(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).
Argued January 3, 2000 -- Decided March 22, 2000
LONG, J., writing for a unanimous Court.
In this appeal, the Court considers the definition of “bad faith” as found in the Uniform Fiduciaries Law (UFL),
N.J.S.A. 3B:14-55 to -61, in the context of an attorney's embezzlement from his clients' trust account.
During the period from mid-November 1993 to mid-February 1994, Joseph C. Caputo, a New Jersey attorney and
sole practitioner, maintained an attorney trust checking account and an attorney business checking account at the National
State Bank (Bank) in Summit. A substantial portion of Caputo's practice consisted of real estate matters. His involvement
with New Jersey Title Insurance Company (NJT) stemmed from several closing in which Caputo represented buyers and
NJT insured title. In those transactions, Caputo received loan proceeds from the buyers' mortgage lenders, which were
intended to be applied to the satisfaction of the sellers' outstanding mortgages.
Although Caputo deposited the mortgage proceeds into his attorney trust account, he did not use them to satisfy
the outstanding mortgages. Rather, within the subject three-month period, Caputo issued from his trust account fifty-two
checks totaling $291,350 payable to himself. He either cashed those checks at the Summit Avenue branch of the Bank, or
had them certified at that branch and then cashed them at the Trump Taj Mahal Hotel and Casino in Atlantic City. He then
used the proceeds of the mortgage loan for casino gambling, primarily at Trump Taj Mahal.
When NJT learned that Caputo had not satisfied the outstanding mortgages, it began an investigation that
uncovered his embezzlement of the funds. NJT paid off the outstanding mortgages and instituted suit against Caputo. An
order was entered enjoining the Bank from disbursing any funds from Caputo's trust account. Trump Taj Mahal and the
Bank were later named as defendants in the action. NJT's action against Taj Mahal eventually was dismissed by
stipulation. A default judgment was entered against Caputo, who pled guilty to criminal charges relating to the
embezzlement and consented to disbarment.
In its suit, NJT alleged that the Bank had actual knowledge that Caputo's intended use of the trust funds would
breach fiduciary duties, and that it was negligent and acted in bad faith in violation of the UFL. The Bank denied the
allegations of the complaint and eventually moved for summary judgment, contending that the NJT's action was barred by
the UFL because the Bank lacked actual knowledge of the alleged breaches of fiduciary obligation by Caputo, and lacked
knowledge that its certification or payment of the checks amount to bad faith.
The facts adduced on the motion disclosed that Caputo had drawn fifty-two trust account checks payable to
himself during the relevant period. On a weekly basis, the transactions ranged between $36,000 and $57,300. Because of
the amounts involved, each of the fifty-two checks Caputo drew required the authorization of the branch manager,
Veronica Kane, or the assistant branch manager, Kathy Martin. Both managers admitted that they knew that an attorney's
trust account contains client funds and that they were aware of Caputo's gambling. Moreover, Kane knew from studying
large ATM withdrawals from Caputo's business account (which was frequently overdrawn) that he was spending a
considerable amount of time in Atlantic City and that he was depositing money from his trust account into his business
account and was then going to Atlantic City and withdrawing it or was writing checks in high amounts and having it
authorized by the Summit branch. Kane became suspicious when she noticed that Caputo's business account was
overdrawn despite the fact that he had made large deposits. Eventually, Kane and Martin decided to close Caputo's
business account due to the overdrafts, the gambling, and because the Bank was not satisfied with the way Caputo was
conducting business. That notwithstanding, the Bank allowed Caputo to cash a $25,000 trust account check the following
day.
Although NJT produced an expert who expressed the opinion that a reasonable jury could conclude that the Bank
was wilfully ignorant of the facts and circumstances surrounding Caputo's transactions such that its paying, cashing, and
certifying the checks constituted bad faith, the trial court granted the Bank's motion for summary judgment, ruling that it
was immune from liability under the UFL because it did not have actual knowledge of Caputo's breach of duty and did not
act in bad faith. The Appellate Division affirmed the grant of summary judgment.
The Supreme Court granted NJT's petition for certification.
