Meridian Growers Processing, Inc. v. J.P. Morgan Chase Bank, N.A.

[7] 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA [10] 11 MERIDIAN GROWERS PROCESSING, No. 1:24-cv-00781-KES-EPG INC., et al., 12 ORDER GRANTING DEFENDANT J.P, Plaintiffs, MORGAN CHASE BANK’S MOTION TO 13 DISMISS v. 14 (Doc. No. 10) J.P. MORGAN CHASE BANK, N.A., et 15 al., 16 Defendants. [18] 19 This matter is before the Court on the motion to dismiss filed by defendant J.P. Morgan 20 Chase Bank (“Chase”) on July 19, 2024. (Doc. 10.) On July 22, 2024, the pending motion to 21 dismiss was taken under submission. (Doc. 11.) For the reasons explained below, Chase’s 22 motion to dismiss is granted. 23 BACKGROUND 24 On June 12, 2023, plaintiffs Meridian Growers Processing Inc., (“Meridian”) and Partners 25 Personnel Management Services, LLC, (“PPMS”) filed a complaint against John Doe and Does 26 2–50 in the Madera County Superior Court. (Doc. 1-3 at 4.) Plaintiffs filed a first amended 27 complaint (“FAC”) adding defendant Chase on May 30, 2024. (Doc. 1-1 at 5.) Chase was served 28 with a summons and copy of the FAC on June 3, 2024. (Doc. 1-1 at 2–17.) On July 3, 2024, 1 Chase timely filed a notice of removal in this court. (Doc. 1.) 2 As alleged in the FAC, Meridian provides processing services for growers of pistachios in 3 California.1 (Doc. 1-1 at ¶ 11.) PPMS provides staffing services to Meridian. (Id. at ¶ 12–13.) 4 On September 14, 2022, PPMS emailed Meridian a summary of outstanding invoices. (Id. at 5 ¶ 22.) On September 21, 2022, Meridian employee Kathy Flores and PPMS employee Ashleigh 6 Haddad exchanged three additional emails regarding an updated summary of outstanding 7 invoices, reflecting a balance of over $400,000 owed by Meridian to PPMS. (Id. at ¶¶ 23–25.) 8 On September 28, 2022, Ms. Flores received a response in the same email chain, from defendant 9 John Doe posing as Ashleigh Haddad, requesting an update on the status of payments, and stating 10 that PPMS preferred to receive future payments to a new bank account.2 (Id. at ¶¶ 30.) John Doe 11 used an email address virtually identical to Ashleigh Haddad’s email address, and he also created 12 fake accounts with email addresses virtually identical to those of the other PPMS parties on the 13 September 21st emails. (Id. at ¶¶ 27–29.) 14 Ms. Flores replied to John Doe, believing she was responding to PPMS, stating that 15 Meridian had already paid for certain invoices and requesting confirmation of receipt of those 16 payments. (Id. at ¶ 31.) In response, John Doe falsely confirmed receipt of prior payments into 17 PPMS’s old account and provided ACH information for PPMS’s supposed new bank account at 18 Chase (the “Fraudulent Account”). (Id. at ¶¶ 16–18, 32). The Fraudulent Account was actually 19 the checking account of an unnamed individual not identified in the FAC. (Id. at 19.) John Doe 20 requested Ms. Flores to “update accordingly and ensure payments going forward” were sent to the 21 new account. (Id. at ¶ 32.) Subsequently, Meridian submitted three payment orders to its bank to 22 wire funds to the Fraudulent Account. (Id. at ¶ 48.) First, on September 30, 2022, Meridian 23 instructed its bank to wire $142,756.91 for “Invoice # 500065793” to the account, listing 24 “Partners Personnel Management” as the recipient with an email address of [25] 1 The court presumes the factual allegations in the FAC to be true in evaluating the motion to [26] dismiss. See Murguia v. Langdon, 61 F.4th 1096, 1106 (9th Cir. 2023). [27] 2 Plaintiffs allege that John Doe “hacked, phished, and/or intercepted emails between Meridian 28 and Partners Personnel.” (Id. at ¶ 14.) 1 “espererepay@espererholdings.com.” (Id. at ¶¶ 33–35.) Second, on October 11, 2022, Meridian 2 instructed its bank to wire a total of $132,266.80 for “Invoice # 500066988” and “Invoice # 3 500068150” to the account, listing the same recipient and email address twice. (Id. at ¶¶ 38–40.) 4 Third, on October 17, 2022, Meridian instructed its bank to wire a total of $107,330.04 for 5 “Invoice # 500069598 . . . Invoice # 500057515-1 . . . Invoice # 500057516-1” and “Invoice # 6 500071050” to the account, listing the same recipient and email address four times. (Id. at ¶¶ 43– 7 45.) 