Iron Bridge Mortgage Fund, LLC v. Bank of America, N.A., No. 4:2020cv08581 - Document 50 (N.D. Cal. 2021)
Court Description: ORDER GRANTING Motion to Dismiss of defendant Bank of America, N.A. 28 . Signed by Judge Phyllis J. Hamilton. (pjhlc1S, COURT STAFF) (Filed on 5/14/2021)
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 IRON BRIDGE MORTGAGE FUND, LLC, 8 Case No. 20-cv-08581-PJH Plaintiff, 9 ORDER GRANTING DEFENDANT BANK OF AMERICA’S MOTION TO DISMISS v. 10 BANK OF AMERICA, N.A., et al., 11 Re: Dkt. No. 28 United States District Court Northern District of California Defendants. 12 13 Defendant Bank of America’s motion to dismiss came on for hearing before this 14 15 court on April 22, 2021. Plaintiff appeared through its counsel, Jacoby Perez. Defendant 16 appeared through its counsel, Austin Kenney. Having read the papers filed by the parties 17 and carefully considered their arguments and the relevant legal authority, and good 18 cause appearing, the court hereby GRANTS Bank of America’s motion, for the following 19 reasons. 20 I. Background 21 Plaintiff Iron Bridge Mortgage Lending, LLC, (“Iron Bridge”) is a financial institution 22 based in Portland, Oregon. Defendant Sergio Alvarez (“Alvarez”) is an individual residing 23 in Alameda County. Defendant Bank of America, N.A., (“BofA”) is a bank registered in 24 Delaware, headquartered in Charlotte, North Carolina. 25 In November 2015, Alvarez purchased the real property located at 7005 Skyline 26 Boulevard, Oakland, CA 94611 (the “property”) from Iron Bridge. Alvarez and his 27 company, Superior Assets, LLC, entered into a loan agreement with Iron Bridge in 28 December 2015, which provided for a series of loans for a new construction project on 1 the property. In connection with funding this construction project, Iron Bridge issued 2 checks to various vendors and subcontractors and provided the checks to Alvarez to 3 distribute. Overall, Iron Bridge issued 23 checks to 14 vendors, dated between March 4 2016 and December 2017. In September 2017, Alvarez defaulted on the loan. Iron Bridge bought back the United States District Court Northern District of California 5 6 property at an April 2018 foreclosure auction. Following the foreclosure, Alvarez’s 7 vendors approached Iron Bridge and demanded payment for the work they performed on 8 the property. Iron Bridge alleges that it found out through a subpoena issued to BofA that 9 Alvarez forged endorsements onto the 23 checks intended for vendors and 10 subcontractors, totaling $168,282.05, and deposited them into his own or Superior 11 Assets’ accounts at BofA rather than distributing them. Iron Bridge further alleges that 12 BofA accepted these checks for deposit despite irregularities in the manner in which they 13 were deposited, including the forged endorsements and that they were deposited into 14 accounts that were not affiliated with the payee indicated on the checks. This suit was initiated by complaint filed on December 4, 2020. Dkt. 1. Iron Bridge 15 16 filed the first amended complaint (“FAC”) on February 12, 2021. Dkt. 19. BofA filed the 17 present motion to dismiss on February 26, 2021. Dkt. 28. Alvarez filed a motion to 18 dismiss the FAC (Dkt. 43) on the same date as the hearing on BofA’s motion, April 22, 19 2021. At the time of this order, Alvarez’s motion remains pending. 20 II. 21 Legal Standard A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests for the 22 legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, 349 F.3d 1191, 23 1199-1200 (9th Cir. 2003). Under Federal Rule of Civil Procedure 8, which requires that 24 a complaint include a “short and plain statement of the claim showing that the pleader is 25 entitled to relief,” Fed. R. Civ. P. 8(a)(2), a complaint may be dismissed under Rule 26 12(b)(6) if the plaintiff fails to state a cognizable legal theory, or has not alleged sufficient 27 facts to support a cognizable legal theory. Somers v. Apple, Inc., 729 F.3d 953, 959 (9th 28 Cir. 2013). 