HELD: Under the Uniform Fiduciaries Law, “bad faith” denotes a reckless disregard or purposeful obliviousness of the
known facts suggesting impropriety by the fiduciary, and is not established by mere negligent or careless conduct or by
vague suspicion.
1. Under the UFL, a financial institution is bound to inquire and may be chargeable with notice of a fiduciary's misdeeds
where it actually knows of the breach of the fiduciary's obligation, and where it knows of facts such that its action in taking
the instrument amounts to bad faith. (pp. 8-10)
2. Although earlier cases interpreting the Uniform Fiduciaries Act (the predecessor to the UFL) used a “bad faith” standard
to impose liability on financial institutions, in application it was almost impossible to establish that liability in the absence
of actual knowledge of fiduciary embezzlement. (pp. 10-14)
3. The majority of out-of-state cases that have interpreted the bad faith standard in the fiduciary context have referred to
dishonesty as a guiding principle, characterizing it as a way of distinguishing bad faith from mere negligence. (pp. 14-18)
4. Although actual knowledge of and complicity in the fiduciary's misdeeds is not required to impose bank liability under
the UFL, where facts suggesting fiduciary misconduct are compelling and obvious, it is bad faith to remain passive and not
inquire further because such inaction amounts to a deliberate desire to evade knowledge. (p. 18)
5. The test for good or bad faith is a subjective one to be determined by the trier of fact unless only one inference from the
evidence is possible. In this case, it was for the jury to determine whether the Bank recklessly disregarded or was
purposefully oblivious to facts suggesting impropriety by Caputo. (pp. 19-20)
6. Because banks may be unsure of exactly what steps to take when presented with cogent and obvious evidence of
fiduciary impropriety, this matter is referred to the Professional Responsibility Rules Committee (PRRC) to recommend
changes in the reporting requirements of Rule 1:21-6(a)(2). (pp. 20-21)
Judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Law Division for trial.
CHIEF JUSTICE PORITZ and JUSTICES O'HERN, GARIBALDI, STEIN, COLEMAN, and VERNIERO join in
JUSTICE LONG's opinion.
SUPREME COURT OF NEW JERSEY
A-
108 September Term 1998
NEW JERSEY TITLE INSURANCE
COMPANY,
Plaintiff-Appellant,
v.
JOSEPH C. CAPUTO and TRUMP TAJ
MAHAL ASSOCIATES d/b/a TRUMP
TAJ MAHAL CASINO RESORT and
improperly pled as TAJ MAHAL
HOTEL and CASINO,
Defendants,
and
NEW JERSEY NATIONAL BANK,
Successor-in-interest to
CORESTATES BANK, CONSTELLATION
BANK and the NATIONAL STATE
BANK,
Defendant-Respondent.
Argued January 3, 2000 -- Decided March 22, 2000
On certification to the Superior Court,
Appellate Division, whose opinion is
reported at
318 N.J. Super. 311 (1999).
James M. Cutler argued the cause for
appellant (Stern, Lavinthal, Norgaard &
Kapnick, attorneys).
John D. North argued the cause for
respondent (Greenbaum, Rowe, Smith, Ravin,
Davis & Himmel, attorneys).
The opinion of the Court was delivered by
LONG, J.
In this case, we are called upon to define more precisely
the standard of bad faith found in the Uniform Fiduciaries Law
(UFL), N.J.S.A. 3B:14-55 to -61, in the context of an attorney's
embezzlement from his clients' trust account.
I
During the period from mid-November 1993, to mid-February
1994, Joseph C. Caputo, a New Jersey attorney and sole
practitioner, maintained two checking accounts, an attorney
trust account and an attorney business account, at the National
State Bank (Bank) in Summit.See footnote 11
Real estate constituted a substantial portion of Caputo's
legal practice. His involvement with New Jersey Title Insurance
Company (NJT) stemmed from several closings in which Caputo
represented buyers and NJT insured title. In those
transactions, Caputo received the loan funds from the buyers'
mortgage-lenders and deposited them into his attorney trust
account. He was expected to use those funds to pay off the
sellers' mortgages. Instead, within the subject three-month
period, Caputo issued 52 checks totaling $291,350, payable to
himself out of his account. Caputo either cashed those checks
at the Summit Avenue branch of the Bank, or had them certified
at that branch and then cashed them at the Trump Taj Mahal Hotel
and Casino in Atlantic City. In either event, Caputo used the
proceeds of those checks for casino gambling, primarily at Trump
Taj Mahal.
