Trial
Court: Santa Clara County Superior Court Superior Court No.
1-15-CV-276708 Trial Judge: Hon. Maureen A. Folan
Counsel for Plaintiff/Appellant Prima Donna Development
Corporation Dincel Law Group Kim Omer Dincel
Counsel for Defendant/Respondent Wells Fargo Bank, N.A.
Severson & Werson Jan T. Chilton Marquis I. Wraight
DANNER, J.
Plaintiff
and appellant Prima Donna Development Corporation appeals
from a judgment confirming an arbitration award in favor of
defendant Wells Fargo Bank, N.A. Prima Donna challenges both
the order compelling arbitration and the denial of its motion
to vacate the arbitration award. We conclude the trial court
properly ordered the matter to arbitration and confirmed the
arbitration award. Accordingly, we affirm the judgment.
I.
Facts and procedural background[1]
Appellant
Prima Donna Development Corporation (Prima Donna) is a
California corporation that develops, builds, and manages
hotel properties in California and Oregon. Michael Chiu is
Prima Donna's president. In March 2007, Chiu opened
several commercial bank accounts on behalf of Prima Donna at
respondent Wells Fargo Bank, N.A. (Wells Fargo).
As part
of the paperwork for opening the accounts, Chiu either signed
or agreed to be bound by a number of agreements. One of these
agreements, the commercial account agreement, contained an
arbitration agreement, which stated, “Except as stated
in ‘No Waiver of Self-Help or Provisional Remedies'
below, [2] Company and Bank agree, at
Company's or Bank's request, to submit to binding
arbitration all claims, disputes and controversies, between
or among Company and Bank... whether in tort, contract or
otherwise arising out of or relating in any way to
Company's Account(s) and/or Service(s) and their
negotiation, execution, administration, modification,
substitution, formation, inducement, enforcement, default or
termination.”
Under a
section entitled “Governing Rules, ” the
arbitration agreement stated “Any arbitration
proceeding will (i) proceed in a location selected by the
American Arbitration Association (‘AAA') in the
state whose laws govern Company's Account; (ii) be
governed by the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice
of law provision in any of the documents between Company and
Bank; and (iii) be conducted by the AAA, or such other
administrator as Company and Bank shall mutually agree upon,
in accordance with the AAA's commercial dispute
resolution procedures.”
The
arbitration agreement also provided that “[t]he
arbitrator[] shall resolve all Disputes in accordance with
the substantive law of the state whose laws govern
Company's Account and may grant any remedy or relief that
a court of such state could order or grant within the scope
hereof and such ancillary relief as is necessary to make
effective any award.”
In
opening the commercial bank accounts for Prima Donna at Wells
Fargo, Chiu also signed a wire transfer services security
procedures agreement (wire transfer agreement) for each
account he opened. In each wire transfer agreement, Prima
Donna “agree[d] that it is bound by any Order, whether
or not authorized, issued in its name and accepted by Bank in
compliance with the security procedure selected by
Company.”[3] The wire transfer agreement specified
security procedures for transfers initiated by
“voice-initiated transfers” (presumably by phone)
and security procedures applicable to transfers initiated
through the Internet.
For
voice-initiated wire transfers, the wire transfer agreement
provided that Wells Fargo would call Chiu by telephone to
verify the order and, if Wells Fargo was unable to reach
Chiu, it would not process the wire transfer. Wells Fargo
also allowed for wire transfers initiated through the
Internet, using Wells Fargo's “commercial
electronic office portal” (CEO). In the case of an
Internet transfer, a “company administrator”
selected by Prima Donna could initiate a wire transfer
through CEO. The wires at issue in this appeal were initiated
through Wells Fargo's CEO portal.
As
described in the arbitration award, for wire transfer orders
placed through CEO, “[t]he Bank gives each Company
Administrator a token card and a PIN. The token card
generates a random security code every minute, which combines
with the PIN to create a unique Passcode. This Passcode is
used by the Bank to authenticate the identity of the Company
and/or person initiating the request. The purpose of all this
is to verify that the person initiating the transfer is
authorized by the Company to do so. Unlike the procedure for
transfer initiated by phone, this procedure does not require
that the specific transfer be confirmed by a phone call to
Chiu.”
