Court Opinion

ID: 9726120
Source: CourtListenerOpinion
Date Created: 2023-08-26 12:32:00.430463+00
Date Added: 2024-06-11T13:13:09.451200
License: Public Domain

HANSON (Thaxton), J.—I respectfully dissent.
By second amended complaint, plaintiff E. F. Hutton & Company, Inc. (Hutton), as drawer, seeks to shift a $638,598 loss from itself to defendant City National Bank (CNB), the collecting bank, a loss occasioned by the dishonest conduct of plaintiff’s employee, Michael Hamaoui (Hamaoui). Hamaoui presented eighteen checks during one year’s time, drawn by plaintiff Hutton and payable to various individual or jointly named payees (six in number), to CNB for collection, purportedly indorsed by the payees; the proceeds as collected were deposited in Hamaoui’s account at CNB’s Beverly Hills branch. As it developed, the indorsements were forged.
It is important to specify at the outset with some particularity what the amended complaint tells us, as well as what it does not tell us. It gives the payees’ names and alleges “[t]he amounts drawn on the aforementioned accounts had been deposited by or on behalf of the individually identified payees and were funds which rightfully belonged to each said payee.” The complaint was filed, however, by Hutton alone, without alleging the assignment of individual claims to it by the payees. The payees are not specifically described as customers of plaintiff, and we are not told exactly how it happened that checks in substantial amounts were drawn by plaintiff and came into the possession of Hamaoui. We are told, by the complaint, that an “unidentified” employee of defendant CNB was the individual to whom Hamaoui presented the checks, at the bank, for collection and deposit. That *76is the extent to which defendant CNB is implicated in the thefts of these substantial sums.1
It is well settled that when assessing a complaint on demurrer, the allegations of the complaint must be taken as truthful (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713 [63 Cal.Rptr. 724, 433 P.2d 732]) and that the trial judge may not rely on extrinsic evidentiary matters (with the exception of materials judicially noticed) to decide the issue. (See generally, 3 Witkin, Cal. Procedure (2d ed. 1971) p. 2408 et seq.) On the other hand, pleading is not a game whereby the pleader may prolong litigation that will be to no avail. Here the trial judge made the only reasonable inferences which could be made from the pleaded facts, and therefore did not deprive plaintiff improperly of its day in court.
Those reasonable inferences were that the named payees of the checks were customers of Hutton, and that they were selected by Hamaoui for his scheme and their names “provided” to Hutton with the intention that the payees were to have no interest in the checks as drawn; and that there were no irregularities evident on the checks in question. This case turns upon these reasonable inferences as hereinafter discussed.
Plaintiff proceeded on three theories of liability; namely, negligence, breach of warranty and common count. None of these theories stand up under examination.
The Negligence Theory
Plaintiff alleged in its first cause of action that CNB, as the collecting bank, owed it a duty to use due care in collecting the checks and depositing them in Hamaoui’s account, a duty CNB breached by processing the checks “without making any reasonable attempt to verify the endorsements thereon or defendant Hamaoui’s authority to cash or deposit each and every check referenced above.” Plaintiff further alleged that CNB breached its duty of due care because “it failed to take reasonable steps available to it to ascertain the genuineness of the endorsements on the said checks ...” and “failed to follow reasonable commercial banking standards.”
The requirements for stating a cause of action for negligence in California are well established, and need only be referred to briefly here. “Actionable negligence involves a legal duty to use due care, a breach of such legal *77duty, and the breach as the proximate or legal cause of the resulting injury. ” (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 594 [83 Cal.Rptr. 418, 463 P.2d 770].) While Civil Code section 1714, subdivision (a) declares that “Everyone is responsible, not only for the result of his willful acts, but also for an injury occasioned to another by his want of ordinary care or skill in the management of his property or person, . . .” the question of determining the existence of a duty giving rise to liability is one of law and fact, involving social policy decisions as well as assessment of the foreseeability of harm. (Weirum v. RKO General, Inc. (1975) 15 Cal.3d 40, 49 [123 Cal.Rptr. 468, 539 P.2d 36].)
A recent California Supreme Court case declined to define the precise scope of the duty owed by a collecting bank to a drawer relative to forged indorsements. (Sun 'N Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 693 [148 Cal.Rptr. 329, 582 P.2d 920].) The analysis utilized in Sun 'N Sand, supra, however, is of assistance here. In Sun 'N Sand, a suit by a drawer against the collecting bank, UCB, the facts were that plaintiff, too, had a faithless employee, who presented small checks payable to UCB to the drawer for signature; UCB collected these checks (substantially altered upward) and in some manner was persuaded to deposit the funds so collected in the UCB account of the drawer’s embezzling employee. While the decision declined to adopt a general holding on the scope of duty owed by a collecting bank to a drawer in California, it did determine that “a bank presented with checks payable to itself by one who proposes to deposit such checks in his personal account ‘ “is put upon inquiry and if it fail to make it, pays at its peril.”’ [Citations.]” (21 Cal.3d at p. 694; italics added.) In other words, the harm was, under these circumstances, foreseeable.
