Severin Mobile Towing, Inc. v. JPMorgan Chase etc.

Filed 6/9/21
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SEVERIN MOBILE TOWING, INC., D077409
Plaintiff and Appellant,
v.
(Super. Ct. No. 37-2017-
JPMORGAN CHASE BANK, N.A., 00031451-CU-MC-CTL)
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Diego County,
Ronald L. Styn, Judge. Reversed and remanded with directions.
Niddrie Addams Fuller Singh, Victoria E. Fuller and John S. Addams
for Plaintiff and Appellant.
Ballard Spahr, Amy Schwartz (pro hac vice), and Scott S. Humphreys
for Defendant and Respondent.
Over the course of a few years, an employee of Severin Mobile Towing
Inc. (Severin) took about $157,000 in checks made payable to Severin’s d/b/a,
endorsed them with what appears to be his own name or initials, and
deposited them into his personal account at JPMorgan Chase Bank N.A.
(Chase). Because the employee deposited all the checks at automated teller
machines (ATM’s), and because each check was under $1,500, Chase—in
accordance with its deposit procedures—accepted each check without “human
review.” When Severin eventually discovered the embezzlement, it sued
Chase for negligence and conversion under California’s version of the
Uniform Commercial Code (UCC), and for violating the unfair competition
law (Bus. & Prof. Code, § 17200; the UCL) based on those alleged UCC
violations.
Severin moved for summary adjudication of its conversion cause of
action and Chase moved for summary judgment of all of Severin’s claims.
Chase argued Severin’s claims as to 34 of the 211 stolen checks were time-
barred and the remaining claims were barred by two UCC defenses:
California Uniform Commercial Code sections 3405 and 3406.1
Section 3405 (generally speaking) shields a bank from liability for
accepting a check made out to an employer if an employee “fraudulently
indorse[d]”2 the check by signing it in a manner “purporting to be that of the
employer” (§ 3405, subd. (a)(2)), and the bank exercised “ordinary care” in
accepting the check “in good faith” (§ 3405, subd. (b)). Chase supported its
motion with an expert’s opinion that Chase’s automated deposit procedures
satisfied the applicable ordinary care standard, but Chase did not address
whether Severin’s employee had fraudulently indorsed the stolen checks as
defined in section 3405, subdivision (a)(2). Chase also relied on section 3406,
1 Unspecified statutory references are to the California Uniform
Commercial Code.
2 “The law in this area is riddled with spelling anomalies. Depository,
depositary—endorse, indorse—insure, assure.” (HH Computer Systems, Inc.
v. Pacific City Bank (2014) 231 Cal.App.4th 221, 226, fn. 3 (HH Computer
Systems).) When referring to the statutory phrase, we will use “fraudulent
indorsement.” In all other contexts, we will use “endorsement.”
2
which applies when a victim’s negligence substantially contributed to the
fraud.
The trial court granted Chase’s motion on statute of limitations and
section 3405 grounds; the court did not reach section 3406. The court denied
Severin’s motion as moot, and entered judgment for Chase.
On appeal, Severin argues only that the court erred in granting
summary judgment to Chase on Severin’s conversion cause of action (and, by
extension, the derivative UCL cause of action). Severin does not challenge
the trial court’s ruling as to the statute of limitations or the negligence cause
of action.
Specifically, Severin argues the court erroneously granted summary
judgment under section 3405 because Chase failed to meet its burden of
establishing that Severin’s employee fraudulently indorsed the stolen checks
in a manner “purporting to be that of [his] employer.” (§ 3405, subd. (a)(2).)
Severin further argues factual disputes about its reasonableness in
supervising its employee preclude summary judgment under section 3406.
We agree with Severin in both respects, and therefore do not reach the
merits of Chase’s claim that its automated deposit procedures satisfy the
applicable ordinary care standard. Accordingly, we reverse the judgment and
remand with directions specified in the Disposition.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Factual Background
Severin is an auto towing company doing business as “USA Towing &
Recovery.” Severin is owned and operated by brothers Asad and Basil Raffo,
who started the company in 2007. That year, Severin hired Guillermo
Oseguera as its first employee. The company did not run a background check
3
on Oseguera when it hired him, but a check a few years later came back
clean.
