The Uniform Fiduciaries Law (UFL) is a statute adopted in NJ to protect banks and victims of fraud.- When an action is brought against a bank by victims of fraudulent practices, the UFL provides that a bank’s legal liability to the victims depends on whether the bank acted with actual knowledge or bad faith of their fiduciary obligations to the account owner.
What Does the UFL Say?
The general law in NJ is that a bank is not liable to victims 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. This heightened standard provides banks with limited immunity. Absent from the plain language of the UFL is whether a common law claim can be the basis for a lawsuit against a bank.
Here is a Recent Case Filed Under the UFL in NJ
In this recent case, a complaint alleged that TD Bank accepted checks with forged endorsements. 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 the conversion of the funds had the victim filed a timely 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 since the victims did not file a UCC claim within the required three-year statute of limitations period. Reliance on the NJ Uniform Commercial Code was not available and the UFL does not expand the victim’s right to sue the bank.
The court concluded that 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.” 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.
The Uniform Fiduciaries Act did away with the [bank]’s liability for negligence and substituted a new test. For the [bank] to become liable under this Act it must be found that it either had actual knowledge of the misappropriation or that it acted in bad faith. Thus, under the UFA, the standard is not whether a reasonable person acting with due care would have been on notice of a breach of a fiduciary obligation.
The relevant section of the UFL is found at N.J.S.A. 3B:14-55 and -58, 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.
When 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.
The court turned next to N.J.S.A. 3B:14-58, which provides:
- 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 (see below), 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.
- In the case of a check made payable to the principal or the fiduciary as fiduciary, the bank is deemed to have notice of the fiduciary’s action when the 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,” otherwise the bank has no duty to inquire whether the fiduciary is in breach of his fiduciary obligation.
If the bank deposits or pays a check “with actual knowledge that the fiduciary is committing a breach of his 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. 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 r principal’s account, “the bank has notice of the breach of fiduciary duty.”
Thus, a bank is not liable 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.
If you are looking for additional details on this topic or if you require advice about your situation, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Elder Abuse Attorney