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February 2016

Gordon & Rees New Jersey Team Obtains Dismissal of UCC Banking Claims

Gordon & Rees New Jersey partner Peter G. Siachos and associate Matthew P. Gallo obtained complete dismissal of a lawsuit against their client, a credit union, regarding a large-denomination fraudulent check. The lawsuit, brought by one of the largest banks in the nation, claimed that the credit union was responsible for funding monies advanced by the bank on the fraudulent instrument. The New Jersey Superior Court found otherwise, completely dismissing all of the bank’s Uniform Commercial Code (UCC)-based claims on Gordon & Rees’ motion to dismiss.

The complaint alleged that an unknown fraudster drafted a check from the account of one of the credit union’s customers. The check was made payable to the credit union customer and another individual who was deceased. The fraudster then forged the signature of the deceased individual and deposited the check at an adversary bank into the deceased individual’s bank account. Despite the fact that the credit union member had not endorsed the check, the bank allowed the check to be negotiated. Days later, when the check was presented to the credit union, it discovered that the check was missing their member’s endorsement, at which point the credit union refused to honor the check and returned it as unpaid. The adversary bank claimed that it took the check for value, in good faith, and without notice that the signature of the deceased payee was forged or of any other defense to the item. The bank then sued the credit union, claiming that the bank was a holder in due course, without notice of any fraud, and that the credit union should be required to pay the bank for the funds advanced pursuant to the fraudulent instrument.

Gordon & Rees made a motion to dismiss the complaint, arguing that the bank could not meet the elements of the holder in due course rule and could not enjoy the protections of the UCC. Gordon & Rees argued that the bank was not a holder in due course because it failed to exercise ordinary care by accepting a check with only one of two required endorsements — one of which belonged to a person who had died before the check was signed. In response to the motion to dismiss, the bank claimed that under UCC § 3-302 and § 4-205, the bank can deposit a check in good faith and as a holder in due course in the absence of the signature of its customer. The bank sent Gordon & Rees a sanctions letter, demanding that the motion to dismiss be withdrawn because it allegedly was “frivolous” and “without merit.” Gordon & Rees proceeded with the motion, arguing that it was the bank’s prerogative to negotiate a check with a missing or faulty endorsement, and it was the bank’s prerogative to assume the risk and face the consequences of the credit union's decision to reject the check because it was missing an endorsement.   

The court agreed with Gordon & Rees and dismissed the entire case against the credit union with prejudice. The bank filed a motion for reconsideration, which was denied, resulting in an outright victory for Gordon & Rees’s client.

Matthew P. Gallo
Peter G. Siachos



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