This is an action in which plaintiff Valley National Bank (‘Walley National”) seeks to recover monies it paid to defendant P.A.Y. Check Cashing, doing business as United Check Cashing (“United Check”), on a $16,000 check issued by Valley National to a natural person payee and a fictitious corporate payee. The check bore a signature and what purported to be a stamped endorsement when it was presented to United Check by the natural person payee and cashed by United Check. The court concludes that Valley National is entitled to recover the full amount of the check despite the existence of a fictitious payee. The facts are undisputed and summary disposition is appropriate.
On April 25, 2002, defendant Balwinder Singh (“Singh”) applied to Valley National for a $16,000 loan to purchase a used 1997 BMW 528T, the cash price for which was $22,000. The application was signed on May 9, 2002. In support of the application, Singh supplied an agreement and bill of sale dated April 30, 2002, signed by Singh and by Daniel Tuck on behalf of Belmont Auto Motors, Inc., at 617 Jericho Turnpike, Belmont, New York. The vehicle identification number was WBADD6324W01751 and the total price, including sales tax, was $23,382. Singh also supplied Valley National with a pay stub and his New Jersey driver’s license.
Valley National approved the loan and on May 8, 2002, Singh signed an installment
United Check promulgated a ten-point list for use by its employees in evaluating checks prior to cashing them. The first point warned employees to be certain that all payees were present and that each had one picture identification and one secondary form of identification. The fifth point queried whether the amount of the check was in line with the person presenting the check. The eighth point required a social security number and instructed employees to ascertain from the number the state in which it had been issued. The ninth point warned employees to have the check signed in their presence, to compare the signature to the identification, and to record the identification on the front of the check. The check list did not provide any specific instructions with respect to checks made payable to business entities.
The back of the check was endorsed by Singh and below his signature was a stamp which read simply “BELMONT AUTO MOTORS, INC.” Singh presented a New Jersey driver’s license and Mario Payano, the manager of United Check, dialed “Information” to obtain a telephone number for Belmont Auto Motors, Inc. He then telephoned Belmont to confirm that it had signed the check. The unidentified person who answered the phone confirmed that it had stamped the check and had authorized Singh to cash the check. United Check then cashed the check and prepared a form 4789 currency transaction report.
The check, deposited on May 9, 2002, was ultimately paid and charged to Valley National’s account. When payment on the loan was not timely received from Singh, Valley National discovered that it had never received the title to the vehicle nor perfected a lien. Its investigation revealed that Singh had disappeared, that Belmont Auto Motors, Inc., did not exist, and that Valley National did not have a full VIN and thus could not verify that the vehicle existed either. Its investigation also revealed that at the time of the loan Singh had only $11,623 in total debt; however, as of September 9, 2002, his total debt had ballooned to $204,899.
Valley National concluded that it had been defrauded and authorized the institution of this action against United Check and Singh, who has never been located and served. Valley National described Singh’s conduct as “bail out fraud.” Inferentially, Valley National was not the only victim of Singh’s fraud. Valley National contends that United Check violated N.J.S.A. 17:15A-47(a), which provides that no licensee shall
[clash a check which is made payable to a payee which is other than a natural person unless the licensee has on file a corporate resolution or other appropriate documentation indicating that the corporation, partnership or other entity has authorized the presentment of a check on its behalf and the federal taxpayer identification number of the corporation, partnership or other entity.
These documentation requirements were not incorporated into United Check’s ten-point checklist. In answer to interrogatories, United Check admitted that it did not have on file a corporate resolution or any other documentation indicating that Belmont Auto Motors, Inc., had authorized presentment of the check nor did United
Valley National also contends that United Cheek has breached the Uniform Commercial Code warranties of presentment and transfer. N.J.S.A 12A:3-416, 3-417, 4-207 and 4-208. United Cheek asserts that it is entitled to the benefit of the fictitious payee defense of N.J.S.A. 12A:3-04. Valley National urges that this defense is only available to United Check when it acts in good faith, which it contends is wanting here.
