Originally published in Law360, New York on January 29, 2013.

Banks, broker/dealers and other financial institutions often are the subject of claims by noncustomer investors, businesses, and estate and trust beneficiaries asserting that the institution is responsible for defalcations involving checks committed by persons running investment schemes, employees of account holders with responsibility for company accounts, attorneys, trustees or executors.

The most common situations in which such claims arise involve corporate employees with responsibilities for corporate accounts, such as controllers and their assistants, or bookkeepers in smaller entities. In most cases, the bank or other institution owes no duty to third parties and enjoys a general rule of nonliability for claims arising out of a breach of another’s fiduciary duty.

However, banks and financial institutions should be aware of certain potential exceptions to the nonliability rule that may apply when the bank or institution acted “knowingly,” in “bad faith,” or where the nature of the transaction suggests the likelihood of misappropriation. Exceptions to the general rule of nonliability can be found in New Jersey’s version of the Uniform Fiduciaries Act and in Article 3 of New Jersey’s version of the Uniform Commercial Code.