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New Jersey Lawyers' Fund For Client Protection v. Pace

SUPREME COURT OF NEW JERSEY


March 7, 2006

NEW JERSEY LAWYERS' FUND FOR CLIENT PROTECTION, PLAINTIFF-APPELLANT,
v.
JEAN A. PACE, DEFENDANT, AND SUMMIT BANK, DEFENDANT-RESPONDENT.
NEW JERSEY LAWYERS' FUND FOR CLIENT PROTECTION, PLAINTIFF-APPELLANT,
v.
JEAN A. PACE, CRAWFORD & COMPANY AND SUN TRUST BANK, DEFENDANTS, AND FLEET NATIONAL BANK, SUCCESSOR IN INTEREST TO SUMMIT BANK, DEFENDANT-RESPONDENT.

On certification to the Superior Court, Appellate Division, whose opinion is reported at 374 N.J. Super. 57 (2005).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

(NOTE: This Court wrote no full opinion in this case. Rather, the Court's affirmance of the judgment of the Appellate Division is based substantially on the reasons expressed in Judge Petrella's written opinion below.)

The issue on appeal is whether the time of discovery rule applies in determining the date on which a cause of action for conversion accrued in a suit brought by the New Jersey Lawyers' Fund for Client Protection (the Fund) against a bank that accepted forged checks for deposit.

The Fund exists to reimburse losses caused by the dishonest conduct of members of the New Jersey bar. It is regulated by the Supreme Court and is supported by payments into it by all New Jersey lawyers. In this case, the Fund had reimbursed several clients of Jean Pace, a Jersey City attorney who was disbarred on March 6, 2000, for knowingly misappropriating client funds. During a period between 1995 and early 2000, Pace had settled claims she had filed for five clients and then forged their signatures on the settlement checks, which she subsequently deposited into her own account at Summit Bank. (Summit Bank became Fleet Bank, which now operates as Bank of America, but the bank is referred to as Summit in the opinion.) These clients did not learn of Pace's wrongdoing until they were informed by the New Jersey Office of Attorney Ethics in early 2000. A sixth client learned from the Office of Attorney Ethics in April 2001 that in addition to a $21,000 settlement by a defendant in an action Pace had brought on is behalf, Pace had settled without his knowledge or authorization his claim against another defendant, for $4,000. Pace had forged her client's endorsement on the $4,000 check and deposited it into her Summit account on May 15, 1998.

Pace's clients filed claims with the Fund, which paid the claims. The clients then assigned their rights to the Fund pursuant to Rule 1:28-3 (e). Thereafter, the Fund filed complaints against Pace and Summit; the Fund alleged that Summit was liable in conversion for accepting the forged settlement checks for deposit. Pace defaulted and the Fund obtained a judgment against her. Summit moved for summary judgment against the Fund on the ground that the conversion action against it was barred by the three-year statute of limitations for claims of conversion of negotiable instruments under the Uniform Commercial Code (UCC), N.J.S.A. 12A:3-118(g).

The motion judge granted summary judgment in favor of Summit, holding that in determining the date a cause of action accrues under the UCC for conversion, the time of discovery rule does not apply. The Fund appealed to the Appellate Division, which affirmed the judgment of the trial court.

The Appellate Division found the language of the UCC clear in its establishment of a three-year period within which to bring a claim of conversion and in its declaration that conversion occurs when the bank pays on the forged endorsement. The court rejected the argument of the Fund that the statutory language is such that the Legislature intended that conversion of negotiable instruments should not be considered as accruing until the conversion is discovered.

The panel commented that there were no controlling or persuasive New Jersey cases on the subject, but declined to follow the cases cited by the Fund in support of its position, noting, among other things, that those cases were decided prior to the adoption of the current three-year limitation period, effective June 1, 1995. When that provision and other amendments to the UCC were adopted in 1995, the desirability of uniformity in application of UCC provisions, and specifically statutory periods of limitations, was stressed. Accordingly, and because of the acknowledged importance of uniformity under the UCC in the area of banking procedures and negotiable instruments, the court looked to the decisions of courts in other states.

The Appellate Division observed that most jurisdictions that have considered the issue have held that the discovery rule does not apply to actions against banks for conversion of negotiable instruments unless there has been an assertion of fraudulent concealment by the bank, which was not alleged here. Those courts have accepted the premise that generally the prompt resolution of controversies and "certainty of liability" advanced by the UCC, take precedence over the rights of unsuspecting victims of forgery, like Pace's clients. The Appellate Division found that the goal of promoting uniformity in the application of the UCC was significant enough to persuade it to follow the holding of the majority of jurisdictions.

