Opinion
B312669
02-14-2022
KARIE HIRONS, Plaintiff and Appellant, v. U.S. BANK NATIONAL ASSOCIATION, Defendant and Respondent.
Law Offices of John A. Belcher and John A. Belcher for Plaintiff and Appellant. Shepard, Mullin, Richter & Hampton, Sascha Henry, Valerie E. Alter and Juthamas Suwatanapongched for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County (Los Angeles County Super. Ct. No. 20STCV26680), Holly J. Fujie, Judge. Affirmed.
Law Offices of John A. Belcher and John A. Belcher for Plaintiff and Appellant.
Shepard, Mullin, Richter & Hampton, Sascha Henry, Valerie E. Alter and Juthamas Suwatanapongched for Defendant and Respondent.
EDMON, P. J.
Plaintiff Karie Hirons (Hirons) appeals a judgment in favor of defendant U.S. Bank National Association (U.S. Bank). The court ordered judgment in favor of U.S. Bank after sustaining U.S. Bank's demurrer with leave to amend, and Hirons did not amend the complaint. We conclude that the trial court properly sustained the demurrer as to each of Hirons's causes of action. Accordingly, we affirm the judgment.
BACKGROUND
I. Prior proceedings.
A. Hirons's sexual assault suit.
Hirons retained attorney Lisa Maki (Maki) in August 2016 to represent her in a sexual assault suit (the sexual assault suit). Hirons and Maki entered into a retainer agreement, under which Maki was entitled to 40 percent of Hirons's recovery.
In April of 2018, Hirons settled the sexual assault suit for $450,000 pursuant to a written settlement agreement. The settlement agreement provided that in exchange for the settlement payment, Hirons agreed to dismiss her action and release the defendants from any and all claims against them. The settlement agreement further provided that "[Hirons] and [her] attorney [Maki], for themselves and for each other, . . . represent and warrant that no settlements funds will be transferred to [Hirons] until all [third party] liens and similar claims have been determined and satisfied by them, and each of them," and "[i]t is understood and agreed that [defendants] shall not be responsible for . . . any lien . . . beyond the consideration directed to go to [Hirons] and [Hirons's] attorney, as mentioned herein, who will hold the monies in trust and/or a set-aside account until such are satisfied."
The settlement check was made out to both Hirons and Maki and was delivered to Maki. Maki signed the check via a stamped signature and submitted it to U.S. Bank for deposit without Hirons's signature. U.S. Bank accepted the check for deposit into Maki's client trust account even though Hirons did not sign the check. Hirons alleges that Maki thereafter paid her only $70,000 of the $270,000 to which Hirons was entitled.
B. Hirons's suit against Maki.
In May 2019, Hirons filed suit against Maki to recover monies that Maki owed her from the settlement. Maki failed to answer the complaint, and in September 2020, Hirons obtained a default judgment against Maki for $1,649,302.
II. The present action.
A. The operative complaint.
On July 15, 2020, Hirons filed the present action against U.S. Bank alleging that U.S. Bank accepted the settlement check made out to both Hirons and Maki, with only Maki's signature. Hirons alleged five causes of action against U.S. Bank: (1) conversion (Civ. Code, § 3336), (2) elder abuse, (3) payment on unauthorized check (Cal. U. Com. Code, §§ 3403, 4401), (4) negligence, and (5) breach of contract.
U.S. Bank demurred to the complaint. The trial court sustained the demurrer with leave to amend.
On November 16, 2020, Hirons filed the operative first amended complaint (FAC). The FAC was nearly identical to the original complaint, but it additionally alleged that Hirons did not authorize Maki to deposit the check into Maki's account, and that "[a]ll of the promises and representations made by Maki to procure Hirons' 'consent' were false." Hirons also attached as exhibits to the FAC (1) the settlement agreement in the sexual assault suit, and (2) Hirons's declaration filed in the suit against Maki. As relevant here, Hirons's declaration stated as follows:
". . . On April 27, 2018, I agreed to settle the [sexual assault suit] for $450,000 after Maki represented to me that the settlement offer was fair. . . .
". . . After the [sexual assault suit] settled, I asked Maki to use the settlement funds to pay off the High Rise Loan. I also asked Maki to hold on to the rest of the settlement funds until I could retain a financial planner. As of that time, the payoff amount for the High Rise Loan was $7,599.00.
The "High Rise Loan" was a loan Hirons obtained to help pay for her living expenses while the sexual assault suit was pending.
". . . Maki agreed to pay off the High Rise Loan. Maki represented that the remainder of the settlement funds would be placed in a client trust account. Maki did, however, disburse approximately $70,000 for my living expenses.
". . . In November 2018, I received a call from High Rise Financial indicating that the High Rise Loan was still outstanding. Prior to this call, I did not know that, contrary to Maki's representation, she had not paid off the High Rise Loan.
". . . In November and December 2018, I demanded that Maki pay off the High Rise Loan and disburse to me the remainder. Maki replied that she will 'take care of everything.' Maki, however, never paid off the High Rise Loan. To date, Maki has only disbursed to me $70,000.
". . . After I became aware of Maki's fraud, I conducted an investigation and learned that Maki's misappropriation of my funds was part of a pattern. In November 2018, I discovered that Maki was ordered ineligible to practice law by the State Bar of California . . . ."
B. Demurrer and judgment.
U.S. Bank filed a demurrer and motion to strike the FAC. U.S. Bank asserted, among other things, that all of Hirons's causes of action failed because the exhibits to the FAC, including Hirons's January 2020 declaration in her suit against Maki, showed that Maki had Hirons's consent to deposit and disburse funds from the settlement check. Further, Hirons "made no demand on U.S. Bank until July 2020 when she filed the lawsuit. By then, over two years had passed since Maki deposited the check, and more than a year had passed since [Hirons] sued Maki. . . . Nowhere in the FAC does [Hirons] explain her inaction or delay in notifying U.S. Bank of Maki's purported fraud or conversion of [Hirons's] funds."
Hirons opposed the demurrer. She urged that she did not authorize Maki to deposit the settlement check before U.S. Bank accepted it, and the events after the deposit were irrelevant to U.S. Bank's breach because "they came after the fact and [were] procured by fraud."
