Los Angeles Nat. Bank v. Bank of Canton

Decision Date03 May 1991
Docket NumberNo. B042986,B042986
Citation280 Cal.Rptr. 831,229 Cal.App.3d 1267
CourtCalifornia Court of Appeals Court of Appeals
Parties, 14 UCC Rep.Serv.2d 848 LOS ANGELES NATIONAL BANK, Plaintiff and Appellant, v. BANK OF CANTON OF CALIFORNIA, Defendant and Respondent.

Suzuki & Ito and Ronald N. Ito, Los Angeles, for plaintiff and appellant.

Kaplan, Russin & Vecchi, Mattaniah Eytan, Daniel H. Qualls, and Jonathan J. Uchima, San Francisco, for defendant and respondent.

GEORGE, Acting Presiding Justice.

Appellant Los Angeles National Bank filed an action against respondent Bank of Canton of California seeking $2,257,965 in compensatory damages, plus punitive damages, for respondent's alleged failure either to pay the face amount of, or notify appellant it would not honor, 28 checks prior to the "midnight deadline" established by the Commercial Code, 1 and for conversion arising from respondent's alleged wrongful failure to pay appellant the face amount of the checks. The superior court denied a motion brought by appellant for summary judgment, instead granting a motion brought by respondent for summary judgment on the basis that the evidence was undisputed that appellant's loss resulted from the negligence of its employees rather than from respondent's failure to return the checks prior to the statutory deadline. The superior court denied respondent's claim that, as the prevailing party, it was entitled to attorney's fees pursuant to Civil Code section 1717.

Appellant contends the superior court erred in (1) granting summary judgment, because respondent is liable for the total face amount of checks it returned after the applicable midnight deadlines; and (2) denying appellant's motion for summary judgment or summary adjudication of issues brought on the ground that respondent is liable as a matter of law for the checks it returned after the midnight deadline. 2 Respondent also appeals, contending the superior court erred in denying its application for attorney's fees. For the reasons that follow, we reverse the summary judgment granted in favor of respondent and therefore do not reach the issue of attorney's fees.

FACTUAL AND PROCEDURAL HISTORY

On September 26, 1986, appellant filed a complaint against respondent, alleging that respondent failed to timely notify appellant it would dishonor 28 checks having a total face value of $2,257,965 and that therefore, pursuant to the Commercial Code and federal banking regulations, respondent was liable to appellant for the face amount of the checks.

It is undisputed that appellant and respondent both use the Los Angeles branch of the Federal Reserve Bank of San Francisco as an intermediary "clearinghouse" to settle accounts for negotiable items which pass between appellant and respondent. In addition, respondent had entered into an agreement with the Federal Reserve Bank requiring the latter to send checks and other items to Decimus Corporation, an entity located outside the premises of respondent and employed by the latter to sort, collate, and otherwise process checks and various items for respondent. In a typical transaction, the U.S. Courier Corporation, a messenger service, would pick up items from the Federal Reserve Bank and deliver them to Decimus Corporation, where they would be processed before delivery to respondent. It was the responsibility of respondent to determine whether to return an item for insufficient funds.

In August or September of 1985, an entity known as Golden Fields Leasing Company, Inc., established a checking account with respondent, purportedly for use in a business consisting of selling and leasing Mercedes Benz automobiles. During the period from January 22 to January 25, 1986, Tony Lam and Peter Wong, principals in the business, executed 28 checks drawn on Golden Fields Leasing Company, Inc.'s account with respondent. These individuals deposited the checks, in three separate groups, in an account held by Golden Fields Leasing Company, Inc., in one of appellant's branch offices in Monterey Park, located three blocks from one of respondent's branch offices.

It was alleged in appellant's complaint that on January 22, 1986, a Wednesday, appellant processed three checks totalling $900,000, drawn by Golden Fields Leasing Company, Inc., on its account with respondent. Appellant sent the three checks for collection to the Federal Reserve Bank, which provisionally "settled" and delivered the checks to respondent before 2:00 p.m. on Friday, January 24th. Respondent, on the basis there were insufficient funds in the account of Golden Fields Leasing Company, Inc., returned the checks to appellant on Tuesday, January 28th, after expiration of the statutory "midnight deadline" for returning the items, which must be met in order to revoke the provisional settlement made by the Federal Reserve Bank. Appellant alleged that, after it subsequently returned each of the checks to respondent marked "Late Return Item Claim, Response," respondent again returned the checks, marking them "Paying Bank's Response To Late Return Item Claim," thus wrongfully denying that the checks were returned late and that appellant was due the face amount of the checks. In a separate cause of action, appellant alleged that respondent wrongfully had converted to its own use the face amount of these checks.