The
arbitrator found “[t]he procedure for voice-initiated
transfers also protects [Prima Donna] against a Company
Administrator who initiates such transfers against Chiu's
wishes because Chiu would have to approve the transfer.
Because the CEO procedure only verifies the identity of the
Company Administrator, it does not protect Chiu against a
Company Administrator who initiates transfers without
Chiu's permission. However, the Bank also allows for
‘Dual Control.' If the customer elects Dual
Control, then the Company must name two Administrators, and
any transaction initiated by one must be approved by the
other before it goes through. Had Chiu elected to use Dual
Control with himself as one of the Company Administrators, he
would presumably have been notified before the transfers and
would have declined to approve them. Prima Donna elected not
to have Dual Control.”
In
January 2014, at the time of the disputed wire transfers,
Prima Donna's financial controller, Thuy Tran, served as
a company administrator for Prima Donna under the wire
transfer agreement. In January 2014, while Chiu was out of
the country, his Yahoo e-mail account was apparently hacked.
On January 23, 27, and 28, Tran received a series of e-mails
from a person whom she believed was Chiu, instructing her to
wire funds from Prima Donna's Wells Fargo bank accounts
to bank accounts overseas. Pursuant to these e-mails, Tran
requested (through the CEO portal) that Wells Fargo make a
number of wire transfers from Prima Donna's Wells Fargo
bank accounts. When Chiu returned to work on January 29, he
told Tran that he had not requested that she transfer this
money. Although Prima Donna called Wells Fargo to report the
fraud, most of the money had already been transferred and
could not be recovered. Prima Donna did not recover $638, 400
that had been wired from its Wells Fargo accounts.
Prima
Donna filed suit in the Santa Clara County Superior Court
(trial court) against Wells Fargo alleging two claims under
Commercial Code section 11202[4] titled “Breach of
Statutory Duty.” In the first cause of action, Prima
Donna alleged that Wells Fargo failed to follow the security
procedures set out in the wire transfer agreement. (§
11202, subd. (b)(i)-(ii).) Therefore, the wire transfers were
“ineffective and/or unenforceable” under section
11202, and Wells Fargo had the obligation of returning the
amount of the wire transfers to Prima Donna pursuant to
section 11204. In the second cause of action, Prima Donna
alleged that “Wells Fargo did not employ
‘reasonable commercial standards of fair dealing'
in its acceptance and processing” of the wire transfers
within the meaning of section 11202. (§ 11202, subd.
(c).) Therefore, Wells Fargo had the obligation of returning
the amount of the wire transfers to Prima Donna pursuant to
section 11204.
Wells
Fargo filed a motion to compel arbitration pursuant to the
arbitration agreement contained in the commercial account
agreement. Wells Fargo stated that in the arbitration
agreement the parties agreed to arbitrate all “disputes
arising between them.” In its motion, Wells Fargo
asserted that, “[b]y its terms” the arbitration
agreement is governed by the Federal Arbitration Act (FAA).
Wells Fargo argued that the trial court should order
arbitration because Prima Donna and Wells Fargo had entered
into an enforceable arbitration agreement, Prima Donna's
claims fell within the scope of the arbitration agreement,
and public policy favors arbitration. In addition to
requesting that the trial court order the parties to
arbitration, Wells Fargo also requested that the trial court
stay the civil action pending arbitration.
Prima
Donna filed an opposition to Wells Fargo's motion to
compel arbitration. Prima Donna did not dispute the
applicability of the arbitration agreement but argued that
“fraudulent wire transfers involving financial
institutions in California are strictly controlled by [the]
California Uniform Commercial Code (‘CUCC') section
11101 et seq. In interpreting [CUCC] 11101 et seq.,
the California Supreme Court has been unequivocal about the
exclusive nature of the statutory scheme controlling the
procedures, rights, obligations and remedies available to the
parties. (Zengen, Inc. v.
Comerica Bank (2007) 41 Cal.4th 239.)
Common law causes of action such as negligence or breach of
contract or the attempt to try and enforce a single
contractual provision between the parties such as an
arbitration clause are specifically inapplicable under CUCC
section 11101 et seq.”
