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Wawel Savings Bank v. First Hope Bank


May 8, 2008


On appeal from an interlocutory order of the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-8301-06.

Per curiam.


Argued April 2, 2008

Before Judges Payne and Sapp-Peterson.

Defendant, First Hope Bank, appeals from the March 30, 2007 Law Division order of Judge Daniel Mecca granting summary judgment to plaintiff, Wawel Savings Bank, and denying its cross-motion for summary judgment. We affirm.

Defendant, First Hope Bank, is the drawer bank that issued two certified checks drawn from the account of Show Shine, LLC (Show Shine) made payable to plaintiff, Wawel Savings Bank. Plaintiff loaned Frederick Hatem, who is not a party to this action, $285,000. Hatem defaulted on the note, which was secured by a mortgage on Hatem's home. Plaintiff instituted a foreclosure action but apparently reached an agreement with Hatem to cure the default. As part of the agreement, Hatem paid $14,916.11, delivered in two Show Shine checks, certified by First Hope, which plaintiff's attorney was to place in an escrow account. When Hatem later filed lost check affidavits with First Hope, the $14,916.11, was credited back to Show Shine's account and two new checks were issued made payable this time to Andover Township, which defendant claimed Hatem used to pay real estate taxes on Hatem's home.

On August 15, 2006, Hatem filed for Chapter 13 bankruptcy. Plaintiff filed a proof of claim in the bankruptcy action for $33,081.09, which represented Hatem's total arrears on the note up to that point. Hatem's bankruptcy plan was approved without objection from plaintiff, who, in addition to filing a proof of claim when it learned of Hatem's bankruptcy petition, also presented the two initial certified checks to defendant for payment. Defendant informed plaintiff that on the basis of having received the lost check affidavits from Hatem, the funds were credited back to Show Shine's account. Plaintiff advised defendant that the checks were not lost and were being held in trust by plaintiff's counsel. Defendant nonetheless refused to honor payment on the checks. Consequently, as well as pursuing relief against Hatem in the bankruptcy action, plaintiff commenced an action in Superior Court against defendant seeking payment of the two dishonored checks pre-judgment interest, consequential damages, attorneys' fees, and costs.

Thereafter, plaintiff moved for summary judgment against defendant, arguing that as a matter of law, under the Uniform Commercial Code, N.J.S.A. 12A:1-101 to 12A:12-26 (UCC), defendant had no right to refuse to stop payment on the two certified checks. Defendant opposed the motion on the grounds that there were genuinely disputed issues of fact sufficient to defeat summary judgment, and also cross-moved for summary judgment. Defendant argued that as a creditor claimant in the bankruptcy proceeding, plaintiff had filed no objection to the debtor's proposed plan and was receiving payments on the note from Hatem in accordance with the approved plan; therefore, plaintiff's claims against it were barred and, further, plaintiff had sustained no damages.

Judge Mecca granted plaintiff's motion and denied defendant's cross-motion. The court agreed that under the UCC, defendant did not have the right to deny payment to plaintiff when the checks were presented for payment. Although raised as an issue by defendant, the judge did not address what credit, if any, defendant was entitled to receive for payments to plaintiff arising out of the bankruptcy plan. The judge specifically limited his ruling to whether plaintiff had a cause of action against defendant for dishonoring the two certified checks. The present appeal ensued.*fn1


We first dispense with defendant's argument that there were genuinely disputed factual issues that warranted denial of plaintiff's motion for summary judgment. Our standard of review of a trial court's grant of summary judgment is the same as that employed by the trial court. Prudential Prop. & Cas. Ins. Co. v. Boyland, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Summary judgment is appropriate where there is no genuine issue as to any material fact challenged. R. 4:46-2(c). Here, plaintiff claims defendant had no right to dishonor payment on the two certified checks. Since there is no dispute that the checks were certified for payment by defendant and there is no dispute that defendant refused payment when the checks were presented, no additional discovery was necessary for the court to address the purely legal question of whether, as a matter of law, defendant had the right to dishonor payment.

Because the certified checks are negotiable instruments, the court turned to the UCC to answer the question. In our review of the motion judge's grant of summary judgment, we owe no deference to his "construction of the legal principles," Lombardo v. Hoag, 269 N.J. Super. 36, 47 (App. Div. 1993) certif. denied, 135 N.J. 469 (1994). We are, however, in complete accord with Judge Mecca's determination that defendant had no right to refuse payment when the certified checks were presented.

Under the UCC, a certified check is "a check accepted by the bank on which it is drawn." N.J.S.A. 12A:3-409(d). When a bank certifies a check and the check is later presented for payment, the bank becomes obligated to pay the check according to its terms at the time it was accepted. N.J.S.A. 12A:3-413(a). This obligation is owed to "[the] person entitled to enforce the draft or to the drawer or an indorser who paid the draft[,]" N.J.S.A. 12A:3-413(a), unless that person has procured the check by fraud. Sutter v. Sec. Trust Co., 96 N.J. Eq. 644, 648 (1924).