Appellant made similar allegations regarding a second group of 17 checks totalling $1,091,520 processed by appellant on Friday, January 24, 1986, which the Federal Reserve Bank provisionally settled and delivered to respondent before 2 p.m. on Monday, January 27th. It was alleged respondent returned these checks for insufficient funds on or after Wednesday, January 29th, after expiration of the midnight deadline. Appellant alleged a separate cause of action for conversion of the total face amount of this group of checks.

Appellant made similar allegations regarding a third group of eight checks totalling $266,445, which it had processed on Monday, January 27, 1986, and which the Federal Reserve Bank provisionally settled and delivered to respondent before 2 p.m. on Tuesday, January 28th. It was alleged respondent returned these checks for insufficient funds on or after Thursday, January 30th, after expiration of the midnight deadline. Appellant alleged a separate cause of action for conversion of the total face amount of this group of checks.

Appellant moved for summary judgment on the ground respondent was accountable for the face amount of the checks because it had failed to return the checks before the midnight deadline in accordance with the applicable provisions of the Commercial Code. Respondent in turn moved for summary judgment on the basis that appellant's loss was caused solely by the negligence of its employees in cashing the checks or giving credit to the principals of Golden Fields Leasing Company, Inc., without verifying that there were funds on deposit with respondent sufficient to pay the face amount of the checks.

In support of its motion for summary judgment, respondent submitted the following evidence. On January 22 and 23, 1986, the principals of Golden Fields Leasing Company, Inc., deposited with appellant three checks totalling $900,000. After appellant had transferred them to the Federal Reserve Bank, at 6 p.m. on Friday, January 24th, U.S. Courier Corporation picked up the first group of three checks from the Federal Reserve Bank and delivered them to Decimus Corporation. After processing by Decimus Corporation, respondent received this group of checks on Tuesday, January 28th, and returned them to the Federal Reserve Bank that day. Between 8:57 and 9:05 a.m. that day, respondent informed the Federal Reserve Bank by telephone that it would not honor the checks. The Federal Reserve Bank wired notice to that effect to appellant later that day.

On Friday, January 24th, the principals of Golden Fields Leasing Company, Inc., deposited with appellant 17 checks totalling $1,091,520. At 6 p.m. on Monday, January 27th, U.S. Courier Corporation picked up the second group of 17 checks from the Federal Reserve Bank and delivered them to Decimus Corporation. On Wednesday, January 29th, respondent received these checks and returned them to the Federal Reserve Bank that day. Between 3:28 and 3:38 p.m. that day, respondent informed the Federal Reserve Bank by telephone that it would not honor the checks. The Federal Reserve Bank wired notice to that effect to appellant on January 30th.

On Saturday, January 25th, the principals of Golden Fields Leasing Company, Inc., deposited with appellant eight checks totalling $266,445. At 6 p.m. on Tuesday, January 28th, U.S. Courier Corporation picked up the third group of 8 checks from the Federal Reserve Bank and delivered them to Decimus Corporation. On Thursday, January 30th, respondent received these checks, returning them to the Federal Reserve Bank that same day. Later that day, respondent informed the Federal Reserve Bank by telephone that it would not honor the checks, and the Federal Reserve Bank wired notice to that effect to appellant.

Respondent's evidence established that U.S. Courier Corporation typically picked up items from the Federal Reserve Bank and delivered them to Decimus Corporation on the same evening. These items would be processed during the following day, and on the third day Decimus Corporation would send them by courier to respondent.

Respondent furnished the following additional evidence. Ms. Pou San Au was an operations officer who worked for appellant in its branch office in Monterey Park. On Thursday, January 23, 1986, after Lam and Wong had deposited three checks totalling $900,000, Ms. Pou San Au gave Lam and Wong $400,000 in cash, in violation of the limitations placed on her authority to give immediate credit. The two men carried the cash out of the bank in brown paper bags. On the same day,...

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