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Bank Not Liable to One Depositor Cheated by Another | #employeefraud | #recruitment | #corporatesecurity | #businesssecurity | #


Metropolitan News-Enterprise

 

Monday,
May 11, 2020

 

Page
1

 

Court of Appeal:

Bank Not Liable to One Depositor Cheated by Another

Panel
Says Financial Institution Has No Duty to Monitor Accounts on Look-Out for
Suspicious Activity

 

By
a MetNews Staff Writer

 

—Long Beach Police Department

ELIZABETH MULDER

Prison Inmate

A bank
has no duty to monitor the accounts of its depositors to detect possible fraud,
Div. Three of the Fourth District Court of Appeal held Friday, rejecting the
bid of a company
to place blame on Bank of
America for his having been cheated out of more than $700,000 by a freelance
bookkeeper.

The scam artist who took plaintiff Kurtz-Ahlers’s money was
Elizabeth “Lizzie” Mulder, who embezzled more than $1.5 million from the
various women-owned small businesses that were clients of her Orange County
financial services company. She was sentenced on Oct. 16, 2017 to five years
and three months in federal prison.

Over a five-year period, Mulder instructed Kurtz-Ahlers (a
luxury travel agency now known as “”Hidden Doorways, A KAA Travel Collection”)
to make out its quarterly checks in payment of state and federal income taxes
to “Income Tax Payments,” and to give her the checks for mailing. Rather than
sending them to the U.S. Internal Revenue Service and the state Franchise Tax
Board, she deposited them in her own account at the same Bank of America branch
where Kurtz-Ahlers also had its account.

Her account included the fictitious business name of “Income
Tax Payments.”

                                
Plaintiff’s Contention Rejected

That name, Kurtz-Ahlers argued on appeal from Orange Superior
Court Judge Walter P. Schwarm’s nonsuit judgment in favor of the bank, should
have alerted the financial institution to Mulder’s fraudulent activity.

Justice Richard M. Aronson authored the opinion affirming the
judgment.

“[T]he trial court correctly ruled as a matter of law the
Bank had no duty to monitor Mulder’s account,” he wrote. “That conclusion
renders moot the dispute over whether Mulder’s dba ‘Income Tax Payments’ was a
highly suspicious ‘red flag’ triggering an inquiry into possible fraud.”

Supreme Court Decision

Kurtz-Ahlers argued that a duty to investigate was
established by the California Supreme Court in its 1978 opinion in Sun ’n
Sand, Inc. v. United California Bank
. In that case, an action was
reinstated against United California Bank (“UCB”) on three theories, including
negligence.

Over a period of three years, an employee of the plaintiff prepared
a total off nine checks in small amounts made out to UCB, obtained on each the
signature of a corporate officer who assumed the sum was owed the bank, altered
the amount to an appreciably higher one, presented the checks to UCB, and had
the funds deposited in her personal account.

Justice Stanley Mosk wrote for the majority in declaring:

“Our conclusion that UCB should have appreciated the indicia
of misappropriation is, of course, nothing other than a determination that Sun
’Sand’s loss was reasonably foreseeable. We are not persuaded that commerce
will be so impeded by a duty of inquiry in this context that we should depart
from the fundamental principle that actors are liable for reasonably
foreseeable losses occasioned by their conduct. The duty is narrowly
circumscribed: it is activated only when checks, not insignificant in amount,
are drawn payable to the order of a bank and are presented to the payee bank by
a third party seeking to negotiate the checks for his own benefit.”

Mosk continued:

“Moreover, the bank’s obligation is minimal. We hold simply
that the bank may not ignore the danger signals inherent in such an attempted
negotiation. There must be objective indicia from which the bank could
reasonably conclude that the party presenting the check is authorized to
transact in the manner proposed. In the absence of such indicia the bank pays
at its peril.”

Case Is Inapposite

That holding, Aronson said, does not benefit Kurtz-Ahlers.

“Significantly,” he remarked, he high court set sharp limits
on the reach of this new duty of inquiry.”

The jurist wrote:

“Here, the ‘objective indicia’ test was met because the checks
were made payable to the very account in which they were deposited, ‘Income Tax
Payments,’ and an authorized signatory endorsed each check.  Consequently,
the ‘narrowly circumscribed’ duty to inquire recognized in Surf ’n Sand does
not apply here.”

Creating Duty

Kurtz-Ahlers urged that if a duty to monitor accounts does
not already exist, the court should create one, at least in the context of
protecting one depositor at a branch from the scam of another depositor there.

That, Aronson responded, “would imperil both customer privacy
and the expedited processing of banking transactions so crucial to a modern
economy,” adding:

“For its part, Kurtz-Ahlers asserts an intra-bank duty of
inquiry would impose a “minor burden” on banks easily outweighed by the
resulting benefit of protecting depositors from misappropriation by fraudsters
like Mulder.  But the argument overlooks the fact depositors are often, if
not always, in a better position than their banks to protect themselves from
fraud by simple steps such as using due diligence in hiring bookkeepers and by
occasionally checking their financial records.  In Kurtz-Ahlers’s case it
would not have been too difficult to discover five years’ worth of
diverted tax payments, had Kurtz-Ahlers exercised basic prudence.  In
other words, Kurtz-Ahlers makes no compelling argument why the Bank should have
borne the burden of detecting Mulder’s fraudulent scheme rather than
Kurtz-Ahlers itself.”

The case is Kurtz-Ahlers, LLC v. Bank of America N.A.,
2020 S.O.S. 2287.

Background on Mulder

Mulder pled guilty to wire fraud and filing a false tax
return. Aronson’s opinion notes that she “is currently in federal prison.”

At the time of her sentencing, U.S. District Court Judge
David O. Carter of the Central District of California order Mulder to make
restitution to seven victims, including Kurtz-Ahlers, in the total amount of
$1,538,781. Additionally, Kurtz-Ahlers on June 25, 2019 obtained a judgment
against Mulder on Orange Superior Court in the amount of $3,188,857.83.

The U.S. Attorney’s Office said in a statement issued on the
day of sentencing”

“Mulder, who was personal friends with most of the victims,
used a variety of means to defraud the victims, including creating false
personas and fraudulent bank accounts. Using fictitious email accounts, Mulder
posed as a potential buyer for one business, obtained a power-of-attorney over
that business’ accounts and emptied the business’ accounts claiming the funds
were being used for expenses associated with the sale of the company. In
reality, Mulder had used the business’ money for her own personal expenses….

“Mulder used the money obtained from her fraudulent scheme
for a variety of personal expenses, including a rental home in Laguna Beach,
cosmetic surgery, vacations and an Arabian horse.”

 

Copyright 2020, Metropolitan
News Company



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