Saturday, June 20, 2020

FYI: Cal App Ct (4th Dist) Holds Banks Owe No Duty to Monitor Other Depositor's Accounts

The Court of Appeals of California, Fourth District, recently held as a matter of law that banks owe no duty to depositors to monitor other depositors' accounts for fraud.

 

A copy of the opinion is available at:  Link to Opinion

 

A bookkeeper ran a check depositing scam against her client (Company). The bookkeeper's scam involved changing her checking account to a fictitious business name "Income Tax Payments" then instructing the Company to write its quarterly state and federal income tax payments to "Income Tax Payments" and give them to her for mailing.

 

Rather than mail the checks to the IRS, the bookkeeper deposited them into her own account over a period of five years in an amount totaling $700,000. Both the bookkeeper and Company shared the same bank.

 

After discovering the fraud, the Company notified the bank and made a claim for loss which the bank denied. The Company then sued the bank for negligence in failing to monitor bookkeeper's account for fraudulent activity after permitting her to add the "inherently suspicious" name "Income Tax Payments" to the account.

 

After a two-week jury trial, the trial court granted the bank's motion for non-suit, holding the bank owed the Company no duty to investigate or monitor the bookkeeper's account.  This appeal followed.

 

Company presented two arguments on appeal. First, the Company argued that the trial court erred in taking from the jury the disputed issue of whether the dba "Income Tax Payments" was so suspicious it triggered a duty on the part of the bank to investigate possible fraudulent activity in bookkeeper's account. Second, the Company argued that the trial court wrongly concluded as a matter of law banks owe no duty to depositors to monitor other depositors' accounts for fraud, or alternatively, the court should recognize a new duty of inquiry owed by banks to depositors.

 

The Appellate Court recognized the relationship between a bank and its depositor is not fiduciary in character, but rather "'founded on contract,' [citation] which is ordinarily memorialized by a signature card that the depositor signs upon opening the account. [Citation.]" (Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532, 537 (Chazen) ["banks 'are not fiduciaries for their depositors'"].)

 

"This contractual relationship does not involve any implied duty 'to supervise account activity' [citation] or 'to inquire into the purpose for which the funds are being used' [Citation] . . . ." (Ibid.) Nevertheless, "[i]t is well established that a bank has 'a duty to act with reasonable care in its transactions with its depositors . . . .' (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 808 [(Bullis)].) The duty is an implied term in the contract between the bank and its depositor. (See Barclay Kitchen, Inc. v. California Bank [(1962)] 208 Cal.App.2d [347,] 353 [(Barclay Kitchen)].)" (Chazen, supra, 61 Cal.App.4th at p. 543.)

 

The Appellate Court noted the parties did not cite, nor had the Court found, any published case involving the issue of whether a bank owes a depositor a duty to investigate and disclose possible fraudulent activity in another depositor's account.  However, many cases reject the notion banks owe such a duty to nondepositors. For example, in Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138 (Casey), another panel of the same appellate court presented a "primer on California banking law" and pronounced the following blanket rule: "[U]nder California law, a bank owes no duty to nondepositors to investigate or disclose suspicious activities on the part of an account holder." (Id. at p. 1149.)

 

In a Casey footnote, the Court noted a single, narrow exception where in Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671 [(Sun 'n Sand)], the California Supreme Court held a bank has a 'minimal' and 'narrowly circumscribed' duty of inquiry '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.)" (Casey, supra, 127 Cal.App.4th at p. 1151, fn. 3.)

 

The Company cited the Sun 'n Sand exception as the basis for its argument that current law imposed a duty of inquiry on the bank. In Sun 'n Sand, the plaintiff, convinced by a dishonest employee that it owed minor sums of money to a bank, made several checks payable to that bank. The employee altered the checks to increase the sums and deposited them in her personal account with the same bank. The bank permitted this negotiation without any inquiry, despite the fact the checks were not payable to the employee.

 

The Appellate Court emphasized the sharp limits on the reach of this new duty of inquiry noting that here, unlike in Sun 'n Sand, the checks that the bookkeeper submitted for deposit had "objective indicia from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed." (Surf 'n Sand, supra, 21 Cal.3d at pp. 695-696.) Notably, the "objective indicia" test was met because the checks were made payable to the very account in which they were deposited, "Income Tax Payments," and an authorized signatory endorsed each check.

 

The Appellate Court held the trial court correctly ruled as a matter of law the bank had no duty to monitor bookkeeper's account, which rendered moot the dispute over whether bookkeeper's fictitious business name "Income Tax Payments" was a highly suspicious "red flag" triggering an inquiry into possible fraud.

