Opinion
A144074
02-02-2017
RONALD GENE BAILEY, Plaintiff and Appellant, v. WELLS FARGO BANK, N.A. et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Solano County Super. Ct. No. FCS043142)
Plaintiff Ronald Gene Bailey appeals from a judgment of dismissal of his complaint against defendant Wells Fargo Bank, N.A. (Wells Fargo). Bailey contends the trial court erred in sustaining Wells Fargo's demurrer, dismissing his complaint, and denying his request for leave to amend. We conclude Bailey should be given the opportunity to amend his complaint.
Wells Fargo Bank, N.A. was erroneously sued as "Wells Fargo & Company." In addition to Wells Fargo & Company, Bailey's complaint named as defendants Fidelity Management Trust Company, Fidelity Investments, also known as FMR, LLC (collectively, Fidelity), and Does 1 through 50. Bailey and Fidelity stipulated to the removal of his claims against Fidelity into arbitration; Fidelity is not a party to this appeal.
I. BACKGROUND
Bailey alleged the following facts in his complaint:
Bailey opened a rollover individual retirement account (IRA) with Fidelity in January 2011. Between March and August 2011, Fidelity issued eight checks—totaling $49,399.77—to an individual claiming to be Bailey, based on telephone calls requesting the checks, without proper identification. In January 2013, Bailey realized for the first time that his IRA had a zero balance and immediately contacted Fidelity. Fidelity informed Bailey that someone claiming to be him had telephoned and asked Fidelity to issue the checks. After investigating Bailey's claim, Fidelity declined to credit Bailey's account, concluding the withdrawals were authorized.
Bailey maintained a checking account at a Wells Fargo branch in Vallejo. Between March and July 2011, Wells Fargo allowed an impostor to cash the eight checks without proper identification and without the exercise of ordinary care. Bailey received no notice that the checks had been cashed. When Bailey discovered the payments had been made, he notified Wells Fargo. Wells Fargo investigated the matter and concluded that Bailey "received [the] benefit" of the checks, and that "all [presented] information matches name, address, phone [number], [social security number], and signature to [his] previously established account."
Bailey's complaint alleged a cause of action for negligence against Wells Fargo, and appears to have alleged an additional claim for conversion, although the face of the complaint indicates that cause of action is alleged "[a]gainst Does 24-50, inclusive." Wells Fargo demurred on the ground that both claims were barred by Commercial Code section 3420, which provides that an action for conversion (and, by implication, for negligence) cannot be brought by a payee who never received delivery of the checks. The trial court sustained the demurrer without leave to amend. Bailey appeals the ensuing judgment of dismissal.
All undesignated statutory references are to the California Uniform Commercial Code (the Code).
II. DISCUSSION
A. Standard of Review
We apply well-established rules of review. " 'A demurrer tests the legal sufficiency of the complaint. [Citation.] Therefore, we review the complaint de novo to determine whether it contains sufficient facts to state a cause of action. [Citation.] "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law." [Citation.]' " (Czajkowski v. Haskell & White, LLP (2012) 208 Cal.App.4th 166, 173.) If the demurrer is sustained without leave to amend, we determine whether there is a reasonable possibility the pleading can be cured by amendment. (Ellena v. Department of Ins. (2014) 230 Cal.App.4th 198, 204-205.) The plaintiff has the burden of proving an amendment could cure the defect. (Grinzi v. San Diego Hospice Corp. (2004) 120 Cal.App.4th 72, 78.)
B. Terminology
It is helpful to set forth at the outset the terminology used in the Commercial Code with respect to banks and checks. The "drawer" is the person ordering payment. (§ 3103, subd. (a)(3).) Here, the drawer would be Fidelity. The "drawee" is the person ordered in the draft to make payment. (§ 3103, subd. (a)(2).) The "payor bank" is the bank that is the drawee of the draft. (§ 4105, subd. (3).) In this case the drawee and the payor bank is BNY Mellon Trust of Delaware—the bank from which Fidelity drew the funds for the check. The "depositary bank" is "the first bank to take an item . . ." (§ 4105, subd. (2).) Here, Wells Fargo is the depositary bank and also the "collecting bank," viz., "a bank handling an item for collection except the payor bank." (§ 4105, subd. (5).) Bailey is, of course, the "payee" on the checks.