The Check Cashers Regulatory Act of 1993
Needless to say, banking institutions are heavily regulated at the state and federal level. In 1993 the New Jersey Legislature determined that it was appropriate to regulate check cashing businesses and enacted the Cheek Cashers Regulatory Act. This Act requires all persons engaged in the business of cashing checks for a fee to be licensed by the Commissioner of Banking. N.J.S.A. 17:15A:32. In addition to establishing licensing requirements, the Act establishes minimum capital or net worth requirements for check cashing businesses and limits the fees which can be charged for cashing checks. N.J.S.A. 17:15A-37, -43. Record keeping duties are imposed upon licensees and annual reports must be filed. N.J.S.A. 17:15A-44, -45. In addition to these mandated responsibilities', the Act prohibits licensees from performing certain acts, including the one at issue here. N.J.S.A. 17:15A-47.
United Check urges that it cannot be found to have violated N.J.S.A 17:15A-47(a) because Belmont Auto Motors, Inc., was a nonentity, that is, it was not a natural person, corporation, partnership or other business entity. It argues that fictitious entities do not come within the scope of the Act, only real business entities do. This argument is fundamentally flawed.
In order to determine whether United Check has violated N.J.S.A. 17:15A — 47(a), the definitions contained in the Act are illuminating. N.J.S.A 17:15A-31 provides that a “ ‘[n]atural person’ does not include a payee identified on the payee line of a check as a partnership, professional association, company, corporation, or other business entity.” The Act then provides that “[n]o licensee ... shall cash a check which is made payable to a payee which is other than a natural person unless the licensee has on file a corporate resolution or other appropriate documentation____” Clearly, “Belmont Auto Motors, Inc.” was a payee on the Valley National check which was “identified on the payee line” as a corporation. It is of no moment that Belmont was not actually a corporation. The fact that it was identified as such was sufficient to trigger the prohibition of the Act.
Valley National contends that this violation of the Act alone is sufficient to render United Check liable to it for the face amount of the check. The Act, however, does not expressly provide for a private right of action. N.J.S.A. 17:15A-49 imposes civil and criminal penalties for violation of the Act and permits the Commissioner to revoke a check casher’s license. However, it does provide that “[p]enalties imposed pursuant to this act shall not dimmish the remedies which may be available to complainants through private actions.” N.J.S.A. 17:15A-49(g).
In deciding whether a legislative act gives rise to a private right of action under the act, the New Jersey Supreme
consider[ ] whether the plaintiff is “one of the class for whose especial benefit the statute was enacted,” whether there is any evidence that the Legislature intended to create a private cause of action under the statute, and whether implication of a private cause of action in th[e] case [before the court] would be “consistent with the underlying purposes of the legislative scheme.”
[Ibid, (citations omitted).!
The legislative history of the Cheek Cashers Regulatory Act must be considered. On April 30, 1992, Assembly Bill No. 1323 was introduced by Sponsors Roberts and Penn. Initially, the sponsors proposed to prohibit check cashing businesses from cashing a check if the payee was not a natural person. The Assembly Financial Institutions Committee on May 17, 1993, submitted a Statement to the Assembly on Assembly Bill No. 1823 in which the Committee reported, in part, that the bill had been amended to permit cashing of cheeks for payees which were not natural persons, but imposed certain record-keeping requirements with respect to such payees.
A more detailed Statement was submitted by the Senate Commerce Committee on November 8, 1993. The Committee stated that the bill required a cheek cashing business to “set up and maintain a separate record keeping system with respect to checks which are cashed for a payee which is not a natural person, i.e., a corporate or business entity.” Specifically, the Committee stated that:
a licensee is prohibited from: cashing a check which is made payable to a payee which is not a natural person unless the licensee has on file a colórate resolution or other appropriate document indicating that the corporation or other entity has authorized the cashing of checks on its behalf and the federal taxpayer identification number of the corporation or other entity; [or] cashing a check for any one other than the payee of the check____
[Senate Commerce Comm. Statement to Assembly, No. 1323 (1993).]
