Recent Federal Case Reaffirms California Law Holding that Absent Extraordinary and Specific Facts, a Bank Does Not Owe a Duty of Care to Non-Customers
California law has long held that a bank does not owe a duty of care to non-customers in the absence of allegations of extraordinary and specific facts. So, for example, in Software Design & Application v. Hoefer & Arnett (1996) 49 Cal.App.4th 472, a group of investors sued two banks for negligence, alleging that the banks failed to supervise and monitor withdrawals and transfers from accounts which the defendant financial consultant and his sister were using to misappropriate the plaintiffs’ investments. The Court of Appeal upheld the dismissal of the negligence claims based on the rule that “absent extraordinary and specific facts, a bank does not owe a duty of care to a noncustomer.” (Id. at 479.) The Court found that the investors were neither customers nor past customers of the banks, and had not alleged any special facts, such as an investor being the alter ego of the account holder or an intended beneficiary of the account, which could have given rise to a duty of care. (Id. at 480-481.)
In the recent case of Evans v. ZB, N.A. (E.D. Cal. Dec. 20, 2017) 2017 U.S. Dist. LEXIS 209632 (“Evans”), the United States District Court for the Eastern District of California reaffirmed this rule. The Evans case was a class action against a bank on behalf of over fifty people who had invested in a corporation which was allegedly operating a Ponzi scheme and misappropriating funds. The corporation maintained its accounts at the bank. After the corporation filed bankruptcy, the investors, none of whom were bank customers, sued the bank for, among other things, negligence and aiding and abetting fraud. They argued that the bank owed them a duty to protect them from the corporation’s fraud.
In granting the bank’s motion to dismiss the case, the District Court reaffirmed California’s rule of no liability to non-customers in the absence of specific facts: “The primary flaw with regard to [the plaintiff investors’] argument, which plaintiffs rely on for all of their claims, is that plaintiffs were neither … customers nor had any relationship with [the bank], and a bank does not owe a duty of care to noncustomers unless extraordinary and specific facts are present. … Because plaintiffs have alleged no such facts, [the bank] was under no legal duty to warn plaintiffs about [the corporation’s] financial condition …” (Evans at *2-3.)
It should be noted that the Court in Evans also recognized an important exception to the rule: that tort liability may be imposed upon a bank in favor of a non-customer in a situation where sufficient facts are alleged showing that the bank had actual knowledge that the account-holder was using its account for the purpose of misappropriating funds. (Evans at *3-4.) The Evans Court did not apply the exception, however, because no such facts were alleged: “The only relevant question therefore becomes whether [the bank] had actual knowledge that [the corporation] was operating a Ponzi scheme and misappropriating funds. … Here, plaintiffs have not pled sufficient facts to give rise to a plausible inference that defendant knew [the corporation] was misappropriating funds. … To support their claim that [the bank] was aware of [the] Ponzi scheme, plaintiffs point to an October 2009 letter in which [the bank] informed [the corporation] that it intended to ‘disengage from the Lending relationship’ because ‘there has been little to no revolving of the outstanding balances.’ … However, even if this demonstrates that [the bank] was aware that [the corporation] could not meet its financial obligations, it does not sufficiently allege that the bank knew that [the corporation] was engaging in fraud and misappropriating money. Accordingly, plaintiffs’ Complaint fails to plead more than ‘alleged knowledge,’ and instead ‘essentially alleges the [bank] knew something fishy was going on with the accounts opened by’ [the corporation] … which is insufficient to plead a cause of action for any of the eight claims plaintiffs assert …” (Id., citations omitted.)