Opinion
Defendant Wells Fargo Bank, N. A. honored more than a hundred forged checks against plaintiff’s account. Plaintiff did not discover the forgeries until more than a year after defendant began honoring these checks. Defendant refused to credit plaintiff’s account for any of these unauthorized checks, and plaintiff filed suit against defendant. Plaintiff alleged causes of action for negligence, breach of contract and common counts and asserted a cause of action for money damages for defendant’s alleged violation of California Uniform Commercial Code section 4406. Defendant’s demurrer to plaintiff’s negligence, breach of contract and common counts causes of action was sustained without leave to amend on the theory that California Uniform Commercial Code section 4406 displaced all other actions based on these forged checks. Defendant’s motion for summary
Background
In 1981 plaintiff established a chеcking account with defendant. The written agreement between plaintiff and defendant provided that defendant would honor only checks signed by authorized signatories. The authorized signatories on the account were Glen Norris and Suzanne Norris. Plaintiff’s then attorney, Kenneth Fehl, was responsible for plaintiff’s accounts payable. He delegated this task to Helen Shino, whom he employed as a bookkeeper. Between August 1990 and May 1992, Shino stole more than 100 of plaintiff’s checks. Beginning in September 1990, Shino forged the signature of one of the authorized signatories on these checks and used the checks to obtain funds for her own purposes. In all, Shino managed to drain $255,761.60 from plaintiff’s checking account without its knowledge. Shino intercepted the bank statements sent to plaintiff by defendant, destroyed them and posted false entries in plaintiff’s books to conceal her scheme. Plaintiff discovered Shino’s scheme on June 6, 1992, and immediately filed this action. Plaintiff also demanded that defendant credit plaintiff’s account for the unauthorized checks defendant had honored. Defendant refused to do so. Plaintiff alleged that defendant’s conduct in paying these unauthorized checks was due to “a lack of ordinary care.”
Plaintiff’s complaint alleged causes of action for negligence, breach of contract and “common counts” and it purported to allege a cause of action based on defendant’s breach of its obligations under California Uniform Commercial Code section
1
4406. Defendant demurred to the complaint by asserting that the negligence, breach of contract and “common counts” causes of action were barred because section 4406 defined plaintiff’s exclusive remedy against defendant under these circumstances. The demurrer was sustained without leave to amend. Defendant then brought a motion for summary judgment on the remaining cause of action. Defendant asserted that plaintiff could not succeed on this cause of action because plaintiff had failed to discover and notify defendant of the forgeries promptly after receipt
Plaintiff did not dispute defendant’s evidence, and defendant’s motion for summary judgment was granted. However, the order granting defendant’s motion gave plaintiff 60 days in which to seek reconsideration if it obtained evidence that defendant had failed to exercise “ordinary care” in paying the unauthorized checks. Plaintiff thereafter sought reconsideration and submitted declarations which it claimed established a material dispute of fact regarding whether defendant had exercised “ordinary care.” The court found that plaintiff had failed to raise a material triable issue of fact by submitting any proof that defendant had failed to exercise “ordinary care.” Plaintiff’s motion for reconsideration was denied, and judgment was entered in favor of defendant. Plaintiff filed a timely notice of appeal.
Analysis
The critical statute at issue in this case is former section 4406. This statute provided as follows. “(1) When a bank sends to its customеr a statement of account accompanied by items paid in good faith . . . , the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after the discovery thereof. [U (2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subdivision (1) the customer is precluded from asserting against the bank [][] (a) His unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and [<][] (b) An unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding 14 calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration. [^ (3) The preclusion under subdivision (2) does not aрply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s).” (Former, § 4406, italics added.)