On January 11, 2021, the trial court sustained U.S. Bank's demurrer. The court explained: "The FAC is premised on Defendant's negligently giving Maki the $450,000.00 in settlement funds and allowing Maki to deposit the funds in an account, allegedly without Plaintiff's knowledge or consent. According to Plaintiff's declaration in the [suit against Maki], of which the Court can and does take judicial notice, Plaintiff consented to Maki obtaining and holding the settlement funds. Plaintiff's declaration . . . states that Maki had authority to obtain the settlement funds on behalf of Plaintiff and Maki could possess such settlement funds. The basis for the FAC fails because Plaintiff's declaration in the [suit against Maki] shows that Plaintiff consented to and had knowledge of Maki's obtaining the settlement funds."
The court granted Hirons leave to amend her complaint, but Hirons did not pursue further amendment. On March 10, 2021, the court entered judgment in U.S. Bank's favor. Hirons timely appealed.
DISCUSSION
I. Standard of review.
"' "On appeal from an order of dismissal after an order sustaining a demurrer, the standard of review is de novo: we exercise our independent judgment about whether the complaint states a cause of action as a matter of law."' (Villafana v. County of San Diego (2020) 57 Cal.App.5th 1012, 1016.)" (Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, 696.) In reviewing the sufficiency of a complaint, we accept as true all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)"' "[F]acts appearing in the exhibits attached to the complaint will also be accepted as true, and if contrary to the allegations in the pleading, will be given precedence." '" (Moran v. Prime Healthcare Management, Inc. (2016) 3 Cal.App.5th 1131, 1145-1146.) With regard to affirmative defenses, "' "[i]t must appear clearly and affirmatively that, upon the face of the complaint [and matters of which the court may properly take judicial notice], the right of action is necessarily barred." '" (Favila v. Katten, Munchin Rosenmann LLP (2010) 188 Cal.App.4th 189, 224.) When" 'a plaintiff is given the opportunity to amend [her] complaint and elects not to do so, strict construction of the complaint is required and it must be presumed that the plaintiff has stated as strong a case as [she] can.'" (Drum v. San Fernando Valley Bar Assn. (2010) 182 Cal.App.4th 247, 252.)
II. Hirons's claims for conversion and payment on unauthorized check (first and third causes of action).
A. A bank is liable for conversion under the California Uniform Commercial Code if it accepts a check on the unauthorized endorsement of a payee.
"' "Conversion is the wrongful exercise of dominion over the property of another."' (Hernandez v. Lopez (2009) 180 Cal.App.4th 932, 939; accord, Hester v. Public Storage (2020) 49 Cal.App.5th 668, 680.)" (Chen v. PayPal, Inc. (2021) 61 Cal.App.5th 559, 576.) "To prove conversion, a plaintiff must establish three elements: (1) 'plaintiff's ownership or right to possession of property,' (2) 'defendant's wrongful act toward or disposition of the property, interfering with plaintiff's possession,' and (3) damages." (Fong v. East West Bank (2018) 19 Cal.App.5th 224, 231; see also Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.)
California Uniform Commercial Code (the Code) section 3420 governs the conversion of negotiable instruments. (§ 3420, subd. (a); AmerUS Life Ins. Co. v. Bank of America, N.A. (2006) 143 Cal.App.4th 631, 638-639.) It provides that a negotiable instrument is converted "if . . . a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment" (§ 3420, subd. (a).) Section 3420 has been held to apply where, as here, one co-payee endorses a check and the other does not. (See Gil v. Bank of America, N.A. (2006) 138 Cal.App.4th 1371, 1377 [payee has cause of action under the Code if the endorsement "was forged, unauthorized, or missing"].) As the comments to section 3420 explain: "This [section] covers cases in which an instrument is payable to two persons and the two persons are not alternative payees, e.g., a check payable to John and Jane Doe. . . . [T]he check can be negotiated or enforced only by both persons acting jointly. Thus, neither payee acting without the consent of the other, is a person entitled to enforce the instrument. If John indorses the check and Jane does not, the indorsement is not effective to allow negotiation of the check. If Depositary Bank takes the check for deposit to John's account, Depositary Bank is liable to Jane for conversion of the check if she did not consent to the transaction. John, acting alone, is not the person entitled to enforce the check because John is not the holder of the check." (Cal. U. Com. Code com. 1, reprinted in West's Ann. Cal. Com. Code, foll. § 3420.)
All subsequent undesignated statutory references are to the California Uniform Commercial Code.
Notwithstanding the foregoing, it is well-settled" 'that there can be no conversion where an owner either expressly or impliedly assents to or ratifies the taking, use or disposition of his property.' (Farrington v. A. Teichert & Son, Inc. (1943) 59 Cal.App.2d 468, 474.)" (Chen v. PayPal, Inc., supra, 61 Cal.App.5th at p. 576.) As relevant here, thus, a bank is not liable to a payee for depositing a check without the payee's endorsement if the payee either consented to the deposit before it was made or ratified the deposit after learning of it. (Ibid.; see also § 3403, subd. (a) ["An unauthorized signature may be ratified for all purposes of this division."]; Spear v. Wells Fargo Bank, N.A. (9th Cir. 1997) 130 F.3d 857, 861-862 [no conversion if payee's agent had authority to deposit checks on payee's behalf without payee's endorsement].)
In the present case, neither Hirons's first nor third cause of action alleges a claim under section 3620; instead, the first cause of action purports to allege a claim for conversion pursuant to Civil Code section 3336, and the third cause of action purports to allege payment on an unauthorized check pursuant to sections 3403 and 4401. As our colleagues in Division Two of this District have explained, however, if a payee's endorsement on a check is forged, unauthorized, or missing, the payee's sole remedy against the depository bank lies in a conversion action under section 3420. (Gil v. Bank of America, N.A., supra, 138 Cal.App.4th at p. 1377; see also InjuryLoans.com LLC v. Buenrostro (D. Nev. 2021) 529 F.Supp.3d 1178, 1185 [citing Gil]; AmerUS Life Ins. Co. v. Bank of America, N.A., supra, 143 Cal.App.4th at p. 643 [§ 3420 "provides a comprehensive framework for allocating losses when a check bearing a fraudulent indorsement is paid"].) We therefore will construe Hirons's first and third causes of action to assert a conversion claim under section 3420.
