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Original WP 5.1 Version
This case can also be found at 163 N.J. 143.
(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
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
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
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,
NEW JERSEY NATIONAL BANK,
CORESTATES BANK, CONSTELLATION
BANK and the NATIONAL STATE
Argued January 3, 2000 -- Decided March 22, 2000
On certification to the Superior Court,
Appellate Division, whose opinion is
318 N.J. Super. 311 (1999).
James M. Cutler argued the cause for
appellant (Stern, Lavinthal, Norgaard &
John D. North argued the cause for
respondent (Greenbaum, Rowe, Smith, Ravin,
Davis & Himmel, attorneys).
The opinion of the Court was delivered by
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.
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
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.
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
[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.
[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)).]
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
[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
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.
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.
SEPTEMBER TERM 1998
ON APPEAL FROM
ON CERTIFICATION TO
Superior Court, Appellate Division
JOSEPH C. CAPUTO, et al.,
NEW JERSEY NATIONAL BANK, etc.,
DECIDED March 22, 2000 Chief Justice Poritz
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.
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