Oseguera began as a tow truck driver, and was promoted to lot
manager within a year. He was “ ‘100 percent responsible’ for running the
lot.” Tow truck drivers would drop an average of four to five cars at the lot
each day. Each driver would give Oseguera an invoice for the vehicle, which
Oseguera was supposed to enter into Severin’s computer system. When
someone would come to retrieve a vehicle, that person would give payment to
Oseguera, who would release the vehicle. Oseguera “was the only lot
manager that had the power to ‘release’ cars from the lot by himself.”3
At the end of each day, Oseguera was supposed to take the invoices and
payments to Asad. Asad testified in his deposition that Oseguera “ ‘was 100
percent responsible for receiving the car, entering the information [into
Severin’s computer system], receiving the check and then releasing the car,
and he would run that all through [Asad].” No one at Severin reviewed
Oseguera’s files or compared the invoices he delivered at the end of each day
to the original invoices in his files.
Severin first suspected in mid-2016 that Oseguera might be stealing
money. Severin discovered that from time-to-time, at the end of the work
day, Oseguera “would actually steal one or two checks and misfile the related
invoices.” When Asad confronted Oseguera about the theft, Oseguera left
work and never returned. Asad filed a police report, but never took legal
action against Oseguera because he was “a fugitive . . . in Mexico.”
3 Asad explained in deposition that managers of Severin’s other lots
“needed permission” because they did not have the software required to
generate invoices.
4
After Oseguera’s departure, Severin implemented several new
procedures to prevent employee theft, including installation of surveillance
cameras on the lot, use of triplicate invoices delivered simultaneously to the
lot manager and an owner, and division of responsibility for intaking and
releasing vehicles. Still, Asad testified Oseguera “could have come up with
something else” to circumvent Severin’s new measures. It “blew out [Asad’s]
mind,” in the first place, “that somebody could cash a check written to
somebody else.”
About a month after it discovered the fraud, Severin notified
Oseguera’s bank (Chase). Based on a review of Oseguera’s account records
for the period January 2014 through September 2016, it appears he deposited
into his own account 211 checks payable to “USA Towing” totaling
$156,805.30. Each check was for an amount less than $1,500, and was
deposited at an ATM. Oseguera endorsed the checks with what appears to be
his own name or initials, rather than the name Severin or USA Towing.4
Under Chase’s applicable Deposit Review Operations procedures,
checks under $1,500 deposited at ATM’s were “automatically processed and
accepted for deposit without human review.” Accordingly, every check at
issue “was processed by automatic means and accepted without review for
deposit into Oseguera’s account.”
4 The appellate record contains Severin’s stolen checks and several
unrelated checks payable to Oseguera. He endorsed all of these checks in a
substantially similar manner, with what appear to be two initials followed by
handwriting that is difficult to decipher (see exemplar attached as Appendix
A, post, page 23). Chase’s appellate counsel acknowledged at oral argument
that none of the “squiggle[d]” endorsements on the checks appear on their
face to be in the name of Severin or USA Towing. We agree.
5
B. Severin’s Complaint
Severin sued Chase in August 2017 to recover the sums Oseguera stole.
Severin’s complaint asserted three causes of action: (1) a statutory negligence
claim alleging Chase breached a duty of care by permitting Oseguera to
deposit checks payable to USA Towing into his personal account without
verifying the endorsements; (2) a statutory conversion claim alleging Chase
converted funds by allowing Oseguera to deposit checks lacking proper
endorsements into his personal account; and (3) a UCL claim premised on the
statutory violations alleged in the first two causes of action.
C. Cross-Motions for Summary Disposition
The parties eventually filed simultaneous dispositive motions—Severin
moved for summary adjudication of its conversion claim, and Chase moved
for summary judgment (or, in the alternative, summary adjudication) of all of
Severin’s claims.
1. Chase’s Motion
Chase moved for summary judgment on two grounds.
First, Chase argued that claims arising from 34 of the stolen checks
were time-barred under the applicable three-year statute of limitations. (See
Edward Fineman Co. v. Superior Court (1998) 66 Cal.App.4th 1110, 1117-
1118 (Edward Fineman) [individual checks are subject to summary
adjudication].) Severin did not contest the argument, and the trial court
found it meritorious.
Second, Chase argued all of Severin’s claims were barred by the
defense set forth in section 3405, which, as noted, can shield a bank from
liability for accepting a check made out to an employer if an employee
“fraudulently indorse[d]” the check and the bank exercised “ordinary care” in
accepting the check “in good faith.” (§ 3405, subd. (b).) Chase relied on the
6
definition of “ordinary care” set forth in section 3103, subdivision (a)(7),
which, in certain circumstances, allows banks to accept checks “by automated
means” without “examin[ing]” them.5 Chase submitted a declaration and
report from a banking expert who asserted Chase “exercised ordinary care
and observed reasonable commercial standards in the process of the ATM
deposits at issue.” Chase did not address the fraudulent indorsement prong
of the defense.