2 While the court is to accept as true all the factual allegations in the complaint, 1 2 legally conclusory statements, not supported by actual factual allegations, need not be 3 accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). The complaint must proffer 4 sufficient facts to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. 5 Twombly, 550 U.S. 544, 555, 558-59 (2007) (citations and quotations omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows United States District Court Northern District of California 6 7 the court to draw the reasonable inference that the defendant is liable for the misconduct 8 alleged.” Iqbal, 556 U.S. at 678 (citation omitted). “[W]here the well-pleaded facts do not 9 permit the court to infer more than the mere possibility of misconduct, the complaint has 10 alleged—but it has not ‘show[n]’—that the pleader is entitled to relief.” Id. at 679. Where 11 dismissal is warranted, it is generally without prejudice, unless it is clear the complaint 12 cannot be saved by any amendment. Sparling v. Daou, 411 F.3d 1006, 1013 (9th Cir. 13 2005). 14 III. 15 Discussion The FAC alleges the following causes of action against either BofA on its own or 16 both BofA and Alvarez together: (1) negligence, (2) breach of warranty, (3) breach of 17 contract, (4) declaratory relief, and (5) violation of California Business & Professions 18 Code § 17200. The sixth claim, for fraud, is only alleged against Alvarez and is thus not 19 discussed here. 20 The FAC identifies the first three claims by reference to the California Commercial 21 Code. The parties discuss in their briefing whether the California common law analogs to 22 each of these Commercial Code claims should remain actionable. The court here makes 23 no decision whether the Commercial Code forecloses common law claims under 24 California law because Iron Bridge made clear at the hearing that it intended to proceed 25 solely under the Commercial Code rather than under common law. Claims 1, 2, & 3 – Statute of Limitations 26 A. 27 BofA argues that Iron Bridge’s three Commercial Code claims, sounding in 28 conversion, are subject to a three-year statute of limitations. An instrument is converted if 3 1 “a bank makes or obtains payment with respect to the instrument for a person not entitled to 2 enforce the instrument or receive payment.” Com. Code § 3420(a). Each “altered, forged, 3 or unauthorized check” gives rise to a separate cause of action. Edward Fineman Co. v. 4 Superior Court, 66 Cal.App.4th 1110, 1118 (1998). And the cause of action accrues at 5 the time the instrument is negotiated. AmerUS Life Ins. Co. v. Bank of Am., N.A., 143 6 Cal.App.4th 631, 639 (2006), as modified (Oct. 30, 2006). Section 3118(g) requires 7 initiation of actions within three years of accrual for claims under section 3420. United States District Court Northern District of California 8 Section 3118(g) also requires initiation of actions within three years of accrual for 9 breach of warranty claims (such as plaintiff’s section 3417 claim), and other enforcement 10 actions arising from the same division of the code (including plaintiff’s section 3405 claim 11 for negligence). Section 4111 similarly requires initiation of a breach of contract action 12 under section 4401 within three years of accrual. All three of plaintiff’s Commercial Code 13 claims are thus bound by a three-year statute of limitations. 14 Tolling of the limitations period based on a plaintiff’s delayed discovery of 15 defendant’s actions is limited. The California Court of Appeal stated in a case factually 16 similar to this one, “To the extent our courts have recognized a ‘discovery rule’ exception 17 to toll the statute, it has only been when the defendant in a conversion action fraudulently 18 conceals the relevant facts or where the defendant fails to disclose such facts in violation 19 of his or her fiduciary duty to the plaintiff.” AmerUS Life Ins. Co. v. Bank of Am., N.A., 20 143 Cal.App.4th at 639. 