On January 10, 1994, then Governor James Florio returned Assembly Bill No. 1323 with recommendations for reconsideration. In doing so he commented that:
This bill would impose a comprehensive system of regulations and oversight on the cheek-cashing industry. There is no question that this legislation is long overdue. As we have seen from the recent hearings held by the State Commission of Investigation, criminals throughout this State have begun to use check-cashing services as a convenient means of laundering their proceeds. Moreover, check-cashing establishments are more and more becoming the financial institution of choice for many of ora' citizens in our most economically distressed areas — areas in which banks are sometimes hesitant to locate. The time has therefore come to bring the check-cashing industry into a sensible regulatory mechanism, not only to strengthen our ability to stem money laundering, but to protect the interests of the consumers as well.
[Governor’ Statement to Assembly, No. 1323 (1994).]
Although the Governor expressed pleasure with the bill, he believed that it should be strengthened in a number of respects, including “more sensible civil and criminal penalties.” Ibid. He recommended revision
Having examined the legislative history and the statute itself, the court must determine whether Valley National is “one of the class for whose especial benefit the statute was enacted.” In re State Comm’n of Investigation, supra 108 N.J. at 41,
The UCC Warranties
Plaintiff alleges that defendant violated the presentment and transfer warranties under the Uniform Commercial Code (“UCC”), specifically, N.J.S.A. 12A:3-416, 3-417, 4-207 and 4-208.
Chapter 4 of the U.C.C. governs bank deposits and collections. N.J.S.A 12A:4-101. The threshold issue is whether United Cheek is a “bank” to which chapter 4 applies. N.J.S.A. 12A:4-105(a) defines the term “bank” as meaning “a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company.” Obviously, a “check casher” is not expressly included in the definition of “bank.” To decide whether a “check casher” is engaged in “the business of banking,” it is fruitful to look at the types of businesses in which banks engage. We begin with the definitions of bank, savings bank, savings and loan association, and credit union found in Title 17.
Pursuant to N.J.S.A. 17:9A-1, banks are corporations organized pursuant to specified New Jersey acts and statutes, including N.J.S.A 17:9A-3, to transact business as a bank or trust company, excluding savings banks. A savings bank is a banking institution organized pursuant to specified New Jersey acts and statutes, including N.J.S.A. 17:9A-7, -8 or -8.1, to transact business as a savings bank. N.J.S.A. 17:9A-1(2) and (13). The powers of banks and savings banks are delineated in N.J.S.A. 17:9A-24 and include, among other things, the power to issue cashier’s checks, treasurer’s checks and money orders; to guarantee signatures and endorsements; to be a member of the Federal Reserve System and the Federal Deposit Insurance Corporation;
The powers granted to savings and loan associations are found in N.J.S.A. 17:12B-47 and -48. Although savings and loan associations do not have all of the powers granted to banks and savings banks, they do share a number of those powers. For example, they may insure their members’ accounts with the F.D.I.C., borrow money, compute interest on direct reduction loans, accept deposits and issue credit cards. N.J.S.A. 17:12B-48. Central credit unions, too, may accept deposits, make loans, establish lines of credit, and buy and sell marketable debt obligations. N.J.S.A. 17:13-73.2. Credit unions, likewise, lend funds to their members, purchase conditional sales contracts, and collect, receive and disburse monies in connection with providing negotiable checks and similar instruments. N.J.S.A. 17:13-89.
By comparison, the check cashing business is quite narrow in scope, being confined to the cashing of checks. Nevertheless, dealing in negotiable checks is part of the business of banking. Check cashing licensees, banks, savings banks, savings and loan associations and credit unions are all subject to regulation and the supervision of the Commissioner of Banking and Insurance. In addition, check-cashing establishments, as the Governor observed, “are more and more becoming the financial institution of choice for many of our citizens in our most economically distressed areas— areas in which banks are sometimes hesitant to locate.” [New Jersey governor statement to assembly, No. 1323 (1994)]. Accordingly, the court finds that United Check comes within the definition of a “bank” which is found in N.J.S.A. 12A:4-105(a), and thus Chapter 4 of the U.C.C. applies to it and to the negotiation of the check in question. Indeed, United Check did not dispute that it was subject to chapter 4 of the U.C.C. as a person engaged in the business of banking.
