Mills v. U.S. Bank

• Decision Date: 10 September 2008
• Docket Number: No. D049805.,D049805.
• Citation: 166 Cal.App.4th 871,83 Cal. Rptr. 3d 146
• Court: California Court of Appeals Court of Appeals
• Parties: JOHN T. MILLS et al., Plaintiffs and Appellants, v. U.S. BANK, Defendant and Respondent.

166 Cal.App.4th 871

83 Cal. Rptr. 3d 146

JOHN T. MILLS et al., Plaintiffs and Appellants, v. U.S. BANK, Defendant and Respondent.

No. D049805.

Court of Appeals of California, Fourth District, Division One.

September 10, 2008.

[166 Cal.App.4th 875]

David L. Kahn for Plaintiffs and Appellants.

Foley & Lardner, Michael P. McCloskey; and Kenneth S. Klein for Defendant and Respondent.

OPINION

IRION, J.

This action is before us for the third time on appeal.¹ Plaintiffs and appellants John T. Mills; Peter A. and Cameron Howe Ministri; Thomas B. and Rosemary K. Mills; Jonathan A. Rauh; Eric W. Holt; Chris D. Wong; Donne Goodrich, as the executor of the estate of Juliette P. Goodrich;² Evelyn W. Howe; and the Howe Family Corporation (collectively, Plaintiffs) challenge three rulings by the trial court with respect to defendant and respondent U.S. Bank. On their appeal from the judgment, Plaintiffs challenge (1) the order granting U.S. Bank's demurrer to the fifth amended complaint's eighth and ninth causes of action for (a) breach of presentment and transfer warranties in violation of California Uniform Commercial Code sections 4207 and 4208,³ and (b) negligence in violation of the California Uniform Commercial Code; (2) the trial court's ruling on a motion to compel discovery; and (3) the order granting summary judgment in favor of U.S. Bank on the fifth amended complaint's fifth and sixth causes of action for common law negligence and gross negligence.

As we will explain, we conclude that Plaintiffs' arguments are without merit, and accordingly we affirm the judgment.

I FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs, who were investors in Third Eye Systems, LLC, wrote checks payable to Third Eye Systems, LLC, in March and April 2000 to purchase their investment units.⁴ Nine of the checks indicated "Third Eye Systems, LLC" as the payee; one of the checks indicated "Third Eye," and one indicated "Third Eye Systems." The checks were not negotiated by Third Eye Systems, LLC, but by a different entity, Third Eye Systems Holdings, Inc., which presented the checks for deposit into its account at U.S. Bank. U.S. Bank accepted the checks for deposit. The checks were marked with various endorsements, including "For Deposit Only Third Eye Systems Holdings," "Third Eye Systems LLC For Deposit Only," "For Deposit Only," and "For Deposit Only Credited to the Account Of The Within Named Payee," but they were not properly endorsed to transfer title from Third Eye Systems, LLC, to Third Eye Systems Holdings, Inc.

According to Plaintiffs, they were injured when the funds from their checks were deposited into the account of Third Eye Systems Holdings, Inc., because, among other things, Third Eye Systems, LLC, was worth 75 percent less without the funds from Plaintiffs' investments. Further, Plaintiffs claim that because they did not have an ownership interest in Third Eye Systems Holdings, Inc., they could not access its assets (purchased with Plaintiffs' funds) to recoup their eventual investment losses.

A. The Nature of This Litigation and the Operative Complaint

In this action, Plaintiffs sued various entities based on the fact that the checks were not deposited into the bank account of Third Eye Systems, LLC. They sued both (1) the drawee banks and brokerage firms, i.e., the institutions that issued the checks Plaintiffs wrote to purchase their investment units, and (2) the depositary bank—U.S. Bank—i.e., the bank at which Third Eye Systems Holdings, Inc., deposited Plaintiffs' checks. In Mills I and Mills II, we affirmed the trial court's orders disposing of Plaintiffs' claims against the drawee banks and brokerage firms. The issues in this appeal concern only U.S. Bank.

The operative fifth amended complaint contains four causes of action against U.S. Bank.

The fifth and sixth causes of action are for common law negligence and gross negligence, alleging that U.S. Bank negligently or with gross negligence breached its duty of "ordinary commercial banking care in the handling and depositing of Plaintiffs' checks" by "failing to take commercially reasonable steps to ensure that all of the Plaintiffs' checks were endorsed by `Third Eye Systems, LLC' and deposited in the bank account of `Third Eye Systems, LLC.'"

