United Jersey Bank is facing a multimillion-dollar loss and lawsuits stemming from the bankruptcy of a customer allegedly involved in a massive wire fraud.

The bank's client, Payroll Express Corp., Elizabeth, N.J., filed for bankruptcy June 5, claiming negative net worth of more than $24 million, including $5.9 million owed to Hackensack, N.J.-based United Jersey Bank, a unit of UJB Financial Corp.

That day, the U.S. government accused Payroll and Robert Felzenberg, its owner, of wire fraud and defrauding the government.

Some Blame Bank

Now, the bankrupt company's creditors are trying to blame some of their losses on the bank, accusing United Jersey of mishandling funds wired into Payroll Express' account. While such claims would be difficult to prove, legal experts said, they could have merit.

"It all depends upon the facts of this case, and a lot of facts are unknown," said Thomas J. Greco, associate general counsel for the American Bankers Association in Washington. "But this does point out the importance of watching for depositors who are not only in financial trouble but could create other exposures for you."

A UJB spokesman denied that the bank is liable to Payroll Express' other creditors.

Payroll Express, founded in 1967, was in the business of cashing paychecks for employees of hospitals, government agencies, and large corporations. The company had more than 100 customers, including the city of New York, American Telephone & Telegraphs Co., the New York Stock Exchange, New York University and the Port Authority of New York and New Jersey.

How Cash Was Handled

Typically, clients would wire money into Payroll Express accounts, including the account at United Jersey. Then Payroll Express employees would withdraw cash from the banks and drive to client sites on paydays. Payroll Express would later return cashed checks and any unused funds to its customers.

The criminal charges filed against Mr. Felzenberg in U.S. District Court in lower Manhattan alleged that Payroll Express' problems surfaced in late May, when the company stopped cashing clients' paychecks. Federal investigators charged Mr. Felzenberg with improperly transferring about $30 million of clients' money into his own account and the accounts of other businesses in which he held ownership stakes.

In the bankruptcy filing, Mr. Felzenberg acknowledged that he had loaned money to his other companies but claimed he ran into a cash squeeze when one of Payroll's banks, National Westminster Bank USA, asked the company to reduce its volume of overdrafts from about $9 million to between $4 million and $5 million.

A bank spokesman declined to comment on this statement.

In court documents, Payroll Express reported total liabilities of $31 million and total assets of $5.9 million. United Jersey Bank was listed as the company's largest creditor.

But some Payroll Express creditors contend that United Jersey Bank is liable for their losses. For example, Kingsbrook Jewish Medical Center filed a civil suit in Brooklyn, N.Y., in which it said that Payroll Express and United Jersey Bank owe it $425,000 for undisbursed payrolls and should pay another $1 million in punitive damages.

Kingsbrook contended that United Jersey is liable for money the hospital wired into a Payroll Express account because the money should have be held in trust by the bank until pay-checks were cashed by Payroll Express.

But the UJB spokesman said the bank owes the medical center nothing because it had never agreed to set up a trust account for Kingsbrook.

Potential Liability Seen

The ABA's Mr. Greco said that the bank could be liable if it set up an account for Payroll Express in which it agreed, in some manner, to monitor the funds Payroll disbursed to its customers' employees. But normally, a bank is not responsible for monitoring a depositor's liabilities to other parties, he added.

Some creditors said they are also contemplating lawsuits in which the bank would be held liable for using inside knowledge about Payroll's problems to limit its own losses, at the expense of other creditors.

United Jersey stopped letting Payroll withdraw funds May 26, a Tuesday, but the bank continued to accept Fed Wire transfers to the company through June 2, the UJB spokesman said.

Some creditors argued that United Jersey Bank officials knew Payroll was in trouble but continued to accept deposits in order to limit its losses from Payroll's impending overdraft.

Bank Outlines Its Actions

Mr. Greco said that, if United Jersey officials knew Payroll was in financial trouble and didn't warn anyone, it could bear some liability for other creditors' losses.

But the UJB spokesman said the bank acted properly and owes other creditors nothing. He said the bank stopped letting Payroll employees withdraw cash because bounced checks were beginning to come in from other banks. The spokesman said the account was not overdrawn until May 29, when $9.2 million of checks from Payroll's NatWest account were processed.

On that day, the bank said, it revoked Payroll's check-writing privileges. United Jersey continued to let Payroll customers wire money because federal rules said these transactions could only be stopped by Payroll, the spokesman said, and Payroll didn't issue this order until June 3.

The spokesman added that Payroll had been a trouble-free customer for more than seven years.

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