Tme Enterprises, Inc. v. Norwest Corp.

• Decision Date: 09 December 2004
• Docket Number: No. B164022.,B164022.
• Court: California Court of Appeals Court of Appeals
• Parties: TME ENTERPRISES, INC. et al., Plaintiffs and Appellants, v. NORWEST CORPORATION, et al., Defendants and Respondents.

22 Cal.Rptr.3d 146

124 Cal.App.4th 1021

TME ENTERPRISES, INC. et al., Plaintiffs and Appellants, v. NORWEST CORPORATION, et al., Defendants and Respondents.

No. B164022.

Court of Appeal, Second District, Division 5.

December 9, 2004.

Certified For Partial Publication.^*

Rehearing Denied January 3, 2005.

Review Denied March 30, 2005.^**

Jeffrey Licht & Associates and Jeffrey L. Licht, Los Angeles, for Plaintiffs and Appellants.

Buchalter, Nemer, Fields & Younger and Debra Solle Healy, Irvine, for Defendants and Respondents.

MOSK, J.

Plaintiffs and appellants TME Enterprises, Inc. and James L. McDaniel (appellants) appeal from a judgment, following a court trial, in favor of defendants and respondents Norwest Bank Colorado (Norwest Bank or the Bank), Norwest Services, Inc. (NSI), and Norwest Corporation¹ (collectively respondents) in appellants' consolidated actions for violation of subpart B of the Federal Reserve Board's Regulation J (12 C.F.R. §§ 210.25-210.32 (2004))² (Regulation J), which incorporates Uniform Commercial Code (UCC) article 4A (12 C.F.R. § 210.25(b))³ and which governs wire transfers through the Fedwire system;⁴ fraud; negligence; civil conspiracy; civil RICO⁵ violations; unfair business practices and other state and federal causes of actions.⁶ Appellants contend that substantial evidence does not support the trial court's findings that Norwest Bank did not violate Regulation J; that respondents were not liable for negligence, civil conspiracy, civil RICO violations, and unfair business practices; and that respondents were not liable as alter egos of each other. Appellants further contend that they are entitled to a new trial because the trial court failed to enforce a March 6, 2001 discovery order requiring Norwest Bank to produce certain documents.

In the published portion of this opinion, we hold that pursuant to Regulation J, which is applicable to this transaction, a bank accepting an incoming wire transfer of funds that specifies both an account number and a named beneficiary may rely on the account number even if the named beneficiary does not hold the account identified by the designated number, so long as the bank does not have actual knowledge of that inconsistency; that actual knowledge of such an inconsistency does not exist unless bank personnel handling the transaction are aware that the name of the owner of the account number designated in the wire bears no resemblance to, and has nothing in common with, the named beneficiary; and that, without reaching any issue of preemption, there is substantial evidence to support the trial court's conclusion that the bank did not act negligently in accepting the wire transfer and in not freezing various accounts prior to the withdrawal of the monies from those accounts. In the unpublished portion of the opinion, we hold, without reaching any preemption issue, that substantial evidence supports the trial court's findings that respondents were not liable for civil conspiracy, civil RICO violations, or unfair business practices; that respondents were not liable as alter egos of one another; and that the trial court did not abuse its discretion concerning the enforcement of the March 6, 2001 discovery order. We therefore affirm the judgment.

BACKGROUND⁷

Appellants were the victims of a fraudulent investment scheme in which $1 million they sent by wire transfer ended up with Vieri Gaines Guadagni (Gaines). Appellants made the wire transfer through their bank, Pacific Business Bank, to an account Gaines maintained at Norwest Bank. Gaines was also a signatory to several other Norwest Bank accounts owned by an entity called Western Distributing Company. Although appellants believed the account specified in their wire transfer was a trust account for the benefit of appellant James McDaniel and designated in the wire transfer "Vieri Gaines Guadagni, Trustee fbo McDaniel" as the named beneficiary, the account was in fact the joint personal checking account of Gaines and his wife, Janet Guadagni.⁸ Gaines's business associate, John Sposato, as part of the fraudulent investment scheme, provided appellants with Gaines's account number and convinced appellants that Gaines would hold the wired funds as a trustee for appellants' benefit. Ultimately, the funds were all withdrawn or transferred from accounts at the Bank. Sposato subsequently pleaded guilty to criminal fraud charges in connection with the investment scheme.

