Case Name:   Barry Elkins, et al. v. Heritage Bank of Commerce, et al.

Case No.:       1-14-CV-265103

 

This action arises from the alleged misappropriation of funds from a number of trusts, including those managed by plaintiff trustees, by defendant Leo J. (“Josh”) Kennedy (hereinafter, “Kennedy”).  Plaintiffs Barry Elkins and Robert Nigra (the “Trustees”) bring this action on behalf of the Hoven Foundation Trust, independently and as successor in interest to the Geraldine G. Hoven Administrative Trust (the “Trust”).  (SAC, ¶ 12.)  Plaintiffs allege that third party Christine Backhouse (“Backhouse”), who was engaged in a romantic relationship with Kennedy during the events giving rise to this action, previously served as trustee of the Trust.  (See SAC, ¶¶ 15 and 28.)  To manage the bank accounts for the various trusts and estates for which she acted as a fiduciary, Backhouse established a master account with defendant Heritage Bank of Commerce (“Heritage”), using defendant Backhouse Fiduciary Services, Inc. (“BFS”)—a corporation Backhouse owned and operated and of which Kennedy was an officer, director, and/or agent—as the account holder.  (See SAC, ¶¶ 14, 15, and 32.)

 

The master account encompassed a number of sub-accounts that held funds belonging to the particular trusts and estates managed by Backhouse, including the Trust.  (See SAC, ¶ 32.)  On December 14, 2009, Backhouse executed a wire transfer agreement with Heritage that required that both Kennedy and Backhouse approve any wire transfers.  (SAC, ¶ 33.)  At the time the agreement was signed, Joan Leis, Senior Vice President of Heritage, represented to Backhouse that Kennedy would not have the ability to transfer funds on his own, he would only have the ability to verify a wire transfer if Backhouse had initiated it and was unavailable when Heritage telephoned to verify it, and only Backhouse would have the authority to authorize wire transfers by executing wire transfer forms.  (SAC, ¶¶ 33-34.)  Ms. Leis further represented that under the wire transfer agreement as it applied to Heritage, Kennedy’s only role was to verify wire transfers previously executed by Backhouse.  (SAC, ¶ 35.)  Kennedy never executed a signature card with Heritage for the BFS master account or any of its sub-accounts.  (SAC, ¶ 36.)

 

In February 2012, Backhouse discovered that Kennedy had misappropriated funds from certain of the trusts Backhouse managed.  (See SAC, ¶ 37-39.)   In response to Backhouse’s request of February 7, 2012, Heritage produced fifty wire transfer forms showing outgoing transfers to various recipients, primarily corporations and LLCs located outside California.  (SAC, ¶ 42.)  Kennedy was the sole signatory on forty-nine of the fifty forms.  (Id.)    Plaintiffs allege that upon receipt of wire transfer forms bearing only Kennedy’s signature, Heritage would telephone the office of BFS to confirm that Backhouse was also authorizing the transfer, and Kennedy would inform Heritage that Backhouse was unavailable and he was consequently authorizing the transfer.  (See SAC, ¶ 45.)  Despite the fact that such single-approval transfers were not authorized by the wire transfer agreement, Heritage approved each of the transfers without question.  (Id.)  On February 15, 2012, Backhouse sent a letter to all of the beneficiaries that she believed were affected by these events, including the beneficiaries of the Trust.  (SAC, ¶ 49.)

On May 8, 2014, Plaintiffs filed the present action against Heritage, Kennedy, BFS, and a number of corporations that allegedly received unauthorized transfers from Kennedy.  Heritage is named as a defendant to the second through seventh causes of action for: (2) breach of contract—third party beneficiary; (3) fraud and deceit; (4) breach of fiduciary duty; (5) negligence; (6) aiding and abetting fraud; and (7) aiding and abetting breach of fiduciary duty.

 

Currently before the Court are Heritage’s demurrer to the complaint and motion to strike portions thereof.

 

Demurrer

 

Heritage demurs to the complaint as a whole on the grounds that its claims are brought by the Trust, which lacks the capacity to sue; it fails to state a cause of action; and it is uncertain.  (Code Civ. Proc., § 430.10, subds. (b), (e), and (f).)  Heritage also demurs specifically to the second through seventh causes of action on the grounds that each fails to state facts sufficient to constitute a cause of action.  (Code Civ. Proc., § 430.10, subd. (e)).

 

Request for Judicial Notice

 

In support of their opposition to Heritage’s demurrer, the Trustees submit a request for judicial notice of: (1) the Court’s (Hon. James P. Kleinberg) order overruling Heritage’s demurrer in part in the related case of Little v. Heritage Bank of Commerce, et al. (Super. Ct. Santa Clara County, No. 1-13-CV-241744) and (2) excerpts from the February 8, 2013 reporter’s transcript in In re the Matter of John Oliver Trust (Super. Ct. Santa Clara County, No. 1-07-PR-162316), another related case.  The request is DENIED in its entirety as these documents are not relevant to the Court’s determination of the pending motions.  (See People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422, fn. 2 [only relevant matters are subject to judicial notice].)