In this transaction, United Check was acting as the “depositary bank,” which “means the first bank to take an item____” N.J.S.A. 12A:4-105(b). It was also a “collecting bank,” defined as “a bank handling an item for collection except the payor bank.” N.J.S.A. 12A:4-105(e). Valley National having issued a check on its own account was both the drawer and the drawee. Thus, it was the “payor bank” as defined by N.J.S.A. 12A:4-105(c). No dispute was raised by United Check as to its and Valley National’s status.
As a depositary and collecting bank, United Check by transfer warranted to its collecting bank, First Union, that it was entitled to enforce the item and that all signatures on the item were authentic and authorized. N.J.S.A. 12A:4-207(a)(1-2).
Generally, a depositary or collecting bank presenting a check with a forged endorsement to a drawee bank may be held liable for breach of the U.C.C. implied warranty that it had good title under N.J.S.A. 12A:4-207. Clients’ Sec. Fund of Bar of N.J. v. Allstate Ins. Co., 219 N.J.Super. 325, 329-330,
This transfer warranty, however, runs only to collecting banks and not to payor banks. The warranties running to payor banks are the presentment warranties found in N.J.S.A. 12A:4-208, which provides:
(a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:
(1) the warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft.
Thus, when First Union presented the check to Valley National as the drawee/payor bank, First Union and United Check warranted to Valley National that they were persons entitled to obtain payment of the check on behalf of the payees. N.J.S.A. 12A:4-208(a)(1).
United Check asserts that it is entitled to the protection of N.J.S.A. 12A:3-04 which governs instruments, including checks, issued to fictitious payees. Subsection (b) of that statute provides, in pertinent part:
If .. the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
U.C.C. Comment 3 to N.J.S.A. 12A:3-404(b) explains the effect of this provision
If a check payable to [a] ... fictitious payee ... is paid, the effect of subsection! 1 ••• (b) is to place the loss on the drawer of the check rather than on the drawee or the depositary bank that took the check for collection. [F]raud is almost always involved in cases governed by subsection (b). The drawer is in the best position to avoid the fraud and thus should take the loss. ... But in some cases the person taking the check might have detected the fraud and thus have prevented the loss by the exercise of ordinary care. In those cases, if that person failed to exercise ordinary care, it is reasonable that that person bear loss to the extent the failure contributed to the loss. Subsection (d) is intended to reach that result.
As previously noted, it has been stipulated that Valley National’s cheek was issued to a fictitious co-payee, which United Check alleges triggers application of this provision. If so, the stamped endorsement in the name of Belmont Auto Motors, Inc., would be effective as the endorsement of Belmont in favor of United Check which took the check for collection. In order to avail itself of this defense, United Check has the burden to prove that it acted in “good faith” in taking the check for collection.
“Good faith” as now used in N.J.S.A 12A:3-404(b)(2) is defined by N.J.S.A. 12A:3-103(a)(4) to mean “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Prior to New Jersey’s adoption in 1995 of the 1990 revisions to the Uniform Commercial Code, there was no standard of care applicable to a party taking an instrument payable to a fictitious payee. Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 494,
Formerly, throughout articles 3 and 4 in all instances in which the term “good faith” was used, it was defined by reference to article 1, § 201(19), i.e., “honesty in fact in the conduct of the transaction concerned.” 5A-7 Ronald A. Anderson, Uniform, Commercial Code (3d ed. 1993). In only two instances was a requirement for the observance of reasonable commercial standards imposed in conjunction with the requirement of good faith. 6 Id. at 420-21, 6A Id. at 102-03.
Former U.C.C. § 3-406 provided:
Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due course or against a drawee or other payor who pays the instrument in good faith and in accordance with, the reasonable commercial standards of the drawee’s or payor’s business.
