BUSINESS LAWSUIT BLOG
Is a Loan Discharged When the Lender Releases the Liens on Collateral Prior to the Payoff Checks Clearing?
In JPMorgan Chase Bank, N.A., v. Jeffco Cinnaminson Corporation, et. al., No. A-2601-10T3
(N.J. Super. Ct. App. Div. March 27, 2012), JP Morgan Chase Bank, N.A. (“Plaintiff”) sued Jeffco Cinnaminson Corporation (“Jeffco”) and Paul T. Andrews (“Andrews”) (collectively “Defendants”) based upon its premature disbursement of collateral held as security against two loans.
In that case, Plaintiff granted Jeffco two loans in order to acquire a Ford GT and a Ferrari (collectively the “Vehicles”). In regard to both loan agreements (collectively the “Agreements”), Andrews signed the Agreements as a cosigner which made him a
guarantor of the debt. Id. at 4.
Plaintiff disbursed the money and, in order to secure the loans, recorded liens on the Vehicles. Subsequently, Defendants entrusted the vehicles to Alfred Sciubba (“Sciubba”), who owned and operated a specialty car business named “Auto Toy Store.” He agreed to find buyers for the Vehicles. Id. at 4.
Sciubba found buyers for both vehicles. It provided pay off checks from Jeffco’s bank account to satisfy the car loans so the sale could be consummated (the buyers obviously would not want to purchase the cars with liens still recorded on the title). The problem arose when the Plaintiff bank endorsed the liens as paid before the check cleared. In fact it did this on two separate occasions, since the cars sold at different times. However, since neither check cleared due to insufficient funds in Jeffco’s bank account, Plaintiff was left with two unpaid and unsecured loans in Jeffco’s and Andrews’ names. Id. at 6-7.
As a result, Plaintiff filed suit in the Law Division of the Superior Court of New Jersey (“Lower
Court”) against Jeffco and Andrews to recover the amounts due. Defendants argued that because Plaintiff had failed to protect the collateral, their two loans were discharged. They also filed a counterclaim which alleged that Plaintiff was negligent because it should not have endorsed both liens as paid before either of the checks had cleared. Id. at 7-8.
Subsequently, Plaintiff filed a motion for summary judgment and Defendants filed a cross motion for summary judgment. A motion for summary judgment allows a Court to determine a case without resort to a trial when there are no material issues of fact and judgment can be granted by applying
the relevant law.
Defendants’ submitted to the Court an expert report and opinion. The expert opined that Plaintiff’s release of the liens violated financial industry standards and was contrary to its policies and procedures. Further, the expert asserted that it failed to properly monitor and manage the Jeffco
loan portfolio after the first payoff check (for the Ford GT) bounced. Id. at 8-9.
The Lower Court stated that Plaintiff “implicitly knew” Sciubba was in the business of selling cars because it received a check from “Auto Toy Store.” It reasoned that because Sciubba regularly sold cars to the public, that alone was a sufficient basis for the Plaintiff to reasonably believe that the checks received from him were adequate and sufficient. Thus, it asserted that it was proper for Plaintiff to have endorsed the liens as paid before the checks had cleared. Further, the Lower Court stated that Defendants could not complain about Plaintiff’s release of the liens because they had set in motion the very facts that led to the consignment of the vehicle to the dealership.
Accordingly, the Lower Court granted Plaintiff’s motion for summary judgment against Defendants for the amounts due plus approximately $40,000.00 in attorney’s fees. Id.
Subsequently, Defendants appealed to the Superior Court of New Jersey, Appellate Division (the “Appellate Court”). In its analysis, the Appellate Court considered Plaintiff’s argument based upon Chapter Nine of the New Jersey Commercial Code (the “UCC”). It claimed that whenever an “innocent purchaser” is involved in the acquisition of an automobile, the rights of a secured lender, almost instantaneously (and inexorably), must bend to the will of the buyer. Id. at 11-12. The Court rejected that argument.
