Financial Institutions: E-Mail Scams

Posted in Financial Institutions on June 2, 2010

Chino Commercial Bank v. Peters, (Fourth District, May 25, 2010) —Cal.Rptr. 3d —-, 2010 WL 2044682, 10 Cal. Daily Op. Serv. 6502

A bank customer who was victimized by a “Nigerian-style” email scam, was sued by his bank for $458,782.60, the total of three wire transfers made to China at the customer’s request after depositing fraudulent checks from third parties. When the bank sought to attach the customer’s assets, he asserted that he had been duped into participating in an email check cashing scam by a person who claimed to be a citizen of Malaysia seeking assistance in transferring funds from third parties in the United States and Canada who owed him money. The defendant had agreed to deposit the checks in his account and then wire transfer the funds in exchange for fifteen percent of the money, and the bank had confirmed that two of the checks had cleared before wiring the sums. However, all three checks were eventually dishonored and the account was overdrawn in the amount of $458,782.60.

The trial court granted a right to attach against the defendant’s property, reasoning that the customer had been negligent and therefore had the burden of proving that the bank had been negligent. The court of appeal affirmed, holding that under the California Uniform Commercial Code the customer had the burden of proving that the bank acted negligently, and that he had failed to do so:

“The trial court found that Peters failed to exercise ordinary care. There is ample evidence to support this conclusion, and Peters does not challenge it; quite the contrary, he concedes that he “was, shall we say, less than smart in moving forward on the transaction….”

Under section 3406, subdivision (b), however, if the Bank failed to exercise ordinary care, and if that failure contributed to the loss, the loss must be allocated between the Bank and Peters. Significantly, even if the Bank was negligent, it is not wholly precluded from recovering against Peters. Its recovery is merely reduced, in accordance with principles of comparative negligence.
. . .
Peters argues that the trial court used the wrong bur-den of proof: it required him to prove the Bank’s negligence, when it should have required the Bank to disprove its own negligence. As we have already discussed, however, under section 3406, subdivision (c), Peters did have the burden of proving the Bank’s negligence.

Alternatively, Peters also argues that there was evidence that the Bank was, in fact, negligent. Basically, he claims it was negligent to allow Faux to make wire transfers to China totaling $468,000 when the balance in the account had historically been between $3,000 and $5,000.
. . .
The California Uniform Commercial Code defines “ ‘[o]rdinary care’ in the case of a person engaged in business [as] observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection …, reason-able commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this division or Division 4….” (Cal.U .Comm.Code, § 3103, subd. (a)(7).)

There was absolutely no evidence that prevailing commercial standards required the Bank to question the wire transfers. The Bank even presented some evidence that it acted in accordance with prevailing commercial standards (although that evidence went largely to its acceptance of the checks for deposit, rather than to its making of the wire transfers). Even assuming the trial court could have concluded that the Bank was negligent, in the absence of any evidence that the Bank actually violated prevailing commercial standards, it was not required to do so.”