In opposition, Severin argued Chase had failed to establish its section
3405 defense because it had not shown that Oseguera fraudulently indorsed
the stolen checks as required by section 3405. Citing the statute’s narrow
definition of a “fraudulent indorsement” as “a forged indorsement purporting
to be that of the employer” (§ 3405, subd. (a)(2), italics added),6 Severin
argued that because Oseguera had signed the checks in his own name, rather
than in Severin’s or USA Towing’s name, Chase had not satisfied the
threshold criterion. Severin also argued Chase “did not act with ordinary
5 Section 3103, subdivision (a)(7) states: “ ‘Ordinary care’ in the case of a
person engaged in business means observance of reasonable commercial
standards, prevailing in the area in which the person is located, with respect
to the business in which the person is engaged. In the case of a bank that
takes an instrument for processing for collection or payment by automated
means, reasonable commercial standards do not require the bank to examine
the instrument if the failure to examine does not violate the bank’s
prescribed procedures and the bank’s procedures do not vary unreasonably
from general banking usage not disapproved by this division or Division 4
(commencing with Section 4101).”
6 The definition also covers another scenario not at issue here: “[I]n the
case of an instrument with respect to which the employer is the issuer, a
forged indorsement purporting to be that of the person identified as payee.”
(§ 3405, subd. (a)(2).)
7
care” because its ATM check deposit procedures were “commercially
unreasonable.”
In its reply, Chase did not address the contention that it had failed to
establish the fraudulent indorsement prong of the section 3405 defense.
Instead, Chase highlighted the undisputed facts showing it acted with
ordinary care in accepting the ATM check deposits. Chase also highlighted
that Severin had not attempted to defend its negligence or UCL claims.
Finally, Chase incorporated by reference its opposition to Severin’s cross-
motion for summary adjudication, in which Chase argued Severin’s
conversion claim was also barred by section 3406, which precludes recovery
by “[a] person whose failure to exercise ordinary care substantially
contribute[d] to . . . the making of a forged signature.” (§ 3406, subd. (a).)
Chase asserted cursorily that “[i]t was [Severin]’s total failure to supervise its
employee that allowed [him] to steal the checks . . . .”
2. Severin’s Motion
Severin moved for summary adjudication of its statutory conversion
cause of action, arguing the undisputed facts satisfied the elements of the
claim and established that Chase’s ordinary care defense failed as a matter of
law. Severin supported its motion with a declaration and report from a
banking expert who opined Chase’s check deposit procedures were
“commercially unreasonable” and “inconsistent with general banking usage.”
Chase opposed Severin’s motion and moved to exclude Severin’s expert
evidence. The trial court ultimately granted the exclusion motion, and
Severin does not challenge that ruling.
Chase opposed Severin’s summary adjudication motion on the basis
that the conversion claim was barred by the ordinary care defenses set forth
in sections 3405 and 3406.
8
In reply, Severin argued primarily that Chase had not exercised
ordinary care in accepting the checks at issue.
D. Trial Court’s Rulings
The trial court granted Chase’s summary judgment motion and denied
Severin’s motion as moot. First, as noted, the trial court found that Severin’s
claims regarding 34 of the checks were time-barred.
Second, the court found that Chase’s unrebutted expert evidence
established a section 3405 ordinary care defense to Severin’s conversion
claim. The court did not explain how Chase had satisfied section 3405’s
fraudulent indorsement requirement, nor did the court address Chase’s
section 3406 argument.
Finally, the court found that Severin’s negligence and UCL claims
failed because (1) Severin “fail[ed] to raise any argument as to” them; (2) the
negligence claim was also barred by the section 3405 defense; and (3) the
UCL claim was merely derivative of Severin’s other unmeritorious claims.
The trial court entered judgment in Chase’s favor.
II. DISCUSSION
Severin maintains the section 3405 and 3406 defenses do not support
summary disposition of its conversion claim (or derivative UCL claim).7
7 The statute on which Severin based its conversion claim (§ 3420) has
its own “good faith” defense, but, by its express terms, it does not apply to “a
depositary bank” like Chase. (§ 3420, subd. (c) [“[a] representative, other
than a depositary bank, who has in good faith dealt with an instrument . . . is
not liable in conversion,” italics added]; see § 4105 [defining a depositary
bank as “the first bank to take an item”]; Laurie B LLC v. Wells Fargo Bank,
N.A. (C.D.Cal., May 8, 2015, No. CV 14-3942-DMG (SSX)) 2015 WL
12656285, at p. *5 (Laurie B.) [although prior version of “conversion statute
provided a good faith defense to depositary banks, [it] was subsequently
eliminated in 1992”]; Official Comment on Cal. U. Com. Code, 23A pt. 2
West’s Ann. Com. Code (2002 ed.) foll. § 3420, p. 507, comment 3 [protection
9
As to section 3405, Severin contends Chase failed to meet its burden of
establishing that Oseguera fraudulently indorsed the stolen checks. We
agree.