Sun 'N Sand did not hold that a collecting bank proceeding on forged indorsements always breaches a duty of care owed to the drawer. The negligence perceived in the Sun TV Sand opinion was the defendant bank’s collection of paper payable to itself and the deposit of the proceeds of such a collection to the account of the drawer’s employee’s account without further inquiry.
The rationale of Sun 'N Sand is extended a step further in Joffe v. United California Bank (1983) 141 Cal.App.3d 541 [190 Cal.Rptr. 443], wherein the check was payable to the escrow department of the bank. The implication of these holdings is that such commercial paper is not regular on its face, that its designation of the collecting bank (or a part thereof) as payee puts the bank on notice that a crime may be involved.
In the case at bench, the pleader, Hutton, characterizes the checks as irregular not because there was anything unusual about them per se, but *78because they turned out to carry forged indorsements.2 The payees were not the collecting bank or any bank. The payees were individuals who appeared to have indorsed the checks. I am unaware of any California statutory or decisional law which declares, as a general principle, the rule that a drawer has a cause of action for negligence against a collecting bank which accepts as valid indorsements which turn out to be forged. Nor has New York, except where some circumstance independent of the forgery should have alerted the collecting bank to the type of “suspicious circumstances” warranting further inquiry. (See, e.g., Merrill, Lynch, Pierce, etc. v. Chemical Bank (1982) 57 N.Y.2d 439 [456 N.Y.S.2d 742, 442 N.E.2d 1253] and Underpinning etc. v. Chase Manhattan (1979) 46 N.Y.2d 459 [414 N.Y.S.2d 298, 386 N.E.2d 1319].)
In my view the fact that Hamaoui was known to defendant CNB as an employee of plaintiff in maintaining his personal checking account with CNB is not a sufficiently “suspicious circumstance” of a nature which would trigger a duty on the part of CNB to investigate further the validity of the indorsements or Hamaoui’s authority to possess such checks. Nor should the possibility that one particular teller received the checks from Hamaoui, on behalf of the defendant, for collection purposes, affect the result either; there were no direct allegations of complicity in Hamaoui’s scheme on the part of any CNB employee, except an allegation, made on information and belief, that said unidentified employee “knew or should have known that the nature of each of the said checks was irregular and that further inquiry by defendant Bank was required.”
What we have here is a situation where there was nothing on the face of the checks or on the indorsements thereon which would have alerted the collecting bank, CNB, to any unusual or suspicious circumstances. There was no foreseeable harm. In my view such paper must be assessed as it itself appears to the collecting bank. The reason for this is that, as amicus curiae, the California Banking Association suggest, to hold otherwise would create an intolerable burden on collecting banks as a practical matter; banks process great amounts of indorsed commercial paper in a very short period of time, paper which appears valid on its face. It has long been the rule that they need not inquire further in the absence of “suspicious circumstances” which were not extant here—or were certainly not so pleaded. I would not extend Sun TV Sand beyond the limited holding of the California Supreme Court in that case. That is what the majority opinion, as I read it, is attempting to do.
*79The Breach of Warranty Theory
Plaintiff Hutton, in the second cause of action, alleged that defendant CNB, as the collecting bank, warranted that the indorsements on the checks were genuine and that since they were forged, CNB was liable for breach of warranty of good title. Sun ’N Sand, supra, held that a drawer such as plaintiff can maintain a cause of action in California against a collecting bank. (21 Cal.3d at pp. 682-683.)
Plaintiff Hutton relies on two sections of the California Uniform Commercial Code sections 4207 and 3417.
Section 4207, subdivision (1), states in pertinent part that “Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that (a) He has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; . . . .”
Similarly, section 3417, subdivision (1) provides in pertinent part that “Any person who obtains payment or acceptance and any prior transferor warrants to a person who in good faith pays or accepts that (a) He has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who has a good title; ...”
On the other hand, California Uniform Commercial Code section 3405, subdivision (1) provides that “An indorsement by any person in the name of a named payee is effective [to pass good title] if (c) An agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.”
