July 17, 2007
FRIENDLY CHECK CASHING CORP., PLAINTIFF-RESPONDENT,
DOLPHIN, LLC D/B/A FALCON MATERIALS AND CIBBY, FALCON AGGREGATE, LLC,*FN1 DEFENDANTS, AND ARI MUTUAL INSURANCE CO., DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, L-6412-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 16, 2007
Before Judges Lefelt and Sapp-Peterson.
This appeal involves the liability of defendant ARI Mutual Insurance Company (ARI) to plaintiff Friendly Check Cashing Company (Friendly) for a check drawn on ARI's account that Friendly cashed but was later dishonored. ARI argued it was not liable because Friendly was aware that the check bore an unauthorized signature, but contrary to law, Friendly nonetheless cashed the check. The motion judge rejected this argument and granted summary judgment in favor of Friendly. The court found that Friendly acted on the reasonable belief that the signatory was authorized to endorse the check and therefore the check was not cashed in bad faith or against reasonable commercial standards. We now reverse.
The salient facts are not in dispute. On May 5, 2005, ARI issued a check to defendants Dolphin, LLC d/b/a Falcon Materials and CIBBY, Falcon Aggregate, LLC in the amount of $28,028.66. The check was mailed to Falcon Aggregate, LLC and forwarded to Dolphin, LLC, ARI's insured, who in turn was supposed to endorse the check and forward it to B&L Body Shop (B&L) where the insured's vehicle had been repaired.
B&L never received the check and requested that ARI issue another check directly to B&L in accordance with a direction of payment executed by Dolphin, LLC. On May 10, 2005, ARI issued another check and stopped payment on the first check. A day earlier, however, Richard Falcon, the proprietor and president of Falcon Materials, Inc., had presented the check to Friendly. After questioning Falcon about the payees, Friendly cashed the check. On May 13, 2005, the check was returned to Friendly marked, "STOP PAYMENT[:] DO NOT REDEPOSIT." When Friendly was unsuccessful in its attempt to recover the money, it filed a complaint in the Law Division against Dolphin, LLC d/b/a Falcon Materials and CIBBY, Falcon Aggregate, LLC, and ARI, claiming that it was a holder in due course and demanded payment of $28,028.66.
Friendly's president, Jose L. Fernandez, Jr., testified during depositions that he knew Falcon and first met him when "[Falcon] became a more high-profiled customer and started cashing the larger checks." Fernandez indicated that Friendly possessed a corporate resolution and identification permitting Falcon to cash checks on behalf of Falcon Materials, Inc. and that Falcon had previously cashed checks issued in his own name. Fernandez acknowledged that Friendly did not have on file any corporate resolution permitting Falcon to cash checks on behalf of any of the payees identified on the check issued by ARI. He nonetheless agreed to cash the check after Falcon explained that Dolphin, LLC "was an old entity that was on the insurance policy that was no longer active." Falcon also purportedly told Fernandez that "this [was] a one-time transaction because this was an old insurance policy, and they had to make it out that way because . . . that's the way that, you know, those trucks, or whatever, were insured." Thus, based upon these representations and their prior relationship, Fernandez permitted Falcon to cash the check.
Friendly obtained default final judgments against all defendants except ARI. Once Friendly and ARI completed discovery, they each filed summary judgment motions. In granting plaintiff's motion and entering judgment against defendant, the motion judge, in a written opinion, found, Mr. Falcon and Friendly had a prior business relationship. In his capacity as principal of Falcon Materials, Inc., he was authorized to cash checks issued by that corporation, which had adopted a resolution to that effect and forwarded a copy to Friendly. Mr. Falcon had also cashed personal checks at Friendly in the recent past. Friendly apparently had had no prior knowledge of any entity called "Dolphin, L.L.C." Ordinarily, Friendly would have required a person cashing a check payable to a corporation to show identification and a resolution adopted by the corporate payee authorizing the bearer to cash that check, but, because of the "prior relationship" between Friendly and Mr. Falcon, it cashed the check payable to Dolphin. Its employee had discussed the check with Mr. Falcon, who assured him that Dolphin was no longer an active corporation. Friendly consequently did not call A.R.I. before cashing the check.
The evidence shows that Friendly acted on [the] reasonable belief, that Mr. Falcon was authorized to endorse this check. The decision to honor the check was not done in bad faith or against "reasonable commercial standards."
