Ponzi scheme.
- Investors’ funds, totaling about $10 million, were deposited into Smith’s Merrill Lynch account and diverted for his own use.
- Plaintiffs alleged Merrill Lynch negligently failed to detect fraud by monitoring the account for indicia of fraud.
- Merrill Lynch moved to dismiss under Rule 4:6-2(e); plaintiffs cross-moved to compel arbitration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to non-customers | Frederick argues Merrill Lynch owed a duty to monitor for fraud despite no customer relationship. | Merrill Lynch contends no duty to non-customers absent a special relationship. | No duty to non-customers; no duty to police Smith's personal account. |
| Arbitration of claims | Arbitration should be compelled for Merrill Lynch claims. | Arbitration lacks an agreement; claims not arbitrable. | Arbitration not warranted; moot due to dismissal on duty grounds. |
Key Cases Cited
- City Check Cashing v. Mfrs. Hanover Trust Co., 166 N.J. 49 (2001) (absent a special relationship, non-customers lack duty; social policy limits bank duties)
- Brunson v. Affinity Fed. Credit Union, 199 N.J. 381 (2009) (reluctance to impose duty on banks for total strangers)
- Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739 (1989) (liberal pleading standard for Rule 4:6-2(e) dismissal)
- Rieder v. State Dept. of Transp., 221 N.J. Super. 547 (1987) (standard for dismissal under Rule 4:6-2(e))