The complete definition of "depositary bank" is: "the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter." (§ 4105, subd. (2).) According to the comments this means that "a payor bank is not also a depositary bank with respect to an item presented for immediate payment over the counter." (See § 4105 Official Reasons for 1990 UCC Changes.) Thus, Wells Fargo is a depositary, not a payor bank.
C. Section 3420
Section 3420 provides that the law of conversion applies to negotiable instruments, including checks (§ 3104), and that an instrument is converted if "a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment." (§ 3420, subd. (a).) An action for conversion, however, "may not be brought by a payee . . . who did not receive delivery of the [check]." (§ 3420, subd. (a).) As will be explained, this is because a payee has no interest in an undelivered check, and if the check is paid out over a forged indorsement, the maker remains obligated to the payee for the amount of the check. Bailey has not alleged or argued that he received any of the checks in question and in fact alleges that the checks were prepared and negotiated without his knowledge or consent. Consequently, section 3420, subdivision (a) explicitly precludes him from bringing an action for conversion against Wells Fargo.
Bailey asserts that he has a right to bring a claim for conversion against Wells Fargo because it is the "drawee bank," and section 3420 provides that "if the amount of a check is paid on a forged [i]ndorsement to any person other than the designated payee . . . the drawee is liable to the designated payee . . . for converting the amount of the check. (Italics added.)" As has been explained, however, Wells Fargo is not the drawee or payor bank, and therefore cannot be sued for conversion by a payee who never received the check. Indeed, as Bailey himself explains, "the drawee is liable for the full amount of the check notwithstanding Commercial Code Section 3420(c) [citations]. A payor bank is, in effect, strictly liable to the true owner if it pays an instrument on a forged [i]ndorsement. The collecting banks are, in turn, strictly liable to the payor bank for breach of warranty of good title. [Citation.]" (Italics omitted.) Thus, as Wells Fargo accurately states, section 3420 "precludes any conversion claim by a payee who has not received delivery of the check because the payee suffers no loss from payment on the check. The underlying obligation of the check's maker (here, Fidelity) to its payee (Bailey) continues to exist despite payment on the check."
Bailey next contends that section 3420 does not preempt common law negligence claims, and he may therefore pursue his negligence cause of action against Wells Fargo. For this contention, Bailey relies on section 1103, which declares that the Code is supplemented by "the principles of law and equity" when not displaced by the Code's particular provisions. Recent precedents, however, have concluded that section 3420 has displaced negligence actions of this nature.
In Gil v. Bank of America, N.A. (2006) 138 Cal.App.4th 1371, 1377-1378 (Gil), the plaintiff payee alleged negligence against the defendant bank after it wrongfully deposited a check made payable to three parties, including the plaintiff, despite the absence of one party's indorsement. (Id. at pp. 1375, 1378.) The court concluded the plaintiff's claims fell within the scope of section 3420 and that the drafters of the Code intended to codify the existing common law relating to a payee's remedy when a bank paid out a check on an unauthorized indorsement. "Thus, the drafters intended to meld actions for negligence and conversion into one remedy under the conversion statute." (Id. at p. 1378.) The court explained: " '[B]oth negligence and conversion require a consideration whether there was payment over an unauthorized indorsement and evaluation of the reasonableness of the defendant's actions. This duplication suggests that the Code cause of action [for conversion] comprehensively covers the field of legal theories available when a check is paid over an unauthorized indorsement.' " (Id. at pp. 1378-1379.)