HELD: Judgment of the Appellate Division is affirmed substantially for the reasons given in Judge Petrella's written opinion. The cause of action for conversion accrued, and the three-year period of limitations began, when the bank paid on the forged endorsement. The time of discovery rule does not apply.

1. The Court agrees that the statute of limitations on a claim for conversion of negotiable instruments begins to run from the date the instrument was negotiated, but writes to clarify the application of the general rule. The Court comments that in many of the cases in which application of the discovery rule was rejected, others were in a position to monitor the persons who forged the negotiable instruments. Here, neither Pace's clients nor the Fund were.

2. The purpose of the Fund is to reimburse losses caused by dishonest attorneys. All attorneys derive a benefit from the operations of the Fund; the Fund's payment of eligible claims sustains the reputation of the bar. As between the Fund and Summit, therefore, and based on equitable considerations, the Court adheres to the general rule and holds that the discovery rule should not be invoked to permit the action by the Fund against Summit.

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN, and RIVERA-SOTO join in this PER CURIAM opinion. JUSTICE WALLACE did not participate.

Per curiam.

Argued September 28, 2005

We agree with the Appellate Division that, generally, the statute of limitations on a claim for conversion of negotiable instruments begins to run from the date the instrument was negotiated. We add the following to clarify the application of that general rule.

In this case, an attorney misappropriated her clients' funds "by forging their endorsements on settlement checks" and Summit Bank (Summit)*fn1 "accept[ed] the forged . . . checks for deposit." New Jersey Lawyers' Fund for Client Prot. v. Pace, 374 N.J. Super. 57, 59 (App. Div. 2005). The New Jersey Lawyers' Fund for Client Protection (Fund), which reimbursed the attorney's clients for their losses and obtained assignments of rights from them, now seeks reimbursement in turn from Summit for conversion of negotiable instruments. Although the Fund's action was filed out-of-time under the Uniform Commercial Code's (UCC) three-year statute of limitations for such claims, N.J.S.A. 12A:3-118(g), the Fund argues that its claim did not accrue until "discovery" of the conversion.

The Appellate Division determined that a "cause of action against a bank in a conversion action with respect to negotiable instruments accrues at the time of conversion, and that the time of discovery rule does not apply under the UCC." Pace, supra, 374 N.J. Super. at 67. The court's approach is consistent with the premise that application of "the discovery rule to negotiable instruments [would be] inimical to UCC policies of finality and negotiability." Menichini v. Grant, 995 F.2d 1224, 1230 (3d Cir. 1993).

We accept that general statement of the law, which is followed by a majority of the jurisdictions that have considered the question.*fn2 We note, however, that many of the cases rejecting application of the discovery rule to claims for conversion of negotiable instruments were decided in circumstances in which others were in a position to monitor the individuals who forged the instruments. See, e.g., Menichini, supra, 995 F.2d at 1230 (noting employer had comparative advantage in preventing conversion of his property by employees); Husker News Co. v. Mahaska State Bank, 460 N.W.2d 476, 479 (Iowa 1990) (noting responsibility for careful bookkeeping should be placed on employers who are in best position to monitor accounts and employees). We observe that in this matter neither the attorney's clients nor the Fund were in such a position.

The Fund was originally established as a Committee of the New Jersey State Bar Association that since 1969 has been regulated by this Court. http://www.judiciary.state.nj.us/ rules/r1-28.htm (last visited Feb. 23, 2006). Its purpose is "to administer and operate, in accordance with [its] rules, . . . the reimbursement, to the extent and in the manner provided by [its] rules, of losses caused by the dishonest conduct of members of the bar of this State." R. 1:28-1(a). All lawyers support the Fund, Rule 1:28-2, and all lawyers derive a benefit from the work of the Fund. It is the reputation of the bar that is sullied when lawyers violate the law, and it is the reputation of the bar that is sustained when the Fund's trustees determine that an eligible claim should be covered by the Fund. See R. 1:28-3.

As between the Fund and Summit, therefore, equitable considerations counsel that we adhere to the general rule. In the circumstances, the discovery rule should not be invoked to allow this action against Summit.

The judgment of the Appellate Division is affirmed.

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN, and RIVERA-SOTO join in this PER CURIAM opinion. JUSTICE WALLACE did not participate.

Chief Justice Poritz PRESIDING


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