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State of California Ex Rel. Joseph Mccann et al v. Bank of America

January 11, 2011

STATE OF CALIFORNIA EX REL. JOSEPH MCCANN ET AL., PLAINTIFFS AND APPELLANTS,
v.
BANK OF AMERICA, N.A. ET AL., DEFENDANTS AND RESPONDENTS.



(San Francisco County Super. Ct. No. CGC08-474067)

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

CERTIFIED FOR PUBLICATION

Joseph McCann and Douglas Valdetero (Appellants) brought a qui tam action against Bank of America (BOA) in the name of the State of California under the California False Claims Act (CFCA; Govt. Code, § 12650 et seq.). The complaint alleged that BOA defrauded the State by failing to pay over to the State amounts that Appellants contend should escheat as abandoned or unclaimed property under the California Unclaimed Property Law (UPL; Code of Civ. Proc. § 1500 et seq.) The trial court sustained BOA's demurrer to Appellants' first amended complaint (FAC) without leave to amend on the basis that it failed to plead a CFCA claim with the required specificity and failed to establish a violation of the UPL. We agree and affirm.

I. Background*fn1

The Check Clearing Process

BOA serves as a "clearing" bank for checking transactions between other banks, as authorized by the Federal Reserve. The process of check clearing involves "the transfer of funds between banks when a check written [on an account at] one bank is deposited in [an account at] another bank." BOA functions as the check clearing bank for numerous "presenting banks" in California through BOA's checking clearing houses located in San Francisco and elsewhere.*fn2 BOA is compensated for its services by the presenting banks which use those services.

A presenting bank performs preliminary processing and coding of the checks. Checks are bundled and tallied by the presenting bank, and are encoded with a dollar amount on the check's magnetic ink character recognition line. A "batch ticket" is prepared that accompanies the bundle of checks to the clearing bank. The presenting bank also prepares a "cash letter," containing the dollar amount of the checks and the number of checks to be forwarded, along with the checks, to the clearing bank or the Federal Reserve. BOA receives the cash letter and accompanying checks from the presenting banks and enters them into its system, which tracks the number of checks and the total dollar amount of all checks as reported by the presenting bank.

BOA processes, clears, debits and credits millions of dollars in checks per day for its corresponding member banks. It processes about 14 percent of all checks nationwide. Twenty percent of the checks cleared by BOA are processed in the State of California. Approximately 75 to 85 percent of the checks processed by BOA's California clearing houses (in San Francisco and Los Angeles) originate from presenting banks situated in California and are payable to citizens, business and governments within the State. Ninety-nine point ninety-nine (99.99) percent of the checks are processed without error.

Debits and credits to the accounts of the presenting banks should balance on a daily basis, but do not always do so. As the check clearing bank, BOA is also responsible for clearing irregularities occurring during the check clearing process. Irregularities arise from such things as "free items" (a check processed by the presenting bank but not included in the batch total or batch listing by the presenting bank), "missing items" (a check detailed on the batch total or batch listing by the presenting bank but not captured, or captured for an improper amount, when the batch is run by the presenting bank), or "encoding errors" (where the presenting bank encodes a dollar amount on the bottom of the check which does not correspond to the amount written on the check).

Appellants alleged that BOA diligently researched errors which could result in debits (i.e., money due) to BOA, but pursued errors which would result in credits (i.e., money payable) to the presenting banks "much less regularly." They contended that, as a result of a policy decision by BOA not to research credits due at the end of each processing date to presenting banks, they became "unidentified credits" which could not be traced to their rightful owners. It was BOA's practice to transfer these monies to a suspense account for a short period of time, and to then appropriate them into income. Money from unidentified credits was projected and budgeted by BOA.

Appellants contend that these unidentified credits are subject to escheat to the State as unclaimed property subject to the UPL.

The California False Claims Act

The CFCA is intended "to supplement governmental efforts to identify and prosecute fraudulent claims made against state and local governmental entities. [Citation.]" (Rothschild v. Tyco Internat. (US) Inc. (2000) 83 Cal.App.4th 488, 494 (Rothschild).) It is modeled on the federal false claims act (31 U.S.C. § 3729 et seq.),*fn3 and "permits the recovery of civil penalties and treble damages from any person who '[k]nowingly presents or causes to be presented [to the state or any political subdivision] . . . a false claim for payment or approval.' ([Govt. Code,] § 12651, subd. (a)(1).)" (Rothschild, at p. 494.) A "claim" under the CFCA means "any request or demand . . . for money . . . [¶] . . . presented to any officer, employee, or agent of the state . . . ." (Govt. Code, § 12650, subd. (b)(1)(A).) False claims include "knowingly present[ing] or caus[ing] to be presented a false or fraudulent claim for payment or approval" (Govt. Code, § 12651, subd. (a)(1)), but also include "knowingly and improperly avoid[ing], or decreas[ing] an obligation to pay or transmit money or property to the state or to any political subdivision" (Govt. Code, § 12651, subd. (a)(7)). The first type is referred to as a traditional false claim and the latter is known as a reverse false claim. (See 1 Epstein et al., Unclaimed Property Law and Reporting Forms (2010) § 5.12A, p. 5-40.14 (rel. 47-9/2007) (hereafter 1 Epstein et al.).)

Both the CFCA and federal false claims legislation " 'ferrets out fraud on the government by offering an incentive to persons with evidence of such fraud to come forward and disclose that evidence to the government.' [Citations.]" (State of California v. Pacific Bell Telephone Co. (2006) 142 Cal.App.4th 741, 746 (Pacific Bell), fn. omitted.) "Subject to certain limitations, the [CFCA] permits a private person (referred to as a 'qui tam plaintiff' or a 'relator')[*fn4 ] to bring such an action on behalf of a governmental agency. ([Govt. Code,] § 12652, subds. (c)(1), (d).)" (Rothshild, supra, 83 Cal.App.4th at p. 495.) If, after the qui tam plaintiff gives notice of the claim to the Attorney General, no governmental prosecuting authority decides to proceed with the action, "the qui tam plaintiff has the right to do so subject to the right of the state or political subdivision to intervene . . . .[*fn5 ] ([Govt. Code,] § 12652, subds. (c)(8)(D)(iii), (f).) Regardless of who prosecutes the qui tam action, if it is successful, the qui tam plaintiff is entitled to a percentage of the recovery achieved in the case. ([Govt. Code,] § 12652, subd. (g)(2)-(5).)" (Rothschild, at p. 495.)

The crux of Appellants' claim is that, by failing to report and deliver the unidentified credits to the State under the UPL, BOA made a "reverse" false claim ...


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