Severin Mobile Towing, Inc. v. Jpmorgan Chase Bank, N.A.
| Decision Date | 09 June 2021 |
| Docket Number | D077409 |
| Citation | 65 Cal.App.5th 292,279 Cal.Rptr.3d 854 |
| Court | California Court of Appeals Court of Appeals |
| Parties | SEVERIN MOBILE TOWING, INC., Plaintiff and Appellant, v. JPMORGAN CHASE BANK, N.A., Defendant and Respondent. |
Niddrie Addams Fuller Singh, Victoria E. Fuller and John S. Addams, San Diego, for Plaintiff and Appellant.
Ballard Spahr, Amy Schwartz (pro hac vice), and Scott S. Humphreys, Los Angeles, for Defendant and Respondent.
Over the course of a few years, an employee of Severin Mobile Towing Inc. (Severin) took about $157,000 in checks made payable to Severin's d/b/a, endorsed them with what appears to be his own name or initials, and deposited them into his personal account at JPMorgan Chase Bank N.A. (Chase). Because the employee deposited all the checks at automated teller machines (ATM's), and because each check was under $1,500, Chase—in accordance with its deposit procedures—accepted each check without "human review." When Severin eventually discovered the embezzlement, it sued Chase for negligence and conversion under California's version of the Uniform Commercial Code (UCC), and for violating the unfair competition law ( Bus. & Prof. Code, § 17200 ; the UCL) based on those alleged UCC violations.
Severin moved for summary adjudication of its conversion cause of action and Chase moved for summary judgment of all of Severin's claims. Chase argued Severin's claims as to 34 of the 211 stolen checks were time-barred and the remaining claims were barred by two UCC defenses: California Uniform Commercial Code sections 3405 and 3406.1
Section 3405 (generally speaking) shields a bank from liability for accepting a check made out to an employer if an employee "fraudulently indorse[d]"2 the check by signing it in a manner "purporting to be that of the employer" ( § 3405, subd. (a)(2) ), and the bank exercised "ordinary care" in accepting the check "in good faith" ( § 3405, subd. (b) ). Chase supported its motion with an expert's opinion that Chase's automated deposit procedures satisfied the applicable ordinary care standard, but Chase did not address whether Severin's employee had fraudulently indorsed the stolen checks as defined in section 3405, subdivision (a)(2). Chase also relied on section 3406, which applies when a victim's negligence substantially contributed to the fraud.
The trial court granted Chase's motion on statute of limitations and section 3405 grounds; the court did not reach section 3406. The court denied Severin's motion as moot, and entered judgment for Chase.
On appeal, Severin argues only that the court erred in granting summary judgment to Chase on Severin's conversion cause of action (and, by extension, the derivative UCL cause of action). Severin does not challenge the trial court's ruling as to the statute of limitations or the negligence cause of action.
Specifically, Severin argues the court erroneously granted summary judgment under section 3405 because Chase failed to meet its burden of establishing that Severin's employee fraudulently indorsed the stolen checks in a manner "purporting to be that of [his] employer." ( § 3405, subd. (a)(2).) Severin further argues factual disputes about its reasonableness in supervising its employee preclude summary judgment under section 3406.
We agree with Severin in both respects, and therefore do not reach the merits of Chase's claim that its automated deposit procedures satisfy the applicable ordinary care standard. Accordingly, we reverse the judgment and remand with directions specified in the Disposition.
Severin is an auto towing company doing business as "USA Towing & Recovery."
Severin is owned and operated by brothers Asad and Basil Raffo, who started the company in 2007. That year, Severin hired Guillermo Oseguera as its first employee. The company did not run a background check on Oseguera when it hired him, but a check a few years later came back clean.
Oseguera began as a tow truck driver, and was promoted to lot manager within a year. He was " ‘100 percent responsible’ for running the lot." Tow truck drivers would drop an average of four to five cars at the lot each day. Each driver would give Oseguera an invoice for the vehicle, which Oseguera was supposed to enter into Severin's computer system. When someone would come to retrieve a vehicle, that person would give payment to Oseguera, who would release the vehicle. Oseguera "was the only lot manager that had the power to ‘release’ cars from the lot by himself."3
At the end of each day, Oseguera was supposed to take the invoices and payments to Asad. Asad testified in his deposition that Oseguera " ‘was 100 percent responsible for receiving the car, entering the information [into Severin's computer system], receiving the check and then releasing the car, and he would run that all through [Asad]." No one at Severin reviewed Oseguera's files or compared the invoices he delivered at the end of each day to the original invoices in his files.