 

In addition, the Court addressed the Company's argument that the Court should recognize a new duty of inquiry owed by banks to depositors by acknowledging a fundamental rule in tort law: "[L]iability in negligence for purely economic losses . . . is 'the exception, not the rule[.]'" (Gas Leak Cases, supra, 7 Cal.5th at p. 400, quoting Quelimane, supra, 19 Cal.4th at p. 58.)3 "Whether a court will nevertheless recognize such a duty does not turn on privity of contract. (Centinela[, supra,] 1 Cal.5th at p. 1013; Quelimane, at p. 58.) Instead, it turns on whether '"public policy . . . dictate[s] the existence of a duty to third parties.'" (Centinela [], at p. 1013; Cabral [v. Ralphs Grocery Co. (2011) 51 Cal.4th 764,] 771 ['courts should create [a duty] only where "clearly supported by public policy"'].)" (QDOS, supra, 17 Cal.App.5th at p. 998.)

 

The only policy argument the Company offered in support of this new duty is that a bank is uniquely able to detect a depositor's fraudulent activities and protect other depositors from that fraud.

The Court was unpersuaded by client's argument noting, in this case, it would not have been too difficult to discover five years' worth of diverted tax payments, had the Company exercised basic prudence, and the Company provided no compelling argument why the bank should have borne the burden of detecting bookkeeper's fraudulent scheme rather than the Company itself.

 

Consequently, the judgment of the trial court was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

Tuesday, June 16, 2020

FYI: NY High Court Rules in Favor of Lender in Action to Recover Settlement and Defense Costs from Insurer

In an action by a lender and its affiliate to recover insurance proceeds for defense costs of a federal qui tam action and indemnification for the resulting settlement, the New York Court of Appeals recently held that an arbitration panel can reconsider an initial determination, or "partial final award," so long as the determination or award does not resolve all of the issues submitted for arbitration.

 

A copy of the opinion is available at:  Link to Opinion

 

Two Insureds, a non-depository lender and its affiliate (Insureds), sought payment of their defense costs of a federal qui tam action and indemnification for the resulting settlement under two insurance policies issued by Insurer. After Insurer denied coverage, the Insureds demanded arbitration pursuant to the arbitration clauses seeking damages for Insurer's alleged breach of the insurance policies by refusing to defend the Insureds in the federal action and indemnify them for the $10.1 million settlement.

 

All parties moved for summary disposition of the arbitration proceeding.  At oral argument one of the arbitrators inquired whether "a partial summary disposition is in the cards," and the Insureds' counsel replied that such a procedure would "make[] the most sense." However, Insurer's counsel never directly commented on whether Insurer would agree to a partial summary disposition, and the arbitration panel never stated on the record that it would issue such a partial determination. Moreover, there was no discussion regarding whether any such "partial summary disposition" would be a "final" award deciding some, but not all, of the issues submitted to the panel.

 

The arbitration panel issued what it denominated a "Partial Final Award," determining that only one insurance policy was applicable, under which only the lender's affiliate was an insured, and that the federal settlement did not constitute a covered loss under this insurance policy. Consequently, the panel concluded that the lender's affiliate was not entitled to indemnification but was entitled to defense costs and, because there was a factual dispute regarding the amount of legal expenses incurred during the federal action, the question of damages would be resolved after a separate evidentiary hearing before the panel.

 

Before an evidentiary hearing was held, Insureds sought reconsideration of the Partial Final Award, arguing that the panel had erred by concluding that the settlement did not constitute a covered loss. Insurer opposed the reconsideration application both on procedural grounds —-namely, that the arbitrators were without authority to reconsider the Partial Final Award under the doctrine of "functus officio" —- and on the merits, arguing that the arbitrators correctly decided the indemnification issue.

 

As you may recall, "functus officio" is Latin for "having performed [one's] office" (Black's Law Dictionary [11th ed 2019]), and has operated historically as a restriction on the authority of arbitrators, precluding them from taking additional actions after issuing a final award.

 

The arbitration panel changed course and concluded in a "Corrected Partial Final Award" that, upon reconsideration, the settlement did constitute a covered loss under the applicable insurance policy. A majority of the panel rejected Insured's argument that the functus officio doctrine precluded reconsideration.

 

Thereafter, the arbitration panel conducted an evidentiary hearing to determine the amount of the lender's affiliate's covered defense costs, and ultimately issued a "Final Award," granting the lender's affiliate recovery against Insurer for damages consisting of both the settlement and defense costs, less offsets for insurance proceeds paid to the lender under insurance policies not otherwise at issue in the arbitration.

 

Insurer appealed to New York's intermediate appellate court.