Here, the certified checks in question were made payable to the order of Wawel Savings Bank, SLA. Defendant made no allegation that Wawel, as payee, procured the checks by fraud. Consequently, Wawel was a bona fide holder for value of the instruments and entitled to payment, despite the lost check affidavits executed by Hatem. Id. at 648 (holding a drawer may not unilaterally stop payment on a certified check unless the "payee is not a bona fide holder, for value, but obtained the check by fraud perpetrated by him upon the maker.").


First Hope next argues that Judge Mecca erred in denying its cross-motion for summary judgment because Wawel is bound by Hatem's confirmed plan of reorganization and, as such, may not collect payment on the certified checks from First Hope. In addition, defendant urges that Wawel's claim is without merit because Wawel did not sustain any damages as a result of First Hope's refusal to pay the certified checks when they were presented. To support these contentions, First Hope cites Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938), a case that has been interpreted as standing for the proposition that a confirmed bankruptcy plan is final and binding upon all creditors. See also In re Szostek, 886 F.2d 1405, 1409-10 (3d Cir. 1989).

In Stoll, supra, the Supreme Court addressed the issue of whether a creditor may challenge a confirmed bankruptcy plan in state court on jurisdictional grounds when the merits of the jurisdictional question had already been decided by the bankruptcy court. Id. at 168-72, 59 S.Ct. at 136-38, 83 L.Ed. at 106-09. The Court held that "after a federal court has decided the question of jurisdiction over the parties as a contested issue, the court in which the plea of res judicata is made has not the power to inquire again into that jurisdictional fact." Id. at 172, 59 S.Ct. at 137-38, 83 L.Ed. at 109. The Court stressed that "[a]fter a party has his day in court, with the opportunity to present his evidence and his view of the law, a collateral attack upon the decision as to jurisdiction there rendered merely retries the issues previously decided." Id. at 172, 59 S.Ct. at 138, 83 L.Ed. at 109. In other words, as the Third Circuit held in Szostek, supra, when a confirmed bankruptcy plan is final and has been finalized without objection or appeal, the plan is not reviewable on the merits. 886 F.2d at 1409-10. The court noted "'the binding effect of a Chapter 13 plan extends to any issue actually litigated by the parties and any issues necessarily determined by the confirmation order.'" Id. at 1409 (citing 5 Collier on Bankruptcy § 1327.01 (5th ed. 1988)).

First Hope argues that because Wawel did not object to Hatem's Chapter 13 plan, it is bound by the plan's terms, which required Hatem to make payments on the note to Wawel. Therefore, Wawel is precluded from seeking recovery against it. We disagree.

"[I]t is true that the bankruptcy court's confirmation of [a] plan binds the debtor and all creditors vis-à-vis the debtor, [however,] it does not follow that a discharge in bankruptcy alters the right of a creditor to collect from third parties." First Fid. Bank v. McAteer, 985 F.2d 114, 118 (3d Cir. 1993) (citing 11 U.S.C.A. § 524(e) (discharge of a debtor does not preclude a creditor from pursuing payment of the full debt from an obligated third party)). Additionally, a creditor's approval of a bankruptcy plan does not have an effect "beyond the confines of the bankruptcy proceeding[.]" Ibid. Therefore, receipt of plan payments does not act to discharge non-debtors of their obligations for the amount still owed.

Ibid. The bankruptcy code alters the contractual obligations of the debtor, but does not have the same effect on the obligations of liable third parties. Ibid. (citing Mellon Bank v. M.K. Siegel, 96 Bankr. 505, 506 (E.D. Pa. 1989)).

When Show Shine, the drawer, requested that the two checks be certified, Show Shine was discharged of responsibility and a new contract was created between First Hope and Wawel. See Times Square Auto. Co. v. Rutherford Nat'l Bank, supra, 77 N.J.L. 649, 650-51. Thus, First Hope became primarily liable to plaintiff to honor payment of the certified checks and, for purposes of the bankruptcy proceeding, became a third-party non-debtor. In other words, First Hope, as a non-debtor third party, was not shielded against liability for its actions by virtue of Hatem's bankruptcy plan. First Fid. Bank, supra, 985 F.2d at 118.


Finally, First Hope argues that its cross-motion for summary judgment should have been granted because Wawel was not damaged by First Hope's refusal to pay the certified checks upon presentation. Judge Mecca declined to address any issues related to damages, including counsel fees. He stated, "The only issue to be decided . . . is whether refusing to honor these checks creates a cause of action against the defendant."

He indicated that he was unsure of what amounts may have been paid to plaintiff through the bankruptcy plan, but recognized that the judgment may have to be "adjusted so as to prevent any unjust enrichment on the plaintiff's behalf as a result of these payments." Consequently, although he entered judgment in favor of plaintiff for $14,916.11, the face value of the two certified checks defendant wrongfully dishonored, he essentially bifurcated any remaining issues related to damages. Under these circumstances, there was no error committed when the court denied defendant's cross-motion for summary judgment.


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