As was explained in Sun ’N Sand, supra, 21 Cal.3d at p. 687, footnote 14, “Subdivision (l)(c) of section 3405 obviously assumes that the employee supplying the payee’s name will cash the check on a forged indorsement and that the named payee, if a real person, will never be aware of the check’s existence. When the named payee is a bank through which the check is channeled, the negotiation of the check by the bank under such circumstances is improper and the loss allocation analysis of the comments to section 3405 is not apt in a negligence action based on the manner of negotiation. The indorsement is still effective for purposes of the good title warranty, however. ” (Italics added.)
Thus, it appears that section 3405 constitutes an absolute defense to an action for breach of warranty by a drawer against the collecting bank where *80a faithless employee of the drawer has occasioned the transactions by use of either fictitious payees or payees in existence who have no knowledge of or connection with the transactions in question. The loss allocation theory referred to in Sun ’N Sand simply states that “[T]he loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee. The reasons are that the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees, or, if he is not, is at least in a better position to cover the loss by fidelity insurance; and that the cost of such insurance is properly an expense of his business rather than of the business of the holder or drawee.” (Cal. U. Com. Code, § 3405, com. 4.)
An employer is not only in a better position to prevent forgeries in the first instance, but the employer is also in a better position to detect forged instruments as they are paid out of the employer’s accounts, by reason of the employer’s opportunity to review monthly bank statements showing the withdrawals from those accounts. In the instant case, the facts alleged showed that checks in an aggregate amount exceeding one-half million dollars were paid from plaintiff’s employer’s accounts over a year’s period, before the scheme was uncovered.
I construe section 3405 not only to constitute an absolute defense but to constitute substantive law, requiring the employer (here, plaintiff Hutton) to plead facts, if it can do so, to show the inapplicability of section 3405.
As previously noted, plaintiff Hutton neither identified the payees as customers or alleged the manner in which the checks as drawn ended up in the employee’s possession. The trial judge, making the reasonable inferences which he was entitled to make, concluded that the employee did in fact “provide” the names of particular customers as payees, with no intention of their receiving the proceeds of the checks, and thus section 3405 was an absolute defense in favor of defendant collecting bank, CNB. Plaintiff argued below, and does here, that such inferences and conclusions should not have been made, that the rules of review concerning demurrers precluded it.
However, Hutton’s entire second amended complaint, when read in conjunction with superseded pleadings and realistically, in a common sense manner, showed that section 3405 was applicable to the facts. To hold otherwise would, in my view, stretch the concept of liberality in pleading beyond the breaking point, foster “gamesmanship” and cause the unnecessary expenditure of legal fees to defend and judicial resources to decide.
By analogy, if a pleading on its face shows the running of the applicable statute of limitations, and is thus subject to demurrer, so also should a *81pleading be subject to demurrer which reasonably shows on its face the applicability of section 3405.
Plaintiff further contended below, and contends here, that failure on the part of a collecting bank to act “in commercial good faith” bars a collecting bank such as CNB from asserting section 3405 as a defense against a breach of warranty cause of action. Plaintiff points out that California Uniform Commercial Code section 1203 provides that “Every contract or duty within this code imposes an obligation of good faith in its performance or enforcement.”
Plaintiff pleaded defendant CNB’s lack of commercial good faith, but offered no specifics in describing that lack, except that it collected the checks in question here on forged indorsements for a depositor who was an employee of the drawer. As the comment to California Uniform Commercial Code section 1201 set forth in subdivision (19) makes clear, more than suspicious circumstances are required in reaching the issue of commercial good faith. (Fireman’s Fund Ins. Co. v. Security Pacific Nat. Bank (1978) 85 Cal.App.3d 797 [149 Cal.Rptr. 883].) Some grossly careless conduct or actual complicity must be alleged. None was here.
The Common Count Theory
Having concluded that plaintiff Hutton has not pleaded viable causes of action based on negligence and breach of warranty theories, the cause of action based on a common count theory, concededly based on the same series of transactions as was defectively set out in the other specific counts, is equally subject to demurrer. (Neal v. Bank of America (1949) 93 Cal.App.2d 678, 681 [209 P.2d 825].)
I would affirm the judgment rendered below.
Respondent’s petition for a hearing by the Supreme Court was denied February 29, 1984.

It may well be that discovery would be required to nail down all the details of Hamaoui’s scheme. Obviously, however, it was within plaintiff’s actual knowledge prior to pleading plaintiff’s case, (1) whether the payees were customers and (2) whether their names were “supplied” to plaintiff when the checks were drawn by plaintiff.

It is assumed that if there had been anything unusual about the checks, those facts would have been pleaded.