It explained that under N.J.S,A. 12A:9-315(a)(1) and (2), a properly filed and recorded lien was not extinguished when the secured property was transferred to another, unless an exception to the UCC applied. One such exception is N.J.S.A. 12A: 9-320(a) because it automatically severs the lien so that the purchaser of the goods enjoys them with clear title; free of any liens due to their seller’s debt. Id.at 14. For example, if you purchased a new coat from a department store you will own that coat without any fear that the department store’s creditors have any rights in them. N.J.S.A. 12A: 9-320(a)
stated:
Except, as otherwise provided in this subsection (e), a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
(emphasis added) Id.
Further, the Court noted that the UCC did not require a secured lender to blindly release a lien without conducting reasonable due diligence; including ensuring that the proffered payoff is sufficient to extinguish the outstanding amount due on the loan. Id. at 13.
In its analysis, the Court explained several reasons why the Lower Court’s grant of summary judgment in favor of Plaintiff was improper. Some of those reasons were:
- Contrary to the Lower Court’s conclusion, Plaintiff could not have implicitly known that the
entity transmitting title to the vehicles was in the business of selling vehicles because it never received a check from the Auto Toy Store. Rather, Plaintiff received a check from Jeffco who was not an entity that was in the business of selling motor vehicles at the time Plaintiff received the checks. Id. - The security interests in this case were created by Jeffco and Andrews, not the Auto Toy Store.
Since, the buyers of the Vehicles were dealing with Auto Toy Store, not Jeffco and Andrews, the provision did not apply to them. Thus, those buyers would have taken free of any security interest created by Auto Toy Store (the buyer’s seller), but not those created by Jeffco and Andrews. Therefore, that argument was immaterial.
Id. at 15. - There was no requirement in the UCC that mandated a speedy release of Plaintiff’s security
interests in the Vehicles. In light of Defendant’s expert’s opinion, it was possible that had the Plaintiff waited a few more business days, instead of robotically processing the lien releases, its discovery of the checks’ dishonor might have enabled Defendants to prevent the conversion
of the purchase proceeds. Id.
Since many questions of fact remained open for the trier of fact to determine, the Appellate Court reversed the grant of summary judgment in favor of Plaintiff, vacated the reallocation of attorney’s fees without prejudice, and remanded back to the Lower Court. Id. at 21.
Does the Omission of Drink Prices on a NJ Restaurant’s Menu Violate the NJ Truth in Consumer Contract Warranty and Notice Act?
Does a restaurant menu constitute a notice or sign pursuant to New Jersey’s Truth in Consumer Contract Warranty and Notice Act (“Act”)? If so, would the omission of prices from a menu violate the Act? In Watkins v. DineEquity Inc., 11-7182 (D.N.J. August 28, 2012), the District Court of New Jersey recently answered the former question in the positive, and the latter question in the negative.
In that case, a class action was brought against DineEquity Inc., Applebees Neighborhood Grill and Bar and International House of Pancakes, LLC (collectively “Defendants”). Defendants offered certain drinks on their menu without listing the prices. Candice Watkins (“Plaintiff”) alleged in her
complaint that Defendants’ practice of omitting drink prices from their menu violated the Act. Id. at 2.
Plaintiff filed her complaint in the Superior Court of New Jersey, Law Division (“State Court”). Subsequently, Defendants removed the action from the State Court to the United States District Court for the District of New Jersey (“Federal Court”) based on diversity jurisdiction. Plaintiff argued that “offering such beverages for sale without indicating the prices violates New Jersey Law, in the [Act], and is contrary to clearly established New Jersey law requiring point-of-purchase notice of an item’s
selling price.” Id. at 2. Defendants filed a Rule 12(b)(6) motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6); Id.
The Court explained that in order for the case to survive Defendants’ motion to dismiss, Plaintiff needed to establish on its face that Defendant violated the Act. Plaintiff was required to show that the
following four (4) elements were met:
(1) the plaintiff was a consumer within the statute’s definition;
(2) the defendant was a seller, lessor, creditor, lender or bailee;
(3) the defendant (a) offered or entered into a written consumer contract or (b) gave or displayed any written consumer warranty, notice, or sign; and
(4) the offer or written contract, warranty, notice or sign included a provision that violated any clearly established legal right of a consumer or responsibility of a seller
Id. at 6.