[6 Id.., at 407 (emphasis added).]
And former U.C.C. § 3-419(3) provided:
Subject to the provisions of this Act concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.
[6A Id. at 50 (emphasis added).]
The 1990 revision to the Uniform Commercial Code defined the term “good faith” as used throughout Article 3 to require honesty
The burden of proving this defense rests upon United Check. Bitsko v. Main Pharmacy, Inc., 289 N.J.Super. 267, 272,
Honesty in fact “is determined by looking to the mind of the particular holder.” Gen. Inv. Corp. v. Angelini, 58 N.J. 396, 403,
Although no case in New Jersey has yet specifically construed the two-prong test for good faith formulated in N.J.S.A. 12A:3-103, it should be interpreted in accordance with prior eases construing
Three New Jersey cases have been found in which summary judgment was granted on the issue of the failure to comply with reasonable commercial standards.
a depositary bank that accepts and forwards for collection without notice or reservation a draft that fails to contain required endorsements, has not acted in a commercially reasonable manner and has breached its presentment warranties, and is therefore not protected by N.J.S.A. 12A:3-419(3).
A number of other jurisdictions have found that similar conduct by banks constituted a failure to act in compliance with reasonable commercial standards as a matter of law. For example, the Michigan Court of Appeals held that it is entirely proper for a trial court to take judicial notice of a lack of compliance with reasonable commercial standards when a bank
Like New Jersey, the District of Columbia Court of Appeals has held that when a bank accepts a check to a corporate payee for deposit into an individual account, it has, as a matter of law, failed to act in accordance with reasonable commercial standards. Am. Mach. Tool Distrib, Ass’n v. Nat’l Permanent Fed. Sav. & Loan Ass’n,
Indisputably, United Check violated the Check Cashers Regulatory Act, which establishes reasonable commercial standards for check cashing licensees, in several ways. First, it cashed a check payable to a corporation without having a corporate resolution or other appropriate documentation indicating that the presentment was authorized. N.J.S.A. 17:15A-47(a). It also did not have a federal taxpayer identification number for the corporation. Id. In addition, it failed to comply with N.J.S.A. 17:15A-44(n), which required it to supervise employees “to ensure the business is conducted lawfully and pursuant to the provisions of this act____” The violation of this provision is clearly evidenced by United Check’s ten-point checklist which did not require its employees to comply with the documentation requirements of N.J.S.A. 17:15A-47(a). Having so violated the Act, United Check became subject to a potential revocation or suspension of its license under N.J.S.A. 17:15A-48(a)(1). In addition, the violation of N.J.S.A. 17:15A-47(a) could have resulted in the imposition of a civil penalty up to $5,000. N.J.S.A. 17:15A-49(b)(2).
Furthermore, United Check violated established law when it took a check payable to a corporate co-payee and cashed it for the individual co-payee. See, e.g., Morgan, Melhuish, supra,
In addition, United Check violated its own internal, albeit insufficient, guidelines for cashing checks. Its manager did not make certain that all payees were present with identification. The amount of the
United Check also urges that Valley National violated its duty under N.J.S.A. 12A:4-406 by failing to give timely notice of its claim. Subsection (c) of § 4-106 provides:
If a bank sends or makes available a statement of account or items pursuant to subsection a. of this section, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
Of course, Valley National is both the bank and the customer and it would hardly seem that any duty could exist in such a situation. Even if it did, the customer’s breach of this duty only operates as a bar to the customer’s action against its payee/drawee bank. N.J.S.A. 12A:4-106(d). Furthermore, in this case the item was not altered, nor was Valley National’s signature unauthorized. Thus, this statutory provision has no application to the facts before the court.
