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Date: 05-09-2020

Case Style:

Kurtz-Ahlers, LLC v. Bank of America, N.A.

Case Number: G057486

Judge: Aronson, J.

Court: California Court of Appeals Fourth Appellate District, Division Three on appeal from the Superior Court, County of Orange

Plaintiff's Attorney:

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Defendant's Attorney: Jan T. Chilton


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Freelance bookkeeper Elizabeth Mulder perpetrated a nearly five-year fraud
against her client, plaintiff Kurtz-Ahlers. Both Kurtz-Ahlers and Mulder coincidentally
had their checking accounts at defendant Bank of America (the Bank). Mulder ran her
scam through her account at the Bank.
Mulder’s scam consisted of the following acts: First, she added the
fictitious business name (or “dba”) “Income Tax Payments” to her existing checking
account at the Bank. Then Mulder instructed Kurtz-Ahlers to write its checks for
quarterly state and federal income tax payments to “Income Tax Payments” rather than to
the Internal Revenue Service or Franchise Tax Board, and to give the checks to Mulder
for mailing. After laying that groundwork, Mulder began depositing Kurtz-Ahlers’s tax
payment checks drawn from the Bank directly into her personal account at the Bank.
Over a period of nearly five years, Mulder swindled Kurtz-Ahlers out of more than
$700,000. Eventually, Mulder pleaded guilty to several federal crimes and is currently in
federal prison.
After discovering the fraud, Kurtz-Ahlers notified the Bank and made a
claim for its losses. The Bank denied the claim and Kurtz-Ahlers sued the Bank for
The complaint alleged the Bank acted negligently in failing to monitor
Mulder’s account for fraudulent activity after permitting her to add the “inherently
suspicious” name “Income Tax Payments” to the account.
1 Kurtz-Ahlers also sued the Bank for conversion, but the Bank successfully moved
for summary adjudication of the conversion cause of action.
After a two-week jury trial, the trial court granted the Bank’s motion for
nonsuit (Code Civ. Proc., § 581c), essentially holding the Bank owed Kurtz-Ahlers no
duty to investigate or monitor Mulder’s account.
A. Standard of Review
“Recovery in a negligence action depends as a threshold matter on whether
the defendant had ‘“a duty to use due care toward an interest of [the plaintiff’s] that
enjoys legal protection against unintentional invasion.”’ (Centinela [Freeman
Emergency Medical Associates v. Health Net of California, Inc. (2016)] 1 Cal.5th [994,]
1012 [(Centinela)], quoting Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397.) We
review de novo whether this ‘“essential prerequisite’” to recovery is satisfied.
[Citation].” (Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 397-398, fn.
omitted (Gas Leak Cases); see also Quelimane Co. v. Stewart Title Guaranty Co. (1998)
19 Cal.4th 26, 57 [whether duty of care exists is question of law subject to independent
review] (Quelimane).)
We also independently review a trial court’s grant of nonsuit. (Legendary
Investors Group No. 1, LLC v. Niemann (2014) 224 Cal.App.4th 1407, 1412.)
B. The Trial Court Properly Granted Nonsuit for the Bank
Kurtz-Ahlers argues two grounds for finding the trial court erred in
granting the Bank’s motion for nonsuit. First, Kurtz-Ahlers argues the court erred in
taking from the jury the disputed issue of whether the dba “Income Tax Payments” was
so suspicious it triggered a duty on the part of the Bank to investigate possible fraudulent
activity in Mulder’s account. Second, Kurtz-Ahlers contends the court wrongly
concluded as a matter of law banks owe no duty to depositors to monitor other
depositors’ accounts for fraud. In regard to the latter contention, Kurtz-Ahlers argues
existing case law supports finding the Bank had a duty of inquiry. Alternatively, KurtzAhlers argues we should recognize a new duty of inquiry owed by banks to depositors.
For the reasons set forth below, the trial court correctly ruled as a matter of
law the Bank had no duty to monitor Mulder’s account. That conclusion renders moot
the dispute over whether Mulder’s dba “Income Tax Payments” was a highly suspicious
“red flag” triggering an inquiry into possible fraud. Consequently, we conclude the court
properly granted nonsuit for the Bank.
1. Banks Have No Common Law Duty to Monitor Deposit Accounts
There is a wealth of case law defining the duties a bank owes to account
