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Unlimited Adjusting Group, Inc. v. Wells Fargo Bank

June 4, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County, Aurelio N. Munoz, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC327975).

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



This case presents a novel issue under California Uniform Commercial Code section 3404, subdivisions (b)(i) and (d).*fn1 Plaintiffs*fn2 lost more than $6 million in an investment fraud scheme. The perpetrator led plaintiffs to believe that brokerage accounts in their names would be opened with Carlin Equities Corporation, an existing broker-dealer, and induced plaintiffs to make checks payable to "Carlin Co.," "Carlin Corp.," and "Carlin Corporation." The culprit opened his own bank account at defendant and respondent Wells Fargo Bank, N.A. (Wells Fargo) under the fictitious business name "Carlin Co." He deposited plaintiffs? checks into that account and then appropriated the monies.

Section 3404, subdivisions (b)(i) and (d)*fn3 provide, in effect, that the drawer of a check may recover from a depositary bank on a comparative negligence basis if, inter alia, the depositary bank failed to use ordinary care in permitting a customer to deposit a check when the person who signed the check as, or on behalf of, the drawer (the "signer") did not intend the person identified as payee on the check to have an interest in the check. (§ 3404, subds. (b)(i), (d).) Plaintiffs asserted a claim pursuant to these provisions against Wells Fargo, alleging that Wells Fargo failed to exercise ordinary care when it allowed the perpetrator of the fraud to deposit plaintiffs? checks in his Wells Fargo account. A jury returned a verdict against plaintiffs and in favor of Wells Fargo.

Plaintiffs argue on appeal that the trial court erred by giving the jury instructions that, in effect, conflated the concepts of an intended payee, as determined under section 3110, with the "person identified as payee" (or the "named payee") referred to in section 3404, subdivision (b)(i). We agree that the jury instructions were erroneous, but conclude that plaintiffs were not prejudiced by the error. By its terms, section 3404, subdivision (b)(i) applies only when the signer does not intend the named payee to have an interest in the check. But the signer can have no such intent when the signer believes that the named payee and the intended payee are the same person or entity. The evidence at trial was undisputed that (1) plaintiffs issued checks payable to "Carlin Co.," "Carlin Corp." and "Carlin Corporation"; (2) plaintiffs intended those designations to refer to Carlin Equities Corporation; and (3) Carlin Equities Corporation was the intended payee of the checks. Because subdivision (b)(i) does not apply, plaintiffs‟ claim under section 3404, subdivision (d) fails as a matter of law. We therefore affirm the judgment.


Won Charlie Yi solicited money from plaintiffs and other investors in the Korean-American community by representing that he would invest their money in brokerage accounts at Carlin Equities Corporation, a nationally recognized broker-dealer based in New York. Yi, however, did not invest the money he received from plaintiffs at all. Instead, Yi registered the name "Carlin Co." as a fictitious name under which he did business. He opened a bank account at Wells Fargo in the name of "Won Charlie Yi dba Carlin Co." Between January and September of 2003, Yi induced plaintiffs to write eight checks, totaling $6.3 million, payable to "Carlin Co.," "Carlin Corp." or "Carlin Corporation." Yi deposited the checks into his Wells Fargo account and absconded with plaintiffs‟ money. He was later apprehended by federal authorities and convicted of a variety of criminal fraud charges.*fn4

Plaintiffs sued Wells Fargo to recover their losses. In their operative second amended complaint, plaintiffs asserted, inter alia, a statutory negligence claim under section 3404, subdivisions (b)(i) and (d). That claim was tried to a jury, which returned a special verdict in favor of Wells Fargo.*fn5 The trial court entered judgment for Wells Fargo. Plaintiffs timely appealed.


A. Relevant Legal Principles

Articles 3 and 4 of the Code govern, respectively, negotiable instruments and bank deposits and collections. (See generally 4 Witkin, Summary of Cal. Law (10th ed. 2005) Negotiable Instruments, § 2, p. 358.) As relevant here, a "check" is a draft that is payable on demand and drawn on a bank. (§ 3104, subd. (f).) The "drawer" of a check is the person who is ordering payment (here, plaintiffs). (§ 3103, subd. (a)(3).) The "drawee" or "payor bank" is the bank on which the check is drawn-that is, the bank ordered by the check to make payment. (§§ 3103, subd. (a)(2), 4105, subd. (3).)

Usually, a check will be payable to the order of an identified person. That person is generally referred to as the "payee." (§ 3109, subd. (b); see Schweitzer v. Bank of America (1941) 42 Cal.App.2d 536, 543; see generally 4 Witkin, supra, Negotiable Instruments, § 17, pp. 373-374.) The identity of the payee is not determined by the name written on the check. Rather, the payee is determined by the intent of the person who signs the check as, or on behalf of, the drawer-that is, the signer. (§ 3110, subd. (a).) This rule is of particular importance when it is unclear from the face of the check to whom the check is payable. For example, if a check is made payable to "John Smith" and two or more people share that name, the intent of the signer will determine which John Smith is the payee. (U. Com. Code com. 1, 23A pt. 2 West‟s Ann. Com. Code (2002) foll. § 3110, pp. 213-214.) Similarly, if the signer intended that John Smith would be the payee but misidentified John Smith as "John Jones" on the check, the payee is nevertheless John Smith, not some other person named John Jones. (Ibid.) The intent of the signer controls even if the check is forged. For example, if an unauthorized employee forges the signature of his or her employer on a check drawn on the employer‟s account, the intent of the forger-signer determines the identity of the payee. (Ibid.; see generally 4 Witkin, supra, Negotiable Instruments, § 17, pp. 373-374; 6 Hawkland and Lawrence, Uniform Commercial Code Series (1999) [Rev] § 3-110:1, pp. 3-106 to 3-108.) For purposes of clarity, we use the term "intended payee" to denote the person to whom the signer intended the check to be payable. We use the term "named payee" to denote the person identified on the check as the payee.

The intended payee may negotiate a check by indorsing it and depositing it in his or her bank account. (See Mills v. U.S. Bank (2008) 166 Cal.App.4th 871, 885, fn. 16 (Mills).) The bank to which the intended payee negotiates the check-that is, the first bank to take the check-is the "depositary bank."*fn6 (§§ 3103, subd. (c), 4105, subd. (2) ["‟Depositary bank‟ means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter"]; see generally Hagedorn and Bailey, Brady on Bank Checks: The Law of Bank Checks (2008) ¶ 11.01 (Brady).) Some provisions of the Code use the term "collecting bank." That term includes a depositary bank, if the depositary bank is not also the payor bank. (§ 4105, subd. (5) [""Collecting bank‟ means a bank handling an item for collection except the payor bank"].) In this case, Wells Fargo was both the depositary bank and a ...

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