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Triffin v. American International Group


April 16, 2008


On appeal from the Superior Court of New Jersey, Law Division, Special Civil Part, Essex County, DC-26349-05 (A-0513-06T5) and Middlesex County, DC-6834-06 (A-0514-06T5).

Per curiam.


Argued December 5, 2007

Before Judges Sapp-Peterson and Messano.

These are back-to-back appeals that have been consolidated for the purposes of this opinion. Plaintiff, Robert J. Triffin, is in the business of purchasing dishonored checks. He in turn obtains an assignment of rights, in connection with the dishonored checks, from the check cashing entity. Plaintiff appeals the dismissal of two complaints following separate bench trials. The first complaint was filed in Essex County against American International Group Inc., a/k/a AIG; New Hampshire Insurance Company - NJ LAD Loss, and The Robert Plan (hereinafter all referred to as AIG). The trial judge dismissed the complaint after concluding that plaintiff's assignor, A-1 Check Cashing Emporium (A-1), was not a holder in due course because it knowingly cashed a check that was facially defective when it was presented for payment. In the second action filed in Middlesex County against Red Carpet*fn4 and David Ruddy (Ruddy), the trial judge dismissed plaintiff's complaint after finding that plaintiff's assignor, Check-X-Change of Perth Amboy (Check-X-Change), was not a holder in due course because it failed to exercise reasonable commercial standards before cashing the checks Ruddy presented to it that were later dishonored. We affirm the judgment dismissing plaintiff's complaint against AIG. We also affirm the entry of default judgment against Ruddy but reverse the dismissal of plaintiff's complaint against Red Carpet and remand for the entry of judgment in favor of plaintiff against Red Carpet.

I. The AIG Action

In the AIG action, the trial proofs were as follows. In November 2002, AIG issued a check to Jermielem Merriwether in connection with a personal injury action. Merriwether presented the check to A-1 for payment on December 4, 2002. A-1's representative, John Carter, testified that "[he] forgot to have Mr. Mer[r]iwether sign the check." He indicated that it was "an oversight" on his part and that he wrote the name on the check probably about a half an hour after he left the store.

Because we deposit the check to the bank so we can g[e]t our money back. And I was left with a piece of paper for the $3,100 [and] when I attempted to call Mr. Mer[r]iwether I didn't get no answer. So, I printed his name so we could make the deposit to the bank. And later, some time later after that, I don't know if I'm talking too much here, you know, the check came back, and then we wound up receiving a[n] affidavit indicating that he didn't cash the check.

He meaning Mr. Mer[r]iwether. And I just think that it was conspiracy on his part to try to get over because he realized that he forgot to sign the check.

The trial judge, in granting a judgment of no cause in favor of defendant, concluded that "[b]y falsely endorsing the check A-1 did not become a holder in due course. Since plaintiff's rights derive from those of A-1, plaintiff has no claim against the payor AIG." We agree.

N.J.S.A. 12A:3-302(a) defines a holder in due course as the holder of an instrument that

(1) . . . when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument for value, in good faith, without notice that the instrument . . . contains an unauthorized signature or has been altered[.]

There is no dispute that A-1's representative, Carter, cashed Merriwether's check without first securing Merriwether's signature and, according to his testimony, "[he] printed [Merriwether's] name [on the check] so we could make the deposit to the bank." Carter also testified that he told A-1's owner, Alex Neu, who later entered into the assignment/transfer agreement with plaintiff, what he had done prior to the assignment. Hence, at the time A-1 submitted the check for payment, it knew that the check bore an "unauthorized signature or [had] been altered." Ibid.

Although in our de novo review of the record on appeal, we accord no deference to the trial court's legal rulings, Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995), here we conclude, as a matter of law, that the trial judge properly found that A-1 was not a holder in due course within the meaning of N.J.S.A. 12A:3-302(a) and, therefore, plaintiff did not acquire a holder in due course status by virtue of the assignment. There is no question that A-1, prior to depositing the check into its bank account, was aware that the check had not been properly endorsed but, nonetheless, proceeded to attempt to enforce its right to receive payment on the check. Because A-1 knew that it had altered the instrument through endorsement of Merriwether's name, not by Merriwether, but by one its employees, it was not a holder in due course under N.J.S.A. 12A:3-302(a). Since plaintiff's rights derived from those of A-1, plaintiff also lacked holder in due course status and had no cause of action against defendant.

Finally, we reject plaintiff's claim that the trial court committed reversible error when it granted a judgment of no cause to defendant after its earlier ruling that defendant had waived any defense that the signature on Merriwether's check was forged because it failed to specifically plead the defense of forgery in its answer to the complaint. See N.J.S.A. 12A:3-308(a). The trial court's ruling did not negate plaintiff's obligation to prove that it was a holder in due course entitled to enforce rights under the check previously held by A-1. With the admission by A-1's employee, Carter, that he altered the instrument prior to presentment for deposit at A-1's bank, plaintiff failed in his burden to establish that he was a holder in due course entitled to enforce rights under the instrument against defendant, a threshold requirement for recovery against defendant for the dishonored check. We therefore affirm the trial court's judgment dismissing plaintiff's complaint with prejudice.