On appeal, ARI argues that Friendly was not a holder in due course and was therefore not entitled to recover against it. Consequently, the motion judge erred as a matter of law in granting summary judgment in favor of Friendly and entering judgment against it.
Whether Friendly was a holder in due course is a purely legal determination. Thus, we must determine whether the motion judge's ruling on the law was correct. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). In going about this analysis, "[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." State v. Harris, 181 N.J. 391, 419 (2004) (quoting Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995)), cert. denied, 545 U.S. 1145, 125 S.Ct. 2973, 162 L.Ed. 2d 898 (2005).
Our analysis requires consideration of two statutes, the first of which is the Uniform Commercial Code (UCC), N.J.S.A. 12A:1-101 to 10-106. The UCC defines a holder in due course as a holder of an instrument if, "the holder took the instrument for value, in good faith . . . [and] without notice that the instrument contains an unauthorized signature[.]" N.J.S.A. 12A:3-302(a)(2). It is the "without notice that the instrument contains an unauthorized signature" language that governs our discussion.
The second statute relevant to our analysis is found in the Check Casher's Regulatory Act (Act), N.J.S.A. 17:15A-30 to -52, which prescribes the responsibilities of check cashers when presented with a negotiable instrument. Friendly is licensed by the New Jersey Department of Banking to cash checks. As such, it is subject to the Act. Under the Act, no licensee or person acting on behalf of a licensee is permitted to, [c]ash a check which is made payable to a payee which is other than a natural person unless the licensee has on file a corporate resolution or other appropriate documentation indicating that the corporation, partnership or other entity has authorized the presentment of a check on its behalf and the federal taxpayer identification number of the corporation, partnership or other entity[.] [N.J.S.A. 17:15A-47(a).]
There is no dispute that Friendly did not have on file a corporate resolution or other appropriate documentation authorizing Falcon to cash checks on behalf of any of the payees identified on the check. There is equally no dispute that Friendly was aware of this deficiency and also aware of its obligation under the law to cash checks made payable to corporate payees only where the appropriate corporate resolution or other authorizing documentation was on file. Fernandez testified that he questioned Falcon about the payee, Dolphin, LLC, and accepted Falcon's explanation that [Dolphin] was "an old entity that was on the insurance policy that was no longer active." Although Falcon told Fernandez that he owned Dolphin, LLC, he also indicated that "he had no papers on it."
The motion judge's decision focused upon Friendly's good faith intent when it cashed the check. Friendly's good faith intentions, however, address only the first prong of the expanded definition of good faith under the UCC. N.J.S.A. 12A:3-103(a)(4).
The 1990 revision to the UCC defines the term "good faith," as not only requiring honesty in fact but also the observance of reasonable commercial standards. Valley Nat'l Bank v. P.A.Y. Check Cashing, 378 N.J. Super. 406, 421 (Law Div. 2004), aff'd, 378 N.J. Super. 234 (App. Div. 2005). This expanded definition establishes an objective approach to determining whether reasonable commercial standards have been applied in a given commercial transaction and is also typically a jury question. Id. at 423 (citing Central, Inc., v. Cache Nat'l Bank, 748 P.2d 351, 353 (Colo. Ct. App. 1987)). There may, however, be circumstances where the failure to adhere to reasonable commercial standards in fair dealing is so apparent that no reasonable jury could conclude otherwise. Ibid. Thus, for example, a failure to follow a statutory obligation is a circumstance where, as a matter of law, there has been a failure to adhere to reasonable commercial standards in fair dealing in a commercial transaction. See Martin Glennon, Inc. v. First Fidelity Bank, N.A., 279 N.J. Super. 48, 57 (App. Div.) (holding bank's action in permitting deposit of check payable to a corporation into an individual account was in clear violation of established law and could not be construed as adherence to reasonable commercial standards), appeal dismissed, 142 N.J. 510 (1995).
Here, the Act requires check cashing companies presented with a check made payable to a corporate payee to cash the check only where there is a corporate resolution or other documentation authorizing the signatory to cash the check on behalf of the corporate payee. Friendly's failure to comply with its statutory obligation was not, as a matter of law, adherence to reasonable commercial standards in fair dealing, irrespective of its good faith belief that Falcon was authorized to cash the check. Therefore, the motion judge erred in granting summary judgment in favor of Friendly.
Reversed and remanded for the entry of a judgment dismissing Friendly's complaint against ARI with prejudice.