8 Plaintiffs allege that the Fraudulent Account “was the personal bank account of an 9 unnamed individual who is a retired veteran.” (Id. at ¶ 17.) Meridian believed it was issuing 10 payments to PPMS and did not know when it submitted the payment orders that the Fraudulent 11 Account belonged to the retiree. (Id. at ¶¶ 36, 37, 41, 42, 46, 47.) “Within just 17 days, 12 Defendant Chase processed three wire transfers into the Fraudulent Account, belonging to [the 13 retiree], totaling $382,353.75.”3 (Id. at ¶ 92.) “The funds transferred to the Fraudulent Account 14 were immediately depleted. Defendant John Doe One transferred the fraudulently obtained funds 15 from Meridian in the Fraudulent Account to another account.” (Id. at ¶ 88.) Plaintiffs allege that 16 Chase knew the retiree did not work, and that the retiree’s income came from pensions and 17 retirement accounts. (Id. at ¶¶ 85, 86.) 18 Based on the allegations summarized above, the FAC asserts five causes of action. The 19 first and second causes of action are for conversion and are brought by Meridian and PPMS 20 separately against John Doe and Does 2–50. (Id. at ¶¶ 50–65.) The third cause of action is for 21 fraud and is brought by Meridian against John Doe and Does 2-50. (Id. at ¶¶ 66–77.) The fourth 22 cause of action is for wrongful payment of wire transfer in violation of California Uniform 23 Commercial Code §§ 11101 et seq., and it is brought by Meridian and PPMS against Chase and 24 Does 2–50. (Id. at ¶¶ 78–96.) Finally, Meridian and PPMS seek declaratory relief against Chase, 25 John Doe, and Does 2–50. (Id. at ¶¶ 97–100.) 26 With respect to the fourth cause of action, plaintiffs allege that Chase “had actual [27] 28 3 Plaintiffs do not specify the starting date for this seventeen-day period. 1 knowledge of [an] inconsistency between the intended beneficiary name, Partners Personnel, and 2 the Fraudulent Account number belonging to [the retiree].” (Id. at ¶ 81.) They further allege that 3 “Chase was not entitled to rely solely on the intended beneficiary account number as the proper 4 identification of the beneficiary wire transfer order” because “the designated beneficiary and 5 account name bear no resemblance to each other and have nothing common with each other.” (Id. 6 at ¶¶ 93, 94.) Neither Meridian nor PPMS maintain accounts with Chase, and Meridian has never 7 wired money to PPMS through Chase. (Id. at ¶¶ 83, 84.) 8 On July 19, 2024, defendant Chase filed a motion to dismiss the claims asserted in the 9 FAC against it, pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 10.) Plaintiffs filed 10 an opposition to the motion on August 2, 2024, and Chase filed a reply on August 12, 2024. 11 (Docs. 12, 13.) 12 LEGAL STANDARD 13 The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal 14 sufficiency of the complaint. N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 15 1983). “Dismissal can be based on the lack of a cognizable legal theory or the absence of 16 sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 17 F.2d 696, 699 (9th Cir. 1990). A plaintiff is required to allege “enough facts to state a claim to 18 relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A 19 claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw 20 the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. 21 Iqbal, 556 U.S. 662, 678 (2009). 22 In determining whether a complaint states a claim on which relief may be granted, the 23 court accepts as true the allegations in the complaint and construes the allegations in the light 24 most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). However, 25 the court need not assume the truth of legal conclusions cast in the form of factual allegations. 