II. The Red Carpet Action

In the second action, plaintiff appeals the dismissal of his complaint against defendant seeking payment of two dishonored checks. The trial judge dismissed plaintiff's claim against Red Carpet after finding that Check-X-Change did not comply with reasonable business practices when it failed to verify that the checks presented for payment were valid and, consequently, Check-X-Change was not a holder in due course. We disagree and reverse.

The salient facts presented at trial are largely undisputed. Neal Silberberg owns Red Carpet, a real estate agency located in Edison. Defendant, David Ruddy, is a former employee of Red Carpet, where he worked as a real estate agent for approximately ten years. In the summer of 2004, Silberberg wrote out two checks totaling $2,239 payable to Ruddy. The checks, numbered 9421 and 9422, were dated July 16, 2004, and July 22, 2004, respectively, and were drawn on Red Carpet's business account. Silberberg testified that he made out the checks intending to give them to Ruddy. However, at some point, Silberberg decided against giving Ruddy the checks and instead left them in his office desk drawer.*fn5 Silberberg claimed that Ruddy removed the checks from his desk drawer without authorization and cashed them at Check-X-Change.*fn6 The Check-X-Change endorsement shows that the checks were cashed on July 23, 2004. When Silberberg realized that the checks had been removed from his desk, he placed a stop payment on the checks. The stop payment was placed on the checks prior to their being cashed by Check-X-Change. When Check-X-Change presented the checks to Red Carpet's bank, the checks were dishonored as a result of the stop payment orders.

Plaintiff purchased the two dishonored checks from Check-X-Change by assignment for $800 on April 6, 2006. On April 20, 2006, Triffin filed a complaint naming Red Carpet and David Ruddy,*fn7 seeking payment of the two checks, the returned check fee of $46 incurred by Check-X-Change, pre-judgment interest in the amount of $51.42, and consolidated credit reporting and access maintenance fees for each defendant. On May 15, 2006, Silberberg filed his answer, claiming that there was no legal transfer of the checks from Red Carpet to Ruddy.

At the conclusion of the trial, the judge granted a judgment of no cause in favor of Red Carpet, concluding that Check-X-Change did not follow reasonable commercial standards when the two checks were presented to it for payment, and, as such, the subsequent transfer of its rights of enforcement in connection with the dishonored checks did not create a holder in due course status in plaintiff. The court reasoned that "[t]he check cashing company did not observe reasonable commercial standards [when it cashed] the checks in question without making a very simple inquiry as to their legitimacy, and therefore, cannot claim to be a holder in due course." The court dismissed the complaint against Red Carpet with prejudice but entered a default judgment against David Ruddy. Plaintiff's timely notice of appeal followed.

On appeal, plaintiff argues that Check-X-Change acted in good faith in its negotiation of the instrument that Ruddy presented for payment and therefore was a holder in due course at the time it transferred its rights under the two checks to plaintiff. We agree.

There is no dispute that at the time the two checks were presented to Check-X-Change for payment, the checks showed no signs of forgery or alteration, and were regular on their face. The checks were genuine Red Carpet company checks made out by Silberberg to Ruddy, and signed by Silberberg. Consequently, Check-X-Change, when it negotiated the two checks, met the legal definition of a holder in due course, as the checks bore no apparent evidence of alteration that called into question their authenticity, and Check-X-Change accepted the two checks "for value, in good faith, without notice that the instrument . . . ha[d] been dishonored . . . contain[ed] an unauthorized signature" or that "any party ha[d] a defense or claim." N.J.S.A. 12A:3-302(a).

The trial judge concluded that Check-X-Change did not act in good faith and, therefore, was not a holder in due course because it failed to confirm the validity of the instruments. The judge found that because verifying the checks' authenticity was not an undue burden on Check-X-Change, it had "abrogated it's responsibility to act in a proper business fashion[.]"

In New Jersey Mortg. & Inv. Corp. v. Calvetti, 68 N.J. Super. 18 (App. Div. 1961), we stated that a holder of an instrument does not owe a duty of active inquiry to "a party who puts negotiable paper afloat." Calvetti, supra, 68 N.J. Super. at 27. Rather, we concluded that whether one is a holder in due course is determined by honesty and good faith, and not by issues of diligence or negligence. Id. We acknowledged, however, that suspicious circumstances are relevant when determining if a holder acted in good faith, even if suspicious circumstances alone are not enough to bar a holder from being a holder in due course. Id.

