Chazen v. Centennial Bank

• Decision Date: 12 January 1998
• Docket Number: Nos. A075356,A075424,s. A075356
• Citation: 71 Cal.Rptr.2d 462,61 Cal.App.4th 532
• Court: California Court of Appeals Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 1057, 98 Daily Journal D.A.R. 1427 Lawrence J. CHAZEN et al., Plaintiffs and Appellants, v. CENTENNIAL BANK, Defendant and Respondent. Sheldon BROWN et al., Plaintiffs and Appellants, v. CENTENNIAL BANK et al., Defendants and Respondents.

Page 462

71 Cal.Rptr.2d 462

61 Cal.App.4th 532, 98 Cal. Daily Op. Serv. 1057,

98 Daily Journal D.A.R. 1427

Lawrence J. CHAZEN et al., Plaintiffs and Appellants, v. CENTENNIAL BANK, Defendant and Respondent.

Sheldon BROWN et al., Plaintiffs and Appellants, v. CENTENNIAL BANK et al., Defendants and Respondents.

Nos. A075356, A075424.

Court of Appeal, First District, Division 1, California.

Jan. 12, 1998.

Poindexter & Doutre, Inc., Bennett M. Sigmond, Los Angeles, for Plaintiffs and Appellants in A075356.

O'Donnell & Pia, Jonathan S. O'Donnell, Mandel, Buder & Verges, Ralph T. Kokka, San Francisco, Plaintiffs and Appellants in A075424.

Coblentz, Cahen, McCabe & Breyer, LLP, Jonathan R. Bass, Susan K. Jamison, San Francisco, for Defendants and Respondents.

Christopher E. Chenoweth, (For California Bankers Association) San Francisco, Amici Curiae on behalf of Defendants and Respondents.

SWAGER, Associate Justice.

In these two consolidated appeals, we review actions against the same defendants, Centennial Bank (hereafter bank) and California Bancshares, involving closely parallel facts, which were also consolidated in the trial court. The separate plaintiffs, Lawrence Chazen (hereafter Chazen) and Dr. Sheldon Brown (hereafter Brown), both appeal from judgments of dismissal entered upon orders sustaining without leave to amend demurrers to their first amended complaints. We reverse the judgment dismissing Brown's fifth cause of action for conversion and otherwise affirm both judgments of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND

Both complaints seek to hold the bank liable for the defalcations of a mortgage loan broker, Robert Cox, and two companies which he controlled, First Capital Finance and Consumer Financial Services (hereafter referred to collectively as Cox). From 1988 through 1994, plaintiffs purchased second mortgages through Cox who agreed to service the loans by collecting payments due and remitting them to plaintiffs. For this purpose, he opened three accounts with the bank which were designated on the bank's signature card as "payment trust account," "custodial account," and "escrow account." Cox deposited note payments into the accounts and then withdrew substantial sums for his own use, including much of the principal payments on a series of notes that were paid in full. Chazen alleges that Cox converted more than $542,000 in note payments belonging to him; Brown alleges that Cox converted, or permitted the conversion of, funds in excess of $681,401.

Chazen and Brown filed original complaints in the Alameda County Superior Court within a week of each other. When the bank filed demurrers against each complaint, the plaintiffs each chose to file a first amended complaint. The bank again demurred to the amended complaints. The matter came up for a hearing on March 28, 1996, and the trial court sustained the demurrers to each first amended complaint without leave to amend.

Contending that the court erred in failing to allow them leave to amend, Chazen and Brown filed similar motions for reconsideration to which they each appended a proposed second amended complaint. Following a hearing on May 29, 1996, the trial court denied both motions for reconsideration.

DISCUSSION

Abandoning other legal theories, appellants challenge the judgment only to the extent it dismissed their causes of action for conversion and negligence. We will analyze each theory under the facts common to both complaints and then consider the propriety of the orders sustaining the bank's demurrer to each first amended complaint and denying each appellant leave to file a second amended complaint.

A. Conversion

In the causes of action for conversion, appellants seek to have the bank share liability for Cox's conversion of the note payments deposited in the three designated trust accounts in the bank. We begin our analysis with the well-established principle, codified in Financial Code sections 952 and 953, that a bank has no duty to monitor trust accounts for breaches of fiduciary duty. The early decision in United States etc. Co. v. First Nat. Bk. (1912) 18 Cal.App. 437, 123 P. 352 provides a classic illustration of the principle. The guardian of a minor received a check made out to him as guardian, deposited it in his individual bank account, and then dissipated the funds. The minor's trustee sued the depository bank to recover the loss. Affirming an order sustaining a demurrer to the complaint, the court observed, "Appellant's contention, if accepted as applicable to the facts presented, would render banks ex-officio trustees in general for all cestuis que trust [beneficiaries]. In our opinion, the law does not impose such duties upon banks or other depositaries of trust funds." (Id. at p. 441, 123 P. 352.)