The eighth and ninth causes of action are based on alleged violations of the California Uniform Commercial Code. The eighth cause of action alleges a statutory cause of action for negligence that Plaintiffs title "Negligence under the Uniform Commercial Code." The ninth cause of action asserts that U.S. Bank breached the presentment and transfer warranties described in sections 4207 and 4208.

In all four causes of action Plaintiffs allege that they "suffered damages in the face amounts of the checks ... plus interest and costs."

B. The Federal Action

Concurrently with the litigation of this action, Plaintiffs were litigating against Third Eye Systems, LLC, Third Eye Systems Holdings, Inc., and the principals of those companies, Saliha Miller and Burke Hovde, in federal court (the federal action).⁵ The federal action was filed in April 2001.⁶ This action was filed in March 2002.

In the federal action, the operative complaint alleged 14 separate claims, including breach of contract, fraud, breach of fiduciary duty, and violation of the securities laws of the States of Washington and California. Many of the claims were premised on the allegation that Plaintiffs' checks were improperly deposited in the bank account of Third Eye Systems Holdings, Inc., and that the funds were thereafter improperly used for purposes other than benefiting Third Eye Systems, LLC.

In 2004, Judge Dana M. Sabraw held a bench trial in the federal action. As described in Judge Sabraw's findings of fact and conclusions of law, the only claim that the federal plaintiffs chose to present at trial was their claim for rescission on the ground that the securities were not registered as required under Washington law.⁷ Judge Sabraw ruled that the securities were required to be registered under Washington law because they did not fall within that state's private offering exemption. As a remedy, Judge Sabraw ruled that the federal plaintiffs, with the exception of John Mills, were entitled to rescission plus interest and costs, conditional on their tender of the securities to the defendants. John Mills was denied the remedy of rescission pursuant to the doctrine of in pari delicto because he participated in the promotion of the securities and received a commission for his services, and thus was "equally responsible for the forbidden transactions."⁸ Judgment was entered in the federal action in March 2004 (the federal court judgment).

C. The Trial Court Sustains U.S. Bank's Demurrer to the Eighth and Ninth Causes of Action

In this action, U.S. Bank demurred to the eighth cause of action (for statutory negligence under the California Uniform Commercial Code) and the ninth cause of action (for breach of certain presentment and transfer warranties under §§ 4207 and 4208). As to the eighth cause of action, U.S. Bank argued that the California Uniform Commercial Code did not give rise to a cause of action for negligence in the situation presented by this case, and that in any event, it satisfied its duty of care by using an automated check processing system. As to the ninth cause of action, U.S. Bank argued that as the drawers of the checks, Plaintiffs were not authorized by sections 4207 and 4208 to sue the depositary bank, and that in any event, any such claim would be barred by the statute of limitations.

The trial court sustained the demurrer. The trial court stated that it "found each of [U.S. Bank's] arguments highly persuasive."

D. The Trial Court Denies Plaintiffs' Motion to Compel Discovery

In the course of this litigation, Plaintiffs sought to discover (1) the bank records of Third Eye Systems, LLC, and Third Eye Systems Holdings, Inc., held by U.S. Bank; and (2) documents concerning U.S. Bank's training of tellers concerning the depositing of checks into the proper account, and whether such training was followed in the case of Plaintiffs' checks.

U.S. Bank opposed the motion to compel, arguing among other things that (1) it was obligated to protect customer privacy, and it would be subject to a lawsuit if it turned over the customers' private records without compulsion by legal process; (2) the discovery concerning teller training was not reasonably calculated to lead to the discovery of admissible evidence; and (3) in any event, Plaintiffs had failed to comply with the rules for filing a full and complete separate statement in support of their motion to compel as required by California Rules of Court, former rule 335.⁹

The trial court denied the motion to compel on both substantive and procedural grounds. It stated, "Plaintiffs have failed to convince the Court that [U.S. Bank's] objections are unfounded or should be disregarded with respect to the discovery requests at issue. The motion itself is confusing and Plaintiffs' main legal points are unsupported by any legal authority (e.g., the argument that there is no third party right of privacy with respect to Third Eye Systems, LLC and Third Eye Systems Holdings, Inc.). [¶] Further, motions to compel require an accompanying separate statement. While Plaintiffs[] have submitted what they titled a separate statement, it fails to comply with [former rule] 335 and has been disregarded."

E. The Trial Court Grants U.S. Bank's Motion for Summary Judgment on the Remaining Fifth and Sixth Causes of Action for Common Law Negligence and Gross Negligence

U.S. Bank brought a motion for summary judgment on the remaining two causes of action, namely, the fifth and sixth causes of action for common law negligence and gross negligence.

U.S. Bank set forth three separate and independent bases for its summary judgment motion. First, U.S. Bank argued that the federal court judgment gave rise to...