B. U.S. Bank established as a matter of law that Hirons ratified Maki's deposit of the settlement check into her client trust account.
There is no dispute that the FAC alleges the essential element of a cause of action for conversion under section 3420- i.e., that the settlement check was made payable to" 'Karie Hirons and her Attorney, Law Offices of Lisa L. Maki, '" that U.S. Bank accepted the settlement check for deposit without Hirons's signature, and that Hirons never "desired nor authorized Maki to deposit the settlement check into Maki's account." U.S. Bank contends, however, that the exhibits to the FAC-namely, the settlement agreement and Hirons's declaration-establish as a matter of law that Hirons either consented to or ratified the deposit of the settlement check into Maki's client trust account. We agree.
Because we conclude that Hirons ratified the deposit of the settlement check into Maki's client trust account, as discussed more fully below, we do not consider whether Hirons also consented to the deposit.
1. Hirons ratified Maki's deposit of the settlement check.
"Ratification is an agency doctrine. 'Ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him. [Citations.]' (Rakestraw v. Rodrigues (1972) 8 Cal.3d 67, 73 (Rakestraw); see Civ. Code, § 2307 ['An agency may be created, and an authority may be conferred, by a precedent authorization or a subsequent ratification']; 3 Witkin, Summary of California Law (11th ed. 2017) Agency and Employment, § 149, pp. 203-204 ['An agent, at the time he or she does an act, may be without authority, actual or ostensible; but the act may be rendered valid and binding on the principal, as of the time the unauthorized act was done, if the principal ratifies and thus gives effect to it'].)" (City of Brentwood v. Department of Finance (2020) 54 Cal.App.5th 418, 436 (City of Brentwood).) Where an act undertaken without authorization is subsequently ratified, "the effect of ratification is that the authority which is given to the purported agent relates back to the time when he performed the act." (Rakestraw v. Rodrigues, supra, 8 Cal.3d at p. 73; see also City of Brentwood, at p. 437 [quoting Rakestraw]; La Jolla Mesa Vista Improvement Assn. v. La Jolla Mesa Vista Homeowners Assn. (1990) 220 Cal.App.3d 1187, 1198, fn. 11 ["when an act has been ratified, it is treated as if originally authorized].)
A purported agent's act may be adopted either expressly or by implication" 'based on conduct of the purported principal from which an intention to consent to or adopt the act may be fairly inferred, including conduct which is "inconsistent with any reasonable intention on his part, other than that he intended approving and adopting it." '" (Behniwal v. Mix (2005) 133 Cal.App.4th 1027, 1040.) Voluntary retention of benefits with knowledge of the unauthorized nature of the act constitutes ratification; acquiescence or silence may also constitute ratification. (Common Wealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App.3d 1014, 1026-1027; see also Estate of Stephens (2002) 28 Cal.4th 665, 673 [an individual ratifies an act by" 'adopt[ing] in some manner as his own an act which was purportedly done on his behalf by another person' "].)
Our Supreme Court addressed ratification of a forged signature in Rakestraw, supra, 8 Cal.3d 67. There, the plaintiff's husband forged her signature on a promissory note and deed of trust in order to obtain funds for a business venture; defendant Rodrigues, a close friend and business associate of her husband, participated in the fraudulent scheme by telling the notary that he had seen plaintiff sign the note and deed of trust. (Id. at pp. 70-71.) The plaintiff learned of the forgery a few days later, but she did not seek a remedy against her husband and Rodrigues for more than three years, when the business venture had failed and the holder of the promissory note sought to enforce it. (Id. at pp. 71-72.) In the interim, the plaintiff "benefited financially through corporate operations made possible by the loan"-specifically, her husband's paychecks from the corporation were deposited into a bank account held jointly by plaintiff and her husband, and the corporation made payments on a loan secured by a deed of trust on plaintiff's property and paid taxes on the property. (Id. at p. 72.) Under these circumstances, the court held "as a matter of law that [plaintiff] affirmatively endorsed the fraudulent acts of [her husband and Rodrigues] in anticipation of benefits to be gained and sought to negate her endorsement thereof only when benefits failed to materialize as anticipated." (Id. at p. 75, italics added.) The court therefore reversed the jury's verdict for the plaintiff and ordered judgment to be entered for Rodrigues. (Id. at p. 76.)
In so concluding, the court rejected the plaintiff's contention that her approval of the transaction and acceptance of the benefits was involuntary because at the time she discovered the forgeries she could not have rescinded the transaction by returning the proceeds of the loan because they had already been spent. The court explained: "There is no merit in this contention. Whether or not she was in a position to return the proceeds of the loan, she could have disavowed the transaction and relieved herself of potential liability by informing [the note holder and title insurer] of the forgeries." (Rakestraw, supra, 8 Cal.3d at p. 75.)
In the present case, as in Rakestraw, although Hirons alleges that she did not authorize Maki to deposit the settlement check into Maki's client trust account, Hirons concedes in her declaration that "[a]fter the Underlying Lawsuit settled, I asked Maki to use the settlement funds to pay off the High Rise Loan . . . [and] to hold on to the rest of the settlement funds until I could retain a financial planner." Because Maki could not have used the settlement funds to pay off the High Rise loan without depositing those funds into an account over which Maki had control, Hirons had to have known of the deposit by the time she made this request. And while Hirons's declaration does not specify precisely when she asked Maki to pay off the loan, she had to have done so sometime prior to November 2018, when she says she learned that Maki had not paid off the loan. Thus, Hirons's declaration establishes that Hirons knew Maki had deposited the settlement check no later than November 2018, more than 18 months before she filed the present action.
Citing Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604-605 (Webb), Hirons appears to suggest that the trial court erred in taking judicial notice of her declaration. In fact, Webb holds to the contrary, stating that a court may take judicial notice "of records such as admissions, answers to interrogatories, affidavits, and the like, when considering a demurrer . . . where they contain statements of the plaintiff or his agent which are inconsistent with the allegations of the pleading before the court." (Ibid., italics added.) In any event, this principle has no application here, where Hirons attached her declaration as an exhibit to her FAC; accordingly, the trial court correctly considered its contents in sustaining the demurrer. (See Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761, 767 ["[w]hile the 'allegations [of a complaint] must be accepted as true for purposes of demurer,' the 'facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence' "]; SC Manufactured Homes, Inc. v. Liebert (2008) 162 Cal.App.4th 68, 83 ["[i]f the allegations in the complaint conflict with the exhibits, we rely on and accept as true the contents of the exhibits"].)
