HH Computer Systems, Inc. v. Pacific City Bank
231 Cal. App. 4th 221
Cal. Ct. App.2014Background
- HH Computer Systems sued three banks—US Metro Bank, Wilshire State Bank, and Pacific City Bank—after an embezzling employee and intermediary check cashing services caused substantial losses.
- Employee Jennifer Kim, HH’s accounting manager, stole ~300 checks made payable to HH during 2011–2012, endorsing them illegibly and cashing them via check cashers.
- Check cashing companies deposited the stolen checks into their own accounts at various banks, including HH’s funds ultimately flowing to the banks through deposits or cashing.
- HH alleged the three banks failed to exercise ordinary care in processing checks from check cashers, breaching California Commercial Code section 3405.
- Trial court sustained demurrers to HH’s 3405 claims; HH appealed asserting banks’ duty as first banks in the collection chain.
- Court reversed, holding check cashers are not banks but first banks remain liable under 3405; case remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether check cashing intermediaries relieve banks of 3405 duties. | HH argues banks as first banks owe 3405 duty despite intermediaries. | Banks contend they are not first banks or subject to 3405 when checks come via cashers. | No; first banks owe duty under 3405; check cashers are not banks. |
Key Cases Cited
- Sun 'n Sand, Inc. v. United California Bank, 21 Cal.3d 671 (Cal. 1978) (first bank duty in check processing emphasized)
- Feldman Constr. Co. v. Union Bank, 28 Cal.App.3d 731 (Cal. App. 1972) (first bank endorsements duty in chain of collection)
- Lee Newman, M.D., Inc. v. Wells Fargo Bank, 87 Cal.App.4th 73 (Cal. App. 2001) (depository bank can be liable under 3405 for lack of due care)
- Karen Kane v. Bank of America, 67 Cal.App.4th 1192 (Cal. App. 1998) (common law duty distinctions; not controlling for 3405)
- Mills v. U.S. Bank, 166 Cal.App.4th 871 (Cal. App. 2008) (describes check circulation and intermediaries in UCC context)
- First Nat’l Bank v. MidAmerica Fed. Sav. Bank, 303 Ill.App.3d 176 (Ill. App. 1999) (first bank warranty in collection chain)
- Valley National Bank v. P.A.Y. Check Cashing, 378 N.J. Super. 406 (N.J. Super. Ct. Law Div. 2004) (check cashers as depositary bank in New Jersey context)
- Federal Deposit Ins. Corp. v. Marine Nat’l Bank, 303 F. Supp. 401 (S.D. Fla. 1969) (support for first bank responsibility in collection chain)
- Edward D. Jones & Co. v. Mishler, 161 Ill. App. 1 (Ore. App. 1999) (commentaries on banking definitions and duties in collection)