Globe Motor Car Co. v. First Fidelity Bank, N.A.

• Decision Date: 03 December 1993
• Citation: 641 A.2d 1136,273 N.J.Super. 388
• Court: New Jersey Superior Court
• Parties: , 25 UCC Rep.Serv.2d 183 GLOBE MOTOR CAR COMPANY, Plaintiff, v. FIRST FIDELITY BANK, N.A., New Jersey, John W. Gallo, Petrics, Meskin & Nassaur, Equifax, Phil L/N/U, Sahron Gallo, W. Karman, Jimmy Hawkins, Jimmy Yar, Walter Harye, Scott Gallo, Turk Jordan, Defendant.

Page 388

273 N.J.Super. 388

641 A.2d 1136, 25 UCC Rep.Serv.2d 183

GLOBE MOTOR CAR COMPANY, Plaintiff, v. FIRST FIDELITY BANK, N.A., New Jersey, John W. Gallo,

Petrics, Meskin & Nassaur, Equifax, Phil L/N/U, Sahron

Gallo, W. Karman, Jimmy Hawkins, Jimmy Yar, Walter Harye,

Scott Gallo, Turk Jordan, Defendant.

Superior Court of New Jersey, Law Division,

Essex County.

Decided Dec. 3, 1993.

Anthony J. Fusco, Jr., Passaic, for plaintiff.

Dennis T. Kearney, Morristown, for defendant First Fidelity (Pitney, Hardin, Kipp & Szuch, attorneys).

John Peter Duggan, Red Bank, for defendant Petrics, Meskin & Nassaur (Wolf, Helies & Duggan, attorneys).

Thomas J. Biamonte, Oradell, for defendant John W. Gallo (Giblin & Giblin, attorneys).

Robert J. Kelly, Morristown, for defendant Equifax Co. (McElroy, Deutsch & Mulvaney, attorneys).

JULIO M. FUENTES, J.S.C.

This summary judgment motion concerns the liability of a bank to its depositor with respect to approximately $1.5 million embezzled by the depositor's employee. The entire sum was stolen by the employee, a compulsive gambler.

The facts are largely not disputed. Plaintiff, Globe Motor Car Company (Globe), is an automobile dealership located in Fairfield, New Jersey. Its day-to-day finances were mainly handled by the office manager, John Gallo. During the relevant period of Gallo's employment, Globe was under an agreement with defendant First Fidelity Bank, N.A. (First Fidelity), which called for the bank to make loans to Globe to permit Globe to acquire new and used motor vehicles for sale or lease. Each extension of credit was to be secured by an interest in the vehicles acquired with the proceeds advanced by the bank. Upon the sale of any secured vehicle, Globe was obligated to pay off the financing loans. According to the agreement, First Fidelity or its designee was permitted to inspect Globe's records and the vehicles "at such time as the Bank may elect." On occasion, First Fidelity designated defendant Equifax, Inc., to inspect Globe's inventory.

From 1987 to 1990, Gallo embezzled over $1.5 million dollars from his employer. He acted alone in a fairly uncomplicated fraudulent scheme. On many occasions, Gallo would simply retain vehicle purchase money for his own use instead of depositing the proceeds to pay off the bank loans. On other occasions, Gallo would make himself and others payees on checks signed in blank by the owner. As the embezzlement progressed, Gallo would forge the owner's signature to checks payable to himself and others. To conceal his activities, Gallo removed checks made out to him from the monthly checking account statement. He also made out fake certificates of deposit and falsified monthly bank reconciliations.

Throughout the period of Gallo's deception, routine inspections by plaintiff's accountants, defendant Petrics, Meskin & Nassaur, failed to reveal any discrepancy. The accountants apparently reviewed only Gallo's falsified bank reconciliation and the top sheet of the bank statement showing the month-end account balance. The accountants never audited Gallo's bank reconciliation and, until he was finally caught, no one reviewed any of his forged cancelled checks, nor did anyone verify any of his forged deposit tickets. On site vehicle inspections by First Fidelity and Equifax failed to reveal any reason for alarm. When vehicle counts did not coincide with bank or dealer records, Gallo gave the inspectors assorted explanations for the discrepancies. When questioned about a vehicle's absence, Gallo often responded that the vehicle was out on lease, already paid to the bank, or sold or traded subject to payment. Gallo's embezzlement was finally brought to light in May 1990, when defendant First Fidelity informed Globe that it was out of trust.

In its complaint, Globe contends that its accountants, Petrics, Meskin & Nassaur, the bank, First Fidelity, and the vehicle counter, Equifax, were all negligent in failing to detect or prevent Gallo's criminal spree. First Fidelity and Equifax move for summary judgment contending that they owed no duty to Globe for its employee's embezzlement. Globe alleges that First Fidelity "owed a duty to Globe to exercise their control over the affairs of Globe," and that First Fidelity breached that duty by "failing to manage, supervise, control and monitor Globe" in its business and financial practices. In essence, Globe claims that the bank violated a fiduciary relationship with the dealership. As to Equifax Globe claims that it was negligent in its duty to inspect the vehicles, and that if it had properly performed its duty it would have detected a discrepancy between Globe's inventory and its bank loan commitments.