Hirons's declaration also clearly establishes that Hirons benefited financially from Maki's deposit of the settlement check. Hirons declares that Maki disbursed to her "approximately $70,000 for my living expenses"-a disbursement that was possible only after Maki deposited the settlement check. Although the disbursement was significantly less than Hirons expected to receive from the settlement, she nonetheless received a clear financial benefit that she could not have received absent Maki's deposit of the settlement check. Hirons's knowledge of the deposit, coupled with her failure to inform the bank that the check had been deposited without her signature and her subsequent acceptance of $70,000 of the settlement proceeds, constitutes ratification of the deposit under Rakestraw.
Hirons contends that that she could not have consented to the deposit of the settlement check into Maki's trust account because "she [n]ever authorized Maki to negotiate the check" and "[t]he events after [Maki's] receipt of the check are irrelevant." Not so. As we have said, a principal may be charged with the unauthorized acts of her purported agent if she ratifies those acts after learning of them-and "the effect of a ratification is that the authority which is given to the purported agent relates back to the time when he performed the act." (Rakestraw, supra, 8 Cal.3d at p. 73.) Thus, the trial court correctly concluded that Hirons ratified Maki's deposit of the settlement check into her client trust account.
2. Hirons's ratification was not vitiated by fraud.
Hirons contends that even if she ratified Maki's action by accepting a portion of the settlement check, her purported ratification was invalid because it was obtained by Maki's fraudulent representations that the settlement funds would be used for Hirons's benefit. It is true, as Hirons suggests, that "[o]rdinarily, the law requires that a principal be apprised of all the facts surrounding a transaction before he will be held to have ratified the unauthorized acts of an agent." (Reusche v. California Pacific Title Ins. Co. (1965) 231 Cal.App.2d 731, 737 (Reusche); see also Rakestraw, supra, 8 Cal.3d at p. 73 ["It is essential . . . that the act of adoption be truly voluntary in character."].) Courts have held this rule not to apply, however, in circumstances like the present one, where a principal's apparent ratification, although fraudulently induced, compromises the rights of a third party.
The Court of Appeal considered this issue in Merry v. Garibaldi (1941) 48 Cal.App.2d 397 (Merry). There, the plaintiff's son-in-law obtained a loan secured by the plaintiff's property by forging the plaintiff's signature on a promissory note and deed of trust. (Id. at p. 398.) The son-in-law then forged the plaintiff's signature on a check made out to the plaintiff in order to obtain the loan proceeds. (Id. at pp. 398-399.) The plaintiff was unaware of the loan and encumbrance until her son-in-law missed a loan payment; she confronted her son-in-law, who admitted to the forgery and promised to pay off the loan as soon as possible. (Id. at p. 400.) The plaintiff did not immediately inform the noteholder of the forgery, but sometime later sued the noteholder to cancel the deed of trust and promissory note. The trial court entered judgment for the noteholder, and the plaintiff appealed. (Id. at p. 398.)
The Court of Appeal affirmed the judgment, explaining that the plaintiff had a duty to immediately inform the noteholder when she first learned of the forgery. (Merry, supra, 48 Cal.App.2d at p. 401.) Because she failed to do so, she deprived the noteholder of the opportunity to file an action against her son-in-law or to recoup its loss from the bank before the expiration of the statute of limitations. Under these circumstances, the court said, "[e]quity and justice should not compel [the noteholder] to bear the loss." (Id. at p. 403.)
The court reached a similar conclusion in Reusche, supra, 231 Cal.App.2d 731. There, the plaintiff was a property owner whose agent, without the plaintiff's knowledge, obtained a loan secured by the plaintiff's property by forging the plaintiff's name on a promissory note and deed of trust. (Id. at p. 734.) The agent arranged to have the loan proceeds mailed to him by the title company, and then forged the plaintiff's signature on the title company's check in order to deposit the loan proceeds into his own bank account. The plaintiff was made aware of the forged check and asked her agent about it, but she was satisfied by his false explanation and did not stop payment on the check. The plaintiff ultimately learned of the loan and encumbrance a year later, when the agent stopped making payments on the loan. (Id. at p. 735.)
Plaintiff sued the noteholder to determine the validity of the forged promissory note and deed of trust, and the noteholder cross-complained, asserting that the plaintiff was bound by her agent's illegal acts. The trial court entered judgment for the noteholder but then granted the plaintiff's motion for a new trial. The noteholder appealed, and the Court of Appeal reversed and reinstated the judgment, finding that the plaintiff had ratified her agent's forgery. (Reusche, supra, 231 Cal.App.2d at p. 739.) The court noted that although ordinarily a principal will be found to have ratified the unauthorized acts of an agent only if she was apprised of all relevant facts, "where ignorance of the facts arises from the principal's own failure to investigate and the circumstances are such as to put a reasonable man on inquiry [citation], he may be held to have ratified despite lack of full knowledge." (Id. at p. 737.) In the present case, "when the bank showed her the check from the title company before crediting the amount to [the agent's] account, she had full knowledge of the check and the forgery of her endorsement. We think that her failure at this point to make reasonable inquiries of the title company and lender practically insured the completion of the fraudulent transaction, that she should have realized the apparent risk of the agent's additional wrongdoing, and that her inaction and her conduct thereafter in accepting the benefits constituted ratification under the foregoing rules." (Id. at p. 738.)
Finally, in Crittenden v. McCloud (1951) 106 Cal.App.2d 42 (Crittenden), a wife forged the signature of her husband (who was then in prison) on a deed transferring the couple's jointly held house in Oakland to the wife alone. The wife then sold the Oakland house to defendant McCloud (purchaser) and used the proceeds of the sale to buy a new house in the name of both husband and wife. (Id. at pp. 44-45.) More than a year later, the husband deeded a one-half interest in the Oakland house to plaintiff Crittenden, his attorney. (Id. at p. 44.)
