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Burns v. Neiman Marcus Group

April 28, 2009; as modified May 20, 2009


Trial Court: San Francisco County Superior Court Super. Ct. No. 457841). Trial Judge: Hon. Patrick J. Mahoney.

The opinion of the court was delivered by: Jenkins, J.


Plaintiff Brian P. Burns appeals from a judgment in favor of defendant The Neiman Marcus Group, Inc. (Neiman Marcus) after its general demurrer to the second amended complaint was sustained without leave to amend. Plaintiff seeks to recover damages arising from an employee's fraudulent use of checks drawn on his personal checking account to make payments on the employee's Neiman Marcus store credit card accounts. Plaintiff argues that he has alleged sufficient facts requiring the reinstatement of his causes of action for common law negligence or, in the alternative, a statutory cause of action pursuant to California Uniform Commercial Code, section 3406, subdivision (b),*fn1 and a related request for an accounting. We disagree and, accordingly, affirm.


As more fully set forth in the operative complaint, plaintiff alleges thatCarol Young*fn3 was employed as plaintiff's secretary, and throughout the relevant time period, her base salary never exceeded the sum of $75,000. Between 1995 and 2000, Young opened several credit card accounts with Neiman Marcus. In the three-year period prior to 2006, Young spent approximately $1 million at Neiman Marcus, and "the balance on [one] credit card, as of January 10, 2006, is and was in excess of $242,000." "As a result of her purchasing volume, [Young] was offered entrée into [Neiman Marcus's] exclusive INCIRCLE(r) rewards program -- a loyalty incentive program offered only to [Neiman Marcus's] most frequent and highest spending customers." Young was also provided a designated sales associate, or a personal shopper, whose compensation was allegedly tied to the volume and price of the merchandise purchased by her clients.

According to plaintiff, Young "did not earn a sufficient salary from her employment to merit the excessive credit limits provided to her by [Neiman Marcus]." Young's personal shopper is alleged to have known that plaintiff's annual salary was less than $75,000, and that Young's huge purchases were well beyond what her financial condition would justify and support. Despite this knowledge, the personal shopper "repeatedly contacted and encouraged [Young] to make excessive purchases with her various [Neiman Marcus] cards."

The complaint describes the transactions giving rise to plaintiff's negligence claim as follows. "Starting at least as early as 1995, . . . [Young] began paying for all her purchases at [Neiman Marcus] by means of unauthorized checks drawn on the personal bank account of [plaintiff]. [Young] would personally deliver on a regular basis, fraudulent and forged checks clearly identified as being drawn on [p]laintiff's Union Bank of California checking account to pay down her various [Neiman Marcus] credit card bills at the Customer Service Center in [Neiman Marcus's] San Francisco store."*fn4

Neiman Marcus presented the fraudulent and forged checks for payment and received funds from plaintiff's personal checking account.

According to plaintiff, "Young employed at various times, at least three different methods of fraudulently presenting [p]laintiff's checks for payment of her personal [Neiman Marcus] credit card accounts: [¶] (a) by theft of [p]laintiff's checks and the forging of [p]laintiff's signature thereon; (b) by theft of [p]laintiff's checks with no signature whatsoever; and (c) by theft of [p]laintiff's checks with [p]laintiff's signature presumed by plaintiff to be for payment towards [p]laintiff's own [Neiman Marcus store] credit card account, but which was diverted by [Young] for payment towards [Young's] personal [Neiman Marcus] credit card account(s)."

Plaintiff alleged that he was not aware of Young's unauthorized activity for the following reasons. "[W]hen [Young] received [p]laintiff's bank statements, she would destroy the checks reflecting the payments made to her [Neiman Marcus] credit card accounts. She would then alter [p]laintiff's ledger account records to reflect payments made to third parties other than [Neiman Marcus] to account for the missing money." Plaintiff did not learn of the actions of Young and Neiman Marcus until April 2006.

The second amended complaint contains four causes of action, only two of which are at issue on this appeal.*fn5 The first cause of action is labeled "Negligence -- Breach of Ordinary Care, Commercial Code §§ 3103(a)(7) and 3406(b)." The second cause of action is labeled "Negligence -- Breach of Ordinary Care, Commercial Code §§ 3103(a)(7) and 3405(b)." Despite the reference to the California Uniform Commercial Code sections in the titles of the two causes of action, both are based on a claim of common law negligence.