26 U.S. ex rel. Chunie v. Ringrose, 788 F.2d 638 , 643 n.2 (9th Cir. 1986). While Rule 8(a) does not 27 require detailed factual allegations, “it demands more than an unadorned, the-defendant28 unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678 . A pleading is insufficient if it offers 1 mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” 2 Twombly, 550 U.S. at 555 ; see also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements 3 of a cause of action, supported by mere conclusory statements, do not suffice.”). Moreover, it is 4 inappropriate to assume that the plaintiff “can prove facts that it has not alleged or that the 5 defendants have violated the . . . laws in ways that have not been alleged.” Associated Gen. 6 Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). 7 ANALYSIS 8 Defendant Chase moves to dismiss on the grounds that plaintiffs fail to state a claim for 9 wrongful payment of wire transfer. (Doc. 10 at 8–11.) Specifically, Chase argues that the 10 allegations in the FAC do not sufficiently demonstrate Chase’s actual knowledge of “a 11 discrepancy between the [intended beneficiary’s] name and the account number in Meridian’s 12 wire instructions” as is required for liability under section 11207 of the California Uniform 13 Commercial Code.4 (Id. at 8.) Chase also argues that plaintiffs’ claim for declaratory relief fails 14 because it is based on the deficient section 11207 claim. (Id. at 11.) As discussed below, the 15 Court finds that the FAC fails to state a claim under both section 11207 and for declaratory 16 relief.5 17 “Article 4A of the UCC governs fund transfers, which includes wire transfers . . . [and] 18 has been adopted in California as Division 11 of the California Uniform Commercial Code.” 19 Grand Bayman Belize, Ltd. v. Wells Fargo & Co., 514 F. Supp. 3d 1188 , 1192 (C.D. Cal. 2021) 20 (alteration in original) (quoting Chino Com. Bank, N.A. v. Peters, 190 Cal. App. 4th 1163 , 1173 21 (2010)), aff’d sub nom. Grand Bayman Belize, Ltd. v. Wells Fargo Bank, N.A., No. 21-55146, [22] 2022 WL 171937 (9th Cir. Jan. 19, 2022). Division 11 “provide[s] a detailed scheme for 23 analyzing the rights, duties and liabilities of banks and their customers in connection with the [24] 4 All subsequent statutory references are to the California Uniform Commercial Code, unless [25] otherwise noted. [26] 5 As plaintiffs have not plausibly alleged defendant Chase’s actual knowledge under section 27 11207, this Order does not consider the parties’ arguments with respect to whether proximate causation is a required element under section 11207 and whether that element was sufficiently 28 pled in the FAC. 1 authorization and verification of payment orders.” Zengen, Inc. v. Comerica Bank, 41 Cal. 4th 2 239, 251–52 (2007). Under Division 11, a “‘[f]unds transfer’ means the series of transactions, 3 beginning with the originator’s payment order, made for the purpose of making payment to the 4 beneficiary of the order.” Cal. Com. Code § 11104 (a). “‘Originator’ means the sender of the first 5 payment order in a funds transfer.” Id. at § 1104(c). In this case, the parties do not dispute that 6 Meridian was the originator, or that the three transactions at issue are funds transfers governed by 7 Division 11 of the California Uniform Commercial Code. 8 Plaintiffs’ wrongful payment of wire transfer claim is based on section 11207. (Doc. 1-1 9 at ¶ 80.) Subdivision (a) of that statute provides that “[s]ubject to subdivision (b), if, in a 10 payment order received by the beneficiary’s bank, the name, bank account number, or other 11 identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no 12 person has rights as a beneficiary of the order and acceptance of the order cannot occur.” Cal. 13 Com. Code § 11207(a). Here, the account number specified in each payment order belonged to 14 an existing and identifiable Chase account—the unnamed retiree’s account—but the listed 15 beneficiary on the wire transfers (Partner Personnel Management) did not match the name on the 16 account. 