The California Court of Appeal, Fourth District, recently issued a much-needed opinion that closed a gap in existing case law regarding duties owed by banks to its depositors. It has long been the rule that banks owe no duty to non-customers to police activity in their customer’s accounts. But does a bank owe a duty to its own depositors to police activity in other depositor’s accounts? The court in Kurtz-Ahlers v. Bank of America, said no.
The full opinion can be found here.
The facts underlying the Kurtz-Ahlers decision are typical of the routine employee embezzlement scheme. A freelance bookkeeper added the fictitious business name “Income Tax Payments” to her personal bank account. The bookkeeper convinced her employer, Kurtz-Ahlers, to write its quarterly state and federal income tax payments to Income Tax Payments and then proceeded to deposit those checks into her personal account. This scam was not discovered for more than five years, by which time the bookkeeper had embezzled approximately $700,000.
Kurtz-Ahlers and the bookkeeper shared the same bank, so Kurtz-Ahlers sued its bank for negligence for failing to monitor the bookkeeper’s account for signs of fraud. Kurtz-Ahlers’ argued that the bank should not have permitted the bookkeeper to add the “inherently suspicious” name Income Tax Payments to her personal account, and that the bank should have notified it of the bookkeeper’s suspicious behavior.
This appeal followed the trial court’s grant of nonsuit in favor of the bank.
Banks Owe No Duty to Non-Customers to Police the Accounts of Depositors
The Court of Appeal recognized that the relationship between a bank and its depositors is founded on contract, and is not fiduciary in nature. Although banks are obligated to act with reasonable care in handling its depositors’ transactions, the contract upon which the bank/depositor relationship is based does not include any implied duties to supervise the customer’s account activity or make any inquiry into the purpose for which the depositor’s funds are used.
Further, it has long since been the rule in California that banks owe no duties (absent a very narrow exception) to non-customers to investigate or disclose suspicious activity engaged in by their depositors. The narrow exception applies in certain limited situations in which checks are both “not insignificant in amount” and payable to a third party, and said checks are presented for deposit for the customer’s own benefit. The Court of Appeal quickly rejected the applicability of this exception to the instant facts because the checks presented had “objective indicia” of legitimacy — i.e., the checks were payable to Income Tax Payments and presented for deposit into an account with the identical fictitious business name.
The Court of Appeal Refused to Create a New Rule Imposing a Duty on Banks to Police Depositor Accounts on Behalf of Other Depositors
Prior to the instant case there were no published decisions on the related issue of whether a bank owes its own depositors a duty to investigate or disclose suspicious activity in an account of another depositor. Hence, Kurtz-Ahlers urged the Court of Appeal to adopt such a new rule. Where the relationship between the parties is founded on contract, liability in negligence for purely economic losses requires a showing that public policy mandates a duty of care. Kurtz-Ahlers suggested that public policy should support a bank’s duty to detect a depositor’s fraud. However, the Court of Appeal was unpersuaded, noting instead that Kurtz-Ahlers itself stood in a much better position to detect the bookkeeper’s fraud simply by conducting its own due diligence, properly supervising its employee and checking its own financial records. Moreover, the burden associated with imposing such a duty on banks would be grossly out of proportion to the harm averted. Instead, the party with the most control and the most to win or lose (i.e., in this case, Kurtz-Ahlers) is the party who should be tasked with the investigation and duty to monitor.
Accordingly, the trial court’s judgment was affirmed, and the Court of Appeal held that banks do not owe its depositors a duty to monitor the account activity of other depositors.