At the time of the transaction at issue, Norwest Bank used an automated system for processing incoming wire transfers (wire transfer system). The wire transfer system included a database of information on account holders who regularly used wire transfers (wire transfer database). If the beneficiary of an incoming wire transfer was in the Bank's wire transfer database, the wire transfer system would automatically process the wire transfer by identifying the account number to be credited posting the wired funds to that account, and recording the name and address of the account holder to whom the funds were credited.

If, on the other hand, an incoming wire transfer was to a beneficiary who was not a regular wire transfer customer of the Bank, a "repair" operator would have to process the wire transfer manually. The operator would enter the beneficiary's account number into a separate database of account holder information. If the beneficiary's account number reflected a valid, existing account at the Bank, the database would provide the operator with the name and address of the account owner, although it is not clear if the operator would be aware that it was a joint account or a trust account. The operator would then manually enter the name and address of the account holder into the wire transfer system for recordkeeping purposes only, and the wired funds would be credited to the account number identified in the wire.

Norwest Bank's wire transfer system would not reject an incoming wire transfer if there was a discrepancy between the designated beneficiary's name and account number, and would process the transaction so long as the account number was valid. Accordingly, the Bank's policies and procedures for processing incoming wire transfers provided that the funds be posted to the account number specified, so long as the wire transfer instructions designated a valid and existing account number. Norwest Bank recorded the wire transfer beneficiary's name and address as part of the transaction history in order to comply with Bank Secrecy Act recordkeeping requirements;⁹ however, the beneficiary's name was not relevant for purposes of posting the wired funds.

Norwest Bank received appellants' wire transfer on December 23, 1996. NSI handled all of Norwest Bank's wire transfer operations. Appellants' wire transfer made through the Fedwire system, as noted above, was for deposit to an account in the name of "Vieri Gaines Guadagni, Trustee fbo McDaniel," account number 101-812-4159, which account was the personal checking account of Gaines and his wife.

Because Gaines was not a regular wire transfer customer of Norwest Bank, his account information was not in the Bank's wire transfer database. Patrick Mahoney, the NSI operator who processed appellants' wire transfer, could not recall appellants' wire transfer or the procedure he followed when he processed that specific wire transfer. He could not explain why just the name "Vieri Gaines Guadagni" was recorded without the words, "trustee fbo McDaniel" in the transaction history. He said that because the Bank's policy was to post the funds to the account number specified in the wire transfer, omitting the words "trustee fbo McDaniel" made no difference. He recalled that he was instructed during Bank training sessions to include in the processing of the wire only the name of the credit party or designated beneficiary of the wire transfer and to omit such phrases as "doing business as" and "trustee," because those words might cause the wire transfer system to reject the transaction. Because appellants' wire transfer specified a valid, existing account number at Norwest Bank, the transferred funds were posted to that account. Appellants had no communication with respondents before or during the sending of the wire transfer.

On December 26, 1996, Norwest Bank received another wire transfer to Gaines' account, this time from James Sanderson in the amount of $300,000. Sanderson's wire transfer specified that the funds were to be deposited to a trust account for his benefit and, like appellants' wire transfer, designated Gaines' personal checking account number as the account to be credited. On December 31, 1996, Gaines withdrew $1,300,000 from the joint checking account he and his wife maintained at Norwest Bank and deposited the monies into his personal Merrill Lynch account.

In December 1996, the Bank issued a fraud alert, because of an unusual amount of telephone calls Bank representatives received from individuals residing outside of Colorado wishing to open accounts at the Bank. In January 1997, after appellants' wire transfer had been accepted and posted, the Bank initiated a fraud investigation of Gaines' account because of telephone calls Bank representatives received from individuals inquiring about transactions relating to that account. There is conflicting evidence as to when telephone inquiries concerning Gaines' account took place; however, there was evidence that the calls did not occur until after Gaines had withdrawn appellants' funds.

On or about January 2, 1997, Gaines, at Sposato's direction, opened an account at Norwest Bank for an entity named Allhandra. Gaines is listed in the Bank's deposit agreement as Allhandra's vice-president and as a signatory on the Allhandra account. Gaines or a business associate of his told the Bank representative who opened the Allhandra account that the account was for international arbitrage trading. On January 23, 1997, Gaines...