17 Section 11207(b) applies when, as in the present case, “a payment order received by the 18 beneficiary’s bank identifies the beneficiary both by name and by an identifying or bank account 19 number and the name and number identify different persons.” Id. at § 11207(b). In this situation, 20 the following rules apply: 21 (1) Except as otherwise provided in subdivision (c),[6] if the beneficiary’s bank does not know[7] that the name and number refer 22 to different persons, it may rely on the number as the proper identification of the beneficiary of the order. The beneficiary’s bank [23] 24 6 Subsection (c) falls outside the scope of this case. That subsection “governs the obligation, as between the originating party and the originating party’s bank, to pay an order accepted by the [25] beneficiary’s bank under . . . subsection (b)(1).” TME Enterprises, Inc. v. Norwest Corp., 124 Cal. App. 4th 1021 , 1031 n.13 (2004). The FAC does not assert any claim by Meridian, the [26] originating party, against its bank, the originating bank. The dispute at issue here is between 27 Meridian as the originator and Chase as the beneficiary’s bank. 28 7 “‘Know’ means to have actual knowledge.” TME, 124 Cal. App. 4th at 1031 . 1 need not determine whether the name and number refer to the same person. [2] (2) If the beneficiary’s bank pays the person identified by name or 3 knows that the name and number identify different persons, no person has rights as beneficiary except the person paid by the 4 beneficiary’s bank if that person was entitled to receive payment from the originator of the funds transfer. If no person has rights as 5 beneficiary, acceptance of the order cannot occur. [6] Cal. Com. Code § 11207 (b). Effectively, section 11207(b) provides a “safe harbor” for a bank 7 that relies on the account number specified in a payment order as identifying the beneficiary of 8 the order. TME Enterprises, Inc. v. Norwest Corp., 124 Cal. App. 4th 1021, 1031 (2004) 9 (collecting secondary sources). In other words, “section 11207(b) plainly permits beneficiary 10 banks to accept wire transfers where . . . there is a mismatch between the name and number [on 11 the payment order]—so long as the number identifies an account held at the bank, and the bank 12 has no actual knowledge of the mismatch.” Grand Bayman Belize, Ltd. v. Wells Fargo Bank, 13 N.A., No. 21-55146, 2022 WL 171937 , at *1 (9th Cir. Jan. 19, 2022) (unpublished). 14 The reasoning behind this safe harbor provision is set forth in the official comment to 15 section 4A-207 of the Uniform Commercial Code—which is persuasive in interpreting section 16 11207 because “the [California] Legislature adopted article 4A of the Uniform Commercial Code 17 exactly as written” in enacting Division 11. Zengen, 41 Cal. 4th at 252. The official comment 18 explains that “[a] very large percentage of payment orders . . . are processed by automated means 19 using machines” which results in “substantial economies of operation and [reduces] the 20 possibility of clerical error . . . .” U.C.C. § 4A-207 cmt. 2. Of course, a bank supplied with a 21 name and account number could determine whether they match, “but if a duty to make that 22 determination is imposed on the beneficiary’s bank the benefits of automated payment are lost.” 23 Id. “Although the clear trend is for beneficiary’s banks to process payment orders by automated 24 means, Section 4A-207 is not limited to cases in which processing is done by automated means. 25 A bank that processes by semi-automated means or even manually may rely on number as stated 26 in Section 4A-207.” Id. 27 Here, the FAC fails to sufficiently allege Chase’s actual knowledge of an inconsistency 28 between the named beneficiary of the wire transfers and the account holder. The FAC merely 1 asserts that an inconsistency existed and assumes that, therefore, Chase somehow knew of it. See 2 Serviacero Especiales SA DE CV v. JPMorgan Chase Bank, N.A., No. EDCV21380JGBSPX, [3] 2021 WL 4805448 , at *2 (C.D. Cal. July 15, 2021) (“Plaintiff alleges no facts that demonstrate 4 that Defendant actually knew of the discrepancy. Rather, Plaintiff alleges that the wiring 5 instructions named GML Steel SA as the beneficiary, and therefore that Defendant knew of the 6 discrepancy.”). The allegations regarding plaintiffs’ lack of account activity with Chase, and 7 Chase’s alleged knowledge that the retiree’s income came from pensions and retirement accounts, 8 are insufficient to plausibly allege actual knowledge of a discrepancy absent an indication that 9 these “red flags” led