Severin first suspected in mid-2016 that Oseguera might be stealing money. Severin discovered that from time-to-time, at the end of the work day, Oseguera "would actually steal one or two checks and misfile the related invoices." When Asad confronted Oseguera about the theft, Oseguera left work and never returned. Asad filed a police report, but never took legal action against Oseguera because he was "a fugitive ... in Mexico."
After Oseguera's departure, Severin implemented several new procedures to prevent employee theft, including installation of surveillance cameras on the lot, use of triplicate invoices delivered simultaneously to the lot manager and an owner, and division of responsibility for intaking and releasing vehicles. Still, Asad testified Oseguera "could have come up with something else" to circumvent Severin's new measures. It "blew out [Asad's] mind," in the first place, "that somebody could cash a check written to somebody else."
About a month after it discovered the fraud, Severin notified Oseguera's bank (Chase). Based on a review of Oseguera's account records for the period January 2014 through September 2016, it appears he deposited into his own account 211 checks payable to "USA Towing" totaling $156,805.30. Each check was for an amount less than $1,500, and was deposited at an ATM. Oseguera endorsed the checks with what appears to be his own name or initials, rather than the name Severin or USA Towing.4
Under Chase's applicable Deposit Review Operations procedures, checks under $1,500 deposited at ATM's were "automatically processed and accepted for deposit without human review." Accordingly, every check at issue "was processed by automatic means and accepted without review for deposit into Oseguera's account."
Severin sued Chase in August 2017 to recover the sums Oseguera stole. Severin's complaint asserted three causes of action: (1) a statutory negligence claim alleging Chase breached a duty of care by permitting Oseguera to deposit checks payable to USA Towing into his personal account without verifying the endorsements; (2) a statutory conversion claim alleging Chase converted funds by allowing Oseguera to deposit checks lacking proper endorsements into his personal account; and (3) a UCL claim premised on the statutory violations alleged in the first two causes of action.
The parties eventually filed simultaneous dispositive motions—Severin moved for summary adjudication of its conversion claim, and Chase moved for summary judgment (or, in the alternative, summary adjudication) of all of Severin's claims.
Chase moved for summary judgment on two grounds.
First, Chase argued that claims arising from 34 of the stolen checks were time-barred under the applicable three-year statute of limitations. (See Edward Fineman Co. v. Superior Court (1998) 66 Cal.App.4th 1110, 1117-1118, 78 Cal.Rptr.2d 478 ( Edward Fineman ) [].) Severin did not contest the argument, and the trial court found it meritorious.
Second, Chase argued all of Severin's claims were barred by the defense set forth in section 3405, which, as noted, can shield a bank from liability for accepting a check made out to an employer if an employee "fraudulently indorse[d]" the check and the bank exercised "ordinary care" in accepting the check "in good faith." ( § 3405, subd. (b).) Chase relied on the definition of "ordinary care" set forth in section 3103, subdivision (a)(7), which, in certain circumstances, allows banks to accept checks "by automated means" without "examin[ing]" them.5 Chase submitted a declaration and report from a banking expert who asserted Chase "exercised ordinary care and observed reasonable commercial standards in the process of the ATM deposits at issue." Chase did not address the fraudulent indorsement prong of the defense.
In opposition, Severin argued Chase had failed to establish its section 3405 defense because it had not shown that Oseguera fraudulently indorsed the stolen checks as required by section 3405. Citing the statute's narrow definition of a "fraudulent indorsement" as "a forged indorsement purporting to be that of the employer " ( § 3405, subd. (a)(2), italics added),6 Severin argued that because Oseguera had signed the checks in his own name, rather than in Severin's or USA Towing's name, Chase had not satisfied the threshold criterion. Severin also argued Chase "did not act with ordinary care" because its ATM check deposit procedures were "commercially unreasonable."
In its reply, Chase did not address the contention that it had failed to establish the fraudulent indorsement prong of the section 3405 defense. Instead, Chase highlighted the undisputed facts showing it acted with ordinary care in accepting the ATM check deposits. Chase also highlighted that Severin had not attempted to defend its...
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