NJ Banks May Not Face Common Law Tort Claims for Improper Electronic Funds Transfers

By Edward J. Sholinsky

The New Jersey Supreme Court in a matter of first impression held that a non-customer of a bank cannot bring a common law negligence claim against that bank for an improper money transfer via the Internet.  In ADS Associates Group, Inc. v. Oritani Savings Bank, the court held that the state legislature intended Article 4A of the UCC to create the exclusive remedy for an alleged breach of a duty when a bank makes an electronic funds transfer and preempts any common law remedies.

At issue in ADS was whether New Jersey’s version of the UCC provides the exclusive remedy when a non-customer alleged an unauthorized electronic funds transfer via online banking, or whether the non-customer could bring a common law negligence claim against the bank.  The trial court held that a non-customer could not bring a common law negligence claim; the state’s intermediate appellate court reversed in an unpublished opinion.  The Supreme Court reversed the appellate court and reinstated the judgment of the trial court.

Plaintiff Brendan Allen entered into a business relationship with co-defendant Asnel Diaz Sanchez to bid on a large construction project.  Rather than creating a new entity, Allen and Sanchez used Sanchez’s then-existing business ADS Associates, Inc., to bid because ADS was an established minority-owned business.  The pair went to Oritani Savings Bank and opened an account.  The account agreement required both Allen and Sanchez to sign checks drawn on the account.  The account agreement also allowed both Allen and Sanchez, as authorized signatories, to use online banking to transfer funds.  Sanchez had other ADS accounts at the bank, and eventually began to electronically transfer money from the ADS account he opened with Allen to other ADS accounts without Allen’s permission.

When Allen discovered the allegedly unauthorized transfers, he brought suit, in his own name and in the name of ADS, against both the bank and Sanchez.  The suit stated claims alleging violations of Article 4A of the UCC, as well as common law claims.  It was undisputed that ADS, and not Allen, was the bank’s customer.  At issue in the Supreme Court was “whether Allen may maintain a common law non-customer negligence claim against Oritani.”

Article 4A of the UCC (codified in New Jersey at N.J.S.A. 12A:4A-101, et seq.) controls the electronic transfer of funds.  The statute sets out a detailed regime for properly authorized electronic transfers, including online banking transfers, and allocates the risk of loss between the bank and the customer.  Per the court, “Article 4A thus defines in detail the rights and obligations of banks and their customers in the event that funds are transferred in accordance with a payment order that the customer has not authorized.”  Relying on the commentary to Article 4A, the court determined that only a customer could pursue a remedy under Article 4A.

In reaching its conclusion, the court distinguished City Check Cashing, Inc. v. Manufacturers Hanover Trust Co., which held that, in the limited circumstances where a non-customer could show that he had a special relationship with the bank, the non-customer could assert a common law tort claim against the bank. The ADS court held that, regardless of any alleged special relationship, when a dispute arises out of “a bank’s acceptance of an order transferring funds from one account held by its customer to another of that customer’s accounts” that the “Legislature intended Article 4A to constitute the exclusive means of determining the rights, duties and liabilities of affected parties.”

Permitting a non-customer to bring a common law negligence action would “contravene” the risk allocation and redefine bank’s duties, which the court declared the “essential objective of Article 4A.” Indeed, the court reasoned that permitting non-customers to bring common law claims could give them more rights than bank customers in unauthorized transfer cases.

After ADS, in New Jersey only bank customers may bring claims against banks relating to unauthorized electronic transfers – including those made through online banking – and those claims only may be brought under Article 4A of the UCC.  Non-customers may not bring claims alleging breaches under the common law, because the exclusive remedy for those transfers is set out in Article 4A.

NJ Supreme Court: Consumer Contract Arbitration Clauses are Unenforceable Unless Consumers Are Clearly Notified that Court Redress is Waived

By Edward J. Sholinsky

Arbitration clauses in consumer contracts are unenforceable in New Jersey unless they specifically state that a consumer is waiving the right to pursue statutory and constitutional remedies in court, the New Jersey Supreme Court held. The court in Atalese v. U.S. Legal Services Group, L.P., reversed decisions by the trial and intermediate appellate courts that an arbitration clause calling for binding arbitration, but not specifically waiving the right to bring an action in court, was enforceable.

The plaintiff in Atalese entered into a contract with the defendant for debt-adjustment services.  The contract contained an arbitration clause that stated that any dispute between the parties would be submitted to binding arbitration, that the parties had to agree to the arbitrator, and that the judgment would be enforceable in court.  The plaintiff brought an action in state court alleging violations of New Jersey’s Consumer Fraud Act and Truth-in-Consumer Contract, Warranty, and Notice Act.  The defendant moved to compel arbitration, and the trial court granted the motion.  The Appellate Division, in an unpublished opinion, affirmed.

The defendant argued that consumers “universally understood” that arbitration is different than litigation.  It also invoked the Federal Arbitration Act’s (FAA) policy in favor of arbitration to support its argument that the contract required arbitration. The court rejected those arguments. Relying on Section 2 of the FAA, the court reasoned that arbitration agreements could “be invalidated by generally applicable contract defenses.”

Starting with the principal that contracts require mutual assent, the court reasoned that both parties to an arbitration clause had to understand the terms to which they were agreeing. Additionally, before a party can waive a legal right by contract, under New Jersey law, she must have “full knowledge” of the right and intend to give up that right.  Also, under New Jersey law, the terms of a consumer contract must be clear to the average consumer.

Rejecting the defendant’s argument, the court stated that the “average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Thus, the defendant’s failure to include clear and unambiguous language that the consumer was waiving her right to pursue her claims in court by agreeing to arbitrate rendered the arbitration clause unenforceable.

The court stressed that there was no “magic language” required in an arbitration clause. Rather, the clause must contain “clear and unambiguous” language that alerts the parties to the distinction between resorting to arbitration and bringing a claim in court.  The court did not require that an agreement specify which statutory or constitutional rights consumers were agreeing to arbitrate. In the contract at issue, the defendant did not use plain language that was “clear and understandable to the average consumer” that she was waiving her right to bring a claim in court, even though the contract referred to binding arbitration.

The Atalese decision should prompt companies doing business in New Jersey and using arbitration clauses in consumer contracts to review those contracts.  Businesses wishing to invoke arbitration must make sure that any arbitration clause contains clear, layman’s terms that a consumer is giving up the right to bring an action in court and agreeing to arbitration, which is an alternative to a lawsuit in court.  The clause must put the consumer on notice that by agreeing to the contract that she is giving up a legal right to a jury (or bench) trial on any dispute arising between the parties.

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