When NJT learned that Caputo had not satisfied the mortgage
liens, it began an investigation that uncovered Caputo's
embezzlement scheme. NJT paid off the outstanding mortgages,
and on January 21, 1994, instituted suit against Caputo. On
that date, an order was entered enjoining the Bank from
disbursing any funds from Caputo's trust account. Trump Taj
Mahal and the Bank were later named as defendants in the law
suit. NJT's action against Trump Taj Mahal was eventually
dismissed by stipulation. A default judgment was entered
against Caputo, who pled guilty to criminal charges relating to
the embezzlement and was disbarred by consent. Matter of
Caputo,
135 N.J. 106 (1994).
The action against the Bank was based on the allegation
that it had "actual knowledge that . . . Caputo's intended use
of the trust funds would breach fiduciary duties,” and that the
Bank was negligent and acted in bad faith in violation of
N.J.S.A. 3B:14-55.
The Bank denied the allegations of the complaint,
contending that NJT's action was "barred under the provisions of
the Uniform Fiduciaries Law, N.J.S.A. 3B:14-52 [to -65], because
the Bank lacked actual knowledge of the alleged breaches of
fiduciary obligation by Caputo, and lacked knowledge that its
certification or payment of the checks amounted to bad faith.”
The Bank thereafter moved for summary judgment.
The facts adduced on the motion are not in dispute. During
the three relevant months, Caputo embezzled over $291,000 in
client funds. In the one month period between December 18,
1993, and January 21, 1994, Caputo drew fifty-two trust account
checks payable to himself as follows:
Date Amount # of checks
12/18/93 $5,000 1
12/20/93 $14,600 3
12/21/93 $5,000 1
12/22/93 $8,000 2
12/23/93 $10,000 2
12/24/93 $7,500 2
12/28/93 $16,000 3
12/29/93 $5,000 1
12/30/93 $32,300 7
12/31/93 $4,000 1
1/02/94 $4,800 1
1/03/94 $4,800 1
1/05/94 $10,000 2
1/06/94 $8,600 2
1/07/94 $8,000 2
1/10/94 $5,000 1
1/11/94 $5,500 1
1/12/94 $5,000 1
1/13/94 $17,000 3
1/14/94 $24,500 5
1/19/94 $15,500 4
1/21/94 $25,250 6
TOTAL: $241,350 52
On a weekly basis these transactions broke down to $45,000
(12/20/93), $57,300 (12/27/93), $36,000 (1/3/94), $57,000
(1/10/94) and $40,750 (1/17/94) respectively.
Because of the amounts involved, each of the fifty-two
checks Caputo drew was authorized by Branch Manager Veronica
Kane or Assistant Branch Manager Kathy Martin. Kane and Martin
were the only platform officers in that small branch bank. Both
Kane and Martin admitted that they knew an attorney's trust
account contains client funds and that they were aware of
Caputo's gambling. More particularly, Kane knew from studying
large ATM withdrawals from Caputo's business account (which was
frequently overdrawn during the subject period) that he was
spending a considerable amount of time in Atlantic City and was
depositing money from his trust account
into his business account and then going to
Atlantic City and withdrawing it or he would
write checks in large amounts and I would
question what it was for and he always came
up with a reason, “It's for a client. I have
a closing.” I didn't know how far I could go
in questioning him what he was doing with his
money.
Kane was suspicious when Caputo's business account was
overdrawn despite the fact that he made large deposits. She said
that she had more than one conversation with Martin to discuss
closing Caputo's trust account based on her suspicions. Kane
learned from her investigation that Caputo never followed the
correct procedure in opening sub-accounts in his trust account
for his clients, and she threatened to close the trust account on
that basis. Kane said that, after speaking with Martin, they
both felt that the business and trust accounts should be closed
because Caputo did not open sub-accounts for his clients and
because of the ATM withdrawals at the casinos. Both Martin and
Kane denied knowing anything about Caputo's embezzlement until a
judge entered an order enjoining the use of Caputo's trust
account.
