Filed 6/9/21

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

SEVERIN MOBILE TOWING, INC.,

Plaintiff and Appellant,

v.

JPMORGAN CHASE BANK, N.A.,

Defendant and Respondent.

D077409

(Super. Ct. No. 37-2017-

00031451-CU-MC-CTL)

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 
2

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 timebarred 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.”
3

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 
4

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. 
5

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.
6

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 
7

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).) 
8

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 crossmotion 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. 
9

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 
10

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. 
11

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 
12

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 
13

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).)
14

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.)
15

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.)
16

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.
17

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 
18

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.”
19

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 
20

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 
21

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 
22

conversion and UCL causes of action. Severin is entitled to its costs on 

appeal.

HALLER, Acting P. J.

WE CONCUR:

AARON, J.

IRION, J.
23

Appendix A