Element One
The Court addressed element one minimally. It merely stated that the Act defined “consumer” as “any individual who buys, leases, borrows, or bails any money, property or service which is primarily for personal, family or household purposes.” N.J. Stat. Ann. § 56:12-15. The Court presumed element one was satisfied and did not proceed further with its analysis. Id. at 6 n.3.
It is possible that it based its determination on the fact that Plaintiff was an individual who purchased drinks for personal consumption rather than resale.
Element Two
The Court did not address element two. However, presumably Plaintiff was able to satisfy it because Defendants were considered “sellers” of food and drink items to the public.
Element Three
The Court held that element three was satisfied. It explained that a menu “fits within the definition of a notice or sign, or both, as presented in the [Act’s] context of a consumer transaction because a restaurant menu is a written document that announces menu items and identifies the specific food and
beverage products offered for sale by the restaurant.” Id. at 15.
Further, the Court considered Black’s Law Dictionary’s definition of “offer” which was, “The act or instance of presenting something for acceptance.” Black’s Law Dictionary 1189 (9th ed. 2009); Id.
at 10. On this basis, it held that “a restaurant menu may be considered an offer, a notice, and a sign for [Act] purposes.” Id. at 15.
Element Four
Element four was not satisfied. It held the Act applied solely to illegal terms and provisions that are included, in writing, in the statutorily significant documents (i.e. an offer, notice, or a sign). Omitted
language was not sufficient to invoke the Act’s protections. Id. at 19. The Court reasoned that the
phrase in element four, “which includes any provision”, refered to inclusions not omissions. Id. at 16.
The Court highlighted a very interesting distinction between something that is omitted and something that is included. It explained that when something is omitted, that can include a very large range of possible items. However, when something is included, the range of possible items is much more narrow. Therefore, since the statute was limited solely to items that were included on the menu, it would have been an unfair expansion of the intent of the statute to include items that were omitted, as well. The Legislature was “concerned with contracts, warranties, notices and signs that include illegal
provisions intended to ‘deceive[] a consumer into thinking that they are enforceable . . . .’” (in other words, items that were included). Id. at 14.
Accordingly, the Court found that merely omitting drink prices from a restaurant menu without more did not state a claim under the Act. Id. at 23. The Court did not find that omissions posed the “same risk of misleading a consumer into failing to enforce her legal rights as an affirmative misrepresentation . . . .” Id. at 22. Thus, it granted Defendants’ Rule 12(b)(6) motion to dismiss the lawsuit. It held that Plaintiff, under these circumstances, failed to make a claim upon which relief could be granted. Fed. R. Civ. P. 12(b)(6). Id. at 23.
Comments/Questions: gdn@gdnlaw.com
© 2013 Nissenbaum Law Group, LLC
Is an Indirect Benefactor from a Nonprofit Organization Considered a “Beneficiary” Under the New Jersey Charitable Immunity Act?
Who should be considered a beneficiary under the New Jersey Charitable Immunity Act?
In Larissa Sapia and Joseph Sapia v. Hunterdon County YMCA, L-10265-09 (N.J. Super. App. Div. August 10, 2012), Larissa Sapia (“Plaintiff”) went to the YMCA (“Defendant”) to examine its facilities with her parents. Plaintiff went with her parents only to act as a translator for them because they did not speak English. While touring the facilities, Plaintiff slipped on a puddle of water located in front of a water fountain. The fountain was between the men’s and women’s locker room entrances.
Plaintiff sought damages against Defendant that were caused by the unsafe condition of Defendant’s premises. Defendant claimed its potential personal injury liability was limited by the New Jersey Charitable Immunity Act (“Act”) and moved for summary judgment. The court granted Defendant’s motion. Plaintiff filed a motion for reconsideration with the Superior Court of New Jersey, Appellate Division (“Court”). Plaintiff acknowledged Defendant’s status as a nonprofit tax exempt entity that was organized for charitable purposes. Therefore, the issue considered on appeal was confined to whether Plaintiff was a beneficiary of the charitable works. If it were, it could potentially receive immunity under the Act.
