QDOS, Inc. v. Signature Financial, LLC
B279475
| Cal. Ct. App. | Nov 29, 2017Background
- QDOS/DeskSite CEO Gillam authorized two company checks (total $516,000) delivered by Fazliq Kader to The Auto Gallery to buy a 2012 Lamborghini; title was placed in Kader’s name.
- DeskSite claimed it had agreed with Kader that title would be vested in DeskSite, but made no written arrangement and did not notify The Auto Gallery.
- Kader later sold the car back to The Auto Gallery, which resold it to Premier and financed by Signature; Jenkins leased the car.
- DeskSite sued Kader (defaulted) and The Auto Gallery (and later Premier, Signature, Jenkins) for claims including conversion, fraud, aiding and abetting, negligence, and sought declaratory relief as to title.
- Trial court granted summary adjudication for The Auto Gallery on DeskSite’s claims (no duty to investigate merely because payment came from a third‑party check), excluded evidence of The Auto Gallery’s alleged negligence at the declaratory‑relief trial, and refused punitive damages at the default prove‑up against Kader for lack of evidence of wealth.
- The Court of Appeal affirmed: a merchant’s receipt of a check payable to it but drawn on a third party’s account, standing alone, is not a red flag triggering a duty to investigate; exclusion of The Auto Gallery negligence evidence was not erroneous; punitive damages denial was supported by lack of financial evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a merchant owes a duty to investigate when a customer pays with a check drawn on a third party’s account | A merchant should investigate because a third‑party check can be a red flag for fraud or misuse and DeskSite’s property interest was at risk | No duty exists from such a bare circumstance; imposing it would unduly burden commerce and privacy | No duty as a matter of law — third‑party checks alone are not a red flag requiring investigation; summary adjudication for The Auto Gallery affirmed |
| Admissibility of evidence about The Auto Gallery’s alleged negligence at title/declaratory trial | Evidence of The Auto Gallery’s suspicions or negligence is relevant to show circumstances and inform title dispute | That evidence is irrelevant to whether Kader had (or violated) an agreement with DeskSite; The Auto Gallery was not a party at trial | Exclusion affirmed — testimony about The Auto Gallery’s alleged negligence was irrelevant to whether Kader was a thief and to the title dispute |
| Whether punitive damages should be awarded against defaulting Kader at prove‑up hearing | DeskSite sought punitive damages equal to compensatory damages; argued court could infer hidden assets from nonproduction | Court must have admissible evidence of defendant’s financial condition to award punitive damages; none was offered | Denial affirmed — DeskSite failed to present evidence of Kader’s net worth or ability to pay; punitive damages properly denied |
| Whether precedent (Sun ’n Sand and progeny) requires investigation when payment is by third‑party check | DeskSite relied on those cases to argue a duty to investigate exists whenever third‑party funds are used | Defendants distinguished those cases (deposits into customer accounts, escrow notations, or other suspicious circumstances) as more probative than a routine merchant sale | Court held those precedents are limited; they do not compel a duty here where check was payable to merchant, properly endorsed, and had no on‑its‑face restriction |
Key Cases Cited
- Sun ’n Sand, Inc. v. United California Bank, 21 Cal.3d 671 (recognizing narrow duty not to ignore red flags when third‑party funds are deposited into a customer account)
- Burns v. Neiman Marcus Group, Inc., 173 Cal.App.4th 479 (retailer’s duty does not extend from mere use of third‑party checks to pay customer’s account)
- Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal.4th 26 (public‑policy factors limit duty to prevent purely economic loss)
- Biakanja v. Irving, 49 Cal.2d 647 (factors for recognizing duty in business transactions)
- Rowland v. Christian, 69 Cal.2d 108 (policy considerations for duty analysis)
- Joffe v. United California Bank, 141 Cal.App.3d 541 (duty where escrow restriction on check faces creates red flag)
- Karen Kane, Inc. v. Bank of America, 67 Cal.App.4th 1192 (limits on red flags; certain third‑party check contexts not suspicious)
- Neal v. Farmers Ins. Exchange, 21 Cal.3d 910 (considerations for punitive damages)
- Adams v. Murakami, 54 Cal.3d 105 (need for evidence of defendant’s ability to pay punitive damages)