Case Name: James B. Little, et al. v. Heritage Bank of Commerce, et al.
Case No.: 2013-1-CV-241744

This case arises out of a fraud resulting in the loss of over $13 million by a large number of plaintiff trusts (“Plaintiffs”). (Complaint, ¶ 1.) Plaintiffs allege their losses were due to a misappropriation scheme designed by defendant Leo J. Kennedy (“Kennedy”) and carried out with the substantial assistance of defendant Heritage Bank of Commerce (“Heritage”) and other defendants. (Complaint, ¶ 1.) Kennedy, aided and abetted by and conspiring with the other defendants, induced Christine Backhouse, the then-Trustee of plaintiff trusts, to entrust him with access to trust funds. (Complaint, ¶ 1.) As a result, Kennedy and the entities he used Plaintiffs’ trust funds to control are out of business and Plaintiffs’ trust funds are lost. (Complaint, ¶ 1.)

The causes of action that still remain in the Complaint against Heritage following a demurrer by Heritage and an August 24, 2016 request for dismissal without prejudice by Plaintiffs are the third (Fraud and Deceit), seventh (Aiding and Abetting Fraud), and eighth (Aiding and Abetting Breach of Fiduciary Duty) causes of action.

There are three motions before the Court: [1] Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the William F. Joesten Living Trust, Dated December 8, 2003; [2] Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Vernon Patrick O’Neil Living Trust; [3] Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Marian E. Gilmore Revocable Living Trust. Each motion moves for summary judgment and, in the alternative, summary adjudication of each remaining cause of action.

The parties have filed objections to evidence. Code of Civil Procedure section 437c, subdivision (q) states:

In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. Objections to evidence that are not ruled on for purposes of the motion shall be preserved for appellate review.

Accordingly, the Court will not rule on objections that are not deemed material to the disposition of the motion.

I. Plaintiffs’ Omnibus Request for Judicial Notice

Plaintiffs request judicial notice of the January 13, 2016 “Order After Hearing on January 8, 2016” in James B. Little, et al. v. Heritage Bank of Commerce, et al. Superior Court of the State of California for the County of Santa Clara, Case No. 1-13-CV-241744. Plaintiffs’ request for judicial notice is GRANTED. (Evid. Code, § 452, subd. (d).)

II. Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the William F. Joesten Living Trust, Dated December 8, 2003

Plaintiffs allege Heritage allowed funds to be withdrawn from an account at Heritage for the Joesten Trust “through unauthorized wire transfers, forged checks, and improper requests for transfer. . . .” (Complaint, ¶¶ 3 and 9.) Heritage argues, inter alia, that Plaintiffs cannot recover for losses to the Joesten Trust because they have not shown any evidence of damages. Heritage contends that the Joesten Trustee has not identified or produced evidence of forged checks or unauthorized wire or electronic transfers.

Heritage relies on discovery responses to support this contention. (See Defendant and Cross-Complainant Heritage Bank of Commerce’s Separate Statement of Undisputed Material Facts and Supporting Evidence in Support of Motion For Summary Judgment, or Alternatively, Summary Adjudication of Issues Against Plaintiff James B. Little as Special Litigation Trustee of the William F. Joesten Living Trust Dated December 8, 2003, No. 34.) Heritage argues that it can rely on Plaintiffs’ factually devoid discovery responses to demonstrate that Plaintiffs have no evidence to establish damages due to an unauthorized transfer or forged check.

A party moving for summary judgment “is not limited to supporting its motion with affirmative evidence. It may also establish its prima-facie entitlement to judgment by demonstrating its opponent’s discovery responses are devoid of evidence to support an element of the opponent’s case.” (Rio Linda Unified School Dist. v. Superior Court (1997) 52 Cal.App.4th 732, 735.)

Heritage propounded interrogatories on Plaintiffs that included Special Interrogatory No. 1: “IDENTIFY EACH ‘unauthorized transfer’ of money belonging to the TRUST that you contend was made from an account maintained at HERITAGE BANK.” (Declaration of Joseph N. Demko in Support of Defendant and Cross-Complainant Heritage Bank of Commerce’s Motion for Summary Judgment or Alternatively Summary Adjudication of Issues as to Plaintiffs Listed on Schedule A to Notice of Motion (“Demko Decl.”), Exhibit 1.) In response, Plaintiffs provide evidence that there was a discrepancy of $22,500 connected to the Heritage Bank balance for the William F. Joesten Administrative Trust and that an additional $30,000 was transferred by check on January 8, 2008. (Separate Statement in Support of Opposition of Plaintiff James B. Little as Special Litigation Trustee of the William F. Joesten Living Trust, Dated December 8, 2003, to Defendant Heritage Bank of Commerce’s Motion for Summary Judgment or, in the Alternative, for Summary Adjudication of Issues, No. 34.)

While not especially detailed, Plaintiffs’ response to Special Interrogatory No. 1 responds to the interrogatory – it identifies the transfers of money belonging to the Joesten Trust from Heritage that Plaintiffs contend were unauthorized. Although no detailed information is given regarding the $22,500 amount, the $30,000 amount is provided together with a date of transfer. This is sufficient information for Heritage to investigate. Therefore, Heritage cannot shift its burden by contending the discovery response is factually devoid. Heritage makes no additional argument and presents no evidence regarding the transfers, such as evidence that these transfers did not occur or that they were not authorized. Consequently, Heritage does not meet its initial burden in this regard.

Heritage argues that the Joesten Trustee’s claims are governed by the UCC and that all common law causes of action in the Complaint arising out of alleged unauthorized electronic transfers are displaced by division 11 of the California Commercial Code and that any transfers arising out of unauthorized transfers made by check are displaced by division 4 of the California Commercial Code. Heritage’s arguments concerning divisions 4 and 11 of the California Commercial Code are essentially the same as those Heritage made previously in connection with the “test” motions for summary judgment that the Court heard and ruled on in January 2016. At that time, the Court ruled that intentional torts such as the fraud, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty causes of action are not displaced. Heritage provides no compelling reason for the Court to reach a different outcome now.