holders. Those duties do not include “policing” other depositors’ accounts for fraud.
The relationship between a bank and its depositor is not fiduciary in
character but, rather, “‘founded on contract,’ [citation] which is ordinarily memorialized
by a signature card that the depositor signs upon opening the account. [Citation.]”
(Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532, 537 (Chazen) [“banks ‘are not
fiduciaries for their depositors’”].) “This contractual relationship does not involve any
implied duty ‘to supervise account activity’ [Citation] or ‘to inquire into the purpose for
which the funds are being used’ [Citation] . . . .” (Ibid.) Nevertheless, “[i]t is well
established that a bank has ‘a duty to act with reasonable care in its transactions with its
depositors . . . .’ (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 808 [(Bullis)].)
The duty is an implied term in the contract between the bank and its depositor. (See
Barclay Kitchen, Inc. v. California Bank [(1962)] 208 Cal.App.2d [347,] 353 [(Barclay
Kitchen)].)” (Chazen, supra, 61 Cal.App.4th at p. 543.)
Case law reflects the narrow scope of a bank’s duties under the deposit
agreement. Such duties include the duty to honor checks properly payable from the
depositor’s account (Chazen, supra, 61 Cal.App.4th at p. 539 [“Banks are strictly liable
for the wrongful dishonor of checks”]; Joffe v. United California Bank (1983)
141 Cal.App.3d 541, 554 (Joffe)); the duty to dishonor checks lacking required signatures
(Bullis, supra, 21 Cal.3d at p. 811 [bank liable for failing to require signatures of both coexecutors for withdrawal from trust estate]); and the duty “to render faithful and accurate
accounts under the contract of deposit” (Barclay Kitchen, supra, 208 Cal.App.2d at
p. 354).
The parties have not cited, and we have not found, any published case
involving the issue of whether a bank owes a depositor a duty to investigate and disclose
possible fraudulent activity in another depositor’s account. A legion of cases, however,
rejects the notion banks owe such a duty to nondepositors. In Casey v. U.S. Bank Nat.
Assn. (2005) 127 Cal.App.4th 1138 (Casey), another panel of this court presented a
“primer on California banking law” and pronounced the following blanket rule: “[U]nder
California law, a bank owes no duty to nondepositors to investigate or disclose suspicious
activities on the part of an account holder.” (Id. at p. 1149.)
Casey cited numerous cases which refused to recognize a bank’s duty to
third parties to “police” a depositor’s account. “[I]in Chicago Title Ins. Co. v. Superior
Court (1985) 174 Cal.App.3d 1142, the court rejected a nondepositor’s claim a bank had
a duty to inform the nondepositor of the bank’s suspicions a bank customer was involved
in a check-kiting scheme: ‘If . . . banks had a duty to reveal suspicions about their
customers, they would violate their customers’ right to privacy, not to mention be forced
to act as the guarantor of checks written by the depositors. We refuse to recognize such a
duty by banks to inform on suspicious customers, and we thereby avoid the loss of
privacy, expense and commercial havoc that would result from such a holding.’ (Id. at
p. 1159; accord, Software Design & Application LTD. v. Hoefer & Arnett, Inc. (1996)
49 Cal.App.4th 472, 483 [(Software Design)] [financial consultant deposited client’s
funds in bank account and embezzled the funds; client sued bank for failing to investigate
and monitor the account; court held bank owed no duty to investor—a nondepositor:
‘Scrutiny into the financial and business affairs of prospective customers for the express
purpose of ferreting out the faithless fiduciary and divining illegal conduits for embezzled
funds would be intrusive for the citizenry and add to the cost of financial transactions,
both in terms of time and money’]; Karen Kane, Inc. v. Bank of America (1998)
67 Cal.App.4th 1192, 1199 [(Karen Kane)] [bank had no duty to inform nondepositor
maker of checks of bank’s suspicions payee was defrauding maker].)” (Casey, supra,
127 Cal.App.4th at pp. 1149-1150.)
In a Casey footnote, we noted a single, narrow exception to the otherwise
sweeping rule a bank owes no duty to nondepositors to investigate or disclose a
depositor’s suspicious activities. “California courts have recognized one situation in
which a bank has a duty to nondepositors to investigate a suspicious banking transaction.