Martin did acknowledge, however, concerns that Caputo was
engaging in tax evasion. Martin testified that cashing more than
$10,000 in checks in a week should have resulted in the issuance
of a cash transaction report (CTR) to the Internal Revenue
Service. Although Caputo's weekly totals were generally five
times the allowable amount and, in fact, on nine occasions,
Caputo met or exceeded the allowable weekly total in just one
day, no explanation was offered for failure to file any such
report, even though this omission could clearly facilitate tax
evasion.
The Bank closed Caputo's business account on January 20,
1994, because of the overdrafts, the gambling, and because “it
was not satisfied with the way he was conducting business.” The
Bank nevertheless allowed Caputo to cash a $25,000 trust account
check the following day.
During discovery, NJT produced an expert who expressed the
opinion that a reasonable jury could conclude that the Bank was
willfully ignorant of facts and circumstances surrounding
Caputo's transactions such that its paying, cashing, and
certifying the checks constituted bad faith.
The Bank moved for summary judgment. The trial judge ruled
that the Bank “was immune from liability under the Uniform
Fiduciaries Law because it did not have 'actual knowledge' of
Caputo's breach of duty and did not act in 'bad faith.'” New
Jersey Title Ins. Co. v. Caputo,
318 N.J. Super. 311, 315 (App.
Div. 1999).
The Appellate Division affirmed the grant of summary
judgment. New Jersey Title, supra, 318 N.J. Super. at 322. We
granted certification,
161 N.J. 150 (1999), and now reverse.
II
The UFL provides in relevant part:
If a check . . . is drawn by a fiduciary as
such or in the name of his principal by a
fiduciary empowered to draw the instrument in
the name of his principal, payable to the
fiduciary personally, . . . and is thereafter
transferred by the fiduciary, whether in pay
ment of a personal debt of the fiduciary or
otherwise, the transferee is not bound to
inquire whether the fiduciary is committing a
breach of his obligation as fiduciary, and is
not chargeable with notice that the fiduciary
is committing a breach of his obligation as
fiduciary unless he takes the instrument with
actual knowledge of the breach or with knowl
edge of facts that his action in taking the
instrument amounts to bad faith.
[N.J.S.A. 3B:14-55 (emphasis
added.]
The UFL's predecessor, the Uniform Fiduciaries Act, N.J.S.A.
3A:41-1 to -14 (UFA) likewise provided, among other things, that
a bank would be immune from liability in honoring a fiduciary's
check “unless the bank pa[id] the check with actual knowledge
that the fiduciary [was] committing a breach of his obligation as
fiduciary in drawing the check or with knowledge of such facts
that its action in paying the check amount[ed] to bad faith.”
N.J.S.A. 3A:4-7. The Uniform Commercial Code (UCC) specifically
repealed parts of the UFA in 1961 (N.J.S.A. 12A:10-105), but did
not repeal N.J.S.A. 3A:41-6 or 7, the provisions on which the UFL
is modeled. Thus, the standard for bank liability in the
fiduciary setting has been the same for over seven decades. That
is important because most of the cases interpreting the bad faith
standard were decided prior to the 1981 codification.
In this case, it is not alleged that the Bank had actual
knowledge that Caputo was embezzling client funds. Nor is this a
“constructive notice” case. NJT is not advancing a claim based
on unrelated bits of knowledge within the ken of different
employees. It contends that the facts actually known by Kane and
Martin were such that it was bad faith not to inquire further of
Caputo.
The issue is whether the evidence, viewed in the light most
favorable to NJT, would permit a rational fact finder to resolve
the disputed question of bad faith in its favor. If so, summary
judgment on behalf of the Bank was unwarranted. The outcome here
depends on the meaning of the bad faith language in the act.
