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Midlantic National Bank v. Georgian

Decided: March 17, 1989.


Arnold, P.J.Cv.


[233 NJSuper Page 622] In this action the plaintiff, Midlantic National Bank (hereinafter "Midlantic"), seeks to recover money which it lent to the defendant, Georgian Ltd. Defendant Logan guaranteed repayment. Defendants counterclaimed alleging that Midlantic improperly honored forged checks which had been drawn on Georgian Ltd.'s account at Midlantic. Midlantic filed a motion for summary judgment on its complaint and to dismiss defendants' counterclaim as time barred by N.J.S.A. 17:9A-229.3 which requires a depositor to bring suit within one year of providing written notice questioning the correctness of an accounting

(e.g. forgery). Because this court holds that the counterclaim sets forth a cause of action in equitable recoupment to which the statute is inapplicable, and because there is a factual dispute as to Georgian Ltd.'s damages, the plaintiff's motion is denied.

The facts which give rise to Midlantic's complaint and defendants' counterclaim are as follows. Defendant, Georgian Ltd. (hereinafter "Georgian"), is a manufacturer, importer and retailer of oriental rugs. Defendant Logan is the president and sole shareholder of Georgian. Since 1984, Georgian has done its banking with Midlantic. Georgian has borrowed money from Midlantic and has maintained checking accounts with Midlantic. Defendant Logan was the only person authorized to sign checks for Georgian. Mr. Logan alleges that on numerous occasions he rebuffed suggestions from officials at Midlantic that a facsimile signature stamp be used to provide the signatures on Georgian's checks.

In April 1986, Georgian hired Patricia Curtis to work in its accounting department. Seven months later, in November 1986, Mr. Logan discovered that Ms. Curtis had obtained a facsimile stamp of his signature and had used that stamp to fraudulently sign numerous Georgian checks and that these checks had been honored by Midlantic. Logan informed Midlantic of the misuse of the facsimile signature stamp sometime between November 1986 and January 1987.

Defendant Logan contends that the fraud perpetrated by Ms. Curtis left Georgian's business in a precarious financial situation and to remedy that situation Midlantic officials suggested that Georgian's line of credit be extended and that Georgian borrow more money from Midlantic. Defendant Logan further contends that he was told by Midlantic officials that repayment would be made on these loans from money that Georgian would receive from Midlantic and Midlantic's insurance company as a result of Midlantic improperly honoring the forged checks. Defendants maintain that as a result of these representations

Georgian borrowed money from Midlantic and Logan guaranteed repayment.

Midlantic investigated the alleged forgeries during 1987 and in early 1988 notified the defendants that Midlantic was not liable for improperly honoring forged checks. Later Midlantic demanded full payment on the loans, which then totalled about $91,000. When defendants did not repay the loans, Midlantic instituted the within action. Defendants in their answer asserted a counterclaim alleging that Midlantic negligently, carelessly and willfully honored forged checks. Defendants argue that even if N.J.S.A. 17:9A-229.3 would serve to bar a suit by them against the bank for honoring the forged checks because the counterclaim was not instituted within one year after written notice was given to Midlantic, it does not bar their counterclaim because the counterclaim states a cause of action in equitable recoupment. They assert that Georgian only borrowed money from Midlantic until either Midlantic or its insurance carrier repaid Georgian and that the loans and the forgeries are so intertwined as to be part of a single transaction. Defendants allege that the amount of the wrongfully honored checks may exceed the $91,000 owned to Midlantic.

Thus, the issue raised by this motion is whether the allegations raised by the defendants' counterclaim set forth a cause of action in equitable recoupment. More specifically, the issue raised is whether a loan made by a bank to a depositor as an interim measure while the bank investigates its liability to repay the depositor for allegedly improperly honoring forged checks constitutes a single transaction or related or connected transactions. For the reasons set forth below, this court holds that these circumstances constitute a single transaction and denies the plaintiff's motion for summary judgment.

Preliminarily, this court notes that N.J.S.A. 17:9A-229.3 does bar depositors from bringing suit challenging the correctness of an accounting (e.g. forgery) more than one year after the depositor has given written notice challenging the correctness

of the accounting. After the lapse of one year from the date of written notice, the accounting is conclusively presumed to be correct. The statute intends that when written notice of forgery is given to a bank the depositor is bound to follow it with suit within one year. Duralite Co. Inc. v. N.J. Bank and Trust Co., 97 N.J. Super. 48, 52 (App.Div.1967). The enactment of New Jersey's commercial code, in ...

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