The reasoning in Gil, supra, 138 Cal.App.4th 1371 is persuasive. Our Legislature adopted the Code as a way to simplify the law governing commercial transactions and make that law more uniform among various jurisdictions. (§ 1103, subd. (a).) The current revision of article 3 of the Code, which encompasses section 3420, "provides a comprehensive framework for allocating losses when a check bearing a fraudulent [i]ndorsement is paid or taken for collection." (AmerUS Life Ins. Co. v. Bank of America, N.A. (2006) 143 Cal.App.4th 631, 643.) For payees whose checks were paid out by a bank on a forged, missing, or incomplete indorsement, section 3420 provides a specific statutory remedy via an action for conversion. (§ 3420 & com. 1.) Therefore, when claims involve factual scenarios covered by section 3420, "the provisions of the Code are controlling and must be deemed to displace common law negligence principles with respect to" those claims. (Roy Supply, Inc. v. Wells Fargo Bank (1995) 39 Cal.App.4th 1051, 1067.)
Our Legislature adopted the Uniform Commercial Code's comments exactly as written with only a few exceptions in article 4. (Lee Newman, M.D., Inc. v. Wells Fargo Bank (2001) 87 Cal.App.4th 73, 81-82 ["revised article 3 is to be 'interpreted and applied in accordance with the official comments of the [Uniform Commercial Code].") Comment one to section 3420 is therefore persuasive in interpreting the statute. (Ibid.)
Here, Bailey did not allege he received the checks, and he therefore has no cause of action for conversion. Nevertheless, Bailey's action falls within the statutory framework provided by the Legislature. As to payees who never received delivery of the instrument, comment 1 to section 3420 states: "There was . . . a split of authority under former Article 3 on the issue of whether [such a payee] is a proper plaintiff in a conversion action. The typical case was one in which a check was stolen from the drawer or in which the check was mailed to an address different from that of the payee and was stolen after it arrived at that address. The thief forged the indorsement of the payee and obtained payment by depositing the check to an account in a depositary bank. . . . [U]nder the last sentence of Section [3420, subdivision (a)], the payee has no conversion action because the check was never delivered to the payee." (U. Com. Code, com. 1 to § 3-420.) The comment continues: "Until delivery, the payee does not have any interest in the check. The payee never became the holder of the check nor a person entitled to enforce the check. . . . Nor is the payee injured by the fraud. Normally the drawer of a check intends to pay an obligation owed to the payee. But if the check is never delivered to the payee, the obligation owed to the payee is not affected. . . . Since the payee's right to enforce the underlying obligation is unaffected by the fraud of the thief, there is no reason to give any additional remedy to the payee." (Ibid., italics added.) The Legislature thus considered situations in which payees do not receive delivery of an instrument that is stolen and paid out on a forged indorsement and chose not to provide those payees with a remedy apart from their "right to enforce the underlying obligation." (U. Com. Code, com. 1 to § 3-420.) As explained in Barrett Business Services, Inc. v. Workers' Comp. Appeals Bd. (2012) 204 Cal.App.4th 597, 603 (Barrett), in that scenario, the issuer of the check (here, Fidelity) remains liable to the payee on the underlying obligation.
Bailey argues that this provision is inapplicable to his case because this portion of the comment gives an example stating that a thief deposits a check, and in his case, Wells Fargo cashed the forged check. This contention is meritless. (U. Com. Code, com. 1 to § 3-420, ["[Section 3420] covers cases in which a depositary or payor bank takes an instrument bearing a forged indorsement (italics added)"].)
Here, Bailey's allegation that Fidelity issued several checks to him that were never delivered to him, stolen by a thief, and then cashed by Wells Fargo on a forged indorsement falls squarely within section 3420. (See § 3420, subd. (a); U. Com. Code, com. 1 to § 3-420.) Because section 3420 " 'articulates a loss distributive scheme that applies to' " Bailey's facts, his common law negligence claim is displaced. (Stenseth v. Wells Fargo Bank (1995) 41 Cal.App.4th 457, 466.)
We are not persuaded otherwise by Bailey's citation to Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 695 (Sun 'n Sand). There, the plaintiffs' employee made several checks payable to the company's bank, United California Bank (UCB). (Id. at p. 678.) The employee had a corporate officer indorse several small checks payable to UCB; the employee then altered the indorsed checks' amounts by thousands of dollars and deposited the altered checks into her personal account at UCB. (Ibid.) The plaintiffs brought suit against UCB under various theories, including negligence, which the trial court dismissed. (Id. at p. 703.) Our high court reversed the dismissal of the negligence cause of action as to several checks. The plurality opinion held that "an attempt by a third party to divert the proceeds of a check drawn payable to the order of a bank to the benefit of one other than the drawer or drawee suggests a possible misappropriation. . . [and] that [the plaintiffs'] allegations define[d] circumstances sufficiently suspicious that UCB should have been alerted to the risk that [the] employee was perpetrating a fraud." (Id. at pp. 694-695.) The court also rejected UCB's contention that the plaintiffs' facts were covered under another provision of the Code and held that the plaintiffs' negligence action was not displaced by the Code. (Ibid.)
Sun 'n Sand is inapposite because the plaintiffs there were not the payees, but the drawers (and payors) of several stolen checks. Our high court interpreted an entirely different provision of the Code, former section 3405, which at the time detailed the effect of a forged indorsement by a dishonest employee in particular circumstances, and determined that the plaintiffs' unique factual allegations fell outside the contemplated scope of that section. (Sun 'n Sand, supra, 21 Cal.3d at pp. 694-696.) Most importantly, however, the high court expressly limited its holding as to the plaintiffs' negligence claim, stating that the duty of care in question was "narrowly circumscribed: it is activated only when checks, not insignificant in amount, are drawn payable to the order of a bank and are presented to the payee bank by a third party seeking to negotiate the checks for his own benefit." (Id. at p. 695.) Here, the checks were made out to Bailey, not to the bank. (Id. at p. 696; see also, Pacific Indemnity Co. v. Security First Nat. Bank (1967) 248 Cal.App.2d 75 [payee bank not protected from loss after depositing series of checks into payor's employee's personal account].)
Joffe v. United California Bank (1983) 141 Cal.App.3d 541 (Joffe), upon which Bailey also relies, had a similarly narrow holding that does not apply to the facts before us: "Under these circumstances—a check for a substantial amount, payable to an escrow, or trust, or similar entity at another bank, with inadequate indicia on the face of the check regarding the representative authorized to negotiate the instrument— . . . the risk to the drawer is sufficiently foreseeable to impose a duty on a depositary bank 'not to ignore the danger signals inherent' in an attempted negotiation by a third party." (Id. at p. 556.) The Joffe court rejected the bank's contention that either section 1103 or section 3406 (which limits the defenses available to one whose lack of ordinary care contributes to the alteration of an instrument) precluded the plaintiffs from proceeding under a negligence theory, noting that those statutory provisions did not "create a loss distributive scheme which would shield depositary banks under fact patterns similar to that alleged in [the plaintiffs'] complaint." (Id. at p. 557.) Here, as we have explained, section 3420 does create a loss distribution scheme applicable to precisely the fact pattern before us here, and that scheme is comprehensive. (See also E.F. Hutton & Co. v. City National Bank (1983) 149 Cal.App.3d 60, 69.)
Two other cases upon which Bailey relies were decided prior to the 1992 amendments to the Commercial Code, and in any event, do not address a payee's right to sue in negligence. (See Sehremelis v. Farmers & Merchants Bank (1992) 6 Cal.App.4th 767, 772 [plaintiffs exercising rights as drawers barred from bringing conversion action but could properly bring negligence action]; Fireman's Fund Ins. Co. v. Security Pacific Nat. Bank (1978) 85 Cal.App.3d 797, 830 [drawer might properly bring negligence claim against collecting bank].) The third case is factually inapposite. In Holcomb v. Wells Fargo Bank, N.A. (2007) 155 Cal.App.4th 490, 497, the court permitted a depositor to sue for negligent misrepresentation after the bank manager incorrectly told the customer that his deposit had "cleared" and he could write checks against the deposited amount.
The trial court properly concluded Bailey cannot plead a conversion claim and that Bailey's common law negligence claim was displaced by section 3420.