In Sun ‘n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671 [(Sun ‘n Sand)], the
California Supreme Court held a bank has a ‘minimal’ and ‘narrowly circumscribed’ duty
of inquiry ‘when checks, not insignificant in amount, are drawn payable to the order of a
bank and are presented to the payee bank by a third party seeking to negotiate the checks
for his own benefit.’ (Id. at p. 695.)” (Casey, supra, 127 Cal.App.4th at p. 1151, fn. 3.)
Kurtz-Ahlers cites the Sun ‘n Sand exception as the basis for its argument current law
imposed a duty of inquiry on the Bank.
In Sun ‘n Sand, the plaintiff, convinced by a dishonest employee that it
owed minor sums of money to a bank, made several checks payable to that bank. The
employee altered the checks to increase the sums and deposited them in her personal
account with the same bank. The bank permitted this negotiation without any inquiry,
despite the fact the checks were not payable to the employee. Upon discovering the
employee’s fraud, the plaintiff sued the bank for negligence, among other claims. The
trial court sustained the bank’s demurrer to all the claims and dismissed the action.
The Supreme Court reversed the trial court’s ruling on the negligence
claim, concluding “Sun ‘n Sand’s allegations define circumstances sufficiently suspicious
that [the bank] should have been alerted to the risk that Sun ‘n Sand’s employee was
perpetrating a fraud. By making reasonable inquiries, [the bank] could have discovered
the fraudulent scheme and prevented its success.” (Sun ‘n Sand, supra, 21 Cal.3d at
pp. 694-695.)
Significantly, the high court set sharp limits on the reach of this new duty
of inquiry: “The duty is narrowly circumscribed: it is activated only when checks, not
insignificant in amount, are drawn payable to the order of a bank and are presented to the
payee bank by a third party seeking to negotiate the checks for his own benefit.
Moreover, the bank’s obligation is minimal. We hold simply that the bank may not
ignore the danger signals inherent in such an attempted negotiation. There must be some
objective indicia from which the bank could reasonably conclude that the party
presenting the check is authorized to transact in the manner proposed.” (Sun 'n Sand,
supra, at pp. 695-696, italics added.)
Kurtz-Ahlers argues the facts of this case come within Sun ‘n Sand’s
narrow “duty of inquiry” exception because Mulder’s addition of the name “Income Tax
Payments” to her account was a circumstance “sufficiently suspicious” to trigger that
duty. The argument fails because the factual circumstances of this case, no matter how
“suspicious,” do not match the very particular factual scenario the Supreme Court
addressed in Sun ‘n Sand. As Chazen, supra, 61 Cal.App.4th 532, explained: “Sun ‘n
Sand and its progeny have held banks to be subject to a duty of care toward
nondepositors only in narrow factual circumstances: Each case involved the bank’s
liability for allowing a person to deposit a check, payable to someone else, into a personal
account[.]” (Chazen, supra, 61 Cal.App.4th at p. 545; accord, Software Design, supra,
49 Cal.App.4th at pp. 480-481 [“The danger signals triggered in these cases all stemmed
from the particular circumstances of the checks, endorsements or depositors, where the
person attempting to negotiate the check is not the payee”].) By comparison, in the
present case Mulder deposited checks payable to her.
In other words, unlike in Sun ‘n Sand, the checks Mulder submitted for
deposit had “objective indicia from which the bank could reasonably conclude that the
party presenting the check is authorized to transact in the manner proposed.” (Surf ‘n
Sand, supra, 21 Cal.3d at pp. 695-696.) Here, the “objective indicia” test was met
because the checks were made payable to the very account in which they were deposited,
“Income Tax Payments,” and an authorized signatory endorsed each check.
Consequently, the “narrowly circumscribed” duty to inquire recognized in Surf ‘n Sand
does not apply here. (Ibid.; see also QDOS, Inc. v. Signature Financial, LLC (2017)
17 Cal.App.5th 990, 994 (QDOS) [seller had no duty of inquiry under Sun ‘n Sand where
customer paid seller with two checks made payable to seller but drawn on a third party’s
account]; Karen Kane, supra, 67 Cal.App.4th at pp. 1198-1199 [bank had no duty of
inquiry as to “business-to-business checks . . . regular on their face” and endorsed by