21 BofA argues that the three-year period for bringing claims has expired for all 22 except one of these negotiated checks. BofA highlights that all but one of the checks 23 underlying Iron Bridge’s claims and attached to the FAC—Check No. 11331 for $1,600— 24 were negotiated more than three years before Iron Bridge filed this action on December 25 7, 2020. Dkt. 19-2, Ex. 6, at pp. 17-39; Dkt. 1. The last-in-time check, negotiated on 26 December 20, 2017, is the only one remaining actionable within the Commercial Code’s 27 three-year statute of limitations. See Dkt. 19-2, Ex. 6, at p. 38. BofA concludes that 28 because each of the 22 other checks represents its own cause of action, each is time 4 1 barred. BofA heads off any argument from Iron Bridge regarding the applicability of the 2 statute of limitations, providing variously (1) that conversion of this sort is not subject to 3 delayed discovery tolling, (2) that the “continuing tort” theory is inapplicable to conversion 4 of instruments, and (3) that the only exceptions to allow for delayed discovery tolling (if 5 the defendant fraudulently concealed the conversion or if the defendant had a fiduciary 6 duty to the plaintiff) are inapplicable here. United States District Court Northern District of California 7 Iron Bridge counters that delayed discovery tolling of the statute of limitations 8 applies here because defendant Alvarez fraudulently concealed the conversion of the 9 checks, precluding discovery of the conversion. BofA, on reply, resists Iron Bridge’s 10 effort to “shoehorn itself” into an exception in its claim against BofA based on Alvarez’s 11 potential fraud. BofA additionally clarifies that it owes no fiduciary duty to Iron Bridge. 12 Here, the Commercial Code limitations periods have expired for all except the last 13 check negotiated. All but one of the checks at issue here were negotiated more than 14 three years prior to Iron Bridge’s initiation of this suit, and Iron Bridge does not fall into an 15 exception allowing for tolling of the statute of limitations. Iron Bridge does not allege that 16 BofA fraudulently concealed the checks here, and Iron Bridge nowhere alleges that BofA 17 owed it a fiduciary duty. Even if Iron Bridge’s claims stood on their own, proceeding 18 under California Commercial Code sections 3405 (negligence), 3417 and 4207 (breach of 19 warranty), and 4401 (breach of contract) rather than sounding in conversion, they are still 20 time-barred because those provisions also have three-year limitations periods. 21 Therefore, the claims based on all the checks except for the one dated December 22 20, 2017, are time-barred. As there is one check surviving, the court considers the merits 23 of the three Commercial Code claims in turn. Claim 1 – Negligence 24 B. 25 Iron Bridge advances a cause of action for statutory negligence on the theory that 26 BofA owed a duty to check payors and breached that duty by cashing the checks 27 endorsed by Alvarez but intended for other payees. Commercial Code section 3405 28 provides that if an employer entrusts an employee (or independent contractor) with 5 1 responsibility for a check, and the employee fraudulently endorses the check, the bank 2 accepting the check must bear the loss to the extent it failed to exercise ordinary care. 3 See Mills v. U.S. Bank, 166 Cal.App.4th 871, 889 (2008); see also Lee Newman, M.D., 4 Inc. v. Wells Fargo Bank, N.A., 87 Cal.App.4th 73, 82 (2001). BofA seeks dismissal of the claim for negligence under section 3405. BofA notes United States District Court Northern District of California 5 6 in significant part, “that section only applies to occasions where a dishonest employee 7 negotiates a check payable to their employer into their personal account, either via forged 8 endorsement or without any endorsement at all.” Dkt. 28 at 15. Iron Bridge argues in 9 opposition that BofA failed to exercise ordinary care when it accepted and deposited the 10 fraudulently endorsed checks into Alvarez’s accounts because there were apparent 11 irregularities in their negotiation and they were not deposited into the accounts belonging 12 to the payees. Iron Bridge avers that Alvarez served as its independent contractor for 13 purposes of distributing the checks issued to the various construction vendors and 14 contractors. Iron Bridge briefly refers to the factors articulated in California Labor Code 15 section 2750.5 to suggest the establishment of an independent contractor relationship. 