As to both causes of action, plaintiff alleges that "with respect to the business of luxury retailing in which [Neiman Marcus] is engaged, there is a prevailing, reasonable commercial standard to observe the practice of taking additional steps when presented with third-party checks so to prevent the unauthorized use of the third-party's checking account, and to prevent the harm that would result to the third party from such unauthorized activity." "Based on all the circumstances as set forth above, when confronted with the unusual habit of [Young] in paying down her massive [Neiman Marcus] credit card debt in person, by third-party checks drawn on the personal account of [p]laintiff, [Neiman Marcus] owed a duty of ordinary care to [p]laintiff to ascertain whether [Young] was authorized to take such actions, or, at the least, to alert [p]laintiff of [Young's] practice." "[D]espite having a duty to do so, and upon information and belief a policy requiring it, no one in [Neiman Marcus's] Customer Service Center ever asked [Young]: (i) why she was paying with [plaintiff's] checks and/or (ii) whether she had authority to make payments to her account with [plaintiff's] funds. Further, no one from [Neiman Marcus] ever contacted [plaintiff] to ascertain whether [Young] had authority to pay her [Neiman Marcus] credit card account with checks drawn on his personal . . . checking account or even alerted [plaintiff] that such payments were being made from his personal checking account." According to plaintiff, Neiman Marcus knew, should have known, or acted with reckless disregard of facts showing that Young was not authorized to pay her credit card bills with checks drawn on plaintiff's personal checking account because the store knew that Young was charging large monetary amounts that exceeded her monthly income, and the store's employees failed to ask Young whether she had authority to pay her bills with plaintiff's personal checks and failed to alert plaintiff that Young was using his personal checks to pay her credit card bills. "As a direct result of [Neiman Marcus's] failure to exercise that degree of ordinary care found in the retail industry in circumstances such as these with respect to the acceptance and processing of credit card payments, as well as [Neiman Marcus's] failure to follow its own corporate procedure with respect to payment on credit card accounts using third-party checks, [Neiman Marcus] failed to observe ordinary care in taking the checks," resulting in a loss to plaintiff exceeding $100,000.*fn6

In sustaining Neiman Marcus's general demurrer to the second amended complaint, the trial court ruled as follows: "The [demurrer to the] first cause of action for negligence under [California Uniform] Commercial Code Section[s] 3103(a)(7) and 3406(b) is sustained without leave to amend. The text and official comments for Section 3406(b) make it clear that section does not create a cause of action, but allows for a defense of comparative negligence. Section 3103(a)(7) provides the definition for ordinary care, but this section does not create a negligence claim. Plaintiff relies on Sun 'N Sand [, Inc. v. United California Bank (1978) 21 Cal.3d 671 (Sun 'N Sand)], and Joffe [v. United California Bank (1983) 141 Cal.App.3d 541 (Joffe)]to support his negligence claim. . . . These cases allowed negligence claims not directly based on a [California Uniform] Commercial Code statute. In both cases, the bank cashing the check was put on notice of a potential fraud by what was on the face of the check and in what account the check was deposited. Here, the fact that an account payment came from a third party is not enough to put [Neiman Marcus] on notice of a potential fraud. The Court will not extend the holding of Sun 'N Sand and Joffe to the facts of this case. [¶] The [demurrer to the] second cause of action for negligence under [California Uniform] Commercial Code Section[s] 3103(a)(7) and 3405(b) is sustained without leave to amend. Section 3405(b) applies when an employee makes a fraudulent endorsement. . . . Plaintiff has alleged various situations where, he claims that the secretary used [his] checks to pay off her account with [Neiman Marcus]. None of these situations fall[s] under the definition of fraudulent endorsement as defined in Section 3405(a)(2)." A judgment of dismissal was entered from which plaintiff filed a timely notice of appeal.


On appeal, plaintiff argues that he has alleged a cause of action for common law negligence that is not barred by the California Uniform Commercial Code. Alternatively, he asserts if he has no common law negligence claim, he has nevertheless alleged sufficient facts to support a cause of action under section 3406, subdivision (b), for breach of the duty of "ordinary care." We conclude that plaintiffs' arguments are unavailing.

Our review of the trial court's ruling sustaining the general demurrer is de novo. We independently evaluate the complaint, construing it liberally, giving it a reasonable interpretation, reading it as a whole, and viewing its parts in context. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Treating as true all material facts properly pleaded, we determine de novo whether the factual allegations of the complaint are adequate to state a cause of action under any legal theory, regardless of the title under which the factual basis for relief is stated. (Id. at p. 318.) Because plaintiff does not contend he should be allowed a further opportunity to amend the factual allegations in his latest complaint, we review whether the demurrer was well taken.*fn7

A. Common Law Negligence Claim Does Not Lie In This Case

" ' [N]egligence is conduct which falls below the standard established by law for the protection of others. ' [Citation.] ' Every one is responsible, not only for the result of his willful acts, but also for an injury occasioned to another by his want of ordinary care or skill in the management of his property or person, except so far as the latter has, willfully or by want of ordinary care, brought the injury upon himself. ' ([Civ. Code] § 1714, subd. (a).)" (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 396-397 (Bily).) Related to the concept of negligence is the tort law that a person is "ordinarily not liable for the actions of another and is under no duty to protect another from harm, in the absence of a special relationship of custody or control." (Nally v. Grace Community Church (1988) 47 Cal.3d 278, 279.)

"The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion. [Citations.] Whether this essential prerequisite to a negligence cause of action has been satisfied in a particular case is a question of law to be resolved by the court." (Bily, supra, 3 Cal.4th at p. 397.)

" California courts have explicitly rejected the concept of universal duty. ' " ' It must not be forgotten that " duty " got into our law for the very purpose of combatting what was then feared to be a dangerous delusion . . . viz., that the law might countenance legal redress for all foreseeable harm. ' " ' [Citation.] Instead, whether to recognize a new 'legal wrong' or 'tort' is often governed by policy factors. [Citation.] In making these determinations, both the courts and the Legislature must weigh concepts of ' public policy, ' as well as problems inherent in measuring loss, and ' floodgates ' concerns, in addition to the traditional ...

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