As to section 3406, Severin maintains (1) Chase waived the issue by
failing to timely and properly assert it in its own motion; (2) there are factual
disputes about whether Severin’s alleged “failure to exercise ordinary care
contribute[d] to . . . the making of a forged signature” (§ 3406, subd. (a));8 and
(3) Chase failed to exercise ordinary care by accepting the stolen checks via
automated means. We disagree that Chase waived the section 3406 defense,
but agree that factual disputes preclude summary judgment under it.
A. Summary Judgment Principles
“Summary judgment is appropriate only ‘where no triable issue of
material fact exists and the moving party is entitled to judgment as a matter
of law.’ ” (Regents of University of California v. Superior Court (2018)
4 Cal.5th 607, 618; see Code Civ. Proc., § 437c, subd. (c).) A defendant who
moves for summary judgment has the initial burden of showing each alleged
cause of action is without merit. (Code Civ. Proc., § 437c, subd. (c); Aguilar v.
Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) A defendant can meet this
burden by “prov[ing] an affirmative defense, disprov[ing] at least one
essential element of the plaintiff’s cause of action [citations], or show[ing]
that an element of the cause of action cannot be established.” (Sanchez v.
Swinerton & Walberg Co. (1996) 47 Cal.App.4th 1461, 1465; see Hutton v.
for depositary banks in former version was eliminated because it “drew
criticism from the courts, that saw no reason why a depositary bank should
have the defense”].)
8 Severin does not argue that section 3406 does not apply because
Oseguera’s endorsements do not constitute “forged signature[s]” under
section 3406. We will assume without deciding that section 3406 applies.
10
Fidelity National Title Co. (2013) 213 Cal.App.4th 486, 492.) “ ‘[A] defendant
moving for summary judgment based upon the assertion of an affirmative
defense . . . “has the initial burden to show that undisputed facts support
each element of the affirmative defense.” ’ ” (Consumer Cause, Inc. v.
SmileCare (2001) 91 Cal.App.4th 454, 467-468 (Consumer Cause).)
“We review an order granting summary judgment de novo.” (Serri v.
Santa Clara University (2014) 226 Cal.App.4th 830, 858.) “A trial court’s
stated reasons for granting summary judgment do not bind us; we review the
court’s ruling, not its rationale.” (Citizens for Odor Nuisance Abatement v.
City of San Diego (2017) 8 Cal.App.5th 350, 358.)
If an appellate court reverses summary judgment on grounds affecting
fewer than all causes of action, the appellate court may direct the trial court
to enter an order granting summary adjudication of the unaffected causes of
action so long as the moving party alternatively moved for summary
adjudication of them. (See Code Civ. Proc., § 437c, subd. (f)(2); Troyk v.
Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1354-1355 (Troyk).)
B. General Principles Regarding the UCC and Checks
In enacting sections 3405 and 3406, the Legislature adopted UCC
sections 3-405 and 3-406, respectively, as proposed by the National
Conference of Commissioners on Uniform State Laws. (See Edward
Fineman, supra, 66 Cal.App.4th at p. 1121; Lee Newman, M.D., Inc. v. Wells
Fargo Bank (2001) 87 Cal.App.4th 73, 81-82 (Lee Newman).) The Legislature
directed that the statutes be “interpreted and applied in accordance with the
Official Comments of the National Conference of Commissioners on Uniform
State Laws.” (Edward Fineman, at p. 1121; see Lee Newman, at p. 82.)
Additionally, because “one important purpose of the Uniform Commercial
Code is to make uniform the law among the various jurisdictions . . . we
11
generally afford great deference to the decisions of our sister jurisdictions
interpreting its provisions.” (Oswald Machine & Equipment, Inc. v. Yip
(1992) 10 Cal.App.4th 1238, 1247; see § 1103, subd. (a)(3).)
Sections 3405 and 3406 appear in division 3 of the California Uniform
Commercial Code, which “applies to negotiable instruments.” (§ 3102, subd.