As a consequence of United Check’s failure to comply with the Check Cashers Regulatory Act and its own internal policies, the court concludes that United Check violated the presentment warranties contained in the Uniform Commercial Code as a matter of law. Valley National urges that subsection (c) of N.J.S.A. 12A:4-207 governing transfer warranties entitles it to recover the face amount of the check plus interest and expenses. However, those transfer warranties do not govern this issue because Valley National is neither a “transferee or subsequent collection bank” for whose benefit the warranties are extended. N.J.S.A. 12A:4-207(a). This is so because under N.J.S.A. 12A:3-203(a) an instrument “is transferred when it is delivered by a person other than the issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” No right to enforce the instrument was transferred to Valley National, rather it was presented for payment. Rather, Valley National’s right to relief arises under the presentment warranties of N.J.S.A. 12A:4-208(a)(1) which were breached by United Check. Subsection (b) of N.J.S.A. 12A:4-208 allows the drawee to recover the amount paid by the drawee (less the amount the drawee is entitled to receive from the drawer) plus expenses and loss of interest resulting from the breach of warranty. This provision entitles Valley National to recover the face amount of the check — $16,000. In addition, neither party has urged that a rate of interest other than that provided by B. 4:42-11 should be applied. Interest under that rule from May 9, 2002, to the date of this opinion totals $1,838.12.
U.C.C. Comment 1 to § 4-208 provides that it conforms to § 3-417 and that the substance of § 4-208 is discussed in § 34117. U.C.C. Comment 5 to the latter section is reproduced in its entirety below:
The measure of damages for breach of warranty under subsection (a) is stated in subsection (b). There is no express provision for attorney’s fees, but attorney’s fees are not meant to be necessarily excluded. They could be granted because they fit within the language “expenses ... resulting from the breach.” Subsection (b) provides that the right of the drawee to recover for breach of warranty is not affected by a failure of the drawee to exercise ordinary care in paying the draft. This provision follows the result reached under former Article 3 in Hartford Accident & Indemnity Co. v. First Pennsylvania Bank,859 F.2d 295 (3d Cir.1988). [N.J.S.A. 12A:3-417, U.C.C. Comment 5.]
In discussing the extent of liability under § 3-417, Anderson observed that “[i]n addition to the recovery above described, the plaintiff will be allowed to recover costs, attorney’s fees, and other incidental expenses as authorized by the paper sued upon or by the practice of the forum," citing § 1-103. 6A Anderson, Supra, at 33 (emphasis added).
Valley National candidly admits that its research has failed to reveal any published opinions in New Jersey that speak to the issue of counsel fees in such a situation. On the other hand, United Check has not raised a dispute about an award of fees.
Despite the absence of such a dispute, the Third Circuit has concluded under New Jersey law that attorney’s fees are not recoverable for breach of UCC warranties. McAdam v. Dean Witter Reynolds, Inc.,
This court is persuaded by the soundness of the opinion rendered by the Third Circuit in McAdam, and is equally convinced
Notes
This fact distinguishes the case from Kuhn v. Tummineili, 366 N.J.Super. 431,
Even if United Check were not a bank subject to Chapter 4 of the U.C.C., it would nonetheless have made the exact same warranties to First Union under N.J.S.A. 12A:3-416(a)(l-2) with respect to the check, a negotiable instrument.
This bank warranty also has an exact corollary in N.J.S.A. 12A:3-417(a) with respect to non-bank presenters and transferors. Thus, even if United Check were not a bank, it would have made the precise same warranty to Valley National with respect to the check.
Bad faith may be evidenced by conduct so irregular in nature that the bank is shown to have violated its own policies and to have failed to act according to the standard of honesfy-in-fact which is required under the Code. Kraftsman Container Corp., v. United Counties Trust Co., 169 N.J.Super. 488,
The grant of summary judgment to the depositary bank was affirmed in Knesz v. Cent. Jersey Bank & Trust Co. of Freehold, 97 N.J. 1, 8-9,
In 2002 that statutory rale of interest was 8%. For the 237 days of 2002 during which interest is awarded, the total amount of interest is $831.12 for 2002. The 2003 rate of interest was 5% and thus interest for that year totals $800. In 2004 the rate of interest is 4% and amount of interest through the date of this opinion is $206.90.