Title Ins. Co. v. Comerica Bank - California

• Decision Date: 17 August 1994
• Docket Number: No. H011620,D,BANK-CALIFORNI,H011620
• Citation: 32 Cal.Rptr.2d 735,27 Cal.App.4th 800
• Court: California Court of Appeals Court of Appeals
• Parties: , 24 UCC Rep.Serv.2d 584 TITLE INSURANCE COMPANY OF MINNESOTA, Plaintiff and Appellant, v. COMERICAefendant and Respondent.

Page 735

32 Cal.Rptr.2d 735

27 Cal.App.4th 800, 24 UCC Rep.Serv.2d 584

TITLE INSURANCE COMPANY OF MINNESOTA, Plaintiff and Appellant, v. COMERICA BANK-CALIFORNIA, Defendant and Respondent.

No. H011620.

Court of Appeal, Sixth District, California.

Aug. 17, 1994.

James M. Ingram, Mount & Stoelker, San Jose, for plaintiff/appellant Title Ins. Co. of Minnesota.

Peter M. Rehon, Lisa C. Roberts, Shannon F. Fallon, Ware & Freidenrich, Palo Alto, for defendant/respondent Comerica Bank-California.

MIHARA, Associate Justice.

At issue in this appeal is the applicability and scope of the "impostor rule," which makes an indorsed check effective if the drawer was induced to issue the check by an impersonator of the payee. (Com.Code, § 3404, subd. (a); former Com.Code, § 3405, subd. (1)(a).) Plaintiff Title Insurance Company of Minnesota contends the trial court erroneously applied this rule in sustaining the demurrer of the drawee bank, respondent Comerica Bank-California ("Bank"), to plaintiff's complaint for negligence. We agree that the impostor rule is not applicable under the circumstances presented, and accordingly reverse the judgment of dismissal.

Allegations of the Complaint

A general demurrer presents the same question to the appellate court as to the trial court--namely, whether the plaintiff has alleged sufficient facts in the complaint to justify relief on any legal theory. (B & P Development Corp. v. City of Saratoga (1986) 185 Cal.App.3d 949, 953, 230 Cal.Rptr. 192; Shahvar v. Superior Court (1994) 25 Cal.App.4th 653, 30 Cal.Rptr.2d 597.) Accordingly, in reviewing an order sustaining a demurrer, we assume the truth of all material facts properly pleaded in the complaint and determine whether it states any valid claim entitling the plaintiff to relief. (B & P Development Corp. v. City of Saratoga, supra, 185 Cal.App.3d at p. 953, 230 Cal.Rptr. 192; Serrano v. Priest (1971) 5 Cal.3d 584, 591, 96 Cal.Rptr. 601, 487 P.2d 1241.) In light of this established principle of review, we summarize the facts as alleged in plaintiff's first amended complaint.

Plaintiff is the assignee of the interests of First National Mortgage Company ("FNMC"), who made two equity loans to Helen Nastor ("Helen"), secured by deeds of trust. Plaintiff issued a policy of land title insurance for each of these loans.

On September 22, 1988, FNMC issued a check payable to Helen in the amount of $58,659.29, the proceeds of the first loan. FNMC gave the check to Helen's son, Rudy Nastor ("Rudy"), for delivery to Helen. That day, someone impersonating Helen indorsed the check and presented it to Bank, where FNMC held an account. Bank paid the impersonator the full amount of the check.

On December 29, 1988, FNMC made a second loan to Helen in the amount of $108,300. Part of the proceeds of this loan were used to pay off the first loan. The remainder was issued to Rudy in the form of a check made payable to him.

When FNMC failed to receive payment on the $108,300 loan, it initiated nonjudicial foreclosure proceedings against Helen's property. On October 17, 1989, Helen's attorney informed FNMC that its deed of trust on the property was invalid because it had been executed by Rudy using a forged power of attorney. Helen thereafter testified by deposition that she had not executed the power of attorney, nor had she indorsed or presented the check to Bank for payment.

FNMC made a claim for payment under the second title insurance policy, and plaintiff paid FNMC $108,300. Plaintiff, acting as subrogee and assignee with respect to FNMC's claim, then sued Bank for negligence, seeking recovery of the $108,000. According to the first amended complaint, Bank had a duty "to establish and practice such procedures and business practices as are or may be reasonably necessary and effective to avoid a breach of any of the duties of care owed by BANK ... to the depositors and customers of BANK ... including therein a duty to immediately inform customers such as FNMC when impostors and/or forgers attempt to cash a check drawn on such customers' accounts with BANK." Bank breached this duty, plaintiff alleged, by failing to ensure "that only properly endorsed and presented checks of its depositors [were] paid." Had Bank "caught" the impostor trying to cash the check payable to Helen, it would have informed FNMC of the attempt, and FNMC would have discovered the forged power of attorney before it made the second loan.