(a).) “ ‘[N]egotiable instruments . . . is a fancy word for checks.’ ” (HH
Computer Systems, supra, 231 Cal.App.4th at p. 227, italics omitted.) A
transaction involving a “ ‘check typically involve three parties, (1) the
“drawer” who writes the check, (2) the “payee”, to whose order the check is
made out, and (3) the “drawee” or “payor bank” . . . [that] has the drawer’s
checking account from which the check is to be paid.’ ” (Mills v. U.S. Bank
(2008) 166 Cal.App.4th 871, 881, fn. 10 (Mills).) “ ‘After receiving the check,
the payee typically indorses it on the back in the payee’s own name, and then
deposits it in the payee’s account in a different bank, the “depositary bank”.
The depositary bank credits the check to the payee’s account, and sends the
check through the check clearing system to the payor bank for ultimate
payment from the drawer’s account.’ ” (Ibid.)
C. Chase Did Not Meet Its Burden to Show That Section 3405 Applies
Section 3405 provides a bank with a “defense for accepting a check
made out to [an] employer that has been fraudulently [i]ndorsed by [an]
employee.” (Taubman v. USAA Federal Savings Bank (N.D.Cal. 2019) 408
F.Supp.3d 1053, 1054 (Taubman); see Lee Newman, supra, 87 Cal.App.4th at
p. 82; § 3405, subd. (b).9) The statute allocates the risk of loss to the
9 Section 3405, subdivision (b) states: “For the purpose of determining
the rights and liabilities of a person who, in good faith, pays an instrument or
takes it for value or for collection, if an employer entrusted an employee with
responsibility with respect to the instrument and the employee . . . makes a
fraudulent indorsement of the instrument, the indorsement is effective as the
12
employer when (1) “the employer ‘entrusted [the] employee with
responsibility with respect to’ the check”; (2) the check was “fraudulently
[i]ndorsed by the employee”; and (3) “the bank accepted the check ‘in good
faith.’ ” (Taubman, at p. 1054, quoting § 3405, subd. (b); see Lee Newman, at
p. 82.) “If these requirements are satisfied, the extent of the defense depends
on the doctrine of comparative negligence. If the bank was not negligent”—
that is, if it exercised ordinary care as defined in section 3103, subdivision
(a)(7) (see fn. 5, ante)—“the defense is complete. If the bank was negligent,
then it remains partially liable, with liability based on the extent to which
the bank’s negligence ‘contributed to the loss.’ ” (Taubman, at p. 1054; see
Lee Newman, at p. 83.)
Section 3405 defines a “[f]raudulent indorsement” as occurring in two
circumstances in which an employee endorses a check in a manner
purporting to be that of the payee.10 In the circumstance at issue here,
involving “an instrument payable to the employer,” a “[f]raudulent
indorsement” is “a forged indorsement purporting to be that of the employer.”
(§ 3405, subd. (a)(2), italics added.) It is sufficient if the endorsement is
“substantially similar” to the employer’s name. (§ 3405, subd. (c).)
indorsement of the person to whom the instrument is payable if it is made in
the name of that person. If the person paying the instrument or taking it for
value or for collection fails to exercise ordinary care in paying or taking the
instrument and that failure contributes to loss resulting from the fraud, the
person bearing the loss may recover from the person failing to exercise
ordinary care to the extent the failure to exercise ordinary care contributed to
the loss.” (§ 3405, subd. (b).)
10 The entire definition reads: “ ‘Fraudulent indorsement’ means (A) in
the case of an instrument payable to the employer, a forged indorsement
purporting to be that of the employer, or (B) in the case of an instrument with
respect to which the employer is the issuer, a forged indorsement purporting
to be that of the person identified as payee.” (§ 3405, subd. (a)(2).)
13
In light of this definition, the courts and commentators agree that
when an employee has endorsed a check other than in a name “purporting to
be that of the employer” (§ 3405, subd. (a)(2)), the employee has not made a
“fraudulent indorsement.” (See John Hancock Financial Services, Inc. v. Old
Kent Bank (E.D.Mich. 2002) 185 F.Supp.2d 771, 773-774, 778 [no fraudulent
indorsement where employee of “John Hancock Financial Services, Inc.”
endorsed checks payable to employer with “Sherman and Associates
Financial Services”]; Continental Cas. Co. v. Fifth/Third Bank (N.D.Ohio
2006) 418 F.Supp.2d 964, 975 [no fraudulent indorsement where employee
endorsed checks payable to employer with “missing or illegible
endorsements”]; Willier, Inc. v. Hurt (S.D.W.Va., Dec. 31, 2007, No. CIV.A.