 

The Appellate Division reversed, granting Insurer's petition, vacating the Corrected Partial Final Award and Final Award, and confirming the Partial Final Award concluding that, "during the arbitration proceedings, the parties agreed to an immediate determination solely as to liability, which they expected would be final," and "nothing in the record . . . suggest[ed] that the parties or the panel believed that the [Partial Final Award] would be anything less than a final determination." Therefore, the appellate court held that, "under the functus officio doctrine, it [was] improper and in excess of the panel's authority" to reconsider the Partial Final Award.

 

The Insureds appealed to New York's highest court.

 

The New York Court of Appeals -- New York's highest court -- begin its analysis by recognizing "New York's long and strong public policy favoring arbitration" and New York Civil Practice Law & Rules Article 75 which codifies a limited role for the judiciary in arbitration. In that regard, an application to vacate an arbitration award may be granted in narrow circumstances, including where "an arbitrator . . . exceeded his [or her] power" (CPLR 7511 [b] [1] [iii]).

 

The Court next noted that, in Mobil Oil Indonesia v Asamera Oil (Indonesia), New York Court of Appeals explained that judicial review of arbitration awards is typically limited to "final determination[s] upon the matters submitted" to the arbitrators, with specifically enumerated exceptions in CPLR article 75 that are not relevant here (43 NY2d at 281, citing Jones, 71 NY at 212; see CPLR 7503 [b]). Thus, a final arbitration award is generally one that is coextensive with the issues submitted to the arbitrators by the parties (see Jones v Welwood, 71 NY 208, 212 [1877]), and that resolves the entire arbitration. 

 

The New York Court of Appeals held that functus officio would apply only to final awards and, despite its name, the Partial Final Award was not in fact final.

 

Insurer argued that the parties here agreed to bifurcate the arbitration, as well as to the issuance of a partial and final award. Federal courts have consistently recognized that partial determinations may be treated as final awards where the parties expressly agree both that certain issues submitted to the arbitrators should be decided in separate partial awards and that such awards will be considered to be final.

 

Most notably, in Trade & Transport Inc. v Natural Petroleum Charterers Inc., the Second Circuit held that -- where both parties expressly asked the arbitration panel to issue a partial award regarding liability for one aspect of the dispute in order to obtain "a decision that was expressly intended to have immediate collateral effects in a judicial proceeding," and neither party objected when the arbitrators informed them that they would render a partial final award as a result of the bifurcation —- the arbitrators were without authority to reconsider the resulting partial final award (931 F2d at 192-193, 195).

 

The New York Court of Appeals found in the present matter, neither the parties nor the arbitrators ever discussed or otherwise demonstrated any mutual understanding regarding whether the proposed severance of the calculation of defense costs would result in a final partial award. This case is therefore distinguishable from Trade & Transport, in which the parties specifically agreed to bifurcate the arbitration for the very purpose of obtaining a "decision that was expressly intended to have immediate collateral effects in a judicial proceeding." Absent an express, mutual agreement between the parties to the issuance of a partial and final award, the functus officio doctrine would have no application in this case.

 

Accordingly, the New York Court of Appeals reject Insurer's argument that the arbitration panel exceeded its authority by reconsidering the Partial Final Award, reversing the order of the Appellate Division, with costs, and affirming so much of the order and judgment of trial court as (1) denied the motion to vacate the August 2016 Corrected Partial Final Award and the April 2017 Final Award and (2) confirmed the April 2017 Final Award reinstated.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

Sunday, June 14, 2020

FYI: DC Cir Holds FDCPA Plaintiff Lacked Standing Under Spokeo

The U.S. Court of Appeals for the District of Columbia Circuit recently vacated a summary judgment order against a debtor on her claims against a debt owner and its debt collector for alleged violations of the federal Fair Debt Collection Practices Act ("FDCPA "), 15 U.S.C. § 1692 et seq., because the debtor did not suffer a concrete injury-in-fact traceable to the alleged statutory violations and therefore lacked the required Article III standing.

 

A copy of the opinion is available at:  Link to Opinion

 

In May 2011, a consumer obtained financing to purchase a used car from a dealer.  The dealer immediately assigned its interest in the borrower's financing agreement to a financier company.  The borrower defaulted on the financing agreement and voluntarily surrender her car to the financier.

 

The debt owner subsequently acquired the debt from the financier. The debt owner retained a debt collector which sent two letters to the debtor indicating that the debt owner had purchased the debt and requiring that the debtor make all future payments to the debt collector.