Here, Red Carpet's arguments to the contrary, there was nothing facially questionable about the two checks that required Check-X-Change to confirm the validity of the two instruments. See Triffin v. Pomerantz Staffing Servs., L.L.C., 370 N.J. Super. 301, 309 (App. Div. 2004)(citing General Inv. Corp. v. Angelini, 58 N.J. 396, 403-04 (1971)) (holding that a party cannot claim holder in due course status when it fails to confirm an instrument's validity when the circumstances of the transaction require that an inquiry be made.). Compare, Triffin v. Somerset Valley Bank, 343 N.J. Super. 73, 85 (App. Div. 2001) (holding eighteen dishonored checks the plaintiff acquired through assignment were enforceable because there was nothing about the appearance of the checks to put the check cashing companies on notice that the checks may be invalid). Although Red Carpet asserts, for the first time on appeal, that the particular circumstances of the presentation of the two checks for payment were unusual, namely, the fact that Check-X-Change usually cashed checks in smaller amounts that were either payroll or Social Security checks, no evidence was presented at trial to support this contention. Thus, Check-X-Change was a holder in due course entitled to recover from Red Carpet, and its assignment of its rights under the checks to plaintiff transferred its holder in due course status to plaintiff as well.

We reject Red Carpet's additional contention that since Silberberg never actually gave the two checks to Ruddy, plaintiff is not a holder in due course. N.J.S.A. 12A:3-203 provides a "[t]ransfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course." N.J.S.A. 12A:3-203(b). Official comment 2 clarifies when a transferee may enforce the rights of a transferor. If the transferee of an instrument does not take by endorsement, then the transferee is not a holder. However, if the transferor was a holder, the transferee obtains the transferor's rights if he or she can prove the transaction through which the instrument was acquired. N.J.S.A. 12A:3-203, comment 2. Because Check-X-Change was a holder in due course within the meaning of N.J.S.A. 12A:3-302(a) and because plaintiff proved the validity of the assignment from Check-X-Change to him, Check-X-Change transferred its enforcement rights under the checks to plaintiff. Therefore, plaintiff was entitled to a judgment against Red Carpet as the maker of the dishonored checks, irrespective of the fact that the checks found their way to Check-X-Change through Ruddy without Red Carpet's authorization, a fact unknown to Check-X-Change at the time it cashed the checks and became a holder in due course. Pomerantz, supra, 370 N.J. Super. at 309 (holder in due course status may not be claimed by one who remains ignorant of facts that are readily apparent and may disclose a defect in an instrument).

Plaintiff was also entitled to a judgment against Ruddy as the endorser on the two checks. N.J.S.A. 12A:3-415 provides "if an instrument is dishonored, an indorser is obligated to pay the amount due on the instrument according to the terms of the instrument at the time it was indorsed [, and] . . . [t]he obligation of the indorser is owed to a person entitled to enforce the instrument." N.J.S.A. 12A:3-415(a). Ruddy endorsed the Red Carpet Realty checks at issue in this case. Plaintiff is a party entitled to enforce the checks because he stands in the shoes of Check-X-Change, a holder in due course. Therefore, plaintiff is entitled to judgment against Ruddy.

Plaintiff's remaining argument on appeal is that the trial court committed reversible error when it entered a default judgment, sua sponte, against Ruddy. Initially, we observe the trial judge did not enter the default judgment sua sponte as plaintiff claims. At trial, plaintiff specifically argued that he was entitled to a default judgment against Ruddy. Plaintiff now seeks reversal of the judgment against Ruddy, with instructions to the trial court to enter a judgment against Ruddy conditioned upon plaintiff filing an affidavit of nonmilitary service.

N.J.S.A. 38:23C-4 requires that a plaintiff in a civil action file an affidavit with the court showing that a defaulting defendant is not serving in the military, within 20 day prior to entry of a default judgment. Rule 1:5-7 implements the statute, and states "[b]efore entry of judgment by default, an affidavit, which may be filed as part of the affidavit of proof, shall be filed as required by law setting forth facts showing that the defendant is not in military service." In PNC Bank, N.A. v. Kemenash, we held that a default judgment entered in the absence of an affidavit of non-military service, as required by N.J.S.A. 38:23C-4 and Rule 1:5-7, is voidable, not void. 335 N.J. Super. 124, 125-26 (App. Div. 2000). Furthermore, a default judgment entered in the absence of an affidavit of non-military service is voidable only by a party against whom the requirement was designed to protect, i.e., a person on active military duty at the time of judgment. Id. at 128-29.

In this case, plaintiff failed to file an affidavit of nonmilitary service certifying that Ruddy was not currently serving in the armed forces, and is now seeking reversal on that ground. However, a default judgment entered under these circumstances is merely voidable and is only voidable by a defendant who was an active member of the armed forces at the time of judgment. Since Triffin is the plaintiff, he is not the party that the affidavit requirement was designed to protect. As such, the right to challenge the default judgment on this ground belongs to Ruddy, and then only if he was actively serving in the military at the time the judgment was entered. Ibid.

To summarize, we affirm the dismissal of plaintiff's complaint in the AIG action, affirm the entry of a default judgment in favor of plaintiff against David Ruddy in the Red Carpet action. We reverse the dismissal of plaintiff's complaint against Red Carpet, and remand for the entry of judgment against Red Carpet.

Affirmed in part, reversed in part, and remanded for entry of judgment against Neal Silberberg t/a Red Carpet Realty. We do not retain jurisdiction.

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