 

Demurrer to Complaint

 

Heritage argues that the complaint fails to state a claim because its common law claims are displaced by division 11 of the California Uniform Commercial Code (“CUCC”).  In support of its argument, Heritage cites Zengen, Inc. v. Comerica Bank (2007) 41 Cal.4th 239 (hereinafter “Zengen”), which held that division 11 displaced a bank customer’s claims for breach of contract, negligence, refund of payment, return of deposit, and money had and received arising from alleged fraudulent wire transfers.

 

As discussed in Zengen, division 11 of the CUCC applies to “fund transfers,” which are defined as “the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order.”  (CUCC, § 11104, subd. (a); Zengen, Inc. v. Comerica Bank, supra, 41 Cal.4th at p. 248.)   A “payment order” is defined as “an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary ….”  (CUCC, § 11103, subd. (a); Zengen, Inc. v. Comerica Bank, supra, 41 Cal.4th at p. 248.)  “Beneficiary,” in turn, is defined to mean “the person to be paid by the beneficiary’s bank,” and the statute provides similar definitions for “beneficiary bank,” “receiving bank,” and “sender.” (Id.)  Zengen held that these definitions applied to transactions apparently identical to those at issue here: transfers originated by a bank’s corporate customer’s agent through an order to wire funds to a beneficiary.  (Zengen, Inc. v. Comerica Bank, supra, 41 Cal.4th at p. 249.)

 

The Trustees contend that the Court cannot determine on demurrer that the transfers alleged in the complaint are “funds transfers” under division 11, because Heritage has made no showing regarding the details of each element of the transaction as defined by the statute.  By way of example, the Trustees point out that Heritage has not identified the “beneficiary banks” for the transactions at issue, and the complaint alleges only that transfers were made to various corporations and individuals, without mention of their banks.  However, it is unreasonable to infer from the allegations of the complaint that the transactions at issue did not involve a beneficiary bank simply because the beneficiary banks are not specifically identified therein.  Furthermore, the Trustees do not specify any reasonable inference to be drawn from the complaint that would establish that the transfers at issue are not “funds transfers.”  Thus, on its face, the complaint demonstrates that the transactions at issue were encompassed by division 11 of the CUCC.

 

Zengen held that “division 11 provides that common law causes of action based on allegedly unauthorized funds transfers are preempted in two specific areas: (1) where the common law claims would create rights, duties, or liabilities inconsistent with division 11; and (2) where the circumstances giving rise to the common law claims are specifically covered by the provisions of division 11.”  (Zengen, Inc. v. Comerica Bank, supra, 41 Cal.4th at p. 253.)  CUCC section 11202, subdivision (b) provides that “if a bank accepts an unauthorized payment order in good faith, it is not liable if a commercially reasonable security procedure was in place, and the bank followed it and any other applicable written agreement or instruction of the customer.”  (Id. at p. 250.)  Thus, division 11 specifically deals with the circumstances at issue here, where the Trustees contend that instructions were put in place that Heritage did not follow when it accepted the unauthorized payment orders at issue.  Like the plaintiff in Zengen, the Trustees “base[] each cause of action on [their] claim that [Heritage] should not have accepted the fraudulent payment orders.”  (Id. at p. 251.)  Accordingly, division 11 displaces each of the Trustee’s claims against Heritage.

 

While the Trustees contend that the demurrer should be overruled because Heritage did not specifically identify section 11202 as the provision of division 11 at issue, Heritage’s reliance on this section is obvious from its citation to Zengen.  Similarly, although the Trustees argue that Heritage fails to specify how Plaintiffs’ common law claims would create rights, duties, or liabilities inconsistent with division 11, this, too, is obvious from a reading of section 11202, which establishes limitations on a bank’s liability that are not incorporated into the Trustee’s common law claims, and it is not required for Heritage to show that the claims here are within the first area of displacement defined by Zengen where they fall within the second area (circumstances covered by the provisions of division 11) as discussed above.

 

Finally, Heritage also contends that any claims arising from forged checks are uncertain and are barred by the statute of limitations.  The Court finds only a single reference to forged checks in the complaint, in an introductory paragraph stating generally that “Kennedy was allowed to loot Plaintiff’s accounts through unauthorized wire transfers, forged checks, and improper requests for transfer.”  (Complaint, ¶ 3.)  The Trustees do not contend that the complaint states a claim based on forged checks, but argue that it is not clear from the face of the complaint that the statute of limitations has run on such a claim, and “a general demurrer does not lie because Plaintiffs’ allegations of Heritage’s wrongdoing are far broader than forged checks.”  (Opp., p. 8.)  Given the single vague allegation as to forged checks, the complaint does not state a claim based on forged checks, but neither is it clear that such a claim is barred.

 

In accordance with the above, the demurrer is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND as to each cause of action on the ground that it fails to state a claim.

 

Motion to Strike

 

In light of the above rulings, Heritage’s motion to strike is MOOT.