Applicability of the Impostor Rule

Bank's demurrer is based entirely on the asserted applicability of the impostor rule, which, according to Bank, interposes an "absolute defense" against plaintiff's allegations of negligence. Bank relies on the current provisions of section 3404, subdivision (a) (hereafter, "section 3404(a)"), which makes an indorsement by any person effective if an impostor had induced the issuance of the instrument to either the impostor or "a person acting in concert with the impostor." ¹ In this case, argues Bank, Rudy was acting in concert with the impostor (the impersonator of Helen), who presented the check to Bank for payment.

Plaintiff responds that section 3404(a) is not applicable, because it was not enacted until 1992, after the events alleged in the complaint. Instead, plaintiff maintains, this case is controlled by former section 3405, subdivision (1)(a) (hereafter, "former section 3405(1)(a)"). The expression of the rule in the latter statute is substantially the same as that of the current provisions, but excluded from its reach are false representations of agency. Because Rudy obtained the check from FNMC by falsely representing that he was authorized to act as Helen's agent, plaintiff argues the transaction at issue is outside the scope of the impostor rule.

We agree with plaintiff that former section 3405(1)(a) governs the disposition of this case, since the events at issue took place in 1988, while that statute was still in effect. ² Former section 3405(1)(a) provided: "An indorsement by any person in the name of a named payee is effective if (a) An impostor by use of the mails or otherwise has induced the maker or drawer to issue the instrument to him or his confederate in the name of the payee...."

This section does not protect Bank from liability under the circumstances presented. As one California court explained prior to the enactment of former section 3405, the impostor rule is applicable only when the issuance of the check has been accomplished through impersonation of the payee: "[W]here a check is delivered to an impostor as payee and the drawer believes that the impostor is the person upon whose endorsement it will be paid, the endorsement by such impostor in the name which he is using to impersonate another is not a forgery.... The soundness of the rule obtains in the fact that the money has actually been paid to the person for whom it was really intended. Because another person might bear the very name assumed by the impostor and might have some contractual relationships with the impostor does not subject to a loss the drawee bank when it has paid the check to the person intended as the payee." (Schweitzer v. Bank of America (1941) 42 Cal.App.2d 536, 540, 109 P.2d 441. See also Security-First Nat. Bank v. United States (9th Cir.1939) 103 F.2d 188, 190; Ryan v. Bank of Italy Nat. T. & S. Assn. (1939) 106 Cal.App. 690, 695, 289 P. 863.)

The reasoning of the Schweitzer court directs our analysis in the present case. If FNMC (the drawer) had been induced by an impostor of Helen to issue the check either to Rudy or to the impostor, then the indorsement would be considered effective as to FNMC under the impostor rule. The rationale for this result is that Bank has paid the person whom FNMC intended to receive the money. When viewed under principles of negligence or estoppel, the outcome of this scenario would be the same: the risk of loss would be shifted to the drawer of the instrument ^MC, who was in a better position to detect the fraud. (See Fireman's Fund Ins. Co. v. Security Pacific Nat. Bank (1978) 85 Cal.App.3d 797, 830, 149 Cal.Rptr. 883 [burden of loss on party who deals with the forger]; Intelogic v. Merchants Nat. Bank (Ind.App. 2 Dist.1993) 626 N.E.2d 839, 842 [under UCC, loss resulting from forged indorsement should fall upon party best able to prevent it]; East Gadsden Bank v. First City Nat. Bank of Gadsden (1973) 50 Ala.App. 576, 281 So.2d 431, 433 [intended payee theory distinguished from negligence or estoppel theory].)

This case presents different facts, however. Here, FNMC made the check payable to the true Helen, not to an impostor representing herself as Helen. FNMC intended that Helen herself--not a person it believed to be Helen--indorse the check and receive the proceeds. There is no question that FNMC intended to deal solely with Helen. The rationale underlying the protection of the impostor rule thus does not apply here. (Cf. East Gadsden Bank v. First City Nat. Bank of Gadsden, supra, 281 So.2d at p. 434.)

A person's false representation that he or she is an agent of the payee is not sufficient. Uniform Commercial Code Comment 2 to former section 3405 notes: " 'Impostor' refers to impersonation, and does not extend to a false representation that the party is the authorized agent of the payee. The maker or drawer who takes the precaution of making the instrument payable to the principal is entitled to have his indorsement." (See Uniform Com.Code com., 23B West's Ann.Com.Code (1964 ed.) § 3405, p. 287.) Here, Rudy obtained issuance of the check to Helen not by impersonating her, but by falsely representing that he was authorized to act on her behalf. Although clearly fraudulent, this conduct does not constitute impersonation and thus cannot be considered an inducement to issue the instrument within the meaning of former section 3405(1)(a). (Cf. Broward Bank v. Commercial Bank (Fla.App.1989) 547 So.2d 687, 689; Valley Bank v. Monarch Inv. Co. (1990) 118...