III
We begin our analysis with the words of the statute which
plainly provide two circumstances in which the institution is
bound to inquire and may be chargeable with notice of the
fiduciary's misdeeds: (1) where it actually knows of the breach
of the fiduciary's obligation and (2) where it knows of facts
such that its action in taking the instrument amounts to bad
faith. These are two entirely different standards. Under the
former, the Bank is liable if it is actually aware that the
fiduciary is misappropriating. In such a case, it takes the
instrument as an accomplice or participant in the breach. The
latter standard obviously requires something less than actual
knowledge or it would be a mere superfluity. Exactly how much
less is the question.
The earliest decision on this subject was rendered in
New Amsterdam Cas. Co. v. National Newark & Essex Banking Co.,
117 N.J. Eq. 264, 265-67 (N.J. Ch. 1934), aff'd,
119 N.J. Eq. 540
(E. & A. 1935). In that case, the UFA was applied to a receiver
who embezzled $149,000 by drawing checks to himself and
depositing the funds in different personal accounts. A suit by
the entity in receivership alleged that the bank paid and
received checks, which put it on notice that funds were being
diverted from the receivership to the receiver's personal
accounts to pay the receiver's personal overdrafts and other
debts. Id. at 270. Although bad faith was not defined in the
UFA, good faith was defined as a thing “done honestly, whether it
be done negligently or not.” N.J.S.A. 3A:41-1. Thus, the Vice
Chancellor in New Amsterdam observed that “conversely bad faith
must be a thing done when it is in fact done dishonestly.” New
Amsterdam, supra, 117 N.J. Eq. at 277. Differentiating bad faith
from negligence, he described the former as contemplating “a
state of mind affirmatively operating with a furtive design or
some motive of interest or ill will.” 117 N.J. Eq. at 277. More
particularly, he stated:
Read in the light of its statutory context,
bad faith, with its sinister implications,
means knowledge by any responsible agency
officer or employee, of a bank, of an
incriminating state of facts, short of actual
knowledge of the breach of trust, but conscious
of it and aiding and abetting or acquiescing in
the breach.
[Id. at 278.]
The Vice Chancellor observed that the “[d]raining of these
accounts into . . . private accounts, if noticed, may have
aroused suspicion, but that would not have been enough to halt
the bank in discharging its obligation to the depositor.” Id. at
280. “Glaring as the scheme now shows up,” the Vice Chancellor
noted it was “without circumstances recognized by the authorities
as warranting either bank in refusing payment.” Ibid. In
ruling, the Vice Chancellor took pains to reiterate that
negligence is not a relevant consideration in this analysis.
The standard of due care or negligence and
the doctrine of constructive notice in
respect of bank deposits of fiduciary funds
finds no recognition in the Fiduciaries Act.
It definitely declares bad faith to be the
test of liability. That was the rule at
common law, and the statute but embodies the
common law rule, making uniform its
application and realigning whatever
deviations it may have fallen into.
[Id. at 277.]
Although the decision was affirmed on appeal, the Court of
Errors and Appeals expressly declined to consider the soundness
of the Vice Chancellor's view that
although the depositor's conduct or course
of dealing “may bring to the notice of the
bank circumstances which would enable it to
know that he is violating his trust, such
circumstances do not impose upon the bank the
duty or give it the right to institute any
inquiry into the conduct of its customer, in
order to protect those for whom the customer
may hold the fund, . . . .”
[New Amsterdam, supra, 119 N.J. Eq. at 271
(quoting Perry on Trusts (7th ed. 1924)).]
Thus, exactly what would trigger the duty to inquire further or
risk being charged with notice of the fiduciary's misdeeds,
remained an open question after New Amsterdam. This much is
clear however: the dishonesty standard began to take on a life of
its own.
The court in Kaufman v. Trust Co.,
130 N.J. Eq. 346, 348 (E.
& A. 1941), for example, reversed a determination that the Trust
Company was on notice of misappropriation of estate funds by an
executor who drew fifteen checks, totaling $36,000, and deposited
them in his personal account to pay personal debts to the Trust
Company. The Court of Errors and Appeals, citing New Amsterdam,
held that “it was incumbent upon the complainant below to
establish that the Trust Company knowingly participated in the
embezzlement or had knowledge of such facts that its honoring of
the checks drawn by the executor amount[ed] to bad faith.” Id.
at 349. The Court found “no inference of [the executor's]
dishonesty” based on the personal debt owed to the Trust Company
and the executor's inability to keep up with his payments. Ibid.
