Central Bank v. Kaiperm Santa Clara Fed. Credit Union

• Decision Date: 17 April 1987
• Court: California Court of Appeals Court of Appeals
• Parties: , 3 UCC Rep.Serv.2d 1003 CENTRAL BANK, Plaintiff and Respondent, v. KAIPERM SANTA CLARA FEDERAL CREDIT UNION, Defendant and Appellant. H000863.

Page 262

236 Cal.Rptr. 262

191 Cal.App.3d 186, 3 UCC Rep.Serv.2d 1003

CENTRAL BANK, Plaintiff and Respondent, v. KAIPERM SANTA CLARA FEDERAL CREDIT UNION, Defendant and Appellant.

H000863.

Court of Appeal, Sixth District, California.

April 17, 1987.

Review Denied July 22, 1987.

H.R. Lloyd, Jr., Hoge, Fenton, Jones & Appel, Inc., San Jose, Mary K. Ison, Finch & Bowen, Campbell, for defendant and appellant

Ted W. Harris, Paul A. Bruno, Richard A. Lapping, Michael D. Freeman, Thelen, Marrin, Johnson & Bridges, San Jose, for plaintiff and respondent.

BRAUER, Associate Justice.

Nineteen blank money orders were stolen from a branch office of Kaiperm Santa Clara Federal Credit Union (Kaiperm), filled out in varying amounts and subsequently paid by Central Bank (Bank). Bank brought suit against Kaiperm for damages and declaratory relief, claiming that Kaiperm had breached its duties under a written trust agreement by failing to safeguard the blank forms. Kaiperm based its defense primarily upon the theory that the rules of the commercial code apply to fix liability between the parties. ¹ Under

the code, when a negotiable instrument such as a check is forged and passed through banking channels, the loss is normally borne by the payor bank. The trial court found that the money orders were not negotiable instruments, and that the code did not otherwise apply to determine the rights of the parties. It ruled that Kaiperm had breached the trust agreement and that the indemnification clause contained therein was valid and enforceable. We agree with the trial court and affirm the judgment in favor of Bank.

SUMMARY

Kaiperm is a credit union serving the employees of five bay area Kaiser hospitals and the Permanente Medical Plan. Bank is a large commercial bank based in Walnut Creek with branches nationwide. As part of its business, Bank operates a money order division which sells money orders through a network of over 2,000 agents from the East Coast to Hawaii. Kaiperm was one of these agents.

Background. The Operation of the Money Order Business

The operation of Bank's money order division is substantially similar to that of its competitor banks. Bank's agents include not only financial institutions such as Kaiperm, but also chain stores, liquor stores and other retail outlets. The agents function like tellers. They are authorized to sell money orders within prescribed limits, ranging from several hundred dollars to thousands of dollars.

Two types of money orders are relevant here: "personal money orders" which are sold only to members of the general public, usually in amounts under $1,000, and "voucher money orders" which can also be purchased by the agent for its own use and generally have a much higher limit, in this case $40,000.

The relationship between Bank and its agent is set forth in a contract prepared by Bank. Once an agent has signed a contract, Bank provides the agent with a supply of money order forms printed to the agent's specifications. The money orders are encoded with sequential serial numbers by which Bank can identify the agent to which they are issued. They are printed in triplicate.

Bank charges its agents a flat rate for each money order, regardless of its eventual face value, and dictates the fee which the agent may charge its purchaser. In the course of a normal transaction, the agent fills out the amount of the money order, collects the face amount and the fee from the purchaser, and gives the purchaser the original and the triplicate copy, retaining the duplicate. The agent either instructs the purchaser to fill in the date and the payee, or completes this information for the purchaser at the time the money order is purchased.

The money collected from the purchaser is deposited into a trust account maintained by the agent solely for this purpose in a bank designated in the contract. The agent prepares a daily sales report, listing the money orders sold and attaching the corresponding duplicate copies. This report is then sent to Bank, along with a check drawn on the trust account covering the total amount of the money orders sold, plus Bank's fee.