authorized signatories].)
Because the facts of this case do not fit within the narrow Sun ‘n Sand
exception, Kurtz-Ahlers failed to demonstrate the Bank had a duty under existing law to
inquire into Mulder’s account activities.
2. There is No Basis for Creating a New Duty of Inquiry
Kurtz-Ahlers alternatively argues we should recognize a new duty on
banks, owed only to depositors, to monitor any account with a fictitious business name so
“odd,” “generic,” or otherwise “suspicious” that it gives a bank reason to suspect the
account holder of fraudulent activity.2 Kurtz-Ahlers characterizes the existence of this
new monitoring duty as an important question of first impression. We are unpersuaded.
As we explain below, we see no basis to broaden a bank’s duty of inquiry
beyond the “narrowly circumscribed” duty the Supreme Court articulated in Sun ‘n Sand:
to make “reasonable inquiries” when “checks, not insignificant in amount, are drawn
2 The argument is premised, in part, on the contention agency law imputes a bank’s
“constructive knowledge” of one depositor’s fraudulent activities to the bank in its
dealings with all depositors. Kurtz-Ahlers cites no authority for applying these agency
principles in the bank-depositor context.
payable to the order of a bank and are presented to the payee bank by a third party
seeking to negotiate the checks for his own benefit.” (Sun 'n Sand, supra, 21 Cal.3d at
p. 695.)
We begin our duty analysis by acknowledging a fundamental rule in tort
law: “[L]iability in negligence for purely economic losses . . . is ‘the exception, not the
rule[.]’” (Gas Leak Cases, supra, 7 Cal.5th at p. 400, quoting Quelimane, supra,
19 Cal.4th at p. 58.)3 “Whether a court will nevertheless recognize such a duty does not
turn on privity of contract. (Centinela[, supra,] 1 Cal.5th at p. 1013; Quelimane, at
p. 58.) Instead, it turns on whether ‘“public policy . . . dictate[s] the existence of a duty
to third parties.’” (Centinela [], at p. 1013; Cabral [v. Ralphs Grocery Co. (2011)
51 Cal.4th 764,] 771 [‘courts should create [a duty] only where “clearly supported by
public policy”’].)” (QDOS, supra, 17 Cal.App.5th at p. 998.) It is on policy grounds
where Kurtz-Ahlers’s “new duty” argument founders.
Case law has long recognized the significant public policies underlying the
rule “a bank owes no duty to nondepositors to investigate or disclose suspicious activities
on the part of an account holder.” (Casey, supra, 127 Cal.App.4th at p. 1149.) In Casey,
supra, 127 Cal.App.4th1138, we referenced Chazen, supra, 61 Cal.App.4th 532 to aptly
summarize those policies. “The [Chazen] court explained the contractual nature of the
bank-depositor relationship limits a bank’s duties in regards to accounts. The court stated
that ‘this contractual relationship . . . entails no contractual obligation to persons other
than the account holder [citation]. . . .’ (Ibid.) [¶] The [Chazen] court identified two
additional policies underlying the rule a bank has no duty to ‘police’ account activity.
One is the customer’s right to privacy. ‘“‘A bank customer’s reasonable expectation is
3 By “purely economic losses,” the court meant pecuniary losses unaccompanied by
injury to person or property. (Gas Leak Cases, supra, 7 Cal.5th at p. 398.) Kurtz-Ahlers
concedes only economic losses are at issue here.
that, absent compulsion by legal process, the matters he reveals to the bank will be
utilized by the bank only for internal banking purposes[.]’”’ (Id. at p. 538.)
“The other policy cited by the court was that of facilitating the efficient
processing of banking transactions. The court noted the present banking system operates
under rules requiring ‘banking transactions to be processed quickly and automatically and
impos[ing] strict deadlines for the payment or timely dishonor of checks. [Citations.] . . .
Under this system . . . a bank cannot be expected to track transactions in fiduciary
accounts or to intervene in suspicious activities.’ (Chazen, supra, 61 Cal.App.4th at
p. 539.)” (Casey, supra, 127 Cal.App.4th at pp. 1149-1151.)
Without addressing these important policies militating against requiring
banks to “police” deposit accounts, Kurtz-Ahlers urges us to recognize a new bank duty
owed only to depositors to monitor other depositors’ “suspicious activities.” The only
policy argument Kurtz-Ahlers offers in support of this new “intra-bank” duty is that a