This well-established principle recognized in United States etc. Co. v. First Nat. Bk., supra, 18 Cal.App. 437, 123 P. 352, can be implied from the nature of the relationship between a bank and a depositor. "It has long been regarded as 'axiomatic that the relationship between a bank and its depositor arising out of a general deposit is that of a debtor and creditor.' [Citation.] 'A debt is not a trust and there is not a fiduciary relation between debtor and creditor as such.' [Citation.]" (Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 476, 261 Cal.Rptr. 735.) Accordingly, banks "are not fiduciaries for their depositors." (Copesky v. Superior Court (1991) 229 Cal.App.3d 678, 694, 280 Cal.Rptr. 338.)

"The relationship of bank and depositor is founded on contract," (Barclay Kitchen, Inc. v. California Bank (1962) 208 Cal.App.2d 347, 353, 25 Cal.Rptr. 383) which is ordinarily memorialized by a signature card that the depositor signs upon opening the account. (2 Cal. Commercial Law (Cont.Ed.Bar June 1992 Update) §§ 8.1-8.3, p. 143.) This contractual relationship does not involve any implied duty "to supervise account activity" (Software Design & Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th 472, 481, 56 Cal.Rptr.2d 756) or "to inquire into the purpose for which the funds are being used" (Keeney v. Bank of Italy (1917) 33 Cal.App. 515, 518, 165 P. 735) and entails no contractual obligation to persons other than the account holder (Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1628, 272 Cal.Rptr. 623). It follows that "[c]ommercial banks have no duty to police their fiduciary accounts" (La Vista Cemetery Assn. v. American Sav. & Loan Assn. (1970) 12 Cal.App.3d 365, 369, 90 Cal.Rptr. 722; LaMonte v. Sanwa Bank California (1996) 45 Cal.App.4th 509, 522, 52 Cal.Rptr.2d 861) and are "not liable for the misappropriation of trust funds by the trustee" (Blackmon v. Hale (1970) 1 Cal.3d 548, 556, 83 Cal.Rptr. 194, 463 P.2d 418).

In Chicago Title Ins. Co. v. Superior Court (1985) 174 Cal.App.3d 1142, 220 Cal.Rptr. 507, the court noted that considerations of confidentiality also militate against imposing on banks a duty to monitor accounts for wrongdoing. There, an escrow company, which suffered losses in an alleged check kiting scheme, sued the depository bank on the theory that it should have disclosed a customer's unusual banking activity. Affirming a summary judgment for the bank, the court stated, " 'A bank customer's reasonable expectation is that, absent compulsion by legal process, the matters he reveals to the bank will be utilized by the bank only for internal banking purposes....' [Citation.] If, as [plaintiff] suggests, banks had a duty to reveal suspicions about their customers, they would violate their customers' right to privacy.... We refuse to recognize such a duty by banks to inform on suspicious customers, and we thereby avoid the loss of privacy, expense and commercial havoc that would result from such a holding." (Id. at p. 1159, 220 Cal.Rptr. 507; see also Software Design & Application, Ltd. v. Hoefer & Arnett, Inc., supra, 49 Cal.App.4th at p. 483, 56 Cal.Rptr.2d 756.)

The principle that the bank has no duty to police their fiduciary accounts finds expression in two statutes with direct relevance to this case. Financial Code section 953 provides: "When the depositor of a commercial or savings account has authorized any person to make withdrawals from the account, the bank, in the absence of written notice otherwise, may assume that any check, receipt, or order of withdrawal drawn by such person in the authorized form or manner, including checks drawn to his personal order and withdrawal orders payable to him personally, was drawn for a purpose authorized by the depositor and within the scope of the authority conferred upon such person." As noted in Boston Ins. Co. v. Wells Fargo Bank (1947) 80 Cal.App.2d 59, 66, 181 P.2d 84, the statute allows a bank to presume that the depositor authorized checks which are drawn by a corporate officer authorized to make withdrawals from the account, even when the officer draws the funds to his personal order: "Regardless of whatever suspicion might have lurked in the mind of the teller as to the destination of the proceeds, no duty of inquiry would have been cast on the bank." (See also Desert Bermuda Properties v. Union Bank (1968) 265 Cal.App.2d 146, 150, 71 Cal.Rptr. 93.)

Financial Code section 952 allows a bank to disregard adverse claims to accounts unless they are made in one of two authorized forms: "Notice to any bank of an adverse claim ... to a deposit standing on its books to the credit of ... any person shall be disregarded, and the bank, notwithstanding the notice, shall honor the checks, notes, or other instruments requiring payment of money by or for the account of the person to whose credit the account stands ... without any liability on the part of the bank...." The statute provides, however, that the bank shall comply with appropriate judicial orders and may delay payment three days if served with "an affidavit of the adverse claimant." (Id. subd. (a).)

The statute was amended in 1941 to apply...