A money order customer will generally be someone who does not have a regular checking account and may use a money order like a check to pay a bill. When the purchaser uses the money order, it passes through normal collection channels and is eventually paid by Bank. Because of the speed of this collection process in comparison with the postal service, the original money order will almost always reach Bank before Bank receives the sales report and remittance forwarded by the agent. When the money order is presented for payment, Bank automatically credits the presenting Bank, subject to a 24-hour reclamation period This process by which Bank pays an item before receiving the supporting paperwork is called "prepayment." James Newman, operations manager/treasurer of one of the three largest commercial issuers of money orders in the U.S., testified that to his knowledge every money order business prepays money orders. "Ninety-nine percent plus of the time" the money order is paid before the supporting paperwork is received from the agent. According to Lloyd Lundquist, manager of Bank's money order division, the prepayment procedure is a means by which the customer can be assured that his payments to creditors will be honored. If for example a customer makes his mortgage payment with a money order, which then arrives at Bank before Bank has received the funds from its agent, "We could hardly return it to the customer and put him in a position where he may lose his home."

during which Bank runs a check to make sure that 1) the imprinted serial number is one issued to an authorized agent, 2) the amount does not exceed the limit printed on the money order and 3) no stop payment has been ordered. If there are no discrepancies, payment is final 24 hours after presentment.

Bank processes between 40,000 and 60,000 money orders per day. Processing is done by computer. The computer pairs up those items paid with those for which a remittance and duplicate sales slip have been received from the agent. A list of prepaid items, for which there has been no corresponding accounting, appears on a daily computer printout, listed by agent. Usually the documentation for these so-called "prepaids" is received within a few days, whereupon they drop off the list.

Bank employs a number of field representatives, whose job it is to follow up and collect those items which remain on the prepaid list. The usual practice of the field rep is to contact the agent by phone after a prepaid appears on the list for more than 10 days. Generally a bill is sent to the agent after approximately 21 days. It is apparently not unusual, however, for items to remain on the prepaid list for 30 to 60 days.

The Kaiperm-Bank Operation

The Contract. In 1977 Bank and Kaiperm entered into a contract entitled "Personal Money Order Agency and Trust Agreement" under which Kaiperm became an authorized agent and trustee of Bank for the sale of personal money orders in amounts not exceeding $1,000 each. In 1978, the contract was amended to include authorization for the sale of the $40,000 limit voucher money orders. The pertinent terms of the contract follow.

Kaiperm agreed to "receive and hold IN TRUST for BANK Money Orders and equipment delivered to TRUSTEE by BANK" (p 3(a)), and "to sell and issue such Money Orders only in accordance with instructions from BANK" (p 3(b)). All unused money orders were to remain Bank's property, having been furnished to Kaiperm for use solely in accordance with the agreement.

Paragraph 5(c) provided that the "TRUSTEE shall be responsible for the proper safeguarding of such supplies, equipment and monetary receipts, and will reimburse the BANK for any loss arising out of damage to, destruction, disappearance, theft, embezzlement or other loss of said supplies, equipment and/or trust funds until such time as these items and/or trust funds are actually received by BANK." Bank was authorized to "pay all Money Orders validly issued by TRUSTEE on said form of Money Order(s), upon presentation to BANK, properly endorsed and otherwise in good form, and shall reconcile such Money Order(s) with the duplicate thereof." (p 5(d))

Paragraph 9 is entitled "Safe Keeping and Liability for Loss" and provides as follows: "Agents shall take such measures to safeguard and protect all Money Orders, supplies, equipment delivered to TRUSTEE pursuant to this agreement and all trust funds as a prudent person would take to safeguard and protect the same as his own property. TRUSTEE shall either cause such property and trust funds to be insured at TRUSTEE's expense against losses from all insurable risks (including ... burglary, dishonesty, fraud, conversion and mysterious disappearance) or shall be liable for The final paragraph of the contract is an indemnity agreement whereby the undersigned, in this case Lyle Irwin, General Manager of Kaiperm, agreed to indemnify BANK "against any and all loss, damage, claims, liability or expense resulting from the failure of TRUSTEE to perform or fulfill any obligation to be performed or fulfilled by TRUSTEE by the terms of said Trust Agreement...."

any uninsured loss thereof.... In case of any loss of Money Orders ... TRUSTEE shall notify BANK immediately, giving full particulars of the loss, including, if applicable, the serial numbers of Money Orders lost and the circumstances of the loss."

When the contract was signed in 1977, Lloyd Lundquist, manager of Bank's money order division, met with Lyle Irwin and the two discussed the contract in its entirety. Lundquist suggested that Kaiperm safeguard the blank money orders under "double custody." He also recommended that employees of Kaiperm remove from the safe or vault only the amount of money orders they expected to use in one day and that they inventory any unused blanks on a daily...