Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03531/USCOURTS-cand-3_06-cv-03531-1/pdf.json

Nature of Suit Code: 430
Nature of Suit: Banks and Banking
Cause of Action: 28:1332 Diversity-Account Receivable

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

TRAVELERS CASUALTY AND SURETY

COMPANY OF AMERICA,

Plaintiff,

 v.

WELLS FARGO BANK, N.A., and

SAN MATEO CREDIT UNION,

Defendants. /

No. C 06-03531 WHA

ORDER GRANTING 

MOTION TO DISMISS 

WITH LEAVE TO AMEND 

AND VACATING HEARING

INTRODUCTION

In this diversity action involving a dispute over the payment of purportedly forged or

altered checks, defendant Wells Fargo Bank, N.A. moves to dismiss the two claims against it

brought by plaintiff Travelers Casualty and Surety Company of America. Both plaintiff and

defendant San Mateo Credit Union filed oppositions to Wells Fargo’s motion. This order holds

that as currently pled, plaintiff’s claims against Wells Fargo cannot survive application of the

superior-equities doctrine, which prevents requiring indemnification by an innocent third party

as against a primary insurer. Additionally, plaintiff’s claims against Wells Fargo appear to be

time barred. Wells Fargo’s motion is, accordingly, GRANTED. Plaintiff, however, will be given

the opportunity to amend so as to cure these deficiencies.

Case 3:06-cv-03531-WHA Document 26 Filed 10/05/06 Page 1 of 6
United States District Court

For the Northern District of California

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STATEMENT

Plaintiff Travelers is an insurance company and the two defendants, Wells Fargo and

San Mateo, are banking institutions. Travelers issued a policy of insurance to J.H. Baxter &

Co., Inc. (Compl. ¶ 8). The policy covered Baxter for losses resulting from employee

dishonesty (ibid.). According to the complaint, from June 2003 to September 2004, a Baxter

employee forged or altered 49 checks out of Baxter’s account with Wells Fargo, seeking to

deposit them or cash them through the employee’s account with San Mateo (id. at Exh. A). 

According to plaintiff, Wells Fargo paid these checks and San Mateo cashed or deposited them

(id. at ¶ 8). The checks allegedly totaled $204,180.29 (id. at Exh. A). Baxter submitted claims

of losses to Travelers, which Travelers paid in exchange for an assignment of Baxter’s rights to

pursue this action (id. at ¶ 8).

Travelers filed this action on June 1, 2006. In Travelers’ complaint, it stated three

claims, two against Wells Fargo and one against San Mateo. The two claims against Wells

Fargo both sought indemnification for the losses incurred as a result of Wells Fargo paying out

on the checks. Claim 1 alleged that the checks were altered. In the alternative, claim 2 alleged

that the checks were forged. Finally, in claim 3, plaintiff alleged that San Mateo failed to

exercise ordinary care in cashing and depositing the fraudulent checks. The instant motion,

however, only involves the first two claims against Wells Fargo.

ANALYSIS

Wells Fargo now moves to dismiss the claims against it on three separate grounds: 

(1) the doctrine of superior equities, (2) statute of limitations, and (3) ratification by plaintiff’s

election to sue both Wells Fargo and San Mateo.

A motion to dismiss under FRCP 12(b)(6) tests for legal sufficiency of the claims

alleged in the complaint. A complaint should not be dismissed “unless it appears beyond doubt

that the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief.” Conley v. Gibson, 355 U.S. 41, 45–46 (1957). On the other hand, “conclusory

allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for

failure to state a claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996).

Case 3:06-cv-03531-WHA Document 26 Filed 10/05/06 Page 2 of 6
United States District Court

For the Northern District of California

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1. SUPERIOR-EQUITIES DOCTRINE.

“The right of subrogation is ordinarily asserted against the obligor or principal.” 

WITKIN, Summary of California Law, vol. 13, § 187 (10th ed. 2005). California law, however,

has long recognized the doctrine of superior equities which limits the right of subrogation in

factual circumstances similar to the instant action. See Meyers v. Bank of Am. Nat’l Trust &

Sav. Ass’n, 11 Cal. 2d 92, 102–03 (1938). “Following the rule of superior equities, California

decisions have denied the right of subrogation to sureties on employee bonds where the surety

has sought to recover from drawee banks the proceeds of payments on checks forged by the

bonded employee.” Cont’l Ins. Co. v. Morgan, Olmstead, Kennedy & Gardner, Inc.,

83 Cal. App. 3d 593, 602 (1978). Accordingly, under this equitable doctrine the ordinary right

of subrogation does not exist in favor of an insurer except as against persons who participated in

the wrongful act of the principal. See Meyers, 11 Cal. 2d 92, 102–03 (1938); Barclay Kitchen,

Inc. v. Cal. Bank, 208 Cal. App. 2d 347, 356–57 (1962); WITKIN, at vol. 13, § 187.

Meyers is instructive. In Meyers, an employee forged checks on his employer’s account. 

A bonding company paid the losses suffered by the employer and then sued the bank for

depositing the forged checks. Adopting the doctrine of superior equities, the Meyers court

explained “[i]n equity, it cannot be said that the satisfaction by the bonding company of its

primary liability should entitle it to recover against the bank upon a totally different liability.” 

11 Cal. 2d at 102. “The primary cause of the loss was the forgeries committed by the employee,

whose integrity was at least impliedly vouched for by his employer to the bank. We cannot say

that as between the bank and the paid indemnitor, the bank should stand the loss.” Id. at

102–03. “Our conclusion, as hereinbefore has appeared, is that since the bonding company had

no superior equities, it was not entitled to be subrogated to any claim plaintiff might have had

against the bank.” Id. at 103.