 

The debt collector sued the debtor in the Superior Court for the District of Columbia to collect the debt. The complaint attached a sworn "Verification of Complaint" and the debt collector's counsel later filed affidavits in support of their fees and costs, including documenting that their fees were contingent upon recovery.  The Superior Court initially defaulted the debtor, but later vacated the default after the debtor filed a motion and paid a $20 fee. 

 

After the debtor retained counsel, the debt collector dismissed its case against the borrower with prejudice.

 

The debtor then filed a putative class action in federal court against the debt owner and debt collector alleging that the affidavits filed in support of the debt collection suit contained "false, deceptive, or misleading representations" in violation of 15 U.S.C. section 1692e, that the affidavits were designed to "harass, oppress, or abuse" the debtor in violation of section 1692d, and that this "unfair or unconscionable" debt-collection practice violated under section 1692f.  The debtor also claimed that the debt collector violated all these provisions of the FDCPA "by attempting to collect contractually unauthorized contingency fees."

 

The debtor testified at her deposition that she "was being scammed" in the debt collection suit because she had "never heard" of the debt collector.  The debtor admitted that she did not take any action or "refrain from doing anything" because of the affidavits.  She also admitted that did not make any payments to the debt collector because of the affidavits.

 

The federal trial court granted the debt owner and debt collector's motions for summary judgment finding that any misstatements in the affidavits were not actionable because they were immaterial and did not affect the borrower's "ability to respond or to dispute the debt."

 

This appeal followed.

 

Although the trial court did not examine the debtor's standing, the DC Circuit began its analysis by evaluating standing because it has "an independent obligation to assure that standing exists." Article III requires that a plaintiff have "a concrete and particularized injury-in-fact traceable to the defendant's conduct and redressable by a favorable judicial order" for standing to exist.  When opposing summary judgment, a "plaintiff must demonstrate standing by affidavit or other evidence."

 

Here, DC Circuit held that the debtor failed to meet her burden because she did not "identify a concrete personal injury traceable to the false representations in the" affidavits.  To the contrary, her testimony established "that she neither took nor failed to take any action because of these statements."  She also did not testify that the affidavits "confused, misled, or harmed" her. 

 

Although the debtor claimed that the lawsuit stressed and inconvenienced her, the debtor "never connected those general harms to the affidavits," as required confer Article III standing on her alleged FDCPA claims.

The DC Circuit rejected the debtor's argument that the "court costs and attorney's fees" that she incurred in defense of the suit were sufficient to establish standing because "the record contains no evidence linking these expenses to the alleged statutory violations."

 

The debtor also argued that she suffered an informational injury sufficient to establish standing because the debt collector and the debt owner denied her "access to truthful information." To demonstrate a cognizable informational injury a plaintiff must prove that she "1) has been deprived of information that, on her interpretation, a statute requires a third party to disclose, and (2) suffers, by being denied access to that information, the type of harm Congress sought to prevent by requiring disclosure."

 

Here, the DC Circuit determined that the borrower could not satisfy the second required because her testimony establish no "detrimental reliance—or any other harm—based on the misrepresentations in the . . . affidavits."

The debtor also argued that her claims were the type of injuries that Congress "sought to curb" with the FDCPA and that the FDCPA authorizes a private right of action. Thus, the debtor claimed that she did not have to prove "any additional harm." 

 

However, as you may recall, in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016) the Supreme Court made it clear that even for a statutory violation, "Article III standing requires a concrete injury." Although Congress may identify and elevate an intangible harm, this "does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right."  Nowhere does the FDCPA state "that every violation of the provisions implicated here—no matter how immaterial the infraction— creates a cognizable injury."

 

The DC Circuit held that simply pointing to alleged false statements in the affidavits in not enough to establish standing because "not all inaccuracies cause harm or present any material risk of harm." Although a misrepresentation in a debt collector's affidavit filed in court could cause a borrower to suffer "a concrete and particularized injury," that was not the case here.  Thus, even if the debt collector and debt owner violated the FDCPA, the borrower lacked Article III standing.

 

Finally, the DC Circuit examined the debtor's argument that her subjective response to the affidavits was immaterial, because the proper inquiry is the "affidavits' likely effect on a hypothetical unsophisticated debtor."

 

The Court rejected this argument because it confused "standing with the merits." Although the "unsophisticated consumer (or in some courts, the least sophisticated consumer)" is the correct substantive standard that courts use to evaluate the borrower's FDCPA claims, this does not relieve a consumer from the threshold requirement "to establish Article III standing—including a concrete and particularized injury-in-fact." This is because, as broad as Congress's powers are to "to define and create injuries," Congress "cannot override constitutional limits."

 

Thus, the DC Circuit vacated the trial court's summary judgment order, and remanded the case to be dismissed for lack of jurisdiction. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments