Opinion
Case No. 19-cv-02251-VC
10-07-2019
Romy TAUBMAN, et al., Plaintiffs, v. USAA FEDERAL SAVINGS BANK, Defendant.
Bryan David Coryell, Casey Joseph Edmondson, John F. Friedemann, Esq., Friedemann Goldberg Wargo Hess LLP, Santa Rosa, CA, for Plaintiffs. Alexandria Gasper, Robert Stewart McLay, Joshua Nathan Kastan, DKM Law Group LLP, San Francisco, CA, for Defendant.
Bryan David Coryell, Casey Joseph Edmondson, John F. Friedemann, Esq., Friedemann Goldberg Wargo Hess LLP, Santa Rosa, CA, for Plaintiffs.
Alexandria Gasper, Robert Stewart McLay, Joshua Nathan Kastan, DKM Law Group LLP, San Francisco, CA, for Defendant.
ORDER DENYING MOTION FOR SUMMARY JUDGMENT
Re: Dkt. No. 17
VINCE CHHABRIA, United States District Judge
Over a period of about two years, Shannon Jones stole over $300,000 from her employers – Romy Taubman and Clay Greene – who were partners in a law firm. Jones, who was responsible in part for managing the firm's finances, took checks from clients payable to one of the partners and fraudulently endorsed them over to herself, forging the relevant partner's signature. Jones then modified the firm's accounting records to cover her tracks, and deposited the checks in her personal account with the defendant, USAA Federal Savings Bank. Jones made these deposits using her cell phone – a process known as "remote deposit capture." In this lawsuit, Taubman and Greene seek to hold USAA liable under California law for these losses.
As discussed at the hearing, the legal basis for the plaintiffs' claim against USAA has not been made precisely clear, and this problem will need to be remedied prior to trial. But both sides seem to agree that the plaintiffs indeed have a claim against the bank.
USAA has moved for summary judgment, invoking two statutory defenses to liability. These defenses, which were adopted with slight modification from the Uniform Commercial Code and which could not be drafted more poorly, are located at sections 3405 and 3406 of the California Commercial Code. Sections 3405 and 3406 each set forth circumstances in which a bank enjoys either a partial or complete defense to liability for accepting a fraudulently endorsed check.
Section 3405 addresses situations where an employer is defrauded by its own employee. As pertinent here, section 3405 provides the bank with at least a partial defense for accepting a check made out to the employer that has been fraudulently endorsed by the employee if: (1) the employer "entrusted [the] employee with responsibility with respect to" the check; and (2) the bank accepted the check "in good faith." California Commercial Code § 3405(b). If these requirements are satisfied, the extent of the defense depends on the doctrine of comparative negligence. If the bank was not negligent, the defense is complete. If the bank was negligent, then it remains partially liable, with liability based on the extent to which the bank's negligence "contributed to the loss." The section 3406 defense is similar in concept, but is not limited to situations where an employer is defrauded by an employee. It does include that situation, and therefore is largely if not wholly duplicative of section 3405. But it potentially applies in any situation (regardless of the identity of the victim and the perpetrator of the fraud) where a bank accepts an altered or forged check. Under this provision, the bank has at least a partial defense to liability for accepting a fraudulent check if: (i) the victim's own failure to exercise ordinary care was a cause of the fraud; and (ii) the bank took the check in good faith. As with Section 3405, if these requirements are satisfied, the extent of the defense depends on comparative negligence: if the bank was not negligent, it is free from liability; if the bank was also negligent, the loss is allocated between the bank and the victim "according to the extent to which the failure of each to exercise ordinary care contributed to the loss."
The actual text of this provision reads, in pertinent part, as follows:
For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the 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 the fraud, 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.
California Commercial Code § 3405(b).
The actual text of this provision reads, in pertinent part, as follows:
(a) A person whose failure to exercise ordinary care contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
(b) Under subdivision (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
California Commercial Code § 3406(a) -(b).
For purposes of this summary judgment motion, the inquiry for both defenses is similar. With respect to section 3405, Taubman and Green concede that Jones was entrusted with responsibility for the checks she stole, and that the checks were fraudulently endorsed. The remaining questions are: (1) whether the bank acted in good faith (in which case it would at least be entitled to a partial defense); and (2) whether the bank exercised ordinary care (in which case it would be entitled to a complete defense because it was not contributorily negligent). And that would be the end of the matter; there would be no need to turn to section 3406. But for the sake of completeness, it's worth noting that with respect to section 3406, the key questions for this motion are also whether the bank (1) acted in good faith and (2) exercised ordinary care. If it did, the only question that would remain under section 3406 is whether Taubman and Green themselves failed to exercise ordinary care (and there is plenty of evidence from which a jury could so find). In any event, as explained below, there are genuine disputes of fact on both of the key questions presented by this motion. This means the jury must decide whether the defenses apply at all and, if so, whether they give USAA a complete defense or merely a partial one.
The bank's remote deposit capture agreement with Jones prohibited her from depositing third-party checks, and yet USAA allowed Jones to deposit third-party checks through her cell phone for nearly two years, totaling over $300,000. See Dkt. 18-3 at 9. This by itself would likely create a factual dispute about whether the bank exercised ordinary care, because the plaintiffs' expert testifies reliably by way of declaration that the bank should have had policies and automated procedures in place to guard against the remote deposit of third-party checks. Dkt. 31 at 7. But there's more: Taubman and Greene have pointed to evidence suggesting that the bank actually knew, at the time, that Jones was remotely depositing third-party checks but did nothing to stop it. Dkt. 27-6 at 13. For this reason, the evidence would not merely allow a jury to conclude that the bank was contributorily negligent for its failure to exercise ordinary care (which would limit application of the defenses). It would allow a reasonable jury to conclude that USAA did not act in good faith in accepting these checks (which would prevent the defenses from applying at all).
USAA FSB's request for judicial notice is granted with respect to Dkt. 18-3. All other requests for judicial notice are denied as moot. At the hearing, USAA retracted its objection to the Declaration of Elaine Hetrick, Dkt. 31.
"Ordinary care" is defined as the "observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged." California Commercial Code § 3103(7). The code also states that "[i]n the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage...." Id.
Good faith means "honesty in fact and the observance of reasonable commercial standards of fair dealing." California Commercial Code § 1201(20).
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USAA does not dispute the validity or admissibility of this evidence, but argues it is entitled to summary judgment nonetheless. First, USAA contends banks may simply assume that their customers will comply in good faith with any contractual restriction on depositing third-party checks remotely, but that is obviously wrong. Second, USAA offers a declaration from an employee who asserts that the bank's policies are consistent with industry standards, but that bare assertion is contradicted by testimony from the plaintiffs' expert that describes several steps USAA should have taken and seemingly didn't. See Dkt. 23 at 2; Dkt. 31 at 5-6; see also Lee Newman, M.D., Inc. v. Wells Fargo Bank , 87 Cal. App. 4th 73, 84-85, 104 Cal.Rptr.2d 310 (2001) ; Lund v. Chemical Bank , 797 F. Supp. 259, 269 (S.D.N.Y. 1992). The bank points to features of its app software that detect fraud, but it appears, at least based on the evidence presented in connection with this motion, that these features could not have detected the relatively ordinary type of fraud at issue here. See Dkt. 23 at 2. Third, USAA argues that the standard for ordinary care in the context of remote deposit capture is defined solely by the bank's own procedures. See Dkt. 33 at 5. But that too is wrong. It's true that, under section 3103(7) of the Commercial Code, banks are not required to physically examine remotely deposited checks, so long as the failure to examine does not violate the bank's procedures, and so long as those procedures don't vary unreasonably from general banking practices. But that code provision merely "rejects those authorities that hold, in effect, that failure to use sight examination is negligence as a matter of law." Uniform Commercial Code Comment, California Commercial Code § 4406 (West 2017). In other words, even if judgment cannot be entered against a bank merely because it has failed to visually inspect the checks it processed, the bank still has a duty to adopt and follow reasonable policies and procedures to combat fraud perpetrated through remote deposits. At least on the evidence presented in connection with this summary judgment motion, a jury could easily conclude that USAA failed in that regard.
USAA FSB's motion for summary judgment is denied.