Prima
Donna asserted that, because the Commercial Code and the
California Supreme Court's decision in Zengen
require that fraudulent wire transfers be addressed only
through the statutory provisions of Commercial Code section
11101et seq., the arbitration agreement was not enforceable
as to Prima Donna's claims against Wells Fargo.
In its
opposition to the motion to compel arbitration, Prima Donna
did not argue that the arbitration agreement was
unconscionable. Nor did Prima Donna reference the formation
of the arbitration agreement, except to note in passing that
Chiu had not separately signed or “acknowledged”
the arbitration clause. Prima Donna did not argue in the
trial court that the court should not enforce the arbitration
agreement because of the circumstances under which the
parties entered into it.
The
trial court conducted a hearing on Wells Fargo's motion
to compel arbitration and granted the motion. In its written
order, the trial court stated “There is no reason given
as to why an arbitrator cannot adjudicate a UCC claim. The
fact that UCC provisions displace common law provisions and
provide the law under which claims are analyzed (as
Zengen v. Comerica Bank (2007) 41 Cal.4th 239 makes
clear) is wholly unrelated to what type of fact finder can
apply that law to this dispute.” The trial court
concluded, “There is no legitimate reason why this
dispute must be heard by a Superior Court Judge in civil
court rather than an arbitrator through binding arbitration.
This matter is to be arbitrated, and the pending civil
action, including all discovery, shall be stayed until the
conclusion of arbitration.”
Prima
Donna filed in this court a petition for writ of mandate
challenging the order compelling arbitration, which this
court summarily denied.
Wells
Fargo and Prima Donna proceeded to an arbitration conducted
through the AAA. The parties engaged in prehearing discovery.
In the course of communications between the parties and the
appointed arbitrator, Prima Donna's counsel wrote to the
arbitrator expressing concern about conduct by Wells
Fargo's counsel relating to discovery and stating that
Chiu was “very concerned whether these proceedings have
now been so contaminated by Wells Fargo's inappropriate
conduct that he and [Prima Donna] ma[y] not be treated fairly
and objectively in this arbitration before you.”
The
following day, the assigned arbitrator recused himself and
resigned from the arbitration. The arbitrator wrote to
counsel and stated, “A party to an arbitration should
have complete confidence in the fairness and objectivity of
the process and the arbitrator, in the overall integrity of
the process, and confidence that each party will be treated
fairly and objectively. In this case it appears that [Prima
Donna] does not have that confidence. I do not reach or
discuss the basis for and/or validity of [Prima Donna's]
concerns, but, rather, accept that it has concerns. I deem
those concerns sufficient to justify my recusal.”
The AAA
appointed retired Justice Christopher Cottle to conduct the
arbitration. The parties continued to engage in discovery,
including a contested proceeding after which the arbitrator
granted Prima Donna's motion to compel production of
documents, broadening the relevant discovery to discovery
relating “to the relationship between Wells Fargo and
Prima Donna, going back to the beginning of their
relationship in 2007.” The arbitrator subsequently
conducted a three-day arbitration hearing, in which he heard
testimony from seven witnesses and received a number of
written exhibits into evidence.
The
arbitrator issued an eight-page written award finding in
favor of Wells Fargo and concluding under the principles set
out in sections 11201 et seq. that Wells Fargo was not liable
for Prima Donna's loss from the January 2014 wire
transfers. In the award, the arbitrator described the
background of the dispute and made a number of factual
findings. The arbitrator found that, at the time of the wire
transfers, Tran had the authority to initiate wire transfers
for Prima Donna's Wells Fargo bank accounts, either by
phone or through Wells Fargo's Internet portal, CEO. The
arbitrator also found that Tran had made the wire transfers
pursuant to Wells Fargo's CEO portal, although Tran had
called the phone number for CEO's customer service for
assistance.
Turning
to Prima Donna's claims against Wells Fargo, the
arbitrator considered Prima Donna's contention (alleged
in the first cause of action in its original complaint filed
in the trial court) that Wells Fargo's security
procedures were inadequate under section 11202, subdivision
(b) (hereafter section 11202(b)). Examining the definition of
“security procedure” under section 11201, the
arbitrator observed that “[t]he term does not include a
procedure for establishing that the customer is not being
defrauded by a third party into making the
transfer.”[5]
Turning
to Prima Donna's claims under section 11202(b), the
arbitrator reviewed the statutory language.[6] The
arbitrator summarized section 11202(b) as providing that,
even if a wire transfer order “is not actually
authorized, the customer will be bound by it if the bank
operated according to a security procedure and (1) the
customer agreed to the procedure; (2) the procedure is
commercially reasonable; and (3) the bank accepted the order
in good faith and in compliance with the security
procedure.”
The
arbitrator rejected Prima Donna's contention that Wells
Fargo's method of processing wire transfer orders placed
through the Internet was not commercially reasonable within
the meaning of section 11202(b). “[T]he security
procedure is not required to be a commercially reasonable
method of protecting the customer against being fraudulently
induced into making a wire transfer to a third party. It is
to be a commercially reasonable method of ‘providing
security against unauthorized payment orders.' The
procedure here is a commercially reasonable method of
ensuring that the payment order is actually coming from the
customer. Whether it is a commercially reasonable method of
ensuring that the customer is not being defrauded by a third
party is irrelevant because the bank is not required to
protect the customer from third parties who might
fraudulently induce the customer to transfer money to
them.”
The
arbitrator also rejected Prima Donna's argument (advanced
in the second cause of action in its original complaint filed
in the trial court) that Wells Fargo's Internet wire
transfer order system through CEO was not commercially
reasonable within the meaning of section 11202, subdivision
(c) (hereafter section 11202(c)) because it did not ensure
that the requested wire transfers were authorized by Chiu,
Prima Donna's president. The arbitrator noted that Chiu
had declined to adopt available security procedures,
including the “Dual Control” procedure for
transfers initiated through CEO. Had Chiu elected to set up
the dual control feature and named himself as one of the
company administrators, any transaction initiated by Tran
would have had to be approved by Chiu before Wells Fargo
fulfilled the wire order. Therefore, the arbitrator reasoned,
Wells Fargo complied with section 11202(c).[7]
The
arbitrator concluded, “Because Prima Donna initiated
the [wire] transfers, and Wells Fargo followed the agreed
procedures to ensure that the transfer was actually initiated
by Prima Donna, Wells Fargo is not liable for the
loss.” The arbitration award stated “Prima Donna
is awarded nothing against Wells Fargo. [¶] The
Administrative fees and expenses of the AAA and the
Compensation and expenses of the Arbitrator are to be borne
as incurred by the parties. [¶] This award determines
all issues submitted by the parties in this arbitration, and
any claim or contention not expressly decided, is
denied.”
The
arbitrator simultaneously issued a four-page written order
deciding certain factual issues, which Prima Donna had
contended the arbitrator should decide in its favor because
of Wells Fargo's failure (in Prima Donna's view) to
produce certain items in discovery. The arbitrator rejected
Prima Donna's requests.
A few
weeks after the arbitrator issued his order and award, Prima
Donna submitted a letter to the arbitrator. In the letter,
Prima Donna's counsel stated, “[i]n agreeing to
have you preside as arbitrator, Prima Donna... understood and
expected that you would be applying the current law
applicable to California Commercial Code (CCC) 11202 et
seq.” Prima Donna's counsel asserted that the
arbitrator omitted any analysis under section 11202(b)
“whether the security procedure was followed in
‘good faith.' ” Prima Donna noted
“[t]hat element was disputed primarily because of Wells
Fargo's failure to respond appropriately when it had
actual notice of the potentially fraudulent nature of the
first wire transfer payment order” through the “
‘risk' score” that Wells Fargo assigned the
transaction.
Prima
Donna stated, “[a]lthough we have no expectations that
you will change your decision, we do expect you to fulfill
your obligation for which you were retained in this matter.
Given this, it is respectfully requested that you complete
the legal analysis required by statute... and supplement your
decision with a complete analysis of ‘good faith'
as stated in CCC [section] 11202(b).” Wells Fargo
opposed Prima Donna's request, arguing that any ...