The Court explained that the Act shields charitable entities from liability for negligence in certain circumstances. The Court noted that the grant of immunity under the Act is not mandatory; it is not conditional. However, the Court also noted that the Act is liberally construed so as to afford immunity to nonprofit corporations organized for charitable, educational, or hospital purposes.
In order for an entity to qualify for charitable immunity it must be:
The Court elaborated upon who is considered a beneficiary of the charitable works under the Act. The Court explained that beneficiary status does not depend upon a showing that plaintiff personally receives a benefit from the works of the charity. Rather, the issue was whether the entity claiming immunity was engaged in the performance of the charitable objectives that was the purpose of its
creation.
The Court considered the following factors:
- Plaintiff was educated regarding the nature of available services that Defendant offered
and on Defendant’s proposed goals. - Plaintiff’s presence was incidental to the accomplishment of her own objectives, which were
related to the charity’s beneficence; ensuring her parents could receive the benefits of the facility tour. - Defendant was advancing its charitable goals at the time Plaintiff was injured because it
occurred while walking a guided tour of the facility where Defendant conducted its activities and functions.
Based upon these factors, the Court held that Plaintiff benefited from the charity’s works. Therefore, she was a beneficiary of Defendant. Thus, the Court affirmed Defendant’s motion to dismiss.
A lesson to be noted is that nonprofits may be immune from personal injury claims even if the person
injured is on the premises for purposes that do not directly benefit them.
Comments/Questions: gdn@gdnlaw.com
© 2012 Nissenbaum Law Group, LLC
May a Private Company Close Off a Public Space That Is an Officially Designated City Landmark Without Explanation?
Many have been wondering when JP Morgan Chase (“Chase”) will take down the fencing closing off Chase Manhattan Plaza, an architectural landmark in Lower Manhattan. Public space activist have been trying to get the Landmark’s Preservation Commission (“Commission”) to step in, to no avail. The Commission stated that Chase did not needs its permission to set up the fencing because it was removable and not attached to the plaza, therefore arguably temporary.
To date, plaza owner Chase has not offered a comment and has not dispelled the position that the site was blocked to keep Occupy Wall Street protesters away. Chase has a permit for waterproofing repair work that includes a “no change in use, egress or occupancy” provision. However, open-space advocates have proclaimed that the fence itself has changed the “use, egress or occupancy” of the site. When a lawyer working on behalf of an open-space advocacy group requested information about the building in a Freedom of Information request, that request was denied because the Chase Manhattan Plaza building has been put on a list generated by the New York Police Department, that keeps the building permit plans confidential due to terrorism concerns.
This dispute over the fencing has taken place for months. A supporter of open and accessible public space recently sued the New York City Department of Buildings over its failure to disclose the permit plans. At a recent hearing in State Supreme Court, there was a suggestion that sensitive information be redacted from the permits to allow the public access to the plans. What the outcome of the dispute will be is unknown.
Comments/Questions: gdn@gdnlaw.com
© 2012 Nissenbaum Law Group, LLC
May a Party be Forced to Arbitrate Issues That are not Clearly Covered by an Arbitration Clause?
In Merrill Lynch v. Cantone Research, Inc.,___ N.J. Super. ____ (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey was presented with the issue of whether a party may be forced to arbitrate in a situation in which they did not sign a contract that included an arbitration clause about the subject matter of their arbitration. The court determined that a party could not be forced to arbitrate under such circumstances.
That case involved an arbitration relating to a transaction involving securities fraud. The question was whether the arbitrations should take place under the Financial Industry Regulatory Authority, Inc. (“FINRA”), given the fact that the parties had not explicitly agreed to do so.
