Software Design & Application, Ltd. v. Hoefer & Arnett, Inc.

• Citation: 56 Cal.Rptr.2d 756,49 Cal.App.4th 472
• Decision Date: 29 August 1996
• Docket Number: No. A071676,A071676
• Court: California Court of Appeals
• Parties: , 30 UCC Rep.Serv.2d 898, 96 Cal. Daily Op. Serv. 7018, 96 Daily Journal D.A.R. 11,438 SOFTWARE DESIGN AND APPLICATION, LTD., et al., Plaintiffs and Appellants, v. HOEFER & ARNETT, INC., et al., Defendants and Respondents.

Page 756

56 Cal.Rptr.2d 756

49 Cal.App.4th 472, 30 UCC Rep.Serv.2d 898,

96 Cal. Daily Op. Serv. 7018,

96 Daily Journal D.A.R. 11,438

SOFTWARE DESIGN AND APPLICATION, LTD., et al., Plaintiffs and Appellants, v. HOEFER & ARNETT, INC., et al., Defendants and Respondents.

No. A071676.

Court of Appeal, First District, Division 4, California.

Aug. 29, 1996.

Raifman & Edwards, Jon Logan Edwards, Liesel Brand Stevens, San Francisco, for Appellant.

Allen E. Broussard, Jonathan R. Bass, Susan K. Jamison, Robert J. Stumpf, Claudia R. Carrington, David W. Studley, San Francisco, for Respondent.

ANDERSON, Presiding Justice.

This is an appeal from judgments of dismissal after the court sustained demurrers and appellants ¹ declined to amend. Although they were strangers to, not customers of, the respondent banks and brokerage firms, ² appellants attempted to recover from them on several theories, including negligence and conversion. The real culprit, appellants' faithless financial consultant entrusted with a valuable portfolio, liquidated the assets with the help of his sister through an ingenious scheme involving a series of fictitious accounts. The trial court correctly concluded there was no liability under the pleadings and, accordingly, we affirm the judgments.

I. FACTUAL BACKGROUND

On appeal we treat the demurrer as admitting all properly pleaded material facts and consider matters which may be judicially noticed. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58; Stanton Road Associates v. Pacific Employers Ins. Co. (1995) 36 Cal.App.4th 333, 340, 43 Cal.Rptr.2d 1.) We thus turn to the complaint for the factual contour, as follows: Appellant Manu Chatterjee is founder and sole owner of SDA, a Hong Kong corporation. In 1991 Chatterjee hired Patrick McDonald (McDonald), a financial consultant, to manage his and SDA's investments.

McDonald immediately opened brokerage accounts with two securities brokerage firms: Hoefer & Arnett and Security Research. Rather than putting the accounts in the name of SDA, the foreign corporation, McDonald opened them in the name of a limited partnership, also called "Software Design & Application, Ltd." The partnership does not exist. McDonald presented falsified papers identifying himself as general partner of this fictitious partnership and SDA as one of its limited partners, and designating himself as sole signatory on both accounts. In opening the accounts, he did not present documentation showing that SDA was, indeed, a limited partner or had authorized him to transact business.

Chatterjee had no knowledge that McDonald took these actions and never authorized him to open accounts in the name of a limited partnership or name himself as sole signatory on any SDA account. In 1993 Chatterjee, with McDonald's encouragement, transferred his Paine-Webber portfolio to the Hoeffer & Arnett account. Paine-Webber documentation provided to Hoeffer & Arnett, at the time of the transfer, indicated the securities and funds were owned and controlled by Chatterjee.

McDonald never gave Chatterjee any reports on either accounts, and had monthly account statements sent to a post office box, falsely representing it as an office address.

Meanwhile, in September 1992, McDonald's sister, Linda McDonald, opened an account at Wells Fargo in the name of the fictitious limited partnership with herself as sole signatory. She was not identified as a partner or agent of the general partner and did not then have a valid California driver's license.

The customer representative handling the transaction knew Linda McDonald--she was a bookkeeper for a San Francisco law firm that was itself a Wells Fargo customer. The complaint also alleges that prior to opening the accounts for the fictitious partnership, Linda McDonald had opened several other Wells Fargo accounts for different entities, always designating herself as sole signatory, and representing that she held various positions with these companies, including that of president.