5:06-CV-00547) 2007 WL 4613033, at p. *6 [no fraudulent indorsement where
employee deposited checks payable to employer into personal account with no
endorsement]; McMullen Oil Co. v. Crysen Ref., Inc. (In re McMullen Oil
Co.) (Bankr.C.D.Cal. 2000) 251 B.R. 558, 565, 574-575 (McMullen) [no
fraudulent endorsement where employee of “McMullen Oil Co.” endorsed
checks payable to that entity with “McMullen Oil Co. Pension Plan,” italics
added]; Laurie B, supra, 2015 WL 12656285, at p. *5 [no fraudulent
indorsement where employee of “Laurie B LLC” endorsed checks payable to
“Desert Underground Utilities Inc., dba Laurie B”];11 6B Lawrence’s
Anderson on the Uniform Commercial Code (3d ed. Dec. 2020 supp.)
Negotiable Instruments, § 3-405:11 (Anderson UCC); 4 Hawkland UCC
Series (Dec. 2020 Update) § 3-405:1.)
11 The Ninth Circuit reversed summary judgment in Laurie B., finding
there was a triable issue of fact about whether the names were substantially
similar. (Laurie B LLC v. Wells Fargo Bank N.A. (9th Cir. 2017) 679
Fed.Appx. 598.)
14
The courts and commentators further agree that section 3405 does not
apply unless an employee has made a fraudulent indorsement as defined in
the statute. (See Mills, supra, 166 Cal.App.4th at p. 889 [“The instant
case . . . does not fall within the scope of section 3405, as it does not concern
fraudulent [i]ndorsements made by an employee”];12 McMullen, supra, 251
B.R. at pp. 574-575 [section 3405 “covers only [the] two categories of
fraudulent indorsements” defined in the statute]; Anderson UCC, § 3-405:10
[“In order for this section to be applicable, there must be a fraudulent
indorsement.”]; see also § 3405, com. 1 [section 3405 “is addressed to
fraudulent indorsements” and “covers [the] two categories” specified in the
definition].)
Although Chase inexplicably failed to address the fraudulent
indorsement prong in its summary judgment papers or in its briefing on
appeal, Chase’s appellate counsel acknowledged at oral argument that, to
establish it was entitled to summary judgment based on the section 3405
defense, Chase bore the initial burden of establishing that Oseguera
fraudulently indorsed the stolen checks. (See Consumer Cause, supra, 91
Cal.App.4th at pp. 467-468 [a defendant moving for summary judgment
“ ‘ “has the initial burden to show that undisputed facts support each element
of [an] affirmative defense.” ’ ”], italics added.) We conclude Chase did not
meet this burden.
12 The parties debate in their briefing the significance of our court’s
decision in Mills. Mills is factually distinguishable because it did not involve
employee fraud (it involved checks deposited by a payee entity into its
affiliate’s bank account). (Mills, supra, 166 Cal.App.4th at p. 876.) The case
is nevertheless instructive because it supports the general proposition that
section 3405 applies only when an employee has made a fraudulent
indorsement. (Mills, at p. 889.)
15
Quite simply, Chase never addressed the fraudulent indorsement prong
of the section 3405 defense in its summary judgment papers. Neither Chase’s
briefing nor separate statement of undisputed material facts addressed the
manner in which Oseguera endorsed the checks (i.e., with what appear to be
his own name or initials), or explained how those endorsements satisfied the
statutory definition of a fraudulent indorsement (i.e, how they “purport[ed] to
be that of the employer” (§ 3405, subd. (a)(2)). Instead, Chase skipped ahead
to the ordinary care analysis. But none of the cases Chase cited on that issue
in the trial court or on appeal involved section 3405’s fraudulent indorsement
requirement. (See Story Road Flea Market, Inc. v. Wells Fargo Bank (1996)
42 Cal.App.4th 1733, 1737 [addressing § 4406, which has no fraudulent
indorsement requirement]; Espresso Roma Corp. v. Bank of America (2002)
100 Cal.App.4th 525, 527 [same]; National Union Fire Ins. Co. v. Wells Fargo
Bank, N.A. (C.D.Cal. Mar. 16, 2005, No. CV 03-2452 NM (CTx)) 2005 WL
6459866 [addressing only motion to exclude experts]; National Union v. Wells
Fargo Bank (C.D.Cal. June 24, 2005, No. CV 03-02452-NM(CTx)) 2005 WL
6524450 [addressing motion for reconsideration of expert issues and
summary judgment ruling on good faith/ordinary care].)13 “[C]ases are not
authority for issues not raised or decided.” (Mintz v. Blue Cross of California
(2009) 172 Cal.App.4th 1594, 1607.)