Chase to discover the inconsistency. See Sliders Trading Co. L.L.C. v. Wells 10 Fargo Bank NA, No. 17-CV-04930-LB, 2017 WL 6539843 , at *8 (N.D. Cal. Dec. 21, 2017) 11 (finding argument that defendant bank should have noticed red flags surrounding transactions did 12 not translate to actual knowledge); Golden State Concessions LLC v. Wells Fargo Bank NA, No. 13 21-CV-00014-KAW, 2021 WL 5002222 , at *3 (N.D. Cal. Mar. 10, 2021) (finding actual 14 knowledge plausibly alleged via allegations that defendant bank was obligated to, and did, 15 confirm wire transfers were “payable to an account held by the actual person or entity the wire 16 instructions set out as the beneficiary” where defendant bank’s internal systems actually 17 identified discrepancy). 18 Plaintiffs also allege that “[t]here exists a complete disconnect[8] between the designated 19 beneficiary and account because the designated beneficiary and account name bear no 20 resemblance to each other and have nothing common with each other.” (Doc. 1-1 at ¶ 93.) 21 However, even if in some circumstances such a disconnect may expose a bank to liability for 22 processing a wire transfer, plaintiffs must still plausibly allege that the bank was aware of the 23 difference between the designated beneficiary of the wire transfers and the name on the account. 24 See TME, 124 Cal. App. 4th at 1034 . The FAC fails to do so. Moreover, the FAC also fails to 25 allege the name on the account or other specific facts that would support an obvious “complete [26] 27 8 “A ‘complete disconnect’ is when the designated name and account name bear no resemblance to each other and have nothing in common with each other.” TME Enterprises, Inc. v. Norwest 28 Corp., 124 Cal. App. 4th 1021, 1034 (2004). 1 disconnect” between the designated beneficiary of the wire transfers and the account holder. 2 Finally, plaintiffs allege that “[w]ithin just 17 days, Chase processed three wire transfers 3 into the Fraudulent Account, belonging to a retired individual, totaling $382,353.75. (Doc. 1-1 at 4 ¶ 92.) But this allegation is of little use in determining whether Chase had actual knowledge of 5 an inconsistency without allegations concerning how, and how quickly, the wire transfers were 6 processed. See Grand Bayman Belize, Ltd. v. Wells Fargo & Co., 514 F. Supp. 3d 1188 , 1193 7 (C.D. Cal. 2021) (finding defendant bank did not have actual knowledge of mismatch where wire 8 transfers were automatically processed in approximately seven seconds), aff’d sub nom. Grand 9 Bayman Belize, Ltd. v. Wells Fargo Bank, N.A., No. 21-55146, 2022 WL 171937 (9th Cir. Jan. 10 19, 2022). Additionally, even if the wire transfers in this case were processed manually, plaintiffs 11 must still plausibly allege Chase’s actual knowledge of the discrepancy. See TME, 124 Cal. App. 12 4th at 1033–35 (finding that evidence at trial showed bank relied on account number specified in 13 wire transfer order, even though wire operator manually processed transfer). 14 For these reasons, plaintiffs fail to state a claim under section 11207. Plaintiffs’ failure to 15 do so forecloses declaratory relief because there is no “actual controversy” before the Court. [16] 28 U.S.C. § 2201 (a). Accordingly, the Court grants defendant Chase’s motion to dismiss the 17 claims asserted against it, with leave to amend. United Data Servs., LLC v. Fed Trade Comm’n, [18] 39 F.4th 1200, 1208 (9th Cir. 2022) (leave to amend should be given if amendment could cure 19 pleading defect). 20 /// 21 /// 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 CONCLUSION 2 For the reasons explained above: 3 1. Defendant Chase’s motion to dismiss (Doc. No. 10) is granted; 4 2. The claims asserted against defendant Chase in plaintiffs’ first amended complaint 5 are dismissed, with leave to amend; and 6 3. Plaintiffs may file a second amended complaint within 21 days of the date of this 7 order. If plaintiffs fail to file a timely amended complaint, the Court will dismiss 8 the claims with prejudice and enter judgment for defendant Chase. 9 [10] 11 | TPIS SO ORDERED. _ 12 Dated: _ September 26, 2024 4h 3 UNITED STATES DISTRICT JUDGE