Gil v. Bank of America, Nat. Ass'n

• Decision Date: 09 February 2006
• Docket Number: No. B181249.,B181249.
• Citation: 39 Cal.Rptr.3d 114,136 Cal.App.4th 848
• Court: California Court of Appeals Court of Appeals
• Parties: Eduardo GIL et al., Plaintiffs and Appellants, v. BANK OF AMERICA, NATIONAL ASSOCIATION, Defendant and Respondent.

39 Cal.Rptr.3d 114

136 Cal.App.4th 848

Eduardo GIL et al., Plaintiffs and Appellants, v. BANK OF AMERICA, NATIONAL ASSOCIATION, Defendant and Respondent.

No. B181249.

Court of Appeal, Second District, Division 2.

February 9, 2006.

Daar & Newman and David Daar, Los Angeles, for Plaintiffs and Appellants.

Barton, Klugman & Oetting and Robert Louis Fisher, Los Angeles, for Defendant and Respondent.

CHAVEZ, J.

Appellants Eduardo Gil (Eduardo) and Rafael Gil (Rafael) appeal from a judgment entered after the trial court granted the demurrer of respondent Bank of America, National Association (Bank) to their second amended complaint. We are asked to determine whether the California Uniform Commercial Code supersedes a payee's common law cause of action for negligence where the collecting bank accepted a check with a missing indorsement. We conclude that missing indorsements are unauthorized indorsements covered by the California Uniform Commercial Code. Furthermore, we hold that the negligence cause of action stated here is subsumed in a conversion action dictated by the California Uniform Commercial Code. The judgment of the trial court is affirmed.

CONTENTIONS

Appellants contend that the trial court erred in granting Bank's demurrer because: (1) the California Uniform Commercial Code does not supersede common law negligence claims where Bank paid on a check with a missing indorsement; (2) under the California Uniform Commercial Code, the Bank is liable for conversion; and (3) appellants stated a cause of action for misrepresentation.

FACTS AND PROCEDURAL BACKGROUND

Appellants filed the operative second amended complaint (SAC) on October 4, 2004, against Bank and other defendants¹ for, among other causes of action, misrepresentation, negligence, and conversion.²

The SAC alleged the following. Eduardo and his son Rafael, owned a house in Whittier, which was damaged by fire in January 2002. In response to appellants' claim, on March 7, 2002, Allstate Insurance Company (Allstate) drew a check on its account at Bank, in the amount of $50,463.53 made payable to Eduardo, Washington Mutual, and insurance adjuster Claims West Adjusters (the check). Washington Mutual was the lender-lienholder of the Whittier residence. J. Reyes Construction Company (Reyes) contracted with appellants to repair the Whittier residence. Allen Connette (Connette), an employee of Claims West Adjusters, and Marco Galindo (Galindo), an employee of Reyes, falsely represented to Eduardo that upon Eduardo's indorsement, they would present the check to Washington Mutual. After Eduardo indorsed the check, it was accepted by Bank and deposited into Reyes's account at a branch of Bank, without the indorsement of Washington Mutual. Reyes failed to repair the Whittier residence and abandoned the project.

The SAC alleged that as part of a fraudulent scheme, Ezequivel Montejano (Montejano), Bank's branch manager, established a practice of accepting fire insurers' checks and depositing them into Reyes's account at Bank, without the necessary indorsements by lienholder financial institutions named as payees. This happened on at least four separate occasions. The SAC alleged that by accepting the check without the indorsement of Washington Mutual, Bank was negligent and also committed conversion within the meaning of California Uniform Commercial Code section 3420.

Bank paid Washington Mutual $50,463.53 in 2004. Appellants alleged that they suffered consequential and special damages, which included giving up the family home.

On December 16, 2004, the trial court granted Bank's demurrer to appellants' SAC.

This appeal followed.

DISCUSSION

I. Standard of Review

The appellate court assumes the truth of all properly pleaded material allegations of the complaint, and gives "the complaint a reasonable interpretation by reading it as a whole and its parts in their context [citation]." (Silberg v. Anderson (1990) 50 Cal.3d 205, 210, 266 Cal.Rptr. 638, 786 P.2d 365.) When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action; when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) If the complaint can be cured, the trial court has abused its discretion. (Ibid.)

