The California Court of Appeal determined that expanding a bank’s duties to include investigating and disclosing possible fraudulent activity was not warranted and that nonsuit in favor of the bank was properly granted. Kurtz-Ahlers, LLC v. Bank of America (Cal. Ct. App. May 8, 2020). To view the full opinion, click here.
A bookkeeper, Elizabeth Mulder (Mulder), defrauded her client, Kurtz-Ahlers, over a five year period by having him sign checks that were deposited into Mulder’s account. Mulder added a dba of “Income Tax Payments” to her checking account and then had Mulder pay income taxes by check to “Income Tax Payments” instead of the IRS or California Franchise Tax Board. The checks were deposited into Mulder’s account. Both Kurtz-Ahlers’ account and Mulder’s account were at the Bank of America (the Bank).
Kurtz-Ahlers filed a lawsuit against the Bank for negligence and conversion. By the time of trial only the negligence claim was at issue since the trial court had previously granted summary adjudication in favor of the Bank on the conversion claim. After trial, the trial court granted the Bank’s motion for nonsuit. On appeal, the Court of Appeal affirmed, concluding that the trial court properly granted the motion.
The Court of Appeal, citing to established case law, stated that the relationship between a bank and depositor is based on contract and is not a fiduciary relationship, and that a bank’s “duties do not include ‘policing’ other depositors’ accounts for fraud.” The court stated that pursuant to case law there is a “narrow scope” of duties, including the duty to honor checks, the duty to dishonor checks lacking required signatures, and the duty to render faithful and accurate accounts. The court stated that “[t]he parties have not cited, and we have not found, any published case involving the issue of whether a bank owes a depositor a duty to investigate and disclose possible fraudulent activity in another depositor’s account.” Citing to Casey v. U.S. Bank. Nat. Assn., 127 Cal.App.4th 1138 (2005), the court further stated that “[a] legion of cases, however, rejects the notion banks owe such a duty to nondepositors.”
The court found that the facts presented in this case did not fall within the “single, narrow exception” in Sun ‘n Sand, Inc. v. United California Bank, 21 Cal.3d 671 (1978) where the California Supreme Court held that “a bank has a ‘minimal’ and ‘narrowly circumscribed’ duty of inquiry ‘when checks, not insignificant in amount, are drawn payable to the order of a bank and are presented to the payee bank by a third party seeking to negotiate the checks for his own benefit.’” The court stated that facts did not match those in Sun ‘n Sand and that “unlike in Sun ‘n Sand, the checks Mulder submitted for deposit had ‘objective criteria from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed’” and that “the checks were payable to the very account in which they were deposited.”
The court also focused on public policy issues, including a customer’s right to privacy and facilitating the efficient processing of banking transactions, stating that “monitoring individual banking transactions to detect fraudulent activity would imperil both customer privacy and the expedited processing of banking transactions so crucial to a modern economy” and that “[b]y investigating and thereby delaying the processing of banking transactions between a suspected fraudster and another depositor, the bank would face liability for violating strict statutory ‘deadlines for the payment or timely dishonor of checks.’” Finally, the court noted that “depositors are often, if not always, in a better position than their banks to protect themselves from fraud by simple steps, such as using due diligence in hiring bookkeepers and by occasionally checking their financial records.” The Court of Appeal concluded that, based on the public policy considerations, expanding a bank’s duties was not warranted and nonsuit was properly granted.
Negligence claims against a bank for failing to detect and disclose fraudulent transactions are unlikely to succeed. In addition to case law providing a very limited exception to create a duty, the public policy issues discussed in Kurtz-Ahlers lean heavily against expanding a bank’s duties.
About one month before the Kurtz-Ahlers opinion, the United States District Court for the Northern District of California, in Chang v. Wells Fargo Bank, N.A., 2020 WL 1694360 (N.D. Cal. 2020), considered a motion to dismiss claims by noncustomers against a bank relating to processing transactions for a Ponzi scheme. The claims in that case included negligence, aiding and abetting fraud and aiding and abetting breach of fiduciary duty. The District Court denied the motion to dismiss as to the aiding and abetting claims, and granted with leave to amend as to the negligence claim. In granting leave to amend the negligence claim, the District Court made clear that the path to stating a viable negligence claim was very narrow, and that a claim that the bank owed duties to noncustomers to “police” accounts was “inviable as a matter of law” and inconsistent with California cases. The District Court stated that the complaint’s allegations were not “within the very limited exception for forged checks carved out in Sun ‘n Sand and cases following it” and that “absent sufficient allegations of some sort of affirmative conduct by Wells Fargo suggesting it expressly took on a direct duty to Plaintiffs, as opposed to a purported ‘duty to safeguard’ or ‘duty to investigate’ inconsistent with California law, this claim will be dismissed without leave to amend next time.” The Chang decision shows that a negligence claim against a bank is still possible, but it is unlikely to succeed. Claims for aiding and abetting fraud or aiding and abetting breach of fiduciary duty are more viable claims against a bank relating to processing fraudulent transactions if the facts of the case provide support for such claims, including facts supporting the bank’s knowledge of the fraud or breach.
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 Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also 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 to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.