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Bank's Failure to Purchase Securities Alleged to Breach Consumer Fraud Act
New Jersey Law Journal
February 19, 2009
The state Supreme Court is poised to decide whether a bank can be held liable under the Consumer Fraud Act for an employee's failure to deliver on a promise to buy securities for a client.
The case, Lee v. First Union National Bank, A-58-08, argued Wednesday, is being closely watched by the banking industry, since a pro-plaintiff ruling carries with it the prospect of treble damages and counsel fees.
Plaintiff Margaret Lee, having received a $12,000 settlement check from a personal-injury suit, deposited $5,000 into her checking account with First Union National Bank in Hillside and took the remaining $7,000 in cash. While at the bank, she inquired about purchasing securities and was directed to Gregory Mack, an employee of the bank's affiliate, First Union National and First Union Brokerage Securities Inc.
On Mack's recommendation, Lee purchased 61.52 shares of Evergreen Omega, a mutual fund, for $2,000 in cash. She also opened a brokerage account with First Union Brokerage. Mack did not deposit the $2,000 into either account. With no funds in the brokerage account, the bank applied $500 from the checking account as partial payment for the purchase and liquidated $1,500 of the Omega fund units from her brokerage account to cover the remainder due, thus reducing the trade amount from $2,000 to $500.
Lee filed suit in Essex County, alleging both common law fraud and unconscionable commercial practices under the Consumer Fraud Act, N.J.S.A. 56:8-1 to -106. Superior Court Judge Jared Honigfeld dismissed the CFA count, holding that the act was inapplicable to the sale of securities, dismissed the common-law fraud count as barred by the two-year statute of limitations of the Uniform Securities Law, 49:3-47 to -76.
But last summer, Appellate Division Judges Donald Collester, Christine Miniman and Edwin Stern reversed, saying the CFA "evinces a clear legislative intent that its provisions be applied broadly in order to accomplish its remedial purpose, namely, to root out consumer fraud." Though securities sales were exempted from the act in 1976, the exception did not apply to a failure to perform an advertised service, they said.
At Wednesday's hearing, the in-house counsel for First Union's successor, Charlotte-based Wachovia National Bank, N.A., asked the Court to reinstate Honigfeld's dismissal of the suit.
Beverly Jo Slaughter said securities are not among the listed goods and services to which the CFA applies, even though the Legislature has considered adding them on several occasions. She said the failure to amend was evidence of the Legislature's "long-term acquiescence" with court rulings in New Jersey and elsewhere that treat securities separately from goods and services.
Justice Barry Albin noted the act defines "merchandise" as "any objects, wares, goods, commodities, services, or anything offered, directly or indirectly to the public for sale."
"Why shouldn't they [securities] be included?" he asked. "Everything else under the sun seems to be."
Slaughter said the Legislature considered it but ultimately chose to exempt securities. "Real estate was listed [in 1976], and that is indicative of legislative intent," she added.
Albin replied with a quote from U.S. Supreme Court Justice Antonin Scalia -- "Congress cannot express its will by a failure to legislate" -- and asked Slaughter what remedy a customer has for a banker's failure to fulfill a promise to purchase securities.
Slaughter said Lee had other options, including the common law fraud claim she included in her suit. "It's not as if by excluding the CFA that the courtroom doors are barred to her," she said.
Justice Roberto Rivera-Soto asked whether the definition of "merchandise" should be read broadly to include intangibles, or more narrowly to include only tangible goods.
Slaughter said it should not be read to include intangible items such as securities, which often do not even exist on paper.
Lee's lawyer, Metuchen solo Henry Gurshman, said the employee malfeasance in this case was precisely the type that the Legislature sought to combat with the CFA. "The CFA protects consumers from shady practices and dealings," he said. "There is a tendency to expand the coverage of the act."
Chief Justice Stuart Rabner asked Gurshman to speak to the definitions of "merchandise" and "anything."
"Anything means anything," Gurshman replied. "The act is aimed at rooting out certain practices, not at certain things."
Albin asked, hypothetically, whether an attorney who accepts a $2,000 retainer to appear on behalf of a client in court and then fails to show up could be held liable under the CFA.
"Yes," Gurshman said. "Especially if the lawyer took the retainer just to get the money."
