Trusting the Fiduciary: How You Can Escape Liability If You Accept a Bad Check- Part 2

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Guardianship & Power of Attorney Lawyer

In our last blog entry, we delved into the idea of trust as it relates to a fiduciary.  Like a family member, we often trust somebody to manage and protect our money and when he or she performs transactions on our behalf the law says you don’t need to question where that money came from or whether the transaction was authorized properly.  Today, we will discuss two exceptions to the rule where somebody cannot escape liability if they accept a bad check.

The first exception to fiduciary immunity is when you know that the fiduciary is paying with money he or she shouldn’t be using.  So for example, if a bank cashes a check from a person and the bank teller knows the account owner didn’t want his or her money to be used the way the presenter is using it, but cashes the check anyway, the bank through its teller opens itself up to liability under this law.  Pretty self-explanatory.

The second exception is a little more confusing.  The language from the statute N.J.S.A. 3B:14-55 is “knowledge of facts that amounts to bad faith.”  So what does this mean?  The Supreme Court explained in New Jersey Title Ins. Co. v. Caputo, where a person was withdrawing large sums of money from his client’s trust account to gamble in Atlantic City.  The checks were approved by the bank’s manager and assistant manager, who noted the large number and amount of withdrawals made on the account.  The bank’s employees had no direct knowledge of stealing, but they had concerns about the withdrawals, so the question was did the second exception apply where the bank should have stopped the person from withdrawing money?  The Court never answered the question, but it defined bad faith as being purposefully oblivious or recklessly disregarding facts that suggest fiduciary impropriety.  Based on the facts in this case, it seemed very likely the bank was complicit in allowing the person to do what he did, as the manager and assistant were suspicious, but never acted on their suspicions.  They allowed the person to violate his trust with his clients, which made the bank liable to some extent in the fraud scheme.

To summarize, the law says the following about fiduciary relationships.  If a check is drawn by someone with a confidential and trusting relationship like a POA or Guardian, you can accept and rely upon that relationship.  However, if you know that the agent is not acting lawfully, or if you should have known he or she wasn’t acting lawfully and you allow the transaction to go forward, you share liability with the culprit.  Trust is earned, and like the person who lost his trust with his clients by spending their money on himself, you lose your trust with others if you knowingly allow this fraud to occur.

To discuss your NJ Guardianship or Power of Attorney matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.