Zengen, Inc. v. Comerica Bk. 3/15/06 CA2/5

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B179022

Case Date: 07/12/2006

Preview:Filed 3/15/06

CERTIFIED FOR PUBLICATION IN THE OFFICIAL REPORTS

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION FIVE

ZENGEN, INC., Plaintiff and Appellant, v. COMERICA BANK, Defendant and Respondent.

B179022 (Los Angeles County Super. Ct. No. BC290637)

APPEAL from a judgment of the Superior Court of Los Angeles County. Teresa Sanchez-Gordon, Judge. Affirmed. Burton V. McCullough for Plaintiff and Appellant. Buchalter, Nemer, Fields & Younger and Michael L. Wachtell, Jeffrey S. Wruble, and Robert S. Addison, Jr., for Defendant and Respondent. _______________

Plaintiff Zengen, Inc. ("Zengen") appeals the judgment entered in favor of Comerica Bank (the "Bank") following the latter's successful demurrer and motion for summary judgment in Zengen's lawsuit to recover unauthorized funds transfers totaling $4.6 million. In this opinion, we conclude that Zengen's common law claims for breach of contract, negligence, return of deposit and money had and received are displaced by the provisions of the UCC. We also consider the content of the notice required to be given to a receiving bank under Uniform Commercial Code section 11505 in order to preserve a customer's right to maintain an action for a refund under section 11204. We conclude that the purpose of the notice requirement is to put the receiving bank on notice that the customer considers the bank liable for the unauthorized funds transfer, and that the customer's notification to the bank that the subject payment orders were "unauthorized" and "fraudulent," standing alone, does not satisfy this requirement. Consequently, we affirm the trial court's grant of summary judgment.

FACTUAL AND PROCEDURAL HISTORY Zengen is a biopharmaceutical company formed in May 1999. Shortly after its incorporation, Zengen opened several bank accounts, including money market account number 88-012-298 (the "298 Account") at Imperial Bank, which has since been acquired by Comerica Bank (the "Bank"). In connection with the opening of its accounts, including the 298 Account, a Business Signature Card and a Funds Transfer Authorization agreement were executed by Zengen's Chief Executive Officer, Johnson Liu, and its Chief Financial Officer, Fung Yen, the company's authorized signatories.
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While Liu had unlimited check signing authority, Yen's authority was limited to checks not exceeding $10,000.

Given Mr. Liu's acknowledgement in deposition that he intended the Funds Transfer Authorization to apply to the 298 Account and authorized funds transfers out of that account, it is immaterial that the Authorization itself did not list the 298 Account by number. 2

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From mid-2000 to early 2001, Yen embezzled $4.6 million from Zengen by directing four funds transfers from the 298 Account to an account Yen opened in the name of Zengen at Chinatrust Bank. To accomplish this feat, Yen formed a British Virgin Islands corporation which he named Zengen, Inc. He then opened an account at Chinatrust Bank in the name of this new corporation with an initial deposit of $1,000, with himself as the sole authorized signatory. Between July 11, 2000 and February 5, 2001, the Bank processed four payment orders, which facially appeared to be signed and authorized by Johnson Liu (as was customary, they were faxed to the Bank for processing and payment), and which are the subject of this lawsuit. These four payment orders requested the Bank to draw funds out of the 298 Account and to wire them to Zengen's account at Chinatrust Bank in the amounts and on the dates as follows: $185,000 on July 11, 2000; $550,000 on September 11, 2000; $1,500,000 on November 22, 2000; and $1,700,000 on February 5, 2001 (collectively, the "Payment Orders"). These transactions appeared on Zengen's monthly bank statements, which Zengen acknowledges it received. Presumably because Zengen's account statements and transaction notices were addressed to Yen as the company's Chief Financial Officer, the latter's defalcation was not discovered immediately. Zengen first learned that something was amiss on June 13, 2001. Zengen's Office Manager, Regina Samuel-Ramcharitar, worked with Tony Galvez of the Bank to uncover the unauthorized activity concerning the 298 Account. According to Zengen, "By July 12, 2001, Samuel-Ramcharitar had specifically told Galvez that Zengen did not authorize the four wire transfers [at issue] and that it appeared that Yen had fraudulently transferred the money." By no later than August of 2001, when Zengen filed a report with the Los Angeles District Attorney's office which included details of the four Payment Orders, Zengen had concluded that Yen had stolen money from the company via the wire transfers from the 298 Account to Chinatrust Bank. By that time, Yen had disappeared with all of the company's financial records, and could not be located. On February 20, 2003, Zengen filed its complaint against the Bank for breach of contract, negligence, refund of payment pursuant to Uniform Commercial Code 3

Section 11204, return of deposit, and money had and received. The Bank filed demurrers to the various causes of action alleged in the complaint. The trial court sustained without leave to amend the demurrer to the negligence cause of action on the ground that the Uniform Commercial Code had displaced a negligence claim, sustained with leave to amend the demurrers to the breach of contract and common count causes of action on the basis that the contract was not attached to the complaint, and overruled the demurrer to the claim for refund. Zengen filed its first amended complaint, realleging the breach of contract claim (and attaching contracts as Exhibits A and B), the claim for refund of payment pursuant to section 11204, and the common counts of return of deposit and money had and received. The Bank demurred to the breach of contract and common counts on the ground that Division 11 of the California Uniform Commercial Code, section 11101 et seq. ("UCC") displaced those claims. The trial court overruled the demurrers. The Bank filed a motion for summary judgment, arguing that (1) the UCC "preempts" Zengen's non-UCC causes of action that are based on the same underlying circumstances and the same injury; and (2) Zengen's failure to timely notify the Bank of its objection to the debit of the 298 Account defeated the section 11204 claim for refund. The trial court granted the Bank's motion, ruling that the breach of contract and common count causes of action were preempted by the UCC. The court further concluded that Zengen could not prevail on its claim for refund because it failed to notify the Bank of its objection to the payments within the time prescribed by section 11505, and was thus precluded from asserting that the Bank was not entitled to retain the payments. Zengen timely appealed.
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2

The complaint also named as defendants Chinatrust Bank, Yen, and the corporations controlled by Yen. These additional defendants are not parties to this appeal. We adopt the terminology used by the parties and the trial court, and use the terms "preempted" and "displaced" interchangeably. 4
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CONTENTIONS Zengen contends on appeal that the trial court erred in the following particulars: (1) by granting the Bank's motion for summary judgment on Zengen's non-UCC causes of action after it had previously overruled a demurrer based on those same grounds; (2) in ruling that the UCC preempts the non-UCC causes of action; and (3) in concluding that section 11505 bars Zengen's recovery. We discuss each contention in turn.

DISCUSSION 1. The Bank's motion for summary judgment The Bank demurred to the first amended complaint's causes of action for breach of contract, return of deposit, and money had and received, arguing that they were preempted by the UCC. The trial court overruled the demurrers, and the Bank filed its answer. The Bank later filed a motion for summary judgment, arguing that there were no triable issues of fact and, as a matter of law, Zengen could not prevail on its breach of contract, return of deposit and money had and received causes of action since those claims were preempted by the UCC. The trial court agreed, and granted the motion. Zengen maintains on appeal that "where a general demurrer to the complaint has been overruled and a motion for summary judgment is subsequently brought contesting again the sufficiency of the complaint to state a cause of action, the motion is treated as a motion for judgment on the pleadings." Zengen then argues that Code of Civil Procedure section 438 prohibits a defendant whose demurrer to the complaint has been overruled from bringing a motion for judgment on the pleadings unless "there has been a material change in applicable case law or statute since the ruling on the demurrer." (Code Civ. Proc.,

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