At oral argument, Chase’s appellate counsel finally advanced a theory
as to how the fraudulent indorsement prong was satisfied: Oseguera must
13 Both in the trial court and on appeal, Chase knowingly and improperly
discussed an unpublished Court of Appeal opinion. (See Cal. Rules of Court,
rule 8.1115 [unpublished Court of Appeal opinions “must not be cited or
relied on by a . . . party in any other action”]; Olive v. General Nutrition
Centers, Inc. (2018) 30 Cal.App.5th 804, 816.) We have not considered the
improperly cited opinion.
16
have “intended” that his “squiggle[d]” name or initials on the stolen checks
“be interpreted by Chase to be that of the employer.” This argument fails for
two reasons. First, Chase forfeited it by raising it for the first time at oral
argument. (See In re I.C. (2018) 4 Cal.5th 869, 888, fn. 5.) Second, even
assuming without deciding that Oseguera’s intent is relevant to the issue,
Chase has cited no evidence—let alone undisputed evidence—establishing his
intent.
More generally, Chase argues it is “self-evident” from a policy
perspective that Severin should bear the losses caused by its employee. In
support, Chase cites Lee Newman, which observed: “As explained in the
Official Comment to the corresponding Uniform Commercial Code provision,
‘Section 3-405 is based on the belief that the employer is in a far better
position to avoid the loss by care in choosing employees, in supervising them,
and in adopting other measures to prevent forged indorsements on
instruments payable to the employer . . . .’ ” (Lee Newman, supra, 87
Cal.App.4th at p. 83.) But Chase’s argument ignores the fact that the cited
Official Comment begins by clarifying that “[s]ection 3-405 is addressed to
fraudulent indorsements,” which include “indorsements made in the name of
the employer.” (Official Comments on Cal. U. Com. Code, 23A, pt. 2 West’s
Ann. Com. Code (2002 ed.) foll. § 3405, p. 426, comment 1 (§ 3405, com. 1).)
We agree with section 3405’s risk-shifting policy as it relates to
fraudulent indorsements. In that context, in which an employee’s
endorsement “purport[s] to be that of the” employer or its payee, the
employer is better situated than the bank to prevent or detect fraud—all the
bank sees is a seemingly proper endorsement by the payee. But in the context
presented here, in which an employee endorsed checks made payable to his
employer in a name that does not appear on its face to be that of the
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employer, the bank is equally well-suited to detect the apparent mismatch
and there is no need to shift the risk of loss to the employer.
In short, because Chase did not meet its burden to show that Oseguera
“fraudulent[ly] indorse[d]” (§ 3405, subd. (a)(2)) the stolen checks, Chase is
not entitled to summary judgment under section 3405.
D. Fact Disputes Preclude Summary Judgment Under Section 3406
Section 3406 provides an ordinary care defense in broader
circumstances than section 3405.14 (See Taubman, supra, 408 F.Supp.3d at
p. 1055 [section 3406 “potentially applies in any situation (regardless of the
identity of the victim and the perpetrator of the fraud) where a bank accepts
an altered or forged check”].) Section 3406 provides a “defense to liability for
accepting a fraudulent check if: (i) the victim’s own failure to exercise
ordinary care was a cause of the fraud; and (ii) the bank took the check in
good faith.” (Taubman, at p. 1055.) “As with Section 3405, if these
requirements are satisfied, the extent of the defense depends on comparative
negligence: if the bank was not negligent”—that is, if it exercised ordinary
care—“it is free from liability; if the bank was also negligent, the loss is
14 Section 3406 states: “(a) A person whose failure to exercise ordinary
care contributes to an alteration of an instrument or to the making of a
forged signature on an instrument is precluded from asserting the alteration
or the forgery against a person who, in good faith, pays the instrument or
takes it for value or for collection. [¶] (b) Under subdivision (a), if the person
asserting the preclusion fails to exercise ordinary care in paying or taking the
instrument and that failure contributes to loss, the loss is allocated between
the person precluded and the person asserting the preclusion according to the
extent to which the failure of each to exercise ordinary care contributed to the
loss. [¶] (c) Under subdivision (a), the burden of proving failure to exercise
ordinary care is on the person asserting the preclusion. Under subdivision
(b), the burden of proving failure to exercise ordinary care is on the person
precluded.”
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allocated between the bank and the victim ‘according to the extent to which
the failure of each to exercise ordinary care contributed to the loss.’ ”
(Taubman, at p. 1055.)
