On appeal from the Superior Court of New Jersey, Law Division, Atlantic County.
Deighan, Cohen and Brochin. The opinion of the court was delivered by Brochin, J.A.D.
[241 NJSuper Page 59] In 1970, Clifford Murray, a stockbroker who was employed as an account executive by Dean Witter Reynolds, Inc., successfully solicited John Sykes, a friend or longtime acquaintance, to open an investment account at Dean Witter's Atlantic City office and to purchase investment securities through Murray. Eventually Sykes' account became an "Active Assets" account with check-writing privileges and Sykes used it as his sole
checking account as well as for his brokerage transactions. By 1980 Sykes had invested approximately $250,000 in treasury bills with Dean Witter and in 1981, at Murray's suggestion, began investing some of his money in money market funds.
Beginning in September 1981, Murray offered Sykes opportunities to invest in what Murray described as the Dean Witter Reynolds Special Situations Fund in New York. Murray told Sykes that the fund consisted of new issues of common stock offered at a discount to Dean Witter as the underwriter. Participation in the fund, Murray explained, was available only to Sykes and other similarly preferred customers. Sykes testified that between September 1981 and October 1982, he entrusted $328,000 to Murray for investment in the Special Situations Fund.
Subsequent events revealed that Murray's New York Special Situations Fund did not exist. It was entirely a fragment of Murray's imagination through which he fraudulently obtained a large sum of money from Sykes and a number of other Dean Witter customers. Murray eventually pleaded guilty to both state and federal charges of defrauding and misappropriating investors' funds and he is now in prison. See McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 754 n. 1 (3d Cir.1990). Sykes claims that out of his total investment of $328,000, Murray returned only $45,000, and that he has therefore lost $283,000.
Sykes made his first investment in Murray's New York Special Situations Fund in September 1981 by transferring funds to Murray out of his regular brokerage account. At Murray's direction, Dean Witter drew its $20,000 check payable to Sykes, drawn on the firm's regular checking account at Morgan Guaranty Trust Company. The $20,000 was charged to Sykes' brokerage account. Sykes endorsed the check in blank and delivered it to Murray. The evidence at trial showed that Murray, unaccompanied by Sykes, cashed the check at the Ventnor Heights branch of Midlantic National Bank/South.
We do not know how Murray disposed of the funds. Sykes' September 1981 statement for his Dean Witter account showed the date and amount of the check and the explanation, "check" and "funds paid." Murray persuaded Sykes that this entry reflected Dean Witter's handling of an internal transfer of funds out of Sykes' brokerage account for investment in the New York Special Situations Fund. Sykes never received any other documentation for this investment.
In December 1981, Murray returned $20,000 to Sykes' Dean Witter account with the explanation that that was the principal amount of Sykes' investment in the New York Special Situations Fund and that the profit on the transaction would remain invested.
In January 1982, Murray told Sykes that Dean Witter was underwriting an increased number of new issues which would provide additional opportunities for investment in the Special Situations Fund. Three more Dean Witter checks were drawn on the firm's checking account at Morgan Guaranty Trust Company, payable to Sykes and charged to his brokerage account; a $30,000 check dated January 5, 1982, a $5,000 check dated January 7, 1982, and a $36,000 check dated January 28, 1982. Sykes endorsed each of these checks in blank and delivered it to Murray. He testified that he did not realize that what he was signing were checks, but he conceded that he intended to authorize the transfer of the money from his brokerage account to Murray for investment in the Special Situations Fund.
On January 13, 1982, Sykes endorsed in blank two payroll checks, totalling $78,420.16, and delivered them to Murray. Sykes testified that he instructed Murray to deposit them in his Dean Witter account. However, Murray cashed the payroll checks at Midlantic's Ventnor Heights branch and received a $38,420.16 cashier's check and $40,000 cash in exchange. He deposited the $38,420.16 in Sykes' Dean Witter account and told Sykes that he had invested the remaining $40,000 in the New
York Special Situations Fund. Sykes protested that he had bills to pay and that Murray should not have disobeyed his instructions to deposit the entire $78,420.16 in his brokerage account. But when Murray promised not to disregard Sykes' instructions again, Sykes acquiesced in Murray's investment of the $40,000 in the Special Situations Fund.
In June 1982, Murray returned an additional $25,000 to Sykes' Dean Witter account, ostensibly as a further return of capital. In July, August and October 1982, according to Sykes, he delivered a total of $30,000 in cash to Murray at Dean Witter's Atlantic City office.
Murray arranged to have four other Dean Witter checks issued to Sykes; for $30,000 dated July 20, 1982, for $120,000 dated August 18, 1982, for $8000 dated August 26, 1982, and for $9,000 dated August 26, 1982. The checks were payable to Sykes and were charged to his Dean Witter account, but Murray forged Sykes' endorsements, presented the checks at Midlantic's Ventnor Heights branch, and received cashiers' checks and currency in exchange. Sykes testified that although he did not authorize Murray to sign his name, he did authorize the transfers out of his Dean Witter brokerage account for investment in the Special Situations Fund. Entries on his monthly statements showed that the checks were charged to his account, and he interpreted the entries as confirming the transfers.
