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U.S. District Court Dismisses Claims Arising From Check Fraud Scheme

In Armenian Missionary Association of America, Inc. v. TD Bank, N.A., et al, 87 UCC Rep. Serv. 2d 766 (D.N.J. 2015), the United States District Court for the District of New Jersey dismissed check fraud claims brought against TD Bank N.A. ("TD"). Plaintiff Armenian Missionary Association of America, Inc. ("AMAA" or "Plaintiff"), a non-profit organization that relies on donations to provide aid and assistance to Armenians throughout the world, sued TD after it discovered a series of alleged thefts by its former employee, Tigran Melkonyan, of over $800,000.00.

Melkonyan was employed by AMMA from August, 1999 until his resignation in April, 2014. His job duties centered on AMMA's child sponsorship and child education programs, but on certain occasions he was asked to go to the bank to deposit donation checks when the person typically responsible for depositing such checks was unavailable.   

AMAA alleged that Melkonyan began his check fraud scheme in 2006 by opening an account at TD in the name of "Armenian Mission Association of America," and by depositing donation checks made payable to, for example, the "Armenian Missionary Association of America," or the "Armenian Missionary Assoc./America" or in the vast majority of cases, simply "AMMA." AMMA discovered Melkonyan's check fraud in February of 2015.

Based on Melkonyan's conduct, AMAA brought claims against TD for: (i) conversion under New Jersey's version of Uniform Commercial Code ("UCC") Section 3-420(a), alleging that the bank was liable for "failing to conduct proper due diligence when Melkonyan opened the TD accounts under the name of "Armenian Mission Association of America;" (ii) relief under UCC § 3-405(b), alleging that TD failed to exercise good faith and/or ordinary care by accepting the deposits, especially with respect to checks were made payable to the "Armenian Missionary Association of America - a facially different payee than the entity assigned to the TD account; and (iii) common law negligence, on the ground that TD substantially contributed to the loss that resulted from the fraud, in breach of a duty owed to Plaintiff.  TD moved to dismiss Plaintiff's Complaint pursuant to Fed. R. Civ. P. 12(b)(6).  

In its opinion, the U.S. District Court began by noting that the New Jersey UCC provides a three-year statute of limitation on claims regarding negotiable instruments.  See UCC Section 3-118(g).  Because New Jersey courts had previously held that an action involving negotiable instruments accrues at the time the item or check is negotiated, the U.S. District Court ruled that the three-year statute of limitation barred Plaintiff's claims regarding checks that were negotiated more than three years before the subject suit was filed.  Citing both state law and Third Circuit precedent, the Court rejected Plaintiff's argument that the "discovery rule" should be applied to check fraud cases.

With regard to these checks negotiated during the three-year limitation period, the Court noted that, pursuant to UCC § 3-420(a), a depositary bank is liable for conversion when the instrument bears a forged endorsement. The Court explained, however, that UCC § 3-405 specifies that an endorsement on the back of a check in a name "substantially similar" to that of the payee named on the face of the check constitutes a valid endorsement when it is made by an employee of payee entrusted with responsibility for the check and where the depositary bank has acted in good faith. The Court concluded that, as a matter of law, the name of the intended payee on each of the checks at issue (Armenian Missionary Association of America) was "substantially similar" to the name appearing on the TD account into which the checks were deposited (Armenian Mission Association of America). Because there were no allegations in the complaint plausibly suggesting that the defendant bank had failed to act in good faith depositing the checks, the Court dismissed the Plaintiff's UCC claims pursuant to Rule 12(b)(6).

In rejecting the Plaintiff's common law negligence claim, the Court noted that a bank does not normally owe a general duty of care to a non-customer. In the case at bar, there was no banking relationship between the Plaintiff and TD. Nor was there any contractual provision that would give rise to a duty of care to the non-customer plaintiff. More importantly though, the Court noted that the UCC displaces common law claims where reliance on the common law would thwart the purposes of the UCC. The Court found that to allow a non-UCC cause of action for negligence would conflict with the careful balancing of the rights of the various parties involved in check fraud litigation. The Court therefore dismissed the common law negligence claim in its entirety.  

AMAA has appealed the dismissal of its claims to the U.S. Court of Appeals for the Third Circuit. Fitch Law Partners LLP will continue to monitor this case and those like it across the country.  

We invite you to learn more about Stephen C. Reilly and Fitch Law Partners LLP's banking law practice on our website

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