Similarly, in Goldstein v. Commonwealth Trust Co.,
19 N.J.
Super. 39, 44 (Law Div. 1952), when a check drawn on an
attorney's special account was improperly honored, the court held
that a bank owes “no duty to the trust estate save to refrain
from participating in misappropriating the funds.” Referring to
New Amsterdam, the court noted that its holding applied even when
a bank has adequate notice that an account is held by a depositor
only in a fiduciary capacity. Ibid.
In Murner v. First Nat'l Bank,
94 N.J. Super. 293, 295 (App.
Div. 1967), a substituted trustee was unable to recover money
misappropriated from a trust account by the original trustee.
The complaint alleged that checks totaling over $6,000 payable to
the trust estate were cashed over the counter, while checks over
$1,000 were credited to the original trustee's personal account.
Because actual knowledge was not alleged, the controversy
centered on whether the bank had knowledge of such facts that its
action in taking the instruments in question amounted to bad
faith:
All that plaintiff had raised was at best a
suspicion; to permit the case to go to the jury
would merely invite speculation on its part.
Although mindful of the fact that a motion for
summary judgment should be granted with caution,
especially where a matter such as bad faith is
involved, . . . there [is] nothing in the case
from which a jury could legitimately conclude
that there was bad faith on the part of any of
the banks.
[Id. at 297.]
The Appellate Division affirmed the judgment of the trial court,
citing the UFA and New Amsterdam as “entirely persuasive and
determinative of this case.” Id. at 298. Although New Amsterdam
and its progeny gave lip service to the statutory bad faith
standard, they made it almost impossible to establish bank
liability in the absence of actual knowledge of fiduciary
embezzlement.
Lustrelon, Inc. v. Prutscher,
178 N.J. Super. 128, 131 (App.
Div. 1981) offers a more measured approach. There a foreign bank
appealed from a grant of summary judgment to a bank that issued a
letter of credit. The foreign bank had honored the letter of
credit when the beneficiary presented a signed draft and
document, purportedly in compliance with the letter. It then
sought reimbursement from the issuing bank. The Appellate
Division reversed the judgment in favor of the issuing bank and
remanded the case for a subjective good faith determination
regarding the issuance of the letter of credit. Id. at 144.
Citing the New Amsterdam definition of bad faith, the court
described that term as including some “indicia of dishonest
conduct or a showing of facts and circumstances '. . . so cogent
and obvious that to remain passive would amount to a deliberate
desire to evade knowledge because of a belief or fear that
inquiry would disclose a defect in the transaction.'” Ibid.
(quoting Edwards v. Northwestern Bank,
250 S.E.2d 651, 655-656
(N.C. Ct. App. 1979)).
The majority of out-of-state cases that have interpreted the
bad faith standard in the fiduciary context have referred to
dishonesty as a guiding principle. E.g. Macon v. Edgcomb,
654 N.E.2d 598 (Ill. App. 1995); Trenton Trust Co. v. Western Sur.
Co.,
599 S.W.2d 481 (Mo. 1980); Guild v. First Nat. Bank,
553 P.2d 955 (Nev. 1976); Manfredi v. Dauphin Deposit Bank,
697 A.2d 1025 (Pa. Super. 1997); Research-Planning, Inc. v. Bank of Utah,
690 P.2d 1130 (Utah 1984). However, those cases have not infused
the term with a high degree of corruption or evil motive.
Indeed, most characterize “dishonesty” as a way of distinguishing
bad faith from mere negligence, and view it as evidencing
purposeful conduct. See Guild, supra, 553 P.
