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CHANCE WORLD TRADING E.C. v. HERITAGE BANK OF COMMERCE

November 7, 2005.

CHANCE WORLD TRADING E.C., Plaintiff,
v.
HERITAGE BANK OF COMMERCE; and DOES ONE through TEN, inclusive, Defendants.



The opinion of the court was delivered by: RONALD WHYTE, District Judge

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

Defendant Heritage Bank of Commerce moves for summary judgment on plaintiff Chance World Trading's sole remaining cause of action, aiding and abetting a fraud. For the reasons set forth below, the court grants the motion.

I. FACTUAL BACKGROUND

  Except where otherwise noted, the following facts are undisputed: Distant relatives Rajeev Sawhney and Rani Yadav-Ranjan embarked together on a business venture. Mr. Sawhney agreed that his company, Chance World Trading E.C., would finance technical testing of Ms. Yadav-Ranjan's product idea. Construction Navigator, Inc., of which Ms. Yadav-Ranjan was the president, was to be the vehicle for this venture. Chance World agreed to invest an intial $200,000 in Construction Navigator. The investment agreement was memorialized in a term sheet, which specified that the $200,000 was to be used solely for the limited purposes of technical development and testing of Ms. Yadav-Ranjan's idea.

  Construction Navigator opened a checking account with Heritage Bank of Commerce. There were three designated signors on the account: Rani Yadav-Ranjan, Rajeev Sawhney, and Poonam Sawhney (Mr. Sawhney's wife). The New Account Client Worksheet indicates that the account required two signatures to authorize any transfer*fn1 out of the account over $10,000. Signature cards were never signed by the Sawhneys. On October 1, 2002, Chance World wired its initial investment of $200,000 to the Construction Navigator account at Heritage Bank.

  Despite the terms of the investment agreement limiting use of the funds to technical development and testing, Ms. Yadav-Ranjan used these funds to pay her personal salary, office rent, and other general corporate expenses not related to the technical testing. To accomplish the alleged misappropriation of the invested funds, Ms. Yadav-Ranjan opened a second Construction Navigator account at Heritage Bank. She presented Heritage Bank's employees with a "Corporate Resolution to Open a Bank Account" signed by "President/Secretary Rani Yadav-Ranjan." This permitted the opening of another account which, unlike the first account, authorized checks signed solely by Rani Yadav-Ranjan. Subsequently, Ms. Yadav-Ranjan transferred funds from the original Construction Navigator account into the newer account, without ever acquiring the authorization of Mr. or Mrs. Sawhney.

  On January 19, 2003, plaintiff sent an e-mail stating that Ms. Yadav-Ranjan was misappropriating the $200,000 plaintiff had invested and requesting a cessation of all activities in the original Construction Navigator bank account. Decl. of Breck E. Milde, Ex. C. The email purported to be from Mr. Sawhney and was addressed to several Construction Navigator personnel and "heritage@herbank.com." Id. According to uncontradicted testimony, heritage@herbank.com is "not a valid email address" for Heritage Bank. Dep. of Joan Leis 67:14. Eventually, Ms. Yadav-Ranjan misappropriated the entire $200,000. None of the withdrawals of this money was authorized by more than one signature. Chance World sued Ms. Yadav-Ranjan to recover the money and eventually settled for $100,000.

  Chance World filed suit against Heritage Bank for allowing this misappropriation to occur. The court granted defendant's motion to dismiss the original complaint because plaintiff had not adequately pled the existence of a contractual, statutory, or tort duty owed by defendant to plaintiff Chance World that had been breached. Subsequently, plaintiff filed an amended complaint adding new causes of action, including aiding and abetting a fraud. Only the aiding-and-abetting cause of action survived the defendant's second motion to dismiss.

  II. LEGAL ANALYSIS

  A. Legal standard

  Summary judgment is proper when the pleadings, discovery and affidavits show that there is "no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FRCivP 56(c). Material facts are those which may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party. Id. A party moving for summary judgment who does not have the ultimate burden of persuasion at trial has the initial burden of producing evidence negating an essential element of the non-moving party's claims or showing that the non-moving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial. Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000).

  Jurisdiction in this case is based on diversity of citizenship, see 28 U.S.C. § 1332(a)(2), and this court must therefore use California law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). The Ninth Circuit has explained courts are to determine state law thusly:
When interpreting state law, federal courts are bound by decisions of the state's highest court. In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. However, where there is no convincing evidence that the state supreme court would decide differently, a federal court is obligated to follow the decisions of the state's intermediate appellate courts.
Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (1996) (internal quotation marks and citations omitted); see also Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001).

  In California, a claim for aiding and abetting a tort requires two things: knowledge of the underlying tort, and substantial assistance in its commission. The law pertinent to plaintiff's claim is most clearly stated in Saunders v. Superior Court: "Liability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person . . . knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act." 27 Cal. App. 4th 832, 846 (1994). A later court emphasized that "California courts have long held that liability for aiding and abetting depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted." Casey v. U.S. Bank Nat'l Ass'n, 127 Cal. App. 4th 1138, 1147 (2005). California courts have acknowledged that the tort of aiding and abetting is at odds with statutory limitations on bank liability, see Cal. Fin. Code § 952,*fn2 but the court in Casey nonetheless held that a bank can be liable for aiding and abetting if it had "actual knowledge" of the underlying wrong. Id. at 1152-53.

  However, on the specific facts in Casey, the court held that allegations that the defendant banks allowed officers of a group of investment companies to engage in "skullduggery" was insufficient as an allegation the banks had knowledge that the officers were breaching fiduciary duties, and thus aiding-and-abetting liability could not attach to the banks. 127 Cal. App. 4th at 1151. Specifically, the plaintiff had alleged that
the banks aided and abetted the [officers] in this money laundering scheme by allowing them to open accounts with invalid tax identification numbers, which accounts were then used to drain funds from the Estate to the accounts of individual directors, officers, their families and affiliated companies; allowing large sums of cash, often in excess of $250,000 at a time and aggregating some $6 million, to be removed from [the banks'] cash vaults (in unmarked duffel bags); violating banking regulations and the [banks'] own internal policies and procedures; allowing obviously forged negotiable instruments to be paid; and, ignoring monetary restrictions ('not to exceed' limits) appearing on the face of individual checks by paying sums in excess of such limits.
Id. at 1142 (internal quotation marks omitted; second and third alterations in original). In spite of this egregious conduct, the court in Casey held that knowledge of such ...

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