Bailey argues that Wells Fargo is not entitled to assert a defense under section 3420, subdivision (c). Subdivision (c) of section 3420 states that "[a] representative, other than a depositary bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it was not paid out." (§ 3420, subd. (c), italics added.) Wells Fargo, which was the depositary bank for the checks issued by Fidelity, does not rely on the defense.
D. Section 3404 and Leave to Amend
Bailey contends for the first time on appeal that Wells Fargo is liable for statutory negligence pursuant to section 3404, subdivision (d). Section 3404 provides in relevant part: "(a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument . . . , an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection. [¶] . . .[¶] (d) . . . [I]f a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss." (§ 3404, subds. (a) & (d).)
Section 3404, subdivision (d) may be applicable here if Bailey can show he is "the person bearing the loss." (§ 3404, subd. (d).) As we have explained, where the issuer of a check does not deliver it to the payee, "the issuer remains liable to the payee on the underlying obligation." (Barrett, supra, 204 Cal.App.4th at p. 603.) Because of this rule, section 3404 is generally applied to give the remedy to the drawer of the checks. (U.C.C. § 3-404, comment 3 ["Subsection (d) . . . allows the person who suffers loss as a result of payment of the check to recover from the person who failed to exercise ordinary care. . . . In those cases, the drawer has a cause of action against the offending bank to recover a portion of the loss."]; Unlimited Adjusting Group, Inc. v. Wells Fargo Bank, N.A. (2009) 174 Cal.App.4th 883, 887.) ["Section 3404 . . . provide[s], in effect, that the drawer of a check may recover from a depositary bank on a comparative negligence basis if, inter alia, the depositary bank failed to use ordinary care in permitting a customer to deposit a check . . . " italics added].)
Upon these premises, Wells Fargo argues that Bailey cannot state a claim based on section 3404, subdivision (d) because "he is not 'the person bearing the loss' 'resulting from payment of the instrument.' " According to Wells Fargo, a payee who never receives the fraudulently procured check "is unaffected by it" because it is the drawer of the check that "normally bears the loss on a check issued to an impostor." While this would "normally" be true, it is not necessarily true in this case if Bailey is unsuccessful in securing reimbursement from Fidelity. Wells Fargo's argument is based on the assumption that "Bailey has suffered no loss 'as a result of the payment' of the eight checks"—an assumption that is called into question by Bailey's affirmative allegation that he has, in fact suffered the loss due to Fidelity's refusal to recredit Bailey's retirement account.
Section 3404, subdivision (d) gives the remedy to "the person bearing the loss" and not to a drawer, a drawee bank, or any other specific person or entity. Therefore, if it is the payee—rather than the drawer—who bears the loss of the forged checks, the payee should not be precluded from seeking recovery against the depositary bank under that statute.
We recognize that Bailey raised this theory for the first time on appeal. It is nevertheless appropriate for us to entertain the argument. " 'When a demurrer is sustained without leave to amend the petitioner may advance on appeal a new legal theory why the allegations of the petition state a cause of action.' [Citation.]" (Dudley v. Department of Transportation (2001) 90 Cal.App.4th 255, 259.) Further, public policy dictates that leave to amend be liberally granted, if there is any reasonable possibility that the plaintiff can state a cause of action. (Harman v. City and County of San Francisco (1972) 7 Cal. 3d 150, 157.) We therefore conclude that the matter should be reversed and remanded to provide Bailey an opportunity to state a cause of action against Wells Fargo under section 3404, subdivision (d). (Cf. Lee Newman, M.D., Inc. v. Wells Fargo Bank, supra, 87 Cal.App.4th 73 [employer bearing loss due to checks fraudulently endorsed by employees has statutory claim for negligence against depositary bank under § 3405, subd. (b), which contains language identical to § 3404, subd. (d)].) In so doing, we express no view concerning the merits of the potential claim nor of any potential defenses.
III. CONCLUSION
The judgment is reversed and the matter is remanded for further proceedings.
/s/_________
Rivera, J. We concur: /s/_________
Ruvolo, P.J. /s/_________
Reardon, J.