bank is uniquely able to detect a depositor’s fraudulent activities and protect other
depositors from that fraud. Setting aside the practical questions about a bank’s ability to
perform either task, we reject the argument because imposing this new duty would
jeopardize the very policies we identified above.
For example, monitoring individual banking transactions to detect
fraudulent activity would imperil both customer privacy and the expedited processing of
banking transactions so crucial to a modern economy. (See Chazen, supra,
61 Cal.App.4th at pp. 537-539.) Additionally, imposing liability for failing to protect a
depositor from fraud would place a bank in an untenable position: By investigating and
thereby delaying the processing of banking transactions between a suspected fraudster
and another depositor, the bank would face liability for violating strict statutory
“deadlines for the payment or timely dishonor of checks.” (Chazen, supra,
61 Cal.App.4th at p. 539 [“provisions of the California Uniform Commercial Code and
federal regulations governing bank deposits and collections require banking transactions
to be processed quickly and automatically and impose strict deadlines for the payment or
timely dishonor of checks”].)
For its part, Kurtz-Ahlers asserts an intra-bank duty of inquiry would
impose a “minor burden” on banks easily outweighed by the resulting benefit of
protecting depositors from misappropriation by fraudsters like Mulder. But the argument
overlooks the fact depositors are often, if not always, in a better position than their banks
to protect themselves from fraud by simple steps such as using due diligence in hiring
bookkeepers and by occasionally checking their financial records. In Kurtz-Ahlers’s case
it would not have been too difficult to discover five years’ worth of diverted tax
payments, had Kurtz-Ahlers exercised basic prudence. In other words, Kurtz-Ahlers
makes no compelling argument why the Bank should have borne the burden of detecting
Mulder’s fraudulent scheme rather than Kurtz-Ahlers itself.
We decline Kurtz-Ahlers’s invitation to engage in a careful weighing of
“the Biakanja/Rowland factors” –– the factors the Supreme Court identified as
particularly relevant to determining the existence of a duty in Biakanja v. Irving (1958)
49 Cal.2d 647, 650 (Biakanja) and Rowland v. Christian (1968) 69 Cal.2d 108, 113
(Rowland).4 In other words, we see no need to engage in a point by point consideration
of those factors to arrive at the conclusion public policy does not weigh in favor of
recognizing the new bank duty Kurtz-Ahlers urges us to adopt.
The court in Software Design, supra, 49 Cal.App.4th 472, expressed this
conclusion perfectly: “[T]he burden on banks, if we were to recognize a duty of inquiry
4 These factors include ‘“. . . the foreseeability of harm to the plaintiff, the degree of
certainty that the plaintiff suffered injury, the closeness of the connection between the
defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s
conduct, the policy of preventing future harm, the extent of the burden to the defendant
and consequences to the community of imposing a duty to exercise care with resulting
liability for breach, and the availability, cost and prevalence of insurance for the risk
involved.’” (Sun ‘n Sand, supra, 21 Cal.3d at p. 695, quoting Rowland, supra, 69 Cal.2d
at p. 113.)
and detection in the circumstances of appellants’ complaint, is out of proportion to the
potential harm averted by such a result. Scrutiny into the financial and business affairs of
prospective customers for the express purpose of ferreting out the faithless fiduciary and
divining illegal conduits for embezzled funds would be intrusive for the citizenry and add
to the cost of financial transactions, both in terms of time and money. Better that the one
contemplating the services of a financial advisor do the background check and then
monitor the services rendered. It is that person who has the most control and the most to
win or lose, and with whom the investigative tasks should rest.” (Id. at p. 483.)
In sum, we conclude “‘overriding policy considerations’” preclude the
existence of an “intra-bank” monitoring duty under general tort principles. (Dillon v.
Legg (1968) 68 Cal.2d 728, 739.) Consequently, we find the trial court properly granted
nonsuit for the Bank.

Outcome: The judgment is affirmed. Respondent is entitled to its costs on appeal.

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