During the same period, Murray was using similar stratagems to obtain funds from other Dean Witter customers. He duped them into authorizing investments in Dean Witter's New York Special Situations Fund and cashed their checks at Midlantic's Ventnor Heights branch office. There was evidence that the total amount for which he purchased cashier's checks at that branch office amounted to more than $3,000,000. On one occasion, the branch cashed a check for him in the amount of $457,000, payable to a pension fund, and delivered that entire amount to Murray in $100 bills. He would call the bank in
advance so that the cash and cashiers' checks could be prepared for him before he arrived. Midlantic employees testified that cashing third-party checks, checks payable to corporations and checks payable to pension funds at Murray's request became a regular routine, although they knew that the practice was in direct violation of stated bank policy.
Although Sykes made his last payment to Murray for investment in the Special Situations Fund in October 1982, Sykes' confidence in Murray apparently remained unshaken until after February 1984. When Murray suggested in February 1984 that Sykes invest $100,000 of his company's pension fund in the New York Special Situations Fund, Sykes apparently viewed the suggestion favorably since he arranged to have his father, who was in charge of pension fund investments, meet with Murray to discuss the proposal. No investment resulted because Murray, unable to provide Sykes' father with specific facts about the investment, reported later that same day that the investment opportunity was not available because the underwriting was being postponed.
In March 1984, Sykes' brother-in-law, who was also one of Murray's customers, was unable to obtain a check which was due to him from Murray and which he needed to close his purchase of a house. As a result, Sykes began to worry about his New York Special Situations Fund investment and only then went to his attorney who asked Dean Witter for an accounting. At about the same time, the fraud was exposed.
When all the proofs had been presented, the court submitted the case to the jury on 32 special interrogatories. The jury found that Sykes had suffered damages in the amount of $167,000 as the result of Dean Witter's fraud, violation of the New Jersey Securities Act, breach of contract and negligence. That amount was equal solely to the sum of the checks on which Murray had forged Sykes' endorsements, and it represented $116,000 less than his total claim. The jury found that Sykes was " in pari delicto " with Dean Witter, that Dean
Witter was 70 percent negligent and Sykes 30 percent negligent, and that the negligence of both had proximately caused Sykes' loss. The jury also found that Midlantic National Bank/South paid $167,000 on checks with forged endorsements, that in doing so it did not act "in good faith and in accordance with the reasonable commercial standards of the banking business," that Sykes ratified all of the forgeries, and that Murray supplied "Dean Witter Reynolds with the name of the payee John Sykes intending that John Sykes had no interest in any checks." The jury determined that Sykes was entitled to $166,000 of punitive damages from Midlantic National Bank/South, but no punitive damages from Dean Witter Reynolds. None of the special interrogatories directed to the jury referred expressly to Morgan Guaranty Trust Company.
The court molded the verdict and entered a detailed form of judgment which awarded Sykes $166,000 punitive damages, without prejudgment interest, against Midlantic National Bank/South. The judgment provided that he could elect to recover from Dean Witter either $167,000 damages plus $49,064 prejudgment interest on his breach of contract claim, or 70 percent of his $167,000 damages, i.e. $116,900, plus $53,763.18 prejudgment interest, on his negligence claim. The judgment recited that Sykes was not entitled to recover against Midlantic National Bank/South and Dean Witter on any other cause of action and that he had no cause for action on any claim against Morgan Guaranty Trust Company.
Midlantic National Bank/South has appealed and Sykes and Dean Witter have cross-appealed. Midlantic challenges the award of punitive damages. It contends that punitive damages could not properly be awarded because Sykes recovered no compensatory damages against the bank and because it was not proved guilty of the kind of outrageous conduct which would warrant punitive damages. Alternatively, the bank contends, the award of punitive damages was the product of mistake, bias, passion and prejudice and, if the judgment for punitive damages could otherwise be sustained, the bank would be
entitled to a new trial on that issue. In addition, Midlantic claims that the court should have granted its pretrial motion for summary judgment based on N.J.S.A. 12A:3-405(1)(c), the New Jersey "fictitious payee" provision of the Uniform Commercial Code which is designed to assure that the risk of loss caused by a faithless employee is borne by his employer.
Dean Witter contends that because of the jury's finding that Sykes was in pari delicto, he was entitled to recover only on his negligence claim and not for breach of contract. Alternatively, it argues, even if he was entitled to recover on the contract claim, the award of prejudgment interest was an abuse of discretion because it was inconsistent with the equities as determined by the jury's verdict.
Sykes claims that he was entitled to $167,000 compensatory damages from Midlantic National Bank/South and that the trial court should have granted his motions for judgment and for judgment notwithstanding the verdict, awarding him $283,000 compensatory damages against Dean Witter. He also argues that the court erred in computing the amount of prejudgment interest which it awarded, in denying him compensatory damages against Morgan Guaranty Trust Company, and in holding that he was not entitled to recover triple damages from Dean Witter for violation of New Jersey's Consumer Fraud Act, N.J.S.A. 56:8-1 and following. Sykes also asserts that if judgment is not entered in his favor against Dean Witter for $283,000, or if the jury's verdict of $166,000 punitive damages against Midlantic National Bank/South is set aside, he should be entitled to a new trial.
Sykes Claims Against the Banks
On undisputed facts, the jury found that Midlantic, as the depositary bank, paid Murray $167,000 for four Dean Witter checks that were payable to ...