Linda McDonald also opened an account in the name of the fictitious limited partnership at First Interstate, identifying herself and Christine Tanner as the signatories; neither "were identified on the false partnership form." The complaint further alleges that Linda had opened other accounts with First Interstate under various entities, representing that she held various positions

Beginning in March 1992 and continuing over the course of two years, McDonald systematically sacked the brokerage accounts. A total of $1,169,050 was transferred from the Hoeffer & Arnett account to the First Interstate and Wells Fargo accounts, and $429,420 was directed from the Security Research account to unknown locations, all without appellants' knowledge, consent or authorization.

Linda McDonald withdrew approximately $746,310 of appellants' funds from the Wells Fargo account during the period June 1993 through March 1994, directing these funds to various other Wells Fargo accounts she had opened. Beginning in April 1992 and continuing for a period of years, Linda McDonald and Tanner withdrew an "unknown" amount of appellants' funds from the First Interstate account.

Around September of 1993, McDonald ceased responding to calls or inquiries from Chatterjee. The following month Chatterjee tried without success to reach McDonald. When Chatterjee then attempted to sell stock from the Hoeffer & Arnett account, he discovered the firm had no knowledge of his interest in the account and that McDonald had wired funds to a Wells Fargo account.

From these alleged facts appellants attempted to state causes of action against all respondents for negligence, conversion and violation of CALIFORNIA UNIFORM COMMERCIAL CODE SECTION 11204³. The court sustained demurrers to the first amended complaint and then dismissed after appellants failed to further amend. This appeal followed.

II. DISCUSSION

A. Appellants Cannot State a Cause of Action for Negligence

The existence of a duty of care toward an interest of another worthy of legal protection is the essential prerequisite to a negligence cause of action, determined as a matter of law by the court. (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The gist of appellants' negligence claim is that the banks and brokerage firms owed a duty of care to Chatterjee and SDA to investigate the entity opening the account and to thereafter supervise and monitor account transactions such as withdrawals and transfers. Respondents successfully demurred on the ground that they did not owe appellants any duty of care.

The primary flaw in appellants' negligence theory is that none of the respondents had any relationship with Chatterjee or SDA. Appellants are not customers or past customers of the banks or the brokerage firms. They are, therefore, strangers to the contractual relationships between respondents and the thieves. We now analyze the duty issue, in its various permutations, against this fact.

(1) Banks

In this case the banks' basic duty of care derives from the contract with their customer, accountholder Linda McDonald. Chatterjee knew nothing of her bank accounts, and was not a customer of either bank; neither was SDA. Recent cases have held that absent extraordinary and specific facts, a bank does not owe a duty of care to a noncustomer. (Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1628, 272 Cal.Rptr. 623 [no showing that noncustomer was alter ego of, or had personally guaranteed debts of, bank's customer]; Roy Supply, Inc. v. Wells Fargo Bank (1995) 39 Cal.App.4th 1051, 1076, 46 Cal.Rptr.2d 309 [no duty to corporate president not a party to corporate account, nor an intended beneficiary thereof].)

(a) No Duty With Respect to the Transfer of Funds Into the Bank Accounts

Nevertheless, appellants posit such a duty, based primarily on Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 148 Cal.Rptr. 329, 582 P.2d 920 and its progeny. ⁴ In Sun 'n Sand, our Supreme Court held that a bank owes a limited duty of inquiry when a check presented for deposit bears some objective signs of fraud. There, the plaintiff, at an employee's urging, made checks payable to defendant bank, believing it owed the bank minor sums. The employee altered the checks to increase the sums, then deposited them in her personal account with the same bank. The bank permitted this negotiation without any inquiry, despite the fact that the checks were not payable to the employee, but to the bank itself.

Our Supreme Court first reiterated the competing policy considerations that come into play when deciding to impose a duty to exercise reasonable care under a given set of circumstances. These include " '... the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost and prevalence of insurance for the risk involved.' " (Sun 'n Sand, Inc. v. United California Bank, supra, 21 Cal.3d at p. 695, 148 Cal.Rptr. 329, 582 P.2d 920, quoting Rowland v. Christian (1968) 69 Cal.2d 108, 113, 70 Cal.Rptr. 97, 443 P.2d 561.)

The court went on to conclude: "[A]n attempt by a third party to divert the proceeds of a check drawn payable to the order of a bank to the benefit of one other than the drawer or drawee suggests a possible misappropriation. Accordingly, we conclude that Sun 'n Sand's allegations define circumstances sufficiently suspicious that [the bank] should have been alerted to the risk that Sun 'n Sand's employee was perpetrating a fraud. By making reasonable inquiries, [the bank] could have...