16 In its reply, BofA demands more detail. It asserts, “Iron Bridge fails to allege any 17 facts surrounding the circumstances of the deposits that would demonstrate whether or 18 not Bank of America exercised ordinary care.” BofA notes hypothetically that Alvarez 19 may have made these deposits via ATM or mobile banking app, and that Iron Bridge’s 20 pleadings fail to clarify how the deposit of the checks failed to meet a standard of ordinary 21 care. 22 Here, BofA is correct that Iron Bridge did not sufficiently plead facts that would 23 demonstrate BofA failed to exercise ordinary care. Further, Iron Bridge’s pleadings fail to 24 establish that Alvarez was actually operating as its independent contractor for purposes 25 of distributing the checks, and for this reason, Iron Bridge cannot avail itself of the narrow 26 statutory cause of action. For both of these reasons, Iron Bridge’s claim for negligence 27 under Commercial Code section 3405 is DISMISSED as to BofA. 28 6 C. 2 Iron Bridge advances a claim for breach of warranty based on portions of the 3 Commercial Code that govern warranties owed by parties related to payment of checks. 4 Commercial Code section 3417, titled “Warranties of Presentor,” provides, in pertinent 5 part: “If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant all of the following to the drawee making payment or accepting the draft in good faith: (1) The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft . . . 6 7 8 9 10 United States District Court Northern District of California Claim 2 – Breach of Warranty 1 11 Com. Code § 3417(a)(1). Under the Commercial Code, a “drawee” is defined as “a 12 person ordered in a draft to make payment,” and a “drawer” is defined as “a person who 13 signs or is identified in a draft as a person ordering payment.” Com. Code §§ 3103(a)(2)- 14 (3). BofA describes, “section (a)(1) is in effect a warranty ‘that there are no unauthorized 15 or missing indorsements.’” Com. Code § 3417, cmt. 2. 16 17 18 19 20 Section 4207, titled “Warranties of Customer or Collecting Bank on Transfer [. . .],” provides: “A customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and to any subsequent collecting bank that all of the following are applicable: (1) The warrantor is a person entitled to enforce the item…” 21 Com. Code § 4207(a)(1). Commercial Code section 4105 defines a “collecting bank” as 22 “a bank handling an item for collection except the payor bank.” Com. Code § 4105(5). A 23 “payor bank” is defined as “a bank that is the drawee of a draft.” Id. at § 4105(3). Thus, 24 the warranties afforded by section 4207 flow from the collecting bank to the payor bank. 25 BofA moves to dismiss Iron Bridge’s claim for breach of the warranties afforded 26 under Commercial Code sections 3417 and 4207 because Iron Bridge is not entitled to 27 enforce those warranties. Rather, based on the positions of the parties in relation to the 28 checks, Iron Bridge instead owes a warranty to BofA. 7 1 2 payment to authorized person of the transferred items for which a settlement or other 3 consideration has been received. This warranty obligation, placed upon banks, extends 4 to drawers of transferred items.” Iron Bridge asserts that BofA breached these warranties 5 by failing to exercise due diligence to ensure proper endorsements on the checks 6 deposited by defendant Alvarez. 7 United States District Court Northern District of California Iron Bridge argues in opposition that the code sections “provide a warranty as to Here, BofA’s interpretation is more accurate. Under section 3417, the warranty is 8 afforded to and enforceable by the drawee—that is, the depository bank, which in this 9 instance is BofA—and not the drawer—here, Iron Bridge. And the section 4207 warranty 10 flows from Iron Bridge’s bank as the collecting bank to BofA as the payor bank. Iron 11 Bridge is not owed a warranty by BofA. The claim for breach of warranty under the 12 Commercial Code is DISMISSED as to BofA. Claim 3 – Breach of Contract 13 D. 14 Iron Bridge advances a claim for breach of contract on the theory that BofA, bound 15 by the terms of its depository agreement with Alvarez, had an obligation not to cash 16 checks with fraudulent endorsements of payees. Commercial Code section 4401 17 governs the circumstances in which a bank may charge its customer’s account. See 18 Com. Code § 4401. 