A. Preclusion Applies to All Causes of Action
The precise meaning of former section 4406 is critical to plaintiff’s appellate arguments. Plaintiff claims that the statute would not preclude its
First, we must cast off the erroneous notion that former section 4406 defined a cause of action against the bank which displaced all other causes of action based on the unauthorized signatures. This is a serious misconstruction of the meaning of the statute. Where the customer has failed to timely notify the bank of an unauthorized signature on an item after receiving the item from the bank with the customer’s statement, the customer will be precluded under former section 4406 from founding any action on the bank’s payment of subsequent items bearing unauthorized signatures by the same wrоngdoer unless the customer can show that the bank failed to use “ordinary care” in honoring these subsequent items. If the customer timely notified the bank of the initial unauthorized signature or the bank failed to exercise ordinary care in paying subsequent items, this preclusion does not apply and the customer may allege any appropriate cause of action based on the bank’s conduct in honoring the items bearing unauthorized signatures. The essence of former section 4406 is a defense for a bank against a customer’s action based on unauthorized signatures on checks under certain circumstances.
Each of plaintiff’s causes of action against defendant was based on defendant’s alleged wrongdoing in honoring forged checks.
2
Under former section 4406, plaintiff could assert the forgeries against defendant as the basis for a legal action only if plaintiff had promptly notified defendant of
B. Preclusion Applied
1. Standard of Review
The applicability of the preclusion set forth in former section 4406 was established by defendant in its motion for summary judgment. Appellate review of a summary judgment is de novo.
(Stratton
v.
First Nat. Life Ins. Co.
(1989)
2. Defendant Proved That It Had Used “Ordinary Care”
Plaintiff alleged that defendant’s conduct in paying these unauthorized checks was due to “a lack of ordinary care.” In order to establish its
Whether defendant’s declarаtions are sufficient to establish that defendant used “ordinary care” in honoring the forged checks depends on what former section 4406 meant by “ordinary care.” Section 4406 did not and does not define “ordinary care,” but the California Uniform Commercial Code did and does elsewhere specify the meaning of this term. The California Uniform Commercial Code was revised in 1992. Prior to these revisions, the California Uniform Commercial Code defined how a “prima facie” showing of “ordinary care” could be mаde by a bank. “[A]ction or nonaction consistent. . .
with a general banking usage
. . . prima facie constitutes the exercise of
ordinary care.”
(Former § 4103, subd. (3), italics added.) “The term ‘general banking usage’ is not defined [by statute] but should be taken to mean a general usage common to banks in the area concerned.” (Com. to former § 4103.) By defining a bank’s standard of “ordinary care” in terms of “general banking usage,” former section 4103 reflected the Legislature’s decision to subject some conduct of banks to a “professional negligence” standard of care which looks at the procedures utilized in the banking industry rather than what a “reasonable person” might have done under the circumstances. (Cf.
Osborn
v.
Irwin Memorial Blood Bank
(1992)
Noting that former section 4103 explained the meaning of “ordinary care” in terms of “general banking usage” prior to the 1992 revision of the
We agree with defendant that this definition of ordinary care did not “change” the law but merely clarified it, and therefore the definition of “ordinary care” in section 3103 is “declaratory” of the meaning of “ordinary care” in former section 4406. Prior to the 1992 changes, “ordinary care” could be established by a bank by showing that the bank’s practices comported with “generаl banking usage” in the area. (Former § 4103, subd. (3); see § 3103, subd. (a)(7), italics added.) The 1992 addition of a more precise definition of ordinary care clarified this standard by detailing that “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 . . . .” (§3103, subd. (a)(7), italics added.) The 1993 definition of “ordinary care” does not vary demonstrably from the pre-1993 definitiоn. Both definitions require a bank to show that its practices comported with general banking usage. The revised definition simply notes that “ordinary care” can be established notwithstanding the bank’s failure to “examine the instrument” so long as the bank’s processing of the instrument was in accordance with both the bank’s practices and general banking usage. This qualification means that a bank cannot establish “ordinary care” unless it can show that its practices comported with “general banking usage.” The fact that the pre-1993 definition of “ordinary care” did not exprеssly mention a duty to “examine the instrument” implies that a bank could then establish “ordinary care” even if the bank had failed to examine the instrument so long as the bank was able to establish that its practices comported with general banking usage.