Severin contends Chase waived its right to assert the section 3406
defense by waiting until its summary judgment reply brief to do so. We are
not persuaded. “It is well established that the trial court’s consideration of
additional reply ‘evidence is not an abuse of discretion so long as the party
opposing the motion for summary judgment has notice and an opportunity to
respond to the new material.’ ” (Jacobs v. Coldwell Banker Residential
Brokerage Co. (2017) 14 Cal.App.5th 438, 449.) In the context of the parties’
cross-motions (in which Chase raised section 3406 in its opposition to
Severin’s motion about three weeks before raising it in reply), and absent a
request by Severin for leave to file a surreply, we find no waiver by Chase.
(See Jacobs, at p. 449 [by failing “to ask the trial court for permission to
submit responsive evidence or to file a sur-reply, . . . or to even object to the
court’s consideration of the evidence, plaintiffs forfeited any claim of a due
process violation”].)
We are similarly unpersuaded by Severin’s assertion that Chase did not
comply with the summary judgment statute’s procedure for incorporating
items by reference. (See Code Civ. Proc., § 437c, subd. (b)(7) [“An
incorporation by reference of a matter in the court’s file shall set forth with
specificity the exact matter to which reference is being made and shall not
incorporate the entire file.”].) Chase identified in its reply brief the specific
materials within the court’s files that it sought to incorporate. This was
sufficient.
Turning to the substance of the section 3406 defense, we agree with
Severin that disputed material facts preclude summary judgment. Whether
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a party “fail[ed] to exercise ordinary care” and whether such a failure
“substantially contribute[d]” to the forging of an instrument ordinarily are
questions for the trier of fact to resolve. (See § 3406, com. 1 [“No attempt is
made to define particular conduct that will constitute ‘failure to exercise
ordinary care [that] substantially contributes to an alteration.’ Rather,
‘ordinary care’ is defined in Section 3-103(a)(7) in general terms. The question
is left to the court or the jury for decision in the light of the circumstances in
the particular case,” italics added]; Atlas Vegetable Exchange, Inc. v. Bank of
America (1970) 10 Cal.App.3d 868, 876 [whether employer was negligent for
failing to implement measures to prevent bookkeeper from forging checks
was an issue of fact for jury]; Elden v. Merrill Lynch, Pierce, Fenner & Smith
Inc. (S.D.N.Y., Mar. 30, 2011, No. 08 Civ. 8738(RJS)) 2011 WL 1236141, at
p. *10 [“[S]ummary judgment is rarely warranted on this issue.”].)
Chase cites evidence that would allow a jury to find that Severin failed
to exercise ordinary care, thereby substantially contributing to Oseguera
forging endorsements on the stolen checks. For example, Asad acknowledged
Oseguera—unlike other lot managers—“was 100 percent responsible for
receiving the car, entering the information, receiving the check and then
releasing the car.” And after Severin discovered the embezzlement, Severin
implemented additional controls to reduce the likelihood it would happen
again, suggesting Severin was aware that its prior measures were
inadequate.
But Severin cites evidence that would allow the jury to reach a contrary
conclusion. Asad explained that Oseguera had more authority than other lot
managers in part because the others did not have access to the computer
needed to generate invoices, but also because Oseguera was a trusted
employee and Severin’s first hire. A subsequent background check on
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Oseguera came back clean. Asad compared the checks and invoices Oseguera
brought to him each day (“he would run all that through [me]”). And Asad
testified it “blew out [his] mind . . . that somebody could cash a check written
to somebody else,” and Oseguera “could have come up with something else” to
circumvent Severin’s new precautions.
On this record, we cannot say as a matter of law that a family-owned
business “fail[ed] to exercise ordinary care” in supervising its long-time,
trusted employee, who was intentionally stealing checks and misfiling
corresponding invoices.
Accordingly, Chase is not entitled to summary judgment under section
3406.
E. Status of Claims
Because Severin has not challenged the trial court’s rulings as to the
negligence cause of action or the claims based on the 34 time-barred checks,
we do not disturb the trial court’s rulings as to those claims, and will direct
the trial court to grant summary adjudication on them in Chase’s favor. (See
Troyk, supra, 171 Cal.App.4th at pp. 1354-1355.)
And because Severin’s UCL claim is derivative of its conversion claim,
and because summary judgment was erroneously granted as to the
conversion claim, the UCL claim will be reinstated.
DISPOSITION
The judgment is reversed. The trial court is directed to vacate its order
granting summary judgment, and to enter a new order granting summary
adjudication to Chase on Severin’s negligence cause of action and all claims
based on the 34 time-barred checks (identified at page 425 of Appellant’s
Appendix), and denying summary adjudication to Chase on Severin’s
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conversion and UCL causes of action. Severin is entitled to its costs on
appeal.
HALLER, Acting P. J.
WE CONCUR:
AARON, J.
IRION, J.
22
Appendix A
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