Travelers notes that other states have disagreed with the Meyers principle (Opp. 3 n. 1). 

This disagreement is inapposite. The doctrine expressed in Meyers is clearly still good law in

California. See Barclay Kitchen, 208 Cal. App. 2d at 356–57; Reliance Nat’l Indem. Co. v.

Gen. Star Indem. Co., 72 Cal. App. 4th 1063, 1081 (1999); WITKIN, at vol. 13, § 187.

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United States District Court

For the Northern District of California

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What is more relevant is the exception to the doctrine of superior equities provided for

in Meyers and the intervening line of cases. Those cases make clear that third-party banks such

as Wells Fargo are only shielded from claims of subrogation by the doctrine of superior equities

if the banks are “innocent.” For example, in Barclay Kitchen, supra, the California Court of

Appeal explained that a bank that was negligent in failing to stop the employee’s fraud could be

held liable. “Here, Bank was not innocent. Its negligence made possible the consummation of

Mrs. Gianopulus’ fraudulent scheme. Its employees admittedly departed from the ‘ordinary

course’ of their banking business. They should have been alert to Mrs. Gianopulus’

misrepresentation of authority.” Barclay Kitchen, 208 Cal. App. at 357.

Plaintiff argues in opposition that Wells Fargo failed to use due in care in sniffing out

the purported alterations or forgeries committed by the Baxter employee. Plaintiff, however,

failed to make any such allegations of negligence in its complaint. Plaintiff acknowledged that

Wells Fargo provided bank statements, but alleged that “Wells Fargo did not supply the

originals or copies of the cancelled checks to Baxter with monthly statements” (Compl. ¶ 10). 

Plaintiff did not allege that Wells Fargo’s failure deviated in any way from the “ordinary

course” of the banking business. Plaintiff simply did not allege that Wells Fargo was negligent

or otherwise culpable. This pleading deficiency is grounds for dismissal under Meyers. 

Plaintiff, however, will be given the opportunity to amend its complaint so as to cure this

deficiency if possible.

2. STATUTE OF LIMITATIONS.

Wells Fargo also argues that Travelers failed to bring this action within the one-year

statute of limitations provided under California law for claims relating to forged checks. 

California Commercial Code § 4406(f) provides:

Without regard to care or lack of care of either the customer or the

bank, a customer who does not within one year after the statement

or items are made available to the customer (subdivision (a))

discover and report the customer’s unauthorized signature on or

any alteration on the item is precluded from asserting against the

bank the unauthorized signature or alteration.

Furthermore, California Code of Civil Procedure § 340(c) provides that actions “by a depositor

against a bank for the payment of a forged or raised check, or a check that bears a forged or

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unauthorized endorsement” must be brought within one year. “Dismissal on statute of

limitations grounds can be granted pursuant to Fed. R. Civ. P. 12(b)(6) ‘only if the assertions of

the complaint, read with the required liberality, would not permit the plaintiff to prove that the

statute was tolled.’” TwoRivers v. Lewis, 174 F.3d 987, 991 (9th Cir. 1999) (internal citations

omitted). “[A] complaint containing dates indicating that the statutory period for instituting an

action has passed raises at least a partial defense on its face.” WRIGHT AND MILLER, Federal

Practice and Procedure, § 1226 (3d ed. 2004).

According to the complaint, all of the allegedly altered or forged checks were issued on

or before September 1, 2004 (Compl. Exh. A). That is over one year before this action was

filed on June 1, 2006. Plaintiff suggests that some equitable principle must toll this seemingly

clear application of the one-year limitations period. Plaintiff, however, has not alleged any

facts that would allow “the plaintiff to prove that the statute was tolled.” TwoRivers, 174 F. 3d

at 991. Accordingly, the statute of limitations is another grounds for dismissal of plaintiff’s

claims against Wells Fargo, as currently iterated. This order, however, will also give plaintiff

an opportunity to rectify this deficiency in its complaint if possible.

3. RATIFICATION.

Finally, Wells Fargo also argues that the plaintiff’s forgery claim should be dismissed

because “plaintiff has sued both Wells Fargo and San Mateo Credit Union for payment on the

altered checks, plaintiff has ratified the payment by Wells Fargo and cannot proceed on a claim

on the checks against Wells Fargo” (Br. 12). For this proposition, Wells Fargo cites Resh v.

Connecticut National Bank, 89 F.3d 598 (9th Cir. 1996). In Resh, the Ninth Circuit explained

that “[i]t is established California law that suit by the payee of a check against the depositary or

collecting bank ratifies the payment made by the drawee or payor bank to the depositary bank.” 

Id. at 600 (citing Cooper v. Union Bank, 9 Cal. 3d 371, 384 (1973)).

As Wells Fargo acknowledges, this ratification principle has only been applied to claims

of forgery, not to claims of alteration. Accordingly, Wells Fargo only proffers ratification as a

defense to one of the two claims against it. Since the prior two issues addressed in this order

dispose completely of the claims against Wells Fargo, this order need not address this more

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United States District Court

For the Northern District of California

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limited argument of ratification at this time. Wells Fargo, however, is free to raise this

argument again in any future motion to dismiss it may choose to make in response to an

amended complaint filed by plaintiff.

CONCLUSION

For the foregoing reasons, Wells Fargo’s motion to dismiss the two claims against it is

GRANTED. Plaintiff shall file any amended complaint within two weeks from the date of this

order. At that time, Wells Fargo is free to raise again any of the above arguments in relation to

the amended complaint. Finding no further argument necessary, the hearing on this motion is

hereby VACATED.

IT IS SO ORDERED.

Dated: October 5, 2006 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-03531-WHA Document 26 Filed 10/05/06 Page 6 of 6