Crittenden sued the purchaser to quiet title in the house, and the trial court entered judgment for the purchaser. (Crittenden, supra, 106 Cal.App.2d t p. 46.) Crittenden appealed, and the Court of Appeal affirmed the judgment. The court concluded that Crittenden stood in the shoes of the husband, and thus he could have no greater rights against the purchaser than the husband had. Although the husband did not learn of the sale of the house until after the purchaser had already paid the purchase price, the purchaser "probably could have salvaged the purchase price had [husband] told him of the forged deed as soon as [husband] learned of it. [The purchaser] could then have proceeded against [wife] for a recovery. It was [husband's] duty to speak at this time." (Crittenden, supra, 106 Cal.App.2d at p. 48.) Instead, the husband did not repudiate the sale for more than sixteen months, after he had "joined in the use of $2,000 of it for the purchase of new home taken in his name as well as his wife's." (Id. at p. 49.) Under these circumstances, "[a]lthough the sale had already taken place before [husband] appeared on the scene, his actions contributed to defendant's loss because they prevented defendant from learning the true facts at a time when he might have obtained relief and before he expended further moneys on the property." (Id. at p. 50.)
The present case is analogous to Merry, Reusche, and Crittenden. In each of these cases, an innocent principal learned of misconduct by a purported agent, but did not immediately inform third parties of the misconduct because they were misled by the agents' misrepresentations into believing that the wrongdoing would be corrected. The Courts of Appeal held that notwithstanding the principals' reliance on the false representations of their agents, the principals could not recover against the third parties because their delay in alerting the third parties to the misconduct constituted ratification of it.
Similarly, in this case, by her own admission, Hirons learned by November 2018 that U.S. Bank had accepted the settlement check for deposit into Maki's bank account without Hirons's signature. Had Hirons immediately advised U.S. Bank of the improper deposit, the bank might have been able to stop payment on the check or freeze the funds in Maki's account. Hirons did not advise the bank, however, because she accepted Maki's false representation that Maki would pay off Hirons's loan and hold the remainder of the settlement in trust for her benefit. It was only when Maki failed to do as she promised that Hirons finally alerted U.S. Bank of the improper deposit by filing the present lawsuit. By that time, 18 months had passed since Hirons's discovery, and U.S. Bank had lost the opportunity to attempt to recoup the funds.
Accepting as true Hirons's allegations, as we must on demurrer, she was an innocent victim of Maki's wrongdoing and was misled by Maki's fraudulent misrepresentations. But that was equally true in Merry, Reusche, and Crittenden, where each of the principals was victimized by the wrongdoing of a purported agent and then was persuaded by the agents' false promises not to disclose the wrongdoing. Nonetheless, in each of those cases judgment was entered in favor of the third party and against the principal because the principal's reliance on the agent's false representations prevented the third party from timely learning of agent's wrongdoing.
Hirons contends ratification is a question of fact, and thus that these and similar cases are distinguishable from the present case because they followed trials, while the present appeal follows an order sustaining a demurrer. We do not agree. While the present case is subject to a different standard of review than were the cited cases, the essential legal issue is the same- namely, whether Hirons or U.S. Bank should bear the loss occasioned by Maki's fraudulent conduct. As to that issue, the relevant facts-that Hirons did not promptly inform U.S. Bank that the settlement check had been deposited without Hirons's signature or consent-are conclusively established by Hirons's FAC and declaration.
We note, moreover, that although Rakestraw followed a jury trial, the Supreme Court reversed the jury's verdict for the principal, holding that the agent was entitled to judgment as a matter of law. (Rakestraw, supra, 8 Cal.3d at pp. 75, 76.)
Hirons contends finally that ratification in the present case should be subject to a different standard because Maki was her attorney, and thus owed Hirons a duty to keep her informed of relevant facts. Hirons is, of course, correct that attorneys owe their clients many duties not owed in other relationships, but she cites no authority for the proposition that those heightened duties are relevant not only to Hirons's action against Maki, but also to this action against U.S. Bank.
For all of these reasons, the trial court properly sustained U.S. Bank's demurrer to the first and third causes of action.
III. Hirons's claims for elder abuse, negligence, and breach of contract (second, fourth, and fifth causes of action).
A. Elder abuse.
Hirons pleads that U.S. Bank committed elder abuse because "U.S. Bank converted the $450,000 NORCAL check by paying it out to Lisa Maki without Karie Hirons' signature or authorization." In her opening brief, Hirons relies on Welfare and Institutions Code section 15610.30, subdivision (a)(2) to assert a cause of action. Under this section, financial elder abuse occurs where a defendant "[a]ssists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both." (Welf. & Inst. Code, § 15610.30, subd. (a)(2).) However, in the banking context, liability only attaches where "the bank, in providing ordinary services, 'actually knew those transactions were assisting the customer in committing a specific tort.'" (Das v. Bank of America, N.A. (2010) 186 Cal.App.4th 727, 745.) Here, Hirons pleaded no facts that would establish that U.S. Bank knew that Maki intended to misappropriate the funds at issue. Nor does Hirons offer any theory to support U.S. Bank's knowledge. As such, this claim fails. (See ibid.) Moreover, "[w]e must presume the FAC as pled is the strongest case appellant can make," and Hirons's claim remains insufficient. (Le Mere v. L.A. Unified School Dist. (2019) 35 Cal.App.5th 237, 244.) Thus, the ruling on the demurrer is affirmed with regard to the elder abuse claim.
B. Negligence.
Commercial Code section 3420 precludes Hirons's common law negligence theory. As we have discussed, our colleagues in Division Two of this District held that conversion claims under Commercial Code section 3420 displace negligence theories when brought by a payee against a bank based on a faulty endorsement. (Gil v. Bank of America, N.A., supra, 138 Cal.App.4th 1371, 1377.) As our colleagues explained, "a collecting bank which cashes a check on the unauthorized indorsement of the payee is liable to the payee; but it is through an action in conversion, not negligence." (Id. at p. 1378.) Thus, Hirons's claim for negligence fails as a matter of law. (See id. at p. 1381) As a result, we affirm the trial court's ruling on the demurrer as to this claim.