2d at 958 (requiring
showing the bank “actually knew or suspected that funds were
being misappropriated, or deliberately or wilfully closed its
eyes or refused to investigate after having its suspicions
aroused.”) In other words, although continuing to use the word
“dishonesty” to explain bad faith, the cases characterize
dishonesty as something other than a moral failing, for example,
intentionally disregarding or refusing to learn the available
facts (Peoples Nat'l Bank v. Guier,
145 S.W.2d 1042, 1047 (Ky.
1940); deliberately refraining from investigating facts that
suggest fiduciary is acting improperly (Macon, supra, 654 N.E.
2d
at 601); and intentional closing of “the eyes or stopping of the
ears” (Research-Planning, supra, 690 P.
2d at 1132).
Nearly all of those cases take their cue from Maryland Cas.
Co. v. Bank of Charlotte,
340 F.2d 550 (4th Cir. 1965). There
a corporate secretary converted to her own personal use nineteen
corporate checks totaling over $18,000. The checks were either
cashed, credited to her personal account, or applied towards
loans she had at the bank. Bank of Charlotte, supra, 340 F.
2d at
551-52. In interpreting the UFA, the Court of Appeals relied on
the Uniform Negotiable Instruments Act, Cahill's Rev. St. c.98
(1929), to define bad faith because the language of the UFA was
borrowed from that statute. Ibid.
The court concluded that “[t]he Bank's personnel had before
their eyes clear evidence of a probable misappropriation.” Id.
at 554. “Giving the Bank the benefit of the most favorable
construction of the statute,” the court held the Bank was not
liable for cashing the first check, but was liable for the second
check, which should have triggered knowledge, and for all
subsequent checks. Id. at 555. It stated:
The Bank again protests, this time, that it
could not have acted in 'bad faith' since it
did not act dishonestly. It is true that
courts construing the U.F.A. have sometimes
read 'bad faith' to mean `dishonesty.' See,
e.g., Western Surety Co. v. Farmers &
Merchants State Bank,
63 N.W.2d 377 (Minn.
1954); National Casualty Co. v. Caswell and
Co.,
45 N.E.2d 698 (Ill. App. 1942). This
abbreviated definition is inaccurate if it is
read to emphasize and require a high degree
of moral guilt. Neither criminal fraud nor
downright corruption is an essential
ingredient of legal bad faith.' The `bad
faith' test was borrowed from the Uniform
Negotiable Instruments Act. Paine v.
Sheridan Trust & Savings Bank,
174 N.E. 368
(Ill. 1921). The standard used in construing
the term under that Act has not been evil
motive. Instead courts have asked whether it
was commercially unjustifiable for the payee
to disregard and refuse to learn facts
readily available. Taylor v. Citizens Bank
160 S.W.2d 639 (Ky. 1942). At some point,
obvious circumstances become so cogent that
it is bad faith' to remain passive.
[Id. at 554.]
Under Bank of Charlotte, where circumstances suggestive of a
fiduciary's breach become sufficiently obvious, a duty to act is
created. In fact, the Appellate Division has already used this
standard in Lustrelon, supra, 178 N.J. Super. at 144-45. See
also Appley v. West, 832 F.2d l021, 1031 (7th Cir. 1987) (quoting
Bank of Charlotte, supra, 340 F.
2d at 554, for the proposition
that at “some point, obvious circumstances become so cogent that
it is 'bad faith' to remain passive”).
In our view, a hybrid formulation drawn from New Amsterdam,
Bank of Charlotte and its progeny most closely approximates the
meaning of bad faith under the UFL. We hold that bad faith
denotes a reckless disregard or purposeful obliviousness of the
known facts suggesting impropriety by the fiduciary. It is not
established by negligent or careless conduct or by vague
suspicion. Likewise, actual knowledge of and complicity in the
fiduciary's misdeeds is not required. However, where facts
suggesting fiduciary misconduct are compelling and obvious, it is
bad faith to remain passive and not inquire further because such
inaction amounts to a deliberate desire to evade knowledge. The
so-called dishonesty standard, which has been a static epithet in
our bad faith jurisprudence, should not be interpreted as having
sinister implications but only as a way of differentiating bad
faith from negligence in terms of purpose. See Pickett v.
Lloyds,
131 N.J. 457, 473, 475 (1993) (confirming that bad faith
is borne of reckless indifference to apparent facts).