19 California law recognizes that in certain circumstances, a third-party may enforce a 20 contract where it was not a signatory, but a third-party may only enforce a contract when 21 that contract was entered into expressly for the benefit of the third-party. Cal. Civ. Code 22 § 1559. A third-party may enforce contract rights where (1) the third-party would in fact 23 benefit from the contract, (2) a motivating purpose of the contracting parties was to 24 provide a benefit to the third-party, and (3) permitting the third-party to bring its own 25 breach of contract action against a contracting party is consistent with the objectives of 26 the contract and the reasonable expectations of the contracting parties. Goonewardene 27 v. ADP, LLC, 6 Cal.5th 817, 829-30 (2019). “The fact that [a third-party] is incidentally 28 named in the contract, or that the contract, if carried out according to its terms, would 8 1 inure to his benefit, is not sufficient to entitle him to demand its fulfillment. It must appear 2 to have been the intention of the parties to secure to him personally the benefit of its 3 provisions.” Walters v. Calderon, 25 Cal.App.3d 863, 871 (1972) (emphasis in original). United States District Court Northern District of California 4 BofA seeks dismissal of Iron Bridge’s Commercial Code section 4401 claim 5 because (1) Iron Bridge is not an intended third-party beneficiary of a contract between 6 BofA and its customer, Alvarez, and (2) no contractual relationship between Iron Bridge 7 and BofA existed to obligate BofA to not charge Iron Bridge’s checks bearing fraudulent 8 endorsements under Commercial Code section 4401. Iron Bridge argues that it should 9 be able to pursue a breach of contract claim against BofA based on the bank’s depository 10 agreement with Alvarez. Iron Bridge alleges that it, as a drawer of checks, belongs to a 11 class of people intended to benefit from a contract between a bank and its depositor and 12 thus qualifies as a third-party beneficiary. 13 BofA argues in response, “even though Bank of America is aware that some third- 14 party will eventually engage in a banking transaction with Alvarez, benefiting those third- 15 parties is not the purpose of entering into the deposit relationship.” BofA remarks, “there 16 is no case law whatsoever that holds a non-customer drawer of a check can be deemed 17 a beneficiary of a depositor’s contract with the depository bank.” 18 Here, Iron Bridge’s position is untenable. Iron Bridge is not a customer of BofA, 19 and it does not otherwise plead a contractual relationship with BofA that would support a 20 claim for breach of contract pursuant to section 4401. Moreover, considering the factors 21 enumerated in Goonewardene, Iron Bridge is not expressly intended to benefit from the 22 depository agreement between defendant Alvarez and BofA. Iron Bridge has not pleaded 23 that a motivating purpose of the agreement between Alvarez and BofA was to provide a 24 benefit to this mortgage lender. Neither Alvarez nor BofA could have expected Iron 25 Bridge to bring suit to enforce their depository agreement. Iron Bridge, as a member of 26 the broad class of persons expecting BofA to reject fraudulently endorsed checks, has 27 such a distant interest in the depository agreement between BofA and its customer that it 28 is simply too attenuated to justify its claim for breach. Thus, Iron Bridge’s claim for 9 1 Claim 4 – Declaratory Relief 2 E. 3 A complaint for declaratory relief is sufficient “if it sets forth facts showing the 4 existence of an actual controversy relating to the legal rights and duties of the respective 5 parties under a written instrument . . . and requests that the rights and duties of the 6 parties be adjudged by the court.” Ludgate Ins. Co. v. Lockheed Martin Corp., 82 7 Cal.App.4th 592, 605 (2002) (emphasis added). 