United States District Court, N.D. California, San Jose Division
November 7, 2005.
CHANCE WORLD TRADING E.C., Plaintiff,
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.
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
"email@example.com." Id. According to uncontradicted
testimony, firstname.lastname@example.org 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
(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
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 atypical banking
procedures did not constitute actual knowledge of the "underlying
tort" required in a claim for aiding and abetting. Id. at 1151.
The court held that "the banks' alleged knowledge of . . .
suspicious account activities even money laundering without
more, does not give rise to tort liability for the banks." Id.
(emphasis in original).
In its motion for summary judgment, Heritage Bank does not deny
that Chance World has evidence that Heritage Bank provided
substantial assistance to Ms. Yadav-Ranjan's transfer and
withdrawal of the funds originally deposited in the Construction
Navigator account, which required two signatures for the transfer
or withdrawal of sums over $10,000. The disposition of Heritage
Bank's motion instead hinges on whether Chance World has raised a
triable issue of material fact on the issue of whether Heritage
Bank had actual knowledge of Ms. Yadav-Ranjan's fraud. Chance
World has not.
Chance World argues that from some combination of the following
list of facts*fn3 an inference can be drawn that Heritage
Bank knew Ms. Yadav-Ranjan was fraudulently misappropriating the
(1) Heritage Bank knew Construction Navigator was a
start-up company funded by a venture capital firm,
(2) Heritage Bank knew that the initial $200,000
deposit into the Construction Navigator money market
account came from Chance World;
(3) Heritage Bank had a copy of the "term sheet"
between Chance World and Construction Navigator;
(4) Heritage Bank knew that Chance World was
purchasing 51 percent of the Construction Navigator
stock; (5) withdrawals for more than $10,000 authorized
solely by Ms. Yadav-Ranjan were forbidden by the
terms of the bank account, the Construction Navigator
corporate charter, and California corporate law; and
(6) Heritage Bank allowed Construction Navigator to
open a corporate banking account before receiving a
corporate resolution authorizing the opening of a
bank account, which was against Heritage Bank's
Even assuming, for the sake of argument, that all of the above
statements are supported by admissible evidence, Chance World's
contentions are unavailing.
That Chance World was a venture capitalist or funded
Construction Navigator does not compel the inference that Ms.
Yadav-Ranjan was misusing funds. (Otherwise, venture capital
firms would never fund start-up companies.) The term sheet
contains in very general terms the substance of the agreement
between Chance World and Construction Navigator; it contains no
restrictions on Construction Navigator's use of funds. That
Chance World was acquiring a majority interest in Construction
Navigator does not imply Heritage Bank knew of Ms. Yadav-Ranjan's
Even if the transfers out of Construction Navigator's accounts
did not comport with Heritage Bank rules or California corporate
law, that alone is insufficient to show that Heritage Bank was
aware of Ms. Yadav-Ranjan's misuse of funds. Plaintiff, citing
Casey and Neilson v. Union Bank of California,
290 F. Supp. 2d 1101 (C.D. Cal. 2003), claims that such "atypical banking
procedures" are, as a matter of California law, evidence that a
bank knows of the fraudulent behavior of a client. Plaintiff has
misapplied these two cases to the instant situation. The alleged
irregularities in this case, considered in the light most
favorable to Chance World, pale in comparison to the activities
alleged in Casey. The court in Casey specifically held that
allegations that the defendant banks violated their "own internal
policies and procedures" were insufficient as allegations the
banks were aware of fiduciary breaches committed by customers.
127 Cal. App. 4th at 1142, 1151. As a matter of California law,
Heritage Bank's failure to adhere to a two-signature requirement
or follow other internal policies regarding the documents
required for corporate checking accounts cannot constitute knowledge that Ms.
Yadav-Ranjan was engaged in any fraudulent activity.*fn4
Chance World claims that Neilson stands for the proposition
that "atypical banking procedures" allow an inference that a bank
had knowledge of a client's crimes. Chance World distorts
Neilson. The court in Neilson had to consider whether a
plaintiff had adequately pleaded the knowledge element of an
aiding-and-abetting cause of action. 290 F. Supp. 2d at 1119-20.
The court ruled that although the plaintiff had not directly
alleged that the defendant banks knew of their client's illegal
activities, other statements in the complaint were sufficient as
allegations of the banks' knowledge. Id. at 1121. The court
While it is true the complaint does not directly
state that the Banks knew Slatkin was running a Ponzi
scheme and stealing investor funds, this is the net
effect of allegations that the Banks knew of
Slatkin's "fraud," "actively participated" in the
Ponzi scheme with knowledge of his "crimes," and
accommodated him by using atypical banking procedures
to service his accounts.
Id. Reading the phrase "atypical banking procedures" in context
in the decision, it seems unlikely the Neilson court would have
found allegations of atypical banking procedures alone sufficient
as an allegation of knowledge by the banks. Even if plaintiff's
reading of Neilson was correct, this court must, under Lewis,
use Casey as a source of California law. Under Casey, Chance
World must produce evidence that Heritage Bank had actual
knowledge of Ms. Yadav-Ranjan's crimes; it cannot rely on
inferences drawn from sloppy work by Heritage Bank. See Casey,
127 Cal. App. 4th at 1151.
Even though not required for Heritage Bank to succeed on its
motion for summary judgment, Heritage Bank has produced evidence
that it did not know of Ms. Yadav-Ranjan's fraud. Two of Heritage
Bank's employees have testified in depositions that they were
unaware that Ms. Yadav-Ranjan was misusing Chance World's funds.
From the available evidence, it appears that Chance World's only
attempt to notify Heritage Bank of Ms. Yadav-Ranjan's wrongdoing
before it was completed is the e-mail misaddressed to
email@example.com. In short, under California law, the inference that Heritage
Bank knew of Ms. Yadav-Ranjan's fraud cannot be drawn from
evidence that Heritage Bank did not follow its own internal
rules, and the only other evidence Chance World has produced that
could show knowledge by Heritage Bank is an e-mail, which,
according to uncontradicted testimony, was not sent to a valid
address for the bank. While there are many facts in dispute
between the parties, none are germane to what Heritage Bank knew
about Ms. Yadav-Ranjan's activities. Chance World has offered no
evidence that shows Heritage Bank had the requisite knowledge to
be held liable, under California law, for aiding and abetting Ms.
Yadav-Ranjan's fraud. Since knowledge of the underlying tort is
an essential element of Chance World's aiding-and-abetting cause
of action, summary judgment for Heritage Bank is appropriate.
For the foregoing reasons, the court grants defendant Heritage
Bank's motion for summary judgment.
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