3. Plaintiffs Evidence Failed to Raise a Triable Issue
Once defendant established that it had used “ordinary care,” the burden shifted to plaintiff to raise a triable issue of fact as tо either whether defendant had followed its own procedures or whether defendant had utilized procedures which were consistent with “general banking practice” in the area. Plaintiff submitted evidence that the signatures on the unauthorized checks “did not bear any reasonable resemblance” to the authorized signatures. It also submitted evidence that the unauthorized checks were “out-of-sequence with respect to the other accounts payable checks . . . .” Plaintiff also submitted evidence which purported to establish that
there is no industry standard
for check processing systems because they are proprietary and each bank keeps its system secret. Because the evidence established that none of the unauthorized checks on plaintiff’s account had been sight reviewed and that defendant’s check processing system ordinarily detected unauthorized signatures on sight reviewed checks, plaintiff sought to establish that defendant’s system for deciding which checks to “out-sort” for sight rеview was inadequate. Plaintiff’s evidence established that (1) there was no specific dollar limit below which the system ignores a particular check, but all checks over $50,000 are sight reviewed, (2) the system is not able to detect unsigned checks, (3) the criteria used by the system for determining whether a check should be “out-sorted” included “location information,” the dollar amount of the check and whether the check is “out-of-sequence,” (4) a check that is “in-sequence” and under $10,000 will not ordinarily be sight reviewеd, (5) a business check payable to an individual which is deposited at
Defendant established its entitlement to judgment by showing that the preclusion set forth in former section 4406 applied. None of plaintiff’s evidence established any material triable issue of fact with regard to defendant’s showing that its check processing system comported with general banking usage in the area. Instead, plaintiff’s showing was merely an attempt to show that defendant’s system was inadequate because it did not result in sight review of checks like those herein in question. Plaintiff’s expert opined that defendant’s check processing system was “commercially unreasonable” because it resulted in sight review of only 1 percent of the checks processed and it did not require sight review of all out-of-sequence checks. However, рlaintiff’s expert did not provide any evidence that defendant’s check processing system was inconsistent with the general practice in the banking industry in the area. Plaintiff’s evidence failed to controvert defendant’s showing.
Plaintiff nevertheless claims that summary judgment was precluded because it was entitled to proceed on its theory that “the procedures followed by a bank are unreasonable, arbitrary or unfair.” Plaintiff derives this language from a comment to section 3103, subdivision (a)(7). “The second sentence of subsection (a)(7) is a particular rule limited to the duty of a bank to examine an instrument taken by a bank for processing for collection or payment by automated means. This particular rule applies primarily to Section 4-406 and it is discussed in Comment 4 to that section. Nothing in Section 3-103(a)(7) is intended to prevent a customer from proving that the procedures followed by a bank are unreasonable, arbitrary or unfair.” (Com. to § 3103.) Plaintiff apparently believes that this comment obviates the preclusion stated in former section 4406 when there is evidence that a bank has used “unreasonable” procedures. We find no such meaning in this comment.
Neither section 4406 nor section 3103 provides that the preclusion set forth in section 4406 is obviated if bank procedures which are consistent
Defendant proved that it had a complete defense to all of plaintiff’s causes of action. Plaintiff failed to dispute defendant’s showing by raising any triable issue of fact. The trial court’s judgment must be upheld.
Conclusion
The judgment is affirmed.
Premo, Acting P. J., and Elia, J., concurred.
Notes
Subsequent statutory references are to the California Uniform Commercial Code unless otherwise specified.
Although plaintiff alleged in its complaint that defendant had paid some checks “without any signatures whatsoever,” it did not assert any cause of action based solеly on defendant’s conduct in honoring unsigned checks as opposed to checks bearing unauthorized signatures. In response to defendant’s summary judgment motion in which defendant asserted that it was undisputed that all of the checks bore unauthorized signatures, plaintiff did not dispute that all of the checks bore unauthorized signatures. Consequently, plaintiff is not permitted to now argue that it had a cause of action based solely on allegedly unsigned checks because it essentially conceded belоw that there were no unsigned checks.
It is interesting to note that the common law had established a similar rule prior to the enactment of the California Uniform Commercial Code. If a bank customer failed to notify the bank of forged checks within a reasonable time after receiving the checks back from the bank, the customer was estopped from challenging the bank’s conduct in honoring the forged checks so long as the bank exercised “proper care” in processing the checks.
(Basch
v.
Bank of America
(1943)