II. Negligence

A. Missing indorsements are covered under the California Uniform Commercial Code

In their SAC, appellants prayed for consequential, special and punitive damages. However, under the California Uniform Commercial Code (the Code),³ "the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special nor penal damages may be had except as specifically provided in this code or by other rule of law." (§ 1106, subd. (1).) In an attempt to circumvent that section, appellants contend that the Code does not supersede claims of common law negligence, where, as here, Bank paid on a check with a missing indorsement.

Appellants' argument is two-pronged: First, they claim that the Code addresses forged or unauthorized indorsements, but not missing indorsements. Next, they assert that since missing indorsements are not covered by the Code, common law negligence principles apply. They are wrong on both counts.

The purpose of the Code is to simplify and clarify the law governing commercial transactions in a uniform manner among the various jurisdictions. (§ 1102.) The Code states that unless displaced by particular provisions, "the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions." (§ 1103.)

The definitions set forth in Roy Supply, Inc. v. Wells Fargo Bank (1995) 39 Cal.App.4th 1051, 1066-1067, 46 Cal.Rptr.2d 309 are helpful to our discussion of the statutory provisions governing the check collection process and duties and liabilities between banks and customers. "A `check' is a draft drawn on a bank and payable on demand. (§§ 3104, subd. (2)(b), 4104, subd. (3).) A `presentment' is a demand for acceptance or payment of the check made upon the person or entity responsible for payment. (§§ 3504, subd. (1), 4104, subd. (3).) The bank upon which the check is drawn and by which it is payable is referred to as the drawee or `payor bank.' (§ 4105, subd. (b).) When a maker or drawer issues a check in favor of a payee, that person will generally submit the check to a bank which may or may not be the payor bank. Regardless whether it is also the payor bank, the first bank to which a check is submitted for collection is called the `depositary bank.' (§ 4105, subd. (a).) If the depositary bank is not also the payor bank, it will present the check to the payor bank either directly or through one or more `intermediary banks,' defined as any bank to which the check is transferred in the course of collection except the depositary bank and the payor bank. (§ 4105, subd. (c).) In this process any bank handling the check for collection, including the depositary bank but excluding the payor bank, is referred to as a `collecting bank.' (§ 4105, subd. (d).)" (Roy Supply, Inc. v. Wells Fargo Bank, supra, at p. 1059, 46 Cal.Rptr.2d 309, fn. omitted.)

An action for negligence in making payment over an unauthorized signature is explicitly controlled and displaced by section 4406, subdivision (f),⁴ which codifies the duties of customers in asserting a forgery against a payor bank "[w]ithout regard to care or lack of care of either the customer or the bank...." (Roy Supply, Inc. v. Wells Fargo Bank, supra, 39 Cal.App.4th at p. 1066, 46 Cal.Rptr.2d 309.) Under section 4207, subdivision (a)(2), customers or collecting banks that transfer items warrant that "[a]ll signatures on the item are authentic and authorized," and the liability of the collecting bank arises from its implied warranty of the indorsement rather than negligence principles. (Cal. Mill Supply Corp. v. Bank of America (1950) 36 Cal.2d 334, 339, 223 P.2d 849.) These warranty provisions of section 4207 also apply "where the validity of an [i]ndorsement is not in issue but the [i]ndorsement is missing." (Feldman Constr. Co. v. Union Bank (1972) 28 Cal.App.3d 731, 736, 104 Cal.Rptr. 912.)

Nevertheless, appellants urge that the Code addresses forged indorsements, but not unauthorized indorsements. They are incorrect. In 1992, the Legislature amended section 3403, subdivision (b) so that it "explicitly defines an `unauthorized signature' to include checks lacking a required signature." (Edward Fineman Co. v. Superior Court (1998) 66 Cal.App.4th 1110, 1116, 78 Cal.Rptr.2d 478.) Section 3403, subdivision (b) now provides: "If the signature of more than one person is required to constitute the authorized signature of an organization, the signature of the organization is unauthorized if one of the required signatures is lacking."

The comment to section 3403, subdivision (b) states: "4. Subsection (b) clarifies the meaning of `unauthorized' in cases in which an instrument contains less than all of the signatures that are required as authority to pay a check.... Some cases took the view that if a customer required that a check contain the signatures of both A and B to authorize payment and only A signed, there was no unauthorized signature within the meaning of that term in former Section 4-406(4) because A's signature was neither unauthorized nor forged. The other cases correctly pointed out that it was the customer's signature at issue and not that of A; hence, the customer's signature was unauthorized if all signatures required to authorize payment of the check were not on the check. Subsection (b) follows the latter line of cases." (23A Pt. 2 West's U. ...