Because of the nature of this standard, each case will
necessarily be fact sensitive. Whether, in light of the
foregoing, the Bank acted in bad faith in continuing to honor
Caputo's trust account checks is not a matter we decide, nor
should the trial court have done so on the motion for summary
judgment. The test for good or bad faith is a subjective one to
be determined by the trier of fact unless only one inference from
the evidence is possible. Lustrelon, supra, 178 N.J. Super. at
144-45 (citing Community Bank v. Ell,
564 P.2d 685 (Or. Sup. Ct.
1977)). That is not the case here.
Without belaboring the point, it is for a jury to determine
whether the Bank recklessly disregarded or was purposefully
oblivious to facts suggesting impropriety by Caputo. Included
among the jury's considerations will be the facts surrounding the
almost daily withdrawals to himself from Caputo's trust account,
amounting to $291,000, each of which was approved by Kane or
Martin; the fact that Kane and Martin understood these
withdrawals to be extraordinary; their concomitant knowledge of
Caputo's regular dealings at a gambling casino; their willingness
to close Caputo's business account, which held low or negative
balances, while allowing the trust account, which held
substantial client funds, to remain open; the fact that the Bank
allowed Caputo to withdraw over $25,000 from his trust account
the day after the business account was closed and the Bank's
failure to report Caputo to the I.R.S. contrary to its
established policies.
We do not suggest that every instance of an improper
withdrawal will trigger a finding of bad faith or a duty to
investigate on the part of a bank. Without more, it seems
unlikely that a single transaction or even a few isolated
transactions would be sufficient to defeat a bank's motion for
summary judgment. However, a reasonable jury could hold the Bank
accountable from the time it closed Caputo's business account, or
earlier, based on the facts developed at trial. Our holding
today is based on the cumulative facts contained in the record.
Future cases will be similarly decided on their particular facts
in keeping with the standard announced here.
IV
The judgment of the Appellate Division is reversed. The
matter is remanded to the Law Division for a trial to determine
whether the Bank acted in bad faith in failing to inquire further
about Caputo's withdrawals from his trust account.
In light of this opinion, and because banks may be unsure of
exactly what steps to take when presented with cogent and obvious
evidence of fiduciary impropriety, we refer this matter to the
Professional Responsibility Rules Committee (PRRC). The PRRC is
to consider Rule 1:21-6, which enables us to monitor loose
practices in trust accounting, in light of the principles to
which we have adverted, and recommend changes in the reporting
requirements of section (a)(2) of the rule. In its
deliberations, the PRRC should specifically address the issues of
direct and electronic withdrawals from an attorney's trust
account and any other practices it deems indicative of
problematic fiduciary behavior. Technology may enable us to
adopt preventive measures that would, without burdening the
banking industry, better protect our citizens and the title
insurance industry. We leave it to the PRRC to explore those
possibilities. The PRRC should consult with and obtain the views
of the banking and title insurance industries and of the relevant
government regulators in formulating its recommendations. If it
chooses to do so, the PRRC may appoint a subcommittee that
includes representatives of those constituencies.
CHIEF JUSTICE PORITZ and JUSTICES O'HERN, GARIBALDI, STEIN,
COLEMAN, and VERNIERO join in JUSTICE LONG's opinion.
NO. A-108 SEPTEMBER TERM 1998
ON APPEAL FROM
ON CERTIFICATION TO Superior Court, Appellate Division
NEW JERSEY TITLE INSURANCE COMPANY,
Plaintiff-Appellant,
v.
JOSEPH C. CAPUTO, et al.,
Defendants,
and
NEW JERSEY NATIONAL BANK, etc.,
Defendant-Respondent.
DECIDED March 22, 2000
Chief Justice Poritz PRESIDING
OPINION BY Justice Long
CONCURRING OPINION BY
DISSENTING OPINION BY
Footnote: 1 1 Other banks have succeeded to the interests of The National State Bank (i.e. Constellation Bank, CoreStates Bank, and now New Jersey National Bank). For this opinion, the term Bank incorporates all of these institutional changes.
Rutgers School of Law - Camden.