In sum, for the reasons discussed here, and in the Court’s prior order regarding the “test” motions for summary judgment, Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the William F. Joesten Living Trust, Dated December 8, 2003 is DENIED.

III. Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Vernon Patrick O’Neil Living Trust

Heritage’s motion with regard to the O’Neil Trust is similar to the motion concerning the Joesten Trust. Heritage argues that there are no damages and that no unauthorized electronic transfer or checks have been identified. Heritage again argues that it can rely on factually devoid discovery responses to shift the burden on summary judgment.

As discussed previously, Heritage propounded interrogatories on Plaintiffs that included Special Interrogatory No. 1: “IDENTIFY EACH ‘unauthorized transfer’ of money belonging to the TRUST that you contend was made from an account maintained at HERITAGE BANK.” (Demko Decl., Exhibit 1.) Heritage provides evidence that the O’Neil Trustee has not identified or produced evidence of forged checks or unauthorized wire or electronic transfers. (Defendant and Cross-Complainant Heritage Bank of Commerce’s Separate Statement of Undisputed Material Facts and Supporting Evidence in Support of Motion For Summary Judgment, or Alternatively, Summary Adjudication of Issues Against Plaintiff James B. Little as Special Litigation Trustee of the Vernon Patrick O’Neil Living Trust, No. 34.) In response, Plaintiffs provide evidence that a January 31, 2012 audit found a $119,785.82 discrepancy connected to the Heritage Bank balance for the O’Neil Trust. (Separate Statement in Support of Opposition of Plaintiff James B. Little as Special Litigation Trustee of The Vernon Patrick O’Neil Living Trust to Defendant Heritage Bank of Commerce’s Motion for Summary Judgment or, in the Alternative, for Summary Adjudication of Issues, No. 34.)

Plaintiffs’ response is sparse and the Court has some concern about the lack of specific evidence regarding the funds identified by Plaintiffs – e.g., the number of transfers, the dates of any transfers, etc. Nevertheless, the parties do not dispute that Kennedy carried out a misappropriation scheme to defraud a large number of trusts. In this instance, Plaintiffs have provided evidence of a discrepancy in the Heritage Bank balance for the O’Neil Trust. The Court finds that this evidence, looked at in conjunction with the totality of circumstances in this action, is sufficient to raise a triable issue of material fact as to whether funds were transferred without authorization and damages can be established.

Heritage’s only other argument in the moving papers is that the common law claims are governed by the UCC and that all common law causes of action in the Complaint arising out of alleged unauthorized electronic transfers are displaced by division 11 of the California Commercial Code and that any transfers arising out of unauthorized transfers made by check are displaced by division 4 of the California Commercial Code. As stated previously, this argument is without merit for the reasons stated by the Court in connection with the “test” motions for summary judgment that the Court heard and ruled on in January 2016.

In its reply papers, Heritage argues that even if division 11 does not displace the remaining causes of action, summary judgment is appropriate because there is no admissible evidence to support the fraud or aiding and abetting causes of action. This argument, raised for the first time on reply, is not properly before the Court. (American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453 [“Points raised for the first time in a reply brief will ordinarily not be considered, because such consideration would deprive the respondent of an opportunity to counter the argument.”].)

Accordingly, Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Vernon Patrick O’Neil Living Trust is DENIED.

IV. Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Marian E. Gilmore Revocable Living Trust

Heritage’s motion with regard to the Gilmore Trust is very similar to the motion concerning the O’Neil Trust. Heritage argues that there are no damages and that no unauthorized electronic transfer or checks have been identified. Heritage again argues that it can rely on factually devoid discovery responses to shift the burden on summary judgment.

As discussed previously, Heritage propounded interrogatories on Plaintiffs that included Special Interrogatory No. 1: “IDENTIFY EACH ‘unauthorized transfer’ of money belonging to the TRUST that you contend was made from an account maintained at HERITAGE BANK.” (Demko Decl., Exhibit 1.) Heritage provides evidence that the Gilmore Trustee has not identified or produced evidence of forged checks or unauthorized wire or electronic transfers. (Defendant and Cross-Complainant Heritage Bank of Commerce’s Separate Statement of Undisputed Material Facts and Supporting Evidence in Support of Motion For Summary Judgment, or Alternatively, Summary Adjudication of Issues Against Plaintiff James B. Little as Special Litigation Trustee of The Marian E. Gilmore Revocable Living Trust, No. 34.)

In response, Plaintiffs provide evidence that a January 31, 2012 audit found a $99,361.25 discrepancy connected to the Heritage Bank balance for the Gilmore Trust. (Separate Statement in Support of Opposition of Plaintiff James B. Little as Special Litigation Trustee of The Marian E. Gilmore Revocable Living Trust to Defendant Heritage Bank of Commerce’s Motion for Summary Judgment or, in the Alternative, for Summary Adjudication of Issues, No. 34.)

As was discussed in connection with the O’Neil Trust, the Court finds that Plaintiffs’ evidence is sufficient to raise a triable issue of material fact as to whether funds were transferred without authorization and damages can be established. Heritage’s other arguments are without merit for the reasons stated in connection with the O’Neil Trust motion.

Accordingly, Heritage’s Motion for Summary Judgment or, Alternatively, Summary Adjudication of Issues by Defendant and Cross-Complainant Heritage Bank of Commerce Against Plaintiff James B. Little as Special Litigation Trustee of the Marian E. Gilmore Revocable Living Trust is DENIED.