C. Breach of contract.
A breach of contract theory requires the" 'pleading of a contract, plaintiff's performance or excuse for failure to perform, defendant's breach, and damage to plaintiff resulting therefrom.'" (Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1031.) These same elements are required for plaintiffs asserting they are third-party beneficiaries. (Ibid.) Here, Hirons claims to be a third-party beneficiary of a contract between U.S. Bank and Maki where "U.S. Bank agreed to hold client funds and pay interest on the account to the State Bar." But, under the facts alleged by Hirons, the funds were deposited into the U.S. Bank account. Even assuming that the bank improperly accepted the deposit, there appears to be no breach of any contract between U.S. Bank and Maki. Under the contract Hirons alleges, U.S. Bank's obligation was to "hold client funds." Here, U.S. Bank did so because it accepted and held the funds for a period of time. Thus, Hirons pleads insufficient facts to allege a breach of contract, and this theory fails. (See ibid.)
Here, we must also presume that Hirons has pled her "strongest case" as she had the opportunity to amend and declined to. (See Le Mere v. L.A. Unified School Dist., supra, 35 Cal.App.5th at p. 244.) Hirons's claim is still deficient, and we affirm the court's order on the demurrer regarding the breach of contract claim.
DISPOSITION
The judgment is affirmed. Respondent U.S. Bank is awarded its appellate costs.
I concur:
EGERTON, J.
VIRAMONTES, J., [*] Concurring and Dissenting.
I agree with the majority opinion to affirm the demurrer for Karie Hirons's causes of action for elder abuse, negligence, and breach of contract.
I disagree with the majority's decision to affirm the demurrer with regard to the conversion and payment on unauthorized check causes of action.
I. U.S. Bank has not established an affirmative defense of ratification as a matter of law by relying on Hirons's declaration.
U.S. Bank National Association (U.S. Bank) points to Hirons's statements in her declaration that she asked Lisa Maki to hold the settlement funds, asked Maki to pay off a loan, and accepted a payment of $70,000 from Maki to argue that the bank has established ratification. Consequently, this defense rests on the conversations between Hirons and her lawyer, Maki, and these conversations are at least partially reflected in Hirons's declaration. Based on the sparse record, U.S. Bank is unable to foreclose Hirons's conversion theories as the record allows Hirons significant opportunity for factual development to undermine a ratification defense.
"Ratification is, generally, an affirmative defense." (Reina v. Erassarret (1949) 90 Cal.App.2d 418, 424.) "It is well[-]settled in California 'that a principal may ratify [a] forgery of his signature by his agent.'" (Rakestraw v. Rodrigues (1972) 8 Cal.3d 67, 73-74 (Rakestraw); see Cal. U. Com. Code, § 3403, subd. (a) ["An unauthorized signature may be ratified for all purposes of this division"].) The Supreme Court explained, however, that a principal's ratification is vitiated if secured by an agent's misrepresentations; "there can be no adoption if the act, although voluntary, is done . . . because [of] . . . [citation] . . . misrepresentation by the agent." (Rakestraw, at p. 73.)
In addition, "[w]hether there has been ratification of a forged signature is ordinarily a question of fact." (Common Wealth Ins. Systems, Inc. v. Kersten (1974) 40 Cal.App.3d 1014, 1026 (Common Wealth).) In Common Wealth, the company's president financially benefitted from a forgery, learned of the forgery and did not disclaim it, and told the holders of the loan that his company would pay back the loan. (Id. at p. 1027.) After trial based on a full record, the Fourth District found that there was substantial evidence of ratification, but also noted that "the facts of the instant case do not approach ratification as a 'matter of law.'" (Ibid.) Even on a full record after a trial, establishing ratification as a matter of law is a heavy burden. (Ibid.) Here, U.S. Bank seeks such a ruling at demurrer.
U.S. Bank's ratification defense related to Hirons's acts around the time of the bank deposit is a question of fact that turns on what Hirons said to Maki, what Maki said to Hirons, the timing of those conversations, and whether Hirons relied on any misrepresentations by Maki in ratifying Maki's bank deposit. Even assuming that Hirons's acts are sufficient to establish ratification absent any misrepresentations from Maki, the facts in the declaration do not "necessarily bar" Hirons from adducing facts to undermine U.S. Bank's ratification defense by showing that Maki only received Hirons's ratification by resorting to misrepresentation. (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 224.)
First, Hirons's declaration points to one potential misrepresentation from Maki, as Hirons states, "Maki agreed to pay off the High Rise loan," and Maki never paid the loan. Second, Hirons's declaration expressly accuses Maki of fraud, "After I became aware of Maki's fraud, I conducted an investigation." Third, the FAC alleges that Maki misrepresented that she would transfer the settlement funds to an investment advisor for Hirons. Fourth, Hirons's declaration does not establish the timing of any conversations between Maki and Hirons, and it is possible that Maki's alleged misrepresentations preceded Hirons's ratification. Importantly, Hirons's declaration does not even establish whether the alleged ratification at issue happened before or after U.S. Bank received the bank deposit. With the timeline less than clear, Hirons can possibly adduce further evidence that Maki misrepresented facts in the course of securing ratification and that Hirons's ratification was done because of misrepresentation by the agent. (Rakestraw, supra, 8 Cal.3d at p. 73.) If for example, Hirons develops facts that: (1) Maki told Hirons that Maki would pay Hirons's debt prior to any ratification, (2) Maki told Hirons that Maki would put the money into Hirons's investment account before Hirons's ratification, and (3) Hirons relied on these misrepresentations in providing any ratification to Maki, then a fact finder could potentially reject U.S. Bank's ratification defense and reach the merits of Hirons's conversion theories.
In addition, the majority points to Hirons's acceptance of the $70,000 payment as a basis for ratification, but the record does not establish when Hirons learned that U.S. Bank accepted the check for deposit without her signature. Generally, ratification requires both a voluntary retention of benefits and knowledge of the unauthorized nature of the acts. (Common Wealth, supra, 40 Cal.App.3d at p. 1026.) Here, it is entirely possible and perhaps quite likely that Hirons did not understand that the settlement check required her signature at the time she accepted the partial funds. If so, she did not have knowledge of the unauthorized nature of the acts at the time she accepted the monies, and there could be no ratification. (See ibid.) Certainly, her declaration does not preclude these facts as her declaration says nothing about when Hirons learned of the missing signature on the check. Moreover, because the record establishes the possibility that Maki was making misrepresentations to Hirons during this period, the partial record suggests that Maki was unlikely to disclose the unauthorized nature of her acts to Hirons.