The court found that the arbitration clause did not apply since there was no “exchange-related dispute.” This was because the dispute arose out of an unusual set of circumstances. The investors were victims of a Ponzi scheme perpetrated by Maxwell Baldwin Smith. “Smith induced the investors to invest, in the aggregate, approximately $8 million in a non-existent investment product . . . instead of investing their money, Smith deposited the funds into Merrill Lynch account held in his and his wife’s name. The account was opened, maintained, and utilized by Smith for the sole purpose of facilitating the fraudulent scheme.” Id. at 3-4.
For that reason, the court concluded that because there was no “exchange-related dispute,” the arbitration agreement that related to such disputes did not apply.
Comments/Questions: gdn@gdnlaw.com
© 2012 Nissenbaum Law Group, LLC
How Does The Imposter Rule Apply in Cases Involving Conversion in Connection With the Cashing of False Checks?
Who should be to blame when a person wrongfully and seamlessly misappropriates the assets of another? The Supreme Court in New York County, New York recently addressed this question in Tripp & Co., Inc. v. Bank of New York, 911 N.Y.S.2d 696 (N.Y. County 2010).
That case involved Tripp & Co., Inc. (“Tripp”), a brokerage firm that retained the clearing services of non-party Pershing, LLC (“Pershing”) to hold the assets of Tripp’s customers in an account. At Tripp’s request, Pershing issued checks payable to Tripp’s customers through Pershing’s account maintained by The Bank of America (Delaware) Inc., n/k/a BNY Mellon Trust of Delaware, N.A. (“BNY”). Tripp’s former employee, Michael Axel (“Axel”) misappropriated over $600,000.00 through a series of fraudulent checks. Axel accomplished this by requesting the checks from Pershing and then forging the payee’s name, replacing the true recipients name with his own. Id. at 1. Axel would then deposit or cash the checks into his personal account at Citibank. Id. Citibank accepted the checks and made payments on them, while BNY accepted and cleared the checks. Tripp was ultimately forced out of business in trying to address the issue and reimburse patrons. Id. Consequently, Tripp filed an action alleging amongst other things conversion against both defendants, BNY and Citibank. Id. Both defendants moved to dismiss the complaint. Id.
While the Court acknowledged that the general rule pertaining to conversion imposes the risk of loss upon the drawee bank for improper payment over a forged endorsement, UCC §3-419, the Court noted that UCC §3-405(1)(C), commonly known as “the imposter rule,” states that “any endorsement by any person in the name of a named payee is effective if . . . an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.” UCC §3-405(1)(c). Additionally, the official comments to UCC §3-405(1)(c) state that the loss should fall on the employer as a risk of his business enterprise because the employer is usually in the best position to prevent the forgery by reasonable care in the regulation of his employees. See Official Comment, UCC §3-405(1)(c)(2009).
The Court found that Axel was an agent of the drawer, Pershing, and so the imposter rule applied. Id. at 3. Further, the Court stated that Pershing acted as Tripp’s agent in performing the services it was hired to perform. Pershing had drew up checks at Axel’s request for over four years and thus established a course of dealing in which Axel routinely supplied the payee information to Pershing so that Pershing could draw the checks. Id. The Court reasoned that as an agent of Pershing, Axel supplied the names of the payees with no intention of Pershing having an interest, such that the imposter rule applied and the endorsements are legally effective. Id.
Further, the Court rationed that Tripp was in a position to prevent the conversion since it could have done a better job of monitoring Axel. In addition, “the imposter rule” imposes no duty of care and makes the endorsements effective despite the commercial reasonableness of the defendants. Id. at 4. Banks cannot, however, use §3-405(1)(c) to shield its own bad faith, but Tripp did not allege that the defendants acted in commercial bad faith. Id. Since the imposter rule applied, Tripp’s conversion claims against BNY and Citibank were precluded and dismissed from the complaint. Id. at 5.
Ultimately, §3-405(1)(c) takes the responsibility off of banks for improper payment over a forged endorsement and shifts the risk of loss to the drawer of the checks.
Comments/Questions: gdn@gdnlaw.com
© 2012 Nissenbaum Law Group, LLC
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