I. NEGLIGENCE AS TO FIRST FIDELITY AND EQUIFAX

Generally, to establish a negligence claim there must be a finding that the defendant owed some duty to the party complaining and a breach of that duty. Kelly v. Gwinnell, 96 N.J. 538, 544, 476 A.2d 1219 (1984); Goldberg v. Housing Authority of Newark, 38 N.J. 578, 583, 186 A.2d 291 (1962); Brody v. Albert Lifson & Sons, 17 N.J. 383, 389, 111 A.2d 504 (1955). "The question of whether a duty exists is a matter of law properly decided by the court, not the jury, and is largely a question of fairness or policy." Wang v. Allstate Ins. Co., 125 N.J. 2, 15, 592 A.2d 527 (1991); Strachan v. John F. Kennedy Memorial Hosp., 109 N.J. 523, 529, 538 A.2d 346 (1988). The inquiry as to whether a duty exists involves a weighing of the relationship of the parties, the nature of the risk and the public interest to be served. Kelly v. Gwinnell, supra, 96 N.J. at 544, 476 A.2d 1219; Goldberg v. Housing Auth. of Newark, supra, 38 N.J. at 583, 186 A.2d 291.

Globe's claim that the bank owes it a duty because of a presumed fiduciary relationship is without merit and unsupported by any state or federal law. On the contrary, "creditor-debtor relationships ... rarely are found to give rise to a fiduciary duty." Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 53 (3d Cir.1988) (citing Aaron Ferer & Sons, Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 122 (2d Cir.1984)). As the Paradise Hotel court further noted, it "would be anomalous to require a lender to act as a fiduciary for interests on the opposite sides of the negotiating table," inasmuch as their respective positions are essentially adversarial. 842 F.2d at 53 (quoting Weinberger v. Kendrick, 698 F.2d 61 (2d Cir.1982), cert. denied, 464 U.S. 818, 104 S.Ct. 77, 78 L.Ed.2d 89 (1983)); see also Gross v. Grimaldi, 64 N.J.Super. 457, 462, 166 A.2d 592 (App.Div.1960) (court distinguished fiduciary attorney-client relationship from relationship "simply that of debtor-creditor"); Klemm v. Labor Cooperative Nat'l Bank, 117 N.J.L. 284, 287, 187 A. 640 (E. & A.1936) (relation of debtor-creditor arising between bank and depositor from general deposit is not fiduciary absent specific establishment of trust).

The agreement between Globe and First Fidelity which governs this matter calls for Globe to keep accurate and complete records of all vehicles in which the bank has an interest. Globe is also to notify First Fidelity promptly of the details of all sales of vehicles, to receive and hold all proceeds of the sale of vehicles as trustee for First Fidelity, and to permit First Fidelity or its designee to inspect and check the vehicles at First Fidelity's election. All of these obligations on the part of Globe were included to protect First Fidelity's security interest in the goods. Nothing in the agreement obligates or even permits the bank to manage, control or monitor Globe's day-to-day business.

Imposing such a duty on a depositor bank would be unreasonable and untenable. Indeed, it would be foolhardy to expect a bank to supervise its depositor's employees, manage its financial planning and oversee its business activities. Moreover, I cannot imagine a depositor wanting a lender bank to be so intimately involved in its financial and private business judgments. Thus, imposing a duty on a bank that would obligate it to be responsible for its depositor's financial affairs would be impractical as a matter of public policy. As one California court stated, "[p]ublic policy does not impose upon the Bank absolute liability for the hardships which may befall the business venture it finances." Wagner v. Benson, 101 Cal.App.3d 27, 34, 161 Cal.Rptr. 516 (Ct.App.1980).

In considering the relationship of the parties and the nature of risks involved, there is no question that depositors such as Globe are better suited than their lending bank to manage their own affairs, hire and supervise their own employees, keep their own records, hire their own auditors and detect and deal with corporate theft. The bank's monthly reports to its creditor permits the depositor to determine if any deposits are missing or if checks are drawn without authority. A prompt examination of those records should have disclosed to the Globe firm that its office manager was a thief. In fact, even if the bank was aware of Gallo's defalcation, the bank had no duty "to disclose matters of which the other party has actual or constructive knowledge or as to which the information or means of acquiring information of the two parties is equal." Weiland v. Turkelson, 38 N.J.Super. 239, 246, 118 A.2d 689 (App.Div.1955) (quoting Sanders v. Reid, 131 N.J.Eq. 407, 411, 25 A.2d 541 (Ch.Div.1942). Banks cannot be expected to be their borrowers' financial guarantors. Here, Globe's attempt to assign liability to First Fidelity for its failure to police Globe's faithless employee is like the farmer, who upon appointing the fox to guard the henhouse, finds fault with the rooster for the subsequent slaughter. In both instances, blame is misplaced.

Absent a contractual duty, a bank has no obligation to manage, supervise, control or monitor the financial activity of its debtor-depositor and is not liable to its depositor in negligence for failing to uncover a...