Based on this limited record, U.S. Bank has not met its burden to show a valid ratification by Hirons as a matter of law. Rather, if Hirons can adduce evidence consistent with her allegations that "[a]ll of the promises and representations made by Maki to procure Hirons'[s] 'consent' were false," then U.S. Bank's ratification defense could fail.
II. The facts do not establish ratification even if Hirons has an obligation to notify U.S. Bank about its potential liability.
The majority takes the view that Hirons had an obligation to inform U.S. Bank of Maki's deposit and fraud related to the deposit after Hirons learned of the bank deposit. Even assuming this view of the law is correct, a point I do concede as explained below, the limited record precludes us from determining what Hirons did or did not do as the record tells us very little about this period of time. Consequently, U.S. Bank cannot carry its burden of establishing "clearly and affirmatively" that its ratification defense bars Hirons's claims. (Favila, supra, 188 Cal.App.4th at p. 224.)
Consistent with the fact-intensive nature of ratification defenses, the cases that the majority relies on were decided after trial based on a full record. (Crittenden v. McCloud (1951) 106 Cal.App.2d 42, 44 (Crittenden); Merry v. Garibaldi (1941) 48 Cal.App.2d 397, 398 (Merry); Reusche v. California Pacific Title Ins. Co. (1965) 231 Cal.App.2d 731 735 (Reusche); Rakestraw, supra, 8 Cal.3d at p. 71.) None of these cases were decided on demurrer, and none were decided based on a single declaration. Relatedly, U.S. Bank cannot carry its burden of establishing ratification because the record is silent about when Hirons learned that U.S. Bank negotiated a check that was missing her signature, when U.S. Bank learned that it accepted a deposit without Hirons's signature, what Hirons communicated to U.S. Bank, and what U.S. Bank communicated to Hirons, and the timing of any communications or actions that the parties took. Because no discovery has taken place, the dearth of facts is unsurprising. Given that U.S. Bank must carry the burden of establishing its defense, it cannot do so in the absence of a record regarding what occurred after Hirons learned of the missing signature on the check. (Cf. Common Wealth, supra, 40 Cal.App.3d at pp. 1026-1027 [ratification turned on detailed accounting of acts of company's president after learning of fraud].) The majority asserts that Hirons did nothing during this period to alert U.S. Bank of the missing signature, but the record simply does not support this conclusion.
The majority asserts that Hirons had an obligation to inform U.S. Bank about the deposit when Hirons learned that Maki had deposited the check. But if Hirons suspected that the check was made out solely to Maki, an assumption consistent with U.S. Bank's decision to cash the check, then Hirons would have no reason to inform the bank of any irregularity at that point. Here, the record is unclear about when Hirons learned that U.S. Bank accepted the check for deposit without her signature. In addition, ratification is generally only appropriate when Hirons is "apprised of all the facts surrounding a transaction" (Reusche, supra, 231 Cal.App.2d at p. 737), and at the point of Maki's deposit, the record does not establish that Hirons knew the facts. Thus, to the extent that Hirons owed any responsibility to inform U.S. Bank about the deposit, that responsibility cannot begin to run before Hirons has knowledge that the unauthorized act implicates U.S. Bank. (See, e.g., Common Wealth, supra, 40 Cal.App.3d at pp. 1026-1027 [substantial evidence of ratification where company president knew of forged signature that implicated third parties].)
Rather, there are multiple avenues for factual development that could undermine U.S. Bank's ratification defense on the theory that the majority relies on. It is entirely possible, for example, that Hirons notified U.S. Bank about its failure to review the settlement check for the missing signature prior to suing the bank. It is also possible that U.S. Bank and Hirons exchanged communications before any lawsuit was filed where the check was discussed. Importantly, the record does establish that Hirons sued Maki and accused Maki of fraud during the period after she had concerns about Maki's treatment of the settlement check-facts directly at odds with any ratification theory. Thus, the majority's view that the record establishes that Hirons did not do enough to protect the rights of U.S. Bank is unsupported by the record even under the inapplicable theory that the majority relies upon here.
III. Hirons had no duty to inform U.S. Bank that the bank failed to notice a missing signature.
The majority opinion correctly notes that California Uniform Commercial Code section 3420, subdivision (a) applies where a bank accepts a check for deposit with two required payees, where one co-payee endorses a check, but another does not. (See Gil v. Bank of America, N.A. (2006) 138 Cal.App.4th 1371, 1377.) In those instances, the bank can be liable to the payee who did not sign the check. (Ibid.) A bank's responsibility to scrutinize the signatures on checks was well-established in caselaw prior to its codification. As the Supreme Court noted," 'A bank is under an obligation to its depositor to use care in scrutinizing checks paid in order to detect forgeries, and to render its accounts to prevent the perpetration of frauds upon its depositor.'" (Basch v. Bank of America (1943) 22 Cal.2d 316, 322.)
Here, by statute, U.S. Bank was responsible for ensuring that all of the co-payees endorsed the settlement check. (See Cal. U. Com. Code, § 3420, subd. (a).) On the facts alleged, it would appear that U.S. Bank failed in its initial responsibility to ensure that all mandatory payees signed the check. Thus, it is U.S. Bank's failure that created its possible legal exposure. Moreover, all of the information that U.S. Bank needed to understand its potential exposure was already in its possession-the settlement check, which on its face was missing an endorsement. Given the large size of the check, $450,000, U.S. Bank had even more incentive to be careful here. Nonetheless, with any modicum of diligence, U.S. Bank should have been on notice that it faced potential liability for processing the settlement check without Hirons's signature. There would be no basis for U.S. Bank's liability if the bank had simply required the signatures of both payees on the check. (See Gil v. Bank of America, N.A., supra, 138 Cal.App.4th at p. 1377.)