8 9 United States District Court Northern District of California breach of contract is DISMISSED as to BofA. BofA asserts that the claim for declaratory relief must be dismissed where it is premised on Iron Bridge’s Commercial Code claims. BofA adds that a declaratory relief 10 claim, adjudicating a controversy regarding rights and obligations under a written 11 agreement, cannot stand in this circumstance because there is no written agreement 12 between BofA and Iron Bridge. Iron Bridge reiterates that it is a third-party beneficiary of 13 the depository agreement between defendant Alvarez and BofA, and on that basis seeks 14 a judicial determination that BofA was negligent. 15 Here, there is no written agreement between Iron Bridge and BofA. Iron Bridge’s 16 attempt to rely on the depository agreement between Alvarez and BofA through a third- 17 party beneficiary theory is unavailing. There is not an actual controversy involving a 18 written agreement between Iron Bridge and BofA for this court to adjudicate. Iron 19 Bridge’s claim for declaratory relief is DISMISSED as to BofA. Claim 5 – Unfair Competition Law 20 F. 21 Section 17200, establishing a right of action for unfair competition, provides: 22 “[U]nfair competition shall mean and include any unlawful, unfair or fraudulent business 23 act or practice and unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. 24 Code § 17200. “‘Because . . . section 17200 is written in the disjunctive, it establishes 25 three varieties of unfair competition-acts or practices which are unlawful, or unfair, or 26 fraudulent.’. . . ‘A practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ or 27 vice versa.’” Lippitt v. Raymond James Fin. Servs., Inc., 340 F.3d 1033, 1043 (9th Cir. 28 2003) (quoting Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 10 United States District Court Northern District of California 1 180 (1999)). To constitute an “unlawful” business act, a plaintiff must allege facts 2 sufficient to show a violation of some underlying law. People v. McKale, 25 Cal. 3d 626, 3 635 (1979). 4 BofA avers that Iron Bridge’s claim for violation of California Business & 5 Professions Code section 17200 must fail because it relies on a predicate claim of a 6 violation of another law or statute, or allegations of unfair, unlawful, or fraudulent conduct. 7 BofA reasons that because Iron Bridge’s Commercial Code claims should be dismissed 8 (as discussed above), none of them may form the basis of the section 17200 claim. 9 Further, the section 17200 claim additionally fails where Iron Bridge does not allege 10 unfair, unlawful, or fraudulent business practices separate from those giving rise to the 11 enumerated claims. In opposition, Iron Bridge argues that its section 17200 claim is 12 sufficiently pleaded because the Commercial Code violations have been sufficiently 13 pleaded. Here, Iron Bridge does not proceed under the theories that BofA acted either 14 15 unfairly or deceptively—its argument is based purely on BofA’s unlawful conduct, so the 16 other theories are not considered. In this way, BofA is correct that Iron Bridge’s claim 17 under section 17200 is derived from its other claims. Iron Bridge’s claims against BofA 18 for violations of the Commercial Code (including statutory negligence, breach of warranty, 19 and breach of contract) are all deficient. Because Iron Bridge fails to state a claim of 20 unlawful action by BofA, it also fails to state a claim for relief under section 17200. 21 Therefore, Iron Bridge’s UCL claim is DISMISSED as to BofA. 22 IV. 23 Conclusion For the foregoing reasons, defendant Bank of America’s motion to dismiss the 24 FAC is GRANTED as to BofA. It is clear from the FAC that the Commercial Code 25 violations pursued here are time-barred as to all but one $1600 check, but these claims 26 additionally fail on the merits. Amendment of these claims would be futile. Therefore, 27 defendant Bank of America is DISMISSED WITH PREJUDICE. 28 11 1 2 3 4 IT IS SO ORDERED. Dated: May 14, 2021 /s/ Phyllis J. Hamilton PHYLLIS J. HAMILTON United States District Judge 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12
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