The following is an update analyzing a recent case of interest:
The United States District Court for the Southern District of California ruled that common law claims involving wire transfers, including claims for negligence, conversion, and money had and received, are displaced by duties, allocation of risk and remedies available under the Uniform Commercial Code Article 4A, codified in California at Cal. Comm. Code §§ 11101, et seq. As a result, a noncustomer third party, Attisha Enterprises, Inc. (Attisha), which sent a wire transfer to Capital One, N.A. (Capital One) which was deposited into a fraudulent account due to false wire transfer instructions provided by fraudsters to Attisha could not assert these common law claims against Capital One. Attisha Enterprises, Inc. v Capital One, N.A., __ F. Supp.. 3d ___. 2020 WL 7181065 (S.D. Cal. 12/7/20). To view the opinion, click here.
In May 2018 Attisha entered into an agreement to buy a convenience store and gas station. The parties opened an escrow with TICOR Title Company of California (TICOR). As part of the agreement, Attisha was to deposit $100,000.00 into the TICOR escrow. In September 2018 Attisha received fraudulent wire instructions from unnamed defendants using the name TICOR, requesting deposit into a Capital One account number. Attisha unwittingly caused the $100,000.00 deposit to be wired from its account to the false account, which transfer was accepted and executed by Capital One. Some time later, Attisha realized the wire transfer instructions were fraudulent and requested that Capital One not release the funds. Nevertheless, Capital One allowed the account owner, who was not TICOR, to withdraw most of the funds.
Attisha sued Capital One in California Superior Court (timely removed to the Southern California District Court based on diversity), alleging common law claims for negligence based on breach of an ordinary duty of care owed by Capital One to Attisha, conversion, and money had and received. Capital One filed a Rule 12(b)(6) motion to dismiss based on failure to state a claim, asserting that Article 4A of the UCC, dealing with fund transfers, barred the common law claims. After analyzing the merits of the three alleged negligent acts, the conversion claim, and the money had and received claim, the district court granted the motion to dismiss with leave to amend. It ruled that UCC Article 4A controlled two of the three negligent acts along with the conversion and money had and received claims which arose from the same operative facts; it ruled that pleading the claims based on an ordinary duty of care was insufficient. As to the third negligence claim, it concluded that the elements of causation and damage were missing, so the claim for relief was defective on its face.
Attisha pled three acts of negligence against Capital One: (1) negligent account opening, which arose from Capital One allowing an entity that was not TICOR to open an account in TICOR’s name; (2) negligent acceptance of the wire transfer whereby Capital One negligently accepted and deposited Attisha’s wired funds into the specified account number which was not truly TICOR’s; and (3) negligent release of the funds to the account holder which was not TICOR. UCC Article 4A has been adopted without significant alterations by California at Cal. Comm Code, Division 11, §§ 11101, et seq., and by title covers Transfers of Funds. Section 11104 defines “funds transfer[s]” as “the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order.” The parties did not dispute that a wire transfer is a fund transfer covered by Article 4A.
The district court ruled that the first negligence claim did not fall under Article 4A because opening the account was not a fund transfer. However, the second and third were, and the UCC barred the common law claims as alleged. Attisha alleged a duty of ordinary care, which was insufficient because under the UCC, Capital One had to “know” that the account name and number referred to a different person than TICOR to allege negligence. The court held that the UCC “sets forth duties, allocation of risk, and remedies that displace common law causes of action in the circumstances applicable here” and dismissed with leave to amend negligence claims (2) and (3) because they arose from a duty of ordinary care which was inapplicable in the circumstances.
The first negligence claim was dismissed with leave because Attisha had not pled that opening the account caused any damage. In addition, under California law a bank “does not owe a fiduciary duty of care to a noncustomer” absent extraordinary and specific facts which had not been pled. The conversion and money had and received claims were also common law claims which had been displaced by the UCC.
This case is well-reasoned and a refreshingly simple read compared to many rulings on Rule 12(b)(6) motions, which can be tedious. I have no doubt its ruling that Article 4A of the UCC applies to the wire transfer at issue is correct and that in light of that, the ordinary care duty alleged was not sufficient to establish the liability of the bank. Other than stating that the UCC displaced the common law claims, it does not discuss what must be pled by Attisha to state a claim under the applicable statute. I hope that there is some level of specific pleading which would allege liability against a bank which had allowed a party which was clearly not a well known title company to open an account in the title company’s name. It seems that alone would be a sufficient red flag to cause the bank to investigate further whether a fraud was being perpetuated. Perhaps there will be another chapter to this story.
This decision is a good reminder to practitioners, however, that where federal banks are involved, ordinary negligence claims will not usually be sufficient to establish cause, effect, and damage. Banking institutions are highly regulated and “where the buck stops” when there has been fraud somewhere in the system, causing damage to a third party, customer or not, often is set by statutes. UCC expertise is generally required to maintain a practice in the banking arena.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. These materials were written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group, with editorial contributions by Monique Jewett-Brewster, a shareholder at Hopkins & Carley, ALC, past chair of the Business Law Section, and a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.