Under the California Uniform Commercial Code, there is no support for the view that it is Hirons's duty to notify U.S. Bank about the missing signatures on the check. (Gil v. Bank of America, N.A., supra, 138 Cal.App.4th at p. 1377 [bank has potential liability for missing signatures on check].) Yet, the majority takes the view that Hirons was obligated to inform U.S. Bank of its potential liability. The majority specifically contends that Hirons had a duty to notify U.S. Bank of Maki's potential fraud, but that position finds no support in the statute where it is U.S. Bank that is charged with reviewing checks for mandatory signatures. (See ibid.)
Moreover, Maki's fraud was separate and apart from the missing signature on the check, as U.S. Bank does not argue that it processed the check because of Maki's fraud or as a result of some trickery. Instead, Maki's alleged fraud is relevant only to U.S. Bank's ratification defense, and specifically, Hirons's attempts to undermine U.S. Bank's affirmative defense. (See Rakestraw, supra, 8 Cal.3d at p. 73.) Thus, the majority's view that Hirons had an obligation to provide U.S. Bank with facts that could potentially undermine U.S. Bank's affirmative defense for a lawsuit that had not yet been filed is without legal support.
The majority cites to Merry, supra, 48 Cal.App.2d 397; Crittenden, supra, 106 Cal.App.2d 42; and Reusche, supra, 231 Cal.App.2d 731, for the proposition that Hirons owed U.S. Bank a duty to inform the bank of the Maki transaction, but none of these cases are analogous.
Unlike the cases that the majority cites, this is not a situation where a forgery was presented to innocent third parties who were not aware of the forgeries and thereafter relied on the fraudulent documents to their detriment. Merry, supra, 48 Cal.App.2d at pages 400 to 401, involved an innocent third party beneficiary of a deed who funded a loan based on fraudulent signatures on a promissory note and deed. In Crittenden, supra, 106 Cal.App.2d at pages 44 to 45, an innocent third party bought a piece of property and made improvements on the property and relied on a forged signature on a deed. In Reusche, supra, 231 Cal.App.2d at pages 738 to 739, innocent third parties were beneficiaries of a deed and were payees on a loan, and they relied on forged signatures on a promissory note and deed. Here, in contrast to the blameless third parties in Merry, Crittenden, and Reusche, U.S. Bank's liability stems from its failure to fulfil its own obligations, looking for signatures on a check. Further, there is no forgery here and no reliance on any fraud. In addition, the innocent third purchaser in Crittenden was an individual who relied on forgeries, and the beneficiaries of the deeds in Merry and Reusche were similarly individuals who relied on forgeries. (Merry, at p. 399; Crittenden, at p. 44; Reusche, at p. 733.) Here, in contrast, U.S. Bank is a sophisticated financial institution that neglected to look for signatures.
Further, in the cases cited by the majority, there would have been no transaction absent the underlying fraud. (Merry, supra, 48 Cal.App.2d at p. 398 [forgery on deed and promissory note resulting in fraudulently obtained loan]; Crittenden, supra, 106 Cal.App.2d at p. 44 [forgery on deed resulting in sale of property through fraud]; Reusche, supra, 231 Cal.App.2d at pp. 733-735 [forgery on deed and promissory note resulting in fraudulently obtained loan].) Here, in contrast, Maki's alleged fraud had nothing to do with U.S. Bank's failure to scrutinize the check for the necessary signatures.
Relatedly, unlike the innocent third parties in Merry, Crittenden, and Reusche, U.S. Bank points to no way in which its rights were compromised by Maki's alleged fraud. In Merry, supra, 48 Cal.App.2d at page 400, with the passage of time after the fraud took place, the innocent third party purchaser was prejudiced because he could not commence any action against party that committed the fraud and could not seek reimbursement from the bank as the statute of limitations had run on the fraudulent signatures. (See Crittenden, supra, 106 Cal.App.2d at p. 48 [defendant could have proceeded against perpetrator of fraud for recovery if fraud had been reported earlier]; Reusche, supra, 231 Cal.App.2d at p. 733 [payees would be unable to recover loan monies and deed would be void because of fraud].) Here, U.S. Bank suffers no prejudice from Maki's alleged fraud as its own failure to scrutinize signatures is the basis of potential liability. As a result, the majority's view that U.S. Bank's rights were compromised by Maki's fraud is unsupported by the record or caselaw.
Similarly, unlike in Merry and Crittenden, where the parties, whose signatures had been forged, actively covered up the fraud at the core of transaction, Hirons has clean hands based on the limited record before us. In Merry, supra, 48 Cal.App.2d at page 403, the Third District noted that "plaintiff agreed to conceal the commission of the felony." Crittenden, supra, 106 Cal.App.2d at page 46, makes the same point as the trial court found the husband whose signature had been forged had" 'full knowledge of such forgery and of the source of said proceeds accepted by him.'" Here, in contrast, Hirons did not participate in any scheme to defraud the bank.
Moreover, unlike the parties in Merry, Crittenden, and Reusche, Hirons actively disavowed the transaction at issue. In Merry, supra, 48 Cal.App.2d at page 401, and Crittenden, supra, 106 Cal.App.2d at page 46, the parties who learned that their signatures were forged remained silent and, therefore, assisted in covering up the fraud. In Reusche, supra, 231 Cal.App.2d at page 735, the plaintiff sent the bank a letter stating that" 'everything is regular and meets with my approval. [My agent] has Power of Attorney to transact business and affix my signature whenever my presence is not available'" after learning her signature had been forged. These facts are far afield from the case at bar where Hirons sued Maki and accused Maki of fraud in a sworn declaration after suspecting wrongdoing with the check. Here, even on the limited record before us, rather than ratifying, Hirons actively disavowed Maki's bank transaction. Further, unlike the party in Reusche, at page 738, who failed to "make reasonable inquiries" and "[e]nsured the completion of the fraudulent transaction," Hirons actively investigated Maki when Hirons suspected wrongdoing and then sued Maki to preserve her rights.
In summary, the facts do not establish ratification as a matter of law as the minimal record allows various factual paths to discrediting a ratification defense. Moreover, placing the onus on Hirons to notify U.S. Bank of the deposited check is inconsistent with statute and caselaw, where U.S. Bank has the obligation to scrutinize the signatures on checks presented for deposit. I therefore respectfully dissent.
[*]Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.